Marketing Efficiency

1. The prerequisite to perform a Data Envelopment Analysis and to distinguish between efficient and inefficient decision-making units (=DMU) is to define which inputs and outputs to analyze. Considering the business of a car dealer, the five outputs pre-defined by the car company are intuitive. They not only refer to four economic figures (operating margin, revenues from used and new cars sold and number of car deliveries) but also to one psychographic figure (dealer image). In addition, the car company pre-defined seven inputs. They refer to costs such as operating costs, personnel costs and costs in the form of rebates which dealers have to allow in order to entice consumers to purchase new or used cars. Next to the marketing budget for dealer promotion activities, the capital investments that are necessary for the dealers business (average capital employed) are also considered. Moreover, the average inventory days of used cars is classified as input, because the longer it takes to sell used cars, the more inventory costs (working capital) dealers have, and the less the selling price they will get. Lastly, the average number of daily MSR events is considered as input with the argumentation that it helps to generate income, which in turn increases margin. A critical evaluation of the above-mentioned in- and outputs has shown a need for reassignment. The average number of daily MSR events should be considered as output rather than as input. It could be influenced by the input variable marketing budget for dealer promotion activities as it can be assumed that the more effective the promotion, the more MSRs are conducted. The amount of rebates can also be considered to influence the number of MSR events, because rebates for e.g. service or maintenance work can lead to more MSR events. Moreover, the two input cost variables personnel and operating costs can be assumed to include costs associated with MSR events. These assumptions are confirmed by the high and positive correlation between MSR and the two cost variables and rebates (App.1). Therefore, MSR should be considered an output. Generally, inputs generate outputs but there are two exceptions. A look at the correlation matrix shows that the input average inventory days of used cars hardly correlates with the given outputs which means there is almost no linear relationship. Moreover, the output dealer image is hardly correlated with the given inputs (App.1). Both should be eliminated from the model because they do not deliver any added value to our efficiency model. In addition, there is an almost perfect positive correlation (R=0.929) between the two outputs new car deliveries and revenue from new cars sold in other words, there is almost a perfect linear relationship (App.1). This relationship can be explained by the fact that heterogeneity between car dealers is very low and they all sell cars at similar prices. There is no need for having both of these outputs in our model, so that new car deliveries should be eliminated, as well. The recommended model consists of the 5 inputs rebates, promotions, personnel costs, operating costs and average capital employed and the 4 outputs number of daily MSR events, operating margin, and revenues from used and new cars sold. The robust estimation of this model is given as the sample consists of 94 DMUs while only 56 DMUs would be needed.

Marketing Efficiency

2. Based on the given data, four different models have been run that discriminate between efficient and inefficient DMUs. For both input- and output-orientation a Constant-Return-to-Scale model (CRS) and a Variable-Return-to-Scale model (VRS) were used. More car dealers are inefficient in the CRS-model (56 inefficient/38 efficient) than in the VRS-model (42 inefficient/52 efficient). Additionally, the number of (in)efficient car dealers within one model is the same for input-orientation (minimum principle) & output-orientation (maximum principle) (App. 2). Considering the fact that the given sample only consists of 94 car dealers, the difference between the two models is quite big (=14; 15%). The smaller number of inefficient dealers in the VRSmodel can be explained by different model assumptions: the CRS-model compares all car dealers with each other the scale efficiency under this model can be considered as a strict efficiency, the so-called global technical efficiency. Contrary, the assumptions of the VRS-model are weaker. Car dealer X, for example, is only compared with those car dealers that have a similar environment (similar input level). If X is efficient, he is the best practice DMU in his reference group of DMUs with the same environment because he uses his inputs more efficiently and produces a maximum output. Since the size of the reference group is (usually) smaller than the total of n firms considered in CRS, there are less car dealers classified as inefficient in the VRS-model. The efficiency of the VRS-model therefore only refers to a weaker, the so-called local pure technical efficiency. Looking at the input-oriented scale efficiency, the following ratio CRS/VRS is an indicator for scale efficiency. Scale-efficient DMUs are global technical efficient and local pure technical efficient. In other words, both CRS and VRS score need to be 100%, which corresponds to an efficiency ratio of 1. This is the case for 38 DMUs (40.4%). These DMUs dont have a need for improvement. However, the ratio of 1 can be misleading, as it can be generated also for inefficient DMUs that have the same CRS and VRS values. Only those DMUs that fulfill the second condition and have zero slacks are efficient. Two DMUs (54 & 68) for example have a ratio of 1 although they are scale-inefficient as their CRS & VRS scores are lower than 100%. This is because the CRS and VRS efficiency frontiers are equal in a certain area. Here the implication would be to improve the local pure technical efficiency (App. 3). The majority of dealers (60%) is scale-inefficient as they have a ratio smaller than 1. In some cases, this inefficiency is caused by unfavorable conditions under which the DMU operates because at least the VRS score is 100% (App. 4). In order to achieve scale efficiency in these DMUs, favorable conditions need to be generated, e.g. by moving to a new location with less rent or by reducing power costs through supplier change. The performance of locally scale inefficient DMUs can be improved e.g. by reallocating budget, cutting costs or training sales personnel (App. 5). Inefficient DMUs should be compared with their benchmark DMU(s) to help identify a better input-output transformation. To foster organizational learning, the car company should introduce a Best-Practice sharing. By incentivizing benchmark DMUs (e.g. DMU 93 which is benchmark for 38 others), inefficient car dealers can be motivated to improve their efficiency.