The Smart Phone industry has average consumer demand of between $50 and $90 million per year.  Each company begins with $90 million in cash and $10 million in fixed assets funded by $100 million in equity.  The beginning annual budget is $40 million, and after the first year, 5% of annual revenues will be added to the budget.

QUESTION

Smart Phone Simulation

BUS 4998/BUS 7999

The Smart Phone industry has average consumer demand of between $50 and $90 million per year.  Each company begins with $90 million in cash and $10 million in fixed assets funded by $100 million in equity.  The beginning annual budget is $40 million, and after the first year, 5% of annual revenues will be added to the budget.  Each year, though, $1 million in operating costs and $10,000 in HR costs is ‘sunk’ (meaning you have no control over it).  As with Real Estate, consumers are looking for specific things in two areas, the phone itself and screen size.  See the Smart Phone Consumer Information spreadsheet for more detail, but consumer preferences, in order of importance, are as follows.

For the Phone:

Price

Brand

Speed

Battery

Camera

For Screen Size:

No Preference

5 inch

6 inch

7 inch

These preferences should be considered when developing a Mission Statement and resulting strategy for your company.

The Smart Phone simulation has the same modules as the Real Estate simulation, however some of the content in those modules is different.  What follows is a module-by-module summary of what you will see.

Management:

All entries in the Strategy Journal for the following items, except for Objective, range from Low to High.  For Objective, rather than having everyone select Net Profit, you will be able to choose which objective you want, however that objective has to be consistent throughout the simulation.  But no matter which objective you choose, you should also try to make some profit.  Also keep in mind that your performance will be evaluated by how well you achieved your objective.  Note, too, that your objective has to be reflected in your Mission Statement.

Choices under Objective are:

Net Profit

Revenue

Units Sold

Brand Equity

Market Share by Revenue

Market Share by Units Sold

As with the Real Estate simulation, what you say in the Strategy Journal should be internally consistent as well as consistent with what you spend for R&D and Marketing.  These are the different Strategy Journal categories.

Pricing

Production

Research & Development

Screen

Speed

Battery

Camera

Marketing

Human Resources

Salary

Benefits

Morale

Ethics

The Strategy Journal also has entries for your Target Consumer Profile.  These entries range from Very to Slightly or Not, and also must be consistent with what you have for, especially, R&D and Marketing.  The categories are:

Pricing

Brand

Screen

Speed

Battery

Camera

Production:

The price can range from $250 to $1,500.  Because there is a 25% retail commission, you will receive only 75% of the price as revenue.  It costs a minimum of $80 (see Product R&D for possible changes) to produce a Smart Phone, and transportation costs (see Marketing for possible changes) are a minimum of $3 per unit.  Inventory carrying costs are $40 per unit, and units in inventory expire after two years.

The price you choose of course has to incorporate your decisions for R&D and Marketing, as well as your Objective.  You also need to be realistic.  For example, a low price might guarantee many units sold, but at the same time could ‘guarantee’ losses.  Since an unprofitable company won’t be able to stay in business long, you should always strive to make some profit (even if that is not your primary objective).

Product R&D:

You have control over the screen size, battery, speed and camera capabilities of your smart phone.  The spending range for battery, speed and camera is from $0 to $6.5 million (and should be consistent with what you have in your Strategy Journal), however camera size has different costs depending on your choices.  The cost implications for your different choices are as follows:

Change in

Size               One-Time Cost           Recurring Cost            Per Unit Cost

5-inch                       $0                                $0                                 $0

6-inch                 $2,500,000                   $500,000                        $7.50

7-inch                 $2,500,000               $1,000,000                       $15.00

If you want to change your screen size, you should do it only once, probably in Year 1, if screen size is something you want to have as a product differentiator.

Sales & Marketing:

As with Real Estate, the more you spend on Sales & Marketing, the higher will be your company’s Brand Equity score.  Whatever you decide to spend is divided equally between Product Line & Brand Advertising and Sales Promotion (this will appear on the results spreadsheets).  You also choose how you want to advertise, but the most effective forms are Internet, Newspapers, Events and Billboards.

You now have three markets in which to sell your Smart Phones, USA, Mexico and Canada.  Moving to either Mexico or Canada (which can increase the size of your market) has cost implications.  There is a one-time fee of $2 million to enter another market, and transportation costs increase from $3 per unit to $4 per unit.

Human Resources:

As with Real Estate, the number of people you need to hire in each area will depend on your R&D, Marketing and Production decisions.  Salary amounts for each area are different, but your options for benefits are the same.  Going forward, pay attention to what is in the parentheses in each area in order to avoid inadvertently having too many people.

Finance:

You can raise money in one of two ways, getting a loan or issuing stock.  Both options do not deliver funds until the next decision period.  A loan carries a 10% interest rate that has to be paid each period, and you can choose how many amortization periods you want (the loan is paid off equally over those amortization periods), ranging from 1 to 5.  Loan payments automatically come out of cash, so you don’t have to include them in your budgeting decisions.  You can take out multiple loans, but the maximum amount you can borrow is $10 million, or a Debt/Equity Ratio of 10%, whichever is lower.

Issuing stock carries no additional expense, but you are limited to issuing a maximum of $10 million worth of stock.  To raise fund from stocks, you have to determine how many shares you need to issue given your stock price.  At the beginning of the simulation all stock prices are $100, so if you would want to raise $1 million in new funding, you would issue 10,000 shares.

Think carefully about raising additional funds at the beginning of the simulation, especially since you have to wait a period before receiving them.

ANSWER

Strategy for Success in the Smart Phone Industry: A Comprehensive Simulation

Introduction

The Smart Phone industry is a dynamic and competitive market with average consumer demand ranging between $50 and $90 million per year. To thrive in this industry, companies need a well-defined mission statement and a strategic approach that aligns with consumer preferences. In this essay, we will explore key modules of the Smart Phone simulation, including Management, Production, Product R&D, Sales & Marketing, Human Resources, and Finance, to optimize the performance of our company while considering factors like pricing, brand equity, market share, and consumer preferences.

Mission Statement and Strategy Development

Crafting a mission statement that reflects your objective is crucial in the Smart Phone simulation. Depending on your company’s objective, such as net profit, revenue, units sold, brand equity, or market share (by revenue or units sold), you should design your strategy accordingly. It is important to maintain consistency between the objective, mission statement, and the allocation of resources in R&D and marketing (Pearce & David, 1987).

Pricing and Production

Setting the right price for your Smart Phone is a balancing act that considers multiple factors, such as consumer preferences, cost of production, and the objective of your company. The price range is between $250 and $1,500, with a 25% retail commission. To ensure profitability, it is essential to strike a balance between maximizing units sold and generating profit. Lower prices may attract more customers, but they can lead to losses. Aim to find the optimal price point that appeals to customers while ensuring profitability.

Product R&D

Consumer preferences play a vital role in the success of your Smart Phone. By allocating resources to research and development, you can enhance crucial features like screen size, battery life, speed, and camera capabilities. However, these enhancements come with associated costs. Consider the one-time and recurring costs associated with different screen sizes, and select the optimal screen size that aligns with consumer preferences and enhances your product differentiation strategy.

Sales & Marketing

Investing in effective sales and marketing strategies is essential for building brand equity and expanding your market share. Allocate your budget wisely between product line & brand advertising and sales promotion (Rouzies et al., 2013). Consider leveraging various advertising channels, such as the internet, newspapers, events, and billboards. Expanding into new markets, like Mexico or Canada, incurs costs but can lead to increased market size. Evaluate the potential benefits and costs before making such a move.

Human Resources

Strategically managing your human resources is vital for operational efficiency. The number of employees needed in different areas, such as R&D, marketing, and production, depends on your strategic decisions. Pay attention to salary amounts and consider the available benefits to optimize workforce management. Balancing your workforce with the demands of each area will help avoid excessive hiring or inefficiencies.

Finance

To raise additional funds, you have two options: taking out a loan or issuing stock. Consider the interest rate and amortization periods for loans, ensuring that your repayments align with cash flow (Shefrin, 2009). Issuing stock allows you to raise funds without immediate expenses, but be mindful of stock prices and the number of shares to issue. Carefully assess the need for additional funds and consider the waiting period before receiving them.

Conclusion

The Smart Phone simulation offers a comprehensive environment to strategize and optimize your company’s performance in a competitive market. By developing a clear mission statement, aligning it with your chosen objective, and considering consumer preferences, you can create a winning strategy. Balancing pricing, product differentiation through R&D, effective sales and marketing, efficient human resource management, and smart financial decisions will contribute to the success of your company. By adapting and refining your strategy based on market dynamics, you can achieve your objectives while staying profitable and competitive in the Smart Phone industry.

References

Pearce, J. M., & David, F. R. (1987). Corporate Mission Statements: The Bottom Line. Academy of Management Perspectives, 1(2), 109–115. https://doi.org/10.5465/ame.1987.4275821 

Rouzies, D., Anderson, E., Kohli, A. K., Michaels, R. E., Weitz, B. A., & Zoltners, A. A. (2013). Sales and Marketing Integration: A Proposed Framework. Journal of Personal Selling and Sales Management, 25(2), 113–122. https://doi.org/10.1080/08853134.2005.10749053

Shefrin, H. (2009). Behavioralizing Finance. Foundations and Trends in Finance, 4(1–2), 1–184. https://doi.org/10.1561/0500000030