1. S I M U L A T I O N M A R K E T I N G M G T. Week 4

2. S I M U L A T I O N M A R K E T I N G M G T.

3. 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

4. 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

5. 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.

6. 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

7. 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

8. 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 …

9. 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.

10. 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

11. 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?

12. 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

13. 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?

14. 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….

15. 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….

16. 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.

17. 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

18. 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

19. 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 6 9 7 4 6

20. 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 Traditional18001068 Low End14002081 High End900668 Performance600823 Size600469

21. 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?

22. 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?

23. 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

24. 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 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! ?

25. 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?

26. 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?

27. 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 THE BIQ Ar: When run 1 shift- must pay all fixed costs- 2 nd shift gets a free ride---only has to pay labor premium…

28. 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…

29. 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

30. 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 Increases in Promotion Budget have diminishing returns. The first $1,500,000 buys 36% awareness; Spending another $1,500,000 (for a total of $3,000,000) buys approximately 50%. The second $1,500,000 buys only 14% more awareness. -- a $1,500,000 promotion budget would add 36% to the starting awareness, for a total awareness of 69% (33% + 36% = 69%). Increases in Promotion Budget have diminishing returns. The first $1,500,000 buys 36% awareness; Spending another $1,500,000 (for a total of $3,000,000) buys approximately 50%. The second $1,500,000 buys only 14% more awareness. -- a $1,500,000 promotion budget would add 36% to the starting awareness, for a total awareness of 69% (33% + 36% = 69%). 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% Advanced Marketing: The Marketing Budget Detail screen allows companies to allocate their Promo Budget among five different media channels. Projections of the upcoming round's awareness display in a bar chart at the bottom of the spreadsheet screen.

31. 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 Like awareness, if your sales budgets drop to zero, you lose one third of your accessibility each year. Achieving 100% accessibility is difficult. Companies must have at least two products in the segment's fine cut. Each product experiences diminishing returns at a sales budget of $3,000,000. However, diminishing returns for the overall segment is not reached until the budgets total $4,500,000 (for example, two products with sales budgets of $2,250,000 each). Once 100% accessibility is reached, you can scale back to around $3,300,000 to maintain 100%. Like awareness, if your sales budgets drop to zero, you lose one third of your accessibility each year. Achieving 100% accessibility is difficult. Companies must have at least two products in the segment's fine cut. Each product experiences diminishing returns at a sales budget of $3,000,000. However, diminishing returns for the overall segment is not reached until the budgets total $4,500,000 (for example, two products with sales budgets of $2,250,000 each). Once 100% accessibility is reached, you can scale back to around $3,300,000 to maintain 100%.

32. 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…

33. S I M U L A T I O N M A R K E T I N G M G T. Promo Budget

34. 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:

35. 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.

36. 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

37. 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%+

38. 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 X-Large dividends & Stock buy-backs Products killed & large sell off of capacity R&D, Ad & sales budgets slashed No plant investments

39. 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

40. 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

41. 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?

42. 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…

43. 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

44. 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….