Participant Handbook for Strategic Marketing - Durable Consumer Goods - PDF

PARTICIPANT HANDBOOK STRATEGIC MARKETING – DURABLE CONSUMER GOODS Jean-Claude Larréché The Alfred H. Heineken Chaired Professor of Marketing INSEAD...

PARTICIPANT HANDBOOK STRATEGIC MARKETING – DURABLE CONSUMER GOODS Jean-Claude Larréché The Alfred H. Heineken Chaired Professor of Marketing INSEAD Hubert Gatignon The Claude Janssen Chaired Professor of Business Administration and Professor of Marketing INSEAD You do not need to print this document, but if you wish to do so, you can save paper by choosing “multiple pages per sheet” and printing double-sided. Copyright © StratX 2023-08-17 i TABLE OF CONTENT I. Introduction to the Markstrat Challenge _________________________________________________ 1 1. Understand your role_______________________________________________________________________________ 1 2. Your objective ____________________________________________________________________________________ 1 3. Your team ________________________________________________________________________________________ 1 4. Getting prepared __________________________________________________________________________________ 2 5. Questions & Technical Support _______________________________________________________________________ 2 II. Overview of the Markstrat World _______________________________________________________ 3 1. Sonite Products ___________________________________________________________________________________ 3 2. Vodite Products ___________________________________________________________________________________ 4 3. Naming Conventions _______________________________________________________________________________ 5 4. Sonite Customers __________________________________________________________________________________ 5 5. Vodite Customers__________________________________________________________________________________ 6 6. Distribution Channels ______________________________________________________________________________ 6 7. Economic Environment _____________________________________________________________________________ 7 III. Managing Your Firm __________________________________________________________________ 8 1. Decision rounds ___________________________________________________________________________________ 8 2. Product, Brand and Base Project______________________________________________________________________ 8 3. Production _______________________________________________________________________________________ 9 4. Pricing __________________________________________________________________________________________ 10 5. Advertising ______________________________________________________________________________________ 10 6. Commercial Team ________________________________________________________________________________ 11 7. Market Research Studies ___________________________________________________________________________ 12 8. Research & Development __________________________________________________________________________ 12 9. Productivity Gains ________________________________________________________________________________ 14 10. Marketing as a Profit Center ________________________________________________________________________ 15 IV. Understanding Your Annual Report ____________________________________________________ 17 1. Market & Competitive News ________________________________________________________________________ 17 2. Company Results _________________________________________________________________________________ 19 3. Market Research Studies ___________________________________________________________________________ 24 4. Tools ___________________________________________________________________________________________ 34 V. User’s Guide to the Software __________________________________________________________ 37 1. Organizing working sessions ________________________________________________________________________ 37 2. Starting a working session (log in)____________________________________________________________________ 37 3. Closing a working session (log out) ___________________________________________________________________ 38 4. Markstrat Layout & Navigation ______________________________________________________________________ 38 5. Team Identity Decision ____________________________________________________________________________ 39 6. Making Brand Portfolio Decisions ____________________________________________________________________ 39 7. Making Marketing Mix Decisions ____________________________________________________________________ 41 8. Ordering Market Research Studies ___________________________________________________________________ 42 9. Making Commercial Team Decisions _________________________________________________________________ 43 10. Making Research & Development Decisions ___________________________________________________________ 44 11. Initial decisions ___________________________________________________________________________________ 47 12. Checking your decisions ___________________________________________________________________________ 48 VI. Positioning and Research & Development _______________________________________________ 50 1. Assessing Perceptions and Preferences _______________________________________________________________ 50 2. Prediction of Ideal Points___________________________________________________________________________ 51 3. Matching product attributes with position ____________________________________________________________ 52 Copyright © StratX 2023-08-17 ii  4. Situations where repositioning is required _____________________________________________________________ 54 5. Repositioning strategies ___________________________________________________________________________ 55 6. Research & Development __________________________________________________________________________ 56 VII. Users’s Guide to the Marketing Plan Tool _______________________________________________ 59 1. Step 1 – Segment size estimates _____________________________________________________________________ 59 2. Step 2 – Market share estimates_____________________________________________________________________ 60 3. Step 3 – Brand sales _______________________________________________________________________________ 60 4. Step 4 – Brand contribution ________________________________________________________________________ 61 5. Step 5 – Firm Profit and Loss statement _______________________________________________________________ 63 Copyright © StratX 2023-08-17 iii TABLE OF FIGURES Figure 1 – Sonite main physical characteristics _________________________________________________ 4 Figure 2 – Vodite main physical characteristics _________________________________________________ 5 Figure 3 – Inventory and production plan versus market demand __________________________________ 9 Figure 4 – From retail price to unit contribution _______________________________________________ 10 Figure 5 – Available market research studies__________________________________________________ 12 Figure 6 – Productivity gains _______________________________________________________________ 15 Figure 7 – Sample Loan Schedule ___________________________________________________________ 16 Figure 8 – Market & Competitive News – Industry dashboard (part 1) _____________________________ 18 Figure 9 – Market & Competitive News – Industry dashboard (part 2) _____________________________ 18 Figure 10 – Market & Competitive News – Brand Characteristics _________________________________ 19 Figure 11 – Company dashboard ___________________________________________________________ 20 Figure 12 –Financial Report – P&L statement _________________________________________________ 21 Figure 13 – Financial Report – Brand contribution _____________________________________________ 21 Figure 14 – Production report – Sales, production & inventory ___________________________________ 22 Figure 15 – R&D report – Sample chart & explanations _________________________________________ 23 Figure 16 – Market Research – Industry Benchmarking _________________________________________ 25 Figure 17 – Market Research – Consumer Survey – Average Awareness ____________________________ 25 Figure 18 – Market Research – Consumer Survey – Purchase intentions by segment__________________ 26 Figure 19 – Market Research – Consumer Survey – Shopping habits _______________________________ 26 Figure 20 – Market Research – Consumer Panel – Market shares _________________________________ 26 Figure 21 – Market Research – Consumer Panel – Market shares _________________________________ 27 Figure 22 – Market Research – Distribution Panel – Channel sales ________________________________ 27 Figure 23 – Market Research – Distribution Panel – Distribution coverage __________________________ 27 Figure 24 – Market Research – Semantic Scales – Brand perceptions ______________________________ 28 Figure 25 – Market Research – Semantic Scales – Ideal values ____________________________________ 28 Figure 26 – Market Research – Semantic Scales – Importance of characteristics _____________________ 29 Figure 27 – Market Research – MDS Study – Perceptual map (Economy X Performance) ______________ 30 Figure 28 – Market Research – MDS Study – Influence of Product Characteristics ____________________ 30 Figure 29 – Market Research – Competitive Advertising – Brand expenditures ______________________ 31 Figure 30 – Market Research – Competitive Commercial Team – Size by firm and channel _____________ 31 Figure 31 – Market Research – Commercial Team Experiment ___________________________________ 32 Figure 32 – Market Forecast – Market Size broken down by Consumer Segment _____________________ 32 Figure 33 – Conjoint Analysis – Relative importance of attributes _________________________________ 33 Figure 34 – Conjoint Analysis – Utility charts __________________________________________________ 33 Figure 35 – Tools – Charting tool ___________________________________________________________ 35 Figure 36 – Tools – Company Scorecard (excerpt) ______________________________________________ 36 Figure 37 – Starting a working session _______________________________________________________ 38 Figure 38 – Markstrat home _______________________________________________________________ 38 Figure 39 – Team Identity decision __________________________________________________________ 39 Figure 40 – Brand portfolio decisions – Home _________________________________________________ 39 Figure 41 – Brand portfolio decisions – New brand launch _______________________________________ 40 Figure 42 – Brand portfolio decisions – Brand modification or withdrawal __________________________ 40 Figure 43 – Marketing mix decision screen ___________________________________________________ 42 Figure 44 – Market research study decision form ______________________________________________ 43 Figure 45 – Commercial Team decision screen ________________________________________________ 44 Figure 46 – R&D decisions – Home __________________________________________________________ 44 Figure 47 – R&D decisions – Shelve Project ___________________________________________________ 45 Copyright © StratX 2023-08-17 iv Figure 48 – R&D decisions – Unshelve Project _________________________________________________ 46 Figure 49 – R&D decisions – Launch a new R&D project _________________________________________ 46 Figure 50 – Decision tools – Budget overview _________________________________________________ 48 Figure 51 – Decisions – Errors & Warnings ___________________________________________________ 49 Figure 52 – MDS Study – Ideal value evolution – Table __________________________________________ 51 Figure 53 – Semantic Scales Study – Ideal value evolution – Graph ________________________________ 52 Figure 54 – Relationship between attributes and perceptions – Semantic scales study ________________ 53 Figure 55 – Relationship between attributes and perceptions – MDS study _________________________ 54 Figure 56 – Interface with R&D department __________________________________________________ 58 Figure 57 – Marketing Plan – Segment size estimates___________________________________________ 60 Figure 58 – Marketing Plan – Market shares estimates _________________________________________ 60 Figure 59 – Marketing Plan – Market sales estimates ___________________________________________ 61 Figure 60 – Marketing Plan – Brand contribution statement _____________________________________ 62 Figure 61 – Marketing Plan – Company P&L statement _________________________________________ 63 Copyright © StratX 2023-08-17 v I. INTRODUCTION TO THE MARKSTRAT CHALLENGE Welcome to Markstrat and congratulations on your new position! You and the other members of your team have just been recruited by a large corporation to manage the marketing department of one of its divisions. Coming from a different industry, your team has no experience in the Markstrat world. You will compete with several other firms to market two types of durable goods to consumers. 1. Understand your role During this exercise, you will be responsible for formulating and implementing the long-term marketing strategy of your division. In particular, you and your team members will have to: Work in a highly competitive market; Target selected consumer segments and position your products; Interface with the R&D department to design and develop new products; Prepare the launch of new products, improve, maintain or withdraw existing ones; Interface with the production department to specify production planning; Make marketing mix decisions (pricing, advertising, …) for each of your brands; Decide on the size and priorities of your commercial team; Order market research studies to get up-to-date information for decision making. 2. Your objective Your objective over the next years is to maximize the Share Price Index (SPI) of your division. The SPI takes into account several indicators including net contribution generated, product market share, your ability to grow the organization’s revenues and the quality of projects successfully completed. 3. Your team An important aspect of the Markstrat Challenge is that you will be part of a team. It is helpful to establish a good working relationship with your teammates and to organize your work with them. Here are questions to take into consideration: Will you work non-stop on your Markstrat exercise for 3 hours from start to finish or will you spread your work over several days? Will all team members meet when they make decisions or are you geographically dispersed? Will all team members be involved in all decisions or will you assign responsibilities (R&D, Production, Finance, etc.) to team members, each making decisions on his or her own? Regarding the last point, try to avoid letting each member concentrate solely on his/her area of professional expertise. Initially, we strongly recommend that each team member be involved in all discussions for everyone to have the same understanding of the business situation. As the simulation evolves, your team will develop a common understanding of the strategic issues. In parallel, the management of the organization will become increasingly complex. At some point, the members of the team can begin focusing on a specific area of responsibility. By following this process, not only will you maximize your internal resources, but also ensure that everyone benefits equally from the Markstrat experience. Copyright © StratX 2023-08-17 1 4. Getting prepared Preparation includes reading the handbook and trying out the Markstrat software with the Preview data. A. Pre-Reading It is highly recommended to read this handbook carefully prior to the beginning of the Markstrat Challenge. If you do not, you may put your team at a disadvantage. Unless otherwise instructed by your professor, you should read the following four chapters prior to Round 1: Introduction to the Markstrat Challenge Overview of the Markstrat World Managing Your Firm Understanding Your Annual Report In these four chapters, you will discover what your new challenge and objective is, what the Markstrat world looks like in term of products, consumers, distribution channels, competitors, etc.; how your company operates and what decisions you will have to make in order to run it through the next 5 to 10 years, and what information will be made available to you in your annual report. You are then advised to read the last two chapters prior to Round 2: Positioning and Research & Development Users’s Guide to the Marketing Plan Tool There, you will learn in more detail: how to use the semantic scales and the multidimensional studies to reposition brands; how and when to reposition brands or to launch new ones and how the R&D and Marketing departments work together. B. Previewing Markstrat Unless otherwise instructed by your professor, you are invited to preview a Markstrat Team to test your knowledge of the Markstrat environment. All registered users have access to the PREVIEW data. Refer to section V.2 for instructions on how to access them. The PREVIEW data have been obtained during a past Markstrat course with real students making the decisions. You will be allowed to browse through all charts and graphs and to open decision screens. Please note that you will be able to preview the content of decision screens but will not be allowed to enter decisions and run the mathematical model on this PREVIEW data. 5. Questions & Technical Support We have done our best to make this guide as clear and complete as possible but the Markstrat simulation is fairly complex and we know from experience that some topics will require additional explanation. If you have questions regarding this handbook or the simulation we suggest that you review the Frequently Asked Questions (FAQ’s), accessible from the question mark icon located in the left-hand bar. Other participants may have already asked similar questions and a response may be available in the FAQ’s. Save time by checking the site first. Responses to frequently asked questions do not address specific team situations and do not provide advice or hints on strategy, management, marketing, finances or any other topic. For these subjects, you should only count on your knowledge and your experience. Copyright © StratX 2023-08-17 2 II. OVERVIEW OF THE MARKSTRAT WORLD The Markstrat world is a fictitious industrialized country of 80 million inhabitants whose monetary unit is the Markstrat dollar ($). This world does not intend to represent any country, market or industrial sector. However, it roughly behaves like most markets, and the general management and marketing knowledge that you have acquired through business experience or formal education applies to this new world. In the Markstrat world, both inflation and GNP growth is fairly stable, and no major political, social or economic event is anticipated in the near future. There are a handful of competing companies that manufacture and market consumer durable goods. These goods are comparable to electronic products such as digital cameras, GPS systems, mobile phones or computers, as well as office equipment, cars, books, or any other consumer durable goods. Initially, the competing companies are identified by a unique letter such as L, M, N, R, S or T. Your first task will be to give a name to your company, starting with this letter and reflecting the spirit within your team. In most cases, each firm starts in a different situation in terms of product specification, target consumers, brand awareness levels, market share, distribution coverage, profitability, R&D expertise, etc. Consequently, the marketing strategy of each firm should be adapted to its particular situation within the industry. However, Markstrat can be configured so that all firms start in the exact same situation. Your instructor will let you know if you are using one of these competition configurations. Nevertheless, no firm has a relative advantage over the others and initially many characteristics are common to all firms. For instance, the initial brand portfolio of all companies is comprised of two brands. As mentioned before, each firm will have the opportunity to design and develop new R&D projects and to introduce new products or upgrade existing ones. All R&D departments have the same capabilities to develop new projects, in their range of experience. Similarly, all commercial teams are equally qualified to handle distributor relationships. 1. Sonite Products At the beginning of the simulation, all rival firms market two Sonite brands. Sonite products have existed for several years and the market has grown quite consistently since the introduction of the first Sonite brand. It is now a well-established market, with several strong brands at different price points covering a wide range of needs. Analysts believe that the Sonite market will continue to grow over the next five years. A Sonite is a complex piece of equipment made up of several components. Although they can be evaluated along more than fifty attributes, Sonite brands are primarily differentiated in terms of five physical characteristics that are considered as the most important ones by industry experts. These characteristics are described below, and additional details are given in Figure 1 Processing Power. This characteristic measures the speed of the internal processor. High processing power is critical for applications using extensive graphics or doing a lot of calculations. It also drives the ability of the Sonite product to process multiple tasks simultaneously. Processing power is given in gigaflops (billions of floating point operations per second), a standard and respected measure that takes several factors into account: number of “cores”, internal memory size, frequency, etc. Display Size. This is the size of the screen, in inches. This characteristic drives the ability of the Sonite product to display higher quality images or videos, or to display more information to the user at a given time. Design Index. This characteristic does not relate to the product esthetic but to the type of raw materials used (wood, plastic, metal...), to the number of components (all-in-one type versus multiple-component type), to the aspect of its various components (position, size …). Therefore, a product rated 8 on the design scale is not better or easier-to-use than one rated 4 on the same scale. Battery Life. This is the number of hours during which the Sonite product can operate without being connected to the main power. Copyright © StratX 2023-08-17 3  Features. This is the total number of features offered by the Sonite product. These features can be hardware related, such as the ability to connect various devices to your Sonite product, or software related. There are a minimum number of core features that each Sonite product must offer. Additional ones are nice to have that may be of interest to some consumers. It is important to understand that offering more of a certain characteristic is not necessarily better. For instance, high processing power processors may require a sophisticated cooling system that has an impact on weight, volume and noise. Consumers who do not need high power will certainly choose a less powerful Sonite that will be relatively small, light and quiet. Similarly, large screens may be highly attractive to some users, but not to others because of their higher weight and heavier power consumption. Similar advantages and drawbacks exist for most characteristics: long duration batteries are bulky and heavy; product with lots of features may be difficult to use and may confuse new or occasional users; etc. The base cost is also an important factor; this is the cost at which each unit will be produced, based on an initial production batch of 100,000 units. The base cost is decided jointly by the Marketing department – which is mainly concerned with margin and profitability– and by the R&D department –which is mainly concerned with product feasibility. Characteristic Abbreviation Unit Range Processing Power Power Gigaflops (GFLOPS) 5 – 100 Display Size Display Inches (“) 4 – 40 Design Design Index 3 – 10 Battery Life Battery Hours (H) 24 – 96 Number of Features Features Number (#) 5 – 20 Base Unit Cost Base Cost $ 25+ Figure 1 – Sonite main physical characteristics 2. Vodite Products Recently, there has been industry speculation that a new type of electronic product might emerge, the Vodite. Although no Vodite brands are available at the start of the simulation, industry experts have a pretty good idea of what future Vodite products might resemble. Vodite products will satisfy entirely different needs from that of Sonite products so that demand for the two products will be completely independent. They will not be complementary in any way and there will not be any substitution from one to the other. It is anticipated that the Vodite market will be quite attractive if the right products are made available at the right price. The expertise required of potential suppliers is similar for both markets in terms of technology, manufacturing, marketing and distribution. Therefore, your division and your competitors are the most likely suppliers of Vodites. Although the Sonite and Vodite technologies are similar, all firms will have to engage substantial R&D resources to develop their first Vodite product. Recent calculations suggest that an investment of 5 to 10 million dollars may be required for each Vodite. Experts agree that Vodite products will primarily be differentiated in terms of the five most important physical characteristics described below. Additional details are given in Figure 2. Resolution. This characteristic relates to the sharpness or clarity of the images processed by the Vodite product. A higher level of details can be observed and processed with high resolution products. Resolution should not be confused with definition, which is the total size of the image. Resolution is usually expressed in lines per millimeter (LPM), from 20 to 100. Energy Efficiency. This characteristic, sometimes called efficient energy use, is about using less energy to provide the same level of performance and convenience. The higher the energy efficiency the less electricity is used. Energy efficiency is usually improved with more efficient technologies such as smaller Copyright © StratX 2023-08-17 4  gates and lower frequency in microcircuits. This characteristic is measured in billion computations per watt-hour (bC/Wh). Carbon Footprint. This characteristic is also referred to as greenhouse gas emission. It weights the carbon impact of the product through its lifecycle: manufacturing, transportation, use, recycling and/or discarding. It is measured in kilograms of CO2 released in the atmosphere. Depending on the scenario selected by your instructor, a “greenhouse gas emission” tax may be put in place by the Markstrat government. In this case, you will be notified one or two years in advance of the amount that you will have to pay if you market a Vodite product with a Carbon Footprint level above a certain threshold value (in kilograms of CO2). This tax will appear as an exceptional cost, proportional to the kilograms of CO2 emitted by your product above the threshold value. This tax has a fixed amount and will not depend on your volume sales. Connectivity. This characteristic measures the ability of the product to connect to varying networks and/or databases as well as the speed of the connection. Connectivity is measured by an index between 3 and 10. Higher connectivity indices guarantee that the product will be able to connect to a network in almost any situation and to exchange data at a fast pace. Application programs or Apps. This is the number of application programs that can be set up and used with the Vodite product. Applications allow user to customize the product and to adapt it to their own needs. Although there are only a handful of basic applications that each Vodite product must offer, some products offer a very large catalog. Characteristic Abbreviation Unit Range Resolution Resolution Lines per Millimeter (L/mm) 20 – 100 Energy billion computations per Energy Efficiency 10 – 100 watt-hour (bC/Wh) Carbon Footprint Carbon Kilogram (Kg) 5 – 50 Connectivity Connect Index 3 – 10 Application Programs Apps Number (#) 5 – 100 Base Unit Cost Base Cost $ 30+ Figure 2 – Vodite main physical characteristics 3. Naming Conventions Brand names are made up of up to six characters. The first letter identifies the firm marketing the brand (M, R, S, T, L or N). The second letter must be an 'O' for a Sonite or an 'E' for a Vodite. The other characters can be letters or numbers and can be freely chosen by each firm to generate different brand names. For instance, brands TONE and TOPS would be Sonites marketed by firm TIGERS, while MEGA and MEMO would be Vodites marketed by company MARMOTS. All new brands must follow these conventions and must have different names. The selected name has no influence on the market response to the brand. 4. Sonite Customers Sonite customers are adults who purchase the products for personal or professional use. Market research studies show that the Sonite market can be divided into five major groups of customers or segments, having similar needs and purchasing behavior. Explorers (Ex) – People in this segment show a high level of interest in Sonites and other similar products. They are extremely knowledgeable about Sonite technology and the different characteristics of the existing brands. Explorers were probably among the first to use Sonite products. They demand high- performance products, i.e. products with high processing power and/or large screens. They are less concerned with the convenience of the products (battery life, design or number of features) however they are quite price-sensitive, since they use Sonite products for their personal use and do not necessarily have high incomes. Copyright © StratX 2023-08-17 5  Shoppers (Sh) – As the name of this segment indicates, Shoppers do a lot of shopping. They have a good knowledge of marketed brands and do extensive product comparison. They look for products with a high quality –price ratio and average levels of both performance and convenience. Like Explorers, they use Sonite products for personal purposes and are quite price-sensitive. Professionals (Pr) – Individuals in this segment may use Sonite products for both personal and professional reasons. Consequently, they are looking for high quality, high-performance and easy-to-use products. They can afford expensive products and often view price as an indication of quality. High Earners (Hi) – This group is characterized by high incomes, using Sonite products on a private basis. Studies show that they usually buy fairly expensive products which they can afford, and that their purchase is partially motivated by social status. Although they tend to use their Sonites less than the average consumer, they demand performance and convenience from the products. Savers (Sa) – This segment includes all consumers who are cautious in the way they spend their money. Although this segment is the largest and is composed of several sub-groups, most customers have similar needs. They are looking for cheap, low-performance products with average convenience. Experts believe that the penetration of this segment is not as high as the other segments. Consequently, its future growth rate could exceed forecasts. Each segment has specific needs in terms of physical characteristics and price. Awareness levels and purchase intentions vary significantly for existing products from one group to the other. Market forecast studies show that the sizes and growth rates of the five segments are significantly different. This is explained in part by the development stage of each segment, by the varying product offerings, and by the intensity of marketing effort targeted at each segment. 5. Vodite Customers While potential consumers for Vodites are the same individuals as those who buy Sonites, a different segmentation strategy is likely to be appropriate for Vodites. Further studies need to be completed, but marketing experts believe that it will be more effective to group consumers according to how they adopt new products. In this light, three groups are examined for Vodites: Innovators (In) – These consumers will be the first users of Vodite products. People in this segment tend to be adventurous and are willing to try new ideas with some risk. Although this segment will probably be the largest one initially, it represents only a small percentage of total potential consumers. Innovators demonstrate both a high desire for and interest in Vodite products. Their income levels are above average. Early adopters (Ad) – Consumers in this segment will not adopt Vodite products as quickly as innovators but will certainly do so before a majority of people have accepted the new technology. As this group is usually much larger than the previous one, its influence on other consumers is fairly high. Early adopters tend to be opinion leaders and helpful in 'advertising' the new product to other potential buyers. They are critical to the adoption process and should not be neglected by marketers. They have an average income level. Followers (Fo) - These individuals represent the bulk of potential consumers. Because they perceive more risk in buying new products, they adopt a product innovation only after a large number of consumers have tried it. Innovators and early adopters particularly influence followers. Their income level is usually below average. 6. Distribution Channels Sonite and Vodite consumers tend to shop in the following three distribution channels: Specialty Stores – These stores are usually small and may not necessarily belong to organized chains. They are geographically close to their customers and can provide a high level of service and technical support. As they do not distribute many different product categories, Sonite products account for a large proportion of their sales. These stores usually carry a broad product line for each category, including the most expensive and/or high-performance products. Because of their high level of technological expertise, specialty stores are likely to be the preferred distribution channel for Vodite products. Copyright © StratX 2023-08-17 6  Mass Merchandisers – These stores operate on a low-price, high-volume basis and try to minimize overhead. Consequently, the level of service they offer is lower than that of the two other channels. While mass merchandisers carry many different product categories, the depth of each product line they carry is usually restricted to a few units. They often distribute the cheaper, low-performance products. Their lack of technical expertise and the low level of service may well prevent them from distributing Vodites in the early years. Online stores – This category of stores includes the web-only merchants (such as amazon.com and newegg.com) as well as the e-commerce websites of traditional retailers (BestBuy.com, Walmart.com, etc.). Although only a small percentage of consumer electronic sales are done on the web, this percentage is much higher for Sonites products, especially for highly connected consumers such as Shoppers. Convenience is the key advantage of online stores as consumers may shop from their home at the time of their choice. In addition, they have access to an almost unlimited choice and can compare features and prices very easily. Privacy and security are the primary concerns of online shoppers, but new mechanisms are put in place by banks and e-commerce sites to reduce fraud. Online stores are likely to become more important in the next 5 to 10 years. Within the Sonite market, market research studies show that all three distribution channels are important; therefore, each of them should be visited by the companies’ commercial team. There are approximately 10,000 specialty stores, 6,000 mass merchandisers belonging to 6 different chains, and 1,000 online stores. Differences between margins obtained by the stores in each of the three channels are mainly due to differences in the level of service and volume sold. These margins are applied to retail prices and are approximately constant across brands for a given channel. In Markstrat, the distributor margins are 40% for specialty stores and 30% for the other ones. 7. Economic Environment You operate in an economy that currently has an average inflation rate of 2%. Inflation affects the production, advertising, commercial and market research costs of your company. It is unlikely that inflation will reach much higher levels in the future. Should this be the case, the government may decide to impose price control on all brands. The Gross National Product (GNP) provides you with information about trends in the Markstrat economy. In the recent past, the overall economy has been growing at a rate of 4%. Copyright © StratX 2023-08-17 7 III. MANAGING YOUR FIRM You and your team will be responsible for the design and implementation of the marketing strategy of your division. You will have to decide the overall direction of the company regarding: The product portfolio strategy – which brands the company will develop and market; The segmentation and positioning strategy – which market segments will be targeted and how products will be positioned; The marketing mix strategy – the day-to-day operational marketing decisions such as pricing, production, communication and distribution. Your performance will be measured by several indicators such as net contribution generated, brand market shares, your ability to grow the firms’ revenues, quality of R&D projects successfully completed, etc. Finally, the best measure of your company's success will be its stock price index, a measure that takes all of the above indicators into account. This chapter describes how your company operates as well as the decisions you will have to make each period. Before making dramatic changes, you should try to get a feel for the behavior of the market. Do not jump hastily to conclusions and bear in mind that obvious solutions may be based upon an incomplete analysis. To reach more robust decisions, use the information from your company results, from the market news and from market research studies to analyze your situation and past competitive behavior. These reports are described in the chapter entitled Understanding Your Annual Report. You will manage the Marketing department as a profit center. We will see in the next paragraphs that most of your decisions will cost you money: advertising budgets, commercial team expenditures, R&D expenses, etc. We will recap these costs at the end of the chapter and we will explain where your money comes from. 1. Decision rounds You will follow a decision-making cycle that will repeat itself for each simulated year, for instance 8 years in total. This cycle is called a decision round or a round. A simulated year is also called a period. 1. At the beginning of each round, the instructor will provide you with your results for the previous year (sales, R&D, production,) together with additional information on the market and your competitors. In the first year, you and your team should begin analyzing this information and then start formulating a strategy for your company and agree on objectives. In the subsequent years, you should appraise your results, check if you have met your objectives and possibly review your initial strategy and decide on what changes should or should not be made. 2. The previous step will lead to a series of decisions, which will be input into the decision forms provided. Decisions can be modified and refined throughout the decision round, until the time is over. 3. At the end of the round, the instructor collects and audits the decisions of all teams. If everything looks fine, the instructor runs the Markstrat mathematical model to simulate the round and produce new results. At this stage, you are ready to start a new round. 2. Product, Brand and Base Project Each of your Sonite and Vodite products is sold to consumers under a brand name such as MOST, ROCK, SEEK or NEXT. The physical characteristics and the unit production cost of the product are defined by its base R&D project, i.e. the project that was conducted by your R&D department to develop the first prototype of the product. R&D projects are given a name when they are initiated; project names start with the letter ‘P’. Initially, each firm markets two Sonite products, for instance MOST and MOVE, each one being characterized by its base project, for instance POMOST and POMOVE. Over the course of the simulation, you will have to upgrade your existing brands to adapt to changing consumer needs or to competitive moves. You may also have to launch new brands to target new consumer segments or to explore new markets. Chapter VI provides you with more information on situations where brand upgrades or brand launches are necessary. Copyright © StratX 2023-08-17 8 3. Production Each period, you must submit a production plan for each of your marketed brands, i.e. you must specify how many units you want to produce for the period. This decision must take into account the potential sales for the brand, the existing inventory at the beginning of the period and the flexibility of the Production department. The Production department of your company is working for several divisions. It can thus be viewed as a highly flexible external supplier. Consequently, you are not concerned about manufacturing investments, fixed costs or capacity utilization. From one period to the next, you are completely free to increase or decrease the production plan of a given product, without any penalty. The Production department will always manufacture the required quantities in the best possible conditions. Moreover, the actual production level for each product is automatically adjusted in response to actual demand for that product in the period, within 20% of your initial production plan. Hence, if you did not order enough units to cover the demand, the production will be automatically increased by up to 20%. On the contrary, if you ordered too many units and cannot sell them in the period, the production will be automatically reduced by up to 20%. In case your production plan was inaccurate by more than 20%, you will either lose sales or build inventory. Figure 3 gives a few examples of varying situations of inventory, production plan and market demand (all numbers are in units). Case A Case B Case C Case D Potential sales (a) 154 000 154 000 154 000 154 000 Beginning inventory (b) 20 000 20 000 20 000 None Production plan (c) 150 000 100 000 200 000 200 000 (your decision) 134 000 120 000 160 000 160 000 Actual production (d) Reduced to Increased to Reduced to Reduced to (automatic adjustment) (a) - (b) (c) + 20% (c) - 20% (c) - 20% 154 000 140 000 154 000 154 000 Actual sales (e) = (a) = (d) + (b) = (d) + (b) = (a) = (a) Lost sales (f) None 14 000 None None Equal to (a) – (e) Ending inventory (g) None None 26 000 6 000 Equal to (b) + (d) – (e) Figure 3 – Inventory and production plan versus market demand The flexibility of the Production department goes beyond automatic adjustment of production plans. The units produced are charged to the Marketing department only when they are shipped to distributors to be sold to consumers. The price paid by Marketing to Production is called the transfer cost; it incorporates all costs associated with this high level of flexibility, including depreciation and fixed costs. The transfer cost of a product is initially equal to the base cost of its base project, assuming that the first production batch is 100,000 units. The base cost is the unit cost that was decided when the project was developed by R&D. The transfer cost will then increase with inflation and decrease over time because of experience effects and economies of scale. As a rule of thumb, you can expect the transfer cost to be reduced by about 15% each time the cumulative production of a given product is doubled. If the first production batch is lower than 100,000 units, then the transfer cost will be higher than the project base cost. For instance, if the initial production is 50,000 units, the cost will be 15% higher. Units produced in excess are kept in inventory, and inventory-holding costs are charged to the Marketing department until these units are sold. Inventory costs per unit are calculated as a percentage of the transfer cost. This information can be found in the Newsletter. Copyright © StratX 2023-08-17 9 Production plans must be entered each period in the Marketing Mix decision form. These decisions should be based on your sales forecasts for the upcoming period and should take into account any units left in inventory. If you are holding a high level of inventory, you can set the production plan to 0 but in this case, no automatic adjustment is possible. 4. Pricing Each period, you must set the recommended retail price for each of your marketed brands. The retail price is the list price for customers. The average selling price is the price at which you sell your product to distributors. It varies by distribution channel since different margins hold in each of the three channels, as explained in the Distribution Channels section. Specialty stores tend to respect the recommended retail prices set by companies. However, mass merchandisers and online stores use promotions or special offers to sell products. On average, these promotions are equivalent to a discount rate of 10% off the list price for mass merchandisers and 5% for online stores. Figure 4 provides a summary of prices, margins and discounts for a recommended Retail Price of $400 and a unit transfer cost of $123. Dumping is strictly forbidden in the Markstrat world; therefore, in all channels the recommended retail price must be set so that the selling price of a product is higher than its transfer cost. Prices must be entered each period in the Marketing Mix decision form. Price increases or decreases greater than 30% in one period are highly discouraged as they often result in negative market reactions. On one hand, an excessive price increase is usually not accepted by consumers who may react strongly and stop purchasing the brand. On the other hand, an excessive price decrease will result in a proportional cut in the distributors’ margin and your commercial team may have a hard time finding distributors for the brand. A message will warn you when such decisions are made. If you ignore the warning, the recommended retail price will be automatically adjusted up or down to stop such adverse reactions. Specialty Mass Online Stores Merchandisers Stores Actual retail price $400 $360 $380 Distribution margin 40% − $160 30% − $108 30% − $114 Selling price $240 $252 $266 Transfer cost $123 $123 $123 Unit contribution $117 $129 $143 Figure 4 – From retail price to unit contribution 5. Advertising Advertising decisions must be made each period for each of your marketed brands. Indeed, the practice in Markstrat is to advertise on brands rather than on company names. Consequently, even if your firm markets several brands, possibly to the same consumer segment, these brands will not benefit from the company’s identity and image. The primary objective of advertising is to build awareness for brand names and to make consumer familiar with the characteristics and price of your product. Advertising is crucial for new brands, but is also important for brands that have been on the market for some years. Indeed, consumers tend to forget about a brand in the absence of advertising. Another objective of advertising is to develop demand for the whole market. Indeed, as potential consumers become more familiar with the products and their characteristics they are more likely to purchase one of them. The size and growth rate of consumer segments is influenced by the amount spent in advertising by the entire industry. Copyright © StratX 2023-08-17 10 Finally, advertising will influence the decision of distributors to carry your products. Spending more in advertising will most likely increase your distribution coverage. It also creates a barrier to entry for your competitors. The absolute amount of advertising spent on your brands is a key factor in the success of your campaign. But because of the competitive nature of the Markstrat industry, your advertising share of voice is important as well. The share of voice is calculated by dividing your own advertising budget (usually several million dollars for a given brand and period) by the industry total advertising budget. A share of voice greater than the ones of your direct competitors is required for a successful new brand launch or for brand repositioning. There are two separate advertising budgets: advertising media and advertising research. As its name indicates, the advertising media budget is used to purchase media space and time. Advertising research is about the creative work, media selection, or other activities conducted by advertising agencies, that improve the quality and the persuasive power of your message. If your objective is to increase or maintain awareness, you should spend the bulk of your budget in media space purchase and only a small percentage in advertising research to make your advertising more effective (for instance 4% to 8%). If your objective is to reposition a brand, i.e. to change consumers’ perceptions, then you should spend a significant percentage of your total budget in advertising research (usually from 10% to 15%). In past years, companies have devoted on average 4% of their total advertising expenditures to advertising research. You are also required to specify which segments should be targeted with your advertising. This decision should be consistent with the marketing strategy of your firm and/or brand. The advertising agency will select the most appropriate vehicle for the targeted segments (for instance, targeting Professionals through specific magazines, professional associations or on trade-shows). Because media selection is not an exact science, some consumers may be exposed to your advertising campaign even if you do not target them explicitly. Finally, you must define perceptual advertising objectives for each brand. This enables you to convey a perceptual message and emphasize, for instance, that a given brand is very powerful or that another one has a very large display and many features. You will learn more in the Repositioning section at the end of the handbook; it is devoted to brand positioning through advertising and explains how to set perceptual objectives. Advertising budgets must be entered each period in the Marketing Mix decision form. Both the advertising media and research budgets must be given in thousands of dollars. You must also indicate the proportion of the budget targeted to each segment. The percentages must add to 100%. 6. Commercial Team Your commercial team is responsible for obtaining and entering orders and for supporting distributors. It is organized by channel to better meet the needs of the distributors, and by brand. The team includes multiple categories of people and resources depending on the channels: sales representatives, customer support, merchandisers, web masters, blog managers, etc. The main tasks conducted by the commercial team are to visit stores, distributors and wholesalers; to enroll them in trade programs; to take orders; to handle out of stock situations; to participate in trade shows; and to help stores organize and conduct promotions. The marketing department must specify the number of people to allocate to each channel and each brand. Commercial people may be reallocated at no cost across distribution channels and/or across brands. However, hiring or firing costs will be automatically charged to your department when the total size of the commercial team increases or decreases. Your decisions must be entered each period in the Commercial Team decision form. The size of your commercial team must be entered in number of Full-Time-Equivalent (FTE), i.e. the equivalent of one person working full-time for one period. The cost of your commercial team is proportional to the number of allocated FTEs plus the hiring or firing costs in case you have extended or decreased its size. Hiring and firing costs are calculated as a percentage of the FTE cost, as indicated in the newsletter. This cost includes the salary of the person plus additional Copyright © StratX 2023-08-17 11 expenses such as company car, medical/dental care, etc. It also includes a sales budget that commercial people can use in activities or tools aimed at increasing sales, such as trade programs, catalogs, permanent or temporary POS materials, gifts, etc. The commercial team will decide on the best mix of tools depending on the channel and the target consumers. 7. Market Research Studies One of your decisions will be to order market research studies. All studies are ordered at the beginning of a period and are conducted by a specialized research firm during that period. Hence, the information provided is relevant to the market situation during the analyzed period except for the Market Forecast study. The results are delivered with your annual report at the end of the period, and can be used for the next period’s decisions. Companies can buy 12 different types of studies, as shown inFigure 5. Studies deal with the Sonite and Vodite markets, consumers and channels. All studies are further detailed in section IV.3. Note: only four studies will be available in your Period 0 report: Consumer survey, Consumer panel, Distribution panel and Market Forecast. Most of the studies apply only if there are brands marketed during the period in the corresponding market. For instance, ordering the Consumer Panel study for the Vodite market is irrelevant if no Vodite brands at all are marketed. If you order these studies and if no brands were marketed in the period, you will not be charged for them. However, the corresponding cost is subtracted from your budget when you make your decisions. You can use the Benchmarking study to anticipate whether competition will launch new brands. Read section “Ordering Market Research Studies” to review the Market Research decision form. Consumer survey Competitive Commercial team estimates Consumer panel Industry benchmarking Distribution panel Advertising experiment Semantic scales Commercial team experiment Multidimensional scaling Market forecast Competitive advertising estimates Conjoint analysis Figure 5 – Available market research studies 8. Research & Development In the past, each firm has successfully completed two R&D projects on which the brands marketed in Period 0 are based. The project name starts with the letters PO followed by the corresponding brand name. For instance, the R&D project corresponding to the existing brand MOST was called POMOST. The Marketing department may ask the Research & Development department to develop new projects to either upgrade/downgrade existing brands or to launch new ones. Indeed, existing products may need to be improved during their lifetime to adapt to the changing needs of consumers and new products may have to be created to target untapped segments in existing or new markets. Chapter VI includes detailed information on R&D strategies and processes. The overview given below will show you how you can control the marketing strategy of your company and will give you the level of details necessary to understand the other chapters of this handbook. When requesting a new R&D project, the Marketing department must specify the name of the project, the desired characteristics for the new or improved product, and the target base cost. The Marketing department must also allocate a budget to the project. Up to ten R&D projects may be ordered each period for the two markets, five Sonite projects and five Vodite projects. Copyright © StratX 2023-08-17 12 A. Project Name Project names may have up to 8 characters. The first letter must be a ‘P’, as in “Project”. The second one identifies the market of the product being developed: ‘O’ for a Sonite product and ‘E’ for a Vodite. The other characters may be chosen freely. We advise you to give meaningful names to your projects. For instance, PO- MOVE2 would be a Sonite project developed to upgrade brand MOVE and PE-INNOV would be a Vodite project developed to launch a new brand targeted at Innovators. The name of a completed project can never be reused for a new project, even if it is a minor modification of the older project. B. Project Characteristics The physical characteristics of the project must be given along with the five most important attributes described in the sections “Sonite Products” and “Vodite Products”. The values entered must within the feasible ranges and in the relevant unit; for instance, Battery Life should be between 24 and 96 hours. Obviously, the Marketing Department should evaluate the attractiveness of various offerings before deciding on specific characteristics. The needs of the target consumers should be considered for this evaluation. There are multiple methodologies to determine the characteristics of a project; they are all discussed in chapter VI. C. Desired Base Cost The base cost of a project is equal to the transfer cost that will be charged by Production to Marketing for each unit of the future product, assuming an initial production batch of 100,000 units. Note that the transfer cost will decrease if you produce more than 100,000 units, as explained in the “Productivity Gains” chapter. You may ask the R&D department to develop the project at the lowest possible base cost also called minimum base cost. This cost depends on the project characteristics: the higher the level in each attribute (Processing Power, Display Size, etc.), the higher the minimum unit cost. There is one exception to this rule: unit cost will increase if you try to reduce the carbon footprint of your products. Developing a project at the minimum base cost will usually be quite expensive in term of the development budget. Indeed, the R&D team must not only develop the new characteristics requested, but also select materials and technologies that are compatible with the low-cost target. You may also ask the R&D department to develop the project at a specified base cost, higher than the minimum cost. This will give more flexibility to the R&D team in the materials and technology selection, and is likely to reduce the development budget. Obviously, the desired base cost must be compatible with the expected brand profitability, taking all factors into account: price, distributor margin, production costs, marketing and sales expenses, etc. D. Project Allocated Budget The Marketing department must allocate a budget to cover the project expenses. These expenses include the cost of developing the prototype and all the costs related to the transition from R&D to production, i.e. ensuring that large quantities of identical units can be economically and reliably produced. At the early stage of the project development, the R&D team will estimate the budget required for completing the project. This budget will depend on how different the new characteristics are compared to the ones of projects already developed. Upgrading a Sonite product will initially cost between a few hundred thousand dollars and 2 million dollars. Industry experts believe that developing the first Vodite prototype will cost each firm a minimum of 5 million dollars. In both cases, R&D costs will decrease over time as more projects are successfully developed. If the budget allocated by Marketing to the project is equal to or higher than the budget required for completion, then the project will be successfully completed and available during the following period. As the R&D department works as a profit center, any budget allocated in excess of the required budget will not be given back to Marketing. If the allocated budget is much lower than the budget required for completion, the project will not be successfully completed. In this case, you have the choice to complete the project in the following period by Copyright © StratX 2023-08-17 13 allocating the amount required by R&D in the annual report, or shelve the project, i.e. put it aside until you have sufficient funds to complete it. Note that a project does not have to be finished in one or two periods; you may well decide to develop your first Vodite prototype in 3 or more periods. If the allocated budget is slightly lower than the budget required for completion, there is a chance that the project will be successfully completed despite the lack of funds. Taking such a risk might not be a good idea if millions of dollars in revenues depend on the availability of the project. E. Feasibility Studies When specifying a new R&D project, you have the choice to allocate a budget to it or to order a feasibility study. A feasibility study costs $100,000 and takes one period to complete. The information is provided in the next period within the R&D section of the company results; it includes the minimum base cost at which the product can realistically be manufactured, and the budget required to guarantee its completion at the currently requested base cost. The main advantages of feasibility studies are their low cost and the accuracy of the information provided. Their main drawback is the time it takes to get this information: a full period. F. Online Queries An online query provides you with an estimate of the budget required to complete a project. You may order an online query only when the project is fully specified, i.e. when you have entered the physical characteristics and the requested base cost, unless you have specified that you want to develop the project at the minimum base cost. The main advantage of online queries is that the information is provided to you immediately. Their main drawbacks are that their results are usually over-estimated by as much as 15% (or even more for the new Vodite technology), and that no more than five queries may be made in any given period. If you change the specifications of your project (characteristics and/or requested base cost) after you have run the online query, you will no longer be guaranteed that the project will be completed within one period at the budget given by the query. In this case, you should run a new query to adjust your decisions according to the new specifications. 9. Productivity Gains Manufacturing costs tend to decrease over time thanks to the experience effect. This is due to many factors such as increase in labor efficiency (fewer mistakes are made), improvement of methodologies & processes, use of new and fewer expensive materials and/or technologies and product redesign. Experience effect should not be confused with economies of scale (the fact that manufacturing costs decrease with the size of the plant). Indeed, large plants amortize fixed costs on larger production batches; they have a higher negotiation or lobbying power; include machines of varying sizes and speeds (ensuring higher usage ratio); other cost reduction factors include transportation in big containers or access to less expensive financing. As the Marketing department is not responsible for production capacity, you are not concerned with economies of scale. Hence, one way to reduce manufacturing costs is simply to produce more units of the same product. On average, it is estimated that manufacturing costs decrease by 15% each time cumulative production is doubled. This is represented by the blue curve on Figure 6: point A represents the base cost that was specified when the base project was developed and point B represents the transfer cost a few periods later, when cumulative production reached 600,000 units. The unit cost of this brand decreased from $150 to $100 (a 33% reduction). Unfortunately, the slope of the curve decreases quite rapidly: the additional production necessary to get an additional 15% reduction in unit cost gets bigger and bigger. Firms can further reduce manufacturing costs by launching a cost reduction R&D project, i.e. a project specifying the same physical characteristics as the initial project, but at a lower base cost. This is represented by the red curve on Figure 6. Although the unit cost will initially be higher than $100 (point A’), the curve shows that transfer costs below $100 will be obtained as soon as cumulative production goes beyond point B’. Then, the transfer costs will be much lower than the ones achievable by the original blue curve. Copyright © StratX 2023-08-17 14 Finally, one should not forget that costs will be adjusted for inflation; this will offset part of the reduction obtained through experience. Figure 6 – Productivity gains 10. Marketing as a Profit Center You will operate the Marketing department as a profit center. Your performance will be measured by the contribution that you generate. Contribution is defined as revenues from sales minus the costs listed below. Note that your Profit and Loss statement is described in detail in the section IV.2.B. R&D: budgets allocated to R&D projects; Production: costs of goods sold and inventory holding costs; Advertising: advertising media & research budgets allocated to marketed brands; Commercial: costs incurred by the commercial team, in all three channels; Market research: costs of market studies ordered in the period; A. Marketing Budget Each period, you are allocated a budget to cover your expenses in R&D, advertising, commercial activities and market research purchase. This budget is linked to the success of the department, being equal to 40% of the net contribution generated in the previous period. However, there is a maximum level where resources are reallocated to other divisions of the company to maximize the return on investment at the corporate level. Similarly, there is a minimum budget level for each period, whereby headquarters may effectively subsidize your division if you are not generating the contribution sufficient for your division can continue operations. In general, your budget for each period will be between 7 and 20 million dollars, adjusted for inflation. You will have to work within this given budget: if total spending exceeds the allocated budget for a period, expenses will be automatically cut by the Finance Control department, starting with advertising expenditures. Your objective is to maximize your return on investment. Consequently, you should not necessarily spend your entire budget in every situation. Indeed, you should not spend one additional dollar unless you expect this dollar to generate a return higher than one dollar. If you perform outstandingly, you may be granted a large budget; however, spending it completely might be a waste of money. Please note that unused budget will not be carried forward to the next period. Copyright © StratX 2023-08-17 15 B. Loans & Budget Increase or Decrease Your instructor may decide to grant you a loan or a budget increase or decrease. This will usually be done at specific periods and under certain conditions to be defined by your instructor. A loan is characterized by its principal – the amount of additional money that you will get – its interest rate in %, its duration in years and the period P at which it is granted. For example, a $5 million loan is granted to team R in Period 3 at 4% interest rate over 5 years. In the Markstrat world, loans are granted at the beginning of the year so that you can use the principal immediately, for instance to invest in new R&D projects. Consequently, you will incur interest in the first year of the loan. However, you will not start to reimburse the principal before period P+1 so that it can be paid with the outcome of the period P investment. A complete example is detailed in Figure 7. Principal Principal Interests Received Reimbursed Paid Period P 5 000 000 0 200 000 Period P+1 923 136 200 000 Period P+2 960 061 163 075 Period P+3 998 463 124 672 Period P+4 1 038 402 84 734 Period P+5 1 079 938 43 198 Period P+6 0 0 0 Figure 7 – Sample Loan Schedule Copyright © StratX 2023-08-17 16 IV. UNDERSTANDING YOUR ANNUAL REPORT You will receive your annual report at the beginning of each decision round. This report provides you with the results of the period that just ended. For instance, you will be making decisions for period 5 based on your annual report of period 4. The annual report is composed of three sets of documents fully described in this chapter: the Market & Competitive News, the Company Results and the Market Research Studies. We suggest that you log into Markstrat and access you first annual report while reading the following pages. If your professor has not yet started your course, you may use the Preview data, as explained in section I.4.B. In order to illustrate varying situations, the following tables and charts have been captured in multiple industries, with different firm and at different periods. Hence, a brand, project or firm may appear on a chart and not on another one. In additional to your annual report, you may access additional tables, graphs and interactive tools that have been especially designed to help you make better decisions and more precisely to: review and analyze your latest results in a graphical format; design R&D projects; position or reposition your product offering; determine price; or allocate your resources across market and segments. In order to simplify this manual, all these additional elements are only documented online. 1. Market & Competitive News The Market & Competitive News provides general and financial data on the industry, on the competing firms and on marketed brands. This is publicly held information; i.e. all competing firms have access to the same documents. The news consists of three or four sections, depending on the availability of Vodite brands. A. Industry Dashboard The industry dashboard provides you with a one-page summary of key performance indicators at firm and brand levels such as stock market data, retails sales and market shares in value and volume, revenues and contribution. The layout will vary over time, especially when the first Vodite brands are put on the market. A sample industry dashboard is depicted in Figure 8 and Figure 9. B. Industry Information This is a short report showing the evolution of economic variables such as inflation rate and GNP growth rate, and providing the cost for the next period of items such as market research studies, commercial people, holding units in inventory or the disposal of inventory units in the case of a product withdrawal or upgrade. All cost calculations are done for you by the simulation. So, you should not need to look at the report in detail. Copyright © StratX 2023-08-17 17  Figure 8 – Market & Competitive News – Industry dashboard (part 1) Figure 9 – Market & Competitive News – Industry dashboard (part 2) C. Market Report This report provides you with the market shares (in units and in dollar value), the volume sold and the retail sales of all marketed brands (Sonites or Vodites). Volume and retail sales are given for the current period, and the variation with the previous period is provided as well. Newly launched or upgraded brands are flagged. The physical characteristics, base cost and price of all marketed brands are given as well. Again, newly launched or upgraded brands are flagged. Copyright © StratX 2023-08-17 18  Figure 10 – Market & Competitive News – Brand Characteristics 2. Company Results The Company Results provides confidential company information. You and your team members are the only ones who have access to the information disclosed in your company results, except for data given in the Industry Benchmarking study. The company results are comprised of the following six sections: Company Dashboard Financial Report Production Report Research & Development Report Decision Review Feedback from your Coach A. Company Dashboard The company dashboard provides you with a one-page summary of the key performance indicators of your firm and your brands such as stock market data, market shares in value and volume, revenues and contribution. The layout will vary over time, especially when you introduce your first Vodite brands. A sample company dashboard is depicted in Figure 11. Copyright © StratX 2023-08-17 19  Figure 11 – Company dashboard B. Financial Report This report provides you with revenues, costs and profit information at the company, market and brand levels. The Profit & Loss statement of your company is illustrated in Figure 12 and is explained below. Revenues: Number of units sold x Average selling price. The selling price is equal to the retail price (your decision) minus the distributors’ margin. Cost of goods sold (COGS): Number of units sold x Unit transfer cost. The transfer cost is equal to the base cost of the underlying R&D project minus the productivity gains. Inventory costs: Inventory holding cost + Inventory disposal loss Inventory holding costs: Units in inventory x Unit transfer cost x Inventory holding cost in % (given in the market news report). Inventory disposal loss: Loss incurred when selling inventory to a trading company because of a product upgrade. Units in inventory x Unit transfer cost x Inventory disposal cost in % (given in the market news report). Contribution before marketing (CBM): Revenues – COGS – inventory costs. Contribution after marketing (CAM): CBM – advertising media – advertising research – commercial team costs (your decisions). Market research studies: costs of the market studies purchased during the period (your decision). Research & Development: budgets allocated to R&D projects during the period (your decision). Interests paid: Interest paid on loans granted in previous periods. Exceptional cost or profit (ECP): Exceptional items such as brand withdrawal costs. Net earnings: CAM – market research studies – R&D – interests paid – ECP. Copyright © StratX 2023-08-17 20  Figure 12 –Financial Report – P&L statement The Market and Brand Contribution reports are similar to the company profit & loss statement. They provide financial elements for each marketed brand as well as the consolidation of all brands by market. A sample brand contribution chart is shown on Figure 13. Figure 13 – Financial Report – Brand contribution C. Production Report The Production Report provides you with information on the number of units produced, the number of units in inventory and on production costs for each of the brands marketed in the period. The Sales, Production and Inventory table shows detailed information on planned production versus actual production and the inventory levels at the beginning and at the end of the current period. All numbers are given in thousands of units. The variation between the production plan (your decision) and the actual production (number of units produced) is due to the automatic adjustment of plus or minus 20%, depending on market demand. The inventory at the end of period is equal to (inventory at beginning of period + actual production – units sold). Copyright © StratX 2023-08-17 21  Figure 14 – Production report – Sales, production & inventory The Unit Cost, COGS and Inventory Holding Cost chart shows the unit transfer cost for each of your marketed brands. The current unit cost is the cost of the most recently produced units, while the average unit cost takes into account the units that were in your inventory at the beginning of the period. You may ignore the difference in most cases. Unit transfer costs are given in $; units sold in thousands of units. Cost of Goods Sold (COGS) are equal to Units sold x Average unit transfer cost. COGS are given in thousands of $. This table also shows the costs incurred for holding your inventory throughout the period. These costs include for instance the storage cost, the cost of capital, etc. Inventory holding cost is equal to Units in inventory x Average unit transfer cost x H%. In the case of a product upgrade or brand withdrawal, you must dispose of your inventory at the beginning of the period and a loss is incurred. Inventory disposal loss is calculated as D% of the value of your inventory at the beginning of the period. H and D are given in the market news. Inventory holding and disposal costs are given in thousands of $. D. Research & Development Report This set of reports provides information on all R&D projects launched in the previous periods. To facilitate the reading, separate charts are provided for projects that have just been completed, for the ones that were completed in previous periods, and for projects that are not yet finished either because the allocated budget was not sufficient or because you have decided to shelve them. The report in Figure 15 shows the list of R&D projects completed in past periods. All reports share the same layout and include the same information: Project name. Available since. Completed projects only. This is the period when the project was completed. Physical Characteristics. The physical characteristics of the future product. This data is given in the relevant units for each characteristic, e.g. gigaflops for processing power or kilograms for carbon footprint. Current and minimum base costs. The base cost is the manufacturing unit cost of the future product, assuming an initial production batch of 100,000 units. The current base cost is the one that you entered in the R&D decision form when specifying the project. The minimum base cost is the cost below which it is impossible to manufacture the future product without taking productivity gains into account. Platform of brand. This is the name of the brand that is based on this project. This column is void for projects that are not yet or no longer in use. Cumulative and required allocated budgets. Uncompleted projects only. The cumulative budget is the total budget that has been allocated to this project over time. The required budget is the budget required to finish the project, i.e. the additional budget that must be invested to ensure Copyright © StratX 2023-08-17 22  that the project will be completed in the following period. You may attempt to finish the project with a lower budget but its successful completion is not guaranteed. Figure 15 – R&D report – Sample chart & explanations E. Decision Review This report recalls the decisions that your team made at the beginning of the current period: brand management, commercial team management, R&D projects and the market research studies purchased. Note that the decisions shown in Period 0 were made by the previous management team which you and your teammates have replaced. The Brand Management chart lists the brands that were marketed during the period, including the ones that were launched in that period. The base R&D project indicates which project was used as the platform of the brand. The other lines show the marketing decisions made for the brand: advertising media and research budgets; segmentation strategy, i.e. how to allocate advertising across consumer segments; and communication objectives (in case of brand positioning or repositioning through advertising). The Commercial Team chart shows how many full-time equivalent people you have allocated to each brand and each distribution channel. Two graphs show how your commercial team resources were allocated across channels and brands. The R&D Projects chart shows the projects that you have initiated or continued in the period in a format similar to the one of the R&D Report. The Online Queries chart reminds you of the online queries that you have requested from R&D while making your decisions to evaluate the budgets to allocate to projects. Note that this chart might be empty in case you ordered no R&D projects. Finally, the Market Research Studies chart lists the studies that you have ordered. Note that this chart might be empty in case you ordered no study. F. Feedback from your coach This report provides you with a list of feedback messages that have been generated by the simulation based on your firm and brand situations. This report is aimed at helping identify some critical issues within your decisions and results. It is a nice complement to your own analysis, but certainly not a substitute. Make sure to spend a good part of your decision time to review and analyze your report and your market studies. Your professor may decide to hide the automated feedback. Some professors prefer to provide their own feedback while facilitating the Markstrat group work. Others want to make sure that you to do your own analysis and are not misled by automatically generated messages. Copyright © StratX 2023-08-17 23 The feedback starts with a section on your firm and continues with a section for each of your brands. The feedback messages focus mainly on your weaknesses and issues rather than on your strengths or successes. So, do not be surprised if your only get negative messages. Some messages are highly important and require immediate corrective actions. Other messages are less important as they will only lead to a minor improvement of your decisions and results. Finally, a few messages cannot be ignored if the suggested actions are not part of your strategy. At the firm level, you will be notified if: A large proportion of your contribution is generated by a unique brand. You market a small number of offerings compared to other competitors. No or few leading brands. Your brands are targeted at non-attractive segments and/or markets. Your revenues are not growing and/or your costs are growing more rapidly than your revenues. Etc. At the brand level, you will be notified if: Your market share in decreasing. Your brand perceptions are not quite different from segment’s expectations. Your price is too high. Your price does not take advantage of a strong competitive position. You have lost sales due to production shortage. You have accumulated a large inventory because of a production surplus. Your awareness is much lower than that of your competitor and your sales would increase with additional advertising. You have not set perceptual objectives or your spending in advertising research is too low. You have lost sales due to a poor distribution (small commercial team). Your commercial efforts are not aligned with the shopping habits of your consumers. You could benefit from a cost-reduction R&D project. Etc. Some numbers will be hidden in the messages if you did not purchase all market studies. 3. Market Research Studies You may purchase up to 23 Market Research Studies each period. The following list provides a brief summary of information within each study. A. Industry Benchmarking The benchmarking study compiles general information from annual reports about each of the Markstrat competitors. The same data is provided in a common format for all companies in such a way that would allow you to compare competitive performance. Summary graphs are provided as well to facilitate the comparison of key data across competitive teams. The data provided includes sales, production costs, marketing expenditures and other expenses, including R&D. See Figure 16 for a sample benchmarking study. Copyright © StratX 2023-08-17 24  Figure 16 – Market Research – Industry Benchmarking B. Consumer Survey The consumer survey is a survey questionnaire administered to 3,000 individuals during the simulated period. It gives brand awareness, purchase intentions and shopping habit data for each consumer segment in the market. The brand awareness figures represent the proportion of individuals who have unaided recall of a brand name. This is obtained by asking respondents a question such as: “What Sonite brands do you know?” and allowing them to list several brands. The report gives the information for each brand currently on the market in total and by consumer segment. See Figure 17 for a sample graph showing average awareness figures. Figure 17 – Market Research – Consumer Survey – Average Awareness The purchase intentions figures represent the proportion of individuals who would select a brand as their first choice, if they were buying within a year. This is obtained by asking respondents a question such as: “Do you intend to purchase a Vodite brand this period?” If the response is yes, then respondents are asked to indicate the brand of their choice. The report gives the information for each brand currently on the market in total and by consumer segment. See Figure 18 for a sample chart. Please note that these figures correspond to the period when the study is done and does not necessarily represent purchase intentions for the following year. Two points require additional explanations. First, awareness is factored in purchase intentions. Indeed, if respondents are not aware of a specific brand they will not list this brand as the brand of their first choice. Second, purchase intentions are normalized to sum up to 100%. This facilitates the comparison between purchase intentions and market shares but it may produce purchase intentions figures that are higher than awareness figures. A typical example is the launch of the first Vodite brand: even if this brand is known by only a few passionate innovators it will have 100% purchase intentions if it is the only one on the market. Copyright © StratX 2023-08-17 25  Figure 18 – Market Research – Consumer Survey – Purchase intentions by segment The shopping habit data represent, for each of the three channels, the proportion of individuals who would choose that channel when shopping for a Sonite or a Vodite product. See Figure 19 for a sample graph. Figure 19 – Market Research – Consumer Survey – Shopping habits C. Consumer Panel The consumer panel study is based on a sample group of over 500 consumers whose buying behavior is believed to be representative of the entire market. It provides market share by consumer segment as well as industry sales in the product category. The market share figures represent the proportion of individuals who have purchased a given brand during the simulated period. The report gives the information for each brand currently on the market in total and by consumer segment; see Figure 20. Figure 20 – Market Research – Consumer Panel – Market shares Copyright © StratX 2023-08-17 26 Additional charts give the unit product category sales by consumer segment and in total. The relative sizes of the consumer segments are provided as well in Figure 21. Figure 21 – Market Research – Consumer Panel – Market shares D. Distribution Panel The distribution panel provides continuous tracking of product sales to consumers based on information gathered at the retail point-of-sale. Information is primarily gathered from scanning cash-registers with supplementary store audits. Our read represents sales in about 17,000 retail outlets in the Markstrat world. The table and charts of this study provide the market shares, based on unit sold, by channel for each brand currently on the market. They also give the unit product category sales by channel and in total. The relative sizes of the channels are provided as well in Figure 22. Figure 22 – Market Research – Distribution Panel – Channel sales The distribution coverage figures in Figure 23 represent the proportion of stores that carry a given brand. The report gives the information for each brand currently on the market. The number of outlets in each distribution channel is provided as well. Figure 23 – Market Research – Distribution Panel – Distribution coverage Copyright © StratX 2023-08-17 27 E. Semantic scales The semantic scales study provides data based on a semantic differential questionnaire administered to 600 individuals. Several semantic scales corresponding to the physical attributes were presented to the respondents. The figure below shows a sample scale for “Processing Power”. Crucial information is derived from these questionnaires: brand perceptions, ideal value along each scale, ideal value evolution, brand maps and ship between brand attributes and brand perceptions. Brand perceptions. Respondents are asked to rate each brand on a scale from 1 to 7 according to the way they perceive the brand. The reported results are summarized in a table such as the one in Figure 24, using the mean value for each brand. For example, a brand rated 2.3 on the Power scale is perceived as being less powerful than a brand rating 5.5 on the same scale. Figure 24 – Market Research – Semantic Scales – Brand perceptions Ideal values. Respondents are also asked to indicate their preferred (also called “Ideal”) value on each scale. The reported results are summarized in a table such as the one in Figure 25, using the mean value for each segment. Figure 25 – Market Research – Semantic Scales – Ideal values Importance of characteristics. Finally, respondents are asked to rate the importance of each characteristic in their purchasing decision. Although consumer segments differ on the exact importance attributed to each characteristic, they tend to agree on the ranking of the scales, i.e. their “relative” importance. This is why only average values are reported on the chart of Figure 26. Ratings are given on a scale from 1 (not important) to 10 (very important). Copyright © StratX 2023-08-17 28  Figure 26 – Market Research – Semantic Scales – Importance of characteristics Brand maps. Additional charts and graphs are available in the study. Brand maps provide a graphical representation of ideal values and brand perceptions on two dimensions at a time. Five maps are provided in the study. Ideal value evolution. The study monitors the evolution of consumer needs over time. The preferred values on each scale over the past 3 years are recorded and displayed in a table for each consumer segment, as shown on Figure 52. Additional graphs. The charts and graphs listed above are given in the main report of the study. Two additional series of charts can be found by clicking on a link at the top of the study. The first series will provide you with a graphical representation of ideal point evolution since the beginning of the simulation. The second series shows the relationships that exist between brand physical characteristics and brand perceptions. These charts are mostly used to design R&D projects are discussed in more details in chapter VI. F. Multidimensional scaling of brand similarities and preferences This study provides a joint space configuration obtained with non-metric multidimensional scaling. It relies on similarity and preference data on the complete set of brands available in the market. These data were obtained through interviews with 200 individuals. Several charts and graphs are given in this study, as explained in the next few paragraphs. Perceptual Maps. The study gives the minimum number of dimensions that are sufficient to p