Definitions FAQs

Click on a link below to access that FAQ (frequently-asked question) topic.


Bandwidth
Calendar Time
Cash Flow and Revenue Realization
Customer Satisfaction
Depreciation
Dividends on the Balance Sheet
Loans
Marketable Securities
Market Share of a Firm
Non-Operating Income
Product Costs
Product Quality Perceptions
Raw Materials, Set-Top Box Configurations, and Product Quality
Reconciling Our Sales With Market Demand
Reconfiguration Timing
Retail Prices in Channel 1
Retail- and Direct-Channel Prices [LINKS products simulations with multiple channels]
Return-on-Assets
Sales Forecasts
Stock Prices
Top-Box Score
Taxes
Taxes When a Firm Is Unprofitable
Transportation Costs
Unfilled Orders
Warranty Costs




Bandwidth

“How should I think about bandwidth in my set-top box product configurations? What does 'terahertz' really mean?”

Bandwidth is a 'more-is-better' product attribute. Terahertz is just a industry-specific generally-accepted metric describing the bandwidth performance of a set-top box product. Customers will always prefer more bandwidth, but they might or might not prefer it enough to offset your additional costs of engineering in higher bandwidth levels to your products. You need to conduct appropriate research to assess customer preferences for higher bandwidth levels and then compare that preference to your input costs of providing higher bandwidth.

revised 08/18/2005
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listed under "Configuration"
listed under "Definitions"





Calendar Time

“How much calendar time does each decision round in LINKS represent?”

As described in the LINKS participant's manual, each LINKS decision round corresponds to one quarter.

revised 08/18/2005
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Cash Flow and Revenue Realization

“Our current cash balance is about $3,000,000. Are our costs expensed at the beginning of the next simulation round or the end of the next simulation round? The answer influences our marketing spending decisions, since we obviously don't want to spend money before we have it.”

Assume that all revenues and costs occur uniformly throughout a simulation round. For example, within a 30-day month, about 1/30 of a month's revenues and costs are attributable to each day's operations. Thus, you do have revenue coming in regularly throughout the simulation round to pay for your various within-round operating costs. Thus, there's no need to worry about within-round cash flow issues with regard to covering your operating costs and within-round marketing spending. Also, note that you do have access to loans, as necessary, to cover shortages in cash.

revised 01/02/2007
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listed under "Definitions"
listed under "Financial and Operating Reports"





Customer Satisfaction

“What drives customer satisfaction for set-top boxes?”
Customer satisfaction is mostly driven by service level. Unfilled orders are another (presumably less important) driver of customer satisfaction. Please view this video for more details.

revised 04/29/2018
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listed under "Definitions"
listed under "Performance Evaluation"
listed under "Research Studies"
listed under "Service"





Depreciation

“I don’t see depreciation in the LINKS profit-and-loss statements. Where is depreciation reported in the LINKS financial statements”

Depreciation is not reported directly in the LINKS profit-and-loss statements. Depreciation is included within the set-top box products' variable manufacturing costs ('Product Costs'). So, depreciation is included indirectly within the variable manufacturing costs ('Product Costs') reported on the LINKS profit-and-loss statements.

revised 03/23/2007
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listed under "Definitions"
listed under "Financial and Operating Reports"





Dividends on the Balance Sheet

“Why are dividends reported as negative numbers on our Balance Sheet?”

Dividends are reported as negative numbers on the Balance Sheet because they represent cash outflows that effectively reduce owners' equity.

revised 08/18/2005
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listed under "Definitions"
listed under "Financial and Operating Reports"





Loans

“How are loans repaid? Is it possible to accelerate loan repayment?”

Excess cash at the end of any simulation round is used to retire existing loans. If there are no outstanding loans, excess cash is invested in marketable securities. These operations are conducted automatically by the LINKS software with no intervention required. Given this automation situation, accelerated repayment of loans does not exist. Loans are already paid off as rapidly as available cash permits.

revised 08/19/2005
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listed under "Definitions"
listed under "Financial and Operating Reports"





Marketable Securities

“How do Marketable Securities work in LINKS?”

Cash in excess of 10% of Revenues is automatically invested in short-term (1-quarter) Marketable Securities. Interest earned on Marketable Securities is reported as Non-Operating Income on the Corporate P&L Statement in the following quarter.

Marketable Securities are automatically converted to Cash during the next quarter, and then possibly re-issued if Cash again exceeds 10% of Revenues at the end of the next quarter. See the process flow in the Cash Flow Analysis Report for the details of the initial conversion to Cash and subsequent re-issuing of Marketable Securities.

revised 12/13/2012
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listed under "Definitions"
listed under "Financial and Operating Reports"





Market Share of a Firm

“How is a firm’s market share determined? Change in market share is one of the KPIs (Key Performance Indicators) on which our LINKS firm is accessed.”

Market share of a firm equals a firm’s sales volume to final end-user customers (across all products in all channels and all regions) divided by industry sales volume to final end-user customers (across all firms' products in all channels and all regions).

Not being present in some channels and/or regions obviously reduces potential sales volume and, therefore, potential market share. However, profitability (net income to revenue, another LINKS Key Performance Indicator) is more important than sales volume or market share.

revised 03/01/2015
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Non-Operating Income

“How is the non-operating income credit/charge calculated on the Corporate P&L Statement?”

Positive [negative] non-operating income means that there were marketable securities [loans] on the previous round's Balance Sheet. Your firm receives or pays interest based on the previous round's marketing securities and loans positions. If your firm has marketable securities this round, you'll receive an interest payment next round; if your firm has loans this round, you'll pay interest next round.

revised 01/03/2007
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listed under "Definitions"
listed under "Financial and Operating Reports"





Product Costs

“What's included in Product Costs on our P&L statements?”

Product Costs are the per-unit costs of finished goods inventory times the number of units sold. If ending inventory exists, you can see this per-unit cost on your firm’s Balance Sheet.

Note that finished goods inventory isn’t a cost (in a P&L sense) until the finished goods inventory is sold. Before sales occur, finished goods inventory is an asset, reported on a firm’s Balance Sheet.

Product volumes and associated dollar values are tracked separately throughout your inventory pipeline. To obtain the relevant units and dollar values of inventory available for sale, your current-round production is added to your beginning inventory level. The average dollar-value of your beginning inventory and your current-round production may differ, due to varying procurement ordering patterns from sub-assembly component suppliers.

When you sell products, the associated volumes are withdrawn from inventory at their current average values. Current-round product costs will normally only equal your calculated variable costs if your beginning inventory of a product in a round is zero. With beginning inventory of a product being equal to zero, all units produced this round are costed at the standard variable costs in effect this round, so this is the only time when per-unit Product Costs are equal to your calculation of current-round variable costs.

revised 09/11/2013
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listed under "Definitions"
listed under "Financial and Operating Reports"





Product Quality Perceptions

“Why does product 6-1 have a lower product quality rating than product 7-1 in region #1?”

Product quality perceptions are based on customer surveys, so there will be some natural statistical variability in such surveying results. This could explain minor differences in product quality ratings for products 6-1 and 7-1 in region #1. However, the main drivers of product quality perceptions are configuration and failure rates. There are two possible answers to your question: products 6-1 and 7-1 have different configurations or products 6-1 and 7-1 have identical configurations but different failure rates due to varying sub-assembly component suppliers being used. Are you really certain that products 6-1 and 7-1 have identical configurations? Perhaps the competitor's product has been reconfigured so it is no longer the same configuration as your product.

revised 04/18/2001
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listed under "Definitions"
listed under "Research Studies"





Raw Materials, Set-Top Box Configurations, and Product Quality

“What's the best level of alpha and beta to use in set-top box configurations? How do our alpha and beta levels affect the quality of our set-top box products?”
You’ll need to conduct appropriate research to assess customers’ preferences for alpha and beta in set-top boxes. Please view this video for details.

revised 04/26/2018
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listed under "Configuration"
listed under "Definitions"
listed under "Procurement"
listed under "Product Development"
listed under "Reconfigurations"
listed under "Research Studies"





Reconciling Our Sales With Market Demand

“If we multiply market share for a particular product in a particular channel and region by total industry sales, we don’t seem to get the same number as our current sales volume. What’s going on?”
Please view this video which provides relevant background information about reconciling reported sales volumes and market shares.

revised 05/03/2018
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listed under "Definitions"
listed under "Financial and Operating Reports"
listed under "Forecasting"





Reconfiguration Timing

“When do reconfigurations occur?”

Reconfiguration requests are processed at the beginning of a simulation round, so reconfigurations occur "immediately" (i.e., before the beginning of the next simulation round).

revised 10/20/2004
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listed under "Definitions"
listed under "Reconfigurations"





Retail Prices in Channel 1

“Why do retail prices in channel 1 change from round to round even though our manufacturer price stays constant?”

Retailers in channel 1 markup manufacturers' prices in arriving at final end-user prices (i.e., retailers' prices). These markup rates vary by region. Retailer markups should be regarded as averages across all retailers. Thus, there will inevitably be some variation through time in reported retailers' prices even if the underlying manufacturers' prices remain constant through time. In addition, retailers' prices are based on surveys of end-user customer prices in channel 1, adding another source of statistical variability to reported retailers' prices.

revised 08/18/2004
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listed under "Definitions"
listed under "Generate Demand"
listed under "Research Studies"





Retail- and Direct-Channel Prices [LINKS products simulations with multiple channels]

“What relationships should exist between retail-channel prices and direct-channel prices? For example, should direct-channel prices always be less than retail-channel prices?”

Manufacturers' prices to channel #1 are the retailers’ costs. Retailers markup manufacturer prices (i.e., the retailers’ cost) to their customers, the final end-user set-top box customers. Manufacturers' prices to direct channels (channels other than channel #1) are to final end-user set-top box customers. So, manufacturers' prices will generally be higher in direct channels than in channel #1 to allow for the retailers' markups in channel #1, assuming that a manufacturer’s target final end-user prices are meant to be similar in all channels.

It's difficult know whether the comparable final end-user prices for set-top box products in channel #1 and in direct channels are predictable as to which would be relatively higher or lower. It seems reasonable to expect that retailers would observe brand-comparable prices in competitive direct channels in their region and would not feel positively inclined toward manufacturers who undercut retailers’ prices in a direct channel.

But, the larger issue may be channel-set segments. Some customers only purchase set-top boxes through a specific channel. Other customers consider all brand options in all channel options when making purchases. So, if the channel-specific segments are large compared to the joint-channel segment, then there wouldn't be much cross-channel competition.

revised 12/13/2008
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listed under "Definitions"
listed under "Financial and Operating Reports"
listed under "Generate Demand"
listed under "Research Studies"





Return-on-Assets

“What's the definition of 'Return-on-Assets' as used in the Performance Evaluation Reports?”

Return-on-Assets is defined in the LINKS participant's manual. In calculating Return-on-Assets, use last quarter's Total Assets (from last quarter's Balance Sheet) and this quarter's Net Income (from this quarter's Corporate P&L Statement) and then annualize the calculated Return-on-Assets figure.

For example, if last quarter's Total Assets was $120,000,000 and this quarter's Net Profits is $6,000,000, then this quarter's ROI is 6,000,000/120,000,000 which equals 5% for this quarter. Then, you'd need to multiply this by 4 to translate it into annualized ROI (20%, in this example).

revised 02/20/2007
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listed under "Definitions"
listed under "Financial and Operating Reports"
listed under "Performance Evaluation"





Sales Forecasts

“Are sales forecasts what customers purchase or what dealers are forecast to purchase from set-top box manufacturers?”

The answer depends on the channel. For the retail channel (channel #1), your sales forecast represents your best estimate of what retailers will order from you. For a direct-to-customer channel (for example, channel #2), your sales forecast represents your best estimate of what final end-users buying direct will purchase.

revised 08/18/2005
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listed under "Definitions"
listed under "Forecasting"





Stock Prices

“How are stock prices determined?”

Stock prices presumably reflect investors’ expectations of a firm’s future financial performance. Investors’ expectations presumably are based on a firm’s current and recent-past financial performance along with other factors like operational efficiency. In addition, industry-wide financial performance might also influence a firm’s stock price, since industry-wide performance reflects long-run financial potential for all firms in an industry. There’s also likely to be a degree of randomness in the formation of investors’ expectations.

revised 03/29/2004
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listed under "Definitions"
listed under "Performance Evaluation"





Taxes

“How are Taxes calculated?”

Taxes are based on "net" Operating Income (i.e., Operating Income adjusted for Non-Operating Income and Patent Royalties). Note that Non-Operating Income and Patent Royalties can be positive, negative, or zero.

Non-Operating Income is the sum of interest received (for Marketable Securities) and interest paid (for Loans); Patent Royalties is the sum of royalties paid and royalties received.

Specifically, Taxes in LINKS are calculated as follows: Taxes = 50% of {Operating Income plus Non-Operating Income plus Patent Royalties}

Taxes will always equal Net Income since the "other 50%" of "{...}" is, by definition, Net Income. Taxes will be a varying percentage of Operating Income, depending on the relevant values for Non-Operating Income and Patent Royalties.

revised 07/20/2005
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listed under "Definitions"
listed under "Financial and Operating Reports"





Taxes When a Firm Is Unprofitable

“When a firm loses money, do taxes still exist?”

If operating income plus non-operating income (interest from marketable securities plus interest paid due to loans plus the sum of all patent royalties paid and received) is negative, the firm is unprofitable. Such a loss generates “negative” taxes (i.e., a tax credit) which results in a reduction in the size of the final, post-tax net income, since the tax credit effectively subsidizes the operating income loss. In such a situation, taxes will be a positive number, reflecting the tax credit. (Normally, taxes is a negative number representing the taxes paid. But, taxes are only paid if the firm is profitable.)

revised 06/21/2009
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listed under "Definitions"
listed under "Financial and Operating Reports"





Top-Box Score

“What's a 'top-box score'?”

A top-box score is an overall summary measure of customer survey responses to a rating scale. For example, suppose that a four-point rating scale is used to measure customer satisfaction. The points on this rating scale might be described by the verbal anchors "Poor," "Fair," "Good," and "Excellent." Rather than translate these verbal anchors into the numeric scale 1, 2, 3, and 4 and then calculate the associated rating-scale average for the survey responses, we might focus on the percentage of survey respondents who checked the top-box on this four-point rating scale (i.e., the percentage of survey respondents who checked "Excellent"). If 32.1% of survey respondents checked the top-box ("Excellent" in this case), then its top-box score would be 32.1%.

Rating-scale averages summarize all survey responses while top-box scores focus on the extreme upside of rating scales. Thus, top-box scores are about customer delight not merely satisfaction. Extreme beliefs drive customer behavior and top-box scores focus on measurement of the extreme upside of customer rating scales. Note, also, that customer satisfaction and product/service perception measures are normally only useful in comparison to other similar measures, either at earlier points in time or for competitive products/services at the same point in time.

revised 06/14/2006
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listed under "Definitions"
listed under "Research Studies"





Transportation Costs

“Do transportation costs depend on the type of set-top box product or on its configuration?”

No.

revised 08/18/2005
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listed under "Definitions"
listed under "Transportation"





Unfilled Orders

“Can unfilled orders exist?”

No. Your manufacturing plant automatically produces sufficient product to meet all customer orders.

revised 04/20/2005
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listed under "Definitions"
listed under "Manufacturing"





Warranty Costs

“What is the full cost of providing set-top box warranties?”

The full cost of warranties to set-top box manufacturers is the sum of three elements:

  1. The direct warranty cost, $8+3(W*W), where W is the warranty length in periods.
  2. The indirect costs that arise when sub-assembly components fail (set-top box manufacturers provide replacement parts without charge to customers when sub-assembly components fail in the field within the warranty-period included with the original product purchase).
  3. The indirect costs associated with call center activity when customers require within-warranty service/support in connection with sub-assembly component failure within the warranty-period protection included with the original product purchase.

revised 05/31/2006
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listed under "Definitions"
listed under "Product Development"




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