CAPSTONE SCORING SYSTEM:

Profits

The Profit category examines the rate at which wealth is being created. Where margins look at percentages, this category examines the actual value of the profit. Because the industry is growing, the profit required to earn 100 points increases each year.

For example, if this is Year 1, and your Net Profit is $3 million, you earned $3M/$6M or 50 points. Of course, negative profits earn no points

Margin

Margin points are earned in three areas.

1.      Contribution Margin Percentage (Up to 33 1/3 points). Each product with a contribution margin greater than 30% earns points. If all products have contribution margins greater than 30%, you earn 33 1/3 points.

2.      Net Margin Percentage (Up to 33 1/3 points). Each product with a net margin greater than 20% earns points. If all products have margins greater than 20%, you earn 33 1/3 points.

3.      ROS or Return On Sales (Up to 33 1/3 points). ROS is defined as (Net Profit / Total Sales). ROS looks at the entire company's after tax margins. You earn 33 1/3 points for an ROS of 10% or greater. You earn nothing for a negative ROS. An ROS between 1% and 10% is scaled. For example, an ROS of 5% would earn 16.65 points.

Emergency Loans

The Emergency Loan category is the one category for which you should always earn 100 points.

100 points — No emergency loan

50 points — Emergency loans to $5 million

20 points — Emergency loans to $10 million

Working Capital

The Working Capital category examines your reserves. You do not want too much or too little working capital. There are three criteria:

1.      You earn 50 points if your Current Ratio is greater than 2.0.

2.      You earn another 50 points if your Days of Working Capital lies between 30 and 90 days.

3.      You lose your Working Capital points if you had an Emergency Loan.

Market Share

The scoring process varies with the number of teams:

With 6 teams you get 20 points for every team you beat

With 5 teams you get 25 points for every team you beat

With 4 teams you get 33 points for every team you beat

With 3 teams you get 50 points for every team you beat

With 2 teams you get 100 points if you beat the other team

Generically, you want high overall market share for three reasons:

1.      You began with a sizeable fixed asset base. You want to utilize your plant and equipment to pay for depreciation and service the long-term debt. Idle plant costs money. As it gathers dust, it also hands you a bill for depreciation, interest, and eventually the principal on the funds used to buy the equipment. Therefore, so long as you at least break even, you would prefer to utilize all of your capacity. That implies high sales volume.

2.      You began with a large company doing business in every segment. An investor would argue that any strategy you develop, including niche strategies, should produce at least average sales. For example, a focused strategy should produce higher share in the target segments, enough to compensate for sacrificing positions in abandoned segments.

3.      If you make a sale, a competitor did not. This weakens competition over the long haul.

Forecasting

The Forecasting category examines your ability to forecast demand, build adequate inventories to satisfy demand, and yet not accumulate excessive inventory. Each product contributes towards Forecasting points.

For a product to earn points, it cannot be out of stock on December 31, and it cannot have more than 120 days of inventory in the warehouse. For example, suppose a product sold 365 thousand units this year. It would earn its points if it had at least 1 unit in the warehouse on December 31st and did not have more than 120 thousand units.

To take the pressure off of new products, a product must start the year with a plant and begin making sales on January 1. Products that are in R&D at the beginning of the year are ignored.

Further, if a product's plant is running at maximum utilization (a complete second shift), stock outs are ignored because you could not make any more inventory in that year. Of course, the team should address the problem, but situations arise where a company faces an unexpected industry-wide capacity shortage. For example, a competitor exits a segment, or downsizes a plant. If the company recognized the problem in their forecast, they would run their plant at 200% utilization this year and add sufficient capacity to meet a forecast for next year.

Each product contributes points. If your company has 3 products, each product can contribute 33 points. If it has 8, each product can contribute 12.5 points.

Note: The more products one has, the less likely it becomes that a company will earn 100 forecasting points. If you have 8 products, you need 8 good forecasts. On the other hand, if your company has fewer products, a missed forecast costs more points. If you have three products, a miss costs 33 points.

Customer Satisfaction

The Customer Satisfaction category examines your performance from the customer's perspective. Each of your products can earn points if it meets four criteria:

1.      It must sell 50 thousand units during the year.

2.      It cannot stock out. However, if the product's plant is running at maximum utilization (a complete second shift) the stock out rule is waived. (There are times when a competitor's unforeseen actions could cause capacity shortages.)

3.      Its December Customer Survey score must be 30 or more.

4.      The product must be available for sale by Dec. 31 of the previous year. All products that sell at least one unit during the year are considered. If the company has five products that sold at least one unit, then each product can contribute 20 points. If it has eight products making sales, each product can contribute 12.5 points.

Since some products make sales in two or more segments, the algorithm produces a weighted average. For example, if a product sold 900 units in Traditional with a score of 40, and 100 units in High End with a score of 10, the weighted average would be (900*40 + 100*10) / 1000 = 37.

A product’s December Customer Survey Score is developed using marketing’s "4 P’s" —

1.      Product

2.      Price

3.      Promotion

4.      Place

Product and Price
The Survey evaluates the product against the buying criteria. A perfect score of 100 results when the product:

a.       Is priced at the bottom of the expected range.

b.      Is positioned at the Ideal Spot. (Because the segment moves each month, this can occur only once each year.)

c.      Has an MTBF specification at the top of the expected range.

d.      Has the ideal age for that segment. (Because the product ages each month, it can only have the segment ideal once each year.)

Promotion
Promotion, driven by your promo budget, creates product awareness before customers shop. If customers are not aware of the product, they are less likely to buy, and that drags down the Survey score.

Think of it this way. Suppose you had a perfect product – a perfect design at a rock bottom price. Further, customers have no trouble finding your product when they shop, meaning that its accessibility is 100%. In this perfect world, you do no promotion at all. awareness is zero. What would happen to demand? On the one hand, some customers will stumble across your product when they shop, take the time to discover that it is perfect, and decide to buy it. On the other hand, some customers will pass over your product on their way to products they know about.

The simulation deals with the problem as follows. The customers that know about your product always consider it. Of the customers that are not aware of your product, half discover it, and half miss it. Mathematically it looks like this. Your perfect product (with perfect awareness) would start with a Survey score of 100. If its awareness were 60%, then 40% of your customers would not know about it. Of these, half (20%) would stumble across it. Instead of having the Survey score fall all the way to 60, it would fall halfway between 100 and 60, ending at 80.

Productivity

The Productivity category examines the productivity of your workforce through the course of the simulation. There are three criteria:

1.      Sales/Employee. You can earn up to 50 points by having high sales volume per employee (Sales/Employee = Total Sales dollars / Complement).

2.      Profit/Employee. You can earn another 50 points by having high profits per employee (Profit/Employee = Net Profit / Complement).

3.      Turnover rate. If the Human Resources module is switched on, you can lose points for a higher than expected turnover rate.

Sales/Employee is scaled based upon historical results in past semesters with Capstone^®. If you reach or exceed these targets, you earn 50 points:

You earn points for anything above the threshold. For example, in Year 1, if your sales are $80,000 or below, you earn nothing for Sales/Employee. At $120,000/Employee, you earn 25 points, and at $160,000/Employee you earn 50 points.

You can improve Sales/Employee several ways:

• Excellent forecasting. Complements are tied to the production schedule. If you use employees to put inventory into the warehouse instead of a customer's hands, you add nothing to Sales yet have an increased complement.
• Higher Automation. Increasing automation levels reduces complement.
• If the HR module is switched on, you have opportunities to improve productivity. Over six years, you could increase productivity by over 20%, and therefore reduce complement.

Profit/Employee is scaled based upon historical results with Capstone^®. The threshold is $0/Employee. If your profits are negative, you earn no points. If you reach or exceed these targets, you earn 50 points:

For example, in Year 1, if you have negative profits, you earn no points. At $5,000/Employee you earn 25 points, and at $10,000 and above you earn 50 points.

Financial Structure

The Financial Structure category examines the Financial Structure of your company — its relationship between Debt and Equity. Leverage is defined as:

Leverage = Total Assets / Total Equity

You earn points based upon your Leverage as follows:

Leverage Points

Wealth Creation

Wealth Creation evaluates your ability to create wealth during your tenure as Management. It examines three measures:

• Cumulative Profits, the sum of all company profits;
• Cumulative Free Cash Flow, the sum of all of the Free Cash Flows since you took over management of the company;
• Market Capitalization, the current value of your stock price times shares outstanding.

Each measure is worth up to 33 1/3 points. Since we are looking at accumulated wealth, the targets increase each year:

If you do not reach the target, you can still earn points. For example, if your Year 4 Cumulative Profits is $18 million, it would earn $18/$36 * 33 1/3 points = 16.65 points.