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PostPosted: Sun Aug 24, 2008 1:19 am 

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Managing your Business, Lesson 2:
The Apple forest or the Apple tree?

After my phone call with Bill Gates, I decided to go for a walk. As I was strolling through beautiful downtown Newark, I passed by a farm belonging to my neighbors, the Kropps. As it happened, Rosa and Hall were out talking. Well, arguing really.

"Is this because you're lazy? It's not doing any good, you might as well cut it down."
"Lazy? That's a cheap shot. We need apples, and the stand is doing fine."

Clearly this was none of my business. So gave a tiny wave to be polite and kept moving on.

"Oh, hi Knolls. Hey, would you please tell my darling husband that a bad tree is not good for business?"
"But before you do that, please explain to my lovey wife how to add?"
"How to add? Really? How about I add a new lump to your head?"
"Oh that's real nice."

Yikes. What have I wandered into?

"Hold on, maybe I can help. Start at the beginning. What are we talking about here?"

"OK. As you know, we have a fruit stand. We grow lots of fruit right here. We have a pear tree, and a lemon tree, and a grape tree, and they're all doing fine," Rosa began.

"Umm, I don't think grapes grow on tr...

"And the stand is doing fine. It makes a good profit from everything we put forward. It all seems OK to me," Hall continued.

"Except for one thing. The apple tree isn't doing us any good."

"See that's where I disagree. We can't run a fruit stand without apples. We sell the apples for a profit in the store. Therefore, the apple tree is just as important as our plum tree and our banana tree."

This seemed slightly familiar. "Interesting that you would say this. I was just talking with someone about how you shouldn't try to do everything yourself."

"Oh, but we don't," Rosa corrected me. "We learned that lesson with the peanut tree."

"It's true. Now we buy our peanuts, along with all our nuts, from Hazel down the road. We just focus on a few fruit trees, and apple is one of them."

I nodded as Hall explained their strategy. On the surface it seemed to make sense.

"And that's where we differ. I think growing apples is turning out badly for us. We pay a bunch in water, fertilizer, and pesticides to keep the tree healthy, and it just isn't worth it."

"It's pretty simple," said Hall. "It costs 4 bucks each to make the fruit, and we sell it in the store for 7. That's profit."

"It's not that simple. You're ignoring something very important," said Rosa.

------------

The Question

Who is correct? Is there something else we need to know?? If so, what is it??? Will either of them offer me a tasty nectarine for my trouble???? How many questions will I put in this paragraph?????

Answer this for yourself, then scroll down and read part B to see what this has to do with your Simunomics company.

_________________
The Guide to Managing your Simunomics Business:
Lesson 1: Should Bill Gates cut his own lawn?
Lesson 2: The Apple Forest or the Apple Tree?
Lesson 3: Which Business is Best?
Lesson 7: All is Well - Advantage Mine or Raw Deal?
Lesson 8: The Art of the Business of War


Last edited by Knolls on Tue Sep 02, 2008 3:40 pm, edited 6 times in total.

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PostPosted: Sun Aug 24, 2008 1:20 am 

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The Answer
Savvy readers will of course instantly side with Rosa. This is because, obviously, women are always right. (Or so I'm told.) But the real question is What information was Hall missing?

Here was his thinking:
Make fruit for β 4.00 at the farm.
Sell fruit for β 7.00 in the store.
Profit of β 3.00

And this is an easy trap to fall into. But he skipped a step. Hall forgot to check the market!

If he had, he would seen that other farmers were wiling to sell their apples for β3.75, or even β3.50.

So what they are doing is:
Make for β 4, sell for β 7, profit of β 3.

But what they could do is:
Buy for β3.50, sell for β 7, profit of β 3.50!

And once you know that, it's obvious that Rosa is correct, and the Kropps shouldn't be growing their own apples. Keeping a few rules in mind will help you avoid this mistake:

Rule 1: Judge your buildings separately.
Just because your store made a profit by selling, that doesn't mean your farm made a profit by growing. The fact that you made a profit on the whole process is not enough, because you have to figure out which building is earning the profit and which one is just being busy.

Rule 2: Act like you are selling to yourself.
Hall made the mistake of moving apples from the farm to the store and not caring what the price was. But if you were selling your fruit to someone else's store you wouldn't do that! Think of it this way: you have managers at each property. And they want their division to be as profitable as possible. So the farm isn't going to hand over fruit to the store for free, otherwise it will look like they lost money and that manager would get fired.

It's up to you to figure out what the "fair" price between buildings is. The next lesson (Managing your Business, Lesson 3) will go into all the ways to calculate a fair price. But the golden answer is a simple one: Other Players. (Including NPC.) If Player A wanted to sell you fruit for β 3.50, and Player B wanted to sell you the same fruit for β 4, you would of course take the lower price. A product is worth the lowest price it will sell for.

So if the market says β 3.50, then the fruit you sell to yourself is valued at that same β 3.50.

And that is what the farm has to use when comparing against costs. Not the β 7 that the store gets, because that's the store's profit.

Important! This works both ways! Maybe you will go to the market and see that players are buying fruit for β 7.50. Well in that case, who is making the profit?

The farm! The farm would be making this great fruit, and you are just robbing yourself by selling it in your store. Either building could be the dead weight, and only the wholesale price lets you know. (Wholesale price = what the business pays, as opposed to Retail which is what the public customers pay.)

Rule 3: The market is always right. Even when it's wrong.

Now you might ask yourself why anyone would sell their fruit for β 3.50 when it costs β 4 to make. Well maybe the other players use a special land and you don't. Or maybe they got a really good deal on supplies. Or maybe they're just not as smart as you, because they don't read awesome guides like this one. It doesn't matter. What matters is, they are giving you an opportunity and you should use it.

Most of the time, you will find that the market price is something like β 5.50. So you act like you sell to yourself for β 5.50. What this means:

Farm: Makes for β 4, sells for β 5.50. Profit = β 1.50
Store: Buys for β 5.50, sells for β 7. Profit = β 1.50

And that means both buildings are equally profitable, and everything is happy. Probably this will be the case most of the time. But if it isn't, a smart player will change his strategy to follow the profits.

Also Important! So far I have been saying "market" when I mean wholesale. But that also includes direct sales too. (Invoices.) If you can get a lower price from someone directly, that's even better than the market. So look at B2B ads, talk to suppliers, check the sales listings, and see what prices people are offering.

Exceptions
Sometimes weird things happen. A player decides to clear out his warehouse and dumps a bunch on the market. Or someone decides they need a lot of fruit to make Juice, and buy a bunch at once. If that happens, the prices may make a big jump. But it is often temporary, so you shouldn't go selling your farm to rely on a supply that will dry up.

Still, it is an opportunity, so what I might do is take the time to start doing expansions. If fruit is really cheap for a short while, then I might start buying fruit and since I don't need the farm growing I would start expanding it. Then later when the price of fruit went up, I would have a bigger fruit farm all ready to go.

But this is a tough call, and you have to use your judgement to decide if a price is here to stay, or is just a temporary thing. Look at the price charts and see how the price has been moving in the past. Pay attention to volume as well as price, because that will help you figure out what people are doing.

There are other possible exceptions, but they tend to apply more in borderline cases and only to large, established businesses that are pursuing a larger strategy. We will cover this in a later lesson. And even then you have to know where the market price is to make a good decision.

Conclusion
Even if you cover both sides, you always have to watch the Wholesale price. The market will tell you what a product is worth, and that is what you use to judge a building.


Last edited by Knolls on Tue Sep 02, 2008 3:38 pm, edited 1 time in total.

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PostPosted: Sun Aug 24, 2008 1:21 am 

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The Lesson to Take Away
There are two important terms that describe this lesson: "Opportunity Cost" and "Division of Labor"

Outsourcing & Insourcing
Outsourcing frequently gets a bad rap from politicians or the media, who have the option of taking a narrow view on it. But seeing it from a high-level viewpoint of responsibility, it frequently marks the better path for your business.

Back in the day, a big business would try to consolidate as much as possible in a major headquarters. Sales would want to be close to Accounting, so they could share information about billing the customers. Processing would need to be near design, so the process could be watched for correctness. And also near shipping, so the products could be removed in an orderly fashion and correctly packed for their destinations. Of course shipping would also need to be near accounting, so the bills and the products were synched up. And so they would build these huge multi-department regional headquarters to keep information and control in a centralized place.

Well technology has advanced and that type of grouping isn't necessary anymore. Coworkers don't have to cluster together to share files, since one computer can be easily accessed anywhere in the world. Design engineers don't have to be present on the factory floor because designs (and questions, and modifications) can zip anywhere instantly. Processes are built with automated checkpoints to detect flaws. And precision tools allow custom-made machinery to be replicated easily in any location. As a result the historical reasons for grouping everything together don't make sense anymore.

Instead, work is getting re-grouped by skillset. A business doesn't need to hire and train its own accountants when there are specialized firms with skills at the ready. Why buy an expensive machine and learn how to operate it if you only need one day a month? You just find another business who specializes in it and rent their services that one day. And why have your own trucks driving all over the country when you can hand your packages off to UPS or Federal Express to deliver in trucks that are already making deliveries?

Outsourcing is when a business realizes that instead of paying a lot to do everything itself, it can take the inefficient pieces and give that work to someone else. And it works in your Simunomics business too. Don't insist on growing Fruit if other suppliers and the market price show that someone else will do it cheaper.

Insourcing is the opposite, doing something yourself instead of hiring out. It tends to be done not for cost but for quality control. (For example, if you found that customers were complaining about customer service, you might decide that it's so important it needs to be handled by people who know your product the best.) Similarly, it's a decision we can only make when we look at the pieces of our business separately and ask, on a case-by-case basis, "is this a smart thing to do?"

_________________
The Guide to Managing your Simunomics Business:
Lesson 1: Should Bill Gates cut his own lawn?
Lesson 2: The Apple Forest or the Apple Tree?
Lesson 3: Which Business is Best?
Lesson 7: All is Well - Advantage Mine or Raw Deal?
Lesson 8: The Art of the Business of War


Last edited by Knolls on Thu Sep 18, 2008 9:29 am, edited 2 times in total.

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PostPosted: Sun Aug 24, 2008 5:54 pm 

Joined: Jun 26, 2008
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Obviously Rosa is right. If you have an appliance store, a grocery store, and a car dealer and the grocery store doesn't make any money then you don't say "Oh, well, uhm... we make enough money to cover the grocery loses from our other businesses". If you just sold the grocery store to some sap down the road then you would stop losing money and you could put the sale money toward a profitable business.


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PostPosted: Mon Aug 25, 2008 5:25 am 

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I'm sure you know the answer anyway Tecko, but as I began to write part 2 I realized that I actually had a better cliffhanger question to ask. So I rewrote part 1 a bit. Now if you think Rosa is right, you also have to say information she's talking about.


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PostPosted: Mon Aug 25, 2008 5:16 pm 

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Well, maybe Rosa is also saying that the apple tree makes less fruit then a grape tree so overall it has a bad ROI and they should tear it down or whatever you do to trees then make a more productive tree and maybe other trees are more productive and have a lower cost meaning that apples are bad.


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PostPosted: Mon Aug 25, 2008 10:32 pm 
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Bellerive Chamber of Commerce
I think I know, but I'm actually kind of excited to find out. I think your style is great, and since it seems your series is more about high-level management I think I might even learn something if you continue!

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"Please let me make my own mistakes? 'cause I really like to learn stuff." --Wise words from Hillside Cottage

Please read the rules. Have information? Why not write a guide?


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PostPosted: Tue Sep 02, 2008 3:37 pm 

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Part 2 is up.


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PostPosted: Tue Sep 02, 2008 4:48 pm 

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The guide gives a clear concept for those who just joined the business. It is very useful and points out one of the most people who made a wrong thought. Though the sentense I like most makes me throw away every other thing you said:

Knolls wrote:
because they don't read awesome guides like this one


Oh joking ofc. A good article. Keep this goes on!

:smile:

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PostPosted: Thu Sep 18, 2008 9:32 am 

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After dragging my heels a bit, I finally finshed up the take-away lesson section. Hopefully I'll get to part 3 before too long because I think that's where the math and the real lessons start.


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