Capsim Simulation Guide

Capsim Simulation Guide

Welcome to your Capsim Simulation! If you're reading this, you are likely about to embark on (or have recently started) your Capsim Simulation journey. Initially, it might seem overwhelming, but rest assured, all the necessary resources are available. Once you grasp the core concepts, you'll find the experience not only manageable but also enjoyable.

About Me

I have been supporting MBA simulation games since 2002, accumulating over 20 years of experience with various platforms including BSG, Capsim, Cesim, Interpretive, Markstrat, and more. Each year, I add a new game to my repertoire to stay current and provide the best guidance possible.

Additionally, I have created a series of free, step-by-step video guides for each simulation round, designed to help students understand and excel in their simulations with better understanding

Part 2

Quick Capsim Guide with Helpful Tips

General Tips

1. Commit to Thorough Study: Engage deeply with the substantial material available. The effort you invest will pay off.

2. Leverage Multiple Information Sources: Utilize class literature, YouTube tutorials, Reddit discussions, and other resources. However, exercise critical thinking and prioritize official Capsim documentation over potentially unreliable online content.

3. Team Dynamics in Simulation: Whether competing against the computer or classmates, teamwork is crucial. It is generally more effective to avoid dividing responsibilities (e.g., one student managing R&D, another marketing). This is due to the interconnected and linear nature of the decision-making process. Instead, consider appointing a "CEO" who can mediate and finalize decisions when team consensus is elusive.

4. Understand and Justify Decisions: Be prepared to explain and understand the rationale behind each decision. Reflect on the reasoning if you find yourself unclear.

5. Adhere to Professor’s Requirements: Know the grading criteria, whether it's stock price, sales, balanced scorecard metrics, or overall performance. Follow any specific instructions or demands from your professor, as they will ultimately assess your performance.

6. Utilize Excel Spreadsheets: Creating your own spreadsheets can enhance your understanding of game mechanics and reduce the likelihood of errors. Be mindful that different simulations might use varying numbers or settings, potentially causing significant mistakes if not carefully tracked.

7. Enjoy the Process: Remember that Capsim is a simulation game. Approach it with a positive mindset and have fun!

By following these guidelines, you will be better equipped to navigate and excel in your Capsim simulation.

Part 3

General Strategy

1. Make Big Investments Early: Don’t hesitate to incur significant debt, face a temporary drop in stock price, or experience initial losses. These early rounds are about laying a solid foundation for your company. Focus on setting things up correctly, and the positive results will follow in later rounds.

2. Consider a "Broad Differentiator" Strategy: This involves having a strong presence across all market segments with high-quality products. While various strategies can succeed, this approach ensures your company is well-rounded and competitive.

3. Follow the Linear Decision-Making Process:

   • R&D: This is the cornerstone of the game. Strong product development can recover a challenging situation. Focus on meeting customer criteria: Age, Position, Price, and MTBF (Mean Time Between Failures).

   • Marketing: Includes the critical task of forecasting. Accurate forecasting is essential and can significantly contribute to your success.

   • Production: This step is relatively straightforward and relies on the decisions made in R&D and Marketing.

   • Finance: Also simple, involving adherence to a few key rules to make sound financial decisions.

   Additional modules such as HR and TQM are not always activated but should be addressed at the beginning of the round if they are.

R&D Details

R&D is pivotal because it affects all other decisions and ensures you have products that sell well. Here’s how to handle the key elements:

• Age: Product age cuts in half when you revise its position. If no changes are made, the product continues to age normally.

• Position: Defined by Performance and Size. Use the industry condition report to guide your positioning decisions. Creating a spreadsheet for this can be highly beneficial.

• Price: Set prices to achieve good margins (Price - Costs) while ensuring strong sales. Some products may not be price-sensitive, allowing you to set higher prices without losing sales.

• MTBF (Mean Time Between Failures): This quality metric influences customer satisfaction and material costs. Higher MTBF generally means higher satisfaction, depending on the segment.

There are five market segments (Traditional, Low, High, Performance, and Size), each with different priorities for these elements. Tailor your approach to meet the specific needs of each segment.

By following these strategies, you'll be well-equipped to navigate the complexities of Capsim and lead your company to success.

Part 4

Traditional Segment

• Age: The target age should be around 2 years. Plan your revisions to transition from an age of 2.7-2.8 to 1.3-1.4.
• Position: Stay within the inner circle on the perceptual map, but don’t stress about being at the ideal position.
• MTBF: Not crucial initially; consider maximizing it as the game progresses.
• Price: Set a relatively high price compared to competitors to maintain high margins.

Low Segment

• Price: The most critical factor. Ensure your price is competitive but maintains high margins without hurting sales.
• Age: Aim for around 7 years. Let the product age naturally and revise it once around Rounds 4-5 before it exits the inner circle.
• MTBF: Similar to Traditional, not very important initially but can be increased over time.
• Tip: Time the revision around 9.3-9.4 to halve the age to 4.6-4.7.

High Segment

• Position: Crucial to be near the ideal position. Use the industry condition report and your spreadsheet for accuracy.
• Age: Aim for age 0, making this segment ideal for new products.
• MTBF: Important enough to maximize when possible.
• Tip: Consider converting the initial High product to Traditional and introducing a new High product.

Performance Segment

• MTBF: The most important factor. Maximize as soon as possible.
• Position: Also significant. Regularly revise the product to maintain the ideal position.

Size Segment

• Position: The primary concern. Ensure you reach the ideal position quickly.
• MTBF: Important but secondary to position. Maximize it over time.

Introducing New Products

• High Segment: Ideal for new products due to the recommended age of 0, smaller capacity needs, and high margins, leading to immediate profitability.
• Other Segments: You can introduce new products based on your strategy and competitors' actions.

Segment Shifts

• Early Moves: Shift products between segments according to your strategy early in the game to set them up promptly.
  • Good options include:
    • High -> Traditional
    • Traditional -> Low
    • Performance/Size -> Traditional

R&D Summary

• New Products: Introduce new products by Round 3 to have all 8 products in position.
• Planning: Plan shifts and new product introductions ahead but adapt as needed.
• Focus Areas:
  • Traditional and Low: Age and Price
  • High, Performance, and Size: Ideal position and MTBF
• Revision Dates: Keep them within the current year, adjusting position and MTBF as needed.
• End-of-Month Revisions: Aim for revision dates close to the end of the month to maximize sales of the revised/upgraded products.

Part 5

Marketing

Marketing Strategy

After completing your R&D decisions, you will move on to the marketing phase. Here, you will set prices, allocate promo/sales budgets, and forecast sales.

Pricing

• General Strategy: Adjust prices each round to account for the $0.5 reduction (specific to Capstone; not applicable to Foundation and CompXM).
• High/Performance/Size Products: Set the maximum price within the desired range, which can be found in the industry condition report or the Courier. Remember to decrease it by $0.5 each round.
• Traditional and Low Products: Find the optimal price to maximize margins and units sold. Traditional products can be priced relatively high as they are less price-sensitive, while Low products should have a slightly lower price to stay competitive.

Promotion/Sales Budgets

• Promo Budget: Aim for 100% awareness as quickly as possible. Invest $2000 per product initially, then reduce to $1400 to maintain 100% awareness once achieved.
• Sales Budget: Allocate budgets per segment. Start with $2000 per segment, then increase to $3000 as the game progresses. Split the budget among all products in the segment.

Recommended Promo/Sales Budgets for Round 1:

• Traditional: $2000/$2000
• Low: $2000/$2000
• High: $1800-$2000/$1800-$2000
• Performance/Size: $1500-$1800/$1500-$1800

Forecasting

There are two main methods for forecasting sales, depending on the market situation.

Method 1: Comparative Analysis

• When to Use: At the start of the game or when market changes are minimal.
• Process: Assess how your product will perform compared to the previous round. For example, if you increased your promo or sales budget and reduced the price, you might expect a 20% improvement in sales.
• Formula: $$\text{Forecast} = (\text{Units sold last round}) \times (1 + \text{Market Growth Rate}) \times (1 + \text{Expected Improvement})$$
• Example: If you sold 10,000 units last round and expect a 20% increase with a market growth rate of 5%, the forecast would be: $$10,000 \times 1.05 \times 1.20 = 12,600 \text{ units}$$

This method involves estimating your product's improvement (or decline) based on changes in your marketing strategy and market conditions. It is particularly useful in the early rounds when all teams are on an equal footing.

Method 2: Detailed Calculation

This method requires a bit more calculation. You'll need to determine the market demand and your product's market share (MS). The calculation is based on the Customer Survey Score (CSS) of the products in each segment, which will help you estimate your market share.

Steps:

1. Calculate Market Share:

   $$\text{Market Share} = \frac{\text{Product CSS}}{\text{Total CSS of all products}}$$

2. Calculate New Market Demand:

   $$\text{New Market Demand} = \text{Last Round Market Demand} \times (1 + \text{Growth Rate})$$

3. Calculate Forecast:

   $$\text{Forecast} = \text{Market Share} \times \text{New Market Demand}$$

Note: Adjust the forecast because the CSS used is from the end of the last round. Compare your product's CSS to others, account for new products entering or exiting the segment, and make necessary adjustments.

Marketing Summary

• Pricing:

  • High, Performance, and Size Products: Set prices to the maximum within the desired range. Remember to decrease by $0.5 each round.
  • Traditional and Low Products: Set prices relatively high compared to the competition, but not excessively.

• Promotion/Sales Budgets:

  • Promotion: Aim for 100% awareness as quickly as possible. Initially invest $2000 per product, then reduce to $1400 to maintain 100% awareness.
  • Sales: Allocate the budget per segment, splitting it among all products. Start with $2000 per segment and increase to $3000 as needed.

Recommended Promo/Sales Budgets for Round 1:

• Traditional: $2000/$2000

• Low: $2000/$2000

• High: $1800-$2000/$1800-$2000

• Performance/Size: $1500-$1800/$1500-$1800

• Forecasting:

  • Use either the comparative analysis method or the detailed calculation method, considering all factors such as product age, revision dates, segment shifts, and new products entering the market.
  • Be conservative in your forecasts to avoid overestimating potential sales.

By following these guidelines, you will be able to make informed decisions in the marketing phase and optimize your product's performance in the simulation.

Part 6

Production

Production

In the production phase, you will need to make several key decisions:

• Production schedule
• Capacity and automation

Production Schedule:

This is based on the forecast value you set earlier in the marketing phase.

Calculation:

$\text{Production Schedule} = (\text{Forecast} \times \text{Buffer}) - \text{Carried Inventory}$

The buffer represents the number of units you want to produce above your estimated forecast, typically ranging from 15% to 20%. A 17% buffer is a good standard, meaning you will multiply the forecast by 1.17.

Carried inventory is the number of units unsold from previous rounds.

Example:

• Forecast = 900
• Buffer = 1.17
• Carried Inventory = 200

$\text{Production Schedule} = (900 \times 1.17) - 200 = 853$

Capacity:

Capacity is the number of units that can be produced each round. With a first and second shift, you can produce two units for every one unit of capacity. For example, with 1000 units of capacity, you can produce up to 2000 units.

An important term is the Production Index (PI), which indicates how much of the second shift is being used. This helps determine the necessary capacity for each product.

$\text{PI (Production Index)} = \frac{\text{Units produced}}{\text{Capacity}}$

For a perfect score on the balanced scorecard, a PI ratio between 1 and 1.8 is required. Aim for a PI of around 1.4-1.5 throughout the game.

Purchasing additional capacity takes a round. To calculate the right capacity to purchase for each product:

$\text{Capacity needed} = \frac{\text{Forecast} \times \text{Buffer} \times \text{Growth Rate}}{1.4}$

This capacity will ensure a minimal PI of 1.4 in the next round, assuming no carried inventory and no major market changes.

At the start of the game, you may have excess capacity for some products. Selling excess capacity in the first round is viable for two reasons: it funds investments (new products, increased automation), and improves the balanced scorecard. When selling capacity, aim for a PI of roughly 1 to avoid repurchasing the same capacity at a higher price later.

Automation:

Automation is a critical investment as it reduces labor costs and increases margins. However, high automation levels extend R&D revision times. Therefore, automation is more effective for low-tech products (Traditional and Low). For Low tech products, automation can be increased up to 10 with minimal consequences.

When the TQM module is enabled, R&D time is faster, allowing for higher automation levels even for high-tech products (Performance, Size, and High).

Recommended Automation Levels:

• Traditional: 8
• Low: 10
• High: 5-6
• Performance: 6-7
• Size: 6-7

By following these guidelines, you can optimize your production process and improve your overall performance in the simulation.

Part 7

Finance

Your main concern in finance is ensuring you have enough funds to cover expenses for the upcoming year without running out of money. You can see the expected end-of-year cash balance at the bottom of the screen, which is often a negative (red) number.

Your goal is to have sufficient cash reserves to handle unexpected events (e.g., sales falling below forecast) without needing an emergency loan.

How much is "enough money"? A good rule of thumb is to have cash reserves equal to 10% of your total gross revenue. You can find the total gross revenue in the marketing section.

There are three primary ways to obtain capital:

• Long-term debt: A 10-year loan with annual interest payments.
• Short-term debt (Borrow): A low-interest loan repaid in full the next year.
• Issuing stock

To determine how much long-term debt and stock to issue, use the Ratio window and look at these parameters:

• Leverage: Aim for around 2 (within the range of 1.8 to 2.5).
• Days of working capital: Aim for around 50 days (within the range of 30 to 90).

In later rounds, as your company becomes more profitable, you will need less funding. Eventually, you may have excess cash to return to investors as dividends. The same limitations on leverage and days of working capital still apply.

A/R and A/P:

Another decision involves setting Accounts Receivable (A/R) and Accounts Payable (A/P). Accounts Receivable is how much credit you give to your customers, and Accounts Payable is how much credit your suppliers give you.

• A/R: Higher days mean more expense due to delayed payment, but customer satisfaction (CSS) increases as customers prefer your product. The ideal value is around 45 days due to diminishing returns.
• A/P: Lower days mean higher expense but better supplier prioritization. The ideal value is 30 days due to diminishing returns.

Finance Summary:

1. Obtain capital: Ensure you end the year with enough cash—10% of gross revenue.
2. Balance funding sources: Use a mix of long-term debt, short-term debt, and issuing stock to:
   • Maintain a leverage ratio around 2.
   • Maintain days of working capital around 50.
3. Managing profitability: As your company becomes more profitable, reduce excess cash by buying back stock and issuing dividends. Maintain a leverage ratio of 2.
4. Accounts management:
• Gradually increase A/R to 45 days.
• Keep A/P at 30 days.

Part 8

TQM

TQM stands for Total Quality Management. It consists of a series of upgrades, called initiatives, that provide your company with various benefits, such as reduced R&D time and lower material costs.

Though TQM initiatives are expensive, their benefits are worth the cost and last for the entire game.

The total budget for each initiative is $4000 for the entire game. Spending too little each round results in minimal effects, while overspending leads to diminishing returns. The ideal investment per initiative is as follows:

• Round 1 (once TQM is enabled): $1500 per initiative
• Round 2: $1500 per initiative
• Round 3: $1000 per initiative

Alternatively, you can invest:

• Round 1 (once TQM is enabled): $2000 per initiative
• Round 2: $2000 per initiative

Both approaches total $4000. The first option is generally better, but the second is faster and more suitable for quick simulations, such as CompXM, which lasts only five rounds.

HR

Human Resources (HR) is where you invest in your company's human capital to make your workforce more efficient and productive. Like TQM, HR investments are costly but worthwhile.

Unlike TQM, HR effects do not last the entire game, so each round should see significant investment in HR. The ideal values are:

• Recruiting costs: $5000
• Training hours: 80

Final Words & Conclusion

This concludes the guide. I hope you found it helpful and that it provides you with useful strategies for your simulation.

Good luck! I'm confident you'll do well. If you need any help or have any questions, feel free to contact me.

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