Newshoes simulation

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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.

Price

Different selling prices can be charges for each region in which you are operating. For Period 0, the previous marketing team set a price of $110.00 in the home market and $90.00 in the domestic market. Decisions on selling price are in dollars and cents, as opposed to the other NewShoes variables, which are entered in whole dollars (or numbers) only. The price you set represents the price to the distributors in the region, and there is no discounting decision in NewShoes. Although you do not have control over the actual price that retailers will charge for your products, retail prices will reflect the price you set, and consumers will respond to any changes you make. The decision you make on selling price is very important and has a major impact not just on sales of your shoes, but on your company's profitability. Your pricing decision should take into account a number of factors:

o Company objectives, such as growth and profitability o Fixed expenses and unit costs o Competitors’ pricing o Market response to price

A word of caution: While each market responds differently to the selling price you set, prices over $150 can cause a rapid decrease in sales in any New Shoes market region.

The previous marketing team had thought that raising the price in the home market from $90.00 in Period −1 to $110.00 in Period 0 would help the bottom line without hurting sales too much. While losses were not as great, home sales dropped more than expected, from $9.2 to $7.5 million, and management wants your team to re-evaluate pricing, particularly in the home market.

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If you have the opportunity to bid on a contract or sell directly to consumers on the web, you will have additional pricing decisions to make. When selling to another business rather than into the retail market, pricing becomes especially important. You must set your price low enough to win the contract, but high enough to make the contract profitable. If your price is too high, you will get no sales. Too low, and you will lose money on the deal, and possibly face charges of predatory pricing. Bypassing retail channels by selling directly to consumers over the web brings additional issues to the pricing decision. Undercutting the retail distribution channels can cause some stores to drop your product and reduce sales in the channel. In NewShoes, pricing for direct sales needs to be coordinated with the prices set for the home and domestic markets. Customers in the foreign market cannot purchase your product from the website, so the direct pricing decision will not have an impact on sales there.

Promotion

Promotion is often divided into two general categories: consumer promotion (e.g. promotion targeting consumers/end-users) and channel or dealer promotion (e.g. promotion targeting the distribution channel). In NewShoes, there are two consumer-oriented decisions and two channel promotion decisions to be made in each region. The following are brief descriptions and some guidelines regarding decisions for the four different types of promotion in NewShoes. Consumer Promotion Consumer advertising is money spent on promotion presented through the media (television, radio, newspapers, magazines, websites etc.) that targets the consumers of your product. In Period 0, advertising expenditures were $1.5 million in the home and $2.0 million in the domestic market. You need to enter the dollar amount for consumer advertising for each region, but be aware that expenditures over $2.0 million per period in a market will have little marginal effect on sales. Consumer sales promotion is money spent in promotional items aimed at the consumer, such as rebates, contests, and premiums. You will need to enter a dollar amount appropriate for the market. Period 0 amounts were $2.5 million in the home market, and $1.5 million in the domestic market. Management thinks the previous marketing team placed too much emphasis on consumer sales promotion, and wants your team to take a look at these expenditures. It is thought that spending more than $1.0 million per period in any market will have little effect on generating additional sales. Channel or Dealer Promotion Personal selling involves having a salesperson from your company contact a distributor to persuade them to carry your product. Salespeople only call on middle-people in the distribution channel and do not deal with consumers or end users of your product. You must decide the

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number of the salespeople in each region. The effect of your salespeople varies by region, but having more than 10 salespersons in any market region will have little effect on generating additional sales. Each salesperson's salary, commission, benefits, support, travel, and other expenses cost your company $80,000 each period. Salespeople may be hired or fired at any time with no training or separation expense. In Period 0, you had 7 salespeople in the home region, and 7 in the domestic region. To change the total number of your salespeople, simply change the number of salespeople for each region. Dealer sales promotion is the money spent on a variety of promotional items aimed at the middle-person in your distribution channel. These items include sales assistance and training, contests, and free displays. You need to decide the appropriate dollar amount to spend in each region. Expenditures per period over $1.0 million in any market region seem to have little marginal effect on sales. Your firm's expenditures in Period 0 were $1.2 million in the home market, and $1.0 million in the domestic market. All four promotion variables can be adjusted separately in each of the three market regions and primarily affect sales in the period in which money is allocated to them. There is little carryover into the following periods. The amount spent in any of these areas of promotion can be changed as often as desired while you are making your decision. Simply change the number in your decision input. Just be sure to review your decisions before the simulation is advanced to confirm that the last input entered is your final decision for the period.

Production Costs

Production does not have to be scheduled in NewShoes because your company manufactures its athletic shoes to meet demand. This simplification of reality means that you do not have to be concerned about inventory control if you over-produce, or about missed sales and employee overtime expenses if you do not schedule enough production. One of the major reasons the loss in Period 0 was not as great as in Period −1 was a lower manufacturing cost of the product. Cost per unit (a pair of athletic shoes) fell from $62.59 in Period −1 to $40.00 in Period 0 as production expanded from 102,000 units in Period –1 to 198,000 units in Period 0. Manufacturing expects cost of goods sold (COGS) to decline even further as the firm gains more experience with purchasing the component materials, making better use of equipment, and developing more efficient manufacturing processes. They estimate that the company is on a 75% learning curve, which means that costs are expected to fall 25%, to 75% of their previous level, each time cumulative production doubles.

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Table 1.B: Production Costs (previous 2 periods)

Home Units Domestic Units Total Units Unit Cost COGS

Period 0 67,600 130,400 198,000 $40.00 $7.9 million Period -1 102,000 NA 102,000 $62.59 $6.4 million

As your team takes over the company, cumulative production stands at 300,000 units. Based on manufacturing's estimates, average unit cost should drop from the current $40.00 to $30.00 when cumulative production reaches 600,000 ($40.00 x 0.75 = $30.00), and drop further to $22.50 when cumulative production reaches 1.2 million units ($30.00 x 0.75 = $22.50). A graph of the Learning/Experience Curve for manufacturing is provided in Figure 1.A as a visual representation of how costs are projected to decrease with future increases in cumulative production.

Figure 1.A: Learning / Experience Curve

The current unit cost of the product is clearly an important factor in your pricing decision. But the experience effects on cost make it clear that you should not only consider current cost, but also the projected cost as sales expand. While setting a high price may seem to be the best way to maximize profitability, a lower price could increase sales enough to lower unit costs and make the company more profitable in the long run. In fact, because production costs are shared across all channels, it may be profitable simply to break even when pursuing sales in a new market if the increase in sales reduces unit costs for all markets.

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Unit cost is especially important when deciding on a price if you choose to bid on a contract. Winning a contract bid can have a positive effect on the profitability of your regular business in the market regions by increasing cumulative production and reducing product unit cost for all sales. Your total cost of goods may be lower with the contract than without it as the contract bid units move you to lower costs on the experience curve.

Market Research and Decision Analysis

To help you with your marketing decisions, NewShoes gives you experience in collecting market research, which is a vital function of the effective marketing manager. A good place to start is the Industry News, where you can get an overview of changes in the markets. The Market Sales report provides more detail, showing not only the unit sales in each market and the number of competitors, but also projected sales for next period.

For more in-depth competitive information, you will need to purchase market research. Corporate level research is available for competitors' product levels and spending on product development. For each market, there is information on price, advertising, consumer promotion, salespeople, dealer promotions, and customer satisfaction. By default, reports of industry averages are available for $10k each. Depending on instructor preferences, industry range and detail reports may become available at prices of $15k and $25k each, respectively.

In addition to market research, there are several tools available to help you analyze your options when making decisions. Break-even Analysis will help you determine the lowest price you can charge for your product in each market without incurring a loss. By entering assumptions about unit sales, you can calculate the break-even price in each market, based on projected expenses from your marketing decisions. Project unit costs using the Cost of Goods Calculator. Simply enter a projection for production (total unit sales for all regions), and it will take into account experience effects to estimate your unit cost for the coming period. The Response Functions analysis screen allows you to graph the relationship between unit sales and a selected marketing variable (price, advertising, salespeople, consumer promotion, or dealer promotion) in a market. Keep in mind that there may not be a direct relationship between an individual variable and unit sales, but graphing the results of previous decisions can be helpful in deciding the best marketing mix for each region. If a contract is open for bidding, the Bid Analysis tool shows the impact on unit cost of winning a contract. Use it to anticipate the impact of additional production from contract sales on your total cost of goods.

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Use the market research and decision analysis tools to help forecast what will happen and to understand why results differ from your projections. If there is a big difference, is it because of changes in overall demand? Has your price changed relative to the competition? Have you changed your marketing expenditures, or has the competition made changes to their marketing? There are no simple answers to these questions, and this is the type of complex analysis that marketers face daily. Only by integrating customer needs, the competitive environment, and your own corporate goals into your analysis, can you learn to make the key decisions that will decide whether your firm is successful or not.

Summary of Decision Variables

A summary of simulation variables is provided in Table 1.C (on next page) and should be used as a reference aid when making decisions in NewShoes. Along with each decision variable, this summary includes suggested limits, costs, other factors, and general parameters of the simulation.

Next Steps

As the new management team of a NewShoes company, several challenging decisions demand your immediate attention. First, you must formulate a strategic plan for your product to guide you in making decisions each period. Before you make the first period's decisions, you will need to choose a name to project a brand image that is in line with your vision of the company, and to differentiate your product from your competitors'. Your parent company expects continued top line growth, but more importantly, a turnaround in profits in the near future. While declining unit costs should help the bottom line, it is up to you to decide on the best marketing mix for the home and domestic regions to maximize sales and profits. Longer term, you will need to track the competition and be ready to take advantage of new sales opportunities as they arise. Markets are dynamic, so you must constantly improve your product to keep up with changes in consumers' taste. Good luck as you put your marketing skills to the test in the world of NewShoes!

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Table 1.C: Decision Variables

Decision Variables

Suggested Limits / Region Cost

Variability by Region

Decision Range Comments

Entering a new region N/A $750,000

Same all regions.

Domestic, Foreign

$750,000 to enter or re- enter a region.

Leaving a region N/A No charge.

Same all regions.

Home, Domestic, Foreign

Product Development

Over $2 million has little effect; not by region.

N/A Not region –specific.

Full range in whole dollars.

Up to 10 new and improved versions possible.

Selling Price Over $150 can have a negative effect.

Varies with manufacturing cost.

Amount can vary by region.

Full range in dollars and cents.

Experience Curve produces 25% decrease in manufacturing cost w/each doubling of cumulative production (see graph).

Consumer Advertising

Over $2 million has little effect on sales.

N/A Amount can vary by region.

Full range in whole dollars.

Targeted at consumers.

Consumer Sales Promotion

Over $1 million has little effect on sales.

N/A Amount can vary by region.

Full range in whole dollars.

Targeted at consumers.

Personal Selling

Over 10 salespeople has little effect on sales.

$80,000 per salesperson per period.

Number can vary by region.

Full range in whole numbers.

No training expense or separation charge. Targeted at middlepersons.

Dealer Sales Promotion

Over $1 million has little effect on sales.

N/A Amount can vary by region.

Full range in whole dollars.

Targeted at middle- persons.

Contract Bid N/A See price/cost discussion and Experience Curve.

Not region- specific.

Full range in dollars and cents.

Ties result in splitting units among tied companies.

Direct Sales Price

Over $150 can have a negative

effect.

Startup cost of $2 million. Period costs of $75 thousand and $2 per unit sold (in addition to production cost

Sales forecast is 10% of Home and Domestic regions.

Full range in dollars and cents.

Undercutting retailers can affect sales in Home and Domestic regions.