In a previous post I mentioned that when I first started playing the game, one of the websites that I initally found useful was:
http://www.corvalliscommunitypages.com/bsgimages/bsgrev2.html
After playing the game many times and after becoming a Grand Champion, my opinion about the site has changed quite a bit. I think that much of the information there is poor advice. I will be quoting that site under the fair use provisions of the Copyright Act for criticism, comment, and teaching for the nonprofit educational purpose of this post.
First of all, I think I should point out the most important reason why all of the recommendations on that page are not appropriate for most games today: the advice is old, outdated and was based on a single game lasting only 6 rounds. The game has changed substantially since that page was written and has not been adequately updated to take these changes into account. Most games today have 10 rounds/years of decisions, not 6. This makes a huge difference because all of the decisions must be compressed and started earlier in a shortened game. This has a large impact on the costs of doing expansion and upgrades early instead of waiting for them to be more cost effective.
This is the advice given about finance.
THE FINANCE AND CASH FLOW PAGE: BORROWING, STOCK DIVIDENDS
This is where you will borrow money. In the first few rounds, you will borrow the maximum in long term (10 year) loans (usually $250 million). Don’t allow your fiscal conservatism to get in the way of your winning the game. By focusing on those scores which are most important, you will inevitably yield ground on credit rating in all but the late rounds to those neophytes who are focused on performing their role as conservative financial officers (CFOs), to the detriment of their team’s overall performance.
Notice the tone of the command imperative. You will do this and you will do that. This aren’t suggestions or advice. The author demands that you implicitly trust what he says merely because he says it, without discussing any drawbacks and only presenting a very weak single argument later, being that the economy of scale should justify immediate large expansion of production. Then he implicitly ridicules any failure to follow his commands as being fiscally (too) conservative as being a detriment to the team. This is using bullying tactics and the logical fallacy of argumentum ad hominem by attacking any potential dissenters, even though he obviously doesn’t know them.
What he doesn’t provide is a reason why a fiscally conservative approach is the only reason why someone might object to his command edicts, or why this approach would prevent prudent investments. Fiscal conservatism doesn’t prevent all investment. It merely expects reasonable and wise justification for investing instead of relying on wild-assed guesses, irrational exuberance, or reliance on dubious purveyors of unreliable advice.
The thing is that I agree with him that investment and expansion is important and useful, but not merely for economy of scale but also to gain the power of financial leverage to gain higher returns than possible only through reinvestment of net profit for capital improvements. I completely disagree with the timing he commands and note that he gives no justification for why the expansion must occur so heavily and quickly in the first years. That’s because the reason is assumed based on having only 6 rounds of decisions for the game. When that assumption is not true, the commands actually become false, misleading and detrimental for any teams following the commands without realizing the major difference about the game length.
I can give you many better reasons why teams should NOT expand and draw large loans to do so in the first few years in a 10 round game. The cost of plant upgrades is directly based on the current size of the plant when the option is ordered, and these costs are large for the best options: $8M/1M capacity for option B to reduce setup cost and $7M per 1M capacity for option C to increase S/Q.
Borrow the maximum in long term loans – – to start a plant in LA, and to increase your capacity in AP in Round 1, and do the setup upgrade in the AP. In Round 1, we made the mistake of borrowing early on to invest in various plant upgrades alongside expanding capacity, rather than focusing only on the latter. You can do the upgrades in later rounds, which is a better idea.
The exception is the production set-up upgrade. As plants and model numbers expand, this upgrade becomes prohibitively expensive, and yet the savings become ever more immense. Do this upgrade as rapidly as possible (see plant capacity below). By investing in it while plants are small, the benefit is inherited as plants grow and cost of the upgrade is nothing additional.
Do you see the self-contradictory advice here? He states it’s better to do the upgrades in later rounds, except for option B. He even notes that investing in option B while the plant is small allows the upgrade to be inherited for no additional cost. But this is true for all of the options, and option C is nearly as expensive as option B.
Elsewhere he states that his team did the following:
Add the maximum allowable for LA (750,000 for an existing plant of 1,500,000 in our case)
This was apparently done before the upgrades were completed. Delaying the upgrades could cost an extra $15M in cost per million production capacity.
Most instructors make use of a bulletin board which you will find worth snickering over at the end of the game, with losing teams congratulating themselves on maintaining their superior credit rating as well as a dozen other deficiencies in their game. Borrowing heavily is essential to the winning of this game. You will NOT win this game if you your goal is an A+ credit rating. You SHOULD try to never plan for a round with a credit rating less than B+, although you may find that, in the game itself, your credit may fall even to C- on an occasion. You will not be focusing upon rational investment decisions but upon predatory ones. [diatribe omitted]
How would he know what most instructors do? He doesn’t. He just likes to use an invalid strawman argument to congratulate himself on winning a game with rather average to poor competition. Having won Grand Champion status, many more games in class and practice sessions, and in coaching game winners and other teams to Grand Champion status, I can state with a high degree of confidence that his advice about credit is bad, wrong, misleading, and inappropriate. In fact, I have seen many teams go bankrupt by making decisions that closely follow that bad information.
You don’t have to rely on me to see this for yourself. Watch how many teams take out the maximum in long term debt in the first two rounds, then watch as their team goes down the tubes trying to pay that interest before their improvements become operational. Even if they avoid bankruptcy, their added costs of doing expansions before upgrades will usually put them at a huge competitive disadvantage compared to teams that delay expansion until after all of the upgrades are online. I’ve seen teams make this huge error in at least one industry in every Invitational that I’ve observed.
Having an A+ credit score in the last year is a major factor to winning the game. Improving your teams credit score to A or A+ status in preparation for taking out a large loan is a better way to finance capital improvements that could save your team millions in unnecessary interest costs. Reduced financing costs can greatly increase your net profit margins. Higher interest rates divert a substantial portion of your team’s profit to the banks. The interest only part of a payment on a $250M loan at 10% is 25M/year, which could match or exceed your entire earnings (EBITDA) for the second round.
Getting the lowest interest rate possible is worth doing, even when it means delaying upgrades and expansion. An interesting observation I’ve made is that it’s usually possible to start the upgrades in the first round if you finance it merely by selling off part of your teams excess capacity in the A-P plant, by refinancing your existing loans over 10 years by paying them off and drawing a new loan, and by increasing your teams net profit in the first year with the capacity you have remaining. Your team will be on track to improve your credit rating to A or A+ just in time to start expanding capacity after completing the upgrades at your existing and new plants.
Getting a large loan at the lowest interest rate will maximize your financial leverage at the lowest cost of financing. This is not only fiscally conservative but also is a great strategic move to be more competitive than teams who carry a large amount of long-term debt at much higher interest rates.
Please note that the goal is not to maintain a high credit rating for it’s own purpose of demonstrating fiscally conservative operations. On the contrary, an important goal during the game is to improve the credit rating to save real money when exploiting the maximum amount of leverage that’s prudent based on the effective use of capital improvements and investment in technology to gain more in earnings than the cost of financing. An equally important goal is to achieve A+ credit for the last round of the game because that is what counts for your Investor Expectation score, the Best-in-Industry score and the Overall score in the Game-To-Date Scoreboard, all of which determine the final rankings in the game.
One lesson you can learn from that kind of bad advice is to not entirely trust anyone who merely declares themselves to be an expert, even me. Evaluate the method of argument and the details of the advice to see if it makes sense or not. Be sure to try alternate scenarios and build projections that will support or weaken the validity of the proposed strategies. I don’t want you to trust me because I said so. I want you to decide for yourself based on the sound principles and evidence I present based on my experience in consistently winning these games.