Simulation for international business

and strategy

CESIM GLOBAL CHALLENGE

Introduction

The task for the student teams is to manage a global mobile

telecommunications company through technological evolution in a
fast paced 21st century operating environment.
The students will develop and execute strategies for their simulated
company operating in the USA, Asia, and Europe.

It integrates a range of concepts from various management related

disciplines, including economical, political, and financial decision
making, as well as accounting, procurement, HR, production,
corporate social responsibility, logistics, research & innovation, and
marketing.

Cesim Global Challenge is an online business simulation game that

develops student understanding of the complexity of global business
operations in a dynamic competitive environment.

What is Cesim Global Challenge?

To give students practical experiences in teamwork and problem

solving and excite competitive spirits in a dynamically evolving
marketplace.

To enhance fact based analytical decision making and crystallize the

financial implications of business decisions by linking the decisions to
cash flows and bottom line performance.

To develop capabilities in identifying & analyzing key environmental

and organizational variables that may influence an organizations
performance within and across national markets, and how these
variables may influence the organization.

To increase the participants awareness of the complexity of operating

an international company from a strategic and general management
perspective.

Learning Goals

Results & teamwork

Observations & reflections

Lectures & discussion

Generalizing from the

experience

Analysis & planning

Applying new ideas

Decision making

Concrete experience

Learning Process

The platform also includes a communications forum that can be used

to communicate within teams and between all teams in one market.

The simulation platform allows team members to work virtually if they

wish. Each team member has her/his own account that enables them
to make decisions and scenarios on their own and later combine the
outcomes with the other team members on the [decision checklist] page.

The simulation is completely web based. There is no need to install

any separate applications and the simulation can be accessed from
any computer that has an internet connection.

Web Based Solution

[Readings] - Access to the decision making instructions and case

description

[Communications] - Access to the discussion forums for team and

market

[Teams] - Teams and team members in your market can be viewed

here

[Schedule] - Simulation schedule is available on this page

[Results] - Results become available in this area after each

deadline

[Decisions] - All decisions are made under Decisions

[Home] - Overview page with deadlines

The simulation platform includes the following pages:

Simulation Platform Structure

Note that the teams compete against other teams in their own
market, not against a computer. The decisions of each team
influences the other teams results and the market development
overall.

All teams are starting from exactly the same position, with similar
market shares and profits. Equally, teams will face the same market
conditions during the simulation.

Each simulation market consists of 2-12 teams, with 1-8 members in

each. The number of parallel simulation markets is not limited,
making it possible to utilize the simulation for any number of students
in the class.

Simulation Organization

Note that you can also change all the other parameters with the same steps
as presented above.

If you want to enable inventory, HR, and/or CSR you need to go to [Case
management] page and click tab Your parameter sets. Then follow these
steps:
1. Click Create new simulation parameters and name it. The parameters
now appear under Your parameter sets
2. Click Parameters and click the box Modules
3. Activate HR, inventory, and/or CSR.
4. Go back to [Case management], choose tab Apply parameters to
groups] and click Assign

HR, inventory, and CSR are disabled by default. If you want to use these
modules they need to be enabled at the beginning of your course.

As an instructor you have the option to include or exclude inventory, HR, and
corporate social responsibility -related decisions for your course.

Course Options

2.
3.
4.

1.

4.

3.

1.
2.

Go to http://www.cesim.com and choose Register on the top right.

Fill in your email and other details and select the language and the time
zone.
click <next>
Enter the course code that is given by your instructor.
click <next>
Enter license code if required. (Note that if the license code is required
you must enter a valid code or proceed to the online payment options.
Otherwise the registration will not continue.)
click <next>
Choose your Group and Team. Group equals one world where a
maximum of 12 teams operate.
click <next>
Click Finish and your registration is almost done.
Check your email and click the activation link.
Login with your email and password at www.cesim.com.

Student Registration Process

Practice
Round

System
calculates
the results automatically
at the given deadline

Decision making with

the web interface

Conclusion
and Analysis

10

Note that it is not possible to modify the decisions after the round deadline. If the team has not saved its
decisions for a round, the system will automatically use the results of the previous round.

The instructor decides the number of

actual decision making rounds (5-12)
and decision making follows the cycle
on the right.

Analysis
and
planning

Decision
making (x 5 12)

Results from the

previous round and
market info for the new
round available

Strategy and
Objectives

After the introduction, the teams

familiarize themselves with the
decision making process via a
practice round. The results of the
practice round will not have any
influence on the actual game results.

Introduction

Flow of Operations

We recommend cumulative total return to shareholders due to its

comprehensiveness. The teams may try to manipulate their profits,
revenues, and market share in the short run, but share price will
punish any short sighted decisions sooner rather than later.

The instructor may, at his/her discretion, choose to use other criteria

to measure the performance of the teams. For example, market
shares, accumulated profits, and revenue growth can be used if so
decided.

The main objective for the teams is to deliver sustainable,

profitable growth. Typically this is measured by a ratio called
cumulative total return to the shareholders, which combines share
price development and dividends paid to show the total return to the
shareholders.

Main Objective & Winning Criteria

11

Remember to save the decisions before the deadline.

The manual and the case description should be read before the
practice round. The market outlooks should be read before starting to
make decisions for each round. A new market outlook containing
information about the market development becomes available as
soon as the previous round has passed.

In the beginning of the game, so called initial round results are

available. These can be used as a starting point for the practice
round decisions. After the practice round, the situation is cleared
back to the initial, and decisions will be made for the first round.

Decision making is round based. One decision making period is

typically regarded as one fiscal year.

Decision Making Fundamentals I

12

Remember to save the decisions before the deadline.

As a starting point in the simulation, the teams have only first

technology products available. Further development of technologies
can take place by own development or by license purchasing. Time
to market with own development is one period, whereas license
purchasing makes the technology available immediately.

Decisions are entered in the white cells. These will be used in the
actual calculation of the results.
Estimations are entered in the blue cells. These will not be used for
the calculation of the results, but they are important because together
with the decisions they form the basis for the budgets.
Drop-down menus are used in certain decisions where there are
some specific options to choose from.

Decision Making Fundamentals II

13

The team will develop and execute global strategies and its success
is measured by its capability to deliver value to the shareholders.
Strategic approach to decision making, careful analysis, continuous
R&D, good timing, and successful product positioning are the main
keys to success.

The essence of Mobil Inc is a fast developing mobile handset

market with product life cycles driven by technological evolution.

The team will take over as the new management team of Mobil Inc,
a global mobile handset manufacturer and will be responsible for the
companys strategy, R&D, marketing, production, logistics, and
finance. (optional modules exist for HR, finished goods inventories,
and corporate social responsibility)

Business Case: Mobil Inc.

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Treasury management
Dividend policy
Capital structure
Short and long term debt
Financial indicators
Budgets

-
-
-
-

Strategic
intent

4. Investments

- Production capacity
- Capacity allocation
- Outsourcing
- Inventories (optional)
- Procurement/CSR
(optional)

3. Production

-Total market demand

-Predicted market growth
-Product selection
-Market shares

2. Demand

- Read the market outlook

1. Market conditions

15

- Development of technology
- Estimations of future demand
- Development of new features
- Investment in new production plants
HR (optional)
- Purchasing of licenses for
technology and features
- Recruiting, layoffs, remuneration

5. R&D

For each product and market

Product feature decisions
Pricing decisions
Promotion investments

6. Marketing

- Delivery priorities
- Transfer prices

7. Logistics

- Transfer prices

8. Tax planning

-
-
-
-
-
-

9. Finances and Budgets

Decision Making Overview

15 %

22 %

30 %

33 %

Tech
2
8%

Tech
1
25 %

Starting situation with 4 teams (example)

In the beginning all teams have exactly the same
market share (e.g.,25%). Each team is starting
with one technology only and 25% market share
consists of sales of one product (Technology 1).

Demand Structure

16

Market shares for each team are affected by:

a.
Product (technology + the number of
features)
b.
Price
c.
Promotion
d.
Past market share for the product and
technology

Demand for different technologies is affected by:

a.
Network coverage
b.
Price level relative to the other technologies
c.
The number of companies offering products in
the technology
d.
Total marketing efforts for that technology

Total market size is affected by:

a.
Economic conditions
b.
Average price level
c.
Aggregate investments in promotion
d.
Aggregate investments in technology

Estimate the total market growth for each market area. Market outlooks provide
a good forecast for the expected development
Decide which technologies to sell in each area.
Estimate the market share for each product (note that the market shares are
quoted per market, not per technology).

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1. Make your best estimate about the split between the two technologies in a
particular market. For example; US market Tech 1 60% and Tech 2 40%.
2. Estimate your target market share in each technology, for example; 20% for Tech1
and 35% for Tech2.
3. Calculate your share of the total market for each product:
! Tech1: 60% x 20% = 12%,
! Tech2: 40% x 35% = 14%.
4. Input 12% and 14% in the market share cells on the demand page accordingly.

Example of how to set market shares for two products in one market:

2.
3.

1.

Recommended steps for demand estimations:

Demand Estimations

Each market area has its own network coverage

forecasts. Those forecasts are indicated in charts
on Demand page.

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Key issues to consider:

Network coverage forecast is not the same as
demand forecast.
Inhabitants outside the network coverage of the
given technology do not purchase devices
New technology is typically considered more
attractive than old technology, ceteris paribus.
The picture above forecasts that in
round 3, Europe has 100% coverage for Networks are usually established in the more
Tech 1, about 50% coverage for Tech 2
condensed areas in the beginning.
and 4, and coverage is just starting to
It is very costly to develop all technologies so
develop for Tech 3.
choices must be made between them.

Network Coverage

Note that contract manufacturing amounts are limited. The limits are given for
each round and teams that use contract manufacturing more actively have
higher limits.

Contract manufacturing can be used to complement own production. Using

contract manufacturing requires that one own production line is
committed to the outsourced product. This means that at any point during
the simulation the maximum amount of different technologies that can be
produced is four.

Investments can be made to start production in Asia and/or expand

production facilities in the USA. Investments take two decision-making
periods from decision to completion.

There are two production areas (USA, Asia) that can be used to satisfy
demand in three market areas (USA, Asia, Europe). There are max 2
production lines per area, i.e., four in total. In the beginning, production
facilities are located only in the USA.

Production Decisions I

19

a.
b.
c.
d.

Basic cost level in the production area

Production cost function (see next page)
Learning curve effect (see next page)
Penalty for having a too high production target as explained
above

Factors that influence the production costs are:

Production is demand-driven by default, which means that

there are no finished goods inventories. If the demand is
overestimated, the production will be reduced automatically to
match the demand. This adjustment causes additional 5-10%
cost on top of the production cost. Note that production will
not adjust upwards automatically. This means that if
demand is higher than estimated, the team will encounter a
situation where it can not meet the demand.

Production Decisions II

20

Inventory value is calculated based on first in first out (FIFO)

method.

All products in inventory are carried at their original production cost

and there is no depreciation of inventory. Inventories incur
management costs that are reported as part of the administration
costs in the P&L and also separately on the production report.

USA and Asia production facilities have their own inventories and
products are never shipped between the areas unless there is market
demand.

If your Global Challenge course has inventories enabled, you will find
detailed information on the inventory page under the production tab.
The beginning and ending inventory figures are also presented on
the production planning page.

Inventory

21

Cost multiplier

20

25

30

35

40

45

50

55

60

65

70

5000

0,95
0%

1,05

1,1

1,15

1,2

10000

20 %

60 %

25000

80 %

Global cumulative production per technology

20000

Capacity utilisation

15000

40 %

USA

120 %

ASIA

30000

100 %

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Learning curve:
Presents production costs per unit as a
function of cumulative production per
technology, i.e., the more you produce of
each technology, the cheaper the
production per unit
Steepness of the curve is different
between USA and Asia.

Production cost function:

Presents production costs per unit as a
function of the capacity utilization.
Production cost minimum can be found in
the range of 75-85% capacity utilization
NOTE: Minimization of costs does not
always lead to profit maximization

Production Cost Function &

Learning Curve

Unit cost, USD

There is always a fixed cost for changing a supplier and to prevent

your company from switching from one supplier to another too
frequently you can purchase studies from independent evaluators in
order to determine the potential long-term development of the
suppliers.

On the procurement page you can choose between five different

component suppliers. The suppliers have different ratings for their
sustainability and ethics. In addition, they have different costs for the
components. When you choose suppliers that have higher ratings
you improve your companys image and it will give you additional
benefit in your marketing efforts.

If your Global Challenge course has corporate social responsibility

module enabled, you will find procurement page under the production
tab.

Procurement/CSR

23

The human resources function consists of three decisions: number of

employees this round, monthly salary and monthly training budget.
The number of employees is definite and you can always have the
amount of workforce you wish provided that your salary level is high
enough. You can also lay off all employees if you so choose. Costs
from human resources include salary, training, recruitment, layoff and
other R&D costs. All of these items are included in research and
development costs on the income statement.

Global Challenge can be used with or without human resources

decisions. If your course has them enabled, you are able to hire R&D
personnel to handle the research and development function in
addition to buying technology and design licenses. This will alter the
in-house development detailed in the next section.

Human Resources I

24

a) Salary through ability to attract talent

b) Cumulative training expenditures
c) Low employee turnover

Employee efficiency is influenced by:

a) Salary
b) Training
c) Success of the company
d) Good use of employees' time (no redundancy)

Employee turnover is influenced by:

Key issues to consider in human resources include employee

turnover and efficiency.

Human Resources II

25

Teams can use any combination of the two to reach the desired level
of technologies and handset features. For example, team can first
invest into its own R&D, then decide to speed up the process and
buy a technology license, and then return back to own R&D. The only
requirement is that you have completed the particular R&D cycle
(new technology or new product feature) before you switch between
in-house and licensing.

Payment for the license is a one-time fee that gives the rights for the
technology and features indefinitely.

Research and development consists of own research & development

and license purchases. The main differences between the two are
time-to-market and costs. Own R&D has one period delay before the
technologies and features become available for production. License
purchases bring technologies and features available immediately.

Research & Development

26

It also means that the required development effort varies based on

your efficiency level and the ultimate costs of development also
depend on your salary and other HR decisions.

If your course has human resources decisions enabled, the in-house

development deals with man-days instead of cash. The development
will work the same way as with cash, but in this case you have to
synchronize your product development decisions with your human
resources decisions.

Research & Development with HR

27

The actual marketing decisions include product features, pricing, and

promotion. Each of these decisions are made for all products in all
markets.

It is notable that the demand function is continuous, without discrete

steps. This means that the demand does not explode or collapse at any
particular single point, e.g., price above/below certain level, but it reflects
the consumers preferences on a continuous scale.

Customers are comparing between the offers of the different vendors and
making their purchase decisions accordingly. This means that each
teams marketing mix relative to the other teams marketing mixes is
crucial in the process of dividing market shares between the teams.

In the simulation the marketing mix consists of product (technology and

features), price, promotion (product promotion and brand).

Marketing

28

Promotion decision influences the demand at three levels: product,

market, and global. Only the product promotion decision is made
explicitly, but the total of the product promotions in one area are
summed up as market promotion, and the total of all product
promotions in all areas are summed up as global promotion.

Price is the single biggest factor that influences demand and

demands elasticity to price is always negative. Price elasticity differs
between the markets.

Features can only be implemented if the company has invested

sufficiently to its own R&D or license purchases. Team can decide to
implement between 1 and 10 features to its devices. From the
consumers point of view more features is better than less features
(in the given scale of 1-10). Implementation of product features
causes additional costs.

Marketing Features, Price,

Promotion

29

In practice this means that in order to minimize the logistics costs, a

team should allocate exactly the right capacity in the right places at
the right time. This can only be achieved by managing the whole
demand-supply network well.

A key driver for logistics is that each manufacturing site is

incentivised to minimise the idle time in production. Consequently, if a
team overestimates demand, the excess will be reduced from both
production areas even if it would be cheaper to ship everything from
one area and stop the machines in the other area.

As the production is demand driven, the logistics is demand driven

too. This means that the products are shipped from the
manufacturing sites automatically to the sales sites according to the
production capacity allocations. No separate decision is needed for
the shipping.

Logistics

30

In order to maximize profits, teams must be aware of the profitability

for each product and market and set the priorities accordingly.

Delivery priority decision is very relevant if the teams global supply is

not enough to satisfy the global demand. For example, delivery order
1,3,2 means that if the team runs out of supply, deliveries will first be
cut from Asia.

Teams can choose in which order they satisfy the demand for
different technologies in the markets. For example, delivery order
1,3,2 would mean that first the whole demand is satisfied in the USA,
secondly in Europe, and third in Asia. Delivery priorities are set for
both production areas and each technology separately.

Logistics Delivery Priorities

31

Tax

Transfer pricing is a highly regulated discipline in the real life and it is

regulated also in the simulation game. The multipliers must be between 1
and 2, which means that the internal price between the manufacturing
unit and sales unit can not exceed two times the direct variable cost in
any situation.

Transfer price is set as a multiplier. The multiplier determines how much

the manufacturing unit is adding margin on top of the direct variable cost
when it ships the products to the sales unit.

Transfer pricing can be used to allocate R&D and other fixed costs
between the countries and to benefit from different tax rates. In practice
this means adjusting profits between different areas.

Tax page gives you information about your companys taxes in each area
as well as about the global effective tax rate. Please note that loss-carryforward is taken into account.

32

Short-term debt in this case includes emergency funding premium and it is

more expensive than long-term debt. Therefore it is best to try and avoid
short-term debt.

Cash at the end of the year cannot fall below 2 million USD. If the planned
financing is not sufficient to maintain this requirement, the system will fill the
gap automatically by taking short-term debt. Short-term debt is paid
automatically when it isnt needed any more.

The goal of the financing decisions is to minimize the cost of funding to the
company and to return capital to the equity holders. Decisions that are
available include:
a. treasury management (transferring funds between group
companies)
b. increases (+) and decreases (-) in long-term loans
c. share issues and buy-backs
d. dividend payments

Financing decisions are typically the last set of decisions being made.

Financing I

33

Dividend payments can be used to return earnings to the shareholders,

assuming the company has retained its earnings.

Share issues and buybacks are made according to the market valuation in
the beginning of the round. The number of shares issued or repurchased
affect the issue or buyback price. Share buybacks are only possible if the
company has equivalent amount of retained earnings.

Long-term loans can be increased/decreased as needed. The companys

leverage influences the interest rate for loans (higher leverage = higher risk =
higher interest rate).

The treasury management decision can be used to transfer funds between

different countries by internal loans, for example to repatriate excess cash
resources from Asia and/or Europe or to supply funding for plant investments
in Asia.

Financing II

34

R&D expense is split between USA and Asia relative to the number of production
facilities. That is, if there are production facilities only in the USA, all R&D
expenditure will be expensed in the USA.

Note that all R&D and marketing (promotion) costs are expensed on the profit and
loss statement during the period the investments are made. As a consequence, profit
for the year may heavily fluctuate depending on the intensiveness of R&D and
marketing investments.

Current round figures update continuously as decisions are made. Actualized figures
for the previous round are shown on the right.

Projections can be launched from the bottom of the page and they consist of profit
and loss statements and balance sheets for the whole group and each area
separately. In addition, projections include key financial ratios and parameters.

Projections

35

Return on capital employed, ROCE % = EBIT / (Total assets Current liabilities)

Indicates the efficiency and profitability of a company's capital investments. Here, EBIT (Earnings
before Interest and Taxes) equals turnover minus costs and expenses during year, whereas current
liabilities are comprised of short term debts and payables that are due within a year.

Gearing, % = (Long term loans + Short term loans Cash and cash equivalents) / Total equity
Net debt to equity (gearing) is a ratio of a company's level of long-term debt in comparison to its equity
capital. Gearing, like equity ratio, indicates financial leverage, but gearing takes the companys cash
position into account.

Equity ratio = Shareholders equity / Total assets

Indicates the companys financial leverage, i.e., what proportion of assets are financed with equity.

Return on sales (ROS) % = Profit for the year / Sales

How much the company earns from every dollar in sales. Also referred to as profit margin.

Operating profit before interest and taxes (EBIT) % = EBIT / Sales

Gives indication about the profitability that the company is earning from its operations. Calculated as
sales revenue minus all operating expenses, including depreciation.

Operating profit before interest, taxes, depreciation (EBITDA) % = EBITDA / Sales

Gives indication about the companys current cash generation capability. It is calculated as sales
revenue minus operating expenses, excluding depreciation.

Key Financial Indicators I

36

The concept of total shareholder return is explained on the next slide

& - current share price + cumulative dividends per share * (1

((
100% $ ++
initial
period
share
price
$% ,
)

Cumulative total shareholder return, % (winning criteria)

this period )

#
1!
!"

P/E = Market value per share / EPS

P/E indicates how many years it takes with the current level of earnings to pay the price
of one share.

Dividend yield-% = Dividend per share / Share price

Indicates the annual percentage of return that the current level of dividend provides to
the investor, as compared to the current share price

EPS (Earnings per share), = Profit / Number of shares outstanding

Return on equity, ROE % = Profit for the year / Average shareholders equity
Indicates the return that the company earns to its shareholders

Key Financial Indicators II

37

In the previous we assumed that the change happened over one round.
The same principle applies for multiple rounds. In that case we add
cumulative dividends to the share price and annualize the return. For
example, 30% cumulative return over three years would be 9%
annualized return on average.

Example;
1. No dividends. Lets say that the share price in the beginning of the
game is 10EUR, and after one round (=year) the share price is
12EUR. This gives 20% return to shareholders for that given year.
2. With dividends. In addition to the above, the company pays a 1EUR
dividend per share during the round. Total return is (12+1)/10 = 30%

It takes into account the changes in the companys share price and
cumulative dividend payments.

Cumulative Total Shareholder Return is the average annualized

percentage return that a company delivers to its shareholders during the
whole simulation.

Cumulative Total Shareholder

Return

38

Also historical decisions for any team member can be accessed by

choosing the respective round from the dropdown menu.

Note that previous round decisions will be used if there are no saved
decisions for the round.

Team decisions can be accessed and consequently edited directly by

pressing go in the team column.

On the decision checklist page all team members decisions can be seen
side by side. By pressing copy a team members decisions are moved to
the team decision column. At the deadline, the system reads the decisions
from the team decision column and calculates results for the round.

Decision Checklist

39

Results provide useful information about a teams own sales, operations, and
finances. In addition, results can be used to benchmark performance with the
competing teams in the same market.

Results consist of:

a. Summary report with a set of charts
b. Financial statements; including consolidated P&L and balance sheet,
and parent company (USA) cash flow statement
c. Financial ratios; including share price info and key financial indicators
d. Area reports for all areas; including market reports and P&L and
balance sheet for each business area
e. Production report; including information about the production volumes,
contract manufacturing, production facilities
f.
Cost report; including information about scrap rates and production and
logistics costs
g. HR report and Social responsibility report are optional and visible only
if the modules are activated.

After each round the system generates reports that show the results of each team
within one simulation universe.

Results

40

Technical Support
[email protected]

Cesim
Arkadiankatu 21 A
00100 Helsinki, Finland
Tel. +358 9 406 660
www.cesim.com
[email protected]

More Information

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