Interpretive simulations answers

Entrepreneur The Retail Entrepreneurship Simulation

Jerald R. Smith, Florida Atlantic University Peggy A. Golden, Florida Atlantic University Michael Deighan, Interpretive Simulations

Charlottesville, Virginia, USA

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Copyright Notice This manual and the simulation described in it are copyrighted with all rights reserved by Interpretive Software, Inc. Under the copyright laws, neither this manual nor the software may be copied, in whole or in part, without written consent of the authors, except in the normal use of the simulation for educational purposes, and then only by those with a valid license for use. The same proprietary and copyright notices must be affixed to any permitted copies as were affixed to the original. This exception does not allow copies to be made for others, whether or not sold. Under the law, copying includes translating into another language or format. Purchasing the simulation experience gives the owner the right to participate in a unique learning event. Each student or participant must purchase the simulation to take part in the event or the institution sponsoring the event must purchase for the entire group participating in the event. Limited Warranty on Media and Manuals In no event, will Interpretive Software, Inc. be liable for direct, indirect, special, incidental, or consequential damages resulting from any defect in the software or its documentation, even if advised of the possibility of such damages. In particular, the authors shall have no liability for any programs or data stored in or used with the computer products, including the cost of recovering such programs or data. This simulation experience is sold, "as is," and you, the purchaser, are assuming the entire risk as to its quality and performance. The warranty and remedies set forth above are exclusive and in lieu of all other, oral or written, express or implied. For more information about other products from Interpretive Software, please contact: Interpretive Simulations 1421 Sachem Place, Suite 2 Charlottesville, VA 22901 Phone: (434) 979-0245 Fax: (434) 979-2454 Website: http://www.interpretive.com Discover a Better Way to Learn. Active Learning through Business Simulations. Copyright © 1987–2007 Peggy A. Golden and Jerald R. Smith Copyright © 2008–2018 Interpretive Software, Inc. All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner whatsoever without written permission of Interpretive Software, Inc. Cover image © BigStock. Incident images, audio, and video © iStockPhoto, GettyImages, and BigStock. Graphic images used in manuals © BigStock and iStockPhoto.

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Contents

Introduction 1 Entrepreneur Quick Start Guide 3 Entrepreneur Manual 4

Entrepreneur Case 5 Entrepreneur Case 6 Location 6 Product Line 7 Business Name 8 Finance 9 Inventory Management 10 Hours 11 Return Policy 11 Pricing 11 Marketing 12 Staffing 13 Overhead and Other Expenses 13 Incidents 14 Reports 14 Performance Measures 16 Next Step 17

Entrepreneurship Essentials 19 Planning, Organizing, and Controlling 21 Financial Statements 23 Team Dynamics 25 Simulation Objectives 26

Appendix 27 Worksheets 28 Marketing Data Analysis 29 Quarterly Budget Variance 30 Log of Quarterly Decisions 31 Glossary 32 Index 38

Printed March 26, 2018

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About the Authors Dr. Peggy Golden is currently Professor of Management and International Business at Florida Atlantic University teaching graduate and doctoral courses in Strategy and the Environment of Business. She has also taught courses on global competition in Spain and to computer industry executives in Asia. Prior to her arrival at FAU, Golden taught at the University of Louisville for five years in a variety of areas including the management of information systems. All courses are taught through extensive use of cases, experiential exercises, and simulation experiences to reinforce the learning process. In addition to teaching college courses, Dr. Golden has also conducted numerous workshops in the development of competitive strategy, general management principles, special topics for women managers, time management, decision-making, and team-building. Consulting activities include strategic planning, systems analysis and design, and management of change. Dr. Golden is an active researcher and writer. She is currently studying corporate reputation and the interaction of corporate governance on top management team pay disparity. She has published seven management simulation games and numerous articles and papers in the area of strategy formulation and implementation, and simulation development and use. Visit Dr. Golden's homepage at http://professorgolden.net Dr. Jerald Smith is Professor Emeritus of Business Strategy and Policy at Florida Atlantic University. He is the author of eight simulation games spanning many interest areas in Management and Marketing. He has taught a broad range of courses at the undergraduate, masters, and doctoral level. He was one of the first to teach a course on the Internet as a host for professional MBA's who are on the go. Dr. Smith has consulted for Fortune 100 companies in diverse areas such as ethics training, supervision, and has helped formulate strategic initiatives for these companies. He is the author of numerous articles. Michael Deighan is a coauthor on the web-based editions of Airline, Entrepreneur, and HRManagement. His expertise, insight, and creativity proved invaluable and made it possible to convert these models to their current web-based versions. Michael joined Interpretive Simulations in 1989 as lead software developer and is now Manager of Content Development. He is coauthor on a number of Interpretive simulations: PharmaSim, AutoSim, BizCafe, StratSimMarketing, StratSimManagement, StratSimChina, ServiceSim, CountryManager, and MarketShare. In addition to developing software, he has been teaching computer programming classes at Piedmont Virginia Community College in Charlottesville, Virginia, since 1990. Michael received his B.A. in German and Economics from Washington and Lee University, and an M.A. in German from the University of Virginia.

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Acknowledgements A project of this magnitude cannot occur without the input and support of many people and organizations. Special thanks go to the following people: The Dean, Bruce Mallen, faculty in the Department of Management, International Business, and Entrepreneurship and its chair, Darab Unwalla, and the Graduate School of Business at Florida Atlantic University for support of our interest in management simulation and software. Our supportive families are always in the background: Adele, Barbara, Michael, Charles, David, Flossie, Susan, Jennifer, Matthew, and Willie. The genesis for this endeavor is in the strong entrepreneurship program at Florida Atlantic University. SUCCESS magazine studied over 250 entrepreneurship programs in the country and published their list of the "Top 50 Business Schools to Study Entrepreneurship." Florida Atlantic University was among the colleges listed. The Entrepreneurship team at FAU includes the director, Larry Klatt, and includes Paul Gugliemino, Kunal Banerji, Dennis Boyer and Bob Keltie. This team believes that simulations are valuable teaching tools for entrepreneurship. This is a real "Learn by Doing" pedagogical philosophy. Professor Richard Hoogerwerf at Miriam College for beta testing the simulation in his classes. Richard gave us 110% in testing and many valuable suggestions. Professor Marc Dollinger at Indiana University for a foundation in entrepreneurship, and Professor James Gray at Florida Atlantic University for making several suggestions in the field of retailing. Early adopters and champions of the cause include: Mary Beth Pinto, Jeff Jones, Richard Hoogerwerf, Judy Harris, Aston Moss, Salim Jiwa, Don Gudmenson, Ken Klatz, and John Pal. Thanks to the team at Houghton Mifflin, Kathy Hunter, Susan Kahn, Florence Cadran, and Melissa Russell. A special thanks to Pat Menard who is undoubtedly the most precise copy editor in the business. Not only does she edit for typos but makes helpful grammatical suggestions and makes sure all the numbers are correct. Those brave souls who tested the beta version were of great help: Steven Maranville, Mary Beth Pinto, Brian Hoekstra, Chris Scalzo, Connie Nott, Philip Little, Walt Bogumil, Rod Borer. Thanks to all! In this revision, we attempted to use all the comments and suggestions made by the many users of the first edition of this simulation. If we tried to name all the contributors we would surely omit one or more so we will simply thank all of you. We had some users who wanted a much more complex simulation with a heavy international emphasis. Others said keep the simplicity of the second edition in order that students who had never played a simulation could do so without getting deep in the many "rules" of a complex simulation. Unfortunately, we could not do both so we have opted for a less complex simulation in this edition.

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1

Introduction

ENTREPRENEUR

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Welcome to the exciting world of simulations! The Entrepreneur simulation provides an opportunity for you to manage a small retail clothing store in a college town. You have the unique opportunity to make business decisions, see how the decisions work out, and then try again! In the process, you will get "hands-on" experience operating a retail store. In Entrepreneur, you will typically be making decisions as part of a student management team. Teamwork is increasingly important in business today, and a valuable part of the simulation experience is learning how to make the best decisions when confronted with several different opinions. Your group will have to decide how to sort out your priorities and objectives in the context of limited resources and a changing environment.

At startup, your team will need to name the shop, decide its location, how to finance it, and pick a product line to best meet your business objectives. You will then make weekly decisions to purchase product, price and promote your line of clothing, set shop hours and hire staff. In addition, you may have to respond to issues raised by "incidents" (mini-cases), and complete supplemental assignments chosen by your instructor. You will need to understand the business in order to make good decisions. Therefore, take some time to familiarize yourself with the case before beginning the simulation. While working through your decisions, you will find it helpful to refer to the manual for information and management tips. To get the most out of the Entrepreneur experience, we recommend the approach outlined on the following page.

Entrepreneur is a dynamic business simulation covering entrepreneurship, ownership, retailing, and the ethical dimensions of management.

You compete against your peers in an Entrepreneur industry. All teams start from the same position and compete in the same environment.

You will gain experience with management, marketing, operations, and finance.

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Entrepreneur Quick Start Guide

PERIOD DECISIONS • Operations • Pricing • Marketing • Staffing • Finance

SIM ADVANCES • Check Schedule for times • Complete Decisions BEFORE Deadline

SIMULATION ENDS • Evaluate team performance • Review what you have learned

STARTUP DECISION • Access simulation from course website • Input a company name • Choose location, financing and product • Team leader MUST finalize startup to allow access to period decisions

READ THE CASE • Industry background • Company starting situation

Your instructor may require additional assignments during the simulation. Check the schedule and messages on your course website for details.

DECISION ANALYSIS • Break-even • Forecast

EVALUATE RESULTS • Company reports • Environment

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Entrepreneur Manual

The remainder of this manual is divided into the sections described below. Your understanding and success in Entrepreneur will be greatly enhanced by reading this manual before you begin the simulation. The sections listed below will answer most of the questions students typically have during the simulation experience, and reading them has the added benefit of improving your competitiveness. Finally, the case and help notes are available on-line in the simulation software. Section 1: The Entrepreneur Case presents information on your retail clothing store in a form similar to a business school case. A thorough understanding of your business, its current situation, and opportunities will help your group decision- making process. Section 2: Entrepreneurship Essentials provides a brief introduction to entrepreneurial management: what it is, why it is important, and what concepts will be used in the simulation. In addition, each of the basic functional areas covered in Entrepreneur are discussed. Appendix: This section includes worksheets to help with decision making, a glossary containing business terms that are used in the simulation, and an index.

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Entrepreneur Case

ENTREPRENEUR

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Entrepreneur Case You are purchasing a store that sells casual clothes, a specialty business in the retail apparel industry with a long history in the local community. It has been a family-owned business for many years, selling tops and pants for work and recreation at moderate prices. The youngest members of the family pursued careers in other fields and the retiring owners are interested in selling the business to ambitious entrepreneurs who can update the image and carry the business forward.

Location The store has been in the same location for many years, across from the college campus. The college location appeals to the student population and there is a fair amount of trade from surrounding neighborhoods. Rent is $5,000 per quarter, and the store is about 1,500 square feet, including both display area and storage space. While parking is limited, foot traffic in the area is constant, and the previous owners have been moderately successful in this location. Their sales last year were $400,000 and their after-tax profit was just over $11,000. The lease expires now, so you have the opportunity to renew the lease at the current rent or relocate. If you plan to continue selling a medium-priced casual line of clothing, then staying at the college location should be a good choice. On the other hand, if you are targeting a different customer base, another location might make more sense. Small retail apparel stores can be found in a variety of locations. Although they are most prevalent in retail malls, successful operations can be found in shopping plazas, downtown stores, and other types of retail space (e.g., adjacent to drive-in grocery convenience stores, former gas stations, and hotel arcades). Each type of location attracts a unique clientele and it is important to be able to identify which population your store is serving and whether there is a large enough segment available to generate profits. Consider the customer base and segment population in your location and be aware of their needs and expectations. The average floor space required for this type of retail outlet is 1,000 to 2,000 square feet with additional stockroom space of 500 to 1,500 square feet. In addition to the college location, you have three other choices, as described next.

• You may lease space in a shopping mall located in a newly developed subdivision, about a mile from the college. The rent is $6,000 per quarter for 2,000 square feet. The Merchants Association at the mall provides a moderate amount of free advertising through flyers. Parking is close and plentiful.

• A store along the main street of the town is available for lease at $6,000 per quarter. The street is steadily becoming a shopping area; many stores are moving there and making improvements.

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There is parking along the street and in back of the stores. Other merchants report there is usually enough parking available. The store is 1,800 square feet.

• A corner property between the college and downtown is available. It currently has a closed service station on it, but the owner will convert it to a retail store of 1,500 square feet with new interior and exterior. There is parking for several cars, and it is located on a busy intersection with good visibility. The landlord will rent it at $4,000/quarter for the first year, with a clause to raise the rent in the second year to no more than $4,500.

None of the locations is "bad". The location decision should be based on your product line, price range, and customer base. However, your team needs to choose the location carefully, since the opportunity to relocate will not be available later in the simulation

Product Line The tops and pants store that you will be operating is a specialty business in the retail apparel industry. Retailers report that they carry several types of pants and an equivalent array of tops, depending on the clientele they wish to attract. The type of population or market segment will affect the type of inventory carried in an individual store. Although the early entrants in this market limited their inventory to jeans, most of the successful operations have broadened their offerings to include a variety of styles of pants and tops (jeans, slacks, fatigues, T-shirts, blouses, casual shirts, etc.). This provides a more complete product mix for customers. Depending on your local market, your team may wish to offer a specialty line of garments, such as ethnic, designer, or uniforms for healthcare, food, and other service professionals. Your store's relationship with its suppliers is excellent. Your primary vendor has offered to replace the existing stock if you change your product line when you take over the business, as long as the product is in the same price range. You can choose one of the following lines of clothing.

• Ethnic: You can choose to sell specialty clothing specific to a region or ethnicity. This includes African, Asian, and Hispanic styles, as well as Western Cowboy.

• Casual: Your current inventory is casual clothing for the contemporary shopper. It includes jeans,

t-shirts, sweaters, and sports apparel.

• Designer: Designer clothes display the label or logo of a fashion designer. Designer brands use name recognition to help sell the pants and tops.

• Ultra-Trendy: Ultra-trendy apparel appeals to the more fashion-conscious buyer. It includes pants

and tops that are the latest fad, as well as higher fashion clothing.

• Uniforms: The uniforms line provides apparel for healthcare, food, and other service professionals. This choice includes a casual line of surgical scrubs.

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You can be successful with any of the product lines, though you need to coordinate your choice with your location and target customers. While you may change to any of the product lines at any time, you will be charged a 10% restocking fee for your inventory of old product. Also, keep in mind that when you switch clothing lines, it will take some time to reach normal sales volume. Frequently changing your product line will confuse customers.

Business Name One of the most important decisions an entrepreneur makes is naming the business. This is also a legal issue since names are usually registered in a governmental office for the locale in which the business operates. Once your business has a new name, the image and reputation for the store immediately begins to take form. Although it is possible to rename your business if the first name selected turns out to be unsatisfactory, it is important to select a name that will stand the test of time. It should also be adaptable to a new product line if you desire to change the line sometime during simulation play. Factors you may want to take into consideration in naming your business and some good/bad examples follow.

• Is the name descriptive of what you sell?

Campus Clothing Corner vs. The Corner Store • Does it avoid meaningless words or initials?

The Jeans Shop vs. The JGD Shop • Is the name distinctive and easy to remember?

Jerry's Jeans vs. Emily Lanahan's Clothing Store • Does the name adapt to changes in products?

Casual Clothes, Etc. vs. Just Tops

Of course, some of these factors have conflicting requirements. It can be difficult to come up with a name that is both descriptive and flexible. You will need to determine which factors are most important for your store's image. In any event, be sure to choose a business name that is descriptive, yet flexible.

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Finance Sales for the past four quarters have ranged from $80,000 in the first quarter (January–March) to $110,000 in the fourth (October–December), with average quarterly revenue of $100,000. After-tax profit for the year was about $11,200. Your accountant has audited the books and believes that the business is a healthy going concern, especially since it could be operated more efficiently than it had been by the previous owners. In her opinion, the purchase price of $55,000 is fair since it includes $21,000 in inventory, some residual advertising, and the good reputation of the firm. Below is a summary of the income statement for last year, along with the balance sheet at of the end of the year.

Figure 1: Income Statement (last year)

Gross Revenue $400,000 100.0% Cost of Goods Sold $200,000 50.0% Gross Margin $200,000 50.0% Marketing $45,000 11.3% Staffing $96,000 24.0% Overhead & Other $43,000 10.8% Total Expenses $ 184,000 46.0% Profit Before Taxes $16,000 4.0% Less Tax (30%) $4,800 1.2% Profit after Taxes $11,200 2.8%

Figure 2: Balance Sheet (end of year)

Cash $15,000 Loans Payable $8,000 Rent Deposit $5,000 Total Liabilities $8,000 Inventory $21,000 Retained Earnings $33,000 Total Equity $33,000 Total Assets $41,000 Total Liab. and Equity $41,000

Your team must put together $75,000 to get the business started: $55,000 to purchase the business, $10,000 for rent deposit, and $10,000 in working capital. There are several ways to raise the capital needed, including selling stock (to the team members, friends or an angel investor) and borrowing the balance of funds needed. Your team has formed a corporation and

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has "pooled resources" of $50,000 that will become the equity in the business, That is, 5,000 shares of common stock will be issued at $10 a share, for $50,000 in equity. For the remaining $25,000, you have three options.

• You have been pre-approved for a $25,000 loan at 8% interest from a local bank through a program with the Small Business Administration. In addition to the interest due, the bank will automatically deduct $2,500 each quarter for principal reduction. This loan is a good choice for those who want to have scheduled payments to pay back their debt.

• The father of one of the stockholders will grant a $25,000 loan to the company at 10% interest. The terms require you to pay quarterly interest, but you can repay the loan principal at any time. This is an interest-only loan; it is up to you to make principal repayments to reduce the debt. While the interest rate is higher than the bank loan, you will have more flexibility in managing your cash flow.

• An angel investor has offered to buy 50% of the stock shares for $25,000; the team would then

control the remaining 50% of the stock. The total number of shares would remain at 5,000. Advantage: no loan interest or loan principal to pay each quarter. If additional funds are needed, a bank will loan funds at 12% interest, and an automatic $2,500 loan payment on principal will then be imposed.

In addition to cash to purchase the business, you will need working capital to operate it. Liquid assets are required for everyday business functions: adding employees, purchasing inventory, paying utilities and rent, etc. While you start with $10,000 in working capital, there may be times when cash gets tight and you need additional funds. In that case, your lender will advance you additional funds from a line of credit, charging you a one-time fee of 3% of the advance, plus interest at the regular annual rate (8%, 10%, or 12%, depending on your financing choice).

Inventory Management Good inventory management is critical to running your business. Before you can sell to customers each quarter, you will need to purchase tops and pants. You must pay for your purchases in the quarter you order them, and the value of the unsold product will be shown as an asset on the inventory line of the balance sheet. Buying too much product can cause problems with cash flow, so you will need to coordinate your sales projections with your product purchases to avoid running short of cash. Also, keep in mind that the appearance of your store can affect sales. Both overstocked, crowded shelves and under-stocked shelves with poor selection can hurt sales. Sales forecasting is difficult, especially when you do not have a sales history to review. The previous owners averaged about $100,000 in sales per quarter, or about 2,000 tops and 2,000 pants in the medium-price range per quarter. Keep in mind that this is an average, and demand will be lower in the first quarter of the year (January–March) than around the holiday season

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(October–December). Demand for your products will also vary with your choice of pricing (low, medium, high) and you should also not expect to sell exactly the same number of tops as pants, so be sure to adjust your forecast, keeping all these factors in mind. While your initial forecast may be off a bit, your projections will improve as you gain experience. Whenever merchandise is displayed on open shelves and available for customer handling, there is the possibility of it becoming soiled, stolen, lost in some way (getting swept off into the waste can) or returned for credit. Goods are often pushed back on shelves, in drawers, or in the stockroom until they are out of season and it is too late to have an end-of-season sale. No money is received for these items, and they are written off the inventory at cost, with the expense assigned to shrinkage. The more inventory you carry, the higher your shrinkage.

Hours Your store should be open at times that are convenient to customers. While longer hours will provide more convenience for your customers, they will also require more staff. The former owners kept their shop open 10 hours per day, but you have the option to be open as few as 8 hours each day or as many as 12 hours. You will have to decide if it is better to be open more or fewer hours, based on customer traffic at your store and the cost of staffing.

Return Policy Your team will need to decide on the type of return policy your store will have. As you have likely experienced yourself, there can be a vast difference in return policies from one store to another. A stringent policy could result in somewhat fewer sales, but will reduce shrinkage. A liberal policy will please customers but increase shrinkage. You may change your policy in the future, but for customer satisfaction, you should not change frequently without thoughtful reasons.

Pricing Prices must be established for pants/jeans as well as tops/blouses/shirts. Markup is the amount added to the cost of goods to establish the selling price of a product. This is usually 100% of cost, meaning if the wholesale cost of the item is $10, the retail price will be $20 ($10 + 100% x $10 = $20). However, retailers often express markup as a percentage of retail price, in which case a product that cost $10 and retails for $20 has a markup of 50% of retail ($10 ÷ [100% - 50%] = $20). End-of-season reductions run approximately 25–35% off the retail selling price, producing narrow profit margins on sale merchandise. Retail outlets occasionally take advantage of buyouts of job lots and pass the savings on to their customers at the same profit margins as the regular stock. These are commonly advertised as "special buys."