*. fair share estimates: 3-4 rnds out: row #1 s i m u l a t i o n m a r k e t i n g m g t. a...
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S I M U L A T I O N
M A R K E T I N G M G T. A Historical Consideration…
RE: Projected Share
• LOW END: 0-1 product killed.. 0-1 repositioned or introduced
• TRADITIONAL: 3-6 repositioned from High…0-1 killed…1-2 introduced
• SIZE: 0-1 killed, 0-1 repositioned to Traditional, 1-2 introduced
• PERFORMANCE: 1-2 killed, 0-1 repositioned to Traditional, 0-1 introduced
• HIGH: 1-3 killed or repositioned to Traditional, 1-3 new products arrive in rounds 2 or 3
S I M U L A T I O N
M A R K E T I N G M G T. Round 3- Forecast Segment Competitive Density
• LOW END: 6 products=rivalry unchanged
• TRADITIONAL: 9 products, w/ 3 repositioned= increased competition
• SIZE: 7 products, w/ 2 new= increased competition
• PERFORMANCE: 4 products, w/ 1 new= reduced competition
• HIGH: 6 products, w/ 2 new= increased competition
66
99
77
44
66
S I M U L A T I O N
M A R K E T I N G M G T.
-Given Round 3 Scenario-How should adjust your production capacities?
Round 0-1st shift Capacity
Round 3-
Brand-Demand
(FAIR-Share)
Traditional 1800 1063
Low End 1400 2081
High End 900 668
Performance 600 823
Size 600 469
2 Q’s:
1. What will the average product sell in the segment next round? (= Fair-Share)
2. To what degree is your product above or below average- on consumers'’ buying criteria? (= Earned-Share)
Estimate Your EARNED SHARE:
1
2
3
4
EARNED Share - Sales EARNED Share - Sales Forecast Forecast
Look-up next round Industry Demand …
Estimate # products that will be in segment. Divide total industry demand by the number of products= FAIR SHARE Your product’s EARNED demand can be ½ to 2X the average product’s demand…Compare your product with competing products.
Factors include design, awareness, accessibility, and planned mid-year revisions.
Examine industry capacities & capacities of the “best” products.Can products meet the demand they generate?
Total=223
R#1 Dec Survey score
% of 223 Predicted sales R#2
Actual Sales R#2
Baker 43 19% 1827 units 1758 units
Able 40 18% 1731 1598
Fast 36 16% 1339 1560
Eat 36 16% 1539 1492
Cake 42 19% 1827 1339
Daze 26 12% 1154 1045
For Example-in Traditional segment everyone begins w/ 13% market share
Opening rounds crucial- can establish competitive advantage (that can be sustained for many years- even thru-out entire sim.)
Initial round demand can vary +/- 25%
Later rounds best case/worst case vary ~~~~ 10-15%
•Enter WORSE case = - (10-12%) < Earned Share in “your sales forecast” on marketing spreadsheet
•Enter BEST case= + (10-12%) > Earned Share in “production schedule” on production spreadsheet
•Spread show up as inventory on proforma BALANCE SHEET
$0.00
In WORSE CASE: You have lots of Inventory
& little or no Cash.
In WORSE CASE: You have lots of Inventory
& little or no Cash.
need to
drive cash
position to
the black…
If you are cash poor, issue Stock /Bonds - or consider a short term loan
If you are cash rich, pay dividends and/or buy back stock.
If you are cash poor, issue Stock /Bonds - or consider a short term loan
If you are cash rich, pay dividends and/or buy back stock.
To adjust your cash position --
Important Considerations re: BEST-WORST Scenario
Analyses
By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL
By adjusting your CASH POSITION according to your WORST CASE estimate– will avoid … BiG AL
Important Considerations re: BEST-WORST Scenario
Analyses
By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs
Fixed costs (marketing, R&D, interest
or depreciation) already covered Thus, any additional sales would
only incur variable (production) costs
By adjusting production according to BEST CASE estimate– will minimize loss of profit due to Stock-outs
Fixed costs (marketing, R&D, interest
or depreciation) already covered Thus, any additional sales would
only incur variable (production) costs
For example:
1. If annual sales $120M, = $10M/mo.
2. If a months material & labor costs = $7M, you missed contributing $3M to Net Margin.
3. You’r taxed at ~35%, so your opportunity cost is ~$2M in profit.
Worst Case:BIG INVENTORY/ no
cash– risk seeing Big Al Best case:
Lots of CASH / no Inventory -you risk stockout
How Big is your Slinky?
Determining A Reasonable Spread
Want to avoid generating an ultra Conservative Worst case scenario …matched w/ an ultra Optimistic Best case scenario
Should be able to sell excess inventory
in ~betw. 6 & 16 weeks
Take your total inventory costs
$23,900M
Take your total inventory costs
$23,900M
How to measure your slinky slack--
& Divide by total variable costs of inventory sold:
$23,900M/$131,119M =.18
52weeks *.18 = 9
Risk ~9weeks of Inventory to avoid
stockout
& Divide by total variable costs of inventory sold:
$23,900M/$131,119M =.18
52weeks *.18 = 9
Risk ~9weeks of Inventory to avoid
stockout
“Generically, profits are driven by the company’s
asset base and by its efficiency
working those assets”
S I M U L A T I O N
M A R K E T I N G M G T.
Key Demand Consideration:
• Overall market growing @ ~ 14%/yr
• “Average” company should/could double - sales in 6 years
Key Capacity Consideration:Key Capacity Consideration:
How effective will u b in building your Co’s asset base?
At outset should be spending ~$10-25M / round on plant improvement
By end should expand asset base to min $140M to $160M+
0
10000
20000
30000
40000
50000
60000
70000
Year1
Year2
Year3
Year4
Year5
Year6
Year7
Year8
NET PROFITS $$NET PROFITS $$
•Year 1 $6 million
•Year 2 $8 million
•Year 3 $10 million
•Year 4 $12 million
•Year 5 $16 million
•Year 6 $21 million
•Year 7 $27 million
•Year 8 $35 million
NET PROFITS $$NET PROFITS $$
•Year 1 $6 million
•Year 2 $8 million
•Year 3 $10 million
•Year 4 $12 million
•Year 5 $16 million
•Year 6 $21 million
•Year 7 $27 million
•Year 8 $35 million
Rounds 6,7,8 should be
most profitable
S I M U L A T I O N
M A R K E T I N G M G T.
Pay off DebtInvest in
growthBuy-back stockPay dividends
Pay off DebtInvest in
growthBuy-back stockPay dividends
Things you can do w/ your $$$:
Which most often selected …but least preferable to do?
S I M U L A T I O N
M A R K E T I N G M G T.
Reducing Leverage
• Says to stockholders— “We can think of nothing better to do w/ $$ than save you interest payments”– More debt eliminated the greater
target you become for a takeover..
• No reason not to maintain Co. Financial Structure that got you to position of high profitability…
S I M U L A T I O N
M A N A G E M E N T
One more thing to
think about
What is the Relationship between My Strategy &
Success Measures
S I M U L A T I O N
M A N A G E M E N T
• Cumulative Profits• Ending Market Share• ROS• Asset Turnover • ROA• ROE• Ending Stock Price• Market Cap.
Strategy
Performance Measures- Defined Performance Measures-Dynamics
Success Measures
Diff Strategies Play into Different Success Measures
Profit MS SP & MC ROE
pf/e
ROS
pf/s
AT
s/a
ROA
pf/a
BCL
L=2-3X X X X
Cost- Niche & PLC X X X
B-Diff L=1.5-2
X X X X
Niche-PLCDiff
X X X X
Cost Strategy = higher leverage/more
margin/ more assets/more debt/ less
equity
Cost Strategy = higher leverage/more
margin/ more assets/more debt/ less
equity
Differentiation Strategy =lower
leverage/less investment/ less assets
Differentiation Strategy =lower
leverage/less investment/ less assets All Segments= more sales & thus enable
greater Cum. profit & overall market share
All Segments= more sales & thus enable greater Cum. profit & overall market share
Focused
Strategies should
operate more
efficiently & have
overall less salesFocused
Strategies should
operate more
efficiently & have
overall less sales
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