THE MARKETPLACE

 ECONOMIC CONDITIONS

            CAPSTONE® is not like the real world in one important respect: all companies start alike. Your situation could be compared to a monopoly that has been broken up by the government. Where once there was one large company, now there are up to six smaller, identical companies.

            CAPSTONE® is designed this way for a reason. We want all strategic options to be available you. You can decide to be a Cost Leader or a Differentiator. You can be a large company, oryou can focus on a niche.

            At the beginning of the simulation, each company generates $100 million in sales. There are no outside competitors or product substitutes. A favorable economic environment features moderate growth, low inflation, and historically averaged interest rates. No economic downturns or other surprises are expected. In short, no excuses— whatever happens as the market evolves will be driven by the tactical execution of strategies, not by external factors.

 THE PRODUCT AND CUSTOMER

            Your products are sensors, devices that sense the environment. New sensor businesses are always being created. Today’s emerging sensor industries include security applications and bio-metrics. Customers put your sensors into the products they manufacture. Two questions dominate their thinking. How big is the sensor, and how well does it perform?

            The customer wants smaller sensors (resulting in a trend towards miniaturization) and higher performance (resulting in a trend towards increased sensitivity and speed). Over time, the customer expects smaller, more powerful products.

            Figure 2-1 -- illustrates the placement of five groups of customers on a Perceptual Map. A Perceptual Map indicates where customers’ buying preferences are located. For each segment, customers undergo a two-stage buying process. The first stage is known as the Rough Cut and the second, the Fine Cut.

 You serve five customer groups or market segments  Each segment is named for its purchasing concerns:

Traditional: 32.4% of market sales dollars. Traditional customers seek proven products using current technology;

• Low End: 31.1% of market sales. Low End customers seek proven products, are indifferent to technological sophistication, and are price motivated;

• High End: 15.3% of market sales. High End customers seek cutting-edge technology in bothsize and performance;

• Performance: 10.4% of market sales. Performance customers seek high reliability, advanced technology products, emphasizing high performance;

• Size: 10.8% of market sales. Size customers seek advanced technology products that focus on small size.

  

THE ROUGH CUT

In the Rough Cut, buyers focus on four product characteristics:

Performance: Customer perceptions of how well the product performs;

Size: Refers to the product's dimensions and weight;

Reliability: Expressed in terms of Mean Time Between Failure, or MTBF;

Price: Different price ranges are associated with each market segment, and distinguish one customer type from another.

 Products must fall within segment guidelines to survive the Rough Cut. Each segment sets its own standards for performance, size, reliability and price.

 PERFORMANCE AND SIZE

Performance and size are evaluated with a Perceptual Map, a marketing tool used to compare products against customer perceptions (See Figure A-7). The Perceptual Map reveals how customers perceive similar products. Performance is scaled from 0 (low performance) to 20 (high performance) on the horizontal axis. Size is scaled from 0 (small) to 20 (large) on the vertical axis.

 

 

 The circles on the Perceptual Map represent market segments. A market segment is a group of  customers with similar purchasing concerns. The market segments currently are grouped in the upper-left quadrant, but as technology improves, customers will want sensors that are smaller and have higher performance (as indicated by the arrows in Figure 2-2). Segments drift in the direction of the arrows.

 

Products that plot within 4.0 units from the center of the circle survive that segment's performance/size Rough Cut. When products plot more than 4.0 units away, they fail the Rough Cut (see Figure 2-3).

 As technology improves, customer expectations increase— they want smaller and faster products. These increased expectations cause the segment circles to drift towards the lower-right.

 Tip: To remain competitive, products must stay within the segment circles. The Perceptual Map evolves throughout the year. A segment can approach a product or leave it behind. Plan your R&D projects so that products always lie inside a segment.

 Segment drift rates average around 1.0 unit per year. The Low End segment moves slowest at about 0.7 units per year and the High End moves fastest at about 1.3 units per year (again, note the arrows in Figure 2-2). Movement occurs in monthly steps.

 Market segments will not move faster to catch up with a product that exceeds their expectations. For example, High End customers will refuse to buy a product to the lower right of the Rough Cut circle. Customers can integrate into their designs only products that fall within their circle on the Perceptual Map.

 PRICE

Each segment sets price guidelines, which further differentiate the segments. For example, Traditional customers do not expect to pay High End prices (Figure 2-4). Segment price expectations correlate

loosely with the segment's position on the Perceptual Map. In general, as performance increases or size decreases, price ranges go higher.

 

 PRICE IN A BUYER’S MARKET

In a Buyer’s Market there is plenty of inventory for customers. Products must compete on their merits. A product priced $1 above or below the segment guideline loses about 20% of its appeal. Products continue to lose approximately 20% for each dollar above or below the guideline, on up to $5, at which point they lose all appeal. For example, last year Performance customers expected a price

between $25 and $35. At $36 a product's appeal falls by 20%. At $39 a product's appeal falls by 80%, At $40 customers refuse to buy the product under any circumstance.

 PRICE IN A SELLER’S MARKET

In a Seller’s Market there are inventory shortages. Products can be priced up to $4.99 above the price range without losing any appeal. Customers dislike the price, but they must have something. However, at $5 above the price range, products still lose all appeal. Sales drop to zero as customers find a substitute or do without.

 Tip: Price ranges fall $0.50 per year in every segment. Remember, the price ranges reported in the CAPSTONE® COURIER. are for the previous round, not the round for which you are making decisions! Price expectations this round are $0.50 lower than last year.

RELIABILITY

Reliability is measured with Mean Time Between Failure (MTBF). The MTBF conveys the number of hours a product is expected to function. Each segment has a different range of expected MTBF (see Figure 2- 6). For example, Traditional customers want products to last at least 14,000 hours before they wear out (Table 2-1)

 

 RELIABILITY IN A BUYER’S MARKET

In a Buyer’s Market (lots of inventory), a product with an MTBF 1,000 hours below the segment guideline loses about 20% of its appeal. Products continue to lose approximately 20% for every 1,000 hours below the guideline, on up to 5,000 hours, at which point they lose all appeal. For example, Performance customers expect an MTBF between 22,000-27,000 hours. At 21,000 hours a product's appeal falls by 20%. At 18,000 hours a product's appeal falls by 80%, At 17,000 hours customers refuse to buy the product under any circumstance.

 RELIABILITY IN A SELLER’S MARKET

In a Seller’s Market (inventory shortages) a product’s MTBF can go 4,900 hours below the range without losing sales. However, at 5,000 hours below the range, products lose all appeal.

 THE FINE CUT

Suppose there are 30 products scattered among the five segments. High End customers would disqualify most of these, leaving only those products that meet the High End's Rough Cut standards. These survivors enter the Fine Cut stage and are compared across four buying criteria:

Positioning

Reliability

Age

Price

 POSITIONING

In the Fine Cut, a product’s exact position within a segment circle increases in importance. Inside each Fine Cut circle, segments have an Ideal Spot where demand is at its highest (Figure 2-5).

 

Customers in the high technology segments (High End, Performance and Size) want cutting-edge products. The Ideal Spots in these segments are located towards the lower-right edge of the circles, where size is smaller and performance is faster. The low technology segments (Traditional and Low End) want proven technology. Traditional customers concentrate in the center of the circle, while Low End customers concentrate towards the upper left. Ideal Spots drift with the circle. Increasing performance and shrinking size will increase the cost of a product’s material.

 RELIABILITY

In the Fine Cut, customers prefer high MTBF ratings to low ones (Figure 2-6). However, if a product's MTBF is beyond the expected range, customers ignore the additional reliability. Raising a product’s MTBF will increase the cost of a product’s material.

 

 AGE

Age refers to the Perceived Age of a product. Some segments prefer newer products, others prefer older, proven products (see Table 2-2). When a product is repositioned (moved on the Perceptual Map), its Perceived Age is cut in half. For example, suppose a product with an age of 3.6 years is moved. On the day it emerges from R&D customers mentally cut the age in half to 1.8

 Tip: In CAPSTONE®, the terms age and Perceived Age are used interchangeably.  

 Tip: In each segment, demand peaks at a different age. For example, in the Traditional segment demand peaks at 2.0 years. Products in that segment with ages of 1.5 and 2.5 would have the same level of demand. However, since sales occur every month, the product beginning the year with an age of 1.5 would have an advantage because, as the months progress, its age moves closer to the peak of 2.0; the product beginning the year with the age of 2.5 moves away from the peak.

PRICING

Price plays a role in both the Rough Cut and Fine Cut stages of the purchase decision. For products that survive the Rough Cut, demand for a product follows a classic economic demand curve: as price goes down, demand goes up (Figure 2-7). Customers, however, also are concerned with the product design. A better product creates higher demand, and this can be traded for a higher price.

 

 For example, suppose that the design for product Able is superior to Baker's. If they were priced the same, Able would outsell Baker. But as Able raises its price, at some point its unit demand will be equal to Baker's demand. Able will trade off some of its potential demand for a higher price on fewer units. In general, the high technology segments (Performance, High End, and Size) are sensitive to design and can command a higher price. The low technology segments (Low End and Traditional) are less sensitive to design and place more of an emphasis on price. Although all segments evaluate products against the four buying criteria, segments assign different importance to each. For example, price is most important to Low End customers and least important to High End customers. These priorities are summarized in Figure 2-9

 MARKET SIZES & GROWTH

Market segments have different sizes and grow at different rates. Table 2-3 and Figure 2-8 summarize the relative sizes for the current year and the forecasted sizes five years from now.

 

 For example, the Traditional segment is growing (in units) at 9.2% per year. The entire market, however, is growing at almost 14% per year. Because the Traditional segment is growing at a slower rate than average, five years from now it is expected to make up only 28.0% of the market, down from its current 32.4%. Over the same period, the entire market is expected to grow 85%.

 Tip: The five-year dollar estimate in Figure 2-8 assumes prices will hold at their current levels, which is extremely unlikely. Unit prices will fall as the simulation progresses. Price pressure in the low technology segments (Low End and Traditional) tends to be greater than in the high technology segments (High End, Performance and Size).