StratSim Automobile Industry Marketing Simulation Case Study
Todd Benschneider, Nadia Kaminskaya, Sam Mohammad
University of South Florida – Dr. James Stock
July 8, 2017
Current Marketing Situation:
As the Stratsim Automobile Industry simulation began, the market was split equally into four firms A,B,D and our own firm C. Each company produced three products, an economy car, a family sedan and a pickup truck. All three market offerings were priced identically for each competing firm and each product began with identical features and marketing budgets.
At the close of the game, team D was spending $610 million to generate a 13.2% brand preference. In comparison, our team C led the game with a 43% consumer brand preference a similar with marketing expenditures of $690 million. These final round numbers tripled the opening round’s baseline marketing costs of $215 million for all teams.
The auto industry is one of the three largest industries in the U.S., which dictates the need for a well engineered marketing strategy and long term brand development consistency. The auto industry operates with little pressure of government regulations and relatively low expectations of social responsibility. Despite the lack of formal regulation, the industry operates in a conservative, understated communication of brand trumpeting.
Our team targets the upper end of the mid-level market, middle class and high income families who prefer the most value for the dollar. Our customers compare product quality, performance and safety prior to comparing pricing. We aim for a broad spectrum of ages, from young singles and stylish economy cars, middle age families who desire larger, high performance cars to those retirees who prefer a premium quality touring sedan. Our trucks, with their large size and powerful engines, are directed at small business owners and skilled tradesmen who view their truck as a symbol of their quality work and professionalism.
Distribution Channel Review:
The vehicles are sold through independently owned franchised dealers that share the advertising costs in their local market through advertising fees built into their franchise agreements. The dealers are rewarded through discounts and bonuses for achieving sales volume and customer satisfaction targets. Since the dealerships compete against each other over pricing and inventory levels, the dealer performance ratings diminish as overall dealer coverage increases. Profitable and stable dealerships attract the highest quality employees and provide customers with a better experience in both sales and service after the purchase. No vehicles are sold exclusively online or direct to consumers from the manufacturers. The barriers to entry and exit are great due to the capital requirements of billion dollar manufacturing facilities.
Marketing Goals and Strategy:
Team C creates a consistent and profitable demand by producing technologically advanced cars with above average performance and carefully tailored product features. Our brand identity is communicated with campaigns featuring quality, safety and performance. Through advanced feature and quality products, our vehicles are considered an investment that savvy buyers choose to protect their families from accidents and their pocketbooks from unexpected maintenance costs.
Team C prioritizes the use of model specific advertising, with a heavy allocation toward direct marketing of vehicles to specific demographics. Brand value is enhanced by using dealer cash rebates, large negotiable dealer profit margins and supported consumer financing to allow greater affordability than the vehicle MSRP would suggest. The premium price point of the MSRP is the backbone of developing our premium brand image.
Team C allocates triple the amount of budgeting expenditures per vehicle sold at nearly $300 per car in comparison to the budget brand marketing strategies. The large marketing budget is of little concern to a brand which averages a contribution margin of nearly $5000 per vehicle sold in comparison to $2000 margins of the low cost leaders in the market
Through manufacturing technology, we strive to produce vehicles on the leading edge of safety, quality, and reliability with our cars and trucks.
The Marketing Simulation Game Progression Timeline:
The StratSim marketing exercise simulated the competitive environment of four auto-manufacturing firms across a five-year span of customer and environmental variables, including interest rates, fuel prices, raw material costs and personal income levels. As each round progressed, the competing firms chose brand identity strategies, marketing budgets, product development, consumer research and financing strategies. The base round referred to as “the -1 round” set some standard industry average values to build an initial strategy from. The simulation was detailed and intricate with hundreds of options for cross industry analysis research studies of consumer preferences. In the early rounds, the complex depth of the game took dozens of hours to comprehend and decisions from the early rounds revealed costly mistakes from poor consideration of the interactions the design costs, pricing and market targeting.
Our team felt that we had an experience advantage in the game, with Todd’s experience in automobile sales and service, Sam’s six sigma and supply chain experience, and Nadia’s marketing talents. The experience of the team, however, did not automatically find quick success in competing against the other firms. In the early rounds we confidently rushed to decisions without fully testing the weight of each decision in the simulation’s “pro forma” estimated results. In fact, we did not fully understand how to use the pro-forma decision simulator until the 3rd round. In addition, during round zero we had miscalculated the due date of the upload and had only a partial collection of decisions uploaded. Fortunately the game automatically reloaded the values of the baseline round into any variable that we had not changed.
Our overall strategy was influenced by the game’s 5 year limit. Only 3 additional models of car could be introduced during the game and those would not go on sale until the 4th round. With the limitations of being unable to pursue a wide range of alternative models such as SUVs, vans, hybrids and sports car we chose to adopt a Honda style model mix, specializing in high quality, moderately equipped, safe vehicles at the upper end of the mid-level price point, all sold at a generous profit to both the dealer and manufacturer. We aggressively marketed our pickup truck, adding size and power to our model from the baseline. We noticed that the baseline contribution margins to the pickup were $5197 as opposed to the $1495 margin of the economy car, while the sales volumes between them were similar at 392,000 and 323,000 respectively. With a lack of other alternatives to cars, we expected to be able to double the sales volume of the pickup by carefully adapting our truck to the buying preferences uncovered in the consumer trend studies. Our intuition was correct and by the fourth round, we had nearly double truck volume and secured a number two ranking in truck sales at 749,000 units, despite being priced at $25,750, which was $2750 higher than the market leader that sold 859,000 with a large surplus remaining. The market leader had a slight advantage because we had run short of inventory in that 4th round; the game estimated that demand for our truck was 30% greater than we had produced.
In the zero round we decided our initial strategy was to begin major technology upgrades to our pickup, applying customer preferences gathered from focus groups, we increased the horsepower from 190 to 210, the size from 70 to 80 and increased interior, style, safety and quality all by two points. Fortunately, we did not notice that all those dramatic improvements had also increased the costs of building that now premium truck by 10%. Had we noticed the $2477 per truck increase in manufacturing costs we probably would have reduced the number of those improvements. Luckily, the results later revealed that truck buyers were willing to pay even 30% higher prices to get the features they wanted and subsequent studies later showed that customers wanted even more horsepower and size than our market leader. In later rounds, our truck was selling out of available inventory while trucks priced $4250 lower had surplus inventory even at half the manufacturing volume. The result managed to create the market position we had in mind to be a premium mid-level brand while the other three firms battled over positioning to be the low cost leader.
We also began a major upgrade to the cash cow of our models, increasing the size of the family sedan from 28 to 38 and horsepower from 145 to 165, we also increased the interior and quality by two points and the safety by one point. These changes increased the future cost of each sedan by $1702, which also was unnoticed by our team and would later haunt us in round two when the upgrades launched at the higher cost after we had lowered our selling prices to better compete with the battle among low-cost leaders. Later our larger sedan size added power commanded a large premium over the cost leader firms.
Planning to capitalize on the untapped market for larger vehicles in later rounds, we hoped to launch both a large family van and an SUV, so we began construction on another development center needed for the assembly plant. We later botched this idea because we did not notice that once the construction was complete on that center that we had to place the concept model into it to begin the 3-year production development. We did not notice what had gone wrong until the 4th round when it was too late to launch. This may have ultimately worked in our favor because the product would have been a poor fit for the 5th round’s consumer demand and complicated our predictions for an appropriate marketing mix.
For the zero round, we increased our price on the family sedan from $20,350 to $23,000, while increasing its marketing budget by 10%. We also increased the price on the truck from $20,498 to $22,500, nearly doubled its marketing budget and increased the dealer profit margin from 12% to 14% to encourage dealers to push the model. We maintained the price of the economy car and slightly increased its marketing budget. We chose to lower production levels by about 10% on all models to burn up round -1’s carry over inventory and test the waters of the higher price’s effect on sales volume.
An error that we made that probably cost us the first place ranking in net income was our choice to buy 500,000 in additional plant capacity to prepare for the later rounds when our new products went into production. That plant capacity cost us $3.57 billion, which we never fully utilized because of our lower volume higher profit strategy. Had the other two new models gone into production as planned, the investment would have allowed us to produce the adequate volume for the higher market share. However, because the added plant volume was never utilized, the investment cost us nearly two rounds of profit and reduced the performance of our otherwise superior round zero income statement to a paltry $1.2 billion despite our average contribution margin of $3830 per vehicle sold.
To finance the round zero investments we sold the maximum allowed stock issue of $3.5 billion and sold $6.6 billion in bonds at 5.5%, we used portion of those proceeds to pay off the $6.6 billion short-term loan that was accumulating 7.5% interest.
A mistake we also later regretted was paying $900 million in dividends back to stockholders rather than holding them as retained earnings. We rationalized that the standard 6% return to investors was needed to pump up our stock prices. Later we realized that holding that $900 million would have nearly doubled our annual earnings for the year. The contextual relationships among the costs and profits between 10 of millions and hundreds of millions and billions was difficult to grasp in the reporting format of thousands of dollars on some columns and millions on other columns rather than simple exact value.. Had it not been for the added plant capacity purchase and the poor choice to issue dividends we would have dominated round zero income statements among the competition through the strengths of our hefty contribution margins.
In round zero we also began our strategy to increase the number of dealerships. We maxed out the allowable by adding 48 dealerships and increasing dealer training to 14 million which equated to $29,167 per dealership compared to the $20,978 average default from round -1. Adequate dealership coverage was imperative to our strategy. Another mistake we had made here was our not understanding that adding all of these dealerships would be reducing the profitability of our existing dealerships if we continued to sell the same annual volume, this was later found in our low dealer ratings among the competition. Fortunately, we had increased the dealer profit margin as part of our marketing strategy, which offset a portion of the damage done by the oversaturation of dealerships. Had our original plan to launch two new models and grab a large share of the existing markets actually worked as designed the increased sales volume would have given those new dealers profits and allowed us the distribution network to outmaneuver competitors through community presence.
Our initial strategy was to focus on the value seeker and family segments. After running some marketing research tests, those segments seemed to most profitable with our vehicle models at the time. We wanted to see what was important to those segments in terms of vehicle attributes. After running some focus groups and other market research, it was clear that there was an overwhelming demand for quality and safety with all the vehicles we made. Therefore, we invested heavily in technology. Investing in technology would allow us to have a competitive advantage over the competitors that stayed stagnant. In addition to revealing important ISSQ attributes, the focus groups also showed us consumer demands for vehicle size and engine power. We adjusted accordingly because we wanted to be proactive to market conditions – not reactive.
Another important part of our initial strategy was to begin developing new vehicle products to satisfy market demand for families. After conducting some market research like concept tests and perceptual mapping, it was clear that two new vehicle lines would mesh well with our brand image of serving families. We began development of a minivan and a utility vehicle, with the idea in mind that as families grew, more seating would be needed.
In round one, we paid the price for an overly optimistic production volume as we increased production of the family sedan to 603,000 and only sold 399,000. Our contribution margins dropped to an average of $2342 from round zero’s $3830 per car. Our marketing expense had attached a $400 burden to the cost to every family sedan sold and in addition, we lowered the price by $2000. Both changes failed to gain additional market share because teams B and D chose minor upgrades to their family sedan. Those minor upgraded sedans hit the market before our major upgrade at a $2000 lower price and captured the bulk of the family sedan market for round 1, even A team’s sedan was at the same specs as ours at a $2000 lower price. This left us with 250,000 unsold units that cost us 4.71 billion to build but not sell in that round, this would be compounded in the next round when our major upgrade launched, causing those 250,000 unsold units to be dumped at a large loss.
Another mistake along the way was that we had unwittingly put our economy car into the 3rd development center for a major upgrade that would add $500 to its cost, and in doing so prevented us from being able to add our van concept to the manufacturing plant. In hindsight, the minor feature changes that we made to the model could have been accomplished using the minor upgrade option and released from the development center a round earlier and given us another year of sales for the more competitive product. Another hindsight error we found, was choosing to reduce the size of our economy car from 12 to 8, while the 2E focus group in that round rated 8 as good for size, the same group later rated even 10 as too small for an economy car. The small size alienated the 2nd largest demographic for economy cars, the 4E customer, as well as overflow 2F buyers. We should have spent some more research money comparing the 10 or 11 size concepts in addition to comparing the needs of the 4E consumer focus group. In the following rounds, we should have retested customer preferences and adapted to the trend direction of larger economy cars.
Round one also saw damage done to the truck market, while holding our price to $22,500, team D’s truck was launched using a minor upgrade to the quality rating, gaining one point edge over ours and pricing at $20,499. While it was assumed that the D team would capture the market, they only produced about 1/3 of the demand volume, which allowed us to capture 400,000 in sales at a $2,000 per vehicle premium and finish above team D in profits.
Due to inadequate cash flow from round zero to round one, we generated a short-term loan of $1.688 billion, which we paid off by another $1.5 billion stock issue and an issue of $3 billion in bonds at 6.5%. Again, we made the poor choice in round one to issue $900 million in dividends as opposed to holding them as retained earnings, which lowered our real income from $1.13 billion to $203 million, pushing us down from 1st place to 3rd place in annual income. In nearly every measure of performance, our group C fell to near last place rankings.
Here is a textbook example of how things can go wrong if the team is slow to learn the pro forma simulated round results. A multitude of mistakes combined with some rushed last minute decisions to set the semester record for most money lost in a single round at $3.4 billion. The largest mistake was not realizing that our major upgrades to the truck and family car went into effect that round, adding about $2000 per car to their manufacturing costs. In the same round, last minute reservations about our price point in the market prompted a revision to cust price increases by $1000 and to further drop production levels. The lower prices caused a sellout shortage exceeding 30% on trucks and sedans at minimal contribution margins as the market responding positively to the added features of the upgraded cars. Adding to the poor performance was our overproduced stale economy car, causing a carryover production of 54,000 units that cost the round two bottom line $540 million.
Another misunderstanding was that the round one, carryover inventory of 25,000 family sedans would add to the income of round two. Somehow, in a manner that we still cannot comprehend, those units were sold at a loss and their income placed into round one profits. We expected those units to fulfill some of the round two demand and instead found ourselves underproduced by nearly 500,000 units in the family sedan that at a $3000 contribution margin would have generated another 1.5 billion in profits.
In round two financing, there was not a cash shortage, instead $500 million in stock was repurchased to take advantage of low stock prices caused by several rounds of mediocre income performance. Additionally a $2.5 billion CD was purchased at 3% interest because neither of the bonds were callable for an amount less than $6 billion.
Altogether, our heads are still spinning on how we could have made so many consecutive errors in cost to pricing and manufacturing volumes. We can only hope that the other teams makes similar mistakes before the game ends. However, we did learn from these mistakes.
Round three is when we started to figure out where to go in the game to test pricing and predict sales volume. We read in the market news that car sales were expected to rise by 30% and therefore adapted our manufacturing volume, assuming that demand for our superior cars would lead us to victory. Fortunately, the demand for our large, high performance truck allowed for spectacular contribution margins of $6200 per truck and created an average contribution margin of $5176 per car sold of all our models. With confidence that several focus groups indicated that customers were willing to pay much higher prices than the recent market had expected, as two of the four automakers battled for low cost leadership, and the third wanted the middle ground in price point. In round three we lead the round with a profit of $1.131 billion and a second place market value of $15 billion, much of which could be attributed to a complete sellout of inventory which eliminates the cost of cars which get manufactured but not sold in the same round. All of our models had 30% higher demand at their pricing than we produced which meant that, had we been more confident in the appeal of our products we could have increased our income by over $2 billion with an adequate inventory despite being priced thousands above most of our competitors.
In round three, we repurchased $1.5 billion in stock with excess cash and bought a $3 billion CD. We cut the advertising back to try to maintain a marketing budget under $200 per car for each model as the focus groups showed little effect on expected market share for advertising above $100 per vehicle. We focused on controlling expenses and optimizing selling price to bring the contribution margins of the economy car back to $1500 per car sold, up from the low of $762 in the previous rounds. In round, three we also did not invest in production or technology but stepped up on direct and social media marketing adding 20 million to each.
We also could not figure out why our dealer satisfaction ratings were lower than most of our competitors, we thought perhaps that we had failed to factor in enough dealer support. Our reaction to ramp up dealer ratings we increased dealer training and support from $20,000 per dealer to $210,000 per dealer. We were disappointed to find in round four that the additional spending had little benefit to our dealer ratings. We still failed to uncover all of the reasons for our low dealer ratings, but suspect that our lower sales volume was spread across a greater number of dealers, causing them to be less profitable than our competitors that had fewer dealer locations.
We also started to suspect that the competing firms have not realized that the cost to build the cars has gone up 8% in materials and labor; in addition, inflation has caused a 7% devaluation of the dollar since round zero. The steady price level on the economy car was becoming a costly liability of several hundred dollars for each car sold. We also noticed that our competitors have not reflected that market share does not equal total profit and suspect that they also had not been checking their pricing decisions against the pro forma estimator. In addition, the competition seemed oblivious to how much more the buyers were actually willing to pay, their strategy to hold prices near the -1 round was probably due to a lack of concept studies that showed that consumers were not as price sensitive as the competition believed. The competitors pricing also worked against us because we were competing against an unprofitable market. The odd thing to us was that only one of the other three competitors raised their prices when they saw us outsell them at 10-20% higher prices. The A team even dropped prices further than the beginning round started at.
Round four’s decisions were based on news forecasts that gas prices would rise from $3.50 to $4.90 and real GDP growth will drop 1.5%. In a gas-crisis recession, trucks and larger sedans sales diminish considerably. In the real market, truck sales dropped around 30% in both 2008 and 2009 when fuel prices went from $2.90 to $3.57 with the least fuel-efficient like ours dropping 50%. Since the market news forecast predicted fuel prices to rise $1.40 we anticipated a 45% drop in demand for trucks and struggled to decide whether to eliminate all unneeded spending on product development and marketing to allow for the lower expected sales volume. In the real market history of vehicle sales there has never been an increase of even $1 average fuel price, so there was no historical precedence to predict the impact on the market mix.
Despite the predicted recession, the industry report expected sales to increase by another 20%; however, in round three we learned that historically these industry sales projections had been delusional optimistic. However, it seemed logical that sagging demand for economy cars would rebound, as consumers with long commutes would be forced into more fuel-efficient replacements. We expected our historical demand for economy cars to grow by 25% from 300,000 to 400,000 units and theorized that if the other teams did not increase production of the unprofitable economy car segment that we could capture half of the expected 1,300,000 new car market demand. If our competitors failed to recognize the changing marketplace, we could make a run at capturing a 700,000 unit share.
We pulled the sales trends of 2008 and 2009 to compare market direction and reasonable sales expectations. The wildcard in this round was the unknown, of new model market entrants, if any of the other teams would be launching new products that might take market share from the current players in each demographic. This observation greatly influences our pricing strategy. We could see that two of the other three teams had built the development centers to launch new products, but since they had not arrived by round four, we had assumed that teams A and B had made the same mistakes that we made by not transferring the concept prototype into the development center for production in round one. In hindsight, we should have begun our new concepts in one of the two existing development centers rather the new center because they would have launched in round three rather than round four since they would not have to wait for the center’s construction to be completed. In addition, we decided not to release our minivan and SUV in this round because of the forecasted gas prices.
In planning for round five, we assumed that total car sales would decline 20% or 13000 units. We decided that we were at a disadvantage on the family sedan market because our sedan had the largest size and highest horsepower, which reduces its appeal in years of skyrocketing fuel prices. In an attempt to compete in the new marketplace, we chose a minor upgrade and reduced engine size by five horsepower, but in a contradictory move increased size from 38 to 40 and added one point to every other metric for more of a long-term plan than an actual recession strategy. We initially expected the arrival of large SUVs and vans by this round to fill the customer demands for larger models, it appeared that those demands remained and probably would offset fractional disadvantages in fuel economy. We were surprised to see that these sweeping changes only increased the cost of each sedan by $550; those changes aligned us with customer preferences from the focus groups, which indicated that customers would consider the specifications of the product to be a good value even at $27,000. However, we were nervous about how accurate those value expectations would be in an uncharted recession marketplace.
The other three teams were competing at $20-$22,000 pricing and we had been outselling them priced at $24,000 going into round four. Team B priced theirs at $21,700 and even had a better-rated sedan than ours, but failed to produce enough to satisfy the market which gave us their spill-off, allowing us to sell out with a shortage of more than 30% less than demanded. Team A sold only 642,000 sedans with a surplus remaining; in comparison, our teams sedan was a 957,000 unit sellout despite being priced at $4000 higher than the similarly rated A team product. The sales volume cannot be explained entirely by model features because the A team had already upgraded theirs to be within one point of our sedan on nearly every measure. We believe that the premiums that our sedan sold at were a result of its larger size and increased horsepower, in addition to a larger dealer network and higher profit margins allowed to those dealers.
At the beginning of round four, our team no longer held the same great advantages in quality, safety, style and interior ratings and we expected that the two of the other three teams would launch additional minor upgrades to mimic our products and market those models at much lower prices. In fact, the B team had substantially surpassed our ratings for safety in every model and surpassed us in quality in the sedan market and two of the three other competitors outscored our sedan in style. Only our truck held great advantages over competitors in the market and team B had even surpassed its safety ratings. All of these observations support the conclusion that model size and performance had dramatic influences on customer demand that were beyond the measures of quality, safety and style rankings.
The main priority of round five was to end the game with sellout inventory to maximize the income statement and prevent disastrous consequences of over-producing vehicles in a recession gas-crisis. Overproduction could erase the profits from all five rounds while underproduction could still generate a modest $1.2 billion profit and retain our $11 billion gains in accumulated market value. The question we wrestled with was how far to decrease production? It made sense to cut truck production in half even at the cost of half our annual profits, the truck carried a round three, contribution margin of $6100 and still sold out. However, our truck was the largest and least fuel-efficient vehicle on the market so it made sense that our truck sales would take a disproportionate brunt of the decline. We could not afford to have 400,000 units carry over past the final graded round, those 400,000 would equate to an annual loss of $8.6 billion in net income
Our team then had to estimate how many sedans to produce; while we had taken a 29% share of the sedan market in the 4th round, at 957,000 units sold. We were at high risk for the market trend to turn against our high-priced gas guzzler and leave us with a 4th place finish at around a 19% market share of a 30% smaller pie, which would equate to around 441,000 units. Our sedan had a $6100 contribution margin, so we could even lower our prices beneath the competition to hold a greater piece of our market share or we could retain our contribution margins and lower production to one-half the previous round’s sales. Either strategy netted similar results on the pro forma. However, total sales could surprise us and remain near constant with the migration trends away from trucks to carry into sedans, which may hold total sales steady in sedans, which could justify producing as many as 5 million units. The night before the final round, we were still planning on the conservative play of cutting total production in half. Another change in strategy was to change our advertising direction from “safety” to “quality”, since all three competitors chose safety and two of the three matched or exceeded our safety rating on the sedan. Only one competitor exceeded our quality rating and with the minor upgrades we should take a solid first place ranking in the customer hotspot of quality.
On the surface it seemed like a natural plan to nearly double production of the economy car, which historically gains sales in a gas crisis; however, we had previously only allocated 300,000 in production facilities to the economy line. The low manufacturing capability greatly increased our retooling costs to ramp up production, what we found was that due to the economy car’s low $1600 contribution margin, the added retooling costs ate up the additional profits that 300,000 in additional unit sales would generate. To add to the overproduction risk, our economy car was priced $2000 higher than any of our competitors economy products were priced at and the features we had built into the car prevented us from competing at their pricing. In order to generate the $1500 contribution margin, we needed the higher price but our features did not provide high enough ratings to justify the premium price. In addition, our small size showed that we had fallen out of touch with demand for larger economy cars. This smaller size 8 mini would reduce our ability to cross sell to the family demographic that was seeking economical alternatives to the sedan market in the recession economy. As with the sedan we were at risk to have our sales volume to drop in half which and stick us with $49 billion in unsold inventory.
We realized looking at the round four results that the competitors we beginning to surpass our ratings and we could no longer justify premium prices in a recession market, faced with two choices to lower our prices or perform minor upgrades to align with our premium brand image. We launched two minor upgrades that were cost effective due to our zero unit carryover inventory, the sedan changes cost about $500 of our $6100 contribution margins. In addition, we planned to lower prices somewhere between $1000 and $2000 per unit, with the lower price and the premium features it seemed unlikely that we could end up with a carryover of round five inventory.
Feature upgrades to the economy car increased the cost by about $250 but allowed us to justify our premium prices. The economy car we increased the price enough to offset the added production costs because we believed that our competitors would fail to produce enough economy cars to meet gas crisis demand and we would sell out from the spill off effects. Both upgrades also supported our overall brand image for producing premium quality cars and the changes would be a symbolic gesture of our long-term planning past the end of the game.
If we could only predict what our competitors had planned for round five we could adapt our decisions to offset theirs. If any of them launched upgrades, we would surely lose market share even if they increased their prices, we doubted that any of the three competitors would increase their prices by more than 10% as evidenced by their past aversion to price increases. We suspected that at least one of the competitors would fail to read the market outlook and see the impending recession and gas crisis, if so the truck market would be saturated with less expensive and more fuel efficient trucks. In addition, if two of the three competitors failed to see the switch to economy cars, the market would run short of demand, which could allow us to sell out of the economy model. However, the recession in the auto industry of 2008 and 2009 demonstrated that all product sectors dropped in sales, the economy sector only dropped by a lower percentage than the gas-guzzlers. If all teams maintained economy production, we would probably end up with carryover of our own economy car. This observation prompted us to hold our economy production steady and consider scaling back rather than ramp up production, it was lower risk and more profitable per unit since we did not have the added costs of retooling for increased production volumes. In the gas crisis of 2008 truck sales dropped; but, there remained at least some market demand for consumers who used trucks for work or did not commute far. With that in mind, we assumed that we could hold our market share and assume a 50% drop in the market demand; to reinforce our market placement we lowered the pricing on our trucks to become more competitive in case the recession market placed a heavy penalty on price points. As mentioned before, the $1.40 per gallon increase in gas would create market disruption at levels beyond prediction; it seemed possible though that the forecasts would prove to be far inflated from the reality of round five results. We could assume that sedan sales would drop 30% and that our share would drop further than the market. However, the results of round four indicated that we had missed the market demand by more than 30%, which meant that our true market share would have been 1.3 million units instead of 957,000. With that in mind a drop to 600,000 units of production seemed appropriate.
In the final hours before the 11pm deadline for round four decisions needed to upload we realized that overproduction would not actually hurt our net income line, they only cost us on the cash flow report. Most importantly we had discovered that we were able to simulate more income using inflated pricing to make large profits on what we did sell and let what did not sell roll into the round six liabilities. With this discovery we readjusted our economy car production from 299 to 450 units adding $1000 for a price of $13,650. We increased trucks from the half volume that we expected at 250 up to a more optimistic but still greatly reduced 450, but increased the price from the initial plan to discount the trucks and instead added another $500 to price it at a lofty $27,000, nearly $2000 more than prior round. We kept the sedan production at 770 which would represent a 20% decline in volume from the previous round; however, increased the price by almost $2900. The strategy had expectations of 50% carryover inventory but a higher income that would be reported on the round five results. Regardless, our downside income exposure seemed capped at a $2 billion loss even if we sold nothing or a $3.5 billion gain if we sold out according to the pro forma estimates. The potential upside to get us beyond our $1.2 billion profit prediction that we were able to generate by playing it safe with lower volumes at lower prices, motivated us to take the risk and overproduce at the higher prices.
Tuesday Morning results surprised us with only a 17% decline in vehicle demand overall, the worst drop of 25% in was in sedans instead of trucks which shocked us by posting a mere 17% drop in reaction to the $1.40/gallon increase in gas prices. Economy car sales only climbed 12% and we were amazed to see that our competitors had all scaled production back on their economy cars, possibly they assumed every other team would pursue the economy market and underproduce for the sedan market.
Our strategy worked and despite being priced $5000 higher than historical market price maximum, we managed to sell out of every model and even at that. But we still missed meeting the demand by another 30%. We once again gained the largest share of the market on every model except the sedan only to be nudged out by D teams version which sold 787,000 at a $5000 lower price and they were plagued by leftover inventory even at that price. In the end, our team was in first place in terms of
- Stock price ($70.65)
- Total shareholder return (15.8%)
- Firm preference (43.3%)
The results of the game reinforced the the philosophy, that price alone rarely wins the market share in major purchases. In fact, features and performance at a premium price do not automatically correct the shortcomings of bare bones pricing either. Automobiles are unique products in their ability to generate sales through each customer’s self-identity. Similar to how many customers would not buy a Wal-Mart branded sneaker or jeans, few customers want their self-identity to be represented by an unstylish entry level vehicle. The slightest perception of substandard quality becomes a product liability to marketers and pricing the product at the bottom of a market nearly ensures that consumer will perceive the product to be a poorly-made substitute to the average quality market offerings. Competitive advantage is imperative.
Customers at times will even pay a premium for the same product for simply being marketed as a more prestigious product. One example is a $4 Starbucks coffee compared to $1 gas station house brand. Or Bud Light compared to the nearly identically flavored recipe of Busch Light which sells at a 20% discount and only captures a mere ⅕th the volume of the Anheuser Busch’s flagship product. Perception is reality in marketing.
Our results proved that the two teams that battled for the lowest price were outperformed by the other two firms who marketed premium priced vehicles at higher MSRP. At times, especially in the 4th round, product ratings of B and D firms ranked higher than C team’s vehicles selling at a 15% premium. If buyers were strictly logical beings, C team should not have been able to sell a single car in the sedan and economy sectors, but we even outsold the superior lower priced competitors.
We believe that C team should advance its premium place in the market moving slightly further into luxury brand identity from premium product placement. The margins allow high revenues at a lower market share which reduces our risk of overproduction losses and need for expensive capital production facilities. Premium retail prices can weather market downturns when parlayed into affordability through manufacturer subsidized financing and lease programs. Large rebates can also be added to the marketing mix to tempt the bargain hunters and those products can still be sold at respectable profit margins.
Once gas prices decline to average prices, the C team should release the premium featured large van into the marketplace to corner niche markets that are not met with competitors products. Two rounds after the van introduction, if positive results are generated by the product, we would release a mid-grade SUV to cater to family’s whose tastes run the middle ground between the family and the truck market.
Our fundamental brand placement would be based on the a mid-level marketing, this would prevent alienating the more modest and proudly “sensible” consumers who would avoid products that are seen as pretentious and extravagant. Just as some consumers will avoid entry level products, a portion of customers will avoid products that seem excessive, regardless of the quality the product offers.
With this strategy of a balanced brand placement that can appeal to both the middle ground and the luxury markets, we plan to avoid the pitfalls of luxury market position while also providing the profits that provide the greatest return on investment. With these profits, we can continue to fund the product development to lead the industry into the fastest technology evolutions. With our superior products, we can better withstand market volatility in the future.