Transcript No Slide Title

MANECSIM
A Business Simulation for Managerial
Economics, Applied Microeconomics,
and Pricing Courses
Fernando Arellano, Ph.D.
1
What is MANECSIM?
• ManecSim is a business simulation in which
decisions are mostly related to topics
covered in a managerial economics course
or in courses covering demand analysis or
pricing.
• The simulated firm manufactures three
products with different demand and supply
characteristics.
2
What are other characteristics?
• Each simulated period represents one
quarter.
• Up to twelve quarters can be simulated.
• Up to sixteen student teams can
participate.
• In addition to financial statements and
supplementary information, teams receive
historical information on sales volumes,
prices, GDP, CPI, and other macroeconomic
variables.
3
What topics can be covered?
– Demand analysis
– Sales forecasting
– Cost analysis
– Pricing
– Break-even analysis
– Cash budgeting
– Financial and operating leverage
– Market structure
4
What decisions can be made?
• In the marketing area:
– Pricing
– Setting promotional expenditures
– Setting customer service expenditures
– Purchasing of information about the
competition
• In addition, participants have to make
market and firm sales forecasts for each
product.
5
What decisions can be made?
• In the finance area:
– Requesting 90-day loans.
– Investing in 90-day certificates of deposit.
– Distributing dividends.
6
What decisions can be made?
• In the production area:
– Ordering production.
– Selecting between two suppliers of raw
material that offer different terms of payment.
7
What are the variables?
• The following variables can be controlled in
setting up the scenario for the simulation:
– Behavior of GDP, population, CPI, interest
rates, unemployment, industrial production
index, and house starts.
– Income elasticities.
– Price elasticities.
– Promotion and customer service elasticities.
– Population elasticities (to model tastes and
preferences).
8
What are the variables?
• The following variables can be controlled in
setting up the firm at the beginning of the
simulation:
– Capital structure
– Cost structure of each product
– Sales volumes and prices
– Production, marketing and administrative costs
– Profit margin per product and firm overall
profitability
9
What are the variables?
• The following variables affect MARKET
demand in ManecSim:
– Market price (average price of all firms)
– Income
– Population
– Tastes and preferences
– Promotion expenditures
10
What are the variables?
• The following variables affect FIRM demand
in ManecSim:
– Firm price
– Promotional expenditures
– Customer services expenditures
11
What are the variables?
• Firm performance is evaluated on the basis
of product contribution margin, overall firm
profitability, and sales forecast errors.
12
What do students learn?
• They learn to identify the different variables
affecting market and firm demand.
– To improve analysis and decision making process,
number of decisions affecting demand are
restricted at the beginning of the simulation.
• They learn to identify the degree to which
different variables affect market and firm
demand:
– Their decisions on pricing, promotion and
customer services expenditures have different
impact on market and firm demand.
13
What do students learn?
• They value the importance of pricing:
– When they decide on prices and observe their
impact on sales.
– When they set prices that are higher or lower
than their competitors’ and consequently,
decrease or increase their market share.
14
What do students learn?
• They value the importance of other demand
variables under the control of the firm:
– When they decide on promotion and customer
services expenditures.
– When they set expenditures on these variables
that are higher or lower than their competitors’
and as result, combined with price, decrease or
increase their market share.
15
What do students learn?
• They calculate break-even points:
– When they want to determine their minimum
prices or minimum production volumes.
• They identify and measure contribution
margin:
– When they calculate the contribution of each
product to cover fixed costs and generate
profits.
• They do profit and cost analysis:
– Before and after they make their decisions.
16
What do students learn?
• They value the importance of accurate sales
forecasts:
– When they need to set production levels.
– When they overestimate production and are left
with inventory, incurring in storage cost.
– When they underestimate production and lose
sales, foregoing profits.
17
What do students learn?
• They value the importance of accurate cash
budgeting and improve their budgeting
skills when they:
– Do cash budgeting to determine their funding
needs (or their excess cash).
– When they underestimate or overestimate their
funding needs and receive emergency funding
at a penalty rate or sacrifice the opportunity
cost of surplus cash.
18
What do students learn?
• They can do regression analysis using the
variables and values present in the
simulation:
– When they want to establish the relationship
between sales and variables affecting demand.
– When they forecast sales
• They identify factors favoring price wars:
– When they recognize cost structure and price
elasticity as relevant variables.
19
What do students learn?
• They recognize the difference between
market structures:
– When they set prices for two products that
have oligopolistic markets and one that is a
monopoly.
– When they forecast sales at the market and
firm levels and recognize the difficulty of
forecasting sales in competitive markets.
20
What do students learn?
• They apply the time value of money
concept when they make the decision on
whether to:
– Purchase raw material using cash or using a
short-term loan from the bank or trade credit
from the supplier.
21
What do students learn?
• They value the importance of financial
leverage:
– When they request short-term loans, invest in
short-term CDs, and distribute dividends
22
What do students learn?
• They appreciate the importance of
operating leverage when they:
– Observe different impact on profits when sales
increase or decrease for each product.
• The three products have different cost
structures and respond different to changes
in price.
23
What do students learn?
• They practice reading and interpretation of
financial statements when they:
– Analyze the impact of their decisions on profits
and other financial indicators.
24
How are decisions scheduled?
• To accomplish the objectives presented
before, decisions are scheduled in a way
that precludes complexity at the beginning
and allows for concentration on specific
topics. The number of decisions allowed are
sequentially increased quarter by quarter.
25
How are decisions scheduled?
• First decision: Participants are asked to
forecast sales at the market and firm levels
while maintaining the same prices and
expenditures on promotion and customer
service.
– Production orders and financing are automatic
• The purpose is to observe the effect of
income, population, and tastes and
preference on sales volumes.
• Their report will show their sales forecast
errors at the market and firm levels.
26
How are decisions scheduled?
• Second decision: participants are allowed to
change prices.
– Production orders and financing are still
automatic.
• The purpose is to observe, besides the
effect of income, population, tastes and
preferences, the effect of market and firm
price elasticities on each product.
• There is no competitive interaction in one
of the products, which is a monopoly.
27
How are decisions scheduled?
• Third decision: Participants are permitted to
set prices again. All other variables are
constant.
• This allows them to observe again the
effect of prices and give them the
opportunity of correcting or fine-tuning
their pricing decisions.
• They still produce automatically what they
will sell and automatically cover their
funding needs.
28
How are decisions scheduled?
• Fourth decision: in addition to setting
prices, participants are permitted to change
expenditures in promotion and customer
service.
• This allows them to observe the effect of
promotion and customer service elasticities
on sales volumes and on profits.
– Firms still have their Chief Operating Officer
and their Chief Financial Officer taking care of
production orders and funding needs.
29
How are decisions scheduled?
– The effectiveness of their pricing and
promotional and customer service decisions will
be expressed in their products’ contribution
margin and in their firm overall profits.
30
How are decisions scheduled?
• Fifth decision: The Chief Operating Officer
resigned. Teams now have to make
decisions on production orders.
• Firm profits will depend now not only on
their pricing and promotional and customer
service decisions, but also on the accuracy
of their sales forecasts.
– Firms may either have excess inventory or
inventory lock-outs with corresponding effects
on profits.
31
How are decisions scheduled?
• Sixth decision: The Chief Financial Officer
also resigned. In addition to their previous
decisions, participants are responsible for
funding decisions.
– Now, firm profits depend on the accuracy of
their sales forecasts and their cash budgets.
32
How are decisions scheduled?
• Seventh decision: Firms can select, for each
product, raw materials from two different
suppliers with different prices and term
payments.
• The purpose is to apply the time value of
money concept.
• They have to decide between purchasing
for cash or on credit.
33
How are decisions scheduled?
• Eight decision: Firms can distribute
dividends (if they have retained earnings).
• The purpose is to observe the impact of
dividends on liquidity and profitability.
• (Firms are not listed on the stock market so
no stock price effect can be observed).
• The distribution of dividends affects the
capital structure of the firm. Thus, the
effect of financial leverage can be also
observed.
34
How are decisions scheduled?
• Ninth decision: All decisions are permitted.
• If a product was initially set with a high
fixed cost and high firm price elasticity, a
price war may be underway.
• Up to twelve rounds of decisions can be
made in ManecSim.
• This decision schedule can be altered to
accommodate the teaching objectives of
the instructor.
35
Summary
• Participants develop abilities and skills in:
–
–
–
–
–
Demand analysis
Sales forecasting
Cost and profit analysis
Pricing
Cash budgeting
• They experience competition and the effect of different
•
•
market structures on their pricing and forecasting decisions.
They recognize the relationship between the areas of
marketing, production, and finance, and the relationship
between the income statement, the balance sheet, and the
cash flow statement.
They experience the effect of cost structure (operating
leverage) and capital structure (financial leverage) on
liquidity and profitability.
36