13.2 Differentiation Strategy with a Product Lifecycle Focus
This practice exercise will help you understand the relationships between business strategy, tactics, functional alignment, and the Foundation® simulation. We will use the Baldwin Company for this example. (During the practice rounds, each company is assigned a different strategy.)
Printable PDF Version for Distribution to Participants
You will execute your plan by inputting the decisions described below. At the same time, your competitors will execute their assigned plans. The practice exercise will take three rounds As each round is processed, you will evaluate the results and then input the next round's assigned decisions.
Upon completion of the practice rounds, the simulation will be reset to the beginning. You can then create and implement your own strategic plan for the actual competition.
We will adopt a Differentiation Strategy with a Product Lifecycle Focus. We will gain a competitive advantage by distinguishing our products with an excellent design, high awareness, easy accessibility, and new products. We will develop an R&D competency that keeps our designs fresh and exciting. We will price above average. We will expand capacity as we generate higher demand.
Premium products for mainstream customers: The company brands withstand the tests of time. Our primary stakeholders are customers, stockholders, management, and employees.
We will allow our present product to become a Low Tech product as the segments drift - eventually phasing it out as it becomes totally obsolete. We will introduce a new product to the High Tech segment every other year, and will ultimately have a High Tech product, a transitional product, and a Low Tech Product.
We will spend aggressively in promotion and sales. We want every customer to know about our superb designs, and we want to make our products easy for customers to find. We will price at a premium.
We will grow capacity to meet the demand that we generate, avoiding overtime when possible. After our products are well positioned, we will investigate moderate increases in automation levels to improve margins, but never at the expense of our ability to reposition products and keep up with segments as they move across the perceptual map.
We will finance our investments primarily through stock issues and retained earnings, supplementing with bond offerings on an as needed basis. When our cash position allows, we will establish a dividend policy and begin to retire stock. We are somewhat adverse to debt, and prefer to avoid interest payments. We expect to keep assets/equity (Leverage ) between 1.5 and 2.0.
Follow the decisions below. After the practice rounds are complete and the competition rounds begin, you are free to choose a different strategy; you are not obligated to continue as a Product Lifecycle Differentiator.
Baker - Slightly reduce reliability (MTBF) to reduce material cost. Example: Reduce MTBF to 20000.
First New Product - Launch a new High Tech product, with a project length less than 2 years (no later than December of next year). Example: Name: Bold (replace the first NA in the list), performance 8.4, size 12.0 and a reliability (MTBF) 23000.
Important: Under the rules of the simulation, the names of all new products must have the same first letter as the name of the company.
Important: Make certain the Baker project completes during this year, before December 31st. Under the rules, a new project can only begin on January 1st. If a project does not complete before the end of this year, you cannot begin follow-up project next year.
Perceptual Map from the Research & Development Spreadsheet: Product names in black indicate the product's current location, names in magenta indicate the product's revised position (with slight revisions, the names will overlap). Names of newly invented products appear in magenta.
Baker - Make moderate price increase and generous increases to promotion and sales budgets. Expect slightly higher sales over last year due to the increase in Marketing budgets. Example: Price $35.00, promotion budget $2000, sales budget $2000. Forecast sales of 1300 units.
First New Product - No change required because the product will not emerge from R&D until next year.
Production schedules will plan for eight weeks of inventory. That is, have enough inventory on hand to meet demand eight weeks beyond the sales forecast. This requires a 15% inventory cushion (8/52 = 0.15). For example, suppose Marketing forecasts demand at 1000, and you have 100 units in inventory. You want 1000 x 115% = 1150 available for sale. Since you have 100 on hand, you would schedule 1050 for production.
If you cannot meet demand, sales go to competitors. Therefore, you want to plan for the upside as well as the downside. Your proforma balance sheet will forecast about eight weeks of inventory. You hope that your actual sales will fall between your sales forecast and the number of units available for sale.
Schedule production for your existing product using this formula:
(Unit Sales Forecast X 1.15) - Inventory On Hand.
First New Product - Buy 300,000 units of capacity by entering 300 in the Buy Sell Capacity cell. Set an automation level of 4.0.
Important: There is a one year lag between purchase and use of new capacity and automation for both new and existing products.
Your fiscal policies should maintain adequate working capital reserves to avoid a liquidity crisis. Working capital can be thought of as the money that you need to operate day-to-day. In Foundation® working capital is current assets (cash + accounts receivable + inventory) - current liabilities (accounts payable + current debt). If you run out of cash because your sales are unexpectedly weak, an Emergency Loan will be issued.
Here are some guidelines to help you avoid an Emergency Loan . Your proforma balance sheet predicts your financial condition at the end of this year. Make conservative sales forecasts. Do not rely on the computer prediction. Override it with a forecast of your own. If you are conservative, it is unlikely that your worst expectations will be exceeded. Next, build additional inventory beyond your conservative expectations. This forces your proforma balance sheet to predict a future where your sales forecast comes true and you are left with inventory. (If you sell the inventory, that's wonderful.) On the Finance spreadsheet, issue stock, bonds or current debt until the December 31 Cash Position for the upcoming year equals at least five percent of your assets, as displayed on the proforma balance sheet. This creates an additional reserve for those times when your worst expectations are exceeded and disaster strikes.
As you gain experience with managing your working capital, you will observe that the guidelines above make you somewhat "liquid," and you may wish to tighten your policy by reducing cash and inventory projections. That is fine. The better your marketing forecasts, the less working capital you will require.
Issue a long-term bond to cover your investment in the new factory for Bold. If you do not have sufficient new bond debt capacity, issue stock to cover the shortfall.
Since we are taking on debt to invest in a new factory, do not pay a dividend.
Save decisions (select "directly to the website").
Baker - Reduce size to improve positioning and cut age. Example: Decrease size to 13.3.
First New Product - Note that the new product's row is yellow instead of green, and that you cannot change these cells. This is because your product will not emerge from R&D until its current project completes. Under the rules of the simulation, new R&D projects cannot begin until the old one completes.
Baker - Hold price, promotion and sales budgets at current levels. Slightly increase the sales forecast. Example: Price $35.00, promotion budget $2000, sales budget $2000, and sales forecast 1400.
First New Product - Price at $45.00 Set promotion and sales budgets at $2000 each. Enter 300 for Your Sales Forecast.
Schedule production for your existing product using this formula:
(Unit Sales Forecast X 1.15) - Inventory On Hand
First New Product - Buy 200,000 units of capacity by entering 200 in the Buy Sell Capacity cell.
Match your plant investment with a stock issue. If you cannot raise adequate capital to match the investment, issue bonds to cover the shortfall.
Look at the proforma balance sheet, and add together your cash and inventory accounts. Apply the following rule of thumb. Keep between 15% and 20% of your balance sheet assets in cash plus inventory. You do not care about the mix, but you do want to have adequate reserves to cover unexpected swings in inventory.
Adjust your cash position to meet the above guidelines. If you are cash poor, issue additional stock or additional bonds. If you are cash rich, pay dividends.
Do not issue current debt.
Save decisions (select "directly to the website").
Baker - Reduce reliability (MTBF) to reduce material cost. Example: Reduce MTBF from 17000.
First New Product - Reduce reliability (MTBF) to reduce material cost. Example: Reduce MTBF from 20000.
Second New Product - Launch a second new High Tech product, with a project length less than 2 years (no later than December of next year). Example: Name: Beam (replace the first NA in the list), performance 10, size 10 and a reliability (MTBF) 23000.
Important: Under the rules of the simulation, the names of all new products must have the same first letter as the name of the company.
Baker - Change Baker 's promotion and sales budgets to $1500. Leave the price at $35. Baker will now be a Low Tech product, therefore the sales forecast should adjust for the loss of High Tech sales. Enter a Sales Forecast of 1100.
First New Product - Leave price, promotion and sales budgets at last year' s levels. Enter a Sales Forecast of 500.
For each product, schedule production using the formula:
Important: As your new product is coming out sometime during the year, you might not be able to use the above formula - new products cannot begin production prior to their revision (release) date. Should the number you enter into the production schedule turn red, reduce the schedule until the red number turns black.
(Unit Sales Forecast X 1.15) - Inventory On Hand
Second New Product - Buy 450,000 units of capacity by entering 450 in the Buy Sell Capacity cell. Set an automation level of 4.0.
You may be able to pay for your new plant with cash on hand. If not, raise the additional capital with stock.
Follow the guidelines from last round to manage your cash position.
Do not issue current debt.
Save decisions (select "directly to the website").
Your instructor may want you to play another practice round. If so, continue the Product Lifecycle Differentiation vision.
Having executed the plan for two or three rounds, you are now in a position to analyze it. Consider the following questions:
What are this plan ' s strengths? Weaknesses?
How will competitors respond to your actions?
How can you influence competitors to avoid competing with you directly?
Which performance measures support this plan?
What is the long range potential of this plan? Its future sales volume? Its future profitability?
How can you best coordinate this plan as a team?