Consumer Products Pharmaceuticals International

Consumer Products Pharmaceuticals International

1: PharmaSim Case

PharmaSim Case — Page 13

The Allstar Brands Medicine Group

LLSTAR BRANDS CORPORATION IS ONE OF THE LEADING MANUFACTURERS of packaged goods in the world. Since its founding in 1924, the company has acquired or merged with a number of smaller packaged goods companies.

The Allround Brand The management team at the over-the-counter cold medicine (OCM) group of Allstar Brands just completed its third presentation in the past month to the Pharmaceuticals Division manager regarding the status of the Allround cold medication. It is apparent, from all the attention the team has received, that the Allround brand it manages is of strategic importance to the company. Unfortunately for the team and the company, the fourth quarter performance reports for Allround were not as positive as management expected. Therefore, the OCM team has been under the intense scrutiny of senior management.

Overview Allstar Brands’ Allround product is a market leader in the over- the-counter (OTC) cold and allergy remedy market. The consistent success of the brand in terms of profitability and sales has made it a critical component of the Pharmaceuticals Division’s long-term strategic plan. The division anticipates that the brand’s cash flow in the coming periods will allow the company to pursue new opportunities in emerging markets.

However, the division manager responsible for Allround has become concerned with the competitive nature of the OTC cold remedy market. In the past three years, the industry has seen several product introductions as well as major increases in promotional and advertising expenditures. There is concern among senior management that this competitive activity will lead to declining market share and profitability for Allround. The brand has lost one full share point in the last year. Senior management expects that skillful marketing will prove pivotal to the long- term success of Allstar Brands. The Company The company consists of three divisions: Consumer Products, International, and Pharmaceuticals. The Consumer Products Division handles a number of packaged goods, such as laundry detergent, shampoo, and bar soap. The International Division distributes Allstar products on a global basis and has a large presence in the European market. The Pharmaceuticals Division is responsible for the marketing and production of ethical and OTC medications. Ethical drugs are available through pharmacies with a physician’s prescription, whereas OTC remedies are widely distributed without the need for a prescription. The management of Allstar’s Pharmaceuticals Division consists of a number of market related groups, one of these being the OCM group. This group is concerned primarily with the marketing activities of the Allround brand and any line extensions or new product introductions that might


Allstar Brands Corporation is one of the leading manufacturers of packaged goods in the world. Since its founding in 1924, the company has acquired or merged with a number of smaller packaged goods companies.

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fall under the same category. An overview of the corporate structure of Allstar Brands is presented in Exhibit 1.1. Exhibit 1.1: Allstar Brands

Consumer Products Pharmaceuticals International

Division Level

OCM Group Allround Brand Group Level

The Brand Management Group at OCM The marketing management group responsible for Allround consists of a brand manager, an assistant brand manager, and a brand assistant who is a recent business school graduate. They work together as a team on all of the marketing decisions related to the OTC cold and allergy remedy market. The three managers are concerned with developing the Allround marketing mix strategy each period, including any reformulation or line extension options. In addition, if Allstar’s research department develops any promising new product ideas for the cold medicine market, this team will be responsible for the new product launch. Although all product and marketing decisions are made as a group, each member of the brand management group has a different role.

The brand assistant has major input on decisions related to retail price, promotional allowances, consumer and trade promotional expenditures, advertising expenditures, and the number of direct and indirect sales force personnel committed to the Allround brand. The brand manager thought it would be

best for the brand assistant to gain experience by understanding the basic marketing variables before becoming more involved in the detailed implementation of the marketing plan. The assistant brand manager has input to the aforementioned issues but is also required to make more in-depth marketing decisions. For example, the assistant brand manager makes recommendations concerning the allocation of the sales force to retailers and across direct and indirect channels. This person is also concerned with the development of the pricing discount structure, as well as more of the specifics of promotional programs, including the advertising message, advertising agency, and trade and consumer promotions. The brand manager is responsible for all aspects of the marketing decisions for the Allround brand. In addition to the decision areas above, the brand manager is responsible for more detailed aspects of the advertising message, including which competitor to position against, the

During the simulation, decision levels progress from brand assistant to brand manager.

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choice of target segments, and the details of how promotional allowances and promotions are allocated across various distribution channels. In general, the brand management group is responsible for making effective marketing decisions in all marketing mix areas to maximize the long-term profitability of Allstar Brands’ OTC cold and allergy remedy group. Industry Overview Allstar Brands competes with four other firms in the OTC cold and allergy market. These five firms offer a total of 10 brands in five different product categories (cold liquid, cough liquid, allergy capsule, cold capsule, and nasal spray) listed in Exhibit 1.2:

The OTC Cold Remedy Market Cold remedies are designed to address five basic symptoms: aches and fever, nasal congestion, chest congestion, runny nose, and cough. Although the cause is different, allergies share many of the same symptoms and are therefore often grouped with cold remedies. However, products formulated specifically for allergy relief medicines are available, and it is common in the industry to consider relief from allergy symptoms as a separate consumer need from virus and flu related illnesses. Chronic allergy sufferers tend to have different usage patterns and more concerns about side effects because of the duration of the symptoms. Brand Formulations Products vary in the ingredients they contain, their form, and the duration of relief. In general, various combinations of six basic types of ingredients are used to formulate OTC brands. Each ingredient targets one of the five basic symptoms or is used as a base for the other ingredients. The ingredients are:

Exhibit 1.2: Company and Brand Summary

Company Name Sales $ (millions) Brands on the Market

Allstar Brands 355 Allround: 4-hr multi-symptom cold liquid

B&B Health Care 286 Believe: 4-hr allergy capsule Besthelp: 4-hr cold capsule

Curall Pharmaceuticals 199 Coughcure: 4-hr cough liquid

Driscol Corporation 255 Defogg: 4-hr allergy capsule Dripstop: nasal cold spray Dryup: 4-hr multi-symptom cold capsule

Ethik Incorporated 396 Effective: nasal cold spray End: 4-hr cough liquid Extra: 12-hr cold capsule

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• Analgesics: Provide relief for aches and fever. Common analgesics are aspirin and acetaminophen (an aspirin substitute).

• Antihistamines: Reduce the secretions that cause runny nose and watery eyes. • Decongestants: Reduce nasal congestion by shrinking the blood vessels in the nose lining

to clear the passages and restore free breathing. • Cough suppressants: Reduce the cough reflex. • Expectorants: Provide relief from chest congestion by loosening the phlegm, thereby

making each cough more efficient. • Alcohol: Provides a base for the other ingredients in some products and helps the patient

rest. (Some consumers view alcohol as a negative attribute.) A brand can be made available in one of three forms: liquid, capsule, or spray. A consumer’s choice with regard to form is usually based on personal preference, but some general differences are apparent. Nasal sprays contain only a topical nasal decongestant that provides faster relief from sinus congestion than other forms. Capsule and liquid cold medications might contain any combination of ingredients, although cough medicine is usually found in liquid form to help soothe throat irritation. According to a recent survey, most consumers find that capsule form is somewhat more convenient than liquid. Two other basic considerations are duration of the product and possible side effects. Product duration is typically either 4-hour or 12-hour. The government regulates the amount of medication for various periods of relief, including the maximum for a 24-hour period without a prescription. The maximum dosage used in 4-hour formulations cannot be taken more than four times each day due to over-medication concerns. Twelve-hour formulations can contain twice the dosage as 4-hour formulations, or half the daily maximum medication. Nasal sprays are considered instant relief products because they act much faster than standard cold medicines, but their effectiveness wears off faster. OTC side effects have become a greater consideration in recent times because of the emphasis on healthier lifestyles and concerns about performance under medication. Drowsiness due to antihistamines or alcohol is the most often mentioned negative side effect, especially when these products are used during the day. Other considerations include upset stomach, long-term effects of nasal spray, and excessive medication. As can be seen in Exhibit 1.3, the Allround brand is a 4-hour liquid cold medicine that provides multi-symptom relief. It contains an analgesic, an antihistamine, a decongestant, a cough suppressant, and alcohol. Most consumers use this product for nighttime relief because of the strength of the medication and because the alcohol and antihistamine help the patient rest. Allround is viewed as one of the most effective brands on the market at reducing multiple cold symptoms. However, consumer groups and some physicians have attacked the multi-symptom “shot-gun” approach as providing excessive medication in many circumstances.

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Market Segmentation and the Market Survey The trade typically segments the OTC cold and allergy market based on how the brands are labeled. The four standard product categories in the OTC market are cold, cough, allergy, and nasal spray. The brand management group often uses the information presented in Exhibit 1.4 as a basis for determining the brand’s direct competition, but also realizes that the report fails to account for the cross-usage of brands (e.g., using a cold medicine to relieve allergy symptoms).

Exhibit 1.3: Current Brand Formulations

Anal-gesic Anti- hist.

Decn- gest.

Cough Supp. Expect.

Alco- hol Description

Max Allow 1,000 4 60 30 200 20 (mg/4-hr dose) Allround 1000 4 60 30 0 20 4-hr multi liquid Believe 0 4 0 0 0 0 4-hr allergy capsule Besthelp 0 4 60 0 0 0 4-hr cold capsule Coughcure 0 0 30 30 0 10 4-hr cough liquid Defogg 0 4 0 0 0 0 4-hr allergy capsule Dripstop 0 0 60 0 0 0 cold spray Dryup 1000 4 60 0 0 0 4-hr multi capsule Effective 0 0 60 0 0 0 cold spray End 0 0 0 0 200 10 4-hr cough liquid Extra 0 0 120 0 0 0 12-hr cold capsule

Exhibit 1.4: Market Share by Product Category Cold Cough Allergy Nasal Total Mfr. Sales (M$) 879.7 366.4 126.1 119.1 1,491.2 Growth 6.6% 3.2% 5.9% 4.5% 5.1% % % % % % Allround 40.4 0.0 0.0 0.0 23.8 Believe 0.0 0.0 50.7 0.0 4.3 Besthelp 25.2 0.0 0.0 0.0 14.9 Coughcure 0.0 54.3 0.0 0.0 13.3 Defogg 0.0 0.0 49.3 0.0 4.2 Dripstop 0.0 0.0 0.0 52.0 4.2 Dryup 14.9 0.0 0.0 0.0 8.8 Effective 0.0 0.0 0.0 48.0 3.8 End 0.0 45.7 0.0 0.0 11.2 Extra 19.5 0.0 0.0 0.0 11.5

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A major marketing research firm offers a nationwide survey of OTC cold and allergy consumers. The market research firm claims that this survey provides a great deal more information on how consumers perceive and use cold and allergy products. The firm also suggests that demographic segmentation could reveal important information about the market. Survey data are provided with two segmentation options: illness (cold, cough, and allergy) and demographics (young singles, young families, mature families, empty nesters, and retired). The marketing research firm conducts this survey every period. (A Sample Market Survey Questionnaire concludes the case.) Curious about possible new market insights, the OCM group obtained partial non-segmented results of the market survey on a “free to examine” trial basis. If the group finds the sample data informative, it may purchase the complete survey for $100,000. The OTC cold and allergy market could then be analyzed based on any or all combinations of illness and demographics that the OCM group desires. Survey Data The consumer survey consists of the following reports: 1) market share based on consumer brand purchases; 2) purchase decision-making criteria used by consumers; 3) brand awareness, trial, and repurchase percentages; 4) brand satisfaction; 5) a comparison of intended versus actual purchases; 6) a comparison of brands based on consumers’ perceptions of their ability to relieve symptoms; and 7) the tradeoff that consumers perceive between symptom relief and price. The sample data for awareness, trial, and repurchase are presented in Exhibit 1.5. The survey results on Brands Purchased, Purchase Intentions, and Satisfaction are based on units sold. Brand Awareness, Decision Criteria, Brand Perception, and Tradeoffs are based on survey population. This distinction reflects multiple purchases from one survey respondent (usage rates).

Exhibit 1.5: Market Survey—Brand Awareness, Trials, and Repurchase

Brand Brand Awareness Brand Trials

Most Freq. Purchased

Conversion Ratio

Retention Ratio

% % % % % Allround 74.1 % 47.1 % 21.8 % 63.6 % 46.3 % Believe 18.9 % 9.2 % 3.8 % 48.5 % 41.9 % Besthelp 56.6 % 30.0 % 13.0 % 53.1 % 43.2 % Coughcure 49.0 % 29.0 % 18.4 % 59.1 % 63.6 % Defogg 24.1 % 13.0 % 4.1 % 53.9 % 31.8 % Dripstop 20.2 % 11.3 % 3.6 % 56.1 % 31.4 % Dryup 23.2 % 10.9 % 7.2 % 47.0 % 65.6 % Effective 22.0 % 12.0 % 3.1 % 54.5 % 26.2 % End 46.9 % 30.6 % 15.6 % 65.3 % 50.8 % Extra 60.1 % 31.8 % 9.5 % 52.8 % 29.9 %

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The OCM group found the data insightful. They were pleased that Allround had very high awareness. The survey measures the percent of those queried who mentioned the Allround brand without prompting, which is considered “unaided awareness.” In addition, the Allround brand had the highest trial level and was the brand most frequently purchased. Allround’s conversion ratio (the percentage of those aware of a brand who have tried it) is also high. The brand manager noted that the retention ratio (the percentage of those who have tried the brand who now purchase it most often) for Allround was lower than that for several other brands. The OCM group wondered if this might be a signal of future problems, but the brand assistant recalled that new brands and brands that fill very specific needs often have higher retention rates than brands that are mature or not highly targeted. Other Marketing Research In addition to the survey data, other information about the market is available. Market trade publications, similar to Exhibit 1.4, are free to the OCM group and provide data for industry outlook on population, market growth rate, inflation, wholesale/direct distribution, and symptoms reported by consumers. Other data concerning competition and distribution are available for a fee. These include a comparison of relevant operating statistics for each company; competitive estimates of sales force allocation, advertising expenditures, and message and promotional programs; and studies of distribution regarding share of channel sales, pricing, consumer shopping habits, average shelf space, and physician and pharmacist recommendations. Assistant Brand Manager and above can also conduct test markets which allow you to experiment with different combinations of price, advertising, and promotion. In some cases, Brand Managers may be able to use a new conjoint study to help with product decisions. The OCM group believes that the Marketing Research studies contain useful information, but that they also need to examine the trade-off between the cost of these studies and the information for decision-making that these studies provide. They also need to recognize that all marketing research studies have some error in them.

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Industry Competition

Pricing and Promotional Allowances: It is industry practice for manufacturers to suggest retail prices to retailers, although retailers ultimately set the price to consumers. Manufacturers commonly offer volume discounts of 15-40 percent of the manufacturer’s suggested retail price plus an

additional “promotional allowance” of 10-20 percent. Allowances are necessary to gain retail distribution, obtain desired shelf facings in retail outlets, and gain retailer support for a brand in advertisements and promotions undertaken by the retailer. Allowances are usually discussed with retailers in conjunction with price levels but are also considered to be a type of promotional expense. Thus, allowances appear on the income statement as a separate variable cost line item. Exhibit 1.6 displays the current pricing policies for the Allround brand.

Exhibit 1.6: Price / Volume Discount Schedule for Allround ($) By Discount Schedule Direct

Volume Discount

Price to Channel

Units Sold (M)

Dollars Sold ($M)

% of Total Sales

Suggested Retail: $ 5.29 <250 25 % $ 3.97 10.5 $ 41.8 11.8 % <2500 30 % 3.70 35.4 131.2 36.9 % 2500 + 35 % 3.44 15.1 51.9 14.6 % Indirect / Wholesale 40 % 3.17 41.1 130.3 36.7 %

NOTE: This information is only available at the Assistant Brand Manager level and above in the simulation. The manufacturer’s suggested retail price (MSRP) for Allround is relatively high with volume discounts ranging from 25–40%, not including promotional allowances. However, the OCM group believes that Allround’s sales have not suffered because of the higher price. In fact, the brand’s effectiveness, high recognition, and level of loyalty have allowed it to maintain a price leadership role in the market. Exhibit 1.7 provides the MSRPs for all brands in the market.

Exhibit 1.7: Manufacturer’s Suggested Retail Prices Allround $ 5.29 Dripstop $ 4.29 Believe 4.39 Dryup 5.09 Besthelp 4.89 Effective 4.39 Coughcure 5.49 End 5.29 Defogg 4.29 Extra 4.49

The OCM group monitors competitive activity in a number of areas, including pricing and promotional allowances, advertising, consumer and trade promotion, and sales force allocation.

NOTE: A market research report showing the average retail price by channel is available for $20,000.

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Advertising Advertising plays a major role in establishing brand awareness among consumers and in helping to shape consumers’ perceptions of products. Last period, $20 million dollars was spent on Allround’s advertising campaign, primarily for commercials aired on network television. Competitive advertising budgets for last period ranged from $1 million for the Effective brand to $16 million for Coughcure. There are four basic advertising message types that the OCM group considers potentially useful for Allround: a primary demand stimulation to focus the advertising message on increasing overall demand for OTC remedies while increasing Allround’s unaided awareness; a benefits approach that states the symptomatic relief properties of Allround; a comparison approach that positions Allround against another brand; and a reminder advertising message to maintain consumer awareness and stimulate the repurchase of Allround. The advertising message used in any period can be a combination of these types and Allround used all of them to some extent last period in their campaigns. The advertising message can also target product use (cold, cough, and/or allergy) and demographics (young singles, young families, mature families, empty nesters, and/or retired). This targeting provides guidance to the advertising agency for creative aspects of the ad design and selection of specific media placements. The OCM group is considering the selection of a new advertising agency. Allround’s current agency is Brewster, Maxwell, and Wheeler (BMW). This agency is known for its high quality work but charges a 15 percent commission on media placements. There is some concern that BMW costs too much and is having an adverse impact on Allround’s profits. The OCM group has received solicitation from two other advertising agencies. Sully & Rodgers (S&R) has a reputation of providing mid-range quality work but charges only 10 percent on media placements. Lester Loebol & Company (LLC) charges only 5 percent on media placements, one-third as much as BMW, but its advertising campaigns are of significantly lower quality. It could be argued that, since the Allround name is well established, a decrease in the quality of advertising might not hurt the brand significantly. Potential cost savings could result in an increase in profits, but the group is concerned that lower quality advertising might cause irreparable damage to Allround’s brand image.

Promotion Trade promotions include promotional allowances and co-op advertising. Promotional allowances, also discussed in the pricing section, are an additional discount to the channel. Co-op advertising provides incentives to the channel to feature a specific brand in their own advertising. Money is made available to retailers to pay for a portion of the retailer’s advertising when the relevant brand is promoted.

The OCM group must make three basic advertising decisions each period: the amount of dollars allocated to the advertising budget, the content of the advertising message, and the choice of an advertising agency.

Consumer and trade promotions are a significant part of marketing in the OTC cold and allergy remedy market.

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Consumer promotions include distribution of free trial size packages, coupons, and point-of-purchase displays. Trial sizes come in smaller packages and allow consumers to try a product before buying. Allround did not use trial size packaging last period but may consider this option in the future. As the name implies, trial size packaging usually contains a smaller dosage of medicine and is provided to potential consumers free of charge. This promotion can be used to attract potential consumers to the Allround brand.

Coupons distributed to consumers in special newspaper or magazine supplements offer additional discounts off the retail price when redeemed at the time of purchase. In the last period, a part of Allround’s consumer promotion budget was spent on coupon support. This included money spent on printing, inserts, and mailings. Point-of-purchase vehicles are special displays, such as retail sale racks, on-shelf advertisements, or end-of-aisle displays that promote a brand to the consumer in the retail store. The OCM group believes that these displays promote brand switching when the consumer is purchasing OTC products. Point-of-purchase money is paid to the retailer, but the promotion targets the end consumer. The brand manager may allocate these funds across retail channels depending on such factors as shopping habits and channel needs. Exhibit 1.8 is a summary of last period’s promotional activity for the Allround brand.

Exhibit 1.8: Promotional Activity for the Allround Brand (in $000s)

Promo Allowances $ 60,400 (17.0%) Co-op Advert 1,400 Point of Purchase 1,400 Trial Size 0 Coupons 4,200 ($0.50 / ea.)

Sales Force The support of a manufacturer’s sales force is critical to the success of a brand in the OTC cold and allergy market. Part of the sales force sells directly to retail outlets. This direct sales force is responsible for maintaining relationships with current retailers and for developing new retail accounts. The direct sales force also presents trade promotions, allowances, and new product introductions to retailers.

Allstar Brands spent significant amounts on consumer and trade promotions for the Allround brand last period. As was the case in advertising, the OCM group believes that Allround has more promotional support than any other brand on the market.

The OCM group not only allocates money for each of these promotional activities but also determines the promotional effort across all retail outlets within the various distribution channels.

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Wholesalers sell OTC brands to smaller, independent retailers that are not reached by the direct sales force of the manufacturer. Merchandisers provide special support to retailers for their in-store activities, such as shelf location, pricing, and compliance with special promotions. Detailers contact doctors and pharmacists to provide information about their brand, introduce new products, and encourage doctors or pharmacists to recommend their brand to consumers.

The OCM group determines the total size of th
Consumer Products Pharmaceuticals International


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