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Wednesday, April 6, 2011

Initial Strategy

First came the release of product SALT:

The two key components of our strategy all throughout the game were one perfect product per segment and high contribution margin. These two components are the foundation for all the decisions we made during the game.

At the beginning of the game, our team had the choice of using two different strategies: a competitive-based strategy that consists of undercutting rivals’ prices, or a segmentation-based strategy that aims to increase the contribution margin as much as possible. We decided to use a segmentation-based strategy, which requires constant adaptation to position our products according to shifts in consumer ideal values.

Our segmentation strategy is to have one perfect product for segment, so by the end of the game we would have one perfect product for each of the five segments in the Sonite Market. The reason is because market segments have unique defining characteristics, so we should tailor our products according to their ideal values of characteristics in order to gain the most market share. We do not recommend having two products per segment, though. Doing so could cannibalize sales. To create perfect products for each segment requires R&D by reposition, withdraw, or introduce products. Existing products require positioning to change perception of brand since customers make purchase decisions based on their perception of the brands, so we positioned products based on characteristics important to our product market. Since preferences change, we have to constantly adapt our products through R&D, which includes assessing consumer needs and estimating how brands are perceived. Semantic scales study and multidimensional scaling study are helpful. We did not end up producing a product for the Buffs segment, because the segment was shrinking. Since Buffs are extremely sensitive, producing a product for them would deviate from our strategy of obtaining high contribution margin (see below). However, this decision might have negatively affected our performance, since winning the game requires not only high contribution, but also high market share. Not having a product for Buffs meant we didn’t have any market share in that segment.

Since we want to have the highest contribution margin possible all throughout the game, we decided that it’s important for us to produce perfect products for Pros and High-Earners as soon as possible. Since these two segments are less price sensitive we can charge a higher price (and thus earn high contribution margins) if we make perfect products for them. Another reason why we want to have high contribution margin is because we want to gain as much budget as possible near the beginning of the game, so once R&D opens, we can start to put a small amount of budget into Vodite every period. This is very important since we predicted that Vodite requires a high amount of budget, so it’s important for us to start putting money into it as soon as possible. This is crucial since we wanted to be the first company to enter the Vodite market in order to get a high market share.

What Team Red A would do next.

We would not have made very significant changes in our strategy had the game continued. We had a strong strategy which we believed worked for us throughout the many periods of the game. Red Team A was largely focused on providing consumers with the perfect products. It was our belief that we could not abandon the Sonite market and thus, we would have remained focused on developing and improving our Sonite products. We had a product for each segment in the Sonite market except for the Buffs. Our ideal was to create a product for each segment, but we ran out of time. An extension of the game would have allowed us to accomplish this goal. We would have also done the same thing in the Vodite market where we would have created an ideal product for the Followers segment. Furthermore, the base cost of our VAIN product was fairly high and was negatively affecting our contribution margin. We believe that we would have been able to reclaim the top spot if there were more rounds in the game and we were able to make these slight adjustments.

What we disliked...

- The winner should not be determined by stock value in final round, instead overall progress and success throughout all rounds should be considered in order to determine a winner; in real life the success of a company does not depend on how well they perform in one period, but instead on its performance over many periods
- Overall, the MarkStrat interface was difficult to use with a lot of information to analyze from period to period and a lack of organization of data (tabs to certain areas were all over the place)
- The software itself has certain flaws. MarkStrat is not compatible with Mac computers and that created complication for us because the majority of the team owns an Apple. We had to adjust to the situation and work on the computer labs.
- The MarkStrat simulation screen has specific nonadjustable measurements that avoids users with net books to view the whole screen.
- MarkStrat would be more interactive if we were provided with more realistic descriptions of what our products actually are. It is difficult to become engaged in a game where we have no clue what products we are making and trying to sell. For example, the characteristics of power and maximum frequency are difficult to understand. We believe that the game is unable to teach us about relevant advertising strategies because we do not have a full grasp of what our products do.

What we liked...

- MarkStrat is a highly stimulating game in that it changed from week to week due to the unpredictability of other teams’ decisions
- It stressed the importance of thinking ahead. Especially with R&D, it was vital for our team to carefully calculate consumers’ preferred characteristics for future periods in order to create the desired products
- The game had realistic features in terms of budget, changing perceptions, volatility and overall decisions that needed to made week-by-week
- Risk and uncertainty: again adding to the realistic nature of the game, these two aspects were definitely felt by our team, just like how companies in the real world often feel
- The variety of tools offered by the simulation to analyse the different variables of products, markets and teams are in great assistance while planning the next decision.

What we learned...

High contribution margin for each product was crucial for the success of our company. During the MarkStrat simulation, many of our competitors chose to enter a price war with each other, whereby they opt to lower their prices substantially. Although this did lead to a short-term increase of sales, their overall profits were still low due to their small contribution margins for each product. Therefore we decided to invest our money into R&D, where we focused on creating the perfect product for each market segment. We then priced our products at the required or even slightly higher price expectancy for each market segment. This in retrospect gave our company the image of being a premium brand, and although our sales were initially lower than our competitors in the short-run, our overall profits were always slightly higher due to our high profit margins on our products. In addition, our company benefited in the long run, as consumers were more willing to pay a premium for our brand due to their established perceptions of the brand.

Product characteristic was the most important strategy in relation to gaining sales and market share. Although the MarkStrat simulation offered a wide range of marketing strategies for our company to use, we found that modifying and creating the ideal product characteristics for each market segment was by far the most important strategy in generating sales. We learned that a big part of consumer’s decision to purchase products in this simulation was down to how the specific product fitted the specific market segment’s needs. Therefore investing into R&D and market reports such as the “semantic scales” and “multidimensional scaling of brands similarities and preferences” was absolutely critical to the success of our company. By creating the ideal product for each segment, we were able to charge higher prices and increase our sales at the same time! Another interesting learning point was that we learned to R&D our products based on the targeted segment’s ideal characteristics for 3 periods in the future. This was because we learned that the product would take at least one period to complete and another period to launch, so we didn’t want the product characteristics to be outdated as soon as it was launched. By thinking ahead and planning the product characteristics to be 3 periods in the future, we were able to launch the products at the ideal time of demand.

Increasing sales force was an important strategy in the short-run. This was highlighted in the early periods where we learned that because our products were still quite similar to our competitors, it was hard for our company to really stand out and differentiate ourselves (without having to lower our prices and thereby lower our contribution margin). Therefore, we invested heavily on a large number of sales force at the beginning, in hopes that increase sales force would increase chances of our employees luring potential customers to our products. We found this to be a very successful technique in the beginning and it really gave our company a boost in the early rounds. It was especially effective since our competitors overlooked the importance of sales force and focused all their attention on competitive advertising.

Creating products for the fastest growing segment was an important lesson. In our case it was for the market segment “Singles”. We believed that it was crucial for us to capture as much market share from the largest potential market segment, as it would lead to most overall profits in the long run. However we also learned that we could not ignore the “Others” product, which at the time was the largest current market segment and still our “cash cow”. Therefore we learned to be balanced in our strategy, where we aggressively pursued the potential markets as well as maintained our already developed markets.

Looking back in retrospect, we learned that we should be more adventurous and aggressive in our strategies. Throughout the Markstrat simulation our team played very conservatively, especially when it came down to estimating the market capture rate and calculating the potential inventory holding costs. Therefore we often weren’t aggressive enough and found ourselves losing potential sales and market share to our competitors. This was most evident in the final period of the game, where our stock price decreased significantly due to our inability to meet the high demand. To make matters worst, our main competitor actually took our lost sales thereby increasing their stock price, and winning the simulation.

Watching and keeping track of our competitors investment strategies was also an important learning point. We learnt that we could more or less anticipate our competitor’s moves based on where they decided to allocate their budgets. This was especially important in anticipating movements to the Vodite market and new product launching from our competitors. In addition, we used this observation to roughly estimate the market capture rate for our newly launched products, and more often than not was successful in predicting the right units and price for our new products to launch at.