Capstone 2.0 Glossary & Guidance

Matthew D. Langenkamp · Isenberg School of Management, UMass Amherst
Prepared in collaboration with Thea · Updated November 3, 2026

This guide defines strategy, financial and operating terms used in MANAGMNT 494BI and Capstone 2.0. It includes formulas, examples and instructions for reading the Courier. Strategy sections cover the presentations for Weeks 1–5 and the planned sessions for Weeks 9–14. Where a term appears in the textbook, the entry gives the chapter and page in Frank T. Rothaermel, Strategic Management (2026 Release), for further reading.

This is an independent teaching guide. For simulation rules and industry-specific figures, consult Capsim’s guides, your Industry Conditions Report and the current Courier.

Graphic Simulations

Open the Capstone Graphic Simulations

Three pixel-art models you can run in your browser: The Second Shift (plant and production economics: price, second-shift labor, automation, inventory), Spreading the Overhead (economies of scale: sales, promotion and administration cost per unit as volume grows) and Big Al Comes Calling (inventory, debt, emergency loans and your ability to invest). Teaching models with labeled estimates; your Capstone decision screens remain the authority.

Two Ways to Compete

Download Two Ways to Compete (PDF)

A MANAGMNT 494BI case and individual exercise contrasting Low End cost leadership with High End differentiation. Includes the Low End ideal-age graphic, forecasting guidance, contribution-margin calculations, and coordinated R&D, marketing, and production decisions.

Revised September 18, 2026. Case figures are hypothetical; use your live Industry Conditions Report and Courier for actual simulation decisions.

Financial Foundations Workbook

Download the Financial Foundations Workbook (PDF, 32 pages)

A classroom workbook to help you prepare for the Capstone 2.0 simulation, the in-class financial foundations exercise, and the final exam. It explains how the income statement, balance sheet, and cash flow statement connect, then follows Andrews’ actual decisions and results through capacity purchases and sales, automation, profit, and cash.

Print it and bring a pencil: the exercises include space for calculations and written answers. You can also read the PDF on screen. Topics include the matching principle, depreciation, EBIT and EBITDA, shareholders’ equity, and step-by-step borrowing and investment examples.

Classroom draft · September 17, 2026. Use the glossary below alongside the workbook. The original financial foundations exercise remains available separately below.

Basic calculations

1. Sales: price × units sold.
2. Contribution: sales − variable costs; divide by sales for the percentage.
3. Depreciation: allocate asset cost over its accounting life; distinguish expense from payment.
4. Net profit: subtract period costs from contribution to find EBIT; then subtract interest, taxes and profit sharing.
5. Financial position: assets = liabilities + equity.
6. Cash: reconcile operating, investing and financing flows.
7. Performance: ROS, asset turnover, ROA, leverage and ROE.
8. Planned production: forecast sales + desired ending inventory − beginning inventory. Check the result against capacity.

For class: Download the financial foundations exercise (PDF). Work individually. The figures are hypothetical. Your instructor will specify the deadline and submission method.

Example: from sales to net profit

Suppose a company sells 1 million sensors at $30 each. Its report, in $ thousands, shows:

Line	$000	Calculation
Sales	30,000	1,000 thousand units × $30
Material and labor	16,000	Costs of units sold
Inventory carrying cost	600	Separate from the inventory asset
Contribution	13,400	30,000 − 16,000 − 600
Depreciation	2,000	Non-cash allocation of asset cost
SG&A	5,400	Includes the listed component budgets
EBIT	6,000	13,400 − 2,000 − 5,400; no other operating items
Interest	1,000	Financing expense
Taxes	1,500	Assumed for this example
Net profit	3,500	No profit sharing or other adjustments

Contribution margin is 44.67% of sales. After the remaining expenses, net profit is 11.67% of sales. The cash-flow statement is needed to explain the change in cash. All figures in this example are hypothetical.

Find a term

Search terms and explanations

Read the reports

Capstone Courier

The industry report for a completed round. It lists company results, product data, customer buying criteria and market share.

Industry Conditions Report

A report of the industry’s starting conditions, including customer buying criteria, segment positions and growth rates. Use the report for your assigned industry.

Annual report

A company’s financial statements for a completed year.

Pro forma statements

Financial statements that project the results of proposed decisions and sales forecasts. Actual results may differ from these projections.

Round and reporting date

A round is one simulated year. At the start of Round 2, the Courier reports Round 1 results. Check whether a figure describes a completed round or a forecast.

Units and dollar scaling

The scale in which a report states its figures. Dollars and unit quantities may be reported in thousands, while prices remain dollars per unit. For example, 1,000 thousand units sold at $30 produce $30,000 thousand in revenue ($30 million). Read the labels on each table.

Sales, costs and profit

Revenue / sales

The value of products sold during a period. Sales = price × units sold for a product sold at one price. Company sales equal the sum of product sales. Unsold products remain in inventory; credit sales remain in accounts receivable until collected.

Units sold

The number of products purchased by customers during a period. This may differ from the number produced or forecast to sell.

Price

The amount charged for one unit. Price affects both revenue per unit and customer demand.

Material cost

The cost of materials in a product. Positioning and reliability affect this cost. The income statement records material costs for units sold; material costs for unsold units remain in inventory.

Labor cost

The cost of production labor. Automation reduces labor requirements. Capstone charges 50% more for second-shift labor than for first-shift labor. This premium applies to labor, not to the product’s total cost.

Variable costs

Costs that vary with activity. Capstone groups material, labor and inventory carrying costs under variable costs in its income statement.

Cost of goods sold (COGS)

The cost of products sold during a period. Production costs for unsold goods remain in inventory. Use the material, labor and carrying-cost lines shown in the Capstone report when calculating contribution margin.

Inventory carrying cost

The expense of holding unsold products. Capstone’s guide specifies a 12% carrying-cost rate. Use the reported charge to reconcile the income statement. The inventory asset is recorded at cost; carrying expense is a separate charge.

Unit contribution

The amount each unit contributes toward period costs and profit. Unit contribution = price − variable cost per unit. A $30 price less $16 in material and labor costs leaves $14 before carrying costs and other expenses.

Contribution margin — dollars

Sales remaining after variable costs. Contribution margin = sales − total variable costs. Sales of $30 million less variable costs of $16.6 million leave $13.4 million to cover period costs and profit.

Contribution margin — percentage

Contribution margin expressed as a share of sales. Contribution margin percentage = contribution margin dollars ÷ sales × 100. A contribution of $13.4 million on sales of $30 million gives 44.67%.

Fixed costs / period costs

Period costs are expenses charged to the period rather than to individual units sold. Capstone includes depreciation and SG&A. Fixed costs do not vary directly with unit sales within a given operating range, though managers may change their budgets.

SG&A

Selling, general and administrative expenses. Capstone includes R&D, promotion, sales and administration. SG&A-to-sales = SG&A ÷ sales; multiply by 100 to express the ratio as a percentage. Deduct either the total or its components, not both.

R&D expense

The expense of developing or revising a product. It is separate from investment in production equipment.

Depreciation

The allocation of an asset’s depreciable cost over its useful life. Straight-line depreciation = (cost − residual value) ÷ useful life. Capstone uses a 15-year straight-line life. A $30 million asset with no residual value incurs $2 million of depreciation for a full year. Depreciation reduces reported profit without a current cash payment.

Accumulated depreciation / net plant

Accumulated depreciation is the total depreciation recorded on an asset. Net plant = gross plant and equipment − accumulated depreciation. If the report shows accumulated depreciation as a negative number, add that signed amount. Net plant is a book value, not an estimate of resale value.

Net margin — Capstone product view

Product contribution less product period costs, as defined in Capstone’s product analysis. This dollar amount is not company net profit. Company expenses, interest, taxes and profit sharing may still need to be deducted.

EBIT / operating result

Earnings before interest and taxes. In Capstone’s income statement, EBIT = contribution margin − depreciation − SG&A − other operating expenses. Follow the signs of any adjustments shown in the report.

Interest expense

The expense of borrowing money. Interest reduces profit. Repayment of loan principal reduces cash and debt but is not an expense.

Taxes and profit sharing

Deductions from earnings shown after interest on Capstone’s income statement. Use the amounts and rates specified in your simulation.

Net profit / net income

Earnings after expenses. Net profit = EBIT − interest − taxes − profit sharing, with any additional adjustments shown in the report. Net profit differs from cash flow because some income and expenses do not involve cash in the same period.

Cumulative profit

The sum of net profits for the rounds included in a report. Retained earnings may differ because they also reflect opening balances and dividends.

Break-even volume

The sales volume at which revenue equals the costs included in the calculation. Break-even units = fixed costs ÷ unit contribution. This formula assumes a positive, constant unit contribution and constant fixed costs. Changes in price, unit costs or capacity require a new calculation.

Assets, financing and cash

Balance sheet

A statement of assets, liabilities and owners’ equity at a particular date. Assets = liabilities + shareholders’ equity.

Cash

Money held by the company. Ending cash = beginning cash + operating cash flow + investing cash flow + financing cash flow.

Accounts receivable (A/R)

Amounts customers owe for credit sales. An increase in receivables reduces operating cash flow relative to reported profit. Longer payment terms delay collection and can affect customer demand.

Inventory

Unsold products recorded as an asset at cost. Without write-offs, ending inventory units = beginning units + units produced − units sold. Producing inventory uses cash before the goods are sold.

Current assets

Assets expected to be used or converted into cash within a year. In Capstone, these generally comprise cash, accounts receivable and inventory.

Plant and equipment / capacity investment

Long-lived assets used in production. Purchases of capacity and automation are investments. Their cost is recorded as an asset and expensed over time through depreciation.

Accounts payable (A/P)

Amounts owed to suppliers. An increase in payables postpones cash payments and increases operating cash flow relative to reported profit.

Current debt

Short-term borrowing. New borrowing increases cash and liabilities. Check Finance for repayment dates and refinancing requirements.

Long-term debt / bonds

Borrowing due beyond the current year. A bond’s face value is its principal, its coupon determines interest payments, and its maturity is the repayment date. Market yield may differ from the coupon rate. Capstone sets limits and charges for borrowing and early repayment.

Emergency loan

An automatic loan issued when a company cannot meet its cash needs under the simulation’s rules. It adds financing costs. Common causes include excess inventory, weak collections, unfunded investment and debt repayments.

Common stock / shares issued

Capital contributed by shareholders. Issuing shares increases cash and equity, not revenue. The common-stock account records contributed capital, not current market value. Additional shares may reduce earnings per share.

Retained earnings

Earnings kept in the business rather than paid as dividends. Ending retained earnings = beginning retained earnings + net profit − dividends, absent other adjustments. Retained earnings are part of equity, not a separate cash account.

Equity

The owners’ book interest in the company. Equity = assets − liabilities. Equity is negative when liabilities exceed recorded assets.

Dividends / share repurchases

Payments to shareholders. Dividends reduce cash and retained earnings. Share repurchases reduce cash, equity and shares outstanding. Both are financing transactions rather than operating expenses.

Working capital / current ratio

Net working capital is the excess of current assets over current liabilities. Net working capital = current assets − current liabilities. The current ratio = current assets ÷ current liabilities. Both measure short-term financial position, but neither shows how quickly receivables and inventory can become cash.

Cash flow from operations (CFO)

Cash generated or used by ordinary business operations. A simplified calculation is net profit + depreciation − increase in receivables − increase in inventory + increase in payables. Include other adjustments shown in the report. Depreciation is added back because it reduced profit without a current cash payment.

Investing cash flow / capital expenditure

Cash spent on or received from long-lived assets. Capital expenditure, such as a plant purchase, is an investing cash outflow. Depreciation records the asset’s expense over time rather than its purchase payment.

Financing cash flow

Cash received from borrowing and share issues, less principal repayments, dividends and share repurchases.

Free cash flow

Operating cash flow remaining after capital expenditure. Free cash flow = operating cash flow − capital expenditures under the definition used here. This is a supplementary measure, not necessarily a separate Courier line. A negative amount indicates a funding requirement.

Courier ratios and performance

Return on sales (ROS)

Net profit as a percentage of sales. ROS = net profit ÷ sales × 100. Also called net profit margin. Use company net profit, not EBIT or Capstone’s product net margin.

Asset turnover

Sales generated per dollar of assets. Asset turnover = sales ÷ total assets, expressed as times. The Courier checked for this guide uses year-end assets; some accounting texts use average assets.

Return on assets (ROA)

Net profit as a percentage of assets. ROA = net profit ÷ total assets × 100 under the Courier convention used here. With consistent figures, ROS multiplied by asset turnover equals ROA.

Leverage — Courier

The ratio of assets to equity, also called the equity multiplier. Leverage = total assets ÷ total equity. Assets of $35 million and equity of $15 million give leverage of 2.33 times. This is not the debt-to-equity ratio.

Return on equity (ROE)

Net profit as a percentage of equity. ROE = net profit ÷ equity × 100. With consistent figures, ROE = ROS × asset turnover × leverage. Very small or negative equity can make this ratio misleading; a loss divided by negative equity produces a positive ratio.

Earnings per share (EPS)

Net profit attributable to each share. EPS = net profit ÷ the applicable number of shares. Use consistent dollar and share units and Capstone’s share-count convention.

Stock price / market capitalization

Stock price is the simulated market value of one share. Market capitalization = stock price × shares outstanding. Market capitalization differs from book equity on the balance sheet.

Market share — actual and potential

Actual market share is the proportion of sales a product or company captures. Potential share estimates the share it could have captured under the report’s assumptions about availability. Stockouts can cause the two to differ. Check whether the report measures share by units or revenue and by segment or industry.

Balanced Scorecard / scoring

A set of measures used to assess company performance. Capstone groups them into financial results, internal business processes, customers, and learning and growth. Check your course’s measures, weights and targets.

Decision terms you will meet next

Sales forecast

An estimate of the units customers will buy. The forecast informs production plans and pro forma statements. Compare expected results with a lower-sales scenario.

Production schedule

The number of units planned for production. Planned production = forecast sales + desired ending inventory − beginning inventory, subject to capacity and timing constraints.

Capacity / plant utilization

Capacity is the number of units a production line can make in a year on one shift. Capstone allows a second shift, up to twice first-shift capacity. Utilization = production ÷ first-shift capacity × 100, subject to the report’s adjustments. Utilization above 100% indicates second-shift use. Purchased capacity becomes available next round.

Automation

Equipment investment that reduces labor requirements per unit. Higher automation can lengthen R&D repositioning projects. Changes become available the following year.

Positioning / perceptual map

Positioning describes a product’s performance and size. The perceptual map plots these attributes against segment preferences, which move over time. Customers prefer products suited to their segment rather than the smallest or fastest product in every case.

Age / revision date

Perceived age is the time since introduction, adjusted for redesign. A repositioning project halves perceived age when completed; the product then continues to age. An MTBF-only change does not halve age. The revision date is the date the change takes effect.

MTBF / reliability

Mean Time Before Failure, a reliability rating measured in hours. Raising MTBF within a segment’s preferred range can improve its customer score but increases material cost. Reliability above the preferred range provides no further scoring benefit.

Promotion / awareness

Promotion is spending intended to make customers aware of a product. Awareness is the percentage of customers who know it. Awareness declines without support, and additional spending produces diminishing gains.

Sales budget / accessibility

The sales budget funds sales and distribution. Accessibility measures how readily customers in a segment can buy from the company. It differs from awareness, which measures whether customers know the product.

Customer buying criteria / survey score

Buying criteria are price, age, reliability and positioning, weighted by segment. The customer survey score measures how well a product meets customer preferences and also reflects awareness, accessibility and credit terms. A 53% price weight is a scoring weight, not a forecast of market share or price sensitivity.

Segment demand / growth

The number of units customers in a segment demand. Next-year demand = current demand × (1 + growth rate). Check the current Courier for the upcoming growth rate. Company sales also depend on market share and product availability.

Cost leadership / differentiation

Cost leadership is competition based on lower costs while meeting customer requirements. Differentiation is competition based on attributes customers value enough to support a price premium. Each requires coordinated product, marketing, production and financial decisions.

Optional modules: HR, TQM and sustainability

Additional decisions available when the instructor enables Human Resources or TQM/Sustainability. Consult your course settings for their start dates and rules.

TQM investments and diminishing returns

TQM investments can reduce material, labor and administrative costs, shorten R&D projects, or increase demand. Benefits begin in the year of investment and continue in later years. Complementary initiatives can support the same objective. Repeated investment eventually produces smaller gains or none. Check Projected Cumulative Impacts; the stated maximums are cumulative limits, not annual gains.

Strategy foundations — Weeks 1–2

Strategy

A coordinated set of choices and actions for achieving an objective and competing successfully. Business strategy specifies whom a firm serves, what value it offers and which activities support its advantage.

Strategic management

The analysis, formulation and implementation of strategy across an organization. It brings together decisions about customers, products, operations, people and finance.

Goal / objective

A result an organization seeks to achieve. A goal states the desired outcome; a strategy explains the approach. A target market share alone is not a strategy.

Tactics

Specific actions used to carry out a strategy or respond to circumstances. Strategy and tactics differ in scope and purpose, not simply in duration. A price cut is a tactic; whether it helps depends on the strategy and its costs.

Michael E. Porter

A Harvard Business School scholar whose work examines industry competition and competitive advantage. His books include Competitive Strategy (1980) and Competitive Advantage (1985). His frameworks include the Five Forces, generic competitive strategies and the value chain.

Competitive advantage

Performance above that of relevant competitors or the industry average, measured on a stated basis over a stated period. A profit rate or market share needs a comparison before it can establish an advantage.

Sustained competitive advantage

Competitive advantage maintained over an extended period. Also called sustainable competitive advantage. Here, sustainable refers to the persistence of the advantage, not its environmental impact; it does not mean permanent.

Competitive disadvantage

Performance below that of relevant competitors or the industry average on the measure being compared.

Competitive parity

Performance comparable to that of relevant competitors on a stated measure. Parity in profitability does not require identical products or strategies.

Benchmarking

Comparing performance or practices with competitors, an industry average or another relevant standard. Comparisons help identify gaps but do not by themselves determine a strategy. Capstone’s optional TQM initiative named Benchmarking is a specific simulation investment.

Return on invested capital (ROIC)

Operating profit after tax relative to the capital invested in operations. ROIC = net operating profit after tax ÷ invested capital × 100. State whether invested capital uses opening, closing or average balances and how it is defined. ROIC differs from the Courier’s ROA and ROE; a 15% return needs an appropriate comparison.

Competitive positions and industry structure — Weeks 1–2

Value creation

Producing benefits customers value at a cost below their willingness to pay. In a simplified economic model, value created per unit = willingness to pay − cost. Price divides this value between customer benefit and the firm’s margin.

Willingness to pay

The maximum amount a customer would pay for a product or service. It depends on the benefits the customer expects and available alternatives. It is not necessarily the price charged.

Strategic positioning

Choosing the customers to serve, the value to offer and the activities needed to deliver it. In Capstone, strategic positioning includes choices about segments, prices and costs; product positioning on the perceptual map is only one part.

Cost leadership

Competing through a lower cost structure than relevant rivals while meeting customers’ requirements. Low costs can support lower prices or higher margins. In Capstone, automation, material choices and production planning affect costs; a low selling price alone does not establish cost leadership.

Differentiation

Competing by offering distinct benefits that customers value enough to support a price premium. In Capstone, positioning, age, reliability and customer access can support differentiation. The premium must cover the added costs; extra features customers do not value are not an advantage.

Focus / niche strategy

Serving a narrow customer group or market rather than a broad one. A focused firm can compete through lower costs or differentiation. In Capstone, concentrating on selected segments is a focus decision; it does not by itself determine how to compete within them.

Strategic trade-off

A choice that accepts less of one benefit to obtain another, or rules out activities inconsistent with a position. In Capstone, greater automation lowers labor requirements but can lengthen product-repositioning projects.

Strategic fit

Consistency among a firm’s activities so that they support one another and its chosen position. A Capstone strategy needs compatible R&D, marketing, production and financing decisions.

Operational effectiveness

Performing activities more efficiently or reliably. It can improve performance, but rivals may copy the improvement. Strategy also concerns which activities to perform and how they combine.

Economies of scale

Reductions in average cost as the scale of operations increases. Fixed-cost spreading and purchasing efficiencies can contribute. More capacity does not guarantee lower unit costs if the capacity is underused.

Barriers to entry

Conditions that make entry difficult or costly for potential competitors. Examples include scale advantages, large capital requirements, customer switching costs and regulatory restrictions. Capstone’s assigned-company structure does not reproduce every real-world entry barrier.

Industry effects

The influence of an industry’s structure and conditions on firm performance. The strength of rivalry and the bargaining power of buyers or suppliers can affect the profits available to firms in that industry.

Firm effects

Differences in performance attributable to a firm’s resources, capabilities and choices rather than to shared industry conditions. Capstone teams face a common starting environment but make different product, operating and financial decisions.

Porter’s Five Forces

A framework for examining industry competition and profit potential: rivalry among existing competitors, threat of new entrants, threat of substitutes, bargaining power of buyers and bargaining power of suppliers. Substitutes meet a similar need in a different way; they are not simply another brand of the same product.

The strategy process — Week 2

AFI framework

Analysis, Formulation and Implementation: three connected parts of strategic management. Analysis examines the situation; formulation selects an approach; implementation puts it into practice. Results can require changes to any of the three.

Analysis

Examining an organization’s internal resources and external environment to identify the challenge it must address. In Capstone, this includes customer criteria, rival products, production costs and financial constraints.

Competitive challenge

The central problem or opportunity a strategy must address. A useful diagnosis identifies its causes. “Profits are low” describes a result; excess costs, weak customer appeal or idle capacity may explain it.

Formulation

Choosing a strategy in response to the analysis. It includes decisions about where to compete, how to create value and how to allocate resources.

Guiding policy

An overall approach for addressing a diagnosed challenge. It directs choices without prescribing every action. Focusing on reliable, low-cost products for price-sensitive customers is a guiding policy; a sales target is not.

Implementation / coherent actions

Putting strategy into effect through mutually supporting actions, budgets, responsibilities and controls. A Capstone sales forecast, production schedule and financing plan must agree about the resources required.

Corporate strategy

Decisions about the businesses or industries in which an organization participates and how it allocates resources among them. It concerns the scope of the organization.

Business strategy

The approach a firm or business unit uses to compete in a particular market. Cost leadership and differentiation are business-level choices.

Functional strategy

The approach a department or function uses to support the business strategy. R&D, marketing, production and finance each make functional choices; no department’s plan alone constitutes the whole firm’s strategy.

Execution risk

The possibility that a chosen strategy will not be carried out as intended. Delays, inadequate funding and conflicting departmental decisions can prevent an otherwise sound plan from succeeding.

Stakeholders and responsibility — Week 2

Stakeholder

A person, group or organization that can affect or be affected by a firm’s actions. Stakeholders include employees, owners, customers, suppliers, creditors and communities.

Internal and external stakeholders

Internal stakeholders participate in ownership, governance or operations, such as shareholders, directors, managers and employees. External stakeholders include customers, suppliers, creditors, communities and government. These categories describe relationships; they do not rank whose interests matter.

Shareholder / stockholder

An owner of shares in a company. Shareholders are one group of stakeholders. Employees, customers and creditors can have interests in the company without owning shares.

Stakeholder strategy

An approach to managing relationships with stakeholders in support of the firm’s long-term performance. It considers their contributions, claims and potential conflicts rather than treating shareholder returns as the only relevant interest.

Stakeholder impact analysis

A process for identifying stakeholders, their interests and claims, the opportunities and threats they present, the firm’s responsibilities toward them, and appropriate responses. Power, legitimacy and urgency help assess which claims require attention.

Stakeholder power

A stakeholder’s ability to influence a firm’s decisions or actions. Control of funding, essential supplies or regulatory approval can confer power.

Stakeholder legitimacy

The perceived validity or appropriateness of a stakeholder’s claim under laws, norms or accepted expectations. A legitimate claim need not come from a powerful stakeholder.

Stakeholder urgency

The degree to which a stakeholder’s claim requires prompt attention because it is time-sensitive and important. Urgency can change as circumstances change.

Transaction costs

The costs of arranging, monitoring and enforcing exchanges, beyond the price of the goods or services exchanged. Search, negotiation and contract enforcement are examples. Trust can reduce some of these costs.

Corporate social responsibility (CSR)

A firm’s responsibilities for its conduct and effects on society. The framework shown in class distinguishes economic, legal, ethical and philanthropic responsibilities.

Pyramid of corporate social responsibility

A framework associated with Archie B. Carroll that groups responsibilities into four categories: economic (operate a viable business), legal (obey the law), ethical (act fairly and avoid harm), and philanthropic (make voluntary contributions to society). The categories are concurrent responsibilities, not permission to postpone legal or ethical duties until profits improve.

Industry analysis — Week 3

PESTEL analysis

A scan of the general environment around an industry: political, economic, sociocultural, technological, ecological and legal factors. It identifies outside forces that can change demand, costs or rules for every firm in the industry.

In Capstone: The simulation fixes most of these factors. Segment growth rates and drifting customer expectations play the role of a changing environment.

Rothaermel: Ch. 3, p. 83.

Industry structure

The number of firms in a market, how alike their products are, and how easily new firms can enter. Economists use four benchmarks: perfect competition, monopolistic competition, oligopoly and monopoly. Real markets rarely match any benchmark exactly.

In Capstone: Each industry is an oligopoly: a few teams whose prices and capacity decisions affect one another every round.

Rothaermel: Ch. 3, p. 98.

Rivalry among existing firms

The intensity of competition among firms already in an industry, through price, products, promotion and capacity. Rivalry is usually stronger when rivals are similar in size, growth is slow, fixed costs are high and exit is costly.

In Capstone: Rivals are the other teams. Price cuts and capacity additions in a segment change the share and margins of every product there.

Rothaermel: Ch. 3, p. 89.

Bargaining power of suppliers

The ability of suppliers to raise prices, lower quality or limit supply. Supplier power is high when few suppliers serve many buyers, inputs are unique, or switching suppliers is costly.

In Capstone: Input prices are set by the simulation, so supplier power is not a decision variable.

Rothaermel: Ch. 3, p. 89.

Bargaining power of buyers

The ability of customers to push prices down or demand more for the same price. Buyer power is high when buyers are few or large, products are standardized, or buyers can easily switch.

In Capstone: Customers in each segment buy the product that best meets their buying criteria. Price weighs heavily in the Low End.

Rothaermel: Ch. 3, p. 89.

Threat of substitutes

The risk that a different product meets the same need. A substitute need not belong to the same industry. Close substitutes limit the price an industry can charge.

In Capstone: Products in a neighboring segment act as partial substitutes when they fall within a segment’s acceptable range.

Rothaermel: Ch. 3, p. 89.

Complements and complementors

A complement is a product that makes another product more valuable, such as ink for a printer. A complementor is the firm that supplies it. Complements raise customers’ willingness to pay. Firms that cooperate on complements while competing elsewhere are practicing co-opetition.

In Capstone: The simulation does not model complements.

Rothaermel: Ch. 3, p. 105.

Network effects

An increase in a product’s value to each user as more people use it. Telephones and social networks are examples. Strong network effects can make entry difficult and can favor one dominant product.

In Capstone: The simulation does not model network effects.

Rothaermel: Ch. 3, p. 91.

Strategic commitments

Large, long-lived investments that are costly to reverse, such as a new plant. Because they are hard to undo, they signal to rivals how a firm will behave and can discourage entry or price cuts.

In Capstone: Capacity and automation purchases are strategic commitments. They take effect the following round and depreciate over many years.

Rothaermel: Ch. 3, p. 102.

Exit barriers

Costs or obstacles that keep a firm in an industry when it is earning poor returns. They include specialized assets, long-term contracts and managers’ attachment to the business. High exit barriers keep excess capacity in an industry and intensify rivalry.

In Capstone: Capacity bought in one round shapes costs and options for years, so teams tend to keep and use the plant they have.

Rothaermel: Ch. 3, p. 102.

Specialized assets

Assets worth much more in their current use than in any other. A plant built for one product or one customer is an example. Specialized assets create exit barriers and expose their owner to hold-up by a trading partner.

In Capstone: A production line is tied to its product, which is one reason capacity decisions are hard to reverse.

Rothaermel: Ch. 8, p. 327.

Strategic groups

Sets of firms in one industry that follow similar strategies, such as point-to-point and hub-and-spoke airlines. Rivalry is usually most intense within a group.

In Capstone: Teams that concentrate on the same segments with similar products form a strategic group.

Rothaermel: Ch. 3, p. 110.

Mobility barriers

Obstacles that prevent a firm from moving from one strategic group to another. Examples include a different cost structure, a network of routes or an established brand.

In Capstone: Moving a product from one segment to another requires repositioning, time and a different cost profile.

Rothaermel: Ch. 3, p. 113.

Internal analysis — Week 4

Internal analysis

The study of a firm’s own resources, capabilities and activities, to explain why it performs better or worse than its rivals.

In Capstone: The Courier and your annual report describe your company’s position: products, plant, automation, costs and finances.

Resources

The assets a firm can draw on, such as plant, cash, brands, patents and skilled people. Resources are tangible or intangible.

In Capstone: Your plant capacity, automation levels, product portfolio, cash and borrowing capacity are your company’s resources.

Rothaermel: Ch. 4, pp. 131, 133.

Tangible resources

Resources with a physical or financial form, such as buildings, equipment, inventory and cash.

In Capstone: Capacity, automation, inventory and cash.

Rothaermel: Ch. 4, p. 132.

Intangible resources

Resources without a physical form, such as brand reputation, know-how, culture and relationships. Intangible resources are often harder for rivals to copy than tangible ones.

In Capstone: Awareness and accessibility built over several rounds, and your team’s experience in reading the Courier.

Rothaermel: Ch. 4, p. 132.

Capabilities

A firm’s ability to combine and use its resources to get things done, such as designing products quickly or producing at low cost.

In Capstone: Accurate forecasting, timely repositioning and coordinated functional decisions are capabilities.

Rothaermel: Ch. 4, p. 131.

Core competencies

The few capabilities that give a firm an advantage across several products or markets and are difficult for rivals to copy. The concept comes from C.K. Prahalad and Gary Hamel (1990).

In Capstone: A team that repositions products well and on time can apply that skill in more than one segment.

Rothaermel: Ch. 4, p. 126.

Resource-based view (RBV)

The view that differences in firms’ resources and capabilities explain differences in their performance. It assumes that resources are unevenly distributed among firms (heterogeneity) and do not move easily from one firm to another (immobility).

In Capstone: Teams begin with identical companies. Differences in performance come from the resources and capabilities they build afterward.

Rothaermel: Ch. 4, p. 132.

Resource heterogeneity

The assumption that firms in the same industry hold different bundles of resources and capabilities.

In Capstone: After the first rounds, no two teams have the same products, plant or finances.

Rothaermel: Ch. 4, p. 134.

Resource immobility

The assumption that some resources cannot easily be bought, sold or transferred between firms, so differences among firms persist.

In Capstone: Teams cannot buy a rival’s products, plant or experience.

Rothaermel: Ch. 4, p. 134.

VRIO framework

A test of whether a resource or capability can support a competitive advantage. It asks whether the resource is valuable, rare, costly to imitate, and whether the firm is organized to capture its value. Apply it to a specific capability, not to a company as a whole.

In Capstone: Ask whether a capability, such as low labor cost from high automation, passes all four tests. Rivals can buy automation too.

Rothaermel: Ch. 4, p. 134.

Valuable, rare, costly to imitate, organized

The four VRIO questions. A resource is valuable if it lets a firm raise customers’ willingness to pay or lower its costs. It is rare if few rivals have it. It is costly to imitate if rivals cannot readily copy or substitute it. The firm must also be organized, with structure, systems and incentives, to capture its value.

In Capstone: A resource that is rare this round may be common next round if rivals can buy the same thing.

Rothaermel: Ch. 4, pp. 135, 136, 138.

Value chain

The sequence of activities a firm performs to design, make, sell, deliver and support a product. Analyzing the value chain shows where a firm adds value and where its costs arise. The concept comes from Michael E. Porter (1985).

In Capstone: R&D, Marketing, Production and Finance decisions form a simplified value chain.

Rothaermel: Ch. 4, p. 149.

Primary and support activities

Primary activities create and deliver the product: inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities make them possible: firm infrastructure, human resources, technology development and procurement.

In Capstone: Production and Marketing are primary activities. Finance, R&D and the HR and TQM modules support them.

Rothaermel: Ch. 4, pp. 131, 151.

Performance and value — Week 5

Firm performance: three measures

Strategy texts measure performance in three ways: accounting profitability (for example, ROIC), shareholder value (stock returns) and economic value creation (willingness to pay minus cost). Each measure shows something the others miss.

In Capstone: The Balanced Scorecard combines accounting results, stock price and other measures into one score.

Rothaermel: Ch. 5, pp. 179, 183.

NOPAT

Net operating profit after taxes: operating profit (EBIT) less the taxes it would bear, before interest. NOPAT = EBIT × (1 − tax rate). It is the numerator of ROIC.

In Capstone: Calculate it from EBIT and the tax rate on your income statement.

Shareholder value

The value a firm creates for its owners, measured by stock-price gains plus dividends. It reflects investors’ expectations of future profits as well as current results.

In Capstone: Stock price and market capitalization appear in the Courier and count in the scorecard.

Rothaermel: Ch. 5, p. 179.

Total return to shareholders

The return an investor earns over a period: stock-price appreciation plus dividends, as a percentage of the starting price.

In Capstone: Compare your stock price change and dividends paid with those of rivals over the same rounds.

Rothaermel: Ch. 5, p. 179.

Risk capital

Money invested in a firm without a guarantee of repayment, such as shareholders’ equity. Investors provide it in expectation of a return that compensates them for the risk.

In Capstone: Issuing stock raises risk capital. It does not need to be repaid, but it dilutes existing shares.

Rothaermel: Ch. 5, p. 169.

Consumer surplus

The difference between what a customer would be willing to pay and the price actually paid. It is the share of value created that the customer keeps.

In Capstone: A price cut increases consumer surplus by the amount of the cut. It does not by itself create value.

Rothaermel: Ch. 5, p. 185.

Producer surplus

The difference between the price a firm receives and its cost. It is the share of value created that the firm keeps, and it corresponds to its profit margin.

In Capstone: Unit contribution is the simulation’s closest measure of producer surplus per unit.

Rothaermel: Ch. 5, p. 185.

Value capture

The division of value created among customers, the firm and its suppliers. Price determines how much the customer keeps and how much the firm keeps. A firm can create value and still capture little of it.

In Capstone: Ask whether a price move created value or only moved it from your company to customers.

Rothaermel: Ch. 5, p. 185.

Triple bottom line

The evaluation of performance on three dimensions: economic (profits), social (people) and ecological (the planet).

In Capstone: The scorecard counts economic and some employee measures. It does not count effects on communities or the environment.

Rothaermel: Ch. 5, p. 193.

Positioning, trade-offs and value — Week 9

Plan vs. strategy

A plan lists activities, budgets and timetables, mostly about matters a firm controls. A strategy is a theory of how the firm will win against rivals: where it will compete, how, and what it will not do. Roger Martin, former dean of the Rotman School, explains the distinction in A Plan Is Not a Strategy (Harvard Business Review, 2022).

In Capstone: A list of R&D, production and promotion decisions is a plan. The strategy explains why those decisions will beat a named rival in a named segment.

What must be true

The conditions about customers, rivals or costs that would have to hold for a strategy to succeed. Stating them in advance turns a strategy into a theory that results can test.

In Capstone: For example: rivals will not cut Low End prices below a stated level for two rounds.

Good strategy

A strategy that faces the main competitive challenge and addresses it with a coherent approach. Richard Rumelt describes its kernel as a diagnosis, a guiding policy and coherent actions. Goals and slogans alone do not make a strategy.

In Capstone: Diagnose your company’s main problem from the Courier before choosing decisions.

Rothaermel: Ch. 1, p. 7.

Business-level strategy

The choices a firm makes about how to compete in a single market: which customers to serve, what value to offer and how to deliver it at a cost that allows a profit.

In Capstone: Each product’s position, price and cost structure expresses your business-level strategy in its segment.

Rothaermel: Ch. 6, p. 217.

Generic strategies

Michael E. Porter’s four basic ways to compete: cost leadership or differentiation, each pursued across a broad market or within a narrow segment. They are the combinations of a source of advantage (low cost or distinct value) and a competitive scope.

In Capstone: A team may differentiate in the High End and pursue cost leadership in the Low End, but each product needs a coherent position.

Rothaermel: Ch. 6, p. 220.

Competitive scope

The breadth of the market a firm targets. A broad scope serves many customer groups; a narrow (focused) scope serves one segment or niche.

In Capstone: Competing in all five segments is a broad scope. Concentrating on one or two segments is a narrow scope.

Rothaermel: Ch. 6, p. 219.

Stuck in the middle

The position of a firm that pursues both low cost and differentiation without achieving either. Its costs are too high to compete on price and its products too ordinary to command a premium.

In Capstone: A product priced and positioned between segments may suit no segment well.

Rothaermel: Ch. 6, p. 220.

Hybrid strategy

A strategy that combines low cost and differentiation. It succeeds when a firm finds ways to raise value and lower cost at the same time, as in value innovation. Most real firms still face trade-offs.

In Capstone: Capstone rewards doing nearly everything well, which is why a hybrid approach often wins the scorecard. This is a feature of the simulation’s scoring, not a general rule.

Low price vs. low cost

Price is what a firm charges; cost is what it spends to make and sell a unit. A firm can charge a low price with high costs and lose money. Cost leadership depends on low cost, not on a low price.

In Capstone: Compare each product’s price with its material and labor cost per unit before calling it a cost leader.

Experience curve

The decline in unit cost as cumulative output grows and workers and managers learn to do the job better. It is distinct from economies of scale, which depend on the volume produced in a period.

In Capstone: The simulation does not model learning directly. Automation and TQM investments are its main ways to lower unit costs.

Rothaermel: Ch. 6, p. 234.

Value stick

A diagram of value creation from Felix Oberholzer-Gee (Better, Simpler Strategy, 2021). From top to bottom it marks willingness to pay, price, cost and willingness to sell. The gaps show what customers, the firm and its suppliers or employees each keep.

In Capstone: Use it to show whether a decision raised willingness to pay, lowered cost, or only changed price.

Willingness to sell

The lowest price at which a supplier will provide an input, or the lowest pay at which an employee will take a job. The difference between what a firm pays and this amount is the supplier’s or employee’s surplus.

In Capstone: Input costs are fixed by the simulation. The idea applies to real suppliers and employees.

Perceived value

The value customers believe a product offers them, which determines their willingness to pay. Differentiation works by raising perceived value by more than it raises cost.

In Capstone: The customer survey score is the simulation’s measure of how well a product meets customers’ preferences.

Innovation and sustaining advantage — Week 10

Erosion of advantage

The tendency of a competitive advantage to shrink as rivals imitate, substitute or leapfrog it. An advantage lasts only as long as something prevents copying.

In Capstone: A rival can reposition a product to match your best product’s specifications within a round or two.

Imitation

Copying a rival’s product, process or approach. Imitation is the main reason advantages erode. Whether it succeeds depends on what protects the original.

In Capstone: Product specifications, prices and automation levels are visible in the Courier, so rivals can copy them.

Isolating mechanisms

Barriers that protect a firm’s advantage from imitation. The main types are path dependence, causal ambiguity, social complexity and legal protection.

In Capstone: Ask which parts of your position took several rounds to build and which a rival could buy in one.

Rothaermel: Ch. 4, p. 140.

Path dependence

The extent to which a firm’s current options depend on its history. Some capabilities take years to build, and a rival cannot shorten the process simply by spending more.

In Capstone: Awareness and accessibility rise over several rounds of spending and cannot be bought at once.

Rothaermel: Ch. 4, p. 141.

Causal ambiguity

Uncertainty about what causes a firm’s success. When even insiders cannot fully explain it, outsiders cannot copy it.

In Capstone: Rivals see your results in the Courier but not the reasoning behind your decisions.

Rothaermel: Ch. 4, p. 142.

Social complexity

Advantage that rests on relationships, trust and culture within a firm or with outsiders. Such advantages are hard to copy because they cannot be bought or transferred.

In Capstone: A team that works well together has an advantage a rival cannot copy from the Courier.

Rothaermel: Ch. 4, p. 143.

Patent

A legal right that excludes others from making, using or selling an invention for a limited time, usually 20 years from filing. Patents protect an advantage, but rivals can sometimes design around them.

In Capstone: The simulation does not model patents.

Rothaermel: Ch. 4, p. 143; Ch. 7, p. 257.

Innovation: product, process and business model

Innovation is the successful commercial use of a new idea. Product innovation changes what a firm sells. Process innovation changes how it makes or delivers it. Business-model innovation changes how it creates and captures value.

In Capstone: R&D repositioning is product innovation. Automation and TQM are process innovation. The simulation fixes the business model.

Rothaermel: Ch. 7, p. 258.

Product innovation

A new or improved product, such as a better-performing or more reliable model.

In Capstone: Repositioning a product or launching a new one through R&D.

Rothaermel: Ch. 7, p. 271.

Process innovation

A new or improved method of producing or delivering a product, usually to lower cost or raise quality. A process innovation pays off only on the volume a firm actually sells.

In Capstone: Raising automation lowers labor cost per unit. Its payback depends on future unit sales.

Rothaermel: Ch. 7, p. 271.

Disruptive innovation

An innovation that starts with a simpler or cheaper offering for customers that incumbents ignore and later improves enough to take their main market. Clayton Christensen developed the concept.

In Capstone: The simulation does not model disruptive innovation, though a low-cost product can move into a neighboring segment.

Rothaermel: Ch. 7, p. 288.

Value innovation and blue oceans

Value innovation raises customer value and lowers cost at the same time, often by eliminating features customers do not need. A blue ocean is a new market space created this way, away from existing rivals; a red ocean is an existing, crowded market. W. Chan Kim and Renée Mauborgne developed the concepts.

In Capstone: Segments are fixed, so a true blue ocean is not possible. The same reasoning applies to cutting costs customers do not value.

Rothaermel: Ch. 6, pp. 238, 240.

Eliminate–reduce–raise–create (ERRC)

A blue-ocean tool that asks which industry features to eliminate, which to reduce below the industry standard, which to raise above it, and which new features to create.

In Capstone: Apply it to one product: what spending could be reduced without lowering its customer score?

Strategy canvas

A chart that plots how much a firm offers on each factor of competition, compared with its rivals. The line for each firm is its value curve.

In Capstone: Plot price, age, performance, size and reliability for your product against rivals in a segment.

Rothaermel: Ch. 6, p. 242.

Correlation vs. causation

Two measures that move together are correlated. Causation requires showing that one change produced the other, after ruling out other explanations such as market growth or a rival’s mistake.

In Capstone: Sales that rose after a promotion increase may have risen because the segment grew or a rival stocked out.

Lower unit cost vs. proof of effect

Spreading fixed costs over more units lowers cost per unit, but a lower unit cost does not prove that the spending caused the extra sales.

In Capstone: If sales rise after a promotion increase, promotion cost per unit may fall even if the promotion had no effect.

Prediction-vs.-result debrief

A review held after each round: what we expected, what happened, why the two differed, and what we will change. Writing the prediction before seeing the result makes an honest comparison possible.

In Capstone: Record your expected results before submitting decisions, then compare them with the next Courier.

Six-line learning record

A team’s written record for each round: the decision and its trade-off, commitments and funding, the expected result and rival response, the threshold that would change course, the actual result, and what the team learned.

In Capstone: Keep it in your team notes and use it for the Individual Performance Memo.

Intended, emergent and realized strategy

Intended strategy is what a firm plans. Emergent strategy is what arises from unplanned actions, such as a response to a rival or a lucky break. Realized strategy is what actually happens: the intended moves that survive plus the emergent ones. Henry Mintzberg developed the distinction.

In Capstone: Your Strategy Memo was the intended strategy. The Courier shows the realized one.

Rothaermel: Ch. 2, pp. 58, 59.

Corporate strategy and capital allocation — Week 11

Vertical integration

Ownership of more than one stage of an industry’s value chain. Backward integration takes over the supply of inputs; forward integration takes over distribution or sales to the final customer.

In Capstone: The simulation does not allow vertical integration. Each company makes and sells sensors only.

Rothaermel: Ch. 8, p. 323.

Industry value chain

The stages through which a product passes from raw materials to the final customer, often performed by different firms. Vertical integration decisions ask how many of these stages a firm should own.

In Capstone: The simulation covers only the stages from design to sale.

Rothaermel: Ch. 8, p. 323.

Make or buy

The decision whether to perform an activity inside the firm or obtain it from the market. The comparison should include the full cost of each choice, including coordination costs and the risk of hold-up, not just the price.

In Capstone: The simulation does not offer make-or-buy decisions. The reasoning applies to the outsourcing decisions you will meet in business.

Rothaermel: Ch. 8, pp. 313, 329.

Hold-up risk

The risk that, after one party makes an investment specific to a relationship, the other party demands better terms because the investment has little value elsewhere.

In Capstone: The simulation does not model hold-up.

Rothaermel: Ch. 8, p. 317.

Taper integration

Making part of a required input or service inside the firm and buying the rest from outside suppliers.

In Capstone: The simulation does not model taper integration.

Rothaermel: Ch. 8, p. 329.

Franchising

A contract in which a franchisor lets a franchisee use its brand, products and methods in exchange for fees and royalties. It allows rapid growth with the franchisees’ capital.

In Capstone: The simulation does not model franchising.

Rothaermel: Ch. 8, p. 319.

Licensing

A contract that lets another firm use a technology, brand or other asset in exchange for royalties.

In Capstone: The simulation does not model licensing.

Rothaermel: Ch. 8, p. 319.

Strategic alliances

Voluntary arrangements between firms to share resources or capabilities while remaining independent. They range from contracts to equity stakes and joint ventures.

In Capstone: The simulation does not model alliances.

Rothaermel: Ch. 8, p. 318.

Joint venture

A separate company created and jointly owned by two or more firms, which share its costs, control and returns.

In Capstone: The simulation does not model joint ventures.

Rothaermel: Ch. 8, p. 321.

Build, borrow or buy

A framework for obtaining a new capability: develop it internally (build), gain it through a contract or alliance (borrow), or acquire a firm that has it (buy). Laurence Capron and Will Mitchell developed it.

In Capstone: Teams can only build, through R&D, automation and the optional modules.

Rothaermel: Ch. 9, p. 355.

Mergers and acquisitions

A merger combines two firms into one, usually as equals. An acquisition is the purchase of one firm by another. Whether a deal creates value depends on the price paid, the synergies achieved, the cost of integration and the alternatives.

In Capstone: The simulation does not allow mergers or acquisitions.

Rothaermel: Ch. 9, p. 370.

Synergies

Gains from combining businesses that neither could achieve alone, such as shared costs or added sales. Expected synergies are often overestimated in acquisitions.

In Capstone: The simulation does not model synergies between companies.

Diversification

Entry into new products, industries or markets. Related diversification moves into businesses that share resources, capabilities or customers with the existing business. Unrelated diversification moves into businesses with little in common. On average, related diversification has performed better than either single-business or unrelated diversification.

In Capstone: Several sensor products in different segments are product lines in one business, not diversification.

Rothaermel: Ch. 8, pp. 331, 332, 333.

Conglomerate

A firm that owns unrelated businesses under one corporate parent.

In Capstone: The simulation does not model conglomerates.

Rothaermel: Ch. 8, p. 333.

Economies of scope

Cost savings from producing several products with shared resources, such as one brand, plant or sales force.

In Capstone: Each product has its own production line, so the simulation offers few economies of scope.

Rothaermel: Ch. 6, p. 223.

Core competence–market matrix

A two-by-two matrix of existing or new core competences and existing or new markets, used to identify where a firm might grow. It is adapted from Gary Hamel and C.K. Prahalad (1994).

In Capstone: Most moves use existing competences in existing markets. Adding a product in a new segment uses existing competences in a new market.

Rothaermel: Ch. 8, p. 335.

BCG matrix and internal capital markets

The BCG growth–share matrix sorts a firm’s businesses by market growth and relative market share into stars, cash cows, question marks and dogs. It is a heuristic, not a decision rule. An internal capital market is a parent company’s allocation of cash among its businesses; it adds value only if the parent allocates capital better than outside investors would.

In Capstone: Moving cash from a mature product to a new one is a small-scale version of an internal capital market.

Rothaermel: Ch. 8, p. 341.

Coordination and influence costs

Coordination costs are the costs of managing activities inside a firm: searching, negotiating, monitoring and managing. Influence costs arise when managers spend time and effort lobbying for resources.

In Capstone: Time spent agreeing on decisions within a team is a coordination cost.

Rothaermel: Ch. 8, p. 314.

Principal–agent problem

The conflict that arises when an agent, such as a manager, acts on behalf of a principal, such as a shareholder, but has different interests and more information.

In Capstone: The simulation does not model ownership and management separately.

Rothaermel: Ch. 8, p. 316.

Capital allocation

The decision of where to invest a firm’s limited money: in the current business, in new products, or in partnerships and acquisitions. Each choice gives up the others.

In Capstone: Each round you choose among capacity, automation, R&D, promotion, debt repayment and dividends.

Opportunity cost

The value of the best alternative given up when a choice is made. Every use of money, time or capacity has an opportunity cost.

In Capstone: Money spent on new capacity is not available for automation or debt repayment.

Rothaermel: Ch. 5, p. 187.

Cost of capital / hurdle rate

The return investors require for providing a firm’s funds, combining the cost of debt and equity. A hurdle rate is the minimum return a project must earn to be accepted, usually at least the cost of capital.

In Capstone: The simulation charges interest on debt. It does not state a cost of equity.

Payback period

The time it takes for an investment’s cash returns to repay its cost. Simple payback = investment ÷ annual cash saving or inflow. It ignores returns after payback and the time value of money.

In Capstone: An automation investment that saves $2 per unit pays back faster at higher volume.

Contribution, profit and cash

Contribution is sales minus variable costs. Profit is what remains after all expenses, including depreciation, interest and taxes. Cash is money in the bank. A profitable company can run out of cash if inventory, receivables or capital spending absorb it.

In Capstone: A product with positive contribution can still lose money, and a profitable company can still need an emergency loan.

Business models and team judgment — Week 12

Business model

A description of how a firm creates and captures value. It answers why the firm exists (its value proposition), what it offers, who its customers are and how it makes money.

In Capstone: Capstone fixes the business model: every company makes sensors and sells them through the same channels.

Rothaermel: Ch. 5, p. 193.

Revenue model

The way a firm charges customers, such as one-time sales, subscriptions, razor-and-blades (a cheap base product with profitable refills), freemium or pay-per-use.

In Capstone: All products are sold as one-time sales.

Bundling

Selling two or more products together at one price.

In Capstone: The simulation does not model bundling.

Wholesale vs. agency model

In the wholesale model, a producer sells to a retailer at a discount and the retailer sets the retail price. In the agency model, the retailer sells on the producer’s behalf for a commission and the producer sets the price.

In Capstone: The simulation does not model these channel choices.

Business-model innovation

Changing how a firm creates or captures value, such as moving from one-time sales to subscriptions, without necessarily changing the product.

In Capstone: The simulation does not allow business-model innovation.

Rothaermel: Ch. 5, p. 199.

Cognitive biases

Systematic errors in judgment. Common biases in strategic decisions include the illusion of control, escalating commitment, confirmation bias and groupthink.

In Capstone: Review your last round’s decisions for each of the four biases below.

Rothaermel: Ch. 2, p. 65.

Illusion of control

The tendency to overestimate how much one controls an outcome.

In Capstone: Assuming that hitting your forecast will win the segment ignores what rivals will do.

Rothaermel: Ch. 2, p. 65.

Escalating commitment

Continuing to invest in a failing course of action because of what has already been spent on it.

In Capstone: Continuing to fund a product that keeps losing money because of past investment in it.

Rothaermel: Ch. 2, p. 66.

Confirmation bias

Seeking or favoring evidence that supports what one already believes.

In Capstone: Reading only the Courier pages where your company did well.

Rothaermel: Ch. 2, p. 67.

Groupthink

Agreement within a group that comes from the desire for harmony rather than from testing ideas.

In Capstone: Nobody challenges the CEO’s plan.

Rothaermel: Ch. 2, p. 68.

Devil’s advocacy and dialectic inquiry

Devil’s advocacy assigns someone to argue against a proposed decision to expose its weakest assumptions. Dialectic inquiry has a second group develop an opposing plan, and the two are debated before a decision is made.

In Capstone: Before submitting, have a teammate who is not the CEO argue against the team’s main decision.

Rothaermel: Ch. 2, p. 69.

Scenario planning

Preparing for several plausible futures rather than one forecast, and deciding in advance how the firm would respond to each.

In Capstone: Prepare decisions for an optimistic and a pessimistic sales forecast and compare the cash position under each.

Rothaermel: Ch. 2, p. 53.

Global strategy, stakeholders and shared value — Week 13

Global strategy

A firm’s plan for competing across national borders: why it goes abroad, where it goes, and how it enters and operates there.

In Capstone: The simulation does not model international markets. Week 13 uses an outside case.

Rothaermel: Ch. 10, p. 392.

Location advantages

Benefits from performing an activity in a particular country, such as lower costs, better inputs or skills clustered in one place. Rothaermel calls these location economies.

In Capstone: The simulation does not model location.

Rothaermel: Ch. 10, p. 401.

Liability of foreignness

The extra costs a foreign firm bears compared with local rivals, because locals know the customers, rules and people better.

In Capstone: The simulation does not model foreign markets.

Rothaermel: Ch. 10, p. 401.

CAGE distance framework

Pankaj Ghemawat’s framework for the distance between two countries: cultural, administrative (political), geographic and economic. Greater distance usually means higher costs and risks of doing business.

In Capstone: The simulation does not model distance between countries.

Rothaermel: Ch. 10, pp. 405, 407.

Entry modes

The ways a firm can enter a foreign market, from least to most commitment: exporting, licensing or franchising, an alliance or joint venture, and a wholly owned subsidiary (foreign direct investment). More commitment brings more control, capital and risk.

In Capstone: The simulation does not model foreign entry.

Rothaermel: Ch. 10, p. 392.

Standardization vs. local adaptation

The two pressures facing a firm abroad: to cut costs by standardizing its products, and to adapt to local tastes and rules. They yield four strategies: international (little of either), multidomestic (adapt to each country), global standardization (one product for the world) and transnational (standardize the core, adapt the edges). The framework follows Christopher Bartlett and Sumantra Ghoshal.

In Capstone: The simulation does not model foreign markets.

Rothaermel: Ch. 10, pp. 411, 412, 414, 415.

Currency and institutional risk

Currency risk is the chance that exchange-rate changes reduce the value of foreign revenue or raise foreign costs. Institutional risk is the chance that a government changes laws, taxes or rules in ways that harm a foreign firm.

In Capstone: The simulation does not model currencies or governments.

National competitive advantage

Michael E. Porter’s explanation of why some countries produce world-leading firms in particular industries. Demanding local customers, strong suppliers and related industries (clusters), and intense local rivalry drive the advantage.

In Capstone: The simulation does not model countries.

Rothaermel: Ch. 10, p. 419.

Productivity

Output per unit of input, such as units produced per worker-hour. A low wage does not mean a low labor cost per unit if productivity is also low.

In Capstone: Automation raises labor productivity and lowers labor cost per unit.

Rothaermel: Ch. 7, p. 255.

Shared value

Michael E. Porter and Mark Kramer’s idea that a firm can create economic value in ways that also create value for society. Their three routes are new products and markets, higher productivity in the value chain, and stronger local clusters. Not every responsible choice is also profitable.

In Capstone: The scorecard counts profit and market measures. It does not count costs borne by communities or the environment.

Rothaermel: Ch. 5, p. 174.

Sustainable strategy

A strategy that performs well on economic, social and ecological measures together, the overlap of the triple bottom line.

In Capstone: The scorecard measures mainly economic results.

Rothaermel: Ch. 5, p. 193.

Business ethics

The standards of right and wrong that guide decisions in business, beyond what the law requires.

In Capstone: Ask who bears a cost that your score does not count.

Rothaermel: Ch. 12, p. 489.

Implementation and evaluation — Week 14

Organizational structure

The formal arrangement of roles, responsibilities and reporting lines in an organization. Structure determines who decides what and how work is divided and coordinated.

In Capstone: Each team assigns a CEO and owners for R&D, Marketing, Production and Finance.

Rothaermel: Ch. 11, p. 439.

Incentives and rewards

What an organization pays, praises or promotes people for. People follow incentives, so rewards that point in a different direction from the strategy undermine it. Steven Kerr called this “rewarding A while hoping for B” (1975).

In Capstone: The scorecard and course grade are the incentives in the simulation. Ask whether they reward the strategy you intend.

Rothaermel: Ch. 11, p. 468.

Leading and lagging measures

A lagging measure reports a result after it has happened, such as profit or market share. A leading measure changes earlier and gives time to act, such as customer survey score or forecast accuracy.

In Capstone: Watch customer survey scores, awareness and accessibility, and product age against the segment’s ideal as leading measures.

Key performance indicators and dashboards

Key performance indicators (KPIs) are the few measures a firm tracks to judge progress toward its goals. A dashboard presents them together.

In Capstone: The Courier and the scorecard report your company’s main indicators each round.

Goodhart’s law

The principle that a measure loses its value as a measure once it becomes a target, because people manage the number rather than what it represents. Marilyn Strathern’s summary (1997) is the usual statement.

In Capstone: Chasing a scorecard measure can hurt long-term profit.

Mission and vision

A mission states what an organization does and for whom. A vision states what it hopes to become.

In Capstone: Your Strategy Memo stated your company’s aims. Compare them with what your decisions have actually pursued.

Rothaermel: Ch. 2, pp. 44, 50.

Course activities

Capstone Footrace

An individual Capstone exercise in which each student runs a company alone for several rounds. It is scored on the Balanced Scorecard and forms half of the final exam, with InBox XM.

In Capstone: Practice with the same decision routine your team uses: forecast, production, finance and cash check.

Practice rounds and the tournament

Practice rounds let teams learn the simulation without scored consequences. The tournament is the scored competition, in which each round’s decisions are final once processed.

In Capstone: Shortcuts that work in practice, such as replaying a round, are not available in the tournament.

AI critique

Testing an AI-generated recommendation before accepting it: check its numbers, identify its unsupported assumptions and confirm its claims against data. A polished answer is not evidence that it is correct.

In Capstone: Compute the key figures yourself first, then check the AI’s answer against the Courier.

Before submitting decisions

• Check the units and round on the report.
• Explain changes in sales, contribution and net profit separately.
• Reconcile ending cash; inspect inventory and debt repayments.
• Check whether a lower-sales forecast leaves enough cash to meet obligations.
• Confirm R&D completion dates and next-round availability of plant changes.
• Record the assumptions behind your forecast.

Reading the supplied Industry Conditions Report

The ideal spot is the position customers prefer. Calculate it by adding the segment’s offset to its center. For example, the supplied High End Round 0 center is performance 7.5 / size 12.5. Its offset is +1.4 / −1.4, giving an ideal spot of 8.9 / 11.1. Positions drift monthly.

The supplied Low End criteria weight price at 53%, age at 24%, positioning at 16% and reliability at 7%. High End weights positioning at 43%, age at 29%, reliability at 19% and price at 9%. These percentages are scoring weights. They do not measure market share or the change in demand caused by a price change.

The report labels growth rates as beginning rates and instructs students to check the current Courier for the upcoming year. Its price ranges are Round 0 ranges; the guide specifies a $0.50 annual decrease. Always identify the round before using a number.

Saving decisions as a team

Changes remain in your rough draft until you save them to the team decision file. Assign responsibility for each department and save by department to avoid overwriting a teammate’s work. Use Load Last Decision File to load saved team decisions. Check the Decision Summary to confirm who saved each department and when.

Sources and scope

• MANAGMNT 494BI, Week 1, What Is Strategy? (5 slides), and Week 2, Chapter 1: What Is Strategy? (22 slides), Fall 2026. Weeks 3–5 and 9–14 presentations, Fall 2026, for the sections added November 3, 2026. Strategy definitions are teaching summaries, not quotations. Historical company examples in the slides are not treated as current performance claims.
• Harvard Business School, Institute for Strategy and Competitiveness: The Five Forces.
• Frank T. Rothaermel, Strategic Management, 2026 Release (McGraw Hill). Page references are to the printed page numbers.
• Michael E. Porter, Competitive Strategy (1980), Competitive Advantage (1985), and “What Is Strategy?” (1996).

• Archie B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders” (1991).

• Capsim, Capstone 2.0 Team Member Guide: Industry Conditions Report; R&D; Marketing; Production; Finance; and financial statements. Consult especially the guide’s numbered pages 2, 7–12 and 28–29. Accessed September 15, 2026.
• Archived class Courier Excel export: financial statement labels and ratio conventions cross-checked for this guide.
• Industry Conditions Report supplied September 15, 2026: Round 0 buying criteria, segment positions and initial growth rates. Consult the current Courier for subsequent rounds.

Other Writing · For Students

Return to Dictionary All Entries (A–Z) For Students Other Writing Capstone 2.0 Projects