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NEW Glo-Bus - AC Camera and UAV Drone - Business Strategy - Making Decisions - Part 1/4

NEW Glo-Bus - AC Camera and UAV Drone - Business Strategy

New GLO-BUS — 2017 Edition

NEW Glo-Bus 2017 - AC Camera and UAV Drone - Business Strategy

Action-Capture Camera Design

UAV Drone Design - Making Decisions   - Part 1/4

NEW Glo-Bus 2017 - AC Camera and UAV Drone - Business Strategy

Action-Capture Camera Design

UAV Drone Design

Making Decisions   

As indicated earlier, there are 56 different types of decision entries and 17 entries involving assumptions about the competitive actions rivals are likely to take.

In some cases, entries for the same decision type (like selling price or advertising and the length of warranties) are required for each of the four geographic regions of the world market.

Each of the decision pages displays calculations of the projected outcomes of your decision entries. These calculations appear instantaneously as soon as each decision is entered, allowing you to isolate the incremental impacts of each decision entry.

On each decision page are calculations showing projections of earnings per share (EPS), return on average equity investment (ROE), credit rating, image rating, revenues, net profit, and year-end cash balance.

These projections are instantly updated each time a new entry is made, allowing you to see the probable impacts of each new decision entry on company performance. You will find these built-in decision support calculations invaluable in evaluating alternative decisions and deciding what to do.

You can easily try out any number of “what if we do this” decision alternatives, review the projected outcomes, and thereby search for a combination of decision entries that appears to offer the best overall performance and meets with the consensus approval of your company’s management team.

The first time you visit a decision entry page, you will need to take time to explore the page and digest all the information.

If you feel the need for additional information while you are working on a particular page, click on the Help button that appears at the top-right. The Help sections provide detailed guidance, including important cause-effect relationships, explanations of all on-screen calculations, and decision-making tips.  

Upon visiting a decision entry page, the numbers you will see in the decision entry fields represent either

(1) the decision entries from the prior year or

(2) the latest decision entries you and/or your co managers saved in the course of having previously worked on the current decision round. No decision entry for the upcoming year is considered final until the deadline (set by your instructor) for entering decisions arrives.

The last decision entry set saved prior to the decision round deadline is considered “final”. When the deadline for the decision round arrives, the GLO-BUS system will process the decision round results, making them available to all companies and to the course instructor.

Thus, it is critical that you save your final entries for the round in time to meet the deadline.   

 

Product Design Decisions

The product design page involves deciding on the components, enhancements, and extra performance features to incorporate in your cameras/drones, the number of models to have in each product line, and how much to spend on product R&D.

Initially the numbers appearing in the decision entry fields (or beside the decision filed for product R&D) are the entries from the prior round (year).

The Product Design entries are important because they determine the P/Q ratings assigned to your cameras/drones. The better the design-related specifications and the greater the number of extra performance features, the better the resulting performance and quality (but the higher the associated production costs).

As decisions are entered, you can review the on-screen calculations of the expected P/Q ratings and the associated costs to determine which combination of design specifications is “best” for implementing the strategy you have chosen to pursue.

All parts, product enhancements, accessories, and components needed for extra performance features are purchased from outside suppliers; these suppliers sell essentially the same items at the same prices to all companies.

The costs of extra performance features increase as the number incorporated into the designs of cameras/drones increases (the cost impacts are shown in the Production Costs section of the page).   

Number of Models.

Prior management elected to have a product line-up consisting of 3 action camera models and 2 drone models. While there is considerable merit in trying to expand sales by adding more models, the addition of more models introduces quality control difficulties that negatively impact P/Q ratings and warranty claims and that also reduces the number of cameras/drones that product assembly teams (PATs) can assemble annually.

PATs cannot assemble 5 models of cameras/drones as proficiently and as problem-free as they can assemble 3 models.

Model increases reduce  camera/drone PAT productivity by some percentage that depends on whether the model increase is 1 model, 2 models, 3 models, or 4 models.

The addition of more models also tends to increase warranty costs because of faulty assembly and/or components that prematurely become defective. Reducing the number of models has the reverse effects. It is easy enough to track the effects of increasing or decreasing the number of models by observing the changes in the on-screen calculations of the P/Q rating, warranty costs, and labor costs.

Product R&D Expenditures.

In Year 5, prior management spent $20 million on product R&D for cameras and $15 million on product R&D for drones. Substantial R&D spending is required to improve product performance, discover and test easier-to-assemble camera/drone designs, develop new and improved models, and program more sophisticated software capabilities for both cameras and drones.

The R&D challenges for improving drone performance are more formidable than for action cameras, partly because video camera technology is better understood and more mature, partly because drones are a relatively new product, and partly because the company just recently entered the drone marketplace and has yet to fully develop its drone designs.

Drone buyers, of course, are highly interested in drones that can stay up in the air longer than the current maximums of 15-30 minutes, fly distances well beyond the view of the person operating the flight controller, and avoid crashing into obstacles in their flight path—such capabilities present formidable R&D challenges that will require sustained R&D efforts   

The combination of current year spending and cumulative spending over time for product R&D

(1) provide a pipeline of tested ways to add more features, improve performance, and build the company’s proficiencies in designing new and improved camera/drone models,

(2) improve a company’s camera/drone P/Q ratings—higher P/Q ratings are realized as soon as current and cumulative R&D spending reach levels sufficient to produce better camera/drone performance and quality,

(3) reduce warranty claims and costs (these two benefits stem from the positive impact of R&D expenditures on P/Q ratings), and

(4) increase the productivity of PATs in assembling camera/drone models— productivity gains occur as soon as current and cumulative R&D spending reach levels sufficient to identify and develop easier to assemble product design. There are separate spending entries for product R&D for cameras and drones so that you can place more/less R&D emphasis on each product.

AC Camera Marketing Decisions

At the top of this second decision page is a section displaying the 7 marketing-related decisions your company will make for action cameras.

Just below the entry fields for the 7 marketing decisions is a section labeled Market Segment Statistics. The first two lines show your company’s (1) actual sales of cameras in the prior year and projected sales in the current year and (2) camera market share in the prior year and projected market share in the current year.

The last three lines of this section report the numbers of multi-store chains, online retailers, and local retail shops in each region stocking and merchandising your brand of action cameras in the prior-year and the current year—the current year numbers were updated at the end of the prior year to reflect the year-end appeal of your company’s camera models and there’s nothing you can do in the current year to attract additional retailers (the updated numbers of retailers willing to stock each company’s camera brands are reported in the Competitive Intelligence Reports).

The company’s regional sales offices (Milan, Singapore, Sao Paulo, and Toronto) are staffed with people who help recruit and service the accounts of retailers in the region. Each time you enter a different value for any of the marketing decisions, you will see the effects on projected unit sales and projected market share.

In addition, you will see on-screen calculations showing the projected price-cost-profit outcomes associated with the marketing decision entries.

The decision entries on the page are pretty much self-explanatory, but click on the Help button at the top-right of the page if you have questions, want additional information, or need guidance.   

There are several things you need to keep in mind as you make entries for the marketing decisions:

  • All seven marketing decisions (along with your company’s P/Q rating and number of models offered, both of which are determined by your entries on the Product Design page) will largely determine the degree to which your company’s camera products are competitive with the camera products of rival companies and whether your company’s brand will be sufficiently appealing to buyers to generate net sales revenues big enough to cover operating costs and yield attractive operating profits and operating profit margins.
  • The accuracy of the on-screen projections of your company’s unit sales and market shares is a function not just of your company’s competitive efforts but also the competitive efforts of rival companies (which will almost certainly include making adjustments in their P/Q ratings, number of models, wholesale prices, advertising, sales promotion efforts, and so forth).

At the bottom of this page is a section labeled Competitive Assumptions containing entry fields for the competitive factors affecting sales and market share in each region. The first time you visit this page these entries prior-year average competitive efforts of rival companies. Unless and until these are changed, the on-screen projections of your company’s unit sales and market share for the current year are based on how your company’s competitive effort for the current year compares against the competitive conditions your company faced last year.

Note: The reason there are entry boxes for only 9 of the 11 competitive factors is that the two missing competitive factors—number of retailers and brand reputation—are already known for the current year because they are updated at the end of every decision round and are reported in the Competitive Intelligence Report.   

Needless to say, the managers of rival companies can be counted upon to alter aspects of their competitive effort in all four regions as they prepare their current-year decisions and seek to boost the performance of their respective companies.

This means that the on screen projections of your company’s unit sales and market share in each region are unreliable because they are based on how your company’s competitive effort in the current year stack up against the past competitive efforts of rival companies, not their forthcoming competitive efforts. If you believe that rival companies are likely to alter their competitive efforts by raising or lowering prices, P/Q rating, models offered, advertising, and so on, then you will definitely need to enter your anticipated changes in the some/all of the industry averages.

If your anticipated changes in the industry averages prove close to the actual outcomes, then the now-revised projections for sales, market share, revenues, costs, and profits will be relatively close to the actual outcomes when the decision entries of all companies are “processed” and the results for the year generated.

Consequently, before you get very far along in making entries for the 7 marketing decisions, it makes sense to first enter your anticipated updates of the industry averages for the 9 competitive factors.

Yes, these are likely to be “guesstimates” or “approximations”, but sales/market share projections based on reasonable assumptions of what rivals are likely to do may be more reliable than projections based on what rivals did a year ago. There is ample reason to believe that the competitive efforts of rivals will, on average, be stronger than in the prior year, if only because poorly-performing companies that were outcompeted last year have strong incentive to initiate actions to boost their competitiveness.   

Even if you overestimate the strength of competition from rivals in the upcoming year (which, in turn, will lower the projected sales/market shares for a given level of marketing effort on the part of your company) and actually end up with bigger sales/market shares than were projected, your company will still assemble, ship, and sell the unexpected units demanded provided your company has sufficient idle workstation capacity to assemble the unexpected orders. It is far better to have the pleasant surprise of selling more than the projected sales volume (and enjoying the accompanying extra revenues and profits) than having the unpleasant surprise of selling less than the projected sales volume because you underestimated the strength of the competitive efforts from rivals. Trying different decision entries and experimenting with different assumed changes in the industry averages for the current year, enables you to evaluate the merits of different decision entries and arrive at a consensus of what strategic actions to take in in striving to combat the anticipated strategies and competitive maneuvering of rivals.   

Exchange Rate Adjustments.

In the section labeled Price-Cost-Profit Breakdown, you will notice that in the Revenue Projection entries just under selling price is a line labeled “± Exchange Rate Adjustment.”

Exchange rate adjustments result from the fact that (1) the exchange rate of one currency for another fluctuates on a daily basis and (2) the company assembles, ships, and sells action cameras in Taiwan (where the local currency is Taiwan dollars) to buyers in other parts of the world (where local currencies are different). Further, the orders tend to occur at some agreed price in a period when exchange rates are one value while buyer payments are not received until some later period (when exchange rates are very likely a different value).

There’s a second reason for exchange rate adjustments: the local currency payments the company receives from buyers over the course of a year must be converted into Taiwan dollars and ultimately into U.S. dollars (since the company reports its financial statements in U.S. dollars and the company’s stock is traded on a U.S. stock exchange).

Thus the company’s business is one with potentially significant foreign exchange risks. To help manage these risks, company officials have negotiated a long-term currency exchange agreement with the Global Community Bank through which the company does most of its business.

The agreement calls for the bank’s foreign currency department to handle the company’s many foreign currency transactions. For simplicity, the agreement entails combining both of the reasons for currency adjustments (enumerated in the above paragraph) into a single adjustment whereby the net revenues the company actually receives on cameras assembled and shipped from its Taiwan assembly facility and sold to buyers in various parts of the world to be adjusted upward or downward is based on the real-world currency swings during the period from one decision round to the next as concerns the U.S. dollar against the Taiwan dollar, the euro against the Taiwan dollar, the Brazilian real against the Taiwan dollar, and the Singapore dollar against the Taiwan dollar.

Specifically:   

  • The net revenue per camera the company actually receives from camera sales to retailers in North America is a result of adjusting the company’s average wholesale price up or down for exchange rate changes between the U.S. dollar and the Taiwan dollar.
  • The net revenue per camera the company actually receives from camera sales to retailers in Europe-Africa is a result of adjusting the company’s average wholesale price up or down for exchange rate changes between the euro and the Taiwan dollar.
  • The net revenue per camera the company actually receives from camera sales to retailers in the Asia-Pacific is a result of adjusting the company’s average wholesale price up or down for exchange rate changes between the Singapore dollar and the Taiwan dollar.
  • The net revenue per camera the company actually receives from camera sales to retailers in Latin America is a result of adjusting the company’s average wholesale price adjusted up or down for exchange rate changes between the Brazilian real and the Taiwan dollar.

In making sales to buyers in Europe-Africa, the company provides price quotes in terms of both the buyer’s local currency and in euros. Buyers, while making payment in their local currency (which can be either euros or some other denomination), agree when the order is placed to tie the amount of their local currency payment per camera to the local currency equivalent of that number of euros per camera—the company’s global bank handles converting the local currency payments of Europe-Africa buyers into the equivalent of euros and then into Taiwan dollars at the appropriate exchange rates.

Should the exchange rate of euros per Taiwan dollar fall from one decision period to the next, say from 0.0250 to 0.0249 euros per Taiwan dollar, then buyer payments of the agreed number of euros per camera at the time the order was placed equate to more Taiwan dollars at the time of payment and an upward adjustment in the company’s revenues. Conversely, when the exchange rate of euros per Taiwan dollar rises, say from 0.0250 to 0.0251 euros per Taiwan dollar (meaning that a specified number of euros equate to fewer Taiwan dollars), then the company does not receive as many Taiwan dollars in payment for the cameras sold and shipped to Europe-Africa buyers and net revenue is accordingly adjusted downward.

The size of the Europe-Africa revenue adjustment is equal to 5 times the actual period-to-period percentage change in the exchange rates of euros to Taiwan dollars (multiplying the actual % change by 5 is done so as to translate the exchange rate change over a few days into a change that is more representative of what might realistically occur over a full year).

Thus, if the exchange rate between euros and Taiwan dollars should change by -0.40% from one decision period to the next, the size of the exchange rate adjustment will be -2.0% (-0.40% x 5 = -2.0%).   Because actual exchange rate fluctuations are occasionally quite volatile over a several day period, the maximum exchange rate adjustment during any one year is capped at ±20%, thus limiting the size of gains and losses from exchange rate adjustments.

The procedures for adjusting revenues on sales to retailers in Latin America, Asia-Pacific, and North America are handled in like fashion. All the pertinent calculations are done automatically, thus relieving you from mastering the intricacies of the exchange rate adjustments. Since the sizes of the expected exchange rate adjustments in dollars per camera/drone are known during the course of making the current-year decisions, you can pursue actions to mitigate the adverse effects of unfavorable (those with a minus sign) exchange rate adjustments.

One option is to adjust sales and marketing efforts in a manner that results in (1) added sales in those areas where the exchange rate adjustments are positive (favorable) and (2) somewhat smaller sales in the regions where the exchange rate adjustments are negative (unfavorable). Another option is to raise the selling prices in a particular region to help offset negative revenue adjustments and realize higher net revenue per camera sold. Because all competing companies have assembly facilities in Taiwan and are thus subject to comparable exchange rate impacts on net revenues per camera sold, you may be able to make offsetting price adjustments without much risk of putting your company at a price disadvantage. Consult the information in the Help section for more details on the mechanics of the exchange rate adjustments and their managerial relevance in making decisions.   

There will be no exchange rate adjustments in Year 6.

The prevailing real-world exchange rate values at the beginning of Year 6 and the real-world rates at the beginning of Year 7 will serve as the base for calculating the Year 7 exchange rate adjustments. The real-world changes in the exchange rates between the beginning of Year 7 and the beginning of Year 8 serve as the basis for exchange rate adjustments in Year 8. And so on throughout the exercise. Since the company’s financial statements are reported in U.S. dollars, company accountants go through the necessary accounting procedures to accurately record and report the revenues collected in Taiwanese dollars in U.S. dollars and to otherwise accurately portray the company’s financials in U.S. dollars. The procedures are in full compliance with generally accepted accounting procedures and have been approved by the company’s auditors.   

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