Capsim "stockholders' meeting" presentation, CSULBA FEMBA 11, August 2011

Stockholders’ MeetingQ1, 2020

Executive OfficersJessica Archer, Meredith Curry, Veronica Dang, Muhammad Soomar, Will Woods

Erie Sensors Company

Edition - CapstoneIndustry C43894 CSU Long Beach, FEMBA XI; Jul.-Aug. 2011, Dr. Lohman Course Level - Graduate

Erie Co.

• Product lifecycle focus• Aggressively market : High, Low, Traditional segments• Expand capacity as needed• Increase automation to reduce labor cost• Finance, as needed (issuance of Stock and then Bonds)• Maximize recruitment spending and training• Maximize TQM investments to streamline operations

Company StrategySensor Differentiation with Lifecycle Focus

Erie Co.CEO

Will Woods•Total Balanced Scorecard

•Each year ≥ 90•Cumulative ≥ 216

• International Management Ranking•≥ 95th percentile, per year and cumulative

Erie Co.

Cumulative Point Goal216 out of 240

Company PerformanceBalanced Scorecard Scores

Cumulative Point Total 236 out of 240

Erie Co.Company Performance

Balanced Scorecard Percentiles

Overall cumulative percentile placed Erie’s management in the 99 th percentile – among the top 15 companies out of 1486 internationally!

Erie Co.R&D and Forecasting

• Customer Buying Criteria

Year 2016 2017 2018 2019Minimum Score 43 43 45 46

Erie Co.R&D and Forecasting

• Key Success Factors• Building forecast spreadsheet for best-case, worst-case,

and average-case sales scenarios• Continual review of competitor decisions• Assuming each competitor would make best possible

R&D moves• Best-case scenario: Production• Worst-case scenario: All other departments

Erie Co.R&D and Forecasting Performance

Customer Buying Criteria (Customer Survey)

• Problem: “Edge” sensor line not in line with strategy• Solution: Reposition to High segment

Erie Co.VP, Customer Acquisition

Meredith Curry• Customer Awareness ≥ 90%

• Customer Accessibility ≥ 90%

• Product Count ≥ 8

• SG&A Expense• ≥ 7% & ≤ 17% of total sales

• Market Share • ≥ 22% of total sensor market• Highest Market Share in the Traditional, High end, and Low end segments

Erie Co.Customer Acquisition

• Key Success Factors• First-to-Market with Multiple High-Profit Sensors in Segments

• 2012 - Two highly-demanded sensors in Traditional Segment • 2013 - Two highly-demanded sensors in Low end segment and

two in the High end segment

• Consistent Promotion and Sales up to or slightly above diminishing returns

• Efficient Sales spending during Advanced Marketing• Sensor-cost/Customer-benefit analysis (MTBF cost vs. benefit)

Erie Co.Customer Acquisition Performance

Awareness, Accessibility, Sensor Count, SG&A Expense

Erie Co.Customer Acquisition Performance

Target Segment Market Share ($)

Erie Co.Customer Acquisition Performance

Target Market Share ($)

8-year Average, Sales Weighted: 20.61% (Highest in Industry)

Erie Co.VP, Internal Business Processes

Veronica Dang

• Contribution Margin ≥ 36%

• Plant Utilization ≥ 100% & ≤ 180%

• Days of Working Capital

≥ 30 days & ≤ 90 days

• No Stock-out costs

• Inventory Carrying Costs ≤ 0.5%

• Operating Profit• Cumulative Profit ≥ $135M

Erie Co.Internal Business Processes

• Key Success Factors• Automation: Determine Maximum Possible Automation

• Production & Capacity: Forecast based on worst-case scenario to prevent high inventory carryover and low plant utilization

• A/P: Work with Finance department and suppliers to control leverage

Erie Co.Internal Business Process Performance

Contribution Margin, Plant Utilization, Days of Working Capital, Stock-out Costs, Inventory Carryover

Erie Co.VP, Learning and Growth

Jessica ArcherYear

2016 2017 2018 2019

Employee Turnover (max.) 5% 4% 4% 4%

Employee Productivity (min.) 112% 114% 116% 118%

TQM Mat'l Cost Reduction (min.) 6.3% 7% 7% 7%

TQM R&D Cycle time Reduction (min.) 35.7% 40% 40% 40%

TQM Admin Cost Reduction (min.) 48% 60% 60% 60%

TQM Demand Increase (min.) 7.9% 10% 10% 10%

Erie Co.Learning and Growth

Human Resources• Train Employees – two weeks each year• Recruit – best employees possible

• Negotiate Fairly – aim for wages, raises & benefits between current contract and labor-demanded value

• Offer - comparable wage, benefits, profit sharing, and raise rates until complement is below 300 employees

• Overtime – aim for zero, to maintain high productivity and low turnover

Erie Co.Learning and Growth

Total Quality Management• Heavy spending, as Finance dept. goals permit• Up to $4M for each initiative, optimally split evenly over three years to maximize impact• Material cost reduction, Labor Cost reduction and

Demand Increase benefit every product line• R&D cycle time reduction benefit product lines targeted

at High end and Traditional segments• Admin. Cost reduction is lowest

priority, but TQM brings downtotal Admin cost by net ~$4Mover 5 years

Erie Co.Learning and Growth Performance

Employee Turnover, Employee Productivity, and TQM Initiatives

Erie Co.VP, Finance

Muhammad Soomar

• Market Capitalization≥ 30% of the sensor industry

• Sales ≥ $181M annually, on average

• No Emergency Loans

Year

2016 2017 2018 2019

Stock Price Per Share $51 $62 $84 $118

Profit ($M) $16 $23 $33 $50

Erie Co.Finance

• Key Success Factors• Raise Capital

• Policy for Working Capital & Cash Flow• Dividend Policy: When no additional debt is needed to

fund operations dividend policy is set to achieve desired 1.8 leverage and to assist Internal Business Processes department achieve Days of Working Capital goal

Erie Co.Profit per Year ($M)

Erie Co.Cumulative Profit ($M)

Erie Co.Stock Price

Erie Co.Market Capitalization, ($M)

Erie Co.Efficiency Metrics

Return on Sales

Erie Co.Efficiency Metrics

Return on Equity

Erie Co.Efficiency Metrics

Return on Assets

Erie Co.The Future

• Maintain competitive advantage through excellent forecasting and financial planning

• Expand sensor line as we retire aged sensors

Erie Co.Why Invest In Erie

• Effectiveness• Excellent Financial Performance• 1st Place in Market Share ($)• Highest stock price, market cap. and cumulative profit

• Stability• Never an emergency loan• Profitable every year

• Growth• Continued consistent growth in sensor industry

WHAT WE LEARNEDClassroom SettingEnd of Stockholder’s Meeting

Erie Co.

• Calculate inter-segmental sales

• Rebuild forecast to calculate sales each month rather than relying on averaging monthly sales each year

• Focus on the goals set forth by the Board of Directors• Capsim

• 50% importance: Balanced Scorecard• 25% importance: Analyst goals• 25% importance: Our own Measures

• CompXM• 100% importance: Balanced Scorecard

What We Have LearnedWhat We Would Have Done Differently

and Will Apply to CompXM

(STOCKHOLDER’S MEETING IS COMPLETE) (CLASSROOM SETTING)

Erie Co.

• Break-even analysis• Forecasting• Evaluation of company financials• Balancing goals to maintain consistent and successful

performance

What We Have LearnedReal World Applications

(STOCKHOLDER’S MEETING IS COMPLETE) (CLASSROOM SETTING)

Erie Co.

• Never completely trust a computer forecast - qualitative analysis is important!• Capsim never consistently forecasts.

• Never over-rely on human intuition – if it is measurable, then measure it and control it!• Stock outs due to strikes

• Never underestimate a competitor’s capacity to upset their overall performance to achieve a few goals• Boosting market share by cutting prices at the expense of profit,

stock price, contribution margin• Boosting stock price at the expense of leverage and days of

working capital

What We Have LearnedWhat We Could Have Done Better

(STOCKHOLDER’S MEETING IS COMPLETE) (CLASSROOM SETTING)

Erie Co.

• Goals, Strategies and Policies, and Performance

• Future Plans

• What We Have Learned

Wrap UpAgenda

Erie Co.International Sensor Conference 2011

Though Andrews, Baldwin, Digby and Erie have challenged each other for eight years, their executives continue to be close after the breakup of the monopoly in 2011. Management of Chester and Ferris could not be reached for comments.