A Virtual Business - Cranfield...

EuroShop: A Virtual BusinessUser Manual

Table of ContentsHow can I learn during the Business Simulation? ..................4An introduction to EuroShop .......................................................6Managing your Virtual Offices ....................................................8Cash Flow .................................................................................... 13Financial Report ......................................................................... 14The Management Report.......................................................... 16Formulating a Strategy ............................................................. 19Additional Resources................................................................. 20Bowman’s PUV Matrix (Competitive Compass) ................. 21Further Reading .......................................................................... 22

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On a personal level, you have the opportunity to reflect, for instance, on your own feelings, attitude, behaviour, and contribution during the participation? What is the experience telling you about yourself? What did you like and what did you dislike about your participation in the business simulation and why? What would you change if you could? How do you think other team members viewed your involvement in, and contribution to, the business simulation?

On an interpersonal level, how did the team work together or not as the case may be? Who took the lead? How were roles allocated? How was conflict handled? What did you admire in others’ contribution and why? How were failure and success handled?

On the technical level, challenge yourself by seeking a role which is unfamiliar to you. For example, if you are comfortable with Finance, why not volunteer to take the marketing role on behalf of the team, and vice versa.

A game or the real thing?The simulation seeks to mimic the reality facing managers in their efforts to achieve success in a competitive business environment. In one sense it is artificial and no more than a game. In another, more critical, sense it is no different from the ‘reality’ with which managers have to contend in managing their own businesses. Maybe the only ‘unreal’ aspect of the simulation is that failure results in nothing more serious than wounded pride.

An opportunity to learn the lessons of failure or success in a ‘safe’ environment.

You and the competitorsBoth you and they are making plans to gain competitive advantage and market leadership. No plan will survive intact its collision with reality - that is as true of your ‘real world’ business context as it is true of the simulation.

Risk and uncertaintyNothing is certain. All courses of action carry risks. The apparent lack of control over the ‘game’ can be frustrating particularly if you are losing. At worst you may blame the simulation, its unclear rules, its refusal to behave in the way that you want and expect it to behave, or, maybe, you just think of it as bad luck – who and what do you blame for failure in your ‘real-world’ business context?

Information and JudgementInformation is the raw material of the decision-making process. There never seems to be enough to create absolute certainty. But then, if there was, there would be no need or scope for judgement. You might note that in the simulation, unlike the ‘real world’, you have no more or less information than your competitors. So it figures that differential performance must relate to the different judgements made in interpreting and acting upon that information!

How can I learn during the Business Simulation?

The business simulation provides you with an opportunity to learn in a risk free environment. So ask yourself how you will exploit and benefit from the opportunity?

The business simulation provides you with an opportunity to learn in a risk free environment. So ask yourself how you will exploit and benefit from the opportunity?

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In addition to all the essential elements of business management, the simulation contains many features relevant to current business e.g. relationship marketing, supply-chain variables, retail distribution channels, Total Quality Management, environmental considerations, customer perceived value and staffing commitments.The simulation does not attempt to reproduce all the conditions that may be met in a real-life situation. To do so would result in a model too complex to be of any immediate value, but the simulation is sufficiently realistic to emphasise the need for the integration of diverse company functions.You are managing a European retail electronics company buying in a range of related products: Games Consoles, MP3 Players and Notebook computers and selling direct to the public through your own retail shops, in competition with several other competitive companies all with similar products and equal financial and physical resources. As a Management Team you will take a series of decisions in your Virtual

Head Offices to improve the profitability of your company. All decisions are interactive, in that the decisions of any one team will impact on the whole market place and on the performance

of competitors. Decisions will have both short term operational and long term strategic dimensions.The ultimate success of your company will be a reflection of the quality of your management of the different functions of the business, and your judgement of

the competitive market-place.This manual has been laid out in functional directorships: Director of Marketing, Sales, Operations and Finance.

To enhance your experience in the simulation we would like you take on functional roles, as this will help to demonstrate the importance of cross-functional interdependency in the real business world. Depending on your final team size, you may find that you will have the opportunity to have 2 marketing directors and/or 2 finance directors working together in the same team.

An introduction to EuroShop

This simulation has been designed to illustrate the relationships between the different functions of a business, e.g. purchasing, marketing, distribution, human resources, retailing, finance, and the interfaces in a competitive market place.

There will be a trial session and this will be the opportunity for you to test out the impact and relationship of your functional role and identify the functional networks you will need to form to take the business forward!

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As the Management team of your company, you work at a “Virtual Head Office.” This comprises a Reception area, the Chief Executive Office, an office for each of Purchasing, Distribution, Marketing and Financial Control and HR functions, in addition to the Board Room where all decisions are made.To move around inside the offices on your PC, use the mouse to navigate around the menu on the left hand side of the screen. The information available is expressed in text, numeric and graphic format. In addition, as you hover over the numeric data in many of the areas, the cursor arrow will become a hand and allow you to open a graph within.

Chief Executive OfficeHere you are able to view the key indicators of performance: Cumulative profit, Market share and a Decision Sheet (summary). When you access the Decision Sheet, you will notice that the data in the far right hand column is a repeat of the data input in the previous period. The system processes whatever data is sitting in this column so you need to ensure that it reflects your current decisions. (Please ask your tutor for an explanation if this is not clear.)

The Board RoomIn the Board Room you will find 4 decision sheets; one for each functional area of the business. They are placed on the table and can be activated by passing the mouse over them (you can also access these decision sheets from the left hand menu). These decision sheets are your only way to relay your business decisions to the market.It is your responsibility to check the accuracy of your input on the decision sheet.The length of a trading period is 6 months. You are going to take your first set of decisions at the beginning of Period 3 (P3), after having had the opportunity to analyse the data for the previous year.

Managing your Virtual Offices

All companies start from the same point with equal share of the total market.

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MARKETING DIRECTOR BRIEFThe Marketing Director has some key areas of concern in the simulation.Typically, you will look at the issues and solutions in the areas of:

• The external environment, understanding customer needs by looking at:• Market Trends

• Marketing Mix:• Price• Product/mix & positioning• Promotions: Advertising and Product promotions• Place

• Company reputation: Environmental concerns

• Brand and brand image

• Performance measures: market share and margins

Your decisions fall into the following functional areas:

DistributionPromotions: There is an immediate effect of all expenditures on promotional activities for each product and also an impact on the competitive index.

MarketingPricing: The selling price per unit must be in whole numbers, and goods cannot be sold below the cost of purchase. The upper limit will be determined by market forces. In no period can a price be more than 250% higher than in the previous period.

Advertising: The amount spent on store publicity will impact on your Attraction Index. The effect of investment is immediate and cumulative.

Environmental IssuesYour active concern in these important issues may be demonstrated by investment in green campaigns which has a positive impact on your Attraction Index.

Attraction Index is your ability to attract customers into your shops. It is a reflection of the number of shops (which enhances your capacity to attract customers), the advertising of your company (which increases the company image), the quality of your services (which puts the customer at ease and builds customer loyalty), your investment in environmental issues (which increases your appeal to the customers sensitive to ecological concerns), and your previous market share (which is the reflection of your gained reputation).

Your Market Share is affected by Price, Product Promotion (Perceived Price), Product Quality, and your ability to attract customers into your retail shops. The mix of these factors form the Competitive Index of which the Attraction Index is a part.

Margins per UnitIn the Marketing area, margins per unit do not include:

• Administrative costs• Warehousing• Environmental spend (as shown on the decision form)• Loan Interest

“Matching customer needs with organisational capability now and in the future”

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OPERATIONS DIRECTOR BRIEFThe Operations Director has some key areas of concern in the simulation.Typically, you will look at the issues and solutions in the areas of:

• Purchasing finished goods -when to buy to meet company objectives:• Right quality (see Journal)• Right quantity - best deals (see Journal)

• Inventory Control: volume and quality

• Storage costs

• Performance measures: efficiency, % quality


PurchasingFinished goods are variable in quality (see Journal each period for the updated offer from the Supplier).

Monitor stock levels and quantities required to achieve company objectives. Purchases must be rounded to the nearest hundred.

Customers are sensitive to the overall quality of products in the market place so an increase in average quality available will enhance market demand.

“Focus on efficiency and effectiveness of the processes”

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SALES DIRECTOR BRIEFThe Sales Director has some key areas of concern in the simulation.Typically, you will look at the issues and solutions in the areas of:

• Setting sales targets

• Ensure sales statistics are available company wide to support commercial strategy

• Plan and manage sales activity• Manage sales team, effectiveness and motivation• Manage sales space• Monitor performance


DistributionCustomer Service: Investments to improve the level of customer service in your retail shops e.g. more check-outs/parking etc. These investments will increase the attractiveness of your shop(s). (see Attraction Index)Retail Shops: The level of sales is influenced by the number of retail shops. Generally, the more shops the greater your potential to increase sales. However, the effect the additional shops have on index of attraction is delayed by one period.Each period, a shop can handle a limited quantity of goods, measured in shelf space. Each shop has a maximum shelf space of 30,000 space units per period. The different products have different space requirements: MP3 Players require 1 space unit; Consoles require 5 space units; Notebooks 10 space units. Your company sales are limited to the total volume that your shops can handle in a period.You may change the number of your shops by investment or disinvestment. Newly acquired shops come into service immediately. There is a penalty clause if you do not wish to renew the rental of a shop, this being equal to a period rental. (Put in a negative figure if you do not wish to renew!)The volume of goods available for sale is a combination of the stock at the end of the previous period plus the purchases of the current period. You can never sell more than the 90% of the goods available because you are obliged to keep a 10% stock-holding of each product.Sales achieved as a direct result of your decisions are seen as “First Choice Sales”. “Additional Sales” are orders which a competitor has not been able to satisfy and from which you have benefited. You will gain these only if you have goods available and your competitive index is above average. Competitive advantage depends on the number of retail shops and the effectiveness of the managers and sales persons.

Administration & Human Resources (Financial Control)Human Resources: Employees in your retail shops fall into 2 categories – Managers and Sales persons. (For salaries see The Journal). Their effectiveness is driven by the number employed and your investments in them. The number of sales people can be increased or decreased, but a negative figure, indicating a reduction, cannot exceed 20% of current levels in any one period. No severance pay is payable. A Manager is automatically employed with each new shop you open at an annual salary of €28,000.

“The right people in the right place to maximise sales effectiveness”

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FINANCE DIRECTOR BRIEFThe Finance Director has some key areas of concern in the simulation.Typically, you will look at the issues and solutions in the areas of:

• Financial statements -Balance Sheet and P&L Account:• Revenue, Profitability and Cost trends

• Minimise risks and losses• Monitor Cash Flow

• Cash projections to determine loan requirement or repayment• Budgets - functional business cases - seeking sustainable CA

• Environmental concerns• Reduced bank interest rate

• Payment of Tax• Performance measures: profitability ratios


DistributionRetail Shops: There is a charge per period for Rent and Council Tax for each shop. For Period 3, the charge is €180,000 per year. These charges appear in the P&L Account on the Finance Report and may vary from period to period. See The Journal.

Administration & Human Resources (Financial Control)Loans: Each company has cash available and the ability to borrow from the bank. The amount which the bank will be prepared to lend reflects their assessment of your performance and is in effect a credit rating for the period.Money borrowed will be at 5% per period. Preferential borrowing rates apply to companies committed to so called “Green Issues” - see below Environmental Issues.New loans taken out and loan repayments take effect as cash transfers at the end of the period. Entering a +ve figure indicates a new loan request. Loans may be repaid at anytime by entering a -ve figure.

Environmental Issues: Normal bank interest charges for the period will be reduced by 0.5% for each €100,000 invested in environmental up to a maximum of €500,000 in any one period (the maximum reduction is 2.5% per period).

Bank interests are charged on previous borrowings; the reduction for environmental investments is seen in the period in which the investment has been made.

“Oversee the preparation of financial reports, direct investment activities and implement cash management strategies”

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Your total cash position is the cash shown in the latest Balance Sheet less commitments for the period. This may be supplemented by new loans.

It is crucial to have a tight control on the cash available in the period and on the future trend of company cash flows. The risk you run if you do not take control is to suffer an automatic reduction for your decisions in the period, that is the system will proportionally reduce your investments.To help you understand better how cash flow is calculated please observe the following terms of payment for expenditure and investment.

Cash (from the end of the previous period in the balance sheet)

• Tax payment (due at the beginning of the year)

• Commitments for the period e.g. shop rental and personnel salaries

+ New loans- Loans repaid

Payment of Tax.There is corporation tax of 50% on all profits made in the period. Tax has to be paid annually at the beginning of each year and is automatically deducted from cash reserves.

The Cash Available is a consequence of:

Payments made in the period, after commitments:New Central OutletsNew Sales PersonsNew Managers (1 per outlet)Promotions2/3 of Purchased Products2/3 AdvertisingIncentives for Sales People

Payments due in the following period (creditors):Warehouse CostsAdministrative Fixed Costs1/3 AdvertisingCustomer ServiceEnvironmental Expenditures1/3 Bought-in Goods

Cash Flow

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The Financial Report includes the Profit and Loss Account, Balance Sheet, R.O.S. ratio and the current borrowing limit. Your PC shows P&L A/c per period; the Financial Report shows it cumulative for the year (2 periods).

37%

Financial Report

PROFIT AND LOSS ACCOUNTThis is the record of income and expenditure. It will show:

Profit & Loss €

Total Revenues Revenues earned from sales of all products in the period i.e. sales volume x product price.

Bought-in GoodsQuantity of goods purchased in the period x price as shown on The Journal (including any discounts on volume).

(Adjustment for movement in stocks held)

This is the change in the value of stock from one period to another. Calculation: Current Balance Sheet (B/S Goods Stock Value LESS previous B/S Goods Stock Value. If adjustment is (+), closing stock value has increased. If adjustment is (-), closing stock value has decreased.

Cost of Goods Sold

Cost of Goods Sold (COGS) = Opening Stock + Purchases - Closing StockIn EuroShop: COGS = Bought-in goods after adjustment for stock change. If the adjustment is (-), ADD to bought-in to calculate COGS. If adjustment if (+) SUBTRACT from bought-in.

Gross Profit Total Revenues less Cost of Goods Sold = GP. GP also known as Contribution Margin.

Administrative CostsThese are fixed additional costs incurred in running the business. €250,000 plus a further €20,000 per existing outlet/shop and €10,000 for each new shop.

Administrative Fixed Costs

Warehouse CostsThere is a standing charge of €30,000 for the warehouse facility plus an additional 1 euro per space unit for each product that remains in stock at the end of the period. Stock is always identified as sitting in the warehouse not in the shops.

Logistics Costs

Commercial ExpenditureIncludes all spend in the period on Promotions, Advertising, Investment in People, Customer Service and Environmental spend

Rent of Outlets/ShopsRental cost of all existing outlets, plus any newly acquired in the period. If you remove an outlet, you are still required to pay the rental for that period, but the outlet cannot be used.

Sales Person Wages Current wages of existing employees plus any newly acquired in the period.

Manager Salary Current salary of existing managers plus any newly acquired in the period.

Total Salaries

Commercial Costs

Operating Profit Revenues minus all costs listed above. Also known as PBIT (Profit Before Interest & Tax).

Loan InterestInterest of 5% per period is charged against the loan on the previous Period’s Balance Sheet. Can be further reduced by investments in environmental issues in the period.

Finance

Total Costs Total of all above costs.

Profit Before Tax (PBT) Also referred to as Net Profit. Revenues minus Total costs

Tax for Period 50% tax on profits for the period

Profit After Tax (PAT) Profit after tax to be carried forward into Retained Earnings on the Balance Sheet. One of the success criteria used.

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BALANCE SHEET

ASSETS

Cash - cash available before commitments

Debtors (Accounts receivable) - A third of revenues of the period

Finished Goods Stock Value - The value of the stock shown in the report

LIABILITIES

Creditors (accounts payable) - the amount of outstanding bills due to be paid in the next period

Provision for Tax - The accumulated provision since the last tax payment. Tax payments are made at the beginning of each year from cash

Loans - The figure of loans outstanding includes all previous loans plus the loans applied for in the current period minus any loans repaid

Cumulative Profit - The accumulated net profit (retained earnings)

Share Capital - This figure remains unaltered throughout

Equity - This is cumulative profit plus share capital

Example Decision Sheet

Decision Sheet P1 Jan-Jun P2 Jul-Dec P3 Jan-Jun

Marketing

Price games console (€) 185.00 185.00 185.00

Price mp3-player (€) 50.00 50.00 48.00

Price notebook (€) 635.00 635.00 645.00

Advertising (€) 210,000.00 210,000.00 250,000.00

Distribution

Promotions games console (€) 0.00 0.00 0.00

Promotions mp3-player (€) 0.00 0.00 0.00

Promotions notebook (€) 0.00 0.00 0.00

Customer Service (€) 20,000.00 20,000.00 30,000.00

No. of Outlets (Shops) (+/-) 0 0 0

Purchase

Bought-in finished goods games console 8,500 8,500 6,700

Bought-in finished goods mp3-player 19,000 19,000 14,000

Bought-in finished goods notebook 900 900 1,350

Administration

Loan - application or (-) repayment (€) 300,000.00 300,000.00 300,000.00

Environmental Investment (€) 0.00 0.00 100,000.00

No. of Sales People (+/-) 0 0 0

Incentives for Sales People (€) 15,000.00 15,000.00 15,000.00

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In addition, a new Management Report will be produced which will provide information in the following areas:

• Total market statistics for the period showing demand, sales, prices, market shares, and average investments in advertising and customer service

• Details of your company performance in terms of unit sales, revenues and competitive position in terms of investments in advertising and customer service

• Details of your stock

• Details of your retail shops, your personnel, and their level of effectiveness

The JournalThis report gives you a forecast of the economic climate for the period you are about to enter and thereby aids your decision making. It includes the following information:

• The cost and the quality of the goods you can purchase; any quantity discount terms and the threshold above which such a discount applies

• The annual rent and council tax payable on your retail shops

• The annual salary level for Managers and sales persons

• The economic indicators. 1.0 is stable: < 1.0 = Recession: > 1.0 is a buoyant economy when compared with period 1

• Total number of retail shops in the market place

• Market research indicating the sensitivity of your customers to several competitive factors

The Management Report

At the end of each period your decisions, and those of your competitors, will be processed and the system updated.

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Financial Report: The report will contain information on financial performance in the form of a Profit and Loss Account and Balance Sheet, together with R.O.S ratio and your bank borrowing limit.

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EuroShop Key Decision Map

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In formulating strategy, you need to answer 5 Key strategic questions.

As you can see from the diagram, this is an iterative process, one that needs to be repeated continually as the market around you changes.

Where to Compete?Understanding the external market place in which we operate...

• What has been the trend of demand for all products in this market? (see: Management Reports and Marketing Office information)

• What is the forecasted demand for each product? (see: The Journal)

• What opportunities exist – will the market be under or over supplied and how might this inform your marketing decisions?

• Do you need to change the scope of the business? e.g. Sell only 1 or 2 product ranges and how easy or difficult might it be to re-introduce a product into the market?

• Will volume sales and margins be sufficient to pay your bills?

• What are supplier trends in terms of price and quality? (see: The Journal)

• Do you have enough information to determine future supplier offers? (see: The Journal)

• What are consumer buying trends and how do you believe these might change in the future?

• Is the concept of product life cycle important to us? How can it influence our decisions?

How to gain advantage? Where do you want to be positioned in this market? High Volume, low price OR Low

volume, high price OR somewhere in the middle?

• What market share might this new position generate for you?

• If you change price, by how much do you need to change volume to achieve the same gross margins?(see: Materials - Gross Margin table)

• Which products provide you with greatest profit/ best margins?(see: Marketing Office & Margins template in Materials area/manual)

• How can you gain cost advantage? Through your purchasing decisions and/or understanding why your customers buy?

What assets are required?

• What new or additional investments do you need to change consumer perception of your products in the market?

• What cash and or loan is needed to fund these investments?

As a team, what skills/ways of working do you require to manage this business effectively?

Formulating a Strategy

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What assets do we have?

• What skill sets do you have in your team? What is your current cash position? Do all decisions need to be paid in cash in the period? See: Cash needed (online)

• Is the bank able to offer you a loan? See: Administration Office – Bank Loan

• If cash is short, which budgets need to be cut?

• How much shop space do you currently have, and is it fully optimised? See: Flow Chart

• Are your employees happy in their work? Are they effective? Are they motivated? See: Administration Office – Human Resources

• What stocks do you currently have? Is it the 10% minimum? See: Distribution Office – Retail Sales

How to Change?

• What do you need to do differently to implement your strategy?

• If all other companies invest and change, what will happen to your company?

• Do you need to downsize or expand? • Do you need to be more aggressive in

your marketing activities?

Board Room Psychology?

• Do you know anything about the New Management Teams in your market?

• Are they risk takers? • How influential are they? • Will they have a strong leader? • What do you think are their next moves?

Throughout the simulation you are supported by the Cranfield Team.

In addition, to support your business simulation experience you will have access to an on-line resource (the Knowledge into Action Resource Engine) containing a brief summary of selected key management concepts, tools and techniques which you may find useful to refer to before, during and after participation. It is deliberately non-prescriptive in order to allow you the freedom to seek out particular information whenever you need it.

The Strategy Module is a good example of the frameworks that are available to you to help break down the simulated business environment into more manageable pieces and give you time for reflection during the decision making process. It is important to mention that some of the elements we have included in this support tool are not immediately applicable to the simulation itself but are there to stimulate further thinking.

Additional Resources

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The Competitive Compass is a matrix based on the premise that we are, as customers, motivated to purchase for reasons other than price, thus, separating out Value from Money.The X-axis represents perceived price, the Y-axis represents perceived use(r) value.

This model is used to monitor how the customer perceives us against our competitors, how they judge us on a number of components of value, i.e. reliability, customer satisfaction, depending on industry product etc. There are 8 viable strategic options on this matrix. Increasing perceived value or decreasing perceived price will increase market share

for example. Companies in NE quadrant are Luxury, SW (Bottom left) are often low cost producers (Ryannair). SE (bottom right) companies are typically monopolies, this corner is also referred to as Suicide Corner, NW (Top left) companies are value driven.

In EuroShopPerceived price = actual price + promotional activity.Perceived use(r) value = Quality and Attraction Index (all the components/investments that make the business more attractive). It is suggested that the most sustainable strategy in many markets is one that drives North adding perceived value, whilst really understanding customer needs, and therefore becoming a low cost producer.

So you not only need to understand your customer needs in EuroShop which you can track in the Journal - buyer behaviour, but you will also need to track how you are perceived against the competition.

Customer Matrix (Competitive Compass)

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Market Position: Bowman’s PUV Matrix

from ‘Strategy in Practice’ , Professor Cliff Bowman

Baines P, Fill C, and Page K (2010) ‘Marketing’ Oxford University Press

Belbin, R.Meredith (1981) ‘Management Teams: ‘Why They Succeed or Fail’ Heinemann Professional Publishing Limited

Bender, Ruth & Ward, Keith (2002) ‘Corporate Financial Strategy’ 2nd edn Elsevier Butterworth-Heinemann

Bowman, Cliff (1998) ‘Strategy In Practice’ Pearson Education Limited

Johnson, Gerry & Scholes, Kevan (2002) ‘Exploring Corporate Strategy’ (6th edn)Pearson Education Limited

McDonald, Malcolm & Christopher, Martin (2003) ‘Marketing: A Complete Guide’ Palgrave MacMillan

Porter, Michael (1980): ‘Competitive Strategy’ New York: Free Press

Porter, Michael (1985): ‘Competitive Advantage’ New York: Free Press

Further resources: see the School of Management website:http://www.cranfield.ac.uk/som

Further Reading

Cranfield School of ManagementCranfield,Bedford,MK43 0AL

http://www.cranfield.ac.uk/som/businessgamesKaren ValverdeEmail: [email protected] +44 (0)1234 754427

© Cranfield School of Management 2017

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