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Full speed ahead

And so MGMT 300 is underway. I really enjoyed meeting so many of the class members in the labs yesterday (Wednesday). What was particularly pleasing was how many people were getting SHVs of $30 or more. I think we will have some very able (and competitive) teams. As a reminder, I should be sending out the team allocations on Monday afternoon (and you should be able to access NetMike ... and your firm for the rest of the course) later that day too.

Also next week, you will be submitting your first learning journal. My big assumption is that you probably haven't had to do something like this before. So, I think it's worthwhile thinking a little about what it means to learn something ... otherwise, how can you write about what you have learnt. Elsewhere, I note that:

Learning is the ability to use knowledge after a significant period of disuse

and

It is the ability to use the knowledge to solve problems in a context different (if only slightly) from the context in which the information was originally learnt

In a practical sense this means that in your learning journal you should be considering the real difference the course is making to your thinking and behaviour. Learning is much more than the regurgitation of memorised facts and words. It is the ability to do something better than one might have done it before the learning. 

So, your learning journal needs to demonstrate how (and why) you are doing (or trying to do) something better. To that end, the article by Daudelin provides a really good structure for your learning journals.

I remember interviewing a senior leader in one of New Zealand's largest firms. He told me that at the end of the day--every day--when he goes home, he reflects on the things that day that didn't go as well as he wanted. He then thinks about why that was, and what he might do differently the next time he is in a simulation. He ascribed much of his success to continually improving what he did through this ongoing process of reflection and learning. I hope that you find learning journals useful too.

Kicking of a new semester

As Semester 1 draws to a close, my mind starts to shift to thinking about Semester 2. And so, I've started to update this wiki to reflect the changes needed for the next semester.

In particular, I've updated the Due dates to be correct for semester 2.

If you notice any errors or omissions, either fix them yourself (most pages can be edited by anyone), or email me so I can do it.

But tAs we head towards the finishing line we have two conglomerates: Road Rascals/Life Cycles, and Vicious Cycles/Pakihara/Hot Wheelies

Road Rascals has taken something of a hit (expect, and should bounce back), but Life Cycles seems to have lost its way a little (perhaps). On the other hand, Vicious Cycles has yet to get the performance from Pakihara and Hot Wheelies, that one might expect.

So against a backdrop of increased retail sales, and an increase in consumer surplus, what's going on?

But these generally favourable conditions have not led to an overall increase in profitability.

There is a lot of capacity in Europe.

The problem is that there is just too much capacity. Idle time seems to be stuck at far too high a level.

But a more detailed look shows that whilst Life Cycles, Pakihara, and Spikes Inc have too much, Hot Wheelies could do with more. Will these firms be able to fix that in the next rollover?

Spending on quality seems to be going up too.

With Life Cycles hitting a 92% quality rating, one has to wonder if that is a bit too high. On the other hand, Spikes Inc down at 41% probably is way too low. Actually, Road Rascals might be a bit low too.

 

Now yes there are ever more products in the market ...

So perhaps it's unsurprising that cycle time is going up, but that seems like a lot ...

And so the average COGs are going up too,

 

On a lighter(?) notes, most firms have more money than they know what to do with, so the debt ratio is heading on down.

 

So, as we head into the last rollover, what's to be made of all this. Will Vicious Cycles be able to dethrone Road Rascals, or will Cruiserz cruise on by to the top. That said, Good Luck Bikes are in a very solid position too.

Possible scenarios. 

Road Rascals or more likely Vicious Cycles 'bet the farm' in a do-or-die move (argh, mixed metaphors). Or maybe they both do, in an attempt to leverage their subsidiaries, leaving the way open for either Cruiserz or Good Luck Bikes.

Or, maybe Road Rascals and Vicious Cycles play it a little too safe. It's hard to find that path between going too hard, and playing it too safe. Again, this could open the doors to the firms chasing them.

Ah, in another 25 hours or so, you'll be able to sit back and relax.

Shuttle diplomacy

In this first look at the results, the question at the forefront of my mind is "What was the result of the shuttle diplomacy?"

There were people discreetly going between rooms, and much hushed talked between CEOs, and then ... nothing. 

Of more note, someone at Vicious Cycles, calmly predicted they would get a shareholder value of close to $100, and the reality was $95. That is a pretty good prediction. Well done that person!

I, however, predicted Hot Wheelies could easily reach $20 or even $30 of shareholder value, and whilst their sales skyrocketed from about $6m to $13m, they only managed to quarter their loss from $6m to $1.5m.  With that level of sales, it would have been reasonable to expect a solid profit.  In contrast, Pakihara's sales drifted down from $49,939,362 to $49,134,417; barely any change, and their profit also slid down by $180k (nothing really). However, that result did see Pakihara's SHV rise by about $10 to $42. 

So, can Vicious Cycles get everyone peddling in the same direction?

 

FirmSHVSharePriceProfitSalesCapacity
Road Rascals106.16105.4616,666,919113,479,311102,048
Vicious Cycles95.0493.7218,618,78661,084,13459,423
Good Luck Bikes61.0353.9216,091,61266,476,62960,070
Cruiserz59.1158.6120,499,27563,657,06051,743
Pahikara44.3142.829,801,44549,134,41745,453
Life Cycles16.9716.31-3,638,03665,864,84547,624
Spikes Inc.4.333.14-11,138,8896,711,68723,552
Hot Wheelies3.393.39-1,519,46813,588,17013,717

Cruiserz maintain a very credible position is the centre of the pack. They sure do seem to be cruising along nicely. They know how to turn moderate sales into nice margin ... almost as nice as Vicious Cycle. Road Rascals must be pleased that those two firms never joined forces.

Finally, what happened over at Life Cycles? Somehow they managed to turn in a tidy increase in Sales (from $61m to $65m), but that translated into a loss of just over $3m. That's a big change from last rollovers $12m profit. Good Luck Bikes are probably happy that the diplomacy didn't work out in the end.

Anway, more detailed analysis to follow later.

 

Moving a Learning Journal

Sometimes, people accidentally create a learning journal in the wrong place.

Here's one way to fix it.

MovingAWikiPost.mp4

The old three ste

Vicious Cycles went shopping and bought Pakihara, who—in turn—own Hot Wheelies. As we think about that, let's keep the maths simple.

Hot Wheelies has a shareholder value of  $3.66. As owners of Hot Wheelies that value effectively is transferred to Pakihara.  If Hot Wheelies can get their SHV up by, say, $20, then, without doing anything Pakihara's SHV will go up by that amount. Likewise, an increase in Pakihara's SHV effectively drives up Vicious Cycles SHV (let's ignore any multipliers).

So, if through their own efforts Hot Wheelies goes up by $20, then Pakihara will go up by $20, and in turn, Vicious Cycles will go up by $20. THEN, if through their own efforts, Pakihara can go up by $30, then Vicious Cycles will go up by $30. In other words, if Hot Wheelies go up by $20, and Pakihara go up by $30, then Vicious Cycles will go up by $50 before they do anything. If Vicious Cycles can, through there own efforts, go up by say $30, then their total increase in SHV will be $80. So they could go from $65 to $140. And that is without extraordinary performance on their part. That could really hurt Road Rascal's position. 

Of course, there are a lot of ifs in there. And the biggest if is "If they can leverage the expertise they have". So far, I don't see any clear evidence of that. Afterall, as you will see,  Pakihara's sales haven't materially increased, nor has Hot Wheelies. It's more a case of them getting costs under control.

Anyhow, let's look at the big picture.

The consumer surplus is still pretty big. Actually, it is huge. At over $1.2Bn it dwarfs the industry's sales revenue (still).

And the sales revenue continues to grow. One has to wonder if that is because what firms' are doing or is it some kind of underlying fundamental. How long can this growth go on for? Still, sales revenue is not even one-third of the consumer surplus.

Hey, big surprise. The actual total spend on advertising has started to go down. I wonder what's behind that change?

Looking at the spending ratio by firms, Spikes Inc have made a notable drop. Perhaps worryingly, Hot Wheelies ratio is pretty high. Their parents should be able to help them put some better numbers in for advertising and PR, to get that under control. But it is out of whack with their level of sales. Just look at where Road Rascal's and Vicious Cycles sit. There along way away from the big spenders (relatively).

If advertising is under control, then it's not clear that the same can be said for quality. However, it is true that some firms did need to spend more on advertising (and some sure needed to spend less). It might take a couple more rollovers to see if the levels are right or not.

There is massive overcapacity in the industry. The poor situation has turned into a bad situation. Some firms need to be cutting their cloth to fit. I.e., scaling back their production facilities; or finding ways to grow demand to fill that idle time. 

But despite that, firms are getting more efficient (at least as measured by the COGM per SCU). How low can that number go?

That reduction has been accompanied by a decrease in cycle time. Firms are starting to really tune their manufacturing machine.

And they've done that tuning despite an ever-increasing array of products. Nice work people!

But all that tuning is for nought if you can't accurately forecast your demand. Here firms vary wildly. Look at the split between the firms at the top of the graph and those at the bottom. That's a key indicator of who is 'in control' and understands whats going on. That said, Life Cycles, Pakihara, Good Luck Bikes, and Cruiserz all had lost sales. 

So how have firms fared? Looking at the profit of the industry, the overall picture looks much rosier. 


But that upward trend hides a number of issues that are more evident when we look at profit firm by firm.

 

FirmSalesProfitMargin
Road Rascals$105,399,524.00$32,632,387.0031%
Good Luck Bikes$67,804,302.00$17,725,191.0026%
Cruiserz$56,794,251.00$14,579,789.0026%
Life Cycles$61,669,956.00$12,203,497.0020%
Vicious Cycles$65,555,048.00$11,408,117.0017%
Pahikara$49,939,362.00$9,979,737.0020%
Hot Wheelies$6,393,026.00-$6,504,730.00-102%
Spikes Inc.$7,301,195.00-$15,378,030.00-211%

At the top, Road Rascal's are generating a remarkable 31% margin with a profit of over $32m. Indeed most firms have very tidy margins. However. both Hot Wheelies and Spikes Inc need to do some work to get back into profitability, otherwise they'll be back into insolvency. Both Pakihara and Vicious Cycles have a vested interest in being as helpful as they can toward Hot Wheelies. Let's see how effective their inter-teamworking is.

I'm still left wondering how much higher Vicious Cycles sales would have (and their profit), if some of their management time hadn't been taking up with evaluating their takeover of Pakihara. It would have been quite reasonable to assume (from the previous rollover) that they could have had sales around $65m, and if they realized that 20% margin ... well, who knows what would have happened on the path that wasn't traveled.

I am a bit surprised that so many firms are rated as having "High Margins". Not "Good", Not "Okay" but "High".  That means the chances of buying an "Okay" firm is becoming increasing difficult (read that as expensive). If someone like Good Luck Bikes, Cruiserz, or Life Cycles wanted to merge with another company, that may no longer be possible — but then again, I've not really dug into the figures on that.

 

As for the league table, Road Rascals remain at the top.

FirmSHVSharePriceProfitSalesCapacity
Road Rascals$84.96$84.50$32,632,387.00$105,399,524.0087,140
Vicious Cycles$66.01$65.81$11,408,117.00$65,555,048.0050,305
Good Luck Bikes$45.20$44.19$17,725,191.00$67,804,302.0049,795
Cruiserz$45.10$45.10$14,579,789.00$56,794,251.0049,848
Pahikara$32.99$32.73$9,979,737.00$49,939,362.0042,778
Life Cycles$23.82$23.21$12,203,497.00$61,669,956.0056,646
Spikes Inc.$6.21$5.14-$15,378,030.00$7,301,195.0023,570
Hot Wheelies$3.66$3.66-$6,504,730.00$6,393,026.0018,268

Anyway, with two more rollovers to go, there could still be a lot of movement, and Road Rascals place is by no means certain.

 

A colleague, who knows that I like to run a bit, sent me through an article on Leadership and Running.

 

As I read it, I found myself thinking of some of the teams who feel they are struggling at the moment, and the following paragraph stood out for me:

A.G. Lafley — who, as CEO, more than doubled the number of Procter & Gamble’s billion dollar brands — may have said this one best. “I think of my failures as a gift.” You can’t grow as a leader if everything goes swimmingly. It’s when things go wrong that you have the best opportunity to learn. Recognizing this makes it easier to push through the setbacks. They are opportunities for true growth. The mark of a great leader, no less than a great runner, isn’t never coming up short. It’s how you handle the challenges.

Learning is difficult. No doubt about it. To start doing things differently, and that means not doing what one did in the past and that is hard. If nothing else, it is hard to break or change old habits. But to move forward it is often necessary to doing things differently.

That said, that's not a call just to try 'random' stuff. Try doing it differently on the basis of thinking things through—darest I say—much like Daudelin suggests.

The state of Europe

So, what's going on in Europe? We have two firms that are insolvent, and others racking up pretty significant losses. Will it turn out that some firms have been overconfident in their projections/analysis—has their ability to guess what the competition will do, based less in good intuition and more in wishful thinking. I don't know. 

Anyway, let's look at the state of play. BTW: Is this stuff interesting or useful? Please comment and let me know.  If no-one finds it useful, then I won't bother doing it.

 

I like to see the context against which this is all happening. And for me, that means looking at the consumer surplus. At over a billion dollars, it is a not insignificant. 

What does that number mean?

I see it as a good proxy for money firms have 'left on the table'. If firms had done everything correctly, all that money would be in their pockets, rather than in the consumer's pockets.

So how much money did firms actually extract from consumers?

Well, retail sales rather than wholesale sales are a good indication of firms' abilities to liberate money from customers. At just about $350m, that is about a quarter of the total that was sloshing around in the economic system of Europe (that could have been spent on bikes).

What is striking is the extent to which firms are able to take that $350 and realise a profit from it ... less than $20. That's a margin of around 5%. Wow! 

When we split that out by firm, we see three firms really struggling to make a profit. Spikes Inc seem to be the mirror image of the former owners Road Rascals; one loosing nearly $25m, the other making nearly $25m.

What I like to see is how Vicious Cycles is powering upward. With a profit of over $12m on sales of $88m, that gives them a margin of nearly 14%. Whereas the most profitable firm (Road Rascals) looks more like 17%.

In the world of cycles, I regard anything around 15% to be pretty tidy.

So what are firms spending money. Well, advertising always seems to loom large. And the upward trend in continues.

And that trend is true even when we look at the Advertising to sales ration. I wonder if it will top 20%. The upward curve seems to be slowing, but folk do love to advertise.

Spikes Inc is something of an outlier when we look at the Advertising to Sales ratio by firm. Their low sales and relatively 'moderate' advertising spend, makes their ration look really bad. 

In anycase most firms advertising to sales ratio continues upwards. That said, and as with the last rollover, there isn't much correlation between the advertising to sales ratio and firms profitability.

Firms have continued to spend money on increasing their capacity. Which is fair enough considering the amount of lost sales. But those lost sales are not evenly spread.

The result is over capacity in Europe. At nearly 10%, that means there is almost one factory too many in Europe. I wonder if that excess capacity will drive folk to even more advertising as they try and increase demand for their particular product. But is is really necessary when the consumer surplus is over $1bn?

 

There is a degree of giving back margin to retailers as they try to get greater access to the market. Big better distribution networks are one way to tap into that surplus. Not all the customers will come to you ... sometimes you need to find more effective ways to get to them.

The other way to access more consumers is through a wider range of bikes that better meets their wants and needs. Some firms are going down this path to as we can see from the increasing number of products in the market. 

Despite producing a wider range of products, overall, firms are managing to contain their manufacturing costs, with the Cost of Goods per SCU continuing downwards ... but manufacturing is generally more expensive than when teams took over their firms.

Part of those costs have to be related to quality, and there we see the quality index being reigned in,

What is striking about quality is that both of the troubled firms—Spikes Inc and Hot Wheelies—have the highest quality index. (Vicious Cycles seem to have gotten off the quality treadmill).

In contrast Road Rascals and Life Cycles have the lowest quality index. Hmmm.

One of the good questions to ask is how effective are factories at in changing manufacturing capacity into dollars. At one point, things seemed to be going well, but the average Profit per SCU has declined markedly.

 

 

sdasddsaSo, lets look at the firm results. Road Rascal's has the highest sales by far. Aside from the two insolvent firms, the rest of the firms all have sales in the region of $45m.

FirmSales
Road Rascals$82,921,994.00
Good Luck Bikes$49,822,692.00
Vicious Cycles$47,849,416.00
Cruiserz$47,502,328.00
Life Cycles$46,178,478.00
Pahikara$46,105,808.00
Spikes Inc.$8,380,996.00
Hot Wheelies$6,844,748.00

 

However, the picture becomes more graduated when we turn to profit. Road Rascals are still at the top of the table, but the spread of profit is much more  distinct. Based on the numbers, one has to be concerned about both Pahikara (who are sailing close to the wind) and LifeCycles who have dropped into negative territory.  Given the levels  sales, those firms sholdn't have too much trouble returning to a more robust profit position.

FirmSalesProfit
Road Rascals$82,921,994.00$23,589,983.00
Vicious Cycles$47,849,416.00$12,427,640.00
Cruiserz$47,502,328.00$10,063,217.00
Good Luck Bikes$49,822,692.00$7,811,220.00
Pahikara$46,105,808.00$1,915,263.00
Life Cycles$46,178,478.00-$5,500,329.00
Hot Wheelies$6,844,748.00-$7,756,601.00
Spikes Inc.$8,380,996.00-$23,946,752.00

 

 

The differences in performance is highlighted when looking at margins.

FirmSalesProfitMargin
Road Rascals$82,921,994.00$23,589,983.0028%
Vicious Cycles$47,849,416.00$12,427,640.0026%
Cruiserz$47,502,328.00$10,063,217.0021%
Good Luck Bikes$49,822,692.00$7,811,220.0016%
Pahikara$46,105,808.00$1,915,263.004%
Life Cycles$46,178,478.00-$5,500,329.00-12%
Hot Wheelies$6,844,748.00-$7,756,601.00-113%
Spikes Inc.$8,380,996.00-$23,946,752.00-286%

Anything over 20% is regard as a very high gross margin, and over 15% is a high gross margin.

 

Turning to shareholder value, let's look at the league table.

FirmSHVSharePriceProfitSales
Road Rascals$55.15$54.89$23,589,983.00$82,921,994.00
Cruiserz$36.06$36.06$10,063,217.00$47,502,328.00
Vicious Cycles$31.15$31.15$12,427,640.00$47,849,416.00
Good Luck Bikes$25.18$24.71$7,811,220.00$49,822,692.00
Pahikara$14.20$14.10$1,915,263.00$46,105,808.00
Life Cycles$13.52$12.97-$5,500,329.00$46,178,478.00
Spikes Inc.$0.99$0.01-$23,946,752.00$8,380,996.00
Hot Wheelies$0.01$0.01-$7,756,601.00$6,844,748.00

Road Rascals remain on the top, with Cruiserz chasing them. Cruiserz must be doing something right as they are neither second in profit or sales, and yet here they are. Mind you, there lost sales are pretty high. That shows they have a lot of room to grow.

Hot on the heels of Cruiserz is Vicious Cycles, who, desptie needing much more capacity turned in a good result.

Good Luck Bikes is also struggling with too many lost sales and insufficient capacity. Again, plenty of room for growth here.

Pahikara on the other hand need to get their inventory under control ... with 16% idle time the need to better match their product to their sales level. Nevertheless, their stock is still rated as 'Hold'. As owners of Hot Wheelies, if they can turn them around, they will get quite a boost.

Life Cycles are persuing a (very) low quality path, and I wonder if they have been a bit too zealous in this. They don't seem to be able to compensate for their low quality with their high advertising spend. 

Spikes Inc are off the bottom of the board, and whilst following a (ultra) high quality path, they may be getting things under control. If the match their costs to their sales they'll easily move into profitability again.

In somethign of a shock, Hot Wheelies have become insolvent. Collectively their knowledge and that of Pakihara should be able to get them out of this situation. After all, there is nothing fundamentally wrong with them quality is okay, advertising is okay, What is noticable is how high their production costs are. At $665 per SCU they are well above, say, Vicious Cycles at $491 or Road Rascals at $487.

Anyway, it looks as if there is plenty of room for movement in the league table in the coming years.

 

 

 

 

 

The reality of the situations faced by firms is starting to hit home. As one team member said, "It's getting real" (have they been reading my old posts? Mayhaps).

Thinking back to the old model of team development—forming, storming, norming, and performing (Tuckman, 1965)—it is clear that some teams are definitely moving into the storming phase. As things don't go quite as planned/desired/expected, tensions are emerging and some folk are struggling to find a way forward. What is less clear, is if they have enough grit and time to move through this successfully. As an aside, I recall (but not from where) that grit is strongly associated with academic success (amongst other things).

References

Tuckman, B. W. (1965). Developmental sequence in small groups. Psychological Bulletin, 63(6), 384–399. https://doi.org/10.1037/h0022100
 
Well, that was a surprise

So much has gone on in the bike business today. I don't know where to begin. Road Rascals have sold Spikes Inc, freeing themselves from what looked like a dead weight. That said, Spikes Inc are off the bottom and are now worth $0.99. In any case, does that mean they'll be in the market for a new acquisition?

Then Pakihara bought the very troubled Hot Wheelies (some would say insolvent). That'll take some turning around—but that's not an impossible task by any means. Give the $11m that was paid, there'll be a lot of pressure on Pakihara to make Hot Wheelies profitable again.

More analysis later

This is one of the habits discussed by Stephen Covey (the author of The Seven Habits of Highly Effective People),  The challenge is, particularly when facing tight deadlines, is to leap into action without a clear view of the end; people are keen to get on the journey and are happy to be going in the right direction. So, the question that some teams (the performance orientated ones, and probably the learning orientated ones) should have asked themselves is, "What end should we be targetting?"

According to the wiki, an A-grade for MikesBikes kind of looks like an SHV of about $500. That data is based on the historical performance of firms over many years, so it is do-able. So how is that possible?

Let's do the maths. Putting those numbers into a financial calculator (PV=13, FV=500, n=6) gives a result of 84% (FYI, to get to $300 you need an annual growth rate of about 70%). In other words, on average that means almost doubling SHV each rollover.

Rember, that is possible (and has actually been done).

So, starting with the end in mind, the question becomes how is that possible?

 

Talking to the CEO of Road Rascals, I get the impression that he thinks I'm a bit Machiavellian. I'm not sure why that is; mind you I try to be provocative with the titles of my blog posts.

Generally, if folk ask me questions I will:

  • give a straight answer, unless I think they are able to (or should be able to) work it out themselves, in which case 
  • I'll ask questions back, provided that they're not looking for strategic advice, then I'll 
  • avoid the question

Anyway, a few folk has asked some general questions about what has typically happened in the past, so here are some notes on that.

  • This class has been a little more aggressive in launching bikes that other classes (but not the most aggressive).
  • I'm not sure that most teams understand the perceptual map as well as other classes have.
  • Normally, it's about now that takeovers are enabled (it is rarely enabled straight away, but given our compressed timeframe, it made sense).
  • Although I have run firms in the past, I'm not running one right now. That honour goes to a couple of Masters students who are looking for a challenge.

 

 

It takes two to tango

The big news of the day is the takeover of Spikes Inc, by Road Rascals. The question on everyone's lips is can Road Rascals (SHV $31.79 ,capitalization$62m) turn around the fortunes of the insolvent Spikes Inc (SHV $0.01, capitialization $18,101). As Spikes Inc sink deeper into debt with this rollover, one has to wonder what plans Road Rascals have in their hostile takeover. Industry analysts suggest that Spikes Inc need at least $29m in new equity, just to be solvent again ... and that won't leave them with any real working capital to trade their way out of the hole they are in.

No doubt we'll talk more about this later.

And so, what else has been going on ...

Industry sales revenue continues upwards. Someone must be doing something right for this to be happening. Revenue has more than doubled since the teams took over their new firms.

Have they been able to double the profits as well?

Yes, is the answer. After the dip in profits after the first rollover (people 'investing' in the future) profits have bounced back and more. They are now about twice what they were.

However, whilst there is more money floating around (in absolute terms), the industry as a whole is not more profitable (i.e., margins have not grown really). The gross margin still hovers around 13%.

 

Mind you, not all firms are equally profitable. 

Hot Wheelies seem to be hitting some bumps in the road. Will they be the next firm to have a new owner?

FirmProfit
Road Rascals16,701,800
Cruiserz10,253,208
Life Cycles8,070,338
Vicious Cycles6,018,633
Pahikara4,647,096
Good Luck Bikes2,451,453
Hot Wheelies-3,032,162
Spikes Inc.-8,325,333

Thinking of costs, my mind turns first to advertising, and that cost has certainly gone up! It's now nearly 7 times the initial amount.

And we see that when we look at the advertising to sales ratio. That has more than doubled, and a cynical person might attribute all the sales growth to that fact.

But whilst this is true at an industry level, is it true for each of the firms?

The spread of 'advertising to sales ratio' is pretty big. At the top, Spikes Inc has a 30% ratio ...  thisseemswaywaytoohigh. And that is some contrast to Road Rascals who have one of the lowest ratios (and technically, some might say too low).

FirmProfit
Spikes Inc.-8,325,333
Life Cycles8,070,338
Good Luck Bikes2,451,453
Pahikara4,647,096
Hot Wheelies-3,032,162
Road Rascals16,701,800
Vicious Cycles6,018,633
Cruiserz10,253,208

That said, is there any relationship between advertising and profit ...

 

Here is the profit table again, this time ranked by advertising to sales ratio (the biggest spenders are at the top, lowest spenders at the bottom).

It seems like spending a lotonadvertising is not a magic bullet, and possibly other things are important.

 

 

In contrast, (I assume) spending on quality has decreased. I can't remember when I last saw a decline in the average quality index this early.

If any firm needs to work on their quality it has to be Pahikara, it is very low.

Of course to generate that amount of sales revenue, one probably needs to sell a lot of bikes. And that means making a lot of bikes. Although the SCU capacity of the industry has increased, It has not doubled ... that probably means that firms are becoming more efficient at turning raw materials into retail dollars (well wholesale dollars really).

So what are firms doing with all that capacity? Making a truck load of bikes.

However, firms are still missing out on a lot of potential profit. Just look at how the consumer surplus is ballooning.

It does make one wonder if too much is being spent on advertising.

So of that consumer surplus may be down to the fact that firms find it hard to forecast well.

So, let's look at the league table.

 

FirmSHVSharePriceProfitSalesCapacity
Road Rascals31.7931.6916,701,80062,292,35052168
Cruiserz28.9128.9110,253,20839,487,49636629
Life Cycles26.5126.018,070,33850,167,72839841
Pahikara21.9821.984,647,09637,385,22241341
Vicious Cycles16.7716.776,018,63329,431,21929455
Good Luck Bikes15.5415.392,451,45330,443,36634118
Hot Wheelies3.963.96-3,032,1629,790,57523829
Spikes Inc.0.90.01-8,325,33323,202,93822732

At the top we have Road Rascals, who have repeated there performance from the practice rounds, coming to the top in the second rollover. Hot on their heels is Cruiserz, who, despite making significantly less profit are only a smidgen behind them (main taining their second place from last rollover).

With the second highest sales, Life Cycles are in third place. If they can fix their profitability they could overtake Cruiserz.

In the middle of the pack are Pahikara, Vicious Cycles and Good Luck Bikes. If I were thinking about taking over a company, these might be a good target ... they are doing well and would be a valuable (low maintenance) addition.

Then there is Hot Wheelies. 

 

 

Governing variables

Talking with many of the teams today, it was striking how good their grasp was of many of the areas in the simulation. It was equally striking the blindspots some of the teams had.

I sense that my gentle questioning has helped move some teams' thinking forward. 

Overall, it still feels as if most teams make all the decisions together, rather than being at a stage where they mainly focus on integrating the decisions/recommendations from each person re their area of speciality/responsibility. I know it takes time to develop as a team before that stage is reached, and—in full semester—I wouldn't expect to see it emerge until around week five; but that should be about now-ish.

What's not clear is whether the compressed timeframe we're operating at actually provides enough time for the more subtle aspects of team life to emerge.

So, predictions for today, there will be a lot of FOMO around Spikes Inc. As I said to a few teams today, two things one might think about before putting a bid in are:

  • Your own team's ability to get Spikes Inc out of that hole; do you understand things that well, and
  • Your team's ability to manage Spikes Inc

Of course, two question you might also think about is:

  • How much do Spike's know (are they bust because they don't know, or is it because they do know and have a plan)? and,
  • Will they require managing at all?

Ultimately though, I think it's important to have a plan for ownership beyond thinking they're a bargain right now.

Anyway, if you're planning a takeover, (hostile or otherwise), hold on to your hats; either way, it's going to be an exciting ride.

 

Well, well, well ...

... I wonder how many people/firms were surprised by the results of the latest rollover. Competition seems to be much strong with more variability in performance as compare with the first practice rollover.  So let's jump in and see what has been happening

For a change, I'll start by looking at debt to equity ratios. You'll remember from the previous rollovers the debt ration kept on going down, and that I questioned the wisdom of that approach.

In this rollover, that trend has been totally reversed. There are two drivers behind that change. First, some firms have gone to the bank and taken out some big loans to fund their expansion; in other words, there have been some big movements in the debt side of the equation. 

Secondly,  there have been some big shifts in equity too (ranging from a high of about $9.5m to a low of about $4.5m). Taken together, this have produced a non-trivial swing in the overall debt to equity ratio of Europe.

 

In terms of sales, total sales this time are about $160m, where as in the first practice rollover, sales were $134m. So, firms are generating more sales.

The question then is, "Are firms generating more profit?" (remembering where profit goes, so does SHV).

And the answer to that question is a resounding "No".

Even without the huge loss made by Spikes Inc, the profit is way down from the first practice rollover.  Since  profit is the difference between revenue and expenses, then expenses must have go one.

Advertising .... people love to spend on advertising, and if people have taken away a lesson from the practice it is "Advertising is good".

In the practice rollovers, advertising went to $15m and then $25m — but this time, in one rollover, advertising has gone up to nearly $20m. 

That seems like a lot, and I have to wonder—given that one can always spend more on advertising—at what point does the marginal return exceed the marginal cost (i.e., at what point is spending more on advertising just throwing money away).

 

So, here we see firms increasing there total costs by over $10m. That probably explains some of the decline in profits.

 

One of the other popular things to spend money on is quality. All the firms are pushing up their quality; most being in the 70s, and only one firm being in the 60s.

Again, quality is one of those things that you can spend evermore on, and which gets increasingly expensive to improve. Where will this top out?

The last big ticket item (if not the biggest ticket item) is product development. With around $20 being spent on new product develop, one needs to anticipate a lot of new products being launched soon.

It'll be interesting to see which markets will be targeted the most. Given the push for quality, one might expect it to be in the high-quality segments. But I don't know if that will be the case or no.

And so to the league table. What's happening? Let's start with sales. Road Rascal are the leaders of the pack ... and yet they still had lost sales of nearly $10m. Does that mean they spent too much on advertising? Or was their factory unable to cope with demand?

FirmSales
Road Rascals$25,298,882.00
Life Cycles$24,266,550.00
Pahikara$24,042,000.00
Cruiserz$22,721,600.00
Good Luck Bikes$21,541,103.00
Vicious Cycles$18,283,993.00
Hot Wheelies$13,433,343.00
Spikes Inc.$11,202,750.00

Now were they able to translate those sales into profit?

 

FirmProfitSalesMargin
Cruiserz$4,165,762.00$22,721,600.0018%
Good Luck Bikes$3,475,642.00$21,541,103.0016%
Road Rascals$2,555,769.00$25,298,882.0010%
Pahikara$2,538,249.00$24,042,000.0011%
Life Cycles$2,315,469.00$24,266,550.0010%
Hot Wheelies$1,490,271.00$13,433,343.0011%
Vicious Cycles$778,628.00$18,283,993.004%
Spikes Inc.-$6,039,330.00$11,202,750.00-54%

Apparently not. Cruiserz were more effective in turning sales into profit than Road Rascals. This is true in absolute dollars and in margin. They are a better money making machine. As a rule of thumb, and I've said it before, where profit goes so goes shareholder value. So is that true this time?

 

FirmSHVSharePriceProfitSalesCapacity
Pahikara$17.12$17.12$2,538,249.00$24,042,000.0029874.00
Cruiserz$16.99$16.99$4,165,762.00$22,721,600.0028450.00
Life Cycles$16.12$16.12$2,315,469.00$24,266,550.0023429.00
Good Luck Bikes$13.92$13.92$3,475,642.00$21,541,103.0022226.00
Hot Wheelies$13.26$13.26$1,490,271.00$13,433,343.0022435.00
Vicious Cycles$11.22$11.22$778,628.00$18,283,993.0024187.00
Road Rascals$8.81$8.81$2,555,769.00$25,298,882.0022853.00
Spikes Inc.$0.88$0.07-$6,039,330.00$11,202,750.0022403.00

Not just yet, but often there is a lag, so will Cruiserz be top of the list next rollover.

Given Crusierz strong financial performance, one has to wonder what Pahikara did to keep their shareholders so happy, and is their approach sustainable?

That said no firm passed the $18 SHV mark this time (compared to 2 firms in the first practice rollover). 

Anyway, enough about the practice rollovers. The competition is definitely on!

Will any of the CEOs care to comment on their firm's performance?