Module Title: MANAGEMENT DECISION MAKING
MANAGEMENT DECISION MAKING FOR MANAGERS
Semester 1, 2022/2023
Assessment title: Decision Simulation Report
Assessment weighting: 75%
Case study & questions for Assessment 2
In this assessment, you are asked to answer five questions using concepts learned in the module. Questions 2, 3 and 5 are based on a case study of a firm called FleXteK Footwear.
This document only includes the case study and the questions. For other relevant information, such as the learning outcomes and the rubric please refer to the document: Assessment 2 – Business Simulation Report 5MNST008W.1 Management Decision Making 2022-23.
2. Mark Distribution
|Q1 – Discuss your experience in terms of group and individual decision making in the simulation game, using the theory covered on this topic.||10|
|Q2. Apply investments appraisal methods to decide on an investment option for your firm||20|
|Q3. Apply linear programming, constrained resource analysis, or scenario and sensitivity analysis to make a game related decision.||20|
|Q4. Research question about the social and environmental impact of the sneaker market. ed to undertake your own research on the topic.||20|
|Q5 Use decision-making matrices and decision trees to decide what to do when faced with a new event which suggests a change in market conditions.||20|
|Participation and ranking in the simulation game (see note)||10|
Note: Participation in the game deemed indicative of 700 words
3. Case Study – FleXteK Footwear
FleXteK Footwear is a sneaker merchandising company that takes pride their continuous business and product innovation which has enabled them to consistently deliver products of the highest quality. Established in 2018 by twins, Iman and Barnaby Lopez, the London-based company has, until now, mainly targeted segments of the footwear market keen on quality and customer intimacy. As creative director, Iman has been responsible for overseeing the creation of creative assets such as marketing and product design. Barnaby on the other hand tasks himself with the general administration and inventory management of the firm. A year ago, they brought in their older sister Andrea, who had recently quit a job in the financial sector, to join as their CFO and handle all financial matters. Soon after joining, Andrea was asked to review the financial situation of the company in 2021 and 2022 (presented in Tables 1, 2 & 3) prior to analysing the impact of a range of possible decisions on revenues and profits, as there has been increasing competition from a newcomer within the market, a company called Gravity.
Table 1: FleXteK Footwear’s Sales, Revenue and Cost
|Total Cost of sales||£1,208,851||£886,767|
|Marketing and Sales||£128,459||£300,000|
|General administration cost||£521,000||£491,000|
*Total Sales Quality, and Customer Intimacy segments
Table 2: FleXteK Footwear’s Selling Prices and Variable Costs
|Men’s Sneakers||Women’s Sneakers||Men’s Sneakers||Women’s Sneakers|
|Price per pair||£90||£80||£70||£90|
Table 3: FleXteK Footwear’s Share of Total Market (Quality + Customer Intimacy segment)
Iman is unsure whether the company can fend-off the newcomer Gravity and think that this might require them to reconsider the direction that the company should be taking. Barnaby has considered whether it makes sense for the company to expand into the Kid’s market (whilst continuing to target the Quality and Customer Intimacy segments). However, Iman does not seem to be attracted to this option. She feels that the risks associated with entering an entirely new market are unacceptable, and worries that the potential gains from such an action are outweighed by the significant resources they would have to commit in order to expand.
To decide on FleXteK Footwear’s five-year strategy, Andrea has commissioned a consultancy company to provide some preliminary research.
The consultancy has analysed the two options proposed by Barnaby and Iman in a report detailed below:
- Focus on R&D to improve product quality
This is Iman’s preferred option. It would require an initial investment of £500,000 up-front in 2023. Andrea has estimated (based on experience) that this is expected to increase market share in the men’s and women’s market and could result in a potential annual increase in net profits for FleXteK Footwear over the next 5-year period (from 2024) as follows:
- Expansion into the Kid’s market
In contrast to Iman, Barnaby would prefer if they took their chances in attempting a riskier expansion into the Kids’ market. Currently, FleXteK Footwear are unknown in the market and there have been concerns about whether they will be able to enter a market segment where many of their competitors have already established themselves. However, there is a potential for the market to grow in future years, something which Barnaby hopes their company can capitalise on.
Currently (2023), a total of 50,000 pairs of trainers are bought annually within the Kids’ market, and it is projected to grow by 6% in each of the next five years. A potential expansion into the Kids market would require an initial of £250,000 in 2023 to pay for additional warehouse capacity, administration fees, and other fixed costs.
Andrea reasons that the company could potentially capture 10% of the market from 2024 whilst generating a net profit of £15 for each pair of trainers sold.
Having reviewed the different marketing options available, the marketing department has concluded the billboards and magazines are the best options for reaching potential customers in the markets in which they operate. Given their contacts in the industry, they were able to secure contracts for the values shown below.
- £3,000 per magazine advert
- A contract has already been signed Sneakers Weekly, where FleXteK Footwear will place at least 30 adverts per year in the magazine (with additional adverts being available)
- The estimate reach for magazine ads is 500 customers (men & women)
- £1,000 per billboard
- The estimated reach of each billboard advert is 400 customers, including both men and women
- There is a limited number of dedicated billboard spaces in London, where FleXteK Footwear operates, with only 100 places available.
Analysis predicts that that inflation levels will rise due to the poor economic growth forecasts. This in turn may lead to a future rise in interest rates, with most analysts predicting that the Bank of England will have to raise interest rates from 8% to 15% in 2026.
The government has announced that it expects ‘low growth’ in consumer spending. Market analysis by your in-house team has also concluded that consumer spending will be dampened, but it is slightly more optimistic than the government and estimates that there is a 30% probability of medium growth. A well-known consultancy recently published their forecasts low or medium growth as the most likely scenarios for the next few years with the risk of a recession being small but notable. The consensus is, however, that a period of high growth is an unlikely.
A magazine article published in Sneaker Weekly observed shifting attitudes to sneaker culture among broader society with many shunning the traditional office attire in favour of more comfortable shoes and clothing.
Moreover, the rising influence of social media over the past decade has brought with it a new medium through which fashion trends can reach people, exposing this previously niche market to a much wider audience.
Q1. Individual and group decision-making
There are two questions in this section. To answer the first one, you need to refer to the theory on individual and group decision-making covered in this module. To answer the second question, you only need to reflect upon your experience working in a group in the context of the business simulation game.
Compare individual and group decision-making, providing examples from the Business Simulation Game to illustrate your arguments. 200 words
What would you do differently if you were to play the business simulation game again? This question refers to your experience working in a team. 100 words.
Q2. Investment options
Andrea, Barnaby, and Iman ask you to compare the different investment proposals. They first want to know how long it takes to pay back the two investments. They also want to know their net present value. The information required to answer this question can be found in the investment and news sections of the case study.
Calculate the payback period of the R&D option and show your workings on a table.
Using the information provided in the News section of the case study, calculate the NPV for the R&D option. Show your workings
If FleXteK Footwear is only willing to undertake projects with a payback period of 3 years or less, would they accept the R&D option?
Calculate the payback period and net present value of the Kids’ market expansion option. Show your formulation of the problem and your calculations.
Based on your calculations so far, which option would you recommend, R& D or expansion into kids’ market?
Explain whether your recommendations would remain the same if interest rates don’t rise as predicted.
Q3. Constrained resources, scenario, and sensitivity analysis
FleXteK Footwear Sneaks is now planning a marketing campaign to increase sales of their men and women sneakers. They want to reach the maximum number of potential customers while keeping the overall campaign within a pre-determined budget of £480,000. Andrea has suggested using linear programming to identify the optimal marketing strategy and asked the FleXteK marketing department to prepare some data about the different marketing options (see Marketing section in case study).
Iman and Barnaby have some concerns regarding the use of linear programming and have pointed out that one of their marketing executives has taken six-months leave on full pay. This leaves only 2 full-time members of staff for managing the campaign. Each works 219 days per year, but realistically speaking they could only allocate 120 days each to the marketing campaign, which Iman and Barnaby fear may not be sufficient.
As FleXteK intern, you have been asked to:
Explain what linear programming means and mention some of its advantages and limitations
Explain how linear programming might be used to identify the optimal marketing strategy as Andrea suggests.
Formulate the linear programming model of this problem
Say that the shadow price for number of billboards in London and for minimum number of ads in magazines is now zero. Explain what this means and calculate how many billboards and magazines advertisements should Flex have?
The company board has decided to double the marketing budget. How would this affect the number of optimal number of billboards and magazine advertisements? To answer this question no calculations are required.
Q4. Social and environmental impact
Research question about the social and environmental impact of the sneaker market.
What are the main environmental impacts of the sneaker industry? You can answer this question using the information and sources provided in the lecture and seminar sessions in week 11. No additional research is required. 200 words
Here, you need to answer only one of the three questions below. 500 words.
- Option 1: If you were the CEO of a sneaker company, explain what you could do to meet one of the Sustainable Development Goals.
- Option 2: What are the main ESGs in the sneaker industry?
- Option 3: Do you think sneaker companies should become carbon neutral?
In your answer, you need to indicate which question you have chosen; explain the key relevant concept (i.e., SDGs, ESGs, carbon neutrality); demonstrate evidence of research (use the Harvard reference method); provide your opinion in response to the question that you have chosen.
Q5 Decision making under risk and uncertainty
FleXteK Footwear sneaker is considering investment options for the next five years. They have calculated the net present value and payback of expanding into the kids’ market and increasing R&D, but the board has pointed out that the results will also depend on possible macro-economic conditions. A consultant calculated the possible payoffs from the two investment options above, and for the option of doing nothing. The payoff table below shows the impact on company profits in the next year in €000s.
|Recession||Low Growth||Medium Growth||High Growth|
Which option should FleXteK Footwear sneaker choose based on of the following criteria? Include your calculations.
- Maximax 1 mark
- Minimax 2 marks
- Minimax regret 4 marks
Using the information provided in the News section of the Case Study, rank the four different macroeconomic conditions from most to least likely
- (35% probability) =
- (30% probability) =
- (20% probability) =
- (15% probability) =
Using the probabilities associated with your answers in 5.2, calculate the expected monetary value for each of the three options (i.e., do nothing, R&D, and kids’ market) and determine which is preferable according to this criterion?
Based on what you have learnt about Ada and Barnaby’s attitudes to risk in the Case Study, explain which of the different criteria (from 5.1) each would base their decision on. Would their preferred option change according to your calculations? Explain whether you agree or disagree with their respective choices.
Q6 Rankings in the simulation game
Please indicate the following information
Name of Sneaker Ink company
Ranking of your company
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