PDA simulation and computational modeling

Marketing PDA Simulation

Info: PART ONE

While many simulations focus on just one general area of management (e.g. supply chain management or leadership), I have selected one that integrates several areas. In particular, you will be looking at income statements and sales reports. You will be making decisions about production, pricing, and investment.

Your first step is to come up with a strategy for how you will make these decisions. I don't want you to run the simulation yet! We will be following the following sequence:

The simulation itself is short, so we will have the opportunity to repeat the above sequence three times.

Access the simulation site http://www.forio.com/pdasim.htm. We will be using the PDA Sim

Read the introduction, and study the Financials and the Market Information. Review the Decisions you will be asked to make.

Describe the strategy that you will use and defend why you think that strategy will work. You may append supporting materials, such as data tables and references.

For the first iteration I will drop the X7 spending entirely, and focus all efforts on the X6 and X5. My reasoning is as follows:

There are poor sales to existing users for the X7 as compared to the other two models. This may indicate that those who purchased the X7 didn't like it.

A strategy to "bracket" the market may make sense, but it would be best to down-price the X5 and increase its R&D, rather than invest in the X7.

The amount of fixed cost attributed to the X7 is relatively low, and can be easily reabsorbed into the other two product lines.

At the same time, I will increase the price on the X6 and decrease the price on the X5. Both are growing well, and repurchase is strong, indicating that both trial and repurchase are high. By lowering the price on the X5, I will start to encroach on the failed X7 attempt.

A therefore decreased the X5 price to $225 from $250, the X6 increased from $400 to $450, and R&D spending was 50/50.

It is necessary to make specific recommendations as to any pricing changes or allocations to R&D. (Drop the price of model X? By how much?) Your recommendations must make sense given your analysis of the market and chosen strategy.

PART II

Review your strategy from last module and enter your decisions into the simulation. Run it through all the way through, and do not deviate from your strategy.

The feedback is that the X5 is in the "shakeout phase," and that our pricing is lower than the competition. Given the phase we are in, lower pricing will help to drive others out of the market and consolidate our share.

The sales of the X6 were not hurt by the price increase, and profits went up.

Result of round 1: profit of $1.08 billion.

Round 2:

Choose to keep the X7 and lower the price and R&D to gain market share.

Choose to plow R&D into the X6 and continue to raise the price to skim the market during the high growth phase.

Choose to reduce X5 prices and spend 30% on R&D to keep it competitive.

The first year's results showed significant growth in the X6 and X7 and stagnation on the X5. The market appears to have reached saturation with the X5. I will then plow more into the X6 and X7, and reduce price yet again for the X7 and increase again for the X6.

Result of round 2: Profit increased to 1,439,313,641.

Round 3:

In view of the too-rapid decline in sales and profits from the X5 fall-off, will invest a bit more in R&D and keep pricing similar.

Will stick with high-price and high R&D strategy for X6.

Will not lower prices on the X7 as readily as with the previous strategy, as the total sales will not make as large a difference on profits as the other two lines during the planning period (this sacrifices long-term growth for shorter-term profits).

Results of round 3: Profit decreased to $1,281,023,786

Reason -- too aggressive pricing on the X6, which drove down repurchase. When I dropped the price of the X6 back to $400, sales and repurchase went up. No need to invest in R&D for the X5 -- would not do that in the future.

Remember that the key here is ANALYSIS. What assumptions did you make when you planed your strategy? Did these assumptions prove to be right, or was there something else you didn't think about that influenced your results? How will taking those factors into account affect your strategy in this upcoming run?

Again, you need to crunch some numbers to determine how successful you were, where the greatest sources of profit are, and what changes make sense. Make sure you proposed changes in strategy are firmly based in this analysis and sound business principles.

PART III

Run the PDA Sim again, this time making any changes you proposed in the Module Two SLP. Then, explain

How you did on this round (Better or worse? What was your score?).

Why do you think you did better (or worse)?

What changes in strategy will you make for the final round?

Again, ground your analysis in business principles and support your arguments and recommendations with data. I am less concerned with the actual performance on this simulation as I am with your ability to explain it and devise a logical strategy to deal with it.

PART IV

For the third and final run of this simulation, enter your decisions taking into account the changes in strategy you proposed in Module Three and discuss

1. Your company's performance in this run.

2. How it compares to the last run.

3. Why you think you did better or worse.

By this time you know the drill! Ground your analysis in solid business theory and principles, and support your conclusions with data.

PART V

Now that you have run this simulation three times, I would like for you to evaluate the experience. First, I would like you to focus on the actual process you went through as you ran the simulation. Specifically, I'd like you to consider the following questions:

What did you learn from this exercise?

It's important to keep the timeframe of measurement in mind. A long-term investment in the rapid-rising product may not show results until after the end of the period being studied. This was the case for X7, which required a longer missionary time than the model allowed.

There's little that you can do for a product in the shake-out phase to make it more attractive or to maintain profits. The X5 product's sales seemed to decline rapidly whether or not I poured in R&D or not, whether I maintained prices or dropped them.

Charging too much for a popular product can move it lower in consumer estimation than the competition. The buyers of the X6 cared about performance, but price was important as well. By increasing the price to $450, then $475, I found a significant reduction in sales and repurchase, which demonstrated that I hit a significant customer resistance point.