Running Head: LESSONS LEARNT FROM PARTICIPATING IN GLOBALSYM

A report on Globalsym: Lessons Learnt and Experience gained

Hema Ramkisoon Student ID# 01751009 Sean Balkisoon Student ID# 90815130 Graig Davis Student ID# 811110094 Rajkumar Kushwaha Student ID# 308003129 EMBA COHORT 24 Management Accounting Course Code# BUAD 6300 Lecturer: Mr. Howard Dottin Date: 13th November 2012

Arthur Lok Jack Graduate School of Business

University of West Indies

Table of Contents Table of Contents..................................................................................................................................2 Executive Summary: ............................................................................................................................3 Background:..........................................................................................................................................4 Formulation and implementation of strategies......................................................................................6 Analysis of Companys current financial position: ..............................................................................9 Trading with 'foreign' companies: ......................................................................................................14 Major insights of the game:.................................................................................................................15 Learning/Recommendations:...............................................................................................................15

3 Executive Summary: Company 15 was incorporated as a legal entity in period 1 of September 2012 with its head office in Monaco and a manufacturing facility in Austria. Additionally, two 100% owned subsidiaries were incorporated in period two in Italy and Poland with intent of carrying out the retailing operation. Under the vision preserving memories and capturing your moments in high quality , company 15 sought to create a business model that would enable the company full control over its value chain by engaging in manufacturing and retailing of large volumes of products at competitive prices. A customer focused strategy under astute and ethical management promised maximum returns to the companys key stakeholders that included industrial customers and consumers, directors, and the equity providers. Operating as both manufacturer and a retailer presented not only unique challenges but also a collage of opportunities that helped in maximizing profits by supplying to sister companys retailing outlets in other countries, building long lasting relationships, benefiting from economies of scale and developing institutional knowledge and know how. Challenges, however, arose owing to changing economic conditions, demographical differences, industrial relations, and regulatory frameworks that pushed the company to find a balance between its industrial trade and consumer trade. A financial model in Microsoft Excel was developed for the complete range of products in each country that calculated each units variable price, contribution, fixed prices allocation and cash flows by inputting the volume and after tax profit level desired for each product. The model helped us tremendously in budgeting, managing cash flows, negotiating with industrial partners and setting the sales price in the consumer market. Throughout the lifespan of the companys 8 periods, the basket of products was tweaked at various junctions to facilitate not only changing economic conditions but also the changing patterns of consumer behaviours. Environmental scans were conducted at the end of each period; these scans were aided by a number of consultants reports such as Manufacturing facilities report, Products and Pricing reports. The incongruent conditions lead to continual adjustments to each cost structure such as different marketing expenditure, finance structure, training and development and CSR initiatives. The dynamic and imperious environment dictated constant monitoring mechanisms and immediate responses. Mitigation against uncertainty and changing conditions, required company 15 adjusting its strategy that placed emphasis on strategic alliances, increased marketing and advertising spend,

4 increased training and development and more CSR projects at the various points of sale. At the end of the game the companys equity grew over five folds by: consistently generating above average profit margins from third period onwards, maintaining above average sales, and by attaining higher return on assets that were comparable to the top five companies competing in the space. Even though with the shaky start, directors mustered all resources and under a clear vision, the entity emerged like a phoenix, soaring to great heights.

Background: Globalsym game is designed to test an individuals capability in the business environment, especially in the fields of ethics, marketing, accounting, relationship management and entrepreneurial skills. More than 100 students from the Universities of Texas, Guatemala and West Indies participated during eight periods, by organizing themselves into a group of three or four students who operated an assigned company. The objective of each company was to maximize the equity through industrial or consumer markets, or both. Special emphasis was placed on encouraging the companies to engage in the business transactions with foreign universitys companies. A Political, Economic, Social, Technological, Physical Environmental and Legal scan (PESTEL) as briefly given below- determined the selection of setting up a manufacturing facility in Austria and the retailing facilities in Poland and Italy, each with three points of sale.

Austria:
Political: Member of European Union Federal Republic exhibited signs of political stability Little no barriers to entry for new business Industry stakeholders call on the government to intervene following the decline in the auto industry low minimum wage Socio-Cultural: Free education system Population 8,219,743 (2012 est.) OECD better life index : Austria time devoted to leisure activity 14.46 hrs per day: ranked : 25/36 Economic: 2nd highest standard of living Most potential for growth One of the 10th richest countries in the world Economy grew by 2.9 % in 2011 2nd highest standard of living Increased inflationary pressures Pressures on the interest rate Fuel cost on the increase Technological Environment: Industry is highly competitive, changes in technology can make product obsolete Encouragement for R&D through tax incentives

High tourist activity

Italy:
Political: Weak coalition government which would "limit the government's ability to respond decisively" to events Government intends to reduce corporation and employment tax to promote economic activity Freedom of press Strong legislative arm : Toshiba ruling Heavy tax burden Low property rights High level of institutional corruption Economic : 7th largest economy in the world

Limited growth potential High cost of labour Countrys large debt/GDP ratio may result in rise in interest High cost of electricity will result in increased operating costs: Slow economic growth Market is not seen s price sensitive Ease of doing business ranking : 87th

Socio/Cultural Unemployment 10.8% OECD better living index ( Work Life Balance ) ranking 13/36 : Low fertility rate Strong sporting culture High tourist activity

Technological Environment: Industry is highly competitive , changes in technology can make product obsolete

POLAND
Political: Open-market policies: Barriers to free trade are quite low. . Inflationary pressures are under control, and foreign investment is welcome. Liberalized economy Social Economic: Low standard of living Low purchasing power High Growth: Polish consumer electronics market grew by 17% last year. Real growth rate: 3.8%, and inflation: 4%. wages increased the most in 12 months

Rich history 33rd most populated country in the world Unemployment: 12.4%. High tourist activity

Technological Environment: Industry is highly competitive for the low end product; Selected demand for the high end products; Changes in technology can make product obsolete

Above environmental scan helped in establishing the fact that: Austria has the second largest potential for growth, with the automobile industry on the decline there would be a steady supply of skilled labour and the country is technologically advanced. Additionally, the micro economic factors such as higher plant capacity of 70,000 units, lower variable unit prices and economies of scale renders Austria ideally suited for setting up the manufacturing plant. Furthermore, the attractive characteristics such as standard of living, purchasing power, GDP and forecasted economic growth of both Polish and Italian economies made them more attractive for setting up the retail outlets. Company 15 decided to maintain the highest standards in relationship management, with customers, suppliers, environment and the community. Some of business, personal and societal objectives set out for the company included: Maintain a ranking among the Fortune 5 companies; To be recognized as a ethical, powerful and respected player in the game by period 4; Maximize returns to the equity providers by at least 7 times equity multiplication; Establish meaningful and long-lasting symbiotic relationships

Formulation and implementation of strategies Political scan helped us segment the market into high end product consumers in Italy and low end product consumers in Poland. Accordingly the product strategy of manufacturing model 1 and model 3 cameras in Austria was developed to serve the Polish and Italian market respectively. Also the high end models were produced for the Austrian market to satisfy industrial transaction needs. We were cognizant of the fact that it would be disadvantageous to produce internally in Austria for industrial transfers to Italy and Poland as the sales can only be realized in the next period resulting in the lost opportunity in the current period. Focus then shifted to maximize the industrial transactions both in selling in Austria and purchasing at Italy and Poland to maximize profitability in each period. Based on environmental scan, we anticipated that demand would be higher in Poland and Italy and a manufacturer was allowed only one point of sale with a maximum selling capacity of 8000 units of each model, so we decided to retail in these countries and produce in Austria. Since all consumer

7 sales are credit sales with the terms 40% cash, 30% receivable in first period and last 30% receivable in the second period, (40/30/30), we didn't want to be strictly retailers for two reasons. One was product security and the other was to buffer the cash flow of retail operations. In other words, the industrial sales from our manufacturing operations generated high percentage of cash which supported the working capital requirement of our retailing operations. On the manufacturing side in Austria, in each period we assessed our costs and set pricing to make minimum 20% net profit margin. The prices were very competitive, and we sold our entire inventory allocated for industrial sales within two to three days of each periods opening. In the retail operations as well we tried to be competitive by purchasing from manufacturers who sell at fair value. Instead of running down to the low ballers who displayed short term opportunistic approach of adjusting their pricing strictly according to the market forces without any consideration to the investment in longer lasting relationship, we successfully built relationships with a few key suppliers like company 4 that assured a reliable supply of products in each period. In our retail operations in Italy and Poland, just as we did for manufacturing operations in Austria, we calculated our costs and set retail pricing to make minimum 20% net profit margin, except for MP3 model 1 in Poland. In Poland, we had approximately 40% sales of our MP3 model -1 inventory in 4 consecutive periods beginning from period 4 at a meagre 15% mark-up. Eventually in period 8 we reduced the mark-up to 12.5% that resulted in 100% sales of MP3 model -1 stock. Initial borrowing was intended to fund our expansionary approach so that we maximize benefits of borrowing by creating wealth through early transactions and be able to pay the interest and return the principle without curtailing the scale of operation. The idea was to sell all our stock in each period, and deploy profits to crank up production volumes in Austria, generate the industrial sales and use the revenue for retail purchases. Managing cash levels at minimum in the each period by employing the profits in working capital that was used to purchase the inventory and in the production process assured maximum assets turnover as depicted in the graph below:

Quick responsiveness by use of computer aided pricing strategy, cash flow determination, and purchase decisions helped company 15 achieve the required turnover. Almost consistently over all periods, we had our budget ready for the period within 4 to 12 hours of receiving the outputs for the previous period. An email used to circulate among all group members outlining the strategy for the period to ensure coherence in approach. Management by objectives was practiced to turn the budgetary intentions into reality. A typical example of such circulations is given below for the purpose of reference:
I am sure everyone would have been elated with the results for the period 4. Except in Poland (MP3-model 1, 4835 units), our all products, put up for consumer sales, have been sold. In line with the discussion we had, attached is the plan for the period 5. The salient features of this plan are: Putting up 37,000 units for industrial sale in Austria for generating sufficient fund to cover the balance for producing 65000 units in the period 6 and purchasing below given inventories: o MP 3 Model -1 in Austria: 5000 units @ 102 per unit; o MP 3 Model -3 in Austria: 3000 units @ 140 per unit; o MP 3 Model -1 in Italy: 8600 units @ 110 per unit; o MP 3 Model -3 in Italy: 8000 units @ 140 per unit; o Camera Model -1 in Italy: 10000 units @ 170 per unit; o Camera Model -3 in Italy: 5000 units @ 215 per unit; o MP 3 Model -1 in Poland: 10000 units @ 110 per unit; o Camera Model -1 in Poland: 12500 units @ 150 per unit;

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The cash availability will improve if we can purchase inventory on credit terms, but currently the plan considers all cash payment. The plan follows the expansionary approach that maximizes the utilization of every dollar available for the business. Therefore, it will raise the retained earnings but not the cash in the period 5. However, it would set a platform to generate more than 10 million euro in cash in the period 6 without the need to cut down the operation significantly.

Analysis of Companys current financial position:

Equity:
Initially the start was shaky as the directors were inexperienced in administering the company through filling decision forms. The situation, however, changed in the period 3 in which the company returned to making a profit of Euro 1.7 million. Subsequently, the profit continued rising in each period resulting in the equity multiplying five times the initially acquired equity of 10

10 million euro by the time game ended in the period eight. Relative to our performance in the period 7 and before, we saw the biggest jump of Euro 14,639,148 in equity that brought our cumulative

11 equity level to Euro 51,285,769 despite having been left with the inventories in Italy and Austria.

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Total Sales:
Misreading the model number of the initially issued 10,000 cameras in the period 1, not entering the units for consumer sales in Austria in the period 2 despite having a point of sale, and transferring the wrong model of cameras to Italy and Poland resulted in no sale in the period 2. The trend however changed and company recorded sales and positive growth in the period 3. A dip in sales in period 5 occurred as a result of our inability to acquire sufficient stocks, and despite an error committed by Globalsym on the allocation of camera models in period 6, growing trend continued in period 6, 7 and 8. During Period 7 further analysis of the market informed a decision to eliminate the low end product, model 1 and company officials concentrated on high priced products to serve both Austrian and Italian market. Also, having faced with difficulty to acquire stocks in Poland, the low end models were produced till period 6 to serve the polish market.

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Margins:
After suffering the initial dip in period 2 while familiarizing with the rules of the game , company 15 was able to increase its revenue generating capabilities in the subsequent periods through conducting timely transactions. During the initial stages of the game, directors persued organic growth strategy, where alliances will occur naturally. However, we soon realized that the limited time of this game would not allow such a strategy to materialize and hence adjustments were made to marketing the high end products for maximizing the profit margins, which resulted in profit margins rising more than three times of the industrial average.

Emergency Credit:
As the graph depics, we managed the cash flow quite well through developing a computer aided model. The circumstance surrounding the issuance of emergency credit can be described as an unforced error. In period 5, directors submitted to manufacture 35000 model 4 cameras. When the team received the ouput report for period 5, it recorded 35000 model 3 camers. Under the assumption that this matter was final, directors priced to sell model 3 cameras . However, on Friday, less than 12 hours before the period was due to close, correction for model 4 for period 6 was communicated. Directors immediately sought the intervention of the games administrators

14 requesting 1 million in compensation, and the decision for the model 3 to remain. While the compensation was given, the model was not changed resulting in emergency credit of more than 7 million dollars. Clearly, if the model 3 units were issued which we sold at 7.3 million Euro, the credit would have been reduced to just 300,000 Euro. While, in period 8, all the products put up in Polish consumer market were sold out, 1476 units of model 4 Digicams in Austria; 6,914 model 3 MP3, 4085 model 4 MP3, 6483 Model 1 digicams and 12517 model 4 digicams in Italy remained unsold. The significant unsold inventory in Italy also resulted in an emergency credit of Euro 1,842,775. Trading with 'foreign' companies:
COMPANY ORIGIN TAG NO. 1 TEXAN 2 4 6 8 9 10 11 13 14 18 19 21 23 24 26 28 Total ORIGIN TEXAN IMBA EMBA 24 Total TEXAN TEXAN TEXAN EMBA 24 EMBA 24 EMBA 24 IMBA IMBA IMBA EMBA 24 IMBA IMBA IMBA IMBA TEXAN TEXAN 1 1 22.00 1 2 2 1 11 2 Number of transactions 1 PURCHASES IN EURO 1,500,000.00 19,382,899.00 1,541,000.00 550,000.00 2,508,000.00 3,333,000.00 2,560,000.00 512,000.00 4,100,000.00 4 3 1 1 2 2 2 2 1 3 3 5 Number of transactions 1 5 SALES IN EURO 1,600,000.00 10,610,000.00 8,240,000.00 12,406,500.00 7,790,000.00 5,660,000.00 890,000.00 270,000.00 6,450,000.00 2,250,000.00 6,800,000.00 1,980,000.00 1,320,000.00 6,920,000.00

35,986,899.00 35.00 73,186,500.00 PURCAHSE IN TRANSACTIONS EURO TRANSACTIONS SALES IN EUOR 16 3 3 22.00 27,035,899.00 5,893,000.00 3,058,000.00 35,986,899.00 10 16 9 35.00 20,450,000.00 31,820,000.00 20,916,500.00 73,186,500.00

Company 15 clearly believed in transnational approach and actively engaged with the companies of foreign universities to build the long lasting relationships that resulted in 16 purchase transactions

15 worth of 27 million Euros. It equates to 75% of our total purchases. Also, a total of 10 sales transactions were conducted with foreign universities that generated 20 million in revenue, equivalent to 28% of the total revenue. Major insights of the game: Borrowing the maximum money in the period 2 to get the head start; Strategic relationship to create sustainable business advantage for the mutual benefits; Controlling value chain; Minimizing unproductive cash holdings to barebones; Developing an excel model to determine the manufacturing and retailing costs for the purpose of budgeting and negotiations; Formulation of strategies through a close dialogue among the directors within few hours of each periods opening; Learning/Recommendations: Recognizing that it was a suppliers market and in face of the difficulties in securing supplies in Italy and Poland, we should have applied the strategy of countertrade- selling to the companies on condition of purchasing in the countries where we had retailing interests. We realized the importance later and applied it effectively in period 8. Wanted more immediate feedback than having to wait until following Monday to see the impact of decisions on sales and profits (suggested bi-weekly periods) Time difference resulting in problems closing deals (8 hours should have been allowed to close deals rather than 60 minutes). But on the other side, it is a clear lesson that opportunities must be availed in time and it requires quick decision making. Upon completion , in hindsight directors agree that while there was an emphasis on cash management to restrict use of credit from commercial institution, more market activity by setting up additional manufacturing plants in recognition of high demand would have increased the profitability and wealth creation for the equity provider One of the most salient points Company 15 learned is that Ethics is a subjective analysis of individuals, and everyone always pose the sufferer of the situation to further complicate the dilemma.

16 Should have built relationships earlier in Italy, Poland and Austria Leverage: Profitability would have increased by borrowing from local banks, which would have created tax shields.