Marketing Case Analysis – Zara

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WHAT BUSINESS IS ZARA IN?1 Daniel J. Doiron wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-09-24

What would 2016 have in store for Inditex and its flagship brand Zara with its “fast fashion” business model? It had taken years for new competitors to build business models that could effectively compete with Zara’s approach.2 Many would recall the early deference many had towards Zara and its counter-intuitive business model. Why would anyone invest in a fashion manufacturer and retailer who produced their clothes in the high- cost labour market of Spain (versus Asia), spent very little on advertising, ostensibly overspent on positioning high-end stores in chic retail districts across Europe, carried substantially less inventory than competitors, manufactured clothes that were, arguably, of a lesser quality and finally, charged 15 per cent less at the cash register. By all accounts, this approach was viewed as a formula for disaster in the highly competitive retail fashion industry.3 At the time, most observers were just not forward thinking enough to see the value in Zara’s approach. And, over time, Inditex took great pride in proving them wrong. By 2014, Zara was, by far, the number one fashion retailer in the world by many measures.4 It really was its unique business model that enabled this astounding success. Inditex, however, could not dwell on past successes, as the future was full of significant challenges associated with the many new upstart and copycat competitors who had infiltrated the market. These new firms would, more than likely, also enjoy a good degree of success. Disruptive innovations, such as Zara’s business model, inevitably were copied. Examples of how industries evolved around disruptive business models included Southwest Airlines leading the discount airline industry and Wal-Mart dominating the discount department store industry. Perhaps it was time for Inditex to reinvent the industry business model, once again.

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Page 2 9B15M088 THE EARLY YEARS In 1963, when Amancio Ortega Gaona started his small dressmaking firm in La Coruña, Spain, at the tender age of 16,5 he never dreamed it would lead to the world’s largest retail fashion empire. Nor did he aspire to become the fourth richest person in the world.6 What he did come to understand over the next twelve years was that textile manufacturing was a very risky, often frustrating, business when you were one step removed from your customers. This was especially true in the fast changing women’s fashion segment of the market. So, in 1975, he opened up his first Zara store in the centre of La Coruña, Spain, a town of 246,000 people and was driven by the overriding principle that the key to success as a fashion retailer was to link fashion design to manufacturing and distribution in a way that allowed for rapid response to the finicky, and often changing, needs of the customers. This was the sole foundation for the creation and growth of Zara. It still is. Early success spurred the opening of nine new stores in Spain’s largest cities over the next eight years.7 Ortega also learned that to be successful he would have to take advantage of the intelligence and trust the judgment of his employees throughout his company.8 In other words, a top down decision-making model, as it related to new product design and distribution, would be counterproductive to his overriding notion of reacting quickly to his customers’ needs. Thus, he put critical processes of product design, manufacturing and distribution decisions in the hands of his employees across the company. It was the combined approach of manufacturing new clothes as quickly as possible in response to customers’ needs and desires while adopting a decentralized decision-making process that allowed Zara to thrive and grow in the ultracompetitive retail fashion industry. Over the next 17 years following the launch of Zara in 1975, Ortega opened more than 1,000 new stores, culminating in an initial public offering on May 23, 2001. The funds raised through this offering would provide the fuel for a tremendous evolution that would see Inditex grow to operate 6,683 stores in 88 markets across eight brands, with fiscal 2014 revenue of €18.1 billion9 and industry leading profit margins (see Exhibit 1).10 THE GLOBAL FASHION RETAIL INDUSTRY The global retail apparel industry had revenues of US$1.323 trillion in 2013, employing approximately seventy-five million people. The industry was expected to grow at a pace of 5.1 per cent annually to reach an estimated US$1.685 trillion by the end of 2018.11 The industry was influenced by a number of factors, including changing demographics and urbanization of the global population. A full 64.4 per cent of the Asian population would be urbanized by 2050, up from 45 per cent in 2011. Likewise, Europe would see 82.2 per cent of its population living in urban centres, 88.6 per cent in North America.12 According to the McKinsey & Company report on succeeding in the future fashion market, “by 2020, a quarter of global wealth will be concentrated in just 60 mega- cities, some of which will be larger than countries.”13 With the global population predicted to grow to over nine billion people by 2050, from the 2014 level of seven billion,14 it would seem the industry was on a trajectory for massive growth. This, tied to a growing middle class in developing nations, like China and India, could lead to a substantive increase in spending on fashion clothing. In 2010, the Brookings Institute predicted that by 2021 “on present trends, there could be more than two billion Asians in middle class households, [with] China alone [accounting for] over 670 million middle class consumers, compared with only perhaps 150 million today.”15 Middle class spending was projected to rise from US$21 trillion today to US$51 trillion in 2030.16 This would surely fuel the retail fashion apparel industry for years to come (see Exhibits 2 and 3).

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Page 3 9B15M088 The women’s apparel market was predicted to grow by 4.8 per cent annually from 2010 to 2025, outpacing the previous growth of 3.3 per cent for the six years prior.17 Lu et al. stated that “some 80 per cent of top growth cities for total apparel sales by 2025 will be in emerging markets.” They went on to say that these cities would enlarge the world apparel markets by an additional US$100 billion over this time period.18 Emerging markets at that time would represent 55 per cent of mid-market women’s apparel sales (see Exhibit 4). NDP Group suggested that in 2013 the U.S. women’s apparel business alone reached US$116.4 billion, a 4 per cent increase over 2012. Online purchases were on a fast growth trajectory as well, representing 15 per cent of women’s apparel sales in the United States, up an astounding 17 per cent over 2012.19 Trends and challenges in this market were many. Responsible sourcing, including greater visibility across the entire supply chain, topped the list. Tragic events, like the blaze at the Tazreen garment factory in Bangladesh in November of 2012,20 had heightened the need for textile manufacturers and retailers to strengthen their supply chains to ensure fair trade, safe work environments, living wages, social commitment and responsible resource development. Industry growth opportunities, specifically in developed countries, included the plus-size categories. This was a US$17.5 billion market in the 12 months ending April 2014 in the United States, up 5 per cent over the previous year,21 and was a direct reflection of the obesity epidemic under way in the developed world where seven of 10 Americans were now overweight.22 The apparel industry moved hand-in-hand with fluctuations in the global economy, with the demoralizing recession of 2009 – 2010 having had a significant negative impact on the industry. According to a study by comScore in 2011, there was a noteworthy decrease in consumer’s willingness to buy the brand they want most, from 54 per cent in 2008 to 45 per cent in 2010.23 Price point clearly became a defining factor during economic downturns, with branded retailers such as Gap and H&M (Hennes and Mauritz) suffering the most. Other factors impacting the industry included global transport costs, linked to the price of oil. It would seem, with oil prices near or below US$60 per barrel by mid-2015, these costs were likely on a downward swing. Technological innovation in textile manufacturing was having an impact on important metrics within the industry beyond cost reduction. Mass customization, small batch manufacturing and time to market were becoming key risk management factors. These drove a deeper focus across the entire supply chain. New fabric innovation was also having a strong positive impact on the growth of the apparel industry, specifically in the sportswear market. Commodity prices could significantly impact the industry cost structure, and specifically cotton, which represented approximately 36 per cent of the textile fibres market.24 In 2014, global cotton prices tumbled by 20 cents per pound to an average price of US$1 per pound on lower demand,25 with total global production at 116.7 million bales, down 5 per cent from the previous year.26 Additionally, the rapidly growing aging population of consumers over 60, referred to as a “demographic earthquake” in developed countries would become one of the fastest growing segments for consideration along with their expenditures on clothing.27

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Page 4 9B15M088 CUSTOMER BEHAVIOURS Perhaps the most significant factors driving change to the retail apparel industry were associated with shifting customer behaviours. Customer buying behaviours and patterns could directly influence a firm’s ability to succeed and in many cases, these behaviours would determine a firm’s approach, and indeed the resulting industry business model. The urban retail fashion market, where Zara played,28 was inextricably tied to two key customer behaviours: Hard to Predict and Influence Fashion apparel customers were a fickle group that could be extremely hard to predict and influence. They could be easily swayed by unpredictable factors, such as celebrity fashion, friends’ fashion choices or the need to differentiate themselves in a crowded urban environment. These variables made it extremely challenging to predict the next fashion hit and contributed to the single largest risk in retail apparel: a “fashion miss.” In turn, fashion misses resulted in discounts and markdowns in order to make room for new inventory. For example, in 2014, H&M had 24.2 per cent of their entire online offering on discount, with close to 10 per cent discounted by 50 per cent or more.29 Studies have shown that specialty apparel retailers could end up marking down from 30 to 40 per cent of their inventory by up to 60 per cent on average.30 To mitigate this risk, many apparel retailers spent an exorbitant amount of money on advertising, with a focus on building brand awareness and loyalty. And it worked — to a degree. For example, Gap spent US$637 million on advertising in 2013 on sales of US$16.148 billion; representing 3.9 per cent of sales or 10.1 per cent of gross profit.31 In the highly competitive fashion industry this could be a defining driver of profitability. Tastes Change Often Fashion cycles could also be notoriously short, especially in the urban womenswear segment. Trends came and went, which drove fashion retailers to introduce new fashions more often and avoid replenishing old items where old stock might necessitate potential discount. At H&M, upwards of 23.1 per cent of its current range of online offerings had been replenished;32 this impacted both their inventory turnover ratios and ability to sell items at or near full price. Introducing new fashions frequently could have the positive desired effect of enticing customers back to the store more often. An average customer would visit the typical fashion store(s) four times per year, while some fashion retailers, such as Zara, enticed their customers back as many as 17 times per year with fresh fashion choices appearing more often.33 A fashion retailer’s ability to react quickly to shifting fashion preferences could be a defining success factor. INDITEX AND ZARA — A UNIQUE APPROACH Inditex was the public holding company for Zara and seven other retail brands, including Bershka, Massimo Dutti, Pull & Bear and Stradivarius. After 23 years of diversifying into these new categories, Zara still represented the vast majority of the sales (and profitability34) of Inditex. In 2014, Zara represented 64 per cent of Inditex’s revenue across 2,085 stores35 (see Exhibits 5 and 6) and a full 66.4 per cent of its EBIT.36 Inditex had been on a tear for the last decade. It had taken its sales from €5.67 billion in 200437 to €18.1 billion in fiscal 2014.38 This had been accomplished through a focused geographic expansion effort that had

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Page 5 9B15M088 seen the company open, on average, 1.22 stores per day across 88 countries.39 Its recent focus for geographic growth was primarily Asia, where 450 stores in China alone where opened by the end of 2014.40 The company’s approach was very different from its traditional competitors. For instance, it was highly vertically integrated, and unlike all its competitors, it manufactured the majority of its own clothes. In fact, it manufactured about half of its own products in what most would consider, the high cost labour markets of Spain, Portugal or other nearby countries, relying less on Third World outsourced manufacturing.41 Its competitors, by contrast, outsourced the vast majority of their production. Unique Capabilities Inditex had built a number of defining competencies, which its competitors did not possess. The first was associated with time to market. The company could move from a sketch of an idea to a product ready for shipment in as little as two weeks.42 This was precisely why Zara had been dubbed as the leading champion of the relatively new “fast fashion” industry. However, Pablo Isla, chief executive officer (CEO) and chairman of Inditex, did not endorse this term. “I don’t identify with the concept of fast fashion,” he said. “We are not about selling a million striped T-shirts as fast as possible.” He went on to say that the success was “based not on speed but on accuracy, on understanding exactly what customers want, week by week, and store by store.”43 This highlights a key capability at Inditex — its ability to identify customer needs and desires and translate these critical inputs back to the design teams in La Coruña. Zara achieved this through employee groups dubbed “commercials.” There were three essential levels of commercials that worked closely with one another at Zara. The design team commercials, which typically consisted of four employees — two product managers and two designers were responsible for designs in a specific category, such as women’s sport clothing. They were given all the decision authority required to succeed, including independence in setting designs, ordering fabric, manufacturing quantities and pricing. These teams decided what Zara would make and sell. In fact, they introduced an astounding 18,000 new individual designs for Zara stores each year. These teams were supported by regional commercials responsible for liaising with store managers (and customers) across certain geographic footprints. Their overriding responsibility was to identify the clothing styles that would sell in their markets. They did this through observing what people were wearing (and importantly wanted to wear), along with the insights (and orders) coming from the store managers.44 Store managers were the third level of commercials. Their primary responsibility was to select the inventory they believed would sell in their stores, accomplished through talking with and observing customers. They had to also be up to the minute and intimate with their store inventory levels and sales. They ordered new inventory within each category in the store twice a week. For many years Zara chose to not implement a store-wide inventory management system, requiring store managers to count inventory by hand. This, among other things, forced the store managers onto the floor and, by default, to interact with customers. The insights gained from this interaction helped managers purchase inventory for their store that was more relevant and compelling for their customers. However, store managers would not always receive the items they ordered. At times, the regional commercials would place new items in stores to “see how they would sell.” They usually made these new clothes in small batches to avoid any significant markdowns in the event they were not popular.45 This approach drove fashion failure rates for Zara’s new products that were as low as 1 per cent, which was considerably lower than the industry average of 10 per cent.46

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Page 6 9B15M088 Commercials were encouraged to remain vigilant at introducing new items weekly and not restocking old items, giving Zara a replenishment rate of only 2.8 per cent.47 This led to two unique customer behaviours. Firstly, Zara customers would visit stores often (17 times per year48) as there were always new fashions to be had. Secondly, when customers found something they liked, they were motivated to avoid deferring their decision to purchase, as Zara had created a sense of scarcity; it simply would not be there next time. These two behaviours drove Zara to an industry-leading inventory turnover ratio of 29.58 in 2013.49 These three levels of commercial teams were the heart of Zara’s success, and they ultimately represented how Zara delivered what customers wanted and when they wanted it, as CEO Pablo Isla had implied. A core capability at Zara related to its ability to efficiently manufacture clothes in small batches. Not only could it move a new item from concept to market very quickly, it was able to accomplish this in small batches permitting it to test the market with very little risk.50 The challenges of having achieved this level of mass customization should not to be underestimated. Inditex invested heavily in automation within its manufacturing plants, tied to effective management of its entire supply chain, with a focus on breaking down any bottlenecks in the manufacturing process. For instance, it operated a local dye and finishing plant close to its factories in La Coruña and did most of its own pre-cutting prior to delivering product to its sewing subcontractors. This was not without cost implications; its clothes typically cost 20 per cent more to manufacture than its competitors, who manufactured in vast quantities in third world countries.51 Distribution was centrally managed through a large distribution centre located in La Coruña. All clothes sold by Zara, even those manufactured in Portugal or Morocco (or China for that matter), were sent to Spain for distribution. Bloomberg Business reported:

Beyond the distribution center are the 11 Zara-owned factories. Every shirt, sweater and dress made in them is sent directly to the distribution centre via an automated underground monorail. There are 124 miles of track. Across the surrounding Galicia region are subcontractors, some of whom have worked for the company since Amancio Ortega founded it in 1975.”52

This enabled Zara to ship new inventory to every store in its network at least twice a week. Orders typically arrived two days after the store placed their request. Additionally, Zara looked to manage its production costs by focusing on fabricating apparel that was designed to be worn only a small number of times, driving lower cost of materials. This did not seem to be an issue with its customers who enjoyed changing their fashions often. Marketing The foundation of Zara’s marketing strategy had always been its stores. New stores were opened at a dizzying pace; 1.22 a day over the past decade.53 The company took store location, design and layout very seriously. Window front designs were viewed as its pre-eminent form of advertising. In fact, Zara had a “full team of window front designers who constantly travel around to international locations to understand the culture and customers of each store. They then create the window design that is unique to the store, and all the props and details are then shipped to each store to be put up under strict guidelines.”54 Zara traditionally had spent lavishly on its store locations. In fact, it completely revamped each store every four to five years, with minor tweaks in-between. Its stores were characterized by its high-end look and feel, along with relative low levels of inventory. This was somewhat anti-intuitive in relation to its competitors who liked to fill their stores with inventory in an attempt to optimize the revenue of their retail space

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Page 7 9B15M088 investment. On the contrary, Zara had always been focused on making the shopping experience as pleasant as possible for its customers, enticing them to come back more often. There were 2,085 Zara stores in 88 markets at the end of 2014. These stores were primarily situated in the high-end retail sectors of major urban centres. Inditex recently announced the purchase of a 4,400 square metre commercial property in the heart of New York’s SoHo district for an astonishing US$280 million. They also announced plans to open up a 2,800 square metre store in the World Trade Center. Zara spent very little on advertising; only advertising (some) new store openings and twice yearly sales events. It spent purportedly 0.3 per cent of its revenue on advertising, versus the industry standard of between 3 per cent and 5 per cent. There was no advertising line item in its financial reports as this category had not amounted to a material expenditure. Marketing Magazine’s Assistant Editor Belle Kwan said it best:

No four-page spread in a glossy publication, no gaudy red posters with tacky WordArt bubbles screaming discounts, no half-naked B-grade celebrity with perfect hair prancing across a billboard. This is a story about the brand that made it sans advertising, sans endorsement and sans almost all forms of mainstream marketing. And when we say “made it,” we mean a loyal global following across 78 countries, and a name that draws squeals of excitement from consumers and nods of respect from industry experts.55

Zara typically priced its clothes an average of 15 per cent lower than its competitors.56 It had been Amancio Ortega’s goal from his humble beginnings in La Coruña in 1975 to provide good quality fashion clothing at affordable prices.57 The difference was Zara did not look like any discount fashion store in the marketplace. As Derek Thompson of The Atlantic put it, Zara liked to “cozy up to the most famous brands in the world to sing their luxury ambitions even as they profit off a brilliant, cheap, short supply chain that delivers similar fashion at a much lower price.”58 Zara enjoyed placing its stores close to luxury brands, such as Prada and Gucci, that, of course, tried to keep as far from Zara as possible. COMPETING INDUSTRY BUSINESS MODEL Traditionally, industry titans, such as Gap introduced the majority of their new clothing launches twice a year during the spring and fall fashion seasons. These introductions were preceded by up to nine months of centralized planning, production and marketing. New line items were revealed to the market on fashion runways and vetted through a team of elite fashion designers and corporate executives. Small runs were made at Third World manufacturers, shipped to centralized facilities, vetted once more, changed and finalized. At this point, large orders were placed with these manufacturers for production at ultra-low per unit cost. Orders were shipped and stored in regional warehouse facilities relatively close to retail outlets. Retail point-of-sale strategies were drawn up and store layouts designed. Inventory levels, determined centrally, were shipped to stores. Subsequently, the advertising and selling began in full force to push product offerings to prospective customers.59 This approach carried the risk of fashion misses, which traditionally, were more than offset by the super low costs of manufacturing offshore. This led to industry-standard gross profit margins of approximately 35 per cent in 2014.60 Growth was accomplished through both geographic expansion and brand expansion. For example, Gap grew from 1,640 stores in 200461 to a peak of 3,700 in 2014.62 They also grew across multiple brands representing different market niches, including Gap, Banana Republic, Old

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Page 8 9B15M088 Navy, Piperlime (an online boutique), Athletica and Intermix.63 It was not uncommon to have multiple Gap-branded stores in one mall or shopping district. INNOVATIVE NEW FASHION COMPETITORS As with any successful new business model that changed an industry, inevitably, a host of new competitors emerged, who presented either variations of the model or totally new approaches. Zara was experiencing this first hand with the emergence of competitors such as Uniqlo and Topshop. Uniqlo was a Japanese firm that had been labelled a technology company, not a fashion company, with a sole focus on revolutionary fashion changes through technology innovation around the products, not the fashion. Kensuke Suwa, Uniqlo’s director of global marketing, explained its approach:

Between fashion and sports is a new area. There are a lot of fashion trends going on, but there is no true innovation that impacts your actual life. How to make your life better could be in the middle between fashion and sports. For example, athletes wear technically sophisticated uniforms; some of the essence of that could result in better clothes that would change clothing itself, instead of just following fashion trends.64

This approach helped Uniqlo quickly grow to 1,574 stores65 with sales forecast of US$13.7 billion in their 2014 fiscal year (ending August 31, 2015).66 For 2014 Uniqlo was the largest apparel chain in Asia, with an eye to becoming number one in the world and a near-term goal of expanding in the United States. Topshop, a U.K.-based clothing retailer, had been trying to beat Zara at its own game and could be aptly defined as “faster fashion with a bite.” It boasted more than 300 new products per week, versus Zara’s 200.67 Its market positioning was slightly different than Zara, with pricier clothes that were arguably higher in quality. “With more than 300 stores across the U.K., over 250,000 shoppers visiting the frankly jaw-dropping Oxford Circus flagship every week, and more than 140 stores in international territories, it’s no exaggeration to say the Topshop is a shopping institution.”68 It had a presence in 31 countries,69 across Europe, Asia and Latin America, with an eye to expansion in the U.S. It had a thriving online business that attracted 1.9 million users per week.70 Topshop was a great example of a firm that had taken Zara’s business model, modified it and created a unique value proposition in the market. NEXT STEPS The competitive landscape was changing. The fast fashion world Zara had invented and dominated was changing. Perhaps it was time to reposition how Zara and the other Inditex brands competed in this changing world. Zara had changed the retail fashion industry once, could it do it again?

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Page 9 9B15M088

EXHIBIT 1: INDITEX 2012 / 2014 FINANCIAL RESULTS INCOME STATEMENT

 

 

As of: (In Millions of U.S. dollars) January 31, 2012 January 31, 2013 January 31, 2014 January 31, 2015

Revenues 15,505 17,925 18,800 20,365 TOTAL REVENUES 15,505 17,925 18,800 20,365 Less Cost Of Goods Sold 6,309 7,213 7,646 8,484 GROSS PROFIT 9,196 10,712 11,154 11,881 Selling General & Admin Expenses, Total 5,530 6,300 6,743 7,259 Depreciation & Amortization, Total 827 895 954 1,016 Other Operating Expenses 4 13 (2) 9 OTHER OPERATING EXPENSES, TOTAL 6,361 7,208 7,695 8,284 OPERATING INCOME 2,835 3,504 3,459 3,597 Interest Expense (4) (12) (13) (11) Interest And Investment Income 34 27 25 29 NET INTEREST EXPENSE 30 15 12 18 Income (Loss) On Equity Investments 0 0 0 36 Currency Exchange Gains (Loss) 23 1 (33) (2) Other Non-Operating Income (Expenses) (12) 0 0 0 EBT, EXCLUDING UNUSUAL ITEMS 2,876 3,520 3,438 3,649 Other Unusual Items, Total 0 0 (8) (2) EBT, INCLUDING UNUSUAL ITEMS 2,876 3,520 3,430 3,647 Income Tax Expense 690 859 754 826 Minority Interest In Earnings (14) (7) (5) (11) Earnings From Continuing Operations 2,172 2,654 2,671 2,810 NET INCOME 2,172 2,654 2,671 2,810

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Page 10 9B15M088

EXHIBIT 1 (CONTINUED) BALANCE SHEET

 

 

(In Millions of U.S. dollars) As of: ASSETS January 31, 2012 January 31, 2013 January 31, 2014 January 31, 2015

Cash And Equivalents 3,898 4,321 4,325 4,270 Short-Term Investments 0 293 239 250 TOTAL CASH AND SHORT TERM INVESTMENTS 3,898 4,614 4,564 4,520 Accounts Receivable 243 334 346 403 Other Receivables 374 685 678 642 TOTAL RECEIVABLES 617 1,019 1,024 1,045 Inventory 1,436 1,778 1,885 2,091 Other Current Assets 163 113 132 333 TOTAL CURRENT ASSETS 6,114 7,524 7,605 7,989 Gross Property Plant And Equipment 8,651 9,714 10,559 12,074 Accumulated Depreciation (4,083) (4,472) (4,783) (5,282) NET PROPERTY PLANT AND EQUIPMENT 4,568 5,242 5,776 6,792 Goodwill 245 233 229 223 Long-Term Investments 11 5 23 170 Deferred Tax Assets, Long Term 401 430 596 723 Other Intangibles 691 689 722 769 Other Long-Term Assets 293 370 515 623 TOTAL ASSETS 12,323 14,493 15,466 17,289

LIABILITIES & EQUITY Accounts Payable 2,067 2,518 2,665 2,791 Accrued Expenses 598 901 839 825 Current Portion Of Long-Term Debt/Capital Lease 1 3 3 9 Current Portion Of Capital Lease Obligations 0 0 0 4 Current Income Taxes Payable 229 186 100 169 Other Current Liabilities, Total 144 310 284 417 TOTAL CURRENT LIABILITIES 3,039 3,918 3,891 4,215 Long-Term Debt 1 4 2 0 Capital Leases 1 1 1 3 Minority Interest 46 40 36 43 Pension & Other Post-Retirement Benefits 43 25 36 69 Deferred Tax Liability Non-Current 205 216 244 271 Other Non-Current Liabilities 651 793 859 960 TOTAL LIABILITIES 3,986 4,997 5,069 5,561 Common Stock 105 105 105 105 Additional Paid In Capital 23 23 23 23 Retained Earnings 8,161 9,489 10,586 11,577 Treasury Stock 0 0 (52) (81) Comprehensive Income And Other 48 (121) (265) 104 TOTAL EQUITY 8,337 9,496 10,397 11,728 TOTAL LIABILITIES AND EQUITY 12,323 14,493 15,466 17,289

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Page 11 9B15M088

EXHIBIT 1 (CONTINUED) STATEMENT OF CASH FLOWS

 

Source: Bloomberg L.P., “Industria De Diseno Textil (ITX:ContinuousMarket (SIBE),” Bloomberg Business, August 31, 2015, www.bloomberg.com/research/stocks/financials/financials.asp?ticker=ITX:SM&dataset=cashFlow&period=A&currency=US %20Dollar, accessed August 31, 2015.

(In Millions of U.S. dollars) As of: January 31, 2012 January 31, 2013 January 31, 2014 January 31, 2015

NET INCOME 2,172 2,654 2,671 2,810 Depreciation & Amortization 657 746 774 817 Amortization Of Goodwill And Intangible Assets 105 99 102 116 DEPRECIATION & AMORTIZATION, TOTAL 762 845 876 933 Amortization Of Deferred Charges 0 12 18 16 (Gain) Loss From Sale Of Asset 0 0 41 46 Asset Writedown & Restructuring Costs 45 89 13 8 Other Operating Activities (59) 39 (318) (33) (Income) Loss On Equity Investments 0 0 0 (35) Change In Accounts Receivable (88) (319) 28 (74) Change In Inventories (62) (414) (157) (269) Change In Accounts Payable (74) 582 (5) 231 CASH FROM OPERATIONS 2,696 3,489 3,167 3,633 Capital Expenditure (1,191) (1,313) (1,230) (1,795) Cash Acquisitions (116) 0 12 0 Sale (Purchase) Of Intangible Assets (134) (135) (147) (184) Investments In Marketable & Equity Securities (14) (287) 34 34 CASH FROM INVESTING (1,456) (1,735) (1,331) (1,944) Short-Term Debt Issued 0 1 0 7 Long-Term Debt Issued 0 4 0 2 TOTAL DEBT ISSUED 0 5 0 9 Short Term Debt Repaid (16) 0 (1) 0 Long Term Debt Repaid (26) 0 0 0 TOTAL DEBT REPAID (41) 5 (1) 9 Repurchase Of Common Stock 0 0 (51) (30) Common Dividends Paid (961) (1,098) (1,304) (1,660) TOTAL DIVIDEND PAID (961) (1,098) (1,355) (1,689) Special Dividend Paid (137) (137) (206) 0 Other Financing Activities (7) (9) (8) (4) CASH FROM FINANCING (1,146) (1,239) (1,570) (1,684) Foreign Exchange Rate Adjustments 16 (20) (52) 88 NET CHANGE IN CASH 110 495 214 92

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Page 12 9B15M088

EXHIBIT 2: THE GROWING EMERGING ECONOMY AND MIDDLE CLASS HOUSEHOLD SPEND

 

Copyright: @ McKinsey & Company. Source: Richard Dobbs, Jaana Remes, James Manyika, Charles Roxburgh, Sven Smit and Fabian Schaer, Urban World: Cities and the Rise of the Consuming Class, McKinsey & Company, June 2012, https://www.mckinsey.com/~/media/McKinsey/dotcom/Insights%20and%20pubs/MGI/Research/Urbanization/Urban%20worl d%20-%20Rise%20of%20the%20consuming%20class/MGI_Urban_world_Rise_of_the_consuming_class_Full_report.ashx, accessed February 18, 2015.

 

EXHIBIT 3: INDITEX GROWTH DATA

Copyright: @ Inditex. Source: Inditex, Inditex Annual Report 2014, Inditex, June 2015, www.inditex.com/documents/10279/18789/Inditex_Annual_Report_2014_web.pdf/a8323597-3932-4357-9f36- 6458f55ac099, accessed July 14, 2015.

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EXHIBIT 4: GLOBAL WOMEN’S APPAREL MARKET GROWTH

 

Copyright: @ McKinsey & Company. Source: McKinsey & Company, Unleashing Fashion Growth City by City, McKinsey & Company September 2014, www.mckinsey.com/search.aspx?q=unleashing+fashion+growth+city+by+city, accessed January 22, 2015.

EXHIBIT 5: INDITEX BRANDS AT A GLANCE

Copyright: @ Inditex. Source: Inditex 2013 Annual Report, Inditex, June 2014, www.inditex.com/documents/10279/18789/Inditex_Group_ Annual_Report_2013.pdf/88b623b8-b6b0-4d38-b45e-45822932ff72, accessed February 2, 2015.

EXHIBIT 6: ZARA INDICATORS

Copyright: @ Inditex. Source: Inditex, Inditex 2013 Annual Report, Inditex, June 2014, www.inditex.com/documents/10279/18789/Inditex_Group_ Annual_Report_2013.pdf/88b623b8-b6b0-4d38-b45e-45822932ff72, accessed February 2, 2015.

Net Sales Number of Net Openings Markets Online (millions of €) Stores in 2014 Served Markets

Zara 11,594 2,085 94 88 26 Pull & Bear 1,284 898 24 65 21 Massimo Dutti 1,413 706 41 68 24 Bershka 1,664 1,006 52 68 17 Stradivarius 1,130 910 52 59 17 Oysho 416 575 26 40 15 Zara Home 548 437 43 48 23 Uterque 68 66 -10 12 14

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Page 14 9B15M088 ENDNOTES 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Inditex or any of its employees. 2 Most would agree that the term fast fashion represented only a part of Zara’s core business model, not the entire foundation of their success. 3 Devangshu Dutta, “Retail @ the Speed of Fashion,” Third Eyesight, 2002, http://thirdeyesight.in/articles/ImagesFashion_Zara_Part_I.pdf, p. 3, accessed August 31, 2015. 4 Graham Ruddick, “How Zara Became the World’s Biggest Fashion Retailer,” The Telegraph, October 20 2014, www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11172562/How-Inditex-became-the-worlds-biggest-fashion- retailer.html, accessed August 31, 2015. 5 Vivienne Walt, “Meet Amancio Ortega: The Third-Richest Man in the World,” Fortune, January 8, 2003, http://fortune.com/2013/01/08/meet-amancio-ortega-the-third-richest-man-in-the-world/, accessed January 20, 2015. 6 Forbes Media LLC, “The World’s Billionaires,” Forbes, January 20, 2015, www.forbes.com/profile/amancio-ortega/, accessed January 20, 2015. 7 Inditex, “Our History,” www.inditex.com/our_group/our_history, accessed January 20, 2015. 8 Andrew Mcfee, Vincent Dessain and Anders Sjoman, “Zara: IT for Fast Fashion,” Harvard Business Publishing, Boston, MA, September 6, 2007, p. 3. 9 €1 = US$1.09843 as of July 31, 2015. 10 Inditex, Inditex Annual Report 2014, www.inditex.com/documents/10279/18789/Inditex_Annual_Report_2014_web.pdf/ a8323597-3932-4357-9f36-6458f55ac099, accessed July 14, 2015. 11 MarketLine, Apparel Retail: Global Industry Guide, September 5, 2014, www.researchmoz.us/apparel-retail-global- industry-guide-report.html, accessed January 22, 2015. 12 Krones AG, Annual Report for Krones AG 2013, p. 57, www.krones.com/en/investor_relations/krones-ag-annual-report- 2013.php, accessed January 21, 2015. 13 Carsten Keller, Karl-Hendrik Magnus, Saskia Hedrich, Patrick Nava and Thomas Tochtermann, “Succeeding in Tomorrow’s Global Fashion Market,” McKinsey & Company, September 2014, http://mckinseyonmarketingandsales.com/succeeding-in-tomorrows-global-fashion-market, accessed January 22, 2015. 14 Deere & Company, ”John Deere Committed to Those Linked to the Land — Strategy Overview,” December 2014, p. 19, http://investor.deere.com/files/doc_presentations/Strategy-Presentation-Final-Web_v001_g81y92.pdf, accessed January 20, 2014. 15 Homi Kharas and Geoffrey Gertz, “The New Global Middle Class: A Cross-Over from West to East,” Wolfensohn Centre for Development at Brookings, 2010, p. 2; Draft version of Chapter 2 in China’s Emerging Middle Class: Beyond Economic Transformation, edited by Cheng Li, Brookings Institution Press, Washington, DC, 2010, www.brookings.edu/~/media/research/files/papers/2010/3/china%20middle%20class%20kharas/03_china_middle_class_kh aras.pdf, accessed January 20, 2015. 16 Lily Kuo, “The World’s Middle Class Will Number 5 Billion by 2030,” Quartz, January 14, 2013, http://qz.com/43411/the- worlds-middle-class-will-number-5-billion-by-2030/, accessed January 20, 2015. 17 Nathalie Remy, Jennifer Schmidt, Charlotte Werner and Maggie Lu, Unleashing Fashion Growth City by City, McKinsey & Company, October 2013, p.2, www.mckinsey.com/search.aspx?q=unleashing+fashion+growth+city+by+city, accessed January 20, 2015. 18 Nathalie Remy, Jennifer Schmidt, Charlotte Werner and Maggie Lu, “Fashion Sense: Apparel Companies Should Look to Cities for Growth,” Forbes, April 23, 2013, www.forbes.com/sites/mckinsey/2013/04/23/fashion-sense-apparel-companies- should-look-to-cities-for-growth/, accessed January 20, 2015. 19 The NDP Group, “The NDP Group Reports U.S. Women’s Apparel Market Grew 4 Per cent in 2013,” NPD Group, April 16, 2014, www.npd.com/wps/portal/npd/us/news/press-releases/the-npd-group-reports-us-womens-apparel-market-grew-4- percent-in-2013/, accessed January 20, 2015. 20 The Economist, “A â€Distinctly South Asian’ Tragedy,” December 6, 2012, www.economist.com/blogs/banyan/2012/12/garment-factory-fires, accessed August 31, 2015. 21 NPD Group, “Sizing Up the Plus Sized Market: Segment Up 5 Per Cent, Reaching $17.5 Billion,” https://www.npd.com/wps/portal/npd/us/news/press-releases/sizing-up-the-plus-sized-market-segment-up-5-percent- reaching-17-billion/, accessed January 20, 2015. 22 Katie Little, “Outsize Growth, Underserved Market: Rent the Runway’s Plus-size Bet,” CNBC, September 29, 2013, www.cnbc.com/id/101065567#, accessed January 20, 2015. 23 Robin Bowmer, “The Effects of the Recession on Brand Loyalty and â€Buy Down’ Behaviour: 2011 Update,” IAB Europe, October 2011, p. 3, www.iabeurope.eu/files/3213/6852/2155/comscore20study20on20brand20purchasing.pdf, accessed January 20, 2015. 24 Janet Bealer Rodie, “Fiber First — Eco-friendly Raw Material and Fiber Production Are the First Links in a Sustainable Textile Manufacturing Chain,” Textile World, September/October 2011, www.textileworld.com/Issues/2011/September- October/Features/Fiber_First, accessed January 22, 2015. 25 Inam Ahmed, “Textile Industry on a Rocky Road,” The Daily Star, August 24, 2014, www.thedailystar.net/textile-industry- on-a-rocky-road-38398, accessed January 21, 2015. 26 James Johnson, Stephen MacDonald, Leslie Meyer, Bryan Norrington and Carol Skelly, “The World and United States Cotton Outlook,” February 21, 2014, www.usda.gov/oce/forum/2014_Speeches/Cotton.pdf, accessed August 31, 2015.

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Page 15 9B15M088 27 A. T. Kearney, “Understanding the Needs and Consequences of the Ageing Consumer,” March 2013, https://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/understanding-the-needs-and-consequences- of-the-ageing-consumer/10192, accessed August 31, 2015. 28 Zara defines their target customers as “young, price conscious and highly sensitive to the latest fashion trends.” Arif Harbott, “Analysing Zara’s Business Model,” The Digital Executive, March 3, 2011, www.harbott.com/2011/03/03/analysing- zaras-business-model/, accessed August 31, 2015. 29 Katie Smith, “Zara Versus H&M — Who’s in the Global Lead?” Web blog post, EDITD, April 15, 2014, https://editd.com/blog/2014/04/zara-vs-hm-whos-in-the-global-lead/, accessed January 22, 2015. 30 Doug Hardman, Simon Harper and Ashok Notaney, “Keeping Inventory — and Profits — Off the Discount Rack,” 2008, p. 2, www.strategyand.pwc.com/media/file/Keeping_Inventory_and_Profits_Off_the_Discount_Rack.pdf, accessed January 20, 2015. 31 Gap Inc., “Embracing the New Customer Reality — 2013 Annual Report,” pp. 60 and 69, www.gapinc.com/content/attachments/gapinc/GPS_AR13.pdf, accessed January 20, 2015. 32 Smith, op. cit.  33 Adrian Swinscoe, December 21, 2011, “Customer Focus in Action: Why ZARA Stores Became a Customer Magnet,” www.adrianswinscoe.com/customer-focus-in-action-why-zara-stores-became-a-customer-magnet/, accessed August 31, 2015. 34 In 2013, Zara represented €2.089 billion of Inditex’s €3.071 billion in earnings before interest and taxes. Inditex, “Inditex FY2013 Results Presentation,” March 19, 2014, p. 18, www.inditex.com/documents/10279/98254/Results+FY2013.pdf/8c54eb89-6319-446c-ac34-9a78d8ccb2e3, accessed January 20, 2015. 35 2,085 of 6,683 stores in total, representing 31.20 per cent of Inditex stores. “Inditex 2013 Annual Report,” Inditex, June 2014, www.inditex.com/documents/10279/18789/Inditex_Group_ Annual_Report_2013.pdf/88b623b8-b6b0-4d38-b45e- 45822932ff72, accessed February 2, 2015. 36 Inditex, “Full Year 2014 Results Presentation,” March 13, 2015, p. 25, https://www.inditex.com/documents/10279/144578/FY+Results+2014.pdf/71be7a85-1b3c-421f-af83-c312ae0c2043, accessed June 20, 2015. 37 Inditex, “Annual Report 2004,” June 2005, p. 13, www.inditex.com/documents/10279/18789/Grupo_INDITEX_informe_anual04.pdf/b8b53824-f2b7-4a2c-9a2f-8b0877cdf5b4, accessed January 20, 2015. 38 Inditex, “Annual Report 2014,” March 2015, p. 2, www.inditex.com/documents/10279/18789/Inditex_Annual_Report_2014_web.pdf/a8323597-3932-4357-9f36- 6458f55ac099, accessed August 31, 2015. 39 Calculated as follows: 6,683 stores to end 2014 (“Inditex Annual Report 2014”), compared with 2,244 in 2004 (“Inditex Annual Report 2004”) across 3,653 days. 40 Graham Ruddick, “How Zara Became the World’s Biggest Fashion Retailer,” The Telegraph, October 20, 2014, www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11172562/How-Inditex-became-the-worlds-biggest-fashion- retailer.html, accessed January 23, 2015. 41 Susan Berfield and Manual Baigorri, “Zara’s Fast-Fashion Edge,” November 14, 2013, www.bloomberg.com/bw/articles/2013-11-14/2014-outlook-zaras-fashion-supply-chain-edge, accessed August 31, 2015. 42 Stephanie Huang, “Why Fashion Is Getting Faster: Zara’s Two-Week Fashion Cycle,” www.thescrippsvoice.com/archives/2013/11/08/why-fashion-is-getting-faster-zaras-two-week-fashion-cycle, accessed August 31, 2015. 43 Tobias Buck, “Fashion: A Better Business Model,” Financial Times, June 18, 2014, www.ft.com/intl/cms/s/2/a7008958- f2f3-11e3-a3f8-00144feabdc0.html#slide0, accessed January 22, 2015. 44 Graham Ruddick, “How Zara Became the World’s Biggest Fashion Retailer,” October 20, 2014, www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11172562/How-Inditex-became-the-worlds-biggest-fashion- retailer.html, accessed August 31, 2015. 45 Kerry Capell, “Zara Thrives by Breaking All the Rules,” October 8, 2008, www.bloomberg.com/bw/stories/2008-10- 08/zara-thrives-by-breaking-all-the-rules, accessed August 31, 2015. 46 Andrew Pearson, “The Story of Zara — the Speeding Bullet,” Unique Business Strategies, p. 2, www.uniquebusinessstrategies.co.uk/pdfs/case%20studies/zarathespeedingbullet.pdf, accessed January 22, 2015. 47 Katie Smith, “Zara vs H&M — Who’s in the Global Lead?” April 15, 2014, https://editd.com/blog/2014/04/zara-vs-hm- whos-in-the-global-lead/, accessed August 31, 2015. 48 Pearson, op. cit., p. 1. 49 Hokey Min, “Zara’s Rapid Rise as a Cool Supply Chain Icon,” June 25, 2015, www.ftpress.com/articles/article.aspx?p=2359420&seqNum=12, accessed August 31, 2015. 50 Gemma Goldfingle, “Inside Inditex: How Zara Became a Global Fashion Phenomenon,” October 20, 2014, www.retail- week.com/sectors/fashion/inside-inditex-how-zara-became-a-global-fashion-phenomenon/5065325.article, accessed August 31, 2015. 51 Hardman et al., op. cit., p. 2. 52 Susan Berfield and Manuel Baigorri, “Zara’s Fast-Fashion Edge,” Bloomberg Business, November 14, 2013, www.businessweek.com/articles/2013-11-14/2014-outlook-zaras-fashion-supply-chain-edge, accessed January 22, 2015.

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Page 16 9B15M088 53 Calculated as follows: 6,683 stores to end 2014 (“Inditex Annual Report 2014”), compared with 2,244 in 2004 (“Inditex Annual Report 2004”) across 3,653 days. 54 Belle Kwan, “Spanish Domination — Zara Brand Profile,” Marketing Magazine, September 23, 2011, www.marketingmag.com.au/blogs/spanish-domination-6575/#.VNJL7lXF_uI, accessed February 4, 2015. 55 Ibid. 56 Hardman et al., op. cit., p. 2. 57 Mike Bird, “How Amancio Ortega Came from Poverty to Become Europe’s Richest Man,” May 29, 2015, http://uk.businessinsider.com/the-rags-to-riches-story-of-europes-richest-man-zara-founder-amancio-ortega-2015-5, accessed August 31, 2015. 58 Derek Thompson, “Zara’s Big Idea: What the World’s Top Fashion Retailer Tells Us about Innovation,” The Atlantic, November 13, 2012, www.theatlantic.com/business/archive/2012/11/zaras-big-idea-what-the-worlds-top-fashion-retailer- tells-us-about-innovation/265126/, accessed January 23, 2015. 59 Hiroko Tabuchi and Hilary Stout, “Gap’s Fashion-Backward Moment,” June 20, 2015, www.nytimes.com/2015/06/21/business/gaps-fashion-backward-moment.html?_r=0, accessed August 31, 2015. 60 CSIMarket Inc, “Retail Apparel Industry Profitability Ratios,” CSIMarket, http://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=1301, accessed January 29, 2015. 61 Gap Inc., “2004 Annual Report — Gap Inc,” p. 9, http://media.corporate-ir.net/media_files/IROL/11/111302/GPS_AR_04. pdf, accessed January 29, 2015. 62 Gap Inc., Key Facts, www.gapinc.com/content/gapinc/html/aboutus/keyfacts.html, accessed August 31, 2015. 63 Intermix is a brand with 30 boutiques across Canada and the United States, which was acquired by Gap in December 2012. 64 Vikram Alexei Kansara, “With an Evolutionary Approach, Uniqlo Aims to Create New Category,” The Business of Fashion, April 19, 2013, Disclosure: Vikram Kansara travelled to Paris as a guest of Uniqlo, www.businessoffashion.com/2013/04/ with-an-evolutionary-approach-uniqlo-aims-to-create-new-category.html, accessed February 2, 2015. 65 With 342 in China alone. 66 Walter Leob, “Uniqlo Aims to Be the World’s Number One Apparel Brand,” Forbes, April 17, 2015, www.forbes.com/sites/walterloeb/2015/04/17/uniqlo-aims-to-be-the-worlds-number-one-apparel-brand/, accessed August 31, 2015. 67 Katherine P. Harvey, “Topshop / Topman Brings Top-Speed Fashion,” The San Diego Union-Tribune, October 30, 2014, www.utsandiego.com/news/2014/oct/30/topshop-topman-store-opens-fashion-valley/, accessed February 2, 2015. 68 Arcadia Group Limited, “Our Brands —Topshop,” Arcadia, www.arcadiagroup.co.uk/about-us/our-brands/topshop, accessed February 2, 2015. 69 Andrew Clark, “Topshop Bites into the Big Apple,” April 2, 2009, www.theguardian.com/business/2009/apr/02/top-shop- opens-in-new-york, accessed August 31, 2015. 70 Arcadia, “Topshop — About Us,” https://www.arcadiagroup.co.uk/about-us/our-brands/topshop, accessed August 31, 2015.

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PharmaSim The Marketing Management Simulation

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About the Authors

Thomas C. Kinnear is D. Maynard Phelps Professor of Business Administration, Professor Emeritus of Marketing, and founding Executive Director of the Samuel Zell and Robert H. Lurie Institute for Entrepreneurial Studies at the Ross School of Business at the University of Michigan. He was formerly Eugene Applebaum Professor of Entrepreneurial Studies, Senior Associate Dean of the Business School, and Vice President for Development and Executive Officer for the University. He headed the $1.4 billion Campaign for Michigan in the 1990s. At Michigan, he has received awards for teaching excellence and service to the University. He holds an undergraduate degree and LLD (honoris causa) from Queen’s University at Kingston, Ontario; an MBA from Harvard University; and a Ph.D. in Business Administration from the University of Michigan.

He has previously held a faculty appointment at the University of Western Ontario and visiting appointments at Harvard University, Stanford University, and the European Management Institute (INSEAD) at Fontainebleau, France. His teaching and research interests are in the areas of entrepreneurial studies, strategic marketing planning, marketing and public policy, and market-based management. His Ph.D. dissertation examined the economic concept of “market failure” as it relates to ecological issues, especially pollution externalities. His research activity has resulted in publications in numerous scholarly journals including: the Journal of Marketing, the Journal of Marketing Research, the Journal of Consumer Research, the Journal of Public Policy and Marketing, and the Journal of Business Research. He is former editor of the Journal of Marketing and former founding editor of the Journal of Public Policy and Marketing. This latter journal publishes scholarly articles related to public policy and the marketplace, including issues of FTC and FDA regulations and environmental dynamics of consumption.

He is coauthor of several books including: Modern Marketing Research (Thomson), Principles of Marketing (Harper Collins), Marketing Research: An Applied Approach (McGraw-Hill), Promotional Strategy (Richard D. Irwin, Inc.), and Cases in Marketing Management (Richard D. Irwin, Inc.).

Professor Kinnear has worked in marketing management, marketing research, and marketing education consulting. His clients have included Aetna; American Electronics Association; AT&T; Alcatel (France); Chrysler; Domino’s Pizza, Inc.; Eli Lilly, Inc.; Federal Trade Commission; General Motors; General Electric; Helmac Products; Kodak; L’ Air Liquide (France); Machine Vision International; TI Group (UK); and Travelers.

He is CEO and chair of the Board of Directors of the Venture Michigan Corporation, a $200 million venture capital fund of funds. He is a director and past-chair of the Board of the American Marketing Association and former chair of the Board of the American Marketing Association Foundation. He has previously served as an Academic Trustee of the Marketing Science Institute, as a director of the Association for Consumer Research, and as the Vice President for Academics

 

 

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and Vice President for Publication at the American Marketing Association. He also has served or is serving as a member of the Board of Directors or Corporate Advisory Boards for several companies and community organizations: Accuri Cytometers, Inc.; Ann Arbor Angels; Avail Networks, Inc.; Bard Manufacturing, Inc.; BlueGill Technologies, Inc.; Center for Learning Through Community Service; Domino’s Pizza, Inc.; Greenhills School; Helmac Products, Inc.; Ecliptic Systems, Inc.; Interpretive Software, Inc.; Janeeva, Inc.; Mobius Microsystems, Inc.; Nanocerox, Inc.; National Patent Development Corporation; Venture Michigan Fund; Network Express, Inc.; Pennaflex Educational Resources, Inc.; and the University Musical Society.

He is active in the entrepreneurial community as a co-founder, advisor, angel investor, and board member of start-up companies: Network Express, BlueGill Technologies, Accuri Cytometers, Avail Networks, Avidimer Therapeutics, Mobius Microsystems, Janeeva, Nanocerox, and NanoBio. He is also a limited partner in Apjohn Ventures, Arbor Partner Ventures, Arboretum Ventures, EDF Ventures, and RPMVentures. He is a member of the investment committee for EDF Ventures and serves as a special limited partner for Arboretum Ventures.

Stu James is the founder of Interpretive Simulations, one of the leading publishers and developers of business simulations worldwide. Interpretive’s simulations are an integral part of the curriculum at many of the world’s top business schools in the areas of marketing, strategy, management, and international business. To date, over 400,000 people have experienced one of Interpretive’s simulations, and many rave about how the simulation was one of the best learning tools they have ever used.

On the academic front, Stu is currently Visiting Lecturer at the University of Michigan (EMBA), and at the Colgate-Darden Graduate School of Business at the University of Virginia (MBA Core Marketing and Custom Executive Programs). In addition, Stu has served at the Allen Center for Executive Education at the Kellogg School of Business, the China Europe International Business School (CEIBS), and the Cheung Kong Graduate School of Business (CKGSB).

Along with his academic work at the above business schools, Stu has also worked with American Honda, CIGNA, The Davidson Institute, General Electric, Genworth Financial, Harvard Business School, Navy Federal Credit Union, Pearson Prentice Hall, and McKinsey & Company. He is co-author of a number of leading simulation products including StratSimManagement, StratSimMarketing, StratSimChina, CountryManager, PharmaSim, HRSimSelection, MarketShare, BizCafe, and ServiceSim, all used at leading universities worldwide. Stu has extensive experience in facilitating simulation events, having directly worked with thousands of executive and MBA participants over the past 25 years.

Currently, Stu’s primary focus is running Management by the Numbers, Inc. (MBTN), a new venture that he co-founded with Paul Farris of the Darden School of Business. MBTN provides a self-paced, on-line environment where students and executives can master the numbers side of marketing and business metrics.

Stu and his family reside in Afton, Virginia at the foot of the Blue Ridge Mountains. In his spare time, Stu enjoys playing and teaching Irish traditional music and competing in triathlons.

 

 

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Michael Deighan is a coauthor on the web-based editions of Airline, Corporation, Entrepreneur, and HRManagement. His expertise, insight, and creativity proved invaluable and made it possible to convert these models to their current web-based versions. Michael joined Interpretive Simulations in 1989 as lead software developer and has served as manager of technology and content development.

He is coauthor on a number of Interpretive simulations: PharmaSim, BizCafe, StratSimMarketing, StratSimManagement, StratSimChina, CountryManager, and MarketShare. In addition to developing software, he has been teaching computer programming classes at Piedmont Virginia Community College in Charlottesville, Virginia, since 1990. Michael received his B.A. in German and Economics from Washington and Lee University, and an M.A. in German from the University of Virginia.

 

 

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Acknowledgements

A moment of appreciation…

The authors wish to thank many people for their support in the development of this simulation. Mary Juraco and Kathleen Simroth of Interpretive Simulations were a great help with the editing process for the initial version of this manual. Melissa Rosati, Jim Boyd, and Jim Sitlington at Scott, Foresman and Company all played an important role in getting PharmaSim off the ground. Steve and Kathleen Simroth and Karen James collected data in retail outlets long before the first line of code was written. We also are grateful to the many students who tested all the versions of PharmaSim over its development. A special thanks is due to Eric Anderson, Craig Ehrnst, Matt Hausmann, Nadine Lindley, Jim Pack, Louise Bedard, and Joanne Novak at the University of Michigan Business School for their help in the alpha and beta test phases of PharmaSim.

Over the years, a number of people contributed to improvements in the manual and software. We especially appreciate the contributions of Julie Koh, Gabriel Buddenbrock, Susan Christmas, Marjorie Adams, Del Kolberg, Erin Simpson, Clayton Shumate, Tony Naidu, and Anne Louque of Interpretive Simulations; Anne Smith of HarperCollins; and Melissa Sabella and Melissa Pellerano of Pearson Education. We also owe a huge debt of gratitude to faculty who have worked with us, including Jose Rosa, Gene Anderson, Harlan Spotts, Ann Root, Marian Moore, Lori Feldman and Hugh Daubek. We also appreciate being invited into the classrooms and meetings by the first- year marketing faculty at the Harvard and Darden Business Schools.

The latest release of PharmaSim incorporates the feedback of the 200,000+ users of the simulation since its initial release. We want to acknowledge the hard work and dedication of a number of Interpretive employees—especially Clayton Shumate, Patrick Neeley, Matt Travis, Steve Messing, Laura Chappell Arnold, Erin Simpson, Caleb Sancken, Rachel Hill, Tim Melson, Tim Sams, and David Luzader.

Thomas C. Kinnear Stuart W. James

Michael Deighan

This simulation is dedicated to Connie, Maggie, and Jamie; Karen and Katherine;

Mary, Justin, Mikaela, Kathleen, and Sean.

 

 

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Contents

Introduction 1 PharmaSim Quick Start Guide 3 PharmaSim Manual 4

Case 5 The Company 7 The OTC Medicine Industry 9 OTC Medicine Marketing 14 Internal Product Development 19 Financial Situation for the OCM Group 21 The Marketing Task 22 Sample Market Survey Questionnaire 23

Marketing Management Process 25 Situation Analysis 28 Marketing Strategy 35 Marketing Mix 38 Conclusion 44

Appendix 45 Using PharmaSim in a Group 46 Market Segment Descriptions 47 Glossary 51 Image Attribution 57 Index 58

Printed July 18, 2019

 

 

 

 

PHARMASIM

Introduction

 

 

 

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PharmaSim is a marketing management simulation based on the over-the-counter cold medicine industry. While it focuses on brand management, the issues raised apply to marketers in any industry. In PharmaSim you will learn the importance of understanding customer needs, creating awareness for your products, finding the best distribution model, and deriving an appropriate pricing structure.

As a member of a marketing management team, you will make decisions regarding product mix, pricing, distribution, advertising, and promotion for Allstar Brands, one of five firms in the market. The four computer-simulated competitors will respond to your decisions and execute their own strategies. All the teams in your section compete within the same environment, allowing your instructor to compare results. PharmaSim covers a timespan of up to 10 simulated years, so you can observe both the short-term and long-term effects of your decisions.

PharmaSim offers three playing levels with varying degrees of complexity. “Brand Assistant” has the fewest decisions and least number of reports available. “Assistant Brand Manager” is moderately complex. “Brand Manager” is the most complex, offering the greatest detail in the decisions and reports. Your instructor may choose to use one or more of the levels. In addition, you may have to respond to special decisions that arise from incidents, and you may be asked to complete supplemental assignments chosen by your instructor.

Competing in the PharmaSim marketplace will require complex analysis and decision-making. Therefore, take some time to familiarize yourself with the case before beginning the simulation. While working through your decisions you will find it helpful to refer to the manual for information and strategy tips.

To get the most out of the PharmaSim experience, we recommend the approach outlined on the following page.

 

 

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PharmaSim Quick Start Guide

1. READ THE CASE • Industry background • Company starting situation

2. START-UP • Access simulation from the course website.

3. PERIOD DECISIONS • Sales Force • Pricing (for each product) • Advertising (for each product) • Promotion (for each product) • Special

4. DECISION ANALYSIS • Budget Allocation • What If… • Pricing Analysis Go back to Step 3 until satisfied with decisions

5. TEAM LEADER ADVANCES SIMULATION • Check schedule for times • Complete decisions before deadline If the simulation is over, skip to Step 7

6. EVALUATE RESULTS • Company reports • Market research • Survey Go back to Step 3

7. SIMULATION ENDS • Evaluate team performance • Review what you have learned

Your instructor may require incident decisions and additional assignments during the simulation. Check the schedule and messages on your course website for details.

 

 

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PharmaSim Manual

The remainder of this manual is divided into the sections described below. Your understanding and success in PharmaSim will be greatly enhanced by reading this manual before you begin the simulation. The manual will answer most of the questions students typically have during the simulation experience, and reading it has the added benefit of improving your competitiveness. Contextual help within the simulation interface and Frequently Asked Questions, “FAQs,” on your course site provide more information.

The remainder of this divided into the sections described below.

The Case contains background on the over-the-counter (OTC) cold and allergy remedy market, and it describes the current situation of your firm, Allstar Brands. It also provides an overview of the decisions you will make and information on the reports and research available. A timeline of the product decisions you will face is also included.

Marketing Management Process presents a general discussion of marketing management: situation analysis, the 5 C’s, SWOT analysis, marketing strategy, and the 4 P’s. It serves as a guide in developing and executing your marketing plan.

The Appendix provides supplemental materials to help you with the simulation experience. There are tips on using the simulation as part of a group. A description of the market segments and distribution channels in the PharmaSim environment may help guide you in segmenting the market and positioning your products. The glossary contains marketing terms that are used in the simulation. An index concludes the appendix.

 

 

 

PHARMASIM

Case

 

 

 

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The management team at the Over-the-counter Cold Medicine (OCM) Group of Allstar Brands just completed its third presentation in the past month to the Pharmaceuticals Division manager regarding the status of the Allround cold medication. It is apparent, from all the attention the team has received, that the Allround brand it manages is of strategic importance to the company. Unfortunately for the team and the company, the fourth quarter performance reports for Allround were not as positive as management expected. Therefore, the OCM team has been under the intense scrutiny of senior management.

Allstar Brands’ Allround product is a market leader in the over-the-counter (OTC) cold and allergy remedy market. The consistent success of the brand in terms of profitability and sales has made it a critical component of the Pharmaceuticals Division’s long-term strategic plan. The division anticipates that the brand’s cash flow in the coming years will allow the company to pursue new opportunities in emerging markets. However, the division manager responsible for Allround has become concerned with the competitive nature of the OTC cold remedy market. In the past three years, the industry has seen several product introductions as well as major increases in promotional and advertising expenditures. There is concern among senior management that this competitive activity will lead to declining market share and profitability for Allround. The brand has lost one full share point in the last year. Senior management expects that skillful marketing will prove pivotal to the long-term success of Allstar Brands.

 

 

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The Company

Allstar Brands Corporation is one of the leading manufacturers of packaged goods in the world. Since its founding in 1924, the company has acquired or merged with a number of smaller packaged goods companies.

The company consists of three divisions: Consumer Products, International, and Pharmaceuticals. The Consumer Products Division handles a number of packaged goods, such as laundry detergent, shampoo, and bar soap. The International Division distributes Allstar products on a global basis and has a large presence in the European market. The Pharmaceuticals Division is responsible for the marketing and production of ethical and OTC medications. Ethical drugs are available through pharmacies with a physician’s prescription, whereas OTC remedies are widely distributed without the need for a prescription.

The management of Allstar’s Pharmaceuticals Division consists of a number of market related groups, one of these being the OCM Group. This group is concerned primarily with the marketing activities of the Allround brand and any line extensions or new product introductions that might fall under the same category. An overview of the corporate structure of Allstar Brands is presented in the following figure.

Organizational Chart for Allstar Brands

The Brand Management Group at OCM

The marketing management group responsible for Allround consists of a brand manager, an assistant brand manager, and a brand assistant who is a recent business school graduate. They work together as a team on all the marketing decisions related to the OTC cold and allergy remedy market. The three managers are concerned with developing the Allround marketing mix strategy each year, including any reformulation or line extension options. In addition, if Allstar’s research department develops any promising new product ideas for the cold medicine market, this team will be responsible for the new product launch. Although all product and marketing decisions are made as a group, each member of the brand management group has a different role.

 

 

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The brand assistant has major input on decisions related to retail price, promotional allowances, consumer and trade promotional expenditures, advertising expenditures, and the number of direct and indirect sales force personnel committed to the Allround brand. The brand manager thought it would be best for the brand assistant to gain experience by understanding the basic marketing variables before becoming more involved in the detailed implementation of the marketing plan.

The assistant brand manager has input on the aforementioned issues but is also required to make more in-depth marketing decisions. For example, the assistant brand manager makes recommendations concerning the allocation of the sales force to retailers and across direct and indirect channels. This person is also concerned with the development of the pricing discount structure, as well as more of the specifics of promotional programs, including the advertising message, advertising agency, and trade and consumer promotions.

The brand manager is responsible for all aspects of the marketing decisions for the Allround brand. In addition to the decision areas above, the brand manager is responsible for more detailed aspects of the advertising message, including which competitor to position against, the choice of target segments, and the details of how promotional allowances and promotions are allocated across various distribution channels.

In general, the brand management group is responsible for making effective marketing decisions in all marketing mix areas to maximize the long-term profitability of Allstar Brands’ OTC cold and allergy remedy group.

 

 

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The OTC Medicine Industry

Allstar Brands competes with four other firms in the OTC cold and allergy market. As shown in the table below, these five firms offer a total of 10 brands in five different product categories (cold liquid, cough liquid, allergy capsule, cold capsule, and nasal spray).

Company and Brand Summary

Company Name Manufacturer Sales (M$) Brands on the Market

Allstar Brands $355 Allround: 4-hr multi-symptom cold liquid

B&B Health Care $286 Believe: 4-hr allergy capsule, Besthelp: 4-hr cold capsule Curall Pharmaceuticals $199 Coughcure: 4-hr cough liquid

Driscol Corporation $255 Defogg: 4-hr allergy capsule, Dripstop: nasal cold spray, Dryup: 4-hr multi-symptom cold capsule

Ethik Incorporated $396 Effective: nasal cold spray, End: 4-hr cough liquid, Extra: 12-hr cold capsule

Cold Remedy Market

Cold remedies are designed to address five basic symptoms: aches and fever, nasal congestion, chest congestion, runny nose, and cough. Although the cause is different, allergies share many of the same symptoms and are therefore often grouped with cold remedies. However, products formulated specifically for allergy relief symptoms are available, and it is common in the industry to consider relief from allergy symptoms as a separate consumer need from cold and flu related illnesses. Chronic allergy sufferers tend to have different usage patterns and more concerns about side effects because of the duration of the symptoms.

Brand Formulations

Products vary in the ingredients they contain, their form, and the duration of relief. In general, various combinations of six basic types of ingredients are used to formulate OTC brands. Each ingredient targets one of the five basic symptoms or is used as a base for the other ingredients. The ingredients are

• Analgesics: Provide relief for aches and fever. Common analgesics are aspirin, ibuprofen, and acetaminophen.

• Antihistamines: Reduce the secretions that cause runny nose and watery eyes. • Decongestants: Reduce nasal congestion by shrinking the blood vessels in the nose lining

to clear the passages and restore free breathing.

 

 

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• Cough suppressants: Reduce the cough reflex. • Expectorants: Provide relief from chest congestion by loosening the phlegm, thereby

making each cough more efficient. • Alcohol: Provides a base for the other ingredients in some products and helps the patient

rest. (Some consumers view alcohol as a negative attribute.)

A brand can be made available in one of three forms: liquid, capsule, or spray. A consumer’s choice with regard to form is usually based on personal preference, but some general differences are apparent. Nasal sprays contain only a topical nasal decongestant that provides faster relief from sinus congestion than other forms. Capsule and liquid cold medications might contain any combination of ingredients, although cough medicine is usually found in liquid form to help soothe throat irritation. According to a recent survey, most consumers find that capsule form is somewhat more convenient than liquid.

Two other basic considerations are duration of the product and possible side effects. Product duration is typically either 4-hour or 12-hour. The government regulates the amount of medication for various periods of relief, including the maximum for a 24-hour period without a prescription. For safety reasons, the maximum dosage used in 4-hour formulations cannot be taken more than four times each day. Twelve-hour formulations can contain twice the dosage as 4-hour formulations, or half the daily maximum medication. Nasal sprays are considered instant relief products because they act much faster than standard cold medicines, but their effectiveness wears off faster.

OTC side effects have become a greater consideration in recent times because of the emphasis on healthier lifestyles and concerns about performance under medication. Drowsiness caused by antihistamines or alcohol is the most often mentioned negative side effect, especially when these products are used during the day. Other considerations include upset stomach, long-term effects of nasal spray, and excessive medication.

As can be seen in the table below, the Allround brand is a 4-hour liquid cold medicine that provides multi-symptom relief. It contains an analgesic, an antihistamine, a decongestant, a cough suppressant, and alcohol. Most consumers use this product for nighttime relief because of the strength of the medication and because the alcohol and antihistamine help the patient rest. Allround is viewed as one of the most effective brands on the market at reducing multiple cold symptoms. However, consumer groups and some physicians have attacked the multi-symptom shotgun approach as providing excessive medication in many circumstances.

 

 

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Current Brand Formulations

 

Analgesic

Antihistam ine

Decongestant

Cough Suppressant

Expectorant

Alcohol

Description

Max Allowed 1,000 4 60 30 200 20 (mg per 4-hr dose) Allround 1,000 4 60 30 0 20 4-hr multi liquid Believe 0 4 0 0 0 0 4-hr allergy capsule

Besthelp 0 4 60 0 0 0 4-hr cold capsule Coughcure 0 0 30 30 0 10 4-hr cough liquid

Defogg 0 4 0 0 0 0 4-hr allergy capsule Dripstop 0 0 60 0 0 0 1-hr cold spray

Dryup 1,000 4 60 0 0 0 4-hr multi capsule Effective 0 0 60 0 0 0 1-hr cold spray

End 0 0 0 0 200 10 4-hr cough liquid Extra 0 0 120 0 0 0 12-hr cold capsule

Market Segmentation

The trade typically segments the OTC cold and allergy market based on how the brands are labeled. The four standard product categories in the OTC market are cold, cough, allergy, and nasal spray. The brand management group often uses the information presented in the table below as a basis for determining the brand’s direct competition but also realizes that the report fails to account for the cross-usage of brands (e.g., using a cold medicine to relieve allergy symptoms).

Market Share by Product Category Cold Cough Allergy Nasal Total

Mfr. Sales (M$) $879.7 $366.4 $126.1 $119.1 $1,491.2 Growth 6.6% 3.2% 5.9% 4.5% 5.6% Allround 40.4% 0.0% 0.0% 0.0% 23.8% Believe 0.0% 0.0% 50.7% 0.0% 4.3%

Besthelp 25.2% 0.0% 0.0% 0.0% 14.9% Coughcure 0.0% 54.3% 0.0% 0.0% 13.3%

Defogg 0.0% 0.0% 49.3% 0.0% 4.2% Dripstop 0.0% 0.0% 0.0% 52.0% 4.2%

Dryup 14.9% 0.0% 0.0% 0.0% 8.8% Effective 0.0% 0.0% 0.0% 48.0% 3.8%

End 0.0% 45.7% 0.0% 0.0% 11.2% Extra 19.5% 0.0% 0.0% 0.0% 11.5%

 

 

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A major marketing research firm offers a nationwide survey of OTC cold and allergy consumers. The market research firm claims that this survey provides a great deal more information on how consumers perceive and use cold and allergy products. The firm also suggests that demographic segmentation could reveal important information about the market. Survey data are provided with two segmentation options: illness (cold, cough, and allergy) and demographics (young singles, young families, mature families, empty nesters, and retired). The marketing research firm conducts this survey every year. A “Sample Market Survey Questionnaire” concludes the case.

Curious about possible new market insights, the OCM Group obtained results of the market survey for $100,000. If the group finds the data informative, it plans to continue purchasing the survey. The Brand Manager and Assistant Brand Manager can analyze the OTC cold and allergy market based on any or all combinations of illness and demographics that the OCM Group desires, but survey cross-sections are not available to the Brand Assistant.

Survey Data

The consumer survey consists of the following reports: (1) market share based on consumer brand purchases; (2) purchase decision-making criteria used by consumers; (3) brand awareness, trial, and repurchase percentages; (4) brand satisfaction; (5) intended purchases compared to actual purchases; (6) a comparison of brands based on consumers’ perceptions of their ability to relieve symptoms; and (7) the trade-off that consumers perceive between symptom relief and price. The sample data for awareness, trial, and repurchase are presented in the table below.

The survey results on Brands Purchased, Purchase Intentions, and Satisfaction are based on units sold. Brand Awareness, Decision Criteria, Brand Perception, and Trade-offs are based on survey population. This distinction reflects multiple purchases from one survey respondent (usage rates).

Market Survey—Awareness, Trials, Repurchase

Brand Brand Awareness Brand Trials

Most Frequently Purchased

Conversion Ratio

Retention Ratio

Allround 74.1% 47.1% 21.8% 63.6% 46.3% Believe 18.9% 9.2% 3.8% 48.5% 41.9%

Besthelp 56.6% 30.0% 13.0% 53.1% 43.2% Coughcure 49.0% 29.0% 18.4% 59.1% 63.6%

Defogg 24.1% 13.0% 4.1% 53.9% 31.8% Dripstop 20.2% 11.3% 3.6% 56.1% 31.4%

Dryup 23.2% 10.9% 7.2% 47.0% 65.6% Effective 22.0% 12.0% 3.1% 54.5% 26.2%

End 46.9% 30.6% 15.6% 65.3% 50.8% Extra 60.1% 31.8% 9.5% 52.8% 29.9%

 

 

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The OCM Group found the data insightful. They were pleased that Allround had very high awareness. The survey measures the percent of those queried who mentioned the Allround brand without prompting, which is considered “unaided awareness.” In addition, the Allround brand had the highest trial level and was the brand most frequently purchased. Allround’s conversion ratio (the percentage of those aware of a brand who have tried it) is also high. The brand manager noted that the retention ratio (the percentage of those who have tried the brand who now purchase it most often) for Allround was lower than that for several other brands. The OCM Group wondered if this might be a signal of future problems, but the brand assistant recalled that new brands and brands that fill very specific needs often have higher retention rates than brands that are mature or not highly targeted.

Other Marketing Research

In addition to the survey data, other information about the market is available. Market trade publications are free to the OCM Group and provide data for industry outlook on population, market growth rate, inflation, wholesale/direct distribution, symptoms reported by consumers, and manufacturer sales for each brand. Other data concerning competition and distribution are available for a fee. These include a comparison of relevant operating statistics for each company; competitive estimates of sales force allocation, advertising expenditures and message, and promotional programs; as well as studies of distribution regarding share of channel sales, pricing, consumer shopping habits, average shelf space, and physician and pharmacist recommendations. Assistant Brand Manager and above can also conduct test markets which allow you to experiment with different combinations of price, advertising, and promotion. In some cases, Brand Managers may be able to use a new conjoint study to help with product decisions.

The OCM Group believes that the Marketing Research studies contain useful information but that they also need to examine the trade-off between the cost of these studies and the information for decision-making that these studies provide. They also need to recognize that all marketing research studies have some error in them.

 

 

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OTC Medicine Marketing

Pricing and Promotional Allowances

It is industry practice for manufacturers to suggest retail prices to retailers, although retailers ultimately set the price to consumers. Manufacturers commonly offer volume discounts of 15– 40% of the manufacturer’s suggested retail price plus an additional promotional allowance of 10– 20%. Allowances are necessary to gain retail distribution, obtain desired shelf facings in retail outlets, and gain retailer support for a brand in advertisements and promotions undertaken by the retailer. Allowances are usually discussed with retailers in conjunction with price levels but are also considered to be a type of promotional expense. Thus, allowances appear on the income statement as a separate variable cost line item. The table below displays the current pricing policies for the Allround brand.

Volume Discount Schedule for Allround

Order Size/Type Volume Discount Price to Channel

Units Sold (M)

Dollars Sold ($M)

% of Total Sales

<250 units direct 25% $3.97 10.5 $41.8 11.8% 250–2499 units direct 30% $3.70 35.4 $131.2 36.9%

2500+ units direct 35% $3.44 15.1 $51.9 14.6% Indirect/Wholesale 40% $3.17 41.1 $130.3 36.7%

The preceding discount schedule is not available at the Brand Assistant level in the simulation.

The manufacturer’s suggested retail price (MSRP) for Allround is relatively high with volume discounts ranging from 25% to 40%, not including promotional allowances. However, the OCM Group believes that Allround’s sales have not suffered because of the higher price. In fact, the brand’s effectiveness, high recognition, and level of loyalty have allowed it to maintain a price leadership role in the market. The following table provides the MSRPs for all brands in the market.

Manufacturer’s Suggested Retail Prices Brand Price

Allround $5.29 Believe $4.39

Besthelp $4.89 Coughcure $5.49

Defogg $4.29

Brand Price Dripstop $4.29

Dryup $5.09 Effective $4.39

End $5.29 Extra $4.49

A market research report showing average retail price by channel costs $20,000 at the start of the simulation.

 

 

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Advertising

Advertising plays a major role in establishing brand awareness among consumers and in helping to shape consumers’ perceptions of products. The OCM Group must make three basic advertising decisions each year: the amount of dollars allocated to the advertising budget, the content of the advertising message, and the choice of an advertising agency.

Last year Allstar spent $20 million on Allround’s advertising campaign, primarily for commercials aired on network television. Competitive advertising budgets for last year ranged from $1 million for the Effective brand to $16 million for Coughcure.

There are four basic advertising message types that the OCM Group considers potentially useful for Allround: a primary demand stimulation to focus the advertising message on increasing overall demand for OTC remedies while increasing Allround’s unaided awareness; a benefits approach that states the symptomatic relief properties of Allround; a comparison approach that positions Allround against another brand; and a reminder advertising message to maintain consumer awareness and stimulate the repurchase of Allround. The advertising message used in any year can be a combination of these types and Allround used all of them to some extent last year in their campaigns. The advertising message can also target product use (cold, cough, and/or allergy) and demographics (young singles, young families, mature families, empty nesters, and/or retired). This targeting provides guidance to the advertising agency for creative aspects of the ad design and selection of specific media placements.

The OCM Group is considering the selection of a new advertising agency. Allround’s current agency is Brewster, Maxwell, and Wheeler (BMW). This agency is known for its high-quality work but charges a 15% commission on media placements. There is some concern that BMW costs too much and is having an adverse impact on Allround’s profits. The OCM Group has received solicitation from two other advertising agencies. Sully & Rodgers (S&R) has a reputation of providing medium-quality work but charges only 10% on media placements. Lester Loebol & Company (LLC) charges only 5% on media placements, one-third as much as BMW, but its advertising campaigns are of significantly lower quality. It could be argued that, since the Allround name is well established, a decrease in the quality of advertising might not hurt the brand significantly. Potential cost savings could result in an increase in profits, but the group is concerned that lower quality advertising might cause irreparable damage to Allround’s brand image.

There is a debate on your management team about the best way to use digital marketing for your company. Currently you have a website with product information, and marketing uses microblogging and social networking applications to announce company news. However, there’s very little positive feedback from buyers or customers, and the social media accounts are not being monitored. Your website and all your social media are run by two people in the Marketing department, neither of whom have web programming experience; so, they rely on “free time” of

 

 

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IT employees in the department. Marketing recently commissioned a consultant to review your social media campaigns and found that you receive below average responses.

One suggestion for improving the digital marketing effort is to create display ads targeting websites that are connected with health issues, especially treatment for cold and cough symptoms. Another idea is to work on search marketing by improving the website so it will score higher in searches for cold and cough medicines (search engine optimization) and to pay to list your products in relevant search results (pay-per-click). A final suggestion is to monitor your social media accounts better and to enhance the coordination of social media efforts with advertising and promotion.

Promotion

Trade promotions include promotional allowances and cooperative advertising. Promotional allowances, also discussed in the pricing section, are an additional discount to the channel. Co- op advertising provides incentives to the channel to feature a specific brand in their own advertising. Money is made available to retailers to pay for a portion of the retailer’s advertising when the relevant brand is promoted.

Consumer promotions include distribution of free trial-size packages, coupons, and point-of- purchase displays. Trial sizes come in smaller packages and allow consumers to try a product before buying. Allround did not use trial-size packaging last year but may consider this option in the future. As the name implies, trial-size packaging usually contains a smaller dosage of medicine and is provided to potential consumers free of charge. This promotion can be used to attract potential consumers to the Allround brand.

Coupons offer additional discounts off the retail price when redeemed at the time of purchase. Coupons can be distributed in print through direct mailings and with periodicals; at the cash register based on your purchases; and through a variety of digital means. Last year a part of Allround’s consumer promotion budget was spent on coupon support. This included money spent on printing, distribution, and redemption.

Point-of-purchase vehicles are special displays, such as retail sale racks, on-shelf advertisements, or end-of-aisle displays that promote a brand to the consumer in the retail store. The OCM Group believes that these displays promote brand switching when the consumer is purchasing OTC products. Point-of-purchase money is paid to the retailer, but the promotion targets the end consumer. The brand manager may allocate these funds across retail channels depending on such factors as shopping habits and channel needs. The table below is a summary of last year’s promotional activity for the Allround brand.

 

 

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Promotional Activity for the Allround Brand Measure Value

Promotional Allowances $60.4M (17.0%) Co-op Advertising $1.4M Point of Purchase $1.4M

Trial Size $0 Coupons $4.2M ($0.50 each)

Sales Force

The support of a manufacturer’s sales force is critical to the success of a brand in the OTC cold and allergy market. Part of the sales force sells directly to retail outlets. This direct sales force is responsible for maintaining relationships with current retailers and for developing new retail accounts. The direct sales force also presents trade promotions, allowances, and new product introductions to retailers.

Wholesalers sell OTC brands to smaller, independent retailers that are not reached by the direct sales force of the manufacturer. Merchandisers provide special support to retailers for their in- store activities, such as shelf location, pricing, and compliance with special promotions. Detailers contact doctors and pharmacists to provide information about their brand, introduce new products, and encourage doctors or pharmacists to recommend their brand to consumers.

The OCM Group determines the total size of the sales force, including the proportion of direct and indirect support. The brand manager allocates the direct sales force to each type of retail outlet and the indirect sales force to its three components (wholesalers, merchandisers, and detailers). The group must also be concerned with sales force hiring with and training costs. The latter is critical to the pharmaceuticals business, even in OTC drugs.

OCM Sales Force Allocation Sales Force Type Count

Independent Drugstores 6 Chain Drugstores 28 Grocery Stores 43 Convenience Stores 3 Mass Merchandisers 14

Subtotal (Direct) 94

Sales Force Type Count Wholesalers 15 Merchandisers 8 Detailers 10

Subtotal (Indirect) 33

Total 127

Channel Choices

As noted above, Allround uses both direct and indirect channels of distribution. Generally, direct sales target larger urban and suburban stores as well as chain retail accounts. Wholesalers typically serve smaller retail outlets and more rural areas, where the revenues generated for Allround do not support the cost of maintaining a salesperson. Wholesalers carry many product lines and therefore have a broader revenue base for supporting the cost of their sales force.

 

 

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Gaining the support of the channel is an important part of a brand’s success, and shelf space allocation and placement can have a significant effect on brand sales. The OCM Group paid for a study of average shelf space in retail channels and found that Allround did not receive the best placement in all channels. The group wondered why Allround did not consistently receive the best placement, since the brand typically generated higher volume than any other OTC medication. Because of this concern, they asked their sales force to query retailers about shelf space allocation among brands. The results from this informal survey showed that retailers considered four basic factors regarding shelf space allocation: product turnover (number of units sold in a given period), promotional allowances, sales force support, and co-op advertising allowances. In general, large grocery stores, mass merchandisers, and chain drugstores were more apt to focus on turnover and allowances, whereas independent drugstores paid greater attention to sales force support. The OCM Group hoped that this information might prove useful in determining how to allocate their resources across distribution channels.

 

 

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Internal Product Development

The OCM Group has important product development and management decisions to make over the next decade and must work closely with the product research and development (R&D) area within Allstar Brands. R&D can provide three major types of product development for the Allround brand group: reformulation of the ingredients in Allround; line extensions of the basic Allround brand; and development of a new brand. New brand options may include ingredients currently available only by prescription should government regulations change. These proprietary, prescription-only medications may offer Allstar Brands competitive advantages in the OTC market.

After lengthy discussion, the OCM Group and R&D agreed that the following schedule would frame the group’s product development decisions. The product alternatives will not be available to the OCM Group outside the given times because R&D will be busy with other projects. No product decisions are available at the start (Year 0).

Product Development Schedule

Two reformulations of the Allround brand will be available from R&D in Year 1 or 2. The two options under consideration are dropping the alcohol or replacing the cough suppressant with an expectorant. If used, the reformulation would replace the current product configuration. The OCM Group must decide by the end of Year 1 or 2 between these two reformulations (for introduction in the market the following year). The opportunity to decide to reformulate will not be available to the OCM Group after Year 2.

Three potential line extensions will be available from R&D in Year 3 or 4. The three options under consideration are a 4-hour cold liquid for children, a 12-hour multi-symptom capsule, or a 4-hour cough liquid. If introduced, the line extension will provide a new stock-keeping unit (SKU) in addition to Allround but also take advantage of Allround’s awareness. The OCM Group must decide by the end of Year 3 or 4 from among these three choices (for introduction in the market the following year). The opportunity to decide on a line extension will not be available to the OCM Group after Year 4.

Three new product formulations will be available from R&D in Year 5 or 6. The three options under consideration are a 4-hour allergy capsule, a cold spray, or one of the line extensions not previously chosen (to be determined by R&D). The allergy medication is based on a unique, non- drowsy product that is currently available by prescription only. However, the company is planning to submit the product for government approval. The OCM Group must decide by the end of Year 5 or 6 from among these three new product choices (for introduction in the market the following year). The opportunity to launch a new product line will not be available to the OCM Group after Year 6.

 

 

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R&D will be available in Years 7 and 8 to reformulate Allround. The OCM Group must decide by the end of Year 7 and/or by the end of Year 8 whether or not to reformulate Allround (for introduction into the market the following year).

Allstar OCM Product Development Timeline

The numbers in the above timeline indicate the period when product development decisions can be made. Any product changes go into effect the following period, after the simulation is advanced.

 

 

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Financial Situation for the OCM Group

An income statement is presented below. Allround is a successful and profitable brand with sales of $355.3 million at the manufacturer’s level last period. The gross margin was $172.3 million, and the margin after advertising and promotional expenses was $145.3 million. The margin after all marketing expenditures, including sales force and administrative costs, was $129.5 million. The Allround brand also carries its share of fixed costs, including the plant where Allround is produced and a share of corporate overhead charges. The OCM Group knew that if demand warranted, the plant would be expanded, and fixed costs would increase based on the increase in capacity. These fixed cost charges were $62.4 million last period, leaving a net income of $67.2 million. Senior management of Allstar Brands expects the OCM Group to make even greater contributions in the future.

The OCM Group has received a budget to make marketing decisions for the Allround brand. The marketing budget must cover all sales force, advertising, and consumer and trade promotion expenditures. In addition, any marketing research purchased is a budget expense. Promotion allowance, however, is treated as a price discount and is not charged against the budget. Each year, the marketing budget is adjusted up or down based on sales and net contribution performance. If a line extension or new product is introduced, the group will receive additional budget funds to help with the launch. Unused budget will not be carried forward to the next year, and budget deficits are not permitted. The brand management group must determine the best way to allocate the available funds and can use the marketing efficiency index (ratio of net income divided by marketing expenditures) to track performance.

OCM Group Income Statement

Item Value (millions of dollars) % of Manufacturer Sales Manufacturer Sales $355.3 100.0% Promotional Allowance $60.4 17.0% Cost of Goods Sold $122.6 34.5%

Gross Margin $172.3 48.5% Consumer & Trade Promotions $7.0 2.0% Advertising $20.0 5.6% Sales Force $6.0 1.7% Administrative $9.8 2.7%

Total Market Expenses $42.8 12.0% Contribution After Marketing $129.5 36.5% Fixed Costs $62.4 17.6%

Net Income $67.2 18.9%

 

 

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The Marketing Task

The task of the Allround brand management team is to maintain long-term profitability and market share in an increasingly competitive and changing environment. With great enthusiasm, the OCM Group sets out to do the job. Each member has separate assignments, but all are concerned with the performance of the Allround brand and any new brands that might be forthcoming. It will be necessary to use marketing research studies to assess Allround’s situation. After completing its analysis of the situation, the group will then make decisions in the areas of product choice, distribution, promotion, and pricing. The group must keep in mind that all decisions are interrelated and must be considered in context. It will repeat this process over the coming 10 years as it attempts to establish AllStar Brands as the leader in both profitability and market share in OTC cold medication.

 

 

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Sample Market Survey Questionnaire

This market survey questionnaire was designed to be given to consumers at the point of purchase (drugstore, grocery store, convenience store). The survey is given only to those who are currently suffering from cold, cough, or allergy symptoms.

MARKET SURVEY QUESTIONNAIRE

PURCHASE INFORMATION

1. Did you purchase any cold medicine? Yes No —If you answered “No” above, go to question 5—

2. Which brand of cold medicine did you purchase? __________________ 3. Which brand of cold medicine did you intend to buy? __________________

SATISFACTION

4. Overall, are you satisfied with the product you just purchased? Yes No 5. Which brands of cold medicine have you heard of?

Allround Besthelp Believe Coldcure Coughcure Dripstop Defogg Effective Extra End Other

6. Which brands of cold medicine have you tried? Allround Besthelp Believe Coldcure Coughcure Dripstop Defogg Effective Extra End Other

7. Which brand of cold medicine do you purchase most frequently? Allround Besthelp Believe Coldcure Coughcure Dripstop Defogg Effective Extra End Other

(Continued on next page…)

 

 

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(…Continued from previous page)

DECISION CRITERIA

8. Please rank the following product attributes in order of importance in your decision to purchase cold medicine:

___ Product Effectiveness ___ Side Effects ___ Price ___ Form ___ Duration

BRAND PERCEPTIONS / TRADE-OFFS

9. Of the brands you mentioned having heard of (from question 5), how effective would you rate the __________________ brand of cold medicine in relieving the following symptoms:

Symptom Effectiveness Rating

1=Not at All Effective, 5=Extremely Effective Aches 1 2 3 4 5

Nasal Congestion 1 2 3 4 5 Chest Congestion 1 2 3 4 5

Runny Nose 1 2 3 4 5 Cough 1 2 3 4 5

Allergy 1 2 3 4 5

10. What is your perception of the price of __________________ brand? 1=Inexpensive, 5=Expensive 1 2 3 4 5

SEGMENT INFORMATION

11. Age: ______ 12. Household size: ____ 13. Children under 12: ____ 14. Children Aged 12–20: ____ 15. What illness are you (or your child) suffering from? Cold Cough Allergy

 

 

 

PHARMASIM

Marketing Management Process

 

 

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PharmaSim is designed to be a challenging and realistic learning experience. One goal of the simulation is to provide you with the opportunity to apply your marketing knowledge in a dynamic environment over multiple years. It is in this setting—where customers, competitors, and the environment are constantly changing—that managers are challenged. Even with the constraints of limited decisions and time, you will find PharmaSim an excellent environment to experience these fluctuations.

A secondary goal of using PharmaSim is to gain decision-making experience in an ambiguous environment. This is very different than a multiple-choice exam where there is one right answer. In a simulation there is no single correct answer and all “answers” (i.e., decisions) are interrelated. Remember, there is no ultimate solution for PharmaSim. Many different strategies, if implemented well and followed consistently, can be profitable.

Another learning goal is to experience making decisions in a group environment where you and your teammates will likely have different opinions on what your firm should do. If this is your first time experiencing a group decision-making process, you will likely find it challenging. That is part of the learning experience. However, be assured most marketing managers grapple with this environment daily.

This section of the manual is designed to help you think through your decision-making process as a team. You may be using a textbook that also offers some advice, and your instructor will have important insights to share as well. However, providing a simple framework for decision-making will help you think through the process.

Let’s start with some typical questions that can help you frame your group’s discussion. The questions below are grouped into three categories. We’ll address what these categories mean in marketing terms soon enough, but spend a few moments now thinking about these questions. Discussing these questions within your group will provide the strategic direction for your firm.

 

You will want to discuss these questions in the first few periods of the simulation. Coming to a common understanding in these areas will be important for your group decision-making process.

 

 

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If your group can agree on this analysis, then you will have a common perspective for decision- making. You will also want to review this periodically, as customers, competition, and your experience will change with time.

Let’s translate these questions into terms that are commonly used in marketing management. So, the question, “Where are we now?” becomes situation analysis. The question, “Where do we want to be?” becomes your team’s marketing strategy. And the question, “How should we get there?” becomes your team’s marketing mix decisions. In effect, the situation analysis drives your marketing strategy, and your marketing strategy drives your marketing mix decisions. This process is graphically displayed below.

 

Many of us tend to jump right into the marketing mix decisions without first going through the situation analysis and marketing strategy stages. This is not surprising. The marketing mix decisions are the hard and fast deadlines and decisions that we must make on a daily basis, whereas the first two stages are more preparatory in nature. However, without the framework of situation analysis and marketing strategy in place, we make decisions in a vacuum, leading to reactive rather than proactive choices. It is essential that your firm does your preparatory work first. So, let’s spend a little time defining situation analysis and marketing strategy before diving into the marketing mix decisions.

 

 

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Situation Analysis

 

When marketers discuss situation analysis, they often use the term “5 C’s.” The 5 C’s refers to completing an internal and external analysis of the circumstances of the firm or business unit— specifically, the context (environment), competition (current and potential), customers (needs, buying process, etc.), collaborators (distributors, suppliers, alliances), and company (current products, image, resources, goals, etc.). The 5 C’s analysis is where it all begins. Without a good understanding of the 5 C’s, it is impossible to craft a successful strategy or make informed marketing mix decisions. Let’s discuss each of the 5 C’s in more detail. For a more complete discussion, please refer to your marketing textbook.

Context

The business environment (context) can have an enormous impact on marketing programs. Health concerns, waste disposal, energy shortages, and changes in commodities prices are some examples of environmental factors that have altered industries and marketing programs. A good example relating to cold medicine was the 2008 announcement from the government regarding the use of OTC cough and cold products for young children. An excerpt from the transcript is provided below.

We strongly recommend that over-the-counter cough and cold products should not be used in infants and young children under two years of age because serious and potentially life-threatening side effects can occur from use of these products.

Obviously, an announcement such as this will have a significant impact on demand for families with young children. But it also may have an impact on other people’s purchasing and use decisions. Think about how a manager might respond to this news.

In PharmaSim there are multiple environmental factors that your firm should monitor. The demand for cold medicine is very much dependent on the number of people reporting various illnesses, as well as seasonal influences (e.g., increased occurrence of influenza or high pollen count). There may be some underlying changes in health concerns that may be monitored by tracking physician recommendations or the purchasing decisions of consumers. You should also consider the effects of inflation on costs and pricing.

 

 

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Competitors

Understanding the dynamics of competition is critical to the success of any marketing plan. Are you able to discern your competitors’ strategies? How do you expect them to react to your actions? By reviewing and tracking your competitors’ marketing mix decisions, performance, and resources, one can develop an understanding of their competitive intent.

In addition to helping you understand your competitors, analyzing competitive marketing data can also often help you gain insight into what may be a more effective use of marketing resources. For instance, you might be tracking advertising expenditures and messages and notice that your competitor has a new program in place. Furthermore, that competitor also had a jump in market share. Perhaps the change in market share was caused, in part, by the change in the advertising decisions. Now your team can discuss the pros and cons of potentially making a similar change and whether that is appropriate for your situation and strategy.

The most difficult facet of the dynamics of competition is anticipating the retaliatory moves of your competitors and deciding whether they might neutralize your marketing programs. One should consider the effects of changes in a competitor’s price, sales force, promotion, or advertising approach on the success of your strategy. Before you make a decision that is likely to cause a retaliatory reaction, think through whether it is in your long-term best interest to begin this process. Sometimes the short-term gain is more than offset by a long-term chain of negative events that is difficult to reverse.

Customers

The customer dimension of the 5 C’s can be broadly partitioned into two areas for analysis. The first is the nature of demand. This includes understanding what benefits customers are seeking, how they learn about products, what their motivation is for purchasing, where they buy the product, what they consider when choosing a product, and the like. The study of these types of issues is often called consumer behavior. The second analysis is the extent of demand. This includes market size and growth, purchase quantities and usage rates, etc. A more in-depth description of these two areas is provided below.

Understanding the nature of demand involves answering the question, “How do consumers make their purchasing decisions?” To understand this process, one should describe the purchasing behaviors and attitudes of the consumer. You may use your own experiences to some degree, but do not impose your personal purchasing preferences on your target consumers. Try to find out what makes their decisions different from yours. Marketing research can be of great assistance in analyzing these behavioral patterns. One framework that you may find useful is the five-stage model of the buying process as shown below.

 

 

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Stage Description

PROBLEM RECOGNITION Someone in my household has a cough, cold, or allergy. I’m out of medicine. I’ve seen advertisements and/or promotions.

INFORMATION SEARCH I’ve used the product before. A doctor or pharmacist recommended one. I’ve seen an advertisement. I’ve looked in the store.

EVALUATION OF ALTERNATIVES

What brands offer good relief of my symptoms? What else is important to me? What is the price compared to the benefit?

PURCHASE DECISION What do I intend to purchase? What happens at the point of purchase? Special promotions? Location on shelf? Actual retail price?

POST-PURCHASE BEHAVIOR Did it relieve my symptoms? Do I continue to use it the next time I have a cold? Was I satisfied with the product?

In the above model the final stage is post-purchase behavior. This is especially important with a consumer packaged-good because satisfaction and repurchase behavior are major drivers of future sales. Satisfaction is particularly important for customers who tend to repurchase frequently—for example, allergy sufferers during the spring.

Let’s consider the drivers of satisfaction and repurchase in more detail. Consumers will typically have some expectations about product performance based on advertising, word-of-mouth, etc. They will also likely have some expectation of the value received for that particular set of perceived benefits. How well the product actually delivers those benefits at the actual price paid relative to the perceived value will be a driver of customer satisfaction and, ultimately, of repeat purchase. It may be helpful to think of this as depicted in the graphic below.

Drivers of Satisfaction and Repurchase in PharmaSim

 

 

 

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Once you have a general idea of how consumers make decisions, try to group consumers with similar decision-making paradigms, seeing whether the market can be segmented based on what consumers want and how they buy. One reason for doing this is to target your marketing resources at consumers with common needs and purchasing patterns. In most cases this will lead to a more efficient use of your limited resources.

Some useful variables to consider for segmentation include age, stage in the family life cycle, geographic location, and product usage. Attitude-based segmentation and consumer psychographics are other, perhaps more insightful, segmentation methods. In PharmaSim one has the ability to segment based on illness (product usage) and demographics (age and family life cycle). For job levels higher than Brand Assistant, the Survey reports may be viewed based on any segmentation scheme. When viewing these reports, one should ask whether the information is significantly different using different segmentation schemes. Do all segments view your product in the same way? If not, why? Again, this should provide more insight into the purchasing process of targeted consumers.

Finally, keep track of how the nature of demand changes over time. Consumers do not necessarily draw the same conclusion every time they make a purchase decision. Their needs may change, their information level may change, and the environment may change. It is important to anticipate how these dynamics evolve over time and how this may affect marketing decisions.

The extent of demand is the current and future size of the market in units and dollars. This information is important to assess what market opportunities offer the greatest potential. How one measures or assesses potential is a fundamental question. Some primary measures would include market size in units and dollars, market growth rates, and profit potential. Often one will have to look at several dimensions and consider them in tandem. For example, a smaller, high- growth market may offer more long-term advantages than a larger, stagnant market.

When evaluating extent of demand, there are three additional issues to consider, especially in PharmaSim: market penetration (which is often related to stage in the product life cycle), usage rates, and segments.

Market penetration compares actual sales with potential sales. For example, it is unlikely that 100% of the people suffering from colds are buying cold medicine. Some people may choose to just suffer through the symptoms or use home remedies instead of cold medicine. Therefore, the actual percent of people suffering from colds who choose to use cold medicine might be only 60%. This value of 60% would be considered current market penetration. If market penetration increased from 60% to 80%, actual sales would climb significantly (33%). If the current sales are 511 million units, increasing market penetration to 80% would increase sales to 681 million units.

Average usage also can have a significant impact on your extent of demand analysis. If the average usage in the current market is 2.7 (i.e., each person who buys cold medicine uses an average of 2.7 bottles per year) what happens if usage increases to 3.0? Sales would climb 11%.

 

 

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Therefore, one should go beyond the basics of unit sales to consider market penetration and usage when estimating market demand.

Finally, you may want to analyze markets on both an aggregate basis (i.e., the total market for OTC cold medications) as well as a segmented basis (e.g., the market for children’s cold medicine). Often the values for the total market are readily available, but segmented estimates are more difficult to calculate. The Manufacturer Sales option on the Market menu provides an estimate of cold, cough, allergy, and nasal spray sales in manufacturer dollars. However, you may prefer segmentation based on usage or demographics. Also, remember that in the Manufacturer Sales report these “segments” are defined by what label the manufacturer puts on the brand rather than consumers’ actual use. For example, you may have a brand labeled as “cold” which is often used for allergies.

Considering all the factors discussed above, how might unit sales in a particular segment, such as older cold sufferers, be estimated? In the simulation interface, go to the Consumer Survey menu, and select the Brand Purchased page. If it is available to you, change the illness segment to “cold” and the demographic segments to “retired.” Identify the percentage of the total unit sales this segment represents. Select one of the brands to see the total unit sales, and multiply by the percent. For example, suppose the segment is 8.7% of unit sales and total unit sales is 511 million, then sales to the segment would be 44 million units per year (0.087 × 511 = 44).

Collaborators

The distribution structure of an industry plays an important role in marketing decisions. In some industries manufacturers sell directly to the consumer, whereas in other industries there are multiple levels of distribution (brokers, wholesalers, retailers, etc.). It is important to understand the roles, strengths, and needs of each channel member. Typically, as more intermediaries come between the manufacturer and the consumer, the amount of control the manufacturer has in the marketplace decreases. In addition, the manufacturer may not receive important market feedback directly from the consumer, thus underscoring the need for marketing research.

It is important to understand how to motivate the channel in terms of discounts, allowances, support, and turnover, all of which play a role in whether or not to stock your brand as well as a brand’s visual placement on retail shelves.

Much of the information regarding channel policies (markup, use of wholesalers, needs, etc.) is found in the case at the beginning of this manual. Remember to consider where your target customers are likely to purchase your medication. Finally, think about the role of the sales force in motivating the channel to carry your product.

Another group of people who influence your customers’ decisions are doctors and pharmacists. They are more concerned with using the proper medication for the symptoms and situation and are less likely to be swayed by advertising. However, these influencers still need to be aware of a brand to recommend it, and if two brands offer similar relief, they may be more likely to

 

 

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recommend one brand over another if they are more familiar with it. So, advertising and sales force—especially the detailers (salespeople whose primary task is to inform clients about new products)—do influence doctors and pharmacists.

In summary, think about the buying behavior of your collaborators, just as you do with your customers. Of course, collaborators’ motivations are quite different from those of the end user, but they are equally important to understand.

Company

Now we arrive at the final C—the company. Most people begin situation analysis with the company because internal functions are more easily known than external issues. However, we have purposely left the company last because situation analysis, especially from a marketing perspective, should have an external focus.

For company analysis, consider your current and future products and brands. Are they successful? Are they growing? Are margins good? Are they unique? Do they meet customer needs? Related to the product, think about your overall position and image in the marketplace with both customers and collaborators. Are you well known? Are you able to charge a premium price? Do you have strength in your distribution channels?

You’ll also want to think about the resources available to your brands. In PharmaSim this is your budget. Your budget is based on your overall performance on sales and profitability. Is your budget more or less than your competitors? Are you spending your budget wisely?

Finally, consider your actual team in the simulation. Do you work together well? Do you share a common vision for your firm and brands? How will you analyze information and come to decisions as a group? Is there trust within the team? Often this aspect of the simulation is overlooked, but it is typically one of the more important determinants of success. This also mirrors the real world. An effective management team and workforce is one of your most important assets.

SWOT Analysis

It is fairly common to group all the 5 C’s information into four categories: Strengths, Weaknesses, Opportunities, and Threats (SWOT). Strengths and weaknesses are internal (company) factors while opportunities and threats are external factors. A brief description of each is provided below.

 

 

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Category Description

STRENGTHS Superior resources and/or skills that can be drawn on to exploit opportunities and diminish threats.

WEAKNESSES Deficiencies in resources and/or skills that inhibit the firm’s ability to capture opportunities or that must be overcome to avoid failure or underperformance.

OPPORTUNITIES

Environmental (consumer, competitors, channels, economy, technology, deregulation, etc.) states of being or trends with positive consequences. They provide a potential new basis for competitive advantage and provide a possibility of improved performance if pursued.

THREATS Environmental states of being or trends with negative consequences. They may impede the implementation of strategy, increase the risks of strategy, increase the resources required, or reduce performance expectations.

 

 

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Marketing Strategy

 

Defining your marketing strategy consists of choosing a segmentation approach, target markets, and positioning objective. This is known as segmentation, targeting, and positioning—or STP for short. STP provides the overall strategic direction for your company—who you will serve, how you will serve them, and on what basis you intend to compete. As an example, if you are selling automobiles, a simple STP statement might be, “We intend to serve the high-income market in Canada through high-performance, all-wheel drive vehicles.”

Your marketing strategy should be based on your 5 C’s analysis you did in phase one (or a variation of that such as SWOT analysis). It is important to build upon previous analysis as you proceed through each phase. Failing to do so is easy; we often like to jump right into decisions or strategy without referencing the underlying assumptions. However, if we fail to properly build on the 5 C’s analysis, our strategy will have flaws, and we will only have ourselves to blame. Statements such as, “The strategy is perfect except for the possible exception of X, but let’s put that aside for now,” reveal potential flaws that need to be addressed. Is “X” something that is essential to the success of the strategy? If so, don’t ignore it or “X” will haunt you as you move forward. Address it up front. Make sure you have analyzed it, and if it still makes sense to proceed, do so knowing that you have done everything you can to account for the impact of “X.”

Often, one of Michael Porter’s three generic strategies will be the underpinning of your marketing strategy. They provide a good starting point for discussing strategy and formulating a marketing plan. They are

• Overall Cost Leadership. Here, the goal of the business is to achieve the lowest possible system cost (production, distribution, supply chain). Generally, a business that pursues this strategy will have the lowest prices and attempt to have the highest market share. This strategy works best for markets where price is the primary consideration in the purchase process. However, it is dependent on your firm being able to achieve the lowest cost position in the industry. If the industry is prone to technological advances that impact cost, it is difficult to achieve a sustainable advantage.

• Differentiation. For a differentiation strategy, the goal for the business is to establish superior performance in one or more areas that are of importance to the customer and typically charge a higher price for that superior performance. This strategy is effective in industries where price is not the primary driver and customers are willing to pay more for a product/service that provides superior benefits.

 

 

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• Focus. Here the goal of the business is to leverage the customer relationship. By focusing on a narrower range of consumer segments, a business can tailor products and services to best meet customer needs. This might be providing low costs or differentiation; whichever is appropriate for the target segment selected.

After your team has agreed on an overall strategy for your business, the next step is creating a marketing plan. You may be asked by your professor to provide this for PharmaSim after a period or two. There are many ways to write a marketing plan, so make sure to follow the directions provided by your instructor. The marketing plan assignment that may be available on your PharmaSim course website essentially asks you to go through the 5 C’s and STP analysis and then put your strategy into writing. Most marketing plans will also include financial projections (sales forecasts, expense forecasts, product contribution) and variables that can be monitored to track the progress against the plan.

Monitoring Results Against Plan

What are the marketing metrics you will use in PharmaSim to track your progress? Net income and market share are good overall benchmarks of performance against other players. However, to determine if your marketing plan is working, you will need to use intermediate measures such as awareness, shelf space, recommendations, etc.

One reason to track intermediate measures is to help distinguish between a symptom and a root cause of a problem. A symptom is an obvious result of a specific problem. For example, you may see that sales or profits are down. You have identified a symptom. Now you need to determine the underlying problem that caused this symptom. Keep asking “why” until you find the root cause of the situation. The following is a fictional conversation between teammates illustrating the process of finding the underlying problem given a symptom.

 

 

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In many cases, more than one problem can cause a general symptom like “profits are down.” In the example above, it might also be that total market sales are down, which would only compound the problem of a competitor’s product launch.

 

 

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Marketing Mix

 

The marketing mix is the implementation of your marketing strategy. Often these marketing mix variables are referred to as the 4 P’s of marketing—product, place (distribution), price, and promotion. In PharmaSim the 4 P’s represent all of the decisions you make each simulated year. This consists of multiple decisions in each area. For example, the primary pricing decision is the MSRP, but there are many other factors to consider, such as volume discounts, promotional allowances, coupons, etc., which ultimately influence the final price paid by the consumer. Let’s look at each of the 4 P’s in a little more detail.

Product

Recall the product development timelines discussed in the case. Every two simulated years, your firm will have the option to change the existing product or introduce a new product through reformulation, line extension, or new product launch. These are important decision points for your firm. In light of your strategy, your team must decide which product development decision is the best option. In addition, your team must decide the best way to implement its product decisions (for example, how best to minimize cannibalization with a line extension).

Allstar OCM Product Development Timeline

There are several tools that you may want to use to supplement your analysis. Understanding customer needs is a good place to start—here, the Decision Criteria report in the Consumer Survey and, if available, the Conjoint Analysis are both helpful tools. Knowing the competitors’ products and their success is also important. Competitive formulations are provided in the Brand Formulations report. Also remember to take into consideration the potential margin which would include the likely selling price for, and cost structure of, the product.

 

 

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Place (Distribution)

Understanding the needs of your distribution channels is essential to any well-thought-out marketing plan. For example, when trying to gain prime shelf space in grocery stores, it is necessary to find out what is most important to those retail outlets. Refer to the case to find out what factors influence the allocation of shelf space among brands. Typically, retailers will consider stock turnover rates (brand sales volume), profitability (unit margin), promotional allowances, sales support (sales force), and trade promotion (e.g., cooperative advertising). If shelf space for your brand is low in the target channels, sales will suffer. Because brand decisions for cold medicines are often made in the store, brands that are at eye level or have special point- of-purchase displays usually have an advantage over those brands found on the bottom shelf.

In general, when considering distribution in PharmaSim, remember:

• Successful brands will gain prime shelf space. • Retailers have different needs/considerations. • Shelf space is essential to reach non-loyal buyers who make purchase decisions in store. • Shelf space in PharmaSim includes both breadth (% stocking) and depth (in-store

attractiveness).

Pricing

When deciding on a price, many external as well as internal factors must be considered. Your price should reflect the strategy you have chosen, while taking into consideration competitors’ pricing and the importance your target customers place on price. The most important price decision is the manufacturer’s suggested retail price (MSRP). However, in setting that, remember that there are many more dimensions (and decisions) that drive the ultimate price that the consumer pays. Before those factors are incorporated, it is imperative that you review and understand the “marketing arithmetic” of prices.

• Manufacturer’s Suggested Retail Price (MSRP): The MSRP is a “reference price” used by the manufacturer and the channel alike to set expectations in the mind of the consumer. It is the value the manufacturer believes the product to have. The MSRP is also the starting point for calculating all discounts in PharmaSim. The volume discount is the percent off MSRP used to calculate the discounted price to the channel. Promotional allowance is then calculated as a percent of the discounted price.

• Volume Discount: This discount is a percentage (15%–45%) of the MSRP, which is subtracted from the MSRP to determine the selling price to the retailer. It depends on the volume of product a retailer purchases (higher discounts for higher volumes). The retailer then sets the actual selling price to the customer. Out of the difference between the actual retail price and the price paid to the manufacturer, the retailer must pay all of its promotional and fixed costs (and hopefully have a small profit left over).

 

 

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• Promotional Allowance: Promotional allowances, sometimes called slotting allowances, are additional discounts offered to the retailer beyond the volume discounts, with the goal of obtaining shelf space for a product. They are particularly important when trying to establish distribution channels for new products. In PharmaSim promotional allowances range between 10%–20%. You can see what allowances your competitors are offering by looking at the Promotion report, which provides all of the major promotional decisions by brand.

• Price to the Channel: This is the actual revenue that your firm receives for a sale of your product. The price to the channel is the MSRP less volume discounts. The channel will then mark the product up from this price before reselling it (in the case of a wholesaler) or selling it to the consumer (in the case of the retailer). This markup plus promotional allowances must cover their costs of selling the product.

• Cost of Goods Sold: Cost of Goods Sold is the variable cost of producing each unit. This amount includes all materials, labor, and production costs for the product.

• Per Unit Margin: This is the manufacturer’s margin on each product. Like the retailer’s margin, the manufacturer must pay all of its remaining costs (advertising, administrative costs, etc.) from this amount. A company’s gross margin is the aggregate of all the per unit margins (each per unit margin multiplied by units sold).

The chart shown below breaks down the elements discussed above for a product whose MSRP is $1.00. These amounts shown are for illustrative purposes only. It is helpful to do an analysis similar to this for your products as you determine their MSRPs.

 

 

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Companies are often tempted to cut prices in response to a downturn in sales. Why is this? First, customers normally prefer a lower price; thus, there is always the perceived “fix” that lowering your price will improve sales. It is also an easy change in the marketing mix to implement. However, there are many risks with using a lower price to spur sales. Consider the impact and potential responses by competitors if Allround, the leading brand, initiates a price cut. Philip Kotler and Kevin Keller cite four possible traps of price-cutting: (1) customers assume quality is low; (2) a low price buys market share but not loyalty because the same customers will shift to any lower-price firm; (3) higher-priced competitors match the lower prices but have longer staying power; and (4) a price war may be triggered.

 

 

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Promotion

Advertising is important in establishing brand awareness and in shaping consumers’ perceptions of products. In managing Allround, you will need to decide how much to spend on advertising and what the message should be for your target group(s).

When targeting specific demographic or product user groups, it is important to have a marketing plan that is consistent with the needs of the target group. This is especially important for line extensions and new product introductions because these are more likely to be marketed to a specific group. The advertising message should appeal to the target group and promote the benefits that are most important to them. When comparing with another brand, target the current leader in that segment. This will create an advertising campaign that communicates why your brand is superior to the competing brand. The promotional strategy should be consistent with the overall brand strategy.

Promotional levers available in PharmaSim can be broadly divided into trade promotion and consumer promotion. The purpose of trade promotion is to motivate your channel partners to (1) carry your brand and (2) provide your brand with good shelf space. In PharmaSim trade promotion includes promotional allowances and co-op advertising. As discussed previously regarding pricing, promotional allowances are an additional discount to target channels. Co-op advertising provides incentives to the channel to feature a specific brand in their own advertising.

The purpose of consumer promotion is to motivate the consumer directly. Consumer promotion in PharmaSim includes coupons, trial-size packages, and point-of-purchase displays. A coupon offers a discount off the retail price when redeemed at the time of purchase. Trial-size medication comes in smaller packages and is provided directly to consumers at a lower price or for free. Point-of-purchase vehicles are special displays, such as retail sale racks, on-shelf advertisements, or end-of-aisle displays that promote a brand to the consumer in the retail store.

Push/Pull Implementation Strategies

PharmaSim is an excellent environment to test push and pull strategies. You will likely use both push and pull elements, but you may decide that for your product category and circumstances, one strategy makes more sense for you to emphasize.

To implement a push strategy, you will probably focus on trade promotions as the primary elements of your marketing mix. This would include higher-than-average promotional allowances and volume discounts, more emphasis on sales force support (especially merchandisers and your direct sales force), and some use of co-op advertising and point-of-purchase displays. All these elements will help increase your shelf space and make your product more appealing to consumers at the point of purchase.

For a pull strategy, you will spend more of your budget on consumer promotion and advertising. The idea is to build your brand strength through greater awareness and knowledge of the

 

 

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benefits of using your brand. Thus, when consumers purchase a product, they will look for your brand. In a pull strategy, it is likely that more of your budget will go toward advertising, trial size, coupons, and detailers. Point-of-purchase displays and co-op advertising can also help to build brand equity.

It is important to note that these two strategies are not mutually exclusive. A strong brand will be more appealing to channel partners. They will want to carry your brand to help bring customers into their retail outlet. Also, strong brand equity can also work to your advantage for customers who are making their product choice at the point of purchase.

How Best to Allocate a Limited Budget Across Brands

In the example below, a division has four brands on the market. Sales, brand contribution, current market share, market share of the largest competitor, and market growth are listed for each brand. The division has a marketing budget of $20 million. Based on this information, how would you allocate the division’s budget?

Example Data from a Division with Four Brands on the Market

Last Yr. Budget Sales Contribution Market Share

Competitor Share

Market Growth

New Budget

Brand A $10.0 $75.2 $15.6 18.3% 16.5% 2.1% ? Brand B $0.5 $12.1 $1.1 2.0% 22.3% 4.5% ? Brand C $8.0 $172.5 $3.7 27.3% 14.9% 16.2% ? Brand D $1.5 $45.8 $4.8 6.3% 12.5% 18.5% ?

Total $20.0 $305.6 $25.2 n/a n/a n/a $20.0

The information presented here is limited, but you probably have some initial thoughts on an approach you might take. You might choose to keep the budget the same as last period. Budgets are often based on last period’s budget. You also might want to consider some other options, such as sales or contribution. Brands that have the highest sales or contribution will receive the highest budget. Some straightforward methods of allocating the budget can lead to surprising range of values, as shown in the following table.

Various Methods of Allocating a $20 Million Budget Based on the Previous Table’s Data Basis for Allocation Brand A Brand B Brand C Brand D

Last Period’s Budget $10.0 $0.5 $8.0 $1.5 Sales $4.9 $0.8 $11.3 $3.0

Contribution $12.4 $0.9 $2.9 $3.8 Return on Expenditures $4.2 $6.0 $1.2 $8.6

Market Size $1.3 $3.1 $13.0 $2.7 Market Growth $1.0 $2.2 $7.8 $9.0 Market Share $6.8 $0.7 $10.1 $2.3

Relative Market Share (ratio of your share to largest competitor’s) $6.3 $0.5 $10.4 $2.9

Range $1.0–$12.4 $0.5–$6.0 $1.2–$13.0 $1.5–$9.0

 

 

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Example calculation for budget allocation based on sales: Brand A represents 24.6% of the division’s sales (75.2 ÷ 305.6). If the budget were allocated based on sales, the brand would receive 24.6% of $20 million, or $4.9 million.

Each one of the example budget allocation approaches has some merit. It is important to note the wide range of outcomes possible based on simple allocation approaches. It is the job of the division manager to sort out priorities, potential, and risks to arrive at an allocation decision. This is not an easy process, but it is one of the essential parts of marketing management. Make use of the tools and market research available in PharmaSim to help you sort out options and priorities. There is no one right answer, only a good answer based on sound analysis. Accepting that level of ambiguity while making a decision takes courage and is a big part of being a manager. Use PharmaSim as an opportunity to become more comfortable in that role.

Conclusion

PharmaSim rewards those players who perform a thorough market and competitive analysis and develop marketing plans that are

• Customer-focused • Reasonable in both the short- and long-term • Consistent and integrated • Financially sound • Responsive to competitive strategies

If you follow these guidelines, your firm will likely prosper. Enjoy your tenure as a member of the Allstar Brands management team.

 

 

 

PHARMASIM

Appendix

 

 

 

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Using PharmaSim in a Group

If you are using PharmaSim in a classroom setting, you may be asked by your instructor to work in groups. Each group will pool its skills and resources to manage collectively as a brand manager, assistant brand manager, or brand assistant for over-the-counter cold medicines. Thus, your group will make specific decisions depending on the management position you are assigned.

One of the most frequent complaints with group work is the amount of time wasted in trying to get organized and make decisions. There are also complaints that members are not “pulling their weight.” To reduce these problems, your group should answer the following questions in their first meeting:

1. When, where, and how often should we meet? 2. How should we efficiently and effectively conduct our meetings? 3. Should we choose a general manager? 4. What authority should this person have? 5. How should we divide the marketing tasks among group members? 6. How do we resolve marketing issues and make final decisions? 7. How do we encourage and maintain a high quality of contribution? 8. How will we deal with personal conflicts among group members?

Over time the group should assess whether it is functioning efficiently and effectively. As your product portfolio changes, new competitive situations arise, and more information becomes available, the group may have to reorganize to best meet the current needs of the business.

Team Leader

When playing PharmaSim as a team, one member will be designated as “team leader.” The team leader is ultimately responsible for advancing the simulation after making sure the decisions are entered correctly and within budget. The team leader also may “lock” decisions to block other team members from changing them before the simulation is advanced to the next period. Thus, it is important that a team chooses a capable leader that is accessible to all team members and the instructor. Additionally, if your instructor has allowed the replay or restart options, your team leader is the person who will implement these options.

The replay option erases any decisions you have made in the current period and moves you back one period. You can only replay to the immediately preceding period, so you can’t, for example, replay from Year 5 to Year 3, but you may be able to replay from Year 5 to Year 4 and then from Year 4 to Year 3. Restart will erase everything you’ve done in the simulation for all periods, placing you back at the beginning. Note that replaying and restarting is different than using the period selector to view previous years. The period selector is for viewing your history, while the replay and restart options are for changing previous periods’ decisions.

 

 

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Market Segment Descriptions

In the over-the-counter cold and allergy market, segments are typically based on how products are labeled. This segmentation approach, however, fails to account for cross-usage of products. For example, a cold medicine might be used to relieve allergy symptoms. In PharmaSim the customer survey allows you to view the market using two additional segmentation options: illness and demographics. This section describes each of the segments in the simulation.

Product Segments

The trade segments the market based on product labels. This is the segmentation approach used on the Manufacturer Sales report for calculating market shares in each category. View the Brand Formulations report to see how each brand is labeled.

Cold Cold products are designed to relieve one or more cold symptoms. They tend to have a decongestant for nasal congestion, with an antihistamine for runny nose. Some will have an analgesic to relieve aches and fever, and some might add a cough suppressant or expectorant to relieve both cough and cold symptoms. All products labeled for colds, except nasal sprays, are included in this category on the report. You could broaden the cold category by including the sprays or narrow it by breaking out the multi-symptom products (such as Allround) and children’s cold medicines.

Cough Cough medicines contain a cough suppressant or an expectorant to relieve cough symptoms. Cough suppressants work by inhibiting the cough reflex. Expectorants help improve the effectiveness of a cough by loosening phlegm in the throat. All brands labeled as cough medicine are included in this category.

Allergy Allergy products contain an antihistamine to relieve sneezing, itchy eyes, and runny nose. Although some cold medicines may contain an antihistamine, only products labeled for allergy use are included in this category.

Nasal Spray This category is based on the delivery method, rather than the symptoms it is intended to relieve. Nasal sprays contain a decongestant to reduce swelling in the nose from increased production of fluid and mucous. They provide quick relief compared to a capsule decongestant but should not be used for extended periods of time.

 

 

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Illness Segments

Segmenting consumers based on illness, or how they want to use the product, is useful for identifying groups of customers who have similar needs and shopping habits. When the survey data is collected, users are asked what illness they are suffering from, and results can be viewed for each category or combination of categories.

Cold Colds have a wide range of symptoms, including sore throat, cough, runny nose, sneezing, and nasal congestion. A slight fever and some aching or tiredness are also possible. Cold sufferers use a wide range of products for relief, including products not labeled for colds. They may take medication for specific symptoms—for example, an antihistamine for runny nose or a pain reliever for aches—or they may take a cold medicine that relieves a full range of symptoms. Users seek cold products in capsule, liquid, or spray form, depending on the symptoms and how they are used. For example, capsules are easily carried around and are most convenient for use away from home, while liquids might be fine for home use. Adult formulas are not recommended for children, but some parents may give them a reduced dose of a liquid cold medicine if a children’s product is not available. Some cold suffers may use home remedies, while others may just put up with the symptoms until they get over the cold.

Cough A cough can occur with a cold or other infectious disease, or it may be in response to environmental conditions. Sufferers may take a cough medicine by itself or along with a cold product. Some may prefer a multi-symptom product to relieve cough and cold symptoms. For a dry cough, users may prefer a cough suppressant. If a cough is accompanied by a buildup of mucous, users may prefer an expectorant to help relieve the congestion. Expectorants may also be preferable for children for a more productive cough and reduced risk of side effects.

Allergy Allergies are caused by a wide range of environmental factors, including foods, pets, and pollens. Symptoms include sneezing, runny nose, and itchy, watery eyes. Symptoms may also include congestion. Most sufferers look for an antihistamine, though it may cause drowsiness, which is an issue for use when working or driving. There may be some cross-usage of cold medicines, especially if allergy medicines are priced high and lower-priced cold medicines with similar formulas are available.

 

 

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Demographic Segments

Demographic characteristics are useful for identifying potential users of your product. In PharmaSim the demographic segments are based on family life cycle and age. Consumers in each of the segments will tend to be looking for a different mix of OTC cold and allergy medicines.

Young Singles Consumers in this segment are young adults living on their own and without families to care for. About half the purchases made by young singles are to help them get through the day at work, when convenience and minimizing side effects are important. When using a product at home, they usually just want something to relieve their symptoms and help them rest.

Young Family Young families are made up of adults with small children, where most are younger than 12 years of age. These consumers buy products for a variety of users: children, working adults, and adults staying home to recover from illness. Most parents prefer liquid medicines with appropriate dosage for their children and are concerned about side effects. Convenience and effectiveness may be more important for adult users.

Mature Family Most of the children in mature families are 12 years of age or older. There is a smaller need for children’s products compared to the Young Family segment, since older children will be using adult formulas. For working adults, convenience and minimizing side effects will be important. This category tends to have many at-home users, since older children will likely stay home from school if they are sick.

Empty Nester The empty nest is made up of older adults with no children at home. Usage is split between products for use at work, and products for getting rest at home. For work, convenience and minimal side effects are important. On the other hand, taking a product at home that makes the user drowsy can be a plus.

Retired Consumers in this segment are older, retired adults. Retired users have a higher preference for liquid medicines compared to other adults and price can be an important factor in their decision. They tend to be brand loyal in their purchase of OTC cold medicines.

 

 

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Distribution Channel Descriptions

Getting your product to where your target customers shop is important to the success of your brand in PharmaSim. To allocate marketing resources efficiently, you will need to understand your collaborators in the channel.

Independent Drug Stores These retail stores consist of small pharmacies selling prescription and OTC medicines, as well as other household items. They tend to order from the manufacturer in smaller volumes or buy product through a wholesaler. Markups are high. Co-op advertising can be important for independent drug stores because their marketing budgets are limited.

Chain Drug Stores Chain drug stores are pharmacies that have a single owner with some central management and a shared distribution system. Smaller chains buy through a wholesaler or in small volumes from the manufacturer. Most larger chains will buy direct. Sales force support and promotion allowances tend to be important for these retailers. Markups are in the mid-range for retailers.

Grocery Stores Grocery stores primarily sell food to consumers but may also sell medicine and household items. Some smaller grocery stores will buy through wholesalers, but most will buy direct in medium to high volumes. Like chain drug stores, sales force support and promotion allowances are important factors in their decision to carry a brand. Markups are in the mid-range for retailers.

Convenience Store These stores are small retailers that stock a range of items; they have long hours and locations that are convenient to their customers. Shelf space is limited, so turnover is important when deciding on the brands to carry. Some stores may buy direct, but most will buy through a wholesaler. Markups are high.

Mass Merchandisers Mass merchandisers are large retail outlets that generally offer discount prices on items and have a high level of sales. Most buy product direct from the manufacturer in medium to high volumes. Mass merchandisers attract customers with low prices, and turnover is important when allocating shelf space.

Wholesalers Wholesalers do not sell to the end consumer; they buy product from different manufacturers and resell it to retailers. They serve smaller retail outlets and more rural areas, providing their own sales force to sell the many product lines they carry. High volume discounts and promotion allowances are important to wholesalers.

 

 

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Glossary

Term Definition

Administrative Costs Expenditures arising from the administration of a product, including some fixed overhead costs, some variable expenses, and some expenses related to the number of orders placed.

Advertising Any paid form of non-personal presentation and promotion of ideas, products, or services by an identified sponsor.

Advertising Message

The point that an advertisement is trying to make, whether to stimulate overall demand for a product group, stress the benefits of the product, compare with other brands, or maintain awareness.

Average Retail Price

The average price for a product charged by retailers, including both those stores with higher prices because of increased personal service, exclusive merchandise lines, attractive store atmosphere, special promotions, convenient location, and/or special services as well as those stores that offer a no-frills, low-price approach.

BCG Growth-Share Matrix

A model developed by the Boston Consulting Group in the 1960s that summarizes a company’s market position. The matrix displays strategic business units (SBUs) on a two- dimensional grid. The horizontal axis gives market share relative to the industry’s largest competitor, whereas the vertical axis represents the growth rate of the market. The placement of an SBU on the grid indicates its cash flow position: Cash Cow, Dog, Question Mark, or Star.

Brand Awareness The level of consumer familiarity with a product, brand, or promotional vehicle. Brand Formulation The physical structure or ingredients of a product or service.

Brand Image The meaning consumers give to a product, based on the perceived benefits that the product provides.

Brand Loyalty A favorable attitude toward, and exclusive purchase of, a brand over time.

Break-Even Analysis

An attempt to determine the volume of sales necessary (at various prices) for the manufacturer or merchant to cover costs or to make revenue equal costs. Break-even analysis is useful to help set prices, estimate profit or loss potentials, and determine the discretionary costs that should be incurred.

Cannibalization Sales of a new product that decrease sales of another product in the product line.

 

 

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Term Definition

Capacity Utilization The extent to which the physical production ability of a plant facility is being used. Normally described as a percentage of total capacity (e.g., 50 percent of capacity).

Channel of Distribution Any firm or individual participating in the flow of products and services as they move from producer to user (consumer or industrial).

Checkout Coupon A coupon printed at the cash register based on your purchases. These coupons are sometimes called “catalinas” after a company that distributes them.

Cooperative (Co-op) Advertising

An agreement in which a manufacturer pays a portion of a retailer’s local advertising costs.

Consumer Promotion Promotional activities aimed at the consumer, including trial sizes of products, coupons, and point-of-purchase displays.

Conversion Ratio Of those consumers aware of a brand, the percentage that have tried the brand (i.e., % trials / % aware). Contribution After

Marketing The dollar amount remaining after subtracting total marketing expenditures from the gross margin.

Cost of Goods Sold The total variable manufacturing cost of producing a product.

Coupons A promotional technique designed to convince consumers to purchase a product by offering an individualized discount on the price of the item.

Demand The desire of consumers for a certain product.

Demography The study of people in the aggregate, including population size, age, income, occupation, and gender.

Detailers Part of the indirect sales force that calls on doctors and pharmacists to provide information about their brand and to introduce new products to consumers.

Digital Coupon A coupon that is distributed electronically. Some types can be printed. Digital Marketing Advertising and promotion done through the internet.

Direct Channel The distribution flow of a product directly from manufacturer to retail outlet.

Direct Sales Force

The portion of a sales force selling directly to retail outlets. The direct sales force maintains relationships with current retail accounts, develops new retail accounts, presents trade promotions and allowances, and introduces new products to retailers.

Display Advertising Internet-distributed advertising that incorporates images. An example is a banner ad.

 

 

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Term Definition

Experience Curve Pricing A price-setting method using a markup on the forecasted average total cost, which accounts for cost trends as sales volume accumulates.

Fixed Costs

The unchanged financial obligations of a firm regardless of the number of units of a product that are produced and marketed, including amortization charges for any capital equipment and plants as well as such charges as rent, executive salaries, property taxes, and insurance.

Geo-demographics The neighborhood clustering of people with similar economic and cultural backgrounds and perspectives.

Gross Margin Revenue less the cost of products sold. (Price â’ Unit Cost) Ă— Units Sold

Income Statement A report of a firm’s overall results for a period, including a breakdown of major expenditures and a calculated value of the net income.

Indirect Channel A distribution channel from manufacturer to retail outlet by way of a wholesaler, merchandiser, or detailer.

Inflation A general rise in the prices that people must pay for products and services.

Keyword

In digital marketing, words or phrases related to a company’s message and/or target consumer. Keywords are used to place advertising or promotions in a relevant context (e.g., a sponsored search result).

Line Extensions The introduction of new flavors, sizes, or models to an existing brand within an existing product category.

Manufacturer Sales Receipts from all sales, both direct and indirect, net of volume discounts.

Margin The difference between the price of a product and its per-unit cost.

Market People or businesses with the potential interest, purchasing power, and willingness to buy a product or service that satisfies a need.

Market Penetration The percentage of actual sales of a product category in relation to the total sales possible in a market.

Market Share The percentage of sales of a product in a market in relation to other products in that market (i.e., Brand X sales Ă· total sales in market).

Marketing

The process of planning and executing the conception, pricing, promotion, and distribution of ideas, products, and services to create exchanges that satisfy individual and organizational needs or wants.

 

 

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Term Definition

Marketing Efficiency Index

The ratio of net income divided by marketing expenditures (budget spent on advertising, promotion, and sales force). This does not include promotional allowances because it is viewed as a discount to the channel.

Marketing Research The systematic and objective approach to the development and provision of information for marketing decision-making.

Markup Pricing A price-setting method common in wholesaling and retailing that adds a markup to average total or variable cost.

Mass Merchandisers Very large retail outlets that generally offer discount prices on items and have a high level of sales.

Media Type The distinction between broad classes of media, such as internet, newspapers, magazines, television, radio, etc.

Merchandisers Part of the indirect sales force that provides special support to retailers for in-store activities, such as shelf location, pricing, and compliance with special programs.

Net Contribution The contribution after marketing less fixed costs.

Net Income The profit remaining after all costs are subtracted from revenues.

Over-the-Counter (OTC) Medicine

A drug a consumer can legally acquire without a prescription from a physician. This is in contrast to an ethical drug, which requires a prescription.

Point-of-Purchase Promotion (POP)

A special display, rack, sign, banner, or exhibit placed in a retail store to support the sales of a brand.

Portfolio Analysis A way of classifying businesses or products, normally using the dimensions of market attractiveness (e.g., growth) and business position (e.g., relative market share).

Price The amount of money a seller requires to provide products or services to a customer.

Price Structure The use of discounts, allowances, and freight cost absorption in determining price. Primary Demand

Stimulation Advertising intended to affect demand for a product category and not a specific brand.

Product Life Cycle The stages that a product goes through during its time on the market, including introduction, growth, maturity, and decline. Product Mix All the products available from an organization.

Promotion The communication mechanism of marketing designed to inform and persuade consumers to purchase.

Promotional Allowance

Reduction in the actual price paid by a channel member resulting from an agreement to participate in promotional activity. In PharmaSim promotional allowance is entered as a percent of the discounted price.

 

 

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Term Definition

Purchase Intentions A product or brand consumers intend to purchase before they actually enter the retail outlet to make a purchase.

Quality All features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs.

Reformulations Changes in the physical formulation of a brand to make the product more desirable to the consumer.

Reminder Advertising An advertising message designed to maintain awareness and stimulate repurchase of an already-established brand.

Research and Development A portion of a firm designated to research, analyze, and design products to meet consumer and market needs.

Retailer A merchant whose main business is selling directly to consumers for personal, non-business use.

Retention Ratio The proportion of consumers who have tried a brand and repurchase the product.

Return on Marketing The ratio of net income divided by marketing expenditures (as a percent). Marketing expenditures are budget spent on advertising, promotion, and sales force.

Return on Sales The ratio of net income divided by manufacturer sales (expressed as a percent).

Sales Force Employees hired to promote and sell a manufacturer’s product through direct or indirect channels.

Search Engine Marketing

Methods used to direct people doing web searches to your content. The methods are adjusting your content to get it higher in search results (Search Engine Optimization, or SEO) and paying for prominent position in the results (Pay Per Click, or PPC).

Segmentation The process of dividing large heterogeneous markets into smaller homogeneous segments of people or businesses with similar needs and/or responses to marketing mix offerings.

Sensitivity Analysis Calculating and comparing the financial effect of various sales and cost scenarios. In PharmaSim this can be done using the “What If..” tool.

Share of Channel Sales Market share segmented by the type of retail outlet.

Shelf Space

The amount of space allocated to a product for display on retail store shelves. Shelf space often depends on the sales and profit potential of the product as well as special arrangements between the store and manufacturer.

Shopping Habits Consumer shopping preferences, including product and retail preferences.

 

 

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Term Definition

Social Media Internet-based services that allow people to share content (text, images, video, etc.) and connect that content with other people and content on the service.

Strategic Business Unit (SBU)

A unit within an organization that includes a distinct set of customers and competitors, has separate costs, and has the ability to undertake a separate strategy.

Trade Publications

Publications that target a particular industry. Often these are generated by trade associations and contain articles of interest to the industry as well as general market research and competitive information.

Trade Rating A summarized result from a survey of retailers and wholesalers on trade support and practices offered by your company. The trade rating value is scaled from 1 to 10, where 10 is best.

Unit Sales The total volume of units sold by a manufacturer in a market. Usage Rates How often a product is used/purchased per period.

Variable Costs Costs tied directly to production, including direct labor and raw materials charges.

Volume Discount Reduction of list price based on the quantity a buyer purchases. May be based on a specific purchase (non- cumulative) or on total purchases over a period (cumulative).

Wholesale Price A special discount price offered to wholesalers to encourage them to purchase and sell merchandise in large quantities.

Wholesaler A business unit that buys and resells merchandise to retailers, other merchants, and/or industrial, institutional, and commercial consumers.

 

 

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Image Attribution

Description Location Attribution Cover i iStock.com/PeopleImages Introduction section heading 1 iStock.com/Kwangmoozaa Case section heading 5 iStock.com/Yuri_Arcurs Marketing Management Process section heading 25 iStock.com/shironosov Appendix section heading 45 iStock.com/jayfish

 

 

 

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Index

A actual market ………………………………………………………….. 31 advertising ……………………………………………………………… 15

agencies …………………………………………………………….. 15 campaign …………………………………………………………… 42 message ……………………………………………………….. 15, 42

alcohol …………………………………………………………………… 10 Allround …………………………………………………………………. 10

discounts …………………………………………………………… 14 price ………………………………………………………………….. 14

Allstar Brands background ………………………………………………………….. 6 organizational chart ………………………………………………. 7 Pharmaceuticals Division ……………………………………….. 6

assistant brand manager, role of …………………………………. 8

B benefits approach ……………………………………………………. 15 brand

awareness ………………………………………………………….. 15 brand assistant, role of ………………………………………………. 8 brand manager, role of ………………………………………………. 8 Brewster, Maxwell, and Wheeler ………………………………. 15 budget ……………………………………………………………………. 43

C channels of distribution ……………………………………………. 17 comparison approach ………………………………………………. 15 competition

analysis ……………………………………………………………… 44 consumer

brand awareness ………………………………………………… 42 consumer survey ……………………………………………………… 12 co-op advertising ……………………………………………….. 16, 18 coupons ……………………………………………………………. 16, 42 cross-usage of brands ………………………………………………. 11

D demand ………………………………………………………………….. 29 OTC remedies …………………………………………………………… 7 detailers …………………………………………………………………. 17 direct channel …………………………………………………………. 17 direct sales force ……………………………………………………… 17

distribution ………………………………………………….. 22, 32, 39

E environment …………………………………………………………… 28

F fixed costs………………………………………………………………. 21

G gross margin ……………………………………………………… 21, 40

I indirect channel ………………………………………………………. 17 indirect sales force ………………………………………………….. 17 instant relief products ……………………………………………… 10

L Lester Loebol & Company ………………………………………… 15 line extension …………………………………………………………. 19

M manufacturer suggested retail price (MSRP) …………. 39, 40 margin …………………………………………………………………… 21 market penetration …………………………………………………. 31 market research ……………………………………………………… 12 market share by product category …………………………….. 11 market survey

brand awareness, trial, repurchases ……………………… 23 market trade publications ………………………………………… 13 marketing management group …………………………………… 7 marketing plans ………………………………………………………. 44 maximum dosage ……………………………………………………. 10 medication forms ……………………………………………………. 10 merchandisers ………………………………………………………… 17 multi-symptom relief……………………………………………….. 10

N new products …………………………………………………………. 19

 

 

59

O OTC cold/allergy

market categories …………………………………………………. 9 product ingredients ………………………………………………. 9

overhead charges ……………………………………………………. 21

P point-of-purchase displays…………………………………… 16, 42 potential market ……………………………………………………… 31 prescription drugs ……………………………………………………. 19 price

competitive………………………………………………………… 39 importance ………………………………………………………… 39

pricing ……………………………………………………………………. 22 primary demand stimulation …………………………………….. 15 product

development ……………………………………………………… 19 duration …………………………………………………………….. 10 line extension …………………………………………………….. 19 new …………………………………………………………………… 19 reformulation …………………………………………………….. 19 turnover …………………………………………………………….. 18

product choice ………………………………………………………… 22 profitability …………………………………………………………….. 22 promotion ………………………………………………………………. 22 promotion allowance …………………………………….. 14, 16, 18 promotion strategy ………………………………………………….. 42

R reformulate product ………………………………………………… 19

reminder advertising ……………………………………………….. 15 research and development ………………………………………. 19 retail

advertising ………………………………………………………… 16 price …………………………………………………………………. 40

retention ratio ………………………………………………………… 13

S sales force ……………………………………………………………… 18

hiring ………………………………………………………………… 17 segmentation …………………………………………………………. 31 share of manufacturer sales ……………………………………… 32 shelf space …………………………………………………… 18, 39, 40 simulation

playing levels ……………………………………………………….. 2 stock turnover rates ………………………………………………… 39 strategic business unit ……………………………………………… 28 strategic business unit (SBU) …………………………………….. 56 Sully & Rodgers ………………………………………………………. 15 symptoms, cold/allergy ……………………………………………… 9

T targeting ………………………………………………………………… 15

segments …………………………………………………………… 42 training cost……………………………………………………………. 17 trial size ……………………………………………………………. 16, 42

U usage rates …………………………………………………………….. 31

 

 

  • Introduction
    • PharmaSim Quick Start Guide
    • PharmaSim Manual
  • Case
    • The Company
      • The Brand Management Group at OCM
    • The OTC Medicine Industry
      • Cold Remedy Market
      • Brand Formulations
      • Market Segmentation
      • Survey Data
      • Other Marketing Research
    • OTC Medicine Marketing
      • Pricing and Promotional Allowances
      • Advertising
      • Promotion
      • Sales Force
      • Channel Choices
    • Internal Product Development
      • Product Development Schedule
    • Financial Situation for the OCM Group
    • The Marketing Task
    • Sample Market Survey Questionnaire
      • Market Survey Questionnaire
        • Purchase Information
        • Satisfaction
        • Decision Criteria
        • Brand Perceptions / Trade-offs
        • Segment Information
  • Marketing Management Process
    • Situation Analysis
      • Context
      • Competitors
      • Customers
      • Collaborators
      • Company
      • SWOT Analysis
    • Marketing Strategy
      • Monitoring Results Against Plan
    • Marketing Mix
      • Product
      • Place (Distribution)
      • Pricing
      • Promotion
      • Push/Pull Implementation Strategies
      • How Best to Allocate a Limited Budget Across Brands
    • Conclusion
  • Appendix
    • Using PharmaSim in a Group
      • Team Leader
    • Market Segment Descriptions
      • Product Segments
        • Cold
        • Cough
        • Allergy
        • Nasal Spray
      • Illness Segments
        • Cold
        • Cough
        • Allergy
      • Demographic Segments
        • Young Singles
        • Young Family
        • Mature Family
        • Empty Nester
        • Retired
      • Distribution Channel Descriptions
        • Independent Drug Stores
        • Chain Drug Stores
        • Grocery Stores
        • Convenience Store
        • Mass Merchandisers
        • Wholesalers
    • Glossary
    • Image Attribution
    • Index
 
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Case 8.5: Union Discrimination

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Read then answer question

Union Discrimination

THE NATIONAL RIGHT TO WORK LEGAL DEFENSE Foundation is one of several anti-union organizations that have been active in recent years. The “right to work,” in this context, means the alleged right of an individual to work without being obliged to join a union or pay union dues. To put it the other way around, it means that companies cannot sign contracts with unions agreeing to hire only workers who are willing to join the union or at least to pay the equivalent of union dues.

What follows is one of the Foundation’s advertisements, titled “Job Discrimination … It Still Exists”:89

Paul Robertson is not a member of a persecuted minority. But he has experienced blatant discrimination all the same because he has chosen not to join a union.
Paul Robertson is a working man, a skilled licensed electrician with more than twenty years’ experience. He found out the hard way how a big company and a big union can discriminate on the job.
Paul was hired by the Bechtel Power Corporation to work on their Jim Bridger Power Plant project in the Rock Springs, Wyoming, area. Only three months later, he was fired, supposedly because of a reduction in force.
But during the week preceding his discharge, Bechtel hired at least nineteen union electricians referred by the local union and retained at least sixty-five unlicensed electricians.
A determined Paul Robertson filed unfair labor practice charges against the company and the union.
An administrative law judge ruled and was upheld by the full National Labor Relations Board that the union and the employer had indeed discriminated. The judge ordered that Robertson and seven other electricians be given the back pay they would have earned if they had been treated fairly.
The NLRB later reversed part of its decision, but Paul Robertson did not give up. With the help of the National Right to Work Legal Defense Foundation, he appealed the Board’s decision to the U.S. Court of Appeals, arguing that hiring hall favoritism is discriminatory and unlawful.
Paul Robertson was fortunate. He found experienced legal help—all important because the case dragged on for nearly four years in the courts and the union still refused to obey the NLRB’s back-pay order.
The National Right to Work Legal Defense Foundation is helping everyone it can—currently in more than seventy-five cases involving academic and political freedom, protection from union violence, and other fundamental rights. But it would like to do even more.
If you’d like to help workers like Paul Robertson write to: The National Right to Work Legal Defense Foundation….

(Shaw)

Shaw, William H. Business Ethics: A Textbook with Cases,  8th Edition. Cengage Learning, 20130101. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

1. Assuming the Foundation’s description of the case is accurate, was Paul Robertson treated unfairly? Was this a case of discrimination? If Robertson was an “at-will” employee, does he have any legitimate grounds for complaint?

2. Does it make a difference to your assessment of the case whether someone like Robertson knows, when he accepts a job, that he must join the union or that non-union employees will be the first to be laid off?

3. If union employees negotiate a contract with management, part of which specifies that management will not hire non-union employees, does this violate anyone’s rights? Would a libertarian agree that the resulting union shop was perfectly acceptable?

4. Presumably Paul Robertson could have joined the union, but he chose not to. What principle, if any, do you think he was fighting for? Assess the union charge that people like Paul Robertson are “free riders” who want the benefits and wages that unionization has brought but try to avoid paying the dues that make those benefits and wages possible.

5. What do you see as the likely motivations of Bechtel Power and the union? How would they justify their conduct?

6. Why did the Foundation run this ad? Is the ad anti-union propaganda? Do you think the Foundation is sincerely interested in the rights of individual workers? Or is it simply interested in weakening unions vis-à-vis management?

7. Assess union shops from the moral point of view. What conflicting rights, interests, and ideals are at stake? What are the positive and negative consequences of permitting union shops?

 
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Go Venture Ceo

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GoVenture Simulation Debrief In addition to the draft strategic plan, you are required to submit a 10-page maximum paper discussing their strategic plan. It must contain, at a minimum, the following topic areas:  Discuss the original strategy, the plan and original financial targets  Identify issues related to the original strategy and underlying assumptions o Stakeholders o Key Assumptions o Strategy with Potential / Desired Outcomes  What occurred in subsequent decision rounds – did you have to modify your approach or assumptions and why/why not?  Financial Debriefing – did you achieve your financial goals and why/why not?

GBA 498 GoVenture CEO Simulation Guidelines and Rubric During the course of the semester, you will be participating in an on-line PC-based exercise in head-to-head competition against their classmates and computer-based participants. Access to the simulation can be attained by going to www.goventureceo.com and following the student registration. However, before registering you will need a company ID that is provided by your instructor. Your instructor will notify you of which group you are a member of, along with the simulation number required to participate. There are three components of this project:

1. Weekly decision rounds 2. Draft of 3-Year Strategic Plan (This Dropbox basket is linked to Turnitin.) 3. GoVenture Simulation Debrief (This Dropbox basket is linked to Turnitin.)

Decision Rounds Practice Simulation – Decision Rounds

• All companies start out on the same footing – with equal resources • Each decision round represents a year • You can advance each year manually

Full Simulation – Decision Rounds

• All companies start out on the same footing— with equal resources • Each decision period in represents a year. Periods will be advanced by the instructor. • You will make variety of decisions each period relating to product pricing, R&D, sales

and marketing, and targeting different consumer profiles and market territories. • In addition, there is accounting and cost data to examine. • The overall goal of the your company is to achieve net profitability, a comprehensive

measure that accounts for a combination of profitability and the different ways in which you can raise capital.

• Your cumulative rank score is calculated based on the company’s achievement of each of the ten performance targets are as follows (more detail on the calculations is contained in GoVentureCEO):

• Rank • Achievements achieved compared to other businesses • Trends – percentage of periods where your performance score stayed the same

or increased • Profit – total profit earned compared to other businesses • Revenue – total revenue earned compared to other businesses • Product competitiveness – combination of price, brand, and R&D scores • Inventory Management – percent of missed unit sales compared to units sold • Marketing – total brand equity scored • Advertising – advertising effectiveness score • HR Management – HR Score • Cumulative rank score (out of 100)

• The total score is composed of an average of your cumulative rank score, scaled market share, scaled price competitiveness, scaled advertising effectiveness, scaled web site usability, and scaled revenues. Note the raw scores in each of these areas is scaled based on your performance relative to the other groups in the simulation.

 

 

 

Draft 3-Year Strategic Plan After year 3 in the simulation, you are required to submit a three-year strategic plan that will cover the remaining three years (years 4, 5, and 6). Preparation of a 3-Year Strategic Plan involves:

1. Stating a strategic vision for the company in a brief paragraph. What is it that you are striving for? Think of this as your team’s vision statement – what are your broad goals for the next three years?

2. An introductory paragraph that discusses where your team is in the simulation – what have you done up until now, what has been driving your decisions, what is your performance like? Just provide an idea of your current status in the simulation.

3. Based on (2) above, discuss your current strategy and note whether your current strategy is either on track or will require substantial internal changes;

4. Declare what strategy the company will employ, why you chose the strategy, and how you will deploy it. This will be based on your current status in the simulation and you will choose a strategy based on improving your status. This is not an action, but a specific strategy (e.g. market development, product development, market penetration, etc.); and

5. Establishing financial objectives for total revenue, profits, cash flow, and stock price appreciation for each of the next three years. You should also have a projected income statement that lays out expected unit sales, revenues, costs, and profits for each of the three geographic regions for the each of the next three years. When you create your financial projections, be sure that you state your assumptions as well.

GoVenture Simulation Debrief In addition to the draft strategic plan, you are required to submit a 10-page maximum paper discussing their strategic plan. It must contain, at a minimum, the following topic areas:

ď‚· Discuss the original strategy, the plan and original financial targets

ď‚· Identify issues related to the original strategy and underlying assumptions o Stakeholders o Key Assumptions o Strategy with Potential / Desired Outcomes

 What occurred in subsequent decision rounds – did you have to modify your approach or assumptions and why/why not?

 Financial Debriefing – did you achieve your financial goals and why/why not? Deliverables All deliverables are due no later than Sunday 11:59 PM EST/EDT of each module.

Module GoVenture Simulation

1 2 Practice Rounds + 1 Decision Round

2 Decision Round 2

3 Decision Round 3

4 Decision Round 4 Draft of 3-Year Strategic Plan

5 Decision Round 5

6 Decision Round 6

8 GoVenture Simulation Debrief

 

 

GoVenture CEO Simulation Debrief Grading Rubric

Content

Points Earned

Comments:

Original Plan Discussed: ď‚· Original Strategy ď‚· Original Financial Targets

/ 25

 

Original Strategy Discussion: ď‚· Identify issues related to

strategy ď‚· Evaluates assumptions ď‚· Recognizes stakeholders and

relationships to the strategy ď‚· Frames a concrete strategy

and acknowledges potential outcomes

/ 25

Strategy Debriefing: ď‚· What occurred in subsequent

decision rounds ď‚· Did strategy have to be

modified

/ 25

Financial Debriefing: ď‚· How did you perform vs goals?

/ 25

Total / 100

 

 

Grading Rubric Limited Proficiency Some Proficiency Proficiency High Proficiency

Level 4 Level 3 Level 2 Level 1

Grading Rubric for Strategic Plan Component Within GoVentureCEO

Identifies & Explains Issues Related to Company’s Strategic Plan

Fails to identify or explain main issues or topics relevant to the company’s strategy. Presents the issues or topics inaccurately or inappropriately.

Identifies main issues or topics relevant to the company’s strategy, but does not explain them clearly or sufficiently.

Successfully identifies and summarizes main issues and topics relevant to the company’s strategy, and weakly explains how to deal with these issues or topics.

Clearly identifies and summarizes main issues and explains how to deal with them by addressing the company’s strategy.

Evaluation of Facts and Information Used in Developing Strategy

Fails to identify facts and information that counts as evidence used in developing strategy and fails to evaluate its credibility.

Successfully identifies some facts and information that counts as evidence used in developing strategy but fails to thoroughly evaluate its credibility.

Identifies the majority of important facts and information used as evidence in developing strategy and rigorously evaluates it.

Identifies all facts and information used as evidence in developing strategy and provides additional data or information for consideration.

Recognizes Stakeholders and their Relationships to Strategy (including all employees, political, shareholders, community, vendors, environment, and ethical)

Fails to accurately identify any relevant stakeholders and their contexts to the issues. Presents problems as having no connections to stakeholders.

Shows some general understanding of the stakeholders and their contexts to the issues but does not identify any specific ones relevant to situation at hand.

Correctly identifies all the stakeholders and their contexts to the situation but only addressed a limited few.

Correctly identifies all the stakeholders and their contexts to the situation and also identifies minor stakeholders and their contexts to the company’s strategy.

Frames a Concrete Corporate Strategy and Acknowledges Possible Outcomes

Fails to formulate and clearly express corporate strategy and/or fails to anticipate possible outcomes.

Formulates a vague and indecisive corporate strategy and/or vaguely describes possible outcomes.

Formulates a clear and precise corporate strategy, but addresses the company’s strengths, weaknesses, opportunities, and threats only lightly.

Not only formulates a clear and precise corporate strategy, but also addresses the company’s strengths, weaknesses, opportunities, and threats in detail.

 

 

Adequately Discusses Strategic Outcomes and Deviations From Plan

Fails to identify and evaluate any of the important issues and/or outcomes in subsequent decision rounds and their effects on the company’s strategy and resulting deviations from the initial plan.

Identifies some of the most important issues and/or outcomes in subsequent decision rounds and their effects on the company’s strategy and resulting deviations from the initial plan.

Identifies and evaluates the majority of important issues and/or outcomes in subsequent decision rounds and their effects on the company’s strategy and resulting deviations from the initial plan.

Identifies and evaluates the all important issues and/or outcomes in subsequent decision rounds and their effects on the company’s strategy and any resulting deviations from the initial plan.

Adequately Discusses Initial Financial Targets and Performance Relative to Plan

Fails to discuss any of the financial targets along with justification and assumptions. Fails to address any of the issues related to deviation of performance vs. goals.

Discusses most of the financial targets along with justification and assumptions. Identifies most of the issues related to deviation of performance vs. goals.

Discusses the majority of financial targets along with justification and assumptions. Identifies the majority of issues related to deviation of performance vs. goals.

Discusses all financial targets along with justification and assumptions. Identifies all issues related to deviation of performance vs. goals.

Level 4 Level 3 Level 2 Level 1

0 – 69 70 – 79 80 – 89 90 – 100

Points Given – 100 Point Scale

 

 

 

 

 

 

Grading Rubric for Student Performance in GoVentureCEO

Grading Rubric Limited Proficiency Some Proficiency Proficiency High Proficiency

Level 4 Level 3 Level 2 Level 1

Time Spent Online Working With GoVenture CEO Simulation

Less than 1 hour per week Between 1 – 1.5 hours per week

Between 1.5 – 2.5 hours per week

More than 2.5 hours per week

Student Discussion Question Posts (Optional)

Fails to identify or explain main issues or topics relevant to the discussion question. Presents the issues or topics inaccurately or inappropriately.

Identifies main issues or topics relevant to the discussion question but does not explain them clearly or sufficiently.

Successfully identifies and summarizes most of the main issues and topics relevant to the discussion question.

Clearly identifies and summarizes all the main issues and explains how to deal with them within the context of the discussion question.

Cumulative Results – Scaled Revenue

Score 0 – 49 Score 50 – 64 Score 65 – 79 Score 80 – 100

Cumulative Results – Scaled Market Share

Score 0 – 49 Score 50 – 64 Score 65 – 79 Score 80 – 100

Cumulative Results – Scaled Price Competitiveness

Score 0 – 49 Score 50 – 64 Score 65 – 79 Score 80 – 100

Cumulative Results – Scaled Advertising Effectiveness

Score 0 – 49 Score 50 – 64 Score 65 – 79 Score 80 – 100

Cumulative Results – Scaled Web Site Usability

Score 0 – 49 Score 50 – 64 Score 65 – 79 Score 80 – 100

Cumulative Results – Scaled Cumulative Rank

Score 0 – 49 Score 50 – 64 Score 65 – 79 Score 80 – 100

Level 4 Level 3 Level 2 Level 1

Points Given – 100 Point Scale

0 – 69 70 – 79 80 – 89 90 – 100

Score

 

 

Sample Spreadsheet for Calculating Scaled Grades in GoVenture CEO

 

 

Cumulative Rank Mkt Shr Competitiveness Site Usability $Million

Group Score Scaled % Scaled Price Scaled Score Scaled Adv. Effect. Rev Scaled Total Score

One 66 93% 8% 100% 30% 60% 94% 100% 100% 24.626 100% 92%

Two 58 82% 4% 50% 50% 100% 80% 85% 100% 13.010 53% 78%

Three 71 100% 7% 88% 30% 60% 94% 100% 100% 23.801 97% 91%

Four 55 77% 1% 13% 9% 18% 88% 94% 100% 10.593 43% 57%

Five 49 69% 0% 0% 0% 0% 72% 72% 100% 3.134 13% 42%

Cumulative Rank: One Two Three Four Five

Rank 2 1 1 1 1

Achievements 5 8 4 2 1

Trends 9 9 9 9 9

Profit 1 1 1 1 1

Revenue 8 10 7 6 2

Product Competitiveness 6 6 5 4 3

Inventory Managment 10 10 10 10 10

Marketing (Brand Equity) 5 6 1 2 2

Advertising 10 10 10 10 10

HR Management 10 10 10 10 10

Total Points 66 71 58 55 49

Percentile Score 93% 100% 82% 77% 69%

Note Percenitle Scores are Calculated As A Percentage of the Highest Group’s Score. All Raw Scores Come from Within GoVenture CEO Reports

 
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