S I M U L A T I O N
M A R K E T I N G M G T.
S I M U L A T I O N
M A R K E T I N G M G T.
Strategic Thinking- the ten big - the ten big ideasideas
Strategic Thinking- the ten big - the ten big ideasideas
Simulation proffers you opportunity to experience every key aspect of strategic thinking developed in past 100 years
S I M U L A T I O N
M A R K E T I N G M G T.
Looking back & ahead…
“For years, corporate planners have based strategic choices on some combo of 3 beliefs:
1.the validity of their intuition
2.the wisdom of their peers
3.the robustness of last's year's strategy”
S I M U L A T I O N
M A R K E T I N G M G T.
Looking back & ahead
Recent Exception: “The promising
attempts to apply scientific method to strategy formulation, ---notably the profit impact of market strategy (PIMS) research”
S I M U L A T I O N
M A R K E T I N G M G T.
Profit Impact of Market Strategy (PIMS)
• 1st significant attempt to study correlation betw: strategic position & financial performance
S I M U L A T I O N
M A R K E T I N G M G T.
Profit Impact of Market Strategy (PIMS)
Suggests: –specific characteristics of an
industry less important than– shared strategic attributes,
such as market share, quality & investment intensity
S I M U L A T I O N
M A R K E T I N G M G T.
KEY QUESTION:How effective & aggressive are you going to be in building your Company’s asset base ??????
S I M U L A T I O N
M A R K E T I N G M G T.
It takes $$ to Make $$
DON”T BE CHEAP !
S I M U L A T I O N
M A R K E T I N G M G T.“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”
S I M U L A T I O N
M A R K E T I N G M G T.
Key Demand Consideration:
• Overall market growing @ ~ 14%/yr
• “Average” company should/could double - sales in 6 years
Key Capacity Consideration:Key Capacity Consideration:
S I M U L A T I O N
M A R K E T I N G M G T.
How effective will u b in building your Co’s asset base?
• At outset should be spending ~$10-25M / round on plant improvement
• By end should expand asset base to min $140M to $160M+
0
10000
20000
30000
40000
50000
60000
70000
Year1
Year2
Year3
Year4
Year5
Year6
Year7
Year8
S I M U L A T I O N
M A R K E T I N G M G T.“Generically, profits are driven by the company’s asset base and by its efficiency working those assets”
S I M U L A T I O N
M A R K E T I N G M G T. Most Basic Principle Guiding Your Decisions:
• will it Increase Demand for Product
• Decrease Cost of Mfgg Product
S I M U L A T I O N
M A R K E T I N G M G T. Increase Product Demand Driven by Effective Mgt of 4 P’s
• Product Mgt.– Introducing new brands,
Repositioning / killing old brands • Promotional Mgt.
– Optimizing Segment & Media Vehicle budget allocations
• Distribution Mgt.– Optimizing Outside & Inside Sales-
force size & segment allocations &– Manufacturer-Rep support / Distributor
relationship building allocations• Pricing-
– Competitive pricing & Fine-tune A/R
S I M U L A T I O N
M A R K E T I N G M G T.
Decrease Mfgg Costs
Effective Mgt of two other P’s:
• People– Investments in HR,TQM & PI
• Plant– Investments in automation &
capacity mgt.
S I M U L A T I O N
M A R K E T I N G M G T.
Increase Demand
• Driven by Effective Mgt of 4 P’s
S I M U L A T I O N
M A R K E T I N G M G T.
Product Mgt. Options
For every product you market-you have 3 options-
• Improve it- to increase demand in current segment
• Reposition it – to compete in another segment
• Kill it- sell off capacity- reinvest recovered capital
For every product you market-you have 3 options-
• Improve it- to increase demand in current segment
• Reposition it – to compete in another segment
• Kill it- sell off capacity- reinvest recovered capital
Kill
Rep
ositio
n
Imp
rove
S I M U L A T I O N
M A R K E T I N G M G T.
Consequences:Improving a product…
PRO’s:• Should increase
sales & market share
• Rightsizing capacity-– if too high-frees capital
for investment– If too low- forestalls
stockouts
Con’s:• Proffering a better-
price, design and/or higher awareness- accessibility- costs $$$
• High Tech segments can take 2+ years-
• Increases SG&A budgets & thus squeezes margins…
S I M U L A T I O N
M A R K E T I N G M G T. Questions need to answer if plan on improving a product…
1. What are your limits -How much can you cut price? Increase R&D… Promotion… Sales Budget?
2. Competitor moves- improving existing brands in seg. and/or introducing new brands in seg.
S I M U L A T I O N
M A R K E T I N G M G T.
Variation on Improving… Can Reposition
Can allow product to age gracefully and ride the
life cycle
Can redirect trajectory of brand position into adjacent segment
S I M U L A T I O N
M A R K E T I N G M G T. Questions need to answer if plan on repositioning a product…
1. How long will it take?
2. Material & labor cost implications?
3. Impact on products in segment entering? Leaving?
S I M U L A T I O N
M A R K E T I N G M G T.
In final analysis– You Could decide to Kill
S I M U L A T I O N
M A R K E T I N G M G T.
Questions need to answer if plan on Killing a product…
1. How many products do you plan to have overall?
2. Going to add a replacement in this or another segment?
3. Kill immediately-or phase out?
4. Other options- Improve? Reposition?
5. How will competitors react?
S I M U L A T I O N
M A R K E T I N G M G T.
Consequences:Killing a product…
1) Makes it difficult maintain Overall Market Share– Even if Niche strategy-
should increase share in selected niche(s) to offset loss in abandoned segments…
• Investors-like to see Co. maintain overall starting share….
S I M U L A T I O N
M A R K E T I N G M G T.
Consequences:Killing a product…
If not replaced:
2) Hands over Market Share to competitors
3) Removes strategic opportunity for distribution $$ efficiencies….
S I M U L A T I O N
M A R K E T I N G M G T. Segment Consequences: Killing a product…
• LOW TECH Segments: Kill the Cash Cow
– In opening years 2/3’s volume & profit from Low & traditional sectors
• HIGH TECH Segments: Difficult to re-enter, could take
up to 3 years to launch new prdt.
S I M U L A T I O N
M A R K E T I N G M G T. Your & Your Competitors Product Mgt. Decisions
Impact nature, magnitude & arena of Competition
Must monitor & anticipate what, where & when… products repositioned, killed, introduced
S I M U L A T I O N
M A R K E T I N G M G T.
Let’s assume……
• LOW END: 0-1 product killed.. 0-1 repositioned or introduced
• TRADITIONAL: 3-6 repositioned from High…0-1 killed…1-2 introduced
• SIZE: 0-1 killed, 0-1 repositioned to Traditional, 1-2 introduced
• PERFORMANCE: 1-2 killed, 0-1 repositioned to Traditional, 0-1 introduced
• HIGH: 1-3 killed or repositioned to Traditional, 1-3 new products arrive in rounds 2 or 3
S I M U L A T I O N
M A R K E T I N G M G T. Round 3- Forecast nature, magnitude & arena of Competition
• LOW END: 6 products=rivalry unchanged
• TRADITIONAL: 9 products, w/ 3 repositioned= increased competition
• SIZE: 7 products, w/ 2 new= increased competition
• PERFORMANCE: 4 products, w/ 1 new= reduced competition
• HIGH: 6 products, w/ 2 new= increased competition
66
99
77
44
66
S I M U L A T I O N
M A R K E T I N G M G T.
-Given Round 3 Scenario-How should adjust your production capacities?
Round 0-1st shift Capacity
Round 3-Unit Demand
Traditional 1800 1068
Low End 1400 2081
High End 900 668
Performance 600 823
Size 600 469
S I M U L A T I O N
M A R K E T I N G M G T.
Optimal levels of capacity?
S I M U L A T I O N
M A R K E T I N G M G T.
Optimal levels of automation?
S I M U L A T I O N
M A R K E T I N G M G T.
Once have optimal levels of capacity–
Need to have most efficient levels of production costs
S I M U L A T I O N
M A R K E T I N G M G T.
How to have most efficient levels of production costs
Reduce Material costs• Proffer minimal/optimal level
MTBF• TQM/Sustainability Initiatives • Process Management Initiatives
Reduce Labor costs• TQM & PI Initiatives• Increase automation• Invest in employee recruitment
& training• Utilize 2nd shift
Reduce Material costs• Proffer minimal/optimal level
MTBF• TQM/Sustainability Initiatives • Process Management Initiatives
Reduce Labor costs• TQM & PI Initiatives• Increase automation• Invest in employee recruitment
& training• Utilize 2nd shift
• Increases length R&D on product line-–makes re-positioning take longer
• Incur employee separation costs
• w/ maximum expenditures can realize 18% improvement in productivity in 6 years!?
S I M U L A T I O N
M A R K E T I N G M G T.
Why run 2nd shift –when labor costs 50% higher?
S I M U L A T I O N
M A R K E T I N G M G T.
Why run 2nd shift –when labor costs 50% higher?
Answer by using your proformas:
1- On production spreadsheet build at capacity- if have 1000 units – build 1000 units
2-On Marketing display- FORECAST 1000 UNITS
3.-ON Proforma Income statement- note NET MARGIN –
Answer by using your proformas:
1- On production spreadsheet build at capacity- if have 1000 units – build 1000 units
2-On Marketing display- FORECAST 1000 UNITS
3.-ON Proforma Income statement- note NET MARGIN –
THE BIQ Q: If we double sales will we double our net margin?– Will we make less because labor costs are 50% higher for 2nd shift?
S I M U L A T I O N
M A R K E T I N G M G T.
Why run 2nd shift –when labor costs 50% higher?
Answer by using your proformas:
1- On production spreadsheet double output-run full 2nd shift
2-On Marketing display- double forecast
3.-ON Proforma Income statement- NET MARGIN –will more than double
Answer by using your proformas:
1- On production spreadsheet double output-run full 2nd shift
2-On Marketing display- double forecast
3.-ON Proforma Income statement- NET MARGIN –will more than double
THE BIQ Ar: When run 1 shift- must pay all fixed costs- 2nd shift gets a free ride-only has to pay lbor premium…
S I M U L A T I O N
M A R K E T I N G M G T.
Now that that you are producing-- in the most efficient manner-- a “perfectly designed” product
• need to make sure “maximum #” consumers are aware of it & can “easily” buy it…
S I M U L A T I O N
M A R K E T I N G M G T.
Moving Product
Message Weight & Media Planning
Breadth, Depth & Heft of Distribution Network
Optimal Pricing & Credit Terms
Message Weight & Media Planning
Breadth, Depth & Heft of Distribution Network
Optimal Pricing & Credit Terms
S I M U L A T I O N
M A R K E T I N G M G T.
Advertising/Promo Budget Drives Awareness
Promotion efforts are subject todiminishing returns.• 1st $1 million- reaches ~ 26% of customers• A $2 million- reaches an additional 18%, • A $3 million budget only another 5%• Have 33% decay/yr-Need $1.4 million just to maintain…
Promotion efforts are subject todiminishing returns.• 1st $1 million- reaches ~ 26% of customers• A $2 million- reaches an additional 18%, • A $3 million budget only another 5%• Have 33% decay/yr-Need $1.4 million just to maintain…
When new products are invented, considered newsworthy events. Awareness is created w/ PR campaign. At launch you automatically are charged a $250 thousand fee for marketing rollout and public relations. This fee earns a new product a starting awareness of 50%
S I M U L A T I O N
M A R K E T I N G M G T.
Sales Budget Drives Access
• As w/ awareness- sales budgets experience diminishing returns at $3M.
• However overall diminishing return is not reached until budgets total $4.5M
• Achieving 100% accessibility is difficult-- need 2 products inside segment
Once you do reach 100% accessibility, you can scale back your total Sales Budget to around $4M and maintain your accessibility. thus access maintenance - ~$2M/product
• As w/ awareness- sales budgets experience diminishing returns at $3M.
• However overall diminishing return is not reached until budgets total $4.5M
• Achieving 100% accessibility is difficult-- need 2 products inside segment
Once you do reach 100% accessibility, you can scale back your total Sales Budget to around $4M and maintain your accessibility. thus access maintenance - ~$2M/product
S I M U L A T I O N
M A R K E T I N G M G T.
Fine tuning your Promo,
Sales & Pricing…
S I M U L A T I O N
M A R K E T I N G M G T.
Promo Budget
S I M U L A T I O N
M A R K E T I N G M G T.
Sales Budget Time Allocations
• OUTSIDE sales-meet face-to-face (cost $120K/each)
• INSIDE sales-works leads & operates website & customer support systems (cost $50K/each)
• Distributors: push product (cost $100K/each)
Decide on how many salespeople & Mfr Reps will have:
How much effort will be focused on market
segments:
S I M U L A T I O N
M A R K E T I N G M G T.
Pricing / Credit terms
A/R Lag: (in days) is the time between customers receiving products & when they are expected to pay for ‘em
• No credit - demand falls to~ 65% of normal.• At 30 days - demand is 92%.• At 60 days - demand is 98.5% • At 120 days - demand is 100%.
The longer the lag, the more your cash is tied up in receivables.
S I M U L A T I O N
M A R K E T I N G M G T.End Game Strategy
S I M U L A T I O N
M A R K E T I N G M G T. If Company well managed- no need to take drastic actions
• Balance Sheet– Current ratio= 2-2.5– Leverage= 1.5-2.5– Sales/Current assets=
3-5
• Income Statement– Contribution Margin=
30%+– ROS=5%+
• Balance Sheet– Current ratio= 2-2.5– Leverage= 1.5-2.5– Sales/Current assets=
3-5
• Income Statement– Contribution Margin=
30%+– ROS=5%+
•Production #’s–Plant Utilization=150%+–Inventories= 1-90 days
•Income Statement–Customer satisfaction=40+–Awareness=80% –Accessibility=80%+
•Production #’s–Plant Utilization=150%+–Inventories= 1-90 days
•Income Statement–Customer satisfaction=40+–Awareness=80% –Accessibility=80%+
S I M U L A T I O N
M A R K E T I N G M G T. End-Game Moves of a Poorly Performing Company
• Large dividends & Stock buy-backs
• Products killed & large sell off of capacity
• R&D, Ad & sales budgets slashed
• No plant investments
S I M U L A T I O N
M A R K E T I N G M G T. End gaming is indicative of BAD MGT-
• Can only occur if Co. has unproductive assets…
• Eliminate unproductive assets early & will have no rational for madness
S I M U L A T I O N
M A R K E T I N G M G T.
• Current ratio 2+ indicates no idle assets
• Plant Utililization 150%+ - no plant to liquidate
• Great products (w/ Cust. Survey Scores 40+) never Killed
• Current ratio 2+ indicates no idle assets
• Plant Utililization 150%+ - no plant to liquidate
• Great products (w/ Cust. Survey Scores 40+) never Killed
S I M U L A T I O N
M A R K E T I N G M G T.
Rounds 6,7,8- should be most profitable
Pay off DebtInvest in growthBuy-back stockPay dividends
Pay off DebtInvest in growthBuy-back stockPay dividends
Things you can do w/ your $$$ Which most
often selected but least
preferable to do?
S I M U L A T I O N
M A R K E T I N G M G T.
Reducing Leverage
• Says to stockholders— “We can think of nothing better to do w/ $$ than save you interest payments”– More debt eliminated the greater
target you become for a takeover..
• No reason not to maintain Co. Financial Structure that got you to position of high profitability…
S I M U L A T I O N
M A R K E T I N G M G T.
Issue DividendsGood Dividend Policy
Net profit can only be allocated in one of two directions:
• It is either paid out to owners in dividends
• or it is Retained Earnings - to grow the company
Net profit can only be allocated in one of two directions:
• It is either paid out to owners in dividends
• or it is Retained Earnings - to grow the company
For Example:
• Ideal Investment/ round = $10-25M ( let take $20M)
• if profits=$30M & Shares = 2M… you have EPS= $15/share
• If need $20M for investment – get ½ from LT-debt- need $10M from Equity—leaves $20M in earnings…
• Could/should issue $10 Dividend
For Example:
• Ideal Investment/ round = $10-25M ( let take $20M)
• if profits=$30M & Shares = 2M… you have EPS= $15/share
• If need $20M for investment – get ½ from LT-debt- need $10M from Equity—leaves $20M in earnings…
• Could/should issue $10 Dividend
S I M U L A T I O N
M A R K E T I N G M G T.
Begin Practice Round 1 decision making….
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