Blue Mountain Coffee Case (ADBUDG)
Blue Mountain Coffee Case (ADBUDG)
Blue Mountain Coffee Case (ADBUDG)
EXERCISE
VERSION 1.0.3
Exercise
Overview
ADBUDG is an advertising sales response model developed by Little (1970)
that uses judgmental inputs about market responses to determine the best
level and timing of advertising expenditures. This implementation of ADBUDG
is designed to accompany the Blue Mountain Coffee case.
Background
Blue Mountains share of the coffee market slipped badly during past decades,
though its brand share recently has stabilized. The advertising manager was
concerned because the increased advertising budget he had obtained the
previous year was cut back in midyear because top management was
dissatisfied with the results. In addition, he thought it was vital to increase
Blue Mountains share so it would not lose distributors.
The advertising manager faced the problem of preparing and justifying an
advertising budget for the coming fiscal year. He was considering using the
ADBUDG model to help him.
In May 1994, Reginald Van Tassle, advertising manager for the Blue Mountain
Coffee Company, tugged at his red mustache and contemplated the latest
market share report. It was a dismal moment. Blimey, he muttered, Ive got
to do something to turn this darned market around before its too late for Blue
Mountain and for me. But I cant afford another mistake like last years. Van
Tassle had been hired by James Anthoney, vice president of marketing for Blue
Mountain, in the summer of 1992. Prior to that time, he had worked for
companies in the Netherlands and Singapore, gaining a reputation as a sharp
and effective advertising executive. Now, in the spring of 1994, he was
fighting to reverse a long-term downward trend in Blue Mountains market
position.
Lucinda Pogue (the president and a major stockholder of the Blue Mountain
Company) also had been dismayed to hear that Blue Mountain Coffees share
of the market was dropping back toward 5.4 percent, where it had been a year
before. She remarked, rather pointedly, to Reggie that if market share and
profitability did not improve during the next fiscal year, she might have to take
some rather drastic actions, murmuring something about a ticket back to
Singapore.
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and execution. The company and the various agencies agreed that nearly all
the advertising budget should go to spot television. Network sponsorship was
difficult because of the regional character of Blue Mountains markets, and no
other medium could match the impact of TV for a product like coffee.
The team from Aardvark Associates, Inc., won the competition with an
advertising program built around the theme Blue Mountain Pure. Aardvark
recommended a 30 percent increase in the quarterly advertising budget to
give the new program a fair trial. After considerable negotiation with Pogue
and Anthoney and further discussion with the agency, Van Tassle
compromised on a 20 percent increase. The new campaign was to start in the
autumn of 1993, the second quarter of the companys 1994 fiscal year (the
fiscal year started July 1, 1993, and would end June 30, 1994). It was dubbed
Operation Breakout.
Blue Mountain had been advertising at an average rate of $2 million per
quarter for the last several years, seemingly enough to maintain its current
market share of approximately 5.4 percent. Neither Van Tassle nor Anthoney
anticipated that competitors expenditures would change much during the next
few years, regardless of any increase in Blue Mountains advertising.
One basis for the 1994 plans was the expectation that the quarterly spending
level of $2 million (ignoring several variations) would be enough to maintain
market share at its current 5.4 percent level. Van Tassle believed increasing
advertising by 20 percent would increase market share to 6 percent.
This projected result sounded pretty good to Pogue, especially after she had
consulted the companys controller. The controller wrote her a memorandum
about the advertising budget increase and its results (Exhibit 1).
Van Tassle had, of course, warned that the hoped-for 6 percent share was not
a sure thing and, in any case, it might take more than one quarter before the
company saw the full effects of the new advertising program.
The new advertising campaign broke as scheduled on October 1, 1993, the
first day of the second quarter of the fiscal year. Van Tassle was a bit
disappointed with Aardvarks commercials and a little worried by early reports
from the field. The store audit report of market share for July, August, and
September showed only a fractional increase in share over the 5.4 percent of
the previous period. Nevertheless, he thought that, given a little time, things
would work out, and the campaign would eventually reach its objective.
The October, November, and December market share report came through in
mid-January. Blue Mountains share of the market: 5.6 percent. On January
21, 1994, Van Tassle received a carbon copy of a memorandum to Pogue from
I. Figure (Exhibit 2).
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CONFIDENTIAL MEMO
To:
From:
I. Figure, Controller
Subject:
Change in ad expense
That is, we can expect to make $.50 in net contribution for each extra dollar
spent on advertising. You can see that as long as this quantity is greater than
zero (at which point the extra gross contribution just pays for the extra
advertising), increasing our advertising is a good deal.
I think Reggie has a good thing going here, and my recommendation is to go
ahead. Incidentally, the extra funds we should generate in net contribution
(after advertising expense is deducted) should help to relieve the cash flow
bind that I mentioned last week. Perhaps we will be able to maintain the
quarterly dividend after all.
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MEMO
To:
From:
I. Figure, Controller
Cc:
Subject:
On Monday, January 24, Anthoney telephoned Van Tassle to say that Pogue
wanted to review the new advertising program immediately. Later that week,
after several rounds of discussion, during which Van Tassle failed to convince
either Pogue or Anthoney that the program would eventually be successful,
they decided to return to fiscal 1993 advertising levels. Van Tassle
renegotiated the TV spot contracts and, by the middle of February, had cut
advertising back toward the $2 million per quarter rate. Aardvark Associates
complained that the efficiency of their media buy suffered during February and
March because of Blue Mountains abrupt reduction in advertising
expenditures. However, they were unable to say by how much. Blue Mountain
also set the spring 1994 rate at the normal level of $2.0 million. Market share
for the quarter beginning in January turned out to be slightly over 5.6 percent,
whereas for the one starting in April, it was approximately 5.5 percent.
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Questions
Question 1. State precisely what you think the objectives of Blue Mountains 1994
advertising plan should have been. Were these Van Tassles objectives? Lucinda
Pogues? I. Figures?
Question 2. Evaluate the results obtained from the 1994 (FY) advertising funds. What
do you think the results would have been if the 20 percent increase had been
continued for the entire year?
Question 3. What should Van Tassle propose as an advertising budget for 1995? How
should he justify this budget to top management?
Question 4. How should Van Tassle deal with the issues of seasonality and copy
quality?
Question 5. Comment on the uses and limitations of the ADBUDG model as a decision
aid for this case and, more generally, as an advertising budgeting decision aid.
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Getting Started
Open the file Blue Mountain Coffee (ADBUDG).xls in My Documents/My
Marketing Engineering/.
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Step 1
(5.4%)
($2,000,000)
Saturation advertising
(6.3%)
(5.7%)
No advertising
(4.7%)
(0.0%)
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If you modify managerial inputs from their default values, the ADBUDG response
function needs to be recalibrated. If you fail to do so, modifications made in
managerial inputs will not be taken into account.
Step 2
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The top of the sheet contains basic figures required to run simulations:
Copy effectiveness
(1.0)
Media efficiency
(1.0)
(5.4%)
Brand price
($17.20/unit)
Contribution
($4.50/unit)
($17.20/unit)
(22,000,000 cases)
(1.0%)
Column C, advertising, is the key column of the model, where you will
enter different scenarios for advertising budgets. These are also the cells
you will need to optimize using Solver.
Cells D20, D24, and D28 are formulas that compute the annual
advertising budget for the next three years. If you face spending limits,
note those constraints in this area.
The next two sheets graph the key columns of this table.
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Step 3
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Using Solver
In Excel, select the menu option TOOLS SOLVER. The Solver dialog box
appears. If the Solver option does not exist, please refer to the last section of
this tutorial to learn how to install it.
The target cell is cell H34, which tries to optimize the weighted objective.
Click Solve. The software will recommend a solution that maximizes the
weighted objective.
Sometimes the optimization procedure produces an apparently suboptimal
solution for allocating the advertising budget over time, in which case Solver
may have settled on a local maximum. In other cases, running Solver may not
lead to convergence at all. You might obtain a (better) new result by providing
different starting values for the advertising expenditures in each period.
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Installing Solver
In Excel, select the menu option T OOLS ADD-INS. A dialog box appears. Check
the Solver option, and click OK. Solver will install automatically.
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