Clean Sweep -

a Competitive Strategy Simulation

Strategic Finance for Value Creation

This document is an entirely fictional work, intended solely for use in an educational context.
While some places and situations described may exist in reality, the authors do not guarantee the
accuracy of any of this content and do not intend to convey any opinion whatsoever about the
information that may or may not appear to be based on fact. Any similarity between the names of
individuals and organisations featuring in the work and those of real-life individuals and
organisations is entirely coincidental.

This simulation has been developed by Ososim Ltd.

© Ososim Limited 2021. All Rights Reserved. Proprietary and Confidential.

 Clean Sweep 4Y

Introductory memo
From: Frank Wilkinson
CEO, Robots Inc.

To: You
Director, Consumer Home Division

Date: 20 December

Dear Executive,

Congratulations on recently being appointed to the executive leadership team of the Consumer
Home Division (CHD) for our company. As you know, we run each division as a stand-alone profit
centre with its own financial statements and accounting. Your new role holds clear responsibility
and accountability for the division’s results. Your executive team will need to determine who will
take on the role of CEO, Marketing & Commercial Director, Operations Director, Finance Director
and HR Director of the division. You will collectively be in charge of generating value from this
business and your primary metric of success will be the Economic Value Added of the division.

The home consumer market is showing strong growth potential and we need to position
ourselves to take advantage of this, leveraging our core technologies and innovation. Of course,
we operate in a competitive market with new players joining every day. Our relatively young
company needs to establish itself as a major force in this field and I expect you above all to out-
perform our competitors.

You will be responsible for taking and implementing the major strategic and operational decisions
for this division on an annual basis. You will be able to rely on your staff, others in the company
and external resources to support you in these tasks. I shouldn’t need to remind you to watch
carefully what is happening in the market, analyse your figures and drivers carefully to optimise
results, and listen to advice given to you by those on the ground.

As you are aware, the standard tenure of a manager in our company is four years in any one
position in order to encourage medium to long term thinking and development. We have a
strong future focus and your objective should be to optimally position this division to continue its
growth after your assignment is over. Your final evaluation will include the results achieved and
an assessment of the potential of the division to create value for our company in the future. I
look forward to seeing what you can achieve over the next four years for this business.

Best regards,

Frank

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Background and context

Company and business

Robots Inc. has a well-established history of technological innovation and a strong engineering
culture. It is globally present with regional centres and manufacturing sites on several continents.
Starting off in unique speciality applications for niche industries, the company developed a loyal
customer base and grew through its smart use of targeted social media and a very clear focus on
specific segments.

The Consumer Home Division (CHD) is one of the most recent parts of the company, growing
originally out of home applications of products initially designed for industry and retail trade
before establishing itself with a flagship product specifically designed for consumers. You will be
managing sales of both the flagship home robot product and the service and maintenance
contract support for that product. The robotic product helps with classic household tasks, for
which solutions are constantly evolving with new technology and innovation. The service
contracts cover repairs arising from normal product use and customer support including routine
or necessary software updates.

Market situation
The consumer robotics market
currently has four major players, Market shares previous year
of which your company is one,
along with a multitude of smaller
players. The major players will be
run by competing management
teams, while the other players in
the market will be simulated by
the model. Player 1 Player 2 Player 3 Player 4 Other players

After a relatively slow

Market size
and stable growth trend
130
over several years, the
market is showing strong
120
signs of accelerating
110
growth for the near
future, although there
100
remains quite a lot of
uncertainty and volatility
90
in the predictions.
Y-3 Y-2 Y-1 Y0 Y1 Y2 Y3 Y4

historical forecast

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Current market information

Recent market studies in the field of consumer robotics have provided the following data about
the current market outlook and demographics.

Within the overall population, the penetration rate of home robotics products has reached just
over 5% according to surveys done in the past two years. However, this penetration rate varies
widely within different segments of the population.

A novel segmentation of the consumer robotics market which avoids the pitfalls of traditional age
and income segmentation – frequently not relevant to such new technology markets – has
identified the following customer segments and their characteristics. *

Segment name Description Relative size Product

penetration rate

Early Adopters Technophiles happy to pay for new 2% 29%

products

Impressers Affluent group readily adopts new 6% 24%

technology, and vocal about their
opinions

Affluent Nesters Happy to pay for products which 7% 14%

improve their own lives and ready
to adopt new technology

Greens Prepared to pay a premium for eco- 9% 6%

friendly products

Retired Renters Older, more traditional group with 16% 3%

diverse interests and less
willingness to adopt new technology

Convenience Seekers Slower to adopt new technology; 18% 7%

most interested in convenience and
impact for their busy lives

Strugglers Lower incomes and little to no 42% 1%

interest in technology or the
environment.

* Adapted from Strategic Analytics, 12 Apr 2017

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A more traditional
segmentation of Customer priorities
customer adoption
10
groups maps their
most important 8
priorities on a scale 6
of 1 to 10, with 10 4
being the most
2
important, as shown
here 0
Value for High tech Brand image Availability Service Ease of use
money

Innovaters & Early majority Late majority

Early adopters & Laggards

According to an analysis by a well-respected consulting firm in this field, the most relevant macro-
trends likely to impact future business prospects in this industry include:
 Acceleration of home technology adoption rates as the average consumer comes to accept
technology in-roads in all areas of life. This is driven in particular by younger generations
moving into their own homes.
 Ever-increasing awareness and sensitivity to the environmental impact of consumption with
larger portions of the consumer market paying attention to questions such as recyclability
and the energy requirements for producing and using goods.
 Consumers becoming more conscious of and less likely to accept extreme social
stratification and inequalities. This can work in favour of home robotics, as a growing
segment of the population finds it more acceptable to use technology solutions instead of
hiring low-paid labour for the same jobs.
 Cyber-security threats continue to evolve and can impact companies and consumers alike if
security is not maintained and strengthened constantly.

Goal and outcomes

Your primary goal is to achieve the maximum Economic Value Added (EVA) for the division during
your four year tenure. The calculation of your final result will include not only the historical
results achieved during the four years, but also an assessment of the future potential of the
business at the end of your assignment. This will depend on the ability of the business to
generate future cash flows and how well you have left it prepared to face the competitive
challenges ahead.

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 Clean Sweep 4Y

Financial statements
The Consumer Home Division is run as a stand-alone business within the corporation and as such,
has its own financial statements as if it were an independent company.

You will be provided with the following simplified versions of the financial statements for your
business both as proforma (forecasted) statements during the current year and as actual results
for previous years. The statements below give the actual results of your business for the year
prior to you taking over its management.

All figures in thousands of USD$

The Income Statement

as % of
Previous year Notes
sales
Sales revenues 135,502 100% function of pricing,
availability and other
decisions impacting the
market outcome
- Cost of goods sold 91,800 68% cost of production and
supply
- Distribution cost 22,220 16% distribution commissions
= Gross profit 21,482 16% sales revenues – cost of
goods and distribution
- Sales, general & admin 13,300 10% includes all marketing,
expenses sales, admin, overhead,
research costs etc.
= Net operating profit 8,182 6% gross profit – SG&A
- Net financing costs 1,464 1% net interest expenses
= Profit before tax 6,718 5% net operating profit –
financial costs
- Taxes 1,881 1% division’s tax allocation
= Profit after tax 4,837 4% profit before tax – taxes

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The Cash Flow Statement

Previous year Notes
Net operating profit 8,182 from income statement
+ Depreciation 6,430 add back non-cash depreciation included
in cost of sales
- Net capital expenditures 5,000 net fixed assets investments minus
divestitures
- Change in working capital 1,070 net change in inventories, accounts
receivable and accounts payable
= Net operating cash flow 8,542 net operating profit adjusted by cash flow
elements above
- Net financial cash flows 1,082 net interest and debt payments
- Net taxes paid 1,758 net tax payments
= Free cash flow 5,702 cash flow available to shareholders

Free cash flow represents the cash flow from operations of the business which is available (‘free’)
to use to provide returns to shareholders. This money can generally either be kept in the business
(reinvested) to generate more operational returns in the future or distributed to shareholders in
the form of dividends.

The Balance Sheet

Previous year Notes
Net fixed assets 45,720 gross fixed assets – accumulated
depreciation
Inventories 10,840 value of products in stock
Accounts receivable 24,370 amounts owed by debtors
Accounts payable - 7,880 (negative) amounts owed to creditors
Cash 7,632 operational cash on hand
= Total Net Assets 80,682 sum of assets
Share capital 32,725 capital invested by shareholders
Retained earnings 4,617 previous earnings kept as reserves
Long-term debt 28,630 financial debt due in more than one year
Short-term debt 11,365 financial debt due within a year
Accrued payments 3,345 payments due not yet paid from cash
= Total Liabilities & Equity 80,682 sum of liabilities & equity

All figures in thousands of USD$

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Economic Value Added

Previous year Notes
Net operating profit 8,182 from income statement
Total net assets 80,682 from balance sheet
Return on capital employed 10% net operating profit divided by total net
(ROCE) assets
Weighted average cost of capital 6.97% cost of debt and equity according to the
(WACC) actual % of funding used
Capital charge 5,623 WACC * total net assets
Net operating profit after tax 5,891 net operating profit * (1 – tax rate)
Economic Value Added (EVA) 268 net operating profit after tax – capital
charge

All figures in thousands of USD$

Economic Value Added is a measure of a company’s economic profit calculated by taking the
difference between the net operational profits of the business after tax and its opportunity cost
of invested capital. If EVA is positive, the company is generating value above and beyond the cost
of the capital that is used in the business, while if EVA is negative, value is being destroyed.

For further definitions and reading, refer to Stern Value Management’s definitions here -
http://sternvaluemanagement.com/intellectual-property-joel-stern/proprietary-tools-value-creation/

Actions you can take

There are fundamentally two types of activities in which you can engage: (1) business decisions
and analysis and (2) gathering information from the available people to inform your decisions.

Business decisions and analysis

You will be taking regular decisions for the two areas of product and service on an annual basis for
four years. Your decisions during the year will be on the basis of forecasts and you will see the
actual outcomes of these decisions on results at the beginning of the next year.

You will be able to interact with the available people to discuss decisions, further your analysis
and gather additional information about impacts and choices using the communication options
below.

Communication
You will be able to call the people available to you during each round to gather more information,
using a limited list of available questions. You can choose to speak to one person at a time and
they will respond immediately based on the information that they have.

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Annual decisions
You will take high level decisions for the two areas of product and service on an annual basis.
These decisions will then be implemented by your staff in more detail at lower levels.

Decisions
Options Notes
Price level 50 – 150% in 1% intervals price as compared to last year’s market
average
Innovation Levels 0 to 5 impacts technology spend and focus of
investment product improvement efforts; will affect
costs and market results
Marketing & sales 0 – $10 M in intervals of set as a budget to be spent over the year
expenditures $100,000
Sales distribution 0 – 30% in intervals of 1% commission paid to distribution channels
commission as % of price
Customer payment Days of credit granted determines payments received during the
terms from 0 to 90 year versus owed the next year
Supplier payment Days of credit granted determines payments made during the
terms from 0 to 90 year versus paid next year
Market research Levels 0 to 4 impacts quality and type of information
budget received; affects costs
Capacity investment -80,000 to +80,000 units in increase or decrease capacity to make
intervals of 20,000 products and supply services
Production volume 0 – maximum capacity determines inventory levels when
level in intervals of 2,000 compared with actual sales volumes
Estimated sales 0 – maximum units used to calculate the forecasted annual
volume available in intervals of results
2,000 units
Dividend distribution 0 – 100% in intervals of % of previous year’s free cash flow to be
level 10% distributed to shareholders as dividends

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Sources of information
In order to run your business and take informed decisions you will need to rely on various sources
of information. These will include people within the corporate office and your CHD management
team, as well as data gathered from the market.

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