The Business Policy Game:

An Internet Integrated International

Strategy Simulation

Player’s Manual-Web

Seventh Edition

Richard V. Cotter, David J. Fritzsche And Simon A. Rodan

 THE
BUSINESS POLICY GAME
An Internet Integrated International
Strategy Simulation
Seventh Edition

PLAYER'S MANUAL

Richard V. Cotter, David J. Fritzsche and Simon A. Rodan

1st Printing

©2017 Richard V. Cotter, David J. Fritzsche and Simon A. Rodan

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 TABLE OF CONTENTS

PREFACE ...................................................................................................................................... 9
AN OVERVIEW OF THE BUSINESS POLICY GAME ....................................................... 12
1. INTRODUCTION.................................................................................................................. 14
THE SIMULATED ENVIRONMENT ................................................................................................ 15
PREPARING FOR ACTION ............................................................................................................ 17
GETTING READY FOR THE FIRST DECISION ................................................................................ 17
SUBMITTING DECISIONS ............................................................................................................. 20
2. QUARTERLY DECISIONS.................................................................................................. 21
THE DECISION PROCESS ............................................................................................................. 21
THE DECISION FORM ................................................................................................................. 22
Company, World, Year, Quarter ........................................................................................... 23
MARKETING DECISIONS ............................................................................................................. 24
Price ...................................................................................................................................... 24
Advertising ............................................................................................................................ 25
Salespeople ........................................................................................................................... 26
Changes in Sales Force Compensation ................................................................................ 28
Model Number ...................................................................................................................... 29
Model Quality ....................................................................................................................... 30
Model Features ..................................................................................................................... 31
Sales Office Orders ............................................................................................................... 31
FINANCE DECISIONS .................................................................................................................. 33
Bank Loan ............................................................................................................................. 33
Sale or Redemption of Bonds ................................................................................................ 34
Sale of Common Stock .......................................................................................................... 35
Dividends .............................................................................................................................. 36
Certificates of Deposit .......................................................................................................... 36
PRODUCTION DECISIONS ............................................................................................................ 37
Research and Development................................................................................................... 37
Production Employee Training ............................................................................................. 38
Production Scheduling .......................................................................................................... 38
Capacity Adjustment. ............................................................................................................ 40
Investment in Production Facilities, Equipment and Second Shift ....................................... 42
MARKETING RESEARCH ............................................................................................................. 45
Competitive Advertising Study .............................................................................................. 45
Competitive Sales Force Study ............................................................................................. 45
Consumer Preference Studies ............................................................................................... 46

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 Sales Force Compensation Study.......................................................................................... 46
ENTERING DECISIONS & PRINTING REPORTS ............................................................................. 47
SOFTWARE LICENSE ................................................................................................................... 47
SUMMARY .................................................................................................................................. 47
3. THE BUSINESS ENVIRONMENT...................................................................................... 51
MERICA ..................................................................................................................................... 52
Exporting............................................................................................................................... 52
Importing............................................................................................................................... 52
Investing ................................................................................................................................ 53
NYSTOK ..................................................................................................................................... 54
Exporting............................................................................................................................... 55
Importing............................................................................................................................... 55
Investing ................................................................................................................................ 55
PANDAU ..................................................................................................................................... 57
Exporting............................................................................................................................... 58
Importing............................................................................................................................... 58
Investing ................................................................................................................................ 58
SERENO ...................................................................................................................................... 60
Exporting............................................................................................................................... 60
Importing............................................................................................................................... 61
Investing ................................................................................................................................ 61
ECONOMIC ENVIRONMENT......................................................................................................... 63
Inflation Adjustments ............................................................................................................ 64
Exchange Rate Calculations ................................................................................................. 65
MARKET AREAS ......................................................................................................................... 65
DISTRIBUTION, RESEARCH AND DEVELOPMENT, PRODUCTION .................................................. 66
REPORTS .................................................................................................................................... 67
4. DEVELOPING THE STRATEGIC PLAN AND SELECTING STANDARDS OF
SUCCESS ..................................................................................................................................... 69
VISION ....................................................................................................................................... 69
MISSION .................................................................................................................................... 69
DEFINING GOALS AND OBJECTIVES ........................................................................................... 69
Explicit Definition ................................................................................................................. 70
FORMULATING STRATEGIES ....................................................................................................... 71
SETTING POLICY ........................................................................................................................ 72
STRATEGIC PLAN ....................................................................................................................... 73
MANAGEMENT REPORT ............................................................................................................. 76
Avoid End Play ..................................................................................................................... 77
PROFITABILITY .......................................................................................................................... 78
Rate of Return on Stockholders' Investment (Investor ROI) ................................................. 78
Other Ratios .......................................................................................................................... 79
FINANCIAL STANDING................................................................................................................ 79
Factors Affecting Credit Ratings .......................................................................................... 80
QUALITATIVE STANDARDS ........................................................................................................ 80
REFERENCES .............................................................................................................................. 82

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5. MARKETING: STRATEGY ................................................................................................ 83
COSTS AND EXPENSES ............................................................................................................... 84
ADVERTISING ............................................................................................................................. 86
PRICE ......................................................................................................................................... 87
PRODUCT ................................................................................................................................... 88
New Model ............................................................................................................................ 89
Model Quality ....................................................................................................................... 92
Model Features ..................................................................................................................... 93
SALESPEOPLE ............................................................................................................................. 94
Hiring Salespeople ................................................................................................................ 95
Transferring Salespeople ...................................................................................................... 96
Firing Salespeople ................................................................................................................ 96
Sales Salaries ........................................................................................................................ 97
Sales Commissions ................................................................................................................ 97
Managing the Sales Force .................................................................................................... 98
PROMOTIONAL BALANCE ........................................................................................................... 99
MARKETING RESEARCH ............................................................................................................. 99
LEAVING AND ENTERING MARKET AREAS .............................................................................. 101
Closing a Sales Office ......................................................................................................... 102
Opening a Sales Office........................................................................................................ 102
OTHER MARKETING EXPENSES ................................................................................................ 103
General Selling Expenses ................................................................................................... 104
Transportation Expense ...................................................................................................... 104
Sales Office Depreciation ................................................................................................... 105
Training Expense ................................................................................................................ 105
Inventory Storage Expense ................................................................................................. 106
Other Expense ..................................................................................................................... 107
Implicit Cost of Stock Outs ................................................................................................. 107
6. MARKETING: SALES FORECASTING ......................................................................... 110
ECONOMIC ENVIRONMENT....................................................................................................... 110
Sales Levels and Gross Domestic Product ......................................................................... 110
Projecting the Trend of Growth .......................................................................................... 111
Projecting Economic Fluctuations ..................................................................................... 112
Leading Indicators .............................................................................................................. 113
FORECASTING SALES ............................................................................................................... 113
Using the Sales Forecast Work Sheets................................................................................ 113
Previous Sales ..................................................................................................................... 114
GDP Changes ..................................................................................................................... 114
Seasonal Factors ................................................................................................................. 115
Marketing Activities ............................................................................................................ 117
Competitors' Actions ........................................................................................................... 118
Completing the Forecast ..................................................................................................... 118
LOOK AHEAD, NOW ................................................................................................................. 119
SUMMARY OF RELATIONSHIPS ................................................................................................. 120
7. PRODUCTION PLANNING, SCHEDULING AND COSTS ........................................... 121

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 THE PRODUCTION PROCESS ..................................................................................................... 122
OPERATIONS PLANNING AND SCHEDULING .............................................................................. 122
Existing Capacity ................................................................................................................ 122
Level Versus Seasonal Production...................................................................................... 123
Inventory Storage Costs ...................................................................................................... 124
Production Plan Work Sheets ............................................................................................. 124
SCHEDULING ............................................................................................................................ 127
RESEARCH AND DEVELOPMENT ............................................................................................... 130
OPERATIONS AND PRODUCTION EMPLOYEE TRAINING ............................................................ 131
PRODUCTION COSTS ................................................................................................................ 132
Production Cost Components ............................................................................................. 136
Cost Variance...................................................................................................................... 140
Illustration of Overtime Costs ............................................................................................. 141
SUMMARY OF RELATIONSHIPS ................................................................................................. 142
8. PRODUCTION: CAPACITY CHANGES......................................................................... 143
INVESTMENT OPTIONS ............................................................................................................. 143
Overtime .............................................................................................................................. 143
Second Shift ......................................................................................................................... 144
Additional Production Lines ............................................................................................... 144
Addition to Existing Plant ................................................................................................... 146
Construction of a New Plant ............................................................................................... 147
CLOSING A PLANT .................................................................................................................... 148
SUMMARY ................................................................................................................................ 149
Investment Options.............................................................................................................. 149
Plant Closure ...................................................................................................................... 150
9. FINANCE: STRATEGY AND CAPITAL BUDGETING ................................................ 151
FINANCE DECISIONS ................................................................................................................ 152
Financing and Investment Considerations ......................................................................... 152
Bank Loan—Parent Company ............................................................................................ 154
Emergency Loans ................................................................................................................ 154
Sale or Redemption of Bonds—Parent Company ............................................................... 155
Sale or Repurchase of Common Stock—Parent Company ................................................. 156
Sale of Common Stock—Subsidiaries ................................................................................. 156
Dividends—Parent Company.............................................................................................. 157
Dividends—Subsidiaries ..................................................................................................... 157
Certificates of Deposit—Parent Company.......................................................................... 158
INVESTMENT ANALYSIS ........................................................................................................... 158
Flexibility and Risk ............................................................................................................. 159
CAPITAL BUDGETING ............................................................................................................... 159
Provisions for Adequate Funds ........................................................................................... 159
Capital Expenditures .......................................................................................................... 160
Sources of Funds ................................................................................................................. 162
SUMMARY ................................................................................................................................ 169
Financial Decisions ............................................................................................................ 169
Investment Analysis ............................................................................................................. 170

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 Capital Budget .................................................................................................................... 170
10. FINANCE: FINANCIAL PLANNING............................................................................. 171
PROFIT PLANNING AND THE INCOME STATEMENT ................................................................... 171
Sales and Cost of Goods Sold ............................................................................................. 172
Gross Profit......................................................................................................................... 178
Selling Expense ................................................................................................................... 178
Administrative and General Expense.................................................................................. 181
Total Operating Expense .................................................................................................... 182
Operating Profit .................................................................................................................. 182
Other Income ...................................................................................................................... 182
Other Expense ..................................................................................................................... 183
Profits, Taxes and Dividends .............................................................................................. 183
Foreign Currency Adjustment............................................................................................. 185
Comprehensive Income ....................................................................................................... 185
CASH BUDGETING AND THE CASH FLOW STATEMENT ............................................................. 185
PRO FORMA CASH FLOW WORK SHEET ................................................................................... 186
Operating Receipts.............................................................................................................. 186
Operating Expenditures ...................................................................................................... 188
Net Operating Cash Flow ................................................................................................... 191
Investment Receipts (parent company only) ....................................................................... 191
Investment Expenditures ..................................................................................................... 191
Net Investment Cash Flow .................................................................................................. 192
Financing Receipts.............................................................................................................. 192
Financing Expenditures ...................................................................................................... 193
Net Financing Cash Flow ................................................................................................... 194
Cash Flow Summary ........................................................................................................... 194
THE BALANCE SHEET .............................................................................................................. 195
Current Assets ..................................................................................................................... 195
Fixed Assets ........................................................................................................................ 196
Liabilities and Equity .......................................................................................................... 199
SUMMARY ................................................................................................................................ 205
Pro Forma Income Statement ............................................................................................. 205
Pro Forma Cash Flow Work Sheet ..................................................................................... 206
Pro Forma Balance Sheet ................................................................................................... 207
APPENDIX A: USING THE BPG PLAYER’S PROGRAM ............................................... 209
BPG INTERNET PLAYER’S PROGRAM DETAILS ........................................................................ 209
APPENDIX B: DECISION SUPPORT SYSTEMS................................................................ 217
APPENDIX C: HISTORICAL DATA FOR YEARS 1 AND 2 ............................................. 219
CONSOLIDATED HISTORICAL DATA FOR YEARS 1 AND 2 (REPORT J)....................................... 219
CONSOLIDATED INCOME STATEMENT, YEAR 2, QUARTER 4 (REPORT A) ................................ 219
CONSOLIDATED CASH FLOW ANALYSIS, YEAR2, QUARTER 4 (REPORT B) .............................. 219
CONSOLIDATED BALANCE SHEET, YEAR 2, QUARTER 4 (REPORT C)....................................... 219
OPERATING INFORMATION REPORT, YEAR 2, QUARTER 4 (REPORT D) ................................... 219

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 OPERATING INFORMATION, PAGE 2, YEAR 2, QUARTER 4 (REPORT E) .................................... 219
QUARTERLY INDUSTRY REPORT, YEAR 2, QUARTER 4 (REPORT F) ......................................... 219
INDEX........................................................................................................................................ 229

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 PREFACE

A number of changes have been made since the 6th edition of this book to enhance its
educational value. Some were updates to the 6th edition and some are new to this edition.

1. Simulation reports for each quarter of play are saved by the Player's Program.
The reports for any completed quarter of play can be viewed in the
viewing module by selecting the desired quarter and then selecting the
desired report.
2. The Altman Z statistic has been added to the Quarterly and Annual Industry
Reports.
3. Company output can be printed in English, Spanish or Portuguese
4. Added comma separated variable output files for the income, cash flow, and
balance sheet statements that can be imported directly into a spreadsheet
program.
5. Added a morale factor that decreases production efficiency for several
quarters when a company lays off or deactivates one or more lines.
6. Significantly enhanced the help module.
7. Added the Player's Manual, Quick Start Manual and program tutorial to the
Help menu of the Player's Program.
8. Added a glossary under the Help menu for all of the terms in the company
reports.
9. Emergency loans after the first one result in customer and salespeople losses.
10. Made part of production costs and operating expenses as well as all taxes
payable the following quarter.
11. Linked spreadsheet templates and the decision form to a Tool menu.

Several features which we believe to be particularly user friendly are:

1. The context sensitive help feature available on command when entering decisions.

2. Thorough checking of decision values when they are entered, with informative mes-
sages notifying players when errors or invalid entries are made.

3. An expanded decision support system is available for use with a variety of spreadsheet
programs.

4. The decision form in the manual matches the form displayed on the computer screen
when decisions are entered.

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 5. The addition of a Quick Start Manual that provides a quick summary of the rules of
the simulation.

The Business Policy Game is a general management simulation that provides students with
a challenging decision-making exercise. It has been used successfully with groups of upper-class
undergraduates and graduate students in business administration and in executive development
programs. The simulation also has been used successfully for over 50 years in the International
Collegiate Business Strategy Competition.

Each team should have access to a computer.

The Business Policy Game has been patterned, in part, after similar games which preceded
it. Particular acknowledgment is given to Dr. John E. Van Tassel, who’s "Boston College Deci-
sion-Making Exercise" inspired the senior author to become interested in business simulation and
influenced the development of the model of this game and the player's manual. This revision is
the result of experiences with the first six editions, as well as numerous other simulations and
discussions with Association for Business Simulation and Experiential Learning (ABSEL)
members and colleagues. We would like to thank all of those authors and friends for their
contributions.

Particular thanks are extended to each of the teams and advisors who participated in a beta
test of the current international revision for the fifty-second annual running of the International
Collegiate Business Strategy Competition in Anaheim during the spring of 2016. Over the years
teams and their advisors from the following schools have provided much feedback that has helped
to improve the simulation:

Steven Achtenhagen, San Jose State University (California)

Mohsen Attaran, California State University, Bakersfield
C. H. Barnes, Gonzaga University (Spokane, Washington)
William D. Biggs, Arcadia University (Glenside, Pennsylvania)
Warren Brown, University of Oregon (Eugene)
Charlene Coe, California State University, Fresno
James Cross, University of Nevada, Las Vegas
Mike Emerson, Harding University (Searcy, Arkansas)
Tom English, Boise State University (Idaho)
Greg Frazier, University of Oregon (Eugene)
Glenn Gomes, California State University, Chico
Edmundo Gonzales, Instituto Tecnologica Y De Estudios Superiores De Monterrey
(Mexico)
Abe Harraf, Embry-Riddle Aeronautical University (Daytona Beach, Florida)
Michael Hergert, San Diego State University (California)
Gerry Huybregts, Eastern New Mexico University (Portales)
Arthur Jensen, California State University, Sacramento
Andrew Klein, Groupe de Bissy Management School (France)
Andrew Klein, Ecole Des Praticiens Du Commerce International (France)

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 Bernard Malamud, University of Nevada, Las Vegas
Don Mann, University of San Diego (California)
Larry Mills, Southern Nazarene University (Bethany, Oklahoma)
Colleen Mullery, Humboldt State University (Arcata, California)
Allen Nash, Murdoch University (Perth, Western Australia)
Don Negri, Willamette University (Salem, Oregon)
Chike Okechuku, University of Windsor (Ontario, Canada)
Jon Ozmun, Northern Arizona University (Flagstaff)
Ralph Pope, California State University, Sacramento
Ronald Salazar, Idaho State University (Pocatello)
Hassan Setoodeh, Embry-Riddle Aeronautical University (Prescott, Arizona)
L. T. Snyder, University of West Florida (Pensacola)
Don Springer, University of Portland (Oregon)
Joe Walka, Northern Arizona University (Flagstaff)

We also would like to thank Fernando de Almeida, Universidade de São Paulo,

Brazil for help with the Portuguese translation and Mario Hernandez, Universidad
Interamericana de Costa Rica for help with the Spanish translation of the player’s
output and the Player’s Program.

We are sure there are others who have been inadvertently omitted to whom we owe an
apology. Special thanks are due to several colleagues who have helped the authors with beta tests
of the fifth edition in the classroom:

Jack C. Green, Pepperdine University(California)

Mike Emerson, Harding University(Searcy, Arkansas)
Tom Leonard, Lewis-Clark State College (Lewiston, Idaho)
Jon Ozmun, Northern Arizona University (Flagstaff)

We also owe a debt of gratitude to our students who have suffered through innumerable
updates as we have tested different variations of the game in our classrooms.

Most of all, we each want to thank our spouses, Carolyn Cotter, Nan Fritzsche and Judith
Rodan, respectively, for their patience and counsel. Without their assistance, and the help and
cooperation of our children, Sonja and Tanya Fritzsche; and Kate and David Cotter, this project
could never have been completed.

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 AN OVERVIEW OF THE BUSINESS POLICY GAME

Educational objective. An instructional supplement for courses dealing with strategic

management and business policy, both domestically and internationally. Formulation of mission,
objectives and strategy are emphasized, with opportunity to implement strategies and policies that
will lead to the realization of objectives. A premium is placed on successful integration of
functional area concepts. The model is challenging to upper-division undergraduate and graduate
business students. A simplified version will challenge lower-level undergraduates.

The simulation. A computer-based simulation of a manufacturing firm with domestic and

international subsidiaries. Student teams compete with each other as members of the management
of simulated companies producing and selling a consumer durable good. Includes marketing,
production and finance decisions. The model is interactive so that marketing decisions, for ex-
ample, may influence the sales of competitors as well as the sales of the firm making the decision.

Course use. Strategic management and business policy at the upper-level undergraduate
or graduate level; suitable for use independently or as supplementary material. A simplified
version is suitable for lower-level undergraduate courses. It is also useful for seminars for man-
agement development. Variations of the model have been used successfully in the classroom and
in intercollegiate competition for over five decades.

Number of participants. Twelve or more. A world may contain from three to eight firms
(student teams), with each firm's management consisting of four to eight participants. For more
than eight teams, separate worlds may be run concurrently.

Time required. Sixteen to twenty sessions of about fifty minutes each (later sessions typi-
cally may require less time). Outside preparation will reduce the time required in group sessions.
Initial preparation by participants may require six to eight hours each.

Space required. Ideally, each company might have a separate "board room" for deci-
sion-making sessions. Grouping of teams in different parts of a large room works satisfactorily.

Materials and equipment needed. A copy of The Business Policy Game: Player's
Manual located under the Help menu of the Player’s Program and The Business Policy Game:
Instructor's Manual for the administrator located under the Help menu of the Administrator’s
Program provide detailed instructions. Access to a computer system by players is recommended,
but not required. A spreadsheet program is useful for student analysis and for using the decision
support system.

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 Administrator's role. To provide an environment which maximizes the learning experi-
ence; and to arrange for materials, physical facilities and computer processing of student deci-
sions. Instructions and suggestions for classroom use and for all phases of the simulation are
provided in the instructor's manual.

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 1. INTRODUCTION

INPUTS PROCESSING OUTPUT

Historical Policy
Data → → Formulation →

Description Data
of → → Analysis →
Model

Beliefs Planning Quarterly

About → ⎯→ → and → ⎯→ Decisions
Competitors Scheduling

Company
Goals → → Budgeting →

Knowledge of Using
Business → → Judgment →
Principles

Experience →

FIGURE 1-1
Flow Chart of Activities in Preparation for
Making Decisions in The Business Policy Game

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The Business Policy Game was designed as a strategic management simulation to provide a
challenging, complex decision-making exercise. As a strategic management simulation, it requires
participants to define and articulate their corporate missions, set objectives, develop strategies to
realize the objectives and create operating policies to ensure that operating decisions support the
strategy. Participants are also responsible for making quarterly operating decisions for each of the
functional areas of finance, marketing and production and to integrate those decisions for the
purpose of meeting the firm's overall goals and aspirations. Participation in the simulation requires
that a student of business administration review information and techniques that have been learned
in other courses and/or in practical on-the-job experience, and put into practice many of the
principles of management decision making and strategic planning. To be successful, participants
need to adopt the viewpoint of top management in the simulated business firm which they operate.
They must specify carefully the goals and objectives which guide their firm's operation. The
participants are required to make quarterly decisions concerning the operations of their
manufacturing firm as they compete with the management teams of other firms in their world.

The Business Policy Game is not intended to duplicate any actual industry. Rather, the
simulation model was designed to include general relationships that might exist in any competitive
industry. One might say it is generic. Participants need to utilize their knowledge and experience
in order to make certain deductions about the economy in which they are operating and about
general relationships which exist within the simulation. These deductions must be combined with
knowledge about specific relationships and with the participants' beliefs about the actions that
competitors are likely to take. A set of decisions ideally would follow from utilizing a combination
of different types of data analysis, forecasting techniques and development of strategies and
policies to meet the goals and objectives of the firm. (See Figure 1-1.)

The Simulated Environment

You will be a member of the management team of a simulated manufacturing company.

Your company's corporate headquarters is located in one of three domestic market areas. Two
subsidiaries handle operations in the other two domestic areas. Operations in a fourth market area
are handled by one of four possible subsidiaries depending upon the simulated environment your
simulation administrator has selected. The choices are Merica 4, Nystok, Pandau or Sereno.
Merica 4 is a fourth market area within Merica creating a competition solely within Merica. The
other choices provide an international competition. Nystok is a simulated Eastern European
country, Pandau is a simulated Southeast Asian country and Sereno is a simulated country in Latin
America. This manual can be used for any of the four different environments. The fourth area
will hereafter be referred to as M/N/P/S to represent one of the four choices. Your simulation
administrator will tell you which subsidiary to associate with M/N/P/S. Many of the examples in
the manual focus upon Sereno. The relationships in Sereno are similar to those that exist in the
other foreign areas. If your competition includes Merica 4, you can ignore the Sereno examples
and the discussion about exchange rates as your currency will be all in dollars.

When involved in an international competition, you need to know that each of the two
countries has a different economic environment reflected in differing growth rates of gross
domestic product (GDP). Different inflation rates are reflected in separate consumer price indexes

15
(CPI). A different social and legal environment results in different demand characteristics for your
product, different tax structures and different employment practices. While the cost relationships
in Year 2, Quarter 4 are the same for any of the three foreign markets at that point in time, this will
quickly change and the costs that you experience will be different from the ones you would have
experienced if your administrator would have chosen a different country. This is due to the
differences in the economic environments of the three countries.

The computer program used to process the decisions made by competing teams includes
definitions of certain relationships that have been abstracted from the economic environment of
the business world. This abstraction, or model, does not purport to include all of the relationships
that exist. To do so would make the simulation too complex to handle. The relationships included
are those that contribute significantly to the degree of realism required to provide a plausible
simulation. These relationships are outlined and described in subsequent sections of this manual.
A description of the rules which must be followed in order to participate successfully in the
simulation also is included.

Some of the relationships that exist in the simulation and the rules for dealing with the
relationships will be described only in general terms. These relationships are comparable to those
in the business world that are subject to uncertainty and thus not completely specified. For
example, if a manufacturer lowers the price of a product, sales of the product normally increase.
The magnitude of the sales increase cannot be known with certainty. Thus, only the general
relationship between price and sales volume will be described in this manual. The actual effect of
a specific price change must be estimated by observing the relationship between price and sales
volume which exists in historical data and by experimentation with the price variable during the
course of the simulation.

Other relationships will be described in more precise terms in later chapters. These rela-
tionships are subject to less uncertainty in the business world. Cost functions, accounting rela-
tionships and methods of deriving various entries in the income statement, cash flow statement
and balance sheet are included in this group. The cash balance at the end of the quarter, for ex-
ample, is equal to the previous quarter's cash balance plus total cash receipts less total cash pay-
ments. Explicit descriptions concerning the constraints required by the simulation model also are
provided, which the participants may consider to be "rules of the simulation." One such rule, for
example, states that only one plant may be built in any marketing area.

During the course of the simulation, the participants will encounter a variety of business
and economic situations and administrative problems. In order to cope successfully with these
problems, the participants will find it necessary to engage in economic forecasting, sales forecast-
ing and profit planning. Cash flow analysis and capital budgets must be prepared. Production
planning and scheduling must be accomplished. Cost analysis, pricing, policy formulation and the
development and implementation of marketing programs will be necessary. In addition, par-
ticipants must prepare and analyze financial reports, cash flow statements, cost and sales analyses
reports and informational reports regarding competitors and the economic situation. Most par-
ticipants will find it necessary to review basic textbooks and materials from this and other courses,
and to draw from their past experiences in order to complete these activities effectively.

16
 Preparing for Action

The Business Policy Game will require a heavy investment in time on the part of the par-
ticipant—TANSTAAFL. (There ain't no such thing as a free lunch.) This investment should be a
prudent one, however, as participation in the simulation should significantly increase overall un-
derstanding of the operation of business enterprises. The more you put into the exercise, the more
you will get out of it.

In order to participate effectively in the simulation, one must understand the relationships
within the simulation model as well as its rules and constraints. Sample historical data from the
previous two years of the firm's operation, prior to your management team's tenure, are shown in
Appendix C.

These data also are found in Historical Data for Years 1 and 2 (Report J) of your
firm's reports for Year 2, Quarter 4, which will be provided to you by your game
administrator. The historical data in your Year 2, Quarter 4 reports will differ from
that in Appendix C if your game administrator is using a different economic
environment.

Study the data thoroughly for relationships which will help the firm in managing its re-
sources. Economic forecasts and sales forecasts must be made, and plans must be formulated for
the firm's continued operation. It should be obvious that these tasks require the delegation of
specific responsibilities to different team members. Thus, members of each firm should organize
to perform the management function effectively.

Getting Ready for the First Decision

Before preparing the first set of decisions and after carefully reading this manual, you and
your colleagues are urged to complete the following set of activities and planning reports:

1. Organize your management team. You should assign members of your team to corporate
offices and other critical posts, decide upon specific decision-making procedures to be followed,
and divide the work load among the various members of your firm. Unless the simulation
administrator prescribes an organizational structure, you may design the organization of your
management team. Your organizational structure and your ability to work together as a manage-
ment team will be important ingredients in the success of your firm.

You should weigh the advantages and disadvantages of various organizational structures
when designing your organization. Company officers for a functional organization might include
president; vice-presidents of finance, marketing and production; vice-president for economic and

17
sales forecasting; and corporate secretary for recording policies and decisions. A geographical
structure might replace the functional heads with subsidiary managers for each of the market areas.

Some teams find centralized decision making to work well. Various company officers will
normally make recommendations to the president regarding the operations of their particular de-
partments. However, the final decision-making authority rests with the president. Other teams
prefer to vest their decision-making authority in the management team as a group. Recommenda-
tions are provided by the various officers of the firm, but the actual decisions are made by the
officers as a group. Still other teams find a decentralized form of organization to be effective.
Final decision-making authority is vested with the head of the unit responsible for the decision.
Under a decentralized functional organization, the marketing decisions would be made by the
vice-president of marketing, production scheduling decisions by the vice-president of operations,
etc. Alternatively, decisions for each market area would be made by the general manager of the
subsidiary in the area. Coordination of overall decision making would be undertaken by the
president, and conflicts would be resolved by the president of the firm.

You should prepare an organization chart that shows the lines of authority in your firm's
organization and the position in the organization of each member of your firm. Then, fill in the
Corporate Charter, located under the Help menu on the Player’s Program, with your company
name and the name and position title of each member of your team. The Corporate Charter should
be turned in to your simulation administrator.

2. Prepare a forecast of expected levels of economic activity by country. Your firm's sales
will be affected by the general level of economic activity in each country in your world. As real
gross domestic product (GDP) rises, you can expect sales to rise, too, and as real GDP falls, sales
are likely to fall at the same time. GDP forecasts for each country are included in your quarterly
reports. A forecast of real GDP will be helpful in estimating future sales. Specific suggestions for
preparing such a forecast are contained in Chapter 6.

3. Prepare a sales forecast by market area. Production scheduling, plans for investment in
new plant(s) and in equipment, expected cash receipts and selling expenses all are affected by the
volume of sales your firm realizes. Suggestions for preparing sales forecasts by market area can
be found in the "Forecasting Sales" section of Chapter 6.

4. Prepare a production schedule. Production must be scheduled for the first decision
period as well as planned for subsequent quarters of business operation. Production planning will
depend upon your firm's expectations of sales volume. The completed plan will provide the basis
for determining production facility requirements. Suggestions for preparing production plans
together with descriptions of production costs and production possibilities, are found in the
"Operations Planning and Scheduling" section of Chapter 7.

5. Prepare an investment plan. Alternative methods of expanding productive capacity and

their associated costs may be analyzed using numerous financial tools. See Chapter 8 for a de-
scription of the alternatives. The nature of the expansion that your firm undertakes will depend
upon your production plan.

18
 6. Prepare a capital budget. Capital is required to finance any planned expansion. The
discussion in the "Capital Budgeting" section of Chapter 9, focuses upon analyzing alternate
sources of funding for your firm.

7. Prepare a cash budget. Sufficient funds must be provided to finance the expenses and
cash outlays required for your operations and investment plans. Sources of funds and cash re-
quirements are outlined in Chapter 9. Suggestions for preparing pro forma cash flow statements
also are included under the "Cash Budgeting and the Cash Flow Statement" section of Chapter 10.

8. Prepare pro forma financial statements. Your projected balance sheet may be used to
analyze how the composition and levels of assets and liabilities affect your financial condition.
Your expected level of profitability is an important means of judging the success of your firm's
planned operation. You should evaluate your decisions prior to submitting them by preparing a
pro forma income statement and balance sheet. Suggestions for their preparation, are found in the
"Profit Planning and the Income Statement" and "The Balance Sheet" sections of Chapter 10.

9. Formulate mission and objectives and outline initial strategies and policies. As you
complete the planning activities outlined above, tentative policies should be developed for the
operation of your firm and for the decisions which must be made on a quarterly basis. We suggest
that you state these policies explicitly in written form for future reference. As the simulation pro-
ceeds, you probably will decide to revise your policies based upon the experience gained from the
operation of your firm and the changing conditions of the dynamic business environment.

We recommend that your firm be very specific in the formulation of mission, objectives,
strategy and operating policies. A corporate objective to "maximize profits" is laudable but
provides little guidance for strategy and policy formulation and is of little value as a standard for
achievement. At the end of the first year of the simulation, or any other year for that matter, you
will have little idea whether profits were in fact maximized or whether you fell short. It would be
better to seek an objective of, say, "15 percent after-tax return on equity." Then you could judge
your achievement more adequately after a year's experience and take corrective action where
necessary.

You may view many of your operating policies as decision rules to be followed in specific
situations. An example of a specific policy might be: "Ignore price reductions by competitors
when they amount to less than ten cents per unit, but when the reductions are greater, match their
price immediately." Avoid such generalizations as "charge a fair price that is consistent with
production costs and with competitors' pricing policies." That's pure cotton. The clear formulation
and statement of your policies will help to assure the consistency and stability of your firm's
operations and will save you a considerable amount of preparation time during the decision periods
as you participate in the simulation. See Chapter 4 for additional help in the development of
mission and objectives and the formulation of strategies and policies.

The simulation administrator may require written reports on some or all of the above
activities as part of the material used to evaluate team performance. A series of spreadsheet tem-
plates suitable for creating these reports can be found under the Tools menu of the Player’s

19
Program. The spreadsheet templates can also provide a simple decision-support system for use
throughout the competition.

Your initial reports will provide a good basis for a more extensive strategic business plan
and policy manual that the administrator may require after you have gained some experience with
the simulation.

Submitting Decisions

The next step is to formulate and submit an actual decision set for the first period of your
firm's operation under your new management, Year 3, Quarter 1. The simulation administrator
will specify the date and time when your decisions are due. It is important that your firm's
decisions be submitted prior to that time. Failure to do so may hold up the simulation run. More
likely it will result in the decision set submitted for your firm during the previous period being
used as the decision set for the current period. Such action normally would not be in the best
interests of your firm. Chapter 2 outlines the decisions that must be made and describes the
decision form. A blank copy of the decision form is included in Appendix D and a printable copy
may be obtained under the Tools menu of the Player’s Program.

We hope that the experience of participating in The Business Policy Game will be both
enjoyable and rewarding. More importantly, though, it should be a meaningful and challenging
educational experience. The amount of serious effort that you put into the analysis, planning, and
decision-making activities of the simulation will determine how much the simulation will
contribute to your education. Remember TANSTAAFL!

20
 2. QUARTERLY DECISIONS

In this chapter the fourth market area will be referred to as M/N/P/S to represent either
Merica 4, Nystok, Pandau or Sereno. The Merica currency is the dollar worth 100 cents. The
Nystock currency is the denar (Dn) worth 100 deni. The Pandau currency is the Rupee (Rp) worth
100 sen. The Sereno currency is the peso (Ps) worth 100 centavos. Most of the examples are
based upon Sereno. The same relationships hold for all three foreign countries at the end of Year
2, Quarter 4. (See Chapter 1.) In many cases reference will simply be made to local currency or
abbreviated LC referring to the currency of the country comprising the fourth market area.

The management of each simulated firm will make a number of decisions for each quarter
of simulated operations. This chapter summarizes the decisions that are required and provides
instructions for their entry on the decision form as well as indicating certain limits and restraints
that have been placed upon specific decisions. Some restraints are a result of the limitations of the
simulation model, and some are imposed to add realism to The Business Policy Game. More
detailed information about each type of decision will be provided in later chapters of this manual
to assist participants in formulating their strategy and decisions. A blank decision form is located
in Appendix D and under the Tools menu of the Player’s Program. A copy may be printed and
filled in and then submitted to the simulation administrator for each decision.

The Decision Process

The simulation administrator will specify the date and time when each simulation decision
set is due. Timely submission of simulation decisions is extremely important. If your decision
set is not submitted promptly, the processing of the simulation may be delayed, causing lost time
and possible hardships for your competitors and the simulation administrator. Failure to submit a
decision set by the appointed time will most likely result in your most recent previous period's
decision set being used for the current quarter, with adjustments for decisions that may not be legal
for the current quarter (i.e. constructing another plant in the same area is not allowed in the model).

The mode of data entry will be specified by the simulation administrator. The two
alternatives are shown below:

1. Individual Decision Entry. You may be asked to enter your own decisions via
personal computer using a web browser and the BPG Player’s Program.

21
 2. Central Decision Entry. The administrator may arrange to have all data entered
centrally from information that your firm submits on decision forms from Appendix
D. Completion of the decision form is discussed later in this chapter.

After the simulation has been run on the Internet, you may view a set of reports (see
Appendix C for an example) showing the results of your operations and those of your competitors.
For individual decision entry, the reports may be viewed using the Player’s Program previously
used to enter decisions. For Central Decision Entry you will likely be given copies of the reports
by the simulation administrator.

A summary of the steps required for each simulated quarter are shown blow. Following
the team’s analysis of the results, the process begins again with step one.

Individual Decision Entry Central Decision Entry

1. Team makes decisions 1. Team makes decisions

2. Team enters decisions 2. Team submits decision

using BPG Player’s form to administrator
Program

3. Administrator runs 3. Administrator runs

simulation simulation

4. Team views simulation 4. Administrator prints

output using BPG Player’s reports
Program

5. Team prints reports if 5. Team retrieves reports

desired

6. Team analyzes reports 6. Team analyzes reports

The Decision Form

The decision form is a handy place to record your decisions during the decision making
process. You may print copies directly from the Player’s Program Tools menu. Data are entered
into the computer directly from the decision form either by the team or by the administrator.
Always be sure to fill the form in completely prior to data entry. Then check it carefully.
Incorrectly completed forms may result in incorrect data entry and thus simulation results which
are somewhat different from what your firm anticipated. We suggest that you refer to the sample
decision form in Figure 2-1 as you read this chapter

22
 The figure illustrates the completed decision form for Company 1, which was used to
generate the historical data for Year 2, Quarter 4 in Appendix C. Values for other companies were
the same, except for advertising and production scheduling. In these two cases, the entries shown
for Area 1 were made in each firm's home area. The home area for Company 2 is Area 2, and for
Company 3 is Area 3. If there are more than three companies, the home areas for Companies 4, 5,
6, 7 and 8 are Areas 1, 2, 3, 1 and 2 respectively. These may be changed by the simulation
administrator.

As you complete the decision form, be sure to enter values within the limits shown below
(including a minus sign where appropriate) in each entry block. If no sign is entered, the numbers
are assumed to be positive. When entering decisions using the BPG Player’s Program, if you enter
a value outside of the limits noted below, an error message will appear in the middle of the screen
requesting a valid entry. If no decision entry is made, the default value from the previous period's
decision set will be used.

Company, World, Year, Quarter

If you are using the paper decision form enter your Company, World, Year and Quarter
numbers on the decision form, as well as your company name.

World 1 Company 1 Year 2 Quarter 4 Company Name: ABC Company

If you are using the BPG Player’s Program, check the decision-entry screen to be sure
that the proper year and quarter are displayed. Then click on the Decisions/Decision entry
menu to activate the decision entry fields. Proceed to enter the decision values that your
company has decided to go with for the quarter.

23
 FIGURE 2-1
Decisions for Year 2, Quarter 4

Marketing Decisions

Marketing strategy is discussed in Chapter 5, along with additional information about

each of the marketing decisions and the costs associated with them. Figure 2-3 at the end of this
chapter summarizes the initial costs and expenses for The Business Policy Game.

Price

The wholesale price of your product must be set each quarter in each of the market areas
in which your firm is operating. During the last quarter of Year 2, each firm charged $10.00 per
unit for its product in each of the Merican market areas and 75 Dn/Rp/Ps (local currency) in N/P/S.
For price, as for all other decision variables, last period's value will be used if there is no entry for
the current quarter. Company policy (and the simulation model) limits price changes to a maximum
of 30 percent per quarter in domestic markets and 40 percent in foreign markets. Because the
product price was $10.00 in domestic areas during Year 2, Quarter 4, the highest price that your
company may charge in these areas in Year 3, Quarter 1 is $13.00 and the lowest is $7.00. A price
change as large as this is discouraged because of the unknown effect that such changes may have
on the market. Management may specify different prices for different areas. If your price is in
whole dollars, enter zeros for the cents so that there is no question of whether you forgot to enter
the cents figures.

The N/P/S market area price is set in local currency rather than dollars. Decimal fractions
for local currency are not required. See the current exchange rate (found in each quarter's financial
reports) to translate the local currency to dollars and cents.

Maximum change, Merican areas: 30 percent in any quarter.

Maximum change, Foreign area: 40 percent in any quarter.
Exception: If the sales office is closed (see below) the price is 0
Limits, Merican areas: 1 to 99.99 (in dollars and cents)
Limits, Foreign area: 1 to 99999 (in local currency)

Price

Area 1 $ 10.00

Area 2 $ 10.00

Area 3 $ 10.00

Sereno Lc 75

Advertising

Advertising expenditures must be allocated to each of the market areas in which your firm
is operating. Enter the amount (in thousands of dollars or local currency) to be spent in each area.
The amount must be specified even though no change is desired, and the default values from the
previous quarter will be used if you make no entry.

Limits, Merican areas: 0 to 999 (in thousands of dollars)

Limits, Foreign areas: 0 to 9999999 (in thousands of local currency)

25
 Adv(000s)

Area 1 $ 46

Area 2 $ 40

Area 3 $ 40

M/N/P/S Lc 105

Salespeople

The number of active salespeople, the number of salespeople in training and the number of
salespeople who have resigned are reported by area in the Sales Force Analysis section of the
Operating Information Report each quarter (Report E, see upper left-hand corner of reports for
report letter.).

1. Hire Salespeople. To hire and begin training new salespeople, enter the number of
people to be trained in each area under Salespeople–Hire. A new salesperson must spend one
quarter in training in an area prior to being sent to the field to sell. Salespeople in training will be
assigned automatically to their area when training is complete. No further decision entry is neces-
sary after the salespeople are hired. If you make an entry in the following quarter, you will hire
additional salespeople to begin their training period in that quarter.

Limits : 0 to 99

2. Transfer Salespeople. If your firm desires to transfer a salesperson from one area to
another, this can be accomplished by making the appropriate entries under Salespeople–Transfer
on the decision form. To transfer salespeople, you should enter a negative number for the area
from which the salespeople are leaving, indicating the number of salespeople you are moving out
of the area. This must be balanced by one or more positive numbers in the area(s) to which the
salespeople are moving.

Your positive moves into some areas may not exceed the total value of negative moves out
of other areas. To do so would indicate an increase in the size of your sales force, and an increase
only may be accomplished by hiring new salespeople and training them (See paragraph 1 on the
previous page). If your negative values total more than your positive values, the additional
salespeople will be fired (see paragraph 3 below).

26
 In order to limit the entries in this field to transferring salespeople (and not firing them),
all individuals who move out must have a place to move to, and all individuals who move in must
have come from another market area. You may transfer salespeople from several areas at the same
time. However, you may not transfer salespeople in and out of the same area in one quarter. They
must either go into an area or out of an area. Not both. Remember, the sum of the negative (people
moving out) and the positive (people moving in) numbers must equal zero. If the value of negative
entries exceeds the value of positive entries, the extra negative values will result in discharging
that number of salespeople.

Salespeople

Hire Transfer Comm Salary

Merica 1 # # 20 ¢ $ 3000

Merica 2 # # 20 ¢ $ 3000

Merica 3 # # 20 ¢ $ 3000

M/N/P/S # # 60 Lc Lc 8971

Transfers take place immediately. A transferred salesperson, however, may not be very
effective until he or she has moved and settled into a new market area. The salesperson will, how-
ever, continue to draw a salary. In addition, the salesperson will be provided with a moving al-
lowance paid by the subsidiary in the area from which the individual moves.

Make sure you leave at least one sales person in each area unless you want to close a
sales office. The sales office in an area will be closed if there are no sales people remaining in the
area (see paragraph 4 on the next page).

Maximum: to be transferred out: number of active salespeople

Subject to: the sum of positive numbers may not exceed the sum of negative numbers
Limits: -99 to 99

3. Discharge Salespeople. You may fire salespeople by entering a negative value for the
number of people you want to fire under Salespeople–Transfer. You indicate that the salespeople
are to be fired by entering a negative number in the area where they are working, with no balancing
positive number in another area indicating a transfer to a new area. Thus, if you decide to fire 2
salespeople in Area 3, enter -2 under the Salespeople–Transfer column for Area 3.

27
 Make sure you leave at least one sales person in each area unless you want to close
the sales office in the area. The sales office in an area will be closed if there are no sales people
remaining in the area (see paragraph 4 on the next page).

Maximum to be discharged: Number of active salespeople

Limits: -99 to 0

4. Closing a sales office. If all salespersons in a subsidiary sales office are transferred or
discharged by entering a negative number under Salespeople–Transfer that is equal to the total
number of active salespeople, then the sales office in that area will be closed. All salespeople that
are discharged will receive severance pay. Sales executives will be discharged and will receive
severance pay. The sales office will be sold to a real estate developer for 90 percent of book value
and there will be no more sales in the area. Any cash balances will be transferred to the parent
corporation. If there is not enough cash to meet all obligations, the parent corporation will supply
it by purchasing more stock in the subsidiary—pouring money down a rat hole.

At the same time that a sales office is closed, you must set the following marketing decision
variables to 0 in the area affected. With no sales office there will be no one available to ac-
commodate further sales in the area.

Price Sales Commissions Sales Salary

Advertising Sales Office Orders

See "Leaving and Entering Market Areas" in Chapter 5.

5. Opening (re-opening) a sales office. To open a new sales office in an area where there
is none (i.e. the sales office was previously closed), transfer at least one salesperson from another
area and hire as many salespersons as you wish to be available next quarter when sales may begin.
A new sales office will be built and executives hired to supervise construction and preparation of
the office. The transferred salesperson will supervise and coordinate sales training and executive
orientation. Construction of the office takes one quarter, and sales may begin immediately in the
quarter following the decision to open the office by transferring one or more salespeople into the
area. See "Leaving and Entering Market Areas" in Chapter 5.

Changes in Sales Force Compensation

The compensation rates for salespeople in each market area may be changed by entering
the new compensation levels on the decision form. If no entries are made, default values (rates
from the previous quarter) will be used.

1. Salary. The salary for each active Merican salesperson at the end of Year 2 amounted
to $3,000 per quarter. Salary for N/P/S salespersons was 8971 in local currency. Sales salaries
may be increased or decreased. Enter the amount of the desired salary level per person, in dollars
or local currency per quarter, under Salespeople–Salary on the decision form.

28
Limits, Merican areas: 1 to 9999 (in dollars)
Limits, Foreign area: 1 to 9999999 (in local currency)

2. Commissions. Sales commissions are paid to salespeople in addition to their basic

salary. Commissions in domestic areas amounted to 20 cents per unit sold at the end of Year 2.
N/P/S commissions were 60/100 of local currency (0.60 deni, sen or centavos) per unit. Sales
commissions may be increased or decreased during any quarter. Enter the new amount for the
desired commission rate in number of cents per unit for Merica or local currency per unit for N/P/S,
under Salespeople–Commission on the decision form.

Limits, Merican areas: 1 to 999 (cents per unit)

Limits, Foreign area: 1 to 99999 (deni, sen or centavos)

Model Number

Enter the model number to be produced during the quarter. For Year 3, Quarter 1 the only
model available is Number 1 and you are producing it at Quality level 2, Features level 2 (see
below). The latest model number developed by the research and development department, together
with the applicable labor and materials costs, will be reported in the Operating Information Report
each quarter.

STANDARD COSTS PER UNIT

for Next Quarter

Merica Merica Merica

Area 1 Area 2 Area 3 M/N/P/S
$ $ $ Lc
Model 1
Quality/Features 2 Labor Cost 2.88 2.88 2.88 8.90
Savings Level 0 Material Cost 1.23 1.23 1.23 5.72

Note: For Quality 3 add 10%. For Features 3 add 10%.

For Quality 1 subtract 10% For Features 1 subtract 10%.

Model numbers are sequential (Models 1, 2, 3, etc.). Your company's Model 2 (when it
becomes available for production) will have different product characteristics than another com-
pany's Model 2. If a new model is available and your company wishes to put it into production,
enter the new model number. Otherwise, enter the model number that was produced in the
previous quarter. If model number 4 is reported to be available, and your firm decides to introduce
it, enter 4 on the decision form. Production of a new model begins immediately. Sales of the new
model begin next quarter unless your firm stocks out of the old model during the current quarter.
If demand exceeds your inventory of the old model, it will be filled with the new model.

29
 IMPORTANT NOTE
The demand during the first quarter of a new model's pro-
duction is for the OLD model—not the new model. The new
model will not officially go on sale until it has been in pro-
duction for one calendar quarter to build inventories.

Maximum: Highest model number reported to be available from the R & D Department.
Minimum: Same model number as was produced last quarter. Once a new model has been
placed in production, an earlier model may not be reintroduced.
Limits: 1 to 12

Model # 1

Qual Feat

Merica 1 # 2 # 2

Merica 2 # 2 # 2

Merica 3 # 2 # 2

M/N/P/S # 2 # 2
Model Quality

When a new model is introduced, the quality level of the product to be shipped to each
sales office must be specified. The quality level should appeal to the market segment the sales
office is targeting in its market area. Consumer preferences for product quality for each market
segment may be obtained by purchasing marketing research studies described below. You may
choose from three quality levels:

(3) deluxe
(2) standard
(1) economy

The quality level of a model ordered by each sales office is determined when the model is
introduced and may not be changed during the production run. The choice of quality level is yours.
Quality level is determined by manufacturing tolerances and the quality and quantity of raw
materials used. It is not related to whatever you may have spent on research and development in
order to bring the new model to market. When introducing a new product, enter the desired quality
level in the Quality space for each market area on the decision form. The quality level may be
different for each market area. If you continue to produce the same model as last quarter, you
must also continue the same quality level in each area.

30
Limits: 1, 2 or 3
May be changed only when introducing a new model

Model Features

When a new model is introduced, the features level of the product to be shipped to each
sales office must be specified. The features level selected should appeal to the customer segment
the sales office is trying to reach in its market area. Each area may contain a different features
level. Consumer preferences for product features may be obtained by purchasing marketing
research studies described below. You may choose from three levels of product features:

(3) enhanced
(2) standard
(1) basic

The features level of a model ordered by each sales office is specified when the model is
introduced and may not be changed during the production run. Features consist of all types of
“bells and whistled” associated with the product being sold. Products possessing enhanced
features contain a wide array of features one associates with a top-of-the-line product. A product
with standard features incorporates those features normally found on a mid-level product.
Products with basic features should be considered stripped down models for people looking for a
functional product.

Limits: 1, 2 or 3
May be changed only when introducing a new model

Sales Office Orders

This is a very important decision variable which must be used to obtain goods for your
firm's sales offices to sell. If a sales office does not place an order with your firm's headquarters,
it will only be able to sell the stock it has on hand in inventory. The product is not shipped to
an area unless an order is placed by a sales office. The only exception is for a sales office in an
area which also has a producing plant. The sales office may obtain additional stock from the plant
in its area if the plant still has inventory remaining after filling all of the sales orders from the other
sales offices.

The sales office in each area must submit an order to your firm's headquarters each quarter.
The order is for the model currently being produced with the quality and features specified by that
office when the model was put into production. Your firm (by way of the BPG computer program)
will then determine how many units of product are shipped from each operating plant, according
to a pre-approved policy (see below). Units not sold during the quarter in which they are purchased
will be placed in inventory. Inventory carried over from one quarter to the next by a sales office
is stored in a public warehouse. Sales office in an area which also has a manufacturing plant may
store up to 300,000 units in the plant's warehouse facility.

31
Limits: 0 to 999 (in thousands of units)

Sales
Office
Orders
(000s)

Area 1 # 87

Area 2 # 75

Area 3 # 75

M/N/P/S # 75

Your firm has developed a set of policies to guide product allocation. The allocation
priorities are as follows:

1. Goods held in inventory by a sales office will not be shipped to another area or country
but will be held for sale in the area where they are located. They were produced according to the
quality and features specifications prescribed for that sales office and thus may be a different
product than the ones sold in other areas.

2. Sales office orders will be filled only from your firm's current-quarter production.
Shipments will be allocated to fill sales office orders before filling any additional customer orders
in a producing area. These shipments include those to all sales offices, both in areas with
manufacturing plants and in areas without a plant. For sales offices in producing areas, "shipment"
constitutes setting goods aside in the plant’s warehouse for sale to local area customers.

3. If a plant's production will exceed the number of units in the local sales office order, the
excess production capacity will be used to produce product to ship to other area sales offices after
the local sales office order has been completely filled. In other words, sales offices in producing
areas are given priority and will have their total order filled (given sufficient production in the
area), even if there is not enough production to fill orders of other sales offices.

4. If an area's production is less than the local sales office order, the shortage will be
entered in a request for shipment from a plant in another area (if there is one).

5. Then, any excess production capacity at each plant will be used to produce goods to
meet the demands of unfilled sales office orders from all areas. If production capacity
equals or exceeds the orders from sales offices in non-producing areas plus unfilled
orders from areas where plants could not meet their sales office orders, all orders are
filled. Otherwise, they are pro-rated according to the size of the orders.

32
 6. If production capacity is available to fill orders from more than one plant, sales office
orders are filled first from non-home area plants in the following order beginning with M/N/P/S,
then from the two domestic non-home areas (the order is Merica 1, Merica 2, Merica 3) and finally
from the home area. Shipments are made to sales offices in the following order: Merica 1, Merica
2, Merica 3 and finally to M/N/P/S.

The bottom line is that the sales office in each market area must manage its own inventory.
Failing to do so may result in stockouts even though other areas have inventory left over.

Finance Decisions

Surplus funds held by your subsidiaries are transferred to your parent firm in the form of
dividends to the parent corporation for investment or applied to other uses.

As a matter of company policy, all external financing, including bank loans, will be under-
taken only by the parent company. Financing needs of subsidiaries (including M/N/P/S) will be
filled by the parent company purchasing additional common stock in the wholly-owned subsidiar-
ies. Stock purchased in the M/N/P/S subsidiary will be paid for in dollars, which will be converted
to local currency at the exchange rate in effect at the time of the purchase.

Financial strategy is discussed in Chapter 9, along with additional information about each
of the finance decisions and the costs associated with them. Figure 2-3 at the end of this chapter
summarizes the initial costs and expenses of The Business Policy Game.

Bank Loan

If your firm wishes to take out a short-term bank loan by drawing against your $2.5 million
line of credit, enter the amount desired (in thousands of dollars) under Bank Loan on the decision
form. Short-term loans are made for a period of one quarter, and repayment is automatic during
the quarter following that in which the loan is made. The annual interest rate will be the short-
term rate that is available during that quarter to a company with your credit standing. Your account
will automatically be charged one-fourth of the annual rate during the quarter in which the loan
is outstanding.

Bank loans are secured by inventory and receivables, and may not exceed 50 percent of the
value of receivables plus inventory at the end of the previous quarter. Your line of credit requires
an annual cleanup, so a loan request will be denied if there has been a loan outstanding during each
of the past three consecutive quarters.

Bank loans are available only to the parent company.

Maximum loan: 50 percent of receivables plus inventory

Maximum loan: 0 if a loan was outstanding in each of the previous three quarters
Limits: 0 to 2500 (in thousands of dollars)

33
 If your firm does not have sufficient funds to meet all of its obligations, including those of
subsidiaries, an emergency bank loan will be provided at higher interest rates reflecting the higher
risk of such loans. (Your firm is technically in default.) The rate for the first emergency loan is
five percentage points above the normal interest rate. The rate for a second loan is fifteen percent,
a third loan thirty percent and all loans after that forty-five percent. Confidence in the firm will
decrease resulting in more sales force resignations and a decrease in customer demand.

Finance (000s)

Bank Loan $

Bond Issue $

Stock Issue #

Dividends $

Time CDs $ 1000

Sale or Redemption of Bonds

1. Bond issue. Your parent company may incur additional long-term debt by issuing new
bonds in amounts that are multiples of $1,000,000. New bond issues are callable ten-year bonds
carrying the long-term rate of interest that will be available to a company with your credit rating
during the quarter of issue. In the financial markets, there is some uncertainty in planning a bond
issue regarding the actual rate that will be available at the time of issue. This amount isn't normally
known very much in advance. In the simulation, the investment banker doesn't fix the rate until
the first day of the quarter in which the bonds are to be sold.

Bonds must be secured by plant and equipment. The value of existing bonds plus new
bonds to be issued may not exceed 75 percent of net fixed assets. Furthermore, your investment
banker will consider an issue too risky to underwrite if the existing bonds, plus new bonds to be
issued, exceed 50 percent of total equity (consisting of the previous quarter's total equity plus the
proceeds of new shares to be sold simultaneously with the bonds—see "Sale of Common Stock"
on the next page). Enter the amount of new bonds to be sold (in thousands of dollars) on the
decision form under Bond Issue. If you decide to issue $1,000,000 worth of bonds, enter 1000 on
the decision form. Do not include commas in your entry. Bonds can be issued only by the parent
company.

34
Maximum issue: 50 percent of equity or 75 percent of net fixed assets, whichever is less
Limits: 0 to 9000 (in thousands of dollars), in million dollar lots

2. Bond redemption. Bonds that are outstanding may be called and redeemed in amounts
that are multiples of $100,000 except that there is a restriction in the bond indenture that prohibits
the redemption of more than $500,000 of the face amount of bonds in any one quarter. A call
premium is required, amounting to 5 percent of the face value of the repurchased bonds. If your
firm has more than one bond issue outstanding, the bonds carrying the highest interest rate will be
redeemed first. If bonds are to be redeemed, enter the face amount of the bonds for which re-
demption is desired (in thousands of dollars), preceded by a minus sign, under Bond Issue on the
decision form. If you decide to redeem $500,000 worth of bonds, for example, enter -500 on the
decision form. The 5 percent call premium will be charged automatically. Bonds can be redeemed
only by the parent company.

Maximum redemption: Total amount of bonds outstanding (if less than $500,000)
Limits: -500 to 0 (in thousands of dollars) in hundred thousand dollar lots

Sale of Common Stock

1. Stock issue. Your parent firm may issue new shares of common stock through an in-
vestment banker in multiples of 100,000 shares, provided the new issue will be large enough to
raise at least $1 million. The investment banker will make a firm offer at any time of a price that
will be determined by the following formula:

(shares outstanding) x (latest market

price)
Issue price = -------------------------------------------
(shares outstanding) + (shares to be
issued)

If your firm's credit rating is 2, this is the issue price. If your firm's credit rating is 3, subtract
10 percent of the formula value from the issue price. If your credit rating is 1, add 10 percent.

Enter the number of new shares to be issued (in thousands of shares) on the decision form
under Stock Issue. If your firm decides to issue 4,000,000 shares of stock, for example, enter 4000
on the decision form. Do not include commas in your entry.

External sale (or repurchase) of common stock will be undertaken only by your parent
company, in thousands of dollars. Subsidiaries may issue stock only to the parent company, and
only to meet financing requirements due to working capital shortages, plant construction or pur-
chase and installation of new equipment. Sales of subsidiary stock will occur automatically when
additional funds are required, and no decision entry is necessary.

Minimum issue: Enough shares to raise $1 million

Limits: 0 to 9000 (in thousands of shares) in 100,000-share blocks

35
 2. Stock repurchase. Shares of your parent firm's common stock may be repurchased by
placing a purchase order with the firm's stockbroker. The shares will be purchased at a price that
is 10 percent above the market price reported at the end of the previous quarter. Stock is repur-
chased by entering the number of shares to be repurchased, preceded by a minus sign, in the Stock
Issue section of the decision form. When stock is repurchased, the shares are cancelled.
Repurchase must be made in multiples of 100,000 shares. If your firm decides to repurchase
500,000 shares of stock during the current quarter, for example, enter -500 on the decision form.
Your corporate charter requires that there be at least 3 million shares outstanding so repurchases
are limited to an amount that would leave at least 3 million shares after the repurchase. Shares
may not be repurchased if the balance of the Accumulated Earnings account is not sufficient to
fund the repurchase.

Maximum repurchase: to leave at least 3 million shares outstanding

Maximum repurchase: to leave a nonnegative accumulated earnings balance
Limits: -500 to 0 (in thousands of shares) in 100,000 share blocks

Dividends

Cash dividends may be paid by your parent company to external stockholders. A restric-
tive bond covenant, however, provides that the dividends paid in any quarter, taken together with
dividends paid in the previous three quarters, may not exceed the total amount of earnings in the
previous four quarters of operations. In addition, the board of directors of your company has de-
cided that even if all bonds should be repurchased, this restriction on dividend policy would be
maintained. Thus, if total earnings in the previous four quarters amounted to $200,000 and divi-
dends already paid in the previous three quarters amounted to $190,000, the maximum dividend
that could be paid in the current quarter would amount to $10,000. Enter the amount of cash
dividends to be paid (in thousands of dollars) under Dividends on the decision form. If your
firm decided to declare the permissible amount of $10,000 in dividends in the above example,
you would enter 10 on the decision form. Dividends may not be declared if the Accumulated
Earnings account on the balance sheet has a negative balance.

Subsidiaries may declare dividends only to the parent company (these are not recorded on
the decision form but paid automatically when funds are eligible to be transferred). No dividends
will be paid by a subsidiary that had negative Accumulated Earnings the previous quarter.

Maximum: Net profits earned in the last 4 quarters minus dividends paid in the last 3 quarters
Maximum: 0, if retained earnings are negative
Limits: 0 to 9999 (in thousands of dollars)

Certificates of Deposit

Three-month time Certificates of Deposit (CDs) may be purchased by your parent firm in
multiples of one hundred thousand dollars. Purchases may be made at the beginning of any quarter.
CDs mature at the beginning of the next quarter, three months later. Interest will be earned on
deposits at the rate reported in the industry report for 3-month time CDs during the quarter in
which they will be invested. Interest (but not principal) will be credited to your account on the

36
last day of the quarter in which the deposit is made (and thus is available to meet that quarter's
expenses), with quarterly interest calculated at one-fourth of the annual rate.

IMPORTANT NOTE
While interest is credited on the last day of the quarter that the
deposit is made, the funds from the deposit itself are not
available until the next day—the first day of the subsequent
quarter. Thus, if your firm should need emergency cash
during the quarter in which the funds are invested in CDs, the
funds will not be available to meet the need.

To purchase time CDs, enter the amount of the purchase in thousands of dollars on the
decision form under Time CDs. If your firm decides to purchase $400,000 worth of CDs, for
example, enter 400 on the decision form. Do not include commas in your entry. Repayment of
the CDs, as well as crediting your account with earned interest, will be done automatically by the
bank.

Limits: 0 to 9900 (in thousands of dollars), in hundred thousand dollar lots

Production Decisions

Production planning, scheduling and costs are discussed in Chapter 7, along with addi-
tional information about each of the production decisions and their associated costs. Production
capacity changes are discussed in Chapter 8. Figure 2-3 at the end of this chapter summarizes
the initial costs and expenses of The Business Policy Game.

Research and Development

Your parent firm is responsible for all research and development work. Research and de-
velopment expenditures fund your R & D department which develops new models of your product.
The department also is involved in adapting the latest manufacturing techniques for use in
producing the new products. Enter the amount (in thousands of dollars) to be spent for R & D.

Limits: 1 to 999 (in thousands of dollars)

37
 R&D/Training
(home
currency)

R&D $ 72

Trng $ 68

Production Employee Training

Training of production employees enhances employee productivity by upgrading skills and

preparing individuals for more complex job assignments. It also helps maintain current productive
efficiency by sharpening ongoing production processes. Thus, training of production employees
can lead to savings in unit labor costs because the employees are more productive. Savings in unit
materials costs may result because of more efficient materials handling and less materials wastage.

The employee training costs are completely funded by the parent company and are paid in
dollars, even though some of the training may take place in manufacturing facilities located in
other domestic market areas or in N/P/S.

Enter the amount to be spent (in thousands of dollars) on production training.

Limits: 1 to 999 (in thousands of dollars)

Production Scheduling

At the beginning of Year 3, a manufacturing plant with six production lines is available in
your home area. No production facilities are currently available in the other areas. However, a
plant may be built in any other area using the area's working capital and additional funding, if
required, from the parent company. There are no restrictions on foreign investment of firms pro-
ducing low-cost durable products in N/P/S.

On each quarterly decision form, all available production lines in each plant and for each
shift must either be scheduled for production, idled or deactivated. See Chapter 7 for certain re-
strictions on production scheduling and temporary layoffs.

1. Schedule first-shift production lines and hours. Production lines to be scheduled for
first-shift operation should be entered on the decision form for the area in which they are located.
Enter the number of production lines that are to be producing (not more than the maximum

38
available) and the number of hours that are to be scheduled per week (from 40 to 48). Make sure
your entry is for the area or areas in which you have a plant. The decision-entry program will not
accept an entry for an area where no production lines are available.

IMPORTANT NOTE
If new lines are desired, an entry must be made under New
Lines one quarter before production may be scheduled. See
paragraph 1 under "Investment in Production Facilities and
Equipment" below.

Limits: Lines: 0 to maximum number of lines available

Hours 0, 40 to 48

Note: Lines scheduled + lines idled + lines deactivated must be equal to the number of lines
available.

2. Second shift. Production on a second-shift operation is possible only in a firm's home-

area plant after new workers have been trained to work the second shift (see Chapter 7). Enter the
number of production lines that will be producing on the second shift and the number of hours that
are to be scheduled per week (see paragraph 1 on the previous page).

Limits, Lines: 0 to maximum number of lines available in home area

Note: Lines scheduled + lines idled + lines deactivated must be equal to the number of
lines available.

Limits, Hours: 0, 40 to 48

39
 Sales
Office Production
Orders Schedule
(000s)
Lines Hours

Area 1 # 87 # 6 # 40

Area 2 # 75 # #

Area 3 # 75 # #

M/N/P/S # 75 # #

2nd Shift # #

IMPORTANT NOTE
Second-shift lines are not available and may not be scheduled
until workers for the shift have been trained according to
paragraph 2 under "Investment in Production Facilities and
Equipment" below. An entry must be made under New Lines
in the Construction section of the form one quarter before sec-
ond-shift lines may be scheduled for production.

Capacity Adjustment.

1. Temporary Layoff (for one quarter only). Production lines that are available but not
scheduled for production, and have not been deactivated, must be idled by laying off employees.
Enter the number of lines which you plan to idle through layoffs on the decision form under Ca-
pacity Adjustment–Layoff. Be sure that all lines (both first-shift lines and second-shift lines) are
accounted for. If you idle a first-shift line, a corresponding second-shift line must be idled or
deactivated unless there remain at least as many first-shift lines as second-shift lines. A second-
shift line may not continue operating unless there is a corresponding line on the first shift. Check
to be sure that your entry is for the area in which you want to idle lines. Note: Layoffs tend to
negatively affect productivity.

Limits: 0 to maximum number of lines available

Cost: $52,000 or 312,000 in local currency per quarter per line

Note: Lines scheduled + lines idled + lines deactivated must be equal to the number of lines
available.

40
 Sales
Office Production
Orders Schedule Capacity Adjustment
(000s) Deac- Reac-
Lines Hours Layoff tivate tivate

Area 1 # 87 # 6 # 40 # # #

Area 2 # 75 # # # # #

Area 3 # 75 # # # # #

M/N/P/S # 75 # # # # #

2nd Shift # # # # #

2. Deactivate first-shift lines. Any line that is available for production may be deactivated
and removed from production until such time as you choose to reactivate the line. Enter the
number of lines that you desire to deactivate in the appropriate area on the decision form under
Capacity Adjustment–Deactivate. Deactivated lines may not be scheduled for production until
they have been reactivated (see paragraph 4 on the next page). Note: Deactivation affects
productivity due to its negative impact on employee morale.

Limits: 0 to the number of lines available for production

Cost: $100,000 or 600,000 in local currency per line

Note: Lines scheduled + lines idled + lines deactivated must be equal to the number of lines
available.

3. Deactivate second shift. Production lines available for second-shift production may be
deactivated by entering the number of lines you desire to deactivate under the Capacity Adjust-
ment–Deactivate column for the 2nd Shift area on the decision form. Second-shift-lines must be
deactivated if the corresponding lines on the first shift are deactivated as both shifts use the same
equipment. Note: Deactivation affects productivity due to its negative impact on employee
morale unless second-shift lines are replaced with new matching first-shift lines.
Limits: 0 to number of second-shift lines available
Cost: $100,000 or 600,000 in local currency per line

Note: Lines scheduled + lines idled + lines deactivated must be equal to the number of lines
available.

4. Reactivate deactivated lines. Production lines that have been previously deactivated
may be reactivated and made available for production. In order to reactivate a second-shift line a
first-shift line must be available or in the process of being reactivated because both shifts use the

41
same equipment. Both first and second-shift lines may be reactivated at the same time. The
number of lines available for reactivation, if any, are shown in the Production Capacity Status
section of your Operating Information Report (Report D).

PRODUCTION CAPACITY STATUS

Merica Merica Merica

Area 1 Area 2 Area 3 M/N/P/S
Production Lines Currently Producing 6 0 0 0
Space Available for New Lines 2 0 0 0
Lines Available for Reactivation 2 0 0 0
Second-Shift Lines for Reactivation 2 0 0 0

Reactivation requires one quarter of preparation before a line may be scheduled for pro-
duction. Enter the number of lines to be reactivated under the appropriate area on the decision
form. Lines may not be scheduled for production until the following quarter.

Limits: 0 to number of lines previously deactivated

Cost: $50,000 or 300,000 in local currency per line

Note: A second-shift line must use the equipment used by a first-shift line. You may not
reactivate a second-shift line unless you have a supporting first-shift line either available,
being built or reactivated.

Investment in Production Facilities, Equipment and Second Shift

Investment in new facilities, equipment or second shift may take the form of construction
of new lines in existing plants, training workers for second-shift operation, constructing a new
addition to an existing plant or constructing a new plant. For details on these alternatives, see
Chapter 8.

1. New First-Shift Lines. Plant space that is available for new line construction is reported
in the Production Capacity Status section of your Operating Information Report (Report D).

PRODUCTION CAPACITY STATUS

Merica Merica Merica

Area 1 Area 2 Area 3 M/N/P/S
Production Lines Currently Producing 6 0 0 0
Space Available for New Lines 2 0 0 0

Construction and preparation of new lines requires one quarter before the lines become
available for production. In Year 3, Quarter 1, space is available to add as many as two new lines
in the existing home area plant. If a new addition or a new plant is under construction, the con-
struction of new production lines may be undertaken as early as one quarter before completion of
the new plant capacity (see paragraphs 3 and 4, below). In this way, production lines may be made
available for production as soon as the new addition or new plant is completed.

42
 Enter the number of new lines to be added in the area where a plant with additional capacity
is located. After the construction has begun, no further entry is necessary (that is, enter 0 in
subsequent quarters) unless you want to build additional lines. Positive entries in subsequent
quarters will result in starting additional new lines at that time (if space is available). When ready
for production, and not before, new lines must be scheduled for production, idled or deactivated.

Limits: 0 to space available

Cost: $500,000 + $100,000 worker training per line or
Lc 3,000,000 + Lc 600,000 worker training per line

2. New Second-Shift Lines. In a home area plant, second-shift operations can be added
to producing first-shift lines. You may also add second-shift lines at the time you build first-shift
lines. The key is that there must always be a first-shift line to support each second-shift line
because the same equipment is used for both shifts. To add second-shift lines, enter the number
of second-shift lines you wish to add on the decision form in the New Lines column under 2nd
Shift. Workers will be trained and the line(s) will be available for production during the next
quarter.

Limits: 0 to number of 1st-shift lines operating in home area

Cost: $100,000 per line worker training (home area only)

3. New Additions. Additions may be constructed by adding new structures to existing

plants. Capacity may be added in increments to accommodate two production lines per addition
unless the maximum plant size of twelve lines already has been reached. Two quarters are required
to construct an addition. An addition may be added to a plant under construction if it is not started
prior to the last 2 quarters of plant construction. To begin construction, enter 2, the number of
lines of capacity, under New Add on the decision form in the area in which you wish to construct
the new lines.

After construction has begun, no further entries are necessary (that is, enter 0 in subsequent
quarters unless space is available within the 12-line maximum plant size and you wish to begin
construction of another addition). If you wish, you may begin construction of production lines
(paragraph 1, above) so that the lines will be available for production when the new addition is
completed. New line construction may be started as early as one quarter after construction of the
new addition is begun.

Limits: 0 or 2 lines (to a maximum of 12 lines in a plant)

Cost: $900,000 or Dn, Rp or Ps 5,400,000 per 2-line addition

43
 Sales
Office
Orders Construction
(000s) New New New
Lines Add'n Plant

Area 1 # 87 # # #

Area 2 # 75 # # #

Area 3 # 75 # # #

M/N/P/S # 75 # # #

2nd Shift #    

4. New Plant. To begin construction of a new plant, enter the number of lines of capacity
that are desired (2, 4, 6, 8 or 10) in the area in which the new plant is to be located. Only one plant
per company is permitted in each of the four market areas. It takes three quarters to complete the
construction of a new plant. After construction has begun, no further entry is required except to
begin construction of new lines (see paragraph 1 on the previous page) prior to the start of
production. New production lines may be started during the third quarter of plant construction.

Limits: 0 in home area; 0, 2, 4, 6, 8, 10 lines in other areas

New plants may only be built in areas where there are no existing plants.

Cost: 2 lines capacity $1,200,000 or Dn, Rp or Ps 7,200,000

4 lines capacity $1,900,000 or Dn, Rp or Ps 11,400,000
6 lines capacity: $2,600,000 or Dn, Rp or Ps 15,600,000
8 lines capacity: $3,300,000 or Dn, Rp or Ps 19,800,000
10 lines capacity $4,000,000 or Dn, Rp or Ps 24,000,000

5. Plant Closing. To close a plant in an area, enter -1 under new plant construction for
the area. See Closing a Plant in Chapter 8 for details on plant closing. This is an important decision
and should be considered carefully before it is implemented. If you enter -1 to close a plant, you
also must deactivate all available production lines at the same time. The plant and production
equipment then will be sold for 90 percent of book value.

Limits: 0 or -1, -1 closes the plant in the area

Once a plant is closed, it will be sold and thus may not be reopened! A new plant must be
built in order to produce again in the same area.

44
 Marketing Research

Quality Research Associates (QRA), a reputable marketing research firm, is ready to

provide five different types of research studies for your firm. The studies include a competitive
advertising study, a competitive sales force study, two different consumer preference studies and
a sales force compensation study. You may order studies from QRA by placing an X next to the
desired studies in the bottom section of the decision form. In the example shown below, the
Competitive Advertising Study and the Competitive Sales Force Study have been ordered.

Marketing Research Studies

(Mark an X in box for studies desired)
Competitive Advertising Study X Consumer Preference Study II
Competitive Sales Force Study X Sales Force Compensation Study
Consumer Preference Study I

When using the Player’s Program to enter decisions, click on the Research menu at the
top of the decision entry window in the Player’s Program. A Research Studies window
containing five check boxes, one for each study, will appear. Simply click on the boxes to order
the studies you desire. Then click OK. Each of these studies is described below.

Competitive Advertising Study

The Competitive Advertising Study provides a report containing an estimate of the

amount of advertising each firm spends in each market area. As with all research studies, there
is some error in the data because individual firms will not disclose the actual amount they spend
on advertising during a quarter. Thus Quality Research Associates monitors television, radio and
print advertising and based upon their findings estimates the amount spent by each firm in each
area. The study estimates expenditures for all firms, thus you can judge the accuracy of the data
by how close the estimate of your firm’s expenditures are to the amount you actually spent.

Cost $40,000 per study

To order click on the Competitive Advertising Study check box in The Research Studies
window.

Competitive Sales Force Study

The Competitive Sales Force Study returns a report containing an estimate of the number
of sales people each firm employs in each market area. Firms consider the number of sales
people they employ to be proprietary information. Thus Quality Research Associates must
conduct a field study to estimate the number of sales people employed by each firm. The

45
accuracy of the data can be judged by comparing the estimates made for your firm with the
actual number of sales people you employ.

Cost $20,000 per study

To order click on the Competitive Sales Force Study check box in The Research Studies
window.

Consumer Preference Studies

Consumer preference studies provide reports containing an estimate of the proportion of

consumers who prefer the different levels of the quality and features product attributes. Quality
Research Associates develops these reports based upon responses to consumer surveys. While
consumers do not always behave the way they claim they will when surveyed, these studies
provide pretty good estimates of consumer preferences for the product attributes.

Consumer Preference Study I reports consumer preferences by market area. The first
section of the report provides preference estimates for product quality by market area. The
second section of the report provides preference estimates for product features by market area.

Cost $60,000
To order click on the Competitive Preference Study I check box in The Research Studies
window.

Consumer Preference Study II also reports consumer preferences by market area.

Within each market area, preferences are reported by quality and features levels. Thus
preferences are reported for each quality/feature level combination within the market area.

Cost $80,000
To order click on the Competitive Preference Study II check box in The Research Studies
window.

Sales Force Compensation Study

The Sales Force Compensation Study provides an estimate of the quarterly take-home
pay of a sales person for each company by area. As this is proprietary date, Quality Research
Associates must conduct field studies to obtain this sensitive data. The accuracy of the data can
be judged by comparing the reported compensation data for your firm with your actual
compensation.

Cost $40,000
To order click on the Sales Force Compensation Study check box in the Research Studies
window.

46
 Entering Decisions & Printing Reports

You may be asked to enter your decisions using a computer browser, then save them on
the Internet server. The browser may also be used to view and/or print your firm's reports. Before
entering your decision on the computer, the following tasks should be performed:

Complete the decision form. We recommend the decision form always be completed
before entering decisions on the computer. The decision form helps to organize your
firm's decision set in the order in which the values will be entered. The form centralizes
the decision variables in one place, thus easing the chore of checking for decision
completeness. The form also serves as the original record of your team's decisions.

Software License

Each team playing The Business Policy Game must obtain a license to use the software
prior to entering decisions for Year 4, Quarter 1. The license should be purchased sometime
after you receive the historical data for Years 1 and 2 but prior to entering your decisions for
Year 4, Quarter 1. No license is needed for Year 3. Licenses are normally purchased by clicking
on the “Home/Buy team license” menu of the Player’s Program and paying for it using a credit
card. Print your receipt for your records.

Summary

Steps for entering decisions.

1. Complete Decision Form

2. Enter decisions using your browser

2a. Enter New Decisions 2b. Change Decisions

Steps for printing/viewing output.

1. Click on Reports menu and select report

2a. View Reports 2c. Print Reports

Steps for viewing/printing graphs

1. Click on Graph menu and select graph

2a. View Graph 2b. Print graph using browsers print function

47
 FIGURE 2-2
QUICK-REFERENCE GUIDE
DECISION-VARIABLE DEFINITIONS AND LIMITS
PRICE TRANSFER OR DISCHARGE SALESPEOPLE
Amount to be charged for your product Number to be transferred or discharged

Maximum change, Merica areas: 30 percent Negative values: discharge or transfer out.
Maximum change, Foreign area: 40 percent Positive values: transfer in.
A negative balance will be discharged.
Limits, Merica areas: 1.00 to 99.99 (dollars and cents)
Limits, Foreign area: 1 to 99999 (Local currency) Maximum: Number available minus 1
If there is no sales office, price must be 0
Limits: -99 to 99
ADVERTISING HIRE NEW SALESPEOPLE
Amount to be spent for advertising in each marketing area Number of new salespeople to be hired.

Limits, Merica areas: 0 to 999 (thousands of dollars) Those hired now will be in training for one quarter, then
Limits, Foreign area: 0 to 9999999 (thousands in local become active salespeople in the following quarter.
currency)
Limits: 0 to 99
COMMISSION SALARY
Commission per unit to be paid to each sales person Quarterly salary to be paid to each salesperson

Limits, Merica areas: 1 to 999 (cents per unit) Limits, Merica areas: 1 to 9999 (dollars)
Limits, Foreign area: 1 to 99999 (deni, sen or centavos per Limits, Foreign area: 1 to 9999999 (local currency)
unit) If there is no sales office in an area, the value must be 0.
If there is no sales office in an area, the value must be 0.
CLOSING A SALES OFFICE OPENING (REOPENING) A SALES OFFICE
Transfer out or discharge of all salespeople will cause the Transfer in of one or more salespeople to an area where there
sales office in that area to be closed and executives is no sales office will cause an office to be built and executives
discharged. to be hired.

Maximum negative entry: Number\ of active salespeople Limits: 0 to 99

Limits: -99 to 0
BANK LOAN BOND ISSUE
Short-term loan to parent company, for one quarter. Sold in million-dollar lots by parent company

Maximum: 50% of consolidated receivables plus inventory Positive numbers: sell new 10-year bonds
Maximum: 0, if loan outstanding in each of the last 3 quarters. Maximum: the lesser of 50% of equity or 75% of net fixed
assets
Limits: 0 to 2500 (in thousands of dollars)
Limits: 0 to 9000 (in thousands of dollars)
BOND REPURCHASE STOCK ISSUE
Redeem outstanding bonds in lots of $100,000 Sold in 100,000-share lots by parent company

Negative numbers: amount of bonds to repurchase. Positive numbers: Number of common shares to be issued,
Minimum issue: enough shares to total $1,000,000
Limits: -500 to 0 (in thousands of dollars)
Limits: 0 to 9000 (in thousands of shares)
STOCK REPURCHASE DIVIDENDS
Repurchased in lots of 100,000 shares Declared and paid by parent company
Amount to pay external shareholders from profits
Negative numbers: Number of shares to repurchase
Maximum repurchase: to leave at least 3 million shares with Maximum: Consolidated net income in last 4 quarters, minus
positive accumulated retained earnings. dividends paid in last 3 quarters.

Limits: -500 to 0 (in thousands of shares) Limits: 0 to 9999 (in thousands of dollars)
TIME CERTIFICATES OF DEPOSIT (CDs) PRODUCT RESEARCH & DEVELOPMENT
Short-term 3-month investments by parent company, Amount for parent company to spend on developing new
purchased in $100,000 lots. models

Limits: 0 to 9900 (in thousands of dollars) Limits: 1 to 999 (in thousands of dollars)

48
 FIGURE 2-2 (Continued)
QUICK-REFERENCE GUIDE
DECISION-VARIABLE DEFINITIONS AND LIMITS
TRAINING OF EXISTING PRODUCTION EMPLOYEES MODEL NUMBER
Amount for parent company to spend on training of existing For production this quarter. Goes on sale next quarter.
production employees (to reduce production costs).
Minimum: Same model number as last quarter
Limits: 1 to 999 (in thousands of dollars) Maximum: Highest number reported to be available

Limits: 1 to 12
QUALITY (of product) FEATURES (of product)
May be changed only on introduction of a new model. May be changed only on introduction of a new model.

Enter 3 for deluxe quality Enter 3 for enhanced features

Enter 2 for standard quality Enter 2 for standard features
Enter 1 for economy quality Enter 1 for basic features
SALES OFFICE ORDERS SCHEDULING PRODUCTION LINES (First Shift)
Number of units to be shipped to each sales office. Units will Number of lines scheduled for production.
be held there for resale. Unsold units will be placed in
inventory. Any lines not scheduled must be Idled or deactivated. New
lines must be purchased and installed one quarter before they
Limits: 0 to 999 (in thousands of units) may be scheduled.

Limits: 0 to number of lines available

SECOND-SHIFT LINES (Home area plant only) SCHEDULING PRODUCTION HOURS (First & Second Shift)
Number of lines scheduled for second shift Number of hours to schedule production per week.

First-shift lines also must be scheduled. New lines must be Number of lines must also be scheduled.
prepared one quarter before production may be scheduled.
Limits: 0, 40 to 48 (hours)
Limits: 0 to number of first-shift lines scheduled for production.
TEMPORARY LAYOFF–IDLED (one quarter only) DEACTIVATE PRODUCTION LINES (Permanent Layoff)
Number of lines to shut down for temporary layoff of Number of lines to be deactivated (and not available for
employees. production until reactivated).

Lines subject to temporary layoff are automatically available If a plant is closed all lines must be deactivated, and none will
for production one quarter later. be available for reactivation later.

Limits: 0 to number of lines available for production Limits: 0 to number of lines available
Lines that are available for production but not scheduled must Lines not scheduled for production must be Idled or
be Idled (temporary layoff) or deactivated. deactivated.
NEW PRODUCTION LINES REACTIVATE PRODUCTION LINES
Number of new lines to be purchased and installed, ready to Number of previously deactivated 1st or 2nd-shift lines to be
begin production the following quarter prepared for production next quarter.

1st-shift lines must be available to install new 2nd-shift lines. 1st-shift lines must be available in order to reactivate 2nd-shift
lines. 1st and 2nd-shift lines may be reactivated at the same
Limits (1st shift): 0 to space reported as available time.
Limits (2nd shift): 0 to number of 1st-shift lines
Limits: 0 to number of previously deactivated lines
NEW ADDITION NEW PLANT
Number of lines capacity to add to the plant Number of lines capacity for a new plant to be constructed

Construction takes 2 quarters. This is an addition to the May only be built in areas where there is no existing plant.
building in which new lines may be installed. Only one new 2- This is a new building in which production lines may be
line addition may be started in any quarter, but another could installed during the last quarter of construction (or later). New
be started the following quarter so that two additions are under lines must be installed separately. New additions may be built
construction at the same time. New lines must be installed later, to a maximum capacity of 12 lines in any area.
separately during the last quarter of construction (or later).
An entry of -1 causes the plant to be closed and sold for 90%
Limits: 0 or 2 (to a maximum capacity of 12 lines) of book value. All lines must then be deactivated at the same
time. No further production in such a plant is possible.
Limits: -1 (to close plant)
0, 2, 4, 6, 8 or 10 (number of lines capacity)
 FIGURE 2-3
SUMMARY OF THE BUSINESS POLICY GAME COSTS — Year 3, Quarter 1
(Costs change over time because of inflation and changes made by management.)

Marketing Expenses
Salespeople Salaries and commissions: $3,000 or Dn, Rp or Ps 8971 per quarter + 20 cents or 0.60 Lc per unit
Training\: $10,000 or 36,000 in local currency per trainee
Moving expense: $5,000 or 30,000 in local currency per salesperson transferred
Severance expense: $5,000 or 30,000 in local currency per salesperson fired

Inventory storage: In-plant warehouse: 10 cents or Dn, Rp, or Ps 0.60 per unit up to 300,000 units
Public warehouse: 30 cents or Dn, Rp or Ps 1.80 per unit
Transportation Expense:
Shipments from: To: Cost per unit in dollars Marketing Research
convert to local currency at current rates Competitive Advertising $40,000
Sales office or plant Customer in same area $0.10 Sales Force Comparison $20,000
Plant (Merica) Sales office in another Merica area $0.60 Consumer Preference I $60,000
Plant (Merica) Foreign sales office $0.90 Consumer Preference II $80,000
Plant (Foreign) Merica sales office $0.90 Sales Force Compensation $40,000

General Selling Expense: Each Merica area: $37,500 + $4,000 x number of salespeople + $0.20 x number of units sold
N/P/S: Lc 225,000 + Lc 24,000 x number of salespeople + Lc 1.20 x number of units sold

Production Costs
Labor costs/line for Model 1, Quality 2, Features 2 (other models as reported): Standard costs/unit
Straight time: $288 or Dn, Rp or Ps 890 per hour for Model 1 Labor $2.88 Lc 8.90
Second shift: 110% of straight time Materials 1.23 5.72
Overtime: 150% of straight time (200% in N/P/S) Maintenance 0.25 1.50
Total (Qual 2/Feat 2)$4.36 Lc 16.12
Maintenance: $25 or Dn, Rp or Ps 150 per hour per line (Qual 3 or Feat 3) + 10%
(Qual 1 or Feat 1) - 10%
Layoff standby cost: $52,000 or Dn, Rp or Ps 312,000 per quarter per line
Deactivation cost: $100,000 or Dn, Rp or Ps 600,000 per line
Reactivation cost: $50,000 or Dn, Rp or Ps 300,000 per line
Construction Costs:
New 2nd Shift: $100,000 per line worker training (home area only)
line: $500,000 or Lc 3,000,000 per line + Worker training: $100,000 or Lc 600,000 per line
New addition to plant: $900,000 or Dn, Rp or Ps 5,400,000 per 2-line addition
New plant construction: 2 lines capacity $1,200,000 or Dn, Rp or Ps 7,200,000
4 lines capacity $1,900,000 or Dn, Rp or Ps 11,400,000
6 lines capacity: $2,600,000 or Dn, Rp or Ps 15,600,000
8 lines capacity: $3,300,000 or Dn, Rp or Ps 19,800,000
10 lines capacity $4,000,000 or Dn, Rp, or Ps 24,000,000

Finance Expenses
Bank loan: Interest at the short-term interest rate during the quarter the loan is issued
Bonds: Existing bonds, at 10% annual interest, new bonds at long term interest rate in quarter of issue
Interest paid quarterly. Bonds\ are callable at a 5 percent call premium
Common stock: Issue price determined by formula in text
Income tax: 39% of net income; paid quarterly
Value Added Tax in N/P/S: 10% of net sales to customers, paid quarterly

Other Expenses
Executives' salaries: $50,000 or Lc 300,000 per manufacturing plant, $25,000 or Lc 150,000 per sales office, each quarter
Plant depreciation: $26,000 per quarter (existing plant)
Straight-line basis over 31.5 years, no salvage value (0.7937% per quarter)
Equipment depreciation: $107,000 in Year 2, Quarter 4 (existing equipment)
Straight-line basis over 7 years, no salvage value (3.5714% per quarter)

50
 3. THE BUSINESS ENVIRONMENT

As The Business Policy Game begins, you and your fellow team members are assuming
the management of a simulated corporation that has been in existence for a number of years. Your
firm's principal business activities are the production and distribution of a consumer durable good.
The specific product will likely be defined by your simulation administrator. The same product
type is also manufactured and sold by other firms in direct competition with your firm. However,
these products are differentiated in the minds of consumers.

The firms in your industry have surprisingly similar histories during past years. An ex-
amination of the historical data and financial statements presented in Appendix C will highlight
the fact that there has been little, if any, difference among the operations of the various companies
in your industry. Each company has maintained substantially the same level of sales; production
levels for each company have been about the same; the pattern of financing has been similar; and
profits have differed by a relatively small amount. One almost could guess that the various com-
panies have been operating under the same management, unless collusion were present. This is an
unlikely assumption in view of the antitrust laws that exist in our simulated world.

As the simulation develops, you may be sure that the different operating strategies that will
be developed by your firm and its competitors will cause a divergence among the production, sales,
financing, and profit performance of the various competing companies. Furthermore, as you and
your competitors place new models on the market, you will find that there is a difference between
the way your product is received by the market and the way in which your competitors' products
are received. Consumers will demonstrate brand preference. You may prefer to think of the
differences as akin to the differences between a new Dell and a new IBM computer or perhaps
even an Apple MacBook.

Your simulation administrator will configure the simulation so that the firms in your world
are conducting business in either one or two simulated environments. If a domestic competition
is chosen, (a single environment) operations and sales are limited to Merica. If an international
competition is selected, (two environments) the second country will be either Nystok an Eastern
European country, Pandau an Asian country or Sereno a Latin America country. A short
background discussion of each country follows. You should read the sections that relate to the
countries in your competition.

51
 Merica

Merica is located in the Western Hemisphere on the North American continent. Its land
area stretches approximately 9.4 million square kilometers. Nearly every type of climate can be
found in Merica from tropical to polar. Deserts and major mountain ranges are found in the
West. While the West is rather arid, with the exception of the Northwest, the East and most of
the Midwest receives sufficient rainfall to support farming. Farming in the west generally
requires irrigation. As you would expect, temperatures vary widely over the country.

Merica’s population is approaching 300 million people. More than half of the people live
in the South and West. Approximately twenty-five percent live in the Midwest and the
remainder live in the Northeast. More than three quarters of the population live in cities, towns
and suburbs. The capital city of Columbia is located on the east coast. The growth in population
is low with approximately 25 percent of the growth occurring through immigration.

Merica is a leading industrialized country. Its work force is highly skilled and mobile.
The citizens generally enjoy a high standard of living. Median family income is over $35,000
per year, and professional and middle-management salaries begin around $30,000 and climb
rapidly upward. Eighty-nine percent of the households own a motor vehicle.

The common language in Merica is English. Many other languages are spoken in various
ethnic areas, but English is the common language of communication. English dialects vary in
different parts of the country, but each is generally understood throughout the country. Primary
and secondary education are provided free of charge by local school districts within each state.
Most states require children to attend school until they reach their 16th birthday. Nearly half of
the graduates of high schools enroll in college. Approximately 25 percent of the population is
college educated.

Exporting

Merica offers tax and non-tax incentives for the export of goods produced in the country.
Unfortunately, your firm is not able to take advantage of tax incentives due to the special nature
of its products. Non-tax benefits of interest to exporters include special financing set up through
export-import banks, credit programs and financing assistance programs for foreign buyers and
promotion of export programs both within Merica and in foreign markets.

Importing

Consumer durables imported to Merica are subject to duty based upon their classification
in the country's import tariff schedules. The duty rate depends upon the country of origin and the
type of product, as well as numerous other factors. Certain countries are given preferential rates
due to trade agreements. Most products are subject to most-favored-nation or general rates of
duty. However, imports from some countries are subjected to the highest rates when normal
trading relations have not been developed.

52
 A product's tariff classification is based primarily upon the product's description. The
product's value is based upon the transaction value which includes the actual sales price plus cer-
tain commissions and other expenses. Transaction values may be documented using commercial
invoices, country of origin certificates, bills of lading and foreign assembly declarations.

According to tariff agreements, the duty rate for your company's durable good is 0 per-
cent. However, you will have to pay a user fee of 0.19 percent which is charged on all imports.
If you ship by water, your goods will be subject to a 0.125 percent harbor maintenance fee.

When your imported goods arrive in Merica you or your agent must file the required
documents with the customs service. The documents include a bill of lading, airway bill or car-
rier's certificate, a commercial invoice showing the value of the shipment, an entry manifest and
a packing list.

Local representation is not required, but licensed customs consultants are readily
available through accounting firms and customs brokers. Sales agents may also be helpful in
meeting the administrative requirements of the import process. Establishing a sales subsidiary
causes no problems from a Merica customs standpoint. However, numerous other Merica
government agencies should be consulted prior to establishing a sales subsidiary.

Your staff will have prepared the appropriate documents and cleared them with the Cus-
toms Service prior to the importation of goods. The processing and importing fees are not shown
separately on your accounting reports, but you can safely assume they have been paid and in-
cluded with other costs of purchase.

Investing

Merica has no restrictions on foreign ownership of firms producing low cost consumer
durables. There are no limits imposed on monetary exchange or the entry of foreign funds into
the country. Both capital and profits may be repatriated as desired. Foreign firms are required to
meet the same requirements as domestic firms when obtaining loans or funds from the capital
markets. The federal government holds a neutral policy with respect to encouraging foreign in-
vestment.

State and local governments follow quite a different course. They offer extensive incen-
tives to attract foreign-owned plants to their area. Incentives are also provided for joint ventures
and licensing arrangements with foreign investors. Their objective is to create jobs, reduce un-
employment and welfare costs and to enlarge the tax base. Incentives are in the form of grants,
such as tax breaks, direct loans and loan guarantees. Additional help may be provided in the form
of recruiting and training services, plant location assistance, etc.

The country has a well-educated, skilled work force. Workers tend to be highly paid in-
cluding substantial fringe benefits. The benefits are not required by law, but they are included in
most union contracts and are generally provided in varying degrees by all employers. The
benefits normally include health insurance, life insurance, sick pay and vacation time. Profit
sharing and pension plans are commonly offered. Fringe benefits account for approximately 28

53
percent of total compensation. A 40-hour work week is common with overtime paid to industrial
employees for time over 40 hours. Ten paid holidays normally are observed in all parts of the
country. Two weeks of paid vacation are commonly provided for new employees with vacation
time increasing with employee tenure to a maximum of four or six weeks. It is unlawful to
discriminate on the basis of age, sex, religion, veteran status, handicap, national origin or race.

A social security program provides limited health and pension benefits for people aged
65 and over. Both employees and employers contribute 8 percent of the employee's pay to the
program. An unemployment tax of 7 percent on the first $7,000 of wages is also paid by the em-
ployer. In addition, employers contribute to state workers' compensation funds which provide
benefits when employees are injured, contract a disease or die as a result of their employment.
The requirements and contribution amounts differ by state. Labor costs represent a significant
portion of total production costs in Merica. As a percentage, labor costs are among the highest in
the industrialized world.

Federal taxes in Merica currently amount to 39 percent of corporate income. There is no

value added tax in Merica nor is there a capital tax on corporations. Other taxes which are as-
sumed by the simulation to be included in the stated level of costs include:

Import and export taxes

Payroll taxes, principally social security
State and local taxes
Taxes on real property

Nystok

Nystok is a large country in Eastern Europe and was a member of the former Soviet Bloc.
It has signed numerous agreements with the European Union and is seeking membership in the
EU. It occupies approximately 300,000 square kilometers making it one of the larger countries
in Europe. The country is generally flat with mountains along one border. Nystok enjoys a
moderate continental climate with an average rainfall of 60 centimeters per year falling mainly
during the summer.

Nystok’s population is approximately 45 million people ranking it seventh among

European countries. Population growth has been 0.8 percent over the past 20 years. Sixty-two
percent of the population live in urban areas. Thirty percent of the population is under 18 and 12
percent is over 60. Retirement age for women is 60 and men must reach 65 to retire. The largest
city is Potsdam, the capital which is located in the center of the country with a population of two
million.

The official language of Nystok is Nystok. Several other languages are spoken by
sizeable minorities living in various parts of the country. They include Germans, Ukrainians,
Belorussians, Czechs, Slovaks, Lituanians, Gypsies and Jews. It is common for educated
Nystoks to speak English or German and Russian. Nystok children are required to attend school

54
between the ages of 7 and 16. Over 30 percent continue on to some form of higher education.
The population is among the best educated in Europe.

Exporting

Nystok wants to promote exports and plans to introduce legislation to provide

concessions for exporters. Currently the law generally grants exemptions from customs fees and
turnover taxes on raw materials and supplies used in the production of goods for export. The
country does not provide any type of export guarantees.

Importing

Import quota restrictions on low-cost consumer durable goods were phased out several
years ago. Nystok has adopted the Combined Nomenclature system for classification of
consumer goods and bases its customs tariffs on this classification. The basic level of duties
range from 0 to 40 percent. The customs value of goods for assessment purposes is the price
paid plus all costs incurred in bringing the goods to the Nystok border. These duties apply to all
World Trade Organization\ countries and to other countries who have been accorded Most
Favored Nation status. Goods imported from developing and less-developed countries qualify
for a preferential customs rate of zero.

The customs duty system provides some protection for local industries. Nystok has
signed an agreement with the European Union (EU) which eliminates duties on an increasing
number of items imported from the EU. An import turnover tax is levied at the Nystok border
and a value added tax is assessed at the same rate that applies to sales of domestic products.
Nystok has developed a single administrative document (SAD) that must accompany all goods
imported into Nystok. The SAD contains information about the goods, the importer, the country
of origin, and the payment method. A declaration of customs value must be completed by the
receiving party which is checked against the SAD. The shipment must also be accompanied by
an invoice or pro forma invoice certifying the value of the goods. No additional charges apply.

Your sales office staff are knowledgeable and capable of handling all import details.
While the turnover tax is not stated separately in your financial reports, you can assume that it
has been paid and is included in with the other costs of purchases. The delivery of goods to a
customer within Nystok is subject to income and value added taxes which will show on your
financial reports.

Investing

The Nystok government is promoting foreign investment. Recent legislative reforms in

joint ventures requirements, personal income taxes and banking have significantly increased the
attractiveness of Nystok as a place of investment opportunity. Bureaucratic procedures have also
been streamlined. However the taxes levied in Nystok are generally neutral with few incentives
or reliefs.

55
 All decisions regarding the formation of companies and the issuance of permits are made
by the Minister of Ownership Changes. Establishing a sales office or a manufacturing facility in
Nystok would require securing a permit to operate. All documents provided with the application
must be in the Nystok language. Companies created under Nystok law are legally considered
Nystok legal persons subject to all Nystok laws. The company form of interest to your firm is
know as a limited liability company subject to the Commercial Code. It is very similar to a
Gesellschaft mit beschränkter Haftung (GmbH) in Germany. The minimal capital structure to
establish a limited liability company is Dn25,000.

Nystok allows up to 100 percent foreign ownership of consumer durable manufacturers.

Ownership may be by outright purchase, perpetual lease or short-term lease. A perpetual lease
must be approved by the Ministry of Interior. The perpetual lease is normally for a term of 99
years. In the last five years of the lease, an extension may be requested to extend the lease for
another 40 to 99 years. A refusal of an extension can only be made “for reasons of important
public interest.” The tenant has the right to use the land, or to sell or give the perpetual lease to
another. The tenant is obligated to maintain rent payments. While a perpetual lease may look
attractive, your firm has a policy of ownership of capital.

A Nystok subsidiary may pay dividends to its parent equal to the entire amount of current-
quarter profits, with the following restrictions:

1. Twenty percent of the profits must be set aside in an equity reserve (part of
retained earnings) until the reserve has accumulated to an amount at least equal
to 50 percent of capital stock.

2. Dividends may only be paid if, after payment, there will be a minimum cash
balance of one million denars (held in Nystok banks).

While local financing is becoming more readily available, it is still more expensive than in
developed countries. This may change in the future.

There is a large, educated labor force in Nystok. Unemployment is over 12 percent

providing a readily available pool of people from which to hire. Wages are relatively low in spite
of high employer paid benefit costs. Employee-employer relations are based upon the Labor Code.
More than 80 percent of Nystok workers belong to unions which are beginning to take a more
active role in employee-employer relations. Foreign-owned companies are viewed as providing
good career opportunities with substantially higher salaries and benefits than Nystok companies.

The Labor Code defines the regular work week as 40 hours with double time required for
any work performed above the 40-hour limit. Double time is also required for Sunday and holiday
work. Employees are entitled to time off with pay for all national holidays and 14 days of paid
vacation after one year on the job. Employers cannot discriminate on the basis of race, religion or
sex.

The social security system is administered by the Social Insurance Institution. All workers
are covered regardless of whether they are full-time of part-time workers. The current rate is 47

56
percent of taxable wages which is paid entirely by the employer. Employees can collect an old-
age pension after reaching the age of 65 for men and 60 for women after working 20 and 25 years
respectively. Numerous other benefits are available for interruptions of employment due to
sickness, care of children and care of the elderly.

Taxes that must be paid in Nystok include:

Taxes on income—the corporate tax rate is 39 percent of net income.

Value added taxes—10 percent of net sales

The value added tax applies to total sales. Since your company imports all of its
merchandise or manufacturers it from imported raw materials and components, there are no
deductions for locally supplied materials. The value added tax is deducted from income for income
tax purposes. Income and value added taxes are calculated and reported separately in simulation
reports. Other taxes assumed by the simulation model to be included in the stated level of costs
are:

Property tax
Social security payroll tax
Turnover tax

Pandau

Pandau is a large Asian country covering approximately 2,000,000 square kilometers. It

is comprised of a peninsula on the southern tip of the continent and a large number of islands,
some of great size. Much of the country is mountainous and covered by tropical rain forests.
The climate is tropical with rainfall averaging around 107 inches per year. The wettest months
are during the monsoons which occur from November to April. Daytime temperatures average
33 degrees and nighttime temperatures average 21 degrees centigrade.

Pandau’s population of nearly 100,000,000 people is growing at the rate of 2.3 percent
per year. Two thirds of the population lives on the peninsula and on the island of Bandau
making those two areas among the most densely populated areas in the world. Large areas of
other islands are sparsely populated. The Pandau population is young with more than half being
under 20 years of age. The population is primarily Malay with significant numbers of Papuans
and Chinese.

The standard of living is relatively high for the area. Unemployment over the past
several years have averaged 8 percent. Nearly 75 percent of the households on the peninsula and
on Bandau have safe water and electricity. The rural areas are close to this percentage. More
than half of the population owns a television and 75 percent have a radio. Two thirds of the
population own an automobile.

Several hundred languages are spoken in Pandau. The official language is Bahasa
Pandau. One will find English, Dutch and Chinese commonly spoken among the Pandau

57
business community. Education is not compulsory in Pandau, but it is provided at no cost to
students between the ages of 7 and 15. Free education is available through age 19 for those who
meet the required academic standards.

Exporting

Pandau encourages exports by providing a number of incentives. They include additional

deductions in income tax calculations, exemptions from excise taxes for materials and
components imported for the purpose of manufacturing exports and additional tax breaks such as
double deductions for promotion of exports.

Importing

There are no import restrictions on low-cost consumer goods in Pandau. The country has
adopted the Harmonized Commodity Description and Coding System of classifying goods.
Merchandise is valued at its invoice price for duty calculations. Luxury goods and goods that
compete with local manufacturers are subject to high import duties. Duties currently range from
0 to 60 percent levied on an ad valorem basis. The duty rate for durable consumer goods such as
your firm produces of 0 percent.

A Declaration of Goods Imported form must be completed and provided at the port of
import. Appropriate invoices must be attached to the form. There is ample storage space at
airports and seaports to store to handle incoming shipments. Following clearance at the port,
goods can be stored at customs-bonded warehouses near port areas. Dutiable goods can be
stored in these warehouses without payment of duties until they are cleared from the warehouse.
Storage is also readily available at reasonable rates for general and valuable cargo.

Your staff are knowledgeable regarding import requirements and you can rest assured
that they will prepare the appropriate documents and obtain the necessary approvals to smooth
the importation of your product and/or materials and components required to assemble your
product. While processing fees are not stated separately in your financial reports, you can
assume that they will have been paid and reflected in the other costs of purchase. Delivery of
goods to customers in Pandau is subject to income and value added taxes.

Investing

Pandau welcomes foreign investment with emphasis upon investment which will promote
export oriented industry. Companies are incorporated under the Pandau Companies Act.
Documents are filed with the Register of Companies. Incorporation can normally be completed
in two months.

A company such as yours would create a private company as a subsidiary. Pandau is

much more likely to approve the formation of a private company which is a subsidiary of a
foreign concern than it is a branch of a foreign firm. A private company must contain the
following limitations in its articles of association:

58
 1. Restrictions on the right to transfer its shares
2. Limit the number of shareholders to 50
3. Prohibit any invitation to the public to purchase shares or to deposit money with the
firm.

The private company is the form of choice for a foreign firm to establish a subsidiary which does
not want to raise capital or borrow funds from the Pandau public. The private company
subsidiary may pay dividends to its parent organization equal to the entire amount of current
quarter profits with the following restrictions:

1. Twenty percent of the profits must be set aside in an equity reserve (part of retained
earnings) until the reserve has accumulated to an amount at least equal to 50 percent of
capital stock.
2. Dividends may only be paid if, after payment, there will be a minimum cash balance
of one million rupees (held in Pandau banks).

The relatively young labor force is growing at about 3 percent per year. While there is a
shortage of skilled technical employees, there is an adequate supply of unskilled and semiskilled
workers in Pandau. The literacy rate among potential employees is high. Wage rates are
comparatively low. Free medical treatment is provided by most foreign owned firms. Working
conditions are governed by the Employment Act which specifies limitations on working hours.
The normal work week is limited to 40 hours. Overtime is compensated at double time.
Employees are guaranteed ten paid holidays, and after one year they are eligible for eight days of
paid vacation. This increases with the length of employment.

The Employees Social Security Act requires all but the smallest employer to insure their
workers under the government run Social Security Organization\. The premium costs are borne
by the employer. The insurance provides benefits to workers and dependents in case of work place
injuries. A social security retirement program known as the Employees Provident Fund Ordinance
is funded jointly by the employee and employer, 11 percent by the employer and 9 percent of
wages by the employee. These payments are tax deductible.

Taxes that must be paid in Pandau include:

Taxes on income—the general corporate tax rate is 39 percent of net income

Value added tax—10 percent of net sales

Value added\ taxes are assessed against total sales. Since your company imports all of its
merchandise or manufactures it from imported raw materials, there are no deductions. The amount
of the tax is deductible for purposes of income tax assessment in Pandau. Income and value added
taxes are calculated and reported separately in simulation reports. In addition, other taxes are
assumed by the simulation model to be included in the stated level of costs:

Payroll taxes, principally social security

Local taxes
Taxes on real property

59
 Taxes on salaries

Sereno

Sereno is a large country in Latin America. It covers approximately 1,800,000 square

kilometers, almost one-fourth the size of Merica. The greater part of the country is on a high
plateau. Almost half of the country is arid or semiarid. Rain generally falls between May and
October with very little rain being received during the rest of the year. Temperatures are generally
moderate most of the year. However, there are mountainous regions in the country which have
quite different climates.

Sereno’s population of approximately 80 million people is growing at the rate of 2.1 per-
cent per year, one of the highest rates in the world. There has been a large shift in the population
from rural to urban areas since 1940. Today more than 60 percent of the population lives in urban
areas. The largest city is the capital city of San Jose which is located at 5,500 feet above sea level.

The distribution of wealth within the country is very uneven. At the higher income levels,
which include upper and middle management, the standard of living is comparable to that found
in industrialized countries. However, only about 20 percent of the population is wealthy enough
to afford this type of lifestyle. Earnings for office, skilled, semiskilled and unskilled workers are
substantially below those in industrialized countries. It should be noted that wages are rising, and
these latter groups are becoming significant markets for low cost durable goods. They tend to be
young and many have young families. One of the country's major problems is to find jobs for
members of these groups which represent a large share of the rapidly increasing population.

A recent article in Fortune argues that people in developing countries tend to buy more
durable goods than they would with the same income in a developed country. Products mentioned
included TVs, refrigerators, etc. Thus you might estimate that between 50 to 75 percent of the
population of Sereno would be financially able to purchase your product.

The national language of Sereno is Spanish. Education is provided free through six years
of primary school and three years of secondary school. The government funds public universities,
which provide an additional three years of pre-college education through preparatory schools.
While all students have a right to attend school, many in the rural areas are not able to attend school
on a regular basis. In recent decades, a major effort has been made to reduce illiteracy.

Exporting

Both tax and non-tax benefits are provided to encourage exports of locally produced goods
from Sereno. Firms exporting from Sereno can claim a value added tax credit for all export sales.
Non-tax benefits include shipments being given top priority in customs clearance and special pro-
motional assistance in Sereno and in foreign markets. An import drawback provision provides for
a refund of import duties paid on imported merchandise that is later incorporated into exported
goods.

60
Importing

Sereno has no import restrictions on low-cost consumer durable goods. The country uses
the Harmonized System for Merchandise Classification and Codification which makes classifica-
tion of goods compatible with that of most of its trading partners. Merchandise is valued at its
commercial invoice price in determining its dutiable value. Duties range from 0 to 20 percent,
with most duties running between 0 to 10%. The duty rate for your company's durable goods is 0
percent.

Industry protectionism is gradually being phased out since Sereno joined the World Trade
Organization several years ago. Most imports of tangible items are subject to a value added tax at
the same rate that applies to domestic sales. The documents required to import goods include the
import declaration completed by a customs broker or forwarding agent, a detailed packing list and
a commercial invoice showing all charges made by the seller in connection with the sale. The
invoices must be stamped by the Sereno consul in the country from which the shipment is made.
A customs services processing fee is payable with the import declaration.

Your staff will have prepared the appropriate documents and obtained consular approval
for importing goods to Sereno. The customs service processing fees are not stated separately in
your financial reports, but you can assume that they will have been taken care of and included with
other costs of purchase.

Delivery of goods made to a customer within Sereno is subject to income and value added
taxes. A local agent must be used to withdraw merchandise from a Sereno customhouse.

Investing

Sereno allows up to 100 percent foreign ownership of consumer durable manufacturers.

Foreign investment normally is made by establishing a Sereno corporation. Prior authorization by
the Ministry of Foreign Affairs is required. The formation of a corporation with minority foreign
ownership usually requires about three or four weeks. A majority ownership takes about twice as
long. The cost is relatively minor. A notarized deed must be obtained which represents a com-
bined charter and bylaws.

A Sereno subsidiary may pay dividends to its parent equal to the entire amount of current-
quarter profits, with the following restrictions:

1. Twenty percent of the profits must be set aside in an equity reserve (part of
retained earnings) until the reserve has accumulated to an amount at least equal to 50
percent of capital stock.

2. Dividends may only be paid if, after payment, there will be a minimum cash
balance of one million pesos (held in Sereno banks).

The availability of local financing is very limited. It also is very expensive. Short-term
commercial credit, when available, commands interest rates of approximately 30 to 40 percent per

61
annum. There are no restrictions on repatriation of capital. However, foreign currency must be
obtained in foreign currency markets. Sereno is not a low-tax country, and it offers no special tax
treatment to foreign investors.

Skilled and managerial personnel are generally in short supply. However, trainable un-
skilled and semiskilled workers are readily available. Labor costs are low compared to developed
countries, although they are rising. Labor unions are becoming widespread. Sereno labor law
requires that all employers provide their employees with a minimum of training.

Minimum wages are established for separate regions of the country. The minimums are
raised each calendar quarter to mirror closely the rate of inflation. The maximum workweek is six
eight-hour days for a total of 48 hours, although a 44 or even a 40-hour workweek is not uncom-
mon, particularly in offices. Double time must be paid for overtime (more than 40 hours per week).
Triple pay is required for work on any of the seven legal holidays.

The social security program includes current medical expenses, workmen's compensation
and old age and disability pensions, which cost employers from 14.6 to 20.9% of their employee's
pay. In addition, a payroll tax of 5% is levied to cover a national low-cost housing program. Labor
contracts often provide for additional benefits. Seniority premiums are paid to all workers who
are fired, die or retire with at least 15 years of service. Under the Sereno constitution, it is unlawful
to discriminate against an individual on the basis of race, religion or sex.

Employers must provide transportation for employees when a plant is located outside of an
area served by reasonable public transportation. Many firms have established company-supported
cafeterias which offer meals at reduced prices. Total fringe benefits, including benefits mandated
by labor law, cost employers between 70 and 100 percent of base wages.

Taxes that must be paid in Sereno include:

Taxes on income—the general corporate rate is 39 percent of net income

Value added taxes—10 percent of net sales

Value added taxes are assessed against total sales. Since your company imports all of its
merchandise or manufactures it from imported raw materials, there are no deductions. The amount
of the tax is deductible for purposes of income tax assessment in Sereno. Income and value added
taxes are calculated and reported separately in simulation reports. In addition, other taxes are
assumed by the simulation model to be included in the stated level of costs:

Import & export taxes

Payroll taxes, principally social security
Local taxes
Taxes on real property
Taxes on salaries

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 Market information in Sereno is neither as abundant or as readily available as in industrial-
ized countries.

Economic Environment

The firms in your industry are conducting business in two simulated environments, Merica
and M/N/P/S. Merica represents a developed country, and Nystok, Pandau or Sereno represents a
developing country. One of the environments is likely to be similar to the economy of your country
during recent years. Because of this similarity, a knowledge of the characteristics of your nation's
economy will enable your firm to make certain inferences about one of the simulated economic
environments. Your country's gross domestic product (GDP) for example, has generally increased
over time. However, unless your country is highly unusual, this growth has not been constant over
time as indicated by the historical record. The GDP index, as well as other economic time-series
indexes, has fluctuated considerably.

The current-dollar and current-dinar/rupee/peso GDP indexes for The Business Policy
Game are reported in the Quarterly Industry Report, unadjusted for inflation. In addition, a four-
quarter forecast of real GDP, adjusted for changes in the Consumer Price Index in each country,
is purchased every three months by your marketing department and reported each quarter in the
Quarterly Industry Report. A four-quarter forecast of expected exchange rates is included in the
forecast.

REAL GROSS DOMESTIC PRODUCT FORECAST

Actual Values, Last 4 Quarters Forecast Values, Next 4 Quarters
Qtr 5 Qtr 6 Qtr 7 Qtr 8 Qtr 9 Qtr 10 Qtr 11 Qtr 12

Merica 102.17 102.66 100.93 99.90 99.57 97.94 98.79 94.46

N/P/S 94.87 97.05 98.20 100.00 104.76 107.08 109.14 115.87
----------------------------------------------------------------------------
EXCHANGE RATE FORECAST

N/P/S 5.99 5.97 5.97 6.00 6.09 6.02 6.08 6.18

As you might expect, the quality of the forecast is best for the quarter immediately ahead,
with a wider range of possible values as time becomes more distant. These are, in fact, excellent
forecasts and may be relied upon as the best data available at the time.

Other economic data also are included in The Business Policy Game reports. The impact
of price level changes is shown by the Consumer Price Index (CPI), also reported for each country
quarterly. The Stock Market Index, reported only for Merica, may be considered as roughly com-
parable to the Dow Jones Industrial Average, the Tokyo Stock Exchange Nikkei 225 average, the
Frankfurt Stock Exchange FAZ index or the Sydney Stock Exchange All Ordinaries index. Interest
rates in the simulation will rise and fall in much the same manner as rates in developed countries
during the last several years. You will find that knowledge of these economic times series data is
helpful as you forecast future levels of simulated economic activity. Suggestions for using
techniques to forecast future economic activity are found in Chapter 6.

63
 FINANCIAL MARKET DATA
Merica N/P/S | ---Credit Rating---
GDP Index (Nominal) 99.90 100.00 | Interest Rates: No. 1 No. 2 No. 3
Consumer Price Index 100.00 100.00 | Long-Term 8.40 9.10 10.60
Stock Market Index 100.00 | Short-Term 11.00 11.20 12.30
3-Month Time CD Rate 9.50 |

Inflation Adjustments

All prices that your firm must pay for goods and services are subject to inflation. Inflation
varies over time and is reported via the CPI for each country. It is important to note that inflation
rates vary by country. Most costs and expenses shown in this manual are those facing your firm
during Year 3, Quarter 1 as you begin the competition. As the competition continues, you will
need to estimate changes in costs during subsequent quarters as price levels change.

To calculate the cost in any subsequent quarter, multiply the cost given for Year 3, Quarter
1 by an inflation multiplier. After you have received the reports for the quarter previous to the one
for which you are estimating costs, divide the country's CPI in that quarter by the CPI in the same
country for Year 2, Quarter 4 (or estimate the previous quarter's CPI if the reports are not available
yet). The resulting value is the inflation multiplier to use. Prices are always adjusted using the
previous quarter's inflation rate as we do not know next quarter's inflation rate until the quarter is
over.

For example, the Year 3, Quarter 1 cost of a 2-line plant in Sereno is given in Chapter 8 as
Ps 7,200,000. If the reported (or estimated) CPI in Sereno for Year 4, Quarter 3 is 145 and the
CPI in Sereno for Year 2, Quarter 4 is 100, the inflation multiplier is calculated as

145  100 = 1.45

Then multiplying the Year 3, Quarter 1 price by 1.45 will result in an estimated peso cost during
Year 4, Quarter 4 of

Ps 7,200,000 x 1.45 = Ps 10,440,000

Similarly, if the Merica CPI in the same quarter turns out to be 124 (a much lower rate of
inflation), the price of a 2-line plant in Merica will be

$1,200,000 x 1.24 = $1,488,000

Notice that the cost of building in each area is not affected by the then-current exchange rate.
Costs in each country are determined by the different way that prices behave in Sereno and Merica.
But because consolidated financial statements are prepared using dollars, the currency of the parent
corporation's country, the costs (and revenues) will be stated in dollars, translated at the exchange
rate of the quarter in which the financial statements are prepared.

64
Exchange Rate Calculations

Continuing the example discussed under "Inflation Adjustments" above, you need to
translate the Sereno plant cost to dollars to determine how the cost of the plant will be reported in
your consolidated financial statements. We will have to estimate this amount using the forecast
of exchange rates in the Quarterly Industry Report for Year 4, Quarter 3. If the forecast for Year
4, Quarter 4 turns out to be 25.20 pesos to the dollar, the translated value of the cost in dollars can
be estimated as $414,000:

Ps 10,440,000  25.20 = $414,286

IMPORTANT NOTE
This is not the same amount that it would cost to build a similar plant in
Merica in the same quarter. The relationship between costs in the two
countries will change over time because of the different rates of inflation and
the different rates of change in the exchange rate. This example shows an
exaggerated difference in the rates and should not be taken as a typical
case—only one that is possible. But it does illustrate the way the relationship
may change dramatically over time.

Market Areas

There are four market areas in The Business Policy Game. Three are located in Merica and
one is in M/N/P/S. For purposes of identification, numerical designations have been given to each
Merica area. The Eastern portion of Merica is known as Area 1, the Southern portion as Area 2
and the Western portion as Area 3. M/N/P/S is the fourth market area. (If your simulation
administrator has chosen a domestic competition and Area 4 is also Merica, Area 3 will be the
Southwest and Area 4 will be the Northwest.) The level of economic activity in each of these areas
is growing although the rate of growth differs between the two countries.

The numerical designations for the first three market areas correspond to the home areas
of the companies that are competing in the simulation unless your simulation administrator notifies
you of a change. At the end of Year 2 (when your management team takes over your firm), each
company has one production plant which is located in its home area. All home areas are located
in Merica. Company 1 has a production plant located in its home area, Area 1. Company 2 is
located in Area 2 and Company 3 in Area 3. If more than three teams are competing, Company 4
has Area 1 for its home area along with Company 1. Company 5 is located in Area 2, Company 6
is located in Area 3, Company 7 is in Area 1 and Company 8 is in Area 2. As yet, no company
has located any production facilities in M/N/P/S, but all have been exporting from their Merica
manufacturing plants to N/P/S. The administrator of the simulation will assign team numbers to
each company and will let you know how many companies are competing. The administrator may
also change the home are locations.

65
 Distribution, Research and Development, Production

While each company has been producing goods only in its home area, each firm has sales
offices and an operational sales force in all four areas and has been marketing its product actively
in each market area. During the fourth quarter of Year 2, each company posted a wholesale price
of $10.00 per unit in market areas 1, 2 and 3 and Ps 75 in N/P/S. During that quarter, selling and
distribution expenses (including advertising, salespeople’s' compensation, transportation,
administration and depreciation) averaged approximately $2.12 per unit sold in Merica and about
Ps 13 in Sereno. Transportation costs vary according to the distance of the shipment. Details on
marketing and distribution are described in detail in Chapter 5.

Research and development outlays have been restricted somewhat during the past year.
The director of research and development, however, has been very optimistic. She recently re-
ported to the board of directors that she believes the new model on which her staff currently is
working should significantly enhance sales and, perhaps, bring substantial savings in production
costs. The former management had threatened her department with a substantial budget cut. She
has requested that you continue her present budget and gradually increase the amount allocated for
research and development expenditures. She will then be able to retain and expand her competent
professional staff and continue research efforts, which she believes will bear fruit within a
relatively short period of time—perhaps within a few months, but most likely by the end of Year
3. See Chapter 7 for additional details about research and development.

In order to match production output more closely with sales volume, the former manage-
ment of your company deactivated two of its production lines in your home area about three years
ago (prior to the period shown in the historical data that are appended). Recent sales trends have
been sharply upward, however, and both of these lines were reactivated to increase production
during Year 1. The plant in your home area now has six production lines available, each with a
capacity of 52,000 units per quarter under normal operating circumstances. Production costs at
present are about $4.67 per unit. Details of costs and production capacity adjustments are de-
scribed in Chapters 7 and 8.

Other operating expenses, for which plans must be made, include inventory storage costs,
training expenses, executive compensation and interest on bonds and loans. The Merica and N/P/S
governments tax corporate income at 39 percent of net profits. In addition, N/P/S has a 10 percent
value added tax on goods sold within the country. The income tax laws of both countries contain
no provisions for carry-back of losses to reduce tax liabilities in prior periods. They may, however,
be carried forward indefinitely to reduce tax liabilities in the future.

Each company has issued 6 million shares of capital stock, which is traded in the
over-the-counter market. The bid price for each company's stock, along with earnings and divi-
dends per share, is quoted regularly in the Quarterly Industry Report. None of the firms in the
simulation, however, has yet declared a dividend. Chapter 9 includes additional details about the
financial environment.

66
 Reports

Computer-generated reports will be provided to your management team following each

quarter of simulated operations. These may be delivered to your team by the simulation adminis-
trator, or they may be placed in files that you can download from the Internet or loaded on your
firm’s flash drive. These may be viewed or printed using the BPG program. Each quarter’s reports
are kept in a separate folder so all reports are available to you at any time assuming you view the
reports on your computer each quarter.

The Business Policy Game program incorporates a Report Viewer. Choose View, and the
BPG Report Viewer window will replace the main window. Click on the Reports menu item and
choose from the list of reports that are available to you. To view a different quarter, select the
desired quarter under the Quarter menu item and then select the report using the Reports menu
item.

Examples of the reports for the fourth quarter of Year 2 are reproduced in Appendix C, along with
a summary of data from Years 1 and 2. Three types of reports may be provided each quarter:

1. Quarterly reports about individual companies, distributed confidentially only to the

company concerned.

a. Financial reports, including

(1) Consolidated Income Statement

(2) Consolidated Cash Flow Analysis
(3) Consolidated Balance Sheet

b. Operating Information Report, including

(1) Production Cost Analysis

(2) Output, Inventory and Sales Analysis
(3) Production Capacity Status
(4) Standard Costs per Unit
(5) Sales Force Analysis
(6) Current Period Decision Summary

2. Reports about competitors that are distributed to each company in the simulation.

a. Quarterly Industry Report, providing information about each competitor of the type
that could be gleaned from industry sources, quarterly financial statements and
public reports. Financial Market data, GDP and exchange rate forecasts also are
included.

b. Annual Industry Report, distributed in the fourth quarter of each year, contains
annual data on operations of competitors. This information is the type that could
be obtained from corporate annual reports.

67
 c. Historical Data for Years 1 and 2, distributed only in Year 2, Quarter 4, includes a
summary of pertinent information for the last eight quarters leading up to the be-
ginning of the competition.

3. Optional supplementary reports that may be distributed by the simulation administra-

tor:

a. Your simulation administrator has the option of distributing evaluation and scoring
reports showing the relative performance of the teams in your world on a variety of
evaluation measures.

b. Vignettes that develop situations and problems outside the scope of the computer
model, and that may require a response from your team or a discussion among class
members.

Data that are reported in the various reports are described in subsequent chapters.

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 4. DEVELOPING THE STRATEGIC PLAN AND SELECTING
STANDARDS OF SUCCESS

Your simulated firm may be viewed as a single business corporation or as a strategic busi-
ness unit (SBU) of a diversified corporation. In either case, you are calling the shots without
interference from above. Your responsibility is to stake out the direction the firm will take in terms
of its mission, develop realistic goals and objectives, create a strategy which will enable your firm
to attain its stated goals and successfully implement its strategy. Your reward could be mega-
salaries and a golden parachute.

Vision

The firm’s vision might be referred to as its dream. The vision focuses upon what the
firm is striving to become in the future including the image it desires to create among its
suppliers, competitors and customers. It provides a long-term perspective. The vision may
include reputation, capabilities, activities and competencies to which the firm aspires. It
provides direction for future development.

Mission

The firm's mission serves as the compass for the organization. It describes the business of
the firm and places limits upon the firm’s activities. The mission deals with the scope of activities
performed and the purpose of the activities. It should also provide motivation for the firm’s
employees. The mission statement may focus upon products and/or services being provided, major
ingredients in a line of products, central technology of an organization, customer groups served,
customer needs, etc. (Thompson and Strickland, 1992). Be sure to leave your rose-colored glasses
home when you develop the mission statement. This one requires some realistic thought.

Defining Goals and Objectives

The manner in which the performance of your simulated firm is evaluated will depend, in
part, upon your ability to meet the goals and objectives that your firm has set. We recommend that
your firm explicitly develop a written set of goals upon which your management can agree very
early in the simulation. The simulation administrator may require your firm to submit a written

69
document defining your goals and objectives, along with the strategies and policies which you
have formulated to achieve these goals and objectives.

Many students, and business managers as well, tend to define their goals and objectives in
very general terms. For example, an objective might be "to make a satisfactory profit on a mini-
mum investment in physical and financial assets." While this may sound fine on the surface, a
closer examination reveals that this statement really doesn't provide very much guidance for the
operation and evaluation of your company.

Explicit Definition

Strategic goals and objectives should set the hurdles for your firm to jump when pursuing
its mission. They provide the specific level of accomplishment desired. If you don't know the
exact height of the hurdle, how high should you jump? Imagine the glory and fame obtained from
jumping five feet to clear a one-foot hurdle, or consider the possibility of jumping three feet to
clear a ten-foot brick wall.

We think of goals as desired long-term performance levels and objectives as short-term

performance targets. Both goals and objectives state what is to be achieved and when it is to be
accomplished (Quinn, 1980). Your strategic goals and objectives should contain the following
four components (Hofer and Schendel, 1978):

"1. the goal or attribute sought

2. an index for measuring progress toward the goal or attribute

3. a target or hurdle to be achieved

4. a time frame within which the target or hurdle is to be achieved."

We urge your firm to provide explicit definitions of your goals and objectives. An explicit
definition can be made either in absolute or in relative terms. Examples of absolute definitions
include:

1. Maintain a rate of return on stockholders' end-of-Year 2 investment

in your company's stock (goal) of at least 20 (hurdle) percent (index)
through Year 7 (time).

2. Maintain a growth rate for assets (goal) of at least 5 (hurdle) percent

(index) each year (time).

3. Generate sufficient sales to maintain a share of the market (goal)

equal to at least 30 (hurdle) percent (index) by year five (time).

Examples of comparative statements of objectives (relative to competitors) include:

70