2016 Foundation Team Member Guide

BUSINESS SIMULATIONS
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Management Tools
1 Introduction
Congratulations, you are now in charge of a multimillion dollar
company. You manufacture sensors, which you market to other
manufacturers. They put your products into the devices they sell.
Your company was created when the government split a monopoly
into identical competitors. As a monopoly, operating inefficiencies
and poor product offerings were not addressed because:
rIncreasing costs could be passed onto customers; and

rMediocre products would sell because customers had no
other choices.
While last years financial results were decent, your products are
getting old, your marketing efforts are falling short, your
production lines need revamping and your financial management is
almost nonexistent.
Competition in the post-monopoly era means you can no longer
ignore these issues. If you do, competitors with better products and/
or lower prices will take your market share.
Sensors Are Everywhere...
1.1 The Industry Conditions Report

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

Here are the tools you need to run your company.
1.2.1 The Rehearsal Tutorial
Think of the Rehearsal Tutorial as a driving school for the

simulation. The tutorial will show you ways to steer the company,
including how to:
rInvent and revise products;

rMake marketing decisions;
rSchedule production and buy/sell equipment; and
rEnsure your company has the financial resources it needs for
the upcoming year.
The sample resources used for the Rehearsal, including its

Foundation FastTrack (see below) and Industry Conditions Report,
mirror those used in the actual simulation.
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1.2.2 The Foundation FastTrack
Every round, you and your competitors will have access to an

industry newsletter called the Foundation FastTrack. The FastTrack
(described in Chapter 5) is an extensive year-end report of the sensor
industry. It includes customer buying patterns, product positioning,
public financial records and other information that will help you get
ahead. In business, knowledge is power. If you want to evaluate your
companys performance or analyze your competitors, the FastTrack
is the place to start.
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Every products Customer Survey Score (Chapter 3) can be found

in the FastTracks Segment Analysis pages. These scores
determine sales distribution. In general, the higher the score, the
better the sales.
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The FastTrack Reports Last Years Results

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Team Member Guide
Company Departments
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1.2.3 The Situation Analysis
Completing the Situation Analysis (described in Chapter 9) will

enable you to understand current market conditions and how the
industry will evolve in the next few years. It will assist you with your
operational planning.
The Situation Analysis comes in two versions:
rOnline interactive
rDownloadable PDF (pen and paper)
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1.2.4 Proformas & Annual Reports
Proformas and annual reports are specific to your company.

Proformas are projections for the upcoming year. Annual reports are
the results from the previous year.
The proformas will help you envision the impacts of your pending
decisions and sales forecasts. The annual reports will help you
analyze last years results.
1.3 Company Departments

The Rehearsal Tutorial and Chapter 4 discuss company activities. You
have four main departments or functional areas:
rResearch & Development, or R&D

rMarketing
rProduction
rFinance
Many simulations utilize the Human Resources and TQM (Total
Quality Management)/Sustainability modules. These modules
require additional management decisions. Your simulation
Dashboard will tell you if the modules are included.
Companies use the Foundation Spreadsheet to enter
departmental decisions.
1.3.1 Research & Development (R&D)
Your R&D Department designs your product line. The department

needs to invent and revise products that appeal to your customers
changing needs.
1.3.2 Marketing
Your Marketing Department prices and promotes your products. It

interacts with your customers via its sales force and distribution
system. Marketing is also responsible for sales forecasts.
1.3.3 Production
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Your Production Department determines how many units will be

manufactured during the year. It is also responsible for buying and
selling production lines.
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1.2.5 The Foundation Spreadsheet
The Foundation Spreadsheet is the nerve center of your company

where you formulate and finalize management decisions for every
department. The spreadsheet comes in two versions:
rA Web Version that allows you to work via any Internet
browser; and
rAn XLS Version that runs via Microsoft Excel.

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1.2.6 Just in Time Information
In the spreadsheet decision areas, look for the

flag symbol shown to the right. Clicking it will
give you detailed information about the area
you are viewing.
1.3.4 Finance
Your Finance Department makes sure your company has the financial
resources it needs to run through the year. The department can raise
money via one-year bank notes, 10-year bonds or stock issues.
The department can also issue stock dividends, buy back stock or
retire bonds before their due dates.
1.3.5 Plug-ins
Plug-ins are different than modules. Plug-ins and their decisions have
a greater overall impact on your organization.
For example, the simulation might include the Ethics plug-in, which
presents you with an unexpected dilemma. Group discussion and
consensus is imperative because your decisions will affect your
financial results.
Your simulation Dashboard will notify you if a plug-in has
been scheduled.
Buying Criteria
1.4 Inter-Department Coordination

1.4.1 R&D and Marketing
R&D works with Marketing to make sure products meet

customer expectations.
1.4.2 R&D and Production
R&D works with Production to ensure assembly lines are purchased

for new products. If Production discontinues a product, it should
notify R&D.
1.4.3 Marketing and Production
Marketing works with Production to make sure manufacturing

quantities are in line with forecasts. Marketings market growth
projections also help Production determine appropriate levels of
capacity. If Marketing wants to discontinue a product, it tells
Production to sell the products production line.
1.4.4 Marketing and Finance
Marketing works with Finance to project revenues for each product

and to set the Accounts Receivable policy, which is the amount of time
customers can take to pay for their purchases.
1.4.5 Finance and Production
After the conclusion of the Practice Rounds the simulation is reset

and the real competition begins. Now its time to drive your company
to success! Companies compete for up to eight rounds, with each
round simulating one year in the life of your company.
1.5.1 Decision Audits
The Decision Audit is a complete trail of all team decisions. It will

help you identify your decision-making strengths and weaknesses.
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1.6 Company Success

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

rCreate and execute a strategy; and
rCoordinate company activities.
Best of luck in running a profitable and sustainable company!
Production tells Finance if it needs money for additional equipment.

If Finance cannot raise enough money, it can tell Production to scale
back its requests or perhaps sell idle capacity.
1.4.6 Finance and All Departments
The Finance Department acts as a watchdog over company

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

Practice Rounds allow you to organize workflow among the members
of your company. You will begin to compete against the other
companies in your simulation or, if you are in a Footrace competition,
against a common set of computer-run companies.
2 Industry Conditions
The information in your Industry Conditions Report will help you
understand your customers.
Your customers fall into different groups, which are represented by
market segments. Customers within a market segment have similar
needs. The segments are named for the customers primary
requirements such as:
rLow Tech
rHigh Tech
The Industry Conditions Report lists market segment sales
percentages and projected growth rates unique to your simulation.
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2.1 Buying Criteria

Customers within each market segment employ different standards
as they evaluate products. They consider four buying criteria: Price,
Age, MTBF (Mean Time Before Failure) and Positioning.
Team Member Guide
Buying Criteria
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2.1.1 Price
Each segment has different price expectations. Low Tech wants

inexpensive products while High Tech, seeking advanced technology,
is willing to pay higher prices.
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2.1.2 Age
Each segment has different age expectations, that is, the length of
time since the product was invented or revised. High Tech wants new
technology while Low Tech prefers proven technology that has been
in the market for a few years.
2.1.3 MTBF (Mean Time Before Failure)
or Reliability
MTBF (Mean Time Before Failure) is a rating of reliability measured

in hours. Segments have different MTBF criteria. High Tech prefers
higher MTBF ratings while Low Tech is satisfied with lower ratings.
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2.1.4 Positioning
Sensors vary in their dimensions (size) and the speed/sensitivity

with which they respond to changes in physical conditions
(performance). Combining size and performance creates a product
attribute called positioning.
The Perceptual Map
Positioning is such an important concept that marketers developed a

tool to track the position of their products and those of their
competitors. This tool is called a Perceptual Map.
Note the Perceptual Map in Figure 2.1. You will see this map quite
often through the course of the simulation.
The map measures size on the vertical axis and performance on the
horizontal axis. Each axis extends from 0 to 20 units. The arrow in
Figure 2.1 points to a product called Able with a performance
measurement of 8.0 and a size of 12.0.
2.1.5 Market Segment Positions on the

Perceptual Map
Market segments have different positioning preferences. The Low

Tech segment is satisfied with inexpensive products that are large in
size and slow performing. It wants products that fall inside the
upper-left set of dashed and solid circles in Figure 2.2. The High Tech
segment wants products that are faster performing and smaller in
size. It wants products that fall within the lower-right set of dashed
and solid circles.
Over time, your customers expect products that are smaller and
faster. This causes the segments to move or drift a little each month.
As the years progress the locations of the circles significantly change.
The example in Figure 2.3 shows the location of the market segments
at the end of the fourth year. Figure 2.4 shows the segments at the end
of the eighth year.
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Buying Criteria by Segment
Each year, the High Tech segment demands greater improvement

than the Low Tech segment. Therefore they drift at different rates.
High Tech moves faster and farther than Low Tech. As time goes by,
the overlap between the segments diminishes.
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Market segments will not move faster to catch up with products that
are better than customer expectations. Customers will refuse to buy a
product positioned outside the circles. Customers are only interested
in products that satisfy their needs. This includes being within the
circles on the Perceptual Map!
Perceptual Maps Can Be Used for
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Your R&D and Marketing Departments have to make sure your

products keep up with changing customer preferences. To do this,
R&D must reposition products, keeping them within the moving
segment circles. See 4.1 Research & Development (R&D) for
more information.
2.2 Buying Criteria by Segment

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

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Buying Criteria for the previous year are reported in the Foundation
FastTracks Segment Analysis pages. As you take over the company to
make decisions for Round 1, your reports reflect customer
expectations as of December 31, Round 0 (yesterday). The Industry
Conditions Report displays the Round 0 buying criteria for each
market segment. Here are two example segments.
Example 1: Customers seek proven products at a modest price.
rAge, 2 years importance: 47%

rPrice, $15.00-$35.00 importance: 23%
rIdeal Position, size 16.0/performance 4.0 importance: 21%
rMTBF, 14,000-20,000 importance: 9%
Example 2: Customers seek cutting-edge technology in size/
performance and new designs.
rIdeal Position, size 12.4/performance 6.6 importance: 43%

3 The Customer
Survey Score
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In any month, a products demand

is driven by its monthly customer
survey score. Assuming it does not
run out of inventory, a product with
a higher score will outsell a
product with a lower score.
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Team Member Guide
Buying Criteria and the Customer Survey Score
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A customer survey score reflects how well a product meets its

segments buying criteria. Company promotion, sales and accounts
receivable policies also affect the survey score.
Scores are calculated once each month because a products age and
positioning change a little each month. If during the year a product is
revised by Research and Development, the products age, positioning
and MTBF characteristics can change quite a bit. As a result, it is
possible for a product with a very good December customer survey
score to have had a much poorer scoreand therefore poorer sales
in the months prior to an R&D revision.
Prices, set by Marketing at the beginning of the year, will not change
during the year.
3.1 Buying Criteria and the Customer

Survey Score
The customer survey starts by evaluating each product against the
buying criteria. Next, these assessments are weighted by the criterias
level of importance. For example, one segment can assign a higher
importance to positioning than the other. A well-positioned product
in a segment where positioning is important will have a greater
overall impact on its survey score than a well-positioned product in a
segment where positioning is not important.
3.1.1 Positioning Score
Marketers must understand both what customers want and their

boundaries. In terms of a products size and performance (as
discussed in Section 2.1.5), the Perceptual Map illustrates
these ideas with circles. Each segment is described with a dashed
outer circle, a solid inner circle and a dot we call the ideal spot
(Figure 3.1).
Rough Cut Circle
The dashed outer circle defines the outer limit of the segment.
Customers are saying, I will NOT purchase a product outside this
boundary. We call the dashed circle the rough cut boundary because
any product outside of it fails the rough cut and is dropped from
consideration. Rough cut circles have a radius of 4.0 units.
Fine Cut Circle
The solid inner circle defines the heart of the segment. Customers
prefer products within this circle. We call the inner circle the fine cut
because products within it make the fine cut. Fine cut circles have a
radius of 2.5 units.
Ideal Spot
The ideal spot is that point in the heart of the segment where, all other
things being equal, demand is highest.
Segment Movement
Each segment moves across the Perceptual Map a little each month.
In a perfect world your product would be positioned in front of the
ideal spot in January, on top of the ideal spot in June and trail the
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A perfect customer survey score of 100 requires that the product: Be

positioned at the ideal spot (the segment drifts each month, so this
can occur only one month per year); be priced at the bottom of the
expected range; have the ideal age for that segment (unless they are
revised, products grow older each month, so this can occur only one
month per year); and have an MTBF specification at the top of the
expected range.
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Buying Criteria and the Customer Survey Score
ideal spot in December. In December it would complete an R&D

project to jump in front of the ideal spot for next year.
Positioning Rough Cut
Products placed in the rough cut area (orange rings, Figure 3.1) are
between 2.5 and 4.0 units from the center of the circle. Products here
are poorly positioned and they will have reduced customer survey
scores. The farther they are from the fine cut circle, the more the
scores are reduced. Just beyond the fine cut, scores drop 1%. Halfway
across the rough cut, scores drop 50%. Scores drop 99% for products
that are almost to the edge of the rough cut.
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Price Rough Cut
Sensors priced $10.00 above or below the segment guidelines will not
be considered for purchase. Those products fail the price rough cut.
Sensors priced $1.00 above or below the segment guidelines lose
about 10% of their customer survey score (orange lines, Figure 3.2).
Sensors continue to lose approximately 10% of their customer survey
score for each dollar above or below the guideline, on up to $9.99,
where the score is reduced by approximately 99%. At $10.00 outside
the range, demand for the product is zero.
Price Fine Cut
Within each segments price range, price scores follow a classic

economic demand curve (green curve, Figure 3.2): As price goes
down, the price score goes up.
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Positioning Fine Cut
Products inside the fine cut (green areas, Figure 3.1) are within 2.5
units of the center of the circle. Ideal spots for each segment are
illustrated by the black dots. The example on the left illustrates a
segment that prefers proven, inexpensive technology. The ideal spot is
to the upper left of the segment center, where material costs are
lower. The example on the right illustrates a segment that prefers
cutting-edge technology. The ideal spot is to the lower right of the
segment center, where material costs are higher (see Figure 4.1 for
an illustration of material positioning costs).
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3.1.3 MTBF Score
Each segment sets a 6,000 hour range for MTBF (Mean Time Before
Failure), the number of hours a product is expected to operate
before it malfunctions. Customers prefer products towards the top
of the range.
MTBF Rough Cut
Demand scores fall rapidly for products with MTBFs beneath the
segments guidelines. Products with an MTBF 1,000 hours below the
segment guideline lose 20% of their customer survey score. Products
continue to lose approximately 20% of their customer survey score
for every 1,000 hours below the guideline, on down to 4,999 hours,
where the customer survey score is reduced by approximately 99%.
At 5,000 hours below the range, demand for the product falls to zero.
MTBF Fine Cut
Within the segments MTBF range, the customer survey score

improves as MTBF increases (Figure 3.3). However, material costs
increase $0.30 for every additional 1,000 hours of reliability.
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A products positioning score changes each month because segments

and ideal spots drift a little each month. Placing a product in the path
of the ideal spot will return the greatest benefit through the course of
a year.
3.1.2 Price Score
Each segment has a $20.00 price range. Customers prefer

productsthe idealtowards the bottom of the range.
Segment price expectations correlate with the segments position on
the Perceptual Map. High Tech customers are willing to pay higher
prices than Low Tech customers.
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Team Member Guide
Estimating the Customer Survey Score
Customers ignore reliability above the expected range demand

plateaus at the top of the range.
3.1.4 Age Score
The age criteria do not have a rough cut; a product will never be too
young or too old to be considered for purchase.
High Tech customers demand cutting-edge technology. They prefer
newer products. Low Tech customers prefer older products with
proven technology.
Each month, customers assess a products age and award a score
based upon their preferences. Examples of age preferences are
illustrated in Figure 3.4.
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builds accessibility, the ease with which customers can work with
you after they begin sourcing. To the 4 Ps we can add two additional
elements credit terms and availability. Credit terms are expressed
by your accounts receivable (A/R) policy. Availability addresses
inventory shortages.
3.2.1 Base Scores
To estimate the customer survey score, begin with the buying criteria
available in the FastTracks Segment Analysis reports. For example,
suppose the buying criteria are:

rIdeal Position, size 16.0 /performance 4.0 importance: 21%
A perfect score of 100 requires that the product have an age of 2.0
years, a price of $20.00, a position at the ideal spot (16.0 and 4.0) and
an MTBF of 20,000 hours.
The segment weighs the criteria at: Age 47%, Price 23%, Positioning
21% and MTBF 9%. You can convert these percentages into points
then use these numbers to estimate a base score for your product. For
example, price is worth 23 points. The perfect price of $20.00 would
get 23 points, but at the opposite end of the price range, a price of
$40.00 would only get one point.
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3.2 Estimating the Customer Survey Score

The customer survey score drives demand for your product in each
segment. Your demand in any given month is your score divided by
the sum of the scores. For example, if your products score in April is
20 and your competitors scores are 27, 19, 21 and 3, then your
products April demand is:
20 / (20+27+19+21+3) = 22%
Assuming you had enough inventory to meet demand, you would

receive 22% of segment sales for April.
What generates the score itself? Marketers speak of the 4 Psprice,
product, promotion and place. Price and product are found in the
buying criteria. Together they present a price-value relationship. Your
promotion budget builds awareness, the number of customers who
know about your product before sourcing. Your sales budget (place)
However, the base score can fall because of poor awareness

(promotion), accessibility (place) or the credit terms you extend to
your customers.
3.2.2 Accounts Receivable
A companys accounts receivable policy sets the amount of time

customers have to pay for their purchases. At 90 days there is no
reduction to the base score. At 60 days the score is reduced 0.7%. At
30 days the score is reduced 7%. Offering no credit terms (0 days)
reduces the score by 40% (see 4.4.5 Credit Policy).
3.2.3 Awareness and Accessibility
After your product leaves the factory and enters the marketplace, the
calculations for its score become less exact. The score will be
affected by the level of the products awareness (the percentage of
people who know about your product) and its segments
accessibility (the number of customers who can easily interact with
your company).
Awareness is built over time by the products promotion budget.
Promotion budgets fund advertising and public relations campaigns.
Research & Development (R&D)
Accessibility is built over time by the products sales budget. Sales

budgets fund salespeople and distribution systems to service
customers within the products market segment.
Similar products with higher awareness and accessibility will score
better than those with lower percentages (see 4.2 Marketing for
more information on awareness and accessibility).
How can you be sure of a sellers market? You cant, unless you are
certain that industry capacity, including a second shift, cannot meet
demand for the segment. In that case, even very poor products will
stock out as customers search for anything that will meet their needs.
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3.3 Stock Outs and Sellers Market

What happens when a product generates high demand but runs out of
inventory (stocks out)? The company loses sales as customers turn
to its competitors. This can happen in any month.
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Usually, a product with a low customer survey score has low sales.
However, if a segments demand exceeds the supply of products
available for sale, a sellers market emerges. In a sellers market,
customers will accept low-scoring products as long as they fall within
the segments rough cut limits. For example, desperate customers
with no better alternatives will buy:
rA product positioned just inside the rough cut circle on
the Perceptual Map outside the circle they say no to

the product;
rA product priced $9.99 above the price range at $10.00
customers reach their tolerance limit and refuse to buy
the product; and
rA product with an MTBF 4,999 hours below the range
at 5,000 hours below the range customers refuse to buy
the product.
Watch out for two common tactical mistakes in a sellers market:
1. A company disregards products that are in the positioning rough
cut. These products normally can be ignored because they have
low customer survey scores. However, when the company
increases the price, the customer survey score falls below the
products in the rough cut areas, which are suddenly more
attractive than their product.
2. The company fails to add capacity for the next round. A sellers
market sometimes appears because a competitor
unexpectedly exits a segment. This creates a windfall
opportunity for the remaining companies. (However, a
well-run company will always have enough capacity to meet
demand from its customers.)
4 Managing Your Company

Its time to unlock the doors and turn on the lights. Welcome to your
company. The Rehearsal Tutorial (described in Section 1.2.1) shows
you the mechanics of the company departments described below.
Remember, entering decisions is the easy part; determining what
decisions to enter requires some thought. This chapter and the
Rehearsal Tutorial will help you get started.
Every company starts the simulation with one sensor product. The
product sells to both Low Tech and High Tech customers. Products
can be terminated or added. Your company must have at least one
product and cannot have more than five. Products can be targeted to
one segment or both segments. Your decisions, made every year on
January 1, are carried out by your employees throughout the year.
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4.1 Research &

Development (R&D)
The Research and Development (R&D)
Department oversees invention and redesign. It
develops the innovations needed to keep the
company ahead of the competition.
R&D is responsible for the
product portion of the 4 Ps of
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Marketing (product, price, place
and promotion). This makes R&D
an essential part of any marketing process.
Your R&D Department invents new products and changes
specifications for existing products. Changing size and/or
performance repositions a product on the Perceptual Map.
Improving performance and shrinking size moves the product
towards the lower right on the map (see 2.1.4 Positioning).
Team Member Guide
Research & Development (R&D)
rThe positioning of each product inside a market segment on

the Perceptual Map
rThe number of products in each segment

rThe age of your products
rThe reliability (MTBF rating) of each product
In Production, R&D affects or is affected by:
rThe cost of material

rThe purchase of new facilities to build new products
rAutomation levels (The higher the automation level, the
longer it takes to complete an R&D project.)
All R&D projects begin on January 1. If a product does not have a

project already under way, you can launch a new project for that
product. However, if a project begun in a previous year has not
finished by December 31 of last year, you will not be able to launch a
new project for that product (the decision entry cells in the R&D area
of the Foundation Spreadsheet will be locked).
4.1.1 Changing Performance, Size and MTBF
A repositioning project moves an existing product from one location

on the Perceptual Map to a new location, generally (but not always)
down and to the right. Repositioning requires a new size attribute
and/or a new performance attribute. To keep up with segment drift, a
product must be made smaller (that is, decrease its size) and better
performing (that is, increase its performance).
Inventing Sensors
New products are assigned a name (click in the first cell that reads NA
in the name column), performance, size and MTBF. Of course, these
specifications should conform to the criteria of the intended market
segment. The name of all new products must have the same first letter
of the company name.
The Production Department must order production capacity to build
the new product one year in advance. Invention projects take at least
one year to complete.
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It is not possible to produce new products prior to the revision date. A

new product with a revision date of July 1 will be produced in the
second half of the year. The capacity and automation will stand idle
for the first half of the year.

Your R&D decisions are fundamental to your Marketing and

Production plans. In Marketing, R&D addresses:

Positioning affects material costs (Figure 4.1). The more advanced

the positioning, the higher the cost. At the beginning of the
simulation, the trailing edge of the Low Tech fine cut has the lowest
positioning cost of approximately $1.50; the leading edge of the
High Tech fine cut has the highest positioning cost of
approximately $10.00.

Positioning Costs
Reliability (MTBF) Costs
The reliability rating, or MTBF, for existing products can be adjusted

up or down. Each 1,000 hours of reliability (MTBF) adds $0.30 to the
material cost. A product with 20,000 hours of reliability includes
$6.00 in reliability costs:
($0.30 20,000) / 1,000 = $6.00
Improving positioning and reliability will make a product more

appealing to customers, but doing so increases material costs.
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Marketing
4.1.2 Project Management
The Low Tech segment circles move on the Perceptual Map at a speed
of 0.7 units per year. The High Tech segment circles move at 1.0 units
per year. You must plan to move your products (or retire them) as the
simulation progresses. Generally, the longer the move on the
Perceptual Map, the longer it takes the R&D Department to complete
the project.
Project lengths can be as short as three months or as long as three
years. Project lengths will increase when the company puts two or
more products into R&D at the same time. When this happens each
R&D project takes longer. Assembly line automation levels also affect
project lengths. R&D project costs are driven by the amount of time
they take to complete. A six-month project costs $500,000; a one-year
project costs $1,000,000.
Sensors will continue to produce and sell at the old performance, size
and MTBF specifications up until the day the project completes,
shown on the spreadsheet as the revision date. Unsold units built
prior to the revision date are reworked free of charge to match the
new specifications.
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When products are created or moved close to existing products, R&D

completion times diminish. This is because your R&D Department
can take advantage of existing technology. If the module is active,
TQM/Sustainability investments can also decrease R&D times (see
7.1 TQM/Sustainability). It is important to verify completion dates
after all decisions have been entered. Usually you want repositioning
projects to finish in less than a year. For example, consider breaking
an 18-month project into two separate projects, with the first stage
ending just before the end of the current year and the second ending
halfway through the following year.
4.1.3 A Sensors Age
It is possible for a product to go from an age of 4 years to 2 years. How

can that be? When a product is moved on the Perceptual Map,
customers perceive the repositioned product as newer and improved,
but not brand new. As a compromise, customers cut the age in half. If
the products age is 4 years, on the day it is repositioned, its age
becomes 2 years. Therefore, you can manage the age of a product by
repositioning the product. It does not matter how far the product
moves. Aging commences from the revision date.
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Age criteria vary from segment to segment. For example, if a segment

prefers an age of 2 years and the products age approaches 3 years,
customers will lose interest (see Figure 3.4). Repositioning the
product drops the age from 3 to 1.5 years, and customers will become
interested again.
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4.2 Marketing
Marketing functions vary widely depending on
the industry and company. In general, the
department drums up interest in the companys
products or services through a mix
of activities. These can include
advertising, public relations and
IUUQDBQTJNDPNHPWGNSL
good old-fashioned salesmanship.
Your Marketing Department is
concerned with the remaining Ps (beyond R&Ds product): price,
place and promotion. Your Marketing Department is also in charge of
sales forecasting.
4.2.1 Pricing Sensors
Price was discussed in 3.1.2. To review, appeal falls to zero when

prices go $10.00 above or below the expected price range. Price
drives the products contribution to profit margin. Dropping the price
increases appeal but reduces profit per unit.
4.2.2 Promotion and Sales Budgets
Promotion and sales budgets affect customer awareness and

accessibility. They also affect the customer survey score. See 3.2
Estimating the Customer Survey Score for more information.
Promotion
Each products promotion budget determines its level of awareness. A

products awareness percentage reflects the number of customers
who know about the product. An awareness of 50% indicates half of
the potential customers know it exists. From one year to the next, a
third (33%) of those who knew about a product forget about it.
Last Years Awareness - (33% Last Years Awareness) =
Starting Awareness
Team Member Guide
11
Marketing
If a product ended last year with an awareness of 50%, this year it will
start with an awareness of approximately 33%. This years promotion
budget would build from a starting awareness of approximately 33%.
Starting Awareness + Additional Awareness from
Figure 4.2 = New Awareness
Figure 4.2 indicates a $1,500,000 promotion budget would add

36% to the starting awareness, for a total awareness of 69% (33 +
36 = 69).
Figure 4.2 indicates a $3,000,000 budget would add just under 50%
to the starting awareness, roughly 14% more than the $1,500,000
expenditure (33 + 50 = 83). This is because further expenditures
tend to reach customers who already know about the product. Once
your product achieves 100% awareness, you can scale back the
products promotion budget to around $1,400,000. This will maintain
100% awareness year after year.
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New products are newsworthy events. The buzz creates 25%

awareness at no cost. The 25% is added to any additional awareness
you create with your promotion budget.
If you have two or more products that meet a segments fine cut
criteria, the sales budget for each product contributes to that
segments accessibility. The more products you have in the segments
fine cut, the stronger your distribution channels, support systems,
etc. This is because each products sales budget contributes to the
segments accessibility.
If you have one product in a segment, there is no additional benefit to
spending more than $3,000,000. If you have two or more products in
a segment, there is no additional benefit to spending more than a
$4,500,000 split between the products, for example, two products
with sales budgets of $2,250,000 each (see Figure 4.3).
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Achieving 100% accessibility is difficult. You must have two or

more products in the segments fine cut. Once 100% is reached,
you can scale back the combined budgets to around $3,500,000 to
maintain 100%.
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Sales
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Each products sales budget contributes to segment accessibility. A

segments accessibility percentage indicates the number of
customers who can easily interact with your company via
salespeople, customer support, delivery, etc. Like awareness, if your
sales budgets drop to zero, you lose one third of your accessibility
each year. Unlike awareness, accessibility applies to the segment, not
the product. If your product exits a segment, it leaves the old
accessibility behind. When it enters a different segment, it gets that
segments accessibility.
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12
Awareness and Accessibility
Think of awareness and accessibility as before and after the sale.

The promotion budget drives awareness, which persuades the
customer to look at your product. The sales budget drives
accessibility, which governs everything during and after the sale. The
promotion budget is spent on advertising and public relations. The
sales budget is spent on distribution, order entry, customer service,
etc. Awareness and accessibility go hand in hand towards making the
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Production
sale. The former is about encouraging the customer to choose your

product; the latter is about closing the deal via your salespeople and
distribution channels.
4.2.3 Sales Forecasting
Accurate sales forecasting is a key element to company success.

Manufacturing too many units results in higher inventory carrying
costs. Manufacturing too few units results in stock outs and lost sales
opportunities, which can cost even more (see 10 Forecasting).
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4.3 Production
For manufacturers, production literally puts
everything together. The department
coordinates and plans manufacturing runs,
making sure that products get out
the door.
In your Production Department,

IUUQDBQTJNDPNHPWGQSE
each product has its own assembly
line. You cannot move a product
from one line to another because automation levels vary and each
product requires special tooling.
As it determines the number of units to produce for the upcoming
year, Production needs to consider the sales forecasts developed by
Marketing minus any inventory left unsold from the previous year.
4.3.1 Capacity
First-shift capacity is defined as the number of units that can be

produced on an assembly line in a single year with a daily eight-hour
shift. An assembly line can produce up to twice its first-shift capacity
with a second shift. An assembly line with a capacity of 2,000,000
units per year could produce 4,000,000 units with a second shift.
However, second-shift labor costs are 50% higher than the first shift.
Each new unit of capacity costs $6.00 for the floor space plus $4.00
multiplied by the automation rating. The Production spreadsheet will
calculate the cost and display it for you. Increases in capacity require
a full year to take effect increase it this year, use it next year.
Capacity can be sold at the beginning of the year for $0.65 on the
dollar value of the original investment. You can replace the capacity
in later years, but you have to pay full price. If you sell capacity for
less than its depreciated value, you lose money, which is reflected
as a write-off on your income statement. If you sell capacity for
more than its depreciated value, you make a gain on the sale. This
will be reflected as a negative write-off on the income statement
(see 6.3 Income Statement).
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4.3.2 Discontinuing a Sensor
If you sell all the capacity on an assembly line, Foundation interprets

this as a liquidation instruction and will sell your remaining
inventory for half the average cost of production. Foundation writes
off the loss on your income statement. If you want to sell your
inventory at full price, sell all but one unit of capacity.
Team Member Guide
13
Production
4.3.3 Automation
As automation levels increase, the number of labor hours required to

produce each unit falls. The lowest automation rating is 1.0; the
highest rating is 10.0.
At an automation rating of 1.0, labor costs are highest. Each
additional point of automation decreases labor costs approximately
10%. At a rating of 10.0, labor costs fall about 90%.
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Despite its attractiveness, two factors should be considered before

raising automation:
1. Automation is expensive: At $4.00 per point of automation,
raising automation from 1.0 to 10.0 costs $36.00 per unit
of capacity;
2. As you raise automation, it becomes increasingly difficult for
R&D to reposition products short distances on the Perceptual
Map. For example, a project that moves a product 1.0 on the map
takes significantly longer at an automation level of 8.0 than at
5.0 (Figure 4.4). Long moves are less affected. You can move a
product a long distance at any automation level, but the project
will take between 2.5 and 3.0 years to complete.
Reducing automation costs money. If you reduce automation, you will

be billed for a retooling cost. The net result is you will be spending
money to make your plant less efficient. While reduced automation
will speed R&D redesigns, by and large, it is not wise to reduce an
automation level.
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Changes in automation require a full year to take effect change it

this year, use it next year.
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Changing Automation
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For each point of change in automation, up or down, the company is

charged $4.00 per unit of capacity. For example, if a line has a
capacity of 1,000,000 units, the cost of changing the automation level
from 5.0 to 6.0 would be $4,000,000.
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14
Finance
4.4 Finance
Corporate finance functions differ
from company to company. Duties can
include managing financial risk,
determining borrowing
levels or even simple
check writing. In general,
IUUQDBQTJNDPNHPWGO
the department monitors
the companys flow of
money, the lifeblood of any business.
Your Finance Department is primarily concerned with five issues:
1. Acquiring the capital needed to expand assets, particularly plant
and equipment. Capital can be acquired through:
rCurrent Debt
rStock Issues
rBond Issues (Long Term Debt)
rProfits
2. Establishing a dividend policy that maximizes the return
to shareholders.
3. Setting accounts payable policy (which can also be entered in
the Production and Marketing areas) and accounts receivable
policy (which can also be entered in the Marketing area).
4. Driving the financial structure of the firm and its relationship
between debt and equity.
5. Selecting and monitoring performance measures that support
your strategy.
Finance decisions should be made after all other departments enter
their decisions. After the management team decides what resources
the company needs, the Finance Department addresses funding
issues and financial structure.
One of the Finance Departments fiduciary duties is to verify that sales
forecasts and prices are realistic. Unrealistic prices and forecasts
will predict unrealistic cash flows in the proformas. Finance can
determine a range of possible outcomes for the year by changing (but
not saving) Marketings forecasts then rechecking the proformas.
Lowering forecasts decreases revenue and increases inventory
worst case; raising forecasts increases revenue and decreases
inventory best case (see 10.4 Worst Case/Best Case).
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4.4.1 Current Debt
Your bank issues current debt in one-year notes. The Finance area in
the Foundation Spreadsheet displays the amount of current debt due
from the previous year. Last years current debt is always paid off on
January 1. The company can roll that debt by simply borrowing the
same amount again. There are no brokerage fees for current debt.
Interest rates are a function of your debt level. The more debt you
have relative to your assets, the more risk you present to debt holders
and the higher the current debt rates.
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Bankers will loan current debt up to about 75% of your accounts

receivable (found on last years balance sheet) and 50% of this years
inventory. They estimate your inventory for the upcoming year by
examining last years income statement. Bankers assume your worst
case scenario will leave a three- to four-month inventory and they
will loan you up to 50% of that amount. This works out to be about
15% of the combined value of last years total direct labor and total
direct material, which display on the income statement.
Bankers also realize your company is growing, so as a final step
bankers increase your borrowing limit by 20% to provide you with
room for expansion in inventory and accounts receivable.
4.4.2 Bonds
All bonds are 10-year notes. Your company pays a 5% brokerage

fee for issuing bonds. The first three digits of the bond, the
series number, reflect the interest rate. The last four digits
indicate the year the bond is due. The numbers are separated by
the letter S, which stands for series. For example, a bond with
the number 12.6S2017 has an interest rate of 12.6% and is due
December 31, 2017.
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Bondholders will lend total amounts up to 80% of the value of

your plant and equipment (the Production Departments capacity
and automation). Each bond issue pays a coupon, the annual
interest payment, to investors. If the face amount or principal of
bond 12.6S2017 were $1,000,000, then the holder of the bond
would receive a payment of $126,000 every year for ten years. The
holder would also receive the $1,000,000 principal at the end of
the tenth year.
When issuing new bonds, the interest rate will be 1.4% over the
current debt interest rates. If your current debt interest rate is
12.1%, then the bond rate will be 13.5%.
You can buy back outstanding bonds before their due date. A 1.5%
brokerage fee applies. These bonds are repurchased at their market
value or street price on January 1 of the current year. The street price
is determined by the amount of interest the bond pays and your credit
worthiness. It is therefore different from the face amount of the bond.
If you buy back bonds with a street price that is less than its face
Team Member Guide
15
Finance
amount, you make a gain on the repurchase. This will be reflected as

a negative write-off on the income statement (see 6.3 Income
Statement).
Bonds are retired in the order they were issued. The oldest bonds
retire first. There are no brokerage fees for bonds that are allowed to
mature to their due date.
If a bond remains on December 31 of the year it becomes due, your
banker lends you current debt to pay off the bond principal. This, in
effect, converts the bond to current debt. This amount is combined
with any other current debt due at the beginning of the next year.
When Bonds Are Retired Early
A bond with a face amount of $10,000,000 could cost $11,000,000 to

repurchase because of fluctuations in interest rates and your credit
worthiness. A 1.5% brokerage fee applies. The difference between the
face value and the repurchase price will reflect as a gain or loss in the
income statements fees and write-offs.
When Bonds Come Due
Assume the face amount of bond 12.6S2017 is $1,000,000. The

$1,000,000 repayment is acknowledged in your reports and
spreadsheets in the following manner: Your annual reports from
December 31, 2017 would reflect an increase in current debt of
$1,000,000 offset by a decrease in long term debt of $1,000,000. The
2017 spreadsheet will list the bond because you are making decisions
on January 1, 2017, when the bond still exists. Your 2018 spreadsheet
would show a $1,000,000 increase in current debt and the bond no
longer appears.
Bond Ratings
Each year your company is given a credit rating that ranges from AAA
(best) to D (worst). In Foundation, ratings are evaluated by
comparing current debt interest rates with the prime rate. If your
company has no debt at all, your company is awarded an AAA bond
rating. As your debt-to-assets ratio increases, your current debt
interest rates increase. Your bond rating slips one category for each
additional 0.5% in current debt interest. For example, if the prime
rate is 10% and your current debt interest rate is 10.5%, then you
would be given an AA bond rating instead of an AAA rating.
4.4.3 Stock
Stock issue transactions take place at the current market price. Your
company pays a 5% brokerage fee for issuing stock. New stock issues
are limited to 20% of your companys outstanding shares in that year.
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Stock price is driven by book value, the last two years earnings per
share (EPS) and the last two years annual dividend.
16
Book value is equity divided by shares outstanding. Equity equals the

common stock and retained earnings values listed on the balance
sheet. Shares outstanding is the number of shares that have been
issued. For example, if equity is $50,000,000 and there are 2,000,000
shares outstanding, book value is $25.00 per share.
EPS is calculated by dividing net profit by shares outstanding.
The dividend is the amount of money paid per share to stockholders
each year. Stockholders do not respond to dividends beyond the EPS;
they consider them unsustainable. For example, if your EPS is $1.50
per share and your dividend is $2.00 per share, stockholders would
ignore anything above $1.50 per share as a driver of stock price. In
general, dividends have little effect upon stock price. However,
Foundation is unlike the real world in one important aspect there
are no external investment opportunities. If you cannot use profits to
grow the company, idle assets will accumulate. Foundation is
designed such that in later rounds your company is likely to become a
cash cow, spinning off excess cash. How you manage that spin-off is
an important consideration in the endgame, and dividends are an
important tool at your disposal.
You can retire stock. The amount cannot exceed the lesser of either:
r5% of your outstanding shares, listed on page 2 of last years

FastTrack; or
rYour total equity listed on page 3 of last years FastTrack.

You are charged a 1.5% brokerage fee to retire stock.
4.4.4 Emergency Loans
Financial transactions are carried on throughout the year directly

from your cash account. If you manage your cash position poorly
and run out of cash, the simulation will give you an emergency loan
to cover the shortfall. The loan comes from a gentleman named Big
Al, who arrives at your door with a checkbook and a smile. Big Al
lends you the exact amount of your shortfall. You pay one years
worth of current debt interest on the loan and Big Al adds a 7.5%
penalty fee on top to make it worth his while.
For example, suppose the current debt interest rate is 10% and you
are short $10,000,000 on December 31. You pay one years worth of
interest on the $10,000,000 ($1,000,000) plus an additional 7.5% or
$750,000 penalty.
You do not need to do anything special to repay an emergency loan.
However, you need to decide what to do with the current debt (pay it
off, re-borrow it, etc.). The interest penalty only applies to the year in
which the emergency loan is taken, not to future years.
Emergency loans are combined with any current debt from last
year. The total amount displays in the Due This Year cell under
Current Debt.
Emergency loans depress stock prices, even when you are profitable.
Stockholders take a dim view of your performance when they witness
a liquidity crisis.
Production Analysis
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5 The Foundation
FastTrack
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4.4.5 Credit Policy
Your company determines the number of days between transactions

and payments. For example, your company could give customers 30
days to pay their bills (accounts receivable) while holding up
payment to suppliers for 60 days (accounts payable).
Shortening A/R (accounts receivable) lag from 30 to 15 days in
effect recovers a loan made to customers. Similarly, extending the
A/P (accounts payable) lag from 30 to 45 days extracts a loan from
your suppliers.
The accounts receivable lag impacts the customer survey score. At 90
days there is no reduction to the base score. At 60 days the score is
reduced 0.7%. At 30 days the score is reduced 7%. Offering no credit
terms (0 days) reduces the score by 40%.
The accounts payable lag has implications for production. Suppliers
become concerned as the lag grows and they start to withhold
material for production. At 30 days, they withhold 1%. At 60 days, they
withhold 8%. At 90 days, they withhold 26%. At 120 days, they
withhold 63%. At 150 days, they withhold all material. Withholding
material creates shortages on the assembly line. As a result, workers
stand idle and per-unit labor costs rise.
Customer purchases and sensor

company financial results are
reported in an industry newsletter
called the Foundation FastTrack.
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The FastTrack displays Last Years Results. The FastTrack available
at the start of Round 1 displays last years results for Round 0, when
all companies have equal standing. The FastTrack available at the
start of Round 2 will display the results for Round 1.
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Successful companies will study the FastTrack to understand the

marketplace and find opportunities. As the simulation progresses
and strategies are implemented, company results will begin to vary.
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5.1 Front Page
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Use the first page of the FastTrack to see a snapshot of last years
results. Be sure to compare your companys sales, profits and
cumulative profits with your competitors.
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5.2 Stock & Bond Summaries

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

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

The Production Analysis (page 4) reports detailed information about
each product in the market, including sales and inventory levels,
price, material and labor costs. Are you or your competitors building
Team Member Guide
17
Segment Analysis Reports
excess inventory? Excess inventory puts pressure on profits (see

Chapter 10).
The Production Analysis also reports product revision dates. Does a
competitor have a product with a revision date in the year after the
year of the report? This indicates a long repositioning project that will
possibly put that product into the other segment.
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Check your competitors automation, capacity and plant

utilization. Increases in automation reduce labor costs, and this
could indicate competitors might drop prices for those
products. Did a competitor reduce capacity? Selling capacity
reduces assets. Running the remaining capacity at 150% to
200% can improve Return on Assets (ROA).
The Production Analysis will report the release date (but not the
coordinates) of a new product if:
rProduction capacity is purchased; and/or

rA promotion budget is entered; and/or
rA sales budget is entered.
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5.5 Segment Analysis Reports

The Segment Analysis reports (pages 5 - 6) review both market
segments in detail (Figure 5.1).
The Statistics box in the upper-left corner reports Total Industry Unit
Demand, Actual Industry Unit Sales, Segment Percent of Total
Industry and Next Years Growth Rate. The Customer Buying Criteria
box ranks the customer criteria within each segment:
rIdeal Position: The preferred product location, also called
the ideal spot, as of December 31 of the previous year ideal

spots drift with the segments, moving a little each month;
rPrice: Price preferences stay the same year after year;
rAge: Age preferences stay the same year after year; and
rReliability: MTBF requirements stay the same year after year.
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The Perceptual Map shows the position of each product in the

segment as of December 31 of the previous year.
18
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5.5.1 Accessibility, Market Share and Top

Products in Segment
The Accessibility Chart rates each companys level of accessibility.

Accessibility is determined by the Marketing Departments sales
budget the higher the budget, the higher the accessibility.
Accessibility is measured by percentage; 100% means every customer
can easily interact with your company sales, customer support, etc.
The Market Share Actual vs. Potential Chart displays two bars per
company. The actual bar reports the market percentage each
company attained in the segment. The potential bar indicates what
the company deserved to sell in the segment. If the potential bar is
higher than the actual, the company under produced and missed
sales opportunities. If the potential is lower than the actual, the
company picked up sales because other companies under produced
and stocked out (ran out of inventory).
The Top Products in Segment area reports, in order of total sales:
rMarket Share
rUnits Sold to Segment
rRevision Date
rStock Out (This tells you whether the product ran
out of inventory.)
rPerformance and Size coordinates

rPrice
rMTBF
rThe products Age on December 31
rPromotion and sales budgets
Balance Sheet
rAwareness
rAccessibility
rDecember Customer Survey Score
5.5.2 Awareness and the December
Customer Survey Score
Customer Awareness is determined by the Marketing Departments

promotion budget the higher the budget, the higher the awareness.
Awareness is measured by percentage; 100% means every customer
knew about your product.
The December Customer Survey Score indicates how customers in
the segment perceived the products. The survey evaluates the product
against the buying criteria.
Product ages and distances from ideal spots change throughout the
year, therefore scores change month to month.
If a repositioning project concludes late in the year, the survey score
for December could be significantly higher than the scores for the
previous months.
6 Proformas and
Annual Reports
Proformas and annual reports include:
rBalance Sheet
rCash Flow Statement
rIncome Statement
Proformas are projections of results for the upcoming year. Annual
reports are the results from the previous year. The proformas allow
you to assess the projected financial outcomes of your company
decisions entered in the Foundation Spreadsheet.
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NPSFJOGPSNBUJPO

5.6 Market Share Report

The Market Share Report (page 7) details sales volume in both
segments, reporting each products actual and potential sales. Did
your company under produce? If the actual percentage for your
product is less than the potential, you missed sales opportunities. If
your actual is greater than your potential, your competitors under
produced and you picked up sales that otherwise would have gone
to them.
6.1 Balance Sheet
5.7 Perceptual Map
Assets are divided into two categories, current and fixed. Current
assets are those that can be quickly converted, generally in less than
a year. These include inventory, accounts receivable and cash. Fixed
assets are those that cannot be easily converted. In the simulation,
fixed assets are limited to the value of the plant and equipment (see
4.3.1 Capacity and 4.3.3 Automation).
The Perceptual Map (page 8) displays both segments and every

product in the industry.
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5.8 Other Reports

The HR/TQM/Sustainability Report displays investments and results
when the optional TQM/Sustainability and/or Human Resources
modules are activated (see Chapter 7).
If simulation plug-ins are scheduled, the results will also display. For
example, the Ethics Plug-in Report shows the impacts of each
companys decisions (see Chapter 8).
The balance sheet lists the dollar value of what the company owns
(assets), what it owes to creditors (liabilities) and the amount
contributed by investors (equity). Assets always equal liabilities
and equity.
Assets = Liabilities + Equity
Liabilities include accounts payable, current debt and long term debt.
In the simulation, current debt is comprised of one-year bank notes;
long term debt is comprised of 10-year bond issues. Equity is divided
into common stock and retained earnings.
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Common stock represents the money received from the sale of

shares; retained earnings is the portion of profits that was not
Team Member Guide
19
Cash Flow Statement
distributed back to shareholders as dividends, but was instead

reinvested in the company.
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7 Additional Modules
Some simulations use additional modules. If a module is scheduled,
the simulation Dashboard will tell you the round it is set to begin and
provide a link to the documentation.
The HR (Human Resources) and TQM (Total Quality Management)/
Sustainability modules described below are frequently enabled. HR
and TQM decisions are used by the Balanced Scorecard, which is one
of the simulation assessment methods (see Chapter 11).
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6.2 Cash Flow Statement

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

Your company can use the income statement to diagnose problems
on a product-by-product basis. Sales for each product are reported in
dollars (not the number of products). Subtracting variable costs from
sales determines the contribution margin. Inventory carrying costs
are driven by the number of products in the warehouse. If your
company has $0 inventory carrying costs, you stocked out of the
product and most likely missed sales opportunities. If your company
has excessive inventory, your carrying costs will be high. Sound sales
forecasts matched to reasonable production schedules will result in
modest inventory carrying costs.
Period costs are depreciation added to sales, general and
administrative (SG&A) costs, which include R&D, promotion, sales
and administration expenses. Period costs are subtracted from the
contribution margin to determine the net margin. The net margin for
all products is totaled then subtracted from other expenses, which in
the simulation include fees, write-offs and, if the module is enabled,
TQM/Sustainability costs. This determines earnings before interest
and taxes, or EBIT. Finally, interest, taxes and profit sharing costs are
subtracted to determine net profit.
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20
7.1 TQM/Sustainability
TQM (Total Quality Management)/Sustainability initiatives can
reduce material, labor and administrative costs, shorten the length of
time required for R&D projects to complete and increase demand for
the product line. The impacts of the investments produce returns in
the year they are made and in each of the following years.
The sustainability-oriented initiatives, UNEP Green Programs and
GEMI TQEM Sustainability Initiatives, can lower labor and material
costs. UNEP Green Programs also improve customer perceptions
about your company, which leads to increased sales. The remaining
initiatives can also increase efficiency and lower costs.
Your company should determine which initiatives best serve its
purposes. If you plan to keep automation levels low so R&D
projects complete more quickly, you might want to invest in areas
that lower labor costs (for example, Quality Initiative Training).
If your company is competing in the High Tech segment, which
has high material costs, you might consider initiatives that
reduce material costs.
To maximize the effect, companies should find complementary
initiatives and invest in each of them. For example, to reduce material
costs, companies could consider investing in both CPI Systems and
GEMI TQEM Sustainability Initiatives.
7.2 HR (Human Resources)

When the Human Resources Module is activated, three areas must be
addressed:
1. Complement: The number of workers in the workforce. Needed
Complement is the number of workers required to fill the
production schedule without overtime.
2. Caliber: The talent of the workforce. If you are willing to spend
the money, you can recruit a higher caliber of worker. This
results in higher productivity and lower turnover. Companies set
a Recruiting Spend budget of up to an additional $5,000 per
worker. If you spend nothing extra, the recruitment cost per
worker remains at $1,000 and you get an average person off the
street. The more you spend, the higher the caliber of the worker.
Making Decisions
3. Training: The amount of time workers spend in training each

year. Training leads to higher productivity and lower turnover,
but takes people off the job while they are in the classroom.
Each training hour costs $20.00 per worker.
Assuming you have sufficient workers (Complement), investments in
Recruiting and Training raise your Productivity Index, which in turn
lowers your per unit labor costs.
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8 Plug-ins
Some simulations use plug-in modules. Plug-ins have a more general
impact on your company.
For example, your response to a dilemma posed by the Ethics Plug-in
could have a negative impact on your corporate profits. Or your
answer to an Accounting Plug-in might help your company avoid a
major financial headache.
8.1 Making Decisions

Your task is to find ways to ensure compliance, minimize exposure
and return value to all stakeholders. Group discussion and consensus
is imperative. If you do not reach a consensus (that is, if there is no
clear majority), the system will default to a do nothing answer.
In the following round, the impacts of your decision will appear in
the Foundation FastTrack. The plug-in area will offer a more detailed
explanation of the events and the reasoning behind the impacts.
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The Situation Analysis is divided into five activities:
rPerceptual Map
rDemand Analysis
rCapacity Analysis
rMargin Analysis
rConsumer Report
The first part of the Perceptual Map activity illustrates Segment
Drift, which occurs each year as customers demand smaller, faster
products. The second part illustrates the ideal spot position
within each segment. This position changes every year. The
Perceptual Map activity will help you decide where to place your
new or revised products.
The Demand Analysis will help you anticipate the yearly upswing in
demand. At the beginning of the simulation, the growth rate for each
segment is different. While the growth rates can change as the
simulation progresses, the beginning rates will help you anticipate
how many products will be demanded in future years.
The Demand Analysis is an external measure that looks at how many
units the market will want.
The Capacity Analysis is an internal measure that determines how
many units you and your competitors can produce. Comparing this
number to the results of the Demand Analysis will give you an idea of
how much production capacity you will need. The Capacity Analysis
also allows you to anticipate the cost of adding capacity and the cost
of increasing automation.
The Margin Analysis will show you how to calculate the contribution
margin, which measures how much money is left over from your sales
income once all direct costs like labor and material have been
deducted. The Margin Analysis also helps you investigate your margin
potential: If you could cut your costs to the minimum and raise prices
to the maximum, how much could you improve your margins?
The Consumer Report asks you to think as if you were a customer. It
will give you an idea of how they perceive your product line.
The Situation Analysis can be done as a group or you can assign parts
to individuals and have them report back to the rest of the company.
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9 Situation
Analysis
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The Situation Analysis

provides a comprehensive
view of the strengths,
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weaknesses, opportunities
and threats facing your
company. It will help you
understand current market conditions and how
the industry will evolve over the next several years.
Team Member Guide
21
Basic Forecasting Method
10
Forecasting
Forecasting requires a little math and a

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

Last years sales can be a good starting point for this years forecasts.
For example, if the segment growth rate for the upcoming year is
10%, you can say, All things being equal, we can expect to sell 10%
more units this year than last year.
Assume next years Low Tech growth rate is 10% and your Low Tech
product sold 1,000,000 units last year without stocking out (running
out of inventory):
1,000,000 0.1 = 100,000
Adding 100,000 to last years sales of 1,000,000 units gives you a

starting forecast for the upcoming year of 1,100,000 units.
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If your product stocked out, calculate what it could have sold by

multiplying the segment demand by the potential sales percentage
reported on page 7 of the FastTrack, the Market Share Report. Next,
multiply that by the segment growth rate.
22
Is this number valid? It is highly unlikely that the market in the

upcoming year will be identical to the previous year. Prices will
adjust, revision projects will complete the playing field will change.
Still, this number can be a good beginning as you assess your product
offer and speculate what your competitors will offer.
Keep in mind the possibility that your products sold because
competitors who otherwise would have made sales under produced
and stocked out. Page 7 of the FastTrack displays actual and potential
sales as a percentage for each product. If your actual sales far
exceeded your potential because your competitors under produced,
you cannot count on them making the same mistake again.
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10.2 Qualitative Assessment

Compare your product to others competing within the segment and
decide whether it is better or worse than the competition. Start with
the FastTrack Perceptual Map (page 8). It shows where products are
currently placed. The Revision Dates at the bottom of the page
reveal the timing of any future repositionings. Continue the
comparison using the FastTracks Segment Analysis pages. These
report each products:
rAge does the product satisfy customer age demands?

rMTBF is reliability near the top of the range?
rPrice will price trends continue or will new automation
(displayed on page 4 of the FastTrack) facilitate a

price reduction?
rAwareness and Accessibility are these percentages leading,
keeping pace with or falling behind other products?
All these elements contribute to the monthly customer survey.
10.2.1 December Customer Survey Score
Will your product be better or worse than average? As an estimate,

look at the December customer survey score in the lower part of each
Segment Analysis. The Customer survey drives demand each month.
For example, if there are four products in December scoring 32, 28,
22 and 14 (for a total of 96), then the top products December
demand would be 32/96 or 33%.
Top Product in Segments Score / Sum of All Scores =
32 / (32 +28 +22 + 14) = 32 / 96 = 33%
What monthly customer survey scores will your product have during
the year? The score will change from month to month because the
segments drift, your product ages and it might be revised. Each
monthly score is driven by how well your product satisfies the
segment buying criteria, plus its awareness and accessibility levels. If
the TQM/Sustainability module is on, some initiatives could increase
the score. (See How Is the Customer Survey Score Calculated? in
Worst Case/Best Case
the Online Guides FAQ|Reports section for more information on

assessing your product.)
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10.3 Forecasts, Proformas and the

December 31 Cash Position
On the proforma income statement, sales revenue for each product is
based on its price multiplied by the lesser of either:
rThe Your Sales Forecast entry (or, if none is entered, the

Computer Prediction); or
rThe total number of units available for sale (that is, the
Production Schedule added to Inventory).
When a forecast is less than the total number of units available for
sale, the proforma income statement will display an inventory
carrying cost. When a forecast is equal to or greater than the number
of units available, which predicts every unit will be sold, the carrying
cost will be zero.
300,000 units, is an acceptable risk when compared to the potential

reward of making extra sales.
In the Marketing spreadsheet, enter the worst case forecast of 1,200
in the Your Sales Forecast cell. In the Production spreadsheet, enter
the best case of 1,500 in the Production Schedule cell (if inventory
remains from the previous year, be sure to subtract that from the
1,500). At the end of the year, in the worst case you will have sold
1,200,000 units and have 300,000 units in inventory. In the best case
you will have sold 1,500,000 units and have zero inventory.
The spread between the positions will show up as inventory on your
proforma balance sheet. Your proforma income statement will also
reflect the worst case for sales. In the Finance area, if the December
31 Cash Position is negative, adjust current debt, long term debt and
stock issue entries until the December 31 Cash Position becomes
positive. This will help ensure against an emergency loan.
To see your best case, return to the Marketing spreadsheet and enter
1,500 in the Your Sales Forecast cell then review the December 31
Cash Position. The actual results should lie somewhere between the
worst and best cases.
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On the proforma balance sheet, under current assets, inventory

reflects the dollar value of all unsold units. Cash reflects the amount
left after all company payments are subtracted from the sum of:
rTotal sales revenue reported on the proforma

income statement; and
rStock, current debt and long term debt entries in the

Finance area.
The proforma balance sheets cash position also displays as the

Finance spreadsheets December 31 Cash Position. Therefore,
unrealistically high forecasts or prices will create cash predictions
that are not likely to come true.
10.4 Worst Case/Best Case

If you wish, you can enter sales forecasts and production schedules
that develop worst case/best case scenarios. Here is an example:
You generate a pessimistic forecast of 1,200,000 for your Low Tech
product, which predicts in the worst case monthly sales of 100,000
units. As a matter of policy, your management team might decide that
manufacturing an additional three months worth of inventory, or
11
Balanced Scorecard
Your simulation might include a tool called the Balanced Scorecard,

which measures performance across four categories:
rFinancial includes profitability, leverage and stock price;

rInternal Business Process ranks (among other
measures) contribution margin, plant utilization and days

of working capital;
rCustomer examines the companys product line, including
how well it satisfies buying criteria and awareness/
accessibility levels; and
rLearning and Growth evaluates employee productivity.
The Internal Business Process and Customer perspectives can
cross-check performance. Under Internal Business Process, a low
score for Contribution Margin could indicate the company is
unprofitable the company should look at its costs and pricing. Under
the Customer perspective, a poor Buying Criteria score suggests the
company should consider R&D projects to improve the product line
or price adjustments.
Team Member Guide
23
Broad Cost Leader
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Mission Statement
Reliable products for low technology customers: Our brands offer

value. Our primary stakeholders are bondholders, stockholders,
customers and management.
Niche Differentiator (High Technology)
12
Six Basic Strategies
These six basic strategies can be the starting point for your own
custom strategy.
Broad Cost Leader

A Broad Cost Leader strategy maintains a presence in both segments.
The company will gain a competitive advantage by keeping R&D,
production and material costs to a minimum, enabling the company
to compete on the basis of price, which will be below average.
Automation levels will be increased to improve margins and to offset
second shift/overtime costs.
Mission Statement
Low-priced products for the industry: Our brands offer solid value.
Our primary stakeholders are bondholders, customers, stockholders
and management.
Broad Differentiator
A Broad Differentiator strategy maintains a presence in both
segments. The company will gain a competitive advantage by
distinguishing products with an excellent design, high awareness
and easy accessibility. The company will develop an R&D
competency that keeps designs fresh and exciting. Products keep
pace with the market, offering improved size and performance.
Prices will be above average. Capacity will be expanded as higher
demand is generated.
Mission Statement
Premium products for the industry: Our brands withstand the test of
time. Our primary stakeholders are customers, stockholders,
management and employees.
Niche Cost Leader (Low Technology)

A Niche Cost Leader Strategy concentrates on the Low Tech segment.
The company will gain a competitive advantage by keeping R&D,
production and material costs to a minimum, enabling the company
to compete on the basis of price, which will be below average.
Automation levels will be increased to improve margins and to offset
second shift/overtime costs.
24
A Niche Differentiator strategy focuses on High Tech. The

company will gain a competitive advantage by distinguishing its
products with an excellent design, high awareness, easy accessibility
and new products. The company will develop an R&D competency
that keeps designs fresh and exciting. Products will keep pace with
the market, offering improved size and performance. The company
will price above average and will expand capacity as it generates
higher demand.
Mission Statement
Premium products for technology oriented customers: Our brands

define the cutting edge. Our primary stakeholders are customers,
stockholders, management and employees.
Cost Leader with Product Lifecycle Focus

A Cost Leader with a Product Lifecycle Focus gains a competitive
advantage by keeping R&D, production and material costs to a
minimum, enabling it to compete on the basis of price. The Product
Lifecycle Focus will allow the company to reap sales for many years
for each new product introduced into the High Tech segment.
Products will then mature into Low Tech products.
Mission Statement
Reliable products for mainstream customers: Our brands offer value.

Our primary stakeholders are bondholders, stockholders, customers
and management.
Differentiator with Product

Lifecycle Focus
A Differentiator with a Product Lifecycle Focus strategy
distinguishes its products with excellent design, high awareness
and easy accessibility. The company will develop an R&D
competency that keeps designs fresh and exciting as they change in
appeal from High Tech to Low Tech. Products will keep pace with
the market, offering improved size and performance. The company
will price above average and will expand capacity as it generates
higher demand.
Mission Statement
Premium products for mainstream customers: Our brands withstand

the test of time. Our primary stakeholders are customers,
stockholders, management and employees.
Index
A
Accessibility 8, 12, 18,
19, 22
Accounts Payable (A/P) 15,
17
Accounts Receivable (A/R)
8, 15, 17
Actual Sales 22
Age 3, 4, 5, 8, 10, 11,
18, 22
Annual Reports 2, 19
Automation 10, 13, 14, 15
Awareness 8, 12, 18, 19,
22
B
Balanced Scorecard 23
Balance Sheet 15, 19
Bonds 15
Book Value 16
Business Ethics 21
Buying Criteria 3, 6, 8, 10,
18, 19, 22
C
Capacity 3, 13, 15
Cash Flow Statement 20
Computer Prediction 13,
23
Create a Sensor 9, 10, 12
Current Debt 15, 16
Customer Survey Score 5,
6, 8, 18, 19, 22
D
December Customer Survey
Score 6, 18, 19, 22
Discontinue a Sensor 3, 13
Dividend 15, 16
Drift 4
Earnings Per Share (EPS) 16

Emergency Loans 16
Perceptual Map 4, 5, 6, 9,
10, 14, 18
Performance 4, 5, 6, 8, 9,
10, 11, 12, 18, 22
Plug-ins 2, 19, 21
Positioning 3, 4, 5, 6, 7,
8, 9, 11, 12, 18, 22
Potential Sales 18, 22
Practice Rounds 3
Price 3, 4, 5, 7, 8, 9, 18,
22
Production 2, 3, 13, 17
Productivity Index 21
Proformas 2, 19, 23
Promotion Budget 11, 12,
18
F
Finance 2, 3, 15, 17, 23
Fine Cut
MTBF 7
Positioning 7
Price 7
Forecasting 13, 22
Foundation FastTrack 1,
2, 5, 6, 7, 8, 9, 11,
12, 16, 17, 18, 19,
21, 22
Foundation Spreadsheet 2
H
Human Resources 19, 20
I
Ideal Spot 6, 18
Income Statement 13, 15,
20
Industry Conditions Report
1, 3, 5, 6, 8
Invent a Sensor 9, 10, 12
R
Rehearsal Tutorial 1
Reliability 3, 4, 5, 7, 8, 9,
10, 11, 12, 18, 22
Research & Development
(R&D) 2, 3, 5, 9, 14
Rough Cut
MTBF 7
Positioning 7
Price 7
Labor Cost 13, 14, 17, 18,

20, 21
Long Term Debt 15
Sales Budget 11, 12, 18

Sales Forecasting 13, 22
Segment Drift 4
Segments 3, 4, 5, 11
Sellers Market 9
Situation Analysis 21
Size 4, 5, 6, 8, 9, 10, 11,
12, 18, 22
Stock 15, 16
Stock Outs 9, 18, 22
Survey Score 5, 6, 8, 18,
19, 22
M
Marketing 2, 3, 5, 11
Market Segment Drift 4
Market Segments 3, 4, 5,
11
Market Share 18, 19, 22
Material Cost 10, 20
Modules 2, 19, 20
MTBF (Mean Time Before
Failure) 3, 4, 5, 7,
8, 9, 10, 11, 12,
18, 22
N
New Sensor 9, 10, 12
T
Terminate a Sensor 3, 13
The Industry Conditions
Report 5
TQM/Sustainability 9, 20
Capsim Team Member Guide cover design

by Ed Kang, a Graphic Design student from
Columbia College Chicago.
Copyright 2012 Capsim Management Simulations, Inc. All rights reserved.
Capsim, Capstone, Foundation, and Comp-XM are trademarks of
Capsim Management Simulations, Inc.
Printed in USA
978-1-933681-35-1

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BUSINESS SIMULATIONS

USA & Canada

rIncreasing costs could be passed onto customers; and

1.1 The Industry Conditions Report

1.2 Management Tools

Think of the Rehearsal Tutorial as a driving school for the

rInvent and revise products;

The sample resources used for the Rehearsal, including its

1.2.2 The Foundation FastTrack

Every round, you and your competitors will have access to an

Every products Customer Survey Score (Chapter 3) can be found

The FastTrack Reports Last Years Results

Team Member Guide

1.2.3 The Situation Analysis

Completing the Situation Analysis (described in Chapter 9) will

1.2.4 Proformas & Annual Reports

Proformas and annual reports are specific to your company.

1.3 Company Departments

rResearch & Development, or R&D

Your R&D Department designs your product line. The department

Your Marketing Department prices and promotes your products. It

Your Production Department determines how many units will be

1.2.5 The Foundation Spreadsheet

The Foundation Spreadsheet is the nerve center of your company

rAn XLS Version that runs via Microsoft Excel.

1.2.6 Just in Time Information

In the spreadsheet decision areas, look for the

1.4 Inter-Department Coordination

R&D works with Marketing to make sure products meet

R&D works with Production to ensure assembly lines are purchased

Marketing works with Production to make sure manufacturing

Marketing works with Finance to project revenues for each product

After the conclusion of the Practice Rounds the simulation is reset

The Decision Audit is a complete trail of all team decisions. It will

1.6 Company Success

rAnalyze the market and its competing products;

Production tells Finance if it needs money for additional equipment.

The Finance Department acts as a watchdog over company

1.5 Practice and Competition Rounds

2.1 Buying Criteria

Team Member Guide

Each segment has different price expectations. Low Tech wants

MTBF (Mean Time Before Failure) is a rating of reliability measured

Sensors vary in their dimensions (size) and the speed/sensitivity

Positioning is such an important concept that marketers developed a

2.1.5 Market Segment Positions on the

Market segments have different positioning preferences. The Low

Buying Criteria by Segment

Each year, the High Tech segment demands greater improvement

Your R&D and Marketing Departments have to make sure your

2.2 Buying Criteria by Segment

Many Types of Products...

rAge, 2 years importance: 47%

rIdeal Position, size 12.4/performance 6.6 importance: 43%

In any month, a products demand

Team Member Guide

Buying Criteria and the Customer Survey Score

A customer survey score reflects how well a product meets its

3.1 Buying Criteria and the Customer

3.1.1 Positioning Score

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