Integrated Strategy Plan Custom Essay

As you can see from the file I have uploaded, it’s an integrated case study assignment concerning financial management, HRM, marketing management and strategic management. So, 2 or more financial reports along with relevant analysis or plan making would be imperative after summarising the information given in Applendix. There is no strict word limit for each segment, taking each part into account would be fine. Thanks.

INTEGRATED CASE ASSIGNMENT

After reading the contents below, you should develop a FIVE YEAR STRATEGY (PLAN) for how you are going to run the business. This will include (but not necessarily be limited to) elements of Strategic Management. Marketing Management, Financial Management and Human Resource Management. Your INDIVIDUAL understanding of this strategy and the ability to communicate this strategy will be assessed in the one hour Class Test on Monday at 11.00 am.

You are assuming the Executive management of EMG plc. And you will create a more competitive environment where the decisions of one company are likely to affect the results of one or more of the ‘live’ competitors. This will require astute decision making to ensure your financial and business success.

Details of the environment in which you will be working and the recent history of EMG plc are given below. Full instructions on use of the simulation and a guide to the decisions to be made are given in Appendix IV.

1. BACKGROUND TO THE EUROPEAN MARKETPLACE

6.1 The Financial and Economic Environment
Inflation at the start of the simulation is 1% but is expected to rise sharply in the coming year. The economic outlook for the whole of Europe is still uncertain with many of the major European Governments continuing the policy of imposing austerity measures designed to reduce public spending. Unemployment is still a big problem in many of the European countries, although figures have recently fallen in some economies. It is predicted that there will continue to be large cross country differences in growth and unemployment in the forthcoming year but that, in general, the situation will stabilize and 2015 should see an improvement. Consumer confidence is likely to fluctuate with the economic conditions of each country but in the immediate future caution is likely to prevail throughout.

6.2 The Car Market
The market is undergoing a period of significant change and turmoil. In 2008 European car sales figures were easily the worst for over a decade at 14.6million (extended Europe) and gloomy forecasts for 2009 proved to be well founded with the whole market falling yet again. There was some recovery at the start of 2010, mainly as a direct result of Government incentives, the most successful being the scrappage schemes that were introduced in 2009 and continued through part of 2010. However, once the schemes ended, the industry was left still suffering from over capacity and a crowded marketplace, forcing several European companies to reduce their workforce and production and enforce new working practices. The year finally ended with registrations falling to 13.8 million.

New product ranges and upgrades to established models stimulated growth in the first quarter of 2011 but eventually registrations fell by 1.7% to 13.1 million for the whole year. There was some optimism as sales improved on 2010 figures in the stronger economies, with sales generally reflecting the economic conditions within individual countries, but this optimism was short lived as 2012 saw a decline in nearly all countries, with the overall market falling by 8.1% to 12.5 million. 2013 saw a further 1.7% fall to 11.85 million, the lowest level since 1995 and 25% below the 2007 peak. Of the leading EU countries only the UK and Spain saw an increase in registrations – a significant 10.8% increase in the UK and a more modest 3.3% in Spain. However, it is notable that in December 2013 nearly all EU markets posted growth, overall the EU saw a 13.3% monthly year-on-year rise in registrations, the largest since December 2009. However, in absolute figures, the results were the third lowest to date for a month of December with a total of 906,294 units so, although encouraging, the rise must be taken in full context.

Forecast
Forecasts for 2014 are mixed, some predict a small increase in EU sales but based solely on the performance in November and December 2013. More cautious reports suggest that the overall market will continue to fall even though there is confidence that some markets will see recovery as consumer confidence gradually returns in the more successful economies. Predictions of a decline are based on consideration of the continuous tough economic conditions, the shift away from driving among older Europeans and falling interest in car ownership among the young, especially in regions of high youth unemployment. In addition, cars are now more durable so consumers do not need to buy a new car as often unless by personal choice.

Any recovery will depend on how quickly European markets emerge from the economic uncertainty triggered by the recession and whether new products are good enough to attract new buyers and recapture old ones.

Fortunately for manufacturers that operate worldwide, sales outside of Europe are, in most cases, helping offset the difficult situation in Europe. Companies are also forging alliances to share production and research facilities to reduce costs. Prior to the crisis of 2008/9, the European car market experienced a period of strong growth with companies launching a number of new models with the aim of enticing consumers into purchasing new vehicles. The recent success of the Land Rover Evoque and the continuing popularity and sales growth of the BMW Mini proves that this can still be achieved, indicating that companies can succeed with the right products to meet market needs. With current high fuel prices and increased taxation on larger cars, there is also the opportunity to exploit a market looking for more fuel-efficient vehicles and those powered by alternative fuels. It also should not be forgotten that when times are difficult buyers will look for a safe option where reliability is assured, as is the case with VW and BMW.

These factors show a way forward but at the moment there is little hope of any significant improvement for at least 2 years and it is expected that 2007 levels will not be achieved until at least 2018.

It is into this environment that you are taking management responsibility for the future success of EMG plc.

2. BACKGROUND TO EMG PLC

History
For many years EMG operated as part of a large industrial group with interests in the aerospace, defence and medical sectors. It was sold three years ago to an automotive group who made significant investment in the company. Sales rose steadily but post-tax profits were mixed and with poor financial results and a fall in company value last year, shareholders have demanded a new management team. EMG is listed on PetroEx – the new European Petroleum Sector Stock Exchange.

Finance
A full set of the EMG’s management and financial statements for the financial year ended on the 31st December 2013 is provided in Appendix II. There is no immediate threat to the viability of the business but it is in a vulnerable position and if the market deteriorates further then the management will face problems. The shareholders and investors expect you to anticipate any fall in business and to take action to protect their financial interests. The external investors are pension fund holders who have high expectation of increasing revenue generation year on year through the payment of dividends. A summary of the performance and financial condition of the business for trading years 2011, 2012 and 2013 is given in Appendix III.

Image
EMG has always enjoyed a strong brand image and has traditionally been known for its style – both the products and the company image in general. The management has recently made a complete overhaul of its products in an attempt to attract a new generation of customers. The aim has been to make the products more attractive to the younger family, while maintaining the high standards of excellent design, engineering and build quality for which the company is known. Much of the company’s current brand awareness and advertising programme is focused on the young, successful family businessman. It is not essential that you continue to pursue this route if you believe a change in market focus will reap more benefits.

Products
The sales profile for the two products already being produced is given below (last financial year).

Product Segment Sales (units) Price £ Gross Margin % Market Share %
Alpha Medium (25-40) 90000 15500 11.83 1.65
Beta Large (25-40) 68253 22950 9.84 2.63

The Alpha is aimed at the junior to middle manager market and competes with the VW Golf and the Audi A3 series of products. It was launched a number of years ago and has been well received by the market with sales increasing year on year in line with increased production.

The Beta is a large Executive vehicle that has been fairly well received by the market, although sales weren’t as high as anticipated when the model was launched. It offers affordable luxury for “up and coming” executives and their families. It competes well with the Ford Mondeo and the company is aiming to increase its appeal to capture customers who normally buy the lower end of the luxury Lexus and BMW offerings.

The Future
The company’s financial performance continues to be challenged by the competitive nature of the marketplace and it is essential that its portfolio is developed and range of products widened if it is to be successful. The following information provides guidance on ways in which the company may move forward.

A review of the firm’s most recent financial statements reveals a significant investment in the research and development budget, which has been attributed to the launch a new model in the near future.
A recent survey has found that the traditional buyer still has respect for EMG’s products, but a generation gap has appeared, with the under 30s stating a preference for brands like the Mini, BMW, VW, Renault and increasingly for Honda and Toyota. There is clearly a need to connect to this generation of customers.

The strong influence that women have on the purchase decision within the family should perhaps also be taken into account, together with the increasing market for single women who like to own and drive attractive looking cars.

It may be that, along with a new company name and changing customer focus, there is a need for diversification from the type of vehicle that has traditionally been representative of the company. To support this a new approach should be taken to the marketing campaign.

At the moment the company does not compete in the growing City car market. It is a highly competitive market but has many attractions in terms of style, design and market size and needs to be considered when designing any new vehicles.

However, it would be wise to utilise and build on the company’s existing expertise in platform technologies and, with the brand being known for its robust engineering, the off-road and SUV market may also be a sensible area of growth.

As the previous management began a move to attract young families, development of an MPV model may also be a wise option as this continues to be a strong market sector.

With increasing pressure on inner city transport and concerns over the environment, most automotive companies have these issues high on their research and development priority list. The company is already in the early stages of evaluating a hybrid engine option for all its products and if this comes to market it will give an “environmentally friendly” edge to the brand’s image.

3. YOUR EXECUTIVE RESPONSIBILITIES

The shareholders and investors have asked you and your colleagues to review the business and establish a strategy and marketing plan. They are expecting you to give them details of your medium and long-term investment plans. They are particularly keen to have an understanding about the level of investment required to ensure that the company is able to re-establish itself as a major player in the European passenger car sector and demonstrate its ability to make profits and generate cash flow in sufficient amounts to enable the company to meet its high debt repayment commitments – currently the company has a £700m outstanding debt and the bank expects to be repaid at least £100m a year. This minimum amount was set by the bank recently as the company’s profits fell and nothing was paid off the capital of the loan in the last financial year. Further penalties are likely to be enforced if the agreement is not adhered to.

You should operate on the assumption that you are totally responsible to the shareholders for the investment strategy, market performance and financial results of your business. It is a ruthless environment – poor ongoing financial performance results in firm action. The shareholders objective is to profitably invest, develop and grow their business interests in the passenger car market in Europe, delivering returns that are above the market average of 15-18% (measured on the Return on the Capital Employed) and seeing market share grow faster than the overall market growth.

APPENDIX I – LIST OF MANAGEMENT ROLES AVAILABLE

These are suggestions only, but you are strongly advised to divide the labour resources of your team across at least some of these functions to prevent duplication of effort.

CHIEF EXECUTIVE OFFICER

Purpose of Job

To deliver shareholder value and ensure compliance with accepted standards of corporate governance

Key Tasks

 Formulation of company strategy
 Presentation of Annual Report to shareholders and investors
 Recommendation of investment proposals and plans
 Effective management of the Executive Management Board
 Approval of company marketing and promotional programmes
 Approval of capital plans up to a maximum annual investment of 5% of annual turnover
 Ensure complete compliance with bank requirements and demands

Performance Indicators

 Delivery of increased shareholder value year on year
 Achievement of the annual profit and cash plan
 Timely presentation of the annual and city/investor report
 Annual reduction in the cost
 Achievement of gross margin target on all product lines

STRATEGIC PLANNING EXECUTIVE

Purpose of Job

To ensure that the company’s strategic plan is developed and implemented to achieve the agreed business goals and objectives

Key Tasks

 Work with the CEO and other Executives to create the strategic plan for the company
 To monitor the activities of the firm’s marketplace and identify market and competitor trends
 To recommend changes to the strategic plan in the light of these trends
 To prepare an annual report for the CEO and the Non-Executive Board on the firm’s strategic achievements and capabilities

Performance Indicators

 Alignment of company activities to meet the needs of the strategic plan
 Delivery of Annual Report for CEO and Non Executive Board
 Achievement of end position to ensure the continued growth and development of the firm
MANUFACTURING EXECUTIVE

Purpose of Job

To deliver the annual production plan to budget and quality targets

Key Tasks

 Preparation of the annual manufacturing resource and output plan
 Development of the training skills plan
 Setting and managing the finished stock policy
 Preparation of capital plans for automation

Performance Indicators

 Achievement of optimum productivity performance indicators
 Stock levels in accordance with the annual/strategic plan
 Annual reduction in the cost of warranty claims
 Achievement of gross margin target on all product lines

FINANCE EXECUTIVE

Purpose of Job

To ensure that the company achieves its key financial performance indicators and stays within its borrowing limits

Key Tasks

 Preparation of the annual budget plan
 Presentation of the annual financial statement
 Evaluating capital plans and requests from manufacturing and engineering departments
 Compliance with established practices and protocols in corporate financial management
 Effectiveness of the IT and business planning systems

Performance Indicators

 Achievement of the annual financial plan
 Effective management of the cash and borrowings policy
 Timely presentation of the financial report to investors and the Board
 Financial capability of all Executive managers

TECHNICAL AND ENGINEERING EXECUTIVE

Purpose of Job

To ensure that all products and specified correctly and that new design ideas are introduced to manufacturing in accordance with best practice

Key Tasks

 Preparation of the technical specification for each vehicle product
 Assessment of new trends in vehicle engineering concepts
 Quality of supplied parts and components
 Clarity of understanding with manufacturing and marketing about new product introductions

Performance Indicators

 Engineering performance
 Technical excellence of product design and engineering
 Use of cross platform technology
 Annual reduction in the cost of warranty claims (in association with manufacturing)
 Value engineering, cost down projects

SALES AND DEALER NETWORK EXECUTIVE

Purpose of Job

To set and achieve the annual sales budget in both volumes and value of product sold

Key Tasks

 Preparation of the annual product sales plan
 Company sales pricing strategy and policy
 Development of the dealer network
 Setting and managing the finished stock policy (in association with the Manufacturing Manager
 Initiation of sales promotions and campaigns

Performance Indicators

 Delivery of sales targets
 Quality and effectiveness of sales promotion campaigns
 New product ideas
 Sales profit margins (price responsibility)

HUMAN RESOURCE EXECUTIVE

Purpose of Job

To establish, implement and manage the company’s HR strategy and policy

Key Tasks

 Establishment of the HR policies
 Development of the annual training programme
 Setting of the annual wage rates for all grades
 Management of the company’s redundancy schemes
 Review of Executive performance

Performance Indicators

 Productivity performance
 Employee absence levels
 Effectiveness of training programmes
 Days lost through undue industrial unrest
 Effectiveness of Executive Board

MARKETING EXECUTIVE

Purpose of Job

To prepare and deliver the company’s marketing and brand development strategy and plan

Key Tasks

 Preparation of the product marketing plans
 Formulation of the media and advertising strategy and plan
 Development of the brand strategy
 Gathering of market intelligence to inform the product development programme for existing and new products

Performance Indicators

 Delivery of the marketing plan to budget
 Protection of the brand image of the company
 News and Media PR responses
 Preparation of recommendations for upgrades of existing and new products introductions

APPENDIX II – MANAGEMENT AND FINANCIAL REPORT FOR FINANCIAL YEAR 2013

EMG plc

Management and Financial Information Pack

for the Financial Year Ended

31st December 2013

Production and Sales Report

Section 1: Model Production and Sales
Market Sector Model Name Produced Sold In Stock Model Price
£ Market Share %
6 Alpha 90000 90000 0 15500.00 1.87
7 Beta 65000 58179 15862 22950.00 2.58

Section 2: Model Resource and Cost Summary
Market Sector Model Name Workforce Materials Costs £ Design & Options Costs £ Labour
Cost £ Gross Margin
% Productivity
6 Alpha 1150 9651.48 3440.61 310.46 13.53 78.26
7 Beta 1100 14214.09 5633.09 411.18 11.73 59.09

Section 3: Productivity Report
Market Sector Model Name Target Production Potential Productivity
Cars/Worker/Year Potential Productivity
With O/time Warranty Cost Per
Car
6 Alpha 90000 72.76 87.31 181.83
7 Beta 65000 65.59 78.71 620.22

Total Workforce 2250
No of days lost to strikes 3
Overall Productivity (cars/worker/year) 68.89
Productivity Index 1.68

Section 4: Market Distribution Analysis
Total Market (m) City Medium Large Luxury
No of Units 4.36 4.81 2.25 0.53

Profit and Loss Account £m

Sales 2730.21
Cost of Sales* 2384.84
Gross Profit (Loss) 345.37

Overheads
Fixed Overheads 225.28
Stock Upkeep Cost 25.79
Product Recall Cost
Promotion 95.00
Research and Development 184.27
Professional Charges 5.21
Warranty Claims 52.45
Training Cost 3.00

Extraordinary Events

Depreciation 77.08

Operating Profit (Loss) -322.70

Gilt Interest Received
Investment Disposal Income
Share Income Received
Interest on Current Account 11.85
Interest on Loans 42.09

Cost of Redundancies
Factory Sale Loss

Pre Tax Profit (Loss) -352.94
Tax
Post Tax Profit (Loss) -352.94
Cost of Dividends
Year Retained Profit (Loss) -352.94

*Cost of Sales Breakdown
Opening Stock 171.91
plus Materials Costs 2468.35
plus Wages 54.67
minus Closing Stock 310.09
Cost of Sales 2384.84

Cash Flow £m

Opening Bank Balance 471.59
Revenue from Debtors 2699.01
Share Investment Income
Gilt Interest Received
Share Issue Income
Investment Disposal Income
Corporate Subsidy
Government Subsidy
Insurance Claim
Factory Sale Income
Bank Interest

Extraordinary Events

Paid to Creditors 2420.90
Wage Costs 54.67
Total Overheads 591.00
Factory Cost
Redundancy Costs
Automation Expenditure 40.00
Loan Repayments
Tax Payments
Bank Interest 30.24
New Model Production Costs 175.00
Investments Purchased
Dividend Costs

Balance Before Loan -141.20
New Loan
Closing Bank Balance -141.20

Balance Sheet £m

Fixed Assets
Cost 900.00
Depreciation -206.33
Book Value of Fixed Assets 693.68

Current Assets
Stock Value 310.09
Debtors 299.20
Bank Balance

Current Liabilities
Tax 0.00
Creditors 371.94
Dividend Cost
Overdraft 141.20

Net Current Assets (or Liabilities) 96.15

Total Assets Less Current Liabilities 789.82

Capital and Reserves
Share Equity 500.00
Share Premium
Total Retained Profit (Loss) -410.18
Total Subsidies
Total Shareholders Funds 89.82

Long Term Liabilities
Loan 700.00

Total Capital Employed 789.82

Financial Indicators
Return on Shareholders Funds % -392.93
Return on Capital Employed % -40.86
Gross Margin % 12.65
Sales Margin % -11.82
Post Tax Profit / Sales % -12.93
Profit / Employee £ -156863.21
Gearing 0.89
Net Gearing 0.90
Current Ratio 1.19
Quick Ratio 0.58
Liquidity Ratio 0.00
Share Price £ 1.00
Market Value £m 5.00
EPS -70.59
PE Ratio -0.01
Dividend per Share £ 0.00
Dividend Cover 0.00
Interest Cover 0.00
Borrowing Limit £m
Net Debt £m 841.20
Net Capital Employed £m 931.02

Designs Included
Design Model 1
Alpha Model 2
Beta
2/4 Door Saloon/Estate Yes
3/5 Door Hatch Yes
Small Petrol Engine Yes
Large Petrol Engine Yes

Options Included
Option
Alpha
Beta
Extended Warranty/Servicing Yes Yes
Upgraded Alloy Wheels Yes
Keyless Entry Yes
Sensor/Park Assist Yes
Rain Sensor/Auto Lights Yes
Panoramic/Glass Sunroof Yes
Leather Upholstery/Finish Yes
Controlled Air Conditioning Yes
Hi-Fi System/MP3 Yes Yes
Metallic Paint Yes Yes
Winter Pack Yes
Luxury Styling Pack Yes

Research and Development Projects (Estimated year of completion)
Project Alpha Beta
Fuel Efficient Engine 5
Ultra Low Emissions Online
Improved Build Quality Online

Promotion Spend £m
Media Channel Total Spend
£m
Television 25.00
Radio 5.00
Periodicals/Reviews 20.00
Internet 0.00
Dealer Incentives 20.00
Promotional Offers 0.00
Sponsorship 25.00
Total Spend 95.00

Workforce, Wages and Automation Expenditure
No of Employees Wages Paid (pp/week) Automation Spend CY Automation Spend Cumulative General R&D Expenditure
(excluding new model investment)
2250 £455 £40m £75m £9.27m

Payment Periods
Days given for customers to pay 40 days
Days waited before paying suppliers 55 days

Recent Industry News

Gilts are to be offered at 100% face value giving 6% interest per annum for 5 years. Economists predict that next year inflation will be around 2%.

A world shortage of steel is likely to result in a 2% increase in the cost of raw materials.

Market Predictions and Information
A reputable Market Research Company has made the following predictions for the car market. Overall, the market will fall from 12.0m to 11.6m cars sold. The City car market is expected to shrink by around 5%. The Medium car market is expected to shrink by around 2%. The Large car market is expected to show little change over the next year. The Luxury car market is expected to shrink by around 1%. Inflation is expected to rise next year

APPENDIX III – SUMMARY FOR FINANCIAL YEARS 2010 TO 2013

Profit and Loss Account

Year Ended 2011 2012 2013 2014 2015 2016 2017
No of Employees 1950 2250 2250
No of Units Sold 95000 130959 148179
Sales Revenue (£m) 1780 2446 2730
Cost of Sales (£m) 1428 2038 2385
Gross Profit (£m) 352 408 345
Total Overheads+ Depreciation+Redundancies 343 387 668
Net Profit/Loss after Tax £m -51.49 -5.75 -352.94
Dividends Paid 0 0 0

Balance Sheet

Year Ended
£m 2011 2012 2013 2014 2015 2016 2017
Fixed Assets 608 556 694
Current Assets 849 912 609
Total Assets 1457 1468 1303
Current Liabilities 208 325 513
Long Term Liabilities 800 700 700
Total Liabilities 1008 1025 1213
Net Asset Value 449 443 90

Key Financial Indicators
Total Capital Employed 1249 1143 790
No of Shares 5m 5m 5m
Share Price (£100) 101.12 118.62 1.00
Market Value £m 505.60 593.08 5.00
Return On Capital Employed % 0.72 1.77 -40.86
Financial Gearing % 0.64 0.61 0.89
Current Ratio (times) 4.08 2.81 1.19
Gross Profit Margin % 19.78 16.66 12.65
Post Tax Profit /Sales % -2.89 -0.24 -12.93

APPENDIX IV – DECISION MAKING IN EXECUTIVE

1 BACKGROUND INFORMATION

The currency used in the simulation is £ sterling.

EMG plc started life three years ago with £500 million in the bank raised from the issue of 5 million £100 shares and currently has a £700m outstanding debt, which is being repaid on a repayment plan agreed with the bank that enforces a minimum repayment of £75m per year. In 2011 the company repaid £100m but made no payment in 2012. As a result the bank is now imposing a repayment fee of £100m per year. This must be adhered to or the bank could ask for immediate repayment of the full amount.

The company has its manufacturing and distribution facilities in the UK. It has two products in the marketplace and has invested £350m in a new model that will come to the market in FY2014.

All costs will rise annually with inflation. A Cost & Data Sheet is provided for each year and can be viewed from the Results drop down menu in the simulation.

2 MARKET SIZE AND DISTRIBUTION

The marketplace is the European Community, which currently has the capacity of between 11m and 16m new car sales per annum. The market is currently falling and is predicted to be approximately 11.6m in the coming year (approximately 12m last year). Market research will be available to purchase that will give you an update on changes in the market and sector sizes and economic conditions.

For the purposes of the simulation, the car market is divided statistically into 16 sectors relating to the car platform/size and the target age group, as identified in the grid below. One of the sectors must be selected for each car model as the target market, and you will see from the shaded boxes that your predecessors have already chosen the market segments for the two current models.

Note: When making and submitting decisions online you will have to enter the actual car size and target age group but the market sectors in the table below will be referred to in the results/reports.

Platform
Age Group City
e.g. Mini Medium
e.g. Megane Large
e.g. Audi A6 Luxury
e.g. Jaguar XK8
Under 25 1 2 3 4
25 to 40 5 6 7 8
41 to 55 9 10 11 12
Over 55 13 14 15 16

NB: Once the size of car has been decided upon it cannot be changed, however, once in production it can be re-targeted at a different age group if required.

It is predicted that in the coming year the approximate market spread between the sectors will be as follows.

Car Size: City
e.g. Mini Medium
e.g. Megane Large
e.g. Audi A6 Luxury
e.g. Jaguar XK8
Sector Size (m) 4.12 4.71 2.25 0.53
Percentage of Total Market 35.5 40.6 19.4 4.5

The car sizes are categorised by selling price ranges as follows, although they can overlap, e.g. the very hi tech or sporty models of each size can be higher than the averages given here.

City: up to £16,500; Medium: £12,000-£28,000; Large: £20,000-£60,000; Luxury: £40,000 to over £100,000.

3 A GUIDE TO THE DECISIONS

You are strongly advised to keep a record of all the decisions made for your reference. The set of decisions made for the last year of trading will be displayed when you enter the simulation. A help screen is available on screen for each decision to be made and the following sections provide more in-depth detail. The Cost & Data Sheet will be needed for calculating all costs, and the year 4 version will be posted on Blackboard following the initial briefing on the 19th February.

PRODUCT DESIGN AND OPTIONS
Design features, including body shape and engine size, may be chosen and options can be made available for purchasers to add to the basic car. The cost of model designs and options are listed on the Cost & Data Sheet.

Every car produced will be built with one of the body designs offered combined with one of the engine sizes offered. The percentage “take up” of each shape and engine size will depend on their popularity and the additional cost will vary accordingly. However, there will be a body design and engine cost added to every car. For cost calculation purposes use an average of the cost of the designs offered plus an average of the engine sizes offered.

Conversely, not all cars will be built with all the options offered, only those chosen by each individual customer, and some cars may leave the factory without any additional options at all. The proportion added will depend on the popularity and appropriateness of the options offered. Therefore, the cost of including options per car will only be a percentage of the total. For cost calculation purposes, an average of a 33% uptake can be used.

Option Packages
Some of the customer choice options are available in the form of packages. Details of these are given in the table below.

Driver Assist Safety Pack Park assist, lane departure warning system, adaptive cruise control with speed limiter, blind spot information, flat tyre indicator, keyless entry.
Winter Pack Heated front seats, power wash headlamps, heated front windscreen and washer nozzles, low washer fluid warning light. Luxury models also include dynamic fog lights and electrically heated and adjusted door mirrors.
Luxury Styling Pack Leather upholstery, privacy glass, heated seats, electrically foldable and heated door mirrors, alloy wheels, advanced navigation system, built-in bluetooth/USB connection, front fog lamp, keyless entry.

RESEARCH AND DEVELOPMENT
Investment can be made in research and development projects for each model. When successful it will increase the model’s value in the long-term. However, both time and money must be spent on each project and it is possible that they will fail. There are five ‘failsafe’ projects that are guaranteed to be successful:

1. Product Relaunch
2. Facelift
10. Fuel Efficient Engine
1. Ultra Low Emissions
27. Improved Build Quality

If a project does fail it is possible to re-invest and begin again or accept that the investment is lost.

R&D projects are divided into two phases:

Phase 1: The research phase which is concerned with the initial work in preparing the project. This is likely to include matters like customer and technical research, prototype development and testing in a laboratory.

Phase 2 The development phase which is concerned with taking the prototype work and developing it for production. This is likely to include design engineering, application, material selection and tooling for manufacturing.

Details of the times needed for each phase for individual projects are given in the following table.
PROJECT TIME PROJECT TIME
1 Product Relaunch 0 + 2 15 Driverless Car 3 + 2
2 Facelift 0 + 1 16 Zero Emissions Engine 5 + 1
3 Aerodynamic Remodelling 1 + 1 17 Remote Self-Parking 4 + 1
4 Advanced Diesel Engine 1 + 2 18 Lightweight Ceramic Brakes 2 + 1
5 Alternative Fuels/Biofuels 2 + 2 19 Smart Noise Insulation 1 + 1
6 Fuel-Save Stop Start System 1 + 2 20 Frost Free Windows 2 + 1
7 Accident Prevention System 2 + 1 21 Ultra Low Emissions 2 + 1
8 Anti-Theft/Tracking 1 + 1 22 Infra Red Night Vision 1 + 1
9 Energy Recovery/Re-Use 3 + 1 23 Lightweight Car Body 1 + 2
10 Fuel Efficient Engine 2 + 1 24 Car-2-Car Communications 3 + 1
11 Breathalyser Interlock 1 + 1 25 ‘Green’ Painting Process 2 + 3
12 Lightweight Engine 2 + 2 26 Chameleon Car Colours 3 + 1
13 Better Electric Car Battery 3 + 1 27 Improved Build Quality 0 + 1
14 Wiperless Windscreen 1 + 2

TIME (in years) – the first figure is for Research, the second is for Development. Projects in bold are failsafe.

At the end of each year an R&D report will be provided that gives the year that the project is expected to come online (or whether it has failed). A project can be stopped at any time before it is available (online) but the money already invested will be considered as a loss and written off.

Once online for one model, the new technology can then be applied to other products without the need for the research phase to be repeated, with the exception of the following model specific projects for which both the research and development phases must be carried out for every model:

1. Product Relaunch
2. Facelift
27. Improved Quality Build

For all other projects, once the research phase is complete, to add it to other models select the project on the relevant R&D decision screen. The project will then come online on the additional vehicles once the development time is complete, however, please note that it is still possible that it will fail for one or more of the other models.

NB: Until the project is online, the box must be checked for it to continue, if unchecked the project will be stopped and the money already invested lost.

Research and Development costs on the Profit and Loss Statement also include 50% of any investment in a new model (see the section on Production/New Models below).
SELLING PRICE AND PROFIT MARGINS
The simulation works on the basis of a single market price for the car, it does not provide for incremental pricing depending on the number of different options that are selected by the customer. The single selling price must be set taking into account the designs and options to be offered and the market at which the model is targeted.

As a general guide typical gross profit margins for the different platform categories are as follows. However, please note that these can be lower or higher depending on the strength and pricing policy of the competition.

City : : 7-15%
Medium : 12-20%
Large : 17-28%
Luxury : 25% plus

PRODUCTION
Factories
Factories are required to house the workforce and production lines. Each factory has the capacity for 4,000 workers, comprising both production and management employees and unlimited amounts of automation. The number of factories depends on the total number of employees, for example, if between 4,001 and 8,000 people are employed, they will be accommodated in two factories, and so forth in multiples of 4,000. Should it be necessary to decrease the staff down to 4,000 or below, the second, and any further factories, will be sold by the simulation. Factories are bought and sold automatically depending on the total size of the workforce. Any number of cars may be produced in a factory.

If a factory is sold, it will only realise 60% of its book value. The oldest factory is the first to be sold.

Car production
The number of each model to be built will depend on the workforce put on the model, productivity for the model size and automation investment. Productivity varies depending on the size of the model and automation investment and is given as cars/worker/year :

City cars : 43
Medium cars : 41
Large cars : 41
Luxury cars : 9

A productivity target must be set for each model. Low targets may allow time for improved build quality whilst high targets may require overtime but can affect product quality. The target set will be the maximum amount of cars produced in the year.

Productivity can be improved by investing in automation, paying better wages and investing in training.

Automation
Automation can be introduced and purchased in units of £530,000 (cost for the first year you are trading only). Each unit is as productive as eight workers, e.g. 5,000 workers + £530,000 of automation will give the equivalent of 5,008 workers. Each unit of automation requires manning to be effective – one man per unit.

Automation must be assigned to the specific models as a percentage of the total available. This allows some models to be highly automated whilst leaving others to be predominantly hand built.

To keep the automation fully effective it must be properly maintained, which costs approximately 10% of the original investment per year. The investment is optional and must be entered in the automation decision box.

New Models
Two cars are already in production and £350m has just been invested to launch a third model in this coming year. You will need to enter all decisions relating to the new car – specification, price, R&D and marketing plan – as part of your year 4 decision-making. In is possible to launch two more models over the life of the simulation (making a total of 5 models), but only at a rate of one per year. Further financial investment will be needed to do this; the investment must be made the year before production commences, e.g. invest in year 4 to launch the fourth model in year 5. The average amount needed is shown on the screen and on the Cost & Data Sheet but it is possible to invest half to twice this figure. The amount invested will have an impact on the degree of success of the new model and should vary according to the size of the new model.

The investment made is divided equally between R&D for the model and on tooling up for production, which is then considered to be an asset. This is reflected in the financial statements where 50% is found in R&D on the P&L account in the year before production starts, and 50% is taken out of the cash flow in the first year of production. The latter is then added to the assets on the Balance Sheet and depreciated by 10% annually.

Once a decision has been made to launch a new model the project cannot be stopped but the launch can be delayed by allocating the minimum 100 workers to the model. The model specification will still have to be made as the workers will be producing a limited number of prototypes and pre-launch products for demonstration purposes.

PERSONNEL
Wages
The workforce must be paid. The industry-wide minimum in force will be £326 in the opening year. It is not possible to pay less than this amount, and the average paid across the industry is given on the Cost & Data Sheet as well as being displayed on screen.

Redundancy payments will apply if the total workforce is reduced and the rate is 12 weeks current salary per affected employee.

Workforce
The workforce may be moved from production of one model to another without incurring problems. If employees are laid off, redundancy payments will have to be paid and bad industrial relations may develop. It is not possible to reduce the workforce for any one model below 100, as these workers will be producing parts for servicing the cars already on the road and providing warranty cover for cars that are returned to the factory for repair.

A working year is 50 weeks. An acceptable rate of absenteeism is 4 days per year.

Training
Investing in training the workforce will improve their skills and subsequently product quality and productivity. Management training improves industrial relations. An average training budget is 2% of the wage bill.

MARKETING AND COMMUNICATIONS
Promotion/Advertising
The Company and it products can be promoted/advertised via the media listed below.

 Television  Promotional Offers
 Radio  Dealer Incentives
 Magazines/Newspapers  Sponsorship
 Internet

Products are promoted individually and there is also the opportunity to invest in Corporate Promotion. It is important to choose the areas that will be most effective in relation to the target market.

Cost of Advertising
There is a cost per unit set within the simulation for each method of advertising. These are guide figures and do not indicate minimum costs, investing half a unit for example will still have some effect within the marketplace. The unit costs are as follows :

Type of Promotion Cost per unit (£m)
Television 14.00
Radio 6.00
Magazines/Newspapers 11.00
Internet 4.00
Dealer Incentives 85.00
Promotional Offers 70.00
Sponsorship 65.00

Product Image
The image of the model to be portrayed to the market can be one of, or a combination of, the following perceptions :

 Comfort  Safety
 Speed  Green
 Style  Hi-Tech

Place a percentage value weighting on each area according to how you want the model to be perceived by the marketplace. The total for each model must be 100% (it is possible to have a 0% weighting for some areas if they are not appropriate). The overall perception should have optimum appeal to the target market, as well as relating to the designs, selection of options and R&D projects for the model.

MARKET AND COMPETITION RESEARCH
Once the simulation has started it is possible to purchase research information on the marketplace and competition as follows. If purchased these reports will be included in the set of results posted back to the teams once the organisers have processed each round. Costs for the different types of information are provided on the Cost & Data Sheet.

Market Research
Teams can invest in general market research that is generated by the computer. The market research comprises market predictions, an investments sheet, and headline expenditure by other teams.

Data on Competition
Teams can request detailed data on the competition in each exercise (i.e. the other 8 teams in your marketplace). The report provides details of all competitor products, their pricing and sales performance, and information relating to more general business and financial performance.

Market Perception Report
There is the option to purchase a Market Perception that provides customer feedback on promotion, option and R&D project demands and popularity.

FINANCE
Funding
To support the funding of this enterprise you have an existing capital base comprising of shareholder equity and term debt finance. Extra funding can be raised by a bank loan or by issuing new shares.

Bank Loan
To cover any cash shortfall, a standard loan is available from the bank. However, the bank will only lend up to a maximum of twice the current value of shareholder’s funds. The amount available is shown on the finance decision screen within the simulation. You already have an outstanding loan of £700m.

In the event of the cash balance at year-end being negative, an overdraft will automatically be granted but at a punitive rate of interest. Teams may not invest in shares or government gilts whilst their bank balance is negative.

Interest on loans will be charged as follows :

negotiated loan : current inflation + 5%
overdraft : current inflation + 8% (subject to a minimum of 15%)

Share Issue
It is possible to raise new money from the stock market by issuing new shares, to a maximum of 10% of the issued share capital in any one financial year. This can only be done if the current share price is above the share face value of £100. A share issue is notified a year in advance, the success of the issue will depend upon the performance of the share price in the current year. The share price is dependent on three factors : the performance of the company, the dividend paid and the demand for the share.

Loan Repayment
Loans can be repaid from positive cash balances as and when you wish to do so. The existing £700m loan has to be repaid at a minimum rate of £100m per year as agreed with the bank.

An overdraft is paid off when the bank balance rises above zero. It should be noted that overdrafts are fully repayable on demand and are not considered to be a part of core business funding.

Investments and Returns
Bank Account
Interest rate on balances in credit: inflation + 1.5%

Gilts
It is possible to invest in gilts. These must be held for five years, with a fixed rate of interest being paid over that period. At the end of the five years/rounds, the original investment value is repaid. The interest rate will depend upon the prevailing inflation rate in the year the gilts were issued, and is calculated as
Interest on gilts: 2.5 x inflation (minimum 6%)

Shares
Shares in competitors may also be purchased. However, not more than 10% of the issued shares of any company can be bought in any one year, but as large a stake as required can be accumulated over a number of years. Shares must be bid for in multiples of 1000 by choosing the maximum price up to which you are prepared to pay for those shares.

Shares purchased can be sold at a later date. Any proportion of the shares held may be sold by choosing the minimum price you are prepared to accept for them.

When buying or selling shares, the number bought or sold will depend upon the stock market demand for them and the price you are prepared to bid or accept.

Remember – teams are not permitted to invest in shares and gilts if their bank balance is negative, or if the purchase cost would cause their bank balance to become negative.

Organisational Overheads
All organizations have overheads. Such expenses cover management costs and expenses, administration, communications, IT, HR, financial and legal management and all the other costs associated with the day to day running of a business. In the simulation, overheads are shown in the P&L account and are calculated using the following formula :

10% x wage bill +
7½% x cost of raw materials used +
5% x opening book value of fixed assets

Tax
Corporation Tax is charged at 22% of pre-tax profit.

Payment Periods
You must set the number of days that you give customers to pay after an order has been placed and the number of days that you will wait before paying suppliers after purchasing materials. Giving customers a long credit period will appeal to buyers, delaying too long before paying your bills will cause suppliers to raise their prices. The minimum/maximum periods permitted for both parameters are 10/99 days.

Assets
Fixed assets are shown on the Balance Sheet and comprise the book value of factories and automation , plus 50% of any investment in a new model launch. All will continue to depreciate at 10% of their book value per annum.

Stock assets (unsold vehicles at the end of each year) are valued at their production cost – raw materials plus the amount spent on wages to produce the volume of cars left in stock. It will cost 15% of each car’s production cost to keep it up to the current year’s specification, and this cost will show as part of company overheads in the P&L account.

4 INSTRUCTIONS FOR OPERATING EXECUTIVE

Using Executive is extremely easy and we are confident that once you have accessed your team file a couple of times you will become very comfortable in its use. It is run online and contains a number of control features that make sure that your decisions remain within quite a wide range of parameters.

It is important to remember that the software is primarily a communication tool that enables you to submit your decisions for processing in an easy and efficient manner. The use of the simulation should not detract from the crucial strategy development and business planning that is key to the exercise.

Once the company’s strategy and plan is in place, a set of decisions must be made. These decisions are then entered into the Executive user screens. The software contains a powerful “what-if” business-modelling tool that enables you to see the POTENTIAL impact of your decisions in a set of forecasted business results. Once decisions are entered, a predicted outcome can be viewed and the decisions can then either be changed or saved for submission to the tutor. NB : The predicted results are only a guide to what the possible outcome could be with that particular set of decisions, when processed in the Master simulation, the background competition, the decisions of the other teams/companies and environmental and economic factors will influence the actual outcome.

It is strongly recommended that changes made to decisions to try to improve performance are managed carefully and their possible effect considered carefully before being entered. If too many changes are made at the same time it will not be possible to identify which one(s) have made an impact. However, simply using the model many times to make repeated changes to one figure will be seen as evidence the simulation replacing the team’s own judgement. Use of the “what-if” model by each team will be monitored automatically and may be subject to additional charges per use.

As with all software packages there are some basic disciplines required and these notes are prepared to guide you through those.

BASIC PARAMETERS

1. There are 5 marketplaces (named after Capital cities) operating in the simulation and there are up to 9 unique teams in each, (numbered 1 to 9).

2. Your team will have your own secure simulation file, identified by your city/team number combination, and supported by a unique access password.

3. Your game files cannot be accessed by any other team provided you do not disclose your secure links to them. Any team who is found to have accessed another team’s files will face severe consequences.

EXECUTIVE OPERATING INSTRUCTIONS

Accessing the software and your team’s game file
Before the exercise commences all team members will receive an email containing their allocated marketplace and team number, a password, and a link similar to :

http://executive.trainingsimulations.co.uk//PlayerLogin/index.php

Just click on the link to run the simulation and enter the allocated team password in the relevant box. (It is advisable to test the link before starting the first decision making period, but do not proceed beyond the first screen until instructed)

After successful log in the first screen of the exercise will be displayed.

Opening Screen
From the opening screen, there are two main buttons for selection :

1. ‘Show Round 3 Results’ – this will enable you to view a drop down menu of the results from the previous round together with the Cost & Data Sheet for the forthcoming round.

At the beginning of any new decision-making period it is strongly recommended that the results from the previous year are analysed and used as the starting point for discussions and decisions relating to the current round/year. That new Cost & Data Sheet will also be needed as prices will have risen with inflation since the previous year.

Any of the Reports, as well as the Cost & Data Sheet, can be saved to a file, opened in a new browser window, or printed, by using the icons on the top right hand side of the reports menu screen.

2. ‘Go Straight to Decisions’ – this will allow you to begin entering decisions immediately. This option is only likely to be used when re-entering the simulation after a break from decision-making.

Other options on this screen :

3. The bottom of the screen there is the option to view previous round results. From here you can view the results for any year/round.

4. There is also the option to exchange messages with the simulation administrators by using the message board.

Entering Decisions
1. To begin entering decisions select the Enter Decisions button, which can be found at the top and the bottom of the screen.

2. There is a generic help screen on each screen and beside each individual decision box there is a symbol that gives additional help on that specific element.

3. There is a main category decision box for each model and the company. These can be accessed directly at any time by using the menu bar on the left hand side of the screens.

4. Each category box has a Status button at the top right hand corner. This will be red and say pending until all decisions have been entered when it will change to green and say complete. It is not possible to proceed to the next stage of the simulation until all these boxes are categorized as complete.

5. Once all decisions have been entered select the green Proceed button at the bottom of the screen. You will then be able to view a set of predicted results.

Viewing Predicted Results
1. Executive will display a forecast set of results for the round and there is also a drop down menu giving the option to view any of the results from the previous round/year. The previous or projected results can be saved to a file or printed by selecting the appropriate icons, but make sure you label any saved files accurately as predicted results will almost certainly be different from final results, and decisions based on misinterpreted reports could lead to catastrophic results.

NB : The predicted results are only a guide to what the possible outcome could be with that particular set of decisions; when processed in the Master simulation the background competition, the decisions of the other teams/companies and environmental and economic factors will all combine to influence the actual outcome.

2. Once the projected results have been viewed it is possible to return to the main decision-making screens and change any of the data entered. To do this select the Change Decisions button at the bottom of the screen. This completes one “what-if” cycle and will be recorded by the master simulation for the purposes of calculating future charges.

Saving Decisions
If the team feels it has completed its decision making for that round, or if the deadline for the round is approaching, save the decisions and submit them for processing by selecting the green Finalise Decisions button at the bottom of the predicted results screen. NB : Once this button has been selected it will NOT be possible to view or make any further changes to the decisions.

APPENDIX V – SUMMARY OF FINANCIAL RATIOS

This paper provides a summary of the financial ratios that are presented by the simulation and defines two that you are required to calculate. In the annual management and financial report there is a financial indicators summary… so some of the work has been done for you.

Ratio How it is calculated What it means
Gross Margin % Gross Profit (Loss)
Sales It shows how profitable your sales are before you incur the admin, organizational and professional expenses. In essence it shows the relationship between the price you charge for your products and the costs in making them
Sales Margin % Operating Profit
Sales It shows how profitable your sales are after you have taken off all the costs and expenses related to the making of the cars and the running of the business, but before financial costs and taxation on any profit.
Return on Shareholders Funds
(ROSF) % Net Profit after tax
Shareholders Funds This ratio demonstrates to the shareholders what their return on their investment is in a given period of time. This ratio is calculated before any dividends are declared from the profits. This ratio sometimes has the term Return on Shareholders Equity – ROE)
Return on Capital Employed % Operating Profit
Total Capital Employed This ratio shows how well the firm is investing all its capital (shareholders equity and long term debt capital) and generating a return on the capital. A firm only creates value if it makes a return on its capital in excess of its cost)
Current Ratio(times) Current Assets
Current Liabilities This is a measure that determines if the firm has enough liquid (cash) type assets to cover its short-term liabilities. Current assets are stock, debtors and stock and current liabilities are creditors, unpaid taxation, dividends due and bank overdrafts. A good ratio is between 1.5-2:1 (£1.5-£2 of current assets for each £ of current liabilities)
Return on Assets% Net Profit (Loss) after tax
Net Assets This is a measure of how well the firm uses the investment in its net assets (fixed assets+ investment assets+ current assets- current liabilities) to produce a profit. It is a measure of asset efficiency.
Quick Ratio (times) Current Assets – Stock
Current Liabilities This is similar to the current ratio except that it focussed only on those current assets that are considered to be liquid and quickly available to the firm. It therefore removes stock from the calculation. Ideally you need to be in a 1:1 ratio – a balance between liquid type assets and current liabilities
Earnings Per Share – EPS (p) After Tax Profits
No of Shares This ratio shows the amount that is available for distribution as dividends to the shareholders
Price Earnings Ratio (PER) Share Price
Earnings Per Share This ratio is a measure of value for investors… it shows how long in years it would take to get their money back from the profits (earnings) of the business if they bought a share at the current price. The lower makes the firm more vulnerable to a takeover. The higher the less attractive to income type investors
Gearing % Total Debt Capital
Capital Employed The gearing (or leverage) of a firm is a measure of business risk. It is calculated by relating the long-term borrowings to the total capital employed and expressing the answer as a % of the capital employed.