Shereen Hamza

Sgh0094

Individual Case Summary for:

Haverwood Furniture, Inc. Case A

MKTG 5150.007/080

Marketing Management

Spring 2019
Problem(s): “What should be Haverwood’s marketing communications (promotion) program and budget for 2008 in order to
achieve its communication objectives?”

Recommendation(s): The table below illustrates the recommended changes to the promotional budget that Haverwood Furniture
should implement for the upcoming year (2008). These changes reflect the priority of the identified communications objective listed
in the case. There are five core approaches to consider when determining the size of a communications budget:
 the percentage of sales approach: tends to be inflexible; not market orientated; when sales increase, communication
expenditures increase
 competitive parity approach: where an organization attempts to maintain a balance between its communication
expenditures and those of its competitors (benchmarking)
 objective task force: when an organization budgets communication as a function of the objectives set for a communication
program and the costs of the tasks to be performed to accomplish the objectives
 advertising share of voice: commonly used for determining the balance of the competitive parity approach; it is the
percentage of a company’s expenditure in comparison to the total industry expenditure; used when companies want to
improve their competitive position
 all available funds: usually used to introduce a new offering for which maximum exposure is desired

Considering all five approaches, only the first three strategies appear to be applicable in the Haverwood scenario. The first
tactic - percentage of sales approach- should be used due to its simplistic nature. It is typically used to project changes from one year
to the next on anticipated sales; but is only used to set a total cap on the budget, not to establish the budget for individual line items.
This explains why the most effective budgeting strategy is the objective task force since it considers the firm’s overall promotional
objectives and then allocates funds according to the requirements for meeting those goals. To check how reasonable their budget
allocation is in totality and/or by line item, Haverwood can use a competitive parity approach. This approach might be able to
validate an increase or decrease in the budget when trying to reach the same level of performance as a competitor or industry
standard. Because HF has a policy of budgeting 5% of expected sales for total promotional expenditures it cannot improve its
advertising share of voice, nor does it need to use all its available funds since it is not a new company introducing a new innovative
product/concept.

Haverwood's Furniture, Inc. Budget Proposal & Communications Program 2008

2007 1 2008 $ change between 2007-2008 % change
Revenue 2
$75,000,000 $78,000,000 $3,000,000 4.00%

Sales Expenses and Administration $995,500 $1,130,500 3 $135,000 13.56%

Cooperative Advertising Allowance $1,650,000 $1,716,650 4
$66,650 4.04%
Trade Advertising $467,000 $490,350 5
$23,350 5.00%
Consumer Advertising $562,500 $562,500 6
$0 0%
Total $3,675,000 $3,900,000 7 $225,000 6.12%

Computations
1
Data provided in Exhibit 2

2
$75,000,000*1.04=$78,000,000

3
$995,000 + $65,000 (increase in sales exp. & admin.) + $70,000 (for additional employee)= $1,130,500
Data provided on page 301

4
$3,900,000-$1,130,500-$490,350-$562,500 = $1,716,650

5
($467,000/1000 stores)= $467 cost of advertising per store; $467 * 50 new stores= $23,350
$467,000+$23,350=$490,350

6
consumer advertising= same levels as 2007 (page 301); on the assumption that consumer advertising is the least important
communication objective
 7
$78,000,000*.05=$3,900,000
Communication Objectives: Haverwood Furniture has four principal communication objectives: Penetrate existing outlets with
Haverwood Furnitures (HF) Full Line, Maintain Retail Support, Reach Consumer at Critical Points in Furniture Buying Process, and
Improve Company Brand Image and Brand Awareness. To achieve these objectives, HF will need to primarily utilize a push promotion
strategy. A push promotion strategy concentrates on channel intermediaries, building relationships, and personnel selling to
wholesalers and retailers. This strategy is typically used when an organization has obvious identifiable buyers, the offering is complex,
buyers view the purchase as risky, and the organization has limited funds for direct-to-consumer advertising. A push strategy centers
more on trade advertising, personnel selling, and cooperative advertising.
Unlike a push strategy, a pull strategy emphasizes more on consumer advertising, free samples and coupons to stimulate
end-user awareness and interest. For effective consumer advertising to exist, there must be a primary demand for a product, the
product must be differentiated from competitors, the product must have unique qualities/benefits, and there must be strong
emotion buying motives involved. An advertising opportunity decreases when one or more of these conditions are not met.
However, it is not to say that HF will not employ some indirect pull strategy. Investment in consumer advertising stimulates consumer
demand, hence increasing product or services sales volume.
Penetrate existing outlets with Haverwood Furnitures (HF) Full Line: The most vital communication objective begins with
penetrating the existing outlets with HF’s full line of existing collections, along with its new styles of living room and dining room
furniture, since it is difficult to make sales when the product is unavailable. Because consumers find it difficult to choose among the
many furniture styles available, and to imagine how the furniture would look in their homes, it is important for manufacturers to
showcase their furniture in an exclusive manner.
According to the case, a significant trend among future retailers is the movement towards the ‘gallery concept,’ where the
product is represented in a unique and comfortable setting without the lure of competitive brands. This advertising method can help
a customer visual the individual pieces of furniture and transition them from the consideration/preference phase to the purchase
phase. Case Exhibit 5 illustrates that 58% of HF’s target market have been inspired with home decorating ideas in a gallery store,
while another 53% have been inspired at a furniture store. Consequentially, 45% of consumers made a purchase in the gallery store,
while another 51% made a purchase in the furniture store.
This means Hf’s most profitable opportunity lies in retail outlet displays. While a combination of promotional tools will be
needed to reach this objective, the primary tool will be trade advertising since it accounts for furniture store displays. The case states
that 50 new accounts will be added in 2008, making the new HF store quantity 1050. According to the case, $467,000 was spent on
trade advertising in 2007, with a quantity of 1000 stores. This means that $467.00 were allocated for each store ($467,000/1000
stores=$467.00). Using this formula, an additional $23,350 will be needed to support the 50 new accounts, making the total trade
advertising budget $490,350.00 for 2008.
Maintain Retail Support: The second most important communication objective is to maintain retail support through
personnel selling and cooperative advertising. According to Standard & Poor’s Industry Surveys, the competition for home furniture
on the retail floor will require even more support, including store personnel sales training, innovative merchandising, inventory
management and advertising. Haverwood’s experience has shown that sales efforts in the retail store, by company representatives,
account for as much as one-half of the company’s sales in any given year. This success is most likely because these representatives
are expected to motivate retail salespeople to sell their line, assist in setting up displays in stores, and give advice on a variety of
matters to their retailers and salespeople. Standard & Poor’s Industry Surveys statement, along with HF’s experience, support the
proposal by HF’s vice president of sales to hire an additional sales representative at $70,000; increasing the total cost of sales
expenses and administration costs to $135,000 ($70,000 for representative + $65,000 for expected rise of sales expenses and
administration costs in 2008).
The consumer panel sponsored by Better Home and Gardens states that 85% of subscribers read furniture ads before they
actually need furniture, signifying that these newspaper ads are a valuable promotional tool. Consumer Exposure to these ads would
benefit both Haverwood Furniture and retail stores because it would pull customers into store locations that do carry the HF brand,
while allowing expert HF sales representatives to utilize a push marketing strategy to finalize the sale. According to the case, HF
already allocated 44.9% ($1,650,000/$3,750,000= 0.4489) of their promotional dollars in 2007 to cooperative advertising , and that
their cooperative advertising allowances are matched by funds provided by retailers on a dollar-for-dollar basis (essentially doubling
their funds). This means that a significant budget increase for this segment is not required, but that any remaining dollars should be
allocated here (after considering the increased costs of trade advertising and sales expense and administration in the upcoming
year).
Reach Consumer at Critical Points in Furniture Buying Process: According to the results of a consumer panel sponsored by
Better Homes and Gardens, 99% of subscribers agreed with the statement that ‘When shopping for furniture and home furnishings, I
like the salesperson to show me what alternatives are available, answer my questions…’ and 63% of the subscribers say they need
decorating advice to ‘pull it all together.’ Many consumers acknowledge that they lack the confidence to assess furniture
construction, make judgements about quality, and accurately evaluate the price of furniture. Consumer research data have prompted
both furniture retailers and manufacturers to stress the need for well-informed retail sales personnel to work with customers. The
first questionnaire in the Appendix (page 302) states that 77.5% of subscribers from The Better Homes and Gardens magazine found
it ‘very important’ to have well-informed salespeople when deciding what store to buy furniture from. This insight to consumer
buying behavior promotes HF’s current strategy of hiring sales personnel because their employees are expected to influence their
consumers at critical points in the furniture buying process . Hiring company representatives is highly beneficial because it narrows
their focus to one product line to advise on, promote on, and educate on.
Improve Company Brand Image and Brand Awareness: In most industries, brand reputation plays a significant role in a
company’s success because it elicits consumer demand. However, the selected findings from The Better Homes and Gardens
consumer panel report (found in the appendix) prove otherwise. The second questionnaire (page 303) demonstrates that only 6.2%
of subscribers from The Better Homes and Gardens magazine found the reputation of the manufacturer or brand name as the most
crucial factor when purchasing furniture. The third questionnaire (page 303) shows that only 4.2% of subscribers were influenced by
a manufacturer’s reputation when purchasing furniture, and only 9.1% were influenced by brand name. These results indicate that
Michael Hervey’s proposal to increase the consumer advertising budget by $225,000 is misguided. Additionally, the National Home
Furnishings Collaborative recommends that wood furniture manufacturers only spend 1% of their sales exclusively for consumer
advertising. Assuming all other competitors adhere to this recommendation, HF can employ a competitive-parity approach and
reduce the percentage of funds allocated for this segment in 2008 since they spent an aggressive 15.3% ($562,500/$3,675,000=.153)
in this sector the previous year.
Instead of concentrating on improving brand awareness/reputation with its consumers, Haverwood Furniture should focus
on expanding brand awareness with its retailers and sales representatives since they are the driving force behind purchases.
According to the case, 10 manufacturers represent about one-third of U.S. furniture industry dollar sales, 25 manufacturers account
for over half of U.S. furniture sales, and 10 furniture brands account for 28% of industry sales (shown in exhibits 3 and 4). This
reiterates the recommendation that HF needs to increase the promotional advertising budget in trade advertising, sales expense and
administration, and cooperative advertising.

Consumer Buying Behavior: Consumer spending for wood furniture is highly cyclical and closely related to the incidence of new
housing starts, consumer confidence, and disposable personal income. Because wood furniture is expensive and frequently sold in
sets, consumers tend to postpone these types of purchases. Exhibit 4 shows that people in between the ages of 35-44 spend the
most in furniture expenditure, indicating that significant life changes, such as job promotions, marriage, children, stimulate these
types of purchases. Although most consumers consider the furniture shopping process to be enjoyable, Standard & Poor’s Industry
Surveys claims that consumers are quite finicky when it comes to buying furniture since most consumers know very little about
evaluating the price or quality of furniture and consequentially base their furniture choice on the price. 36.8% of subscribers of
Better Homes and Gardens add that ‘once [they] fund something [they] like in furniture, [they] wish it would last forever so [they’d]
never have to buy again’ (questionnaire 4, page 304). The complexity of furniture shopping has caused many consumers to lack
confidence when it comes to making decisions and rely more on well-informed retail sales personnel to help them understand their
options.

Increasing Costs and Decreasing Margins: In the January budget meeting, Charles Bates, president of Haverwood Furniture, Inc,
mentions that higher material costs, pricing pressure, and a recent wage increase are forecasted to squeeze HF’s gross profit margin
and threaten the company objective of achieving a 5% net profit before taxes. In the same budget meeting, John Bott, vice
president of sales, mentions an estimated total promotional budget of $3,975,000 in 2008. However, due to the 5% percentage-of-
sales policy limit, the budget is capped off at $3,900,000.
The higher material costs most likely stem from the wood manufacturer’s increased emphasis on quality by monitoring the
entire production process from the raw materials used, to construction, finishes and packaging; while the pricing pressure stems
from overseas imports. Imports have driven down furniture prices by as much as 30% in some furniture categories (page 298). Due
to these cost concerns driving down the gross profit margin, it is recommended that HF adheres to the percentage of sale policy and
saves the additional $75,000 as a cushion against any potential deficit.