Decision Rationale Decision 1 In determining our initial strategy, we knew that we wanted to focus on the product that would be most profitable and key in on features that are important to the customer. Looking at product sales in 2008, the NiMH sold 28. 0 M units and the Ultracapacitor sold only 4. 3 M units. Based on these sales, the NiMH generated $280. 3 M and the Ultracapacitor generated $86. 2 M. In addition, when reviewing the Income Statement, the NiMH produced a profitable contribution in the years 2006 through 2008. The Ultracapacitor, on the otherhand, produced an unprofitable contribution during the same timeframe.
Based on these figures, we decided to focus on the NiMH. We relied on the income statement to determine the forecast for both the NiMH and Ultracapacitor. In 2007, the NiMH made $3. 25 M per unit and in 2008, made $3. 41 M per unit. This is an increase of approximately 5%. We felt this trend would continue and decided to increase our forecast for the upcoming year, however, instead of increasing our forecast by 5% our team wanted to be conservative and increased our forecast by 3% which equaled a forecast of 28. 8 M units. In 2007, the Ultracapacitor made -4. 3 M per unit and in 2008, made -4. 6 M per unit. This is a decrease of approximately 8%. Under the same reasoning as the NiMH, we decreased the forecast by 5% to be conservative and forecasted 4. 1 M units. When deciding where to invest our money, we reviewed what features were most important to the customer. Energy density was rated the highest among all features so we decided to focus on this one. We chose energy density within the NiMH due to its historical profitability. The minimum annual cost for this project was $3M. Since this was our first round of the simulation, we decided to invest the minimum required.
Our team also felt it was important to focus on process improvement. Learning from the GEOX case study, in order to compete with surrounding competition, a company must always look for methods to improve. We chose to put two million towards both the NiMH and Ultracapacitor. We did not want to be aggressive with this figure as we were not sure of the effect that this investment would have on the sales figures. Decision 2 In 2009, the NiMH sales grew by approximately 21% to 33. 8M. Based off of this increase, we raised the forecast 10%, again, taking the conservative approach. For 2010, the team forecasted 37. M. The Ultracapacitor increased its sales year over year by less than 5% so we decided to leave the forecast as is at 4. 5 M. In order for the investment in energy density to be effective, the project must last for a minimum of 4 years, so we invested an additional 3M in this feature for the second year in a row. Since the NiMH continued to be profitable another year, the team increased their investment in process improvement and invested 3M for the NiMH. At this time, the team decided to review the prices of each product and compare these prices against the demand of the customer.
The price of the NiMH was exactly where the customer thought it should be so we decided to leave the price for this product alone. The Ultracapacitor was currently priced at $20, however, the customer felt this price should be half of that. Based on this information, the team decreased the price by $2. We chose the $2 decrease because we wanted to see what type of impact this decrease had on the market. If data did show an impact, then we would continue the price decrease in future years. Decision 3 In 2010, sales for the NiMH started to level out and this was the first year that we did not under forecast this product.
Our forecast was over by roughly 8%. We felt that a trend may be starting for this product and so we decreased our forecast by 5% to $32. 6M. Sales for the NiMH increased by roughly 8% and so we decided to increase this forecast. Being conservative, we increased our forecast by half of this percentage, 4%, to $5M in sales. Due to the leveling of sales in the NiMH, we also increased our investment in energy density to $4M and continued to invest $2M in NiMH process improvement. In addition, due to the larger growth in sales for the Ultracapcitor, we increased our investment in process improvement to $3M. Why did we leave the prices unchanged? Decision 4 In 2011 there was a sharp decline in sales by 36% when compared to sales in 2010. As a result , we adjusted our forecast to $22M in 2012. Because of the big decline in the NiMH sales, we decided to be conservative with our ultracapacitor forecast and used the 2011 sales results as our 2012 forecast. We kept the price of the Ultracapacitor at $18, but lowered the price of the NiMH to $9 due to market pressure and decline in sales. The R&D investments were the same as 2011. Decision 5
We continued to estimate a decline in NiMH sales, lowering our forecast to $21M which also mirrored the sales figure in 2012. However, we forecasted a sharp increase in Ultracapacitor sales with a 2013 sales estimate of $6. 9M which is also the 2012 sales figure. (Break-through? ) The price of the NiMH was lowered to $8. 50 due to increasing market pressure, but we left the price of the Ultracapacitor the same. We kept our R&D investments in process improvement the same for both the NiMH and Ultracapacitor, but decreased our investment in NiMH energy density to $2M.
The decision to decrease this investment was based on the decline in sales for this product. Decision 6 In 2014, we estimated a steep decline in NiMH sales, with a forecast of $14. 9M as the sales from the previous year decreased by more than 29%. In addition, we lowered our sales forecast of the Ultracapacitor down to $4. 6M based off the decline in sales from the previous year as well. The Ultracapacitor decreased by 34%. We did not change the price of the Ultracapacitor, but lowered the price of the NiMH yet again to $7 due to the market pressure.
We discontinued our R&D investments in the NiMH due to the declining sales and invested $3M in the Ultracapacitor’s process improvement. Decision 7 We estimated a dramatic increase in NiMH sales in 2015, up to $23M due to the previous year’s results. We slightly lowered our forecast of the Ultracapacitor to $4. 5M which is what sales produced in the previous year. We kept the selling price the same for both items. We continued to invest $3M in Ultracapacitor process improvement. Because we started focusing on the Ultracapacitor instead of the NiMH, we also invested $2M in Ultracapacitor energy density.
Energy density was chosen due to the perception of importance by the client. Decision 8 For the last year of the simulation, we kept our forecasts relatively the same as 2015. We felt that the markets were stabilizing as there was not as large of a variance year after year. In 2016, we estimated NiMH sales of $22M and Ultracapacitor sales of $4. 6M. We did not change the selling price of either item and the R&D investments were kept the same as 2015, with a stronger emphasis on the Ultracapacitor. Results In our simulation we achieved results through spending time on research and strategy, and by seeking to strike a good balance.
In attempts to pursue too many R&D projects at the same time, we were fired. Not committing to one project and switching between them seemed to be a waste of resources in that there were no breakthroughs and our financial resources were depleted. R&D Projects require people, time and a great financial investment. We decided to review the information we were given in the foreground and make a decision on where best to make an R&D commitment. We decided to focus on process improvement and energy density. The foreground reading told us price is a major factor driving purchasing decisions.
With twenty different companies competing for our business, we needed to keep our price competitive and we felt we needed to put money into process improvement to lower our manufacturing costs and to stay in the competition. This decision later enabled us to reduce our cost by three dollars for the NiMH and by two dollars for the ultra capacitor which was needed to meet customer demand. Had we not invested in process improvement we would have priced ourselves out of the market. By lowering our costs through process improvement spending on both the NiMH and Ultra Capacitor batteries, we invested towards growth and eased our spending.
We spent a total of $10 million on NiMH in this area and $23 Million on the Ultra capacitor. Our NiMH variable costs went down about 10% to 91. 8 M, and our Ultra capacitor variable costs went down 37% to 55. 8 M. Total cost decrease overall was 30%. This allowed us also to improve the bottom line and increase our profit. Early on, our profit was $0 because of spending, but by the final period we reached $231. 60 M. Our profit increases by year gradually improved, until we were up 23% by the final period. This should hopefully continue to improve in future years.
With greater profit, our company can also spend additional funds on R&D. Moving forward, we should continue to maintain reasonable spending on the Ultra capacitor. This will allow additional breakthroughs to occur, and greater profits to be made. In the beginning, the losses we sustained from the Ultra capacitor battery were a concern; we knew we had to make significant improvements. We learned in the foreground reading of the Ultra capacitor’s quick recharging, lack of issues with battery memory or charging cycles, and its ability to store charge.
In addition, there were several issues such as size and a lower energy density. We invested early on in process improvement and after our commitment to energy density with the NiMH had been met we reallocated our resources to the energy density of the Ultra Capacitor. Customers were willing to pay more for the new technology of the Ultra Capacitor; therefore price was not as important as with the NiMH. The recharge cycle and time were well beyond consumer expectations. We saw the shelf life of the Ultra Capacitor as an opportunity for us to expand in the power pack market.
We saw the Ultra Capacitor as a high risk and high cost opportunity and excellent solution to our consumer demands. We were careful to support the NiMH as the bulk of the company’s profit and consumers came from the NiMH. Our focus on energy density allowed us to achieve the second area that had been requested by one of our big clients, a major power tools manufacturer, in the foreground reading. It was also an area of high importance that needed improvement for our customers. So we spent about $3 million a year in R&D on NiMH batteries in this area, or a total of $16 million.
Ultimately, this seemed to pay off in breakthroughs and in sales. Had we had more budget to work with, it would probably have been beneficial to spend more on Ultra capacitors in this area, as energy density is a weakness for them. (WHAT ARE YOU TALKING ABOUT) Several breakthroughs we had during the simulation improved our ability to profit. These were in energy density and self-discharge on the NiMH battery. The breakthroughs allowed for a better product that our customers really wanted. As these breakthroughs occurred, we felt we should reduce spending in those areas and reallocate our resources.
This afforded us the opportunity to divert more spending over time towards the Ultra capacitor’s R&D. Since the NiMH market was our most profitable and nearing maturity and approaching decline we asked what assets does the NiMH have? Who are our customers? And how can we grow in the declining market? We found the NiMH battery to have two major advantages; it is significantly more durable than other battery technologies, and it is less expensive to the consumer. The foreground reading told us that the demand for higher energy density drove a switch from NiMH to Li-ion batteries.
We found our largest potential customers to be in the power tool and power pack markets, which required the durability and the battery life or energy density. We decided if the reason our customers were switching to Li-ion batteries was a need for energy density we needed to invest our resources there to meet customer demand. A second source of confirmation came when we reviewed the simulation customer feedback and saw this was what the customers wanted most. Our thought was if we could provide what the customer wanted at a price they were willing to pay and have a quality durable product, we could reverse the decline in the NiMH.
Although the NiMH market is mature and declining, we were still able to profit well from it. I believe the breakthroughs and R&D spending helped in this. Our revenue from NiMH at the final period ($159. 20) was about 43% lower than where it started for us ($280. 30), and 53% lower than its peak ($342. 90). We thought it may be possible to reverse the effects of the decline, however this wasn’t our experience. Over time, we slowly directed more of our spending away from the NiMH and towards the Ultra capacitor, which we felt was where the market was going.
New technology like the Ultra Capacitor battery changes the importance of features because of its strengths and weaknesses. Ultra Capacitor batteries are known for their rapid recharge time and long life. Therefore, they most likely wouldn’t require as much investment in this area. According to the background reading, they proved useful with power tools and may become increasingly important with hybrid applications such as cars. On the other hand, they have poor energy density. As we saw during the simulation, the technology is very expensive and was difficult at first to make a profit from it.
So it made sense to focus on process improvement R&D to try to help in that area. The portable power tools, two way radios, and portable power packs differed in their needs in Energy Density, Recharge Cycles, Recharge Time, Self Discharge and Price. The power tools draw a high current from battery packs; the two-way radios also have a high current draw and must be durable. The portable power packs provide energy back-up power and require a lower loss of power when not in use. Early on, energy density had the highest importance of improvement for power tools and two way radios.
Power packs needed self discharge improvement the most. There was an increased demand for power tools in 2008 and 2009 then sales plummeted with an overall decrease of 43% in 2011. In 2012 we saw a major shift in the customer desire for energy density in the power tool market and an increase in the importance of recharge time. The customer found that fast recharges reduced the need of extended battery life. We reduced our R&D from four to two million the following year. Two way radios and power packs seemed to decline first in sales.
Later on in the simulation, it was power packs and power tools that increased the most. We also saw a change in competition which pushed the prices down resulting in our decision to reduce the price of NiMH from ten to nine dollars per unit to meet the request of a 10% price reduction from portable power tool makers. In 2013, Market News reported that Lithium-ion battery producers were attempting to grow market share in the portable power pack market through aggressive price reductions. Market News reported buyers of portable power packs were now demanding price reductions of 25% to $6. 5 for future orders. A 25% reduction in price gives our competitor an advantage we could not compete with. You can balance annual or cumulative profitability with market position at the end of play by not being overly committed to one area, but rather maintaining good balance. This was what we aimed for. Although we wanted to achieve better profitability than where we started, it was not our number one priority. We knew the importance of investing in the company’s future, and putting it in a good position moving forward.
So we felt that our decisions were justified in achieving that goal of balance and future potential. The fluctuations through the years forewarned us to be careful with spending too much and we did not use all of the R&D money we had available to us because we wanted to be sure we had the funds available to follow through on our commitment to Energy Density in the NiMH and the process improvement in both the Ultra Capacitor and the NiMH. We ended the game with an increase in net income of 25. 10%. We had gradually seen an increase in profit with a decrease in price per unit.
The market continued to demand a decrease in price. Our investment in process improvement helped to decrease our variable costs, which continued to pay dividends in meeting customer price and Energy Density demand while maintaining a positive bottom line. One area that was difficult at times to work with was sales forecasting. We tried to predict where sales were going based on previous years sales, but it wasn’t easy to be accurate. So if sales were increasing, we would try to replicate that percentage and vice versa.
Our variance ranged from 2 all the way to 54. 2, and it didn’t seem to be foreseeable. Overall, the average NiMH variance was 3 and Ultra capacitor was 3. 7. This is largely due to the several bad forecast periods that swung in either direction. What made this area difficult was our ability to anticipate market changes in demand which affected sales, and threw off our estimates in several periods. The consequences of attempting to pursue too many R&D projects at the same time or switching too often results in being fired, or poor results.
From the beginning we committed to certain areas of improvement, such as energy density and process improvement, which allowed us to not fall into that trap. But in separate simulations we did individually, we witnessed some of the problems caused by poor R&D planning. Too much spending led to financial problems and firing. Not enough spending did not result in any breakthroughs, and limited positive results. Conservative targeted spending on important areas of concern, which was more like our approach, seemed to work well.
The company is profitable and in a good position to move forward. The total estimate of net income for 2017 is $51. 2 Million. The company is growing and in a position to allocate addition funds to R&D projects. The Ultra Capacitor market is growing and our steady investments are paying off. We have invested in process improvement and energy density and we feel a breakthrough is forthcoming. The unit price for both the NiMH and the Ultra Capacitor has held steady with customer demand for the last five years.
We are looking at a significant increase in potential consumers in power tools and power packs and a decrease in two-way radios. Growth in the Ultra Capacitor has been slow but there is progress, a breakthrough in energy density could have a significant impact on sales. Lessons Learned The first lesson learned by our group from taking part in the simulation was to be consistent and remain invested in research and development decisions. Success came to our team when we realized what type of research and development would suit us best and consistently put money into that specific feature.
We tend to be a group of overachievers, but it was apparent early on that diving into too many research and development projects at once would get us fired every time. We may have overlooked the actual costs of each development, as they were per year costs and not total costs. Through a simulation it can be easy to make high spending decisions, knowing in the back of our minds that it is not real money, but once we grounded ourselves and decided that we needed to control our finances and settle on one research and development project we began to see breakthroughs and were able to keep our jobs as well.
Consistency was not the only thing that came with it’s benefits, but it was also important for us to watch the market and what changes our research and development was having year to year in order to gage how much money needed to be added or subtracted from the current investment. We also learned the importance of proper research before investing in various new technologies. Sometimes team members at work may think that they are well informed possibly based off of experience, but without thorough research there could be unknowns that may effect the success of the project.
By carefully analyzing the simulation foreground reading and ensuring we were educated on the business decisions we were about to invest in, we felt more confident going forward and made less mistakes than prior to performing thorough research. A very important lesson we all took away from the simulation was the value of investing research and development funds into your own business. It took many tries of us only thinking about new technology and expanding, rather than starting at home and improving our own processes, but we quickly learned the positive effect of investing money into process improvement.
We know this is an important lesson to take away from the simulation and use in our own work environments. This was not something that we ever stopped investing in. Once we decided to invest in process improvement we were consistent with it and let it continue to build and grow which opened the door for us to lower manufacturing costs, and in turn stay competitive with our prices. Another lesson our team learned was to ease into new ventures concerning a new product that consumers are not familiar with.
Although it’s hard to keep in mind, since your company and team become so familiar with the new technology, such as the ultra capacitor, but it doesn’t mean that the world is ready for the new product. Our initial thought, after reading the foreground information, was to put all of our research and development funds into the ultra capacitor. We had read about how the ultra capacitor has the potential to be exactly what customers want, with an incredibly fast charge time and no limit to how many charges it can hold in it’s lifetime.
As an ambitious young team we were initially ready to put all of our research and development into this brand new technology that could be the next big thing, but unfortunately we were fired many times. It became apparent that we needed to focus on securing the NiMh battery’s market for our company and become stable before we could move on to the next venture, and by taking it slow and easing into the research for the ultra capacitor we were ultimately successful as a business.
One final lesson learned at the end of the simulation involved us as a group, discussing the simulation in terms of why we used it as a learning tool. We realized that in reflecting back on the simulation in terms of our class topic of innovation, that we may have been forgetting throughout our trials that we were trying to run a successful as well as innovative company. We believe if we had realized earlier on in our trials that Back Bay was trying to be innovative by seeing an opportunity to create products with features that no customer has seen before, that we would have made different decisions regarding the company.
We learned as a group how difficult it can be to be a manager for a company such as Back Bay, when the goal is to be innovative, but the companies other goal is always to be financially stable as well. I think we all were able to take away from the simulation the need for innovation and change in organizations to continue satisfying the market but also the difficulties and challenges that come with keeping an organization afloat financially in order to be able to innovate with new technologies and opportunities.
Changes for the Simulation One thing our group would like changed in the simulation was the drastic effect of the sales forecasts. We understand the negative effects on a company of a manager who is constantly over estimating sales forecasts but during the simulation we found that once we received notice that management was not happy with out sales forecasts and the negative relationship, that the next year we were terminated.
It would happen so quickly that we felt we were unable to get the forecasts under control and attempt to problem solve before we were fired. We do believe that a manager should be fired if their incorrect forecasts over many years truly negatively impacted the company, but in order to learn from it better we would advise the simulation to allow you to better control the situation before being terminated.
Another feature we would have liked to see in the simulation would be the ability to control price as well as research and development for each individual product rather than NiMH batters and ultra capacitors. We think we could have gained additional experience making decisions for each item separately and it would have added an extra challenge to the simulation. We would have had more decisions to make and more specific strategies to test as well.