Tycoon 2-2 CW Post 12-10-2002 Dr. B. Armandi MGT 71: Business Policy Roth Hall Subject: Final report on the Executive Game for firm 2, industry 2. Dear Dr. Armandi:
Enclosed is the final report for the Executive Game for Tycoon 2-2. The members of Tycoon 2-2 are, Matt Kassin, Raghav Sharma, Rose Ann Licaros, and Kevin Cherry. The following report will provide information concerning all aspects of the first 3 years of operation. The Executive Game report will dissect all information from the previous 12 quarters and all decisions made by the firm. An Executive Summary will clearly outline where in the report, any desirable information can be found. There is a section containing a quarter by quarter analysis for the first 3 years, there is a section devoted to financial ratios for the firm and also a section explaining the firms strategy and policies over the course of the 12 periods. All of the information for this report was gathered from the previous 12 periods of play from the Executive Game. All numbers, strategies and policies are clearly outlined in the report Tycoon 2-2 took this project very seriously and ran it as it were a business, not a game. We have learned a great deal through this project about how to apply what we have learned in our years spent studying business management. Thank you.
Sincerely, Matt Kassin, President Raghav Sharma, VP of Finance Rose Ann Licaros, VP of Marketing Kevin Cherry, VP of Marketing
II. Executive Summary First in sales volume, first in net profit in first quarter -4 High Dividends and high volumes. -5 Highest net profit and finished the year off with 12.26% ROI -7 Continuation of dividends -8 Increase in sales allowed for an increase in dividends.-9 Corrected raw material purchase -10 Preparation for strike -11 With strike we’re the only company who did not need to borrow -12 Only company with dividends -14 Third in ROI and ready for quarter number fourteen -16 Number one in research and development -16
III. Strategy and Policies Analysis Starting in quarter one; we felt that a mid-priced, high volume, mid-high quality product was the proper direction for Tycoon 2-2. By keeping volume high and the price in the mid part of the company range, Tycoon 2-2 was able to keep a steady profit and it also allowed us to avoid borrowing money and to keep the company profitable. Through out the course of the three years, it was decided that marketing would be increased an average of approximately 12% per quarter. This policy was kept until quarters seven through ten. In this time period there was a possibility of a strike, and then a strike. Also during this time frame in period seven, Tycoon 2-2 had an ordering problem which was corrected in time for the following strike. With out this temporary policy change Tycoon 2-2 would have had serious financial problems in the later strike months. In quarter seven, research and development was suspended in order to reverse the minor monetary problems that the inventory error caused. The first three quarters, Tycoon 2-2’s plant expansion policy was to increase production by approximately 3.35% a quarter. This policy was lowered in quarters four and five. This was because of a fear that Tycoon 2-2 was expanding faster than the economy would allow. Throughout the possible strike period, expansion was stopped due to an unsure future of the availably of materials to produce with.
IV. Quarter by Quarter Analysis 1st Quarter Analysis
The first quarter of the game was difficult in that we were feeling out the game as a group. Our strategy was in its infancy and we weren’t exactly sure what kind of approach we were going to take. What we decided on, was to play the first quarter a bit conservatively but to keep in mind the seasonal index for the following quarter. The firm decided to set the price at $23.42, thinking that it would be a bit below the industry average of $24. Here our market potential would be 139,046 and our production could reach 126,296. Our marketing expense was $222,000 and our research and development expense was $118,000. In retrospect we could have either raised our price a little or spent less in marketing to even out the market potential and our production for the quarter. However we had materials left over for the next quarter when the seasonal index would be at its peak. We gave out dividends of $49,191 or 18% of net profits after income tax. The decision on plant capacity was to increase it 3.3% and the total plant and equipment investment totaled $424,850. The materials purchased for the following
quarter were $551,850. Since October, November, and December is the biggest quarter in terms of sales; we wanted to make sure we had a substantial amount of raw materials so we could acquire a larger market share. It was difficult to make the decisions for the first quarter; however we came out at the top in our respective industry. We put ourselves in good position for the following quarter and got a better idea of how we were going to make future decisions in the game.
2nd Quarter Analysis
For the second quarter, that being October, November, and December, the group felt it necessary to increase sales and bring in as much revenue as possible. We felt there wouldn’t be too much of a change in price but if there was any, it would go down. The price was set at $23.37, again aiming at the middle of the pack as far as the estimated industry average. The market potential at this price was 176,776 and production could reach 151,792. Again we did not adjust our other decisions to bring the market potential down to what we could produce, leaving money for other firms to make. In hind sight we also could have increased plant capacity at a greater rate than the 3.3% we used in the first two quarters. At the 3.3% increase, the plant capacity for next quarter is 112,142. Marketing was $246,420, up 11% from the previous quarter, and research and development was $139,240 up 18% from the previous quarter. These decisions were a bit premature as it wasn’t necessary to increase marketing because of the seasonal index and our market potential being as high as it was in relation to the max production schedule. Research and Development was increased so much to try and go toward a more differentiated product and acquiring a niche within the market. Dividends paid out for qtr.2 were $119,755, holding the 18% policy from the previous quarter. The Materials purchases for the next quarter were $989,091 and the seasonal index for the next quarter is the low-point for the year. The first two quarters taught us a great deal about the industry and how it is was affected by the decisions. We were far more efficient in the following quarters.
3rd Quarter Analysis
The 3rd quarter brought in the year low as far as seasonal index for the months of January, February and March. The total industry sales were expected to drop about 36% and so the firm decided to raise the price to $23.45 where the estimated industry average was $23.75. The market potential at this point was 124,135 and production could reach 120,816. We decided at this point to try and bring those two numbers closer together yet leave some room for error. This way we would waste less money and still be able to compete if the estimates were off. Marketing for the 3rd quarter was increased 11%, totaling $273,526. Research and development was increased 18% totaling $164,303. Both expenses followed suit from the previous quarters’ policy. Plant investment for the 3rd quarter was increased to 3.5% up from 3.3% the two previous quarters. The firm felt that a slight increase at this point would enable us to produce more when the seasonal index reaches its high point again. The maintenance expense for the 3rd quarter was also lowered about 25% to cope with the low seasonal index and sales. The materials purchase for the 3rd quarter was $757,516. This is down because the firm realized it over spent on materials the previous quarter. The seasonal index will still be on the low side next quarter, so an abundance of raw materials is not essential. Dividends paid out in this quarter were $15,476 or the 18% policy from the previous quarters. At this point the firm is doing well in terms of profits and owners equity. Cash assets are also increasing. The next quarter marks the end of the first year and the firm is doing well and improving.
4th Quarter Analysis Quarter 4 brings us to the end of the first year of the Executive Game. After three quarters, management has gotten a decent grasp of the rules of the game and because we had previously done well, we wanted to take steps to continue to do so and even raise sales and profits. In this quarter, we had lowered our price to $23.20, which we had hoped would be close to the average. At this point, we had figured that we would be able to meet the market potential that we calculated of 152,847 units. In order to do that, we increased plant capacity to 1.50% to produce what we felt we needed and in an effort to capture more of the market and generate more profits. Additionally, we held consistent with our marketing budget increase by raising it 11% to $303.614. However, unlike the previous quarter, we held our research and development budget at $164,303. Although we wanted to be able to differentiate our product through quality, we felt that it wouldn’t be detrimental to our performance to leave our research and development budget as it was. Increases were felt in both areas of maintenance and materials purchased. We had greatly increased our materials purchase to 965,993, which is a 21.58% increase from quarter 3. We felt it necessary to do so in order to be able to produce what we had calculated because we saw an opportunity to increase our sales. We were hoping that our decisions thus far would allow us to end the first year of the Executive Game with a substantial gain and high returns and a strong return on investment.
5th Quarter Analysis Quarter 5 ushered in year 2 of the Executive Game. Although our calculations seemed off for the fourth quarter and we ended up with a loss and inventory carried over, we did finish the first year off strongly, ranking number one in both sales and return on investment. Our overall performance for the first year provided us with confidence despite the errors that had occurred in quarter 4. Grappling with the problem of high market potential that we weren’t meeting and with full knowledge that the next quarter had the highest seasonal index, we once again raised plant capacity by 1.75%, as well as, raise the marketing budget by 13% to 343,084. Additionally, we lowered our price once again to $23.17, which is below what we felt the average would be. We felt we had to take these actions in order to recoup the losses incurred in quarter 4. We took a loss in the previous quarter and wanted to post positive numbers and the lower price and increased marketing was necessary in order to be able to not only sell what we could produce but the inventory we carried over from quarter 4 as well. This quarter also brought renewed interest in research and development and we raised that budget by about 1.5% to 193,878. However, being a little more cautious due to the unexpected losses of quarter 4, we held back a bit on dividends and decreased our distribution of them by 9.5% to $26,469. We wanted to take this quarter as an opportunity to regain what we had lost in the previous quarter and strengthen our position.
6th Quarter Analysis Decisions made in the previous quarter had paid off and we came out number one in both sales volume and net profit, so we were finally able to put behind us our first loss. Keeping in mind that the next quarter will have the lowest seasonal index, we felt comfortable enough with our performance and our production that we kept plant capacity and marketing steady and did not increase or decrease the budget. We did, however, raise our price to $23.45 because we felt that this period would be the busiest and that though our market potential was 196,912, we were only able to produce 153,340 and that a raise in our prices would not really affect the amount we sell because we could only make so much and this way, we allowed ourselves some room for error and at this point experimentation. In continuing with previous quarters, we did raise our research and development budget by 1% to 228,776. We felt that by steadily investing in research and development, we would be able to differentiate our product from others, thus increasing our market and sales. The confidence that we had also regained allowed us to share in our earnings by increasing dividends by about 33% to 40,092. At this point in the game, we feel comfortable with our cash assets, which were increasing, and our performance. The next quarter marks the end of the second year and though the firm is doing well, we wanted to continue to do so and prosper and are carefully looking at the minor discrepancies that are present in order to better perform.
7th Quarter Analysis
The seventh quarter constituted the months of January, February and March, which is the slowest quarter of the year following the holiday season. In the precious year we had excelled in our return on investment percentage so we as a group decided that we should try to provide a stable company with positive cash assets and low fluctuations in net profit. In order to provide a stable company to the shareholders, we decided to set the price at $23.37, thinking that it would be a bit below the industry average of $23.55. Here our market potential would be 152,743and our production could reach 120,347. We could have set a higher price than that to match the market potential and our production, but we choose the conservative method as we were unsure of the market price as we had seen other firms prices fluctuate consistently. Our marketing expense was $228,776, which we had decreased by 20% and our research & development expense was $118,000 which remained the same as last quarter. Though we could have either raised our price a little or spent less in marketing to even out the market potential and our production for the quarter. We gave out dividends of $8,147 or 18% of net profits after income tax. The decision on plant capacity was to keep it constant as we had estimated that we were increasing it at a faster rate than we should. The materials purchased for the following quarter were $1,040,000. This was an increase from the previous quarters as we had noticed that we were ordering fewer raw materials and often our production would be limited to the raw material and not the plant capacity. Though here we saw a decrease in cash assets due to the changes, namely lower price and ordering more raw materials.
8th Quarter Analysis
the 8th quarter consisted of the months of April, May and June, here the market returned to its normal strength with the seasonal index at 100. Here there was a 50% possibility of a strike. We wanted to protect ourselves in this quarter as well as have some raw materials for the next quarter. As in case of a strike we wouldn’t be able to purchase any raw materials and could have to bear a loss in the next quarter. The price was set at $24.28, which was higher than the industry price as learning from our previous quarter, we set our sales volume closer to our market potential. The market potential at this price was 130,758 and production could reach 161,490, which meant that we sell 130,758 and have approximately 30,632 units remaining in our inventory to sell next quarter if there was a strike. Our marketing expense was $233,297 down 15% from the previous quarter, and research & development was $269,956 up 18% from the previous quarter. Research & Development, was increased so much to try and go toward a more differentiated product and acquiring a niche within the market. Dividends paid out for this quarter were $8,287, maintaining the 18% policy we followed. The Materials purchase for the next quarter was $904,275.
9th Quarter Analysis
The 8th quarter was the end of the year, we were starting on our 3rd year, we were the only firm to have net cash assets as we wanted and were second in ROI percentage. The 9th quarter consisted of the months of July, August and September, which had a seasonal index of 95. Going into the 9th quarter there was a 75% probability of a strike, though negotiations were still continuing. We tried to minimize our losses and followed the same plan as we did in the previous quarter. We decided not to sell all the units at in this quarter as then in the next quarter we wont have any units to sell and will have expenses. So we set our price at $24.82 which we expected to be lower than the industry price as we assumed that in the scenario of the strike other firms will increase their prices to make a profit this quarter which will help them mitigate the losses they might incur it the following quarter. The market potential at this point was 119,980 and production could reach 169,270, which meant that we had 49,290 units remaining which we will sell in the next quarter. Marketing for this quarter was decreased by 25% totaling $174,973. We continued to increase our Research and development by 18% in order to produce a better product, the R&D totaled to $318,548. As in the previous quarters we did not increase our plant investment as we were trying to maintain the capacity of the plant at that level and also due to the possibility of a strike we didn’t want to increase it and waste money as we wouldn’t have been able to produce up to plant capacity. We maintained our dividend policy of 18% of net income, as dividend is a pay off for the shareholders for the money they invested in our firm, we
strongly believed in paying dividends every quarter. The materials purchased for the next quarter were $806,678. and our total addition to cash assets were a negative $32,175.
Quarter 10 Analysis Quarter ten brought forth a problem within the industry as a whole. Because of a strike in the previous quarter, Tycoon 2-2’s raw material order was canceled. However, in quarter nine, we saved some of raw materials in case such incidents were to occur. In this quarter, we had enough raw materials saved to produce 49,098 units. In this quarter, Tycoon 2-2 had the highest sales volume of the industry. Research and development was cut to $159,274 in order to compensate for our projected loss. This move saves Tycoon 2-2 close to $160,000. All marketing was canceled at this point in order to save cash and lower or marketing potential which was 87,772 units, almost 37,000 more then we could produce. Through this strike it was felt that a price of $28.70 was appropriate and that this would be on the high end for the industry. Our analysis was incorrect; the high price for the industry was $30.50. This incorrect analysis cost the firm approximately 50-75 thousand dollars. This is money that could have been used to offset our expenses which were $1,642,142. In this quarter our raw material order was placed. This did not affect our bottom line because the money that was saved in the prior quarter from the canceled order was used for this order. This quarter being October, November, and December caused a great loss to both us and the industry as a whole. However, because of our past savings and policies we were able to stay in the black in terms of cash. Though we had an overall loss, we were prepared for this. Unlike many of the other firms that had to borrow, we had cash set and materials set aside for just such an even.
Quarter 11 Analysis Quarter eleven brought us a profit of $74,809. This was with a price of $24.18 which was slightly below the industry average. We felt the average would be around $23.50. We felt that in order to make up for the previous quarter’s loss that we would increase above the average. This, however, showed that our analysis was quite a bit off, as the average was $25.75. In this quarter, we were also the only company in the industry to post a dividend. We increased marketing and research and development to $268,292 and $318,548 respectively. This increase helps us create a greater demand for our products but also created a production problem. Do to factory limitations we were only able sell 159,960 units. In this quarter we also suspended plant expansion for fear of the following quarter’s economic conditions. We also lowered maintenance to approximately one dollar per unit, saving the company some money.
Quarter 12 Analysis Our price for this quarter was set at $26.30. Marketing was increased 11% and Research and Development 18%. Our price and marketing brought us a potential of 184,664 units. However, our facilities allowed us to only produce 158,725 units with the use of overtime. The increase of price was doing to an analytical view that price overall would be increasing and that the loss obtained during the strike could start to be recouped. However, we were still in the red for this month in our cash account. Our net profit for this quarter was $273, 391, with taxes of $76,150. This brought our net profit to $197,241, our highest in quite a while. Our dividend policy was increased to 22% of profits or $51,524. We felt that as profits increased we should start to give more back to the shareholders. We also felt that plant expansion would be suspended for the last month of year three. We felt expansion would be over stated for the time being. Starting in quarter 13, our analysis showed that expansion could start again at a modest one to two percent per quarter. This would allow for the company to start expanding in accordance with the economic conditions set before it. We ended off this year third in ROI. Though not bad, not that great either. However, by looking at the other companies we determined that we were only one of the few that would be ready for the following quarter, if this game continued.
V. Financial Ratios Ratios are important in determining the trends and the companies SWOT analysis. Financial ratios are dividing into certain categories which are: Liquidity ratio, Leverage ratios, Activity ratios and Profitability ratios. Liquidity Ratios: These ratio tries to determine how liquid its assets are, also whether or not a corporation is going to meet its short term obligations, and whether they have enough short term assets to cover its short term liabilities. An example of a liquidity ratio is the current ratios. Current Ratio = Current Assets / Current Liabilities. In out firm we don’t have any current liabilities, hence we can not compute this ratio. Another ratio that we may use in finding the liquidity of the firm can be the working capital, this shows in dollar form how much in excess our current assets are over the current liabilities. Working capital = Current Assets – Current Liabilities. Year 1 Year 2 Year 3 Working Capital = 1,934,432.00 – 0 = 1,934,432.00 Working Capital = 1,872,681.00 – 0 = 1,872,681.00 Working Capital = 1,808,785.00 – 0 = 1,808,785.00
Leverage Ratios: These ratios measure how the funding of the firm is broken up and classified. It segregated and compares the amount of money invested in the firm by owners and the loan given by creditors. Debt to Equity Ratio = Total Debt / Total Equity. This ratio shows the relationship between debt and equity. Our firm was financed 100% by Equity. Equity Ratio = Equity / Assets This ratio shows the relationship between the equity of the firm and the total assets of the firm. It shows the assets contributed by owners. As our firm did not have any debt, our total equity equaled to our total assets, hence making the ratio equal to 1. Activity Ratios: These ratios help to determine the efficiency of the firm. Asset turnover = Sales / Total assets. This is a measure to estimate how well assets are being utilized to generate sales. Year 1 Year 2 Year 3 Asset turnover = 1.281014654 Asset turnover = 1.303043767 Asset turnover = 1.182496349
Profitability Ratios: These ratios tell how profitable a company is, that is how much profit a company is making with respect to sales and assets. Operating Profit margin = Profit before interest and Taxes / Sales This compares the firm’s income from operations to sales, without considering interest expense. Year 1 Operating Profit Margin = 0.069211089 = 6.9% Year 2 Operating Profit Margin = 0.026692144 = 2.6% Year 3 Operating Profit Margin = 0.020191367 = 2.019%
Net Profit Margin = Net Profit / Sales This compares the net profits to sales, it helps in determining the amount of net profit that has generated from sales. Year 1 Net Profit Margin = 0.052115009 = 5.21% Year 2 Net Profit Margin = 0.021714835 = 2.17% Year 3 Net Profit Margin = 0.017562905 = 1.75%
Return on Assets = Net Profit / Total Assets This relationship show how total assets are being used to produce profit. Year 1 Return on Assets = 0.06676009 = 6.6% Year 2 Return on Assets = 0.02829538 = 2.8% Year 3 Return on Assets =0.020768071 = 2.07%
VI. Conclusion The SWOT analysis can be determined as follows. The firm’s strengths are its cash assets, in that at no time did the firm need to borrow money, and another strength is the consistency of the firm, investing in firm 2 is the safest bet because of its high ROI and low risk. A weakness of the firm may be its lack of risk taking. Firm 2 is more of a safe bet, its policies do not include making decisions that have a high chance of affecting the firm adversely. One way the firm may have increased ROI would be in taking chances like zeroing out Marketing and R&D. however we felt those decisions to be too risky to chance. Opportunities of the firm can include the fact that had the game gone on into period 13 and beyond, Firm 2 would be in very good shape to take a large percentage of the market. A threat of the firm would most likely come in the form of another company with a highly differentiated product, where a portion of the industry sales volume would be taken away. However, Firm 2 is prepared for most threats because of its cash assets and stable operation. In conclusion, the above paper and following worksheets show a compilation of four years of schooling in business and a semester of extended learning. Through out this semester the members of Tycoon 2-2 have learned various methods of how to manage a business’ finances and how to create various policy’s that will help promote future growth.