1. Product differentiation
The data entry page presently allows the teams to enter only one
product model and quality level. The manual states that stocks from older
models are automatically sold first, and newer models can only then be
sold into the market. Does this mean that the teams cannot pursue any
differentiation strategy, selling model 2 in Sereno, for instance, and
model 3 in Merica? No teams have yet got a second factory up and
running. When they do, assuming their R&D provides them with the
models, can they produce different models in different factories
simultaneously? And how does the product model allocation to the
marketplace work then? Most teams want to implement different pricing
and quality strategies in the two countries - is this possible? If
not, what's the purpose of having different market areas (as opposed
to different production areas), and if they can differentiate, what do
they enter where?
Only one product model at one quality level can be produced by a
company at any point in time. To do otherwise introduces a great deal
more complexity and we believe it is complex enough at this time. If
a firm was producing a different product and/or a different quality
level in different areas, it would cause problems when shipping product
to different areas which were selling a different quality level or
product. When you start to keep track of inventory things really get
You can differentiate product in different areas using all of the
marketing variables with the exception of product and quality. Thus
promotion and price are readily available. The addition of the sales
offices adds an interesting inventory control problem. It is not
enough to have inventory at a plant, it must be available to sales
offices making sales.
2. Unfilled orders
Would you tell me what happens to customer orders that are unfilled.
Do they affect demand the following quarter (i.e., the customers don't
renege) or do they affect other company's customer orders (i.e., the
customers buy from a competitor) or something else?
In the BPG, customer orders that can't be filled are likely to be
filled by competitors as the customers go somewhere else. Future
demand also is affected--both for the company that stocked out and for
the one that still had goods available for sale. Some of the
customers will lose their loyalty and switch suppliers.
3. Demand forecasting
From your experience, is there a "best" demand forecasting method for
individual companies to use? I have played around with regression and
I have not been that successful in coming up with a good forecasting
As in the business world, demand is affected by many factors. With a
limited data base at the beginning of the simulation (8 quarters of
data) there are not many degrees of freedom for multiple regression
analysis, but students may find regression to be about as good as
similar models used in the business world.
In the Player's Manual (Chapter 6) we suggest a sales forecasting
model that seems to work about as well for students as anything. It
uses a worksheet from the back of the manual, and the worksheet is
available on the student disk as a spreadsheet template.
4. Price increases
Is there a way to raise your price more than 40% in Sereno? It is
quickly becoming impossible to make money there. The exchange rate is
so high even this coming quarter that almost no one will be able to
make a profit selling from Merica to Sereno.
I'm sorry but the maximum price change in Sereno is 40 percent in any
quarter. The general price level is up only 6.4 percent from Year 2,
Quarter 4. Your company had the second highest Sereno product price
in Year 3, Quarter 1.
5. Price ceiling
My group would like to know if there is a price ceiling on demand. An
example would be if you were the only one in Sereno selling product
and your price was outrageously high, would you sell out, or would
demand taper off as your price goes up even though you are the only
one selling, theoretically, until no units are sold..
The answer to your question about prices is that your product shows
sensitivity to price changes, even if you are the only one in Sereno
selling product. If your price becomes outrageously high, not very
many from Sereno will buy it. The larger the increase in price, the
fewer people will buy it. I presume you might stop raising the price
before the demand approaches zero.
We have a concern about operations in Sereno. Our concern is with the
exchange rates. With the limits currently set in the game, we are not
able to keep our prices up with the current exchange rate. We are
open to any suggestions you might have to help us keep our prices in
line with rates. Thank you.
You don't necessarily have to keep Sereno prices up with exchange
rates. Costs within Sereno are affected by the Sereno inflation rate-
-not by the exchange rate. Costs of imported goods are affected by
the inflation rate in the country from which the are exported, and the
exchange rate. The other side of the coin is that costs of goods
exported FROM Sereno become less when paid for with dollars.
The limit on price increases in Sereno is still 40 percent in any
quarter. That would amount to a tremendous amount of price inflation
in a year. Compounded quarterly, 40 percent per quarter equals about
384 percent per year.
7. Managing inventories
We are having trouble controlling inventories. Could you help us?
I can understand your confusion, but you have complete control over
managing your inventories and new production. Existing inventories of
goods will not be shipped to other areas, but will be sold first
before any new production or new shipments are sold (first-in first-
out). New production each quarter is shipped according to the sales
office orders that you enter on the decision form. If sales office
orders total more than the available production, you have lost some of
that control. In that case, the order for the sales office in the
producing area has an advantage--its orders will be filled first.
Then the balance of production will be prorated to other sales offices
in proportion to the amount of available goods to the total sales
office orders for those offices. See the BPG Player's Manual, 4/e,
pages 18 and 19 for more detail.
It appears that your Year 3, Quarter 2 sales offices totaled 692,000
and your production totaled only 464,000. The area 1 order was filled
in full, and the rest were pro-rated. There was not a large enough
shipment to Sereno to fill all of the orders.
You put Model 2 into production in Quarter 2, and had only a small
stock on hand of Model 1 (30,000 units). These were sold, and the
balance of filled orders for model 1 actually received model 2. The
only case where the liquidator could buy up units would have been if
you were overstocked with model 1--more than could have been sold in
Quarter 2. See pages 66-68 for more details.
8. Price and demand
Does the simulation look at a company's price compared to other
companies when it determines sales increases/decreases from one
quarter to the next or does it look at the changes that the company
makes from one quarter, with some industry wide trends factored in?
For example: If a company keeps its price at $10 while everyone else
goes to $9, does the company with $10 get a hit (with lower sales) for
a higher price relative to the other companies? Or, does the company
just not get the gain in unit sales that the other companies did for
lowering their prices?
Obviously I won't be able to give you the exact relationship between
price and demand, but then you wouldn't have that relationship in the
real business world, either. Both factors that you mentioned are
factors in determining the demand for your product:
1. A company's price is compared to that of other companies.
Customers tend to choose the company with the lowest price, all other
things being equal (they never are equal, though).
2. When a company raises its price, some of its customers are likely
to shop around for a lower-priced product, all other things being
9. Customer orders
I am not clear, from the student manual, what customer orders
represents. I understand the box on page 18, but am not clear
regarding what time period these orders are for and why some companies
sell significantly more than their customer orders.
Customer orders indicate the number of customers who attempt to buy
the product of their choice from a firm during the current quarter.
If firm A stocks out in an area, the customers who wanted to buy firm
A's product will buy other firm's products as substitutes. The
products purchased as substitutes will not show up as customer orders,
but they will show up as sales on the other firm's reports.
10. Salespeople compensation
Does the BPG take into account the full compensation of salespeople,
as opposed to just individually looking at salary effect on loyalty
and commission effect on sales? In other words, does the BPG look at
total compensation for a salesperson in addition to independent salary
and commission effects?
Does the BPG look at each market area (1,2,3,4) individually for
effect of compensation on the sales force (i.e. what sales are
possible in that market), or does it take a generic view of the market
as a whole?
As you would expect, salespeople are often more concerned with total compensation
than with the particular levels of salary and commissions. And the effect can
be different in each market area. The Business Policy Game model takes these and
other factors into account.