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Your Objective:

Your objective in this simulation is to maximize your cumulative net income. When run in a
competitive setting (with other students/teams competing), the team that generates the highest
cumulative net income (net income summed across all the decision periods) would be the
winning team. The cumulative net income is generated as part of the final summary output of
the simulation.

Company Background:

TeKnowIndutries Inc. is a manufacturer of laptop computers. Based in the United States, it has
been in existence for over a decade. In recent years, the company has experienced considerable
financial and marketing difficulties and last year it had to consider filing for bankruptcy, as its
financial health deteriorated. A bank has agreed to provide financing for the continued survival
of the company. You have been hired by the bank as a marketing turnaround specialist to take
on the role of the Chief Marketing Officer (CMO) and to help TeKnowIndustries return to a
profitable state.

It is January 1st, and you will be overlooking the companys marketing operations in 3-month
(quarterly) time intervals. For each quarter, you will make pricing, advertising, and customer
service decisions for the six products that the company markets in the United States. The
company has no exports and has no plans or resources for export operations. Prior to you joining
the company, most of the senior managers were relieved of their duties, and all cost-cutting
measures at the central level were carried out. Therefore your mission is to manage the products
and to optimize their marketing programs and cutting of overhead costs is not part of your
mandate. Your goal is to maximize the companys cumulative profits over the time period that
you will serve as the CMO.

The overhead costs of the company, which cover the lease of the head office, the head office
staff salaries, the salaries and benefits for the top executives, and interest payments for the
bailout funds provided by the bank is $10 mil. per quarter. In addition, each of the six products
has its own fixed costs directly related to its operations, as well as variable costs related to the
production of the laptop computers sold. The staffing of customer service, sales, and sales
support operations represent additional costs, associated with each product.

The Products:

On January 1, you will have six products to manage. Two of these products (Homer Protg and
Homer Elite) focus on home users. Two other products (WallStreet2000 and WallStreet5000)
focus on business users. An additional two products (Driller-XP and RoboComp) target
industrial buyers. Below is an outline of these products and their features:

Homer Protg: This is a laptop computer primarily intended for home use. It is a very basic
laptop, with no bells and whistles and is intended for the price-sensitive buyer. While the market
segment that Homer Protg targets is the largest laptop market in the country with
approximately 200,000 units sold each year, there are many competitors targeting this segment
of buyers. However consumer tastes are gradually shifting toward more advanced computers
that have multi-media features and are not as simple as the Protg. The distribution of market
share across the various competitors is therefore highly fragmented and last year you were one of
the smaller players in this market, with a market share of 8%. The Homer Protg is sourced
from manufacturing facilities in Europe and the Far East and due to exchange rate fluctuations it
is expected that the unit variable cost for this product will significantly increase in the next two
year. The market size for all competitors in the country for the coming year is expected to be
about 150,000 units, and sales are highly seasonal, with significantly higher sales figures during
the second half of the year as the Christmas season nears.

Homer Elite: Similar to the Homer Protg, the Elite focuses on home use. The Elite has the
added advantage of being a more advanced computer, with multi-media features and a high data
storage capacity. The product is produced at TeKnowIndustries production facilities in Des
Moines, IA, and within the segment of high-end home laptop computers it had a 16% share of
the 66,000 units sold last year by all competitors targeting this segment. The Elite is pre-loaded
with an array of home office software, requiring very little, if any, additional software
installations by the customer. The overall market segment targeted by the Elite and its
competitors is expected to be about 75,000 units in the coming year, and due to its unique
benefits, the typical buyers of the Homer Elite are less price sensitive than the buyers of the
Homer Protg.

WallStreet2000: This is a basic laptop computer targeting entry-level business customers. Its
shell and hardware are designed to be more durable than the Homer line. Of the nearly 90,000
units of product sold by TeKnowIndustries and its competitors targeting this segment of buyers,
16% were WallStreet2000 units. This market will likely remain steady in the coming year, but is
both price sensitive and seasonal. Typically sales drop during the second half of the year for this
type of product due to corporate budget cycles.

WallStreet5000: This is an advanced laptop computer targeting high-end business customers,


such as executives, engineers and scientists. Similar to the WallStreet2000, it has a durable shell
and hardware designed. It has the added benefit of preloaded software, advanced video-
conferencing hardware, and easy multi-media integration features. These added benefits make it
attractive to buyers who tend to be less price-sensitive compared to the typical WallStreet2000
buyer. However, similar to the WallStreet2000, the sales for this product are typically lower
during the second half of the year due to corporate budget cycles, and of the 30,000 units sold by
all competitors in the market, 23% were WallStreet5000 computers. This market is expected to
grow to about 50,000 units in the coming year.

Driller XP: This is a highly advanced laptop computer specifically designed and manufactured
with the needs of construction professionals in mind. It is a super-durable computer that can
withstand the physical shocks of construction sites and unforeseen events such as emersion in
water. It also has patented software developed by TeKnowIndustries for use by construction
professionals to conduct engineering calculations and site measurements. While the Driller-XP
has clear benefits to its buyers, it is in an innovative category of products that the construction
industry has yet to familiarize itself with, and as a result the market segment for this product was
only about 7,500 units last year, of which the Driller-XP had a 5% market share. Due to a
slowdown in the construction industry the market size next year is expected to significantly drop,
to nearly half the figures for the prior year. In order to tap into this unique market, the company
has hired well-paid sales and customer service specialist to support the product.

RoboComp: This laptop computer is designed for the unique needs of military applications. It is
designed to facilitate distance-learning for military personnel on the battle field. The computer
has unique multi-media and web-conferencing features that enable soldiers in the field to obtain
training and advice on the usage of advanced weapon systems such as missal guidance devices
and robots for neutralizing explosives. The RoboComp has many of the durability features of the
Driller-XP with the added benefit of being radiation resistant, in order to be operational in cases
of battlefield radiation contamination or nuclear war. While the market for this product is very
small, with only about 3,000 units sold by TeKnowIndustries and its competitors last year,
RoboComp has 32% share of the market, and the market is expected to double in the coming
year.

Management Decisions:

For each quarter, the following decisions have to be made by you, for each of the products
marketed by TeKnowIndustries:

1. Price. The unit price of the product needs to be determined by you. This is the price that
the product is sold to your buyers, whether they are end users or retailers and
distributors. You are allowed to price all products anywhere between $200 to
$10,000. Since your production costs for the various products differ you may need to
examine your unit variable cost before setting a price. You may also want to compare
your price with those charged by competitors. For each quarter, the simulation will
provide you with market data on the average price competitors have sold comparable
laptop computers for on the market.
2. Advertising Budget. The amount of money spent on advertising and promoting each
product is determined by you. This amount can range from a low of $0 per quarter to a
high of $200,000 per quarter, for each product. Your choice of the amount of money
spent on advertising a given product should be motivated by your belief on the effects of
advertising on its sales.
3. Advertising Content. You will also be able to decide on the content of advertising
targeting potential buyers of each product. For example you may want to have low
prices, or excellent customer service as the primary focus of your advertising
campaign.
4. Number of Staff. Considering that customers require support, and that the products may
need to be serviced, you will need to determine the optimal number of staff needed. Staff
will also be needed to pitch the product to potential buyers and support sales
operations. You will therefore determine an overall head count for staff supporting the
customer service, sales, and sales support activities of each product. This figure can
range from a low of one person to a high of 20 for each product. In each quarter you can
choose to add or drop staff as needed, subject to the above limits.
5. Product Discontinuation. In case you find a specific product to be unattractive you
have the option of discontinuing it. Once you have discontinued the product you will no
longer be able to produce and sell it. You are allowed to discontinue only one product
during a quarter and no more than two products can be discontinued during the course of
your tenure as the CMO. You may also choose not to discontinue any product.

While the above factors are under your direct control, other product-related variables are
not. You therefore have to manage your marketing activities, with given figures for the
following financials:

a) The unit variable cost of the product. This figure reflects the cost of the raw material,
labor, and direct production-related expenses for each product. In some cases the
variable costs may change as a result of exchange rate fluctuations, especially if the
product is manufactured outside the United States.
b) Fixed costs associated with the product. These costs relate to the physical facilities for
managing, producing, warehousing the product and associated information technology
needs.
c) Average salary of staff supporting a given product. Since labor market conditions guide
salaries, this figure is not directly under your control.
d) Overhead costs of the company. In addition to product-related fixed and variable costs,
the operations of the companys headquarters, executive salaries, and financing
obligations result in an overhead of $10 million per quarter.

Your Goal:

As the Chief Marketing Officer, your primary goal is to ensure that your decisions result in
profitable results. This would be assessed by computing the cumulative net income at the end of
the simulation. When competing with other teams/students in the class, the criterion for success
is therefore the cumulative net income, which is a figure computed and reported at the very end
of the simulation.

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