Marketing Strategies, Simulation Exercise - Essay Example

REPORT ON SIMULATION EXERCISE INTRODUCTION Automobile industry is one of the main businesses in the world that contribute significantly to the global economy. In fact the automobile industry represents over 3% of the US Gross Domestic Product (Power and Associates, 2002a) and accounted for 9.5% of total UK exports and 1.1% of UK gross domestic product (Parker and Mcginity, 2006) In UK alone, the industry provides employment to about 780,000 people. The automobile industry thrives on innovation and increasing consumer demand. In fact, the vehicle prices have risen enormously through last few decades as more and more innovative changes and extra styling and comfort parameters are added to the cars. But there has been no drop in the consumer demand. In fact, it is still rising. People are demanding much better styles and quality in the vehicles today. But for car companies, even small changes in style are very costly. As per Sherman and Hoffer (1971) and White (2001), the costs of styling have increased tremendously from $100 million in the late 1950s to up to $4 billion in recent years. But to top it all, the success of such changes is still uncertain and even after spending so much, the companies are never sure that the product is going to work. (Farr 2000) Although it has been seen that immediate sales after any small change do pick up but whether they contribute to the overall rise in company’s value is still not certain. (Hoffer and Reilly 1984). MARKETING STRATEGIES The key marketing strategies employed by automobile companies world over are the new product developments and promotional activities. These two together contribute the long term and short term financial performance of the company. The new product development could actually be a totally new product or an upgrade on the previous product. Thus innovation is one of the key factors of competitive advantage in this industry sector. The strategy of new product development including the upgrades to existing products is by far the most extensively used in the industry. Successful new products are seen as the major contributors to achieving a sustained competitive advantage. As per Booz, Allen Hamilton (2004), the total sales due to the introduction of new products developed within the last three years is about 33%. And as Pauwels et al (2004) suggest, that new products introductions increase a firm’s long-term financial performance and market value. Thus now a days, more and more companies are using new product launches to bolster their market values. And more and more resources are now getting allocated and utilized for this innovation and R&D activities. It was reported that companies introduced 12.1 new products on average in 1989 as compared to the 6.2 new launches in 1987. (Mahajan and Wind, 1992) And in terms of resources, it was estimated that around 8% of a company’s sales are allocated for new product introductions. (Wolff, 1990). The second strategy of sales and marketing promotional activities is more of a short term strategy which provides immediate results but is not able to sustain the growth it achieved initially. Thus car manufacturing companies use sales promotions to boost immediate sales and optimize capacity utilization in rapidly changing market environment. Thus new products launching is the best move to look for long terms gains in the market and business. As per the PDMA study (2004), the companies that have very good new products developments are able to have double sales than those who are not able to use this strategy. But as per Mahajan and Wind (1992), the revenues from new products may take some time to materialize. But if successful, the new-product introductions have a persistent effect on revenues, as compared to the sales incentives and promotions, which give only temporary benefits (Nijs et al. 2001, Pauwels et al. 2002, Srinivasan et al. 2000). As per Geroski et al. (1993), a new product can temporarily increase the financial position of a company because of an innovation but it will only yield permanent benefits if it can transform into a source of competitive advantage. But it it worthwhile to note that while new product launches are capable of providing long term financial growth, the costs of development and production are quite high and the initial launch itself may need quite a considerable marketing resources. Moreover, the stock market may not react as much to the new product as expected. But it is also a known fact that not all new products are successful and new-product failure rate ranges from 33% to 60%. (Boulding, Morgan and Staelin 1997, McMath and Forbes 1998, Wind 1982) SIMULATION EXERCISE In our exercise, we are doing the market simulation for cars and automobiles. There are seven firms named A, B, C, D, E ,F and G. We are representing firm D and our main objective is to improve the overall financial performance of our firm through innovative product launches or use of better technology and concepts of market share, marketing communications, distribution and manufacturing. We have chosen the new product development as our main strategy along with appropriate marketing and distribution options. We know that this is a long tern strategic option but this is the only one that can provide sustainable advantage and growth if it is successful. Literature on new products also pinpoints to the importance of the new products development and its contribution towards future growth and profitability. (Cooper 1984, Chaney, Devinney and Winer 1991). And as per Jonash and Sommerlatte (1999), there is a direct relationship between high returns for the shareholders and new innovations in the companies’ products. Based on this knowledge, we also chose to bring out a new car and upgrade the old ones as part of our strategy to gain growth and value for our firm D. For this we have identified the key consumer segments such as Value Seekers – having basic transportation needs such as commuting to work. They are more price sensitive and identify safety and quality as the two most important attributes that they seek while making purchase decisions. So, they generally buy the economy class vehicles. Families – have more flexible needs and they use their vehicles for ferrying children and other family members besides the basic transportation need of commuting to work. They are also price sensitive with special focus on safety and quality. They generally look at family, economy, and minivan classes of vehicles. The singles – They are young people with more disposable income at hand and definitely more style conscious. In addition the performance factor is also important to them and usually look at sports and truck classes of vehicles. High income group – look for style and luxury to show off their wealth. For them, their vehicle is an indicator of their affluence and success and therefore look for more style and good performance. Hey generally buy Luxury and family cars. Enterprisers – Use their vehicles for business and personal needs. Since in this case the cars could be company owned as well, thus the categories they look for are the luxury, sports, utility etc. Look at Table 1 below for the findings on potential new customers at the start of the simulation exercise. Table 1 : New Customers Research has identified the top 3 potential new customer segments.   Segment Vehicle Class Est. Units (000's) Exp. Price Range Approx. Veh. Size Most Important Attribute High Income(4) Minivan 260-400 $30-44k 50-70 Interior High Income(4) Sports 30-50 $51-77k 45-65 Styling Enterprisers(5) Hybrid 110-170 $21-31k 25-45 Styling But we decided to bring out a luxury car for the niche market and an upgrade in the economy class vehicle. Firm D came out with one new product in the luxury segment called SUPER D and one upgrade in economy brand called Delite. This one was able to capture 28% market share after the upgrade and became the market leader in its category. But the luxury car D SUPER (7% market share) did not bring in the expected sales. See table 2 and 3 for the market share captured by these two cars. The other two were the DUSTY (14% share) in the truck category and DEFY in the Family category (15% market share). Table 2 : Luxury Class Vehicle Share of Class Overall Share MSRP Adv. (mill.) Adv. Theme Promo. (mill.) Glamour 93% 2% $40,500 $45 Quality $45 D SUPER 7% 0% $78,900 $100 Quality $80 Table 3 : Economy Class Vehicle Share of Class Overall Share MSRP Adv. (mill.) Adv. Theme Promo. (mill.) Delite 28% 6% $11,492 $30 Safety $30 Buzzy 17% 4% $11,999 $27 Quality $22 Cameo 14% 3% $11,499 $60 Safety $55 Fish 12% 3% $11,750 $30 Quality $15 Go 12% 3% $13,000 $20 Styling $20 Alec 9% 2% $11,049 $30 Quality $40 Echo 8% 2% $11,492 $35 Safety $25 Thus firm D was able to cater to families and value seekers through their economy class – DELITE. But had very little impact on luxury car users. See Table 4 for the percentage market share of all firms on major consumer segments. Table 4: Consumer Segments   Segment Units  (000's)   Chg   A       B       C       D       E       F       G       Value Seekers(1) 1,363 +11% 14.2% 13.3% 15.9% 14.9% 13.5% 15.0% 13.2% Families(2) 4,767 +10% 12.1% 10.5% 18.0% 17.6% 13.1% 13.7% 15.1% Singles(3) 1,072 +6% 9.9% 8.4% 12.7% 12.1% 12.8% 32.3% 11.7% High Income(4) 851 +10% 10.1% 3.0% 8.6% 13.0% 8.5% 7.0% 49.8% Enterprisers(5) 936 +31% 4.3% 2.0% 39.4% 7.1% 4.4% 10.0% 32.8%   Total 8,989 +12% 11.1% 9.1% 18.4% 15.0% 11.8% 15.1% 19.5% As is clear from the table above, Firm D was not able to capture the share of new customers as pointed out by the market research. The second strategy of an effective sales marketing activity to boost demand was also followed and as Blattberg and Neslin (1990) said that sales promotions without the risks associated with new products. And as Hanssens, Parsons and Shultz (2001) pointed out, the promotions and marketing communications are much more easier to implement than new product development and have much more immediate and visible effects on sales volumes. Because of this reason, most companies are increasing their share of promotions in the marketing budgets. Our firm D has third largest budget for marketing communications. See Table 5 for the comparison of marketing budgets for different firms. Table 5: Marketing Communications   Firm Corp.  Mkting Brand Adv.   Brand  Promo. Total   Comm. Val Mkt Share  Unit   Share Firm  Pref. Firm A $140 $155 $195 $490 11.2% 11.1% 14.1% Firm B $50 $102 $67 $219 8.0% 9.1% 12.4% Firm C $65 $250 $190 $505 19.7% 18.4% 14.2% Firm D $50 $205 $170 $425 13.2% 15.0% 12.2% Firm E $31 $195 $180 $406 11.5% 11.8% 13.6% Firm F $58 $160 $100 $318 13.1% 15.1% 16.4% Firm G $140 $195 $200 $535 23.3% 19.5% 17.2% Note: Dollar amounts are in millions. For any company or firm, improving the financial performance and value of the firm is the key objective of the strategy planning Now let us take a look at the financial performance of the company D with respect to other. See table 6 Table 6 Financial Summary Firm A Firm B Firm C Firm D Firm E Firm F Firm G Val Mkt Share 11.2% 8.0% 19.7% 13.2% 11.5% 13.1% 23.3% Unit Share 11.1% 9.1% 18.4% 15.0% 11.8% 15.1% 19.5% Preference 14.1% 12.4% 14.2% 12.2% 13.6% 16.4% 17.2%   Sales 17,575 12,601 30,767 20,589 18,038 20,511 36,479 COGS 14,383 10,533 25,337 18,078 15,161 20,286 28,504 Marketing 490 219 505 425 406 318 535 R&D 488 0 288 127 0 0 254 G&A 909 777 1,216 1,054 910 1,025 1,227 Manufacturing 1,879 2,152 2,161 2,011 2,299 2,118 2,390 Other 829 3,549 884 2,741 1,770 3,059 1,181 Income -1,402 -4,629 375 -3,846 -2,508 -6,296 2,388   Stock Price 3.89 1.26 29.40 2.01 1.79 1.99 69.04 Mkt Value 1,952 630 14,748 1,007 893 995 34,522 Total Debt 7,086 30,863 8,103 23,857 19,486 26,604 0 Note: Dollar amounts (except stock price) are in millions. Thus based on figures above, firm D is fourth in terms of share of units sold and stock price. And in terms of market share and sales figures, it is third in number, It does not seem to be having a good growth in terms of its financial indicators. Actually, the problem seems to be because of SUPER D which failed to live up to its expectation. Although Delite was able to capture the market share, the same did not happen in this case. Moreover, as we know that new product strategy is supposedly long term plan – thus it is quite possible that over a longer period of time, it will be able to recover its costs as well as book profits. Moreover, as the research indicated, the consumers were looking for sports, hybrid or minivan at the moment, when we launched the luxury car SUPER D. Thus we were not able to take advantage of the market research and made the mistake of launching this car. CONCLUSION Hence , from above figures and discussion, we can conclude that although our strategy of new products development was time tested and good one, we succeeded only in the upgrade version. This is not surprising as we have seen before that only 33% to 60 % of total new product launches are successful and rest are failures. (Boulding, Morgan and Staelin 1997) Moreover, we cannot also say that firm D has performed badly, because the new products take quite a long time to perform on the financial front. Most of the early business will only be able to recover costs and it might take time for it to become more popular. REFERENCES Blattberg, R. and Neslin, S. (1990), Sales Promotion, Concepts, Methods and Strategies, Englewood Cliffs, New Jersey: Prentice Hall. Booz Allen Hamilton (2004) New Product Development Study Boulding, W., Morgan, R. and Staelin, R (1997), Pulling the Plug to Stop the New Product Drain, Journal of Marketing Research, 34 (February), 164-176. Chaney, P., Devinney, T. and Winer, R (1991), The impact of new-product introductions on the market value of firms, Journal of Business, 64 (4), 573-610. Cooper, R. 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