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I enrolled for Capsim project to sharpen my management and financial knowledge through a simulation that present environments similar to actual businesses. At least, it was both educative and thrilling to be the decision maker. After participating in seven rounds, I realized that business managers have difficult decisions to make because of operating in a highly competitive environment where consumer behavior is not easy to predict. Therefore, decisions require experience within a particular industry and collaboration with stakeholders such as employees, shareholders, and others. I participated in team Chester where made decisions to compete with four other participants. In this paper, I will reflect on the strengths, weaknesses, opportunities, and threats of learning through the capsim simulation based on the results I got from the rounds and overall experience.
Round 0 started with equal platform with all key parameters similar. Contribution margin was 28.3%, profit $4, 188, 507, zero emergency loan, return on asset (ROA) 4.4%, asset turnover (A.S) 1.05, market share 16.67%, and earning per share (EPS) at $2.09 among others. Through the round 1 to 7, Chester team had to make decision to either make or break the firm.
Round 1 started well with contribution margin increasing to 30.9%, which was second best among the six participants. Cumulative profits doubled from $4.18 to $8.90 million as ROA increase to 4.7% and ROE increase to 9.0%. Similarly, liabilities reduced from $48.28 million to $47.71 million. Chester made better decisions that round 0, which saw major performance parameters assume positive value. In general, Chester got four stars in round 1 scoring above the board in contribution margin above 30%, no emergency loan, positive stock price change, and positive sales margins. From the above positive data, it is evident that my team utilized assets well and created value to the shareholders. Reducing liabilities also confirms that team Chester reduce company debts from round zero.
Round 2 provided even better results than round one, which is an indication that team Chester was making progressive change and positive learning curve. I had the best contribution margin of 36.71% among the six participants with profits hitting %19.92 million from only $4 million in round 1. Resultantly, cumulative profits hit $28.82 million. ROA increased to 16.1% from 4.7% and ROE increased to 27.5% from 9.0%. Asset turnover also increased to 11% as market share change from 16.7% to 22.11%. Again, Chester performed exemplary in achieving the best contribution margin in the industry. It also utilized its assets as well as gain more dollars for the shareholders. A progressive manager learns mistakes from previous decisions and improve from it. That is what I did at Chester to make it perform well. Overall, the team earned four stars spread in contribution margin (more than 30), positive margins, no emergency loans, and increased stock prices.
Round 3 decisions were more successful that previous decisions because it expanded profits and other key performance metrics. Despite contribution margin reducing, it was still above the minimum 30% required to earn a star. Contribution margin was 31.1% as market share increase to 24.49%. Increased market share indicates that marketing decisions such as promotion enhanced popularity of Chester products. Again, it could imply that R&D decisions produced quality products that enjoyed a higher level of differentiation in the market. Increased market share increase revenue earned because products have huge market potential (Drechsler & Natter, 2012). ROA and ROE increased to 10.9% and 16.9% respectively. Increased ROA signifies that decision makers utilized assets of the firm in manner that increase return while positive ROE indicates that shareholders will have increased confidence in the firm because of value addition (Gugler, 2003). As a matter of fact, Chester had the highest EPS of $7.36 in round 7. Profits increased to $14. 71 million and cumulative profits hit $43.54 million.
Round 4 contribution margin increased from 31.1% to 33.1%, which implies that team Chester managed its expenses satisfactorily. Consequently, profits increased to $27.84 million thereby pushing cumulative profits to $71.39 million. Potential and existing shareholders would be happy with increased net income. Employees would also feel motivated to work harder if the company increase its profits; they would not worry about salary issues. Again, ROA and ROE increased to 16.9% and 24% respectively, which confirms the ability of team Chester to increase asset utilization capacity and maximization of shareholder value. Market share also increased to 29.18% from 24%, which affirms Chester’s ability to convince more consumers to purchase its products through effective marketing as well as R&D decisions. Overall it was a successful round that encouraged me to play further.
Round 5 marked a slight reduction in contribution margin to 33.0%, but still suppressed the minimum required value of 30%. Profits also increased to $31.41 million as cumulative profit figure hit $102.79 million. ROE increased to 21.4% and ROA increased to 17%. Market share hit 28.19%, which was reduction. Overall, team Chester received a four-star rating with a star each in contribution margin, margin, increased stock prices, and no emergency loans. From the results in round 7, team Chester increased confidence among shareholders in improving profits and enhancing plant utilization capacity. The team was also able to maintain significant market share to drive sales revenue and positive margins.
Round 6 produced the second best contribution margin against the five rivals to stabilize it at 36.5%. Profits increased to $36.67 million as cumulative profits increased to $139.46 million. Team Chester’s profit was the highest in round 6. While market share reduced to 25.82%, the team was able to maintained a positive change in net cash position for the company. Again, the outcome indicated that Chester managed its expenses to realize reasonable profits. Variable expenses such as human resource cost of production and advertisement costs should not be at lower levels without compromising on quality of products and marketing goals. Team Chester seem to balance costs and benefits to create extra wealth for stockholders in round 6.
Round 7 was the last competition cemented team Chester’s dominance against the five competitors based on performance. Contribution margin hit a record highest of 39.9% emerging the most profitable firm within the industry. Profits earned in round 7 hit $45.54 million as cumulative profits reached $185.01 million. ROE and ROA increased to 19.9% and 18.8% respectively. In general, the team received four-star rating scoring in all key performance indicators except inventory management. In the end, Chester produced the best results in terms of profits and contribution margin margins, which are the issues investors would be interested in before making decision to buy stocks or not. With high income and positive cash flows, Chester could reward its shareholder’s attractive dividends to increase their confidence in the company and invest more equity.
Indeed, making better decisions each successive year requires understanding the industry dynamics and financials. I managed to make better decisions for Chester team through online video tutorial that provided guidance on how to balance the KPIs. I must also acknowledge the help of capsim support that withstood my inquisitive nature. I contacted the support whenever something was not clear. The capsim manual provided at the beginning of the capstone project also provided guidelines. I could constantly check profoma statements to ensure I had profits of at least $ million before proceeding to the next level. For every decision I made in the marketing, R&D, production, and financials, I could check the impact in annual report before moving forward. Effective decisions in management requires studying trend of the financials such as profit history, revenue, ROE, ROA, and other aspects. Above all, commitment and carefulness is what differentiate between good and bad decision makers.
In as much as the decision from round 1 to 7 cumulatively produced the best results, the company did experience challenges. No business finds it smooth through a given financial year because decisions made face challenges from different spheres, which all require delicate balancing. One persistent problem that troubled the firm throughout the seven rounds and denied it a five-star rating is inventory management. For example, the decisions led to production of approximately 7,000 units in round 3 against available capacity of 6,000. In round 4, the firm produced 9,000 units against the available capacity of 6,000. Similar excesses were experienced in round 5 where the firm produced 11,000 units instead of the required 6,000. After realizing the problem, I did reduced inventory in round 6 by producing 6,000 against 4,000 units required. However, situation turned pout worst in round 7 when the company produced 10,000 units against the maximum available capacity of approximately 6,000. Evidently, team Chester did not utilize the Just-in-time (JIT) policy well, which could have seen it produce based on demand rather than exceeding the capacity. Therefore, the firm incurred avoidable storage costs of excess inventory, which would have increased the income earned. Among the storage costs that comes with excess inventory include pilferage of items, theft, and damage (Omar & Sarker, 2015). Effective inventory management practices can caution a company from incurring avoidable expenses associated with stock excesses.
Another major weakness is that Chester team did not pay dividends to the shareholders during the seven financial years. In as much as making profits is the primary goal of a company, shareholders would only feel happy if they receive dividends as a confirmation that the company is doing better. Indeed, team Chester never experienced serious cash flow crisis during most of the rounds. It could have paid shareholders to increase their confidence in the company. Again, the firm never increased shares of the company because number of outstanding shares remained stagnant at 2,000,000 till the seventh round. At least Chester could have issued some shares to increase capitalization of the company. Constant number of shares for seven years running can communicate a negative image to the potential shareholders that the stocks of the company are not attractive enough.
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I did benefit from the opportunities in the capsim project. I started the project with quite limited financial knowledge because I am not traditionally a finance student. However, I finished knowing some important information about what it takes to manage a business. Anderson (2005) advices that simulation programs are effective way of bring the practical business environment to classroom for learning. I think I gained a lot from the program.
First, I noted that inventory control can determine whether a business satisfy its customers or incur the costs of unplanned production. Apart from the market potential, production personnel should balance the available capacity with the production schedule. I also realized that consumers respond differently to decisions by the management concerning prices, promotion, and R&D. Either way, consumers are always the boss and their needs should be addressed. Second, a company should maximize the value of shareholders’ equity to enhance its position and competiveness in the industry. Return on Equity (ROE) is a critical ratio that communicate to the shareholders whether the company is maximizing their wealth or not.
Among the key business terms, I learned include return on asset, asset turnover, dividends, stock prices, and earning per share. I learned that better asset utilization increase ROA, more sales revenue can have measured based on asset turnover, and dividends guided investors on where to invest their capital. Earnings per share is the amount shareholders earn on each shareholding they possess. Business should always make profits to avoid being bankrupt and requesting for emergency loans.
In future, I would apply the lesson learned in the capstone to answer questions in interview. As an as admission counselor in a college or university, I would use the knowledge to sell myself as having management skills and critical thinker. I did realize that capsim simulation is not just about punching figures. It involves understanding the cause effects, and being analytical, which are all indications of effective management skills.
Apart from helping in interviews, I would apply the experience I gained in managing my own business or venture in future. I now know and understand the drivers of business profitability as well as inventory management skills. For example, I would use inventory management skills I gained to ensure I produce based on capacity and demand instead of incurring over stock costs or stock out costs. I would also improve the return on equity (ROE) to increase returns on initial investment and the value of my business. I would also value how much my assets contribute towards the long-term stability of my firm. I now know that taking emergency loans is a sign of financial problems. A well-managed business should shy away from taking emergency loans. In general, the capsim experience prepared me to be an effective manager that knows how to strike a balance among key drivers of a company profitability. As an entrepreneur, the skills gained are important.
I must admit that capsim simulation program has its weaknesses that can prevent a learner from gaining knowledge effectively. I did notice that there is limited leaner-teacher contact, which may not be that healthy for slow learners. Similarly, late studiers would like me would also face difficulty because classes for the program are scheduled at odd hours.
Mostly, we made decisions on R&D, marketing, production & human resources. However, no clear guidance exists on how to manage the total quality management decisions as well as corporate social responsibilities. Typical businesses are careful about corporate social responsibility decisions, which I did not get well in the capsim. I suggest that the class should be designed to have one final round where the professor show students how they should have made better decisions in inventory, marketing, production, human resources, and other key performance indicators (KPIs) instead of assuming we learned. Again, students should read widely before applying the knowledge in their later career endeavors because reversing decisions is not possible in normal business decision making environment as witnessed in the capsim project.
If I were to do the capism again, I would do various things differently. First, I would pay attention to inventory levels. From the capsim results, team Chester scored well in contribution margin, positive sales margins, stock prices, and emergency loans, but never got a star in inventory management. I did produce more inventory without considering the capacity available, which eventually shot up storage costs. Second, I would wish the professor showed us the basics and principles of decision making in the rounds without letting us read the manual only. I understand the capsism is supposed to enhance personal reading and learning, but that would be difficult If the learner does not know how basics. Apart from that, I would enhance my contact with the professor, especially through the chat option, to improve the quality of my decisions. If I had timely feedback and guidance from the professsor, I could ask question through during each round. I would have made the 5 stars because I would have been able to understand where I was going wrong.
- Anderson, J. R. (2005). The Relationship Between Student Perceptions of Team Dynamics and Simulation Game Outcomes: An Individual-Level Analysis. Journal of Education for Business, 81(2), 85-90. doi:10.3200/joeb.81.2.85-90
- Drechsler, W., & Natter, M. (2012). Understanding a firm’s openness decisions in innovation. Journal of Business Research, 65(3), 438-445. doi: 10.1016/j.jbusres.2011.11.003
- Gugler, K. (2003). Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment. Journal of Banking & Finance, 27(7), 1297-1321. doi:10.1016/s0378-4266(02)00258-3
- Omar, M., & Sarker, R. (2015). An optimal policy for a just-in-time integrated manufacturing system for time-varying demand process. Applied Mathematical Modelling, 39(17), 5327-5329. doi: 10.1016/j.apm.2015.03.041