GLOBAL OPERATIONS
an exploration of business strategy
Virtual Patient Edition
GLOBAL OPERATIONS
THE BUSINESS STRATEGY SIMULATION
PARTICIPANTS' BRIEF
INTRODUCTION
This simulation is designed to allow you to experience the start of a new business and its expansion and development world-wide. You will work as a member of a senior management team making strategic business decisions in direct competition with several other teams. A computer based business model simulates the implementation of these decisions and the operation of your business.
Your decisions cover product development, choice of markets, product offering, pricing, promotion, factory capacity and funding. To help evaluate the effect of these decisions several reports are produced and market research information may be requested. As well as reacting to competitive action it is necessary to manage a global environment.
THE SIMULATION
The simulation is designed to allow you to test and experiment with strategies and business concepts and share knowledge and experience with your fellow participants. It consists of three stages as follows:
PREPARATION
DECISION MAKING
REVIEW AND DEBRIEFING
PREPARATION
Preparation involves becoming familiar with the basic business situation, defining individual responsibilities, considering objectives and deciding how to measure and control the business. When doing this you should recognize that it takes some time before you fully understand the response of the market and your competitors' strategies. Thus it is likely that you will only understand the business after you have made several decisions and analyzed their results. Thus understanding and your effectiveness will improve throughout the simulation.
DECISION MAKING
Once the preparation is complete the business is simulated for several periods each representing one trading year. (The first decision period is year 1). Each period involves the following:
SUBMISSION OF DECISIONS
SIMULATION OF THE BUSINESS
ANALYSIS OF RESULTS
MARKET RESEARCH
SUPPLEMENTARY TASKS
DECISION SUBMISSION - the decisions must be submitted to the simulation control center at or before the time specified. You must keep to the decision making schedule since late submission may mean that decisions for the previous period may be used in their place. The decisions are made on the forms provided and should be complete and legible.
SIMULATION - the decisions are entered into the computer that simulates their impact. This processing takes time and you should use the time be used to reflect on objectives and strategies.
RESULTS - the results are returned to each team's “board room”. After receiving your results you have a limited time to analyze them before submitting the next set of decisions.
RESEARCH - during the analysis time you have the opportunity to submit requests for market research to the simulation control center. These are processed if there is sufficient time.
SUPPLEMENTARY TASKS - from time to time you may be asked to perform other tasks.
REVIEW AND DEBRIEFING
At the end of the simulation you must present a directors' report, discuss and compare your results with the other teams. The directors' report should describe the team's business objectives, strategies and results. To prepare for the review you should document your progress.
THE BUSINESS
The business that you are to manage has just been set up as a stand-alone subsidiary of a large company to market a new high-technology product. The large company has provided equity funding. However, since the original development was government funded several other firms are licensed to produce the product and are setting up in competition.
Provided your business is operating successfully, your parent company gives you complete freedom to set objectives and decide strategies. However, from time to time they may ask you to provide them with information about your business.
The product is totally new and innovative. But, because, the first version (Model 1) was developed at a combined University Engineering Department and Medical School, several organizations (your direct competitors) will be offering it.
Although totally new, the product has been test marketed in Europe and the results of this test are attached. Besides European sales it is expected that the product can be sold throughout the world and a forecast of potential market sizes is attached
THE PRODUCT
The product is a high technology whole body simulator (The Virtual Patient) that is used to train and retrain doctors. It is designed to facilitate the non-invasive diagnosis of illness. Incorporating advanced voice synthesis and recognition, the doctor can converse with the Virtual Patient. In addition, the doctor can use a full range of diagnostic instruments ranging from thermometer and stethoscope to ECG and ultrasound. The first version covers a wide range of common complaints. It is envisaged that later versions will extend this coverage.
THE MARKETS
The world is divided into eight markets as follows:
EUROPE
NORTH AMERICA
SOUTH AMERICA
JAPAN
SE ASIA
INDIA
MIDDLE EAST
and AFRICA
Your success in any market is influenced by a combination of:
PRICE
PROMOTION EXPENDITURE
PRODUCT OFFERED
and COMPETITION
You do not need to serve all the markets and may enter or withdraw from any of them at any time. The overhead cost of serving a market is $20,000 per year.
PRODUCT DEVELOPMENT
During the simulation you need to develop your product offering beyond the initial model (model 1). Each of these new models (models 2, 3, 4 etc.) is a more sophisticated version of the previous model and therefore more attractive to discerning customers. Unlike the initial model (model 1), these products are the property of your company (although you still pay a royalty).
Each year you decide how much to spend on product development. The effect of this expenditure is cumulative and it is not necessary to spend sufficient in a single year to develop the next model fully. In fact, the longer the development time, the lower the total expenditure.
The development of a new model takes at least a year to complete. After the design is complete, the new product is launched in the following year. For example, if model 2 is fully developed in year 1 it will be launched in year 2. Similarly, if model 2 is partially developed in year 1 and completed in year 2 it will be launched in year 3.
Once a new model has been developed work starts on the next model. A range of models may be offered provided they are offered to separate markets (it is not possible to offer more than one model to a market).
Each year you are informed of the expected cost of completing the development of the next model (it is estimated that it will take $300,000 to develop model 2). Development cost increases as the model becomes more sophisticated.
When a model is produced for the first time you are charged $100,000 to cover new factory fixtures (although the existing plant capacity can be used).
BUSINESS RESEARCH
To help you decide the attractiveness of markets and products business research is available as follows:
TEST MARKET
MARKET POTENTIAL
ECONOMETRIC TRENDS
COMPETITIVE POSITION
TEST MARKET
Before entering a market or modifying your offering to a market you may wish to test market it. This costs $20,000 for each individual market test. The test covers a proposed price, promotion and model. Appendix 1 shows the test done on the European market.
MARKET POTENTIAL
This report provides an estimate of the total sales potential for each of the eight world markets for the next year. The report costs $5,000. Appendix 2 shows this report for year 1.
ECONOMETRIC TRENDS
This report provides a detailed estimate for the expected trends in a specific market. The report costs $5,000 for each market researched.
COMPETITIVE POSITION
This report informs you of the estimated total sales demand and, for each company, their price, the model offered and estimated unit share. You automatically receive this report for the markets your that team serves but, a report showing all the world's markets costs $2,000.
FINANCIAL ASPECTS
FUNDING
Initial venture funding for business is one million dollars ($1,000,000). This money is needed to:
PURCHASE PRODUCTION MACHINERY
FUND WORKING CAPITAL
PAY FOR NEW PRODUCT DEVELOPMENT
COVER ANY INITIAL LOSSES
You are able to increase funding by taking out term loans and through overdrafts. Requests to increase term loans are only allowed if they are financially viable. Overdrafts are provided automatically, however, if you do not maintain a sufficiently liquid position you risk bankruptcy. Term loans are on an interest only basis and last ten years.
The parent company feels that its initial equity funding is sufficient. However, once your company has a proven track record it may discuss a further injection of equity.
FUNDING COSTS
You pay interest on your term loans and overdrafts and earn interest on any cash balances. Interest on term loans is currently 12% and overdraft interest is eight percent above this (20%). Whenever you take a term loan, there is a one- percent arrangement fee. If you have a cash surplus, this earns interest at about half the term loan rate.
If capital gearing (the ratio of loans plus overdrafts to total equity) exceeds fifty percent, a premium rate of interest is charged and it is unlikely that you will be allowed to take a term loan. If the liquidity position is very poor, the bank may curtail investment in new capacity or new product development.
The Parent Company expects a return on their equity investment equal to or greater than the term loan interest rate (currently 12%). Initially, this dividend can be deferred but eventually the parent company expects you to pay a dividend and catch up with any backlog.
PRODUCTION ASSET PURCHASES
You must buy machines to set up your factory and, later, you may need to purchase more machinery to meet sales demand.
Production machinery can only be bought in blocks of 1,000 units of capacity and the minimum number of blocks that can be purchased is 5 blocks (5,000 units of capacity). Between 5 and 9 blocks the cost is $100,000 per block. From 10 to 24 blocks the cost is $90,000 per block and above 24 blocks the cost is $75,000 per block.
New production machinery takes about three months to install and so in the purchase year only 75% of the new capacity is available for use. If demand is too high sales are lost. Production machinery depreciates in money terms by 10% per year and is likely to decline in productive capacity by a similar amount.
PRODUCTION COSTS
Indirect production costs are based on the current capacity and are $20 per unit of capacity per year. Direct production costs are based on the actual production and are about $75 per unit. Direct production costs consist of direct materials ($50/unit) and direct labor ($25/unit). Production overheads (covering production management, purchasing etc.) are $50,000 a year.
The production costs are for Model 1. But, because of improved designs and methods, it is expected that the later models will cost about the same. If you are offering a range of models, production efficiency is less and production costs increase by $20,000 for each additional model produced.
OTHER EXPENSES
These are the other expenses associated with the company and include promotion, distribution, market overheads, general overheads, royalties and product development. Promotion and product development are decisions. Market overheads are $20,000 a year per market served. General overheads are $50,000 a year. Royalties are $5 per unit of sales. Distribution cost depends on the distance from the factory (in Europe) to the market and the amount shipped.
TAXATION
Each year you will be assessed corporation tax at thirty-three percent on your net profit. If you make a loss this will give rise to a tax credit that will be set against future tax liabilities.
DECISIONS
You must submit your decisions to the simulation control area at the times stated by the simulation director. These decisions must be made on the decision form supplied and cover the following:
DEVELOPMENT EXPENDITURE
NEW CAPACITY PURCHASES
NEW TERM LOANS
DIVIDENDS
And for each market served:
PRICE
PROMOTION EXPENDITURE
PRODUCT OFFERED
NOTES
Ensure that the form is completed legibly and that it is checked before submission.
Price may be entered as a whole number (e.g. 205).
Product offered is the model number (i.e., 1, 2, etc.)
Promotion expenditure, development expenditure, new term loans, loan repayment and dividends are in thousands of dollars.
New capacity must be entered as blocks of 1000 units and, if you are increasing capacity, you must increase by at least five blocks (5,000 units).
RESULTS
Shortly following your decisions you will receive some interim results that show several key results for you to work on until your full results are available.
INTERIM RESULTS
This report is provided before the main results and shows several key results:
TOTAL MARKET SHARE
TOTAL UNIT SALES
SALES INCOME
OPERATING PROFIT
CASH
OVERDRAFTS
NEWEST PRODUCT
TOTAL MARKET SHARE is the company's total sales income expressed as a percentage of the total sales incomes of all the competing companies.
TOTAL UNIT SALES is the total units of all product types sold in all markets.
SALES INCOME is the value of sales made during the year.
OPERATING PROFIT is gross profit less operating expenses. It measures the profit generated by the core business.
CASH is the amount of cash on hand or held at the bank at the end of the year.
OVERDRAFTS are the amount owed in overdrafts at the end of the year.
NEWEST PRODUCT is the model number of the product available for sale in the coming year. So, it reflects the outcome of the year's product development.
FULL RESULTS
These are provided next and comprise the basic reports that show how the business performed for the year as follows:
MARKET REPORT
OTHER INFORMATION
INCOME STATEMENT
BALANCE SHEET
KEY MEASURES
COMPETITIVE REPORT
COMMENTS
Appendix 3 shows a forecast of these results for year 1.
MARKET SUMMARY
This provides basic information about sales to the markets served by the company thus:
UNIT SALES
PRICE
SALES INCOME
PROMOTION
DISTRIBUTION
UNIT INVENTORY
RECEIVABLES
UNIT SALES are the amount of product, in units, sold to customers in the market.