- MESE Team Manual
- Making Decisions
- Economic Analysis
MESE Team Manual
MESE is a competition based of economy simulation software. Your team compteses against other teams as you manufacture and market various products. Teams are challenged to outperform the competition in profit, sales and market share. During the competition, you read and interpret financial reports. You must think about production, marketing and finance, and relate them to economic principles they have been studying. You set prices, determine production levels, plan marketing, research and development budgets, and invest in plant and equipment. These decisions require planning and analytical thinking, making MESE a powerful tool as well as an exciting competition.
This manual guides you through the decision-making process and teaches you about the basic mechanics of an economy.
Each period in the contest, each team makes five important business decisions for the simulated company it is managing. This section describes each of the decisions and its implications along with suggestions for weaving these decisions into a winning strategy. Please note that some contests may offer fewer decisions.
The price of your product is a very important element in determining how many orders you receive. All other things being equal, the company with a lower price will receive more orders than a company with a higher price.
The lower the average price in a group of companies the more orders received by the entire group.
The number of products you have to sell is determined by the number that you produce which is limited by the capacity of your factory.
Your lowest cost per unit is always achieved when you produce at 80% of your factory’s capacity. This is known as “capacity utilization” and is calculated by dividing your production by your factory’s capacity.
As you move above or below 80% capacity utilization, your production cost per unit rises, just a little when you are close to 80% but more and more steeply as you move further away.
Because of the increase in cost at low levels of utilization, it is almost always better to close your factory completely for a period than it is to produce below 60% capacity utilization.
Marketing expenditures represent all the efforts a company makes to sell its products, such as promotion, advertising, and sales work. All other things being equal, a company that spends more on marketing will receive more orders than a company that spends less.
The higher the marketing expenditures in a group, the more orders received by the entire group. This means that your competitors benefit somewhat from your marketing expenditures which attract new customers, some of whom buy from the competition (and conversely, your competitors’ marketing expenditures benefit your company in the same way). For example, high marketing expenditures may attract customers who then buy from the company with the lowest price.
Investment determines the capacity of your factory. Your factory depreciates, or wears out, at 5% each period. You must invest 5% of its value (listed on the Balance Sheet) to maintain your factory’s capacity. If you do not invest at least equal to depreciation, your factory capacity will decrease.
To increase your factory capacity, you must invest more in a period than depreciation. Your factory will increase by 1 unit of capacity for each $40 you spend on Investment in excess of depreciation.
Since it takes time to expand factories, the increase in capacity (which you can take advantage of through the Production decision) occurs in the period following the investment.
For example, to increase your factory capacity by 100 units in Period 2, you would need to invest $4000 (100 * $40) more than depreciation in Period 1. If you did that, you could increase your production in Period 2.
Larger factories produce at lower cost than smaller factories, so investment lowers your cost per unit in addition to increasing your capacity. The greater the increase in your factory size, the larger the decrease in your production cost per unit.
Research and Development (R&D)
R&D expenditures increase the quality and features of your product. All other things being equal, a company that spends more on R&D will receive more orders than a company that spends less.
Product improvement is a permanent change so increasing R&D expenditures can increase orders at any price level over what they would otherwise be. This effect is permanent. In addition, R&D expenditures “build up” over time. The effect of R&D expenditures is immediate, but lasts for several periods.
A company which steadily spends more on R&D than its competitors will gain the competitive advantage of higher quality. This translates into more orders at the same price or the same orders at a higher price.
R&D expenditures also build demand for the entire group. The more spent on R&D by the entire group, the higher the level of orders for the group. R&D expenditures are the way to grow the overall market similar to the way Investment expenditures increase production capacity.
Framework for Decision-Making
All these decisions and their interaction can be confusing. How is a manager to create a successful and profitable strategy? Successful companies usually use their Marketing and R&D expenditures to increase their orders while using Production and Investment decisions to assure that there are enough products to fill the orders they receive. Price should be set to balance orders with the supply available in any period.
The following calculation can be useful. Fill in the blanks (____).
|Factory size next period in units||____|
|Times most efficient utilization rate||x 0.80|
|= production available for sale||____|
|Plus inventory||+ ____|
|= total available for sale||____|
|Minus orders received in last period||- ____|
|= Additional orders needed next period||____|
If additional orders needed next period is positive, then you will need to lower your price and/or increase your marketing and R&D to obtain more orders. If additional orders needed next period is negative, then you can raise your price and/or decrease your marketing and R&D to receive fewer orders and make more money on the products you have available. You will also need to keep in mind what your competitors are likely to do and adjust for their actions as well.
It is better to err on the side of having inventory left over than to have orders you are unable to fill. Inventory left from one period can be sold in the next period while lost orders are gone forever.
Testing Your Decisions
The contest menu provides a convenient way for you to test your decisions. Before entering your decisions, click on “What If” which assists you in forecasting the results of your decisions. By using “What If” you can try out your decisions by entering them and then estimating your orders and your production costs. Click on “Tell Me!” and you will receive forecast financial statements based on your estimates.
You can try different estimates to see what happens under different circumstances and so refine your decisions to have the best outcome for your company.
Planning for the Long Term
Your goal is to have the highest MPI score in the last period of the contest. Though it is nice to lead during intervening periods, it is the score in the last period that determines which team has won.
This means you should always be crafting a strategy for the future. If you increase the size of your factory, you will have more products to sell in the future. To sell more, you will either have to decrease your price, increase your marketing, or invest in R&D or some combination of all three. Where will the money come from? How will your competitors react?
In general, companies need to choose a strategy somewhere on the spectrum between low price and high volume and high quality and high price. Many different combinations can be successful. If most teams choose the same strategy, they end up hurting each other and the team that has a unique plan comes out on top.
You cannot spend money you do not have (or cannot borrow) so the amount of funds available is an additional limit on decisions. Initially this is more of a constraint than the decision limits since no company has enough to spend the maximum on everything. As managers, it is your job to choose!
Funds come from two sources: Cash (listed on the Balance Sheet) and Credit. Available credit can be calculated by subtracting a company’s Loans (listed on the Balance Sheet) from the Loan Limit (listed on the Industry Report).
Cash plus available credit (or “funds”) is the maximum a company can spend on its decisions. Since decisions are made at the beginning of a period, the funds available as listed on the reports for the previous period is the maximum that can be spent on decisions.
Use the following formula to calculate if you have enough funds to make your decisions.
|Cash||(listed on Balance Sheet on Company Report)|
|+ Available Credit||(Credit Limit on Industry Report minus Loans on Balance Sheet on Company Report)|
|= Available Funds|
|Production Cost||(estimated Production Cost/Unit x units to be produced according to Production decision)|
|+ Marketing Cost||(total to be spent on Marketing)|
|+ Investment Cost||(total to be spent on Investment)|
|+ R&D Cost||(total to be spent on R&D)|
|= Cost of Decisions|
Cost of Decisions is the amount of funds required for your decisions at the time you make them. Cost of Decisions must be less than Available Funds. The system will not allow you to enter decisions for which your company does not have sufficient funds.
The “What If” decision forecasting tool does NOT take credit limitations into account. You can use “What If” to project under any circumstances but must calculate whether or not you have enough funds before actually entering your decisions.
How the line of credit works
Each HPGBC company has an automatic line of credit up to the Credit Limit, so loans are extended automatically without managers having to apply for them. This occurs at the beginning of the period when decisions are entered.
If a company does not have enough Cash to pay for its decisions, its Loans are increased to cover the cost of decisions. If the cost of a company’s decisions are less than its Cash, then the extra cash is automatically applied to reduce its Loans.
Any changes in the Loan Limit will be announced in the MESE Street Journal.
Your competitors apply more subtle but perhaps more important limits on your decisions. A company is unlikely to be successful with a price far above or far below its competitors. A large amount of inventory in a group will put pressure on the ability of any company in the group to raise prices. If a company’s competitors are expanding their factories, then their production costs are going down implying that prices may be going down too. If competitors are spending a lot on Marketing and/or R&D, perhaps your company can take advantage of the higher level of orders that will produce and spend less. Though a company may make any decisions that the Decision Limits and Available Funds allow, managers will also want to carefully consider what the competition is doing as an additional guide or limit to their decisions.## Industry and Competitive Analysis
An important part of deciding what you want to do is knowing what everyone else is doing. Sometimes you might want to do the same thing and sometimes you might want to do just the opposite, but it is always helpful to know.
Some of the decisions made by your competitors are obvious, but getting a complete understanding, especially of what they are likely to do in the future, requires analysis of the available information. This manual provides hints on how to make that analysis.
The contest is divided into competing groups of teams. All of the groups, or industries, together form the contest economy. Though the competition in each industry is separate, the entire contest economy is subject to the same economic conditions including such things as tax rates, interest rates, layoff charges, inventory charges, and loan limits.
In addition to news stories, the MESE Street Journal also publishes statistics gathered by the industry association based on results from all groups combined. These statistics show overall trends and provide insight into what the future might hold. For example, if Capital Investment is increasing that means that production is likely to rise and costs fall. If investment is increasing faster than orders, then inventory is likely to rise putting pressure on future prices. It can be particularly instructive to examine how your industry compares to the economy as a whole and determine what the cause of any differences might be. How and why are you and your competitors acting differently from most teams?
The Industry Report provides information on your group or industry, including such key data as orders, unit and dollar sales, production and total costs per unit, inventory and investment. These data represent combined information from all the companies in your group.
Watch the trends, as indicated by the percentages reported for each category, to predict what will happen in the future. Extract your own information from the industry statistics to see how big a part your decisions played in the trends for each item. Analyze the figures to estimate the information that is not reported. For example, if there is a big difference between the production cost per unit and the total cost per unit, then a large amount is being spent on Marketing and/or R&D. How much? Who do you think is doing it?
The Industry Report provides information about your competitors that companies generally know about each other. This includes Sales, Profit, and Price. You can directly compare your performance in these areas with that of your competitors. This analysis is especially helpful in setting your Price. Did companies with higher or lower prices do better than your company?
This data can also be used to estimate information that is not so directly reported. Use it to keep up with your competitors’ operations and finances.
The first thing you need to know is how many units each of your competitors sold each period. You can determine this by dividing their Sales by their Price. Did they sell more or less than your company? Why? Did they sell all they have or do you think they have inventory left? How much of the total industry inventory is held by each company? What is each one likely to do next?
By subtracting a company’s Profit from its Sales, you can determine how much was spent on everything in between allowing you to construct an estimated Income Statement for each of your competitors. Taxes can be determined using Profit and the Tax Rate, both on the Industry Report. Other items can be estimated using the operations analysis described above. For example, a reasonable estimate for COGS is to multiply the number of units sold by the Average Production Cost per Unit as reported on the Industry Report. This exercise provides a good estimate of how much each company is spending on Marketing and R&D. Who is spending a lot and who is spending a little? What implication does this have for your decisions?
If you start off with a decision strategy, keep tabs on your competitors, and adjust your plan as necessary in response you are likely to be successful.