Management s Overview:

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1 Management s Overview: The Incredibles have just come off of a challenging year having aggressively utilized their strong market share and accessibility to accelerate sales growth. The company s profits were the highest in seven years and stock price soared to $98.38/share, over $20 higher than the next strongest competitor. However, success did not come without its drawbacks; the company was forced to take out a $16.233MM emergency loan to cover the costs of under-estimated capacity needs. Industry Analysis & Strategic Outlook: Contrary to original expectations, the strongest competition for market share this year was in the Traditional and Low End segments. The Incredibles s strategy has been to pursue the three consumer segments with the highest overall market share growth (High End, Size, and Performance). Able and Acre (Traditional, and Low End, respectively) narrowly held onto their market share leads, amassing $132,106M in revenue for the company. Competition is fierce in the Traditional and Low End segments, especially with the introduction of several new products in each. This works to the Incredibles s advantage if market share in the following years increases at the rates originally predicted by Capsim (High End 16.2%; Performance 19.8%; Size 18.3%) then the company will be wellpoised to out-sell any competitors and reap payoffs from its early R & D efforts in these sectors. This speculation will be enhanced by the higher prices that can be charged in these three segments over the Traditional and Low End price schemas. Currently, Adam and Agape (High End and Size) are market leaders, while Aft is neck-and-neck for market share with a Ferris Company product. Agape has an impressive 39% market share in the Size market, a position the company will look to take advantage of in coming years. Strategy: Our mission statement was to: To ethically conduct business with an emphasis on creating stakeholder value while providing excellent customer service and establishing the Incredibles as a front runner in the electronic sensor industry. This was successfully implemented through our balance marketing strategy. Prior to 2009 the Incredibles pursued a strategy that equally distributed fiscal resources amongst all five consumer segments. In 2009 we tweaked our strategy following two years of high sales but low profits. Thereafter, the company launched more aggressive efforts in the three fastest growing market 1

2 segments (High End (16.2%), Performance (19.8%), & Size (18.3%)). After the adoption of the new strategy, it was predicted that the Incredibles would be strongest in those three market segments. The plan was never to entirely drop the other two (Low End and Traditional), but the company didn t anticipate performing as strongly in those two segments as they did. Contrary to original predictions, the Incredibles currently enjoy the highest market share in 4 out of 5 consumer segments. In the three most aggressively targeted segments, market share lead over the next closest competitor varies from 3% to 19%*. Marketing Analysis: Forecasting and Pricing Analysis- Our strategy for pricing was two fold. For segments where prices were important (low end and traditional), we price on the low end of the price range, thereby increasing market share in these segments. For segment that had low price sensitivity (high end, performance, size), we stayed toward the high end of the range, but were careful not to price out of the range. This was to increase our profit margin in these segments. Since the acceptable price ranges changed each year. We lower our prices based on customer needs. We also took our customer s prices into consideration and tried to stay within a competitive range. Sales and Marketing Analysis- At the start of the game we generally found that our products had much higher customer awareness ratings than accessibility ratings. In order to correct this problem we took some of the money we were spending on promotions and transferred it to our sales budgets. In doing so we may have over compensated, because we ended up having much higher accessibility ratings than awareness. As far as our sales and promotion budgets go, we did not spend evenly in each area. We tailored our approach to each product. Each product had areas for which the benefit of spending was good, and we spent heavily in those areas. But each product also had areas which the benefit of spending was poor, and we did not spend any money in those areas. There were also areas in which the benefit of spending was fair, and we spent moderately in those areas. Our goal for spending on sales and promotion was to have the highest awareness and accessibility rating in each segment. In order to do this we planned to out spend our competitors. We did not achieve the highest ratings in each product segment, but our products always ranked near the top. Performance Analysis: 2

3 Net Sales Growth Sales have been increasing in a pulsing manner (big increase, followed by a smaller increase, then again followed by a large increase) since the beginning of the game. In 2014 sales reached $319.8MM, having come off the largest jump in 2012 from approximately $230.0MM to $302.4MM in With four out of the five sensors leading their respective segments in market share, consistent R&D year-after-year has resulted in tremendous sales growth. As a result of the growth in demand, additional capacity was needed. Investments were made heavily in TQM and automation to reduce the need for second shift capacity. TQM savings were significant in the areas of administration costs, R&D cycle time, and labor cost-reduction. The company anticipates that sales will continue to flourish in sync with the growing demand for electronic sensors in general. Please refer to Appendix A for a graphical representation. Profits For the first few years, The Incredibles faced challenges realizing significant profits and increasing shareholder value. Times changed during the third year when the first dividend was offered to shareholders. The initial dividend was for $.25. Since 2010, the dividend has significantly increased year-over-year with the largest payout and stock buyback occurring in The Incredibles have really been capitalizing on their marketing and sales strengths to boost profits in 2013 and Profits can largely be attributed to the sales levels and market shares held by each particular segment. Prior to 2013, profits lagged around $6.0MM but have since sky-rocketed and been hovering around $30.0MM. The new increases in profits have allowed the company to retire more debt and issue larger yearly dividends to shareholders. The profit boost is attributed to overall growth of the electronic sensor market, in addition to the adoption of TQM initiatives, a refined forecasting formula, and very strong marketing and sales prowess across all segments. Please refer to Appendix B for a graphical representation. TQM- The Incredibles actively pursued TQM initiatives as a primary cost reduction driver. In addition to automation, management concluded TQM initiatives were one of the best ways to increase our contribution margin due to its immediate effects. Reduction of material, labor, and administrative costs were a primary concern of the company so investment in Vendor JIT, CPI Systems, and Quality Initiative Training were heavily favored. Other TQM initiatives were used to complement corporate strategy in the dramatic reduction of R&D cycle time and subtle demand increase in each segment. Please refer to Appendix C for a graphical representation. Automation- Following 2012 the Incredibles were experiencing a diminishing contribution margin. Management felt to significantly boost the margins an increased investment in automation was needed. That year over $18 million was invested in 3

4 automating four of five product lines. This significantly increased our contribution margin, raising it from 25.9% in 2012 to 30.8% in This had an immediate impact on profits, increasing them six times greater in that same time period. Automation also had an impact on the Incredibles learning and growth ratios, dramatically increasing round scores for the concluding rounds of the simulation. At the conclusion of the simulation management had elected to invest a cumulative total of $42 million on automation. This saved an estimated $3 million by the end of Significantly more return would have ensued if investment in automation would have taken place earlier into the simulation or if the game spanned years after Please refer to Appendix D for more data Forecast: Next year the company will need to make a number of investments especially in the realms of capacity and automation that will offset net profits. Currently, the company s strategy is to buy automation in the segments with the least aggressive R & D efforts (notably, Traditional and Low End). Other companies have employed similar strategies with regard to automation investment, and the Incredibles are slightly ahead of the curve in this respect, haven eaten the bulk of their automation costs early in the game. The Incredibles will also need to pay off the emergency loan acquired in The company will strive to payoff the emergency loan using 2015 profits alone. The Marketing and R & D budgets can be slightly lowered to compensate for this burden. Monumentally important is purchasing production capacity a cost that can be distributed over the next two years and be offset by issuing more long-term debt and possibly more stock. Automation will be purchased only after sufficient capacity has been paid for. The overall outlook for 2015 is promising; The Incredibles will continue to capitalize on their strong market share and sales growth performance to cover some of the debt incurred in 2014 and to offset automation and capacity needs. Peer Analysis For 2014 management elected to perform a peer group analysis consisting of activity, liquidity, leverage, and profitability ratios. The ratios were then ranked against Baldwin, Chester, Digby, Erie, and Ferris. The Incredibles faired extremely well in lieu of cash deficiencies for the last round of the simulation. Management adopted an end of game strategy to boost stock price and increase game scores. The cash deficiencies can be explained due to increased dividend payout and a price freeze of Aft which caused an over forecast of sales for the product in the performance segment. Liquidity ratios fell from

5 due to this newly adopted strategy. Although Liquidity ratios were overly deflated Incredibles profitability ratios ranked first over all its peers. Please see Appendix E for full analysis. 5

6 Appendix A Net Sales Growth Net Sales Sales $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $ Round Appendix B Profits Net Income $35,000 $30,000 $25,000 Income $20,000 $15,000 $10,000 $5,000 $ Round 6

7 Appendix C-TQM TQM Total Expenditures Quality Function Deployment Effort, 3,000,000 Benchmarking, - CCE/6 Sigma Training, 4,500,000 CPI Systems, 3,500,000 Vendor/JIT, 8,000,000 CPI Systems Vendor/JIT Quality Initiatives Training Channel Support Systems Concurrent Engineering Concurrent Engineering, 3,500,000 Channel Support Systems, 3,000,000 Quality Initiatives Training, 3,000,000 Benchmarking Quality Function Deployment Effort CCE/6 Sigma Training Cumulative Impacts 70.00% 60.00% 50.00% Materials Cost Reduction Labor Cost Reduction Impact 40.00% 30.00% 20.00% Reduction R&D Cycle Time Reduction in Admin Costs Demand Increase 10.00% 0.00% Round 7

8 Appendix D- Automation Labor Costs able acre adam aft agape Savings By Product able acre adam aft agape Total Savings: Cost of Capacity able acre adam aft agape Totals Cost: Total Investment Total Savings Return on Investment $ 41,796 $ 44,623 $ 2,827 8

9 Appendix E- Peer Analysis Our Andrews Baldwin Chester Digby Erie Ferris Rank Activity Ratios Liquidity Ratios Leverage Ratios Profitability Ratios Turnover of Inventory Turnover of Recievables Turnover of Fixed Assets Turnover of Total Assets Current Ratio Quick Ratio Cash Ratio T-5 Operating Cash Flow Ratio Debt to Equity Interest Coverage Debt to Assets ROS 9.2% 4.2% 1.2% 6.8% 6.3% 7.2% 1 ROA 17.3% 7.7% 1.5% 12.0% 8.4% 11.3% 1 ROE 29.0% 15.1% 3.5% 22.4% 16.3% 22.6% 1 Dividend Payout 70% 26% 0% 0% 0% 12% 1 9