Case Study

—Obi Wan Kenobi, Star Wars

You can't stop the waves, but you can learn to surf.

—Jon Kabat-Zinn, MD, founder of Mindfulness-Based Stress Reduction

Marketing without data is like driving with your eyes closed.

—Dan Zarrella, social media scientist

Thomson Corporation, in 1997, was a Toronto media company that owned 55 daily newspapers that were doing well.1 CEO Richard Harrington, however, observed several trends in the environment that caused him to move the firm away from newspapers. He anticipated the Internet was going to undercut classified advertising and cable television and the Internet were going to steal readers. Despite the fact that the company was profitable, he made the rather dramatic decision to divest newspapers and to move the firm into delivering information and services online to the law, education, healthcare, and finance industries. That decision allowed Thomson to thrive today while other newspaper-based firms are struggling. The decision was based on projecting and acting on environmental trends.

The focus in this chapter changes from the market to the environment surrounding the market. Being attentive to these broader environmental trends can have a make-or-break effect on companies. The rapid rise of the App Store and mobile technologies was critical to the entry success of 2009 startup WhatsApp and set the stage for it to gain 500 million active users by 2014, ultimately resulting in its acquisition by Facebook for $19 billion.2 On the other hand, a government regulation requiring new product labels can be the death knell for a small food company that must expend a large percentage of its profits to comply. External events can help or hurt companies of all sizes. The goal is to identify and evaluate trends and events that will affect strategy either. Getting in front of emerging trends also allows the firm to prepare strategies to defend itself against threats or, as Thomson did, to neutralize them.

This chapter begins by examining environmental analysis. This broad topic is also covered in other strategy and strategic planning courses. Therefore, the focus here will be on trends emerging from technology, culture, business, government, and the economy that have implications for the market. Given an understanding of trends, the firm can move into three types of analysis: (a) impact analysis, which will help assess the relative importance of threats facing the firm; (b) scenario analysis, which will help the firm assess the meaning and impact of different environmental events; and (c) SWOT analysis, which compares environmental threats and opportunities with firm strengths and weaknesses to derive strategic actions.

ENVIRONMENTAL ANALYSIS

Environmental analysis is by definition very broad and casts a wide net to catch different stakeholders and trends that may have implications for the firm. As a practical matter, the analysis requires discipline to make sure that it does not become an out-of-control fishing expedition that occupies time and generates reports, but provides little real insight and actionable information.

Although environmental analysis has no bounds with respect to subject matter, it is helpful to provide some structure in the form of five broad areas of inquiry that are often useful: demographics, culture, business and technology, government/policy, and economic trends. The exact areas that should be monitored will vary depending on the business. For example, monitoring science developments will be critical to a pharmaceutical company but not important to a home-delivery food service. Exactly which parts of the external environment should be monitored is the first decision a company makes, and it should be revisited as the business changes.

Customer Trends

Customer trends can present both threats and opportunities. They have helped create fortunes for those companies able to take advantage of these trends and driven out less the fortunate. These trends can emerge out of the sheer force of demographics or involve more profound cultural shifts. The following sections discuss recent demographic, cultural, and business and technology trends occurring in customer markets.

Demographic Trends

Demographic trends can be a powerful underlying force in a market and can be predictable. Among the influential demographic variables are age, income, education, geographic location, and ethnicity. Consider the demographic shifts described in Figure 5.1.

Aging. The world population is aging more rapidly due to decreased fertility rates and people's tendency to live longer. In 2015, 8.5 percent of the world's population of 617 million people were aged 65 or older. The share of the population over age 65 is expected to continue to grow, hitting 12 percent in 2030 and 17 percent in 2050.3 This effect is expected to be even more dramatic in the United States with 20 percent of the U.S. population expected to be older than 65 by 2030.4

Changing Ethnic Mix. The United States is projected to become more racially and ethnically diverse in the coming decades due to both birth rate and immigration. Today, 14 percent of the U.S. population was born outside of the country, as opposed to merely 5 percent in 1965. By 2060, the non-Hispanic White population is expected to decrease from over 50 percent of the nation's population to just 44 percent, and no ethnic group is predicted to have a majority share of the U.S. population. The population of those who identify as two or more races is projected to be the fastest growing over the next five decades, with the Asian population and Hispanic population being the second and third fastest-growing groups. By 2060, more than one-quarter of the U.S. population is projected to be Hispanic.5

Women in the Labor Force. Since the 1960s, American women have increasingly participated in the labor force and the gender pay gap has decreased. In 2011, 40 percent of households with children reported that the mother was the primary breadwinner. While the proportion of women in political and business leadership positions has risen, it remains small compared to that of their male counterparts.6

Shifting Family Structures. The marriage rate has been declining for decades, and the number of households with two-parents is declining in the United States. Simultaneously, divorce, remarriage, and cohabitation rates are increasing. The stereotypical roles of mothers and fathers are converging, in part because of the rise in the proportion of breadwinner mothers.

Decreasing Middle Class. In 2015, the number of middle-class U.S. adults fell to 50 percent, while the lower and upper classes expanded. The income gap between middle- and upper-class Americans has also widened. In 1970, the wealthiest households held 29 percent of the U.S. aggregate household income; today, they hold 49 percent.

Boomerang Generation. 29 percent of young adults have moved back in with their parents.7 This delays young adults' need to purchase their own homes, contributing to U.S. homeownership rates in 2016 being at an all-time low.8

Figure 5.1 Demographic Trends Important to Customer Behavior

Cultural Trends

The cultural values underlying a market vary according to the unique history of a geography, which can be a region, country, state, or city. As customer behavior arises from this cultural soup, it is important that a business stays abreast of foundational and changing cultural trends for the markets it serves. Consider the cultural values of a country. According to the Hofstede cultural values measure, there are six dimensions of culture on which countries differ:

Power Distance: Societal comfort with unequal distribution of power between members of society.

Individualism versus Collectivism: Degree to which people primarily identify as individuals or as members of groups

Masculinity versus Femininity: Societal preference for achievement, competition, and toughness versus cooperation, caring, and quality of life

Uncertainty Avoidance: Level of discomfort with the unknown and ambiguity

Long-term versus Short-term Orientation: Preference for maintaining traditions and norms versus comfort with change

Indulgence versus Restraint: Societal acceptance of people's desire to enjoy life and have fun.

Figure 5.2 shows how the U.S. and BRIC countries compare on these values. In addition to these foundational cultural values, cultural values change over time. Consider, for example, the trends in Figure 5.3.9

Histogram for Comparison on the United States and BRIC Countries on Hofstede’s Cultural Values.

Figure 5.2 A Comparison on the United States and BRIC Countries on Hofstede's Cultural Values

Me Nation. Consumers see themselves as the center of attention and crave self-expression and individuality. Those who previously admired celebrities, for example, now desire to become them, leading to a rise in the number of YouTube stars, reality shows, and talent competitions. Responsive firms offer products that can be hyper-personalized, as customer demands are satisfied through this type of engagement with brands.

Power Play. Customers want to introduce fun, spontaneous aspects into their routine. Retailers are applying game mechanics, such as challenges, achievements, and rewards in order to engage customers. Responsive firms reward customers who frequently purchase with free products or encourage customers to visit their social media platforms to receive discounts.

Visualization. Customers demand immersive experiences through interactive visual content. Examples of this include the Facebook Live feature, Google Hangouts, viral sharing of photo-shopped images with Tumblr, and Pinterest's online pinboard. Taste for aesthetically pleasing designs is critical in many categories where customers seek a beautiful look to go with strong functionality.

Transparency. Customers desire transparent and genuine experiences and want to have control over their lives. They are increasingly choosing to purchase products that align with their values, so firms must communicate details of their production processes, ethics, sustainability, and product quality in a manner that is easily accessible. One example of a response to this trend is TOMS One for One shoe donations.

Simplification. Technology has made customers' lives vastly simpler. Smartphones allow customers to communicate through social media, shop online, or use GPS trackers whenever and wherever they want. Firms must cater to this desire for instant, easier, and simpler customer experiences. PayPal, for example, allows customers to execute cashless payments and transactions. Additionally, with this instant access, customers are increasingly able to compare brands and prices. Responding firms are challenged to create more personalized suggestions in order to decrease the time customers spend making decisions.

Snacking. Through technological advances, customers expect all aspects of their lives to be immediate, interactive, and intuitive. Customers now prefer to digest smaller portions of information, data, or entertainment and they prefer access to be immediate and free. Examples of this trend include blogs, YouTube videos, RSS feeds, Tumblr photos, and Tweets.

New Networking. Communities can now be based on shared interest instead of location. Social media and online communities are thriving, and customers now digitally connect with a purpose, such as volunteering for a cause or participating in Kickstarter campaigns.

Local Celebration. Customers are increasingly opting to purchase locally produced goods over products sourced from other countries. Customers prefer to support local communities, traditions, and culture because it gives them a sense of pride, belonging, and exclusivity. Responding firms offer locally sourced brands and products.

My Tribe. There is growing affinity toward a social unit that is centered on an interest or activity and not bound by conventional social links. Harley-Davidson events, such as the annual rally in Sturgis, South Dakota, attract hundreds of thousands of participants. The Apple users group has been a strong part of Apple's success in a PC world. The Internet has generated a host of communities and chat groups that play an influential role through information exchange and social networking.

Renting Not Owning. There is a growing trend, especially among young customers, toward valuing access to products instead of owning them. Rather than seeing renting as a poor substitute for owning, many customers actually prefer the flexibility and pricing model of renting. This trend can be seen in the increasing use of Zipcar and BMW DriveNow that allow customers to use a car for a few hours, and companies, such as Spotify, that allow customers to listen to music without purchasing CDs.

Sustainability

A mega cultural trend worth examining in more depth is the green movement of the twenty-first century. Customers care a great deal about sustainability, or the impact of their purchases on the environment, and there are a variety of different ways that this concern influences their purchasing behaviors. For example, many customers have switched from conventional products, such as incandescent light bulbs, gas-fueled cars, and conventionally grown foods, to more eco-friendly ones, such as CFL or LED light bulbs, hybrid cars, and organic produce. Other customers consider how sustainable a firm's business practices are when deciding whether or not to make a purchase. Still other customers are choosing to not purchase new products altogether, instead repairing old products or borrowing or trading products through organizations such as Freecycle.10

Importantly for firms, increasing numbers of customers—66 percent in 2015, up from 50 percent in 2013—report being willing to pay more for eco-friendly products.11 Some customers, most notably Millennials in the United States and a range of customers in developing countries, do pay more for eco-friendly products, but other customers' actual willingness to purchase environmentally friendly products lags behind their purported support for them. For example, 26 percent of customers say they want more eco-friendly products on the market, but only 10 percent have actually bought these new products when they are made available. Companies seeking to compete on environmental benefits should carefully determine whether their target market's interest equals their willingness to pay.

Business and Technology Trends

Business and technology trends represent opportunities to those firms in a position to capitalize and threats to firms which are not.

Big Data

The ability to capture and store data became possible in the 1950s and 1960s with large mainframe computers. Since then, the advent of the personal computer in the 1980s, the rise of the Internet in the 1990s, and expanded bandwidth into the 2000s have set up the ability to collect, store, and manipulate large data sets often referred to as big data. Supported by the “cloud” where data are now stored and accessed by customers and companies, big data is one of the megatrends of our era.

Firms in general and marketing teams in particular are swamped by data and are struggling to turn that data into insights, more valuable products and services, and better decisions. It is truly an avalanche that has many sources, some new and some ongoing. One distinguishing feature of these data is that they are at the individual customer level, which means that the company has a much richer understanding of customer behavior and the ability to act on it. For example, a bank achieved more than 600 percent ROI (return on investment) by using predictive analytics to more intelligently target customer offers. Among the sources of these data are Internet search and shopping records, social media activity, blogging participation, mobile phone usage behavior including opt-in records of GPS (Global Positioning System) locations, digital picture and videos, purchasing data, and much more.

A second distinguishing feature of big data is that it is often real time in nature, which means that companies are able to learn quickly if there are problems and work to resolve them. For example, social media activities help alert the firms to problems with their products and services, and credit card companies are able to alert their customers to the possibility of fraud by documenting purchases in real time and comparing to the customers' purchase history patterns.

Firms trying to use “big data” to get an edge or just to keep up with competitors require a set of competencies. First, it is critical to be able to ask the right questions, both strategic and tactical, because with big data, questions are not obvious and the nature of the insights is often hidden. Finding the right questions requires a deep connection to customers achieved through interviews or visits where customers purchase and use products. Second, firms need to be competent in designing and interpreting an ongoing flow of experiments. The ability to learn in real time sets up an opportunity for companies to run small and numerous experiments to tune their strategies. Third, big data often presents big integration challenges because companies have social media data in one repository and purchase data in another. To get the 360-degree view of customers in communication, purchasing, and social activities, systems should be set up to capture and integrate customer data. Finally, companies need to be good at data storage, data handling, analytics, and the development of problem-driven statistical models. Without such capabilities, they can't play the big data game.

Innovations

Trends, both market and environmental, can stimulate innovation. It is useful to distinguish between incremental, substantial, and transformational innovation. They differ in terms of how new they are and how much wealth they represent for the business. An incremental innovation makes the offering more attractive or profitable, but does not fundamentally change customer behavior, the value proposition, or the go-to-market strategy. In general, substantial innovations have ten times the impact of incremental innovations; the impact of transformational innovations is ten times greater again. Substantial and transformational innovations need to be detected and tracked by companies.

A transformational innovation often provides a fundamental change in the business model, likely involving a new value proposition and a new way to manufacture, distribute, and/or market the offering. It is likely to make the assets and competencies of established firms irrelevant. The advent of steam power, which ultimately spelled the end of sail-powered transport, was a transformational innovation. The automobile, Southwest Airlines, the business model of Dell Computers, smartphones, Amazon.com, Uber, and Cirque du Soleil represent innovations that have transformed markets. Transformational innovations often attract customers who had been the sidelines because the prior offering was too expensive or lacked some critical element.

Substantial innovations are in between in newness and impact. They often represent a new generation of products, such as the Boeing 747 or the iPad, that make existing products obsolete for many customers. Cisco introduced a videoconference technology called telepresence that uses massive amounts of bandwidth to provide a high-fidelity experience and should expand the use of videoconferencing. In these cases, the basic value proposition and business model were enhanced but not changed. Substantial innovations are much more common than transformational innovations, but can still create major changes in the competitive landscape.

Innovations that are transformational or even substantial are often championed by new entrants into the industry, so it is important to monitor new, even small, firms and not let the large, established firms dominate the environmental analysis.12 Incumbent firms—especially successful ones—have incentives to protect and improve their profitable niches in the market by extending current offerings with incremental innovations. Their people, culture, and mix of assets and competencies are unlikely to support a transformational innovation. As a result, when transformational innovations appear, the first reaction of incumbent firms is denial followed by discounting the new entrant's ability to reach and convert the market. This skepticism is why horse-drawn buggy manufacturers never became automobile firms, telegraph companies missed out on the telephone, and 3M and others felt that the early and primitive Xerox copy technology would never replace heat-sensitive copier paper. Chapter 13 will discuss how the substantial and transformational innovation can define new subcategories and lead to enduring success.

Workplace

Online communication platforms have increased employees' ability to work remotely.13 Thirty-seven percent of U.S. workers reported having used a computer to work from home. Office workers are especially likely to be able to telecommute with 44 percent of white collar professionals reporting working remotely at least occasionally. Remote work can be a boon for employees when it increases their flexibility, but employees' ability to work remotely also means that they are increasingly expected to be “on call” for work outside of traditional business hours.

This blurring of the lines between work and leisure time is further augmented by the trend for companies to offer lifestyle “perks” to their employees. These perks range from onsite health care (Facebook), nap pods, and an errand running service (Google) to three catered meals a day and meditation classes (Twitter).14 These more extreme examples still are limited primarily to technology companies, but firms in a wider range of industries are adopting employee perks, which, they hope, can increase both employee satisfaction and productivity.

New technologies, such as Slack, an instant messaging system designed for internal team collaboration, are now widely used by employees for all types of instant messaging inside companies. Launched in August 2013, Slack grew to 4 million daily users by October of 2016. Slack also appears to be crossing over from business use to personal use as a social media platform.15

Another important trend, which has been facilitated by improved technology, is the growth of the “sharing” or collaborative economy. This term refers to a business model in which online technologies enable people to get what they need from each other rather than from centralized institutions. Sharing economy companies such as Uber, Airbnb, and TaskRabbit provide a platform, such as an app, that enables people who are looking for a service to connect with another person who is willing to provide it. Originally the domain of small start-ups, established companies have seen the potential in this economic model and are beginning to add sharing style services to their core offerings.16

Sustainable Businesses

The sustainability trend described earlier applies to business as well. In one study by MIT and Boston Consulting Group in which nearly 3,000 executives from 113 countries were interviewed, two thirds of the firms said that sustainability was critically important to being competitive.17 There are several drivers of “green.” One driver is concerns about global warming and resource depletion. Many firms feel a responsibility to be part of the solution, including Unilever and Walmart. Unilever's CEO Paul Polman observed that climate change cost Unilever well over 200 million Euros in just one year and that is enough motivation to do something about the problem.18 In response, Unilever has set a goal to cut their environmental impact in half by 2030.19

A second driver is the ability of green programs to provide functional benefits to firms in the form of cost savings from reduced energy consumption. Firms are often surprised at the extent to which green programs pay off. Walmart, whose green story is told in the insert, discovered, to its surprise, that an ambitious environmental program was associated with meaningful, tangible cost savings plus a positive sales response to green products. A third driver is a desire to be respected by customers and employees, both of which value a relationship with a firm that they admire.

WALMART TURNS GREEN

In 2005 Walmart began to develop green programs, an amazing turnaround for a company that had prided itself on low costs and prices first and foremost.20 Through its partnership with the Environmental Defense fund and its own initiatives, Walmart has set and met numerous environmental goals over the past ten years.21 The firm has set the goal to create zero waste across its global operations. It is working to achieve this goal through projects such as reducing in-store plastic bag usage, and as of 2016, 81 percent of the materials from operations in the United States were diverted from landfills. However, Walmart's most significant area of environmental impact is in how it can influence the thousands of suppliers that produce and transport its products. Walmart both rewards suppliers who are already producing products in an environmentally friendly way by putting a Sustainability Leader badge on approved products and helps suppliers to shrink their environmental footprint. These assistance initiatives are wide ranging, from working with corn farmers to optimize their fertilizer use, to encouraging suppliers to use sustainably harvested palm oil to reduce deforestation, to improving energy efficiency in Chinese manufacturing facilities. Given Walmart's footprint and influence around the world, these programs are likely to make a difference.22

Also in 2005, a brand repositioning initiative was launched that resulted in a new brand position in 2008. Research found that customers wanted value more than just low prices, value in the form of cleaner stores, better customer service, more high-quality products, and the lifestyle benefits of saving money. The result came together under a new slogan “Save money. Live better.” It helped provide an umbrella theme for the new Walmart and its sustainability program as well as organic foods, higher quality products, and improved store look and feel.

There are still hardcore Walmart critics, but it is clear that their intensity and breadth are visibly lessened. Articles “Green Project Making It Harder to Hate Walmart” and “Walmart's Environmental Game Changer” show evidence of this change. By 2016, Walmart was in the top 7 percent of all brands in Y&R's Brand Asset Valuator.23

Why did Walmart suddenly make such a U-turn? Three reasons. First, the CEO decided it was the right thing to do, based, in part, on the influence of an environmental professional who had vacationed with members of the outdoor-oriented Walton family. Second, a single-minded focus on costs and the resulting policies regarding employees, communities, and suppliers had generated extremely negative press attention that affected the company's ability to grow and succeed. More communities were turning down Walmart stores, and 8 percent of Americans were committed to shopping elsewhere. Walmart executives knew they needed to take actions to improve the company image. Finally, to the surprise of the executives, many of the green programs were helping the bottom line.

Government/Policy Trends

The addition or removal of legislative or regulatory constraints can pose major strategic threats and opportunities for companies. For example, the ban of some ingredients in food products or cosmetics has dramatically affected the strategies of numerous firms. The impact of governmental efforts to reduce piracy in industries such as software (more than one-fourth of all software used is copied), CDs, DVDs, and movie videos is of crucial importance to those affected. Deregulation in banking, energy, and other industries can affect the nature and intensity of competition as firms enter and exit to take advantage of the change. The automobile industry is affected by fuel-economy standards, the luxury tax on automobiles, and incentives for electronic car purchases. Companies such as Amazon are dramatically affected by regulations requiring collection sales tax on products shipped.

Companies should track all legislative and regulatory activities that have positive and negative implications for their business, including local, state, national, and international developments. For example, Brexit will have significant implications for firms operating in the United Kingdom and the European Union and beyond. The influx of refugees from the Middle East and North Africa into Europe, the 2016 coup in Turkey, Russia's annexation of Crimea, and increased tensions with Ukraine may provide both opportunities and constraints for firms operating or planning to operate in these regions. Tracking allows companies to engage in legal advocacy activities to influence the nature of policy decisions. Discussed in more detail in the section Scenario Analysis, like any trend, government actions are not necessarily bad for business and may even be a source of competitive advantage for some firms more than others.

Economic Trends

Economic factors play a critical role in the effectiveness of a firm strategy. A very different strategy is needed when the economic climate is healthy than when it is under stress. Further, it is far better and sometimes critical to put strategies into place before a strong or weak economy hits. Of particular importance is to forecast and adjust to recessions, especially deep ones, because they can threaten firm survival. That means the balance sheet and cash position need to be buttressed, which, in turn, implies that firms need to cut budgets and programs, sometimes radically. Marketing is particularly vulnerable because its budget appears to be discretionary. However, as marketing is the firm's connection to the customer, research has shown that while such cuts give a short-term boost to the bottom line, they are often damaging to long-term profits.24 Rather than cutting marketing budgets and programs across the board, think of a budget crunch as an opportunity to develop and nurture the effective and identify and defund the ineffective. The actual market impact of a budget reduction can be minimized by identifying and cutting support to budget areas in which marketing performance is mediocre or worse.

Recessions can also provide opportunities for major changes in a company's competitive advantage. First, some industries and offerings thrive in recessions. Firms that offer lower priced alternatives to preferred products witness increased sales during recessions. These can be direct substitutes for higher priced goods, such as private label products over name-brand products or products that fulfill customers' needs in a similar way, such as Keurig single cup coffee pods rather than coffee drinks at Starbucks or Coleman camping gear rather than hotel room for a vacation getaway. Products that inexpensively satisfy customers' needs to indulge also do well. For example, during the 2001 recession, Leonard Lauder, chairman of Estée Lauder companies, noticed that lipstick was selling very well. He hypothesized that when money is tight, customers substitute an inexpensive, but high-quality indulgence, such as lipstick, for a larger one such as new clothing or shoes, a phenomenon that has come to be known as “the lipstick effect.”25 In the service industry, there is increased demand for firms that upgrade, maintain, or repair existing equipment as customers prefer to repair than replace equipment when in tough economic times. For example, auto mechanics can do well during recessions as customers choose to repair their old cars rather than purchase new ones.26 Products that support frugality, such as Tupperware, which stores leftovers or allows customers to break up bulk purchases into meal-sized units, also do well when budgets are tight.

Second, a recession can provide an excellent platform to introduce products or marketing programs because the media environment is likely to be less cluttered and competitors will be less motivated and able to respond. Third, it is important to find ways to communicate value, often a necessity during tough economic times, without hurting the brand. Customers do become more price sensitive during recessions, but shouting price and deals is the wrong course because it announces that the brand is not worth the price. One way is to divert attention to value subbrands such as the BMW One Series or the Fairfield Inn by Marriott. Another is to bundle services to provide extra value at the same price, such as free shipping by Amazon or McDonald's McPick 2. Still another is to demonstrate the value of quality—Bounty paper towels pay for themselves by doing more for the same price. Finally, the frame of reference can be changed—other products can become the comparison standard. For example, KFC's Family Value Meal versus home cooking or Crayola's 64 colors versus expensive toys.

Fourth, firms can benefit from spending on marketing in a recession. Spending when other companies are cutting costs can help a firm consolidate its gains or provide an opening for a new firm to enter the market. Firms with solid marketing fundamentals in place before a recession hits have the culture, competencies, and assets to treat the recession as an opportunity rather than a problem. In particular, spending on new product development during a recession is beneficial for firms to maintain their long-term technological advantage.27

Cultivating Vigilance

There is a strong tendency to fail to perceive or underestimate important trends or to miss the accurate prediction of future events.28 Just consider how the threats from digital photography were ignored at Kodak. It was a Kodak engineer who invented the digital camera in 1975, and Kodak had clear indicators as early as 1979 that that the market would gradually switch from film to digital over the next thirty years, but these warnings were ignored.29 One reason is that executives were focused on execution and had little attention span left for “might be.” Kodak's executives encouraged innovation, but directed it toward the chemical side of film development rather than the digital side.30 Another reason is a natural perceptual bias toward ignoring or distorting information that conflicts with current strategies. This “confirmation bias” means that critical information is lost. Because Kodak's business model was based on selling inexpensive cameras and expensive film, filmless digital cameras were regarded as “the enemy” rather than the future.31 Still another reason is the support of “groupthink” within the organization—it is awkward to point out that basic assumptions may be wrong. In the case of Kodak, being centered in the one-company town of Rochester, New York, further limited criticism of the company.

Research on organizational vigilance suggests several ways that leaders and organizations can improve. First, be curious, externally focused, and connected. What is happening in areas that will impact the business? Travel, observe, and interact with people of all types. Second, make every employee a listening post for the organization and create processes that allow the observance of even small signals from any sector to be shared in a low-cost manner and recognized in annual reviews. Third, develop a systematic set of processes for collecting, disseminating, and responding to information from the firm's stakeholders. Johnson & Johnson has a strategy process termed Frameworks that looks at regulations, insurance coverage, and competitive moves and considers their implications. Related, make sure that all units inside the company as well as partners outside the company are communicating so that all the pieces of trends can be assembled in-house. Fourth, create discovery mechanisms. Texas Instruments holds a “Sea of Ideas” meeting each week to recognize emerging needs and innovation at the fringe of its business.32 One such meeting led to the development of a low-power chip for mobile phones. Finally, force a long-term perspective; get away from day-to-day executional issues and programs. Some firms create a separate division of the company that is shielded from the demand to create immediate value for the company in order to develop truly innovative ideas and seize long-term opportunities. For example, Google has a “moonshoot” research and development program, X, that is separate from Google Research and focuses on radical innovations, such as driverless cars, high-altitude Wi-Fi balloons, and glucose-monitoring contact lenses.33

STRATEGIC ANALYSIS

Uncertainty often emerges from environmental analysis. Before strategies are developed, two additional strategic analysis steps should be taken, each described in the sections that follow. First, to be manageable, strategic uncertainties need to be grouped into logical clusters or themes. It is then useful to assess the importance of each cluster in order to set priorities with respect to information gathering and analysis. Impact analysis is designed to accomplish that assessment. Second, sometimes the strategic uncertainty is represented by a future trend or event that has inherent unpredictability. When this is the case, information gathering and additional analysis will not be able to reduce the uncertainty. In that case, scenario analysis can be employed. Scenario analysis basically accepts the uncertainty as given and uses it to drive the development of two or more future scenarios. Strategies are then developed for each.

Impact Analysis

An important objective of environmental analysis is to rank strategic uncertainties and decide how they are to be managed over time. Which uncertainties merit intensive information gathering and in-depth analysis and which merit only a low-key monitoring effort?

The problem is that dozens of strategic uncertainties and many second-level strategic uncertainties are often generated in environmental analysis. These strategic uncertainties can lead to an endless process of information gathering and analysis that can absorb resources indefinitely. A publishing company may be concerned about cable TV, lifestyle patterns, educational trends, geographic population shifts, and printing technology. Any one of these issues involves a host of subfields and could easily spur limitless research. Unless distinct priorities are established, external analysis can become descriptive, ill-focused, and inefficient.

The extent to which a strategic uncertainty should be monitored and analyzed depends on its impact and immediacy. The impact of a strategic uncertainty is related to (a) the extent to which it involves trends or events that will impact existing or potential businesses; (b) the importance of the involved businesses to the overall firm; (c) the number of involved businesses; and (d) the likelihood of impact on the company. The immediacy of a strategic uncertainty is related to (a) the probability that the involved trends or events will occur; (b) the time frame of the trends or events; and (c) the reaction time likely to be available to respond compared with the time required to develop and implement appropriate strategy. Each of these is now discussed in more detail.

THE COCA-COLA COMPANY AND WATER: FROM RISK TO OPPORTUNITY34

The Coca-Cola Company started its Global Water Initiative in 2002. Originating in a ten-person strategy think tank the company created to study long-term challenges, the goal of the initiative was to understand the nature and impact of business risks related to water—an essential ingredient in all Coca-Cola products. Around the same time, Coca-Cola began receiving negative press around water issues. For example, activists claimed the company was consuming too much water and was creating conflicts with local municipalities around the world. In India, Coke bottles were smashed on the steps of Parliament and the company was accused of polluting farms with a byproduct from its plants. By 2001, the company recognized water quantity and quality as one of the biggest risks to the Company and cited it in its 10-K filing with the Securities and Exchange Commission.

The think tank began by assessing its water use and associated risks and then set out to ensure that this assessment was accurate by working with plant managers across the Coca-Cola network. While the company historically had focused on operational issues such as water efficiency and wastewater management, it became clear that there were also many systemic issues in the watersheds and local communities where it operated. To ensure it was focused on the correct risks, the company took two bold steps. The first was to interview over 200 water experts, local officials, and company employees around the world to understand the emerging water challenges. Because water problems are so diverse, it was important to understand the local problems facing the company and to develop customized solutions depending on local priorities—from sanitation to watershed protection to groundwater depletion and contamination. By listening to local stakeholders and company employees who faced these challenges everyday, the company developed a risk management methodology to identify the 100 riskiest plants around the world. Risks were assessed and prioritized on the basis of empirical evidence about both physical and social aspects of water use. In contrast to the original focus of internal water use—efficiency and wastewater management inside the plant walls—the risk assessment revealed that the biggest threats to company profits and reputation were related to degrading watersheds and social conflicts with other users.

After the risks were identified, a series of two-day workshops was organized with company employees and bottler partners around the world to share the findings and to plan effective mitigation strategies. This was a two-way learning process whereby Coca-Cola could refine its understanding of water challenges and set priorities and the local partners could better understand and address the water risks they were facing. It also created partnerships with local communities more than an operational plan for Coca-Cola. Based on the risk assessment, it became clear that the company needed to pay more attention to the systemic water issues affecting watersheds and communities and begin to develop metrics and support to actively mitigate these challenges. Therefore, phase two of the water initiative was focused on supporting community water partnerships. Local company divisions and bottlers used the risk assessment to define new goals of improving water sustainability in their watersheds. Of course, the company couldn’t do this alone; it required a proactive approach of forming partnerships with local NGOs, governments, and other stakeholders to create more systemic interventions. By forming alliances with organizations such as WWF and USAID, the company was able to bring attention and resources to address pressing water problems. Interestingly, the risk assessment process shifted the company from a narrow and reactive approach to a much more proactive and collaborative strategy. To reinforce this broader approach, Coca-Cola developed the following water goals:

Reduce: By 2020, improve water efficiency in manufacturing operations by 25 percent compared to 2010.

Recycle: Treat wastewater in 100 percent of bottling plants to a level that can support aquatic life.

Replenish: Facilitate water to communities and watersheds to produce volumetric benefit equivalent to global water production volume by 2020.

Manage Risk: Assess water quality and quantity at every plant “to make sure we do what we can to avoid adversely affecting the ability of others to access water.”

In an attempt to maximize its positive impact on water resources globally, Coca-Cola also helped to launch multistakeholder efforts such as the CEO Water Mandate and the Global Water Challenge. It extended its water efforts beyond manufacturing to address sustainability challenges in its supply chain, for example, by helping to launch the Better Sugarcane Initiative (now Bonsucro). In establishing its “Replenish” goal, the company aspired to be a net positive contributor to water sustainability globally. In August 2016, the company announced that it had replenished 115 percent of its operational water use through community and watershed partnerships, five years before its stated deadline.

Impact of Strategic Uncertainties

Each strategic uncertainty involves potential trends or events that could have an impact on present, proposed, and even potential businesses. For example, trends in the microbrewery market can impact a beer firm's proposed microbrewery entry and its current imported beer offering. A trend toward natural foods may create strategic uncertainties while also presenting opportunities for a sparkling water product line for Coca-Cola Inc. The impact of a strategic uncertainty will depend on the importance of the impacted business to a firm. Some businesses are more important than others. The importance of established businesses may be indicated by their associated sales, profits, or costs. However, these metrics might need to be adjusted to account for the future growth potential in such businesses. The number of involved businesses can also be relevant to a strategic uncertainty's impact. The higher the number, the greater the impact of the uncertainty. Finally, if there is a low probability of the event occurring, this reduces the expected impact. For example, although a bill introduced to Congress could reshape a business, if trends show no support from members, the expected impact of the legislation is low.

IMPACT OF NEW TECHNOLOGIES

It can be important, even critical, to manage the transition to a new technology. The appearance of a new technology, however, even a successful one, does not necessarily mean that businesses based on the prior technology will suddenly disappear. A group of researchers at Purdue studied fifteen companies in five industries in which a dramatic new technology had emerged:35

Diesel-electric locomotives versus steam

Transistors versus vacuum tubes

Ballpoint pens versus fountain pens

Nuclear power versus boilers for fossil-fuel plants

Electric razors versus safety razors.

Two interesting conclusions emerged that should give pause to anyone attempting to predict the impact of a dramatic new technology. First, the sales of the old technology continued for a substantial period, in part, because the firms involved continued to improve it. Safety-razor sales have actually increased 800 percent since the advent of the electric razor. Thus, a new technology may not signal the end of the growth phase of an existing technology. In all cases, firms involved with the old technology had a substantial amount of time to react to the new technology.

Second, it is relatively difficult to predict the outcome of a new technology. The new technologies studied tended to be expensive and crude at first. The most spectacular erroneous forecast was attributed to Thomas Watson, the CEO of what is now IBM, who predicted in 1943 that the total world market for computers is maybe five. New technologies also sometimes start by invading submarkets, and it can be hard to imagine the full market potential. Transistors, for example, were first used in hearing aids and pocket radios.

Immediacy of Strategic Uncertainties

Events or trends associated with strategic uncertainties may have a high impact, but such a low probability of occurrence that it is not worth actively expending resources to gather or analyze information. Similarly, if occurrence is far in the future relative to the strategic-decision horizon, then it may be of little concern. Thus, the harnessing of tide energy may be so unlikely or may occur so far in the future that it is of no concern to a utility company. Finally, consider the reaction time available to a firm compared with the reaction time likely needed. After a trend or event crystallizes, a firm needs to develop a reaction strategy. If the available reaction time is inadequate, it becomes important to reinvest and anticipate emerging trends and events better so that future reaction strategies can be initiated sooner.

Managing Strategic Uncertainties

Figure 5.4 suggests a categorization of strategic uncertainties for a given business. If both immediacy and impact are low, then a low level of monitoring and analysis is recommended. If the impact is thought to be low but the immediacy is high, the area may merit monitoring and analysis. If the immediacy is low and the impact high, then the area may require more in-depth monitoring and analysis and contingent strategies may be considered but not necessarily developed and implemented. When both immediacy and potential impact of the underlying trends and events are high, then an in-depth analysis will be appropriate, as will be the development of reaction plans or strategies.

Immediacy of Threats

Low High

Impact of Threats High Monitor and analyze; long-term contingent strategies outlined Monitor and analyze in more depth; perform scenario analysis and develop contingent strategies in depth

Low Monitor for changes; low investments Monitor and analyze for changes; outline a short-term response

Figure 5.4 Impact Analysis

Scenario Analysis

Scenario analysis can also help firms deal with strategic uncertainties. The difference between impact analysis and scenario analysis is that instead of investing in more information search and analysis to reduce uncertainty, the firm creates a small number of environmental scenarios, assesses their likelihood and impact, and then uses this analysis to develop or test potential strategies.

There are two types of scenario analyses. In the first type, strategy-developing scenarios, the object is to provide insights into future potential environments and then use these insights to evaluate existing business strategies and stimulate the creation of new ones. Such analyses can help create contingency plans to guard against disasters—an airline adjusting to a terror incident, for example, or a pharmaceutical company reacting to a product safety problem. They can also suggest investment strategies that enable the organization to capitalize on future opportunities caused by customer trends or technological breakthroughs.

In the second type of analysis, decision-driven scenarios, a strategy is proposed and tested against several scenarios.36 The goal is to challenge the strategy, thereby helping to make the go/no-go decision and suggesting ways to make the strategy more likely to withstand environmental forces. If the decision is to enter a market with a technology strategy, alternative scenarios could be built around variables such as marketplace acceptance of the technology, regulations, and competitor response.

In both analyses, a scenario analysis will involve three general steps—create scenarios, relate those scenarios to existing or potential strategies, and assess the probability of the scenarios (see Figure 5.5).

Figure 5.5 Scenario Analysis

Step 1: Create Scenarios

Strategic uncertainties can drive scenario development. The impact analysis will identify the strategic uncertainty with the highest priority for a firm. This source of uncertainty should be the focus of the scenario. A manufacturer of a medical imaging device may want to know whether a technological advance will allow its machine to be made at a substantially lower cost. A farm equipment manufacturer or ski area operator may believe that the weather—for example, whether a drought will continue—is the most important area of uncertainty. A server firm may want to know whether a single software standard will emerge or if multiple standards will coexist. The chosen uncertainty could then stimulate two or more scenarios.

When a set of scenarios is based largely on a single strategic uncertainty, the scenarios themselves can usually be enriched by identifying related events and circumstances. Thus, an inflation-stimulated recession scenario would be expected to generate a host of conditions for the appliance industry, such as price increases and retail failures. It is sometimes useful to generate scenarios based on possible outcomes: optimistic, pessimistic, and most likely. The consideration of a pessimistic scenario helps test existing assumptions in a firm's strategic plan. The “what-if” exercises in a scenario analysis provide a nonthreatening way to consider the possibility of clouds or even rain on the picnic.

Often several variables are relevant to the future period of interest. The combination can define a relatively large number of scenarios. For example, a large greeting-card firm might consider three variables as important: the success of small boutique card companies, the creation and sharing of e-cards, and the nature of future distribution channels. The combination can result in many possible scenarios. Experience has shown that two or three scenarios are the ideal number with which to work; if a larger number is used, the process becomes unwieldy, and any value is largely lost. Thus, it is important to reduce the number of scenarios by creating a small set that ideally includes those that are plausible/credible and those that represent departures from the present substantial enough to affect strategy development.

Step 2: Relate Scenarios to Strategies

After scenarios have been identified, the next step is to relate them to strategy—both existing strategies and new options. If an existing strategy is in place, it can be tested with respect to each scenario. In which scenario does the strategy do best? How bad will the strategy perform if the wrong scenario emerges? What will its prospects be with respect to customer acceptance, competitor reactions, and sales and profits? Could it be modified to enhance its prospects?

Even if the scenario analysis is not motivated by a desire to generate new strategy options, it is always useful to consider what strategies would be optimal for each scenario. A scenario by its nature will provide a different perspective than the status quo. Any strategy that is optimal for a given scenario should become a viable option. Strong parts of suboptimal or infeasible strategies can also be harvested for use in future strategies.

Step 3: Estimate Scenario Probabilities

To evaluate the effectiveness of different alternative strategies, it is useful to determine the scenario probabilities. What is the probability of a scenario emerging? Experts could be asked to assess probabilities directly. A deeper understanding will often emerge, however, if causal factors underlying each scenario can be determined. For example, the construction equipment industry might develop scenarios based on three alternative levels of construction activity. These levels would have several contributing causes—interest rates, availability of funds to customers in the home building sector (which, in turn, would depend on the emerging structure of financial institutions and markets), and level of government spending on roads, energy, and other infrastructure areas.

SWOT Analysis

Environmental analysis identifies a host of many potential threats and opportunities. The challenge is to determine which are most relevant for the firm's business and to prioritize them. Both impact and scenario analyses can help the firm develop initial answers. However, even with similar answers from these analyses, not all companies should respond to all environmental events. Whether and how a company responds will be a function of the nature of the environmental activities and the company's own strengths and weaknesses. A SWOT analysis is a framework that guides such decisions. SWOT analysis examines a set of environmental trends classified company strengths (S) and weaknesses (W) and external opportunities (O) and threats (T).

Firm Strengths and Weaknesses

In developing or implementing a strategy, it is important to perform an internal analysis of the firm. This analysis follows the same checklist of strengths and weaknesses used to examine competitors in Chapter 3 (see Figure 3.4) and will not be reviewed in depth again here. There are more than three dozen organized under the categories of innovation, manufacturing, financial, management, marketing, brand equity, and customer base. This checklist is a good place to start when analyzing whether the company can respond to a threat or opportunity or whether it needs to build new assets and competencies to do so. In addition, the Appendix A contains other financial and nonfinancial criteria important to an internal analysis of the firm that should be used in this assessment.

Each asset or competence relevant to the business should be evaluated as to its strength and impact. Is it dominant in that it provides a point of advantage that has endured and is likely to remain so in the future? The service delivery capability of Disney theme parks, for example, is so superior that other firms study its operation. Is the organization willing to invest to make the asset or competence dominant into the future? Certainly, Disney has shown this willingness over many decades. The investment commitment needs to be factored into the financial resource picture. It may mean that resources for new ventures will be limited.

Is it strong but vulnerable? Are others catching up? Should the firm invest to attempt to regain a dominant position so that it is a point of advantage? If so, what program at what cost is implied? Or should the firm retreat so that the asset or competence is simply a modest advantage over some competitors and a point of parity with respect to others? Is the asset or competence adequate, a point of parity? Is it strong enough so that customers do not avoid the firm because of it? If so, is that a satisfactory long-term position? Can advantage be achieved on other dimensions? What investment is implied to maintain the current strength so that it does not become a point of disadvantage? If Target, for example, can deliver quality adequate enough so that customers do not use a quality judgment as a reason to exclude Target from their consideration set, the battle will shift to other dimensions on which Target is likely to excel. Is the asset or competence a liability? Is it holding back the firm from gaining and retaining customers?

External Threats and Opportunities

Imminent threats with high impact should drive a strategic imperative, a program that has the highest priority. If there is a visible quality problem (such as contaminated Perrier water or defective Bridgestone tires on Ford Explorers), fixing it and thus addressing the associated threat needs to be a high priority. When the threat is of low impact or is not immediate, a more measured response is possible. The most extreme threat is one that potentially makes the business model obsolete. Because of the decline in the use of printers, HP has seen its cash cow, printer supplies, declined with rather troubling strategic implications. AOL, with its “You've got mail” greeting and a route to the Internet for newbies and the intimidated, had a dominant business model with some 35 million subscribers. However, it failed to respond to the fact that its customers eventually obtained more sophistication and better equipment. AOL was in a position to be a successful social network Internet company but instead watched others such as Facebook assume that role and allowed its value proposition to erode. Recognizing the threat to the business model in a timely fashion and making the organization responsive might have led to a very different outcome for AOL.

Threats can come in the form of a strategic problem or a liability. Strategic problems, events, or trends adversely affecting strategy generally need to be addressed aggressively and corrected even if the fix is difficult and expensive. Strategic liabilities—the absence of an asset (such as good location) or competence (for example, new product skills)—usually require a different response. A business often copes over time with a liability by adjusting strategies in a way that neutralizes that liability. A firm that lacks new product competencies might engage in a systematic product acquisition strategy.

An opportunity similarly can be evaluated as to whether its impact will be immediate and major. If so, the organization should be set up to move quickly and decisively. One study found that most organizations only get faced with a “golden opportunity” once or twice a decade. The mark of a firm that can adapt to new conditions and still come out a market leader is recognizing and reacting to such opportunities. Opportunities that have a low impact or are in the future may justify serious investment and perhaps an experimental entry into a new business area to gain information, but the resource commitment is likely to be more modest.

In general, lost opportunities are costly and common. As Drucker wrote in several forms, “Managers need to spend more time on opportunities and less on solving problems.”

Combining Elements in a SWOT Analysis

The goal of this analysis is to identify the firm's net ability (strengths – weaknesses) to defend itself against current and emerging environmental threats or to offensively exploit opportunities in the environment. Take the example Gillette versus Dollar Shave Club (DSC). DSC took advantage of lower barriers to entry to reach markets through Internet channels instead of traditional retail channels when it was founded in 2011. DSC began as a subscription model that delivered a razor and an ongoing supply of blades to buyers' (mostly men) homes. Billed as a “club” and touted through engaging Internet ads that target men's desire to have a simple shaving experience and forgo the retail experience (“shave money, shave time”), DSC grew to 5 percent market share within its first five years of business.37 Other new entrants followed, and lingering effects of the great recession made the monthly fees ease some of the financial burden facing many customers. It is likely that P&G, maker of Gillette, considered this entrant and the larger trend a threat. However, P&G's considerable branding competency, its strong relationships with the retail channel, its financial resources, and Gillette's long-standing reputation and many loyal followers will help P&G defend its 60 percent market share. As a weakness, Gillette is a well-established brand that is not as contemporary as the Internet startups entering the market. Further, the high price of a Gillette razor is a vulnerability. A SWOT analysis would consider these facts and other potential scenarios that might emerge. How will trade agreements with China or South Korea, where DSC manufacturers its products, affect its price? Will DSC enter traditional retail markets like three-year-old Harry's Razor Company recently entered Target and stole 10 percent market share from P&G?38 Will it be purchased by a major competitor that can improve its reach? How well can P&G defend itself in these different scenarios? Is there an opportunity for P&G to enter the online shave club business with an entrant of its own? In fact, DSC was bought by Unilever in 2016 for 1 billion dollars and P&G entered with gilletteshaveclub.com but at considerably higher prices than DSC.

FROM ANALYSIS TO STRATEGY

In making strategic decisions, inputs from a variety of assessments are relevant, as the last several chapters have already made clear. However, the core of any strategic decision should be based on three types of assessments. The first concerns firm strengths and weaknesses. The second evaluates competitor strengths, weaknesses, and strategies because a company's strength is of less value if it is neutralized by a competitor's strength or strategy. The third assesses the market and environmental context, including the customers and their needs, the market, and the larger environment, in order to determine how attractive the selected market will be, given the business strategy.

The goal is to develop a strategy that exploits business strengths and competitor weaknesses and neutralizes business weaknesses and competitor strengths. The ideal is to compete in a healthy, growing industry with a strategy based on strengths that are unlikely to be acquired or neutralized by competitors. Figure 5.6 summarizes how these three assessments combine to influence strategy.

Figure 5.6 Structuring Strategic Decisions

GE's decision to sell its small-appliance division illustrates these strategic principles. Small appliances were a part of GE's legacy and linked to its lamp and major-appliance product lines in the minds of retailers and customers. The small-appliance industry was not profitable, however, in part because of overcapacity and retailer power, which cut into GE's margins. Also, cost pressures contributed to a reduction in product performance and reliability. Further, GE's strengths, such as its technological superiority and financial resources, were not being leveraged in the small-appliance business, as any innovation could be copied. Thus, GE decided that a strategic fit did not exist and it sold the small-appliance business to Black & Decker.

KEY LEARNINGS

Environmental analysis of technology, customer, political, and economic trends can detect opportunities or threats relevant to an organization.

Impact analysis involves assessing systematically the impact and immediacy of the trends and events that underlie each strategy uncertainty.

Scenario analysis, a vehicle to explore different assumptions about the future, involves the creation of two to three plausible scenarios, the development of strategies appropriate to each, the assessment of scenario probabilities, and the evaluation of the resulting strategies across the scenarios.

SWOT analysis combines an environmental assessment with an examination of firm strengths and weaknesses to assist in the development of firm strategy. It can be used to help companies determine which opportunities they should exploit, which threats they can manage, and which assets and competencies may need to be built in order to take such actions.

FOR DISCUSSION

What did the tablet replace? What will replace (or has replaced) the tablet?

Perform a SWOT analysis for The Coca-Cola Company in the soft drink category. What are the biggest threats and opportunities? What are Coca-Cola's relevant strengths and weaknesses? What strategic actions are necessary for the company to thrive by 2025?

Develop a scenario based on the proposition that hydrogen-fueled cars will continue to improve and take 15 percent of the automotive market in a few years. Analyze it from the point of view of an energy company such as Shell or a car company such as Mercedes.

Pick a start-up you admire. What are the major trends emerging from an environmental analysis? What are the major areas of uncertainty? How would a major company in the industry handle these trends and uncertainties? How do you predict the start-up will respond?

Focusing on the airline industry, develop a list of strategic uncertainties and possible strategic actions.

Visible criticism has been leveled at the bottled water industry, including the claim that their product is not better than tap water in many locales (some brands are even said to have an unpleasant aftertaste) and that the plastic bottles are carbon costly to make and are not biodegradable. What programs would you consider to combat these arguments if you were PepsiCo, the maker of Aquafina, or The Coca-Cola Company, the maker of Dasani?

BEST DIGITAL PRACTICE

Kraft Mac and Cheese: A Stealth Marketing Approach

A trend that has a critical impact on the consumer packaged goods industry in recent years is consumers' desire for simpler, more transparent, and more natural ingredients. Many companies have responded by publicly stating their intentions to remove artificial coloring and preservatives from long-standing brands and then repositioning the product as “clean” or “pure” within the market. While this strategy aligns well with trends, it risks alienating individuals who are used to purchasing goods based on more intangible factors such as nostalgia, predictability, and even taste.

Kraft used a novel approach to handling these shifting consumer preferences. To stay competitive within the category, the company realized it had to rethink the product formula of one of its superstar brands, Kraft Mac and Cheese. However, management knew it was crucial to make changes without tainting elements of the product that consumers had come to expect. For generations, individuals had associated Kraft Mac and Cheese with its orangish hue and smooth sauce consistency. Kraft made it a point to carefully maintain these identifying attributes as it eliminated ingredients and removed artificial dyes.

The aspect of Kraft's strategy that was a real differentiator though was how it rolled out the reformulation. Rather than advertising the measures the company had taken to make its product more natural—common practice among competitors—Kraft simply didn't say anything. Studies have shown that even the mention of a new formula can cause consumers to perceive flavor to be different, so Kraft chose not to call attention to the change.

After consumers had accepted the new formula, as evidenced by sales remaining stable, Kraft launched a digital campaign to announce the adjustment. The campaign tagline “It changed. But it hasn't” was featured in 15- and 30-second online video spots. Tongue-and-cheek lines such as “We'd invite you to try it, but you already have” were incorporated into digital display ads, promotions through channels like Pandora radio and Snapchat, and magazine print. Kraft also encouraged fans to share their experiences with the product on social media using #didntnotice and offered giveaways to encourage postings.

Kraft's ability to make a fundamental change to an iconic product without consumer backlash is a testament to its thoughtful marketing approach. Quietly testing the waters in a landscape of uncertainty can help companies anticipate reactions to significant product changes that ultimately help them stay one step ahead.

Questions:

Develop a scenario in which Kraft's strategy might have backfired. How might Kraft have prepared for this possibility?

How should Kraft respond to the demographic trends examined in the chapter?

Sources:

Martha C. White, “Kraft Reveals Revamped Mac and Cheese, 50 Million Boxes Later,” The New York Times, March 20, 2016, http://www.nytimes.com/2016/03/21/business/media/kraft-reveals-revamped-mac-and-cheese-50-million-boxes-later.html?_r=2

Justin Bariso, “How Kraft Used Psychology to Make Its Mac and Cheese Go Viral,” Inc., March 21, 2016, http://www.inc.com/justin-bariso/kraft-just-changed-its-classic-mac-and-cheese-and-used-psychology-to-ensure-its-.html