Strategic Promotion Timing Analysis for NovaTech Under Competitive Market Dynamics

NovaTech and its competitor, Apex Innovations, both sell high-performance, customizable laptops directly to consumers, competing for the same customer base. Sales occur from October to March. A promotion (a price reduction from $900 to $850) increases the promoting firm’s sales by 40% in that month but shifts 20% of demand from each of the next three months. The competitor loses 25.0% of sales during the promotion month and 10% in each of the following three months. If both companies promote in the same month, each gains 10% in sales and experiences 20% forward buying from the next three months.

When the two firms promote in different months (e.g., Apex in October and NovaTech in December), the effects accumulate over time. For instance, Apex’s October promotion boosts its own sales that month while pulling demand forward from November, December, and January:reducing NovaTech’s sales in those months. Later, when NovaTech promotes in December, it increases its December sales but from a smaller base of demand (already reduced by Apex’s earlier promotion), while also pulling some of its future demand from January, February, and March. Thus, each promotion triggers a chain reaction that alters sales dynamics for both firms over multiple months.

NovaTech employs 66.0 workers who earn $15/hour for regular time and $23/hour for overtime, with a maximum of 40 hours per employee per month. The workers work 20 days a month, eight hours a day on regular time. Each laptop requires 4 labor hours to produce. Up to 10 new workers can be hired at a cost of $500 each and laid off at a cost of $800 each (the number of employees could fluctuate between 60 and 70). Material costs are $300 per laptop, inventory holding costs are $9 per laptop per month, and any unsold inventory at the end of March must be discounted, incurring a cost of $500 per laptop. NovaTech begins October with 2,000 laptops. Shortages are not carried over to the following month; therefore, any unmet demand results in lost sales.

Demand Forecast for Novatech

Month Demand Forecast

Question:
Should NovaTech run a promotion and if so, in October or December?

Hint
Calculate NovaTech’s profit for each option (no promotion, promotion in October, promotion in December), given each of Apex’s possible decisions (no promotion, promotion in October, promotion in December). Identify the option that yields the highest minimum profit across Apex’s decisions.

Brief summary of the assessment requirements 

Task objective:
Decide whether NovaTech should run a promotion : and if so, whether in October or December : by computing NovaTech’s total profit under three NovaTech options (No promotion, October promotion, December promotion) for each of Apex’s three possible actions (No promotion, October promotion, December promotion). Adopt a conservative decision criterion: choose the NovaTech option that maximises the minimum profit across Apex’s alternatives (maximin).

Key outputs required in the submission:

1. Clear statement of assumptions and the demand forecast used (show the demand table for Oct–Mar).

2. A month-by-month sales model for Oct–Mar showing how promotions alter demand (including forward-buying and cannibalisation effects) under every scenario pairing.

3. Calculation of monthly production capacity (regular hours and overtime), labor usage and costs, hiring/layoff decisions and costs, material costs, inventory flows, holding costs, unsold-end-of-March disposal cost, and revenue (price × units sold).

4. Profit calculation broken down by month (revenue − variable costs − labour costs − inventory holding − hiring/layoff costs − end-of-March discount costs) and aggregated over Oct–Mar for each scenario.

5. A payoff table (3×3) reporting total profit for NovaTech for each pairing of NovaTech decision vs Apex decision.

6. Use the maximin rule to identify the safest NovaTech decision (the option whose worst-case profit is highest).

7. Sensitivity notes: brief analysis of how results change with plausible variations (e.g., different labor overtime use, alternate demand elasticity, different unsold cost).

Important modelling details to include (must be explicit):

• Promotion effects on the promoter and competitor each month (apply given percentage changes and forward-buying rules).

• Forward buying: for a promoting firm, +40% that month and −20% of that promotion month’s post-promotion demand pulled forward from each of the next three months (or the provided “both promote” rule if both promote same month). Apply sequentially if promotions occur in different months : cumulative impacts must be tracked chronologically.

• Sales lost due to shortages are lost sales (not backlogged). Inventory can be built in earlier months; inventory holding cost = $9 per laptop per month. Unsold inventory at end of March incurs $500 penalty per laptop (discount cost).

• Production capacity: 66 current workers × 40 regular hours/month = regular labour hours available. Each worker regular pay = $15/hr; overtime pay $23/hr for hours beyond regular. Each laptop needs 4 labour hours. Hiring cost = $500 per new worker (max +10), layoff cost = $800 per worker (min employees 60). Material cost = $300 per laptop. Start inventory = 2,000 units. No shortage carryover.

• Price assumptions: promotion price = $850; regular price = $900. Revenue = price × units sold that month.

• All calculations in Excel with clearly labelled sheets: (1) demand & promotion adjustments timeline, (2) production & labour plan, (3) inventory and costs, (4) monthly profit, (5) scenario profit summary / payoff matrix.

How the Academic Mentor guided the student

Below is the exact stepwise approach the Academic Mentor used to coach and check the student’s work. Use these steps to structure your Excel workbook and written submission.

Step 1 : Clarify objective, timeframe and decision rule

• Mentor ensured the student understood the decision criterion (maximise the minimum profit across Apex’s actions).

• Clarified months under study (Oct–Mar) and the need to simulate six months sequentially because promotions in different months have cumulative effects.

Step 2 : Tabulate base demand & prepare scenario matrix

• Mentor instructed student to input the base demand for NovaTech for each month (the demand forecast table) and to create a copy for scenario adjustments.

• Built a 3×3 scenario matrix representing all combinations of NovaTech decision (No / Oct / Dec) vs Apex decision (No / Oct / Dec).

Step 3 : Implement promotion demand rules chronologically

• Mentor showed how to implement promotion rules month-by-month:

  • If firm A promotes in month t: apply +40% to firm A’s baseline demand in month t; subtract 20% of that increased demand from months t+1, t+2, t+3 respectively (forward buying).

  • Competitor loses 25% in the promotion month and 10% in each of next three months.

  • If both promote same month: use the special rule (+10% to each in promotion month and 20% forward buying from next three months).

• For promotions in different months, mentor emphasised running the timeline sequentially and applying each promotion’s forward-buying effects additive to prior adjustments.

Step 4 : Build monthly supply, production capacity and labour model

• Calculated regular labour hours: Employees × 40 hours. Each laptop = 4 hours → max regular production = floor(regular_hours / 4).

• If required output > regular capacity, compute overtime hours at $23/hr (subject to monthly overtime limits if any; otherwise use overtime as needed). Mentor warned to track overtime cost per laptop: (overtime_hours_per_laptop × $23).

• Showed how to include hiring/layoff decisions: permitted headcount range [60,70]; hiring/layoff cost applied in month of change. Hiring up to 10 new workers at $500 each; layoffs cost $800 each. Mentor advised modelling a simple policy (hire when expected next months’ production needs exceed current regular+OT capacity net of hiring cost tradeoff) or do an optimisation to minimise total staffing and overtime cost.

Step 5 : Inventory flows and costing

• Holding cost = $9 × average units held (mentor suggested simply apply $9 × ending inventory per month for simplicity).

• End-of-March unsold inventory penalty = $500 × Ending Inventory in March (explicitly required).

• Material cost per produced unit = $300 × production.

Step 6 : Revenue and profit per month

• Revenue = Units sold × applicable price (promotion month price $850 for promoter; competitor price $900 unless they promote). Mentor clarified that when both promote in same month both sell at $850.

• Total monthly cost = material cost + labour cost (regular + overtime) + hiring/layoff cost apportioned in that month + inventory holding cost (for that month).

• Monthly profit = revenue − total monthly cost. Sum monthly profit across Oct–Mar to get total scenario profit.

Step 7 : Construct payoff matrix and apply decision rule

• Mentor instructed the student to compute total profit for NovaTech across the nine scenario pairings.

• For NovaTech’s three candidate actions, record the profit under each Apex action → obtain three rows of three profits.

• Compute the minimum profit across Apex options for each NovaTech action (row minima).

• Choose the NovaTech action with the highest row minimum (maximin).

Step 8 : Sensitivity and robustness checks

• Mentor recommended: run sensitivity checks on key parameters (e.g., magnitude of forward buying, overtime cost, unsold disposal cost) to test whether the chosen decision is robust. Summarise results in a short paragraph.

Step 9 :Report writing & presentation

• Mentor advised to present: (1) assumptions & demand table, (2) one scenario worked example showing month-by-month flows, (3) payoff table with totals, (4) decision justified by maximin, and (5) brief sensitivity analysis and managerial recommendation.

Final outcome 

What the student delivered 

• A fully-documented Excel workbook with separate sheets for:

  • Base demand and promotion-adjusted monthly demand for each scenario,

  • Production capacity and labour calculations (regular + overtime + hiring/layoff),

  • Inventory and costing calculations,

  • Monthly profit calculations,

  • Summary payoff matrix (3×3), and sensitivity table.

• A written report that:

  • States all assumptions clearly,

  • Shows one complete scenario timeline (detailed month-by-month figures),

  • Presents the payoff matrix of total profits,

  • Applies the maximin rule and provides a recommended decision with justification,

  • Discusses limitations and sensitivity results.

Learning objectives achieved

• Quantitative modelling: built a month-by-month stochastic/deterministic simulation of demand adjustments due to promotions and forward buying.

• Cost and capacity analysis: connected labour hours, hiring/layoff costs, overtime, material and inventory costs to production planning decisions.

• Decision analysis: constructed a payoff matrix and applied a normative decision rule (maximin) appropriate for risk-averse strategy under competitive uncertainty.

• Excel & reporting skills: demonstrated ability to implement calculations in Excel, produce charts/tables, and write concise managerial recommendations.

• Strategic thinking: interpreted how promotion timing can cannibalise or shift demand and assessed competitor interactions.

• Sensitivity analysis: evaluated how robust the recommendation is to changes in key parameters.

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