Should the cost of new sales recruits be included in the forecast? 4. If, in response to the question above, you believe the analysis should be modified, do so and prepare to discuss the results you obtain. What assumptions are the “key drivers” of your results? 5. Which marketing strategy should Rotator recommend? DESCRIPTION OF THE PROBLEM In September 1990, Emilio Rotator, financial controller of Loon’s Gallo Italian S. P. A. , began to evaluate strategies for launching a new product called Zinnia, an oral antibiotic remedy to current drugs for flu-like feverish diseases.
With the existence of an already capture a large market share found itself infeasible if the company wanted this product to main profitable. As a result, Gallo is considering two options; the opportunity to either directly sell the product or to co-market the product. Under the co-marketing distribution method another company would be given ingredients and rights to produce the same product under a different brand name in an attempt to increase product marketing. Under the direct sales approach Glass’s sales force would be the only medium of distribution.
Decision as to which form of sales methods the company would choose would highly affect the company’s financial criteria, strength of brand equity, or lack of sales, so proper implementation of one of these programs was necessary for Gallo to maximize their return on shareholder’s equity. Mr.. Rotator focused highly on payback and AIR for his criteria for evaluating results. Based on these criterion, Rotator’s results specifically implied co-marketing option would be the best method of distribution. The question is, however, whether Mr..
Rotator has properly taken into account all significant costs in his models and whether these generated results from the payback and AIR criteria accurately representing the firm’s market position and value. We came to the conclusion immediately that Mr.. Rotator has not accounted for all of relevant costs involved with this product. He stated that solely manufacturing and promotional costs are considered relevant and that the remaining items, such as historical and future R&D, medical testing costs, real financial charges, and taxes, are not taken into account.
We feel that these costs are in fact relevant and should be included in Glass’s forecast. First we included R expenses, local production and bottling costs, custom and transportation fess in our forecast. Calculated by 80%, 20%, and 4% of transfer price and product mix we forecasted 3. 6 billion, . 91 billion and . 02 billion lira, respectively. We also decided to include the expected Italian Lira inflation rate of 4% instead of using 0%. Furthermore, we felt that a 6 year forecast to 1996 was not sufficient enough for a forecast of Zinnia’s potential seeing as most product lives are 10-20 years.
Therefore our second step was forecasting market demand of antibiotics and the specific market share for Zinnia through both the direct sales strategy and co-marketing strategy further into the future, up to year 2000. We used a rolling average of the market forecasts room 1993-1996 as our basis for any market forecast past 1996 and for the market share as a reasonable rate of decline beyond 1996(Gallo Case Study, Footnote 13). After calculating both the expected market share of Zinnia and the market demand forecasts for antibiotics we were able to forecast expected quantities of units sold by Gallo and furthermore, revenues.
We then extrapolated Gross Margin and marketing expenses as percentages of revenues Just as Mr.. Rotator had in his forecast and were able to determine the compensation cost for sales force #1 by assuming that the cost per salesperson loud grow by 4%, the inflation rate of the lira(as noted in Gallo Case Study, Footnote 12). We then included our costs for other expenses that we calculated in our first step above to come up with our projected profits (or losses) for each year, which would prove to be our best p rosy for Gallo Italian’s free cash flows (Off’s) outside year 1996.