Managing the Contest
Overview
Caps is an exciting way to introduce your students to basic management decision making while teaching fundamental economics concepts. As you guide the class through the contest, remember that it is intended to be an instructional tool. While it simplifies many complex business decisions and avoids the use of complex financial statements, it can be a springboard to help students understand the problems and issues in business.
Students intuitively understand the custom cap business and quickly grasp the concepts involved. Since they are highly competitive, they are eager to learn how they can beat their classmates. This motivation can be used to teach the basic concept of balancing supply and demand and other economic principles the contest illustrates.
Caps was designed to be introduced incrementally. The four decision levels: price, orders, promotion, and investment can be presented one at a time. You can play as many rounds at each level as necessary for students to understand the effects of that decision before moving to the next. This section provides tips on setting up and starting the contest and introducing each decision level. The Handouts section provides materials that can be copied and distributed to students to accompany each of the steps outlined in this section.
STEP 1: Introduce the Contest
To introduce Caps, explain that you are going to give the students a chance to manage a small business that customizes baseball caps. They will “buy” boxes of unfinished caps at wholesale prices, customize them, and sell them to retail customers. This business requires them to make decisions on how many boxes of unfinished caps to buy, what price to charge for their customized caps, and how much to spend on promotion. They remake these decisions every round or “week”, and receive a weekly report that describes how successful they have been.
Several companies are in the same business and each works hard to sell its caps. The company that earns the highest profit while operating its business has managers that make the best decisions!
Describe the details of the custom cap business:
- Each Custom Cap Company buys caps in boxes of 25 caps.
- Each box of caps costs $100.
- Each Custom Cap Company pays $1.00 per cap to imprint its design.
- Each Custom Cap Company pays $50 rent each week.
Note: You can change each of these amounts at the beginning or during the contest. See the section on “Changing Parameters” for information on how to make changes.
STEP 2: Organize the Companies
The classroom master Welcome to the Business World which describes the custom cap business can be copied and distributed to students. After introducing the entire class to the custom cap business, divide the class into Custom Cap Companies. Caps can support from two to eight “companies”. Each Custom Cap Company should be a team of three to five students. Management teams should be composed of students with different ability levels who will be able to work together for several class periods.
Direct each group to decide on a company name. Company names can be up to 8 characters in length. Ask students to list the names of companies they are familiar with and review what makes a good name for a business. Encourage them to choose a distinctive name that will identify them in the custom cap market.
Each student team should also select a “president”. Companies may also wish to appoint a record keeper to be responsible for keeping track of all Company Reports and Industry Reports.
STEP 3: Print Reports
Enter each company name in the computer and print Period 0 reports. Period 0 shows the state of each company when the new student management teams take it over. Emphasize that all competitors start on an equal basis in Period 0 as illustrated by the Period 0 Industry Report.
STEP 4: Setting the Price
ECONOMICS TEACHING OPPORTUNITY: Develop a demand schedule and plot a demand curve by determining the number of caps ordered at each price charged. Discuss strategies businesses use to determine demand and set prices for their products.
Decision Level 1
Distribute the Decision Level 1 worksheet to each company. Worksheet masters are in Part 3: Classroom Masters. Direct the students to complete the worksheet and make their first price decision. Circulate among the companies to answer questions and give advice.
Go into the Caps decision section and choose decision level 1. Have companies enter their price decisions into the computer. After all companies have entered their price decisions, print reports for the “week”. Distribute an Industry Report to each company along with its own Company Report.
The students analyze their reports. Focus on the relationship between price and orders and changes in inventory for companies and for the industry.
STEP 5: Price and Orders
ECONOMICS TEACHING OPPORTUNITY: While the contest does not provide the data necessary to generate cost curves, it should help the students understand why supply curves slope “up” from left to right. They will see that it would be wonderful to sell a large quantity of caps at a high price and that there is less incentive to sell a large number of caps at cost. At the same time, the students should begin to understand the costs of ordering more caps than can be sold or setting a price so low that orders exceed a company’s inventory of caps. You may also wish to discuss inventory control techniques businesses use.
Decision Level 2
Balancing Supply and Demand
After students have experience setting the price for their caps and seeing the resulting changes in orders, tell them they now must also decide how many boxes of wholesale caps to order for the next week. By deciding on both the price of their caps and the number of caps they will have available to sell, students gain direct experience in balancing supply and demand. The key to success in Caps is balancing orders for caps with caps available for sale.
Distribute the Decision Level 2 worksheet to each student team. Circulate among students to answer questions and give advice as they make “price” and “order” decisions.
Make sure students understand that they control both “supply” and “demand.” For example, they can purchase fewer boxes of caps and maintain a high price to reducethe quantity demanded. By following this strategy, they hope to make a large profit on each cap sold. Alternatively, they can purchase more caps and cut prices to increase the quantity demanded. By following this strategy, they hope to sell a large number of caps with a small profit on each cap sold.
Reinforce the importance of balancing orders and demand by having students make two or three “price” and “order” decisions before introducing “promotion” into the contest.
STEP 6: Price, Orders and Promotion
ECONOMICS TEACHING OPPORTUNITY: Illustrate the shift in demand that has occurred as a result of investment in promotion. Compare orders for caps at a particular price in previous periods to orders at the same price in this period.
Decision Level 3
Increasing Demand for Caps
After students have gained experience balancing supply and demand through their price and orders decisions, discuss methods other than price cuts, such as advertising or promotions, that companies use to increase sales. Discuss strategies firms use to stimulate demand for their products. Compare these strategies to those used by mail-order businesses. Caps allows students to invest more money in these efforts through the “promotions” expenditure.
Explain that when one firm invests money in promoting personalized caps, all firms benefit to some extent. When McDonald’s advertises, the demand for hamburgers increases and sales at Burger King and Wendy’s will increase as well. The business that spends the most on advertising, however, will benefit the most!
Setting a Promotion Budget
Distribute the Decision Level 3 worksheet to the student teams. Circulate among students to answer questions and give advice as they make decisions.
Assist in performing necessary calculations. Emphasize that a certain amount of estimation or guesswork is involved in planning promotion expenditures. Even major corporations are never sure exactly how much sales will increase as a result of an advertising campaign. In addition, the results vary depending on the decisions of competitors.
STEP 7: Price, Orders, Promotion and Investment
ECONOMICS TEACHING OPPORTUNITY: An investment that changes a per unit cost to a flat fixed cost, such as the printing equipment in Caps, commits a company to a high volume strategy to get the highest return on its investment. Have students list items in their own lives with fixed costs (e.g. local phone calls, car rides) and variable costs (e.g. long distance phone calls, taxi rides) and describe how they use them. How would they use them if the fixed and variable costs were reversed? Connect these patterns to the investment decision in Caps, pointing out that leased printing equipment must be used at a high rate to actually lower costs.
Decision Level 4
Fixed Costs vs. Variable Costs
So far in the contest, each student company has paid $1.00 per cap to an outside vendor to imprint the custom design on each cap that it sold. (The cost of outside printing defaults to $1.00 per cap unless this value is changed through “Manage Contest” page.) This cost has been applied to each cap that was sold.
Decision Level 4 allows students to invest in their own printing equipment to eliminate the need to pay an outside vendor to imprint their caps. By investing in their own equipment, students can reduce the per cap cost of printing. Though the variable cost of imprinting the caps is reduced, companies that invest in printing equipment incur a weekly fixed lease fee no matter how many caps they sell.
Decision Level 4 provides a good opportunity to discuss under which circumstances it is best to have a variable cost of product and under which it is better to have a known fixed cost.
Investment Opportunities
The investment decision allows students to decide whether or not to invest in capital equipment and what level of investment to make. Students can choose from three models of printing machines: economy, standard, and deluxe. The costlier the lease for the machine, the more it reduces the per cap cost of imprinting.
Determining the Level of Investment
Distribute the Decision Level 4 worksheet to the student teams. Circulate among students to answer questions and give advice as they make decisions. Assist in performing necessary calculations and filling in the table. Point out that investment reduces cost for higher volume strategies, so the investment decision must be tied in with the team’s other decisions and its business strategy for future weeks.
Risk
Investment is a one-time decision in Caps, since once a team decides to obtain its own printing machine by committing to a lease, it cannot change its decision for the duration of the contest. This illustrates how capital investment decisions are among the most important a company makes and locks a company into one kind of strategy even if subsequent circumstances change.
If future conditions change, an investment may turn out to be better or worse than it appeared when it was made. This situation can be simulated by changing the cost of outside printing using the Control P function. In a custom cap industry where some companies are using their own leased equipment and some are using an outside vendor to imprint their caps, relative profit levels are very sensitive to the relative costs of production of the two situations.
STEP 8: Play More Rounds
ECONOMICS TEACHING OPPORTUNITY: You can also introduce students to different business conditions and illustrate new concepts by changing the economic parameters in Caps. This can be done while a contest is in progress, or you can change the parameters at the beginning of a new contest and play under different economic conditions. See the section Changing Economic Parameters for information on how to change the economic variables and assumptions in Caps.
Continuing the contest
Students may continue to compete in the contest for as many rounds or “weeks” as you wish. Student teams should be able to make decisions for their custom cap companies at least two or three times each class period.
it is often best to start over and compete at “Level Three” after introductory periods of competition. This allows students to demonstrate what they learned from early mistakes or to try different competitive strategies.