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MET AD655 A2 International Business, Economics, and Cultures
(2019 Fall)
CESIM FINAL REPORT (TEAM PINK)
Jialu Li
Shuwen Li
Runjia Chen
Roberto Pineda
Miras Suleimenov
Date :12/17/2019
1
TABLE OF CONTENTS
LETTER TO SHAREHOLDERS
1
COMPANY OVERVIEW
2
REVIEW OF FINANCIAL PERFORMANCE
3
DISAGGREGATING STOCK PRICE
5
MANAGEMENT ANALYSIS
6
COMPETITOR ANALYSIS
9
BUSINESS OUTLOOK
10
SIMULATION LEARNING OUTCOMES
10
FINAL REMARKS
11
REFERENCES
12
A Letter to Shareholders
To Team Pink shareholders and investors:
After several rounds, we revised our guidance for our company fiscal report. Ended on round
eight, We now achieved the following:
Revenue of approximately 3.2 million
● Operating expenses of approximately 26,000
● short term debts approximately 0
● Total shareholder equity and liabilities more than 4.5 million
●
With our targeted scale and scope, Pink company are able to satisfied our customers and leading
the market. As we step back and reflect on the big picture, we see something incredible: a word
eager to new technology, potential market emerging, united in the joy of qualified cell phone
products. Pink team has adjusted the goal and updated the products with R&D Investment.
Results turns out, our company maximizes profits while promising shareholders’ value stably.
For the financial part, total shareholders equity is satisfied. Even though there are ups and downs
each round, we offer a stable performanceFocusing on market share, by now, Tech 3 and Tech 4
products are sharing a large part of the Asian market. By setting planning research and
development properly,in advance, our company avoid unnecessary outlays. Our production line
focus on Asian and USA, and well-managed production capacity for each plant. This turns out
higher satisfied production, and nearly 100% capacity utilization also achieved the target
capacity utilization.
Our company’s goal is to achieve maximum shareholders profit and satisfying customer’s
demand, focus global market. So we anticipated challenges in key emerging markets like China
and America, depending policies and economic changes. Even those challenges exist, our
performance in many areas showed remarkable strength, due to insist mission and adjusted goals.
For example, analysis others price each round, we increased investment on promotion while
cutting down proper price. Analysing data through out every decision.
Looking Ahead
We’ve sharpened our focus around customers expectations, qualified products and advanced
tech. We closed out the fiscal year with strong performance across our business. Still we have
opportunities to keep that momentum.
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Every idea we inspire, each product we produced, and every innovation feature we invested—all
generate from one goal, to make our company lead the cell phone industry advanced.
Company Overview
Pink team involved in the cell phone industry from the beginning of 21 century. In recent years
with technology development, Pink company’s strategies have been changed, high technology,
leading products and reliable prices, all those aspects are setting as the company’s competitive
goals. “Breaking the status Quo”, our company’s slogan, being innovative and passionate about
our products. We insist the mission, building long-term value for shareholders and stakeholders
through research & development of new technologies and pursuing consistent profitable growth.
Our vision is to bring the best user experience to our customers with innovative products, to
become a pioneer in the cellular industry.
Being a transnational company, we focus on specific markets and adjust the strategies based on
local policies and customer’s prospection. In order to maximize our companies’ profits and to
satisfy investors, we centered efforts on balancing sale revenue and cost, avoiding short term
debt. Market colleagues set KPI about ratio, also due to proper invest in R&D , we win a great
chance to take most market. Base on certain situation each turn, not only focus our strategy but
analysis competitors, we sold products in the most profitable market and evenly distribute
capacity among target market. Each round, the result turned out dramatically different, even with
the consist strategy and reliable logistic. For example, at round four and five, our sales revenue
were decreased among global market. At those two rounds, our competitors sold the popular
products to customers, since red team take most market of Tech 1 and Tech2, they leaded
products price which made them a great profit. Therefore, in the following rounds, to avoid
fierce competition among mature products, Pink team’s strategy adjusted, we invested in Tech 4,
increasing domestic production, the Blue Ocean strategy opened new market and promote
demands on High Tech products. Results turned out the strategy we adjusted was right, we
shared more market ratio after six rounds. For the production part, we added Tech 2 products line
in the US market, while increasing plants to expand our market scales. Also, by comparing
competitors’ price in the same market, we adjusted our pricing strategy by reaching economic of
scales. Until round six, the cumulative total shareholder return was 6.96% per year.
In the future, our company will continuously striving for better financial performance, and being
an innovation pioneer, to maximize profit and provide advanced products to our customers.
2
Review of Financial Performance
Since the beginning of the project, we stated some goals and metrics to pursue throughout the
simulation and to focus on our growth more than to compare ourselves to other groups. Our main
goal was to fulfill our market capitalization goal of $ 5 US billion and create a healthy company.
The initial statement was that our company should be revenue oriented and have a profitability
that is attractive for our investors, in order to define our profitability we used some financial
ratios to demonstrate how healthy was the company throughout the simulation. Throughout the
semester we had ups and downs, change strategies and try different approaches towards each
round. At last, we decided to impulse the theory of blue ocean strategy which is ​the simultaneous
pursuit of differentiation and low cost to open up a new market space and create new demand. It
is about creating and capturing uncontested market space, thereby making the competition
irrelevant. We focused our strengths in commercializing technologies that didn’t have a red
ocean, which is defined as are all the industries in existence today – the known market space,
where industry boundaries are defined and companies try to outperform their rivals to grab a
greater share of the existing market.
As mentioned, in order to evaluate our progress we used some following financial ratios to
measure our progress and make the necessary corrections in our strategy. The financial ratios we
used where the following:
● The ​profit margin ratio​, also called the return on sales ratio or gross profit ratio, is a
profitability ratio that measures the amount of net income earned with each dollar of sales
generated by comparing the net income and net sales of a company.
● The ​asset ​turnover ratio measures the value of a company’s sales or revenues relative to
the value of its assets. The asset turnover ratio can be used as an indicator of the
efficiency with which a company is using its assets to generate revenue.
● The ​leverage ratio ​is the proportion of debts that a bank has compared to its
equity/capital.
In the three cases we used this financial tools to demonstrate the capacity we had, how efficient
we where doing considering our asset investment and lastly, how profitable where we.
At the end of the simulation we can see the graphs that show both our revenue and profit
throughout the 8 rounds. It’s clear that we had the ability to managed to finish the whole
simulation in second place due to our tactics. We managed to have a healthy debt that allowed us
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to finance our asset investment, we had a strong ratio towards liquidity which meant we had
enough cash to fund our project and investments in R&D and finance our marketing campaigns
in order to increase our revenue.
Considering that an average EBIDTA is usually a 14.9%, our astonishing 37.35% EBIDTA
reflected the great decisions we took throughout the simulation. And lastly finish our goal of
reaching the capitalization of our company and reached a market value of $15 Billion USD.
Final Results
→ Profit Margin Ratio (Net Income/Net Sales) 25.26%
→Asset Turnover Ratio (Net Sales/Average Total Assets) .7
→Leverage Ratio (Total Liabilities/Total Equity) .1532
→Market Capitalization: $15.5B
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Disaggregating Stock Price
Almost all factors influence the stock price. The positive outcomes such as sales growth, the
amount of market share, EBITDA and technological advancement are important for maximizing
stock price. From the beginning of simulation our team tried to enhance all above mentioned
factors during all rounds. After eight rounds of observation, it is clear that these variables are
largely responsible for a firm’s share price.
It is important to increase sales growth and to have more market share
When sales growth and market share of our team started considerably increase from round 5
Team Pink’s stock price also started to rise. ​The faster a business grows, the more willing
investors are to purchase its stock, and the more they are willing to pay for it. If the supply of
stock remains the same while the demand for it increases, the stock price will go up. Therefore, if
companies have huge market share it means your company will be faced with high demand
which affects the stock price.
EBITDA
Stock price reflects cash flow generation not profitability. Profitability, as measured by net
income, is comprised of non-cash charges such as depreciation. Therefore, it is irrelevant when
measuring firm performance. A better measure of firm performance is EBITDA. EBITDA does
not include non-cash charges making it a better indicator of stock price appreciation.
Earnings
The most important factor that affects the value of a company is its earnings. Earnings are the
profit a company makes, and in the long run no company can survive without them. If a
company never makes money, they aren’t going to stay in business. The reason behind this is that
analysts base their future value of a company on their earnings projection. If a company’s results
rapidly increase, the price jumps up. If a company’s results disappoint, then the price will fall.
To sum up, without any doubt good financial performance of the company directly will influence
the stock price. Also market share is extremely important. If companies occupied the market,
these companies will be most attractive by investors. One of the foremost key factors is the profit
of the company. Everyone knows that if companies making considerable amount of money, they
are good at doing business. Therefore, their stock price will increase.
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Management Discussion and Analysis
Global Market Conditions
The cell phone market had four following traits: high-technological competition, shrinking
demands in some regions, oversupply, and price competition. By having these four
characteristics of the market, one out of seven companies went bankrupt.Given that one company
went bankrupt, they will be expected to leave the markets where they generate less revenue from.
With seven companies, it formed a high competitive market. With high competitive market,
companies aimed to be more advanced in terms of research and development in technologies. As
bankrupt company will leave the market, it leaves the space for an oligopoly in Tech 4 product
which gives our company an opportunity to be one of the major players.
Product Portfolio
Team Pink offers its customers three types of cell phones, Tech 1 which represents entry-level
phone for market entries to both local and foreign markets. Tech 2 with multi-features
technology aims to target middle-class customers. Tech 4 which considered to be the most
innovative cell phone in the market that targeted the tech-savvy customers especially in Europe
region. By leveraging first-mover advantage, we successfully occupied huge market in certain
areas. Team Pink always targets the highest growth markets. By doing that we avoided selling
older technologies with slow or negative growth rate. In the later product life cycle after more
liquidity were generated, it allowed Team Pink to reduce overall production costs. As other
companies continue to compete in aging product, they ended up to a price war. Long before the
price war started, Team Pink already gave up selling entry level product but rather focus on Tech
2 and 4. By leveraging ratio of on-site production and outsourcing, we managed to have lowest
average production costs for Tech 2 and thus leading us to be the monopoly.
Foreign Operations
Team Pink manages its global operations to maximize flexibility. By producing both
technologies (Tech 2 and 4) in both the U.S. and Asia, Team Pink has managed to shift
production from both U.S and Asia to Europe to take advantage of changing market conditions.
This helps minimize the negative effects of market specific situations like shifting in tariffs and
rising transportation costs. For the past years, the outsourcing costs went up and down, however,
it did not influence Team Pink much, since most of the products were manufactured in the U.S.
and Asia along with reasonable market demand forecasts. As in the beginning, Team Pink
planned ahead to invest largely into plants both in the U.S. and Asia, although it shrinked our
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profit in the first several years, however we benefited from the later development phases. We had
17 plants in the US and 10 plants in Asia which are the most among our competitors. We always
managed to satisfy local markets that was – selling U.S. made into U.S. market first; selling Asia
made products in Asia regions; and the remaining productions were shipped to EU region. The
ability to predict market demand and quickly ship products from one market to another allowed
Team Pink as a transnational company to gain competitive advantages over other competitors.
Research and Development
With clear defined objectives and product selection, Team Pink focused on products associated
technology development. Investing in R&D is essential for cell phone industry to keep up the
technology features in order to satisfy our customers. At the beginning, we spent R&D
depending our in-house design and engineering. After we entered global markets, we started to
push the R&D on an edge so to compete with other competitors. Large investments were spent
on Tech four since the feature of the product is supposed to be the most advanced cell phone in
the market. Overall spending on R&D helped further and faster lower production costs than other
competitors. Last year, in order to be the tech-leader in tech 4 and further penetrate the market,
we spent a large proportion of our liquidity on licensing.
Market Share
When tech 1 cell phone just launched, it occupied the most aggregate market share globally.
However, when there were too many competitors in the market, the product life cycle is
shortened due to price competition, no doubt that the price for Tech 1 is shrinking sharply during
the first two years. While other competitors striving to get a piece of cake for Tech 1, Team Pink
already entered the same markets with different product selections. This strategic movement
allowed the Team Pink to be the pioneer and achieve economic of scales over the years for Tech
two as shown in the pie chart below.
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Data source: Cesim Simulation
Also, keeping a large market share in one region is not secure enough, investment spent on
advanced technology in Tech 4 parallelly brought a great opportunity to target affluent
customers. Team pink achieved the highest market share in Tech 4 as well.
Data source: Cesim Simulation
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Competitor Analysis
It is true that during all rounds each team has been faced with strong competition. Almost all
teams had been changing their strategy every round. It has become extremely difficult to predict
competitors’ strategic position. The decisions of each team influences the other teams’ results
and the market development overall. As an example, product demand is directly related to the
technological competence of competing companies. Research and Development (R&D) plays a
very important role in the success of a business. R&D contributes to sustainability of business.
Many companies do not understand the importance of R&D until it is too late. Fortunately, from
the beginning Pink team invested money buying technology licences and to develop own
features. Therefore, Pink team was competitive in the market among all teams. Furthermore, in
the middle of the simulation Pink Team was able to determine its strengths. Thus, our team was
concentrated only in two technologies and continue to develop them which helps us to be one of
the most successful companies in the rest of the rounds.
One of the key instruments in the simulation is price that plays an important role in occupying
market. Form the second round some of teams considerably decreased their price which allowed
them to have huge market share. For instance, in the beginning of the simulation Red team
decreased their price for its products and occupied half of the market. Then, all teams adjusted
for this strategy. But our team found another strategy that was concentrated on developing new
products or in other words to blue ocean strategy. In particular, Pink team avoided price war in
Tech 1 and started to invest money for new products which brought positive outcome for our
team.
Our team has built a considerable production cost advantage over its competitors. Pink Team had
significantly more production capacity. At the beginning of the simulation we had invested for
new plants. With larger capacity, our team has the ability to grow its sales and to have huge
market share. It gave advantage for our team during times of strong demand. Moreover, it takes
more time to have a new plant, so it is much better to invest money at the beginning of the
competition. Our team had understood it and invested money in the first three rounds. Only our
team has 17 plants in the US and 10 plants in Asia.
To sum up, after the each rounds our team deliberately analysed results of competitors. It was
crucial for us working with our mistakes. Having our own strategy and being persistent to be
competitive we achieved our goal to one of the leaders of the market. Your products in this case
your cell phones should be high-advanced or unique technology with affordable price in order to
occupy market share. Our plan follow above mentioned strategy and we were successful in the
market. We also could understand that such products will have high demand and we had
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provided enough production for this. Analyzing hole market and your competitors’ decisions you
can find better solutions or ways to improve your products.
Business Outlook
In following years, our company will focus on market share, according to market demand, we
expect balance supply and demand. Currently, our company’s plants attach 100% utilization on
USA market and 98% on Asia, because proper capacity allocation either in house manufacturing
or overseas. It is our goal to optimize our utilizations in order to lead price inflation increase.
Next year, more plants will be added for operation in order to occupy more market shares in all
regions. ​A​voiding short term debts by reliable demand forecast. Align with the sales forecasts,
we will ensure a high sales revenue and liquidity flow. We will continue to invest in R&D next
year, focusing on at least one core feature. What’s more, promotion strategy will also be adjusted
to attract more customers and stimulate consumption.
Simulation Lessons Learned
Logistics
Logistics is a vital part of a company’s business model. Logistics management is responsible for
satisfying customer demands. It is necessary to maintain an appropriate amount of inventory in
each market. Otherwise, customers’ demand could not be fulfilled, and the revenue would not
reach the estimated amount.
Logistics plans should be adjusted round by round according to different conditions. For
example, market outlook of one round indicates that due to the trade war between the US and
Asia market, the number of products shipping between these two regions need to be decreased in
order to cut down extra cost. The remaining product can be transferred to Europe.
Demands and Production
From the simulation experience, to have large capacity and more production plants could be a
successful factor. One main reason of failure for Team Pink in round 4 and 5 (ranked 5 and 7 in
sales revenue) was that the capacity was not fully used. After changing the strategy, making full
use of in-house manufacturing and contract manufacturing, Team Pink’s sales revenue became
the top 1 among 7 teams. Team Pink could turn it around within one round is because having the
most plants among all teams.
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Demands forecasting decides how many products and which products to produce. To analyze
others’ performance may help discover the commercial opportunity. For example, team pink
found out that there was not any team selling tech 2 in Europe so they start to ship more Tech 2
to Europe. The result turned out that Team Pink had 100% market share of Tech 2 in Europe.
The amount of products team pink predicted is often more than how many products can be
produced in order to avoid the condition of Cut Production.
R&D
At early stages, to invest in research and development for a company is the worthiest investment.
Money paid in R&D will be back by the high sales revenue and profit. Although some
technologies are expensive, it’s necessary to occupy the market with these technologies. Because
customers prefer a product which has advanced technology and high quality.
Pricing Strategy
In the market conditions of Cesim, almost every team used the low pricing strategy. It seems that
all the teams are in a price war. The one who set high price will not get high revenue. In our real
life, this situation exists, there are also many other different types of pricing strategy such as
Penetration Pricing, Skimming Pricing, Premium Pricing and so on. More factors should be
considered in the real market, low pricing strategy may not work out in some conditions.
Final Remark
Being top 2 in the first 3 rounds and last 3 rounds, Team Pink’s overall performance was good.
They analyze the results after each round and make strategy adjustment in time. Cesim is a
simulation which create a global market situation for students to deal with different business
management topics such as marketing, logistics management etc.
From this simulation, Group Pink as a team not only learned the knowledge of business decision
making, but also learned the importance of cooperation in a team. Each team member should be
clear about their task and finish their part on time. If a team member has difficulty in a part, all
teammates brainstorming together help generate new ideas. Taking part in the simulation provide
the precious experience for students to work in a condition which is just like the real global
business market.
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References
● Understanding Item Analyses. (n.d.). Retrieved from
https://www.washington.edu/assessment/scanning-scoring/scoring/reports/item-analysis/.
● “Profit Margin Ratio: Analysis: Formula: Example.” ​My Accounting Course,​
www.myaccountingcourse.com/financial-ratios/profit-margin-ratio.
● “Red Ocean vs Blue Ocean.” ​Blue Ocean Strategy,​
www.blueoceanstrategy.com/tools/red-ocean-vs-blue-ocean-strategy/.
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Strategy & International
Business Simulation
CASE DESCRIPTION
v6
Mobilé Inc.
CASE COMPANY DESCRIPTION
T
he US Department of Justice ordered the boards of directors of the major
mobile handset manufacturers to dismiss and replace their top
management due to years of cartel-like behaviour. Investigations found that
the companies’ directors had agreed amongst themselves in secret banquets on
issues such as deliberately stagnating technology development plans, pricing the
handsets artificially high, and other key matters that had set the companies in
exactly the same financial and operational position. Finally, the board of directors
has understood the serious nature of this situation and hired you to compete
against the other restructured companies.
The core operations of the companies operating in the mobile handset
manufacturing industry consist of research and development, production and
marketing. Sales revenues in the previous financial year were a bit more than 1
billion dollars. Due to collusion, profitability has been good, and the companies are
also generating sufficient amounts of cash. This is a good starting point since it is
likely that the increased competition and rapid technological evolution over the
next years will tax both profitability and cash.
1
Mobilé Inc.
CASE COMPANY DESCRIPTION
BACKGROUND
HISTORY OF THE INDUSTRY
The first international cellular mobile telephone network, NMT, was introduced in 1981. At the time, the
transportable mobile phones were heavy and huge. Towards the end of the 80’s actual hand portables
came into the market and the era of the mobile phones industry began.
Many of the mobile communications companies have evolved from multi-industry companies as a result
of the recession in the end of the 80’s and the beginning of the 90’s, when the downward spin of the
economy slowed down the general economic growth for a couple of years. Despite the economic
slowdown, heavy investments in R&D were made in the telecommunications sector. With the birth of a
second generation (2G) of mobile telephones, the telecommunications business started to emerge from
other business’ shadow, and on July 1st, 1991, the world’s first genuine GSM call was placed by the
prime minister of Finland, Harri Holkeri, to the mayor of Helsinki to discuss the price of Baltic herring.
GSM’s American counterpart, CDMA, is the world’s second most common mobile phone standard,
covering a third of the world’ s mobile phone subscribers. The constant development of mobile phones in
the 90’s made the devices smaller and lighter, their technical design more complex, and increased the
number of available functions. FOMA, the first 3G (third generation) network was launched in Japan in
2001 by NTT DoCoMo. The new technology made possible the transfer of voice data and non-voice
data. This paved the way for data-based mobile services and started to transform the whole industry. By
2009 it had become clear that the overwhelming growth of data traffic could not be sustained with the
existing technology and industry started looking for new data-optimized technologies. The first 4G
networks were launched by Sprint in the US and TeliaSonera in Scandinavia.
PRESENT DAY
Currently the companies have an annual sales revenue of about 1,2 billion USD and due to relatively
large R&D investments the companies’ handset businesses have developed favourably. Appealing and
customer-driven designs have been named as some of the key success factors in the business.
The companies sell their products in the U.S., Asia, and Europe. Production and R&D have historically
been located in Atlanta (GA), but recently the companies have also started building plants in Asia. Some
years ago, the possibility to begin production in Europe was investigated as well. It became clear that the
more complicated and inflexible labour laws in Europe would make the operations difficult and
expensive.
To ensure flexibility in R&D and production, the companies have also actively negotiated agreements for
subcontracting parts of their production and R&D.
Based on a picture by Matti Mattila. License: CC BY-SA 2.0
2
Mobilé Inc.
CASE COMPANY DESCRIPTION
FUTURE CHALLENGES
The pace of change in the industry has been rapid and great expectations have been set for new
technologies. The overall trend is towards increased mobility with tested communication speeds of the
5G technology at 100 megabits per second in metropolitan areas and improved support for device-todevice communication. The overall growth potential of the industry is good, but development can vary
heavily from one market to another.
The biggest challenge for a mobile handset manufacturer may be keeping up with technological
evolution since R&D requires continuous large investments. Phones have already long been much more
than just devices for talking.
It seems that not everything can be developed in-house and therefore partners for technology licensing
are needed. The growth in the global markets will probably create momentum for establishing more
production facilities at least in Asia.
As the mobile industry evolves into new applications and services, co-operation among industry players
has intensified, facilitating a faster adoption of mobile services as well as market growth for the entire
mobile industry.
OPERATIONS
PRODUCTION
Characteristic to high-tech companies, production is complicated and high costs are incurred in the
beginning phases of the production of new models. This, combined with short product life-cycles, forces
the companies to adapt the production process to manufacture a new product model as soon as
possible, in pursuit of low costs. Eventually, as the company becomes more acquainted with a specific
technology, production cost per unit will fall with the learning curve effect. It should be kept in mind that
when subcontracting production, the learning curve effect is foregone. On the other hand, since adding
new in-house manufacturing capacity comes into effect with delay, the extra capacity from contract
manufacturing can become very useful. Also, sometimes the contractors can provide the devices with
significantly smaller costs.
The company is running just in time production process and there are no finished goods inventories. If
the initial demand estimation is too high, the production department will automatically decrease the
production volumes according to the actual demand. There is an additional 5-10% cost on top of the
regular cost due to the production re-adjustment. More importantly, if the initial demand estimation is too
low, the production department is not able to increase the production during the period and the company
will encounter lost sales due to insufficient delivery capacity.
SALES AND MARKETING
The companies have traditionally operated only in the U.S. market. Over the last years, sales networks
have been established in Asia and Europe as well. Marketing plays a significant role in promoting the
brand and communicating to consumers about the product. Marketing is particularly important in the U.S.
and Europe. In Asia the effect of promotion is less but still considerable. Typical marketing spending in
the industry is 3-5% of Sales revenue.
3
Mobilé Inc.
CASE COMPANY DESCRIPTION
R&D
R&D is extremely important for IT – and other high-tech companies, because of the dynamic nature of
the industry. Consumers continuously demand new products and the margins from old products decline
rapidly due to tight competition.
The companies have a choice of performing their own R&D or outsourcing the process by purchasing
technology licenses for the technologies and their related features. The first step of the R&D process is
to develop the base technology upon which up to ten technology-specific product features can be added.
There is one notable difference between in-house R&D and technology licenses: when R&D is
performed internally, the benefits are available in the next period. If R&D is outsourced, the new
technology/feature is available immediately.
The cost of in-house R&D is lower when the process is a gradual one, comparing to a lump-sum
investment. Technology licensing fees are one-time payments. The cost of which will decrease as the
technology ages. A typical company in the industry spends as much as 10% of Sales revenue on R&D.
It should be noted that R&D expenditure will not be capitalised on the balance sheet. That is, all R&D
expenses are considered as operating expenses and as such R&D investments may cause substantial
fluctuations to the companies’ P&L.
TECHNOLOGIES
So far, the companies have been manufacturing Technology 1 mobile handsets. New mobile networks
are developed constantly, and these will require new technology handsets. Therefore, steps should be
taken to begin developing new technologies. R&D of new technologies may require relatively large
investments, but it is crucial to secure a prosperous future for the company.
It should be mentioned that the technologies are dependent on the networks in which they operate in.
Thus, a Technology 2 phone cannot operate in Technology 1 network infrastructure.
You should monitor the network coverage forecasts on the demand-page before you plan your R&D as it
indicates when the various technologies are economically viable to be introduced.
FEATURES
The underlying technology for mobile handsets is not very different from one company to another, so
product differentiation is done with product features. These may be, for example, design, cover, screen
size, processor speed, specific applications, etc. In the simulation you decide about the number of
features. Minimum number of features is one and maximum is ten for each technology. Product features
have different effects on demand in different market areas.
4
Mobilé Inc.
CASE COMPANY DESCRIPTION
TRANSPORTATION AND LOGISTICS
Transportation to export markets is handled by an independent freight company and the cost of the
service cannot be influenced by the teams. The total logistics cost per unit is transportation cost + tariff.
There is no logistics cost involved when the good is manufactured and sold in the same area.
INTERNATIONAL TAXATION
International taxation and transfer pricing are sensitive issues. The companies have created a system
that allows some flexibility, but the ultimate purpose is to even out the cost-impact of the R&D
expenditure. R&D functions are located in connection to the production facilities and the costs are
allocated on the profit and loss statements with the following principles:
Let’s assume that we have 10 plants in the US and 2 plants in Asia, i.e., 12 plants in
total. Our total R&D expenditure for the period is 200 mUSD. Respectively, 10/12 x 200
mUSD is allocated to the US P&L and 2/12 x 200 mUSD is allocated to the Asian P&L.
While determining transfer prices, multipliers (between 1 and 2) are applied to the direct variable cost of
production. In practice this means that the direct variable cost of production can be multiplied with a
number between 1 and 2 and the outcome is the transfer price. When used wisely, these multipliers can
also be used to benefit from differences in corporate tax rates in different areas. At a minimum, the
company should use the multipliers to take benefit from any accumulated losses that may have been
created.
FINANCE
In addition to income financing, the companies can obtain financing from equity investors and lending
institutions. The companies are listed on the stock exchange, enabling effective equity financing by
issuing shares. Shareholders expect a return on the equity invested in the form of dividends and capital
gains.
Over the past few years, the industry has been in a rapid growth phase, and shareholders have not been
able to enjoy large dividends. On the other hand, the increase in share price has been remarkable and
the companies have outperformed the Nasdaq Composite Index over the last couple of years.
You can reward your investors in the form of dividends or share repurchases. Share issues and
buybacks are made according to the market valuation at the beginning of the round.
Lending institutions provide short- and long-term loans with an interest rate depending on the company’s
financial condition. Short-term debt is considered to be the last resort, i.e., emergency funding, and it
always carries a premium over the long-term loan rates.
You can also transfer funds between different countries by internal loans (International Treasury
Management). You may want to use internal loans if you have accumulated substantial cash reserves in
Asia or Europe that can be repatriated and distributed to the owners, or if for instance you need to
finance some plant investments in Asia.
5
Mobilé Inc.
CASE COMPANY DESCRIPTION
MARKET AREAS
USA
EUROPE
ASIA
USA is the local market of
Mobilé and at the same time its
largest market. The USA is
generally known to be a leader
in high-tech industries but in the
wireless sector the leadership is
not that clear due to the
multitude of different network
technologies. Product features
are currently less appreciated
than in Europe, but advertising
appears to have a good
response.
The companies have been
exporting products to Europe for
a couple of years. Production
facilities will not be established
in Europe because of the high
labour costs.
It is predicted that the highest
growth potential is in fact in
Asia. Currently the market
grows at 20% p.a., but longterm growth prospects are hard
to make.
The market growth is expected
to be about 10% p.a. and
demand is expected to grow
steadily for several years to
come. This market appears to
be the most responsive to
product features currently.
The market is quite polarized
between high-spenders who
always want to have the latest
technologies and late adopters
who are happy with their old
devices. But on average it
seems that consumers are
currently less responsive to new
technologies and features than
their counterparts in USA and
Europe. Also, the average
responsiveness to prices is
higher than elsewhere.
Demand is expected to grow
steadily about 5-10% p.a. at
least for the next 2-3 years.
There seems to be no reason
why growth should stop even
after that. According to some of
the least conservative
estimates, in a few years with
the introduction of new
technologies, growth in demand
may show peaks of up to 1520% p.a.
MEASURES OF PERFORMANCE
The primary objective of the firm is to maximize the value to its shareholders. In this case the returns to
shareholders are measured by a term called cumulative shareholder return. It takes into consideration
both the dividends paid as well as the share price development over time. This ratio is then annualized to
portray an annual performance of the company. Share price correlates well with the profitability and
growth of the company. Dividends are considered to earn 8-9% annual shareholder return after they
have been paid out of the company.
6

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