Resource Allocation

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Resource Allocation

• Marketing Strategy
• Fall 2004

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Mid-Semester Summary

• Scope of strategy
• Industry analysis (rivalry, entry, substitutes,
  buyers, suppliers, complements)
• Pricing strategy (golden rule of pricing)
• Strategic segmentation (segmentation variables,
  price discrimination, behavioral data, evolution
  of segments)
• New product development (idea generation, idea
  screening, market research, concept formulation,
  pre-test, test market)
• Competition understand competitors, price
  competition, dynamics
• RD and customer needs experience on RD,
  dynamics
• Market evolution (innovators, imitators, Bass
  model)
• Understanding customers (their language,
  perceptual maps, conjoint analysis)
• Market planning making choices, understanding
  competitors
• Marketing diagnostics demand process
  (awareness, interest, purchase intention,
  availability), dynamics

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Next Few Weeks

• Wednesday Markstrat decision 6
• Monday, Nov. 8 Guest speaker, Anne Hector,
  Vice-President, Analysis group
• Wednesday, Nov. 10 Markstrat decision 7
• Monday, Nov. 15 Case American Airlines
• Wednesday, Nov. 17 Markstrat decision 8
• Following two weeks CRM, loyalty, dynamics,
  Cases Brita Products and CMR Enterprises, Guest
  speaker, Marc Singer, McKinsey Co.
• Last week Markstrat and course wrap-up
• Optional sessions this week
• Thursday, Nov. 4, 9-1030, F310
• Friday, Nov. 5, 9-1030, S489

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Samsung 1999

• At the time, possibly the biggest consumer
  electronics maker that consumers never heard
  about. Competed mainly behind-the-scenes as
  supplier of computer monitors and semiconductors
  to more powerful multinationals.
• Increasingly, going to market with own branded
  PDAs, mobile phones, and DVD players considered
  low-cost provider with low visibility.
• Samsung was trying to change this. 1billion to
  spend.
• 14 product categories, 200 countries, 476
  category-country combinations.
• Where and how much to spend?

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Samsung 1999 (cont.)

• First. Collect information overall population
  and population of target buyers, spending power
  per capita, per capita spending on product
  categories, category penetration rates, overall
  growth of categories, share of each of the
  companys brands, media costs, previous marketing
  expenditures, category profitability, competitor
  metrics.
• Second. Use this information to create a full
  model to have profit forecasts of any type of
  resource allocation (simulate profits).

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Samsung 1999 Outcome of Analysis

• 1. There was overinvestment in North America and
  Russia given their profit potential. Reduce share
  of budget from 45 to 35.
• 2. There was underinvestment in Europe and China
  given their profit potential. Increase share of
  budget from 31 to 42.
• 3. Three categories (mobile phones, vacuum
  cleaners, and air-conditioning units) were
  getting more than half of the budget, but other
  potentially profitable categories were being
  starved of support (camcorders, DVD players and
  recorders, televisions, PC monitors,
  refrigerators, VCRs). Reduce support to mobile
  phones, vacuum cleaners, and air-conditioning
  units by 22.
• Problem Organizational issues?

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Samsung Results 2002

• Top five in mobile phones global market
• Significant gains in camcorders, flat-panel
  computer monitors, DVD players and recorders,
  digital TVs
• From 10th to 3rd in digital music players, from
  8th to 2nd in LCD monitors, from nowhere to 8th
  in portable DVD players
• Brand value increased by 30 to 8.3b (world rank
  from 42nd to 34th place). Sony brand decreased
  7 to 13.9b, 21st place.
• Annual sales rose 25 from 2001 to 2002, from
  27.7b to 34.7b. Net income from 2.5b to 5.9b.

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Marketing is fun but..

• Resource Allocation is
• difficult
• tedious
• mathematical
• Necessary evil

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Poor Resource Allocation

• throwing at something that isnt responding.
• starving the opportunities that are crying for
  help.
• Number one cause of poor marketing performance
  after misreading customer needs

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How do you spend it?
Which businesses, segments, brands?
Which marketing mix element?
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What are the methods you could use?

• Microeconomic approach
• optimization
• Rules of thumb
• Objective task method
• Portfolio method

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Microeconomic ApproachTwo simple ideas

• if 1 more of spending gets you more than 1 in
  contribution, increase spending
• elasticities are constant

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First simple idea

• We assume is that contribution is a concave
  increasing function of spending

spending
contribution

Optimal spending
Spending ()
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Second Simple Idea

• elasticities are not constant but
• in a limited range of spending they are close to
  being constant
• this is why companies pay research firms big to
  estimate
• price elasticity
• advertising elasticity

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Derivation of Rules

• Assume your spending is in line then
• Mktg increase (D Mktg) CBM increase (D CBM)
• D Mktg / Mktg x Mktg D CBM / CBM x CBM
• D Mktg x Mktg D CBM x CBM
• Mktg / CBM D CBM / D Mktg
• Mktg / CBM Elasticity
• CBM Sales - COGS
• CBM / Sales Contr Margin
• Mktg / Sales Elasticity x Contr Margin
• This means that when Mktg / Sales is less than
  the product of elasticity and Contribution
  Margin you should increase marketing. Conversely
  if Mktg / Sales is greater than the product of
  elasticity and Contribution Margin you should
  reduce marketing.

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Rules for Microeconomic Resource Allocation

• evaluate 2 things
• ratio of spending to sales
• or
• product of spending elasticity and
  Contribution Margin

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The Comparison

• If is less than
  then
• it is optimal to increase marketing.
• If is greater than
  
• then it is optimal to decrease marketing.

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Graphical Implication
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Microeconomic Resource Allocation

• Advantages
• assuming you have elasticities, it is an easy
  rule to apply
• given a market with many competitors, you can
  approximate optimal spending

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Microeconomic Resource Allocation

• Disadvantages
• elasticities are hard to measure
• category expansion effect and a business stealing
  effect
• assumes no reaction by competitors
• whats the time dimension
• salesforce elasticities
• advertising elasticities

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Rules of Thumb

• 4 Percentage of sales
• 4 All you can afford
• 4 Match competitors
• 4 Last-year based

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Rules of thumb

• Advantages
• easy, can be done in a spreadsheet
• in a mature market where nothing changes can be
  effective

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Rules of Thumb

• Disadvantages
• we can do better
• of sales
• brands that need help versus those that dont
• All you can afford?
• whats an acceptable profit level?
• single product company

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Rules of thumb

• Disadvantages
• Match competitors
• can never grow
• what if they are over-spending?
• Last year based
• the world does not change

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Comparison
Allocation Method of Respondents Highest
Percentage Objective Task 64 Canada
(87) Singapore (86) Percentage of
Sales 48 Brazil (73) Hong Kong
(70) Executive Judgment 33 USA
(64) Denmark (51) Brazil
(46) UK (46) All-You-Can-Afford 12 S
weden (30) Germany (25) Match
Competitors 12 Germany (33) Sweden
(33) Last-Year Based 12 Canada
(24) Syndoinos, Nicolaos E., Charles F. Keown,
and Laurence W. Jacobs (1989), Transnational
Advertising Practices, Journal of Advertising
Research, 29 (April-May), 43-50.
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Objective and Task

• Set a sales, market share or profit objective for
  the brand
• recommend spending and allocation to achieve
  objective
• Share(Awareness) x (conditional Purchase Intent)
  x (Availability)
• where do you spend to achieve your objective?

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Objective and Task

• assumes
• your objective is reasonable
• you know the response functions for various
  elements
• But how do you put all of this into action?

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Decision Calculus

• You can hire an econometrician to
  construct/estimate response functions for each
  marketing element
• but it is expensive
• they use quantitative but do not incorporate
  qualitative knowledge in the way that a
  front-line manager does

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Decision Calculus

• the best judges of responses might be your people
  on the front line
• district sales managers (sales response)
• brand managers and the account group (advertising
  response)

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Advantages

• objectives recognize different roles and
  potential of brands
• using managers expertise to plan optimally
• allows you to calculate the cost of various
  scenarios to achieve one objective
• allocate resources to link that gives you the
  biggest bang for the buck

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Disadvantages

• Managers judgment
• do they have enough data to make these judgments
• Potential gaming concerns
• How do you manage a portfolio of brands?

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The Share Growth Grid
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Whats the idea behind the names?

• Cash Balance
• Market growth is used as a proxy for the need for
  cash
• Market share is used as a proxy for the ability
  to generate cash

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Cash Balance
need cash in a big way
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Cash Balance
throw off major cash
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Product Life Cycle
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Share Growth Matrix
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Strategic Analyses of the BCG Portfolio

• Check your portfolio for internal balance
• Develop or estimate major competitors own
  portfolios
• gives clues for their possible strategies
• gives clues for reactions to your own moves

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Competitive Analysis

Competitors Portfolios Us A B
C D E
?
?
?
?
?
?
?
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Benefits of Share/Growth Analysis

• simple pictorial representation of your brands
• assuming growth markets need cash and large share
  brands generate cash
• balance your portfolio
• predict competitor actions
• manage several brands together and classify them
  by segment

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Key Takeaways

• There are many ways to allocate resources
• rules of thumb are simple but dangerous
• microeconomic approach requires elasticity
  estimates and depends on small reactions by
  competitors

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Key Takeaways

• Objective and Task
• calibrated by managers
• allows reactions of competitors and the long term
  to be recognized
• how to manage a basket of brands?

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Key Takeaways

• Portfolio approaches
• recognize the roles of different brands
• best known is BCG
• Recognizes cash flow