Marketplace Live Simulation Tip: Running a Pessimistic and Worst Case Scenario

Want your team to avoid going bankrupt or having large emergency loans? Here is a tip:

Usually, after having entered all their marketing and sales decisions, your students will go into the manufacturing area, project their demand, run their factory simulation and then go into the pro forma financial statements to load the information. They will then take a hard look at the top and bottom lines and if they are satisfied, they will submit their decisions and expect to be in a good shape when the results come in.

What they often forget is that pro forma financial statements are simply projections and the numbers they run during a quarter are solely based on their projection, nothing more. Therefore, it is strongly advised to have your students run pessimistic and worst case scenarios.

 

How is that done?

Factory Simulation

Tell your students to not make any changes to their decisions (all marketing, sales, operating capacity, quality and changeover investments, etc. should stay the same). Have them go into Manufacturing- Factory Simulation and cut their demand numbers for all brands in half (especially in the test market quarters; in later quarters, the demand might be cut by 30% for example). They can save the factory simulation and load the data in their pro forma financial statements located under pro forma accounting. The numbers should already look a lot different compared to their initial projections. Perhaps, they are running out of cash (and incurring an emergency loan) or they may be flirting with bankruptcy (common stock + retained earnings must remain positive to avoid bankruptcy). Tell them that projections are just projections. This pessimistic scenario could come true. Will they feel comfortable to run the risk of a bad quarter or would they prefer to make adjustments to their decisions?

Pro Forma Cash Flow

In a worst-case scenario, you may want to have students run their factory simulation with demand numbers at only 25% of their expectations (at least in the test market quarters; the cut could be a bit less dramatic in later quarters). Again, with all decisions remaining the same, they simply go to the Manufacturing area and run the factory simulation with their worst-case demand numbers. They save the factory simulation and load the data in their financial statements.

Whether a pessimistic or worst-case scenario will materialize depends on the effectiveness of all the team’s decisions combined, but marketing effectiveness, sales expansion, and quality are critical factors in demand creation. When the actual demand is much below the team’s demand projection, it is likely that the team will incur excess operating capacity (the percent of effective operating capacity that was not needed during the quarter; costs associated with overhead and maintenance of unneeded scheduled production). Have them take a hard look at this number. Students often do not understand it so it may be beneficial to provide mini-lectures to clarify what it means.

It is good for a team to know where it would stand if things did not pan out the way they were expecting. So be sure to encourage them to try out different demand scenarios in the factory simulation and pro forma financial statements. It does not guarantee to keep them out of trouble but it will reduce the chance.

If you have any questions regarding how to run pessimistic and worst case scenarios, please contact support at [email protected]

 

About Marketplace Simulations
Marketplace Simulations is a family of over 30 marketing and business simulations designed for university business courses and executive business programs. Our business simulation games allow students to experiment with business strategies, test business ideas, and experience the consequences of their actions in a virtual business environment. With a purpose to create business education tools that are both engaging and transformative, our most popular and best simulation games include Introduction to Marketing, Venture Strategy, Strategic Marketing, and Business Fundamentals. Other top selling games include, Introduction to Business and Strategy, Conscious Capitalism, and International Corporate Management. For more information or to schedule a personal tour of an online simulation game, please contact one of our Product Specialists at +1-865-522-1946.

Leave a Reply

Your email address will not be published. Required fields are marked *

Humanity Test * Time limit is exhausted. Please reload CAPTCHA.