MNGMNT Game Manual 2010

International Management Game
Carnegie Mellon University

Tepper School of Business
Game year 2010
PLAYERS MANUAL
Final Edition @ 11/24/2009
The Management Game Welcome to the Management Game
Table of Contents
Welcome and overview 4-17
Registration 4
Play within Worlds 8
Play within Universes 9
Factory Design 10
Product Design 11
Market Design 11
Other Start-up Information 12
Things To Think About As You Play 13
Input – Overview 14
Output – Overview 14
Input Description 18-46
MARKETING INPUTS
Prices 21
Contract Description 23
Shipping Preferences 24
Shipping Containers 26
Marketing Budgets 28
Marketing Consultants 29
OPERATIONS INPUTS
Research and Development 31
Production Consultants 32
Existing Operations 33
Factory Relocations 38
2
FINANCE INPUTS
Debt Transactions 40
Equity Transactions 41
Dividends 42
Receivables Collection Budget 43
Early Payment Incentive 44
Insurance 45
Currency Futures 46
Output Description 49-92
Market Report 50-64

Production Report 65-77
Finance Report 78-88
Cash Flow Report and Description 89-92
Appendix – Market Research Tools 93

Index 94-96
3
Welcome to the Management Game!
This manual explains the basic rules of the Management Game

simulation software. It will be your reference guide as you progress
through the Game. The software environment provides a framework
that simulates a competitive business situation. As a Management
Game player, you will run a multi-national company, based in the
United States, that produces two brands of a consumer product and
sells them in six different countries.
Your success, or rather the success of your company, depends on

your competition, the preferences of your customers, and your skill in
determining and addressing these preferences and the actions of your
competitors.
For this class, your company will produce and market wrist watches.
Registration- Keys
As the class begins, it will be necessary for you to register. You will
be given a "Key" and you can use this Key to visit the class website
and register for one of the classes. Your registration Key will be given
to you by your local professor or in some cases, your registration key
may appear above next to the word "Registration-Keys". At any given
time, there may be several classes running. Your Key will permit you
to register only for the correct class, (either MBA or Undergraduate).
For students in Pittsburgh, you will be given your registration key as a
link via email as the class begins and this link will take you
automatically to the class webserver. The direct address to the class
web server is this:
4
https://managementgame.tepper.cmu.edu
When you arrive to this site, it will look like this:
Select "Student" and you will see this screen:
If you have an Id and

password, go ahead and
login. If you do not have
an Id and password,
choose the link
“register” and follow the
instructions.
5
The first time you visit this site and register, you will be mailed a
password which will permit you to enter the site. After you login for
the first time using the password which was assigned to you, you will
be able to select a password which will be something easier to
remember. If you ever forget your password, you can use the retrieve
password feature of the login screen and your password will be sent to
you via e-mail. If your e-mail address changes during the class, you
can update your information using the "Administration" link which
appears just after the login screen.
Please remember several things as the class progresses:
1. If you change your email address for any reason, you must go to
the webserver and change the address there as an update to your
personal contact information.
2. If you forget your password, you can have it mailed to you in a few
seconds by using the "retrieve password" link on the login screen.
3. You can reset your password anytime you wish to make it easier to
remember, by using the "change password" link on the login screen.
6
Competitive Design
To mimic a “real” company, play of the Management Game relies on

teamwork. You and your classmates will be put into a group, or team,
that represents the management personnel for your company. As you
continue through this manual, you will see the terms team and
company used interchangeably.
7
Play within Worlds

Your team exists in its own world, named World 1, 2, 3, etc., and
competes against four or five other companies. All companies within
a given world sell their products in the same countries: United
Kingdom, Germany, China, Japan, United States, and Mexico.
The figure below is an example of World 1 for 5 companies.
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Assume that you are part of Company 5. As part of that management

Sidebar text team, you are competing with Companies 1 through 4 in the six
countries of the World 1 market.
8
Class teams cannot interact across worlds, which means you are not
At the start of the
competing with the teams of your classmates outside your world.
Game, the
economic Each team will publish its high-level performance data on the class
characteristics of all
website, so that the relative performance of each team will be
the worlds are the
same. measured against other teams in the class to some degree. When
this manual refers to your competition, it means only those other
As the Game
continues, companies within your world, not all of your classmates.
competitive
dynamics drive the
outcomes for each
world in different Play within Universes
directions.
Worlds exist within different universes, named Universe 1, 2, 3, etc.
Sidebar text
Universes exist so that the worlds can share the stock market. You
will explore the workings of the stock market as you proceed with the
Game. The figure below shows how worlds within a universe interact.
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9
Factory Design
When the Management Game begins, each team has two factories
located in different countries. The starting characteristics of each
factory are as follows:
 Each factory makes only one product; that is, a factory can
either make Product 1 or Product 2, but not both products.
 The Game involves six possible countries in which your
factories are located: Japan, China, Mexico, United Kingdom,
Germany, and the United States.
 Factory locations are initially selected for you, but once the
Game starts you can relocate the manufacturing facilities to any
location within your world. Normally, this key strategic decision is not
permitted in the first year of the competition.
 Initially, both factories are of approximately equal size; you can
make them larger or smaller after the Game begins.
 A factory reflects the available labor and material costs typical
of the country in which it is located.
 Both factories can be located in the same country.
Keep in mind that if  The quality of watches produced in any factory will differ
you run your depending on the country in which is it located. Some locations will
company correctly, result in higher quality products than others.
you can produce a
quality product For example, German and Japanese factories are usually more
anywhere in the automated and capital-intensive; therefore they have high fixed costs
world. The cost of and costs for building new facilities, but fairly low total labor costs for a
obtaining high very high quality product. Factories in China and Mexico, on the other
quality products is hand, use more, much less expensive labor and cheaper facilities with
what changes from less automation; it can be more difficult and more expensive overall to
location to location. get the same high quality products out of these factories. Research
and development spending will also have different efficiencies in each
country. A dollar spent on research to produce watches in a German
factory will deliver different results compared to the same dollar spent
Sidebar text on research to produce watches in a British factory. The differential
research spending effectiveness of each country changes each year
and will be published separately as the game begins.
10
Product Design
Your company can make no more than two different products, but
some teams may decide to produce and market only one. Teams will
not be rewarded or penalized for the number of product models they
choose to make.
Products are positioned in the market as described below. You may

disagree with this initial positioning of the products, but you can
change it as the Game progresses:
 Product 1 is at the more price-sensitive end of the market;

customers of this product show less product loyalty and will quickly
buy from your competitors should your company "stock out."
 Product 2 is a more premium product; Product 2 customers
show both brand loyalty and more sensitivity to quality.
 Very important: Customers in both the product 1 and product
2 markets are completely independent of each other. Nothing which
happens in the product 1 market will have any impact at all on product
2 customers. The reverse will be true also.
 Customer preferences are complex and vary considerably from
country to country. It is not correct to conclude that price is irrelevant
in any market or that quality will always dominate the purchase
decision for product 2 markets.
Market Design
At the start of the Management Game, each team is currently

marketing two products in all six countries: Japan, China, Mexico, the
United Kingdom, Germany, and the United States. The markets are
approximately the same size as those of the actual countries, and the
behavior of these markets mimics their real-world counterparts in
terms of market demand, cost structure, growth rates, and other
macroeconomic parameters. In addition, any transactions that occur
11
in a country's local currency are consolidated into US dollars for

financial reporting purposes.
Consumers in these markets have markedly different preferences.

Your intuition about these preferences in each country will hold
generally true. For example, consumers in more affluent countries
tend to be less price sensitive. For your company to thrive, your team
must identify these preferences; for your company to be profitable and
successful, your team also has to address these preferences better
than your competitors.
Other Start-up Information
Several years of historical data are available so that you can develop
a feel for consumer preferences, price and quality characteristics, and
Customer
Preferences are other aspects of the economic environment for each market. You will
fixed for the
entire receive both input and output data for your company, so that you can
competition and
are identical in determine what actions your predecessors decided to take and what
all worlds. resulted from their decisions. This historical data is extremely rich in
Therefore as
you gain insight valuable information. You will also receive current information about
into how your
customers the economic conditions for each country at the start of the Game,
trade-off
changes in price such as tariff rates, transportation rates, currency exchange rates, and
against changes
in quality, this
average manufacturing costs. Information about the cost structure of
relationship will manufacturing facilities in various locations as well as the
remain fixed.
effectiveness of research spending will be published separately from
this manual each year. Using this information and your own
management savvy, your team can choose reasonable strategies,
position your products according to customer needs and determine
the feasibility of relocating a factory or factories. Remember, though,
that you can produce a competitive, quality product anywhere in the
world if you manage efficiently. Therefore, while factory location may
constrain your future flexibility, it has less impact on your team’s
12
performance than your ability to understand your customer needs and

to serve these needs.
Things to Think About as You Play
 What type of decision and/or support tools will your team need
(i.e., tools to manage cash flow or forecast sales, or monitor
competitors)?
 What type of organizational structure should your team have?
You need to design ways to coordinate the work of your team
members effectively.
 What strategies would you like to implement and what value will
these strategies add to your business? How will you defend your
advantage?
 You are all talented managers, capable of great success.
Planning and effective organization will be the key.
 Effective teams use all of their assets productively. Remember
that your most valuable assets are the time and talents of your people.
How to Play
Your team is responsible for tracking its progress using different online
tools. The simulation will run periodically using the variables that you
input to produce output data. Your inputs and those of your direct
competitors drive the output data.
In addition, some activities will occur between simulation cycles. For

instance, the stock market that you share with your competitors is only
open when the simulation is not running. The stock market closes as
the simulation starts to run and remains closed until after the output
data is produced, normally an eight-hour period.
13
Inputs—Things teams can control in

each simulation cycle
First, you have to choose your company’s input variable and enter
them into a web browser interface. These inputs record variables
such as pricing, marketing budgets, and the like for each team. The
next section discusses these variables in detail.
Each team must complete a set of input decisions for the company
each period. Each time period represents 3 months of simulation
time. The web based input interface provides a template for making
and entering your decisions
To begin the Management Game, your team must consider the

variables that appear as entry fields on the input interface. These
are the things that you control.
Outputs—Results of the simulation using the inputs

for a single cycle
Once your input decisions are submitted, the simulation acts upon
your company decisions, as well as the decisions of your competitors
to produce reports (called outputs) that can be printed from a
Microsoft Excel workbook file. The Management Game spans 10 or
Sidebar text 12 moves or periods to represent a total cycle of up to three years. A
single move equals three months. You will hear the terms move and
period used interchangeably both in this manual and in the classroom.
14
At the end of a given period, teams can access resulting information

using either the three pre-formatted output forms provided in the
outputs workbook, or a team can design its own output report using
any other desired tool. Many teams build sophisticated, analytical
tools to help them make future decisions.
The diagram below illustrates what happens during a single move or

period in the Management Game.
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The pre-formatted output reports available to Management Game

teams include the following:
 The Market Report provides summary information about the

company's place and performance within the world market and
explains how the company's pricing compares to other companies in
that world.
 The Production Report describes the activity of a company's
two factories, including the unit price and capacity at which the factory
is operating.
 The Finance Report supplies information about what your
competitors are doing, including the size of their facilities, the amounts
of their loans, and their retained earnings for the period.
 The Cash Flow Report is a simple, single-period cash flow
statement that should help each team manage its cash flow.
 The Competitors Report is a set of graphical and tabular data
that shows comparative data across the 5 teams in your world. This
data is instrumental to your understanding of your competitors.
Where Do You Go from Here?

The remainder of this manual provides detailed explanations of both
the inputs and outputs of the Management Game Simulation.
The first section, Inputs, indicates the name, and description for each
field your team must complete at the beginning of each game cycle.
16
The Outputs section of this manual explains the different parts of the
pre-formatted output reports, the information these parts contain, and
how that information is calculated. The pre-formatted outputs for your
company will look identical to the ones shown here. Becoming more
familiar with the layout of these reports will allow you to locate
information more easily in the future; use this manual as a reference
as you continue with the Game. Once you and your teammates are
familiar with these output reports, you can create additional
management tools and models to help you analyze your company's
performance.
The manual also includes an Index of important terms or information

so that you can find what you need quickly and easily. You will find
the Index immediately following the Outputs section.
Good Luck!
17
The Management Game Inputs
Inputs
Marketing
Decisions
18
Research & Development Expense, Product 1 000 USD

Research & Development Expense, Product 2 000 USD
Consulting Production, Total USD 000 USD
Consulting Production, % to Product 1 0 to 100
Consulting Production, % to Product 2 0 to 100
Production Budget, Product 1 Factory 000 USD
Production Budget, Product 2 Factory 000 USD
Construction Budget, Product 1 Factory 000 USD
Construction Budget, Product 2 Factory 000 USD
Unit Capacity Decrease, Product 1 Factory 000 units
Unit Capacity Decrease, Product 2 Factory 000 units
Completely Close Product 1 Factory 1=yes, 0=no
Completely Close Product 2 Factory 1=yes, 0=no
New Factory Location, Product 1 Factory 1 to 6
New Factory Location, Product 2 Factory 1 to 6
Unit Capacity of New Product 1 Factory 000 units
Unit Capacity of New Product 2 Factory 000 units Production
Loan Payment (Reduce Debt) 000 USD
Additional Loan (Increase Debt) 000 USD Decisions
Stock Purchase (Reduce Equity) 000 USD
Stock Sale (Increase Equity) 000 USD
Dividends Paid 000 USD
Collection Budget 000 USD
Early Payment Incentive Percent Discount
Property Casualty Insurance Budget 000 USD
Directors & Officers Insurance Budget 000 USD
Product Liability Insurance Budget 000 USD
Buy Currency Forward Contract, Yen 000,000 Yen
Buy Currency Forward Contract, Peso 000,000 Peso
Buy Currency Forward Contract, Yuan 000,000 Yuan
Buy Currency Forward Contract, Pound 000,000 Pound
Buy Currency Forward Contract, Euro 000,000 Euro
Sell Currency Forward Contract, Yen 000,000 Yen
Sell Currency Forward Contract, Peso 000,000 Peso
Sell Currency Forward Contract, Yuan 000,000 Yuan
Sell Currency Forward Contract, Pound 000,000 Pound
Sell Currency Forward Contract, Euro 000,000 Euro
Green P1 000USD
Green p2 000 USD
19
Finance
Decisions
Variables the teams can control

in each simulation cycle
Teams operate their companies by controlling certain variables, called
inputs. Inputs are actually entries you make in the web interface that
represent your company's decisions. The Input decisions are divided
into three main sections: Marketing Inputs, Production or Operations
Inputs, and Finance Inputs. These 3 sections are distributed over 5
screens:
1. Prices
2. Shipping
3. Marketing
4. Operations
5. Finance
This section provides information on the input fields you will have
control over as you attempt to operate your company. The data
appears in the following format:
Field Name or Input Name

Description of input decision Units for the decision
Description
A brief description of the field appears here.
Example
A sample entry for the field appears here.
20
Product Prices

Important!
Local currency refers

to the type of
Description
Your team must set prices for both products in all markets.
Do not leave any price field blank. If you leave this field blank for
currency accepted as any country, the system will use the prices from the previous year.
the national currency
of a certain country. If you don’t want to sell your product(s) in a certain market, enter a
price of 0. Do not enter a very high price, as this will damage your
Local currencies for
company image.
this Game are shown
here.  Note that prices are in local currency:
Japan = Yen Germany = Euros United Kingdom = Pounds

Mexico = Pesos China = Yuan United States = Dollars
21
Contract Prices
Description Units Period 1

Contract Price Product 1 USD 40
Description
In addition to the six retail markets, there is also an institutional United
States government market. Only product 1 can be sold within this
government auction market. This market is divided into two types of
contract auction opportunities to sell product 1. The two auction
opportunities have different rules. One auction is conducted each
time period within each world for a fixed volume of units that are pre-
announced one period in advance. This auction is part of the
decisions which you make each time period and the auction itself is
conducted within the simulation. The second auction opportunity to
sell product 1 to the US government is conducted through the class
web site in-between simulation cycles. The rules for this "on-line
auction" do not appear in this manual. They appear only on the class
web site. Below, we describe the contract auction which is embedded
within the simulation.
Contract Volume In this field, you bid for a United States government contract to supply
refers to the number a fixed number of units of your Product 1. Only contracts for
of units fixed in the Product 1 are available.
contract.
To give you an idea of how many Product 1 units are required, the
contract volumes will be announced one period before bidding. If you
are the low bidder on a contract, then you “win” the contract and the
product is sold, shipped and paid for during that period at your
Your company’s winning bid price.
contract image is the
dollar per unit Winning the contract bid often enough allows you to develop a
advantage that your significant advantage in future bidding. This advantage is visible to
team has
you as your contract image in the Next Period Data section of your
accumulated by
successfully bidding Finance Report (see the Outputs section for more information). Keep
for past contracts in mind that contract image rarely exceeds 10% to 15% of the contract
unit selling price. Each time that you win a contract, your contract
image will grow but it will level off at approximately 4-5 dollars per unit
22
after an infinite number of successful bids. Your company's contract

image will fall 1.0 each time that you either fail to bid or you fail to win
a bid. However, your company's contract image can never fall below
zero. A contract image of 1.5 should be interpreted as $1.5
advantage over other bidders if their contract image is zero.
Your effective bid, when determining who wins the contract, equals
your actual bid minus your contract image.
Example
Assume that you bid $40 and your contract image is $3; your effective
bid is $37. If $37 is the lowest bid, then you win the contract and will
receive $40 as the selling price equal to your bid.
What Happens if Nobody bids for the contract? The winner of the
contract will be team "0" implying that nobody bid so nobody won.
Any non-zero contract images will fall by 1.0 but will not fall below
zero.
What Happens if there is a perfect tie for the contract? The contact
will be replicated and awarded to each team which ties. Each winner
will receive and fill the entire contract. The winner of the contract will
appear in the output as "multi". The contract image of each winning
team will increase.
On-line Government contract Auctions

In addition to the contracts that can be won by
sealed bid, we will also hold on-line auctions each
simulation cycle. Rules describing this will be
visible on the class web page.
The characteristics of the two types of product
1 US government auction markets are
summarized below:
Imbedded On-line
Auction Auction
One contract per world. Only One contract per world but all
23
companies within your world can contracts can be bid and won by
bid. any team in the class and one
team can win multiple contracts.
Lowest price -advantage wins and Lowest price with sufficient quality
quality does not matter. wins. If your product quality is too
low, you will be blocked from
bidding on some contracts which
require higher quality products
Successful bidder gains advantage Successful bidder gains no

To stock out means in future bidding advantage in future bidding
that your demand
exceeded your
Winner is determined as part of the Winner is determined in advance
ability to supply
products. simulation, and the contract is of when input decisions are due
shipped immediately making and permitting better production
Consumers of production planning uncertain. planning.
Product 1 react to
stock outs by Competitive bids are not visible All bids are visible in real time
purchasing
products from one All bids must be equal to or above Same
of your competitors variable manufacturing cost
in the current time
period.
Shipping Preference Order

Product 2
consumers react to
stock outs by not
purchasing. They
Description
wait until a future
period to buy. This field indicates the order in which the product will be shipped to
meet demand. Order is relevant for determining the distribution of
Your Product 2
customers do, manufacturing costs between inventory layers since inventory is
however, become shipped FIFO (first-in, first-out). It is also relevant in situations when
less brand-loyal if demand exceeds supply and your company experiences a stock out.
you stock out. You cannot distribute stock outs equally across all areas. The retail
Their reaction is market that you specify as last in your preference will bear the full
proportional to the
shortage of a stock out.
size of your stock
out. Note that if you win any contract sales of product 1, the product will be
shipped first to satisfy the contract, and then your retail markets will
receive inventory in the order that you specified.
24

Important!
The Management Game
The entire amount (100%) of the demand for each country will be
Inputs
fulfilled in the order that you requested until the product is exhausted.
All contract units are shipped free of all transportation costs, all tariffs,
and do not require any containers.
Example
The sample below shows Shipping Preference Order field entries for
one company.
In this example, the company selected the United States as the 1st
priority market for Product, followed by the Japan, Germany, the
United Kingdom etc. There are 5 input fields and 6 countries so
whichever number does not appear is automatically specified lowest
priority. Remember, if there is no stockout, then the shipping order
preferences will impact only how the costs of different inventory layers
are allocated to different markets. However, if demand exceeds
supply and your company does experience a stockout, the location of
25
the stockout will be determined by these shipping preference

decisions.
26
Containers
You can buy or rent

shipping containers.
Approximately 5%
of your containers
wear out each time
period and are
discarded at the
END OF THE
TIME PERIOD
Description
Your company’s
transport capacity Your company needs containers to deliver its products. This field
appears in the indicates how MANY DOLLARS your company wishes to allocate to
Production Report of purchase or rent containers to deliver your product(s). These
your output file.
containers are available immediately following your purchase request
and can be used in the period that they are purchased.
You can only buy or rent containers; you cannot sell them. Each
container costs $3,000.00 to buy and is capable of transporting 1,000
units per period used. Rental costs are $2,000.00 per period.
Because the containers depreciate slowly, lowering your transport

capacity, companies may wish to periodically replace containers to
maintain or expand the initial transport capacity. Your company
27
might want to rent containers to increase transport capacity

temporarily. Rented containers incur no maintenance costs.
Each period, 5% of the containers wear out and must be replaced. If

you do not purchase any containers, then your transportation capacity
will slowly decrease. Containers always wear out at the end of the
time period; so the transportation capacity of your company is always
known from the previous period's output.

Note: If your demand for product exceeds your ability to ship them,
Important! your company will automatically rent additional containers for special
emergency rates. These rates are $3,000 per container for one period
rental, which is very high; so underestimating the need for containers
can be expensive.
Example
Assume that your sales forecast indicates that your are likely to sell
250,000 units of product 1, 200,000 units of product 2, and 50,000
units of product 1 into the government contract market. Also assume
that you currently own 400 containers. Therefore, if your sales
forecast is good, you will need 50 more containers. If you decide to
purchase them, you would enter "150" into the input field for
purchases and if you decide to rent them, you would enter "100" into
the input field for rentals. You could also rent some containers and
buy some containers at the same time, if you choose.
28
Marketing Budgets
(also called Marketing Expenses)
Description
You indicate your allocated marketing budget for each product in
this field. The effects of your marketing programs change over time
in response to your competitors’ actions. Products are marketed in
every country, unless you set a price of 0 (see Product Prices
section above).
 Note Volatile marketing spending is less effective than smooth

Important!
spending. Marketing dollars have impact on demand partially in the
period that they are spent and also in future periods in a
diminishing way. Marketing spending on each product has no
impact on the demand of the other product in the same country.
All marketing budgets are in local currencies. In addition,

countries of different sizes require different sized marketing
budgets to be effective.
All number entries are in thousands of local currency units.
29
Example
For instance, if you enter “600” for Product 1 in Mexico you are
really allocating 600,000 pesos. This will impact the sales of
product 1 in Mexico in the current period and in the future. This will
not impact at all the demand for product 2 in Mexico and this
spending will not impact at all the demand for product 1 in other
countries.
Marketing Consultant Fees
Marketing
consultants improve
marketing
effectiveness. Their
effect is multi-period
similar to
organizational
learning Description
You may hire consultants each period to help improve the
effectiveness of your marketing programs. Payments to
consultants are in US dollars.
Expenditures per period that exceed $300,000 face diminishing

effectiveness, but the impact of incremental spending is always
positive. Sharp, significant decreases in consulting usually diminish
30
marketing spending efficiency. There is a delayed cumulative

impact of this spending on the effectiveness of your other marketing
programs.
The consulting effort can be directed to any of the 6 countries

where your company may be marketing products. Marketing
consulting effort will impact both products equally within each
market.
31
Operations Inputs
Research & Development (R&D)
Steady research
spending is more
effective than volatile
spending of the same
magnitude.
Your relative quality

index refers to the
quality of your
product when
compared to the
average quality for
your world.
The manufacturing
cost of your product
Description
increases as your
quality increases You set your company’s R&D budget in this field. You will have a
relative to your
separate R&D budget for each product.
competitors. This
increase is a small R&D budgets influence the attractiveness of your product to your
one to reflect the
customers as measured by the Relative Quality Index (see the
higher quality of
components in the Outputs section)
watch. Effects of R&D expenditures are cumulative and long lasting, but
often with significant lag times.
All research facilities reside in the United States meaning research

costs are in US dollars.
Example
The impact of your company’s spending for R&D in Period T is fully
reflected in your Relative Quality Index at the end of Period T.
Products sold during Period T are perceived by your customers to
have the quality indicated at the end of Period T – 1.
32
For instance, assume that your Period 4 output for Product 1 shows
a quality index of 0.90. When you make your decisions for Period
5, you increase your R&D spending, and we will assume that this
higher spending level results in a relative quality increase to a level
of 1.0. Therefore, this higher spending results in an increase in
relative quality index which appears in your Period 5 output.
The products sold in Period 5 have a relative quality index of 0.90

in the minds of your customers. The products sold in Period 6 will
have a quality index of 1.0 in the minds of your customers.
Remember - Quality is both relative AND absolute. If you increase

research spending and others simultaneously increase spending
more than you do, then your RELATIVE quality will actually fall,
while your ABSOLUTE quality increases. Your customers care
both about relative and absolute quality.
In addition to making your products better with research spending,

you can also make them "greener". Your customers care about
how your products impact the environment as well as how they
function.
Production Consultant Fees
33
Description
Your company has the ability to hire consultants to improve the
efficiency of your manufacturing operations. These consultants are
directable and their effort must be allocated to the 2 products which
you manufacture. The impact of these consultants is primarily on
the variable manufacturing costs. They can not affect factory
capacity and they normally do not impact fixed costs in a significant
way. Sharp decreases in production consulting spending can
cause variable manufacturing costs to increase. Consultants
impact costs in a cumulative, multi-period way. Consulting
expenses diminish in effectiveness at higher levels. The impact of
additional consulting spending is never zero or negative, but
diminishes rapidly above $300,000/Quarter
Operations (existing Locations)
Operate existing
factories
Expand existing
factories
Downsize existing
Factories
Close Existing
Factories
34
Description
The first two fields define your production budget; that is, the
money allocated to your two factories to manufacture your product
in the current time period. Your funds automatically go to defray
material and labor costs as needed.
If you allocate more money than your factory needs to produce at

full capacity, the excess is not used. The amount is also not
available to earn the interest it would have had you left your cash in
the bank. Because the excess money is also not available for other
needs, your company may experience a cash flow problem.
The production budget appears in US dollars regardless of where

your factories are located; the simulation automatically converts the
amount into local currency based on the location of your factory.
Example
If you decide that you want to operate your company at less than
full capacity, you can accomplish this by reducing the amount of
money available for production.
Of course, the lowest possible amount you can enter here would
equal your fixed costs. In this case, your factory would produce a
very small number of product units at a very high cost per unit.
Consider an example using these simplified numbers:
 Unit Capacity = 250,000

 Fixed Cost = $1,000,000
 Variable Cost = $5,000,000
 Fixed Cost/Unit = $4.00/unit
 Variable Cost/Unit = $20.00/unit
To operate your company at full capacity under these

circumstances, you need to allocate $6,000,000. To operate at
80% of full capacity, you would need to allocate $5,000,000; that is:
$1,000,000 + $20 x 0.80 x 250,000 units of capacity = $5,000,000
35
Your total cost per unit while operating at 80% capacity would then
be $25.00, as compared to $24.00 if you were operating at full
capacity.
To operate at 60% of full capacity, you would have to reduce your

production budget to $4,000,000; that is:
$1,000,000 + $20 x 0.60 x 250,000 units of capacity
This reduction would yield a total cost per unit of $26.66.
You can see that as you lower your factory utilization below 100%,
your unit costs rise.
If unit costs rise as operation capacity drops, why would you ever
want to operate below full capacity?
You may find that your company has an excess production

capacity, excess inventory, or both, as a result of poor decision-
making or planning. In this situation, you may wish to tolerate
higher unit manufacturing costs to better match your sales to your
production levels.
Factory Construction (Also called Expansion)

Description
Your company may construct additional production capacity at its
existing location any time with an entry in these fields. Companies
can expand up to 15% of the previous period’s capacity and can do
the same in each upcoming period.
Expansion costs run between 16 and 25 US dollars per unit of

capacity, depending on the location of the factory. You must pay
for the expansion at the time of the request, but for accounting
purposes, the cost is capitalized and expensed over the life of the
factory. Factories depreciate at a constant rate of 1.25% per
quarter.
Expansion takes time to complete. If you request an expansion in

Period X, the additional capacity will be available in Period X + 1.
36
Example
Construction costs per unit of capacity (in US dollars):
Japan = $25 Mexico = $17 China = $16
United States = $20 United Kingdom = $22 Germany = $24
Presume that you have a 225,000 unit factory in Germany and you
find that you can sell more than this amount. You wish to expand
to 250,000 units of production capacity.
25,000 addition units would represent an 11.1% expansion, so it

would fall within the 15% maximum limit. This means that you can
accomplish the expansion in just one time period. The cost would
be 25,000 units x 24$/unit = $600,000. Notice that all construction
costs are in US dollars, independent of where the factory is being
built. The entry in the input field would be 600, since the input field
accepts decisions in thousands of dollars.
Existing Factory Capacity Decrease

Description
You can request the partial sale of your factory for exactly 75% of
its purchase price per unit. The number you enter represents
thousands of units of capacity for liquidation. You may decide to do
this if you discover that your factory is permanently too large
relative to the sales that you feel are achievable.

These funds are available immediately.
Important!
The amount you enter in this field is thousands of units of capacity
—not dollars. Plant capacity takes multiple periods to rebuild. A
mistake in this field can be devastating.
For example, if you enter 50 in this field, then 50,000 units of your
factory’s capacity will be sold for 75% of its net book value. You
will receive this amount in cash. You will also see an expense
equal to 25% of the net book value of the sold capacity in the Plant
Sale Loss section of your Finance Report (see the Outputs section
for more details).
37
Be Careful! If you enter 200 or 300 in this field, thinking that you are liquidating
a few hundred thousand dollars of capacity, you will soon discover
that you liquidated most of your plant capacity.
Factory Closure
You have the ability to completely close a factory. This decision is
entered in the fields directly below factory decreases. If you
choose to completely close a factory, it is not also necessary to
also indicate a factory capacity decrease. Closing a factory is
equivalent to completely selling all capacity. If you choose to close
a factory, it will be closed immediately at the start of the period in
which you make this choice. Do not allocate money to operate a
closing factory. You can continue selling inventory for multiple
periods without a factory but once the inventory is gone, your
warehouse will disappear.
After your factory is closed and your inventory is gone, you must
set zero prices for the markets in which you are not participating. If
you later decide to re-open your factory it is necessary to build a
new one using the factory relocation input fields described below.
Be sure that you understand that closing a factory is a very

unusual, expensive and risky decision that should be
thoroughly analyzed.
38
Factory Relocation
Request a new factory

in a new location
Specify the size of this

new factory
Status of factory
location. After you
have submitted and
approved your
decisions, your factory
location and status will
be displayed here.
Make sure you agree
with the actions about
to take place.
Description

Companies have the ability to move their factories. To relocate
Important! your factory to another country, you must enter the target
destination country of the new factory and the number of units of
product that factory will produce at full capacity. If you do not
Pay careful attention wish to relocate your factory, enter 0 in these fields. Do not
to this factory status leave any fields blank.
information. This
will tell you the A new factory can be no more than 15% larger than the old factory;
outcome of your
decisions on your the new factory can be any amount smaller than the old factory.
factory status. The You can also move both of your factories simultaneously.
timing of when
factories close and To permit the construction of your new factory, relocation takes one
relocate is important
to your planning period to complete. However, you can (and should) continue
production at the old factory until the new one is completed so that
there is no interruption in supply of product to sell.
39
A full description To document when construction on the new facility begins, both
of the Production you and your competitors will see a notice in the production report
Report appears in of your output file (see Outputs section).
the Outputs
section of this The old and new factories will yield products at the same quality
document. level. Any history of consulting spending will move from the old
factory to the new factory
Cost structure You will not know the exact cost structure of the new factory until
refers to your fixed
it is completed. Because you will not have operating information for
and variable
manufacturing the new factory, you should make a conservatively high estimate of
costs. the cost structure to set your production budget for the new factory
when it is first completed. After the factory has been in operation
for one period, you will be able to analyze the new cost structure.
Description (Factory Relocation, Continued)

Because new factories are usually inefficient in their initial stages of
operation, spending money on production consultants is an
effective way to drive these costs down quickly (see
Consultants section).
Newly relocated factories cannot be moved again until one period

after completion. The simulation reports no change if you try to
relocate a factory before construction is completed or if you try to
move it back to its original country.
Example
For instance, if you indicate that you want to move your factory
from China to Mexico during period T, you can continue production
at the China location until period T +1, when the facility in Mexico is
completed.
If you make the request for relocation in period T, you will have to
set your production budget for the new facility in period T + 1,
without any prior data about the cost structure associated with the
new location.
If you make a request for relocation in time period T, and

construction ends in period T + 1, then you cannot relocate that
factory again until period T + 2.
40
Financial input decisions
Debt Transactions
Each company has a limited line of credit that allows it to borrow
money for operations costs, as needed. Companies can make
payments or increase borrowing as desired. Think of this as a
revolving line of credit. The simulation does not make loan
payments automatically; you must designate money for this
purpose. If you take no action, your loan balance increases each
time period by an amount equal to the interest expense. You can
only borrow money in US dollars.
Credit limits appear at the bottom of the Finance Report output for
each period (see the Outputs section for more information).
Interest rates appear in this same location. Initially, all teams pay
the same interest rates, but as play continues the rates may
fluctuate. The interest rate that you pay depends on your recent
past profitability. If you are losing money, your debt will carry a risk
premium up to 100% above the rates available to the best
companies.
41
Your credit line and loan repayment costs are in US dollars. Your
In this case, debt is capped at 200% of the book value of your equity. However,
equity refers to
it will become risky and expensive at lower levels so it is unlikely it
the common
stock plus is a good idea to operate with debt levels at or near the upper limit.
retained
earnings as Stock Transactions (Buy or Sell)
they appear in
your balance
sheet
VERY Description
IMPORTANT
Since stock You can raise needed cash by issuing new stock in your company.
transactions will
likely impact stock You can also return unneeded cash to owners by buying shares of
prices, these your own company. In these fields, you choose the dollar amount of
transactions must be the transaction. The shares will be bought or sold at the most
pre-announced to
the stock market. recent stock market closing price. SEE THE NOTE REGARDING
There is a CFO area STOCK MARKET REQUIRED ANNOUNCEMENTS TO THE LEFT.
within the stock
market provided Stock transactions cost 1% of the amount purchased or sold and
where the CFO of
each team is appear as miscellaneous fees in your Detailed Income Statement
required to pre- on your Finance Report (see Outputs section for more information).
announce any stock
transactions one Companies cannot buy or sell securities of other companies.
trading day in
advance of the
transaction. If the Example
announcement is not
made, then the Presume that your company wishes to purchase 1 million dollars of
transaction can not stock in the next simulation cycle which is scheduled for
be completed.
Wednesday morning. The CFO of the company, (or any member of
the team designated by the president to have authority to make
such announcements), is required to post an announcement within
the stock market prior to 2PM on Tuesday. In addition to the
announcement, the transaction must be entered as an input
decision. The stock price used for the transaction will be the
closing price Tuesday.
42
Dividends must be Dividends Paid

announced by the CFO
in the announcement
area of the stock
market in the same
manner as stock Description
transactions. If you
fail to make the In addition to stock sales, you can also pay cash dividends.
announcement by the
deadline then you will The simulation distributes dividends in the period that you declare
not be permitted to pay them to reduce retained earnings. The common stock field on your
the dividend. This
assures normal balance sheet will always remain at 1million dollars as this
corporate governance represent a par value for your stock. Remember that dividends will
by forcing disclosure
of information relevant
come out of cash and retained earnings.
to investors.
Do not pay dividends that drive retained earnings into negative
amounts. If retained earnings become negative because your
company has been unprofitable, then you will not be permitted to
pay dividends until retained earnings are again above zero.
Dividends paid by companies are actually distributed to the owners

of those securities. So dividends will make your company's stock
look more attractive and may cause increased interest from buyers.
43
Collections Budget
Description
Your company's bad
debt expense can be By allocating money to collect receivables, you can accelerate the
negative if you are rate at which your company collects these receivables and you can
successful collecting
receivables which also influence your company’s bad debt expense rate.
were previously Overly aggressive collection tactics often drive customers away,
written off as a bad
which causes your sales to suffer. Be cautious in allocating your
debt.
collections budget.
Collection budgets appear in thousands of dollars.
Example
If your company spends nothing on collections in time period T, that
is, you make no entry in this field, the simulation will automatically
44

apply a baseline bad debt rate of 0.7% of the retail sales from time
period T – 2.
Important!
You can drive this rate below 0.7% by your collections budget
choices.
Later in the description of the output, you will find a detailed

description of how your receivables are collected. You will also find
a description as to how and how much you can accelerate this
payment by setting a non-zero collection budget.
See the section in the finance report which describes the timing of
cash flows.
Early Payment Incentive
You have the ability to offer an early payment discount to your

customers of up to 2 percent of your selling price. If you choose to
offer this discount, it must be made available to all of your customers
for the current time period. Some of your customers will respond by
paying you faster and some will not. You can use this cash
management tool to increase cash flow in the current time period.
Enter any early

payment incentive
as a whole number.
So 1 percent should
be entered as 1.0
45
Insurance
There are 3
types of
insurance that
you can buy
Description
As indicated, your company can buy three types of insurance.
The system uses premium rates to determine costs. Rates and

coverage appear on the outputs for each period.
Currently, rates are as follows (in US dollars, per 100,000 dollars of

coverage, per quarter):
 Property casualty = $400

 Directors and officers liability = $300
 Product liability = $1,000
The decision to buy insurance depends on each team's

assessment of the risks and benefits
46
The spot rate is

the current
currency
exchange rate.
The forward rate Futures Currency Market

is the expected
or future
exchange rate
Description
This field allows you to buy and sell forward contracts on different
blocks of currency. Each period, a spot rate and a forward rate
for each currency will be published. You may buy or sell contracts
at the current forward rate.
Numbers for this field appear in units of millions of non-dollar

currency. You can lose a great deal of money very quickly if you
do not use these financial instruments carefully.
47
When you sell products, you are paid in local currency, not in US
dollars. If one or both of your factories are located outside of the
US, they will consume local, non-dollar currency.
Because your factories might reside in different countries around

the world, and because you receive payment in many currencies,
forward contracts are useful in hedging your exchange rate risk. To
reduce this risk, you can buy contracts in the currencies where you
pay costs and sell contracts in the currencies where you collect
your revenues.
The expected payoff of these contracts is 0 because the contracts

are sold at the current forward rate. If the forward rate in Period T
and the spot rate in Period T + 1 are equal, then all contracts have
no impact. You gain or lose only if the spot rate differs from the
previous period’s forward rate.
These contracts allow your company to protect itself from currency

fluctuations that may impact your costs as well as the value of your
sales outside the United States.
Example
For instance, if you enter 25 in the field labeled "Buy Currency Forward
Contract, Yen", you are agreeing to purchase 25 million yen at the
current forward rate of exchange. The contract is then settled at
the end of the time period.
If you are not familiar with futures contracts, enter 0 or a small

number until you understand how and when the contracts pay.
Consider these examples, assuming the following information:
Period T
Spot Rate = 120 yen
Forward Rate = 110 yen
Consider 3 possible scenarios for Period T + 1?

A. spot rate =110 (yen valued as expected)
B. spot rate = 115 (yen less valuable than expected)
48
C. spot rate = 105 (yen more valuable than expected)
What would happen if you BOUGHT yen in Period

T?
A. Nothing, because the yen is worth exactly what was expected.
B. You lose money because the yen is worth less than expected.
C. You gain money because the yen is worth more than expected.
What would happen if you SOLD yen in Period T?

A. Nothing, because the yen is worth exactly what was expected.
B. You gain money because the yen is worth less than expected.
C. You lose money because the yen is worth more than expected.
49
The Management Game Outputs
Outputs
Results of a move in the simulation cycle based on

the variable entries made by teams
Teams have four pre-formatted outputs available to them as the
Game finishes each move or period. The pre-formatted outputs will
help you to view the information you need to make decisions for
your company.

Each report is derived from raw data. When you open the file, be
Important!
sure to read the first page, called READ ME, very carefully.
This page explains how to manipulate information in the file.
Recall that the pre-formatted outputs include:
 The Market Report provides summary information about the

company's place and performance within the world market and
explains how the company's pricing compares to other companies
in that world.
 The Production Report describes the activity of a company's
two factories, including the unit price and capacity at which the
factory is operating.
 The Finance Report supplies information about what your
competitors are doing, including the size of their facilities, the
amounts of their loans, and their retained earnings for the period.
 The Cash Flow report is a simple, single-period
inflow/outflow statement that can help teams manage their cash
flow.
 The Competitors report provides benchmarking data over
time regarding the activities of all of the teams in your world.
50
The Management Game Outputs
51
The Management Game Outputs—Market Report
Market Report
The Market Report contains three main sections that provide specific
information about your company’s performance during a single
period:
 Market Statistics section provides information about the

climate and condition of the world market. The statistics relative to
Product 1 appear first in the section; Product 2 statistics appear
directly below Product 1 information.
 Pricing Data section describes your company’s place in the
world market by comparing the price and quality of your product(s)
with those of other companies in your world. Again, results for
Product 1 appear first in this section and Product 2 results follow.
 Contract Marketing Information section offers a description
of the activity in the contract market.
The following diagram identifies these

sections for you.
52
P e rio d C u rre n tly D is p la y e d 8 MARKET REPORT S e le c t P e r io d to V ie w

C om pany N um ber 3 8
P r o d u c t 1 M a r k e t S t a t is t ic s World
Jap an % W ld M e x ic o % W ld C h in a % W ld U . K . % W ld G e r m a n y% W ld U . S . % Wld Totals
T o ta l D e m a n d ( U n it s ) 2 3 5 ,4 1 8 1 9 % 1 4 4 ,5 1 5 1 2 % 1 0 5 ,7 4 1 9 % 1 4 8 ,2 8 5 1 2 % 1 9 6 ,9 8 0 1 6 % 3 8 8 , 1 6 8 32% 1,219,107
1 T o ta l S a le s (U n its ) 2 3 5 ,4 1 8 1 9 % 1 4 4 ,5 1 5 1 2 % 1 0 5 ,7 4 1 9 % 1 4 8 ,2 8 5 1 2 % 1 9 6 ,9 8 0 1 6 % 3 8 8 , 1 6 8 32% 1,219,107
T o t a l M a r k e tin g E x p P 91 1 ,9 9 9 ,9 7 81 0 % 3 ,4 4 9 ,9 9 7 6 % 4 ,6 0 0 ,0 1 8 8 % 6 0 0 ,0 0 0 1 3 % 1 , 6 9 9 ,9 9 82 8 % 2 ,3 0 0 ,0 0 0 35% 6,628,896
M kt sh M kt sh M kt sh M kt sh M kt sh Mkt sh
C o m p a n y D e m a n d (U n its ) 4 6 ,7 9 7 2 0 % 2 9 ,0 7 3 2 0 % 2 2 ,8 9 4 2 2 % 2 5 ,7 9 6 1 7 % 3 0 ,0 4 1 1 5 % 4 9 ,5 0 8 13% 204,109
C o m p a n y S a le s ( U n its ) 4 6 ,7 9 7 2 0 % 2 9 ,0 7 3 2 0 % 2 2 ,8 9 4 2 2 % 2 5 ,7 9 6 1 7 % 3 0 ,0 4 1 1 5 % 4 9 ,5 0 8 13% 204,109
2 A d d itio n a l S a le s ( U n it s ) 0 0% 0 0% 0 0% 0 0% 0 0% 0 0% 0
Marketing C o m p a n y M a rk e tin g E x2p1 ,9 9 9 ,9 8 62 4 % 7 4 9 ,9 9 8 2 2 % 1 ,0 0 0 ,0 0 42 2 % 1 2 0 ,0 0 0 2 0 % 3 0 0 ,0 0 0 1 8 % 3 0 0 , 0 0 0 13%
Statistics % S ls % S ls % S ls % S ls % S ls % Sls
C o m p a n y S a le s ( c u r re n2c1y 5) ,2 6 6 ,2 0 02 0 % 9 ,4 4 8 ,7 2 5 1 2 % 9 ,3 8 6 ,5 4 01 3 % 7 5 4 ,5 3 3 1 3 % 1 , 2 0 1 ,6 4 01 6 % 2 ,0 7 9 ,3 3 6 25% 8,174,333
Section. Divided D e liv e r e d M fg C o s1t 3 4 ,0 0 0 ,0 6 86 2 % 6 ,1 1 3 ,1 1 2 6 5 % 4 ,3 5 4 ,0 5 54 6 % 3 8 9 ,2 5 0 5 2 % 5 9 1 , 2 6 7 4 9 % 1 ,0 8 2 ,6 8 6 52% 4,443,331
into 3 areas 3
G r o s s M a r g in 8 1 ,2 6 6 ,1 3 23 8 %
C o m p a n y M a rk e tin g E x2p1 ,9 9 9 ,9 8 61 0 %
3 ,3 3 5 ,6 1 3 3 5 %
7 4 9 ,9 9 8 8 %
5 ,0 3 2 ,4 8 55 4 %
1 ,0 0 0 ,0 0 41 1 %
3 6 5 ,2 8 3 4 8 %
1 2 0 ,0 0 0 1 6 %
6 1 0 ,3 7 3 5 1 %
3 0 0 ,0 0 0 2 5 %
9 9 6 , 6 5 0 48%
3 0 0 , 0 0 0 14%
3,731,002
1,163,572
I m p o rt T a rif fs 2 5 ,8 3 1 ,9 4 41 2 % 5 6 6 ,9 2 4 6 % 0 0% 7 5 ,4 5 3 1 0 % 1 2 0 ,1 6 4 1 0 % 1 0 3 , 9 6 7 5% 599,922
1.World data C o n t rib u tio n M a rg in3 3 ,4 3 4 ,2 0 21 6 % 2 ,0 1 8 ,6 9 1 2 1 % 4 ,0 3 2 ,4 8 14 3 % 1 6 9 ,8 3 0 2 3 % 1 9 0 ,2 0 9 1 6 % 5 9 2 , 6 8 4 29% 1,967,508
2.Company Data P r o d u c t 2 M a r k e t S t a t is t ic s World
3. Profitability by Jap an % W ld M e x ic o % W ld C h in a % W ld U . K . % W ld G e r m a n y% W ld U .S . % Wld Totals
country market T o ta l D e m a n d ( U n it s ) 1 9 5 ,9 5 3 1 8 % 1 1 8 ,3 2 2 1 1 % 9 0 ,4 8 1 8 % 1 4 9 ,3 7 1 1 4 % 1 8 7 ,3 6 0 1 8 % 3 2 4 , 9 1 9 30% 1,066,406
information T o ta l S a le s (U n its ) 1 9 5 ,9 5 3 1 8 % 1 1 8 ,3 2 2 1 1 % 9 0 ,4 8 1 8 % 1 4 9 ,3 7 1 1 4 % 1 8 7 ,3 6 0 1 8 % 3 2 4 , 9 1 9 30% 1,066,406
T o t a l M a r k e tin g E x p P 72 0 ,0 0 0 ,1 2 6 7 % 3 ,3 9 9 ,9 9 9 5 % 3 ,7 0 0 ,0 1 5 5 % 1 ,2 9 6 ,9 9 9 2 4 % 1 , 9 7 5 ,0 0 12 8 % 2 ,5 0 0 ,0 0 0 32% 7,873,977
M kt sh M kt sh M kt sh M kt sh M kt sh Mkt sh
C o m p a n y D e m a n d (U n its ) 3 9 ,2 6 9 2 0 % 2 5 ,8 2 2 2 2 % 2 0 ,4 2 0 2 3 % 3 3 ,9 6 0 2 3 % 3 5 ,6 8 6 1 9 % 6 8 ,8 2 6 21% 223,983
C o m p a n y S a le s ( U n its ) 3 9 ,2 6 9 2 0 % 2 5 ,8 2 2 2 2 % 2 0 ,4 2 0 2 3 % 3 3 ,9 6 0 2 3 % 3 5 ,6 8 6 1 9 % 6 8 ,8 2 6 21% 223,983
E x c e s s D e m a n d (U n its ) 0 0% 0 0% 0 0% 0 0% 0 0% 0 0% 0
C o m p a n y M a rk e tin g E x1p0 ,0 0 0 ,0 1 81 4 % 6 0 0 ,0 0 2 1 8 % 7 0 0 ,0 0 3 1 9 % 2 9 9 ,0 0 0 2 3 % 3 2 5 ,0 0 0 1 6 % 5 0 0 , 0 0 0 20%
% S ls % S ls % S ls % S ls % S ls % Sls
C o m p a n y S a le s ( c u r re n2c7y 0) ,9 5 6 ,1 0 01 8 % 1 1 ,6 1 9 ,9 0 01 1 % 1 0 ,2 1 0 ,0 0 01 0 % 1 ,1 2 0 ,6 8 0 1 5 % 1 , 6 4 1 ,5 5 61 6 % 3 ,3 0 3 ,6 4 8 30% 11,157,184
D e liv e r e d M fg C o s1t 7 1 ,7 5 2 ,7 0 96 3 % 7 ,8 6 1 ,8 9 9 6 8 % 5 ,8 8 6 ,4 7 75 8 % 7 4 7 ,2 5 7 6 7 % 1 , 0 2 4 ,2 2 16 2 % 2 ,2 1 2 ,0 6 1 67% 7,212,577
G r o s s M a r g in 9 9 ,2 0 3 ,3 9 13 7 % 3 ,7 5 8 ,0 0 1 3 2 % 4 ,3 2 3 ,5 2 34 2 % 3 7 3 ,4 2 3 3 3 % 6 1 7 ,3 3 5 3 8 % 1 ,0 9 1 ,5 8 7 33% 3,944,607
M a r k e tin g E x p e n s e s1 0 ,0 0 0 ,0 1 8 4 % 6 0 0 ,0 0 2 5 % 7 0 0 ,0 0 3 7 % 2 9 9 ,0 0 0 2 7 % 3 2 5 ,0 0 0 2 0 % 5 0 0 , 0 0 0 15% 1,511,553
I m p o rt T a rif fs 3 2 ,5 1 4 ,7 3 21 2 % 6 9 7 ,1 9 4 6 % 8 1 6 ,8 0 0 8 % 0 0% 0 0% 1 6 5 , 1 8 2 5% 573,775
C o n t rib u tio n M a rg in5 6 ,6 8 8 ,6 4 12 1 % 2 ,4 6 0 ,8 0 5 2 1 % 2 ,8 0 6 ,7 2 02 7 % 7 4 ,4 2 3 7 % 2 9 2 ,3 3 5 1 8 % 4 2 6 , 4 0 4 13% 1,859,280
P r o d u c t 1 P r ic e s RELATIVE
Jap an r e l p rc M e x ic o r e l p rc C h in a re l p rc U .K . re l p r c G e r m a n y re l p rc U .S . rel prc QUALITY
C o m p a n y 1 4 ,6 0 0 .0 0 98% 3 2 5 .0 0 98% 4 1 0 .0 0 97% 3 2 .0 0 109% 3 7 .0 0 9 6 % 3 6 .0 0 93% 90.1%
C o m p a n y 2 4 ,8 0 0 .0 0 103% 3 4 0 .0 0 102% 4 4 0 .0 0 104% 3 1 .0 0 105% 3 9 .0 0 1 0 2 % 4 0 .0 0 103% 115.2%
C o m p a n y 3 4 ,6 0 0 .0 0 98% 3 2 5 .0 0 98% 4 1 0 .0 0 97% 2 9 .2 5 99% 4 0 .0 0 1 0 4 % 4 2 .0 0 108% 90.6%
C o m p a n y 4 4 ,8 0 0 .0 0 103% 3 5 0 .0 0 105% 4 4 0 .0 0 104% 2 8 .0 0 95% 4 0 .0 0 1 0 4 % 4 0 .0 0 103% 115.5%
C o m p a n y 5 4 ,6 0 0 .0 0 98% 3 2 5 .0 0 98% 4 1 0 .0 0 97% 2 7 .0 0 92% 3 6 .0 0 9 4 % 3 6 .0 0 93% 88.6%
Pricing and A v e r a g e P ric e 4 ,6 8 0 .0 0 3 3 3 .0 0 4 2 2 .0 0 2 9 .4 5 3 8 .4 0 3 8 .8 0
Quality P r o d u c t 2 P r ic e s RELATIVE
Information Jap an
C o m p a n y 1 6 , 9 0 0 .0 0
r e l p rc
101%
M e x ic o
4 5 0 .0 0
r e l p rc
98%
C h in a
5 0 0 .0 0
re l p rc
100%
U .K .
3 3 .0 0
re l p r c G e r m a n y re l p rc
97% 4 6 .0 0 1 0 2 %
U .S .
4 8 .0 0
rel prc
98%
QUALITY
116.2%
C o m p a n y 2 6 , 3 0 0 .0 0 92% 4 2 5 .0 0 93% 4 6 7 .5 0 94% 3 2 .0 0 94% 4 4 .0 0 97% 4 8 .0 0 98% 79.5%
C o m p a n y 3 6 , 9 0 0 .0 0 101% 4 5 0 .0 0 98% 5 0 0 .0 0 100% 3 3 .0 0 97% 4 6 .0 0 1 0 2 % 4 8 .0 0 98% 116.6%
C o m p a n y 4 7 , 1 0 0 .0 0 104% 5 1 5 .0 0 112% 5 2 5 .0 0 105% 3 9 .0 0 1 1 5 % 4 4 .0 0 97% 5 3 .0 0 108% 93.0%
C o m p a n y 5 6 , 9 0 0 .0 0 101% 4 5 0 .0 0 98% 5 0 0 .0 0 100% 3 3 .0 0 97% 4 6 .0 0 1 0 2 % 4 8 .0 0 98% 94.7%
A v e r a g e p r ic e6 , 8 2 0 .0 0 4 5 8 .0 0 4 9 8 .5 0 3 4 .0 0 4 5 .2 0 4 9 .0 0
Information C o n t r a c t M a r k e t in f o r m a t io n
P r ic e t o b e a t
about activity in C o n tr a c t W ith z e o Y o u r c o n tr a c t Y o u r C o n tr a c t Y o u r C o n tr a c t C o n tra c t
the contract
market
53
123
Market Report—Market Statistics Section

Now take a closer look at the Market Statistics section. Even though
Market Statistics contains information about both Product 1 and
Product 2, this discussion focuses on the information for Product 1.
Keep in mind as you read that these descriptions also apply to the
Product 2 information.
The Market Statistics section for Product 1 contains three

subsections that describe the activity of Product 1. The information
appears in three subsections so that you can easily identify where
your company is making money and where problems exist.
The first subsection, (see arrow below), indicates the total product
demand, total sales, and total marketing expenses for each country
in both units and percentages. Notice, in this example, the total
demand equals the total sales. This means that for this period there
were no product shortages and no “stock out” situations. Total sales
that are less than total demand would indicate that a product
shortage had occurred.
P r o d u c t 1 M a r k e t S t a t is ti c s W o rld
Japan % W ld M e x ic o % W ld C h in a % W ld U . K . % W ld G e r m a n y% W ld U . S . % W ld T o ta ls
T o t a l D e m a n d ( U n it s ) 2 3 5 , 4 1 8 1 9 % 1 4 4 ,5 1 5 1 2 % 1 0 5 ,7 4 1 9 % 1 4 8 ,2 8 5 1 2 % 1 9 6 ,9 8 0 1 6 % 3 8 8 ,1 6 8 32% 1 ,2 1 9 ,1 0 7
T o ta l S a le s ( U n its ) 2 3 5 , 4 1 8 1 9 % 1 4 4 ,5 1 5 1 2 % 1 0 5 ,7 4 1 9 % 1 4 8 ,2 8 5 1 2 % 1 9 6 ,9 8 0 1 6 % 3 8 8 ,1 6 8 32% 1 ,2 1 9 ,1 0 7
T o ta l M a r k e tin g E x p P911 , 9 9 9 , 9 7 81 0 % 3 ,4 4 9 , 9 9 7 6 % 4 ,6 0 0 , 0 1 8 8 % 6 0 0 , 0 0 0 1 3 % 1 , 6 9 9 , 9 9 82 8 % 2 , 3 0 0 , 0 0 0 3 5 % 6 ,6 2 8 ,8 9 6
M kt sh M kt sh M kt sh M kt sh M kt sh M kt sh
C o m p a n y D e m a n d ( U n it s ) 4 6 ,7 9 7 2 0 % 2 9 ,0 7 3 2 0 % 2 2 ,8 9 4 2 2 % 2 5 ,7 9 6 1 7 % 3 0 ,0 4 1 1 5 % 4 9 ,5 0 8 13% 2 0 4 ,1 0 9
C o m p a n y S a le s ( U n it s ) 4 6 ,7 9 7 2 0 % 2 9 ,0 7 3 2 0 % 2 2 ,8 9 4 2 2 % 2 5 ,7 9 6 1 7 % 3 0 ,0 4 1 1 5 % 4 9 ,5 0 8 13% 2 0 4 ,1 0 9
A d d itio n a l S a le s ( U n it s ) 0 0% 0 0% 0 0% 0 0% 0 0% 0 0% 0
C o m p a n y M a r k e tin g E x2 p1 , 9 9 9 , 9 8 62 4 % 7 4 9 ,9 9 8 2 2 % 1 ,0 0 0 , 0 0 42 2 % 1 2 0 ,0 0 0 2 0 % 3 0 0 ,0 0 0 1 8 % 3 0 0 ,0 0 0 13%
% S ls % S ls % S ls % S ls % S ls % S ls
C o m p a n y S a le s ( c u r r e n2c1y5) , 2 6 6 ,2 0 02 0 % 9 ,4 4 8 , 7 2 5 1 2 % 9 ,3 8 6 , 5 4 01 3 % 7 5 4 , 5 3 3 1 3 % 1 , 2 0 1 , 6 4 01 6 % 2 , 0 7 9 , 3 3 6 2 5 % 8 ,1 7 4 ,3 3 3
D e liv e re d M f g C o s1t 3 4 , 0 0 0 ,0 6 86 2 % 6 ,1 1 3 , 1 1 2 6 5 % 4 ,3 5 4 , 0 5 54 6 % 3 8 9 ,2 5 0 5 2 % 5 9 1 , 2 6 7 4 9 % 1 , 0 8 2 , 6 8 65 2 % 4 ,4 4 3 ,3 3 1
G ro s s M a r g in 8 1 , 2 6 6 , 1 3 23 8 % 3 ,3 3 5 , 6 1 3 3 5 % 5 ,0 3 2 , 4 8 55 4 % 3 6 5 ,2 8 3 4 8 % 6 1 0 ,3 7 3 5 1 % 9 9 6 ,6 5 0 48% 3 ,7 3 1 ,0 0 2
C o m p a n y M a r k e tin g E x2 p1 , 9 9 9 , 9 8 61 0 % 7 4 9 ,9 9 8 8 % 1 ,0 0 0 , 0 0 41 1 % 1 2 0 ,0 0 0 1 6 % 3 0 0 ,0 0 0 2 5 % 3 0 0 ,0 0 0 14% 1 ,1 6 3 ,5 7 2
I m p o r t T a r if fs 2 5 , 8 3 1 , 9 4 41 2 % 5 6 6 ,9 2 4 6 % 0 0% 7 5 ,4 5 3 1 0 % 1 2 0 ,1 6 4 1 0 % 1 0 3 ,9 6 7 5% 5 9 9 ,9 2 2
C o n t r ib u t io n M a r g in3 3 , 4 3 4 , 2 0 21 6 % 2 ,0 1 8 , 6 9 1 2 1 % 4 ,0 3 2 , 4 8 14 3 % 1 6 9 ,8 3 0 2 3 % 1 9 0 ,2 0 9 1 6 % 5 9 2 ,6 8 4 29% 1 ,9 6 7 ,5 0 8
54
The percentages in the Market Statistics section have different

meanings in each subsection. For instance, German consumers of
Product 1 comprise 16% of the world sales; however, the same
consumers are receiving more than 28% of world marketing dollars
for this period.
In contrast, Japanese Product 1 consumers represent 19% of the

world demand, but only 10% of world marketing dollars are spent in
Japan.
Once you know the world market totals, you can determine how well
your company did in each market by examining the remaining
subsections directly underneath the world market statistics. First,
consider the company demand statistics, (see arrow below), which
indicates your company’s sales performance in each country.
P r o d u c t 1 M a r k e t S t a t is t ic s W o rld
Japan % W ld M e x ic o % W ld C h in a % W ld U .K . % W ld G e r m a n y% W ld U .S . % W ld T o ta ls
T o ta l D e m a n d ( U n its ) 2 3 5 ,4 1 8 1 9 % 1 4 4 ,5 1 5 1 2 % 1 0 5 ,7 4 1 9 % 1 4 8 ,2 8 5 1 2 % 1 9 6 ,9 8 0 1 6 % 3 8 8 ,1 6 8 3 2 % 1 ,2 1 9 ,1 0 7
T o t a l S a le s (U n its ) 2 3 5 ,4 1 8 1 9 % 1 4 4 ,5 1 5 1 2 % 1 0 5 ,7 4 1 9 % 1 4 8 ,2 8 5 1 2 % 1 9 6 ,9 8 0 1 6 % 3 8 8 ,1 6 8 3 2 % 1 ,2 1 9 ,1 0 7
T o t a l M a r k e tin g E x p P9 11 , 9 9 9 ,9 7 81 0 % 3 , 4 4 9 ,9 9 7 6 % 4 ,6 0 0 ,0 1 8 8 % 6 0 0 , 0 0 0 1 3 % 1 , 6 9 9 , 9 9 82 8 % 2 ,3 0 0 ,0 0 0 3 5 % 6 ,6 2 8 ,8 9 6
C o m p a n y D e m a n d ( U n its )4 6 ,7 9 7 2 0 % 2 9 ,0 7 3 2 0 % 2 2 ,8 9 4 2 2 % 2 5 ,7 9 6 1 7 % 3 0 ,0 4 1 1 5 % 4 9 ,5 0 8 1 3 % 2 0 4 ,1 0 9
C o m p a n y S a le s ( U n its ) 4 6 ,7 9 7 2 0 % 2 9 ,0 7 3 2 0 % 2 2 ,8 9 4 2 2 % 2 5 ,7 9 6 1 7 % 3 0 ,0 4 1 1 5 % 4 9 ,5 0 8 1 3 % 2 0 4 ,1 0 9
A d d itio n a l S a le s ( U n its ) 0 0% 0 0% 0 0% 0 0% 0 0% 0 0% 0
C o m p a n y M a rk e t in g E 2x 1p , 9 9 9 ,9 8 62 4 % 7 4 9 ,9 9 8 2 2 % 1 ,0 0 0 ,0 0 42 2 % 1 2 0 ,0 0 0 2 0 % 3 0 0 ,0 0 0 1 8 % 3 0 0 ,0 0 0 1 3 %
C o m p a n y S a le s ( c u r r e n2 c1 y5 ), 2 6 6 ,2 0 02 0 % 9 , 4 4 8 ,7 2 5 1 2 % 9 ,3 8 6 ,5 4 01 3 % 7 5 4 , 5 3 3 1 3 % 1 , 2 0 1 , 6 4 01 6 % 2 ,0 7 9 ,3 3 6 2 5 % 8 ,1 7 4 ,3 3 3
D e liv e r e d M fg C o s1 t3 4 , 0 0 0 ,0 6 86 2 % 6 , 1 1 3 ,1 1 2 6 5 % 4 ,3 5 4 ,0 5 54 6 % 3 8 9 ,2 5 0 5 2 % 5 9 1 ,2 6 7 4 9 % 1 ,0 8 2 ,6 8 6 5 2 % 4 ,4 4 3 ,3 3 1
G r o s s M a rg in 8 1 , 2 6 6 ,1 3 23 8 % 3 , 3 3 5 ,6 1 3 3 5 % 5 ,0 3 2 ,4 8 55 4 % 3 6 5 ,2 8 3 4 8 % 6 1 0 ,3 7 3 5 1 % 9 9 6 ,6 5 0 4 8 % 3 ,7 3 1 ,0 0 2
C o m p a n y M a rk e t in g E 2x 1p , 9 9 9 ,9 8 61 0 % 7 4 9 ,9 9 8 8 % 1 ,0 0 0 ,0 0 41 1 % 1 2 0 ,0 0 0 1 6 % 3 0 0 ,0 0 0 2 5 % 3 0 0 ,0 0 0 1 4 % 1 ,1 6 3 ,5 7 2
Im p o r t T a rif fs 2 5 , 8 3 1 ,9 4 41 2 % 5 6 6 ,9 2 4 6 % 0 0% 7 5 ,4 5 3 1 0 % 1 2 0 ,1 6 4 1 0 % 1 0 3 ,9 6 7 5 % 5 9 9 ,9 2 2
C o n t r ib u tio n M a rg in3 3 , 4 3 4 ,2 0 21 6 % 2 , 0 1 8 ,6 9 1 2 1 % 4 ,0 3 2 ,4 8 14 3 % 1 6 9 ,8 3 0 2 3 % 1 9 0 ,2 0 9 1 6 % 5 9 2 ,6 8 4 2 9 % 1 ,9 6 7 ,5 0 8
In this example, the company had below-average market share in

the United States (13% vs. 20%), but above-average market share in
China (22% vs. 20%).
55
This company is spending 13% of the total marketing dollars which

are being spent by all 5 companies in the United States, even though
the United States represents 32% of the world market.
Notice the line in the display titled “Additional Sales.” If one of your
competitors stocks out and their customers buy from you, these
sales will appear as Additional Sales for your company. In this
example, however, the company had no additional sales during this
period. It is important that you know how to distinguish between
sales that your company generated and sales that were given to you
by the poor planning of your competitors. Product 1 customers will
always behave like this. They will shop around until they buy a
product from some company. So a stockout in any product 1 market
will send customers to one of your competitors.
Now consider the last Market Statistics subsection, which outlines

company profitability, see arrow here.
P r o d u c t 1 M a r k e t S ta tis tic s W orld

Japan % W ld M e x ic o % W ld C h in a % W ld U .K . % W ld G e rm a n y % W ld U .S . % W ld T otals
T o ta l D e m a n d (U n its ) 2 3 5 , 4 1 8 1 9 % 1 4 4 ,5 1 5 1 2 % 1 0 5 ,7 4 1 9 % 1 4 8 ,2 8 5 1 2 % 1 9 6 ,9 8 0 1 6 % 3 8 8 ,1 6 8 3 2% 1,219 ,107
T o ta l S a le s (U n its ) 2 3 5 ,4 1 8 1 9 % 1 4 4 ,5 1 5 1 2 % 1 0 5 ,7 4 1 9 % 1 4 8 ,2 8 5 1 2 % 1 9 6 ,9 8 0 1 6 % 3 8 8 ,1 6 8 3 2% 1,219 ,107
T o ta l M a rk e tin g E x p P 1 9 1 ,9 9 9 ,9 7 8 1 0 % 3 ,4 4 9 ,9 9 7 6 % 4 ,6 0 0 ,0 1 8 8 % 6 0 0 ,0 0 0 1 3 % 1 ,6 9 9 ,9 9 8 2 8 % 2 ,3 0 0 ,0 0 0 3 5% 6,628 ,896
C o m p a n y D e m a n d (U n its ) 4 6 , 7 9 7 2 0 % 2 9 ,0 7 3 2 0 % 2 2 ,8 9 4 2 2 % 2 5 ,7 9 6 1 7 % 3 0 ,0 4 1 1 5 % 4 9 ,5 0 8 1 3% 204 ,109
C o m p a n y S a le s (U n its ) 4 6 ,7 9 7 2 0 % 2 9 ,0 7 3 2 0 % 2 2 ,8 9 4 2 2 % 2 5 ,7 9 6 1 7 % 3 0 ,0 4 1 1 5 % 4 9 ,5 0 8 1 3% 204 ,109
A d d itio n a l S a le s (U n its ) 0 0% 0 0% 0 0% 0 0% 0 0% 0 0% 0
C o m p a n y M a rk e tin g E x p2 1 ,9 9 9 ,9 8 6 2 4 % 7 4 9 ,9 9 8 2 2 % 1 ,0 0 0 ,0 0 4 2 2 % 1 2 0 ,0 0 0 2 0 % 3 0 0 ,0 0 0 1 8 % 3 0 0 ,0 0 0 1 3%
C o m p a n y S a le s (c u rre n c y2)1 5 , 2 6 6 ,2 0 0 2 0 % 9 ,4 4 8 ,7 2 5 1 2 % 9 ,3 8 6 ,5 4 0 1 3 % 7 5 4 ,5 3 3 1 3 % 1 ,2 0 1 ,6 4 0 1 6 % 2 ,0 7 9 ,3 3 6 2 5% 8,174 ,333
D e liv e re d M f g C o s t 1 3 4 , 0 0 0 ,0 6 8 6 2 % 6 ,1 1 3 ,1 1 2 6 5 % 4 ,3 5 4 ,0 5 5 4 6 % 3 8 9 ,2 5 0 5 2 % 5 9 1 ,2 6 7 4 9 % 1 ,0 8 2 ,6 8 6 5 2% 4,443 ,331
G ro s s M a rg in 8 1 ,2 6 6 ,1 3 2 3 8 % 3 ,3 3 5 ,6 1 3 3 5 % 5 ,0 3 2 ,4 8 5 5 4 % 3 6 5 ,2 8 3 4 8 % 6 1 0 ,3 7 3 5 1 % 9 9 6 ,6 5 0 4 8% 3,731 ,002
C o m p a n y M a rk e tin g E x p2 1 ,9 9 9 ,9 8 6 1 0 % 7 4 9 ,9 9 8 8 % 1 ,0 0 0 ,0 0 4 1 1 % 1 2 0 ,0 0 0 1 6 % 3 0 0 ,0 0 0 2 5 % 3 0 0 ,0 0 0 1 4% 1,163 ,572
Im p o r t T a riff s 2 5 ,8 3 1 ,9 4 4 1 2 % 5 6 6 ,9 2 4 6 % 0 0% 7 5 ,4 5 3 1 0 % 1 2 0 ,1 6 4 1 0 % 1 0 3 ,9 6 7 5% 5 9 9 ,922
C o n trib u tio n M a rg in 3 3 ,4 3 4 ,2 0 2 1 6 % 2 ,0 1 8 ,6 9 1 2 1 % 4 ,0 3 2 ,4 8 1 4 3 % 1 6 9 ,8 3 0 2 3 % 1 9 0 ,2 0 9 1 6 % 5 9 2 ,6 8 4 2 9% 1,967 ,508
56
This last subsection provides a brief profit/loss statement for your

company in each country’s market. The statement attempts to
allocate costs to each market so that you get a picture of your profit

Important! margins separated into country or product markets. This depiction of
your profitability includes an allocation of all of the costs which are
clearly associated with each individual market. Remember, since
these markets act independently, the marketing and pricing
decisions in one market will have no impact at all in any other
market. So, it is correct to allocate the full cost of marketing dollars
spent in Japan to the sales in Japan, since these marketing dollars
have no impact at all outside of Japan.
There are many costs which involve judgment in order to allocate,

like research and development or warehouse costs. To get a total
picture of profitability by individual product market, you will need to
allocate all of your costs to some market, according to your own
judgment. The ABSOLUTE quality and the Green value of your
products are reported in red in your marketing report.
57
What is included in the Contribution Margin?

The contribution margin includes all the direct costs of doing
business in each country. It allows your company to pinpoint where
it is making money and where it is losing money. A negative
contribution margin means that your company is not generating any
profits in that particular market. Because the contribution margin
does not take indirect costs, like insurance and R&D into account, a
company with a positive contribution can still be losing money.
The contribution margin makes assumptions about your company’s

cost allocations in terms of product and country markets that are
neither correct nor incorrect. You and your teammates can either
view these results as an accurate depiction of your profitability, and
use them for decision-making purposes, or you can disagree with the
results and construct your own model of profitability.
Because time is of the essence, it is important that your company

determine ahead of time what constitutes profitability in the product
and country markets. When the simulation generates these
numbers, you can agree or disagree with the outlook provided and
take action based on your models and independent analysis.

Regardless of your choice, make sure you continue to manage your
business. It is probably poor use of your valuable time to try to
Important!
reproduce these numbers. You should either rely on them or
develop your own view of profitability.
What is the Difference between the Market

Statistics for Product 1 and Product 2?
The first difference between the market places for each product is
the customers. Product 1 customers have different preferences and
58
behaviors than Product 2 customers. For instance, Product 1 targets

customers who are concerned mostly about price; customers
interested in Product 2 care more about quality. While price and
quality are concerns for both groups of customers, the proportions
are different for each country. You should rely on your ability to
analyze historical data to make decisions regarding customer
preferences.
A company stocks
Consumer behaviors when confronted by “stock outs” are also
out when its
demand exceeds markedly different between Product 1 and Product 2. If your
its ability to supply
company accidentally stocks out, your Product 1 customers waste
products.
no time in going to your competitors and buying their products. The
reverse also applies, in that if one of your competitors stocks out,
you may receive additional sales (directly underneath Company
Sales in your marketing report) in the country where the shortage
occurred.
On the other hand, Product 2 customers are a bit more selective.

They exhibit more brand loyalty than their counterparts in that they
won’t run to competitors if you stock out. If your company runs out of
product 2 to sell, your customers will buy nothing and they will wait
until the following period to make a new choice. Your customers'
attempt to buy your product shows up in the "Excess Demand"
section of your marketing report output. So you can always see the
sales that you lost from the stock out. Product 2 customers become
less brand-loyal in future time periods if you stock out in the current
time period. So, a stockout in any product 2 market by one of your
competitors in time period T represents an opportunity for you to gain
customers in time period T+1.
59
Market Report—Pricing & Quality Data Section

Each Market Report contains a Pricing & Quality Data section that
summarizes all the prices for both Products 1 and 2 throughout the
world. For instance, the Pricing Data section shown below provides
the Product 1 and 2 prices and relative quality data for all the
companies within this world.
P r o d u c t 1 P r ic e s R E L A T IV E
Ja pan re l p rc M e x ic o re l p rc C h in a re l p rc U .K . r e l p rc G e rm a n y re l p r c U .S . rel prc Q U A L IT Y
C om pany 1 4 ,6 0 0 .0 0 98% 3 2 5 .0 0 98% 4 1 0 .0 0 9 7 % 3 2 .0 0 109% 3 7 .0 0 96% 3 6 .0 0 93 % 90 .1%
C om pany 2 4 ,8 0 0 .0 0 103% 3 4 0 .0 0 102% 4 4 0 .0 0 1 0 4 % 3 1 .0 0 105% 3 9 .0 0 1 0 2 % 4 0 .0 0 1 0 3 % 1 15 .2%
C om pany 3 4 ,6 0 0 .0 0 98% 3 2 5 .0 0 98% 4 1 0 .0 0 9 7 % 2 9 .2 5 99% 4 0 .0 0 1 0 4 % 4 2 .0 0 108% 90 .6%
C om pany 4 4 ,8 0 0 .0 0 103% 3 5 0 .0 0 105% 4 4 0 .0 0 1 0 4 % 2 8 .0 0 95% 4 0 .0 0 1 0 4 % 4 0 .0 0 1 0 3 % 1 15 .5%
C om pany 5 4 ,6 0 0 .0 0 98% 3 2 5 .0 0 98% 4 1 0 .0 0 9 7 % 2 7 .0 0 92% 3 6 .0 0 94% 3 6 .0 0 93 % 88 .6%
A v e ra g e P ric e 4 ,6 8 0 .0 0 3 3 3 .0 0 4 2 2 .0 0 2 9 .4 5 3 8 .4 0 3 8 .8 0
P r o d u c t 2 P r ic e s R E L A T IV E
Ja pan re l p rc M e x ic o re l p rc C h in a re l p rc U .K . r e l p rc G e rm a n y re l p r c U .S .
rel prc Q U A L IT Y
C om pany 1 6 ,9 0 0 .0 0 101% 4 5 0 .0 0 98% 5 0 0 .0 0 100% 3 3 .0 0 97% 4 6 .0 0 102% 4 8 .0 0
C om pany 2 6 ,3 0 0 .0 0 92% 4 2 5 .0 0 93% 4 6 7 .5 0 94% 3 2 .0 0 94% 4 4 .0 0 97% 4 8 .0 0 98 % 1 16 .2%
C om pany 3 6 ,9 0 0 .0 0 101% 4 5 0 .0 0 98% 5 0 0 .0 0 100% 3 3 .0 0 97% 4 6 .0 0 102% 4 8 .0 0 98 % 79 .5%
C om pany 4 7 ,1 0 0 .0 0 104% 5 1 5 .0 0 112% 5 2 5 .0 0 105% 3 9 .0 0 115% 4 4 .0 0 97% 5 3 .0 0 98 % 1 16 .6%
C om pany 5 6 ,9 0 0 .0 0 101% 4 5 0 .0 0 98% 5 0 0 .0 0 100% 3 3 .0 0 97% 4 6 .0 0 102% 4 8 .0 0 108% 93 .0%
A v e ra g e p ric e 6 ,8 2 0 .0 0 4 5 8 .0 0 4 9 8 .5 0 3 4 .0 0 4 5 .2 0 4 9 .0 0 98 % 94 .7%
Pricing summary tables include both average prices and relative

prices, so that you can see at-a-glance how your company is faring
in the global market. Keep in mind that these prices are in local
currency.
You can see that Company 4 has set their price at 115% of average
in the UK for product 2, while quality is below average at 93%. You
would not expect this to be popular with British consumers.
The Quality Myth—

(or “Of course my company makes a high quality
product”)
The last column in the table lists the relative quality of Product 1 for
each company. An entry of 100% indicates a product is average. A
relative quality percentage of 112% means that the company makes
60
a Product 1 that has a quality of 12% above average. An entry of

80% means a company is making a product with 20% less quality
than average.
Be Careful!
You can improve the quality of your products by spending more
Increasing your
spending does not money on R&D. However, it is entirely possible to increase your
insure an increase in
R&D spending and still experience a drop in relative quality, if your
relative or absolute
quality. competitors are improving their products faster than you can improve
yours. The absolute quality of your products matter to your
customers as well as the relative quality. Absolute quality is
compared to a maximum theoretically possible quality which
increases over time as technology improves. If you do not improve
your products, their absolute and relative quality will drift lower over
time. If you increase your research spending more slowly than
technology advances, then you absolute quality could drop.
As the absolute quality of your products improve, the relative quality

of your products matters less and less to your customers. Higher
and higher levels of absolute quality become increasingly expensive
to attain and less valuable to customer and therefore to your
company.
61
Trends in Consumer Preferences

Customers base their purchasing decisions on the following factors:
 Relative Price
 Marketing budget
 Relative Quality
 Absolute Quality
 Green Level
 Availability
 History
 Company Image
Customers also compare your company’s variables with variables of
other companies to make their final buying decision, and they don’t
forget the past.

One reliable method of predicting future sales and customer
Important!
preferences is to analyze historical data carefully. As a rule,
consumer preferences and macroeconomic data that were true when
the historical data was collected, remain true going forward and, in
general, will not change. Therefore, time devoted to “mining past
data” is time well spent.
One word of caution:

Even More
Important! It is dangerous to extrapolate conclusions beyond the ranges of the
historical data. For instance, some students build models to obtain
insight into price elasticity. While these are valuable insights, they
are only valid within the ranges of price and quality that appear in the
historical data. Once outside the range of the data, these insights
fail and you will have to revisit your analysis and update your
conclusions, as new data becomes available.
62
Market Report—Contract Market Section

The last part of the Market Report, the Contract Market section,
describes any activity that occurred in the contract market for that
period. A sample of this section appears below.
C o n tra c t M a rk e t in fo rm a tio n
P ric e to b e a t
C o n tra c t W ith z e o Y o u r co n tra c t Y o u r C o n tra ct Y o u r C o n tra ct C o n tra c t
V o lu m e C o n tra c t S a le s re v e n u e S a le s co s t U S D / Im a g e fo r V o lu m e
T h is p e rio d W in n e rA d va n ta g e T h is p e rio d U N IT ST h is p e rio dU N IT N e xt P e rio d N e x t p e rio d
5 0 ,0 0 0 5 2 5 .0 0 0 0 0 0 0 .0 0 0 6 0 ,0 0 0

All contract sales involve only Product 1 in the United States.
Important!
Contract sales incur no transportation costs, no tariff costs and
require no containers. All activity in both of the 2 types of
contract markets is reported here as a composite transaction.
In the example above, Company 5 won the 50,000 contract and

since there are no revenues reported, we must be looking at the
output for some team different from Company 5. The price that
Company 5 bid was 25.00; assuming that they had a company
image of zero. As a further example, let's presume that your
company wins 3 contracts within the on-line, web-based contract
auction, and then also proceeds to win the single contract within the
auction conducted as part of the simulation. What will appear in the
output report will be a single transaction representing the sum of the
4 contracts.
For our purposes, you can think of the contract market as being the
government bid market. The US government reacts with hostility
toward a company that tries to sell it a product at above retail prices.
63
Therefore, your bid should be less than your retail price for product 1
in the United states.
The volume of a product that can be sold at any one time is

announced just one period in advance and all contracts are a single-
period arrangement. While it is not necessary for you to enter a bid
price; if you choose to do so, your bid must be lower than your US
retail price for product 1 and higher than your marginal
manufacturing cost for product 1. Otherwise, this would be
considered dumping and the US Justice Department may pay you a
visit. The variable cost which applies is the one which appears in
your production report under the column labeled "next period@ full
capacity".

Important!
One important thing to remember is that if you bid and win, you
supply the contract first and then you will supply your retail markets.
Be certain that you have enough inventory or production capacity
before you bid, because if not, your company will “stock out” in its
retail markets. This can be very damaging since not only are you
losing sales in what may be some of your most profitable markets,
but also Product 1 customers won’t wait around for you to restock
your inventory. Instead, they will take their business elsewhere.
If you stock out in the retail market for Product 2, you will lose profits
but your customers will wait and buy nothing—although their loyalty
to your brand will be reduced.
THE ON-LINE CONTRACT MARKET IS DIFFERENT
Additional Product 1 contracts are available to the lowest bidder via

the Management Game web site. The rules associated with these
64
contracts are different and you need to view these rules by visiting
the web site. The fundamental differences are listed here:
1. The auctions are real time with visible bids
2. The contract auction winners are known BEFORE the

simulation input decisions are due, which affects production
planning.
3. The on-line auctions have minimum quality constraints and

companies not meeting these constraints can not bid.
4. The on-line auction is a CLASS WIDE auction and so you will

be bidding against more than just the people located in your
specific world.
5. One team can win more than one contract. In fact, one team
could win all of the contracts at least in theory.
6. Contract image does not apply to the on-line auction. Past

winners gain no advantage in future bidding.
65
Improving Your Company’s Contract Image

Your company’s
By continually winning in the contract market, your company will
contract image is
the dollar per unit develop a positive contract image which is an advantage in future
advantage that
bidding. Each company’s contract image appears on the bottom of
your team
accumulates from the Market Report. This number equals the company’s dollar
bidding
advantage per unit in the bidding for the next period. This
successfully on
past contracts. advantage applies only to the contract auction within the
REMEMBER: The
simulation and does not apply to the web based on-line auction.
advantage applies
only to the
contract auction
conducted within Your contract image can grow approximately 25% to 35% of a
the simulation and normal bid price and can help you win a bid even if yours is not the
does not apply to
the auctions absolute lowest. Contract image drops by 1.0 each time you bid and
conducted via the lose or choose not to bid, but it will not fall below zero (0.0).
66
The Management Game Outputs—Production Report
Production Report
The Production Report constitutes the second type of standardized

output. This report describes activity in your company’s two factories.
These dedicated facilities make either only Product 1 or only Product
2, and each facility can reside in a different country.
Notice that the Production Report also includes transportation cost

information, factory relocation activity and other miscellaneous
information about your competitors. You will learn more about this
information later in this section.
67
8 PRODUCTION REPORT
Period Currently Displayed Select Period to View
3 8
Company Number
Product 1 factory PRODUCT # 1
in China with cost CHINA
structure and LOCAL CURRENCY RESTATED IN USD
capacity This period % Of Full This period @ Next Period @ This period This period @Next Period @
Actual Capacity Full Capacity Full Capacity Actual Full Capacity Full Capacity
information Production Quantity 265,111 100% 265,111 261,797 265,111 265,111 261,797
Fixed Cost 9,718,622 100% 9,718,622 9,637,134 1,091,980 1,091,980 1,082,824
Variable Cost 37,343,279 100% 37,343,279 35,226,467 4,195,874 4,195,874 3,958,030
Total Cost 47,061,901 100% 47,061,901 44,863,601 5,287,854 5,287,854 5,040,854
Variable Cost per unit 140.86 100% 140.86 134.56 15.83 15.83 15.12
Product 1 Total Cost per unit 177.52 100% 177.52 171.37 19.95 19.95 19.25
warehouse showing INVENTORY PRODUCT 1
the 3 possible Inventory is valued Inventory Inventory Inventory Total Months of
in local currency Produced Produced Purchased Inventory Sales
inventory layers Previously This period This period
UNITS 0 0
1. Very old 0
132,952
0
132,952 1.95
VALUE 23,601,394 23,601,394
inventory from a COST / UNIT 0.00 177.52 0.00 177.52
previous period 2 PRODUCT # 2
2. Inventory GERMANY
1 3
remaining from LOCAL CURRENCY RESTATED IN USD
current period PRODUCT # 2
This period
Actual
% Of Full This period @ Next Period @
Capacity Full Capacity Full Capacity
This period This period @Next Period @
Actual Full Capacity Full Capacity
production Production Quantity 192,938 100% 192,938 207,193 192,938 192,938 207,193
Fixed Cost 1,520,379 100% 1,520,379 1,508,714 1,689,310 1,689,310 1,676,349
3. Inventory which Variable Cost 3,887,422 100% 3,887,422 4,458,587 4,319,358 4,319,358 4,953,985
was purchased for Total Cost
Variable Cost per unit
5,407,801
20.15
100%
100%
5,407,801
20.15
5,967,301
21.52
6,008,668
22.39
6,008,668
22.39
6,630,334
23.91
your company at the Total Cost per unit 28.03 100% 28.03 28.80 31.14 31.14 32.00
end of the time INVENTORY PRODUCT 2
period because your Inventory is valued Inventory Inventory Inventory Total Months of
ending inventory
in local currency Produced Produced Purchased Inventory Sales If a company
Previously This period This period
from current
UNITS 0
0
15,433 6,965 22,398 0.30 relocates a factory,
VALUE
production was less 432,567 214,025 646,592
it would appear here
COST / UNIT 0.00 28.03 30.73
than 10% of demand
as required. TRANSPORTATION REPORT
USD FACTORY RELOCATION ACTIVITY
Number of shipping containers you have now 486 NEW Company 1 Company 2 Company 3
Depreciation cost of your shipping containers in USD $76,720 Location P1
Transportation Fixed cost of maintaining your shipping containers USD $143,210
Cost of Renting containers requested by you USD $0
Location P2
Capacity P1
capacity, costs, Emergency cost of renting containers NOT requested by you USD $0 Capacity P2
Variable costs of shipping product -- USD $365,571 1 = Japan 2 = Mexico 3 = China 4 = UK
and activity TOTAL SHIPPING COSTS - USD $585,501
UNITS
485,892
C ap a city A na lysis
Information C o m p a n y 1 C o m p a n y 2C o m p a n y 3 C o m p a n y 4 C o m p a n y 5
about P ro d u ct 1 F a c tro y V a lu e 4 ,1 8 8 ,7 4 6 4 ,1 8 8 ,7 4 6 4 ,1 8 8 ,7 4 6 4 ,1 8 8 ,7 4 6 4 ,1 8 8 ,7 4 6N o te : D ivid e b y c o n s tru c tio n c o s t p e r u n it fo r th e c o u n try w h
competitors P ro d u ct 2 F a c to ry V a lu e 4 ,9 7 2 ,6 3 8 4 ,2 0 1 ,8 1 5 4 ,9 7 2 ,6 3 8 5 ,3 0 0 ,8 6 0 3 ,8 0 1 ,8 1 5e a c h fa c to ry is lo c a te d to c a lcu la te u n it c a p a c ity.
factory size and In ve n to ry A n alysis
inventory levels C o m p a n y 1 C o m p a n y 2C o m p a n y 3 C o m p a n y 4 C o m p a n y 5
P ro d u ct 1 In ve n to ry V a lu e 1 ,1 2 2 ,7 6 8 9 9 4 ,9 9 6 2 ,6 5 1 ,8 4 2 1 ,0 5 8 ,0 6 2 5 7 3 ,3 7 7
P ro d u ct 2 In ve n to ry V a lu e 1 ,3 8 0 ,6 7 8 2 ,1 2 3 ,1 5 9 7 1 8 ,4 3 6 7 3 7 ,9 9 0 6 ,5 6 0 ,3 2 7
68
Production Report—Product Information

Now shift your focus to the details of the Production Report using the
Product #1 portion of the report.
PRODUCT # 1
C HIN A
LO C AL CU R R E NC Y R ES TA T ED IN U SD
T his period % O f Full T his period @ N ext P eriod @ This period T his perio d @N ext P eriod @
Actual C apacity Full C apa city F ull C apacity Actual Full C apacityF ull C apacity
P ro duction Q uantity 265,11 1 100% 265,111 261,797 265,111 265,111 261,797
Fixed C ost 9,718,622 100% 9,718,622 9,637,134 1,091,980 1,091,980 1,082,824
V ariable C ost 37,343,279 100% 37,343,279 35,226,467 4,195,874 4,195,874 3,958,030
T otal C ost 47,061,901 100% 47,061,901 44,863,601 5,287,854 5,287,854 5,040,854
V ariable C ost per unit 140.8 6 100% 140.86 134.56 15.83 15.83 15.12
T otal C ost per unit 177.5 2 100% 177.52 171.37 19.95 19.95 19.25
IN V EN T O R Y PR O D UC T 1
Inventory is valued Inve ntory Inventory Inventory T otal M onths of
in local currency Produced P ro duced Purch ased Inventory Sales
Previously T his period T his period
U N IT S 0 132,952 0 132,952 1.95
VAL U E 0 23,601,394 0 23,601,394
C O S T / U N IT 0.0 0 177.52 0.00 177.52
The design of the Production Report simplifies your production

planning and cost accounting so that you can easily see your
production costs. The report indicates where the factory is located
and what product the facility makes. As shown, this factory is in China
and makes Product 1. The report also separates your production
costs so that you can locate and identify them. The report also
provides the figures in the factory’s local currency and then converts
these figures to US dollars.
This example shows the fixed and variable costs, as well as the unit
costs in Chinese currency (on the left) and US dollars (on the right).
69
Three columns in this display describe manufacturing costs:
 The “This Period Actual” column indicates what happened

during the current period. In the example above, the factory produced
265,111 units at a total cost of 47,061,901 Yuan or $5,287,854 (US).
In addition, the factory operated at full capacity this period.
 The middle column shows the costs that would apply if the
factory were operating at full capacity. These would differ from actual
costs whenever the factory was operated below full capacity.
For instance, if the production budget had been set at $4,000,000,

how much product would have been manufactured?
 Answer: 183,703 (4,000,000-1,091,980)/15.83

At what unit cost? Answer: $21.77 (4,000,000/183,703)
 The third column, “Next Period Full Capacity,” predicts the

manufacturing costs that are expected in this Chinese factory during
the next period. Sometimes annual costs are higher; sometimes they
are lower. Sometimes predicted costs match actual costs exactly.
Can you determine what number to put in Field 41 of your Input file in
order to operate this factory at 92% of rated capacity during the next
period?
Answer: If the prediction of future costs comes exactly true and
the exchange rates do not change, the entry would be
$1,082,824+0.92*3,958,030 = $4,724,211.60. To operate at 100%
capacity would require a budget of $5,040,854 or more.
70
Production Report—Inventory Data

The Inventory Data section of the Production Report appears just
below the summary of your manufacturing costs. This section, shown
below, describes your inventory.
IN V E N T O R Y P R O D U C T 1
In ve n to ry is v a lu e d In ve n to ry In ve n to ry In ve n to ry T o ta l M o n th s o f
in lo c a l c u rre n c y P ro d u c e d P ro d u ce d P u rc h a s e d In ve n to ry S a le s
P re vio u s ly T h is p e rio d T h is p e rio d
U N IT S 0 1 3 2 ,9 5 2 0 1 3 2 ,9 5 2 1 .9 5
VALUE 0 2 3 ,6 0 1 ,3 9 4 0 2 3 ,6 0 1 ,3 9 4
C O S T / U N IT 0 .0 0 1 7 7 .5 2 0 .0 0 1 7 7 .5 2
Remember that all the costs displayed are in local currency. In this

Very case, we are still looking at a Chinese factory.
Important!
Also, the numbers represent end of period balances as you would

expect.
If you operate your factory correctly, all of your inventory that remains
unsold at the end of a given time period should have been
manufactured during that period. This type of product is reported in
the second column, called “Inventory Produced This Period.”
The first and third columns will normally contain zeros, unless you
are having difficulty managing your inventory. Inventory levels may be
too high or too low when compared to your sales.
What if you produce too much?

In this situation, inventory that was manufactured in a previous
period will eventually remain unsold at the end of the current period.
The first column to the left in your warehouse report contains this type
of very old inventory.
71
What if you produce too little?

If the period ends and your total inventory is less than 10% of your
demand for the period, then product will be purchased for you
automatically, in sufficient quality to bring your total inventory up to
10% of your demand. The third column from the left reflects this
situation. Non-zero numbers in this column indicate that your
company produced too few (or sold too many—depending on your
perspective) units.

If it becomes necessary to purchase inventory, you will pay $3.00 over
Important! your current period manufacturing cost per unit to buy this product.
You are required to end the period with a buffer of 10% inventory
or more. If you do not manufacture enough product, you will be
For more
information about forced to buy it at the higher, $3.00 premium cost, thus increasing
the Production
your costs. Remember, if inventory is purchased for you, it is
Budget input,
please refer to the purchased at the very end of the time period after all sales are
Inputs section.
complete. This purchased product can not be sold until the following
You can calculate simulation cycle.
exactly how much
money is required
to operate your
factory at full Regulating Your Production Capacity
capacity because
you know both Your team can choose the level of operation for your factories by
the fixed costs allocating a Production Budget in the Input interface. If you scale back
and the variable
costs for a given on the amount of funds you allocate to production, your factories, in
period. turn, will scale back production to remain within the budgeted limit.
Remember that you allocate funds for factory operation in US dollars.

Unless your factory is actually located in the United States, the
simulation converts your production budget into the local currency to
pay workers and buy materials for that factory.
72
Tips on Factory Expansion

Remember that you can either expand your factories or make them
smaller (refer to the inputs section for more details). Generally, you
should try to operate your factories at or near full capacity. However,
you can only expand factory capacity by 15% each time period.
Regardless of the scope of your request, all factory expansion stops at
15%.
The overall value of a factory will depreciate over time, and with it,
maximum production capacity. To maintain a fixed production
capacity, your company will need to reinvest additional plant capacity
equal to the amount of depreciation. The financial depreciation rate is
always equal to the real depreciation rate of your factories and so the
book value of your factories, (as well as those belonging to your
competitors) will always equal their replacement cost. This permits
you to monitor the production capacity of your competitors by
watching their balance sheet information.
Remember, too, that if your company decides to relocate one or both

of its factories, the process takes one period to complete. (Please
refer to the Factory Relocation discussion in the Inputs section for
more information.)

Moving factories is an expensive decision. Make sure you analyze the
Important!
costs and benefits before you proceed. Make sure you understand
the differences between CASH FLOWS and EXPENSES
associated with relocating a factory.
73
For example, assume that you want to move a $5,000,000 factory

from Mexico to China. The cash flow and expenses are determined
as follows:
The $5,000,000 factory would have a capacity of 294,117.65 units

($5,000,000/$17 per unit). When the factory is built in China, you
want it to have a capacity of 250,000 units. If you make the
appropriate inputs for Period 7 for instance, nothing happens in
Period 7. But, in Period 8 (at the first moment), the Mexican factory is
closed and sold for $3.75 million (75% of $5 million), which generates
a 1.25 Million Dollar "Plant Sale Loss” that will appear as a pre-tax
expense in Period 8. Your company then receives $3.75 million in
cash.
Your company also must build a new factory in China. The

construction cost in China is $16 per unit capacity; therefore it will cost
$4 million to build ($16 per unit x 250,000 units capacity). Notice that
the $4 million is a cash flow, not an expense.
Beyond these immediate cash flows and expenses, transportation

costs and tariff costs will change, unit manufacturing costs will
change, and the effectiveness of your future research spending will
change. Information about relative manufacturing costs and
differential research efficiencies are published each year separately
from this manual.
Where do you store your products?

All the Management Game companies rent two warehouses for
$50,000 (US) each fixed cost plus a per unit variable storage fee, so
74
that each product stays in its own warehouse. The variable storage
fee depends on the level of ending inventory.
Ending Inventory Variable Unit Holding cost
Up to 25% of quarterly demand $1.00/unit
Between 25% and 50% of $2.00/unit

quarterly demand
Between 50% and 100% of $3.00/unit

quarterly demand
Greater than 100% of quarterly $4.00/unit

demand
The holding cost per unit applies to ALL UNITS IN ENDING

INVENTORY. For example, if your company's demand for product 1
was 250,000 units and your ending inventory is 62,499 units, then
your warehouse cost for product 1 will be 50,000 + 62,499 =
$112,499. However, if your ending inventory were 62,500 units, then
your warehouse expense would be 50,000+2*62,500 = $175,000. At
higher inventory levels, holding costs become prohibitively expensive.
75
If you operate your factory at very low capacity and generate inventory
that has a cost per unit greater than the average of all retail prices,
then this inventory will be "written down" to the average retail price
that prevails in the market. This loss appears in the Detailed Income
portion of your financial report. This feature forces inventory created
at very high unit cost to impact profits in the period in which it is
manufactured rather than when it is sold to reflect the reality that this
product can never realistically be sold at a profit. This prevents your
company from holding inventory and delaying the loss recognition
beyond the current period.
Consider a situation with the following characteristics:
 Fixed Cost = $1,000,000

 Variable Cost = $20/unit
 You want to make 1,000 units
The unit cost will then be $1,020,000/1,000 or $1,020. Clearly, you

cannot sell your product for more than $1,020 each! It is inappropriate
to “store this loss” in inventory. Therefore, these 1,000 units will be
“written down” and you will see a loss in your income statement
labeled “Inventory Writedown.” This will appear in the period in which
the high cost product is manufactured.
76
Production Report—Additional Information

Now consider the several small tables at the bottom of the Production
Report.
The Transportation Report

The first describes your transportation costs and capacity. As you
examine this information, make sure that you have adequate shipping
capacity. Remember that emergency rates for renting additional
containers are very high. If you have temporary need to ship product,
you can either purchase or rent containers at more reasonable rates
by placing these requests in the input screen in the appropriate field:
Remember:

 Each container holds 1,000 units of either product.
Important!
 The purchase price for new containers is $3,000 (US). These
containers last about five years before they wear out; therefore you
should replace them from time to time.
 The rental price for containers is $2,000 (US) per three-month
period—pretty expensive when compared to the purchase price.
 The emergency rental rate is $3,000 (US) for a three-month
period. This is clearly a punishingly high rate.
77
A sample Transportation Report appears below.
TRANSPORTATION REPORT
USD
Number of shipping containers you have now 486
Depreciation cost of your shipping containers in USD $76,720
Fixed cost of maintaining your shipping containers USD $143,210
Cost of Renting containers requested by you USD $0
Emergency cost of renting containers NOT requested by you USD $0
Variable costs of shipping product -- USD $365,571
TOTAL SHIPPING COSTS - USD $585,501
UNITS
Next period shipping capacity (units) if you do not buy any containers 485,892
The variable costs of shipping from country to country are listed in a

table on your finance report. These variable rates may change from
time to time. All transportation costs are in US dollars. In this
example, there are no emergency rentals and no requested voluntary
rentals.
Factory Relocation Activity

If you or one of your competitors decide to move a factory,
documentation of this decision appears at the bottom of your
production report, as shown below.
FACTORY RELOCATION ACTIVITY

NEW Company 1 Company 2 Company 3 Company 4 Company 5
Location P1
Location P2
Capacity P1
Capacity P2
1 = Japan 2 = Mexico 3 = China 4 = UK 5=Germany 6=US
The actual move occurs as the next period begins. Notice that the
table indicates the new capacity of the relocating factory. This gives
78
you and your competitors one period to react to any relocation

decision.
If no team is relocating a facility, no Factory Relocation display will

appear on the Production Report. As you can see in the example,
company 1 has decided to move their product 1 factory to the United
States and when this factory becomes operational, it will have a
capacity of 225,000 units.
Competitor Operational Data
Capacity Analysis
Company 1 Company 2 Company 3 Company 4 Company 5

Product 1 Factroy Value 4,188,746 4,188,746 4,188,746 4,188,746 4,188,746
Product 2 Factory Value 4,972,638 4,201,815 4,972,638 5,300,860 3,801,815
Inventory Analysis
Company 1 Company 2 Company 3 Company 4 Company 5
Product 1 Inventory Value 1,122,768 994,996 2,651,842 1,058,062 573,377
Product 2 Inventory Value 1,380,678 2,123,159 718,436 737,990 6,560,327
There are two additional tables of data at the bottom of your

Production report which help you monitor the capabilities and activities
of your competitors. From these tables, you can see the size of your
competitors' factories as well as their inventory levels.
79
The Management Game Outputs—The Finance Report
The Finance Report
The third pre-formatted output report is the Finance Report. As its

name suggests, the Finance Report provides financial data both for
your company and for your competitors. A sample of this document is
shown here.
P e rio d C u r re n tly D is p la y8e d F IN A N C E R E P O R T Select

S ePeriod
le c t P e to
rio View
d to V ie w
1
C om pany N um ber 3 8
6
P E R IO D N U M B E R 8 BALAN CE SHEET D ATA
C om p an y 1% Com pany 2 % C om pany 3 % Com pany 4 % C om pany 5 % DETAILED INCOME STATEMENT
C a s h a n d S e c u r itie5 s,2 8 7 ,9 2 4 1 5 % 4 ,9 3 1 ,7 5 7 1 4 % 5 ,0 4 5 ,0 2 7 1 5 % 6 ,3 1 3 ,9 3 0 1 8 % 3 ,1 7 3 ,3 9 6 9 % Sales Revenues 19,331,517 100.26%
R e c e iv a b le s1 6 ,1 7 5 ,2 7 94 7 % 1 6 ,5 0 4 ,0 9 4 4 8 % 1 5 ,1 3 0 ,4 6 5 4 4 % 1 6 ,7 2 5 ,8 9 6 4 7 % 1 4 ,5 1 8 ,1 0 2 4 2 % Interest Income 29,680 0.15%
In v e n to r ie s 2 ,5 0 3 ,4 4 6 7 % 3 ,1 1 8 ,1 5 5 9 % 3 ,3 7 0 ,2 7 8 1 0 % 1 ,7 9 6 ,0 5 2 5 .0 % 7 ,1 3 3 ,7 0 4 2 1 % Currency Trading Income (80,533) -0.42%
S h ip p in g C o n t ( N e1t),4 5 7 ,6 7 5 4 % 1 ,4 5 7 ,6 7 5 4 % 1 ,4 5 7 ,6 7 5 4 % 1 ,5 4 2 ,5 5 7 4 % 1 ,4 5 4 ,9 6 8 4 % TOTAL REVENUES 19,280,664 100.00%
P la n t a n d E q u ip (N 9e t),1 6 1 ,3 8 4 2 6 % 8 ,3 9 0 ,5 6 1 2 4 % 9 ,1 6 1 ,3 8 4 2 7 % 9 ,4 8 9 ,6 0 6 2 6 % 7 ,9 9 0 ,5 6 1 2 3 %
T O T A L A S S E T3S4 ,5 8 5 ,7 0 8 3 4 ,4 0 2 ,2 4 2 3 4 ,1 6 4 ,8 2 91 0 0 % 3 5 ,8 6 8 ,0 4 1 3 4 ,2 7 0 ,7 3 1 Cost of goods sold 11,068,159 57.41%
Gross Margin 8,212,505 42.59%
T r a d e P a y a b le s5 ,6 2 9 ,2 3 8 1 6 % 5 ,7 5 2 ,3 5 8 1 7 % 5 ,6 4 8 ,2 6 1 1 7 % 6 ,1 9 2 ,6 3 4 1 7 % 5 ,2 9 4 ,1 8 2 15% OPERATING EXPENSES
T a x e s P a y a b le 1 8 8 ,5 2 6 1 % 2 8 1 ,1 1 2 1% 3 0 ,5 3 2 0 % 2 7 3 ,3 0 1 1 % 1 8 2 ,8 2 5 1% Transportation Expenses 585,501 3.04%
L o a n s a n d In te r e s5 t,4 7 7 ,5 4 1 1 6 % 5 ,4 7 7 ,5 4 1 1 6 % 5 ,4 6 7 ,7 1 3 1 6 % 5 ,2 7 0 ,2 5 5 1 5 % 5 ,6 8 2 ,3 7 0 17% Marketing Expenses 2,675,125 13.87%
C o m m o n S to c k1 ,0 0 0 ,0 0 0 3 % 1 ,0 0 0 ,0 0 0 3 % 1 ,0 0 0 ,0 0 0 3 % 1 ,0 0 0 ,0 0 0 3 % 1 ,0 0 0 ,0 0 0 3% Warehousing Expenses 255,350 1.32%
R e ta in e d E a rn in 2g 2s ,2 9 0 ,4 0 46 4 % 2 1 ,8 9 1 ,2 3 1 6 4 % 2 2 ,0 1 8 ,3 2 3 6 4 % 2 3 ,1 3 1 ,8 5 2 6 4 % 2 2 ,1 1 1 ,3 5 4 65% Research & Development 2,700,000 14.00%
T O T A L L IA B & E Q U3IT4 ,5 Y 8 5 ,7 0 8 3 4 ,4 0 2 ,2 4 2 3 4 ,1 6 4 ,8 2 9 3 5 ,8 6 8 ,0 4 1 3 4 ,2 7 0 ,7 3 1 Interest Expense 64,835 0.34%
D e b t/E q u ity 2 3 .5 % 2 3 .9 % 2 3 .8 % 2 1 .8 % 2 4 .6 % Factory Depreciation 110,903 0.58%
D IV ID E N D S P A ID 5 0 0 ,0 0 0 5 0 0 ,0 0 0 5 0 0 ,0 0 0 5 0 0 ,0 0 0 5 0 0 ,0 0 0 Factory Sale Loss 0 0.00%
Inventory Write Down 0 0.00%
IN C O M E S T A T E M E N T D A T A Consultants 300,000 1.56%
C om p an y 1% Com pany 2 % C om pany 3 % Com pany 4 % C om pany 5 % Insurance 160,000 0.83%
2 T o ta l S a le s R e v e n2u0e,6 5 5 ,7 8 0
N e t In c o m e 3 6 5 ,9 6 2 2 %
2 1 ,2 4 1 ,5 3 9
5 4 5 ,6 8 9 3 %
1 9 ,3 3 1 ,5 1 7
5 9 ,2 6 9 0 %
2 1 ,3 4 1 ,4 9 0
5 3 0 ,5 2 5 2 %
1 9 ,9 8 8 ,8 8 6
3 5 4 ,8 9 7 2 %
Admin and Misc Expenses
Bad Debt Expenses
20,000
77,294
0.10%
0.40%
A n n u a liz e d R O E 6 % 10% 1% 9% 6% Import Tariffs 1,173,696 6.09%
TOTAL OPERATING EXP 19,190,863 99.53%
F ro m --> > > T A R IF F R A T E S
To Ja pan M e x ic o C h in a U .K . G e rm a n y U .S . PRETAX INCOME 89,801 0.47%
Ja pan 0 .0 0 % 1 2 .0 0 % 1 2 .0 0 % 1 2 .0 0 % 1 2 .0 0 % 1 2 .0 0 % TAXES 30,532 0.16%
3 M e x ic o 6 .0 0 % 0 .0 0 % 6 .0 0 % 6 .0 0 % 6 .0 0 % 0 .0 0 % NET INCOME 59,269 0.31%
C h in a 8 .0 0 % 8 .0 0 % 0 .0 0 % 8 .0 0 % 8 .0 0 % 8 .0 0 %
U .K . 1 0 .0 0 % 1 0 .0 0 % 1 0 .0 0 % 0 .0 0 % 0 .0 0 % 1 0 .0 0 %
G e r m a n y 1 0 .0 0 % 1 0 .0 0 % 1 0 .0 0 % 0 .0 0 % 0 .0 0 % 1 0 .0 0 % INSURANCE SUMMARY
U .S . 5 .0 0 % 0 .0 0 % 5 .0 0 % 5 .0 0 % 5 .0 0 % 0 .0 0 % Rates are USD per 100,000 coverage per QTR.
Rate Coverage $ Premium $
F ro m --> > > TR AN SPO RT RATES 7 Property / Casualty 400 5,000,000 20,000
To Ja pan M e x ic o C h in a U .K . G e rm a n y U .S . Directors & Officers 300 13,333,333 40,000
J a p a n $ 0 .5 0 $ 1 .0 0 $ 0 .5 0 $ 1 .2 5 $ 1 .2 5 $ 1 .0 0 Product Liability 1,000 10,000,000 100,000
4 M e x ic o $ 1 .0 0
C h in a $ 0 .5 0
$ 0 .5 0
$ 1 .5 0
$ 1 .5 0
$ 0 .5 0
$ 1 .0 0
$ 1 .0 0
$ 1 .0 0
$ 1 .0 0
$ 0 .5 0
$ 1 .0 0
U .K . $ 1 .2 5 $ 1 .0 0 $ 1 .0 0 $ 0 .5 0 $ 0 .5 0 $ 0 .7 5 NEXT PERIOD DATA
G e r m a n y $ 1 .2 5 $ 1 .0 0 $ 1 .0 0 $ 0 .5 0 $ 0 .5 0 $ 0 .7 5
U .S . $ 1 .0 0 $ 0 .5 0 $ 1 .0 0 $ 0 .7 5 $ 0 .7 5 $ 0 .5 0 Max Loan 8,056,413 Company Image - Product 1 1.80
Max New Loan 2,588,700 Company Image - Product 2 1.80
CU RR ENC Y CO N TR AC TS %/Qtr
L a s t P e r io d L a s t P e rio d T h is P e r io d T h is P e rio dB u y o r C o n tr a c ts G a in o Sr e ttle m e n t Borrowing Interest Rate 1.20% 8
L o c a l C u r r e n c y p e r SUpSoDt R a te F o r w a r d R a te S p o t R a te F o r w a r d R a teS e ll M illio n s L o s s U S D o lla r s Rate Earned on Excess Cash 0.70%
Y E N 1 3 7 .0 0 1 3 9 .0 0 1 3 4 .0 0 1 3 9 .0 0 S e ll 3 0 0 .0 0 L o s s (8 0 ,5 3 3 )
5 P E S O 9 .3 0
Y U A N 8 .7 0
9 .4 0
8 .9 0
9 .4 0
8 .9 0
9 .5 0
9 .0 0
S e ll
Buy
1 0 .0 0
1 0 .0 0
0
0
P O U N D 0 .6 9 0 .6 9 0 .6 9 0 .6 8 S e ll 3 .0 0 0
M A R K 0 .9 0 0 .9 0 0 .9 0 0 .9 0 Buy 5 .0 0 0
80
As you can see, your finance report is divided into eight areas:
1. Balance Sheet Data
2. Income Statement Data
3. Tariff Rates
4. Transport Rates
5. Currency Contracts—rates and your company’s activity
6. Detailed Income Statement—your company only
7. Insurance Information
8. Some miscellaneous data that applies to next period
81
Finance Report—Balance Sheet Data

Of the Finance Report sections, the Balance Sheet Data section may
be the most useful for you in analyzing your competitors’ performance
for a given period. This portion of the output contains the balance
sheets of all of the companies within your world.
These balance sheets provide a wealth of information about your

competitors, including:
 Competitors’ inventory levels

 Insight into how they may price their products in the future
 Whether or not they are building larger factories
 Who is borrowing more money
 Their return of equity
 Their dividend activity

Do not underestimate the amount of information you can gather from
Important!
these balance sheets.
Tracking Your Receivables

Your receivables are collected in a very predictable pattern.
 You collect 100% of your contract sales as cash in the period

the product is sold.
 You collect 30% of your non-contract retail sales in this period
as cash.
 The remaining 70% of your non-contract retail sales are added
to receivables.
 In period T+ l, you collect 80% of the retail sales from period T
that were not already collected when sold (that is, 0.80 x 0.70 = 0.56).
82
This presumes a zero collection budget in the previous and current

time period. If you set a non-zero collection budget, then you have the
potential to collect more than 80% of these receivables. The impact of
collection spending on receivables can be estimated by analyzing the
receivables behavior in response to changes in collection spending in
the past. The relationship is deterministic and stable.
 In period T+2, you either collect the remaining receivables, or
you write them off as bad debt. Unless you wish to spend some
money on the collection of your receivable, the bad debt will be 0.7%
of the RETAIL sales from 2 periods previous. You can lower your bad
debt expense by setting a non-zero collection budget. In some cases,
your bad debt expense may be negative, indicating that you have
recovered cash from bad debts which were written off in a pervious
period.

Remember that as you spend more and more money on collections,
Important!
at some point, you will begin to reach diminishing impact and your
money will be wasted.
The calculation you can use to reproduce your receivables in any

given period is as follows:
Receivable @ Time (T) = (0.7 * retail sales @Time T)+(0.2*0.7* retail

sales @Time = T -1) NOTE: this assumes no collection spending. If
you set a non-zero collection budget, receivables will be lowered.
As for the other fields in the Balance Sheet Data section, consider the
following information:
 Regardless of where in the world your inventory is sitting, the

system converts all inventory into US Dollars and lists them in your
report.
 The report lists your physical assets, including factories and
containers that you own as net of all accumulated depreciation, also in
US dollars.
83
 Your trade payables are always equal to half the cost of

operating your two factories last period, in US dollars. This is very
useful to know if you wish to estimate the cost structure of your
competitors' factories.
 The system combines loans and interest on your balance sheet
because you are not required to pay the interest on your debt if you
don't want to. However, you must make this choice on the input
screen. If you decide not to make payments, the debt on your balance
sheet will grow in an amount equal to your interest expense to indicate
that you didn't pay.
Your company has 2 equity accounts. The one labeled "Common

Stock" contains the par value of your common stock and for simplicity,
this account balance never changes. The account labeled "Retained
Earnings" is the only active account. All profits, dividends, and stock
sales or purchases are reflected as a change in this retained earnings
account.
Finance Report—Income Statement Data

Below the Balance Sheet Data section are very abbreviated income
statements for all the companies. These figures allow you to
determine all the sales and profits for the period. A sample Income
Statement Data Section appears below.
IN C O M E S T A T E M E N T D A T A
C o m p a n y 1% C o m p a n y 2% C o m p a n y 3% C o m p a n y 4% C o m p a n y 5%
T o ta l S a le s R e v e2 n0 u,6e5 5 ,7 8 0 2 1 ,2 4 1 ,5 3 9 1 9 ,3 3 1 ,5 1 7 2 1 ,3 4 1 ,4 9 0 1 9 , 9 8 8 ,8 8 6
N e t In c o m e 3 6 5 ,9 6 2 2 % 5 4 5 ,6 8 9 3 % 5 9 ,2 6 9 0 % 5 3 0 ,5 2 5 2 % 3 5 4 ,8 9 7 2 %
A n n u a liz e d R O E 6 % 10% 1% 9% 6%
The Return on Equity information reported here is simply 4 times the

quarterly rate using the book value of your equity, (common stock +
retained earnings).
84
Finance Report—Tariff and Transport Rates

The next two sections of the report list the tariff rates and
transportation rates for the period.
From -->>> TAR IFF R AT ES

To Japan M exico China U .K. G erm any U.S.
Japan 0.00% 12.00% 12.00% 12.00% 12.00% 12.00%
M exico 6.00% 0.00% 6.00% 6.00% 6.00% 0.00%
C hina 8.00% 8.00% 0.00% 8.00% 8.00% 8.00%
U .K. 10.00% 10.00% 10.00% 0.00% 0.00% 10.00%
G erm any 10.00% 10.00% 10.00% 0.00% 0.00% 10.00%
U .S. 5.00% 0.00% 5.00% 5.00% 5.00% 0.00%
From -->>> TRANS P O R T R ATE S

To Japan M exico China U .K. G erm any U.S.
Japan $0.50 $1.00 $0.50 $1.25 $1.25 $1.00
M exico $1.00 $0.50 $1.50 $1.00 $1.00 $0.50
C hina $0.50 $1.50 $0.50 $1.00 $1.00 $1.00
U .K. $1.25 $1.00 $1.00 $0.50 $0.50 $0.75
G erm any $1.25 $1.00 $1.00 $0.50 $0.50 $0.75
U .S. $1.00 $0.50 $1.00 $0.75 $0.75 $0.50
As you read these tables, remember that while the rows represent
country of destination, the columns represent countries of origin. In
the table above, the first row displays the rates from various countries
to Japan. Similar logic applies to the transportation rates.
Remember, these transportation rates represent only the marginal unit

cost of transportation. There are fixed transportation costs, as well.
The tariff rates are applied to your company's sales revenues in each
country, not to your manufacturing costs.
85
Finance Report—Currency Contracts

Because most people are not familiar with how to trade forward
contracts, the following explanation discusses the more important
aspects of this table.
CU RRENCY CO N TR ACTS
L a st P e rio d L a s t P e rio d T h is P e rio d T h is P e rio d B u y o r C o n tra cts G a in o rS e ttle m e n t
L o ca l C u rre n cy p e r U S pDo t R a te F o rw a rd R a te S p o t R a te F o rw a rd R a te S e ll M illio n s L o ss U S D o lla rs
Y E N 1 3 7 .0 0 1 39 .0 0 1 3 4 .0 0 1 3 9 .0 0 S e ll 3 0 0 .0 0 L o ss (8 0 ,5 3 3 )
PESO 9 .3 0 9 .4 0 9 .4 0 9 .5 0 S e ll 1 0 .0 0 0
YUAN 8 .7 0 8 .9 0 8 .9 0 9 .0 0 Buy 1 0 .0 0 0
PO UND 0 .6 9 0 .6 9 0 .6 9 0 .6 8 S e ll 3 .0 0 0
M ARK 0 .9 0 0 .9 0 0 .9 0 0 .9 0 Buy 5 .0 0 0
The first four columns list the spot and forward rates that were in
place three months ago and are currently in place. You can buy and
sell any of the currencies in million-unit blocks, but only three months
in advance. (Please consult the Inputs section for more information
and a detailed example.) The far right column shows the gain or loss,
if any, on the currency contracts put in place at the start of the period.
In this example, 300 million yen were SOLD at 139. When the new
spot rate was published, the yen was more valuable than expected at
134; so there was a small loss on this particular contract of $80,533.
86
Finance Report—Detailed Income Statement
DETAILED INCOME STATEMENT

Sales Revenues 19,331,517 100.26%
Interest Income 29,680 0.15%
Currency Trading Income (80,533) -0.42%
TOTAL REVENUES 19,280,664 100.00%
Cost of goods sold 11,068,159 57.41%

Gross Margin 8,212,505 42.59%
OPERATING EXPENSES
Transportation Expenses 585,501 3.04%
Marketing Expenses 2,675,125 13.87%
Warehousing Expenses 255,350 1.32%
Research & Development 2,700,000 14.00%
Interest Expense 64,835 0.34%
Factory Depreciation 110,903 0.58%
Factory Sale Loss 0 0.00%
Inventory Write Down 0 0.00%
Consultants 300,000 1.56%
Insurance 160,000 0.83%
Admin and Misc Expenses 20,000 0.10%
Bad Debt Expenses 77,294 0.40%
Import Tariffs 1,173,696 6.09%
TOTAL OPERATING EXP 19,190,863 99.53%
PRETAX INCOME 89,801 0.47%

TAXES 30,532 0.16%
NET INCOME 59,269 0.31%
The sixth table on the Finance Report is the Detailed Income

Statement for your company. While most of the entries are self-
explanatory, there are some that need clarification:
 The Plant Sale Loss field captures the 25% loss that results
from selling factory capacity. This field also captures the cost of
moving a factory if you should choose to move one. If neither of these
conditions apply, the field will be 0.
 The Inventory Writedown field captures the decrease in
inventory value that results from operating your factory at low volume.
This, too, is unusual and the field will normally be 0 (see earlier
discussion about Inventory Writedown).
 The Depreciation rate for factories is 1.25% per quarter. The
depreciation rate for containers is 5% per quarter.
87
 The Admin and Misc. Expense field captures 3 expenses: The

1% transaction fee on stock sales or purchase, the change in
compensation for management negotiated with your board of
directors, and any money that you spend on collecting your
receivables.
 The consulting field captures the cost of marketing consultants,
production consultants and also the investments that you make in
improving the environmental sensitivity of your products (Green
Level).
A Note on Taxes
Taxes—in the name of simplicity, are calculated at a flat tax of 34%
and this one rate applies to all taxable income no matter where in the
world it is earned. While this may be unrealistic, it becomes
cumbersome to track and understand your taxes if you paid them
locally. If you lose money, the loss carries forward and never expires.
The losses will be carried as a negative taxes payable account
balance until they are offset by future profits.
Insurance Summary
INSURANCE SUMMARY
Rates are USD per 100,000 coverage per QTR.
Rate Coverage $ Premium $
Property / Casualty 400 5,000,000 20,000
Directors & Officers 300 13,333,333 40,000
Product Liability 1,000 10,000,000 100,000
Your company has the ability to purchase 3 types of insurance. These

3 types of insurance are described in detail within the input section of
this manual. You can see a summary of whatever insurance you have
in place here within your finance report. The rates listed here are in
dollars per quarter per 100,000 dollars of protection. The column
88
labeled "Coverage" shows the level of protection. The column labeled

"Premium" shows the quarterly expense for each type of insurance.
Next Period Data
NEXT PERIOD DATA

Max Loan 8,056,413 Company Image - Product 1 1.80
Max New Loan 2,588,700 Company Image - Product 2 1.80
%/Qtr
Borrowing Interest Rate 1.20%
Rate Earned on Excess Cash 0.70%
There are a few pieces of miscellaneous information provided for next

period in order to aid in your planning. The maximum permitted loan
balance as well as the maximum new loan are published. You can
calculate these numbers since the maximum permitted debt level is
capped at an amount equal to 200% of the book value of your equity.
However, the values are published here for convenience. The
maximum permitted debt level is calculated at the end of the quarter. If
you lose a lot of money, pay big dividends, or buy large amounts of
stock; it is possible to lower your equity book value and temporarily
exceed your maximum permitted debt level. If this happens, the
maximum new loan will be a negative number and this amount of
money will be taken automatically from your starting cash balance the
following time period.
The quarterly interest rates for money that you lend to the bank or
borrow from the bank are also listed. These rates will fluctuate from
time to time but will always be published one period in advance to aid
your planning.
89
You can see a company image for product 1 and product 2 published
for your company. This is an index which will grow 0.1 each quarter
that your company does not stock out. If your company does stock
out, then this image will be decreased temporarily in proportion to the
size of the stockout. This index is provided to remind you that your
demand will be depressed in the period following a stockout but this
negative impact will pass. You will know that the negative impact is
finished when the index returns to its original trend line. For example,
let's say that your company image at the end of period 8 is equal to
2.0. Assume that you stockout in period 9 and the index in the output
at the end of period 9 is 1.8. You then know that your demand in
period 10 will be depressed about 10% from what it would have been.
Now let's presume that at the end of period 10, your company image
is 2.2, (it has recovered to where it would have been, absent the
stockout). You then know that your demand in period 11 will be
unaffected by the stockout which occurred in period 9. Effectively,
your customers have forgotten about the stockout. A very large
stockout may take longer to be forgotten than a very small stockout.
90
Cash Flow Dynamics
Select Period to View Period Currently Displayed 20 CASH FLOW

20 Company Number 1 Report
CASH FLOWS FROM OPERATING ACTIVITIES
Net profits 113,765
Add back non-cash expenses
Depreciation part of transportation expense 60,090
Interest expense 198,290
Factory Depreciation 97,486
Plant Sale loss 0
Inventory writedowns 0
Change in Accounts Receivables (259,727)
Changes in Inventory net of any writedowns (182,281)
Changes in Trade payables 359,531
Changes in Taxes payable 58,606
Net cash from operations 1,329,776

(Note: Changes in assets are subtracted while changes in liabilities are added)
CASH FLOW FROM INVESTING ACTIVITIES
Cash Flow From Purchases of Shipping Containers 0

Net Cash Flow From Changes In Plant and Equipment (500,000)
Net cash flow from investing activities (500,000)
CASH FLOW FROM FINANCING ACTIVITIES
Debt Payments (negative), or New Borrowing (positive) 0

Commons Stock Purchases(negative) or Sales (positive) 0
Dividend payment 0
Net Cash from Financing Activities 0
NET CHANGE IN CASH 829,776

BEGINNING CASH BALANCE 3,905,632
ENDING CASH BALANCE 4,735,408
Cross check 0
It is important for you to understand how cash is disbursed and how it

is collected. A sample Cash Flow Report appears below. This is a
simple, one period cash flow report that uses conventional accounting
to calculate the numbers shown.
91
The following lists provide the cash flow dynamics that you need to
know to play the Management Game, in no particular order.
Cash Arriving—Collections
Inflows at the BEGINNING of the Period:

Inflows include...  New debt
 Plant sale proceeds
 Stock sale proceeds
 Collection of receivables
 Cash sales during the period
Inflows at the END of the Period:

 Interest income
 Currency trading activity
Cash Departing—Disbursements
Outflows at the BEGINNING of the Period:

Outflows include...  Half of production budgets
 All payables to suppliers from the previous period
 Construction of factories
 Purchase or rental of containers
 Loan repayments
 Stock repurchases
 Dividends declared
 Taxes
 Tariffs
92
 Marketing expenses
 Research and development costs
 Consultants
 Collections budget
 Insurance
 Administrative and Miscellaneous Fees
Outflows at the END of the Period:

 Warehouse costs
 Transportation costs
 Inventory purchases, (this can be a large outflow of cash)
 All other disbursements if any
In addition, if your cash at the start of the period plus cash inflows at
the beginning of the period exceed your disbursements, then you earn

interest income on the excess. However, if your disbursements
Important! exceed your cash plus inflows, then you are insolvent and "checks
will begin bouncing." When this happens, the system will not
complete requested expenditures.
What happens depends on the size of the shortfall. Loan payments

and stock purchased will be quashed, that is, they won’t register value
at all. If the cash shortage persists, then operating expenses will be
reduced.

Remember, it is the “inter-period cash excess” that cannot fall below
Important! zero. It is possible to have cash at the beginning and cash at the end
of the period and still run out of cash in the middle.
93
Input Cash Flow vs. Automatic Cash Flow

Keep in mind that some of these cash flows are driven by your inputs,
and some are automatic. For example:
 Your taxes are paid automatically every other period (even

periods).
 Your payables, warehouse costs, transportation, tariffs, and
other minor items are also automatically paid each period.
 Your marketing and research expenses, as well as your
production budgets, dividend, construction, container purchase and
many other items are decided by your inputs each period.
These factors mean that you not only control all the really large cash
disbursements but you also know about them in advance.
Notice that many of your cash collections depend on sales. It is

therefore important that you be able to accurately forecast sales so
you have adequate cash supply.
A final note on tax payments

Remember that taxes are incurred every period that you earn profits.
You will see them as a tax expense on your income statement.
However, they are disbursed at the beginning of even-numbered
periods only. Therefore, in Period 6 you disburse the taxes incurred
in Periods 4 and 5 (assuming your company was profitable). In period
7, there would be no tax disbursement, although there would be an
expense if you earned profits in period 7.
94
Appendix – Market Research Tools
There are 3 ways to learn about your customers preferences. You

can rely on the publicly available information that is published in the
newspaper. This is free, directionally correct, but very inaccurate.
You can also use statistical methods to analyze the 5 years of past
data to infer the preferences of customers by modeling their reaction
to changes in the things that you know they care about. This is a
theoretically sound approach if you think that you learned how to build
and use multivariate regression models. The only limitation is that you
have only 20 time periods of data, so it will be challenging to get good
fit to the data. The third method for learning customer preferences is
to conduct market research. It is possible for you to conduct binary
product comparison tests using tools provided on the class website.
Each test will give you a single point on the N-dimensional customer
preference surface for one of the 12 consumer retail markets. This is
an excellent way to test you understanding of what customers want by
effectively asking them.
There are detailed descriptions as to how to use these tools on the

class webserver. However, there is no information there about how to
design an intelligent market research investigation. If you do not think
carefully about what you wish to learn as you craft your market
research surveys, you will spend a lot of money to learn very little that
will be useful. So, think carefully about what you really need to know
and how best to discover it.
95
Index
[m = margin note]
auctions, difference between the two types, 23
auctions, on-line government contract, 23,62
bad debt recovery, 43m
cash flow dynamics, 89
cash flows and expenses, examples, 71-72
cash flows based on team's input vs. automatic, 92
cash inflows at beginning of period, 5 items, 90
cash inflows at end of period, 2 items, 90
cash outflows at beginning of period, 15 items, 90
cash outflows at end of period, 4 items, 91
collection budget, an example and bad debt rate, 43
collection budget, description, 43
company image product 1 and product 2, 88
competitor operational data, capacity and inventory, 77
containers, 26
containers, an example, 27
containers, description and key conditions, 27
contract image and its advantage, 22m
contract image improvement in contract auction, 61
contract prices, government contracts, 22,61
contract sales, an example and conditions, 61-62
contracts, no containers, shipping costs, tariffs, 25
contracts, sealed bid, 22
contribution margin, 56
countries, 8
customer preferences, fixed and identical, 12m
decisions, 15 production , 19
decisions, 44 marketing, 18
decisions, 9+5+5=19 finance decisions, 19
dividends, description, 42
equity refers to common stock and retained earnings, 41m
extrapolating beyond ranges of data, a warning on, 60
factory capacity decrease, an example, 36
factory capacity decrease, description, 36
factory closure, 37
factory construction (expansion), description, 35
factory construction, an example, 36
factory depreciation, 35
factory design, 7 key game rules, 10
factory expansion, tips on, 71
factory relocation report, 76-77
factory relocation, an example, 39
factory relocation, cost structure, 39
factory relocation, description, 38
factory relocation, effect of consultants, 39
factory relocation, input, 38, output, 76
field (input) name, 18
finance report, 16, 78
finance report, balance sheet data, 6 key data, 80
finance report, currency contracts, examples, 84
96
finance report, illustration, 78

finance report, income statement and key factors 82, 85
finance report, income statement, return on equity, 82
finance report, tariff and transport rates, 83
forecast sales accurately, importance of, 92
forward rate, 46m
future currency market, description, 46
future currency market, examples, 47-48
high quality products, cost varies by location, 10, 10m
historical data, rich in valuable information, 12
how to play, simulation cycles, 13
inputs, list of 78 inputs, 18
inputs, under team's control, 14,18-19
inputs/outputs sections, 14
insolvency and system's response, 91
insurance summary, property, D&O, product liability, 45, 86
insurance, directors/officers liability insurance, 45
insurance, product liability, 45
insurance, property/casualty, 45
interest income earned on excess cash, 91
inter-period cash excess cannot fall below zero, 91
inventory holding costs illustrated, 72-73
inventory writedown, 74
loans, description, 40
local currency, 21m
market design, key rules, 11
market report detailed format and data, 51
market report, 3 sections, 50
market report, additional sales, 54
market report, company profitability 54, 55
market report, contract market section, 61
market report, demand, sales, marketing expenses, 52
market report, market statistics section, 52-55
market report, market statistics, pricing, contract, 50
market report, pricing and quality data section, 58
market report, world performance data, 53
marketing budgets (also called expenses), 28
marketing budgets, an example, 28
marketing budgets, descriptions and conditions, 28
marketing consultant fees, description, 29
next period data, maximum loan, interest rates, 87
on-line contract market, key characteristics, 62-63
outputs in preformatted forms, 16
outputs, market, production, finance, and cash flow, 49
producing too little, 70
producing too much, 69
product design, 3 key rules, 11
product differences between products 1 and 2, 56-57
product prices, 21
production budget at full capacity, 34
production budget, an example of volume and costs, 34
production budget, description, 34
production budget, fixed and variable costs, 34
production capacity regulation, 70
production consultants fees, description, 32
production report, illustrated, 66
production report, introduction, 65
97
production report, inventory data, 69

production report, product information, examples, 67-68
quality improvement and cost, 31
quality myth and relative quality, 58-59
R&D relative quality index, 31
receivables, predictable collection patterns, 80-82
relative quality index on R&D, 31m
reports, market, production, finance, cash flow, 16
research and development (R&D), key characteristics, 31
shipping preference order, 24
shipping preference order, an example, 25
simulation cycles, 13
spot rate, 46m
start-up information, tips for managing the company, 12
stock market shared by the worlds, 9
stock out, 24m
stock out, consumer reactions differ, 24m
stock out, first-in, first-out, 24
stock out, retail market specified order, 24
stock transactions (buy or sell), description, 41
stock transactions, an example, 41
stock transactions, need for advance announcement, 41m
tax payments in even-numbered periods, 92
taxes and tax rate, 86
taxes automatically paid every other month, 92
things to think about as you play, 5 key elements, 13
transportation report, an example, containers, 76
transportation report, key factors, 75
trends in consumer preferences, 6 key items, 60
universe containing 5 worlds, 9
universes, 9
warehousing and variable storage fee, 73
warehousing, 72
worlds driven by competitive dynamics, 9m
worlds, 8
worlds, same characteristics at start, 9m
wrist watches, 4
98

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International Management Game

Carnegie Mellon University

Welcome and overview 4-17

Input Description 18-46

Output Description 49-92

Market Report 50-64

Appendix – Market Research Tools 93

Welcome to the Management Game!

This manual explains the basic rules of the Management Game

Your success, or rather the success of your company, depends on

When you arrive to this site, it will look like this:

Select "Student" and you will see this screen:

If you have an Id and

Please remember several things as the class progresses:

To mimic a “real” company, play of the Management Game relies on

Play within Worlds

The figure below is an example of World 1 for 5 companies.

Assume that you are part of Company 5. As part of that management

Products are positioned in the market as described below. You may

 Product 1 is at the more price-sensitive end of the market;

At the start of the Management Game, each team is currently

in a country's local currency are consolidated into US dollars for

Consumers in these markets have markedly different preferences.

Other Start-up Information

performance than your ability to understand your customer needs and

Things to Think About as You Play

In addition, some activities will occur between simulation cycles. For

Inputs—Things teams can control in

To begin the Management Game, your team must consider the

Outputs—Results of the simulation using the inputs

At the end of a given period, teams can access resulting information

The diagram below illustrates what happens during a single move or

The pre-formatted output reports available to Management Game

 The Market Report provides summary information about the

Where Do You Go from Here?

The manual also includes an Index of important terms or information

Research & Development Expense, Product 1 000 USD

Variables the teams can control

Field Name or Input Name

Local currency refers

Japan = Yen Germany = Euros United Kingdom = Pounds

Description Units Period 1

after an infinite number of successful bids. Your company's contract

On-line Government contract Auctions

Successful bidder gains advantage Successful bidder gains no

Shipping Preference Order

The Management Game

the stockout will be determined by these shipping preference

You can buy or rent

Because the containers depreciate slowly, lowering your transport

might want to rent containers to increase transport capacity

Each period, 5% of the containers wear out and must be replaced. If

 Note Volatile marketing spending is less effective than smooth

All marketing budgets are in local currencies. In addition,

All number entries are in thousands of local currency units.

Marketing Consultant Fees

Expenditures per period that exceed $300,000 face diminishing

marketing spending efficiency. There is a delayed cumulative

The consulting effort can be directed to any of the 6 countries

Your relative quality

All research facilities reside in the United States meaning research

The products sold in Period 5 have a relative quality index of 0.90