The Forest for the Trees

Photo: MSA

Management Science Associates helps customers put their data to work.

By Taco Tuinstra

During TMA’s 2020 virtual conference, Management Science Associates (MSA) shared its insights into recent U.S. trade trends. MSA Senior Vice President Don Burke highlighted the most important developments in the nicotine market of the past 12 months, including new restrictions on flavors, a higher minimum purchasing age, the 2019 outbreak of vaping-related illnesses and, above all, the impact on sales of the ongoing Covid-19 pandemic.

Burke’s presentation contained an impressive amount of information but demonstrated only a fraction of MSA’s capabilities. While many firms offer data, MSA goes a step further by processing the information in a way that enables customers to make optimal decisions. Using analytic tools, systems engineering and data management, the company teases out the nuggets that allow clients to solve problems and identify opportunities.

“We help customers put their data to work,” says Burke.

MSA typically serves industries where there is either so much data that it is difficult to manage or industries where business critical data are not readily available. Big data, of course, has become a buzzword in recent years. What sets MSA apart is its ability to determine statistical significance from sparse data. Unlike other data companies, MSA takes no ownership of the data it processes. This is a critical element in the company’s business model: MSA is paid to process, cleanse, match, integrate, report and analyze data—but not for the data itself. According to Burke, this keeps MSA unbiased and allows the company to direct clients to the most appropriate data sources for their specific business issues and to integrate those sources with their own data.

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Lessons from chemistry

Alfred A. Kuehn

MSA is the brainchild of Alfred A. Kuehn. In the late 1940s, Kuehn was a chemical engineering student at the Carnegie Institute of Technology (CIT, now Carnegie Mellon University) in Pittsburgh, Pennsylvania, USA and an employee of Gulf Oil R&D. To obtain added perspective and greater control over his research, he was recruited for a business degree at the Carnegie Tech’s Graduate School of Industrial Administration (GSIA), which today is known as the Tepper School of Business.

One of Kuehn’s professors, Herbert A. Simon, who would go on to win a Nobel Prize in 1978 for his pioneering research into the decision-making process within economic organizations, instructed his class to study human behavior and learning processes. Most students set up experiments with rats in mazes, but Kuehn took a different approach: He developed a model of buying behavior based on his experience with chemical processes.

During his research at Gulf Oil, Kuehn had worked on optimizing what was then the world’s largest oil refinery in Port Arthur, Texas, USA. Pondering professor Simon’s assignment, Kuehn realized there were many similarities between his work with petrochemicals and the task at hand. Chemical engineering distinguishes itself from other types of engineering by the fact that things are flowing. “In most other engineering areas, you are building an object, and it is static,” says Kuehn. “That means you need different kinds of measurements.” Kuehn viewed consumer behavior as a flow too. Just as crude oil is impacted by heat, pressure and mixing, consumer behavior is affected by advertising, promotions and price, among other factors.

Encouraged by Simon, Kuehn started teaching economics at GSIA, bringing science to marketing. Until then, marketing was often taught like law—through case histories. But whereas in law, case studies are important because they become precedents for future law, marketing is dynamic and what was effective last year may be irrelevant next year.

As he had done as a student, Kuehn took an unconventional approach in front of the classroom. “Instead of the normal methods of faculty members—they write a paper, often forget about it and then write another paper—I asked my students to implement the models we were developing,” he says.

Kuehn created and computerized a model of the detergent business to help Lever Brothers (aka Unilever) make business decisions. The project was so successful that CIT started using Kuehn’s marketing models as the basis for an instructional management game that was played by all MBA and professional executive students from 1960 until 1995. After that, only minor adjustments, such as changing the industry (watches instead of detergent) and geography (four countries instead of four U.S. regions), were made to the CIT game.

Today, some form of GSIA’s original academic and scientific underpinnings—referred to as “management science”—is taught at most leading business schools. Impressed by Kuehn’s research, the Ford Foundation began sponsoring Kuehn summer workshops in 1959 to teach quantitative techniques and model building to select marketing faculty members. Some of the participants of that first workshop subsequently edited Mathematical Models and Methods in Marketing containing Kuehn’s marketing/advertising model, published by Richard D. Irwin in 1961.

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Solving problems

MSA’s first projects were solving steel industry and consumer packaged goods market research problems using analytic tools, systems engineering and data management technologies. Today, MSA serves a wide variety of additional sectors, including the pharmaceutical industry, casino gaming, the foods business and media companies.

The company’s work has become sufficiently important that during the Covid-19 crisis, the governor of Pennsylvania had MSA declared an “essential service,” allowing it to keep innovating even as many other businesses were forced to cut back operations. “Many of the services we provide are to businesses dealing with food, medical records and other vital industries—so the information we process and manage for our clients is critical to keep those organizations operating” explains Burke.

Brown & Williamson became MSA’s first tobacco client in 1969. Today, MSA serves a wide variety of tobacco companies from minor players to multinationals. Separately developed expertise in antitrust regulations enables the company to manage multiple clients within the same industry without running into anti-competitive concerns. MSA boasts a customer retention rate of more than 96 percent, according to Burke, with many relationships lasting more than 40 years. “The only time we have ever lost a tobacco customer has been due to a merger or acquisition,” he says.

The company’s services have expanded over time. Many MSA products now involve data-management and analytic platforms that manage billions of dollars in trade payments and other mission-critical retail execution applications. When the attorneys general of 46 states in 1998 signed the $246 billion dollar Master Settlement Agreement that ended their healthcare cost-recovery lawsuits against the tobacco industry, they entrusted MSA with the complex task of managing the constantly changing payments from many companies to all states.

MSA offers its tobacco customers various services. For example, the company collects manufacturer shipment data for a “first read” on the market and distributor shipment data from more than 2,000 distributors for a near census-level measurement of tobacco volumes by store and by item. It also gathers survey and retail scan data to provide the additional measurement of consumer takeaway.

The insights derived from that information vary by client, according to MSA, but many involve custom analysis of the effectiveness of promotions, assessment of price and price gap analysis, providing tools for forecasting the potential of new products or new product categories and current issues impacting the industry—menthol, flavor bans, new regulations, etc.

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Examples of MSA services for the tobacco industry:

  • Every Monday morning, MSA processes and projects manufacturer shipment data to provide the first read on the U.S. tobacco industry for the previous week.
  • MSA collects data each week from approximately 2,000 candy and tobacco distributors to report to tobacco manufacturers the shipment volume of each item in the tobacco category to each retail outlet across all classes of trade.
  • MSA operates one of the largest CPG retail scan data programs, at the transaction level, enabling clients to view tobacco market basket information at retail every day and feature pricing and promotion performance, along with consumer demand trends.
  • MSA continually provides analytical data expertise to the tobacco industry to understand and improve overall industry performance.

Saving money

Perhaps one of the most striking examples of how MSA helped a customer save money is when Kuehn and the company, along with Andrew Brimmer, the first African American to serve as a governor of the Federal Reserve System, advised the U.S. government against developing a supersonic passenger jet in 1966. After France and Britain teamed up to develop what would later become the Concorde, the U.S. government asked Kuehn and MSA to evaluate the prospects for such an aircraft. MSA quickly determined that despite the prestige attached to having a supersonic transport, it would not be cost effective and successful from a financial and market perspective.

Kuehn, who was also a pilot, demonstrated that the complexities of traveling at speeds faster than sound are so great that a supersonic passenger jet would not at that time be economical. “The original design included drogue chutes,” he recalls. “Landing with drogue chutes would expose passengers to the same stress experienced by a fighter pilot, going from 300 miles per hour to 10 miles per hour within two miles. And then they were trying to get special consideration—that wherever they arrived they would get priority on the airfield at the expense of everybody else. Furthermore, you were also supposed to forget about the great problems associated with sonic booms.”

So MSA suggested that instead of building a supersonic transport, the U.S. develop long-distance subsonic jets that would offer time savings by skipping stopovers. “Going to London from the U.S. in those days, you landed in Newfoundland and Ireland—so if we had wide-body, longer distance planes that didn’t have to land, we could make up the time,” says Kuehn. Those long-distance jets went on to become the largest source of annual U.S. export earnings from 1969 until 1993 (after which, Tobacco Reporter readers will be pleased to learn, they were overtaken by shipments of charcoal filtered cigarettes to Japan, according to Kuehn). The Concorde, by contrast, retired in 2003, having swallowed millions of francs and pounds in state subsidies without turning a profit.

MSA's RockPoint data center

Protecting data

Needless to say, when handling confidential information for competitors in an industry, data security becomes paramount. A tremendous amount of care and some redundancy are required to handle, store and analyze such information.

According to Mario Cafaro, MSA’s vice president of corporate IT, MSA’s two data centers are among the most secure in the U.S. They are backed up by two fully redundant Tier III equivalent data centers. These state-of-the-art facilities feature full SSAE 18 SOC compliance, highly secure tiers of multi-factor access controls, electric power from two utility companies, complete coverage through internal and external video monitoring along with numerous options for telecom, internet and cloud connectivity.

The company’s hometown, Pittsburgh, too, offers considerable security advantages. The region just north of the city has one of the lowest seismic ratings in the U.S., and the Appalachian Mountain range protects the area from East Coast hurricanes, for example. What’s more, the data centers are in stable, well-established neighborhoods unlikely to experience social upheavals. In the nationwide protests following the death of George Floyd in Minneapolis, two Pittsburgh Police cars were burned, but the perpetrator was quickly identified and then turned himself in with his parents present, according to MSA.

The human touch

While the rapid increase in computing processing power and the rise of artificial intelligence (AI) have turbocharged data analysis, MSA continues to rely heavily on human input. “There is no substitute for a thorough understanding of the data-generation process and a strong industry domain knowledge,” says Kuehn. “A technology-derived fact is simply a statement until humans, with strong domain knowledge, can appropriately apply it to a solution for an industry problem or opportunity.”

Informed business decisions, he explains, need to be based on appropriate definitions of problems or opportunities as well as data. “The creative approach to exploring and identifying problems and opportunities often includes as much “artistic thinking” as mere numbers,” says Kuehn.

Steve Gongaware, MSA’s senior vice president of business development, states that MSA is always alert to opportunity: “MSA is keen to offer its insights to new sectors, such as the budding businesses of legal cannabis and CBD.” Its experience working with the tobacco industry places the company in a strong position to do so. “Over the years, tobacco has evolved into a very regulated business, managed very differently than your typical consumer good,” explains Burke. “Once CBD and cannabis gain broader acceptance and mature in their life cycles, they too may likely become regulated industries. So our ability to work with competing firms, our ability to understand all the implications that go into appropriately managing competing businesses and providing value to each of those businesses, will allow us provide appropriate direction to customers in the legal cannabis/CBD space as well.”

In the meantime, MSA is helping its customers navigate the unprecedented environment brought about by the Covid-19 pandemic, which has upended existing consumer trends and made predictions ever more challenging.

“What is known this year is the great impact on tobacco consumption of the stay-at-home orders. Consumer confidence is required to return to closer-to-normal behavior and to reduce unemployment levels and potential government stimulus activities,” says Burke. “These variables, all difficult to predict, not only impact overall category consumption, but also each of the individual segments of the tobacco market.” (See box below.)

“What we have learned is that lockdowns carry a cost, so we must quickly learn about the tradeoffs. Determining what the impacts may be will require continued fast learning and rapid adaptation as the current social turmoil is unlikely to soon create stable market conditions,” he says.

If anything, the coronavirus crisis has demonstrated the importance of actionable insights—not just raw numbers—to achieve the understanding required to optimize decisions. With its impressive record of helping customers create great value from data, MSA is in a strong position to provide such insights. Whether it is the Covid-19 situation, the illegal THC vaping crisis or an analysis of supersonic jets, MSA has the data and analytical skills to provide the business knowledge that clients need to navigate uncertain situations.

This year’s trends

The most significant trend in U.S. tobacco sales noted by MSA this year has been the increase in unit volume. The stay-at-home situation, where consumers are free to use their tobacco products of choice rather than being restricted from smoking or chewing, has contributed to an increase in cigarette sales, marking a break with the typical 4–6 percent annual decline in recent years.

MSA is also continuing to find strong growth in the “modern oral” category, where items such as pouches, similar to snus, deliver nicotine without tobacco.

Also, the illegal THC vaping crisis in the last half of 2019, along with vapor flavor restrictions, resulted in declines in the vapor category for the first time in many years.

MSA has seen a significant increase in growth of lower priced tobacco options, including pipe and roll-your-own tobacco, as unemployment levels have increased, bucking the trend of the past few years when record low unemployment resulted in declines in these categories.

For more MSA insights, please view TMA’s webinar.