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 StrategyBuild to make moneyDetermine if profits on new capacity allowed for cost of building new plant

Avoid unnecessary capacityExpanding on this example. In the next year, year 4 the market called for 4152 units so we built 4000. That 1000 new units of capacity had direct profits of $27,400,00040Production 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

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 $27,400,000. Subtract the 10m for the new plant, total profits on luxury were $17,400,00041Inventory 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

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 %

Areas of R&DWe invested equally in the 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 profits

51Benefit of DevelopmentIncreasing gross profit Being market leader in net profitsAll of this growth requires capital, Wes is going to tell you how we made the decisions to drive our decisions.

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

Strategic Alternatives

Strategic AlternativesPaying dividends

Diversification into different markets within the automobile industrySUVsHybrid VehiclesMotorcycles

Strategic AlternativesBackwards integration to reduce manufacturing costsEngine manufacturingTire and wheel productsElectronics

Defusing new technologiesFirst mover advantage for new auto featuresEstablish brand image as first mover in the auto industry