Simulation Technique For Start-Up Company: A Case Study
Course of Action
Simulation is the technique whereby the inferences can be made from the operation of the system which has been developed. The operation is conducted for the multiple and consecutive times with different data inputs so that the different outputs can be validated and analysed so as to reach at appropriate conclusion. In the given case, the simulation technique has been followed for start – up company. The simulation has been done for six rounds with different data inputs as given in the dashboard and the whole of the data has been analysed with the given and defined decision making areas. These includes performance measure areas like increase in net profit, movement of cash flows and the net increase or decrease in the cash or cash equivalents, strategic measurement areas like efficiency in operations, reduction in cost, effectiveness of the management of the company, employee motivation and retrenchment rate, etc. All the above is the part of the analysis that has been discussed in detail through the medium of this report. In the first section, the course of action has been described. In this, the various changes that have been made in the data input have been detailed. Thereafter, the details of the various decisions that are required to be made have been described. After having the course of action and the decision platform, the strategy has been detailed as to how the data has been analysed and the results thereon. At the end the report has been concluded and the recommendations for necessary improvements have been given.
The course of action will be flowed throughout the process. The strategy that has been adopted for simulation techniques is to consider each and every spheres of the financial information whether it is of profit earning capacity or of hiring of new employee as engineer or sales person. After analyzing the situation, the data has been entered into the heads and accordingly the results have been obtained and analysed. In this manner, six rounds have been made for simulating the data of the company – 5678 Inc.
The company is the startup company with $ 1 million as the cash in hand or the funds that has been obtained from the relatives or friends. The company has generally two types of competitors. One is of startup competitors and second one is of incumbent competitors. In order to start the process and for furtherance of the object of the report, mainly these two competitors have been considered and their data has been analysed in each round of the simulation.
Style of Decision Making
In first round of the simulation, the data that has been exhibited at the site has been analysed. It contains $75,000 per unit as the sale price, $60,000 per unit as the cost price, $10,00,000 as the cash in hand, 5 number of employees. In order to grow, the company requires the funds and therefore, in the second round the investment has been obtained from the venture capitalist to the tune of $5,00,000 and in order to make the public and market aware of the products of the company, sales force to be increased to four people (Evanno, G.2005).
Therefore, in the second round of simulation, venture capital fund has been requested for $5,00,000 and one additional personnel is required for sales and marketing personnel.
In the third round, $250000 has been set as launch for Initial Public Offering due the reason that the $500000 as requested from the venture capitalists is still pending as on date and there is the need of funds for the growth of the business.
In the fourth round, the price per unit has been decreased by $500 per unit so as to have the competitive advantage over the competitors to $74500 per unit.
In the fifth and sixth round one more sales personnel has been employed with the decrease in the sales price per unit.
The above courses of action have been made on the basis of the analysis of each field of the data whether it is related to sales or net profit. In the next phase the decision on the basis of which the courses of action has been taken are detailed in the accurate manner.
There are nine major decisions as depicted in the simulation table which are required to be addressed for each round and then also profitability is required to be checked in comparison with the competitors. These are as follows:
- Price per unit
- Cost per unit
- Stock Grants
- Options Granted
- Proportion of Engineer
- Hiring of New Engineers
- Hiring of Sales and Administration Personnel
In the first round, it has been observed that the net worth of the company is $3.4 million as compared to other startup company which is $9.0 million. Although the price per unit is comparatively lower than the startup companies but the cost per unit is equivalent which means that the company is in the growing stage as the cost of producing the product is equivalent to the market and industry standards. Energy savings is almost equal. Therefore, in order to have the further growth in the business the funds have been asked for in the second round to the tune of $5,00,000. Although after having the analysis of the projected needs, it has been observed that the company has the cash requirement of $796550, but in order to have the more deep analysis the investment has been asked for $5,00,000. Secondly in order to procure more and more business and to have more sales revenue, it is decided to employ one more people in the sales force so as to float the name and business of the company in the market. In the current scenario, there is no need to give stock or the stock options to the employees unless the growth of the company has been increased (Johnson, 2009).
The company has noticed that the funds as requested from venture capitalists to the tune of $500000 is pending and has not been approved and therefore IPO has been launched and accordingly the company has seen the sudden increase in the business. The cumulative profit of the company has been increased as compared to the other startup companies with -$161862 against the -$200132. The burn rate per year of the company has also been considerably increased.
In the fourth round, the venture capitalists have agreed to provide the fund of $400000 as loan with the interest rate of 11.99 % p.a. and accordingly the company has accepted the loan in order to have the growth in the business of the company. With the available funds the company’s sale has been increased and the cumulative profit has been $322252 which is comparatively higher than the incumbent and the other competitors (Railsback, 2006). With the increase in the profit and the growing business the company has decided to employ one more personnel in the sales and marketing department so as to have the more and more advertising and marketing of the company as the company can now take the risk of increase in the cost of the salary (Law, 2010).
With the employment of more sales people in the next round and with the correspondingly decrease in the sale price of the product the cumulative profit has been considerable increased to $474765 and $764071 over the next two years.
In the next few rounds, if have been made available for the study then the company would have taken the decision to have more and more engineers and the sales personnel with the further IPO launch. IPO will be launched in order to save the financing costs and thereby financing cash outflow.
These decisions have been taken only because of the decrease in the cost per unit that has been obtained from the continuous learning or experience of the employees that they have gathered during the course of their employment. Due to the presence of the employees and their involvement in the work the company has been able to achieve the learning curve and accordingly have gained the competitive advantage over the competitors and the incumbent competitors.
The operational approach that has been adopted during the simulation process is the controlling of each and every operating minutely and directing all the efforts of all the individuals towards the accomplishment of the common goals of the organization (Luke, 2005).
At first, there has been observed that the company is in the urgent needs of $796500 and the cash flow if in case does not maintained then it will run out in the near future which is not too long and just 1.5 year which shows that in case the company has been unable to obtain the funds then the company will be in liquidation or the shut down situation after two year. Therefore, at first the funds have been obtained from the venture capitalists and then through the Initial Public offering because the former one was pending for approval. At this point of time the company has followed the techniques of cash management which is the part of the operations.
Thereafter the company has adopted the model of business process redesign. Through this approach, each and every process of the company is developed and maintained in accordance with the standards prevailing in the market. By having this approach the company has first adopted the decrease in the sale price per unit as the cost per unit has also been decreased due to learning curve that the employees have developed over their employment. Secondly they have employed more sales personnel in the company to advertise their product.
By having this approach towards the operations and related processes, the company has been able to come at par with the competitors and if the company has been able to follow the same then there will be no fear from incumbent competitors present in the market.
The 5678 Inc is the startup company and has grown very well over the past so many years and has been able to obtain the learning curve which is competitive to the other participants. All the inputs for the simulation have been entered and tested for results and the results have come up to the expectations of the company.
It is recommended that the company shall conduct the market survey also in order to have more details of the working of the other companies and accordingly shall adopt the strategies for better functioning of the company. Secondly the company shall employ the management technique of Business Process Redesign so as to cope up with the challenges that the company might face in the future as exhibited by the data results.
Evanno, G.,(2005), “Detecting the number of clusters of individuals using the software STRUCTURE: a simulation study”. Molecular ecology, 14(8), pp.2611-2620
Johnson, B., (2009), “The role of adaptive management as an operational approach for resource management agencies” Conservation ecology, 3(2)
Law, A.M., (2010), “Simulation modeling and analysis” (Vol. 2). New York: McGraw-Hill.
Luke, S., (2005), “Mason: A multiagent simulation environment”. Simulation, 81(7), pp.517-527
Railsback, S.F., (2006), “Agent-based simulation platforms: Review and development recommendations”. Simulation, 82(9), pp.609-623