The Situation Analysis will help your company understand current market conditions and how the industry will evolve over the next eight years.

The analysis can be done as a group or you can assign parts to individuals and then report back to the rest of the company.

An online version of the Situation Analysis is available in the Getting Started area.

The exercises require two reports: The Industry Conditions Report and the Capstone Courier, which are available from the website’s Reports link. The Courier is also available from the Capstone Spreadsheet’s Reports menu bar.

The Courier available at the start of Round 1 displays the results for Round 0, when all companies are equal. If you access the report from the website, use the Round 0 Courier for the Situation Analysis.

The Situation Analysis has five parts:

• Perceptual Map
• Industry Demand Analysis
• Capacity Analysis
• Margin Analysis
• Consumer Report

7.1 Perceptual Map

The Research & Development Department can use the Perceptual Map exercise to plan revision and invention projects that meet customers’ shifting size and performance expectations. The Marketing Department can use the results during forecasting as they compare competing products and when determining prices (in general, better positioned products can command higher prices).

Each segment has a set of circles. The inner fine cut circles have a radius of 2.5 units. They represent the heart of the segments where demand is strong. In addition, each inner circle has an ideal spot, a location where demand is strongest. The larger outer rough cut circles have a radius of 4.0 units. They represent the outer fringe of the segments where demand is weak.

7.1.1 Segment Centers and Segment Drift

Tables 1 and 2 in the Industry Conditions Report display information about segment drift.

Table 1 shows the yearly drift rates for each segment. For example, assume the center of the Traditional segment ends Round 0 (the year before the start of the simulation) with a performance of 5.0 and a size of 15.0, and the yearly drift rate for performance is +0.7 (customers want better performing products) and for size is -0.7 (customers want smaller products). At the end of Round 1 the center of the Traditional segment will have a performance of 5.7 and a size of 14.3.

5.0 + 0.7 = 5.7 and 15.0 - 0.7 = 14.3

Table 2 displays the segment center locations at the end of each round.

Print the Perceptual Map Form in the Industry Conditions Report then use Table 2 to find the location of each segment center for Rounds 1 through 7. Mark the approximate locations on the form (see the example in Figure 7.1).

Remember, the locations in Table 2 are the centers of the segment circles, not product positions. Product positions are reported on page 4 of The Capstone Courier.

The locations in Industry Conditions Report Table 2 reflect the segment centers at the end of the round. Therefore, the Round 0 positions can be seen as the Round 1 starting positions, Round 2 positions can be seen as the Round 3 starting position, etc. Each month during the simulation year, the segment drifts 1/12th of the distance from the starting position to the ending position.

7.1.2 Ideal Spots

Customer positioning preferences are reported in the Segment Analysis pages of The Capstone Courier. Within each analysis, the Buying Criteria box displays the ideal performance and size as of December 31 of the previous year. The ideal position is also called the ideal spot. If all other criteria are equal, a customer will prefer a product that is located nearer the ideal spot over a product that is located farther from it.

Some segments place a higher level of importance on positioning than others.

Within each segment, the ideal spot is at a position relative to the center of the circle. Offsets are reported in Table 3 of the Industry Conditions Report. For example, because the High End segment wants cutting edge sensors, its ideal spot is ahead of the center. Suppose the High End center is at Performance 7.4 and Size 11.6. Ideally High End customers want more performance and smaller size. If Table 3 reports “High End. Performance +0.9 | Size -0.9”, then the ideal spot would be at:

Performance 7.4+0.9 = 9.3 and Size 11.6-0.9=10.7

Use Tables 2 and 3 to determine each segment’s ideal spot for Rounds 1 through 7. Enter the results in Form 1.

Form 1: Segment Ideal Spot Locations

Traditional Round Pfmn Size 0 1 2 3 4 5 6 7 8	Low End Round Pfmn Size 0 1 2 3 4 5 6 7 8	High End Round Pfmn Size 0 1 2 3 4 5 6 7 8
Performance Round Pfmn Size 0 1 2 3 4 5 6 7 8	Size Round Pfmn Size 0 1 2 3 4 5 6 7 8

On the Perceptual Map Form, mark the Round 8 ideal spot for each segment.

7.2 Industry Demand Analysis

The Industry Demand Analysis will help the Marketing and Production Departments understand future demand. Marketing can use the total demand for each segment as it creates forecasts (see 8 Forecasting). Production can use the results when making capacity buy and sell decisions.

You will need the Segment Analysis reports (pages 5 - 9) of The Capstone Courier for Round 0 and the Industry Conditions Report.

At the top of each Segment Analysis page you will find a box called Statistics. On Form 2, copy the Total Industry Unit Demand number for each segment into the Demand cell for Round 0. Next, copy the Next Year’s Growth Rate, which is also in the Statistics box, into the Rate cell.

Multiply the Round 0 demand by the growth rate and add the result to the Round 0 demand. This will give you a close approximation of Round 1 demand. Copy this number into the Demand cell for Round 1.

If you prefer, you can use the following shortcut. For example, assume the Traditional growth rate is 9.2%. Convert the percentage to a decimal:

Traditional Segment Growth Rate = 9.2% = 0.092

Add 1 to the decimal:

1 + 0.092 = 1.092

Multiply the Round 0 Traditional demand by 1.092. This will give you a close approximation of Total Industry Demand for Round 1.

Remember, the demand numbers are in thousands! For example, if the Round 0 Total Industry Unit Demand for the Traditional segment reads 7,387, the Traditional Segment demanded 7,387,000 units.

While you can calculate the demand for Round 1 from the information on hand, future growth rates are unknown. Can you predict the market size for Rounds 2 to 8? No. On the other hand, you need something for planning purposes to address critical questions like, “How much production capacity will we need in the future?” “How much money do we need to raise?” “Which segments are most attractive for investment?”

Planners address this type of issue with scenarios. Typically there are three– worst case, average case, and best case. The average case assumes that the current growth continues into the future indefinitely. Worst case assumes a lower growth rate. Best case a higher growth rate. The truth will unfold as the simulation progresses. Next year’s growth rate is published in the Courier on each Segment Page in the Statistics box.

For your purposes, complete Form 2 with the “average” scenario. Assume the Round 1 growth rates will continue into the future unchanged. This will give you some idea for potential market size. If you have time, try a worst case and best case scenario. For worst case assume, say, half the growth rate. For best case assume, say, 1.5 times the growth rate. (Consider developing a simple spreadsheet for this purpose.)

Form 2: Demand Analysis

Traditional Round Dmnd Rate 0 1 2 3 4 5 6 7 8	Low End Round Dmnd Rate 0 1 2 3 4 5 6 7 8	High End Round Dmnd Rate 0 1 2 3 4 5 6 7 8
Performance Round Dmnd Rate 0 1 2 3 4 5 6 7 8	Size Round Dmnd Rate 0 1 2 3 4 5 6 7 8

7.3 Capacity Analysis

The Industry Demand Analysis indicates the sensor market is growing. The Capacity Analysis will help the Production and Finance Departments anticipate the cost of adding capacity and automation.

Enter the name of your company's product for each segment in the Product Name column of Form 3. You will find this information in the Production Analysis, page 4 of The Capstone Courier for Round 0. The names of your products start with the first letter of your company's name. If you are not yet assigned to a company, use the Andrews Company information.

Next, find each product's First Shift Capacity in the Capacity Next Round column of the Production Analysis. This number (in thousands) indicates the amount of sensors that can be built over the course of a year using a single, eight-hour shift. In Form 3, enter the Capacity Next Round into the column under First Shift Capacity, Company.

Multiply the First Shift Capacity, Company by the number of active companies in your simulation (page 1 of the Courier displays each company name). This indicates the amount of sensors that can be built for the segment by the entire industry using a single shift over the course of a year. Place the result in the First Shift Capacity, Industry column.

Production schedules that exceed the First Shift Capacity require hiring a second shift. Multiply the First Shift Capacity, Company by 2 and place the result in the First & Second Shift, Company column.

Multiply the First Shift Capacity, Industry by 2 and place the result in the First & Second Shift, Industry column.

Copy the value for Automation Next Round from the Production Analysis into the Automation Level column.

Use the formulas below to calculate the Cost to Double Capacity and the Cost to Raise Automation to 10.0.

Cost to Double Capacity = First Shift Capacity x [$6 + ($4 x Automation Level)]

Cost to Increase Automation to 10.0 = First Shift Capacity x [$4 x (10 - Automation Level)]

Form 3: Capacity Analysis

Segment	Product Name	First Shift Capacity		First & Second Shift Capacity		Automation Level	Cost to Double Capacity	Cost to Raise Automation to 10.0
		Company	Industry	Company	Industry
Traditional		1,800		3,600		4.0	$39,600,000	$43,200,000
Low End
High End
Performance
Size

7.4 Margin Analysis

Healthy margins, the difference between a product's manufacturing cost and its price, are critical to company success. The Margin Analysis will help the Research & Development Department understand the cost of material, and the Production Department understand the effect automation has on labor costs. It will also demonstrate to the Marketing Department the importance of adequate pricing, and to the Finance Department the upper limits of profitability.

Enter the name of your company's product for each segment in the Product Name column in the top part of Form 4. You will find this information in the Production Analysis, page 4 of The Capstone Courier for Round 0. The names of your products start with the first letter of your company's name. If you are not yet assigned to a company use the Andrews Company information.

Next, enter each product's price, material cost, labor cost, and note whether or not (Y/N) a second shift was used.

Calculate the Contribution Margin (assume there is no inventory and therefore no Inventory Carrying cost):

Contribution Margin Price - (Material Cost + Labor Cost)

Calculate the Margin Percentage:

Margin Percentage = Contribution Margin / Price

Enter these results into the top part of Form 4.

7.4.1 Margin Potential

Use the bottom part of Form 4 to determine the margin potential. Go to the Buying Criteria on the Segment Analysis pages of The Capstone Courier for Round 0 to find the maximum permitted price and the minimum acceptable Mean Time Between Failure (MTBF) for each segment (lowering the MTBF decreases material cost). Determine the minimum Material Cost per segment using the following equation (see Table 7.5 for an example):

Minimum Material Cost = ($0.0003 x Minimum Acceptable MTBF) +Trailing Edge Positioning Cost in Table 7.4

Determine the minimum Labor Cost for each segment. Assume a base labor cost of $11.20 ($11.20 is a rough estimate of the labor cost. It is used solely to illustrate the Margin Potential concept):

Minimum Labor Cost = [$11.20 - (1.12 x Automation Ratings below)] + 1.12
Traditional Automation:	7.0
Low End Automation:	10.0
High End Automation	5.0
Performance Automation:	6.0
Size Automation:	6.0

Find the Contribution Margin dollars and Contribution Margin percent:

Contribution Margin = Price - (Material Cost + Labor Cost)

Margin Percentage = Contribution Margin / Price

Table 7.1 Material Positioning Component Costs: These costs are for the beginning of Round 1. They are used solely to illustrate the Margin Potential concept.

	Trailing Edge	Leading Edge
Traditional	$3.80	$7.80
Low End	$1.00	$5.00
High End	$6.00	$10.00
Performance	$4.50	$7.50
Size	$4.50	$7.50

The Trailing Edge Positioning Cost indicates the cost of material for products placed in the upper-left quadrant of the fine cut circle, where products are larger in size and slower in performance. Consequently, the material cost is less than for products at the Leading Edge (the lower-right quadrant), where size is smaller and performance is faster. These costs drift with the circle.

Table 7.2 Minimum Material Costs for the Traditional Segment: Assumes the Traditional minimum reliability is 14,000. Use the Traditional Segment Analysis to determine the exact value.

Minimum Reliability Component Cost	$0.0003 x 14,000 = $4.20
Trailing Edge Positioning Component Cost	$3.80
Total	$7.00

Form 4: Margin Analysis

Product Name	Price	Material Cost	Labor Cost	Second Shift (Y/N)	Contribution Margin $ %
Traditional				N
Low End				Y
High End				N
Performance				N
Size				N
Margin Potential	Maximum Price	Minimum Material	Minimum Labor		Contribution Margin $ %
Traditional	$30.00	$7.00	$3.36	N	$17.64	62%
Low End				N
High End				N
Performance				N
Size				N

7.5 Consumer Report

The Consumer Report will help the Research & Development Department understand the need to design quality products and the Marketing Department the importance of adequate pricing, sales budget and promotion budget decisions.

You will need the Buying Criteria from the Segment Analysis pages and the Production Analysis in the Round 0 Courier. You will need the Segment Analysis reports (pages 5 - 9) of The Capstone Courier for Round 0 and the Industry Conditions Report. If you are not yet assigned to a company, use the Andrews Company information.

Enter your ratings to the categories below in Form 5.

Price: Award an A if your product's price is in the bottom third of the expected price range, B if it is in the middle third and C if it is in the top third. You can find the price in the Production Analysis.

Reliability: Award an A if the MTBF specification is in the top third of the range, B if it is in the middle third and C if it is in the bottom third.

Age: Award an A if the age on December 31 is within 0.5 years of the ideal age, B if the age is 0.6 to 1 year and C if the age is beyond 1 year.

Positioning: Award a Good if your product is within 0.5 units of the segment's ideal spot, B if it is 0.6 to 1.5 units away and C if it is beyond 1.5 units.

Awareness: Award an A if your product's awareness exceeds 80%, B if it is 50% to 80% and C if it is below 50%.

Accessibility: Award an A if your product's accessibility exceeds 80%, B if it is 50% to 80% and C if it is below 50%.

In the Overall row, give your product an A only if the top two attributes in the Buying Criteria were rated A, and if the awareness and accessibility were rated at least a B. Give your product a B if the top two attributes were at least a B and awareness and accessibility were at least a B. Otherwise, give your product a C.

Form 5: Consumer Report

Traditional		Low End		High End		Performance		Size
Price	C	Price	B	Price	C	Price	C	Price	C
Reliability		Reliability		Reliability		Reliability		Reliability
Age		Age		Age		Age		Age
Positioning		Positioning		Positioning		Positioning		Positioning
Awareness		Awareness		Awareness		Awareness		Awareness
Accessibility		Accessibility		Accessibility		Accessibility		Accessibility
Overall		Overall		Overall		Overall		Overall