MBA 8145 MarkStrat Notes *Decision Rounds* Do not jump hastily to conclusions and bear in mind that obvious solutions may be based upon an incomplete analysis. To reach more robust decisions, use the information from your company results, from the market news and from market research studies to analyze your situation and past competitive behavior. These reports are described in the chapter entitled Understanding Your Annual Report. *Product, Brand and Base Project* Over the course of the simulation, you will have to upgrade your existing brands to adapt to changing consumer needs or to competitive moves. You may also have to launch new brands to target new consumer segments or to explore new markets. Chapter VI provides you with more information on situations where brand upgrades or brand launches are necessary. *Production* The Production department of your company is working for several divisions. It can thus be viewed as a highly flexible external supplier. Consequently, you are not concerned about manufacturing investments, fixed costs or capacity utilization. Moreover, the actual production level for each product is automatically adjusted in response to actual demand for that product in the period, within 20% of your initial production plan. The transfer cost of a product is initially equal to the base cost of its base project, assuming that the first production batch is 100,000 units. The base cost is the unit cost that was decided when the project was developed by R&D. The transfer cost will then increase with inflation and decrease over time because of experience effects and economies of scale. As a rule of thumb, you can expect the transfer cost to be reduced by about 15% each time the cumulative production of a given product is doubled. If the first production batch is lower than 100,000 units, then the transfer cost will be higher than the project base cost. For instance, if the initial production is 50,000 units, the cost will be 15% higher. Units produced in excess are kept in inventory, and inventory-holding costs are charged to the Marketing department until these units are sold. Inventory costs per unit are calculated as a percentage of the transfer cost. This information can be found in the Newsletter. *Pricing* Prices must be entered each period in the Marketing Mix decision form. Price increases or decreases greater than 30% in one period are highly discouraged as they often result in negative market reactions. *Advertising* Indeed, the practice in Markstrat is to advertise on brands rather than on company names. Consequently, even if your firm markets several brands, possibly to the same consumer segment, these brands will not benefit from the company’s identity and image. The size and growth rate of consumer segments is influenced by the amount spent in advertising by the entire industry. Advertising will influence the decision of distributors to carry your products. Spending more in advertising will most likely increase your distribution coverage. It also creates a barrier to entry for your competitors. Because of the competitive nature of the Markstrat industry, your advertising share of voice is important as well. The share of voice is calculated by dividing your own advertising budget (usually several million dollars for a given brand and period) by the industry total advertising budget. A share of voice greater than the ones of your direct competitors is required for a successful new brand launch or for brand repositioning. There are two separate advertising budgets: advertising media and advertising research. In past years, companies have devoted on average 4% of their total advertising expenditures to advertising research. You are also required to specify which segments should be targeted with your advertising. This decision should be consistent with the marketing strategy of your firm and/or brand. *Commercial Team* Your commercial team is responsible for obtaining and entering orders and for supporting distributors. It is organized by channel to better meet the needs of the distributors, and by brand. The marketing department must specify the number of people to allocate to each channel and each brand. Commercial people may be reallocated at no cost across distribution channels and/or across brands. However, hiring or firing costs will be automatically charged to your department when the total size of the commercial team increases or decreases. *Market Research Studies* One of your decisions will be to order market research studies. All studies are ordered at the beginning of a period and are conducted by a specialized research firm during that period. Hence, the information provided is relevant to the market situation during the analyzed period except for the Market Forecast study. The results are delivered with your annual report at the end of the period, and can be used for the next period’s decisions. *Research & Development* Chapter VI includes detailed information on R&D strategies and processes. The overview given below will show you how you can control the marketing strategy of your company and will give you the level of details necessary to understand the other chapters of this handbook. *Productivity Gains* As the Marketing department is not responsible for production capacity, you are not concerned with economies of scale. Hence, one way to reduce manufacturing costs is simply to produce more units of the same product. On average, it is estimated that manufacturing costs decrease by 15% each time cumulative production is doubled. *Marketing as a Profit Center* You will operate the Marketing department as a profit center. Your performance will be measured by the contribution that you generate. Contribution is defined as revenues from sales minus the costs listed below. • R&D: budgets allocated to R&D projects; • Production: costs of goods sold and inventory holding costs; • Advertising: advertising media & research budgets allocated to marketed brands; • Commercial: costs incurred by the commercial team, in all three channels; • Market research: costs of market studies ordered in the period;