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2. Round 2 Production Results……………………………………………………………………………………… 21
3. Round 3 Production Results……………………………………………………………………………………… 23
4. Round 4 Production Results …………………………………………………………………………………….. 23
Table of figures
Figure 1: Figure 1.1. Company performance in each round ……………………………………………….. 4
Figure 2: Gross margin for Speed1, Speed2, and Speed3 ………………………………………………… 8
Figure 3: Closing bank balance for each round…………………………………………………………………. 9
Figure 4: Gross margin for all car models………………………………………………………………………. 11 Figure 5: Workforce at each round………………………………………………………………………………… 15
Introduction
The company developed two car models to ensure that customers are offered better buying experience as well as meeting larger market segments as focus is on the European market. With an improved customers’ experience, the business anticipates constant increase in the market share.
The company has made a positive appearance in the market throughout its existence from round 1 to four. It has had a steady rise in the total sales which implies it has been experiencing a constant increase in its market share. However, it seems like it has not been performing too well in other areas most likely operational and financial. The closing bank balance at the end of each round is steadily decreasing and so does the shareholder funds. With such a detrimental trend, the firm risks being bankrupt and failing to finance its production in the future.
Figure 1.1. Company performance in each round
Total Sales
Total Unsold Stock
Shareholder Funds
Closing Bank Balance
Outstanding Loan
Round 1
0
0
397.31
-187.69
0
Round 2
675.88
0
139.40
13.34
529.43
Round 3
1305.70
3371
-98.58
-371.59
528.24
Round 4
1917.93
0
-364.31
-1157.41
528.46
Part A
Company Performance
Apart from the changes made for the initial budgeted pricing in the first round for car speed1 and speed2 from £15,000 to £9,800 and £10,500 respectively, the movement of pricing was constant throughout for the two. The price of speed3 was set at £2,400 in round 3 but was adjusted in round 4 to £23,000. As envisaged in the appendix, the rest of the prices were fairly constant or not fluctuating especially in relation to the budgeted pricing. The major consideration for the changes in the prices could largely be as a result of market competition which affected the demand of the cars. Other market factors could also been put into consideration. However, externalities that prompted the firm to fluctuate the prices of the cars must be detrimental to its total sales and profitability. The variable costs for producing each car model have been rising with each round while the prices remained constant or slightly decreased.
Round 1
The results from this round were merely unqualified for any analysis. A majority of decisions that were made could be accounted for in the next round since nothing of significance took place in the market place. However, for purposes of reporting, each factor or variable shall be discussed. First, the estimated sales in this round is irrelevant since little was done in terms of production and sales in the market. Estimated sales are determined by multiplying the selling prices per unit with the round’s forecasted production (Leach, 2010). Since no sales are made in the first round, the manufacturing cost of fixed assets is treated as an expense while selling price as zero.
The closing bank balance in this round is a negative value. Normally, bank balance indicates the company’s financial strength in terms of cash flow at the end of each financial period (Alexander, 2001). However, since no sale is made in this round, the negative closing bank balance is totally understandable and acceptable. However, it needs to improve in the future rounds. The manufactured cars in this round were sold in the next round. Therefore, the question of unsold stock is also irrelevant at this stage. In the same way, since there was no instance of selling the manufactured cars in this round, the question of gross margin does not arise. As for the market share, it can only be forecasted and compared to the actual market share of all other competitors in the market. However, since no forecasts and sales are made in this round, the question of market share is best remains unanswered.
Round 2
Round 2’s sales clearly matched the estimated sales value. The produced number of Speed1 was 54,000 units while those of Speed2 were 14,000 units. The total sale for Speed1 was £529,200,000 while that of Speed2 was £146,678,000. Therefore, the total sale for round 2 was £675,878,000. The number represents the sale of the entire stock of products available. This can be equated to the entire estimated sales. Since the company engaged actively in selling its cars to the market, its bank balance greatly improved to a positive value. However, for a company that requires continuous running especially in the next rounds of simulation, it requires a different source of liquid finance. This explains the bank loan as shown in the income statement of the company for round two. In fact, the bank balance in this round has been determined in the presence of the bank loan. This implies that the incomes from the sales of the cars did not cover for the expenditures for the same round.
As mentioned earlier, the total sales involved exhausting of all available stock. This means that there was no unsold stock for round 2. Gross margin for Speed1 and Speed2 was 12.32% and 7.59% respectively. For a company that seeks to grow and establish itself in the market, this gross margin is quite low. The low gross margin implies that the firm is inefficient in its manufacturing and distribution process (Leach, 2010). At every pound of revenue generated for the given period, the firm retains £0.12 and £0.076 for Speed1 and Speed2 respectively. The remainder is spent on the cost of goods produced. This implies that little or no funds remain for other critical expenditures like paying off general expenses and debts. In the end, the shareholders remain with very little or no funds to distribute amongst themselves. Therefore, it is important for the managers to come up with a solution to correct the low gross margin for the two production lines.
For the start, the company had a market share of 1.04% for Speed1 and 0.27% for Speed2. It may be difficult to measure the potential these car models held in the market at the start of its operation. However, given a functional and effective promotion techniques, the company ought to perform better in the following rounds. Nonetheless, since all the cars were sold by the end of round 2, it may be concluded that the company received an expected and deserved response in the market. A high number of unsold stock would imply that the promotion and distribution methods by the firm may not have been effective (Alexander, 2001). On this basis, it may be true to conclude that the company may have underproduced for each brand in the market. The low market share for the vehicles may also imply that each model has a stiff competition in the market with other companies. But since the company is still at its preliminary stage, it may mean that the products have a great potential in the market, one which the company ought to pursue.
Round 3
In this round, another line of production for Speed3 automotive was introduced by the company in the market. The production of other two lines was fairly maintained at this round. The same amount or number of stock for the two existing models was maintained in this round. However, the price of Speed2 was slightly raised from £10477 to £10500 and was able to match the sales level recorded in the previous round. The new Speed3 line was priced at £24,000. Considering that the unsold cars were 3771 out of the produced 30000, the range between the estimated sales and actual sales was quite large. The company missed out on a significant number of sales and need to readjust the price to account for the unsold stock. Alternatively, it may employ more efficient promotion strategies while maintaining constant the price and the output level of the Speed3 model.
Figure 2: Gross margin for Speed1, Speed2, and Speed3
The gross margin for Speed1 and Speed2 reduced to 9.08% and 4.28% respectively. At this point, this does not look good for a company with high vision as this. For every unit produced, the amount spent on cost of goods increased significantly. Low gross margin indicates inefficiency in the manufacturing and distribution methods. If the company does not find means to cut costs, it may find itself in a position with low cash flows and unable to effectively run the daily operations of the business. The closing bank balance at the end of the round was -371.59 which reflects on the low gross margin for the two models. Speed3’s gross margin was at 25.03% which indicates good performance compared to the other two models. This may imply that the company is producing more efficiently on this area than any other. However, for it to achieve its vision and targets, it ought to make better decisions at manufacturing and distribution level.
The market shares for Speed1 and Speed2 remained fairly the same as in the previous rounds. As for Speed3, it gained a market share of 0.99% at its first round in the market. Considering that the model also experienced quite a large number of unsold stock, the competition in the market must also be significantly high. As mentioned earlier, the price of this model must be higher than that of the competition in the market. Speed3 did not attain its potential in the market in terms of market share gained and total sales due to a higher price than that in the market. The same can also be interpreted as having the company overproduced for this model. The total sales for round 3 improved significantly compared to that of round 2. The main reason behind this improvement was because of the introduction of Speed3 to the current stock. The sales level for Speed1 and Speed2 was maintained in round 3, thus, there was no impact on the increase in the sales level in round 3.
Figure 3: Closing bank balance for each round
As discussed in round 2, the negative bank balance meant that the company could not fund its operation. Therefore, a loan of £490,000 was borrowed. The company made a loss of £360,000 in round 2. With the cash flow from loan, the closing bank balance was positive at £13,340. In round 3, the company incurred a pre-tax loss of £237,980. The closing bank balance in round 3 was -371590. This implies that the company is not doing well in the market. It has incurred increasing losses for each period, only that in round two, the loss value was covered by the loan borrowed which converts to a positive bank balance. The losses made implies that the company is operating inefficiently in various areas. At this point, it is important for the business to employ better profit-maximization methods beginning with cost reduction.
Round 4
The company maintained a similar level of sales for all the automotive as was in round 3. Speed1, Speed2 and Speed3 produced were 54000, 14000 and 30000 respectively. The model price for the first two models were also the same as in the previous round. However, the price of Speed3 was adjusted from £24,000 to £23,000 in round four. In the previous round, Speed3 model did not attain its estimated sales and a price adjustment was required. The price readjustment was to ensure that the company countered the effect of competitors in the market while attempting to realize maximum possible sales of the Speed3 model. Of these three products, Speed3 model seems to be doing a lot better in the market compared to the other two. Nonetheless, all the three achieved their estimated production levels at the set prices. Another model, Speed4, was introduced to the market by the company in round 4. The new model made a perfect start to the market by attaining its level of expected sales for the price of £15500.
Round 4 recorded the overall lowest gross margin. Speed 2 gross margin was at a negative value which is not good for the business. The company is not able to retain any amount from the sale of each automotive as all the profits earned from the revenue accruing from the sale of Speed2 is spent on the cost of goods. Therefore, it is recommended that the company puts more focus on reducing the labor costs and turn to other suppliers who offer the raw materials at a lower cost. Failure to act fast, the company may not be in a position to finance its operating expenses for future production. Furthermore, the negative value in Speed3’s gross margin reveals a great deal of production inefficiency by the company. The same applies to the other two models which value of gross margin reduced. Speed3 recorded a gross margin of 25.5% in round 3 but was reduced to 17.79% in round 4. With the level of output and prices remaining constant for both periods, operating expenses must have risen which explains the decrease in the gross margin for the firm.
Figure 4: Gross margin for all car models
For each production line introduced to the market by the company for the first time, it usually does fairly better than the rest. The same is true with the current new Speed4 in the market which recorded a gross margin of 19.54%. The company recorded an increased market share from round 3. Speed1 and Speed3 experienced incredible increase in market share compared to Speed2 which saw an increase of 0.04% increase. With a reduced price, Speed3 was able to meet the targeted sales of 30000 and adding to the previous unsold stock of 3771. From this scenario, it may be right to deduce that the company may have underproduced Speed3. With an increased production, the company should experience an augmented sales and increased market share. The increased market share accounts for the total automotive produced for round 4 combined with the remainder of the unsold stock in the previous round.
Part B
Critical Reflection
Without employing the information taught during the semester on various topics relevant to business game, it would be impossible to make sound and informed decisions in each stage. The information is the foundation of all decision making. It leads you to view the game in one angle instead of another. It helps students avoid making decisions that may not be helpful in the efficient running of the business. A critical reflection of how various management and general business knowledge was used in the simulation aids the teacher to understand exactly why students opted for one decision instead of another. Furthermore, it enables them to rate their level of understanding on various subjects which may be a subject of learning in the future. The materials employed by the students in making the decisions in the business simulation will be discussed and the impact of the decisions on the company will be justified. If a move was wrong, an alternative decision will be proposed and explanation of the different expectation will be discussed as well.
The Financial Material
When the term financial material is mentioned, the first thing that comes into mind of a manager is the financial statements of the business. These statements entail various important information that archives how finances were used in each accounting period, the events and products that were used for and their impacts on the revenues and costs of the company both in the short run and long run. Normally, in the real-time business, these activities are usually done under the finance department in an organization. Almost every other department in the business is linked directly to the finance department. As such, financial statements reflect on many events that take place within and outside the business. Financial tools are also designed in a manner that can help decision makers predict on the direction in which particular activities and in the business as a whole is heading. It can also be used to value the worth of a venture on the business and whether or not it is a good decision.
In the latest phase in the game simulation, the company closed with a negative bank balance. In the previous rounds, the final bank balance was also negative except in round 3 when a loan was borrowed. Even so, the balance could still have been negative. The statement of the company’s financial position has been really wanting. It seems like every decision made for the business was not focused on the overall performance or the for the short run. However, in as much as the current financial conditions seem in a bad position, there is still a small room for improvement.
In the decision making, the major focus in the mind of decision makers was on the production level. The advice from the tutor not to over or under produce was the basis of our decision making. In truth, it is inefficient to overproduce and suicidal to underproduce. However, there is no certain correct formula for estimating the demand for the company’s products in the market. As such, it is important for the business to maintain a considerable level of output and then increase it with time. In the first round, the company made a quick and critical decision to reduce the prices of Speed1 and Speed2 to match that of the competition in the market. The adjusted price ensured that all the stock produced were sold fully.
In the other rounds, since it was mandatory to introduce a new line of production for round 3 and round 4, it was necessary to use the financial data to maintain other production lines viable and operational while initiating the new ones at the same time. It is for this reason the decision to borrow a long-term loan from bank was made. Principally, the decision was made for the continuance of business operation. The implications of the decision will affect the shareholders directly. The debt to equity ratio for the firm will increase as a result of preferring debts as the means to finance the running of the business as opposed to equity.
Furthermore, the bankruptcy risk in the preceding rounds increased progressively. If the business fails, the shareholders especially the common shareholders stand to lose a great deal of finance. However, even though the business seems to be heading in a wrong direction, there is a chance to maximize the profit through cost reductions in various areas. At this point, since the business is experiencing a period of consistent loss making, the interest payments may be exempted from tax deduction thereby reducing the burden even though it is by a small amount.
During the game, we focused more on ensuring that the new lines of production or models of cars are incepted well. Given a second chance in the same position, we could have focused more making the production more efficient and less costly. In other words, in the first round, the main activity would be to find raw materials with the least cost as well as other undertakings concerning production of automotive. Furthermore, it would be more efficient to focus on producing more on areas that the company feels that it holds an absolute advantage in. While it will also continue to produce in other models, the company should have taken a position to minimize production in areas with the highest cost of production. For instance, in the first round, since Speed1 had a higher market share and gross margin than Speed2, the company should intentionally minimize the production of Speed2 and increase that of Speed1.
The Human Resource
Human resource department in an organization largely deals in organization of people or workers as assets, the activities that they will accomplish and their rewarding contributions. This department is also crucial in the running of the business especially in its overall productivity. The productivity of the organization begins with the manner in which employees are brought in the firm, their skills and expertise, their moral and motivation among others. An organization with an effective human resource experiences efficiency in production and stands in the best position of growing faster in the market. The same applies with the business game where a functional human resource management system will increase efficiency and productivity of the organization both in the long run and short run.
Figure 5: Workforce in each round
In the simulation, the recruitment of employees was done out of obligation and strict time constraint. In the beginning of round 2, the initial workforce was 2500 employees. The workforce grew progressively to 5500 employees in round 4. The labor cost also increased progressively from round 1 to round 4 for each model car. The increase in workforce in round 3 and round 4 were essentially for covering the production of the new models introduced by the organization for its production lines. The productivity index for the company decreased with each passing round from 2 to 4. In the first round, the productivity index was 62% but gradually decreased to 57% in round 3 and 54% in round 4. In spite of the decrease in productivity, the human resource did quite a good job in the business game. It ensured that it hired enough workers to enhance the production of new lines of model cars. However, the level of motivation of the employees must have been fairly the same since their productivity levels decreased slightly.
The external stakeholders affected by this department are the debtors. Having inexperienced and unskilled labor in the organization as well a demoralized workforce would affect its productivity and eventually its total output. As such, the company will experience problems with the quality of goods and services which will in turn affect the sales negatively. The revenues will also be affected vastly which may affect the ability of the company to pay its debts.
Given the same chance in the game, I would set the starting wage for the employees at a lower level but relatively fair compared to the market wage. In many ways, it may be seen as a method that may discourage top talents in the market to join the firm. However, this may not be true since workers generally consider other rewarding and remuneration methods. For instance, a promise for promotion after a certain period of time back up with the level of production set. In this way, the human resource will be able to minimize the cost of labor while maintaining a high productivity for the company.
Operations
Operations entails every aspect that deals in manufacturing of the cars right from its preliminary stage to the last one and finally to the final consumers. This is the core area which the business cannot existence without at least for the current organization. It begins from the purchase of raw materials, processing in the plants or firms to finished commodities. This stage is largely affected by the decision made by the human resource department as discussed in the previous section. All employees are brought in to ensure that they either participate directly in the operation process or work in another position that completes or complements it. After the demand for the product in the market is determined, it is in this region where the units required are produced.
The managers and assistant managers are usually directly affected in this department. Under this area, the managers in their respective capacities show their leadership skills and expertise in their area of specialization. Consequently, this affects the employees working under them. Suppliers are the major external stakeholders to the business who are affected by this area. The quality of the products is usually determined at this section. Suppliers will be better motivated to supply the company’s products when they are of the best quality in the market.
The simulation game did not account for this area specifically. However, investing in research and development can impact the area immensely. During the game, no significant decision under this region especially for car production took place.
Marketing
The main responsibilities for the marketing department is to reach as many consumers in the market as possible and convince them to purchase the company’s products instead of any other substitutes. The tactics used by the marketing team can reach a large number of people in the market who would then demand the company’s products. As a result, the level of sales in the market increases which raises the revenues for the organization. The business is able to employ the profit-maximization technique of ensuring that it attains the maximum number of sales possible in the market. From this point, the managers could decide to reduce the prices of the products so as to enjoy the economies of scale that comes with large number of sales.
Given another chance to make decision under this area in the game simulation, I would reduce the promotion avenues employed by the company to three. After that, ensure that the avenues that will be chosen, possibly TVs and social media. In the technique used will entail something different and unique which could make a great impact on the effectiveness of the promotional technique. The center of promotion will seemingly focus on the strengths of the cars and the free extra services offered upon purchasing like test drive.
As discussed under the critical analysis area, given a chance to play the game again, the team and I would make better decisions than the first. After playing the game to this point, it is important to confess that nervousness and lack of experience might have gotten into me and some of the team members. After gaining exposure to the way the game is supposed to be played, it was too late to revers some of the decisions already made in the previous rounds. Furthermore, the experience gained to this point in the game gives us hope that all is not lost and we can still make short term profits and correct the unfavorable cash flows. Better communication practices will definitely be employed. Better teaming up and working together will also be initiated along with other fundamental attributes for team coordination.
Part C
A critical evaluation of the performance of the team
In the real world, organizations encourage employees to operate as a team even when they perform different activities but linked either directly or indirectly. In a department, employees usually work as a team especially when they undertake tasks that are similar or different but interdependent. In the game simulation, all the group members worked as a team. With various predetermined goals and objectives, each member was allocated a particular task in which they were to accomplish in the best way possible according to their respective capabilities. The group members are Peizhe Wang, Zheji Wang, Hao Guan, Bilal Qaiyum Babar, and Siyuan Huang. It is important to acknowledge every member of the group for their respective individual contribution to the team. The group’s achievement to this point in round 4 could only be possible through collective efforts. Each decision that was made independently according to the tasks at hand enabled the organization make the achievements it currently hold.
The marketing department was allocated to Peizhe Wang. He was tasked with the duty to formulate the market research programs and advice other team members in other areas that are interrelated with his. He undertook an incredible task of preparing PowerPoint slides for team’s presentation. He was responsible for measuring or estimating the market indicators like demand, price level and competition. He also prepared and made the executive decision on which way the team will go about promotion strategy in the market. He researched on the most effective and economical ways in which the organization can do the sales promotion. The finance department was allocated to Zheji Wang. He was actively involved in the decision concerning finance. All the team members had to consult him before making a decision on how to spend business’s finances in a specific area. For instance, he was actively involved in making the decision on how much to pay the employees in consultations with the human resource manager. He also provided the budget limits for which a team leader can spend in their respective area of allocation.
Hao Guan was allocated human resource department. He set all the meetings that took place for the purposes of the game simulation. He recorded the minutes for each meeting and prepared the agendas that would be discussed. Bilal Qaiyum Babar was allocated the task of being the leader for operation. He was responsible making important decisions regarding the production of the cars. In collaboration with Zheji Wang, he made the decision on the quantity of output at a given round. The design of the cars and other features like size were decided by him. Siyuan Huang was the general manager who ensured that all decision by each team leader are synchronized to the mission and vision of the organization. He communicated the important instructions to each team leader to use in their decision making. The responsibility of reading individual team leaders’ decision in a broader way was entrusted to him.
Each team leader made a decision regarding their respective department for every round. In each round, after making the decision, the team leader evaluated every decision and revalued it in a broader perspective. Decisions whose outcomes are not in consistent with the vision and mission for the organization, he altered them or rescinded them altogether. Other decisions that were made that were important in the running of the business, he considered them. In the end, he inquired from each team leader on the impacts of the alteration of the decisions on every department. The experience was quite incredible especially in the manner in which we communicated as leaders. Presentation and communication skills are important in this field which more or less resembled what happens in the real world.
References
Alexander, C. (2001) Market models: a guide to financial data analysis. John Wiley & Sons, Chichester. ISBN 9780471899754
Elgood, C., & Elgood, C. (1997). Handbook of management games and simulations. Aldershot, England: Gower.
Meijer, S. A., & Smeds, R. (2014). Frontiers in Gaming Simulation: 44th International Simulation and Gaming Association Conference, ISAGA 2013 and 17th IFIP WG 5.7 Workshop on Experimental Interactive Learning in Industrial Management, Stockholm, Sweden, June 24-28, 2013. Revised Selected Papers. Cham: Imprint: Springer.
Leach, R. (2010). Ratios made simple: A beginner’s guide to the key financial ratios. Petersfield, Hampshire: Harriman House.
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