In this simulation, you are making important decisions for your shoe company as it relates to the Marketing Mix. The product that you

NewShoes Principles of Marketing Simulation

Willbann D. Terpening, Gonzaga University James G. Helgeson, Gonzaga University

Michael L. Ursic, Gonzaga University

Charlottesville, Virginia, USA

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Copyright Notice

This manual and the simulation described in it are copyrighted with all rights reserved by Interpretive Software, Inc. Under the copyright laws, neither this manual nor the simulation may be copied, in whole or in part, without written consent of the authors, except in the normal use of the simulation for educational purposes, and then only by those with a valid license for use. The same proprietary and copyright notices must be affixed to any permitted copies as were affixed to the original. This exception does not allow copies to be made for others, whether or not sold. Under the law, copying includes translating into another language or format. Purchasing the simulation experience gives the owner the right to participate in a unique learning event. Each student or participant must purchase the simulation to take part in the event or the institution sponsoring the event must purchase for the entire group participating in the event. Limited Warranty on Media and Manuals In no event, will Interpretive Software, Inc. be liable for direct, indirect, special, incidental, or consequential damages resulting from any defect in the software or its documentation, even if advised of the possibility of such damages. In particular, the authors shall have no liability for any programs or data stored in or used with the computer products, including the cost of recovering such programs or data. This simulation experience is sold, "as is," and you, the purchaser, are assuming the entire risk as to its quality and performance. The warranty and remedies set forth above are exclusive and in lieu of all other, oral or written, express or implied. For more information about other products from Interpretive Software, please contact: Interpretive Simulations 1421 Sachem Place, Suite 2 Charlottesville, VA 22901 Phone: (434) 979-0245 Fax: (434) 979-2454 Website: http://www.interpretive.com/ Discover a Better Way to Learn. Active Learning through Business Simulations. Copyright © 2006–2017 Willbann Terpening, James Helgeson, Michael Ursic, and Interpretive Software, Inc. Images © iStock.com and © BigStock.com. All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner whatsoever without written permission of Interpretive Software, Inc. Graphic images copyright © BigStockPhotos, copyright © iStock.

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Contents

Copyright Notice ii Contents iii About the Authors iv

NewShoes Introduction 1 NewShoes Quick Start Guide 3 NewShoes Manual 4

NewShoes Case 5 The Athletic Shoe Industry 6 The NewShoes Industry 8 Product 9 Place 10 Price 11 Promotion 12 Production Costs 13 Market Research and Decision Analysis 15 Summary of Decisions Variables 16 Next Steps 16

Marketing Concepts 19 The Marketing Function 20 Product 21 Price 21 Promotion 22 Place 23 Marketing Strategy 23 The Decision-Making Process 25 Models as Decision Aids 26 Forecasting 28 Types of Decisions and Response Functions 29 Measuring Results 31 Summary 35

Appendix 37 Regional Market Descriptions 38 Glossary 40 Index 44

Printed April 26, 2017

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About the Authors WILLBANN TERPENING is Professor of Operations Management at Gonzaga University’s School of Business Administration. He teaches courses in operations management, research methods, spreadsheet modeling, and process management at the undergraduate and graduate levels. Dr. Terpening’s areas of expertise are process management, the use of information in operations management, and human judgment and decision-making. His research has been published in leading journals, including Psychology and Marketing, the Journal of Psychology, and the Journal of Business and Management. Professor Terpening consults in the areas of operations, information systems, and research methods. He sits on the board of Sirti, a state economic development agency and other nonprofit organizations. He also has programmed systems to support managerial decision-making for several organizations. He received his Ph.D. and M.A. from Southern Illinois University and his B.A. from the University of Montana. JAMES HELGESON is Professor of Marketing at Gonzaga University’s School of Business Administration. His area of expertise is behavioral decision-making, with a focus on consumer and respondent decision-making and information processing. He teaches marketing theory and practice, marketing strategy and qualitative decision-making in the undergraduate and graduate business programs. He was awarded the Gonzaga University Great Teachers Program Award for Distinguished Scholarship in 1995. Dr. Helgeson’s research has been published widely in leading journals, including the Journal of Consumer Research, the Journal of the Academy of Marketing Science, Organizational Behavior and Human Decision Processes, the Journal of Behavioral Decision Making, the Journal of Marketing Research, the Journal of Consumer Psychology, Psychology and Marketing, the International Journal of Market Research. Dr. Helgeson received his Ph.D. from the University of Oregon and his M.B.A. and B.A. from Eastern Washington University. The late MICHAEL URSIC served on the faculty at Gonzaga University's School of Business Administration, where he taught marketing research and consumer behavior. His areas of expertise were decision-making and public policy. His research was published in the Journal of Consumer Research, the Journal of Public Policy and Marketing, the Journal of Consumer Affairs, Psychology and Marketing, Industrial Marketing Management, the Journal of the Academy of Marketing Science, the Journal of Business Research, and the Journal of the Market Research Society. He received his Ph.D. from the University of Oregon.

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NewShoes Introduction

NEWSHOES

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Newshoes is a marketing simulation which offers you the chance to manage a brand of athletic shoe, and to experience the exhilaration of competition in the marketplace. Consider the simulation an opportunity to apply the marketing concepts you have studied or will study this term. Thoughtful decisions will go far toward achieving success in NewShoes. As is true in the real business world, luck can also play a role in business success. But as is also true in the real business world, relying solely on luck and not sound business decisions, is a high-risk strategy.

You and your team are responsible for deciding which markets to compete in, as well as pricing and promotion decisions for each market. You will also need to decide how much to develop your product in order to remain competitive in the marketplace. As you manage the marketing for your brand of shoe you will gain a practical understanding of business strategy and how various factors interact and affect one another in a marketing organization. By analyzing information, making decisions, and observing the results, you will experience first-hand the challenges and rewards of strategic marketing.

Unlike the real market in athletic shoes, every NewShoes company starts from the same position, so there is no competitive advantage for any team at the beginning of the simulation. Your goal is to increase sales and profits for your company. By making better decisions than your competitors, you will increase your company's share of sales in the market and be more profitable. Key factors in making good decisions are: understanding your situation, evaluating all your options, and assessing the results of your choices. By working together with your team in each of these areas, you will learn much about managing a brand in the marketplace.

To get the most out of the NewShoes experience, we recommend the approach outlined on the following page.

NewShoes is a competitive simulation covering basic concepts in marketing.

You will learn about developing a product, while pricing and promoting it in different markets.

You will compete against your peers in a NewShoes industry. All competitors start in the same position.

By researching the markets, making good marketing decisions, and analyzing the results, you will gain experience with marketing management.

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NewShoes Quick Start Guide

PERIOD DECISIONS • Corporate decisions • Marketing (input for EACH region) • Market research

SIM ADVANCES • Check Schedule for times • Complete Decisions BEFORE Deadline

SIMULATION ENDS • Evaluate team performance • Review what you have learned

STARTUP DECISION • Access simulation from course website • Input a company name

READ THE CASE • Industry background • Company starting situation

Your instructor may require additional assignments during the simulation. Check the schedule and messages on your course website for details.

DECISION ANALYSIS • Cost of Goods • Break-even • Contract Bid

EVALUATE RESULTS • Company reports • Market research

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NewShoes Manual

The remainder of this manual is divided into the sections described below. Understanding and success in NewShoes will be greatly enhanced by reading this manual before you begin the simulation. The sections listed below will answer most of the questions students typically have during the simulation experience, and reading them have the added benefit of improving your competitiveness. Finally, the operations guide and NewShoes case are also available on-line in the simulation software. Section 1: NewShoes Case contains a brief history of the athletic shoe industry and background on the current situation of your firm. It also provides details of the decision variables that you will set over the course of the experience. A summary table of all the decisions you will face in NewShoes is also included. Section 2: Marketing Concepts presents a general discussion of the marketing function, the 4Ps, the strategic planning process, how to make decisions, and an introduction on how to analyze the effectiveness of your decisions. Appendix: This section provides a description of the regional markets’ customer groups in the NewShoes environment. This section details customer expectations by region and can help guide you in marketing approaches to advertising, sales promotion, price, etc. The decisions and research request form will be useful for recording and analyzing your company’s decisions. The glossary contains marketing terms that are used in the simulation. An index concludes the appendix.

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NewShoes Case

NEWSHOES

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The Athletic Shoe Industry The Athletic Shoe Industry is a dynamic and exciting industry with sales of over $70 billion worldwide. In recent history, increases in product demand were fueled by health and physical fitness trends, but the advent of athletic shoes goes back to the 1800s. Now athletic shoes are common and designed to meet many different consumer needs.

When the jogging and fitness craze began in the mid-1970s, athletic shoe manufacturers were dubbed "Adidas and the Seven Dwarfs" because of the success of West Germany's Adidas company. But the early dominance of Adidas was no guarantee of future success. In the mid-1970s, Adidas not only underestimated the amount of growth that was about to occur in the athletic shoe market but also the aggressiveness of other manufacturers, such as Nike in the United States.

The rise of Nike in the athletic shoe industry is a Cinderella story. A university runner (Phil Knight) and his former coach (Bill Bowerman of the University of Oregon) went into business distributing Japan's Tiger running shoes in the United States. In 1971, they developed their own shoe and named it Nike. Fiddling with a waffle iron and some urethane rubber led Bowerman to develop the "Waffle" sole. This product improvement gave Nike its initial impetus. On the marketing side, the now famous "swoosh" trademark on the shoes was developed by an art student at a cost to the company of a mere $35!

Nike experienced phenomenal sales growth from $14 million in 1976 to $920 million in 1984. Although Adidas remained "number one" outside the United States, fast-rising Nike dominated the domestic market by the early 1980s. In the mid-1980s, Nike had several problems to contend with, including a peak in demand in the athletic shoe industry, quality control difficulties, and a loose and paternalistic management style that appeared inadequate for a billion-dollar firm. As Nike faltered, a new player, Reebok, surged. Beginning its life in the United States as a subsidiary of a British firm, Reebok became a publicly held firm that went on to own its former parent. Reebok's revenues zoomed from $4 million in 1982 to $900 million in 1986. Although Nike lost its position as number one in market share to Reebok in 1986, it regained it through astute changes in its management style, improved marketing strategies, and product development. During the 90s, Adidas dropped to fifth place in

As can be seen in this brief history of the athletic shoe industry, it is a competitive market with changing market trends and fads that result in a dynamic business environment. The NewShoes simulation will allow you to experience this same competition, excitement, and dynamism.

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Adidas Nike

Reebok

New Balance

Puma

United States market share. But ever the competitor, Adidas has come back and now battles with Reebok for the number two market share position, behind Nike. Other competitors also entered the scene, such as L.A. Gear, whose sales skyrocketed in the early 1990s, driven by a focus on fashion athletic footwear. In recent time, L.A. Gear has lost its edge. In the late 90s, Italian-based Fila surged to third place behind Nike and Reebok in United States athletic shoe sales. It too, has lost its edge. New Balance has done well, pulling into the number four market share position on occasion, focusing on serious athletes and unique products that come in varying widths. Puma, with roots that actually connect it to Adidas in its early days, duels with New Balance for position in the U.S. athletic shoe market. Brooks (owned by Berkshire Hathaway), Converse (now owned by Nike), Asics, Under Armor, Keds, and Skechers brands play more niche roles, but make the market interesting and competitive. And, Adidas now owns its old rival Reebok! Today, the athletic shoe industry in the United States generates approximately $15 billion in sales annually. As can be seen in this brief history of the athletic shoe industry, it is a competitive market with changing market trends and fads that result in a dynamic business environment. The NewShoes simulation will allow you to experience this same competition, excitement, and dynamism.

ATHLETIC SHOE INDUSTRY

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Personal Selling

Dealer Promotion

Product

Price

Product

Retail Price

Advertising

Consumer Promotion

Manufacturer Distributor

The NewShoes Industry The industry in NewShoes is made up of competing firms from your class, each selling one basic shoe. You have been hired as a member of the new marketing management team for your company. In the simulation, there are three regions representing different kinds of markets. The home region is a geographic sub-market, such as the Pacific Northwest in the United States or the Prairie Provinces in Canada. The domestic region represents a national market, such as the entire United States or Canadian market, minus the home market. The foreign region is the entire international market outside the home and domestic regions. The home market is generally a smaller market than the domestic market, with the foreign market being the smallest market of the three, at least early in the simulation. It is not known what the full potential of the foreign market might be. In NewShoes, athletic shoes are sold by manufacturers such as your company to distributors in a market, who then sell to consumers in retail stores. Price is a significant factor in sales, but how you market to distributors and consumers can also impact sales. Through personal selling and dealer promotion, you can encourage distributors to "push" your product and increase sales. By advertising and offering consumer promotions, you can make consumers aware of your brand and persuade them to buy it. Each market is unique, with distributors and consumers responding to your marketing decisions in different ways, so your task is to find the correct marketing mix for each region.

Consumers

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When your team takes over marketing for the firm, there are two periods of results available for you to evaluate the condition of the company. A "period" in the world of NewShoes can be viewed as a month, a quarter, or a year of operations. It is simply a period of company operation and of competition with the other NewShoes company teams. At the beginning of the simulation, your company is struggling to make a profit. After a loss of $2.4 million in Period –1, the previous marketing team decided to raise the price from $90 to $110 in the home market, and expand into the domestic market. The changes were a qualified success. Total revenue increased from $9.2 million to $19.2 million, but home sales dropped somewhat, and the company still lost $1.2 million. Table 1.0.A: Sales and Revenue (previous two periods)

Home Sales Domestic

Sales Total

Revenue COGS Expenses Net Profit

Period 0 $7.5 $11.7 $19.2 $7.9 $12.5 -$1.2

Period -1 $9.2 NA $9.2 $6.4 $5.2 -$2.4

As a member of the new marketing management team, you face challenging decisions concerning your product, its pricing and promotion, and new distribution opportunities. While the same product is sold into all the regions, you must make price and promotion decisions for each market. Thus, you must consider the four Ps of marketing in managing your firm: product, price, promotion, and place. That is, you must decide where to distribute (place) your product, what price to charge, and how to promote it.

Product All companies begin with the “Basic Version” of athletic shoes and each firm sells only one version at any given time, in all regions. Investment in new product development can lead to a new version of your athletic shoes. The firm spent $800,000 on product development in Period –1, and $900,000 in Period 0. Higher and more regular investments tend to result in shorter development times, but expenditures beyond $2 million in a given period have a diminishing effect on product development. As is true in the athletic shoe industry, there is some uncertainty as to when the next breakthrough in shoe development will occur. A new version of your product can be developed from Version 1 up through Version 10, though it is unlikely that Version 10 will be attained in a NewShoes competition. Version 5 or 6 is usually the highest version that can be reached after 8 to 10 decision periods. Each time your company releases a new version, that new version is automatically distributed in all the regions where you have a presence, and each region receives approximately the same positive effect on sales.

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Place Your firm is well established in the home market at the start of the simulation. Distributors have been carrying your brand for some time, so additional salespeople and dealer promotions are only marginally effective. Customers in this market are looking for a high quality shoe with a price that is "just right"−not too high and not too low. A drop in revenue after a recent price increase may be an indication that the current price is above what customers expect to pay. Advertising is a good way of reaching customers, and consumer promotion is also helpful. In the domestic region, your firm has just entered the market, and initial sales have met expectations, but it is not clear if the marketing mix chosen by the previous management team is optimal. Early research indicates that customers in this market consider price an important factor in their decision, and they are not willing to pay as much as customers in the home market. Though advertising is helpful in reaching new customers in this market, they are more likely to pay attention to consumer promotions. Access to distribution in the domestic market is more difficult than in the home market, and requires higher levels of salespeople and dealer promotions. As the simulation progresses, the foreign market may open up as an opportunity for your firm. Be aware that a marketing mix that works well in the home and domestic markets may not work well in the foreign market. Customers interested in athletic shoes in the foreign region are looking for a high quality product, and price is not much of an issue. They will not be swayed very much by advertising and consumer promotions. Getting your product distributed will be a big challenge, and requires spending on salespeople and dealer promotions. You may enter new markets when available, and leave market regions as you choose, though you do need to maintain a presence in at least one market. There is no charge for leaving a region. There is, however, a $750,000 start-up charge each time you enter or re-enter a region. All you have to do to enter or re-enter a region is to input marketing decisions for the region, being sure to choose a marketing mix that is appropriate for the region. If your entry into a region has not been successful, and you would like to concentrate on other markets, you can leave a region by zeroing out the decision variables for that market. Remember, it costs $750,000 to enter a new market or re-enter a market you previously left, so think carefully before abandoning a region. The firm entered the domestic market in Period 0, and along with the consumer and dealer promotion expenses, there was a charge of $750,000 for the period. That amount is included in the total expenses shown for the Period 0 results. In addition to selling into the regular distribution channels, a major retailer may ask you to bid on a contract to sell a large quantity of shoes directly to them so they can market them as a store brand of athletic shoe. This means the purchaser will put its own brand name on the product, and your brand name will not appear on the shoes. Contracts are awarded based on the lowest

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bid, and sales to the contract winner are guaranteed. In case of a tie bid, the contract will be split equally between the companies submitting the winning bids. In NewShoes, contract sales have no impact on sales in the regular distribution channels. You may choose to bid or not to bid on these contracts if they become available. You may also have the opportunity to sell directly to consumers by establishing a presence on the web and setting up an order processing system. The potential for direct sales to consumers is estimated to be about 10% of sales through the retail channels in the home and domestic markets. Foreign market customers will not be able to buy direct.

Price Different selling prices can be charges for each region in which you are operating. For Period 0, the previous marketing team set a price of $110.00 in the home market and $90.00 in the domestic market. Decisions on selling price are in dollars and cents, as opposed to the other NewShoes variables, which are entered in whole dollars (or numbers) only. The price you set represents the price to the distributors in the region, and there is no discounting decision in NewShoes. Although you do not have control over the actual price that retailers will charge for your products, retail prices will reflect the price you set, and consumers will respond to any changes you make.

The decision you make on selling price is very important and has a major impact not just on sales of your shoes, but on your company's profitability. Your pricing decision should take into account a number of factors:

o Company objectives, such as growth and profitability o Fixed expenses and unit costs o Competitors’ pricing o Market response to price

The previous marketing team had thought that raising the price in the home market from $90.00 in Period −1 to $110.00 in Period 0 would help the bottom line without hurting sales too much. While losses were not as great, home sales dropped more than expected, from $9.2 to $7.5 million, and management wants your team to re-evaluate pricing, particularly in the home market. If you have the opportunity to bid on a contract or sell directly to consumers on the web, you will have additional pricing decisions to make. When selling to another business rather than into the retail market, pricing becomes especially important. You must set your price low enough to win the contract, but high enough to make the contract profitable. If your price is too high, you will

A word of caution: While each market responds differently to the selling price you set, prices over $150 can cause a rapid decrease in sales in any NewShoes market region.

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get no sales. Too low, and you will lose money on the deal, and possibly face charges of predatory pricing. Bypassing retail channels by selling directly to consumers over the web brings additional issues to the pricing decision. Undercutting the retail distribution channels can cause some stores to drop your product and reduce sales in the channel. In NewShoes, pricing for direct sales needs to be coordinated with the prices set for the home and domestic markets. Customers in the foreign market cannot purchase your product from the website, so the direct pricing decision will not have an impact on sales there.

Promotion Promotion is often divided into two general categories: consumer promotion (e.g. promotion targeting consumers/end-users) and channel or dealer promotion (e.g. promotion targeting the distribution channel). In NewShoes, there are two consumer-oriented decisions and two channel promotion decisions to be made in each region. The following are brief descriptions and some guidelines regarding decisions for the four different types of promotion in NewShoes. Consumer Promotion Consumer advertising is money spent on promotion presented through the media (television, radio, newspapers, magazines, websites etc.) that targets the consumers of your product. In Period 0, advertising expenditures were $1.5 million in the home and $2.0 million in the domestic market. You need to enter the dollar amount for consumer advertising for each region, but be aware that expenditures over $2.0 million per period in a market will have little marginal effect on sales. Consumer sales promotion is money spent in promotional items aimed at the consumer, such as rebates, contests, and premiums. You will need to enter a dollar amount appropriate for the market. Period 0 amounts were $2.5 million in the home market, and $1.5 million in the domestic market. Management thinks the previous marketing team placed too much emphasis on consumer sales promotion, and wants your team to take a look at these expenditures. It is thought that spending more than $1.0 million per period in any market will have little effect on generating additional sales. Channel or Dealer Promotion Personal selling involves having a salesperson from your company contact a distributor to persuade them to carry your product. Salespeople only call on middle-people in the distribution channel and do not deal with consumers or end users of your product. You must decide the number of the salespeople in each region. The effect of your salespeople varies by region, but

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having more than 10 salespersons in any market region will have little effect on generating additional sales. Each salesperson's salary, commission, benefits, support, travel, and other expenses cost your company $80,000 each period. Salespeople may be hired or fired at any time with no training or separation expense. In Period 0, you had 7 salespeople in the home region, and 7 in the domestic region. To change the total number of your salespeople, simply change the number of salespeople for each region. Dealer sales promotion is the money spent on a variety of promotional items aimed at the middle-person in your distribution channel. These items include sales assistance and training, contests, and free displays. You need to decide the appropriate dollar amount to spend in each region. Expenditures per period over $1.0 million in any market region seem to have little marginal effect on sales. Your firm's expenditures in Period 0 were $1.2 million in the home market, and $1.0 million in the domestic market. All four promotion variables can be adjusted separately in each of the three market regions and primarily affect sales in the period in which money is allocated to them. There is little carryover into the following periods. The amount spent in any of these areas of promotion can be changed as often as desired while you are making your decision. Simply change the number in your decision input. Just be sure to review your decisions before the simulation is advanced to confirm that the last input entered is your final decision for the period.

Production Costs Production does not have to be scheduled in NewShoes because your company manufactures its athletic shoes to meet demand. This simplification of reality means that you do not have to be concerned about inventory control if you over-produce, or about missed sales and employee overtime expenses if you do not schedule enough production. One of the major reasons the loss in Period 0 was not as great as in Period −1 was a lower manufacturing cost of the product. Cost per unit (a pair of athletic shoes) fell from $62.59 in Period −1 to $40.00 in Period 0 as production expanded from 102,000 units in Period –1 to 198,000 units in Period 0. Manufacturing expects cost of goods sold (COGS) to decline even further as the firm gains more experience with purc

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