April
TRAINING
EXECUTIVE
THE
BUSINESS SIMULATION
Case Study and Financial Reports
Student Briefing Pack
February 2012
Experience Teaches…..
CONTENTS
Page No
1.
SYNOPSIS ...................................................................................................... 1
2.
THE VOLKSWAGEN GROUP IN SUMMARY ................................................ 2
3.
POTTED HISTORY OF THE VW GROUP ...................................................... 2
4.
THE VW PORTFOLIO IN THE SIMULATION ACTIVITY ............................... 3
5.
COMPANY PERFORMANCE TO DATE ........................................................ 6
6.
YOUR GROUP RESPONSIBILITIES.............................................................. 6
7.
YOUR GROUP TASKS AT THE START OF THE SIMULATION ACTIVITY.. 7
8.
BACKGROUND TO THE EUROPEAN AUTOMOTIVE SECTOR .................. 7
9.
BRIEF GUIDE TO SIMULATION DECISION MAKING .................................. 8
10.
INSTRUCTIONS FOR OPERATING EXECUTIVE........................................ 14
Appendices
I
Managing Across The Value Chain ............................................................ 16
II
Key Performance Indicators ....................................................................... 23
III
Research & Development Times ................................................................ 24
IV
Summary of Headline Financial Results FY 2009/10 ................................ 23
V
Description of Financial Ratios .................................................................. 26
1.
SYNOPSIS
Welcome to the business simulation, which is being provided to enable you to work as a member of a
business management team with responsibility for the future strategic development of one of the
products within Europe’s largest automobile company, Volkswagen. We have selected Volkswagen
to provide the opportunity to consider the business value contribution that a number of its product
portfolios make to the overall success of the company and to develop skills in managing a dynamic
business using a number of analysis, decision making and performance management tools to help
you.
In this simulation event there are nine teams (companies), each one working with an individual
product area of the VW portfolio. Some of these areas compete with in-house brands; all of them
compete in the wider European passenger market with the likes of Ford, GM, BMW, Mercedes,
Jaguar Lexus, Nissan, Mercedes Benz, Toyota and the other global producers of passenger vehicles.
The product areas we have selected are as follows and each ‘product company’ has two products in
the market at the present time.
Team
No.
Product Area
Comment
1
Polo Eos and Up
Products are positioned in the city segment of the market
2
Golf
Products are positioned in the medium segment of the market
3
Beetle
Products are positioned in the medium segment of the market
4
Passat
Products are positioned in the large segment of the market
5
Audi
6
Audi Exec
7
Skoda
8
Porsche
9
4x4
Products are positioned in the medium and large segment of the
market
Products are positioned in the large and luxury segment of the
market
Products are positioned in the city, medium and large segments
of the market
Products are positioned in the large and luxury segments of the
market
Products are positioned in the large segment of the market
Each product company has plans to add a new model to their portfolio in the next financial year,
having made an investment of £300m for product development in FY2011. The investment is shown
on the financial reports split 50/50 between the profit and loss account and the cash flow statement (it
is also added to fixed assets in the Balance Sheet). It is possible to have a total of five products in the
company portfolio but only one new product can be added each year.
The environment represents the current economic, financial and market conditions that exist in the
global and European arena. You will be trading from FY 2012/2013 (FY end January) and for four
additional trading periods covering the financial years 2013/14, 2014/15, 2015/16 and your final year
of trading will be FY 2016/17. The economic cycle will bring changes in the environment as the
simulation progresses.
Details of the simulation parameters are given in section 9 and instructions for operating the software
are provided in section 10.
Page 1
2.
THE VOLKSWAGEN GROUP IN SUMMARY
The Volkswagen Group (VW) with its headquarters in Wolfsburg is the third largest car maker in the
world and the largest in Europe. It controls 9 percent of the world market share in the automotive industry,
although this has fallen from the 11.4% share it held in 2010. The focus of the company is in Europe where it is
hugely successful; its ability to match consumer expectations has resulted in it taking an approximate 23.9%
share of the market. It also has a growing market presence in China where it is the largest foreign automaker.
Traditionally VW has struggled in the US (with the exception of the Audi brand) where it has to
compete with cheaper Japanese models, but this could be set to change as the end of 2011 and the
beginning of 2012 has seen a sharp increase in sales of up to 47%.
The passenger car group is made up of nine brands from seven European countries : Volkswagen,
Audi, Bentley, Bugatti, Lamborghini, Seat, Skoda, 49.9% of Porsche and the truck manufacturer
Scania. Each brand has its own character and operates as an independent entity on the market. The
product range extends from low-consumption small cars to luxury class vehicles. In the commercial
vehicle sector, the product offering spans pick ups, buses and heavy trucks.
In 2011, the Group was named in the top 25 largest companies in the world by Forbes Global 2000. It
operates 62 production plants in fifteen European countries and a further seven countries in the
Americas, Asia and Africa. Around the world, nearly 400,000 employees produce more than 30,000
vehicles or are involved in vehicle-related services each working day. The Volkswagen Group sells
its vehicles in 153 countries.
It is the goal of the Group to offer attractive, safe and environmentally sound vehicles which are
competitive on an increasingly tough market and which set world standards in their respective
classes. It aims to double its US market share from 2% to 4% for the year 2014 to become,
sustainably, the world's largest car maker by 2018.
Innovation
Shaping the future is a fascinating challenge for industry and society. The automotive future is formed
by social conditions and trends. The VW Group sees its task as anticipating the future needs of its
customers and converting those needs into innovative technologies.
The technological challenges of the future can only mastered by intensive research and networked
cooperation both inside and outside the company. The VW mission is to continue meeting its
customers’ wishes for individual and affordable mobility through sustainable technologies, working
with industrial partners to achieve this goal.
Group Research has its headquarters in Wolfsburg and performs research for all Group brands.
International trend scouting and technology scouting form part of the strategic orientation. The Group
also operates from research bases in the US, Japanese and Chinese markets
Sustainability
Superior value, social responsibility and a practical commitment to sustainability are hallmarks of
VW’s corporate culture. A far-sighted approach is taken to the key issues of the future, such as
climate change and a broad range of research and development activities are pursued to generate
the pioneering technology that the mobility of the future will demand.
The social responsibility extends to taking care of its workforce and in 2011 the Company pledged to introduce
measures to improve the work-life balance of the employees. However, this overall commitment can pose some
threat to the stability of the Company. 53.3% of Volkswagen's workforce is based in Germany which means it is
heavily unionized and governed by some of the world's strictest labour regulations. In addition, VW's employees
elect half of the VW's Supervisory Board. Combined, these factors make it difficult to impose efforts by the
company to cut costs, increase efficiency or downsize the labour force.
3.
POTTED HISTORY OF THE VW GROUP
On 28 May 1937 the "Gesellschaft zur Vorbereitung des Deutschen Volkswagens mbH" company was
founded, and on 16 September 1938 was renamed "Volkswagenwerk GmbH". In early 1938, in what
is today Wolfsburg, work began on construction of the Volkswagenwerk plant which was to house
production of the new vehicle designed by Ferdinand Porsche. During the Second World War
Volkswagen’s production was switched to armaments. After the end of the Second World War, in mid
June 1945, responsibility for Volkswagenwerk was placed in the hands of the British Military
Government. Under the management of Major Ivan Hirst, mass production of the Volkswagen Beetle
began.
Page 2
On 8 March 1950 the Type 2 went into production, expanding the company's product range. The
Volkswagen Bus, still today known to many as the "VW Bully", soon created rising demand thanks to
its multifunctional capabilities. In 1956 a separate manufacturing base for the Transporter was
established in Hanover, at the same time setting down the roots of today's Volkswagen Commercial
Vehicles brand. In 1955 employees and dealers from Germany and abroad celebrated the production
of the one millionth Volkswagen Beetle in Wolfsburg.
On 17 February 1972 Volkswagen broke the world car production record: with 15,007,034 units
assembled, the Beetle surpasses the legendary mark achieved by the Ford Motor Company's Model
T, popularly known as the "Tin Lizzy", between 1908 and 1927.
In 1973 the Passat was the first model of the new generation of Volkswagen vehicles to go into
production - with front-wheel drive, a water-cooled four-cylinder engine and a range of engines up to
110 bhp. The Passat was built in line with the modular strategy, by which standardised components
usable in a range of different models provide significant rationalisation.
In June 1983 production of the second-generation Golf began. The car was designed for a largely
automated assembly process, and in the specially erected final assembly hall, designated Hall 54,
robots were deployed for the first time in vehicle manufacture.
In 1995 VW's first MPV, the Sharan was launched. In 2003, the smaller, compact Touran was added
to the MPV range, using a Golf chassis. Production of the vehicle was accompanied by the
introduction of a special collective pay model, aimed at implementing lean production and involving
flat hierarchies, team working, flexible working hours and the deployment of more process expertise
by the workforce.
Volkswagen once again made automotive history in July 1999 with the launch of the first production
car to offer fuel consumption of just three litres per 100 kilometres – the Lupo 3L TDI.
In August 2002, at Volkswagen Slovakia, a.s. in Bratislava, mass production of the Touareg began, a
luxury-class SUV off-road vehicle. This marked Volkswagen's move into an entirely new market
segment and major components of the Touareg are now shared with the Porsche Cayenne and Audi
Q7 sport utility vehicles. The mid-sized SUV, the Tiguan, was launched in 2008 to offer a more
compact version of the Touareg.
In 2003 production of the fifth-generation Golf started, embodying a new dynamism in its design and
engineering.
The sixth generation Golf was launched in 2008 to become runner-up to
the Opel/Vauxhall Insignia in the 2009 European Car of the Year. Some of its features have
subsequently been used in the VW Jetta and Scirocco, the Seat Leon, Toledo and Altea, Skoda's
Octavia, the Audi A3 hatchback rangeand the new mini-MPV.
2006 brought the launch of the Group's first hardtop cabriolet, the Eos, which replaced the Golf
convertible.
The latest addition to the Brand's portfolio is the UP, a l litre city car. Production began in Bratislava
in December 2010 but expansion to other plants is expected in 2011. A plug-in electric version is
scheduled for market in 2013.
4.
THE VW PORTFOLIO IN THE SIMULATION ACTIVITY
City Market Products
The EOS
The days when customers had to decide between a cabriolet and a coupé are now a thing of the past.
The Eos offers the best of both worlds: authentic cabriolet fun and the dynamic performance of an
innovative coupé have entered into a unique alliance in this fascinating and versatile vehicle. The
Eos appeals to the heart and the head in equal measure. It can be driven either with the roof closed
or with an unobstructed view of the sky, depending on the weather and your inclinations. The
innovative vehicle concept, with its ingenious functionalities, provides an astonishing range of options
and unadulterated driving pleasure.
Page 3
The Polo
An expression of personality, an acknowledgement of a particular lifestyle, personal space, a status
symbol or simply a way of getting around. No matter what the customers attitude to the automobile –
one thing’s for sure, the latest Polo car is and will remain a statement. The CrossPolo is more than
just a car – it’s an individualist. And that’s apparent at the very first glance: the bumpers, door
handles and side rubbing strips feature a number of individual and bold design details. Sporty driving
pleasure is also part of the package. With its innovative overall concept, the new Polo BlueMotion is
in many respects a car that will fascinate customers. It delivers a convincing performance with its
economical fuel consumption of 3.8 l/100 km as well as ideal propulsion, a comprehensive safety
package and an ergonomically styled, generously dimensioned interior (fuel consumption: 3.8 l/100
km; CO2 emissions: 99 g/km**).
The UP
Even before it is available for sale, the Up has been named Car of the Year 2012 and the City Car of
the Year 2012 by several publications. It has a low entry price while offering the latest technology,
top-rated safety features, the internal space to take four adults despite small external dimensions,
excellent fuel economy and a low insurance group rating. VW are also offering a low-price 3year/maximum mileage servicing package. With all these features, it is likely to appeal to a wide
range of customers.
Mid Sized Portfolio Products
The Golf
Better value than ever before, the quietest Golf of all time completely redefines the level of quality and
comfort in its class in many areas. Its dynamic and stylish design reflects the perfection of the latest
Golf down to the tiniest detail. The innovative driver assistance systems and modern and fuel-efficient
engines also guarantee reliable driving pleasure.
Customer needs not be deceived by its compact exterior: inside the Golf Plus you will now find no end
of personal space. This is all thanks to its impressive spaciousness, its tremendous variability and its
ingeniously conceived design, all blended together with the top-class quality of a Golf. That really is
as good as it gets
Where its predecessors were surprisingly spacious, the Golf Estate takes this concept even further.
Its remarkable load capacity of up to 1,550 litres, including load-through hatch, is predestined for trips
that involve lots of luggage. The classic design is perfectly complemented by chrome strips on the
radiator grille and by practical roof rails.
From 0 to 180 at heart-racing speed: the Golf GTI is uncompromising, strong of mind; strong of body
and the unmistakably sporty design. The undiluted driving pleasure and dynamism. The supreme
sense of safety and maximised everyday practicality. A real treasure for the motoring connoisseur!
The New Beetle
Everybody remembers the very first Volkswagen car of all: the Beetle. With its unique shape and
reliability, it wrote motoring history. In 1993, Volkswagen succeeded in picking up where it had left off
and put a smiling new face on the icon in the guise of the New Beetle.
The latest generation of the New Beetle is equally impressive as a saloon and as a cabriolet. The
appealing looks, the captivating shapes and the powerful curves make both versions of the New
Beetle irresistible. Whichever you choose, you are guaranteed exceptional driving pleasure.
The New Beetle is a vehicle with character and extraordinary styling. Its harmonious curves give it its
looks, from the arched roof, the windscreen drawn forward over the bonnet and wings, to the rear end
drawn down low to the road. Its long wheelbase and wide track indicate strength. Classic details like
the assist straps in the interior evoke memories of the old Beetle, completing the bridge between the
past and the future of car design.
The Skoda
With a legacy of over 100 years of getting people from A to B. Skoda started an association with VW
th
in 1990 and formally joined the stable of brands in 1991 becoming the 4 brand in the VW stable
Having previously been a laughing stock of the European passenger car markets (you only warm your
hands on a Skoda in winter!), the brand has benefited from the expertise of VW and its products have
won a number of awards, more recently being recognised by several JD Power surveys in the last 5-7
years.
Page 4
With a focus on designing vehicles for a wide audience, Skoda’s products range from the Fabia for
the city segment, medium saloons under the Octavia portfolio to small MPV Yeti and Roomster and
large cars under the Superb brand.
Large Portfolio Products
The Passat
The Passat has the power to indulge customers. It not only inspires because of its elegant exterior
appearance but it also convinces with its generous space. Not only the passengers on all seats enjoy
highest comfort but the 565 litres capacity of the boot is also enormous. Its interior equipment is as
notable for its ergonomic design as for its functionality and makes each trip with the Passat extra
special.
The Passat Estate not only offers much room for luggage but also space for admiring looks. Its
design convinces with clear, flowing and dynamic lines. Noble woods, aluminium applications and
leather seats shape the interior. Additionally, the Passat Estate impresses with practical solutions like
its smart storage and space concept.
The Passat R36 with its 220 kW (300 hp) is the most powerful Passat ever and superlatives are also
entirely appropriate to describe its looks. The "Biscay Blue, pearl effect" paint finish, the motorsportstyle bumpers typical of the R series and the body-colour wheel arch and sill extensions are genuine
highlights. (Fuel consumption: 10.5 l/100 km; CO2 emissions: 249 g/km.)
The first four-door luxury coupé from Volkswagen sets new trends in the area of design. Pure sports
car dynamics and uncompromising saloon-style comfort are the characteristic features of the new
Passat CC. And the sporty styling is continued at the same high level inside the car, the spacious
interior is impressive for its sophisticated materials and the optional panoramic tilting sunroof with its
view of the heavens.
The Passat with BlueMotion Technology (fuel consumption: 4.9 l/100 km; CO2 emissions: 128 – 129
g/km) is one of the world’s most eco-friendly cars. An international jury voted the Passat BlueMotion
into the top three of the “World Green Cars 2008” during the New York International Auto Show.
Thanks to its outstanding fuel efficiency and low CO2 emissions, the Passat with BlueMotion
Technology fended off competition from numerous hybrid models and a fuel cell vehicle.
The Audi
The Audi badge – the 'Four Rings' – is the emblem of one of the oldest car manufacturers in
Germany. It symbolises the 1932 merger of the four independent motor-vehicle manufacturers: Audi,
DKW, Horch and Wanderer. Together with the NSU brand, which joined in 1969, these companies
are the roots of the present-day AUDI AG.
The Audi brand is aimed to compete head to head with the BMW, Mercedes Benz, Jaguar and Lexus
marques. With a comprehensives range of saloon, sports models and options, Audi has a product
that meets the needs of a wide range of customers. Audi supports its range of cars with a lifestyle
portfolio of accessories.
Audi has a strong emphasis in technical and engineering excellence and on the use of new and
emerging technology to give customers an enhanced driving experience. It is considered to be a
flagship brand within the total VW brand portfolio.
The Tourag
Whether as an athlete on off-road terrain or a striking figure in the city – the Touareg masters simply
every situation. Always with a sense of style: it radiates a commanding presence, which is reflected
in the elegance of the interior. In terms of comfort and convenience, nothing has been overlooked.
Exquisite materials are combined with excellent craftsmanship and the numerous functions are
operated with intuitive ease. The Touareg epitomises attention to detail, which customers will
experience every time they step inside. Technical brilliance, sporting spirit and the power of one of
the world’s mightiest production diesels – just three of the many characteristics that make the
Touareg R50 a consummate high-performance athlete. (Fuel consumption: 11.9 l/100 km; CO2
emissions: 315 g/km.)
Page 5
Luxury Portfolio Products
Porsche
While products and technologies designed and created by Porsche now look back at more than
100 years of successful history, the first car bearing the brand name Porsche was produced by the
state government of Kärnten in Austria "only" 60 years ago on 8 June 1948 - the very first Porsche
356 to see the light of day. The intellectual and spiritual "father" of the car was Professor Ferdinand
"Ferry" Porsche, Moving his Company during the war from Stuttgart-Zuffenhausen to the town of
Gmünd in Kärnten, Ferry Porsche had started with his faithful employees in 1947 to "build a sports car
of the kind I like myself" based on the Volkswagen Beetle developed by his father.
Porsche's Research and Development Centre in Weissach, 25 kilometres west of Stuttgart, is of
equally great significance in the automobile world as Porsche's sports cars from Zuffenhausen. The
Weissach Centre continues the tradition initiated by Professor Ferdinand Porsche, the father of Ferry
Porsche, at his original Design Office in Stuttgart, developing not only the sports cars of the marque,
but also technical projects and new technologies for customers the world over. Indeed, no other
manufacturer these days is able to offer such a complete, all-round range of development services
extending from detailed solutions all the way to complete vehicles.
Like the Volkswagen Beetle built in huge numbers, the Porsche 911 now looks back at the longest
production run of any sports car in the world. A particular highlight in the 911 model range was the
911 Turbo presented by Porsche at the 1974 Paris Motor Show and originally intended for a
production "volume" of just 500 units.
Since September 1996 the Porsche Boxster, combining the driving dynamics of a thoroughbred
sports car with unlimited everyday driving qualities, has offered a new performance and safety
standard in the open sports car market. Featuring a novel roof opening/closing mechanism, the
electric roof of the Boxster opens and closes within just 12 seconds, that is at a speed and with a
degree of efficiency never seen before
5.
COMPANY PERFORMANCE TO DATE
A full set of the management and financial statements for the financial year ended on the 31 January
2012 will be provided at the beginning of the simulation exercise. There is a summary of the
FY2011/12 headline performance for all companies in Appendix VI and a table describing several
financial ratios, how they are calculated and a statement on what the ratio indicates in Appendix V of
this document.
Your business, market and financial performance will be determined across a number of factors
amongst which are the following:
The macro economic environment
Consistency of your performance and your investment strategy
The strength of your portfolio and the position of your company in the marketplace
General market and customer sentiment
Press recommendations
Regulation changes
6.
YOUR GROUP RESPONSIBILITIES
You are totally responsible to the Executive Board of VW Group for the investment strategy, market
performance and financial results of your portfolio business.
The Board’s objectives are to profitably invest, develop and grow their business interests in the
passenger car market in Europe, delivering returns that are above the market average of 18-20%
(measured on the Return on the Capital Employed) and seeing market share growth that is in excess
of market growth.
Page 6
7.
YOUR GROUP TASKS AT THE START OF THE SIMULATION ACTIVITY
To review the business case and financial information you have been given and to undertake some
basic research about the portfolio category you are being allocated and also about the dynamics of
the European passenger car market so that you can make informed business and investment
planning decisions. You will develop a plan that includes proposals for building the products in your
portfolio, addresses the markets that your products are designed to satisfy and grow the strength of
your portfolio in those markets.
You should use the principles of the Value Chain (Michael Porter) to develop a plan for your portfolio
– so you need to develop a process to map your business using the Value Chain. Please see
additional information contained in Appendix I about the way to use and construct a value chain
model. You can also do some web based research to look for new ways that manufacturing
companies use the value chain to identify where profitable opportunities lie.
In preparing for the simulation you are advised to read through this document and familiarise
yourselves with the portfolio company, its performance and the challenges that it faces, which have to
be taken into account when planning the portfolio investment and market development plan for the
future. In preparing your Board presentation please include the following :
Comment on the portfolio that you have been assigned to – provide some insights into the
products, its values and the market/customer segments it seeks to address in Europe
Review the market, business and financial performance for the last completed year (end
31 January 2012) and prepare a summary overview for the presentation
Outline your plans to develop the portfolio and the business performance over the next 5
trading period from FY2012/13 to FY2016/17 showing critical timelines and investment plans
Prepare a Value Chain of the business and portfolio showing those critical dependencies and
areas that will require your attention
Summarise the principle risks and threats to the business from the macro economic and fiscal
environment
Set some Key Performance Indicators that you will use to manage the performance of the
business in each of the four following financial years.
Present three team learning goals that you wish to gain from the simulation activity
8.
BACKGROUND TO THE EUROPEAN AUTOMOTIVE SECTOR
8.1
The Financial and Economic Environment
There continues to be a shift of economic power from Western to Eastern economies and the outlook
for the West remains uncertain. There are general concerns about the issues of inflationary
pressures in the global economy and about the financial state of a number of European countries.
Worldwide, stock markets have fallen in response to fears that some countries are so highly
leveraged that they may not be able to meet their obligations. EU Governments, with the support of
the IMF, have tried to alleviate the crisis by agreeing packages in the hope of restoring some
confidence but it is an uphill task given the actions of individual nation states such as Greece, Italy
and Portugal.
In addition, the major European Governments are enforcing a number of austerity measures designed
to reduce public spending, which is leading to a reduction in public and private sector employment. It
is forecast that unemployment is likely to continue to rise across Europe over the next 12-24 months.
Consumer confidence is therefore understandably low but is expected to improve in the next 2-3
years.
No one knows how long it will be before conditions stabilize in the main European economies.
8.2
The Car Market
The car market is undergoing a period of significant change and turmoil.
Both Chrysler and General Motors faced financial crisis in 2008 and only investment from
governments and other companies kept them in operation. The GM European subsidiaries of Opel
and Vauxhall are still under significant threat as the divisions continue to lose money in Europe
despite increased sales figures in 2011 as a result of the launch of new models in 2009/10. Latest
reports suggest that the German Government wants to encourage VW to step into the acquisition
frame to avoid a sale to a Chinese company.
Page 7
From a position of strength a few years, Toyota has also hit more difficult times, resulting in the
company closing factories, withdrawing from partnership arrangement and ceasing production at its
Japanese factory for a considerable period of time. The situation further deteriorated with the
consequences of the disastrous earthquake that hit Japan earlier in 2011 as both Toyota and Nissan
are faced parts and material supply problems in their European-based factories. Although delays
were relatively short-term, it has yet to be seen if there was an effect on sales relating to orders not
being fulfilled on time and/or potential customers becoming nervous about delivery and subsequent
servicing. These sales could potentially have gone to their European or US brand competitors. The
actual consequences will not be known until sales figures for the whole year are known.
To address the financial difficulties, several European companies are downsizing their workforce and
product portfolio, having periods of short working time and introducing a range of new working
practices to reduce cost and boost productivity.
In addition, the fundamental, underlying issues of over capacity - industry capacity continues to
exceed demand by 35-40% in Europe - and a crowded marketplace also have to be addressed.
In the short-term there are likely to be more plant closures (particularly older ones that are expensive
to maintain or upgrade) and the development of multi-brand manufacturing complexes as the major
auto organisations focus on the value of the brand and on the life time value of the customer.
It is into this environment that you are bringing the business.
9.
BRIEF GUIDE TO SIMULATION DECISION MAKING
The decisions to be made in the business simulation exercise involve a wide range of business skills,
from finance and understanding accounts to marketing, strategy, effective interpretation of
information, presentation skills and many others. The simulation is fully interactive so participants are
working in a live marketplace. There is the opportunity to explore, experiment and then evaluate your
knowledge, judgement and decision making.
The company will sell cars into the European market. Responsibilities include decisions on a wide
variety of aspects, for example :
the size of car to be made and the target age group;
the quality of products to be sold;
the market price of the vehicles produced;
the size of the workforce;
the amount to be produced;
financing of the project;
investment in the portfolio
All costs are given on the Cost & Data Sheet, which can be accessed via the Results drop down
menu in the simulation. They will rise with inflation annually.
The currency is £sterling.
Inflation is predicted to be approximately 3% in the coming year.
9.1.
The Marketplace
At the beginning of the exercise it is predicted that the total marketplace will be 15.6m.
The marketplace is the extended European Community plus that handful of countries that are not full
members of the Union – Norway and Switzerland for example. Market research informs us that the
car market is divided statistically into the following platform sizes/types and age groups. The numbers
are used by the simulation software in the Company Reports/Annual Results to indicate the sector
you are operating in. When making decisions in the simulation you will be asked to enter the size car
you intend to produce and the age group at which it is targeted.
Page 8
Car market sectors
Platform
Age Group
City
e.g. Mini
Medium
e.g. Megane
Large
e.g. Audi A6
Luxury
e.g. Jaguar XK8
Under 25
1
2
3
4
25 to 40
5
6
7
8
41 to 55
9
10
11
12
Over 55
13
14
15
16
The car sizes are categorised by selling price ranges (broad guidelines) as follows :
City: up to £15,000; Medium: £12,000-£23,000; Large: £19,000-£50,000; Luxury: over £40,000.
The market share of each sector in % terms is as follows :
Platform
Age Group
City
e.g. Mini
Medium
e.g. Megane
Large
e.g. Audi A6
Luxury
e.g. Jaguar XK8
Under 25
11.00
6.50
1.80
0.22
25 to 40
9.75
12.60
5.75
1.48
41 to 55
7.75
11.00
5.80
1.55
Over 55
8.00
9.50
5.75
1.55
Total
36.50
39.60
19.10
4.80
At the start of the simulation activity, the number of models in each sector, as made by the nine
competing companies, are positioned as follows :
Platform
City
Medium
Large
Luxury
Under 25
0
0
0
0
25-40
2
5
2
0
41-55
1
2
4
2
Over 55
0
0
0
0
Age Group
Once a model is in production, the size CANNOT be changed, however, it can subsequently be retargeted at another age group.
9.2.
Product Design and Options
Design features, including body shape and engine size need to be chosen and value added options
can be selected available for purchasers to add to the basic car. In addition, research and
development projects can be run to increase the model's perceived value.
The cost of model designs, options available and research and development are listed on the Cost
and Data Sheet.
Page 9
Every car produced will be built with at least one of the body designs offered combined with one of
the engine sizes/types offered. The percentage "take up" of each shape and engine size will depend
on their popularity and the additional cost will vary accordingly. You are able to offer multi design and
engine options on each of your products where this is deemed to be an appropriate offering.
Remember that giving the customer a wider choice of products will add complexity to your supply
chain and manufacturing.
Not all cars will be built and sold with all the options offered, only those chosen by each individual
customer, and some cars leave the factory without any additional options at all. The proportion added
will depend on the popularity and appropriateness of the options offered. Therefore, the cost of
including options per car will only be a percentage of the total. The simulation uses a complex
mathematical model to determine the popularity and sales of cars in each trading period.
Customer Choice Packages
Some of the customer choice options are available in the form of packages. The content of these
packages is shown below
Winter Package
Heated front seats, headlight washer system, heated windscreen, washer
nozzles, plus dynamic fog lights on luxury models
Styling Package
Alloy wheels, comfort/sport seats, sport steering wheel, special exterior trim
Security Package
Immobiliser, tracker, wheel nut locks
Safety Package
Flat tyre indicator, rear side airbags, rain sensor headlight wash, high beam
assistant
Luxury Package
Leather upholstery, tinted glass, heated seats, advance key locks, advance
key, improved carpets, floor mats and sound proofing
9.3.
Research and Development
Research and development investment is an important part of your business decisions. Research
and development enable you to continue to enhance your products and offer the potential to provide a
value added opportunity. R&D projects are divided into TWO phases:
Phase 1:
The research phase which is concerned with the initial work in preparing the project.
This is likely to include matters like customer and technical research, prototype development and
testing in a laboratory.
Phase 2
The development phase which is concerned with taking the prototype work and
developing it for production. This is likely to include design engineering, application, material
selection and tooling for manufacturing.
There are both time and costs associated with each individual project. A schedule of the costs is
shown with the cost and data sheet. It is important to remember that not all research projects will be
successful and it is possible for them to fail. You will receive an update on the progress of your
research and development projects with your annual management and financial report. It is
recommended that you only do the research element on one of your products and, once it is available
‘on line’, you can then apply it to your other products. There are three research and development
projects that are model specific and must be applied to each vehicle. These projects are as follows :
1.
2.
27.
Product Relaunch
Facelift
Improved Build Quality
Page 10
9.4.
Selling Price and Profit Margins
The simulation works on the basis of a single average market price for the model. It does not provide
for incremental pricing depending on the number of different options that are selected by the
customer. The single selling price must be set taking into account the designs and options you have
chosen to offer and the market at which the model is targeted. We have set the initial pricing
parameters broadly in line with those that are available in the market today. However, remember that
we are creating a competitive environment and this is likely to have a bearing on your pricing policy.
You need good judgement when thinking about the pricing and market positioning of your products.
As a general guide typical gross profit margins for the different platform categories are as follows:
City
Medium
Large
Luxury
9.5.
7-15%
12-20%
17-28%
25% plus
Marketing/Promotion
Products are promoted individually allowing emphasis or equal spending in the following ways :
Television
Radio
Periodicals/Reviews
Internet
Promotional Offers
Dealer Incentives
Sponsorship
Areas that complement the model and the target market should be concentrated upon.
The image of the model to be portrayed to the market can be one of, or a combination of, the
following perceptions :
Comfort
Speed
Style
Safety
Green
Hi-Tech
Choose the areas and place a value weighting on each. The total for each model must be 100%.
The perception should reflect the design and selection of options and R&D projects on the model.
As well as promoting models individually, the company may also choose to invest in Corporate
Promotion. This can be done across the same areas as listed above and with any amount.
9.6.
New Model Introduction
The company has already invested in a new model to be launched in the forthcoming year to make a
total of three vehicles in its portfolio, the new model must be specified in opening year/round. During
the simulation it will be possible to produce a further two models if it is considered a wise investment.
In order to develop a new model a financial investment must be made in the year before production
commences. The amount of investment affects the degree of success, the average amount required
is given on the Cost and Data sheet.
The amount invested is divided equally between R&D for the model and on tooling up for production.
This is reflected in the finance statements where 50% is found in R&D on the P&L account and 50%
is taken out of the cash flow as an asset investment and shown as part of the fixed assets in the
Balance Sheet and depreciated annually at 10% per annum. Once a decision has been made to
launch a new model, the project cannot be put on hold. However the launch can be delayed but you
will need to employ at least 100 people who will produce a limited number of prototypes and prelaunch products for demonstration purposes. Decisions relating to the new model are made during
the trading year following the year when the investment is made.
9.7.
Market and Competition Research
Once the simulation has started you can purchase research information on the market and also
acquire data on the competition as follows.
Page 11
1.
Market Research
Invest in general market research that is generated by the computer at an initial cost of £5.08 million.
The market research comprises market predictions, an investments sheet and expenditure by other
teams.
2.
Data on Competition
Request computer generated detailed data on the competition at an initial cost of £10.17 million/whole
market report. The data on competition report provides details of all products in the marketplace, their
pricing and sales performance and information relating to more general business and financial
performance.
3.
Market Perception Report
A Market Perception Report may be purchased for any one or all of your models of car at an initial
cost of £5.08 million each. This provides feedback on promotion, option demands and R&D projects
and is attached to the computer generated company report.
9.8.
Production Facilities
A factory has already been purchased at a cost of £650 million.
Each factory has the capacity for 4,000 workers, comprising both production and management
employees and unlimited amounts of automation. The number of factories depends on the total
number of employees, for example, if between 4,001 and 8,000 people are employed, they will be
accommodated in two factories, and so forth in multiples of 4,000. Should it be necessary to
decrease the staff to 4,000 or below the second factory, they will be sold. Factories are bought and
sold automatically depending on the total size of the workforce. Any number of cars can be produced
in a single factory, subject to the right number of resources (people and automation).
If a factory is sold, it will only realise 60% of its book value and the oldest factory is the first to be sold.
The cost of new factories increases each year with inflation. You can open as many factories as you
wish, provided you have the appropriate funding available. All factories are located in the United
Kingdom and are therefore subject to UK employment law.
9.9.
Output and Productivity
The workforce size and target production is specified separately for each model. Productivity varies
depending on the size of the model and automation investment and is given as cars/worker/year:
City cars
Medium cars
Large cars
Luxury cars
:
:
:
:
41
39
39
8.5
Setting low production targets may allow time for improved build quality whilst high targets may
require overtime but can affect product quality. The target set will be the maximum number of cars
produced, whatever the potential capacity may be.
Productivity can be improved by investing in automation, paying better wages and investing in
training.
The workforce can be moved from the production of one model to another without incurring problems
or charges but cannot be reduced below 100 on any individual model. It is assumed that these
employees are producing parts for servicing those sold and on the road and providing warranty cover
for cars that are returned to the factory for repair.
9.10.
Automation
Automation must be assigned to the specific models as a percentage of the total available. This
allows some models to be highly automated whilst leaving others to be predominantly hand built.
Page 12
Automation can be introduced and purchased in units of £510,000 (cost will rise with inflation). Each
unit is as productive as ten workers, e.g. 4,000 workers + £510,000 of automation will give the
equivalent of 4,010 workers.
Each unit of automation has to be manned by one person to be productive. Automation must be
maintained annually and upgraded from time to time. It is wise to allocate 7.5-10% of your annual
investment to be spent each year on upgrading and maintenance expenses.
9.11.
Personnel
You will be required to recruit and pay a workforce. There is an industry-wide minimum weekly wage
in force of £276 per week. It is not possible to pay less than this amount and the average paid in the
marketplace as you enter the simulation exercise is £401.50.
A working year is 50 weeks. The workforce will expect to receive an increase in pay each year.
If people are recruited and subsequently laid off, redundancy payments will have to be paid and poor
industrial relations will develop.
An acceptable rate of employee absenteeism is around 5 days per year.
If you need to declare redundancies or layoffs you will be required to make a redundancy payment of
12 weeks salary to each employee.
9.12.
Training
Investing in training the workforce will improve their skills and subsequently product quality and
productivity over time whilst management training improves industrial relations. An average training
budget is 2% of the wage bill.
9.13.
Finance
The company began with £500 million cash that was subscribed by shareholders but this was
insufficient to meet the startup costs – the factory alone was £650 million. A bank loan was available
from the bank but this was not requested and the company therefore has a negative bank balance.
In the future it may be possible to negotiate a loan from the bank up to a maximum of twice the
current value of shareholders' funds.
An overdraft of any size will be granted automatically but will be charged a punitive rate of interest.
9.14.
Interest Rates
negotiated loan
overdraft
on a balance in credit
:
:
:
5% + inflation
8% + inflation (minimum 15%)
1.5% + inflation
Repayment of an overdraft is made from cash flow and 50% of any surplus cash in the bank is used
to repay any long term debt finance.
You will need to set a period of credit given to customers and a period of debit for which you wait
before paying suppliers (maximum 99 days for both). Allowing a long credit period will appeal to
customers, delaying too long before paying your bills will cause your suppliers to raise their prices.
Average days are:
Customers
Suppliers
:
:
30-50 days
60-75 days
Corporation Tax is charged on profits at 30% and payable in the following financial year.
9.15.
Assets
Fixed assets are factories, automation and 50% of any investment in a new model launch. All will
depreciate at 10% of their book value per annum.
Page 13
Stock assets are valued at materials plus the amount spent on wages to produce the cars left in
stock. It will cost 15% of each car's production cost to keep them up to specification while in stock.
9.16.
Organisational Overheads
All organizations have overheads. Such expenses cover management costs and expenses,
administration, communications, IT, HR, financial and legal management and all the other costs
associated with the day to day running of a business. In the simulation overheads are calculated
using the following formula :
10% x wage bill +
7½% x materials used +
5% x opening book value of fixed assets
10.
Instructions for Operating Executive
Using the Executive simulation is extremely easy and we are confident that once you have been able
to access your team files a couple of times you will become very comfortable in its use. It is run
online and contains a number of control features that make sure that your decisions remain within
quite a wide range of parameters.
It is important to remember that the software is primarily a communication tool that enables you to
submit your decisions for processing in an easy and efficient manner. The use of the simulation
should not detract from the crucial strategy development and business planning that is key to the
exercise.
Once the company's strategy and plan is in place, a set of decisions must be made. These decisions
are then entered into the Executive user screens. The software contains a powerful "what-if"
business-modelling tool that enables you to see the POTENTIAL impact of your decisions in a set of
forecasted business results. Once decisions are entered, a predicted outcome can be viewed and the
decisions can then either be changed or saved for submission to the tutor. NB : The predicted results
are only a guide to what the possible outcome could be with that particular set of decisions, when
processed in the Master simulation, the background competition, the decisions of the other
teams/companies and environmental and economic factors will influence the actual outcome.
It is strongly recommended that changes made to decisions to try to improve performance are
managed carefully. If too many changes are made at the same time it will not be possible to identify
which one(s) have made an impact. It is best to make as few changes as possible each time the
"what-if" model is run.
As with all software packages there are some basic disciplines required and these notes are prepared
to guide you through those.
10.1. Basic Parameters
Your game files are unique to you and cannot be access by any other team provided you do not
disclose your secure links to them. Any team who is found to have accessed another team’s files will
face severe consequences. They could be asked to leave the simulation and their business and
assets sold by the regulators.
10.2. Language Settings
Some of your laptops might be set to a non UK language setting in windows and this will cause
windows to translate the software into Danish. To ensure you get the English version, you need to
ensure that your regional language setting. This is found in the control panel, under regional settings.
10.3. Executive Operating Instructions
Accessing the software and your team’s game file
The nominated member(s) of your team will receive an email containing a team number, a password
and a link similar to :
http://executive.trainingsimulations.co.uk//PlayerLogin/index.php
Click on the link to run the simulation and enter the team password in the relevant box.
The first screen of the exercise will be displayed.
Page 14
Opening Screen
From the opening screen, there are the following options for selection :
1.
'View Market Data', which enables you to view results from the previous round/year and the
Cost & Data Sheet for the current round.
At the beginning of any new decision-making period it is strongly recommended that the
results from the previous year are analysed and used as the starting point for discussions and
decisions relating to the current round/year. The new Cost & Data Sheet will also be needed
as prices will have risen with inflation since the previous year.
The Reports and Cost & Data Sheet can be saved to a file or printed by using the icons on
the top right hand side of the screen.
2.
'Go Straight to Decisions' to begin entering decisions immediately. This option is only likely
to be used when re-entering the simulation after a break from decision making.
3.
At the bottom of the screen there is the option to view previous round results. From here you
can view the results for any year/round.
4.
There is also the option to exchange messages with the simulation administrators by using
the message board.
Making Decisions
To begin entering decisions select the Enter Decisions button, which can be found at the top and the
bottom of the screen.
There is a generic help screen on each screen and beside each individual decision box there is a
symbol that gives additional help on that specific element.
There is a main category decision box for each model and the company. These can be accessed
directly at any time by using the menu bar on the left hand side of the screens.
Each category box has a Status button at the top right hand corner. This will be red and say pending
until all decisions have been entered when it will change to green and say complete. It is not possible
to proceed to the next stage of the simulation until all these boxes are categorized as complete.
Once all decisions have been entered select the green Proceed button at the bottom of the screen.
You will then be able to view a set of projected results.
Viewing Projected Results
Executive will display a forecast set of results for the round and there is also a drop down menu
giving the option to view any of the results from the previous round/year. The previous or projected
results can be saved to a file or printed by selecting the appropriate icons.
Once the projected results have been viewed it is possible to return to the main decision-making
screens and change any of the data entered. To do this select the Change Decisions button at the
bottom of the screen. (Please take note of the introduction to this Section with regard to making
changes.)
Saving Decisions
To save the decisions for submitting to be processed select the green Finalise Decisions button at
the bottom of the screen. NB : Once this button has been selected it will NOT be possible to
view or make any further changes to the decisions.
Page 15
APPENDIX I - MANAGING ACROSS THE VALUE CHAIN
Michael Porter has offered many insights around the ways that business are managed from a
strategic perspective since he came to wider prominence in the mid 1980’s following the publication of
his book ‘Competitive Strategies’. In his second book, he develops his ideas around the concept of
the Value Chain and this has become an area of much interest and debate in both business and
academic circles.
There are many advantages of using the Value Chain to manage a business enterprise particularly
around the identification of potential sources of competitive advantage and your Key Strategic
Resources. Key strategic resources are those critical resources that your competitors will find hard to
replicate. So for example, any investment in automation is unlikely to be a key strategic resource as
automation would be commonly available to all your competitors.
When you come to make your final presentation on Thursday afternoon, we would like you to include
a brief discussion on the key components of your value chain highlighting the benefits and limitations
of the model when managing a business from a strategic perspective and how you have used the tool
to manage your business enterprise and establish the basis of your competitive advantage.
One recent academic writer has attempted to make links between the Value Chain and the
Scorecard… and to segment both tools into 6 key components:
Investment in Research and Development
Economic Performance
Operations (including quality and technical)
Supply Chain
People and organisation
Customer, market and service
You will find attached to this note a paper that discusses the dynamics and dimensions of The Value
Chain.
Page 16
MICHAEL PORTER’S VALUE CHAIN
The basic idea of the value chain is quite simple, and is based on the chain of events that every
product or service must go through. First of all, someone has to invent it, and develop the processes
that will allow it to be produced. Next, the raw materials and parts need to be brought together to
make it. Then, it needs to be manufactured, after which it must be distributed to customers through
the distribution channels. During and after the production and distribution process, customers must
be persuaded to buy the product. Finally, once it is delivered, the firm needs to take care of any
problems that arise, and offer spare parts and routine maintenance.
Value chain analysis is a way of seeing where in this chain of activities an organisation is successfully
adding value. It lets us pinpoint the particular capabilities and assets that are important to an
organisation and show precisely where and how they are being applied. A number of frameworks
have been developed to help map firms’ activities and compare them between different organisations.
Most of these frameworks, following the lead given by Michael Porter in his 1985 book, Competitive
Advantage, set up checklists of the different activities that occur in a firm, under two broad headings:
primary and support activities.
Primary and Support Activities
The primary activities in a value chain include manufacturing operations, sales and marketing and
after-sales service for a manufactured product like a car, journalism and advertising sales for a
magazine, till service and cheque handling for a bank. Different types of value chain have different
types of primary activity.
Support activities include thinks like the purchasing function, process development, human resource
management, planning and financial control.
It is important to bear in mind that the activities in a value chain are not the same as the functions in
an organisation structure, even if they may, confusingly, have the same names. The sales and
marketing activity, for example, includes all marketing that goes on in any function in the
organisation – whether it be sales people on their rounds, marketing executives developing
promotional campaigns, senior managers lunching with prospective clients or the finance department
helping to calculate price levels. The planning and financial control activity, similarly, includes all
inputs to planning and control from everyone in the organisation, not just those with job titles like
“accountant” or “planner”.
Table 1
Strategic Decisions in the Value Chain
Deployment of resources
Vertical integration
Scale of operations
Scope of operations
Which assets and capabilities an organisation chooses to use in
connection with specific activities.
Whether the organisation decides to carry out an activity itself or to
outsource it to a specialist supplier or a franchisee.
Whether an organisation tries to gain economies of scale or other
types of advantage from the scale of its operations in a particular
activity.
Whether an organisation tries to share one or more activities across
different products and markets.
Location of operations
In which country or region an organisation chooses to locate
particular activities.
Linkages
Whether the organisation tries to gain advantage by linking its
activities together in a new and different way.
A value chain analysis looks at how each primary and support activity adds value – that is, leads to
cost or differentiation advantage. Table 1 lists the types of strategic decision that determine how well
they will achieve this.
If the organisation can utilise some strategic asset or distinctive capability in an activity, then that
activity is likely to add value. Strong brands and reputations can be deployed to give differentiation in
marketing and sales, or to attract good staff. Capabilities in reliability can be deployed in production
or in after-sales service.
Page 17
Sometimes an organisation may need to be selective about the resources it uses. It may have many
assets and capabilities at its disposal, but will not necessarily want to deploy all of them in every
market that it serves.
TYPES OF VALUE CHAIN
Value chain analysis uses a set of “generic” value chains which vary slightly across different types of
organisation, and which are based on a number of common elements which have been observed in
these different settings. These models serve as a kind of checklist to help us know what kinds of
activity to look for and analyse in particular organisational settings. In this section, we look at generic
value chains that have been developed for three different types of organisation.
MANUFACTURING STYLE ORGANISATIONS
These are the kinds of organisation where a set of inputs is translated into a set of outputs using a
classic path, from product development through to after-sales service, that we sketched in the
introduction in the value chain analysis. Along with most manufacturing firms, what we are calling
service-manufacturers – organisations like retailers, fast-food providers and hotels, which produce a
standardised product that happens to have a strong service component to it – also use this kind of
value chain. One way to judge whether an organisation falls into this category is to look at the way it
measures its outputs and judges its success. Manufacturing-style firms’ outputs are measured in
volume terms (numbers of computers, hamburgers or hotel room-nights produced and sold) and unit
costs are an important measure of efficiency.
The generic value chain for a manufacturing-style organisation includes six primary activities:
Product design and development – pure and applied research in areas like materials
science and electronics, product development and testing and product design.
Supply – the mechanical and operational procedures that bring inputs into the organisation:
ordering and delivery procedures, the inspection of components to make sure that they meet quality
requirements, and so on.
Operations – the transformation of inputs into the finished product or service. In a factory it
embraces all the functions related to production, including scheduling, production engineering, quality
assurance and maintenance. In a restaurant it includes the cooking and serving of food and the
washing of dishes, cutlery and linen. A retailer’s operations include the stacking of shelves and
serving of customers at the counter or checkout.
Distribution – the physical transportation of products from the point of production to the point
of sale, and then on to the end-user. It also includes the process of managing relationships with
distributors, wholesalers or retailers to ensure that they have adequate stocks of the products they
require. For some retailers, the distribution activity covers the process of getting goods from
centralised depots to the stores.
Marketing and Sales – locating customers, identifying their requirements, making them
aware of the organisation through promotional activity and setting the prices at which the product is to
be sold, and the discount structure for large purchases. This activity has responsibility for the
selection and management of salespeople, distributors and retailers to make sure that they have the
knowledge and motivation to “push” the organisation’s products and services.
After-sales Service – everything that an organisation provides to customers after the goods
or service has been delivered. It includes repair and maintenance services, complaints handling,
customer training and telephone help-lines.
Page 18
Table 2
Possible Sources of Competitive Advantage in the Primary Activities of a Manufacturing Style
Value Chain
Resources
Vertical integration
Scale and scope
Location
Linkages
Capabilities in:
innovation
customer
responsiveness
risk
management
Laboratories
IT facilities
Designers
Use alliances and
Partnerships
Large scale and
broad scope to
allow crossfertilisation of
ideas
between people
across products
and markets
Close to
customers and
competitors to
allow exposure to
latest ideas
Operations
Supply
IT systems (EDI
and extranets)
Activity devolved to
Suppliers
Suppliers located Operations
nearby for
Purchasing
speedy responses Vertical linkage:
suppliers
Operations
Proprietary
Equipment
Retain core
Economies of
activities and
scale and scope,
develop capabilities. plant utilisation
Outsource
other
activities to worldclass suppliers
Low-cost
locations
Specialised
vehicles, depots
and handling
equipment
Keep in-house to
ensure customer
satisfaction
Many distribution
points for
speedy customer
responses
Capabilities in
reliability,
customer
responsiveness,
speed of response
Use top-class
wholesalers,
retailers
Reputational
assets. Customer
databases.
Knowledge of
consumer
preferences
In-house sales to
retain control of
customer service
and information
Product
design
and
development
Capabilities in
innovation,
reliability,
customer
responsiveness,
speed of response
Distribution
Marketing
and
Sales
Capabilities in
Communication
After-sales
Service
Trained human
resources
Testing and
diagnostic
equipment and
software
(May be dangerous
to outsource
activity fully)
Agents and
distributors for local
knowledge and
contacts
In-house to capture
product and
customer data
Economics of
scale and scope
Marketing and sales
After-sales service
Close to
customer to gain
responsiveness
Few, strategically
located points for
economies of
scale
Economies of
scope in branding
and sales
Distribution
Product design and
development
Supply
Marketing and sales
Distribution
Human resources
management
Distribution
Sales
Vertical linkage:
wholesalers and
retailers
Close to customer All other internal
for local sensitivity activities.
Clustered near
competitors’
outlets
Vertical linkage:
distributors and
retailers
Large scale to
maximise
exposure to
customers
Scale to offer
customers local
service
Close to
customer for local
sensitivity
Product design and
development
Economic of
Scope
Call centre for
cost advantage
Economies of
scale in
advertising
Marketing and sales
Outsource to gain
benefits of third
parties’ scale,
scope, local
availability
Human resource
management
Table 2 summaries the main alternative ways in which organisations might try to gain competitive
advantage through these primary activities.
Page 19
The manufacturing-style value chain also includes four support activities, which also appear in the
generic value chain for professional service and network organisations:
Purchasing – the identification of potential suppliers and negotiations of prices and delivery
terms.
Process development – all activities to do with enhancing the routines and technologies that
the organisation uses.
Human resource management – the recruitment and training of employees and design of
appraisal, payment and employee welfare systems.
Finance and planning – invoicing, treasury, accounting, budgeting, planning and related
activities.
Table 3 summaries the main ways in which these support activities can contribute to competitive
advantage.
The purchasing activity is sometimes grouped together with the supply and distribution activities and
called supply chain management.
Table 3
Possible Sources of Competitive Advantage in the Support Activities
of a Value Chain
Resources
Purchasing
Process
development
Vertical integration
Supplier
databases
Capabilities in
negotiation
Substantial
human and
financial
resources
Keep in-house to
give tailored
solutions and
preserve expertise
Scale and scope
Location
Linkages
Economies of
scale and scope:
discounts and
spreading of
overheads
Centralise to
maximise scale
and scope
economies.
Devolve to
maximise
flexibility and
responsiveness
All primary activities
Larger scale and
scope bring
exposure to more
technologies and
markets
Central
management to
transfer best
practices around
organisation
Most other activities
Outsource to
specialist system
suppliers and
consultants
Human
resource
management
Communications
and training
systems
Finance and
planning
IT and financial
control systems
Planning systems
(rarely)
Vertical linkage:
suppliers
Vertical linkage:
suppliers and
researchers in other
firms
Most other activities
Small, low-cost
and non-intrusive
Most other activities
Vertical linkage:
Financial
institutions,
governments
Page 20
HOW TO ANALYSE A VALUE CHAIN
Value chain analysis is potentially a very powerful tool for understanding an organisation’s strategy. It
brings together a number of different aspects of the organisation – decision about scale and scope
and vertical integration, strategic resources – and shows how they combine to generate competitive
advantage. However, as you will have seen, it can get quite complex and difficult, particularly if you
try to incorporate every single detail about every single activity. In this section, we look at how to
simplify the analysis to make it less daunting and more useful.
What do you include in a value chain analysis?
There are three possible approaches to value chain analysis the comprehensive list, that the selective
approach and financial analyst. Most people use the second of these, and we recommend that you
do likewise.
The comprehensive approach
There is a strong temptation, when confronted with a value chain diagram for the first time, to try to fill
in every square in meticulous detail using a large number of the categories we have described above.
One can certainly learn a lot about an organisation in this way, particularly if you are unfamiliar with its
industry.
The problem with this approach is that, although your list would include the important aspects of a
firm’s strategy, they will be obscured by a lot of mundane and unimportant ones. You may be able to
say that a company has up-to-date machine tools in its factory, or employs a top agency to do its
advertising. However, the same is quite likely to be equally true of most of its competitors, and indeed
of most large firms in any manufacturing industry.
The selective approach
Under the selective approach, your value chain analysis becomes a tool for picking out the important
elements of a firm’s strategy and operations. The analysis focuses upon the capabilities and
decisions that enable a firm to achieve cost and/or differentiation advantage, and ignores the others.
For an innovative firm that has invented a new way of doing business, this may still yield quite a long
list of distinctive elements.
However, for an established firm in an established industry the list is
likely to be shorter, and some of the cells in the value chain diagram are likely to be empty. This is
because most firms have only a few distinctive capabilities, while decisions relating to things like scale
and location are likely to be copied by competitors if they are seen to be effective.
What about weaknesses?
The value chain approach focuses upon identifying factors that contribute positively to competitive
advantage. There is a vast range of possible ways in which an organisation may add value, so that
no two successful firms are likely to deploy precisely the same mix of factors in the same activities.
This means that, because there are so many ways in which different organisations can achieve
success, it can be very difficult to identify the precise elements of value chain that lead to failure. It
will never be clear which element of which firm’s strategy an organisation should be copying. Is
Company X falling because it lacks Company A’s reputation and operations reliability, or Company
B’s highly trained sales-force and economies of sale? Could it succeed just on the basis of reputation
plus economies of scale? Does it need the capability in reliability as well, or would a capability in
customer responsiveness do instead?
This limits the extent to which value chain analysis can help identify areas where a firm is subtracting
value rather than adding it. However, if all the leading firms are following very similar strategies, or if
there is a single leading firm that you can use for the purposes of comparison, then a value chain
analysis may reveal areas of weakness alongside distinctive strengths.
Page 21
PRACTICAL DOS AND DON’TS
VALUE CHAIN ANALYSIS
1.
Determine whether the organisation you are analysing is a manufacturing-style organisation, a
professional services organisation or a network. This involves looking at the nature of its business
and the kinds of measure it uses or might use to measure performance.
2.
Determine the activities that you are analysing. The relevant generic value chain for a manufacturingstyle, professional service or network organisation can serve as a guide. However, it is perfectly in
order for you to “tweak” the generic chain, by adding, subtracting or renaming activities, it you feel that
this gives a better picture of the organisation and the way it competes.
3.
Go through the activities systematically, picking out how each of them uses resources, vertical
integration, scale and scope or location to generate cost and/or differentiation advantage. Look also
for linkages between the activities that are unusual.
4.
Be discriminating in selecting what to include in your value chain. There is no law that says that, if a
box appears on a diagram, you have to write something in it. Be careful that the resources that you
include are rare, valuable, difficult to acquire and copy and have no ready substitutes. If you identify
scale in an activity as part of an organisation’s value chain, be sure in your mind that the scale of that
activity is generally exceptional, and identify how it leads to advantage. Similarly scope, vertical
integration or location should only feature in your analysis if they are genuinely unusual in the industry
in question.
5.
Neither a list of value chain factors nor a filled-in value chain diagram constitutes a value chain
analysis. You need, in addition, to show in your analysis, using quantitative and qualitative evidence:-
6.
•
why you believe that each feature you have highlighted is exceptional
•
how it leads to cost and/or differentiation advantage.
You may also want to highlight in your analysis why some elements of an organisation’s strategy do
not feature in its value chain. It may be that the firm’s managers obviously believe its scale, or its
state-of-the-art computing facilities, or its training programmes, are extremely important. You may
conclude that the managers are wrong, and that the company is not significantly better that average in
those areas. In such cases, it is helpful to state these conclusions explicitly, and to show why you
have reached them.
Page 22
APPENDIX II - KEY PERFORMANCE INDICATORS
Select your KPIs from this list (or decide on some for yourselves!)
Financial Indicators
Bank Balance £
Return on Shareholders Funds %
Return on Capital Employed %
Return on Assets %
Gross Margin %
Sales Margin %
Current Ratio (to)
Quick Ratio (to)
Gearing Ratio (to)
Liquidity Ratio (to)
Market Indicators
Sales Volumes pa
Sales Value pa
Market Share (total)
Market Share (per market sector)
Productivity Indicators
Output per Person pa (cars/employee pa)
Sales per Employee
Profit per Employee
Training £ per Employee
Days Lost to Strikes
Page 23
APPENDIX III - RESEARCH AND DEVELOPMENT TIMES
PROJECT
1 Product R-launch
2 Facelift
TIME
0+2
0+1
PROJECT
TIME
15 Driver Assistance
2+1
16 Zero Emissions Engine
5+1
3 Aerodynamic Remodelling
1+1
17 On Board Internet
0+1
4 Advanced Diesel Engine
1 + 218 18 Lightweight Ceramic Brakes
2+1
5 Alternative Fuels/Biofuels
2+2
19 Four Wheel Steering
2+2
6 Fuel-Save Stop Start System
1+2
20 Frost Free Windows
2+1
7 Advanced Safety Systems
2+1
21 Low Emissions
2+1
8 Anti-Theft System
1+1
22 Infra Red Night Vision
1+1
9 Regenerative Brakes
3+1
23 Carbon Fibre Bodywork
1+2
10 Fuel Efficient Engine
2+1
24 Blind Spot Removal
2+2
11 Breathalyser Interlock
1+1
25 Exchangeable Bodywork
2+3
12 Lightweight Engine
2+2
26 20% Lighter Car
1+1
13 Speed Limiting Device
3+1
27 Improved Build Quality
0+1
14 Wiperless Windscreen
1+2
TIME (in years) - the first figure is for Research, the second is for Development. Fail-safe R&D
projects are shown above in bold italics. The remainder carry a risk of failure.
NOTE: Projects 1, 2 and 27 are model specific and must be selected for individual models. They are
also failsafe projects, which means they will happen if selected. The other projects can be researched
on one model and then applied to other models in the portfolio once the research project has been
successfully completed and the R&D report shows it is ‘online’.
Page 24
APPENDIX IV - BUSINESS SIMULATION – SUMMARY OF HEADLINE FINANCIAL RESULTS FOR FY 2011/2012
Team
1: VW Polo
2: VW Golf
3: VW Beetle
4: VW Passatt
5: VW Audi
6: VW Audi Exec
7: VW Skoda
8: Porsche
9: VW 4X4
Team
1: VW Polo
2: VW Golf
3: VW Beetle
4: VW Passatt
5: VW Audi
6: VW Audi Exec
7: VW Skoda
8: Porsche
9: VW 4X4
Team
1: VW Polo
2: VW Golf
3: VW Beetle
4: VW Passatt
5: VW Audi
6: VW Audi Exec
7: VW Skoda
8: Porsche
9: VW 4X4
Sales £m
847.00
1227.00
748.50
2003.25
2183.84
1501.73
1705.07
1376.98
1538.24
Cost of Sales £m
817.67
1203.87
616.10
1640.38
1722.03
962.41
1537.43
897.21
1162.90
Gross Profit £m
29.33
23.13
132.40
362.87
461.82
539.33
167.65
479.77
375.34
Gross Margin %
3.46
1.88
17.69
18.11
21.15
35.91
9.83
34.84
24.40
Fixed Overheads £m Total Overheads £m Operating Profit £m Sales Margin % Post Tax Profit £m Post Tax Profit / Sales %
99.58
477.81
-531.48
-62.75
-531.48
-62.75
129.66
558.69
-620.56
-50.58
-620.56
-50.58
84.59
476.29
-427.89
-57.17
-427.89
-57.17
161.63
543.05
-264.18
-13.19
-264.18
-13.19
170.85
605.32
-227.50
-10.42
-227.50
-10.42
128.35
466.77
-12.44
-0.83
-12.44
-0.83
157.77
647.90
-565.25
-33.15
-565.25
-33.15
135.73
527.13
-134.86
-9.79
-134.86
-9.79
132.40
589.77
-299.43
-19.47
-299.43
-19.47
Bank Balance £m
-732.10
-813.64
-660.33
-453.33
-454.86
-463.34
-784.70
-726.51
-598.17
Outstanding Loan £m
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Total Profit £m
-531.48
-620.56
-427.89
-264.18
-227.50
-12.44
-565.25
-134.86
-299.43
Page 25
APPENDIX IV - BUSINESS SIMULATION – SUMMARY OF HEADLINE FINANCIAL RESULTS FOR FY 2011/2012
Team
1: VW Polo
2: VW Golf
3: VW Beetle
4: VW Passatt
5: VW Audi
6: VW Audi Exec
7: VW Skoda
8: Porsche
9: VW 4X4
Return on Assets %
0.00
0.00
-593.40
-112.03
-83.48
-2.55
0.00
-36.93
-149.29
Current Ratio
0.11
0.13
0.11
0.30
0.36
0.58
0.21
0.55
0.31
Quick Ratio
0.11
0.13
0.11
0.30
0.31
0.25
0.18
0.16
0.21
Model Details By Team
Team 1 : VW Polo
Model Name
Market Sector
Workforce
Cars Sold
Polo 1.2
5
1000
40000
Polo TDI
9
900
35000
Golf 1.4
6
1200
45000
Golf 1.5
10
1100
40000
VWB 1.9
10
650
25000
VWB 2DR
6
550
20000
VWP 2V6
7
900
40000
VWP CC
11
750
35000
Team 2 : VW Golf
Model Name
Market Sector
Workforce
Cars Sold
Team 3 : VW Beetle
Model Name
Market Sector
Workforce
Cars Sold
Team 4 : VW Passatt
Model Name
Market Sector
Workforce
Cars Sold
Page 24
APPENDIX IV - BUSINESS SIMULATION – SUMMARY OF HEADLINE FINANCIAL RESULTS FOR FY 2011/2012
Team 5 : VW Audi
Model Name
Market Sector
Workforce
Cars Sold
A3 1.6 3
6
900
40000
A4 Avant
7
1200
53236
Q7 3ltr
11
600
19908
R8 4V8
12
1200
10000
Octavia
6
1200
55000
Fabia
5
1500
71228
Boxster
7
1200
18008
Cayenne
8
1500
10000
Touran
6
1000
35000
Touareg
7
1000
31033
Team 6 : VW Audi Exec
Model Name
Market Sector
Workforce
Cars Sold
Team 7 : VW Skoda
Model Name
Market Sector
Workforce
Cars Sold
Team 8 : Porsche
Model Name
Market Sector
Workforce
Cars Sold
Team 9 : VW 4X4
Model Name
Market Sector
Workforce
Cars Sold
Page 24
APPENDIX V - BUSINESS SIMULATION - DESCRIPTION OF FINANCIAL RATIOS
This paper provides a summary of the financial ratios that are presented by the simulation and defines two that you are required to calculate. In the annual management
and financial report there is a financial indicators summary… so some of the work has been done for you.
Financial
Ratio
How it is calculated
Gross Profit
Gross Profit (Loss)
Sales
Sales Margin
Operating Profit
Sales
Return on
Shareholders
Funds (ROSF)
Return on
Capital
Employed
Net Profit after tax
Shareholders Funds
Operating Profit
Total Capital Employed
Net Profit (Loss) after tax
Return on
Assets
Net Assets
Current Assets
Current Ratio
Current Liabilities
Current Assets – Stock
Quick Ratio
Gearing
(Leverage)
Interest Cover
Current Liabilities
Total Debt Capital
Capital Employed
Net Interest
Operating Profit
What it means
It shows how profitable your sales are before you incur the admin, organizational and professional expenses. In
essence it shows the relationship between the price you charge for your products and the costs in making them
It shows how profitable your sales are after you have taken off all the costs and expenses related to the making of
the cars and the running of the business, but before financial costs and taxation on any profit.
This ratio demonstrates to the shareholders what their return on their investment is in a given period of time. This
ratio is calculated before any dividends are declared from the profits. This ratio sometimes has the term Return on
Shareholders Equity – ROE)
This ratio shows how well the firm is investing all its capital (shareholders equity and long term debt capital) and
generating a return on the capital. A firm only creates value if it makes a return on its capital in excess of its cost)
This is a measure of how well the firm uses the investment in its net assets (fixed assets+ investment assets+
current assets- current liabilities) to produce a profit. It is a measure of asset efficiency.
This is a measure that determines if the firm has enough liquid (cash) type assets to cover its short-term liabilities.
Current assets are stock, debtors and stock and current liabilities are creditors, unpaid taxation, dividends due and
bank overdrafts. A good ratio is between 1.5-2:1 (£1.5-£2 of current assets for each £ of current liabilities)
This is similar to the current ratio except that it focussed only on those current assets that are considered to be
liquid and quickly available to the firm. It therefore removes stock from the calculation. Ideally you need to be in a
1:1 ratio – a balance between liquid type assets and current liabilities
The gearing (or leverage) of a firm is a measure of business risk. It is calculated by relating the long-term
borrowings to the total capital employed and expressing the answer as a % of the capital employed.
This is a financing ratio and is a reflection of the firms ability to service its debt interest obligations from its operating
profits.
Page 25