16 Occasionally, we develop a model to better understand past performance in cases where all of the underlying data is not discoverable. 17 This 'Marketing Strategy'model provides an example of this. 18 In this case we are 'modeling' history to develop an understanding of what has happened. 19 This is generally done with the intent of informing forward looking decisions. 20 We will not apply the insights gained from the model to specific decisions. 21 However, the general applicability to developing a forward-looking pricing, channel and competitive cost strategy is clear. 22 An understanding of what has happened is fundamental and critical to formulating a business strategy. 23 24 You are analyzing a company that sells replacement windows, its only product. 25 The company has only one competitor. 26 20 Abusiness with only two competitors is calla 'duopoly'. 27 Both companies sellthrough two market channels: 28 20 Direct-selling direct (e-commerce) to consumers through Google, Facebook, etc. 29 22 Retail- selling through retailers such as Home Depot and Lowes 30 Before constructing the model the company had a qualitative knowledge of significant changes occurring in the industry. 31 3 The overall market has been growing relatively quickly 32 32 There has been a broad shift from the retail channel to the direct (e-commerce) channel. 33 The company's only competitor has been increasingly discounting e-commerce (direct channel) sales. 34 17 As a result, the company has been rapidly losing market share in the direct channel because of the competitor's successfule-commerce strategy and aggressive pricing. 35 Neither company reports financial data beyond that data required in their 10-K reporting. 36 To understand what is happening, you need to develop a model of both companies' historical results based on the limited information you have. 37 3 A research firm did market research in both 2016 and 2019 to develope estimates of the market size and channel share. 38 so Use the CAGR to calculate the interim years (each year should increase by 1 + CAGR). 39 sy Based on interviews in the field, you have estimated the split between direct and retail sales and the company's share of both the direct and retail markets. 40 Average prices by channel are available from a price data information service. 41 * You have estimated the company has a unit cost 10% lower than the competitor because of its historically greater scale and consequent higher level of automation. 42 Errors in the model will turn red. The exercise is designed such that an error early in the assignment will not adversely impact later grading. 43 44 We want to differentiate between direct and retail channels versus direct and indirect costs. 45 The market size model was designed to represent a business that sells thought multiple distribution channels: 46 Direct to Consumer selling is marketing and distributing direct to the end use consumer, as performed by AllBirds, Casper, Hubble Contacts, Warby Parker 47 Retail selling is distributing to a retailer who then sells to the end use consumer, such as Macy's, Sears and Walmart. 48 The term 'direct' has a different meaning when describing the Cost of Revenues. 49 Direct costs are typically those that scale with revenues, variable costs and the related overhead to make a product or deliver a service. 50 Direct Costs are the firm's resources (supplies, materials, labor, sales commissions, freight) that go into the production or performance of a product/service 51 Indirect Costs exclude expenses that wouldn't be incurred without that particular sale. Indirect costs are resources used to produce more than one sale. 52 53 Enter formulas in the yellow cells to create model. 54 55 Industry Unit Model 2016 2017 2018 2019 CAGR 56 Estimated Total Market Size in Units 650 748 860 989 15% 57 Growth Rate 15% 15% 15% 58 Estimated Percent Direct 33% 40% 48% 58% 20% 59 Direct Market Size in Units 217 299 413 569 60 Retail Market Size in Units 433 449 447 419 61 62 Company Competitor 63 Company Unit Models 2016 2017 2018 2019 CAGR 2016 2017 2018 2019 64 Estimated Direct Market Share 50% 45% 40% 35% -11% 50% 55% 60% 65% 65 Estimated Retail Market Share 70% 75% 80% 85% 7% 30% 25% % 20% 15% 66 Direct Units Sold 108 135 165 199 23% 108 164 248 370 67 Retail Units Sold 303 336 358 356 6% 130 112 89 63 68 Total Units Sold 412 471 523 556 11% 238 277 337 433 69 0% 70 Revenues Model 2016 2017 2018 2019 CAGR 2016 2017 2018 2019 71 Price to Direct 200 200 200 200 0% 190 180 170 160 72 Price to Retailers 125 125 125 125 0% 125 125 125 125 73 Direct Revenues 21,667 26,910 33,010 39,859 23% 20,583 29,601 42,087 59,219 74 Retail Revenues 37917 42,047 44.701 44,535 6% 16,250 14,016 11,175 7,859 75 Total Revenues 59,583 68.957 77,710 84,394 12% 36,833 43,617 53,262 67,078 76 77 78 Gross Profit Model 2016 2017 2018 2019 CAGR 2016 2017 2018 2019 79 Unit Cost 100 100 100 100 0% 111 111 111 111 80 Direct Cost of Revenues 10,833 13455 16,505 19,930 23% 12,037 18,272 27,508 41,124 81 Retail Cost of Revenues 30,333 33,638 35,760 35,628 6% 14444 12,458 9,933 6,986 82 Direct Gross Profit 10,833 13455 16,505 19,930 23% 8,546 11,329 14,579 18,095 83 Retail Gross Profit 7,583 8409 8.940 8,907 6% 1806 1,557 1,242 873 84 Total Gross Profit 18417 21,864 25,445 28,837 16% 10,352 12,886 15,821 18,968 85 86 EBIT (Operating Profit) Model 2016 2017 2018 2019 CAGR 2016 2017 2018 2019 87 Direct SG&A Percent 10% 10% 10% 10% 10% 10% 10% 10% 88 Retail SG&A Percent 5% 5% 5% 5% 5% 5% 5% 89 Direct SG&A 2,167 2,691 3,301 3,986 23% 2,058 2,960 4,209 5,922 90 Retail SG&A 1,896 2,102 2,235 2,227 6% 813 701 559 393 91 Direct EBIT 8,938 11,353 14,270 17,703 26% 6,488 8,369 10,371 12,173 92 Retail EBIT 5,688 6,307 6,705 6,680 6% 993 857 683 480 93 Total EBIT 14,625 17,660 20,975 24,383 19% 7,481 9,225 11,053 12,653 94 95 Use the model you have created to answer the following questions. CAGR 9% A e -21% 51% -22% 22% 0% CAGR -6% 0% 42% -22% 22% CAGR 0% 51% -22% 28% -22% 22% CAGR 5% 42% -22% 23% -22% 19% 95 Use the model you have created to answer the following questions. 96 What was the CAGR of the overall market in units? 97 98 99 100 What was the CAGR of the 'Direct Market Size in Units'? 101 102 103 What was the CAGR of the competitor's 'Total Revenues'? 104 105 What was the CAGR of the competitor's price to Direct? 106 107 108 What was the CAGR of the company's total EBIT 109 110 111 Did either company earn the majority of profits in Direct sales. 112 113 114 What was the impact of the competitors aggressive pricing strategy? 115 116 16 Occasionally, we develop a model to better understand past performance in cases where all of the underlying data is not discoverable. 17 This 'Marketing Strategy'model provides an example of this. 18 In this case we are 'modeling' history to develop an understanding of what has happened. 19 This is generally done with the intent of informing forward looking decisions. 20 We will not apply the insights gained from the model to specific decisions. 21 However, the general applicability to developing a forward-looking pricing, channel and competitive cost strategy is clear. 22 An understanding of what has happened is fundamental and critical to formulating a business strategy. 23 24 You are analyzing a company that sells replacement windows, its only product. 25 The company has only one competitor. 26 20 Abusiness with only two competitors is calla 'duopoly'. 27 Both companies sellthrough two market channels: 28 20 Direct-selling direct (e-commerce) to consumers through Google, Facebook, etc. 29 22 Retail- selling through retailers such as Home Depot and Lowes 30 Before constructing the model the company had a qualitative knowledge of significant changes occurring in the industry. 31 3 The overall market has been growing relatively quickly 32 32 There has been a broad shift from the retail channel to the direct (e-commerce) channel. 33 The company's only competitor has been increasingly discounting e-commerce (direct channel) sales. 34 17 As a result, the company has been rapidly losing market share in the direct channel because of the competitor's successfule-commerce strategy and aggressive pricing. 35 Neither company reports financial data beyond that data required in their 10-K reporting. 36 To understand what is happening, you need to develop a model of both companies' historical results based on the limited information you have. 37 3 A research firm did market research in both 2016 and 2019 to develope estimates of the market size and channel share. 38 so Use the CAGR to calculate the interim years (each year should increase by 1 + CAGR). 39 sy Based on interviews in the field, you have estimated the split between direct and retail sales and the company's share of both the direct and retail markets. 40 Average prices by channel are available from a price data information service. 41 * You have estimated the company has a unit cost 10% lower than the competitor because of its historically greater scale and consequent higher level of automation. 42 Errors in the model will turn red. The exercise is designed such that an error early in the assignment will not adversely impact later grading. 43 44 We want to differentiate between direct and retail channels versus direct and indirect costs. 45 The market size model was designed to represent a business that sells thought multiple distribution channels: 46 Direct to Consumer selling is marketing and distributing direct to the end use consumer, as performed by AllBirds, Casper, Hubble Contacts, Warby Parker 47 Retail selling is distributing to a retailer who then sells to the end use consumer, such as Macy's, Sears and Walmart. 48 The term 'direct' has a different meaning when describing the Cost of Revenues. 49 Direct costs are typically those that scale with revenues, variable costs and the related overhead to make a product or deliver a service. 50 Direct Costs are the firm's resources (supplies, materials, labor, sales commissions, freight) that go into the production or performance of a product/service 51 Indirect Costs exclude expenses that wouldn't be incurred without that particular sale. Indirect costs are resources used to produce more than one sale. 52 53 Enter formulas in the yellow cells to create model. 54 55 Industry Unit Model 2016 2017 2018 2019 CAGR 56 Estimated Total Market Size in Units 650 748 860 989 15% 57 Growth Rate 15% 15% 15% 58 Estimated Percent Direct 33% 40% 48% 58% 20% 59 Direct Market Size in Units 217 299 413 569 60 Retail Market Size in Units 433 449 447 419 61 62 Company Competitor 63 Company Unit Models 2016 2017 2018 2019 CAGR 2016 2017 2018 2019 64 Estimated Direct Market Share 50% 45% 40% 35% -11% 50% 55% 60% 65% 65 Estimated Retail Market Share 70% 75% 80% 85% 7% 30% 25% % 20% 15% 66 Direct Units Sold 108 135 165 199 23% 108 164 248 370 67 Retail Units Sold 303 336 358 356 6% 130 112 89 63 68 Total Units Sold 412 471 523 556 11% 238 277 337 433 69 0% 70 Revenues Model 2016 2017 2018 2019 CAGR 2016 2017 2018 2019 71 Price to Direct 200 200 200 200 0% 190 180 170 160 72 Price to Retailers 125 125 125 125 0% 125 125 125 125 73 Direct Revenues 21,667 26,910 33,010 39,859 23% 20,583 29,601 42,087 59,219 74 Retail Revenues 37917 42,047 44.701 44,535 6% 16,250 14,016 11,175 7,859 75 Total Revenues 59,583 68.957 77,710 84,394 12% 36,833 43,617 53,262 67,078 76 77 78 Gross Profit Model 2016 2017 2018 2019 CAGR 2016 2017 2018 2019 79 Unit Cost 100 100 100 100 0% 111 111 111 111 80 Direct Cost of Revenues 10,833 13455 16,505 19,930 23% 12,037 18,272 27,508 41,124 81 Retail Cost of Revenues 30,333 33,638 35,760 35,628 6% 14444 12,458 9,933 6,986 82 Direct Gross Profit 10,833 13455 16,505 19,930 23% 8,546 11,329 14,579 18,095 83 Retail Gross Profit 7,583 8409 8.940 8,907 6% 1806 1,557 1,242 873 84 Total Gross Profit 18417 21,864 25,445 28,837 16% 10,352 12,886 15,821 18,968 85 86 EBIT (Operating Profit) Model 2016 2017 2018 2019 CAGR 2016 2017 2018 2019 87 Direct SG&A Percent 10% 10% 10% 10% 10% 10% 10% 10% 88 Retail SG&A Percent 5% 5% 5% 5% 5% 5% 5% 89 Direct SG&A 2,167 2,691 3,301 3,986 23% 2,058 2,960 4,209 5,922 90 Retail SG&A 1,896 2,102 2,235 2,227 6% 813 701 559 393 91 Direct EBIT 8,938 11,353 14,270 17,703 26% 6,488 8,369 10,371 12,173 92 Retail EBIT 5,688 6,307 6,705 6,680 6% 993 857 683 480 93 Total EBIT 14,625 17,660 20,975 24,383 19% 7,481 9,225 11,053 12,653 94 95 Use the model you have created to answer the following questions. CAGR 9% A e -21% 51% -22% 22% 0% CAGR -6% 0% 42% -22% 22% CAGR 0% 51% -22% 28% -22% 22% CAGR 5% 42% -22% 23% -22% 19% 95 Use the model you have created to answer the following questions. 96 What was the CAGR of the overall market in units? 97 98 99 100 What was the CAGR of the 'Direct Market Size in Units'? 101 102 103 What was the CAGR of the competitor's 'Total Revenues'? 104 105 What was the CAGR of the competitor's price to Direct? 106 107 108 What was the CAGR of the company's total EBIT 109 110 111 Did either company earn the majority of profits in Direct sales. 112 113 114 What was the impact of the competitors aggressive pricing strategy? 115 116