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Team A
November 2011
University Of Pavia
Introduction
Advanced Marketing course taught by Prof. Birgit Hagen and Prof. Stphane Ganassali provided us with the opportunity to participate in Markstrat Simulations. In November 2011, we as Team A and other 5 teams were asked to practice our marketing strategy and management skills in the Markstrat world. During the simulation we had 10 different periods in which we asked each of these to take different types of decisions regarding Marketing mix , sales force, Research and Development, Brand Portfolio and Market research studies. In this report we decided to divide our Markstrat experience into 3 milestones according to our performance during the simulation and for each of these milestones we highlighted the context, strategy, marketing mix, financial and market performance . Our first milestone was characterised by best results compared to our competitors. Our decisions for the second part has affected our results which led to a huge decrease both in market share and net contribution. Our team decided to recover our position, thanks to better marketing decisions, R&D decisions and Financial decisions, we were able to compete with the first 2 competitors. We decided to divide our report in this way because we think this is the best way to describe our track during this enjoyable journey.
Team A is:
Federica Merli fede.merli.87@hotmail.it Valentina Salvini persemprevale@hotmail.it Filippo Vescovo filippo.vescovo@gmail.com Khader Alsadi khader.alsady@gmail.com
Summary
CHAPTER 1 The Great Illusion (Period 0 to Period 3)
1.1. The Context 1.2. Evolution of the simulation during period 1 to 3 1.3. Our strategy 1.4. Financial & Market performances 1.5. The Marketing Mix Recap 1.6. Research & Development Pag. 3 Pag. 4 Pag. 5 Pag. 5 Pag. 7 Pag. 8
At the beginning of the simulation all the six competitive firms started from the same level of market share, sales and all with two Sonite brands in the market (with the same characteristics). Our products were: SAMA and SALT.
The Sonite market is composed of five customers segment. Each one represents different customers preferences and purchasing behaviours. - Buffs: people in this segment are very interested in Sonite products and they are extremely knowledgeable about Sonite technology. They are quite price sensitive and they demand high performance products. - Singles: they demand average level of both performance and convenience in Sonite product; like Buffs they are quite price sensitive. - Professionals: they are looking for high quality, high performance. They can afford expensive products and often view price as an indication of quality. - High-earners: this group of people have an high income so they can purchase relatively expensive products and their purchase is partially motivated by social status. - Others: this segments includes all consumers who do not belong to any of the above group, and usually they are looking for cheap, low-performance products with average convenience.
Sonite and Vodite consumers purchase in the following three distribution channels: - Specialty stores These stores are usually small and do not belong to organized chains. They are geographically close to their customers and can provide a high level of service and technical support. 3
Simulation Report - Team A - Department stores Department stores are characterized by the wide product assortment they offer, but their technological expertise is lower than that of specialty stores. - Mass merchandisers - These stores operate on a low-price, high volume basis and try to minimize overheads.
As concerning the competitive environment, the first three periods saw good performance by our group and group O, both in terms of market shares (21% and 19% respectively), and Net contribution ($ 30+M and $40+M).
In period 2 we noticed the possibility to enlarge our brand portfolio in the Vodite Market, that seemed attractive because it was a so-called Blue-ocean market, with no competitors and high growth rates in the future. For this reason, in period 2 we started an R&D project in order to create the first Vodite (available in period 4).
SAMA, during the first three periods was chosen to target two segments at the same moment: Others and Singles, both of them dynamic groups with growth rates between 20% and 30% each year. As regarding the market share, the performance was quite stable in the first two periods, while in period 3 it registered an increase for the segment Single from 16,7 to 26,6%, and from 7 to 9,6% overall (Sonite market). 5
Simulation Report - Team A Even if in the market share SAMA performed quite well, the same cannot be said for its profitability. And this fact is linked to two clear reasons, marked with red in the table. SAMA
Periods Sales Units sold Average retail price (final consumer) Average selling price (distributors) Revenues Production Units produced Average unit transfer cost Cost of goods sold Contribution before marketing Marketing Advertising expenditures + Sales force Contribution after marketing K$ K$ -1.500 4.138 -1.890 5.399 -2.140 3.970 -2.690 5.491 U $ K$ K$ 80.000 74 -5.261 6.250 80.000 65 -5.350 8.033 96.000 58 -5.650 6.947 151.000 70 (a) -10.553 9.126 U $ $ K$ 71.320 244 162 11.562 82.535 243 163 13.414 97.064 194 (b) 130 12.621 150.955 193 131 19.737 Unit 0 1 2 3
a) During the second period, our company started the R&D project PSAM2 in order to upgrade the product, making its physical characteristics more suitable to the two segments, working on design and power. The error here was to work only on those two characteristics and not on its producing cost: with 1 M more invested on the R&D project, the production cost could have been decreased in order to increase the profit margin. The result then resulted the opposite: as can be seen in the production cost per unit, from period 2 to period 3, the production cost raised from 58 to 70, with a resulting in a big jump in terms of COGS. b) In period 2 we decided to decrease the selling cost for SAMA from 250 to 200, in order to cut away our competitors and secure the segments of Others and Singles, which were also the most price-sensitive. Even if the move worked in terms of market share, the same cannot be said in terms of its profitability. If in period 1 SAMA was sold at 163 to the distributor, in period 2 the value shrinked to 130, with a decrease in margins. Said this, inventory (<10% of units sold for all three periods) and sales forces resulted appropriated. SALT (performance rating: A-)
SALT was the product that was targeting Pros and Hi-Earns segments (with annual growth rates between 14 and 20% during the first three periods). As regarding the Market shares, we can take a look at the graphic here, where there are represented the market shares of SALT for three segments. We can notice a substantial equilibrium in the first two periods, while in the third, the product became the Hi-earns first product of the market with a share of 30,3%. This phenomenon can be explained both with advertising policies and price policies (the price was increased). 6
Simulation Report - Team A For what concerns the profitability, SALT resulted in much better performances than ones of SAMA, with a net contribution that grew during all the periods and passing from $16 M in period 0 to $28 M in period 3 (+175%) and a doubling in units sold. In period 3, the increase of the price increased the margin, while did not affected at all the market shares (Hi-earners instead, increased). SALT
Periods Sales Units sold Average retail price (final consumer) Average selling price (distributors) Revenues Production Units produced Average unit transfer cost Cost of goods sold Units in inventory Contribution before marketing Marketing Advertising expenditures + Sales force Contribution after marketing K$ K$ -3.100 12.479 -3.550 21.724 -3.895 27.350 -4.390 28.820 U $ K$ U K$ 97.400 161 -15.680 6 15.591 135.200 134 -18.069 95 25.278 156.000 121 -18.850 0 (A) 31.154 177.100 148 (B) -26.170 45 33.010 U $ $ K$ 97.394 493 321 31.271 135.111 493 321 43.348 156.095 492 320 50.005 177.055 508 334 59.180 Unit 0 1 2 3
Anyway, two little mistakes could have been avoided during the period, in order to increase the Net contribution. The first (A on the table) is due to a too low level of production during period 2 (we did not dimensioned the level properly), but during other periods, the level of production have been forecasted quite well, with low inventory cost. The second is similar to the error made for SAMA. With the developing of the R&D project PSAL2, we focused only on characteristics without taking into account the production price: a bigger investment could have bring higher profits in the period 3 and followings.
Simulation Report - Team A SALT Production: the team decided to increase the production in all the three periods as in the case of SAMA. The average increase was much higher than SAMA, since it was 47%. This was due to the fact that despite all the efforts made by the Production department, they were not able to fulfill all the orders of the brand. Price: the starting price was much more higher than SAMAs price and it was settled at 500. We decided to increase a little (from 500 to 515 in the period 3). Since we targeted Professionals and High earners, which are less price-sensitive in comparison to the other segments, we did not expect a negative reaction for the increase in price. Promotion: the advertising budget was increased both for media and research, in order to reach the targeted segments; Place: we focused mainly on Specialty stores and secondary on Department stores, since our segments shown high level of purchasing in these distribution channels. Moreover, they provided higher technical support.
We also started an R&D project for developing our first Vodite product in period 2 and we finished it in period 3. Regarding this project, we did not have a precise idea of what was the best solution to satisfy the Vodite Markets consumers. We invest only 4,6 M$ in this project and this amount of money was very low to create a good product. In particular, the prototype resulted weak in terms of Autonomy, Max Frequency and Design.
Vodite The central part of simulation saw also the born of the Vodite market. Lets take a look at its segments. Innovators (In) These consumers will be the first users of Vodite products. Although this segment will probably be the largest one in the early days, it represents only a small percentage of total potential consumers. 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. 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. 9
Simulation Report - Team A Vodite market officially started in period 4, with the launch of VARA product by our group and VOA1 by group O. Our main competitor (firm O), launched its first Vodite product much better than our VARA and they reached almost 98% of market share in Vodite Market in the first year. In period 6, two new competitors entered, group E with its VERI, and group and VYBI by group Y. They performed much better than us, leaving our VARA at weak market shares. As it will be explained later, the bad characteristics of our product were putting it completely out of the market. Overall, our weak performances turned out in lower budgets, period after periods. Our financials have been saved in period 6 by a $ 4M loan (used to re-launch successfully our Sonite and upgrade our VARA) and in period 7 by an external surprise bonus of $5 M. Those two injections, united with better marketing policies, contributed to a remarkable recover for our Sonites product, especially during period 7.
The lowest peak was reached in the 6th period, when we ended with a very low budget, and so we had to ask a loan of $4 M, mostly used for the improvement of our Vodite product, VARA. 10
Simulation Report - Team A But lets see now the performance product by product. SAMA (performance rating: C-)
SAMA started very bad, registering in period 4 a loss in terms of market share of 35,1%, due to our competitors SIRO and SOLD, that stole us relevant part of the Others segment. Our reaction as it will be explained in the R&D chapter was to start a modification of the product in order to better target the segment of Others (which was, in the long term, the biggest and most dynamic in Sonite market). In period 5, when we launched the new version of SAMA we made a very big mistake and we underestimate the quantity of unit sold. By producing so few units (60k, from 100k in the previous period), we suffered 2 bad effects: 1) we loss potential selling, and so revenues; 2) we did not benefited from scaleeconomies, resulting in high producing cost, and so low margins; those bad mistakes bring us to a loss again in market share, and a negative Net contribution. In period 6 we performed better, and we could steal some of the lost market share and avoiding negative Net contributions, while in period 7 SAMA finally came back as one of the Others mass products (11,6%, third positioned in the segment), but still not so good in terms of revenues (less than 7% of our companys revenues), also because of the low margins of the segment. SALT (performance rating: B+)
SALT was the product that could make us survive during the central part of the simulation, covering on average more than 90% of our total revenues. The success of SALT during periods 4 to 7 was mainly due to its good positioning among the segment of Hi-earners, especially in terms of physical characteristics. This fact granted SALT to be the segments first product in the market, with shares between 35% and 23%. Exploiting its high margins and scale economies, we could make SALT a good source of revenues between $31 M (period 4) and $21 M (in period 6). SAFA (performance rating: C+)
SAFA was launched in period 5 with the intent of targeting the segment of Single, that we considered potentially very profitable, both because of market forecasts, both because the competition was not too high (competitors, in fact, concentrated more on the Other segment than Single, during all the simulation). SAFA, during periods 5 to 7 performed well in terms of market share and bad in terms of net contribution. As regarding market shares, it reached in the second year the 23% of Single segment, making it the first product for this group of consumer: a very satisfying result. At the other side of the coin instead SAFA turned out to be a great delusion, registering weak performances in terms of revenues. This result is mainly due to our bad price management. In fact, SAFA was launched with a retail price of $ 220, which alone could not cover the cost of production: an important mistake mainly due to our inexperience, that we could understand only on the next period. After having understood the roots of our mistake, we decided to put up some modifications: We increased the price from 220 to 260; We concentrated more the sales force in the specialty stores, where the margins are bigger.
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Simulation Report - Team A The result was that, after 2 periods of negative performances, Net contribution resulted in $1,3 M in period 7 (with selling lost in this period due to under-estimation of the production), and eventually increased in later periods. The change in price did not result in a lost in market share, nor it changed the perception of customers. Probably, the price could have been raised until 280, where our segment-competitor SINO was located. VARA (performance rating: E)
VARA was launched in period 4 with the highest expectations, because it was the first product in Vodite market. Production units was dimensioned at 80K units, 50% of the expected new-born market (we did know that one of our competitors was going to launch another Vodite in the same period). The result was a disastrous: just 2K units were sold, corresponding to 1,4% of the new-born Vodite market. In the following period units sold increased to 27K, mainly due to the growth in the Vodite market, and again, in period 6 selling went down to the entering of new competitors. Weak performances were registered for the product also in terms of revenues: negative Net contributions in all the three periods. How this happened? The answer is clear and simply: our product was very bad, and too low R&D investments were put on it. The result was that consumers were not buying VARA, and so retailers were forced to sell it under-price, between 370 and 400, compared to a retail price of (on average) 500, and production cost was around 400. Vodite so registered low selling, and those few were also characterized by a price lower than production cost, resulting in negative net contributions, even before the marketing expenses. In few words, VARA during those periods was a total disaster, and for this reason our team decided to invest $3.5 M for the improvement of the product, using the money of a loan we received in period 6.
SALT Production: the production was decreased a little in the fifth and sixth periods; Price: the team decided to maintained the same price for all the macro-period; Promotion: the advertising budget was increased both for media and research, because of lower budget in comparison to the previous periods; 12
Simulation Report - Team A Place: thanks to the sales force experiment, the team understood that the sales force distribution was allocated in the right way.
SAFA (introduced in period 5) Production: the starting level of production was fixed at 150 KU for both periods 5 and 6; Price: the price was fixed at 220 and the targeted segment was Singles, since the market forecast shown a high growth level; Promotion: the team spent a little bit more in 5 period, since it was a key step in the introduction in the market. One year later, the budget decreased by -18%. Place: we focused mainly on Specialty stores and secondary on Department stores, since our segments shown high level of purchasing in these distribution channels.
VARA (introduced in period 4) Production: the team decided to start with 100 KU of units produced. After its first period, it showed that it was not the right product that satisfied the need for that specific segment, the Innovators. Price: in the first period the fixed price was 680, which was much higher than our main competitor VOA1, launched in the same period. Then, the team decided to decrease the price (even if the base cost was very high) in order to reach a higher market share. Promotion: the advertising budget was increased in the period 6 both for advertising media and research (+18%); Place: VARAs sales allocation was distributed mainly between Department stores and Specialty stores, according to consumers habits research.
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In terms of competition, the expanding of the market did not result in great competition: Group O increased its market shares until 50% of the total market (both in terms of Value and units sold)in the last period, becoming a monopolist-like group; In period 8, many brands folded, passing by 26 to 23, while instead an increase was expected.
The greater change that was observed during this period came essentially from our group A. In fact, our new-modified-VARA was able to steal relevant shares to group O in the Vodite market. In the last period, relevant performances came by product VYBE of group Y.
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As it can be seen, the great part of our success was due to the stunning performance of our Vodite product VARA. The other increase came from the product SAFA, while SALT decrease dramatically, from $24 to $9 K. But lets see now the details product by product.
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SAMA bring us very low margins during all the last three periods, and so low level of revenues. Could we make it better with this brand? The answer is yes, and to understand it we can take a look at our competitors. In the table here there are values of SAMA and the two main competitors SEMI and SOLD in periods 8 and 9 (average values). First of all, we can see that those two products were selling much more than us (<30% compared to 10%), mainly thanks to a better advertisement (product characteristics were more or less the same). SEMI and SOOT had been turned out to be more profitable than our SAMA because of 2 reasons: They were selling more (due to better positioning), and so producing more: this let them decrease production cost with scale economies; Their basic margin between production cost and retail price were greater at the beginning (86, compared to 89 and 99);
Said this, the segment Others were the less profitable one in all the Sonite industry because of its state of maturity and so its low prices to consumers. Surely, we could have increased our revenues here with greater volumes of selling, an objective failed due to weak marketing policies, and so bad positioning. SALT (performance rating: C+)
SALT were the second disappointment of the last part of the simulation, passing from a market share of 21,8% among Hi-earners (2nd position) to just 6,6% in period 10. In terms of net contribution, it passed from $24 K of period 8 to $9 K in the last one. How can be explained this big loss in market shares? Lets see to whom we lost them: SELF and SOHI: the first went from 55 to 70%, while SOHI from 5 to 20% of Hi-earners segment. Their better results came from: Better positioning through advertisement (they spent on average $ 800 more than us, and had registered better results, as can be seen in the table communication dimension and message quality that we purchased in period 9). Better price-policy: both of our competitors decreased the price while we were maintaining it constant: it bring them more close to consumers in terms of economy and convenience.
Lost in market shares turned out to decrease deeply profitability and so, Net contribution. In the end, we can observe that, with a decrease in selling price (assisted by a better and greater investment in terms of advertisement), even if our per-unit margins would have reduced, scale economies would have maintained the product very profitable.
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SAFA, compared to the other two Sonite products, turned out to be a good success. In terms of market shares, it passed from 22% of Period 7 to 31% in the last period, consolidating its first position among the segment of Singles. SAFA have probably been the brand that we better managed. In terms of price management, even if we offered the highest price among our segment-competitors SOLD and SUSI, we did not lost any market share. In terms of advertisement, we registered a poor performance (see market research studies of period 9), mainly due to low budget, on average $ 500 below SOLD and SUSI volumes. Our success in this segment was the characteristics of SAFA, which was much better than our competitors, especially in terms of Power (68, compared to 40 and 50), which was the second most relevant characteristic after price. In this sense, merits go to the R&D department that created an ad-hoc product for the segment. A bad mark goes instead to the dimensioning of the volumes to be produced: in period 8 the production resulted in being too low, and so we lost potential customers. VARA (performance rating: B+)
VARA was our biggest disappointment in the central part of the simulation. In the last part it became instead our biggest success. In period 8 we introduced the new model of VARA (based on the R&D project PVAR1), and the results came: units sold passed by 7 to 111K and market share from 1,5% to 15%. Despite those numbers, the Net contribution turned out to be negative, mainly due to our inventory disposal loss which is the cost derived by the lost of old Vodites we had in inventory (without this negative line, VARA would have turned out in a Net contribution of $3 K. Period 9 was a consolidation of the previous success: units sold from 111 K to 248 K, with an increase of market share from 15% to 24%. Net contribution resulted in $19 K. The result came surprisingly with the increase of the sales among the cluster of Early Adopters, rather than Followers.
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Simulation Report - Team A SALT Production: the production was almost at the same levels for all the periods (130KU); Price: the team decided to maintained the same price for the first three periods, since the team decided to focus on High Earners, but it was decreased during the last period from 515 to 450; Promotion: the advertising budget was increased both for media and research, because the available budget was addressed to the brand with lower brand awareness; Place: we focused on Specialty stores and Department stores.
SAFA Production: the level of production constantly increasing, because of the success of this brand on the targeted segment (Singles); Price: the price was fixed at 260 for the four periods. Promotion: the team decreased the expenditure on advertising media and there was a focus on the advertising research, in order to have a good quality of the message; Place: the sales forces were distributed in all the three distribution channels with no significant difference.
VARA Production: the production constantly increased in all the periods, since we introduced a modified brand in period 8 which met the need of both Followers (95% targeted) and Early Adopters (5% targeted); Price: in order to satisfy segments needs and to compete with other 8 Vodites products the team decided to decrease the price from 600, in the first two periods, to 550 in the remaining periods; Promotion: the advertising budget was constantly increased in all the periods because we observed that our product was one of the best in terms of quality; Place: the sales forces were distributed mainly in Department stores and Mass merchandiser.
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