Just Starting – Basic Business Guidelines for Planning (Capsim Explanation)

There are a few basic business guidelines that you should follow when planning your business.  These guidelines are general enough where they apply to just about every business model out there.  I came up with these guidelines after performing in the 99th percentile of the national Capsim simulation.
What is Capsim?  Capsim Business Simulation
Capsim is a business simulation model.  Here is how it works in a nutshell.  Your business sells sensors and you compete against 5 other companies.  You start out with a number of products that are placed on in the high end market, performance market, size market, traditional market, and low-end market.  There is an R&D, Production, Marketing, Human Resource, TQM, and Finance Tab.
In the R&D tab, you can move your products on a perceptual map with size and performance on the axis.  Based on where your product sits in the plane, determines which of the 5 markets the product is in.
In Production, you decide how much you are going to produce, buy/sell capacity, and increase or decrease automation.
In Marketing, you set your prices and determine your administrative and marketing/sales budgets.
In Human Resource, you determine how much training you want to give your employees and how many times to train them.
In TQM, you can spend money to reduce costs in areas like administrative, R&D research time, and material costs.
In the finance tab, you sell stock, buy stock back, take out loans, pay back loans, pay dividends, and pay back emergency loans.
Capsim is fairly simple; there are 7 guidelines to follow for the simulation and how they apply to real-world situations (Bold).
1.   Have at least one excellent product in every market.  2 in the markets that you are dominating.  There is no need to switch markets or move all of your products to one niche.  The simulation tells you what criteria the customers want.  Listen to your customers and give them what they want.
Don’t try to make products something they are not – this is why you won’t be seeing the Chevy Cavalier in the high-end market anytime soon.
2.   Borrow money – it takes money to make money.  Don’t be afraid to borrow the maximum amount 3-4 rounds in a row.  In the simulation, the only problem with borrowing money is that you are paying interest.  But as long as your automation, marketing, sales, and TQM are not maxed out, then you should be borrowing money; assuming that you don’t have cash on-hand.  Make investments now to pay off in the future.
3.   Don’t give up your market share.  Too many teams make the mistake of moving products from low-end to traditional or traditional to high-end and then not having any products in those markets.  Why do they do this?  I do not know.  Simple math will tell you that if there are 5 products in one market your share is 20% if all products are equal.  And if there is 5+1(the product you are moving) in a market then your share is 16.66%.  This move makes more sense in real life than it does the simulation.  In the simulation, every team can meet the same criteria and there is minimal branding.  As previously said, don’t try to make products something they are not, make new ones for new markets.
4.   Keep your products up-to-date.  Other than the low-end market, you should be revising your products every year to finish in the same year, so they can be revised again in the next year (because it is a year-long turn based simulation). Keep revising and give your customers what they want.
5.   Don’t overestimate and keep cash on-hand.  Perhaps the number one error teams make is that they overestimate their market share and leave a bunch of inventory on hand.  Then, they end up having to take an emergency loan, pay a bunch in interest and don’t produce as much inventory next year because they have so much excess.  This leads to separated employees, whom they have to pay a separation fee.  Bottom line is, don’t overestimate your predictions.  Be realistic in your predictions and produce about 2 months of inventory on top of that.  Most importantly, know what your competitors are doing.  As they move products and create new products they will affect you.
6.   Automate everything.  This is the main part of the game.  If you automate, you reduce costs and at what expense?  You pay some more interest when you borrow the money.  By the end of the game, you should be pushing 65% margins.
7.   Spend now to reduce future costs.  Right along with the automation, you need to spend money now in order to reduce future costs and increase profits.  You should be investing to the max (until diminishing returns) in sales/marketing/TQM/automation/HR.  You’ll find by the end of the simulation that you have so much money you can’t spend it, so you might as well just borrow the money now and get your costs down for the 8 years.  Focus on immediate gains with positive future impacts.
8.   Aim for the high-end price range.  No, don’t just aim for the high-end market on the perceptual map, but aim for the high-end price range of the market.  So, if the range is $20.00-$35.00, you should be pricing at or around $35.00.  What does this do for your company?  It increases your margins, minimizes your risk, and you have to sell less material to make the same profit.  If you are automating, pricing high, marketing, selling, and investing in TQM there is no way you will lose money.  Even if you are awful at forecasting.
 
-      Matthew Sodoma

Comments

  1. No doubt it was Egyptian Proverb who is often attributed with saying the following -Do not rejoice over what has not yet happened.

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