Transcript The Dynamics of Strategy Core Concepts

STRATEGIC MANAGEMENT DYNAMICS
Kim Warren
Exercise 6.7: The Choice Pipeline
Exploring how marketing spend develops consumers through
stages, leading to growing sales and profits
This exercise supports Figure 6.7 in chapter 6 of the textbook ‘Strategic Management Dynamics’
by Kim Warren, from J Wiley & Sons, 2008. www.wiley.com/go/smd featured in class 6 of the course.
The model …
The model to which these instructions refer - ‘Figure 6.7 Exercise Choice
Pipeline.msf’ – can be found at
www.strategydynamics.com/smdresources/chapter6.asp.
The model requires the mystrategy™ software – a Reader version can be
downloaded from www.strategydynamics.com/msi
The model can be run with the Reader version, but results cannot be saved
Instructions on fully licensing the software can be found on the Help menu
After installing mystrategy:
Start mystrategy and open the model
Read the following pages before working with the model
™ ‘mystrategy’ is a registered trade mark of Global Strategy Dynamics Ltd.
© Copyright Kim Warren, 2008. All rights reserved.
Building a consumer brand, e.g. a premium coffee
Background.
Your company launched a premium coffee brand in North America 3 years ago.
Estimated potential consumers = 50 million
Marketing spend was $20m/month over 3 years
This marketing was split equally [$20m/month] across four elements
- mass advertising to make consumers aware of the brand
- further targeted advertising to make them understand and interested in the
brand
- trial promotions to make interested consumers start buying the brand
- loyalty promotions to make otherwise disloyal consumers choose this brand for
every purchase
The brand won more than 35m consumers over 3 years
… and became profitable, but cumulative profit was still negative - i.e. it has not
made back in total profits all the marketing spent to launch it
Your challenge.
You have been asked to launch the brand in Europe where there are also 50 million
potential consumers. Can you spend the marketing budget better, to win more
consumers over 3 years, become more profitable, and make enough profit to get back
all the marketing you spend, i.e. cumulative-positive cash by the end of 36 months?
© Copyright Kim Warren, 2008. All rights reserved.
The outcome of the N America marketing launch
[ Dashed line indicates total
aware consumers – solid line
indicates those who are aware,
but not interested or buying. ]
Can you spend money better than this
… to make more profits sooner?
© Copyright Kim Warren, 2008. All rights reserved.
Rules …
You can spend a maximum of $10million per month on each of the
four types of marketing
… so a maximum of $40m/month, but no more than $10m on any
of them.
Within this limit, you may spend more or less than the N American
launch cost of $20m/month
Spending decisions are committed for 6 months at a time.
© Copyright Kim Warren, 2008. All rights reserved.
Running the model …
Zoom to change the size of
the model in your window.
Scroll to move around the
model. Hit ‘Home’ key to
return to top-left.
The decisions you enter will appear in these
small charts – double-click to change the
spend decisions [see next page]
You must stop the model ‘’
before you can make any
changes
Click ‘’ to run all 36 months at once
or ‘| ’ to step through 6 months on each click
© Copyright Kim Warren, 2008. All rights reserved.
Changing the spending decisions …
After double-clicking on one of the four monthly
spending decisions:
Mass advertising spend
Values Advertising spend
Spend on trial promotions
Spend on Loyalty Promotions
... this ‘Element Set-Up’ will appear.
Do not alter the vertical scale – the
model is only configured to work in a
range of $0-10million per month.
1. Select the Graph tab [do not enter any
values in the Equations tab, or the graph’s
values will be ignored]
2. Enter values in the cells for the spending rate
you want for each 6 month period – the red
chart line will change to reflect these values
3. … alternatively, drag the mouse across the
chart area – the values in the cells at left will
change to reflect this red line
© Copyright Kim Warren, 2008. All rights reserved.
4. Click ‘OK’ to confirm your changes
Comparing your results …
The black line shows results of the
original strategy [constant, equal
spending rates].
The results of running the
business with your decisions are
shown with a purple line
To save the model with your
decisions, click File, Save As …
[full version of mystrategy only]
Double-click the large charts and click the
‘Y axis’ button to change the vertical scale
[the model need not be stopped]
© Copyright Kim Warren, 2008. All rights reserved.
Note the numerical values
also displayed
Further challenges …
Spending no more than $20million per month in total:
- what is the earliest time you can make the brand profitable?
- what is the best cumulative profit you can make by month 36?
Repeat this challenge, spending:
- no more than $10 million per month in total
- no more than $5 million per month in total
The attached planning sheet will be helpful.
© Copyright Kim Warren, 2008. All rights reserved.
Planning sheet for choice pipeline marketing spend plans
Spending on each marketing activity: $millions per month
Months:
Mass
advertising
1-6
7-12
13-18
19-24
25-30
31-36
© Copyright Kim Warren, 2008. All rights reserved.
Values
advertising
Trial promotions
Loyalty
promotions
TOTAL
Further information …
Zoom to change the size of
the model in your window.
Scroll to move around the
model. Hit ‘Home’ key to
return to top-left.
There are two copies of the model:
the first model, directly below this display runs with
your decisions
the second model, below and to the right, runs the
default decisions of $5million/month on each activity.
Various parameters in the model can be changed, e.g. the total
number of consumers, the fraction responding to each $million of
marketing, and the fractions moving back down the pipeline each
month.
Beware of changing these values – badly chosen values may lead
to incorrect or meaningless behaviour of the model.
The model itself is below this display area,
scroll down to view the model.
© Copyright Kim Warren, 2008. All rights reserved.