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26667
Tiinr> 1 Qftl
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
INTRODUCTION TO MANAGEMENT SCIENCE AND MARKETING*
( 26667
June, 1967
* Comments and criticisms are solicited but this paper may not be cited
g,
1967
by
David Bo Montgomery
and
Glen Lo Urban
TABLE OF CONTENTS
page
Introduction _
A Marketing DialoKue in 1988 1
Mansgement Science Tin Marketing: The Present b
Purpose of This Book 9
INTRODUCTION
specializes in marketing research; and Scott, the sales manager for the
company. The scene opens as Bill, Rod, and Scott enter John's office.
John: Morning Bill. .. Rod. .. Scott . What's on the agenda for this
morning?
Bill : We want to take a look at the prospects for our new beef substi-
tute.
(All four gather around the remote cpnsole video display unit,
John activates the console and requests it to display the sales results
from the most recent test market. The system retrieves the data from
John : That looks goodi How does it compare to the first test?
(The console retrieves and displays the data from the first
Rod : Let me check the significance of that sales increase of the most
(Rod requests that the system test and display the likelihood
Bill : Good.' How did the market respond to our change in price?
John : Is that about what our other meat substitute products show?
John: Hmm. .. $5,500,000. Looks good. Is that based upon the growth
Bill : No. This is based upon the penetration progress other food
(He reactivates the product planning model, this time using his
5x11 : Let's see if there's a better marketing strategy for this product.
We must remember that these profit estimates are based on the preliminary
keting program based upon the data and judgmental inputs which are avail-
sales call each week to the new product committees of the chain stores,
Scott : I don't think our salesmen will go along with that- They don't
John : Well, the profit increase is still $500,000, so let's add that
response function.)
video unit based upon his judgment of the effectiveness of the new appeal.)
4
Rod : I think you are underestimating the response on the basis of past
data,
John : Well, this product is different. How much would it cost for a
in profit?
with the product right now. What are the chances of a failure with this
marketing mix?
John: Looks like a 35% chance of failure. Maybe we'd best run further
tests in order to reduce the risk of failure. What's next on the agenda
this morning?
The dialogue presented in this section indicates the probable
assist them in charting the course and evaluating the results of the
firm's marketing efforts. Such systems will provide the manager with
ii decisions. They will also provide him with the capacity to store,
In the period after World War II, a new methodology for analyz-
ena.
ing's past lag may encourage the reader to doubt the compatibility of
firms to seek better methods for decision making. Since marketing costs
are becoming a major proportion of total costs, firms will tend to focus
product lives have made new products of crucial importance to the firm.
to marketing problems.
9
^ po s e.ofThis_Bo^
structure will indicate the overall nature of the problems and will
the analysis. The occurrence of these gaps should not be too surpris-
for the future. It is hoped that this book will supply a base for
to build and implement models for use in analyzing and solving marketing
1. Formulation of a problem
2. Development of a hypothesis for understanding or solving
the problem (usually in the form of a model)
11
-.nethodology.
the behavioral sciences, are all relevant to the area of management science.
prints which represents the larger system. A third model might be a set
be identified:
1. Implicit models
2. Verbal models
3. Logical flow models
4. Mathematical models
the system may be the decision procedure itself. In this way a model
Implicit models are models that are not made explicit by some
that all decisions are made by the use of a model. This is not an
is clear that all decisions are made on the basis of a model, since some
example of a verbal pricing model may be, "follow the price of the
way in which they are related. In Figure 1-1, the simple verbal de-
2
See W. F. Mass/ and J. Saavas, "Logical Flow Models for
,"
Marketing Analysis Journal of Marketing Vol. XXVIII (January, 1964),
,
pp. 32-37.
14
FIGURE 1-1
START
15
might be:
PROFIT = U
q
where
U = Profit
With this model the existing decision structure and new procedures
in which the model treats time and risk. The first classification is
divided into segments: static and dynamic. That is, those models
that do not consider time effects and those that do. The second clas-
or decision maker who approaches his problems using the more formal-
tions about the effects of changing the model or the inputs to the model.
"what if" questions of the model. This definition implies that simula-
They explore the implications of alternatives but they do not find the
tical decision theory and game theory are useful methods for analyzing
uncertainty.
will depend on the structure of the model and purpose the model is
facility with each technique and thereby make it a tool he can use in
should form a tool kit that can be used to solve marketing problems
and the instruction in how it has been and can be used in marketing is
and solving problems. The uses of models will be discussed within this
3
to find optimal or good solutions to his problems.
and predictive models. See Figure 1-2 for the classification of model
uses. Descriptive models are concerned with providing detailed and accu-
transform a large body of detailed data relating this system into a more
consumer panel into a more relevant form. The panel data may be trans-
areas where data are needed and lead to search for this information by
3
For a discussion of limits of rationality, see Herbert A. Simon,
Administrative Behavior (2d ed. New York: Macmillan Co.
; 1961)
,
,
pp. 80-96.
20
FIGURE 1-2
A. Descriptive Models
B. Predictive Models
tures should help the decision maker gain a better understanding of his
testing hypotheses.
for reconciling differing opinions about the nature of the larger system.
problem areas. All these uses are related to improved problem solving
understanding.
models which not only describe but also forecast the system's future
parameters and inputs and then using the model to generate a system fore-
this forecast does not correspond to the actual results, either the descriptive
ation. For example, the manager might have a simulation model of his
response conditional upon some specific marketing mix and some particular
23
The uses outlined in the last two paragraphs indicate that the
exist.
The value of normative models lies in the fact that they yield
to the problem. Such a model may place the problem in a total content
parameters, this would indicate the need for more accurate data con-
normative models is that once they are formulated they can be used to
and assess the desirability of chan^ng the new product's marketing plan.
The "man" is the manager who has a problem or a decision to make. The
questions the system and the system replies with information. (See
figure 1-3.
FIGURE 1-3
MANAGER
WITH
PROBLEMS AND DECISIONS
26
resulting data are stored in a data bank. These data can be examined
by the manager through the display unit after being retrieved from the
find a particular file and deliver it to him. The physical file is then
the display unit and the secretary serves the retrieval function with
the filing cabinet functioning as the data bank. A more complex system
program searching magnetic disk records that make up the data bank.
The manager may not be interested in the raw data per se. In
within the system by the use of a statistical methods bank. This bank
displaying it in the desired form on command from the manager. The data
27
FIGURE 1-4
Information System
THE MANAGER
^TT
X- X X X X
X. X. X X
STATISTICAL
BANK
CO
0)
rH
-a
3
(1)
6
H o
M 0)
CO
X
w XI
c
V y XData
y
_v|^ ^
ENVIRONMENT
transformed in this manner may also be sent back to the data bank to be
The manager may address the system with a request for information
would contain management science models that are designed to solve par-
input data from the data bank in the hope of achieving help in under-
standing and solving his problem. This input data may be the original
model output would be displayed and could then be stored in the data
bank for future retrieval and display. If the manager is not satis-
data, he can initiate tests that will generate new data. His requests
that will be monitored by the system and stored in the data bank. This
new data may then be displayed for the manager's use in making decisions,
The data bank represents the system's first contact with the
environment. The data bank serves as a store house for the information
that the firm views as relevant for its decisions. A typical flata bank
FIGURE 1-5
Data Bank
DATA BANK
DATA PRE-PROCESSOR
V
DATA STORAGE
DISAGGREGATED
CLEAN
RAW
AGGREGATED
ENVIRONMENT
MODEL GENERATED
STATISTICALLY PROCESSED
MANAGEMENT JUDGEMENTS
_^
DATA CAPABILITY
RETRIEVAL
FILE TRANSFORMATION
FILE REORGANIZATION
UPDATING ABILITY
30
code and clean data. Clean data are data that are correctly recorded
and organized. Since errors may occur in data during collection and
The pre-processor may not be used to clean all data. Highly referenced
while other data may be directly stored and cleaned only when it is
data. The appearance of aggregate data in the data bank may reflect
executives.
4
For a further discussion of data handling needs, see
D. Montgomery, "Computer Uses in Marketing Research: A Proposal,"
B.
Journal of Marketing Research (May, 1967), pp. 195-198.
31
and file updating. The first two reflect the need to regroup and
can be used by the statistical or model bank. The last reflects the
bank was given. It might be useful at this point to outline some of the
relevant data which might be stored in such a bank. Figure 1-6 presents
data relates to whether the data are obtained from records internal to
whether the data are based upon internal accounting records or whether
they are generated by other reports and studies. A few examples are
given in the figure. Information from any study which might be useful
Secondary data are external data which have been gathered for purposes
other than that of the firm. Examples would be government data which
32
FIGURE 1-6
A. Secondary Sources
1. Government Data
B. Primary Data
1. Test Markets
2. Market Experiments
ated by test markets and market experiments are prime examples here.
data. The data bank should contain all the data relevant to the de-
TJje .^t^tistical_Baiik
information system. The first is direct display while the other two
are indirect paths through the statistical or model banks. The statis-
tical bank should contain programs which will enable the manager to
test for relationships as well as estimate and test various models and
The first of these are the analysis of variance and other classical
data from the data bank will generally serve as input to these procedures.
34
FIGURE 1-7
Statistical Bank
A. Regression Analysis
B. Discriminant Analysis
C. Factor Analysis
D. Cluster Analysis
A. Cross-Classification
which finds many uses in estimating and testing market response func-
of the assumptions which underlie the model. This will tend to lesseti
statistical bank itself should warn the user of potential pitfalls and
should help prevent naive use of this method. Similar remarks apply to
In the first place, it applies to data which do. not satisfy measurement
to similar tests when the data are only measured on an ordinal scale.
preferably in real time from a remote console, should increase the use
the manager with the ability to estimate probability models whose esti-
structure.
which requires discussion is the model bank. The three major classes
of models in such a model bank are outlined in Figure 1-8 , along with
The last section of the model bank will contain normative models that
section of the bank may contain a number of models. The purpose of the
37
FIGURE 1-9
MODEL BANK
DESCRIPTIVE MODELS
SIMULATION OF MARKET
PREDICTIVE MODELS
STOCHASTIC MODEL OF
CONSUMER BEHAVIOR
MODEL OF RESPONSE TO
COMPETITOR'S PRICE
CHANGES
NORMATIVE MODELS
The "best" model is the one that answers the manager's needs at the low-
est cost. With this requirement upon the system, it is logical to place
and cost of execution of each model were different so that some particu-
them.
The Man
now led to the point of interaction between the system and the manager.
The design and specification of the system are oriented towards the
manager and his needs. To design the system components such as the
The manager's demands will depend upon the relevant problems he faces
and the decision structure he uses in approaching the system. The most
consumer and market behavior. At the next level, the manager may desire
formal decision structure. For example, his procedure may begin with
structure, the manager may request information and guidance from the
system.
the system and interact with it to solve the relevant problems. This
of this book.
This book will not concern itself with the entire information
a basis for the extension of the state of the art of the application of
second chapter of this book will briefly review and summarize some of
ing decisions can begin. The first area of study will be the nature of
plete form until Chapter 8. Chapter 8 integrates the marketing mix and
competitive strategy within the context of new product and product line
organization.
crease the reader's capability to build models that will extend the
state of the art of management science and should enhance the reader's
marketing models.
.;
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