Goal Programming for Marketing Decisions: A Case Study

Author(s): Sang M. Lee and Roy E. Nicely

Source: Journal of Marketing , Jan., 1974, Vol. 38, No. 1 (Jan., 1974), pp. 24-32
Published by: Sage Publications, Inc. on behalf of American Marketing Association

Stable URL: https://www.jstor.org/stable/1250163

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

American Marketing Association and Sage Publications, Inc. are collaborating with JSTOR to
digitize, preserve and extend access to Journal of Marketing

This content downloaded from

182.181.158.5 on Mon, 18 Nov 2024 18:58:33 UTC
All use subject to https://about.jstor.org/terms
Sang M. Lee and Roy E. Nicely

Goal Programming for Marketing

Decisions: A Case Study
A new tool is provided for the simultaneous solution of conflicting marketing goals.

T HE reality of business management requires related to linear programming (LP).1 GP is cap-

that individual actions taken with respect to able of handling decision problems that deal with
particular business functions be evaluated for a single goal comprising multiple subgoals as well
their probable overall impact. Marketing actionsas problems having multiple goals with multiple
are no exception. Before resources are committed subgoals. In the conventional LP method, the
to a marketing proposal, management needs to objective function is unidimensional-either to
determine as efficiently as possible the probable maximize profits (effectiveness) or to minimize
results for each of the identified, admissible al- costs (sacrifice). The GP model handles multiple
ternative courses of action. Contemplated mar- goals in multiple dimensions; there is no dimen-
keting actions must be pretempered by careful sional limitation of the objective function. Also,
analysis as to their likely effects on other func- in many cases where LP would yiela an infeasible
tional activities and their potential contributions solution, GP will still yield a feasible solution.
at every level in the organization's hierarchy of Often goals set by the decision maker can be
goals. achieved only at the expense of other goals. Fur-
Fortunately, the decision sciences have evolved ther, certain combinations of these goals may
to a point where such careful, efficient analysis create inherent conflict for the organization. Thus,
is now practicable through the application of there is a need to establish a hierarchy of im-
mathematical and, specifically, goal programming. portance among the potentially incompatible
Of course, such techniques do not obviate the goals so that the lower order goals are considered
need for a decision. The contribution of goal only after the higher order goals are satisfied
programming derives from its structure, which or have reached the point beyond which no fur-
permits logical, sequential progression through ther improvements are desirable.
analyses that heretofore were largely dependent In GP, instead of trying to maximize or mini-
on intuitive appeals and experience-based judg- mize the objective function directly, the devia-
ments. Unlike other quantitative techniques such tions between goals and what can be achieved
as linear programming, goal programming pro- within the given set of system constraints are
vides a way for managers to determine the ex- to be minimized. In the simplex algorithm of
tent to which several conflicting goals may be LP, such deviations are called "slack" variables.
realized simultaneously. These deviational variables (di) take on a new
The following problem and its solution via a significance in GP. The deviational variable is
goal programming model demonstrate one way represented in two dimensions, both positive and
that analyses of multifaceted problems or oppor- negative deviations from each subgoal or goal.
tunities can be improved with reasonable invest- The objective function becomes the minimization
ments of time and effort. of these deviations, based on the relative impor-
tance or preemptive priority weights (Pj) as-
signed to them. The objective function, however,
The Goal Programming Approach
may also include decision variables with ordinary
or preemptive priority weights in addition to the
The purpose of this paper is to present, and
deviational variables.
illustrate the use of, an important technique for
the analysis of marketing problems involving mul- 1. See A. Charnes and W. W. Cooper, Management
Models and Industrial Applications of Linear Program-
tiple goals and linear relationships. The technique
ming, Vol. 1 (New York: John Wiley & Sons, 1961); Y.
is called goal programming (GP) and is closely
Ijiri, Management Goals and Accounting for Control (Am-
sterdam: North Holland, 1965); and Sang M. Lee, Goal Pro-
gramming for Decision Analysis (Philadelphia: Auerbach,
Journal of Marketing, Vol. 38 (January 1974), pp. 24-32. 1972).

24

This content downloaded from

182.181.158.5 on Mon, 18 Nov 2024 18:58:33 UTC
All use subject to https://about.jstor.org/terms
 Goal Programming for Marketing Decisions: A Case Study 25

The primary characteristic of GP is that it provide valuable information in regard to how

allows for an ordinal solution. Stated differently, resources should be allocated to various market-
management may be unable to obtain informa- ing projects and where trade-offs must occur
tion on the cost or value of a goal or a subgoal, among goals due to limited resources. The fol-
but often upper or lower limits may be stated lowing case demonstrates the application of goal
for each goal. Usually the manager uses his judg- programming for aggregative marketing strategy.
ment to determine the priority of the desired Mr. Rayne is the principal stockholder and
attainment of each goal or subgoal and rank them manager of Raynebo, Inc., a lessor of color tele-
in ordinal sequence. Economically speaking, the vision receivers in a large, eastern standard
manager works with the problem of allocating metropolitan statistical area (SMSA). Raynebo,
scarce resources. Obviously, it is not always pos- Inc., in competition with three other similar firms,
sible to achieve every goal to the extent desired seeks to profitably serve the institutional market
by management. Thus, with or without GP, the within this SMSA. The target market, then, con-
manager attaches a certain priority to the achieve- sists of hotels, motels, bars, and schools that
ment of a particular goal. lease color television receivers. The present total
The basic concept of GP involves incorporating number of television receivers in service among
all managerial goals into the model as goal con- the intermediate-institutional customers is 5,000
straints. The objective of GP is to achieve a set sets. Demand for this service is increasing
of goals according to their priorities subject to slowly, about 2% per year.
the given set of system (operational) constraints. Raynebo, Inc., has 25% of this market and
Thus, GP involves a repetitive process by which hopes to increase its share profitably. If Ray-
the most important goal (PI) is first considered. nebo's share cannot be increased profitably, then
This is followed by an attempt to achieve the Mr. Rayne wishes to retain the present share of
second goal (P2), to the extent possible, subject the market while realizing a before tax return on
to the first goal achievement already accomplished investment (ROI) of 20%. Raynebo's present in-
and the system constraint relationships. This vestment is valued at $500,000. Seventy percent
process continues until all goals have been con- of the investment is product inventory (1,250
sidered in the priority ranking specified by man- television sets under lease and a replacement
agement. A very important advantage of GP is float of 150 sets). The remainder of the invest-
that the GP model can be easily solved by the ment consists of pickup and delivery vehicles,
familiar simplex procedure.2 spare parts, test equipment, tools, and the like.
Mr. Rayne estimates that Raynebo's operating
Raynebo, Inc.: A Case for Aggregative costs are in line with those of its competitors.
Marketing Strategy
The annual cost per placed television set is
Many marketing decisions involve multiple con- around $48, excluding salaries, wages, and $10,966
flicting objectives. It is extremely difficult to in fixed costs.
answer questions such as what should be done Mr. Rayne is customer oriented. He seeks to
now, what can be deferred, what alternatives are develop a marketing mix that will increase the
to be explored, what kinds of goals are to be probability that Raynebo's marketing goals will
sought, and what should be the priority struc-be reached. Mr. Rayne has defined the three
ture for the goals. Suppose a firm is to formulatebroad goals for the company, in order of priority,
a marketing strategy in order to determine the
as follows:
optimum resource allocation to achieve long- 1. Achieve the minimum ROI of 15%0/ and
range objectives. The firm may attempt to strive for the target ROI of 20%. The amount
achieve a certain level of return on investment, of the investment is to be determined using
secure a given proportion of the market share, the gross value of the firm's assets.
and grant a certain percentage of pay increases 2. Maintenance or improvement of market vol-
to its employees. Here, the assignment of priori- ume, which is now 1,250 leased sets (25 cli-
ties to the competitive marketing actions becomes
ents, each of whom on the average leases
a difficult decision problem. A GP model can 50 sets on a full-time basis). Factors that
2. See Lee, same reference as footnote 1, pp. 93-125. influence Raynebo's share of the market
and its ROI include its promotion effective-
ness and the quality of its customer service
* ABOUT THE AUTHORS.
as compared with its competitors. For ex-
Sang M. Lee is associate professor and coordinator of the ample, it is assumed that a client will not
management science program in the College of Business,
Virginia Polytechnic Institute and State University, Blacks- pay the monthly lease fee ($20 per set)
burg. where a malfunctioning set is not replaced
Roy E. Nicely is associate professor of business adminis- within two hours of notification of the lessor.
tration at Augusta College, Augusta, Georgia. Similarly, a client is lost to a competitor if

This content downloaded from

182.181.158.5 on Mon, 18 Nov 2024 18:58:33 UTC
All use subject to https://about.jstor.org/terms
 26 Journal of Marketing, January 1974

a malfunctioning set goes more than 48 vice was performed satisfactorily. In addition,
hours without replacement. Mr. Snowe is expected to discover and cultivate
3. Retention of present work force. Mr. Rayne prospective new business. With regard to this
believes that a large part of Raynebo's good- latter function, Mr. Snowe is authorized to spend
will is directly attributable to the reputation no more than $110 per week, for which he is ac-
countable.
its employees have built with the clients.
Experience has indicated that employee Mrs. Rayne is the "Girl Friday" at Raynebo. She
turnover affects employee morale and pro- handles all correspondence and accounts. When
ductivity adversely in most instances. Mr. Mrs. Rayne must be absent from the office, tem-
Rayne also believes that the entire operation porary office help is secured. On the average, 100
is less efficient when it becomes necessary toperson-hours of temporary office help are required
bring on a new employee. For these reasons, annually at an estimated hourly rate of $5.00.
Mr. Rayne believes that it is important to min- The four dispatchers-inventory clerks work con-
imize turnover among his workers. He sees tinuously, rotating eight-hour shifts so as to pro-
job satisfaction as crucial to the minimiza- vide full coverage at all times. Except during
tion of turnover. He also feels that job satis- their vacation periods, the dispatchers-inventory
faction derives principally from equitable clerks take turns at acquiring the eight hours of
treatment of Raynebo's employees, especial- overtime wages (overtime is one and one-half
ly in the area of wages and salaries, oppor- times the straight-time hourly wage rate). Each
tunities for overtime, vacation schedules, member of the section is entitled to two-weeks
and the like. vacation with pay. Vacations are scheduled so
The composition of Raynebo's current work only one person is on vacation at any one time.
force is as follows:
When a member of the section is on two-weeks
vacation, the remaining members each work 112
Mr. Rayne: Chairman of the board, presi-
hours (80 hours at straight time and 32 hours at
dent, and chief operating officer
time and one-half). Of course, the vacationing
Salary: $16,000 per year
member receives pay for 80 hours at straight
Mr. Snowe: Executive vice president
time. Wages for the dispatcher-inventory clerk
Salary: $13,000
section amount to $28,272 per year.
Mrs. Rayne: Vice president, secretary-
treasurer
The technicians and bench repairmen schedule
Salary: $10,000 their paid two-week annual vacations so as to in-
sure continuous two-man coverage in the mainte-
4 Dispatchers-inventory clerks
Straight-time hourly rate: $3.00 nance and repair section on a five-day, 8 hours
1 Shop supervisor for maintenance and per day, workweek basis. However, to help in-
repair sure against drawing down replacement float to
an out-of-stock condition during the time a tele-
Salary: $9,600
vision technician-bench repairman is on vaca-
2 Television technicians-bench repairmen
tion, the on-duty repairman works a 58-hour week
Straight-time hourly wage rate: $4.00
each of the two weeks his co-worker is on vacation
4 Pickup and delivery van operators
Straight-time hourly wage rate: $2.50 (10 hours per day Monday through Friday and 8
hours on Saturday). The first 40 hours are paid
Mr. Rayne manages Raynebo's overall opera- for at the straight-time rate and the remaining
tions. He allots two afternoons per week to new 18 hours are paid for at the overtime rate. Sun-
business development and to enhancement of day overtime is avoided whenever possible since
client relations. During these times, he and Mr. it would have to be paid for at twice the straight-
Snowe call on prospective and present clients to time rate. Of course, the shop supervisor sub-
determine their current and projected needs for stitutes for an absent repairman as his super-
color television receivers; to learn about plans visory duties permit. Wages for the two television
for expansion, contraction, relocation, and so on; technicians-bench repairmen total $17,072 per
and to learn how Raynebo's customer service year.
compares with that provided by Raynebo's three The four-man section of van operators works a
competitors. Mr. Rayne limits the amount of shift and overtime schedule that is identical to
company funds he personally spends on public the one previously described for the dispatche
relations to $50 per week. inventory clerk section. Wages for the section
Mr. Snowe is the principal order-getter, client- amount to $23,560 per year.
relations man in the organization. His duties re- Mr. Rayne sees Raynebo, Inc., as a member
quire that he call on every account each week and firm in a differentiated oligopolistic industry with-
that he check personally with each client who re- in the SMSA served by Raynebo and its three
quired replacement service to insure that the ser- competitors. Therefore, he reasons that it would

This content downloaded from

182.181.158.5 on Mon, 18 Nov 2024 18:58:33 UTC
All use subject to https://about.jstor.org/terms
Goal Programming for Marketing Decisions: A Case Study 27

be unwise to attempt price competition. Raynebo's officers believe unani

Instead,
he has chosen to differentiate his above
offering kinds toandthedollar amounts o
target market by providing a better service to crucial to the maintenance of their share of the
customers at a price no greater than that charged SMSA market. They are reluctant to attempt to
by his competitors. quantify the relative importance of each kind of
In his analysis to determine how best to im- promotion.
plement Raynebo's marketing strategy, and hav- In a meeting called to devise a strategy whereby
ing eliminated price as an active variable, Mr. Raynebo Incorporated might grow at a rate equal
Rayne considered carefully the nonprice con- to four times the industry average, Mr. Rayne
trollable variables: product, place, and promotion. reiterated his strongly held belief that promo-
He sees Raynebo's product as the total offering tional outlays would have to continue at the
to its clients; that is, television receivers that are present levels just to maintain parity, that is,
at least equal in appearance and function to those to equal the industry growth rate of 2% annually.
offered by Raynebo's competitors plus Raynebo's Furthermore, he believed intuitively that any re-
superior service, which reduces to a minimum duction in the present kinds or levels of promo-
the probability that final customers of Raynebo's tion would result in the proportional erosion of
clients will ever be without quality television Raynebo's share of the market. However, Mr.
reception capability for more than two hours. Rayne doubted that increasing the amount to be
spent for promotion by more than $2,000 over
In Rayne's estimation, the company's success
the current expenditures would result in a pro-
depends to a large extent upon the combined
portionate increase in the market share.
productivity of the work force as exemplified in
At this time, Mr. Snowe stated that one of their
the way place decisions are planned and carried
out. For without the capability of determining customers was expanding and would require an
a client's immediate need and ways of quickly additional 25 new sets at the beginning of the
satisfying that need, Raynebo's total product is year. He also said that he knew of two "about-
less attractive to the client. Inefficiency on the to-be" clients in the SMSA. Each prospective
part of dispatchers, repairmen, or van operators client would require 50 leased sets. One would
need sets starting the first of March and the other
most likely will result in loss of a monthly lease
fee or, more importantly, permanent loss of the would require sets the first of June.
client to a competitor. Moreover, Mr. Rayne ap- Mr. Snowe then suggested that Raynebo should
preciates the potential of the "web of word of undertake a special sales campaign aimed at the
mouth" to enhance or diminish Raynebo's repu- two "about-to-be" clients. His proposal was to
tation as a provider of quality service. Thus, he offer each of the prospective clients cost-free ser-
believes strongly that the work force must be vice for a period of up to four months provided
fully employed and adequately compensated. the client agreed to lease Raynebo's television re-
ceivers for a minimum of two years. Mrs. Rayne
However, while recognizing the contributions
volunteered that the company would have to pur-
of decisions about the place variable, Mr. Rayne
chase 112 additional sets (an additional 100 sets
has not lost sight of the importance of promo-
under lease and a replacement float increment of
tion. He knows that prospective and present
12 sets) at a cost of $28,000.
clients need to be kept informed about the ser-
vice offered and guaranteed by Raynebo, Inc. The Mr. Rayne reminded Mr. Snowe that their in-
promotion mix consists of personal selling, pub- dustry was a differentiated oligopoly and that
licity, public relations, Yellow Pages advertising, Raynebo's competitors would probably view this
direct mail advertising, specialty advertising, and act as a price cut which they would feel com-
display of the company name, slogan, and tele- pelled to match or exceed.
phone number on pickup and delivery vans. Mr. Rayne had several serious reservations
about the proposed sales promotion campaign.
Mr. Rayne believes the promotional objectives
He reminded the other officers that Raynebo's
of Raynebo can be accomplished by the comple-
mentary activities performed through the above first objective was a before-tax ROI of 20%. He
communications media. The annual costs incurred noted also that costs must be kept under close
control in these times of inflation. Furthermore,
for promotion are as follows:
he stated that because of inflationary pressures
Publicity and public relations $ 8,000 64% he desired an across-the-board pay increase of
Yellow Pages advertising 2,000 16 5%. However, he felt that primary consideration
Direct mail advertising 1,000 8 should be given to the hourly wage earners. More-
Specialty advertising 750 6 over, while he believed Raynebo should do every-
thing practicable to increase its market volume,
Van markings 750 6
no more than $14,500 should be budgeted this
Total $12,500 100% year for all forms of promotion except personal

This content downloaded from

182.181.158.5 on Mon, 18 Nov 2024 18:58:33 UTC
All use subject to https://about.jstor.org/terms
 28 Journal of Marketing, January 1974

selling. Mr. Rayne concluded the meeting by

x, = Salary-Mr. Snowe
x, = Salary-Mrs.
stating that while he agreed that Rayne
the present wor
force would probably x7
not need
= Salary-Shop to be increased
supervisor
x8 = Wages-Dispatchers-inventory
to service two new clients, nevertheless, clerks
the pur
chase of 112 new color television receivers would x9 = Wages-Television technicians-bench re-
reduce the company's financial reserves to an pairmen
irreducible minimum and that under no circum-
xo1 = Wages-Pickup and delivery van opera-
stances would he be a party to financing promo. tors
tion with borrowed funds.
xl = =Wages-Temporary
X12 office
Publicity and public help
relations
The Goal Programming Model for Raynebo, Inc. x13 = Yellow Pages advertising
The development of a GP model requires a x14 = Direct mail
sequence of logical steps.3 These steps include x15 = Specialty advertising
analysis of the following: (1) determination of xl, = Van markings
management goals and their priorities, (2) iden- x17 = Number of leased sets required by "new"
client the first of June
tification of the decision variables, (3) definition
of necessary assumptions for model formulation,
(4) analysis of unique aspects of the problem, Assumptions for the Model Formulation
(5) formulation of model constraints, and (6) For any model formulation, it is necessary to
analysis of the model solution and its mana- define the conditions under which the model is
gerial implications. These logical steps are dis-applicable. The following assumptions will be
cussed in greater detail below. applied to the GP model formulation:

Management Goals and Their Priorities 1. If the number of sets leased is reduced be-
low the present level, the excess sets will be
Management of Raynebo, Inc., has set the fol- placed in the reserve float.
lowing goals in ordinal ranking of priorities: 2. Scheduled revenue per leased set will re-
1. Achieve a return on investment (ROI) of at main constant at $240 per set per year.
least 15% 3. Investment in other sets will remain con-
2. Maintain at least 1,200 leased sets stant at $150,000.
3. Retain the current level of employment 4.
in Variable expenses per leased set will remain
terms of wages and salaries at $48 per set per year.
4. Maintain promotional expenditures at their 5. Fixed expenses will remain at $10,996 per
present level year.
5. Achieve a normal annual market growth of 6. Possible cost for capital if borrowed from
2% or 25 additional leased sets above the outside sources will not be considered.
present level of 1,250 7. The percentage of reserve sets to leased sets
6. Attain the target ROI of 20% is constant at 12 (1,250 x .12 = 150).
7. Grant a pay increase of at least 5% 8. Investment per new set is $250 ($28,000 +
8. Increase promotional expenditures by at 112 = $250 per new set).
least $2,000 9. Investment in new sets will be required one
9. Expand volume by at least 100 new leased month before sets are actually replaced.
sets via the special sales campaign
Unique Aspects of the Model
Decision Variables
There is one primary difficulty in formulating a
For the development of a GP model to achieve GP model for Raynebo, Inc. The difficulty arises
the above-stated marketing goals, the followingbecause three different investment bases are in-
variables should be examined: volved for ROI, that is, the original investment
at the beginning of the year, increase in invest-
x, = Number of leased sets from present in-
vestment base ment because of the market growth, and the in-
crease in investment if the special sales cam-
x2 = Number of leased sets expected to result
from "normal" growth paign is adopted. In addition, the costs and
revenue-generating capacity of the "special" sets
xa = Number of leased sets required by "new"
client the first of March will be different from that of the others.
x4 = Salary-Mr. Rayne For the purpose of this problem, ROI is as-
sumed to be the ratio of net income before taxes
3. See Lee, same reference as footnote 1, pp. 39-62, and
Sang M. Lee and E. R. Clayton, "A Goal Programming(NIBT) to the gross value of total assets. The
Model for Academic Resource Allocation," Management investment is equal to the original $500,000 plus
Science, Vol. 18 (April 1972), pp. B395-B408. capital invested in new television sets:

This content downloaded from

182.181.158.5 on Mon, 18 Nov 2024 18:58:33 UTC
All use subject to https://about.jstor.org/terms
 Goal Programming for Marketing Decisions: A Case Study 29

ROI = NIBT/Investment It is also imperative that appropriate propor-

NIBT = ROI x Investment tions among the various elements of promotional
Since the investment is equal to the original expenditure be maintained.
16
$500,000 plus capital invested in new television
sets:
.36x12 --.64 xi + d2 - d+2 = 0
1=13

.84x13 - .16 (x12 + x14 + x15 + X16) + d-3 -

Investment = 500,000 + 250 (1.12) [x2 + (11/12)
x, + (2/3) x17] .92x14 - .08 (x12 + x13 + x15 + x16) + d-4 -
where 1.12 represents the conversion weight for .94x,, - 16.06 (x12 + x13 + x14 + x16) + d-5 -
the leased sets to total sets, and other weights .94x16 - .06 y xi + d-, - d+6 = 0
i1=12
represent timing adjustments for "special" sets.
Hence, NIBT for the following ROIs will be: (1) P1 goal-goal with the first priority facto
ROI: 15%
(Pj represents the preemptive priority factor.
NIBT = 75,000 + 42x2 + 38.5x3 + 28x17 priority factors have the relationship of Pj>
ROI: 20%
Pj+l,
NIBT = 100,000 + 56x2 + 51.33x3 + 37.33x17 which
however implies
large it maythat the multiplication
be, cannot make Pj+xgreo
NIBT is also equal to revenue less expenses ex- than or equal to Pj.)
clusive of taxes. The most important goal is to achieve a ROI
at least 15 %.
NIBT = 240[xl + x2 + (5/6)x3 + (7/12)x17]
- 1648 [xl + x2 + (5/6)x3 + (7/12)x17] 192x, + 150x2 + 121.50x3 + 84x17
16

- y xi - 10,996
1=4 - i=4
y xi + d-7 - d+7 =-85,996
By rearranging the equation, we derive:
(2) P2 goal
NIBT = 192x, + 192x2 + 160X3 + 112x17
16 The second goal of management is t
- I xi - 10,996 at least 1,200 leased sets.
1=4
x, + d-8 - d+8 = 1,200
Therefore, for an ROI of 15% the equation would
be: (3) P3 goal
192(x1) + 150(x,) + 121.50(x3) The third goal is to retain the current level of
16

+ 84(x17) - xi = 85,996 employment in terms of wages and salaries.

1=4
x4 + d-9 - d+9 = 16,000
For an ROI of 20% the equation would be: x, + d-10 - d+10 = 13,000
192(x1) + 136(x2) + 108.67(x3) x6 + d-11 - d+11 = 10,000
+ 74.67(x17) - x, = 110,996 X7 + d-12 - d+1, = 9,600
1=4 xs + d-13 - d+13 = 28,272
So far no consideration has been given to the x9 + d-14 - d+14 = 17,072
requirement that free service of from one to four x0 o + d-15 - d+15 = 23,560
months was to be offered. The following table in- x1l + d-16 - d+16 = 500
dicates the coefficients for x, and x17 to reflect (4) P4 goal
this requirement.
The fourth goal to achieve is maintaining the
Months of ROI of 15% ROI of 20% promotional expenditures at their present level.
Free Service xs x17 X3 X,,
0 $121.50 $84.00 $108.67 $74.67
16

1 xi + d-17 - d+17 = 12,500

1 101.50 64.00 88.67 54.67 i=12

2 81.50 44.00 68.67 34.67

3 61.50 24.00 48.67 14.67 (5) P5 goal
4 41.50 4.00 28.67 -5.33 The fifth goal of the GP model is to achieve a
normal market growth of 2% or 25 additional
Model Constraints
leased sets above the present level of 1,250.
There are two basic types of constraints in the xl + X2 + d-s18 -d+18 = 12,500
GP model: goal constraints and "fact-of-life" type
system constraints. First, system constraints will(6) P6 goal
be discussed, followed by the goal constraints. The sixth goal of Raynebo management is to
The number of television sets to be leased from achieve the target ROI of 20%.
the original investment base must be limited to
the sets in stock. 192xl
16 + 136x2 + 108.67xa + 74.67x17 -
y xi + d-19o - d+19 = 110,996
x1 + d-1 = 1,250 i=4

This content downloaded from

182.181.158.5 on Mon, 18 Nov 2024 18:58:33 UTC
All use subject to https://about.jstor.org/terms
 30 Journal of Marketing, January 1974

(7) P7 goal TABLE 1

RESULTS
The seventh goal is to grant a pay incre
at least 5% to employees. All
Variable Run of2 the
1 Run Run 3 equat
through x1l were changed to reflect this in
for example, x4 + d-20xi-1,250
d+20 1,250 1,250
= 16,800.
(8) P8 goal
x2 25 25 25
xs 50 50
The eighth level goal x4
is 16,000 16,800 16,000
to increase promot
expenditures by at X, 13,000
least 13,625 13,000
$2,000.
16 x6 10,000 10,500 10,000
X7 9,600 10,080 9,600
, x i + d-28 - d+28 = 14,500
i=12 X8 29,318 29,686 29,686
(9) P9 goal x9 17,926 17,926 17,926
The ninth goal is to expand volume by at least x0o 23,560 24,738 24
100 new leased sets via the special sales cam- x12 8,000 8,000 8,000 x- 500 525 500
paign. Before formulating these goal constraints, xiS 2,000 2,191 2,000
it must be remembered that the number of spe- x14 1,000 1,096 1,000
cial sets leased to each of the "new" clients is x16 750 821 750

50. Hence, goal constraints will be: x16 750 821 750
x17 50
X3 + d-29 = 50
x17 + d-30 = 50
(10) The objective function The First Run

The objective function of the GP model is In to

the first run, the GP model formulated above
minimize the deviational variables with appropri-
is solved with no special sales promotion in mind.
ate preemptive (Pj) and differential weights as-
The results of the first run are presented below
signed to them. and in Table 1.

Min Z = Pld-7 + P2d-8 + P3(d-9 + 2d-lo + 3d-11

Goal Attainment
+ 4d-12 + 7d-13 + 8d-14 + 6d-15 + 5d-16)
ROI of 15% Achieved
+ P4d-17 + P5d-18 + P6d-19 + P7(d-2o + 2d-21
Market share of 1,200 sets Achieved
+ 3d-22 + 4d-23 + 7d-24 + 8d-25 + 6d-.,
+ 5d-27) + P8d-28 + P9(2d-29 + d-30) Retain current employment level Achieved
In the above objective function, differential Maintain current promotion
weights are assigned at the P3, P7, and P9 levels. expenditures Achieved
P3 and P7 represent maintaining or increasing the Volume increase to 1,250 Achieved
current payroll in various job categories. Man- ROI of 20% Achieved
agement assigned greater weights to the payroll Pay increase of 5% to
of hourly workers as compared to salaried em- employees Not Achieved
ployees. At the P9 level, priority is assigned to
Increase promotional
acquiring new clients at the end of March over
expenditure by $2,000 Not Achieved
getting a new client at the end of June.
From the above results it should be evident that
Solutions and Discussion
the management of Raynebo, Inc., could achieve
The GP model provides three types of solu- most of the important goals. With the volume of
tions: (1) identification of the input (resource) 1,275 leased sets and no significant increase in
requirements to attain all the desired goals, (2) payroll and promotional expenditures, the firm
the degree of goal attainments with the given could attain 20% ROI exactly. A pay increase of
input, and (3) the degree of goal attainments 5% to all employees was not completely attained,
under various combinations of inputs and goal although the solution was the best the firm could
structures. This study presents three separate achieve. Only the television technicians-bench re-
solutions in order to demonstrate the capability pairmen received the desired 5% raise. The dis-
of the model. First, the model is solved with no
patchers-inventory clerks received a little over
"special" sales promotion. The second run offers 3% increase ($1,046 out of desired $1,414 increase).
two months free service to promote special sales.All other employees received no pay increases.
The third run considers four months of free ser- This result was derived because the model as-
vice with the sales promotion. The solutions ofsigned
the greater differential weights to pay incre
model are based on the modified GP simplex com-for these two employee categories in the objec
puter program.4 function. With the given resources and the prio
4. See Lee, same reference as footnote 1, pp. 140-147. ity structure of goals, there was no way to all

This content downloaded from

182.181.158.5 on Mon, 18 Nov 2024 18:58:33 UTC
All use subject to https://about.jstor.org/terms
 Goal Programming for Marketing Decisions: A Case Study 31

cate the desired $2,000 additional funds

be able forexactly
to achieve pro-20% ROI with the tota
motional expenditures. of leased sets at 1,325 and four months of free ser-
vice to the new customers (50 sets). However,
The Second Run the increased cost had its toll. The firm could
provide 5% pay increases to the dispatchers-inven
In the second run, the model includes two
tory clerks and television technicians-bench re-
months of free service as a means for the special
pairmen. The pickup and delivery van operators
sales promotion. Hence, the ninth goal is toreceived
ex- about 4% pay increase ($1,066 of the
pand the current volume by at least 100 new desired $1,178). All remaining employee groups
leased sets. The results of the second run are
did not receive any pay raises. Furthermore, the
shown below and in Table 1.
firm could not allocate $2,000 in additional funds
Goal Attainment to the promotional expenditure as desired.
ROI of 15% Achieved From the results of the three runs derived

Volume of 1,200 sets Achieved above, it is clearly evident that the firm sh
adopt the policy of two months free service f
Retain current employment level Achieved
the special sales promotion in order to attain t
Maintain current promotion desired goals to the greatest possible extent. T
expenditures Achieved decision alternative provides the largest volume
Volume increase to 1,250 Achieved increase, maximum revenue, and optimum allo-
ROI of 20% Achieved cation of resources.

Pay increase of 5% to There all are two points that deserve special at-
employees Achieved tention. First, in the above goal programming
Increase promotional model the impact of the special promotion in
expenditure by $2,000 Not Achieved a differentiated oligopoly situation was not con-
sidered. If the special promotion was indeed
Increase volume by 100
viewed as a price-cutting practice by Raynebo's
through special promotion Achieved
competitors, it might initiate a degenerative com-
The results of the second run indicate that petitive spiral in the market. Undoubtedly, such
Raynebo, Inc., could achieve all its goals except
a consequence would result in changes in the
the eighth goal (increase of promotional expendi-model coefficients (i.e., rental fee, effectiveness
tures by $2,000). The firm achieved exactly measures
20% of various promotional mixes, etc.). It
ROI while providing a 5% payroll increase and is also
extremely difficult to measure the exact reper-
an increase of $1,191 in the promotional expendi-cussions of such a special promotion project.
ture. This was possible because the special pro- Perhaps a game theoretic approach could be
motion resulted in an increase of 100 additional used to analyze the change in model coefficients.
leased sets, thereby achieving the total of 1,375Once the resulting changes in coefficients were
leased sets. The additional revenue generated by determined, the GP approach could incorporate
the increased volume was not sufficient to pro-
the impact of the special promotion into the
vide the desired increase of $2,000 in the pro-
model. The second point that must be considered
motional expenditure. However, $1,191 of addi- is whether firms are concerned with the market
tional funds was allocated to the promotional share (volume of leased sets) when ROI is being
efforts.
measured, or vice versa. Clearly, these two are
closely related criteria of organizational effective-
The Third Run ness. In the opinion of the authors, ROI can be
In the third run, the model formulated for the improved through many organizational innova-
tions while market share remains relatively stable.
second run is modified slightly. Here, the ninth
In this study, ROI and market share have been
goal is to expand volume by at least 100 new
treated as two distinct but related goals by
leased sets by providing four months of free ser-
vice to new customers. This extended free service Raynebo, Inc.
will undoubtedly increase costs and thereby affect
Conclusion
the ROI. The results of the solution indicate that
all goals would be completely attained, except the This paper has discussed the application of goal
seventh (pay increase of 5% to all employees), programming to strategic marketing decision
eighth (increase of promotional expenditure by analysis through a case study. Many real-world
$2,000), and ninth (increase volume by 100 sets marketing problems involve multiple conflicting
through the special promotion) goals. The values objectives. The GP approach on the basis of the
of the decision variables are also presented inordinal solution appears to be the most promising
Table 1. technique, at least at this stage of decision sci-
The results indicate that Raynebo, Inc., would ence development. This approach has been ap-

This content downloaded from

182.181.158.5 on Mon, 18 Nov 2024 18:58:33 UTC
All use subject to https://about.jstor.org/terms
 32 Journal of Marketing, January 1974

plied for the optimization of specific

influence the marketing decision process. aspe
In thi
marketing operation,study,
such as sales
the GP approach effort
was utilized because it allo
tion5 and advertising
allows media
the optimizationscheduling.6
of multiple conflicting H
ever, the true impact of the GP application to goal attainments while permitting an explicit con-
marketing appears to be in aggregative market- sideration of the existing decision environment.
ing decision analysis, as attempted in this study. Developing and solving the goal programming
Numerous management science techniques have model points out where some marketing goals
been applied to the optimization of marketing cannot be achieved under the desired policy and,
decision problems. However, they have generally hence, where trade-off must occur due to limited
neglected or often ignored the priority structure
resources and conflicts among goals. Further-
for goals, the unique organizational values, and
more, the model allows the manager to review
the bureaucratic decision structure. Yet these
critically the priority structure for the goals in
are important environmental factors which view greatly
of the solution derived by the model. In-
5. See Sang M. Lee and M. Bird, "A Goal Programming deed, the most important property of the goal
Model for Sales Effort Allocation," Business Perspectives, programming approach is its great flexibility,
Vol. 6 (Summer 1970), pp. 17-21. which allows model simulation with numerous
6. See A. Charnes, et al., "A Goal Programming Model
for Media Planning," Management Science, Vol. 14 (April variations of constraints and priority structur
1968), pp. B423-B430. of goals.

MARKETING MEMO T

Criteria for an MIS model...

Following are five criteria that such models should satisfy.
First, they should be simple and understandable. While important phenomena
and variables should be included, users often pressure the model builder to increase
complexity and detail. The model builder must resist this tendency until the user
demonstrates that he can handle the increased level of detail. ...
Second, these models should be robust. The structure should constrain answers
to a reasonable range of values and make it difficult for implausible answers to
result from inputs ....
Third, the model should be easy to control; it should respond in the way the
user wants. That is, inputs should be set in order to obtain nearly any outputs.
Marketing decision problems virtually always involve major components of
judgmental input. The decision calculus notion then is that if management judg-
ment is to be an important component, the manager ought to be left in control....
Fourth, the model should be adaptive. It should be easy to change the param-
eters and the structure of the model as new insights and information evolve.
Fifth, it should be complete on important issues. The phenomena that the
manager considers important must be represented either (1) explicitly in the model
structure, or (2) as conditioning factors for specific parameter assumptions. Finally,
the model should be easy to communicate with.
-David B. Montgomery, "The Outlook
for MIS," Journal of Advertising Re-
search, Vol. 13 (June 1973), pp. 5-
11, at p. 10.

This content downloaded from

182.181.158.5 on Mon, 18 Nov 2024 18:58:33 UTC
All use subject to https://about.jstor.org/terms