Simulation exercise

StratSimMarketing The Marketing Strategy Simulation

Michael Deighan, Interpretive Simulations Stuart W. James, Interpretive Simulations

Thomas C. Kinnear, The University of Michigan

Charlottesville, Virginia, USA

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Copyright Notice This manual and the simulation described in it are copyrighted with all rights reserved by Interpretive Software, Inc. Under the copyright laws, neither this manual nor the software may be copied, in whole or in part, without written consent of the authors, except in the normal use of the simulation for educational purposes, and then only by those with a valid license for use. The same proprietary and copyright notices must be affixed to any permitted copies as were affixed to the original. This exception does not allow copies to be made for others, whether or not sold. Under the law, copying includes translating into another language or format. Purchasing the simulation experience gives the owner the right to participate in a unique learning event. Each student or participant must purchase the simulation to take part in the event or the institution sponsoring the event must purchase for the entire group participating in the event. Limited Warranty on Media and Manuals In no event, will Interpretive Software, Inc. be liable for direct, indirect, special, incidental, or consequential damages resulting from any defect in the software or its documentation, even if advised of the possibility of such damages. In particular, the authors shall have no liability for any programs or data stored in or used with the computer products, including the cost of recovering such programs or data. This simulation experience is sold, "as is," and you, the purchaser, are assuming the entire risk as to its quality and performance. The warranty and remedies set forth above are exclusive and in lieu of all other, oral or written, express or implied. For more information about other products from Interpretive Software, please contact: Interpretive Simulations 1421 Sachem Place, Suite 2 Charlottesville, VA 22901 Phone: (434) 979-0245 Fax: (434) 979-2454 Website: http://www.interpretive.com Discover a Better Way to Learn. Active Learning through Business Simulations. Copyright © 1995–2018 Interpretive Software, Inc. All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner whatsoever without written permission of Interpretive Software, Inc. Cover image © BigStock. Incident images, audio, and video © iStockPhoto, GettyImages, and BigStock. Graphic images used in manuals © BigStock and iStockPhoto.

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Contents

Introduction 1 StratSimMarketing Quick Start Guide 3 StratSimMarketing Manual 4

StratSimMarketing Case 5 Industry Overview 6 Vehicle Attributes 7 Vehicle Classes 8 Consumer Segments 10 Consumer Purchase Process 12 B2B Purchase Process 13 Firm Decisions 14 Company Reports 21 Industry Reports and Tools 23 Next Steps 24 Summary of Decisions 25 Product Class Examples 26 Segment Descriptions 31

Managing for Success in StratSim 33 Fundamentals of Strategy 35 The Profit Equation 37 Monitoring Performance and Pro-Forma 46 Long-Term Planning in StratSim 46 Timelines 47

Market-Based Marketing Management 53 Special Firms – Special Market Relationship 55 Creating the Market-Based Organization 56 Marketing Scope 61 Customer Value 63 Market Segmentation 66 Basis for Reaching Market Segments 69 The Target Market Decision 74 Positioning 76 Market-Based Organization Structure & Process 79 The Marketing Management Challenge 85

Operations Guide 87 Simulation Navigation 88 Results & Decisions 90 Decision Analysis 114 Market 119 Competition 131 Tools 137

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Simulation 150

Appendix 151 Glossary 152 Index 154

Printed November 6, 2018

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Acknowledgements We have always considered our customers to be the most important part of our product development team, and we are fortunate that they put their time and effort into improving our products through their feedback and experiences. We will continue to incorporate suggested improvements into up-coming releases of this product, and welcome your comments and suggestions.

There are many people to thank for their assistance on this project and we would like to single out a few who significantly contributed to the content of this product over the years. In particular, Interpretive would like to thank Tom Kinnear from the University of Michigan, who provided a great deal of guidance and feedback with regard to original content of the project and later joined us as coauthor. In addition, the original B2B module design was derived in part from a customized project with Volkswagen, where we collaborated with James Thorne of Market Focus and Doug Dean of Volkswagen.

The most recent release of the browser-based version of StratSim was a team effort over several years and we especially would like to thank the development and support group at Interpretive: Clayton Shumate, Patrick Neeley, Anne Louque, Caleb Sancken, Matt Travis, Tim Sams, Andrew Roy, and Holly Miller.

Prior to this latest release, we have been fortunate to have many people provide feedback and advice to help StratSim get to where it is today. At Interpretive, Erin Simpson, Tony Naidu, Payton James-Amberg, Susan Christmas, Marjorie Adams, Gabriel Buddenbrock, Mary Deighan, Bill Luers, and Laura Simroth all contributed their talents and experience along the way. Faculty users have been the source of countless suggested improvements and StratSim is a significantly stronger product because of their thoughtful insights. In particular, we’d like to thank Paul Arsenault, Torsten Ringberg, Glenn Christensen, Christine Moorman, Marian Moore, Ron Wilcox, Paul Farris, Jeff Lefebvre, Larry Feick, Marty Roth, Robert Dooley, Marc Filion, Ujwal Kayande, Rick Leininger, Sam Certo, Sunil Gupta, Gerald Fryxell, and Juan Antonio Fernandez.

The section on Market-Based Management in the manual has benefited from interactions with many outstanding faculty colleagues at the Ross School of Business at the University of Michigan, and those participating in executive programs at General Electric, Kodak, CIM, and many more organizations. We especially want to recognize Gene Anderson, George Day, Chris Puto, Adrian Ryans, and Jim Taylor. This section has also been formed from discussions with literally thousands of senior corporate executive participating in executive education program over many years. We are grateful for the contributions they all have made to the development of this material.

Finally, we would be remiss if we failed to thank all the students and executives who have experienced StratSim in one form or another over the years. In particular, we appreciate the executives in programs at Volkswagen, Michigan EP, and McKinsey & Company. We’ve also been fortunate to have some extremely competitive and insightful students put StratSim through the wringer. The students in the Michigan EMBA, and Darden MBA and Executive programs are always extremely thorough in their analysis and some of their questions have led to improvements introduced in this version.

We look forward to hearing your comments and suggestions on our latest release and best wishes for a great experience with StratSimMarketing.

Stu James Mike Deighan

Tom Kinnear

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Introduction

STRATSIMMARKETING

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Simulations are one of many different methods for learning business skills. They can capture the essence of reality and help us practice implementing business theory without the potentially large costs of errors. StratSimMarketing is a marketing strategy simulation game based on the automobile industry. Needless to say, much of the complexity of the industry has been simplified to allow participants to focus their time and energy on strategic issues. However, we've retained as much realism as possible to make it easier to quickly understand the overall environment. StratSimMarketing addresses the following issues:

• Learning what it means to have a market-oriented perspective. • Developing and implementing a profitable long-term marketing strategy. • Identifying customer needs and creating products to satisfy them. • Analyzing competitors and understanding their strategic intent. • Using marketing research tools and techniques as a source of competitive advantage. • Allocating scarce resources among products, functions, and other investment alternatives. • Understanding the differences between consumer and B2B buying processes (optional). • Negotiating mutually beneficial relationships with other firms through licensing (optional)

In the simulation, you or your group will be competing directly against other teams, either in your class or possibly at other universities. Decisions are made once each simulated year. Once all competitors have made these annual decisions, the simulation will be advanced, and the results will be updated. These results will be dependent upon your decisions, those of your competitors, and the evolution of the market. Each run of the simulation will develop uniquely based on how the competitors interact, what new products are introduced, and how these products are supported. As you will soon see, StratSim provides a very dynamic learning experience. Segment needs will evolve, new products will be introduced, and the economy will have its ups and downs. The simulation is designed to be a fun, but challenging, experience. Competing in the StratSim environment will require complex analysis and decision-making. Therefore, take some time to familiarize yourself with the program and manual before beginning the exercise. While working through the simulation, you will find it helpful to refer to the manual for information and strategy tips. In order to benefit most from the StratSim experience, we recommend the approach presented on the following page.

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StratSimMarketing Quick Start Guide

PERIOD DECISIONS • Marketing decisions • Distribution decisions • Manufacturing decisions • R&D decisions • Finance decisions

SIM ADVANCES • Check Schedule for times • Complete Decisions BEFORE Deadline

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

STARTUP DECISION • Access simulation from course website • Watch introductory video • Enter first period decisions

READ THE CASE • Industry background • Company starting situation

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

DECISION ANALYSIS • Tools • Timeline • Pro-forma

EVALUATE RESULTS • Company reports • Environment • Competitive reports

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StratSimMarketing Manual

The remainder of this manual is divided into sections described below. Understanding and success in StratSim will be greatly enhanced by reading this manual before you begin the simulation. The sections listed below will answer most of the questions students typically have during the simulation experience, and reading them has the added benefit of improving your competitiveness. Finally, the operations guide and StratSim case are also available on-line in the simulation software. Section 1: StratSim Case presents the StratSim industry in a form similar to a business school case. It also serves as an introduction to the situation when starting the simulation. Following the case are examples of the various product classes and segment descriptions. Section 2: Managing for Success in StratSim Tackling the simulation is quite an undertaking. This section provides a basic framework for designing and implementing a successful strategy in StratSim. Also contained in this section are some helpful tips for performance analysis and time- line planning. Section 3: Market-Based Marketing Management provides some of the core concepts of marketing strategy theory in textbook form. For the most part, these topics apply to StratSim, but they may also be assigned for reading as part of the class outside of the StratSim exercise. Section 4: StratSim Operations Guide provides guidance on how to use StratSim, including a detailed description of each menu option. Appendix: This section contains several appendices that provide you with information on how to export data to a spreadsheet, a glossary, and an index.

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StratSimMarketing Case

STRATSIMMARKETING

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Congratulations on your recent appointment to manage one of the firms in StratSim. Though your primary objective will of course be to learn, you will also be setting other goals and objectives for your firm. Those may be to become the market leader, or perhaps to maximize shareholder return, or possibly to generate the most net income over the course of the game. Selecting objectives is up to your instructor and your group. However, you will find that the firms who do best in StratSim have a market-oriented strategy and execute it better than their competitors. This is far easier to say than to achieve. That is the challenge faced by all marketing managers and executives.

The case provides background information on the industry in which you will be competing. The data that appear in this case may not match your particular scenario. Be sure to use the reports in the simulation for exact numbers.

Industry Overview

Your firm is one of five competitors in the StratSim environment. At the start of the simulation each firm is in a unique starting position, with three vehicles targeting different market segments. All revenues are generated through sales of cars and trucks to automobile dealers, who sell to consumers in the StratSim world. Additional revenues may be possible through business-to- business sales as the simulation progresses. Industry sales in the most recent year were 4.4 million units, and some growth is expected in the next year. An overview of the five firms and the vehicles they manufacture at the start of the simulation is provided in Exhibit 1.1 below. Note that the first letter of each vehicle matches the first letter of its manufacturer for easy identification.

Exhibit 1.1: Company Overview

Firm Name Vehicles Sales

(000s units) Sales

(billions) Income

(billions) (A) Amazing Cars Alec, Alfa, Awesome, 1,278 $21.9 $1.3 (B) Best Motor Works Beaut, Boffo, Buzzy 374 $11.7 $1.2 (C) Cool Cars Cafav, Camini, Climax 482 $13.3 $1.2 (D) Driven Motor Co. Defy, Delite, Detonka 1,128 $20.0 $1.3 (E) Efficient Motors Efizz, Estruck, Euro 1,099 $21.3 $1.3

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Vehicle Attributes Vehicles have attributes that can be measured and compared. In StratSim, these include price, as well as size, performance, interior, styling, safety, and quality. Each attribute has a range of values based on what can feasibly be designed and built by a firm. The interior, styling, safety, and quality attributes (ISSQ) have a maximum value dependent upon the firm's technology capability in that area. Currently, the maximum values are somewhere between 3 and 8, depending on the firm and the attribute. Vehicles with higher attributes in these four dimensions are more appealing to customers, all other things being equal. Customers may find a particular attribute more important (i.e. consider it a "hot button"), depending on their needs and preferences. In evaluating vehicles, customers weigh the ISSQ attributes against the price of the product, while also considering the size and engine performance of the vehicle. Exhibit 1.2 summarizes vehicle attributes and the range of values associated with each. Exhibit 1.2: Vehicle Attribute Descriptions

The current vehicle attributes and manufacturer's suggested retail price (MSRP) are summarized in Exhibit 1.3, ordered by vehicle class.

Attribute Description Range of Values

Price Manufacturer’s Suggested Retail Price (MSRP). Actual (retail) selling price to customer will vary from MSRP.

Generally ranges from $10,000–

$50,000

Size Length and width of vehicle, which includes passenger and cargo space. Size is measured on a scale of 1–100.

1–100 (smallest to largest)

Performance Measured by engine horsepower (HP). 50–300 HP (low to high

performance)

Interior Comfort, visibility, instrumentation, music systems, ergonomics.

1 to maximum firm capability

Styling General curb appeal, styling, handling, finish / workmanship. 1 to maximum firm

capability

Safety Structural design, braking systems, safety features. 1 to maximum firm

capability

Quality Overall reliability, durability, consistency of products. 1 to maximum firm

capability

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Exhibit 1.3: Vehicle Attributes/Characteristics by Class and Name

CLASS NAME MSRP SIZE HORSEPOWER INTERIOR STYLING SAFETY QUALITY

Economy Alec $ 15,351 14 135 2 1 3 2 Delite $ 11,293 5 85 1 1 1 1

Family

Alfa $ 24,084 28 165 2 1 3 2 Boffo $ 35,003 49 200 4 3 2 2 Cafav $ 31,361 49 165 4 2 2 2 Defy $ 25,922 43 165 2 1 3 2 Efizz $ 18,869 35 140 1 1 2 1

Luxury Beaut $ 38,385 62 240 2 4 2 2 Climax $ 45,997 74 240 4 2 2 2

Minivan Camini $ 24,144 82 200 2 1 2 1 Sports Buzzy $ 34,652 54 190 3 3 2 3

Truck Detonka $ 19,572 66 185 1 1 1 1 Estruck $ 21,843 75 280 1 1 1 2

Utility Awesome $ 21,149 40 220 1 1 1 1 Euro $ 26,528 59 200 1 3 1 1

Vehicle Classes The industry has historically been broken into seven vehicle classes—Economy (E), Family (F), Luxury (L), Sports (S), Minivan (M), Truck (T), and Utility (U). However, two new classes offer future potential if developed and marketed well—the Alternative Energy Vehicle, or AEV (A) and Delivery (D). The AEV is a potential new breakthrough in drive technology while the Delivery is designed only for the fleet buyer (B2B). Each of these classes represents a unique configuration that requires a significant expenditure in R&D to develop. Remember that there are underlying needs met by these product classes. For example, a minivan meets the need for family transportation plus cargo room in a fairly economical package. Exhibit 1.4 describes the vehicle classes, shows unit sales for each class, and identifies the vehicles competing in each class at the beginning of the simulation, along with their share of class sales. See Exhibit 1.4 on the following page.

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Exhibit 1.4: Vehicle Classes

Vehicle Class

Description Expected

Price Typical

Size Typical Engine

Sales (000s units)

Vehicles (with share of

class)

Economy (E)

Small, basic car that is inexpensive to buy and operate.

Under $20,000

1–30 Under 150 hp

872 Alec (68%) Delite (32%)

Family (F)

Mid-sized car for reliable, safe transportation at a reasonable price.

$15,000 to $38,000

30–65 120–200

hp 1,457

Alfa (24%) Boffo (6%) Cafav (10%) Defy (33%) Efizz (27%)

Luxury (L)

High-end vehicle with top of the line features and performance.

Above $35,000

45–75 Over 150

hp 273

Beaut (53%) Climax (47%)

Sports (S)

Cars emphasizing performance and style. Size and price range widely, but all are fun to drive.

$14,000 to over $35,000

15–60 Over 150

hp 144 Buzzy (100%)

AEV (A)

Alternative-energy- drive vehicles use new drive technology that is energy efficient and low polluting.

Above $20,000

1–50 70–150

hp 0

No vehicles introduced.

Minivan (M)

Family-oriented vehicles with lots of passenger and storage room.

$18,000 to $35,000

50–100 120–240

hp 214 Camini (100%)

Utility (U) Classified as a truck, but more passenger room and style.

$17,000 to $40,000

30–90 Over 150

hp 710

Awesome (47%) Euro (53%)

Truck (T)

Traditionally working vehicles, trucks are finding broader appeal as second vehicles and alternatives to sport cars.

$15,000 to $35,000

30–90 Over 150

hp 690

Detonka (53%) Estruck (47%)

Delivery (D)

Covered trucks specially designed for delivery companies. B2B only.

$20,000 to over $40,000

60–100 Over 190

hp 0

No vehicles introduced

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Consumer Segments There are two broad approaches to analyzing the StratSim market—by vehicle class and consumer segment. Each approach offers advantages, and both should be considered. The five consumer segments in StratSim are numbered 1 through 5, each representing a different group of customers with shared demographics and needs. However, it is the intersection of the consumer segment and vehicle class that will be the primary basis for competition. For purposes of identification in StratSim, this intersection is called a microsegment. Microsegments are labeled 1–5 for segments and E–U for preferred vehicle class. As an example, the 1E microsegment consists of customers who are Value Seekers (1) with a preference for an Economy (E) car. Customers in some microsegments have a strong preference for a particular vehicle class. For other customers, there are two or more vehicle classes that would meet their needs. For example, in the StratSim environment, 4F customers are High Income (4) people who have a primary preference for a Family (F) car and a secondary preference for a Luxury (L) car. However, it should be noted that if the customer finds a vehicle from another class that provides a better solution to their needs and budget, they might purchase that vehicle instead. Exhibit 1.5 provides a description of each consumer segment, unit sales at the start of the simulation, and associated microsegments with their preferred vehicle classes.

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Exhibit 1.5: Consumer Market Segments

Segment Description Sales (000s

Units)*

Preferred Vehicle Class**

(1) Value Seekers

Value seekers have basic transportation needs, using their vehicle for commuting or as an all- purpose vehicle. Quality and safety are important to these price sensitive buyers.

768 (1E) Economy (1T) Truck

(2) Families

Families have somewhat basic transportation needs, but require flexible vehicles with both people and cargo-carrying capabilities. Safety and quality are most important to these fairly price sensitive buyers.

1,724

(2E) Economy/ Family (2F) Family (2M) Minivan

(3) Singles

The singles market is young, and tends to spend a fairly high percentage of disposable income on their vehicles. Singles look for vehicles that are fun to drive. Styling and performance are important to this segment.

865

(3S) Sports (3T) Truck / Sports (3U) Utility / Sports

(4) High Income

This segment includes families, professionals, or retirees. With high disposable income, they are willing to spend more for extra features. Interior, styling, and safety are important attributes.

381 (4F) Family / Luxury (4L) Luxury

(5) Enterprisers

Enterprisers see their vehicle as an extension of their business and personal aspirations. They use their vehicles for business and also to impress. Styling and performance are important.

621 (5L) Luxury / Sports (5U) Utility

*NOTE: Segment unit sales shown are per firm at startup. Actual market size varies with number of firms, and will change over time based on underlying market conditions and competitive dynamics. **NOTE: Vehicle classes are listed in order of preference within the segment. Market research has also identified some potential new microsegments in the market where customers’ needs are not satisfied by the current vehicles. Customers in the new microsegments may be looking for a new vehicle class, such as an AEV, or a significantly different configuration of an existing vehicle class. If a firm introduces such a vehicle that "excites" these customers, the new microsegment may "pop", creating new demand in the marketplace. As a rule in StratSim, at most, one new microsegment can "pop" each period. Additional new customer opportunities may be identified as the simulation progresses. It is important to understand that there are no guarantees with introducing products into new markets and StratSim reflects this risk: introducing a vehicle targeting a new microsegment does not guarantee that it will "pop."

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Promotion

Training/Support

Vehicle

Dealer Invoice

Vehicle

Selling Price

Advertising Promotion

MSRP

Manufacturer Dealer

Consumer Purchase Process What vehicle a consumer will ultimately purchase reflects a complex decision making process. Consumers typically start out looking for a specific kind of vehicle in the right price range, though they may consider a couple of different kinds of vehicles. For example, a family buyer might consider both a minivan and a family class sedan in the $25,000-$30,000 price range. When consumers find a vehicle of the right type, they will then take a close look at the attributes of the vehicle. Of course, the overall appeal of the vehicle is weighed against the price the customer will ultimately pay. This trade-off between price and appeal is what creates value in the mind of the buyer. Each consumer has different needs and also places a different importance on each need. Some attributes may be very important to the consumer ("hot buttons") while others are less important. In some cases, consumers may want more of an attribute, while in other cases, they may have a particular ideal in mind. Their decision will also be impacted by their knowledge of the vehicle (awareness), experience at the dealership (dealer rating, dealer coverage), and special promotional offers and activities. The diagram in exhibit 1.6 illustrates the consumer purchase process for cars and trucks in StratSim. Exhibit 1.6: Vehicle Purchase Process

Consumers

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B2B Purchase Process Unlike the consumer market, where automakers are selling to individuals and small organizations through their captive dealership network, the business-to-business (B2B) or "fleet" market purchases in large quantities directly from the manufacturer. Examples of B2B customers are rental fleets such as Hertz or Avis, parcel carriers such as UPS and FedEx, and other large entities such as the government or large companies with a national presence. In StratSim, these three customer types comprise the three B2B segments and are briefly described in the table below. Exhibit 1.7: B2B Segments

Segment Description

(6) Rental Fleets

The B2B rental fleet market is composed of rental vehicle companies operating in all regions of the country. Most contracts are nationally recognized rental car companies that provide vehicles to traveling business people or vacationers, typically for less than one week.

(7) Parcel Carriers

The Parcel Carrier fleet market is composed of national delivery companies that provide coast-to-coast pickup and delivery of packages, such as UPS and FedEx. Most Parcel Carrier companies service their own vehicles, resulting in lower distribution coverage minimums, but are concerned with the cost of purchasing, owning and maintaining the vehicles. In addition, parcel fleets typically require a custom built vehicle of the delivery class.

(8) Other Fleets

The Other Fleets segment is composed of other B2B customers such as government agencies and large corporations. Most of these other fleet contracts represent smaller orders and require high levels of dealership support, as they typically are not servicing their own vehicles beyond basics.

In some cases, B2B customers may use the same models as individuals, although with a different use and purchase process. This would often be the case for rental car companies, some government agencies, and large companies. In other situations, the customers may have very specific needs that would require a customized platform. In that case, auto companies would have to design a platform uniquely for the customer. For example, this would occur for parcel carriers who require a delivery class vehicle with unique load and configuration specifications. Company fleet buyers also have a significantly different purchase process than individuals. First, these buyers will only purchase a specific vehicle class and have requirements that must be met in order for a manufacturer to qualify for a contract. These include meeting or being less than a maximum price, meeting or exceeding dealer coverage in all regions to provide an adequate service network, being within a particular range for size and performance, and meeting or exceeding particular attributes (interior, styling, safety, and quality). Second, their purchase is direct from a manufacturer rather than through a dealership. Finally, one manufacturer will be selected as a preferred supplier and receive a contract for twice as many vehicles. Preferred supplier status goes to the company which meets the specifications at the lowest price.

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Firm Decisions Each period firms must make a number of decisions in StratSim. Your team will need to allocate marketing expenditures for the corporation and products, maintain and grow your dealership network, and set the production schedule. In addition, you must decide what technologies to invest in, products to develop, whether to expand plant capacity, and ensure you have sufficient resources to accomplish your goals. This section describes in more detail each of the decision areas. Marketing In StratSim you will have to make marketing decisions for the corporation as a whole and for each product. To make your marketing effective, you must first identify the kind of company you want to be, then use advertising, promotion, and pricing decisions to project the appropriate corporate image and generate interest in your products. Corporate advertising budgets are set on a regional basis. These funds are spent on generating a corporate identity in support of the dealer network in the regions. A public relations budget is also set to support publicity events for the firm, corporate, and investor relations. Finally, direct marketing can be used to generate interest within a particular target segment. Product advertising plays an important role in establishing vehicle awareness and shaping consumers' perceptions of products. In the StratSim world, managers are responsible for setting an advertising budget and an advertising theme. The majority of the budget is spent on media buys, with the remainder on the creative input and theme. The theme emphasizes one of the primary characteristics of the vehicle—performance, interior, styling, safety, or quality. Product managers attempt to match the advertising theme with the "hot buttons" of their target customer. Promotional budgets are set at the product level and include special incentive programs and general promotional activities. The purpose of special incentive programs is to move product during slower periods of demand. Examples of incentives include consumer rebates, below market financing, and dealer-oriented sales incentives. Examples of general promotional activities include funds for brochures, advertising in support of incentive programs, mailings, trade shows, and motivational contests. Vehicle pricing and costing is complex and requires careful attention to detail. Depending on the context, price can have several meanings. The manufacturer sets the vehicle MSRP (Manufacturer's Suggested Retail Price). This is the price that is posted in the window of the vehicle, but is rarely the price that the customer actually pays. Average retail price is the average of all the actual prices that customers pay. This price includes dealer mark-ups, promotional discounts, haggling with the dealer, etc. The dealer invoice is what the dealer pays for the vehicle and is the monetary value your firm receives as revenues. Finally, the manufacturing cost for the

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vehicle is the cost associated with production of the vehicle. The dealer invoice less the unit cost is the per unit margin the manufacturer receives for each sale. Choosing the best marketing mix for a vehicle is a difficult task. Test markets allow marketers to try different combinations of price, advertising, and promotion to determine their effects on sales and profitability. In StratSim, test markets can be used with vehicles that have existing sales. A test market condition is created in a particular city where levels of price, advertising, and promotion are adjusted from your national levels and the change in the sales in that market is measured. By extrapolating this change to national levels, a marketing manager can make better judgments on how much to adjust the marketing mix variables for the coming year. Dealer Distribution While the purpose of advertising and promotion is to generate interest, create an image, and communicate information about the vehicle, it is the automobile dealership that actually makes the sale and provides follow-up services. In StratSim, each firm has a captive dealership distribution structure organized on a regional basis. Each period firms must decide how many dealerships to open or close in each region as well as allocate funds for training and support. You may grow or shrink your dealership network by up to 10% of the total dealers in a single period. Below is a table of the dealership network for each firm at the start of the simulation. Exhibit 1.8: Dealers by Region

Firm Number of Dealers

North South East West Total

A 120 120 120 120 480 B 65 75 65 75 280 C 80 95 85 90 350 D 70 100 110 120 400 E 100 130 70 80 380

The profitability and success of a dealership depends to a large extent on the popularity of the manufacturer's vehicles. However, the number of dealerships also plays a role. In StratSim, this is referred to as dealer coverage, the number of dealers divided by the number of sales territories in a region. Having too few dealerships can leave smaller cities and towns uncovered. On the other hand, if coverage in a region exceeds 100%, sales can be spread too thinly across dealerships and lead to overly competitive pricing within the region. Management often looks to the sales, gross profit per dealer, and coverage as indicators of the proper balance. Dealer ratings can also provide insight into the success of dealerships. A strong dealer gross is expected to translate into a successful dealership, but training, support, and service revenues all contribute as well.

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Fleet Sales (B2B) Depending on the simulation configuration, you may have the opportunity to pursue contracts for selling large numbers of vehicles to fleet buyers (B2B). To compete in the B2B market, the first step is to purchase research on the contracts. The research report will tell you the class of vehicle, number of units, maximum price, vehicle attributes, and minimum dealer coverage required by the buyer. The next step is to pursue the contracts you would like to bid on by hiring a direct sales force to work with the corporate buyers. Each contract requires five sales people to receive an invitation to bid on a contract and support a contract on an on-going basis. Salespeople are hired automatically when a contract is targeted. One period after hiring sales force to pursue a contract, you will receive a request from the corporate buyer to bid on it. If your bid meets all the requirements, you will receive a contract that guarantees sales of the minimum amount. If your bid price is the lowest of all qualified competitors for the period, you will receive additional sales equal to the guaranteed amount of the contract. Manufacturing Having good products, effective marketing, and a strong dealership network are all essential to creating demand for your products, but you must also produce enough vehicles to meet demand. In the short term, managers have to decide how to use plant capacity to produce the best mix of vehicles. Longer term, the firm must increase capacity to produce new vehicles and adjust to changing demand for existing vehicles. Capacity for each firm is fixed for a given year. However, changes of up to 50% of your current capacity may be initiated at any time. The increase or decrease takes one year to take effect. Thus, if you build additional capacity this year, next year you will be able to set production levels based on the new plant capacity. It is important to coordinate capacity increases with the launch of new products. In StratSim, firms may choose to set production levels above capacity in the short-run by running extra shifts and paying overtime. An over-capacity charge will be incurred if capacity utilization is over 100%. Production within the constraint of capacity is fairly flexible. Firms must decide on production volume for each product on the market. When the production level on a line is increased from the previous period, the capacity now associated with that product is upgraded and retooled. Retooling also occurs when current or new productive capacity is dedicated to a new product line. Lower plant maintenance costs are likely when the factory is updated. Firms may choose to use a flexible production option that increases or decreases production by up to 10% from the firm’s target production value, depending on demand. If production volume is insufficient for demand, consumers who are unable to purchase a vehicle at the end of the

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period postpone their purchase decision until the beginning of the next year, purchase an alternative brand, or buy a used vehicle. Inventory levels should be considered when deciding on production schedules for the coming year. Too little inventory can mean lost sales, and too much increases costs and puts downward pressure on dealer margins. A reasonable target for inventory is 30 to 60 days. If a product is being redesigned or discontinued, the current inventory will be sold in markets outside the StratSim simulation at 90% of cost, so it is especially important to manage inventory levels when upgrading a vehicle. The costs for building plant capacity or retooling investment are recorded as an asset on the plant and equipment line of the balance sheet. The plant assets are depreciated over ten years and the expense included in the cost of manufacturing products each period. Cumulative depreciation is shown below plant and equipment on the balance sheet. Research and Development Each firm in the StratSim world has technological capabilities that parallel the vehicle attributes of interior, styling, safety, and quality (ISSQ). To keep measurement relatively straightforward, these are rated from 1 to the current maximum (where 1 equals a poor rating on that attribute). All firms in the industry start with different initial technology ISSQ capabilities. Firms have the ability to expand their capabilities up to current industry technology limits through investments in technology capabilities. These investments provide two advantages—first, the ability to develop cars with enhanced features (e.g. higher ratings); and second, the lowering of costs to develop a similar set of characteristics. For example, a firm with technology ISSQ capabilities of 8/8/8/8 would be able to produce a 4/4/4/4 car at a lower unit cost than a firm with a technology profile of 6/6/6/6. The current technology profiles with the maximum limitations are displayed below. Exhibit 1.9: Technology Capabilities of Firms

Interior Styling Safety Quality Maximum: 9 11 9 11

( A ) Amazing Cars 5 5 4 6 ( B ) Best Motor Works 7 8 5 8 ( C ) Cool Cars 6 7 5 7 ( D ) Driven Motor Co. 4 5 5 6 ( E ) Efficient Motors 3 5 3 5

Note that having the capability to build a vehicle with certain attributes is not the same as actually doing it. So increasing the firm technology capabilities does not automatically increase the attributes of individual vehicles. To make changes to vehicles using the increased firm technology

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capabilities requires starting new development projects, either to upgrade existing vehicles or develop new ones. As is the case with the automobile industry, product development in StratSim is expensive, time consuming, and risky. However, the reward of having the leading vehicle within a product class is often well worth the investment, and falling behind other vehicles in terms of styling, performance, and appeal is dangerous. Additionally, new products are needed to take advantage of opportunities in the market. For every development project, there is also an overall cost for the development process, an estimated unit cost, and a time to complete. Each firm has a limited number of product development centers affecting its ability to work on multiple development projects (upgrades and new products) concurrently. You start with two centers. Funding new centers increases your ability to develop more products at the same time. This investment corresponds to hiring more product development engineers and expanding the R&D facilities, allowing your firm to work on more new vehicles or upgrades at the same time. Developing a new vehicle starts with a concept created by development engineers based on your specifications. You can create as many concepts as you want, and there is no cost until you decide to start development by moving the concept into one of the development centers. Concept testing is an important step in the new product development process. This is an opportunity for your firm to get early feedback on your potential product before the costly development cycle begins. Spending some time up front with customers can save a tremendous amount of resources down the road. New vehicles in a class in which you already have experience take two years to develop, while a new class takes three. Upgrades start with an existing vehicle, and make modifications to the platform to better suit customer needs. Changes can be made to the ISSQ characteristics as well as the size and horsepower. The modifications can be major or minor. Minor changes can be completed for the next period, while major changes are ready in two periods. When an upgraded vehicle is put into production, any existing inventory will be sold in markets outside the StratSim simulation at a loss. Thus while a minor upgrade can be deployed quickly, any inventory will be written off immediately. The extra period required for a major upgrade gives you time to get excess inventory under control before it is written off. All projects have an estimated unit cost based on 100,000 units of production ("base cost"), which depends on the vehicle class and attributes. If actual production is less than 100,000 units, actual unit costs will be higher than the estimate. If actual production is greater than projected, actual unit costs will be lower than estimated base cost. In general, unit costs decrease with greater production volumes due to the experience. You can also initiate a cost reduction upgrade to reduce the base cost of a vehicle. A cost reduction upgrade makes changes to the vehicle design and manufacturing process without affecting the attributes. An overview of the product development paths is illustrated in Exhibit 1.10 on the following page.

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Exhibit 1.10: Product Development Timelines

Current Period

Period + 1

Period + 2

Period + 3

Cost Reduction $100-$200 Million

in current year

Put in Dev. Center (no changes to specs

allowed)

IN MARKET Retooling.

Results impacted. (vehicle costs

reduced, no impact on sales)

Minor Upgrade $100-$300 Million

in current year

Put in Dev. Center Tweak Specs*

Adjust Marketing Mix Adjust Production

(Inventory disposed)

IN MARKET Results impacted. (Including sales,

retooling, inventory write-off)

Major Upgrade $250-$750 Million Spread over 2 Yrs.

Put in Dev. Center Modify Specs†

Build Add’l Capacity

Project in Dev. Center Tweak Specs*

Adjust Marketing Mix Adjust Production

(Inventory disposed)

IN MARKET Results impacted. (Including sales,

retooling, inventory write-off)

New Product (Existing class)

$250-$1,500 Mill. Spread over 2 Yrs.

Create Concept Put in Dev. Center

Name Product Build Add’l Capacity

Project in Dev. Center Tweak Specs*

Set Marketing Mix Set Production

IN MARKET Results impacted. (Including sales,

retooling)

New Product (New class)

$500-$2,500 Mill. Spread over 3 Yrs.

Create Concept Put in Dev. Center

Name Product

Project in Dev. Center Tweak Specs*

Build Add’l Capacity

Project in Dev. Center Tweak Specs*

Set Marketing Mix Set Production

IN MARKET Results impacted. (Including sales,

retooling)

* Max change for each of the interior, styling, safety, and quality attributes (ISSQ) is 1; HP is 5; and size is 2. † In the first period of a major upgrade, you’re allowed a max change of 2 for ISSQ, 20 for HP, and 10 for size. Licensing In addition to developing its own vehicle, a firm may choose to license one from a competitor. In this situation there are no development costs, and vehicles are purchased at a fixed unit price plus an optional annual fee. For example, Firm A might license a truck from firm D based on the specifications of the Detonka. The product will be marketed under a new name, starting with “A”, such as Ant. Licensing a platform from another firm is something worth considering if a manufacturer lacks experience in a vehicle class or has limited technological or development capabilities. Often licensing is a short-term measure until R&D is able to design a vehicle internally. However, a firm

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cannot license more than two vehicles from other firms at any given time. Firms that have strong product development capabilities and low cost production but weak distribution may find licensing vehicles to other firms a profitable option. Licensing is unlikely to occur unless both parties materially gain from the exchange. Please note that licensing is an optional feature that your instructor can choose to enable or disable. Financing Financial management in StratSim is essential. In addition to choosing among investments in technology, manufacturing, and product development, firms must also manage cash flow and investor expectations. A firm running low on cash has three options in StratSim: sell stock, issue bonds, or draw on a revolving line of credit. Selling stock has the benefit of not creating an interest expense or additional obligations. However, the drawback is dilution of the shares of stock that may lower the share price at the time of issuance. In StratSim, you specify the amount of capital to raise, and the appropriate number of shares will be sold at the current stock price in order to reach your goal. Stock sales are recorded at a par value of $1 per share, with any amount above that going to additional paid in capital on the balance sheet. The second option for raising capital is to sell 10-year bonds, callable after three years. The interest rate on the bonds will reflect current interest rates and the credit rating for the company. AAA rated bonds offer the lowest investment risk and therefore the lowest interest rate. The interest rate is fixed for the life of the bonds and interest is paid out automatically each period, with the principle coming due at maturity (after the simulation is over). When bonds are sold, the issue amount is added to long-term debt on the balance sheet. After three years, the bonds can be called. Only one bond issue can be called in a period, the entire issue must be paid off at once, and there is a one year interest penalty for calling the bonds. StratSim firms must maintain a minimum amount of cash on hand to sustain operations, about 1% of revenue. If there are not enough funds available, a loan is automatically issued from a revolving line of credit to make up the difference, adding to short-term debt on the balance sheet. The interest rate on the line of credit tends to be higher than the rate on bonds, and will vary with changes in the prime rate and company credit rating. Interest due each period is paid automatically, but it is up to the finance manager to schedule repayment of the principal. A firm with a surplus of cash has a number of options. In addition to investing the cash in expanding the company, it can be used to purchase a one-year certificate of deposit, retire debt, or distribute as a dividend to shareholders. If management thinks the firm’s stock is undervalued, it may also be possible to repurchase stock with the extra cash. If stock repurchase is permitted, the firm is limited to 20% of the current market value of the company.

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Company Reports Financial statements allow you to track company results and make better decisions. Shareholders and lenders use a firm’s financial statements to evaluate its performance in setting a stock price and bond rating. In StratSim, firms have access to the income statement and balance sheet of all their competitors, allowing them to compare their own results against other firms in the industry. A summary of the financial condition of all the firms in the industry at the beginning of the simulation is provided in exhibit 1.11. Exhibit 1.11: Financial Summary

Firm A Firm B Firm C Firm D Firm E

Val Mkt Share 24.8% 13.2% 15.1% 22.7% 24.1% Unit Share 29.3% 8.6% 11.1% 25.9% 25.2% Preference 19.3% 27.0% 20.3% 15.1% 18.3%

Sales $21,886 $11,675 $13,310 $20,041 $21,280 COGS $16,847 $7,738 $9,379 $14,926 $16,252 Marketing $378 $379 $376 $377 $384 R&D $1,029 $1,001 $820 $1,223 $1,182 G&A $897 $464 $528 $807 $790 Other $1,471 $869 $980 $1,408 $1,374 Income $1,264 $1,225 $1,228 $1,300 $1,299

Stock Price $48.87 $44.93 $46.17 $47.47 $48.09 Mkt Value $17,838 $10,783 $11,773 $15,902 $17,312 Total Debt $10,539 $3,489 $4,903 $9,444 $8,991

Note: Dollar amounts (except stock price) are in millions.

The Income Statement summarizes revenues and expenses for the company. Revenues in StratSim consist of vehicle sales to dealers and direct sales to businesses. All costs directly attributable to the production of the vehicles sold is shown under cost of goods sold (COGS). This includes both the variable cost of materials and labor, as well as the fixed costs of the plant. The Cost of Goods Sold detail shows how COGS is calculated. Subtracting COGS from revenue yields the gross margin on vehicles sold. Low gross margins are a sign that products are priced too low, or production costs are too high. Some expenses, such as marketing, research and development, and general administrative expense, are not directly attributable to production. Marketing expense includes corporate advertising, product advertising and promotion, and sales force expenses. Research and development shows the costs associated with product development and technology improvements. General and administrative expense includes overhead from sales and the dealership network. Dealership training and the cost of changes in the number of dealerships

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are the result of your decisions, but most G&A expenses are not under your direct control. Income from operations is calculated by subtracting these indirect expenses from gross margin. Income from operations is a good measure of the health of the company’s core business. If gross margin is healthy but operating profit is low, that may be due to ineffective marketing, heavy investment in R&D, or rapid expansion of the dealer network. Interest income and expense as well as extraordinary items are applied to operating income to calculate income before tax. A high interest expense relative to income from operations could be a sign that a firm is having trouble managing its debt. Finally, taxes are deducted, leaving net income. Net income, less any dividends paid, is added to retained earnings on the balance sheet each period. If net income is negative, retained earnings will be reduced. There is no provision for tax loss carry-forward in StratSim. The Balance Sheet provides a snapshot of the firm’s assets, liabilities, and equity. In StratSim, assets include cash, receivables, inventory, and plant and equipment less depreciation. The firm must always keep enough cash on hand to pay current expenses, about 1% of revenues. Cash does not earn interest, but investing in a one-year CD will make it more productive. Receivables are the unpaid invoices owed by dealers. Dealers who are struggling will be slower to pay, resulting in higher receivables as a percent of revenue. Rising inventory may indicate changes in demand or competitive environment, while inventory that is too low could be resulting in lost sales. Plant and equipment is the total investment in production facilities through expanded capacity and line retooling; depreciation on the balance sheet represents the cumulative plant depreciation expense shown on the income statement.

Liabilities consist of accounts payable, short-term debt and long-term debt. Accounts payable is the amount owed to suppliers and payroll taxes collected but not yet paid to the government. Short-term debt in StratSim is the balance on the revolving line of credit, while long-term debt is the total of bonds issued. Equity consists of the original value of stock at par, any additional paid in capital, and retained earnings. Stock is sold at $1 par value per share. Your firm's initial shares of stock outstanding were all sold at par value. If stock is issued at a higher price, then the amount over par is shown in a separate line item as additional paid in capital. Retained earnings show the cumulative net income from the income statement, less any dividends distributed. Dividends may not be distributed if you have negative retained earnings. The Income Statement and Balance Sheet provide an overview of the financial health of the company. Managers use them to identify potential problems in the business. Correcting problems will require taking a closer look at additional reports. The Cash Flow statement, along with the Product Contribution report are internal reports to help management make better decisions.

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The Cash Flow statement shows the sources and uses of the firm’s cash. The changes in the amount of cash in the firm are calculated based on income from operations adjusted for depreciation, inventory, payables, and receivables; investment activities such as capacity increases, plant retooling, and CD investments; and financing activities such as stock or bonds issued, changes in loan balance, or dividend payments. A healthy company will have positive cash flow generated by core operations, though a negative cash flow as a result of investment in the company could be a sign of future growth. The reports discussed so far give an overview of the results for the entire company. The Product Contribution report allows managers to identify which products are contributing toward the success of the company, and which products need improvement in development or marketing. When calculating product contribution, only revenues generated by the product and direct variable costs, along with product advertising and promotion are considered. The report is very helpful in prioritizing development projects and identifying the effectiveness of marketing for specific products.

Industry Reports and Tools StratSim provides a number of reports with information on the market environment and the competition. Market reports include general news in the industry, market shares by vehicle, regional analysis, and sales by consumer segment. Competitive reports are available on the products in the market, technology capabilities of competitors, spending on marketing, dealer networks, manufacturing capacity and utilization, and a summary of the financial results for each firm. Analyzing data on the market, customers, and competitors will help managers make better decisions. There are a number of tools available in StratSim to help you convert data into knowledge and to improve your ability to make good decisions. Some tools will help you with product design,

others will help you with resource allocation, and others may offer competitive insights not available from public secondary sources. The exact tools that will be available to your team will depend on the configuration of your game. New tools may also be introduced as the game is advanced, so be aware of changes in availability. Most of these tools will cost money to use, just as ordering and designing market research studies would in the real world. So you should spend some time knowing when and where these tools will be of the most value to you.

Important! Since everyone on your team is sharing the same decision set, when there are a limited number of studies that can be run, this total is for your ENTIRE team, not just you as an individual. So be sure to coordinate purchase of research studies. Once someone on your team purchases a study or tool, your entire team will have access to the results of that research.

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Next Steps The task of the management team is to maintain long-term profitability in the context of an increasingly competitive and changing environment. Customer needs and tastes will evolve. Competitors will be battling for market share and entering new product classes. Technologies and cost structures for the firms will change over time. Every simulated year, each firm will perform a situation analysis, identify problems and opportunities, and generate alternative options for decisions. Finally, based on careful consideration, persuasive presentation of competing ideas, and probably some arm-twisting, your team will come to a consensus as to which set of decision is best and implement them. Once your firm has a thorough understanding of the StratSim world, one of the first tasks should be to define a strategy. A successful firm will likely have a strategy that is well thought out and executed. Creating a sound strategy is the most important process your firm will undertake because your strategy is the framework for all decision-making and firm organization. The strategy should be a long-term vision for your firm that every member of your team can reference when making decisions and analyzing data. Strategy is defining segments served and creating a sustainable competitive advantage. It is your road map. It is where and how your firm chooses to compete. It is essential. Enjoy your tenure as a management team in the StratSim world. It should be an exciting and challenging learning experience. Good luck and have fun!

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Summary of Decisions Each period your firm will need to make a large number of decisions. The table below provides a summary of these decisions to help you track them

Decision Category Firm Decision Product Decision

Marketing

 Corporate Advertising • By Region • Themes

 Social Media  Direct Marketing

• Budget • Target Segments

 Pricing • MSRP • Dealer Discounts

 Advertising • Budget • Theme

 Promotion B2B Marketing  Target Contract  Contract Bid

Distribution  Dealer Openings / Closings

• By Region  Training and Support

 Distribute in Market

Manufacturing  Capacity Change  Schedule Production  Flexible Product On / Off

R&D

 Technology Investment • Interior • Styling • Safety • Quality

 New Development Center

 Vehicle Upgrade • Major • Minor • Cost Reduction

 New Vehicle • Create Concept • Move to Development

Finance

 Sell Stock  Issue Bonds  Borrow / Repay Loan  Purchase CD  Distribute Dividends

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Product Class Examples The following pages provide a sample picture of a vehicle in each product class in StratSim as well as a brief description of some of the features one can expect to find in each class. Please note that the specifications are approximate and meant as a general guide to distinguishing product classes. Economy

Economy vehicles typically are small, low priced cars with less powerful engines. Price in the early periods is under $20,000. Engine horsepower is likely to be under 150. Most economy vehicles will have a hatchback and sedan model option, and some may also offer a small wagon. An economy car can usually seat 4 adults, though probably not comfortably. A child may be able squeeze in the middle of the back seat in a pinch. Legroom and storage space are minimal. In StratSim, this corresponds to a size of approximately 1–30.

Features on an economy car are also likely to be basic in order to keep the costs down. Some consumers are willing to pay more for these features, but one should be careful not to provide too many, driving up costs and eroding profitability. It is difficult to make significant money in the economy segment, though production volumes are significant. Also, for many consumers, an economy vehicle is their first car purchase, and therefore is an important part of your vehicle line-up.

Examples of economy vehicles are the Toyota Yaris, Ford Focus, Volkswagen Beetle, Honda Civic, and Chevy Cobalt.

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Family Family vehicles are mid-sized, medium priced cars with mid-range engines. Price in the early periods is between $15,000–$38,000. Engine horsepower is likely to be 120–200. Most family vehicles will have several different model offerings, and most will have four doors. A family car can usually seat 5 adults, though those in the back seat may be a bit cramped. Legroom and storage space are reasonable. In StratSim, this corresponds to a size of approximately 30–65. Features on a family car are likely to focus on safety and flexible storage. Customers who are in search of a family vehicle want a reliable, safe means of transportation for their families at a reasonable cost. This vehicle is likely to be their primary mode of transportation and should hold up well under the normal wear and tear of everyday family life. Volumes for this class are significant, so it is important to create a vehicle with wide appeal. Price and promotional deals have a significant impact on buyers of these vehicles.

Examples of family vehicles are the Honda Accord, Toyota Camry, Ford Fusion, Chrysler 200,

and Chevy Malibu. Luxury

Luxury vehicles are high priced cars with top of the line features and performance. Price is typically in excess of $35,000. Engine horsepower is likely to be over 150. Luxury vehicles come in a wide array of models including sedans, coupes, and even wagons. A luxury car can usually seat 5 adults comfortably. Legroom and storage space are ample. In StratSim, this corresponds to a size of approximately 45–70. Features on a luxury car are normally

numerous. Interior, styling, safety, and quality are all likely to be quite high. Customers who are in search of a luxury vehicle want the best and are willing to pay for it. Though volumes in this class are less, per vehicle profit margins are high. These vehicles are also often the "flagship" brand for the company and help create showroom traffic.

Examples of luxury vehicles are Mercedes, Cadillacs, Lexus, and some BMWs.

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Sports Sports vehicles emphasize performance and come in a range of prices and sizes. Typically they appeal to the young and the young at heart. An economy sports car might be priced as low as $14,000, whereas a high-end sports car may well be in excess of $35,000. Engine horsepower is likely to be over 150. Sports cars normally are coupes or hatchbacks. Some sports cars have only two front seats while others may have small back seats for additional cramped seating. Legroom in the front is reasonable, but there is typically little storage space. In StratSim, this corresponds to a size of approximately 15–60. Features on sports cars usually are related to styling and performance. Customers who are in search of a sports car want to be noticed and are willing to spend a good chunk of their disposable income to that end. Though volumes in this class are less, per vehicle profit margins are pretty good. These vehicles are also often high awareness brands for the company and help create showroom traffic.

Examples of sports cars are Ford Mustang, Mazda Miata, and Nissan 370Z. Alternative Energy Vehicle (AEV)

Alternative Energy Vehicles (AEVs) have more to do with the technology used to power the vehicle than the style and size of the vehicle. AEVs encompass a wide range of technologies that might be used to power the vehicle including electricity only (rechargeable batteries), fuel cell, hydrogen, solar, or some combination of these. Though the technology is more expensive and somewhat untested, it does lead to significantly improved energy efficiency and lower pollution. Power and/or range still remain a challenge. Expected prices are from $20,000 and up. Engine horsepower is likely to be 70–150, and size in StratSim ranges from 0–50 depending upon the application.

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Minivan Minivans are family oriented vehicles that have lots of passenger and storage room, but drive more like a car than a truck. These are perfect for families who need more space than a family vehicle can offer. Price is typically between $18,000–$35,000. Engine horsepower is likely to be 120-240. Most minivans will have several different model offerings, which mainly vary seating capacity and cargo area. A minivan can usually seat 7 adults, possibly more depending on the seating configuration. Legroom and storage space are excellent. In StratSim, this corresponds to a size of approximately 50–100. Like family vehicles, features on a minivan are likely to focus on safety and flexible storage. Customers who are in search of a family vehicle want a reliable, safe means of transportation for their families at a reasonable cost. This vehicle is likely to be their primary mode of transportation and should hold up well under the normal wear and tear of everyday family life. Price and promotional deals have a significant impact on buyers of these vehicles.

Examples of minivans include the Dodge Caravan, Toyota Sienna, and Honda Odyssey.

Utility Combine the attributes of a truck, minivan, and sports car, and you get a utility vehicle. Utility vehicles offer a little bit of fun and utility for those who need more passenger room than a truck, but don’t want to have the minivan "family" image. Price starts at around $17,000 for small utility vehicles, but fully loaded large ones will sell for over $40,000. Engine horsepower is likely to exceed 150. Legroom and storage space are excellent on larger models, which can also seat 5 adults. In StratSim, sizes of utility vehicles range from 30– 90.

Features on utility vehicles usually are related to styling and performance. Many of the high-end models come with leather seats and other amenities normally found in luxury cars. Most customers prefer the 4-wheel drive models.

Examples of utility vehicles include the Ford Escape, Honda CR-V, Jeep Cherokee, and Toyota RAV-4.

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Truck At one time, trucks were reserved for farmers and handymen, but no more. Truck sales have taken off in recent years thanks to their broadening appeal as an alternative to sports cars and a great second vehicle. Truck prices start at around $12,000 for small ones, but fully loaded larger trucks will sell for $25,000 or more. Engine horsepower also has a wide range depending on the size of the truck. Leg and headroom is ample, and most trucks seat 2 or 3, though some new models are adding back seats. In StratSim, sizes of trucks correspond to a range of approximately 30– 90. Features on trucks usually relate to styling and performance. Four-wheel drive models are very popular as well. Truck buyers are quite brand-loyal.

Ford, Chevy, Dodge, and Toyota all make several popular truck models. Delivery (Business-to-Business Model Only)

Delivery vehicles are covered trucks specially designed for national delivery companies that provide coast-to-coast pickup and delivery of packages, such as UPS and FedEx. They typically focus on providing ample space for storage and enough horsepower and torque to power a full load of shipments. Delivery prices start at around $20,000 for smaller vehicles, but ones with more capacity and features will sell for $40,000 or more. Engine horsepower also has a wide range depending on the size of the delivery vehicle. In StratSim, sizes of delivery vehicles correspond to a range of approximately 60–100.

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Segment Descriptions The following pages provide a brief description of the five consumer segments in StratSim. Value Seekers (1) Value Seekers have basic transportation needs. They use their vehicle to commute to work, or perhaps as a basic all-purpose vehicle. However, they don't have as much disposable income as other segments and are, therefore, more price sensitive. Quality and safety are especially important to these buyers. Vehicle classes that may be of particular interest to value seekers include economy and truck. Families (2) Families have flexible, but somewhat basic transportation needs. They need a combination of people and cargo-carrying capabilities with perhaps a bit of family fun built in. However, they don't have as much disposable income as other segments and are, therefore, somewhat price sensitive. Safety and quality are especially important to these buyers. Vehicle classes that may be of particular interest to families include family, economy, and minivan. Singles (3) The singles market is young, with more disposable income to spend on transportation and a wide variety of transportation needs. Styling and performance are most important to this segment. Vehicle classes that may be of particular interest to singles include sports and truck. High Income (4) People with high incomes have more elaborate transportation needs. This segment may be families, professionals, or retirees. They see their vehicle as an indication of their success in life. Since they have more disposable income to spend on transportation, they are likely to purchase vehicles with extra features and good performance. Vehicle classes that may be of particular interest to the high-income segment include family and luxury. Enterprisers (5) Enterprisers see their vehicle as an extension of their business and personal aspirations. Enterprisers use their vehicles for business transportation and also to impress potential clients. Their vehicles may be company or privately-owned. Careers such as real estate, investments, and sales are likely to fall in this category. Vehicle classes that may be of particular interest to enterprisers are luxury/sports utility, and other high-end vehicles, depending on their business needs.

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Rental Fleets Contracts (6) (Business-to-Business Model Only) The B2B rental fleet market is composed of rental vehicle companies operating in all regions of the country. Most contracts are nationally recognized rental car companies that provide vehicles to traveling business people or vacationers, typically for less than one week. The sales force plays a significant role both in securing the request for quotation and the guaranteed contract. However, the most important element is meeting the contract requirements in order to be considered for the sale. Some of the rental fleet companies are quite concerned with the dealership service support, while others tend to service the vehicles themselves. For those that expect service support from dealerships, there are typically higher coverage requirements for each region. Rental fleets tend to be very cost conscious as a large percentage of their operating costs are the actual purchase of the vehicle as gas and insurance costs are borne by the renter. However all are concerned with the cost of owning and maintaining the vehicles. Parcel Carrier Fleets (7) (Business-to-Business Model Only) The Parcel Carrier fleet market is composed national delivery companies that provide coast-to- coast pickup and delivery of packages such as UPS and FedEx. As is the case with the rental fleet segment, certain requirements must be met to receive the guaranteed contract unit sales. Most Parcel Carrier companies service their own vehicles resulting in lower distribution coverage minimums. Generally, these customers are most concerned with the cost of purchasing, owning and maintaining the vehicles. Other Fleets (8) (Business-to-Business Model Only) Other Fleets is composed of other B2B customers such as government agencies and large corporations. Most of these other fleet contracts are smaller orders and require high levels of dealership support, as they typically are not servicing their own vehicles beyond basics. These fleet buyers are quite concerned with both the initial outlay and on-going costs of owning the vehicle.

Important: To qualify for a B2B contract, dealer coverage minimums in all regions and specification requirements must be met. Winning bids must be at or below the minimum contract price to qualify. The supplier with the lowest price that meets the requirements receives preferred supplier status resulting in twice the units of the guaranteed contract.

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Managing for Success in StratSim

STRATSIMMARKETING

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StratSim is designed to be a challenging and realistic learning experience. We hope that you will enjoy the challenge. The idea behind a simulation is that by striving to improve your performance in an active way, you will better understand how to operate a business. This section of the manual will provide you with insights that will help your StratSim team manage a successful business while making decisions based on ambiguous information in a dynamic environment. The first goal of StratSim is to allow you to develop, implement, and potentially adjust a strategy in a dynamic environment over multiple years. What exactly does "dynamic environment" mean in the context of business? It means that we can expect customers, competition, and macro- economic conditions to change as time progresses. A good strategy must reflect current realities while also assessing future paths to success in an ever-changing world. The second goal of the simulation is to give you experience in strategic planning and making decisions in an ambiguous environment. You will be leaving behind the comfort of structured exercises and entering a situation where the road to success is not so clearly defined. Although a company’s strategy is planned and implemented based on knowledge of the current situation, a strategy is also based on certain assessments and judgments about the future. Furthermore, decisions in StratSim are interrelated. Decisions should not be based solely on how one decision in isolation will impact an outcome, but also take into consideration the context of your other decisions as well as those of your competitors. How these decisions will interact is difficult to predict. Remember as the simulation progresses that even if you do not "win" in the simulation, gaining the experience of wrestling with these difficult decisions in an ambiguous environment is an important part of the learning process. In fact, many participants of the simulation will say that their greatest learning occurred when challenges were the greatest. The third goal of StratSim is to give you experience in making decisions as a group where your teammates will likely have different opinions about what your company should do. If this is your first time experiencing a group decision-making process, it requires new skills in addition to knowledge and judgment that focus on group and managerial processes. How will you organize your group? How will you make decisions? Consensus? Delegation? Can you come to a shared vision and mission for your company? Will you embrace your strategy or will you second guess others if faced with obstacles? Managing people and organizations is indeed a challenge. Your team should develop a written "charter" that describes the operating process that the team will use to do analysis, divide labor, and make decisions. Use StratSim as an opportunity to gain experience in this group process. Before we jump into analysis for success in StratSim, let’s begin with a quick review of the fundamentals of strategy, because a team with a well-reasoned strategy has a better chance of succeeding than a team without one. Then we will discuss some points regarding execution of strategy in the context of StratSim. These include measures that provide strategic insights and helpful tips that should improve performance.

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Fundamentals of Strategy A successful strategy is based on two foundations. First is a good understanding of the business situation, achieved from thorough internal and external analyses. Internal analysis is focused on knowing the capabilities and resources of your organization. External analysis focuses on the environment where your company chooses to do business. This will include both industry level considerations (markets, channels, competition, suppliers, etc.) as well as macro considerations (political, economic, socio-cultural, technological, environmental, and legal—sometimes referred to as PESTEL). The goal here is to understand the forces at work that impact your company. One framework that is often used to organize internal and external insights is SWOT analysis (Strengths, Weaknesses, Opportunities and Threats). The second foundation of a strategy is the formulation of a shared mission and vision that the leadership sets for the company. This defines where and how it chooses to do business and also provides the directive for setting corporate goals and objectives, and the measures that should be used to evaluate performance and acceptable outcomes. Mission and vision are also the primary drivers of corporate culture and organizational structure, and must be chosen with key stakeholders in mind. Stakeholders are the people and organizations that stand to gain or lose something based on the success of the organization. Typical stakeholders include owners, employees, customers, partners, and suppliers.

Internal and External Analysis

Strategy Shared Vision and Mission

Michael Porter cites a strategic model that predicts two sources of strategic advantage that lead to better than industry average performance: Low-cost and Differentiation. A firm with a low cost position in an industry is able to produce essentially the same product or service as its rivals at a lower cost. A firm with a differentiation advantage is one that is able to offer a sufficiently unique or enhanced product or service where it can charge a price high enough to cover the costs of differentiation. StratSim reflects this underlying logic. Generally, customers are willing to pay more for what they believe to be a superior product or service within the set of brands they are willing to consider. Therefore, in your target markets, make sure you have either a cost advantage (allowing you to lower prices) or superior product differentiation (allowing you to charge a higher price). Without one of those two advantages, your firm will likely find itself in a less profitable position within the industry. Of course, it may be possible to develop both a cost advantage and superior differentiation for a brand for a specific segment.

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The above provides only a brief overview into the process of designing a successful strategy. Your instructor will likely provide additional resources for you to learn more about strategic planning. To summarize, make sure your team has the following:

• A good grasp of the business situation through internal and external analysis • An agreed upon vision and mission for your company • An established process for group analysis and decision-making

Regardless of the framework used, the objective of strategy is to leverage a firm’s capabilities and resources in the context of the external environment to create a sustainable competitive advantage over both the short- and long-term. The remainder of this chapter will be devoted to helping you improve your performance in StratSim. Importance of Strategic Assessment and Judgment The quality of strategic analysis is an essential part of success in StratSim. Be sure to take the time and effort to fully understand the industry and your firm’s position within that industry. An example where a team’s strategy could move in a non-optimal direction would be where your analysis of the industry causes you to believe that your firm is a high-end provider of vehicles when, in fact, your firm is more of a volume producer. That is different than saying that "although our company is currently positioned as a volume producer, we want to reposition ourselves as a high-end provider". This latter statement at least acknowledges the strategic challenge. Then the question becomes, how does the company reposition itself and is it viable to do so. A second example might be concluding that your firm enjoys a cost advantage over its rivals, when, in fact, the company does not have a true cost advantage where it can produce the same product at a lower cost. Instead, it has low per unit costs due to poor product specifications (e.g. the design has poor ISSQ—Interior, Styling, Safety, and Quality). In both of these examples, the decisions your firm will make will reflect these underlying strategic assessments, which, in the above examples, were not accurate. Poor assessment will often lead to poor performance. So, it is worthwhile to take the time to question important assessments to make sure your strategy is based on accurate information. Another area to consider is the definition of competitive arena—both how the arena is defined and where a company chooses to compete. There are several different ways to define the competitive arena. Should it be vehicle class (e.g. utility, minivan)? Consumer Segment (e.g. singles, families)? Microsegment (e.g. value seekers buying trucks, utility vehicles for enterprisers)? Region (e.g. North, South)? Each approach has its merits, but focusing on one arena definition alone may lead to an incomplete analysis. For example, one can leverage experience in a vehicle class as it is less expensive and faster to develop another vehicle of the same class than invest in an entirely new class of vehicle. But that may lead to cannibalization of the current product line. A second example might be pursuing opportunities in the truck class, without having thought through how the alignment of dealerships in particular regions factors

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into your ultimate success. These are examples of how arena definition needs to support one’s strategic assessments. In terms of choice of arena, consider two companies—one which focuses on low-end economical vehicles, and another that has been making high-end luxury and sports cars. Which do you think would be more successful launching a high-end sports utility vehicle for $50,000? Would customers wonder if the low-end company is capable of designing this vehicle? Is this potential customer also looking for an element of the prestige associated with owning a particular brand of vehicle? Remember that your company will have a perceived positioning in the marketplace which should be taken into account when considering alternative strategic options. So, when you move into new market spaces, remember that it may take more time and money to gain success in areas that are far from your core experience. It can be done but requires resources and patience. Performance Success and Shortfalls Most of the sources of poor financial performance fall into one of three areas: 1) not having enough sales to sustain the on-going costs of running the business; 2) failing to understand the financial structure of your company (e.g. too high product or fixed costs); and 3) failure to have a long-term plan that takes into consideration the proper staging of actions and investments. The remainder of this section will help you identify and diagnose sources of common performance successes and shortfalls.

The Profit Equation Because long-term profitability is one of the measures of financial performance for your company, you should understand the drivers of profit. As the graphic below shows, unit sales multiplied by unit margin less fixed costs equals your company’s profit. Put another way, if your unit sales multiplied by your unit margin does not cover your fixed costs, your profit will be negative. So, generally you will find that if your profit is negative, your unit sales are low, your margin is low, or your fixed costs are high relative to industry standards. This should be straight forward to business students, but easy to forget as the dynamics of your industry play out.

Unit Sales x Unit Margin – FC = PROFIT

(Market Size x Market Share) x (Selling Price – Variable Cost) – FC = PROFIT We can further define unit sales as market size multiplied by a company’s share of the market. We can also further define unit margin as the selling price less the cost of goods sold (COGS). We will refer to this formula as the profit equation. Therefore, poor profit performance is caused by some combination of low overall demand, low share, poor margins (the difference between

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selling price and COGS), or high fixed costs. Let’s look at each of these factors in more detail for potential causes of performance successes or shortfalls. Unit Sales: Market Size What are some of the factors that influence overall (or segment or microsegment) market size? Three are presented in graphic below—base or intrinsic demand, current economic conditions, and the competitor dynamics within the industry.

Unit Sales x Unit Margin – FC

(Market Size x Market Share) x (Selling Price – Variable

Cost) – FC

Base Demand

Economic Cycles Industry Dynamics

(products, marketing spend, pricing, etc.)

Let’s consider some examples of each of these factors. Base demand depends on long-term trends in population, the environment, or customer preferences. Separate from intrinsic trends would be the impact of the economic environment on demand. The automobile industry historically has been extremely cyclical. During recessions, new auto sales almost always slump as people put off purchasing new vehicles if they are not immediately needed. Also, rising (or declining) gas prices can negatively (or positively) impact the overall demand for vehicles and cause a shift in the demand of specific customer groups or for specific vehicle classes. So, one must consider how changes in the economy and gas prices will impact demand. Finally, how all the firms compete in particular markets also has an impact on overall demand (or demand within a segment). If all the firms innovate, advertise, expand distribution, etc., this will generally stimulate demand overall. Industries where there is less investment in these areas will grow less, all other things remaining equal. So how do changes in demand impact profitability? In general, the more a company’s costs are fixed rather than variable, the more dramatic the impact on profitability will be when demand falls (or rises). As an example, for a firm with $100M of revenues, if variable costs are running at 60% of revenues ($60M) and fixed costs constitute 30% of revenues ($30M), profit will be 10% of revenues ($10M). If demand falls by 10% resulting in revenues of $90M, the firm’s profits will decline to 6% of revenues ($6M or $90-$54-$30). This represents a 40% decline in profit or four times the magnitude of the sales decline. Had all costs had been fixed ($90M), there would have been no profit with a 10% sales decline. Generally, if overall demand is down, all firms will see their profits fall, but weaker firms (firms without a cost or differentiation advantage) will be hurt the most as their gross margins are typically smaller.

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Unit Sales: Market Share If the size of the market is stable but your share of the market declines, a corresponding drop will be seen in unit sales. After recognizing that your market share has dropped, analyze changes in share at the vehicle class or microsegment level to find the root cause. What caused the drop in market share in the family class or sales of family vehicles in the high income segment? Was it a new product launch by a competitor? Did a competitor upgrade a product? Was it due to a change in the marketing mix by either your firm or one of your competitors—pricing, advertising, or promotion? Was it due to insufficient production or perhaps a competitor finally increasing their production to meet demand? If you see that all of your vehicles are losing market share, perhaps the cause was more at the corporate level, due to distribution or firm preference. Usually problems in these areas will impact all your product lines more or less equally.

Unit Sales x Unit Margin – FC

(Market Size x Market Share) x (Selling Price – Variable Cost) – FC

Base Demand Product Fit Economic Cycles Competition Industry Dynamics Price Relative Marketing Support ($/Quality) Service / Distrib. Firm Preference

All of these issues are drivers of your market share. What makes it difficult to diagnose is that there are normally changes in all of these factors each year, which can lead to very reactive decision-making. Your firm’s strategy is what provides you with the long-term direction as to how best to alter your tactics as the game progresses. Which target markets should receive our limited resources? Do our products meet our target customer needs? Which competitors do we need to understand and monitor most closely? What will be the most effective methods (levers) to use to drive market share? Utilization of tools to help you better understand the customer and competition, such as the "test market", "focus group" and others, is critical for success. Unit Sales: Forecasting Sales for a Product Now that we have discussed the drivers of market size and market share, it is a good time to consider how one might forecast unit sales. Why is this important? In StratSim, you will be asked to enter a production plan for each vehicle. Though this can be adjusted by up to 10% each year by selecting the flexible production option, it is important for your production decision to be as accurate as possible to avoid either stockouts, where there is insufficient production to satisfy demand, or having unsold inventory, where production plus existing inventory exceeds demand. A stockout will result in lost sales and presumably, lost contribution. Unsold inventory ties up

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cash and runs the risk of becoming obsolete resulting in an inventory write-off if the product is upgraded or discontinued. Avoiding these conditions should be one of your company’s goals. Of course, the production level for a vehicle should take into consideration the current level of inventory available for sales of that brand. Because the production plan should be based on next period’s expected sales adjusted for inventory, the key to making an accurate production decision is having a good estimate of sales for next year. This is not a trivial process and the techniques one would use in StratSim are different for an existing product than for a new product. For both situations, however, the drivers of the Market Size x Market Share part of the profit equation are the basis for the forecast. What varies is the level of uncertainty and the tools one would use. Forecasting the sales of a new vehicle class requires using a combination of information about the vehicle class and consumer segments. The first step is to identify the market segment in which the new vehicle will be competing. Next estimate the number of consumers in the segment that have a preference for the vehicle class, and project the share of those consumers the firm can expect to sell to with the new vehicle. Take as an example a firm developing a sports vehicle for the singles market. The class preferences for the segment include utility, truck, and sports vehicles (in that order). Based on this information, they might estimate that 25% of those consumers would prefer a sports vehicle. Further, they project that 50% of those consumers will buy their new sports car based on the results of their concept tests and the fact that no other manufacturer is selling a vehicle in the class. If the size of the singles market is 1000 thousand units, then the sales forecast would be:

sales forecast = 1000 thousand x 25% x 50% = 125 thousand units For an existing product, there is the big advantage of knowing current sales as a base to start the process. For purposes of this example, let us state that the product had achieved sales of 100,000 units. The first question to ask is whether or not there were any special circumstances regarding production levels that impacted these sales. For example, was there a stockout situation either for this product or one of its direct competitors? Check the manufacturing detail for your company and the competitors to find this information. Read the message (some shortages: <10%, significant shortages: 10%-30%, or extreme shortages: >30%) to get an idea of the magnitude of the production shortfall. If, for example, you saw a message that stated "significant shortages", you may want to adjust your base to 120,000 units as an estimate of what you would have sold had you produced sufficient volume to meet demand. In the same way, if a direct competitor’s sales were affected by insufficient production, you may want to adjust your base downward. The potential impact of upgrades must also be taken into account. Conjoint analysis and concept tests may be helpful analysis to estimate the potential increase in market share. These analyses do not take into account any potential competitive product upgrades, however. Remember, as well, that with a major or minor upgrade, any existing inventory will be liquidated.

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Next, consider what decisions you are planning for the marketing mix. The potential impact of changes in price, advertising, and promotion may be measured using the test market tool to help you estimate the sensitivity to adjustments in these variables. Of course, this tool assumes that there are no other changes to either your product or competition. This brings us to the most difficult assessment you must make—what will the competition do and how might this affect next period’s market share for the product? The most important issue to note is whether a new competitor is entering into the same market or vehicle class as the product. In the industry news report, all new products (new class) entries are announced one period before the vehicle is sold in the market. This information is important to consider as it will impact your sales forecast, and perhaps as importantly, create a much greater margin for error in the forecast. However, upgrades and new products (same class) are not announced in advance and these will also impact sales. By analyzing historical trends, available development centers, and competitor past behavior and intent, you may be able to gain some insight as to what the competitor is likely to do with regard to upgrades. There are two final considerations when deciding on production volume. First is your assessment of the risk of losing sales (due to under production) against the cost of holding excess inventory (due to over production). Some of the factors to take into consideration when weighing lost sales versus holding costs are the margin on the product, your plans to upgrade the product in the future and thus obsolete current inventory, and the cost of capital used to build inventory. The second consideration is the potential cost of retooling. Remember that anytime production is increased from the previous period, a retooling charge is assessed. Therefore, a steady production volume over time is preferable to one with significant variation, all things being equal. Unit Margin Unit margin is defined as the difference between your selling price (which in StratSim is your MSRP less your dealer discount) and the unit variable cost or cost of goods sold (COGS). Unit margin is how much your firm makes on each vehicle sold. In a business where the variable costs are a high percentage of your selling price, pricing and unit cost savings are especially important. This is certainly the situation in StratSim where COGS is often between 65-85% of revenues (or on a per unit basis, of the selling price). Therefore, pay close attention to the impact of pricing and variable costs on the profitability of your business. Let’s explore these two areas in more detail.

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Unit Margin: Selling Price Pricing is one of the most critical issues facing a firm. This is because the pricing decision influences all parts of this performance equation. In the profit equation, pricing affects the revenue inflow side of the margin (what the firm receives when it sells a product or service). But the pricing decision also impacts: 1) your market share due to price relative to the competition, 2) overall demand due to general price levels in the market, and 3) COGS due to potential changes in volume sold (and produced). Let’s briefly consider how important this margin is. Let’s say your business currently sells a product for $100 and COGS is approximately 80% or $80. If you decide to reduce your price by $10 and the COGS remains the same, you have also reduced your margin by $10. On a percentage basis, however, you have cut your margin by 50% ($20 reduced to $10). This means that unless unit sales doubles, your profits will decrease. So tactically, at least in the short-term, your firm should be asking whether a 10% reduction in price will double your sales. Alternatively, consider a $10 increase in price with the corresponding increase in margin of $10/unit. On a percentage basis, you have increased your margin by 50% ($20 increased to $30). To maintain or increase product contribution, your sales can decrease by 33% and be no worse off with regard to contribution. Examining the price expectations in consumer segments and utilizing tools such as "focus groups" and the "test market" can help you evaluate these trade-offs. Basically, these tools are provided to help you understand the price sensitivity or price elasticity for your target market. So, that is the tactical nature of the pricing decision, but pricing has far greater strategic implications.

Unit Sales x Unit Margin – FC

(Market Size x Market Share) x (Selling Price – Variable Cost) – FC Base Demand Economic Cycles Industry Dynamics

Product Fit Competition Price Relative Marketing Support ($/Quality) Service / Distrib. Firm Preference

(MSRP – %) Value

Price Sensitivity Positioning

Cost position in industry

Let us consider some of the more strategic aspects to this pricing decision. Most of these have to do with the dynamic nature of strategy. First, price advantage is often temporary. A competitor can easily (and quickly) drop (or increase) prices if their cost position is equivalent. Is this a dynamic that you want to engage in with your competition, or would other ways to compete be more effective over the long-run? Second, consider the possible impact on the scale of your business. Is it appropriate to assume that fixed costs will remain the same, or will a price reduction require new investments in productive capacity? A third strategic consideration is how

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you want to position yourself in the marketplace. Is it important to have a consistent message as being a high-end or value provider? Price points send a message to consumers about what they might expect from your company and vehicles (just make sure you deliver if you are high end!) You may want to frame the question of reducing (or increasing) price as one of many alternative "investments." For example, you might estimate that cutting price will cost $50 million in lost margin. Are there better uses for that investment? Can you instead capture that value, and reinvest it in either product (or service) enhancements or cost reduction opportunities? Or, conversely, would your target customers be willing to pay more for product improvements? The main point is to think carefully about pricing. Consider the impact on your profitability and the potential for competitors to match the price. Think about consistency across your product lines with regard to positioning. Always understand the financial implications of your pricing choices. The pro- forma contribution and pro-forma income statement can be of great value in trying out different scenarios. Unit Margin: Cost of Goods Sold (COGS) The other half of the margin equation is your cost of goods sold (COGS). What impacts these costs? How can your firm strive to lower the unit cost of a product? The cost of your vehicle is based on the specifications of the vehicle of size, HP, and ISSQ (which is an abbreviation for interior, styling, safety and quality), the technology capabilities of your firm, and the volume produced of that vehicle and vehicles in the same class (experience effects). All firms in the industry are also impacted by changes in labor and materials costs over time.

Unit Sales x Unit Margin – FC

(Market Size x Market Share) x (Selling Price – Variable Cost) – FC Base Demand Economic Cycles Industry Dynamics

Product Fit Competition Price Relative Marketing Support ($/Quality) Service / Distrib. Firm Preference

(MSRP – %) Value Price Sensitivity Positioning Cost position in industry

Size, HP, ISSQ Upgrades

Technology Volume

There are several drivers of cost savings in StratSim including learning curve effects, cost savings through product design, and investments in technology capabilities. Experience Curve Effects. The experience effect shows that with each doubling of cumulative volume, there is a fairly consistent percentage decrease in unit costs. In StratSim, there are

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experience curve effects present at both the brand level and the class level. Therefore, all things being equal, a firm that has higher production volume of a particular brand, or of a particular vehicle class, will enjoy a cost advantage over those products or firms with lower production. For example, if experience effects of 90% are present, and the unit cost of the 100,000th vehicle is $10,000, the cost of the 200,000th vehicle produced will be $9,000 ($10,000 x .90). Savings through Product Design. It is important to recognize that the product design process has an impact on unit variable costs. Part of this is determined by the specifications of the product, with higher values increasing the unit costs, all other things being equal. However, one of the major sources of lowering unit costs is provided through the upgrade process. When a vehicle is upgraded, along with creating the new product design, the engineers working on the product also attempt to find ways to lower the cost of the product without sacrificing the value that the customer perceives in the brand. Your firm can calculate the impact of the cost savings of an upgrade by choosing a cost reduction project which, by definition, makes no changes to the specifications, but only lowers costs via other design improvements. Compare the base cost on the original ("previous") product design with the upgrade. Savings through Investment in Technology Capabilities. Finally, a firm may invest in technology capabilities allowing a firm to create vehicles with higher specifications, while also decreasing costs on existing vehicles. An estimate of the savings based on your current product portfolio and projected sales is provided on the "technology capabilities" input screen. More specifically, a firm with higher capabilities in ISSQ is able to produce an identically specified vehicle at a lower cost than a firm with lesser capabilities in ISSQ. It is essential that your firm considers the effectiveness of using these cost savings techniques in the context of your overall strategy. Cost savings are a net positive whether they improve your profit margin or are passed on to the customer in hopes of gaining more sales. However, remember that it is implementation of "smart" cost savings that is ultimately rewarded. Having the largest production capacity is only an effective cost savings if that capacity is used in production (and sold). Having a low-cost vehicle is only effective if consumers still want to purchase it. Thus, the successful manager is always looking for ways to lower cost, but keeps an eye on whether that cost savings is ultimately rewarded by affecting the bottom line. Fixed Costs Fixed costs are costs which do not fluctuate based on units sold, even if those costs are discretionary. Thus, investments in upgrades, new products, technology capabilities, development centers, new capacity, distribution, advertising, etc., generally are the same regardless of the level of unit sales in the market. This is not to say these investments will not have an impact on unit sales. The firm makes these investments in the aggregate and then unit sales occur. The amount of fixed cost per unit is just the division of the amount of fixed cost by the number of units sold.

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Unit Sales x Unit Margin – FC

(Market Size x Market Share) x (Selling Price – Variable Cost) – FC Base Demand Economic Cycles Industry Dynamics

Product Fit Competition Price Relative Marketing Support ($/Quality) Service / Distrib. Firm Preference

(MSRP – %) Value Price Sensitivity Positioning Cost position in industry

Size, HP, ISSQ Upgrades Technology Volume

R & D Capacity Tech Invest. Distrib. Adv. Interest Tooling etc.

Strategic and tactical questions your group should discuss pertain to which of the fixed cost investments should be made to positively influence the rest of the profit equation. Should the focus be on product improvement, corporate infrastructure, technology, cost reduction, marketing, distribution, etc.? Generally, over the course of the simulation, your firm will likely invest in all of these areas, but the questions of priorities, direction, and financial benefit must be reviewed in the context of your overall strategy and objectives. As a group, you will also have to find the proper balance between short-term and long-term perspectives. Obviously, the best way to maximize profit in the short-run is to not invest in any long-term projects that have no immediate impact. The related corollary is also true, that a company that only makes short-term investments will face long-term challenges. StratSim reflects this need for balance in time horizons. The above discussion relates to the strategic nature of alternative fixed investments. However, there are also important operational elements to manage as well. For example, your firm may find that fixed expenses are consistently running high and putting pressure on profits. How does this occur? One fairly common source of trouble is having too large an operation for your level of sales. To check for this, compare your sales with your capacity. If your sales are less than 70% of your capacity, you have a large fixed asset that is not productive and only adding to your on- going costs (depreciation and plant maintenance). If this is an on-going concern, you may want to consider selling / writing-off some of your plant capacity. Although resulting in a one-period loss, it may improve overall future performance. You also may want to check your expenditures on R&D and marketing versus the industry averages. If you are significantly out of line and it is not part of your strategy, you may want to rethink this level of expenditures. Typically, firms that are struggling with high fixed costs relative to their total gross margin will find themselves going into debt. The associated debt interest payments then become another fixed cost to manage. The cost structure of the firm not only impacts the profit equation but also the firm’s cash flow. Certain fixed costs that are charged to the fixed cost part of the profit equation are amortizations of investment in capacity, development centers, etc. The cash required for these investments is often expended earlier than the full charges to the profits equation. Thus, the firm will need to be concerned with both the profit and cash flow aspects of fixed costs.

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Your firm will want to try to make sure that it has sufficient funds from operations available early in the simulation to fund any long-term projects and weather any challenging periods. This may not be possible and thus the appropriate use of the debt and equity markets to satisfy the firm’s cash needs may be necessary. Last, there are some "hidden" costs of doing business that you should try to control. These include on-going inventory write-offs, high retooling costs and the like. Generally this is due to poor forecasting, which, as was discussed earlier, is not a simple issue. However, as you gain experience and make better use of the tools, you’ll find you can improve your ability to manage these operational issues.

Monitoring Performance and Pro-Forma The best way to analyze the profit equation during the decision-making process is by using the pro-forma analysis. The pro-forma reports use your forecasts and the cost of your decisions and allow you to calculate financial statements based on these assumptions. It is important to recognize that your forecasts are what drive unit sales in the pro-forma analysis; the simulation does not forecast sales for you. However, the pro-forma analysis will allow you to test your assumptions about the profit equation and basically answer the question, "If we make these decisions and achieve our forecasts, what will be the financial outcome?" Once you have made your decisions and the simulation is advanced, compare your estimate of results from the pro-forma (sales, market share, net income, etc.) with actual results. If there is a significant difference between the two, you should find out why. Sometimes results will be better than expected. Other times (and probably more often), results will be less than you hoped. Use downturns as motivation to better understand your business.

Long-Term Planning in StratSim In StratSim and strategy in general, decisions often take time to implement and to have an impact in the marketplace. This section discusses some of the most important timing and staging issues in StratSim to allow you to plan your timeline accordingly. Some decision impacts are immediate (that is, a decision made and after the simulation is advanced, it impacts the results) while the initial impact of other decisions may be delayed for up to two additional advances. In addition, some decisions have longer-term effects. New products sell for multiple periods; advertising has both an immediate and long-term effect through building brand equity; investment in technological capability, development centers, dealer capacity, plant capacity, etc. have longer term impacts. Finally, remember that costs and cash flows do not always match up with these effects, so one must also take into consideration availability of funding for various investments.

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Note: All of the examples below

are for a simulation that is in the 2nd round. In other words,

teams are reviewing second

period results and making decisions for

period 3.

It is essential that you understand the staging of various decisions for planning purposes. The graphics below should help you with this staging process. You may also want to review the table in the case that covers product development. The following graphics also show related issues that should also be considered (such as disposing of inventory and adjusting production when a minor upgrade is implemented).

Timelines Marketing Mix Decision Timeline (Immediate)

Marketing mix decisions (pricing, advertising, promotion) have immediate impact on results and therefore production should be adjusted based on the expected impact of the revised decision as shown below.

Capacity Decision Timeline (Capacity Available in the Following Year) When adding capacity, cash is used to build the additional productive capacity immediately, but the additional capacity cannot be used until the following decision period. Remember there is a maximum change of 50% of current capacity in any period. When selling off capacity, the loss shows up as an extraordinary item after the advance and there is a cash inflow of the sales price of the plant (50% of book value).

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Product Development Decision Timelines (Immediate to 3 years) For all upgrades and new products shown below, a simple rule to remember is that: A brand will become available for sale in the last year it is in the development center. On the development center screen it will show a message such as "launch now". Now we will review each of the product development options in more detail. Cost Reduction Upgrade (Launch Now) A cost reduction upgrade only impacts your COGS for the product. Any existing inventory will not be liquidated. The timeline for cost reduction upgrades is the same as the minor upgrade (below), but the only impact will be on costs. Minor Upgrade (Launch Now) Minor upgrades are the fastest way to get product changes into the market. Basically, the same period you initiate the minor upgrade is the period you also prepare for the upgraded brand’s introduction into the market for sale. The maximum change for a minor upgrade is 1 on the four vehicle specifications, 5 on HP, and 2 on size. A minor upgrade is in a development center for one period. Also remember that any existing inventory will be written off at a cost of approximately 10% and that production must be adjusted immediately upon initiating the minor upgrade.

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Major Upgrade (Launch after 1 Advance) Major upgrades take one period longer than minor upgrades, but also allow you to make more significant changes to the product. They occupy a development center for two periods rather than one period as in minor upgrades. The maximum change for a major upgrade in the first year is 2 on the four vehicle specifications, 20 on HP, and 10 on size. These may be modified in the second year. Because major upgrades take an extra period, you will be charged half of the total development cost in the first period of development and the remainder in the second period. Also note that you may make additional changes to the specifications in the second year of development and that any existing inventory will be disposed in the second period when the major upgraded vehicle is offered for sale in the market.

New Product in the Same Class (Launch after 1 Advance) New product in the same class has the same timing as a major upgrade but without the complication of potentially disposing of inventory. A development center will be occupied for two decision periods and the development costs will be divided equally between the two periods. The one additional consideration here may be adding capacity (if needed—it is not a requirement if you have sufficient capacity to produce all your product lines). For a new product where you already have developed a vehicle in the same class, the decision to add capacity should be done in the same period that you start product development as shown below.

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New Product in a New Class (Launch after 2 Advances) New product in a new class works much the same way as a new product same class, except that it takes one additional period to complete. In this situation, capacity (if needed) would be added the period after the product development project is initiated. Also note that a development center will be occupied for three rounds. So it is important to plan accordingly. Development costs will be spread equally over the three periods it resides in the development center.

Development Centers (Center available after 1 advance) If you find the need to add a development center, you must think ahead as it takes one period before it is available to be used for development projects. However, the cash used to build the center will be used and expensed immediately. The firm needs to make an assessment as to the number of development centers that will be needed, when they will be needed, and how to raise the funds necessary to build them. Only one new development center may be added in a given period and there is a maximum of five total centers for any firm.

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Technology Investments (New Limits available after 1 advance) Investing in technology works much the same way. It will take one year to increase that capability. Remember that investing in technology only increases your ability to design a vehicle with higher specifications. It does not automatically implement those changes to your existing vehicles. You must explicitly use upgrades to accomplish this. So again, it is important to plan ahead.

Dealership Decision Timeline Dealerships also take a year to build. This delay makes sense as it takes time to build new buildings and hire personnel to expand your channel presence.

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Conclusion To summarize what was covered in this section, here are six key points to review with your group as you work through the simulation.

• Understand the business situation through internal and external analysis • Create an agreed upon vision and mission for your company • Establish a process for group analysis and decision-making • Use the concept of the profit equation to better understand the dynamics and financial

implications of your alternative decisions • Use the pro-forma reports to check your sales and financial assumptions • Make sure part of your long-term planning process takes into account the time required

to complete various strategic decisions Using this strategic checklist will help your group stay on track strategically and help you avoid many of the reactive pitfalls that naturally occur as competition intensifies. Best of luck managing your company!

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Market-Based Marketing Management

STRATSIMMARKETING

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This section discussed the issues that arise for marketing decision-makers in their firm’s relationship with consumers in the marketplace. Specifically, the following pages address how a firm becomes a market-based organization, and how a marketing decision-maker creates customer value and captures a significant part of that financial value for the firm. Basically, the marketing decision-maker’s job is to help prepare the firm to create and capture long-term or strategic customer value, while at the same time to create and capture enough short-term value to make the firm profitable in the short run. It is this combination of thinking strategically for the long-term and thinking about current sales and profits that defines the complex challenge facing marketing decision-makers. The specific general manager’s topics that we will discuss are:

1) Creating the market-based organization 2) Marketing scope 3) Customer value creation, measurement, and capture 4) Market segmentation 5) Basis for reaching market segments 6) Segment targeting and product positioning 7) Creation of a market-based organization structure

It needs to be clearly understood that these issues involve all the senior general managers and senior functional managers of the firm. This is true because these issues impact all aspects of the firm. These issues clearly draw upon the capabilities of the marketing function to provide appropriate strategic analysis and implementation. However, they transcend the marketing function to impact corporate strategy, operations, information technology requirements, research and development, human resource approaches, and financial value dynamics. These issues have too broad an im mpact and are too important to be the domain of only the marketing function, or any other function, but the marketing function is a key player in this process.

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Special Firms – Special Market Relationship If you ask a group of senior executives to name firms with exceptional customer focus, high satisfaction, and a deep relationship with consumers, you will usually get a common set of firms mentioned by very diverse groups of executives from all over the world. This set of exemplary firms includes: Nordstrom, Singapore Airlines, and Lexus automobiles. What do these firms know and do that most firms only dream about, or pretend to do? Let’s take a quick look at each. Nordstrom: Ask a Nordstrom customer about the "Nordstrom experience." You will be deluged with superlatives about how sales personnel have gone out of their way to anticipate and respond to customer needs. Singapore Airlines: The mention of most airlines sends many air travelers into a tirade recounting numerous examples of how they have been mistreated. Some of the few exceptions are Virgin Atlantic Airways, Midwest Express, and especially Singapore Airlines. Again, listen to their customers describe the attention to their needs in every detail. Lexus Automobiles: In a short period of time Lexus established itself as a premium nameplate in the car business. This was accomplished through keen attention to meeting the desires of luxury car buyers from the design of the cars, to a most positive retail experience at the dealership, and to the delivery of an attentive and deeply personal level of service.

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Creating the Market-Based Organization Just what is a market-based organization, and why is it so important that the general manager should care passionately about it? We lay the basic framework to answer these questions in Figure 1.

Figure 1: The Structure of Market-Based Management

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Market Focus Like all great structures, a market-based management structure requires that the firm build a deep and strong foundation. Refer to the base of the pyramid in Figure 1. The market-based organization’s foundation is comprised of an obsessive "market focus" by all employees, not only the general and senior marketing managers. The firm’s culture must be focused directly on gaining a competitive advantage by providing superior value to the consumer. It is the marketing manager’s job, in combination with the work of other senior managers, to create such an environment through hiring practices, training, compensation methods, and promotions. The question that should occupy the general manager is, "Do all our employees get out of bed every day with the obsession to differentially create superior value for our consumers?" The firm’s entire culture should be focused directly on gaining a competitive advantage by providing superior value to the consumer. Consumer Led versus Consumer Leading It is important to understand that obsession with consumer value creation does not mean blindly following the consumer wherever the consumer leads. What we can expect from consumers is an articulation of their needs. However, we should not expect them to articulate the exact product or service that will satisfy their needs. Link to Results The key point of this obsession with the consumer is that there is a positive link between a market-focused culture (Figure 1, base level) and the financial value creation of the firm (Figure 1, top level). Simply stated, firms that build a market focus into their culture gain substantially on such marketing performance measures as market share, consumer satisfaction, and consumer retention; and on such financial performance measures as profit, return on investment, and cash flow.

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The mechanism of this relationship is further illustrated in Figure 2. Here we see the relationship among the concepts of the value cycle: 1) creating a customer-based value proposition based on comparative advantage in the firm’s resources and skills in marketing and other business functions; 2) creating competitive advantage in delivering this value to the customer; 3) thus developing customer satisfaction and loyalty; 4) thus being able to retain a significant part of the value created in the firm; 5) resulting in significant market share and financial rewards; 6) that allow enough resources to be available to regenerate the value proposition to repeat the value cycle. Also key to the proper implementation of the value cycle is that the customer value creation question be answered from the perspective of the consumer and not based on internal company beliefs. The relationship between market focus and operating results holds only if the consumer truly believes that the firm cares about their needs and provides a product/service offering of real value. Strategic Analysis The market-based firm not only builds a market-focused culture, but also is committed to objective strategic analysis. This concept is reflected in the four building blocks on the second level of Figure 1. Proper strategic analysis systematically and routinely examines the company, customers, competitors, and other conditions in the environment. This analytical structure is presented in more conceptual detail in Figure 3. Here we see the basic marketing decision-making process.

Figure 3: Marketing Decision-Making Process

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This strategic analysis and the marketing decision-making process can be thought of as asking and answering four basic questions: 1) Where are we as a firm aka Situation Analysis? This is the basis of the situation analysis for the firm. Here we examine in detail all relevant aspects of the four boxes on level 2 of Figure 1. This analysis is comprised of an understanding of the current goals of the firm and the SWOT (strengths, weaknesses, opportunities, and threats) analysis that defines the firm’s current circumstances. We need to be clear on the definitions of the SWOT components.

Strengths and weaknesses are internal to the firms as follows:

Strengths: Superior resources and/or skills and/or position held that can be drawn on to exploit opportunities and diminish threats. Weaknesses: Deficiencies in resources and/or skills and/or position held that inhibit the firm’s ability to capture opportunities or that must be overcome to avoid failure or underperformance.

The strengths and weaknesses are related to all aspects of the firm: marketing, operations, R&D, human resources, natural resources, financial, etc. They should also not be considered a stagnant concept. The firm may be required to acquire or develop new strengths or strive to overcome current weaknesses. Opportunities and threats are external to the firm as follows:

Opportunities: Environmental {consumer, competitors, channels, conditions (political, economic, social, technological, deregulation, etc.)} states of being or trends with positive consequences. They provide a potential new basis for competitive advantage and provide a possibility of improved performance if pursued. We must clearly note that opportunities are not actions. Indeed, many opportunities may not be acted upon. Marketing managers must make the decision to act upon a specific opportunity or not. Threats: Environmental {consumer, competitors, channels, conditions (political, economic, social, technological, deregulation, etc.)} states of being or trends with negative consequences. They may impede the implementation of strategy, increase the risks of a strategy, increase the resources required, or reduce performance expectations.

When evaluating a course of action, the strengths of the firm and the opportunities that are related to a course of action are the "pros" that argue for taking that alternative. Similarly, the weaknesses of the firm and the threats that are related to a course of action are the "cons" that argue for not taking that alternative.

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2) Where do we want the firm to be aka Marketing Strategy? This sets the strategic direction of customer value creation by the firm in terms of: a) the identification of market segments, b) the targeting of selected segments, and c) the positioning of the firm’s products within the chosen segments. 3) How should the firm get to where it wants to be aka Marketing Mix? This is where we develop the marketing mix to determine the delivery of value. What exact product composition, distribution structure, price, promotion, processes, and people will drive the implementation of the strategy? 4) What is next after we implement the marketing program? Here we monitor, adapt and renew the value cycle. The marketing decision-making process involves an on-going review of these questions. In some firms this is an annual process, in others it is more or less regular. In StratSim, each decision- making cycle requires this same process. Market Segmentation and Positioning The third level of the pyramid in Figure 1 involves the strategic choice of market segments and product positioning. Here the marketing decision-maker must specify which needs of which user groups to serve and what brand positioning the firm should strive for within the selected segments. We will examine these topics in more detail later in this section of the manual. Competitive Advantage Once the firm has built a culture around providing superior value to the customer, performed a competent SWOT analysis, and specified the target segments and the brand positioning, the firm must provide a structure for the marketing program that will deliver this value to their customers. This is illustrated in the competitive advantage box on the fourth level of Figure 1. This approach is then implemented through operating decisions (Figure 1, level 5) across all functional areas to generate the operating results (Figure 1, top level). To state it simply, marketing decision-makers have the task of utilizing strengths and overcoming weakness to actualize the selected opportunities while overcoming the threats that confront the firm. This is one of the jobs of the senior marketing officers of the firm. Sometimes this requires the development of new strengths and strategies to overcome weaknesses (i.e. changing the firm over time). However, what should not change is the fundamental creation of a market-based and consumer-centric culture in the firm.

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Marketing Scope Defining the scope of the marketing effort is an important aspect of strategy development. Here we define the arena where the business will compete as the foundation for the entire marketing effort. Defining the scope of the marketing effort allows the firm to 1) focus attention on needs satisfied for the customer groups served; 2) establish directions for growth and boundaries of this effort; 3) provide a framework for comparisons with competitors; and 4) create a starting point for strategy development. The marketing scope is a direction statement that is a key decision for a strategic business unit. An innovative definition of marketing scope can provide the base for competitive advantage. Marketing managers need periodically to review the appropriateness of the firm’s definition of marketing scope. So just what do we mean by scope? Marketing scope involves the following strategic choices:

Segments Served: Of the segments identified, whom do we choose to serve? Functions Provided: Of the array of product attributes and services available, which ones do we choose to deliver? Technologies Utilized: Of the technologies or processes available to support the customer segments selected, which ones do we choose to utilize? Value Added Chain: Does the firm provide an end-to-end solution or use strategic partners?

Figure 4 provides a visual illustration of the first three concepts of scope. On the horizontal dimension we see the choice of customer groups or segments to serve. In this medical scanning device example, the customer segments could be research hospitals, standard hospitals, community hospitals, remote clinics, doctors’ offices, etc. On the vertical dimension, we see choices related to the customer functions intended to serve the needs of selected customer groups. In this example, the scanning devices could be used simply for diagnostics or additionally for therapy planning or even treatment. The firm could also choose to do any of these along with a choice of alternative technologies such as X-ray, magnetic resonance imaging (MRI), ultrasound, or CT scanners. Thus, one firm could choose to serve only large research hospitals with a MRI device that only does diagnostics. Another firm could take a broader scope on any or all of the dimensions. It could provide all technology solutions for all customers’ needs across all segments. Scopes of varying degrees between these extremes are also possible.

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The fourth dimension of scope related to the structure of the value chain could similarly be narrow or broad. In the former, the firm might sell in cooperation with a larger strategic partner or through wholesalers. In the latter, the firm would provide an end-to-end solution.

Figure 4: Contrasting Marketing Scope

For each of the four aspects of scope there are four sub-questions:

• Which of the targets/activities/technologies/value chain structure that the industry accepts as convention should our firm not do?

• Which of the targets/activities/technologies/value chain structure that the industry accepts as convention should our firm do below accepted industry standard?

• Which of the targets/activities/technologies/value chain structure that the industry accepts as convention should our firm do substantially above accepted industry standard?

• Which of the targets/activities/technologies/value chain structure should be implemented that the industry has never offered?

The discount airline industry provides an example to consider in light of these questions. For example, Southwest Airlines provides no interconnect schedules or baggage transfer with other airlines, nor does it provide a specific seat reservation. However, it does offer a premium on- time record and low fares. EasyJet of the UK goes so far as to provide a refund of the ticket price if the plane is over two hours late. These scope decisions define EasyJet as very different from classic full service, high cost, airlines.

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These two sets of four questions define where and how the firm chooses to compete and define the customer of the firm. Our customer is one who falls within the scope that we define for the firm, based upon the answers to these eight questions. Strategically, we will provide a great value for this customer. However, if the potential customers fall outside of the defined scope, we will not accept them as our customer. The latter is "the devil carrying cash." That is, they have the potential to distract us from our focus. To illustrate this set of choices, let us examine the Marriott Corporation line-up of property types as it relates to the choice of segments. Figure 5 presents the various brands used by Marriott and the general nature of the target that each brand serves.

Figure 5: The Marriott Product-Brand Line-Up

Marriott Resorts Vacation Villas and Activities Marriott Marquis Luxury Urban Hotel Marriott Suites Premium Priced Suites Marriott Hotels Standard, Basic Hotel Courtyard Business Travelers Fairfield Inn Economy Leisure and Business Residence Inn Premium Extended Stay Ramada International International Economy TownePlace Suites Extended Stay, Mid-Price SpringHill Suites Apartment-Like, Economy ExecuStay Extended Stay Apartments Marriott Vacation Club Opulent Activities Renaissance Hotels Premium-Priced Special Hotels Ritz-Carlton Super-Premium Hotels

As Jack Welch, legendary ex-CEO of General Electric noted: "It takes courage and tough- mindedness to pick the bets, put the resources behind them, articulate the vision to the employees, and explain why you said yes to this one and no to that one."1

Customer Value With the marketing scope of the firm decided, marketing managers need to turn their attention to the creation, measurement, and capture of customer value.

Customer value is = Perceived Total Benefit Derived from Purchase – Perceived Total Cost of Purchase

1 Fortune, March 27, 1989.

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We note that as the consumer’s perceptions of total benefits exceed perceptions of total cost, the customer derives greater value from the exchange. Sources of Benefits include:

Product Benefits — derived from use of product Service Benefits — value-added services that enhance customer satisfaction Reputational Benefits — derived from the image of the "brand" or producer of the product

Sources of costs include:

Purchase Price — net price after discounts/rebates Transaction Costs — costs of acquisition (shipping, terms of payment, etc.) Usage Costs — costs of use (maintenance, disposal, etc.)

It is important to note that price is only one aspect of the cost of the brand. Marketing managers need to focus on the whole set of costs. Thus, the manager should avoid the knee-jerk impulse to reduce price to compete. The adage that "any fool can cut prices" is relevant in this situation. The difference between perceived benefits and perceived costs across all these dimensions defines the net value to the customer. We can summarize this net position on a customer value map (see Figure 6).

Figure 6: Customer Value Map

This matrix defines the net benefit and cost position of the brand relative to the brand’s competitors. The crossing of the zero point on the net benefit position on the horizontal axis and the zero position on the net cost position on the vertical axis defines a position where the brand has no value creation greater or less than its competitors. Perceived benefits increase by moving to the right on the horizontal axis and decrease when moving to the left. Perceived total cost advantage increases by moving up on the vertical axis and decreases when moving downward.

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The best competitive advantage position in value is the top right box. Here we have the advantage in both benefits and cost. To improve a brand value perception relative to competitors, the manager could:

1) Strengthen position in areas of competitive risk; and/or 2) Shift perceived importance to undervalued benefits or non-price aspects of costs; and /or 3) Add new benefits — create new sources of value; and/or 4) Find ways to lower the total "cost" of purchase without lowering revenue; and/or 5) Lower purchase price only as last resort!

Although price plays a very visible role in a customer’s perceptions of value, there are many non- price factors to be addressed in developing customer value-based strategies. Customer Value Measurement It is important that marketing managers undertake marketing research to measure the customer value that they create. In doing so, it is critical that all aspects of perceived benefits and costs be researched. (The techniques for doing this are beyond the scope of this discussion.) Customer Value Capture Once the manager has created and measured the customer value created, there is still a need to determine how to share the value created between the customer and the firm. We want the customer to have value and we want the brand to be profitable. Figure 7 shows an example of the potential relationship between the value created and the margin shared between the firm and the customer. The vertical axis of Figure 7 shows the prices charged for various car brands. The horizontal axis shows the perceived customer value created by these car brands. The 45-degree line between price and value represents the "fair" price value relationship as perceived by customers. Thus car brands on this line are perceived as providing a fair value for the price. Now note the Lexus ES 330, which lies beneath the 45-degree line. This position indicates that the vehicle is priced lower than expected, thus having a superior price to value relationship. Its value is seen as equal to the BMW 5 Series, but its price is slightly below the BMW 3 Series. The vertical distance from the point of the ES 330 to the 45-degree line represents the incentive for the customer to purchase the ES instead of the BMW 5. If the ES 330 were priced at the point indicated on the graph, all of the extra value created would be assigned to the customer as an incentive to buy the ES. If this were the case, the firm would not capture approximately $15,000 in margin related to the value created. Indeed, the marketing managers may decide to set a higher price for the ES 330. For example, at $37,500 the firm and customer would equally share the value created. Marketers must always remember that their jobs involve creating value and capturing margin, not just selling a large number of units.

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Figure 7: Customer Value Capture

Market Segmentation The choice of segment or segments in which to compete is critical not only to marketing programs, but also to other functional areas of the firm. The choice of which customers to serve determines in large part the nature of the research and development that the firm undertakes, the skills sets required, and the types of personnel that the firm hires, etc. Definition Market segmentation is defined as:

The process of dividing heterogeneous markets into smaller, homogeneous subsets of people or businesses with similar needs and/or responsiveness to marketing mix offerings.

This process is illustrated in Figure 8.

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Figure 8: Market Segmentation Definition Process

Steps in Market Segmentation Consider this example. The management at Bausch & Lomb developed a set of eye care products based on different consumer needs-based segments: dry-eyes, computer related sore-eyes, allergy-eyes, and dust-eyes. In a sense, each of us is a distinct market segment because no two people or companies are exactly alike in their motivations, needs, decision processes, and buying behavior. Obviously, it is usually not feasible to tailor a specific marketing mix to every individual, due to cost. Thus, the objective is to identify groups within the broader market that are sufficiently similar in needs and responses to promotional and other marketing mix actions to warrant separate marketing treatment. The marketer then seeks to correlate the groups defined by their needs and responsiveness to other characteristics such as demographics or geographic location. More specifically, effective market segmentation requires six steps, which are listed below.

1) Identify the needs structure of the consumer population (people or companies) at the individual level. This is usually done by selecting a sample from the overall population and measuring individual consumer needs or benefits sought, as those needs relate to the product or service of interest. Thus, the general manager at this point will have many needs profiles that represent the diverse needs of the whole group of consumers.

2) Group the consumers into homogeneous subgroups or segments based on needs

profiles. The intention in this step is to form groups of consumers that are very homogeneous within the groups in terms of needs or benefits sought and very heterogeneous across the groups. This is usually done with the use of a clustering computer program that can quickly do the necessary calculations on the sample of consumers to form the homogeneous needs profile groups. For example, in the car

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market, this might yield one segment whose primary need is large passenger and cargo capacity, while another segment's primary need might be fuel economy.

3) The identification of factors or descriptors that are correlated with the needs-based

subgroups or segments of the market. These correlates or descriptors include such variables as demographic, lifestyle, geography, and consumption patterns. For example, the Classico premium brand of pasta sauce is targeted at the "25- to 54-year-old segment." What is really happening here is that this age profile is correlated in a useful fashion to the need for higher quality sauce that this segment desires. Be careful with this issue, because many marketers often loosely discuss segments in terms of the variables that correlate with the needs rather than the real needs themselves. It is the needs that form the segment and the correlates that allow one to access the segment with promotional effort.

4) The selection of target markets. This is the selection of the segment or group of segments

for which a specific promotional program or programs and other elements of the marketing mix will be developed. The selected target segment or segments are those that offer the greatest opportunity for profitability under a given set of market and competitive conditions.

5) The development of a "positioning" for the product or service offering within the

selected segment or segments. Positioning addresses the issue of how consumers in the targeted segment or segments are supposed to perceive the marketer's product or service offering as compared to those of competitors. Positioning is discussed in detail later in this section.

6) Develop a marketing strategy, objectives, and marketing mix for each selected

segment. Here the marketing manager develops the details of the implementation plan to serve the selected segments.

These six steps require a careful analysis of buyer motivation and behavior as discussed in the previous sections. The first three steps are designed to identify usable market segments. In a sense, the identification of usable market segments is one of the most practical payoffs in marketing research. We will consider the first three steps together, followed by discussion of steps 4 and 5. First, however, we will address the issue of usable market segments. Criteria of Usable Segments Sometimes segmentation identification produces results that are not of much use in promotional planning. For a market segment to be usable, five criteria should be met: 1) the segment should be of sufficient size and market potential to warrant expenditure of marketing funds; 2) the segment's market potential must be measurable; 3) it must be possible to reach or access the segment through available media; 4) the segment should show clear variations in market

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behavior in comparison with other segments (i.e., the response of the segment to promotional variables must be different); and 5) the existence of the segment must be durable. Sufficient Size: If a total market consisted of 1 million persons, it could be divided into 1 million segments. Obviously, such an approach is of no use, because a segment must offer sufficient size and market potential to be of any significance. A leading manufacturer of paper products was confronted by this problem when it introduced a new and demonstrably different crayon in 11 test markets. Although the product appealed to a certain segment of users more than to others, it appeared that only 2 percent of a $30 million market could be captured. The possible sales revenue did not warrant the expenditures necessary to produce and market the product. Measurability: A key to assessing the size of a segment is the degree to which its purchase potential can be measured. For example, the market potential for machine vision systems in factory automation of circuit boards in the electronics industry is unknown. The size of paint inspection systems in the auto industry for the same machine vision technology is accurately known. The latter target is a more useful one for promotional planning because some sense of the likely payback is possible. Accessibility: It is also critical that the marketer design a marketing program that can be delivered to the identified segment. For example, the marketers of Sunkist lemons found little or no demographic correlation with the heavy consumption of lemons. This made targeting heavy lemon users with demographic-based media such as magazines very impractical. Market Response Differences: For any segmentation scheme to be useful, the consumers in the segments must in general respond differently to variations in promotional activity directed at the segment. Thus, we have Coke using various versions—country, rock, blues, and so on—of its basic musical theme to reach different segments. The country music-oriented radio audience responds well to a country theme, but not as well to some general theme or to a rock version. Without this variation between segments, the market segmentation has no point at all. Durability: It is also imperative that the identified and targeted segments exist over a long enough period of time to warrant the cost and effort of developing specific promotional activities and other marketing mix dimensions to meet the needs of the consumers in the segment.

Basis for Reaching Market Segments Once the market segments have been formed, based on the clustering of similar consumer needs structures, a key issue becomes how to reach these consumers. The promotional manager can use a great variety of factors to reach the targeted segment. The key is that the selected factor or factors, sometimes called market descriptors, must be correlated with the fundamental needs that defined the segments. These descriptors do not define the segments themselves, but serve

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as a basis to reach the segments. Often marketers refer to these descriptors as "segmentation variables." Again, be careful with this terminology because these descriptors do not in themselves define the segments. Only the basic needs structure defines the segments. The descriptors must (1) be correlated with the needs-defined segments and (2) be associated with particular media or other promotional devices. For example, a needs-based segment might demand a "smooth ride" in a car. The question for the promotional manager then becomes how to reach this segment to inform them of how a particular vehicle fits this need. A segment descriptor could be "age." People over 55 might have a high need for smooth ride. Thus, age fulfills the first requirement because it is correlated with the needs structure of the segment. In turn, the over-55 age group is highly associated with certain magazines such as Modern Maturity. Thus, age also fulfills the second requirement of being associated with particular media. The bases for reaching segments are classified as being geographic, demographic, psychographic, or behavioral. The first two classes describe the consumer's "state of being," whereas the third and fourth are related to the consumer's "state of mind." Not all of the bases listed have proved equally useful in developing promotional strategies. Bases of a demographic or geographic type, together with selected psychographic and behavioral approaches, such as product usage rate, attitude toward brand, and preferred values and benefits, are the most widely used in current practice. Thus, our discussion here of bases for reaching market segments will be limited to these, with particular attention being paid to the problems associated with measurement and analysis. Market segmentation is not difficult to understand conceptually, but real problems may arise when applying the concepts. Geographic Variables Very significant differences exist in the usage of many products based on geographic location, both across countries and within the United States. Thus, promotional managers commonly use a geographic basis to form segments. Indeed, one of the significant trends in promotional activity has been the development of regionalization of promotional programs. Frito-Lay uses this type of regional basis to segmentation. Since the basic consumer need is correlated with geography, and the promotional effort can be directed regionally, this base satisfies the two accessibility criteria. For geography to be most useful as a basis for reaching segments, the promotional manager must calculate the relative sales possibilities in the various potential geographic segments. For example, if a product is sold nationwide, how much promotional effort should be expended in Chicago relative to Phoenix? This key question can be answered only when market potentials are computed, for effort is generally allocated in proportion to potential, all other things being equal. Several different potentials might be computed for a given product: 1) volume attainable under ideal conditions (i.e., if all efforts were perfectly adapted to the environment); 2) the relative

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capacity of a market to absorb the products of an entire industry, such as the major appliance industry; 3) the relative size of market for a company's type of product (i.e., sales of color television sets versus stereo sets); and 4) the actual sales a company can expect. The last category, of course, is the equivalent of the sales forecast for a firm, or the sales volume that can be expected if the firm continues on its present course. Potential, on the other hand, refers to sales possibilities rather than expected sales and is of greater significance for purposes of demand analysis. Although forecasting is necessary in determining allocations and budgets, an extended discussion of it is beyond the scope of this discussion. This is not to say however, that potential is the sole basis for allocating resources, because potentials for industry sales do not reveal the competitive structure of a market or the firm's ability to make inroads. Boston, for example, might appear to offer high potential, whereas in reality competitors are so entrenched there that inroads would be impossible. Ideally, then, potentials must be augmented with information about the competitive structure as well as the firm's previous experience in the market. The goal, of course, is to make an optimum allocation of resources to alternative markets. This can only be done with great precision with a reliable estimate of the impact of a given level of promotional expenditure on market share. Demographic Characteristics The market potential for any product is equal to the number of people who want or need that alternative and have the resources to obtain it. Motivation to buy is to some extent both determined and revealed by the demographic life position of the person (age, education, income, gender, and so on), as is ability to pay. The most widely used are age, income, and gender. Age: A buyer's wants and ability to buy obviously change as he or she ages and passes through various stages in life, and this provides useful clues for marketing strategy. Jergens' Aloe & Lanolin lotion proved to be most appealing to women over 35. This is not surprising, given the preference of younger consumers for a medicated skin conditioner. There would have been little to gain if the younger market had been the target of efforts to change preferences, so the logical strategy was to target the older segment and capitalize on that opportunity. Income: Marketers have long used income segmentation with generally favorable results. For example, the Jaguar automobile is targeted to those making about $100,000 per year, and the media used include mostly national magazines and Sunday newspaper supplements appealing to this affluent segment. The effort is confined largely to the two coasts, reflecting the geographic segmentation of the market. One must be cautious in assuming that income is a reflection of the consumer's social class. This obviously is not the case, given the high wages now earned by those in the trades and various blue-collar occupations. Therefore, income by itself usually is not an accurate basis for segmentation.

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Gender: It is obvious that some products appeal more to men than to women, and vice versa. With the increase of women working outside the home and greater female initiative as a result of the equal rights movement, women have become a target for more products. Women, for their own use, purchase almost half of all cars sold in the United States; this requires major changes in the promotional activities of car companies. In addition, changing gender roles have resulted in the necessity to promote many grocery products to men. Psychographic Characteristics In the psychographic approach to reaching segments, consumers are differentiated on the basis of differences in patterns by which people live and spend time and money. The requirement for this type of segment descriptor is that segment needs are correlated with the psychographic characteristics. These patterns represent consumer lifestyle. Some analysts include social class as a part of lifestyle, whereas others classify it as a demographic variable. For the most part, psychographics or lifestyle refers here to consumer attitudes, interests, and opinions (often referred to as AIO measurements) and the way in which these affect buying activities. For example, consider the heavy users of eye makeup. Demographically, they are younger and better educated than average and are more likely to be employed outside the home. This tells us something, but notice how much helpful information is added when users are differentiated from nonusers in psychographic terms: Highly fashion conscious; desire to be attractive; oriented to the future; interested in art and culture; interested in world travel; not home centered; relative rejection of the traditional. Behavioral Variables In the behavioral method of reaching needs-based segments, buyers are differentiated on the basis of their knowledge of and attitude toward a product or its attributes, and of their response to and use of the product. It is finding widespread use. Our discussion here is confined to segmentation by product usage rates. Product Usage Rates Promotional managers often find consumer usage rates for a specific product category helpful in reaching segments in the market. Different strategies are then required for those in various usage categories. Again, the requirement is that the basic needs of consumers are correlated with the descriptor, product usage rates. Nonusers of Product Category: It is important to determine whether or not nonusers offer a potential market. Sometimes the problem is only lack of awareness of the brand. If this is the case, an opportunity may exist to build familiarity through promotion and thereby lay the groundwork for later sales. In other instances, a basically favorable attitude may exist, but may be constrained by opposing forces from the environment. For example, if the problem is concern

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over financing, it is possible that advertising or personal selling could stimulate sales by promoting the offer of easy credit. Most likely the analysis of nonusers will document segments that will not respond, regardless of the strategy. There may be a basic conflict between the company offer and evaluative criteria, lifestyles, and so on. Every attempt should be made to avoid such segments if possible, because the probable return would not be worth the expense. Users of the Product but Not the Company Brand: The purpose of this inquiry is to assess the probability of making inroads into competitors' markets. If their offerings or images are weak in certain respects or fail to satisfy important evaluative criteria, it may be possible to increase market share. On the other hand, competitors may be invulnerable in certain segments, especially if there is brand loyalty based on psychological commitment or centrality. The best strategy always is to appeal to the "waverers" (those whose commitment is diminishing) rather than to attack an entrenched competitor head-on. Regardless of competitive market shares, many promotional managers believe that the best strategy is to appeal to "heavy users" of the product class, often referred to as the heavy half. For example, the so-called heavy half of the beer drinkers' market (in actuality, this is 17 percent of the total market) consumes 88 percent of all beer; the heavy half in the market for canned soup (16 percent of the total) consumes 86 percent of the product sold. The assumption is that the heavy half is the most productive segment, and there probably is some merit in this viewpoint. Certainly the propensity to respond will be higher. Concentration on this segment has been made more feasible through use of data from syndicated research services showing the product consumption by audiences of various advertising media. Efforts should not be concentrated on the heavy half, however, unless there is evidence that it is not feasible to turn nonusers into users and light users into heavy users. There should be an inquiry into why they buy or do not buy, what the product means to them, and other related questions. The answers to these questions may make it possible to win over buyers. Users of Product and Company Brand: The greatest asset possessed by any organization is its core of satisfied users, and the present user cannot be overlooked in promotional strategy. It is particularly important to monitor brand image and to clarify that the company offerings are still satisfying salient evaluative criteria better than the perceived offerings of a competitor. Any deficiencies should, of course, be remedied. Frequent buyer programs (airlines, hotels, rental cars, etc.) take this approach as their basic premise. The promotional program is then designed to help establish a lasting relationship with these consumers. In addition, it is useful to monitor awareness of the company brand and competitive brands. In a highly volatile market, eroding awareness can be followed by a sales decline. A frequent advertising objective is just to maintain "share of mind"—that is, relative awareness vis-à-vis competitors.

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It may also be possible to assess the potential for increasing brand loyalty among light to moderate users, for stimulating new product uses, for encouraging switching from competitive brands, and for preventing inroads by competitors, to mention only a few of the many possibilities. Undertaking Segmentation Analysis Many bases for reaching segments, and associated segment descriptors, have been analyzed in this section; none of these are applicable in every situation. Thus, it is impossible to generalize with respect to the ideal descriptor variables. What emerges is the wide variety of ways in which imaginative research and creative planning can identify groupings that are a part of the total market. Marketing strategy requires a probing analysis to determine if viable segments exist. If these are present and recognized, they offer an opportunity for profit. There are, however, two general approaches to reaching segments: a priori and post hoc. In the a priori approach, the marketer has a good reason to define the segmentation description criteria in advance. We might be certain, for example, that the most frequent purchasers of our product category are either women or people with incomes over $50,000. To use this approach, the marketer must have good reason to believe that the descriptors selected to define the segment are correlated with the consumer needs structure that actually forms the segment. For example, for the gender variable, it seems reasonable and appropriate to use the specific physiological needs of a woman a priori to describe the segment. In the post hoc approach, the criteria for segmentation are not decided in advance, but rather are an outcome of the analysis itself. The first step is to develop a set of needs assessing questions that define the domain of interest to the marketer. Second, a large sample of potential consumers is selected and asked to respond to these needs assessing questions. Third, the respondents are clustered into homogeneous groups or segments on the basis of the similarity of their responses across the needs assessing questions. They are clustered using one of a number of multivariate data analysis procedures that are appropriate for this purpose. The needs structure of the groups is then examined for its uniqueness, and other characteristics (demographic, media usage, psychographics, etc.) are checked for their correlation with the needs groups.

The Target Market Decision Once the market has been segmented along the relevant bases or criteria, the marketing manager must make the target market decision. The target market decision relates to the selection of the specific segment or segments toward which promotional activity will be directed. In general, the managers would like to select a segment or segments where: 1) the firm’s

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capabilities fit highly with the choice; 2) the customer segment is highly attractive; and 3) the competitors are relatively weak. Within this context, the firm has three basic general options: undifferentiated marketing, differentiated marketing, and concentrated marketing. Undifferentiated Marketing If an undifferentiated marketing strategy is followed, segments are in effect ignored and one marketing mix is offered for everyone. All efforts are poured into building a superior image that will overcome these demand variations. Certainly the cost advantages to this approach are undeniable, as Henry Ford found when the Model A Ford was introduced in any color you wanted "as long as it is black." Ford, of course, had a near monopoly on the market, but few firms enjoy that advantage today. As a result, undifferentiated marketing is exceedingly rare. A more common variation is to target only the largest segment of the market, perhaps using the heavy-half concept. The problem is that this strategy appeals to most competitors; they concentrate in similar fashion and ignore smaller segments. The outcome of using this approach is often that the marketer becomes a sitting duck for competitors who differentiate and provide the desired option ranges. Differentiated Marketing In differentiated marketing, a firm operates in two or more segments and offers a unique marketing mix for each. This strategy has become quite common in larger corporations, as is reflected in a trend toward multiple product offerings. It certainly offers the advantage of recognizing the demand variations that exist and capitalizing on them, in contrast with undifferentiated marketing. Differentiated marketing is not without its disadvantages. For example, national marketers are finding that the latest marketing trend of regionalization is a complex way to market their products. Regionalization replaces national mass-marketing strategies with custom-tailored approaches in the hope that such localized targeting can boost market share in a slow-growth environment. By segmenting the market into tightly focused areas, companies can design special advertising and promotional campaigns, and even develop new products (or new versions of existing products) that cater to local tastes. Although the idea seems simple enough, implementing the strategy can be a major undertaking. Concentrated Marketing In the undifferentiated strategy, marketers target the whole market, while in the differentiated strategy, they target two or more segments. It is often wise to concentrate on one segment, with

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the objective of establishing a larger share and focus resources on excellence in a more limited market. The danger of concentration, of course, is that the target market can be a small segment or can even dry up with amazing rapidity. Therefore, including some diversification may be a wise policy to follow, especially if there is a high rate of product change. The Choice of Approach The fundamental means by which the marketer selects one of these approaches to segmentation is a cost/benefit analysis. The marketer expects to generate additional revenue from a segment by more completely satisfying the needs of that group and by providing promotional activities that better match the segment. In doing so, the marketer incurs additional costs for new ads, new promotions, new sales-force activities, and so forth. In general, a unique program would be developed for a segment if the incremental revenue expected exceeds the incremental costs of serving it. Of course, the marketing manager must also consider other constraints such as financial resources.

Positioning Once the general manager has identified the potential segments and has chosen the segments to be targeted for promotion, he or she must still select a positioning for the product or service in the minds of the consumers in the selected segments. Positioning is defined as the perception that targeted consumers have of a firm's offering relative to competitors. One very easy and useful way to understand positioning is to fill in the following sentence for your each of your products.

For (target market segment), the (product/service brand) is (single most important benefit), because (reason why).

Positioning is often the most critical element in a firm's strategy because it defines the perception the firm intends consumers to have of its product or service. In addition, positioning directs the entire marketing mix of the firm. A clear positioning statement is key to the direction of promotional activity.

Positioning strategy may be approached in one of six ways: 1) by attributes 2) by price and quality 3) by use or application 4) by product user 5) by product class 6) by competitor.

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Positioning by Attribute The most commonly used positioning strategy is to associate a product with an identified level of a defined set of attributes, such as power, sportiness, caffeine content, or color. Thus, the American Express platinum card is positioned highly on the attribute "travel emergency assistance," an attribute of great salience to a certain segment of consumers, and the Hummer SUV takes the high position on the attribute "true off-road capability," by using the claim, "Go places and do things no other wheeled vehicle in the world can do." Positioning by Price and Quality Although price and quality may be thought of as attributes, they are so important that they warrant separate treatment. In many product categories, some brands that offer more features, better service, or better performance use a higher price as a cue to the consumer that they have higher quality. Alternatively, other brands emphasize lower price with limited features to drive a value positioning. For example, BMW holds a premium-quality positioning, and Chevy Geo holds a value-based positioning. Positioning by Use or Application In positioning by use or application, the marketer attempts to position his or her brand as being associated with a particular use or occasion. For example, Gatorade took the "use with strenuous exercise" positioning when it was first introduced, and Hallmark took the positioning of being the card to send "when you care enough to send the very best." Positioning by Product User In positioning by product user, the brand is associated with a specific user or class of users. For example, Revlon makeup has built a consumer franchise on a succession of well-known models such as Cindy Crawford. Positioning by Product Class It is possible to position one's brand with respect to the product class in which it competes or to some associated product class. For example, the margarine brand "I Can't Believe It's Not Butter" has been positioned with respect to the associated product class "butter" rather than "margarine." Weight Watchers brand foods have been positioned with respect to higher caloric foods rather than diet foods. Positioning by Competitor In all positioning approaches, an explicit or implicit frame of reference is the competition. This is because an established competitor's image can be used as a reference point for another brand's

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positioning. In addition, what is most important is how consumers perceive your brand relative to competitive offerings, not how it is absolutely perceived. The relevant question is whether your brand is better than a given competitor in service, cost, or value, or for use at snack time. Lexus Automobiles uses positioning for its line of cars. The relevant positioning dimensions are 1) rational benefits, composed of reliability, quality, maintenance cost, durability, and resale value; and 2) emotional benefits composed of luxury, style, safety, and performance. The positioning map shows the Lexus desired target positioning relative to the competitors. Lexus analysis also indicated that a significant segment of consumer desired cars that would occupy this positioning in the map. All aspects of the Lexus’ product development work, distribution structure, and promotional strategy were then focused on delivering against this target positioning with great success. Developing a Positioning Strategy The development of a competitive positioning strategy is a seven-step process:

1) Identify the relevant competitors; they may be brands within the product category or substitute products outside the category.

2) Determine how the competitors are perceived and evaluated; this requires marketing research to measure consumer perceptions. It may involve research to determine the relevant attributes for the positioning.

3) Determine the competitors' positions; all competitors, including one's own brand, are placed relative to each other.

4) Analyze the consumers relative to their needs; the marketing research is designed to define an open and attainable position for the current product or new product.

5) Select the desired positioning; for example, a firm might desire to offer the highest fiber cereal.

6) Implement a marketing and promotional program to establish the desired positioning. 7) Monitor the consumers' perception of the positioning. The marketer must continuously

monitor the marketplace to see the impact of changing consumer tastes and competitors' new products or attempts to reposition themselves.

Key Strategic Choices: Segment Targeting and Product Positioning The success of a market-based strategy depends on two key strategy choices that involve general management: the choice of segment or segments to be targeted for promotional effort and the designation of the positioning desired for the organization's product in consumers' minds. The choice of target segment determines where the marketer will fight the promotional battles, and the designation of positioning determines what ammunition the marketer will fight with. Indeed, in any given market, the segment target and the positioning choices will largely determine who the competitors are going to be.

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Market-Based Organization Structure & Process To make marketing decisions competently, the firm must create an organizational approach that captures their understanding of markets. A key approach to achieving this is to create horizontal thinking in the firm. This type of thinking puts all the resources and skills of the firm against the chosen customer segments. The purpose of this thinking is to overcome two great enemies of effective marketing: functionalism and regionalism. The former occurs when all the functions of the firm do not line up to serve the customer. The latter occurs when market segments have been identified in various regions of a country or across countries, and the regional or country managers do not effectively implement a national or global strategy against segments. One approach to overcoming functionalism and regionalism is to create a horizontal orientation to the firm as described below. The Horizontal Market-Based Global Company The marketing management of the 21st century global corporation faces the challenge of making their far-reaching global company responsive to the market segments in which the management has chosen to compete. This is difficult even in the domestic market context. It is especially problematic when these segments exist in a global context across countries. Thus, management faces the complex problem of organizing all the business functions within its global businesses across market segments that exist horizontally across countries. In this context, how does the firm: 1) learn about the existence and needs of these horizontal market segments; 2) identify the go-to-the-market global strategy that will work in these horizontal segments; 3) define the role of the country and central management in the global marketing strategy? This section explores the nature of how marketing management along with other senior management can help create a horizontal company to be responsive to the presence of these global horizontal market segments. Figure 9 illustrates conceptually such a horizontally structured, market-based company. We note the existence of both specialists and integrators. The specialists provide deep expertise in the marketing sub- functions and other non-marketing functions. The integrators have relationships with consumer segments (the consumer equity teams), the channels (the customer management teams), and the supply chain (the product supply team).

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Figure 9: A Horizontal Market-Based Organizational Concept

In this context consider the following real management situations:

• A large UK-based consumer packaged goods company has historically been organized on a country-by-country basis. The country manager has the final say on all aspects of new product introductions, brand target segments, brand names, brand positioning, advertising, sales promotion, pricing, and so on. The senior corporate management in the UK has become concerned that: 1) major new product innovations developed in one country or in the central research and development laboratories are introduced in various countries in a very slow fashion or not introduced at all; 2) no global or even regional brands names have been developed; 3) common new products often have different segment targeting, positioning, advertising, and so on, in different countries.

For example, it took ten years for this company to introduce a major new household food product in the major countries of the EU, and this implementation consisted of six different brand names, varied segment targeting and brand positioning and related price points that ranged from "premium" to "bargain," and very diverse advertising and promotion programs.

Senior management believed that the firm was not reaching its potential as competitors were duplicating its product innovations and introducing them into countries that the firm was slow to enter. There was also a belief that recreating complete marketing strategies and programs from each country was wasteful.

• One of the world’s largest global banks was a major competitor in credit cards in North America and Europe. It had some presence in Asian countries in commercial,

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mortgage, and retail banking and had a few branches in major Asian cities. Senior management believed that there was great opportunity for the bank to market Visa and MasterCard based credit cards across sixteen Asian countries. In each country, the bank encountered varying degrees of competition from local bank credit cards, and from American Express. Virtually all of the bank’s country managers opposed the introduction of credit cards in their countries.

• A major global marketer of industrial manufacturing robots, control systems, and

related services had traditionally organized its marketing and sales activities around vertical markets based on industry type, such as specialty chemicals, automobiles, electronics, aerospace, and so on. Under this system, each of its vertical divisions separately pursued technical product and service applications without regard to the other divisions. Senior management was concerned that this approach to the market ignored any synergies that might exist across vertical markets and divisions. In addition, this vertically based structure was combined with a country based vertical structure similar to the UK based package goods company, described above.

For example, its aerospace, automobile, and electronics divisions were all separately developing "visual" inspection systems. The research and development cost of developing these three was very high, as was the on-site implementation costs and customization required for specific industries across different countries. As a result, this was a very unprofitable set of product lines.

The Meaning of Market All three of these firms believed that they were a "market-based" company. After all, the UK package goods company was taking country differences into account, the credit card company allowed the country managers to do what was best in their countries, given the competitive situation, and the robotics firm was developing deep understanding of the specific industry requirements for its products. This type of "vertical" thinking is still commonplace in many global companies today. The problem with this vertical thinking is that in many situations it no longer represents the real market that it purports to serve. A truly market-based company organizes itself around market segments based upon consumer needs. A market segment is a set of consumers with a common needs structure, not necessarily consumers in a specific country or a specific vertical industry. The problem with the vertical structure noted above is that it is unrepresentative of the needs- based market segmentation that has developed in many markets.

Real Horizontal Markets Let’s illustrate the horizontal nature of market segments related to the three situations at the beginning of this section. The package goods company discovered that the market for an

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innovative yogurt was not based on the countries that form the EU, but on four needs-based segments that existed to varying degrees in each country. One such segment was the "health and innovative" segment. It constituted about 25 percent of yogurt users in Denmark, Germany, and the UK, 18 percent in Ireland and the Netherlands, and only about 4 percent in France, Portugal, and Spain. One segment, the "top quality seekers" was strongly represented across all the EU countries. Thus, we can see the commonality of needs across the EU countries has given the opportunity to place different brands and formulations of yogurt horizontally across the countries of the EU. In a similar fashion, the global bank found with intensive marketing research that there existed a useable needs-based segment for credit cards across Hong Kong, Singapore, India, Indonesia, Malaysia, Thailand, and Taiwan. This segment needed a card that had flexible credit limits, that was useable when traveling internationally, and offered premium services such as airline club entry, insurance, and so on. The size of this segment in some of the countries would not support the required high cost of obtaining customers, taken one country at a time. However, taken as a whole across all the countries, the cost-benefit was easily positive. There were enough total potential customers and great cost economies of logistics and the marketing program if the business was managed horizontally. The story for the industrial robots company is similar. For example, in robotics-based visual inspection systems application there were a number of common segments across the vertical industries. In one instance, inspection for the presence of a part in an assembled product (rivet, chip, etc.) was common across automobiles, electronics, aerospace, and so on. The technological approach was similar and the company was able to develop more off-the-shelf products, with great savings in costs of customizing software. Failure to understand and act upon the existence of needs-based segments that are often horizontal has left many companies with declining fortunes. In contrast, senior management that has grasped this understanding has driven some legendary successes. IBM eventually found that its vertically structured mainframe computer magic was unresponsive to the large group of both individual and corporate consumers who did not require, nor were they willing to pay for, pre- sale education or full-service installation for their personal computers. Dell and Gateway developed this understanding and put the appropriate logistical system in place to serve this horizontal segment. "Dot com" firms are by their nature often horizontally based. Country borders mean little to their approach as they look for the commonality across these borders. For example, firms such as E*trade, and Amazon.com have left traditional competitors wondering what to do with their vertically oriented infrastructures and if they can operate both their classic vertical company and a new dot com company simultaneously. For example, Merrill Lynch spent years struggling with this dilemma. In the interim, the innovative companies have grabbed large customer bases and market position. On the positive response side, Procter & Gamble saw the horizontal nature of markets arising in Europe almost twenty years ago. As a result, P & G can now introduce a new product globally in

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less than eighteen months based upon a horizontal approach. This is in sharp contrast to the up to fifteen to twenty years to do so in the old days of omnipotent country managers. Implementation Challenges The commitment to approach markets in a horizontal fashion raises many challenges. These include: 1) identification of the needs-based segments; 2) constituting horizontal teams to manage against the targeted segments; 3) making appropriate use of vertically based specialists; 4) determining the split between central and country- or other vertically-based authority; and 5) designing an appropriate compensation system. Identifying Needs-Based Segments The most positive aspect of vertical or country based segmentation is that it is easy to do. For example, in the vertical world, one just need say that the firm is targeting the "French market," or the "automotive market." Consider how much more difficult it is to identify and locate the "top quality seekers" for yogurt, or the "inspection for the presence of parts" segment for visual based robots. A horizontal organization is one committed to the discipline of marketing research in order to identify needs-based segments. Top management of these organizations also recognizes that needs-based segments change over time and that its organizations must change as these segments change. The Role of Teams Teams that are simultaneously cross-functional and cross-geographic regions are required to manage the horizontal enterprise. These teams perform the critical integrating function. The development and acceptance by senior and middle management of a charter of these teams in terms of their responsibilities is critical. The teams must have clear authority and responsibility. Typically, effective horizontal teams have senior management leadership, have consistent membership of the same people, have individuals responsible for critical functions and geographic regions present, and stick to the domain of decisions defined in their charter. Integration of Specialists One of the difficulties of horizontal teams is that they often lack depth of functional expertise, both in marketing and other functional areas. Effective teams must have easy access to a stable of functional experts in marketing research, marketing strategy, advertising, production planning, finance, and so on. The key is that these specialists be effectively integrated into the decision making of the group. Without the group integrators the team will not deliver the whole enterprise against the needs-based segment. Without the effective use of specialists the team is likely to perform shallow analysis and not create high quality marketing and other programs. The intention is to obtain the skills of the vertical organization along with the needs-satisfying aspects of the horizontal organization.

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Central versus Decentralized Authority and Responsibility The horizontal team structure usually exists alongside both the functional vertical organization and the country or regional manager’s organization. What tasks should be performed by the horizontal team in this context? One approach is to have the teams responsible for the strategic aspects and leave the details of implementation to the vertical functions and regional managers. No global team can competently make all the detailed decisions of implementation around such issues as advertising copy, promotional contests, exact price discount structure to the channel, and so on. However, the team can be instrumental in identification and targeting of the horizontal segments, selecting a positioning for the brand, setting general price levels, setting general tone for the advertising programs, and pushing product innovations. These are the critical strategic issues for the company. The charter for the teams must articulate the locations and nature of these authorities and responsibilities. Compensation We noted in the package goods and credit card examples above that the country mangers tended to be resistant to horizontal initiatives. There could be many reasons for this, including their belief that local knowledge about markets is superior, and political fights about the evils of headquarters. Hopefully, these types of issues would be clarified in the team charter. There is one issue that is beyond the scope of the charter. This is the compensation for functional and country managers. This concern was the root cause of the resistance of the country managers of the package goods and the credit card country managers to accepting the horizontal initiatives. They expected their bottom lines to be adversely impacted by the costs of introduction of the horizontal brand and by other decisions made by teams outside of their control. Thus, since their bonuses were based on functional performance standards or country-specific measures, they were naturally resistant. The most logical solution is to change the compensation system to reflect the true nature of their responsibilities. Thus, for a country manager, some part of compensation must be based on their positive participation in the horizontal teams, the performance of horizontal brands across countries, along with the performance of the parts of the marketing and other functional programs that are specific to their countries. All three of the companies discussed earlier implemented a horizontal-oriented organization and strategy with resounding success. For example, the credit card business in Asia became the most profitable part of its banking business. The package goods company now routinely introduces brands globally within a few years and has experienced both increases in market share and cost savings. The robotics firm basically saved itself from bankruptcy.

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The Marketing Management Challenge It is the job of those who toil in marketing management to effectively manage all the elements discussed so briefly in this section of the StratSim manual. The challenge is to create a market- based organization by competently completing a SWOT analysis, defining a marketing scope, creating customer value, identifying and targeting market segments, selecting a positioning, and creating a horizontal market-based organization structure.

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Operations Guide

STRATSIMMARKETING

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Simulation Navigation StartSim is designed to be easy to use and is compatible with all major Internet browsers. This Operations Guide describes all the reports and decision screens in StratSim. When you first login, you will see the Briefing similar to below (but with your company information).

The center of the screen is reserved for displaying the reports, decisions, and graphs for the simulation. Surrounding this display is the easy-to-use navigation system for StratSim consisting of two parts:

1) The top bar contains the main menu (pull down), icons for often used functions, and a period selection list box.

2) The right side of the screen contains a pull down menu and links that provide quick reference for all vehicles in your StratSim industry.

The navigation and general control buttons found at the top of the simulation screen are: Back, Pop-Out, Print, Excel, Help, and Logout. The [Back] button lets you reach

the last page you visited. The [Pop-Out] button applies to the current screen you're viewing, allowing you open a New Window with that screen so you can compare it with other data. The [Print] button applies to the report currently on the screen. For instance, if you click on the [Print] button when viewing the Product Contribution report, the report will be sent to your default printer. Clicking the [Excel] button will export data to Excel. Clicking on the [Help] button brings up additional information about the current menu option / screen that you are currently viewing.

Primary Menu

Navigation Buttons

Change the Period View

Industry, Firm, and User Info

Vehicle Specs & Details

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The Main Menu (shown at right) leads to reports, tools, and input screens you will need to analyze your current position, plan and research a strategy, and input your decisions. These links are divided into seven categories. Use Results & Decisions to monitor your financial situation and make decisions. Decision Analysis allows you to review your decisions and run the pro- forma analysis. The Market reports provide important information about the environment and segments. Competition reports contain detailed competitor information. The Tools menu gives you access to insightful market research reports and techniques. One of the easiest ways to find out more about an option is just to try it out. Each of these menu options will be described in greater detail in the operations guide, but you may also just view a report and then click on the question mark icon to bring up the corresponding page in the operations guide for more in-depth information. Role of Team Leader in the Decision Making Process When playing StratSim as a team, one member will be designated "team leader." The team leader has the ability to "lock" out other team members from entering decisions. This "lock" is available at the top of the active screen, above where you make your decisions. It is only available to the team leader and is only on the decision screens. While it is not necessary to lock decisions, the team may decide to lock decisions after reviewing the team's decision summary and agreeing that it is the final set of decisions. At that point, only the team leader would have access to change any decisions.

Note: All the screen shots showing data that appear in this operations guide may or may not match your particular scenario. Also note that demand in a particular market may change at any time. Costs are not fixed; they may increase or decrease without notice, as the simulation progresses.

The Team Leader can opt to lock out other members’ decisions by clicking into the "Lock Decisions" check box.

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Results & Decisions Dashboard Purpose: The DASHBOARD summarizes important performance measures for your firm and indicates the trend and relative rank within your industry for each measure selected. You may add performance measures to your Dashboard (and are encouraged to do so!) based on what you find most important to monitor. Click the [Edit] button (top-right corner) to add to or remove previously selected performance measures. A brief explanation of each Dashboard performance measure is provided below. The first four measures are always shown in the dashboard. The others are optional and based on your objectives.

Net Income ($)* Net Income after taxes Cum. Net Income ($)* Total Net Income after taxes generated since the start of simulation Stock Price ($)* Current stock price (in $) Total Shareholder Return (%)*

Annualized return based on the purchase of a firm's stock at the beginning of the simulation (included appreciation and dividends paid)

Cash (M$) Cash account balance from the Balance Sheet Debt (M$) Combined short- and long-term debt outstanding from Balance Sheet Firm Preference (%) Percent of consumers surveyed that prefer your company

Dealer Rating Dealer experience on a scale of 1-100 based on a survey of those who visited dealerships for service or new vehicle purchase.

Capacity Utilization (%) Actual vehicle production divided by firm capacity

Days Inventory Current estimate of how many days of inventory remain in stock at period end based on current demand for vehicle and inventory level.

Gross Margin (%) The difference (as % of sales) between sales and cost of goods sold. Revenue (M$) Sales Revenue for the firm Value Market Share % Sales Revenue for firm divided by sales revenue for entire industry Unit Sales (000s) Vehicles sold for the firm Unit Market Share (%) Vehicles sold for the firm divided by total vehicles sold for industry Marketing (M$) Expenditures for corporate and brand advertising and promotion R&D (M$) Expenditures in technology and product development for firm Market Research (M$) Expenditures in market research and tools for firm Earnings Per Share ($) Net Income divided by shares of stock outstanding Shares Outstanding Number of shares of stock outstanding Return on Sales (%) Net Income divided by sales revenue Return on Equity (%) Net Income divided by equity Return on Assets (%) Net Income divided by assets Debt to Equity Ratio of total debt to equity

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Financial Statements Purpose: The FINANCIAL STATEMENTS menu provides access to the firm's Income Statement, Balance Sheet, and Cash Flow reports. Click the corresponding [button] to access the report you want to view. Income Statement: The INCOME STATEMENT shows the firm's overall results for the most recent year with major expenditures broken out. Each line item is also displayed as a percent of manufacturer sales (not retail sales) for year-to- year comparative purposes.

Sales Sales are recognized at the time of purchase by the customer. The dollar amount is based on dealer invoice, not retail price or MSRP. Click the link to see the breakdown by product revenues.

COGS Cost of goods sold (COGS) is the total manufacturing costs including fixed costs related to production. Click the link to see COGS details.

Gross Margin The difference between sales and cost of goods sold. Shareholders often analyze the gross margin % year to year as one measure of profitability.

Marketing The sum of corporate advertising, public relations, product advertising, product promotion, and sales force.

Research & Development

Research and Development are the costs associated with product development and technology increases.

General and Administrative

General and Administrative includes overhead from sales and the dealership network. Dealership training and the cost of changes in the number of dealerships are the result of your decisions, but most G&A expenses are not under your direct control.

Income from Operations

Results from deducting expenses from gross margin.

Interest Income Interest generated from CDs held. Interest Expense Interest on long and short-term debt. Extraordinary Items

Includes plant and inventory write-offs.

Income before Tax

Income from Operations less extraordinary items and interest expense.

Less Tax @ 35% Taxes charged at the rate for your industry environment. Net Income Net Income less taxes. Dividends Paid The dividends paid to stockholders.

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Balance Sheet: The BALANCE SHEET shows the current account balances for assets, liabilities, and shareholder equity at the most recent year-end. A sample screen is shown below.

Asset Categories

Cash Current cash balance on the books. See the Cash Flow statement for more detail on how cash is generated (or used).

1 Year CD Inv. Value of any CDs purchased for the year. Receivables Outstanding invoices unpaid by dealers. Inventory Current value of finished inventory. Plant and Equip.

Original value of the plant and equipment used in production of the vehicles. This includes retooling investments.

Depreciation Accumulated depreciation on assets. Plant, equipment, and retooling costs are expensed over 10 years using straight-line depreciation.

Liability and Equity Categories Accts Payable Amount currently owed to vendors. Short-Term Debt

Outstanding short-term lines of credit used to fund on-going operations, typically resulting from underestimating cash needs in the current year.

Long-Term Debt

Face value of long-term bonds that were issued.

Stock Original value of any stock issued at $1 par value. Retained Earnings

Accumulated net income from previous years.

NOTE: Please refer to RESULTS & DECISIONS: Financing in this section of the

manual for more information on debt and stocks.

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Cash Flow The CASH FLOW statement shows the sources and uses of the firm's cash. Changes in the amount of cash in the firm can be calculated based on cash flow from operating, investing, and financing activities. Line items may have different context modifiers as indicated by parenthesis. Using the Inventory line item as an example, a positive inventory cash flow amount indicates an increase in cash due to a decrease in inventory, and a negative inventory cash flow amount indicates a decrease in cash due to an increase in inventory. If a value is in parenthesis, it refers to negative cash flow (cash out).

Cash Flow from Operating Activities

Includes Income from Operations plus depreciation and any changes in inventory, accounts receivable, and accounts payable.

Net Income This figure comes from the Income Statement. Investment Activities

Related to manufacturing or cash investments, such as increases in capacity and retooling costs.

Financing Activities Include proceeds from short-term loans and bonds or stock issues less interest and dividends paid (see following page).

Net Increase (Decrease) in Cash

Total of changes in cash from operating, investing, and financing activities.

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Product Contribution Purpose: The PRODUCT CONTRIBUTION menu provides financial results at the product level. This report is particularly beneficial for comparing the profitability of various product lines and provides insight for pricing decisions from an internal perspective. Three different analyses are accessible within this report via the buttons at the top: [Total], [Per Unit], and [Percent]. These provide product level insights into pricing and costing factors. However, it does not include any allocated overhead costs, only variable costs (COGS) and marketing costs directly attributable to a product. Total Provides overall contribution based on total revenues for the product (dealer invoice multiplied by units sold). Sales made other than through your own dealers (B2B, licensing) will appear in the "Direct Sales" column. The sum of the "Revenue" and "Direct Sales" columns equals the "Sales" value from the Income Statement. The cost of goods sold (COGS) and expenditures on advertising and promotion are then subtracted to calculate the overall contribution of each product. Per Unit In this report, the focus now shifts to product line profitability on a per unit basis, removing the unit volume from the results. This answers the questions, what are my variable costs per unit, how much are we spending on advertising and promotion per unit ($budget / volume), and what is per unit contribution. Not that this report includes direct sales; so this analysis is based on average revenue and margin over all sales including those to the B2B market. Percent The Percent button will now shift the report to a percentage basis which normalizes all values relative to price. This report calculates the margin percent and contribution percent which are helpful measures for pricing decisions.

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Technology Purpose: TECHNOLOGY decisions consist of investing in the four basic technical capabilities of the firm, an important long-term decision. Higher technical capabilities bring two significant competitive advantages. First, your firm is able to develop vehicles with better characteristics, which is likely to be important to some customers. Second, the base cost of projects is lower with greater technical capabilities. In other words, a vehicle with attributes of 2, 2, 2, 2 (interior, styling, safety, and quality) costs less on a per unit basis for a firm with greater technical capabilities, given the same production levels.

Select the blue checkbox on the line "Increase Attribute" to invest in one or more of these areas. The cost of each of these enhanced capabilities in $millions is provided in the "Cost to Increase to increase by 1" line. The estimated annual benefit of the increase in capability is also displayed. Note that the simulation uses the decisions you are in the process of making to estimate the benefits. For example, an increase or decrease in your scheduled production of a particular vehicle will be reflected in the estimated annual benefit. You may "undo" any changes to these decisions until the simulation decision deadline. Product Development Purpose: The PRODUCT DEVELOPMENT screen summarizes all activity in your development centers. Decisions include adding a development center, upgrading current vehicles, creating new vehicle concepts, and putting new concepts into development. Development costs are expensed in the current period, except multi-period development projects (major upgrades and new products) in which costs are spread over the time the project remains in the development center.

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Decisions: Projects The sample screen at right shows a firm with two active development centers, one of which is being used to develop a new Economy class vehicle that will be called the Enigma when it is released into the market. The specifications of the Enigma are listed to the right as well as the cost (this period only) for developing the product. The second development center is currently available for another project and could be used for a major or minor upgrade, or for another new product. To add a development center, click the checkbox labeled "Construct a new center for $XXX Million". You may add only one development center each period, up to the total maximum of 5 centers over the course of the simulation. There is a one- time cost associated with building a new center, and it takes one year to become operational.

To change one or more of product specifications of a vehicle, click "Upgrade", then choose an existing vehicle to upgrade and the type of upgrade to implement (minor, major, or cost reduction). An upgrade also attempts to reduce your per unit cost of goods sold. A minor upgrade allows you to change each of the four vehicle specifications by 1, HP by 5, and size by 2. A major upgrade allows a

maximum change of 2 for the ISSQ attributes, 20 for HP, and 10 for size; small changes can be made to the specifications in the second year. A minor product upgrade is in a development center for 1 period and launches immediately. A major upgrade allows a wider range of changes for each attribute to the vehicle but is in the development center for two years (launched the following period). A cost reduction upgrade attempts to reduce only the unit cost of the vehicle through changes to the vehicle that do not impact specifications or perception in the market.

Note: In the period an upgrade is launched, any current inventory will be sold off at a loss, and your firm will also incur a retooling charge.

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Decisions: Concepts There are two categories of new product concepts—a new product within a class where the firm has experience, or a new product in a class that is new to the firm. The first step in launching a new product is the creation of a product concept. A concept in StratSim is a set of potential specifications for a vehicle to give to the R&D department for further study. Concept creation is not used to upgrade or change an existing vehicle; it is only used for new vehicles. There is no cost associated with the creation of a concept. Costs are only incurred once the concept is move into development.

Select a vehicle class and specifications in the NEW CONCEPT pop-up box, and then click the [Create] button to create the concept. Once created, you will get feedback from R&D regarding the expected unit cost (at 100,000 units of production), the overall cost of the development project if you decide to move it from concept to development, and the number of years required for development. Before deciding whether to further develop the concept (expensive!), you may want to see what your target market(s) think of the potential vehicle. You may do this using the TOOLS: Concept Tests. Please review the description of the tool later in this guide for details on how to run and interpret concept tests. Based on the results from the concept testing process, you may decide to change the concept. To do so, click on the concept which will pop up the specifications input screen. There is no additional expense to modify a concept at this stage. Therefore, get it right before moving ahead to the product development stage. Once you are satisfied with your concept and have decided it is worth the investment to put it into development, click the up-arrow icon (to the left of the concept) which will move the concept

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into development and occupy one of your development centers for two or three years (depending on the length of the project).

When you move a concept into development, you will be asked to name the project. This will ultimately become the name of your product in the market and is limited to 12 characters. The product name has no impact on the sales of your product, although civility is appreciated in playing the game. You may choose to cancel development at any time if you change your mind about the viability of the project. Remember that development centers are limited, and product development is a time-consuming and costly process, so choose wisely. Analysis The Analysis button provides a graphical view of past, present, and future use of development centers to aid with product development planning. Development centers in StratSim are among a firm's most valuable resources for strategic differentiation.

Important: You must move a product from the concept stage into the development center; otherwise the product will never come to market.

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Consumer Marketing CONSUMER MARKETING decisions consist of corporate marketing decisions and vehicle product mix decisions. The marketing function is also responsible for product sales forecasts for the coming year. These forecasts will be used in generating Pro Forma results.

Decisions: Corporate Marketing Corporate marketing decisions are concerned with your firm's overall corporate image and message. Corporate advertising funds are allocated on a regional basis, helping to create awareness and preference for your firm, while also providing advertising support for your dealerships. You may select an overall corporate image Ad Theme. Social Media expenditures help stimulate interest in your firm's new and future product offerings, allowing you to target particular consumer segments via various social media vehicles.

Direct Marketing funds target particular consumer segments, for example, postcards and emails telling them about dealership special promotions. Decisions: Product Marketing Product marketing decisions are the marketing mix decisions for each vehicle in your product line: price (MSRP), dealer discount, advertising budget and theme, promotional budget, and sales forecast (used in the pro-forma and analysis. MSRP is important because it sets price expectations in the mind of the consumer (positioning) and is the basis for setting your firm's actual revenues after dealer discounts are taken. For example, if MSRP is $20,000 and dealer discount is 10%, your actual revenues will be $20,000 x (1 – 0.10) = $18,000. Typically, the retail price (what the customer pays) for the vehicle will be between the price to the dealer ($18,000) and the MSRP ($20,000), and will vary depending on promotional programs, demand / inventory, target markets, etc. Product advertising and advertising theme play an important role in establishing vehicle awareness and shaping customers' perceptions of products. The majority of the advertising

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budget is spent on media buys, with the remainder on creative input and theme, and serves three primary purposes in StratSim: 1) Creates general awareness for the vehicle and establishes brand/product identity:

Whether or not the consumer knows the product name and its general positioning in the market.

2) Creates top-of-mind awareness: Loosely interpreted as a "share of voice" measure. For example, if consumers are asked to name a utility vehicle, the utility vehicle(s) they are most likely to mention have the greatest awareness and share of voice.

3) Establishes advertising message content: A vehicle aspect that is emphasized in advertising (interior, styling, safety, quality or performance). Match your product's ad theme with what is most important to the target customer(s) and that represents that vehicle's competitive advantage.

Promotion budget is used for special dealer or consumer promotions, such as below market financing rates, consumer rebates (additional price discounts), and dealer incentives (i.e., additional dealer discount if certain sales goals are met). Some of the promotional budget will also be used to generate awareness through product brochures, mailings, contests, etc. Check the B2B Only—sometimes called Remove From Market—checkbox to stop selling a vehicle to consumers. If you are discontinuing a vehicle, you may wish to sell off remaining inventory before taking the vehicle off the consumer market. Analysis The Consumer Marketing analysis projects your company product line’s contribution using your decisions and your forecast, providing insight into price and volume options. You may want to use the TOOLS: Test Market to learn more about the sensitivity of price, advertising, and promotion changes on your sales volume. These projected contributions include any B2B sales and are displayed on both an overall and per unit basis.

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B2B Marketing (Instructor Selected Option) Purpose: Competing in the B2B market is a three-step process that requires a minimum of 2 years before sales are generated. Step 1 is to research the market, typically by purchasing market information about the B2B contracts using the MARKET: B2B Contracts menu choice. Step 2 is targeting particular contracts with your salesforce to receive a request for quotation (RFQ). Step 3, done the period after targeting a contract, is to bid on a contract, presuming you have a vehicle that qualifies. Decisions: Targeting Contracts If you decide that you want to explore B2B opportunities and obtain an invitation to bid on a contract through an RFQ, the first step is to target specific contracts from the B2B decision screen as shown below. Target the contracts by clicking into the checkbox. This will automatically hire (or reallocate if you are changing targets from last period) sales people to establish a relationship and support the sales process with the B2B customer. Contracts will remain targeted until deselected.

Important: Unless your firm targets contracts by clicking on the Contracts / Sales Force link and selecting specific contracts, you will not receive any requests for quotation after the simulation advances. Purchase market research on the MARKET: B2B Contracts page to immediately find out more about contract requirements. Or target contracts, and allow your salesforce to collect the requirements for viewing next period.

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Decisions: Bidding on Contracts In the period following after targeting a contract, a summary of each contract will appear under the "Contracts" section.

You may qualify for some of these contracts based on your current vehicles, but in many cases you will have to make modifications to your vehicle or distribution structure to qualify. Clicking on the contract name will bring up the contract details (the RFQ). The detail of the contracts shows the guaranteed number of units, the required class, the maximum price acceptable, and the required dealership coverage in all regions. If you click one of the contract names it will bring up more detailed information about the requirements, as shown below.

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On the detailed requirements for a particular contract, you will see the required size range, engine range, minimum interior, styling, safety, quality, and dealer coverage. In addition, you can see your actual dealership coverage and, once a vehicle had been selected for a bid, the actual characteristics of the vehicle versus the requirements. Clicking on the Choose list box will bring up those vehicles in your portfolio that are of the required class and show their characteristics to compare with the RFQ. If you don’t qualify for the contract by meeting all specifications, you will not sell any units. Decisions: Analysis Clicking on the Analysis button at the top of the B2B decisions screen will display an overview of all the contracts similar to what you would find under the MARKET: B2B Contracts.

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Distribution Decisions Enter dealership management decisions, such as opening or closing dealerships on a regional basis and setting an overall dealership training and support budget. It takes one year to build / staff a new dealership or close an old one. Not having enough dealerships can leave markets uncovered, but having too many dealerships can lead to poor results due to overly competitive pricing and sales being spread thin. For each region, enter a change in the number of dealerships as a positive or a negative number. The maximum allowable change is 10% of your current total number of dealerships. So, if you have 600 dealerships, and you add 30 in one region and decrease by 30 in another region, you have reached your maximum allowable change (of 60 in the example). Coverage (dealerships in a region / sales areas in a region or full coverage) is calculated in two places. One with the scheduled change (dealerships added in the previous period) as well as with the current decisions. Especially important for B2B coverage requirements. Training and Support: These expenditures are spread equally across all dealerships. The allocation of this resource is targeted to improve the experience the customers will have at the dealership in the long run.

NOTE: It takes 1 year to open or close a dealership. For example, if you make the decision to add dealerships in the initial period, it will not impact results until the results are generated for period 2. Pending dealership openings and closings will appear on the "Sched. Change" line.

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Analysis This screen provides further insight into the performance of your dealer network, including dealer coverage and financial performance by region, planned openings, sales and support per dealer, and dealer ratings. Full coverage: The number of sales areas in each region. Thus, coverage of 45% would imply that 45% of the sales areas are covered in a particular region by dealerships. Gross/Dealer: The average amount of money (gross) a dealer in a region has to operate their business. This amount equals the difference between the dealer invoice (what the dealer pays for the vehicle) and the actual retail price for all vehicles sold in their dealership. These are, in effect, the revenues for the dealership. The more revenues for the dealership, the better salespeople and support staff they can hire, the more they can reinvest in their facilities, etc. Thus, the gross/dealer amount is a good indicator of their success as a business, which, along with training and support, will likely translate into higher dealer ratings. Dealer Rating: Customer satisfaction index from a leading market research company (range 1– 100, with 100 corresponding to highest satisfaction). Dealer ratings provide insight into the success of dealerships. The success and coverage of your dealerships is an important aspect of your firm's overall success. Your firm should think of your dealership network as a key strategic partner who shares in your success. Generally, the more successful your dealerships are, the more successful you will be, and vice versa. Unit Sales: Displays vehicle sales at the product level by region. Differences by region may be due to underlying demand overall, demand for a particular type of vehicle, differences in distribution, and differences in competitor intensity. You may access this same information on your competitors under the COMPETITION: Distribution menu.

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Licensing (Instructor Selected Option) Purpose: The licensing feature in StratSim allows you to negotiate an agreement to buy or sell a vehicle with another firm. The licensee requests to buy a number of units with particular specifications at a given price from another firm, which may accept or reject the offer. The LICENSING menu option allows the licensee to initiate a licensing agreement, the licensor to accept offers, and both parties to view existing agreements. Once an offer is extended by the licensee and accepted by the receiving firm, it is a binding agreement between the two firms. A firm cannot license more than two vehicles from other firms at any given time, so make your offers with care. Creating a New License Generally, teams will either meet face-to-face, talk on the phone, or email each other during the negotiation process, and the software is only used to enter the agreement. Thus, the licensee would typically enter specs that have already been negotiated and then officially extend the offer to the licensor. The offer is made through the decision screen shown below by entering the terms and clicking on the “extend offer” checkbox. Until that box is checked, the offer will not show up on the other firm’s license screen.

After saving the input, you may return to the main license screen which will be updated to show the offer. The licensee may continue to modify the agreement until it is accepted by the partner. Generally, however, any modifications should be made prior to selecting the “extend offer” checkbox. After that point, it is as if you mailed a signed contract to the other firm in the mail. From the licensor’s perspective, once an offer is made to them by the licensee, their licensing decision screen will show the offer. The licensor (Firm D in the above example) may now click on the vehicle name to see the offer from the licensee (Firm A in the above example). This will display the details of the offer made, and the team may choose to accept the offer by clicking on the

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[Accept] button. They will be asked to select a vehicle that qualifies for the license. The specifications for the licensed vehicle must exactly match the size and horsepower of the vehicle it’s based on—and interior, styling, safety, and quality for the licensed vehicle may be no more than the vehicle it’s based on. The licensor may initiate a minor upgrade on a vehicle to get it to qualify for a license agreement the same period; in this case, the minor upgrade may not be changed in a way that disagrees with the license nor may the upgrade project be deleted.

As soon as the offer is accepted, both the licensor and licensee screens will now show “accepted” status, and both firms are legally obligated to fulfill the license agreement. The licensee should remember to enter marketing decisions for a newly-licensed vehicle. License agreements can only be canceled by mutual consent, so both firms should be very careful about the negotiations and acceptance of agreements. Renewing an Existing License License agreements must be re-extended and re-accepted each period if the license agreement is to last more than one period. There is an opportunity to make changes to the agreement each period it is renewed. Note that period-by-period renewal does not preclude two firms making long-term agreements. However, they are outside of the scope of the simulation, and the obligations must be enforced in another manner as arranged by the instructor. If the licensee requests and the licensor accepts any change to a licensed vehicle’s attributes, an upgrade project will automatically be created in one of the licensor’s development centers. The project cannot be edited, and it can only be removed if the license is terminated. A major upgrade project will be created for large changes. The first year of the major upgrade, the licensed vehicle’s specifications will remain unchanged. The major upgrade cannot be modified partway through. Remember that licenses must be manually be renewed each period if you wish them to continue—even when a major upgrade is in progress for a licensed vehicle. While minor and major upgrades to a licensed vehicle must be initiated by changes to the license agreement by the licensee, a cost reduction upgrade may only be initiated by the licensor on the Product

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Development page. Note that upgrading the licensed vehicle does not upgrade the vehicle the licensed vehicle was originally based on and vice versa. While licensing a vehicle from another firm, the licensee may develop their own platform to bring production of the vehicle in-house. To begin development of the platform, go to the Product Development page, view the Transferrable Products at the bottom of the page, and click the up arrow icon next to the licensed vehicle that you want to transfer; the vehicle will then be moved to the Projects part of the page where development will proceed like any other project. When the project is ready, decisions for the licensed vehicle will be transferred to the newly developed platform, and the license agreement will be terminated. Manufacturing Purpose: Use the MANUFACTURING menu to enter decisions for product line production and overall firm capacity. The decisions and analysis screens provide supportive information regarding previous sales, inventory levels, and projections based on previous results, your decisions, and your forecasts. Based on your decisions, you may incur retooling, over-capacity charges, and / or the costs associated with building new capacity, all of which will be displayed here. Analyze your manufacturing process including scheduled product line planned production, flexible production, and overall plant capacity. Decisions: Production At the product level, there are two manufacturing decisions to be made: Scheduled (or Planned) Production and flexible production. Previous sales and current inventory levels are noted to help in your planning process, as are retooling costs, if applicable. Flexible production increases or decreases production by up to 10% to meet demand if the box is enabled. In general, the car industry aims to have 30–60 days of inventory available, but may have less if a firm is planning to upgrade or discontinue a vehicle. NOTE: when upgrading a vehicle, the current inventory will not be sold in the market, but instead will be written off at a loss to the company.

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By default, the Flexible Production checkbox is enabled. Flexible Production will not change production if inventory levels are projected to be between 0 and 120 days. However, if anticipated demand is greater than supply, the simulation will attempt to make up the difference by increasing production up to 10%. If anticipated supply is greater than 120 days, the simulation will reduce production by up to 10% in an attempt to limit inventory to 120 days. Since Flex Production is based on anticipated, rather than actual, supply and demand, it is possible for production to flex too much or not enough. If the Flexible Production checkbox is disabled, your firm will produce exactly what you have entered in the Scheduled Production field. NOTE: If the sum of all production (including flexible) exceeds capacity, you will be charged any over-capacity charges that apply. The over-capacity charge represents running extra shifts and paying overtime. Retooling costs are based on new platforms or increases in the production of an existing model, where existing capacity needs to be changed from one model to another. Thus, careful planning with regard to forecasting demand and production helps keep retooling costs lower. Decisions: Capacity To build or sell off overall firm capacity, click Capacity Change and enter the change in capacity (positive or negative). A capacity increase takes one year to build and cannot exceed 50% of the current capacity. The cost of the increased capacity is depreciated over ten years. The estimated cost of an additional 100,000 units of production is displayed, though you are not restricted to blocks of 100,000 units. The additional capacity becomes available for production decisions the following period. You may decrease capacity by entering a negative number. This sells off the least efficient plant capacity at 50% of remaining book value (if any). Increases and decreases are limited to 50% of your current capacity.

Alternatively, you may choose to produce over capacity at a charge dependent upon the number of units produced beyond the firm's base capacity. This value is shown in the plant capacity section of the screen as "Over-capacity Charge ($M)".

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Analysis The top half of the screen shows results from the most recent period; the bottom projects inventory levels based on your current decisions and forecasts. "Days inventory" is an estimate of the number of days of inventory available at year-end based on yearly sales; derived by the formula (365 x units inventory / sales). Generally, auto companies aim for approximately 30 days of inventory, but this may vary based upon development / upgrade plans for a particular vehicle. In the Comment field, a number of messages may appear: "some shortages" means less than 10% lost sales, "significant shortages" are 10–30%, and "extreme shortages" are over 30%. You may also see a note about a new or upgraded product, or if sales have exceeded planned production. You may find this same information on your competitors under the COMPETITION: Manufacturing menu. Financing Decisions Purpose: The financing decision screen is for all decisions related to the financial aspect of managing your firm, with a particular focus on cash flow and shareholder equity. You may select alternative financial instruments to raise funds, choose to invest extra cash in CDs, issue dividends to shareholders, and potentially buy back stock or call long-term bonds. Often, these decisions will be made after you have used the pro-forma [Analysis] to forecast your cash flow and financing needs.

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All values are entered in millions; thus, 2000 equals $2 Billion. To change a value, click into the value and that value-entry screen will open.

Cash: Current Cash Balance represents funds currently available for investment. Cash may be invested in a 1-year CD to earn interest. Stock: Issuing stock is one method of raising cash for the company, however issuing additional shares may dilute shareholder value. If stock buy-back is enabled, cash may be used to repurchase up to 20% of the outstanding shares by entering a negative number. Enter shareholder dividend amount, should you choose to offer a dividend. The shares outstanding will remain constant unless your team chooses to sell or buy back stock. Debt: Short-Term Debt represents a revolving line of credit at variable interest rates that is automatically issued if the firm runs out of cash. Reducing your short-term debt is a decision that you must make in the context of having sufficient cash available. Long-Term Debt bonds with a term of 10 years have lower interest rates than short-term loans. Bonds are eligible to be called after 3 years, but do not have to be. An interest penalty of 1 year is applied when they are called. Bonds must be paid off in full if called. No partial calls are allowed. Bond rating will vary based on the financial position of your company. Short- and long-term interest rates will vary based on your bond rating and general interest rates. Bonds are rated from D (lowest) to AAA (highest), where higher ratings correspond to lower interest rates. If your bond rating improves, the interest rate the market requires from your debt issues will decrease, all other things being equal. Analysis Results shown in the FINANCING: ANALYSIS reflect your decision inputs and projections from the current period using the format of the Cash Flow Statement, but adding the starting and projected balance in the cash account from the balance sheet. Review this report carefully to assess and forecast your cash flow and financing needs for the coming period.

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Special Decisions (Instructor Selected Option) Special Decisions If your instructor chooses, you may be faced with special decisions based on "incidents". Generally, there is no correct answer as it often depends on your firm’s particular situation as to what the best option would be. Some decisions have financial implications, others don’t. A special decision is a required option – you must select one from the list of options available in that period. The full incident description will be shown when you select the Special Decision menu choice. There is also a short video related to the incident. Feedback on your choice will be displayed under Industry News.

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Decision Analysis Review The DECISION REVIEW screen provides a summary of all your decisions for the current period. View this report at the end of your decision process and before the decision deadline, making sure all choices have been entered correctly. With the exception of the purchase of market research or tools, all decisions for the period can be changed until the simulation is advanced. After the simulation has been advanced, you will not be able to correct any input errors, so take the time to double check your entries before the deadline. You may also want to print out a copy. Select a different period in the top toolbar to view previous period decisions.

Alerts are displayed near the top of the decision review screen, warning you of potential decision input errors. These timely messages to your firm may warn you of no changes entered in your product decisions, no launch information entered for new products, unused concepts that have not been put into development, production of zero units, and no changes in non-product firm decisions. While some of

these may be your intent, it is always worth checking these messages so you can enter any necessary adjustments to your decisions before the simulation is advanced. When the simulation has been advanced to the next period, your course website and the simulation interface will be updated with the latest results; refresh your browser window to view the updated results. The simulation will now be in the next period (reflected at the top of the StratSim window).

Timeline The TIMELINE displays important events during the simulation related to decisions your company makes. The timeline may highlight dealership, production, development, manufacturing, and licensing decisions (if enabled).

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Pro-Forma PRO-FORMA uses your decisions and product forecasts to project inventory, income statement, balance sheet, cash flow, and product contribution for the upcoming year. Estimating the financial implications of decisions is an important part of the decision process. If the estimated values do not meet your expectations, you may want to reconsider your decisions or forecasts (or possibly, your expectations). Forecast Start the Pro-Forma process by entering your forecasts for each product. You may have done this during the decision process, but you may update those values here. The default forecasts are the sales during the prior year. Use the Sales Forecast links on this report to enter a forecast for each product. The forecasts represent your sales estimate (in units) for the consumer market for the coming year. When setting these forecasts, consider factors such as changes in your product (upgrades), price (MSRP or discounts), marketing support (advertising and promotion), expected demand, and, of course, the competition. Additionally, review any qualifying direct sales. Once forecasts have been entered, you can view the pro-forma Product Inventory report

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that calculates your projected inventory and retooling costs (if any), and Product Contribution report. All pro-forma reports are based on your forecasts and production levels.

NOTE: These values are derived solely from your decisions and your forecasts; actual results will differ from the figures displayed here after the simulation is advanced. The

pro-forma is for planning purposes only and has no actual impact on outcomes. Reports The Pro-Forma analysis provides five projection reports: Product Inventory, Income Statement, Balance Sheet, Cash Flow and Production Contribution. These reports parallel the ones under Results and Decisions, but are based upon your forecasts and inputs. Please see those menus for a more complete description of the content. Select the drop down menu just below the [Reports] button to select and view a different report. Reports: Product Inventory The inventory report levels on this report may be used to check planned production volume decision for the coming year. This report uses product sales forecasts, existing inventory (taking into consideration upgrades), and planned production volume to predict inventory levels for the upcoming year. Good forecasts are key to making accurate production decisions.

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Reports: Income Statement The PRO-FORMA: Income Statement report shows projected overall financial results for the upcoming year, based upon your current decisions. Click a line category link on this page to view detail of the charges that comprise the total.

Reports: Balance Sheet The PRO-FORMA: Balance Sheet report shows projected asset and liability account balances for the upcoming year, based upon your decision inputs and forecasts this period.

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Reports: Cash Flow The CASH FLOW statement shows the sources and uses of the firm's cash. Changes in the amount of cash in the firm can be calculated based on cash flow from operating, investing, and financing activities. Line items may have different context modifiers as indicated by parenthesis. Using the Inventory line item as an example, a positive inventory cash flow amount indicates an increase in cash due to a decrease in inventory, and a negative inventory cash flow amount indicates a decrease in cash due to an increase in inventory. The modifier in parenthesis corresponds to the negative cash flow amount.

Reports: Product Contribution The PRO-FORMA: Product Contribution report shows projected financial results at the product level, based on your current decision inputs and forecasts. This is an especially helpful report for setting prices relative to costs as it takes into account any product upgrades, production volume, and increases in material and labor costs for existing products and provides an accurate estimate of variable manufacturing costs for new products. The estimated contribution ($) and percent is valuable to compare across product lines.

Projections are provided overall (top) and on a per unit basis (bottom).

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Market Industry News Purpose: INDUSTRY NEWS is a great place to start the external / environmental analysis process as the NEWS and OUTLOOK buttons provide information on high level events and trends shaping the industry. Availability: Always Available | Free | No Restrictions News NEWS highlights significant events that occurred throughout the industry in the previous period and information about the state of the economy. News items include product launches and upgrades, planned launches of new products into new classes, new development centers, drastic changes in stock prices and market share, and other news of general interest. Finally, if there are any incidents to address in the current decision period, these will be listed here with a short description. Less important information is not included in the report, such as minor fluctuations in stock prices or market share. Links to important information, such as new product attributes, are embedded in the text. New vehicle class launch plans of your competitors (3 year projects) are announced in Industry News in the period before the launch, and licensing agreements are shown in the period vehicles are launched.

Though the INDUSTRY NEWS report is rather brief at the beginning of the simulation, you can be assured this screen gets considerably longer as the game progresses!

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Outlook The OUTLOOK report provides a very brief overview of the general economic conditions for the current year, past year, and a forecast for the coming year to help with financial decisions. Economic strength (based on GDP growth) and low interest rates typically have a positive impact on car sales. The inflation rate and increases in material and labor costs should be considered when making pricing decisions. The Prime Rate is the underlying index for most loans and therefore is the basis of the borrowing rate for firms along with duration and risk. The Cash Rate is the interest rate paid on 1 year CD investments. Availability: Always Available | Free | No Restrictions

Dealer Car Sales equals the total sales of economy, family, luxury, sports, and AEV classes. Dealer Truck Sales equals the sales of minivan, truck, utility, and delivery classes. If enabled, B2B Direct Sales total will also be shown in this report. Sales by vehicle class can be found in the MARKET: Vehicle Sales report.

The graph displays data from this report over time. The default graph is a plot of the Economic Indicators over time, but you may also select Gas Prices or Car, Truck and B2B Sales using the drop-down list box as shown in the example to the left.

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Vehicle Sales Purpose: VEHICLE SALES provides more detail on two standard industry categorizations – Region and Vehicle Class. REGION ANALYSIS provides insights for distribution decisions while CLASS ANALYSIS will help your firm assess the relative attractiveness of the various vehicle classes. Availability: Always Available | Free | No Restrictions Class Description The CLASS DESCRIPTION report provides a graphic of the relative size of the vehicle classes based on unit sales as well as a description of each vehicle class.

In StratSim, there are multiple vehicle classes as shown in the graphic to the left and other classes may be developed and introduced as the simulation progresses. Click the graphic (i.e., the slice of the pie chart associated with Utility vehicles) for description of the vehicle class as displayed in the example at the left.

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Region Analysis VEHICLE SALES summarizes vehicle sales by class, region, and B2B (if selected). Click a vehicle class (i.e., Economy) to view details of product unit sales by region and a graph illustrating product market shares for that class (as shown on previous page). Click on a region (i.e., North) to view dealerships and sales by firm on a regional basis. Vehicle detail available on a pop-up basis.

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Class Analysis This report provides a selectable pie chart of unit market share by vehicle class. Clicking on a piece of the pie (or into the class from the list at right) will provide more detailed information about the products competing in that vehicle class. Several pull-down graphs are also available for the selected class.

The link to a vehicle class (such as, Family) provides details of the vehicle class market share and marketing information. This information includes vehicle sales (in units), share of class, overall share for the vehicle, MSRP, advertising budget and theme, and promotional budget. It also will open up some of the graphical analysis tools for this report, which is described in further detail on the following page. Clicking a vehicle name link will open a pop-up window with additional product details.

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Class Analysis: Graphical Analysis Associated with the vehicle classes are five analysis graphs: Units Sold, Unit Share, Positioning Map, Advertising and Promotion. All but the positioning map are fairly straightforward graphical aids. The POSITION MAP provides a visual representation of expected Vehicle Size and MSRP ranges for a particular class, including how vehicles in that class are positioned on these two dimensions. In the example, the boxed area denotes the expected price and size ranges for the economy class. The two economy class vehicles, Alec and Delite, are marked A and B and are listed in the legend in the order of sales. Thus, the sales leader for this class is Alec. Based on this plot, one can say that Alec is larger and higher priced than the Delite, that the expected price of an economy vehicle appears to be under $20,000, and that the expected size of an economy vehicle is less than 35.

NOTE: Positioning maps can also be viewed at the microsegment level which provides

specific information for microsegments rather than for vehicle classes.

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Consumer Segments Purpose: CONSUMER SEGMENTS brings the consumer into your analysis at a high level. SEGMENT SALES provides information about relative attractiveness (sales, growth and preferred vehicle class) of each consumer segment and SEGMENT ANALYSIS provides information about segment preferences. Availability: Always Available | Free | No Restrictions Segment Descriptions The SEGMENT DESCRIPTIONS report provides a graphic of the relative size of the consumer segments based on unit sales as well as a description of each segment.

In StratSim, there are five consumer segments labeled 1– 5. Within each segment, there are multiple microsegments with different transportation needs. Demographic and psychographic characteristics also vary by segment. Click the graphic (i.e., the slice of the pie chart associated with Families) for description of the segment as displayed in the example at the left. To learn more about the preference of the various segments, use the SEGMENT ANALYSIS button as described on the following page.

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Segment Analysis SEGMENT ANALYSIS provides additional information each segment including the retail sales, unit sales, and preferred vehicle class. Click a segment link (i.e., Families) for the Preferred Vehicle Class and Firm Shares reports. The first report provides more preference details based on the segment’s preferred vehicle class(es), including expected price range, preferred vehicle size, most important vehicle attribute, and the top selling vehicle. The second report provides additional detail based on the firm, including retail and unit sales, market share, and top selling vehicles. You may find these reports sufficient for making decisions, or you may want to explore each segment more by reviewing information at the microsegment level.

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Microsegments Purpose: The MICROSEGMENTS report summarizes customer detail information, displaying overall sales to each customer, the percent change in sales during the most recent period, a forecast for next year, and the leading product (based on units sold to microsegment). This report is designed to assist you in assessing microsegment attractiveness based on relative demand. Availability: Always Available | High Level – Free, Detail - $25,000 each | No Restrictions Click a microsegment link (i.e., 1E through 5U) to display customer detail information, as described on the next page.

The screen at left shows 3 Potential New Consumer Segments (circled) and initial data on these potentially emerging customers. In this sample, the High Income segment that would like to purchase a minivan (4M) is estimated to be the largest potential new customer in terms of expected units sold. The expected price range, vehicle size range, and most important attribute are also shown. New customers may be looking for a new vehicle

class, such as an AEV, or a significantly different configuration of an existing vehicle class. If a firm introduces a vehicle that "excites" these customers, a new customer may "pop", creating new demand in the marketplace. As a rule in StratSim, at most, only one new customer can "pop" or emerge each period. Additional new customer opportunities may be identified as the simulation progresses.

NOTE: It is important to understand that there are no guarantees when Introducing products into new markets and StratSim reflects this risk.

For one of these emerging customers to generate significant sales, the vehicle must be designed to meet the needs for that customer. Without sufficient differentiation and marketing for the

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new vehicle, the necessary marketplace "buzz" will not be generated. The combination of unmet needs and successful development and marketing of a vehicle makes a new microsegment emerge as a viable market. Microsegment Detail ($) Purpose: The MICROSEGMENT DETAIL report provides sales and consumer data at a finer level than either consumer segment or vehicle class. Use this information to decide if this is a microsegment your firm should target based on market attractiveness and competitive intensity or how to better meet your target customer’s needs with an existing vehicle. Availability: Always Available | $25K per microsegment | No Restrictions A microsegment is defined as a particular segment that has a preference for a vehicle class. Thus 1E = 1 (Value Seekers) who prefer an E (Economy Class Vehicle). In addition to repeating the microsegment demand information from the overview, this report also contains information relevant to a particular customer’s purchase preferences including expected size, price, and engine ranges, microsegment hot buttons, and price sensitivity. In the bottom half of the screen, the report lists the primary vehicles competing for this customer, their microsegment unit market share, and some relevant marketing mix information.

Below this detailed description, there are three analysis graphs relating to the microsegment detail: A Position Map of the leading competitors for that particular customer, a scatter plot of Price vs. Unit Sales, and a scatter plot of Awareness vs. Unit Sales. These are described on the following page.

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Microsegment Detail ($): Graphical Analysis The Position Map (default option) includes all vehicles in the primary or secondary class (or vehicles with greater than 5% of market share). The vertical axis maps the MSRP, while the horizontal axis maps the Vehicle Size. The boxed area represents the microsegment's price and size preference which one could think of as their "consideration set". Although similar to the positioning map previously discussed in the VEHICLE SALES: Class Analysis report, this map is focused on a particular microsegment, rather than a vehicle class. Generally, a microsegment’s positioning map has a more narrowly defined focus than the vehicle class positioning map. Click into the drop-down menu to change the graphical analysis. Price/Sales maps the relationship between price and the number of units sold for vehicles competing for this customer. Awareness/Sales maps the relationship between units sold and advertising awareness for the vehicles preferred by the selected customer.

Be careful not to use any one of these relationship graphs as the single predictor of sales. All must be considered, along with other factors such as the various vehicle characteristics (interior, styling, safety, and quality), distribution, etc., to fully understand sales results. However, the maps can be quite helpful in visualizing some of the key variables that impact market share by microsegment.

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B2B Contracts Purpose: This report displays a list of all B2B contracts and displays if you have hired sales force to target the contract, the segment (6, 7 or 8), the required class, and the guaranteed units (000s). The overview will help a company determine which B2B contracts may make sense to pursue. In addition, once firms bid and are awarded contracts, the sales for each company will be listed here as well. The report provides a helpful overview of contract potential and competitive activity in the B2B market. Availability: Instructor selected option | High Level – Free, Detail $25,000 each | No Restrictions

From the main screen, you may sort on the B2B segments, the required vehicle class, and the guaranteed units. You can also click a contract link from this screen (as you can from B2B Segments screen) to purchase a contract detail report. This will provide your firm with the requirements for qualifying, as well as the current preferred and secondary suppliers. There are also links to hire/reallocate a salesforce to pursue the contract and a link to the B2B Marketing decisions screen.

To qualify for the contract, your vehicle must be the correct class, within the size and engine ranges, and must meet or exceed the interior, styling, safety, and quality ratings, and must meet or exceed the dealer coverage in ALL regions. The preferred supplier will be the vehicle that meets all the qualification criteria at the lowest price.

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Competition Products Purpose: The PRODUCTS report provides side-by-side comparisons of the main characteristics of each vehicle in the market. Each vehicle’s class, price, size, engine, interior, styling, safety and quality are displayed along with its overall market share. Click a column title link to reorganize the data by vehicle Name, Class, Units Share, MSRP, or Size. Availability: Always Available | Free | No Restrictions

View in-depth product details by clicking a vehicle name link (such as Alec or Boffo). The detail report includes all relevant information on a particular vehicle, including current attributes, prices, and marketing strategies, along with attributes over time.

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Technology Purpose: This report displays the current Interior, Styling, Safety, and Quality (ISSQ) technological capabilities and the development center count for each firm. These values represent the maximum ISSQ the firm can achieve in the current period using product development. The current maximum feasible limit for ISSQ for any firm is also shown. The maximum limit may change over time if new breakthroughs are discovered and represents the highest value any firm can achieve long-term through investments in technology capabilities. Availability: Always Available | Free | No Restrictions

This example shows the most appealing product Firm A can create is one with interior of 5, styling of 5, safety of 4, and quality of 6. All customers find higher values in these areas more appealing than lower values. Should a firm consider the

investment worthwhile, increases in ratings can be achieved long-term through investments in technology capabilities up to the current maximum feasible of 9, 11, 9, 11. For insight into a firm's possible future vehicle

generations, click a firm link (Firm A through Firm E). These details contain the history of the firm’s investment in technology capability.

Definitions Interior (I) Flexibility of the cargo space. Styling (S) General curb appeal, styling, handling, finish. Safety (S) Structural design, braking systems, safety features. Quality (Q) Overall reliability, durability, consistency of product.

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Marketing Communications Purpose: The MARKETING COMMUNICATIONS report summarizes information on marketing expenditures and firm brand equity as measured by market share and firm preference. Brand Advertising and Brand Promotion are the total of individual products. Val. Market Share equals firm sales ($) divided by total industry sales ($) at the manufacturer’s level (not retail). Unit Market Share equals firm sales (units) divided by industry sales (units). Firm Preference is the measure of customers that showed an overall preference for doing business with a particular firm based on vehicles offered, dealership reputation, and other factors. Historical Graphs include Communications Expense, Unit Share, and Firm Preference all available using the drop- down box. Availability: Always Available | Free | No Restrictions

Click a firm name link (Firm A through Firm E) to display that firm's marketing expenditures and decisions broken down by category, and vehicle-specific marketing mix decisions. To re-display the firm level graphs after viewing details, click the X at the top right corner of the Marketing Details section. Click a vehicle name link (e.g. Defy) to display that vehicle's Product Detail screen which provides information on key marketing details over time.

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Distribution Purpose: The DISTRIBUTION report summarizes information about the dealer networks for all firms. These include current and previous number of dealerships, scheduled openings, spending on dealer training/support, dealer ratings, and inventory data. Availability: Always Available | Free | No Restrictions

Historical Graphs include Dealer Rating, Inventory, Dealers, and Dealer Training over time. Dealer Rating is a customer satisfaction index from a leading market research company and ranges from 1–100, where 100 corresponds to highest satisfaction. Dealer ratings provide insight into the success of dealerships based on the customer experience during sales and service visits. To view a firm’s Distribution Details report which includes dealership performance on a regional basis, click the firm name link (e.g. Firm A through Firm E). Details include the coverage ratio, planned openings, sales and support per dealer, dealer ratings, and specific vehicle sales by region. Coverage is the number of dealers divided by the number of sales territories in a region. Thus, coverage of 45% would imply that 45% of the sales territories are served by dealerships in a particular region.

Gross/Dealer represents the average amount of money (gross) that a dealer has to operate their business.

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Manufacturing Purpose: The MANUFACTURING report displays production capacity, actual production, capacity utilization, sales, and inventory (in 000s and days) for each firm. Comments may also be displayed including alerts for product shortages, production greater than demand, or demand being greater than capacity. Graphs including Plant Utilization, Units Sold, Inventory, Production, and Capacity display data over time for all firms in the industry.

Firm-specific manufacturing details can be viewed by clicking a firm name link (Firm A through Firm E). The Details report provides Production, Sales, Inventory, and Days Inventory for each product line. Days Inventory is an estimate of the number of days of inventory available at year-end based on yearly sales and is derived by the formula (365 x units inventory / sales). In the Comment field, a number of messages may appear including estimates of shortages, sales exceeding planned production, and if a product is upgraded or new.

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Financial Summary Purpose: This report provides a comparison of key financial and market performance data for all competitors, such as market share, firm preference, sales, COGS, income, stock price, and debt level. Click a Firm name to access all three publicly available financial statements (Income Statement, Balance Sheet, and Cash Flow described earlier under Results and Decisions).

Mkt Value is the stock price times the number of shares outstanding. Note that each firm has a different number of shares outstanding at the start (and may issue or buy back shares). Graphs display historical graphs on key performance data for all firms.

Val Mkt Share Firm sales divided by total industry sales at the manufacturer’s level (not retail). Unit Share A firm's vehicle sales in units divided by industry unit sales.

Preference Firm preference is a measure of customers surveyed who show a decided preference for a particular firm. This is based on overall vehicle offerings, dealership reputation, and firm awareness.

Sales ($) Sales are recognized at the time of purchase by the end customer. The dollar amount is based on dealer price, not retail price or MSRP.

COGS ($) Cost of goods sold (COGS) is the total variable manufacturing cost for the product sold. This is based on the R&D unit cost and the cumulative production.

Marketing The sum of corporate advertising, public relations, product advertising, product promotion, and sales force.

R&D Research and Development are the costs associated with product and technology development including process improvement costs.

G&A General and Administrative includes overhead from sales and the dealership network. Dealership training and the cost of changes in the number of dealerships are the result of your decisions, but most G&A expenses are not under your direct control.

Other ($) Licensing fees, interest expense, plant and inventory write-offs, and income taxes. Income ($) Income after taxes. Stock Price ($) Current per share market value of the firm.

Mkt Value ($) Stock price times the number of shares outstanding. Each firm has a different number of shares outstanding and can issue new shares, so this is a better indicator of the relative value of the company than stock price alone.

Total Debt ($) Combined long and short-term debt.

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Tools Sales by Microsegment ($) Purpose: The Vehicle SALES BY MICROSEGMENT tool reports which customer segments are buying a particular vehicle and how many they are buying. This information identifies those customers most interested in a particular vehicle. Availability: Instructor selected option | $25,000 each | Maximum of 10 studies per period Data for this study is collected through a consumer survey of car buyers and and broken down by customer microsegments. This report contains only information on the consumer market and does not include B2B customers.

On the initial screen, select a vehicle from the list box. Clicking the [View Study] button will charge you for study and display the report, as shown below. Each column may be sorted by clicking on the column header.

Units are the unit sales to that microsegment. Percent of Vehicle Sales calculates the sales of a vehicle to a particular microsegment relative to all consumer sales of that vehicle (e.g. sales of a

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particular vehicle to microsegment / total sales of that vehicle). The Unit Share of Segment column calculates the sales of a particular vehicle sales relative to the total purchases by that microsegment (e.g. sales of a particular vehicle to a microsegment / all vehicles purchased by that microsegment). The Other microsegment contains outlying customers that purchased an insignificant number of units. Focus Groups ($) Purpose: A focus group is typically a gathering of six to ten people with a facilitator designed to learn what participants think about particular product/service attributes, how they make purchase decisions, or any other information that may be relevant to the company. Availability: Instructor selected option | $50,000 each | No restriction on number of studies per period

Data is organized by customer microsegment and is summarized from focus group discussions throughout all regions of the StratSim world. The list of available reports is ordered by customer microsegment (e.g. 1E, 1T, etc.). To purchase a report, select the microsegment link (e.g. 1E, 1T, etc.) and click on the [View Study] button to see the focus group results as show below.

The STUDY RESULTS show the market share and customer opinions for the top selling vehicles purchased by the particular microsegment during the most recent period. Their responses provide descriptive measurements about the attractiveness of various vehicles to aid in R&D and competitive analysis. The columns marked "hot" indicate the most important attributes for the selected microsegment.

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Concept Tests ($) Purpose: CONCEPT TESTS allow firms to get early feedback on development products in the concept stage or that are already in development (upgrades and new products). Spending time with customers early in the process can save a tremendous amount of resources down the road. Availability: Instructor selected option | $100,000 each | Maximum of 10 studies per period Concepts, upgrades, and new products must be first created under RESULTS & DECISIONS: PRODUCT DEVELOPMENT before a test can be run. Once created, development projects and concepts can be tested against one microsegment and price point at a time. Within the context of the CONCEPT TEST study, the MSRP and retail selling price is the same. In reality, the actual retail selling price is rarely the same as the MSRP as the dealer decides on the retail selling price, often on an individual basis. To run a CONCEPT TEST, select the Microsegment, Project (Concept), enter Price and click the [Run Study] button. Each price, microsegment, and concept combination is a new study.

Study Results provide two helpful pieces of information on the development project. First is a summary of the target microsegment’s feedback on your vehicle similar to the focus group study. Second is the estimate of the percentage of people who are likely to purchase the product based on current competitive products and pricing. This estimate does not take into account competitive differences in distribution, advertising, preference, etc. Nor does it include potential sales to other microsegments. Use the "Likely to buy" result only as a starting point in product launch production forecasts. For example, if the likely to buy is 20% and the target segment is forecast for 100K units, a good starting point for your forecast would be 20K (.20 * 100K) units.

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Competitive Mapping ($) Purpose: The COMPETITIVE MAPPING tool is used to graphically track competitive movement on key decision variables over time, and becomes more valuable as the simulation progresses. Availability: Instructor selected option | $25,000 each | Maximum of 20 studies per period

Compare your product to a competitor's, or compare competitor products to each other. Select two products and two dimensions from among important marketing variables and product development specifications. Clicking [Run Study] will charge you for the study and display the comparison grid similar to the example below.

In the Study Results, selected products are represented as shapes and positioned based on the values associated with the dimensions chosen. Shape size scales with unit sales for the products selected. Movement reflects changing decisions by the associated company over time.

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Perceptual Mapping ($) Purpose: The PERCEPTUAL MAPPING TOOL uses multi-dimensional scaling (MDS) to display the relative positioning of brands and the ideal vehicle of a microsegment in a two-dimensional graphical space. The technique provides insight into relative vehicle positioning in the mind of a consumer microsegment, vehicle appeal to that microsegment, and potential drivers of vehicle perception. In addition, one may also use it to roughly estimate vehicle attributes based on consumers’ perception of the vehicles. Availability: Instructor selected option | $250,000 each | Maximum of 8 studies per period

Study Results: To run the study, choose a microsegment and click on the [Run Study] button to purchase the report and generate the map. Initially, the map will only show the perceived relative positioning of the vehicles in the minds of the microsegment selected along with microsegment ideal positioning. The map displays the top vehicles of interest to the microsegment (ranked by sales), an "ideal" vehicle (the "*" on the map), and the "stress" of the map (how difficult it is to display in two dimensions, where lower stress indicates a map that captures the relative positions better in two dimensions). There are three overlays to the map to aid in your interpretation. First is the choice of one of eight vectors (along with corresponding r-squared, where higher indicates a stronger correlation of the vehicle ordering on that dimension between the map position and vehicles’ actual attributes) that may be placed on the map. Second are the associated perpendiculars from the vehicles to the chosen vector which may be used to show relative perceived position on a particular dimension (tempered by statistical validity). Last are the proximity circles that capture the relative distance of vehicles to the ideal point.

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Interpreting Perceptual Map Results Perceptual mapping in StratSim uses multi-dimensional scaling (MDS) techniques to arrange vehicles in a two-dimensional space based on how similar (or dissimilar) respondents believe the vehicles to be. Three aspects of the map need to be understood: plotting of the brands and customer, addressing the issue of stress, and interpretation of the directional vectors.

First, consider the limitations of displaying relative positioning of vehicles with multiple dimensions in a two-dimensional* graphical space. For example, we know that automobiles have thousands of actual and perceived characteristics. Even with this constraint, generally one will find that when the vehicles are plotted on a two-dimensional perceptual map, vehicles that are perceived as similar tend to cluster together. In the example at left (for the 3U microsegment), we could say that people surveyed perceive the Awesome and

Euro to be similar to each other and similar to the customer ideal (both are sports utility vehicles in this example), but much different from the Defy and Alfa. We could also say that this customer perceives the Defy and Alpha to be more similar to each other than the Alec and Buzzy are to each other, as the distance between the brands can be used to measure the degree of similarity. In addition, the "ideal" product for the 3U is also plotted, and, based on the graph below, we would expect the Awesome and Euro to be selling well to the 3U customer as they are close to this estimated ideal product. It is important to note that this plot is based on consumers' perception of the brands. For example, a manufacturer might market two physically identical vehicles under different nameplates. You might expect the two brands to be located in the same position, but this is unlikely to occur because of perceptual differences. These differences may be intentional, due to marketing strategy, such as advertising message, price, or distribution, or they may be unintentional, for reasons such as a lack of information. *Practitioners generally refer to perceptual maps as being n-dimensional because the number of dimensions may vary. Perceptual maps are typically plotted in two- or three-dimensions for visual clarity.

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Perceptual maps generally portray similarities and differences accurately (such as in the above example), but other times they may be difficult to understand. Mathematically, this is represented by the stress factor value, which measures the ability of the mapping technique to solve all of the relationships among the brands. The closer the stress factor value is to zero, the better the map describes the similarities among the brands. It is unlikely that the stress factor value will be zero unless the number of dimensions matches the underlying number of dimensions (fairly large) or there are few brands.

The directional vector correlates brands with a particular characteristic. In the example shown at left, perceived size increases moving up and to the right on the graph in the same direction as the vector. The rank order of vehicles based on size can be determined by drawing lines perpendicular to the directional vector through the brand position. Thus, the expected order (from lowest to highest perceived size) moving from left to right perpendicular to the vector in the example below is Alec, Awesome, Detonka, Efizz, 3U ideal, Alfa, Euro, etc. This may or may not be the same order

as the actual size. This is due to the underlying methodology used in creating the map as well as how the products may be perceived vs. their actual characteristics. The reliability of the vehicle placement is somewhat captured by the overall stress measure and the r-squared of the particular vector. Nevertheless, if managing the Awesome and targeting the 3U microsegment, we might conclude that the size should be increased to better meet the needs of the 3U microsegment. The r-squared value for this vector equals 0.92, which indicates a very good relationship (1.0 would be a perfect relationship, 0 would be no relationship). Typically, the characteristics that are most important to the consumer also have high r-squared values; one would expect the characteristics that are most important to a consumer type to differentiate the vehicles in the consumers' minds. This is not always the case, so be sure to consider the r-squared value before drawing any conclusions. The perceptual map contains a great deal of information and can be of great value in determining who your competitors are in the mind of a particular consumer, providing an indication of what is important to a consumer, and potentially the changes needed to better target a particular microsegment. But it has limitations and requires an understanding of the underlying methodology used to create the map as well as how to interpret the results. StratSim uses true perceptual mapping techniques in this tool rather than a simplified model of mapping. This means that you will be able to transfer techniques learned with the simulation to actual

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perceptual maps of other industries. To see a more simplified approach, please see the positioning maps in the MARKET: Vehicles Sales report under Class Analysis or TOOLS: Competitive Mapping, both of which display a basic graph of two directly measured dimensions and are easier to interpret. Test Market ($) Purpose: The TEST MARKET tool estimates the impact of changes in price, advertising, and/or promotion on awareness, market share, and contribution based on either simulated test markets or city level experiments that scale well to the national level. The test market study should mainly be used for estimating the sensitivity to changes in these marketing variables not as a forecast itself, as the sales forecast will be influenced by many other factors such as competitors’ decisions, product upgrades, etc. Availability: Instructor selected option | $100,000 each | Maximum of 10 studies per period

Select a product and enter the price (MSRP), advertising, and promotion levels (as if done nationally). The maximum change in price is +/- 10%. Advertising and promotion can be run at levels representing $50 million or double the current levels, whichever is greater. Clicking the [Run Study] button will charge you for the test, run the test market, and display the results.

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STUDY RESULTS show the current marketing expenditure levels as a Baseline, but may vary from national conditions. The Test column will show the test market conditions and resulting awareness, market share, and net contribution.

Note that these results are only estimates based on the test market and don’t factor in other changes in the market or competitive landscape that may occur in the decision period.

Conjoint Analysis ($) Purpose: CONJOINT ANALYSIS helps marketers better understand the choices that consumers make. A well-designed conjoint analysis experiment provides an estimate of the relative importance and level of attributes to a particular consumer microsegment. Conjoint experiments require consumers to make trade-offs among various attributes to estimate a consumer’s underlying choice structure. Availability: Instructor selected option | $500,000 each | Maximum of 4 studies per period Before using the CONJOINT ANALYSIS tool, determine what attributes or dimensions are important to your target microsegment and the relevant ranges for those attributes. The particular attribute levels that are chosen have an impact on study validity. You must choose ranges wide enough to provide reasonable trade-offs, but not too wide as to be beyond the consumer’s consideration set or beyond the scope of your product development capabilities.

Example: If you choose 3 price levels on a car of $20,000, $20,001, and $20,002, most consumers, though they would prefer $20,000, would be very happy to pay another $1

or $2 for an engine that they’d prefer. Thus, they aren’t being forced to make a real trade-off between two choices. Without that trade-off, conjoint analysis isn’t effective.

Click either the [Guided Study] or [Standard Study] button to select a microsegment and the most important trade-off attributes. In the Standard Study, your firm will have the ability to select three of five vehicle attributes: product Class, Price, Engine (HP), Specs (ISSQ), and Size. The Guided Study allows you to select only two of three options: Price, Engine (HP), and Size.

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Select a Microsegment and the appropriate number of Dimensions to use in the study. Choose dimensions that are important to both the respondent and to the product development process. Based on the inputs selected in the sample at left, there will be 4 x 4 x 4, or 64 different combinations of attributes. Participants will actually be asked to choose from among fewer than 64

different product combinations, thanks to statistical methods allowing fewer choices while still providing the trade-offs. For illustrative purposes, you can easily imagine a customer deciding between an MSRP of $14,000 and an engine HP of 140 and an MSRP of $12,000 with an engine HP of 100. In effect, are they willing to pay $2,000 more for the extra 40 HP?

Once the attribute levels have been entered, click the [Run Study] button to see the conjoint study results. Note: ISSQ specifications are considered in conjoint within StratSim as a unit. Thus, in the example above, one option is 1, 1, 1, 1, and another is 1, 1, 2, 2, etc. and the target microsegment considers that combination in its entirety rather than separately. This actually provides the conjoint designer more options for trade-offs with regard to ISSQ levels.

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Interpreting Conjoint Study Results The STUDY RESULTS show the relative importance of each attribute to the microsegment. At the top of the results page is a Weights/Importance section with the relative importance of each type of attribute. In the example below, for this particular microsegment, with this particular set of attribute values, price appears to be most important, followed by the specifications, and finally the engine performance (70% > 18.6% > 11.4%). Remember that two other dimensions (vehicle class and vehicle size) that weren’t considered at all and that results may vary considerably depending on the particular attribute levels selected. It may be insightful to rerun the study with different dimensions and/or attribute levels.

The next section of the STUDY RESULTS is titled Parts-Worth Analysis. This represents the preference associated with each level of attribute tested. Thus, in the example above, an engine horsepower of 100 appears to be most preferred (having a utility of +.05) and a price of $11,000 (utility of +.36). It appears that for this customer, under this set of assumptions, that having the price of $11,000 is more important than having the right engine (+.36>+.05). This is also reflected in the Weights/Importance values above. Based on just these results, it appears that designing a vehicle that has HP of 100 and a cost that would allow it to be priced at around $11,000 would be a good place to start the product development process for this microsegment. However, one must always be careful with pricing decisions to consider competition, customer expectations, and cost (margin). The pricing issue is especially important because of the high importance placed on price by this customer. Apparently, the customer is unlikely to opt for more features at a higher price.

NOTE: All numbers in this example are for illustrative purposes only and

should not be used as the basis in your own strategy.

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Portfolio Analysis The PORTFOLIO ANALYSIS displays your current product portfolio in a 2 x 2 growth-share matrix using the standard Boston Consulting Group (BCG) definitions (growth rate and relative market share) and terminology (star, cash cow, dog, question mark). The growth-share may be used to better understand the relative market and competitive position of the products in your portfolio and potentially to help determine resource allocation across a company’s product lines. A considerable amount of information is captured in this single graphic including a product’s:

• market attractiveness based on vehicle class or microsegment growth (vertical position) • relative competitive performance based on relative market share (horizontal position) • relative importance to the company based on sales (circle size)

This analysis may be run on a market definition of vehicle class or microsegment. By Vehicle Class Click the [By Vehicle Class] button to select the market definition to vehicle class. This view displays an overview of your competitive position relative to other products in the same vehicle class. By Microsegment Click the [By Microsegment] button to change your market definition to customer microsegment. Doing so will repopulate the analysis based on the customer segment that purchases the most of a particular vehicle. Growth and relative share are also adjusted accordingly. Market Attractiveness: Growth rates for product classes are found in the MARKET: VEHICLE SALES reports and analysis. Growth rates for microsegments are found under MARKET: MICROSEGMENTS. Relative Share: In this study, relative market share is used as the measure of a product's performance. Relative Share is calculated by dividing a product's market share by the market share of its largest competitor. Obviously, share of market would be dependent upon the definition of market (as described above). Share of each brand for a product class is found in the MARKET: VEHICHLE SALES -> Class Analysis and then clicking on a vehicle class. Share of microsegment is found in the MARKET: MICROSEGMENT and then clicking on a particular microsegment.

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As an example for how to calculate relative marketing share, if a utility vehicle has 47% of the utility class and its largest competitor has 19% of that same class, its relative market share is 47 / 19 = 2.47, placing it to the left of the vertical line. Thus, those products that are centered to the left of the vertical line are market leaders; those to the right are market followers (based on this definition of market).

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Simulation Introduction A brief video overview of StratSim environment and reports.

Resources An assortment of files that provide additional information about the simulation:

• CASE: Presents the simulation's scenario in a form similar to a business school case. Please read it carefully.

• GUIDE: A downloadable PDF of the simulation operations guide. • GLOSSARY: Definitions of terms used in simulation and student manual; also appears in

the Appendix of the student manual. Print Reports The PRINT REPORTS page makes it easy to export hardcopies or spreadsheets of multiple reports in the simulation. Check the checkboxes for the reports you’re interested in. Click the Download button to export the selected reports to a single Excel workbook file with each report on its own worksheet. Click the Print button to sequentially make hardcopies of the selected reports: A report will open in a new window, and the print dialog will open automatically. You can close the new window when you’re finished printing the report and return to the main simulation window. Click Print Next to open another report in a new window for printing; click Done to cancel the print process. Theme Select the color theme to use in your simulation window. Logout Simulation logout

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Appendix

STRATSIMMARKETING

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Glossary

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

Advertising Message The point that an advertisement is trying to make, whether to build a particular image, stress the benefits of the product, compare with other brands, or maintain awareness.

Average Retail Price

The average price for a product charged by retailers, including both those dealerships with higher prices due to increased personal service, exclusive merchandise lines, attractive showroom atmosphere, special promotions, convenient location, or special services, and those who offer a no-frills, low-price approach.

Awareness The level of consumer familiarity with a product, brand name or advertisement.

Breakeven Analysis

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

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

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

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

Competitive Analysis The process of studying other companies who are vying to satisfy similar consumer needs. This includes analyzing competitors' strategy, product, pricing and channels of distribution.

Dealership The retail distribution outlet where consumers purchase the product (automobiles).

Demand The desire of consumers for a certain product.

Fixed Costs

Financial obligations of a firm that remain at the same level no matter how many units of a product are produced and marketed. Amortization charges for capital equipment and plant, plus such charges as rent, executive salaries, property taxes, and insurance are examples.

Gross Margin Total revenue less product manufacturing costs (materials, labor, plant and equipment).

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

Inventory Stock of a product that is already produced but not yet sold. Margin The difference between the price of a product and its per unit cost.

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

Market Share The percentage of sales of a certain product in a market in relation to other products in that market (i.e. Brand X / Total sales in market).

Marketing The process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.

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

Microsegment The intersection of a consumer segment and a preferred vehicle class. For example, 1E identifies those Value Seekers (1) who prefer an Economy class vehicle (E).

Net Contribution The contribution after marketing less fixed costs. Net Income The profit remaining after all costs are subtracted from revenues.

Price The amount of money required for a product or brand in order for an exchange of ownership to take place.

Product Mix All of the individual products available from an organization.

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

Quality

The totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. In the automobile industry, quality is sometimes more narrowly defined and measured by defects per 1000 cars or reliability.

Research and Development

Portion of a firm designated to research, analyze, and design products to meet consumer and market needs.

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

Unit Sales The total volume of units sold by a manufacturer in a market.

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

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Index

A accounts payable .................................................. 22, 92, 93 accumulated depreciation ................................................ 92 action plan .................................................................. 35, 36 advancing the simulation ................................................ 114 advertising ...................................... 14, 91, 94, 99, 133, 136

budget ................................................................. 14, 123 corporate ..................................................................... 14 message ..................................................................... 152 theme .................................................................. 14, 123

AEV vehicle ....................................................................... 28 alternatives ......................................................................... 4 Amazing Cars .......................................................... 6, 15, 17 appendix ............................................................................. 4 attributes ........................................................................ 145 average retail price ................................................... 14, 152 awareness ................................................... 14, 99, 145, 152

B B2B

contracts .................................................................... 130 customers .............................................................. 13, 32 qualifying for contracts ................................................ 13 requirements .............................................................. 103

balance sheet ........................................................ 17, 22, 92 base cost ........................................................................... 95 Best Motor Works ................................................... 6, 15, 17 bond rating ..................................................................... 111 bonds ............................................................ 20, 92, 93, 111 breakeven analysis .......................................................... 152 business-to-business (B2B) ...................................... See B2B

C cannibalization ................................................................ 152 capabilities and resources ................................................ 35 capacity ....................................................... 16, 93, 109, 135

change ....................................................................... 109 over-capacity charge ................................................. 109 utilization ........................................................... 135, 152

cash ..................................................................... 20, 93, 118 cash flow ........................................................................... 20 Cash Flow statement ................................................ 93, 118 cash rate ......................................................................... 120 channel ....................................................... See distribution competitive

advantage ........................................................ 24, 60, 95 analysis .............................................................. 138, 152 arena ........................................................................... 36 mapping ..................................................................... 140

competitors .................................................................... 140

concentrated marketing ................................................... 75 concept

test ............................................................................ 139 conjoint analysis

interpretation of ....................................................... 147 consumer

leading ........................................................................ 57 segments ..................................................................... 10

consumer perceptions...................................................... 14 contracts ................................................................. See B2B contribution ............................................................. 94, 153 Cool Cars ................................................................ 6, 15, 17 cost

variable ....................................................................... 91 cost of goods sold (COGS) .............................21, 91, 94, 136

impacts on................................................................... 43 cost structure ................................................................... 24 culture .............................................................................. 57 customer ............................................. 10, 99, 128, 132, 138

definition ..................................................................... 10 demand, effects on ..................................................... 38 detail report .............................................................. 128 needs........................................................................... 24 value............................................................................ 63

customer needs ................................................................ 17

D Dashboard ........................................................................ 90 dealer

coverage .......................................................... 12, 13, 32 invoice ................................................................... 14, 91 markup ........................................................................ 14 rating ........................................................... 12, 105, 134 training ...................................................................... 134

dealership .............................................. 15, 51, 92, 104, 152 debt ................................................................................ 136

long-term .................................................................... 92 decision analysis

decision review alerts .................................................................... 114

pro-forma .................................................................. 115 decisions ..........................................................2, 24, 95, 116

concept creation ......................................................... 97 pro-forma, cash flow ................................................... 34 technology .................................................................. 95

delivery vehicle........................................................... 13, 30 demand .....................................................16, 109, 135, 152 demographic characteristics ............................................ 71 depreciation ....................................................... 92, 93, 136 development center ................................................... 50, 96 differentiated marketing .................................................. 75 differentiation advantage................................................. 35 distribution ..................................................................... 134

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dividend ............................................................................ 93 Driven Motor Co ........................................................... 6, 17 dynamic environment ....................................................... 34

E economic

conditions .................................................................. 120 outlook report ........................................................... 120

economy ......................................................................... 120 economy / familyvehicle ................................................... 11 economy vehicle ..................................................... 8, 11, 26 Efficient Motors ...................................................... 6, 15, 17 engine ................................................................................. 7

range.......................................................................... 128 enterprisers segment ........................................................ 31 equity ................................................................................ 22 experience curve effect .................................................... 43 external analysis ............................................................... 35

F families segment ............................................................... 31 family / luxury vehicle ....................................................... 11 family vehicle .......................................................... 8, 11, 27 financial

implications ................................................................. 20 financial statements ................................................... 91, 92 Financial Statements

Cash Flow ............................................................. 93, 118 firm preference ....................................................... 133, 136 fixed costs ................................................................. 44, 152 fleets ................................................................................. 13 flexible production ............................................................ 16 forecast ................................................... 115, 116, 120, 127 functions provided ............................................................ 61

G gross margin ....................................................... 21, 91, 152 group decision making ...................................................... 34 growth-share matrix ....................................................... 148

H hidden costs ...................................................................... 46 high income segment........................................................ 31 horizontal markets ............................................................ 81 horizontal organization ..................................................... 79 horsepower (HP) ............................................................. 7, 8 hot buttons ......................................................... 12, 14, 128

I ideals ................................................................................. 12 income ............................................................................ 136

from operations ..................................................... 91, 93 income statement ....................................................... 21, 91

income taxes .................................................................. 136 industry news ................................................................. 119 inflation .......................................................................... 153 interest

expense ....................................................20, 91, 93, 136 rates .................................................................... 20, 111

interior .............................................. 8, 14, 17, 95, 129, 132 internal analysis ............................................................... 35 inventory ............................................... 17, 40, 92, 134, 153

days ................................................................... 108, 134 write-offs............................................................. 91, 136

investment ....................................................................... 18 alternatives ................................................................. 20 risk............................................................................... 20

investments ........................................................ 17, 93, 118 plant ............................................................................ 93 technology ................................................................ 132

invitation to bid .............................................................. 101 ISSQ .................................................................................. 36

L legends on graphs .......................................................... 124 luxury / sports vehicle ...................................................... 11 luxury vehicle ......................................................... 8, 11, 27

M major upgrade ............................................................ 19, 49 margin .................................. 15, 153, See also gross margin market ...................................................................... 10, 153

growth rate ................................................................... 6 segments ..................................................................... 10 share ..................................................133, 136, 148, 153 share by customer .................................................... 129 share by region ......................................................... 122 value.......................................................................... 136

market descriptors ........................................................... 69 market focus .................................................................... 57 market segmentation ........................................... 60, 66, 67 market share ............................................................ 39, 145

effects on .................................................................... 39 market-based organization .............................................. 56 marketing ....................................................................... 153

communications ........................................................ 133 expenditures ....................................................... 91, 136 management ................................................................. 4 research .................................................................... 153 scope ........................................................................... 61

menus brief descriptions of ................................................... 89

microsegment ................................................................ 153 microsegments report .................................................... 127 minivan vehicle ...................................................... 8, 11, 29 minor upgrade ............................................................ 19, 48 mission and vision ............................................................ 35 MSRP ...........................................................14, 99, 123, 146

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N naming your product ........................................................ 98 needs-based segments ..................................................... 83 net contribution .............................................................. 145 net income .......................................................... 91, 92, 153 new class ........................................................................... 50 new concept ..................................................................... 97 new customers ............................................................... 119 new platform ............................................................ 18, 109 new product................................................................ 19, 49

O operations guide ................................................................. 4 opportunities .................................................................... 24 opportunities and threats ................................................. 59 other fleets segment ......................................................... 32

P parcel carrier segment ...................................................... 32 parts-worth ..................................................................... 147 perceptual map

interpretation ............................................................ 143 performance

vehicle ..................................................................... 7, 14 PESTEL ............................................................................... 35 plant maintenance ............................................................ 16 platform

development ............................................................. 132 portfolio analysis ............................................................ 148 position map ................................................................... 124 positioning ................................................................ 76, 124 potential contracts .......................................................... 102 price ............................................... 131, 153, See also MSRP

range.......................................................................... 128 pricing

impacts of .................................................................... 42 strategy ........................................................................ 42

primary vehicle class ................................................. 10, 129 product

advertising ................................................................... 14 class ............................................................................. 26 contribution ................................................................. 94 detail report............................................................... 131 development ............................................................... 18 development ............................................................... 97 launch ........................................................................ 119 name ............................................................................ 98 portfolio ..................................................................... 148 price ................................................................. 8, 14, 131 production ................................................................... 16

product benefits ............................................................... 64 product mix ..................................................................... 153 production .......................................................... 16, 40, 135

capacity ....................................................................... 16 costs............................................................... 18, 95, 136

volume ........................................................................ 18 products report .............................................................. 131 profit equation ................................................................. 37 pro-forma

analysis ........................................................................ 46 promotion ............... 12, 14, 91, 94, 100, 123, 133, 136, 153 psychographic characteristics .......................................... 72 public relations ................................................... 14, 91, 136 purchase decision ............................................... 12, 17, 128 purchase price .................................................................. 64

Q quality ............................... 8, 14, 17, 95, 129, 131, 132, 153

R R&D .................................................................. 91, 136, 153 ranges ............................................................................. 124 receivables ....................................................................... 92 regions ................................................................ 13, 32, 104 relative market share ............................................. 148, 149 rental fleets segment ....................................................... 32 requirements ................................................................... 103 retained earnings ....................................................... 22, 92 retooling ............................................................... 41, 92, 93 revenues ................................................................. 6, 21, 94 r-squared ........................................................................ 143

S safety ................................................. 8, 14, 17, 95, 129, 132 sales ...............................................................9, 91, 120, 136

by customer .............................................................. 127 units .................................................................... 94, 131

sales force ........................................................................ 32 sales forecast .................................................................... 39 secondary vehicle class ............................................ 10, 129 segmentation ........................................................... 74, 153 segments .............................................................. 10, 24, 31 segments served .............................................................. 61 service benefits ................................................................ 64 shortages ........................................................................ 110 short-term debt .......................................................... 92, 93 simulation

navigation ................................................................... 88 singles segment ................................................................ 31 size ......................................................................... 7, 8, 127

range ......................................................................... 128 sports vehicle ......................................................... 8, 11, 28 stock ..............................................................22, 92, 93, 136 stockouts

avoiding ....................................................................... 39 strategic

advantage ................................................................... 35 analysis ........................................................................ 36 planning ...................................................................... 34

strategy ............................................................................ 24

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StratSim case ...................................................................... 4 strengths and weaknesses ................................................ 59 stress ............................................................................... 143 styling................................................ 8, 14, 17, 95, 129, 132 SWOT analysis ............................................................. 35, 59

T target market .................................................................... 74 taxes.......................................................................... 91, 136 team leader....................................................................... 89 technologies utilized ......................................................... 61 technology

capabilities ..................................................... 17, 51, 132 maximum feasible limit ............................................. 132

test market....................................................................... 144 timeline ........................................................................... 114

capacity increase ......................................................... 47 dealerships .................................................................. 51 development center .................................................... 50 major upgrade ............................................................. 49 marketing mix .............................................................. 47 minor upgrade ............................................................. 48 new class ..................................................................... 50 new product ................................................................ 49 technology ................................................................... 51

trade-offs ........................................................................ 145 training and support ......................................... 15, 104, 134 truck / sports vehicle ........................................................ 11 truck vehicle............................................................ 8, 11, 30

U undifferentiated marketing .............................................. 75 unit cost.............................................................. 17, 18, 136 unit margin ....................................................................... 41 unit sales ........................................................................ 153 upgrade .................................................................... 18, 108

effects on cost ............................................................. 44 utility / sports vehicle ....................................................... 11 utility vehicle .......................................................... 8, 11, 29

V value added chain ............................................................ 61 value capture.................................................................... 65 value creation ................................................................... 57 value cycle ........................................................................ 58 value map ......................................................................... 64 value proposition ............................................................. 58 value seekers segment ..................................................... 31 variable costs .................................................... 15, 136, 153 vectors ............................................................................ 143 vehicle

attributes .................................................7, 95, 131, 138 classes ................................................................. 8, 9, 26 names.................................................................... 8, 131 sales by microsegment .............................................. 137

W weights ........................................................................... 147