REINVENTING A BUSINESS SIMULATION TO INCORPORATE

RISKS ASSESSMENT IN AN INTERCONNECTED WORLD

Robert Boehner, JDThomas Pray, Ph.D.

Gregory VanLaeken, MBA

Bob Boehner

The Paper

The focus is on “modeling” a business simulation scenario

whereby a firm may enter into a new and riskier foreign market with a rapidly changing high-tech product and a short time

horizon

Business Simulations

• Many business simulation have the participants manage a business in a relatively stable market

• CAPSTONE/CAPSIM has the team “turn” around a 100 million dollar business, which has average products and may have from 5 -8 years to do it

Business Simulation Revisited

• Web-DECIDE simulation has each team picking a deliberate strategy and attempting to implement that strategy over 2 -3 years in a purely domestic market

Three Parts to the Reinvention

Simulation Software

Excel Spreadsheets

A Business Case

In terms of Web-DECIDE simulation – after 2 years of play we introduce this new opportunity:Produce a high-tech product – Smart LED

Light Bulbs – and sell in a new foreign market – Indonesia

Restricted to a maximum of two year horizon

The Scenario

1.How much capital will be spend to manufacturer the product?

2.Where will we manufacturer the product?3.Estimate how many will be purchased?4.R&D and SGA allocations5.Quality training overseas6.Hourly wage7.What price will we charge?8.Terms for AR and AP9.Overseas manufacturing – estimate WAAC and

exchange rate projection

Decisions

1.RISKS1.Market acceptance and forecast error with Bass Function2.Over or under capitalization3.Production setup and capacity conversion issues4.Consumer reaction to AR terms5.Supplier reaction to AP terms6.Exchange rate7.WAAC rate changes8.Downtime and Waste variability9.Inadequate quality focus

Risks

Risk Assessment:Forecasting Demand

Forecasting Sales – The Bass Diffusion Model

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 240%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Market Penetration - Various Values innovators (p) and Imitators (q)

p=.0112 q=0.5 p=.5 q= .001

p=.001 q=.3Market Penetration

Time

Risk Assessment:Build Overseas or in the US?

• What is an appropriate discount rate that properly captures non-quantifiable risks?

• Should capital come from an internal parent-to-subsidiary loan, from a domestic capital market, or from a foreign source?

• How do the country tax rates impact the discounted cash flow?

• Is the local currency freely convertible and if profits are allowed to be repatriated will they be taxed?

THANK YOU FOR COMING AND LISTENING

FROMBob, Tom and Greg

QUESTIONS