MarkStrat Final Report

MarkStrat Written Report ENGM 181: Marketing Professor Y. Jackie Luan Fall 2010

Industry: Green Team: U

Group 5 Gaurang Desai Amir Golnabi Allison McKendry Jens Moebius Harinarayanan Ranganathan

December 1, 2010

Strategies Pursued Initially the team had a relatively comfortable position with a large budget, and large revenue due to the strong performance of SULI in the Sonite market. SUSI was performing moderately and had excess production. No brands were present on the Vodite market. The team was leading in the “High Earners” and “Professionals” markets while competitors had an edge in the “Singles” and “Others” segments. The former two segemtents were the largest and most profitable markets due to their price insensitivity. However “Singles” and “Others” were expected to grow significantly over the following five years and the Vodite market was very promising in terms of both growth rate and profitability in the long term. The goal of the exercise was to achieve the highest stock price at the end of the six-year period. Therefore, market share and return on investment had to be maximized in the long term. In particular, the team’s strategy was aimed at having a well performing and mature Vodite brand on the market that would generate large revenues and profit at the end of the six-year period as a primary objective. As a secondary objective, the growing “Singles” and “Others” Sonite segments were targeted in order to increase overall brand market share and finance the entrance to the Vodite market in the short term. The final objective was to sustain the strong performance of SULI as a source of funding for the primary and secondary objectives. Within the framework of the overall strategy, the team agreed upon intermittent goals for each period. A summary of how the marketing mix was adjusted for each brand during each period can be found in the Appendix. In Period 1, the team aimed to sell all excess inventory of SUSI, adjust segment targeting for both Sonite brands, and order all market research studies available. In Period 2, the team aimed for brand market shares to increase proportional to the predicted growth of the Sonite market segments. Specifically, the team designed marketing schemes to increase brand awareness of SUSI and advertise POD’s for SULI apart from ordering three research and development projects for the Vodite market. Remaining funds were allocated to ordering market research studies. In Period 3, the team determined which of the three Vodite R&D projects had the best base cost-to-required budget ratio and developed it, naming the new brand “VUCK”. In the short run, the team aimed to have this brand target “Innovators”, then “Adopters”, and finally “Followers” in the long run. This brand development required a large portion of the budget, so to conserve funds the team cut marketing and sales force expenditures for Sodite brands 1

and only ordered the market research studies that the team deemed vital for decision making in the next period. SUSI had been underperforming, so the small amount of budget remaining was allocated to SUSI marketing. In Period 4, VUCK was officially launched with a marketing scheme that targeted “Innovators” and promoted brand awareness. The budget more than tripled from the previous period due to a high return on investment. This allowed the team to allocate a substantial amount of funds back into the marketing of the Sonite brands and for the sales forces to be re-hired. In Period 5, the team aimed to adjust the marketing of VUCK to target the “Adopters” segment. With the forward-looking goal of targeting the “Followers” segment in the next period, the team ordered a modified VUCK project (PVUFF) with characteristics chosen to meet the preferences of that segment apart from ordering two research and development projects for the modification of an underperforming SUSI. This was attributed to a straddled brand position between the “Others” and “Singles” segments. Keeping this in mind, the team had one of the SUSI projects designed to focus on the preferences of “Others” (PSUSO) and the second project focused on the preferences of “Singles” (PSUS2). The remaining budget was spent on marketing the Sonite brands and ordering market research studies. In Period 6, the team’s goal was to modify VUCK according to the new “Followers”-focused project (PVUFF) and adjust the marketing scheme to capture significant market share in the “Followers” segment. The team found that the “Singles” segment had slightly higher brand awareness for SUSI, so the team modified that existed brand according to the PSUS2 and introduced the new brand SUSO based on the project PSUSO. Marketing schemes were set for both of these, and the remaining budget was used for SULI marketing and the ordering of market research studies. The team’s final consideration was to maximize the long-term competitiveness of the firm with a well-position brand portfolio. VUCK (based on PVUFF) was a Vodite brand well-positioned for the “Followers” segment, SUSI (based on PSUS2) and SUSO were new Sodite brands each designed to better target “Singles” and “Others” respectively, and SULI has continuously exhibited strong performance each year in the Sonite market. Analysis of Performance Overall, the team performance was agreed to be satisfactory. Starting with the highest market capitalization and the best sales as of Period 0, the team found that competitors were using SULI as a benchmark and modifying their

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respective brands targeting the SULI market share. In such a competitive scenario, the team’s strategy effectively countered the threats to a creditable extent. In terms of improvement, the team was able to increase stock price by a margin of 120.6% which was one of the primary goals of the company. Working within a budget, SUSS was not improved as well as the team would have liked, but accounted for it by pursuing an effective marketing strategy based on the three critical factors of customer, company and competitor. Also, it helped sharpen decision making skills of the team members, teaching an important lesson in prioritizing objectives. The group dynamics were excellent. With the right mix of risk takers, moderates and conservatives, the team was exposed to an extensive brainstorming of ideas and results were arrived at on a quantitative basis. The diverse mix also opened a panorama of ideas to achieve the same target, which was an extremely enriching experience to all the members of the group. Key Points Learned The team believed that the key success factor in the simulation was the long-term strategy to enter the Vodite market with a well-developed brand that suits customers’ needs and expectations. During the competition, two additional teams entered this market in the “Green” industry, namely “E” and “I.” Team “E” was the first team to develop a Vodite brand, however it was not well-suited toward the market needs. Teams ‘I’ and ‘U’ spent more time and money on R&D before entering to the Vodite market, and as a result, their performances were significantly superior to team “E.” Here, the team learned a lesson that only developing a new brand is not sufficient to be successful in a growing and promising market. In order to be a leading company, the marketing team must study the market behavior and expectations exhaustively (3 C’s) and come up with a viable marketing strategy (STP) before launching a new brand. During the 6-year period simulation, the team learned that all competitors are constant threats to the company stock price index and underestimating any one of them may jeopardize the company’s financial situation, as exemplified by team A which achieved a remarkable turnaround after period 1. Marksrat enabled the team to understand and implement prominent concepts of marketing management, including the 3C’s, STP, and the 4P’s. Examining the 3 C’s provided the team with a strategic look at the factors 3

needed for marketing success. In regard to customer analysis, research studies such as Consumer Survey and Consumer Panel helped the team to understand how the brands were perceived by the targeted consumer segments. Market Forecast helped the team to keep a track of customer needs and requirements over the periods which in-turn enabled the team to plan strategies in advance as the simulation moved forward. Next, considering competition analysis, reports on Semantic Scaling, Competitive Sales Force and Competitive Advertising gave the team a picture of where and how well the other competitive brands were placed in the market in terms of customer segment, price and brand specifications. Finally, for company analysis, with every period the team came to know how the customer segments perceived the company (and individual brands) which further helped the team in understanding strengths and weaknesses and in defining objectives. The STP framework was used to develop an overall strategy for the simulation. In regard to segmentation, the defined market segments enabled the team to decide which customers to target, simplifying strategy and decision making processes. Next, targeting played an important role when the team was deciding how to allocate marketing efforts and expenditures to particular groups. Market research reports we used extensively to ensure each brand was correctly targeted for particular segments of interest. Finally, in terms of positioning, MarkStrat allowed for the adjustment of key brand characteristics and defining of perceptual objectives in order make the brand more appealing to particular segments. The team used the 4 P’s to determine how each brand could best satisfy customers in their target markets. Regarding product, the data from customer and market analyses were used to decide the specifications for introducing new Vodite and Sonite brands and modifying existing brands. Next, in terms of place, various distribution channels were pre-defined in the simulation and research studies provided feedback about channels preferences by segment. Considering promotion, advertising expenditures and reports were adjusted to analyze the advertising impact on brand awareness. Finally, considering price, the team recognized that many factors are to be taken in to account before deciding the price for a particular brand. Issues such as customer segment required price range, distributor margin, competitor’s price, and market forecast were evaluated in order to make informed decisions when defining the recommended retail price of each brand. Overall, the MarkStrat simulation provided the team with a great opportunity to further learn, experience,

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APPENDIX: MARKETING MIX

Period 1 I. SULI A. Production 1. Level: If we do not change marketing spending, we can expect to sell 63 KU due to forecasted growth rate for the next period in the segment: “Pros” (23.6%) and “HiEarners” (33.9%) These were weighted by the relative market size of each segment, and then averaged to get about 25% expected increase in units purchased. 2. Inventory Sold: We do not have any inventory, so we are not selling anything to a trading co. B. Pricing 1. Recommended Retail: Do not change price ($520) because the next closest competitor (SELF) has a higher price ($550) and we want to maintain our advantage. C. Advertising 1. Media: We are producing an amount appropriate for current demand. To keep up with the 25% growth in “Pros” and “HiEarners” segments, our marketing should minimally increase by 25%, which translates to $3,600K. 2. Research: We maintained Advertising research budget at 5% of the overall advertising budget. 3. Targeting: “Others” were not targeted because their purchase intention was too low compared to the other segments. We're increasing the targeting percentage for “Pros” and “HiEarners” (to 40% each) because they have the highest purchase intentions and they are growing segments. This leaves 20% to be distributed between “Buffs” and “Singles”, and we decreased the “Buffs” level to 10% because that segment is shrinking and maintained the 10% level for “Singles” from the previous period. D. Perceptual Objectives 1. None selected in order to promote brand awareness. II. SUSI A. Production 1. Level: Decrease Brand Production Level from 100 (which lead to 80 KU actually being produced, and 26 KU in inventory) to 46 KU. Our minimum achievable target is 63 KU because last period we sold 54 KU, and if we do not change marketing spending, we can expect to sell 63 KU due to forecasted growth rate for the next period in the segment: “Singles” (23.6%) and “Others” (18.4%) These were weighted by the relative current market size of each segment, and then averaged to get about 20% increase in units purchased. To determine the brand production level, we back calculated from 63 KU according to +/-20% due to production level fluctuation and subtracted the 26 KU already in inventory [x-x/5+26=63, x=46]. This will allow us to satisfy everything between 63-81 KU. 2. Inventory Sold: None, try to sell the 26 KU inventory at full price B. Pricing 1. Recommended Retail: Did not change. C. Advertising 1. Media: We are producing too much. If we do not change the product, the only way we can increase demand for the product is through a pull strategy. Due to the growing “Singles” and “Others” segments, our sales should minimally increase by 20%. We aim to beat that by improving marketing which will lead to an increase in our sales by 33% (which is the average of the production level range already determined 63-81KU), so our marketing spending needs to be increased by at least 33% also, so we chose a round number for Advertising Media = $1,250K, which translates to 30.2% change and is close enough to 33%. 2. Research: We maintained Advertising research budget at 5% of the overall advertising budget. 3. Targeting: We are changing the segment targeting to focus mostly on “Singles” and “Others”. 5

The Consumer Survey: Purchasing Intentions and Market Forecast: Segment Size and Growth Rates were used to determine the targeting levels. Of the current segment, the purchase intention for “Singles” is 8.1% and for “Others” it is 17.9%, and for the forecasted segment sizes for next period, “Singles” are forecasted to purchase 14.17 KU and “Others” 48.6 KU. The ratio between those two numbers is 3.4, which will be translated into the segment targeting. “Pros” and “HiEarners” are not being targeted because their purchase intentions are both less than 1%. “Buffs” are also not being targeted because they have a low purchase intention (3%) and their segment is forecasted to decrease in the future. Thus, we are left will 100% of the targeting to be distributed between “Singles” and “Others”. Using the 3.4 ratio, we are targeted “Singles” with 25% and “Others” 75%. D. Perceptual Objectives 1. None selected. This will allow marketing to focus on increasing brand awareness. Period 2 I. SULI A. Production 1. Level: Production level was increased by 20% because the target segments are forecasted to grow by 20%, brining our new level to 147. 2. Inventory Sold: None B. Pricing 1. Recommended Retail: According to the Semantic Scales Brand map for Price vs. Price, we noticed that our product was priced too high for both of our target segments, so we want to decrease our price to be more appealing for both of them. We decided to meet the price of SEMI, at $495, because that is a POP and our product is superior in perceived quality. C. Advertising 1. Media: We would like to increase the advertising budget to keep pace with the increase in target segment sizes, so we increased the advertising budget by about 20% 2. Research: Advertising research was set at 10% of the overall advertising budget. 3. Targeting: No change in targeting spread D. Perceptual Objectives 1. We already have high brand awareness, so we should use perceptual objectives to advertise our POD's from competitor products. a) Power: Our product is the best b) Price: We just lowered our price to meet that of our closest competitor, but our product is of overall higher quality II. SUSI A. Production 1. Level: Production level was increased to keep pace with the forecasted increase in the “Singles” and “Others” segments. Calculation was made similar to last period, and it is predicted that the segments will grow by about 20% again, so we increased production by 20%. This calculation was made based on the number of units actually sold last period, not the amount we produced last period (because we had an inventory to tap into in that period). 2. Inventory Sold: None B. Pricing 1. Recommended Retail: We are increasing because based on SS “Singles” are willing to pay more, and “Singles” are forecasted to increase more than the “Others”. C. Advertising 1. Media: We will be increasing the overall advertising budget by 100% to keep up with the increase in segment growth and really promote brand awareness (we are 50% and we want to get to about 70%, this is for “Singles” and “Others”) 2. Research: Advertising research was set at 10% of the overall advertising budget. 3. Targeting: “Singles” have a stronger future than “Others”, so we changed the targeting levels to 40 and 60, respectively. 6

D. Perceptual Objectives 1. None selected. This will allow marketing to focus on increasing brand awareness. Period 3 I. SULI A. Production 1. Level: Producing 120 units because the HiEarner's market is set to grow at about 20%, but because we are not spending any money in marketing, we can not expect to be meeting this growth level. Remember that last period we sold 130 despite having great marketing (SALT stole our market!) 2. Inventory Sold: None B. Pricing 1. Recommended Retail: We seem to be straddling the “Pros” and HiEarner's market, so we are dropping the price to meet the expectations of “HiEarners” because we cannot compete with the closest competitor in the “Pros” market (SEMI). Thus, we are choosing to compete with SALT, SOLD, and SELF. We are used the Market Research: Ideal Values (5.79) and then compared it to the Relationship between PRICE and perceived PRICE to translate that into the final price of $450. C. Advertising 1. Media: No money will be spent on advertising in order to conserve funds for the vodite launch. SULI already has good brand awareness, and we still have a sale force, and we lowered the price, so hopefully it will sell itself! 2. Research: None. 3. Targeting: No change in targeting spread D. Perceptual Objectives 1. None selected in order to promote brand awareness. II. SUSI A. Production 1. Level: We decided to keep production the same because we are not increasing marketing. 2. Inventory Sold: None B. Pricing 1. Recommended Retail: Keeping it the same because we like our positioning between “Singles” and “Others”. C. Advertising 1. Media: We removed almost all money from advertising in order to conserve for Vodite R&D. The only money put into this was the little amount remaining in our budget after Vodite R&D, sales force reduction, and market research purchasing. There was small amount of funds remaining in the budget after allocating all other company expenses for the period, allowing for K$11 to be allocated here. 2. Research: K$1 was allocated for advertising research 3. Targeting: No change in targeting spread D. Perceptual Objectives 1. Our closest competitor is SAMA, so we used Brand Maps to determine which dimensions to advertise, which ended up being Frequency and Power, because SUSI falls closer to “Singles” and “Others” ideal than SAMA in those dimensions. Period 4 I. SULI A. Production 1. Level: Our target was set at 91 (based on the market which is growing at 7.5%, and we hope to grow with it) but we have 19 KU in inventory, so we set the production level to 72 KU 2. Inventory Sold: None B. Pricing 7

1. Recommended Retail: Increasing from $450 to $480 because we misinterpreted the brand map of price vs. price to mean the retailers price, not the base cost. Thus, by lowering our price we decreased the profit margin for retailers, lowering there incentive to sell our product. C. Advertising 1. Media: K$1,300 2. Research: K$69 (about 5%) in order conserve for ordering marketing researching 3. Targeting: No change in targeting spread D. Perceptual Objectives 1. None selected in order to promote brand awareness. II. SUSI A. Production 1. Level: Our target was 64 (based on the market which is growing at 20%, and we hope to grow a bit more than it) We have 24 KU in inventory, so we set the production level to 40 KU 2. Inventory Sold: None B. Pricing 1. Recommended Retail: Kept the same C. Advertising 1. Media: We have M$5.7 to split among SULI, SUSI, and VUCK advertising. We have decided to split this 20-20-60 or about M$1.5, M$1.5, M$2 respectively (leaving K$200 for market research) K$1,400 allocated here 2. Research: 10% of media budget, so this was set to K$140 3. Targeting: No change in targeting spread D. Perceptual Objectives 1. None selected in order to promote brand awareness. III. VUCK (Based on PVUCK) A. Production 1. Level: We used the Market Forecast-Segment Size and Growth Rates to estimate the size of the “Innovators” market (92,000) and we estimate that we will gain about 50% of this segment because our product is good and we're pricing it lower than the initial VELV price, so we set our production at 50,000. 2. Inventory Sold: None B. Pricing 1. Recommended Retail: Only competitor (VELV) is priced too high for all three segments of the market, so we know we want to price our product less than their $2,316 price tag. Our target segment for this period is the “Innovators”. We estimated the price preference level for this segment using the price vs. price brand map (where VELV was located at about 6.5 and “Innovators” value price at 6) and decided to set our price at $2,038. C. Advertising 1. Media: We have M$5.7 to split among SULI, SUSI, and VUCK advertising. We have decided to split this 20-20-60 or about M$1.5, M$1.5, M$2 respectively (leaving K$200 for market research) K$1,800 allocated here 2. Research: K$180 (10% of media budget) 3. Targeting: “Innovators”: 60, “Adopters”: 30, “Followers”: 10 D. Perceptual Objectives 1. None were selected in order to promote brand awareness Period 5 I. SULI A. Production 1. Level: Last period we probably could have sold more than 105 KU, which we are rounding up to 110 KU. Market for “Pros” and “HiEarners” is growing at about 10% which would correspond to being able to sell about 120 KU and because we are increasing advertising we estimate that we can 8

actually sell 135 KU (which is about 20% increase from last period). This is not too aggressive because there is a +/-20% buffer in the actual number of unit produced. 2. Inventory Sold: None B. Pricing 1. Recommended Retail: Maintained price at $480 C. Advertising 1. Media: We decided to allocate about 50% of remaining total budget to Vodite advertising and about 50% to Sonite advertising. Advertising Media = K$3,700 2. Research: K$370 (10% or media budget) 3. Targeting: Using the Consumer Panel - Market Shares based on Units Sold we decided “Singles”: 10, “Pros”: 65, “HiEarners”: 25 D. Perceptual Objectives 1. None selected in order to promote brand awareness. II. SUSI A. Production 1. Level: The market for “Singles” and “Others” is set to grow at 15% and we hope to increase along with the market, so we increased production by 36 KU up to 75 KU 2. Inventory Sold: None B. Pricing 1. Recommended Retail: Did not change C. Advertising 1. Media: We decided to allocate 50% of remaining total budget to Vodite advertising and 50% to Sonite advertising, so Advertising Media: was set to K$2,750 2. Research: K$300, about 10% 3. Targeting: Based of Brand Purchase Intentions: “Singles”: 30, “Others”: 70 D. Perceptual Objectives 1. None selected in order to promote brand awareness. III. VUCK (Based on PVUCK) A. Order new project (PVUFF) so we can modify VUCK and target “Followers” in Period 6 B. Production 1. Level: The market is going to grow by almost 70%, and we are decreasing price while increasing marketing efforts, so we can expect to outpace the market. We are estimating that we're going to grow by 80% above the 60 KU that we actually produced last period. Thus, we set production level at 110. We recognize that this is taking a risk because we are assuming no new vodite products are being introduced to the market. However, we feel that losing out on potential profits from failing to meet demand levels is a greater threat. 2. Inventory Sold: None C. Pricing 1. Recommended Retail: values says “Innovators” have SS=5.93 for price and “Adopters” have SS=5.13 which is about a 13% difference. So we decreased the price by about 13% by $250 to $1,750 D. Advertising 1. Media: We decided to allocate about 50% of remaining total budget to Vodite advertising and about 50% to Sonite advertising. Media budget set to K$5,500 2. Research: K$550 (10% of overall advertising media budget) 3. Targeting: We considered the Market Forecast for predicted size of the market for next period and found that “Adopters” and “Followers” will be our key segments. “Innovators”: 30, “Adopters”: 35, “Followers”: 35 E. Perceptual Objectives 1. None selected in order to promote brand awareness. Period 6 9

I. SULI A. Production 1. Level: Increase by only 10%, because market is almost stagnant, value set at 150 2. Inventory Sold: None B. Pricing 1. Recommended Retail: Maintained price at $480 C. Advertising 1. Media: Increase by only 10% to M$4 2. Research: K$400, 10% of media budget 3. Targeting: Shifting targeting from “Singles” to “HiEarners”, such that “HiEarners”=35% and “Pros”=65% D. Perceptual Objectives 1. None selected in order to promote brand awareness. II. SUSI (Modified according to PSUSO) A. Used Semantic Scales to estimate ideal Sodite products targeted at the “Others” segment (PSUSO) and the “Singles” segment (PSUS2), independently B. The Brand Awareness for “Singles” and “Others” of SUSI was about the same (~53%), so we considered Market Forecast (Si=12.2% Oth=17.3%) and Purchase Intentions (Si=1.1% Oth=8%) and decided to MODIFY SUSI according to PSUSO in order to better target “Others” while maintaining the SUSI brand awareness C. Production 1. Level: 157,000 targeting a minimum expected market share of 17.5% and maximum of 26.25% 2. Inventory Sold: We had 5 KU of the original SUSI left from last period, so that was automatically sold to a Trading Co at 80% recommended retail price D. Pricing 1. Recommended Retail: Catering to the ideal value of “Others”, this was set to $220 E. Advertising 1. Media: M$2 2. Research: K$200 3. Targeting: 100% targeted at “Others” F. Perceptual Objectives

1. Power III. SUSS (Based on PSUS2) A. Production 1. Level: 120,000 targeting a minimum expected market share of 13% and maximum of 20% 2. Inventory Sold: B. Pricing 1. Recommended Retail: Catering to the ideal value for “Singles”, this was set to $290 C. Advertising 1. Media: M$2.7 2. Research: K$300 3. Targeting: 100% targeted at “Singles” D. Perceptual Objectives 1. None selected in order to promote brand awareness. IV. VUCK (Modified according to PVUFF) A. Production 1. Level: Set at 150,000 with the target of capturing 50% market share of “Adopters” and “Followers” 2. Inventory Sold: None B. Pricing 1. Recommended Retail: We wanted to drop the price to meet the ideal prce for “Followers”, which using semantic scales we calculated to be $825, but the program did not allow for more than a 30% 10

price reduction, so the price was set at $1210 C. Advertising 1. Media: Of the M$5.5 budget available, we decided to allocate an extra M$2.5M here, which increased the total advertising media budget to M$6.5 2. Research: 10% of media budget, so it was set to K$650 3. Targeting: Adjusted to better reach “Followers” and “Adopters” such that: “Followers”=65%, “Adopters”=25%, “Innovators”=10% D. Perceptual Objectives 1. None selected in order to promote brand awareness.

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