12676_Business Environment - Case Study-1

Virtual business environment – Mobile phones market

Business Operations & Strategy Simulation - BOSS

An integrated approach for learning business management practices

7/12/2015 Business Environment & Manual 1Property of www. stratEDGE.biz

• What is Simulation based learning

• How will it be conducted

• Business environment details

• Screenshots for participants

• How balanced scorecard will be calculated

Contents


Concept of Simulation


Participants divided into 5 teams, represent 1 company each and make business decisions on e-portal. Performance results calculated by simulation tool are then debriefed by instructors. Teams

enter next year of simulation to improve performance or outperform other teams

Product & Price

- Attributes- Costing- Price

Business environment document, teams formation & username passwords

Marketing

- Total spends- Marketing mix- Choice of media

Production

- Investment- Capacity- Efficiency

Sales

- Sales target- Promotion budget- Distribution mix

Teams make strategic decisions on key verticals

Decisions submitted on BOSS

Algorithms of BOSS run at individual & comparative level

Each company gets performance report card & Stock Price index

Instructor de-briefs on results & connects with theory & realityTeams make decisions to the run company in 2nd year of operations

Simulation workshop flow


Business environment – Mobile phones industry

Your country report

Demographics Total Population – 10 crores Expected to remain almost the same for the next 5 yearsMature population, with median age of 45 years30% population non-working.

Pop. spread 10% population lives in 10 Urban cities20% population lives in 20 Emerging cities40% population lives in 50 Traditional towns30% population lives in 400 Rural areas

EconomicsConsumption based economy growing at 2% CAGR, consistentlyStable currency, almost 0% inflation expected in next 5 yearsR & D support to technology companies, makes investments feasible

Politics/Social

Stable government, came into power for 2nd termHard working people with multi ethnic backgrounds



Your Mobile phones industry report

Market Mobile phones market is in its 1st year of operation in country, because license to sell mobile phones were held by government, due to securityHuge potential due to low base, expected to grow in volumes above 20% in the next 5 years.

Competition There are 5 companies who have entered this market. Your team is the management team of one of these companies. All are starting fresh & will be competing against each other to give higher return on investments of the venture capitalist.

Capital & Cost You will have to invest capital in Production plant & Distributor set up.Development of phone will entail fixed investment in R & DYou cost structure will have Marketing, Dealer margins, Trainings & plant running costs, which you will have to manage.

Funding by PE Private Equity of 3000 Cr INR has been given to each company, to run operations. PE Fund is looking at 15% net profits from 2nd year onwards. If required, PE fund can give more money, if the case is good.


2015 2016 2017 2018 2019

Total Market size 3000 3600 4680 6084 12168

< 8000 price 1380 1656 2153 2799 5597

8000 < p < 16000 price 900 1080 1404 1825 3650

16000 < p < 24000 price 360 432 562 730 1460

24000 < p < 36000 360 432 562 730 1460

Mobile Phones industry size potentialx1000 consumers – Mobile phone Price band wise



Industry potential forecast

This table shows the Market Potential forecast & not Demand forecast. Be careful.If there are attractive products in their respective price bands, sales can be more than potential

alsoHowever, if there are too many players in same price bands, potential will get shared among them.

Consumer insights – Customer profile

Affluent Value seekers Budget driven Strugglers

- 25 to 40 yrs- Income > 15 Lacs pa- Seeks only best in class- Motivated by styling- Uses phone often- Singles, Double Income

Single Kid, DISK

- 30 to 50 yrs- Income 10~15 Lacs pa- Pays for only value- Being smart is

important- Uses phone very often- Married, DISK, joint

family

- 35 to 50 yrs- Income 5~10 Lacs pa- Fix budget, finds best

price at avg quality, price sensitive

- Average user, no special wants or aspirations

- Married, joint family

- 25 to 40 yrs- Income <5 Lacs pa- Buys for his basic needs

only- Highly price sensitive- Uses phone less- Singles, married, single

income


TV Newspaper Internet Dealer Others

Affluent 80% 60% 40% 10% 10%

Value 50% 40% 50% 10% 5%

Budget 60% 30% 10% 20% 5%

Struggler 30% 20% 5% 30% 5%

Media habits


What is the source of your information? Multiple answers.

Consumer insights – Qualitative research excerpts


I have always appreciated intelligent advertisements. The other day I went to the launch function of a premium car, Ranbir Kapoor's presence was awesome.I like fully loaded cars, which the best technology, styling & performance and I don’t mind paying a good price for this. I don’t want any compromise because I think I might miss out

something if I buy a lower grade car. – Affluent from a metro

To me, advertisement plays some role & more importantly social initiatives that some of these companies take are valuable. I want to make smart choice & pay the right price for any service or product. Sometimes, mobiles companies provide features that are not used often. I don’t understand the rationale of providing Touch & Qwerty both options in one phone. Recently I

bought a nice digital SLR camera at a reasonably high price & it is very stylish– Value seeker from an emerging town

I always go with brands which are seen in the hands of users, and not in awards functions or advertisements. I always go by tried and tested products, which are priced very reasonable. Recently I bought a DVD player, which was too stylish & had many features and it did not work well. I decided not to buy such products in future, where in quality is compromised on the cost

the providing fancy features – Budget driven from a traditional town

What ever these big companies advertise & get celebrities, awards, ultimately they are charging from us only. Why should I pay for that. In any case, my needs are so very basic as I have other more important expenses to manage. The other day, I purchased a microwave after much research, on very good discount & price, and it had just the basic functions of heating & timer, no grill no convection but for me it serves my purpose at such a low price & I am very satisfied

– Struggler from a Rural place


Consumer insights – Population spread income wise

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

> 16 Lacs

12 ~ 16 Lacs

8 ~ 12 Lacs

4 ~ 8 Lacs

< 4 lacs

Metro Emerging Traditional Rural




Products & Price – Decisions to be made in BOSS

Attributes You will decide attributes of the mobile phone, you plan to sell to your consumers on the basis of 11 parameters such as Screen size, Battery capacity, Quality, Styling, Processor among others.

CostsAs per the attributes you choose, BOSS will give you material cost of that product. You can play around with attributes to get to your target variable cost & specifications.

R & D Expenses Depending upon the attributes, R & D expenses are calculated by BOSS. Expense for higher specification phones are higher & lower for low end phones. It ranges from 30 Cr to 100 Cr & is a fixed cost

Price You will decide the selling price of your product for the target consumers. Judge the potential from various reports available to you. This is the only “P”, which will earn you money. Be careful !!

Head of Product & Price makes such decisions, in consultation with CEO


Screenshot from BOSS – Product & Price



Marketing – Decisions to be made in BOSS

Total budget As Chief Marketing Officer, you will decide your overall marketing spends. Spending less would not generate less demand while spending more would eat into your budget and might not be required as well. Think about your target audience & decide accordingly

Marketing mix Here you decide that out of your total marketing budget, how much %age would you spend on creative or celebrity endorsement or launch etc. The more relevant your allocation, the more effective is your communication and it will help generate more demand & brand image

Media mix For example, out of 100cr total marketing budget, if you spend 13Cr in Marketing mix, remaing 87 will become your Media Budget. You have to decide the distribution of this 87, in different media types such as TV, Newspaper, Digital, Events etc. These are called media decisions.

Brand image Brand image scores (generated by system) are cumulative in nature, it means, marketing investments of 1st year will have an impact on balanced scorecard of 2nd year. However, current years demand will depend upon marketing decisions of the current year only.

Head of Marketing makes such decisions, in consultation with CEO


Screenshot from BOSS – Product & Price



Sales & Network – Decisions to be made in BOSS

Set up costs You have to decide the number of sales outlets that you plan to open. More outlets means more demand, but it does cost more also. In urban places, since real estate cost is high, the investments are high and in rural area, it is quite low. Refer table of next slide

Closure saving In 2nd year of simulation, you can also close some of the outlets that you have opened in the previous years, if you want. It will save you the same costs, as much as you had invested in. However, maximum number of outlets that you can open remains same for all years.

Motivation To run its own business, cover fixed costs & make some money, distributors needs margins, incentives etc to be motivated to sell your products. A motivated dealer sells more phones, but of course giving margins will cost you more money. Refer table of next slide

Manpower Good trained sales manpower can increase your sales potential. Each urban outlet has 10, Emerging outlet 5, Traditional outlet 3 & Rural outlet 1 employee. It is a fast growing industry & retention is a problem, while training seems to help. 30k/employee is cost/level

Head of Sales & Network makes such decisions, in consultation with CEO


Distribution Network related assumptions

Distributor location Maximum Nos. Set up cost in cr Population %age Manpower/Outlet

Metro cities 10 3 10% 10

Emerging cities 20 1.5 20% 5

Traditional 50 0.7 40% 3

Rural towns 400 0.1 30% 1

Sales promotions decisions Maximum Minimum

Distributor margin (as %age of Price of mobile) 5% 2%

Corporate discount (as %age of Price of mobile) 5% 3%

Incentive to dealer (as %age of Price of mobile) 2% 1%

Trainings of manpower (Each level = 30,000/employee) 4 1



Screenshot from BOSS – Sales & Distribution



Production – Decisions to be made in BOSS

Investments Putting up a manufacturing unit is the biggest investment in this industry. Of course, once invested, the created capacity is available for the next five years. And you can not close a plant once it is opened. Refer next slide to know type of plants that you can open.

Utilization A team can decide to run a plant by upto +20% capacity utilization by spending some extra costs OR run at -20% capacity utilization and save some costs. At 100% capacity utilization, there is no additional cost or saving. You can fine tune investment – production numbers

Efficiency You will have to decide on Quality of production, Manpower trainings, Wages & incentives and Eco-friendliness of the plant, within stipulated limits as given on next slide. Trained manpower who is paid high incentives will give more output, but will add to your running costs.

Production Plant will produce what is decided by you, irrespective of the natural demand of your product. If you produce more than natural demand, your 1/3rd of excess production or lesser will be sold. If you produce less & create more demand, you will have a loss of opportunity.

Head of Production makes such decisions, in consultation with CEO


Manufacturing – Decisions to be made in BOSS

Efficiency parameters Maximum Minimum

Capacity utilization +20% -20%

Quality of production 110 90

Manpower training in Hrs/year 100 10

Wages & incentives 20% 5%

Eco friendliness (no of initiatives) 7 1

Production Plant Capacity (units) Investment in Cr

Type - A 250,000 300

Type - B 500,000 500

Type - C 1000,000 800


You can decide Plant type & efficiency parameters and calculate Total costs & production in BOSS – Production tab


Screenshot from BOSS – Production


Key performance indicators – It will be calculated by BOSS, you will receive

reports.


Balanced scorecard elements

1. Market share 2. Value share 3. Brand Image share 4. Return on Sales 5. Cash balance are the 5 key performance indicators(Each element has 20% weightage in calculation of Stock Price Index)

Stock price index

calculations

At the beginning of the year, all teams have same starting Stock Price Index of 1000. The movement of stock price is the real reflection of your company/team’s individual performance as well as relative performance to others. This value is based on current performance.

No bias towards any

segment

The balanced scorecards and hence stock price are independent of the positioning, that one company takes. Be it low cost mass manufacturing or value provider or a niche expensive player. There is no biasing in BOSS portal for any particular segment.

Cumulative nature as in real market

As in the real world, the Stock Price Index is cumulative in nature. Image scores are also cumulative, however performance of a particular year will depend on marketing decision of that year only.


- Each team will receive 1 username & id, to login to BOSS. When you login, on the left hand side, Click on Team-1 or 2 or which ever appears (your team number basically), and then click on 2015

-You can navigate between Product/price, Marketing, Sales & Production tabs and use save button to save your decisions. You might see some values already placed in the decision boxes, please ignore and you can overwrite your decisions, in these boxes.

-Once you have made your final decisions, press Submit button, after which you will not be able to change your decisions. Think twice before pressing Submit button & ask instructor first before doing so

-You can change your password but not your user id by going into the Profile tab. Ignore Dashboard button for the moment. Reports button will be populated after the simulation is run and results are produced at the end of 1st round

-You will receive this presentation a few days in advance. You have 2 hours in the first session so as to get used to the system, make teams etc. Each subsequent session is open for 2 hours only. You must discuss within team and make decision well in time.

-Cheating in the form of knowing or sharing each other’s decision is not acceptable. Purpose of BOSS is to take ownership, make decisions, learn from mistakes and make better decisions. Scoring high on stock price is your target, but learning from BOSS is your mission.

-You can approach the instructor to get certain confidential reports of industry or of other players, which in real world are available through paid market research. Good managers usually ask smart questions.

-Excel & calculator would be a great friends. BOSS will test your overall understanding & strategic sense of business management. All the best !!

Some rules & guidelines



Virtual business environment – Mobile phones market

Business Operations & Strategy Simulation - BOSS

An integrated approach for learning business management practices


Documents

12676_Business Environment - Case Study-1