Sunday, January 22, 2017

CAPSTONE Core Fundamentals

Disclaimer: The fundamentals mentioned below are my viewpoints and what we learned at IIMB.
Thanks to professor Mr. Dharam Pal to give me the permission to post this blog.

Before you start any round of the CAPSTONE, please remember the following points. I would suggest one of your team members to check all your decisions against this checklist before you submit every round decisions.

Guidance:

1. Keep the assets low and sales high. Market Cap should be around 6 times of sales to do well in CAPSIM.
         - Market Capitalization (MCAP) greater than Profits, and
         - Profits greater than Assets (these two condition should be met always)
2. What are intangible while running any business?:
         - Price to volume equation, Capacity to employee planning
         - Competitor analysis*, Customer aspirations
         - (Most important) Forecasting
3. Stock Price depends on Book Value, EPS and management decisions (subtle factor)
4. New Products should be launched specifically in market segments where the effective MCAP is high
         - Segment growth rate may be higher for some, but collective MCAP would be less
         - So the effort of making a new product should be on MCAP effectiveness to make more profits
5. Always focus on margin and not prices
6. Understand the difference between buyers and sellers market
         - In Buyers market you need to listen to customers buying criteria, do not produce more than forecast
         - In sellers market customers will buy your product even if the price are high and you can produce more making more profits
7. When to enter the market?:
         - High growth rate, better margins foreseen, Buying behavior better
         - Scalable segment, Lesser or weaker competition, Less capital outlay
         - Size of the market and sustainable for longer period
         - (Most important) Have better forecasting logic and have cash to fund it
8. When to exit?:
         - When MCAP is reducing, Customer survey is down in consecutive years
         - scope of recovery less, ROA, ROE etc are low and price less than variable cost
9. Always be the influencer and not customer savvy. Of course buying criteria is the bible, but influence the market as well
10. Always keep a good watch on what competitors are doing
         - How have they reduced the variable cost?, How are they pricing products in every round?
         - How much cash is left?, What financial decisions have benefited them?
         - Who has the solvency / liquidity less? What are their ratios informing us?

Execution Wise:

1. Increase automation for the product where ideal position (or R&D expectation is less) and price expectation is less
         - Automation will reduce dependency on labor but every change in specifications it shall increase time
2. Two of the round could have negative and 0% growth so plan your capacity purchases accordingly
3. 3rd of 7th round shall have labor strike and hence keep number of labor requirement less
4. Always keep the following least possible: [a] Sales / Profit ratio, [b] variable cost, [c] labor cost
5. In every round & every segment maintain the drift of the ideal position
         - Ideal position refers to the performance and size of the product
         - In every round customer expects the product to move it along the perceptual map
         - In each segment the center of the circle will vary and expected max / min drift shall also be mentioned
         - Your product ideal position if higher than the drift limit, them customer survey shall be low and affect sales
6. Do not make products with the same name as the ones provided in Round 0
         - Do not give chance to competitors to guess which segment you are placing the new product in !!
7. Sell the excess capacity in round 8 (capacity beyond your opportunity cost) and retire some of the bonds as well
8. Try to maintain competency level of the labors above 110% if possible
9. [IMP] Divide your team into: Forecasting, Buying criteria Manager, Report analyzer, Checklist Manager, Strategist /Visionary
10. Never miss to verify the Proformas->Ratios and Porformas->Balanced Scorecard in every round
         - Better to check this after every major decisions you update, you learn the effect of your decision
11. Invest in TQM always (except in Round 8) to get benefits in all aspects - More in next blog
12. Price your product as per the cost you are incurring and not as per competitors, it affects the margin
13. Bring the NEW products in Round 1 or 2 or max in Round 3. Better if its on Low and Traditional segments
14. Velocity in your actions makes the difference. Make R&D and product releases fast enough before competitors catch your trend
15. [IMP] When the segment expected units (TIUD) is more than total segment production capacity than understand that its the "SELLERS market"
         - Increase price and production, reduce the promos and sales budget
         - Reduce SG&A cost, variable costs to make a kill: Profit shall be huge in such case
16. Having "some" inventory left over is ALWAYS better than stock out.

Abbreviations:
[A] ROA = Return on Assets
[B] ROE = Return on Equity
[C] MCAP = Market Capatilization
[D] R&D = Research and Development
[E] TQM = Total Quality Management
[F] EPS = Equity Per Share

In my next blog I shall explain round wise what each team should do in CAPSIM.

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