Tutorial

Objetives

Keys to success

Instructions for participants

Quantum World

Firm Management

Objetives

The Quantum program is an effective tool for learning marketing strategies in a competitive, international environment. Specific objectives are that players of Quantum:

• Learn to interpret and use market research in making marketing decisions.

• Understand comparative advantages of products in a product portfolio and distribute funds among these products.

• Decide the degree of precision and the value of information in ordering market research to understand customer preferences.

• Create, eliminate, and modify brands in national and international contexts to satisfy segments of customers.

• Appreciate the effects of decisions made by immediate and potential competitors.

• Develop abilities to make operating and strategic decisions in the 4Ps of marketing in national and international contexts.

Keys to Success in Quantum

Keys to the success in the Quantum universe are:

1. Understand and respond to the needs of targeted customer segments.

2. Analyze information about company resources and performance, competitive actions, and customer segments.

3. Adapt marketing strategies to specific markets and to specific international environments.

4. Work with a strategic perspective.

Instructions for Quantum Game Participants

You are going to compete in a marketing strategy simulation as the department of Marketing in a large business operating in a dynamic industry. You and the other members of your team have just been hired to direct the department.

Your team is assumed to have no prior experience in this industry and no experience with market segments in the industry. In the next several Quantum years (periods of the simulation), you will manage existing products and launch new products based on new technologies. During these years, your team will be responsible for formulating, evaluating, and revising marketing strategies of your business in competition with other businesses. Particularly, your team must:

• Select attractive segments of market and position your brands to satisfy each segment.

• Cooperate with your R&D department to design and develop new products.

• Prepare the launch of new products and improve, maintain, or withdraw existing products.

• Cooperate with your production department in the planning of production.

• Make strategic and operating decisions on prices, advertising, promotion, customer loyalty activities, distribution, and sales force for each of your brands.

• Purchase market research studies that provide information useful in making all decisions indicated above.

Quantum World

The Quantum world represents no specific country, market, or industrial sector. Nevertheless, the Quantum world behaves similarly to many markets. Thus, principles learned in playing Quantum can be applied to improve professional experience or theoretical understanding. The Quantum world contains an assembly of virtual companies that designs, manufactures, and markets a technology-based durable good called “Quantum.”

Companies are located in a fictitious developed country of approximately 80 million inhabitants (living in some 30 million homes) and containing more than 1 million businesses. The country is undergoing an integration process and at some future time will form part of a common market with other similar countries. The country currently is experiencing steady economic growth and stable levels of inflation.

THE SUPPLY: QUANTUM PRODUCTS

Quantum products have a limited useful life in the consumer and business markets (B2C and B2B markets, respectively) where they are used. Though the needs of consumers and businesses are different, the technology used in Quantum products permits products that satisfy both types of customers. The useful life of a product is determined by technological obsolescence and by changes in market needs. However, industry experts estimate that the useful life of a Quantum product is about three years.

All businesses marketing Quantum products face similar opportunities and similar challenges. All businesses have equal possibilities to develop their commercial activity with success. At the start of the simulation, all businesses have an equal number of Quantum products in the market. However, businesses begin competition in slightly different situations in terms of relative strengths and weaknesses, brand specifications, preferences of target consumers, brand knowledge levels, market shares, and distribution coverage, for example. Thus, the marketing strategy of each business must be adapted to its particular starting situation.

Quantum products represent innovations with customer demand that is expected to follow the classical evolution of the product life cycle. Business will find during the course of the simulation that products in their portfolio are located in different stages of the product life cycle from the introduction phase of a new product, growth phase, and maturity phase. Market research provides growth expectations for each Quantum product to help identify its phase of the cycle.

From a technical point of view, Quantum products are differentiated by specifications on five physical characteristics and by price. The five characteristics that define a Quantum product (and their permitted range of feasible values) are: Speed (1-100), Capacity (50-100), Consumption (10-100), Residuals (5-90), Style (1-10), and Price (500-7000). Thus, each Quantum product is an assembly of physical attributes and a price.

From a customer point of view, Quantum products are identified using four macro-attributes or perceptual dimensions that influence consumption decisions in a market segment. These dimensions are:

• Value, or an appraisal of price and benefits of a product in economic terms,

• Efficiency, or the capability of a product to function in better, faster, or more reliable ways.

• Ecology, or the residue present at product disposal and the product’s consumption of energy during operation, and

• Suitability, or product design relative segment needs and uses.

Physical characteristics of Quantum products influence the four perceptual dimensions that, in turn, form customer preferences. The table below illustrates possible effects (positive or negative relationships) between price and physical characteristics associated with all Quantum products and the four perceptual dimensions. However, the signs in this table are fictitious; the actual relationships must be discovered using markets research studies.

The importance or weight that each perceptual dimension has in customer appraisals of Quantum products is different. Besides, different segments of the market assign different importance to the same.

The segments of the market are differentiated so much in their preferences (this in the assembly of dimensions that seek) as in the relative importance that they assign to these dimensions (the weight that has a dimension at the moment of to elect a mark). Thus for example, we can find a segment of consumers that when is asked them on the level of demands that has in how much to ecology of the products indicate that very ecological and that besides, that is the ecological aspect is that more attention dedicates and is more important in its decisions of purchase.

At the same time, another segment of consumers can express that also seeks very ecological products but that this factor is not the most important one at the moment of its decision of purchase, that above all seeks economic products.

Quantum Countries and Conventions on Names. Each business in the Quantum world has a "country of origin" where its products are manufactured. At the start of the simulation, all businesses sell their products only to customers located in their respective countries of origin. As the simulation develops, businesses may be given the opportunity to export products to another country known as the "country of destiny". Eventually, the economic authorities can also allow production of-shoring to other countries, which became the brand country of origin.

1. Each county is identified by a number from 1 to 5.

2. Companies are identified by a capital letter.

3. Quantum brand names always contain five characters. The first character is a letter like A, B, or C that identifies the business that produces the brand. The second and third characters are combinations of letters that are freely chosen by each business. The fourth character identifies the country of production origin and fifth the country of destiny. For example, Quantum brand “Med21” is produced by business M in country of origin 2 and country of destiny 1 (the product is manufactured and sold in the same country), and is distinguished by the letters "ed". All new brands must continue this convention and must have different names. Chosen brand names have no influence on the response of any market to any product.

THE DEMAND: QUANTUM CONSUMERS

Market Demand. Market demand for a customer’s first purchase of a Quantum product is based on the product’s physical characteristics and price. Demand for the first purchase of any Quantum product is initiated with the introduction of Quantum products to a market at the start of year 1 of the simulation. Demand for the first purchase grows or declines based on guidelines associated with the innovations diffusion model of Bass (1969). That is, a potential market for Quantum Products exists that is sensitive both to economic conditions (based on the average price of all Quantum products, evolution of price indices or inflation, and GDP) and to global communication efforts carried out by competing businesses in the market. The rate at which a Quantum innovation penetrates a market and approaches the market potential depends on the number of first-time adopters of Quantum products (consumers who buy them for the first time) in each period of time. The number of first-time adopters in each period is influenced by two factors (a) the tendency of potential customers to innovate as influenced by information obtained through impersonal media and (b) the tendency of potential customers to imitate purchase behaviors of earlier adopting consumers.

Customers of Quantum products can be either homes or businesses. Of the 30 million homes in the Quantum world, industry experts believe that approximately 22 million homes are potential buyers and that businesses potential customers approach one million. These estimates of market potential for first-time adopters assume a usage of one unit per home or business. As time and Quantum technology progress, homes and businesses will buy another Quantum product as a replacement and thus total market demand equals the sum of first-time purchases and replacement purchases.

The Quantum market is divided into B2C and B2B components, resulting in five large groups of customer segments that have similar purchase needs and habits

Each segment has specific needs in terms of physical characteristics of Quantum products and prices. Thus, levels of product knowledge and purchase intentions can vary significantly for existing Quantum products from one segment to another. Each segment has a different size and a different rate of growth, explained by the stage of development of each segment, characteristics of products offered to each segment, and the intensity of marketing efforts directed toward each segment.

The importance or weight of a perceptual dimension used in evaluating Quantum brands differs by customer segment and evolves or changes over time.

Demand for Specific Brands.

1. Demand of first-time adopters is distributed among Quantum brands offered according to customer segment preferences and to marketing decisions: price and physical characteristics of the Quantum products, brand awareness, promotions, distribution coverage, and sales force effectiveness.

2. Demand for replacement purchases is distributed among brands offered based on brand loyalty coming from customer satisfaction with a previously bought brand, the effect of company sponsored loyalty programs, and each company’s distribution coverage.

DISTRIBUTION CHANNELS

All Quantum products sold in the B2C market use independent distribution channels. Consumer segments have different purchase habits in these channels, preferring to buy their Quantum products in different types of stores. The three types of stores are small shops, large stores, and self-service stores. All stores use the retail selling prices as recommended by Quantum businesses and receive a margin of 30 or 35 percent based on this price (the margin is set by the Instructor).

Quantum products sold in the B2B market use a direct channel of distribution and purchase at the retail price.

Firm Management

Teams direct the department of Marketing and have full responsibility for marketing performance as measured by the following indicators: net contribution generated, market share, growth in income of the business, quality of R & D projects carried out, etc. However, the best measures to use in evaluating success of a team’s marketing decisions are the current and accumulated returns on investment. This measure has in consideration all the indicators mentioned above.

Decisions that teams make in each period are described below. It is important that each team understand conditions relevant to each market segment before making dramatic changes. Each team should make reasoned decisions based on analyses of information obtained in market research studies and on expectations of competitive behavior.

PRODUCTION

Each team is responsible for presenting a production plan to the department of Production for each period for each of its brands. The department of Production works for several divisions in the business and can be regarded as a highly flexible external supplier. Thus, teams need not worry about investments in production capacity or about utilization of production capacity. The department of Production has a limited capability to increase or diminish the production plan for a period based on actual quantities sold, without any penalty to a team.

Teams should keep in mind that a production plan should be based on estimates of unit sales for each brand. The department of Production can adjust production output automatically to the actual demand in each period to certain limit (+/-30%). However, adjustments of production output come at a cost. For example, if the production plan calls for production of 1000 units of a brand for a period, production of the brand will be between 700 and 1300 units, depending on actual demand. If actual demand for the brand is greater than 1300 units, sales will be lost to competitors. If actual demand for the product is less than 700 units, excess units will be stored as inventory. Units produced are loaded to the department of Marketing only when units are sold to the channel members and are valued at a production cost that incorporates labor and material costs, costs associated with production adjustments beyond the limit, and depreciations. Units produced beyond actual demand are maintained in inventory with costs to maintain inventory loaded to the department of Marketing. Inventories accumulated from different periods are sold using a FIFO method with a cost of goods sold also adjusted for inflation during the storage period.

If the department of Production produces units beyond the number called for in the production plan, the unit price of all unplanned production raised 20 percent because of overtime costs. If the department of Production produces a smaller number of units than the number called for in the production plan, the unit price is increased 15 percent for those units placed in inventory. Production costs of a Quantum product increase with the inflation but decrease with the effects of experience: Unit prices for Quantum products are expected to fall approximately 15% each time that cumulative production is doubled. If a business changes the physical attributes of an existing brand based on a new R & D project, any inventory of the existing brand is sold automatically at a low price to a recycling business.

Although the products Quantum are entirely produced with variable costs, in some cases there could be indirect fixed costs of general administration. These costs are specific for each country of origin of production, and include depreciation and amortization of central offices, salaries of managers and information systems. They are not directly related to the level of production, but can be adjusted when the overall level of production surpasses some thresholds. In particular, we can consider small, medium or large capacity administrative facilities. If the overall production in a country becomes larger (or smaller) than the thresholds, the indirect fixed costs are automatically modified.

PRICE

In each time period, you will have to decide the recommended retail price of every brand. The recommended selling price is the price that you recommend retailers use in their stores. Retail margins (different in each distribution channel) will be deducted from your recommended selling price.

Since dumping is strictly forbidden in this simulation, products retail price must be higher than the unit production cost.

PROMOTION

Decisions on communication are essential for the brand success and the brand equity strategy. The communication mix in the quantum market presents the following tools, with different characteristics and effects on demand:

1. Advertising: allows to develop both brand awareness and image

2. Sales promotion: encourage short-term demand.

3. Loyalty programs: aim to reward loyal customer.

Teams should make advertising decision in each period. You should set the brand advertising budget allocated to different media. For each brand you should decide investment in offline media, online media, and advertising at trade shows. You should also consider if your firm will use neutral messages without any perceptual objectives (aimed to increase brand awareness), or if the messages have perceptual goals (trying to achieve a specific positioning, which must be indicated).

Also teams can invest in loyalty programs and sales promotion activities. Sales promotions influence short-term sales. Promotions are very interesting in the case of an excess inventory, since they encourage short-term demand. Loyalty programs seek that customers remain loyal and repurchase the brand.

PLACE (distribution and salesforce)

Each team’s sales force is organized in four groups. Three groups call on stores in the three channels of distribution (small shops, large stores, self-service stores) and one group has responsibility for direct sales. The department of Marketing must specify the number of salespersons in each group. Salespeople can be reassigned from group to another without cost. However, hiring and dismissal activities incur costs that are charged to departments of Marketing when the total number of salespersons increases or diminishes.

Each salesperson receives a specified salary for each period. Each salesperson sells all brands marketed by a company with efforts devoted to each brand as assigned by the department of Marketing. Each sales person in the direct channel also may receive an incentive in the form of a sales commission decided by Quantum teams.

MARKET RESEARCH STUDIES

Another decision to take in each period is the purchase of market research studies. Studies are designed and executed by an external supplier specialized in investigation of markets. The supplier’s prices for individual studies are established and will not be raised. Prices of individual studies vary with research precision as requested by Quantum teams. Results of research ordered are immediately available in the following period.

RESEARCH AND DEVELOPMENT (R & D)

The department of Marketing is responsible for decisions to initiate or stop R & D projects. These decisions are crucial to company performance. Existing products almost certainly must be improved to adapt to changing needs of customer segments. New products must be designed and launched to satisfy new target segments found in existing or new markets.

To initiate a new project with R & D, the department of Marketing must specify physical characteristics for the new Quantum product, a name for the project, and the expenditures assigned for the project. Expenditures can be partial or complete with respect to the R & D cost that is required to complete the project. A complete payment guarantees that the R & D project will be completed in one year. Once the expenditure is set, the department of R & D is responsible for conducting all necessary activities.

MARKETING BUDGET

The marketing department is assigned a budget in each period, in order to cover next period expenses (Next period budget), which are the following:

• Promotion:

  Advertising campaigns fixed costs and cost of commercial insertions in media
  Sales promotions
  Loyalty programs Publicidad: costes fijos y por inserción

• Sales foce:

  Operative costs, hiring, training and firing costs.

• R&D:

  Investment in projects

• Market research studies:

  Cost of the reports.

Your marketing budget will depend on your success. There is a minimum and a maximum budget for each period. The budget should never exceed this maximum, although its amount is revised according to each period inflation rate. The budget is assigned in each period. If this budget is not completely spent, you should bear in mind that it will NOT be accumulated for the next period. If total expenses exceed the assigned budget for a certain period, the decisions file cannot be saved. You must revise your decisions.

Alternatively, to cover marketing expenses exceeding the assigned budget, it is possible to ask for loans and subsidies. In each simulation period, the instructor will specify the indications for this last option.

THE SIMULATION PROCESS

Teams make decisions for each period of the game based on primary data in the form of market research (ordered in the previous period) and secondary data (describing the previous period) in the form of internal and external secondary data. Internal secondary data include accounting data, sales information, inventories, and indicators of performance. External secondary data include economic information, currency exchange rates, and market shares by country and company.

The team should begin its decision making by analyzing this information in the context of a carefully chosen set of objectives and strategies for each chosen segment.