Beruflich Dokumente
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A Strategic Management
Simulation
4th Edition
INSTRUCTOR'S MANUAL
Revised September 2001
CONTENTS
Contacting the authors.............................iv
Changes in the Fourth Edition...................iv
Administering the Simulation B an
Overview..................................................v
Section 1
Installing the Software and Running the
Programs
Computer Requirements............................1
Installing the Software..............................1
Running the Program on Your Computer.....3
Printer Details..........................................5
Error Messages.........................................6
Establish Correct Setting for Attachments. .6
Using Yahoo Mail Program.........................6
Section 2
Classroom Topics
General Description of the Simulation........7
Time Requirements...................................8
A Typical Syllabus......................................8
Debriefing Student Teams..........................9
Analysis Forms and Log Books...................9
Peer Evaluation.........................................9
Grading..................................................10
Weekly Analysis......................................10
The Mid-Continent Airline Case................10
Size and Makeup of Student Teams..........11
Special Classroom Activities....................11
An Exercise in Structure and Strategy......12
Stock Price and Performance Points.........12
Counseling and Advising Teams................13
Section 3
Simulation Topics
Demand Algorithm..................................14
Calculating the Breakeven Load Factor.....15
Bypassing a Team If They Do Not Submit
Decisions................................................15
Parameter Changes.................................16
Administrators Report............................19
Instructor Prints Quarterly Financial Report
..............................................................20
Students Print Quarterly Financial Report 20
News Messages to Students.....................20
iii
Incidents.................................................20
Changing Parameters..............................22
Typical Questions from Students..............24
Examples of Takeovers and Mergers.........28
Airline Fourth Edition Instructions for
Students.31
iv
Peggy
954-762-5220
Email:
peggygolden@attglobal.net
Golden
5. Cabin service costs have been adjusted to reflect current food costs.
6. Markets served for odd numbered firms has been simplified and a one-stop
route has been added. In addition, a route that does not include a hub has
been added.
7. An item that needed changing, the cost of fuel, was not made as the entire
algorithm would need to be rewritten. This is a job we did not want to tackle
this edition. The important fact to get across to students is that fuel prices do
fluctuate and are not simply a given.
8. The buy- versus lease-costs have been changed so that it is slightly more
efficient to buy the aircraft. In the past students have been averse to
assuming loans; This should make the playing field more level.
ADMINISTERING THE SIMULATION B An Overview
(More detailed coverage of the following information is later in this manual)
The steps below should give you a general idea how the administration is
executed.
1. Both students and instructor should read Pages 1-39 in the student manual.
2. Establish teams (up to 12) of from one to six students. We strongly
recommend teams of three to four if possible. Teams will select a name for
their airline and make a set of decisions for the first quarter (quarter one).
3. The instructor must decide whether students are going to submit decisions on
their own (team) disk, or submit the decisions on a (paper) decision form. In
this case, the instructor will be entering the decisions on the computer. If you
have teams enter decisions on their own disk, ALWAYS use a virus checker on
each student disk as you put it into your floppy disk drive. If the students are
entering decisions on their own disk, the instructor should prepare the
required disks and/or the computer's hard drive, following instructions in this
manual.
If students are entering decisions on a disk, they must be informed
of the TOTAL NUMBER OF TEAMS PLAYING the simulation before
they begin. The decision entry program will not let them proceed
without this information.
You will also need to establish the name of the industry (A, B, C, D,
etc.) and assign a team number to each team.
4. Merge the decisions for quarter one. During this process you will be asked for
the number of teams playing. Then you will compute the results. This will take
from five to 20 minutes, depending on how many teams you have and
vi
whether you are entering the decisions or whether you are using student
disks.
5. Print the administrator's report for yourself. We like to print it before printing
the student reports as there may be some information on the administrator's
report that may be passed on to the student teams via the instructor's news
message (which is printed on each team's report).
6 There are two methods of printing the student reports. If the teams are
entering their own decisions, they will also have a program that allows them
to print the quarterly report. You may print the student reports for them. You
may also want to print page one of the report for yourself. This will take from
five to 30 minutes depending on your choice of printing options and printer
speed.
vii
7. The whole process repeats, beginning with a new set of decisions. In most
classroom situations, decisions are made once a week.
8. Please help us to keep you informed of any changes by visiting the Airline
home page 2-3 times during the semester. The location
is:
http://home.att.net/~simulations/airline/airline.htm
You may be advised to download a more current copy of the software from the
publisher's internet site.
Computer-Related Problems
We would like to ask a favor. If you are having any kind of computer problem,
please try to get someone around your school to look at the problem first. Many
cases of that #$%#$@*&#$% simulation is a result of a program not being
copied onto a disk, a disk drive door was left open, or (often) the wrong file
location was entered into the program (e.g., Entering A: as the location when the
files were in C:\AirlineHistory). If you've never worked with a computer, it
would be very helpful to get someone more experienced to show you how to
install the program and make copies of student disks. We encourage you to
become familiar with running the simulation before turning it over to a student
or an assistant to run--you'll feel much more in control of the situation. This is
very important to new users. More on this on page 5.
IMPORTANT NOTICE - USED BOOKS
The used book market has become very efficient. In fact, too efficient, because
used simulation manuals, most with pages missing, are being shipped from one
part of the country to another. We have seen some used simulation manuals
missing as much as 40% of the book--with no forms whatsoever.
In addition, the previous user has often written their team's decisions in the
manual, giving the purchaser an unfair advantage.
Please put on your book order form that you want new books. You will be doing
your students, and us, a favor.
Thanks from the authors!
BECOME FAMOUS! ADD YOUR NAME!
Note: We want to add the names of the professors who adopt AIRLINE
to the acknowledgments page of the student manual. However, we
dont know who you are! If you will drop us an Email note, we will place
your name in it the next time we print a new run of student manuals.
Thanks!
SECTION 1
INSTALLING THE SOFTWARE AND RUNNING THE PROGRAMS
COMPUTER REQUIREMENTS
AIRLINE requires an IBM-PC (or compatible) with one floppy disk drive and a hard
(fixed) disk; either system needs 256K memory. The program requires Windows
95 or higher. It will not operate with Windows 3.1. A printer is also necessary.
Complete instructions for installing the simulation are given below.
You will obtain the program files from the publisher. Contact your Prentice Hall representative for
information on obtaining a password to access the download program on the web. The files will include
files to install the program and a program which are the operating programs which you run in order to
access the menu and run the program.
Make certain you place an extra copy of the Airline programs around your office or home. If
your C Drive crashes, you will not be out of business!
Creating Directories for the Programs
Create the following directories:
C:\Airline
C:\AirlineHistory
C:\AirlineStudentHistory
This is for the teams decision files and data Files. It is set up in the
program to recognize this directory.
To Recap: You can use the AirlineHistory directory for your history files and the AirlineStudentHistory
for the student decision files.
If you enter decisions, you should use the AirlineStudentHistory directory for the student decisions. Or,
you may use a floppy disk in the A: drive for student history, whichever you choose. If you are
receiving decisions from students via email, you will want to use the C:\AirlineStudentHistory directory
for accumulating those files, as it will be easier. If you want to transport the files to another location for
processing or printing, then use a floppy for student history.
INSTALLING THE SOFTWARE
1. There are three files that are used to install the instructor's programs: Airline.CAB, setup.exe, and
setup.lst. We will assume you have saved the program files from the publisher in a temporary directory.
Go to that directory via Windows Explorer and go to START, then RUN, then type setup.exe.
During the installation process you will be given a chance to rename the location where the program is
going to install the software. We strongly suggest you rename this location, as the typical installation
program will bury the programs three-layers deep and it will be very hard to find them later unless you
1
make the changes shown below. On the screen that is titled (see below for a mock-up of the screen):
_____________________________________________________________
AIRLINE Setup
_____________________________________________________________
Image
of a
Computer
Directory
C:\Program Files\Airline\
_______________________________________________
FIRST, CHANGE THE DIRECTORY TO C: \AIRLINE
This will place it on the main portion of your C: drive and much easier to find it to run it.
SECOND, DOUBLE CLICK ON THE BOX WITH IMAGE OF A COMPUTER.
This will continue the installation process.
Follow the remaining instructions on the screen and your programs will install automatically.
=============================================================
=
NOTE: If for any reason you need to correct an error that either you or the team
made, you can add or deduct from their Other Expenses the following quarter
and make up for the error. This is a feature in the Parameter menu which is
accessed during the Compute routine. A negative entry will subtract from other
expenses and increase profits. A positive number will increase other expenses and
decrease profits. The latter action is normally used to fine a firm for not
submitting decisions or not submitting decisions on time.
=============================================================
=
If your program is acting erratic, do what Microsoft always advises for any and
all problems, RE-BOOT YOUR COMPUTER and we add, with a complete COLD
boot (turn switch off, wait 10 seconds and then turn switch back on.
5. The Merge Student Decisions routine will take the individual student decision files, named Team#.IQ
where # is the company number, I is the industry, and Q is the quarter number. Example: Team1.A1
Follow the instructions on the screen.
The result will be a master decision file that contains all teams. It is named History.IQ
where I is the industry and Q is the quarter number.
Example: History.A1
6. Then go to the Compute Routine: Calculate all Values routine. After the preliminary information, you
will be shown a screen on which you can change one or all parameters. For the test run, we suggest no
changes, although you may want to take a look at the various values you could change and you can
exit without needing to make any changes. The program will compute the values and notify you that
the History file has been stored in the directory you have chosen.
A Note on the Parameter Change Screen:
One change you may want to make when actually running teams decisions is on the Parameter
Selection Menu and is titled Change Demand for Entire Industry. This will allow you to make a
small to large change in the overall demand. You can experiment with the various changes and see the
results on the final results screen. As long as you do not SAVE the program at this point, you can try
different demand settings until you get the results you want.
The results of the program will be printed out on the last screen of the Compute program. This allows
the administrator to ascertain that all values are within reasonable bounds and that the run is a good
one. To continue, simply press Exit to Menu and you will be transferred back to the main menu again.
7. Next go to Print Administrator Report. You may enter the number of copies of the stock price page.
We usually print one if we post the report, or one for each team. Wait until the administrators report is
finished printing before sending any other print jobs to the printer. The question concerning the stock
price reports is so you may print one report per team, or just one and post it in a place the students can
access.
A Note on Your Printers Memory:
If you have been printing other materials before running AIRLINE, we suggest that you turn your
printer off, wait a few seconds, and then turn it back on. This will clear previous data from the printers
memory.
8. Next go to Print Student Reports and print as many reports as you want. It may be faster to use your
copier to copy the number of reports you desire.
PRINTER DETAILS
If you have any problems with columns not lining up, it is due to the printer substituting a
proportional font for courier. So make sure you have either Courier or Courier New selected. We
can send you the Courier New size 10 Font if you dont have it installed. Email
esim@bellsouth.net or if an emergency, phone 954-462-5220.
There are so many types of computers and printers that a program is hard-pressed to perform with
all combinations. If you are having problems and are using a local area network printer (shared), try
connecting a printer DIRECTLY to the computer. This may solve your problem. Otherwise, contact
your computer expert or help desk for assistance as we are miles away and cannot help much
without being right there with you.
9. When the reports are finished, follow the instructions on the screen to return to the main menu and
then exit out of the program.
10. You may want to use the default values for company one, and change the values for companies two
and three and compare results of your experimentation.
11. This is the end of your test run. You may want to check the contents of your history file location and
note that the files that are created for each quarter are Decis.a1 and Hist.a1. In quarter two, the
files are named Decis.a2 and History.a2. This scheme allows you to return to any point in the
simulation and rerun the data.
=====================================================================
If you want to re-run the COMPUTE program after changing the demand or other expenses,
you must start the program from the beginning, e.g. go to START, RUN, etc. Windows
programs use up the computers memory and it is just safer to have a fresh start.
=====================================================================
ERROR MESSAGES
1. An Unable to write to disk or permission denied errors are caused when the plastic write
protection notch was accidentally pushed open or closed on the floppy disk.
2. A File not found (Error #53) is displayed when the program cannot find the industry or quarter
number file on the history disk. You may have used the wrong history disk, or entered the wrong
industry designation, or entered the wrong location on the configuration screen, e.g., A: instead of
C:\Airlinehistory
3. A subscript out of range or divide by zero error usually occurs because a team has entered a
value that is out of the normal range for the simulation. While we try to trap the decisions as they are
entered, something may have slipped by. Check the values and if one seems really out of line, correct it
and run the simulation again.
4. We encourage you to become familiar with running the simulation before turning it over to a student
or an assistant to run the program. You'll feel much more in control of the situation. This is very
important to new users.
A REMINDER CONCERNING START-UP INFORMATION NEEDED by STUDENTS
Note: In the third edition students needed their previous decision file in order to enter decisions. In this
version they do not need it. This is a great improvement as you will not need to restore lost files for
teams and any team member with the student decision routine can enter the decisions. However, before
entering decisions, teams must know how many teams are playing as well as their team number and
Industry designation. While the message Use Incident XX next quarter is given on their quarterly
report, they must know the maximum values for that incident so they do not enter an invalid value. The
decision entry program cannot check for this value, as it does not have the previous file to cue from.
CRITICAL NOTE IF SENDING AND RECEIVING DATA BY EMAIL
You will need to set the options on your Email program, e.g., Outlook Express so attachments do not
open in the BODY of the message. Some Email programs automatically open the attachment. The
attachment MUST stay intact as a text file. DO NOT ATTEMPT TO OPEN THIS ATTACHMENT as
it is simply a file with data in it and is NOT a self-executing program, (thus the name, TEAM1.A3 or
whatever). COPY THIS FILE to either your A: drive or to C:/AirlineHistory. Then use the MERGE
STUDENT FILES program to open the file. When you send the DATA file back to the students your
Email program must have the option set so that the DATA file will not open up in the body of the
message they receive (usually termed inline text).
USING YAHOO AS MAIL PROGRAM
IF YOU CONTINUE TO HAVE A PROBLEM WITH CERTAIN EMAIL PROGRAMS, YOU MAY
HAVE TO ZIP THE DATA FILE BEFORE ATTACHING IT. If a team is using YAHOO for email,
they must ascertain the program option is set so INLINE TEXT is not selected. They should go to
Check Messages, then select the one from the instructor, and on the top line of tabs, select the
(center) box that will have two options, Inline Text (which unfortunately is the default) and
Attachment. Select the latter.
SECTION 2
CLASSROOM TOPICS
Overall Strategy: Type of airline and market segment; overall plans, decision to haul cargo.
Operations Management: Scheduling of aircraft and number of trips in each market, maintenance
level, fuel forecasting/pricing, quality programs budget.
Human Resource Development: Wages paid, bonus or other incentive plans, training and
development.
Financial: Lease or buy new aircraft, capital acquisition through equity or borrowed funds (short or
long term), cash management through the purchase of CDs, Dividends.
Asset Management: Equipment acquisition and disposal. Firms may choose between seven
different configurations and sizes of aircraft (actual manufacturer's specifications are given).
Behavioral Elements: There are 15 different mini-cases (incidents). You may choose which order
you want to use them. Teams must respond to each of these. They include social
responsibility/business ethics issues, environmental forces, and the international environment.
TIME REQUIREMENTS
A caveat: the simulation can take as much or as little time as the instructor wishes to devote to it. If
used only as a peripheral activity, it would take less time than described here. However, the authors use
the simulation (and several related analysis-type activities) as the core of the strategy course, so the
time prescribed is perhaps at the maximum side of the continuum.
Students should read the student manual carefully. This would normally take a minimum of two hours.
The instructor will also want to do this. The first decision takes longer than usual and teams normally
take 3-4 hours; this may be spread into two sessions. How much class time is devoted to simulation
activities is up to the instructor. The authors normally split the time with students, devoting 1/3 to 1/2 of
the class time to simulation activities (e.g., 1.5 hours per week; student teams will then meet outside
class time for another hour or so each week). If individuals are to be effective team members, they may
want to prep themselves for the team meetings by analyzing the data in their particular area of
responsibility and prepare various types of documents for presentation to the team (charts, graphs,
computer spreadsheets, financial ratios, etc.). This could require 1-2 hours per week.
A TYPICAL SYLLABUS
(Optional activities are shown with an asterisk *)
Week 1 *Assign Mid-Continent Airline Case (in student manual) as a formal, written case. Includes
an industry study as outlined in the student manual. It is usually 5-10 pages. An alternate
method is to have the students read the case and prepare a 1-2 page synopsis of
recommendations and/or key issues. Another option is to do an industry study. In a summer
semester, we have them do a 1-2 page analysis of the mid-continent case.
Week 2 Continue preparing the case. Instructor has classroom activities concerning the big
picture in strategic planning for these first 2-3 weeks, covering as much of the policy text as
possible.
Week 3 *Airline Case is due. Hand in the written case and discuss in class. Students should read the
student manual pages 1-42.
Week 4 First decision is due. The authors also have teams turn in their formal strategic plan-- which
admittedly is tentative, but at least they have been forced to consider their overall strategy
and not just a series of disjointed decisions.
Week 5-11 Continue making decisions. A total of 8 to 12 decisions are made.
End-of-semester. One or more of the following activities are accomplished:
1. Stockholders report
2. End-of-semester management audit
3. Team debriefing
4. Instructors debriefing (we also give out different types of awards and/or certificates).
Both the audit and stockholder's meeting are described in the student manual.
DEBRIEFING STUDENT TEAMS
If you have not used a simulation before, let us emphasize the importance and the tremendous learning
experience of a thorough debriefing of the simulation. This should include a strategic management
audit (e.g., self-study) presented formally by each team to the class. After the presentations, the
instructor can lead a discussion of the simulation and hear about the learning outcomes.
ANALYSIS FORMS AND LOG BOOKS
The student manual contains forms for analyzing appropriate ratios, conducting individual market
analyses, and lease/purchase analyses. Students who conduct such information analysis can justify their
decisions more easily for audits as well as articulate their decision-making behavior if they are having
performance problems. We require each student to turn in an analysis of their choice EACH WEEK.
The forms in the book can be readily adapted to personal computer spreadsheet programs and we give
extra credit to students who create spreadsheet programs.
It is VERY useful for students to keep a logbook of their analyses and decision rationales. This
documentation helps you discuss any strategic problems that may occur. In addition, it provides a
written record that expedites their strategic audits and stockholders' reports. A loose-leaf binder with
dividers (one per team) is a good medium for this purpose.
The authors recommend that teams provide a short written rationale of their incident (mini-case)
response each decision period. This forces them to think through their position more carefully. It can
be turned in on the page the incident is printed on. A copy should be maintained in their logbook or the
instructor can return it so the team can retain it in the log.
The student manual includes an exercise in strategic planning and a strategic audit. These may be used
at the discretion of the instructor. Our experience suggests that teams who engage in these strategic
processes show improved performance. A format for a management audit is provided to guide teams in
assessing their performance. We strongly urge teams to discuss the interpersonal aspects of the team
and how they are coping with decision-making and problem solving. The stockholders' report provides
an opportunity for students to understand the special interest of this important constituency. We
recommend the stockholders' report at about the midpoint of simulation play and the management audit
at the conclusion.
PEER EVALUATION
In order to help ensure cooperation by all members of a team, two different types of peer evaluation
forms are included in the student manual. We emphasize the responsibility of the manager in doing
performance evaluations and thus provide an opportunity for students to practice this duty. If students
know they are to be evaluated by their peers and that this evaluation will be factored into their grade,
most students are more motivated to do their fair share of the work.
We normally have the students turn in the salary bonus evaluation at the mid-term point when the
stockholder's meetings are held and the final evaluation form is done at the end of the semester. We do
the evaluations in class (after we've asked everyone to reposition themselves around the classroom so
they won't sit next to a teammate). If you have them do it out of class, the team will get together and
score its members very high! We use the peer evaluation only to spot the students who are not doing
their fair share or who are doing a lot of extra work for the team.
GRADING
We weigh the simulation activities from 30 to 50 percent of the total grade for the class, depending on
our emphasis on the simulation. This includes the written exercises, including strategic plans and audits
5-10%
10%
5-15%
(Each student responsible for turning in
some type of analysis of some aspect of the
______ simulation or as an extra credit activity)
30-50% of semester grade
WEEKLY ANALYSIS
Students learn a lot if they must analyze some aspect of the airline's operations. You may either require
some type of quantitative analysis each week or use it as an extra credit activity. In any case, we always
give extra credit if a student builds a spreadsheet using their own ideas for incorporating useful
information.
THE MID-CONTINENT AIRLINE CASE
The authors have used both case study and simulation for many years. We have felt a weakness of case
analysis is that it is difficult to prove the validity of a student's analysis and recommendations. The idea
of putting your money where your mouth is (pardon the colloquialism) gave rise to combining this
case with a simulation.
We do two things to prepare students for the simulation. First, they must do an industry study of the
airline industry about the second week of class. This can be as short or as long as you prefer. The
critical factor is that it sets the stage for the environment found in the simulation. Second, we have
them analyze the mid-continent case found in the student manual. The case ends at the same place the
simulation begins--a small airline pondering what to do. Again, how much written work they do on the
case is your choice, but we have found that it is a good opportunity for students to do their first formal
case analysis and then prove how good their recommendations were by applying those to the simulation
decision variables.
If you feel that the Airline case is being handed down from one class to another, you could assign any
other current airline to study. Some interesting ones would be Alaska Airlines, Southwest, and any of
the new upstart airlines. Regardless, by the third or fourth week of class they have been well prepared
to begin actual decisions for the simulation. If you are on a quarter basis, you may want to combine the
industry study and case so decisions can be started no later than the end of the second week of class.
We have found that it takes a minimum of seven decision periods for the simulation to have a learning
impact. Every decision period that you can run greater than eight adds greatly to the learning
experience; the learning curve is well in place by then and teams can fine tune their strategic plans. An
ideal number of quarters to play are probably in the 8-10 range.
SIZE AND MAKEUP OF STUDENT TEAMS
We have found that four students are the optimal number for a team. Five is acceptable but an
introverted (or unmotivated) student on a five-member team tends to be able to hide from group
interaction and responsibilities for company management. At the other extreme, a competent two-
person team can manage a successful game as long as the analyses performed are kept to necessary pro
forma statements and marketing analyses. The three-person team is well suited to graduate level
classes. However, the authors have often assigned a team of two in a smaller graduate class where we
need to get the total number of airlines up which increases the number of markets available and
enhances competition.
SPECIAL CLASSROOM ACTIVITIES
The simulation can create an environment for additional strategic activities to occur. These events
usually involve play-acting current events in the business environment (e.g., takeovers, advertising
campaigns). We recommend that teams not engage in additional activities until after quarter four. We
have been able to engineer a hostile takeover event in the following manner:
1.
The takeover team buys 5 percent of the stock of another team on the open market through loans
or excess cash. These funds are kept in the CD account. At that time, the acquirer must issue
formal notice to the Department of Transportation and the SEC (accomplished with the news
message) of their intention to acquire the firm. They may then complete their takeover after a onequarter lag to give the targeted team time to respond (adopt a poison pill, sell a lot of stock to
dilute the earnings, dispose of cash by purchasing aircraft, etc.).
2.
If after one quarter the acquiring team still wants to purchase the company, the acquiring team
must place an amount (in CDs and leave it there) equal to the total shares outstanding times the
current stock price. There is no way to transfer this cash anywhere else (e.g., to the stockholders
who sell their stock), so we just allow it to sit in the CD account.
3.
The team being acquired may ward off the attempt by taking steps to increase their company's
stock price or by diluting shares so that the acquiring company is unable to obtain the balance of
95 percent of the stock. It is important that students understand the ethics involved in their
responses. For example, issuing new shares and keeping the funds in their cash accounts might
offend their stockholders.
If a team succeeds in acquiring controlling shares, they are given a one-time opportunity to review the
records of the company and present suggestions to management. The acquired team must respond to
each of the suggestions but is not obligated to implement all of them.
This exercise can enrich the simulation by permitting students to gain a greater understanding of the
issues facing the strategic manager. Special debriefing is necessary to complete the process. In the
above example, the acquiring company should be encouraged to verbalize the issues that led them to
select the target and the environmental conditions that made it desirable. The acquired company may
express feelings of being violated or lack of control. The impact carries over to other student teams
who may begin to see new opportunities and threats facing their companies; in this manner, the entire
class benefits from the exercise.
We have included documents at the end of this manual that pertain to takeovers. They have been
prepared by some of our student teams and we have made no attempt to edit them. We think, if left to
their own devices, teams can be innovative and clever!
AN EXERCISE IN STRUCTURE AND STRATEGY
Although every business policy textbook discusses strategy/structure, most instructors are hard pressed
to find an interesting method of driving the point home. The following exercise permits students to
draw their own conclusions. At the end of quarter six or seven, most teams have accomplished some
level of growth. In general, their attention has been focused on expanding markets and capitalizing on
their investments.
At this point, the instructor announces that each team is to evaluate its organization chart. Teams should
be allowed to meet for approximately 45 minutes and then present their findings to the class. Inevitably,
they will discover that the size of their company has grown without consideration to the configuration,
formalization or complexity of the formal organization. This will be especially true of those companies
that have engaged in diversification strategies. The exercise can then be debriefed according to the
instructor's favorite perspective on strategy and structure.
This exercise requires about one hour.
STOCK PRICE AND PERFORMANCE POINTS
Students are always extremely concerned about what factors are used to determine stock price. We are
VERY careful not to disclose this other than as some broad sweeping generalizations, as follows:
A combination of factors are much like the real world: ROI, ROS, ROA, EPS, and dividends. Factors
that would lower stock price are overdraft loans, lower than average quality, high employee turnover,
and lack of sufficient market research.
If students knew exactly what the formula was, they would play the game to maximize the stock price
formula and not to learn something about business strategy! Although we would like to, we cannot base
the stock price very heavily on earnings per share. It would favor the teams that leased all their aircraft
and discriminate against teams that sold more stock to raise capital to purchase aircraft.
Performance points are the cumulative stock price to date, with five points subtracted for poor cash
management in any quarter that cash is zero or greater than $350,000. Performance points give a better
game-to-date evaluation while stock price indicates the team's short-term position.
We are always interested in your suggestions pertaining to a fair algorithm for the stock price. Please
let us know. We will continue to fine-tune this particular item!
SECTION 3
SIMULATION TOPICS
THE DEMAND ALGORITHM Confidential! Not for student eyes.
We have had requests to include a detailed description of the demand algorithm in the instructor's
manual. Due to the sensitive nature of this information, and the fact it could get into student hands, we
cannot do it. However, in order to advise poorly performing teams, we are including a few key
observations and hope you do not share these verbatim with your students. We think the trial-and-error
system of learning is much better in the simulated environment. Some generalizations:
1.
Two flights in a market is barely sufficient. Three is better and four is optimum. However, it
should be noted that the point of diminishing returns is reached when a market is served by more
than 12 flights per day (total for all firms).
2.
Cabin service does not normally have a positive payoff. It is one of those necessary evil things;
only needed if the competition is doing it. Luxury airlines should always have the highest level;
while discount airlines should have none.
3.
Advertising and promotion should increase as the size of the fleet increases: Since the beginning
expense of $5,000 is termed small in the student manual, students should realize that this
particular expenditure should be increased. A combined budget of $20,000 might be sufficient for
a company with four aircraft, but much too small for a company with 10 aircraft Suggestion:
Have the students call a local newspaper and ask about advertising rates.
We always urge teams to buy the market research studies giving the industry average for these
items and to decide on a strategy of being below, at, or above the average. Remind them that the
industry average (since it is a mean) may be too high or too low.
4.
Sales force budget: Hopefully it is obvious (or maybe it isn't!) that since a large percentage of the
airline's tickets are sold through travel agents, you don't need too many missionary salespeople out
on the streets. While salespeople could convince larger companies that have a travel clerk to call
the airline directly, this is a fairly small portion of their business. The correct number of
salespersons is relative to the size of the firm's fleet. For purposes of confidentiality, let's just say
that a firm should have somewhere between two and eight salespersons.
5.
Quality and Training Budget: Again, the budget is somewhat small at the beginning. It should be
increased in proportion to the number of employees in the firm.
6.
Maintenance level: Directly influences reliability of the airline and therefore the amount of refunds
made. Luxury airlines should always have the highest level.
7.
Lease vs. buy: Since the cost of purchasing an aircraft is higher in both cash flow and direct costs
than the leasing option, the algorithm gives a little demand boost to firms that purchase aircraft.
We do this not only to help level the playing field but also under the assumption that a firm will
maintain something it owns a little better than something it leases. Thus, a bit better reliability,
pride of ownership, etc. In terms of profits, it matters little whether a firm buys or leases.
However, after running the numbers most teams think that they will take the lowest cash flow
alternative, leasing. Counter this a bit in class by saying that in purchasing, the firm is building
assets on its balance sheet and that someday (although not during the duration of the simulation),
it will probably profit when selling its used aircraft, due to appreciation.
8.
Type of aircraft: Teams should never have more than two types of aircraft at any one time because
maintenance costs increase dramatically (too many parts to stock, different systems to train
mechanics, etc.). The student manual warns about this.
Strategically, it is better to increase the number of flights in a market with smaller aircraft so
breakeven loads don't need to be so high. As demand builds in a market, teams should replace the
18-, or 19-seat aircraft with 30- or 36-seat aircraft for some of the more popular flight times, e.g.,
three flights a day: morning, late afternoon, and evening.
9.
Reliability: It is affected by maintenance level and employee turnover. Tell the class this fact.
Sometimes teams forget about the winter quarters (4, 8, 12) and ask "What happened to our
reliability." It dropped a full 2 percent! Remind them of the winter quarter. (It is in the student
manual.)
PARAMETER CHANGES
You have the opportunity to change some of the parameters in the simulation. A brief summary of these
parameter changes is given below. Our advice is to run the simulation "as is your first semester and
then make mild changes the second semester.
1. Fuel Prices
The simulation will automatically set up a table for future fuel prices. You may alter these values if you
choose. You may change the fuel price on the spot market for the current quarter as well as the contract
price for the following quarter. The SPOT PRICE is the current fuel price on the open market. The spot
and contract fuel prices can provide an interesting dimension of play, since they are charged on a seatmile-flown basis. It provides an opportunity for students to play a commodity market. The
CONTRACT MARKET PRICE that you set will be posted for the following quarter of play; that is, if
you set it in quarter one, it will take effect in quarter two.
2. Demand Index
The simulation has automatic demand generators that will keep the overall demand close to the
intensity of industry growth. You may change the demand for the current quarter by creating a stable
environment, an upbeat economy, or a recession economy. If you alter the economic environment, it is
advisable to alert student teams about this in the news message, in the report routine, one quarter prior
to the change. They have been buying the demand forecast which may have indicated another type of
economy and thus complain about wasting money on worthless market research.
3. Demand Forecast
You will be provided with a demand forecast (for the next four quarters) that is calculated from the
current demand. The forecast for the subsequent four quarters can be changed on a quarter-by-quarter
basis; this is market research or environmental information that can be purchased by students.
Consequently, the forecasts indicate environmental turbulence or stability that affects decision-making.
It should be noted that the forecast has nothing to do with the demand index. It is the demand index
that establishes the base demand for the simulation. The forecast is a linear regression of past quarters
of play.
4. Individual Company Demand
You may adjust the demand for any team. This may be done as credit for outside assignments such as
an advertising layout or plan, or it may be done to temporarily help a struggling team. You may also use
it to take the wind out of the sails of a team that is doing too well, either because of blind luck or
because the team expanded rapidly. (Due to the automatic demand generator, a team may expand
rapidly early in the game and get firmly established in many markets, to the detriment of other teams.)
We did not want to place any artificial constraints on the simulation expansion so occasionally you will
need to slow down the sales of a certain team.
Due to the fact that most costs are relatively sunk once flights are established, extra passengers added
or deducted from demand directly affect profits -- there is little additional variable cost in transporting
one extra passenger or conversely, little savings if one passenger fewer is flown. Therefore, be very
conservative in applying the addition or deduction to a team the first time until you get a feel for the
sensitivity of this parameter. A plus or minus two to 4 percent will usually be sufficient.
5. Modify Company Names
Teams may modify their name at any point in the simulation if they decide to change their image or take
advantage of the dual designation option in incident F. If students are using student disks for entering
decisions, they can also change the company name at any point.
6. Adjust Other Expenses
This allows you to adjust a firm's expenses by adding to or subtracting from other expenses. We use
this to pay back a team that has made an innocent input error which hurt sales and profits more than it
should have. It can also be used to fine a team for whatever reason you choose (e.g., being late in
turning in their decisions). In one instance we used it to fine two teams $200,000 each for collusion:
they had agreed to stay out of each other's markets! In another case, a team did not realize the high cost
of disposing of owned aircraft; so in order to save money they sold three new (large) aircraft so they
could lease them back.
The brokerage fee for selling aircraft is 2 percent of the book value so its cost was over $600,000 to
dispose of these aircraft. We felt a loss of that size at the beginning of the game was too great a fiscal
(and mental) handicap, so we refunded $500,000 -- thus charging them $100,000 for their error (which
was simply a case of not reading the fine print in the manual).
7. Alter Algorithm Parameters
The list of these parameters is printed at the end of this section. Be VERY careful in changing anything
except cost parameters. The simulation algorithm is a delicate balance of many factors, with literally
thousands of possible combinations, all depending on decisions by competing firms. One suggestion:
increase the cost of maintenance about the 5th quarter. See if any firms reduce the level of maintenance
when faced with higher costs.
After completing these parameter changes, the COMPUTE program will compute all values.
At the end of the COMPUTE program, each firm's profits and stock price will be printed on the screen.
You can determine if you have a good run or not. If you want to tweak or fine-tune the entire
simulation, or perhaps one team, you can rerun the compute program at that point. If not, you can
proceed to the next step: printing the administrator's report.
Rerunning the Simulation
At the end of the COMPUTE program, the profits or losses are displayed on your computer screen. If
it looks like a reasonable run, simply press ENTER and the values will store on your HISTORY disk. If
the simulation needs some fine-tuning or you want to boost a team's demand for whatever reason, you
have an opportunity to rerun the simulation at this point. In order to clear out all of the old values that
were created in the first run, always start the program from scratch.
Reasons to Rerun the Simulation
You may have a very aggressive industry which has expanded too rapidly and a majority of firms are
still showing substantial losses after the third quarter of play. For the sake of keeping the classroom
atmosphere upbeat, you may want to make another run. You can increase the business index somewhat
and compute the quarter again.
If any team's profit or loss is out of the range that you feel is normal, you may go back and rerun the
compute program, changing the demand for any team whose results you want to modify. It will only
take about two minutes too re-compute the simulation.
Since the fixed costs are high in comparison to variable costs in the transportation industry, it is
relatively easy for a firm to have too low or too high sales (and profits/losses). While the algorithm is
very complicated and has many checks and balances, it could not cover every possibility; thus the
reason for giving this opportunity to re-compute the game at this point.
Normal Profits
In this regard, let us share our experiences. If an industry is conservative in its decision-making and
adds aircraft very slowly, teams will usually lose $50,000 to $100,000 per quarter as new aircraft are
acquired and new markets are opened. Although the student manual does not state this (we didn't want
it to), it takes a full three quarters for a new market to become profitable. If a firm is very aggressive
and acquires a number of new aircraft and markets very quickly, it can experience losses in the
$500,000 to $800,000 range each quarter. They normally turn the corner by the fourth quarter and
begin making a profit.
Suggestions to Increase or Decrease Fares
While many instructors do not believe in helping teams stay solvent and therefore do not give teams
suggestions, we do to a certain extent. After all, your students have never operated an airline(!) not
played this simulation before. If we can give a tip or two to keep teams solvent, we do so. We never
give teams that are profitable any hints! So, here are some ideas if you are so inclined.
You may also need to prod a team to raise its fare if it has acquired new aircraft but not raised fares.
The 35-cent fare at the beginning of the simulation is appropriate for the current fleet with very low
loan payments and is almost depreciated off, but a somewhat higher fare is necessary as new, very
expensive equipment is obtained. It will need to be in the .36 to .37 range for the normal fare range, .31
if a discount airline, and .48 to .50 if a luxury airline.
Fares at the .28 - .29 range are definitely money losers as the added passengers do not make up for the
loss in revenue. Fares in the .50 -.51 range are too high and passengers switch to a lower priced
airline. Teams that have a substantial number of markets with promotional fares can also experience
such a loss of revenue as to suffer substantial losses. This is very much the case in the real world of air
transportation. I give a tip to my classes and then dont dwell on it any more that they should use the #1
or #2 fare for a new market and then revert back to a no fare sale policy for that market.
ADMINISTRATOR'S REPORT
The administrator's report provides the following information:
Section 1 - Recap of Key Decisions
This section contains a recap of key student decisions. Advertising and promotion have been combined
to save space. The column listing salespersons indicates the total number hired to date, not just those
hired this quarter. The wage items conform to the key shown on the student decision form, as do the
decisions regarding maintenance, fuel purchasing policies, capital equipment acquisition, and market
research. Dividends are shown in total dollars paid this quarter, and not dollars per share. (Dividends
per share are listed on page 4 of the administrator's printout.)
Section 2 - Key Operating Data
Section 2 contains production data for each company, including a daily seat productivity ratio that
indicates the number of times per day that each available seat flew a passenger (a larger number is
better). It is optimal to increase yield per available seat mile and load factor simultaneously.
Section 3 - Key Financial Data
The ratios in this section are calculated by the formulas shown in the student manual. Return on assets
may be somewhat meaningless in this simulation since a company that has a policy of choosing
operating leases will have minimal assets, thus inflating this ratio. Large debt-to-equity ratios are
common in the airline industry and should not be construed as poor financial management, although the
simulation has the flexibility to support equity companies. We have found return on sales to be the best
single performance indicator. It may run between two and 12 percent.
Administrators Report - Page 2
Interpreting the Market Report
The market report shows the activity in each market for this industry. The total sold item indicates the
total number of seats sold for the entire market. The next set of numbers show the company number,
number of flights, number of seats sold by that airline and the type of fare in that market. This report
may help explain losses for an airline that shows a high load factor but a low yield per available seat
mile on page 1 of the report (i.e., it may be flying in highly competitive markets with promotional
fares).
It is usual to have three or four airlines competing in one market. However, WHEN THERE ARE
MORE THAN 12 FLIGHTS IN ONE MARKET, there are not enough passengers to cover variable
costs and contribute significantly to fixed costs.
Administrators Report - Page 3
Page 3 of the report shows the market research information that is sold to each company that purchases
this information. Note that the $8,000 Market Research Report (total sales in each market) is always
listed on page 3 of the student printout. We make a note of this here as students sometimes ask where
their $8,000 company sales report is.
Administrators Report - Page 4
Page 4 is an industry report that is printed in duplicate so that a copy may be posted for student teams.
The ratios are calculated as arithmetic means. The fleet status is cumulative and reflects activity for the
simulation to date, rather than for the current quarter.
INSTRUCTOR PRINTS QUARTERLY FINANCIAL REPORT
Although you may print several copies of the report, it is a time-consuming process. Therefore, we
suggest that you print only one copy of the report and make the student teams accept responsibility for
duplicating copies for their team members. You will probably want to make one extra copy for personal
use. If so, you can use the Print 1 page or Print 2 pages reports selection to save paper.
STUDENTS PRINT QUARTERLY FINANCIAL REPORT
If you are using student disks, the report program has a routine that allows you to record the student
results on each student disk allowing them to print their own reports. They must use Courier or Courier
New 10 point font for proper column alignment.
NEWS MESSAGES TO STUDENTS
You will be asked if you care to provide a 4-line message to the entire industry. This can be considered
environmental information, or it may contain some class-specific assignment. For example, one
parameter option permits a dip in the economy. The instructor may enter a news message that predicts
this dip. Some examples are given later in this manual.
A description and analysis of the student report may be found in the player's manual.
INCIDENTS
The incidents are mini-cases that provide an additional element of environmental uncertainty. The
students may be given a message on their printout that indicates the outcome of their decisions on these
items. However, there may be messages that only obliquely refer to the incident and/or its outcome; in
two cases, they are kept guessing as to the outcome. In some cases, the impact is felt over a substantial
period of time and may not be evident in the quarter immediately following the decision.
You have the option of choosing in which order the incidents are used. We always change the order in
each class if we are running more than one class. That way, a team that gets its printout back before the
other class makes a decision can't pass on how a certain response affected the simulation results. If
Incident N is used, it must be used for the last simulation quarter, as there is no real effect on the
simulation. It is just a good exercise in forward planning and decision making.
CRITICAL NOTE INCIDENT ORDER
Teams MUST be informed in which order the incidents are going to be used. There is no mechanism in
the program to do this.
Item
Value
YOU MAY WANT TO CONFER WITH THE AUTHORS BEFORE MAKING ANY OF THESE
CHANGES.
Why do the teams have such a liberal line of credit during the first quarter?
Although the firm is in relatively poor condition at the start, we are assuming the bank is very
optimistic about the new management team's ability to turn the company around. The real reason
is to allow teams to make the buy or lease decision from the start.
2.
3.
Can a firm merge (an option in incident F) if they have dual-designated in an earlier quarter?
Yes. Since the merger assumes that the firms will be operated as (separate) strategic business
units.
4.
5.
Why didn't a declared dividend payment show up on the income and expense statement?
The computer program zeros out any dividend payment that is greater than the profits that quarter.
It will not allow a dividend payment if there are negative retained earnings.
6.
We tried to put in a wage increase but the program wouldn't accept it. Why?
A team must declare the TYPE of compensation policy (Entry #6) before it can enter the amount
of a wage increase.
7.
8.
9.
adding costs. This is not to say you can't go for growth, but there IS a limit.
22. What happens when we over fly our maximum mileage?
If is perfectly acceptable to fly at the maximum mileage allowed. Although you may go over this
limit by a few miles, any mileage over the limit will begin to have an effect on the maintenance of
your aircraft and your firm will pay for this sooner or later (including the loss of an aircraft for a
quarter to do a major airframe and engine overhaul). Operating costs will also rise dramatically.
You may be fined by the FAA for not keeping up with required maintenance.
23. What if we entered more seats in the markets flown section of the decision form than we actually
have?
You will always be charged the cost of operating those seats for every mile flown. In addition,
other serious consequences will occur (such as losing an uninsured aircraft caught overnight in a
strong storm!).
24. Is cabin service really a factor in attracting customers?
It can be, if your competition is offering it and you're not. This is one reason to buy market
research so you can keep an eye on the competition.
25. How do the hospital charter flights affect profits?
The direct costs for this service are not charged to the direct cost categories (fuel, maintenance,
passenger service, flight operations) on the income statement. Therefore, the profit of the
ambulance operation as shown under OTHER PROFITS is the net contribution toward fixed
expenses.
26. Can a firm become unionized?
If a firm is operating profitably and its wages are not keeping up with the industry, there is a
possibility of unionization. Those teams that become unionized will be informed in their news
messages. They are instructed to raise their additional compensation by x percentage points in
order to avert a strike.
27. How are total passengers calculated on the OTHER DATA portion of the printout?
It is calculated by multiplying the number of round trip seats sold by 70 days in a quarter times
two. Thus, a round trip ticket represents two passengers flown by the airline. Cabin service
charges are based on the total passengers flown.
28. Why does the printout indicate we sold more stock than we put on the decision form?
You probably had an employee stock bonus plan. The company must sell stock to the bonus plan
administrator so he can give it to the employees.
29. We received an error message about the printer when trying to print. What's wrong?
Many the times, the students have selected a computer that is not connected to a printer or forgot
to turn the printer on. If the computer is using a local area (shared) network printer, that printer
must be correctly identified when the Select Printer screen appears.
30. Why do we have other expenses this quarter?
It can be due to costs of the current incident, aircraft disposal fee, lease cancellation fee, or
ongoing costs of selecting certain incidents.
31. Why do aircraft in excellent shape have engine problems?
Because nothing is perfect in an imperfect world. There is nothing you did to cause this nor
nothing you could have done, such as having a higher level of maintenance, that would have
prevented it. While we are on this topic, let us point out that in all organizations, negative and well
as positive things happen.
32. Why cant we figure out the relationship between the value of Common Stock on the balance
sheet and the calculation of stock outstanding multiplied times current price per share?
The value carried on the balance sheet is what the company sold its stock for at various times. The
current price of the stock is the value that the stock market has recently placed on the stock. This
value multiplied times number of shares may be greater than, equal to (unlikely), or less than the
value carried on the balance sheet.
-Aire, Inc.
These were submitted by student teams. No responsibility for grammar will be assumed!
COASTAL AIRLINES
1000 Millionaire's Way
Suite #1, Victory Tower
Jacksonville, Florida 32914
FAX: 954-XXX-9466
Professor ___________:
Dr. Golden,
This letter will officially notify you, in compliance with SEC regulations of the purchase of over 5
percent of the outstanding shares of common stock of Alliance Airline, as reported in the 1989
shareholders report. The cost to Coastal Airline is $50,000 plus any brokerage fees.
Please be advised that this will take effect as of quarter 16 in the simulation.
Faithfully submitted, this fourth day of April 2002,
Alliance Airlines
1 World Trade Center
Penthouse Suite
New York, New York 136
Phone (516) CO. NUMBER 1
TO: Coastal Airlines
FROM: Alliance Airlines
RE: Proposed Stock Purchase of Over Five Percent
DATE: April 4, 2001
Board Members, Stockholders, and Distinguished Management:
This Letter is to inform you that Alliance Airlines accepts your offer for 5 percent stock purchase in
accordance with our Articles of Constitution. It is required that companies attempting hostile takeovers
meet criteria as stated in Article Ten, Section 1:
1. Creditors to both Short- and Long-Term Loans be paid in full by
Coastal Airlines before any exchange of stock takes place.
2. Cash bonuses of $150,000 be paid to each of the four Executive
Officers of Alliance Airlines by Coastal Airlines.
If said conditions are approved, the Executive Committee of Alliance Airlines welcomes our new
shareholders.
It should be noted that the Executive Committee of Alliance Airlines each own 15 percent of company
stock.
Respectfully submitted,
The Executive Committee
Alliance Airlines
JOINT VENTURE AGREEMENT
April 17, 2001
Link-Aire, Inc. and Coastal Airlines, Inc. do hereby enter into agreement for the express purpose of
purchasing Executive Express, Inc. (a.k.a. company #4). This agreement supersedes all prior
agreements between Link-Aire, Inc. and Coastal Airlines, Inc. which contain specific references to the
exchange of money between the two corporate parties of said Link-Aire, Inc. and Coastal Airlines, Inc.
Henceforth, all promises to pay the amounts specified in prior written agreements are hereby declared
null and void upon the successful acquisition of Executive Airlines, Inc. This renunciation of prior
commitments extends only to those debts which occurred outside the operational sphere and which
involved training.
Link-Aire, Inc. will retain majority control and ownership of this venture. Of the outstanding stock at
the time of purchase, 67 percent of the shares will accrue to Link-Aire, Inc. and the balance will accrue
to Coastal Airlines, Inc. These shares will have full and equal voting rights. The full purchase costs of
this acquisition will be distributed according to the aforementioned stock ownership ratio. In the event
that it is deemed necessary by either party to sever this joint venture and subsequently assign
ownership to either Link-Aire, Inc. or Coastal Airlines, Inc., severance will take the form of a private
opening of sealed bids between Link-Aire, Inc. and Coastal Airlines, Inc. to determine the total value
of the venture. The highest bidder will retain ownership of the venture and will pay the losing
corporate bidder its current stock ownership ratio multiplied by the winning bid amount. Due
immediately, this will be paid in cash or other form of settlement. On no condition will the winning
bidder be permitted to raise funds for payment to the losing bidder by attempting to secure those funds
against the assets of the venture. Such an action will disqualify the winning bid and make the winning
corporate party liable for damages.
Due consideration in the amount of $1.00 (one dollar) will be paid to the contract administrator, Peggy
Golden, by both parties upon signing of this agreement. The undersigned of each party, being official
corporate representatives with authorization and capacity to make binding agreements for said
corporations, do hereby affix their approval, consent, and acknowledgment of all terms presented
herein.
Link-Aire, Inc.
Enter Decisions
!
!
Print Decisions
(Do immediately after entering your decisions to check entries)
Print Reports (Use if you are printing reports from the DATAx.xx file from the
instructor)
Once your instructor computes the values and returns them via a DATA file, you
may use the
this program to print your report.
! Exit
In all cases, make sure you indicate the correct file location when the program asks for the
file location. If you get an error message, file not found it is caused by not indicating the
correct file location. Good Luck!