Simulation Pre-Reading

The SABRE Simulation

Anyone running a business today knows that the job is tougher than ever before. Managers
worldwide are swamped with problems of unprecedented difficulty, risk and complexity. Many
have never worked harder, longer or under more stress just to survive let alone to move
forward and make a fair return on investment.

Since these pressures have been building for some time, it’s not surprising that there has been
an intensive effort to learn and apply proven methods and principles of strategic management.
Business managers who stand out as the best practitioners of strategic management have
knowledge and skills that make them superior in four areas:

1. Ability to size up problems by identifying key success factors,

2. Ability to formulate and implement strategy,

3. Ability to use analytical tools to aid in decision making, and

4. Wisdom to avoid common pitfalls of strategic management.

Why a Simulation?
Until recently there has been no method for business managers to practice and develop their
strategic marketing skills. Like swimming, marketing strategy cannot be learned by talking
about it – it must be practiced!

Marketing strategy is dynamic. A good strategy in one situation may be poor strategy in
another situation. Like lecturing someone at the side of the pool, case studies and lectures
cannot capture the reality of developing and executing a strategy. That's why the SABRE
business simulation was developed specifically for business managers. It allows them to test
and develop their strategic marketing skills in a highly competitive and realistic business
environment.

Secondly, as humans we learn best through experiences. We have an experience, reflect on the
result, draw any conclusions and adjust our behavior accordingly. However in marketing an
action taken today often won’t reveal a meaningful result for 8-12 months. Trying to
remember what you did 8-12 months ago that gave a certain result is almost impossible,
making learning extremely difficult.

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The SABRE simulation allows the participants to make a strategic decision and then it
compresses time giving meaningful results within 30 minutes. Participants can then examine
their decisions and determine what marketing strategies worked and why. In real life, as in the
simulation, there is no one correct strategy but clearly there are strategies that are superior
and inferior given the market circumstances.

Benefits of the Competitive Marketing Strategies Course:

1. Develops long-term strategic thinking by simulating up to nine years of business activity.
2. Sharpens strategic thinking skills, as strategies must be developed executed and
evaluated.
3. Creates a common strategic planning language.
4. Enhances wisdom, as knowledge must be applied.

Course Format
SABRE is to business people what a flight simulator is to a pilot. It has been specifically
designed to allow managers to apply and test strategic marketing concepts in a competitive
situation.

All participants will be placed on teams that form companies that compete directly for profit
and market share. Like a fighter pilot, you will have all the information necessary to perform a
strategic marketing analysis. From this analysis you must develop and execute a strategic
marketing plan.

The market analysis and subsequent strategy executed in the SABRE business simulation
directly affects your corporate results. Strategic decisions are made in uncertain market
conditions, including uncertainty about competitors’ actions.

SABRE places you in the cockpit of your company and gives you the instruments necessary to
compete successfully. SABRE provides the environment that responds and reacts as customers
would to competitors’ actions. But SABRE only provides the environment. The outcome is
totally dependent upon the strategy and tactics that you employ.

You will be working as a member of a team that is competing against several other teams. To
be successful, you will have to manage this team process (as you must in real life).

Each decision your team makes represents one year of business activity. Because the
simulation runs over six to nine simulated years, strategic planning is extremely important and
allows you and your team to adequately develop and test your marketing strategies.
Specifically, SABRE focuses on the various marketing functions of the firm and it emphasizes the
main elements of marketing strategy.

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Role of Administrators
Once the simulation has started, the administrators cannot manipulate the data. There are no
pre-set winners and no strategy or team consistently wins. Each simulation plays very
differently depending on the strategies and tactics that you and your fellow participants
employ.

Final Considerations
As you read through this introduction you are beginning to participate in an exciting learning
experience. You’ll feel the frustration associated with failure and the rush of excitement when
your team is successful. For sure you will be challenged, and to be successful you must
constantly look for new opportunities to serve your market and gain competitive advantage.
There will be emotional ups and downs but, as in any memorable experience, these are a
necessity.

Buckle up and Good Luck!

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SABRE Corporation
Mr. Bob Erickson was reviewing the strategic marketing plans for SABRE, an electronics
products division of a diversified global company. Mr. Erickson had recently taken over as the
new division manager and was anxious to make his mark.

Currently the SABRE Corporation manufactures and markets two products and competes
against several other similar companies who each have their own portfolio of electronic
devices. The market place is currently divided into several segments and indications are that
new segments may emerge in the future as the market matures. However this is only
speculation.

Company Background
The SABRE Corporation is part of an international manufacturing company with holdings
worldwide. Originally a maker of mechanical components, SABRE entered the electronic
devices manufacturing business over 10 years ago. At that time SABRE entered into joint
venture agreements with several electronic corporations to produce state of the art electronic
devices. Even though their products were considered technologically superior, they never were
able to achieve broad market acceptance. SABRE electronic devices as a whole was a failure
and several directors and managers were replaced in attempts to revive the division but all
attempts to date have failed.

When SABRE Corporation went through a major reorganization three years ago many of the
production facilities were sold off as SABRE returned to its roots. The division headed now by
Bob Erickson is somewhat of an anomaly. Having survived the reorganization Mr. Erickson’s
division is the only remaining foothold in the Electronic device market place operated by
SABRE.

The Market Place:

Like any market place the electronic devices market has its own idiosyncrasies. Currently
SABRE markets two products that compete against several competitive product offerings from
various other companies.

SABRE was able to obtain a non-exclusive license for some important technology, and now is in
the position of competing with other companies that also licensed the technology. The
products on the market are therefore very similar and all market players are now looking for
ways gain an advantage in the undifferentiated market.

The more accurate and faster an electronic device is the higher the premium it can command in
the market place. The market place itself has several distinct segments each with unique

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differences. A market research study is available and has information on the market and
segment sizes and projected growth rates.

In this particular market where the user must interface with the product, ‘too fast’ can also be a
disadvantage as novice users often make mistakes in setting up and running these devices.
Faster machines can start processing data before the user is totally ready causing the user to
get frustrated with the product.

Product Attributes and Differentiators

The products sold in the electronic devices Market are all very similar but can be easily
differentiated by:

1. Price: in dollars
2. Weight: measured in kg
3. Complexity: measured as an index
4. Frequency: measured in Hertz
5. Power: measured in Watts and
6. Speed: measured in instructions per nanosecond
The electronic devices that are offered in the various segments have different characteristics
and therefore serve different segments better. Currently the main differentiating factors
amongst the various products, when it comes to consumers making a purchase decision, are
the ‘Complexity’, the ‘Speed’ and the ‘Retail Price’.

Speed can be easily measured and the various segments demand different speeds. In segments
where speed is essential they are willing to pay more for higher speed. Conversely in the lower
segments a high speed is seen as a negative.

Complexity is a more subjective measurement. Research indicates that purchasers view

Complexity differently and once again this is segment-specific. In other words, some segments
want a richer and more complex user interface, while other segments prefer a simpler, more
limited interface.

Market Research Studies

Since the electronic devices Market is somewhat mature many market research companies
have developed research studies that they sell to companies competing in this market place.
There are many market research studies available. Each study provides a unique piece of
market information. These studies have various degrees of accuracy and are priced
accordingly.

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The STAR Market
Recently there have been rumors about the development of a completely new market place
called STAR. Advancements in the electronic devices market combined with advances in
microelectronics have generated the idea for this new generation of electronic products.

Over the past few years there has been much talk about this exciting new market place but as
of yet no company has invested the estimated four to five million dollars to develop a product
for this market place. However the general consensus is that the Electronic device companies
are the best positioned to develop and exploit this market place mostly based on the belief that
the same marketing channels could be used to sell this product. Even though there is no direct
link between the market places, the Innovators in the market place are pushing the Electronic
device companies to develop some STAR products.

Preliminary work in the STAR market reveals that the products will have these characteristics:

1. Retail Price: in dollars

2. Ergonomics: measured as an index

3. Size: measured in cm2

4. Battery: life measured in hours

5. Weight: measured in grams

6. Speed: measured in operations per nanosecond

Even though these products have these physical characteristics research shows that the
consumers in all segments will initially differentiate on the basis of:

1. Retail Price (not to be confused with unit cost)

2. Size, and
3. Speed
As in the electronic devices market these differentiators may change over time but so far
market research shows no significant changes for the near future. However as with any new
market, information is both difficult to find and somewhat inaccurate as consumers are still
struggling to find a reference point on which to base their decisions. Although a number of
market studies are currently available for the STAR market, some of them are unable to provide
any meaningful information until products are actually available in this market place. Caution
should be exercised when purchasing market information.

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The Company
Budget and Financial Performance
Each year the SABRE Corporation receives a financial report detailing the financial performance
of each of the product offerings. Next year’s budget is based on the current year’s financial
results and can range between 8 and 20 million dollars. The head office had assured Mr.
Erickson that his budget would never fall below 8 million and conversely will never rise above
20 million (adjusted for inflation). With a tight budget Mr. Erickson knows he will have to make
tough resource allocation decisions.

The budget is used to cover the following expenses:

1. New product development

2. Sales force salaries and training

3. Advertising and

4. Market research studies

Distributors
The SABRE Corporation sells all of its products through distributors. The distributors can be
part of the direct (internal), indirect (external) channel, and in some cases through chains and
all take a distributor’s margin of between 30% and 35%. Mr. Erickson noted that he needed to
take this into account when pricing the various product offerings.

Strategic Planning
Each year Mr. Erickson’s team is responsible for making the following decisions, some of which
will affect the budget and some that will not.

Sales Force
1. How many sales people should be allocated to each distribution channel?

2. How much should be spent on sales force training?

The sales force is currently organized by channel. Because each sales person carries the full line
of products in each particular market any change in the number of sales people influences the
distribution coverage.

Training can increase the sales force effectiveness. Each year the sales force may be
redistributed to better serve the needs of the ever-changing market place. There is no
significant cost to redistribute the sales force as they are knowledgeable about all of the
products offered by the company in their particular market.

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The cost of hiring and laying off sales people is something Mr. Erickson must remain conscious
of, as these costs can be significant. The company report will give detailed information on
these costs each year. The STAR market will require its own sales force should Mr. Erickson
decide to enter into this market place. Mr. Erickson did note however that there is no cost
involved if sales people are transferred from the electronic devices market to the STAR market.

Product Planning
Product production: Although his division is not responsible for manufacturing they are
responsible for giving manufacturing a reasonably accurate sales forecast. Ordering too much
stock will result in inventory which is charged to Mr. Erickson’s department at 10% of its unit
cost. Not ordering enough product results in lost sales.

Manufacturing does allow for some flexibility. They can increase or decrease production by
15% at no additional cost. Beyond this 15 percent level there is either a stock-out situation or
inventory, as shown in Figure 1.

Request
100k units
85k 115k
Demand unknown in advance

Production Production
reduced by increased by
up to 15% up to 15%

Excess inventory Lost sales due

must be stored to insufficient
Production matched
at a cost. production.
to demand
(“stocked-out”)
1.
Figure 1: Production Range for a 100,000 unit Production Request

Each year Mr. Erickson and his management team must make key decisions around product and
production planning:

1. Which products should be supported in the market place?

2. How much to produce to satisfy customer demand?

3. What price best reflects each product’s value?

4. How much should be spent on advertising to build appropriate brand awareness?

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 5. In what media to advertise to get the best value for money spent?

6. How to best position the various product offerings in the market place?

Market Research Studies

Up to thirty-two market research studies may be purchased (sixteen for each market) in any
given year but they are expensive. Some questions that must be answered are:

1. What studies should be purchased?

2. How much information is needed in order to make good decisions?

Please see the SABRE Student Guide for a complete list of market studies and a brief description
of the information contained within them.

Research and Development

Companies can create their portfolio of research projects that may be then commercialized and
offered in the market place. It takes a minimum of one year to complete a research project.
These projects are expensive and will cost 1-2 million dollars to complete a modification of an
existing product and 4-5 million to develop a completely new product for the STAR market for
example. Some questions that need to be answered are:

1. How much of the limited budget should be invested into new product development?

2. What segments should you target your development efforts at?

3. What product characteristics will bring the most value to the customers and your
company?

Product costing
Products are not transferred to Mr. Erickson’s department at a fixed price. Instead, gains in
production expertise are passed onto the marketing department. Typically, the more products
manufactured the cheaper they are to make. This cost reduction effect, called an experience
curve, is passed onto Mr. Erickson. Initial product costs are given for the first 100K units.

Pricing actions
Even though his department is in charge of product pricing, Mr. Erickson noted that in the past
products that had a 30% price increase or reduction experienced a negative reaction in the
market place.

Number of Products
Current company policies would not allow Mr. Erickson to carry more than five products in total
(both markets combined).

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Economic Conditions
The current economy is healthy and growing. Real GNP growth is about 4.0 percent per year.
The recession appears to be over and strong economic growth is predicted for the next several
years. Inflation is a concern running at 4 to 5 percent per year. Information on the economy
and other economic indicators will be published each year in your annual report.

Next Steps
In most cases you will need a “team code” from your course administrator to start making
decisions in SABRE. In the meantime, you should familiarize yourself with SABRE by reading the
Student Guide.

(If you are using the offline version of SABRE you should complete the software installation
process according to the separate instructions you received.)

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