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Week 4

Week 4. Most Basic Principle Guiding Your Decisions:. w ill it Increase Demand for Product. Decrease Cost of Mfgg Product. Increase Product Demand Driven by Effective Mgt of 4 P’s. Product Mgt. Introducing new brands, Repositioning / killing old brands Promotional Mgt.

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Week 4

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  1. Week 4

  2. Most Basic Principle Guiding Your Decisions: • will itIncrease Demandfor Product • Decrease Cost of Mfgg Product

  3. Increase Product DemandDriven by Effective Mgt of 4 P’s • Product Mgt. • Introducing new brands, Repositioning / killing old brands • Promotional Mgt. • Optimizing Segment & Media Vehicle budget allocations • Distribution Mgt. • Optimizing Outside & Inside Sales-force size & segment allocations & • Manufacturer-Rep support / Distributor relationship building allocations • Pricing- • Competitive pricing & Fine-tune A/R

  4. Decrease Mfgg Costs Effective Mgt of two other P’s: • People • Investments in HR,TQM & PI • Plant • Investments in automation & capacity mgt.

  5. Increase Demand • Driven by Effective Mgt of 4 P’s

  6. Product Mgt. Options For every product you market-you have 3 options- • Improve it-to increase demand in current segment • Reposition it – to compete in another segment • Kill it-sell off capacity- reinvest recovered capital Reposition Improve Kill

  7. Consequences:Improving a product… PRO’s: • Should increase sales & market share • Rightsizing capacity- • if too high-frees capital for investment • If too low- forestalls stockouts Con’s: • Proffering a better- price, design and/or higher awareness- accessibility- costs $$$ • High Tech segments can take 2+ years- • Increases SG&A budgets & thus squeezes margins…

  8. Questions need to answer if plan onimproving a product… • What are your limits -How much can you cut price? Increase R&D… Promotion… Sales Budget? • Competitor moves- improving existing brands in seg. and/or introducing new brands in seg.

  9. Variation on Improving… Can Reposition Can allow product to age gracefully and ride the life cycle Can redirect trajectory of brand position into adjacent segment

  10. Questions need to answer if plan onrepositioning a product… • How long will it take? • Material & labor cost implications? • Impact on products in segment entering? Leaving?

  11. In final analysis– You Could decide to Kill

  12. Questions need to answer if plan onKilling a product… • How many products do you plan to have overall? • Going to add a replacement in this or another segment? • Kill immediately-or phase out? • Other options- Improve? Reposition? • How will competitors react?

  13. Consequences:Killing a product… 1) Makes it difficult maintain Overall Market Share • Even if Niche strategy-should increase share in selected niche(s) to offset loss in abandoned segments… • Investors-like to see Co. maintain overall starting share….

  14. Consequences:Killing a product… If not replaced: 2) Hands over Market Share to competitors 3) Removes strategic opportunity for distribution $$ efficiencies….

  15. Segment Consequences:Killing a product… • LOW TECH Segments: Kill the Cash Cow • In opening years 2/3’s volume & profit from Low & traditional sectors • HIGH TECH Segments: Difficult to re-enter, could take up to 3 years to launch new prdt.

  16. Your & Your Competitors Product Mgt. Decisions Impact nature, magnitude & arena of Competition Must monitor & anticipate what, where & when… products repositioned, killed, introduced

  17. Let’s assume…… • LOW END: 0-1 product killed.. 0-1 repositioned or introduced • TRADITIONAL: 3-6 repositioned from High…0-1 killed…1-2 introduced • SIZE: 0-1 killed, 0-1 repositioned to Traditional, 1-2 introduced • PERFORMANCE: 1-2 killed, 0-1 repositioned to Traditional, 0-1 introduced • HIGH: 1-3 killed or repositioned to Traditional, 1-3 new products arrive in rounds 2 or 3

  18. Round 3- Forecastnature, magnitude & arena of Competition • LOW END: 6 products=rivalry unchanged • TRADITIONAL: 9 products, w/ 3 repositioned= increased competition • SIZE: 7 products, w/ 2 new= increased competition • PERFORMANCE: 4 products, w/ 1 new= reduced competition • HIGH: 6 products, w/ 2new= increased competition 6 4 9 6 7

  19. -Given Round 3 Scenario-How should adjust your production capacities?

  20. Optimal levels of capacity?

  21. Optimal levels of automation?

  22. Once have optimal levels of capacity– Need to have most efficient levels of production costs

  23. How to have most efficient levels of production costs • Reduce Material costs • Proffer minimal/optimal level MTBF • TQM/Sustainability Initiatives • Process Management Initiatives • Reduce Labor costs • TQM & PI Initiatives • Increase automation • Invest in employee recruitment & training • Utilize 2nd shift • Increases length R&D on product line-–makes re-positioning take longer • Incur employee separation costs • w/ maximum expenditures can realize 18% improvement in productivity in 6 years! ?

  24. Why run 2nd shift –when labor costs 50% higher?

  25. Why run 2nd shift –when labor costs 50% higher? Answer by using your proformas: 1- On production spreadsheet build at capacity- if have 1000 units – build 1000 units 2-On Marketing display- FORECAST 1000 UNITS 3.-ON Proforma Income statement- note NET MARGIN – THE BIQ Q: If we double sales will we double our net margin?– Will we make less because labor costs are 50% higher for 2nd shift?

  26. Why run 2nd shift –when labor costs 50% higher? Answer by using your proformas: 1- On production spreadsheet double output-run full 2nd shift 2-On Marketing display- double forecast 3.-ON Proforma Income statement- NET MARGIN –will more than double THE BIQ Ar: When run 1 shift- must pay all fixed costs- 2nd shift gets a free ride---only has to pay labor premium…

  27. Now that that you are producing-- in the most efficient manner-- a “perfectly designed” product • need to make sure “maximum #” consumers are aware ofit&can “easily” buy it…

  28. Moving Product • Message Weight & Media Planning • Breadth, Depth & Heft of Distribution Network • Optimal Pricing & Credit Terms

  29. Advertising/Promo Budget Drives Awareness Increases in Promotion Budget have diminishing returns. The first $1,500,000 buys 36% awareness; Spending another $1,500,000 (for a total of $3,000,000) buys approximately 50%. The second $1,500,000 buys only 14% more awareness. -- a $1,500,000 promotion budget would add 36% to the starting awareness, for a total awareness of 69% (33% + 36% = 69%). Advanced Marketing: The Marketing Budget Detail screen allows companies to allocate their Promo Budget among five different media channels. Projections of the upcoming round's awareness display in a bar chart at the bottom of the spreadsheet screen. When new products are invented, considered newsworthy events. Awareness is created w/ PR campaign. At launch you automatically are charged a $250 thousand fee for marketing rollout and public relations. This fee earns a new product a starting awareness of 50%

  30. Sales Budget Drives Access • Like awareness, if your sales budgets drop to zero, you lose one third of your accessibility each year. • Achieving 100% accessibility is difficult. Companies must have at least two products in the segment's fine cut. • Each product experiences diminishing returns at a sales budget of $3,000,000. However, diminishing returns for the overall segment is not reached until the budgets total $4,500,000 (for example, two products with sales budgets of $2,250,000 each). • Once 100% accessibility is reached, you can scale back to around $3,300,000 to maintain 100%.

  31. Fine tuning your Promo, Sales & Pricing…

  32. Promo Budget

  33. Sales BudgetTime Allocations Decide on how many salespeople & Mfr Reps will have: How much effort will be focused on market segments: • OUTSIDE sales-meet face-to-face (cost $120K/each) • INSIDE sales-works leads & operates website & customer support systems (cost $50K/each) • Distributors: push product (cost $100K/each)

  34. Pricing / Credit terms • A/R Lag: (in days) is the time between customers receiving products & when they are expected to pay for ‘em • No credit - demand falls to~ 65% of normal. • At 30 days - demand is 92%. • At 60 days - demand is 98.5% • At 120 days - demand is 100%. • The longer the lag, the more your cash is tied up in receivables.

  35. End Game Strategy

  36. If Company well managed- no need to take drastic actions • Balance Sheet • Current ratio= 2-2.5 • Leverage= 1.5-2.5 • Sales/Current assets= 3-5 • Income Statement • Contribution Margin= 30%+ • ROS=5%+ • Production #’s • Plant Utilization=150%+ • Inventories= 1-90 days • Income Statement • Customer satisfaction=40+ • Awareness=80% • Accessibility=80%+

  37. End-Game Moves of a Poorly Performing Company • X-Large dividends & Stock buy-backs • Products killed & large sell off of capacity • R&D, Ad & sales budgets slashed • No plant investments

  38. End gaming is indicative of BAD MGT- • Can only occur if Co. has unproductive assets… • Eliminate unproductive assets early & will have no rational for madness

  39. Current ratio 2+ indicates no idle assets • Plant Utililization 150%+ - no plant to liquidate • Great products (w/ Cust. Survey Scores 40+) never Killed

  40. Rounds 6,7,8- should be most profitable Things you can do w/ your $$$ • Pay off Debt • Invest in growth • Buy-back stock • Pay dividends Which most often selected but least preferable to do?

  41. Reducing Leverage • Says to stockholders— “We can think of nothing better to do w/ $$ than save you interest payments” • More debt eliminated the greater target you become for a takeover.. • No reason not to maintain Co. Financial Structure that got you to position of high profitability…

  42. Issue DividendsGood Dividend Policy Net profit can only be allocated in one of two directions: • It is either paid out to owners in dividends • or it is Retained Earnings - to grow the company • For Example: • Ideal Investment/ round = $10-25M ( let take $20M) • if profits=$30M & Shares = 2M… you have EPS= $15/share • If need $20M for investment – get ½ from LT-debt- need $10M from Equity—leaves $20M in earnings… • Could/should issue $10 Dividend

  43. Begin Practice Round 1 decision making….

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