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 ideas Strategic Thinking- the ten big ideasStrategic ThinkingStrategic Thinking Strategic Thinking- the ten big ideas Strategic Thinking- the ten big ideasStrategic ThinkingStrategic Thinking 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.th e 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) 1 st 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 ~ 14%/yr “Average” company should/could double - sales in 6 years 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 +

S I M U L A T I O N M A R K E T I N G M G T. AAA/AA/A/BBB/ … BB & beyond is Junk… B/CCC /CC/C/D = default As your debt-to-assets ratio increases… Your short term interest rate increases… For each additional.5% increase in interest -You drop one category The More Assets U have the better you Bond Ratings

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 Reposition Improve

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 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. 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 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

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- 1 st shift Capacity Round 3- Unit Demand Traditional Low End High End Performance Size600469

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 optimal 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 optimize 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 2 nd 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 2 nd 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 2 nd 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 2 nd 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 2 nd shift –when labor costs 50% higher? Answer by using your proformas: 1- On production spreadsheet double output-run full 2 nd 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 2 nd shift 2-On Marketing display- double forecast 3.-ON Proforma Income statement- NET MARGIN –will more than double When run 1 shift- must pay all fixed costs- 2 nd shift gets a free ride-only has to pay labor 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  M essage Weight & Media Planning  B readth, Depth & Heft of Distribution Network  O ptimal Pricing & Credit Terms  M essage Weight & Media Planning  B readth, Depth & Heft of Distribution Network  O ptimal 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 to diminishing 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 to diminishing 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= –Leverage= –Sales/Current assets= 3-5 Income Statement –Contribution Margin= 30%+ –ROS=5%+ Balance Sheet –Current ratio= –Leverage= –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 Debt Invest in growth Buy-back stock Pay dividends Pay off Debt Invest in growth Buy-back stock Pay 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 Dividends Good Dividend Policy Good 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….