5

NEWSHOES

NewShoes Case
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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
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
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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.

New
Balance

Adidas Nike

ATHLETIC SHOE INDUSTRY

Puma Reebok

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
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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.

Personal Selling

Dealer Promotion

Product Product
Manufacturer Distributor Consumers

Price Retail Price

Advertising

Consumer Promotion

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.
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Table 1.0.A: Sales and Revenue (previous two periods)

Domestic Total
Home Sales COGS Expenses Net Profit
Sales Revenue
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

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.

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.
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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
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
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number of the salespeople in each region. The effect of your salespeople varies by region, but
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 purchasing the component materials, making
better use of equipment, and developing more efficient manufacturing processes. They estimate
that the company is on a 75% learning curve, which means that costs are expected to fall 25%, to
75% of their previous level, each time cumulative production doubles.
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Table 1.B: Production Costs (previous 2 periods)

Domestic
Home Units Total Units Unit Cost COGS
Units
Period 0 67,600 130,400 198,000 $40.00 $7.9 million
Period -1 102,000 NA 102,000 $62.59 $6.4 million

As your team takes over the company, cumulative production stands at 300,000 units. Based on
manufacturing's estimates, average unit cost should drop from the current $40.00 to $30.00
when cumulative production reaches 600,000 ($40.00 x 0.75 = $30.00), and drop further to
$22.50 when cumulative production reaches 1.2 million units ($30.00 x 0.75 = $22.50). A graph
of the Learning/Experience Curve for manufacturing is provided in Figure 1.A as a visual
representation of how costs are projected to decrease with future increases in cumulative
production.

Figure 1.A: Learning / Experience Curve

The current unit cost of the product is clearly an important factor in your pricing decision. But
the experience effects on cost make it clear that you should not only consider current cost, but
also the projected cost as sales expand. While setting a high price may seem to be the best way
to maximize profitability, a lower price could increase sales enough to lower unit costs and make
the company more profitable in the long run. In fact, because production costs are shared across
all channels, it may be profitable simply to break even when pursuing sales in a new market if the
increase in sales reduces unit costs for all markets.
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Unit cost is especially important when deciding on a price if you choose to bid on a contract.
Winning a contract bid can have a positive effect on the profitability of your regular business in
the market regions by increasing cumulative production and reducing product unit cost for all
sales. Your total cost of goods may be lower with the contract than without it as the contract bid
units move you to lower costs on the experience curve.

Market Research and Decision Analysis

To help you with your marketing decisions, NewShoes gives you experience in collecting market
research, which is a vital function of the effective marketing manager. A good place to start is
the Industry News, where you can get an overview of changes in the markets. The Market Sales
report provides more detail, showing not only the unit sales in each market and the number of
competitors, but also projected sales for next period.
For more in-depth competitive information, you will
need to purchase market research. Corporate level
research is available for competitors' product levels
and spending on product development. For each
market, there is information on price, advertising,
consumer promotion, salespeople, dealer promotions,
and customer satisfaction. By default, reports of
industry averages are available for $10k each.
Depending on instructor preferences, industry range
and detail reports may become available at prices of
$15k and $25k each, respectively.

In addition to market research, there are several tools available to help you analyze your options
when making decisions. Break-even Analysis will help you determine the lowest price you can
charge for your product in each market without incurring a loss. By entering assumptions about
unit sales, you can calculate the break-even price in each market, based on projected expenses
from your marketing decisions. Project unit costs using the Cost of Goods Calculator. Simply enter
a projection for production (total unit sales for all regions), and it will take into account
experience effects to estimate your unit cost for the coming period. The Response Functions
analysis screen allows you to graph the relationship between unit sales and a selected marketing
variable (price, advertising, salespeople, consumer promotion, or dealer promotion) in a market.
Keep in mind that there may not be a direct relationship between an individual variable and unit
sales, but graphing the results of previous decisions can be helpful in deciding the best marketing
mix for each region. If a contract is open for bidding, the Bid Analysis tool shows the impact on
unit cost of winning a contract. Use it to anticipate the impact of additional production from
contract sales on your total cost of goods.
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Use the market research and decision analysis tools to help forecast what will happen and to
understand why results differ from your projections. If there is a big difference, is it because of
changes in overall demand? Has your price changed relative to the competition? Have you
changed your marketing expenditures, or has the competition made changes to their marketing?
There are no simple answers to these questions, and this is the type of complex analysis that
marketers face daily. Only by integrating customer needs, the competitive environment, and your
own corporate goals into your analysis, can you learn to make the key decisions that will decide
whether your firm is successful or not.

Summary of Decision Variables

A summary of simulation variables is provided in Table 1.C (on next page) and should be used as
a reference aid when making decisions in NewShoes. Along with each decision variable, this
summary includes suggested limits, costs, other factors, and general parameters of the
simulation.

Next Steps

As the new management team of a NewShoes company, several challenging decisions demand
your immediate attention. First, you must formulate a strategic plan for your product to guide
you in making decisions each period. Before you make the first period's decisions, you will need
to choose a name to project a brand image that is in line with your vision of the company, and to
differentiate your product from your competitors'.

Your parent company expects continued top line growth, but more importantly, a turnaround in
profits in the near future. While declining unit costs should help the bottom line, it is up to you
to decide on the best marketing mix for the home and domestic regions to maximize sales and
profits. Longer term, you will need to track the competition and be ready to take advantage of
new sales opportunities as they arise. Markets are dynamic, so you must constantly improve your
product to keep up with changes in consumers' taste.

Good luck as you put your marketing skills to the test in the world of NewShoes!
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Table 1.C: Decision Variables

Decision Suggested Variability Decision
Cost Comments
Variables Limits / Region by Region Range
Entering a Same all Domestic, $750,000 to enter or re-
N/A $750,000
new region regions. Foreign enter a region.
Home,
Leaving a Same all
N/A No charge. Domestic,
region regions.
Foreign
Over $2 million Full range in Up to 10 new and
Product Not region
has little effect; N/A whole improved versions
Development –specific.
not by region. dollars. possible.
Experience Curve
produces 25% decrease
Over $150 can Amount can Full range in
Varies with in manufacturing cost
Selling Price have a negative vary by dollars and
manufacturing cost. w/each doubling of
effect. region. cents.
cumulative production
(see graph).
Over $2 million Amount can Full range in
Consumer
has little effect N/A vary by whole Targeted at consumers.
Advertising
on sales. region. dollars.
Consumer Over $1 million Amount can Full range in
Sales has little effect N/A vary by whole Targeted at consumers.
Promotion on sales. region. dollars.
Over 10 No training expense or
$80,000 per Number can Full range in
Personal salespeople has separation charge.
salesperson per vary by whole
Selling little effect on Targeted at
period. region. numbers.
sales. middlepersons.
Over $1 million Amount can Full range in
Dealer Sales Targeted at middle-
has little effect N/A vary by whole
Promotion persons.
on sales. region. dollars.
See price/cost Full range in Ties result in splitting
Not region-
Contract Bid N/A discussion and dollars and units among tied
specific.
Experience Curve. cents. companies.
Startup cost of $2 Sales
million. Period costs forecast is
Over $150 can Full range in Undercutting retailers
Direct Sales of $75 thousand and 10% of
have a negative dollars and can affect sales in Home
Price $2 per unit sold (in Home and
effect. cents. and Domestic regions.
addition to Domestic
production cost regions.