The Global Business Game:

A Strategic Management and International Business Simulation, 3e
Player's Manual

Joseph Wolfe, Ph.D.
Experiential Adventures LLC
To my wife, Nancy, who has made possible so many wonderful experiences
Player's Manual for The Global Business Game, 3e
Joseph Wolfe

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Contents

Table of Exhibits and Screens

Chapter 1 The Global Household Audio and Video Equipment Industry Industry Demand and Product Characteristics
World and National Markets Germany Spain Mexico Japan Thailand United States Country Seasonal Demand Competitive Strategies in Global Industries

Chapter 2 Company History and Background
Global Industry Report
Market/Country Area Reports
Market/Country Operations Report
Your Next Steps

Chapter 3 Marketing and Marketing Logistics
Demand Creation
Product Prices and Back Orders
Product Segments
Distribution Centers and Sales Offices
Shipping Methods
Inventory Handling Charges
Distribution Center and Sales Office Expenses
Independent Wholesale Operations
Company-Owned Wholesale Operations
Intracompany Transfers
Sales Force Size
Sales Representatives and Sales-Incentive Programs
Import Tariffs, Trading Communities, and Trading Zones
Research and Development
Patents and Cross-Licensing Agreements
Intercompany Contracts and Joint-Licensing Ventures
Market Research
Private-Label Bids
The Marketing/Production Interface

Chapter 4 Manufacturing Operations
The Production Process
Worker Scheduling, Vacations, and Absenteeism
Television Set Components and Subassemblies
Subassembly Inventories
Subassembly Inventory Charges
Subassembly Quality Grades
Straight-Time, Second-Shift Operations, and Overtime
General Administration and Factory Overhead
Work In Process
Warranty Work
Product Quality
Automaton Precision
Highly-Automated Factory Operations
Work Crew Training and Development
Assembly Line Supervision
Quality Control Budget
Plant and Equipment Maintenance
Capital Equipment Changes
Automaton Additions and Transfers
Used Automaton Sales and Purchases
Asset Sales and Joint Ventures
Plant Construction and Outfitting
Plant Shut-Down, Capacity Sales, and Transfers
Social Costs
Almost Everything In Place

Chapter 5 Finance, Financial Markets, and Accounting Operations
Common Stock Issues
Treasury Stock Purchases
Dividends
Debt Issues
Overdrafts
Ninety-Day Short-Term Loans
Ten-Year Bonds
Call Option
Cash Transfers
Income Taxes
Value-Added Taxes
Dividend Taxes
Exchange Rate Risk
Short-Term Investments
Money Circles and Hedging
Accounting and Cash Flow Operations
Gross Receipts
Other Income
Cost of Goods Sold
General Administration
Depreciation
Interest Charges
Income Taxes
Capital In Progress
Retrained Earnings
Accounting and Cash Flow Operations
Income Statement Results
Balance Sheet Results
Cash Flow Operations
Entering Decisions

Chapter 6 Simulation Operations and Playing Procedures Common Stock Issues

Appendixes
Appendix A Critical Incidents
Incident 1—Bill Fisher’s New Salary Bonus System
Incident 2—“You Have To Get Their Attention”
Incident 3—The New Automaton Technician
Incident 4—How To Implement A Structural Change
Incident 5—Ferdie Milano Fights Back
Incident 6—“Hell No To This Baksheesh Stuff!”
Incident 7—Jumping The Gun, Or Fast To Market?
Incident 8—Making Our Quality Circle Program Work
Incident 9—Getting A Better Read On The Market
Incident 10—“Are Our TVs Really Global?”
Appendix B Patent Licensing Agreement
Appendix C Plant Capacity and Automaton Sale Agreement
Appendix D Subcontracting Agreement

Chapter 1
The Global Household Audio and
Video Equipment Industry

This chapter is a general introduction to the world that has been created by The Global Business Game's (GBG) model. The game itself is very flexible and provides your game administrator with a number of options regarding its complexity. Depending on the learning objectives chosen for you, your company may be competing as a manufacturer of 25-inch nationally and privately branded color television sets for sale in your home country, which might be the United States. Should your game administrator wish to give you more strategic options, your company might be allowed to increase its scope to include 27-inch sets. If your game administrator wants to present you with a challenge that has international dimensions, you might have the option of building new manufacturing facilities in Mexico, or Germany and Spain, or Japan and Thailand. Under these conditions, your company could sell the sets made in those countries throughout the world. Before your game begins, your instructor or game administrator will inform you of your particular game's configuration and will provide you with start-up information on how your firm has performed in its most recent business quarter.
The Global Business Game is a simplified model of the structure and details of the television segment of the Household Audio and Video Equipment Industry (NAICS 334310)∗. Because the GBG is a teaching simulation, it simplifies the real world, for if it duplicated reality it would take a lifetime to master! Instead, the game's model captures those elements essential to understanding how globally competitive industries operate and the options and operating methods allowed firms in such industries. It gives you a chance to practice strategic management and to better understand your own strengths and weaknesses as a key business decision maker. Since many companies and industries now compete at the international level, even the strongest domestic firms are no longer protected from foreign competition. Such factors as fast, inexpensive communications, rising income levels in numerous countries, and the internationalization of consumer tastes and expectations have created world markets for a large array of goods and products. For financial survival, at the minimum, or financial security and growth, at the maximum, companies must be able to handle competition on the international level. The GBG has been created to help you become more attuned to this competitive world.
Because this is a global industry, many different-sized companies manufacture and sell their products across national borders and these products are as diverse as jukeboxes, microphones, television sets, and remote control devices. Your company's previous management group in The Global Business Game has chosen to pursue a single-business, corporate-level strategy by competing in a smaller segment of the household audio and video equipment industry. Considering your firm's more limited assets, as well as its specialized competencies, it chose specifically to manufacture and sell through wholesale distributors a limited line of middle-sized consumer-related television sets— after having used an unrelated or conglomerate corporate-level strategy when it had once ventured in small clock radios, record turntables, and audio tape recorders and players.

INDUSTRY DEMAND AND PRODUCT CHARACTERISTICS

The demand for television sets depends on a number of intertwined factors, both economic and socioeconomic in nature. These factors include disposable incomes and literacy levels, the country's degree of electrification, leisure time and how it is used by the population, the relative costs of alternative pastimes and diversions, and the population's size and number of household units.
The set you are making is the result of a series of inventions and discoveries begun in Britain in 1908, when Alan Archibald Campbell-Swinton proved that light signals could be transmitted and received by a cathode-ray tube. In 1920, John Logie Baird demonstrated "radio-vision" in London. Four years later he presented his transmitting and receiving system at the Wembley Exhibition. It was a mechanical system using synchronized spinning disks. Britain was the first country to have regular television service, which was begun by the BBC in November 1936 from a London hilltop.
Although the British were at the vanguard regarding television's basic technological research, it was in the United States that its commercial possibilities and mass market appeal were the most thoroughly exploited. RCA’s Director of Electronic Research V. K. Zworykin directed applied research in the early 1930s. RCA invented the iconoscope capturing broadcasted images and then the kinescope for viewing them after being transmitted. By the late 1940s, television stations were operating in most of America's larger cities but viewing hours were restricted.
Even though American consumers were purchasing many black-and-white television sets at the time, color television set demonstrations were also occurring. The CBS network's field sequential system of spinning colored disks initially challenged RCA and its NBC network for supremacy, but the latter's more complicated but theoretically superior three-color gun system prevailed. Today almost all new television sets are color sets, and all come with a number of convenience features.
The most popular-size sets in North America are those with picture tubes measuring 25 or 27 inches diagonally across the face. These sets lie between the industry's smallest 19- and 20-inch model, and its big-screen models, measuring 31 inches or more. In the United States, the industry's 25-inch TVs are often used as secondary or even tertiary sets in larger bedrooms or dens. The big-screen sets are used in large family rooms. Monophonic 25-inch sets retail in the United States for $250 to $280, with those featuring stereophonic or "surround" sound retailing for $270 to $350. This class of sets, which is presented in Exhibit 1.1, is limited regarding the number of features and amenities.
In contrast, the industry's 27-inch sets offer higher-quality sound and a host of useful features and enhancements. Many provide "warmth" adjustments that present flesh tones and interiors in a more favorable light, automatic volume controls that tone down loud advertisements, S-video-input jacks that take advantage of the superior picture quality generated by Hi8 or S-VHS-C camcorders, picture-in-picture, and audio circuitry that emulates surround sound. Exhibit 1.1 cites the typical features of sets in this size category. These television sets currently retail for $350 to $580 in the United States, but have higher price tags in foreign markets due to the tariffs and value-added taxes (VATs) often levied on them. Sets sold in foreign markets are also often retailed through relatively inefficient marketing channels.

Exhibit 1.1
25- and 27-Inch Sets
|25-Inch Set Features |27-Inch Set Features |
|Remote control |Universal remote control |Ambient sound |
|On-screen multilingual menu |"Warmth" adjustment |Audio-output jacks |
|Closed-caption capability |Automatic volume control |Commercial-skip timer |
|Closed captioning when muted |S-video-input jack |Picture-in-picture |
|Monaural sound |Multiple-input jacks |Channel block-out |
|Commercial skip timer |On-screen bilingual menu |24-month parts warranty |
|12-month parts warranty |Closed-caption capability |24-month picture-tube warrant |
|24-month picture-tube warranty |Closed-captioning when muted |Stereo sound |

Sets of these two sizes produce acceptable pictures and sound. There are substantial differences, however, in the reliability of the various brands in the marketplace. Many consumers attach great importance to having a set not prone to breakdowns and the brand names that have been associated with poor reliability records, such as Zenith, RCA and General Electric, have suffered long-term declines in their ability to garner premium prices.
The demand for these features, and the ability to pay for them, differs among countries. The number of broadcast television channels and cable channels also varies dramatically from country to country. Additionally, the television set's use as a home entertainment medium varies depending upon the household's financial circumstances. Various features are also more or less attractive due to differing literacy levels, the availability of repair facilities, and the product's life-cycle stage within each country. Depending on the situation, increased complexity or greater product sophistication could be a product disadvantage. Exhibit 1.2 shows that a high degree of product saturation and market maturity exists in the United States for television sets. The markets of Spain, Mexico, and Thailand are relatively unsaturated in this regard.

WORLD AND NATIONAL MARKETS

Because the household audio and video equipment industry is global in scope, competitors must systematically monitor many global economic trends and developments. Raw population projections, such as those shown in Exhibit 1.3, indicate that the world's population will increase about 49.7 percent in the very long term. This results in a 3.0 percent average annual increase in the number of people who might potentially watch a television set. The greatest growth will be found in the developing areas of Asia, Africa, and Oceania as well as in the more highly developed North America due to immigration.

Although the gross estimates for these areas are notable, your company's previous management group has been relatively uninterested in conducting international operations and has focused solely on its home country of the United States. Some in your company, however, are aware of international developments, especially the profits that might be gained through expanded operations encouraged in North America by North American Free Trade Agreement (NAFTA) and in Western Europe and Asia via their respective trading zones of the European Union (EU) and the Asia Pacific Economic Cooperation (APEC). Exhibit 1.4 shows the projected population growth rates for these economic zones and for the specific countries possibly available to you in The Global Business Game.
While a country's population growth is important when seeking foreign markets, your company was also interested in the buying power of each nation's population as well as its current stock of television sets. On a per capita basis, a relatively low level of television set saturation has been realized in Thailand and Mexico, with a modest degree in Germany and Spain. The Japanese and American markets have reached the saturation point, with all new sales being based on replacement demand.
To create their best estimates of each nation's attractiveness as a site for further expansion, your company's for presentational purposes in Exhibit 1.5. This exhibit combines each country’s estimated total television sets owned with additional estimates of an average firm’s sales for the two screen size segments it wanted to emphasize. A.T. Kearney's 2004 Foreign Direct Investment Confidence Index. (FDICI) for each country was also included as each country’s index reflected the feelings of American CEO's about the comparative ease and attractiveness of doing business in those markets.

As a further piece of research your firm also collected general profiles on the countries available for business. These profiles were obtained from the most recent edition of the United States’ 2005 CIA World Fact Book.

Germany. The reunification of the Federal Republic of Germany (West Germany) with the German Democratic Republic (East Germany) on late-1990, created Europe's most-powerful economic unit. As the European Community has taken shape, Germany has assumed the central role in its affairs as well as the euro's value. A low internal inflation rate and elaborate rail, roadway, and telephone infrastructures along with a pro-business governmental posture make this country a major exporter of highly engineered products. Export sales are important to this country due to a long-term projected population decline. Its per capita incomes are amongst the highest in Europe. Major industries are steel, ships, vehicles, machinery, coal, and chemicals. About 34 percent of its labor force is engaged in industry and commerce, and 64 percent in various service industries. Less positive features are labor rates that are the highest in the world, a work week lasting only thirty-five hours, vacations lasting up to six weeks, and very rigid and militant labor unions although these are beginning to lose some of their power.

Key statistics for Germany in mid-2005:

Major cities—Berlin (3.3 million), Hamburg (2.7 million), Munich (2.3 million), and Frankfurt (0.6 million)
Chief ports—Hamburg, Bremen, Bremerhaven, Lubeck, and Rostock
Population—82,431,390 2004 est.
Population density—611 per square mile
GDP per capita-- $28,700
Land mass—137,800 square miles
Literacy rate—99.0 percent, with compulsory education for ages 6 to 15
Television sets—581 per 1,000 population
Daily newspaper circulation—305 per 1,000 population
Airports—550
Physicians—1 per 290 persons
Hospital beds—1 per 138 persons
Infant mortality—4.16 per 1,000 births

Spain. This country continues to be a favorite manufacturing site for European firms wishing to lower their labor costs. The economy has been growing at a relatively high rate for the past several years, although it also has a very high unemployment rate. Despite this level of unemployment, wages have been rising, and they have been outgaining increases in worker productivity. Spain has had rather turbulent politics and a degree of political unrest lingers. A 1981 coup was foiled by King Juan Carlos and the Socialist Workers' Party under Feleipe Gonzalez Marquez won four consecutive general elections from 1982 to 1993. He lost to a coalition of conservative and regional parties in March 1996. Basque separatist activities continue after they cancelled their September 1998 cease-fire in November 1999. Both Catalonia and the Basque country have been granted autonomy.

Key statistics for Spain in mid-2005:

Major cities—Madrid (5.1 million), Barcelona (4.4 million), and Valencia (0.8 million)
Major ports—Barcelona, Bilbao, Valencia, and Cartagena
Population 40,341,462 2004 est.
Population density—209 per square mile
GDP per capita-- $23,300
Land mass—194.9 million square miles
Literacy rate—97.9 percent, with 10 years of compulsory education
Television sets—555 per 1,000 population
Newspaper circulation—100.3 per 1,000 population
Airports—156
Physicians—1 per 241 persons
Hospital beds—1 per 234 persons
Infant mortality—4.42 per 1,000 births

Mexico. This country's economic and political history has been turbulent and long lasting. Various administrations have attempted to improve the population's welfare through economic and social reforms, but little real progress has been made. The Institutional Revolutionary Party (PRI) dominated politics from 1929 until the late 1990, when it was defeated by Vicente Fox Quesada on July 2, 2000. Zapatista National Liberation Army guerrillas launched a southern Mexico uprising on January 1, 1994. The peso was devalued in the 1980s and an austerity plan and aid from the United States saved the country's currency from collapsing again in early 1995. It has been estimated that an amount almost 40 percent as large as Mexico's official GDP is obtained through illegal or undocumented activities. Despite having one of the hemisphere's lowest factory labor rates much unemployment and underemployment exists.

Key statistics for Mexico in mid-2005:

Major cities—Mexico City (18.7 million), Guadalajara (3.7 million), Monterrey (3.3 million) and Puebla (1.9 million)
Major ports—Coatzacoalcos, Mazatlan, Tampico, and Veracruz
Population—106,202,903 2004 est.
Population density—141 per square mile
GDP per capita-- $9,600
Land mass—761,600 square miles
Literacy rate—91.4 percent, with 10 years of compulsory education
Television sets—272 per 1,000 population
Newspaper circulation—93.6 per 1,000 population
Airports—1,833
Physicians—1 per 613 persons
Hospital beds—1 per 1,196 persons
Infant mortality—20.9 per 1,000 births

Japan. "Japan, Inc." is no longer the economic juggernaut it once was although it is still the world’s second-largest economy. It suffered a long GDP decline in the 1990s. Conditions have improved recently even though its banking system is in deep need of restructuring. After World War II, it rebuilt itself through close and protective relations between government and business with a manufacturing base built on efficiency and productivity. Reform candidate Junichiro Koizumi was swept into power in April 2001 with the expectation that it would take three years for his reforms to take effect. Relations with the United States have been strained since President George W. Bush rebuked the Kyoto Accord on global warming.

Key statistics for Japan in mid-2005:

Major cities—Tokyo (35.0 million), Osaka (11.2 million), Nagoya (3.1 million), Sapporo (1.8 million), and Kyoto (1.8 million)
Major ports—Tokyo, Kobe, Osaka, Nagoya, Chiba, Kawasaki, and Hakodate
Population—127,417,244 2004 est.
Population density—880 per square mile
GDP per capita-- $29,400
Land mass—145,882 square miles
Literacy rate—99 percent
Television sets—719 per 1,000 population
Newspaper circulation—578 per 1,000 population
Airports—174
Physicians—1 per 522 persons
Hospital beds—1 per 74 persons
Infant mortality—3.3 per 1,000 births

Thailand. The Pacific Rim economic collapse caused by Thailand’s devaluation of its currency in July 1997 has run its course. Shortly thereafter Thailand received $15.0 billion in international emergency loans and a new constitution was created in September of that year. Its economy has never been very robust, and it has been estimated that its Black Market amounts to 70.0% of its official economy’s value. Corruption has existed in high places and this has made it especially difficult for the government to take effective action. Its AIDS rate, which has been one of the world’s highest, has been somewhat abated.

Key statistics for Thailand in mid-2005:

Major cities—Bangkok (7.1 million), Nakhon Ratchasima (0.2 million), Chiang Mai (0.2 million), and Hat Yai (0.2 million)
Major ports—Bangkok and Sattahip
Population—65,444,371 2004 est.
Population density—328 per square mile
GDP per capita-- $8,100
Land mass—198,500 square miles
Literacy rate—92.6 percent, compulsory for those ages 6 to 15
Television sets—274 per 1,000 population
Newspaper circulation—63 per 1,000 population
Airports—109
Physicians—1 per 3,461 persons
Hospital beds—1 per 599 persons
Infant mortality—20.5 per 1,000 births

United States. Once incomparable in most economic activities, this country's businesses have encountered strong competition on its home soil, while finding it difficult to sell many of its products overseas. This has resulted in a chronic trade deficit. Despite these problems, the United States is both the world's richest and largest market and one whose government is basically pro-business. Its relatively low interest and inflation rates have led to the longest run of GDP growth in its history although an economic slowdown occurred in mid-2001. Because of its relatively high manufacturing labor costs, a number of its major corporations have established offshore operations. Because of its long-term trade imbalance the dollar has been weakening against both the euro and the yen and it appears this trend will continue.

Key statistics for the United States in mid 2005:

Major cities—New York City (7.4 million), Los Angeles (3.4 million), Chicago (3.1 million), Houston (1.7 million), and Philadelphia (1.6 million)
Population—295,734,134 2004 est.
Population density—83 per square mile
GDP per capita-- $40,100
Land mass—3,717,796 square miles
Literacy rate—97 percent, with compulsory education for ages 7 to 16
Television sets—844 per 1,000 population
Newspaper circulation—212per 1,000 population
Airports—14,857
Physicians—1 per 365 persons
Hospital beds—1 per 243 persons
Infant mortality—6.5 per 1,000 births

COUNTRY SEASONAL DEMAND

Your company has also collected information on past television set sales by nation. In gathering data, it became clear that television set sales varied throughout the year regardless of each country's underlying macroeconomic elements, and that seasonal variation differed from country to country. In the United States, your television sets, because of their size, have proven to be good Christmas gifts for a child's bedroom. In Germany and Spain, two countries that have many rabid soccer fans, television set sales spike in June shortly before the World Cup matches begin.
The empirically derived seasonal indicators your management group has created are presented in Exhibit 1.5. These indexes, because they are based on long-term, relatively constant factors, will not change over the course of your simulation. They also reflect the fact that distributors stock their warehouses well before retailers stock their shelves with television sets in anticipation of consumer demand.

COMPETITIVE STRATEGIES IN GLOBAL INDUSTRIES

A global industry can be defined as one in which participants are present in all key international markets, demand for the product is standardized and the product itself is fairly standardized, and a significant portion of the product's components or raw materials are obtained from international sources. Accordingly, the automobile industry is a global industry. This could also be said of the tire, watch, and pharmaceutical industries.
Because of the growing importance of global competitiveness, various authors have attempted to describe the basic strategies that can be employed by companies competing in them. It has been suggested that four competitive strategies exist in global industries: broad-line global competition, global focus, national focus, and protected niche. This matrix of strategies has been expanded to include a strategy of integrated low-cost/differentiation in global markets.
The television set industry is involved in global international competition. A firm thus needs to employ international business-level strategies to enter the international markets and market segments available. In determining how your company should compete in The Global Business Game, the strategies that have been used in the real world can be used, to some degree, in the game you are about to play. These business-level strategies, and how they can be implemented in the game, are the following:

• International low-cost strategy— Create low-cost operations in your firm's home country and export standardized products to target markets using foreign-owned distribution channels.
• International differentiation strategy— Create unique products and company-owned distribution channels in each foreign market.
• International focus strategy— Within each foreign market, limit production to the single set size, quality grade, and channel support activities associated with a particular customer segment.
• International integrated low-cost/differentiation strategy— Obtain low manufacturing costs by building factories in low labor cost countries, or by using automation to lower overall unit manufacturing while indicating product differences through sales promotion efforts.

Because your firm may choose to enter a number of country markets, its international corporate strategy can take one of three forms. If your corporate-level strategy is multidomestic, you would decentralize your management team's talents to the country unit level. Within each country unit, the country unit manager would decide the appropriate price, quality level, segment, and service level based on local competitive conditions. Under a global corporate-level strategy, decisions would be highly centralized and controlled, with standardized products being made and shipped to all country units. If your firm chose a transnational strategy, it would try to achieve both global efficiency and local responsiveness. It could do this by manufacturing a fairly universal, standardized product in a low labor cost country while tailoring its sales promotion tactics and appeals to local tastes.
While both international business-level and corporate-level strategic decisions must be made, you will have to implement those strategies through your market entry method. The market entry modes available to you in The Global Business Game are exporting, licensing/strategic alliances, and new, wholly owned subsidiaries. Under the exporting market entry mode, your firm merely ships goods from its home country factory to the chosen country unit(s). This mode may require expansion of your domestic factory's capacity and it will be attended by inflexible shipping arrangements, tariff restrictions, and shipping charges. Under the licensing/strategic alliances mode, your firm can have a country unit competitor manufacture television sets for you while sharing in research and development costs on patent-pursuing activities. Using a wholly owned subsidiary market entry method is costly, but allows for the greatest level of control. This mode would be implemented through building a correct-size factory in the country unit while simultaneously creating a company-owned wholesaling operation.
In choosing which corporate-level, business-level, and market entry strategy to implement, you should consider a number of factors: the internal resources possessed by your management team, the physical and financial resources your company has at this time and can make available to itself, and the global opportunities available to all companies in your industry. A number of experiential exercises have been created to help you through the process of auditing your firm's current situation, and then structuring your group so that you can proceed in an intelligent manner in choosing and implementing your company's strategic intent. These materials are part of the GBGPlayer pacakage you have purchased.
Chapter 2
Company History and Background

The company you will be running was born of the enthusiasm of Gary Elliott, Arthur Moore, David Stevenson, and Casimir (Casey) Sobieski. They had served together in the Signal Corps during World War II, but had previously been employed as electronics engineers at RCA's David Sarnoff Laboratories. The work they performed there was the basic research that made television commercially feasible. Because they were avid tinkerers and experimenters with everything that went into that era's electronic gear, they dreamed of starting their own home electronics firm once the war was over.
By early 1948, after mustering out of the Signal Corps, they had accumulated enough private capital to start making products, but ones that did not require large amounts of start-up monies. Although they yearned to get into making television sets, they first turned their attention to making the more easily assembled FM radios and wire recorders that were just being introduced in the United States.
Their first television set was a very small unit introduced in 1954. It was given the brand name MagnaArgus. The MagnaArgus had a 10-inch picture tube with an 8 5/8 x 6 1/4-inch screen. It retailed for $275. The company's picture tubes were purchased under a RCA licensing agreement; the sets were hand-assembled in a small plant in Erie, Pennsylvania. The sets sold well in regional markets in western New York and northern Ohio, but limited quantities of picture tubes and quality assurance problems kept the partners from expanding their sales territory.
A number of successor models were produced, and the company had visions of becoming a national brand. As the 1960s wore on, however, the company's founders were unable to broaden the firm's product line of television sets and had to fall back on the production of high-fidelity equipment and FM tuners as a way of stabilizing their earnings. More important, a number of domestic television set manufacturers were being squeezed out of existence, and by the early 1970s foreign manufacturers from the Pacific Rim had entered the industry and were making great headway with their reliable yet moderately priced offerings. Your company's market position and economic fortunes began to deteriorate, and its founders decided to go public in 1985 under the corporate name MagnaArgus, Inc. This was done to obtain enough new capital to either grow—or die—by becoming a niche television set manufacturer.
With its new capital, and an expanded board of directors and shareholder interests to consider, your firm took a number of years to implement its new strategy of focused efforts. Its high-fidelity equipment products were pulled from the market, and new specialty dealers and wholesalers had to be enlisted. Most important, its Erie, Pennsylvania, production operations had to be converted to full-time television set manufacturing, albeit at a very flexible level of operations, given a lack of knowledge of the scale of operations the company could attain as a niche player.
Your firm was often in a precarious situation, but it has survived and has generated modest but unstable profits. Its founders have long since given up active management of the company, and in fact, three of them have died— after transferring their shareholdings to their children, who have pursued other interests. Knowing that their children had no interest in running your company, Gary, Arthur, David, and Casey had actively hired and groomed new managers as their replacements. You are now the newest generation of their management team, and they have placed their legacy in your hands.
In anticipation of future, possible global growth, as well as hoping to ensure the company's survival, Gary Elliott, as your firm's last active co-founding manager, asked your company's accounting firm to create an accounting system that would handle most eventualities. Your accounting firm complied and prepared mock-ups of the types of reports the new system would produce if all possible company operations were implemented.
Because your company was operating only in your home country of the United States when the mock-ups were created, only the income statements, balance sheets, and industry reports for the United States are described in depth. Should your Game Administrator choose a different home country and additional market areas for your simulation, the start-up reports provided at the beginning of play would reflect that change. Your Game Administrator will also inform you before play begins of the range of different-size television sets you will be able to sell and the markets and countries in which you will be allowed to compete. Appropriate computer-generated reports will be provided for these conditions. At this juncture the reports for each additional market area and country in which your company decides to operate are basically the same as your North American or NAFTA report, except that all monetary values are stated in the relevant country currencies. Your consolidated corporate-level report gathers together the reports generated by each country's operation.
In The Global Business Game you will be interacting online with the game via GBGPlayer and the interface that has been created for you. For each quarter or decision round you will submit a set of decisions that will be processed by an action taken by your Game Administrator. Your management team will enter its decisions into GBGPlayer, which is a data entry and retrieval program found in your "Player's Suite" at the game's website. The decisions made by the company being demonstrated are for a NAFTA-based company engaged only in American domestic operations. Your Game Administrator or instructor may have you play a game where your home country is Japan, Mexico, Thailand or Germany and you may be restricted as to the scope of set sizes that can be offered for sale. Regardless of the nature of your actual competitive environment, the following describes the nature of each piece of information the simulation provides its companies.

GLOBAL INDUSTRY REPORT

This report is received by all companies in your industry. The report displays information commonly known by companies in a real-world industry, and you can assume the information presented is as accurate as possible.

GLOBAL INDUSTRY A REPORT— These two lines designate the industry to which your company has been assigned. Your Game Administrator may create a number of independently operating industries. Your company's performance will be judged only against the performance of the other firms in your own industry.

QUARTER 4— This part of the line identifies the simulation's operating quarter. Your Game Administrator will inform you about the number of quarters the simulation will run. Quarter 4 would be the business year's fourth quarter while, for example, QUARTER 2 YEAR 1 would be the second quarter of the game's first year of play.

YEAR 0— This indicates the simulation's operating year. In this case it is the game's base year. Your Game Administrator will inform you of the number of years your game will run. You may also be allowed to play a few practice or trial runs for familiarizing yourself with the game's interface before official play begins. If this is done the game will be rolled back to Quarter 4, Year 0 for official play.

WAGE RATES— The average wage, in local currency values, of workers that can be assigned to assembling your firm's 25-inch and 27-inch sets.

SHORT-TERM RATE— The general interest rates found for ninety-day loans in each market area's major financial markets of New York City, Frankfurt, and Tokyo. This is an indicator of the interest rate a country operation would have to pay for a ninety-day short-term loan after considering the country unit's credit rating.

BOND RATE— A statement of the general yield rates found for ten-year bonds in each market area's major financial markets of New York City, Frankfurt, and Tokyo. This is an indicator of the nominal interest rate a country operation would have to pay for a ten-year callable bond given the country unit's credit rating. This bond rate serves as the basis of your firm's effective interest rate on any of its outstanding bonds.

STOCK MARKET INDEX— The stock market indexes associated with each market area's financial center. For North America this is the Dow Jones Industrial Average (DJIA), for Western Europe it is the Frankfurt DAX-30, and for Asia it is Tokyo's Nikkei 225. These indexes may be updated throughout the simulation and can be found via the Internet or in any of the commonly available financial newspapers, such Section C of The Wall Street Journal.

GDP QUARTER/YEAR— Each relevant country's quarterly gross domestic product changes are reported as index numbers based on the game's base year for the current year and operating quarter and its predicted value for the following quarter and four quarters after the game's start-up year. The values presented here reflect either real-world data or numbers created by your Game Administrator to reflect comparative positive or negative growth rates among the economies being simulated.

SUBASSEMBLIES— The lot price of the Group 1 and Group 2 subassemblies by grade needed for the manufacture of each television set, free on board (FOB) Hong Kong. Subassemblies are purchased in lots of 100, and their prices may vary throughout the simulation's run.

BULLETIN BOARD— A listing of various events or announcements associated with your simulation. Your Game Administrator may present critical incidents for you to solve and bids and offers for used automatons or base capacity. Home Electronics King's requests for bids on privately labeled sets will also be found here. Periodic announcements of new product patents obtained, fines and penalties assessed, and factory openings, expansions, closings or liquidations will also be found on the bulletin board. The value of any construction announced by the bulletin board covers only the plant's line worker base capacity and not the value of any automatons that may be installed in the factory or the cost of the plant's land. The true value of any new capacity is reported in the country unit's balance sheet as it is confidential information.

CURRENCY CROSS RATES— Displays the currency exchange rates in effect during the decision quarter. These rates may change from quarter to quarter.

GLOBAL INDUSTRY A REPORT— This information is presented to all firms in your industry. Your industry will begin with between three and nine companies competing against each other.

25" TV LIST PRICE— Each company's list price to wholesalers for its 25-inch television sets in the countries listed.

25" TV ACTUAL PRICE— A moderately correct, one-quarter lagged estimate of the actual market price wholesalers had to pay for 25-inch sets in the previous quarter. This price reflects trade discounts and price incentives employed by each firm to induce greater sales of their 25-inch television sets in the countries listed.

27" TV LIST PRICE— The company's list price to wholesalers for its 27-inch television sets in the countries listed.

27" TV ACTUAL PRICE— A somewhat accurate estimate of the actual price wholesalers paid for the designated product in the previous quarter. This price reflects trade discounts taken by each firm to further stimulate sales of its 27-inch television sets in the countries listed.

25" TV CONTRACT BID— A fairly close estimate of the unit price charged for 25-inch sets as either a product for private-label purposes or for contract sales to another firm.

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27" TV CONTRACT BID— A somewhat accurate estimate of the unit price charged for 27-inch television sets as either a product for private-label purposes or for contract sales to another firm.

SALES OFFICES— The number of sales offices operated by the company exclusive of those attached to its distribution center(s) and/or factories.

DISTRIBUTION CENTERS— The number of regional distribution centers in operation by country. The number reported here does not reflect the distribution center that is part of any country unit's factory.

C-WHOLESALERS— The number of company-owned wholesalers in operation by country.

I-WHOLESALERS— The number of independent wholesalers being used by each firm by country.

SALES REPS— The number of sales representatives the company had in the field in each country by the quarter's end.

CONSOLIDATED PERFORMANCE INDICATORS— A report on the economic performance of all companies in your industry at the consolidated or corporate level. Your Game Administrator may use any or all these indicators. If the indicators shown here are employed, they may be weighted at the Game Administrator's discretion and you will be informed of the weighting scheme being employed.

PROFIT— The company's total earnings or profit for the quarter in the home country's currency unit.

ROA— The company's rate of return on assets for the quarter. This is the firm's earnings for the quarter divided by the firm's assets for the quarter.

EPS— The company's earnings per share for the quarter. This is the firm's owners' equity divided by the number of shares outstanding at the quarter's end.

ROE— The company's rate of return on owners' equity for the quarter. This is the firm's earnings for the quarter divided by the quarter-ending owners' equity (common stock, paid-in capital plus retained earnings).

STOCK PRICE— The firm's stock price at the quarter's end.

PERFORMANCE INDEX— The weighted ranked average of the quarter's performance indicators as chosen by your Game Administrator.

MARKET/COUNTRY AREA REPORTS

This set of reports contains material that is unique and confidential to your own company's operations. Assuming your home country is the United States, you would receive balance sheets, income statements, and operating reports only for NAFTA or North American operations, and then only for U.S. operations, but not for Mexico unless that country has been made available for commerce by your Game Administrator. If your company is allowed to enter any of the other market areas available in the simulation, such as APEC or EU, you would receive similar reports for the particular market areas and countries involved.

NAFTA CONSOLIDATED INCOME STATEMENT— A line identifying the market area's operations. Identical sheets are supplied for the APEC and EU market areas. Because the United States is your home country in this example, the results obtained in other countries and market areas "consolidate" U.S. operations.

FIRM 1 - MAGNAARGUS CORPORATION— Your company's firm number and name. Your Game Administrator will assign you a company number, but you will create your firm's name before the game's start-up quarter when you initialize your company. Instructions for doing this are presented in Chapter 6.

QUARTER 4YEAR 0— A line indicating the simulation's operating quarter and year.

GROSS REVENUES— All revenues associated with the sale of your company's television sets. If the country in which the sale was made levies a value-added tax (VAT) or imposes a tariff on the firm's products, these taxes are included in the firm's gross revenues. This amount includes currently generated sales as well as any backorders filled from the previous quarter. It is possible that your sales representatives will write more orders than can be supplied from either your company's current production, finished goods inventories or goods either purchased from others or transferred from your firm's other country units. Should this occur, your firm's shipping clerk allocates any available units according to the following priorities. The first priority will be product contract sales to other firms in your industry. The second priority will be private-brand contract sales. The third priority will be the filling of backorders, unless you have lowered your firm's actual price for that product. If your actual price has been lowered, the backorders for that product will be cancelled at the original price and will be shipped and billed at the new actual price. The next priority will be the shipment of goods generated by new sales in the current quarter. If the total of all these operations entails a shortfall, that shortfall will be new backorders, and possibly lost sales, the following quarter.

VALUE-ADDED TAX— Any VAT the firm collects for the government must be rebated each quarter. The VAT is a tax on the value you have added through the manufacturing process to the raw materials your company has purchased. In the simulation this is a tax on net revenue minus the value of all subassemblies found in the quarter's cost of goods sold. Tariffs are assessed at the country's rate on the actual price you placed on your sets.

NET SALES— The algebraic sum of all revenues associated with your company's main form of activity which is the sale of television sets to the civilian market.

OTHER INCOME— Nonoperating revenue sources available and employed by your company.

CAPITAL SALES GAINS/LOSSES— The net cash proceeds from plant and/or automated equipment sales to other companies in your industry.

INVESTMENT INCOME— Income earned on ninety-day short-term investments.

LICENSES— Income earned on patent licenses granted to other firms.

NONOPERATING INCOME— The algebraic sum of the three previous items. This constitutes income from activities incidental to your company's main manufacturing and sales activities.

TOTAL REVENUE— The sum of all previous items.

COST OF GOODS SOLD— The unit manufacturing costs of all products sold during the quarter. This is basically the unit costs for television sets you produced yourself or those obtained from other company-
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owned units through transfers in or contract manufacturing performed for you by other firms in the industry. For sales that have been through intracompany transfers, your unit cost is the transfer price used to make the transfer as well as any applicable country or economic zone tariffs. For intercompany transfers-in or manufacturing contract sales, your unit cost is the transfer price agreed upon by both parties, with the purchaser paying the shipping costs involved.

ADVERTISING— The unit's total advertising budget.

GENERAL ADMINISTRATION— The unit's total expenses for top executive compensation, a liaison executive to coordinate the activities of each country market in operation, factory superintendancy, line supervision and severance pay for any discharged line workers, automaton technicians, plant superintendents and line supervisors, the plant's size, supervising new plant construction/expansion, equipment purchases and transfers and shut-down and continuing security costs on any decommissioned or liquidated factories.

SALES OFFICES—The quarter's total lease and administrative expenses for all sales offices in operation. This amount does not include the salaries and commissions earned by sales representatives attached to each sales office, but include the salaries, hiring, firing, and moving expenses of any personnel associated with the firm's sales office.

DISTRIBUTION CENTERS—All expenses associated with distribution center operations. This amount includes the costs of warranty work performed at each center, administrative overhead, and lease payments, but not unit inventory and handling charges. If an area does not have a distribution center and all goods are shipped directly from the market/country's factory, warranty work is both performed and charged at the plant level.

WHOLESALE OPERATIONS—The quarter's total expenses for all wholesale operations, regardless of whether they are C-wholesalers (company-owned wholesalers) or I-wholesalers (independent wholesalers). C-wholesaler expenses include any sales office start-ups, overhead, and shut-downs associated with sales offices tied to the C-wholesaler and its own its start-up and shut-down costs, leases, and staff salaries.

SALES FORCE SALARIES— Salaries and commissions to all sales representatives on the unit's payroll. Sales reps who quit the company leave on the quarter's last day and collect all monies owed them at that time.

TRAINEES— Salaries for all personnel in training in your firm's sales office(s).

TRAINING AND DEVELOPMENT— Your unit's training and development budget for the quarter. This account combines the individual budgets you have appropriated for training line workers, automation technicians, and sales representatives.

INVENTORY CHARGES— Inventory carrying and handling charges on the number of subassemblies and finished goods held in inventory on the previous operating quarter's last day. Inventory charges are not incurred on contract sales by your firm to other firms in your industry or for any sets you make for Home Electronics King.

SHIPPING— Shipping charges on products obtained for inventory through intercompany manufacturing contract sales, subassemblies received from your components consolidator in Hong Kong, and products shipped from your factories to your distribution centers. The shipping costs associated with the purchase of new automatons are considered part of the acquisition costs of adding or building new plant capacity, and are capitalized and subsequently depreciated. The same accounting procedures apply to the interfirm and intrafirm sale or transfer of used automatons. Contract and private-label sales are shipped FOB your factory, and these units do not go through your distribution centers.

LICENSE FEES— Payments made by your firm to other companies for the use of their patented products.

RESEARCH AND DEVELOPMENT— Your unit's research and development budget for the quarter.

QUALITY CONTROL— Your unit's quality control budget for the quarter.

DEPRECIATION— The quarter's total depreciation charges on fixed plant and equipment. A twenty-year depreciation schedule applies to plant and equipment, with a ten-year depreciation schedule earmarked for automatons.

MAINTENANCE— Your unit's maintenance budget for the quarter. This amount is the total of individual budgets for general factory and assembly line maintenance, and maintenance by automaton type.

INTEREST CHARGES— This section gathers the interest charges on all the forms of debt your firm has used during the quarter.

OVERDRAFTS— Overdrafts associated with interest expenses forced on your company's corporate operations due to cash shortfalls in any of your operating units that cannot be covered by your home country unit's cash account. Because your corporate-level operations are ultimately responsible and accountable for the solvency of all market/country area operations, all cash shortfalls must be covered at your company's corporate level. Should country area operations place your corporation into technical bankruptcy, an overdraft is issued at the consolidated level.

SHORT-TERM LOAN— Interest expenses associated with an operating unit's ninety-day loan.

BONDS— The interest charges on the face value and nominal interest rate on all your company's outstanding bonds. Should the operating unit call all or a portion of its outstanding bond debt, the portion called will appear as an expense in this account, with the portion of the unamortized bond discount being called charged against current earnings.

MISCELLANEOUS— This includes three items: Merlin Group research studies; fines, penalties, or credits issued by the Game Administrator; and assorted direct costs associated with critical incident responses.

TOTAL EXPENSES— The sum of all expenses incurred during the quarter.

INCOME BEFORE TAXES— Total revenues less total expenses for the quarter.

INCOME BEFORE TAXES— Taxable income. If negative, a tax credit will be retained as an offset against future positive profits.

INCOME TAX— Federal and local taxes collected on all operating unit profits. Taxes are collected on a quarterly basis. If income is negative, the negative amount will be counted for tax credit purposes and offsets on positive earnings for three years or twelve quarters.

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DIVIDEND TAX— Any taxes levied by foreign governments on retained earnings repatriated to the company's home country. These taxes have already been paid at the country/market level by the time they are consolidated at the headquarters level.

NET INCOME— Your operating unit's earnings after all taxes and expenses have been paid.

NORTH AMERICAN CONSOLIDATED BALANCE SHEET— A line identifying the market area's operations. Identical sheets are supplied for the APEC and EU market areas.

FIRM 1 MAGNAARGUS CORPORATION— A line identifying the company number as well as the unique name you have created for your company.

CASH— All cash assets held by the area operation and currently available for cash flow purposes during the next quarter.

ACCOUNTS RECEIVABLE— Monies owed your firm by your independent wholesale customers. This amount is collected and will be available to your firm the following quarter. Through a tight credit policy and mandatory performance bonds, all accounts are paid in full within ninety days of the following business quarter.

TAX CREDIT— A record of your firm's cumulative negative profits, which serve as tax credits.

SHORT-TERM INVESTMENTS— The total value of any investments your company has made in its respective local ninety-day money markets. This amount returns to the cash account on the first day of the next operating quarter, with the interest earned on the investments also going to the firm's cash account.

DUE FROM COUNTRY UNIT(S)— The value of all monies advanced to any country units in operation. The foreign country's credit rating will be very poor until these funds are repatriated to the home country.

SUBASSEMBLIES INVENTORIES— The market value of all grades and groups of subassemblies available for production in the next quarter based on their purchase price during the acquisition quarter.

FINISHED GOODS INVENTORIES— The value of all products held in inventory at the quarter's end after all sales and product transfers have been conducted. This figure is the weighted average of the unit costs of all contributors to this pool of products.

GOODS IN TRANSIT— The administered or transfer "price" value of all intrafirm goods being shipped by surface to other country units given it takes a full quarter for them to arrive at their destination.

CAPITAL IN PROGRESS— The value of any plant construction being conducted by the firm within the hemisphere and the net book value of any new or used automatons being purchased from your machine-tool supplier or other companies in your industry. This capital in progress begins to depreciate in the first quarter it becomes operational.

PLANT AND EQUIPMENT— The original value of all new plant and equipment, the purchase price of the land for the plant, the market value of used automatons purchased from other firms, and the remaining book value on used automatons transferred into your market area's operations. Once built and installed, the plant and equipment part of this valuation is subject to a twenty-year straight-line depreciation rate of 1/20th per year or 1/80th per quarter on its original value except for automatons, which depreciate on a ten-year schedule at the rate of 1/10th per year or 1/40th per quarter.

LESS DEPRECIATION— The total amount of depreciation that has occurred on all assets owned by the operating unit since their purchase date.

ACCOUNTS PAYABLE— The value of monies payable during the next operating quarter. Consists of portions of the operating quarter's factory labor costs, general administration expenses, advance purchases of subassemblies, and plant expansion and automaton purchases. The values reported here may not track exactly due to adjustments in payouts to suppliers due to cash flow exigencies and surpluses.

OVERDRAFT— An emergency loan automatically granted by the simulation to cover any total-company cash shortages. This loan will be automatically paid off by the simulation through its own cash flow operations, but should be taken into consideration when making the next quarter's cash projections.

DUE TO HOME COUNTRY—This is a nonfunctioning account for the home country unit but is active for any country unit, as it reflects monies advanced to it at the consolidated corporate level.

SHORT TERM LOAN—A ninety-day loan requested by your company. This loan's interest is charged in the current quarter and is automatically paid off in the simulation's following quarter. It can be rolled over quarter after quarter.

BONDS—The original face value of all ten-year bonds floated by your operating unit.

STOCKHOLDER'S EQUITY—The sum of all monies owed to the company's shareholders.

COMMON STOCK—The par value of all shares outstanding. This account is inoperative at the country unit level, as country units cannot float stock on their own account.

PAID-IN CAPITAL—The total value of all stock issues selling above or below par. This account is inoperative at the foreign country unit level.

RETAINED EARNINGS/DEFICIT—An account that accumulates all past and current quarter earnings and serves as the source for dividend declarations.

EXCHANGE GAINS/LOSSES—The algebraic sum of currency gains and losses obtained during the quarter.

MARKET/COUNTRY OPERATIONS REPORT

The next set of reports is unique to your company's operations. Depending on the number of market areas and products available to you, a number of market/country area reports are generated by the simulation. In these reports the data are usually reported in units, although at various times interest rate percentages, indexes, and ratings are displayed.

FIRM 1 MAGNAARGUS CORPORATION—The firm being reported.

CREDIT RATING— The credit rating associated with each country operation. This rating is highly dependent on the firm's current liquidity, its total debt/equity ratio, and its times-interest-earned coverage. This rating ranges from AAA to C, with a AAA rating representing a firm entitled to the unit country's prime rate for short-term loans and the home country's federal government ten-year bond rate plus 1.0 percentage point. A "C" rating indicates a firm that has fallen into technical insolvency during the current quarter or, if a foreign unit, owes funds to the home country unit.

BOND RATE— The nominal or face rate applicable to ten-year bonds by each country operation. This rate is greatly influenced by the firm's liquidity, its debt management skills as indicated by its credit rating, and its amount of owners' equity given its total long-term debt. The effective rate, or the actual interest rate, charged for any bond issue is the result of the interaction between the firm's liquidity and equity value and the yield rates prevailing in the market/country area's major money market. In this case the money market area is New York City.

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INTEREST RATE— The interest rate for a ninety-day loan in the firm's home country money market, given the unit's credit rating.

UNIT SALES— A breakdown of the actual units sold through all channels available.

25" TV SALES— The number of 25-inch television sets sold in each country through both C-wholesalers and I-wholesalers.

27" TV SALES— The number of 27-inch television sets sold in each country through your company's channels of C-wholesalers and I-wholesalers.

CONTRACT SALES— The number of contract units sold by your company by set size and country. These can be contracted units manufactured for other firms in your industry or private-label sales to Home Electronics King.

MARKET SHARE— Your company's proportion of total units sold by product and market/country area. This statistic does not include contract sales of any type in the home country.

BACKORDERS— The number of back-ordered units for delivery next quarter. The delivery of these units takes precedence over the delivery of newly generated sales, but is of lower priority than shipments to other country units or contract sales.

LOST SALES— The number of units of sales lost during the quarter. These lost sales are the result of your firm stocking-out and a number of your wholesalers refusing to accept your back-order offer. In any given quarter your firm's total actual sales could have been the sum of its units sold, back-orders, and lost sales.

PRODUCTION— The number of units your company's factory actually produced by product and shift. Two shifts are available, with overtime operations available as a 25 percent extension of each plant's second shift.

LINE SUPERVISORS— The number of supervisors or foremen assigned to each factory. These supervisors are distributed across the quarter's assembly lines and shifts.

WORKERS— The number of factory workers who actually appeared for work by shift and by products. The total number of workers who actually appear is a function of each country labor force's culturally biased inclinations or "work ethic" for the type of work and wages provided by your firm, their health, the number of legal holidays in force as well as the amount of training they have received, an appropriate level of line supervision and the maintenance of the equipment they must use.

HOURS DELIVERED— The number of worker labor hours actually delivered by shift and by products. This amount is circumscribed by the availability of raw materials for products scheduled for production, the amount of training and supervision workers have received in previous quarters, equipment maintenance budgets, and your work crew's "work ethic." It is on this amount of hours, given the prevailing wage rates in your market/ country area, that your factory's wage bill is calculated.

WARRANTY WORK— The number of units upon which warranty work was performed by your firm's distribution centers and/or factories. The amount of warranty work required is a function of the various types of quality control programs conducted during the quarter.

GOODS IN TRANSIT— The number of units in shipment by product to any non-home country operation via surface transportation. These goods take one quarter to arrive at their destination point. While in transit they remain on the sending unit's balance sheet. Upon their arrival the following quarter, the receiving unit's finished goods inventory is updated by the shipped-in amount. Its finished goods inventory account on its balance sheet will reflect the entire value of the shipment, whereas its cash account will be debited by this same value. The sending unit's cash account will be credited with the transfer price, and its finished goods inventory account will be debited by the same amount. Because private-label sales can only be made to a domestic retailer, shipments to them are not by air express. Contract sales, because they are negotiated far in advance, are shipped by surface transportation and always appear as goods in transit for one quarter.

FINISHED GOODS INVENTORY— The total number of products held in temporary storage in your factories or distribution centers. All private-label TVs are shipped directly to the contracting retailer and therefore do not enter your firm's finished goods inventory.

UNIT COST— The average unit cost of your company's products and any private-label TVs you have made. The cost reported here is the weighted average of older units in inventory and those units possibly added in the current quarter.

QUALITY INDEX— An indication of the physical quality of the products produced in the operating quarter or sold via contract sales. Given the grades of subassemblies available to your company, the effective range of this index runs from 1.0 to 10.0, with a 5.0 indicating products of minimum quality, a 7.5 indicating an above average level of quality, and a 10.0 associated with the highest-quality products. For successful contract/private branding sales, the product's quality index must meet or exceed the quality grade contracted. For products made under license to other firms in your industry, you must produce your units at or above the quality index level specified in the contract. If this level is not attained during the contract's production quarter, the contract order is cancelled by the contracting firm and the sets are returned to your finished goods inventory for possible sale during the current quarter.

SUBASSEMBLY INVENTORY— The number of subassemblies available for next quarter's production by sub-assembly group and grade. Both groups of subassemblies are required to complete a television set, and these subassemblies can be purchased in three different quality grades. If your plant runs out of any grade or group during the quarter production stops immediately.

PLANT CONFIGURATION— The mixture of assembly line-attended production methods, as possibly augmented by automatons of two levels of self-control and technical complexity. This mixture determines the engineering-based productivity of your firm's factories. The amount of production hours generated by the combination of workers and automatons is reported as total labor hours, which can be distributed among your products, given their assembly-labor-hour requirements. Base capacity is reported in the total number of workers that can staff each eight-hour shift. Automatons are reported in the number of Auto 1s and Auto2s installed in each factory.

NEW CAPACITY IN PROGRESS— The incremental changes being made in your plant-operating capabilities through capacity expansions, new plant construction, or automaton purchases or transfers. The value reported is shown for only the first quarter of the capacity expansion or purchase.

PRODUCT DISTRIBUTION FROM/TO— A statement of the products actually shipped from and to various country units in the decision quarter. The number of units shipped may not equal the amounts you planned due to a number of factors, such as running out of raw materials, not scheduling enough line workers, or having equipment breakdowns. If a production shortfall occurs, your plant's logistics department will pro-rate the delivery of goods to the designated country units.

SHIPPING METHOD— A statement of how goods were shipped within and between countries. Regular nondomestic surface shipments take one quarter for delivery and are reported as "Goods In Transit." All within-area shipments are delivered to distribution centers during the same quarter for sale. Express air (ExAir) shipping allows the receipt of all nondomestic products to other countries in the same quarter. Any combination of surface or express air shipping method applies to all shipments during the quarter. The amounts shipped by method can differ from what was requested due to production shortfalls.

CAPACITY DISTRIBUTION— A restatement of how your company distributed intercompany transfers of base capacity and automatons by automaton type and destination. These entries do not summarize those associated with any intrafirm asset sales to others in the industry, as these are separate buying/selling operations conducted outside your firm's usual line of business.

MAINTENANCE EFFORT— An index of the suitability of the operating unit's maintenance budget. Values below 1.00 indicate an inadequate amount of maintenance money was budgeted. If this condition is chronic, the plant's equipment begins to break down, labor hour productivity falls, and worker absenteeism increases.

CASH— A statement of how you transferred cash between companies.

RETAINED EARNINGS FROM— A statement of how you asked any offshore operations to remit their own retained earnings to your home country's retained earnings account. Because of dividend taxes levied in each foreign country, the amount of retained earnings ultimately arriving at headquarters will be less than the stated amount.

YOUR NEXT STEPS

You have now been presented with the basic types of outputs The Global Business Game produces. At this point you may want to "dive in" and start making decisions. It is recommended, however, that you sit back, take a deep breath, and organize your company and your activities so you will be as successful as possible in the long-run. A number of experiential exercises are available to you at the game's dedicated Website that can help you at this time. The following exercises can be found in your GBGPlayer package:

Personal-Goal and Group Norm Setting—Helps you and your teammates learn about each other's motivations and to set high performance norms for your management group.
Executive Evaluation—Creates a method by which you can rate the performance of your teammates at the game's midpoint and end point.
External Analysis—Helps your firm to understand the three types of environments within which you are conducting your business.
Internal Analysis—Creates an inventory of your firm's resources while determining which ones have long-term strategic value.
Strategic Intent and Mission—Provides a self-generated inventory of your company and team's assets and how you will use them to achieve your company's goals and mission.
Strategy Choice and Implementation—Has your company create its strategy based upon your management team's resources, capabilities, and core competencies.
Organization Structure/Descriptions—Results in a clear picture of your company's reporting relationships and the tasks each member will perform.

Your Game Administrator may assign some of them to you or you may wish to use them yourself.
Just as this chapter has dealt with the game's outputs, the next chapter will begin to deal with your inputs to the game. These entail the many decisions you will have to make if you are to run a successful company. Chapter 3 covers the simulation's marketing and marketing-logistics operations, and chapter 4 takes you through your company's factory operations. All this takes money, and that is covered in chapter 5, which details the game's financial and accounting operations. Chapter 6 will tell you how to interface with the game via the internet, and how to enter and retrieve your quarterly results. A number of decision-making aids and PowerPoint tutorials are also available to you in the GBGPlayer package so you should look there to see what you and your team could use.
Chapter 3
Marketing and Marketing Logistics

Your company's major revenues come from selling television sets delivered to wholesale customers through your distribution centers. These sets can be manufactured by yourself, or you can get them through contract sales from other firms in your industry. These television sets, regardless of how they are obtained, are then distributed through wholesaling operations that you either own or use in cooperation with independent wholesalers who sell related home-electronics items. Shipments to these wholesalers are recorded as "sales" from your company's distribution centers or factories. If you make any television sets for a retailer's private-label program, those units will be shipped FOB directly to the retailer's distribution center from the factory producing them. Your TV sets, along with those of your rivals, are then retailed, where they meet the challenges of the marketplace.
To be a successful marketer you must understand the details of the markets you have entered or may enter in the future, as well as how to handle the logistics of supplying your wholesalers and distribution centers with the products you want to sell. This chapter provides details regarding the markets and product/quality segments in which you can compete, the logistics of national and international product distribution, how preferential demand for your television sets can be accomplished, and how you can obtain proprietary information about your markets and marketing efforts.

DEMAND CREATION

The factors affecting the general demand for television sets and the seasonal demand factor associated with each country's market has already been presented in Chapter 1. Although your firm has little influence on each marketing area's macroeconomic and socioeconomic factors, it can influence the derived demand for its branded television sets in a number of ways. This can be done through (1) changes and improvements in product quality and features; (2) the relative size of your quarterly advertising budgets; (3) the amount of service you provide your wholesalers through the number of distribution centers and sales offices you have; (4) the total number of wholesalers handling your products; and (5) the number of Sales Representatives you have and the types of sales-incentive programs you use to motivate them.
Product quality and product features pertain to the physical properties of your products. These physical changes are obtained through (1) research and development expenditures, which may result in obtaining a patented improvement in your products; (2) the quality of the subassemblies you use in each television set you make; (3) the level of quality control you obtain through your company's quality control budgets; and (4) the reliabilities of the two types of automatons your company uses in its manufacturing process. While these efforts physically differentiate your products, they can also be differentiated in a psychological sense. This is done through the prices you charge for your TVs, the strength of your sales promotions, and the distribution channel support you apply.
Sales promotion efforts entail the relative size of the advertising programs you conduct in your various geographic markets for each product sold by TV set size, the magnitude of your sales force(s), and your sales force's quality and enthusiasm. Sales force quality is determined by the amount of money you spend on its training and development, and enthusiasm or zeal is largely determined by the amount of incentives you use to encourage the staff to pursue sales.
The effectiveness of your advertising program is determined by factors both within and outside your company's control. The controllable factor is the size of your advertising budget on a product-by-product basis. The factors you cannot control are the sizes of your competitors' advertising budgets and each nation's ability to read and respond to your print advertisements. This latter factor is indicated by each country's literacy and newspaper readership rates, presented in the national profiles in Chapter 1.
Channel support boosts your advertising programs, which tend to pull your products through the distribution channel, and the amount of service and delivery promptness you provide through the number of distribution centers you operate. The number of Sales Representatives you employ out of sales offices in each geographic market tends to push your products through each country's distribution channel. When adding new sales offices to those already in operation, your simulation will open the new office in the country's next largest city market. If you add more offices later, the simulation moves to the next largest city market. Accordingly, in the United States, your first sales office would be in New York City, the next office would be in Los Angeles, and the next would be in Chicago.
You can also control marketing channel operations by owning and conducting your own wholesale operations. If you do this, your firm must bear the risks and costs of the building and equipment leases associated with these company-owned wholesalers. On the other hand, you gain the dedicated efforts of this part of your wholesaling function.

PRODUCT PRICES AND BACK ORDERS

Many of your company's sales promotion activities are attempts to lessen the impact of raw prices on the demand for your products. To some degree you can do this, but product prices are still very important to your ultimate consumers. This is because your independent wholesalers want to stock the sets that are the easiest to sell, and low prices are very attractive to end-users. More important, manufacturer prices are multiplied as they go through the industry's distribution channels. Given the standard markups each channel participant expects to take, a relatively small change in the manufacturer's price is greatly magnified by the time it gets to the retail level. Over the years the various country markets’ wholesalers have come to accept what are normal wholesale prices. Exhibit 3.1 indicates the wholesale prices that have been in place in the six countries within which you might compete.
It has become standard practice to use catalogue or "list prices" in your industry. While these are each firm's official prices, they are subject to the market's supply and demand pressures. Thus they are never the actual prices charged for the sets being sold. All list prices are subject to trade discounts, volume incentives, and unit-based slotting allowances you negotiate with your wholesalers. The total value of these trade incentives is reflected in the difference between each firm's list prices and each product's actual price. The Global Industry Report lists each firm's list prices for the quarter. Actual prices are also reported, but this information has taken one quarter to collect and report accurately. Thus the "actual price" listed in The Global Industry Report is for the previous quarter's prices by company.
Each firm's Sales Representatives are paid their commissions on list prices rather than actual prices. This is because each product's final price is not under the direct control of your Sales Reps, although you are encouraging them to conclude all sales as close to your list price as possible.
If your Sales Reps write orders for more units than can be supplied by your firm that quarter, a back order condition will occur. This filling of the back orders receives priority treatment in the following quarter, with these back orders taking a higher delivery priority than that given to the quarter's new orders. If your firm lowers a product's actual price between quarters, any back orders are filled at the lower price. The commission paid on these sales, still, will be on the list price that initially created the sale.

PRODUCT SEGMENTS

Depending on the game's complexity, you may sell both models of your television sets in every country market available to you. Additionally, within your home country you can also dedicate some of your factory's capacity to manufacture sets for private label or house-brand sales. Each of your nationally branded sets can be targeted for the industry's various price and quality segments through (1) the quality control measures taken by your company, (2) the degree of reliability fostered by the amount of automaticity you employed in your manufacturing processes, and (3) the quality mix of the subassembly grades found in each television set. For private-brand sales, announcements of bid requests by Home Electronics King will appear quarterly on the simulation's bulletin board within The Global Industry Report. To win the quarter's bid your firm must be the lowest bidder, offer sets that are at or above the product quality grade index announced in the retailer's request while setting a price that allows the retailer a "fair" profit.
Regarding your company's branded products, it appears to your customers that the industry's best sets are made from the finest materials available. The product's finish has a custom-made appearance, and the product experiences very few failures or warranty repairs and therefore is considered very reliable. In the simulation products in this league, use the highest-grade subassemblies and use highly automated and closely supervised manufacturing processes. Products in this category have consistently earned "best quality" ratings or quality indexes in the 9.1 to 10.00 range in various consumer magazines, such as Consumer Reports.
Minimum quality television sets are those with quality indexes ranging from 4.00 to 6.50. These products have fewer features that could malfunction, use less sophisticated circuitry and employ a finished appearance that is pleasing but not highly crafted. These sets have often earned "best value" ratings in various consumers' digests and electronics getting retailers to stock their products once their customers started complaining about them. Exhibit 3.2 summarizes the characteristics of the product grades found for the television sets you can manufacture and/or sell.
When selling your sets in the different countries found in The Global Business Game, you will find that, as in the real world, each country is in a different life-cycle stage of its acceptance of these products. Thus these products possess different meanings for different populations. You can capitalize on these usage differences by differentiating the quality, features, and prices of your offerings from country to country. For example, in the United States the proportion of customers buying new, basic-feature 25-inch sets may be comparatively low. In Thailand, such a set would be an important segment where low incomes prohibit the purchase of larger, higher quality sets. In the United States, these would be products for mass market or discount stores while in the low income countries of Mexico, Spain and Thailand they might be the only sets that could be purchased.. In such high per/capita income countries as Germany and Japan, high quality sets are demanded and can be afforded.
Your firm's retailers have traditionally given you much support. This is because your products have had generally high quality levels. Those companies in your industry that have manufactured sets of lower quality have had

Exhibit 3.2
Product Grades and Market Segments
|Quality Index |Market Segment |Product Characteristics and Retailer Service Level |
|9.0-10.0 |Prestige, high-price, high |Highest grade materials, custom-crafted appearance, high reliability, high |
| |quality segment |retail sales staff support |
|7.5-8.9 |Mass market, medium-quality segment |Average grade materials, utilitarian finish, moderate dealer sales staff |
| | |support |
|4.5-7.4 |Low-price, promotional, discount |Low-grade materials, basic features, low service support |
| |retailer segment | |

Difficulty getting retailers to stock their products once their customers started to complain about them. Exhibit 3.2 summarized the characteristics of the product grades found for the television sets you can manufacture and/or sell.
When selling yours sets in the different countries in The Global Business Game, you will find each country is in a different life-cycle of its acceptance of these products. You can capitalize on these usage differences by differentiating the quality, features, and prices of your offerings from country to country. For example, in the United States the proportion of customers buying new, basic-featured 25-inch sets is comparatively low. In Thailand, such a set may be considered very desirable. For the more full-featured 27-inch sets, the demand may be higher in Germany than in the United States, due to the former country's greater interest in highly technical products. Alternatively, the typical German home is smaller, so a very reliable 25-inch set might be more desirable than a larger, less reliable 27-inch set.
Although it may be a good idea to target your offerings to certain market segments, the frequent switching from segment to segment on your company's part can lead to customer confusion. Some firms have found it best to stay in a particular price/feature/quality segment for several periods before attempting to upgrade or downgrade their television sets to match a segment's particular needs.

DISTRIBUTION CENTERS AND SALES OFFICES

In distributing your products, each factory initially operates as its own warehouse and sales office. Accordingly, if your company has a factory in a particular country, your firm automatically possesses one distribution center and one sales office. It is your company's policy to include a Sales Office as part of a Distribution Center's operation. Accordingly every Distribution Center automatically has one Sales Office. Should you wish to distribute products in a country where you do not have a factory, or you wish to have better coverage of a particular country market, your firm can lease warehousing space and sales offices according to the schedule in Exhibit 3.3.
If your firm wants to improve the service level it provides its wholesalers, and therefore obtain long-term goodwill and customer reorders, additional sales offices, which may or may not be attached to any company-owned wholesalers you may have, can be leased to accomplish these ends. Over the simulation's duration you can increase or decrease the number of sales offices operated within each country, as well as the number of distribution centers. The lease-cancellation penalty is the same regardless of the remaining number of quarters left on the lease being cancelled.
When choosing the number of sales offices you operate, as well as the number of Sales Representatives you want to assign to them, it would be wise to consider the geographic expanses and population densities involved in the countries within which you conduct business. You can assume that diminishing marginal returns on additional sales offices, distribution centers, and Sales Representatives will begin immediately after the leasing of your first additional sales office, distribution center, Sales Representative, or company-owned wholesaler. This is because your company has chosen a marketing policy of initially establishing itself in each country's most populous city and then moving sequentially to the next largest population area.
With more distribution centers, your firm obtains faster delivery times to its wholesalers within its particular geographic area as well as minimizing the shipping charges retailers must pay when getting your television sets from your distribution centers. This higher level of accessibility improves the service level you provide your wholesalers. And you can expect wholesalers to be more loyal to those companies that provide them with better service.
When determining the shipping charges your firm encounters during the business quarter to get your television sets to distribution centers, remember that your factory counts as one distribution center. Thus this factory-related distribution center does not require a shipping charge, as it simply ships products held temporarily in storage as they come off the assembly line. Shipping charges are incurred for getting goods to all your other domestic centers. These charges are spread equally over the number of distribution centers you have in operation, minus one for the factory's distribution operation. The following example demonstrates an activity that results in a $691,666 shipping charge appearing on an American-based country operation's income statement.

415,000 units shipped within the United States
5 distribution centers
1 factory distribution operation
69,167 units shipped per distribution operation (415,000/6)
345,833 units shipped to distribution centers
69,167 units distributed by factory distribution operation
US$691,666 shipping charges incurred (345,833 x $2.00)

SHIPPING METHODS

Under normal conditions you will probably be making your shipments by regular surface transportation to your distribution centers. This is an inexpensive and relatively reliable method for domestic operations. For overseas sales, however, it is very slow. For operations between the United States and Germany, for instance, between loading your TVs on rail cars in Erie, Pennsylvania, and delivering them to the port in Newark, New Jersey, then shipping them across the Atlantic Ocean to the German port of Hamburg for rail shipping within Germany itself, a number of months will have elapsed. Because all sales, except those that are made either under contract or for private-label purposes, are made through your firm's distribution centers, all orders must be filled from these centers. Accordingly, they must be fully stocked at the beginning of the quarter, or experience enough inboard shipments during the quarter to allow them to make all their sales, thereby avoiding back orders and causing possible customer dissatisfaction. You can assume, unless express air shipping methods are employed, that all shipments within a country can be completed during the quarter and that shipments between countries or continents take one quarter to complete.
Through careful planning, you can save your firm money by using only regular surface shipping. There may be occasions, however, when you have misplanned, have experienced greater sales during the previous quarter than anticipated, or merely would like to speed up your firm's inventory cycle. If this is the case, you can service any of your distribution centers by using express air (ExAir) shipments.
As shown in Exhibit 3.4, the ExAir rate is about three times higher than the surface rate. Your firm, however, may feel this higher cost is compensated for because you will not have dissatisfied retailers seeking other wholesale suppliers in future quarters. When making your quarter's decision, you must indicate the total number of units that are to be shipped to each country by set size. If both shipping methods are used during the quarter, all sets will be shipped proportionally to the total number of sets being shipped surface and air express. As an example the following product distribution would result in 2,500 25-inch TVs surface-shipped to Mexico and 1,500 air-expressed to the same country. Spain would receive 938 25-inch sets via surface and 562 by air express. Respective 27-inch sets' surface and ExAir shipments to Mexico would be 1,250 and 750 units, while Japan's would be 312 and 188 units.

The shipping factory's transportation manager will attempt to ship all orders as directed. The manager's task is simple and straight-forward when there are enough finished products to fill all shipping requests such as dedicating units to Home Electronics King bids, Interfirm contractual obligations and Intrafirm transfers to other Country Units. Problems arise, however, if the total number of sets to be shipped is more than are available.

|Product Distribution |Units |
|25" TV Distribution to Mexico | 4,000 |
|25" TV Distribution to Spain | 1,500 |
|27" TV Distribution to Mexico | 2,000 |
|27" TV Distribution to Japan | 500 |
|Surface Shipping | 5,000 |
|Express Air Shipping | 3,000 |

Your company has decided, for the maintenance of good customer and marketing channel relations, that customer groups will be serviced on a priority basis if a "ship short" situation arises. Thus your transportation manager will first service any Home Electronics King bids, will next attempt to fill all Contract Sale obligations and then will then begin to ship all remaining sets to your firm's own Country Units. If a mixture of Surface and ExAir shipping methods has been asked for all ExAir shipments will be filled first under the assumption that ExAir was employed because of its ability to return revenues more quickly. When dealing at the between-Country Unit level the order in which the three Economic Zones are supplied depends on the location of the shipping country's Finished Goods. For shippers within the NAFTA countries the shipping order is NAFTA, EU and APEC. For EU-based countries the order is EU, NAFTA and then APEC. If the shipper resides in any of the APEC countries the order is APEC, EU followed by NAFTA. These shipping orders were based on the idea that shipping distances should be minimized thereby lowering overall shipping costs. To further maximize revenues, while minimizing shipping costs within each zone, the larger of the two countries within each zone will be serviced first.
Under the shipping policies governing your transportation manager's decisions sales within the shipping Country Unit are sacrificed in order to satisfy all shipping requests as much as possible. Thus, under extreme Finished Goods shortfall conditions, the shipping Country Unit may experience few, if any, domestic sales.

INVENTORY HANDLING CHARGES

Your company's products are very durable so they do not deteriorate under normal warehousing conditions. Because of this, the direct inventory charges for your finished goods are fairly low on a per unit basis. Handling charges, however, are somewhat high for your company's television sets because of their fragile components. The handling charges for your 27-inch set are slightly higher than for your 25-inch sets, as your larger sets are more complex and have more parts that can be broken. No handling and inventory charges are due on contract or private-label sets, as these are shipped directly to the recipient's own facilities.
The inventory and product handling costs involved are presented in Exhibit 3.5. They will appear as part of the inventory charges on your company's income statement and are incurred on all units processed through a Distribution Center during the quarter.

DISTRIBUTION CENTER AND SALES OFFICE EXPENSES

The administrative charges and general overhead and operational expenses associated with each distribution center and sales office represent fairly fixed costs regardless whether they operate out of your factories or are leased. Because of this fixed-cost nature, there are certain economies of scale can be realized in your company's logistics function. Exhibit 3.6 itemizes the charges linked to each country and its operation. These charges include lease payments, heat, light and utilities, and front-office salaries.

INDEPENDENT WHOLESALE OPERATIONS

Your company, as is the industry's norm, has used independent wholesalers in the past to service its customers. These wholesalers handle a large number of products from other manufacturers, but none of these products competes directly with yours. In this regard each wholesaler is totally dedicated to taking orders for your television sets from its retail customers, as well as engaging in a modest amount of its own wholesale advertising.
Because they are independent wholesalers with years of experience in the electronic appliance business, they require minimal attention from your company's Sales Representatives. Thus the cost of servicing or supporting each independent wholesaler is rather low, as shown by country in Exhibit 3.7. An additional benefit in using independent wholesalers lies in the fact that they lighten the load on your Sales Representatives and allow them to work more directly with retailers to promote the sale of your products.

COMPANY-OWNED WHOLESALE OPERATIONS

In your industry the use of independent wholesalers has been the standard practice for many years. However, each independent wholesaler sells a wide range of products and their attentions are naturally divided. Also, their natural loyalties are to themselves rather than to your company. This situation has begun to change. With the arrival of super stores and category killer and big box retail operations, the bargaining power between retailers and their wholesalers has shifted. With small, local wholesaling operations under threat, a number of home-electronics manufacturers have begun to create their own wholesale operations as well as attempting to countervail the bargaining power of these larger retailers. When you create your own wholesalers, you obtain their full-time dedication to your products while retaining for them the standard 40.0 percent markup on merchandise cost the independent wholesalers have needed in the past to cover their own expenses.
By creating your own wholesalers, however, your company has to bear the fixed-cost risks associated with leasing arrangements and certain semi-variable personnel costs. Independent wholesalers are almost free, as they require minimal attention by your company— although you must provide them with the markups they need so they can make a reasonable profit.
Should you wish to create a number of your own wholesaling operations, with each one possessing its own sales office, your company would be subject to the schedule presented in Exhibit 3.8. This covers the quarterly salaries of personnel associated with each operation, the initial start-up costs, overhead and lease costs, and any shut-down costs should you want to cease a wholesaling operation and eliminate its quarterly salaries. The salaries presented in this exhibit do not include those of the Sales Representatives assigned to the market territory.
The amount of business each company-owned wholesaler does is based on the mix of independent and company-owned wholesalers your firm uses. It is assumed you would place your own wholesalers in each country market's most important local markets, while using independent wholesalers to fill out the rest of that country's market coverage.
On this basis your first company-owned wholesaler would contribute the most to your country's sales volume, with each succeeding company-owned wholesaler contributing less and less to total sales. When deciding on the optimum mix between independent and company-owned wholesale operations, remember that your company's total sales is partially determined by the total number of wholesalers you have selling your products.
When calculating the margins your company receives on television sets sold by your own wholesalers, you can assume that your revenue on each sale would be your manufacturer's actual price plus the standard 40.0 percent wholesaler's markup on cost. As an example, assume that the actual price to independent wholesalers of your 25-inch sets is $105.00 per unit. That wholesaler would mark the sets up to $147.00 for sale to retailers. If those sets were sold to the same retailers by your company-owned wholesaler, the independent wholesaler's markup would be your own. In this case, this amounts to $42.00 a unit. This markup recovery, however, is not free. You must now bear the costs of running a wholesale operation, which means you would be spending much more to get an equal amount of geographic coverage of your country's market.

INTRACOMPANY TRANSFERS

Your company can produce products in one area and sell them in another. You can also ship finished goods between countries for distribution from your regional distribution centers. In the past, your firm has set its intracompany transfer price by marking up its unit production costs by 10.0 percent. This markup covers the producing factory's overhead expenses, with the receiving country/market absorbing the product's transportation costs.
When making intracompany shipments, the sending country's factory ships the products to distribution centers in the designated country market before it makes product shipments to its own domestic distribution center(s). Therefore, foreign transfers have a priority over shipments to domestic distribution center(s) and the filling of any back orders obtained in the previous quarter. When shipments are made, the sending factory's inventory valuation is decreased by the standard transfer price, and its cash account is increased by the same amount. The receiving country's inventory valuation is increased by this same transfer price, and its cash account is decreased by this valuation plus the associated shipping charges that are borne by the receiving country unit. These shipping charges will also appear on the receiving country's income statement for the quarter.
All monetary transactions are done at the exchange rates existing between countries during the quarter the transfers occur— except for transfers of products between Spain and Germany, whose rates are fixed under the new, euro-based monetary system. When making shipments to a country's distribution center either from your company's factories or to other distribution centers, you can assume that your products will be optimally disbursed among all centers operating within each country.

SALES FORCE SIZE

As your firm enters new sales territories, or as you experience personnel turnovers, you will have to take steps to maintain or increase the number of Sales Representatives you have in the field. You can do this through two methods. One method is to train new people for sales openings that may eventually occur. The second method is to hire experienced Sales Representatives away from other firms.
It is important that you maintain a steady, experienced, and well-trained sales force. The best method you have for doing this is to pay competitive salaries. When you do, Sales Reps do not seek employment with other firms. Despite any outstanding salaries you may pay, however, it is quite likely you will always experience Sales Rep "quits." This is because they want to move to other cities, go to other companies just for a change of scenery, or their spouses made career moves. Your objective, then, is to guard against a higher number of quits than is normal for firms with sales staffs of your size.
If your company wants to increase its sales force, the least expensive way is to plan ahead and train new hires in your sales offices. When they are in training, your trainees are paid the salaries that apply to them in Exhibit 3.9 by county. All trainees must be held in their training programs for at least one quarter to insure that they have been adequately trained. Thereafter they can be moved into the field at the costs shown in the same exhibit. Once in the field they earn the same base salaries and are subject to the same commission schedules that apply to the rest of your sales staff.
Training new people in advance of your current needs is a relatively low-cost option. You may wish, however, to move more quickly. This is done by hiring experienced Sales Representatives. If you do this, your company uses the services of an outside personnel search firm. You pay the recruiting fee, as well as the moving expenses incurred by each newly hired Sales Rep, in the quarter she or he joins your company.
Given the market's fluctuations, it is entirely possible you may place too many people in the field, or have put too many in training. To make a downward adjustment in your sales staff, you can dismiss or fire them from their positions. There are no costs attached to firing trainees, as they have not yet attained a "career" status in your company. The firing of veteran Sales Representatives is another matter. Out of appreciation for their past efforts, your firm's policy has been to provide each dismissed Sales Rep with a severance package that combines money with outplacement services. The costs associated with the implementation of this policy in each country are also presented in Exhibit 3.9.
When you submit your sales force decisions each quarter, the simulation will comply with any requests you make. Thus if your sales force initially had ten sales reps in the United States and your entry for the decision quarter was eight sales reps, the simulation would assume you wanted to fire two sales representatives. This action would be taken and a charge of $12,000 would be added to your quarter's sales force expenses. The dismissal of trainees operates in the same fashion. If you were training three sales reps in the previous quarter and your entry for this quarter was one trainee with none being moved into the field, the simulation would remove two trainees from your company's sales office training program.
The simulation will also operate in an intelligent fashion regarding the use of the sales personnel available. Because of language barriers, however, sales reps cannot be moved between countries. As an example of how the simulation handles the deployment of sales representatives, if your past quarter's sales reps totaled eleven in Germany, and you wanted to have three representatives added to the German sales force while already having two trainees in your sales offices, the simulation would automatically move the two trainees into the field while hiring one experienced sales rep off the street. The associated charges of €50,900 would be added to your country unit's sales force expense for the decision quarter.

SALES REPRESENTATIVES AND SALES-INCENTIVE PROGRAMS

The quality of your company's selling force is important at the local sales office level. This quality level is related to the size of your company's training and development budget within each country and the number of sales representatives you have. Within each country, a minimal base salary appears to be appropriate given local wage and salary rates. To this base salary your company may want to apply a per unit commission on each of your company's branded sets. On your firm's decision form, this per unit commission is stated as a percent of the firm's list price for each size of television set you are selling. No commissions are paid on contract sales, as they are negotiated by a separate office in your home country's headquarters.
Your sales force's quality is also a function of its turnover rate. As your sales force's turnover increases, its overall effectiveness is diminished. This is because customer relationships are broken and new sales representatives must establish their credentials with wholesalers. As the simulation progresses you will be informed of the loss of sales representatives through messages found in your company's Operations Report. Experienced sales representatives are immediately paid the base salary you have established in the countries in which they were hired and assigned.

IMPORT TARIFFS, TRADING COMMUNITIES, AND TRADING ZONES

Various countries, either by themselves or jointly through such trading communities as NAFTA, EU, or APEC, have used tariff policies over the years. These policies are intended to stimulate trade within particular areas, provide revenues for the governments affected, and/or protect domestic manufacturers and their workers' jobs from foreign competition. Through tariff actions a country makes foreign products more expensive for domestic consumption, thereby making the domestically produced product comparatively less expensive— regardless of its intrinsic quality or value. Tariff actions, however, often cause foreign governments to impose retaliatory tariffs.
These aspects associated with tariff policy can be seen in the rate schedules shown in Exhibits 3.10 and 3.11. The first of these two exhibits displays the tariff rates set by each trading zone. For the purposes of this business game, it is assumed that NAFTA, EU, and APEC are in effect in a simplified fashion. Within-zone tariffs are very low or nonexistent, but fairly restrictive tariffs have been applied to all products entering from countries outside each trading zone. These trading zone tariffs are added to each country's own tariff, if one exists. The second exhibit shows the tariff rates each country has established for itself against the television sets made in other countries both inside and outside their own trading zones.
As an example of how tariffs operate, if an American firm wanted to sell its television sets to customers in Japan, it would have to pay a 7.0 percent trading zone tariff and a 1.6 percent country tariff, for a total tariff charge of 8.6 percent on the product's actual selling price, but not its list price. As a general rule, the United States has been relatively open to foreign competition, whereas many Asian countries have been relatively closed and protective. The tariff rates in these exhibits will be in effect at the beginning of your simulation, but changes in the world's political and economic situation during the simulation may cause various countries to alter their tariff policies. Should your firm engage in any intrafirm product transfers, the tariffs shown in Exhibits 3.10 and 3.11 will be assessed on the transfer price that was established and will be charged to the receiving country unit. It is assumed that the country's tariff charge is passed on to consumers through the nation's distribution channels, thereby putting foreign-made products at a competitive price disadvantage. The tariffs your firm collects must be rebated each quarter to the country unit's federal government, as you are merely acting as its tax collector. In the simulation these tariffs will automatically be deducted from the country unit's cash flow operation for the quarter.

RESEARCH AND DEVELOPMENT

Although the television industry is in its mature stage, new developments are always occurring in electronics technology. Thus it might be a good idea to engage in a steady program of research. As your firm engages in these efforts, it might even make a discovery that results in an improvement or a modest innovation that is patentable and has commercial value. This patent, when applied to your television sets, either enhances the set's picture quality or its sound system, or provides a new, highly desirable convenience feature. Thus your firm will obtain a modest competitive advantage, which applies automatically to all TV sets you produce. The strength of this advantage will be greatest during the first quarter of its use, although residual strength will last for almost a year. After about one year your innovation will be effectively duplicated by others in your industry.
When your R&D monies have produced a patentable innovation, you will receive confidential written notification of this fact as part of your firm's Operations Report. Products improved by this innovation will go on sale in the following quarter. Any existing goods in the current quarter's finished goods inventory are retrofitted with the patented feature as part of your company's existing R&D budget.
Getting a patented product improvement requires a number of quarters of R&D projects. Your company should first determine an R&D budget policy and then engage in a steady implementation of that policy. Only through steady budgets will your firm obtain a patentable feature. There is no limit to the number of patents your firm can receive, as any number of research projects can be in operation simultaneously within your firm.

PATENTS AND CROSS-LICENSING AGREEMENTS

Your firm can also purchase from another firm one of its patented features. You can also offer your most recent patented feature to other companies in your industry. To accomplish either of these actions, you must notify the Game Administrator that you have a patented feature you would like to buy or sell and at what price. Your Game Administrator will cause the simulation to place an announcement of your offer on The Global Industry Report's bulletin board.
To complete the purchase or sale of a patented feature, both parties must use the "Patent Licensing Sale and Patent Transfer Agreement" form found in Appendix B of this manual. This form must be used for each patent-licensing sale or transfer. It should be (1) properly signed and approved by the Game Administrator; (2) signed by both parties to the transaction; and (3) submitted with your decision set for the quarter in which the transaction is to occur. The competitive advantage time frame cited for the firm that created the patented innovation will immediately accrue to the firm obtaining the patent for its own use.

INTERCOMPANY CONTRACTS AND JOINT-LICENSING VENTURES

In addition to being able to transfer your company's patents or buy patents from others, you can engage in joint-licensing ventures. In conducting these ventures, one firm contracts to provide another firm an agreed-upon number of units of product at a negotiated price and quality level. The contracted units are shipped to the purchaser's distribution center at the shipping rate applicable to the geographic area within which the units were fabricated with the Surface shipping costs paid by the purchasing firm.
The sets contracted for will be shipped by Surface and only if the product quality level specified in the contract is matched or exceeded by the contractee. Acceptable contracted units take priority over shipments and sales the selling company could obtain from its own distribution center. If the contracted TVs do not meet the quality level specified in the contract, they will not be shipped; and instead become part of the contractee's finished goods inventory for sale the next period.
The process by which your firm obtains such a joint-venture partner is initiated by submitting the "Subcontracting Agreement" form found in this manual's Appendix D to your Game Administrator. Your company's desired action will be posted the following quarter. All asset sale items can be found on your GBGPlayer's Tool Bar under Decision Set/Asset Sales. Should you obtain a potential joint-venture partner, the product, quality grade, and contract length of that venture should be certified and accepted by the Game Administrator and both joint-venture parties. After receiving the properly signed instruments, your Game Administrator will cause the contract to be implemented for the quarter specified in the joint-venture contract bid. Both the selling and purchasing companies will be informed of the transaction's completion via an Operations Report bulletin. The selling firm completes the sale's product contractual requirements by dedicating the required number of units under "Contracted Units" found on GBGPlayers' Logistics page.

MARKET RESEARCH

Your firm can elect to conduct market research as an aid to better understanding how your industry's markets operate. Although you would probably never be able to answer every question you might have about the markets in this game before making future decisions, a modest amount of market research can be conducted for you by the Merlin Group, Ltd. This group is a fairly new market research firm headquartered in San Jose, California. The types of research studies the Merlin Group will conduct for you, along with their fees, are presented in Exhibit 3.12. Information is available on the unit sales results of your competitors by country, the relative size of each market segment by country, and the perceived quality levels of the products you are facing in the different geographic markets. research firm. It also must receive its payments in American dollars. To obtain its services, your company should pick the items it wants to have researched by checking the appropriate question number(s) from those listed on your GBGPlayer tool bar under Decision Set/Merlin Group Report Requests. The Merlin Group's fees will automatically be charged to your current quarter's home country miscellaneous expense account.

PRIVATE-LABEL BIDS

One of your home country's major home electronics chains has run a private branding program of its own for a number of years. The "Kingston" brand has been very successful for the Home Electronics King chain, and it has been very competitive with the privately labeled television sets and home appliances sold by Sears and K-Mart.
Your game's Global Industry Report bulletin board will periodically list bid requests made by the Home Electronics King chain. It will cite the number of sets they want for delivery the next quarter as well as the quality grade desired. If your firm wishes to bid for this business you must (1) enter your contract price offer in the appropriate "TV Contract Bid" spaces on the Decision Set/Marketing drop-down menu in GBGPlayer, and (2) dedicate the required number of units on the "Logistics" page under "TV Contract Distribution". Home Electronics King operates only in your home country market, and the chain pays for all shipping and handling charges associated with the bid. All sets are shipped from your factory and completely bypass any distribution centers or wholesalers you use in your normal distribution channel.
The winning bid will go to the firm in your industry with the lowest price who makes sets at a quality grade level that meets or exceeds that specified in the bid request. To make a reasonable profit on its privately labeled sets, Home Electronics King expects to pay a price that is significantly below what it normally has to pay its wholesale suppliers. If the price you are asking is too high for Home Electronics King's profit goals, it will refuse your offer because of these considerations. You will be notified of this decision via an announcement on your operations report.
Your firm must also guarantee the delivery of any "won" bids. If your firm has the lowest acceptable price, but fails to deliver or dedicate for shipment under "Contract Shipping" the number of sets demanded, your winning bid is cancelled and all units intended for Home Electronics King are returned to your firm's finished goods inventory for sale during the quarter. These cancelled sets cannot be reworked or retrofitted to change their current quality grade level.

THE MARKETING/PRODUCTION INTERFACE

Your company has now familiarized itself with how products are sold, distributed, and marketed in The Global Business Game. Your next task is to learn how to produce as economically and as reliably as possible all the products your sales representatives can sell, given the demand you have created for your products through your sales promotion efforts. It will be very difficult for you to obtain a perfect match between what can be sold and what can be produced and distributed, but you should try to come as close as possible to this ideal. A PowerPoint tutorial has been prepared for your use should you wish to review your company's distribution system. It is labeled "DistributionSystem" and is part of your GBGPlayer package.
For your factory or factories to run as smoothly as possible, your firm's marketers must produce fairly accurate sales forecasts while also delivering product to customers. Information obtained from the Merlin Group may be useful in providing plant management with sales estimates so they can determine how much factory capacity will be needed in the long term and how much should be produced in the short term, given temporary capacity constraints. At this time, it might be wise to develop forecasting methods that will help you to coordinate these efforts. Regardless of what you do, plant operations and marketing go hand in hand, and you must ensure this will be a prosperous collaboration.
Chapter 4
Manufacturing Operations

Your company's manufacturing function lies at the core of your operations because your company produces television sets for sale to the consumer market. In Chapter 3, which dealt with marketing and distribution, the emphasis was on selling products and making sure they were the right products at the right price at the right time. This was a market-based or externally derived view of how a firm succeeds in the long term. In this chapter, the focus is an internal one, and the stress is on making those television sets that have sold well in the past as efficiently as possible and delivering them for distribution in adequate quantities.
Based on your company founders' design expertise and their engineering bias, your firm has attempted to obtain a strategic advantage by designing TV sets that have creative circuitry and assembling them under strict quality control standards. Rather than designing and manufacturing a television set's basic components or subassemblies, your company has put its resources into the creative application of subassemblies made by others. Given the television industry's relative maturity, which has generated a number of parts suppliers with excess capacity, and the high cost of setting up and running a subassembly factory, your firm has decided to let others produce what are near commodities within the electronics industry.
All current manufacturing operations are conducted in your home country of the United States in a wholly owned facility in Erie, Pennsylvania. The site, which was purchased for $200,000, has excellent rail and expressway connections, with additional land space readily available for plant expansions, if desired. The local labor supply is adequate for both your current and future needs, and you have obtained favorable long-term tax waivers and abatements from your local government to keep you in the area as a major employer. Your firm, nonetheless, is subject to the relatively high labor rates charged in this highly industrialized and unionized part of the country. As a hedge against these high labor rates, your company has recently purchased three automated assemblers, or automatons. These automatons are highly productive because they operate at relatively high quality control levels and require little maintenance and supervision. More important, they do not require wages and fringe benefits to make them productive, and they also increase a plant's base productivity without requiring additional space.
Despite the attractions of your Erie, Pennsylvania, site, it is also a long distance from most of your major city markets in the United States. It is even farther from your firm's potential overseas markets. Given the global and changing nature of your industry, a number of overseas manufacturing locations may be available to you if your Game Administrator has structured your game in that fashion. If that option is not available to you, wage/cost pressures alone on your Pennsylvania plant may require you to change how you assemble your television sets. Considering either foreign or domestic perspectives, your company may have to make a number of important decisions in this regard.

THE PRODUCTION PROCESS

Your company uses a standard method for manufacturing its sets. This is the traditional hand-tended assembly line, throughput method used in high-volume, mass-assembly factories found throughout the world. Your Operations Report indicates how your plant has been configured. This is the one you have inherited from your company's previous management group.
Under the manufacturing system being used you have Line Workers who perform their tasks within designated work stations. One side of the assembly line usually works on 25-inch sets coming down its side of the flat assembly belt. If your company also makes 27-inch sets, these sets usually come down the belt's other side. If you devote your plant exclusively to either one of these two basic sets, the spaces on both sides of the assembly line would be occupied by appropriately trained personnel. Your only constraint is that both sets cannot be simultaneously manufactured on the same side of the plant's assembly line although they can be sequentially manufactured in same-size batches.
Your workers apply components to the television chassis coming down the line from two groups of subassemblies taken from supply bins placed behind them. The subassemblies involve each set's audio and visual circuits as well as each unit's cabinetry. 25-inch sets are more easily assembled than are 27-inch sets, as they can be more closely spaced on the belt because they have fewer components that have to be placed inside the chassis.
Three automatons are currently straddling your assembly belt if you are starting the game as an American-based company. If your Game Administrator has changed the game's Home Country your actual plant configuration is cited on your Operations Report. With only three Automatons a facility is operating at a relatively low level of automaticity, as it is employing two Auto1s and one Auto2. These mechanical workers, or robots, operate in humanlike fashion by sensing, through the use of bar codes and transponders, the components that must be installed in the TV chassis when it arrives at its station. As a manufacturing technology, automatons possess a degree of intelligence, require no supervision, and perform minimal maintenance operations and quality-control tests on themselves and their work. In many instances they have replaced various operations performed by workers on traditional, hand-tended assembly lines.
More automatons can be added to your line, given your line's base capacity. This base capacity is determined by the line's length. Automatons can be placed anywhere along the line, as your Auto1s and Auto2s can be programmed to perform a wide range of functions. When you are adding automatons to your assembly line, you are basically packing your given-size line with more productive nonhuman workers, thereby increasing your factory's output without changing its absolute physical size.
As more automatons are used in your assembly process, fewer and fewer line workers are required to make the same number of television sets. The number of technicians needed to reprogram your automatons, however, increases. Exhibit 4.1 indicates the characteristics of these automatons and the number of higher-paid technicians needed to service them. Exhibit 4.2 displays the hourly automaton technician pay scales for each country in local currencies and U.S. dollars, assuming the exchange rates shown in this manual's sample Global Industry Report. These wage rates may change over time, given the different inflationary pressures existing in each country and the internal labor market for automaton technicians.
One technician can handle the needs of four Auto1s, but one technician can comfortably handle only three Auto2s. The Auto1s and Auto2s are progressively more flexible, with Auto2s having a higher quality-control standard and operating rate than Auto1s. When an automaton of either type is placed on an assembly line, it fills the space of two human work stations, one on each side of the line.
As a plant manager or production scheduler, your task is to use your factory's labor-hour capacity to make television sets for shipment to distribution centers, whether those labor hours are created by human labor or the artificial labor of automatons. Exhibit 4.3 shows the total number of labor hours it takes to make each of the two set sizes you can manufacture. Given your current plant's base capacity, its length allows 140 workers to be equally split on each side of the assembly line per shift. Without automatons, your factory could produce approximately 622 25-inch television sets each working day, or 3,110 per week. You could make 560 27-inch sets per shift per day. If you were to run two full shifts, your output would almost double. Under your company's overtime option, which can run as a 25.0 percent extension of your plant's second shift, your total output could be 1,400 25-inch sets, or 1,260 27-inch sets a day. This assumes that all workers scheduled for work actually appear for work.
Your current plant, if it is an American one, has three Automatons. Although the space required for your automatons eliminates six laborers, the automatons increase your factory's net productivity. As currently configured, your plant uses 134 workers, two Auto1s, and one Auto2. This configuration could theoretically generate 1,177 labor hours per shift, which would work out to 653 25-inch TVs or 588 27-inch sets if your plant was fully staffed.

WORKER SCHEDULING, VACATIONS, AND ABSENTEEISM

Before each quarter begins, your company must request the total number of workers it wants on the factory's payroll. This is done by assigning workers by shifts to products. Your 27-inch set workers receive a higher hourly wage than that earned by your 25-inch set workers due to their greater experience and seniority. When scheduling your plant's operations, 27-inch set workers can assemble both their own sets and the simpler 25-inch sets. Workers on 25-inch sets, due to their lack of experience and skill, cannot effectively work on 27-inch sets. Although 27-inch workers can make 25-inch sets, this is not a very rational action, as you are hiring the most expensive workers to make the cheapest sets. If you actually use 27-inch workers to make 25-inch sets, certain line changeover inefficiencies will occur that lower your plant's efficiency. Inefficiencies also occur if you mix set sizes on the same side of the line.
The prevailing base wage rates for The Global Business Game's six countries by set size are presented in Exhibit 4.4. The rates stated here are in local currencies and may change during the course of the simulation due to wage rate fluctuations. The prevailing factory wage rates for the countries in the business game will be regularly posted as part of your simulation's quarterly Global Industry Reports. Based on these wage rates, and assuming that no automatons have been installed, a firm making a 25-inch television set in the United States would carry a unit labor charge of $31.61.
Because different hourly wages exist throughout the world, many manufacturers have established offshore plants. Due to Germany's high hourly wages, many manufacturers have chosen not to produce their products in that country. Many German firms have sought lower-cost production sites, with a favorite European site being Spain. Using the currency rates found in the sample Global Industry Report, Exhibit 4.5 reports the base labor costs that would apply to your 27-inch TVs if they were made in the countries shown.
While your company must schedule the number of workers it wants per product before the following quarter's run, the actual number of hours delivered may be lower than scheduled. This may be because of lost hours due to vacations, sick days, and absenteeism, or to running out of subassemblies, which would cause your plant to shut down temporarily. Vacations and authorized sick days are part of your company's wage and salary benefits plan, but absenteeism is more a function of your work crew's work ethic. Company benefits vary from country to country, as does the work ethic.
In the more disciplined and economically advanced countries of Germany and the United States, you can expect that very few workers will be unofficially absent from work. The absenteeism rate in the less developed countries of Mexico and Thailand, however, may amount to as much as 15.0 percent of the labor hours requested or scheduled.
Another factor that can cause worker absenteeism is the amount of maintenance work you budget for your factory. Equipment begins to break down and becomes dangerous to use when your maintenance budget is deficient. Under these conditions, workers who take pride in their work or have concerns for their personal safety, seek employment elsewhere and are often missing from work. In the countries of United States, Germany, and Japan, this maintenance factor is especially important. Regardless of the number of workers who actually report for work, your company must pay the wage bill on the number of workers requested, not the bill for the actual number of labor hours delivered.
These work ethic elements, along with each country's vacation and sick-day regulations, should be factored into your scheduling practices. Exhibit 4.6 summarizes the prevailing vacation and sick-day practices and behaviors your company faces. As shown, the average vacation for the types of workers your company needs in the United States lasts four weeks, and each worker also takes about five sick days a year. Absenteeism runs about 1.7 days a year. In Germany, the average vacation is 6 weeks long, and 12 sick days are authorized and usually taken. Absenteeism, however, is very low.
As an example of this factoring-in process, if you wanted to have an average of 65 workers in an American plant, you would need 70 workers on the payroll to cover all the vacations that would be taken. Looking at the German experience, after considering the average number of sick days that would be taken per year, which amounts to 2.4 weeks, you would need to have about 3 surplus workers on hand to cover for those calling in sick. This surplus amount does not consider the number of additional workers needed to cover Germany's average 6-week vacation.

TELEVISION SET COMPONENTS AND SUBASSEMBLIES

The television sets you manufacture require two general groups of subassemblies. Both groups must be installed in each set to produce a complete unit. Exhibit 4.7 presents the number of subassemblies required by the two set sizes you can manufacture, classified by their major groupings. Your 27-inch sets, being the more complex of the two, require the greater number of subassemblies from both groups.

SUBASSEMBLY INVENTORIES

Your company has a practice of purchasing its subassembly raw materials via longtime supplier relationships developed in the very active Hong Kong electronic parts market. In this center of activity, consolidators gather parts from Pacific Rim producers for large-lot shipments to manufacturers throughout the world. Thus, the prices they quote are FOB Hong Kong in US$, and they are bought and shipped in 100-unit lots by grade and group.
If you wanted to order 522,347 units of a certain type and grade of subassembly, you would need to order 5,224 lots to obtain enough units. Make sure when you make your quarterly decision you enter the number of lots you want to purchase and not the actual number of subassembly units you desire. Although your subassemblies are readily available you must allow for their timely delivery.
For your plant to run full-time, it must have a complete supply of subassemblies in inventory before the quarter begins. If your plant runs out of subassemblies during the quarter, or a grade within a subassembly group, it will operate as long as it can by drawing down the supply of subassemblies available and applying them in equal proportions over the units you want manufactured. Once any one of the subassemblies has been exhausted, your plant will shut down and all workers will be furloughed at full pay for the remaining business quarter. You will be notified via an Operations Report notice if your plant had to shut down during the quarter due to a lack of any subassembly grade. Due to the long shipping distances involved and your supply dealers' commitments to other customers, there is no possibility that your firm could obtain emergency shipments of any additional raw materials needed for a quarter's production run. Therefore, your company should estimate as accurately as possible its sub-assembly requirements in advance.
Exhibit 4.8 lists your industry's initial subassembly lot prices. These prices have been quoted for the simulation's base period and are subject to change because of inflationary pressures in the producing countries and the supply and demand for the use of the same raw materials in other home and commercial electronic products. Any changes in the lot prices for subassemblies will be posted as part of the simulation's Global Industry Report.
The shipping charges you must pay per lot to obtain these subassemblies are shown in Exhibit 4.9. These charges include handling, insurance costs, and port-of-entry processing fees. Although lots in different subassembly groups weigh about the same, Group 2's greater value and bulkier protective packaging cause them to be more expensive to ship.

SUBASSEMBLY INVENTORY CHARGES

Your subassemblies are stored in their original 100-unit lot containers which minimize theft, damage, and in-house handling costs. All subassemblies are also stored in high-security areas within each factory's warehouse, as these parts are easily stolen and have a relatively high unit value in spite of their small size. Consequently, the cost of storing subassemblies is more a function of their monetary value and the need to have them on hand to keep assembly lines operating, than of their weight or bulk.
The majority of your subassembly storage costs lie in the insurance coverage required. This coverage, plus the extra warehouse staff needed to maintain the secured area, amounts to 1.7 percent of the value of all subassemblies on hand at the end of the previous business quarter.

SUBASSEMBLY QUALITY GRADES

Three quality grades are associated with the two groups of subassemblies used in your television sets. The quality indexes associated with these grades are displayed in Exhibit 4.10. These subassembly grades are processed with equal efficiency by your firm's manufacturing processes. Your inventories are drawn down during the quarter's run in the proportion they are available at the beginning of the quarter, if you have a mix of grades in inventory. By mixing the grades of raw materials used in your TVs, you can have a major impact on their quality levels, their desirability, and their unit costs and subsequent retail prices.
Other factors, however, also affect the physical quality of your products. These are the (1) precision of your Auto1s and Auto2s, (2) amount of training and development monies you have budgeted for factory operations, and (3) your plant's quality control budget, which screens out defective TV sets before they leave your plant. Considering only the effect of raw material grades on product quality, however, if you wanted to obtain a quality index of 10.0 for a certain run of television sets, you would have to use only Grade A subassemblies in your manufacturing process.
For example, assuming you wanted to make 11,500 25-inch sets, the following start-of-quarter supply of raw materials would produce a group of new 25-inch TVs having a 7.27 quality index rating.

| Group |Grade A |Grade B |Grade C |
|1 | 33,557 | 22,098 | 39,338 |
|2 | 20,412 | 22,704 | 28,884 |

As a check on your mathematics, this particular run of 11,500 25-inch TVs would leave you with the following ending supply of raw materials by grade and group:

|Group |Grade A |Grade B |Grade C |
|1 | 1,057 | 696 | 1,239 |
|2 | 851 | 946 | 1,204 |

As a further check on your arithmetic, the unit cost of each of your 25-inch sets would be $70.91, using the unit labor charges previously calculated for a set this size.

Unit labor cost $31.61
Subassembly landed costs: Group 1, grade average 10.98 Group 2, grade average 28.32
Total $70.91

If your firm wanted to sell to the industry's premium quality and price segment, it would have to manufacture sets using the most expensive mix of subassembly grades. Note, however, that not all consumers in all countries can afford to purchase these highly desirable sets nor may they not actually want them.

STRAIGHT-TIME, SECOND-SHIFT OPERATIONS, AND OVERTIME

While making your company's production decisions, you must determine which products you want to schedule for production and on what shift(s) they should be produced. You can run partial shifts, run a complete two-shift operation, or use overtime as a 25.0 percent extension of the plant's second shift. The simulation will automatically assign the number of workers available from the labor pool you have requested for the quarter. You do not have to hire additional workers for any overtime operations, as the second shift's workers are held over for the hours needed to complete the production run you order.
In scheduling workers, you can assume that productivity is not constant between shifts. Traditionally your plant managers have found that the second shift is about 4.0 percent less productive than the first shift. When overtime has been scheduled, your managers have noticed an even sharper decrease in productivity, amounting to about 9.0 percent less than the second shift's productivity.
When your factory runs a second shift, a 4.5 percent labor premium is involved. The overtime hourly labor rate is 1.5 times the second shift's hourly labor rate. Because overtime is run as an extension of your second shift, the overtime labor rate is combined with the shift's 4.5 percent labor premium. Using the base labor hour rates presented in Exhibit 4.4, the hourly rates shown in Exhibit 4.11 would be incurred for various shift options in an American factory.

GENERAL ADMINISTRATION AND FACTORY OVERHEAD

Your company's general administration expenses are a function of a set of both fixed and semi-fixed expenses. The fixed component is the executive salaries you and your management group receive on a quarterly basis. This executive compensation amounts to $50,000 per quarter, or its equivalent amount depending on your firm's home country. Your company's semi-fixed general administration expenses entail the salaries of your plant's automaton technicians, a factory superintendent for each operating factory, a country market liaison executive for each country market in which sales are conducted or a factory is in operation, all assembly line supervisors, clerical staff and head office support which also include fire and liability insurance premiums and the supervision of any plant construction, automaton installation and equipment transfers or removals. One-time charges are incurred for security protection for any liquidated plant as well as layoff charges associated with the decommissioning of any factory. One-time charges are also levied whenever Line Workers, Line Supervisors and/or Automaton Technicians are fired between quarters. The severance pay given to these individuals varies from country to country as presented in Exhibit 4.23. The charges apply to your Erie, Pennsylvania plant and to all offshore operations but in equivalent local currency values and wage rates:

Country market liaison— $25,000/country applied only to the firm's Home Country unit
Factory superintendent— $38,000/factory
Line Worker firing— Exhibit 4.23
Assembly line supervision— $17,000.00/line supervisor
Line Supervisor firing— Exhibit 4.23
Automaton technicians— $23.32/hour/technician
Automaton technician firing— Exhibit 4.23
Head office support— $100/base labor hour capacity
Capacity change supervision— 10.0 percent of construction and/or automaton value
Equipment transfer/removal supervision— 15.0 percent of equipment book value
Plant decommissioning— A one-time cost amounting to 5.0 percent of the book value being shut-down plus severance pay for the factory's superintendent and line supervisors, job counseling for automaton technicians and line workers, social costs, first-time security protection, and ongoing quarterly security patrol charges
Plant liquidation— Severance pay for the factory's superintendent and line supervisors, job counseling for automaton technicians and line workers' social indemnities owed to local government agencies and the shut-down of the factory's distribution center and sales office

WORK IN PROCESS

A nonsignificant number of units will be left unfinished at the end of each quarter because of the high speed at which your assembly line operates. Thus, your firm will have no work in process, and you can assume that all operations and production runs have been cleaned up at each quarter's end.

FINISHED GOODS INVENTORIES

During your company's operating quarter you will have created a number of units for distribution. All units left over from current production and product transfer-ins from other country and company operations, after making all sales, are gathered into a finished goods inventory account. The finished goods inventory valuation of these products is the weighted average of the mix of all products found in your inventories, regardless of their source or the originator's initial cost.
To obtain sales in other countries, your firm must transfer products from its factories to its distribution center(s). This action is not automatic. If you do not place your products in your distribution center(s), they will merely sit in temporary storage at your factories while they wait for your disposition. While sitting as finished goods on your factory floor, inventory charges are not assessed, as this is temporary in-house storage.

WARRANTY WORK

Your factory will inevitably produce a modest number of defective television sets. This is due to variances in automaton operating characteristics, the amount of supervisory and training and development attention given to your workers, and the size of your company's maintenance budget. Defects are quickly discovered by those who buy your sets. When this occurs, they return their defective sets to the retail store from which they made their purchase. If the set is returned while it is under its one-year parts warranty, the retail dealer, in turn, returns the set to the nearest country distribution center for warranty repairs. When this happens, the center absorbs the repair costs in local currency values.
Standard warranty charges are made for each returned set: $20.00 for 25-inch sets and $26.50 for 27-inch sets returned in the United States. Warranty charges in offshore distribution centers are in equivalent local currency values. No warranty charges are assessed on contract sets, as the retailer private-branding your sets performs the warranty work.

PRODUCT QUALITY

It was pointed out in Chapter 3 on marketing and marketing logistics that your company can differentiate its products both psychologically and physically. It is here, at the factory operating level, that you implement any strategies you may have for your company regarding product quality and product differentiation. This quality level is indicated as the quality index found in your operations report. The value reported reflects the weighted average of any product size category found in the firm's ending finished goods inventories.
This chapter's section on subassembly quality grades indicated a major way product quality levels are determined— through the quality mix of the components used in making your sets. A second method for improving product quality is via the mix of automatons you use, due to the tolerance or precision levels associated with each Auto1 and Auto2. A third method entails the creation and staffing of factory wide training and development programs. These programs enhance your personnel's capabilities and flexibility by training workers in new job techniques and in reeducating the technicians who program your automatons. The last way you can improve product quality is through the number of line supervisors you employ per factory. Having a greater number of line supervisors helps workers perform at optimal levels because such enlightened management techniques as quality circles can be used and closer supervision can be applied to the work as the sets are being assembled.

AUTOMATON PRECISION

Just as your automatons produce different amounts of product by set size, they also differ in their ability to produce defect-free products. Exhibit 4.12 indicates your Auto1s and Auto2s have accuracy rates ranging from 94.0 percent to 98.5 percent with per-type automaton variances ranging from ±1.2 percent to ±2.5 percent. Depending on the automaton mix in your factories, the products will be directly affected by these empirically derived machine performance ranges, given the quality grade of subassemblies used in the production process.
As an example of the interaction between subassembly grades and automaton accuracy on television set quality assume only Auto1s and Auto2s were used in the production process using a correct supply of Grade B subassemblies from both groups. This restriction eliminates or holds constant the effects on product quality produced by human labor inefficiencies, training and development monies and the adequacy of line supervision. Using only Auto1s the Quality Index for 25" and 27" TVs would be 7.09 ranging from 6.91 to 7.26. If only Auto2s were used to make the sets the Quality Index range would be 7.20 to 7.47 with an average Quality Index of 7.39.

HIGHLY-AUTOMATED FACTORY OPERATIONS

It is possible for your company to fully automate its production process. This is done by using only Automatons to produce each quarter's television sets. If you want your plant to be fully automated, and to rely only on the Automatons currently on-line, you should take the following actions:

Schedule one or two Line Workers. Although all your TV sets will be assembled by the plant's Automatons these few Line Workers help the plant's Automaton Technicians who will be relatively busy now that the factory has been highly automated.
Schedule only one-two Line Supervisors for each shift. Relatively few are now needed as there are no real Line Workers for them to supervise and your plant's Automaton Technicians are all that is required to run the automated assembly line.
You will need to continue to allocate funds to both Line Worker Training and Quality Control Training but at very low levels.
Over-maintain the factory's Automatons as they will be working very hard.
Make sure you have a fairly high training budget allocated to your Automaton Technicians and that their coverage of the plant's Automatons is correct.

By following these rules your plant will produce its output at relatively low unit costs as the labor component has essentially been removed from your product's unit cost. To reap the full benefits of automating plant operations, and to improve product quality at the factory floor level, consider scheduling a small number of Line Workers for each shift along with a Supervisor to direct them. Greater overall productivity will ensue because these workers would now be used primarily for materiel handling purposes. On the negative side you will probably experience increased absentee problems given the small number of workers involved. When running a fully-automated operation be sure to budget Line Maintenance and Line Worker Training funds in the normal fashion.

WORK CREW TRAINING AND DEVELOPMENT

Another way you can maintain or improve the quality of your television sets is to actively engage in training and development efforts. These efforts are applied to your assembly line workers and your automaton technicians. A small, semi fixed amount for continued work crew training is necessary for the efficient operation of your assembly operations. If your basic plant size and the number of assembly workers you have tending the line are increased, you should increase the size of this budget. Alternatively, as the proportion of your assembly operations being accomplished by automatons increases, your assembly line worker training and development budget could be decreased, and the amount you spend on automaton technician training should be increased.
In the past your firm has spent the equivalent of about US$5,000 per quarter on its American assembly line workers, regardless of the number of automatons installed. Additionally, your company has budgeted another US$5,000 per quarter for automaton technician training. If you create a completely automated factory this training budget per Automaton Technician should be increased due to the plant's total reliance on its automatons for output. When your company's training and development effort drops below a minimum level, product quality falls and the number of products returned for warranty work increases due to shoddy workmanship and disguised assembly errors.

ASSEMBLY LINE SUPERVISION

The number of line supervisors needed to oversee each factory's assembly line is related to the total number of workers hired and therefore must be controlled or supervised, tempered by the plant's automation level and the quality of the workforce being supervised. If your assembly line's operations are more labor-intensive, the level of supervision must be higher. Each country's labor force also possesses different skill levels, which severely impacts the span of control that can be comfortably exercised by a line supervisor. When the workforce is relatively untrained and undisciplined, the span of control is much narrower. Exhibit 4.13 indicates the ideal control spans associated with each country. For more highly automated plants, the optimal number of line supervisors can be much lower as there are relatively few work stations to supervise. When your factory operates a second shift, the number of line supervisors needed naturally has to double. Overtime or premium pay is not paid to line supervisors who work a plant's second shift or overtime operations. A proper ratio of line supervisors to work crews must be maintained to ensure optimum productivity. If your level of supervisors falls either significantly above or below the optimum number, product quality falls, absenteeism increases, and returns and warranty charges will also probably increase. This is because in the first case workers feel they are being too closely supervised or "hounded" by management while in the second case workers sense a lackadaisical attitude on management's part.
As an example of the effects of too little supervision on factory management's part on product quality and worker absenteeism, assume an American plant puts 223 workers on its payroll for the upcoming quarter. The ideal number of line supervisors in this case would be 9.29 [223/24 = 9.29] rounded to nine whole supervisors. Suppose, however, management hired only three line supervisors for the plant's operations. Under this condition, product quality, as reflected in the quarter's product quality index, would fall. Absenteeism would also increase, causing a decrease in the number of labor hours generated during the quarter. These effects might be of the magnitudes shown below if the plant was making only 25-inch TVs on its first shift.

|Output Effect | Supervisory Level |
| |Adequate | Inadequate |
|Quality Index | 8.41 | 8.11 |
|Absentee Hours | 758.20 | 821.36 |
|Hours Delivered |104,051.80 | 103,998.64 |
|Sets Produced | 57,806 | 57,771 |

Assembly line supervision is treated as part of your company's general administration expense. Each line supervisor earns a salary comparable to the prevailing rate for American line supervisors and is about 1.4 times the salary earned by automaton technicians. If your company discharges any line supervisors during a quarter, the one-time general administration charge for them presented in Exhibit 4.23 for each fired line supervisor. This charge covers severance pay and job-search counseling.

QUALITY CONTROL BUDGET

In the past your company has relied on self-inspection and the precision of its automatons to ensure that you were making TV sets with adequate quality levels. Because of the greater importance of quality in product performance, however, your company has recently installed a quality control program. You have hired a quality control supervisor making the equivalent of US$10,000 per quarter and have given this person the authority to request additional monies for various new quality control programs. These programs entail drawing product samples from the assembly line for quality assurance tests, with larger budgets allowing for more thorough testing. If you want to spend less than the current US$10,000 for quality control, you can do so. With less money spent in this area, you lose the services of a full-time quality control supervisor but instead use one on a part-time basis, depending on the salary level you have budgeted.
Because your current quality control program is very new, your previous management team had not drawn any conclusions regarding the value of this effort. In theory, however, the quality control budget should increase the perceived quality of your television sets, as any off-grade sets coming down your assembly line are immediately taken off the line and never reach the marketplace. If very few of your defective products ever entered the marketplace your company's managers felt, surveys— such as the ones conducted by Consumer Reports— would generate superior quality perceptions on a par with those of Sanyo and Philips Magnavox.
Your company's quality control supervisor currently holds monthly quality circle meetings, but more important, statistically controlled studies of product samples can be used to predict and control the number of products returned for warranty work. The quality or rigor of these sampling studies is determined by the size of the sample the quality control supervisor draws from current production.
Three sample-size programs have been designed by your quality control supervisor. These programs, along with their costs and the quality control standards achieved, are presented in Exhibit 4.14. For Quality Control Program A, a 0.05 percent sample of all units produced at the designated factory would be drawn, with the guarantee that about 6.0 percent of the products that are actually defective would be released for sales. This program adds US$13,000 to your company's quality control budget. If you wanted to ensure that even fewer defective products reached the market, you could employ Quality Control Program C. In this case 98.5 percent of all products reaching the marketplace would be perfect, resulting in a quality level far superior to that achieved by Toshiba. These quality control programs use destructive tests to examine the quality of the product samples drawn. Because these tests make the sets unusable, they are deducted from the total number of units available for sale and their total value at the plant's manufacturing cost is transferred to the quality control program's budget.

PLANT AND EQUIPMENT MAINTENANCE

As your factories are used over time, and the rate at which they are used intensifies, maintenance problems increase. Wear and tear is normal and to be expected. If your plant does not use many automatons, your maintenance budget naturally must be higher, as automatons maintain themselves and thereby your plant's overall maintenance needs are lower. Nonetheless, windows get broken, roofs need repair, and assembly-belt drives and bearings need periodic replacement.
Your firm should budget its maintenance monies based on each factory's rate of use, as measured by (1) the number of labor hours actually delivered, including all shifts and overtime, and (2) the proportion of those hours delivered by automatons. Exhibit 4.15 lists the recommended maintenance monies that should be allocated to each of your types of automatons. For plant maintenance in general, in each past quarter your company has been spending about US$200.00 per worker scheduled in the country's local currency value. If your maintenance budgets fall significantly below the recommended amounts, the number of labor hours available in subsequent quarters will fall, due to the equipment that has completely broken down. If this case occurs you can engage in an accelerated maintenance repair program although a number of quarters must elapse before your plant recovers its original engineered capacity.

CAPITAL EQUIPMENT CHANGES

As you know from your company's history in Chapter 2, your founders thought they had left you in the position to realize a number of worldwide growth opportunities. Based on their beliefs, they expect the equity value of their company to increase dramatically under your leadership. If you want to fulfill their expectations, your management group will probably want to reconfigure or expand your company's manufacturing facilities so you can produce more television sets for overseas shipments, increase the absolute size of your initial factory, or create manufacturing facilities and wholesalers in other countries if these options are available. All these strategic moves entail alterations in your company's current manufacturing site or the creation or transfer of capital from one country to another.

CAPACITY ADDITIONS AND TRANSFERS

Through the use of automatons, you can make your company more productive or more efficient, given a similarly valued fixed investment without automatons. This can be done by three methods, either singly or in combination. Your current plant's configuration can be changed by (1) purchasing new automatons, (2) purchasing used automatons from other companies in your industry, (3) transferring base capacity or (4) transferring your own automatons from your home country factory to one of your own manufacturing facilities in another country.
Regardless whether you purchase new or used equipment, or transfer your own Base Capacity and/or Auto 1s and Auto2s between factory sites, two quarters of time are required. Additionally, for cash flow purposes, half the monies involved is dispensed or received during the first quarter of the operation and the remaining half will be dispensed or received during the second quarter of the operation. During these two quarters your general administration account will incur a charge for supervising the automaton transfer and base capacity removal that amounts to 15.0 percent of any valuation.
As a company policy, your previous management group decided that all automatons would be purchased from the same supplier. This exclusive purchasing arrangement was employed to get the best quoted prices possible and to standardize throughout the corporation the spare parts inventories and maintenance and training procedures associated with the automatons. After investigating a number of machine-tool manufacturers in Switzerland, Germany, France, Japan, and the United States, your company decided on the family of automatons manufactured by a prominent company in Turin, Italy. As part of the negotiations for the sale of its automatons, the Italian machine-tool manufacturer included as part of its price the costs of installing the automatons and the initial training of the automaton technicians who would program them. The shipping costs from Turin to your possible factories, however, are borne by your company, per the schedule in Exhibit 4.16. These shipping costs are amortized as part of the original capital investment.
The automaton purchase prices negotiated by your company's previous management group are presented in your home country's currency in Exhibit 4.17. When plant purchases are made in Spain or Germany, the transactions are paid in euros. If they are made in Mexico, Japan, or Thailand, they are made in their local currency equivalents according to the exchange rates in effect at the time of sale. Your company at the corporate level must ensure that the receiving country unit has adequate actual and anticipated funds to cover all cash flow needs associated with the equipment purchase. If not, it is possible that an overdraft may be forced on your company at its corporate level. Another way your company can reconfigure a factory is to transfer automatons from one country's factory to a factory you own or are constructing in another country. The movement of Auto1s and Auto2s from one country to another is a unilateral action on your part and is accomplished by entering your decision via GBGPlayer's tool bar "Decision Set/Asset Transfers" drop-down menu. In this case your firm is basically "selling" equipment to itself, as this is a lateral transfer of assets. The average depreciated value of the automatons by unit and type determines the new depreciation charges subsequently incurred by the receiving country's factory and for both countries' plant and equipment balance sheet adjustments. For this transfer to be successful, the target country's plant must already be on-line or at least one quarter into its new construction and the donor plant's assets must have been active for at least one quarter. The productivity of any transferred equipment in its new location is determined by how well it has been maintained over its lifetime. If their maintenance records are poor they may add little output to the new factory in which they have been installed.
The transfer of automatons is subject to the shipping charges and dismantling fees listed in Exhibit 4.18. Although the values used in this table are in U.S. dollars, the equivalent amount in the company's local currency will be used except for transfers between Spain and Germany, which will be in the European Union's euros.
These fees, plus the remaining depreciated book value of the automatons being transferred, are paid by the receiving unit's operation. They become part of that unit's plant and equipment and will be amortized along with the unit's other depreciable assets. The receiving unit's cash account is debited during the quarter of transfer, and the automatons are available for production one quarter later. The selling unit's cash account is credited at the beginning of the transferring quarter, with an appropriate reduction in its plant and equipment account for the value of the automaton assets that have been transferred.
As an example of this type of transaction, assume that you want to send five Auto1s and four Auto2s to a plant you have already established in Spain. The example also assumes the automatons you are dismantling and shipping to Spain were purchased and installed in your plant in Pennsylvania five and one-half years ago. Accordingly, the combined original book value of US$3,255,000 for the automatons you are shipping has fallen to US$1,464,750, given the automaton group's depreciation at US$81,375 per quarter. Broken down by automaton type after including the inbound shipping charge, which is also being depreciated, each respective Auto1 and Auto2 is now worth US$132,750 and US$200,250.

|Automaton | Unit Purchase/Shipping Price |
| |Original Value |Residual Value |
| Auto1 | 295,000 | 132,750 |
| Auto2 | 445,000 | 200,250 |

Because a dismantling and shipping charge is required for each Automaton, amounting to US$32,000 a unit, the entire transaction entails cash and asset flows amounting to US$1,752,750. The U.S. section of your NAFTA North American balance sheet's cash account would receive a credit in this amount, whereas its plant and equipment account would be debited the same amount. An opposite set of actions would occur for the Spanish section of your company's European (EU) balance sheet.

USED AUTOMATON SALES AND PURCHASES

Another method by which the factory's configuration can be changed is by purchasing used an automaton from the industry’s other firms. This process is initiated by informing the Game Administrator or instructor that you wish to either buy or sell automatons. The Game Administrator will post an announcement of your company's wishes on the Global Industry Report's bulletin board. You will also find a summary of all potential and actual automaton sales and purchases, if any are in play, as part of the simulation's asset sales drop-down menu accessed through your tool bar's decision set routine.
Once the announcement has been posted, the marketplace's forces that are created between firms in your industry that might want this capacity, determine what next happens. You may have responses that range from little or no interest to perhaps a number of lively sessions between your firm and potential buyers or traders. If an agreement is made, it must be written as a contract between the two parties. This is done by completing the "Plant Capacity and Automaton Sale Agreement" in Appendix C and submitting it to the Game Administrator for approval. The Game Administrator will determine whether all negotiations have been at arm's length and whether the prices charged and received reflect at least the nominal value of the assets being transferred. If the agreement is approved, the number and types of automatons will be transferred from and to the sites referenced in the agreement.
Any capital gains or losses incurred by the selling company will be costed at the time the automatons are sold These are processed through the firm's "Other Income, Capital Sales Gains/Losses" account. Because this account is the medium being employed, any gains or losses are taxed or credited at the tax rates applicable to the particular country's operations.

ASSET SALES AND JOINT VENTURES

Your firm has a number of available joint venture and asset sales options. Regarding asset sales you can buy and sell Base Capacity and/or Automatons to others in your industry. As part of those sales these assets can also be transferred between countries as part of the buying and selling process. A Joint Venturing strategy can entail licensing your company's patents to others. You can also have television sets manufactured, or manufacture them for others, on a quarterly subcontracting basis.
Regardless of what you decide to do your Game Administrator must approve these types of dealings. This is to make sure the terms of any between-party agreements are implemented completely and correctly. In working out any contractual relationship between the buyer and seller, it is expected that both parties would pursue "with due diligence". For the purchaser this means investigating all aspects of the assets being purchased. For the seller this means responding honestly to all asset-related questions posed by all potential purchasers.
The following steps illustrate the process by which Firm 1, MagnaArgus Corporation, has agreed to sell 2,500 25" sets and 5,000 27" sets to be delivered to Firm 3, Consumer Electronics, Inc.'s German Country Unit at the respective quality levels of 8.50 and 6.82 for $76.00 and $81.00 per set. Firm 2, Global Megapolis, Corp. has agreed to sell 10,000 units of its American Base Capacity to the MagnaArgus Corporation to be installed in Mexico for $18,600 per capacity unit.

Your firm informs the Game Administrator of your buying or selling intention(s).
Your Game Administrator posts an announcement of your intentions on The Global Industry Report's upcoming Bulletin Board.
Firms in the industry begin to bargain over contractual terms.
If a contract between parties is agreed upon the terms are formally written-up and presented to the Game Administrator using the appropriate form found in the Player's Manual. Use the "Patent Licensing Agreement" form found in Appendix B for Patent agreements. Use Appendix C's "Plant Capacity and Automaton Sale Agreement" form for asset sales. The "Subcontracting Agreement" form in Appendix D is used to formalize co-manufacturing and product rebadging contracts.
Your Game Administrator will cause the simulation to begin the finalization of all agreements. When this occurs your "Decision Set/Asset Sales" option on GBGPlayers' tool bar will light up and the "Available Asset Sale Items" drop-down window will appear showing all available "Interfirm Asset Sales". This screen is a quarterly list of all asset dealings that have occurred or are pending.
If your firm has agreed to Subcontract television sets to another firm you must (a) make sure you have the products available and (b) insure the units shipped in the selling quarter meet or exceed the quality terms agreed upon. If your firm does not meet either of these obligations the sale will be cancelled. Once approved by your Game Administrator the Subcontracting agreement is finalized by the selling firm under 'Decision Sets/Logistics/25" or 27" Contract Distribution' where the numbers of units are dedicated for shipment. The shipping of these Finished Goods takes precedence over all other product shipments being made by the selling firm.

PLANT CONSTRUCTION AND OUTFITTING

The simplest and most straightforward way to increase a plant's production capabilities is to increase its base capacity. This is done by increasing the length of its assembly line. This lengthening allows more workers to be placed along the line.
The beginning size for any plant, whether it was the original plant in Erie, Pennsylvania, if the United States was your home country, or is a new one to be built in a foreign country, must accommodate at least thirty total workers, or fifteen workers per side of the assembly line. Your current plant can accommodate 140 workers, of which six have already been replaced by three automatons. Your original plant without automatons cost US$3,360,000 to build and outfit, requiring a capital investment of US$24,000 per worker. Added to this cost was the purchase price of the land needed by the plant along with various site preparation charges and test borings for substrata strength; city, country, and state governmental filings; and public hearings on your plant's environmental impact. The cost of the acreage needed by a typical plant in each country is presented in Exhibit 4.19. The cost of the plant's land is added to the value of your firm's plant and equipment, while the cost of the site preparation charges and governmental filings amounting to US$150,000 is added to the construction cost of any original plant. This brings your plant's total initial investment up to US$3,710,000. It is on this amount, less the value of the factory's land, that depreciation is charged. As automatons are added to a factory, they too are depreciated but on their own ten-year schedules.

Exhibit 4.19
Land Purchase Costs and Land Sale Values (in local currencies)
|Land |U.S. |Mexico |Germany |Spain |Japan |Thailand |
|Purchase Price |200,000 |430,000 |194,469 |117,787 |25,800,000 |1,200,000 |
|Sale Value |345,000 |500,000 |197,025 |144,830 |23,400,000 |1,000,000 |

One method commonly used by firms for reaching foreign markets, and for increasing their capacity, is to build new or "greenfield" manufacturing facilities in those markets. If you should do this, your company would avoid restrictive tariff charges, would benefit from any favorable labor-hour rates, and would eliminate shipping charges to the market in which the new factory was built.
The plant construction and outfitting process is straightforward but time-consuming. Before a new plant can be built, home office site-selection teams inspect a number of potential locations. After a specific site has been selected, land surveys and test borings are taken and legal clearances are obtained from local governments. If all goes well, your company can begin construction and outfitting after the land has been purchased. The entire process encompasses two quarters. Therefore, if a plant's construction began in Quarter 2, the result would be a factory that went on-line in Quarter 4.
The site selection and land surveying involved is conducted by the home country's personnel, with local personnel ensuring compliance with all local laws, ordinances, and covenants. Because this is a home office operation, these costs are about the same regardless of the country being investigated. They amount to $150,000 per plant and, as was the case with your original plant, are capitalized along with the factory's construction and outfitting cost. Your company has become very comfortable with the US$24,000 capital per worker equation, and this is the one that applies to any new plant construction or expansions initiated by your firm.
As an example of the costs and depreciation rates involved in nondomestic plant construction, assume that you want to build a base eighty-six-worker plant in Mexico, and that you want to replace some of those workers by seven Auto1s and thirteen Auto2s. Exhibit 4.20 shows the costs and depreciation charges resulting from building this new factory. Note the depreciation charges on plant and equipment are on a twenty-year amortization schedule, whereas your automatons are on a ten-year depreciation schedule and that no depreciation is charged on the value of the plant's land.
When building a factory or expanding its capacity, which is done by entering the new capacity in worker units, you must anticipate the cash flows associated with these actions. For cash flow purposes, half the value of the new plant or expansion must be paid during the first quarter of construction, and the second half must be paid during the second quarter of construction. The quarterly cash needed will be automatically deducted by the simulation, and your firm's operations report will indicate "Capacity in Progress" in labor hours. Your firm's relevant balance sheet will also indicate "Capital in Progress" during any construction quarter. Once your new plant is on-line or your automatons have been installed, their value will appear as additions to your company's plant and equipment. It is at this time that depreciation charges will begin on these capacity changes.

PLANT SHUT-DOWN, CAPACITY SALES, AND TRANSFERS

You have already been advised that your firm can ship its automatons to other factories you may have already constructed or are in the process of constructing. You can also sell a plant's automatons to other firms in your industry. Both these moves decrease a plant's capacity and may indicate an attempt to reduce commitments to a home country manufacturing operation, which has strong social implications for those living in the factory's city. If this is the case, several alternatives are available: (1) temporarily idling the plant, (2) permanently decommissioning or "mothballing" it, or (3) selling off or shipping all or part of its capacity to other country units or competitors in the industry.
If the home country's base capacity is lowered, and it is being shipped to any of your firm's other foreign manufacturing sites, the actions are the same as for transferring automatons. This is a unilateral decision and does not require approval or intervention by the Game Administrator. When downsizing the home country's base capacity in piecemeal fashion, the plant cannot fall below one that is large enough to accommodate thirty workers, or fifteen workers per side of the line. This is because the assembly line technology cannot be housed in smaller facilities. If a plant's base capacity falls below the thirty-worker limit, as a result of your selling or transferring most of its base capacity, it must be decommissioned. Any decommissioned plant operation entails one-time charges and continuing security charges. The one-time cost amounts to 5.0 percent of the plant's remaining book value. This is a mothballing charge that covers the erection of razor-wire security fences and high-powered lighting at what remains at the factory site. The continuing charge is for a twenty-four-hour security patrol at the quarterly wage rates found in Exhibit 4.21. All shutdown costs are charged to the country unit's general administration expense. When your firm has made a decision that decommissions a factory, the results of this action is confirmed via a notification appearing on your firm's operations report.

To reduce the plant's size, enter the amount of worker capacity and any automatons to be transferred and the countries to which the capacity is to be sent in the appropriate spaces in the "Decision Set/Asset Transfers" drop-down menu in GBGPlayer. It takes two quarters for this plant and equipment to be torn down, carted away, shipped, and installed in its new home. To minimize production disruptions caused by dismantling automatons only one of each type can be sold or transferred each quarter. Any country receiving the used capacity must already have its plant on-line, or have the plant under construction for at least one quarter. During the first quarter of this operation, the home country unit's general administration account is charged 15.0 percent of the depreciated value of the capacity being torn down in the form of equipment transfer and removal supervision. The accounting and cash flow operations associated with base capacity transfers are the same as those for transferring automatons. The cartage, shipping, and installation costs accompanying base capacity transfers are summarized in Exhibit 4.22 while the costs for transferring automatons have already been presented in Exhibit 4.18.
On occasion you may find you temporarily have too much capacity or an undesirable finished goods inventory build-up. Under these conditions it might be advisable to shut down the plant for a quarter or so until the capacity is again needed. This shut-down is accomplished by not staffing the factory with line workers, line supervisors, or automaton technicians, although plant maintenance must continue. The plant's factory superintendent is kept on payroll to manage the factory's restart if that ever occurs.
Another way to lower the firm's plant investment is to liquidate it or sell it off to the industry's other firms. If it is your desire to completely eliminate the home country's factory, it would probably be best to try to sell it to others, as severe capital losses are suffered under liquidation. Your offer to sell base capacity is handled the same way as used automaton sales. Inform the Game Administrator that you want to sell your plant under what proposed terms and an appropriate message will be posted on the Global Industry Report's bulletin board. You must then wait to see what happens. While you are waiting, you can entertain any number of offers. You can also sell your capacity to more than one firm in any given quarter as long as the total capacity you wish to sell does not exceed the capacity you have available. If during the course of selling off a plant's base capacity the remaining plant falls below the thirty-worker technological requirement, the remaining portion of the plant will be decommissioned. You have the later option of liquidating or decommissioned plant if such an event occurs.

If no offers are received, or if your company receives offers it feels are unacceptable, the last option is to liquidate the plant by selling it to a salvaging operation. Do this by checking the "Liquidate Plant" box on the "Plant" page under "Decision Set" in GBGPlayer. The plant will immediately be shut down and its line supervisors and superintendent will be dismissed with two months' severance pay. On the capital structure side, the plant is removed from the firm's books and is scrapped at 15.0 percent of its remaining valuation. This 15.0 percent is credited to the company's cash account while the remaining value is recorded as a capital loss on the home country's income statement, with the sale proceeds going to the balance sheet's cash account. No fees are associated with the physical part of the salvaging operation, as this is paid for by the salvager who is buying the plant and equipment for scrap metal. Subassemblies are purchased by a consolidator at 80.0 percent of their original values.
What remains is the factory's original land. This is no longer needed and is sold during the quarter. Capital gains can be expected on this sale of land originally costing US$200,000 if the United States is the home country. The same holds true except for Japan and Thailand, where land values have been falling slightly due to long-term economic weaknesses in Japan and political instability and financial failures in Thailand. Exhibit 4.19 indicates the value of the factory's land when it was purchased and its price when the country unit's plant is liquidated. The gains or losses on this value are recorded as "Other Income" and a capital sales gain/loss on the home country's income statement. The cash account receives any net proceeds from the land sale in the liquidating quarter.

SOCIAL COSTS

Any time you eliminate or decommission a factory you are removing it as one of the local area's major employers. This causes a number of "social" costs to arise. A large number of loyal workers are now out of work and need retraining and job counseling if they are to find other employment. Your firm also received a number of government-sponsored incentives to keep the plant as an employer and contributor to the area's general welfare. These incentives took the form of widening the highways leading to your plant, adding additional public transportation services, and expanding the vocational training programs conducted in the area's public schools. Since your company is reneging on various contractual and implied commitments, compensatory refunds are proper if they have been granted to your firm. The amounts involved are presented in Exhibit 4.23, where the total amounts associated with your line workers, automaton technicians, and line supervisors are levied on their number on the previous quarter's payroll.

ALMOST EVERYTHING IN PLACE

By now your company has reviewed the overall nature of its industry, have some ideas about how your markets operate, and know how your firm makes its products. Running your company successfully in a financial sense is covered in the next chapter, which deals with company finances and accounting for your company's activities and results. If you would like to be "tutored" on how various parts of your factory operates, you might wish to visit your GBGPlayer package. There you will find the following PowerPoint presentations and tutorials:

PlantOperations— Provides an overview of how labor hours are generated, how to schedule workers, calculating the plant's wage bill and the effects of quality control programs on product quality and unit costs.
Subassemblies— Covers the subassembly ordering process, shows how to calculate the correct subassembly order given forecasted production needs, examines the plant's production possibilities curve, and provides an algebraic solution for obtaining targeted product quality levels.
PlantCapacity— Reviews a typical plant's configuration, plant expansion costs and cash flows, the value of using automatons in the production process, and buying and selling automatons and any capital gains/losses associated with those actions.

Many opportunities face your firm and a number of financial moves may be necessary. These are covered in the next chapter. Even if you do not do anything dramatic, you will have to monitor the results of your many decisions. This can be done by intelligently using the financial and accounting reports prepared for you by The Global Business Game— or others you design for yourself once you thoroughly understand the strengths and weaknesses of the reports that have already been provided.

Chapter 5
Finance, Financial Markets, and Accounting Operations

As a member of your company's management team, you must ensure that a steady stream of money flows through all its operations. These flows are both short-term and long-term in nature. Most important, they need to be accurately anticipated if you want to make your company financially efficient. Your short-term needs will probably be filled by using funds received from your current sales, product licenses and accounts receivables. Other short-term fund sources can come from short-term borrowing, currency exchange gains and interest income from short-term investments.
Because your firm might compete in a number of growing markets, you may need to obtain longer-term financing for fixed plant investments and occasional foreign start-up costs. To support these efforts, you can engage in corporate bond and/or common stock sales. If your Game Administrator has set The Global Business Game to operate internationally, you will have access to several major international financial markets. Each market's operating patterns, variances, interest rates, and national risks have been incorporated in the GBG's model. In setting this financing challenge, your Game Administrator can choose to (1) use data from the real world's various money markets, (2) supply you with a set of quarterly data that approximates real-world conditions, or (3) freeze the money market conditions throughout the entire simulation.
If your Game Administrator chooses to use actual money market data in your simulation, the economic and money market indicators and data shown in Exhibit 5.1 will be used for each of the simulation's major financial markets of New York City, Frankfurt, and Tokyo. These indicators are commonly available and are listed on a daily basis in such financial sources as Section C of The Wall Street Journal, and monthly in the "Monthly Survey of Interest Rates" in the Business International Money Report. These indicators may be updated for each quarterly run of your simulation by your Game Administrator, and you should take this information into account as you make your financing decisions.
You can see from reading this Player's Manual that your company has already created an integrated accounting system that is adequate for most purposes. Because this has been done, your major accounting task will be to understand the nature of the results reported each quarter. As you become more familiar with your firm's financial reporting needs, you might consider creating additional spreadsheet-based accounting information systems for yourself or use or modify the decision making aids found in your Player Suite at the game's website.
When your consolidated or home country unit enters the equity market, or any of your local operations enter the debt market, the actual interest rates charged, or the stock issue yield obtained by your firm, will vary, depending on the unit's credit rating in the current quarter. Accordingly, the debt interest rates associated with the indicators in Exhibit 5.1 present the base upon which your firm will be assessed interest rates on short-term loans or its ten-year bond issues. The range of credit ratings employed in the simulation, and their associated interest rates, are presented in Exhibit 5.2.

COMMON STOCK ISSUES

One way to finance your company's operations is to issue common stock. This decision is indicated by entering the number of shares you wish to sell. Your firm's initial corporate charter has authorized the sale of up to 10,000,000 shares, of which 2,500,000 shares are already outstanding. This is indicated on the "Common Stock" line of your balance sheet.
Stock issues are a corporate-level or home country decision, so your company's shares are traded on the exchange that is associated with your home country's operation. This is the New York Stock Exchange for the simulation's NAFTA countries of Mexico and the United States, the Frankfurt Stock Exchange for the EU countries of Germany and Spain, and the Tokyo Stock Exchange for the APEC countries of Japan and Thailand.
Your firm's stock is sold through an underwriter, who ensures that all the shares you offered will be sold—although perhaps at a steep discount, if necessary. The underwriter's fee, or commission for underwriting your issue, is a flat $15,000, plus 1.5 percent of the stock issue's total market value. The cash proceeds from the issue, and the share price at which your stock was sold, will vary depending primarily on the issue's size, because the issue temporarily dilutes your shareholders' claims on potential stock dividends. For cash flow purposes, your firm receives the proceeds of the stock sale one month into the issuing quarter.
When setting the initial price for your stock offering, your underwriter takes into consideration the stock's value in the previous quarter. Thereafter, the forces of the equity capital marketplace take over. It is almost certain that your stock's price will be discounted, although the exact amount of discounting that will occur cannot be predicted exactly. The net proceeds from the stock sale, after the stock's dilution and the payment of all underwriting fees, are added to consolidated's cash account and to owner's equity during the quarter of issuance. If your issue sells above its nominal $1.00 par value, the surplus above par is added to your paid-in capital. If your stock issue sells for less than its par value, the issue's decrement below par is subtracted from retained earnings. Exhibit 5.3 provides an example of the actions and balance sheet changes associated with a stock sale of 750,000 shares of common stock.
The results presented in this exhibit and in Exhibit 5.4 were generated by a spreadsheet program that emulates your game's stock market and tries to take out some of the guesswork your company may have to engage in when dealing with stock transactions. This program labeled "STOCKS" is available to you in your Player Suite at the game's Website. Although the program is not completely accurate it can provide you with a reasonable approximation of the results of any stock action your firm has taken.

TREASURY STOCK PURCHASES

Your company can purchase its shares on its own account. This action, which is indicated by entering the number of shares you wish to purchase, or "retire," will temporarily increase the value of all remaining outstanding shares, as this operation's temporary effects are the opposite of those associated with a stock issue. To guard against stock price manipulation on your part, your board of directors has placed two limitations on your engaging in Treasury stock actions: the number of shares outstanding cannot fall below 2 million at any time, and retained earnings must always be positive. The simulation will automatically void any Treasury stock action whose results would cause either of these conditions to be violated.
When Treasury stock is purchased, shareholders sell their shares at a premium. This premium is at least 9.0 percent above its most recent quote. Accordingly, a stock that was listed at $24.37 a share on the last day of Quarter 3 would be purchased by your firm in Quarter 4 at a price that would be not less than $26.56. When such a purchase is consummated, your firm's cash account is debited the entire cost of the stock purchases, with your common stock account debited the par value of the shares retired and any excess above par deducted from your paid-in capital account. Exhibit 5.4 provides an example of these Treasury stock actions.

DIVIDENDS

Your shareholders are vitally interested in your company's stock performance, as well as the dividend payout policies you have created for yourself. Thus, you may wish to issue dividends periodically, given other financial considerations your company faces. All dividends are issued on a per share basis.
The total value of any quarterly dividend should not exceed your firm's projected total retained earnings for the dividend quarter. Declarations that are greater than retained earnings are basically liquidating dividends and will be voided by the simulation. This type of dividend is also frowned upon by your stockholders, who wish to see their company continue as a viable enterprise for many years to come.

DEBT ISSUES

Your firm can also cover its cash requirements through various combinations of debt financing. This is in the form of short-term debt, long-term debt, and cash transfers from the proceeds of any debt action. These debt instruments can be (1) ninety-day, short-term loans obtained from commercial banks in each marketing area's major commercial market and (2) ten-year bonds. Should your overall consolidated operations experience a cash shortfall during any operating quarter, the simulation will automatically issue an overdraft, which is unplanned debt financing of a very expensive and undesirable form.

OVERDRAFTS

This is basically a distress loan. It is the least attractive and most costly way to finance your company's business. During any particular quarter, an area operation of yours might become technically insolvent. Should this occur, the simulation will first attempt to cover the cash shortfall from idle cash available at your company's consolidated level. If cash is available, consolidated will automatically transfer the necessary funds to the deficient local operation without a penalty to the technically bankrupt operation. If cash is insufficient at the consolidated level, an overdraft loan will be obtained by consolidated for each affected local operation, with cash disbursements automatically made to them during the quarter to cover any shortfall.
Because you exhausted all your firm's internal capital sources to arrive at the point that requires an overdraft, and your company has been unable to forecast its cash flow needs accurately, the cost of an overdraft is very high. The rates for consolidated's overdraft borrowings are about 24.0 percentage points above the prevailing ninety-day short-term loan rate available in its home financial market. In most applications of this simulation, your company's home market financial center is New York City.
The simulation will automatically pay off your company's overdraft during the following quarter. It does this by deducting from your firm's following quarter's cash flow the total amount of the overdraft plus the overdraft's interest payment for the quarter. Consequently, to maintain your company's solvency in the payoff quarter, you must plan for this "payment." While your overdraft loan is outstanding, both the principal and interest due appear as liabilities on your consolidated and country/market balance sheets.
As an example, assuming a cash flow shortfall of US$147,913 and the short-term rate for the United States, the current quarter would incur a liability of US$162,150 (147,913 x [8.50 + 30.0]/4). This amount would be taken from your company's cash flow in the following quarter, with the interest charge of US$14,237 appearing on that quarter's consolidated and country/market income statements.

NINETY-DAY SHORT-TERM LOANS

Short-term debt may be obtained by any one of your local operations within the constraints of its credit rating, past cash management experience and current ratio. If your ninety-day loan request is granted, the entire amount arrives during the borrowing quarter with the loan repaid the following quarter. The interest payment on the loan should be anticipated as it is paid in the current quarter. The repayment of this loan does not have to be entered, as the simulation automatically pays off the loan and its associated interest in the following quarter out of your company's operating cash flow. You must, of course, plan for this cash removal when making your quarter's financial plans.

TEN-YEAR BONDS

Your company can issue callable ten-year bonds in even $1,000 amounts. The interest rate on your bonds depends on (1) the yield rates on comparable ten-year bonds in the world's major money markets, (2) your firm's credit rating, and (3) your company's debt-to-equity ratio.

To enter the bond market, your company enters the dollar amount of the bonds to be sold in even $ 1,000s. You will receive the bond issue proceeds during the issuing quarter, with the bond's first interest payment due in the same quarter. Any number of bonds, or the value of bonds, can be outstanding at any given time— your firm needs only to service them, that is, pay their required interest each quarter. When bonds are outstanding, their total face value is listed as a liability, and the interest expense for that quarter appears as an interest charge on your income statement. Exhibit 5.5 provides an example of a bond issue of US$450,000 placed in the New York City money market, when the company had an A credit rating and U.S. Treasury bonds had a 5.67 percent yield. The results shown here were generated by a spreadsheet program labeled "BONDS" that is available in your Player Suite at the game's website. While it is not completely accurate, it can give your firm a better idea of the proceeds and true costs of bond issues.
In issuing your corporate bonds, it is very likely the proceeds will be less than the bond's face value. Discounts will occur and this amount of discounting occurs naturally and is charged as a one-time cost to your interest expenses. In subsequent quarters the only interest charges you incur are those needed to service the bonds that are outstanding.
There is no restriction on the amount of total outstanding bonds your firm can possess at any time. No new issue, however, can be larger than its home country unit's owner's equity or its current assets less its current liabilities. Should these restrictions not be met, the bond issue will fail and your firm will be accordingly notified of this failure on its operations report. It is also very likely that subsequent bond offerings will fail for a number of quarters after a country unit earns a C credit rating.

CALL OPTION

Your bonds feature a call option by which you can retire all or any part of their total value at any time. This option is exercised by entering the monetary value of the bond amount to be called or retired. When making this retirement, a call premium of 7.5 percent is levied on the amount being called, and this premium is charged to your firm's interest account for the quarter's call. Thus, if US$150,000 of a US$400,000 outstanding amount of bonds were called, your balance sheet's cash account would be debited US$161,250, your income statement's interest account would be debited US$11,250, and your total bond liability would fall to US$250,000. The spreadsheet program available to your Game Administrator labeled "BONDS" also deals with bond calls.

CASH TRANSFERS

Due to the borrowing power of different company units, and variances in interest rates associated with your firm's major money markets, you may wish to transfer cash between any local operations you may have. This can be done to handle temporary cash flow needs, allow a local operation to make short-term investments in its own money market, or pay for plant construction and equipment transfers.
These transactions are entered as cash transfers "from" "donor" units and "receiving" unit(s) in the donor country's local currency. The country operation providing the funds is the transferor or "donor" and the country operation receiving the funds is the transferee or "receiver." The total values of the cash-out transfers naturally equal the total value of the cash-in transfers which becomes a "Due to Home Country" value on the receiving country unit's Balance Sheet. You should plan each country unit's financial needs just as for your home country unit. If a country unit experiences a technical insolvency during the quarter, the simulation will automatically transfer funds from your home country to cover the cash shortfall. This action will cause the country unit's credit rating to fall to a C level. Repeated shortfalls may cause your home country's credit rating to be damaged and serve to lower your firm's Stock Price, as such deficiencies indicate your firm lacks adequate financial controls.

INCOME TAXES

Because you are an international corporation, your earnings are subject to the varying taxation policies of the federal and local governments within which your units operate. All countries impose general taxes on a unit's total income, and value-added taxes may apply to varying degrees from country to country.
Exhibit 5.6 presents the income tax rates applicable within each country at the beginning of your simulation. These rates combine federal taxes with any local taxes. These taxes are paid on a quarterly basis, and the simulation automatically collects them from your firm's cash flow. Should an operating unit experience losses during a quarter, the amount of those losses is carried for a three-year period and will be used to offset, or act as a tax credit against, profits or earnings made in subsequent quarters.

VALUE-ADDED TAXES

Many countries, as a hidden and additional source of easily collected revenue, levy value-added taxes (VATs) on products manufactured within their borders. These taxes can be complex and confusing. The Global Business Game simplifies the assessment and collection of VATs by applying the country's particular VAT rate to the country unit's product sales less the value of all subassemblies found in the units sold in the quarter. All VATs are automatically collected from each country unit's cash flow and gross revenues to result in the net revenues actually generated by the country unit.

DIVIDEND TAXES

Many countries tax the dividends or excess capital foreign subsidiaries remit to their overseas owners. The politics of this action encourages foreign investors to keep their capital in the country for reinvestment purposes rather than remitting it at a heavy discount to the company's home country. Exhibit 5.6 displays the dividend tax rates being used by various nations within the simulation to accomplish this purpose.
When an overseas country unit forwards all or any portion of its retained earnings to its home country headquarters, that amount will be taxed according to the applicable dividend tax rate. As an example, if your German unit had retained earnings of €205,147 and wanted to send €100,000 of that to consolidated's retained earnings for its own dividend declaration needs, €30,000 would be taxed away, with the remaining €70,000 going to the home country's retained earnings.

EXCHANGE RATE RISK

Your company's previous management group has required that all local profits and losses be converted into the home office's currency. This allows for standardized financial comparisons. Your Game Administrator will determine your company's home country before the simulation begins, as this establishes the base currency employed. Assuming your company's home office is in the United States, the relevant currency would be the U.S. dollar.
Any time a nation's currency changes in value relative to that of other nations, gains and losses on the exchange or conversion of those currencies will occur. If the U.S. dollar falls in value relative to another currency, the American home country company realizes exchange rate losses. If the U.S. dollar rises in its relative value, the American company receives exchange rate gains. These effects can be substantial if one of the currencies is especially volatile and a large volume of sales is made in that currency. The sum of all currency gains and losses are considered additions or subtractions from your reported profits and corporate-level retained earnings, therefore affecting your firm's owner's equity and the amount of dividends you can pay your shareholders.
To illustrate the effects of currency fluctuations on profits and intercompany comparisons, assume that the currency and exchange values shown in Exhibit 5.7 were in effect for Quarters 3 and 4 for the United States, Mexico, and Japan. Between the two periods shown, U.S. dollars rose in relation to Mexican pesos 0.1754 points, or 2.04 percent [(8.7850 - 8.6096)/8.6096 = 0.0204]. U.S. dollars in relation to Japanese dollars fell 4.01 points, or 3.1 percent [(125.50 - 129.41)/125.50 = 0.031] in value.

Now, let us assume that the following operating profits were obtained by your company's operations in Quarter 4 in the United States, Mexico, and Japan. Converting Mexico's and Japan's local currencies into American dollars at the Quarter 4's exchange rates produces the following consolidated and country-related exchange rate gains and losses:

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Exchange rate gains were recorded on Mexico's operations between Quarters 3 and 4 because the value of the American dollar rose in relation to the Mexican peso. This gain was US$16,000 after rounding, as it took fewer American dollars to convert Mexico's Quarter 4 Year 3 earnings into dollars. Because the value of the American dollar fell in relation to Japan's yen between the two quarters, exchange rate losses amounted to about US$49,000 after rounding. This resulted in a net exchange loss of $33,000.

SHORT-TERM INVESTMENTS

Your company has two other nonoperating revenue sources in addition to selling automatons to other firms in your industry. These sources are revenues from the sale of patent rights and their accompanying royalty payments and the proceeds from locally placed short-term investments.
To make a short-term investment for an operating quarter, you designate the monetary value that is to be placed in each country's respective three-month, short-term money market. This amount is immediately withdrawn from your company unit's cash flow at the beginning of the quarter, and returns to your unit's cash account at the beginning of the following quarter. The interest income is collected during the current quarter. The interest rate or yield on this investment will be that of the ninety-day short-term money rate found in the money markets of New York City, Frankfurt, and Tokyo.

MONEY CIRCLES AND HEDGING

In earlier years in the world of international commerce, firms often either capitalized on the slow pace of international currency transactions or attempted to protect themselves from wild currency fluctuations. In the former case, various firms would create money circles. These circles took advantage of the "float" or long time it took banks to reconcile their international currency accounts. In the latter case, firms felt it was useful to hedge their currency activities, especially for those associated with countries experiencing large currency valuation swings.
Through the advent of electronic reporting and electronic money transfers, the delay or lack of information that made these activities possible or lucrative in the past are not as important as before. Thus your firm cannot create a money circle, nor would it be useful to engage in hedging operations.

ACCOUNTING AND CASH FLOW OPERATIONS

The accounting system created by your company a number of years ago planned on having multiple revenue and cost sources from both its own country's operations and those overseas. In this regard the accounting statements consist, in their most elaborate form, of three separate global area reports, whose results are gathered and summarized into a consolidated report. Each area report, in the form of global area reports, presents the results from the two countries where business can be conducted in each economic zone.
This manual has previously described the nature of every item in the simulation's income statements, balance sheets, industry report, and operating statements. The present section describes the various accounting procedures used in the game, starting with your company's income statement. Many income statement accounts are budgeted each quarter— such as advertising, training and development, and research and development. These are not covered, as the income statement merely repeats your decision entry and has already been covered in earlier chapters. Instead, the more abstract cash flow implications of various entries and accounts are presented subject to the accounts receivable and accounts payable operations presented in Exhibit 5.8.

Exhibit 5.8
Summary of Cash Flow Operations
|Accounts Receivable |20.0 percent of net sales and operating revenue collected next quarter. |
| |All revenues associated with "Other" nonoperating income collected during the quarter. |
|Accounts Payable |10.0 percent of factory worker wages for the quarter is paid next quarter |
| |25.0 percent of subassembly purchases |
| |30.0 percent of general administration expenses |
| |30.0 percent of sales representatives' base salaries and commissions |
| |50.0 percent of any new plant and equipment expenses during construction or expansion |

GROSS RECEIPTS

This account summarizes all revenue associated with the sale of television sets. Included in these receipts are any VATs assessed by a federal government. You must rebate this VAT to each country's tax collector. This is not a manual entry on your part, as these funds are automatically remitted to the federal government(s) involved. Thus the value of the VAT is subtracted from gross receipts to produce the net sales or operating revenue produced by your company. Approximately 80.0 percent of net sales are collected during the current quarter, with the remaining amount going to accounts receivables for collection the following quarter.

OTHER INCOME

Because your company has been defined as a manufacturer and seller of television sets, income from any other source(s) must be considered as nonoperating or extraordinary income. The three items in this account category are pure cash inflow by the end of the quarter, although your firm could take a book loss on the sale of any of its land, plant, and equipment, which would be charged against current earnings.

COST OF GOODS SOLD

Your company operates under the standard weighted cost inventory method. The unit value of each of your company's three products is the weighted value per unit of the pool of (1) units drawn from any finished goods held over in inventory from previous quarters and (2) the current quarter's unit production costs and volumes. No LIFO (Last In, First Out) or FIFO (First In, First Out) option is available to your company. The value of the raw materials or Subassembly portion of each product's valuation is determined by the weighted average cost of the pool of raw materials from which your television sets are assembled. About 90.0 percent of your firm's production costs associated with worker wages is current quarter cash outflows, with the remaining 10.0 percent portion becoming an accounts payable item due the following quarter.
If tariffs are being levied on the sale of imported products by a particular host nation, these charges are added to the country unit's cost of goods sold at this time. These tariffs act to increase the cost of any products you sell in the host country, which are not produced locally, and you should consider these tariffs when setting the prices of your television sets.

GENERAL ADMINISTRATION

This is a collection of executive compensation, supervisors' wages, technician salaries, market liaison managers (if you are running any foreign operations), the firing of line workers, automaton technicians, line supervisors and plant superintendents, construction supervision when required, an overhead assessment based on plant size, and any one-time and continuing charges associated with plant liquidations and decommissionings. Approximately 70.0 percent of this expense is a current cash outflow, with the remaining portion an accounts payable.

DEPRECIATION

This is a noncash expense, with general plant and equipment being depreciated on a twenty-year, straight-line schedule. Automatons are a special category of equipment subject to high economic obsolescence and are accordingly depreciated on a ten-year, straight-line schedule. These assets begin their depreciation once they have been installed and have become a working asset. They are listed as capital in progress while going through the installation and construction process.

INTEREST CHARGES

Any short-term loans or bonds held by your company were contracted for in a previous quarter. Accordingly, the interest charges associated with them are current quarter cash outflows. Your short-term loans, plus their interest charge, are automatically paid off by the simulation so you should accordingly anticipate this cash outflow requirement.
Overdrafts incurred by firms are not anticipated but are forced on a company that is technically insolvent during the operating quarter. In this regard the amount of the overdraft, plus its interest charge, is a cash outflow element that must be planned on by the company for the following quarter.

INCOME TAXES

Income taxes are assessed at the simplified and combined federal and local rates presented in Exhibit 5.6. These taxes are collected quarterly and therefore are a current cash outflow item. If your firm has negative profits for the quarter, a negative income tax amount will appear on your firm's income statement, and your retained earnings will be subsequently debited by the entire amount of the quarter's loss. This negative tax is a tax credit, which will be held in your company's records to act as a deduction from any future profits your firm earns within the next three years.

CAPITAL IN PROGRESS

This account sums the value of all monies associated with the construction of new plant and equipment, the expansion of current plant capacity, and the interfirm and intrafirm transfer of base capacity and automatons. The values recorded here for intrafirm base capacity and automaton sales will be the amounts agreed upon by the parties involved and duly recorded and approved by the Game Administrator on the appropriate "Plant Capacity and Automaton Sale Agreement" form found in Appendix C. The amount for new automaton purchases by automaton type is at the rates posted in Exhibit 4.17's automaton price schedule. New plant construction, or plant line expansion, will be at the rate of US$24,000 per worker as measured in units of base capacity. Thus, if you wanted to build a plant that could be staffed by twenty more line workers, you would have to spend US$480,000 on that facility plus incurring construction supervision costs amounting to US$96,000 for the two construction quarters.
Any setup or transportation charges associated with capacity expansions or base capacity and automaton transfers are immediately included in the cost, and the entire amount, from the quarter in which expansions are contracted, is depreciated at the rate applicable to the technology being depreciated. One-half of the cash flow cost of such an operation would be taken from your cash account or any other concurrent source of cash. The full amount of the action would appear on your balance sheet as capital in progress, and that capital would start being depreciated once it had been completely installed. The other half of the action's required cash flow would come from cash sources you provide during the following quarter's activities.

RETAINED EARNINGS

This residual item can be used for internal funding purposes or can be the source of dividend declarations. For offshore units it is an amount that is subject to transfer to your firm's home country for use at that site. If any of these retained earnings are sent to your home country, they are subject to existing dividend taxes. This tax is a current cash outflow item and must be anticipated by your operating unit before the retained earnings transfer is made.

ACCOUNTING AND CASH FLOW OPERATIONS

The income statements, balance sheets, and operations reports generated by The Global Business Game summarize the results produced by the many decisions you will make over the game's duration. To help you understand these reports, and to help you see how the results presented in the game's reports are created, a number of sample forms and printouts have been prepared. The materials presented in this section are for illustrative purposes only. The decisions that produced these results, as well as their underlying scenarios, do not necessarily represent the best strategies that could have been pursued or the game that has been prepared for you by your Game Administrator. In this example we are examining the activities of Firm 5, WonderView` TV and its overall and country unit results for Quarter 2, Year 5. These results have been put into a combined spreadsheet form for greater viewing ease in Exhibits 5.9 and 5.10 using the cut and paste feature available in GBGPlayer.
The company is competing in a five-firm industry with competition possible in the NAFTA and APEC economic zones. It has decided to compete only in the United States, Mexico and Thailand by building plants in each of those countries. The firm has increased the size of its American plant and its overseas plants are identical 100 Base Capacity operations. On the marketing side it is using C-Wholesalers in all countries and its product quality levels are appropriate for their markets.

Exhibit 5.9
WonderView TV's Consolidated Income Statement
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Exhibit 5.10
WonderView TV's Consolidated Balance Sheets
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INCOME STATEMENT RESULTS

WonderView TV had net sales at the consolidated level of $31,517,624. Value-added taxes in the amount of MEX$2,465,079 and B21,830,872 were respectively collected in Mexico and Thailand. There were no other income sources for Firm 5, such as the sale of plant and equipment, product licensing, or short-term investments.
Currently, many of its American 27" TVs are made in both Mexico and Thailand with the start-up funds for those operations coming from the proceeds of stock sales conducted in United States.
Firm 5's operations in all its markets are very diverse as they engage in manufacturing, incurring all the costs associated with operations management, while also running their own marketing functions. The net result of these activities resulted in an American-based profit of $5,828,077, a Mexican profit of MEX$2,992,394 and a Thai profit of B41,693,019. Currency translation gains amount to US$9,401 were realized between Quarters 1 and 2, Year 5.

BALANCE SHEET RESULTS

Firm 5's balance sheets at the country/market and consolidated levels portray a company that has done very well and is financially secure. Its major strength lies in its large reserve of retained earnings and its lack of debt in any form. WonderView TV also very liquid, as it has a large hoard of cash and its inventory of sub-assemblies will turn into television sets in the next quarter. Accounts receivables in the total amount of $6,929,566 will also be collected in Quarter 3, Year 5.

CASH FLOW OPERATIONS

Cash flow operations for your company in The Global Business Game can become somewhat complicated because of the large number of transactions involved. For your interest a completed spreadsheet-based cash flow analysis of WonderView TV's Quarter 2, Year 5 American operation can be found at The Global Business Game's Website in a file labeled "Chapter5CashFlow."
To help you better understand a company's cash flow operations, Exhibit 5.11 itemizes WonderView TV's cash flow operation for the United States. Exhibits 5.12 and 5.13 explain how each of the values found in the cash flow model were obtained. As a test of your own understanding of the processes and accounts involved, you might try your hand at completing an analysis for its Mexican and Thai country units. By visiting the Website for the "Chapter5CashFlow" spreadsheet you will also be able to review the various formulas embedded in the spreadsheet's many cells. You will also discover as well the nature of as the database needed to construct a viable cash flow model of your own design.
As seen in Exhibit 5.11, a total cash inflow, or surplus of US$44,548,167, was associated with Firm 1's American results. Its cash outflows were $14,694,544 while its inflows were $59,242,710, due mainly to carrying over a large cash account.

ENTERING DECISIONS

The Player's Manual has now taken you through the mechanics of The Global Business Game, as well as directing you to a number of experiential exercises at its Website that have been designed to help you form a dynamic, flexible, and productive top management group. The next and final chapter will deal with inputting your decisions into the simulation, obtaining your quarterly results, answering commonly asked questions about the game, and responding to various critical incidents your Game Administrator may employ.
Exhibit 5.11
Sample Cash Flow Analysis, Quarter 2 Year 5
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Exhibit 5.12
U.S. Cash Inflow Operations
|Inflow Item |Amount |Explanation |
|Sales | 20,232,470 |This is 80.0 percent of the country unit's net revenues for the quarter. The remaining 20.0 |
| | |percent becomes an account receivable and will be a cash inflow items next quarter. |
|Cash Account | 3,373,799 |The previous quarter's cash balance brought forward. |
|Accounts Receivable |0 |The remaining part of the previous quarter's net sales collected this quarter. |
|Short-Term Investments |0 |The firm did not make any short-term investments |
|Short-Term Loan |0 |The company did not take out a short-term loan. |
|Bond Sales |0 |No bonds were sold this quarter. If sales had been made, the total value of the bond sale |
| | |should be entered as the underwriting fees and first-quarter interest payment are treated |
| | |later as cash outflows. |
|Stock Sales |0 |No new shares of stock were sold this quarter. If stock had been sold, the issue's net |
| | |proceeds should be entered. |
|Patents Licensed |0 |The firm has not received any patents and has accordingly not been able to sell or license a|
| | |patent to other firms in the industry. |
|Subcontracting |0 |The company has not contracted out any of its capacity for manufacturing television sets to |
| | |others in the industry. |
|Capital Sales |0 |No sales or transfers of the unit's base capacity or automatons were completed this quarter.|
| | |If a capital sale is made to another company in the industry, the sale's cash proceeds are |
| | |entered. If the unit transfers any of its plant and equipment to another one of its country |
| | |units, the asset's book value is treated as cash. |
|Liquidation/Salvaging |0 |The firm did not liquidate any of its plant and equipment and therefore no cash values were |
| | |obtained. Upon a factory liquidation or decommissioning subassemblies in inventory are |
| | |automatically salvaged at 30.0 percent of their original market value. This amount would be|
| | |treated as cash income. |
|Miscellaneous Credits |0 |The game administrator did not levy any credits to the firm. |
|Cash Transfers-In |0 |No funds were transferred to the firm's American unit from either Mexico or Thailand. |

Exhibit 5.13
U.S. Cash Outflow Operations
|Outflow Item |Amount |Explanation |
|Factory Wages | 2,973,073 |This is 90.0 percent of the wage bill generated by the number of line workers who appeared for |
| | |work. The remaining 10.0 percent is an accounts payable. Note that the factory's wage bill may |
| | |not be the firm's cost of goods sold. |
|Subassemblies Purchases | 3,744,753 |70.0 percent of the market value of any new subassemblies purchased for next quarter's factory |
| | |operations |
|Advertising | 90,000 |A current cash expense as budgeted |
|General Administration | 339,592 |70.0 percent of the country unit's current general administration expense. The residual value |
| | |becomes an accounts payable due the following quarter. |
|Distribution Centers | 520,826 |This amount includes the cost of performing any warranty work. |
|Wholesalers/Sales Offices | 2,094,914 |This amount includes the factory's sale office |
|Sales Force/Trainees | 695,265 |70.0 percent of the base salaries and commissions paid to all sales representatives on payroll |
| | |at the quarter' end. Budgeted sales force training and development funds are also placed in |
| | |this account. |
|Training and Development | 30,000 |Budgeted training funds expended on line workers and automaton technicians. |
|Inventory Charges | 646,273 |The cost of handling and storing all finished goods and subassemblies held on the country |
| | |unit's books. |
|Shipping | 489,773 |All shipping charges associated with the purchase of subassemblies and finished transferred |
| | |from other firms or the firm's own foreign country units. |
|License Fees | 0|The company did not purchase any patent licenses from other firms. |
|Subcontracting | 0|The firm did not purchase television sets from other firms in the industry for resale under the|
| | |firm's own account. |
|Research and Development | 27,000 |Budgeted for the quarter. |
|Quality Control/Programs | 139,412 |The firm's budgeted quality control programs and quality inspection programs. All units |
| | |destroyed through destructive testing are considered a noncash expense but a cost to the |
| | |Quality Control Department. |
|Maintenance | 86,000 |As budgeted. |
|Miscellaneous Charges | 4,250 |The firm purchased a few Merlin Reports this quarter. |
|Income Tax |1,772,928 |A cash outflow when positive and zero when negative. |
|Accounts Payable |2,738,246 |A flexible account that varies somewhat with the firm's liquidity. When the firm is very |
| | |liquid, all accounts payable are processed. When the firm approaches illiquidity, some payments|
| | |to vendors are delayed. |
|Overdraft Payment | 0 |The firm had no emergency loans. This payment is automatically deduced from the quarter's cash |
| | |flow and should be anticipated by the company. |
|Interest | 0 |The interest on any short-term loans or/or bonds |
|Dividend | 0 |No dividends were declared this quarter. |
|Bond Call/Treasury Stock | 0 |The firm has no outstanding bonds and it did not purchase any of its own stock. |
|Capital In Progress | 0 |No new capital or land for a factory was purchased by the firm. Any value state here would |
| | |include only the cost of the capital itself and not the construction supervision charges |
| | |associated with installing any plant and equipment. |
|Cash Transfers Out | 0 |The company did not send any funds to its offshore units. |

Chapter 6
Simulation Operations and Playing Procedures

We have now come to the part of the game where you must transfer your company’s decisions into a form that can be used by your game administrator and the simulation itself. You will be basically interacting with the game and your opposing firms using a 3.5-incy floppy company disk or files although you will be installing the game’s programs on your personal computer from the CD found in this package. After every company in your industry has submitted their decisions, your game administrator will process them and you will receive feedback on your company’s performance. The results will be given back to you via your company disk or a similar file.
This chapter deals with how your game will be typically configured at most locations. There are a number of options your game administrator can employ for interacting with the game’s model, such as a Web site, faxes between you and all parties connected with the industry being simulated, or a local area network (LAN). You game administrator will explain the procedures in effect at your institution.

GENERAL DISKETTE OPERATIONS AND PROCEDURES

You will find in the GBGPlayerPackage a file that contains GBGPlayer. This application is needed to run your part of the simulation. Your team will have to supply its own 1.44MB floppy disk which you should prominently identify as being from your company. This disk is used to enter your firm’s quarterly decisions and to retrieve your results each quarter. To interact with the program, you must first copy GBGPlayer onto the computer you will be using. Once that has been accomplished you can enter and later access the results from the game.
The initial installation of GBGPlayer, your company initialization process, and the game’s quarterly decision set input and output steps follows the process of Installing GBGPlayer, Initializing your firm, Inputting your company decision set, Submitting your company diskette to your instructor, Receiving your company’s results via your company diskette and so on until the game ends. If you have a dedicated laptop or desktop computer, it is advised that you place GBGPlayer on your computer’s desktop for easy access.

SYSTEM REQUIREMENTS

to run GBGPlayer you will need a personal computer with the following configuration and memory sizes:

Computer/Processor Personal or multimedia computer with an 80486 or higher processor.
Operating System Microsoft Windows® 95, Windows® 98, Windows® Millennia, Windows® 2000, Windows®NT 4.0, or Windows® XP.
Memory In Windows® 95 or 98, 8MB of RAM. In Windows® Millennia, 2000, NT and XP, 16MB of RAM.
Disk Drives: Hard Disk 12MB of free hard-drive space. CD-ROM a standard CD-ROM drive Floppy 1.44MB
Monitor VGA or higher-resolution video adapter, Super VGA, 256-color idea.
Peripherals Any printer supported by Windows®. Windows®-compatible mouse or other pointing device.

PLAYER APPLICATION INSTALLATION

Do the following to install The Global Business Game on your computer:

Place the CD you have purchased in your computer’s CD tray and close. This normally will be your “D” drive.
Go to the folder labeled gbgPlayer. This is a compacted file.
Once the folder has been opened click on the file labeled gbgPlayer.
Copy that file to a new directory which you might call GBGPlayer. Once you have copied that file a factory icon will appear as shown.
[pic]
It is suggested that you create a shortcut to GBGPlayer by placing this icon on your desktop. Do this by right-clicking the factory icon and then “Send to…/Desktop”. The icon will now appear on your desktop labeled “Shortcut to gbgPlayer”.

COMPANY INITIALIZATION

before you can begin inputting your company’s first round of decisions, you must identify your company, the industry in which it is competing, and the members of your management team. It is assumed at this point you have been assigned to a company and your game administrator has provided you with the industry letter that applies to your firm. These letters can run from “A” to “I”. It is also assumed you have placed the factory icon on your desktop.

The first steps to follow are illustrated in Screen 6.1.

Left-click the factory icon.
An opening screen will appear for a few seconds.
A “Getting Started” window will appear. Click on “Initialize your company”.
Fill in the name you have chosen for your company, indicate its Industry letter and Firm number.
Create a password that you and your team will not forget.
Click “Next” to move onto the next window.

In the next screen you are asked to identify yourself and the members of your company. Complete the information that your instructor has asked of you as shown in Screen 6.2. Finally you will save and output to your floppy the information you have entered as presented in Screen 6.3.

ENTERING AND EDITING COMPANY DECISIONS

The GBG has been designed to look and feel like a typical Windows® application. Thus all the conventions associated with that software apply to the game’s menus and screens. To begin GBGPlayer again click on your factory icon. This time, however, click on “Open an existing firm”. Click on File and then Open. The “Open File” screen appears as in Screen 6.4. Use the “Look in” combination box to get to your floppy which should be in Drive A. If you are accessing the game from a file that has been placed in storage, your game administrator should inform you as to its location. Retrieve the appropriate file and submit your password. Once you have done this the first of six decision “pages” will begin to appear such as the one shown in Screen 6.5. This page is used to receive your company’s marketing decisions for each country found in your industry. For all decision pages Column A itemizes the decisions that must be made within the functional area displayed. The B column, with its numbers in blue, reminds you of the decisions your company made last quarter. The C column asks you to update or revise each of the decisions that are needed in the current quarter. Tabs at the bottom of the screen let you page through the game’s marketing, logistics, subassembly, production, plant and finance decision areas. The screen’s spin box allows you to dial the country unit for which you are making decisions.

VIEWING AND PRINTING RESULTS

After you have submitted your decision set to the game administrator, your firm’s results will be returned to you via the same decision disk or file. To retrieve your results and the reports that accompany those results, launch GBGPlayer in the normal fashion and access the GBG file related to the quarter for which you will be making your new decisions. Click on Reports on the tool bar where you will find a dropdown menu covering Merlin Reports, The Global Industry Report, your firm’s operations report, income statement and balance sheet. Be sure you check your results immediately and report any confusion you might have about what your firm has done.
Screen 6.1 Starting GBGPlayer and Initializing Your Company

[pic]

Screen 6.2 Company Roster
[pic]

Screen 6.3 Saving Company Input

[pic]

Screen 6.4 Opening Firm Files

[pic]

6.5 Decision Screen, Tools and Tabs

[pic]
Appendixes
Appendix A: Critical Incidents

CRITICAL INCIDENT 1

BILL FISHER'S NEW SALARY BONUS SYSTEM

After serving in your company's Chicago sales office as the area's top sales representative for five years, Bill Fisher was moved to your South Jersey district sales office in Trenton, New Jersey, four months ago to improve its below-average performance. After looking over his salespersons' records and getting to know each better by going on calls with them, he was concerned that some were not as productive as he felt they could be. He also sensed that many, especially the district's senior reps, had fallen into old patterns, weren't looking for new business, and needed to improve their selling techniques.
Bill felt the crux of the problem came from how the company's sales bonuses were calculated. As he explained, "The system we have now is the traditional one. I sit down with the rep at the beginning of the year and we set what we agree are reasonable sales goals. If reps beat the goal, they get the bonus. If they don't... no bonus. While this all sounds straightforward, it's much more complicated than that. We spend a lot of time arguing over what's a reasonable goal. Even worse, most reps meet the goal, but I think they could do even more."
To fix the situation, Bill has devised what he calls the Market Share Gain Plan. Under this system, each sale rep is ranked against all the other district reps regarding the market shares of the company's television sets they produce in their sales area. Bill reasoned, "We live and die on market share, and we have to increase our market penetration. What I'm doing is rewarding those who produce what we need. Those who increase their market shares the most get the biggest bonuses, and those who lose market share get closer supervision from me. That way they'll be able to do better next season. If they ultimately don't improve after all my help, I'm afraid I'd have to let them go."
Before implementing his system, Fisher paid a courtesy call to the Human Resources Management Department because of his plan's payroll ramifications. Despite his enthusiasm, the HRM Department cautioned him about certain potential problems.
Those who receive Bill's "help" after not getting their bonuses might consider this a form of punishment or a way of singling them out for ridicule among their peers. The ability of a single sales rep to produce market share gains was also thought to be problematical. To some degree, your company's market share in any sales area is a function of the quality and prices of the sets being offered by your competitors. A sales representative has no control over this. More important, some in the HRM Department felt Bill's system might discriminate against older sales reps, as they had established market shares, whereas new sales reps started out from low market shares, which might be more easily increased.

Responses

Let Bill Fisher implement his Market Share Gain Plan. He believes most reps will get some type of bonus and that those who don't "make bonus" might get one the following year after his help. It is believed this option would generate additional profits of $250,000 and would appear as a credit to your miscellaneous account for the quarter.
Let Bill Fisher implement his Market Share Gain Plan on a trial basis in two separate New Jersey sales areas, with one area under the control of one of your senior sales reps and the other under the control of a junior sales representative. This option would cost your firm $15,000 and would appear as an additional one-quarter sales force expense.
Step back and have Bill present his Market Share Gain Plan at a district meeting of all sales representatives to get their feedback. It is believed strong objections would be heard from your older sales reps, but they make up only 25 percent of the district's selling staff. The cost of this option would be $110,000, which is the value Bill puts on the lost margins he thinks his plan would produce if implemented immediately.
Don't implement the plan and concentrate on improving the selling techniques of all sales representatives. This option requires you to spend at least $10,000 per country on sales rep training for the next four consecutive quarters.

CRITICAL INCIDENT 2

"YOU HAVE TO GET THEIR ATTENTION"

John Englehart threw off his jacket, loosened his tie, and said to no one in particular, "Trying to sell our sets cold canvas is really frustrating. What we need is something that will get our foot in the door so we can make our pitch."
Englehart's complaint received a sympathetic response from the sales office's other sales reps. They all had spent many idle hours trying to see the retail buyers who might buy your TVs. As John asserted, "To make a sale you have to get their attention. If we can just do that, we can sell more goods, and make it easier to get our commissions, and we'll stop wasting time cooling our heels in waiting rooms. Let's all try to brainstorm this thing. I'm sure we can come up with some good ideas."
On that note a number of notions were bandied about. Helen Fernandez suggested putting together a mailing list of the market's major retailers who were not stocking your company's sets. Mike Hardaway tagged onto that idea, but suggested that some type of gift with the letter might really get the buyers' attention. "Why not offer everyone on the list $35 for an appointment? I've heard some other companies have done this with pretty good results." "I don't know about that idea, Mike," Helen responded. "That sort of sounds like a bribe to me or that we're really desperate." "Well, maybe we can tone it down a bit, or be more subtle, but I think we're on the right track. Any more good ideas?" John asked. "What do you think we should do?"

Responses

Send out a mailing offering a straight $30 cash gift to no more than 400 retail buyers whose stores do not stock your sets. The entire charge of $14,000 will be billed to your firm's sales force expense for the quarter.
Combine the above mailing list with a list of all retailers presently stocking your sets. Offer all recipients an appropriate "Seasons Greetings" gift valued at about $20. In a form letter, thank all those who are stocking your sets for their business, with wishes for a successful New Year. For those not stocking your TVs, indicate you will be contacting them soon to show them how to have an even more successful coming year by stocking your sets. The entire cost of $55,000 for this mailing will be billed to your firm's sales force expense for the quarter.
Send a letter offering all retailers not stocking your sets a $50 rebate on the first order they place with your company. On this order only they will also receive an additional $2 special allowance for each set purchased. You estimate about 100 retailers will respond with an appointment and that the average order will be for twelve sets. The entire cost of this option will be added to your firm's sales office expense in the current quarter.
Increase the space of your company's booth at the upcoming Home Electronics Trade Show in New York City's Javits Trade Center. Invite every retailer in all your markets to visit your "Hospitality Center" when they are at the trade show. The cost of this response will add $35,000 to your firm's advertising expense for the quarter.

CRITICAL INCIDENT 3

THE NEW AUTOMATON TECHNICIAN

One of your brightest, up-and-coming younger workers is having some on-the-job problems. Consuelo Hernandez came to your company as a secretary right after graduating with a community college degree in secretarial science. She had real hands-on knowledge of every piece of equipment and all software associated with the modern business office. Consuelo quickly fit in because of her cheerful personality and willingness to learn.
From the very start of her employment, she made it clear, but in a very nice manner, that she was ambitious and was willing to try anything that would promote her career and give her a well-rounded view of your firm's operations. Because of her skills and energy level, after three years Consuelo had grown beyond her job requirements but could not assume executive secretary or office manager status because very competent people with greater seniority already occupied these positions.
Rather than losing her to some other company, and because it was believed her knowledge of programmable software and practical computer savvy would transfer to the skill requirement side of an automaton technician's job, Consuelo was offered such a position. As you had expected, Consuelo gladly accepted the challenge, as it gave her exposure to the factory side of your operations, a totally new line of advancement, and a pay raise.
As Consuelo had done in your office, she quickly caught onto the job's requirements after going through a short technical training program conducted off-site by your automaton manufacturer. That was not the problem. What was the problem were complaints she has brought to you about the hazing she was being subjected to, much of it verbally and graphically sexually suggestive. When probed about the comments and cat-calls yelled out by line workers as she passed through the factory, Consuelo broke down crying and handed you a sheaf of crudely scrawled notes and cardboard signs that made all sorts of sexual propositions to her.
Before taking any action in this regard, you and your plant superintendent toured your Erie, Pennsylvania, factory to follow up on Consuelo's view of the situation. An inspection of the factory's walls and girder columns found them to be clean, freshly painted, and free of graffiti. The walls and stalls in the men's restroom, however, were covered with felt-tipped pornographic messages and pictures, a few of which listed Consuelo's home telephone number and a list of the "services" she would provide.
As your tour continued later in the day, the plant superintendent observed, "Boys will be boys," and said that the male line workers were just having a little fun to break up the monotony of their jobs. As far as he was concerned, they did not mean any harm and "Consuelo should learn how to take it." When asked what should be done about the situation, your superintendent replied, "Look, I can talk to the guys and tell them to knock it off. I don't know if it will do any good, though. She sort of causes the problem herself. You know, it's those tight T-shirts she wears. It's okay for guys to wear them in here because of all the heat, but for her to wear one—that's just asking for trouble. What I want to know from you is why did you have to put such a good-looking gal in here in the first place!"
Based on this information, what do you believe is your best course of action? You are aware of the recent U.S. Supreme Court ruling that employers must ensure their general work environments are free of sexual harassment and that class action suits by the government are appropriate when such conditions are not being met in the victims' eyes. You are also aware that your female assembly line workers, who make up about 25 percent of these workers, are following Consuelo's case with great interest.

Responses

Have your plant superintendent hold a meeting of all line workers to remind them that sexual comments, and the display of pornography, violate your company's standing policies intended to ensure that a sexual harassment-free environment exists in all work spaces. This option, taken for one-half hour on company time, results in a nonsignificant cost to your firm.
Hold a mandatory three-part weekly series of workshops and plant conferences on sexual harassment. These one-hour meetings would be held on company time at the beginning of Wednesday's plant operations and would cost your home country plant US$140,000 for training and estimated lost-productivity costs for the current quarter. The charge would be processed through your miscellaneous account.
Advise Consuelo that you understand the pressure under which she has been placed. Caution her, however, that there are always "two sides to every story" and that she may be partially the cause of her trouble. Suggest to her that she be more circumspect about her attire in the factory and offer to return her to her former secretarial position. This action causes your firm no out-of-pocket expense.
Fire your plant superintendent as a demonstration "that you mean business" about sexual harassment and that he has failed to enforce your company's harassment-free policy. This response will cost your firm US$ 120,000 through your current quarter's miscellaneous account for the "early retirement" of this superintendent.

CRITICAL INCIDENT 4

HOW TO IMPLEMENT A STRUCTURAL CHANGE

"Look, we're going to have to change who pays these warranty costs we're getting sooner or later, so I say let's do it now and get it over with as fast as possible." With these words Tim Martinko, your company's marketing director, summarized how he would go about changing who is really responsible for minimizing warranty work and its costs.
Almost the opposite tack was being suggested by your operations manager, Joe Graham, and your quality control supervisor, David Hubanks. "It took a long time for this problem to develop, so it'll take a long time for it to be resolved," David observed. "I think we should go about this slowly, so everybody feels comfortable about what has to be done."
After much wrangling over who was accountable for the warranty charges currently being absorbed by your distribution centers, the argument has finally come down to these polar positions. In its desire to be fast in its response to problems with defective sets, your company set up repair facilities as close to your customers as possible. It was felt this would be at the distribution center level, where control over repairs would be stronger, as opposed to the wholesaler level. Once these repair facilities had been established in your distribution centers, it was logical to have the centers pay for the warranty repairs, as they were doing the work. Also, by having them bear these expenses, they would be encouraged to minimize these costs as much as possible.
Over the years, however, your distribution centers have started to feel they are bearing the brunt of having to fix TVs they think your plants should have made right in the first place. They also have reasoned that by having the distribution centers fix whatever is wrong with the sets, the plants have no incentive to minimize assembly errors.
So far no decision has been made about how to solve this problem. As the person in charge of implementing whatever change is ultimately decided upon, however, which of the following do you think would be the best course of action for you to take?

Responses

Rather than changing who pays for the warranty repairs, take action to minimize any off-quality TVs coming out of your factories. Demonstrate to your distribution centers your good faith in this regard by guaranteeing that every plant's quality control program will be at the maximum level from this quarter forward. This response will cost your firm the price of the standard C sample size quality control program in addition to the quality control supervisor's regular US$10,000 quarterly salary.
Rather than changing who pays for the warranty repairs, have all defective television sets shipped ExAir, for the fastest customer service possible, to their factories of origin. All shipping charges, inventory and handling charges, and warranty repair costs will be borne by the factory involved. This procedure would continue for the remainder of the simulation.
Have each distribution center continue to repair all sets under warranty, but have the repair charges paid by each factory of origin. This option merely switches who pays for the repairs. Accordingly, all warranty repair costs would be charged to your firm's general administration expense for the remainder of the game.
Delay determining who pays for the warranty work costs for one quarter. Create a warranty work task force made up of relevant personnel from your distribution centers, Quality Control Department, and line supervisors. Their task would be to create in one quarter a mutually agreeable payment method, the only constraint being that the solution must result in optimal service to customers who have brought their sets in for repairs. It is assumed this option will not produce new out-of-pocket costs to your firm.

CRITICAL INCIDENT 5

FERDIE MILANO FIGHTS BACK

At the beginning of the 1999 selling year, Bill Fisher implemented his new Market Share Gain Plan. This system rated sales reps on the market shares they produced in each of their sales areas. Many of the younger reps liked the system and reaped sizable bonuses. Ferdinand ("Ferdie") Milano, however, was struggling. Once the district's top salesperson, he was now ranked at the bottom, and this was vexing to both him and Bill Fisher. Ferdie was mad because he was no longer getting bonuses, and Bill was frustrated because he had spent many fruitless hours trying to turn Ferdie around.
Bill had made a number of dual calls with Ferdie and had worked with him on his sales presentations. He also mailed him technical literature describing advances in electronics technology and how those advances made the company's sets more competitive. Ferdie didn't respond well to these suggestions and said to others that he was "in Bill's doghouse" and might lose his job.
The breaking point came when Bill happened to be in Ferdie's Lawrenceville, New Jersey, neighborhood at about 9:30 a.m. on other business. As he drove by, he saw the company's gray car in the driveway even though all sales reps were supposed to be "on territory" by that time. Because he suspected something was wrong, and Ferdie had been submitting territory activity reports showing he was making calls every morning by 8 a.m., Bill started to make regular checks. More often than not, the company car was in the driveway.
This was enough for Bill. Over coffee and doughnuts at their favorite diner on a Thursday morning, he handed Ferdie a dismissal notice effective immediately. Bill then followed Ferdie home, where he told him to hand over the company car keys as well as the company's sales literature. Ferdie was brokenhearted and humiliated and stated in no uncertain terms that he "was not going to take this lying down" and that his "life had been ruined."
The Newark, New Jersey, law firm of McDuff & Rice has just served your company with notice that its client Ferdinand Milano is threatening a lawsuit. The terms of the settlement would be reinstatement of his position, three months' back wages, $750,000 for pain and suffering, the payment of all associated legal fees filed by McDuff & Rice, a written apology from Bill Fisher, and the revocation of your company's Market Share Gain Plan. If these terms were not met, McDuff & Rice would file on Milano's behalf a 13-count age discrimination complaint. Under N.J.S.A. 10:51-2(d), the New Jersey Law against Discrimination, it would be claimed that your company created a motivation system that was prejudiced against its senior sales representatives and that you fired Ferdie in retaliation for not accepting your firm's Voluntary Enhanced Retirement Program offered earlier in the year.

Responses
Settle out of court by accepting all of Ferdie Milano's terms. This option would cost your firm $771,450, which would appear as a miscellaneous expense for the current quarter.
Negotiate with the law firm, assuming their terms are just "talking points." You can assume the negotiations would last six months, during which back wages would mount but Ferdie might ultimately settle for $350,000 and no job reinstatement. This amount would show as an expense of $350,000 for the present quarter.
Allow the lawsuit to go to a jury trial in the State of New Jersey. Your company lawyers believe they would win the case, based on Ferdie's lack of response to Bill's efforts to rehabilitate him and the fact that many sales reps have done well under the new bonus system. Should you lose the case, which your lawyers believe is unlikely, they think a jury's award for this case might range from $ 1.5 to $2.5 million. An amount comparable to awards given for such cases would appear as an expense item in the current quarter's miscellaneous account.
Launch a countersuit for $500,000 plus court costs against Ferdie Milano and the law firm of McDuff & Rice. In your lawsuit, you are claiming (1) the filing of inappropriate and exorbitant lawyers' fees by McDuff & Rice as part of the possible out-of-court settlement and (2) defamation of Bill Fisher's character by Ferdie in public statements he has made about his former boss and your company. If successful, this response would result in a net credit of $500,000 to your firm's miscellaneous account in the current quarter.

CRITICAL INCIDENT 6

"HELL NO TO THIS BAKSHEESH STUFF!"

You have recently sent Robert Frazier, one of your country liaison executives, around the world with your operations manager, Joseph Graham, to scout possible new plant locations. They are now summarizing for you their estimation of the prospects for building new plants overseas.
"As far as I can see, we have a large number of choices, especially in Asia, which is also closest to our Hong Kong supplier." Bob Frazier continued, "Our labor costs would be very low and the infrastructures available to us would be adequate for an assembly operation like ours."
"I have to agree with you on that," Joe Graham responded. "But I have a real problem with some other things, especially with the ethics some of those foreign businessmen showed me. And I thought it was even worse in the case of some of the government people we met."
"Well, you'll just have to get used to that. . . they've operated this way for years and that's how it's done over there." Bob leaned across the table to emphasize his point. "Even more, it's good to get on their good side, and a little bit of baksheesh can save you a whole lot of time and money in the long run."
This comment seemed to trigger an anger that had been boiling inside Joe all during the trip. "I don't care if you call it blat, baksheesh, or grease! It's all illegal, and I don't think we should have any part of it. It just galls me that we have to line the pocket of some puny little bureaucrat just to process some papers that he's supposed to do in the first place! I know there has to be a law somewhere against this."
On that note a rambling discussion ensued. It was pointed out that the U.S. Foreign Corrupt Practices Act of 1977 allows for personal payments to foreign government and company officials as gratuities for performing "nondiscretionary" services or engaging in activities that are appropriately within the scope of their job descriptions. In this case, a small payment is not illegal. It was pointed out, however, that problems arise over what are considered "small" versus "large" payments, and what are "nondiscretionary" versus "discretionary" actions or are actions outside the scope of the official's strict job duties.
Given that your company may eventually build a plant in a country where you will face this problem, what position do you think your company should take?

Responses

Avoid building any new plants in Asia, where the practice of baksheesh is widespread.
Avoid breaking any American laws by conducting all negotiations on plant sites in a "neutral" nation such as Liechtenstein, Vanuatu, the Netherlands Antilles, or the Cayman Islands, where such activities are not illegal or are not monitored closely. This option would add the equivalent of US$250,000 to the cost of constructing your next plant in either Japan or Thailand and would be amortized along with the original investment expense.
Be practical and follow the "rules of the road" and deal with the problem on a plant-by-plant and country-by-country basis. This response would cause your miscellaneous account to be debited the equivalent of US$75,000 for each plant subsequently built in Thailand or Japan.
Hire local middlemen to represent your company in all negotiations with government officials and relevant business-persons. This option would add US$80,000 to the cost of building any APEC factory.

CRITICAL INCIDENT 7

JUMPING THE GUN, OR FAST TO MARKET?

After seeing all your company's R&D monies for the past three quarters being pumped into developing a new comb filter circuit for your TV sets, your marketing director, Helen Monroe, wants the feature installed in all new units starting next quarter. While the technology itself is proven, has worked exceptionally well in prototype sets, and would be a real, marketable breakthrough for your line of TVs, a few assembly-related problems exist. The circuit itself, while on a smaller board, must be protected from heat and therefore requires the tricky insertion of a heat shield next to the unit on the TV's chassis. Therein lays the heated argument that is going on between Helen and Joe Graham, your operations management director.
Helen was summarizing her position for the group that had witnessed the debate. "I read in the Wall Street Journal that Japan's carmakers take only 26 to 30 months to take their cars from concept to production with Mazda doing it in only 21 months. In the United States we take 29 to 46 months. Gillette introduces its products on a 2-year cycle instead of every 3 years as they did before—and because Bell Helicopter reduced its product-to-market time from 24 to 12 months it got a new $113.0 million contract for army training helicopters. You know the early bird gets the worm. We can't sit on this feature even if we have a few little problems putting the set together. Let me propose this—we can 'up' our quality control budget to catch any sets that don't work, and we can rebate to our distribution centers the unit repair costs of any sets above the norm that come back for warranty work. This way we'll beat the competition to market with something big, plus we've covered any assembly problems that might crop up."
Joe Graham responded, "I don't care what you read in the Journal or about getting worms. All that speed to market hasn't kept Mazda from losing money year after year and losing market share to boot. Rushing products to market is really dangerous to your firm's quality image. Remember IBM had to recall the Warp version of its OS/2 after it came out? And what about all the bugs in first release of Windows® 95? I think we should wait another quarter to design some type of 'snap' assembly that combines the new comb filter circuit with the shield that is needed. Let's make haste slowly on this."
Given the need to get a payback on your R&D expenses, as well as the potential increases in sales that might accompany the introduction of your set's superior comb filter, which of the following alternatives do you want to implement?

Responses

Bring the product to market immediately. This option presents no out-of-pocket expenses to your firm.
Delay the introduction of the new feature for at least one quarter, during which any actual assembly problems associated with the installation of the new comb filter are worked out completely. This option costs your firm $85,000 for production-related R&D, which is charged to your company's general administration expense for one quarter.
Bring the product to market immediately, and also contract for a C sample size quality control program, which would allow only 1.5 percent of all defective products to reach the market. The US$36,000 charge for a study of this size would be processed in the normal manner.
Bring the product to market immediately and budget a C sample size quality control program, and also rebate to your distribution centers warranty repair costs for half of all sets returned for the next two quarters.

CRITICAL INCIDENT 8

MAKING OUR QUALITY CIRCLE PROGRAM WORK

Your quality control supervisor, David Hubanks, has just summarized for you the results of one quarter's worth of quality circle meetings he's held. "I think the ideas that have come out of these meetings are pretty good and I think we can implement some of them. Although I think we can get even more participation in the future, what's most important now is getting our line workers thinking 'quality' and involved in the quality process. Unfortunately, even though we've paid our line people to attend our quality circle meetings after work Wednesday, our attendance has been uneven, and I don't think we have much momentum going for us."
When you asked him if he had any ideas about getting momentum and better meeting attendance, Hubanks responded, "A simple solution would be to hold our meetings during regular factory working hours at full pay. They're already here and we wouldn't be infringing on their leisure time, kid pick-up obligations, and supper time. I think this solution would deal with the problem of getting good attendance. On the other hand, I don't think it gets to the core issue of getting our workers to want to do things better or to realize that we have to do better to be competitive in this business."
"Well, then," you responded, "what are your thoughts about dealing with that?"
David Hubanks then provided you with four ways to motivate your assembly line workers to get involved in a company-wide Total Quality Management program. Which one of the following would you select?

Responses

Conduct all future quality circle meetings on company time, thereby demonstrating that you are serious about quality. Have the first four meetings chaired by a motivational-type speaker from the Crosby College of Quality. This response would cost you US$20,000 for the speaker and an estimated US$180,000 in lost productivity. All expenses would be charged to your firm's miscellaneous account.
Create a number of benchmarking groups who would visit other factories in the area using similar manufacturing and assembly techniques. These groups would report back to your quality circle meetings what they have discovered. This response would cost you US$65,000 for two quarters and would be part of your firm's miscellaneous costs.
Have an independent consultant do a survey feedback study to determine what your factory workers feel about job satisfaction, their attitudes, performance, organizational climate, and the quality of work relationships. The consultant would use the information to stimulate discussions during quality circle meetings on company time about organizational problems while ultimately generating a plan for organizational change. This alternative would cost your company US$35,000 for one quarter for the consultant, over and above estimated lost productivity costs of US$180,000 to your miscellaneous account for the rest of the simulation.
Demonstrate the need for change to your workers by bringing to your factory a panel of customers who have had repeated warranty work problems with sets. Use this customer feedback to promote discussions during subsequent quality circle meetings on company time on the need for change and the need for customer satisfaction. This response would cost your company US$4,000 for one quarter, in addition to US$180,000 in lost productivity per quarter for the remaining quarters of the game. These expenses would be charged to your miscellaneous account.

CRITICAL INCIDENT 9

GETTING A BETTER READ ON THE MARKET

Because your company's previous management group felt that international operations might be in its future, a well-regarded consulting firm had been retained to make recommendations on how to go about "internationalizing" your company. The prime focus of their effort was to give your company, which has always had a strong domestic product structure, the ability to understand foreign markets.
The consulting firm's basic recommendation was to create an International Division, which would consolidate in one unit the country liaison executives now part of your company's general administration expense. By housing these executives together, it was reasoned, they could more easily share general information while retaining the unique knowledge they possess about their particular country's business practices and culture. They would also be given new power to influence product development priorities within your firm's R&D operation. The new International Division would be headed by a vice-president who would report directly to your company's CEO and would have veto power over international capital appropriations and the rationing of television sets between domestic customers and any offshore operations.
Given that your company might create an International Division, four ways have been suggested to increase its internal effectiveness after it has been created. Each one has its pros and cons.

Responses

Have the division grow in influence by doubling the number of liaison specialists per country. This decision will add to your general administration expense the equivalent of US$25,000 per quarter for each offshore country/ market for the rest of the simulation.
Increase the division's influence by stationing your country specialists in the R&D Department, with a dual reporting relationship to the heads of the R&D Department and the International Division. This decision does not result in an out-of-pocket cost to your company.
Increase the division's influence by stationing your country specialists in the Marketing Department, with a dual reporting relationship to the heads of the Marketing Department and the International Division. This decision does not result in an out-of-pocket cost to your company.
Create cross-functional marketing and product development teams with it being mandatory that your country liaison specialists serve on those teams. Because of the time involved with these activities, one additional country liaison executive would have to be hired at the equivalent of US$25,000 per quarter. This expense would be added to your general administration expense.

CRITICAL INCIDENT 10

"ARE OUR TVS REALLY GLOBAL?"

The discussion about how to advertise your television sets overseas between your marketing director, Helen Monroe, and one of your country liaison executives, Corinna del Greco, was getting heated. Helen, trying to drive home her essential arguments, explained. "We're competing in a global industry. That basically means the same TV set can be sold around the world regardless of the country's nature. If you agree with me on that point, it means we should have a standard logotype and a universal advertising campaign for all our sets. Nowadays all TV sets are like commodities. They're basically the same on the outside and fundamentally the same inside. If there is a difference between the various brands, most consumers wouldn't know the difference or don't care to know. Even more important for us, we grind our TVs out like cookies, which drives down their costs because of the economies of scale we get by doing this. We should apply the same principle to our advertising campaign. By using the same ad campaign over and over again from country to country, we get our own economies of scale."
Corinna replied a bit more coolly but just as emphatically, "Are our TVs really as global as you seem to think they are? The TVs might be the same, but the world's markets aren't that simple. These might all be the same sets, but they mean different things to those living in different countries. Also, some features that are important in one country are not that important in other countries. For example, the remote controls that are so important to German and American consumers are not that important to those in Japan and Thailand. In fact, for those in Japan and Thailand a remote control is a liability, because it's expensive to replace their batteries all the time. I urge you to reconsider your position and let me help you design ad campaigns and themes that are uniquely identified with the needs of each of the foreign markets we hope to enter."
On that note, a number of graduated alternatives were jointly developed by Helen and Corinna over the next few weeks. Choose one of the following from the set they have presented to you.

Responses

Follow Helen's basic idea and use the same advertising theme in all markets. This suggestion entails a one-time advertising design cost of US$25,000, which is processed through your firm's miscellaneous account this quarter.
Create an advertising program that emphasizes the same logotype in all advertisements, with slight variations in pictorial layouts and body copy from country to country. This alternative entails a one-time advertising design cost of US$25,000, processed through your firm's miscellaneous account this quarter plus an additional US$4,000 charge for the number of foreign countries your game administrator has allowed your firm to consider for entry.
Develop an advertising program that employs a basic image and logotype but is differentiated by the major markets of NAFTA, EC, and APEC. This response costs your company US$25,000 for creating the campaign's basic image and logotype and US$7,000 for each of the major markets your game administrator has allowed your firm to consider for entry.
Follow Corinna's basic idea and create a different advertising theme for each market based on consumer research conducted in each country. This suggestion costs your company, for each country where your products are sold, the equivalent of US$7,000 for a consumer research study and an amount equal to US$25,000 for each unique advertisement required. A total charge of US$32,000 will be processed for each country currently being commercialized in the current quarter with the same amount being charged whenever a new country is entered.
Appendix B: Patent Licensing Agreement_______________________________

TO: Game Administrator
FROM: Firm_____________________________
Subject: Patent Licensing Agreement
Date: ________________________

Our company would like to inform you that an agreement has been reached between our firm and Firm _________ to transfer our Patent Number _____________ to them beginning in Quarter ____, Year____, for the sum of ________________. The following are each company's authorized signatories to this contract, with a summary of the terms we have agreed upon.

Patent Selling Firm: _______________________________

Patent Purchasing Firm: ________________________________

Implementation:

Date: Quarter _______, Year ______

Cash Value: _______________

Selling Firm Authorization: _____________________

Buying Firm Authorization: _____________________

Game Administrator Approval: __________________________
Appendix C: Plant Capacity and Automaton Sale Agreement______________

TO: Game Administrator

FROM: __________________

SUBJECT: Plant Capacity, Automaton Sale and Transfer Agreement

DATE: __________________________

Our company would like to inform you that an agreement has been reached between our firm and _____ to transfer a quantity of our fixed capital to them in Quarter __, 200__, for the sum of $_________. The following are each company's authorized signatories to this contract, with a summary of the terms we have agreed upon.

| TARGET COUNTRY | BASE CAPACITY | AUTO1S | AUTO2S |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |

Implementation:

Quarter ___ , Year 200 ___

Total Cash Value: _______________

Selling Firm Authorization: _____________________

Buying Firm Authorization: _____________________

Game Administrator Approval: __________________________
Appendix D: Subcontracting Agreement_______________________________

TO: Game Administrator

FROM: Firm _______________________________

SUBJECT: Subcontracting Agreement

DATE: __________________________

Our company would like to inform you that an agreement has been reached between our firm and Firm ______________ to transfer to them a quantity of our television sets with a Quality Grade Level at or above __________ in Quarter __, 200__, for the total on-time sum of $____________. The following are each company's authorized signatories to this contract, with a summary of the terms we have agreed upon.

| TARGET COUNTRY | 25" SETS | 27" SETS |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |

Minimum Quality Grade Level: ________

Implementation:

Date: Quarter _____, Year 200 _____

Total Cash Value: ______________

Selling Firm Authorization: _____________________

Buying Firm Authorization: _____________________

Game Administrator Approval: __________________________

∗

The North America Industry Classification System describes this industry as one that is "primarily engaged in manufacturing electronic audio and video equipment for home entertainment, motor vehicle, public address and musical instrument amplifications."

-----------------------
Exhibit 3.3
Distribution Center and Sales Office Start-Up and
Shut-Down Costs (in local currencies)
|Country |Distribution Centers |Sales Offices |
| |Start-Up |Shut-Down |Start-Up |Shut-Down |
|United States |45,000 |56,000 |20,000 |15,000 |
|Mexico |297,000 |360,000 |14,200 |10,600 |
|Germany |77,700 |96,700 |34,500 |25,900 |
|Spain |34,700 |43,100 |15,400 |11,500 |
|Japan |5,200,000 |7,740,000 |2,150,000 |4,410,000 |
|Thailand |1,300,000 |1,610,000 |64,800 |48,600 |

Exhibit 3.4
Unit Shipping Rates (in dollars)
|Country Market |Shipping Method |
| |Surface |ExAir |
|Within North America | 2.00 | 6.20 |
|North America to Europe | 9.00 | 27.90 |
|North America to Asia | 12.00 | 36.00 |
|Within Europe | 2.50 | 7.48 |
|Europe to North America | 10.00 | 30.50 |
|Europe to Asia | 15.50 | 48.70 |
|Within Asia | 4.50 | 13.50 |
|Asia to North America | 8.50 | 52.75 |
|Asia to Europe | 18.00 | 53.80 |

Exhibit 3.7
Independent Wholesaler Servicing Costs (in local currencies)
|Country |Cost |
|United States |11,000 |
|Mexico |27,200 |
|Germany |19,000 |
|Spain |8,485 |
|Japan |1,350,000 |
|Thailand |24,600 |

Exhibit 3.8
Company-Owned Wholesaling Operations Costs (in local currencies)
|Country |Start-Up |Shut-Down |Lease |Salaries |
|United States |35,000 |52,500 |3,000 |60,000 |
|Mexico |24,700 |37,000 |24,400 |42,500 |
|Germany |60,600 |91,200 |40,900 |1093,000 |
|Spain |26,700 |40,200 |18,100 |45,500 |
|Japan |4,500,000 |6,900,000 |390,000 |7,500,000 |
|Thailand |114,000 |171,000 |117,000 |194,600 |

Exhibit 3.10
Trading Zone Tariff Rates
|Sending Zone |Receiving Zone |
| |NAFTA |EU |APEC |
|NAFTA |0.0% |4.0% |7.0% |
|EU |3.0% |0.0% |7.0% |
|APEC |3.0% |5.0% |0.0% |

Exhibit 3.11
Country Tariff Rates
|Sending Country |Receiving Country |
| |U.S. |Mexico |Germany |Spain |Japan |Thailand |
|United States |0.0% |0.0% |1.6% |1.6% |1.6% |1.6% |
|Mexico |0.0% |0.0% |0.0% |5.3% |0.0% |0.0% |
|Germany |4.7% |2.0% |0.0% |0.0% |1.0% |4.6% |
|Spain |1.7% |4.0% |0.0% |0.0% |8.0% |1.0% |
|Japan |0.5% |1.0% |3.0% |7.0% |0.0% |0.3% |
|Thailand |6.0% |0.0% |4.6% |3.0% |0.3% |0.0% |

Proxy Income Statement in Local Currencies
Global Industry A Firm 1 MagnaArgus Corporation Quarter 4 Year 3
| Statement Item |United States |Mexico | Japan |
| |(US$) |(Mex$) |(Yen) |
|TOTAL REVENUE | 105,437 | 75,656 |1,376,647 |
|EXPENSES | 102,001 | 68,546 |1,174,692 |
|OPERATING PROFIT | 3,430 | 7,110 | 201,955 |

Exhibit 5.5
A Bond Offering Example
|U.S. Treasury Bond Rate | 5.67% |
|Unit's Credit Rating | A |
|Bond Interest Rate | 8.17% |
|Bond Issue Amount |$450,000 |
|Bond Liability |$450,000 |
|Bond Discount | $24,750 |
|Quarterly Interest Payment | $9,191 |
|Annual Cash Outflow | $36,765 |

Exhibit 4.3
Labor-Hour Requirements by Product
|Set Size |Hours |
|25-inch | 1.8 |
|27-inch | 2.0 |

Exhibit 4.6
Vacations, Sick Days, and Absenteeism (by country)
| Country |Vacation Weeks |Sick Days |Absent Days |
|United States | 4 | 5 | 1.7 |
|Mexico | 3 | 3 | 5.4 |
|Germany | 6 | 12 | .2 |
|Spain | 4 | 4 | 2.0 |
|Japan | 3 | 5 | .5 |
|Thailand | 2 | 4 | 14.0 |

Exhibit 4.9
Lot Shipping Rates from Hong Kong
(in base period US$)
| Destination |Group 1 |Group 2 |
|North America (NAFTA) | 7.57 | 8.43 |
|Western Europe (EU) | 13.48 | 15.30 |
|Asia (APEC) | 6.88 | 7.10 |

Exhibit 4.11
U.S. Assembly Line Hourly Rates by Shift
| Shift |Worker Set Assignment |
| | 25-inch | 27-inch |
|First | 17.56 | 17.74 |
|Second | 18.35 | 18.54 |
|Overtime | 27.53 | 27.81 |

Exhibit 4.13
Ideal Line Supervisor
Control Spans
| Country | Workers |
|United States | 24 |
|Mexico | 9 |
|Germany | 26 |
|Spain | 16 |
|Japan | 29 |
|Thailand | 8 |

Exhibit 4.21
Quarterly Security Patrol Costs
(in local currencies)
| Country | Cost |
|United States | US$6,249.80 |
|Mexico |Mex$4,086.68 |
|Germany | €10,826.18 |
|Spain | €4,438.98 |
|Japan | ¥861,327.70 |
|Thailand | B49,924.43 |

Exhibit 4.18
Automaton Shipping Charges and Dismantling Fees (in US$)
| From | Destination |
| | U.S. |Mexico |Germany |Spain |Japan |Thailand |
|United States | --- | 20,000 | 38,000 |32,000 |45,000 | 50,000 |
|Mexico | 5,000 | --- | 12,000 | 9,000 |17,000 | 19,000 |
|Germany |21,000 | 22,000 | --- |16,500 |31,000 | 22,250 |
|Spain |17,000 | 11,000 | 4,500 | --- |34,000 | 36,500 |
|Japan |12,500 | 12,000 | 13,000 |12,250 | --- | 2,000 |
|Thailand | 7,000 | 6,500 | 6,000 | 5,500 | 1,500 | --- |

Exhibit 4.20
Building an 86-worker Factory with Automatons in Mexico (in US$)
| Item | Cost | Quarterly |
| | |Depreciation |
|Land | 45,431 | n.a. |
|Site preparation | 150,000 | 1,875 |
|Base Capacity (86*24,000) | 2,064,000 | 25,800 |
|Auto1s (7*250,000) | 1,750,000 | 43,750 |
|Auto2s (15*400,000) | 6,000,000 | 150,000 |
|Automaton Shipping (22*45,000) | 990,000 | 24,750 |
|Construction supervision (.20*9,814,000) | 1,962,800 | n.a. |
|Total |12,962,234 | 246,175 |

Exhibit 4.22
Unit Base Capacity Transfer Costs (in local currencies)
| From | Destination |
| | U.S. |Mexico |Germany |Spain |Japan |Thailand |
|U.S. | --- | 13,800 | 2,660 | 2,170 |430,000 | 144,300 |
|Mexico | 5,000 | --- | 820 | 620 |163,000 | 138,000 |
|Germany |21,000 | 15,250 | --- | 590 |295,000 | 64,200 |
|Spain |17,000 | 7,600 | 300 | --- |324,000 | 67,000 |
|Japan |12,500 | 8,300 | 870 | 845 | --- | 5,700 |
|Thailand | 7,000 | 7,000 | 790 | 770 | 14,300 | --- |

Exhibit 5.2
Credit Ratings and Debit Interest Rates
|Credit Rating |1 10-Year Bond Rate | Short-Term Rate |
| AAA |Bond Rate + 1.0 point |Short-Term Rate |
| AA |Bond Rate + 1.5 points |Short-Term Rate + 3.0 points |
| A |Bond Rate + 2.5 points |Short-Term Rate + 7.5 points |
| B |Bond Rate + 6.0 points |Short-Term Rate + 15.0 points |
| C |Bond Rate + 8.5 points |Short-Term Rate + 24.0 points |

Exhibit 5.3
A Stock Sale Example
|Quarter 1 shares outstanding | 2,500,000 |
|Quarter 1 stock price | $18.50 |
|Market value of shares outstanding (18.50 * 2,500,000) |$46,250,000 |
|Shares issued Quarter 2 | 750,000 |
|Stock price after dilution effects ($46,250,000/3,250,000) | $14.23 |
|Issue gross proceeds (14.23 * 750,000) |$10,672,500 |
|Less brokerage fees: | $15,000 |
|Flat fee |$160,088 |
|Commission | |
|Issue net proceeds |$10,497,413 |
|Proceeds to Common Stock | $750,000 |
|Proceeds to Paid-In Capital | $9,747,413 |

Exhibit 5.4
A Treasury Stock Purchase Example
|Quarter 3 shares outstanding | 4,730,000 |
|Quarter 3 stock price | $24.37 |
|Shares purchased in Quarter 4 | 500,000 |
|Estimated Treasury stock price | $26.56 |
|Stock purchase cost ($26.56 * 500,000) |$13,280,000 |
|Cost from Common Stock | $500,000 |
|Cost from Paid-In Capital |$12,780,000 |

Exhibit 5.1
Data Sources for Money Markets and Financial Activities
| Indicator | New York | Frankfurt | Tokyo |
|90-day short-term loan |3-month Treasury bill deposit |3-month eurodollar |Money market rate |
|10-year bonds |U.S. Treasury bond |U.K. government bond |Japanese government bond |
|Stock market activity |Dow-Jones Industrial Average |Frankfurt DAX-30 |Tokyo Nikkei 225 |

Exhibit 5.6
Simplified Income, Value-Added, and Dividend Tax Rates
| Tax |Country |
| | U.S. | Mexico | Germany | Spain | Japan |Thailand |
|Income | 47.0% | 50.0% | 73.4% | 35.0% | 45.0% | 35.0% |
|VAT | 0.0% | 15.0% | 15.0% | 12.0% | 15.0% | 20.0% |
|Dividend | 0.0% | 0.0% | 30.0% | 10.0% | 20.0% | 20.0% |

Exhibit 5.7
Sample Currency Rate Changes by Country
|Quarter |Country and Currency |
| |U.S. Dollars |Mexican Pesos |Japanese Yen |
| 3 | 1.00 | 8.6096 | 129.41 |
| 4 | 1.00 | 8.7850 | 125.40 |

Proxy Income Statement in Home Office Currency
Global Industry A Firm 1 MagnaArgus Corporation Quarter 4 Year 3
| Statement Item |Consolidated |United States |Mexico | Japan |
| |(US$) |(US$) |(Mex$) |(Yen) |
|TOTAL REVENUE | 125,027 | 105,437 | 75,656 |1,376,647 |
|EXPENSES | 119,172 | 102,001 | 68,546 |1,174,692 |
|OPERATING PROFIT | 5,855 | 3,430 | 7,110 | 201,955 |
|Exchange Gain/Loss | -33 | 0,000 | + 16 | - 49 |

Exhibit 1.2
Television Set Ownership in the United States
|Item |1970 |1980 |1990 |2000 |
|Percent of households | 95.3 | 97.9 | 98.2 | 98.2 |
|Sets in homes (millions) | 81.0 |128.0 |193.0 | 245.0 |
|Sets per home | 1.4 | 1.7 | 2.1 | 2.4 |
|Color set households (millions) | 21.0 | 63.0 | 90.0 | 101.0 |

Source: Statistical Abstract of the United States.

Exhibit 1.3
Major Region Population Projections (in millions)
|Major Region |1999 |2050 |Annual Growth |
|Africa | 767.0 | 1,766.0 | 4.6% |
|Asia | 3,634.0 | 5,268.0 | 2.9% |
|Europe | 729.0 | 628.0 | -1.7% |
|Latin America & Caribbean | 511.0 | 809.0 | 3.2% |
|Northern America | 307.0 | 392.0 | 2.6% |
|Oceania | 30.0 | 46.0 | 3.1% |
| Total World | 5,978.0 | 8,909.0 | 3.0% |

Source: United Nations Population Division.

Exhibit 1.4

Population Projections for Selected NAFTA, EU, and
APEC Countries (in millions)
|Country |Year |Annual |
| | |Growth |
| |2002 |2010 |2015 |2020 | |
|United States |280.6 |299.0 |311.2 |323.8 |0.8% |
|Mexico |103.4 |117.4 |127.1 |137.6 |1.6% |
|Germany | 83.3 | 83.9 | 84.3 | 84.8 |0.1% |
|Spain | 40.1 | 40.1 | 40.1 | 40.1 |0.0% |
|Japan |126.6 |129.0 |130.3 |131.6 |0.2% |
|Thailand | 62.4 | 67.0 | 70.1 | 73.3 |0.9% |

Source: Environmental Encyclopedia.

1 Exhibit 1.5

2 Total Household Sets, Average Annual Sales Per Firm and

3 Foreign Investment Attractiveness

|Country |Total Sets |Average Sales Per Firm |FDICI |
| |(000,000) | | |
| | |25” |27” | |
|United States | 249.6 | 133,016 | 153,338 | 1.45 |
|Mexico | 28.9 | 33,398 | 12,308 | 0.80 |
|Germany | 47.9 | 63,122 | 17,926 | 1.17 |
|Spain | 22.4 | 66,639 | 14,452 | 0.96 |
|Japan | 91.6 | 55,200 | 11,973 | 0.97 |
|Thailand | 17.9 | 14,717 | 1,145 | 0.85 |

Source: World Almanac and A.T. Kearney.

Exhibit 1.5
Television Set Seasonal Indicators
|Country |Quarter 1 |Quarter 2 |Quarter 3 |Quarter 4 |
|United States |.74 | .82 |1.31 |1.13 |
|Mexico |1.21 | 1.11 |.81 |.87 |
|Germany |1.17 | 1.08 |.83 |.92 |
|Spain |1.19 | 1.10 |.79 |.92 |
|Japan |.84 | 1.00 |1.12 |1.04 |
|Thailand |.94 | 1.02 |1.03 |1.01 |

Exhibit 3.1
Wholesale Prices by Country (in local currencies)
|Set Size |U.S. |Mexico |Germany |Spain |Japan |Thailand |
|25" |102.83 |955.49 |141.50 |121.94 |18,013.50 |3,666.76 |
|27" |122.40 |1,137.34 |157.75 |138.80 |22,090.00 |4,365.45 |

Exhibit 3.6
Quarterly Distribution Center and Sales
Office Overhead Costs (in local currencies)
| Country | Operation |
| | Distribution | Sales |
| |Center |Office |
|United States | 110,000 | 86,000 |
|Mexico | 78,000 | 60,300 |
|Germany | 190,100 | 148,600 |
|Spain | 84,800 | 66,300 |
|Japan | 13,600,000 | 10,940,000 |
|Thailand | 342,200 | 278,000 |

Exhibit 3.9
Sales Force Hiring, Firing and Moving Costs (in local currencies)
| Country |Sales Representatives | Trainees |
| |Hiring |Firing |Moving |Salary |Moving |
|United States | 11,000 | 6,000 | 8,680 | 9,100 | 3,000 |
|Mexico | 4,680 | 1,100 | 1,800 | 5,850 | 1,200 |
|Germany | 15,800 | 5,200 | 19,100 | 18,400 | 8,000 |
|Spain | 7,000 | 2,300 | 8,400 | 4,500 | 3,400 |
|Japan |1,400,000 |840,000 |1,050,000 |850,000 |300,000 |
|Thailand | 120,202 | 71,300 | 15,300 | 72,300 | 10,200 |

Exhibit 4.1
Automaton 8-hour Productivity and
Required Technical Support
|Automaton | Hours |Technicians |
| |Generated |Needed |
| Auto1 | 32 | .25 |
| Auto2 | 41 | .30 |

Exhibit 4.2
Automaton Technician Hourly Wages
| Country | Hourly Wage |
| |Local Currency | US$ |
|United States | US$23.32 |23.32 |
|Mexico | Mex$16.52 | 1.86 |
|Germany | €35.37 |30.01 |
|Spain | €17.28 |14.66 |
|Japan | ¥2,586.45 |20.05 |
|Thailand | B77.44 | 1.94 |

Exhibit 4.5
Shift 1 Charges for 27-inch Sets for
Selected Countries
| Country | Currency |
| | Local | US$ |
|Mexico |Mex$23.20 | 2.45 |
|Germany | €61.46 | 72.44 |
|Japan | ¥4,889.74 | 37.90 |

Exhibit 4.7
Product Subassembly Requirements
|Group | Set Size |
| |25-inch |27-inch |
| 1 | 8 | 9 |
| 2 | 6 | 7 |

Exhibit 4.8
Subassembly Lot Prices by Grade and Group (in base period US$)
|Grade |Group 1 |Group 2 |
| A | 168.96 | 579.31 |
| B | 128.80 | 463.45 |
| C | 115.00 | 403.00 |

Exhibit 4.10
Subassembly Grades and
Quality Indexes
| Grade |Quality Index |
| A | 10.0 |
| B | 7.5 |
| C | 5.0 |

Exhibit 4.4
Base-Period Hourly Wage Rates by Factory
Task Assignment (in local currencies)
| Country | Set Assignment |
| | 25-inch | 27-inch |
|United States | US$17.56 | US$17.74 |
|Mexico |Mex$11.25 | Mex$11.60 |
|Germany | €30.43 | €30.73 |
|Spain | €12.17 | €12.60 |
|Japan | ¥2,212.03 | ¥2,444,87 |
|Thailand | B137.75 | B141.71 |

Exhibit 4.12
Automaton Precision Levels and
Variance Rates
|Automaton |Accuracy |Variance |
| Auto1 | 94.5% | ±2.5% |
| Auto2 | 98.5% | ±1.2% |

Exhibit 4.14
Quality-Control Inspection Programs (in US$)
|Program |Sample Size | Cost |Defects |
| A | .50% |13,000 | 6.0% |
| B | .65% |21,000 | 4.7% |
| C | .85% |36,000 | 1.5% |

Exhibit 4.15
Quarterly Automaton Maintenance
Requirements (in US$)
|Automaton |Budget |
| Auto1 | 200.00 |
| Auto2 | 450.00 |

Exhibit 4.17
Automaton Price Schedule
(in US$)
| Automaton | Price |
| Auto1 | 250,000 |
| Auto2 | 400,000 |

Exhibit 4.23
Plant Liquidation Social Costs (per person in local currencies)
| Item | U.S. |Mexico |Germany | Spain | Japan |Thailand |
|Line Worker retraining | 700 | 500 | 1,100 | 350 | 90,300 | 0 |
|Automaton Technician retraining | 750 | 550 | 1,200 | 375 | 92,000 | 0 |
|Line Supervisor severance | 34,000 | 40,000 | 28,500 | 8,500 | 675,000 | 0 |
|Factory Superintendent severance | 38,000 | 43,400 | 31,900 | 9,500 | 760,000 | 0 |
|Infrastructure refund | 38,000 | 0 | 0 | 63,800 |9,100,000 | 370,500 |

Exhibit 3.5
Inventory and Handling Charges by Product
(in local currencies)
| Country | Set Size |
| |25-Inch |27-Inch |
|United States |Inventory | .75 | .80 |
| |Handling | 1.20 | 1.30 |
|Mexico |Inventory | .50 | .56 |
| |Handling | .85 | .90 |
|Germany |Inventory | 1.40 | 1.54 |
| |Handling | 2.49 | 2.53 |
|Spain |Inventory | .63 | .68 |
| |Handling | 1.03 | 1.11 |
|Japan |Inventory | 96.50 |101.50 |
| |Handling | 155.00 |160.00 |
|Thailand |Inventory | 2.40 | 2.60 |
| |Handling | 3.83 | 4.15 |

Exhibit 3.12
Merlin Group, Ltd., Research and Rate Schedule (in dollars)
|Question |Charge |Information Provided |
| 1 | 1,500 |All company 25" TV unit sales by Country. |
| 2 | 1,500 |All company 27" TV unit sales by Country. |
| 3 | 500 |Near-term forecast of 25" TV unit sales by Country |
| 4 | 500 |Near-term forecast of 27" TV unit sales by Country |
| 5 | 1,000 |Near-term forecast of unit demand for 25" and 27" Private-label sets. |
| 6 | 2,000 |All 25" TV set Quality Indices by Company and Country. |
| 7 | 2,000 |All 27" TV set Quality Indices by Company and Country. |
| 8 | 750 |Sales Representative average compensation by Company and Country. |
| 9 | 250 |All 25" TV set Advertising budgets by Company and Country. |
| 10 | 250 |All 27" TV set Advertising budgets by Company and Country. |
| 11 | 300 |Estimated R&D budgets by Company and Country. |
| 12 | 300 |Estimated QC budgets by Company and Country. |

This opening screen appears for a few seconds.

Click “Initialize your company” as you are a new management team.

Save to either a floppy or a file.

Click “Finish” to complete your company Initialization. If you are saving to a file a following window will ask you for the file’s destination.

Click on “Open” because your firm is no longer “New”.

In this case the firm’s Initialized file was placed in a folder labeled Chapter6. Click on “Open” to retrieve the file.

Enter your firm’s Password and click “OK”.

Game Tools.

Functional area decision menu.

Marketing area decisions.

Functional area tabs.

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