2. Integrated Business Management
Copyright 2002 by Ernest R. Cadotte

3. Copyright 2002 by Ernest R. Cadotte
Learning Strategy
Business war games are a form of combative training where participants pit their business skills against those of formidable opponents under the watchful eye of a training coach.
Copyright 2002 by Ernest R. Cadotte

4. Copyright 2002 by Ernest R. Cadotte
Learning Strategy
I listen, I forget.
I see, I remember.
I do, I understand.
Old Chinese Proverb
Copyright 2002 by Ernest R. Cadotte

5. Learning Strategy: Learn by Doing
Participants learn about all aspects of business by managing a simulated business.
The Marketplace scenario follows the life cycle of a new product.
Business decisions are introduced as they become relevant in the evolution of the product.
Copyright 2002 by Ernest R. Cadotte

6. Copyright 2002 by Ernest R. Cadotte
Key Benefits
Develop teamwork across functions & locations.
Promote better decision making by helping participants see how their decisions can affect the performance of others & the organization as a whole.
Facilitate learning of important business concepts, principles and ways of thinking.
Copyright 2002 by Ernest R. Cadotte

7. Copyright 2002 by Ernest R. Cadotte
Key Benefits
Develop strategic planning and execution skills within a rapidly changing environment.
Instill a bottom line focus and the simultaneous need to deliver customer value.
Crystallize the financial implications of business decisions by linking them to cash flows and bottom-line performance.
Copyright 2002 by Ernest R. Cadotte

8. Copyright 2002 by Ernest R. Cadotte
Key Benefits
Discover how important it is to use market data and competitive signals to adjust the strategic plan and more tightly focus business tactics.
Build confidence through knowledge and experience.
Copyright 2002 by Ernest R. Cadotte

9. How is the business war game conducted?
Teams are placed in a war game scenario - starting up and running a new business venture.
The opposition is played out by competing teams.
Copyright 2002 by Ernest R. Cadotte

10. Objective is to profitably capture a dominant market position
Business Team
Market
Opponent
Objective is to profitably capture a dominant market position
Copyright 2002 by Ernest R. Cadotte

11. Copyright 2002 by Ernest R. Cadotte
Business Teams
Each team member assumes a tactical area of responsibility.
Marketing
Finance
Research
Production
Overall Leadership
Copyright 2002 by Ernest R. Cadotte

12. Copyright 2002 by Ernest R. Cadotte
How conducted?
Business team receives information on current situation.
Current situation is evaluated, strategy formulated and tactics set in placed.
Tactical decisions are fed into the marketplace simulator, along with decisions of opponents.
Results of decisions are fed back to business team.
Copyright 2002 by Ernest R. Cadotte

13. Copyright 2002 by Ernest R. Cadotte
How conducted?
The business team can acquire information on what is happening in the marketplace:
customer reaction to market decisions
competitor actions
Current situation is evaluated, strategy formulated, and tactics set in place.
Tactical decisions are again fed into the marketplace simulator.
Copyright 2002 by Ernest R. Cadotte

14. Copyright 2002 by Ernest R. Cadotte
Game Scenario
You and your business partners have decided to enter the international microcomputer industry.
The microcomputer industry is in its introductory stage of the product life cycle.
Several other international firms are entering the market at the same time.
Copyright 2002 by Ernest R. Cadotte

15. Copyright 2002 by Ernest R. Cadotte
Game Scenario
Your business strategy will be tightly focused on direct sales to business customers.
You will not sell to the home market or through retail stores.
You will sell through company-owned sales offices in major metropolitan markets around the world.
Copyright 2002 by Ernest R. Cadotte

16. Copyright 2002 by Ernest R. Cadotte
Game Scenario
The market is Europe, United States, Canada, Brazil and China.
Needs and wants vary by country/region
Copyright 2002 by Ernest R. Cadotte

17. The Marketplace simulation is available via the Internet at:
marketplace6.com
Copyright 2002 by Ernest R. Cadotte

18. Copyright 2002 by Ernest R. Cadotte
The Task List leads you through each step of the game, and helps to illustrate the logic of the marketing process.
Copyright 2002 by Ernest R. Cadotte

19. Be sure to read the directions on how to use the Marketplace software.
Copyright 2002 by Ernest R. Cadotte

20. Copyright 2002 by Ernest R. Cadotte
Game Scenario
The market is the Europe, United States, Canada, Brazil and China.
Needs and wants vary by country/region.
Copyright 2002 by Ernest R. Cadotte

21. Copyright 2002 by Ernest R. Cadotte
Sales Offices
Paris
Berlin
Rome
London
Beijing
Shanghai
Guangzho
Tianjin
Curitiba
Rio de Janeiro
Sao Paulo
Belo Horizonte
Montreal
Toronto
Calgary
Vancouver
New York
Atlanta
Chicago
Los Angeles
Copyright 2002 by Ernest R. Cadotte

22. Market Segments (Market Structure)
Price
Performance
Cost Cutter
Work
Horse
Traveler
Innovator
Mercedes
Copyright 2002 by Ernest R. Cadotte

23. Copyright 2002 by Ernest R. Cadotte
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).
Copyright 2002 by Ernest R. Cadotte

24. Copyright 2002 by Ernest R. Cadotte
Chronology of Events
Q3: Test-market brands, prices, ad copy, media campaigns, sales staffing. Determine production schedule for each brand.
Q4: Study end user feedback, competition, and financial performance and make adjustments in strategy.
Copyright 2002 by Ernest R. Cadotte

25. Copyright 2002 by Ernest R. Cadotte
Chronology of Events
Q5: Prepare a two-year business plan. Present business plan and financial request to venture capitalists and negotiate equity investment.
Q5 – Q12: Initiate international roll-out campaign.
Copyright 2002 by Ernest R. Cadotte

26. Copyright 2002 by Ernest R. Cadotte
Chronology of Events
End of game, prepare report to the Board regarding
second year performance
deviations from plan
justification for departures
analysis of current market
plan for future
Copyright 2002 by Ernest R. Cadotte

27. Equity Financing (Q1-Q4)
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.
Forty thousand shares of stock will be issued to the executive team in exchange for their 4,000,000.
The initial stock value is 100 per share.
Copyright 2002 by Ernest R. Cadotte

28. Copyright 2002 by Ernest R. Cadotte
Equity Financing (Q5)
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.
The venture capitalist will expect an outline of the strategic plan for the second year in business, including target markets, geographic expansion, R&D, plant expansion, quality improvements, etc.
Copyright 2002 by Ernest R. Cadotte

29. 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 firm's equity position in the previous quarter.
The bank is highly risk adverse and will call in your loan in part or whole if your debt capacity declines due to unusual or extended losses.
Copyright 2002 by Ernest R. Cadotte

30. Debt Financing (Q5 and beyond)
Other financial institutions will also buy long-term notes at 2 points over conventional bank loans. The acceptable debt capacity is two times the firm's 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.
Copyright 2002 by Ernest R. Cadotte

31. 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 by the name of Guido to obtain an emergency loan to cover the firm's checking account.
Copyright 2002 by Ernest R. Cadotte

32. Guido’s Financing Terms
Guido 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 100 which Guido places in your checking account, he will take one share of stock in your firm.
The issuing of stock to Guido causes a dilution of your stock value and your share of the company.
Copyright 2002 by Ernest R. Cadotte

33. Copyright 2002 by Ernest R. Cadotte
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.
Copyright 2002 by Ernest R. Cadotte

34. Performance Evaluation
Business Plan
Report to Board
Strategic thinking and tactical execution
Balanced Scorecard- cumulative score for the last 4 quarters of play
How well the company is prepared for the future
Copyright 2002 by Ernest R. Cadotte

35. Q1: Organize the Business
Name the company
Assign organizational responsibilities
Share personal learning goals
Establish team norms
Purchase survey of end users
Sell stock to executive team
Copyright 2002 by Ernest R. Cadotte

36. Learning Points for Quarter 1
Managing the team
Organizing the work
Deciding what one wants from the learning experience
Copyright 2002 by Ernest R. Cadotte

37. Copyright 2002 by Ernest R. Cadotte
Market
conditions
Marketing
strategy
tactics
assessment
objectives
performance
Manufacturing
Human resource
Financial
Environmental
analysis
Business
Strategy
Feedback
Mental Discipline of Marketplace
Performance
Assessment of Business Conditions
BUSINESS LEVEL
FUNCTIONAL LEVEL
Copyright 2002 by Ernest R. Cadotte

38. Quarter 2 Setting Up Shop
Establishing the firm’s strategic direction with a focus on brand design considerations.
Copyright 2002 by Ernest R. Cadotte

39. Q2: Establish Strategic Direction
Analyze market information
Establish strategic direction
select target segments
decide on competitive posture
Set up shop
design brands for target market segments
develop distribution strategy
locate and build plant
open initial sales offices for test market
Copyright 2002 by Ernest R. Cadotte

40. Customers Buy Benefits, Not Features
Copyright 2002 by Ernest R. Cadotte

41. Copyright 2002 by Ernest R. Cadotte
Once you select a segment, you must design a brand to meet the needs of that segment.
What features would make a computer more attractive to the Traveler segment?
Copyright 2002 by Ernest R. Cadotte

42. How far do you go in giving the customers what they say they want?
Is more speed, software applications, memory, keys on the keyboard, etc. always valued?
Could “more of some feature” even make a customer unhappy?
Copyright 2002 by Ernest R. Cadotte

43. What is the elasticity of the peanut?
Searching for the
Market’s Response Function
Copyright 2002 by Ernest R. Cadotte

44. Copyright 2002 by Ernest R. Cadotte
Suppose you could design the ideal candy bar. How many peanuts would you put in the candy bar to make you the happiest?
None
A few?
A bunch?
A whole lot?
Copyright 2002 by Ernest R. Cadotte

45. Which Candy Bar has the Most Peanuts?
Baby Ruth
Snickers
Payday
Milky Way
Copyright 2002 by Ernest R. Cadotte

46. Copyright 2002 by Ernest R. Cadotte
Which Candy Bar
Do You Like the Most?
Baby Ruth
Snickers
Payday
Milky Way
Copyright 2002 by Ernest R. Cadotte

47. What does your response function look like for peanuts?
Is more always better?
Would your happiness increase with every new peanut we added to the candy bar?
Is there a limit?
Copyright 2002 by Ernest R. Cadotte

48. Influence of quantity of peanuts on candy bar enjoyment
Number of Peanuts
None few many whole bunch
Delicious
Disgusting
Enjoyment
Copyright 2002 by Ernest R. Cadotte

49. What would be your response function for the following?
Chocolate
Caramel
Nougat
Coconut
Rice
Peanut butter
Copyright 2002 by Ernest R. Cadotte

50. Copyright 2002 by Ernest R. Cadotte
Here are a number of response functions. Which one applies to peanuts, chocolate, coconut, etc?
Hot
Cold
Less
More
More is good to a
point and then ceases
to add excitement
More is
always
better
Copyright 2002 by Ernest R. Cadotte

51. Copyright 2002 by Ernest R. Cadotte
Response Functions
Hot
Cold
Less
More
A little is just
right, more only
takes away value
More adds
value to a point
& then takes
away value
Copyright 2002 by Ernest R. Cadotte

52. Copyright 2002 by Ernest R. Cadotte
Response Functions
Little interest
until threshold
is crossed
Hot
Cold
Less
More
Any amount is bad
Copyright 2002 by Ernest R. Cadotte

53. No reaction. Indifference
Response Functions
No reaction. Indifference
to having the feature
Hot
Cold
Less
More
Copyright 2002 by Ernest R. Cadotte

54. Take Any PC Segment, How Excited Will It Become if You Provide….
More memory?
More speed?
More functions on the key board?
More software?
More.….?
Just like the candy bar ingredients, you must discover the response function for each PC component.
Copyright 2002 by Ernest R. Cadotte

55. Select components that yield benefits for Travel PC segment
Portability Use on road Connect to office Easy to use
Rugged Micro- High Wireless 6-hour Low-profile, Compact Trackball Wrist rest
casement circuitry resolution modem battery built-in disk, keyboard mouse on keyboard
flat LCD CD drives
display
Copyright 2002 by Ernest R. Cadotte

56. Learning Points for Quarter 2
Market opportunity analysis
Segmentation and target marketing
Strategic and tactical planning
Financial management
Copyright 2002 by Ernest R. Cadotte

57. Learning Points for Quarter 2
Game theory - competitive positioning
Brand design
linking product features to customer benefits
finding the customer’s response functions
Marketing & manufacturing tradeoff - satisfy the customer or run the most efficient factory, the issue of changeover
Financial liquidity - cash versus assets
Logistics of plant location - production versus shipping economies
Copyright 2002 by Ernest R. Cadotte

58. Quarter 3 Go To Test Market
Copyright 2002 by Ernest R. Cadotte

59. Copyright 2002 by Ernest R. Cadotte
Q3: Go to Test Market
The Goal is to Maximize Learning and Not Profits
Copyright 2002 by Ernest R. Cadotte

60. Copyright 2002 by Ernest R. Cadotte
Q3: Go to Test Market
Set selling prices
Develop advertising campaign
design 2 ads, one for each brand
determine number of placements per ad
Develop distribution strategy
hire sales force for quarter
open new sales offices for Q4
Copyright 2002 by Ernest R. Cadotte

61. Copyright 2002 by Ernest R. Cadotte
Q3: Test Market
Schedule production
set minimums and maximums for warehouse
forecast demand
run factory simulation, check numbers
Contract for market research on customers and competition
Check pro forma financial statements - All
Copyright 2002 by Ernest R. Cadotte

62. You are a market maker, not a market taker
The market is not waiting for you to take their orders.
You must create the market
Sell brands that customers want and at a price they are willing to pay
Locate sales offices where the largest number of customers can be found
Inform and persuade customers to buy a PC through advertising
Hire sales people to go out and find customers and persuade them to buy your PC
Copyright 2002 by Ernest R. Cadotte

63. Copyright 2002 by Ernest R. Cadotte
How to Set Price?
Costs (production, marketing, overhead)
Profit goals
What the market will bear
Competition
Copyright 2002 by Ernest R. Cadotte

64. In the beginning, you will not be able to price above your costs
There are many startup costs which will exceed your revenues.
Your production volumes will be very low, resulting in high per unit costs.
Copyright 2002 by Ernest R. Cadotte

65. Copyright 2002 by Ernest R. Cadotte
No early profits
Money
Time
Costs to setup
& grow the
business +
Copyright 2002 by Ernest R. Cadotte

66. Revenues will fall below costs at the outset of a new business
Money
Time
Costs to setup
& grow the
business +
Copyright 2002 by Ernest R. Cadotte

67. Profits will come later
Profits come latter.
You are here.
Profit
Profits
Time
Costs to setup
& grow the
business
Revenue + -
Copyright 2002 by Ernest R. Cadotte

68. Your goal is to speed up the adoption rate
Demand
Time
Introduction
Growth
Maturity
Decline
You are here
(High costs-low demand)
Copyright 2002 by Ernest R. Cadotte

69. What Will the Market Bear?
You must discover the market response function regarding price.
Copyright 2002 by Ernest R. Cadotte

70. What is the market’s price response function?
Your
Demand
Your Price
Elastic (demand drops fast with increasing prices)
Inelastic
(price is not a big factor)
Copyright 2002 by Ernest R. Cadotte

71. Maybe it looks like this?
Your
Demand
Your Price
Demand drops slowly with small price increases and then drops dramatically with larger price increases
Copyright 2002 by Ernest R. Cadotte

72. How will the market respond to competitor prices?
Your
Demand
Competitor’s Price
Low competitor prices
will kill your demand
Copyright 2002 by Ernest R. Cadotte

73. Low price How to Create Ads? Easy to use More productive
Order of priority tells the ad agency what to stress in the ad and implies importance of message to customer.
Low price
Easy to use
More productive
Fast
Office applications
Picture office workers
Your Ad
Most Important
Least Important
Copyright 2002 by Ernest R. Cadotte

74. Which response function is at work?
How much to say in an ad?
(Number of benefits?)
Which response function is at work?
More is good to a
point and then ceases
to add excitement
Hot
Cold
Less
More
More adds
value to a point
& then takes
away value
Copyright 2002 by Ernest R. Cadotte

75. How often do you advertise?
Your
Demand
Number of Ads
Diminishing
returns
Too little
Copyright 2002 by Ernest R. Cadotte

76. But it also depends on what your competitors do.
Demand
Competitor’s Advertising
Strong competitor advertising
will steal away your customers
Copyright 2002 by Ernest R. Cadotte

77. Copyright 2002 by Ernest R. Cadotte
How many sales people?
Your
Demand
Number of Sales People
Too many
Diminishing
returns
Too few
Copyright 2002 by Ernest R. Cadotte

78. The response function is dynamic!
Shift the response function upwards with better brands, prices, advertising, web tactics, sales force placement and compensation
Your
Demand
Number of Sales People
Copyright 2002 by Ernest R. Cadotte

79. Learning Points for Quarter 3
Execution of a coherent strategy
Management of cash in the face of great uncertainty
Learning to walk before you run
Copyright 2002 by Ernest R. Cadotte

80. Learning Points for Quarter 3
Marketing strategy - coordinating a host of tactics
Pricing - balancing costs, profit, what the market will bear, and competition
Testing the market - discovering the market’s many response functions
Production - managing capacity, inventories, and costs in light of demand goals
Copyright 2002 by Ernest R. Cadotte

81. Copyright 2002 by Ernest R. Cadotte