New shoes simulation decisions

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NewShoes Case

NEWSHOES

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The Athletic Shoe Industry is a dynamic and exciting industry with sales of over $70 billion worldwide. In recent history, increases in product demand were fueled by health and physical fitness trends, but the advent of athletic shoes goes back to the 1800s. Now athletic shoes are common and designed to meet many different consumer needs. When the jogging and fitness craze began in the mid-1970s, athletic shoe manufacturers were dubbed "Adidas and the Seven Dwarfs" because of the success of West Germany's Adidas company. But the early dominance of Adidas was no guarantee of future success. In the mid- 1970s, Adidas not only underestimated the amount of growth that was about to occur in the athletic shoe market but also the aggressiveness of other manufacturers, such as Nike in the United States. The rise of Nike in the athletic shoe industry is a Cinderella story. A university runner (Phil Knight) and his former coach (Bill Bowerman of the University of Oregon) went into business distributing Japan's Tiger running shoes in the United States. In 1971, they developed their own shoe and named it Nike. Fiddling with a waffle iron and some urethane rubber led Bowerman to develop the "Waffle" sole. This product improvement gave Nike its initial impetus. On the marketing side, the now famous "swoosh" trademark on the shoes was developed by an art student at a cost to the company of a mere $35! Nike experienced phenomenal sales growth from $14 million in 1976 to $920 million in 1984. Although Adidas remained "number one" outside the United States, fast-rising Nike dominated the domestic market by the early 1980s. In the mid-1980s, Nike had several problems to contend with, including a peak in demand in the athletic shoe industry, quality control difficulties, and a loose and paternalistic management style that appeared inadequate for a billion-dollar firm. As Nike faltered, a new player, Reebok, surged. Beginning its life in the United States as a subsidiary of a British firm, Reebok became a publicly held firm that went on to own its former parent. Reebok's revenues zoomed from $4 million in 1982 to $900 million in 1986. Although Nike lost its position as number one in market share to Reebok in 1986, it regained it through astute changes in its management style, improved marketing strategies, and product development. During the 90s, Adidas dropped to fifth place in United States market share. But ever the competitor, Adidas has come back and now battles with Reebok for the number two market share position, behind Nike. Other competitors also entered the scene, such as L.A. Gear, whose sales skyrocketed in the early 1990s, driven by a focus on fashion athletic footwear. In recent time, L.A. Gear has lost its edge. In the late 90s, Italian-based Fila surged to third place behind Nike and Reebok in United States athletic shoe sales. It too, has lost its edge. New Balance has done well, pulling into the number four market share position on occasion, focusing on serious athletes and unique products that come in varying widths. Puma, with roots that actually connect it to Adidas in its early days, duels with New Balance for position in the U.S. athletic shoe market. Brooks (owned by Berkshire Hathaway), Converse (now owned by Nike), Asics, Under Armor, Keds, and Skechers brands play more niche roles, but make the market interesting and competitive. And, Adidas now owns its

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old rival Reebok! Today, the athletic shoe industry in the United States generates approximately $15 billion in sales annually. As can be seen in this brief history of the athletic shoe industry, it is a competitive market with changing market trends and fads that result in a dynamic business environment. The NewShoes simulation will allow you to experience this same competition, excitement, and dynamism.

Adidas Nike

Reebok

New Balance

Puma

ATHLETIC SHOE INDUSTRY

The NewShoes Industry

The industry in NewShoes is made up of competing firms from your class, each selling one basic shoe. You have been hired as a member of the new marketing management team for your company. In the simulation, there are three regions representing different kinds of markets. The home region is a geographic sub-market, such as the Pacific Northwest in the United States or the Prairie Provinces in Canada. The domestic region represents a national market, such as the entire United States or Canadian market, minus the home market. The foreign region is the entire

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international market outside the home and domestic regions. The home market is generally a smaller market than the domestic market, with the foreign market being the smallest market of the three, at least early in the simulation. It is not known what the full potential of the foreign market might be. In NewShoes, athletic shoes are sold by manufacturers such as your company to distributors in a market, who then sell to consumers in retail stores. Price is a significant factor in sales, but how you market to distributors and consumers can also impact sales. Through personal selling and dealer promotion, you can encourage distributors to "push" your product and increase sales. By advertising and offering consumer promotions, you can make consumers aware of your brand and persuade them to buy it. Each market is unique, with distributors and consumers responding to your marketing decisions in different ways, so your task is to find the correct marketing mix for each region.

Personal Selling

Dealer Promotion

Product

Price

Product

Retail Price

Advertising

Consumer Promotion

Manufacturer Distributor Consumers

When your team takes over marketing for the firm, there are two periods of results available for you to evaluate the condition of the company. A "period" in the world of NewShoes can be viewed as a month, a quarter, or a year of operations. It is simply a period of company operation and of competition with the other NewShoes company teams. At the beginning of the simulation, your company is struggling to make a profit. After a loss of $2.4 million in Period –1, the previous marketing team decided to raise the price from $90 to $110 in the home market, and expand into the domestic market. The changes were a qualified success. Total revenue increased from $9.2 million to $19.2 million, but home sales dropped somewhat, and the company still lost $1.2 million.

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Table 1.0.A: Sales and Revenue (previous two periods)

Home Sales Domestic Sales Total

Revenue COGS Expenses Net Profit

Period 0 $7.5 $11.7 $19.2 $7.9 $12.5 -$1.2

Period -1 $9.2 NA $9.2 $6.4 $5.2 -$2.4

As a member of the new marketing management team, you face challenging decisions concerning your product, its pricing and promotion, and new distribution opportunities. While the same product is sold into all the regions, you must make price and promotion decisions for each market. Thus, you must consider the four Ps of marketing in managing your firm: product, price, promotion, and place. That is, you must decide where to distribute (place) your product, what price to charge, and how to promote it.

Product

All companies begin with the “Basic Version” of athletic shoes and each firm sells only one version at any given time, in all regions. Investment in new product development can lead to a new version of your athletic shoes. The firm spent $800,000 on product development in Period –1, and $900,000 in Period 0. Higher and more regular investments tend to result in shorter development times, but expenditures beyond $2 million in a given period have a diminishing effect on product development. As is true in the athletic shoe industry, there is some uncertainty as to when the next breakthrough in shoe development will occur. A new version of your product can be developed from Version 1 up through Version 10, though it is unlikely that Version 10 will be attained in a NewShoes competition. Version 5 or 6 is usually the highest version that can be reached after 8 to 10 decision periods. Each time your company releases a new version, that new version is automatically distributed in all the regions where you have a presence, and each region receives approximately the same positive effect on sales.

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Place

Your firm is well established in the home market at the start of the simulation. Distributors have been carrying your brand for some time, so additional salespeople and dealer promotions are only marginally effective. Customers in this market are looking for a high quality shoe with a price that is "just right"−not too high and not too low. A drop in revenue after a recent price increase may be an indication that the current price is above what customers expect to pay. Advertising is a good way of reaching customers, and consumer promotion is also helpful. In the domestic region, your firm has just entered the market, and initial sales have met expectations, but it is not clear if the marketing mix chosen by the previous management team is optimal. Early research indicates that customers in this market consider price an important factor in their decision, and they are not willing to pay as much as customers in the home market. Though advertising is helpful in reaching new customers in this market, they are more likely to pay attention to consumer promotions. Access to distribution in the domestic market is more difficult than in the home market, and requires higher levels of salespeople and dealer promotions. As the simulation progresses, the foreign market may open up as an opportunity for your firm. Be aware that a marketing mix that works well in the home and domestic markets may not work well in the foreign market. Customers interested in athletic shoes in the foreign region are looking for a high quality product, and price is not much of an issue. They will not be swayed very much by advertising and consumer promotions. Getting your product distributed will be a big challenge, and requires spending on salespeople and dealer promotions. You may enter new markets when available, and leave market regions as you choose, though you do need to maintain a presence in at least one market. There is no charge for leaving a region. There is, however, a $750,000 start-up charge each time you enter or re-enter a region. All you have to do to enter or re-enter a region is to input marketing decisions for the region, being sure to choose a marketing mix that is appropriate for the region. If your entry into a region has not been successful, and you would like to concentrate on other markets, you can leave a region by zeroing out the decision variables for that market. Remember, it costs $750,000 to enter a new market or re-enter a market you previously left, so think carefully before abandoning a region. The firm entered the domestic market in Period 0, and along with the consumer and dealer promotion expenses, there was a charge of $750,000 for the period. That amount is included in the total expenses shown for the Period 0 results. In addition to selling into the regular distribution channels, a major retailer may ask you to bid on a contract to sell a large quantity of shoes directly to them so they can market them as a store brand of athletic shoe. This means the purchaser will put its own brand name on the product, and your brand name will not appear on the shoes. Contracts are awarded based on the lowest

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bid, and sales to the contract winner are guaranteed. In case of a tie bid, the contract will be split equally between the companies submitting the winning bids. In NewShoes, contract sales have no impact on sales in the regular distribution channels. You may choose to bid or not to bid on these contracts if they become available. You may also have the opportunity to sell directly to consumers by establishing a presence on the web and setting up an order processing system. The potential for direct sales to consumers is estimated to be about 10% of sales through the retail channels in the home and domestic markets. Foreign market customers will not be able to buy direct.