1. S I M U L A T I O N M A N A G E M E N T Management Simulation Week3 Getting it together

2. 3 Levels of Strategy In what business do we compete? Corporate-Level : In what business do we compete? Corporation How do we compete? Business-Level : How do we compete? Sensors Unit Nano-Tech Unit Cons.Elec. Unit How do we coordinate? Functional-Level : How do we coordinate? Finance HR / R&D ProductionMarketing

3. Level 3- Functional Strategy How do we coordinate?

4. Marketing Coordinates w/: R&D when products are launched or repositioned Production in its unit sales & margins forecast Finance w/ overall sales projections & the budget R&D when products are launched or repositioned Production in its unit sales & margins forecast Finance w/ overall sales projections & the budget

5. Marketing when products are repositioned or introduced Production when products are launched or material costs change Finance over budget. Marketing when products are repositioned or introduced Production when products are launched or material costs change Finance over budget. R&D coordinates w/:

6. Production coordinates w/: R&D about new product introduction & material costs Marketing about demand, scheduling, and inventory Finance about plant and equipment changes, inventory levels, & margins HR about levels of personnel training & support R&D about new product introduction & material costs Marketing about demand, scheduling, and inventory Finance about plant and equipment changes, inventory levels, & margins HR about levels of personnel training & support

7. Finance coordinates w/: R&D over budgets & product introductions Marketing about sales projections, margins & budgets Production about margins, plant & equipment changes & inventory levels R&D over budgets & product introductions Marketing about sales projections, margins & budgets Production about margins, plant & equipment changes & inventory levels

8. Management Simulation Week3 Strategic Alignment & Functional Integration

9. What makes a decision strategic? Multi-functional in scope & consequences Requires choice & trade-offs, integration & alignment R&D Prdtn Mrktg

10. In order to execute & achieve selected growth & competitive strategies--Need to coordinate decisions across all Functional domains Marketing Production Finance R&D HR

11. Getting In-Sync w/ Functional Planning The goal of functional planning is to achieve a state of Internal Strategic Alignment MARKETING PRODUCTION FINANC E

12. INTERNAL STRATEGIC ALIGNMENT MARKETING PRODUCTION FINANC E Achieved when : All Decisions made by & within all functional areas are in sync w/ one another, As well as with the overall strategic direction of the firm Achieved when : All Decisions made by & within all functional areas are in sync w/ one another, As well as with the overall strategic direction of the firm

13. Functional Planning Matrices Examples of: internal strategic alignment

14. Functional Alignment: In Achieving Cost Efficiency

15. Functional Alignment: Implementing Differentiation Strategy

16. Functional Alignment: In Achieving Superior Innovation

17. Functional Alignment: Superior Customer Rlshps

18. When all decisions made by & within all functional areas are in sync w/ one another, As well as w/ your overall strategic direction -- you achieve… When all decisions made by & within all functional areas are in sync w/ one another, As well as w/ your overall strategic direction -- you achieve… Distinctive Competencies Distinctive Competencies

19. Competitive Advantage* Distinctive Competencies *Achieved when you sustain profits above Industry Average Distinct competencies needed to achieve selected competitive strategy

20. Areas in which you can develop “Distinct Competencies” MARKETING: Awareness & Accessibility R&D: Product innovation & design PRODUCTION: Plant Automation & utilization Human Resources: Worker Expertise & Training MARKETING: Awareness & Accessibility R&D: Product innovation & design PRODUCTION: Plant Automation & utilization Human Resources: Worker Expertise & Training

21. Distinct Competencies Competencies in automation & human resources could lead to a competitive advantage in cost leadership.

22. Achieving Competitive Advantage thru Cost-Focused Strategy Allows for good profit margins on sales while keeping prices low especially in price-sensitive segments… Functional Alignment Production Automation - pursued early & aggressively Capacity improvements unlikely (may run overtime instead) Marketing Spend moderately on promotion & sales R&D Spend minimally on R&D

23. Distinct Competencies Competencies in awareness, accessibility & design could lead to a competitive advantage built upon differentiation

24. Differentiator Seeks to create maximum awareness & brand equity. Wants to be well known as a maker of high quality/highly desirable products Seeks to create maximum awareness & brand equity. Wants to be well known as a maker of high quality/highly desirable products Production Less likely to invest in increased automation or production capacity Marketing Spend heavy on advertising & sales to create maximum awareness & accessibility Prices tend to be higher R&D High R&D spending - keep products fresh Functional Alignment

25. Virtually all tactical mistakes that are made when implementing strategy are a consequence of the lack of synchronization of decisions made in at least two functional areas

26. R&D and Production breakdown You develop a new product but forget to buy plant & equipment for it…the year before it is to be launched…

27. Marketing, Production & Finance out of sync The company takes an emergency loan because inventory levels increase…

28. Marketing, R&D, and Production out of sync You reposition a product from the High End to the Traditional segment, but do not address their material & labor costs…

29. Everybody is out of sync! Financial decisions are made before knowing the budget demands of all R&D, Marketing and Production decisions…

30. TODAY’S Begin drafting “functional alignment” strategic & tactical decisions matrices

31. Need to begin to determine the basic objectives & specific tactical decisions that need to be made within & across each management domain …in order to successfully implement your growth & competitive strategies

32. Functional alignment- decisions matrix Competitive Strategy :______ Strategic Objectives Brand Rnd1 Tactics Rnd2 Marketing 1 2 3 4 1 2 3 4 R&D 1 2 3 4 1 2 3 4 Production 1 2 3 4 1 2 3 4 HR Finance

33. EXAMPLE: Functional alignment- decisions matrix BRAND:_new Competitive Strategy : Niche Differentiation Strategic Objectives Tactics Rnd1 Tactics Rnd2 Marketing R&D Production HR Finance

34. Competitive Strategy:ND Strategic Objectives Marketing Spend aggressively in promotion & sales in Hitech segments…. make our products easy for customers to find... price at a premium. In the low tech segments we”ll exit gracefully, … as they exit the Low End R&D We will keep our existing HiTech products (HI, PRF, & SIZE), phase out TRAD and LO, and introduce a new brand in the High End segment. Our goal is to offer technology oriented customers products that match their ideal criteria for positioning, age, and reliability Production Grow capacity to meet demand … avoid overtime After products well positioned, investigate modest increases in automation levels to improve margins, but keep ability to reposition products HR Spend aggressively on recruitment, training; minimize labor T/O w/ +wage & benefit packages; Focus TQM & Process initiatives on reducing labor & material costs, R&D time and enhancing effectiveness of promo & sales budgets… Finance We”ll finance investments primarily thru stock issues, retained earnings, supplement w/ bond offerings as needed.. When our cash position allows- issue dividends & retire stock.-We are adverse to debt & prefer to avoid interest payments. We’ll keep assets/equity (leverage) betw. 1.5 - 2.0. We measure performance w/ ROS, Asset T/O,& ROA.

35. EXAMPLE: Functional alignment- decisions matrix Competitive Strategy : Niche Differentiation Strategic Objectives Tactics Rnd1 Tactics Rnd2 Marketing R&D Production HR Finance

36. Competitive Strategy:ND Tactics Year 1 Marketing TRAD – increase price, make modest cuts in promotion and sales budget. Forecast a modest reduction in unit sales compared to last year. Example: price $28.50, promotion budget $600, sales budget $600, and sales forecast 1000. LO – increase price, make modest cuts in promotion and sales budget. Forecast a modest reduction in unit sales compared to last year. Example: $23.50, promotion budget $600, sales $800, and sales forecast 1400. HI – increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $39.50, promotion budget $1900, sales $1900, sales forecast 400. PRF – increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $34.50, promotion budget $1900, sales $1900, sales forecast 440. SIZ –increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $34.50, promotion budget $1700, sales $1700, sales forecast 390. New HI – no action required because the product will not emerge from R&D until next year.

37. Competitive Strategy:ND Tactics Year 1 R&D TRAD – tweak positioning to reduce age. Reduce reliability to reduce material cost. Example: Increase Performance by 0.1 and reduce MTBF by 1000 hours. LO – leave positioning alone, allowing the product to age further. Reduce reliability to reduce material cost. Example: reduce MTBF by 1000 hours.. HI – improve positioning and reduce age. Hold reliability (MTBF) steady. Example: reduce Size by 1.2, and increase Performance by 1.2. PRF – improve positioning and reduce age. Improve reliability to enhance demand. Example: Increase Performance by 1.4, reduce Size by 0.5, and increase MTBF by 1000 hours. SIZE – improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Reduce Size by 1.4, and increase Performance by 0.5. New HI – Launch a new High End product, with a project length of 20 to 23 months (no later than December of next year.) Example: positioned at leading edge of High End segment, -- Performance 10.2, Size 9.8. Set MTBF in the middle of the High End reliability range: MTBF 23,000.

38. TACTICS -Example: decision matrix- to add a new High End product… R&D What= A New product- Size coordinate = 10. Performance coordinate = 11. MTBF = 25,000 hours. When Due out in 2007 MARKETING Competitively Price @ $35. Target 68% Awareness (50% @intro +18% will cost=$2M promo budget- allocate web, email & Trade Shows) maintain hi- level Distribution w/ Sales budget = $1.4M…w/ appropo allocations- When 2007. PRODUCTION What Produce 75,000 units at automation level of 3. When Ready by second month of 2007. How Purchase capacity in 2006. HR What Investments in Concurrent Engineering & Quality Deployment- to reduce R&D Times When & How Much $2M-2005; $1.5M-2006;$1M-2007 FINANCE What Finance $11M. When NOW. How Issue long term debt.

39. Competitive Strategy:ND Tactics Year 1 Production For each product, schedule production w/ formula: (UnitSalesForecast X 112%) – InventoryOnHand. – sell 100 to 300 units of capacity of Hi end prdt-, and given our new Hi end product it is unlikely we”ll need 900 units of capacity in the future. Make no other plant improvements to capacity or automation UNTIL YEAR 2- WHEN New High End product DEVLOPMENT COMPLETE – buy 600 units of capacity at automation level 5.0.

40. Competitive Strategy:ND Tactics Year 1 HR Invest $1.5 million per selected – critical TQM ( Quality Function Deployment; CCE ) & Process Initiatives (CPI,JIT,QIT, Channel Support & Concurrent Engineering) Finance On proforma Balance Sheet-- add together Cash and Inventory accounts. -- Keep between 15% and 20% of balance sheet assets in Cash plus Inventory. Drive Cash position until it roughly equals your Inventory position. …. If you are cash poor, issue additional stock to cover the investment in new capacity. If you are cash rich, pay dividends. AVOID Short Term Debt.

41. Tonight’s Begin drafting “functionally aligned” strategic & tactical decisions matrices Competitive Strategy Strategic Objectives Brand Rnd1 Tactics Rnd2 Marketing 1 2 3 4 1 2 3 4 R&D 1 2 3 4 1 2 3 4 Production 1 2 3 4 1 2 3 4 HR Finance