Simulation Practice Round 1

Hello Asma,

After you login, go to Dashboard and under Practice Round 1 > click Homework. Under Assignment click > Review and do the 7 questions.

To get to the data to answer the questions do the following: Dashboard and under Practice Round 1 > click decisions. Launch the web spreadsheet
. Click > continue as draft. You don’t have to enter any data just view the data to provide the analysis. View the data under Decisions, Proformas and Reports. My team is the ‘Baldwin” team so only view the data from my team to do the analysis. Just click file exit to exit please do not save. I uploaded some but all supporting files if you need them can be found by going to Dashboard and under Practice Round 1
click > Round 0 Reports. I really need this by 9 am EST June 6 2013 If you have any questions, please advise.

Thank you.

BUSINESS SIMULATION

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W W W . C A P S I M . C O M

http://www.capsim.com

1 introduction ……………………………………………………..

1.1 The Industry Conditions Report …………………………….1
1.2 Management Tools ……………………………………………….1
1.3 Company Departments ………………………………………..

1.4 Inter-Department Coordination ……………………………

1.5 Practice and Competition Rounds ………………………… 3
1.6 Company Success ………………………………………………… 3

2 industry conditions …………………………………… 3
2.1 Buying Criteria …………………………………………………….. 3
2.2 Buying Criteria by Segment ………………………………….

3 the customer survey score ……………………….. 5
3.1 Buying Criteria and the Customer Survey Score ………….

3.2 Estimating the Customer Survey Score ………………….

3.3 Stock Outs and Seller’s Market ……………………………..

4 managing your company …………………………… 9
4.1 Research & Development (R&D) …………………………..

4.2 Marketing …………………………………………………………..

4.3 Production ………………………………………………………….

4.4 Finance ……………………………………………………………….

5 the capstone courier ……………………………….. 17
5.1 Front Page …………………………………………………………. 17
5.2 Stock & Bond Summaries …………………………………… 17
5.3 Financial Summary …………………………………………….. 17
5.4 Production Analysis …………………………………………….17
5.5 Segment Analysis Reports …………………………………..

5.6 Market Share Report …………………………………………..19
5.7 Perceptual Map …………………………………………………. 19

5.8 Other Reports …………………………………………………….. 19

6 proformas and annual reports…………………. 19
6.1 Balance Sheet …………………………………………………….. 19
6.2 Cash Flow Statement ………………………………………….

6.3 Income Statement ……………………………………………… 20

7 additional modules ………………………………….. 20
7.1 TQM/Sustainability …………………………………………….. 20
7.2 HR (Human Resources) ………………………………………. 20

8 plug-ins …………………………………………………….

8.1 Making Decisions ………………………………………………. 21

9 situation analysis …………………………………….. 21

10 forecasting ………………………………………………

10.1 Basic Forecasting Method …………………………………. 22
10.2 Qualitative Assessment ……………………………………… 22
10.3 Forecasts, Proformas and the December 31

Cash Position ………………………………………………………

10.4 Worst Case/Best Case ……………………………………….. 23

11 balanced scorecard ………………………………… 23

12 six basic strategies ……………………………….. 2

12.1 Broad Cost Leader ……………………………………………..

12.2 Broad Differentiator …………………………………………… 24
12.3 Niche Cost Leader (Low Technology) ………………….. 24
12.4 Niche Differentiator (High Technology) ………………. 24
12.5 Cost Leader with Product Lifecycle Focus …………… 24
12.6 Differentiator with Product Lifecycle Focus ………… 24

Most instructors include
team Practice rounds. When
the Practice is over, the
simulation will restart from
the beginning, using the
unique model selected by
your instructor.

When the Competition
begins, your decisions
count! Additional tasks
could include:

» Optional Homework
Assignments
» Peer Evaluations

See your Dashboard for
complete information.

Login with your User ID and
Password at capsim.com.
Click on Capstone. Go to
Getting Started and follow
the steps that include:

» Reviewing the
Rehearsal Tutorial
» Opening the Capstone
Spreadsheet
» Forming your company

The Course Road Map

Getting
Started

Practice Rounds
(if applicable)

Competition
Rounds (if applicable)

Your instructor might
include a Comp-XM exam.
Go to the Course Page and
choose Comp-XM. Follow
the instructions on the
Dashboard which include:
» Decision making

using the Comp-XM
Spreadsheet

» Board Queries (quizzes)

Go to capsim.com/register,
follow the onscreen
instructions and register
into your Industry.* Create
your User ID and Password.

*Your instructor may have
given you an Industry ID
Number. If not, you can
locate your industry by using
your school name/campus
and either the course section
number, start date or your
instructor’s initials.

Registration

Table of Contents

SUPPORT TICKETS:

If you need assistance, please submit a support ticket. Login at capsim.com, click Capstone, then in the left menu, select Help > Support.

If you have problems registering, send an email to support@capsim.com.

Team Member Guide

Management Tools

1 Introduction

Congratulations, you are now in charge of a multimillion dollar
company. You manufacture sensors, which you market to other
manufacturers. They put your products into the devices they sell.
Your company was created when the government split a monopoly
into identical competitors. As a monopoly, operating inefficiencies
and poor product offerings were not addressed because:

• Increasing costs could be passed onto customers; and
• Mediocre products would sell because customers had no

other choices.

Although last year’s financial results were decent, your products are
getting old, your marketing efforts are falling short, your
production lines need revamping and your financial management is
almost nonexistent.

Competition in the post-monopoly era means you can no longer
ignore these issues. If you do, competitors with better products and/
or lower prices will take your market share.

Sensors Are Everywhere…

Sensors are devices that observe physical conditions. For

example, the average cell phone contains dozens of sensors

that allow it to interpret touch, spatial orientation and

signal strength.

New sensor businesses are created every day in areas as

diverse as security, aeronautics and biomedical engineering.

You are in a business-to-business market, not a direct-to-

consumer market; the sensors your company manufactures

are incorporated into the products your customers sell.

1.1 The Industry Conditions Report

Each simulation industry is unique. As your simulation starts, the
Industry Conditions Report, which is explained in Chapter 2, will
outline the beginning business environment, including customer
buying criteria.

The Industry Conditions Report is available from your

simulation Dashboard.

1.2 Management Tools

Here are the tools you need to run your company.

1.2.1 The Rehearsal Tutorial
Think of the Rehearsal Tutorial as a driving school for the
simulation. The tutorial will show you ways to steer the company,
including how to:

• Invent and revise products;
• Make marketing decisions;
• Schedule production and buy/sell equipment; and
• Ensure your company has the financial resources it needs for

the upcoming year.

The sample resources used for the Rehearsal, including its Capstone
Courier (see below) and Industry Conditions Report, mirror those
used in the actual simulation.

The Rehearsal is available from your simulation Dashboard.

1.2.2 The Capstone Courier
Every round, you and your competitors will have access to an
industry newsletter called the Capstone Courier. The Courier
(described in Chapter 5) is an extensive year-end report of the sensor
industry. It includes customer buying patterns, product positioning,
public financial records and other information that will help you get
ahead. In business, knowledge is power. If you want to evaluate your
company’s performance or analyze your competitors, the Courier is
the place to start.

Customer Survey Scores for each product (Chapter 3) can be found in
the Courier’s Segment Analysis pages. These scores determine sales
distribution. In general, the higher the score, the better the sales.

The Courier Reports “Last Year’s Results”

The Courier available at the start of Round 1 displays results

for Round 0, when all companies were equal just after the

monopoly’s breakup. The Courier available at the start of

Round 2 will display the results for Round 1. As the simulation

progresses and strategies are implemented, results among

the competing companies will begin to vary.

Company Departments

1.3 Company Departments

The Rehearsal Tutorial and Chapter 4 discuss company activities. You
have four main departments or functional areas:

• Research & Development, or R&

•

Marketing

•

Production

• Finance

Many simulations utilize modules such as Human Resources and
TQM (Total Quality Management)/Sustainability. Modules require
additional management decisions. Your simulation Dashboard will
tell you if any modules are included.

Companies use the Capstone Spreadsheet to enter
departmental decisions.

1.3.1

Research & Development (R&D)

Your R&D Department designs your product line. The department
needs to invent and revise products that appeal to your customers’
changing needs.

1.3.2 Marketing
Your Marketing Department prices and promotes your products. It
interacts with your customers via its sales force and distribution
system. Marketing is also responsible for sales forecasts.

1.3.3 Production
Your Production Department determines how many units will be
manufactured during the year. It is also responsible for buying and
selling production lines.

1.3.4

Finance

Your Finance Department makes sure your company has the financial
resources it needs to run through the year. The department can raise
money via one-year bank notes, 10-year bonds or stock issues.

The department can also issue stock dividends, buy back stock or
retire bonds before their due dates.

1.3.5 Plug-ins
Plug-ins are different than modules. Plug-ins and their decisions have
a greater overall impact on your organization.

For example, the simulation might include the Ethics plug-in, which
presents you with an unexpected dilemma. Group discussion and
consensus is imperative because your decisions will affect your
financial results.

Your simulation Dashboard will notify you if a plug-in has
been scheduled.

The Courier is available from

two locations:

• From the Capstone Spreadsheet, click Reports in the
menu bar; and

• On the website, log into your simulation and click the

Reports link.

1.2.3 The Situation Analysis
Completing the Situation Analysis (described in Chapter 9) will
enable you to understand current market conditions and how the
industry will evolve in the next few years. It will assist you with your
operational planning.

The Situation Analysis comes in two versions:

• Online interactive
• Downloadable PDF (pen and paper)

The Situation Analysis is available from your

simulation Dashboard.

1.2.4 Proformas & Annual Reports
Proformas and annual reports are specific to your company.
Proformas are projections for the upcoming year. Annual reports are
the results from the previous year.

The proformas will help you envision the impacts of your pending
decisions and sales forecasts. The annual reports will help you
analyze last year’s results.

Proformas are only available from the Capstone

Spreadsheet’s Proformas menu.

To access the annual reports:

• From the Capstone Spreadsheet, click Reports in the
menu bar; or

• On the website, log into your simulation then click the
Reports link.

1.2.5 The Capstone Spreadsheet
The Capstone Spreadsheet is the nerve center of your company where
you formulate and finalize management decisions for every
department. The spreadsheet comes in two versions:

• A Web Version that allows you to work via any Internet
browser; and

• An XLS Version that runs via Microsoft® Excel®.

After you log into your simulation, the spreadsheet is

available from the Decisions link.

1.2.6 Just in Time Information
In the spreadsheet decision areas, look for the
flag symbol shown to the right. Clicking it will
give you detailed information about the area
you are viewing.

Team Member Guide

Buying Criteria

to success! Companies compete for up to eight rounds, with each
round simulating one year in the life of your company.

1.5.1 Decision Audits
The Decision Audit is a complete trail of all team decisions. It will
help you identify your decision-making strengths and weaknesses.

The audit is available from two locations:

• From the Capstone Spreadsheet, click Help in the
menu bar; or

• On the website, log into your simulation then click the
Decision Audit link.

1.6 Company Success

The board of directors, shareholders and other stakeholders expect
you to make the company a market leader. Successful managers will:

• Analyze the market and its competing products;
• Create and execute a strategy; and
• Coordinate company activities.

Best of luck in running a profitable and sustainable company!

2 Industry Conditions

The information in your Industry Conditions Report will help you
understand your customers.

Your customers fall into different groups, which are represented by
market segments. Customers within a market segment have similar
needs. The segments are named for the customer’s primary
requirements such as:

• Traditional
• Low End
• High End
• Performance
• Size

The Industry Conditions Report lists market segment sales
percentages and projected growth rates unique to your simulation.

The Industry Conditions Report is published once at the

beginning of the simulation. It is available from your

simulation Dashboard.

2.1

Buying Criteria

Customers within each market segment employ different standards
as they evaluate products. They consider four buying criteria: Price,
Age, MTBF (Mean Time Before Failure) and Positioning.

1.4 Inter-Department Coordination

1.4.1 R&D and Marketing

R&D works with Marketing to make sure products meet
customer expectations.

1.4.2 R&D and Production
R&D works with Production to ensure assembly lines are purchased
for new products. If Production discontinues a product, it should
notify R&D.

1.4.3 Marketing and Production
Marketing works with Production to make sure manufacturing
quantities are in line with forecasts. Marketing’s market growth
projections also help Production determine appropriate levels of
capacity. If Marketing decides to discontinue a product, it tells
Production to sell the product’s production line.

1.4.4 Marketing and Finance
Marketing works with Finance to project revenues for each product
and to set the Accounts Receivable policy, which is the amount of time
customers can take to pay for their purchases.

1.4.5 Finance and Production
Production tells Finance if it needs money for additional equipment.
If Finance cannot raise enough money, it can tell Production to scale
back its requests or perhaps sell idle capacity.

1.4.6 Finance and All Departments
The Finance Department acts as a watchdog over company
expenditures. Finance should review Marketing and

Production

decisions. Finance should cross-check Marketing’s forecasts and
pricing. Are forecasts too high or too low? Will customers be willing
to pay the prices Marketing has set? Is Production manufacturing
too many or too few units? Does Production need additional
capacity? Has Production considered lowering labor costs by
purchasing automation?

1.5 Practice and Competition Rounds

Practice Rounds allow you to organize workflow among the members
of your company. You will begin to compete against the other
companies in your simulation or, if you are in a Footrace competition,
against a common set of computer-run companies.

Don’t confuse the Rehearsal Tutorial with the Practice

Rounds! During the Rehearsal Tutorial, you are shown how to

make decisions in a scripted environment. During the

Practice Rounds, you can experiment with your decisions in a

competitive environment.

After the conclusion of the Practice Rounds the simulation is reset
and the real competition begins. Now it’s time to drive your company

Buying Criteria
4

2.1.5 Market Segment Positions on the
Perceptual Map

Market segments have different positioning preferences. The Low
End segment is satisfied with inexpensive products that are large in
size and slow performing. It wants products that fall inside the
upper-left set of dashed and solid circles in Figure 2.2. The High End
segment wants products that are faster performing and smaller in
size. It wants products that fall within the lower-right set of dashed
and solid circles.

Over time, your customers expect products that are smaller and
faster. This causes the segments to move or drift a little each month.
As the years progress the locations of the circles significantly change.
The example in Figure 2.3 shows the location of the market segments
at the end of the fourth year. Figure 2.4 shows the segments at the end
of the eighth year.

2.1.1 Price
Each segment has different price expectations. One segment might
want inexpensive products while another, seeking advanced
technology, might be willing to pay higher prices.

2.1.2 Age
Each segment has different age expectations, that is, the length of
time since the product was invented or revised. One segment might
want brand-new technology while another might prefer proven
technology that has been in the market for a few years.

2.1.3 MTBF (Mean Time Before Failure)
or Reliability
MTBF (Mean Time Before Failure) is a rating of reliability measured
in hours. Segments have different MTBF criteria. Some might prefer
higher MTBF ratings while others are satisfied with lower ratings.

2.1.4 Positioning
Sensors vary in their dimensions (size) and the speed/sensitivity
with which they respond to changes in physical conditions
(performance). Combining size and performance creates a product
attribute called positioning.

The Perceptual Map

Positioning is such an important concept that marketers developed a
tool to track the position of their products and those of their
competitors. This tool is called a Perceptual Map.

Note the Perceptual Map in Figure 2.1. You will see this map quite
often through the course of the simulation.

The map measures size on the vertical axis and performance on the
horizontal axis. Each axis extends from 0 to 20 units. The arrow in
Figure 2.1 points to a product called Able with a performance
measurement of 8.0 and a size of 12.0.

Figure 2.1 The Perceptual Map Used in the
Simulation: The Perceptual Map plots product
size and performance characteristics.

Figure 2.2 Beginning Segment Positions:
At the beginning of the simulation, segment
positions are clustered in the upper-left
portion of the perceptual map.

Figure 2.3 Segment Positions at the End
of Year 4: The overlap between the seg-
ments decreases because the Low End
and Traditional segments move at
slower speeds.

Figure 2.4 Segment Positions at the End
of Year 8: The segments have moved to the
lower right; very little overlap remains.

Example! See your Industry Conditions Report for exact segment locations.

A product with a

performance of 8

and a size of 12 is

positioned here

Team Member Guide

Buying Criteria by Segment

In the simulation, there are zero customers interested in

products positioned outside of the dashed circles.

Your R&D and Marketing Departments have to make sure your
products keep up with changing customer preferences. To do this,
R&D must reposition products, keeping them within the moving
segment circles. See “4.1 Research & Development (R&D)” for
more information.

2.2 Buying Criteria by Segment

Buyers in each segment place a different emphasis upon the four
buying criteria. For example, some customers are more interested in
price, while others are more interested in positioning.

Positioning and price criteria change every year. Age and

MTBF criteria always remain the same.

Buying Criteria for the previous year are reported in the Capstone
Courier’s Segment Analysis pages. As you take over the company to
make decisions for Round 1, your reports reflect customer
expectations as of December 31, Round 0 (yesterday). The Industry
Conditions Report displays the Round 0 buying criteria for each
market segment. Here are two example segments.

Example 1: Customers seek proven products at a modest price.

• Age, 2 years– importance: 47%
• Price, $20.00-$30.00– importance: 23%
• Ideal Position, size 16.0/performance 4.0– importance: 21%
• MTBF, 14,000-19,000– importance: 9%

Example 2: Customers seek cutting-edge technology in size/
performance and new designs.

• Ideal Position, size 11.1/performance 8.9– importance: 43%
• Age, 0 years– importance: 29%
• MTBF, 20,000-25,000– importance: 19%
• Price, $30.00-$40.00– importance: 9%

3 The Customer
Survey Score

In any month, a product’s demand
is driven by its monthly customer
survey score. Assuming it does not
run out of inventory, a product with
a higher score will outsell a
product with a lower score.

Each year, some market segments demand greater improvement
than others. Therefore segments drift at different rates. Segments
demanding greater improvement will move faster and farther than
others. As time goes by, the overlap between the segments
diminishes.

Drift rates are published in the Industry Conditions Report.

Market segments will not move faster to catch up with products that
are better than customer expectations. Customers will refuse to buy a
product positioned outside the circles. Customers are only interested
in products that satisfy their needs. This includes being within the
circles on the Perceptual Map!

Perceptual Maps Can Be Used for

Many Types of Products…

Perceptual Maps can be used to plot any two product

characteristics. For example, cereal manufacturers could plot

nutrition and taste. The dots in the figure below represent

sales of breakfast cereals based on ratings of taste and

nutrition. There are few sales in the lower-left corner– not

many consumers want products that have poor taste and

poor nutrition.

As they review product sales, marketers would notice three

distinct clusters. The cluster to the upper left indicates a

group of customers that is more interested in nutrition than

taste. The cluster to the lower right indicates a group that is

more interested in taste than nutrition. The cluster to the

upper right indicates a group that wants both good taste and

good nutrition.

The clusters, or market segments, could then be named

“Taste,” “Nutrition” and “Taste/Nutrition.” The simulation uses

a similar positioning method to name its market segments.
Watch a video overview at:
http://capsim.com/go/v/ccss

http://capsim.com/go/v/ccss

Buying Criteria and the Customer Survey Score

3.1.1 Positioning Score
Marketers must understand both what customers want and their
boundaries. In terms of a product’s size and performance (as
discussed in “Section 2.1.5”), the Perceptual Map illustrates
these ideas with circles. Each segment is described with a dashed
outer circle, a solid inner circle and a dot representing the ideal
position called the ideal spot (Figure 3.1).

Rough Cut Circle

The dashed outer circle defines the outer limit of the segment.
Customers are saying, “I will NOT purchase a product outside this
boundary.” We call the dashed circle the rough cut boundary because
any product outside of it “fails the rough cut” and is dropped from
consideration. Rough cut circles have a radius of 4.0 units.

Fine Cut Circle

The solid inner circle defines the heart of the segment. Customers
prefer products within this circle. We call the inner circle the fine cut
because products within it “make the fine cut.” Fine cut circles have a
radius of 2.5 units.

Ideal Spot

The ideal spot is that point in the heart of the segment where, all other
things being equal, demand is highest.

Segment Movement

Each segment moves across the Perceptual Map a little each month.
In a perfect world your product would be positioned in front of the

Customer survey scores are calculated 12 times a year. The

December scores are reported in the Capstone Courier’s

Segment Analysis pages.

A customer survey score reflects how well a product meets its
segment’s buying criteria. Company promotion, sales and accounts
receivable policies also affect the survey score.

Scores are calculated once each month because a product’s age and
positioning change a little each month. If during the year a product is
revised by Research and Development, the product’s age, positioning
and MTBF characteristics can change quite a bit. As a result, it is
possible for a product with a very good December customer survey
score to have had a much poorer score–and therefore poorer sales–
in the months prior to an R&D revision.

Prices, set by Marketing at the beginning of the year, will not change
during the year.

3.1 Buying Criteria and the Customer
Survey Score

The customer survey starts by evaluating each product against the
buying criteria. Next, these assessments are weighted by the criteria’s
level of importance. For example, some segments assign a higher
importance to positioning than others. A well-positioned product in a
segment where positioning is important will have a greater overall
impact on its survey score than a well-positioned product in a
segment where positioning is not important.

The Industry Conditions Report and the Courier’s Market

Segment Analysis pages break down each segment’s criteria

in order of importance.

A perfect customer survey score of 100 requires that the product: Be
at the ideal position (the segment drifts each month, so this can
occur only one month per year); be priced at the bottom of the
expected range; have the ideal age for that segment (unless they are
revised, products grow older each month, so this can occur only one
month per year); and have an MTBF specification at the top of the
expected range.

Your customers want perfection, but it is impractical to

have “perfect” products. In many cases you will have to

settle for “great” products, but the better the products, the

higher the costs. Your task is to give customers great

products while still making a profit. Your competitors face

the same dilemma.

Figure 3.1 Positioning Scores: The dashed outer circle defines the edge of the
rough cut. It measures 4.0 units from the center of the circle. The inner circle
defines the edge of the fine cut. It measures 2.5 units from the center. Segment
ideal spots are represented by the black dots.

The example on the left displays a positioning score for a segment that prefers
products with slower performance and larger size. The example on the right
displays a score for a segment that demands cutting-edge products with high
performance and small size. The orange areas represent the segment rough cuts,
where scores rapidly decrease towards zero.

Example!
See your Industry Conditions Report for exact information.

Team Member Guide

Buying Criteria and the Customer Survey Score

ideal spot in January, on top of the ideal spot in June and trail the
ideal spot in December. In December it would complete an R&D
project to jump in front of the ideal spot for next year.

Positioning Rough Cut

Products placed in the rough cut area (orange rings, Figure 3.1) are
between 2.5 and 4.0 units from the center of the circle. Products here
are poorly positioned and they will have reduced customer survey
scores. The farther they are from the fine cut circle, the more the
scores are reduced. Just beyond the fine cut, scores drop 1%. Halfway
across the rough cut, scores drop 50%. Scores drop 99% for products
that are almost to the edge of the rough cut.

Sensors that are about to enter the rough cut can be revised

by Research & Development (see “4.1.1 Changing

Performance, Size and MTBF”).

The location of each segment’s rough cut and fine cut circles

as of December 31 of the previous year appears on page 11 of

the Courier.

Positioning Fine Cut

Products inside the fine cut (green areas, Figure 3.1) are within 2.5
units of the center of the circle. Ideal spots for each segment are
illustrated by the black dots. The example on the left illustrates a
segment that prefers proven, inexpensive technology. The ideal spot is
to the upper left of the segment center, where material costs are
lower. The example on the right illustrates a segment that prefers
cutting-edge technology. The ideal spot is to the lower right of the
segment center, where material costs are higher (see Figure 4.1 for
an illustration of material positioning costs).

Participants often ask, “Why are some ideal spots ahead of

the segment centers?” The segments are moving. From a

customer’s perspective, if they buy a product at the ideal

spot, it will still be a cutting-edge product when it wears out.

For contrast, if they buy a product at the trailing edge, it will

not be inside the segment when it wears out.

A product’s positioning score changes each month because
segments and ideal spots drift a little each month. Placing a
product in the path of the ideal spot will return the greatest benefit
through the course of a year.

3.1.2 Price Score
Every segment has a $10.00 price range. Customers prefer
products–the ideal–towards the bottom of the range. Price ranges
in all segments drop $0.50 per year.

Figure 3.3 Mean Time Before Failure
(MTBF) Score: As MTBF increases, the
score increases. Customers are
indifferent to MTBFs above the
segment range.

Figure 3.2 Classic Price/Demand
Curve (Green Bow): As price drops,
demand (price score) rises. Scores
drop above and below the price range
(orange arrows).

Segment price expectations correlate with the segment’s position on
the Perceptual Map. Segments that demand higher performance and
smaller sizes are willing to pay higher prices.

Price ranges for Round 0 (the year prior to Round 1) are

published in the Industry Conditions Report and the Segment

Analysis pages

of the Capstone Courier.

Price Rough Cut

Sensors priced $5.00 above or below the segment guidelines will not
be considered for purchase. Those products fail the price rough cut.

Sensors priced $1.00 above or below the segment guidelines lose
about 20% of their customer survey score (orange arrows, Figure
3.2). Sensors continue to lose approximately 20% of their customer
survey score for each dollar above or below the guideline, on up to
$4.99, where the score is reduced by approximately 99%. At $5.00
outside the range, demand for the product is zero.

Price Fine Cut

Within each segment’s price range, price scores follow a classic
economic demand curve (green curve, Figure 3.2): As price goes
down, the price score goes up.

3.1.3 MTBF Score
Each segment sets a 5,000 hour range for MTBF (Mean Time Before
Failure), the number of hours a product is expected to operate
before it malfunctions. Customers prefer products towards the top
of the range.

Estimating the Customer Survey Score

3.2 Estimating the Customer Survey Score

The customer survey score drives demand for your product in a
segment. Your demand in any given month is your score divided by
the sum of the scores. For example, if your product’s score in April is
20 and your competitors’ scores are 27, 19, 21 and 3, then your
product’s April demand is:

20 / (20 + 27 + 19 + 21 + 3) = 22%

Assuming you had enough inventory to meet demand, you would
receive 22% of segment sales for April.

What generates the score itself? Marketers speak of “the 4 P’s”–
price, product, promotion and place. Price and product are found in
the buying criteria. Together they present a price-value relationship.
Your promotion budget builds “awareness,” the number of customers
who know about your product before sourcing. Your sales budget
(place) builds “accessibility,” the ease with which customers can
work with you after they begin sourcing. To the 4 P’s we can add two
additional elements– credit terms and availability. Credit terms are
expressed by your accounts receivable (A/R) policy. Availability
addresses inventory shortages.

3.2.1 Base Scores
To estimate the customer survey score, begin with the buying criteria
available in the Courier’s Segment Analysis reports. For example,
suppose the buying criteria are:

• Age, 2 years– importance: 47%
• Price, $20.00-$30.00– importance: 23%
• Ideal Position, size 15.0 /performance 5.0– importance: 21%
• MTBF, 14,000-19,000– importance: 9%

A perfect score of 100 requires that the product have an age of 2.0
years, a price of $20.00, a position at the ideal spot (15.0 and 5.0) and
an MTBF of 19,000 hours.

The segment weighs the criteria at: Age 47%, Price 23%, Positioning
21% and MTBF 9%. You can convert these percentages into points
then use these numbers to estimate a base score for your product. For
example, price is worth 23 points. The perfect Round 0 price of
$20.00 would get 23 points, but at the opposite end of the price range,
a price of $30.00 would only get one point.

You can use the age and positioning charts in your

Industry Conditions Report to estimate average points for

those criteria.

However, the base score can fall because of poor awareness
(promotion), accessibility (place) or the credit terms you extend to
your customers.

3.2.2 Accounts Receivable
A company’s accounts receivable policy sets the amount of time
customers have to pay for their purchases. At 90 days there is no

MTBF Rough Cut

Demand scores fall rapidly for products with MTBFs beneath the
segment’s guidelines. Products with an MTBF 1,000 hours below the
segment guideline lose 20% of their customer survey score. Products
continue to lose approximately 20% of their customer survey score
for every 1,000 hours below the guideline, on down to 4,999 hours,
where the customer survey score is reduced by approximately 99%.
At 5,000 hours below the range, demand for the product falls to zero.

MTBF Fine Cut

Within the segment’s MTBF range, the customer survey score
improves as MTBF increases (Figure 3.3). However, material costs
increase $0.30 for every additional 1,000 hours of reliability.
Customers ignore reliability above the expected range– demand
plateaus at the top of the range.

3.1.4 Age Score
The age criteria do not have a rough cut; a product will never be too
young or too old to be considered for purchase.

Customers demanding cutting-edge technology prefer newer
products. The ideal ages for these market segments are generally one
and a half years or less. Other segments prefer proven technology.
These segments seek older designs.

Each month, customers assess a product’s age and award a score
based upon their preferences. Examples of age preferences are
illustrated in Figure 3.4.

Age preferences for each segment are published in the

Industry Conditions Report and the Segment Analysis pages

of the Capstone Courier.

Figure 3.4 Age Scores: The example on the left displays a score for a segment
that prefers products with an age of one year. The example on the right displays
a score for a segment that prefers products with an age of two years.

Example!
See your Industry Conditions Report for exact information.

Team Member Guide

Stock Outs and Seller’s Market

1. After completing a capacity analysis, a company decides that
industry demand exceeds supply. They price their product
$4.99 above last round’s published price range, forgetting that
price ranges fall by $0.50 each round. Demand for the
product becomes zero. They should have priced $4.49 above
last year’s range.

2. A company disregards products that are in the positioning rough
cut. These products normally can be ignored because they have
low customer survey scores. However, when the company
increases the price, the customer survey score falls below the
products in the rough cut areas, which are suddenly more
attractive than their product.

3. The company fails to add capacity for the next round. A seller’s
market sometimes appears because a competitor
unexpectedly exits a segment. This creates a windfall
opportunity for the remaining companies. (However, a
well-run company will always have enough capacity to meet
demand from its customers.)

How can you be sure of a seller’s market? You can’t, unless you are
certain that industry capacity, including a second shift, cannot meet
demand for the segment. In that case, even very poor products will
stock out as customers search for anything that will meet their needs.

See “How Is the Customer Survey Score Calculated?” in the

Online Guide’s FAQ|Reports section for more information on

assessing your products.

4 Managing Your Company

It’s time to unlock the doors and turn on the lights. Welcome to your
company. The Rehearsal Tutorial (described in Section 1.2.1) shows
you the mechanics of the company departments described below.
Remember, entering decisions is the easy part; determining what
decisions to enter requires some thought. This chapter and the
Rehearsal Tutorial will help you get started.

Every company starts the simulation with five sensor products. Your
company has one product for each segment. You have one assembly
line per product. Products can be terminated or added. Your
company must have at least one product and cannot have more than
eight. Your decisions, made every year on January 1, are carried out
by your employees throughout the year.

Your simulation might also include additional modules

and plug-ins. Your simulation Dashboard will notify you if

these decisions are scheduled.

reduction to the base score. At 60 days the score is reduced 0.7%. At
30 days the score is reduced 7%. Offering no credit terms (0 days)
reduces the score by 40% (see “4.4.5 Credit Policy”).

3.2.3

Awareness and Accessibility

After your product leaves the factory and enters the marketplace, the
calculations for its score become less exact. The score will be
affected by the level of the product’s awareness (the percentage of
people who know about your product) and its segment’s
accessibility (the number of customers who can easily interact with
your company).

Awareness is built over time by the product’s promotion budget.
Promotion budgets fund advertising and public relations campaigns.

Accessibility is built over time by the product’s sales budget. Sales
budgets fund salespeople and distribution systems to service
customers within the product’s market segment.

Similar products with higher awareness and accessibility will score
better than those with lower percentages (see “4.2 Marketing” for
more information on awareness and accessibility).

If the TQM/Sustainability module is enabled, some initiatives

can increase the customer survey score (see “7.1 TQM/

Sustainability”).

3.3 Stock Outs and Seller’s Market

What happens when a product generates high demand but runs out of
inventory (“stocks out”)? The company loses sales as customers turn
to its competitors. This can happen in any month.

The Market Share Report of the Capstone Courier (page 10)

can help you diagnose stock outs and their impacts.

Usually, a product with a low customer survey score has low sales.
However, if a segment’s demand exceeds the supply of products
available for sale, a seller’s market emerges. In a seller’s market,
customers will accept low-scoring products as long as they fall within
the segment’s rough cut limits. For example, desperate customers
with no better alternatives will buy:

• A product positioned just inside the rough cut circle on
the Perceptual Map– outside the circle they say “no” to
the product;

• A product priced $4.99 above the price range– at $5.00
customers reach their tolerance limit and refuse to buy
the product; and

• A product with an MTBF 4,999 hours below the range–
at 5,000 hours below the range customers refuse to buy
the product.

Watch out for three common tactical mistakes in a seller’s market:

Research & Development (R&D)
10

Reliability (MTBF) Costs

The reliability rating, or MTBF, for existing products can be adjusted
up or down. Each 1,000 hours of reliability (MTBF) adds $0.30 to the
material cost. A product with 20,000 hours of reliability includes
$6.00 in reliability costs:

($0.30 × 20,000) / 1,000 = $6.00

Improving positioning and reliability will make a product more
appealing to customers, but doing so increases material costs.

Material costs displayed in the spreadsheet and reports are

the combined positioning and reliability (MTBF) costs.

Inventing Sensors
New products are assigned a name (click in the first cell that reads NA
in the name column), performance, size and MTBF. Of course, these
specifications should conform to the criteria of the intended market
segment. The name of all new products must have the same first letter
of the company name.

The Production Department must order production capacity to build
the new product one year in advance. Invention projects take at least
one year to complete.

4.1 Research &
Development (R&D)

The Research and Development (R&D)
Department oversees invention and
redesign. It develops the
innovations needed to keep
the company ahead of the
competition. R&D is
responsible for the
“product” portion of the 4
P’s of Marketing (“product, price, place and promotion”). This
makes R&D an essential part of any marketing process.

Your R&D Department invents new products and changes
specifications for existing products. Changing size and/or
performance repositions a product on the Perceptual Map.
Improving performance and shrinking size moves the product
towards the lower right on the map (see “2.1.4 Positioning”).

Your R&D decisions are fundamental to your Marketing and
Production plans. In Marketing, R&D addresses:

• The positioning of each product inside a market segment on
the Perceptual Map

• The number of products in each segment
• The age of your products
• The reliability (MTBF rating) of each product

In Production, R&D affects or is affected by:

• The cost of material
• The purchase of new facilities to build new products
• Automation levels (The higher the automation level, the

longer it takes to complete an R&D project.)

All R&D projects begin on January 1. If a product does not have a
project already under way, you can launch a new project for that
product. However, if a project begun in a previous year has not
finished by December 31 of last year, you will not be able to launch a
new project for that product (the decision entry cells in the R&D area
of the Capstone Spreadsheet will be locked).

4.1.1 Changing Performance, Size and MTB

A repositioning project moves an existing product from one location
on the Perceptual Map to a new location, generally (but not always)
down and to the right. Repositioning requires a new size attribute
and/or a new performance attribute. To keep up with segment drift, a
product must be made smaller (that is, decrease its size) and better
performing (that is, increase its performance).

Positioning Costs

Positioning affects material costs (Figure 4.1). The more advanced
the positioning, the higher the cost. The trailing edge of the Low End
fine cut has the lowest positioning cost of approximately $1.00; the
leading edge of the High End fine cut has the highest positioning cost
of approximately $10.00.

Figure 4.1 Approximate Material Positioning Costs: Material costs
are driven by two factors, reliability (MTBF) and positioning.

Positioning costs vary depending on the product’s location on the
Perceptual Map. Products placed at the trailing edge of the seg-
ments have a positioning cost of approximately $1.00; products
placed on the arc of the leading edge have a positioning cost of
approximately $10.00. Products placed on the arc halfway between
the trailing and leading edges have a positioning material cost of
approximately $5.50.

While the segments will drift apart and the distance between the
leading and trailing edges will increase, the positioning cost range
will not change. The leading edge will always be approximately
$10.00, the trailing edge will always be approximately $1.00 and
the midpoint will always be approximately $5.50.

$1
0.

$1
.0

$5
.5
0

Watch a video overview at:
http://capsim.com/go/v/crd

Team Member Guide

Marketing

the product’s age is 4 years, on the day it is repositioned, its age
becomes 2 years. Therefore, you can manage the age of a product by
repositioning the product. It does not matter how far the product
moves. Aging commences from the revision date.

Changing the MTBF alone will not affect a product’s age.

Age criteria vary from segment to segment. For example, if a segment
prefers an age of 2 years and the product’s age approaches 3 years,
customers will lose interest (see Figure 3.4). Repositioning the
product drops the age from 3 to 1.5 years, and customers will become
interested again.

Log into the Capstone Spreadsheet and click the Decisions

menu. Select Research & Development. To change a product’s

performance, enter a number in the New Pfmn cell; to change

its size, enter a number in the New Size cell. To change the

reliability rating, enter a number in the MTBF cell. As you vary

the specifications, observe the effect upon the revision date,

project cost, material cost and age.

The Rehearsal Tutorial’s R&D Tactics show you how to run the

department. Log in at the Capsim website and go to your

Dashboard for information about the Rehearsal.

4.2 Marketing

Marketing functions vary widely depending on
the industry and company. In general, the
department drums up interest in the company’s
products or services through a mix
of activities. These can include
advertising, public relations and
good old-fashioned salesmanship.

Your Marketing Department is
concerned with the remaining P’s (beyond R&D’s product): price,
place and promotion. Your Marketing Department is also in charge of
sales forecasting.

4.2.1 Pricing Sensors
Price was discussed in 3.1.2. To review, appeal falls to zero when
prices go $5.00 above or below the expected price range. Price drives
the product’s contribution to profit margin. Dropping the price
increases appeal but reduces profit per unit.

Segment price ranges fall at a rate of $0.50 per year. For example, if in
Round 0, Traditional customers expect a price between $20.00 and
$30.00, then in Round 1, the Traditional price range will be $19.50-

All new products require capacity and automation, which

should be purchased by the Production Department in the

year prior to the product’s revision (release) date. If you don’t

buy the assembly line the year prior to its introduction, you

cannot manufacture your new product!

It is not possible to produce new products prior to the revision date. A
new product with a revision date of July 1 will be produced in the
second half of the year. The capacity and automation will stand idle
for the first half of the year.

4.1.2 Project Management
Segment circles on the Perceptual Map move at speeds ranging from
0.7 to 1.3 units each year. You must plan to move your products (or
retire them) as the simulation progresses. Generally, the longer the
move on the Perceptual Map, the longer it takes the R&D Department
to complete the project.

Project lengths can be as short as three months or as long as three
years. Project lengths will increase when the company puts two or
more products into R&D at the same time. When this happens each
R&D project takes longer. Assembly line automation levels also affect
project lengths. R&D project costs are driven by the amount of time
they take to complete. A six-month project costs $500,000; a one-year
project costs $1,000,000.

Sensors will continue to produce and sell at the old performance, size
and MTBF specifications up until the day the project completes,
shown on the spreadsheet as the revision date. Unsold units built
prior to the revision date are reworked free of charge to match the
new specifications.

If the project length takes more than a year, the revision date

will be reported in the next Capstone Courier. However, the

new performance, size and MTBF will not appear; old product

attributes are reported prior to project completion.

When products are created or moved close to existing products, R&D
completion times diminish. This is because your R&D Department
can take advantage of existing technology. If the module is active,
TQM/Sustainability investments can also decrease R&D times (see
“7.1 TQM/Sustainability”). It is important to verify completion dates
after all decisions have been entered. Usually you want repositioning
projects to finish in less than a year. For example, consider breaking
an 18-month project into two separate projects, with the first stage
ending just before the end of the current year and the second ending
halfway through the following year.

4.1.3 A Sensor’s Age
It is possible for a product to go from an age of 4 years to 2 years. How
can that be? When a product is moved on the Perceptual Map,
customers perceive the repositioned product as newer and improved,
but not brand new. As a compromise, customers cut the age in half. If

Watch a video overview at:
http://capsim.com/go/v/cmrk

Marketing

The Courier’s Segment Analysis reports (pages 5-9)

publish awareness percentages.

New products are newsworthy events. The buzz creates 25%
awareness at no cost. The 25% is added to any additional awareness
you create with your promotion budget.

Sales

Each product’s sales budget contributes to segment accessibility. A
segment’s accessibility percentage indicates the number of
customers who can easily interact with your company via
salespeople, customer support, delivery, etc. Like awareness, if your
sales budgets drop to zero, you lose one third of your accessibility
each year. Unlike awareness, accessibility applies to the segment, not
the product. If your product exits a segment, it leaves the old
accessibility behind. When it enters a different segment, it gets that
segment’s accessibility.

If you have two or more products that meet a segment’s fine cut
criteria, the sales budget for each product contributes to that
segment’s accessibility. The more products you have in the segment’s
fine cut, the stronger your distribution channels, support systems,
etc. This is because each product’s sales budget contributes to the
segment’s accessibility.

If you have one product in a segment, there is no additional benefit to
spending more than $3,000,000. If you have two or more products in
a segment, there is no additional benefit to spending more than a
$4,500,000 split between the products, for example, two products
with sales budgets of $2,250,000 each (see Figure 4.3).

Sales budgets are less effective when products are not

completely positioned in the fine cut circle, when prices rise

above segment guidelines or when MTBFs fall below

segment guidelines.

$29.50; Round 2, $19.00-$29.00, etc. This puts pressure on
companies to improve their cost structures.

4.2.2 Promotion and Sales Budgets
Promotion and sales budgets affect customer awareness and
accessibility. They also affect the customer survey score. See “3.2
Estimating the Customer Survey Score” for more information.

Promotion

Each product’s promotion budget determines its level of awareness. A
product’s awareness percentage reflects the number of customers
who know about the product. An awareness of 50% indicates half of
the potential customers know it exists. From one year to the next, a
third (33%) of those who knew about a product forget about it.

Last Year’s Awareness – (33% × Last Year’s Awareness) =
Starting Awareness

If a product ended last year with an awareness of 50%, this year it will
start with an awareness of approximately 33%. This year’s promotion
budget would build from a starting awareness of approximately 33%.

Starting Awareness + Additional Awareness from
Figure 4.2 = New Awareness

Figure 4.2 indicates a $1,500,000 promotion budget would add
36% to the starting awareness, for a total awareness of 69% (33 +
36 = 69).

Figure 4.2 indicates a $3,000,000 budget would add just under 50%
to the starting awareness, roughly 14% more than the $1,500,000
expenditure (33 + 50 = 83). This is because further expenditures
tend to reach customers who already know about the product. Once
your product achieves 100% awareness, you can scale back the
product’s promotion budget to around $1,400,000. This will maintain
100% awareness year after year.

Figure 4.2 Promotion Budget: Increases in promotion budgets
have diminishing returns. The first $1,500,000 buys 36% aware-
ness; spending another $1,500,000 (for a total of $3,000,000)
buys just under 50%. The second $1,500,000 buys less than
14% more awareness.

Figure 4.3 Sales Budget: For budgets above $3,000,000, the dotted red line indicates there
is no additional benefit for companies that have only one product in a segment; the dashed
red line indicates returns for companies with two or more products in a segment. Increases
in sales budgets have diminishing returns. The first $2,000,000 buys 22% accessibility. For
companies with two or more products in a segment, spending $4,000,000 buys just under
35%. The second $2,000,000 buys less than 13% additional accessibility.

Team Member Guide
Production
13

• Gross Revenue Forecast (Price multiplied by either the
Benchmark Prediction or, if entered, Your Sales Forecast.)

• Variable Costs (Labor, Material and Inventory Carrying
costs subtracted from the Gross Revenue Forecast.)

• Contribution Margin Forecast (Gross Revenue Forecast
minus variable costs.)

• Less Promotion and Sales (Contribution Margin Forecast
minus the product’s Promotion Budget and Sales Budget.)

The Rehearsal Tutorial’s Marketing Tactics show you how to

run the department. Log in at the Capsim website and go to

your Dashboard for information about the Rehearsal.

4.3 Production

For manufacturers, production literally puts
everything together. The department
coordinates and plans manufacturing runs,
making sure that products get out
the door.

In your Production Department,
each product has its own assembly
line. You cannot move a product
from one line to another because automation levels vary and each
product requires special tooling.

As it determines the number of units to produce for the upcoming
year, Production needs to consider the sales forecasts developed by
Marketing minus any inventory left unsold from the previous year.

4.3.1 Capacity
First-shift capacity is defined as the number of units that can be
produced on an assembly line in a single year with a daily eight-hour
shift. An assembly line can produce up to twice its first-shift capacity
with a second shift. An assembly line with a capacity of 2,000,000
units per year could produce 4,000,000 units with a second shift.
However, second-shift labor costs are 50% higher than the first shift.

Each new unit of capacity costs $6.00 for the floor space plus $4.00
multiplied by the automation rating. The Production spreadsheet will
calculate the cost and display it for you. Increases in capacity require
a full year to take effect– increase it this year, use it next year.

Capacity can be sold at the beginning of the year for $0.65 on the
dollar value of the original investment. You can replace the capacity
in later years, but you have to pay full price. If you sell capacity for
less than its depreciated value, you lose money, which is reflected
as a write-off on your income statement. If you sell capacity for
more than its depreciated value, you make a gain on the sale. This
will be reflected as a negative write-off on the income statement
(see “6.3 Income Statement”).

Achieving 100% accessibility is difficult. You must have two or
more products in the segment’s fine cut. Once 100% is reached,
you can scale back the combined budgets to around $3,500,000 to
maintain 100%.

The Courier’s Segment Analysis reports (pages 5-9)

publish accessibility percentages.

Awareness and Accessibility

Think of awareness and accessibility as “before” and “after” the sale.
The promotion budget drives awareness, which persuades the
customer to look at your product. The sales budget drives
accessibility, which governs everything during and after the sale. The
promotion budget is spent on advertising and public relations. The
sales budget is spent on distribution, order entry, customer service,
etc. Awareness and accessibility go hand in hand towards making the
sale. The former is about encouraging the customer to choose your
product; the latter is about closing the deal via your salespeople and
distribution channels.

4.2.3 Sales Forecasting
Accurate sales forecasting is a key element to company success.
Manufacturing too many units results in higher inventory carrying
costs. Manufacturing too few units results in stock outs and lost sales
opportunities, which can cost even more (see “10 Forecasting”).

Log into the Capstone Spreadsheet and click the Decisions

menu. Select Marketing. Use this area to determine each

product’s Price, Promotion Budget, Sales Budget and Sales

Forecast. What’s the difference between the Benchmark

Prediction and Your Sales Forecast? The Benchmark

Prediction cannot consider what your competitors are doing.

It does not know. Instead, it assumes each of your

competitors will offer one mediocre product (with a customer

survey score of 20) in each segment. It benchmarks how your

product would do against this mediocre playing field.

The Benchmark Prediction, expressed as units demanded,

changes as you make decisions about your product. Use the

Benchmark Prediction to evaluate the impact your decisions

will have upon your product’s appeal. For example, you can

estimate the impact a price change will have upon demand.

The Your Sales Forecast column overrides the Benchmark

Prediction with your own prediction (see Chapter 10). Until

you provide a sales forecast, the computer uses its mediocre

Benchmark Prediction to predict your proforma financial

statements. Always override the Benchmark Prediction with

your own forecast.

The remaining cells display the financial impacts of

your decisions:

Watch a video overview at:
http://capsim.com/go/v/cprd

Production

takes significantly longer at an automation level of 8.0 than at
5.0 (Figure 4.4). Long moves are less affected. You can move a
product a long distance at any automation level, but the project
will take between 2.5 and 3.0 years to complete.

Changing Automation

For each point of change in automation, up or down, the company is
charged $4.00 per unit of capacity. For example, if a line has a
capacity of 1,000,000 units, the cost of changing the automation level
from 5.0 to 6.0 would be $4,000,000.

Reducing automation costs money. If you reduce automation, you will
be billed for a retooling cost. The net result is you will be spending
money to make your plant less efficient. While reduced automation
will speed R&D redesigns, by and large, it is not wise to reduce an
automation level.

When you buy automation, you might want to determine the

return on investment (ROI). On your income statement, find

last year’s labor cost for the product you are automating.

Your labor cost savings will be approximately 10% for each

new point of automation. Multiply the savings by the number

of rounds remaining in your simulation then divide it by the

total cost of the automation.

(Savings × Remaining Rounds) / Automation Cost = RO

If your plant is highly utilized your ROI will be higher than if

your plant is only partially utilized (if your plant is under-

utilized you might consider selling excess capacity).

Clearly, the greater the ROI, the better the investment.

Changes in automation require a full year to take effect– change it
this year, use it next year.

Log into the Capstone Spreadsheet and click the Decisions

menu. Select Production. Use this area to enter for each

product:

• A Production Schedule
• Increases in first-shift capacity (Put a positive number in

Buy/Sell Capacity.)

• Decreases in first-shift capacity (Put a negative number in
Buy/Sell Capacity.)

• Changes in automation level (Enter a number in New
Automation Rating.)

The Rehearsal Tutorial’s Production Tactics show you how to

run the department. Log in at the Capsim website and go to
your Dashboard for information about the Rehearsal.

The dollar value limit of capacity and automation purchases

is largely determined by the maximum amount of capital that

can be raised through stock and bond issues plus excess

working capital. The decision area displays this amount.

4.3.2 Discontinuing a Sensor
If you sell all the capacity on an assembly line, Capstone interprets
this as a liquidation instruction and will sell your remaining
inventory for half the average cost of production. Capstone writes off
the loss on your income statement. If you want to sell your inventory
at full price, sell all but one unit of capacity.

4.3.3 Automation
As automation levels increase, the number of labor hours required to
produce each unit falls. The lowest automation rating is 1.0; the
highest rating is 10.0.

At an automation rating of 1.0, labor costs are highest. Each
additional point of automation decreases labor costs approximately
10%. At a rating of 10.0, labor costs fall about 90%.

Labor costs increase each year because of an Annual Raise in

the workers’ contract.

Despite its attractiveness, two factors should be considered before
raising automation:

1. Automation is expensive: At $4.00 per point of automation,
raising automation from 1.0 to 10.0 costs $36.00 per unit
of capacity;

2. As you raise automation, it becomes increasingly difficult for
R&D to reposition products short distances on the Perceptual
Map. For example, a project that moves a product 1.0 on the map

Figure 4.4 Time Required to Move a Sensor on the Perceptual Map
1.0 Unit at Automation Levels 1 Through 10

Team Member Guide

Finance

January 1. The company can “roll” that debt by simply borrowing the
same amount again. There are no brokerage fees for current debt.
Interest rates are a function of your debt level. The more debt you
have relative to your assets, the more risk you present to debt holders
and the higher the current debt rates.

As a general rule, companies fund short term assets like

accounts receivable and inventory with current debt offered

by banks.

Bankers will loan current debt up to about 75% of your accounts
receivable (found on last year’s balance sheet) and 50% of this year’s
inventory. They estimate your inventory for the upcoming year by
examining last year’s income statement. Bankers assume your worst
case scenario will leave a three- to four-month inventory and they
will loan you up to 50% of that amount. This works out to be about
15% of the combined value of last year’s total direct labor and total
direct material, which display on the income statement.

Bankers also realize your company is growing, so as a final step
bankers increase your borrowing limit by 20% to provide you with
room for expansion in inventory and accounts receivable.

4.4.2 Bonds
All bonds are 10-year notes. Your company pays a 5% brokerage
fee for issuing bonds. The first three digits of the bond, the
series number, reflect the interest rate. The last four digits
indicate the year the bond is due. The numbers are separated by
the letter S, which stands for “series.” For example, a bond with
the number 12.6S2017 has an interest rate of 12.6% and is due
December 31, 2017.

As a general rule, bond issues are used to fund long term

investments in capacity and automation.

Bondholders will lend total amounts up to 80% of the value of
your plant and equipment (the Production Department’s capacity
and automation). Each bond issue pays a coupon, the annual
interest payment, to investors. If the face amount or principal of
bond 12.6S2017 were $1,000,000, then the holder of the bond
would receive a payment of $126,000 every year for ten years. The
holder would also receive the $1,000,000 principal at the end of
the tenth year.

When issuing new bonds, the interest rate will be 1.4% over the
current debt interest rates. If your current debt interest rate is
12.1%, then the bond rate will be 13.5%.

You can buy back outstanding bonds before their due date. A 1.5%
brokerage fee applies. These bonds are repurchased at their market
value or street price on January 1 of the current year. The street price
is determined by the amount of interest the bond pays and your
credit worthiness. It is therefore different from the face amount of

4.4 Finance

Corporate finance functions differ
from company to company. Duties can
include managing financial risk,
determining borrowing
levels or even simple
check writing. In general,
the department monitors
the company’s flow of
money, the lifeblood of any
business.

Your Finance Department is primarily concerned with five issues:

1. Acquiring the capital needed to expand assets, particularly plant
and equipment. Capital can be acquired through:

• Current Debt
• Stock Issues
• Bond Issues (Long Term Debt)
• Profits

2. Establishing a dividend policy that maximizes the return
to shareholders.

3. Setting accounts payable policy (which can also be entered in
the Production and Marketing areas) and accounts receivable
policy (which can also be entered in the Marketing area).

4. Driving the financial structure of the firm and its relationship
between debt and equity.

5. Selecting and monitoring performance measures that support
your strategy.

Finance decisions should be made after all other departments enter
their decisions. After the management team decides what resources
the company needs, the Finance Department addresses funding
issues and financial structure.

One of the Finance Department’s fiduciary duties is to verify that sales
forecasts and prices are realistic. Unrealistic prices and forecasts
will predict unrealistic cash flows in the proformas. Finance can
determine a range of possible outcomes for the year by changing (but
not saving) Marketing’s forecasts then rechecking the proformas.
Lowering forecasts decreases revenue and increases inventory–worst
case; raising forecasts increases revenue and decreases inventory–
best case (see “10.4 Worst Case/Best Case”).

Finance can print the worst case and best case proformas,

then compare them to next year’s annual reports.

4.4.1 Current Debt
Your bank issues current debt in one-year notes. The Finance area in
the Capstone Spreadsheet displays the amount of current debt due
from the previous year. Last year’s current debt is always paid off on

Watch a video overview at:
http://capsim.com/go/v/cfin

http://capsim.com/go/v/cfin

Finance

Book value is equity divided by shares outstanding. Equity equals the
common stock and retained earnings values listed on the balance
sheet. Shares outstanding is the number of shares that have been
issued. For example, if equity is $50,000,000 and there are 2,000,000
shares outstanding, book value is $25.00 per share.

EPS is calculated by dividing net profit by shares outstanding.

The dividend is the amount of money paid per share to stockholders
each year. Stockholders do not respond to dividends beyond the EPS;
they consider them unsustainable. For example, if your EPS is $1.50
per share and your dividend is $2.00 per share, stockholders would
ignore anything above $1.50 per share as a driver of stock price. In
general, dividends have little effect upon stock price. However,
Capstone is unlike the real world in one important aspect– there are
no external investment opportunities. If you cannot use profits to
grow the company, idle assets will accumulate. Capstone is designed
such that in later rounds your company is likely to become a cash
cow, spinning off excess cash. How you manage that spin-off is an
important consideration in the endgame, and dividends are an
important tool at your disposal.

You can retire stock. The amount cannot exceed the lesser of either:

• 5% of your outstanding shares, listed on page 2 of last year’s
Courier; or

• Your total equity listed on page 3 of last year’s Courier.
You are charged a 1.5% brokerage fee to retire stock.

4.4.4 Emergency Loans
Financial transactions are carried on throughout the year directly
from your cash account. If you manage your cash position poorly
and run out of cash, the simulation will give you an emergency loan
to cover the shortfall. The loan comes from a gentleman named Big
Al, who arrives at your door with a checkbook and a smile. Big Al
lends you the exact amount of your shortfall. You pay one year’s
worth of current debt interest on the loan and Big Al adds a 7.5%
penalty fee on top to make it worth his while.

For example, suppose the current debt interest rate is 10% and you
are short $10,000,000 on December 31. You pay one year’s worth of
interest on the $10,000,000 ($1,000,000) plus an additional 7.5% or
$750,000 penalty.

Emergency loans are combined with any current debt from last
year. The total amount displays in the Due This Year cell under
Current Debt.

You do not need to do anything special to repay an emergency loan.
However, you need to decide what to do with the current debt (pay it
off, re-borrow it, etc.). The interest penalty only applies to the year in
which the emergency loan is taken, not to future years.

Emergency loans depress stock prices, even when you are profitable.
Stockholders take a dim view of your performance when they witness
a liquidity crisis.

the bond. If you buy back bonds with a street price that is less than its
face amount, you make a gain on the repurchase. This will be
reflected as a negative write-off on the income statement (see “6.3
Income Statement”).

Bonds are retired in the order they were issued. The oldest bonds
retire first. There are no brokerage fees for bonds that are allowed to
mature to their due date.

If a bond remains on December 31 of the year it becomes due, your
banker lends you current debt to pay off the bond principal. This, in
effect, converts the bond to current debt. This amount is combined
with any other current debt due at the beginning of the next year.

When Bonds Are Retired Early

A bond with a face amount of $10,000,000 could cost $11,000,000 to
repurchase because of fluctuations in interest rates and your credit
worthiness. A 1.5% brokerage fee applies. The difference between the
face value and the repurchase price will reflect as a gain or loss in the
income statement’s fees and write-offs.

When Bonds Come Due

Assume the face amount of bond 12.6S2017 is $1,000,000. The
$1,000,000 repayment is acknowledged in your reports and
spreadsheets in the following manner: Your annual reports from
December 31, 2017 would reflect an increase in current debt of
$1,000,000 offset by a decrease in long term debt of $1,000,000. The
2017 spreadsheet will list the bond because you are making decisions
on January 1, 2017, when the bond still exists. Your 2018 spreadsheet
would show a $1,000,000 increase in current debt and the bond no
longer appears.

Bond Ratings

Each year your company is given a credit rating that ranges from AAA
(best) to D (worst). In Capstone, ratings are evaluated by comparing
current debt interest rates with the prime rate. If your company has
no debt at all, your company is awarded an AAA bond rating. As your
debt-to-assets ratio increases, your current debt interest rates
increase. Your bond rating slips one category for each additional
0.5% in current debt interest. For example, if the prime rate is 10%
and your current debt interest rate is 10.5%, then you would be given
an AA bond rating instead of an AAA rating.

4.4.3 Stock
Stock issue transactions take place at the current market price. Your
company pays a 5% brokerage fee for issuing stock. New stock issues
are limited to 20% of your company’s outstanding shares in that year.

As a general rule, stock issues are used to fund long term

investments in capacity and automation.

Stock price is driven by book value, the last two years’ earnings per
share (EPS) and the last two years’ annual dividend.

Team Member Guide 17

Emergency loans are often encountered when last year’s

sales forecasts were higher than actual sales or when the

Finance Department failed to raise funds needed for

expenditures like capacity and automation purchases.

4.4.5 Credit Policy
Your company determines the number of days between transactions
and payments. For example, your company could give customers 30
days to pay their bills (accounts receivable) while holding up
payment to suppliers for 60 days (accounts payable).

Shortening A/R (accounts receivable) lag from 30 to 15 days in
effect recovers a loan made to customers. Similarly, extending the
A/P (accounts payable) lag from 30 to 45 days extracts a loan from
your suppliers.

The accounts receivable lag impacts the customer survey score. At 90
days there is no reduction to the base score. At 60 days the score is
reduced 0.7%. At 30 days the score is reduced 7%. Offering no credit
terms (0 days) reduces the score by 40%.

The accounts payable lag has implications for production. Suppliers
become concerned as the lag grows and they start to withhold
material for production. At 30 days, they withhold 1%. At 60 days, they
withhold 8%. At 90 days, they withhold 26%. At 120 days, they
withhold 63%. At 150 days, they withhold all material. Withholding
material creates shortages on the assembly line. As a result, workers
stand idle and per-unit labor costs rise.

Log into the Capstone Spreadsheet and click the Decisions

menu. Select Finance. Use this area to raise money:

• Current Debt (These are one-year loans.)
• Long Term Debt (These are 10-year bonds.)
• Issue Stock
As resources permit, companies can:

• Retire Stock
• Retire Bonds
• Issue a Dividend
Finance also establishes Accounts Receivable (A/R) and

Accounts Payable (A/P) policies.

The Rehearsal Tutorial’s Finance Tactics show you how to run

the department. Log in at the Capsim website and go to your

Dashboard for information about the Rehearsal.

5 The Capstone
Courier

Customer purchases and sensor
company financial results are
reported in an industry newsletter
called the Capstone Courier.

The Courier is available from

two locations:

• On the website, log into your simulation then click the
Reports link; and

• From the Capstone Spreadsheet, click the Reports menu.

The Courier displays “Last Year’s Results.” The Courier available at
the start of Round 1 displays last year’s results for Round 0, when all
companies have equal standing. The Courier available at the start of
Round 2 will display the results for Round 1.

Printing the Courier can make it easier to review. From the

Excel spreadsheet, click the printer icon; from the website,

use the PDF version.

Successful companies will study the Courier to understand the
marketplace and find opportunities. As the simulation progresses
and strategies are implemented, company results will begin to vary.

5.1 Front Page

Use the first page of the Courier to see a snapshot of last year’s results.
Be sure to compare your company’s sales, profits and cumulative
profits with your competitors’.

5.2 Stock & Bond Summaries

The Stock and Bond Summaries (page 2) report stock prices and
bond ratings for all companies. The page also reports the prime
interest rate for the upcoming year.

5.3 Financial Summary

The Financial Summary (page 3) surveys each company’s cash flow,
balance sheet and income statements. This will give you an idea of
your competitors’ financial health. In-depth financial reports for
your company are also available (see Chapter 6).

5.4 Production Analysis

The Production Analysis (page 4) reports detailed information about
each product in the market, including sales and inventory levels,
price, material and labor costs. Are you or your competitors building

Watch a video overview at:
http://capsim.com/go/v/ccou

Segment Analysis Reports

5.5.1 Accessibility, Market Share and Top
Products in Segment
The Accessibility Chart rates each company’s level of accessibility.
Accessibility is determined by the Marketing Department’s sales
budget– the higher the budget, the higher the accessibility.
Accessibility is measured by percentage; 100% means every customer
can easily interact with your company– sales, customer support, etc.

The Market Share Actual vs. Potential Chart displays two bars per
company. The actual bar reports the market percentage each
company attained in the segment. The potential bar indicates what
the company deserved to sell in the segment. If the potential bar is
higher than the actual, the company under produced and missed
sales opportunities. If the potential is lower than the actual, the
company picked up sales because other companies under produced
and stocked out (ran out of inventory).

The Top Products in Segment area reports, in order of total sales:

• Market Share
• Units Sold to Segment
• Revision Date
• Stock Out (This tells you whether the product

ran out of inventory.)
• Performance and Size Coordinates
• Price
• MTBF

excess inventory? Excess inventory puts pressure on profits (see
Chapter 10).

The Production Analysis also reports product revision dates. Does a
competitor have a product with a revision date in the year after the
year of the report? This indicates a long repositioning project that will
possibly put that product into another segment.

If a revision date has yet to conclude, the Courier will report

the product’s current performance, size and MTBF. The new

coordinates and MTBF will not be revealed until after the

completion of the project.

Check your competitors’ automation, capacity and plant
utilization. Increases in automation reduce labor costs, and this
could indicate competitors might drop prices for those
products. Did a competitor reduce capacity? Selling capacity
reduces assets. Running the remaining capacity at 150% to
200% can improve Return on Assets (ROA).

The Production Analysis will report the release date (but not the
coordinates) of a new product if:

• Production capacity is purchased; and/or
• A promotion budget is entered; and/or
• A sales budget is entered.

Are your competitors investing in capacity and automation?

The Production Analysis reports capacity and automation

ratings for the upcoming round. The Financial Summary

reports the cost of plant improvements for all companies.

5.5 Segment Analysis Reports

The Segment Analysis reports (pages 5 – 9) review each market
segment in detail (Figure 5.1).

The Statistics box in the upper-left corner reports Total Industry Unit
Demand, Actual Industry Unit Sales, Segment Percent of Total
Industry and Next Year’s Growth Rate. The Customer Buying Criteria
box ranks the customer criteria within each segment:

• Ideal Position: The preferred product location, also called
the ideal spot, as of December 31 of the previous year– ideal
spots drift with the segments, moving a little each month;

• Price: Every year on January 1, price ranges drop by $0.50–
this is the price range from last year;

• Age: Age preferences stay the same year after year; and
• Reliability: MTBF requirements stay the same year after year.

Are your products meeting your buyers’ expectations?

The Perceptual Map shows the position of each product in the
segment as of December 31 of the previous year.

Figure 5.1 Market Segment Analysis: Segment Statistics and Buying Criteria
display in the upper-left corner of each segment analysis. Accessibility and
Market Share Actual vs. Potential Charts display to the upper right. Customer
Awareness Percentages and December Customer Survey Scores display on
the lower part of the page.

Team Member Guide 19

6 Proformas and
Annual Reports

Proformas and annual reports include:

• Balance Sheet
•

Cash Flow Statement

• Income Statement

Proformas are projections of results for the upcoming year. Annual
reports are the results from the previous year. The proformas allow
you to assess the projected financial outcomes of your company
decisions entered in the Capstone Spreadsheet.

To access proformas, click the Proformas menu in the

Capstone Spreadsheet. To access the annual reports, click

the Reports menu in the Capstone Spreadsheet or, on the

website, log into your simulation and then click the

Reports link.

The proforma reports are only as accurate as the

marketing sales forecasts. If you enter a forecast that is

unrealistically high, the proformas will take that forecast

and project unrealistic revenue (see “

10 Forecasting

” for

more information).

6.1 Balance Sheet

The balance sheet lists the dollar value of what the company owns
(assets), what it owes to creditors (liabilities) and the amount
contributed by investors (equity). Assets always equal liabilities
and equity.

Assets = Liabilities + Equity

Assets are divided into two categories, current and fixed. Current
assets are those that can be quickly converted, generally in less than
a year. These include inventory, accounts receivable and cash. Fixed
assets are those that cannot be easily converted. In the simulation,
fixed assets are limited to the value of the plant and equipment (see
“4.3.1 Capacity” and “4.3.3 Automation”).

Liabilities include accounts payable, current debt and long term debt.
In the simulation, current debt is comprised of one-year bank notes;
long term debt is comprised of 10-year bond issues. Equity is divided
into common stock and retained earnings.

Retained earnings are a portion of shareholders’ equity. They

are not an asset.

Common stock represents the money received from the sale of
shares; retained earnings is the portion of profits that was not

• The product’s Age on December 31
• Promotion and sales budgets
• Awareness
• Accessibility
• December Customer Survey Score

5.5.2 Awareness and the December
Customer Survey Score

Customer Awareness is determined by the Marketing Department’s
promotion budget– the higher the budget, the higher the awareness.
Awareness is measured by percentage; 100% means every customer
knew about your product.

The December Customer Survey Score indicates how customers in
the segment perceived the products. The survey evaluates the product
against the buying criteria.

Product ages and distances from ideal spots change throughout the
year, therefore scores change month to month.

If a repositioning project concludes late in the year, the survey score
for December could be significantly higher than the scores for the
previous months.

Use the Customer Survey Score as a quick comparison tool

when conducting a competitive analysis. Perfect scores

are almost impossible. Scores of 50 or above are

considered good.

5.6 Market Share Report

The Market Share Report (page 10) details sales volume in all
segments, reporting each product’s actual and potential sales. Did
your company under produce? If the actual percentage for your
product is less than the potential, you missed sales opportunities. If
your actual is greater than your potential, your competitors under
produced and you picked up sales that otherwise would have gone
to them.

5.7 Perceptual Map

The Perceptual Map (page 11) displays all the segments and every
product in the industry.

Are your products competitively positioned?

5.8 Other Reports

The HR/TQM/Sustainability Report displays investments and results
when the optional TQM/Sustainability, Human Resources and/or
Labor Negotiation modules are activated (see Chapter 7).

If simulation plug-ins are scheduled, the results will also display. For
example, the Ethics Plug-in Report shows the impacts of each
company’s decisions (see Chapter 8).

Cash Flow Statement
20

7 Additional Modules

Some simulations use additional modules. If a module is scheduled,
the simulation Dashboard will tell you the round it is set to begin and
provide a link to the documentation.

The HR (Human Resources) and TQM (Total Quality Management)/
Sustainability modules described below are frequently enabled. HR
and TQM decisions are used by the Balanced Scorecard, which is one
of the simulation assessment methods (see Chapter 11). Other
modules include Labor Negotiation and Advanced Marketing.

7.1 TQM/Sustainability

TQM (Total Quality Management)/Sustainability initiatives can
reduce material, labor and administrative costs, shorten the length of
time required for R&D projects to complete and increase demand for
the product line. The impacts of the investments produce returns in
the year they are made and in each of the following years.

The sustainability-oriented initiatives, UNEP Green Programs and
GEMI TQEM Sustainability Initiatives, can lower labor and material
costs. UNEP Green Programs also improve customer perceptions
about your company, which leads to increased sales. The remaining
initiatives can also increase efficiency and lower costs.

Your company should determine which initiatives best serve its
purposes. If you plan to keep automation levels low so R&D
projects complete more quickly, you might want to invest in areas
that lower labor costs (for example, Quality Initiative Training). If
your company is competing in the high technology segments, with
high material costs, you might consider initiatives that reduce
material costs.

To maximize the effect, companies should find complementary
initiatives and invest in each of them. For example, to reduce material
costs, companies could consider investing in both CPI Systems and
GEMI TQEM Sustainability Initiatives.

7.2 HR (Human Resources)

When the Human Resources Module is activated, three areas must be
addressed:

1. Complement: The number of workers in the workforce. Needed
Complement is the number of workers required to fill the
production schedule without overtime.

2. Caliber: The talent of the workforce. If you are willing to spend
the money, you can recruit a higher caliber of worker. This
results in higher productivity and lower turnover. Companies
can set a Recruiting Spend budget of up to an additional $5,000
per worker. If you spend nothing extra, the recruitment cost per
worker remains at $1,000 and you get an average person off the
street. The more you spend, the higher the caliber of the worker.

distributed back to shareholders as dividends, but was instead
reinvested in the company.

Depreciation is an accounting principle that allows

companies to reduce the value of their fixed assets. Each year

some of the value is “used up.” Depreciation decreases the

firm’s tax liability by reducing net profits while providing a

more accurate picture of the company’s plant and

equipment value.

Depreciation is expensed, product by product, on the income

statement. Total depreciation for the period is reflected as a

gain on the cash flow statement. On the balance sheet,

accumulated depreciation is subtracted from the value of the

plant and equipment. The simulation uses a straight line

depreciation method calculated over fifteen years.

6.2 Cash Flow Statement

The cash flow statement indicates the movement of cash through the
organization, including operating, investing and financing
activities. The annual report’s cash flow statement shows the change
in the amount of cash from the previous year. The proforma cash
flow statement indicates the expected change at the end of the
upcoming year.

6.3 Income Statement

Your company can use the income statement to diagnose problems
on a product-by-product basis. Sales for each product are reported in
dollars (not the number of products). Subtracting variable costs from
sales determines the contribution margin. Inventory carrying costs
are driven by the number of products in the warehouse. If your
company has $0 inventory carrying costs, you stocked out of the
product and most likely missed sales opportunities. If your company
has excessive inventory, your carrying costs will be high. Sound sales
forecasts matched to reasonable production schedules will result in
modest inventory carrying costs.

Period costs are depreciation added to sales, general and
administrative (SG&A) costs, which include R&D, promotion, sales
and administration expenses. Period costs are subtracted from the
contribution margin to determine the net margin. The net margin for
all products is totaled then subtracted from other expenses, which in
the simulation include fees, write-offs and, if the module is enabled,
TQM/Sustainability costs. This determines earnings before interest
and taxes, or EBIT. Finally, interest, taxes and profit sharing costs are
subtracted to determine net profit.

Once your decisions are final, you can print your proforma

income statement (click the printer icon). When the

simulation advances to the next year, you can compare the

results to your proforma projections.

Team Member Guide

Making Decisions

company. It will help you understand current
market conditions and how the industry will evolve
over the next several years.

The Situation Analysis is divided into five activities:

• Perceptual Map
• Demand Analysis
• Capacity Analysis
• Margin Analysis
• Consumer Report

The first part of the Perceptual Map activity illustrates “Segment
Drift,” which occurs each year as customers demand smaller, faster
products. The second part illustrates the “ideal spot” position
within each segment. This position changes every year. The
Perceptual Map activity will help you decide where to place your
new or revised products.

The Demand Analysis will help you anticipate the yearly upswing in
demand. At the beginning of the simulation, the growth rate for each
segment is different. While the growth rates can change as the
simulation progresses, the beginning rates will help you anticipate
how many products will be demanded in future years.

The Demand Analysis is an external measure that looks at how many
units the market will want.

The Capacity Analysis is an internal measure that determines how
many units you and your competitors can produce. Comparing this
number to the results of the Demand Analysis will give you an idea of
how much production capacity you will need. The Capacity Analysis
also allows you to anticipate the cost of adding capacity and the cost
of increasing automation.

The Margin Analysis will show you how to calculate the contribution
margin, which measures how much money is left over from your sales
income once all direct costs like labor and material have been
deducted. The Margin Analysis also helps you investigate your margin
potential: If you could cut your costs to the minimum and raise prices
to the maximum, how much could you improve your margins?

The Consumer Report asks you to think as if you were a customer. It
will give you an idea of how they perceive your product line.

The Situation Analysis can be done as a group or you can assign parts
to individuals and have them report back to the rest of the company.

A link to the Situation Analysis can be found on the

simulation Dashboard.

A downloadable “pen and paper” version of the Situation

Analysis is also available.

3. Training: The amount of time workers spend in training each
year. Training leads to higher productivity and lower turnover,
but takes people off the job while they are in the classroom.
Each training hour costs $20.00 per worker.

Assuming you have sufficient workers (Complement), investments in
Recruiting and Training raise your Productivity Index, which in turn
lowers your per unit labor costs.

If a module is scheduled, the simulation Dashboard will

display a link to the documentation.

8 Plug-ins

Some simulations use plug-in modules. Plug-ins have a more general
impact on your company.

For example, your response to a dilemma posed by the Ethics Plug-in
could have a negative impact on your corporate profits. Or your
answer to an Accounting Plug-in might help your company avoid a
major financial headache.

8.1 Making Decisions

Your task is to find ways to ensure compliance, minimize exposure
and return value to all stakeholders. Group discussion and consensus
is imperative. If you do not reach a consensus (that is, if there is no
clear majority), the system will default to a “do nothing” answer.

In the following round, the impacts of your decision will appear in
the Capstone Courier. The plug-in area will offer a more detailed
explanation of the events and the reasoning behind the impacts.

The simulation Dashboard will tell you if a plug-in is

scheduled. If it is, the Dashboard will display a link to the

decision-making area and documentation.

9 Situation
Analysis

The Situation Analysis
provides a comprehensive
view of the strengths,
weaknesses, opportunities
and threats facing your

Watch a video overview at:
http://capsim.com/go/v/csa

http://capsim.com/go/v/csa

Is this number valid? It is highly unlikely that the market in the
upcoming year will be identical to the previous year. Prices will
adjust, revision projects will complete– the playing field will change.
Still, this number can be a good beginning as you assess your product
offer and speculate what your competitors will offer.

Keep in mind the possibility that your products sold because
competitors who otherwise would have made sales under produced
and stocked out. Page 10 of the Courier displays actual and potential
sales as a percentage for each product. If your actual sales far
exceeded your potential because your competitors under produced,
you cannot count on them making the same mistake again.

Any new products about to come to market must have a

plant. Plant purchases are reported on the Production

Analysis (Courier, page 4).

10.2 Qualitative Assessment

Compare your product to others competing within the segment and
decide whether it is better or worse than the competition. Start with
the Courier Perceptual Map (page 11). It shows where products are
currently placed. The Revision Dates at the bottom of the page
reveal the timing of any future repositionings. Continue the
comparison using the Courier’s Segment Analysis pages. These
report each product’s:

• Age– does the product satisfy customer age demands?
• MTBF– is reliability near the top of the range?
• Price– will price trends continue or will new automation

(displayed on page 4 of the Courier) facilitate a price
reduction? (Remember, price ranges drop $0.50 per year.)

• Awareness and Accessibility– are these percentages leading,
keeping pace with or falling behind other products?

All these elements contribute to the monthly customer survey.

10.2.1 December Customer Survey Score
Will your product be better or worse than average? As an estimate,
look at the December customer survey score in the lower part of each
Segment Analysis. The Customer survey drives demand each month.
For example, if there are four products in December scoring 32, 28,
22 and 14 (for a total of 96), then the top product’s December
demand would be 32/96 or 33%.

Top Product in Segment’s Score / Sum of All Scores =
32 / (32 + 28 + 22 + 14) = 32 / 96 = 33%

What monthly customer survey scores will your product have during
the year? The score will change from month to month because the
segments drift, your product ages and it might be revised. Each
monthly score is driven by how well your product satisfies the
segment buying criteria, plus its awareness and accessibility levels. If
the TQM/Sustainability module is on, some initiatives could increase
the score. (See “How Is the Customer Survey Score Calculated?” in

10 Forecasting

Forecasting requires a little math and
a little logic. For example, does your
forecast predict your
product will acquire half a
segment’s sales when
there are four or five
products in the segment?
Unless your product’s
positioning, age and MTBF are significantly superior to the other
products and your price is at the low end of the range, it is not likely
that you will acquire half the sales. Does your forecast predict you
will take only one tenth of the sales when there are four or five
products in the segment? Unless your product’s positioning, age and
MTBF are significantly inferior and your price is at the high end of the
range or above, chances are you can sell more.

Forecasts are used by the proformas to calculate financial

projections (see Chapter 6). If you enter a forecast that is

unrealistically high, the proformas will take that forecast and

project unrealistic revenue.

If you do not enter values in the Your Sales Forecast cells, the

proformas will use the Benchmark Predictions to project

financial results.

10.1 Basic Forecasting Method

Last year’s sales can be a good starting point for this year’s forecasts.
For example, if the segment growth rate for the upcoming year is
9.2%, you can say, “All things being equal, we can expect to sell 9.2%
more units this year than last year.”

Assume this year’s growth rate for Traditional is 9.2% and your
Traditional product sold 1,100,000 units last year without
stocking out (running out of inventory):

1,100,000 × 0.092 = 101,200

Adding 101,200 to last year’s sales of 1,100,000 units gives you a
starting forecast for the upcoming year of 1,201,200 units.

The statistic boxes on the Segment Analysis reports (pages 5

– 9 of the Courier) publish last year’s Industry Unit Demand

and the Growth Rate for the upcoming year. Multiplying last

year’s demand by the Growth Rate then adding the result to

last year’s demand will determine this year’s demand.

If your product stocked out, calculate what it could have sold by
multiplying the segment demand by the potential sales percentage
reported on page 10 of the Courier, the Market Share Report. Next,
multiply that by the segment growth rate.

Watch a video overview at:
http://capsim.com/go/v/cfrc

http://capsim.com/go/v/cfrc

Team Member Guide

Worst Case/Best Case

In the Marketing spreadsheet, enter the worst case forecast of 1,200
in the Your Sales Forecast cell. In the Production spreadsheet, enter
the best case of 1,500 in the Production Schedule cell (if inventory
remains from the previous year, be sure to subtract that from the
1,500). At the end of the year, in the worst case you will have sold
1,200,000 units and have 300,000 units in inventory. In the best case
you will have sold 1,500,000 units and have zero inventory.

The spread between the positions will show up as inventory on your
proforma balance sheet. Your proforma income statement will also
reflect the worst case for sales. In the Finance area, if the December
31 Cash Position is negative, adjust current debt, long term debt and
stock issue entries until the December 31 Cash Position becomes
positive. This will help ensure against an emergency loan.

To see your best case, return to the Marketing spreadsheet and enter
1,500 in the Your Sales Forecast cell then review the December 31
Cash Position. The actual results should lie somewhere between the
worst and best cases.

Log into the Capstone Spreadsheet and select Marketing

under the Decisions menu. The Benchmark Prediction

assumes your competition has mediocre products and

therefore is not reliable. The Your Sales Forecast column

allows you to enter forecasts of your own.

11 Balanced Scorecard

Your simulation might include a tool called the Balanced Scorecard,
which measures performance across four categories:

• Financial– includes profitability, leverage and stock price;
• Internal Business Process– ranks (among other

measures) contribution margin, plant utilization and days
of working capital;

• Customer– examines the company’s product line, including
how well it satisfies buying criteria and awareness/
accessibility levels; and

• Learning and Growth– evaluates employee productivity.
The Internal Business Process and Customer perspectives can
cross-check performance. Under Internal Business Process, a low
score for Contribution Margin could indicate the company is
unprofitable– the company should look at its costs and pricing. Under
the Customer perspective, a poor Buying Criteria score suggests the
company should consider R&D projects to improve the product line
or price adjustments.

the Online Guide’s FAQ|Reports section for more information on
assessing your product.)

Consider whether or not the top products in the segment

can meet customer demand. On the Production Analysis,

examine the top products’ capacities. Can they

manufacture sufficient units? If not, you could have an

opportunity to exploit.

10.3 Forecasts, Proformas and the
December 31 Cash Position

On the proforma income statement, sales revenue for each product is
based on its price multiplied by the lesser of either:

• The Your Sales Forecast entry (or, if none is entered, the
Benchmark Prediction); or

• The total number of units available for sale (that is, the
Production Schedule added to Inventory).

When a forecast is less than the total number of units available for
sale, the proforma income statement will display an inventory
carrying cost. When a forecast is equal to or greater than the number
of units available, which predicts every unit will be sold, the carrying
cost will be zero.

The simulation charges a 12% inventory carrying cost.

On the proforma balance sheet, under current assets, inventory
reflects the dollar value of all unsold units. Cash reflects the amount
left after all company payments are subtracted from the sum of:

• Total sales revenue reported on the proforma
income statement; and

• Stock, current debt and long term debt entries in the
Finance area.

The proforma balance sheet’s cash position also displays as the
Finance spreadsheet’s December 31 Cash Position. Therefore,
unrealistically high forecasts or prices will create cash predictions
that are not likely to come true.

10.4 Worst Case/Best Case

If you wish, you can enter sales forecasts and production schedules
that develop worst case/best case scenarios. Here is an example:

You generate a pessimistic forecast of 1,200,000 for your Traditional
product, which predicts in the worst case monthly sales of 100,000
units. As a matter of policy, your management team might decide that
manufacturing an additional three months’ worth of inventory, or
300,000 units, is an acceptable risk when compared to the potential
reward of making extra sales.

Broad Cost Leader

Mission Statement

Reliable products for low technology customers: Our brands offer
value. Our stakeholders are bondholders, stockholders, customers
and management.

12.4 Niche Differentiator (High Technology)

A Niche Differentiator strategy focuses on the high technology
segments (High End, Performance and Size). The company will gain a
competitive advantage by distinguishing its products with an excellent
design, high awareness, easy accessibility and new products. The
company will develop an R&D competency that keeps designs fresh
and exciting. Products will keep pace with the market, offering
improved size and performance. The company will price above
average and will expand capacity as it generates higher demand.

Mission Statement

Premium products for technology oriented customers: Our brands
define the cutting edge. Our stakeholders are customers,
stockholders, management and employees.

12.5 Cost Leader with Product
Lifecycle Focus

A Cost Leader with a Product Lifecycle Focus centers on the High End,
Traditional and Low End segments. The company will gain a
competitive advantage by keeping R&D, production and material
costs to a minimum, enabling it to compete on the basis of price. The
Product Lifecycle Focus will allow the company to reap sales for many
years on each new product introduced into the High End segment.
Products will begin their lives in the High End, mature into
Traditional and finish as Low End products.

Mission Statement

Reliable products for mainstream customers: Our brands offer
value. Our stakeholders are bondholders, stockholders, customers
and management.

12.6 Differentiator with Product
Lifecycle Focus

A Differentiator with a Product Lifecycle Focus strategy concentrates
on the High End, Traditional and Low End segments. The company
will gain a competitive advantage with excellent design, high
awareness, easy accessibility and new products. The company will
develop an R&D competency that keeps designs fresh and exciting.
Products will keep pace with the market, offering improved size and
performance. The company will price above average and will expand
capacity as it generates higher demand.

Mission Statement

Premium products for mainstream customers: Our brands withstand
the test of time. Our stakeholders are customers, stockholders,
management and employees.

The Capstone Spreadsheet projects Balanced Scorecard

results for the upcoming year (see the Proformas menu).

Scores from previous years are available on the website; log

into your simulation then click the Reports link.

12 Six Basic Strategies

These six basic strategies can be the starting point for your own
custom strategy.

12.1 Broad Cost Leader

A Broad Cost Leader strategy maintains a presence in all segments of
the market. The company will gain a competitive advantage by
keeping R&D, production and material costs to a minimum, enabling
the company to compete on the basis of price, which will be below
average. Automation levels will be increased to improve margins and
to offset second shift/overtime costs.

Mission Statement

Low-priced products for the industry: Our brands offer solid
value. Our stakeholders are bondholders, customers,
stockholders and management.

12.2 Broad Differentiator

A Broad Differentiator strategy maintains a presence in every
segment of the market. The company will gain a competitive
advantage by distinguishing products with an excellent design, high
awareness and easy accessibility. The company will develop an R&D
competency that keeps designs fresh and exciting. Products keep
pace with the market, offering improved size and performance.
Prices will be above average. Capacity will be expanded as higher
demand is generated.

Mission Statement

Premium products for the industry: Our brands withstand the test of
time. Our stakeholders are customers, stockholders, management
and employees.

12.3 Niche Cost Leader (Low Technology)

A Niche Cost Leader Strategy concentrates primarily on the
Traditional and Low End segments of the market. The company
will gain a competitive advantage by keeping R&D, production and
material costs to a minimum, enabling the company to compete
on the basis of price, which will be below average. Automation
levels will be increased to improve margins and to offset second
shift/overtime costs.

Index

Accessibility 8, 9, 12, 18,

19, 22

Accounts Payable (A/P) 15,
17

Accounts Receivable (A/R)
8, 15, 17

Actual Sales

18, 19, 22

Age 3, 4, 5, 8, 10, 11, 18,

19, 22
Annual Reports 2, 19
Automation 10, 13, 14, 15
Awareness 8, 9, 12, 18,

19, 22

Balanced Scorecard 23
Balance Sheet 15, 19
Benchmark Prediction 13,

22, 23
Bonds 2, 15, 16
Book Value 16
Buying Criteria 3, 6, 8, 10,

18, 19, 22

Capacity 3, 13, 14, 15
Capstone Courier 1, 2, 5,

6, 7, 8, 9, 11, 12,
13, 16, 17, 18, 19,
21, 22

Capstone Spreadsheet 2
Cash Flow Statement 20
Create a Sensor 10, 12
Current Debt 2, 15, 16
Customer Survey Score 5,

6, 8, 18, 19, 22

December Customer Survey
Score 6, 18, 19, 22

Discontinue a Sensor 3, 14
Dividend 15, 16
Drift 4

Earnings Per Share (EPS) 16
Emergency Loans 16

Finance 2, 3, 15, 17, 23
Fine Cut

MTBF 8

Positioning 7

Price 7

Forecasting 13, 22

Human Resources 19, 20

Ideal Spot 6, 7, 8, 18, 19,
21

Income Statement 13, 15,
20

Industry Conditions Report
1, 3, 5, 6, 7, 8

Invent a Sensor 10, 12

Labor Cost 13, 14, 17, 18,
20, 21

Labor Negotiations 19
Long Term Debt 2, 15, 16

Marketing 2, 3, 5, 11
Market Segment Drift 4
Market Segments 3, 4, 5,

11
Market Share 18, 19, 22
Material Cost 10, 20
Modules 2, 19, 20
MTBF (Mean Time Before

Failure) 3, 4, 5, 7,

8, 9, 10, 11, 12,
18, 22

New Sensor 10, 12

Perceptual Map 4, 5, 6,
10, 14, 18

Performance 4, 5, 6, 7,
8, 9, 10, 11, 12,
18, 22

Plug-ins 2, 19, 21
Positioning 3, 4, 5, 6, 7,

8, 9, 10, 11, 12,
18, 22

Potential Sales 18, 19, 22
Practice Rounds 3
Price 3, 4, 5, 7, 8, 9, 18
Production 2, 3, 13, 17
Productivity Index 21
Proformas 2, 19, 23
Promotion Budget 12, 19

Rehearsal Tutorial 1, 3, 11,
13, 14, 17

Reliability 3, 4, 5, 7, 8, 9,
10, 11, 12, 18, 22

Research & Development
(R&D) 2, 3, 5, 10,
14

Rough Cut
MTBF 8

Positioning 7
Price 7
S

Sales Budget 12, 18, 19
Sales Forecasting 13, 22
Segment Drift 4
Segments 3, 4, 5, 11
Seller’s Market 9
Situation Analysis 21
Size 4, 5, 6, 7, 8, 9, 10,

11, 12, 18, 22
Stock 2, 15, 16
Stock Outs 9, 18, 22
Survey Score 5, 6, 8, 18,

19, 22

Terminate a Sensor 3, 14
TQM/Sustainability 9, 20

2013 Capsim Team Member Guide cover
design by Ed Kang, a Graphic Design student
from Columbia College Chicago.

978-1-933681-33-7

Copyright © 2012 Capsim Management Simulations, Inc. All rights reserved.
Capsim®, Capstone®, Foundation®, and Comp-XM® are trademarks of
Capsim Management Simulations, Inc.®
Printed in USA

1 Introduction

1.1 The Industry Conditions Report
1.2 Management Tools
1.3 Company Departments
1.4 Inter-Department Coordination
1.5 Practice and Competition Rounds
1.6 Company Success

2 Industry Conditions

2.1 Buying Criteria
2.2 Buying Criteria by Segment

3 The Customer
Survey Score

3.1 Buying Criteria and the Customer Survey Score
3.2 Estimating the Customer Survey Score
3.3 Stock Outs and Seller’s Market

4 Managing Your Company

4.1 Research & Development (R&D)
4.2 Marketing
4.3 Production
4.4 Finance

5 The Capstone Courier

5.1 Front Page
5.2 Stock & Bond Summaries
5.3 Financial Summary
5.4 Production Analysis
5.5 Segment Analysis Reports
5.6 Market Share Report
5.7 Perceptual Map
5.8 Other Reports

6 Proformas and Annual Reports

6.1 Balance Sheet
6.2 Cash Flow Statement
6.3 Income Statement

7 Additional Modules

7.1 TQM/Sustainability
7.2 HR (Human Resources)

8 Plug-ins

8.1 Making Decisions

9 Situation Analysis

10 Forecasting
10.1 Basic Forecasting Method
10.2 Qualitative Assessment
10.3 Forecasts, Proformas and the December 31 Cash Position
10.4 Worst Case/Best Case

11 Balanced Scorecard
12 Six Basic Strategies

Broad Cost Leader
Broad Differentiator
Niche Cost Leader (Low Technology)
Niche Differentiator (High Technology)
Cost Leader with Product Lifecycle Focus
Differentiator with Product Lifecycle Focus

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© 2011 Capsim Management Simulations, Inc.

Capstone® Debrief Rubric Report

Table of Contents

How to Use This Report

……………………………………………………………………………………………………………….. 2

Sample Report

…………………………………………………………………………………………………………………………….. 3

The Company Rubric

……………………………………………………………………………………………………………………. 4
ROS ………………………………………………………………………………………………………………………………………… 4

EPS (Earnings Per Share) …………………………………………………………………………………………………………… 5

Contribution Margin ………………………………………………………………………………………………………………… 5

Change in Stock Price ………………………………………………………………………………………………………………..

Leverage …………………………………………………………………………………………………………………………………. 6

Stock Price ………………………………………………………………………………………………………………………………. 7

Bond Rating …………………………………………………………………………………………………………………………….. 8

Emergency Loans …………………………………………………………………………………………………………………….. 8

Current Ratio …………………………………………………………………………………………………………………………… 9

Inventory Reserves…………………………………………………………………………………………………………………. 1

Plant Purchases Funded …………………………………………………………………………………………………………..

Accounts Receivable ……………………………………………………………………………………………………………….

Accounts Payable ……………………………………………………………………………………………………………………

Asset Turnover ……………………………………………………………………………………………………………………….

Sales to Current Assets …………………………………………………………………………………………………………… 14

Overall Plant Utilization …………………………………………………………………………………………………………..

Stock Outs (Company level) …………………………………………………………………………………………………….. 15

Bloated Inventories ………………………………………………………………………………………………………………… 16

Overall Actual vs. Potential Demand ………………………………………………………………………………………… 16

Cost Leadership ……………………………………………………………………………………………………………………… 16

Product Breadth ……………………………………………………………………………………………………………………..

Market Share Overall ……………………………………………………………………………………………………………… 17

Overall Awareness ………………………………………………………………………………………………………………….

Overall Accessibility ……………………………………………………………………………………………………………….. 18

Overall Design ……………………………………………………………………………………………………………………….. 19

Asset Base …………………………………………………………………………………………………………………………….. 19

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© 2011 Capsim Management Simulations, Inc.

The Product Rubric

……………………………………………………………………………………………………………………. 19
Positioning ……………………………………………………………………………………………………………………………. 19

Age ………………………………………………………………………………………………………………………………………. 20

Reliability ………………………………………………………………………………………………………………………………. 20

Price Percentile ………………………………………………………………………………………………………………………

Awareness …………………………………………………………………………………………………………………………….. 21

Accessibility …………………………………………………………………………………………………………………………… 22

Customer Survey Score …………………………………………………………………………………………………………… 22

Potential Share/Average Share ………………………………………………………………………………………………… 23

Actual Share/Potential Share …………………………………………………………………………………………………… 23

Plant Utilization ………………………………………………………………………………………………………………………

Automation …………………………………………………………………………………………………………………………… 24

Contribution Margin ………………………………………………………………………………………………………………. 24

Days of Inventory …………………………………………………………………………………………………………………… 24

Promotion Budget ………………………………………………………………………………………………………………….. 25

Sales Budget ………………………………………………………………………………………………………………………….. 25

R&D Utilization ………………………………………………………………………………………………………………………. 25

Overall Product Evaluation ……………………………………………………………………………………………………… 25

Summary Rubrics

………………………………………………………………………………………………………………………. 26

How to Use This Report

The Capstone® Debrief Rubric Report offers a comprehensive evaluation of a company and its products.

It is prepared as a rubric, with each item in the report scored on a scale of zero to three:
• Excellent – 3 points
• Satisfactory – 2 points
• Poor – 1

point

• Trouble – 0 points

There are seven categories ranging from “Margins & Profitability” to individual products. Each line item
is discussed below, beginning with how the item was scored.

To make quick use of the report, scan it for zeros. Find the description below to learn why the company
earned a zero. We recommend having a Capstone Courier at your disposal as you interpret the results.

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© 2011 Capsim Management Simulations, Inc.
All rights reserved.

Sample Report

DEBRIEF REPORT 2013 Ferris C42681

COMPANY RUBRIC
Points
(0..3)

Margins & Profitability Asset Utilization
ROS (Profits/Sales) 0 Asset turnover (Sales / Assets) 1
EPS (Earnings Per Share) 0 Sales to Current Assets 1
Contribution Margin 2 Overall plant utilization 2
Change in Stock Price 0 Total (Max 9) 4
Total (Max 12) 2

Ability to raise growth capital Forecasting
Leverage 2 Stock outs 2
Stock price 0 Bloated inventories 2
Bond rating 1 Overall Actual vs. Potential Demand 3
Total (Max 9) 3 Total (Max 9) 7

Sound Fiscal Policies Competitive Advantage
Emergency loans 3 Cost leadership 0
Leverage 2 Product breadth 3
Current Ratio 3 Market share 2
Inventory reserves 0 Overall Awareness 2
Plant purchases funded 3 Overall Accessibility 2
Accounts Receivable 2 Overall Design 1
Accounts Payable 2 Asset Base 3
Total (Max 21) 15 Total (Max 21) 10

PRODUCT RUBRIC Cake Cedar Cid Coat Cure Ch Cp Cs Overall
Primary Segment Trad Low High Pfmn Size 0 Pfmn Size
Positioning 1 3 2 2 2 0 1 1 2
Age 3 3 1 3 3 0 2 1 2
Reliability 0 0 0 0 0 0 0 0 0
Price Percentile 0 1 0 0 0 0 0 0 0
Awareness 2 2 3 3 3 0 2 2 2
Accessibility 2 2 0 2 2 0 2 2 2
CustomerSurveyScore 1 0 3 3 3 0 3 1 2
PotentialShare/Avg 1 1 3 3 3 0 0 0 1
ActualShare/Potential 3 2 3 3 2 0 2 2 2
PlantUtilization 3 3 3 2 2 0 0 0 2
Automation 0 0 1 2 2 0 2 2 1
ContributionMargin 0 0 0 0 0 0 0 0 0
Days of Inventory 2 2 2 1 2 0 0 0 1
Promotion Budget 0 0 3 3 3 0 3 3 2
Sales Budget 0 0 3 3 3 0 2 2 2
R&D Utilization 0 0 0 0 0 0 0 0 0
Total (Max 48) 18 19 27 30 30 0 19 16 21

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© 2011 Capsim Management Simulations, Inc.
All rights reserved.

The Company Rubric

ROS
Return on Sales (Profit/Sales) answers the question, “How much of every sales dollar did we keep as
profit?”

Excellent ROS > 8%
Satisfactory 4% < ROS <=8% Poor 0% < ROS <= 4% Trouble ROS <= 0%

Between 0% and 4%, while the company is at least making a profit, it is not bringing in sufficient new
equity to fund growth. The industry is growing at about 15% per year. The industry consumes about
15% more capacity each year, which arrives in the form of plant expansions and new products.
Therefore, as the simulation begins, an average company would add about $12 million in new plant each
year. If half that or $6 million was funded with bonds, an average company would need about $6 million
in new equity. Therefore, if the company does not have the profits, it must either issue $6 million in new
stock, or $12 million in bonds, or not grow to keep up with demand. Worse, if it has no profits, its stock
price falls, making it difficult to raise equity through stock issues.

This ignores investments in automation, which also require a funding mix of equity and debt.

In the opening round of Capstone® companies have an excess of assets, and that can convert idle assets
into productive ones. Therefore, do not worry too much if the company’s profits are low. But after year
3, expect that idle asset cushion to be gone. Profits become critical because those companies with
profits can grow, and those without cannot.

What if profits are negative? The company is destroying equity. Its stock price has plummeted, making it
more difficult to raise equity. All of the problems described above are now accelerated. In short,
trouble.

How can companies improve ROS? Here are a few questions to pose.

1. Can you raise prices?
2. Can you reduce your labor costs? Your material costs?
3. Can you forecast sales better and thereby reduce your inventory carrying expenses?
4. Have you pushed your promotion or sales budgets into diminishing returns?
5. Can you sell idle plant to reduce depreciation? Alternatively, can you convert idle plant into

some other productive asset, like automation or new products?
6. Is your leverage too high, resulting in high interest expenses. (See leverage.)

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© 2011 Capsim Management Simulations, Inc.
All rights reserved.

EPS (Earnings Per Share)
EPS (profits/shares outstanding) answers the question, “What profits did each share earn?” EPS is a
driver of stock price, and stock issues are an important source of growth capital.

Excellent EPS > $2 + Round #
Satisfactory ($2 + Round #)/3 < EPS <= $2 + Round # Poor $0.00 < EPS < ($2 + Round #)/3 Trouble EPS <= $0.00

In the table, “Round #” refers to the year in the Capstone®. Round 1 is year 1, round 2 is year 2. The
market is growing, and so should profits. In Round 5, for example, an excellent EPS would be ($2 + $5) =
$7.00 per share, and a satisfactory EPS would be at least 1/3 that or $2.33.

EPS is important for three reasons. First, profits bring new equity into the company. Second, EPS drives
stock price, and the company can issue shares to bring in new equity. Third, any new equity can be
leveraged with new debt.

An example may help. Suppose the company wants to invest $15 million in new plant and equipment
each year for the next three years. If its profits are zero and it issues no stock, the purchases would need
to be funded entirely with bonds. But this would drive up interest expense, and worse, eventually the
company would reach a ceiling where bond holders would give it no additional debt. The company
would stop growing.

In the end, a company’s growth is built upon equity. If it has equity, it can get debt, too.

How can companies improve EPS? Improve sales volume while maintaining margins. EPS is closely linked
with the Asset Utilization and Competitive Advantage categories.

Contribution Margin
Contribution margin is what is left over after variable costs. Variable costs include the cost of goods
(material and labor) and inventory carrying expense.

The biggest expense is the cost of goods. If the contribution margin is 30%, then out of every sales
dollar, $0.70 paid for inventory and $0.30 is available for everything else, including profits.

Excellent Contribution Margin > 35%
Satisfactory Contribution Margin > 27%
Poor Contribution Margin > 22%
Trouble Contribution Margin < 22%

Fixed costs are those expenses that will be paid regardless of sales. They include promotion, sales
budget, R&D, admin, and interest expenses.

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© 2011 Capsim Management Simulations, Inc.
All rights reserved.

As the contribution margin falls below 30%, it becomes increasingly difficult to cover fixed costs.

How can a company improve its contribution margin? Guard price and attack material and labor
expenses.

Change in Stock Price
The change in stock price from one year to the next is an indicator for the long term growth potential of
the company.

Excellent > $20.00
Satisfactory > $7.00
Poor > – $5.00
Trouble < - $5.00

If the stock price is increasing, the company will enjoy easier access to new equity via profits and stock
issues, which in turn can be leveraged with additional bonds, and the combined capital can fund plant
improvements and new products.

If the stock price is falling, it becomes increasingly difficult to obtain new investment capital, either
equity or debt. Eventually the company’s ability to make improvements comes to a halt.

Leverage
In Capstone® Leverage is defined as Assets/Equity. (It is sometimes defined as Debt/Equity, but in either
case, Leverage is addressing the question, “How much of the company assets are funded with debt?”)
The higher the Assets/Equity ratio, the more debt is in the mix.

Using Assets/Equity, a Leverage of 2.0 means half the assets are financed with debt and half with equity.
Read it as, “There are $2 of assets for every $1 of equity.” A leverage of 3 reads as, “There are $3 of
assets for every $1 of equity.”

Excellent 1.8 < Leverage < 2.5 Satisfactory 1.6 < Leverage <1.8 , or 2.5 < Leverage < 2.8 Poor 1.4 < Leverage <1.6, or 2.8 < Leverage < 3.2 Trouble Leverage < 1.4, or Leverage > 3.2

It is easy to see why too much Leverage can cause problems. As debt increases, loans become more
expensive. The company becomes high risk, and lenders eventually decline to lend the company money.

On the other hand, companies with a competitive advantage usually have a larger asset base than their
competitors. For example, a broad product line implies a larger plant. A highly automated facility implies
a large investment. Growing the company’s asset base quickly calls for prudent use of debt.

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© 2011 Capsim Management Simulations, Inc.
All rights reserved.

Here is an example. Suppose Andrews has assets of $100 million, and Baldwin $125 million. Assume that
each team is utilizing their assets productively. An observer will bet on Baldwin because its larger asset
base translates into more products or more productivity. Now suppose that Andrews is leveraged at
2.0, and Baldwin at 2.5. If so, they both have $50 million in equity. By leveraging its equity, Baldwin
gained an advantage.

Too little leverage can also indicate weakness, provided that investment opportunities exist. Think of it
this way. When a company retires debt, it is saying to stockholders, “We are out of ideas for
investments. The best we can come up with is to save you the interest on debt.” This will not impress
stockholders, who are looking for a high return on their equity (ROE). An investor expecting a 20% ROE
will be unhappy learning that their money was used to reduce debt at 10%.

ROS * Asset Turnover *Leverage = Price/Sales * Sales/Assets * Assets/ Equity = ROE. If the company can
somehow hold its margins and productivity constant, increasing leverage improves ROE.

If leverage is falling, here are some things to suggest to the company.

1. Decide upon a policy towards leverage. For example, “Our leverage will be 2.5.” Adjust your
leverage before saving your decisions. (Issue/retire debt, issue/retire stock, pay dividends.)

2. Find investment opportunities. For example, if the market is still growing, and you are already at
a high plant utilization, you will need to add some capacity each year. Or perhaps you can add a
new product. Fund these investment opportunities with a mix of debt and equity consistent
with your policy.

3. In the latter rounds of Capstone® you are likely to become a “cash cow”. You discover that you
have excess working capital that cannot be put to good use. In the real world management
might get into new businesses, but in Capstone® there are no such alternatives. In this case,
make your stockholders happy by buying back stock or paying dividends to maintain the
leverage.

Stock Price
Stock price is a function of book value, EPS and the number of shares outstanding. Book value sets a
floor, although negative earnings can depress stock price below book. Stock price can also be negatively
impacted by emergency loans. In the absence of losses and emergency loans, Capstone’s stock price is
primarily a function of past and present EPS.

Excellent Stock price > $40 + 5 * Round number
Satisfactory Stock price > $25 + 5 * Round number
Poor Stock price > $10 + 5 * Round number
Trouble Stock price < $10 + 5 * Round number

In the table, “Round Number” refers to the year in the Capstone®. Round 1 is year 1, round 2 is year 2.
The market is growing, and so should profits. As time passes and EPS increases, we should expect stock
price to increase.

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© 2011 Capsim Management Simulations, Inc.
All rights reserved.

Stock price is important because, ultimately, equity drives the company’s ability to raise capital for
growth. Even if it never issues a share, a rising stock price means it is accumulating profits as retained
earnings. More equity means that it can raise additional debt, and together its mix of debt and equity
fuels the company’s growth.

Also see the discussion for EPS and Leverage.

Bond Rating
The bond ratings are, from best to worst, AAA, AA, A, BBB, BB, B, CCC, CC, C, DDD. Bond ratings are
driven by leverage. As bond ratings fall, interest rates climb on both short term and long term debt.

As the bond rating decays, bond holders become reluctant to give the company additional debt. This
sets a limit on the company’s ability to acquire additional assets, particularly automation, capacity, and
new products.

Since leverage is a function of equity, the bond rating is in some sense derived from equity. Companies
can improve their bond rating by adding equity, either as a stock issue or as profits. The more equity
they have, the more debt they can raise, and the bigger their asset base.

Alternatively, companies can improve their bond rating by reducing debt. However, reducing debt also
implies shrinking the asset base. While there are always exceptions to the rule, shrinking the asset base
in a growing market would be limiting to growth.

Excellent AAA, AA, A
Satisfactory BBB, BB, B
Poor CCC, CC, C
Trouble DDD

Emergency Loans
If a company is out of cash on December 31st, a character in the simulation, Big Al, arrives to give it just
enough money to bring its cash balance to zero. The company pays Big Al its short term interest rate
plus a 7.5% premium. Stock price also falls – how much depending upon the severity of the loan.

Excellent No emergency loan
Satisfactory Emergency loan less than $1 million
Poor Emergency loan less than $8 million
Trouble Emergency loan greater than $8 million

The great majority of emergency loans are rooted in three mistakes.

1. The company purchased a plant, but did not fund it adequately.
2. The company forecasted too much demand, and when it did not materialize, its inventory

expansion exceeded reserves.
3. The company neglected to fund your current assets adequately, usually because it brought its

current debt to zero.

You can also direct students to the online Team Member Guide, and the Analyst Report, where
emergency loans are also discussed at some length.

While painful, an emergency loan that purchased assets is not destructive so long as the assets are
useful. After all, the company could have and should have funded the assets with cheaper debt. It now
has an asset at its disposal, even though it overpaid for it.

However, there is another cause of emergency loans – sustained negative profits. The company is, well,
a zombie, kept in motion by transfusions from the deep pockets of Big Al. The only advice we can offer
here is, intervene before the company joins the walking dead. If profits are negative two years in row,
intervene to improve margins and reverse the trend.

Current Ratio
Current Ratio is defined as Current Assets/Current Liabilities, which in turn is (Cash + A/R + Inventory) /
(A/P + Current Debt). From a banker and vendor’s point of view, it answers the question, “How likely
am I to get my money back?”

Excellent 1.8 < Current Ratio <= 2.2 Satisfactory 1.6 < Current Ratio <=1.8, or 2.2 < Current Ratio <= 2.4 Poor 1.3 < Current Ratio <=1.4, or 2.4 < Current Ratio <= 2.7 Trouble Current Ratio < 1.3, or Current Ratio > 2.7

Like any asset, current assets are paid for with a mix of debt and equity. The debt is Accounts Payable
and Current Debt, which we can think of as “short term funding”. The balance is “long term funding”,
and it is probably equity, but it could be long term debt. More precisely this long term funding is
Working Capital, which is defined as Current Assets – Current Liabilities.

What should the Current Ratio be? While that is a policy decision, we suggest starting with the
debt/equity mix of the entire company. If the mix is 50/50 overall, why would the company have a
different policy for Current Assets? If Current Assets are funded half with Current Liabilities and half with
equity, then the Current Ratio is 2.0.

Where does trouble begin? A Current Ratio of 1.0 says that Current Assets are funded entirely with
Current Liabilities. Bankers and Vendors are very worried, and are likely to withhold additional funding.
They do not begin to relax until the ratio reaches 1.3, which in effect says for every $1.30 of current
assets they fund $1.00. By 1.6 they remain watchful but are less concerned, and at 1.8 they are happy to
lend money or offer credit.

However, trouble exists at the high side, too. A Current Ratio of 3.0 says that the company has $3.00 of
assets for every $1.00 of debt, and therefore $2.00 of current assets are being funded with long term
money. But if long term money is tied up with current assets, it cannot be used to fund long term assets
– capacity, automation, and new products.

Consider a stockholder. The stockholder knows that he/she gets no return on current assets.
Stockholders make no return on Cash, on Accounts Receivable, or on inventory. In some sense they are
necessary evils. Stockholders recognize the necessity of current assets, but if they expect a 20% return
on their investment, they would rather the company borrow money from a bank at 10% so their money
can be invested in wealth producing assets – capacity, automation, and new products. A stockholder
wants to see a low Current Ratio, while vendors want to see a high Current Ratio.

It follows from this reasoning that paying current debt to $0 is a mistake. The question companies must
answer is, “How much current debt should be in the mix?”

In the real world, bankers will typically fund up to 75% of Accounts Receivable and 50% of inventory.
Using this as a rule of thumb, here is a quick method to arrive at Current Debt before a company saves
decisions.

1. Drive the proforma financial statements into a “worst case scenario”. In the worst case, the
pessimistic unit sales forecast is put into the Marketing worksheet, and the best case unit sales
forecast into the Production schedule. In the worst case, the proforma balance sheet ‘s
inventory is at a maximum.

2. Looking at the proforma balance sheet, calculate 50% of the inventory and 75% of the
Receivables.

3. On the Finance sheet, enter the result as Current Debt for next year.

Companies will discover that if its policy towards A/R is 30 days, its policy towards inventory is 90 days,
and it has $1 of cash, then a policy of A/P at 30 days, and current debt at 75% of A/R and 50% of
inventory, will give it a Current Ratio of about 2.0.

Inventory Reserves
Inventory expansions are the number one cause of emergency loans. This can be further broken down
into two root causes – forecasting, and inadequate inventory reserves.

By inventory reserves we mean, “How much inventory are we willing to accumulate during the year in
our worst case?” We express this as “days of inventory.”

Suppose the gross margin is 30%. If so, then the cost of inventory consumes 70% of every sales dollar. If
sales are $100 million, over the course of a year the company spends $70 million on inventory. In one
day it spends $191 thousand. In 30 days it spends $5.7 million. In 90 days $17.3 million.

We are interested in how many days of inventory the company planned to be able to absorb, because if
inventory expanded beyond this, it would see Big Al for an emergency loan.

Excellent 75 to 105 days of inventory
Satisfactory 55 to 75 days, or 105 to 135 days of inventory
Poor 30 to 55 days, or 135 to 160 days of inventory
Trouble Below 30 days or more than 160 days of inventory

To find inventory reserves we determine cash and inventory positions on January 2nd, after all the dust
has settled from borrowing, stock issues, bond issues, debt retirement, etc.

Inventory reserves in days = ((Starting Cash + Starting Inventory)/COG) * 365. For example, if starting
cash and inventory totaled 30 million on January 2nd, and annual cost of goods is expected to be $120
million, then days of inventory was $30/$120 * 365 or 91 days.

If the company sells its entire inventory, it converts it all to cash. The more inventory accumulated, the
more that cash is crystallized as inventory. Eventually the company runs out of cash and turns to Big Al
to pay for the inventory that has accumulated in the warehouse.

Companies can develop an inventory reserves policy by considering their worst case forecast for sales. If
the inventory policy is 90 days, they can plan the production schedule so that they will have (1 + 90/365)
= 125% of their worst case forecast, including any starting inventory.

Companies cannot predict what competitors will do in detail. Therefore, companies plan for the worst
and hope for the best.

Trouble is highly likely to occur when inventory reserves are less than 30 days. The company may get
away with it, but that requires both precise forecasting and predictable competitors or, more likely, lots
of luck.

Trouble appears in a different form when inventory reserves exceed 160 days. Now the company has
idle assets, which should either have been put to work or given back to the stockholders.

Plant Purchases Funded
Failure to fully fund plant purchase is the number two cause of emergency loans. The error occurs
because companies often count on profits or perhaps inventory reductions that do not materialize.

Excellent Fully funded
Satisfactory Funding shortfall is within $4 million
Poor Funding shortfall is within $8 million
Trouble Funding shortfall is greater than $8 million

Funding sources include:

1. Depreciation
2. Stock issue
3. Bond issues
4. Excess current assets

Depreciation often confuses students. While we do pay cash for expenses like promotion or inventory,
we never actually pay cash for depreciation. And yet governments allow businesses to deduct
depreciation as an expense, thereby reducing profits and taxes. Why?

Governments want businesses to continue to pay taxes, and they agree that equipment wears out and
must be replaced. The purpose of depreciation is to set aside a guaranteed cash flow that can be used
for the purchase of new plant and equipment. Teams can successfully argue that cash from
depreciation is a valid source of funding.

Stock and bond issues raise long term funds for any investment in the company.

Excess current assets can be defined as “anything greater than the current assets required to operate in
our worst case scenario”. For our purposes, we assume that teams need a minimum of 90 days of
inventory, 30 days of accounts receivable, and $1 of cash. Of course, teams might want to have deeper
reserves, but in applying the rubric to Plant Purchases, we allow companies to apply anything above this
minimum to plant purchases. We use the January 1st balance sheet (same as the December 31st balance
sheet from last year’s reports) to discover starting current assets.

If the sum of the company’s funding sources is greater than its plant purchases, the company fully
funded the purchase. If the shortfall is less than $4 million, it is plausible that its intention was to reduce
the current asset base by $4 million. If the funding shortfall is $8 million, it is conceivable albeit unlikely
that the shortfall was planned. Anything more than $8 million is cutting deeply into current assets, and
will likely result in an emergency loan.

Accounts Receivable
The accounts receivable policy affects both demand and the balance sheet. Companies express the
policy in days. A 30 day policy means that accounts receivable will be 30/365 * Sales.

Excellent 45 to 60

days

Satisfactory 30 to 45 days, or 60 to 75 days
Poor 20 to 30 days, or 75 to 90 days
Trouble Less than 20 days or more than 90 days

On the balance sheet, if a company expands A/R policy from 30 days to 60 days, it doubles A/R. In effect
it gives a loan to customers, and in the process it incurs the additional expense of carrying that loan. For

example, if accounts receivable expanded from $10 million to $20 million, and the company funded the
expansion with short term debt at 10%, it would incur an additional $1.0 million in interest expense.

On the other hand, demand would increase by about 5% from $120 million to $126 million, while fixed
costs would remain the same. Profits would increase by about $0.8 million after paying the additional $1
million in interest expense. And, of course, the additional $6 million in sales came out of competitors.

But there is a risk. It is trivial for competitors to copy A/R policies, and if that happens, the increase in
demand is neutralized while everyone absorbs the additional $1.0 million in interest expense. The
question then is, “Will competitors realize we have expanded our credit terms? All of them?”

Beyond 60 days, the incremental cost in interest exceeds the incremental gain in demand.

As companies shorten A/R policy, they effectively reduce the loan they have made to customers. Cash
goes up, interest expense falls. However, customers want credit terms. If the company demands cash
payment, demand falls to 65% of its potential.

These relationships are easily explored with the company’s Marketing worksheet. As they vary the A/R
policy, they should watch the computer’s demand forecast.

Accounts Payable
Accounts payable policy affects both parts deliveries and the balance sheet. Companies express the
policy in days. A 30 day policy means that it pays vendors 30 days after it receives a bill.

Excellent 0 to 15 days
Satisfactory 15 to 30 days
Poor 30 to 45 days
Trouble Over 45 days

On the balance sheet, if companies expand A/P policy from 30 to 60 days, it doubles A/P. In effect it
extracts a loan from vendors on which its pay no interest. If payables expand from $10 million to $20
million, that means that it could borrow $10 million less from its banker, and if interest rates are 10%, it
saves $1 million in interest expense.

However, vendors want to be paid. If they are not paid, they begin withholding parts deliveries. At 60
days, parts deliveries fall 8%. The company pays for the workforce, but it gets 8% less inventory to sell.
In Round 1 this translates to about $2.35 million in wasted labor expense, and potentially missed sales
from stockouts.

A policy between 0 and 15 days improves production about 2%. This translates to about 84 thousand
units that the company in Round 1 that the company would not have had before. In effect, the labor
cost on these units is free, a savings of $700 thousand, plus the contribution margin on these units,
another $800 thousand.

These relationships are easily explored with the Production worksheet. As the company varies A/P
policy, watch the impact upon total Production After Adjustments.

Asset Turnover
Asset Turnover or Sales/Assets answers the question, “For every dollar of assets, how many sales dollars
do we generate?” We would like to generate as many sales dollars as possible.

Excellent ATO > 1.3
Satisfactory 1.0 < ATO <=1.3 Poor 0.8 < ATO <= 1.0 Trouble ATO <= 0.8

In Capstone®, 1.0 to 1.3 (that is, $1.00 to $1.30 of sales for every dollar of assets) is considered
satisfactory. Anything over 1.3 is excellent. Between 0.8 and 1.0, chances are the company has idle
assets.

Consider its starting Traditional product (Able, Baker, Cake, Daze, Eat, or Fast). In Round 0 it could
produce 1.8 million units on first shift, yet demand was only 1.0 million units. Almost half the plant was
idle. Its Sales/Assets ratio was depressed, dragging down the entire company’s Asset Turnover.

Below 0.8 the company is in trouble. Either sales are depressed, or the assets are unproductive, or both.

What can companies do to improve Asset Turnover? Fundamentally a company needs to increase
demand or reduce the asset base. Many of the other items in the rubric drill down into these issues.
Consider these questions:

1. Is the plant utilization on any product below 130%? (See plant utilization.)
2. Can the company make its products more competitive? (See Design, Awareness, Accessibility).
3. Are its current assets appropriate for its sales base? (See Sales to Current Assets).

Excellent Asset Turnover >1.3
Satisfactory 1.0 < Asset Turnover < 1.3 Poor 0.8 < Asset Turnover < 1.0 Trouble Asset Turnover < 0.8

Sales to Current Assets
This ratio asks the question, “Given our sales base, do we have adequate current assets to operate the
company?” Current assets are comprised of Cash, Accounts Receivable and Inventory. In the worst case
scenario, cash has dwindled to $1 as inventory expanded. The accounts receivable policy (for example,
30 day terms) is a direct function of Sales.

Given the A/R policy in days, inventory policy in days, and sales, it is easy to calculate whether a
company has adequate Current Assets to operate the company. For example, suppose the company
projects worst case sales to be $120 million, sets A/R policy to 30 days, and is willing to carry 90 days of
inventory. If its gross margin is 30%, then it will spend 70% * $120 million on inventory during the year,

or $84 million, and a 90 day inventory policy translates to 90/365*$84 = $21 million. Accounts
Receivable will be 30/365*$120 million = $10 million. In the worst case the company will have only $1 in
cash. Current Assets = $1 + $10 million + $21 million = $31 Million. Sales/Current Assets = 3.8

Excellent 3.5 < Sales/Current Assets <4.5 Satisfactory 3.0 to 3.5, or 4.5 to 5.0 Poor 2.5 to 3.0, or 5.0 to 5.5 Trouble Sales/Current Assets < 2.5, or > 5.5

Too low a ratio risks a visit from Big Al. Too high a ratio indicates idle current assets which should either
be put to work or given back to shareholders as a dividend or stock repurchase.

Overall Plant Utilization
Overall Plant Utilization asks the question, “Are we working our plant hard?” It is calculated as Total
Production / Total Capacity.

Excellent Plant Utilization > 1.7
Satisfactory Plant Utilization > 1.3
Poor Plant Utilization > 0.9
Trouble Plant Utilization < 0.9

It is easy to demonstrate that second shift is nearly always more profitable than first shift. This often
surprises students who look at the 50% second shift wage premium and assume that second shift must
be something to avoid. But suppose we only run one shift – by necessity it must pay all of the fixed costs
– depreciation, R&D, Promotion, Sales Budget, Admin, and Interest. Anything on second shift only pays
for the 50% premium on labor.

It follows that we want to run as much second shift as possible. In a perfect world, we would run two
shifts, our best case demand forecast would come true, and we would have only one unit of inventory
left at the end of the year. On the other hand, if we max out second shift, there is a good chance we
could stock out, and stock outs are very costly. Therefore, 170% plant utilization or more is considered
excellent and 130% satisfactory.

Stock Outs (Company level)
Stock outs are HUGELY expensive. Consider a typical stock out. Demand is 500 thousand. The company
stocks out at 400 thousand. The price is $30, and the unit cost is $21. Consider – the 400 thousand that
were sold must have paid for all of the fixed costs – depreciation, R&D, Promotion, Sales Budget, Admin,
and Interest. Therefore, the missed units would have only have paid for their cost of goods, contributing
$900 thousand towards profit, been taxed at 35%, resulting in a $585 thousand net profit.

At the company level, we are interested in how many of the company’s products stocked out. (At the
product level below, we will examine the individual stock out.) Chronic stock outs suggest problems with
forecasting.

Excellent No product stocked out
Satisfactory 1 product stocked out
Poor 2 products stocked out
Trouble 3 or more products stocked out

Bloated Inventories
We define a bloated inventory as any product that has more than 4 months of sales sitting in the
warehouse.

While it is not uncommon to be taken by surprise by a competitor on a single product (perhaps a new
product was introduced), if inventories are bloated across several products, the company is having
difficulty forecasting demand.

Excellent No product had a bloated inventory
Satisfactory 1 or 2 products with bloated inventories
Poor 3 or 4 products with bloated inventories
Trouble 5 or more products with bloated inventories

Overall Actual vs. Potential Demand
The company worked hard to create the demand, but did it meet it?

Potential Demand tells companies what they deserved to sell based upon customer preferences. Actual
demand is what companies actually sold, and it is often affected by stock outs.

If companies are not meeting potential demand, the problem is usually forecasting, and sometimes
capacity shortages.

Excellent Met potential demand (or exceeded)
Satisfactory Met 98% of potential demand
Poor Met 96 % of potential demand
Trouble Met less than 96% of potential demand

Cost Leadership
Cost leaders attack the cost of goods, both material and labor costs. We can assess overall cost
leadership by assess the average unit cost across the company’s product line.

Excellent < $18 – (Round #/4) Satisfactory <$20 – (Round #/4) Poor <$22 – (Round # /4) Trouble >$22 – (Round#/4)

Over time we expect companies to become more efficient. The simulation advances the clock a year at a
time, and a Round is one advance. Using the formula, an excellent average cost of goods in Round 2 is
$17.50.

Companies can attack cost of goods by:

1. Reducing MTBF.
2. Placing products well behind the leading edge of the segment. The Material cost can be several

dollars cheaper per unit at the trailing edge versus the leading edge.
3. Automating to reduce labor costs

Product Breadth
How many products does the company have in its line-up?

Consider this thought experiment. Suppose that there are four competitors in a segment and they all
offer identical products. Each gets a 25% share. Now the “A” competitor adds a fifth identical product.
“A’s” share becomes 40%. The gain was not free. “A” doubled its R&D, Promotion, Sales Budget, Admin
costs, and it had to buy a new plant for its new product. But it has 40% share.

“B” likes this and adds a sixth identical product to the mix. Its share (and “A’s”) are now 33%. What
should “C” and “D” do? If they match, everybody’s costs double. If they do not match, their share falls
from 25% to 16%.

Product breadth also impacts accessibility. In Capstone® two products in a segment both contribute
towards the Accessibility because two Sales Budgets are contributing instead of 1. You can only reach
100% accessibility if you have two or more products in the segment.

Excellent 7 or 8 products
Satisfactory 4, 5 or 6 products
Poor 3 products
Trouble 1 or 2 products

Market Share Overall
Overall market share is an indicator of strength or weakness. Companies began the simulation with a
share of 1/#Teams.

Excellent 1.5 times

average

Satisfactory 0.9 to 1.5 times average share
Poor 0.6 to 0.9 times average share
Trouble <0. 6 times average share

There is a synergistic relationship between falling share and expenses. Fixed costs do not vary much
relative to sales from year to year. Fixed costs include R&D, Promotion, and Sales Budget. The R&D
budget will be about the same whether the product is making $20 million in sales or $40 million in sales.

But as market share slips, companies feel pressure to reduce these fixed costs. Trimming R&D,
Promotion and Sales leads to reduced demand, which leads to lower share, then further trimming – a
deadly spiral.

Overall Awareness
Economists speak of “perfect information”. In Capstone® 100% awareness means that the product loses
none of its attractiveness because some potential customers are not aware of it. Awareness answers
two questions, “How many potential customers know about a product before they make a purchase
decision? How difficult is it for them to discover a product offer?” If awareness is 75%, then 75% know
about the product beforehand, and 25% have to work to discover it.

Attractiveness is expressed in the Customer Survey score. Products are evaluated on a scale of 0 to 100
on the four buying criteria – price, positioning, age, and reliability. A perfect product scores 100. If

awareness is 100%, the perfect product keeps all 100 points. But as awareness falls, so does its product
score. At 0% awareness, the perfect product is down to 50 points.

Excellent Average awareness > 85%
Satisfactory Average awareness > 70%
Poor Average awareness > 50%
Trouble Average awareness < 50%

Overall awareness looks at the product line average awareness. A low average exposes a chronic
problem with awareness.

Overall Accessibility
Accessibility addresses the question, “How easy is it for customers to work with the company during and
after the sale?” Accessibility translates into sales people, distribution centers, customer service
departments, etc. If accessibility is 75%, then 75% of customers find it easy to work with the company,
and 25% have problems ranging from getting through to a salesman to taking delivery.

Capstone® requires two products in a segment to reach 100% accessibility. With a single product,
companies can reach 75% accessibility. This constraint is relaxed if the Advanced Marketing module is
switched on, in which case teams are given direct access to their distribution channel budgets.

Like Awareness, Accessibility affects the Customer Survey score. Products are evaluated on a scale of 0
to 100 on the four buying criteria – price, positioning, age, and reliability. A perfect product scores 100.
If accessibility is 100%, the product keeps all 100 points. But as accessibility falls, so does its product
score. At 0% accessibility, the perfect product’s score is down to 50 points. At 75% accessibility, an
otherwise perfect product would score 87.5.

Excellent Average accessibility > 70%
Satisfactory Average accessibility > 60%
Poor Average accessibility > 50%
Trouble Average accessibility < 50%

Overall accessibility looks at the product line’s average accessibility. A low average exposes a chronic
problem with accessibility.

Overall Design
In Capstone® product design includes Positioning, Age, and Reliability. They offer the customer “value”,
which is then compared with Price. Overall design averages these three design attributes across the
product line.

See the Product Rubric for Positioning, Age, and Reliability criteria. From an overall perspective, we
average these rubric scores.

Excellent Average across design attributes > 2.5
Satisfactory Average across design attributes > 1.5
Poor Average across design attributes > 0.5
Trouble Average across design attributes <0.5

A low average exposes a chronic problem with design.

Asset Base
Companies with a competitive advantage usually have a larger asset base than their competitors. For
example, a broad product line or a highly automated plant implies a large investment in equipment. (See
the discussion on Leverage.)

Over time we expect teams to accumulate more assets.

Excellent Assets > $84M + $20M * Round#
Satisfactory Assets > $84M + $16M * Round#
Poor Assets > $84M + $12M * Round#
Trouble Assets < $84M + $12M * Round#

In the table, “Round #” refers to the year in the Capstone®. Round 1 is year 1, round 2 is year 2. The
market is growing, and so should our asset base. In Round 5, for example, and excellent asset base
would be $84M + $20M * 5 = $184M, and a satisfactory asset base would be at least $164M.

The Product Rubric

Positioning
Positioning refers to the product’s placement on the Perceptual Map relative to the Ideal Spot in its
primary segment. The closer a product is to the ideal spot, the more points it earns towards its
Customer Survey Score.

The ideal spot is moving constantly across the map, while products only move when an R&D project
finishes. Products play “leap frog” with the ideal spot.

Excellent Product within 0.5 of ideal spot
Satisfactory Product within 1.0 of ideal spot
Poor Product within 1.5 of ideal spot
Trouble Product beyond 1.5 of ideal spot

Segment Importance Ideal Positioning
Traditional 21% Ideal spot in center of segment.
Low End 16% Ideal spot trails the center of the segment.
High End 43% Ideal spot leads the center of the segment.
Performance 29% Ideal spot leads the center of the segment.
Size 43% Ideal spot leads the center of the segment.

Age
Age refers the customer’s perceived age of the design. When a product is repositioned in an R&D
project, on the day of completion its age is cut in half. It becomes “the new improved” product, which is
not as old as the previous model, but not brand new either.

Product’s age throughout the year, becoming a little older each month.

Excellent Product within 0.5 of ideal age
Satisfactory Product within 1.0 of ideal age
Poor Product within 1.5 of ideal age
Trouble Product beyond 1.5 of ideal age

Segment Importance Ideal Age
Traditional 47% 2.0 Years
Low End 24% 7.0 Years
High End 29% 0.0 Years
Performance 9% 1.0 Years
Size 29% 1.5 Years

Reliability
Reliability refers the customer’s expectations for MTBF (Mean Time Before Failure) specification. This
does not change over time.

Excellent MTBF within 1000 hours of the top of the

range

Satisfactory MTBF within 2500 hours of the top of the range
Poor MTBF within 4000 hours of the top of the range
Trouble MTBF below 4000 hours of the top of the range

Segment Importance MTBF Range
Traditional 9% 14000 – 19000 hours
Low End 7% 12000 – 17000 hours
High End 19% 20000 – 25000 hours
Performance 45% 22000 – 27000 hours
Size 19% 16000 – 21000 hours

Price Percentile
The Price Percentile is defined as (Price – Low End of Expected Price Range)/(High End – Low End). For
example, if the expected price range is $30-$40, a $32 is at the 20th percentile.

The Expected Price Range declines by $0.50 each year. For example, if the expected price range was
$20-$30 last year, it will be $19.50 to $29.50 this year.

Excellent Below the 50th percentile
Satisfactory Below the 75th percentile
Poor Below the 90th percentile
Trouble Above the 90th percentile

Segment Importance Expected Price Range Round 0
Traditional 23% $20 – $30
Low End 53% $15 – $25
High End 9% $30 – $40
Performance 19% $25 – $35
Size 9% $25 – $35

To be candid, this particular item in the rubric is difficult to defend. For example, in the High End, it
makes little sense to price below the 50th percentile. Further, competitive rivalry is certainly a factor in
pricing, yet what is “Excellent” in one situation could be “Poor” in another.

Yet we must say something about pricing. In the end we decided to use the customer’s perspective. A
customer would say that any price below the 50th percentile in the range is an excellent price.

Awareness
(See also Overall Awareness.) Economists speak of “perfect information”. In Capstone® 100% awareness
means that your product loses none of its attractiveness because some potential customers are not
aware of the product. Awareness answers two questions, “How many potential customers know about
the product before they make a purchase decision? How difficult is it for them to discover the product
offer?” If awareness is 75%, then 75% know about your product beforehand, and 25% have to work to
discover it.

awareness is 100%, a product keeps all 100 points. But as awareness falls, so does the product score. At
0% awareness, the perfect product is down to 50 points.

Excellent Awareness > 90%
Satisfactory Awareness > 75%
Poor Awareness > 50%
Trouble Awareness <= 50%

Accessibility
(See also Overall Accessibility.) Accessibility addresses the question, “How easy is it for customers to
work with the company during and after the sale?” Accessibility translates into sales people, distribution
centers, customer service departments, etc. If accessibility is 75%, then 75% of customers find it easy to
work with the company, and 25% have problems ranging from getting through to a salesman to taking
delivery.

Like Awareness, Accessibility affects the Customer Survey score. Products are evaluated on a scale of 0
to 100 on the four buying criteria – price, positioning, age, and reliability. A perfect product scores 100.
If accessibility is 100%, the product keeps all 100 points. But as accessibility falls, so does the product
score. At 0% accessibility, the product score is down to 50 points. At 75% accessibility, an otherwise
perfect product would score 87.5.

Excellent Accessibility > 75%
Satisfactory Accessibility > 60%
Poor Accessibility > 50%
Trouble Accessibility <= 50%

Customer Survey Score
In any month, a product’s demand is driven by its monthly customer survey score. Assuming it does not
run out of inventory, a product with a higher score will outsell a product with a lower score.

A customer survey score reflects how well a product meets its segment’s buying criteria. Company
promotion, sales and accounts receivable policies also affect the survey score.

Scores are calculated once each month because a product’s age and positioning change a little each
month. If during the year a product is revised by Research and Development, the product’s age,
positioning and MTBF characteristics can change quite a bit. As a result, it is possible for a product with a
very good December customer survey score to have had a much poorer score – and therefore poorer
sales – in the months prior to an R&D revision.

The Rubric exams the December Customer Survey score. Scores are on a scale of 0 to 100, but scores
above 60 are rare.

Excellent December Customer Survey Score > 45
Satisfactory December Customer Survey Score > 30
Poor December Customer Survey Score > 15
Trouble December Customer Survey Score <= 15

Potential Share/Average Share
This ratio offers insight into how well the product is doing relative to an average product. The potential
share is what the product would have sold had there been sufficient inventory in every month.

Average share is 1/Teams. If there are 6 teams, average share would be 16.67%.

For example, if product Able’s potential share was 20%, then the ratio would be 20%/16.67% = 1.2.

Observe that the fewer the products in a segment, the higher the potential. We are not using the
number of products to compute an average share, but the number of competitors in the industry. All
teams had one product in the segment at the beginning of the simulation. We are also interested in the
rivalry in the segment, and where the team has chosen to compete.

For example, if only 3 products are left in the segment, and our product had a 40% share, the ratio
would yield 40%/16.67% = 2.4. But if there are now 10 products in the segment, and our share is 12%,
the ratio would yield 12%/16.67% = 0.72.

Therefore, we are asking the related questions, “Did you choose a good place to compete?”, and “Were
you successful in either driving competitors out or in keeping them from entering?”

Excellent Potential/Average Share > 1.5
Satisfactory Potential/Average Share > 1.0
Poor Potential/Average Share > 0.5
Trouble Potential/Average Share < 0.5

Actual Share/Potential Share
This ratio examines the question, “Did the product meet the demand it generated?” It ignores those
situations where the product picked up undeserved demand from a competitor’s stock out.

Excellent Actual/Potential share > 0.999
Satisfactory Actual/Potential share > 0.949
Poor Actual/Potential share > 0.899
Trouble Actual/Potential share <=0.899

Plant Utilization
See also Overall Plant Utilization. As discussed some second shift production is desirable.

Excellent Plant Utilization > 150%
Satisfactory Plant Utilization > 100%
Poor Plant Utilization > 90%
Trouble Plant Utilization <=90%

Automation
Potential automation levels in a segment are affected by R&D cycle times. On the one hand, a team
wants all the automation they can get. On the other, the higher the automation level, the more difficult
it becomes to reposition a product in a 12 month time-frame. For example, in the fastest moving High
End segment, it is highly desirable to reposition a product every year. At an automation level of 6.5 to
7.0, this becomes difficult. R&D cycle times are further constrained by the number of projects underway
– the more projects, the longer each project takes. Therefore, a differentiator with a broad product line
cannot automate as highly as a niche differentiator with a narrower product line.

In the table below, automation levels are listed by segment in the order of Traditional, Low End, High
End, Performance and Size.

Excellent Automation > (8,9,6,7,7)
Satisfactory Automation > (6,7,5,6,6)
Poor Automation > (5,6,4,5,5)
Trouble Automation < (5,6,4,5,5)

Contribution Margin
Contribution margin is defined as: (Price – Unit Cost)/Price.

It is the percentage of the price left over after paying for the inventory. The remainder can then be
applied towards fixed costs. As a practical matter it is difficult to make a profit in Capstone® if the
contribution margin is less than 30%.

Excellent Contribution Margin > 36%
Satisfactory Contribution Margin > 30%
Poor Contribution Margin > 25%
Trouble Contribution Margin <= 25%

Days of Inventory
Days of Inventory addresses the question, “Given our rate of annual sales, how many more days would it
take to sell our inventory?”

Excellent 1 <= Days of Inventory <=45 Satisfactory 45 < Days of Inventory <=90 Poor 90 < Days of Inventory <= 120 Trouble 120 < Days of Inventory OR 0 (stocked out)

Promotion Budget
The promotion budget is subject to diminishing returns. Beyond $2 million per year little additional gain
is seen in awareness, and by $3 million any gain has disappeared. On the other hand, we would like to
see a product reach 100% awareness eventually. If it does reach 100%, the company can maintain its
awareness for $1.4 million each year.

Excellent $1.4M < Promo Budget <=$2.0M Satisfactory $1.0..$1.4M, or $2.0..$2.5M Poor $0.7..$1.0M, or $2.5..$3.0M Trouble <$0.7M, or >$3.0M

Sales Budget
The Sales Budget is subject to diminishing returns. Beyond $3.0M the product contributes no additional
gain in accessibility.

Excellent $2.2M < Sales Budget <=$3.0M Satisfactory $1.5M < Sales Budget <=$2.2M Poor $0.7M < Sales Budget <= $1.5M Trouble Sales Budget < $0.7M

R&D Utilization
We would like to see the R&D department work as hard as possible. If a project ends before December,
we are wasting months of potential R&D time. If a company discovers that they can reposition a product
perfectly in less than 12 months, it should add additional automation to both reduce labor costs and
improve R&D utilization.

Excellent Project ends in December
Satisfactory Project ends in November
Poor Project ends in October
Trouble Project ends before October

Overall Product Evaluation
How did the team do on each element across the product line? We sum the row and divide by the
product count. For example, if a team has 4 products and their positioning scores are (3,2,3,2), the
formula will yield 10/4 = 2.5 which will round to 3.

Summary Rubrics

Using the Courier Excellent – 3 points
Satisfactory –

2 points
Poor – 1

point
Trouble – 0

point

1 Pg 1. ROS >8% 4%..8% 0%..4% < 0% 2 Pg 1. Turnover >1.3 1.0..1.3 0.8..1.0 < 0.8

3
Pg 1. Leverage 1.8 – 2.5 1.6-1.8, 2.5-2.8

1.4-1.6,2.8 –
3.2 <1.4, >3.2

4 Pg 1. Emergency Loan $0 $0 – $1M $1M .. $8M >$8M
5 Pg 1. Contrib. Margin >35% 27% .. 35% 22% .. 27% <22%

Pg 1. Market Share (depends on
# teams) >1.5 times

average share

0.9 – 1.5
times average

0.6 – 0.9
times

average
share

< 0.6 times average share

7
Pg 2. Stock Price (round # =

1..8)
>$40 +

5*Round #

>$25 +

5*Round #
>$10 +

5*Round #
<$10 +

5*Round #

8
Pg 2. Stock Price Change

>$20 >$7 >-$5 <-$5

9
Pg 2. EPS (round # = 1..8) >$2 + Round

#
>(2 +

round#)/3
$0..(2+Roun

d#)/3 < $0

10 Pg 2. Bond Rating AAA, AA, A BBB, BB, B CCC, CC, C DDD

Pg 3. Inventory fluctuation
reserves 75..105 days 55..75, or 105..135 days

30..55, or
135..160

days

<30 or >160
days

Pg 3. Plant Improvement $12M to $24M

investment

$6..12M or
$24..30M

investment

$0..$6M or
$31..$36M
investment

<$0M or >$36M
investment

Pg. 3. Plant purchases funded.
StockIssues+BondIssues+Depre
ciation+Excess Working Capital

– Plant Improvement

Fully funded.
Funding-Plant
Improvement>

Funded within
$4M.

Funding-Plant
Improvement

> -$4M

Funded
within $8M.

Funding-
Plant

Improvemen
t > -$8M

Not funded
within $8M

Pg 3. Sales to Current Assets
(Note. Typically AR policy is 30

days and inventory 90 days.
Ratio between

3.5 and 4.5

Ratio is
3.0..3.5 or

4.5..5.0

Ratio
2.5..3.0 or

5.0..5.5

Ratio <2.5 or >5.5

Pg 3. Current Ratio (Current
Assets over Current Liabilities) Ratio between

1.8 and 2.2
Ratio 1.6..1.8

or 2.2..2.4
1.3..1.6 or

2.4..2.7 <1.3 or >2.7

16
Pg. 3 Total Assets >($84M+20*R

und#)

>($84M+16*R

ound#)
>($84M+12*

Round#)
<($84M+12*Ro

und#)
17

Pg. 4. Overall Plant Utilization
(Total Production/Total Capacity)

>1.7 >1.3 >0.9 <0.9

Pg.4 Automation Spread All Product
Automation
with 2.0 of
each other

All Product
Automation
with 3.0 of
each other

>All Product
Automation
within 4.0 of
each other

Automation
spread>4

19 Pg 4. Product count >7 products >=4 products <4 products <4 products 20 Pg 4. Stock outs None 1 stockout 2 stockouts 3 or more

Pg. 4 Products with Big
Inventories. (More than > 4

months of sales.)
None <=2 products <=4 products 5+ products

22
A/R credit terms 45-60 days 30-45 or 60-75 days

20-30 or 75-
90 days

<20 days or >90 days

23 A/P credit terms 0-15 days 15-30 days 30-45 days >45 days

Pg 10 Overall Actual versus
Potential Demand Met Demand

Met 98% of
potential
demand

Met 96% of
potential
demand

Met < 96% of potential demand

25
Average Unit Cost <$18-round#/4 <$20-round#/4

<$22- round#/4 >$22-Round#/4

Product Rubric

Excellent – 3
points

Satisfactory –
2 points

Poor – 1
point

Trouble – 0
point

1 Positioning
Within 0.5 of
Ideal Spot Within 1.0 Within 1.5 Beyond 1.5

2 Age
Within 0.5 of

ideal age Within 1.0 Within 1.5 Beyond 1.5

3 Reliability

Within 1000 of
top of range Within 2500 Within 4000

Below 4000
from top of

range

4 Price Percentile
<50% of the

range
<75% of the

range
<90% of the

range
>90% of the

range
5 Awareness >90% >75% >50% <=50% 6 Accessibility >75% >60% >50% <=50% 7 Customer Survey Score >45 >30 >15 <15

8 Potential Share/Avg

>1.5*average
share

>Average
share

>0.5 *
average

<0.5 * average share

9 Actual Share/Potential >0.999 >0.949 >0.899
Unit

Sales<=.899 10 Plant Utilization >=150% >=100% >=90% <90%

11 Automation >=(8,9,6,7,7) >=(6,7,5,6,6)
>=(5,6,4,5,5

) <(5,6,4,5,5)

12 Contribution Margin >=36% >=30% >=25% <25%

13 Days of Inventory 1..45 days 45..90 days
90..120

days
>120 days or

stock out

14 Promotion Budget $1.4M..2.0M
1.0M..1.4M,
2.0M..2.5M

0.7M..1.0M,
2.5M..3M.. <0.7M or >3.0M

15 Sales Budget $2.2M..3.0M 1.5M..2.2M 0.7M..1.5M <0.7M or >3.0M

16 R&D Utilization
Project ends
in December

Project ends
in November

Project ends
in October

Project ends
before October

Your instructor can customize the simulation scenario. The information below is specific to your industry.

The sensors your company manufactures are incorporated into the products your customers sell. Your
customers fall into five groups which are called market segments. A market segment is a group of
customers who have similar needs. The segments are named for the customer’s primary requirements
and are called:

· Traditional · Performance

· Low End · Size

· High End

Customers within each market segment employ different standards as they evaluate sensors. They
consider four buying criteria:

· Price · MTBF (Mean Time Before Failure)

· Age · Positioning

1 Positioning

Perceptual Map

Each market segment has different positioning preferences. This is illustrated by the sets of dashed and
solid circles in the graphic below. Over time, these preferences will shift (see Section 2.1.5 in the Team
Member Guide for more information).

Perceptual Map Form: Segment circles and ideal spots
for Round 0 are shown below (see Section 3.1
in the Team Member Guide for more information
about segment circles and ideal spots).

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Capstone® Industry Conditions Report For C57912

Drift Rates

Each year, the segments drift the length of the hypotenuse of the triangle formed by customers’ desire
for smaller and faster products.

Table 1 Segment Circle Drift Rates: Every year, customers
demand increased performance (Pfmn) and decreased size.
Note that the drift rates vary for each segment.

Pfmn Size

Traditional +0.7 -0.7

Low End +0.5 -0.5

High End +0.9 -0.9

Performance +1.0 -0.7

Size +0.7 -1.0

Segment Centers

Table 2: Segment Centers at the End of Each Round: As shown in the
Perceptual Map Form above, size is on the vertical axis and performance
(Pfmn) is on the horizontal axis.

Traditional
Low
End

High
End Performance Size

Round Pfmn Size Pfmn Size Pfmn Size Pfmn Size

Pfmn Size

0 5.0 15.0 2.5 17.5 7.5 12.5 8.0 17.0 3.0 12.0

1 5.7 14.3 3.0 17.0 8.4 11.6 9.0 16.3 3.7 11.0

2 6.4 13.6 3.5 16.5 9.3 10.7 10.0 15.6 4.4 10.0

3 7.1 12.9 4.0 16.0 10.2 9.8 11.0 14.9 5.1 9.0

4 7.8 12.2 4.5 15.5 11.1 8.9 12.0 14.2 5.8 8.0

5 8.5 11.5 5.0 15.0 12.0 8.0 13.0 13.5 6.5 7.0

6 9.2 10.8 5.5 14.5 12.9 7.1 14.0 12.8 7.2 6.0

7 9.9 10.1 6.0 14.0 13.8 6.2 15.0 12.1 7.9 5.0

8 10.6 9.4 6.5 13.5 14.7 5.3 16.0 11.4 8.6 4.0

The information in Table 2 reflects the segment centers at the end of the round. Therefore, the Round 0
positions can be seen as the Round 1 starting positions, Round 2 positions can be seen as the Round 3
starting position, etc. Each month during the simulation year, the segment drifts 1/12th of the distance
from the starting position to the ending position.

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Capstone® Industry Conditions Report For C57912

Ideal Spots

Table 3 Ideal Spot Offsets:
Customers prefer products
located this distance from
the center of the segment
circle.

Pfmn Size

Traditional 0.0 0.0

Low End -0.8 +0.8

High End +1.4 -1.4

Performance +1.4 -1.0

Size +1.0 -1.4

The information in Table 3 shows the Ideal Spot “offsets” or distances from the segment center. The
ideal spot is that point where, all other things being equal, demand is highest. It is different from the
segment center. Why are some ideal spots ahead of the segment centers? The segments are moving.
From a customer’s perspective, if they buy a product at the ideal spot, it will still be a cutting edge
product when it wears out.

2 Segment Sizes and Growth Rates

Traditional and Low End sell more units than the high technology segments, High End, Performance and
Size. Page 10 of the Capstone Courier, the Market Segment Report, displays total industry sales.

Each market segment grows at a different rate. Table 4 lists the beginning segment growth rates for
your industry. The growth rates might change from year to year. Check the Segment Analysis reports
in the Capstone Courier each round for the upcoming year’s growth rates.

Table 4 Beginning Segment Growth
Rates

Traditional 9.2%

Low End 11.7%

High End 16.2%

Performance 19.8%

Size 18.3%

3 Buying Criteria By Segment

These are your products and the primary segments they sell into at the beginning of the simulation.
These can change according to your decisions and as the simulation evolves.

Able Traditional

Acre Low End

Adam High End

Aft Performance

Agape Size

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Capstone® Industry Conditions Report For C57912

The buying criteria for each segment, in order of importance, are displayed below. Positioning and Age
score information also display. Please see Chapter 3 of the Team Member Guide for explanations of
Positioning, Age, Price and MTBF scores.

3.1 Traditional Segment Buying Criteria (Round 0)

Traditional customers seek proven products at a modest price.

Age, 2 years – importance: 47%

Price, $20.00-$30.00 – importance: 23%

Ideal Position, performance 5.0 size 15.0 – importance: 21%

MTBF, 14,000-19,000 – importance: 9%

Industry Conditions Figure 3.1: Traditional Buying Criteria

Traditional customers give higher position scores to sensors located in
the center of the segment circle.

Traditional customers give higher scores to sensors in the 2 year
range.

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Capstone® Industry Conditions Report For C57912

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3.2 Low End Segment Buying Criteria (Round 0)

Low End customers seek low prices and well proven products.

Price, $15.00-$25.00 – importance: 53%

Age, 7 years – importance: 24%

Ideal Position, performance 1.7 size 18.3 – importance: 16%

MTBF, 12,000-17,000 – importance: 7%

Industry Conditions Figure 3.2 Low End Buying Criteria

Low End customers prefer inexpensive sensors with slower
performance and larger size.

Low End customers give higher scores to sensors in the 7 year range.

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Capstone® Industry Conditions Report For C57912

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3.3 High End Segment Buying Criteria (Round 0)

High End customers seek cutting-edge technology in size/performance and new designs.

Ideal Position, performance 8.9 size 11.1 – importance: 43%

Age, 0 years – importance: 29%

MTBF, 20,000-25,000 – importance: 19%

Price, $30.00-$40.00 – importance: 9%

Industry Conditions Figure 3.3 High End Buying Criteria

High End customers demand cutting edge sensors with high
performance and small size.

High End customers give higher scores to newer sensors.

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Capstone® Industry Conditions Report For C57912

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3.4 Performance Segment Buying Criteria (Round 0)

Performance customers seek high reliability and cutting edge performance technology.

MTBF, 22,000-27,000 – importance: 43%

Ideal Position, performance 9.4 size 16.0 – importance: 29%

Price, $25.00-$35.00 – importance: 19%

Age, 1 year – importance: 9%

Industry Conditions Figure 3.4 Performance Buying Criteria

Performance customers emphasize performance over size.

Performance customers want sensors in the 1 year range.

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Capstone® Industry Conditions Report For C57912

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3.5 Size Segment Buying Criteria (Round 0)

Size customers seek cutting edge size technology and younger designs.

Ideal Position, performance 4.0 size 10.6 – importance: 43%

Age, 1.5 years – importance: 29%

MTBF, 16,000-21,000 – importance: 19%

Price, $25.00-$35.00 – importance: 9%

Industry Conditions Figure 3.5 Size Buying Criteria

Size customers emphasize size over performance.

Size customers prefer sensors in the 1.5 year range.

4 Projected Interest Rates

Prime Interest Rate Round 1: 7.0%

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Capstone® Industry Conditions Report For C57912

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