Week 4

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Week 4
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(No Transcript)
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Most Basic Principle Guiding Your Decisions

• will it Increase Demand for Product

• Decrease Cost
• of Mfgg Product

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Increase Product Demand Driven by Effective
Mgt of 4 Ps

• Product Mgt.
• Introducing new brands, Repositioning / killing
  old brands
• Promotional Mgt.
• Optimizing Segment Media Vehicle budget
  allocations
• Distribution Mgt.
• Optimizing Outside Inside Sales-force size
  segment allocations
• Manufacturer-Rep support / Distributor
  relationship building allocations
• Pricing-
• Competitive pricing Fine-tune A/R

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Decrease Mfgg Costs

• Effective Mgt of two other Ps
• People
• Investments in HR,TQM PI
• Plant
• Investments in automation capacity mgt.

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Increase Demand

• Driven by Effective Mgt of 4 Ps

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Product Mgt. Options

• For every product you market-you have 3 options-
• Improve it- to increase demand in current
  segment
• Reposition it to compete in another segment
• Kill it- sell off capacity- reinvest recovered
  capital

Reposition
Improve
Kill
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ConsequencesImproving a product

• PROs
• Should increase sales market share
• Rightsizing capacity-
• if too high-frees capital for investment
• If too low- forestalls stockouts

• Cons
• Proffering a better- price, design and/or higher
  awareness- accessibility- costs
• High Tech segments can take 2 years-
• Increases SGA budgets thus squeezes margins

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Questions need to answer if plan on improving a
product

• What are your limits -How much can you cut price?
  Increase RD Promotion Sales Budget?
• Competitor moves- improving existing brands in
  seg. and/or introducing new brands in seg.

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Variation on Improving Can Reposition

• Can allow product to age gracefully and ride the
  life cycle

Can redirect trajectory of brand position into
adjacent segment
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Questions need to answer if plan on repositioning
a product

• How long will it take?
• Material labor cost implications?
• Impact on products in segment entering? Leaving?

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In final analysis You Could decide to Kill
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Questions need to answer if plan on Killing a
product

• How many products do you plan to have overall?
• Going to add a replacement in this or another
  segment?
• Kill immediately-or phase out?
• Other options- Improve? Reposition?
• How will competitors react?

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ConsequencesKilling a product

• 1) Makes it difficult maintain Overall Market
  Share
• Even if Niche strategy-should increase share in
  selected niche(s) to offset loss in abandoned
  segments
• Investors-like to see Co. maintain overall
  starting share.

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ConsequencesKilling a product

• If not replaced
• 2) Hands over Market Share to competitors
• 3) Removes strategic opportunity for distribution
  efficiencies.

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Segment Consequences Killing a product

• LOW TECH Segments
• Kill the Cash Cow
• In opening years 2/3s volume profit from Low
  traditional sectors
• HIGH TECH Segments
• Difficult to re-enter, could take up to 3 years
  to launch new prdt.

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Your Your Competitors Product Mgt. Decisions

• Impact nature, magnitude arena of Competition
• Must monitor anticipate what, where when
  products repositioned, killed, introduced

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Lets assume

• LOW END 0-1 product killed.. 0-1 repositioned
  or introduced
• TRADITIONAL 3-6 repositioned from High0-1
  killed1-2 introduced
• SIZE 0-1 killed, 0-1 repositioned to
  Traditional, 1-2 introduced
• PERFORMANCE 1-2 killed, 0-1 repositioned to
  Traditional, 0-1 introduced
• HIGH 1-3 killed or repositioned to
  Traditional, 1-3 new products arrive in rounds 2
  or 3

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Round 3- Forecast nature, magnitude arena of
Competition

• LOW END 6 productsrivalry unchanged
• TRADITIONAL 9 products, w/ 3 repositioned
  increased competition
• SIZE 7 products, w/ 2 new increased
  competition
• PERFORMANCE 4 products, w/ 1 new reduced
  competition
• HIGH 6 products, w/ 2 new increased competition

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-Given Round 3 Scenario-How should adjust your
production capacities?
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Optimal levels of capacity?
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Optimal levels of automation?
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Once have optimal levels of capacity Need to
have most efficient levels of production costs
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How to have most efficient levels of production
costs

• Reduce Material costs
• Proffer minimal/optimal level MTBF
• TQM/Sustainability Initiatives
• Process Management Initiatives
• Reduce Labor costs
• TQM PI Initiatives
• Increase automation
• Invest in employee recruitment training
• Utilize 2nd shift

• Increases length RD on product line-makes
  re-positioning take longer
• Incur employee separation costs

• w/ maximum expenditures can realize 18
  improvement in productivity in 6 years!

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Why run 2nd shift when labor costs 50 higher?
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Why run 2nd shift when labor costs 50 higher?
Answer by using your proformas 1- On production
spreadsheet build at capacity- if have 1000 units
build 1000 units 2-On Marketing display-
FORECAST 1000 UNITS 3.-ON Proforma Income
statement- note NET MARGIN
THE BIQ Q If we double sales will we
double our net margin? Will we make less because
labor costs are 50 higher for 2nd shift?
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Why run 2nd shift when labor costs 50 higher?
Answer by using your proformas 1- On production
spreadsheet double output-run full 2nd shift
2-On Marketing display- double forecast 3.-ON
Proforma Income statement- NET MARGIN will more
than double
THE BIQ Ar When run 1 shift- must pay all
fixed costs- 2nd shift gets a free ride---only
has to pay labor premium
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Now that that you are producing-- in the most
efficient manner-- a perfectly designed product

• need to make sure maximum consumers are
  aware of it can easily buy it

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Moving Product

• Message Weight Media Planning
• Breadth, Depth Heft of Distribution Network
• Optimal Pricing Credit Terms

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Advertising/Promo Budget Drives Awareness
Increases in Promotion Budget have diminishing
returns. The first 1,500,000 buys 36 awareness
Spending another 1,500,000 (for a total of
3,000,000) buys approximately 50. The second
1,500,000 buys only 14 more awareness. -- a
1,500,000 promotion budget would add 36 to the
starting awareness, for a total awareness of 69
(33 36 69).
Advanced Marketing The Marketing Budget Detail
screen allows companies to allocate their Promo
Budget among five different media channels.
Projections of the upcoming round's awareness
display in a bar chart at the bottom of the
spreadsheet screen.
When new products are invented, considered
newsworthy events. Awareness is created w/ PR
campaign. At launch you automatically are charged
a 250 thousand fee for marketing rollout and
public relations. This fee earns a new product a
starting awareness of 50
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Sales Budget Drives Access

• Like awareness, if your sales budgets drop to
  zero, you lose one third of your accessibility
  each year.
• Achieving 100 accessibility is difficult.
  Companies must have at least two products in the
  segment's fine cut.
• Each product experiences diminishing returns at a
  sales budget of 3,000,000. However, diminishing
  returns for the overall segment is not reached
  until the budgets total 4,500,000 (for example,
  two products with sales budgets of 2,250,000
  each).
• Once 100 accessibility is reached, you can
  scale back to around 3,300,000 to maintain 100.

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Fine tuning your Promo, Sales Pricing
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Promo Budget
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Sales Budget Time Allocations
Decide on how many salespeople Mfr Reps will
have
How much effort will be focused on market
segments

• OUTSIDE sales-meet face-to-face (cost
  120K/each)
• INSIDE sales-works leads operates website
  customer support systems (cost 50K/each)
• Distributors push product (cost 100K/each)

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Pricing / Credit terms

• A/R Lag (in days) is the time between customers
  receiving products when they are expected to
  pay for em
• No credit - demand falls to 65 of normal.
• At 30 days - demand is 92.
• At 60 days - demand is 98.5
• At 120 days - demand is 100.
• The longer the lag, the more your cash is tied up
  in receivables.

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End Game Strategy
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If Company well managed- no need to take drastic
actions

• Balance Sheet
• Current ratio 2-2.5
• Leverage 1.5-2.5
• Sales/Current assets 3-5
• Income Statement
• Contribution Margin 30
• ROS5

• Production s
• Plant Utilization150
• Inventories 1-90 days
• Income Statement
• Customer satisfaction40
• Awareness80
• Accessibility80

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End-Game Moves of a Poorly Performing Company

• X-Large dividends Stock buy-backs
• Products killed large sell off of capacity
• RD, Ad sales budgets slashed
• No plant investments

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End gaming is indicative of BAD MGT-

• Can only occur if Co. has unproductive assets
• Eliminate unproductive assets early will have
  no rational for madness

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• Current ratio 2 indicates no idle assets
• Plant Utililization 150 - no plant to liquidate
• Great products (w/ Cust. Survey Scores 40) never
  Killed

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Rounds 6,7,8- should be most profitable
Things you can do w/ your
Which most often selected but least preferable to
do?

• Pay off Debt
• Invest in growth
• Buy-back stock
• Pay dividends

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Reducing Leverage

• Says to stockholders We can think of nothing
  better to do w/ than save you interest
  payments
• More debt eliminated the greater target you
  become for a takeover..
• No reason not to maintain Co. Financial Structure
  that got you to position of high profitability

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Issue DividendsGood Dividend Policy

• Net profit can only be allocated in one of two
  directions
• It is either paid out to owners in dividends
• or it is Retained Earnings - to grow the company

• For Example
• Ideal Investment/ round 10-25M ( let take
  20M)
• if profits30M Shares 2M you have EPS
  15/share
• If need 20M for investment get ½ from
  LT-debt- need 10M from Equityleaves 20M in
  earnings
• Could/should issue 10 Dividend

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Begin Practice Round 1 decision making.