TMG_Overview

TMG_Overview - 13. Overview of the Effects of Decision...

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Unformatted text preview: 13. Overview of the Effects of Decision Variables The Marketing Game! model is interactive—meaning that a finn's performance depends on its whole set of decisions as well as decisions made by other firms in the industry. As a result, there is no “right” decision in a specific area that will always work. Rather, firms must plan strategies that are consistent across decision areas and that anticipate what competitors are likely to do. Thus, any effort to describe the isolated effects of a specific decision variable risks some oversimplification. On the other hand, it is often useful to have a general overview of the key effects of each decision area. This chapter offers a concise summary of the major ways in which each of a firm’s decisions will affect its results. To keep the discussion focused . this chapter does not delve into the details of the simulation model—or into the Specifics of how decision variables interact. That material is provided in the next chaptermwhich presents a more thorough and detailed explanation of the logic and computational flow of the simulation model. Parts of that chapter are technical in nature. ' Either chapter can be read independently and there is some overlap in the discussion. However, you will find that they both offer insights—from somewhat different perspectives—on the market environment of the game. The Marketing Game! focuses on strategic marketing variables. In each game period, firms make decisions in the following areas (some decisions are marked ‘optional’ meaning they may not be activated at the less difficult game levels): Product: Brand Name (for identification only) Product Features (optionalwsecond product) Place: Distribution intensity (% of dealers) for each channel Customer Service: Total firm expenditures The Marketing Game! 193 Chapter 13 Promotion: Advertising: Expenditure level Advertising Type (optional) (optionai—second product) Personal Selling: Number of sales reps in each distribution channel Percent of non-selling time (optional) Commission rate (optional) Sales Promotion: Expenditures in each channel (optional) (optional—«by product) Price: Wholesale Prices (optional—in each channel) (optional—by product) Market Research: Requests for reports (optionatw-by product) Demand Forecasting: Requested production order quantity (optional-em product) Each of these decision areas is discussed in more detail in the sections that follow. PRODUCT Brand Name The brand name is used for identification purposes only and has no impact on a firrn's results. Although there are no restrictions in the computer program that require a firm to keep the same brand name throughout the game. we strongly recommend that firms not be allowed to change brand names once the game is undemay. Such changes can be confusing to other firms in the industry and serve no useful purpose. Product Features Each product type (i.e. voice recognition device and digital vocal communicator) has three design features. which may be modified within the allowable ranges. A brand's features directly affect how attractive that brand is to the different market segments. Other things being equal, a brand with features close to those desired by a segment will have a higher share of sales than brands, which do not match that segment's consumer preferences very well. Thus, product features are one factor which influence a brand's market share of a segment. 194, Mason 8. Perreault _W Overview of the Effects of Decision Variables Product features have another role in the simulation. In addition to affecting the share of sales that a firm receives, product features also affect demand (and therefore the total unit sales volume)- The closer that available brands match the preferences of a segment, the higher the sales volume to that segment will be. in other words, designing brands to satisfy customers increases the market potential. Product features aiso affect unit production costs. And changing features results in product modification costs. Larger R&D changes in a singie time period are i l i i I much more expensive than small changes. PLACE Distribution Intensity Firms set the distribution intensity — measured as the percent of dealers in each channel who stock and sell the software. (This is a revision of and replacement for the "market exposure" decision from the previous edition.) Note that the "ideal" level of distribution intensity depends on the rest of the marketing mix. It is especially critical that the firm set the sates force size to match their distribution intensity. The percent of dealers that the firm wants to work with determines how much work sales reps have to do. A distribution intensity that is too high given the number of safes reps leads to a situation where sales reps are ovenNorked and cannot effectively service their accounts. Too tow a distribution intensity relative to the sales force size leads to wasted spending on persona! selling. individual firms can keep track of their sales force workload by purchasing the Marketing Effectiveness Report (Report 4). The distribution intensity also influences the brand’s availability to customers — and thus the "push" it gets from dealers in a channei. Other things being equal. the firm with greater distribution intensity will have the greatest channel push. CUSTOMER SERVICE i In all difficulty levels of the game, firms specify their total annual expenditures on customer service - customer service supports both products if a firm has two products. Spending on customer service affects both market shares and total ‘ category demand. For each firm, the "expected" customer service spending depends on the current “instalied customer base” as measured by total units sales (of both products) in the previous period. The ratio of actua! spending to the "expected" spending results in the individual firm’s‘customer service rating. Furthermore, if a firm's rating is lower than the industry average, sales and market share will drop. Conversely, a higher than average rating will lead to : relatively greater sales and market share. The Marketing Game! 195 Chapter 13 in addition, customer service spending also affects the total industry demand. As the level of total industry customer service expenditures exceed the expected level, category growth is boosted. In contrast, lower than expected spending on customer service can depress industry demand. . 'ixdxr'z'JW: PROMOTION Advertising Expenditures Each firm decides how much to spend on advertising for each brand. Advertising expenditures have two possible effects: '(i) to raise the level of brand awareness among customers and, (ii) to encourage growth of primary demand for the product market. In general, increased advertising spending leads to increased brand awareness. However. expenditures by one firm are compared with the industry average—thus, simultaneous escalation of advertising spending by all firms tends to drown one another out. In addition, there is a saturation point. Outspending competitors beyond the saturation point leads to iittle additional benefit. Advertising expenditures also spur the growth of primary market demand. As the level of total industry advertising increases, so does the market potential. In contrast, low levels of industry advertising will reduce the level of market growth. Once again, there is a saturation point beyond which increased total industry spending has little impact. Advertising Type (Optional) ln levels 2 and 3, firms choose which type of advertising to use for each brand from the following: pioneering, direct competitive, indirect competitive, reminder, and corporate. Each of these types has a different effect on the market: PIONEERING advertising helps to encourage primary demand for the product market. This can be eSpecially useful early in the game when the total market is relatively small. Pioneering advertising that helps to expand the overall market may be a better choice than competitive advertising that aims to increase a firm’s share of the market. Pioneering advertising may atso make sense if a firm has a large share of the market—- and the firm with the largest share will get the most benefit when the overall market expands. DIRECT COMPETITIVE advertising increases a firm‘s advertising effectiveness in the period in which it is used, but has relatively littie carryover to future periods. This type of advertising aims to increase a firm’s market share in the current period but has iittie impact on overall market growth. INDIRECT COMPETITIVE advertising also increases a firm’s advertising effectiveness in the period that it is used (although the effect is less than with 196 Mason 8. Perreault — Overview of the Effects of Decision Variables Direct Competitive). In addition, compared with direct competitive there is more carryover benefit in future periods. REMINDER advertising can be useful for a firm that has achieved brand awareness of at least 50 percent. if this is true, then reminder advertising will stretch a firm’s advertising dollars. On the other hand, as brand awareness drops below 50 percent, then reminder advertising is increasingly ineffective. i l g CORPORATE (institutional) advertising is usefut for a firm with two products— because institutionai advertising for one product has spillover effects to the other product. For a firm with one product, corporate advertising is less effective than the other options. Number of Sales Reps Each firm decides the number of sales reps in each distribution channel. The number of sales reps directly affects (i) how well the firm is able to sell to and support the dealers and, (ii) the overall ‘push' the dealers give the finn‘s brand in a channel. The number of dealers that the sales reps must call on is determined by the percent of dealers specified. by the distribution intensity decision. Too few sales reps for a given distribution intensity means that the safes reps are stretched too thin, and are unable to give each retaii account adequate time and attention. Safes effort in Channel 1 exhibits decreasing returns — that is, it takes increasingly more sales reps to achieve a greater percent of distribution intensity. For example, to increase the percent of dealers from 10% to 20% requires about 3 sales reps selling full—time, whereas an increase from 80% to 90% requires about 4.5 full time sates reps. In contrast, adding sales reps in Channel 2 exhibits constant returns to scale, i.e. is linear. lfa firm has two products, then some increase in the sales force size is needed compared with a single product firm. The number of additional sates reps depends on the relative emphasis the firm places on the two products. If sales of one product are small compared with the other, then not many additional sales reps are needed. On the other hand, if the two products have approximately equal sales volume, then up to 40 percent more sales reps may be needed as compared with a singie product firm. Changes in sales force size from one period to the next also affect a firm’s results. When a firm decreases the total number of sales reps, $5,000 in severance pay will be charged for each sales rep fired. When the size of the sales force is increased, the new reps spend 20 percent of their first year in training and are only available for selling 80 percent of their first year (note that the percent non-seliing time wiil reduce their "effective" selling time even further). Each sales rep gets $20,000 a year in salary. Sales Salary expense is allocated between products when the firm offers two products. The Marketing Game! 197 Chapter 1-13 Percent of Non-Selling Time (Optional) in levels 2 and 3, firms decide how much time the sales reps will devote to non- selling activities. in level 1 the percent of non-selling time is fixed at 10 percent. As described above, one effect of percent non-selling time is to reduce the amount of time a sales rep has for selling. in addition, percent non‘selling time determines how satisfied dealers are with the amount of support they receive from a firm's sales reps. In general, increasing the percent non-selling time (relative to competitors) will increase the deaters’ satisfaction. This, in turn, leads to a stronger competitive position. The magnitude of the effect of non-selling time varies across the channels. The traditional dealers in Channel 1 are much more responsive to non-selling activities than are the discount dealers in Channel 2. Commission Rate (Optional) At levels 2 and 3, firms decide the commission rate for their sales reps. At level 1, the rate is fixed at 5 percent. The commission rate directly affects the motivation of the sales reps and the amount of effort they put into selling. The effect is determined by both the absolute commission rate as weil as the commission rate compared with that of competitors. In the absolute sense. 5 percent serves as the anchor point—rates above 5 percent will increase the effort put forth by sales reps, and rates below 5 percent will lead to reduced effort. in a relative sense, the firm with the highest commission percent will have the most aggressive sales force, and the firm with the lowest rate will have the least aggressive sates force. Sales (Trade) Promotion Expenditures (Optional) In levels 2 and 3, firms decide on sates promotion spending in each channel and for each brand. Sales promotion expenditures may have two possible effects: (i) reduce the retail price through deals and allowances, and (ii) enhance personal selling effectiveness by building goodwill with dealers. The effects vary across the channels. In Channel 1, the dominant effect of sales promotion is the building of goodwill, whereas in Channel 2 the dominant effect is to reduce the retail price. How much goodwill is prompted through trade promotion spending also depends on the distribution intensity tevel — the greater the percentage of deaiers the firm is trying to serve, the more "diluted" the effort of a given dollar amount of promotion. it is important to note that sales promotion is a ‘relative' issue—if all firms spend equally on sales promotion, the goodwitl effect canceis out leaving firms no better off than if they had all spent nothing on sales promotion. (It is only the goodwill effect, and not the price reduction through deals, that cancels out.) 198 Mason 8. Perreauit Overview of the Effects of Decision Variables WHOLESALE PRICE(S) in level 1, each firm sets (one) wholesale price for its brand. This one wholesale price is used in both channels of distribution. In levels 2 and 3, firms set the wholesale price separately for each channel. Retail prices are computed from the wholesale prices using a markup on selling price of 50 percent in Channel 1 and 35 percent in Channel 2. These retail prices are then discounted based on the amount of sales promotion expenditures (if any) available for deals and the number of units sold on deal. Different segments have different price sensitivities — so retail price influences the share of a segments purchases. l MARKET RESEARCH In each period, firms may purchase any or all of the market research reports listed beiow. Purchase of market research has no direct effect on a tirm's results other than the cost. However, there should be an indirect effect as the information purchased can greatly help a firm to develop and implement an effective strategy. Cost for Cost for Product 1 Product 2 Research Report Title Number ‘- — -- -_ 4 Marketin Effectiveness Reort $25 000* $25,000‘ Unit Sales 3 Sement and Channel $15,000 $15,000 Customer Sho in Habits $7 000 Product Positionin Reort“ $30 000 $30,000 * Since part of the information in Report 4 is the same for Product 1 and Product 2, the cost to purchase this report is $25,000 for one brand or $30,000 for both brands. ** Report 7 is only avaiiable in Levels 2 and 3. l Reports 1, 2, and 5 contain market share andlor actual sales volume data and wilt vary with each decision period. Report 4 summarizes the effectiveness of a i firm’s decisions in the promotion and customer service areas and will also I change with each decision period. Report 3 contains average customer ; preferences. These reported preferences vary from one period to the next due to two factors—some of the variation comes from sampling error and some represents actual changes in preferences. However, these changes are gradual and move in a consistent direction over time. Report 6 provides customer 1 shopping habits. The reported figures vary over time but, unlike report 3, all the variation is sampling error and the true shepping habits are constant throughout 1 the simulation. The product positioning numbers in Report 7 depend on the i availabie brands' features (excluding price), the segments' ideal points and l importance weights —~ and will vary from one period to the next. The Marketing Game! 199 200 PRODUCTION ORDER QUANTITY In each decision period, firms must estimate the demand for their brand(s) in order to decide the amount of production to request. Aithough the actual production quantity will, in general, differ from the requested amount, the amount requested sets both lower and upper bounds on the actual production. Specifically, actual production is adjusted from the requested amount by up to 20 percent in either direction to meet demand. Thus, if a firm underestimates demand (and hence, the requested production), the actual production will automatically be adjusted upward by as much as 20 percent. Beyond that point however, the firm will lose potential sales due to a product shortage. If this happens and other firms in the industry have not reached their iimit on production, then half of the potentiai lost sales will spillover to competitors and haif wilt simply be lost. On the other hand, a firm may overestimate demand (and hence, requested production). Once again, actual production wilt automatically be adjusted downward by as much as 20 percent. Beyond that point however, no further adjustment is po'ssible (since the product is already made and in inventory). if this happens, at theend of the period all excess inventory is automatically transferred to an overseas subsidiary. The revenue received for transferred inventory is equal to only 85% of the product's unit cost-—-—the 15% difference (loss) will appear as Transfer Charges on the fin’n’s financial summary. Transfer charges are not charged against the budget. BUDGET FOR NEXT PERIOD While not actually a decision variable for firms to decide, the budget amount is a variable in The Marketing Game! Initially, all firms start with the same budget of $984,000. However. once the game is underway, a firm's budget will depend on its net contribution. The higher a finn’s net profit contribution in the current period, the higher its budget wilt be for the next period. However, the relationship is noniinear—as net contribution increases, the budget also increases but at a decreasing rate. And, even if a firm is not profitable, it will still receive a budget for the next period. The minimum budget amount is $800,000 and any firm with a negative net contribution will receive this amount. Occasionally, firms want to know what happens ifthey don't spend their entire budget. The answer to this is two-fold. First, whatever isn't spent aiso isn't an expense. Thus, to the extent that not spending the fuil budget amount reduces expenses, that will help to increase the net contribution. However, this must be balanced against the expected gains in sales revenues that could have resulted from spending the additional amount. Only if a firm believes that it has reached the point where the gains don't outweigh the extra expenses should a firm try this approach. Second, that portion of their budget that isn’t spent cannot be saved for later periods. In each period, the budget for the next period depends solely Mason & Perreault Overview of the Effects of Decision Variables i l I ! on net contribution in the current period. For example, assume a firm chooses not to spend its entire budget and winds up with a negative net contribution. Its budget for the next period wili be $800,000—the excess does not carry over. (However, any unused residual discretionary reserve funds do carry over to successive periods.) The Marketing Game! 201 ...
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TMG_Overview - 13. Overview of the Effects of Decision...

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