BU220-8: Principles Of Marketing Unit 1 Discussion: Introduction In this simulation, you are making important decisions for your shoe company as it relates

 Unit 1 Discussion: Introduction

In this simulation, you are making important decisions for your shoe company as it relates to the Marketing Mix. The product that you are selling can be considered a need as well as a want (shoe). It is important to understand your consumer’s needs, wants, as well as demands as you create the perfect marketing plan to sell your shoes.

  • What strategy will you use to ensure that you can understand the needs of the consumer in the New Shoes case? Ensure that you apply the steps of the Marketing process in your response. In addition, address how you will plan for marketing myopia when marketing your shoes as well.

Please be sure to validate your opinions and ideas with citations and references in APA format.

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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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.

1

NewShoes
Introduction

NEWSHOES

2

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.

3

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.

5

NewShoes Case

NEWSHOES

6

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.

7

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

9

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

13

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.

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