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MARGA Stories: What do you learn with the business simulation?

We have just finished the first qualification round of the MARGA Online Competition 2016/2017 with individual feedback sessions. Wow, the competition was exciting again!

  • Some investments have paid out last minute.
  • Other teams have taken high risks and have been lapped by the competitors at the end.
  • Sometimes those teams with extraordinary high market shares were not the most profitable ones. 
  • And sometimes the competition was very tough and no competitor was able to achieve high margins at all.

Here we report on some of these 'MARGA stories':

  • Leading a company

    In the MARGA business simulation the participants act as a management team and lead their own virtual company. But how to lead a company in accordance with the principles of value-based management and how to maximize the company’s value?

    In the beginning of the business simulation most teams start developing a strategy, positioning their products on the markets and try to optimize the operational processes in their company. Some teams split the responsibilities and build up smaller groups for production, marketing and finance. In that case good coordination is essential. For example, if one increases the production capacities the finance department needs to spend money and the marketing department needs to increase their marketing activities to make sure that more customers can be reached. Thus, all changes have an impact on all functional areas of the company. In the business simulation the teams learn the interaction between all these areas and also learn which parts have the most influence on the company’s value. Furthermore, they are able to control their financial key figures in order to maximize the MARGA Value Added. 

  • Why does a Balance Sheet have two sides?

    At the beginning of the MARGA business simulation this is one of the most frequently asked questions. The answer is simple: The right side is divided in equity and liabilities and shows how the company is financed. This is also known as the source of funds. Equity is the part of the capital which the owners invested in their company. Liabilities means the part of the capital which is borrowed from a third party for example from banks. The left side of the balance sheet (assets) shows the assets in which the company invested their capital. For example, the assets could be buildings, machines or materials. From the beginning of the MARGA business simulation the teams understand the balance sheet as an important management tool and analyze it carefully. It is not possible to determine whether a high capital, which consequently causes higher capital costs, offers the opportunity to invest more in production capacities or a lean balance sheet is more successful for MARGA. In the MARGA business simulation as well as in reality it depends on the industry, the strategical direction of the company and the market conditions. However, for all holds: to understand and get to know the balance sheet with its different influencing factors is helpful to lead a company to success. 

    Business simulation: Balance Sheet

  • Virtual Teamwork

    Most of the MARGA team members are located in different places during their time as the MARGA management board. Some teams face the challenge to manage and lead their company through various continents and time zones. For example, if the board members live in Brazil, Germany, Russia and China, team sessions the MARGA webconferencing tool with all team members are rare and thus the teams need to coordinate themselves via e-mail or in smaller groups. In fact, those teams which are not located at the same premise are yet very successful in the MARGA business simulation. They do not only invest time, but they also learn how to deal with conflicts and how to solve discussions over long distances, only via virtual communication. Every now and then, MARGA teams even meet and see each other for the first time at the MARGA final. Usually, during the course of the MARGA competition, all team members bond in such a way that they become friends. And to have friends in your company is the best way of networking.   

    "One team, six people on four continents and one decision to make - it is just great which possibilities we have today."

    Finalist Anna-Lena Schulz, Volkswagen AG

  • The vacation period

    Vacation period

    As usual, the third period of the MARGA business simulation is the vacation period. In this quarter one third of the skilled and unskilled workers are on vacation.  

    What is the impact of the vacation period on the result? The costs (salaries and fringe benefits) for the workers on vacation are no longer ‘personnel costs’ but ‘unproductive staff costs’ now. Those are part of the administration costs in the income statement and thus reduce the EBIT (earnings before interest and taxes). Of course, the salaries for the active workers also reduce the EBIT, but in comparison to that, they are part of the cost of sales. That is why the loss, the teams have to deal with during the vacation period, is not caused by the shifting of the personnel costs, but rather by the need for additional resources in order to keep the production level.

    Now a strategic management of resources is needed! There are different possibilities to compensate this personnel lack. The three most common ones are presented as follows:

    1. Pre-production / Trade goods

    The teams can pre-produce products during the second period in order to compensate the lack of the vacation period. Thus, additional products are produced and stored until they will be sold in the third period. By this, additional production costs as well as storage costs are caused in the second period. When these pre-produced products will be sold during the third period, the production costs will be activated as cost of sales. Additionally, the salaries for the workers on vacation have to be paid by means of administration costs. Both costs reduce the EBIT.

    Another option is the purchase of trade goods. Trade goods ordered during the second period will be delivered and ready for sale in the third period. However, also the number of available trade goods is limited.

    2. Short-term increase of personnel

    At least a part of the personnel lack can be compensated short-term by recruiting temporary workers and increasing the overtime of the remaining active workers. However, both the number of temporary workers available at the market and the overtime rates are limited and cause high costs.

    3. Reduction of production

    Of course, it is also possible just to accept the lack of capacity during the vacation period. To avoid a surplus in demand the MARGA board teams can adapt the marketing decisions (e.g. price increases) in order to purposely decrease the demand. At best the number of sales will be decreased as expected, but there will be no huge break-in of revenues due to increased prices. However, the impact of all board decisions on sales and revenues always depend on the decisions of the competitors, too. It is not possible to forecast the sales exactly.  

  • Managing Product-life-cycle

    Every MARGA participant works in a team as a management board of a virtual company with three different products. All products have specific attributes and are in different phases of their product-life-cycle. At the beginning of the simulation the participants usually focus on the product type (e. g. consumer product or service product) and neglect the product-life-cycle. During the simulation process most teams figure out that those who integrate the product-life-cycle of the products in their strategy usually invest more precisely and thus more efficient. But what does the product-life-cycle stand for? The product-life-cycle shows the changes of revenue and profit of a product dependent on time. During the growth phase for example other marketing tools are more effective than during the saturation phase, in which one cannot expect a high market growth. For example, during the saturation phase high investments in quality are rather unusual. To show the product-life-cycle and to compare the own company with those of the competitors, the portfolio analysis is helpful, which is integrated in the MARGA software. The participants can analyze their position in the different markets and thus can plan their strategical approach in a well-founded manner.

    Business simulation: Portfolio Analysis

  • Market shares vs. profitability

    At the beginning of the competition all four companies of a group start with 25 percent market shares in each market segment. Some teams only focus on increasing the market shares. They decrease prices and increase advertising budgets to attract new customers. By doing this, they often lose track of the profitability. What is the benefit of high sales volumes, if every sold product causes a loss? This case proved to be obvious during the feedback again: Company 3 was the clear market leader, its overall market shares increased to nearly 40 percent. But at the end of the competition, the competitor which had low market shares but high profits was much more successful: company 2 was able to compensate high prices with a clear quality leadership.

    Business simulation: Market shares vs. profitability

  • Stick to your strategy!

    Cost leadership, differentiation or focus strategy: No matter which competitive strategy the board teams have chosen, we recommend them to stick to this strategy through all simulation periods. To be successful with a strategy, it is usually necessary to make certain investments, which often will only pay off after some time. A cost leadership for example mostly only works out after initial investments in machines and personnel. It also requires investments in marketing, since the built capacities should be used and the products have to be pushed into the market. Generally, it is possible to win the MARGA business simulation with any strategy. But usually those teams are most successful, which consequently stick to their chosen strategy.

     

    Business Simulation: Generic competitive strategies (Porter)

  • Raw material management

    In one group, all four companies had completely different approaches: Company 1 installed the supply chain management tool with the respective costs already starting from period 1 onwards. Consequently the prices per unit were somewhere in mid-level and there were no stock costs or capital commitments attached. Companies 3 and 4 both bought a lot of raw material during the first period. Due to the accretion of discount they benefited from extremely low prices per unit and could therefore reduce their variable production costs. The disadvantage: A pre-financing was necessary and the high current assets caused capital costs. Finally in period 4 the raw material stock ran low for both competitors and they then decided on different courses of action: Company 3 again bought a huge amount of raw material – which is an advantage concerning the variable costs, but a disadvantage concerning  the stock and capital costs. Here it was not possible to use up all stock until the end of the last period.  Company 4 in contrast, continued by installing the supply chain management tool in period 4. In this case the advantage was a minimization of risk and a reduction of stock and capital costs. The disadvantage was the costs for the installation of the tool and an increase of the variable costs per unit.

    Considering all four companies, in the beginning Company 2 had the highest variable costs per unit. This company did not make use of the supply chain management tool, but they only bought a small amount of raw material in the beginning of the round. The disadvantage was a high price per unit and stock as well as capital costs. Luckily the company board promptly identified this mistake and chose to make use of the supply chain management tool from period 2 onwards.


    Which method is the best? Of course, this depends on the strategy chosen and as concerning all MARGA decisions, it is inevitable to carefully balance all advantages and disadvantages. As a matter of fact, a cost leadership is only possible with low costs for raw materials. This means that in the best case an investment is only necessary once at the beginning and then the stock can be reduced bit by bit up to the end of the round.

    Business Simulation: Impact of raw material management on variable production costs

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