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Marketing Assignment

PharmaSim The Marketing Management Simulation

Stuart W. James, Interpretive Simulations Thomas C. Kinnear, The University of Michigan

Michael Deighan, Interpretive Simulations

Charlottesville, Virginia, USA

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Copyright Notice This manual and the simulation described in it are copyrighted with all rights reserved by Interpretive Software, Inc. Under the copyright laws, neither this manual nor the simulation may be copied, in whole or in part, without written consent of the authors, except in the normal use of the simulation for educational purposes, and then only by those with a valid license for use. The same proprietary and copyright notices must be affixed to any permitted copies as were affixed to the original. This exception does not allow copies to be made for others, whether or not sold. Under the law, copying includes translating into another language or format. Purchasing the simulation experience gives the owner the right to participate in a unique learning event. Each student or participant must purchase the simulation to take part in the event or the institution sponsoring the event must purchase for the entire group participating in the event. Limited Warranty on Media and Manuals In no event, will Interpretive Software, Inc. be liable for direct, indirect, special, incidental, or consequential damages resulting from any defect in the software or its documentation, even if advised of the possibility of such damages. In particular, the authors shall have no liability for any programs or data stored in or used with the computer products, including the cost of recovering such programs or data. This simulation experience is sold "as is," and you, the purchaser, are assuming the entire risk as to its quality and performance. The warranty and remedies set forth above are exclusive and in lieu of all other, oral or written, express or implied. For more information about other products from Interpretive Software, please contact: Interpretive Simulations 1421 Sachem Place, Suite 2 Charlottesville, VA 22901 Phone: (434) 979-0245 Fax: (434) 979-2454 Website: www.interpretive.com Discover a Better Way to Learn. Active Learning through Business Simulations. Copyright © 1990–2014 Interpretive Software, Inc. Images © iStock.com and © BigStock.com. All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner whatsoever without written permission of Interpretive Software, Inc. Graphic images copyright © BigStockPhotos, copyright © iStock.

http://www.interpretive.com/
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Contents

Copyright Notice ....................................................................................................................................................... ii About the Authors ................................................................................................................................................... iv Acknowledgements ................................................................................................................................................ vii

PharmaSim Introduction ........................................................................................................................................ 9 PharmaSim Quick Start Guide................................................................................................................................. 11 PharmaSim Manual................................................................................................................................................. 12

1: PharmaSim Case .............................................................................................................................................. 13 The Brand Management Group at OCM ................................................................................................................. 15 Industry Overview ................................................................................................................................................... 16 The OTC Cold Remedy Market ................................................................................................................................ 16 Market Segmentation and the Market Survey ....................................................................................................... 18 Industry Competition .............................................................................................................................................. 21 Internal Product Development ............................................................................................................................... 25 Financial Situation................................................................................................................................................... 26 The Marketing Task ................................................................................................................................................ 27 Sample Market Survey Questionnaire .................................................................................................................... 28

2. Marketing Management Process ..................................................................................................................... 31 Situation Analysis .................................................................................................................................................... 33 Marketing Strategy ................................................................................................................................................. 39 Marketing Mix......................................................................................................................................................... 41

3. Operations Guide ............................................................................................................................................. 49 Simulation Navigation ............................................................................................................................................. 50 Startup Menu .......................................................................................................................................................... 52 Decisions Menu ...................................................................................................................................................... 54 Decision Analysis Menu .......................................................................................................................................... 73 Company Menu ...................................................................................................................................................... 77 Market Menu .......................................................................................................................................................... 86 Survey Menu ......................................................................................................................................................... 101 Simulation Menu .................................................................................................................................................. 114

Appendix ........................................................................................................................................................... 117 Using PharmaSim in a Group ................................................................................................................................ 118 Market Segment Descriptions .............................................................................................................................. 120 Distribution Channel Descriptions ........................................................................................................................ 123 Glossary ................................................................................................................................................................ 125 Index ..................................................................................................................................................................... 130

Print Date: 6/17/15

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About the Authors THOMAS C. KINNEAR is Eugene Applebaum Professor of Entrepreneurial Studies, Executive Director of the Samuel Zell and Robert H. Lurie Institute for Entrepreneurial Studies, and Professor of Marketing at the Ross School of Business at the University of Michigan. He was formerly Senior Associate Dean of the Business School and former Vice President for Development and Executive Officer for the University. He headed the $1.4 billion Campaign for Michigan in the 1990s. At Michigan, he has received awards for teaching excellence and service to the University. He holds an undergraduate degree and LLD (honoris causa) from Queen's University at Kingston, Ontario, an MBA from Harvard University, and a Ph.D. in Business Administration from the University of Michigan. He has previously held a faculty appointment at the University of Western Ontario and visiting appointments at Harvard University, Stanford University, and the European Management Institute (INSEAD) at Fontainebleau, France. His teaching and research interests are in the areas of entrepreneurial studies, strategic marketing planning, marketing and public policy, and market-based management. His Ph.D. dissertation examined the economic concept of "market failure" as it relates to ecological issues, especially pollution externalities. His research activity has resulted in publications in numerous scholarly journals including: the Journal of Marketing, the Journal of Marketing Research, the Journal of Consumer Research, the Journal of Public Policy and Marketing, and the Journal of Business Research. He is former editor of the Journal of Marketing and former founding editor of the Journal of Public Policy and Marketing. This latter journal publishes scholarly articles related to public policy and the marketplace, including issues of FTC and FDA regulations and environmental dynamics of consumption. He is co-author of several books including: Modern Marketing Research, (Thomson), Principles of Marketing (Harper Collins), Marketing Research: An Applied Approach (McGraw-Hill), Promotional Strategy (Richard D. Irwin, Inc.), and Cases in Marketing Management (Richard D. Irwin, Inc.). Professor Kinnear has worked in marketing management, marketing research, and marketing education consulting. His clients have included: Aetna, American Electronics Association, AT&T, Alcatel (France), Chrysler, Domino's Pizza, Inc., Eli Lilly, Inc., Federal Trade Commission, General Motors, General Electric, Helmac Products, Kodak, L' Air Liquide (France), Machine Vision International, TI Group (UK), and Travelers. He is CEO and Chair of the Board of Directors of the Venture Michigan Corporation, a $200 million venture capital fund of funds. He is a Director and Past-Chair of the Board of the American Marketing Association and former Chair of the Board of the American Marketing Association Foundation. He has previously served as an Academic Trustee of the Marketing Science Institute, as a Director of the Association for Consumer Research, and as the Vice President for Academics and Vice President for Publication at the American Marketing Association. He also has served or is serving as a member of the Board of Directors or Corporate Advisory Boards for several

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companies and community organizations including: Accuri Cytometers, Inc., Ann Arbor Angels, Avail Networks, Inc., Bard Manufacturing, Inc., BlueGill Technologies, Inc., Center For Learning Through Community Service, Domino's Pizza, Inc., Greenhills School, Helmac Products, Inc., Ecliptic Systems, Inc., Interpretive Software, Inc., Janeeva, Inc., Mobius Microsystems, Inc., Nanocerox, Inc., National Patent Development Corporation, Venture Michigan Fund, Network Express, Inc., Pennaflex Educational Resources, Inc., and the University Musical Society. He is active in the entrepreneurial community as a co-founder, advisor, angel investor, and Board member of startup companies, including: Network Express, BlueGill Technologies, Accuri Cytometers, Avail Networks, Avidimer Therapeutics, Mobius Microsystems, Janeeva, Nanocerox, and NanoBio. He is also a limited partner in Apjohn Ventures, Arbor Partner Ventures, Arboretum Ventures, EDF Ventures, and RPMVentures. He is a member of the investment committee for EDF Ventures and serves as a special limited partner for Arboretum Ventures. MICHAEL DEIGHAN is a co-author on the new web-based editions of Airline, Entrepreneur, and HRManagement. His expertise, insight, and creativity proved invaluable and made it possible to convert these models to their current web-based versions. Michael joined Interpretive Simulations in 1989 as lead software developer, and is now Manager of Content Development. He is co-author on a number of Interpretive simulations: PharmaSim, AutoSim, BizCafe, StratSimMarketing, StratSimManagement, StratSimChina, ServiceSim, CountryManager, and MarketShare. In addition to developing software, he has been teaching computer programming classes at Piedmont Virginia Community College in Charlottesville, Virginia, since 1990. Michael received his B.A. in German and Economics from Washington and Lee University, and an M.A. in German from the University of Virginia. STU JAMES is the founder of Interpretive Simulations, one of the leading publishers and developers of business simulations worldwide. Interpretive’s simulations are an integral part of the curriculum at many of the world’s top business schools in the areas of marketing, strategy, management, and international business. To date, over 400,000 people have experienced one of Interpretive’s simulations, and many rave about how the simulation was one of the best learning tools they have ever used. On the academic front, Stu is currently Visiting Lecturer at the University of Michigan (EMBA), and at the Colgate-Darden Graduate School of Business at the University of Virginia (MBA Core Marketing and Custom Executive Programs). In addition, Stu has served at the Allen Center for Executive Education at the Kellogg School of Business, the China Europe International Business School (CEIBS), and the Cheung Kong Graduate School of Business (CKGSB). Along with his academic work at the above business schools, Stu has also worked with American Honda, CIGNA, The Davidson Institute, General Electric, Genworth Financial, Harvard Business School, Navy Federal Credit Union, Pearson Prentice Hall, and McKinsey & Company. He is co-

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author of a number of leading simulation products including StratSimManagement, StratSimMarketing, StratSimChina, CountryManager, PharmaSim, HRSimSelection, MarketShare, BizCafe, and ServiceSim, all used at leading universities worldwide. Stu has extensive experience in facilitating simulation events, having directly worked with thousands of executive and MBA participants over the past 25 years. Currently, Stu’s primary focus is running Management by the Numbers, Inc. (MBTN), a new venture that he co-founded with Paul Farris of the Darden School of Business. MBTN provides a self-paced, on-line environment where students and executives can master the numbers side of marketing and business metrics. Stu and his family reside in Afton, Virginia at the foot of the Blue Ridge Mountains. In his spare time, Stu enjoys playing and teaching Irish traditional music and competing in triathlons.

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Acknowledgements The authors wish to thank many people for their support in the development of this simulation. Mary Juraco and Kathleen Simroth of Interpretive Simulations were a great help with the editing process for the initial version of this manual. Melissa Rosati, Jim Boyd, and Jim Sitlington at Scott, Foresman and Company all played an important role in getting PharmaSim off the ground. Steve and Kathleen Simroth and Karen James collected data in retail outlets long before the first line of code was written. We also are grateful to the many students who tested all the versions of PharmaSim over its development. A special thanks is due Eric Anderson, Craig Ehrnst, Matt Hausmann, Nadine Lindley, Jim Pack, Louise Bedard, and Joanne Novak at the University of Michigan Business School for their help in the alpha and beta test phases of PharmaSim. Over the years, a number of people contributed to improvements in the manual and software. We especially appreciate the contributions of Julie Koh, Gabriel Buddenbrock, Susan Christmas, Marjorie Adams, Del Kolberg, Erin Simpson, Clayton Shumate and Anne Louque of Interpretive Simulations, and Anne Smith of HarperCollins. We also owe a huge debt of gratitude to faculty who have worked with us over the past ten years, including Jose Rosa, Gene Anderson, Harlan Spotts, Ann Root, Marian Moore, Lori Feldman and Hugh Daubek. We also appreciate being invited into the classrooms and meetings by the first year marketing faculty at the Harvard and Darden Business Schools. For the new browser-based version, we would also like to thank Melissa Sabella and Melissa Pellerano of Pearson Education for their assistance with the Kotler/Keller Framework for Marketing Management: Integrated PharmaSim Simulation Experience, and Tony Naidu and Sue Overton of Interpretive Simulations for the redesigned cover. We would also like to thank Joni Jackson, David Fowler, Paul Chad, John Cantrell, and Donald Wlodarski for allowing us to beta test the latest version in their class. We consider all our customers part of our product development team, and we are fortunate they have put their time and effort into improving our product. We especially appreciate the suggestions and comments of the many faculty and students who have used PharmaSim over the years.

Michael Deighan Stuart W. James

Thomas C. Kinnear July 2008

This simulation is dedicated to Karen and Katherine,

Connie, Maggie, and Jamie, Mary, Justin, Mikaela, Kathleen, and Sean.

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Introduction − 9 −

PharmaSim Introduction

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HARMASIM IS A MARKETING MANAGEMENT simulation based on the over-the-counter cold medicine industry. While it focuses on brand

management, the issues raised apply to marketers in any industry. In PharmaSim, you will learn the importance of

understanding customer needs, creating awareness for your products, finding the best distribution model, and deriving an appropriate pricing structure.

As a member of a marketing management team, you will make decisions regarding product mix, pricing, distribution, advertising, and promotion for Allstar Brands, one of five firms in the market. The four computer-simulated competitors will respond to your

decisions and execute their own strategies. All the teams in your section compete within the same environment, allowing your instructor to compare results. The simulation covers a time- span of up to 10 periods, so you can observe both the short-term and long-term effects of your decisions. PharmaSim offers three playing levels with varying degrees of complexity. "Brand Assistant" has the fewest decisions and least number of reports available. "Assistant Brand Manager" is moderately complex. "Brand Manager" is the most complex, offering the greatest detail in the decisions and reports. Your instructor may choose to use one or more of the levels. In addition, you may have to respond to issues raised by "incidents" (mini-cases), and complete supplemental assignments chosen by your instructor.

Competing in the PharmaSim marketplace will require complex analysis and decision-making. Therefore, take some time to familiarize yourself with the case before beginning the simulation. While working through your decisions, you will find it helpful to refer to the manual for information and strategy tips.

To get the most out of the PharmaSim experience, we recommend the approach outlined on the following page.

P

You compete against simulated competitors. All teams in your section face the same environment.

PharmaSim is a challenging simulation covering brand management concepts.

You will gain experience with the 4Ps of marketing: product, price, place, and promotion.

Introduction − 11 −

PharmaSim Quick Start Guide

EVALUATE RESULTS • Company reports • Market research • Survey

READ THE CASE • Industry background • Company starting situation

SIMULATION ENDS • Evaluate team performance. • Review what you have learned.

STARTUP DECISION • Access simulation from course website. • Read the Briefing. • Make first period decisions.

DECISION ANALYSIS • Budget Allocation • What If…

PERIOD DECISIONS • Sales Force decisions • Input for EACH product

• Pricing • Advertising • Promotion

TEAM LEADER ADVANCES SIM • Check Schedule for times. • Complete advance BEFORE deadline.

Your instructor may require additional assignments during the simulation. Check the schedule and messages on your course website for details.

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PharmaSim Manual

HE REMAINDER OF THIS MANUAL is divided into the sections described below. Understanding and success in PharmaSim will be greatly enhanced by reading this manual before you begin the simulation. The sections listed below will answer most of

the questions students typically have during the simulation experience, and reading them has the added benefit of improving your competitiveness. Finally, the operations guide and PharmaSim case are also available on-line in the simulation software.

Section 1: PharmaSim Case contains background on the over-the-counter (OTC) cold and allergy remedy market, and the current situation of your firm, Allstar Brands. It also provides an overview of the decisions you will make and information on the reports and research available. A timeline of the product decisions you will face is also included. Section 2: Marketing Management Process presents a general discussion of marketing management: situation analysis, the 5Cs, SWOT analysis, marketing strategy, and the 4Ps. It serves as a guide in developing and executing your marketing plan. Section 3: Operations Guide explains how to use the PharmaSim software, including navigating the simulation, decision entry, and detailed description of the reports. This section also provides details on using the simulation decision analysis tools. Appendix: This section provides supplemental materials to help you with the simulation experience. There are tips on using the simulation as part of a group. A description of the market segments and distribution channels in the PharmaSim environment may help guide you in segmenting the market and positioning your products. The glossary contains marketing terms that are used in the simulation. An index concludes the appendix.

NOTE: The data shown in screenshots in the case may not match reports in your simulation. The values in the case and screenshots are taken from Period 0. Other periods may be similar, but one should rely only on the values shown in the simulation screens. Also, the level of detail of some of the information in the screenshots may not be applicable to the Brand Assistant's decisions (Level 1).

T

PharmaSim Case — Page 13

1: PharmaSim Case

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The Allstar Brands Medicine Group

LLSTAR BRANDS CORPORATION IS ONE OF THE LEADING MANUFACTURERS of packaged goods in the world. Since its founding in 1924, the company has acquired or merged with a number of smaller packaged goods companies.

The Allround Brand The management team at the over-the-counter cold medicine (OCM) group of Allstar Brands just completed its third presentation in the past month to the Pharmaceuticals Division manager regarding the status of the Allround cold medication. It is apparent, from all the attention the team has received, that the Allround brand it manages is of strategic importance to the company. Unfortunately for the team and the company, the fourth quarter performance reports for Allround were not as positive as management expected. Therefore, the OCM team has been under the intense scrutiny of senior management.

Overview Allstar Brands' Allround product is a market leader in the over- the-counter (OTC) cold and allergy remedy market. The consistent success of the brand in terms of profitability and sales has made it a critical component of the Pharmaceuticals Division's long-term strategic plan. The division anticipates that the brand's cash flow in the coming periods will allow the company to pursue new opportunities in emerging markets.

However, the division manager responsible for Allround has become concerned with the competitive nature of the OTC cold remedy market. In the past three years, the industry has seen several product introductions as well as major increases in promotional and advertising expenditures. There is concern among senior management that this competitive activity will lead to declining market share and profitability for Allround. The brand has lost one full share point in the last year. Senior management expects that skillful marketing will prove pivotal to the long- term success of Allstar Brands. The Company The company consists of three divisions: Consumer Products, International, and Pharmaceuticals. The Consumer Products Division handles a number of packaged goods, such as laundry detergent, shampoo, and bar soap. The International Division distributes Allstar products on a global basis and has a large presence in the European market. The Pharmaceuticals Division is responsible for the marketing and production of ethical and OTC medications. Ethical drugs are available through pharmacies with a physician's prescription, whereas OTC remedies are widely distributed without the need for a prescription. The management of Allstar's Pharmaceuticals Division consists of a number of market related groups, one of these being the OCM group. This group is concerned primarily with the marketing activities of the Allround brand and any line extensions or new product introductions that might

A

Allstar Brands Corporation is one of the leading manufacturers of packaged goods in the world. Since its founding in 1924, the company has acquired or merged with a number of smaller packaged goods companies.

PharmaSim Case — 15 —

fall under the same category. An overview of the corporate structure of Allstar Brands is presented in Exhibit 1.1. Exhibit 1.1: Allstar Brands

Consumer Products Pharmaceuticals International

Division Level

OCM Group Allround Brand Group Level

The Brand Management Group at OCM The marketing management group responsible for Allround consists of a brand manager, an assistant brand manager, and a brand assistant who is a recent business school graduate. They work together as a team on all of the marketing decisions related to the OTC cold and allergy remedy market. The three managers are concerned with developing the Allround marketing mix strategy each period, including any reformulation or line extension options. In addition, if Allstar's research department develops any promising new product ideas for the cold medicine market, this team will be responsible for the new product launch. Although all product and marketing decisions are made as a group, each member of the brand management group has a different role.

The brand assistant has major input on decisions related to retail price, promotional allowances, consumer and trade promotional expenditures, advertising expenditures, and the number of direct and indirect sales force personnel committed to the Allround brand. The brand manager thought it would be

best for the brand assistant to gain experience by understanding the basic marketing variables before becoming more involved in the detailed implementation of the marketing plan. The assistant brand manager has input to the aforementioned issues but is also required to make more in-depth marketing decisions. For example, the assistant brand manager makes recommendations concerning the allocation of the sales force to retailers and across direct and indirect channels. This person is also concerned with the development of the pricing discount structure, as well as more of the specifics of promotional programs, including the advertising message, advertising agency, and trade and consumer promotions. The brand manager is responsible for all aspects of the marketing decisions for the Allround brand. In addition to the decision areas above, the brand manager is responsible for more detailed aspects of the advertising message, including which competitor to position against, the

During the simulation, decision levels progress from brand assistant to brand manager.

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choice of target segments, and the details of how promotional allowances and promotions are allocated across various distribution channels. In general, the brand management group is responsible for making effective marketing decisions in all marketing mix areas to maximize the long-term profitability of Allstar Brands' OTC cold and allergy remedy group. Industry Overview Allstar Brands competes with four other firms in the OTC cold and allergy market. These five firms offer a total of 10 brands in five different product categories (cold liquid, cough liquid, allergy capsule, cold capsule, and nasal spray) listed in Exhibit 1.2:

The OTC Cold Remedy Market Cold remedies are designed to address five basic symptoms: aches and fever, nasal congestion, chest congestion, runny nose, and cough. Although the cause is different, allergies share many of the same symptoms and are therefore often grouped with cold remedies. However, products formulated specifically for allergy relief medicines are available, and it is common in the industry to consider relief from allergy symptoms as a separate consumer need from virus and flu related illnesses. Chronic allergy sufferers tend to have different usage patterns and more concerns about side effects because of the duration of the symptoms. Brand Formulations Products vary in the ingredients they contain, their form, and the duration of relief. In general, various combinations of six basic types of ingredients are used to formulate OTC brands. Each ingredient targets one of the five basic symptoms or is used as a base for the other ingredients. The ingredients are:

Exhibit 1.2: Company and Brand Summary

Company Name Sales $ (millions) Brands on the Market

Allstar Brands 355 Allround: 4-hr multi-symptom cold liquid

B&B Health Care 286 Believe: 4-hr allergy capsule Besthelp: 4-hr cold capsule

Curall Pharmaceuticals 199 Coughcure: 4-hr cough liquid

Driscol Corporation 255 Defogg: 4-hr allergy capsule Dripstop: nasal cold spray Dryup: 4-hr multi-symptom cold capsule

Ethik Incorporated 396 Effective: nasal cold spray End: 4-hr cough liquid Extra: 12-hr cold capsule

PharmaSim Case — 17 —

• Analgesics: Provide relief for aches and fever. Common analgesics are aspirin and acetaminophen (an aspirin substitute).

• Antihistamines: Reduce the secretions that cause runny nose and watery eyes. • Decongestants: Reduce nasal congestion by shrinking the blood vessels in the nose lining

to clear the passages and restore free breathing. • Cough suppressants: Reduce the cough reflex. • Expectorants: Provide relief from chest congestion by loosening the phlegm, thereby

making each cough more efficient. • Alcohol: Provides a base for the other ingredients in some products and helps the patient

rest. (Some consumers view alcohol as a negative attribute.) A brand can be made available in one of three forms: liquid, capsule, or spray. A consumer's choice with regard to form is usually based on personal preference, but some general differences are apparent. Nasal sprays contain only a topical nasal decongestant that provides faster relief from sinus congestion than other forms. Capsule and liquid cold medications might contain any combination of ingredients, although cough medicine is usually found in liquid form to help soothe throat irritation. According to a recent survey, most consumers find that capsule form is somewhat more convenient than liquid. Two other basic considerations are duration of the product and possible side effects. Product duration is typically either 4-hour or 12-hour. The government regulates the amount of medication for various periods of relief, including the maximum for a 24-hour period without a prescription. The maximum dosage used in 4-hour formulations cannot be taken more than four times each day due to over-medication concerns. Twelve-hour formulations can contain twice the dosage as 4-hour formulations, or half the daily maximum medication. Nasal sprays are considered instant relief products because they act much faster than standard cold medicines, but their effectiveness wears off faster. OTC side effects have become a greater consideration in recent times because of the emphasis on healthier lifestyles and concerns about performance under medication. Drowsiness due to antihistamines or alcohol is the most often mentioned negative side effect, especially when these products are used during the day. Other considerations include upset stomach, long-term effects of nasal spray, and excessive medication. As can be seen in Exhibit 1.3, the Allround brand is a 4-hour liquid cold medicine that provides multi-symptom relief. It contains an analgesic, an antihistamine, a decongestant, a cough suppressant, and alcohol. Most consumers use this product for nighttime relief because of the strength of the medication and because the alcohol and antihistamine help the patient rest. Allround is viewed as one of the most effective brands on the market at reducing multiple cold symptoms. However, consumer groups and some physicians have attacked the multi-symptom "shot-gun" approach as providing excessive medication in many circumstances.

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Market Segmentation and the Market Survey The trade typically segments the OTC cold and allergy market based on how the brands are labeled. The four standard product categories in the OTC market are cold, cough, allergy, and nasal spray. The brand management group often uses the information presented in Exhibit 1.4 as a basis for determining the brand’s direct competition, but also realizes that the report fails to account for the cross-usage of brands (e.g., using a cold medicine to relieve allergy symptoms).

Exhibit 1.3: Current Brand Formulations

Anal-gesic Anti- hist.

Decn- gest.

Cough Supp. Expect.

Alco- hol Description

Max Allow 1,000 4 60 30 200 20 (mg/4-hr dose) Allround 1000 4 60 30 0 20 4-hr multi liquid Believe 0 4 0 0 0 0 4-hr allergy capsule Besthelp 0 4 60 0 0 0 4-hr cold capsule Coughcure 0 0 30 30 0 10 4-hr cough liquid Defogg 0 4 0 0 0 0 4-hr allergy capsule Dripstop 0 0 60 0 0 0 cold spray Dryup 1000 4 60 0 0 0 4-hr multi capsule Effective 0 0 60 0 0 0 cold spray End 0 0 0 0 200 10 4-hr cough liquid Extra 0 0 120 0 0 0 12-hr cold capsule

Exhibit 1.4: Market Share by Product Category Cold Cough Allergy Nasal Total Mfr. Sales (M$) 879.7 366.4 126.1 119.1 1,491.2 Growth 6.6% 3.2% 5.9% 4.5% 5.1% % % % % % Allround 40.4 0.0 0.0 0.0 23.8 Believe 0.0 0.0 50.7 0.0 4.3 Besthelp 25.2 0.0 0.0 0.0 14.9 Coughcure 0.0 54.3 0.0 0.0 13.3 Defogg 0.0 0.0 49.3 0.0 4.2 Dripstop 0.0 0.0 0.0 52.0 4.2 Dryup 14.9 0.0 0.0 0.0 8.8 Effective 0.0 0.0 0.0 48.0 3.8 End 0.0 45.7 0.0 0.0 11.2 Extra 19.5 0.0 0.0 0.0 11.5

PharmaSim Case — 19 —

A major marketing research firm offers a nationwide survey of OTC cold and allergy consumers. The market research firm claims that this survey provides a great deal more information on how consumers perceive and use cold and allergy products. The firm also suggests that demographic segmentation could reveal important information about the market. Survey data are provided with two segmentation options: illness (cold, cough, and allergy) and demographics (young singles, young families, mature families, empty nesters, and retired). The marketing research firm conducts this survey every period. (A Sample Market Survey Questionnaire concludes the case.) Curious about possible new market insights, the OCM group obtained partial non-segmented results of the market survey on a "free to examine" trial basis. If the group finds the sample data informative, it may purchase the complete survey for $100,000. The OTC cold and allergy market could then be analyzed based on any or all combinations of illness and demographics that the OCM group desires. Survey Data The consumer survey consists of the following reports: 1) market share based on consumer brand purchases; 2) purchase decision-making criteria used by consumers; 3) brand awareness, trial, and repurchase percentages; 4) brand satisfaction; 5) a comparison of intended versus actual purchases; 6) a comparison of brands based on consumers' perceptions of their ability to relieve symptoms; and 7) the tradeoff that consumers perceive between symptom relief and price. The sample data for awareness, trial, and repurchase are presented in Exhibit 1.5. The survey results on Brands Purchased, Purchase Intentions, and Satisfaction are based on units sold. Brand Awareness, Decision Criteria, Brand Perception, and Tradeoffs are based on survey population. This distinction reflects multiple purchases from one survey respondent (usage rates).

Exhibit 1.5: Market Survey—Brand Awareness, Trials, and Repurchase

Brand Brand Awareness Brand Trials

Most Freq. Purchased

Conversion Ratio

Retention Ratio

% % % % % Allround 74.1 % 47.1 % 21.8 % 63.6 % 46.3 % Believe 18.9 % 9.2 % 3.8 % 48.5 % 41.9 % Besthelp 56.6 % 30.0 % 13.0 % 53.1 % 43.2 % Coughcure 49.0 % 29.0 % 18.4 % 59.1 % 63.6 % Defogg 24.1 % 13.0 % 4.1 % 53.9 % 31.8 % Dripstop 20.2 % 11.3 % 3.6 % 56.1 % 31.4 % Dryup 23.2 % 10.9 % 7.2 % 47.0 % 65.6 % Effective 22.0 % 12.0 % 3.1 % 54.5 % 26.2 % End 46.9 % 30.6 % 15.6 % 65.3 % 50.8 % Extra 60.1 % 31.8 % 9.5 % 52.8 % 29.9 %

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The OCM group found the data insightful. They were pleased that Allround had very high awareness. The survey measures the percent of those queried who mentioned the Allround brand without prompting, which is considered "unaided awareness." In addition, the Allround brand had the highest trial level and was the brand most frequently purchased. Allround's conversion ratio (the percentage of those aware of a brand who have tried it) is also high. The brand manager noted that the retention ratio (the percentage of those who have tried the brand who now purchase it most often) for Allround was lower than that for several other brands. The OCM group wondered if this might be a signal of future problems, but the brand assistant recalled that new brands and brands that fill very specific needs often have higher retention rates than brands that are mature or not highly targeted. Other Marketing Research In addition to the survey data, other information about the market is available. Market trade publications, similar to Exhibit 1.4, are free to the OCM group and provide data for industry outlook on population, market growth rate, inflation, wholesale/direct distribution, and symptoms reported by consumers. Other data concerning competition and distribution are available for a fee. These include a comparison of relevant operating statistics for each company; competitive estimates of sales force allocation, advertising expenditures, and message and promotional programs; and studies of distribution regarding share of channel sales, pricing, consumer shopping habits, average shelf space, and physician and pharmacist recommendations. Assistant Brand Manager and above can also conduct test markets which allow you to experiment with different combinations of price, advertising, and promotion. In some cases, Brand Managers may be able to use a new conjoint study to help with product decisions. The OCM group believes that the Marketing Research studies contain useful information, but that they also need to examine the trade-off between the cost of these studies and the information for decision-making that these studies provide. They also need to recognize that all marketing research studies have some error in them.

PharmaSim Case — 21 —

Industry Competition

Pricing and Promotional Allowances: It is industry practice for manufacturers to suggest retail prices to retailers, although retailers ultimately set the price to consumers. Manufacturers commonly offer volume discounts of 15-40 percent of the manufacturer’s suggested retail price plus an

additional "promotional allowance" of 10-20 percent. Allowances are necessary to gain retail distribution, obtain desired shelf facings in retail outlets, and gain retailer support for a brand in advertisements and promotions undertaken by the retailer. Allowances are usually discussed with retailers in conjunction with price levels but are also considered to be a type of promotional expense. Thus, allowances appear on the income statement as a separate variable cost line item. Exhibit 1.6 displays the current pricing policies for the Allround brand.

Exhibit 1.6: Price / Volume Discount Schedule for Allround ($) By Discount Schedule Direct

Volume Discount

Price to Channel

Units Sold (M)

Dollars Sold ($M)

% of Total Sales

Suggested Retail: $ 5.29 <250 25 % $ 3.97 10.5 $ 41.8 11.8 % <2500 30 % 3.70 35.4 131.2 36.9 % 2500 + 35 % 3.44 15.1 51.9 14.6 % Indirect / Wholesale 40 % 3.17 41.1 130.3 36.7 %

NOTE: This information is only available at the Assistant Brand Manager level and above in the simulation. The manufacturer’s suggested retail price (MSRP) for Allround is relatively high with volume discounts ranging from 25–40%, not including promotional allowances. However, the OCM group believes that Allround's sales have not suffered because of the higher price. In fact, the brand's effectiveness, high recognition, and level of loyalty have allowed it to maintain a price leadership role in the market. Exhibit 1.7 provides the MSRPs for all brands in the market.

Exhibit 1.7: Manufacturer's Suggested Retail Prices Allround $ 5.29 Dripstop $ 4.29 Believe 4.39 Dryup 5.09 Besthelp 4.89 Effective 4.39 Coughcure 5.49 End 5.29 Defogg 4.29 Extra 4.49

The OCM group monitors competitive activity in a number of areas, including pricing and promotional allowances, advertising, consumer and trade promotion, and sales force allocation.

NOTE: A market research report showing the average retail price by channel is available for $20,000.

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Advertising Advertising plays a major role in establishing brand awareness among consumers and in helping to shape consumers' perceptions of products. Last period, $20 million dollars was spent on Allround's advertising campaign, primarily for commercials aired on network television. Competitive advertising budgets for last period ranged from $1 million for the Effective brand to $16 million for Coughcure. There are four basic advertising message types that the OCM group considers potentially useful for Allround: a primary demand stimulation to focus the advertising message on increasing overall demand for OTC remedies while increasing Allround's unaided awareness; a benefits approach that states the symptomatic relief properties of Allround; a comparison approach that positions Allround against another brand; and a reminder advertising message to maintain consumer awareness and stimulate the repurchase of Allround. The advertising message used in any period can be a combination of these types and Allround used all of them to some extent last period in their campaigns. The advertising message can also target product use (cold, cough, and/or allergy) and demographics (young singles, young families, mature families, empty nesters, and/or retired). This targeting provides guidance to the advertising agency for creative aspects of the ad design and selection of specific media placements. The OCM group is considering the selection of a new advertising agency. Allround's current agency is Brewster, Maxwell, and Wheeler (BMW). This agency is known for its high quality work but charges a 15 percent commission on media placements. There is some concern that BMW costs too much and is having an adverse impact on Allround’s profits. The OCM group has received solicitation from two other advertising agencies. Sully & Rodgers (S&R) has a reputation of providing mid-range quality work but charges only 10 percent on media placements. Lester Loebol & Company (LLC) charges only 5 percent on media placements, one-third as much as BMW, but its advertising campaigns are of significantly lower quality. It could be argued that, since the Allround name is well established, a decrease in the quality of advertising might not hurt the brand significantly. Potential cost savings could result in an increase in profits, but the group is concerned that lower quality advertising might cause irreparable damage to Allround’s brand image.

Promotion Trade promotions include promotional allowances and co-op advertising. Promotional allowances, also discussed in the pricing section, are an additional discount to the channel. Co-op advertising provides incentives to the channel to feature a specific brand in their own advertising. Money is made available to retailers to pay for a portion of the retailer's advertising when the relevant brand is promoted.

The OCM group must make three basic advertising decisions each period: the amount of dollars allocated to the advertising budget, the content of the advertising message, and the choice of an advertising agency.

Consumer and trade promotions are a significant part of marketing in the OTC cold and allergy remedy market.

PharmaSim Case — 23 —

Consumer promotions include distribution of free trial size packages, coupons, and point-of-purchase displays. Trial sizes come in smaller packages and allow consumers to try a product before buying. Allround did not use trial size packaging last period but may consider this option in the future. As the name implies, trial size packaging usually contains a smaller dosage of medicine and is provided to potential consumers free of charge. This promotion can be used to attract potential consumers to the Allround brand.

Coupons distributed to consumers in special newspaper or magazine supplements offer additional discounts off the retail price when redeemed at the time of purchase. In the last period, a part of Allround's consumer promotion budget was spent on coupon support. This included money spent on printing, inserts, and mailings. Point-of-purchase vehicles are special displays, such as retail sale racks, on-shelf advertisements, or end-of-aisle displays that promote a brand to the consumer in the retail store. The OCM group believes that these displays promote brand switching when the consumer is purchasing OTC products. Point-of-purchase money is paid to the retailer, but the promotion targets the end consumer. The brand manager may allocate these funds across retail channels depending on such factors as shopping habits and channel needs. Exhibit 1.8 is a summary of last period's promotional activity for the Allround brand.

Exhibit 1.8: Promotional Activity for the Allround Brand (in $000s)

Promo Allowances $ 60,400 (17.0%) Co-op Advert 1,400 Point of Purchase 1,400 Trial Size 0 Coupons 4,200 ($0.50 / ea.)

Sales Force The support of a manufacturer's sales force is critical to the success of a brand in the OTC cold and allergy market. Part of the sales force sells directly to retail outlets. This direct sales force is responsible for maintaining relationships with current retailers and for developing new retail accounts. The direct sales force also presents trade promotions, allowances, and new product introductions to retailers.

Allstar Brands spent significant amounts on consumer and trade promotions for the Allround brand last period. As was the case in advertising, the OCM group believes that Allround has more promotional support than any other brand on the market.

The OCM group not only allocates money for each of these promotional activities but also determines the promotional effort across all retail outlets within the various distribution channels.