Analysis of Daniel Renick’s
Practice Round Six Results
Authorized by: Dr. Miceli
Prepared by: Michael C. Jewell
Submission Date: May 2, 2010
May 2, 2010
Dr. Miceli
PO Box 1000
Athens, WV 24712-1000
Dear Dr. Miceli:
I am pleased to submit this analytical report on Daniel Renick’s
practice round six results. The report systematically reviews the
decisions made my Mr. Renick within each of the seven decision modules
that are available in the simulation.
The areas that are dissected in this analysis are Research and
Development, Marketing, Production, Finance, Human Resources, Total
Quality Management, and Labor Negotiations. Following the analysis of
these sections, recommendations for improvement follow.
The analysis found that Mr. Renick’s company is experiencing some
financial shortfalls that are a result of products not being
positioned well in relation to the competition and overspending on
plant improvements. These two factors have led to large amounts of
debt and emergency loans.
I thank you for your review of this analytical report and have found
that through its preparation I have a better understanding of the
material that exists within the Capsim Capstone Simulation.
Sincerely,
Michael C. Jewell
Table of Contents
Executive Summary .................................................... 1
Highlights ......................................................... 1
Conclusions ........................................................ 1
Recommendations .................................................... 2
Introduction ......................................................... 3
Limitations and Delimitations ...................................... 3
Assumptions ........................................................ 4
Methods and Procedures ............................................. 4
Research and Development ............................................. 4
Traditional Market Segment ......................................... 4
Low Tech Market Segment ............................................ 5
High Tech Market Segment ........................................... 5
Performance Market Segment ......................................... 6
Size Market Segment ................................................ 6
Marketing ............................................................ 7
Traditional Market Segment ......................................... 7
Low Tech Market Segment ............................................ 7
High Tech Market Segment ........................................... 8
Performance Market Segment ......................................... 8
Size Market Segment ................................................ 9
Production ........................................................... 9
Traditional Market Segment ......................................... 9
Low Tech Market Segment ........................................... 10
High Tech Market Segment .......................................... 10
Performance Market Segment ........................................ 10
Size Market Segment ............................................... 11
Finance ............................................................. 11
pg. i
Cash Flow Statement ............................................... 11
Balance Sheet ..................................................... 11
Income Statement .................................................. 12
Financial Ratios .................................................. 12
Human Resources ..................................................... 13
Total Quality Management ............................................ 14
Labor Negotiations .................................................. 15
Summary ............................................................. 15
Conclusion .......................................................... 16
Recommendations ..................................................... 16
Research and Development .......................................... 16
Marketing ......................................................... 16
Production ........................................................ 17
Finance ........................................................... 18
Human Resources ................................................... 19
Total Quality Management .......................................... 19
Labor Negotiations ................................................ 20
pg. ii
Executive Summary
The purpose of this paper is to analyze, draw conclusions, and
offer recommendations after reviewing my classmate Daniel Renick’s
practice round six results. This analysis follows a systematic
approach similar to making decisions within the Capsim Capstone
Simulation Program.
The problem to be investigated within this analysis is to
highlight decisions made by Mr. Renick that need improvement in order
help his company become more profitable. By completing this analysis
and offering recommendations, both my and Mr. Renick’s understanding
of business operations within a company should be improved.
Highlights
During this round, Mr. Renick was attempting to catch up with his
competitors because his market share had fallen to 14.46% and he was
trying to gain it back. His strategy of broad differentiation fell
short with four out of the five products his company offers falling to
last place in sales within their respective segments. This led to a
loss of $13,108,602 when combined with excessive spending on plant
improvements and having to pay off large amounts of current debt.
Conclusions
Although attempting to regain lost market share, the prices for
Mr. Renick’s products were too high and his positioning of products
relative to the competition was substandard. Also, automation levels
for production were too low and labor costs were too high on half of
his products to create a substantial enough contribution margin to go
pg. 1
toward earnings. These occurrences combined with overspending on plant
improvements led to the inevitable necessity of a large emergency loan
to keep the company operational.
Recommendations
Recommendations for Research and Development include positioning
products more closely with the top selling competition. On half of the
products Mr. Renick offers, the revision date was in the middle of the
year and could have been further improved during the year to better
meet the competition’s standards and achieve more sales.
Marketing recommendations include lowering the prices on four out
of the five products offered because they were higher than competing
products with better performance and size coordinates.
Production recommendations encompass increasing the automation
levels on products with contribution margins below 30% to reduce the
effect of increasing labor costs and increase earnings.
Finance recommendations include improving earnings through
increased sales as a result of better product placement and pricing.
Also, spending on plant improvements should be funded through long
term debt and should take a gradual approach toward improvement.
Human Resources recommendations are such that recruiting spending
and training hours be increased to improve the productivity index.
Total Quality Management recommendations include focusing more on
reducing material, labor, and administrative costs.
Labor Negotiations recommendations include positioning the
starting and ceiling negotiation positions with the labor demands in
between them to avoid the strike days that were incurred.
pg. 2
Introduction
The Capsim Capstone Simulation Program is a great tool for
students to put their acquired business knowledge to work. This
program presents real world challenges that reveal the strengths and
weaknesses within business students and get them ready for workplace
situations after graduation.
The purpose of this report is to analyze the results of my
classmate Daniel Renick’s round six practice decisions for the Capsim
Business Simulation and offer potential recommendations for
improvement. The scope of this analysis will include and discuss the
Capsim Simulation decision areas of Research and Development,
Marketing, Production, Finance, Human Resources, Total Quality
Management, and Labor Negotiations. Upon completing the analysis of
these decision sections within the simulation, recommendations for
improvement within the listed decision areas will follow.
Limitations and Delimitations
Limitations within this report include interpreting the decisions
made by Mr. Renick in an objective manner. Also, these interpretations
should offer constructive criticism for improvement in the form of
recommendations and not ridicule.
The delimitations of this report are constrained to the analysis
and interpretation of the main decision modules listed above and the
outcomes that are a result of Mr. Renick’s decisions within each
module.
pg. 3
Assumptions
Within this report it is assumed that Mr. Renick is attempting to
accomplish what is best for his company. This includes profitability,
a contribution margin above thirty percent, and having enough
production capacity and suitable products to please customers.
Methods and Procedures
With this business simulation program students must make
decisions each round within the seven decision modules listed
previously by analyzing the results of the previous round. Each module
has its own series of decision possibilities ranging from Research and
Development revision dates to financing activities such as issuing
stocks or bonds.
This report will follow a similar systematic approach to
analyzing Mr. Renick’s round six results as if potential decisions for
round seven were to be made. Each module will be dissected in order to
arrive at recommendations for improved results.
Research and Development
Traditional Market Segment
The positioning of the product Able is set at 9.5 performance and
10.6 size. This positioning is above the target position within the
segment of 9.2 and 10.8, but competing top products have their
positioning placed at 10.1 and 9.9. Furthermore, the revision date on
Able is 8/30/2016. This shows that there was available time to make
Able more competitive. Able’s mean time before failure is where it
should be comparative to the top selling products at 18,000 hours.
pg. 4
Mr. Renick’s placement of Able below the specifications of his
better selling competitors caused him to become fifth in sales within
the traditional segment, but third in December customer surveys. This
placement within December customer surveys shows that there may be an
increase in sales next round.
Low Tech Market Segment
The positioning of Acre within this segment is 4.4 performance
and 16.2 size. It is below the target of 4.7 and 15.3, but this is a
good approach within this segment due to the importance of age
perception by customers purchasing low tech products. This has made
Acre the top selling product within this segment and has gained the
most favorable December customer surveys as well. The mean time before
failure is at 12,000 hours where it should be to be competitive within
this segment. Overall, Mr. Renick’s decisions for Research and
Development pertaining to Acre have garnered desirable results.
High Tech Market Segment
Mr. Renick’s positioning of his high tech product Adam is at 14
performance and 6.2 size. This positioning is close to the target of
14.3 and 5.7. However, the top selling products in the segment are
positioned at 14.7 and 5.4. This has caused Adam to fall to sixth in
both sales and December customer surveys. The mean time before failure
is in line with the competition at 25,000 hours.
With Adam, Mr. Renick fell behind the curve for improvements of
this product in earlier rounds and is now not able to keep up. This is
evidenced by his late revision date of 11/1/2016 that could have been
pg. 5
extended another month, but still most likely would not have made a
significant increase in sales.
Performance Market Segment
Mr. Renick’s positioning of the product Aft is at 14.4
performance and 12.4 size. This is well below the target of 15.4 and
11.8. The top products in the segment are positioned at 15.7 and 11.5
and are much closer to the target coordinates. Similar to the results
for the high tech segment, Aft came in sixth in both sales and
December customer surveys. Also, the mean time before failure on Aft
is well placed with the competition at 27,000 hours.
The revision date for Aft is 5/11/2016. This shows that almost
seven months of time for revisions were available to improve the
product more during this round. Failure to take advantage of this has
let Aft fall behind the curve in development and ability to compete
with other products in the segment.
Size Market Segment
As with Adam and Aft within their respective segments, the
positioning of Agape within the size segment is below the competition.
Agape’s 8.5 performance is above the target of 8.2, but its 5.0 size
is behind the target of 4.6. Furthermore, the competition’s
positioning is ahead of the curve in both performance and size.
The positioning of Agape behind the competition has also caused
it to become sixth in both sales and December customer surveys. The
mean time before failure is in line at 19,000 hours, but is not enough
to create more sales.
pg. 6
Mr. Renick’s positioning of Agape and results are most likely due
to falling behind in Research and Development in earlier rounds. The
11/22/2016 revision date for this product shows that not much time was
available for further product improvement and is a direct result of
falling behind early.
Marketing
Traditional Market Segment
The price of Able within this segment is $28 while the top
competing products are at $27. These two prices are close, but
reduction to the top product’s pricing could improve sales with the
moderately price conscious customers within the traditional segment.
Also, a reduction in price should be considered for Able because its
positioning is not up to par with the top products.
The promotion budget for Able at $1,300,000 has created a
competitive accessibility rating of 78%. The sales budget of
$2,142,000 resulted in an 86% customer awareness rating, but may be a
little excessive during these later rounds.
Forecasting for Able was well done with 15,000 units left in
inventory. Overall, the forecasting has helped this product create
income.
Low Tech Market Segment
The price for Acre is at $19 and is the top product in this
segment. Mr. Renick’s promotion budget for this product is good at
$1,300,000 and yields the second best customer awareness rating of
79%. Acre’s sales budget at $2,053,000 has created an accessibility
pg. 7
rating of 72%, but could be reduced a little during these later
rounds.
Forecasting for Acre during this round was good, but it stocked
out. This is not such a bad result for this product though because it
still was the top selling product within the low tech market segment.
High Tech Market Segment
Pricing for Adam within this segment is set at $38 while the top
products are at $37. Reductions in price could have helped sales not
only just to keep up with the competition, but because Adam’s
positioning is not as good as the top products.
The promotion budget is at $850,000, yet still yields the highest
customer awareness in this segment at 84%. It was smart to leave the
promotion budget low because customer awareness was already high. Mr.
Renick’s sales budget for Adam was also well placed at $1,607,000 and
created a comparable accessibility rating of 70%.
Forecasting for Adam was off the mark and resulted in 206,000
units left in inventory. However, some of this excess inventory could
be a result of the bad economy variable that is placed within the
circumstances of round six.
Performance Market Segment
The pricing for Aft is $33. As with Adam, lowering the price of
Aft should be considered because the competition’s price is at $32 and
Aft’s positioning is worse than the competition.
Aft’s promotion budget is in line with the competition at
$1,100,000 and resulted in the third best customer awareness rating of
pg. 8
77%. The sales budget is set at $1,428,000 and only yields an
accessibility rating of 61%.
Mr. Renick’s forecasting for Aft was good with only 47,000 units
remaining in inventory at the end of the year.
Size Market Segment
The pricing of Agape is at $34 and should be lowered to compete
with the top products priced at $32 and $31. Lowering the price should
also be considered because Agape is positioned below the competition.
Agape’s promotion budget is well set at $1,000,000 because it has
the highest customer awareness rating of 79%. The sales budget is also
well placed at $1,696,000 because it yields a competitive
accessibility rating within the segment at 70%.
The forecasting for Agape was well off the mark with 560,000
units left over in inventory. Some of this excess inventory can be
attributed to the poor economy in round six, but most of it is
probably a result of not taking into account the reductions in sales
that occur with a bad economy.
Production
Traditional Market Segment
The capacity for Able is 2,285,000 units and 1,670,000 units sold
during this round. This capacity is a little high when compared to
what actually sold, but will soon be used during the normal economy
rounds of seven and eight. Overall, keeping the capacity for Able
where it is should be sufficient for the next round.
pg. 9
Automation for Able is at 5.0 and resulted in a contribution
margin of 35% for the product. This is good, but could be increased to
6.0 when funding allows.
Low Tech Market Segment
The capacity for Acre is at 3,950,000 units for the next round
because Mr. Renick purchased more due to the threat of stocking out.
This new capacity amount should be sufficient for the next rounds
production.
Acre’s automation rating is 5.0 and only results in a
contribution margin of 21%. Consideration should be placed on
increasing this to 6.0 or 7.0 in the future to increase the
contribution margin overall.
High Tech Market Segment
Adam’s capacity is 900,000 units for this round and the next
round. 678,000 units sold during this round, so leaving the capacity
where it is was a good move by Mr. Renick.
The automation rating for Adam is at 5.0 and results in a 34%
contribution margin. This is acceptable for this round, but increasing
it to 6.0 may be necessary to help increase the contribution margin
when material costs rise as improvements are made.
Performance Market Segment
Capacity for Aft within this segment is 1,000,000 units for the
next round with 748,000 units selling this round. This amount of
capacity should be enough for the next round. However, more capacity
may need to be purchased for round eight.
pg. 10
The automation rating for Aft is at 3.0. This automation rating
is insufficient and only results in a contribution margin of 20% for
the product because of increased labor costs. The automation rating
should potentially be placed at 5.0 or 6.0 to alleviate this problem.
Size Market Segment
The capacity for Agape is 1,190,000 for the next round. This
amount of capacity is a little excessive due to the fact that only
496,000 units sold during round six. Therefore, keeping the capacity
at this level through the end of the simulation should be considered.
Agape’s automation rating is at 5.0, but only helps to produce a
contribution margin of 27%. Increasing the automation rating to 6.0
would help this by reducing labor costs associated with this product.
Finance
Cash Flow Statement
This statement shows that Mr. Renick’s company incurred an
overall loss of $13,109,000 during this round. This can be attributed
to the $64,760,000 spent on plant improvements during the bad economy
round. Also, within this round $48,406,000 worth of current debt had
to be paid off. All of this spending without enough income led to the
$111,224,000 emergency loan that was required to break even.
Balance Sheet
Mr. Renick’s cash being at $0 is a direct result of incurring too
much debt and having to take out an excessive emergency loan. Also as
a result of having no cash on hand, total assets are $67,000,000 below
the average of the competition. The excessive amount of current debt
pg. 11
that Mr. Renick’s company is carrying at $132,074,000 is dangerous and
will still have to be paid off very soon even though funds will most
likely not be available.
Income Statement
Sales for this round are low when compared to the competition.
Mr. Renick’s sales were only at $180,000,000 while four out of the
five competing companies were well above $200,000,000 in sales. This
low figure has also contributed to the necessity of excessive debt and
emergency loans to stay afloat.
Financial Ratios
ROS = Net Income/Net Sales
The return on sales was very low at -7.3%. This is attributed to
the lack of income that Mr. Renick’s company is experiencing due to
decreased sales, increased costs, and an overall loss.
ROA = (Net Income + Interest Expense)/Average Total Assets
Return on assets was equally low at -7.7%. The extremely low
value of this ratio is directly related to a lack of overall earnings
and operating income. Because the company experienced a loss and not a
profit, the ratio is extremely low.
INV Turnover = COGS/INV
The value of the inventory turnover ratio for this round was
1.06. This value is just barely above being equal and is a result of
having excessive inventory on hand for the products Adam and Agape.
Leverage
Mr. Renick’s leverage rating was 6.2. This is not very good and
is a result of carrying too much debt. This essentially means that the
pg. 12
amount of debt in comparison to assets is much too high. This of
course comes from the excessive emergency loans and other current debt
items that have been incurred.
ROE = Earnings Available to Common Stockholders
Common Stock Equity
The return on equity is extremely low at -48.1%. This means that
for every dollar invested in this company, 48.1 cents will be lost.
This is a direct result of sales, earnings, and net income being
severely insufficient to maintain the operations of the company
without having to take out excessive amounts of debt.
SGA/Sales
The value for this ratio is 11.5% and is not too far out of line
with the competition. It is a little higher than the competition, but
is not enough to cause the major cash deficiencies that Mr. Renick’s
company is experiencing.
Contribution Margin% = Contribution Margin$/Sales Revenue$
Mr. Renick’s overall contribution margin is 26.8%. This is not
terribly bad, but should be improved to be above 30%. With this
percentage being below 30% it does not leave a large amount of money
earned from products sold to pay for fixed costs or contribute to
operating income after all variable costs are paid for. Overall, this
contribution margin below 30% has slightly played a role in the
financial woes that occurred in round six.
Human Resources
The Human Resources module was set to where the number of
employees matched the needed complement for the round. This number
pg. 13
came to 1,163 employees with 900 working on the first shift and 263 on
the second shift. Therefore, no overtime was incurred.
The training hours per employee per year are thirty and the
recruiting spending per new employee is set at $2,000 for the round.
Although these numbers seem relatively suitable, the productivity
index of Mr. Renick’s company is still only 100.00%. This appears to
be a result of increasing training hours and recruiting spending to
the current levels recently within later rounds instead of doing so
early to achieve a more efficient productivity index.
Total Quality Management
During round six Mr. Renick spent a total of $9,000,000 on TQM.
The cumulative impacts of this round’s and previous spending resulted
in a material cost reduction of 2.69%. Other companies within the
simulation were experiencing material cost reductions of around 5%.
Increasing this percentage could be beneficial to Mr. Renick’s company
when money allows.
Labor cost reduction cumulative impacts were at 3.44% for the
round. This figure is close to the majority of the competition, which
had labor cost reduction figures of 4%. Improving this percentage
would also be beneficial to Mr. Renick’s company.
Reductions in research and development cycle time were right in
line with the competition at 21.43%, showing that some emphasis has
been placed on trying to catch products up with the competition.
However, this may be too little too late for Mr. Renick as the
majority of his products are still positioned behind the competition.
pg. 14
Reductions in administrative costs of 15.16% were far below the
competition’s reduction of 29%. This percentage could easily be
increased to help improve the bottom line of Mr. Renick’s company.
The demand increase for round six was 8.09% and was the highest
among the companies within the simulation. This figure helps Mr.
Renick’s company achieve more sales, but still is not enough to
overcome the massive amounts of debt it is carrying.
Labor Negotiations
Mr. Renick has lower labor wages per hour than the competition at
$28.83, a higher benefits package at $2,818, equal profit sharing at
2.2%, and a higher annual raise of 5.7%. These numbers were achieved
through a twenty five day strike though. Although this strike length
is relatively short, it is still a month’s worth of time with no
employee production. Therefore, in future rounds Mr. Renick should
concentrate more on placing the starting and ceiling negotiating
positions with the labor demands in between them to avoid potential
strikes that are more significant.
Summary
In an attempt to catch up with the competition, Mr. Renick has
lost the edge in competing with the other companies in the simulation.
Four out of his five products are behind the development curve in
comparison to competing products and poor sales and customer
perception are the result. Furthermore, poor financing activities have
placed the company in severe debt and have made it necessary to take
out emergency loans that only add to the total amount of debt.
pg. 15
Conclusion
Mr. Renick’s decisions in the areas of Research and Development,
Marketing, Production, Finance, Human Resources, Total Quality
Management, and Labor Negotiations have some good reasoning and
thought behind them. However, lackluster positioning of products, low
automation ratings, and excessive debt has caused his company to
produce a loss instead of a profit. Correction of these problems is
advised in order achieve improved results during competition rounds.
Recommendations
Research and Development
The main problem for Mr. Renick in the Research and Development
department is that four out of his five products are positioned behind
the competition. Emphasis needs to be placed on keeping product
performance and size in coordination with the target numbers in early
rounds so products will not fall behind. This is one of the most
important aspects of product development and should be emphasized.
Also, attention needs to be given to what the actual revision
dates are for the products. Both Able and Aft had multiple months
available for revisions because their revision dates were in the
middle of the year. This action left useful time to keep product
positioning up with the competition on the table and ultimately caused
these products to fall behind in sales.
Marketing
The pricing on every product except for Acre is too high to be
competitive with rival products within specific segments. Each of
pg. 16
these products is one to two dollars above the top selling products.
To go along with this, these four products are all positioned with
lower performance and size coordinates than the competition, thus
making them less desirable to customers.
To correct this problem, pricing on each of these products must
be reduced to at or below what the competition’s prices are. This must
be done because the positioning of each product is too low. Lowering
the prices should help in gaining more sales in intended and possibly
other market segments even though the positioning is off target.
Some forecasting corrections need to occur as well. For the most
part the forecasting was well done if this round were a normal economy
round. However, some scaling back on forecasting numbers should have
occurred due to the knowledge that round six is a bad economy round.
Interpretation of potential factors such as this on forecasting in the
future will help to alleviate excess inventory levels for Adam and
Agape.
All sales budgets above $2,000,000 should be cut back some as
well. During these later rounds spending excess amounts within the
sales budgets will have diminishing returns. Therefore, reductions
within this expenditure would help save Mr. Renick’s company some much
needed funding.
Production
The main problem in the Production department is that automation
levels are too low to help reduce labor costs and improve the overall
contribution margin. This is especially prevalent with the products
Acre, Aft, and Agape. Each of these products has a contribution margin
pg. 17
below 30% and is dragging down the overall contribution margin of the
company.
These three product lines need increases in automation of 2.0
points or 20% in order to help Mr. Renick’s company. Doing this would
reduce the labor costs of each of these products and boost their
contribution margins as well. Ultimately, this would be a step in the
right direction toward helping the company become more profitable.
Finance
Virtually all the financial ratios and debt levels of Mr.
Renick’s company need improvement. The three main areas that must be
emphasized to improve the financial status of Mr. Renick’s company are
selling more inventories, reducing liabilities, and improving overall
earnings.
In order to sell more inventories or reduce the amount of
inventory left over at the end of the year, forecasting and correct
product positioning must occur. More emphasis must be placed on being
aware of potential forecasting hardships such as poor economy rounds.
Along with this the product placement has to be close or equal to the
competition’s in order to be competitive and get more inventories out
of the warehouse and into the customer’s hands. This includes
comparable pricing of products as well.
Reductions and better management of the company’s liabilities
must be completed. For example, spending on plant improvements should
not be so extravagant during a poor economy round. Also, current debt
should be avoided unless completely necessary. The excessively high
level of current debt that exists within Mr. Renick’s company is the
pg. 18
main contributing factor to why the company incurred a major loss
instead of a profit this round.
By completing the tasks of selling more inventory and managing
liabilities in a more responsible manner, it becomes easier to focus
on improving overall earnings for the company. If these three things
are focused on from the beginning of the simulation, such large losses
and emergency loans can be avoided.
Human Resources
As stated earlier, the productivity index of Mr. Renick’s company
remains at 100.00% even though 30 training hours per employee per year
and $2,000 recruiting costs are set within the module. In order to
boost this productivity index and become a more efficient workforce,
the training hours per employee per year should be increased to 40.
Also, the recruiting spending on each new employee should be raised to
$3,000 so more productive talent can be brought into the workforce and
improve the overall productivity index.
Total Quality Management
In order to receive better cumulative impacts from TQM, more
emphasis should be placed on reducing material costs, labor costs, and
administrative costs. Increasing the reductions in these areas would
help improve the overall contribution margin of Mr. Renick’s company
and would help to improve earnings as well. Overall, this would be a
good start at trying to catch up with the competition in terms of
lowering expenses.
pg. 19
Labor Negotiations
Mr. Renick had twenty five strike days at the end of this round
that were a result of unsatisfied workers during the negotiation of
their labor contract. Their dissatisfaction was a direct result of the
starting and ceiling negotiations being too low.
To correct this problem and avoid labor strikes in future rounds,
consideration should be placed on positioning the starting and ceiling
negotiating levels with the labor demands being more directly in
between them. This would better satisfy the labor demands and reduce
overall strike days or even eliminate them. This will also help to
reduce the turnover rate of 9.9% to a more manageable level.
pg. 20