S I M U L A T I O N

M A N A G E M E N T

Performance Mgt & Assessment

Performance Mgt & Assessment

S I M U L A T I O N

M A N A G E M E N T The Big Picture

•CCompanyompany

•CConsumersonsumers

•CCompetitorsompetitors

•CConditionsonditions• PESTPEST

GrowthGrowth &&

Competitive Competitive StrategiesStrategies

Finance

HR

Production

R&D

Marketing

FunctionFunctional al IntegratiIntegrationon

Profits Mrkt Share ROA ROS ROE Asset T/O Stock Mrkt Cap

Situation/SWOT Situation/SWOT AnalysisAnalysis

Strategic Strategic PlanningPlanning

Functional Functional IntegrationIntegration

Performance Performance AssessmentAssessment

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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.

Success Measures

Performance Measures- Defined Performance Measures-Dynamics

NET PROFITS $$NET PROFITS $$

•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 $$NET PROFITS $$

•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

CUM PROFITCUM PROFIT Typical Range: $20

to $100 M

CUM PROFITCUM PROFIT Typical Range: $20

to $100 M

S I M U L A T I O N

M A N A G E M E N T It is important to look at the means used to achieve

outcomes …. not just focus on the outcomes themselves

• To only focus on traditional financial accounting measures (such as

ROI, ROE, EPS) …..does not give mgt the whole picture….

S I M U L A T I O N

M A N A G E M E N TPerformance needs to be judged thru mix of both financial & non-financial measures….

As - nonnon--financialfinancial measures are driversdrivers of financial outcomes

Performance needs to be judged thru mix of both financial & non-financial measures….

As - nonnon--financialfinancial measures are driversdrivers of financial outcomes

Will Make $$$ - if sell product

Will sell product if consumer wants, knows about , can get, &

LIKES product

To achieve “above’ everyone must effectively do their job

To effectively do job must know what to do

S I M U L A T I O N

M A N A G E M E N T

Strategic Thinking- the ten big ideas - the ten big ideas Strategic Thinking- the ten big ideas - the ten big ideas

9 9. Metrics that matter

Balanced score card- a system that attempts to balance financial performance w/ consideration of customer's perspective, learning & growth perspective, & internal business process perspective

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Balanced ScorecardPuts Mission- Vision-

Values & Strategy At Top

of Assessment System

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What is measured gets noticed

What is noticed gets acted on

What is acted on

gets improved

Today …

~ 70% of Fortune 1,000 companies utilize a Balanced Balanced ScorecardScorecard to help manage performance—

because…..

Today …

~ 70% of Fortune 1,000 companies utilize a Balanced Balanced ScorecardScorecard to help manage performance—

because…..

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For Each Perspective:

FinancialObjectives Measures Targets Initiatives Responsibility Budget1.2.3.

Customer… Business processes… LearningObjectives Measures Targets Initiatives Responsibility Budget1.2.3.

FinancialObjectives Measures Targets Initiatives Responsibility Budget1.2.3.

Customer… Business processes… LearningObjectives Measures Targets Initiatives Responsibility Budget1.2.3.

S I M U L A T I O N

M A N A G E M E N T

Basic Scorecard Terminology(Southwest Airlines Example)

Objectives

• Fast ground turnaround

Objectives:What the

strategy is trying to achieve

Targets

• 30 Minutes• 90%

TargetsThe level of

performance or rate of

improvement needed

• Cycle time optimization

InitiativesKey action programs

required to achieve targets

InitiativesMeasures

• On Ground Time

• On-Time Departure

MeasuresHow

performance is measured

against objectives

Strategic Theme: Operating Efficiency

Profits and RONAFinancial

Learning

Ground crew alignment

Lowest prices

Fewer planes

Customer

Internal

Fast ground turnaround

Strategy Map

On-time Service

Attract & Retain More Customers

Grow Revenues

S I M U L A T I O N

M A N A G E M E N T

• % Ground crew trained

• % Ground crew stockholders

A Complete Scorecard is a Program for Action

Objectives Measures

• # Customers• FAA On Time

Arrival Rating• Market Survey

• On Ground Time

• On-Time Departure

Strategic Theme:Operating Efficiency

Initiatives

• Cycle time optimization

• Ground crew training

• ESOP

•Customer loyalty program• Quality management

Targets

•30% +/yr

•20%

•5% • 12% growth• Ranked #1• Ranked #1

• 30 Minutes• 90%

• yr. 1 70%yr. 3 90%yr. 5 100%

• Profitability

• Grow Revenues

• Fewer planes

• More Customers

• Flight is on -time

• Lowest prices

• Fast ground turnaround

• Ground crew alignment

Strategic Theme:

Operations ExcellenceProfits and

RONAFinancial

Learning

Ground crew alignment

Fewer planes

Customer

Internal

Fast ground turnaround

Attract & Retain More Customers

Grow Revenues

Lowest prices

On-time Service

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Capstone's Balanced Scorecard Manager's Guide: Balanced Scorecard

Capstone's Balanced Scorecard Manager's Guide: Balanced Scorecard

S I M U L A T I O N

M A N A G E M E N T Additional Tools/Techniques for Managing & Assessing Your Performance:

1.Accurate Sales Forecasting

2.Marketing-Evaluation Checklist

3.Round Analysis & Analyst Report

•Tutorials: Forecasting & Developing a Unit Sales Forecast• Guidelines Re: Sales Forecasting

You’ll be left w/less revenue than

anticipated PLUS production &

inventory carrying costs that must be

paid..

IF You Produce a crappy product &/or Your Competitors produce a

better product &/or You produce too much product

Then

You’re left w/less revenue than anticipated and did not plan & allocate enough cash to cover your production & inventory carrying costs....

IF

Then

Big Al arrives -- pays your bills, and leaves you with a loan & a stiff interest payment

•Maintain Adequate working

capital & cash reserves

In order to:

In order to:

•Have realistic/ accurate sales forecasts

•Avoid “Big AL” & a Liquidity Crisis-

Need to:Need to:

Sales Forecasting

1. Quick N’ Dirty

2. Consumer Pref’s

3. Best / Worst Case

Estimate Your FAIR SHARE

Answer 2 Q’s:

1.What will average product sell in this segment next round?

2.To what degree is your product above or below average- on consumers'’ buying criteria?

1

2

3

4

Fair Share - Sales Forecast Fair Share - Sales Forecast Determine industry demand next round. Take last year’s total demand -- multiply by (1 + Growth

Rate).

Estimate # products that will be in segment. Divide total industry demand by the number of products. Your product’s demand will typically be between one half and twice the average product’s demand.

Compare your product with competing products.

Factors include design, awareness, accessibility, and planned mid-year revisions.

Examine industry capacities, and the capacities of the “best” products.Can products meet the demand they generate?

#2 Forecast by Consumer Pref’s

Forecast off Customer Survey Scores

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%

After 1st Year/Round-Can see demand spread

Total=223

R#1 Dec Survey score

% of 223 Predicted 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

R#1 Survey score

43

40

36

36

42

26

R#2

12

CASE

CASE

Worst Case:BIG INVENTORY/

little cash Best case:

Lots of CASH / little Inventory

•Enter WORSE case- in “your sales forecast” on marketing spreadsheet

•Enter BEST case- in “production schedule” on production spreadsheet

•Spread show up as inventory on proforma BALANCE SHEET

$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.

$0.00

In WORSE CASE: You have lots of Inventory

& thus need to drive your cash position to the black…

In WORSE CASE: You have lots of Inventory

& thus need to drive your cash position to the black…

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 --

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

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

For example, 1. If your annual sales

were $120M, in one month you’d sell $10M.

2. If a months material & labor costs = $7M, you missed contributing $3M to Net Margin.

3. This would be taxed in the simulation at 35%, so your opportunity cost is a missed $2M in profit.

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?

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 Any less -- risk a visit from Big Al Any more –- would require major screw-up from

competition

Take your total inventory costs

$23,900M

Take your total inventory costs

$23,900M

How to measure your slinky slack--

& 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

Additional Tools/Techniques for Managing & Assessing Your Performance:

1.Accurate Sales Forecasting

2.Marketing-Evaluation Checklist

3.Round Analysis & Analyst Report

S I M U L A T I O N

M A N A G E M E N T

Evaluating Product Success

S I M U L A T I O N

M A N A G E M E N T

Simulation Scoring System

S I M U L A T I O N

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Round analysis-example

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The Relationship between Your

Strategy & Success Measures

One more thing to think about:

Diff Strategies Play into Different Success Measures

Profit MS SP & MC ROE

pf/e

ROS

pf/s

AT

s/a

ROA

pf/a

BCL

L=2-3X X X X

Cost- Niche & PLC X X X

B-Diff L=1.5-2

X X X X

Niche-PLCDiff

X X X X

Cost Strategy = higher leverage/more

investment/ more assets/more debt/ le

ss

equity

Cost Strategy = higher leverage/more

investment/ more assets/more debt/ le

ss

equity

Differentiation Strategy =lower

leverage/less investment/ less assets

Differentiation Strategy =lower

leverage/less investment/ less assets All Segments= more sales & thus enable

greater Cum. profit & overall market share

All Segments= more sales & thus enable greater Cum. profit & overall market share

Focused

Strategies should

operate more

effectively &

have overall less

sales

Focused

Strategies should

operate more

effectively &

have overall less

sales

M A R K E T I N G

M A N A G E M E N T

• 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

1) Draft- Financial Objectives & Tactics

2) Draft- Mission & Vision Statements

This week’s assignment: