Strategic Marketing Management

Chapter 3Marketing Decision

Making and Case Analysis

Strategic Marketing Problems, Cases and Comments, 12 Edition Roger A. Kerin & Robert A. Peterson

Decision-Making Process

Although no simple formula exists that can assure solution to all problems at all time, use of systematic decision making process can increase likelihood of arriving at better solutions. The decision making process described here is called DECIDE.1. Define the problem2. Enumerate the decision factors3. Consider relevant information4. Identify the best alternative5. Develop a plan for implementing the chosen

alternative6. Evaluate the decision and the decision process

1. Define the Problem

• The philosopher John Dewey observed that “A problem well defined is half solved”

• What this statement means?

– Objectives of the decision maker

– Constraints

– Success measure or Goal

1. Define the Problem (cont…)Consider the situation faced by EI Nacho Foods, a marketer of

Mexican foods. The company had positioned its line of Mexican foods as a high quality brand and used advertising effectively to convey that message. Shortly after the company’s introduction of frozen dinners, two of its competitors began cutting the price of their frozen dinner entrees. The firm lost market share and sales as a result of these price reduction; this loss led to reductions in the contribution dollars available for advertising and sales promotion. How might the problem be defined in this situation?

One definition of the Problem: “Should we reduce our price”

A mush better definition: “How can we maintain our quality brand image (Objective) and

regain our lost market share (success measure), given limited funds for advertising and sales promotion

(Constraint)?

2. Enumerate the Decision Factors

• Two sets of decision factors must be enumerated in the decision-making process

1. Alternative courses of action and2. Uncertainties in the competitive environment

• Alternative courses of action are controllable decision factors because the decision maker has complete command of them. Alternatives are typically product market strategies or changes in the various elements of the organization’s marketing mix.

• Uncertainties, on the other hand, are uncontrollable factors that the manager cannot influence.

• In marketing context, they often include actions of competitors, market size, and buyer response to marketing action.

3. Consider Relevant Information

• Relevant information, like the relevant costs, consists of information that relates to the alternatives identified by the manager as being likely to affect future events.

• Identifying relevant information is difficult both for the practicing manager and for the case analyst.

• There is frequently and overabundance of facts, figures and viewpoints available in any decision-making setting.

• The truly successful managers and leaders of the [twenty-first] century will…be characterized not by how they can access information, but how they can access the most relevant information and differentiate it from the exponentially multiplying masses of non relevant information.

Upon the conclusion of the first three steps, the manager or case analyst has completed a situation analysis. The situation analysis should produce an answer to the synoptic question,

“Where are we now?”

4. Identify the Best Alternative

• A framework for identifying the best alternative is decision analysis.

• Decision analysis matches each alternative identified by the manager with the uncertainties existing in the environment and assigns a quantitative value to the outcome associated with each match.

• Manager implicitly use a decision tree and a payoff table to describe the relationship among alternatives, uncertainties, and potential outcomes.

4. Identify the Best Alternative (cont…)

Suppose that at the conclusion of Step 2 in the DECIDE process (that is, enumerating decision factors),

EI Nacho executives identified two alternatives:1. Reduce the price on frozen dinners, or2. Maintain the price

They also recognized two uncertainties:1. Competitors could maintain the lower price2. Competitors could reduce the price further.

4. Identify the Best Alternative (cont…)

Conclusion of Step 3 in the DECIDE process (considering relevant information),

EI Nacho executives examined the changes in market share and sales volume that would be brought about by the pricing actions. They also calculated the contribution per unit of frozen dinners for each alternative for each competitor response.

4. Identify the Best Alternative (cont…)

Decision Tree for EI Nacho FoodsCompany Action Competitor Response Financial Outcomes

Maintain Price $150,000

Reduce Price

Reduce Price further $110,000

Maintain Price $175,000

Maintain Price

Reduce price further $90,000

4. Identify the Best Alternative (cont…)

Payoff Table for EI Nacho Foods

Uncertainties

Competitors Maintain Price

(Probability 90%)

Competitors Reduce Price

(Probability 10%)

Reduce Price 150,000 110,000

Maintain Price 175,000 90,000

Alternatives

4. Identify the Best Alternative (cont…)

EMVPI = 168,500 - 166,500 = $2,000

EMVPI = EMV (Certainty) - EMV (Best Alternative)

EMV (Certainty) = 0.9(175,000) + 0.1(110,000) = $168,500

Calculation of Expected Monetary Value of Perfect Information (EMVPI):

EMV (A2) = 0.9(175,000) + 0.1(90,000) = $166,500

EMV (A1) = 0.9(150,000) + 0.1(110,000) = $146,000

Calculation of Expected Monetary Value (EMV)

90,000175,000A2: Maintain Price

110,000150,000A1: Reduce Price

Competitors Reduce Price (Probability 10%)

Competitors Maintain Price (Probability 90%)

Payoff Table Uncertainties

Decision Analysis and the Value of Information

Alternatives

4. Identify the Best Alternative (cont…)

• The higher average contribution of 166,500 for maintaining the price indicates that EI Nacho’s management should maintain the price. The contribution is higher because competitors are expected to maintain their prices nine times out of ten. Under the same condition (same outcome, same probability estimates), EI Nacho’s would achieve an average contribution of 146,000 if the price reduction alternative were chosen. A rational management would, therefore, select the price maintenance alternatives.

5. Develop a plan for implementing the Chosen Alternative

• The execution phase is critical, and planning for it forces the case analyst to consider resource allocation and timing questions. For example if a new product launch is recommended, it is important to consider how managerial, financial, and manufacturing resources will be allocated to this course of action. If a price reduction is recommended, it will be important to monitor whether the reduced prices are reaching the final consumer and not being absorbed by resellers in the marketing channel. Timing is crucial, since a marketing plan takes time to develop and implement.

6. Evaluate the Decision and the Decision process

1. Did I define the problem adequately?2. Did I identify all pertinent alternatives and uncertainties?

Were my assumptions realistic?3. Did I consider all information relevant to the case?4. Did I recommend the appropriate course of action? If so

was my logic consistent with the recommendation? If not, were my assumptions different from the assumptions made by others? Did I overlook an important piece of information?

5. Did I consider how my recommendation could be implemented?

Honest answers to these questions will improve the chances of making better decisions in the future.

Preparing and Presenting a Case Analysis

• Approaching the Case• Formulating the case Analysis

– Nature of the Industry, Market, and Buyer Behavior– The organization– A plan of Action– Potential outcomes– Formulating the case analysis in teams

• Communicating the Case Analysis– Class Discussion– Oral Presentation– Written Report