Marketing Questions

1. Product differentiation

The data entry page presently allows the teams to enter only one product model and quality level. The manual states that stocks from older models are automatically sold first, and newer models can only then be sold into the market. Does this mean that the teams cannot pursue any differentiation strategy, selling model 2 in Sereno, for instance, and model 3 in Merica? No teams have yet got a second factory up and running. When they do, assuming their R&D provides them with the models, can they produce different models in different factories simultaneously? And how does the product model allocation to the marketplace work then? Most teams want to implement different pricing and quality strategies in the two countries - is this possible? If not, what's the purpose of having different market areas (as opposed to different production areas), and if they can differentiate, what do they enter where?


Only one product model at one quality level can be produced by a company at any point in time. To do otherwise introduces a great deal more complexity and we believe it is complex enough at this time. If a firm was producing a different product and/or a different quality level in different areas, it would cause problems when shipping product to different areas which were selling a different quality level or product. When you start to keep track of inventory things really get interesting.

You can differentiate product in different areas using all of the marketing variables with the exception of product and quality. Thus promotion and price are readily available. The addition of the sales offices adds an interesting inventory control problem. It is not enough to have inventory at a plant, it must be available to sales offices making sales.

2. Unfilled orders

Would you tell me what happens to customer orders that are unfilled. Do they affect demand the following quarter (i.e., the customers don't renege) or do they affect other company's customer orders (i.e., the customers buy from a competitor) or something else?


In the BPG, customer orders that can't be filled are likely to be filled by competitors as the customers go somewhere else. Future demand also is affected--both for the company that stocked out and for the one that still had goods available for sale. Some of the customers will lose their loyalty and switch suppliers.

3. Demand forecasting

From your experience, is there a "best" demand forecasting method for individual companies to use? I have played around with regression and I have not been that successful in coming up with a good forecasting model.


As in the business world, demand is affected by many factors. With a limited data base at the beginning of the simulation (8 quarters of data) there are not many degrees of freedom for multiple regression analysis, but students may find regression to be about as good as similar models used in the business world.

In the Player's Manual (Chapter 6) we suggest a sales forecasting model that seems to work about as well for students as anything. It uses a worksheet from the back of the manual, and the worksheet is available on the student disk as a spreadsheet template.

4. Price increases

Is there a way to raise your price more than 40% in Sereno? It is quickly becoming impossible to make money there. The exchange rate is so high even this coming quarter that almost no one will be able to make a profit selling from Merica to Sereno.


I'm sorry but the maximum price change in Sereno is 40 percent in any quarter. The general price level is up only 6.4 percent from Year 2, Quarter 4. Your company had the second highest Sereno product price in Year 3, Quarter 1.

5. Price ceiling

My group would like to know if there is a price ceiling on demand. An example would be if you were the only one in Sereno selling product and your price was outrageously high, would you sell out, or would demand taper off as your price goes up even though you are the only one selling, theoretically, until no units are sold..


The answer to your question about prices is that your product shows sensitivity to price changes, even if you are the only one in Sereno selling product. If your price becomes outrageously high, not very many from Sereno will buy it. The larger the increase in price, the fewer people will buy it. I presume you might stop raising the price before the demand approaches zero.

6. Price

We have a concern about operations in Sereno. Our concern is with the exchange rates. With the limits currently set in the game, we are not able to keep our prices up with the current exchange rate. We are open to any suggestions you might have to help us keep our prices in line with rates. Thank you.


You don't necessarily have to keep Sereno prices up with exchange rates. Costs within Sereno are affected by the Sereno inflation rate- -not by the exchange rate. Costs of imported goods are affected by the inflation rate in the country from which the are exported, and the exchange rate. The other side of the coin is that costs of goods exported FROM Sereno become less when paid for with dollars.

The limit on price increases in Sereno is still 40 percent in any quarter. That would amount to a tremendous amount of price inflation in a year. Compounded quarterly, 40 percent per quarter equals about 384 percent per year.

7. Managing inventories

We are having trouble controlling inventories. Could you help us?


I can understand your confusion, but you have complete control over managing your inventories and new production. Existing inventories of goods will not be shipped to other areas, but will be sold first before any new production or new shipments are sold (first-in first- out). New production each quarter is shipped according to the sales office orders that you enter on the decision form. If sales office orders total more than the available production, you have lost some of that control. In that case, the order for the sales office in the producing area has an advantage--its orders will be filled first. Then the balance of production will be prorated to other sales offices in proportion to the amount of available goods to the total sales office orders for those offices. See the BPG Player's Manual, 4/e, pages 18 and 19 for more detail.

It appears that your Year 3, Quarter 2 sales offices totaled 692,000 and your production totaled only 464,000. The area 1 order was filled in full, and the rest were pro-rated. There was not a large enough shipment to Sereno to fill all of the orders.

You put Model 2 into production in Quarter 2, and had only a small stock on hand of Model 1 (30,000 units). These were sold, and the balance of filled orders for model 1 actually received model 2. The only case where the liquidator could buy up units would have been if you were overstocked with model 1--more than could have been sold in Quarter 2. See pages 66-68 for more details.

8. Price and demand

Does the simulation look at a company's price compared to other companies when it determines sales increases/decreases from one quarter to the next or does it look at the changes that the company makes from one quarter, with some industry wide trends factored in?

For example: If a company keeps its price at $10 while everyone else goes to $9, does the company with $10 get a hit (with lower sales) for a higher price relative to the other companies? Or, does the company just not get the gain in unit sales that the other companies did for lowering their prices?


Obviously I won't be able to give you the exact relationship between price and demand, but then you wouldn't have that relationship in the real business world, either. Both factors that you mentioned are factors in determining the demand for your product:

1. A company's price is compared to that of other companies. Customers tend to choose the company with the lowest price, all other things being equal (they never are equal, though).

2. When a company raises its price, some of its customers are likely to shop around for a lower-priced product, all other things being equal.

9. Customer orders

I am not clear, from the student manual, what customer orders represents. I understand the box on page 18, but am not clear regarding what time period these orders are for and why some companies sell significantly more than their customer orders.


Customer orders indicate the number of customers who attempt to buy the product of their choice from a firm during the current quarter. If firm A stocks out in an area, the customers who wanted to buy firm A's product will buy other firm's products as substitutes. The products purchased as substitutes will not show up as customer orders, but they will show up as sales on the other firm's reports.

10. Salespeople compensation

Does the BPG take into account the full compensation of salespeople, as opposed to just individually looking at salary effect on loyalty and commission effect on sales? In other words, does the BPG look at total compensation for a salesperson in addition to independent salary and commission effects?

Does the BPG look at each market area (1,2,3,4) individually for effect of compensation on the sales force (i.e. what sales are possible in that market), or does it take a generic view of the market as a whole?


As you would expect, salespeople are often more concerned with total compensation than with the particular levels of salary and commissions. And the effect can be different in each market area. The Business Policy Game model takes these and other factors into account.