BRANDMAPS FAQ S. Frequently Asked Questions

Transcription

1 BRANDMAPS FAQ S Frequently Asked Questions 1

2 Opening New Market Regions Permanent Marketing Research For "All" Regions [1] "After opening a new market region, one of my teams has reported that they are not receiving some marketing research results for the new region. They previously specified 'all' markets when ordering Marketing Research Study #36 and everything was fine up to the most-recent quarter (when I opened a new market). What's going on here?" [2] "I've opened a new market region and marketing research studies on permanent order are not executing for the new market region. Why is that?" When you open new regions, the "all" regions designation for some marketing research studies does not adjust automatically. Software flags are set for each market region is existence at the time the "all" pre-order is made. However, there's no way to read students' minds regarding what is intended with the use of the "all" designation. Does "all" mean every market region all of the time or does "all" mean all of the current market regions at the time the permanent marketing research order was executed? Rather than guess, the software makes no changes in the original "all" market regions designation. Advise your students to re-enter data for marketing research studies where "all" regions had been previously ordered permanently and for which it is desired that "all" continue to refer to all market regions now in existence (after the opening of the new market region or regions). For temporary marketing research ordering, nothing special needs to be done, since the correct breadth of regions will be specified when the next "all" regions order is processed for any marketing research study. Sales Forecasting Sales Forecasting Accuracy and Inaccuracy "Earlier today, I was discussing the team's problems (they're at 75% performance level, losing sales revenue and market share) and they commented about their disenchantment with Marketing Research Study #32 ('Brand Sales Forecasting'). The report before their last decision suggested that for region 3 only about 9,000 units would be sold. As it turned out nearly 20,000 units were sold. This affected not only their sales forecasting accuracy percentage but resulted in a large share of unfilled orders. The current forecasting report shows a low number of unit sales forecast with a relatively small-size error. The students express little faith in the forecast, saying what good is it, and then they use it, in part, to blame why their overall performance in the simulation is bad. My response to them was that the sales forecast uses data as described in the student manual. If there is much variability in industry sales by total and region, forecasting may be less accurate (but the error term should be large also, shouldn't it?) I also told them that the forecast is based on current competitor activity and cannot anticipate what marketing decisions will be forthcoming. Consequently, any new and dramatic 'moves' by competition is not accounted for in the forecast. It is my opinion that they put too much faith in their sales forecast (they request only 3-1

3 4 marketing research studies) and don't temper it with other information available to them or with reasonable intuition. I looked in your instructor's manual to learn what factors go into the sales forecast other than historical industry sales data and environmental factors, but could not find any discussion of the forecasting methodology except what the student manual provided. What competitor activities are factored into the forecast?" The sales forecasting marketing research studies (#31 and #32) are merely short-term extrapolations. As you note, they don't take competitive actions into account, except at the most general level. This group apparently is not reading or not believing what they read. Push them to justify their marketing decisions based on facts, evidence, analysis. Don't let them get away with blaming the marketing research. If the marketing research quality is low, then the students should make their own sales volume forecasts. There's no requirement to purchase any particular marketing research study. Indeed, if the value is lower than the cost, don't do it! My experience with poorly performing teams is to require meetings with me prior to every decision. Make them justify what they are doing and don't let them get away with guessing and seat-of-the-pants decision making. Sales Forecasting Accuracy Score [1] "How is the Sales Forecasting Accuracy Score calculated?" [2] "Our Sales Forecasting Accuracy Score for 5-2 in market region 5 is.00% but we sold 5,165 and had a sales forecast of 15,000. I realize we weren't very accurate but it should be near 30%, not 0. This really hurt our average score and thus impacted our overhead. Why the.00%?" Sales Forecasting Accuracy Score is calculated in two steps. First, sales forecasting error is calculated for each active product in every market region: ERROR={FORECAST-(ACTUAL+UNFILLED)}/ {ACTUAL+UNFILLED} where ERROR is the sales forecasting error (expressed as a proportion), FORECAST is the sales volume forecast, ACTUAL is the actual sales volume, and UNFILLED is the unfilled orders. Second, the Sales Forecasting Accuracy Score, SFAS, is then calculated: SFAS=100*(1-abs(ERROR)) where abs(.) is the absolute value function. Sales Forecasting Accuracy Scores are calculated and accumulated whenever the volume market share for a product in a region exceeds 2.5%. With a forecast of 15,000 and actual sales of 5,165, the associated Sales Forecasting Accuracy Score is calculated as (forecast-{actual+unfilled})/ {actual+unfilled}, adjusted to percentage terms. Relative to actual sales, the forecast was more than 100% in error, thus the.00% Sales Forecasting Accuracy Score. 2

4 Suppose that brand 4-1 in region 2 had a sales forecast of 9,000 and actual sales of 7,779. Applying the Sales Forecasting Accuracy Score definition yields the following result: 100.0*{1-abs(9,000-7,779)/7,779} = 100.0*{1-abs(1,221/7,779) = 100.0*{1- abs(0.1570)} = 100.0*{0.8430} = Sales Forecasting Accuracy Score Reporting on Financial Statements "One of my groups did not get a message about sales forecasting accuracy score for one of the regions on the FINANCIAL AND OPERATING STATEMENT MESSAGES page of the financial results. Their other brands are mentioned but not this one. In the SALES FORECASTING ACCURACY REPORT, this brand is included with an accuracy score of They were concerned about whether by some chance this score was not counted. Are the FINANCIAL AND OPERATING STATEMENT MESSAGES only produced for performance outliers (i.e., for 'very good' or 'very bad' cases) or for all cases?" The FINANCIAL AND OPERATING STATEMENT MESSAGES part of the financial results generally only reports exceptional and noteworthy things. It's meant to be the beginning of an exception accounting style of report. For sales forecasting accuracy, only extremes of sales forecasting performance are noted here. Sales forecasting accuracy only counts (for the purposes of the Sales Forecasting Accuracy Score) when a brand's regional market share is 2.5% or higher. Otherwise, it's too difficult to accurately predict market shares, with a percentage-error loss function. All "recorded" sales forecasts reported within the SALES FORECASTING ACCURACY REPORT have been counted in the determination of the Sales Forecasting Accuracy Score. Sales Forecasts "Are sales forecasts what customers purchase or what dealers are forecast to purchase from manufacturers?" The decision variable "Sales Forecast" refers to what dealers purchase from manufacturers (i.e., manufacturer sales volume). Remember, dealers are the direct customers of vaporware manufacturers, although they are not the final consumers of vaporware. Marketing research studies reference final-customers' purchases of vaporware (i.e., dealers' sales). Thus, marketing research studies that refer to sales forecasts are based on final-customer sales volume. It follows, for example, that "Industry Sales Volume" refers to the sales of all actively-distributed vaporware brands to final customers. Of course, manufacturer sales volume only equals dealer sales volume for a brand if dealers keep constant their vaporware brand inventory. 3

5 Sales Forecasts For Q#2 "How should students make sales forecasts for Q#2? Because of the time lag involved in obtaining marketing research studies, they can not make these forecasts based on the results of Marketing Research Study #31. So, what information should be used to create the Q#2 sales forecast?" If a firm plans no decision variable changes for Q#2, then the best sales forecast for Q#2 is probably current (Q#1) sales levels. A firm planning some decision variable changes (e.g., increasing advertising spending) should take the impact of the changes into account (e.g., an advertising spending increase presumably leads to increases in sales volume). Obviously, the Q#2 sales forecasting problem is a great challenge with very limited data. However, all firms face the same problem so it's at least equitable (if unpleasant) for everyone. The biggest issue here is to look forward and assemble relevant data that will be helpful in making future sales forecasts. Learning is crucial. Unless you know more tomorrow than you do today, you're not moving forward and keeping up with your competitors. Conjoint Analysis Conjoint Analysis in a New Market Region "Will a conjoint analysis be of any value for the new market region which just opened? I was thinking that it wouldn't be useful now because the customers in the new market region have not had any experience with vaporware." Conjoint analysis is concerned with assessing underlying customer values for products and services (product/service positioning and pricing, in particular). As such, it doesn't explicitly reference already existing products/services. Remember, it is a concept testing style of marketing research, involving the elicitation of customer reactions to hypothetical products/services. Thus, conjoint analysis should work fine in a newly opened market even though the customers have not yet personally experienced vaporware. There may be a little more random noise in the conjoint analysis results (reflecting customer inexperience with vaporware), but the basic pattern of the findings should not be affected materially. Conjoint Analysis in "All" Market Regions "If a conjoint analysis is specified for 'all' market regions, are average results reported or are individual results reported for each market region?" "All" market regions for conjoint analysis means that the specified experimental design (specified levels for each of the five raw materials, Compatibility, Warranty, and dealer price) is executed independently in each market region with results being reported separately for each market region. Although the student manual shows an example of results only for a single market region, "all" means that there will be separate results for each market region. Average results across market regions are not reported since they 4

6 would have little meaning if regional variations exist. And, of course, students could create their own averages if they thought that such numbers were meaningful. Conjoint Analysis in Multiple Regions "I ordered a conjoint analysis (Marketing Research Study #10) for market regions 2 and 4. However, I only received the results for market region 4. What gives?" Marketing Research Study #10 (Conjoint Analysis) can be executed either for one market region or for all market regions simultaneously. It cannot be executed for two particular market regions in one quarter. Only the last entry (for market region 4) was retained and executed. If you really want to execute conjoint analyses for two specific market regions in one quarter, you will have to use Marketing Research Study #10 for the first one and Marketing Research Study #34 for the second one. Conjoint Analysis Relative Importances "The conjoint analysis indicates that Glomp is the least important attribute to customers (3.9% relative importance). Concept tests results indicate that customers also prefer a standard vaporware weight (weight of the five raw materials sums to about 100). Based on this, I developed a formulation with the other attributes at their peak of desirability (per the conjoint) and plugged Glomp at 27 to get a standard vaporware weight. The preference rating was a lot lower (30 points!) than other formulations where the other attributes varied from their high points but Glomp was in the range of 6-9. If Glomp has so little importance, why does it impact the preference so significantly? I'm really getting confused here." "Relative importance" in conjoints is within the range of the specified weights. If you go well outside the range, then who knows what might happen. Be wary the "relative importances." They can easily be misleading. Always look to the weights. They never lie or mislead providing, of course, that you don't extrapolate too much outside the range of the weights you specified for the design of the conjoint analysis study. You are placing a lot of credence in the belief that "standard" vaporware (raw materials sum to 100) is somehow important to customers. Customers want what they want. If their wants happen to lead to a vaporware product whose raw materials to sum (or near) 100, that is incidental to customers' requirements for specific levels of the raw materials. It's vaporware-industry talk that refers to vaporware as being "light," "standard," or "heavy." Customers don't necessarily speak in such terms. The moral here should be clear: don't worry about the sum of the raw materials (unless, of course, the sum violated current vaporware technology limits). Conjoint Analysis Weights "The part-worth utilities obtained in conjoint analysis never have gone above 100 or below 0. Yet, in textbook discussions and various articles about conjoint analysis, there are examples where these values have different ranges and can even have negative values. Can you provide some insight as to how the part-worth values are determined in the conjoint analysis used in BRANDMAPS?" 5

7 Conjoint analysis yields only relative trade-off weights (the part-worth utilities), not absolute weights. Technically, conjoint weights are intervally scaled, not ratio scaled. Thus, differences in conjoint weights are meaningful but ratios are not. With intervally scaled data, any positive linear transformation of the raw conjoint weights is permissible. Relative differences are unaffected by such positive linear transformations. I've chosen to scale the raw conjoint weights into the interval 0 to 100 for ease of interpretation. Other researchers and authors use different intervals (0 to 1 or centering the attribute-level weights on each attribute to sum to zero, thus yielding positive and negative weights across the attribute-levels). None of these scaling approaches is "right" or "wrong" in some fundamental sense. They're just different approaches to reporting the same underlying raw conjoint weights. I continue to prefer the 0 to 100 approach, and that's why it's the one you see in BRANDMAPS. Web-Based Supplementary Readings "Can you recommend some web-based supplementary readings about conjoint analysis?" Yes, here are some nice web-based readings that you and your students can freely access to learn more about conjoint analysis: 1. "Understanding Conjoint Analysis in 15 Minutes" (Quirk's Marketing Research Review Jun/Jul '89), 2. "Conjoint Analysis: After the Basics" (Marketing Research: A Magazine of Management & Applications), 3. "Trade-Off Analysis of Consumer Values" (Journal of Marketing Research May'74), Opening New Market Regions Cost Consequences of Withdrawing a Brand "What are the cost considerations that a firm should take into account when contemplating withdrawing a brand from a region?" There are no direct costs associated with dropping a brand from a region. However, there are a lot of indirect cost-related considerations and a lot of implicit considerations in brand withdrawal decisions. Here's some counsel from Sam Gillespie (Texas A&M University) on this topic: "The decision to withdraw a brand from a region needs to be well thought out. The upside to withdrawing could be: (1) Concentrating limited resources on brands and regions perceived to be more profitable; (2) Focusing brands in a single region; and (3) Inability to gain market share in a region due to strong first-mover advantage of a competitor. There are no direct product costs in withdrawing a brand from a region. However, if a firm chooses to re-enter that market in a later quarter, there will be another introduction 6

8 cost. New entries and re-entries are treated similarly and incur the same introduction cost. In withdrawing a brand from a region, it is important to remember to reduce to zero all marketing support spending (advertising and promotion) associated with that brand in that region. If there are other brands still active in that region, then sales force time allocation must be shifted to still-active brands. If there are no other brands active in that region, then the sales force size in that region must be set to zero to eliminate sales costs. If the sales force is retained in a region with no actively marketed brands, sales salaries and overhead will continue to be charged to the firm. Firms need to decide if retaining the sales force for future activity would outweigh the costs associated with firing and hiring in the region from which the firm withdrew. If the sales force is fired, a settlement fee equal to two months salary per salesperson fired will be charged to the firm in that region. Additionally, a sales overhead charge of the same amount will occur. For example, if the sales force size in the region is 50 and monthly salary is $2,500, then sales force and sales overhead will incur charges of 50*($2,500*2) or $250,000 each." Decision Variable Capacity Order Payments "When are payments for plant capacity orders charged?" The full purchase price is due when plant capacity is ordered. Note that this is a balance-sheet transaction only (a swap of cash for plant capacity), with no immediate profit-and-loss implications until the plant capacity is put into actual use and depreciation begins. Firms with insufficient cash to pay for a plant capacity order will, of course, have automatic loans generated to provide such cash. Correcting an Introduction Request "An erroneous introduction request was entered. The brand was erroneously introduced into region 3 when it was meant to be introduced to region 4. What should I do?" As long as the game wasn't run, there's no problem. Just drop the brand from the erroneous region and introduce it into the correct region. Of course, the brand will need a complete marketing program (price, rebate, advertising, media content, etc.) for the correct region. Decision Variable Change Limits in BRANDMAPS "On p. 36 in the BRANDMAPS 4/e student manual, marketing decision variable change limits are summarized. But, are they overall firm-wide limits, brand-specific limits, or region-specific limits?" 7

9 BRANDMAPS marketing decision variables have built-in limitations related to how much they may change from one quarter to the next. For reference purposes, these limitations are summarized in a table on p. 36 of the BRANDMAPS 4/e student manual. The summary table on p. 36 of the BRANDMAPS 4/e student manual does specify these limits correctly, but the frame of reference is not indicated explicitly. For example, the maximum possible increase in sales force size is specified as 50, implicitly interpreted as "per market region" which is the natural frame of reference for sales force size in BRANDMAPS. (As a BRANDMAPS decision variable, sales force size is always expressed in per-region terms. Similarly, promotion is always expressed in "perbrand, per-region" terms.) In every case, these limits refer to the frame of reference associated with the relevant decision variable in BRANDMAPS, even though not explicitly mentioned in the BRANDMAPS 4/e student manual. Advertising, for example, is always specified at the brand-specific level in a market region. Thus, the advertising change limit also refers to brand-specific and market-specific advertising. These per-brand, per-region, and per-brand per-region decision variable change limits are explicitly specified in the corresponding table on p. 25 of the BRANDS 2/e student manual. Decision Variable Checks "When exiting the decision variable input program B_DV.EXE, the following message appears on the screen: 'No decision variable check warnings for firm 1.' What does this warning/error message mean?" The B_DV.EXE software performs a variety of logical checks on decision variables when the user exits the program. For example, the decision variable checks include verifications that marketing support spending only occurs for active or to-be-introduced brands and that marketing support spending is not too "small" (e.g., advertising of $10 would be flagged with a warning message, since values of advertising spending less than $100,000 are rare). This message, "No decision variable check warnings for firm 1," just verifies that all internal decision checks have been satisfied for firm 1's decision inputs. If there were any apparent problems based on the specific decision variable checks encoded in the software, specific warning messages would be displayed on the screen. Dividend Policy in BRANDMAPS [1] "What is the right dividend policy in BRANDMAPS?" [2] "How can I use dividends effectively in BRANDMAPS?" Financial theory generally suggests that dividend policy is irrelevant to lots of things, such as stock prices. In BRANDMAPS, dividends are a dollar amount returned to stock holders (not a per-share amount). Indeed, the number of outstanding shares of each firm is not known information in BRANDMAPS, so a per-share dividend amount cannot be calculated. The immediate impact for the dividend-paying BRANDMAPS firm is to reduce cash and to reduce owner's equity. In general, then, excess cash invested automatically by the 8

10 software at relatively low rates of return in marketable securities might be returned to shareholders directly via dividends. This reduces the "I" part of ROI and can improve ROI, if profitability remains high. The bottom line is simply that firms should be able to earn more in the vaporware market than in having cash automatically invested in marketable securities. Overall firm ROI is a combination of return on investment from cash (0%), marketable securities, and firm-wide profitability. Therefore, excess cash should be discarded and dividends are the way to discard such excess cash. Note, however, that excess cash is also available for use in funding inventory expansions, plant capacity expansions, and new product launches which may lead to short-run negative profitability. Dropping a Product and Associated Inventory Consequences "If a team drops a brand from a market region (i.e., if they quite selling the brand in a particular market region) in BRANDMAPS, what happens to the finished goods inventory on the balance sheet?" Finished goods inventory on the balance sheet exists to service dealer requests for brand purchases anywhere in the world. As long as a dropped brand is still active in at least one other market region, the existing finished goods inventory will be used in those still-active market regions. In BRANDMAPS, there is only one plant and one warehouse (located adjacent to that plant). Production and inventory of each brand is for worldwide use, in all market regions in which brands are actively distributed. If a dropped brand is no longer active anywhere, the existing finished goods inventory will continue to remain on the balance sheet until a subsequent reformulation of that brand. Of course, there are inventory charges associated with finished goods inventory and those inventory charges continue to accrue as long as finished goods inventory exists. Emergency Production Limit Costs "In BRANDMAPS, what are the costs associated with having a non-zero emergency production limit if emergency production turns out not to be needed in a quarter?" There are no costs associated with emergency production limits in BRANDMAPS unless emergency production is actually required. Introduction and Reintroduction "Brand 2 was previously in market region 3 but was dropped several quarters ago. If the firm reintroduces brand 2 into market region 3, will it have to pay another introduction charge?" Yes. Introduction charges are incurred in the first quarter of an introduction. Here, "introduction" is defined to be a situation where a brand is inactive in one quarter and is active in the next quarter. A reintroduction of a brand is an introduction and introduction charges accrue. 9

11 Launching Other 30/30/30/5/5/5/5 Brands "The game starts with a single brand active for each firm. Its formulation is 30/30/30/5/5/5/5. Is it correct that other brands can only be launched if they are reformulated? Otherwise, won't there be patent infringements?" All existing brands' patents are legal at initialization due to grandfathering clauses in the vaporware patent laws. However, new reformulations must honor existing patent laws. The initial formulations 30/30/..., for brand 1 and for other brands, are legal and can be launched. But, it doesn't seem to make a lot of sense to launch another 30/30/... brand when there are already a bunch of those out there. Marketable Securities "Are marketable securities in BRANDMAPS just another form of cash on hand? If not, can they be liquidated?" Marketable securities are another form of cash, although one that does earn interest. To liquidate marketable securities, pay a dividend. But, be careful. Cash or marketable securities are needed to fund operating losses, plant capacity purchases, and inventory investments. In the absence of sufficient cash and/or marketable securities, loans are automatically issued by the BRANDMAPS software. Pre-Launch Marketing Support Spending "One of my firms just tried to do pre-launch marketing support spending in the quarter prior to reformulating and launching a new product. They spent $2,000,000 in advertising, promotion (sales representative training and dealer training), and sales salaries. This spending was included on the firm's financial statements for the quarter. However, the firm noticed that their brand was not listed on the Marketing Research Study #8 ('Media Content Analysis') output. The firm is concerned that this pre-launch marketing support spending was wasted. Please advise." Pre-launch marketing support spending (e.g., advertising, research and development, and sales force) is possible and does have some residual value beyond the quarter of spending. However, pre-launch promotion makes no sense given its well-known shortrun nature. Of course, just because there is long-term value in advertising, research and development, and sales force efforts doesn't imply that pre-launch spending is the most profitable thing to do. With regard to marketing research reports, only active brands are displayed. Since, by definition, pre-launch spending is for inactive brands that are to be launched in the future, their current market status will be masked until they are launched. To use a Star Trek metaphor, pre-launch marketing support spending is "cloaked" (i.e., undetectable or stealth) spending since it cannot be observed by competitors ahead of the time at which such brands are activated. However, the pre-launch money is spent and there will be some non-zero (although not necessarily profitable) impact on the market. 10

12 Producing More Than Current Capacity "Several of my students want to know if they can actually produce and sell more units than they have capacity. Is this an option? Should I let them?" Production orders are separate and independent of plant capacity. For example, if a firm has 100,000 units of plant capacity and orders 110,000 units of production across its various products, 110,000 units of production will be produced even though production will be on an over-capacity basis. There will be accelerated depreciation in effect associated with the units produced beyond 100,000, but it's not a big deal if the overcapacity production is relatively modest (say less than 10% or so) and short term. Repeated and substantial over-capacity usage can lead to plant capacity depreciating faster than it can be replenished through normal plant capacity orders. See the discussion on p. 38 of the BRANDMAPS student manual for details of the economics associated with over-capacity usage. My recommendation is to permit the students to do what they wish with regard to production ordering and capacity management. They will suffer the consequences if they fail to coordinate production orders with plant capacity. Promotional Type Equals Zero "Promotional type is reported as being zero in some marketing research study reports. However, promotional types equal to zero are impossible in BRANDMAPS. What gives?" Promotional type is reported as being zero in marketing research study output when the associated promotional spending is zero. After all, if there's no spending, there's no promotional type of record at that moment, even if the software has a promotional type recorded in it. Only when there is promotional spending is the promotional type revealed to the world. Promotions (Customer Rebates) [1] "Suppose that a firm wished to give a $100 customer rebate. I do not believe that there is a place in the input to assign a dollar amount per-unit sold for this type of promotion. Instead, you must assign a total promotion budget. Therefore, by assumption, if I input a $10,000,000 promotion budget with promotional type 9 and a forecasted sales of 100,000 units, that would correspond to $100 rebate per unit. If sales only reached 65,000 units, would that team be charged the entire $10,000,000 for promotion or $6,500,000 (i.e., $100 times 65,000 units)?" [2] "Product 1-1 had sales volume of 0 in market region 4 this quarter. The firm had budgeted $10,000,000 in promotion for this quarter for 'customer rebates.' Where did the $10,000,000 in 'customer rebates' go if there were actual sales in this quarter?" The total promotion dollars are always spent, regardless of the promotional type chosen and regardless of the sales volume that occurs in the subsequent quarter. With customer rebates, an estimate of sales volume is created to size the per-unit customer rebate that would be appropriate. Such an estimate is required prior to the actual running of the next quarter since the customer rebate level will influence the quarter's sales volume. 11

13 If there are no actual sales in the quarter, there is an obvious problem because the promotion dollars will all be spent. I suggest that you refund the promotion amount (as a negative consulting fee). Also, promotion spending of $10,000,000 is certainly a huge amount, even in large markets. You might wish to review with the particular team how they arrived at that amount of promotion dollars. Did they actually calculate what this would mean in terms of per-unit customer rebates (based, for example, on their actual sales forecast for the particular quarter)? Promotion Spending Not as Input "Promotion spending as reported on the financial results is not equal to what my students input on their disk. What's happening?" BYESNO (line 349 in the game parameter file) is set equal to "2" for each firm in your industry. Thus, quarterly budget constraints are in effect for marketing support spending (advertising, promotion, research and development, and sales force). Your firms are exceeding their marketing support spending limits and the software is automatically reducing marketing support spending (to zero, if necessary), starting first with promotion. Quarterly budget constraints are described in pp of the BRANDMAPS student manual. If your students are using disk input, then the software has been warning them about marketing support spending violations. Also, the second last page of the financial results reports these software-based changes in marketing support spending Research and Development After a Reformulation "When a currently-active brand is reformulated, does the R&D drop to $0 (i.e., they can only spend a maximum of $250,000 in that quarter)? The manual doesn't seem very clear on this." Research and development spending does not automatically revert to $0 for a reformulated brand. Research and development spending continues on from its previous dollar amount, regardless of the reformulation status of a brand. After all, if a brand is reformulated, then it's "new and improved" and research and development is still appropriate to fine-tune its quality. Sales Force Size Maximum Change "Is the maximum possible sales force size change from one quarter to the next equal to 50 across all market regions in total or equal to 50 per market region?" The maximum possible increase in sales force size is 50 sales representatives per market region per quarter. 12

14 Definitions Brand Quality Perceptions of Zero "Is there any reason a brand should have a brand quality perception of 0.0 when other brands of the firm have non-zero values?" Research and development spending for the brand is $0. Since brand quality perception is driven by research and development spending, $0 spending results in 0.0 brand quality. Cash "Our current cash balance is about $3,000,000. Are our costs expensed at the beginning of the next quarter or the end of the next quarter? The answer influences our marketing support spending decisions, since we obviously don't want to spend money before we have it." Assume that all revenues and costs happen uniformly throughout the quarter. That is, with a 90-day quarter, about 1/90 of the quarter's revenues and costs are attributable to each day's operations. Thus, you do have revenue coming in regularly throughout the quarter to pay for your various within-quarter operating costs. Thus, there's no need to worry about within-quarter cash flow issues with regard to covering your operating costs and within-quarter marketing support spending. Also, note that you do have access to loans, as necessary, to cover shortages in cash. Compatibility "What is compatibility? How does low compatibility reduce the benefits that customers derive from vaporware?" Like "vaporware" itself, the product attribute "compatibility" is an abstract, generic construct. The implication of building higher-compatible vaporware is clear: costs rise. Cost-based consequences of compatibility for product costs are well described in the student manual. But, what is "compatibility"? Vaporware is a durable, capital good with a presumed lengthy life. Its useful life isn't exhausted in the first customer usage occasion. If vaporware is an electronic product like a stereo system or personal computer or high-definition digital television or color printer for personal computers or a multi-purpose set-top box for TVs, then "compatibility" might refer to how easy it is for a particular vaporware brand to interface with other system components. Vaporware with high [low] compatibility would be easy [difficult] for the customer to use with other system components. Low-compatible vaporware is less useful to customers than high-compatible vaporware. Thus, compatibility is desirable and customers prefer vaporware brands with higher compatibility. 13

15 Consumer Price Indices "How should the Consumer Price Indices be interpreted?" The Consumer Price Index is a relative measure of general prices. Values may be compared across market regions and through time. One important use of Consumer Price Indices is in the calculation of real income. If incomes grow in nominal terms less than the rate of growth in the Consumer Price Index, then real incomes are falling. For "normal" goods (in the economic sense), falling real incomes would be associated with reductions in industry demand. Also, Consumer Price Indices are relevant in assessing current vaporware price levels. Vaporware prices which rise faster than the growth in the Consumer Price Index should be expected to result in decreased levels of demand for vaporware, since all other goods and services are priced more attractively by comparison. Convenience "What is 'convenience'?" As described in the student manual (Marketing Research Study #21) in a very terse fashion, "convenience" refers to convenience to buy and convenience to use after purchasing. "Convenience" is, of course, perceptual so a brand's communications program (particularly media content) would presumably influence such perceptions. However, for a durable good like vaporware, it should be expected that more engineering-like, objective variables are the principal drivers of convenience perception. Convenience perception depends on the convenience of buying and using vaporware. Brands that are convenient to buy would be stocked by lots of dealers (dealer availability), would be well-known with easy top-of-mind awareness (customer brand awareness), and would be in-stock (no or low or infrequent unfilled orders). In general, the various components of marketing support spending (advertising, promotion, and sales force) will be major drivers of the convenient-to-buy part of convenience perception. Easy-to-use vaporware brands would work well in their intended setting, be highly compatible with existing systems and infrastructure, fail infrequently, and would be well-warranted if they fail. Thus, the easy-to-use part of convenience perception involves Compatibility, quality (as driven by research and development spending), and Warranty. To provide further insight into the drivers of convenience perception, the v4.07 software (dated 02/01/99 or later) includes estimates of correlations of various drivers of convenience perception as part of an expanded Marketing Research Study #21. These correlations are provided on a regional basis, consistent with the display of each region's perceptual map. Since correlations must be interpreted with caution, the following interpretive notes are printed as the second-last page of marketing research results whenever a marketing research study that includes correlations is reported: "These marketing research results contain one or more research studies where correlations have been reported as part of the marketing research output. Such correlations should be interpreted with caution, as the following notes suggest. 14

16 1. Correlations measure the strength of linear association between two variables. Correlations run from -1.0 (exact negative relationship) to +1.0 (exact positive relationship). A zero correlation implies that two variables are statistically unrelated to one another. 2. These correlations are based on data from the last five quarters, to the extent that such data exist in the historical archives of this industry. Sample sizes are reported. Correlations based on less than five data points and/or negative correlations are reported as 'n/s'. 3. These correlations are based on products with market shares of at least 2.5% in a quarter. This avoids using data from products with small market shares that might distort calculated correlations. Products with small market shares might have unusual or extreme associated performance and convenience perception driver-values. 4. Pairwise correlations can be influenced by other forces which are highly correlated with the two variables for which correlations are calculated. Correlation does not mean causation. These correlations, like all correlations, should be interpreted with a measure of caution. 5. Only theoretically plausible drivers of the specific variables that are the subject of interest are reported. For example, dealer price is not included among the reported drivers of performance and convenience perceptions. While higher dealer prices might well increase performance and convenience perception, a simpler explanation exists: firms choose to set higher prices for products with higher perceived performance or higher perceived convenience. Thus, causality runs from performance and/or convenience to dealer price and not the other way around. Of course, correlations do not establish the direction of causality but merely the magnitude of a statistical association." Customer Preference For Vaporware "If you give customers more than what they want, will they like vaporware better? Since we cannot customize our marketing research to target segments other than at the regional level, it may simply be a software constraint that we must assume that more is better (i.e., if you prefer 1/4 lb. of beef on your hamburger, you'll like 1/2 lb. even better)." What does your marketing research tell you about customer preferences for vaporware product attributes? Is more always preferred to less? In addressing these questions, you must distinguish between the physical raw materials (attributes 1-5) and the associated vaporware product characteristics, Compatibility and Warranty (attributes 6 and 7). The raw materials (attributes 1-5) are of the "I-want-what-I-want" variety, so you'll normally be striving to provide customers with exactly the levels of these attributes that they want (and are willing to pay for). Too much of attributes 1-5 is not necessarily preferred to just the right amount. For Compatibility and Warranty (attributes 6 and 7), "more-is-always-better" is presumably the theoretically correct answer. Of course, cost considerations are relevant too, so it's possible that customers may want more than they are really willing to pay for. 15

17 Dealer Margin "What is 'dealer margin'?" "Dealer margin" is total dollars earned by dealers from selling a brand, which equals volume times the sum of unit margin and unit rebates. Dealer Price "What's the difference between 'manufacturer price' and 'dealer price'?" "Manufacturer price" is the price at which you sell to dealers/distributors, "dealer price" is the price at which dealers sell to final customers. You only control the "manufacturer price" not the "dealer price" (dealers markup your products some amount). The only way to tell what the dealer markup rates are in the various market regions is to compare your "manufacturer price" to the "dealer prices." Of course, you always know your own "manufacturer price" but you will need marketing research to learn about "dealer prices." Depreciation "How is depreciation calculated in BRANDMAPS?" To show all details of the calculation of total depreciation costs and physical plantcapacity units in a quarter, the following worksheet/spreadsheet would be needed. This simplified worksheet assumes that plant capacity utilization does not exceed 100%; if so, then refer to Table 8 on page 38 of the BRANDMAPS 4/e student manual for details on how to modify the value of plant capacity utilization rate shown in line (5) below. (1) Beginning-Quarter Capacity [Units] {from balance sheet} (2) Beginning-Quarter Capacity Investment [$] {from balance sheet} (3) Capacity Value Per Unit [$/unit] {divide line (2) by line (1)} (4) Total Production (Regular and Emergency) For All Products [Units] (5) Plant Capacity Utilization Rate {divide line (4) by line (1)} (6) Calculation of Depreciation: (a) Fixed Depreciation [Units] = 0.03 * line (1) (b) Variable Depreciation [Units] = 0.12 * line (5) (c) Total Depreciation [Units] = line (6a) + line (6b) (7) Calculation of Depreciation Costs: (a) Fixed Depreciation Costs [$] = line (3) * 0.03 * line (1) (b) Variable Depreciation Costs [$] = line (3) * 0.12 * line (5) (c) Total Depreciation Costs [$] = line (7a) + line (7b). Disposal Sales "What are disposal sales?" After a minor or major reformulations in BRANDMAPS, any available finished goods inventory is immediately sold-off before the quarter occurs. A reformulated brand always has zero inventory available for sale as the quarter begins. Thus, current-quarter 16

18 production after a reformulation will have to be sufficient to meet anticipated currentquarter sales at the time of a reformulation. The appropriate disposal sale charge (5% of the finished goods inventory value for a minor reformulation and 25% of the finished goods inventory value for a major reformulation) is recorded on the DIVISIONAL OPERATING STATEMENT as Disposal Sales. Dividends "Why are dividends reported as negative numbers on the DIVISIONAL BALANCE SHEET?" Dividends are reported on the DIVISIONAL BALANCE SHEET as negative numbers since they represent cash outflows that effectively reduce owners' equity. Emergency Production Limits "We set our emergency production limit for product 5-1 to the maximum possible value of 10%. However, we actually produced 14.2% emergency production last quarter. What's happening here?" The emergency production limit in BRANDMAPS is based on the total potential sales (actual and unfilled), not on your production level. A "10% emergency production level" means that a maximum of 10% of total potential sales (actual and unfilled) can be produced on an emergency production basis. If the emergency production limit was based on production, then a production order of zero units would also mean that emergency production was zero units. This would be non-intuitive and of no value to a firm wishing to reduce its current inventory level by producing zero units but also wishing to have some flexibility in meeting demand in case current-quarter demand exceeds existing inventory levels. Industry Sales and Market Shares "To calculate the total volume for a market region, I am dividing the number of units we sold by our market share. I am unsure whether adding the unfilled orders to this total would be a better reflection of the market volume had we produced sufficient quantity. Any advice?" Total sales in a market region is equal to your actual unit sales divided by your actual market share (expressed in proportional not percentage terms). Market shares reflect actual sales not unfilled orders. Your proposed recalculation of actual market share is a reasonable thing to do to account for potential market share. You may wish to track both actual market share and potential market share through time to monitor the performance of your firm and of individual brands. 17

19 Interest Expense [1] "With a substantial investment in capacity this past quarter, we used up all of our cash and marketable securities and took on $34M in debt. Normally, this interest expense reduces the income tax liability but I do not see where this is shown on our income statement. What gives?" [2] "Our company had quite a lot of loans already on the DIVISIONAL BALANCE SHEET when we took over the firm. Why was our non-operating expense from these loans only $723,242 in Q#8 and $10,410,855 in Q#9? What would cause it to jump so dramatically?" Interest expense is lagged a quarter. Next quarter, you pay interest on the outstanding loans that were in effect at the end of this quarter. Incidentally, the same lagged process works for marketable securities. Last quarter's marketable securities yield interest on this quarter's profit-and-loss statement. Thus, for example, interest expenses reported on the Q#9 financial statements reflect outstanding loans on the Q#8 DIVISIONAL BALANCE SHEET. Introduction Charges [1] "Is the charge to introduce a brand the same regardless of the number of market regions involved in the introduction or is the charge a per-region charge?" [2] "If I stop selling a brand in a region and then later (after several quarters) decide to sell the same brand with the same formulation, will that be treated as a new product introduction (and be assessed the appropriate charges)?" The new product introduction charge is per brand per region. It reflects the inevitable setup costs incurred when a product is first launched into a market. Prior participation in a market region is irrelevant to new product introduction charges. New product introduction charges are automatically charged for any product that is active in the current quarter and that was inactive in the previous quarter. Inventory Charges "How are inventory charges calculated in BRANDMAPS?" In BRANDMAPS, product-specific inventory charges are based on the average of beginning-quarter and ending-quarter inventory levels. Here, "beginning-quarter" inventory refers to the inventory level at the end of the previous quarter and "endingquarter" inventory refers to the inventory level at the end of the current quarter. The only time inventory charges will be zero is when both beginning-quarter and endingquarter inventory equal zero. (Since production is on "automatic" in BRANDS, there is never any inventory and associated inventory charges are always zero.) 18

20 Inventory Consequences of Reformulations "Assume that firm 1 does a product modification on brand 1-3 in BRANDMAPS. They have 30,000 units of 1-3 finished goods inventory and dealers hold an additional 10,000 units in inventory. What happens to these inventories?" On all reformulations, a firm's finished goods inventory is immediately sold at cost ("at cost" on the DIVISIONAL BALANCE SHEET as of the previous quarter) as the quarter begins. Thus, beginning-quarter finished goods inventory becomes zero when a reformulation occurs. In addition, dealers' inventory is liquidated. "Old" inventory is never converted to "new" inventory. Inventory disposal penalties are levied on the current values of finished goods inventory and dealers' inventory, as described in the BRANDMAPS student manual. Loans "How are loans paid back? Is it possible to accelerate loan repayment?" Excess cash at the end of any quarter is used to retire existing loans. (The sources of such excess cash to retire loans include profits from operations, reductions in plant capacity investments, and reductions in investments in finished goods inventory.) If there are no outstanding loans, the excess cash is invested in marketable securities. These operations are conducted automatically by the game software, with no student or instructor intervention required. Given this automation situation, accelerated repayment of loans does not exist. Loans are already paid off as rapidly as available cash permits. Manufacturer Price "What's the difference between 'manufacturer price' and 'dealer price'?" "Manufacturer price" is the price at which you sell to dealers/distributors, "dealer price" is the price at which dealers sell to final customers. You only control the "manufacturer price" not the "dealer price" (dealers markup your products some amount). The only way to tell what the dealer markup rates are in the various market regions is to compare your "manufacturer price" to the "dealer prices." Of course, you always know your own "manufacturer price" but you will need marketing research to learn about "dealer prices." Non-Operating Income "Would you please explain the non-operating income credit/charge on the Divisional Operating Statement in more depth? The student manual explains that this charge is the result of marketable securities (in our case since the groups were credited rather than debited this amount). All the groups were credited the same amount: $925,620 (the game is in the second quarter)." 19

21 Positive non-operating income in Q#2 means that there were marketable securities on the Q#1 balance sheet. This is why all the firms' numbers are identical in Q#2; all of the firms' balance sheets were identical at initialization at Q#1. Through time, the nonoperating income will vary (positive if last quarter's balance sheet includes marketable securities and negative if last quarter's balance sheet includes loans). Patent Zones Next Quarter "In BRANDMAPS, a competitor's product has a current patent zone of 19. How far away does my reformulation have to be to be successful when the game next runs?" The game run sequence is as follows: (1) the clock advances by one quarter; (2) all patent zones are reduced by three units; (3) reformulations are processed; (4) the game runs; and, (5) marketing research pre-orders are processed. Thus, you have to be 17 patent zone units away from this product's current formulation to be legal, since its patent zone will be 16 units when the game next runs. Of course, you also have to be outside all other products' patents, including those reformulated ahead of you at the start of the next quarter. Pending [1] "When introducing a brand to a market, 'Inactive' is replaced by 'Pending' on the decision variables change screen. What does 'Pending' mean?" [2] "One of my teams has 'Pending' on a brand that it introduced in a previous quarter. Shouldn't the 'Pending' have already been replaced by 'Active' status?" Introducing a brand actually means "order an introduction which will actually occur the next time the game runs." Introduction does not occur at the time the introduce command is given. The status "Pending" means that the introduction of the brand in the specified region is pending and that it will occur in the next quarter. Once a brand is introduced, it is "Active." If students mistakenly attempt to reintroduce it, there's no harm caused. True, the activity status will show "Pending" on the decision input screen prior to the next quarter being run. And, the software will introduce this brand the next quarter. But, there will be no introduction charges because the software will note that the brand was actually "Active" last quarter. One other case could lead to "Pending" being reported for a brand that was introduced in the previous quarter. That case involved a team disk that was not updated correctly after the previous game run. The updating process copies the revised post-game files back to the team's disk. If that operation doesn't occur (e.g., just didn't happen or disk write errors occurred), then the team's disk doesn't contain the current status of all decision variables. This would be a major problem and a replacement disk should be created to permit the students to input their decision variable changes and marketing research pre-orders for the next quarter. 20

22 Plant Capacity Sales "When a team sells capacity to another team, is that capacity sold permanently or is it leased for that quarter only?" Such plant transactions, which must be implemented by the course instructor, are sales not leases. The buying firm has permanent possession of the purchased plant capacity. Promotional Type #10 "When we choose promotion type #10 in BRANDMAPS, are there random percentages of the promotional budget allocated to promotional types #1-#5 for dealers or does promotional type #10 just mean a general promotion push on dealers?" In BRANDMAPS, promotional type #10 means that the regional sales manager chooses a particular promotional type for the next quarter. You should assume that means your brand receives a more-or-less average kind of promotional selection, "average" effectiveness of promotions upon which perhaps you could improve through time with superior promotional type decisions. Relative Product Desirability "What is Relative Product Desirability (referenced in Marketing Research Study #29)?" Relative Product Desirability refers to the desirability of a product's formulation. It's based on an implicit "n"-way preference test, for the "n" active brands in a market region. High performance on Relative Product Desirability is consistent with a superior product formulation, compared to competitors' formulations in a specific market region. Return-on-Assets "What is return-on-assets?" Return-on-assets is equal to current-quarter profits from the divisional operating statement divided by the previous quarter's assets from the firm's balance sheet, expressed in percentage terms. Note, also, the definition of return-on-equity: return-on-equity is equal to currentquarter profits from the divisional operating statement divided by the previous quarter's net equity (which equals total liabilities and equity minus loans) from the firm's balance sheet, expressed in percentage terms. Return on assets will be equal to or less than return on equity since the asset base of a firm will be greater than the equity base whenever a firm as outstanding loans. 21

23 Return-on-Equity "What is return-on-equity?" Return-on-equity is equal to current-quarter profits from the divisional operating statement divided by the previous quarter's net equity (which equals total liabilities and equity minus loans) from the firm's balance sheet, expressed in percentage terms. Note, also, the definition of return-on-assets: return-on-assets is equal to current-quarter profits from the divisional operating statement divided by the previous quarter's assets from the firm's balance sheet, expressed in percentage terms. Return on equity will be equal to or greater than return on assets since the asset base of a firm will be greater than the equity base whenever a firm as outstanding loans. Return-On-Investment "How should the ROI (return-on-investment) figures be calculated for individual decision periods? Given the information on the DIVISIONAL BALANCE SHEET, what data should be used to obtain the ROI for that quarter?" Quarterly ROE (return-on-equity), which is also ROI (return-on-investment), equals current-quarter net operating income divided by last quarter's net assets. Net assets are assets minus loans. Another similar financial performance measure is ROA (return-onassets), with quarterly ROA being equal to current-quarter net operating income divided by last quarter's total assets. Multiply these figures by 100 to express these figures in percentage terms. multiply them by 100. Note that quarterly ROI (or quarterly ROE) is not the same as annual or annualized ROI, which has to take into account when net income and dividends for earlier quarters of the current year actually occurred. Sales Force Salaries "Our sales force salaries seem too high. For example, product 4-3 has a sales force size of 115 people (it's only sold in one market region). No change was made to sales force size or sales force salary between Q#8 and Q#9. Our sales salary is $2,600. As I understand it, sales salaries should be (115)($2,600) = $299,000, but our current product operating statement shows total salaries of $897,000. What's going on?" Sales force salary is quoted is $/month terms as a decision variable but the financial statements represent a full quarter's operations. Multiple your monthly sales force salary decision variable by three to obtain your quarterly sales force salary expenses. Sales Overhead [1] "How is Sales Overhead defined?" [2] "I have a firm who have just received their output from Q#2 and Sales Overhead went from about 1.6 million to about 3.6 million although their sales had increased only about 13% from 70,000 to 79,000. The only sales force decision that had been changed was sales commission, which went from the default 1% to 4%. Why did their Sales Overhead increase so much?" 22

24 As defined in the student manual, Sales Overhead is equal to the sum of Sales Salaries and Sales Commissions. Thus, every dollar of sales force compensation, whether in the form of salary or commission, also has associated with it a dollar of sales overhead. This 100% sales overhead rate covers a wide range of implicit and indirect sales force representative costs such as benefits, selling expenses, office space and related expenses, sales support, sales training, and administrative support and other indirect expenses. Seasonality "When sales fluctuate due to seasonality, does the seasonality effect depend on the brands' marketing efforts?" Seasonality is an exogenous factor that influences industry sales volume. It happens regardless of, and is independent of, the marketing activities of the firms in the vaporware industry. Smoothing Costs Associated With Reformulations "We are planning a reformulation and have ordered 25,000 units of production with the new formulation versus 28,000 units of production that we ordered last quarter for the old formulation. When calculating production and labor smoothing costs in BRANDMAPS, should we assume that it is a 12% change or a 100% change, the latter occurring if you zero out the old product and then start production up in the new product formulation? Please advise." The previous production order was 28K. This is all that matters in the smoothing cost calculation in BRANDMAPS. A reformulation is irrelevant to the calculation of smoothing costs; only last quarter and current quarter production levels influence smoothing costs. A change in production from 28K to 25K will have a 12% smoothing adjustment cost associated with it. Smoothing Costs When Previous Production Was Zero "In BRANDMAPS, if production of a product changes from zero to any positive number in the next quarter, what are the associated smoothing costs?" In moving a product's production from 0 in a quarter to any positive number in the subsequent quarter, smoothing costs will hit their maximum values (since the base case production level is 0 and the change in production always exceeds 100% of the base case production level, by definition). Maximum smoothing costs are equal to current production and current labor costs. 23

25 Transportation and Shipping Costs "Are transportation and shipping costs reduced for lighter-weight vaporware brands?" No. Transportation and shipping costs are expressed in per-vaporware-unit terms. Transportation and shipping costs are not based on the weight of the vaporware brand. Unfilled Orders [1] "What are unfilled orders?" [2] "In BRANDMAPS, what happens to my unfilled orders? Do they come back as sales in the next quarter?" [3] "On unfilled orders, how do customers make their brand selections in the next quarter? Are they guaranteed the product at the previous quarter's price, when they first wished to purchase it?" In BRANDMAPS, if a brand's sales volume exceeds current-quarter production plus emergency production plus beginning-of-quarter inventory, unfilled orders result. Some part of a brand's unfilled orders shift to other available brands in the current quarter. Unfilled orders are not backorders. Customers who are unable to purchase their firstchoice brand do one of three things: (1) wait until the next quarter to attempt a purchase of their preferred brand; (2) switch to another brand that is available; or, (3) purchase no brand now or in the next quarter. Thus, some part of your brand's "unfilled orders" shift to competitors' brands in the current quarter, providing that the competitors' brands do have available inventory to meet this shifted demand. However, some of your brand's "unfilled orders" are truly backorders and return again next quarter. The division between shifters and backorders is unknown. For customers of the first type, a purchase in the next quarter is based on the brand's relative standing at that time compared to all other brands available for purchase. Presumably, customers of the first type are predisposed to purchasing their preferred brand from the prior quarter. However, brand prices in the next quarter do influence customers' brand choices. All transactions in the next quarter are at the prices in effect in the next quarter. Unfilled Orders Allocations "How does BRANDMAPS allocate the production of a brand between regions in instances when demand exceeds the available production and existing inventory? Does it allocate on the basis of the region that has the highest margin or by some other criteria?" BRANDMAPS fills all dealer orders proportionately to total demand. Thus, unfilled orders will always be a constant percentage of total possible sales (actual sales plus unfilled orders). There is no way to direct orders to be filled in some prioritized fashion, say by highest margin. All dealers are dealt with equally in this approach regardless of their profit or margin potential. 24

26 Variable Depreciation "Our Q6 DIVISIONAL BALANCE SHEET shows 116K units of plant capacity. Our total production for all products in Q7 was 115K. Why is our variable depreciation $90.68? Shouldn't it be $90.00 per unit (12% of $750)? It would seem that the extra $0.68 per unit is a premium for producing over 100% of our capacity yet our production volume was actually under 100%." When you order plant capacity in BRANDMAPS, there is a fixed cost per order in addition to the variable cost of $750 per unit. That fixed cost is included within the value of your plant capacity as recorded on the DIVISIONAL BALANCE SHEET, since it appropriate to pro-rate this cost over the useful life of the plant capacity. Thus, the effective cost per unit of plant capacity in BRANDMAPS will be a little above $750 per unit. Marketing Research Advertising Program Experiments "Is the cost of Marketing Research Study #35 (Advertising Experiment) per experiment or the specified total for any number of experiments (one to ten)?" The cost is per experiment. If you execute the maximum possible number of advertising experiments in a quarter (10), the total cost would be ten times the stated perexperiment cost. Billings Records "In some cases, the marketing research study billings records seem to report more usage than the students claim to have ordered. Any help on this would be appreciated." Marketing research is run after the quarter has concluded and after the quarter's financial statements have been assembled. It follows, then, that marketing research is not billed until the next quarter's financial reports are generated. So, Q#2 marketing research is billed with the Q#3 financial statements. See the footnotes at the MARKETING RESEARCH BILLINGS records on the financial statements for confirmation of this point. Direct your students to these footnotes, too. Some marketing research studies are costed on a per-unit basis, where the "per-unit" metric is not the same as executing the marketing research study once. This is done for accounting purposes, so that the software only needs to track two items: frequency of execution and cost per-unit of execution. As an example, Marketing Research Study #12 ("Concept Testing") is recorded as being executed as many times as there are market regions when the study is ordered for "all" market regions. In a four-region industry, "all" implies that four concept tests are executed as far as the software is concerned. However, students might think that only one concept test has been executed. 25

27 For marketing research studies where "all" regions have been selected for permanent ordering (such as Marketing Research Study #41), teams must explicitly cancel market regions in which they are no longer interested or else the "all" market regions order continues to be in effect. Of course, even if a firm no longer has active brands in one or more market regions, there is still some reason to monitor competitive developments in non-active regions. Concept and Preference Test Limits "The student manual indicates that concept tests and each variety of preference tests may be executed a maximum of 20 times per quarter. However, my students are running into problems when they ask for more than 10 concept tests or more than 10 preference tests of any variety in a quarter. What's the problem?" There are two constraints on the maximum number of concept tests and preference tests of each variety. First, a maximum of 10 individual concept test or preference test (for each type of preference test) requests may be pre-ordered in any quarter. This is a hard constraint that reflects the maximum memory set aside in the software to store concept and preference test pre-orders. Second, these concept tests and preference tests of each variety can reference a maximum of 20 market regions. Based on these constraints, 10 individual concept tests for a single market region exhaust the available limit for pre-ordered studies in any quarter. Likewise, five concept tests ordered in "all" regions of a four-region game exhaust the maximum limit of 20 concept tests in any quarter even though only five such individual concept tests have been ordered. For marketing research billings purposes (and for the purposes of enforcing the execution limit on the number of marketing research studies that may be conducted in any quarter), a multiple-region test request counts for as many tests as there are regions being tested. Counts for Marketing Research Studies with Limited Availability "The student's manual states that up to 20 concept tests can be requested in any quarter. A team requested 10 concept tests in various formulation/region combinations. The screen reported 'All requests for study #12 are currently in use. Cancel one or more study requests before processing a new request.' At first pass, it seems as if her team should be able to do 10 more concept tests. If this is wrong, how should they be 'counting' a concept test?" For the concept and preference testing marketing research studies, each market region in which a test is conducted counts as one test against the quarter's maximum limit. This is also indicated in the "Availability" sub-section under the description for Marketing Research Study #12: "A maximum of 20 concept tests may be requested in any quarter. In a six-region industry, ordering this study for all market regions simultaneously results in a total of six concept tests being conducted." Given the amount of data entry required for these concept and preference testing marketing research studies, it's rare for students to order more than a handful of tests at one time. Often, of course, a single test is ordered for several regions and, as noted 26

28 above, each region counts as one test for the purposes of the availability limit. However, the software only has the capability of storing a maximum of 10 separate test requests, each for one or all regions. In the extreme, 10 concept test requests, each for a single market region, would exhaust the internal storage capability of the program even though the maximum of 20 concept tests in one quarter had not been reached. Dealer Markups "The dealer markup for the market region 3 (Pacific) is stated to be 70% in the student manual. However, in reviewing Marketing Research Study #41 output, one of my groups has found a $4 deviation in what should have been a 70% markup. What's going on here?" Dealer prices are estimated based on a survey of dealers. Thus, they will exhibit a measure of sampling error. The dealer prices reported in these marketing research studies are estimates of the true average dealer price in a market region. It follows that there could be some variation in observed markups from quarter to quarter due to the randomness inherent in the survey-based estimates of average dealer prices. Estimating a Competitor's Manufacturing Price "Is it possible for a firm to estimate a competitor's manufacturer price by using a combination of marketing research studies?" A fairly direct approach exists to estimate a competitor's manufacturer price. Estimate the regional markup rate by comparing your own manufacturer price to your own dealer price (the price at which dealers sell to final customers). Then, using that markup rate and your competitor's dealer price, it is possible to backout an estimate of a competitor's manufacturer price. For example, if your manufacturer price is $723 and the associated dealer price is $1,232, this implies a dealer markup of 70.4%. For a competitor with a dealer price of $1,089, this implies an associated manufacturer price of ($1,089/1.704) = $639. Since dealer prices are estimated based on a survey of dealers, they will exhibit a measure of sampling error. Thus, the dealer prices reported in various marketing research studies are estimates of the true average dealer price in a region. It follows that there could be some variation in observed markups from quarter to quarter due to the randomness inherent in the estimates of average dealer prices. In BRANDMAPS, there are a wide variety of marketing research studies that provide estimates of dealer prices (#25, #36, #40, #41, and #50). In BRANDS, Marketing Research Study #41 is the only source of dealer price estimates. Marketing Research Printout Pagination "We successfully downloaded and printed our marketing research results from the course website. Our marketing research results begin on page 18. Does this make sense? Are we missing anything?" 27

29 The marketing research results are paginated in sequence after the financial results. Thus, with 17 pages of financial results, your marketing research printout would follow starting on page 18. Note that the marketing research studies are printed in numerical order (1, 2, etc.), but the only marketing research studies that are printed are the ones that you actually ordered. Marketing Research Study #1 "When I request Marketing Research Study #1 for my firm, the marketing research report shows on the study title but provides no further information. What's going on here?" Marketing Research Study #1 is designed to report competitors' earnings and dividends, not your own firm's data. Your own firm's earnings and dividends data are reported on your balance sheet. Marketing Research Study #10 "When I order a conjoint analysis for 'all' regions in BRANDMAPS, do I receive an overall set of aggregate conjoint results or do I receive conjoint analysis results for each market region separately?" A conjoint analysis ordered in "all" regions results in separate conjoint analyses being executed in each market region with the results reported separately for each market region. "All" market regions for conjoint analysis means that the specified experimental design (specified levels for each of the five raw materials, Compatibility, Warranty, and dealer price) is executed independently in each market region with results being reported separately for each market region. Although the student manual shows an example of results only for a single market region, "all" means that there will be separate results for each market region. Average results across market regions are not reported since they would have little meaning if regional variations exist. And, of course, students could create their own averages if they thought that such numbers were meaningful. Marketing Research Study #12 "We ordered three concept tests (Marketing Research Study #12) for alternative vaporware formulations in a particular market region. Each of the test scores yielded 0% interest in the tested formulations. Is this possible?" Yes, this is possible. Apparently, these are terrible formulations relative to the needs of the customers in this market region. Marketing Research Study #18 "Does Marketing Research Study #18 in BRANDMAPS report on all existing patents or only the patents held by other firms?" 28

30 In BRANDMAPS, Marketing Research Study #18 and Marketing Research Study #30 search over all existing patents, including those currently held by your firm. Thus, a "false positive" could occur. A patent could be reported as existing but that patent could be your own. On a reformulation, only other brands' existing patent zones are checked, not the brand that is being reformulated. Thus, during a reformulation effort, you may violate your own brand's patent (but not any of your other brands' patents), providing that you don't also violate other brands' existing patents. Note, also, that Marketing Research Study #18 and Marketing Research Study #30 search for patents now. But, when reformulations occur next quarter, all patent zones decrease by three patent zone points prior to reformulation bid queue processing. Thus, a patent violation now might actually not be a patent violation at the start of the start of the next quarter. The only way to know about patent zones is to track everyone's patents carefully with the available marketing research resources within BRANDMAPS. Of course, you can't predict who will reformulate or how much they'll bid in the future, but you can at least know where all the existing patents lie. Sales Force Efficiency "How can sales force efficiency be measured in the simulation?" Test marketing (Marketing Research Study #20) may be used to test any elements of a marketing program. Test marketing is not limited to just tests of product formulation variations or new product launches. Thus, test marketing may be used to test variations in sales force resource allocations. In addition to reporting sales, market share, and profit estimates, test marketing also reports a variety of market-based diagnostics that may be useful in assessing a brand's strengths and weaknesses (e.g., customer brand awareness, dealer availability, and brand quality perceptions). Since sales force resource allocations have a long-run character, multi-quarter test marketing experiments would be the norm when testing alternative sales force resource deployments. Test Marketing Results Are Missing "Several student teams report ordering a multi-quarter test marketing study (Marketing Research Study #20) but not receiving its results with the rest of their marketing research results. Any advice that you have on this would be appreciated." To do test marketing, students must both change the decision variables and order the marketing research study. The usual reason for no test marketing results being reported is that the students forgot to order the study, thinking (erroneously) that just changing the decision variables was all that needed to be done. This two-part procedure is described in the student manual. 29

31 Marketing Research Study #21 (Self -Reported Importance Weights) and Pricing "In Marketing Research Study #21, self-reported importance weights for perceived performance, perceived convenience, and dealer price are reported. Even though students are cautioned about the impreciseness of such self-reported importance weights, the consistently high values of the relative importance for dealer prices encourages students to pursue price cutting strategies sometimes to their detriment. Do you have any advice on how to deal with this?" The self-reported importance weights in Marketing Research Study #21 for perceived performance, perceived convenience, and dealer price are fragile things. There is no special magic to them. Presumably, they reflect customer brand choice behavior to a degree. However, the track record of such self-reported weights is poor. It's easy for customers to say they want it all, to avoid trade-offs, and to run to convenient/transparent/obvious variables like price rather than make the necessary trade-offs between price and product/service benefits. There are many other marketing research resources available to assess the role of pricing is customers choices and in brand/firm profitability. The key teaching issue is to demand that your students focus on profitability and not just volume (market share) issues. The market position summaries provided in Marketing Research Study #41 ("Regional Summary Analysis") suggest the salience of the performance, convenience, and price market drivers. If, for example, the major market share brands are high in perceived performance, that would suggest the relative supremacy of perceived performance in this market region. On the other hand, if high performing brands differ widely in market shares, then other factors (perceived convenience, dealer price, relative maturity of the brand/formulation) must be relevant to explaining market share positions. Preference testing with varying dealer prices is a simple way to quantify formulationprice trade-offs, without relying on self-reported importance weights of questionable quality. Test marketing major price changes is another important marketing research resource to gauge the potential profitability of low-price strategies and tactics prior to instituting them in the real vaporware market place. Indeed, some instructors have required test marketing evidence to be presented prior to approving any reduction in dealer price. One effective teaching approach is to require teams to complete a pricing worksheet prior to or in connection with any reductions in dealer prices. Such a one-page pricing worksheet is provided in PRICING.DOC, a Word document listed on the home page. The use of this pricing worksheet will force students to consider profitability and not just volume in their pricing decisions. While there is no magic to this pricing worksheet, its use does force profitability issues to the forefront. It also creates a wonderful opportunity for instructor-student interaction about strategies and tactics, when the instructor insists on a contemporaneous or post-quarter review of price reduction decisions. The broader teaching issue here is really differential advantage. Attempting to compete by using low prices avoids the much harder challenge of offering a superior benefit proposition to customers. Students should be forced to justify low-price strategies and tactics in written analyses, oral presentations, etc. Are such strategies sustainable? How will price wars be avoided? Are low-price strategies really the most profitable ones? 30

32 What combination of benefits (perceived performance and perceived convenience) and price are most profitable in the long run? Marketing Research Study #30 "Does Marketing Research Study #30 in BRANDMAPS report on all existing patents or only the patents held by other firms?" In BRANDMAPS, Marketing Research Study #18 and Marketing Research Study #30 search over all existing patents, including those currently held by your firm. Thus, a "false positive" could occur. A patent could be reported as existing but that patent could be your own. On a reformulation, only other brands' existing patent zones are checked, not the brand that is being reformulated. Thus, during a reformulation effort, you may violate your own brand's patent (but not any of your other brands' patents), providing that you don't also violate other brands' existing patents. Note, also, that Marketing Research Study #18 and Marketing Research Study #30 search for patents now. But, when reformulations occur next quarter, all patent zones decrease by three patent zone points prior to reformulation bid queue processing. Thus, a patent violation now might actually not be a patent violation at the start of the start of the next quarter. The only way to know about patent zones is to track everyone's patents carefully with the available marketing research resources within BRANDMAPS. Of course, you can't predict who will reformulate or how much they'll bid in the future, but you can at least know where all the existing patents lie. Marketing Research Study #31 "We are considering ordering Marketing Research Study #31 ('Industry Sales Volume Forecast') for a newly opened market region. We wonder if it will be relevant since there are currently no industry sales and no historical industry sales data in the newly opened market region. Can Marketing Research Study #31 still provide us with an estimate of industry sales in a newly opened market region?" Marketing Research Study #31 ("Industry Sales Volume Forecast") is indeed based on historical data. Since a newly opened market region has, by definition, no past industry sales data, an industry sales forecast about the future cannot be created in the absence of such historical data. However, please do note the timing of the execution of Marketing Research Study #31. Like all marketing research studies, Marketing Research Study #31 will be executed after the next game run. If there is at least one active brand in a new market in the next quarter, then there will be some historical data available (one quarter of data) on which to base a future industry sales volume forecast. On the other hand, perhaps you would prefer to create your own industry sales volume forecast using measures and criteria other than historical sales data. 31

33 Marketing Research Study #33 (Bidding Statistics) "From BRANDMAPS Marketing Research Study #33, there were 7 bids submitted with an average bid of $827,204 and a high bid of $5,300,000. However, our financial reports show a reformulation charge of $2,843,568. Note that $827,207 times 7 equals $5,790,428 for the total amount of the seven bids submitted. But, if I subtract the high bid and our team's bid, I end up with a negative number. What's up?" Your "reformulation" amount on your divisional operating statement includes the $2,500,000 costs associated with a major reformulation. The reformulation bidding statistics from Marketing Research Study #33 only refer to the amounts bid for position in the reformulation queue, not to the subsequent reformulation costs. Marketing Research #33 (Blank Reformulation) "A current-quarter reformulation shows up blank on the output of Marketing Research Study #33. Why is that?" Marketing Research Study #33 reports the reformulations of products that have been successfully reformulated in the current (i.e., just-completed) quarter. To conduct a formulation analysis, products must be actively distributed in at least one market region. (A sample unit must be purchased through normal distribution channels to conduct the reverse engineering.) Apparently, this product was reformulated but was not introduced. Once introduced into one or more market regions, this product's current formulation can be accessed by reverse engineering it via Marketing Research Study #2. Marketing Research Study #40 (Missing Reformulations) "Firm 2's BRANDMAPS output for Marketing Research Study #40 showed two products (3-3 and 6-3) with formulations "**" when, in fact, both products had been reformulated in the past and are currently active in at least one market region. Is there an explanation for this missing data?" Direct your students to carefully read the marketing research study description for Marketing Research Study #40, especially the footnotes. This is NOT a core dump of all existing formulations! These students didn't "know" the current formulations for products 3-3 and 6-3 because they had not done the right marketing research in the past. Tell them to do Marketing Research Study #2 if they want to "know" these formulations now (and simultaneously update their firm's personal Marketing Research Study #40 formulation database). Marketing Research Study #41 ("Industry" and "Average") "In Marketing Research Study #41, what do 'industry' and 'average' mean?" 32

34 In Marketing Research Study #41, "industry" means total (for all firms in the industry). "Average" means average per-product. Marketing Research Study #43 "One of my BRANDMAPS teams ran Marketing Research Study #43 ('Marketing Spending Productivity') for all regions. Their report indicated that they had only one product in market region 1 when they actually have two products active in that region. I'm not sure why this happened. Can you solve this mystery?" Marketing Research Study #43 only reports results for products whose market share is at least 5.0%. Since this study is based on ratios of sales revenues, the "small-brand" problem arises: brands with small sales revenues can lead to wildly large ratios, which can result in average ratios that are uninterpretable. To avoid this problem, only larger (i.e., greater than 5.0% market share) brands are included in this study. As it turns out, this caveat is included in the "Other Comments" sub-section of the description of this marketing research study in the BRANDMAPS student manual. As is often the case, the answer turns out to be in the manual. In cases where students have questions about marketing research study results, it is my experience that asking them to re-read the manual description of the marketing research study is usually helpful. Most student questions are resolved with a careful re-reading of the manual. Marketing Research Study #47 (Results Interpretation) "Is it correct to interpret the results from Marketing Research Study #47 in a cumulating style? That is, if 12% of potential customers prefer a value of '8', 21% prefer a value of "20", and 33% prefer a value of '32', then 12%+21%+33%=66% prefer a value of '32.' After all, don't customers always want 'more' so a product with an attribute value of 32 is always preferred to a product with an attribute value of '20'?" There are two different type of attributes which comprise vaporware. There are physical raw materials, attributes #1-#5, and there are directional elements, attributes #6-#7 (Compatibility and Warranty). The physical raw materials are of the "ideal-point" variety. Customers want what they want. Deviations, in either direction (too little or too much), are bad. For directional attributes (Compatibility and Warranty, and Dealer Price too), more-is-better or less-is-better are always the cases. For physical raw materials (attributes #1-#5), too much or too little are presumably both bad, although not necessarily with equal dispreference to customers. Do not cumulate the percentages in Marketing Research Study #47. A value of "56" is NOT a preferred value to those who really want "24"; 56 is a long-way from "24". "56" is just different from "24." Attributes #6-#7 are directional, with more always being better. All customers should want high levels, "9"s if possible. Whether you should offer such a level is, of course, another matter when you factor in cost considerations. Marketing Research Study #47 does not report self-attribute preferences for directional attributes, like Compatibility 33

35 and Warranty. Since more-is-always-better for Compatibility and Warranty, research is not needed to learn that everyone prefers a value of "9" for vaporware attributes #6 and #7. Marketing Research Study #48 "Is a 100% brand satisfaction score possible? I've just found one, for a newly launched product. Any comments?" A 100% brand satisfaction score for a newly launched product presumably represents a lot of statistical noise associated with the initial launch of one or more brands into a market region. It's also possible that the very early buyers for a new product might be somewhat different than later buyers who represent a broader and more realistic crosssection of vaporware customers. After customers and channel members really get to know a newly launched product and its associated marketing program after another quarter or two, things will settle down to a more realistic brand satisfaction score. Marketing Research Study #50 "I am troubled by Marketing Research Study #50 ('Price Sensitivity Analysis'). It always seems to show that the lower the prices, the higher the profitability. What is going on?" Marketing Research Study #50 only predicts long-run market share, based on very specific assumptions (see the marketing research study details in the student manual). It is necessary to translate the long-run market share estimate into a profitability estimate (a spreadsheet would be needed to do so). Obviously, lower prices would increase market share, but lower prices also reduce margins. In addition, lower prices might invite competitive retaliation and lead to all prices in the industry being lower, with consequent lower margins and lower profitability for all. Please do look carefully at your spreadsheet to ensure that profits are calculated correctly. My experience is that most students' spreadsheets don't have profits calculated correctly. Several cautions are in order with regard to Marketing Research Study #50. First, Marketing Research Study #50 ("Price Sensitivity Analysis") estimates market share only based on price and product attributes. "Convenience" is not factored into this estimate (price sensitivity analysis is equivalent to a choice simulation in conjoint analysis). Second, price sensitivity analysis estimates could be quite unstable at the beginning of a simulation, when the products are all so similarly positioned. Use caution in commodity-like environments. Third, it might be appropriate to follow-up price sensitivity analysis with a test marketing experiment, since that's a more reliable (albeit expensive) form of long-term marketing mix evaluation. Marketing Research Study #55 "What is Marketing Research Study #55? Firms appear to be billed for this study automatically every quarter." 34

36 Marketing Research Study #55 represents the management information system charges of $1,000 per page associated with all financial and marketing research reports. Q#2 charges will normally be the same for all firms, since the Q#1 financial reports will normally be identical for all firms and no marketing research will have been ordered. Starting at Q#3 (with the charges for Q#2 marketing research being recognized within the Q#3 financial results), these management information system charges will vary across firms due to the varying amounts of marketing research ordered by the firms. Market Region "9" "One of my student teams tried to do Marketing Research Study # 12 ('Concept Testing') and there seems to be a problem. This industry has three market regions and when the students selected all regions, the confirmation said they had ordered the study for region 9. I had them use both the lower and upper case 'A' for all regions, but the confirmation came back each time as region 9. They were able to enter one region at a time. What's going on here?" Region "9" is a valid market region number. It is actually an internal software code for "all regions." For some of the marketing research studies, individual regions are listed by number and a request for "all regions" results in each region being listed separately. For other marketing research studies, region "9" is listed and that is the internal software code for "all regions." Patent Information Timing "What is the timing of patent-related information provided in BRANDMAPS marketing research studies? Does it reflect the situation in the current quarter or in the next quarter?" Patent information provided is always as of the moment a marketing research study is executed. Thus, a patent search on a specified formulation that reports a patent violation reflects the situation as of that moment. When BRANDMAPS next runs, patent zones are reduced by three units and such a formulation might then not violate existing patents. On the other hand, a patent search on a specified formulation that reports no violation means that such a reformulation is certainly patentable if the associated reformulation request is the first one processed when the game next runs. To be the first reformulation processed in BRANDMAPS requires, of course, that the reformulation bid be the highest one submitted in connection with the next game run. As an example, consider a reverse engineering study of a competitor's brand processed in connection with the normal game run for quarter #8. Since the marketing research is executed after the conclusion of quarter #8, results reflect the situation in quarter #8. A competitor's brand that has just been reformulated will show a patent zone of 25 in the Marketing Research Study #2 output. However, the effective patent zone is really 22, since that is what will be the case when the next quarter runs and that is when reformulations next occur in BRANDMAPS. Between quarters #8 and #9, patent zones for newly reformulated brands are 25. Patent zones decrease to 22 when quarter #9 begins. Reformulation requests are the next thing that happens after the game's time counter advances to quarter #9. After reformulation requests are process, the game runs. 35

37 Patent Searches "My BRANDMAPS team was considering a minor reformulation and ran a patent search. It reported a patent violation. Does the patent search ignore our team's formulations in its patent searching?" Patent searches associated with a reformulation (which are implicitly executed by the BRANDMAPS software) check all patents other than the brand being reformulated. Patent searches run independently of a reformulation do not distinguish between your brands or your competitors' brands. Thus, your patent search could indeed be reporting a violation of the brand you anticipate reformulating. The good news is that a failed minor reformulation is not the end of the world, since the product would have only changed modestly. To preserve your ability to still reformulate elsewhere (another brand) when attempting this minor reformulation, you could submit multiple reformulation requests for multiple brands. The bids will be processed in bid order and the first one completed successfully will knock the others out of the reformulation processing (but you still have to pay the bid prices, of course). Thus, you could try for the minor reformulation, either before (higher bid) of after (lower bid) another reformulation attempt. This would give you more than once chance at a reformulation, in case the minor reformulation attempt ran into someone else's patent. Patent Searches Associated with Reformulations "When a product is reformulated in BRANDMAPS, I was under the impression that the firm is required to order Marketing Research Study #18 ("Patent Search"). It seems like we are being charged more than this marketing research study actually costs. Can you please clarify if this marketing research study needs to be ordered when we reformulate or is it ordered automatically?" There is no need to order Marketing Research Study #18 in connection with a reformulation. The software does this automatically as it processes your reformulation request(s). This study needs to be ordered for each reformulation try that you make. Thus, if your third reformulation try is the one that is successful, a total of three patent searches will have been conducted to facilitate this reformulation (one for each of the first, second, and third tries). Indeed, if you are unsuccessful in a reformulation effort, you will still have incurred the costs associated with executing three patent searches. The only time that you will be charged for only one patent search is if your first reformulation try is successful. Perceived Performance After a Reformulation "I am in a quandary regarding customer perceived performance in region 3 regarding our brand 1-1. The conjoint analyses we performed shows that our reformulated 1-1 should be very well received by customers in region 3, yet customers seem to feel that it is simply average in perceived performance. Is there any way (short of another reformulation) that I can improve customers' perceived performance of 1-1? Any advice you can give me would be greatly appreciated." 36

38 Congratulations on your 1-1 reformulation. It must have been a non-trivial challenge to get by all of the competitors' patent barriers. Now, of course, the real work begins - making the brand profitable. Of course, with lots of entrenched and good competitors, market share growth will be slow, particularly since you don't have a dominant formulation, just one in the vicinity of the leaders in preference. But that's a major accomplishment, given where your old brand 1-1 stood in the universe. Such a substantial brand repositioning is likely to take a while to be fully realized in the market place. Customers' perceptions may have to adjust through time. Is the direction of movement what you expected, even if the final story hasn't been written on where performance perceptions may end up? If preference testing, conjoints, etc. show the brand fits the customer requirements, then perhaps something else is amiss. What else drives perceived performance? What about quality? How's your quality perception compared to competitors? How much are you spending on R&D compared to your competitors? Are you using the right media content, given your dramatic brand repositioning? Where's the evidence as to the appropriateness of your current media content and media mix? Keep your nose to the grindstone and your shoulder to the wheel. You are on the right track. Keep going. Pre-Ordered Marketing Research (Definition) "What is pre-ordered marketing research?" Since marketing research takes some time to conduct, there is a lag between ordering and receipt of marketing research in the real world. In the simulation, that lag time is simulated by requiring teams to pre-order marketing research (either temporarily or permanently) along with their decision variable change requests. These marketing research pre-order requests are either entered by the students on their disk (if disk-based input is being used) or they are entered on the standard marketing research request forms included in the participant's manual (if the Game Administrator inputs all decision variable changes and marketing research pre-orders). Pre-Ordering Procedures For Marketing Research "Are you allowed to pre-order marketing research more than once or do you have to enter all relevant marketing research pre-orders at the same time?" Marketing research may be pre-ordered in stages. The marketing research pre-orders accumulate until the game next runs and the marketing research pre-orders are processed. Thus, there is no problem pre-ordering some marketing research today and more marketing research tomorrow. Of course, the disk-based input programs B_DV.EXE and/or B_PREMRS.EXE must be exited normally for all decision variable changes and marketing research pre-orders to be saved correctly onto the disk. Sometimes students just remove the disk and walk away from their PCs without saving everything first. Whatever is on the disk at the present time (i.e., when students access the disk) is what the software understands to be true. If a previous decision variable change or marketing 37

39 research pre-order doesn't seem to be present on the disk, then the correct thing to do is to re-enter the decision variable change or marketing research pre-order request. Product-Specific Marketing Research Costs "Is it possible to break out total marketing research costs into product-specific marketing research costs, to facilitate product-line performance evaluations?" No and it is probably unwise to do so. Such overhead allocations are going to be quite arbitrary, no matter how they are done. Thus, it is better to view this as one (of many) corporate-level unallocated overhead items that are only reported on the DIVISIONAL OPERATING STATEMENT. Test Marketing and Sales Forecasting "Why do sales forecasts differ so much between test marketing and the sales forecasting marketing research study?" The test marketing study is based on the current brands in the market and their evolving marketing programs. Only the tested brand's marketing program can vary in test marketing. All other brands' marketing programs are held constant at their existing values during test marketing. However, the dynamics of the market (e.g., evolving dealer availability) are taken into account within test marketing. The sales forecasting marketing research study is a pure extrapolation of recent trends. Since test marketing takes many more things into account (and provides much more diagnostic information), it is likely to be a much better sales forecasting tool than the very simple extrapolative nature of the sales forecasting marketing research study. Naturally, test marketing is considerably more expensive than a simple extrapolation of past sales realizations. Timing of Marketing Research Billings "My firm isn't being charged for the right marketing research. What's wrong?" The MARKETING RESEARCH BILLINGS records are lagged a quarter on the standard financial statements. For example, marketing research pre-orders in connection with quarter #4 (i.e., submitted along with other decision variable changes for quarter #4), are actually executed after the completion of quarter #4 and are billed, therefore, with the quarter #5 financial statements. This lagged billings situation is described in the financial statements in a footnote at the bottom of the page that reports the details of the current quarter's marketing research billings. 38

40 Output Interpretation Cash Balance "What determines our ending cash balance? I would like to have $1M in cash and the rest placed in marketable securities." Ending cash balance must be at least a specified percentage of current quarter revenues. See the student manual for details. If the natural ending cash balance does not meet the minimum required level, a loan is automatically created to bring the adjusted ending cash balance up to this minimum required level. The software automatically invests any excess cash (above the maximum cash level, again tied to current quarter revenues) in marketable securities. Your ability to control precisely the level of marketable securities is limited given the automatic provisions built into the software. Over time, of course, you may control the level of investment in marketable securities by issuing dividends which require cash payments, thereby reducing cash and/or marketable securities. Capacity Usage Situation "I am not sure how to interpret the following capacity usage situation reported within the financial reports: Current capacity is 115,010 units; pending capacity is 40,400 units. With no change in production, next quarter capacity usage will be 113.4%. Next quarter capacity is 133.0% of current quarter sales volume. Forecast capacity utilization is more than 100% ### Warning: Major Overcapacity Utilization Problem May Be Imminent ### Their current divisional operating statement shows 86,502 units of sales for all products in all regions. Their current production is 130,400 with an ending inventory of 43,899 units." The software does not know anything about the students' possible plans for the next quarter. It is only reporting on the current status of things at the time this financial report is created, immediately after the conclusion of the most-recent quarter's game run. True, these students might conclude that they should reduce production next quarter, in light of their current sales volume and their current inventory level. But, of course, that is at the discretion of these students. Pending capacity is not available next quarter. It becomes available at the end of the next quarter, not at the beginning of the next quarter. Only the top-line capacity figure on the DIVISIONAL BALANCE SHEET is available for use next quarter. Current production of 130,400 obviously exceeds current capacity of 115,010. Thus, this warning message is issued. Note that 130,400/115,010 = 113.4% capacity usage, assuming that production next quarter is equal to the previous quarter's production level (130,400). 39

41 Common Stock "What are the number of shares of outstanding common stock for a firm?" Assume that all firms had 1,000,000 shares of common stock at initialization (i.e., at quarter 1). However, it's not clear that the number of outstanding shares is that crucial a consideration to life on this planet. Indeed, if the answer to the question "how many shares?" had been "unknown," how would decisions in marketing, operations, finance, etc. change? Probably not at all. The key thing is return on assets deployed. Some form of ROI (return-on-investment), or ROA (return-on-assets), or ROE (return-on-equity) measure is the ultimate financial performance indicator. Think about NPV (net present value) calculations for investments of corporate resources in products, markets, or projects. Where in such calculations are the number of shares outstanding? However, everywhere in such NPV calculations are returns (profits, net cash flows, etc.) and assets deployed (investments) to realize these returns. Cost Recognition Timing "Could you explain why we had product costs of $10M this quarter in BRANDMAPS? We had an inventory of approximately 18K units with no production order this quarter. The plan was to eliminate the inventory that had built up over the previous quarters. I have always thought that product costs are incurred during the quarter in which the product is produced." The accounting principle of matching (i.e., matching revenues and costs) is key here. You are charged for variable production costs ("product costs" in the simulation) when it's sold not when it's produced. When the product is produced, it's a strict asset side transaction on the financial statements with cash decreasing and finished goods inventory increasing. There's no profit-and-loss implication of production. When the product is sold, the balance sheet is affected with finished goods inventory decreasing and cash increasing. On the profit-and-loss statement, the sale of the product has associated with it product costs. Cumulative Financial Statements [1] "Our BRANDMAPS team changed financial reporting formats in Q#5. We now get REGIONAL OPERATING STATEMENTS, which fits our team's structure. But I've noticed a possible problem. Our Q#5 CUMULATIVE DIVISIONAL OPERATING STATEMENT isn't cumulative. It excludes Q#1-Q#4 performance. What's up?" [2] "Although all of my firms are profitable, the net income on the cumulative financial statement in Q#5 is less than the corresponding figure in Q#4. What's happening?" [3] "When I examined the financial reports generated with the Q#5 game run, I discovered that each of the six firms in the industry has identical cumulative and current product operating statements. Firm 3, for example, has both current and cumulative operating income of $9,006,490 and firm 5 has $1,854,464 in both categories. What's happening?" 40

42 "Cumulative" refers to year-to-date, not "cumulative from the beginning of time." Since Q#5 is the beginning of the second year, the cumulative Q#5 figures are the same as the current-quarter Q#5 figures since the current and the cumulative year-to-date figures are always the same in the first quarter of each year. Debt "I have two BRANDMAPS teams with debt leverage of more than 50% and another team with a debt leverage of 196.8%. Is this serious? How should this debt problem be solved?" Yes, this kind of high level of debt is a serious problem. Some remedial action on your part is almost certainly necessary. High debt is a symptom of other problems and it's those underlying problems that must be resolved. The relative amount of debt compared to a firm's asset base determines their interest rate on loans. High debt leverage (more than 50%) has associated with it 9% per quarter interest rates. What are the sources of debt? This is an interesting starting-point question since the scenario files start the teams off in a positive profit and low/no debt situation. Debt has these possible sources: (1) borrowing to fund plant capacity orders; (2) borrowing to fund investment in finished goods inventories; (3) borrowing to fund the payment of dividends; and, (4) borrowing to fund continuing large operating losses. Firms who have debt problems normally ordered much too much plant capacity and didn't stop ordering it when sales growth failed to materialize. A quite solution to help out such a firm is to sell-off on-order plant (at the order cost per unit). This will free up the capital allocated to that unneeded plant capacity order. With regard to too-high finished goods inventory levels, push the firms to pay a lot more attention to production ordering in light of realistic sales forecasts. If necessary, you could alleviate finished goods inventory problems with disposal sales (at the current cost per unit on the balance sheet, since you don't want such a firm to profit from such an inventory disposal sale). Using disposal sales in this way also helps a team who feels constrained not to reformulate until inventory levels are worked down to a more manageable level. If operating losses are the problem, look to firms that are grossly over extended with too many undistinguished products in too many markets. Force them to focus their efforts and demand that they quite chasing volume just of the sake of volume. Demand profitability and demand it now. Financial Statement Implications of Plant Capacity "Explain the mechanics of plant capacity on the balance sheet and the cash flow statement." Plant capacity is an asset, so most of the interesting action associated with plant capacity occurs on the balance sheet and on the cash flow statement, not on the profitand-loss statement. A purchase of plant capacity is an exchange of cash for plant capacity, a purely assetside transaction on the balance sheet. If your firm has too little cash, a plant capacity 41

43 order may trigger a corresponding loan to replenish your cash to minimum required levels. On the cash flow statement, a purchase of plant capacity is a "use" of funds. (Other "uses" of funds are for covering operating losses, paying dividends, and funding increases in investment in finished goods inventories.) Depreciation reduces your investment in plant capacity, thereby increasing your available cash. The variable part of depreciation is embedded into your product costs; the fixed part of depreciation is a direct fixed cost to your firm, included in the divisional profit-and-loss statement. You might care to think of depreciation as a "sale" of some part of your plant capacity to the manufacturing side of your business, with the receipts of that "sale" serving to increase your cash. On the cash flow statement, depreciation is a "source" of funds. (Other "sources" of funds include profits from operations and reductions in investments in finished goods inventories.) Fixed Depreciation "How is fixed depreciation calculated?" Fixed depreciation is equal to 3% of the value of the current plant capacity, regardless of the plant capacity usage (the total of all production orders, regular and emergency). For example, if the initial (quarter 0) plant is 160,000 units and each unit of plant capacity is valued at $750, then it follows that the fixed depreciation of $3,600,000 reported on the first-quarter divisional operation statement is equal to (0.03)*($750/unit)*(160,000 units). "Funny Numbers" and Rounding "Some numbers on the financial reports seem 'funny' and inexact. For example, depreciation is reported as $3,599,999 rather than the correct value of $3,600,000. What's up?" Since the software is written in FORTRAN, there are occasional rounding errors when converting from real to integer values. This is one such example. If students ask, it's best just to be honest and advise them of the possible existence of such minor rounding errors Production Equals Sales "One of my teams sold exactly the amount of product that they produced in successive quarters. Are they merely lucky or is something else going on here?" Sales volume exactly equal to production plus inventory (resulting in no endingquarterly inventory) can happen in BRANDMAPS under these circumstances: (a) pure coincidence; (b) if the brand's emergency production order is set to 0% and if sales exceed production plus inventory, but this would lead to some amount of unfilled orders being reported for the brand; or, (c) if another brand has unfilled orders and some portion (the "switchers") of those unfilled orders were shifted to brands with available inventory. However, in case (c), secondary unfilled orders do not occur in 42

44 BRANDMAPS, so when the recipient brands for other brands' unfilled orders exhaust current inventory, no further sales are made. This points out the need to monitor unfilled sales via Marketing Research Study #39, for example. Otherwise, your current sales volume could be due to competitors' brands having unfilled orders rather than to your good marketing efforts. Plant Capacity "On my BRANDMAPS output, I have 91,000 units of current plant capacity and 15,500 units of 'Plant On Order For 1 Quarter Hence.' Can I produce up to 106,500 units next quarter without being invoking overcapacity usage depreciation penalties?" No, you only have 91,000 units of plant capacity available for use next quarter. Production orders above 91,000 units will involve overcapacity usage depreciation penalties as described in the student manual. Plant capacity listed on the DIVISIONAL BALANCE SHEET as "Plant On Order For 1 Quarter Hence" is not available for use in the next quarter. Only the top-line plant capacity amount listed under "Current Plant" (91,000 in your case) is available for use in the next quarter. "Plant On Order For 1 Quarter Hence" becomes available at the end of the next quarter, not at the beginning of the next quarter. Variable Costs "Why are my variable costs in the quarter profit-and-loss reports different that the variable costs reported in the 'Product Cost Analysis Estimates' sub-report?" Your quarterly variable costs reflect withdrawals from your finished goods inventory, which are done on an average costing basis. The variable costs reported in the "Product Cost Analysis Estimates" sub-report are estimates of next quarter's costs, under some very specific and limiting assumptions. Sam Gillespie (Texas A & M University) comments: "Not only does the Margin Analysis section of the 'Product Cost Analysis Estimates' sub-report exclude transportation and shipping costs, it excludes sales C=commissions. Both of these need to be factored back into the regional costs estimates to get an accurate estimate of each brand's regional unit variable contribution to margin (UVCM). Additionally, these costs need to be included in the 'Variable Cost' line in a pricing worksheet when firms make price changes and attempt to estimate the impact of this change on UVCM. These errors in cost calculation are easy to make if the instructor doesn't remind students of the omission of these data, since only divisional costs, not regional costs, are included in the cost calculation information provided in the quarterly financial statements." Variable Costs in BRANDMAPS [1] "The variable costs ('Product Costs') reported on the BRANDMAPS profit-andloss statements don't match the variable costs ('Total Variable Costs') reported on the 43

45 DETAILED VARIABLE COST CALCULATIONS report provided toward the end of the regular financial statements. Could you please explain this discrepancy?" [2] "I am having a difficulty explaining to my BRANDMAPS? students the circumstances under which total product costs will not be the simple product of total variable costs times sales (units). Of course, emergency production would increase total product costs. Yet, I am finding conditions where total product costs are higher than variable costs times units sold in the absence of emergency production. In addition, I am finding conditions where total product costs are less than this product. Can you help me out on this?" Variable costs can vary in successive quarters for the same BRANDMAPS formulation due to inventory withdrawal effects, smoothing costs, experience curve effects, the use of emergency production, and over-capacity usage. Current-quarter costs of new production in BRANDMAPS are documented within the DETAILED VARIABLE COST CALCULATION report in the financial statements. (However, note that the DETAILED VARIABLE COST CALCULATION report doesn't include the effects of emergency production, if any.) Smoothing costs, in particular, can have large effects on variable costs. The software tracks finished goods inventory in terms of both physical units and associated dollar value of those physical units. Due to smoothing costs and experience curve effects, the per-unit dollar value of this quarter's production volume will not necessarily be equal to the per-unit dollar value in previous quarters, thus the need to track both physical units and their dollar values. Vaporware units sold to dealers in a quarter are withdrawn from available finished goods inventory at the current quarter's average dollar value. FIFO and LIFO are not employed due to the difficulty of tracking physical units of inventory with differing dollar values. The implications of these two points is that current variable costs as reported on the profit-and-loss statements will generally not equal this quarter's variable costs for justproduced inventory (as reported on the DETAILED VARIABLE COST CALCULATIONS report). Only in the case of zero opening finished goods inventory in a quarter will the two values be identical. An opening inventory of zero units can occur under two circumstances: if a brand has unfilled sales in the last quarter (so that last quarter's ending inventory was zero) or if a brand is reformulated in this quarter. Variable Depreciation in the Financial Statements "Where is variable depreciation recorded on the financial statements? I see that fixed depreciation is reported on the DIVISIONAL OPERATING STATEMENT. However, there's no such line-item for variable depreciation." Variable depreciation is embedded within the variable costs associated with producing each product. See the DETAILED VARIABLE COST CALCULATIONS report within the financial statements for the inclusion of variable depreciation in variable costs. 44

46 Variable Depreciation (Per Unit) [1] "Variable depreciation per unit always seems to be $90/unit in BRANDMAPS, regardless of the level of plant capacity usage. Why is this so?" [2] "I'm running BRANDMAPS with production and capacity management set to "automatic" via the switches in the game parameter file. Why is variable depreciation constant at $90? Is this in effect 'fixed'?" Two interrelated concepts are relevant here. Variable depreciation per unit refers to the cost of depreciation that is imbedded into variable costs. Capacity usage determines the amount of total plant capacity that depreciates in any quarter. For total production orders (across all products, including both regular and emergency production) that do not exceed current plant capacity as shown on the balance (excluding pending capacity), variable depreciation is always 12% of current plant capacity cost expressed in per-unit terms. With plant capacity costs of $750/unit, variable depreciation is costed at (0.12)*($750/unit) = $90/unit. (Actually, plant capacity costs per unit as shown on the DIVISIONAL BALANCE SHEET will differ slightly from $750/unit due to the fixed plant capacity ordering costs included in plant capacity orders.) With production and capacity management switches set to "automatic," depreciation per unit is always $90/unit since the plant is, by definition, always operating at full capacity under the "automatic" settings of these switches. Variable depreciation cost is not related to the actual level of plant capacity usage (provided that usage does not exceed 100%); it is always 12%. However, the level of plant capacity usage does influence the total amount of plant capacity that depreciates in any quarter. For example, with a plant capacity of 143,200 units and a production volume of 105,000 units, plant capacity utilization would be 73.32% in a quarter. This implies that total plant capacity depreciation in the quarter would be 0.03+((0.7332)*(0.12)) = , or %. (The 0.03 figure corresponds to the fixed plant capacity depreciation rate per quarter of 3%, regardless of plant capacity utilization.) Note that this % figure refers to plant capacity deprecation, not variable depreciation cost. The per-unit variable depreciation cost is still 12% of the current per-unit plant capacity cost as recorded on the firm's DIVISIONAL BALANCE SHEET. If the cost of plant capacity changes from its initial value of $750/unit in BRANDMAPS, then the value of plant capacity on the firm's DIVISIONAL BALANCE SHEET would, of course, change to reflect a blending or mixture of plant capacity units purchased at different dollar values. Variable depreciation cost per unit would then change from $90/unit to continue to reflect its cost of 12% of the current per-unit cost of plant capacity as reflected on the firm's DIVISIONAL BALANCE SHEET. Patents Minor Reformulations and Patent Zones "It appears that patent zones may not be updating correctly after reformulations in BRANDMAPS. Sometimes the patent zones don't jump to their correct value of 25 45

47 after a successful reformulation. Rather, they just continue to decline by steps of three every quarter. What's going on here?" Reformulations in BRANDMAPS are of two types: minor (product modifications) and major (product reformulations). Minor reformulations involve a maximum formulation change of five units, at a correspondingly lower cost than major reformulations. However, one of the aspects associated with minor reformulations is that patent zones do not change to 25. Rather, they just continue to decrease by three units per quarter just as if a reformulation had not occurred. Patent zones are always centered around existing formulations. With a minor reformulation, a patent zone shifts to remain centered around the new formulation even though its size continues to decrease by three patent-zone points every quarter. For example, a 30/20/40/5/5/5/5 formulation with a patent zone of 22 which is successful with a minor reformulation to 31/20/40/5/5/5/5 has a patent zone of 19 in the subsequent quarter and that patent zone is centered around the brand's new formulation, 31/20/40/5/5/5/5. Overlapping Patent Zones "Please explain overlapping patent zones in BRANDMAPS. Why aren't patent zones exclusive?" Even though reformulations cannot violate existing patent zones at the time of a reformulation, patent zones can and do overlap in BRANDMAPS. For example, the formulations 30/50/40/5/5/1/9 and 30/40/40/5/5/5/5 differ by 18 patent-zone points. However, if each has a current patent zone greater than or equal to 13, it would be impossible for either to reformulate to 30/45/40/5/5/5/5 since this reformulation attempt violates both products' existing patents. While a product can reformulate inside its own patent zone, other products' current patent zones may overlap making even a minor reformulation impossible. Overlapping patent zones are the reason why a marginal change (of, say, one unit) in a patent can fail. True, patent searches for reformulation are conducted for all other products excluding the one being reformulated at the moment. But, one or more other products' patent zones could already overlap on the intended reformulation point. "Own"-Brand Patent Violations "Can a brand violate its own patent in BRANDMAPS? I had a team hit gold with an early formulation and they are asking whether they can reformulate on a regular basis to protect their patent zone. They are talking about changing six or seven points at a time to try to match any preference drift. Could they be deprived of their current formulation via the bidding process if they try to reformulate and are unsuccessful?" Yes, a team can violate its own patent zone for the brand being reformulated. Patent searches are on all other brands' formulations (including other brands of the firm) except the brand being reformulated. However, there is no guarantee that any particular minor change would lead to a new formulation in the patent space that is available for patenting, even if the brand being reformulated already covers that point with its current 46

48 patent. Due to overlapping patent zones, any particular formulation point in the patent space could be covered by several brands' patents. However, since the firm is seeking to tweak the formulation just a little, there's no real problem if the reformulation attempt fails. The brand always retains its formulation until it is successfully reformulated. Instead of being "new and improved" it would be "old but quite good already." Patent Zone Reduction Timing "When do BRANDMAPS patent zones change, before or after a game run?" The full BRANDMAPS game-run sequence is: (i) quarter counter clicks forward; (ii) patent zones decrease; (iii) reformulation requests are processed; and, (iv) the game runs. Of course, the marketing research pre-order requests still have to be completed, after the game run. In the standard BRANDMAPS configuration, patent zones begin at 25 for justreformulated brands and decrease by 3 each subsequent quarter until the patent-zone minimum of 7 is reached. Thus, in the quarter in which a brand is reformulated, it has a patent zone of 25 with respect to those brands which are reformulated after it in the reformulation bidding queue. In the next quarter, that brand has a patent zone of 22. For example, if brand 2-3 is reformulated in Q#6, its patent zone is 25 in Q#6 (i.e., for the rest of the Q#6 reformulation bid queue processing). In Q#7, brand 2-3 would have a patent zone of 22 for the purposes of blocking other reformulations during the Q#7 reformulation bid queue processing. Capacity Controlling Over-Capacity Production Across Products "In our BRANDMAPS firm, product 1-1 has a high margin and product 1-2 has a low margin. Our potential sales exceeds our current plant capacity so we'll be ordering total production that exceeds capacity. We would prefer to control the specific product that is involved in the over-capacity usage to maximize our margins. How can we do that?" There is no way to control which product is involved in over-capacity usage in BRANDMAPS. It's automatically done in a proportional fashion. For example, if your production orders total 150,000 and your current plant capacity is only 125,000, then 20% of each product's production will be on an over-capacity basis with associated premium capacity-usage charges. The use of emergency production limits in BRANDMAPS does offer a measure of control over production of specific brands. However, emergency production limits have nothing to do with plant capacity limits. Rather, emergency production limits provide direction as to how to respond to situations where demand exceeds available inventory plus current-quarter production (whether or not that production exceeds current plant capacity). 47

49 Timing of Plant Capacity Availability "On my BRANDMAPS output, I have 91,000 units of current plant capacity and 15,500 units of 'Plant On Order For 1 Quarter Hence.' Can I produce up to 106,500 units next quarter without being invoking overcapacity usage depreciation penalties?" No, you only have 91,000 units of plant capacity available for use next quarter. Production orders above 91,000 units will involve overcapacity usage depreciation penalties as described in the student manual. Plant capacity listed on the DIVISIONAL BALANCE SHEET as "Plant On Order For 1 Quarter Hence" is not available for use in the next quarter. Only the top-line plant capacity amount listed under "Current Plant" (91,000 in your case) is available for use in the next quarter. "Plant On Order For 1 Quarter Hence" becomes available at the end of the next quarter, not at the beginning of the next quarter. Reformulation Backup Marketing Plans in Case of a Failed Reformulation "Is there any way to put a backup marketing plan in place in BRANDMAPS that would be enacted if a reformulation fails? For instance, our marketing plan will be based on the premise that our reformulation request would be successful. However, if it fails, our marketing strategy is meaningless and will result in losses." I applaud you for thinking ahead and considering the full consequences of reformulation actions. Brand repositionings (i.e., "reformulations" in BRANDMAPS ) are major undertakings, with lots of associated risks, rewards, and costs. Repositionings are a major management challenge, to plan and to execute. In BRANDMAPS, bidding high for your reformulation request is the only complete protection you have to ensure a successful reformulation and to avoid marketing plan problems with failed reformulation attempts. Of course, even if your reformulation bid is highest, you must still have a technologically valid reformulation request and your reformulation must not violate any existing patents at the time of the reformulation. Thus, there's lots of detailed upfront analysis necessary to ensure that your reformulation will be successful. There is no capability in BRANDMAPS to have one marketing plan (i.e., set of decision variables) in effect if you successfully reformulate and another marketing plan (i.e., set of decision variables) in effect if your reformulation request is unsuccessful. All marketing plans are unconditional. They happen whether or not your reformulation is successful. (But, see the special exception of conditional introductions associated with initial launches of products into market regions that also involve a reformulation.) This is part of the challenge of doing launches, repositionings, and reformulations. These marketing initiatives are very chaotic kinds of things with lots of potential for adverse consequences. 48

50 You do, of course, have the ability to make ad subsequent quarter, to update your marketing plans based on the outcome of a reformulation request. Thus, reformulation consequences for marketing plans aren't permanent all-or-nothing propositions. There are some ways you can purchase a measure of insurance to protect yourself from the uncertainties associated with reformulation outcomes: (1) bid high; (2) conduct lots of careful analysis to ensure that you know competitive brands' formulations and patent zones when you form you reformulation request; (3) use the maximum emergency production limit (10%) to provide a measure of production flexibility in case your sales are unexpectedly high; (4) delay making major commitments of marketing support spending to a brand until you are sure that it has been reformulated successfully; and, (5) until you are sure that a reformulation has been successful, choose marketing decision variables that are not sharply focused on a particular product positioning (e.g., promotional type of 10, standard media mix of 55555, $0 dealer rebate). Price is normally a special challenge in reformulations if the costs of the new product will be dramatically different than the old product. However, there's a logic in pricing "low" during a reformulation attempt, regardless of the short-run financial consequences. (Here, "low" refers to the lower of the prices associated with the old reformulation and the new reformulation.) If your reformulation is successful, a "low" price encourages trial of the new formulation. Since the reformulation is presumably superior to the old, the "low" price yields faster market share gains. You will, of course, expect to raise price someday to extract the superior financial performance that you hoped to achieve in the first instance with the reformulation effort. If your reformulation is unsuccessful, you were probably facing decreases in market share anyway so the "low" price is a way to hold your market position in the face of a poor product formulation. Bidding on Minor Reformulations "In BRANDMAPS, is it necessary to bid for minor reformulations? Doesn't a firm already own the patent zone within which a minor reformulation occurs?" Bidding is required for all reformulations, minor and major. Firms do not own exclusive rights to patent zones, since patent zones may overlap in BRANDMAPS. Indeed, many products' patents could cover the same patent-zone point. It seems prudent to bid low for minor reformulations since the fallback position, the current formulation, is normally satisfactory. Goodwill Carryover After Reformulation [1] "Suppose that a firm has a mature product in the U.S. If they choose to reformulate that same product and reintroduce it into the U.S., how much of the goodwill carries over to the new product? I realize that the student manual says 'some' does, but is the student manual referring to bringing a new product in while the old one still exists? This question is relevant because the answer determines whether a team should cultivate an old brand or reformulate a new and improved brand." [2] "After reformulating, does the former position of the product influence dealer support? Or, does the new formulation have to start from ground zero with dealers?" 49

51 Whether a reformulation is for an old already-in-a-market product or for a new to-beintroduced-to-a-market product, the same basic principle is at work. The former positioning is generally remembered by customers and dealers. It follows that the former positioning is taken into account in current purchase decisions. Reformulation means "new and (presumably) improved" with carryover of previous standing with customers (e.g., customer brand awareness) and dealers (e.g., dealer availability). Well-known, well-entrenched products build off their previous market positions after a reformulation, whether that reformulation is major or minor. Unknown products, launched (i.e., introduced in a market region or regions) at the time of reformulation, must build market presence. Awareness and distribution take time and cost money to develop. That's the reason why a dominant new formulation ("dominant" according to product design research) doesn't necessarily win the whole market immediately. It has to build up awareness, distribution, reputation, and convenience perception after launch. Two additional other observations are relevant here. First, an active brand that is reformulated for its current market(s) only does not need to be introduced. It is already active in its current markets. Introduction only occurs when a product is first launched into a market region or regions. Second, carryover is brand-specific not firm-specific. If you drop product 4-2 from a market and simultaneously introduce a reformulated version of product 4-1 into that same market, there is no carryover present. As far as the customers in that market are concerned, product 4-1 is a new product. It would have to earn market position, awareness, distribution, etc. like any other completely new product. Introduction After Failed Reformulation "One of my BRANDMAPS firms submitted a reformulation request and all three reformulation variations violated pre-existing patents. However, the product was still introduced into market region 1 with the exact same formulation as their original product 6-1 (30/30/30/5/5/5/5). After all three of their reformulation requests failed, the software introduced a second exactly identical product into market region 1. This split their sales and increased their costs. Shouldn't the same formulation have been a patent violation on their own existing product (6-1) in market region 1?" Original (at initialization) formulations are grandfathered regarding BRANDMAPS patent laws. Their formulations are legal although all other reformulations must satisfy patent laws. Since all products start off with the same formulation (30/30/30/5/5/5/5), there are lots of apparent patent violations possible. Thus, the existence of this grandfathering provision. Note also that minor reformulations (i.e.., changes of no more than five) are not possible for the original formulations, until such time as all other original-formulation products have been reformulated since patent laws include a minimum patent zone of seven at all times. Your students probably should have used a conditional introduction associated with this reformulation request. That way, an unsuccessful reformulation attempt would have resulted in the launch being canceled and the support spending being deleted. You might suggest that all your students review the student manual regarding "conditional introductions." Note, also, that patents are universal, not region-specific. Thus, a patent protects a formulation everywhere, not just in the limited number of market regions in which it might happen to be actively distributed at the present time. 50

52 Reformulating for Specific Regions "Product 4-2s current formulation is very desirable in region 1 but a complete misfit in region 2. Is it possible to reformulate product 4-2 to match the requirements of region 2 while maintaining the original formulation for region 1? Product 4-2 has an ending inventory." No, reformulations are product-specific not region-specific. Each product has one and only one formulation regardless of the market regions in which it is actively distributed. This is the reason for multiple products in the simulation. Each product can have its own separate formulation and be targeted at the particular buying requirements of designated customer segments (market regions). Reformulation Bid Processing Problem "I have a firm which introduced a new product (1-2) into one market region. They requested a reformulation for this product, but none of their three requests were accepted. Their reformulation requests included 13/35/14/32/5/6/4, 16/32/8/38/5/6/5, and 10/32/8/35/5/6/5. They bid $200,017. They don't seem to be violating any patents. The only other reformulated brands include 2-1 (15/90/20/44/5/3/3), 3-2 (32/5/26/32/5/5/5), and 4-2 (14/38/13/28/5/5/5). They don't seem to be violating any technological constraints either. Why wasn't their reformulation bid successful?" Actually, there is a patent zone violation problem here. These three reformulation attempts are only 11, 24, and 23 patent zone points away from the 4-2 reformulation. If 4-2 bid more and was reformulated in this quarter, it has a patent zone of 25 and other reformulations must be at least 26 patent zone points away (this quarter). Reformulation Bidding in Test Marketing "In a test market, is it necessary to put in a reformulation bid value for a product that is being reformulated?" A bid is not required for a reformulation attempt in test marketing. The first reformulation try is automatically assumed to be successful in test marketing (i.e., no patent searches are conducted). Reformulation Bids (Minimum Bid) "In BRANDMAPS, is a reformulation bid of $0 permitted?" Yes. Within the software, a reformulation (whether minor or major) is indicated by the presence of a reformulation attempt (a valid set of raw materials, compatibility, and warranty), not the presence of a reformulation bid. A blank (missing) reformulation bid is interpreted as a bid of $0 by the software. 51

53 Reformulation Charges "One of my BRANDMAPS teams bid $1,700,001 for a reformulation but was actually charged $4,200,001 on the DIVISIONAL OPERATING STATEMENT. What's going on?" BRANDMAPS reformulation costs on the DIVISIONAL OPERATING STATEMENT include both the reformulation bid (charged regardless of whether the reformulation is successful) and the reformulation cost ($500,000 for a minor reformulation and $2,500,000 for a major reformulation, in the fourth edition of BRANDMAPS ). In your case, the correct number is indeed $4,200,001 for a major reformulation involving a reformulation bid of $1,700,001. Reformulation Consequences For a Brand' s Marketing Program "If a reformulation is ordered for an active brand and it fails in BRANDMAPS, what happens to the currently active brand? Does it go on with the marketing decisions from the previous quarter? Is it simply dropped?" If a brand reformulation attempt fails, the existing formulation and the rest of the brand's marketing support program continues to be in effect. Conditional introduction is only an option when introducing a brand into one or more market regions in association with a reformulation. There is no such thing as a "conditional drop" (a brand is dropped from one or more regions if a reformulation fails). Reformulations and "New" Products "We'd like to reformulate an existing brand and also launch a new brand in the same quarter. However, the input software is warning us that two reformulations are being requested. What's going on?" All brands always have formulations at all times, whether or not they are currently actively marketed. Even your "new" brand has an existing formulation. Note that reformulation and introduction are independent decisions. You can reformulate without introducing and you can introduce (an existing formulation) without reformulating. You may, of course, also reformulate and introduce at the same time. To introduce a "new" brand and reformulate it (presumably a wise thing to do, since there's no reason to believe that the original formulations for all brands are good ones) does count as a reformulation. Thus, a reformulation request for brand #1 at the same time as attempting to launch and reformulate brand #2 does, indeed, constitute two reformulation requests in the same quarter. The mistake is to believe that a formulation for brand #2 doesn't exist and that the associated attempt to give it a formulation doesn't count as a reformulation. That belief is incorrect, since all brands always have a formulation at all times. 52

54 You may introduce any number of brands into any number of market regions at any time. However, you may only reformulate one brand per quarter, according to the limit described in the student manual. Reformulation of a 30/30/30/5/5/5/5 Product "Is it possible to do a minor reformulation of 3?1 in BRANDMAPS? All?-1 products are formulated 30/30/30/5/5/5 and patent zone violations were grandfathered in. Our understanding is that a minor reformulation is 5 or less points away from the previous formulation. If we did a minor reformulation, we would violate all other?-1 patent zones of 7, unless our grandfather clause allows any violation of the patent zones for?-1 products by another -1 product." You could only do a minor reformulation of 30/30/... if all other such formulations have already been changed via major reformulations. The only "grandfathering" is on the original patents, not on anything else. Existence of any other 30/30/... would mean that a minor reformulation is impossible due to their patent zones being at the minimum of 7... any change of a 30/30/... by no more than 5 would violate another 30/30/...'s patent. Reformulation Sequencing and Overlapping Patent Zones "Assume that product 5-1, currently distributed in France only, has a patent zone of 22. Now further assume that the company reformulates it with a totally new formulation targeted to an entirely different market region. What happens to the 'original' patent for 5-1? Does that patent zone of 22 still apply even though there is no brand attached to it? Further, can this company now reformulate product 5-2 with a formulation that 'violates' the 'old' 5-1 patent, now that 5-1 is a totally new formulation? If this is possible and it all took place in one quarter, then is it contingent upon the order of the bids which then determines the order of the new patents? Do patent zones 'disappear' prematurely if the product is reformulated to something altogether different?" Reformulation sequence is totally determined by bids, regardless of the source (firm) of the bids. The highest bid is processed first. The first of the highest bidder's reformulation alternatives to satisfy patent constraints is accepted and its patent (for the reformulation) immediately becomes 25. All succeeding reformulations must honor all patent zones, including patent zones of newly reformulated products. On reformulation, the previous patent no longer exists. Thus, its patent zone is up for grabs PROVIDED that no other existing patent (for any firm) already overlaps on the former patent zone. This is the rub and the potential problem. Any particular patent point (i.e., formulation) can actually be covered by multiple products' patent zones. For example, assume that the two reformulations 10/20/30/40/5/5/5 and 10/46/30/40/5/5/5 are submitted in one game run and both are successful. Their patent zones begin at the usual 25 points so other reformulations must be at least a 26 patent zone point difference. Note that these two formulations are 26 patent zone points apart and, thus, they would not conflict with each other. However, both formulations cover the patent 53

55 point 10/33/30/40/5/5/5, prohibiting any other product - including themselves - from reformulating to that particular formulation. Indeed, overlapping patent zones are the reason why a marginal change (of, say, one unit) in a patent can fail. True, patent searches for reformulation are conducted for all other products excluding the one being reformulated at the moment. But, one or more other products' patent zones could already overlap on the intended reformulation point. In summary, the answers to your specific questions are as follows: (1) The "original" patent of 5-1 disappears when 5-1 is reformulated. That patent zone of 22 no longer exists the moment after 5-1 reformulates. (2) 5-2 can be reformulated to the now nonexistent "original" formulation of 5-1 PROVIDED that no other products' patent zones overlap that point in the patent space. (3) This sequence of events could all happen within a single game run involving multiple reformulations. Reformulation bids determine the sequencing of reformulation activity. Chris Puto (Georgetown University) suggests that this "... is quite similar to trademark rights. Once you establish a trademark, you must continue to use it regularly or run the risk of losing it. The same forces are at work here. Once you reformulate, you are no longer in a position to use [protect via patent] the 'old' formulation." Strategy Brand Equity Across the Vaporware Product Line "In managing brand equity of a firm's line of vaporware products, is there an obvious problem in having multiple brands at different price points in the same market region?" It might appear problematic to have lower-priced and higher-priced vaporware brands of the same firm marketed in the same region simultaneously. Does the low-priced, lowperformance brand somehow tarnish the brand equity (brand image) associated with the high-priced, high-performance brand? "Maybe and maybe not" is perhaps the best answer that can be offered on a priori grounds. It is an empirical question whether customers see the differentiation across multiple brands in a product line as being meaningful. It is also an empirical question whether customers' perceptions of one brand from a firm are influenced by the presence of another brand from the same firm. Lots of real markets feature multiple brands and/or brand variants from the same firm arrayed along a price-performance frontier. Providing that customers recognize the product line variations as delivering difference performance levels, there is no obvious problem with having multiple brands in the same market region simultaneously. Underlying segment structure presumably plays a major role in this matter. If the various brands in a firm's product line clearly appeal to one and only one sub-segment of customers, then the presence of another of the firm's brands in the market presumably has little or no impact on pre-existing brands' market positions. It might be possible to examine this issue via test marketing. The diagnostics provided by the test marketing experiment (particularly perceived performance and perceived convenience), as well as hard performance measures like market share, provide a rich set of indicators of the impacts associated with launching an additional brand or brands from the same firm into a market region which already includes at least one of the firm's brands. 54

56 Cost and Volume Management "To improve profitability, is it better to counsel students to work toward improving top-line results (i.e., increasing market share, volume, and revenue) or improving bottom-line results (i.e., decreasing variable and fixed costs)?" My short answer is "yes" to both cost structure management efforts and to top-line volume-related improvement efforts. But, that's not overly helpful advice, relative to the specific nature of your question. Here's a much more thoughtful answer by Sam Gillespie (Texas A&M University): "In mature, saturated, and very competitive markets, it is often much easier to squeeze out a dollar of profit on the cost reduction side than it is on the sales revenue side of the profit equation. For example, with a percentage variable gross margin is 33%, a firm needs to find $3 of additional revenue for every dollar of cost reduction to generate the same level of profits. If such a firm can lower expenses $250,000 while retaining the same level of sales volume, it is the same as finding $750,000 of additional sales revenue holding all fixed costs constant. Closely assessing the marginal value of a dollar's worth of spending (marketing or nonmarketing expenditures) is an important element of prudent management and budgeting. This is not to diminish the importance of an effective marketing program (in amount and mix), but it does focus attention on how productive these expenditures really are. It is not unusual, in the context described above, for the various market sensitivities associated with marketing mix variables to be less elastic than one is led or wishes to believe, particularly when the current ratio of regional industry expenditures to regional dollar-volume revenue is high relative to prior quarters or years. It is possible that the slope of the marketing productivity curve is approaching zero. Prudent budgeting and attention to cost structure management issues may be the right advice to offer." Failed New Product Launch "Last quarter, we launched a new product in two regions. I don't believe that we made any data entry errors in our submission and our customer brand and dealer awareness numbers appear strong. That being said, having zero sales volume puzzles me. I could understand having an unsuccessful launch, but zero sales volume leads me to believe that we may have committed a serious error in inputting our decisions or made a procedural error relating to the launch. I would think that, due to randomness, we would have had positive sales volume in at least one of the regions. Did we commit a serious input error or was it just a serious error of judgement?" Please review your original logic in launching this product. What was the basis of your belief that this launch was a good thing to do in these particular market regions? What differential advantage did you expect to offer to customers? Where's the evidence to support these beliefs? Check your marketing research results. In both market regions, your perceived performance is 0.0 and your price is substantially higher than any other brand in these markets. Based on this, why should anyone purchase your product? What marketing research indicated that this product with this particular formulation (priced as high as you priced it) would be well received by customers? 55

57 First Mover Advantages [1] "One of my teams commented that they felt the game rewarded disproportionately firms who early in the game got into the market with a better product. In one case, and probably the one to which the team was referring, the new reformulation achieved 100% market share. The complaining team then drew the conclusion that if a firm gets a good product, it is impossible (at least for several quarters) for another firm to get a competitive share of the market. This led the complaining team to believe that the game was not sensitive to other products in the region, particularly if one firm had a superior product. What comments do you have on this?" [2] "A student in one high-performing group noticed a possible trend or bias in the simulation. The group established a solid leadership position in Q#3 and have been able to sustain it ever since with a consistent strategy over the quarters of raising price resulting in selling more. Through informal discussions with other groups, the leading team believes that some of the other groups have tried what seem to be very logical and well strategized moves in the vaporware marketplace to little avail. It seems that no matter how hard the other teams tried after Q#3, they could not overtake the leading firm. Is there a feature of the simulation where firm establishing a solid leadership position by Q#3 are virtually ensured a leadership position throughout the simulation regardless of rival firm attempts?" These stories sound like perfect examples of first-mover advantage, and that is an important lesson for students to learn. It's difficult to catch up, particularly if the leader has a good product which is well-marketed with substantial marketing support spending. Difficult to catch up is not, however, the same as being impossible to catch up. It should take time and sustained effort for followers to overcome leaders. That's how real markets work and it's an important lesson for students to absorb. The real problem arises with followers who merely emulate leaders rather than offering a superior value proposition. Without significant differential advantage (in product, price, or marketing support spending), why should followers quickly overtake leaders? Push your students to seek out greater differential advantage. Of course, as the bar is raised with regard to product-fit with customer preferences, product itself will become less crucial and price, compatibility, warranty, and marketing support spending become more important, by definition. By the sixth quarter or so, students are in the grind-it-out-for-profitability phase of the simulation. It is important to push all teams (leaders and followers) to focus on profitability not volume. This is an important aspect of the marketing management task. The substantive question is really "Was it skill or luck?" A careful assessment of customer requirements can easily lead to the conclusion that vaporware customers in at least some market regions are not well served by the original 30/30/30/5/5/5/5 formulations. In market regions where customers really dislike the original formulations, there is obviously lots of room for improvement, and lots of room to dominate the market if one is first with a reasonable product. ("Reasonable" dominates "terrible" any day in any market.) Usually, though, the original launches are only approximately what customers require, based on rough marketing research. Followers can improve upon the reformulation efforts of the first movers, but of course the first movers are already there and the followers have to catch up. Additionally, there's no reason to believe that every market is driven purely by product considerations (performance perceptions). Price and convenience also matter. Perhaps the right approach is to seek out price-sensitive and convenience-sensitive customers. 56

58 Personally, I'm quite unsympathetic to those who moan and complain that the leaders had an unfair advantage. That's life in real markets. Try competing against Microsoft. It's no fun, and, to compete, it becomes a grind-it-out-for-nickles-and-dimes-advantages kind of marketing problem. On the specific issue of a dominant product launch, Sam Gillespie (Texas A&M University) goes on to offer the following commentary: "Even though the new entry firm has an excellent product, the simulation is not structured to give all of its business to only one product, albeit a superior one. What appears to have happened is that other firms do not have a reasonably close competitive product and the market is not willing to consider these alternatives favorably. The task of competing firms is to develop a systematic program of product development which will locate market opportunities, identify acceptable/marketable alternative product formulations, and support them with effective communication and distribution programs. I emphasize that the game is not structured to reward only superior product formulations marketed effectively and that competitors can survive profitably with lesser formulations that are marketed properly." Well said, and absolutely correct both in the real world and in the simulation. New Product Development "What are the logical steps toward developing new products in this simulation?" The simulation parallels the real world with reactive and proactive new product development strategies existing. While proactive leaders do create some entry barriers (for example, market presence), a vigilant nimble follower can be successful in the simulation. Note that the information lags in identifying and reacting to leaders' proactive new product development efforts represent an implicit first-move advantage to innovators. Reactive new product developers emulate successful competitors' brands. They watch for dramatic share rises (or improvements in performance perceptions), reverse engineer such formulations, perhaps using customer preference marketing research to check for slight variations that might lead to marked improvements in competitors' formulations, and then attempt to reformulate around all of the leaders' existing patent barriers. Matt Sauber (Eastern Michigan University) describes this as being "the bandit approach, waiting until a competitor successfully launches a new formulation and then reformulating around it, given the patent zone." While the reactive approach is seen by many to be lower risk, it assumes that patent barriers will be surmountable and it also overlooks the amount of time involved to notice a competitor's successful reformulation, reverse engineer it, develop a clone, and launch the clone successfully. And, the leader has had the benefit of a number of early quarters of market penetration with attendant profitability (and, of course, risk of failure). The leader also has the market position/presence (in the channel and in the minds of the customers) and if the follower is merely an emulator without meaningful differential advantage then the follower's market share will take much time to catch up with the leader's market share. Proactive new product developers must select attractive markets to target (presumably using criteria such as market size and growth rate, market sociodemographics, degree of current and like future competitiveness, price sensitivity, unmet customer requirements, etc.) and then design/launch new products successfully. The design stage involves a delicate balancing of easy-to-get and low-cost marketing intelligence, such as competitors' formulations (via Marketing Research Studies #2 or #33) and overall customer preferences (via Marketing Research Study #47), with sophisticated customer 57

59 reverse engineering tools (concept tests and preference tests). Launch activities can potentially be helped with selective use of the admittedly expensive test marketing experiment (Marketing Research Study #20). Note, however, that all of these marketing research studies take time and cost money to conduct. Segmentation Strategy and Tactic s [1] "Is there a way to segment the market regions based on customer demographics (consumer/industrial, income, lifestyle, etc.)? Currently, every team seems to target a particular product formulation that will attract the largest part of the market. In essence, everyone seems to target the same market niche. We would be interested in targeting a small percentage of the market that would be willing to pay a high price, but we are not sure how to find these potential buyers. For example, a conjoint analysis tells you what a majority of the population wants, but doesn't identify different niches." [2] "I can see no easy way to segment the market within any one region. There seems to be no market research available that would allow us to understand, as an example, the distribution of income within the population, all that's available is a per capita figure." These are good and thoughtful questions. The continual pursuit of differential advantage with finer and finer customer niches is the essence of skillful marketing, especially when all obvious segments are served and served well by existing competitors. However, please don't make the common mistake of assuming that, since all products are similar in physical (objective) senses, there are no further interesting marketing issues. There's more to marketing life that just "product." In fact, I've heard that there's a whole marketing mix to worry about. Some of the segmentation that you are asking about is normally done at a lower organizational level than is included within this marketing simulation game. Remember, this is a marketing strategy simulation and at some point a line has to be drawn on which details to include and which details to leave for "others" (advertising agency, regional sales managers, plant managers, etc.) to implement. While a vaporware advertising manager or advertising agency would need to know a lot about specific media vehicles (e.g., audience size, demographics, buying habits, etc.) to place vaporware ads in appropriate publications, television shows, and the like, the vaporware marketing manager is really just setting overall strategy direction and policy. Others (e.g., advertising manager, advertising agency, media buyer, etc.) implement the specific tactical details associated with these marketing strategies, policies, and initiatives. The geographic market regions are, of course, one type of segmentation. Whether there are further sub-segments (niches) within these market regions is an interesting question. If you're uncomfortable with regional segments, try this thought exercise, if you wish. Think of the market regions as demographic segments. For example, perhaps "region 1" is really "high technophiles" and region 2 is "elder roamers." Now, has anything material really changed in how your students should approach the vaporware marketing challenge? Not as far as I can see. To be sure, other simulations use different public segmentation labels (masking, perhaps, whether further underlying segments also exist), but the marketing management principles associated with marketing a range of products and services to multiple market segments are common. 58

60 Within the simulation, all existing marketing research is at the regional level, so it may be difficult to find sub-segments within vaporware market regions even if they do exist. A number of possible approaches exist to identify the existence of sub-segments or strategy variants to address the concerns raised in Question #1. First, it's appropriate to begin by focusing on profitability. Volume and market shares are not the only games in town. Profitability is crucial. Even if everyone has about the same products (in product-attribute terms), everyone may not have the same bottom-line outcome. Continue to manage your brands for maximum profitability. Second, are your limited brands (product formulations) deployed in the right market regions? Less attractive market regions might be vacated in favor of more attractive regions. In the historical archives of this simulation, there have been cases of successful market leaders who have concluded that a region-leading brand in a small market region would be better deployed in another much larger market region. Think long and hard about what makes a region "attractive" in the long run. There are more market regions than brands so choices have to be made. And, there's no rule that says you can't have more than one brand targeted at a particular market region. Third, can off-region launches yield incremental profits? Here, "off-region launches" refers to launching brands customized for one region into some other region or regions. Since these brands are not well-formulated for the "off-regions" by definition, their lack of product-attribute fit must be offset by significantly lower prices. This could be thought of as a bottom-fishing strategy, attempting to attract the most price sensitive customers who may be prepared to trade-off product attributes for price. This bottomfishing strategy will probably work best for low-cost light-weight product formulations where there is lots of room for price moves while still retaining some margin. Such offregion launches can also disrupt high-priced, high-margin competitors in these other markets. Fourth, at the macro level, one might imagine that each market region consists of a mixture of performance, convenience, and price sensitive customers. Perhaps one should concentrate on excelling on a dimension other than performance (which presumably is principally driven by product attributes). Even if everyone's more-or-less tied on performance perception, there's still convenience and price to work on. Fifth, with regard to product attribute segmentation, Marketing Research Study #47 ("Self-Reported Attribute Preferences") might identify sub-segments within market regions, if they exist and are significant. Multiple preference peaks would indicate the presence of product attribute sub-segments. Alternatively, one might search in particular product-space regions for multiple peaks with targeted conjoint analyses. Chris Puto (Georgetown University) offers the following comments on attribute-based segmentation: "Segmenting by demographics is only effective when you can trace the demographic characteristics down to a specific need. I don't think there is enough information available to do that. However, need-based segmentation is possible if you use attribute preferences as surrogates for needs (not an unreasonable approach). So, one could do a self-reported attribute preference study and see if there were multiple levels of preference within a region. Then, one could do a conjoint study to see if it further substantiated multiple preferences within a region. If so, then there are multiple segments. If not, then that particular market may be undifferentiated on demand for products attributes." Sixth, keep looking carefully at customer preferences. Be watchful for systematic customer preference drifts. Try to reformulate ahead of systematic customer preference drifts to maximize the life of a specific product formulation. 59

61 Seventh, it is possible to compete at various points on the price-performance spectrum. While the first five product attributes (the raw materials) might all be similar across leading brands, competition on compatibility and warranty is still possible. One possible approach is to seek to bracket the market with low-end and high-end offerings, both of which are relatively similar on raw materials mix but differ vastly on compatibility and warranty. For example, the low-end brand might have "1/1" and the high end brand might have "8/8" on compatibility and warranty, respectively. Given the existing vaporware cost structure, such brand formulations would have significant cost differences, thus opening up the possibility of significant price differences. However, be careful to assess customers' price-performance trade-offs before blindly reformulating to low or high levels of compatibility and warranty. Of course, such an approach requires the commitment of two brands to a market region. But, for larger market regions, this might be viable. Note, also, that such a bracketing strategy builds up patent barriers increasing competitors' reformulation difficulties. If none of the above yield fruitful results, then you are clearly in a grind-it-out toe-to-toe competitive mode, not unlike the commodity-like product category that economists like to talk about. True, the competitive offerings are quite good at meeting current customer requirements and so it seems a little harsh to label such brands as being commodities. But, that's the nature of competitive advantage. Competitive advantages are short-lived not permanent. Efficient cost structure management would be crucial in such circumstances. Marketing support spending efficiencies would be of paramount interest (and there's lots of marketing research available to help you work on this). Product reengineering may still be needed, to get some costs out without sacrificing too much preference. And, of course, customer preferences can change, new markets can become available, technology can change, and costs can change. All in all, there is much to do and a need for continued vigilance even if the only meaningful segments are at the level of market regions. Winning and Losing Strategies (Abridged) "Is it possible to characterize winning and losing strategies in the simulation?" Here's a try to do so, with minimum text. Please do note the parallels between the simulation and real markets. The following approach seems to work well in the simulation and in real life: enter the market early with a good but not necessarily great product (but one that clearly dominates existing offerings at the time of entry), support that product with liberal does of marketing support spending, innovate continuously updating product formulation as customer preferences dictate, nurture the channel, have consistent strategies and tactics through time, and aim for a premium price positioning for your strong brand. For followers, the following strategy surely dooms a brand to a poor market and financial performance: enter a market late with a me-too or inferior product, fail to provide adequate marketing support spending, ignore the channel, and have erratic strategies and tactics (varying marketing mix decision variables widely from quarter to quarter) especially with regard to price. 60

62 Teaching Strategies and Tactics Causes of Poor Team Performance "In your experience, what are the causes of poor team performance in the simulation?" In my experience, the principal causes of poor team performance in the simulation are a combination of the following factors: 1. not really meeting customer requirements for vaporware (i.e., failure to establish any meaningful differential advantage, particularly regarding product formulation); 2. lack of focus, by trying to be all things to all markets (capacity, reformulation, time, and human resource constraints combine to favor concentrated effort in fewer than "all" market regions); 3. failure to have a complete and coordinated marketing program, managing all elements that influence perceived performance and perceived convenience (after all, the only real value that customers derive from vaporware is based on the perceived performance and the perceived convenience that accrues from the vaporware that they purchase); 4. limited marketing research and/or limited efforts to interpret the marketing research that is available; 5. limited attention to competitive developments (i.e., lack of in-depth competitor analysis to discover the underlying drivers of vaporware market behavior); 6. financial mismanagement related to cost structure management (variable and fixed costs management, covering corporate-wide overheads, etc.), smoothing costs, production and inventory levels, and capacity management; 7. not really understanding the game structure and environment (i.e., treating the manual in a cursory fashion rather than something to be studied in detail and referenced regularly); 8. poor work ethic (not spending enough time on the game); and, 9. team mismanagement (not spending enough time thinking about and discussing team management issues and related human resource deployment strategies and tactics). Predatory Pricing For Money -Losing Firms "One of my undergraduate teams sent me the following message: 'After viewing the results for Q#7 and analyzing firm 8's performance (especially its stock price and ROI), I believe that this firm should be either sold at bargain basement prices or be liquidated. In the real world, the stockholders would sue the board of directors for mismanagement or the Federal Government would step in to stop their predatory pricing. And the firm would either fold or be subject to federal restrictions. Why isn't that happening in the simulation? Can we sue them for predatory pricing?' What, if anything, should I do here?" 61

63 Lawsuits are a fact of real life too, so I would not arbitrarily rule them out. But, the instructor needs to think through exactly how the lawsuit process would be managed (and what its goals are). If the offending firm is not making money and has low prices, then the instructor normally needs to be very forceful with them. For example, perhaps such a firm would be limited to no new introductions or reformulations or plant capacity orders until positive profits return. In addition, the instructor might force prices to be raised by at least 50% immediately. Don't allow a team to be unprofitable for long, especially if they have substantial market share but little, no, or negative profits. Such performance is unacceptable in the real world, and so too should it be unacceptable in the simulation. In short, the instructor needs to be proactive, call the team in, and read them the riot act regarding responsible business behavior. No profits means failure in real life, and so too should that be the case in the simulation. If necessary, declare them bankrupt and sell off the firm to others (through open bidding). The bankrupt team would, of course, would need to be assigned alternative work to make up for their absence from the game. Teams Managing the Non-Performing Group Member "What hints do you have for managing a non-performing group member?" Here are some suggestions from Ginger Howerton (University of Texas at Dallas, Masters in International Management Studies program) for managing a non-performing "lazy" team member. This advice appears to be useful for all situations involving student groups. It would appear to be especially valuable reading for students in teambased simulations where the group-work nature of the simulation may extend throughout a course. Working with others is often challenging, whether within a family unit or a group at work. However, in those situations, working together is rarely an option and almost always a requirement. In today's educational system, students are often required to work together in groups to simulate the work setting, thereby gaining skills that assist them to function better in the 'real world.' Group participation is often a tremendous source of frustration among students. Frequently, one student in the group fails to carry his own weight in the course, but receives a high grade as a result of his group members' hard work, discipline, and dedication to delivering the required project. This frustration leaves students feeling as though they have been used and that the 'lazy' student has not learned the skills required to receive a passing grade. The team fears reporting the student to the professor because they don't want to jeopardize the student's career, but resent the student for his lack of participation. A key to leading the team to success is participation by all members. The first challenge is to identify the person who has the potential for being 'lazy.' Signs of a potential 'lazy' team member include: (1) a person who sits back in his chair and offers no sign of active participation in the groups discussion; (2) a person who has a conflict with all attempts to identify group meeting time; (3) a person who can not understand the objective or assignments in the course and generally sees no value to the course; (4) a 62

64 person who monopolizes team meetings with personal accounts of his active social life; (5) a person who fails complete assigned work on time or ever; and, (5) a person who frequently calls other team members to get guidance on how to complete his portion of the assignment. Once the 'lazy' team member has been identified, immediate and decisive intervention must be taken to save the team from frustration and resentment. To engage the 'lazy' team member will require patience and consistency of the entire team, but ultimately, one person will need to continually pressure the potentially 'lazy' team member into participation. Some useful techniques include the following: Identify the 'lazy' person's strengths and weaknesses. Stroke the strengths and supplement his weaknesses by another team member's strengths. Pair the 'lazy' person with another team member whose strengths include motivation, persuasion, and accountability skills. Set very specific expectations and offer to demonstrate how to carry out the project or map out an approach to complete the project. This type of person may suffer from low self esteem, so frequent praise and encouragement by the team may stimulate performance. Contact the 'lazy' person frequently to keep him on track and encourage success. Allow the person to identify one meeting time that meets his needs only and then require him to attend meetings that meet the scheduling needs of the other team members. Allow the 'lazy' member to share his portion of the project first, since often a short attention span precludes the person's participation after a long meeting. Engage the 'lazy' person in participation by requiring each team member to identify strengths and weaknesses of other team members contributions to the project. Often, when the 'lazy' team member feels successful early in the group sessions, participation in future projects will come more naturally. In the event engaging the 'lazy' team member fails to gain the required results, disciplinary action should be taken. Disciplinary action is often difficult in the student setting because students feel they lack the authority to hold others at their same level accountable. However, just as in a healthy work environment, peer accountability often gains the best results. Disciplinary action should begin with the first offense of 'laziness.' Failure to show up prepared or failure to show up at all should invoke a coaching session from the team. The coaching session should include the specific issue or problem, specific expectations for next assignment or meeting, impact of not meeting expectations on the group and consequences of the failure to meet the expectations. The second level of disciplinary action should be at the written level. Failure to meet the expectations of the team a second time should prompt a written response to the team member with a copy forwarded to the professor. The written response should be a joint effort by the rest of the team and signed by all. The written response should include the date of the first coaching session and it's outcome, the specific issue or problem, expectations, impact on the team and consequences should the student continue to fail to meet his obligation to the team. If the student continues to fail to meet the group's expectations, the time commitment to assist this team member becomes damaging to the entire team's opportunity to learn and 63

65 grow together. Finally, as a group, the team must confront the 'lazy' team member and request that they voluntarily drop the course or request a transfer to another team. Again, this should be documented in writing to the student with a copy forwarded to the professor. The same information should be documented with the student's response. The team may prefer to ask the professor to participate in the confrontation session with the 'lazy' student so he may see first-hand group dynamics and facilitate the group through any conflict that may arise. Many reasons for 'laziness' among students exist. Unfortunately, many times the student truly isn't lazy, but paralyzed by the amount of work, fear of failure, or true lack of understanding. Although understandable, these explanations for lack of participation can not be tolerated because they only lead to frustration by all involved. Encouragement and role modeling are the best motivators. If the 'lazy' student can not engage and participate with group members offering support and guidance, then most likely they are too 'lazy' to take the course and they should be required to drop or suffer the consequences of the grade they earned (an 'F')." Test Marketing Test Marketing Decision Variables [1] "When I try to input test marketing decision variable changes, the changes don't seem to be saved on their disks. After I input the decision variable changes for the test marketing experiment and exit the program, I get a message that reads 'Inputing Original Firm 1 Marketing Decision Variables.' Going back into the test marketing decision variable input screen then confirms that none of the changes were saved. What's up?" [2] "When you change decision variables under test marketing and then update them and go back to see what the decisions look like, the software resets the variables back to their 'original' values, so you can not really see what decisions you've made (unless you print them out). Is it supposed to be like that?" Regular and test marketing decision variables are stored in separate files. Only one set of decision variables, either regular or test marketing, is in the active program's memory at any point in time. Test marketing decision variables are created from the current values of the regular decision variables when the program begins. On exiting, the test marketing decision variables are stored in the appropriate file on disk. And, on exiting, the regular decision variables are read back into the program, which explains the presence of the message "Inputing Original Firm 1 Marketing Decision Variables." It is not possible to go back into the test marketing decision variables and check them out. Test marketing decision variables always start with the base case of the current non-test decision variables. (Otherwise, students could go back and inadvertently change the base-case decision variables without making the corresponding adjustments in the test marketing decision variables.) Changes in the base-case current decision variables are then made to establish the desired values for test marketing purposes. In re-entering the test marketing decision variables change program, previous changes are lost. To see the status of test marketing decision variables, look at file DVTESTn.D_i (for firm "n" in industry "i"). This file is viewable via the SeeFile option included within the software. This is an ASCII-text file which contains current test marketing decision variables. 64

66 If a change in test marketing decision variables is needed, all test marketing decision variables must be re-entered. This re-entry problem is not, however, too daunting, since test marketing normally involves relatively few decision variable changes. Otherwise, it would be difficult to detect what's driving the differences between the control and the experimental cases. Test Marketing a New Product "We've setup the test marketing decision variables for a new product launch in a particular market region but the product doesn't appear when the test marketing experiment is executed. What's happening?" In addition to making any desired changes in test marketing decision variables, a new product must also be introduced in test marketing mode if it is to be actively distributed during the test marketing experiment. (Already-active products do not have to be reintroduced if the intention is that such already-active products are to continue to be actively distributed during the test marketing experiment.) The presence of marketing support spending is not interpreted by the software as a signal that a product should be automatically introduced. Such marketing support spending could merely be pre-launch spending in preparation for a subsequent launch. The software treats all decision variables as being independent of each other; you must construct the interrelationships via your explicit decision variable changes. You must explicitly introduce products that are to be launched in test marketing mode. Test Marketing Costs "Our test marketing experiment for a new product launch shows results for both the new product and another product already actively distributed in that market region. Are we being charged extra for this two-product test marketing experiment?" Test marketing experiments may be executed in one or in all market regions in any quarter. Test marketing experiments are region-specific, not product-specific. Thus, a test market experiment reports results for all active products at the time the test marketing experiment is executed. If there are multiple products active in a region targeted for a test marketing experiment, test marketing results will be reported for all of these products. The cost of a test marketing experiment is based regions tested and length of the test marketing experiment not on number of active products involved in the test. Test Marketing in Multiple Regions [1] "Is it possible to run two test marketing experiments in a single region? This assumes that the two are independent of each other. For example, can a firm run a test marketing experiment for 5-1 in region 1 and another test marketing experiment for brand 5-2 in region 2?" [2] "Assume that firm 5 wants to test market 5-1 in region 1 and test market 5-2 in regions 2 and 3. Currently, 5-1 is active in all regions and 5-2 is not active in any region. Since firm 5 wants only to test in region 1, must it de- 65

67 activate 5-1 in the other regions?" [3] "Assume that firm 5 wishes to test market 5-2 in market regions 2 and 3, but not in market region 1. How can this be done?" Some general remarks address some of the issues raised in these questions. Then, specific comments follow address each of these questions. First, there are only two possible options when running test marketing experiments. Test marketing experiments may be run for a single market region or for all market regions simultaneously. A test marketing experiment cannot be run in two specific market regions (unless your industry only consists of two market region at the time of the test marketing experiment). Second, test marketing is conducted on a market region, not for a specific product or products. It's true that the test marketing decision variables are loaded in for designated products in a targeted test marketing region or in all market regions. However, the test marketing experiment is conducted on a market region (or on all market regions) and, therefore, includes all products that are active in that market region (or in all market regions) at the time of the test marketing experiment. Third, there are no cost implications associated with multiple products being active in a market region during a test marketing experiment. As described in the student manual, test marketing experiment costs depend only on test marketing length and whether the test marketing experiment in run in one specified market region or in all market regions. With regard to the specific questions raised, here are some relevant responses. [1] Yes, this is possible if a test marketing experiment is executed for all market regions. These test marketing experiments are independent of each other in the same sense that the market regions are independent of each other. [2] Run the test marketing experiment in market region 1 only. All other markets, and the activity status of 5-1, is irrelevant for the purposes of a test marketing experiment in market region 1. [3] A two-region test marketing experiment in a three-region industry can only be done by ordering the test marketing experiment for all regions. In such a situation, there is no need to make any changes to the products that are currently active in market region 1. (In particular, there is no need to deactivate brands in market region 1.) The results from market region 1 may still, of course, be of interest even though no changes were made in the marketing programs associated with the products that are currently active in that market region. In addition to the testing aspect of the test marketing experiment, it also provides a sophisticated form of sales forecasting, with associated market diagnostics. Test Marketing Results Don't Include All Decision Variable Changes "Our test marketing results don't include all of the changes that we requested, only some of them. What happened?" While you can order the test marketing study either before or after you input your regular decision variable changes and test marketing decision variable changes, there is one constraint on the order of data entry. You must complete all regular decision variable changes before entering your test marketing decision variable changes. To establish the base decision variables for test marketing purposes, the software uses all current decision variables. (If it didn't do this via copying, then you would have to manually enter all decision variables, and this would be both time consuming and error prone.) Then, the software stores your test marketing changes in a separate file. 66

68 Obviously, there is a problem if, after setting up your test marketing decision variables, you go back and make additional changes to your regular decision variables. The moral here is clear: the last thing that you do must be do is to setup your test marketing decision variables. If you change your regular decision variables after you have setup your test marketing decision variables, then you must re-enter all of your test marketing decision variables. Fortunately, test marketing typically involves the change of only a few variables, so it's not that big a deal to do over. 67