Lecture

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Lecture 2Strategic Planning Guidelines
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The Marketplace is designed to give students
practice in the design, implementation, and
control of business strategies. It is an
operationally oriented exercise in which the
application, and not the definition, of business
concepts, principles, and methods is important.
In addition, the integration of the major
decision areas of business are stressed rather
than the sequential presentation of these
subjects.
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Educational Objectives

• Learn to formulate, execute, and control business
  strategies in a real time, competitive
  environment
• Learn to solve business problems by dealing with
  performance and cost tradeoffs inherent in
  business decisions
• Internalize marketing and business concepts and
  principles through practice in a simulated
  market and
• Develop a working knowledge of microcomputers and
  business software.

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The Marketplace will focus you on Strategic
Managementin addition to Management Strategy
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Strategic Management versus Management Strategy

• Both Require
• creativity
• qualitative thinking
• an ability to deal with complex tradeoffs

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Strategic Management further requires

• an ability to adapt to
• a changing environment
• a willingness to take risks
• an ability to manage day-to-day issues while
  trying to position the firm to deal with long
  term problems and opportunities.

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In Strategic Management the emphasis is on

• action
• execution
• responsibility
• a managers role

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Management Strategy implies

• a sedentary role of a consultant whose concern
  is chiefly analysis and planning, and who can
  walk away from the implementation of the plan.

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• Are business schools doing their jobs?
• No! say some critics who find that MBA
  graduates are too narrowly educated.
• From a special report in the Harvard Business
  Review, Are Business Schools Doing Their
  Jobs?, by Behrman and Levin (1984).

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Business school critics assert that we place

• Too much emphasis on quantitative analysis,
  tools, models, and theory
• Too little emphasis on qualitative thinking,
  complex tradeoffs, execution, and creativity
• Too much emphasis on short term performance
• Not enough on long term success

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• Too much emphasis on bureaucratic management
• Very little on entrepreneurial activities and
  risk taking
• Too much emphasis on career and corporate goals
• Too little attention on interpersonal
  relationships and social ethics
• Too much emphasis on separate disciplines
• Not enough on integrative problem solving and
  management

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Comparisons of Alternative Learning Formats
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Lectures and Multiple Choice Exams

• Very efficient
• Maximize communication of new concepts
• maximize number of students
• minimize instructor involvement
• Can be standardized to minimize unwanted
• variance in teaching
• But. . . they do not encourage
• creativity
• integration
• problem solving
• decision making
• risk taking
• interpersonal skills

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Case analysis

• Students are able to
• analyze and solve complex problems
• think in strategic ways
• integrate material across disciplines
• But, students do not have to
• execute their decisions
• live with the consequences
• respond to competitive moves and counter moves

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Simulation Strengths

• Students are able to
• analyze and solve complex problems
• think in strategic ways
• integrate material across disciplines
• . . . and
• execute their decisions and
• live with the consequences
• respond to competitive moves
• and counter moves

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• Finally, simulations represent high involvement
  learning. Running their own business gives
  students a personal stake in the outcome and can
  help them learn about managing in a competitive
  situation.
• But. simulations do require
• substantial time and effort.

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Overview of TheMarketplace Environment
Building Blocks of The Marketplace
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Game Structure

• Up to 12 manufacturers
• 20 geographic markets
• 5 market segments

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Sales Offices
Montreal Toronto Calgary Vancouver
New York Atlanta Chicago Los Angeles
London Paris Berlin Rome
Osaka Tokyo Yokohama Sapporo
Curitiba Rio de Janeiro Sao Paulo Belo Horizonte
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Market Structure
Mercedes
Traveler
Innovator
performance
Work Horse
Cost Cutter
cost
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Chronology of Events

• Q1, organize the team, name the company and
  contract for a survey of potential customers.
• Q2, analyze market information, establish
  strategic direction and set up shop (build plant,
  design brands and set up sales offices).

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Chronology of Events

• Q3, Q4, test market brands, prices, ad copy,
  media campaigns, sales staffing. Study
  competition and make adjustments in strategy.

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Chronology of Events

• Q5, prepare a two-year business plan. Present
  business plan and financial request to venture
  capitalists and negotiate equity investment.
• Q5 - Q8, initiate international roll-out campaign.

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Chronology of Events

• Q9, present report to the Board regarding
• second year performance,
• deviations from plan,
• justification for departures,
• analysis of current market, and
• plan for third year.

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Equity Financing

• The initial capitalization is 4,000,000 which is
  being invested by the executive team in 1,000,000
  increments over the first 4 quarters.
• The executive team owns 100 of the company.
• Four thousand shares of stock will be issued to
  the executive team in exchange for their
  4,000,000.
• The initial stock value is 1000 per share.

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Equity Financing (continued)

• At the end of the first year of business, the
  executive team will have the opportunity to
  request up to 5,000,000 from a venture capitalist
  (instructor).
• The venture capitalist will expect an outline of
  the strategic plan for the second year in
  business, including target markets, geographic
  expansion, RD, plant expansion, etc.

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Debt Financing (Q5 and beyond)

• The bank will extend a line of credit to the
  executive team equal to one and a half times the
  firms equity position in the previous quarter,
• The bank is highly risk averse and will call in
  your loan in part or whole if your debt capacity
  declines due to unusual or extended losses.

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Debt Financing (continued)

• Other financial institutions will also buy
  long-term notes at 2 points over conventional
  bank loans. The acceptable debt capacity is two
  times the firms equity position in the previous
  quarter.
• Long-term debt is for 5 years with little
  possibility of the financial institution calling
  in the note due to short-term swings in income.

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Special Financing Needs

• The bank is intolerant of poor financial
  management.
• If a firm ends a quarter with a negative cash
  position, the bank will contact a loan shark to
  obtain an emergency loan to cover the firms
  checking account.

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Loan Sharks Financing Terms

• Loan shark requires repayment in the next quarter
  
• The emergency loan interest rate is a sliding
  scale which begins at 10 per quarter and may go
  as high as 25 per quarter.
• For each 1000 which the loan shark places in your
  checking account, he will take one share of stock
  in your firm.
• The issuing of stock to a loan shark causes a
  dilution of your stock value and your share of
  the company.

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Bankruptcy

• A firm is technically bankrupt if its cumulative
  losses exceed its equity investment.
• Bankruptcy occurs when the sum of the retained
  earnings and the common and preferred stock is a
  negative number.
• Stated differently, the management has used up
  all of the equity of the firm when the negative
  value of the retained earnings exceeds the value
  of the common and preferred stock.