Snackchips in China

Abstract

This case is intended to work well as an exam or a capstone for a course on decision analysis, simulation, real options, and game theory. It explores a conventional snack-chip marketer's strategy in China for promoting and advertising a recently acquired healthy snack-chip brand in mid-2002. The marketer has some key decisions to make, now and in the future, about a range of marketing expenditures in the context of an exciting emerging market and in the face of a formidable competitive threat from its chief rival. The case allows students to consider how two parties' decisions about marketing expenditures and market entry interact and to extend the notion of a single party's downstream decision (or real option) to multiple parties' "interactive" real options. The case's competitive situation can be modeled as a dynamic game of imperfect information, or a multiperiod decision situation with continuous uncertainties and a strategic interaction embedded downstream. Monte Carlo simulation of both parties' payoffs under equilibrium play in the downstream subgame yields a subgame perfect Nash equilibrium, which entails “interactive” threshold policies for both parties.

Excerpt

UVA-QA-0698

Rev. Nov. 23, 2009

SNACKCHIPS IN CHINA

By mid-2002, it was not quite clear how Janessa Caldwell, recently elected CEO of Snack Foods International (SFI), should go about growing the company's new product line, SnackChips, a healthy snack-food product. SFI, a large U.S.-based global manufacturer of conventional snack foods, acquired SnackChips' parent company, International Brands (IB) in 2001 because Caldwell believed in significant growth opportunities for SnackChips beyond its primary market in the United States. “We didn't buy International Brands for its current U.S. sales,” she said. “We bought it for its future growth prospects around the world.” If she did not get top line growth, Caldwell would have paid an awful lot for some cost savings.

One of these avenues for growth was clearly China, where, among others, SFI had some key decisions to make about a range of marketing expenditures in the context of the emerging Chinese market and a formidable competitive threat from its chief rival, Consolidated Snack Foods (ConF). Although a version of the Snackchips brand had been developed for the Chinese marketplace and was available in some Chinese cities, SnackChips was not widely distributed and had not been aggressively promoted in China. Moreover, ConF had yet to develop a healthy snack-food brand for the Chinese marketplace. How SFI went about promoting SnackChips in China now and in the future would almost surely affect its rival's response and SFI's long-term profitability.

Background

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Keywords: decision analysis, simulation, real options, and game theory