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FAIR SHARE ESTIMATES: 3-4 Rnds out: ROW #1

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S I M U L A T I O N M A R K E T I N G M G T. A Historical Consideration… RE: Projected Share LOW END: 0-1 product killed.. 0-1 repositioned or introduced TRADITIONAL: 3-6 repositioned from High…0-1 killed…1-2 introduced SIZE: 0-1 killed, 0-1 repositioned to Traditional, 1-2 introduced PERFORMANCE: 1-2 killed, 0-1 repositioned to Traditional, 0-1 introduced HIGH: 1-3 killed or repositioned to Traditional, 1-3 new products arrive in rounds 2 or 3

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S I M U L A T I O N M A R K E T I N G M G T. Round 3- Forecast Segment Competitive Density LOW END: 6 products=rivalry unchanged TRADITIONAL: 9 products, w/ 3 repositioned= increased competition SIZE: 7 products, w/ 2 new= increased competition PERFORMANCE: 4 products, w/ 1 new= reduced competition HIGH: 6 products, w/ 2 new= increased competition 6 9 7 4 6

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S I M U L A T I O N M A R K E T I N G M G T. -Given Round 3 Scenario- How should adjust your production capacities? Round 0- 1 st shift Capacity Round 3- Brand-Demand (FAIR-Share) Traditional18001063 Low End14002081 High End900668 Performance600823 Size600469

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1.Quick N’ Dirty 2. Consumer Pref’s 3. Best vs. Worst Case Projections

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2 Q’s: 1.What will the average product sell in the segment next round? ( = Fair-Share) 2.To what degree is your product above or below average- on consumers'’ buying criteria? ( = Earned-Share) Estimate Your EARNED SHARE:

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1 2 3 4 EARNED Share - Sales Forecast Look-up next round Industry Demand … Estimate # products that will be in segment. Divide total industry demand by the number of products= FAIR SHARE Your product’s EARNED demand can be ½ to 2X the average product’s demand… Compare your product with competing products. Factors include design, awareness, accessibility, and planned mid-year revisions. Examine industry capacities & capacities of the “best” products. Can products meet the demand they generate?

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1.Quick N’ Dirty 2. Consumer Pref’s 3. Best vs. Worst Case Projections

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Forecast off Customer Survey Scores

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Total=223 R#1 Dec Survey score % of 223Predicted sales R#2 Actual Sales R#2 Baker 43 19%1827 units 1758 units Able 40 18%1731 1598 Fast 36 16%1339 1560 Eat 36 16%1539 1492 Cake 42 19%1827 1339 Daze 26 12%1154 1045

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R#1 Survey score 43 40 36 42 26 R#2 12

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For Example-in Traditional segment everyone begins w/ 13% market share Opening rounds crucial- can establish competitive advantage (that can be sustained for many years- even thru-out entire sim.) Initial round demand can vary +/ - 25% Later rounds best case/worst case vary ~~~~ 10-15%

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After 1 st Year/Round- Can see demand spread R#1R#1 R#3R#3R#2R#2

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CA SE

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Worst Case: BIG INVENTORY - Little Ca$h Best Case : Lots of CA$H - Little Inventory

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Enter WORSE case = - (10- 12%) < Earned Share in “your sales forecast” on marketing spreadsheet Enter BEST case= + (10-12%) > Earned Share in “production schedule” on production spreadsheet Spread show up as inventory on proforma BALANCE SHEET

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$0.00 In WORSE CASE: You have lots of Inventory & little or no Cash. In WORSE CASE: You have lots of Inventory & little or no Cash. need to drive cash position to the black…

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If you are cash poor, issue Stock /Bonds - or consider a short term loan If you are cash rich, pay dividends and/or buy back stock. If you are cash poor, issue Stock /Bonds - or consider a short term loan If you are cash rich, pay dividends and/or buy back stock. To adjust your cash position --

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Important Considerations re: BEST-WORST Scenario Analyses By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL

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Important Considerations re: BEST-WORST Scenario Analyses By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs Fixed costs (marketing, R&D, interest or depreciation) already covered Thus, any additional sales would only incur variable ( production ) costs By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs Fixed costs (marketing, R&D, interest or depreciation) already covered Thus, any additional sales would only incur variable ( production ) costs

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For example: 1. If annual sales $120M, = $10M/mo. 2. If a months material & labor costs = $7M, you missed contributing $3M to Net Margin. 3. You’r taxed at ~35%, so your opportunity cost is ~$2M in profit.

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Worst Case: BIG INVENTORY / no cash – risk seeing Big Al Best case: Lots of CASH / no Inventory -you risk stockout How Big is your Slinky?

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Determining A Reasonable Spread Want to avoid generating an ultra Conservative Worst case scenario …matched w/ an ultra Optimistic Best case scenario Should be able to sell excess inventory in ~betw. 6 & 16 weeks

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Take your total inventory costs $23,900M Take your total inventory costs $23,900M How to measure your slinky slack--

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& Divide by total variable costs of inventory sold: $23,900M/$131,119M =.18 52weeks *.18 = 9 Risk ~9weeks of Inventory to avoid stockout & Divide by total variable costs of inventory sold: $23,900M/$131,119M =.18 52weeks *.18 = 9 Risk ~9weeks of Inventory to avoid stockout

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Tutorials: Forecasting Demonstration

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“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

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S I M U L A T I O N M A R K E T I N G M G T. Key Demand Consideration: Overall market growing @ ~ 14%/yr “Average” company should/could double - sales in 6 years Key Capacity Consideration:

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How effective will u b in building your Co’s asset base? At outset should be spending ~$10-25M / round on plant improvement By end should expand asset base to min $140M to $160M +

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NET PROFITS $$ Year 1 $6 million Year 2 $8 million Year 3 $10 million Year 4 $12 million Year 5 $16 million Year 6 $21 million Year 7 $27 million Year 8 $35 million NET PROFITS $$ Year 1 $6 million Year 2 $8 million Year 3 $10 million Year 4 $12 million Year 5 $16 million Year 6 $21 million Year 7 $27 million Year 8 $35 million Rounds 6,7,8 should be most profitable

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S I M U L A T I O N M A R K E T I N G M G T. Pay off Debt Invest in growth Buy-back stock Pay dividends Pay off Debt Invest in growth Buy-back stock Pay dividends Things you can do w/ your $$$: Which most often selected … but least preferable to do?

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S I M U L A T I O N M A R K E T I N G M G T. Reducing Leverage Says to stockholders— “ We can think of nothing better to do w/ $$ than save you interest payments ” –More debt eliminated the greater target you become for a takeover.. No reason not to maintain Co. Financial Structure that got you to position of high profitability…

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S I M U L A T I O N M A N A G E M E N T One more thing to think about What is the Relationship between My Strategy & Success Measures

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S I M U L A T I O N M A N A G E M E N T Cumulative Profits Ending Market Share ROS Asset Turnover ROA ROE Ending Stock Price Market Cap. Strategy Performance Measures- Defined Performance Measures-Dynamics Success Measures

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Diff Strategies Play into Different Success Measures ProfitMSSP & MCROE pf/e ROS pf/s AT s/a ROA pf/a BCL L=2-3 XXXX Cost- Niche & PLC XXX B-Diff L=1.5-2 XXXX Niche- PLCDiff XXXX Cost Strategy = higher leverage/more margin/ more assets/more debt/ less equity Differentiation Strategy =lower leverage/less investment/ less assets All Segments= more sales & thus enable greater Cum. profit & overall market share Focused Strategies should operate more efficiently & have overall less sales

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Select Success Measures & Determine Relative Weightings Need to enter weightings – prior to round-1 Select Success Measures & Determine Relative Weightings Need to enter weightings – prior to round-1

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