Sales Promotion, Concepts, Methods and Strategies, Englewood Cliffs - Essay Example

REPORT ON SIMULATION EXERCISE INTRODUCTION As per Power and associates (2002a), the automobile industry has grown tremendously over the last few decades and now contributes over 3% of the US Gross Domestic Product. In fact, the automobile companies account for one of every seven jobs in the US domestic economy (Tardiff 1998). The market for automotives that is cars, trucks, vans etc. is highly complex and still evolving. As compared to few decades earlier, instead of three or four companies following a monopolistic strategies, there are number of companies and each follow their own different strategy to capture the market share or attain their competitive advantage. Generally, there has been a rise in vehicle prices over the years because of the innovations in technology as well as improvement in quality. But it has been seen that the demand has not dropped, in fact the demand has steadily been increasing with more and more car companies bringing in products to match specific consumer preferences and segments. The style quotient has assumed quite an importance in today’s manufacturing and purchase decisions. This trend started in early 1920 and has resulted in manufactures trying to bring about the desired changes through innovation in product-line (Menge 1962, Farr 2000). But automobile manufacturers have to bear a considerable cost for this styling changes especially when the success is still not certain. The focus on style and comfort is the new mantra these days. SIMULATION EXERCISE For any company or firm, improving the financial performance and value of the firm is the key objective of the strategy planning. Marketing provides one such option whereby different marketing strategies can be used to effect the overall growth of the company. The marketing strategies such as new product introductions and promotional incentives help to capture the market share with innovative products and creative promotional campaigns. There are both the short-term and long-term strategic plans to achieve success in capturing the market and improving the financial performance (both top-line—firm revenue and bottom-line--- firm income) and the stock market performance of the company. In the automobile industry, both the new product introductions and promotional incentives are identified as the important performance drivers. (Pauwels et al., 2004) It has been seen that both type of strategies help improve the firm’s revenue by boosting sales. The use of promotional activities may help in boosting sales in the short term but it does not improve long-term financial performance as the new product innovations help to do. Moreover, the investor interest comes in two three months after the product launch and its performance in the market and thus new products are the long term performance improvement options. And as seen in the market before, the product entry in a new market yields the highest top-line, bottom-line and stock market benefits.(Pauwels, 2004) In our exercise, we are doing the market simulation for cars and automobiles. There are seven firms named A, B, C, D, E ,F and G. We are representing firm D and the key objectives given to us are to increase and improve the overall financial performance of our firm through innovative product launches or use of better technology and concepts of market share, marketing communications, distribution and manufacturing. We have utilized the new product development as our main strategy along with appropriate marketing and distribution options. Usually for all the organizations, the successful new products are the key drivers of growth (Cohen, Eliashberg and Ho 1997). In fact, many authors have stressed upon the importance of the new products development and its contribution towards future growth and profitability and to prevent the organization from obsolete product lines (Cooper 1984, Chaney, Devinney and Winer 1991). Many experts have studied the relationship between high returns for the shareholders coming through due to innovations in companies’ products. (Jonash and Sommerlatte 1999). But it is also a known fact that not all new products are successful and new-product failure rate ranges from 33% to 60%. (Boulding, Morgan and Staelin 1997, McMath and Forbes 1998, Wind 1982) Thus our Firm D came out with one new product in the luxury segment called D SUPER and one upgrade in economy brand called Delite.(28% market share) This one was well accepted by the consumers and became the market leader in its category, the luxury car D SUPER (7% market share) did not bring in the expected sales. See table 1 and 2 for the market share captured by these two cars. The other two were the DUSTY (14% share) in the truck category and DEFY in the Family category (15% market share). Table 1 :Luxury Class Vehicle Share of Class Overall Share MSRP Adv. (mill.) Adv. Theme Promo. (mill.) Glamour 93% 2% $40,500 $45 Quality $45 D SUPER 7% 0% $78,900 $100 Quality $80 Table 2 : Economy Class Vehicle Share of Class Overall Share MSRP Adv. (mill.) Adv. Theme Promo. (mill.) Delite 28% 6% $11,492 $30 Safety $30 Buzzy 17% 4% $11,999 $27 Quality $22 Cameo 14% 3% $11,499 $60 Safety $55 Fish 12% 3% $11,750 $30 Quality $15 Go 12% 3% $13,000 $20 Styling $20 Alec 9% 2% $11,049 $30 Quality $40 Echo 8% 2% $11,492 $35 Safety $25 The market was divided into five major consumer segments namely – Value Seekers – who had basic transportation needs such as commuting to work. They are more price sensitive and safety and quality are the two important attributes that they seek while making purchase decisions. So, they generally look at economy class vehicles. Families –They have more flexible needs besides the basic transportation including lots of children and their luggage etc. They are also price sensitive with special focus on safety and quality. They generally look at family, economy, and minivan classes of vehicles. The singles – They are young people with more disposable income at hand and definitely more style conscious. In addition the performance factor is also important to them and usually look at sports and truck classes of vehicles. High income group – For them, their vehicle is an indicator of their affluence and success and therefore look for more style and good performance. For them, Luxury and family cars are more interesting. Enterprisers – for them the vehicle is again an indicator of their success and status in life. They use it for business and personal needs. Since in this case the cars could be company owned as well, thus the categories they look for are the luxury, sports, utility etc. Let us take a look at the Table 3 below for the market share of different firms in major consumer segments. Table 3: Consumer Segments   Segment Units  (000's)   Chg   A       B       C       D       E       F       G       Value Seekers(1) 1,363 +11% 14.2% 13.3% 15.9% 14.9% 13.5% 15.0% 13.2% Families(2) 4,767 +10% 12.1% 10.5% 18.0% 17.6% 13.1% 13.7% 15.1% Singles(3) 1,072 +6% 9.9% 8.4% 12.7% 12.1% 12.8% 32.3% 11.7% High Income(4) 851 +10% 10.1% 3.0% 8.6% 13.0% 8.5% 7.0% 49.8% Enterprisers(5) 936 +31% 4.3% 2.0% 39.4% 7.1% 4.4% 10.0% 32.8%   Total 8,989 +12% 11.1% 9.1% 18.4% 15.0% 11.8% 15.1% 19.5% Thus firm D was able to cater to families and value seekers through their economy class – DELITE. But had very little impact on luxury car users. Our second strategy was to have an effective sales marketing activity to boost demand without incurring the risks associated with new products (Blattberg and Neslin 1990). As Hanssens, Parsons and Shultz (2001) pointed out, the promotions and marketing communications are much more easier to implement than new product development and have much more immediate and visible effects on sales volumes. Because of this reason, most companies are increasing their share of promotions in the marketing budgets. Our firm D has third largest budget for marketing communications. See Table 4 for the comparison of marketing budgets for different firms. Table 4: Marketing Communications   Firm Corp.  Mkting Brand Adv.   Brand  Promo. Total   Comm. Val Mkt Share  Unit   Share Firm  Pref. Firm A $140 $155 $195 $490 11.2% 11.1% 14.1% Firm B $50 $102 $67 $219 8.0% 9.1% 12.4% Firm C $65 $250 $190 $505 19.7% 18.4% 14.2% Firm D $50 $205 $170 $425 13.2% 15.0% 12.2% Firm E $31 $195 $180 $406 11.5% 11.8% 13.6% Firm F $58 $160 $100 $318 13.1% 15.1% 16.4% Firm G $140 $195 $200 $535 23.3% 19.5% 17.2% Note: Dollar amounts are in millions. Usually, most of the strategic marketing mix investment decisions are made on the basis of specific market performance objectives.(Kotler, 1980). One of the measures used to check the performance of the company is in terms of its share of units sold. Let us take a look at the Table 5 below for this key indicator for all the firms. Table 5 Financial Summary Firm A Firm B Firm C Firm D Firm E Firm F Firm G Val Mkt Share 11.2% 8.0% 19.7% 13.2% 11.5% 13.1% 23.3% Unit Share 11.1% 9.1% 18.4% 15.0% 11.8% 15.1% 19.5% Preference 14.1% 12.4% 14.2% 12.2% 13.6% 16.4% 17.2%   Sales 17,575 12,601 30,767 20,589 18,038 20,511 36,479 COGS 14,383 10,533 25,337 18,078 15,161 20,286 28,504 Marketing 490 219 505 425 406 318 535 R&D 488 0 288 127 0 0 254 G&A 909 777 1,216 1,054 910 1,025 1,227 Manufacturing 1,879 2,152 2,161 2,011 2,299 2,118 2,390 Other 829 3,549 884 2,741 1,770 3,059 1,181 Income -1,402 -4,629 375 -3,846 -2,508 -6,296 2,388   Stock Price 3.89 1.26 29.40 2.01 1.79 1.99 69.04 Mkt Value 1,952 630 14,748 1,007 893 995 34,522 Total Debt 7,086 30,863 8,103 23,857 19,486 26,604 0 Note: Dollar amounts (except stock price) are in millions. Thus based on figures below, firm D is fourth in terms of share of units sold and stock price. And in terms of market share and sales figures, it is third in number, though its net income is still in negatives. Thus besides the economy class, it has not been able to capture substantial share in any other vehicle class. The problem seems to have arisen because of the unsuccessful launch of Luxury car – D SUPER. It was not able to match up to the leader in this case. Although it was promoted as a quality car , its price was too high – almost double as compared to the other car in the same category. See table 1 again. Moreover, the technological components are also similar that it there is nothing “special” about D SUPER which could compel customers to buy it. See table 6 for the technological factors for each firm. Table 6 : Technology Capabilities Firm Ratings (1=low capability)   Interior Styling Safety Quality Max. Feasible 11 13 12 13 Firm A 5 6 4 6 Firm B 4 6 5 7 Firm C 4 6 4 6 Firm D 4 6 5 6 Firm E 5 7 5 7 Firm F 5 8 6 7 Firm G 4 6 4 6 Tech Dim Considerations Interior flexibility of cargo space Styling general curb appeal, styling, handling, finish Safety structural design, braking system, safety features Quality overall reliability, durability, consistency of products CONCLUSION Thus we see that although new products development is one of the key strategies to grow as a company, the successful product launch is more important. And there is no way to predict the success of a new product. Thus the costs associated with a launch of a new product are so high that the failure can cause lost of problems to a company in terms of its financial performance and stock prices as can be seen in the case of firm D. As per the Forrester Research (2006) more than 90% of CEOs feel that new product innovation is very important to growth and contributes immensely in increasing the firm’s value. But in the same vein, it is very difficult to predict the success of any product. As per Nielson (2003), most of the companies are unable to predict the success of the new product and only one out of every five new product launches is successful. REFERENCES Blattberg, R. and Neslin, S. (1990), Sales Promotion, Concepts, Methods and Strategies, Englewood Cliffs, New Jersey: Prentice Hall. Boulding, W., Morgan, R. and Staelin, R (1997), Pulling the Plug to Stop the New Product Drain, Journal of Marketing Research, 34 (February), 164-176. Chaney, P., Devinney, T. and Winer, R (1991), The impact of new-product introductions on the market value of firms, Journal of Business, 64 (4), 573-610. Cohen, M A., Eliashberg, J and Ho, T (1997), An Anatomy of a Decision-Support System for Developing and Launching Line Extensions, Journal of Marketing Research, 34 (February), 117-129 Cooper, R. (1984), How New Product Strategies Impact on Performance, Journal of Product Innovation Management, 1, 5-18. Farr, M. (2000), Automobile Industry, Hoover’s Online. February. Forrester Research, (2006) Report on New Product Development Hanssens, L. Parsons & Schultz (2001), Market Response Models, 2nd Edition. Boston: Kluwer Academic Publishers. Jonash, R. and Sommerlatte, T (1999), The Innovation Premium, Reading, MA: Perseus Books. Kotler, P. (1980), Marketing Management: Analysis. Planning, and Control. 4th ed.. Englewood Cliffs. NJ: Prentice-Hail. McMath, R. and Forbes, T. (1998), What Were They Thinking? New York: Business-Random House. Menge, J. (1962), Style change costs as a market weapon, Quarterly Journal of Economics, 76, 632-647 Neilson, (2003) Report on New Product Development. Pauwels, et al. (2004), New Products, Sales Promotions and Firm value, With Application to the Automobile Industry, Journal of Marketing. Power and Associates (2002a), GM Expresses New Confidence, Powergram. Tardiff, J. (1998), Motor Vehicles and Motor Vehicle Equipment, US Industry Profiles, New York: Gale Research, 394-401. Wind, J. (1982), Product Policy: Concepts, Methods, and Strategy. Reading, MA: Addison-Wesley. Read More