MGT 490 Final Report PDF PDF

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cesim final report for simulation...

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Table of Contents

Letters to Shareholders

2.

Company Overview

3.

Review of Financial Performance - Selected Financial Indicators - Selected Line-Item Analysis

4. 4. 7.

Disaggregating Stock Price

7.

Management’s Discussion and Analysis

9.

Business Outlook

11.

Simulation Learning Outcomes

12.

Final Remarks

13.

1

Letter to Shareholders Team Green is pleased to announce that your company is the world’s leading cell phone provider. With the highest gross margin, third highest ROE, and a share price of $170, Team Green has endeavored to become one of the leading organizations in multiple nations. Team Green had a rough start, endured a recession and price wars, and managed to rise up from the bottom. Team Green always strives to offer the most features for each of our technologies! We want our customers to get the most for their money. Team Green has been able to offer customers the phones that range from average to below average. Even while selling our technologies as prices below average, we were still able to make a profit. Towards the beginning of this endeavor, we were using in-house manufacturing as well as contract manufacturing, but as we grew more and more, we were able to produce more plants. Soon we had enough plants in both the USA and Asia to produce the technologies completely on our own. We also took advantage of licensing features from time to time to make sure we stayed ahead. Team Green’s success can be attributed to its corporate mission of maximizing ROE and aiming for a high cumulative shareholder return, while selling products at a relatively low cost. Although Team Green did not have the highest shareholder return, by focusing on this and ROE, we were able to persevere. By constantly planning ahead, we were able to ensure that our company would continue to rise as the markets changed. For example, by investing to build more plants, Team Green was prepared for any market outlook. By having a vast amount of plants, we were able to produce the products in-house ourselves, rather than relying on contracting, which can become increasingly expensive as the market outlook and demand changes. Team Green also planned ahead by constantly investing in R&D to ensure we would have the most amount of features to offer, while creating them for a lower price. Finally, we made sure to pay careful attention to which technologies we produced and where, based on the demand, and cost to produce them. Our team focused on the demand and market outlook to see which products would benefit the most in each area. Based on the demand and each area, we produced the technologies in house in the USA and Asia. We made sure to pay close attention to where we should produce each product based on the costs of each and determined the best way to do it at the lowest cost for our company. Team Green was able to persevere and rise by learning from our mistakes and fixing them with each decision, to ensure we did not make the same mistakes. Team Green’s biggest flaw was not carefully planning out the taxes we were going to charge each country. This set us back for a bit, but Team Green learned as we went along! Another fault of Team Green was issuing too many shares. This also put our company back for a short while, but we grew as we bought the

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shares back. Team Green plans to continue moving up in the market and in doing so will be able to realize the profits that have been deferred.

With the vast amount of plants, no unsatisfied demand, an above average market share, the highest asset turnover, and the highest gross margin, Team Green is confident that with continued planning, Team Green can continue to rise and sell more products.

Company Overview Team Green is an international producer of phones/headsets, dedicated to creating the most technologically advanced products at a below average price. Team Green allocated more plants to the USA than in Asia, as it was cheaper to produce products in the USA than Asia. Having more capacity in the USA allowed Team Green to produce the most demanded products at a lower price and keep production costs low. Team Green was able to persevere by introducing technologies before the other companies and having more features, at a lower cost. By doing so we were able to have a competitive advantage over the other brands and set the tone of the market ourselves. Team Green started to In-house developed Tech 3 & 4 at such an early stage. By year 2, we were having those 2 techs developed. If we wanted to, we could have started to sell Tech 3 and 4 by round 3 but we didn’t feel like there was a high demand yet to proceed with that. Instead, we had developed 2 more features for tech 3 & 4. By year 4 we had 5 in each. Our focus in Tech 3 & 4 at such an early stage is what really helped us out by year 6, and we were prepared. Team Green always kept our eye on our Long-Term debt and knew that by the end of year 6 we wanted to have it completely paid off. Instead of leaving it for the last year, which is what seems like most teams did, we started a payment plan from year 3 to have it paid off by the end. By the beginning of year 3 our long-term was just a little over 509 million. Team Green did the math and figured out that if we paid 128 million every year it will be paid off by the end of 3

the year 6. This really helped Team Green as this wasn’t a big surprise to us by the end and is what cause our company to rise in our cumulative total shareholder return percentage by 10%. This causes our company to go from second to last place to 6th place in our industry. Our company moved up 3 places.

Review of Financial Performance Selected Financial Indicators Although Team Green Started out on the wrong foot, the company has been able to recover drastically through hard work and dedication. Team Green has remained steady in successfully paying off long-term debt as well as paying any short-term debt the company may have incurred. Our position is reflected in the key ratios: asset turnover, profit margin/return on sales, as well as leverage ratio (net debt to equity ratio). These three ratios make up the company’s Return on Equity or ROE.

ROE = Profit Margin x Asset Turnover x Leverage Ratio Profit Margin Profit margin reflects the company’s profit (sales less all expenses) divided by revenue. This ratio shows how well Team Green was able to handle our finances in their entirety. With a return on sales of about 11.71%, it becomes clear that Team Green has focused on the best way to produce our products, at the best costs, and sell for the best price. Despite having average to below average selling prices, Team Green was still able to produce profit as our competition started to rise. Below is a graph showing where Team Green stands relative to the rest of the competition.

ROS 30 20 10 0 Green

Red

Blue

Orange

Grey

Ochre

Pink

Navy

Yellow

Olive

-10 -20 -30

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Asset Turnover Asset turnover ratio helps investors to gain a better understanding of how effectively our company is using our assets to generate sales. It is generally better to have a higher ratio in this aspect as it implies that Team Green is more than competent in generating sales from our assets. Below is a depiction of Team Green’s Asset Turnover with an industry high of 1.5%. Our industry high asset turnover helps distinguish Team Green from the rest of the technology companies.

Asset Turnover Olive Yellow Navy Pink Ochre Grey Orange Blue Red Green 0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Leverage Ratio Leverage ratios indicate the level of debt Team Green has incurred and provides an indication how our assets and business operations are financed. Our company uses the net debt to equity ratio. Due to the fact that debt is risky, in general, lenders and investors tend to lean towards companies with lower debt to equity ratios, because this means there is a lower risk. As shown below, Team Green’s net debt to equity ratio is at 32.67%. Although our company does not have the best ratio in the industry, our ratio is still competitive. With Team Yellow and Team Orange having such a high D/E ratio, it puts Team Green in a great spot. *Note: Team Ochre’s D/E ratio was not applicable, so for the purposes of this chart, it is displayed as 0.

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Net Debt to Equity 400

253.37

300 200 268.83 100

40.58

0.98

32.67 -30.71

0

0 -86.78

-100

-51.83 -58.73

-200 Green

Red

Blue

Orange

Grey

Ochre

Pink

Navy

Yellow

Olive

Return on Equity By multiplying the three main factors Dupont’s Analysis, we come to our ROE of 32.67%. Below is a depiction of Team Green’s ROE in comparison to the rest of the industry. *Note: Team Ochre’s ROE was not applicable, so for the purposes of this chart, it is displayed as 0.

ROE 300 30.94

250 134.76 200 150 100

15.58

0

14.65 50

3.47 -4.57

27.35 28.22 -0.46 0 Green

Red

Blue

Orange

Grey

Ochre

Pink

Navy

Yellow

Olive

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Selected Line-Item Analysis Outsourcing Costs Unlike most of our competitors, Team Green did not continue to rely on outsourcing. With the expanded capacity of our plants built in the USA and Asia, we no longer need to rely on contract manufacturing. Contract manufacturing always appeared to have a lower cost but was ultimately more expensive than producing the technology in-house. We are proud to say that we have gotten to a point where we have enough capacity between our plants to provide to the market’s growing demand! Research and Development Team Green consistently sought to be the industry’s highest competitor in research and development. Team Green often spent above industry average and was able to sustain having the highest number of features offered for each technology except Technology 2, in which we were below the highest by 1 feature. Cash Reserves Team Green is currently struggling a bit with cash and cash equivalents. Our company currently has $34.65K in cash and cash equivalents (in k USD), whereas some of our competitors (Team Grey) have upwards of $5M. Team Green has begun to repurchase stock to maintain financial flexibility and a higher share price. By repurchasing stock, our company avoided the obligation of dividend payments, thus allowing us to be flexible in the ever-changing market conditions.

Disaggregating Stock Price After 6 years of observations, it becomes clear that there are a few factors that influence our stock price, such as EBITDA, capacity, and of course, market share. EBITDA EBITDA is earnings before interest, taxes, depreciation and amortization. EBITDA is important to investors because it provides them with an idea of short-term operational efficiency. Our stock price is reflective of cash flow generation. Below is a depiction of Team Green’s EBITDA in relation to the rest of the market.

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EBITDA Green

26.69

Red

24.79

Blue

28.76

Orange

19.92

Grey

31.44

Ochre

11.16

Pink

13.74

Navy

24.12

Yellow

29.65

Olive

27.62

Conclusive of what is shown above, Team Green generally has a high EBITDA. This shows our investors that we have less operating expenses than about 50% of our competitors, and also shows that with our high earnings we are able to pay our operating costs while still having a decent amount of revenue afterward. Capacity During Year 6, Team Green had unexpected short-term loss of 341,028. Although we had this large, unexpected loss, our stock price was still able to avail, and rise roughly 77 dollars. Market Share and Sales Growth Team Green ended the 6th year with a share price of $170.14. This wasn’t a good end of share price but also wasn’t bad. Team Green went from a share price of $101.79 in year 5 to $170.14 in year 6. That was a big improvement as our share price went up about 67% in a span of a year. The bigger improvement was our share price from year 4 to the end of year 6. With a price of $84.49 in year 4. This shows how in a span of 2 years our price went up about 101.4%. Team Green is showing an upward trend in the shareholder price. Team Green’s struggle was when we were issuing 18 million more shares by the end of year 3 dropping our shareholder price to $71.55. Our total amount of outstanding shares was at 48 million shares. By the end of year 6 we have bought back shares to decrease our shares outstanding to 38.88 million. This really did help with our shareholder price going up so much in a span of 2 years.

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Management’s Discussion and Analysis Global Market Conditions The market was being driven by these factors, weak demand, oversupply, and price competition. The market had low demand for Tech 2, 3, and 4 for the first 3 years. It wasn’t until year 4/5 where there was a high demand for tech 2, 3, and 4. There was even a civil war going on in year 3 then year 4 was the recovery. There was a price competition between the companies that this got some companies to leave the market because they couldn’t sell the tech for a profit. For example, Green Team couldn’t sell tech 1 in Asia because the price was so low that the company wouldn’t make a profit. It was going to cost more to manufacture compared to the selling prices. As companies left the market due to price wars and weak demand, this left an opening for the companies that stayed to take on a bigger part of the demand. With 10 companies, the industry was a perfectly competitive market. Product Portfolio Team Green offers its customers the most technologically advanced cellphones/headsets. Selling all 4 technologies, our company aims to supply the most demanded products for each region. By paying close attention to the demand in each country, we have been able to sustain sales for each technology. In the USA, Team Green feels that Tech 1 and Tech 2 make up most of the demand. In Asia, we felt as though Tech 2 and Tech 3 were the most demanded, and while both of them were, there is still a very high demand for Tech 1, which we have ceased to implement. This definitely set us back a bit in the Asia market. In Europe, Team Green had the right idea of implementing Tech 2 and Tech 4, however, due to the price war, even though we have the most amount of features, we did not have as much demand for Tech 4 because our price was too high compared to our competitors, who undercut us by a large amount. Foreign Operations Team Green has been able to maximize global operation in order to ensure flexibility with the ever-changing market. Team Green produces all technologies at both our USA and Asia plants. Our company has been able to shift production based on demand and cost of producing the product, to give us the most advantageous outcome. This helped minimize production costs. The technologies that were most demanded were produced in the USA, as it was cheaper to produce here. The technologies that had less of a demand were produced in Asia, as it was more expensive. Our ability to shift production around from USA to Asia is an important factor of a worldwide business. Research and Development Team Green focused on R&D from start-up. Our company always focused on implementing tech with the most features before our competitors. By focusing on R&D we were able to minimize production costs and feature costs. The amount Team Green spent on R&D was beneficial 9

because of when we spent and now how much we spent. Some of our competitors didn’t focus on careful planning, so they were then stuck with higher costs of production to license new features for each technology, in order to be able to compete with competitors. The initial impression of each technology is where the sales start and foreshadows how they will continue, so without careful planning, your sales will not escalate as well. Market Share Team Green has focused on rising in the global market, as we do not currently have the highest aggregate market share. By attaining a large market share, we have a better competitive edge over the other companies in our industry. By having a larger market share, we would have an even greater demand, which would in turn give us lower production costs. The more we produce in quantity, the less the unit price is to product each unit of technology. Below shows our global market share after year 6.

Although having a large market share is a long-term goal of ours, it is not our only goal. We also strive to give our consumers the best technologies with the most features at a low price. The graphs below depict our market share by country. ASIA

USA

EUROPE

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By year 6, the USA, we had a market share of 9.03 in Tech 1 and 8.36 in Tech 2. In Asia, we had a market share of 12.41 in Tech 2 and 11.46 in Tech 3. Finally, in Europe, we had a market share of 17.83 in Tech 2 and 10.37 in Tech 4. What hurt us in Asia was our competitors steeply undercutting our prices in Tech 4. If our competitors did not undercut our prices, we would have had a much larger market share in Tech 4 because we were one of 4 companies that implemented this technology.

Competitor Analysis This industry is a very competitive environment and in order to sustain the company and succeed, we must understand not only our company, but our competitors as well. We must be able to determine their strengths and weaknesses to determine how we want to combat them, as well as how they might affect us. Knowing these factors will help us see where we stand as well as what we might need to prepare for. Several other companies in our industry held the same level, and some held more technological competence to sell cell phones than our companies, and this decreases our ability to sell at our fullest extent. We had to think about what prices some of our other competitors will do and try to predict how they would react after seeing the prices from the previous year. In the price war, Green Team competed with the other companies to drive them out of the market by lowering our prices. We did it to a point where we make a profit and be able to sell the most products for having the lower price. We also had a high promotion to keep our consumers interested in the Tech at such a low price. This allowed us to drive companies to other techs to continue to make a profit. Team Green developed an early advantage as we soon started developing Tech 3 and 4 by year 2. By year 4, Green Team had 5 features in each of the 2 techs. This allowed us for the advantage to sell these technologies by the time the demand has reach a limit to where we can make a profit. Team Green got the most out of what they can in Tech 1 in Asia and Europe before the price war taking them out of the market to sell Tech 2, 3, and 4 instead. Green Team being prepared and developing these techs early, made them prepared for when this happened and ready to sell by year 4. This was Green Team’s biggest factor behind their success. The early development of plants in USA and Asia and features for the different techs.

Business Outlook Team Green anticipates industry demand to increase as we adjust our prices to compete in the price war. Team Green currently utilizes plants at 46% capa...