CASS BUSINESS SCHOOL

MARKSTRAT
MARKETING SIMULATION

STUDENT MANUAL for MARKETING MANAGEMENT Spring term

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TABLE OF CONTENTS

INTRODUCTION........................................................................................................ 1
Overview of the Markstrat World ...........................................................................................................1 Products...................................................................................................................................................1 Objectives and Performance..................................................................................................................2 Decisions .................................................................................................................................................2 The Learning Process and the Markstrat Simulation...........................................................................3

THE MARKETS ......................................................................................................... 4

Sonites .....................................................................................................................................................4 Vodites .....................................................................................................................................................5 Distribution ..............................................................................................................................................6

GETTING STARTED ................................................................................................. 7

Simulation process .................................................................................................................................7 Markstrat Main Window ..........................................................................................................................7 Files and Interfacing with Instructor......................................................................................................8

DECISIONS MODULE............................................................................................. 10
Errors & Warnings.................................................................................................................................10 Summary................................................................................................................................................11 Budget....................................................................................................................................................11 Marketing Plan.......................................................................................................................................11

BRAND DECISIONS - PRODUCTION, PRICE AND ADVERTISING ..................... 15

Production specification ......................................................................................................................15 Pricing ....................................................................................................................................................16 Advertising ............................................................................................................................................17

SALES FORCE AND DISTRIBUTION .................................................................... 18 REPORT AND ANALYSIS MODULES ................................................................... 19
Report Module .......................................................................................................................................19 Industry Newsletter ...............................................................................................................................21 Analysis Module ....................................................................................................................................21

MARKET RESEARCH............................................................................................. 22
Ordering Market Research Studies......................................................................................................22 Summary of Market Research Studies ................................................................................................22

POSITIONING ......................................................................................................... 24
Consumers' perception of brands .......................................................................................................24 Semantic Scales ....................................................................................................................................25 Multi-Dimensional Scaling (MDS) ........................................................................................................27 Repositioning Strategies ......................................................................................................................31 Positioning through advertising ..........................................................................................................31 Positioning through research & development....................................................................................32

RESEARCH AND DEVELOPMENT PROJECTS.................................................... 33

Creating a New R&D Project ................................................................................................................33 Completing an On-going R&D Project.................................................................................................35 Reintroducing a Suspended R&D Project...........................................................................................36 Deleting or Shelving an R&D Project...................................................................................................36 Utilisation of completed R&D projects ................................................................................................36

BRAND PORTFOLIO .............................................................................................. 37

New brand introduction ........................................................................................................................37 Brand modification................................................................................................................................37 Brand withdrawal ..................................................................................................................................38

COST REDUCTION VERSUS EXPERIENCE CURVE............................................ 39 FINANCE ................................................................................................................. 40 APPENDIX 1 INSTALLING MARKSTRAT TEAM SOFTWARE ............................. 41 APPENDIX 2 TIMETABLE ...................................................................................... 44 APPENDIX 3 PRACTICE FILE................................................................................ 45 APPENDIX 4 PROCEDURE FOR SUBMITTING DECISIONS ............................... 46

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INTRODUCTION
You have been recruited as Marketing Manager for a division of a large diversified firm. You come with your own team from a different industry and have no experience of the Markstrat world. You will be facing several other firms in a highly competitive environment, marketing two types of durable goods to consumers. Marketing strategy is your main area of responsibility, but you will also be concerned with financial matters, production planning, and R&D. You will have to integrate these various dimensions of business strategy into a long-term perspective in order to gain an edge on competition. The simulation is played on computers with the Markstrat software installed. This software is installed on computers in the PC labs and can also be downloaded for free from the Markstrat website (http://www.markstrat.com/). It is advised that you all thoroughly familiarize yourselves with the Markstrat software prior to the simulation exercise. There is a Practice industry supplied with the software for this purpose. Throughout this manual sample tables are included from this practice industry. Your company will not necessarily be in the same position as the company in this practice industry. Your team will make decisions every week, for the first 4 weeks and every 3 days for the last 2 weeks. Each decision represents a year. See Appendix 2 for details of the timetable for the simulation. Each group will be in an industry competing against 3 or 4 other groups (multiple simulations or industries will be running at the same time). This manual provides all the basic information needed to understand and manage the Markstrat simulation. For a full overview of instructions you may want to obtain a copy of the official Markstrat manual, but this is not essential (no more than one copy per team will be needed): Jean-Claude Larreche, Hubert Gatignon (1998) MARKSTRAT3: The Strategic Marketing Simulation with Student Software, 3e, Thomson publishing. The manuals can be ordered directly from Thomson publishing (http://www.itpe.com/). A small number of these manuals will be available in the library.

Overview of the Markstrat World

The Markstrat simulation does not claim to accurately represent a particular industry or market. It relates to an artificial community of approximately 250 million inhabitants whose monetary unit is the Markstrat Dollar, symbolized by $. Both inflation and GNP growth are fairly stable and no major political, social or economic event is anticipated in the near future. This Markstrat world behaves globally like most markets, and all general marketing principles accumulated either through experience or from marketing textbooks are relevant. However, Markstrat, like any specific country, market or industry, also has its own peculiarities. The Markstrat world consists of a handful of competing companies that manufacture and market consumer durable goods comparable to electronic entertainment products. At the beginning, each firm markets two brands that can be modified or withdrawn from the market. Each firm can also introduce new brands as the simulation evolves. Each firm starts in different initial situation in terms of many criteria, including market share, customer awareness levels, distribution coverage and profitability. The marketing strategy of each firm should consequently be adapted to its particular situation within the industry. In spite of these differences in the characteristics, no firm has a systematic advantage over the others. Each company has an equal opportunity to develop an appropriate strategy, which, although different for each competitor, will lead to successful performance. Each firm will have the opportunity to design, develop and introduce new products or upgrade existing ones. All R&D departments have the same capabilities to develop new products. Similarly, all sales forces are equally qualified to handle distributor relationships.

Products
Your company manufactures and markets consumer durable goods comparable to electronic entertainment products, known as Sonites. The Sonite market has grown quite consistently over the past 20 years. The products have increasingly appealed to a wider audience, and the market has recently achieved an even greater rate of growth. It is now a well structured market. It is also widely accepted in the industry that a new market is likely to emerge for a second product type, the Vodite. The idea of the product comes from a basic technological breakthrough made in the space industry

under government contracts. Your company and your competitors in Markstrat are the most likely suppliers of Vodites because of their technological and marketing expertise. The Sonite and Vodite markets will be completely independent in terms of demand, technology and manufacturing. They are not complementary in any way and there will not be any substitution from one to the other. Each firm currently distributes two Sonite brands. All initial brands, which are available at the start of the simulation, along with their characteristics will be listed in your first Newsletter.

Objectives and Performance

The Marketing department for which you and your team will be responsible is a profit centre responsible for the design and implementation of marketing strategy as well as for marketing operations. In this privileged situation, the marketing department is responsible for the overall orientation of the company to its markets and it must interact with other departments of the firm. The performance of the marketing department as a profit center is measured by the net contribution it generates, as well as its market share position and ability to grow and maintain brand equity. At the end of the day, the best measure of your company's performance will be its Share Price Index. Movements in your SPI will be affected by a number of factors, notably: your company's market share, sales growth, net contribution, cumulative net contribution and your investments in R&D. The overall objective of the simulation is to maximise your SPI and your final mark will be based on this. However your marks will be adjusted to take into account the relative performance of the teams competing in your industry and the logic of the decisions you made over the simulation. This simulation will be worth 20% of the total coursework marks for the Marketing course.

Decisions
During this exercise you will be responsible for formulating and implementing the long-term marketing strategy of your division. You will have to target select segments and position your products in a highly competitive market. Specific decisions need to be taken on: Production planning: You set a planned production level for each brand, which is adhered to by manufacturing with a degree of flexibility. Inventory disposal: You may decide to reduce your inventory by selling all or part to a trading company at a given percentage of the transfer cost (usually between 50 and 90%) Pricing: You set the recommended retail price for each marketed brand Mass communication: You determine expenditure for each brand on two dimensions: o Quantity - purchase of media space & time o Quality - advertising research for copy tests, media selection, and creative work performed by advertising agencies Targeted segments: You specify which segments should be targeted by your advertising. Target selection only affects the media vehicle selected to communicate the message, but does not impact the message itself. Perceptual objectives: You determine the perceptual "message" that is to be conveyed (dimensions and objectives) Sales force: You determine the number of salespeople and structure them by distribution channel and instruct your sales force on how to allocate their efforts across the various brands that they carry Market research: You can purchase any number from a range of different studies each year R&D projects: You can commission R&D projects to develop new products or to modify existing products, and determine how much to spend on R&D each period.

During the course of the simulation, companies may introduce new Sonite or Vodite brands, and reposition or withdraw existing ones. The maximum number of brands marketed by a company in a given period is limited to five brands per market (Sonite or Vodite). This constraint makes it extremly important to find optimal segmentation and positioning strategies. The positioning and repositioning of brands with respect to

the specific needs of various consumer segments is a major aspect of the Markstrat companies' marketing strategy. The strategic issues surrounding market segmentation and product positioning can be summarized in three questions: Which segment do we want to target? How do we design the product appropriate for this segment and position it effectively? As the environment changes, how should we reposition our existing brands? Some Pitfalls to Avoid Before making dramatic decisions, try to get a good feeling for the behavior of the market. Do not jump to the first explanation, or conclusion, that you may have reached when faced with a problem: it may be incomplete. Analysis of key information from market research studies, of your own situation and of past competitive behavior should help you reach more robust decisions. Default Decisions During the simulation run, default decisions are produced automatically for each team. These decisions are the same as the decisions of the previous period, with the following modifications: Brand portfolio Brand decisions o production plan o inventory selling o pricing o advertising o perceptual objectives Sales Force & Distribution o number of salespeople o % effort Market research studies Research & development o completed projects o uncompleted projects no modification; no modification; set to 0; no modification; no modification; set to no objectives; no modification; no modification; no modification; removed from decisions; base cost and budget set as specified in company report to terminate project;

Default decisions are convenient because it is easier to modify existing decisions than starting from scratch each period. However, default decisions are far from optimal.

The Learning Process and the Markstrat Simulation

The Markstrat simulation has proven its effectiveness as a learning tool. This is in particular due to the following reasons: Extensive treatment of market competition - Most simulations concentrate on the internal accountingfinance-manufacturing aspects of a firm and have a very simplistic representation of market competition. This is indeed the most difficult component to model, but also the most important one. Strategic perspective - In the Markstrat simulation, learning of strategic concepts prevails over 'gaming' behaviour. It becomes clear that tactical decisions such as pricing, distribution, selling or communications cannot be effective without first defining explicit portfolio, market segmentation, and brand positioning strategies. This is reinforced by the long term perspective provided by the simulation as it usually runs over periods of six to twelve simulated years. Solid theoretical foundations - The Markstrat model incorporates theories of market and competitive behaviour which have been tested empirically in a variety of situations.

THE MARKETS
There are in essence two markets. The Sonite market and the Vodite market. However they are both served by the same distribution channel. Information concerning the macro-economic environment (inflation rate, growth in GNP, etc.) will be available in the Newsletter and updated each period.

Sonites
The Sonite is the only product type currently marketed by your company. Sonite brands are differentiated mainly in terms of five physical characteristics as well as base cost. Only these principal characteristics will be considered in the course of the simulation. They are: Characteristics Feasible range 1. Weight (Kg) 10-20 2. Design (index) 3-10 3. Volume (dm ) 20-100 4. Maximum frequency (KHz) 5-50 5. Power (W) 5-100 6. Base cost ($) minimum 10 (for a production batch of 100,000 units) Note that design is not related to the products aesthetics but to the type of raw material and components used (and a higher index does not necessarily mean it is better). The base cost is the cost at which each unit will be produced based on an initial production batch of 100,000 units. The base cost is decided jointly by the marketing department which is mainly concerned by margin and profitability - and by the R&D department which is mainly concerned with product feasibility. It is generally thought that the Markstrat firms will modify their brands and introduce new ones in the coming years in order to better meet the needs of the market segments. These changes will represent variations on the six main characteristics described above. Brand improvements and new brand introductions naturally depend upon the willingness and ability of the firms to launch and complete R&D projects. In doing the R&D, the values of the physical characteristics should be specified in whole numbers of the relevant units, and within the feasible technical range for each dimension.

Market segments (Sonites)

The target markets in Markstrat are households and individuals over 18 years of age. The opinion of experts, confirmed by several studies undertaken by the firms, is that one can distinguish five segments in the Sonite market with different characteristics and significantly different purchasing behaviour: Buffs (Bu) - People who are enthusiastic and very knowledgeable about the products and the different characteristics of existing brands. Buffs were probably among the first to use Sonite products. They demand high-performance products, primarily concerned with quality and technical features. They are less concerned by the convenience of the products. However, they are quite price-sensitive, since they use do not necessarily have high incomes. Singles (Si) - People in this segment live alone. Although they are less technically competent than Buffs, they demand good performance and convenience from a product that they may use more than the average consumer. Like buffs, they use Sonite for personal purposes and are quite price-sensitive Professionals (Pr) - Persons who have a higher level of education and high incomes. They tend to be more independent in their occupation and to engage in many social activities. Their purchase of the product is partially motivated by social status needs. They may use Sonites for both personal and professional needs and hence are looking for high quality, high-performance and easy-to-use products. They can afford expensive products and often view price as a indication of quality. High earners (Hi) - People who have high incomes but do not possess the higher level of education or occupational independence of the individuals in the Professionals segment. Studies show that they usually buy fairly expensive products which they can afford. Although they tend to use their Sonites less than the average consumer, they demand performance and convenience.

Others (Ot) - Consumers who do not belong to any of the above groups. This segment represents the largest proportion of the population. Although this segment is composed of several sub-groups, most customers have similar needs. In the past it has known a significantly lower penetration of Sonite products than other segments. However, in the future its growth rate could exceed forecasts. They are looking for cheap, lowperformance products with average convenience. The overall Sonite market growth has seen relatively high growth over the last three years. However, the five segments are at different stages in their development and are growing at different rates. Current segment sizes and growth trends will be communicated to you when you take up your new job. Short-term and longterm forecasted growth rates will be available in the Market Research Studies. Brand name conventions Each brand name is made up of four characters. The first letter being an 'S' for a Sonite, or a 'V' for a Vodite. The second letter of the brand name identifies the company marketing the brand (A, E, I, ...). The last two characters (letters or numbers) are freely chosen by each firm to generate different brand names. For instance, brands SIBI and SIRO would be Sonites belonging to company I, and brand VAIN would be a Vodite marketed by company A. All new brands should follow these conventions. All brands should have different names, but the selected name has no influence on the market response to the brand.

Vodites
Although the scientific bases are known and available, substantial R&D efforts are likely to be required for the development of a Vodite product. Recent estimations anticipate investments of about $10m may be required for firms to develop their first Vodite product. From preliminary information available, the main physical characteristics of a Vodite will be:

Characteristics

Feasible range

1. Autonomy (m) 5-100 2. Maximum frequency (KHz) 5-20 3. Diameter (mm) 10-100 4. Design (index) 3-10 5. Weight (Kg) 10-100 6. Base cost ($) minimum 10 (for a production batch of 100,000 units) If developed, Vodites would satisfy a totally different need to that of Sonites, and there would be no interaction between the two types of products at the sales level. There is little reliable information today about the potential size of the Vodite market. Experts tend to agree, however, that it could be quite attractive if the right products were made available at the right price.

Market segments (Vodites)

While potential consumers for Vodites are the same individuals who buy Sonites, a different segmentation scheme is likely to be valid for Vodites. Analysts believe that it will be most effective to consider three segments for this new technology: Innovators (In) - People in this segment tend to be adventurous, more cosmopolitan in their social relationships, and wealthier than those who adopt later. They are willing to try new ideas at some risk. These will be the first users of Vodite products. Although this segment will probably be the largest one in the early days, it represents only a small percentage of the total. Early adopters (Ad) - They usually adopt new ideas early but carefully. They are among the most influential people in their communities. They represent a critical group in the adoption process, as this group is usually

much larger than the previous one. They tend to be opinion leaders and helpful in 'advertising' the new product to other potential buyers. Followers (Fo) - These people represent the bulk of customers. They adopt an innovation only after a large number of people have tried it, and are thus often highly influenced by early adopters. Their income level is usually below average.

Distribution
All products may be distributed through three distribution channels, each of which is visited by the supplier's sales force. Specialty stores - They make an important proportion of their sales from Sonite-type products and provide specialised services. These stores usually carry a broad product line for each category, including the most expensive and/or high performance products. Because of their high level of technological expertise, specialty stores are likely to be the preferred distribution channel for Vodite products. Department stores -These handle a wide variety of merchandise and may have a department carrying Sonites. They provide extensive customer service, but their technological expertise is lower than that of specialty stores. Department stores are often organized in chains and have a high degree of power in negotiating margins with manufacturers. Mass Merchandisers - These carry Sonites only as one of the many product categories they distribute. These stores operate on a low-price, high-volume basis. As a consequence they offer a low level of service and each product line is usually restricted to a few units. They often distribute the cheaper, low-performance products. Their lack of technical expertise may well prevent them from distributing Vodites in the early years. It is estimated that there are at the outset some 30,000 specialty stores, 7,000 department stores belonging to 15 different chains, and 10,000 mass merchandisers belonging to 8 different chains, all of which can potentially distribute the various Sonite and Vodite brands. Differences between margins obtained by the stores in each of the three channels are mainly due to differences in the service level and the quantities purchased. These margins, expressed as a percentage of their retail price, are approximately constant across brands for a given channel type. Their values are: 40% for specialty stores 30% for department stores 30% for mass merchandisers.

GETTING STARTED
Simulation process
At the beginning of the simulation your team is assigned one of the Markstrat firms and will receive your Company Report and Industry Newsletter representing the situation of your company and the market you are active in, at the time you are taking over the firm's marketing management. You are able, from the company report information and the information in this document, to evaluate the relative market strength of your firm compared to your competition. Even though you might have a fair amount of information, there are still many uncertainties, which will decrease when you acquire more specific market research data and when you make the decisions and your competitors make their moves. Consequently, you should not take inconsiderate risks for your first decision. Your decisions will then be submitted, together with the decisions of your competitors, to the Markstrat3 software model which will generate the results of that period. You will receive these results on diskette and print-outs of the following documents: The Company Report: summary of the firm decisions, messages, results of the firm overall as well as by product category (Sonite and Vodite markets) for the period, results for each brand marketed by the firm, feedback from the R&D department, and cumulative results since the beginning of the simulation. The Newsletter: contains general market information Market Research Studies: market research information bought from outside marketing service firms. Each of these modules can be accessed in the software via the menu buttons found on the module bar of the main screen of the Markstrat3 software. After analysing this new set of information, the team will check objectives and decide to follow or adapt the strategy. You will then make decisions for the next period and follow this cycle of decisions and results for eight simulated years. For your first decision, you should concentrate on the management of your two existing brands. In the process of reaching your decisions for that first period, you should analyse the actions of your firm's previous management team. It is not wise at this stage to drastically change their advertising, pricing, sales force, and production policies since you probably cannot yet make a sound decision about the direction and the degree of the change. On the other hand, you may consider purchasing market research studies, which will be made available for your next set of decisions. During the first set of decisions, it is essential that you rapidly develop good working relationships in your group. It is important that each member of your group should be involved in the discussion of all issues and should develop a grasp of the total situation. Therefore, it is important to avoid the natural tendency for each member to concentrate in his or her area of expertise. Later in the simulation - when everybody has a common understanding of the strategic issues and the management of the firm becomes more complex in terms of the number of brands, the R&D interface, the market developments, and the intensity of competition - some specific problem areas can be delegated to individuals. In this way, the group should learn to work efficiently, and each of its members should benefit equally from the Markstrat experience. The software distributed comes with a PRACTICE industry to help you familiarize yourselves with the software and the decisions to be taken (see Appendix 3).

Markstrat Main Window

The Markstrat main window is partially displayed below (Figure 1). It is always located at the top of the screen and is always as wide as possible. Its caption shows the Markstrat version number and the name of the currently opened industry. The six large buttons of the top bar give access to the six main modules. When you click on one of these buttons, the associated module window pops up to give you access to the charts, graphs or dialog boxes available in this module

Figure 1 Markstrat Main Screen (Partial)

The red button on the upper right top row is the Exit button. Clicking on this button will close Markstrat. Note that your decisions are automatically saved on the hard disk each time you make a modification, so you can close Markstrat at any time without the risk of losing your data. The smaller buttons at the bottom of the window are grouped in two categories: selector buttons and tool buttons. The selector buttons allow you to specify which data you want examine. The tool buttons give you access to useful features such as Copy to clipboard, Print facility, Configuration or On-line help. Decisions module Use this module to make decisions for next period. Decisions are grouped in five categories: Brand Portfolio, Brand Decisions (Production, Price and Advertising), Sales Force & Distribution, Market Research Studies and Research & Development. NB. As decisions for Period 1 are limited in scope, the 'Brand Portfolio' and 'Research and Development' buttons have not been released at this stage and remain grey to indicate that you cannot access them. Report module This module provides confidential information on your company: Company Results, Brand Results, R&D projects, Cumulative Results, and a recap of Past decisions. Newsletter module This module provides you with publicly held information on this industry: Stock Market, Economic Variables, and Market Information. Market Studies module This module provides you with detailed information on a given market in terms of : Brand Awareness, Purchase Intentions, Segment Analysis, Brand Perceptions, etc. This data is not free and must be ordered as part of your decisions, one year in advance. Analysis module. This module uses the information provided by the other modules to produce and display charts and graphs. It also provides a number of analysis tools such as a Product Portfolio Matrix. Interface module This module serves as the interface between your company and your instructor.

Files and Interfacing with Instructor

The Interface module serves as the link between you and your instructor. It contains two pull-down menus; File, to handle data files and Finances, to request loans and/or budget changes. Open Industry You must open your Markstrat industry to browse the simulation results or to make your decisions. To open an industry, select File/Open industry in the Interface module. The dialog box showing a list of available industries and team details pops up.

An industry is a set of three files containing the cumulative results of the simulation from period 0 to the last period, in addition to the default team decisions for next period. For instance, for industry PRACTICE and team E, the three files are: PRACTICE.MTE: simulation results and team decisions for next period; PRACTICE.MRE: miscellaneous information (current period, team name and password, ...); PRACTICE.REC: license information (university name and address, professor name, type and date of course, ...).

The industries available in your private directory are listed in the box on the left. Select the one you want to open and check the information that appears in the right-hand fields: team initial, industry name and current decision period. Enter your password if required and finally click on Open industry. If no industry is listed when the dialog box pops up, it probably means that you have not transferred the industry from the instructor. You may need to stop working on Markstrat in the middle of a decision round. In this case, simply save your industry by selecting File/Save and close industry in the Interface module. To work on your industry later, select File/Open industry in the same menu. To copy an industry file from one computer to another, use the Save and backup industry and Restore industry commands. Finally, team industry files can be protected by passwords. Select File/Change industry password to set or change your own password. Transfers to/from Instructor During the course of the simulation, you will have to transfer your industry files several times to and from the instructor. Transfers Decisions to Instructor Decisions must be transferred to your instructor at the end of each decision round so that he/she can run the simulation and produce the results for the current period. Select File/Transfer decisions to instructor in the Interface module. A confirmation message pops up. If you click on Yes, your decisions will be transferred in the Instructor/Team exchange directory. You will be invited to insert your team diskette into the disk drive, assuming that the exchange directory is set to A: or B. Hand this disk to your instructor. Note that you can transfer your decisions several times during the same decision round. Each time, the newer version of your decisions will replace the older one in the exchange directory. Transfer Results from Instructor Once the simulation runs and produces results for the following period, data files must be transferred from your instructor to each team. This is necessary in order to update your industry with the latest version of the simulation results. To transfer an industry, place your floppy disk in the drive, select File/Transfer Results and Default Decisions from Instructor in the Interface module. The dialog box showing your team details and the currently active industry will pop up. The industries available in your exchange directory are listed in the left-hand side of the dialog box. Select the one you want to transfer and check the information that appears in the right-hand fields: team initial, industry name and current decision period. Enter your password if required and finally click on Transfer results & default decisions and open industry. If no industry is listed when the dialog box pops up, it probably means that your configuration is incorrect.

DECISIONS MODULE

Figure 2 Decision Module

The Decisions module is used to make all the required decisions during the Markstrat simulation. The Decision module is made up of five sub-modules: Brand Portfolio. Brand decisions: Production, Price and Advertising. Sales Force and Distribution. Market Research Studies. Research and Development.

Each of these sub-modules is discussed in a separate section of the manual. The Decision module has 4 additional parts that allow to: locate errors and warnings in your decisions; look at a summary of the decisions made; check your marketing expenditures against your allocated budget; analyze your marketing plan, i.e. make sales forecast and estimate your next period contribution based on your current decisions.

NB. Click on the S or V buttons at the top left-hand corner to choose either the Sonite or the Vodite market.

Errors & Warnings

A yellow or red message in the middle of the Decisions module window may indicate that Markstrat has discovered a few errors and/or warnings while analyzing your decisions. Do not pay too much attention to these messages if you are just beginning to make your decisions; they will probably be cleared after your decisions are finalized. If the messages are still there at the end of the decision round, it is a good idea to click on the Errors & Warnings button. A dialog box pops up with the list of errors and warnings in the top middle box. To get more detail on the particular error or warning, click on a given message in this box: a picture is displayed in the top left box and an explanation message is given in the bottom box.

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 A yellow exclamation point indicates a warning. Most warnings should be resolved, but this is not mandatory. A red hand indicates an error. All errors must be fixed before transferring your decisions to the instructor. A frequent error is "Budget limit exceeded". Click on the Budget button to find out how you can reduce your marketing expenditures ... or check with your instructor if you can negotiate a loan or a budget increase!

Summary
The 'Summary' button gives access to five tables which provide a detailed description of all decisions. Each of these tables can be reviewed by clicking on the corresponding tab at the bottom of the screen.

Budget
The Marketing department of each firm is allocated a budget for the following period to cover advertising, sales force, research & development, and market research expenditures. You will have to work within this given budget! Click on the Budget button at the bottom of the Decisions module window to obtain a summary of your current expenditures. The Overall Budget Section presents expenditures by market. The budget shows the funds available to spend in the next year. If total spending exceeds the allocated budget for a period, expenses will be automatically cut, starting with advertising expenditures. A red negative number indicates that you have overspent your marketing budget. A purple positive number is a good sign; you have some money left over!

The allocation of advertising and sales force expenditure by brand can be found in the Brand Details Section. The R&D Details section lists the R&D projects requested for the next period with the corresponding budgets assigned to each of them. The budget allocated to the Marketing department is linked to the success of the department: it is a straight 40% of the net contribution achieved in the previous period. Above a maximum level, however, resources are re-allocated to other businesses of the company under a different management organization. A minimum budget is always provided in case of insufficient performance. Because of these resource allocation decision rules, a firm may be given a much larger budget than would really be needed to maximize the firm's performance. In such a situation, the firm should certainly not automatically spend its entire allocated budget, (especially when you reach the $15M - $20M range). Your strategy should guide you in deciding whether a given expense is worth making or not. If your objective is to maximize ROI you should not necessarily spend your entire budget in every situation. If your spending exceeds your budget use the Brand budget and R&D budget tables to find out how you can reduce your marketing expenditures. You may also explore the possibility of negotiating a loan or a budget increase with your instructor!

Marketing Plan
The Marketing Plan sub-module is a useful tool to check the consistency of decisions and to easily anticipate their possible financial consequences. It provides, however, no guarantee of achieving the projected results. The actual brand contribution and company performance statements for the next period may be quite different from the pro forma projections obtained from the plan! Many facets of the environment may have changed unexpectedly, including consumer needs or competitive actions. Other aspects directly controlled by the firm may not have been properly incorporated, or may have been overlooked. For example, students often overlook the following issues: the distribution mix estimates may not have taken into account the fact that the deployment of the firms sales force no longer corresponds to the new shopping trends; or the share estimates for a given brand did not anticipate negative consumer reactions to the price increase; or the cut in the advertising budget did not have such a negative impact on sales and that, as a result, the brand has performed better than expected and is out of stock.

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The process of planning in MARKSTRAT brings discipline to marketing thinking, action, and learning in at least three important ways: firstly, by demanding a focus on the tangible results of decisions at the brand level; secondly by making it easy to check the validity of the overall financial results; and thirdly by providing support for a post-mortem analysis. On the first aspect, the marketing plan sub-module helps to focus on the three key elements of market evolution (segment sizes), brand performance (in shares or volume), and distribution coverage. Having to submit estimates for these components of the plan should solicit discussion and reflection about the variables affecting them. By modifying the estimates, it is also relatively convenient to perform sensitivity analyses to better understand how they affect the brand contribution. Moreover, if the resulting projected brand contribution appears significantly higher or lower than expected, then the validity of some of the decisions should be questioned. For instance, observing an abnormally high projected contribution for a given brand may lead to checking if the share estimate is coherent with the competitive positioning, the retail price, or the advertising support of the brand. It is easy to switch between the marketing plan sub-module and the other components of the decision module to adjust either the decisions or the estimates, and reach a situation in which the firms management has confidence. The module also allows you to easily check on the expected overall financial performance of the firm. Within the firms portfolio, it may be decided to invest heavily in a new brand and to accept a substantially negative contribution for this brand as long as other products generate sufficient funds to reach financial objectives. This financial interdependence between brands is sometimes difficult to apprehend but it is easy to investigate and analyze with the marketing plan sub-module. Finally, an important role of the marketing plan is to provide a tangible basis to learn over time. The Brand Contribution and Company Performance statements in the marketing plan are in the same format as in the company report. This makes it easy to compare between the anticipated projections and the actual results when they are obtained. A systematic analysis of the sources of variance between the two documents will help you learning both about the market mechanisms and about the planning process. In the long-term, this learning dimension is probably the most important contribution of the marketing planning process. After accessing the marketing plan sub-module by clicking on the corresponding button, five distinct components appear in the tabs at the bottom of the screen: Segment sizes, Brand shares/sales, Distribution mix, Brand contribution, and Company performance. Each component of the marketing plan is accessed by clicking on the corresponding tab. The first three correspond to the different types of estimates that have to be input into the plan. The last two are a simulation of the simulation based on both the decisions and the estimates. Marketing Plan - Segment Sizes The first estimates you must provide as inputs to the marketing plan concern the size (in thousands of units) of each segment. Click on the Segment sizes tab in the Marketing Plan sub-module. The chart at the center of the screen initially displays each segments size last period. The estimates for the variation of the segments sizes next period should be entered in one of the two columns on the right-hand side, in thousands of units or in percentage change. One can shift from the Sonites screen to the Vodites screen with the selector buttons in the top left-hand corner of the dialog box. Two automated estimation approaches are available. You can click on the Same as last period button to use segment's size from the previous period, or click on the As in market forecast study button to input the segment size projections from market research. The second alternative is available only if the corresponding study has been purchased. If this is not the case, the button is grayed. These two automated approaches provide a basis on which individual adjustments can be made, either in thousands of units or in percentage change. Marketing Plan - Brand sales or brand share estimates by segment One of the most important aspects of marketing planning is the anticipation of the market response to a specific set of decisions or actions. In this screen, anticipated market reactions must be entered for each brand in each segment. They can be specified either in terms of brand shares or brand sales by selecting the appropriate tab button at the bottom of the screen. The numbers for the previous period are displayed for each brand in each segment as well as for the total market. An estimate for the next period can be entered either as a target or as a change from the previous period.

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Figure 3 Marketing Plan - Estimated Brand Share by Segment

Assuming that brand share inputs are first selected, one easy way to start is to use the same brand shares as in the previous period. Estimates can then be changed for each brand/segment combination, either as expected brand shares or as expected changes in brand share points. Whenever a change is made in any of the estimates, the number for the other mode of entry is automatically updated. The total brand share estimates for the market as a whole are also updated in the right-hand column. Simultaneously, the estimates of the corresponding brand unit sales in each segment are calculated based on the segment sizes previously defined and the brand share inputs. These numbers can be displayed by selecting the brand sales tab button at the bottom of the screen. The estimates of brand sales can then be updated as targets or as changes from the previous period in the same way as for the brand shares. The approach described above consists of: starting with brand share estimates, displaying the expected brand sales resulting from the segment size and market share estimates, and updating selected brand sales estimates. It probably reflects the most logical process but it is also possible to directly set estimates of expected brand sales. In this case, brand share estimates are calculated on the basis of the brand sales and the segment sizes.

Marketing Plan - Distribution Mix The price received by the firm for the sale of a product is equal to the retail price minus the distributors margin. As the distribution margin varies across channels, the average selling price of a brand will depend on the mix of its sales across the channels. To calculate the financial contribution of a brand thus requires an estimate of its distribution mix. The Distribution mix estimates can be made by selecting the corresponding tab in the marketing plan submodule. They can be set to the same values as in the last period, or be calculated automatically based on the shopping habits study, by selecting the appropriate button at the bottom center of the screen. The second alternative is available only if this market research study has been purchased in the current period. In this case, MARKSTRAT3 uses the brand sales projections entered in the previous steps of the marketing plan. For each brand the purchases of each segment are split by channel based on the shopping habits data. The sales of a brand in a given channel are obtained by total over the segments. The distribution mix estimates can also be entered or updated manually one by one. One should, however, be particularly careful that the vertical sum of the percentages adds up to 100. The average distribution margin corresponding to a given mix is displayed on the bottom line and is updated any time a change is made in the chart.

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Marketing Plan - Projections (Brand contribution and Company performance) On the basis of the decisions and the estimates for segment sizes, brand shares, brand sales, and the distribution mix, the marketing plan sub-module can make financial projections for the next period. These projections can be displayed by selecting the Brand contribution and Company performance tabs at the bottom of the screen. When making financial projections, the software also makes a number of consistency checks; an errors and warnings screen may be displayed if any problems are encountered. Common inconsistencies include forgetting to enter some estimates, the distribution mix for a brand not adding up to 100%, or the sales forecast for a brand exceeding the available inventory volume plus the production plan. Such errors and warnings will require corrections in either the marketing plan estimates or the decisions. In the first case, just select the appropriate tab and make the desired adjustments before returning to the financial projections. In the second case, you can go back to the decision module by clicking on the close button at the bottom of the screen, make any needed changes to the decisions, and return to the marketing plan sub-module. The previous estimates entered in this marketing plan section have been saved and will be used for financial projections unless modified. Selecting the Brand contribution tab gives access, if all consistency checks are passed, to a pro forma statement of brand contribution. From the top line of the statement, units sold, to the bottom line, contribution after marketing, the software uses decisions and parameters to produce a simulation of the brand contribution statement, which will appear in the company report. For instance, the average selling price is obtained from the retail pricing decision and the average distribution margin calculated from the distribution mix estimates. Similarly, the inventory level is calculated on the basis of the previous inventory (a factual data) plus the production plan (a decision) minus the sales estimates, allowing for upward or downward adjustments possible in the production process. Selecting the Company performance tab gives access, if all consistency checks are passed, to a pro forma statement of Company performance. This replicates a page in the company report but allows you to go one step further by simulating results based on estimates. From the top line of units sold to the level of contribution after marketing, it is an aggregate of the information available in the brand contribution pro forma statement, separately for Sonites and Vodites as well as in total. Other expenses are then deducted to provide the net contribution. Finally, a budget for next period is estimated on the basis of these expected financial results.

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BRAND DECISIONS - PRODUCTION, PRICE AND ADVERTISING

Figure 4 Brand Decision Screen

Before entering your brand decisions you first have to select a brand. Two selector buttons at the top lefthand corner let you choose between Sonite or Vodite brands. Then, a set of tabs labeled with brand names let you choose which brand you want to process. Decisions on production, price, and communication can then be entered for that brand. The Last period column is a reminder of your previous decisions. Input your new decisions in either the This period column or as a percentage, positive or negative, in the %Change column.

Production specification
The required decisions include the brand production level and the number of inventory units sold to trading companies. Both decisions are given in thousands of units. The Base R&D project cell cannot be modified. To introduce new brands or modify or withdraw existing ones, you must use the Brand portfolio dialog box (see later). Enter a production level based on your expectations of the sales in the coming period, taking into account the units left in inventory if any. The production department will adjust up to a limit of 20% (+ or -) to respond to the real demand. You can decide to sell all or part of your inventory to a trading company which will buy it at given percentage of its value (this percentage can be found in the Newsletter). This operation will generate a loss of (1 - the given percentage) of the value of the stock sold to the trading company. Production Department The production department is working for several divisions of your company, and can thus be viewed as a highly flexible external supplier. As a consequence, you are not concerned about manufacturing investments, fixed costs or capacity utilization. Each period, the Marketing department specifies a production plan for each product. The Production department then proceeds to manufacture the required quantities in the best possible conditions. The following rules guide the interface between the Marketing and the Production departments: In a given period, the actual production level for each product is automatically adjusted in response to actual demand for that product, within plus or minus 20% of the production plan submitted by Marketing. From one period to the next, Marketing is completely free to increase or decrease production plan of a given product, without any penalty. The transfer cost for each product incorporates all costs associated with this high level of manufacturing flexibility, including depreciation and fixed costs.

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Marketing pays the Production department only when goods are actually sold. inflation (which increases it) experience effects and economies of scale (which reduce it)

The transfer cost of a given product will evolve over time under two main forces: o o

The transfer cost may be above the base cost specified in the successful R&D project (one of the products six characteristics) in the case of a production level below 100,000 units. Indeed, until accumulated production reaches 100,000 units, fixed costs have to be allocated to fewer units. Inventory In cases of over-production leading to inventories, Marketing is charged inventory holding costs corresponding to warehousing and working capital expenses. The inventory is valued at transfer cost and holding costs are computed as a percentage of its value, according to the rate given each year in the Newsletter. Teams can decide to sell off a portion of the stock by selling that portion to a trading company, at a price corresponding to a given percentage of the transfer cost (the exact percentage will be found each period in the Newsletter and is usually between 20% & 50%). As the units are still in the possession of the production department, which charges the marketing department when units are sold, the obsolete units must then be purchased from the production department and paid for. Consequently, a loss of (1 - the given percentage) of transfer cost is taken on the obsolete inventory. This loss will appear as a cost for inventory disposal in the next period company results. In all cases, the older stocks will be sold first, according to the FIFO method, and the transfer price of each unit will be calculated according to the production cost of the product at the time it was manufactured, adjusted for inflation. Lost sales In case of under-production, there is no exact calculation of the level of lost sales. However, to get a good feel for the amount of lost sales, one can compare the purchase intentions (consumer survey) with the actual market share (consumer panel) for a given product. Sales can be lost to competition, in which case, consumers who had the intention to buy your brand and cannot find it will transfer their buying to a competitive brand. This competitive brand would then probably reach a higher market share than its initial purchase intentions. Sales can also be completely lost to the industry, in which case, the market does not develop as much as it could have, or alternatively, customers can decide to postpone their purchase decision until the following period.

Pricing
Markstrat companies provide recommended retail prices for each of their brands. This is the list price for consumers. This corresponds to the price usually paid by consumers (except in the mass merchandiser channel). Specialty and department stores respect recommended retail prices provided by Markstrat companies. Mass merchandisers typically sell all brands at a similar discount rate of 10% off the list price. Note that this implies that mass merchandisers' margins are typically lower than those of the other channels because the percentage margin applies to this discounted price. The table below provides a summary of retail prices, margins and discounts: Recommended retail price = $400 Specialty Stores Actual retail price Distribution margin Selling price $ % $ $ 400 40% 160 240 Dept. Stores 400 30% 120 280 Mass Merchants. 360 30% 108 252

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Please note that the recommended retail price cannot be set so low that the company's Average Selling Price is under transfer cost (i.e. dumping is strictly forbidden). In addition, price increases or decreases of greater than 30% in one period are highly discouraged as they often result in adverse market reactions. While consumers may react strongly in case of excessive price increases, distributors may react as strongly when their margins are about to be cut because of a significant decrease in the price of a brand. This applies whether or not the product marketed under that brand name is modified. A message would warn the team when such decisions are made. If the team ignores the warning, the recommended retail price is likely to be automatically adjusted to limit the negative effect of the adverse reaction.

Advertising
The required decisions include the advertising media budget and the advertising research budget. Both decisions are given in thousands of dollars. The advertising research budget finances the creative work, media selection or other activities conducted by advertising agencies which improves the quality of your message. In past years, companies have devoted on average 7% of their total communication expenditures to research. Advertising research will normally make your advertising more effective, and is especially important when you introduce a new brand or when you look to reposition an existing one. In thee last two instances, higher percentages are recommended (in the range of 15-20%). You can allocate your advertising budget to the various market segments. The entry on the 'targeted segments' line corresponds to the proportion of the budget targeted to each of the segments respectively. The percentages must add to 100%. Perceptual objectives Select on which dimensions you want to communicate. You can give No objectives at all, or communicate on MDS dimensions or on Semantic scales, i.e. on physical characteristics. Then, select in the Dimension 1 and Dimension 2 cells the two dimensions along which you want to reposition the brand. Choose None in the second dimension if you need to communicate on only one dimension. Finally, enter in the two Objective cells the target positions. MDS positions must be given in whole numbers on a scale from -20 to +20. Semantic dimensions on a scale of 1 to 7 may be expressed with one digit after the decimal place. Do not set any perceptual objective for your communication in the first period as you do not have enough information yet to do so. See the section on Positioning for further information.

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SALES FORCE AND DISTRIBUTION

Figure 5 Sales Force Screens

Your company's sales force is organised by channels of distribution. Your primary decision will be to assign a number of sales people to each of the three distribution channels. Changes in the number of salespersons are expected to have an influence on the distribution coverage of your brands. Your sales force is knowledgeable about all your products. You can therefore modify the allocation of salespeople to specific distribution channels without any expenditure. Your secondary decision will be to instruct your sales people on how to allocate their efforts to the various brands that they sell. Indeed, some brands are targeted to segments which are more likely to make their purchase in certain channels of distribution. Enter for each distribution channel and each brand the % of effort, mostly the time spent, which the salespeople will exert on this brand. The percentages must add up to 100% in each column. Using the 'normalize' button after you have entered new figures will automatically adjust your inputs to total 100% in each channel. The sales force budget is automatically calculated for each brand and totaled. The 'assistant' button generates automatic allocation options through a dialog box which provides help on the time allocation decision. Four assistant options are proposed. The first option 'equal allocation on all brands' allocates an equal amount of effort to each brand within a channel. The three following options are based on the previous period's results (allocation proportional to last period's unit sales, retail sales or contribution). In these cases, no effort will be allocated to new brands introduced during the current period. Obviously, you will need to enter some figures so that some effort is devoted to new brands. Beware, none of these four allocation modes is optimal; hard thinking, a good strategy and a careful analysis of the Shopping Habits study can also help you optimize the allocation of the sales force.

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REPORT AND ANALYSIS MODULES

At the beginning of each decision round you will receive a copy of your annual report. The annual report provides you with the results of the period that has just ended. The annual report is composed of three separate documents: the Industry Newsletter, the Company Report and Market Research Studies. The information available in these reports is also available in Markstrat along with some additional analysis tools.

Report Module
This module/report provides you with information on your company. Here is a summary describing the available charts: Company results The company scorecard is a general summary of the firm's overall performance with a comparison with the prior year's results. Four overall measures of performance are reported: market share, retail sales, firm contribution and a stock price index. The stock price index is based on multiple measures of the performance of the firm in its industry. The return on investment is the ratio of the net contribution with the expenditures (marketing, market research and R&D). The company performance table consolidates all brands' contributions. The firm's net contribution is the total Contribution after marketing - (market research studies + research and development + interest + exceptional cost or profit)

Figure 6 The Company Scorecard and Company Performance Report

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Brand results This section provides the contribution by brand (Figure 7). It also gives the total market share of each brand and its distribution coverage i.e. the number of stores carrying the brand. Brand Contribution calculation Average retail price = Average prices paid by consumers, depending on the channels used Average selling price = Average retail price - distributors' margins. Depends on the split among the three different distribution channels, since retail prices and margins are different Revenues = Number of units sold x Average selling price Current unit transfer cost = Unit price charged by Production department to Marketing department for the production batch of current period (for units sold only) Average unit transfer cost = Computed on the basis of first-in, first-out. Likely to be different from the current unit transfer cost when inventories were left at the end of the previous period Cost of goods sold = Number of units sold x Average unit transfer cost Inventory holding cost = Inventory value x Inventory holding cost per annum rate (% rate given each year in the Industry Newsletter) Inventory disposal loss = Inventory sold to a trading company at a given % of transfer cost -> leads to a loss of (1 - the given %) of transfer cost per unit Contribution before marketing = Revenues - (cost of goods sold + inventory holding cost + inventory disposal loss) Contribution after marketing = CBM - (advertising + advertising research + sales force)

Figure 7 Contribution by Brand

Additional reports R&D: Information on completed and incomplete R&D projects. Cumulative results: Cumulative data on sales, production and marketing expenditures at brand and company levels. Messages: Messages generated by the simulation and the administrator. Past decisions: Summary of decisions made at the beginning of the previous period.

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Industry Newsletter
This module/report provides you with publicly held information on the industry and on competing firms. Here is a summary of the available data: Stock market and key performance indicators: - Stock price indices, market shares, sales, contributions, key company performance indicators. Economic variables and costs: - GNP growth rate, inflation rate, production and sales force costs, market research costs. Market information: - Brand physical characteristics, brand prices, brand sales and market shares in units and value. It also indicates which brands have been recently improved upon or introduced.

Analysis Module
This module uses the information provided by the other modules to produce and display charts. It also provides access to a number of interactive analysis tools. A number of selectors, located on the chart itself, let you specify which data you want to plot: in units or in value; Sonite market only, Vodite market only, all markets; XY graph with time on the horizontal axis, pie or bar graph for current period only, bar graph for cumulative data; time scale (evolution, or selected period)

There are five components: 1. Market - Market size and growth rate, segment size and growth rate, number of marketed brands, average market prices. 2. Performance - Retail sales, market shares, contribution, stock prices, return on investment. 3. Benchmarking - Charts corresponding to the benchmarking study: retail sales, revenues, ...etc. 4. Product Design - Set of charts, graphs and tools that use data from the Semantic Scales and MultiDimensional Scaling (MDS) studies to help you design new products or improve existing ones. Most of this information is based on simple and multiple regression analysis. Ideal value trends, estimate of ideal brand characteristics, estimates of brand perceptions, or estimates of physical characteristics for brand repositioning. 5. Portfolio Tool - Product portfolio growth/share matrix.

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MARKET RESEARCH
Ordering Market Research Studies

Figure 8 Ordering Market Research Studies

Market research studies may be requested simply by checking the boxes corresponding to each of the studies desired. The cost of these studies appears as the boxes are checked. All studies except Benchmarking can be ordered separately for the Sonite and the Vodite markets. When you order a study, the study is performed during the simulated period and the results are made available at the end of the period, providing information for the next period's decisions. Some of the studies may apply only if there are brands marketed during the period (e.g., the consumer panel for the Vodite market). It may be difficult to anticipate whether competition will launch new brands ahead of time. You can nevertheless order these studies in anticipation that the study will contain relevant information. If this is not the case, you will not be charged for this study. The cost of the market research studies is expected to increase with inflation during the course of the simulation. Inflation rate is about 3-4 %. The results from these studies have different levels of errors attached to them, according to the methodology used and the sample size. The information in each report pertains to the market situation at the end of the indicated period.

Summary of Market Research Studies

Industry benchmarking: Provides general information about each competitor (obtained from their annual reports). This includes income statement data on revenues and expenses globally for the entire company. Consumer Survey: This is a survey questionnaire administered to 3000 individuals at the end of the simulated period. It gives brand awareness, purchase intentions, and shopping habit data of each for the five segments for all marketed brands. The brand awareness figures represent the proportion of individuals who have unaided recall of the brands name, and they are given for each Sonite (or Vodite) brand currently on the market. The shopping habit data indicate, for each channel type, the proportion of individuals who would choose this channel when shopping for a Sonite. The purchase intentions figures represent the proportion of individuals, among those familiar with the various brands, who would select a brand as their first choice if they were buying one within a year. These figures are also represented for each Sonite brand currently on the market. Consumer Panel: This study provides the market shares, based on units sold, for each Sonite (or Vodite) brand in each segment. The industry sales in each segment are also indicated, in thousands of units (KU). Distribution Panel: This study provides the market shares, based on units sold, for each Sonite (or Vodite) brand in each channel. The industry sales in each distribution channel are also indicated in thousands of

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units. This study also indicates the level of presence of each brand in the various distribution channels. Brand coverage is expressed as a percentage of the total number of outlets for each channel. Semantic Scales: This study is based on a semantic differential questionnaire administered to a sample of 600 individuals. Respondents are asked to rate each characteristic of each brand on a scale from 1 to 7 according to the way they perceive the brand. Several semantic scales, such as the following one corresponding to the physical characteristics of Sonites (or Vodites), were presented to the respondents: Lightest 1 2 3 4 5 6 7 Heaviest They were also asked to indicate their most preferred (or ideal) point on each scale, and to rank the scales in terms of their importance to them. The reported results are the mean scale values for each brand and for the segment ideal points on the three scales that were ranked as most important. When no brand is available on the market, this will only give the perception of ideal values on the semantic scales for each segment, and would be used primarily for R&D planning. Perceptual Mapping of Brand Similarities and Preferences: This study provides a joint space configuration obtained by non-metric multi-dimensional scaling. It relies on similarity and preference data on the complete set of Sonite brands obtained through interviews with a sample of 200 individuals. If first gives the minimum number of dimensions that were sufficient to provide a good fit to the data, as well as a likely interpretation of the axes based on semantic scale responses. The study then provides the graphical representation in this space of the perceptual positioning of the Sonite brands and the segments ideal points. Further details on such a perceptual map and on its interpretation will be given later. Market Forecast: This study provides an estimate of the expected Sonite (or Vodite) market size in thousands of units and market growth of each segment, for the next period as well as for five periods later. It relies on market extrapolation and assumes stable marketing action on the part of the competitors. Any change in the competitors' strategies and in market conditions would not be reflected in such a study. When no brand is available on the market this study will give a forecast of the potential market for the first period of introduction of a product, based on declared likelihood of purchase obtained from a sample of individuals. In this case, the market forecast obviously does not rely on history and tends to be less accurate and generally somewhat optimistic. Competitive Advertising Estimates: Estimates of the total advertising expenditures for each competitive brand are provided by an advertising research firm. These estimates are also given for the brands of the company requesting the study as a reference to control for estimation errors. Competitive Sales Force Estimates: Estimates of the sales fore sizes of competitive companies and their breakdown by channel of distribution are obtained from a specialized market research firm. The same estimates are also given for the sales force of the company request the study as a reference to control for estimation errors. Advertising Experiment: An advertising experiment is conducted, increasing the advertising budget in selected regional test markets. The experimental results are used to project what the level of brand awareness and the share of market would have been for each of the company brands by segment if the advertising budget had been increased for that brand by the indicated percentage over the actual expenditures while all other factors, including competitors activities, had remained the same. The estimates are also broken down by segment. The experiment only tests the budget size, not changes in other parts of advertising strategy such as advertising research or positioning objectives. Sales Force Experiment: A sales force experiment is set up in regional test markets by increasing the number of salespersons per channel. The experimental results are then used to estimate the number of distributors and market share each of the companys brands would have had in the entire market if the sales force directed to each channel had been increased as indicated while all other factors, including competitors activities, had remained the same.

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POSITIONING
Consumers' perception of brands
You, as a manufacturer, can easily classify your and competing brands based on objective data like their technical attributes and their price. When it comes to making a buying decision however, consumers are influenced by their 'perception' of the brands available on the market rather than by the actual features and properties of these brands. This perception is often based on subjective data and information and can easily be distorted from reality. The consumers' perception, for a given category of products, is primarily driven by their most important needs in this category. Once consumers are aware of a brand, they typically analyse to what extent this brand meets their needs better than the competing brands that they already know. Your success will greatly depend on your ability to manage the development and positioning of brands. The "Perceptual Map" is a valuable tool for visualizing brand positioning. It shows the ideal points for each customer segment and customers perceptions of existing brands. Need 2
SELF SONO

+20 B

Illustrative Perceptual Map (based on MDS Study)

SEMI SUL I SOLD

P H +20 S Need 1

-20

SALT SI SUSI SAMA

Key
O
SIR

Ot

Segment ideal Point Perceptual positioning of Brands

-20 Repositioning strategies

Once a brand has been sold in the market, consumers have a certain idea about the brand, which is represented by its position in a perceptual space. Over time, demand and competitive dynamics affect what should be the optimal positioning of a brand. In Markstrat, brands may be repositioned to adapt to new environmental conditions. A brand might not need to be repositioned. Indeed, if the perception on one dimension corresponds to what consumers want, there is no reason to change that perception. Repositioning can be achieved by advertising and/or by R&D. Brand repositioning by advertising is limited by the actual physical attributes of a product, and consumers' perceptions of these characteristics may be shifted only within a certain range by advertising. At some point, it becomes more effective to reposition a brand by changing its physical characteristics than by advertising alone. The choice of repositioning through advertising versus new product development depends on the extent to which repositioning is desired and is a function of the current level of brand awareness. A brand which consumers are extremely familiar with will be more difficult to reposition. It also depends, of course, on the ability of the firm to complete R&D projects with the physical characteristics of the products that corresponds to the market needs. Finally, it should be noted that completing an R&D project will take at least one period, while advertising has an immediate effect.

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Perceived Performance

Repositioning

Advertising
Perceived Economy

R&D

Identifying and anticipating market evolution Ideal points reflect the needs of consumers. These needs gradually change as the consumers' values and behavior evolve over time. These changes are typically due to changes in the environment, which in turn does not change drastically from one period to the next. Therefore, changes in preferences are by no mean entirely external to the industry. Indeed, the actions of the competitors in the industry can have a significant impact on these trends. Marketing decisions of the firms in the industry impact the segments' evolution in terms of their size, the importance of the dimensions characterising the brands in the consumers' perceptual space, and consumers' preferences in terms of the degree to which they desire the product to possess given attributes. The semantic scales and MDS studies both provide a map which tracks the ideal point evolutions. If the pattern over time is stable enough and if the information provided by the market research is reliable enough, it is then possible to predict the position of an ideal point as a function of time.

Semantic Scales
Respondents are asked to rate each brand on several semantic scales corresponding to the physical characteristic of Sonites (or Vodites). These are measured on a scale from 1 to 7. For example: Lightest 1 2 3 4 5 6 7 Heaviest They were also asked to indicate their most preferred (or ideal) point on each scale, and to rank the scales in terms of their importance to them. The reported results are the mean scale values for each brand and for each segment the ideal points on these scales (see Figure 11 NB these are representative and should not be used for inference during the simulation) For each brand characteristic, including price, a simple regression analysis is made to calculate perceived semantic scales as a linear function of real brand attributes. For instance, perceived weight on the 1 to 7 scale is compared against actual weight in Kg. The regression analysis is made on all existing brands. The results are given in the Analysis module. Regressions can be estimated only if at least three brands are marketed. This is always the case in the Sonite market, but not in the Vodite one. The graph in figure 10 and similar ones are provided on-line for each physical attribute when you purchase the Semantic Scales Study. Perceptions are plotted against actual attributes for all marketed brands. A graphical interpolation on this graph will let you calculate accurately which physical level is required to reach a given perceived level. Estimates of perceptions for new or modified brands Access the dialog box shown below to estimate using six regression formulas how a new or modified brand would be perceived, i.e. where it would be positioned on the Brand Map.

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Figure 9 Semantic Scales

Figure 10 Relationship between Perception and Reality

Figure 11 Estimates of Perceptions

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In case of a new brand, click on New brand and key in its physical characteristics and price in the blue cells. Then click on the Estimate button. The estimated perceived position is given in the red cells. In case of an existing brand, click on Modified brand and choose the brand you plan to modify. Its current physical characteristics and price appear in the blue cells and the perceived position is estimated in the red cells. Note that at this point, you can check the accuracy of the regression formulas by comparing the estimated perceived values against the actual ones given in the semantic scales study. Key in the modification you plan to make to this brand, i.e. lower price or higher power, and click on the Estimate button. The estimated perceived position is immediately calculated and shown in the second section of the dialog box on a scale of 1 to 7 in red text. Estimates of characteristics for brand positioning The estimations can be reversed i.e. Markstrat will estimate how an existing brand or R&D project should be modified in order to achieve a given position on the Brand Map. Follow the steps below: 1. 2. To reposition an existing brand, select Brand to reposition and choose a brand. To modify an existing R&D project, select R&D project to modify and choose a project. The current characteristics of the brand or project are displayed in the first row of black cells. Price is not relevant for R&D projects. Simultaneously, the actual perceived position, obtained from the Semantic Scales study, is given in the second row (only for brands). Finally, the estimated perceived position, as calculated with the regression analysis formulas, is given in the third row. Note that you can check the accuracy of the regression formulas by comparing the second and third rows, which, ideally, should be identical. Enter in the blue cells entitled Target perceived position the position on the Brand Map where you would like to reposition the brand or project. Click on the Estimate button. Markstrat applies the inverted regression formulas to estimate what the new characteristics of the brand or project should be. The results are immediately calculated and noted in red.

3. 4.

Figure 12 Estimates of Physical Characteristics

Multi-Dimensional Scaling (MDS)

A second basis for analysing the positioning of each competitive brand is the perceptual mapping of similarities and preferences based on the Multidimensional scaling study. MDS differs from the semantic scales study in that the respondent is not provided with criteria to evaluate the brands. Instead, these criteria are deduced by the approach which is based on global assessment of similarities of pairs of brands. It relies on similarity and preference data on the complete set of Sonite brands obtained through interviews with a

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sample of 200 individuals. Respondents are asked to rate pairs of marketed brands according to the similarities or difference between two brands. Complex mathematical formulas are applied to these ratings so as to build a three-dimensional map where the distance between two brands is small for similar brands and brands are far from each other on the map for dissimilar brands. The map is a graphical representation of the respondents ratings. The dimensions are labeled by comparing brands positions on each dimension and their ratings on semantic scales. In this space the perceptual positioning of the Sonite brands and the segments ideal points can be plotted. This is a complex task which necessitates a number of brands to be able to derive a solution. This study is therefore not available for the Vodite market until sufficient (i.e. 7) competing brands are marketed. Composite dimensions The Multidimensional scaling study measures brand perceptions along three composite dimensions which are more or less influenced by the various brand attributes. The most satisfactory interpretation of these dimensions for the Sonite market is: 1. Economy 2. Performance 3. Convenience The table below shows the relationship between Sonite brand characteristics and composite dimensions in the initial period: Composite dimension Relative importance Influence of physical characteristics Weight Slight Slight Moderate (-ve) Design Slight Slight Strong Price Strong (-ve) Slight Slight Max Freq. Slight Moderate Slight Volume Slight Slight Moderate (-ve) Power Slight Strong Slight

Economy Performance Convenience

High Medium Low

The dimensions for the Vodite market are: 1. Efficacy 2. Flexibility 3. Economy The table blow shows the relationship between Vodite brand characteristics and composite dimensions, in the initial period: Composite dimension Relative importance Influence of physical characteristics Weight Slight Moderate (-ve) Slight Design Moderate Slight Slight Price Slight Slight V. strong (-ve) Max Freq. V. strong Slight Slight Autonomy Slight Strong Slight Diameter Slight Moderate (-ve) Slight

Efficacy Flexibility Economy

High Medium Low

For each composite dimension of the perceptual map - Economy, Performance and Convenience for the Sonite market - a multiple regression analysis is calculated to estimate perceived MDS positions as a linear function of real brand attributes; for instance, perceived performance on the -20 to +20 scale against actual weight in Kg, actual power in W, actual volume in dm3, etc.

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Figure 13 Relationship between Composite Dimension and Product Characteristic

Figure 14 MDS Perceptual Map

Positioning Map This is a two-dimensional map whose axes are arbitrarily scaled from -20 to +20 and represent composite dimensions. Axis one represents the first most important need of the consumers and axis 2 the second most important need for that product category. The study will provide the best interpretation of the composite dimensions for each axis. Note only 2 dimensions out of the 3 can be represented simultaneously. The circles 'Bu', 'Si', 'Pr', 'Hi', and 'Ot' on the graph represent the ideal points of each of the five segments. Each circle only represents the 'center of gravity' of the whole segment. Each consumer has a different preference; however, the preferences within a segment are sufficiently similar so that the ideal point represents well the overall global preference of the segment. The various geometric shapes (square, triangle, star...) correspond to the positioning of the brands as they are perceived by the market at the time of the study. Each brand name is clearly labeled. One specific color and shape is attached to each firm (for example, all brands marketed by firm A are represented by red stars).

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Estimations Estimates of perceptions for new or modified brands or estimates of characteristics for brand positioning can both be calculated in a similar way to the procedure described under semantic scales. For example Markstrat can show how an existing brand should be modified in order to achieve a given position on the Perceptual Map utilizing three regression formulas which Markstrat solves with an optimization routine. To do this, follow the steps below: 1. 2. Choose the brand to reposition. The current characteristics of the brand are displayed in the first row of black cells. Simultaneously, the estimated perceived MDS position, as calculated with the regression analysis formulas, is given in the row entitled Estimated perceived position. Note that you can check the accuracy of the regression formulas by comparing the estimated perceived position against the actual one given in the MDS study. Enter in the blue cells entitled Target perceived position the position on the Perceptual Map where you would like to reposition the brand. These values will often be the ideal values given by the MDS study, unless you plan to target multiple segments with a single brand. Check the characteristics which the optimizer is allowed to work with; Max Freq, Power and Price in the example below. The more characteristics you check, the longer time the optimization will take and the less accurate it will be. In addition, you may not want to completely redesign your brand because of the high budget that will be required by the R&D department. Click on Optimize and wait for the optimizer to complete the calculations. MARKSTRAT3 applies the inverted regression formulas to estimate what should be the new characteristics of the brand.

3.

4.

5.

The result can be read in the red cells (the blue ones that became red when you checked them). You can check the accuracy of the optimizer by comparing the target position, which you specified, with the achieved one given in the black cells entitled Optimized perceived position. Marktrat3 offers three optimization modes, depending on the time allocated. The Fast routine is fast but not very accurate, the Slow one is slow but usually very accurate; the Normal one is in between.

Figure 15 Evolution of Ideal Points

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Repositioning Strategies
Ideal points on the perceptual map, or on the semantic scales chart, reflect the needs of consumers, or the price that they are ready to pay to get a product fitting these needs. For a given brand and a given segment, the optimal position on the map is as close as possible to the ideal point of that segment. However, there are several reasons why brands are not always ideally positioned. Changing segment needs. Segment needs evolve over time. This may be due to changes in the environment or in the consumers value and behaviour. Period after period the distance on the map between the brand and the ideal point becomes greater and greater. Price pressure. As price is the most important dimension in the Sonite market, manufacturers should expect pressure from consumers to lower prices, especially in the low-end segment. Again, if prices are not adjusted accordingly, the distance between the brand and the ideal point and the price or economy axis is likely to increase. New target segments. For a new market in its early stages, a good strategy may be to serve several segments with a single brand. This situation may occur if the needs of two segments are fairly similar or if one segment is too small to allow the necessary economies of scale. Then as needs change or as the segment size increases it may become desirable to position one brand closer to each ideal point. Competitor entry. In the absence of competition, one firm may successful serve consumers with a product that is not exactly adapted to their needs. Then if a competitor introduces a new brand that fits these needs better, it may become necessary to reposition the old brand closer to the ideal point.

Positioning through advertising

Advertising in Markstrat is primarily used as a communication tool to get consumers to know about the brand name and about the characteristics of the brand. Advertising strategy should be consistent with the marketing strategy of the firm. It is used to increase brand awareness and to position and reposition brands so that consumers are convinced that the product offerings correspond to their needs and wants. Using advertising to reposition a product requires four types of decisions: 1. 2. Selecting the target segment(s) Specifying perceptual objectives for the brand. For example, to reposition SUSI closer to the 'Singles' segment, you would check the actual coordinates of the ideal point of that segment, try to anticipate its moves by looking at the trends, and enter the coordinates of the point that you want to reach on the map. You can choose to set perceptual objectives either on semantic scales or on MDS dimensions. A maximum of two dimensions can be used to keep the message simple and effective. Allocating an advertising media budget for the brand. Allocating an advertising research budget. The higher the advertising research budget, the more accurate one may expect the repositioning to be in terms of reaching the perceptual objectives, although there will naturally remain a limit to how far and how fast one can move perceptions.

3. 4.

Simply indicating the targeted segment (100% of budget on the 'Singles') is insufficient to reposition a brand. Target selection only affects the media vehicle selected to communicate the message, but does not impact the message itself. Although consumers perceptions are linked to the brands physical characteristics, they can be slightly influenced by communication. But the repositioning effect is limited this is especially true when the brand awareness level is high because a brand which consumers are extremely familiar with is more difficult to reposition The appropriate advertising program must also be designed in order to let consumers know of the change in the physical characteristics of a brand in case of brand modification through the implementation of a new R&D project. Perceptual objectives When trying to reposition a brand with advertising, it is necessary to indicate to the advertising agency what the desired perceptual objectives are. If the intent of the advertising is simply to raise brand awareness with no positioning objective, simply check the 'no objective' option.

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Objectives may be chosen on two communication dimensions. Perceptual objectives may be provided either in terms of semantic scales or in terms of the scales derived from the multidimensional scaling study. Just click on the type of scale of your choice. The choice of objectives to communicate depends on your scale choice. The appropriate dimensions can be displayed by clicking on the arrow of the boxes corresponding to dimensions 1 and 2. Once this choice of dimension is made, the objective levels must be entered. For the scales based on the multidimensional scaling study, these numbers should be between -20 and +20, the maximum coordinates of the axes. For the semantic scales, the range is from 1 to 7. These perceptual objectives convey information primarily of a qualitative nature (for example, how much should the lightness of the product be stressed) for the design of the advertising platform and copy. The numeric representation of these perceptual objectives is used only for communication purposes. The communication may be on a single dimension (a unique selling proposition). In this case, the list box for dimension 2 should not remain blank; instead, pick 'none' in the list to indicate that the communication is made on a single objective indicated in the box for objective 1.

1
Do you want to communicate on the semantic scales or on the MDS composite dimensions?

2
On which dimensions do you want to communicate?

3
Input the coordinates of the point that you want to reach on the map

Positioning through research & development

After assessing a situation and developing a marketing strategy in line with the needs of the market, the strategy must be implemented. One of the most important aspects of implementation is specifying the characteristics of the product that will be offered to consumers. Given the time necessary to complete R&D projects and the long term nature of strategy, the product specifications should be based on the expectations of where the product should be positioned in the future. Whether you use semantic scales or the MDS study it is possible to relate the perceptual dimension or scale to an actual physical characteristic of the product. The specification of physical characteristics of a product can only be done effectively by gauging the relationship between an actual product attribute and the consumers' perception of that attribute. A simple way to summarize the information that you possess about that relationship is to plot the perceptions versus the actual characteristics. Alternatively, when few data points are available, it could be preferable simply to estimate the optimal physical characteristics for a given segment from the closest brands available in the market. These methods, although imperfect, offer approximations which should become more accurate as more data becomes available over time.

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RESEARCH AND DEVELOPMENT PROJECTS

The Marketing department is responsible for initiating research and development projects. Making R&D decisions is a crucial task because: (1) existing products will probably have to be improved during their lifetime, so as to suit the changing needs of consumers; (2) new products may have to be designed in order to target untapped segments in existing or new markets. The R&D department also operates as a profit centre. The marketing department of a firm may request its R&D department to develop specific projects in order to improve existing products or introduce new ones. Up to five R&D projects may be specified in a given period for each of the two markets (5 Sonite and 5 Vodite projects), and a maximum of 30 Sonite and 30 Vodite projects applies over the simulation. The Research portfolio: and Development dialog box allows you to perform the following operations on your project Start a new project Conduct an on-line query or request a feasibility study Continue or complete an on-going project Reintroduce a suspended project Deleting or Shelving a project

Figure 16 Research and development Module

Creating a New R&D Project Click on the New project button at the bottom of the Research & development window to start a new project. A dialog box pops up where you enter the last three characters of the new project name. If you want to slightly modify an existing project, check Use one of the completed projects and select it the project in the list. This will enable you to use one of the previously completed projects as the basis for a new project. The Names of the R&D projects are made up of five characters. The first character is always a 'P' for project. The second letter identifies the type of product being developed ('S' for Sonite, 'V' for Vodite), the last three characters can be freely chosen by the firm. In the past, each firm has successfully completed two R&D projects corresponding to the brands marketed in Period 0. Their name is made of the letter 'P' followed by the corresponding brand name. For instance, the R&D project corresponding to the existing brand SAMA was called PSAMA. The name of a given project cannot be reused for a different project, even if the new project is only to search for a minor modification of the product (except the base cost). If a firm realises that one (or several) of the first five characteristics requested is not right for the market, this implies that a new project code name needs to be used.

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Marketing requests a project from the R&D department by specifying a project name, a budget, the physical characteristics and base cost of the desired product. A project specification consists of any combination of the five most important characteristics for the product category as long as each is a whole number and remains within its respective feasible range. Enter the required physical characteristics in the Project specifications cells. The range of possible values is given in the text above the input cells. R&D budget The budget for a given project represents the investment that marketing is ready to make for the R&D department to try to develop that specified product in the coming year. It will be deducted from the marketing budget. Therefore, the performance of the marketing department depends on an effective interaction with the R&D department. R&D project expenditures include not only the expenses required to develop the project but also the research and evaluation necessary to find components and potential suppliers, make technical evaluations, and provide production line planning. The total budget required to complete a project depends on the characteristics specified and the experience of the firm with similar products, in particular the experience of the R&D department in completing similar projects in the past. It also depends on the base cost requested. Enter the Allocated budget in thousands of dollars or check Feasibility study. In the later case, the project will not be developed, but the R&D department will find out the exact budget required to complete the project and the minimum feasible base cost (see later). The allocated budget corresponds to the budget allocated during the current period to the project. The total R&D budget accumulated so far is also shown. Base cost calculation For both Sonites and Vodites, the base cost figure represents the unit cost that would be charged to the marketing department for the product for a production batch of 100,000 units. Cost does not have any upper limit, and its lower limit depends on the five physical characteristics of the product. The unit cost increases with the specification on design, maximum frequency, power, and autonomy. It decreases with the specification levels of the weight, diameter, and volume. In requesting an R&D project, this indicates the unit cost which the R&D department must use as a target. It is the role of the R&D department to determine the feasibility of such a cost with the budget they have been provided. One simple way to specify a base cost in an R&D project is to start from the price that consumers in the targeted segment are willing to pay for that product. Given an objective for the margins, the maximum cost possible to realize that objective can be computed. This might not be the lowest cost achievable, but it provides a basis above which the strategy would not be attractive. An alternative method for determining the cost characteristic is by doing many on-line queries or feasibility studies, as R&D can provide information as to the lowest cost that they are willing to guarantee. Because not all physical characteristics have the same importance for the consumers, a trade-off must be found to achieve a cost which will provide appropriate margins for the firm.

The HIGHER the requested characteristic the HIGHER the base cost

Base cost

Requested characteristic

Design Max. Frequency Power Autonomy Volume Weight/ Diameter

The HIGHER the requested characteristic the LOWER the base cost

Base cost

Requested characteristic

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This cost should be specified once information about the feasibility of the product at a certain cost with a given R&D budget is obtained. The on-line query can help you decide which base cost to specify and which budget to allocate. In the absence of such information, the R&D department can be requested to search for the minimum transfer cost technically feasible, for the requested technical specifications, by checking the corresponding box. Beware - developing a project at the minimum cost usually requires a high development budget since the development team will not have much flexibility in the choice of materials and production processes. On-Line Queries and Feasibility Studies When starting a new project or trying to complete an existing one, each team may immediately obtain a response from the R&D department by requesting an on-line query. At any point in time, you may check with the R&D department the feasibility of a product with specific characteristics. The information given by a query includes: the minimum feasible base cost, in dollars; the budget required for completion at the requested base cost (note that the requested base cost is automatically adjusted to the minimum one if the amount given was too low).

On line-queries are free of charge and provide immediate results, but are limited to five queries in each period. They can be used in the current decision round to specify R&D projects. However, on-line queries are not very accurate. In this case, they provide their best estimates at no cost but without performing a thorough, costly investigation More precisely, the information provided is over-estimated by a factor that can be as high as 50%. This means that projects specified with query information will be successfully completed the following period, but for a budget that was probably far too high!
click here to obtain a safe estimate of the minimum base cost and budget required for completion of this project

Alternatively, you can get estimates of the minimum cost at which the product could realistically be produced and the R&D budget required to guarantee the completion by requesting a feasibility study for $100,000. Although feasibility studies require time, since the information is not available before the end of the period during which it is requested, the information provided is very accurate and not over-estimated. Completing an On-going R&D Project Select the project to complete by clicking on its tab button of the Research & development dialog box. If the project is not in the current list of projects, you must first reintroduce it. The cells contained in the Response from R&D for ongoing project box are filled in with the R&D department report. The available information includes: 1. the minimum feasible base cost in dollars; 2. the current base cost in dollars, i.e.; the base cost that was requested during the previous decision round;

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3. the cumulative development budget allocated to this project since the beginning, in thousands of dollars; 4. the budget required for completion, in thousands of dollars. The additional budget required to guarantee completion does not need to be invested in the next period. The guarantee applies to any future period, the amount being adjusted for inflation over time. At this point, you have two options. 1. You can complete the project at the current base cost by entering the current base cost in the cell Requested base cost and the required budget for completion in the cell Allocated budget. By default, MARKSTRAT3 automatically completes this for you. Using this option, you are 100% guaranteed that the project will be available next period to launch a new brand or to modify an existing one (see brand portfolio). 2. If you are not satisfied with the current base cost, for instance because it is much higher than the minimum one, you can try to develop the project at a lower base cost. Of course, the budget required for completion no longer applies because the R&D department assumed that the project would be completed at the current base cost. So, if you enter a lower base cost in the cell Requested base cost, you must enter a higher budget in the cell Allocated budget. The on-line query may help you specify these two decisions. Using this option does NOT give you a 100% guarantee of the projects successful completion: the project may not be available next period. Reintroducing a Suspended R&D Project Suspended projects are projects which are not completed, but ones which the R&D department has worked on for at least one period. Suspended projects can be reintroduced by clicking on Reintroduce suspended project. If this button is grayed, it means that none of your projects have been shelved for future use. Reintroduced projects can then be completed as explained in Completing an on-going project. Deleting or Shelving an R&D Project Select the project to delete or shelve by clicking on its tab at the button of the Research & development dialog box.

Utilisation of completed R&D projects

All the R&D projects which the firm has pursued in the current and past periods are listed in the R&D section of the company report. The list includes the projects which already existed in the firm at the beginning of the simulation. For each project the following information is given: Name, Physical characteristics, Base cost (current and minimum realistic), Cumulative expenditures (total expenditures made on each project up to its completion or to the current period), and Additional budget required for completion (if the project has been successfully completed, the availability is indicated). It is also possible to view only the projects currently available on a separate window or only a list of the on-going (not yet completed) projects. An R&D project, once completed, makes the corresponding product available for production. If the team decides to use the new product opportunity, two options are available. Either the product is entered on the market as a new brand, or an existing brand is modified with the physical characteristics corresponding to the project (see next section).

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BRAND PORTFOLIO
Use the Brand Portfolio screen dialog box to introduce new brands and modify or withdraw existing ones

New brand introduction

click here to display all completed R&D projects and their features

By clicking on the 'introduce new brand' button, a dialogue box appears. A new brand is introduced on the market by entering a brand name which has not been used in the past. This brand name is completely independent of the code used for the R&D project. The name of the R&D project giving the project specifications for producing the brand must be entered on the line 'Base R&D project'. The list of available R&D projects is provided for information and the detailed specification of each project can be obtained by clicking on the 'View R&D report' button. The name of the R&D project to be used as the base can simply be selected by clicking on the name of the project in the list of available projects. Obviously, in order to introduce a brand in a given period, it is required that the corresponding R&D project be successfully completed in a previous period. A project requested from the R&D department is never available for commercialization before the beginning of the following period. Multiple brands with same physical characteristics The same product can be marketed under different names. This could occur in competitive situations where the presence of multiple brands could build barriers to the entry of new brands by competitors. This situation could also occur when the same basic product is to be distributed under different brand names to different segments which may be willing to pay different prices.

Brand modification
An existing brand is modified by keeping its existing name and using the physical characteristics corresponding to a new completed project. The only difference with a brand introduction is that the brand name is not new, so awareness levels are maintained. Select in the list entitled Marketed brand the brand which you want to modify, and then click on the 'Modification' button. The R&D project name corresponding to the new product specification must be selected among the available R&D projects completed in prior periods. Of course, the name of the brand cannot be changed, otherwise, it would be a brand introduction. The 'undo' button in the brand portfolio window can be used to cancel the changes made to a brand using the 'modification' button. Inventory disposal One of the consequences of a brand modification decision is that the production department will immediately start producing the new version of the product. Inventories of the obsolete product have to be sold outside of the Markstrat world. In this case, the obsolete stocks are sold to a trading company at a price corresponding to a given percentage of the transfer cost (the exact percentage will be found each period in the Newsletter).

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As the units are still in the possession of the production department, which charges the marketing department when units are sold, the obsolete units must then be purchased from the production department and paid for. Consequently, a loss of (1 - the given percentage) of transfer cost is taken on the obsolete inventory. This loss will appear as a cost for inventory disposal in the next period company results. The same rule applies if inventories remain when a brand is withdrawn from the market.

Brand withdrawal
The 'withdraw' option removes a brand which was marketed in the previous period from the market for the following period. The undo option enables the team to re-insert a brand which had been moved to the 'withdraw brand' table. If inventories remain when a brand is withdrawn from the market, they are sold to a trading company (as outlined previously). A brand which was marketed in the past and withdrawn from the market may not be reintroduced later in the simulation.

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COST REDUCTION VERSUS EXPERIENCE CURVE

The manufacturing cost of the products tends to decrease as a result of productivity improvements gained through experience, although this effect may be offset by inflation. This 'experience effect' can result from a variety of sources in addition to labor productivity. The cost reduction generated by the production department is very regular, every time cumulative production for a given product doubles, unit transfer cost from the production department to the marketing department decreases by about 15%. However, in the case of several products based on the very same R&D project, cumulated productions will be added and productivity gains will be shared. Greater changes in manufacturing costs may be obtained by undertaking appropriate R&D projects, for which it is necessary to change only the cost characteristic of an otherwise unmodified product. There are two methods for deciding what should be the actual cost requested: 1) feasibility study specifying the lowest possible base cost (very accurate but takes time); 2) on-line R&D query option (overstated but immediate). The budget required to complete such a cost reduction project varies by firm and depends on the amount of R&D experience developed over time by each firm. The base cost of a new project might be lower than the base cost for the first 100,000 units of the current product but higher than the current transfer cost achieved by experience effect. It can, however, lead to cost reduction as, after the product modification, production starts a new experience curve. By the time the brand is known in the market, sales could be substantial and cumulative production could double extremely fast, possibly within the first year of production. While the older product might be in the flat part of its experience curve, where gains in productivity are minimal, the new product starts on a new experience curve and therefore benefits from high level of productivity gains.

Cost reduction projects should be weighed against experience curve effects

Transfer cost

Base cost A

A
Current product (initial experience curve)

Base cost B Current transfer cost A1

B A1
cost reduced product (new experience curve)

100 KU

225 KU

Cumulative production

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FINANCE
Budget
You have been given a marketing budget to fund your marketing expenditures: advertising, sales force, market studies and R&D. Click on the Budget button at the bottom of the Decisions module window to obtain a summary of your current expenditures. The last row of the Overall budget chart will tell you if you have exceeded or not your budget. A red negative number indicates that you have overspent your marketing budget. Use the two detailed charts entitled, Brand budget and R&D budget to find out how you can reduce your marketing expenditures. You may also explore the possibility of negotiating a loan or a budget increase with your instructor! A purple positive number is a good sign; you have some money left over! It is recommended that you do not systematically spend your entire budget, especially when you reach the $15M - $20M range. Your strategy should guide you in deciding whether a given expense is worth making or not.

New Loan
You can negotiate a loan or a budget increase with your instructor on the basis of a well-defined marketing plan. If you do get a loan, select Finances/New loan in the Interface module. You will see the dialog box pop up which gives you the option to request a new loan and to specify an amount. Click on the New loan tab and input the loan characteristics in the corresponding cells. Beware; the capital borrowed must be given in thousands of dollars. The instructor validates the loan by entering his or her password in the field Director's signature. Do not worry if your instructor is not able to sign your loan before you must transfer your decisions. He or she can approve the loan once decisions from your team are collected. Loan Policy The following loan policy will apply to all teams, regardless of their financial situations: Maximum cumulated amount of loans during the course: $ 10M Maximum amount for a single loan : $ 5M Loan terms: 8% interest rate over 3 years Loan schedule The loan schedule screen provides the list-of past and new loans or budget modifications which you have negotiated with the instructor. to access this list, select Finances/Loan schedule in the Interface module.

Budget Increase or Decrease

You can negotiate a loan or a budget increase with your instructor on the basis of a well defined marketing plan. If a budget increase has been approved, select Finances/Budget increase or decrease in the Interface module. The dialog box will pop up and you will be able to enter the amount of budget increase or decrease and request the CEO's signature. Click on the Change in budget tab at the bottom of the screen and input the allocated amount in the cell Budget change from corporate headquarters. Enter budget decreases with negative numbers. Note that the amount must be noted in thousands of dollars. The instructor validates the budget change by entering his or her password in the CEO's signature field. Do not worry if your instructor is not able to sign your budget increase before you transfer your decisions. He or she can delay approval until all decisions from all teams are collected.

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APPENDIX 1 INSTALLING MARKSTRAT TEAM SOFTWARE

Computer Requirements
The minimum computer configuration required to operate MARKSTRAT3 Team Software is the following:
IBM-compatible personal computer Pentium processor 16 megabytes of memory Hard disk with at least 20 megabytes of available storage Windows 95, Windows 98 or Windows NT4 Laser or ink-jet printer (recommended)

Starting the Installation Procedure

If you have downloaded MARKSTRAT from the MARKSTRAT web site, you should have received a self-extractable archive file named "MARKSTRAT3 Team V3.XX" where 3.XX is the version number. Double-click on this file to start the setup procedure. The dialog box shown on the right pops up; click on the Yes button and then refer to section Installing MARKSTRAT3 below. If you are using a MARKSTRAT3 CD-ROM, the setup procedure should start automatically when you insert the CD-ROM in the drive. Otherwise, click on the Start button and select Run... in the Windows pop-up menu. The input box shown on the right pops up; type D:SETUP, where D is letter of your CD-ROM drive, in the Open: cell and click on OK to start the setup procedure.

Installing Markstrat3
This section describes how to install MARKSTRAT3 on a stand-alone computer. Shortly after you start the setup procedure as explained above, the dialog box shown below pops up allowing you specify in which folder Markstrat3 should be installed. The default folder is: "C:\Program Files\StratX\Markstrat3 Team". We strongly advise you to use this default folder as it will make your life considerably easier; for instance, future updates will install automatically in the same folder; similarly, communicating with the technical assistance or reading the FAQs will be simplified as all will refer to the default installation folder. If you wish to install Markstrat3 in another folder, click on the Browse button.

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This actual installation starts when you click on the Next > button. MARKSTRAT3 files are copied into the following sub-folders:
Binaries Private Application files, images, sound files, help files Practice industry

Two of the files copied in the Binaries folder must be registered in the Windows registry. Windows must be restarted at the end of the setup procedure to validate the installation. This is done automatically, as shown below.

The setup utility creates a shortcut called MARKSTRAT3 Team in a group called MARKSTRAT3 - By StratX. Click on the Start button and then on the Programs menu to access to this shortcut and start MARKSTRAT3, as shown below.

The setup utility installs MARKSTRAT3 with a default configuration that can be partially modified by clicking on the small toolbox button located in the top right-hand corner of the screen. The dialog box shown below pops up. The configuration includes the following elements:

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Program Directory. This is where MARKSTRAT3 read-only files are stored: executable files, images, sounds, etc. The program directory may be located on a local drive or on a remote one. The program directory can be changed only by reinstalling the software. Private Directory. This directory, located on a local or remote drive, is where private files are stored: data files, Excel reports, etc. At installation time, the setup utility creates a subfolder named Private in the folder that you specified for (by default: MARKSTRAT3 C:\Program Files\StratX\MARKSTRAT3 Team). We suggest that you not change the value of this directory, unless you are asked to do so by your instructor. If you do need to change the private directory, click on the Browse button and select a new directory. Note that the instructor may prevent you from modifying the configuration, in which case an error message will appear when you click on the Browse button. Instructor/Team exchange directory. This directory specifies how you will transfer data to and from your instructor. If the exchange directory is A:\ or B:\, then data transfers are done with team diskettes. If the exchange directory is located on a disk drive of a network server, then data transfers are done through the network. We suggest that you not change the value of this directory, unless you are asked to do so by your instructor. If you do need to change the private directory, click on the Browse button and select a new directory. Note that the instructor may prevent you from modifying the configuration, in which case an error message will show up when you click on the Browse button. Language. This is the language used in the simulation. There are currently two languages available: English and French. Tool Buttons Tool buttons are located at the top right-hand corner of the main window. They provide a quick access to useful commands such as copy to clipboard or print current screen. Copy the current screen or chart to the clipboard. Access the current module's Print facility. Open the Configuration dialog box. Start the help facility. Display the MARKSTRAT3 information screen and play music if your computer is equipped with a sound card.

Print Facility
MARKSTRAT3 documents can be printed on any Windows compatible printer. However, high quality and fast printing will only be achieved with ink-jet or laser printers. Activate the MARKSTRAT3 Print facility by clicking on the small printer button in the top right-hand corner of the Main Window. Depending on which module you are currently working, pressing the print button will allow you to print different documents. Interface module - print team report: company report, newsletter and market research studies; Decisions module - print decision related documents: summary of decisions and budget, detailed budget, marketing plan; Report, Newsletter, Market Studies and Analysis modules - print the currently displayed graph or chart.

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APPENDIX 2 TIMETABLE
Please Note: This timetable is subject to change Date Tue 28 Jan Tue 4 Feb As part of lecture 1 As part of lecture 2 Short introduction to Markstrat Markstrat instruction 1 Hand in team composition form Mon 10 Feb Tue 11 Feb Mon 17 Feb Mon 24 Feb Mon 10 Mar By e-mail, before 18:00 As part of lecture 3 By e-mail, before 18:00 By e-mail, before 18:00 By e-mail, before 18:00 Hard copy to course office Mon 17 Mar Mon 20 Mar Mon 24 Mar Mon 27 Mar Mon 31 Mar By e-mail, before 18:00 By e-mail, before 18:00 By e-mail, before 18:00 By e-mail, before 18:00 Hard copy to course office Submit decision 1 Markstrat instruction 2 Submit decision 2 Submit decision 3 Submit decision 4 Submit marketing plan Submit decision 5 Submit decision 6 Submit decision 7 Submit decision 8 Submit end-of-course reflection on marketing plan

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APPENDIX 3 PRACTICE FILE

You are about to start a course using MARKSTRAT3. Before you begin working on the real data received from your instructor, you can get to know this simulation with a demonstration data file named PRACTICE. You can browse through the results of company E for the last 7 years and you can make decisions for year 8. Company E is specialized in developing, manufacturing and marketing Sonites, a consumer durable good comparable to an electronic entertainment product. More recently, it has diversified in a new product, the Vodite. Coming from a basic technological breakthrough made in the space industry, Vodites satisfy an entirely different need than that of the Sonites. To open the PRACTICE data file, please follow the steps below.

If you are still in front of the MARKSTRAT3 introduction screen, click on OK. With Windows 95, the OK button may be partially hidden by the task bar. In the File menu, select Open industry. Select practice.mte in the left-hand side box; the cells on the right will be filled in automatically, including the Password one. Click on Open industry.

You are ready to analyze the results of company E. Before, it is important to understand that MARKSTRAT3 is organized in six main modules Decisions, Report, Newsletter, Market studies, Analysis and Interface which you can activate by clicking on the buttons in the top bar. For instance, click on the Analysis button. The menu below the top bar shows Market, Performance, Benchmarking, ... Look at the Market graphs to get the big picture on the market evolution: size, growth and price. Then use the Performance graphs to study the performances of the five competitors. You will see that company E is experiencing some difficulties in sales and market share ... The purpose of the other five modules is fully explained in the manual. At any time, you can print the current graph or data table by clicking on the print facility button in the top-right corner, next to the date and time. To print a complete company report, select the Interface module, click on the print facility button, input 1 in the Number of copies, click on Complete output, uncheck Excel files only and finally click on Print.

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APPENDIX 4 PROCEDURE FOR SUBMITTING YOUR DECISIONS

Preparing for the game: 1. Make sure you have one 3.5 inch floppy disk that you will use throughout the term as your designated Markstrat simulation disk. If youd rather be safe than sorry, keep a second disk with a backup, and keep this backup up-to-date. It is advisable that all team members carry a disk with a copy of the simulation data from the designated disk. 2. At the end of lecture 2, you have handed in your team composition form, via which you have provided the lecturer with an e-mail address (as well as a backup e-mail address). The lecturer will use that e-mail address to send the results of the simulation to all the teams after each simulation run. Make sure these are e-mail addresses that work and that are read regularly! 3. All teams will receive their starting positions by e-mail as soon as the teams are formed. All data files will be sent in a zip-file, so you need to make sure you have Winzip (or equivalent) at your disposal. Winzip can be downloaded for free from the internet. 4. In order to upload the data, to make your decisions, and to transfer your decisions to the disk, you need a computer with the Markstrat student software installed. The Markstrat software is installed on PCs in the computer labs, and you can install it on your own PCs and laptops by downloading a free copy from http://www.markstrat.com. 5. The Markstrat software comes with a practice industry. Build a competitive advantage by reading the Markstrat manual you have received from the lecturer and by familiarising yourself with the software and the types of decisions that need to be made.

Playing the game: 6. Unzip the files you have received from the lecturer and save them to your designated disk. Start up the Markstrat software. Choose Transfer results and default decisions from instructor in the interface menu. You can do this on as many computers as you like, so that team members can work in parallel. 7. If possible, use one PC or laptop as your central computer. While team members can use any computer with the Markstrat software installed to analyse information and try out alternative decisions, this central computer is used to bring all decisions together. Intermediate decisions can be saved on this computer, and regular backups can be made. 8. Make sure you input your final decisions in one Markstrat session on a single computer. Insert your designated disk and choose Transfer decisions to instructor in the interface menu. NO OTHER COMMAND WILL CREATE THE FILE THAT NEEDS TO BE SENT TO THE LECTURER. 9. From your designated disk, e-mail the most recently created file (a file named after your industry, with the extension .dz followed by your team letter, e.g., JUPITER.dzO) to the lecturer at e.m.vanraaij@city.ac.uk. This file does not have to be zipped. 10. Only when all files from all teams have been received, the lecturer can run the simulation, so please respect the deadlines! Wait for the lecturer to send you the results and go back to step 6.

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