Diving deeper into PharmaSim and other requested discussions

In Week 4, we discussed customer analysis in the first part of class and more about PharmaSim in the second part of class.  Prof. Spotts asked us to restart PharmaSim and perform some specific scenarios which included advancing to period 2 without making any changes.  This was an eye opener for me.  In my previous attempts, I assumed I was doing something right by making changes right away.  It turns out sales increased, anyway, without making any changes, so I was not so smart, afterall.  Then we were asked to look at the conjoint analysis and run period 3 with the preferred changes recommended and then replay with the non-preferred changes recommended and report on the results. 

The preferred changes included changing the price to $3.67 (price utility reference score of 0.333) and dropping alcohol from the formulation (product utility reference score of 0.187).  While sales skyrocketed to 139 million units (up from 118.8 million), net income was negative $13.1 million compared to a positive income of $75.6 million the previous period.  Stock price also dropped from $43.10 to $12.17 per share.  Yikes!  I guess this proves that you can’t always just give the customers what they want or you might be out of business in no time. 

While we’re here, I also want to discuss capacity utilization with regard to PharmaSim.  The guide says that “Plant capacity expands in 20 million unit increments automatically when demand exceeds current capacity by 10%.”  This seems a little unrealistic given the last scenario.  I don’t think any executive would automatically agree to increase capacity when net income falls from positive $75.6 million to negative $13.1 million and stock prices fall from $43.10 to $12.17 per share.  Exceeding 100% capacity is impossibility in my current position.  If we (Vermont Yankee) go above rated 100% capacity even for a short time, we are in serious trouble with our regulator (Nuclear Regulatory Commission) because we would be in an unanalyzed condition.  Serious fines and possible revocation of our operating license could be the result.  So this idea of operating above 100% capacity is more a little than foreign to me.  Adding capacity can involve a much larger decision than the simulation implies.  And now I’ll get off my soapbox and continue with the findings.

The non-preferred changes include changing the price to $6.11 (price utility reference score of -0.4) and keeping the formulation the same (product utility reference score of -0.133).  While sales fell to 103.1 million units (from 118.8 million), net income increased to $85 million compared to $75.6 million the previous period.  Stock price also dropped from $43.10 to $39.99 per share; not nearly as bad as with the preferred changes.  This was a valuable exercise because it shows that you can’t always give the customers everything they want and still stay in business.  You also can’t completely ignore the customer or you will continue to lose sales.  The tradeoffs curve shows that customers believe Allround costs too much for the benefits it brings with these non-preferred changes.  The key is to balance what the customer wants with what the business needs to stay in business.              

We were asked to provide comments on and compare and contrast two different classmates’ blogs.  It looks like my fellow classmates are procrastinating as much as I am this week, so I’ll discuss two classmates’ blogs in general.  I like the way Aleena adds humor to her blog posts.  Her posts last week were a little late last week, but I agree that her posts are enjoyable to read.  She’s also an engineer, so I guess I’m a little biased.  I’m also enjoying Ahmed’s posts, which appear very professional with sited references which are outside the required reading.  By the way, I still have a working Betamax, along with an 8-track player, turntable and all my old Beta movies, 8-tracks and records.  The wife wants me to get rid of them, but I just can’t bring myself to letting them go.  Both Aleena and Ahmed add pictures to their posts, which I like and was something I said I was going to try to do this week.  Unfortunately, time has gotten away from me, so I’ll try again next week.  Neither Aleena or Ahmed seem to be hitting all the points Prof. Spotts would like us to hit, which is something I’m finding a little more difficult each week, as well.

How do I make over the counter cold medication purchases?  I’ve developed brand loyalty to Contac tablets, especially when I want to get a good night’s sleep because it knocks me out.  I’ve found it is really the only product that gives me overnight relief.  Now that they have the day and night formula, it’s pretty much the only brand I’ll buy.  I’ve tried others (Nyquil, Dayquil, etc.), but none really works for me like Contac does.  With the amount of competition that’s out there, Contac doesn’t always get the shelf space I would like because I end up spending more time than I would like trying to find it.

Analyze This

This week we read about and discussed defining our competitive set and analyzing our industry and competition.  One of the interesting questions discussed was “Who defines competition?”  My early response, which was shared by the majority at the time, was that the customer defines competition.  However, later in the lecture, I noted that the company can narrow its view of the competition if it has limited resources.  If they market to a large set of customers, then can’t meet those customers’ needs, they can ruin their reputation and end up losing most, if not all, of their customers.  Therefore, in a sense, the company can choose what industry and who it competes against for customers, but it must always keep the customers’ needs in mind.  The customer ultimately decides who the real competitors are for their dollars, especially when their dollars are limited.

There are a multitude of variables to consider when defining the competitive set and analyzing the chosen industry and competition.  I imagine there are some which have not even been considered, yet.  As Lehmann and Winer state, “The easiest way to define competition is to let someone else do it for you.”  They also discuss methods for determining competitors, which include managerial judgment and customer based measures using behavioral data and customer judgment. 

The generally accepted grouping of factors for industry analysis is aggregate category factors, category factors and environmental factors.  Aggregate category factors include category size and growth, stage in a life cycle, sales cycles and/or seasonality and profits. Category factors include the threat of new entrants, the bargaining power of buyers and/or suppliers, current category rivalry, pressure from substitutes and category capacity.  Environmental factors include technological, political, economic, regulatory, and social.

Sources of information for competitor analysis are usually described as primary or secondary sources, but there are other sources.  Primary sources can be expensive and time consuming and can be gathered from the sales force, customers, employees, suppliers, consultants or specialized firms, and investment bankers.  Secondary sources are more readily available and include internal sources, local newspapers, annual reports, 10K statements, patent or trademark filings, general business publications, news releases, promotional literature, trade press, consultants, employee communications, trade associations, government sources, and electronic data services.  Other sources include help wanted ads, trade shows, plant tours, reverse engineering, monitoring test markets and hiring key employees.  Some other sources which are considered ethically questionable include aerial reconnaissance, buying or stealing competitor’s trash, bribing printers, running phony want ads and snooping on airplanes.  Lehmann and Winer then list various analyses and assessments that can be performed.  Some of these will be performed during the next several weeks in our PharmaSim exercises.         

Another PharmaSim report that I am finding useful is the Performance Summary.  This report gives one-stop shopping of general information about the company’s current performance and the decisions made for that period.  One thing it does not provide is the number of people in PharmaSim’s world.  This week we learned how to extract that information and the number of people in Period 0 is 263.9 million.  This will be important for subsequent periods because the population is expected to change with time. 

We’ve been asked to read and comment on one classmate’s blog.  I’ve been trying to read all of my classmate’s blogs, but last week I didn’t get to all of them.  Being a fellow engineer, I obviously enjoy David Griffin’s posts using on subject Dilbert cartoons in most of his posts.  I also like the way David adds graphs and pictures to his posts.  This is something I still want to learn and will spend more time on in the next week or two.        

PharmaSim report blog post

I realized I didn't incorporate my PharmaSim report discussion in either of my other two posts this week and I couldn't get into any of PharmaSim reports tonight after multiple attempts.  However, I do have the student manual and, from my previous interactions with PharmaSim, the report that interests me the most is the Market Update report.  This report has three sections; news, messages and incidents.  The news section provides market information which might not show in the more specific reports.  The messages are specific to our company and the incidents section relates to information about special decisions.  I plan on using this report to serve as a guide when I don't notice any identifiable trends from the other reports.  This can also serve as a guide to direct specific changes based on what is happening.  I think it is important to have the overall view before diving into specifics, which can lead to myopic decisions.

Qualitative metrics and how they can work – an unusual example and one closer to home

As I said in a previous post, I was listening to “Decisive” on my way to work last week and thinking about a question that one of my classmates presented, but I don’t believe we discussed in class.  The question was about developing qualitative metrics.  The unusual example was in the audiobook and the one closer to home is, of course, one that we use at Vermont Yankee.

The unusual one actually seems like a wacked out antic from a diva rock star.  When David Lee Roth was with Van Halen, there was an unusual demand to have M&M’s backstage.  However, all the brown M&M’s had to be removed.  This was actually written into their contracts.  What they also had written into their contracts was that, if any brown M&M’s were found, the band could refuse to play and still get paid in full.  Sounds pretty crazy, right?  It was actually a very specific qualitative metric.

Van Halen had a very elaborate stage show which required a lot more specific safety and other measures to be followed, so their contracts were much larger than most other bands.  The M&M clause was inserted to ensure that the venue had read and understood everything in the contract.  If any brown M&M’s were found, David would freak out and demand a full quality check of every other detail in the contract.  If there were no brown M&M’s, David could safely assume that the venue had lived up to the contact and he could just perform.  Although they had the right to refuse to play with full pay, doing so would alienate their fans, so I don’t think they ever did.  However, David was accused of being a diva as a result of this unusual qualitative metric.

The one closer to home is for Design Engineering’s specific product, Engineering Changes, or EC’s.  During implementation of EC’s, there are sometimes changes required to the EC.  These are called ECN’s, or Engineering Change Notices.  While we do keep a metric on the number of ECN’s, we also code each ECN with a reason for change code.  If the change is required because of a parts shortage, implementation preference, or unforeseen interference in areas of the plant where we don’t have access to during normal operation, then the ECN doesn’t really affect our performance.  However, if the ECN is needed because a design error or mistake was made in the original EC, that does affect our performance.  This qualitative metric then feeds into another quantitative metric of percentage of design error ECN’s per ECN.       

More on the electricity market in New England - a short situational analysis for EWC

Last year was a tough year for the Entergy Wholesale Commodities (EWC), which consists of the Entergy’s northern plants. 

http://www.kjonline.com/news/Wholesale-electricity-prices-lowest-in-decade.html

Simple regression of the recent trend could lead to panic and, in fact, may already have, after listening to our new CEO’s video message outlining our new vision, mission, business purpose, values, and strategic imperatives.  Our vision is “We Power Life” and mission statement is “We exist to operate a world-class energy business that creates sustainable value for our four stakeholders: Owners, Customers, Employees and Communities.”  I think Drucker would roll over in his grave to see Owners listed before Customers and Dr. Levitt would correctly guess that our new CEO is our former CFO. My other criticism of our company’s direction is that we appear to be limiting ourselves to producing nuclear electrical power; at least in the EWC.  EWC did purchase a natural gas plant in Rhode Island either last or the year before.     

The previous article was written in January.  This past winter exposed what may be a weakness in natural gas’ dominance in providing electrical power in New England.  The attached is a short article which explains the limitations.  This was good news for Vermont Yankee, but could have been better.  Equipment problems kept us from operating at 100% of rated power.

http://www.hartfordbusiness.com/article/20130327/NEWS01/130329866/new-england-electricity-prices-near-10-year-high

In addition, historic trends have shown that natural gas prices can be cyclical.  Factors which can affect natural gas prices are shown in the U.S. Energy Information Administration’s website.  They also recognize that winter weather influences residential and commercial demand.   

http://www.eia.gov/energyexplained/index.cfm?page=natural_gas_factors_affecting_prices

However, I’m not sure anyone recognized how significant that demand affects the New England market (Mass Hub) compared to other regional ISO markets.  The chart in the link below shows this phenomenon for the past year. 

http://www.ferc.gov/market-oversight/mkt-electric/new-england/elec-ne-east-pr.pdf

If we are truly a world-class “energy” business (not just a nuclear energy business), with this knowledge we should be looking at (and taking advantage of) this more closely, and not just talking about the difficult decisions that were continuously reiterated in the CEO’s message.

And now for a short plug for nuclear power.

http://www.youtube.com/watch?feature=player_embedded&v=rW2uXnoBYhE#!

 

More on my first question on Drucker’s creationist view of marketing

Today finally marked the end of Vermont Yankee’s 30^th refueling outage.  Although we were back on the grid on Friday, the Outage Control Center was operating until 3PM today and I was able to leave work at 10AM, since there were no more electrical issues to deal with.  I have a one hour commute each way from my home in Holyoke to work at Vermont Yankee.  Recently, I’ve been filling that time listening to audio books rather than switching between WEEI and Lazer 99.3.  The book I’m listening to now is “Decisive: How to Make Better Choices in Life and at Work” by Chip and Dan Heath.  On my way home from work this morning, they quoted Drucker about the need to prepare for unexpected success.  Specifically, Drucker warned that managers should be prepared for their innovations to be used for purposes other than what the “creators” had intended and to capitalize on that success.  Otherwise, you are just creating opportunities for your competitors to succeed using your innovation.  We talked a little about that with Apple.  From what I remember of the book “Imagine: How Creativity Works” by Jonah Lehrer, which I read last summer, most or a lot of successful products are not created by the original innovators, but by others who had a clearer vision of what the innovation could do and was worth.  So it seems Drucker was warning innovators to not have such a narrow view of their creations.  I highly recommend both books.  In fact, I think some of the tools in “Decisive” helped me with a few issues during our refueling outage, which, for engineering, finally ended today, even though the plant has been on line since Friday.  One, in particular, is what they call the WRAP process (Widen Your Opinions/Options, Reality-Test Your Assumptions, Attain Distance before Deciding, and Prepare to Be Wrong).

One of my favorite Drucker quotes is, "Your job as a business leader is not to provide the right answers. It is to provide the right questions."   

Marketing in the Electric Utility Industry and Entergy

As mentioned during our first class, marketing in the Electric Utility Industry is unique.  In fact, with “deregulation,” it is different in different areas of the country.  The company I work for, Entergy, currently owns regulated plants in the South, where they are the utility selling directly to customers, and deregulated plants in the north and Midwest, where we are merchant plants selling to the local “grid” (a non-profit ISO, or Independent System Operator), which then sells to transmission and distribution (T&D) companies, unless we have specific power purchase agreements with specific T&D companies.  I could write all semester about Vermont Yankee’s recent issues with the State of Vermont and our current lack of any major power purchase agreement, but I think that would take away from the generic discussion about marketing in the electric utility industry.      

So, the regulated southern plants sell directly to the customers, but their prices are controlled by public utility commissions or public service boards.  In general, they are able to pass the cost of any required capital improvements directly to the customers in the form of rate increases.  The deregulated northern plants sell to the grid.  “Deregulated” isn’t really deregulated.  Enron destroyed that dream with their shenanigans in California (for more on that, see the book or movie “Enron: The Smartest Guys in the Room”).  As a result, we now have FERC (The grid’s prices are set by the highest priced capacity which is required to meet demand.  In other words, Vermont Yankee bids a certain (low) price.  Therefore, we are guaranteed to be on the grid.  As demand increases, the ISO adds capacity from the next highest bidder and everyone supplying at that time get that higher price. 

With the recent low prices in natural gas, electricity prices have been pretty low, so the deregulated plants have been severely challenged.  It’s pretty funny that Christine Clemmons mentioned that her mother and stepfather worked at our Fitzpatrick plant and then Prof. Spotts mentioned the McKinsey consulting firm, because, as we speak, McKinsey has been hired by our CEO to see how we can become more “competitive” and they are starting at Fitz.  Needless to say, people are nervous.  In the nuclear industry, we are expected to lose 30% of our workforce in the next 5 years to retirements, anyway, but…      

We, Entergy, came into an interesting scenario in Arkansas a couple of years ago.  This was before natural gas prices were so low, so our northern plants were making quite a bit of profit.  The Arkansas public service commission (or whatever their name is) was arguing that the ratepayers in Arkansas should not pay a higher rate to pay for capital improvements at plants in Arkansas because Entergy was making more money than expected in the northern plants.  I’m not sure what the outcome was, but, now that the northern plants are not making much (if any) money because of natural gas competition, I’m sure they would not be willing to subsidize Entergy’s losses in the north, even though they were more than willing to demand subsidies from the north when we were making money.  I almost didn’t want to add this section because we recently suffered a tragic industrial accident at our Arkansas plant, but I thought it was important to show how the market for electricity varies not just within the country, but within one company.

How does this apply to me and my job?  I’ve been told it doesn’t.  However, even though I do not directly deal with our customers, I am at least partly responsible for the reliability of the station.  We can’t meet any market demand if we are not operating at or near full capacity.  I’m proud to be part of an industry that was producing at just 50% percent capacity when I started in 1979 and is now consistently produce at or near 90% capacity.  

I may have failed to mention in my introduction to the class that I've been trying a new hobby; homebrewing.  I haven't gotten to the "keg" level, yet, and the beer I've produced hasn't been that great, but I am finding the process pretty fascinating.  Thinking about Cohen's description of the eras of marketing, it seems like trend in the beer industry was moving back to the craftsmen and simple trade era, but then I read that Berkshire Brewing Company will be producing 12 ounce cans of their Steel Rail Ale soon.  Ugh!  Personally, I prefer their Lost Sailer IPA, anyway, so I hope they never decide to can that, but...  As I said, I am probably the oldest person in the room, so I've been a consumer/customer for longer than anyone else in the room.  I also work in an industry (electrical power) which does not really consider the customer enough.  My next post will talk more about the electric power market, because it is different in different areas of our country and my company.  I just wanted to get this out there as a test to see how this works.  More tomorrow!