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Lecture #2 Strategic Planning Guidelines. The Marketplace is designed to give students practice in the design, implementation, and control of business strategies.
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The Marketplace is designed to give students practice in the design, implementation, and control of business strategies. It is an operationally oriented exercise in which the application, and not the definition, of business concepts, principles, and methods is important. In addition, the integration of the major decision areas of business are stressed rather than the sequential presentation of these subjects.
Educational Objectives • Learn to formulate, execute, and control business strategies in a real time, competitive environment; • Learn to solve business problems by dealing with performance and cost tradeoffs inherent in business decisions; • Internalize marketing and business concepts and principles through practice in a simulated market; and • Develop a working knowledge of microcomputers and business software.
The Marketplace will focus you on Strategic Managementin addition to Management Strategy
Strategic Management versus Management Strategy Both Require • creativity • qualitative thinking • an ability to deal with complex tradeoffs
Strategic Management further requires • an ability to adapt to • a changing environment • a willingness to take risks • an ability to manage day-to-day issues while trying to position the firm to deal with long term problems and opportunities.
In Strategic Management the emphasis is on • action • execution • responsibility • a manager’s role
Management Strategy implies a sedentary role of a consultant whose concern is chiefly analysis and planning, and who can walk away from the implementation of the plan.
Are business schools doing their jobs? “No!” say some critics* who find that MBA graduates are too narrowly educated. • From a special report in the Harvard Business Review, “Are Business Schools Doing Their Jobs?,” by Behrman and Levin (1984).
Business school critics assert that we place: • Too much emphasis on quantitative analysis, tools, models, and theory • Too little emphasis on qualitative thinking, complex tradeoffs, execution, and creativity • Too much emphasis on short term performance • Not enough on long term success
Too much emphasis on bureaucratic management • Very little on entrepreneurial activities and risk taking • Too much emphasis on career and corporate goals • Too little attention on interpersonal relationships and social ethics • Too much emphasis on separate disciplines • Not enough on integrative problem solving and management
Lectures and Multiple Choice Exams Very efficient • Maximize communication of new concepts • maximize number of students • minimize instructor involvement • Can be standardized to minimize unwanted • variance in teaching But. . . they do not encourage • creativity • integration • problem solving • decision making • risk taking • interpersonal skills
Case analysis Students are able to • analyze and solve complex problems • think in strategic ways • integrate material across disciplines But, students do not have to • execute their decisions • live with the consequences • respond to competitive moves and counter moves
Simulation Strengths Students are able to • analyze and solve complex problems • think in strategic ways • integrate material across disciplines . . . and • execute their decisions and • live with the consequences • respond to competitive moves • and counter moves
Finally, simulations represent high involvement learning. Running their own business gives students a personal stake in the outcome and can help them learn about managing in a competitive situation. But…. simulations do require substantial time and effort.
Overview of TheMarketplace Environment Building Blocks of The Marketplace
Game Structure Up to 12 manufacturers 20 geographic markets 5 market segments
Sales Offices Montreal Toronto Calgary Vancouver New York Atlanta Chicago Los Angeles London Paris Berlin Rome Osaka Tokyo Yokohama Sapporo Curitiba Rio de Janeiro Sao Paulo Belo Horizonte
Market Structure Mercedes Traveler Innovator performance Work Horse Cost Cutter cost
Chronology of Events • Q1, organize the team, name the company and contract for a survey of potential customers. • Q2, analyze market information, establish strategic direction and set up shop (build plant, design brands and set up sales offices).
Chronology of Events • Q3, Q4, test market brands, prices, ad copy, media campaigns, sales staffing. Study competition and make adjustments in strategy.
Chronology of Events • Q5, prepare a two-year business plan. Present business plan and financial request to venture capitalists and negotiate equity investment. • Q5 - Q8, initiate international roll-out campaign.
Chronology of Events • Q9, present report to the Board regarding • second year performance, • deviations from plan, • justification for departures, • analysis of current market, and • plan for third year.
Equity Financing • The initial capitalization is 4,000,000 which is being invested by the executive team in 1,000,000 increments over the first 4 quarters. • The executive team owns 100% of the company. • Four thousand shares of stock will be issued to the executive team in exchange for their 4,000,000. • The initial stock value is 1000 per share.
Equity Financing (continued) • At the end of the first year of business, the executive team will have the opportunity to request up to 5,000,000 from a venture capitalist (instructor). • The venture capitalist will expect an outline of the strategic plan for the second year in business, including target markets, geographic expansion, R&D, plant expansion, etc.
Debt Financing (Q5 and beyond) • The bank will extend a line of credit to the executive team equal to one and a half times the firm’s equity position in the previous quarter, • The bank is highly risk averse and will call in your loan in part or whole if your debt capacity declines due to unusual or extended losses.
Debt Financing (continued) • Other financial institutions will also buy long-term notes at 2 points over conventional bank loans. The acceptable debt capacity is two times the firm’s equity position in the previous quarter. • Long-term debt is for 5 years with little possibility of the financial institution calling in the note due to short-term swings in income.
Special Financing Needs • The bank is intolerant of poor financial management. • If a firm ends a quarter with a negative cash position, the bank will contact a loan shark to obtain an emergency loan to cover the firm’s checking account.
Loan Shark’s Financing Terms • Loan shark requires repayment in the next quarter • The emergency loan interest rate is a sliding scale which begins at 10% per quarter and may go as high as 25% per quarter. • For each 1000 which the loan shark places in your checking account, he will take one share of stock in your firm. • The issuing of stock to a loan shark causes a dilution of your stock value and your share of the company.
Bankruptcy • A firm is technically bankrupt if its cumulative losses exceed its equity investment. • Bankruptcy occurs when the sum of the retained earnings and the common and preferred stock is a negative number. • Stated differently, the management has used up all of the equity of the firm when the negative value of the retained earnings exceeds the value of the common and preferred stock.
