Project 4 Analysis Directions: Write your answers below each question. Please do not delete the questions.
1. What strategy were you implementing? What type of product (speed, accuracy, service life, and price) did you design in Round 1? Explain how your settings for speed, accuracy, service life, and price in Round 1 were driven by the chosen strategy.
2. How did you create a sales forecast in each round? Explain. For Round 1 only, how did you use the sales forecast for capacity planning?
3. What was the level of automation in your plant? Why? Discuss the role of contribution margins, if any, in your decisions regarding automation.
4. Are you running a second shift? Why or why not? Did you have inventory issues in any round? Explain.
5. Which country (or countries) and customer segment (or segments) were you targeting with your product and why? Describe any two marketing decisions that you implemented over the four rounds to enable your desired targeting. If you introduced a region kit, describe how that affected your sales.
6. Remembering what you have learned in MBA 620 and by referencing the financial accounting ratios, calculate the net profit margin ratio at the end of Round 4. What does this ratio tell you about the profit being generated?
7. Examining the balance sheet at the end of each round, calculate the current ratio for each round. Next, perform a trend analysis based on the current ratio you calculated for the end of each round. Do you find the current ratio increasing or decreasing through the four rounds? (Keep in mind, if the current ratio is below 1, the company does not have enough in current assets to cover current liabilities, if the current liabilities were all due at once). At the end of Round 4, can the company satisfy current liabilities?
8. Understanding how efficiently your company is operating is important from an operations and finance perspective. The best way to measure operational efficiency through financial statements is through working capital. Calculate working capital for Round 4 using the balance sheet for your calculation. How efficiently is your company operating? (Keep in mind, a good working capital ratio is between 1.2 and 2.0).
9. At the end of Round 4, how aware are consumers of your product in each country? How accessible is your product to the consumers in each country? How did your awareness and accessibility change from Round 3 to Round 4, and did that have any impact on your sales?
10. Did your team’s decisions in Rounds 1-4 always align with the chosen strategy? If you found yourself deviating from your strategy, explain why. In hindsight, what decisions would you have made differently? Explain.
Project 4 Analysis Directions: Write your answers below each question. Please do not delete the questions.
For Project 4, Team Digby used the Niche Differentiator Strategy. The Niche Differentiator Strategy focuses on the high-tech segment across two or more countries (UMGC, 2021a.). In Round 1, we decided we were going to produce two different products with the intention of selling one in the United States and market the other for Germany.
At the beginning of Round 1, we already had our first product, Daze, in production. Daze was our product for the United States, and it had a speed and accuracy of 7.4, a service life of 21,000, and was sold for $39.00 per unit. We also introduced our new product, Dome, into Research and Development, with a projected speed and accuracy of 7.5 and service life of 20,250. We determined our speed and accuracy positioning based on the market conditions for the high-tech segment, 6.7 for Round 1 (UMGC, 2021b.).
For Round 1, Team Digby reviewed our total sale from Round 0 to determine our sales forecast for Round 1. In Round 0, our total unit sales were 973 in the high-tech segment and 533 in the low-tech segment, totaling 1,506. Based on the Market Conditions Report, the United States had an expected growth rate in the high-tech segment of 13% and 6% in the low-tech segment
(UMGC, 2021b.). Because Team Digby was primarily focusing on the high-tech segment, we looked at the new market size and based our forecasts off that and a 10% increase of our previous year’s total sales. We reduced our forecast from 1,700 in Round 0 to 1,400 based on our assumption of our product not being marketed to the low-tech segment anymore.
The reduction in our forecast also reduced our needed production. We decided not to sell any capacity at this time, so it remained at 1,700. This decision was made because we did not want to sell capacity and need to acquire more in the future. Because we lowered our production and were not operating at full capacity, our plant utilization was 84% for Round 1.
The automation for a product is determined the year prior. In Round 1, Team Digby operated Daze with an automation of 3. We also had a contribution margin of 40.4% for Daze. The contribution margin measures the total amount by which revenue from sales exceeds costs (Gallo, 2017). Essentially, the higher the contribution margin, the better. In Round 1, we determined our automation for Daze to be 3.3 and Dome to be 2 for Round 2.
Our contribution margin for Daze in Round 2 was 39.7%; however, we also increased our price slightly to $41.00 per unit. Our contribution margin for Dome was 24.2% for Round 2. The reason it had a lower contribution margin was because it was operating at a lower automation, thus increasing labor costs which subsequently increased variable costs.
In Round 2, we set our automation for Round 3 as follows, Daze at 4 and Dome at 3.5. In Round 3, our contribution margin for Daze was 38.4% and for Dome was 33.7%. In Round 3, we set our automation for Round 4 at 4 for both Daze and Dome. Our contribution margin for Daze was 34.7% and 25.7% for Dome in Round 4. Lastly, one reason the contribution margin for Daze remained higher than Dome for the duration
of all 4 rounds was because the product was sold in the country it was manufactured in. Thus, we did not have the shipping costs added to our total costs and lowering the contribution margin.
In Round 1, Team Digby did not run a second shift. We also did not have an inventory surplus in Round 1. In Round 2, we ran a second shift for Daze. We produced just slightly over capacity, running at a 112% plant utilization. We also had an inventory of 255 units remaining in surplus at the year end. We did not run a second shift for Dome, we operated at 100% plant utilization.
We did have an inventory surplus for Dome as well in Round 2, 134 units. In Round 3, we still required a second shift for Daze. However, we had reduced our production and our plant utilization to 103%. We did have a very large surplus that year, 748 units. We also ran a second shift for Dome, operating at 113% plant utilization. We had a slight inventory of 50 units for Dome.
In Round 4, we greatly reduced our production because of the prior year’s surplus. We did not require a second shift and operated at 78% plant utilization. Additionally, we still had a surplus of 524 units; however, it was lower than the previous year. Dome required a second shift and operated at 159% plant utilization. The surplus increased to 298 units for Dome in Round 4.
Team Digby targeted the high-tech customer segments in the United States and Germany. We decided to only introduce one product per country because we were only targeting the high-tech
segment and did not want our products competing against one another, we felt there would be enough other competition with the other teams. We marketed Daze to compete in the United States and immediately implemented a region kit. The region kit was crucial to attaining a higher market share in that country. We marketed Dome to compete in Germany and implemented a region kit as well.
One decision we made to ensure we were following our Niche Differentiator strategy was our positioning. In the high-tech markets in both the United States and Germany, ideal positioning is at the top for customer buying criteria (UMGC, 2021b.). We wanted to have to most competitive speed and accuracy because of their importance. Additionally, we tried to keep our products’ ages as close to 0 as possible. We were able to continuously reduce the age of our products by adjusting our speed and accuracy.
Net profit margin is equal to the amount of net income or profit is generated as a percentage of revenue (Murphy, 2021). In other words, net profit margin is equal to net income divided by revenues multiplied by 100. In Round 4, Team Digby had a net income/net profit of $4,923,000. Our total revenues for Round 4 were $94,106,000. To determine our net profit margin, we divide our net income of $4,923,000 by our revenues of $94,106,000.
After multiplying the total by 100, we come up with a net profit margin of 5.23%. A larger profit margin means more of every dollar in sales is kept as profit. Although our profit margin was not the highest of the teams, Erie had the best profit margin of 8.15%, but we did have the second highest profit margin. What our net profit margin tells me is that we were able to keep
a good percentage of our total sales as profit. I can attribute this to our low variable costs, specifically our low labor costs. High labor costs eat into profits.
A current ratio determines a company’s liquidity (Fernando, 2021). A current ratio is equal to current assets divided by current liabilities. Current assets are defined as all the assets which are expected to be sold or used within the next year as the result of normal business operations; current liabilities include liabilities due within the next year, accounts payable, dividends payable, interest payable, etc. (Fernando, 2021). In Round 1, Team Digby had $21,729,000 in current assets and $2,626,000 in current liabilities. We had a current ratio of 8.27 in Round 1.
In Round 2, we had $39,821,000 in current assets. We had $5,360,000 in accounts payable and $1,867,000 in current debt, giving us $7,227,000 in current liabilities. Thus, our current ratio was 3.87. In Round 3, Digby had $46,339,000 in current assets and $5,048,000 in current liabilities, as we only had accounts payable. We ended the year with a current ratio of 9.18. In Round 4, we had $55,617,000 in current assets. We had $5,299,000 in accounts payable and $3,733,000 in current debt, giving us $9,032,000 in current liabilities. Round 4 closed with a current ratio of 6.16. At the end of Round 4, Digby was able to cover their current liabilities.
Over the course of the four rounds our current ratio varied greatly. In Round 1, it was 8.27 but was reduced to 3.87 in Round 2. The reason behind the drop is because we had bonds coming
due that year, so they moved from long-term liabilities to current liabilities. In Round 3, our ratio increased to 9.18 because we did not have any long-term debt maturing. Round 4, saw another drop in our current ratio to 6.16, but not nearly as drastic as Round 2. We had increased our current assets more by Round 4 to offset the long-term debt which was maturing. Additionally, we did not take out any short-term loans and did not require any emergency loans during any of the rounds. This greatly reduced our current liabilities and increased our current ratio.
A working capital ratio is used to assess a company’s financial performance (Maverick, 2019). Working capital is equal to current assets minus current liabilities. A working capital ratio is the same thing as the current ratio. In Round 4, we had $55,617,000 in current assets. We had $5,299,000 in accounts payable and $3,733,000 in current debt, giving us $9,032,000 in current liabilities. We closed Round 4 with $46,585,000 in working capital, with a ratio of 6.16.
Our ratio of 6.16 is much higher than what is considered a good working capital ratio of between 1.2 and 2.0. A high ratio can be attributed to many things including high accounts receivable, a large inventory, a large amount of cash on hand. In our case, we had lots of cash on hand in Round 4 totaling $26,632,000. Because of this amount of cash, we did not require any short-term debt. It would have been wise if we would have used some of the cash on hand to invest more into the company or to pay off some of our existing long-term debt.
At the end of Round 4, Team Digby had two products in two different countries which we specifically targeted the high-tech segments. Even though our strategy was for high-tech, we were still able to pull a bit from the low-tech segment for Dome. Daze was our United States product with a region kit. In the high-tech market, Daze had 100% customer awareness. The region kit helped with our awareness. Daze also had 82% customer accessibility.
Our high awareness and accessibility percentages attributed to our high design score of 94. In Round 4, we had Dome as our product in Germany with a region kit. In the low-tech segment, Dome had 100% customer awareness and 17% customer accessibility. I attribute the low customer accessibility due to the fact we were marketing the high-tech segment.
In the high-tech segment, Dome had 100% customer awareness and 65% customer accessibility. The high accessibility in both segments is due to the region kit and our promotion budget. Although our customer accessibility was only 65%, we had maxed out our sales budget. However, we still had the highest accessibility in Germany for the high-tech segment.
Overall, I believe Team Digby’s decisions aligned with our chosen strategy of Niche Differentiator. I believe our pricing and positioning strategies placed us directly in the high-tech segment for the United States and Germany. In hindsight, I would have made some different
decisions. I believe we should have expanded our products into more than one market per product. I feel we could have captured a larger market share. The main reason we chose not place more than one of our products into each market was because we did not want to compete against ourselves.
I believe if we would have chosen a different strategy, preferably Broad Differentiator, we would have had multiple products in each segment. But because both of our products were targeted at the high-tech market, we thought it best to leave it one per region.
Fernando, J. (2021, March 1). Current ratio. Retrieved from https://www.investopedia.com/terms/c/currentratio.asp
Gallo, A. (2017, October 13). Contribution margin: what it is, how to calculate it, and why you need it. Retrieved from https://hbr.org/2017/10/contribution-margin-what-it-is-how-to- calculate-it-and-why-you-need-it
Maverick, J.B. (2019, March 29). The working capital ratio and a company’s capital management. Retrieved from https://www.investopedia.com/ask/answers/041015/what- does-low-working-capital-ratio-show-about-companys-working-capital-management.asp
Murphy, C. (2021, February 26). Net profit margin. Retrieved from https://www.investopedia.com/terms/n/net_margin.asp
UMGC. Eight Strategies in Capsim. (2021a.). Document posted in University of Maryland Global College MBA 670 A521 online classroom, archived at https://leocontent.umgc.edu/content/umuc/tgs/mba/mba670/2211/course-resource- list/types-of-strategy.html?ou=576699
UMGC. Capsim Global – Market conditions report. (2021b.) Document posted in University of Maryland Global College MBA 670 A521 online classroom archived at https://leocontent.umgc.edu/content/dam/learning-resources/course- content/mba/mba670/capsim/ms-office-files/CapsimGlobal %20MarketConditionsReport.pdf?ou=576699
MBA 670 Project 4 Discussion (Solved Question 1 and 2)
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