MANECSIM

11

MANECSIMMANECSIM

A Business Simulation for Managerial A Business Simulation for Managerial Economics, Applied Microeconomics, Economics, Applied Microeconomics,

and Pricing Coursesand Pricing Courses

Fernando Arellano, Ph.D.Fernando Arellano, Ph.D.

22

What is MANECSIM?What is MANECSIM?

• ManecSim is a business simulation in ManecSim is a business simulation in which decisions are mostly related to which decisions are mostly related to topics covered in a managerial topics covered in a managerial economics course or in courses economics course or in courses covering demand analysis or pricing.covering demand analysis or pricing.

• The simulated firm manufactures The simulated firm manufactures three products with different demand three products with different demand and supply characteristics.and supply characteristics.

33

What are other What are other characteristics?characteristics?• Each simulated period represents one Each simulated period represents one

quarter.quarter.

• Up to twelve quarters can be simulated.Up to twelve quarters can be simulated.

• Up to sixteen student teams can Up to sixteen student teams can participate. participate.

• In addition to financial statements and In addition to financial statements and supplementary information, teams receive supplementary information, teams receive historical information on sales volumes, historical information on sales volumes, prices, GDP, CPI, and other macroeconomic prices, GDP, CPI, and other macroeconomic variables.variables.

44

What topics can be What topics can be covered?covered?

– Demand analysisDemand analysis– Sales forecastingSales forecasting– Cost analysisCost analysis– PricingPricing– Break-even analysisBreak-even analysis– Cash budgetingCash budgeting– Financial and operating leverageFinancial and operating leverage– Market structureMarket structure

55

What decisions can be What decisions can be made?made?

• In the marketing area:In the marketing area:– PricingPricing– Setting promotional expendituresSetting promotional expenditures– Setting customer service expendituresSetting customer service expenditures– Purchasing of information about the Purchasing of information about the

competitioncompetition

• In addition, participants have to make In addition, participants have to make market and firm sales forecasts for market and firm sales forecasts for each product.each product.

66


• In the finance area:In the finance area:– Requesting 90-day loans.Requesting 90-day loans.– Investing in 90-day certificates of deposit.Investing in 90-day certificates of deposit.– Distributing dividends.Distributing dividends.

77


• In the production area:In the production area:– Ordering production.Ordering production.– Selecting between two suppliers of raw Selecting between two suppliers of raw

material that offer different terms of material that offer different terms of payment.payment.

88

What are the variables?What are the variables?

• The following variables can be The following variables can be controlled in setting up the scenario for controlled in setting up the scenario for the simulation:the simulation:– Behavior of GDP, population, CPI, interest Behavior of GDP, population, CPI, interest

rates, unemployment, industrial production rates, unemployment, industrial production index, and house starts.index, and house starts.

– Income elasticities.Income elasticities.– Price elasticities.Price elasticities.– Promotion and customer service Promotion and customer service

elasticities.elasticities.– Population elasticities (to model tastes and Population elasticities (to model tastes and

preferences).preferences).

99


• The following variables can be The following variables can be controlled in setting up the firm at the controlled in setting up the firm at the beginning of the simulation:beginning of the simulation:– Capital structureCapital structure– Cost structure of each productCost structure of each product– Sales volumes and pricesSales volumes and prices– Production, marketing and administrative Production, marketing and administrative

costscosts– Profit margin per product and firm overall Profit margin per product and firm overall

profitabilityprofitability

1010


• The following variables affect MARKET The following variables affect MARKET demand in ManecSim:demand in ManecSim:– Market price (average price of all firms)Market price (average price of all firms)– IncomeIncome– PopulationPopulation– Tastes and preferencesTastes and preferences– Promotion expendituresPromotion expenditures

1111


• The following variables affect FIRM The following variables affect FIRM demand in ManecSim:demand in ManecSim:– Firm priceFirm price– Promotional expendituresPromotional expenditures– Customer services expendituresCustomer services expenditures

1212


• Firm performance is evaluated on the Firm performance is evaluated on the basis of product contribution margin, basis of product contribution margin, overall firm profitability, and sales overall firm profitability, and sales forecast errors.forecast errors.

1313

• They learn to identify the different variables They learn to identify the different variables affecting market and firm demand.affecting market and firm demand.– To improve analysis and decision making To improve analysis and decision making

process, number of decisions affecting demand process, number of decisions affecting demand are restricted at the beginning of the simulation.are restricted at the beginning of the simulation.

• They learn to identify the degree to which They learn to identify the degree to which different variables affect market and firm different variables affect market and firm demand:demand:– Their decisions on pricing, promotion and Their decisions on pricing, promotion and

customer services expenditures have different customer services expenditures have different impact on market and firm demand.impact on market and firm demand.

What do students learn?What do students learn?

1414

• They value the importance of pricing:They value the importance of pricing:– When they decide on prices and observe When they decide on prices and observe

their impact on sales.their impact on sales.– When they set prices that are higher or When they set prices that are higher or

lower than their competitors’ and lower than their competitors’ and consequently, decrease or increase their consequently, decrease or increase their market share.market share.


1515

• They value the importance of other They value the importance of other demand variables under the control of demand variables under the control of the firm:the firm:– When they decide on promotion and When they decide on promotion and

customer services expenditures.customer services expenditures.– When they set expenditures on these When they set expenditures on these

variables that are higher or lower than variables that are higher or lower than their competitors’ and as result, their competitors’ and as result, combined with price, decrease or combined with price, decrease or increase their market share.increase their market share.


1616

• They calculate break-even points:They calculate break-even points:– When they want to determine their minimum When they want to determine their minimum

prices or minimum production volumes.prices or minimum production volumes.

• They identify and measure contribution They identify and measure contribution margin:margin:– When they calculate the contribution of each When they calculate the contribution of each

product to cover fixed costs and generate product to cover fixed costs and generate profits.profits.

• They do profit and cost analysis:They do profit and cost analysis:– Before and after they make their decisions.Before and after they make their decisions.


1717

• They value the importance of accurate They value the importance of accurate sales forecasts:sales forecasts:– When they need to set production levels.When they need to set production levels.– When they overestimate production and When they overestimate production and

are left with inventory, incurring in are left with inventory, incurring in storage cost. storage cost.

– When they underestimate production and When they underestimate production and lose sales, foregoing profits.lose sales, foregoing profits.


1818

• They value the importance of accurate They value the importance of accurate cash budgeting and improve their cash budgeting and improve their budgeting skills when they:budgeting skills when they:– Do cash budgeting to determine their Do cash budgeting to determine their

funding needs (or their excess cash).funding needs (or their excess cash).– When they underestimate or When they underestimate or

overestimate their funding needs and overestimate their funding needs and receive emergency funding at a penalty receive emergency funding at a penalty rate or sacrifice the opportunity cost of rate or sacrifice the opportunity cost of surplus cash. surplus cash.


1919

• They can do regression analysis using They can do regression analysis using the variables and values present in the the variables and values present in the simulation:simulation:– When they want to establish the relationship When they want to establish the relationship

between sales and variables affecting between sales and variables affecting demand.demand.

– When they forecast salesWhen they forecast sales

• They identify factors favoring price wars:They identify factors favoring price wars:– When they recognize cost structure and When they recognize cost structure and

price elasticity as relevant variables.price elasticity as relevant variables.


2020

• They recognize the difference They recognize the difference between market structures:between market structures:– When they set prices for two products When they set prices for two products

that have oligopolistic markets and one that have oligopolistic markets and one that is a monopoly.that is a monopoly.

– When they forecast sales at the market When they forecast sales at the market and firm levels and recognize the and firm levels and recognize the difficulty of forecasting sales in difficulty of forecasting sales in competitive markets.competitive markets.


2121

• They apply the time value of money They apply the time value of money concept when they make the decision concept when they make the decision on whether to:on whether to:– Purchase raw material using cash or Purchase raw material using cash or

using a short-term loan from the bank or using a short-term loan from the bank or trade credit from the supplier.trade credit from the supplier.


2222


• They value the importance of financial They value the importance of financial leverage:leverage:– When they request short-term loans, When they request short-term loans,

invest in short-term CDs, and distribute invest in short-term CDs, and distribute dividendsdividends

2323


• They appreciate the importance of They appreciate the importance of operating leverage when they:operating leverage when they:– Observe different impact on profits when Observe different impact on profits when

sales increase or decrease for each sales increase or decrease for each product. product.

•The three products have different cost The three products have different cost structures and respond different to structures and respond different to changes in price.changes in price.

2424


• They practice reading and They practice reading and interpretation of financial statements interpretation of financial statements when they:when they:– Analyze the impact of their decisions on Analyze the impact of their decisions on

profits and other financial indicators.profits and other financial indicators.

2525

How are decisions How are decisions scheduled?scheduled?

• To accomplish the objectives To accomplish the objectives presented before, decisions are presented before, decisions are scheduled in a way that precludes scheduled in a way that precludes complexity at the beginning and complexity at the beginning and allows for concentration on specific allows for concentration on specific topics. The number of decisions topics. The number of decisions allowed are sequentially increased allowed are sequentially increased quarter by quarter.quarter by quarter.

2626


• First decision: Participants are asked to First decision: Participants are asked to forecast sales at the market and firm forecast sales at the market and firm levels while maintaining the same prices levels while maintaining the same prices and expenditures on promotion and and expenditures on promotion and customer service. customer service. – Production orders and financing are Production orders and financing are

automaticautomatic

• The purpose is to observe the effect of The purpose is to observe the effect of income, population, and tastes and income, population, and tastes and preference on sales volumes. preference on sales volumes.

• Their report will show their sales forecast Their report will show their sales forecast errors at the market and firm levels.errors at the market and firm levels.

2727


• Second decision: participants are allowed Second decision: participants are allowed to change prices.to change prices.– Production orders and financing are still Production orders and financing are still

automatic. automatic.

• The purpose is to observe, besides the The purpose is to observe, besides the effect of income, population, tastes and effect of income, population, tastes and preferences, the effect of market and firm preferences, the effect of market and firm price elasticities on each product.price elasticities on each product.

• There is no competitive interaction in one There is no competitive interaction in one of the products, which is a monopoly.of the products, which is a monopoly.

2828


• Third decision: Participants are Third decision: Participants are permitted to set prices again. All other permitted to set prices again. All other variables are constant.variables are constant.

• This allows them to observe again the This allows them to observe again the effect of prices and give them the effect of prices and give them the opportunity of correcting or fine-opportunity of correcting or fine-tuning their pricing decisions.tuning their pricing decisions.

• They still produce automatically what They still produce automatically what they will sell and automatically cover they will sell and automatically cover their funding needs.their funding needs.

2929


• Fourth decision: in addition to setting Fourth decision: in addition to setting prices, participants are permitted to prices, participants are permitted to change expenditures in promotion and change expenditures in promotion and customer service.customer service.

• This allows them to observe the effect of This allows them to observe the effect of promotion and customer service promotion and customer service elasticities on sales volumes and on elasticities on sales volumes and on profits.profits.– Firms still have their Chief Operating Officer Firms still have their Chief Operating Officer

and their Chief Financial Officer taking care of and their Chief Financial Officer taking care of production orders and funding needs.production orders and funding needs.

3030


– The effectiveness of their pricing and The effectiveness of their pricing and promotional and customer service promotional and customer service decisions will be expressed in their decisions will be expressed in their products’ contribution margin and in their products’ contribution margin and in their firm overall profits.firm overall profits.

3131


• Fifth decision: The Chief Operating Fifth decision: The Chief Operating Officer resigned. Teams now have to Officer resigned. Teams now have to make decisions on production orders. make decisions on production orders.

• Firm profits will depend now not only on Firm profits will depend now not only on their pricing and promotional and their pricing and promotional and customer service decisions, but also on customer service decisions, but also on the accuracy of their sales forecasts.the accuracy of their sales forecasts.– Firms may either have excess inventory or Firms may either have excess inventory or

inventory lock-outs with corresponding inventory lock-outs with corresponding effects on profits.effects on profits.

3232


• Sixth decision: The Chief Financial Sixth decision: The Chief Financial Officer also resigned. In addition to Officer also resigned. In addition to their previous decisions, participants their previous decisions, participants are responsible for funding decisions. are responsible for funding decisions. – Now, firm profits depend on the accuracy Now, firm profits depend on the accuracy

of their sales forecasts and their cash of their sales forecasts and their cash budgets.budgets.

3333


• Seventh decision: Firms can select, for Seventh decision: Firms can select, for each product, raw materials from two each product, raw materials from two different suppliers with different prices different suppliers with different prices and term payments.and term payments.

• The purpose is to apply the time value The purpose is to apply the time value of money concept.of money concept.

• They have to decide between They have to decide between purchasing for cash or on credit. purchasing for cash or on credit.

3434


• Eight decision: Firms can distribute Eight decision: Firms can distribute dividends (if they have retained earnings).dividends (if they have retained earnings).

• The purpose is to observe the impact of The purpose is to observe the impact of dividends on liquidity and profitability.dividends on liquidity and profitability.

• (Firms are not listed on the stock market so (Firms are not listed on the stock market so no stock price effect can be observed).no stock price effect can be observed).

• The distribution of dividends affects the The distribution of dividends affects the capital structure of the firm. Thus, the effect capital structure of the firm. Thus, the effect of financial leverage can be also observed.of financial leverage can be also observed.

3535


• Ninth decision: All decisions are Ninth decision: All decisions are permitted.permitted.

• If a product was initially set with a high If a product was initially set with a high fixed cost and high firm price elasticity, a fixed cost and high firm price elasticity, a price war may be underway.price war may be underway.

• Up to twelve rounds of decisions can be Up to twelve rounds of decisions can be made in ManecSim. made in ManecSim.

• This decision schedule can be altered to This decision schedule can be altered to accommodate the teaching objectives of accommodate the teaching objectives of the instructor.the instructor.

3636

SummarySummary• Participants develop abilities and skills in:Participants develop abilities and skills in:

– Demand analysisDemand analysis– Sales forecastingSales forecasting– Cost and profit analysisCost and profit analysis– PricingPricing– Cash budgetingCash budgeting

• They experience competition and the effect of different They experience competition and the effect of different market structures on their pricing and forecasting market structures on their pricing and forecasting decisions.decisions.

• They recognize the relationship between the areas of They recognize the relationship between the areas of marketing, production, and finance, and the relationship marketing, production, and finance, and the relationship between the income statement, the balance sheet, and between the income statement, the balance sheet, and the cash flow statement.the cash flow statement.

• They experience the effect of cost structure (operating They experience the effect of cost structure (operating leverage) and capital structure (financial leverage) on leverage) and capital structure (financial leverage) on liquidity and profitability.liquidity and profitability.

Documents

MANECSIM