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Resource Allocation

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Reduce support to mobile phones, vacuum cleaners, and air-conditioning units by 22 ... Samsung Results 2002. Top five in mobile phones global market ... – PowerPoint PPT presentation

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Title: Resource Allocation


1
Resource Allocation
  • Marketing Strategy
  • Fall 2004

2
Mid-Semester Summary
  • Scope of strategy
  • Industry analysis (rivalry, entry, substitutes,
    buyers, suppliers, complements)
  • Pricing strategy (golden rule of pricing)
  • Strategic segmentation (segmentation variables,
    price discrimination, behavioral data, evolution
    of segments)
  • New product development (idea generation, idea
    screening, market research, concept formulation,
    pre-test, test market)
  • Competition understand competitors, price
    competition, dynamics
  • RD and customer needs experience on RD,
    dynamics
  • Market evolution (innovators, imitators, Bass
    model)
  • Understanding customers (their language,
    perceptual maps, conjoint analysis)
  • Market planning making choices, understanding
    competitors
  • Marketing diagnostics demand process
    (awareness, interest, purchase intention,
    availability), dynamics

3
Next Few Weeks
  • Wednesday Markstrat decision 6
  • Monday, Nov. 8 Guest speaker, Anne Hector,
    Vice-President, Analysis group
  • Wednesday, Nov. 10 Markstrat decision 7
  • Monday, Nov. 15 Case American Airlines
  • Wednesday, Nov. 17 Markstrat decision 8
  • Following two weeks CRM, loyalty, dynamics,
    Cases Brita Products and CMR Enterprises, Guest
    speaker, Marc Singer, McKinsey Co.
  • Last week Markstrat and course wrap-up
  • Optional sessions this week
  • Thursday, Nov. 4, 9-1030, F310
  • Friday, Nov. 5, 9-1030, S489

4
Samsung 1999
  • At the time, possibly the biggest consumer
    electronics maker that consumers never heard
    about. Competed mainly behind-the-scenes as
    supplier of computer monitors and semiconductors
    to more powerful multinationals.
  • Increasingly, going to market with own branded
    PDAs, mobile phones, and DVD players considered
    low-cost provider with low visibility.
  • Samsung was trying to change this. 1billion to
    spend.
  • 14 product categories, 200 countries, 476
    category-country combinations.
  • Where and how much to spend?

5
Samsung 1999 (cont.)
  • First. Collect information overall population
    and population of target buyers, spending power
    per capita, per capita spending on product
    categories, category penetration rates, overall
    growth of categories, share of each of the
    companys brands, media costs, previous marketing
    expenditures, category profitability, competitor
    metrics.
  • Second. Use this information to create a full
    model to have profit forecasts of any type of
    resource allocation (simulate profits).

6
Samsung 1999 Outcome of Analysis
  • 1. There was overinvestment in North America and
    Russia given their profit potential. Reduce share
    of budget from 45 to 35.
  • 2. There was underinvestment in Europe and China
    given their profit potential. Increase share of
    budget from 31 to 42.
  • 3. Three categories (mobile phones, vacuum
    cleaners, and air-conditioning units) were
    getting more than half of the budget, but other
    potentially profitable categories were being
    starved of support (camcorders, DVD players and
    recorders, televisions, PC monitors,
    refrigerators, VCRs). Reduce support to mobile
    phones, vacuum cleaners, and air-conditioning
    units by 22.
  • Problem Organizational issues?

7
Samsung Results 2002
  • Top five in mobile phones global market
  • Significant gains in camcorders, flat-panel
    computer monitors, DVD players and recorders,
    digital TVs
  • From 10th to 3rd in digital music players, from
    8th to 2nd in LCD monitors, from nowhere to 8th
    in portable DVD players
  • Brand value increased by 30 to 8.3b (world rank
    from 42nd to 34th place). Sony brand decreased
    7 to 13.9b, 21st place.
  • Annual sales rose 25 from 2001 to 2002, from
    27.7b to 34.7b. Net income from 2.5b to 5.9b.

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11
Marketing is fun but..
  • Resource Allocation is
  • difficult
  • tedious
  • mathematical
  • Necessary evil

12
Poor Resource Allocation
  • throwing at something that isnt responding.
  • starving the opportunities that are crying for
    help.
  • Number one cause of poor marketing performance
    after misreading customer needs

13
How do you spend it?
Which businesses, segments, brands?
Which marketing mix element?
14
What are the methods you could use?
  • Microeconomic approach
  • optimization
  • Rules of thumb
  • Objective task method
  • Portfolio method

15
Microeconomic ApproachTwo simple ideas
  • if 1 more of spending gets you more than 1 in
    contribution, increase spending
  • elasticities are constant

16
First simple idea
  • We assume is that contribution is a concave
    increasing function of spending

spending
contribution

Optimal spending
Spending ()
17
Second Simple Idea
  • elasticities are not constant but
  • in a limited range of spending they are close to
    being constant
  • this is why companies pay research firms big to
    estimate
  • price elasticity
  • advertising elasticity

18
Derivation of Rules
  • Assume your spending is in line then
  • Mktg increase (D Mktg) CBM increase (D CBM)
  • D Mktg / Mktg x Mktg D CBM / CBM x CBM
  • D Mktg x Mktg D CBM x CBM
  • Mktg / CBM D CBM / D Mktg
  • Mktg / CBM Elasticity
  • CBM Sales - COGS
  • CBM / Sales Contr Margin
  • Mktg / Sales Elasticity x Contr Margin
  • This means that when Mktg / Sales is less than
    the product of elasticity and Contribution
    Margin you should increase marketing. Conversely
    if Mktg / Sales is greater than the product of
    elasticity and Contribution Margin you should
    reduce marketing.

19
Rules for Microeconomic Resource Allocation
  • evaluate 2 things
  • ratio of spending to sales
  • or
  • product of spending elasticity and
    Contribution Margin

20
The Comparison
  • If is less than
    then
  • it is optimal to increase marketing.
  • If is greater than
  • then it is optimal to decrease marketing.

21
Graphical Implication
22
Microeconomic Resource Allocation
  • Advantages
  • assuming you have elasticities, it is an easy
    rule to apply
  • given a market with many competitors, you can
    approximate optimal spending

23
Microeconomic Resource Allocation
  • Disadvantages
  • elasticities are hard to measure
  • category expansion effect and a business stealing
    effect
  • assumes no reaction by competitors
  • whats the time dimension
  • salesforce elasticities
  • advertising elasticities

24
Rules of Thumb
  • 4 Percentage of sales
  • 4 All you can afford
  • 4 Match competitors
  • 4 Last-year based

25
Rules of thumb
  • Advantages
  • easy, can be done in a spreadsheet
  • in a mature market where nothing changes can be
    effective

26
Rules of Thumb
  • Disadvantages
  • we can do better
  • of sales
  • brands that need help versus those that dont
  • All you can afford?
  • whats an acceptable profit level?
  • single product company

27
Rules of thumb
  • Disadvantages
  • Match competitors
  • can never grow
  • what if they are over-spending?
  • Last year based
  • the world does not change

28
Comparison
Allocation Method of Respondents Highest
Percentage Objective Task 64 Canada
(87) Singapore (86) Percentage of
Sales 48 Brazil (73) Hong Kong
(70) Executive Judgment 33 USA
(64) Denmark (51) Brazil
(46) UK (46) All-You-Can-Afford 12 S
weden (30) Germany (25) Match
Competitors 12 Germany (33) Sweden
(33) Last-Year Based 12 Canada
(24) Syndoinos, Nicolaos E., Charles F. Keown,
and Laurence W. Jacobs (1989), Transnational
Advertising Practices, Journal of Advertising
Research, 29 (April-May), 43-50.
29
Objective and Task
  • Set a sales, market share or profit objective for
    the brand
  • recommend spending and allocation to achieve
    objective
  • Share(Awareness) x (conditional Purchase Intent)
    x (Availability)
  • where do you spend to achieve your objective?

30
Objective and Task
  • assumes
  • your objective is reasonable
  • you know the response functions for various
    elements
  • But how do you put all of this into action?

31
Decision Calculus
  • You can hire an econometrician to
    construct/estimate response functions for each
    marketing element
  • but it is expensive
  • they use quantitative but do not incorporate
    qualitative knowledge in the way that a
    front-line manager does

32
Decision Calculus
  • the best judges of responses might be your people
    on the front line
  • district sales managers (sales response)
  • brand managers and the account group (advertising
    response)

33
Advantages
  • objectives recognize different roles and
    potential of brands
  • using managers expertise to plan optimally
  • allows you to calculate the cost of various
    scenarios to achieve one objective
  • allocate resources to link that gives you the
    biggest bang for the buck

34
Disadvantages
  • Managers judgment
  • do they have enough data to make these judgments
  • Potential gaming concerns
  • How do you manage a portfolio of brands?

35
The Share Growth Grid
36
Whats the idea behind the names?
  • Cash Balance
  • Market growth is used as a proxy for the need for
    cash
  • Market share is used as a proxy for the ability
    to generate cash

37
Cash Balance
need cash in a big way
38
Cash Balance
throw off major cash
39
Product Life Cycle
40
Share Growth Matrix
41
Strategic Analyses of the BCG Portfolio
  • Check your portfolio for internal balance
  • Develop or estimate major competitors own
    portfolios
  • gives clues for their possible strategies
  • gives clues for reactions to your own moves

42
Competitive Analysis

Competitors Portfolios Us A B
C D E
?
?
?
?
?
?
?
43
Benefits of Share/Growth Analysis
  • simple pictorial representation of your brands
  • assuming growth markets need cash and large share
    brands generate cash
  • balance your portfolio
  • predict competitor actions
  • manage several brands together and classify them
    by segment

44
Key Takeaways
  • There are many ways to allocate resources
  • rules of thumb are simple but dangerous
  • microeconomic approach requires elasticity
    estimates and depends on small reactions by
    competitors

45
Key Takeaways
  • Objective and Task
  • calibrated by managers
  • allows reactions of competitors and the long term
    to be recognized
  • how to manage a basket of brands?

46
Key Takeaways
  • Portfolio approaches
  • recognize the roles of different brands
  • best known is BCG
  • Recognizes cash flow
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