John Harke

Professor Marilyn Kaplan

BPS 4305.004
October 7, 2016
Differentiation
My experience with differentiation through the Capstone Simulator was a learning
process. Not being familiar with the system, I had many failed attempts at trying to produce a
positive profit through bad financing, bad R&D decisions, low price and promotion, and
spending more on the plant than producing the products. I tried easing the price up slowly
between rounds at first until I ultimately decided to just sell higher than my competition. During
my first rounds of practice, I did not want to borrow much in debt as I felt it would be too hard to
payback until I understood that long-term debt was the way to finance as it did not have to be
paid back immediately and could support funding my company. I was overfunding R&D for the
traditional and low segment when differentiation is about the higher quality products. After many
practice rounds, I ended up with high profits, sales, and the largest contribution margin through
benchmarking and lower automation.
The first round was dedicated to financing the company. I borrowed the maximum longterm debt and issued the max amount of stock I could. I decided to create three more products in
R&D and spec the size and performance for the third year when they were ready to sell. Since
differentiation requires the employees to be heavily skilled, I dedicated 80 hours to training with
a 5000$ budget which continued through all four rounds. I also spent $1500 in each of the
categories of TQM to lower costs, reduce R&D cycle times for the high end products, and
increase demand. Since the customer criteria was feature service and high quality products, I
spent more than my competition to promote and sell the products. I spent a little more than my

competition on selling the product in the first year though due to needing the promotional base
first.
Rounds two and three are were most of the benchmarking took place. While trying to
meet the criteria of my customers, I also needed my prices to be above my competition as well as
sales and marketing. The goal was to have the prices 1.00 above the top price of my competitors
and sales/marketing to provide the best promotion along with the best service. To accomplish
this, I spent $2000 on promoting my products and $2000 on service to the customers giving the
perception that my products were unique and of high quality. I added more capacity for my
newly added top quality products and increased the performance while decreasing the size on the
original top quality products. With two choices and two high quality products in size,
performance and high end, the goal was to capture the market in these segments. I financed a
little more long-term debt and usually kept the production +/- 100 of the forecasts. Lastly, I
continued TQM for $1500 for round two and $1000 for round three.
Round four was about capturing the market share, achieving high profits and raising the
companys contribution margin. R&D was vital to keep up with my competition and the
customers criteria. I increased the performance and decreased the size to keep up my
competition and customer expectations. My customer awareness for each product was close to
100% so I decreased the promotion and left the sales service at 2,000. I stopped the TQM as the
cost at this point exceeded the benefits as the percent increases were slim. The low end segment
was never changed throughout the four rounds because the customer awareness was high in the
beginning and the age and price were the most important factors. Through differentiation I
achieved the highest contribution margin, highest profits, and the largest market share.

Cost Leadership
My cost leadership strategy was about providing the lowest price at the lowest possible
cost. The primary goal for my firm Sensordime was to slowly lower prices while decreasing
variable costs associated with producing our products. This was accomplished through top
quality management, research and development, marketing, automation and finance. It did
however, take many attempts to become profitable and successful. Some of the mistakes made
along the way were: Lowering the MTBF on the performance and high end products thinking
more about saving money than the customer expectations, trying to introduce a new product
when expanding the plant has high costs, not borrowing enough, and focusing more on
automation than capacity which costed more in overtime. After correcting my errors, the firm
achieved the highest ROS, ROA, ROE, profits, contribution margin, and a considerable market
share.
In round one, the primary focus was to increase automation and capacity for the
traditional and low end segments and raise the capacity, essentially maxing the investment into
expanding the plant. Research and development was primarily for keeping up with customer
expectations and lowering costs on the traditional, low end and size segments by decreasing the
mean time before failure. I issued max stock and borrowed the maximum amount of long term
debt for future investments into the firms. To maintain low quality workers, I invested 20 hours
into H&R with a 1000$ limit to help lower operational costs. For the first year, I left the prices
alone so I could benchmark them to the cost leadership competitor Chester as well as being able
to lower the variable costs in the future. Lastly, I applied 1000$ in all of the TQM aspects except
benchmarking and channel support systems to reduce costs and increase demand.

Rounds two and three was focused upon increasing automation, capacity and increasing
the TQM to 1500$ (except for eliminating Concurrent Engineering in round three due to a high
reduction in cycle time at this point). Each year my firm lowered the price of each segment to
become the lowest cost leader making benchmarking decisions based upon Chesters
performance. Profits were low in round one and two due to lower demand and higher costs.
Round three saw the second greatest profit as the costs started declining and the demand
increased each year. Increasing the capacity and automation decreased overtime as well as
variable costs. For financing, my firm took out more long term debt in rounds two and three and
issued more stock in round three to increase the firms equity. Using the financial leverage, it will
be advantageous in the future to further expand the plant as well as introducing new products.
Round four was the greatest year for my firm. Due to the diminishing returns of TQM, I
did not invest anymore capital as the benefits would not exceed the costs. I spent less on plant
upgrades as my low end automation became maxed and my traditional segment was at 9.0. I
found that the forecasted sales were generally less than actual sales so I did not stock out and had
reserves for the following year. I dropped my promotions from 1500 to 1000 and increased my
sales budget to 1500 and let the price dictate the sales. I achieved the lowest SGA costs, second
lowest variable costs, zero emergency loans, the highest profit through volume and net profit. If I
could replay this scenario again going eight rounds, I would have introduced a low and
traditional segment the first year but probably would not have started selling them until round
five due to customer expectations and high costs in the beginning.

Focus/Niche
I chose focus low cost for my final rounds of Capsim. The goal was to sell off the
inventory from my performance, high end and size markets and convert them into the traditional
segment. Accomplishing this took many attempts at trying to make a profit while scaling down
the other three segments. TQM played a big role in accomplishing this task to lower costs and
R&D reduction times. By spending 1500 in each category for the first two years, I was able to
significantly change the products into the traditional segment. The goal was to offer reliable and
low technology products at the lowest price and focus my target market on the traditional and
low end segments. Without the TQM investment, I faced less demand, higher costs and was
struggling to upgrade the plant. Another mistake I experienced was financing too much debt in
previous attempts and overinvesting in capacity and automation upgrades.
The first round consisted of investing in TQM and slowly changing each product in
R&D. I financed max long term debt as well as a maximum stock issuance. For marketing, I
spent 1250 in promotions for each product as well as 1000 for selling the products. I slowly
lowered the price for each product by 1-2$ per product. Since the consumer demand for MTBF
was low for the traditional and low end segments, I lowered the amount for each product to
reduce costs. I raised the automation for each segment and the capacities of the low, high, size
and performance segments. The goal was to change the three segments to the traditional market
by year 3.
Round two and three consisted of continuing the changes to my three other segments to
match the traditional segment. I lowered the price again to become the lowest cost market
available as well as lowering the MTBF. In round two I borrowed the maximum long term debt
and issued more stock to obtain a financial leverage over my competition. I also spent another

1500 in each category in the TQM to lower costs, raise demand and decrease my R&D reduction
time. By the end of round two, I was starting to corner the market on the traditional and low end
market segments. Round three consisted of catching up to my competition through
benchmarking Chesters prices against mine. I ended up lowering the traditional and low end
products prices to 25.00 and 18.00 respectively to become the focus low cost leader. I decided to
spend nothing in TQM for year three to avoid having to finance anymore debt. At the end of
round three, I started generating a positive cumulative profit for the company and the company
was finally starting to become successful.
Round four was the most successful round due to having low costs from properly
investing in the previous rounds. I was successful in capturing 73.5% of the traditional market
share and 33.6% for the low end product. I ended up with high margins including 42.5% gross
margin, 11% ROS, 11.5% ROA, 22.1% ROE, 7.06$ EPS, $20,342 net profit and the highest
market share. I invested into further lowering costs by raising automation to 6.0 for the
traditional market and 10.0 for the low end market. Our customers at SensorDime rated us #1 in
accessibility for the traditional market and we received the highest customer survey score. Even
though Ferris achieved a higher profit using a differentiation strategy, SensorDime was very
successful in 2019 and 2020.

Generic Strategy List