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					 Introduction
      to
Venture Strategy




   Copyright 2004 Ernest R. Cadotte
Learning Strategy

   I listen, I forget.
  I see, I remember.
  I do, I understand.

                        Old Chinese Proverb

   Copyright 2004 Ernest R. Cadotte
                   Learning Strategy

Computer simulations are a form of combative

training where participants pit their entrepreneurial

business skills against those of formidable

opponents under the watchful eye of a training

coach.           Copyright 2004 Ernest R. Cadotte
 When we study one discipline at a time,
we are like a bunch of blind people trying
   to understand what an elephant is.
           It’s a sheet                                 It’s a steel
           of rawhide.                                     tube.

    Please tell me
      what it is?
                                                           It’s a
                      It’s a snake.                     tree trunk.



                     Copyright 2004 Ernest R. Cadotte
 With business simulations, you can crawl
all over and under the new venture to help
you to see and understand the whole thing.
                                                        Accounting

              Marketing
                                                          Distribution

         It is an
       enterprise!
                                                         Production
                                    Finance

                       Human
                       Resources
                     Copyright 2004 Ernest R. Cadotte
    Team of Experts Helped to
      Design a Very Realistic
     Learning Environment
• Harry Bruce – leadership,          • Dominique Garval –
  governance                           business strategy
• Joyce Russell – team               • Ernie Cadotte – marketing
  work, human resources              • Ken Gilbert – production
• Jim Reeve – accounting,              processes
  profit analysis                    • Ivan Slimak – brand
• Sarah Gardial & Bob                  design, quality processes
  Woodruff – customer                • Tom Mentzer – supply
  value                                chain
• Jim Wansley – finance
                   Copyright 2004 Ernest R. Cadotte
            Learning Strategy:
                 Learn by Doing
• Participants learn about all aspects of business by
  managing a simulated new business venture.
• The Marketplace scenario follows the lifecycle of
  a new product.
• Business decisions are introduced as they become
  relevant in the evolution of the product and
  company.
                   Copyright 2004 Ernest R. Cadotte
           Mental Discipline &
            Business Culture
• Develop leadership, teamwork and interpersonal
  skills.
• Promote better decision making by learning to
  manage a totally integrated company, including
  the management of sales outlets, marketing,
  production, and human and financial resources.
• Facilitate learning of important entrepreneurial
  concepts, principles and ways of thinking.
                  Copyright 2004 Ernest R. Cadotte
       Mental Discipline &
        Business Culture
• Develop strategic planning and execution
  skills within a rapidly changing environment.
• Instill a bottom line focus and the
  simultaneous need to deliver customer value.
• Crystallize the financial implications of
  business decisions and how they flow to
  bottom-line performance.
               Copyright 2004 Ernest R. Cadotte
         Mental Discipline &
          Business Culture
• Discover how important it is to use
  market data and competitive signals to
  adjust the strategic plan and more
  tightly focus business tactics.
• Live and breathe new venture startup
  and management.
• Build entrepreneurial confidence
  through knowledge and experience.
                 Copyright 2004 Ernest R. Cadotte
  How is the business simulation
           conducted?
• Teams are placed in a entrepreneurial scenario -
  starting up and running a new business venture.

• The opposition is played out by competing
  teams.


                 Copyright 2004 Ernest R. Cadotte
Objective is to profitably capture
  a dominant market position
                      Opponent

                                                     Opponent



 Business Team                             Market


                                                    Opponent



             Copyright 2004 Ernest R. Cadotte
Business Teams
                         Each team member
                         assumes a tactical area of
                         responsibility.


                            •Marketing
                            •Finance
                            •Distribution
                            •Production
                            •Overall Leadership

  Copyright 2004 Ernest R. Cadotte
           How conducted?
• Business team receives information on current
  situation.
• Current situation is evaluated, strategy
  formulated and tactics set in placed.
• Tactical decisions are fed into the Marketplace
  simulator, along with decisions of opponents.
• Results of decisions are fed back to business
  team.
                Copyright 2004 Ernest R. Cadotte
            How conducted?
• The business team can acquire information on
  what is happening in the marketplace:
  – customer reaction to market decisions
  – competitor actions
• Current situation is evaluated, strategy
  formulated, and tactics set in place.
• Tactical decisions are again fed into the
  Marketplace simulator.
                 Copyright 2004 Ernest R. Cadotte
                    Game Scenario

• You and your business partners have decided to
  enter the international microcomputer industry.

• The microcomputer industry is in its
  introductory stage of the product life cycle.
• Several other international new ventures are
  entering the market at the same time.
                  Copyright 2004 Ernest R. Cadotte
Sales Offices


          Paris
 Toronto
                                    Tokyo
New York




 Copyright 2004 Ernest R. Cadotte
International Web Center
     for e-Commerce


      Toronto




       Copyright 2004 Ernest R. Cadotte
              Market Segments
                       (Market Structure)



                                                     Mercedes
              Traveler


Performance




                       Work
                       Horse
                                  Price
                  Copyright 2004 Ernest R. Cadotte
            Chronology of Events

• Q1: Organize the team, name the company,
 analyze market information, establish strategic
 direction and set up shop (design brands, open
 a sales office and/or an international web
 center and build a factory).


                Copyright 2004 Ernest R. Cadotte
         Chronology of Events
• Q2: Test-market brands, prices, ad copy, media
  campaigns, sales staffing and internet tactics.
  Determine compensation package for employees
  and production schedule for each brand.
• Q3: Study end user feedback, competitive
  tactics, employee productivity and financial
  performance and make adjustments to strategy
  and tactics.
                 Copyright 2004 Ernest R. Cadotte
        Chronology of Events

• Q4: Prepare a business plan. Present business
  plan and financial request to venture
  capitalists and negotiate equity investment.
• Q4 – Q6: Initiate international roll-out
  campaign.



                 Copyright 2004 Ernest R. Cadotte
       Chronology of Events
• Q7: Prepare report to the Board regarding
  –   second year performance
  –   deviations from plan
  –   justification for departures
  –   analysis of current market
  –   plan for future



                 Copyright 2004 Ernest R. Cadotte
              Equity Financing (Q1-Q4)

• The initial capitalization is 4,000,000 which is being
  invested by the executive team over the first 3 quarters,
  2,000,000 in Q1 and 1,000,000 Q2 and Q3.
• The executive team owns 100% of the company.
• Forty thousand shares of stock will be issued to the
  executive team in exchange for their 4,000,000.
• The initial stock value is 100 per share.
                     Copyright 2004 Ernest R. Cadotte
         Equity Financing (Q5)

• At the start of quarter 4, the executive team will
  have the opportunity to request up to 4,000,000 from
  venture capitalists.
• The venture capitalist will expect an outline of the
  strategic plan for the second year in business,
  including target markets, geographic expansion,
  R&D, plant expansion, etc.

                   Copyright 2004 Ernest R. Cadotte
    Debt Financing (Q4 and beyond)

• The bank will extend a line of credit to the executive
  team equal to one and a half times the firm's equity
  position in the previous quarter.
• The bank is highly risk adverse and will call in your
  loan in part or whole if your debt capacity declines due
  to unusual or extended losses.



                   Copyright 2004 Ernest R. Cadotte
           Special Financing Needs


• The bank is intolerant of poor financial
  management.
• If a firm ends a quarter with a negative cash
  position, the bank will contact a loan shark by the
  name of Guido to obtain an emergency loan to
  cover the firm's checking account.

                Copyright 2004 Ernest R. Cadotte
       Guido’s Financing Terms
• Guido requires repayment in the next quarter
• The emergency loan interest rate is a sliding scale which
  begins at 10% per quarter and may go as high as 25%
  per quarter.
• For each 100 which Guido places in your checking
  account, he will take one share of stock in your firm.
• The issuing of stock to Guido causes a dilution of your
  stock value and your share of the company.

                    Copyright 2004 Ernest R. Cadotte
                                 Bankruptcy

• A firm is technically bankrupt if its cumulative losses
  exceed its equity investment.
• Bankruptcy occurs when the sum of the retained
  earnings and the common and preferred stock is a
  negative number.
• Stated differently, the management has used up all of
  the equity of the firm when the negative value of the
  retained earnings exceeds the value of the common
  stock.
                   Copyright 2004 Ernest R. Cadotte
      Performance Evaluation
• Balanced Scorecard- cumulative score for quarters 3
  through 6
• Business Plan
• Report to Board
• Strategic thinking and tactical execution
• Executive Briefings
• How well the company is prepared for the future


                  Copyright 2004 Ernest R. Cadotte
Measurement of the
Firm’s Performance

The Balanced Scorecard




     Copyright 2004 Ernest R. Cadotte
Why Use a Balanced Scorecard?
• It is too easy to get caught up in market share and
  short-term profits.
• Long-term viability requires that managers also
  deliver customer satisfaction and invest in the future.
• The balanced scorecard measures both the long-term
  and the short-term.
• The best managers will be good in all areas
  measured.


                   Copyright 2004 Ernest R. Cadotte
                       Financial
                      performance

Human resource                                          Market
 management                                           performance


                  Total Business
  Asset                                                    Marketing
                   Performance
management                                                effectiveness



     Creation
     of wealth                                      Investments in the
                                                       firm’s future

                 Copyright 2004 Ernest R. Cadotte
End of Introduction to
  Venture Strategy




      Copyright 2004 Ernest R. Cadotte
The following slides provide
  an introduction to the
     Web Software for
  Venture Strategy in the
        Marketplace


        Copyright 2004 Ernest R. Cadotte
  Marketplace is a Fun Way to
 Learn About Venture Strategy

• It is a business game.
• It is learning by doing.
• It brings to life business concepts,
  principles, and ways of thinking.
• It energizes the competitive spirit.

                Copyright 2004 Ernest R. Cadotte
           It Is Realistic!
• You do what your real-life counterparts do:
  – Design brands
  – Plan advertising campaign
  – Decide on employee compensation
  – Schedule production
  – Worry about profits
  – Manage cash flows

              Copyright 2004 Ernest R. Cadotte
           It Is Organized!
• The game scenario follows the logical
  process of starting up a new company.
• You are guided through the decision-making
  process.
• Detailed help files are available at the touch
  of a button.


                Copyright 2004 Ernest R. Cadotte
Marketplace is
available via
Netscape and
Internet Explorer.

Go to:
marketplace6.com



                     Copyright 2004 Ernest R. Cadotte
The step-by-step
process that walks
you through the
information and
decisions.

The software
controls your
progression to
reduce your
uncertainty and to
help you see the
logic of the
marketing process.
                     Copyright 2004 Ernest R. Cadotte
 Be sure to read
  the directions
 on how to use
the Marketplace
    software.




                   Copyright 2004 Ernest R. Cadotte
For illustration purposes, suppose you start up a
      company named Traveler Computers.
                 Copyright 2004 Ernest R. Cadotte
 You can setup an international Web Center for
  e-commerce, and/or four international sales
                    offices.



What are the pros and
 cons of each sales
     channel?




                        Copyright 2004 Ernest R. Cadotte
              Market Segments
                       (Market Structure)



                                                     Mercedes
              Traveler


Performance




                       Work
                       Horse
                                  Price
                  Copyright 2004 Ernest R. Cadotte
                                   Each market
                                   segment has
                                   its own set of
                                   needs.




Copyright 2004 Ernest R. Cadotte
                                   You must decide
                                   which segment you
                                   want to target
                                   initially. As the
                                   exercise progresses,
                                   you are asked to
                                   select a second
                                   segment.


                                   For example, the
                                   Traveler segment might
                                   be selected.

Copyright 2004 Ernest R. Cadotte
                                   Once you select
                                   a segment, you
                                    must design a
                                    brand to meet
                                   the needs of the
                                       segment.

                                   What features would
                                   make a computer more
                                   attractive to the
                                   Traveler segment?



Copyright 2004 Ernest R. Cadotte
   You set the
  selling price,
  decide if you
  want to use a
   rebate, and
  signal to the
sales staff which
  brand has the
highest priority.

                    Copyright 2004 Ernest R. Cadotte
                                                  You must design ads
                                                  which appeal to the
                                                    target segment.



                                                           You decide
                                                           which brand
                                                           will be featured
                                                           in the ad.
You select the benefits to
mention in the ad and indicate
their order of priority.
                        Copyright 2004 Ernest R. Cadotte
You can select marketing tactics that can
    increase the traffic to your site.
                                                You can spend more
                                                or less than the
                                                industry norm
                                                 to potentially
                                                change the relative
                                                attraction of your
                                                web site.


                                                   What
                                                   commission
                                                   should you offer
                                                   your partners?



             Copyright 2004 Ernest R. Cadotte
Once at your web site, what can you do to increase the
     probability visitors will make a purchase?




The tactics are not
equally good and
some may not
justify any
expenditure.




                      Copyright 2004 Ernest R. Cadotte
You must decide on the compensation package
            for your employees.




              Copyright 2004 Ernest R. Cadotte
And, how many sales
 people to employ.




                                      You can
                                      specify how
                                      many
                                      should be
                                      assigned to
                                      each
                                      segment
                                      and service
   Copyright 2004 Ernest R. Cadotte   support.
How many units should you
 produce to meet demand?




      Copyright 2004 Ernest R. Cadotte
 And, how much should you invest in plant
capacity for next quarter given your demand
      forecast and financial liquidity.




              Copyright 2004 Ernest R. Cadotte
When your decisions are ready to be processed
 through the Marketplace simulator, a quality
check is made to make sure there were no entry
  errors and nothing important was forgotten.




               Copyright 2004 Ernest R. Cadotte
                                   Immediately
                                        after
                                    processing,
                                    you find out
                                        how
                                   profitable the
                                    division was
                                   in the quarter
                                      that just
                                       ended.

Copyright 2004 Ernest R. Cadotte
                                    You can see
                                    your market
                                     share by
                                   segment and
                                   for the whole
                                      market.



                                     Your
                                     company is
                                     Traveler.

Copyright 2004 Ernest R. Cadotte
You are given market research that tells you how
satisfied your target segment is with your brand
design and those of the competition. 100 is total
                   satisfaction.
                Copyright 2004 Ernest R. Cadotte
 You are also
given a profit
  analysis of
each brand so
 that you can
  adjust your
brand strategy.



                  Copyright 2004 Ernest R. Cadotte
                                    If a brand is
                                   not doing well,
                                   you can study
                                    other brands
                                    and redesign
                                     your brand.


              Your Better
              brand brand
Copyright 2004 Ernest R. Cadotte
     Grading:The Balanced Scorecard
• Final evaluation will be computed based upon:
   – Financial Performance (earnings per share)
   – Market Performance (market shares in 2 target segments adjusted for unmet
     demand)
   – Marketing Effectiveness (customer satisfaction with brand and advertising
     designs in 2 target segments (scored 0 to 100) plus unit sales per sales person)
   – Investments in the Future (spending on new offices and research and
     development as percent of sales)
   – Creation of Wealth (retained earnings/total investment)
   – Asset Management (asset turnover adjusted for excess inventory)
   – Human Resource Management (sales force and factory worker productivity)
   – The Final Score is a single number which combines all of these factors. Quarter
     6 results will be used to compute the grade.

                              Copyright 2004 Ernest R. Cadotte
  Each quarter, you will be presented with
your balanced scorecard. Your goal is to be
        the best firm by Quarter 6 in
       Total Business Performance.
              Copyright 2004 Ernest R. Cadotte
You can also compare your scores
   against industry standards.
        Copyright 2004 Ernest R. Cadotte
Mechanics of Web Marketplace




         Copyright 2004 Ernest R. Cadotte
Electronic Marketplace Resides at
  Innovative Learning Solutions
              Students log on to view
          information and make decisions




                                              Marketplace
                                              Processing
                                               Center

           Copyright 2004 Ernest R. Cadotte
 Team Members Work in Sequence
  to Review the Current Situation,
     Evaluate the Options and
       Make Their Decisions.                  Marketplace
                                              Processing
John studies the marketing research            Center
   and sends out his conclusions
           on Monday .
        Katie logs in on Tuesday and
    makes her marketing recommendations.
      Joseph makes his factory decisions
           on Wednesday morning

       Bonnie evaluates the financial
    implications on Wednesday afternoon.
           Copyright 2004 Ernest R. Cadotte
         Team members collaborate via
        email, chat rooms and in person




On Wednesday evening, Bonnie brings the team
together in a chat room to finalize their decisions
                Copyright 2004 Ernest R. Cadotte
Instructor can log on to view
      work and results




                                           Marketplace
                                           Processing
                                            Center

        Copyright 2004 Ernest R. Cadotte
Q1, Organize the Business

•   Name the company
•   Assign organizational responsibilities
•   Share personal learning goals
•   Establish team norms




              Copyright 2004 Ernest R. Cadotte
Q1, Establish Strategic Direction
  • Analyze market information,
  • Establish strategic direction
    – select target segments
    – decide on competitive posture
  • Set up shop
    – open initial sales office or web center for test
      market
    – design brands for target market segments
    – build a factory in Toronto
                Copyright 2004 Ernest R. Cadotte
View Sample Decisions




      Copyright 2004 Ernest R. Cadotte
   The Following Slides
  Represent a Marketing
Lecture on Market Response
         Functions
    Students must design brands in
   Quarter 1. In selecting components
    and price points, they should be
  aware of the market’s many response
                 functions.
             Copyright 2004 Ernest R. Cadotte
Customers Buy Benefits,
     Not Features




      Copyright 2004 Ernest R. Cadotte
Once you select a segment, you must design
 a brand to meet the needs of the segment.


                                        Slim, rugged, portable
                                        design

                                        10” color flat screen for
                                        portable

                                        Network and Internet
                                        connections




Using the computer on the road is important to the traveler
segment. What features would provide this benefit?
                  Copyright 2004 Ernest R. Cadotte
How far do you go in giving the
 customers what they say they
            want?
   Is more speed, software applications,
    memory, keys on the keyboard, etc.
             always valued?

   Could “more of some feature” even
      make a customer unhappy?

              Copyright 2004 Ernest R. Cadotte
What is the elasticity of the
         peanut?


      Searching for the
  Market’s Response Function



         Copyright 2004 Ernest R. Cadotte
Suppose you could design the ideal
 candy bar. How many peanuts
would you put in the candy bar to
    make you the happiest?

  •   None
  •   A few?
  •   A bunch?
  •   A whole lot?


                 Copyright 2004 Ernest R. Cadotte
Which Candy Bar has the
    Most Peanuts?

•   Baby Ruth
•   Snickers
•   Payday
•   Milky Way


           Copyright 2004 Ernest R. Cadotte
  Which Candy Bar
Do You Like the Most?

•   Baby Ruth
•   Snickers
•   Payday
•   Milky Way


          Copyright 2004 Ernest R. Cadotte
  What does your response
function look like for peanuts?
        Is more always better?

  Would your happiness increase with
  every new peanut we added to the
             candy bar?

           Is there a limit?
            Copyright 2004 Ernest R. Cadotte
Influence of peanuts on candy
       bar enjoyment
Um-um good




      Yuk

             None                few              lot   whole bunch

                Number of Peanuts

                    Copyright 2004 Ernest R. Cadotte
What would be your response
 function for the following?
 •   Chocolate
 •   Caramel
 •   Nougat
 •   Coconut
 •   Rice
 •   Peanut butter

              Copyright 2004 Ernest R. Cadotte
 Here are a number of response
functions. Which one applies to
peanuts, chocolate, coconut, etc?

Hot                                       Hot
         More is
         always
          better
                                                             More is good to a
                                                           point and then ceases
                                                             to add excitement
Cold                                      Cold


       Less        More                             Less         More

                      Copyright 2004 Ernest R. Cadotte
         Response Functions

            More adds                                         A little is just
          value to a point                                  right, more only
           & then takes                                    takes away value
Hot         away value                     Hot




Cold                                       Cold


       Less           More                          Less       More


                      Copyright 2004 Ernest R. Cadotte
        Response Functions

                                             Hot
Hot
          Little interest
         until threshold
            is crossed                                     Any amount is bad




Cold                                         Cold


       Less             More                             Less        More



                      Copyright 2004 Ernest R. Cadotte
Response Functions

  Hot


                No reaction/indifference
                 to having the feature



  Cold


             Less             More



         Copyright 2004 Ernest R. Cadotte
        Take Any PC Segment,
         How Excited Will It
        Become if You Provide?
        •   More memory
        •   More functions on the key board
        •   More software
        •   More ….
Just like the candy bar ingredients, you must discover the
        response function for each PC component.
                    Copyright 2004 Ernest R. Cadotte
        Select components that yield
       benefits for Travel PC segment
           Portability                 Use on road             Connect to office              Easy to use




Rugged        Micro-      High           Wireless    6-hour       Low-profile,     Compact    Trackball Wrist rest
casement      circuitry   resolution     modem       battery      built-in disk,   keyboard    mouse    on keyboard
                          flat LCD                                CD drives
                          display




                                             Copyright 2004 Ernest R. Cadotte
Learning Points for Quarter 1

• Managing the team
• Organizing the work
• Deciding what one wants from the learning
  experience




              Copyright 2004 Ernest R. Cadotte
Learning Points for Quarter 1

 •   Market opportunity analysis
 •   Segmentation and target marketing
 •   Strategic and tactical planning
 •   Financial management



             Copyright 2004 Ernest R. Cadotte
Learning Points for Quarter 1
• Game theory - competitive positioning
• Brand design –
  – linking product features to customer benefits
  – finding the customer’s response functions
• Financial liquidity - cash versus assets




                 Copyright 2004 Ernest R. Cadotte
                  Strategic Planning Mental
                          Discipline

Objectives                         Strategy                               Tactics



                        Strategic                 Strategy
 Problem                Analysis                                            Tactics
                                                Formulation


 •Definition of     •Internal appraisal        •Resources made       •Tactical Plans
  problem           •External appraisal         available            •Execution
                                               •Strategic options
                                               •Choice of one option
                                               (Chosen Option =
                                               Strategic Thrusts)
                                                                            Controls
        Note : The chosen option is made of « Strategic Thrusts »
                              Copyright 2004 Ernest R. Cadotte
                                                                 Copyright Dominique Garval 2003
The following slides are for
         Quarter 2




         Copyright 2004 Ernest R. Cadotte
    Q2, Go to Test Market

The Goal is to Maximize
Learning and Not Profits.




            Copyright 2004 Ernest R. Cadotte
    Q2, Go to Test Market

50% of the firm’s
decisions will prove to be
unacceptable – be careful




            Copyright 2004 Ernest R. Cadotte
   Q2, Go to Test Market

• Set selling prices
• Develop advertising campaign
  – design 2 ads, one for each brand
  – determine number of placements per ad
• Develop distribution strategy
  – hire sales force for quarter
  – open new sales outlets for Q3

             Copyright 2004 Ernest R. Cadotte
          Q2, Test Market
• Schedule production
  – forecast demand
  – set daily production for each brand
  – run factory simulation, check numbers
• Contract for market research on customers
  and competition
• Check pro forma financial statements

               Copyright 2004 Ernest R. Cadotte
  You are a market maker, not a
          market taker
• The market is not waiting for you to take their orders.
• You must create the market
   – Sell brands that customers want and at a price they are
     willing to pay
   – Locate sales offices where the largest number of customers
     can be found
   – Inform and persuade customers to buy a PC through
     advertising
   – Hire sales people to go out and find customers and
     persuade them to buy your PC

                     Copyright 2004 Ernest R. Cadotte
                    How to Set Price?


•   Costs (production, marketing, overhead)
•   Profit goals
•   What market will bear
•   Competition


              Copyright 2004 Ernest R. Cadotte
In the beginning, you will not be
 able to price above your costs

• There are many startup costs which will
  exceed your revenues.
• Your production volumes will be very low,
  resulting in high per unit costs



              Copyright 2004 Ernest R. Cadotte
                No Early Profits

          Costs to setup
        + & grow the
          business
Money

        0
                                Time




                     Copyright 2004 Ernest R. Cadotte
   Revenues will fall below costs
     at outset of new business
                                       Revenue
        Costs to setup
   +    & grow the
        business
Money

   0
                                  Time




                   Copyright 2004 Ernest R. Cadotte
              Profits will come later

                                                 Revenue
             Costs to setup
         +   & grow the
             business

Profit                              Profits                        Profits
         0                                                          come
                                                            Time    later

                    You are here
         -
                         Copyright 2004 Ernest R. Cadotte
  Your goal is to speed up the
        adoption rate
                                                   maturity


                                                              decline

Demand
                         growth



          introduction




     You are here,                                  Time
high costs-low demand
                         Copyright 2004 Ernest R. Cadotte
What will the market bear?
    You must discover the market
  response function regarding price.




           Copyright 2004 Ernest R. Cadotte
  What is the market’s price
    response function?

Your
Demand
                              Inelastic
                              (price is not a big factor)


                           Elastic (demand drops fast
                           with increasing prices)

                  Your
                  Price


         Copyright 2004 Ernest R. Cadotte
Or, maybe it looks like this?

Your
Demand                Demand drops slowly with small
                       price increases and then drops
                       dramatically with larger price
                                  increases




                 Your
                 Price

         Copyright 2004 Ernest R. Cadotte
A differential advantage can
   reduce price elasticity

Your
Demand                             Less Elastic



                                                 Differential advantage
                                                 shifts demand curve and
                  Elastic                        reduces price elasticity


         Price premium for your brand 



                   Copyright 2004 Ernest R. Cadotte
How will the market respond to
     competitor prices?

     Your
     Demand



                               Low competitor prices
                                will kill your demand


                                  Competitor’s Price



              Copyright 2004 Ernest R. Cadotte
            How to create ads?


 Your Ad            Low price                                  Most important

                        Easy to use
                    More productive
                                    Fast
                           Office applications
                              Picture office workers
                                                                Least important

  Order of priority                                    Order of priority tells
implies importance of                                  the ad agency what to
 message to customer                                       stress in the ad
                        Copyright 2004 Ernest R. Cadotte
       How much to say in an ad?
                             (number of benefits)


                Which response function is at work?

                                       or

Hot
                                               Hot



                                                                More adds
           More is good to a
                                                              value to a point
         point and then ceases
                                                               & then takes
Cold       to add excitement                   Cold
                                                                away value

       Less           More                                  Less            More

                         Copyright 2004 Ernest R. Cadotte
How often do you advertise?

    Your              Diminishing
    Demand              returns




                         Too little


                                   Number of ads



             Copyright 2004 Ernest R. Cadotte
But it also depends on what
   your competitors do


Your                                         Strong competitor
Demand                                          advertising
                                               will steal away
                                              your customers

         Competitor’s Advertising




                Copyright 2004 Ernest R. Cadotte
How many sales people?

             Diminishing
               returns

Your
Demand                                      Too many


                 Too few

         Number of sales people



         Copyright 2004 Ernest R. Cadotte
The response function is dynamic!



 Your
 Demand                                    Shift the response function
                                          upwards with better brands,
                                            prices, advertising, sales
                                                 force placement

          Number of sales people



                   Copyright 2004 Ernest R. Cadotte
Managing Inventories and Cash
     (the razor’s edge)
 • High production
   – Lower unit production costs
   – Risk of too much inventory
      • Uses up large volumes of cash
      • Risk of brand obsolesce (wrong product in warehouse)
 • Low production
   – Low cash requirements
   – Higher per unit production costs
   – Risk of too little inventory –
      • Stock outs
      • Lost revenue
      • Customer ill will (unhappy customers)
                  Copyright 2004 Ernest R. Cadotte
        Projecting Demand
• Sales people will probably sell between 30
  and 100 units each.
• Demand is a function of market potential of
  the segment and market and the quality of
  marketing decisions.
• On average, sales people will sell 50 units
  each for the entire quarter.

               Copyright 2004 Ernest R. Cadotte
         Expect net losses and negative
                   cash flow
                                                 Revenue
             Costs to setup
         +   & grow the
             business

Profit                              Profits                        Profits
         0                                                          come
                                                            Time    later

                    You are here
         -
                         Copyright 2004 Ernest R. Cadotte
Learning Points for Quarter 2

• Execution of a coherent strategy
• Management of cash in the face of great
  uncertainty
• Learning to walk before you run



             Copyright 2004 Ernest R. Cadotte
Learning Points for Quarter 2
• Marketing strategy - coordinating a host of tactics
• Pricing - balancing costs, profit, what the market
  will bear, and competition
• Testing the market - discovering the market’s
  many response functions
• Production - managing capacity, inventories, and
  costs in light of demand goals



                 Copyright 2004 Ernest R. Cadotte
Copyright 2004 Ernest R. Cadotte

				
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