CAPSIM: Decision Analysis and Simulation

This is the detailed account of our journey through CAPSIM's Business Simulation game. We were a team of six - Dhiraj Jagota, Raghav Shourie, Rohit Singh, Roopanjali Jasrotia, Shreya Dhar and Luv Rustagi (me), who participated in this simulation as part of our first year PGDM (SPJIMR) course of Decision Analysis and Simulation (DAS). The story  of our company ERIE takes you through all the ups and downs our team went through and is full of passive emotion if you can make that out!

ROUND 0

Our team had a mixed overall performance during the Practice Rounds, while we scored the highest on most of the parameters in Practice Round 1, we could not repeat our performance in the second practice round and ended up as the 5th among 6 teams. This sudden swing in performance alerted us and we decided to closely look at the courier reports of the two rounds and consolidate our learning before the actual rounds began.

ROUND 1

While analysing our own and other teams’ (including the Computer-teams) performance in the practice rounds, we had identified the following as the crucial aspects for achieving success:

Learning from Practice Rounds

• Accuracy of forecasting (most of the teams had been either too conservative or had ended with excessive inventory at the end of practice rounds)
• The Computer-teams had increased the automation levels in the TRADITIONAL & LOW end segments significantly. This gave us an opportunity to take a call on the benefits and disadvantages of doing the same.
• Increasing automation makes buying capacity costly, so basis estimated growth rates in different segments, we had to plan future capacity requirements and see where we could avoid buying capacity at higher cost by adding it at an earlier stage.
• Early Launch with sub-optimal coordinates, proved to be a useful strategy, when at the end of the previous year teams had almost similar specifications for their products. We used this to great effect in the HIGH end segment, but underestimated the market potential.
• Financing of investments, in plant & automation must be done with equity or debt. This we had learnt from the performance of other teams, some of which ran into emergency loans during practice rounds.

Round Performance: 

• Accurate Forecasting – Except the TRADITIONAL segment the left-over inventory was less than 50 units in all segments
• Highest Market Share –We were the joint overall market leaders with Andrews (18% market share)
• Best Financial performance- We excelled in ROE, ROS, ROA, share price and the profits.

Team Dynamics & Decision making strategy

• The team had unanimously decided that everyone will be a part of all decisions and we will not divide the responsibilities among us on the basis of functional areas.  During the decision making process, no major conflicts or difference of opinions were observed in this round.
• We were buoyed up by the success we had had after ROUND 1. We were awarded “The Cap” for our achievement which resulted in a lot positive energy and a firm resolve to prepare well and excel in the next round also.

Blind spots 

• Lowest percentage of SG&A/Sales costs: While we did discuss this briefly, we failed to pay due attention that some companies had a significant jump in their awareness & accessibility percentages.

ROUND 2

We analysed in detail the courier report for the ROUND 1, and gave due consideration to the performances and strategies of other teams apart from discussing our own, for ROUND 2.  We had a 7 hour long marathon meeting before the actual decision making session to prepare for the decisions.

Round Performance

• Significant drop in our performance, we ended up at the 5th position in terms of most of the financial ratios.
• Forecasts were largely within reasonable proximity to actual sales, except for the LOW end segment.
• We found that we were much more conservative in our estimates when compared to others in terms of forecasting.
• LOW END segment, we failed to estimate the how much the drop in prices will be (which all other teams executed) and had kept a much higher price, resulting in large inventory holding costs.
• Highest prices in the SIZE & PERFORMANCE segments when compared to competition resulted in low customer survey scores, apart from the reason that our products were not the best in terms of specifications.
• HR module: We decided to follow the strategy the computer teams had followed in practice Round-2.

Team Dynamics & Decision making strategy

• How much increase in Automation is apt? We decided to follow the strategy of the computer teams and increased automation to similar levels as those teams had done by ROUND-2. 
• The results were not at all according to our expectations. We were quick to recover and analyse that the key reason for the drop in performance was that the other teams had outperformed us rather than any major wrong decisions that we took.
• Sales & Promotion Spends: When this point came into discussion, the team decided to be within the top 3 companies. We were the companies with the lowest proportion of these spends in ROUND 1, so we had tried to compensate that and ended up with the highest percentage of SG&A/Sales after ROUND 2. Although since our performance had been far from satisfactory, the team formed an unfavourable opinion on consistently increasing/maintaining these high spends. 
• The team was focused again with “Retaining the CAP” being our prime motivation.

Blind spots 

• Decreasing Leverage: Our leverage had been consistently decreasing, as we were relying on equity as well as current debt for investments. We did not realize the implications of a low leverage (for the balance score card as well as ROE) at that stage and thus this was not a part of our team discussions.

ROUND 3

There was a substantial drop in the performance of all the teams and we were placed 1st amongst the human teams, just below the computer-teams. The key highlights of our performance were:

Round Performance

• Market Share: We were second in terms of market share. Had performed well in TRADITION, LOW and HIGH end segments, but not so well in PERFORMANCE and SIZE segments due to sub-optimal product.
• TQM: We spend 8 million on TQM and reached comparable improvements when compared to competition in all areas except cycle time reduction where we had decided to spend in coming rounds.
• Emergency Loans: This was something totally unexpected. Due to large inventory left unsold, and our financing through current-debts we had ran into emergency loan of 2 million, which had a severe hit on our share price. We decided to stop relying on current debt and only use long-term debt and equity for financing investments.

Team Dynamics & Decision making strategy

• While making the decisions, their two distinct opinions in the team on sales/promotion costs. In spite of having the highest SG&A/Sales expenses in Round-2 we had ended up at the 5th spot in Round 2, this had tilted the majority opinion towards cutting down on these costs to Round 1 level where we had done well. The other opinion was to continue with these high costs, which lost favour during the discussions
• Considering our consistently below par performance in SIZE & PERFORMANCE segments it was decided to launch two new products one in each segment.
• We were able to retain the CAP again this time owing to the choice of winning criterion as ROE.
• The team was re-energized by this and decided to continue with a focused approach in the coming rounds.

Blind spots 

• Awareness & Accessibility: We did not give due consideration to the fact that the other 3 human teams had all increased their awareness scores above 80% in almost all segments. The accessibility scores for them were still between 50-60% but were slightly higher than us. Instead we were more inclined to draw conclusions that it was sufficient to just stay competitive in these two areas, since we had performed well in ROUNDS 1,3 where he had lower spends, as compared to ROUND 2 where he had the highest promotion spending.

ROUND 4

We were warned about the possibility of a recession after this round so all teams were cautious in adding capacity in this round. Due to fewer investments, there were opportunities to score high on the financial ratios mainly ROS.

Round Performance

• The emergence of FERIS – While we were at the second position in terms of most of the financial ratios, the key highlight of the result was the exceptional performance of FERIS, who were far ahead in terms of almost all the performance metrics.
• Market Share – We had become number third in terms of market share after ANDREWS & FERIS.
• S&P Rating – This was one of the items of the courier report we could rejoice, as we had received AA rating, which had significantly reduced the borrowing rates for us.
• Awareness & Accessibility- We were placed at number 3 in terms of both awareness and accessibility in almost all segments, and in spite of having good products on the buying criteria our products had suffered.

Team Dynamics & Decision making strategy

We realized that we were lacking in awareness and accessibility scores. With Advanced Marketing coming in, we decided to maximize our promotional spending. The team realized that even though we were at the second position, FERIS who was the leader was so far ahead, that being second was nothing to boast about.

Blind spots 

• Capacity Utilization: FERIS had improved their capacity utilization to impressive levels; we did not discuss this aspect and overlooked excess capacity we had on various product lines, which had been continuously eating up our profits in the form of depreciation.
• Leverage: We continued to be ignorant about the falling leverage, which was going to have implications particularly for the balance-score card scores later.
• Not completely selling the capacity of PERFORMANCE segment product- We had decided to kill one of the products in the PERFORMANCE segment, which had 71 units leftover, but instead of killing the product completely, we decided to keep one unit of inventory so that those 71 units sell at fixed price instead of at a lower price. We did not realize this will hamper our plans to launch a new product in the next round as we would not be able to remove this product from our product list.

ROUND 5

FERIS’ amazing recovery in ROUND 4 after their subdued performances in first three rounds had taken us off-guard. We had by now realized that promotion and sales spends had an important part in final customer survey scores in the following rounds. This round turned out to be one of the biggest setbacks for us, from where we could never really recover.

Round Performance

• FERIS continued to be on a roll- FERIS excelled and further improved their performance with cumulative profits to the tune of 34 million. Other teams had also started chipping in.
• Not updating the HIGH end product- Amidst the hurried decision making process for ROUND 5, we had missed updating the product specifications for HIGH end segment, which later on proved to be the costliest mistake and contributed to us being wiped out of this segment in ROUNDS 6,7.
• Costly attempt to increase the leverage- It had started playing on our minds that our ROE was suffering as a result of a low leverage (least in the industry). Thus we decided to buy back equity and pay $2 per share as dividend. The move backfired as our forecasts were not up to the mark and we ended up with 700 units of unsold inventory across segments, which pushed us into losses.
• Loss & Emergency Loan- We were in for another shock when we found out that our ROS is negative for the first time and we had made a loss of 1 million

Team Dynamics & Decision making strategy

The team had consciously decided to focus on making moves to increase the leverage. The team decision to pay dividends was backed up by the fact that the projected statements before uploading decisions had shown that we would have enough cash even after paying a dividend of $2/share. But as the results were declared, and we ran into an emergency loan (owing to excess inventory), there were voices in the team that claimed to have forewarned against paying dividends. We realized that the way ahead was very challenging and the possibility of being pushed out to a point of no return was very real.

Blind spots 

• FORECASTING for the WORST case and PRODUCING for the BEST: We had not yet followed this Golden Rule, instead all our energies during forecasting had been focused on accurate forecasts and equating that in the production numbers. We had achieved great success with this approach during initial rounds and stuck with it. But in the latter rounds, it had become difficult to forecasts with such accuracy and hence it was important to maintain a window between the worst case and the best case, so that at the time of uploading decisions itself the company was well equipped for the worst case. This tactic had been missing from our repertoire so far.

ROUND 6

We were desperate to make a recovery. But perhaps the mistakes committed in the last few rounds had compounded to push us so far back that it had become a formidable task to recover.

Round Performance

• In terms of the profits we were at the bottom of the pile just above the Computer teams who had suddenly lost their touch and ran into huge losses.
• Playing on the Price- We decided that the only way we could compete was on the basis of price, and we lowered our prices to a level, we thought the competition would not stoop down to. The move killed our margins but to make matters worse, as we were still trying to forecast just for the likely case, we overlooked the possibility of others getting a STOCK-OUT, as a result we missed capturing a huge potential in the TRADITIONAL segment.
• Wiped out of the HIGH end segment- We were now paying for our two critical mistakes and were not even competing in the HIGH end segment
• Promotion & Accessibility now coming into play- These two were the real differentiators now and with the Advanced Marketing module putting limits on the incremental gains a company could make in these two, we were at number 3 or 4 in awareness and accessibility in all segments in spite of spending heavily on these fronts. The detrimental effects were so evident that even though we had the lowest price in the LOW end segment (where price is the most important criterion) we were number 4 in terms of market share in this segment.

Team Dynamics & Decision making strategy

The team was apparently distraught after the results were declared and the feeling that ERIE was at a point of no return was prevalent. While other teams had emerged from huge losses in the earlier rounds, we were going down the spiral. 

Blind Spots

By now all the blind spots had been exposed, and we were realizing how each mistake of the past rounds was hitting us hard. The only blind spot at this stage could have been not focusing enough on the BALANCED SCORE CARD, but we had other challenges, namely, survival – which kept us busy.

ROUNDs 7 & 8

The disappointment was very evident in the team when we got together for making the decisions for the last two rounds. The usual effervescent fervour which was an important component of our team meetings was missing. But even when our company was facing one of biggest lows of the entire journey, we were together, with the team collectively sharing the blame for whatever had happened just like we shared the joys of winning the cap twice.

Round Performance

• For both of these rounds we forecasted for the worst case and produced for the best case scenario for market share. This was the first time we used this approach and thus the projected statements that we were seeing before uploading the statements were indicating the worst case scenario and we could prepare for it well in advance.
• We followed the strategy of raising prices and rationalizing market share expectations to preserve our margins.
• The sudden recovery of the market after recession in Rounds 7 & 8 had taken us by surprise and the capacity which we had for our newly launched product in Round 8 was well below our market potential.
• Recovery of sorts: The improvement in the results was there to see, fro ROUND 7 & ROUND 8 we were able to obtain significant improvements in our financial ratios. We crossed 6% & 8% levels in ROS respectively in 7 & 8 for the first time. We moved from 4th spot to 2nd or 3rd sport in terms of most of the financial ratios. We had the highest ROA is Round 8.

Handing over a Company with Strong Fundamentals: 

• We did not resort to any of the “end-gaming tactics” and were proud of the fact that at the end of Round 8 we were handing over a company with the best S&P rating of AAA, which was a testimony to the fact that our performance had been the most consistent in the industry when all 8 rounds are considered together. At the same time it was important to know that a team like FERIS got a rating downgrade in this round, probably due to their sporadic aggressive tactics, a luxury which they could afford.
• While fierce competitors like FERIS lost market share (-3%), we rose against the odds to gain market share (+2.1%) cumulatively in the last two rounds. 
• Our share price had the highest positive change of $18 in the last round. Although we had learnt our lessons the hard way in the last 3 rounds, we ended on a high note! 

KEY TAKEAWAYS

• Maximize awareness & accessibility before ADVANCED MARKETING is enabled. Advance marketing will limit the effect of spends and it is not easy to recover if a company is below 80% in awareness/accessibility after this module is enabled.
• Focus on capacity utilization. Plan capacities well in advance, immediately after the ambiguity of the recession is cleared, rationalize capacities, while making enough provision for a robust recovery of volumes in Round 7 & 8.
• FORECAST for the WORST, PRODUCE for the BEST. It is important to be prepared for the worst case as that will ensure that the company never runs into emergency loans.
• Keep a vigilant eye on the BALANCE SCORECARD. It is important to keep a close track of the metrics on the balanced scorecard ROUND 5 onwards. This will help the teams avoid anomalies like extremely low leverage by round 7/8 (especially when they are profitable), so that they can take measures to productively use excess cash in investments, buy backs or paying dividends from ROUND 6 onwards itself.

PS: Would like to know the reader's comments, if the inferences/learning drawn above made sense to their CAPSIM experience ... :)

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