GLOBAL MANAGEMENT CHALLENGE

Important detail on how to use this on-line manual

The left hand 'frame' always contains a clickable contents list.
The relevant part of the manual appears in the (scrollable) right hand frame, as here.

When you choose one of the main sections (for example, The business environment), then the contents list changes in order to expand the choices for that section.

The main parts of the manual are shown with a pale blue/green background. Within the manual there are hyperlinked cross-references to other, relevant parts of the manual.

In addition, there are many links to additional pages -

• Guidance notes, which provide general help on various important topics, are shown with a pale yellow background.
• Detail notes, containing technical details (as here), are shown in boxes, or panels, with a pale blue/green background.
• Tables of various fixed parameters (eg costs)

These optional pages, replace the main (right hand) page. Use the 'backspace' key (or browser 'Back' button) to retrace your selections.

If you prefer, and if you have a large screen, you can open these additional pages in a new window, by right-clicking. You can then move and resize these windows as needed. They can be left on screen for reference, or you can exit them in the usual (X) way.

Or, you can open any other page (eg Tables) in another 'tab' and switch to and from your main page and any other such pages.

The manual is optimised for a 1024x768 screen. Toggling F11 maximises the useable area. Alternatively, you can temporarily remove one or more toolbars (eg the status bar).

Note that, currently, there is no keyword index to this manual. However, you can search each of the main sections using your browser's search facility (Edit then Find, or use Ctrl+F).

Back

Important detail about Exchange Rates

The exchange rate is quoted in € per US$: i.e. the price paid in euros for one US dollar.
When the euro-cost of a dollar is falling you will be paying fewer euros per dollar hence the euro is strengthening and the dollar weakening, and you can expect to sell fewer products in the dollar area (all other things being equal). If the euro-cost of a dollar is rising the opposite effect occurs.

The exchange rate quoted is fixed at the end of last quarter and will be used in exchange transactions throughout next quarter. The rate used last quarter (i.e. in the latest management report that you have) will have been quoted in the report for the quarter before last.

The economic statistics are given in deseasonalised form, so that underlying economic trends can be deduced from them directly with no need to worry about smoothing.

Back

Important detail about Information

Free information comprises -

• Prices which are quoted by company, product and sales area (Europe, Nafta and Internet).
• Total number of employees which includes unskilled machinists and skilled assembly workers.
• The basic wage rate is the rate for assembly workers decided by each company.
• Total number of agents (Europe) and distributors (Nafta) last quarter.

Information which must be paid for includes -

Market shares: for each of your competitors, based on the number of sales made last quarter.

Other company activities are:

• The figures for spending on advertising and product development are totals. There is no breakdown by product.
• The consumer assessment rating of the design quality of your own and your competitors' products takes the form of the award of 'stars', varying in number from five for a superlatively designed, technically advanced, well-made product; to one star for an obsolete, shoddily made product. This information is gathered from consumer panels and reflects the views of the general public. Consumer assessments should be viewed with a little caution as they come from an analysis of subjective discussion between small sample groups of consumers.
• An assessment rating, based on the same 5-star system) of the attractiveness, effectiveness and ease of use of your web-site (if you are trading on the Internet).

Back

Important detail about Product Development

Each quarter, the degree of success of your product development is shown at the bottom of the 'Products' section of your management report, by the words 'MAJOR', 'MINOR', or 'NONE'.

You must have had a Major improvement reported before you can take one up. If you start the process to take one up without having had one reported, it goes ahead anyway and existing stocks are sold off, but there is no corresponding marketing advantage.

A Major product improvement is only reported once. Whether or not you take it up immediately next quarter, your product development department will have started a new project, and it is up to you to remember if you have improvements in hand, not yet implemented.

Major improvements which are not taken up immediately do not disappear. You can take them up in a future quarter. If you do not take them up soon, however, you are likely to find that rival companies seize the advantage by bringing similar improvements to the market before you.

It is possible to leave a major improvement for so long that a second one is reported. In this case when you do take one up, you automatically take both with an increased marketing effect.

Taking up a major improvement has no effect on any backlog of unfulfilled orders you may have.

Minor improvements are a by-product of the research on the way to a major improvement, and do not interfere with the progress of that research.

The process of taking up a Major product improvement is as follows:

• Each quarter you decide the product development expenditure for each of your products.
• After a number of quarters this investment pays off and your product development department reports a Major product improvement for one of the products.
• Next quarter, or in some later quarter, you decide to implement that improvement. It is important to weigh up the marketing benefits an improved product will bring against the potential loss of sales revenue in selling off obsolete stocks of old product cheaply, and that will depend on how much old stock you currently have in hand.
• Once you decide, at the beginning of next quarter, any stocks of that product are sold off at the valuation price, outside the normal markets.
• Your production department begins to make the new product and marketing begins to sell it.
• Consumer assessment committees evaluate the new product and may revise its star rating.

Back

Important detail about Agents and Distributors

If you have no agents or distributors working for you, then you will receive no orders from the European or Nafta markets. If you wish to appoint some, then you must decide one quarter in advance how many agents or distributors you want to try to appoint, and what support and commission you are offering, so that the terms are clear before they join your network. The key for successfully appointing and retaining them is both the level of support and commission they receive.

Reduction in the number of agents you have must also be notified one quarter in advance.

There are fees to be paid for recruiting, and for closing down agents and distributors.

The same should apply to internet operations, but you only need one distribution agent. The agent is appointed automatically when you start to operate on the internet, and should you close down your internet operation he will be dismissed.

If you wish to start an internet operation for the first time, you must decide how many internet ports your web-site will operate. Making this decision will signify the start of your operation, via a web-hosting Internet Service Provider (ISP). A distributor will be recruited automatically, and orders should begin to flow in the quarter after next.

Starting an internet operation incurs a substantial joining fee, and also, at least, a minimum support payment to the distributor.

Closing an Internet operation requires one quarter's notice, and is signalled by reducing the number of ports to zero.

Commission paid to agents in the European market is based on the value of orders received. Distributors in Nafta are paid commission based on the value of sales made. Your internet distribution agent is also paid a percentage of the value of sales. Agents and distributors are sensitive to the rewards they receive compared to your internet operation. If they feel that the internet operation is competing against them unfairly and undermining their profitability then they are likely to leave your organisation. This situation can be controlled by the level of commission paid.

The capacity of your web-site to handle potential customers at peak times is critical to your marketing image. People who can't access your web-site quickly, because of a lack of capacity, will simply go elsewhere. Statistics about your site are available to help you monitor its performance. Adding extra ports to an existing system will only have a partial impact on the number of orders received in the quarter they are added.

Back

Important detail about Internet Operations

Starting on the Internet

If you want to start trading on the internet for the first time, you must set up your operation one quarter in advance, by deciding on how many ports you want. There is a joining fee when you make this decision for the first time. Your system will then be available to use from the beginning of the quarter after next.

During this preliminary quarter, you also appoint a distributor and you should decide on a support payment, otherwise the minimum will apply. There is also a cost of setting up your distributor.

You will also need to design and develop your web-site software. This also takes one quarter, and so you must decide on development costs when you decide what capacity you want.

Website capacity

Deciding on the number of ports to have is not easy, because demand on your web-site will vary considerably from day to day, and also throughout the day. If you are not able to give quick and efficient service to visitors at peak times your marketing image may decline quite sharply.

Adding a port to your system means adding capacity 24 hours per day. A single port operating on its own is much less able to handle the varying web-site traffic than a system of multiple ports. For example, a realistic average capacity for a single port is only about one fifth of the capacity it would have if traffic were steady. But, as the number of ports is increased, the capacity rises more quickly because more ports allow more effective use. With a large number of ports the average approaches the maximum.

The following table gives a guide to the link between ports and service.

Number of parallel ports	1	2	5	10	20	50
Theoretical average capacity (number of visits per hour)	12	24	60	120	240	600
Practical working capacity (number of visits per hour)	2	7	31	81	190	537

If you wish to close down your internet operation, you should set the number of ports to zero. As you must give one quarter's notice of closure, your existing ports will continue to function until the end of next quarter. You must also pay closing down fees to both your ISP and distributor.

Back to Marketing or Operations

Important detail about Recruitment

Because of the time taken to advertise for, and interview workers, recruits will not begin work until the beginning of the quarter after next. The cost of recruitment includes the costs of advertising and interviewing expenses.

As an alternative to recruitment of experienced people, you can train unskilled unemployed people to the standard needed for assembly. Training takes place in the company's own training school at the factory. This limits the number that can be trained to nine per quarter. After decisions to train people have been taken, they are brought in from the local unemployed labour pool at the beginning of next quarter, complete the course and become available to work at the beginning of the quarter after next. The cost of training covers the trainees' wages, materials and training-staff. Training people is more expensive than recruiting them directly, but it ensures that you get the number you want, and that they stay and work for you for at least one quarter after their training is complete.

Skilled workers can be dismissed by making the appropriate decision. The decision to dismiss implies that notice is given at the beginning of next quarter, and that the workers continue to work for the remainder of the quarter before leaving at the end of it. Those who are dismissed are paid compensation). Dismissals tend to make the remaining workers restive, and demotivated.

The same general causes which influence people to leave for other companies will also create discontent among those skilled workers who remain, possibly leading to industrial unrest and strikes in the assembly shop. Official strike notice from the trade union is given in one quarter, determining the length of the strike (in weeks), which then takes place at the beginning of the next quarter regardless of any changes you may make to improve wages and conditions, and involves all your skilled workers. Unskilled workers do not belong to the same trade union and are content to stay at work while benefiting from any wage increases or improvements which may be won by the skilled workers.

When assembly workers take industrial action the total number of hours that can be worked is reduced by 48 hours per person, per strike-week (thirty-five hours basic, plus seven hours on Saturdays and six hours on Sundays).

Absenteeism can also reduce the number of hours of work available. In the case of unskilled workers this has no apparent effect, but it does affect skilled workers, and hours can be lost in the assembly shop because of genuine sickness, disaffection caused by too much over-time, and low motivation brought on by poor quality products or poor management.

Assembly workers may become ill, or suffer serious accidents so that they are off work for a significant length of time. When this happens you continue to pay them as normal, but their position is temporarily filled with skilled workers from an agency who charge twice the assembly wage rate. The cost of the agency workers can be covered by insurance.

Reductions in the number of machines or in the shift level means that you will have surplus unskilled labour. Because of a trade union agreement, only half of these workers can be dismissed at the beginning of next quarter. Any surplus still remaining are given labouring jobs around the factory, and paid the same average earnings as those workers who are still manning the machines. Half of this surplus will then be dismissed at the beginning of the quarter after next, and so on until all have gone, or an increase in the number of machines or shift level enables them to go back to productive work again. Unskilled workers who are forced to leave are paid compensation.

Back

Important detail about Pay

Assembly workers and machine operators are paid up to a maximum number of hours per person at basic rates of pay. Thereafter the rate is increased for additional hours worked on compulsory overtime on Saturdays which is paid at 50% more than the basic rate, and on Sundays which is paid at 100% more than the basic rate. No decision needs to be taken about overtime working, which is applied automatically at a lower management level. Basic hours are applied first, then Saturday working, then Sunday working up to the limits shown. After that no further work can be done, even though your delivery schedule may call for more products to be made than your labour force can produce.

The skilled assembly workers operate only a single shift, but they can work overtime up to the limit shown in Table 16. They are paid only at the single shift rate. There is no guaranteed minimum number of hours worked for skilled workers, but a trade union agreement requires that the average weekly earnings of skilled employees (based on the number of weeks out of twelve worked) should not be less than that paid to unskilled workers, and any deficiency that occurs is made up by a 'parity payment'.

Unskilled workers are paid at a basic rate, which is set as a fixed proportion of the basic skilled rate, as agreed with the trade union.

If you decide to work more than one shift, all of your machines are manned fully on all of the shifts, and the rate of pay for all unskilled workers is increased by a shift premium.

Table 16 sets out the maximum hours that each person can work, and the rates paid. Unskilled workers are paid for hours worked, but each quarter there is a guaranteed minimum number of hours work per person. Unskilled workers are paid when machines are broken down and under repair, but not for maintenance, which is carried out when the factory is not working.

Any increase in your management budget will be implemented at the beginning of next quarter, but a decrease requires one quarter's advance notice and is limited to 10% in any one quarter.

Back

Important detail about Finance

At the beginning of next quarter your bank account (or overdraft) as shown on last quarter's balance sheet will be immediately adjusted to take account of any cash movements resulting from new decisions involving share transactions, long term loans, term deposits and any dividends paid.

Term deposits earn interest at the European Central Bank rate as announced in last quarter's management report. The interest is credited to your bank account at the end of next quarter.

The flow of cash into and out of your company for all other reasons is assumed to occur at a steady rate throughout the rest of the quarter.

The maximum authorised overdraft available to you next quarter is shown in your management report for last quarter.

Interest due on an overdraft, if any, is calculated from both the revised opening balance (as above) and the level of overdraft at the end of next quarter. A different interest rate could apply in each case, depending on whether the level is above or below your overdraft limit.

Any overdraft at the end of next quarter will include the interest charged, and this may sometimes take your overdraft above your authorised limit, even if the interest was charged at the lower rate.

The total medium term loan (or addition to an existing loan) is limited to your borrowing power. This varies from quarter to quarter and depends on the value of your company's shares on the Stock Exchange, the amount of any existing term loans and overdraft limit which your bank has set. Your borrowing power for next quarter is shown in last quarter's management report.

Interest on term loans is at a fixed rate and is calculated from the first day of each quarter.

Back

Important detail about Insurance

When disruption does occur, it is shown in the management report in the following ways -

• Physical loss of material and product stocks are reported directly in the report.
• Loss of machine time and assembly time are shown under breakdown time and absenteeism, respectively and are not separated from routine minor problems.
• Dangerous or ecologically unsound products are included in guarantee servicing, and are usually large quantities.

If disruption occurs in any of the above cases, the symbol "!" will occur alongside the relevant figure.

The total notional cost of disruption is combined into a single claims figure each quarter and if the total claim is greater than the value you have decided to underwrite yourself, you will then be paid the difference, immediately.

If you have no insurance cover you cannot make a claim.

Insurance premiums are calculated as a percentage of the total value of your non-current assets and inventories. This percentage varies with the amount of primary risk that you are prepared to accept yourself, before a claim is passed to the insurance company.

The larger the proportion of the risk that you are prepared to take on, the lower the premium will be on the remaining asset value to be covered.

There are four plans in which the proportion of primary risk which your company takes on itself rises successively from 0.1% to 0.4%, and the corresponding percentage premium which the insurance company will charge to cover the remaining asset value.

Back

More detail about balance sheet definitions

Machinery

The value of machines shown in the balance sheet for the quarter before last, less the depreciated value of any machines sold last quarter, all reduced by the quarterly rate of depreciation; plus the value of any machines purchased last quarter.

Product inventories

The numbers of each product held in the area warehouses multiplied by their valuations.

Materials inventory

The total number of units held and on order, multiplied by a percentage (Table 21) of the lowest of the spot, 3-month or 6-month price for material next quarter given in the management report for last quarter. This price, in dollars, is converted to euros using the exchange rate quoted last quarter.

Cash and cash equivalents and overdraft

Cash and cash equivalents includes any term deposit, even if you have an overdraft.
Note that any overdraft at the end of a quarter will include the interest charged for that quarter. As a result, the overdraft may slightly exceed your authorised limit, but without penalty.

Trade payables

The cost of advertising, guarantee servicing, website development, maintenance, warehousing, business intelligence and hired transport, plus 50% of materials purchased (see Table 24).

back

More detail about accounting practice

Cash collection and credit control

have associated costs which are a fixed amount per unit of product sold both for European and Nafta agents and also for servicing credit card payments by internet customers (see table 20).

Sales

made by your company are invoiced to customers for payment. Amounts due, but not paid before the end of a quarter are carried forward as trade receivables on your balance sheet. Payments from the different markets are expected in full within the target periods given in Table 23. However not all customers pay promptly so that these targets are never quite met. This does not apply to internet customers who pay in full by credit card (see below).

Purchases

made by your company are either paid in the same quarter as the purchase was made, or in a later quarter, in which case the amount owed is carried forward in your Balance Sheet as a liability (trade payables). Table 24 lists all types of purchase that can be made and the timing of these payments. Trade payables cannot be manipulated to assist your cash flow.

Company tax

is levied on taxable profit at a rate given in table 20. The tax year is the same as the calendar year, and an assessment of tax is made at the end of the fourth quarter. Any tax assessed is deducted immediately from the company's profit and entered as a liability on the balance sheet, where it remains until it is automatically paid in the second quarter of the following year. Any losses are accumulated, and offset against future taxable profits.