1. The Markstrat Challenge II

2. Strategy Positioning R&D
Your success will depend on your ability to manage the development & positioning of brands
Positioning
R&D
Strategy
During the course of the simulation, companies may introduce new Sonite/Vodite brands and reposition or withdraw existing ones. The maximum number of brands marketed by a company in a given period is limited to five brands per market (Sonite or Vodite). This constraint makes it extremely important to find optimal segmentation and positioning strategies. The positioning and repositioning of brands with respect to the specific needs of various consumer segments is a major aspect of the Markstrat companies' marketing strategy.
The strategic issues surrounding market segmentation and product positioning can be summarized in three questions:
1. Which segment do we want to target?
2. How do we design the product appropriate for this segment and position it effectively?
3. As the environment changes, how should we reposition our existing brands?
In Markstrat, various approaches can be used to help address these questions.

3. Customers make purchase decisions based on their perception of your brands
Your perception of brands
Brand A
Brand B
Brand C
Brand D
Technical quality
Their perception of brands ?
Consumers' perception of brands
As a manufacturer, you can easily classify your brands and other competing brands based on objective data like their technical attributes and their price.
When it comes to making a buying decision however, consumers are influenced by their 'perception' of the brands available on the market rather than by the actual features and properties of these brands. This perception is often based on subjective data and information and can easily be distorted from reality. The consumers' perception, for a given category of products, is primarily driven by their most important needs.
Once consumers are aware of a brand, they typically analyze to what extent this brand meets their needs better than the competing brands that they already know.
Brand B
Brand C
Brand D ?
Brand A

4. The "Perceptual Map" is a valuable tool for visualizing brand positioning
based on MDS Study
Need 2
+20
-20
SELF Pr Hi Bu Si Ot
SEMI
SONO
SOLD
SULI
SAMA
SUSI
SALT
SIBI
SIRO
Need 1
Multidimensional scaling of brands similarities and preferences
One basis for analyzing the positioning of each competitive brand is the perceptual mapping of similarities and preferences based on the multidimensional scaling study. The data are obtained through interviews with a sample of 200 individuals.
This is a two-dimensional map whose axes are scaled from -20 to +20 and represent composite dimensions. Axis one represents the first most important need of the consumers and axis two the second most important need for that product category. The study will provide the best interpretation of the composite dimensions for each axis.
The circles 'Bu', 'Si', 'Pr', 'Hi', and 'Ot' on the graph represent the ideal points of each of the five segments. Each circle only represents the 'center of gravity' of the whole segment. Each consumer has a different preference, however, the preferences within a segment are sufficiently similar so that the ideal point represents well the overall global preference of the segment.
The various geometric shapes (square, triangle, star...) correspond to the positioning of the brands as they are perceived by the market at the time of the study. Each brand name is clearly labeled. One specific color and shape is attached to each firm (for example, all brands marketed by firm A are represented by red stars).
This study differs from the semantic scales study in that the respondent is not provided with criteria to evaluate the brands. Instead, these criteria are deduced by the approach which is based on global assessment of similarities of pairs of brands. This is a complex task which necessitates a number of brands to be able to derive a solution. This study is therefore not available for the Vodite market until sufficient competing brands are marketed.
Key
Perceptual positioning
of brands
Segment ideal point Ot

5. There are two key ways to re-position brands in Markstrat
Perceived
Performance
Advertising
Perceived
Economy
R & D
Repositioning strategies
Once a brand has been sold in the market, consumers have a certain idea about the brand, which is represented by its position in a perceptual space. Over time, demand and competitive dynamics affect what should be the optimal positioning of a brand. In Markstrat, brands may be repositioned to adapt to new environmental conditions. Repositioning can be achieved by advertising and/or by R&D.
A brand might not need to be repositioned on both dimensions. Indeed, if the perception on one dimension corresponds to what consumers want, there is no reason to change that perception.
Brand repositioning by advertising is limited by the actual physical attributes of a product, and consumers' perceptions of these characteristics may be shifted only within a certain range by advertising. At some point, it becomes more effective to reposition a brand by changing its physical characteristics than by advertising alone.
The choice of repositioning through advertising versus new product development depends on the extent to which repositioning is desired and is a function of the current level of brand awareness. A brand which consumers are extremely familiar with will be more difficult to reposition. It also depends on the firm’s ability to complete R&D projects with the physical characteristics of the products that corresponds to the market needs. Finally, it should be noted that completing an R&D project will take at least one period, while advertising has an immediate effect.

6. BRAND CHARACTERISTICS
Physical positioning involves matching brand characteristics to customer needs
CUSTOMER NEEDS
Economy
Performance
Convenience
Price
Power
Max. Freq.
Design
Volume
Weight
SAMA
Positioning through research & development
After assessing a situation and developing a marketing strategy in line with the needs of the market, the strategy must be implemented. One of the most important aspects of implementation is specifying the characteristics of the product that will be offered to consumers. Given the time necessary to complete R&D projects and the long term nature of strategy, the product specifications should be based on the expectations of where the product should be positioned in the future.
Whether you use semantic scales or the MDS study it is possible to relate the perceptual dimension or scale to an actual physical characteristic of the product. The specification of physical characteristics of a product can only be done effectively by gauging the relationship between an actual product attribute and the consumers' perception of that attribute. A simple way to summarize the information that you possess about that relationship is to plot the perceptions versus the actual characteristics.
Alternatively, when few data points are available, it could may be preferable simply to estimate the optimal physical characteristics for a given segment from the closest brands available in the market.
These methods, although imperfect, offer approximations which should become more accurate as more data becomes available over time.
BRAND CHARACTERISTICS

7. Positioning with advertising requires setting "Perceptual Objectives"
Perceived
Performance 20 10 9 Si
SUSI 5
Perceived
Economy 5 11
Positioning through advertising
Advertising in Markstrat is primarily used as a communication tool to get consumers to know about the brand name and about the characteristics of the brand. Advertising strategy should be consistent with the marketing strategy of the firm. It is used to increase brand awareness and to position and reposition brands so that consumers are convinced that the product offerings correspond to their needs and wants. Using advertising to reposition a product requires four types of decisions:
1. Selecting the target segment(s)
2. Specifying perceptual objectives for the brand. For example, to reposition SUSI closer to the ‘singles' segment, you would check the actual coordinates of the ideal point of that segment, try to anticipate its moves by looking at the trends, and enter the coordinates of the point that you want to reach on the map. You can choose to set perceptual objectives either on semantic scales or on MDS dimensions. A maximum of two dimensions can be used to keep the message simple and effective.
3. Allocating an advertising media budget for the brand.
4. Allocating an advertising research budget. The higher the advertising research budget, the more accurate one may expect the repositioning to be in terms of reaching the perceptual objectives, although there will naturally remain a limit to how far and how fast one can move perceptions.
Simply indicating the targeted segment (100% of budget on the ‘singles') is insufficient to reposition a brand. Target selection only affects the media vehicle selected to communicate the message, but does not impact the message itself.
The appropriate advertising program must also be designed in order to let consumers know of the change in the physical characteristics of a brand in case of brand modification through the implementation of a new R&D project.
-10
-20
-20
-10 10 20

8. Strategy Positioning R&D
Your success will depend on your ability to manage the development & positioning of brands
Positioning
R&D
Strategy

9. Changing segment needs
R&D success demands long-term thinking and the ability to identify evolving opportunities Hi Si
New target segments
Changing segment needs
Pressure on margins
Identifying and anticipating market evolution
Ideal points reflect the needs of consumers. These needs gradually change as the consumers' values and behavior evolve over time. These changes are typically due to changes in the environment, which in turn does not change drastically from one period to the next. Therefore, changes in preferences are by no mean entirely external to the industry. Indeed, the actions of the competitors in the industry can have a significant impact on these trends.
Marketing decisions of the firms in the industry impact the segments' evolution in terms of their size, the importance of the dimensions characterizing the brands in the consumers' perceptual space, and consumers' preferences in terms of the degree to which they desire the product to possess given attributes. The semantic scales and MDS studies both provide a map which tracks the ideal point evolutions. If the pattern over time is stable enough and if the information provided by the market research is reliable enough, it is then possible to predict the position of an ideal point as a function of time. Pr
Competitor entry Ot

10. . . . and also requires working effectively with your R&D department
Number
of Projects
Similarity of Projects
R&D = Profit Center
Experience
Research and development
The R&D department also operates as a profit center. The marketing department of a firm may request its R&D department to develop specific projects in order to improve existing products or introduce new ones. Up to five R&D projects may be specified in a given period for each of the two markets (5 Sonite and 5 Vodite projects), and a maximum of 30 Sonite and 30 Vodite projects applies over the simulation.
The Names of the R&D projects are made up of five characters. The first character is always a 'P' for project. The second letter identifies the type of product being developed ('S' for Sonite, 'V' for Vodite), the last three characters can be freely chosen by the firm. In the past, each firm has successfully completed two R&D projects corresponding to the brands marketed in Period 0. Their name is made of the letter 'P' followed by the corresponding brand name. For instance, the R&D project corresponding to the existing brand SAMA was called PSAMA.
The name of a given project cannot be reused for a different project, even if the new project is only to search for a minor modification of the product (except the base cost). If a firm realizes that one (or several) of the first five characteristics requested is not right for the market, this implies that a new project code name needs to be used.
The budget for a given project represents the investment that marketing is ready to make for the R&D department to try to develop that specified product in the coming year. It will be deducted from the marketing budget. Therefore, the performance of the marketing department depends on an effective interaction with the R&D department.
Provide sufficient budgets
Set realistic expected unit costs

11. When doing R&D, keep in mind both positioning and economic factors
SONITE
Weight
Design
Volume
Max.
Freq.
Power
Base Cost
(at 100K units of production)
Most important physical characteristics
Target margin
Cost in other projects
Project budget
Impact of physical characteristics
Market needs
Competitive brands
Feasible range
Project budget
Product specifications
Marketing requests a project from the R&D department by specifying a project name, a budget, the physical characteristics and base cost of the desired product. A project specification may consist of any combination of the five most important characteristics for the product category as long as each is a whole number and remains within its respective feasible range.
One simple way to specify a base cost in an R&D project is to start with the price that consumers in the targeted segment are willing to pay for that product. Give an objective for the margins, the maximum cost possible to get to that objective can be computed. This might not be the lowest cost achievable, but it provides a basis above which the strategy would not be attractive. An alternative method for determining the cost characteristic is by doing many on-line queries or feasibility studies, as R&D can provide information as to the lowest cost that they are willing to guarantee. Because not all physical characteristics have the same importance for the consumers, a trade-off must be found to achieve a cost which will provide appropriate margins for the firm.
ECONOMIC FACTORS
POSITIONING FACTORS

12. Impact of physical characteristics on base cost
Design
Max. Frequency
Power
Autonomy
The HIGHER the
requested
characteristic
the HIGHER the
base cost
Base
cost
Requested characteristic
Volume
Weight
Diameter
The HIGHER the
requested
characteristic
the LOWER the
base cost
Base
cost
Requested characteristic
Base cost calculation
For both Sonites and Vodites, the base cost figure (6th characteristic) represents the transfer cost corresponding to the average unit production cost of manufacturing the first 100,000 units of the new product. Cost does not have any upper limit, and its lower limit depends on the five physical characteristics of the product.
The unit cost increases with the specification on design, maximum frequency, power, and autonomy. It decreases with the specification levels of the weight, diameter, and volume. In requesting an R&D project, this indicates the unit cost which the R&D department must use as a target. It is the role of the R&D department to determine the feasibility of such a cost with the budget they have been provided.

13. The budget required to complete an R&D project is a function of several factors
R& D Budget required for completion
R&D Experience
Physical characteristics
Requested base cost
accuracy
speed
feasibility study
on-line query
vs.
to find out more:
R&D expenditures
R&D project expenditures include not only the expenses required to develop the project but also the research and evaluation necessary to find components and potential suppliers, make technical evaluations, and provide production line planning. The total budget required to complete a project depends on the characteristics specified and the experience of the firm with similar products, in particular the experience of the R&D department in completing similar projects in the past. It also depends on the base cost requested.
R&D On-line query
The R&D on-line query provides an opportunity to communicate with the R&D department at a greater frequency than the simulated year. At any point in time, you may check with the R&D department the feasibility of a product with specific characteristics. The R&D will respond immediately to such a query with the estimated minimum base cost and with an estimate of the budget required to complete such a project. In this case, they provide their best estimates at no cost but without performing a thorough investigation. These quick estimates include an over-estimation factor to cover any possible surprise they may encounter if the project is implemented.
Feasibility studies
Alternatively, you can get estimates of minimum base cost and total budget required for completion of a given R&D project by requesting a feasibility study for $100,000. Although feasibility studies require time, since the information is not available before the end of the period during which it is requested, the information provided is very accurate and not over-estimated.

14. There are two possible outcomes of any R&D project
Project submitted to R&D:
weight
design
volume
max.
freq.
power 17 6 85 35 70
Minimum base cost is calculated
at an early stage in the project.
Minimum base cost = $110
Case A
Requested Base Cost = $80
(requested base cost is below minimum, but the R&D will try to develop the project at the minimum base cost)
Budget required for completion = $ 800
(at base cost = $ 110)
Case B
Requested Base Cost = $130
Budget required for completion = $ 550
(at base cost = $ 130)
Budget required for completion is also calculated at an early stage in the project
R&D Department responses
All the R&D projects which the firm has pursued in the current and past periods are listed in the R&D section of the company report. The list includes the projects which already existed in the firm at the beginning of the simulation. For each project the following information is given: Name, Physical characteristics, Base cost (current and minimum realistic), Cumulative expenditures (total expenditures made on each project up to its completion or to the current period), and Additional budget required for completion (if the project has been successfully completed, the availability is indicated). It is also possible to view only the projects currently available on a separate window or only a list of the on-going (not yet completed) projects.
Project Available Message: The marketing department might decide to use a completed project the following period or to keep it for later use. In the case of a successfully completed project with a current base cost higher than the minimum realistic cost, they might decide to launch a cost reduction project (keeping the same physical characteristics and lowering the base cost to the minimum).
Insufficient Budget Message: The team may decide to continue the project next period with the same five characteristics attached to the project code. However the base cost may be changed without changing the project name.
The additional budget required to guarantee completion does not need to be invested in the next period. The guarantee applies to any future period, the amount being adjusted for inflation over time.
Case A2
Case B1
Case B2
Case A1
Budget allocated by team for this period:
$ 1,000
$ 300
Project is available at base cost = 110
Project unsuccessful
Project is available at base cost = 130

15. A completed R&D project may be used to modify existing brands and/or introduce new brands
Performance Bu Si Pr Hi
Economy
New Brand
"SAMY"
Utilization of completed R&D projects
An R&D project, once completed, makes the corresponding product available for production. If the team decides to use the new product opportunity, two options are available. Either the product is entered on the market as a new brand, or an existing brand is modified with the physical characteristics corresponding to the project.
New brand introduction
A new brand is introduced on the market by entering a brand name which has not been used in the past. This brand name is completely independent of the code used for the R&D project. This R&D project code, however, needs to be specified in order for the production department to know the product specifications.
Brand modification
An existing brand is modified by keeping its existing name and using the physical characteristics corresponding to a new completed project. The only difference with a brand introduction is that the brand name is not new, so awareness levels are maintained.
Multiple brands with same physical characteristics
The same product can be marketed under different names. This could occur in competitive situations where the presence of multiple brands could build barriers to the entry of new brands by competitors. This situation could also occur when the same basic product is to be distributed under different brand names to different segments which may be willing to pay different prices.
New SAMA
more performance Ot
Old SAMA

16. Inventory Obsolete inventory disposal
Bringing successful R&D projects onto the market may result in obsolete inventory
I'll buy any product
at a given % of its
transfer cost
Brand
modification
(name kept)
SAMA
Obsolete inventory
Inventory
disposal
Brand modification or withdrawal
One of the consequences of a brand modification decision, is that the production department will immediately start producing the new version of the product. Inventories of the obsolete product have to be sold outside of the Markstrat world. In this case, the obsolete stocks are sold to a trading company at a price corresponding to a given percentage of the transfer cost (the exact percentage will be found each period in the Newsletter). As the units are still in the possession of the production department, which charges the marketing department when units are sold, the obsolete units must then be purchased from the production department and paid for. Consequently, a loss of (1 - the given percentage) of transfer cost is taken on the obsolete inventory. This loss will appear as a cost for inventory disposal in the next period company results.
The same rule applies if inventories remain when a brand is withdrawn from the market.
Inventory disposal
When commercializing a non-modified product with units left in inventories from previous periods, teams can decide to sell off a portion of the stock by selling that portion to a trading company, according to the same pricing agreement as above (given percentage of transfer cost).
Transfer cost valuation
In all cases, the older stocks will be sold first, according to the FIFO method, and the transfer price of each unit will be calculated according to the production cost of the product at the time it was manufactured, adjusted for inflation.
Brand
withdrawal
TRADING COMPANY

17. (new experience curve) Cumulative production
Cost reduction projects should be weighed against experience curve effects
Transfer cost A
Base cost A
Current product
(initial experience curve)
Base cost B B A1
Current
transfer cost A1
Cost reduction versus experience curve
The manufacturing cost of the products tend to decrease as a result of productivity improvements gained through experience, although this effect may be offset by inflation. This 'experience effect' can result from a variety of sources in addition to labor productivity. The cost reduction generated by the production department is very regular, every time cumulative production for a given product doubles, unit transfer cost from the production department to the marketing department decreases by about 15%. However, in the case of several products based on the very same R&D project, cumulated productions will be added and productivity gains will be shared.
Greater changes in manufacturing costs may be obtained by undertaking appropriate R&D projects, for which it is necessary to change only the cost characteristic of an otherwise unmodified product. There are two methods for deciding what should be the actual cost requested: 1)a feasibility study specifying the lowest possible base cost (very accurate but takes time) ; 2) a on-line R&D query option (overstated but immediate). The budget required to complete such a cost reduction project varies by firm and depends on the amount of R&D experience developed over time by each firm.
The base cost of a new project might be lower than the base cost for the first 100,000 units of the current product but higher than the current transfer cost achieved by experience effect. It can, however, lead to cost reduction as, after the product modification, production starts a new experience curve. By the time the brand is known in the market, sales could be substantial and cumulative production could double extremely fast, possibly within the first year of production. While the older product might be in the flat part of its experience curve, where gains in productivity are minimal, the new product starts on a new experience curve and therefore benefits from high level of productivity gains.
Cost reduced product
(new experience curve)
100 KU
225 KU
Cumulative production

18. The MDS study measures brand perception along three composite dimensions...
SONITE market
Influence of brand characteristics on MDS dimensions in P0
Perceived Economy increases if Max. Freq. increases
Perceived Economy increases
if Price decreases
Weight
Design
Volume
Max. Freq.
Power
Price
Economy
slight
moderate
strong
Performance
Convenience
Product
charac.
Composite
dimensions

19. ... which are more or less influenced by the various brand attributes
VODITE market
Influence of brand characteristics on MDS dimensions in P0
Perceived Efficacy
increases if Max. Freq. increases
Perceived Flexibility increases
if Weight decreases
Autonomy
Max. Freq.
Diameter
Design
Weight
Price
Efficacy
slight
very strong
moderate
Flexibility
strong
Economy
Product
charac.
Composite
dimensions

20. New decisions introduced in Period 2
Brand portfolio
Perceptual objectives (on semantic scales or MDS)
R&D

21. You can now extend your portfolio by introducing new brands ...
When you click Introduce new brand, you will see the list of completed R&D projects and their features
Introducing a new brand
By clicking on the 'introduce new brand' link, a new screen appears.
First, the name of the brand must be entered using the naming conventions. The name of the R&D project giving the project specifications for producing the brand must be selected in the ‘Base R&D project‘ drop down. The list of available R&D projects is provided for information. The name of the R&D project to be used as the base can simply be selected by clicking on the name of the project in the list of available projects. In order to introduce a brand in a given period, it is required that the corresponding R&D project be successfully completed in a previous period. A project requested from the R&D department is never available for commercialization before the beginning of the following period.
The 'undo' button in the brand portfolio screen can be used to remove a new brand added to the portfolio with the 'Introduce new brand' button. Just select the brand and click on the 'undo' button, the new brand is removed from the ‘marketed brands' list.

22. ... you can also modify existing brands
Select a new R&D project
Keep the same name
Modifying an existing brand
A new screen appears when clicking on the ‘modification' button. The R&D project name corresponding to the new product specification must be selected among the available R&D projects completed in prior periods. Of course, the name of the brand cannot be changed, otherwise, it would be a brand introduction.
The 'undo' button in the brand portfolio window can be used to cancel the changes made to a brand using the 'modification' button. Just select the modified brand and click on the 'undo' button, the old brand specification (based on the project used in the prior period) replaces the changes which had been made.
Withdrawing a brand
The 'withdraw' option removes a brand which was marketed in the previous period from the market for the following period. The brand to be removed is first selected by clicking on that brand in top table of the Brand Portfolio window. Clicking on the 'withdraw' button moves the brand to the lower table of the Brand Portfolio window.
The ‘undo' option enables the team to re-insert a brand which had been moved to the 'withdraw brand' table. Just click on the brand name which corresponds to the brand you want to re-introduce. This brand name is highlighted. Then click on the 'undo' button and the brand name will re-appear on the top table showing the list of marketed brands.
If inventories remain when a brand is withdrawn from the market, they are sold to a trading company at a given percentage of the transfer cost and a loss of (1 - the given percentage) is incurred. A brand which was marketed in the past and withdrawn from the market may not be re-introduced later in the simulation.

23. To convey the right message to the market, set perceptual objectives for each of your products1
Do you want to communicate on the semantic scales or on the MDS composite dimensions? 2
On which dimensions do you want to communicate? 3
Input the coordinates of the point that you want to reach on the map
Perceptual objectives
When trying to reposition a brand with advertising, it is necessary to indicate to the advertising agency what are the desired perceptual objectives. If the intent of the advertising is simply to raise brand awareness with no positioning objective, check the 'no objective' option.
Objectives may be chosen on two communication dimensions. Perceptual objectives may be provided either in terms of semantic scales or in terms of the scales derived from the multidimensional scaling study. Just click on the type of scale of your choice. The appropriate dimensions can be displayed by clicking on the arrow of the boxes corresponding to dimensions 1 and 2. Once dimension choice is made, the objective levels must be selected. For the scales based on the multidimensional scaling study, these numbers should be between -20 and +20, the maximum coordinates of the axes. For the semantic scales, the range is from 1 to 7.
These perceptual objectives convey information primarily of a qualitative nature (for example, how much should the lightness of the product be stressed) for the design of the advertising platform and copy. The numeric representation of these perceptual objectives is used only for communication purposes.
The communication may be on a single dimension (a unique selling proposition). In this case, the list box for dimension 2 should not remain blank; instead, pick 'none' in the list to indicate that the communication is made on a single objective indicated in the box for objective 1.

24. You can initiate up to five R&D projects per period and per product type (five Sonite and five Vodite)
Click here to obtain an estimate of the minimum base cost and budget required for completion of this project
Research and Development
Names should be given to R&D projects according to the convention. Clicking on the 'S' or 'V' button brings the information concerned with either the Sonite or the Vodite market respectively. Buttons at the bottom of the window are used to start new R&D projects, delete a current project, or continue a project which had been temporarily suspended.
For each project, the values of the five physical characteristics for the desired product should be indicated on the top row of the section. The technical feasible ranges are indicated. The requested base cost is the unit cost that would be charged to the marketing department for the product for a production batch of 100,000 units. This cost should be specified once information about the feasibility of the product at a certain cost with a given R&D budget is obtained. In the absence of such information, the R&D department can be requested to search for the minimum transfer cost technically feasible by checking the corresponding box.
The allocated budget corresponds to the budget allocated during the current period to the project. The total R&D budget accumulated so far is also shown.
In the case of a feasibility study, the corresponding box should be checked. The R&D department will reply with the minimum cost at which the product could realistically be produced and the R&D budget required to guarantee the completion. This information is provided in the following period in the R&D section of the company report. It is much more accurate than the on-line query answers.

25. You now know everything.
From here on, it's down to your strategy...

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