Decided To Divide Our Markstrat Experience

Published Date: 02 Nov 2017

COMPETITITVE MARKETING STRATEGY

Markstrat Simulation: Final Report

By Group 11

Sachin G

Morgane Jouffre

Julien Chenoy

Justin Servant

Damien Cadoret

Mathieu Simon

Date: 19/11/2012

Table of Contents

Introduction

The course ‘Competitive Marketing Strategy’ by Prof. N.B. Kanagal provided us with an opportunity to participate in Markstrat Simulations. We were assigned the team ‘U’ in Industry B, which contained 5 more firms apart from ourselves. This turn based simulation was held for 7 different periods (turns) in which each of the participating groups (firms) had to take different types of decisions regarding Marketing mix , Sales force, Research and Development, Brand Portfolio and Market Research Studies. The following report is the final report that concludes the performance and decisions of firm ‘U’ of Industry B in the Simulation. We decided to divide our Markstrat experience into 3 parts:

Market Analysis and Performance analysis over the seven periods

Decision rationale over the seven periods

Recommendations for the future and Conclusion

Rationale for Decisions 1 through 7

Markstrat is a well-known simulation that integrates the students into the real life and the day-to-day choices that face companies in a competitive environment. 6 companies compete against each other’s with objective to be the most profitable in the Sonites market.

Objectives before the simulation

Economic and financial objective: To be the first in market capitalization and net contribution. As the shareholders and stakeholders look at the financial value of a company to appreciate the performance of a company, it was a necessity to deliver a good performance throughout each period.

Reduce cost per unit: To reduce cost per unit over the long run by stabilising our expenditures on advertising and sales force.

Advertising spend: To spend within the available budget and not through external funding, so as to avoid interest payments.

To work as a team: To give everyone the opportunity to express themselves in order to take the decision without any conflicts that could result to bigger problems after each decision and sometimes to the end of a firm. In order words, we didn’t want to have a vertical hierarchy but have a flat hierarchy structure where everybody is as equal.

ROUND 1: Period 0 - Decisions for period 1

Before our decision, we tried to regroup the 5 different consumers segment into homogeneous groups that share the similar characteristics in terms of performance, convenience and price sensitivity.

Customer Segmentation

We identified 3major groups that have different characteristics:

Buffs (BU)

Singles (SI)

Professionals (PR)

Hi-Earners (HI)

Others (OT)

Performance

High

Average

High

High

Low

Convenience

Average

Average

High

High

Average

Use

Personal

Personal

Personal & Private

Personal

-----------

Price Sensitivity

Sensitive

Sensitive

Insensitive

Insensitive

Sensitive

We thought that Buffs (BU) & Singles (SI) and Professionals (PR) & Hi-Earners (HI) were homogeneous enough to be considered as one segment each. Others (OT) are unique to any other segments in the industry.

Product Portfolio

Regarding our products, SURF and SUNY, we decided to associate each product to not more than one of our 3 pre-determined groups.

SURF: We decide to focus SURF for BU and SI. Indeed, the characteristics of SURF matched most of the requirements of this group and exceeded a few such as convenience. Purchase intention for BU was already at 8.7% and was 22% for SI with brand awareness being 58.9% for BU and 62.5% for SI.

SUNY: We decided to mainly target this towards for PR & HI. Once again the characteristics of SUNY match the characteristics of this group. Purchase intention was at 21.1% for PR and 11.3% for HI and brand awareness reached 60.1% for PR and 57.4% for HI.

With this kind of segmentation, we have products that are already in the mind of our target consumers and that fit their needs.

Decisions through Growth forecast and Consumer survey:

The decisions for production level was based on growth forecast for the next period with respect to the particular segment the product was aimed at.

The decisions on the sales force/distribution coverage was done based on the shopping habits of the consumers in the particular segment at which the product was aimed at.

Period 1

Brand

Production Level

Pricing

Advertising

Sales Force

Target segments

SURF

100000

320

2000

30

Singles & Buffs

SUNY

110000

610

2750

30

Hi-Earners & Pros

Pricing: Since we did not have any information on the ideal semantic values in period 1, we tweaked our prices based on the understanding of our customer segments to gauge their initial reaction. We increased the prices of SUMO by 10% and vice versa with SURF to see how much the high-status customers and price sensitive customers reacted to price changes.

Advertising: Advertising was increased by 15-20 % based on the ‘0’ period decision in order to gain any possible early mover advantages.

ROUND 2: Period 1 - Decisions for period 2

Period 2

Brand

Production Level

Pricing

Advertising

Sales Force

Target segments

SURF

185000

320

2500

30

Singles & Buffs

SUNY

120000

590

3000

30

Hi-Earners

Result of Round 1 – Exceeded expectations with high growth levels in SURF, but concerns about stagnant growth in SUNY

Research and Development

From the start, we wanted to create a completely new product for the OT that will meet perfectly their needs. This group of consumers is heterogeneous in their needs in comparison to the other consumers, and their future growth seems interesting enough to dedicate one product for them.

Hence we opted for an R & D project to create a new product for ‘Others’ segment. The product characteristics were almost identical to Ideal semantic values of ‘Others’ when we opted for an R & D project SUCE.

Pricing

SURF – Maintained constant prices, due to being on par with the competition and perceived value of customer segment

SUNY – Decreased price levels to stimulate growth in the segment and to match ideal perceived levels for Hi-earner segment

We feared that we couldn’t target Singles perfectly with SURF and Hi-earners with SUNY if we were to also focus on Buffs and Professionals with the same products. As we were at the beginning of the simulation we decided to continue with our strategy but to be attentive towards this problem.

ROUND 3: Period 2 – Decision for period 3

Period 3

Brand

Production Level

Pricing

Advertising

Sales Force

Target segments

SURF

260000

320

2900

35

Singles & Buffs

SUNY

100000

520

4000

40

Hi-Earners & Pros

SUCE

64000

240

1600

25

Others

Result of Round 2 – Exceeded expectations with high growth levels in SURF, but concerns about stagnant growth again in SUNY

Brand Portfolio: To react to our problem of being "stuck in the middle" with our initial strategy, we introduced our new product SUCE (for others)

R & D: Began a new R&D project in order to come to the market with a product specifically designed for HI-Earners, due to stagnant sales levels. SUNY would be devoted to Pros after the introduction of this new product.

Advertising & Sales force: With a view to stabilize our spending on advertising, advertising was not increased by more than 25% among any brands. Sales force was increased due to a product addition to the portfolio.

ROUND 4: Period 3 – Decision for period 4

Period 4

Brand

Production Level

Pricing

Advertising

Sales Force

Target segments

SURF

220000

310

3100

26

Singles

SUNY

100000

520

2500

23

Pros

SUCE

120000

270

2500

31

Others

SUMO

80000

480

3800

40

Hi-Earners

Results of Period 4 – Satisfactory performance levels from SURF and SUNY. Disappointed with the poor reception of SUCE by the ‘Others’ segment.

Advertising & Sales force: SUCE was a promising product but we were disappointed with the low penetration of consumer purchase intention. Realizing the mistake was that we didn’t put enough money in advertising to launch our new product. We doubled our advertising for this round for SUCE and kept the advertising expenses constant on SURF. The newly positioned SURF exclusively for Pros had reduced ads because of an introduction of new product specifically for Hi-Earners.

Brand Portfolio: SURF was, unintentionally, well placed for the ‘Others’ segment. Hence, SURF was now only used to target the ‘Singles’ and SUCE for ‘Others’, but we feared that we might lose market share in the process of "transferring" OT from SURF to SUCE.

The competition also reached another level. Firm O modified 2 of their existing products and introduced a new product. With these changes, firm O skyrocketed in their performance. Firm Y introduced 3 new products. And it becomes obvious that it was a matter of time before the other firms introduced and/or modified their product. In turn, we needed to be very careful in our decisions.

Our new product SUMO was ready to be launch, but with the modification of firm O to their products, SOLO reached 75% of purchase intention in the HI. Our strategy to introduce a product design for HI was questioned. Was it worth beginning a battle with firm O that will demand a lot of money and that could lead to a price war leading to a decrease in revenue and subsequently profits?

Another solution was to capture 100% of BU and PR. It was obvious that every firm wanted to target SI, HI and OT due to their market size. PRO and BU would become little markets but with less competition and so easy to capture.

The problem was that we had already invested money in the development of SUMO and so we decided to introduce it. We could have applied the sunk cost theory that implied that all previous costs should not be considered when taking decisions for the future. But the limited decision period left made it sensible to not waste an R & D project.

ROUND 5: Period 4 – Decision for period 5

Period 5

Brand

Production Level

Pricing

Advertising

Sales Force

Target segments

SURF

120000

280

1700

13

Singles

SUNY

16000

460

1150

13

Pros

SUMO

120000

460

2900

20

Hi-Earners

Result: Huge drop in the market share of SURF and high levels of unsold inventory. No growth in SUCE’s sales. Increase in sales of SUMO and SUNY.

R & D and Brand portfolio: Because of the sudden drop in sales of SURF, we decided to re-evaluate the product characteristics and concluded to modify the product to meet the new ideal values of the ‘Singles’ segment. Dropped SUCE and concluded as a failed product.

Advertising & Sales force: Due to drop in sales of SURF, the available funds was low for marketing decisions, with our objective to not borrow loan, the advertising and sales force spending was cut by half.

Evaluation: Regarding the financial objective, it is a failure. We are only 3rd in the stock price index and market capitalization and we are 2nd in the cumulative net contribution. It is quite a disappointment but as it was clear during the last decision that it will not be possible for us to be first.

On the other hand, our last objective has been reached. During all the simulation there was a good atmosphere and everybody proposed ideas that were discuss before taking any decisions. Even if sometimes this kind of organization can lead to a loss of time due to passionate debates, it was a good opportunity for us to deal with problems of differing views.

ROUND 6: Period 5 – Decision for period 6

Modified Objectives

Financial/Economic Objective: To finish at least second among cumulative profits and at least third in Stock value.

Gain more than 10% market share

Establish a Cash Cow for the short term

Have higher spend on advertising to gain market share

Period 6

Brand

Production Level

Pricing

Advertising

Sales Force

Target segments

SURF

40000

280

5050

41

Singles

SUMO

100000

460

8450

100

Hi-Earners

Result: Losses incurred on SURF and SUNY. No growth among SUMO.

Brand Portfolio: Dropped SURF, a loss making product aimed at a small market. Increased spending on SUMO

Advertising and Sales force: Increased advertising and sales spending to match the segment leader. This was a must with a necessity to increase the firm’s market share from a lowly 8%.

ROUND 7: Period 6 – Decision for period 7

Period 7

Brand

Production Level

Pricing

Advertising

Sales Force

Target segments

SUMO

180000

445

8250

100

Hi-Earners

Result: SURF is still a loss making unit. There is a high increase in SUMO’s sales.

Brand Portfolio: Dropped the loss making unit of SURF.

Advertising and Sales force: Highest level of advertising and sales spending to increase market share of growing SUMO and to attack the market leader.

Sonite Industry Analysis

Market Segment Size

C:\Users\Theatre Of Dreams\Desktop\Markstrat Final Report\Screenshots\Mkt Size (value).JPG

From the five different market segments, only three manage achieve a growing trend over the seven year period of the Sonite market in the Markstrat simulation. Our main targeted segments of Singles and High-earners constitute the first two places in terms of the total value of the market. Others and Singles have risen from the bottom two places in terms of total value of the market to become the second and third most valuable segments in the Sonite industry. The buffs market has slowly declined over the seven year period to become inconsequential, whereas the Professionals market has almost maintained a constant percentage of the total market value.

Market Segment Growth Rate

Two of the five segments, i.e., the Buffs and the Professionals have had unfeasible growth rates for any particular firm to concentrate on these segments as their primary segments in the coming five years. Their continuous and sustained decline in terms of growth has contributed to the overall Sonite market to not grow as expected.

No particular trend: Even if we consider the market segments that have exhibited significant growth rates in particular periods, there is no particular trend identifiable among the growth rates of three market segments of Singles, Pros and Hi-earners. All the three markets after having started on promising percentages have nose-dived in periods 2 and 3. And after a change to an increasing trend in growth rates from periods 3 to 5, the growth rates have again dwindled post period 5. An up and down trend among the three segments which have a psitive growth rate makes it unpredictable to firms in determining the most valuable segment.

C:\Users\Theatre Of Dreams\Desktop\Markstrat Final Report\Screenshots\Mkt growth rate.JPG

Internal Analysis

Internal analysis is a process that all organizations big or small undergo during the formulation and implementation of marketing strategy. Internal analysis could also be relevant when the organizations venture into new areas chosen by business acumen and the core competencies have to evolve which is evident in a dynamic Markstrat game. We have mainly used the internal analysis to understand the directions taken by our firm and to provide recommendations in for the future.

Costs

Advertising and Sales Force Costs: The above two costs are easily the two highest levels of spending every period. This trend is in line with the industry standards where advertising and sales force expenditure has taken precedence over other costs.

Advertising Research: Although, the recommended percentage for advertising research is 7% in the Markstrat handbook, the higher percentages in the final few periods has helped to increase the quality of the advertising and in turn the purchase intentions of the target segments.

Market Research Expenditure: Our firm has always found it best to employ more resources towards market research which has definitely helped in making informed decisions and has continued the trend consistently up until the last period.

Inventory Holding and Disposal Costs: Both the holding and disposal costs have been minimal for all periods except for spikes in period 4 for the holding cost and in period 5 which was to subsequently dispose the discounted brand.

Cumulative Market Research Studies Costs

C:\Users\Theatre Of Dreams\Desktop\Markstrat Final Report\Screenshots\Mkt Research.JPG

Cumulative Costs of Firm U

Brand Portfolio

SURF (Discontinued): Surf was our firm’s ‘STAR’ product, mainly aimed at Singles segment of the market in the first 3 periods. Unsustainable advertising spends from competitors and entry of numerous similar products, particularly from Firm ‘O’ resulted in dwindling of the market share of the product. Due to a crowded market space for the segment and

SUCE (Discontinued): Since, the market forecasts predicted ‘Others’ segment to be the biggest growing segment in the industry, product SUCE, was our failed attempt to tap into this market segment. We could not gain the necessary scale of sales to provide any type of reasonable value to the firm.

SUNY (Discontinued) and SUMO: They are our two products in different product cycles but serving the same purpose, i.e., aiming to serve the Hi-earners segment.

Profit Margins and Advertising Spend

Cumulative Profit Margins By Brand

Brand

Cont. Aft. Mktg.

Ad Spend

Units Sold

Ad Spend/$

Profit Margin

SURF

52041000

20620000

866000

0.40

60.09

SUCE

1468000

4140000

89000

2.82

16.49

SUNY

55530000

15870000

403000

0.29

137.79

SUMO

49435000

23700000

501000

0.48

98.67

The above table represents the following:

Cumulative advertising spends per dollar ($) of profit:

Advertising spend ratio measured in terms of total amount of spending per dollar profit helps us to understand which products have had absorbed more spending per unit of sales.

SURF: It was one of our consistent brands in the early periods that yielded higher profits for lower advertising spend

SUCE: We never reached significant volumes of sales to justify our advertising spend and was one of the reasons to discontinue our product

SUNY & SUMO: SUNY has provided us with the best value for advertising and an increase in SUMO’s spending is mainly due to reducing competitive prices in the segment.

Ad Spend/$ of Profit

Firm

Contribution (MN$)

Ad Spend (MN$)

Ad Spend/$

A

118

62

0.53

E

44

63

1.43

I

37

53

1.43

O

412

78

0.19

U

158

57

0.36

Y

131

48

0.37

We would like to conclude that the ad spend average is very high in the Industry, in part due to firms vying for increased market share irrespective of the level of expenditure. This model might not be sustainable for very long if the trend is same from the majority of the firms.

Profit Margin on a per unit basis:

SUNY & SUMO: As we can observe from the above tables, the profit margins for SUNY and SUMO are by far greater than any other products we have produced. The greater margins put less pressure on the firm to sell larger quantities of the product.

SURF: This was one of the higher end models of the Sonite product mainly catering to Singles and Others segment and hence has maintained a higher than average profit margin.

SUCE: A specialized product, only to cater to others segment had the least profit margins

Growth Share Matrix

C:\Users\Theatre Of Dreams\Desktop\Markstrat Final Report\Screenshots\Growth Share Matrix (2U).JPGC:\Users\Theatre Of Dreams\Desktop\Markstrat Final Report\Screenshots\Growth Share Matrix (7U).JPG

GROWTH SHARE MATRIX IN PERIOD 2 AND PERIOD 7

The above growth matrices show the current predicament of the firm. There are no ‘STARS’ in the product portfolio and only a part ‘Cash Cow’ via the only existing product, SUMO. Although SUMO has more than 11 per cent of the total value of the Sonite market as of the last period, the firm will have to produce a ‘STAR’ to gain significant share and an assured future in the Sonite market.

External Analysis

Competitive Advertising & Distribution

The above diagram represents the advertising spending in the final period based on each customer segment. The final period spending shows our firm ‘U’ with the highest spend among the Hi-Earners segment. This was done in an effort to regain highest market share with in the segment and consolidate the positioning of our product ‘SUMO’ as a premium product catering to the needs of Hi-Earners. The distribution coverage by our firm ‘U’ is based on the preference of our primary customer segment for ‘SUMO’ i.e., Hi-Earners

Competitor Analysis by Segment

We will try to analyse the competing brands in the segment that our firm ‘U’ is primarily catering to or intends to enter the segment in the future. We have not considered the customer segments of Buffs and Professionals because of a continuous decline in the market size over the previous seven periods and are likely to continue the trend for the next five years.

Singles Segment

Both Brand awareness and the Purchase intentions of the Singles segment is currently dominated by Firm ‘O’ and Firm ‘Y’ takes second place in the market. Analysis of advertising and sales force expenses reveals firm O being the best among all.

There is high scope for entry into Singles market to new producers due to the following reasons:

Number of market leaders being very small in number.

Comparatively low cost on sales and advertising.

Relatively low cost on R & D

Hi-Earners Segment

Hi-Earners segment has two established firms in Firm O and U and two growing firms in E and Y. Firm U, which is our firm, has achieved the highest levels of purchase intention as of Decision period 7 from the target segment – Hi-earners. This has been possible because of concentration of our entire advertising budget towards one particular brand and subsequently outspending the market leader ‘O’ to gain market share.

In comparison to other segments of the Sonite market, we can conclude that the threat of entry is relatively low due to the following reasons:

Increased number of firms with majority market share

High entry costs imposed in terms of high R & D Expenditure for a similar product

Highest sales and advertising costs in the Industry

Others Segment

Others segment is dominated by firm ‘O’. Firm O’s product, SODA which is aimed at the others segment has an overall share of 11.5% of the Sonite market which is thrice as much as the nearest competitor SYNC, which accounts for 3.5% of the market share. The advertising and sales spend is one of the lowest in the Industry.

Threat of Entry is high due to:

Lowest cost in industry on R & D

Very few or just one dominant player in the segment

One of the segments to have low advertising and sales expenses.

Ideal Value Evolution for Customer Segments

We have considered the MDS scaling to measure the Ideal value evolution from different customer segments. The MDS scaling measures 3 different scales of a product – Economy, Performance and Convenience. Taking the standard deviation of each of these scales over the seven periods of Markstrat provides us with the scale of changes that a customer expects in the product over a longer duration. This in turn, helps us to identify which particular segment demands larger changes over a certain period and helps in developing the product through R&D.

The mean of standard deviation of three different scales gives us a comparable to decide which customer segment’s product needs to be modified after a smaller duration.

Standard Deviation

Singles

Hi-Earners

Others

Economy

0.62

1.84

0.93

Performance

1.56

1.91

2.15

Convenience

0.25

0.34

1.1

Mean of Std. Deviation

0.81

1.36

1.39

The above table suggests that ‘Singles’ is the least varying customer segment. Hi-Earners and ‘Others’ are segments that have twice the variability as ‘Singles’ in product scale over a similar period.

Leanings from Markstrat

Overflow of Information: An almost real world scenario in Markstrat helped us realize that it is not east to segregate the needed information from the available information when making a decision. It is of utmost importance to not neglect any vital information available, on the other hand, we cannot allow our judgement to be influenced by irrelevant information.

Competitor behaviour affects almost everyone: Competitor’s action forces one to evaluate their objectives and constantly modify one’s strategies to adapt to changing scenarios, especially in advertising spend

Quality of advertising: Advertising research is vital and there has to be a significant spend on this to produce high quality of advertising

Acquiring Market Share: Acquiring market share is the most primary objective of any given firm. Increased spending on advertisement and Research and development in the early stages will reward the firm at a later stage.

Limited offering helps: Smaller number of products helps in gaining rapid market share in a particular segment as evidenced our own firm’s approach in Period 7, where concentrated spend on advertising on a single segment helped to boost the market share of the product and prepared to challenge for market leadership.

Pricing skimming does not always help: Reduction of prices alone will not increase the sales of a particular product, even if the product is of a superior quality and target segment is a price sensitive segment. The reduction will reap dividends only if matched with sustained advertising.

Recommendations for Firm ‘U’

Premium Brand: The Hi-Earners segment is highest value segment and the company has to have a sustained presence. If it cannot establish a STAR product in the segment, a significant share will at the minimum present a healthy ‘Cash Cow’ product to the company.

Enter Singles Market: Singles segment offers significantly better profit margin than the ‘Others’. And the segment has lesser variations in the ideal product scale, which provides scope for lesser spend on R&D. Projected average growth of more than 30% p.a. for the next five years provides sufficient incentive to enter the market.

Market Leader in Hi-Earners: We are currently just 0.3% behind the total market share of our direct rival SOLO. And have already achieved highest purchase intentions in the segment due to increased spending in the last period.

Form an Alliance: The easier way of entering the ‘Singles’ market would be to form a partnership with the second best product – SYDP, in the segment offered by ‘Firm Y’.