STRATEGIC MARKETING MANAGEMENT

WINTER 2014

Market Strategy Report

Team 44

Industry Parrot

Firm Solomon

Instructors: Dr. Barbara Deleersnyder & Max Nohe

Date: 09.03.2014

Team Members: Alex Oschatz, 274379

Andrea Cappozzo, 851826

Catalina Suarez, 907848

Cipriana Baldinazzo, 976917

Laura Wuerz, 340584

Natasha Koppert, 623677

Team Secretary: Alex Oschatz

Email: a.oschatz@tilburguniversity.edu

Phone: +31 612791835

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Strategic Analysis

External Analysis:

The Sonites market is a highly competitive market made of 4 different companies. Each of the firms

started with two products, both having the same characteristics but different levels in them and

different prices correspondingly. A big opportunity is represented by the market growth: the industry

volume has risen from 702 million in period 0 to 1197 million in period 3, growing by 72%. In addition,

this growth level seems to be stable throughout the periods. On the other hand, the market growth

is also known by our competitors, which may become a threat if they decide to develop new

products. Therefore, the fact that the information about the market as a whole is very easy to obtain

throughout affordable research investments, represents both an opportunity and a threat for our

company. The Sonites market segments were identifiable from the beginning and could be summed

up and categorized into two main groups of consumers: customers who are looking for high quality

products, such as the High Earners, Professionals and Explorers, and consumers seeking products

with intermediate or low quality such as Shoppers and Savers, which are expected to become the

largest segments in the coming periods (Appendix 3) and hence might represent an opportunity. The

Savers represent a steady segment with regards to their preferences which is another opportunity in

terms of product positioning. However, the Shoppers have a more unpredictable and unstable

behavior (Appendix 5) and the difficulty to deal with unforeseen changes/turbulence (De Meyer,

Loch & Pich 2002, SMJ, p. 60) is a threat. Moreover there is the risk that Shoppers` and Savers` needs

could overlap, due to the similarity of the two segments. During the 3 periods we could see that

consumers are generally strongly influenced by the prices, though the relative effect differed per

consumer group. As a result the market is very focused on competing for having the ideal price.

In the Sonites market there are three different distribution channels: Specialty Stores, Mass Markets

and Online Stores. All consumers, except Savers, prefer to buy their Sonites products in Specialty

Stores. Savers prefer Mass Merchandisers, which is no surprise since Savers have the largest

emphasize on price.

For our two Sonites products, Soft and Solo, until the end of period 3, we have had the same main

competitors constantly: Move and Most (table 1). Yet in this period we have a new competitor: Root.

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The strategy adopted by our competitors consists of improving the characteristics of their existing

products to fit the needs of a specific sub-segment. To give an overview of the competitive situation

we applied Porter`s 5 forces model in Appendix 12.

To conclude, we are dealing with a stable economic environment, in which iwe have the opportunity

to easily access information about social-cultural settings.

Internal analysis:

Starting from P0 two products compose Solomon’s brand portfolio: Soft and Solo. The physical

attributes of our products, as well as their price and unit cost, are reported in Appendix 2. With the

given attributes, we concluded that our brands are best used to meet the needs of one group only

(Savers and Shoppers respectively) because they are already promisingly close to these consumer

groups. This is a strength. Focusing one product on two consumer groups would be ineffective we

believe. Additionally this is aided by Savers and Shoppers expected to become the largest segments

in the coming periods (Appendix 3).

On the other side, our brands are very similar. This may lead to cannibalization and is certainly a

weakness in our portfolio. On the positive side, according to the MDS, Solo’s positioning does not

require high levels of investments to be modified and better reach its targets expectations. We rely

on these small-moderate investments as our limited budget without a possibility to loan is a

weakness.

Concerning financial assets, several factors indicate that Solomon is financially healthy: First, the

cumulative ROI is 219% and has constantly risen in past periods. Moreover revenues, contribution

before and after marketing have grown constantly (Appendix 6), the earning before taxes increased

by 83%. Most importantly, our SPI grew by 44%, and we are now ranked second in the market by SPI

(Appendix 4). However, our budget has never been - so far - high enough to afford the development

of a Vodites brand without making substantial cuts to our current operation which relates back to the

weakness mentioned in the paragraph above. In terms of brand contribution after the marketing,

Soft currently represents our stronger brand (59% vs. 41% of Solo).

We strongly believe in the effectiveness of the marketing activities and our marketing expenditures

are the highest of the market. Both Solo and Soft have had the highest levels of brand awareness

since P0, which is an important strength and must be maintained. In fact, if two brands are equally

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valued, the brand with the highest awareness will be purchased more often (Rossiter, J.R. and Percy,

L. (1997), Advertising Communication and Promotion Management. Sydney: McGraw-Hill). Also our

distribution coverage has high levels, and the percentages of coverage in the different channels

reflect more or less the shopping habits of our targets (Appendix 7) as we adjusted them accordingly.

Strategy Formulation

We are competing in a Shake-out market, Sonites, which is well-segmented in five consumers group.

At the beginning of the simulation it was clear that with our products we could best satisfy the needs

of two of the five segments: Savers and Shoppers. Accordingly, our long-term strategic goal is to

maintain a strong position in the Sonites markets by giving to the Savers and Shoppers respectively

products as close as possible to their requests and consequently become (market share) leader in

these customers segments. In order to contribute to our competitive advantage we will focus on

competitive and value-based pricing approaches rather than cost-based pricing strategies in order to

set competitive prices and the consumers´ willingness to pay.

Given by the simulation, our ultimate objective is to maximize our Share Price Index. In these graphs

(Appendix 8) the development of the SPI, Revenues, Earnings before Taxes and the Market Share for

the first four periods is displayed. It is already possible to identify constant of growth of our SPI up

until this point. We aim to maximize this, ultimately paying less attention to the other indices like

profit margin or ROI.

On the basis of our SWOT-analysis (Appendix 9) we found that one opportunity is the growing market,

especially the Savers and Shoppers` segments. This allows us to safely invest in this market in the

future. To make-use of the growing market opportunity it is essential to have high brand awareness.

At the moment brand awareness is the best in the entire market (Appendix 10), so consumers can

easily identify our products. Reaching/keeping high brand awareness requires a continuously

constant level investment in advertisement which is in contrast to our low budget available.

The market is relatively mature and the segments are well-defined which implies that consumers’

needs are easy to identify and to consequently offer them the best products. This information can be

also considered as a threat as competitors might buy the same market research information, analyze

similarly and opt to develop a suitable product for each segment or target group as well. Our

products are positioned in particularly competitive segments, for that the characteristics required by

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Shoppers and Savers are very low and subsequently easy and cheap to develop, making the risk of

entrance of new competitors high. The segments in the Sonites market are easy adjustable, therefore

our firm could also enter a new segment with a newly developed Sonites product or modify an

existing one to move to another segment. Due to the fact that this also applies to the other firms in

the market, we should carefully monitor our competitors to prevent further competition in our two

main segments. From the beginning, we only had few direct competitors and hence the opportunity

to build up awareness and position our brand strong in our targeted segment. Therefore the main

threat now is the entrance of new competitors into our segments. In order to defend this threat our

firm can use the strength that it possesses: such as brand awareness and well-positioned brands

along with careful pricing. Nevertheless in a market characterized by increasing competitiveness it is

critical to maintain customers` loyalty by improving our products in order to match perfectly offer

and demand. This requires constant Research and Development investment if customers demand

change.

Another possible threat for our firm is the cannibalization by close positioning and price setting, since

Shoppers and Savers do have relatively similar needs.

On the basis of the SWOT analysis, a confrontation matrix was drawn (Appendix 11) in order to

better determine the company’s position in the market confronting strengths and weaknesses with

opportunities and threats.

After the analysis, using the SWOT and confrontation matrix of the current market and firm`s

situation (Period 3), we made strategic decisions. In order to maintain competitive advantage,

Solomon determined two viable strategies that could be implemented aiming to achieve the long

term goal.

The first strategy is to be the first firm that will enter into the Vodites market, with a high quality

product, in order to achieve the needs of the Innovators and subsequently Early Adopters

requirements. This strategy represents, according to the literature (Miles & Snow, 1978) a Prospector

business strategy. In order to implement this strategy Solomon needs severe adjustments in

marketing mix and brand portfolio. Without any prior knowledge and experience we would have to

invest a large amount into the Research and Development department when entering into the

Vodites market. In order to allow the realization of the project, Solomon would have to drastically

decrease advertisement and sales force for the existing products or alternatively should remove one

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of the two Sonites products from the market, since they would not be profitable anymore without

sufficient advertisement and commercial team. When implementing this strategy, we have to take

into account the significant risk that our firms accepts when entering into the Vodites market - it is a

new, unexplored and unknown market especially in terms of competitors.

Because Shoppers and Savers are segments increasing in volume, the second strategy formulated by

Solomon is to remain in these segments in the Sonites market, trying to match perfectly our existing

products with consumers’ needs along with the Defender business strategy (Miles & Snow, 1978). In

order to obtain this result Solomon should constantly monitor the consumers` behavior through a

massive use of market research reports (i.e. multidimensional scaling, conjoint analysis, etc.) and by

using the R&D department to keep improving the characteristics of the products. Furthermore we

should use our strength, the high brand awareness and continue investing in advertising. However,

Solomon is aware that Savers and Shoppers are high-competitive segments, for this reason the

strategy should not be focused only on market penetration: the risk of an entrance of new

competitors might push Solomon to move from this segments to other, less competitive, segments.

In the end, this second strategy could belong to Defender business strategy but with the possibility to

move in another, more profitable, segment with a newly developed product that would satisfy the

respective new segment perfectly.

Strategy Evaluation: We are not sure if we can enter in the Vodites market due to two factors: a) the

limited simulation time of 6 periods (hence limited time to earn a sufficient ROI) and b) the

unpredictability of the market as of now. Because of our already gained experience and knowledge in

the Sonites market, improving current Sonites products and even develop new ones does not require

as much investment as developing a Vodites product. In conclusion, first and foremost, we want to

focus on the Sonites market and will choose the second proposed strategy.

Strategy Implementation

SOLO:

With regards to our chosen Defender strategy we are focusing mainly on Shoppers with our Solo

brand. In order to keep our market position, we continuously improve our attributes according to the

Shoppers´ preferences. Since we improved SOLO´s product attributes in period 2, in line with the

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values given in the Conjoint Analysis, we replaced our former brand by the improved one in period 3.

We increased the recommended retail price by 10$ to 309$ due to our improved brand attributes

and the “perfect” price for Shoppers we have seen in the conjoint analysis. We also took into account

that the prices or SOLO and SOFT should have sufficiently large distances in order to prevent

cannibalism. We set our production to 180.000 by multiplying the purchase intensions of the

segments by their predicted sizes in the next period considering our expectations of win or lose in

market share.

We decided to spent a total of 2400 k$ on advertising, whereby the main amount, 2000 k$, was

spent on advertising media and 400 k$ on research. 77% was attributed on the Shopper segment,

10% to our second strongest segment, Explorers and the remaining percentages divided between the

others. We are by far the firm with the most brand awareness in the industry and by continue

spending a large amount on advertising we are trying to keep this position.

The main proportion of our commercial team is divided between specialty stores and mass

merchandisers, since these are the channels most used by Shoppers.

The rest of our budget was spent on forecasts and surveys to make sure that we constantly

understand the Shoppers´ needs that are prone to vary somewhat and to early recognize new

entrants and monitor especially our main competitor Move.

SOFT:

As we chose congruent strategies for both products, we were also Defenders with our Soft product.

Soft’s strength was and is its appeal to Savers. Coming from a strong position with an overall markt

share (unit) of 12,5% in P0, we experienced a slight drop to 12,2% in P1. We believed this was not

due to an increase in price (210$ to 215$) as this was set evaluating the conjoint analysis (with

caution as to how trustworthy it would be), but rather due to our main competitor MOST fitting

Savers’ expectations better. In fact we felt the price was still below optimum and hence increased it

to 223$. While a further drop in market share in P2 to10,1% occurred, we managed to increase our

margin the 2nd period in a row and used P2 to develop SOFT’s attributes to fit the Savers better. As

mentioned before, we set the R&D attributes using the conjoint findings taking into account that our

both products should not steal market share from each other. P3 results would be crucial as to show

the effect of our modifications. We decided not to put the increase in base cost on solely the

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customers’ shoulders but accept a lower margin instead hoping this would pay off with an even

bigger market share. This was supported with an absolute increase in ad spending, a relative increase

in ad R&D spending and increase spending on commercial team. However, none of these actions

were too drastic. We so far benefit from the commercial team reallocation made after P0 and keep

this strategy: ratios according to main customers’ channel habits, constantly monitored and adjusted

for changes. Our strong brand awareness was high from the start and needs to be upheld. Both in

distribution coverage and brand awareness, we remain in top position. Our strategy of adjusting

product features turned out very well in P3. Our modification has led to a great number of customers

shifting from our competitor Most to us. Demand even exceeded our production. For the first time,

we lost potential revenue. Furthermore we noted a new entrant, Root. Some of its features fit the

Savers’ needs better than ours which makes it potentially dangerous despite its currently significantly

higher price. Now that the importance of really fitting product attributes has been proven, we will

start yet another R&D project to make Soft fit the Savers not closely but perfectly. We will also keep

an even more competitive price to Most. With these two actions we hope to take even more

customers from Most and at the same time keep Root from having a significant effect on the Savers

market.

Considering production numbers, advertising spending and commercial team allocation we will keep

to the strategies mentioned regarding Solo which are based on extensive study of market research

connected with predictions of the effect of the changes we initiate every period.

Furthermore, as of the results of P3, we decided on not launching a new brand in the Sonites market

in order to concentrate on strong market positions in the Savers and Shoppers segments (Appendix 4)

and protect our brand according to our Defender strategy. This includes the use of a large amount of

advertising and the purchase of many surveys and researches in order to properly monitor the

market environment rather than putting ourselves in jeopardy with a new product (considering our

budget).

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Appendix

Appendix 1: Direct and indirect competitors

SOLO Product SOFT Product

Similar Different Similar Different

Customers

Similar Move

Customers

Similar Most

Root

Different

Most Tone

Different

Tone

Soft Rock Move Rock

Root Tops Solo Tops

Roll Roll

Appendix 2

Appendix 3: Market Size broken down by Consumer Segment (in thousands of units)

Appendix 4

Brand Launched in

Features

(1)

Design

(2)

Battery

(3)

Display

(4)

Power

(5) Price Base Cost

Base Cost

(% price)

MOST Period 0 8 5 53 11 10 250 66 26 %

MOVE Period 0 13 4 82 17 29 380 130 34 %

ROCK Period 0 14 9 89 33 76 495 219 44 %

ROLL Period 0 13 4 78 36 91 550 232 42 %

SOFT Period 0 5 3 53 8 10 210 45 21 %

SOLO Period 0 7 6 60 11 38 340 97 29 %

TONE Period 0 16 10 74 24 76 535 244 46 %

TOPS Period 0 10 4 35 38 95 405 173 43 %

(1) . From 5 to 20; (2) . From 3 to 10; (3) . From 24 to 96; (4) . From 4 to 40; (5) . From 5 to

100;

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SEGMENT SHARES - SONITES / SAVERS

SHARE PRICE INDEX

Appendix 5: Ideal Value Evolution (MDS)

Segment Period Economy Performance Convenience

Savers Period 1 12.4 -11.1 -4.5

Savers Period 2 12.6 -10.6 -4.4

Savers Period 3 12.7 -10.2 -4.3

Shoppers Period 1 5.6 -0.1 2.2

Shoppers Period 2 5.8 1.7 1.8

Shoppers Period 3 6.0 2.5 1.8

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Appendix 6 : Company Profit & Loss Statement

Period 0 Period 1 Period 2 Period 3

Revenues 28.266 30.339 36.368 54.171

Cost of goods sold -11.612 -10.735 -12.976 -26.549

Inventory holding costs -130 -60 -1 -7

Inventory selling costs 0 0 0 -4

Contribution before marketing 16.524 19.544 23.390 27.611

Advertising media -3.840 -4.746 -3.800 -3.908

Advertising research -160 -250 -300 -745

Commercial team costs -1.224 -1.770 -1.694 -2.133

Contribution after marketing 11.300 12.778 17.597 20.824

Market research studies -245 -401 -191 -255

Research and development 0 0 -1.332 -329

Interests paid 0 0 0 0

Exceptional costs or profits 0 0 0 0

Earnings before taxes 11.055 12.377 16.074 20.240

Appendix 7: Distribution

SOFT

Sonites

SOLO

Sonites

Specialty stores 34.4 % 48.0 %

Mass Merch. 58.2 % 50.5 %

Online Stores 42.5 % 49.7 %

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Appendix 8: Solomon indeces

Appendix 9: SWOT analysis Solomon

OPPORTUNITIES

- Active in growing and predictable segments

- Well-defined segments, easy to adjust to

- Savers have stable needs

- Few main competitors

STRENGHTS

- Close fitting of customers needs

- High Brand awareness

THREATS

- New main competitors (also b/c growing segments)

- Shoppers needs vary

WEAKNESSES

- Low budget available without the possibility to loan

- Intra-firm cannibalization Solo-Soft (also: portfolio not

diverse)

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Appendix 10: Brand Awareness Period 3

Appendix 11: Confrontation Matrix

Active in growing

and predictable segments

Well-defined segments, easy

to adjust to

Savers have stable

needs

New main competitors

(also b/c growing

segments)

Shoppers needs vary

Close fitting of customers needs

- 3 3 - 3

High Brand awareness

3 3 1 3 2

Intra-firm

Cannibalization

Solo-Soft - 1 - - 3

Low budget

available without

the possibility to

loan

2 1 - 1 2

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Appendix 12: 5 FORCES MODEL OF PORTER

5 FORCES EVALUATION RATIONALE

Rivalry among existing firms Moderate Within the segments the

competition is high but between

the segments is low

Threat of news entrants Very High The market size is growing and

any firm have access to different

informations (expected marked

size, consumers’ preferences,

product characteristics, etc…).

Furthermore, the costs of

developing a new Sonites brand

are moderate.

Supplier power (no information)

Buyer power High Low switching costs between the

brands

Threat of substitutes (no information)