Capstone 2 0 - Common Pitfalls

Summary

The video discusses the four common pitfalls companies face in Capstone 2.0: lack of strategy, low contribution margins, poor product design, and receiving emergency loans. The key to success is selecting and sticking to a strategy, optimizing contribution margins by adjusting material, labor costs, or price, and catering products to customer preferences. The video highlights the importance of proper inventory management and cash flow forecasting to avoid financial pitfalls. Finally, it encourages a data-driven approach to decision-making and offers support resources for participants facing challenges.

Takeaways

• 📊 Determine your company's strategy before making any decisions, and stick with it to guide your actions.
• 📉 Contribution margin is key for profitability; aim for at least 30% to ensure you're either breaking even or profiting.
• 🛠️ Improve contribution margins by lowering material or labor costs, or by increasing product prices—but always consider customer preferences.
• 💡 Automation can reduce labor costs, but it takes a year for machinery investments to have an effect.
• 💸 Be mindful of customer price sensitivity when adjusting prices, especially for segments that prioritize low costs.
• 👥 Understand customer preferences, as each market segment has unique buying criteria; cater products to these needs for success.
• 📈 The customer survey score reflects how well your product meets market demands—use it to compare and adjust your product strategy.
• 🧮 Manage inventory carefully; aim for 2-3 months of stock to balance between avoiding missed opportunities and excessive carrying costs.
• 💰 Receiving an emergency loan may indicate either overproduction or improper financial planning; analyze inventory and cash flow for improvements.
• 📉 Accurate forecasting is essential to avoid cash flow issues and plan for large investments, such as plant space or equipment.

Q & A

What is the first step a company should take before making any departmental decisions in Capstone 2.0?

The first step a company should take is determining its strategy by reviewing the six basic strategies found on page 32 of the user guide. Once a strategy is chosen, it is important to stick with it throughout the game, adapting only when necessary.

Why is it important to follow a chosen strategy from start to finish?

Following a chosen strategy helps streamline decision-making and provides direction for the company. Without a clear strategy, the company is likely to face confusion and lack of success.

What is contribution margin and why is it important?

Contribution margin is the difference between a company’s sales and its variable expenses, expressed as a percentage. It indicates how profitable a product or company can be. Ideally, a company should aim for a contribution margin of 30% or higher to ensure profitability or at least break even.

What are three ways to increase a low contribution margin?

A company can increase a low contribution margin by: 1) lowering the product's MTBF (reliability) in R&D to reduce material costs, 2) increasing automation in production to lower labor costs, and 3) raising the product’s price, provided that the customer is not price-sensitive.

Why is it important to consider customer buying criteria when adjusting product features?

Customer buying criteria vary by segment, and meeting these preferences increases the likelihood of selling more products. Ignoring these criteria, such as price sensitivity or product reliability, can result in losing customers to competitors.

How can you use the customer survey score to improve your product?

You can compare your product’s customer survey score with the best product in that segment, then analyze differences in customer buying criteria. This helps pinpoint areas where your product falls short, allowing you to make adjustments that will better meet customer expectations.

What are two reasons a company might receive an emergency loan in Capstone 2.0?

A company might receive an emergency loan if: 1) it overproduced and has excess inventory, or 2) it made large investments and failed to properly finance them.

How can companies avoid inventory-related emergency loans?

Companies can avoid inventory-related emergency loans by maintaining a balance of around 2-3 months of extra inventory at the end of the year. Anything higher impacts cash flow due to a 12% carrying cost.

What should you analyze if excess inventory isn’t the cause of an emergency loan?

If inventory isn’t the issue, the company should analyze its cash flow statement to see if large investments, such as plant space or equipment, were made without proper financing, and consider borrowing funds via debt or issuing stock.

What is a good rule of thumb for determining how much cash a company should have on hand?

A company should aim to have a cash position of around 7-10% of its projected sales. For example, if a company expects to sell $100,000 worth of products, it should have $7,000 to $10,000 in cash to cover operations.