This action might not be possible to undo. Are you sure you want to continue?
Simulation methods: pretend you're in the new business, and try to imagine what your competitors might do. Fully automated: SimCity, with business modeling software instead of teenage games. Manual: groups of people role-playing. Value: lets you think about what your competitors might do. Risk: somewhat disconnected from reality.
Wargames for war
Invented by von Reisswitz (Prussia) in 1824 (Kriegspiel). Below is a picture of a US wargame from 1895. Before the Battle of Midway, a Japanese participant in one of their wargames suggested a counterstrike; Admiral Ugaki overruled the result.
the origin of all the shoot-em-up computer games now popular. H. invented a set of mathematical rules for deciding the winners of wargames. In Germany the Kaiser insisted that he would always win. W. by some accounts. This is. (He also built the first four-wheeled car in Britain and invented disk brakes). for example. One of Wells' colleagues. G. based on toy soldiers. Lanchester. invented a game he called "Little War" in 1913. In Japan Lanchester's equations are used in marketing (doubling your effort increases sales four times). later a pacifist. F. not equations.H. Wells. . Wells Strangely enough. G. These rules regulated the ratio of your soldiers to enemy deaths. Most wargames are decided by umpires.
the US Navy had a fleet exercise in which two carriers commanded by Admiral Harry Yarnell launched planes for a dawn raid on Pearl Harbor. without seeing a single fighter in opposition. . he retired. They dumped 20 tons of dummy explosives on the naval base. The umpires ruled that 1/3 of the attacking planes would have been shot down by antiaircraft fire and concluded that "it is doubtful if air attacks can be launched against Oahu". Yarnell was regularly ignored in his calls for more airpower and more opposition to Japan. Over the next few years. disappointed in 1939. 1932.And we're no better On February 7.
New York Times. 1941 . below is December 8. 1932. page 3. 8. Feb.
they can add to the tendency to do nothing). the hottest strategic tool.So what about competitive intelligence? Companies use wargames to plot out marketing strategy. if run honestly. To quote the Fuld-Gilad-Herring Academy of Competitive Intelligence. is to recognize some of the risks of a new venture. they can be a counterweight. what they do. enable management to examine strategies and initiatives in light of external competitive conditions. if your company is too conservative.“ Realistically. (And. . "War games. unfortunately. In companies where there is a tendency to be overly optimistic.
are gathered around an elegant mahogany table. the $9 billion pharmaceutical giant. (At least according to Fuld-Gilad-Herring. Teams do data collection. although more than a few also sport tasseled shoes.” .) Whether you use a simulation program is probably less important than whether you look at the results honestly. and then one day trying scenarios and writing the final recommendations. They spend one day working on the rules. They are outfitted in combat fatigues. with a couple of weeks preparation. Some people take this much too seriously: “About 40 mid level managers from the Latin American division of SmithKline Beecham PLC.What is a full-scale business wargame? Two days.
SCIP survey of CI methods .
SCIP survey of CI methods .
makes great strategic sense -. which leverages off an existing SmithKline brand. developed and run by Advanced Competitive Strategies (ACS) of Portland. The product.” (Fast Company. Oregon.html) .000 on a computer-based simulation to help his executives think through plans to introduce a new consumer product in the rapidly growing Mexican market. http://blackbox.at least on paper.com/online/06/sidebar. This two-day simulation.What do these things cost? “Cruz has spent more than $100.and hopefully create a sense of urgency and esprit de corps.fastcompany. is designed to help the team convert ideas into action -.
the consultants put all of them into a modeling program. and the like. The consultants may also present surprises: a new competitor enters. investment. how much advertising affects the market. A model is also made of production costs. how much brand loyalty there is. … . showing how much people will buy at what price. Then different teams present their strategies. and the computer reports an answer. and so on.How the full scale process works A mathematical model is made of the market. interest rates change. a currency is devalued.
What if they try a $50 rebate? They will still make $25/bicycle. we’d still have just as much total profit. you ask what the competitor would do. Then we’ll keep the 10% market share. We have 10% of the market. What if we propose a $25 rebate for each purchase? It would reduce our profit per bicycle to $25. but if it doubled the sales. but we’ll be out of business. too. advertising the same amount and thus making $75/bicycle.A sort of example The parts for a bicycle cost $50. they’ll only lose 1/3 of their profit. So our profit is $50/bicycle. and lose half our profit. Assume they would cut their price. If you wargame it. . Our company currently pays $50 to have them assembled and sells the result to retailers at $150 who sell to the public at $250. A competitor is assembling the bicycle parts in Mexico for $25 each.
And the assumptions in the simulation (about people’s reaction to price changes. Or by investing in machinery that will assemble the bicycles more efficiently. etc) make all the difference. But it’s not likely that you’ll get this kind of information OUT of a wargame because you have to know in going IN to the game. (You really should have known that ahead of time). You might win by doubling the advertising budget and emphasizing that your bicycles are higher quality or let you ride faster or something.Message from the last example You can’t win at price-cutting against somebody who has lower costs. .
the less precise the answer but possibly the more informative. or a price cut. the larger the scope. or starting a filthy rumor about the competitor’s product? . etc) will you consider? • For all of these. Setting up the rules: how do you decide the effect on market share of advertising. new competitors.Many questions in defining a game What products are covered? What is the time horizon? (how long into the future will you look) What range of environmental contingencies (interest rates.
Too much math? .
Elasticity Elasticity is the ratio of the change in sales as a result of some other change. note the minus sign. This number is typical. typically it is only about 0. advertising elasticity would be 0. that would be a price elasticity of -0.5.2. if a 10% increase in advertising yields a 5% increase in sales.1 If a 10% increase in price led to a 2% decrease in sales. . Thus.
org/who/docs/execsummary0302.advertising.tracy%20towner.ac.uk/Psychology/docs/courses/ m092/ does.How do you guess these effects? Horrible problem.ppt But really judging how much you can expect to gain from running ads is very difficult. for example.ex.fsicouncil. There’s no agreement on the effects of advertising.doc http://www.work. . You can find a few studies eg http: //www.
gas for your stove).Price elasticity Price elasticity is easier to understand than advertising elasticity. . “Inelastic” commodities have sales that aren’t affected much by price.g. but over a few years people can buy cars with better mileage or rearrange their commuting. Inelastic commodities are commodities that are basic necessities. people will not stop buying them if they get more expensive (e. “elastic” commodities have sales which are affected by price. in any given week the amount of gasoline bought may not change much. Elastic commodities are items where it’s easier to cut back. Price elasticity can be short-run or long-run. such as restaurant meals. for example.
Price elasticity for a variety of commodities. org/article. sign reversed (increased price means decreased sales). From: http://www.asp?ID=12 47 .mackinac.
Why did a 33% decline in available minutes lead to a 14% rise in the price per minute of advertisements? Elasticity: 33% minute decline/14% price increase = an elasticity of -2.Estimating price elasticity • • • On January 1. 1973. the price of one minute of advertising on network TV increased from $6900 to $7900 or roughly 14%. the National Association of Broadcasters imposed a restriction of 12 minutes per hour of nonprogram material during children's TV shows effectively reducing the quantity of advertising allowed during children's viewing hours by 33%.3 for price elasticity (of advertising!) Note that the TV networks were worse off. . Within four months.
) .Public policy implications “I conducted an analysis of the RIAA's market data from 1992 through 2001. 2001's price elasticity was broadly in line with historical norms.8).com/cs/user/view/wlg/2496 (ps again the sign of price elasticity is reversed: he says so.oreillynet. the recording industry was able to eke out both a small inflation-adjusted price increase and an increase in unit shipments. I found that the industry has experienced an average price elasticity of 6.3 (CDs taken alone have an average price elasticity over the period of 2. After adjusting their market figures for inflation using the Consumer Price Index. and desperately wants to believe that the return to historic norms was due to illicit file sharing rather than the market returning to historical norms of the past decade. What is the real issue? Perhaps it's that in 1998.” http://www.
Econometrics of advertising These studies were done to refute claims that advertising had no effect on the level of smoking. . It clearly has some. but less than you would think.
025 reported by Ward and Lambert.Advertising elasticity of beef in USA “For the U. Coulibaly and Brorsen obtained even smaller elasticities (i.0005). Freebairn.edu/publications/ briefings/Briefing32. and James. such as 0. beef market.0005 reported by Altson.” From http://www.0 x 0.e.pdf . This suggest that a 10 percent increase in beef advertising expenditures increases retail beef demand by only 0. one of the smaller advertising elasticities is that of 0. The relatively larger advertising elasticity is that of 0.S.0003).montana..ampc.005 percent (10.
563 kg volume This is a 54. the advertising-sales elasticity is 0.376.376 (15.167 kg is a 15.8% increase over the existing 343.8% / 42%) If the actual advertising-sales elasticity is less than 0. requiring an increase in market share from 4.1] .Godiva chocolate analysis. advertising in Belgium Viability of the Advertising Expenditure A breakeven of 54. Godiva will not recoup its incremental advertising expenditure [NOTE: typical advertising elasticity is 0.3% to 4.8 ton increase.9% in a relatively flat Belgian market Increase in advertising expenditure is 42% Therefore.
. which means that although egg prices were going DOWN.Elasticity of egg sales in Australia Note some confusing things here: the price elasticity is positive. egg sales went DOWN as well.
Brand loyalty .
Random chance So Sales = Current + (PE*price change)*(AE*advertising change)*(available customers by loyalty)*randomness Don’t believe too much of this math (AE. Effect of advertising/marketing elasticity 3. Effect of price elasticity 2.So how estimate future sales? Take current sales and add: 1. PE are advertising and price elasticities) . Effect of brand loyalty 4.
.Example If you currently have a 5% market share. And if you think that random chance is deciding 50% of purchases. you might see an increase of 10% (5% from the ad increase. then you’ll only see a 5% increase.5%.5 If you raise the ad budget 50% and cut the price 10%.1 while the price elasticity is -0. and the advertising elasticity is 0. then you’ll only see 2. 5% from the price decrease). But if you think that brand loyalty for your competitors is 50%.
. But you can get a feeling for what might happen when your strategy hits the market. It is not credible that you’re going to do business analysis with the precision suggested by these programs.Realistically We simply don’t know the numbers involved well enough to do simulations well.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.