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Simulation Debrief December 7 th 2010. Executive Team. President : Clay Bridges VP Sales: Miu Goto VP Marketing: Casie Huffman VP Production: Robb Harper VP Finance: Wes Knight. Industry Environment. Industry comprised of 6 major players 6.8 billion dollars in sales - PowerPoint PPT Presentation
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Broncho Motors
Simulation DebriefDecember 7th 2010
Executive TeamPresident: Clay Bridges VP Sales: Miu Goto VP Marketing: Casie Huffman VP Production: Robb Harper VP Finance: Wes Knight
Industry EnvironmentIndustry comprised of 6 major players6.8 billion dollars in sales161,214 units sold
In the most recent year (Year 6) this slide shows sales dollars and unitsNorth American auto market still in a growth stage3Porters Five ForcesAtyfi MotorsOverall cost leadershipAverage features on all vehicle classesSold their vehicles on the high end of the scaleInvested on the high end of advertisingInvested very little on research and developmentLow profit margins on all vehicle classes
Operational Cost Reduction & Gross Profit %:Economy $600, 31.83%Sedan $600, 29.21%Truck $1500, 24.61% Luxury - $600, 27.12%
Avery MotorsOverall cost leadershipLow end features on all vehicle classesInvested very little in advertisingInvested very little on research and developmentLow profit margins on all vehicle classes
Operational Cost Reduction & Gross Profit %:Economy $300, 30.58%Sedan $300, 30.59%Truck $300, 31.98% Luxury - $300, 35.37%
Central MotorsDifferentiation by technology; higher pricedAverage to low end on features offeredAverage number of vehicles sold to the marketInvested a moderate to high amount on advertisingAbove average R&D investment; 3rd highest in the industryBetter than average profit margins; 2nd only to Broncho
Operational Cost Reduction & Gross Profit %:Economy $5100, 45.77%Sedan $5400, 41.6%Truck $5400, 40.34% Luxury - $5400, 48.23%
Komiyama AutomobilesDifferentiation by high priceAverage on featuresAverage volume of vehicles sold to marketInvested a moderate to high amount on advertisingInvested very little on research and developmentLow profit margins on all vehicle classes
Operational Cost Reduction & Gross Profit %:Economy $2700, 37.83%Sedan $2700, 36.83%Truck $2700, 36.45% Luxury - $2700, 39.89%
ValurDifferentiation by features offeredOverall market share leaderAverage volume of vehicles sold to marketInvested on the high end of advertisingAbove average R&D investment; 2nd only to BronchoBetter than average profit margins; 3rd best in the industry
Operational Cost Reduction & Gross Profit %:Economy $6600, 50.98%Sedan $6600, 37.84%Truck $4200, 32.52% Luxury - $6600, 42.25%Industry Environment OpportunitiesHigh growth which leads to opportunity for increase in market share
Price differentiation
Price differentiation - leverage R&D and technology to provide high margins with yet a competitive price in the marketplace
10Industry EnvironmentThreatsChanging customer expectations
Technology breakthrough of competitors
Internal EnvironmentCorporate Level Strategy
Differentiation
StrategyHeavy R&D investment to drive down costs
Keep customer expectations in mind for each car and grow each attribute year after year for every car
Sell cars at high end of price range to maximize profitsStrategy40% minimum gross margin profit in each vehicle class
Invest in new plants only when economically feasible compared to sales
Strong advertising close to the top expectation range or over
StrategyLong term goal
Create the highest margins in every class investing heavily in cost reduction
Net profitsSalesVP SalesMiu Goto
SalesSales StrategyImprove each characteristic in every vehicle classFuel EconomyEngine PowerSafety FeaturesLuxury FeaturesReliabilityIncrease prices each yearSell every unit
Characteristics
Fuel economy had a 25% importance factor to the consumer so we kept this characteristic at the top of the range.19
Characteristics
We dropped the economy cars reliability in year 3 to maintain a growing gross profit margin but brought it back in year 420
Characteristics
Safety Features had a 25% importance factor to the consumer so we kept this characteristic at the top of the range.
21
Characteristics
Characteristics
We dropped the trucks fuel economy in year 3 to maintain a growing gross profit margin but brought it back in year 4.Engine Power had a 25% importance factor to the consumer so we kept this characteristic at the top of the range.
23
Characteristics
Characteristics
Characteristics
Luxury features had a 25% importance factor to the consumer so we kept this characteristic at the top of the range.
26Sales - GrowthSales grew at consistent rates annually
Economy 25%Sedan 30%Truck 20%Luxury 35%MarketingVP MarketingCasie Huffman MarketingI am going to cover a 4 Ps analysis29Marketing - PriceHigh end of customer range
Increased every yearWith an exception for economy class in year 2
Marketing - Product
Marketing - Place
Marketing - PromotionAdvertising Slogan
Marketing - PromotionAdvertising StrategySpend on the high end of scaleSpend as much or more than competitors
MarketingPromotionTarget MarketAverage income increase 3.5% yearly
MarketingPromotionAdvertising Media
MarketingPromotionAdvertising MediaYear 6
ProductionVP ProductionRobb Harper ProductionStrategySales forecast & productionHolding inventoryCost of not selling
I am going to discuss these things39Production Strategy1. Build to make moneyDetermine if profits on new capacity allowed for cost of building new plant
2. Avoid unnecessary capacityTo explain how we analyzed our situation to follow these two strategies I will give a detailed example straight from our simulation experience.40Production StrategyYear 3Market 3,075 units of luxuryCurrent capacity 3,000Cost to build 75 unitsDirect Cost - $1,767,375New plant cost - $10,000,000Sales for 75 units - $3,675,000Profit for 75 units ($8,092,375)
Decided to not spend $10,000,000 to build a plantBreak even was 394 units
Variable costs + fixed costs sales = a negative cash position on this investmentDoing a per unit break even analysis determined that we would have to build 394 units
Expanding on this example. In the next year, year 4 the market called for 4,152 units so we built 4000. That 1000 new units of capacity had direct profits of $17,400,000 also taking into consideration the cost of building the new luxury car plant.41Inventory HeldProduce what will sell, do not hold inventorySold every unit produced in years 2-6Year 1 sales shortageEconomy139 units$1.6m in costTruck156 units$3.3m in cost
We realized that year how important selling every unit was to us. We ended up with a deficit that year because of the cost of not selling these units.42Cost of Not Selling UnitsRetain cash to cover units not sold
Just in case we didnt sell all of our units we retained a surplus to cover a percentage of each class43Get more aggressive?Scanned the external environment
Year 2: Broncho, AtyfiYear 3: Broncho, Avery, ValurYear 4: Broncho, Komiyama, ValurYear 5: Broncho, Komiyama, Atyfi, CentralYear 6: Broncho, Atyfi
To support our decision to not build too many units we scanned the industry to determine if our competitors were selling every unit and found that some were, but most were not.44Unit Production
New PlantsIn 6 years we spent $270 million on new plants
Research & DevelopmentStrategyDevelopment areasCost of improvementsBenefit of improvements
R&D StrategyHeavy emphasis on R&D investingCompetitive advantageReduce costsLabor costMaterial costIncrease gross profit %
Use R&D to leverage a competitive advantage by reducing labor and material costs, and increase gross profit percentages48Areas of R&DWe invested equally in all four areas of research and developmentNew technologiesSoftwareRoboticsEquipment Enhancements49Research & Development$320,000,000 total spending
Year 6 Operational Cost Reduction Per Unit
We spent $320 million to achieve $11,700 cost reductions per unit, per class 50Benefit of Development
Increase gross profits
Be the industry leader in net profits
Year 4Year 5Year 6Net ProfitsIncreasing gross profit Being market leader in net profitsAs the number of units sold increased year over year our net profits eventually exploded51Benefit of DevelopmentIncreasing gross profit with a minor set back in year 3 because the customer expectations in luxury got pretty highBut we always grew overall profit percentagesAll of this extreme growth required heavy capital and just as meticulous planning to get there, so now Wes is going to tell you how we made the decisions to drive our company.
52FinanceVP FinanceWes Knight
FinancialsSales Dollars - $1,199,467,750
Cost of Goods Sold - $538,358,725
Operating Profits EBIT - $408,395,678
Net Profits - $285,843,059
I am going to discuss these things54FinancialsGross Profit marginsEnd of year 1 40%End of year 6 55%
Total AssetsBeginning - $75 millionEnding - $655 million
EPS Beginning of game - $1.94Game end - $19.44
Stock Price Beginning $11.68Ending $118.57
I am going to discuss these things55FinancialsOutstanding Shares
$50 million in outstanding shares beginning of game
$95 million in outstanding shares after year 3, issued stock to finance growth in plants and R&D during years 1,2, and 3
$25 million in outstanding shares at game end, profits used to buy back shares in years 4, 5, and 6Because of high profit margins we started buying back treasury stock and retiring both long and short term debt.
56FinancialsShort term debt
$5 million at beginning of game
$15 million ending year 3 used to finance growth in plants and R&D
$1.8 million at game end used profits to pay off debtI am going to discuss these things57FinancialsLong term debt
$7 million at beginning of game
$21 million ending year 3 used to finance growth in plants and R&D
$2.6 million at game end used profits to pay off debtI am going to discuss these things58Strengths&WeaknessesInternal Environment Strengths
We are the industry leader in:Gross Profit Margin, Operation Profit Margin, Net Profit Margin, ROE, ROA, and Stock Price60Internal Environment WeaknessesCash management we had deficits in two years
Too aggressive in sales forecast in first year 5% over market prediction except in Economy
If we had the points we lost for a deficit in just one of the two years we would have taken first place from Komiyama by 5 points.61Strategic Alternatives
Strategic AlternativesPaying dividends
Diversification into different markets within the automobile industryHybrid VehiclesSUVsMotorcycles
If the simulation were going forward we would do these things63Strategic AlternativesBackwards integration to reduce manufacturing costsEngine manufacturingTire and wheel productsElectronics
Diffusing new technologiesFirst mover advantage for new auto featuresEstablish brand image as first mover in the auto industry
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