Introduction
to
Strategy and Business Policy
Copyright 2006 Ernest R. Cadotte
Learning Strategy
I listen, I forget.
I see, I remember.
I do, I understand.
Old Chinese Proverb
Copyright 2006 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 2006 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
of rawhide.
Please tell me
what it is?
It’s a snake.
Copyright 2006 Ernest R. Cadotte
It’s a steel
tube.
It’s a
tree trunk.
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!
Finance
Human
Resources
Copyright 2006 Ernest R. Cadotte
Production
Team of Experts Helped to
Design a Very Realistic
Learning Environment
• Harry Bruce – leadership,
governance
• Joyce Russell – team
work, human resources
• Jim Reeve – accounting,
profit analysis
• Sarah Gardial & Bob
Woodruff – customer
value
• Jim Wansley – finance
• Dominique Garval –
business strategy
• Ernie Cadotte – marketing
• Ken Gilbert – production
processes
• Ivan Slimak – brand
design, quality processes
• Tom Mentzer – supply
chain
Copyright 2006 Ernest R. Cadotte
Learning Strategy:
Learn by Doing
• Participants learn about all aspects of strategic
planning 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
Copyright 2006 Ernest R. Cadotte
company.
Mental Discipline &
Business Culture
• Live and breathe strategic planning and
management in a rapidly changing environment.
• 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.
Copyright 2006 Ernest R. Cadotte
Mental Discipline &
Business Culture
• Crystallize the financial implications of
business decisions and how they flow to
bottom-line performance.
• Facilitate learning of important business
concepts, principles and ways of thinking.
Copyright 2006 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.
• Build business confidence through
knowledge and experience.
Copyright 2006 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 2006 Ernest R. Cadotte
Objective is to profitably capture
a dominant market position
Opponent
Opponent
Business Team
Market
Opponent
Copyright 2006 Ernest R. Cadotte
Business Teams
Each team member
assumes a tactical area of
responsibility.
•Marketing
•Finance
•Distribution
•Production
•Overall Leadership
Copyright 2006 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 2006 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 2006 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 venture firms
are entering the market at the same time.
Copyright 2006 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 2006 Ernest R. Cadotte
Market Segments
(Market Structure)
Mercedes
Traveler
Performance
Work
Horse
Price
Copyright 2006 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 2006 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, factory operations,
and financial performance and make adjustments
to strategy and tactics.
Copyright 2006 Ernest R. Cadotte
Chronology of Events
• Q4: Perform a comprehensive strategic
analysis and prepare a business plan. Present
strategic analysis, business plan and financial
request to venture capitalists.
• Q4 – Q6: Initiate international roll-out
campaign.
Copyright 2006 Ernest R. Cadotte
Chronology of Events
• Q7: Prepare report to the Board regarding
–
–
–
–
–
performance since presentation of Business Plan
deviations from plan
justification for departures
strategic analysis of current situation
plan for future
Copyright 2006 Ernest R. Cadotte
Equity Financing (Q1-Q3)
• 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 2006 Ernest R. Cadotte
Equity Financing (Q4)
• 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 capitalists will expect a strategic plan
for the next three quarters in business, including
– strategic analysis of the current situation,
– strategy (goals, priorities, and strategic thrusts),
– tactical plan (geographic expansion, R&D, plant
expansion, etc.) and
– pro forma financial statements through Quarter 6
Copyright 2006 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 2006 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 2006 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 2006 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 2006 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 2006 Ernest R. Cadotte
Measurement of the
Firm’s Performance
The Balanced Scorecard
Copyright 2006 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 2006 Ernest R. Cadotte
Financial
performance
Human resource
management
Asset
management
Market
performance
Total Business
Performance
Creation
of wealth
Marketing
effectiveness
Investments in the
firm’s future
Copyright 2006 Ernest R. Cadotte
End of Introduction to
Strategy and Business Policy
Copyright 2006 Ernest R. Cadotte
The following slides provide
an introduction to the
Web Software for
Strategy and Business Policy in
the Marketplace
Copyright 2006 Ernest R. Cadotte
Marketplace is a Fun Way to
Learn About 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.
• It is transformational – it all comes together,
discover you can be a manager
Copyright 2006 Ernest R. Cadotte
It Is Realistic!
• You do what real-life strategists do:
– Evaluate market opportunities
– Write a business plan
– Raise money by selling your plan to investors
– Do what you said would work – execute the plan
– Be judged not by your promises but by your
results
Copyright 2006 Ernest R. Cadotte
You Will Actually
Run the Business
•
•
•
•
•
•
•
•
Design brands
Distribute products to end users
Workup advertising campaigns
Decide on employee compensation
Schedule production
Worry about profits
Manage cash flows
Etc.
Copyright 2006 Ernest R. Cadotte
It Is Organized!
• The game scenario follows the logical
process of starting up a new company.
• You are guided through the strategic
planning and decision-making processes.
• Detailed help files are available at the touch
of a button.
Copyright 2006 Ernest R. Cadotte
You Will Sweat the Details
•
•
•
•
•
Investors are challenging
Customers are demanding
Competitors are unrelenting
Many functional, tactical decisions to master
Decisions must be well coordinated and
timed
• Cash is always a constraint
• Constant skillful adjustment is required to
stay on course and get ahead
Copyright 2006 Ernest R. Cadotte
You will be Driven!
• Inherent competitiveness – it is in your genes
• Ownership – it is your business, your money,
your responsibility
• Captivating – try ideas and see results immediately
Copyright 2006 Ernest R. Cadotte
Development of Your
Critical Business Skills
• Discussion and debate within each team
• Managing many tactical decisions within
financial constraints, demanding customers
and aggressive competitors
• Preparation of business plan
• Negotiations with Venture Capitalists
• Instructor interaction with teams
– Regular Executive Briefings
Copyright 2006 Ernest R. Cadotte
Sequence of Key Activities
• Startup phase (3 quarters)
– Organize the team and learn to work together
– Learn the business
– Test the market
• Transition phase (one quarter)
– Prepare Business Plan to accelerate growth
– Present Business Plan to and negotiate equity
investment with independent Venture Capitalists
• Growth phase (3 quarters)
– Execute Business Plan
– Skillfully adjust tactics in response to unforeseen
problems and opportunities
• Final accountability - present Report to Board
Copyright 2006 Ernest R. Cadotte
Introduction to Software
Copyright 2006 Ernest R. Cadotte
Marketplace is
available via
Netscape and
Internet Explorer.
Go to:
marketplace6.com
Copyright 2006 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 2006 Ernest R. Cadotte
Be sure to read
the directions
on how to use
the Marketplace
software.
Copyright 2006 Ernest R. Cadotte
For illustration purposes, suppose you start up a
company named Traveler Computers.
Copyright 2006 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 2006 Ernest R. Cadotte
Market Segments
(Market Structure)
Mercedes
Traveler
Performance
Work
Horse
Price
Copyright 2006 Ernest R. Cadotte
Each market
segment has
its own set of
needs.
Copyright 2006 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 2006 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 2006 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 2006 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 2006 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 2006 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 2006 Ernest R. Cadotte
You must decide on the compensation package
for your employees.
Copyright 2006 Ernest R. Cadotte
And, how many sales
people to employ.
Copyright 2006 Ernest R. Cadotte
You can
specify how
many
should be
assigned to
each
segment
and service
support.
How many units should you
produce to meet demand?
Copyright 2006 Ernest R. Cadotte
And, how much should you invest in plant
capacity for next quarter given your demand
forecast and financial liquidity.
Copyright 2006 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 2006 Ernest R. Cadotte
Immediately
after
processing,
you find out
how
profitable the
firm was in
the quarter
that just
ended.
Copyright 2006 Ernest R. Cadotte
You can see
your market
share by
segment and
for the whole
market.
Your
company is
Traveler.
Copyright 2006 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 2006 Ernest R. Cadotte
You are also
given a profit
analysis of
each brand so
that you can
adjust your
brand strategy.
Copyright 2006 Ernest R. Cadotte
If a brand is
not doing well,
you can study
other brands
and redesign
your brand.
Your Better
brand brand
Copyright 2006 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. The
results of Quarters 3 through 6 will be used to compute the grade.
Copyright 2006 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 2006 Ernest R. Cadotte
You can also compare your scores
against industry standards.
Copyright 2006 Ernest R. Cadotte
Mechanics of Web Marketplace
Copyright 2006 Ernest R. Cadotte
Electronic Marketplace Resides at
Innovative Learning Solutions
Students log on to view
information and make decisions
Marketplace
Processing
Center
Copyright 2006 Ernest R. Cadotte
Q1, Organize the Business
•
•
•
•
Name the company
Assign organizational responsibilities
Share personal learning goals
Establish team norms
Copyright 2006 Ernest R. Cadotte
Q1, Establish Strategic Direction
• Analyze market information to evaluate the
market opportunity
• Consider
• Available financial resources
• Costs to open sales outlets
• Costs to set up and operate factory
• Establish strategic direction
• Formulate corporate strategy
• Formulate functional strategies
Copyright 2006 Ernest R. Cadotte
Q1, Setup Shop – Tactical Decisions
• Locate factory in Toronto – all firms
• Build fixed plant capacity
• Develop channel options
• Decide on relative emphasis of brick and mortar
offices versus web centers
• Open initial sales office or web center
• Design two brands for target market segments
Copyright 2006 Ernest R. Cadotte
View Sample Decisions
Copyright 2006 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 2006 Ernest R. Cadotte
Customers Buy Benefits,
Not Features
Copyright 2006 Ernest R. Cadotte
Once you select a segment, you must design
a brand to meet the needs of the segment.
Using the computer on the road is important to the traveler
segment. What features would provide this benefit?
Using the computer on the road
Slim, rugged, portable
design
10” color flat screen for
portable
Copyright 2006 Ernest R. Cadotte
Network and Internet
connections
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 2006 Ernest R. Cadotte
What is the elasticity of the
peanut?
Searching for the
Market’s Response Function
Copyright 2006 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 2006 Ernest R. Cadotte
Which Candy Bar has the
Most Peanuts?
•
•
•
•
Baby Ruth
Snickers
Payday
Milky Way
Copyright 2006 Ernest R. Cadotte
Which Candy Bar
Do You Like the Most?
•
•
•
•
Baby Ruth
Snickers
Payday
Milky Way
Copyright 2006 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 2006 Ernest R. Cadotte
Influence of peanuts on candy
bar enjoyment
Um-um good
Yuk
None
few
bunch
Number of Peanuts
Copyright 2006 Ernest R. Cadotte
whole lot
What would be your response
function for the following?
•
•
•
•
•
•
Chocolate
Caramel
Nougat
Coconut
Rice
Peanut butter
Copyright 2006 Ernest R. Cadotte
Here are a number of response
functions. Which one applies to
peanuts, chocolate, coconut, etc?
Hot
Hot
More is
always
better
Cold
More is good to a
point and then ceases
to add excitement
Cold
Less
More
Less
Copyright 2006 Ernest R. Cadotte
More
Response Functions
Hot
More adds
value to a point
& then takes
away value
Cold
A little is just
right, more only
takes away value
Hot
Cold
Less
More
Less
Copyright 2006 Ernest R. Cadotte
More
Response Functions
Hot
Hot
Little interest
until threshold
is crossed
Cold
Any amount is bad
Cold
Less
More
Copyright 2006 Ernest R. Cadotte
Less
More
Response Functions
Hot
No reaction/indifference
to having the feature
Cold
Less
More
Copyright 2006 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 2006 Ernest R. Cadotte
Select components that yield
benefits for Travel PC segment
Portability
Rugged
casement
Microcircuitry
Use on road
High
resolution
flat LCD
display
Wireless
modem
Connect to office
6-hour
battery
Low-profile,
built-in disk,
CD drives
Copyright 2006 Ernest R. Cadotte
Easy to use
Compact
keyboard
Trackball Wrist rest
mouse
on keyboard
Learning Points for Quarter 1
• Managing the team
• Organizing the work
• Deciding what one wants from the learning
experience
Copyright 2006 Ernest R. Cadotte
Learning Points for Quarter 1
•
•
•
•
Market opportunity analysis
Strategic and tactical planning
Segmentation and target marketing
Financial management
Copyright 2006 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 2006 Ernest R. Cadotte
Strategic Planning Mental
Discipline
Objectives
Problem
•Definition of
problem
Strategy
Strategic
Analysis
•Internal appraisal
•External appraisal
Tactics
Strategy
Formulation
Tactics
•Resources made
•Tactical Plans
available
•Execution
•Strategic options
•Choice of one option
(Chosen Option =
Strategic Thrusts)
Controls
Note : The chosen option is made of « Strategic Thrusts »
Copyright 2006 Ernest R. Cadotte
Copyright Dominique Garval 2003
The following slides are for
Quarter 2
Copyright 2006 Ernest R. Cadotte
Q2, Go to Test Market
The Goal is to Maximize
Learning and Not Profits.
Copyright 2006 Ernest R. Cadotte
Q2, Go to Test Market
50% of the firm’s
decisions will prove to be
unacceptable – be careful
Copyright 2006 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 sales channel
– hire sales force for quarter
– open new sales outlets for Q3
Copyright 2006 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 2006 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 2006 Ernest R. Cadotte
How to Set Price?
•
•
•
•
Costs (production, marketing, overhead)
Profit goals
What market will bear
Competition
Copyright 2006 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 2006 Ernest R. Cadotte
No Early Profits
Costs to setup
+ & grow the
business
Money
0
Time
Copyright 2006 Ernest R. Cadotte
Revenues will fall below costs
at outset of new business
Revenue
+
Costs to setup
& grow the
business
Money
0
Time
Copyright 2006 Ernest R. Cadotte
Profits will come later
Revenue
+
Profit
Costs to setup
& grow the
business
Profits
0
Time
You are here
Copyright 2006 Ernest R. Cadotte
Profits
come
later
Your goal is to speed up the
adoption rate
maturity
decline
Demand
growth
introduction
You are here,
high costs-low demand
Time
Copyright 2006 Ernest R. Cadotte
What will the market bear?
You must discover the market
response function regarding price.
Copyright 2006 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 2006 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 2006 Ernest R. Cadotte
A differential advantage can
reduce price elasticity
Your
Demand
Less Elastic
Elastic
Differential advantage
shifts demand curve and
reduces price elasticity
Price premium for your brand 
Copyright 2006 Ernest R. Cadotte
How will the market respond to
competitor prices?
Your
Demand
Low competitor prices
will kill your demand
Competitor’s Price
Copyright 2006 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
implies importance of
message to customer
Order of priority tells
the ad agency what to
stress in the ad
Copyright 2006 Ernest R. Cadotte
How much to say in an ad?
(number of benefits)
Which response function is at work?
or
Hot
Hot
Cold
More is good to a
point and then ceases
to add excitement
Less
Cold
More
Copyright 2006 Ernest R. Cadotte
More adds
value to a point
& then takes
away value
Less
More
How often do you advertise?
Your
Demand
Diminishing
returns
Too little
Number of ads
Copyright 2006 Ernest R. Cadotte
But it also depends on what
your competitors do
Your
Demand
Strong competitor
advertising
will steal away
your customers
Competitor’s Advertising
Copyright 2006 Ernest R. Cadotte
How many sales people?
Diminishing
returns
Your
Demand
Too many
Too few
Number of sales people
Copyright 2006 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 2006 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 2006 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 2006 Ernest R. Cadotte
Expect net losses and negative
cash flow
Revenue
+
Profit
Costs to setup
& grow the
business
Profits
0
Time
You are here
Copyright 2006 Ernest R. Cadotte
Profits
come
later
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 2006 Ernest R. Cadotte
Learning Points for Quarter 2
• 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 2006 Ernest R. Cadotte
Copyright 2006 Ernest R. Cadotte