Presentation of Marketing Strategy

bcuebu

MarketingStrategyTextandCases7thEditionbyO.C.Ferrell.pdf

Home >Business & Finance homework help >Marketing homework help >Presentation of Marketing Strategy

96519_cvr_ptg01_hires.indd 1 17/05/16 5:43 PM

96519_cvr_ptg01_hires.indd 2 17/05/16 5:43 PM

O.C. Ferrell Belmont University

Michael D. Hartline Florida State University

Marketing Strategy TEXT AND CASES

SEVENTH EDITION

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

Marketing Strategy: Text and Cases, Seventh Edition O.C. Ferrell and Michael D. Hartline

Senior Vice President, General Manager, Social Sciences, Humanities, and Business: Erin Joyner

Product Director: Jason Fremder

Senior Product Manager: Mike Roche

Product Assistant: Brian Pierce

Marketing Manager: Katie Jergens

Marketing Coordinator: Casey Binder

Content Project Manager: Darrell E. Frye

Manufacturing Planner: Ron Montgomery

Production Service: MPS Limited

Senior Art Director: Bethany Casey

Cover Image: Black_Diamond/Shutterstock.com; vs148/Shutterstock.com; scyther5/Shutterstock.com; Pulvas/Shutterstock.com

Intellectual Property Analyst: Diane Garrity Project Manager: Sarah Shainwald

ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced or distributed in any form or by any means, except as permitted by U.S. copyright law, without the prior written permission of the copyright owner.

For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706.

For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions.

Further permissions questions can be emailed to [email protected].

Unless otherwise noted all items © Cengage Learning.

Library of Congress Control Number: 2016942345

ISBN: 978-1-337-29651-9

Cengage Learning 20 Channel Center Street Boston, MA 02210 USA

Cengage Learning is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world. Find your local representative at www.cengage.com.

Cengage Learning products are represented in Canada by Nelson Education, Ltd.

To learn more about Cengage Learning Solutions, visit www.cengage.com.

Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com.

Printed in the United States of America Print Number: 01 Print Year: 2016

To my wife, Linda

O.C. Ferrell

To my girls, Marsha, Meghan, Madison, and Mallory

Michael D. Hartline

Brief Contents Preface xiii

About the Authors xvii

1 MARKETING IN TODAY’S ECONOMY 1 2 STRATEGIC MARKETING PLANNING 27 3 COLLECTING AND ANALYZING MARKETING INFORMATION 56 4 DEVELOPING COMPETITIVE ADVANTAGE AND STRATEGIC FOCUS 89 5 CUSTOMERS, SEGMENTATION, AND TARGET MARKETING 119 6 THE MARKETING PROGRAM 153 7 BRANDING AND POSITIONING 203 8 ETHICS AND SOCIAL RESPONSIBILITY IN MARKETING STRATEGY 230 9 MARKETING IMPLEMENTATION AND CONTROL 260 10 DEVELOPING AND MAINTAINING LONG-TERM CUSTOMER RELATIONSHIPS 289

CASES CASE 1 USA TODAY: INNOVATION IN AN EVOLVING INDUSTRY 318

CASE 2 CONSUMERS TAKE A SHINE TO APPLE, INC. 331

CASE 3 MONSANTO BALANCES THE INTERESTS OF MULTIPLE STAKEHOLDERS 342

CASE 4 NEW BELGIUM BREWING (A): SOCIAL RESPONSIBILITY AS COMPETITIVE ADVANTAGE 355

CASE 5 NEW BELGIUM BREWING (B): DEVELOPING A BRAND PERSONALITY 364

CASE 6 MATTEL CONFRONTS ITS MARKETING CHALLENGES 373

CASE 7 MISTINE: DIRECT SELLING IN THE THAI COSMETICS MARKET 384

CASE 8 BP STRUGGLES TO REPAIR ITS TARNISHED REPUTATION 396

CASE 9 CHEVROLET: A CENTURY OF PRODUCT INNOVATION 407

CASE 10 WYNDHAM WORLDWIDE ADOPTS A STAKEHOLDER ORIENTATION MARKETING STRATEGY 422

CASE 11 NASCAR: CAN’T KEEP A GOOD BRAND DOWN 431

CASE 12 INDYCAR: SEEKING A RETURN TO MOTORSPORTS’ FAST LANE 443

CASE 13 ZAPPOS: DELIVERING HAPPINESS 454

CASE 14 NETFLIX FIGHTS TO STAY AHEAD OF A RAPIDLY CHANGING MARKET 465

CASE 15 GILLETTE: WHY INNOVATION MAY NOT BE ENOUGH 475

CASE 16 IKEA SLOWLY EXPANDS ITS U.S. MARKET PRESENCE 487

CASE 17 UBER: THE OPPORTUNITIES AND CHALLENGES OF MARKET DISRUPTION 496

CASE 18 SCENTSY, INC.: A SUCCESSFUL DIRECT SELLING BUSINESS MODEL 507

CASE 19 SIGMA MARKETING: STRATEGIC MARKETING ADAPTATION 515

CASE 20 BELLE MEADE PLANTATION: A SOCIAL ENTREPRENEURSHIP MARKETING STRATEGY 525

CASE 21 COCA-COLA: INTEGRATED MARKETING COMMUNICATIONS 534

Index 544

Brief Contents v

Contents Preface xiii

About the Authors xvii

1 MARKETING IN TODAY’S ECONOMY 1 THE CHALLENGES AND OPPORTUNITIES OF MARKETING IN TODAY’S ECONOMY 2

Power Shift to Customers 3

Massive Increase in Product Selection 4

Audience and Media Fragmentation 4

Changing Value Propositions 4

Shifting Demand Patterns 5

Privacy, Security, and Ethical Concerns 5

Unclear Legal Jurisdiction 6

BASIC MARKETING CONCEPTS 7

What Is a Market? 8

What Is Exchange? 9

What Is a Product? 10

MAJOR MARKETING ACTIVITIES AND DECISIONS 13

Strategic Planning 15

Research and Analysis 15

Developing Competitive Advantage 16

Marketing Strategy Decisions 16

Social Responsibility and Ethics 19

Implementation and Control 20

Developing and Maintaining Customer Relationships 20

TAKING ON THE CHALLENGES OF MARKETING STRATEGY 21

LESSONS FROM CHAPTER 1 23

NOTES 24

2 STRATEGIC MARKETING PLANNING 27 THE STRATEGIC PLANNING PROCESS 29

Organizational Mission versus Organizational Vision 30

Corporate or Business-Unit Strategy 34

Functional Goals and Objectives 35

Functional Strategy 36

Implementation 36

Evaluation and Control 36

THE MARKETING PLAN 37

Marketing Plan Structure 37

Using the Marketing Plan Structure 43

Purposes and Significance of the Marketing Plan 44

Organizational Aspects of the Marketing Plan 45

MAINTAINING CUSTOMER FOCUS AND BALANCE IN STRATEGIC PLANNING 46

Customer-Focused Planning 46

Balanced Strategic Planning 49

LESSONS FROM CHAPTER 2 51

NOTES 53

3 COLLECTING AND ANALYZING MARKETING INFORMATION 56 CONDUCTING A SITUATION ANALYSIS 58

Analysis Alone Is Not a Solution 58

Data Are Not the Same as Information 59

The Benefits of Analysis Must Outweigh the Costs 59

Conducting a Situation Analysis Is a Challenging Exercise 59

THE INTERNAL ENVIRONMENT 61

Review of Current Objectives, Strategy, and Performance 61

Availability of Resources 62

Organizational Culture and Structure 63

THE CUSTOMER ENVIRONMENT 63

Who Are Our Current and Potential Customers? 65

What Do Customers Do with Our Products? 65

Where Do Customers Purchase Our Products? 66

When Do Customers Purchase Our Products? 66

Contents vii

Why (and How) Do Customers Select Our Products? 68

Why Do Potential Customers Not Purchase Our Products? 68

THE EXTERNAL ENVIRONMENT 69

Competition 71

Economic Growth and Stability 73

Political Trends 74

Legal and Regulatory Issues 74

Technological Advancements 75

Sociocultural Trends 76

COLLECTING MARKETING DATA AND INFORMATION 79

Secondary Information Sources 79

Primary Data Collection 82

Overcoming Problems in Data Collection 83

LESSONS FROM CHAPTER 3 84

NOTES 85

4 DEVELOPING COMPETITIVE ADVANTAGE AND STRATEGIC FOCUS 89 MAKING SWOT ANALYSIS PRODUCTIVE 91

Stay Focused 91

Search Extensively for Competitors 93

Collaborate with Other Functional Areas 93

Examine Issues from the Customers’ Perspective 93

Look for Causes, Not Characteristics 95

Separate Internal Issues from External Issues 96

SWOT-DRIVEN STRATEGIC PLANNING 97

Strengths and Weaknesses 97

Opportunities and Threats 97

The SWOT Matrix 99

DEVELOPING AND LEVERAGING COMPETITIVE ADVANTAGES 102

ESTABLISHING A STRATEGIC FOCUS 104

DEVELOPING MARKETING GOALS AND OBJECTIVES 109

Developing Marketing Goals 111

Developing Marketing Objectives 112

Moving beyond Goals and Objectives 115

LESSONS FROM CHAPTER 4 115

NOTES 117

viii Contents

5 CUSTOMERS, SEGMENTATION, AND TARGET MARKETING 119 BUYER BEHAVIOR IN CONSUMER MARKETS 121

The Consumer Buying Process 121

Factors that Affect the Consumer Buying Process 127

BUYER BEHAVIOR IN BUSINESS MARKETS 129

Unique Characteristics of Business Markets 130

The Business Buying Process 132

MARKET SEGMENTATION 133

Traditional Market Segmentation Approaches 133

Individualized Segmentation Approaches 136

Criteria for Successful Segmentation 138

IDENTIFYING MARKET SEGMENTS 139

Segmenting Consumer Markets 139

Segmenting Business Markets 144

TARGET MARKETING STRATEGIES 145

LESSONS FROM CHAPTER 5 147

NOTES 151

6 THE MARKETING PROGRAM 153 PRODUCT STRATEGY 155

Strategic Issues in the Product Portfolio 155

The Challenges of Service Products 158

Developing New Products 160

PRICING STRATEGY 162

Key Issues in Pricing Strategy 162

Pricing Service Products 168

Base Pricing Strategies 170

Adjusting the Base Price 171

SUPPLY CHAIN STRATEGY 172

Strategic Supply Chain Issues 173

Trends in Supply Chain Strategy 178

INTEGRATED MARKETING COMMUNICATIONS 182

Strategic Issues in Integrated Marketing Communications 183

Advertising 185

Public Relations 187

Contents ix

Personal Selling and Sales Management 189

Sales Promotion 191

LESSONS FROM CHAPTER 6 195

NOTES 200

7 BRANDING AND POSITIONING 203 STRATEGIC ISSUES IN BRANDING 206

Basic Branding Decisions 206

Strategic Brand Alliances 209

Brand Value 209

Packaging and Labeling 212

DIFFERENTIATION AND POSITIONING 213

Bases for Differentiation 215

Positioning Strategies 217

MANANGING BRANDS OVER TIME 218

Development Stage 220

Introduction Stage 221

Growth Stage 221

Maturity Stage 223

Decline Stage 224

LESSONS FROM CHAPTER 7 226

NOTES 228

8 ETHICS AND SOCIAL RESPONSIBILITY IN MARKETING STRATEGY 230 ETHICS AND SOCIAL RESPONSIBILITY IN MARKETING STRATEGY 231

Dimensions of Social Responsibility 232

Sustainability 235

Marketing Ethics and Strategy 237

The Challenges of Being Ethical and Socially Responsible 239

ETHICAL ISSUES IN THE MARKETING PROGRAM 241

Product-Related Ethical Issues 241

Pricing-Related Ethical Issues 243

Supply Chain–Related Ethical Issues 244

Promotion-Related Ethical Issues 245

x Contents

MANAGING AND CONTROLLING ETHICAL ISSUES 246

Regulating Marketing Ethics 246

Codes of Conduct 248

Ethical Leadership 249

RELATIONSHIP TO MARKETING AND FINANCIAL PERFORMANCE 250

Stakeholder Orientation 250

Marketing Financial Performance 251

INCORPORATING ETHICS AND SOCIAL RESPONSIBILITY INTO STRATEGIC PLANNING 251

LESSONS FROM CHAPTER 8 252

NOTES 255

9 MARKETING IMPLEMENTATION AND CONTROL 260 STRATEGIC ISSUES IN MARKETING IMPLEMENTATION 262

The Link Between Planning and Implementation 262

The Elements of Marketing Implementation 264

APPROACHES TO MARKETING IMPLEMENTATION 268

Implementation by Command 268

Implementation through Change 270

Implementation through Consensus 271

Implementation as Organizational Culture 271

INTERNAL MARKETING AND MARKETING IMPLEMENTATION 272

The Internal Marketing Approach 272

The Internal Marketing Process 274

EVALUATING AND CONTROLLING MARKETING ACTIVITIES 275

Formal Marketing Controls 276

Informal Marketing Controls 279

Scheduling Marketing Activities 281

LESSONS FROM CHAPTER 9 283

NOTES 286

10 DEVELOPING AND MAINTAINING LONG-TERM CUSTOMER RELATIONSHIPS 289 MANAGING CUSTOMER RELATIONSHIPS 290

Developing Relationships in Consumer Markets 292

Developing Relationships in Business Markets 294

Contents xi

QUALITY AND VALUE: THE KEYS TO DEVELOPING CUSTOMER RELATIONSHIPS 296

Understanding the Role of Quality 296

Delivering Superior Quality 298

Understanding the Role of Value 299

Competing on Value 303

CUSTOMER SATISFACTION: THE KEY TO CUSTOMER RETENTION 304

Understanding Customer Expectations 304

Satisfaction versus Quality versus Value 307

Customer Satisfaction and Customer Retention 310

Customer Satisfaction Measurement 312

LESSONS FROM CHAPTER 10 313

NOTES 317

CASES CASE 1 USA TODAY: INNOVATION IN AN EVOLVING INDUSTRY 318

CASE 2 CONSUMERS TAKE A SHINE TO APPLE, INC. 331

CASE 3 MONSANTO BALANCES THE INTERESTS OF MULTIPLE STAKEHOLDERS 342

CASE 4 NEW BELGIUM BREWING (A): SOCIAL RESPONSIBILITY AS COMPETITIVE ADVANTAGE 355

CASE 5 NEW BELGIUM BREWING (B): DEVELOPING A BRAND PERSONALITY 364

CASE 6 MATTEL CONFRONTS ITS MARKETING CHALLENGES 373

CASE 7 MISTINE: DIRECT SELLING IN THE THAI COSMETICS MARKET 384

CASE 8 BP STRUGGLES TO REPAIR ITS TARNISHED REPUTATION 396

CASE 9 CHEVROLET: A CENTURY OF PRODUCT INNOVATION 407

CASE 10 WYNDHAM WORLDWIDE ADOPTS A STAKEHOLDER ORIENTATION MARKETING STRATEGY 422

CASE 11 NASCAR: CAN’T KEEP A GOOD BRAND DOWN 431

CASE 12 INDYCAR: SEEKING A RETURN TO MOTORSPORTS’ FAST LANE 443

CASE 13 ZAPPOS: DELIVERING HAPPINESS 454

CASE 14 NETFLIX FIGHTS TO STAY AHEAD OF A RAPIDLY CHANGING MARKET 465

CASE 15 GILLETTE: WHY INNOVATION MAY NOT BE ENOUGH 475

CASE 16 IKEA SLOWLY EXPANDS ITS U.S. MARKET PRESENCE 487

CASE 17 UBER: THE OPPORTUNITIES AND CHALLENGES OF MARKET DISRUPTION 496

CASE 18 SCENTSY, INC.: A SUCCESSFUL DIRECT SELLING BUSINESS MODEL 507

CASE 19 SIGMA MARKETING: STRATEGIC MARKETING ADAPTATION 515

CASE 20 BELLE MEADE PLANTATION: A SOCIAL ENTREPRENEURSHIP MARKETING STRATEGY 525

CASE 21 COCA-COLA: INTEGRATED MARKETING COMMUNICATIONS 534

Index 544

xii Contents

Preface Welcome to one of the most interesting, challenging, and important topics in your business education. What makes marketing strategy so interesting, challenging, and important you ask? To begin, marketing strategy is interesting because (1) it is inher- ently people-driven and (2) it is never stagnant. A distinct blend of both art and sci- ence, marketing strategy is about people (inside an organization) finding ways to deliver exceptional value by fulfilling the needs and wants of other people (custo- mers, shareholders, business partners, society at large), as well as the needs of the organization itself. Marketing strategy draws from psychology, sociology, and economics to better understand the basic needs and motivations of these people— whether they are the organization’s customers (typically considered the most critical), its employees, or its stakeholders. In short, marketing strategy is about peo- ple serving people.

For this reason, marketing strategy is interesting because it is never stagnant. The simple fact is that people change. A strategy that works today might not work tomorrow. Products that are popular today are forgotten next week. These truisms are important because truly understanding marketing strategy means accepting the fact that there are few concrete rules for developing and implementing marketing activities. Given the constant state of change in the marketing environment, it is vir- tually impossible to say that given “this customer need” and “these competitors” and “this level of government regulation” that Product A, Price B, Promotion C, and Distribution D will produce the best results. Marketing simply doesn’t work that way. The lack of concrete rules and the ever changing economic, sociocultural, competi- tive, technological, and political/legal landscapes make marketing strategy a terribly fascinating subject.

Now that you know why marketing strategy is so interesting, it should be easy to see why it is also challenging. A perfect marketing strategy that is executed flawlessly can still fail. Sometimes, organizations are lucky and have success despite having a terrible strategy and/or execution. The nature of marketing can make mar- keting planning quite frustrating.

Finally, the importance of marketing strategy is undeniable. No other business function focuses on developing relationships with customers—the lifeblood of all organizations (even non-profits). This statement does not diminish the importance of other business functions, as they all are necessary for an organization to be suc- cessful. In fact, coordination with other functions is critical to marketing success. However, without customers, and marketing programs in place to cultivate customer relationships, no organization can survive.

xiii

OUR FOCUS Given this marketing landscape, Marketing Strategy: Text and Cases, 7th Edition provides a practical, straightforward approach to analyzing, planning, and imple- menting marketing strategies. Our focus is based on the creative process involved in applying the knowledge and concepts of marketing to the development and imple- mentation of marketing strategy. Our goal is to encourage students of marketing to think and act like a marketer. By discussing the key concepts and tools of marketing strategy, our emphasis on critical thinking, both analytical and creative, allows stu- dents to understand the essence of how marketing decisions fit together to create a coherent strategy.

Our approach in Marketing Strategy: Text and Cases, 7th Edition is also grounded in the development and execution of the marketing plan. Throughout the text, we provide a comprehensive planning framework based on conducting sound background research, developing market capabilities and competitive advantages, designing integrated marketing programs, and managing customer relationships for the long term. We also emphasize the need for integrity in the strategic planning pro- cess as well as the design of marketing programs that are both ethical and socially responsible. We also stress the integration and coordination of marketing decisions with other functional business decisions as the key to achieving an organization’s overall mission and vision. Throughout the text, we offer examples of successful planning and implementation to illustrate how firms face the challenges of marketing strategy in today’s economy.

PURPOSE We view strategic marketing planning not only as a process for achieving organiza- tional goals, but also as a means of building long-term relationships with customers. Creating a customer orientation takes imagination, vision, and courage, especially in today’s rapidly changing economic and technological environments. To help meet these challenges, our text approaches marketing strategy from both “traditional” and “cutting-edge” practices. We cover topics such as segmentation, creating a competi- tive advantage, marketing program development, and the implementation process with a solid grounding in traditional marketing, but also with an eye toward emerging practices. Lessons learned from the rise, fall, and reemergence of the dotcom sector, recent corporate scandals, and the most recent economic recession illustrate the importance of balancing the traditional and emerging practices of marketing strat- egy. Our text never loses sight of this balance.

Although our approach allows for the use of sophisticated research and decision-making processes, we have employed a practical perspective that permits marketing managers in any sized organization to develop and implement a marketing plan. We have avoided esoteric, abstract, and highly academic material that does not relate to typical marketing strategy decisions in most organizations. The marketing plan framework that we utilize throughout the text has been used by a number of organizations to successfully plan their marketing strategies. Many companies report great success in using our approach partially due to the ease of communicating the plan to all functional areas of the business.

TARGET AUDIENCE Our text is relevant for a number of educational environments, including undergrad- uate, graduate, and corporate training courses. At the undergraduate level, our text is appropriate for the capstone course or any upper-level integrating course such as

xiv Preface

“Marketing Management,” “Marketing Strategy,” or “Marketing Policy.” At this level, the text provides an excellent framework to use with our included text-based cases, live-client cases, or a computer simulation. At the graduate level, our text is appropri- ate for courses addressing strategic marketing planning, competitive marketing strat- egies, or as a supplement for any simulation-based course. A growing segment of the market, corporate training, can utilize our text when educating business profes- sionals interested in developing marketing plans of their own, or interpreting and implementing the plans of others.

Each of the 21 cases included in our text describes the strategic situations of real-world, identifiable organizations. Because these cases feature real situations, instructors have the option of using the case material as published, or they may give students the opportunity to update the cases by conducting research to find the latest information. Many additional resources for students and instructors can be found at our text’s companion website, www.cengagebrain.com.

ACKNOWLEDGMENTS Throughout the development of this text, several extraordinary individuals pro- vided their talent and expertise to make important contributions. A number of indi- viduals have made many useful comments and recommendations as reviewers of this text.

We also deeply appreciate the assistance of several individuals who played a major role in developing cases or other materials. Specifically, we thank the follow- ing individuals:

Joe Alexander, Belmont University

Noushin Laila Ansari, University of New Mexico

Timothy W. Aurand, Northern Illinois University

Harper Baird, University of New Mexico

Chandani Bhasin, University of New Mexico

Christin Copeland, Florida State University

Linda Ferrell, Belmont University

John Fraedrich, Southern Illinois University – Carbondale

Bernadette Gallegos, University of New Mexico

Sederick Hood, University of New Mexico

Jennifer Jackson, University of New Mexico

Danielle Jolley, University of New Mexico

Kimberly Judson, Illinois State University

Robert P. Lambert, Belmont University

Cassondra Lopez, University of New Mexico

Julian Mathias, University of New Mexico

Kevin Mihaly, Florida State University

Christian Otto, University of New Mexico

Greg Owsley, New Belgium Brewing Company

Kelsey Reddick, Florida State University

Preface xv

Don Roy, Middle Tennessee State University

Mike Sapit, Sigma Marketing

Jennifer Sawayda, University of New Mexico

Beau Shelton, University of New Mexico

Bryan Simpson, New Belgium Brewing Company

Debbie Thorne, Texas State University

Jacqueline Trent, University of New Mexico

Robyn Watson, Florida State University

Lecia Weber, University of New Mexico

Celeste Wood, Florida State University

We greatly appreciate the efforts of Jennifer Sawayda, University of New Mexico, for coordinating much of the new case development in this edition. The editorial, production, and marketing staff at Cengage cannot be thanked enough. With a deep sense of appreciation, we thank Mike Roche and Zach Fleischer.

Finally, we express appreciation for the support and encouragement of our families and friends, and our colleagues at Belmont University, Florida State University, and the University of New Mexico.

xvi Preface

About the Authors O.C. FERRELL, PH.D. Belmont University

O.C. Ferrell (Ph.D., Louisiana State University) is University Distinguished Chair of Business Ethics at Belmont University. He recently served 9 years as University Dis- tinguished Professor of Marketing at the Anderson School of Management, Univer- sity of New Mexico. He also served at the University of Wyoming and was Chair of the Marketing Department at Colorado State University. Prior to his arrival at CSU, Dr. Ferrell was the Distinguished Professor of Marketing and Business Ethics at the University of Memphis. He has also served as a professor at the University of Tampa, Texas A&M University, Illinois State University, and Southern Illinois University. His MBA and BA degrees are from Florida State University.

Dr. Ferrell is past president of the Academic Council of the American Marketing Association and former chair of the American Marketing Association Ethics Commit- tee. Under his leadership, the committee developed the AMA Code of Ethics and the AMA Code of Ethics for Marketing on the Internet. He is a Society for Marketing Advances Fellow and the Vice President of Publications for the Academy of Market- ing Science. He is a former member of the Board of Governors as a Distinguished Fellow for the Academy of Marketing Science. He received the Cutco Vector Distin- guished Marketing Educator Award from the Academy of Marketing Science. In addi- tion, he received the first Innovative Educator award from the Marketing Management Association.

Dr. Ferrell has taught a wide variety of courses, including marketing strategy, principles of marketing, marketing ethics, international marketing, as well as most undergraduate courses in marketing. For 16 years he taught a graduate course in competitive marketing strategies at Thammasat University in Bangkok, Thailand. He has also been a visiting professor at University of Wisconsin, University of Michigan–Ann Arbor, and University of Hanover, Germany.

Dr. Ferrell is the co-author of over 20 books and more than 100 articles. His research is published in the Journal of Marketing Research, the Journal of Market- ing, the Journal of Business Ethics, the Journal of Business Research, the Journal of the Academy of Marketing Science, as well as other journals. His Marketing: Con- cepts and Strategies text, co-authored with Bill Pride, is one of the most widely adopted principles of marketing texts in the world. Furthermore, his Business Ethics: Decision Making and Cases is the leading business ethics text.

Dr. Ferrell has served as an expert witness in many high-profile civil litigation cases related to marketing ethics. More recently he has assisted international cor- porations and worked with state regulatory agencies in modifying marketing pro- grams to maintain compliance with both ethical and legal requirements. Currently,

xvii

he is working with the National Association of State Boards of Accountancy to develop an ethical leadership certification for students. He has appeared on the NBC Today show and he has been quoted in national papers such as USA Today.

Dr. Ferrell and his wife Linda (also a faculty member at Belmont University) live in Nashville, Tennessee. He continues to help coordinate the Daniels Fund Ethics Ini- tiative at the University of New Mexico. He enjoys golf, skiing, reading, and travel.

MICHAEL D. HARTLINE, PH.D. Florida State University

Michael D. Hartline (Ph.D., University of Memphis) is Interim Dean and Charles A. Bruning Professor of Business Administration in the College of Business at Florida State University. Previously, he served as Associate Dean for Strategic Initiatives and Chair of the Department of Marketing. Prior to joining the FSU faculty in 2001, Dr. Hartline served on faculty at the University of Arkansas at Little Rock, Louisiana State University, and Samford University. His MBA and B.S. degrees are from Jacksonville State University in Alabama.

Dr. Hartline primarily teaches graduate courses in Marketing Strategy and undergraduate courses in Services Marketing. He has won many teaching and research awards and made many presentations to industry and academic audiences. Dr. Hartline has also served as a consultant to several for-profit and nonprofit orga- nizations in the areas of marketing plan development, market feasibility analysis, customer satisfaction measurement, customer service training, and pricing policy. He currently serves on the Academic Advisory Council of the Direct Selling Educa- tion Foundation and on the board of the Knight Creative Communities Initiative in Tallahassee, Florida. He has previously served on the executive committee of the Academy of Marketing Science, co-chaired two international conferences for the American Marketing Association, and has served on the editorial review boards of a number of leading marketing journals.

Dr. Hartline’s research addresses marketing implementation issues in service firms. Specifically, his work examines the role of customer-contact employees and workgroups in the effective delivery of quality service to customers. Dr. Hartline’s research appears in the Journal of Marketing, the Journal of Service Research, the Journal of Business Research, the Journal of Relationship Marketing, the Journal of Services Marketing, the Cornell Quarterly, the Journal of Strategic Marketing, the Journal of Business Ethics, and the Marketing Science Institute Working Paper Series.

Dr. Hartline and his wife Marsha live in Tallahassee with their three daughters Meghan, Madison, and Mallory. They have two dogs, Bella and Chief (both Japanese Chins), and two cats, Snickers and Sammie. Dr. Hartline is a self-professed electron- ics and gadget enthusiast who enjoys music, reading, computers, travel, college football (Go Seminoles!), and being a dad.

xviii About the Authors

Marketing in Today’s Economy

INTRODUCTION As noted in the opening Beyond the Pages 1.1 story, competing in today’s economy means finding ways to break out of commodity status to meet customers’ needs bet- ter than competing firms. All organizations—both for-profit and nonprofit—require effective planning and a sound marketing strategy to do this effectively. Without these efforts, organizations would not be able to satisfy customers or meet the needs of other stakeholders. For example, having an effective marketing strategy allows Apple to develop popular products, such as the iPhone, iPad, iWatch, and its MacBook line of computers. Further, effective planning and strategy allows Cola- Cola to continue its leadership in soft drinks, make key acquisitions, and continue its expansion into the lucrative Chinese market. These and other organizations use sound marketing strategy to leverage their strengths and capitalize on opportunities that exist in the market. Every organization—from your favorite local restaurant to giant multinational corporations; from city, state, and federal governments, to chari- ties such as Habitat for Humanity and the American Red Cross—develops and imple- ments marketing strategies.

How organizations plan, develop, and implement marketing strategies is the focus of this book. To achieve this focus, we provide a systematic process for devel- oping customer-oriented marketing strategies and marketing plans that match an organization to its internal and external environments. Our approach focuses on real-world applications and practical methods of marketing planning, including the process of developing a marketing plan. The chapters of this book focus on the steps of this process. Our goal is to give the reader a deeper understanding of mar- keting planning, the ability to organize the vast amount of information needed to complete the planning process, and an actual feel for the development of marketing plans.

In this first chapter, we review some of the major challenges and opportunities that exist in planning marketing strategy in today’s economy. We also review the nature and scope of major marketing activities and decisions that occur throughout the planning process. Finally, we look at some of the major challenges involved in developing marketing strategy.

CHAPTER

THE CHALLENGES AND OPPORTUNITIES OF MARKETING IN TODAY’S ECONOMY Traditional ideas about marketing strategy began to change forever during the mid- 1990s. Advances in computer, communication, and information technology forever

BEYOND THE PAGES 1.1

Thriving in Commodity Hell1

Have you noticed that regardless of the industry, most goods and services offered by competing companies are eerily the same? Most household appliances, such as refrigerators, washing machines, and stoves, offer the same basic features and come in white, beige, black, or stain- less steel. Virtually all Android-based smartphones offer the same features at similar prices. Even air- line flights from New York to Los Angeles are essentially the same. Everywhere you look, most companies offer the same basic products to the same customer groups at roughly the same prices. This situation is referred to as “commodity hell” and it’s a tough situation for most companies. Commoditization is everywhere and is the result of mature markets where goods and services lack any real means of differentiation. Unfortunately for companies, when customers begin to see all competing products as offering roughly the same benefits, price is the only thing that matters.

Commoditization is a consequence of mature industries where slowing innovation, extensive product assortment, excess supply, and frugal consumers force margins to the floor. Since firms have few competitive differences, they are unable to increase margins. They must also spend a great deal on promotion to attract new custo- mers. This situation makes firms more vulnerable to the entry of new competitors. Consider the air- line industry. Notwithstanding a few minor differ- ences, most air travelers see all airlines as being roughly the same. They all get passengers from Point A to Point B while offering the same basic customer services. This makes price the driving force in consumer decision-making and allows discount airlines such as Southwest and Jet Blue to steal customers away from traditional full- service carriers. This same precarious situation exists in a broad range of industries including telephone service, hotels, packaged goods, auto- mobiles, household appliances, and retailing.

As you might expect, low price leaders can do quite well in commoditized markets. South- west, for example, was profitable for over 33 years until the economic recession hit the

industry hard in 2008. To counteract the down- turn, Southwest expanded routes by acquiring rival companies such as AirTran. The company also stands apart from others with its innovative “No Bag Fees” policy. Other firms, however, avoid commodity status through the most basic of marketing tactics: brand building. Here, firms break free from commodity status by developing a distinctive brand position that separates them and their products from the competition. Firms that come to mind are Apple, Coca-Cola, and Chick-fil-A. By offering compelling reasons for consumers to buy products, brand building allows firms to increase margins. Apple, in partic- ular, enjoys the highest profit margins of any firm in the technology sector.

Starbucks is another case in point. Starbucks clearly sells one of the most commoditized, ubiq- uitous products of all time: coffee. Starbucks Chairman Howard Schultz, however, does not accept that his firm is in the coffee business. Instead, Schultz sees Starbucks as a “third place” to hang out (with home and work being number 1 and number 2, respectively). Through this mental- ity, Starbucks offers its customers much more than coffee, including wireless Internet access, music, food, and relaxation. Starbucks has contin- ued its brand-building activities by introducing breakfast combos, Via instant coffee, and the con- tinued push of its Seattle’s Best brand into restau- rants, offices, hospitals, and vending machines.

Getting out of commodity hell is not an easy feat. To do so, firms must give consumers a com- pelling reason to buy their products over compet- ing products. Ultimately, winning the commodity game is all about innovation. Consider the firms that top Fast Company’s list of the World’s Most Innovative Companies for 2014 (in order): Goo- gle, Bloomberg Philanthropies, Xiaomi, Dropbox, Netflix, Airbnb, Nike, and ZipDial. Each of these companies offers innovative products, processes, or experiences that stand apart from the compe- tition; yet each competes in mature industries known for commoditization. These companies prove that innovation and good marketing strat- egy are the antidotes for commodity hell.

2 Chapter 1 • Marketing in Today’s Economy

changed the world and the ways that marketers reach potential customers. The col- lapse of the dot-com bubble in the late 1990s was followed by a historic collapse of the worldwide economy in 2008. The powerhouse companies of the past have weak- ened and lost relevance in an economy marked by constant change and consumer skepticism. Consider the following fundamental changes to marketing and business practice, as well as our own personal buying behavior.

Power Shift to Customers Perhaps the single most important change during the last two decades is the shift in power from marketers to consumers. Rather than businesses having the ability to manipulate customers via technology, customers often manipulate businesses because of their access to information, the ability to comparison shop, and the con- trol they have over spending. Individual consumers and business customers can compare prices and product specifications in a matter of minutes. Using a smart- phone and the Amazon app, customers can walk Target’s aisles, scan bar codes to check prices on Amazon, and order items for 2-day delivery while in the store. This fact is the reason that Target, and other retailers like Best Buy, now price matches Amazon and other online competitors. In other cases, customers are able to set their own prices, such as purchasing airline tickets at Priceline.com. Customers can now interact with one another, as merchants such as Amazon and eBay allow custo- mers to share opinions on product quality and supplier reliability. As power con- tinues to shift to customers, marketers have little choice but to ensure that their products are unique and of high quality, thereby giving customers a reason to pur- chase their products and remain loyal to them.

D an ie l Ko eb e/ Fa nc y/ Co rb is

Consumers can instantly find competitors’ prices while in the store.

Chapter 1 • Marketing in Today’s Economy 3

Massive Increase in Product Selection The variety and assortment of goods and services offered for sale on the Internet and in traditional stores is staggering. In grocery stores alone, customers are faced with countless options in most aisles, such as in cereal and soft drinks. The growth in online retailing now allows customers to purchase a car from CarsDirect, handmade gifts from over 1.2 million shops on Etsy, or a case of their favorite wine from Wine.com. Increased transaction efficiency (e.g., 24/7 access, delivery to home or office even on weekends) allows customers to fulfill their needs more easily and con- veniently than ever before. Furthermore, the vast amounts of information available online has changed the way we communicate, read the news, and entertain our- selves. Customers can now have the news delivered to them automatically via smart- phone apps, such as Flipboard, that pull from hundreds of sources. This radical increase in product selection and availability has exposed marketers to inroads by competitors from every corner of the globe.

Audience and Media Fragmentation Changes in media usage and the availability of new media outlets have forced mar- keters to rethink the way they communicate with potential customers. Since the advent of cable television in the 1970s, mass media audiences have become increas- ingly fragmented. Television audiences, for example, shifted from the big three net- works (ABC, CBS, NBC) and began watching programming on ESPN, HGTV, Nickelodeon, and the Discovery Channel. When the growth of the Internet, satellite radio, and mobile communication is added to this mix, it becomes increasingly diffi- cult for marketers to reach a true mass audience. Media audiences have become fragmented due to (1) the sheer number of media choices we have available today, and (2) the limited time we have to devote to any one medium. Today, customers increasingly get information and news from Facebook and Twitter rather than the New York Times or CBS. They spend a growing amount of time interacting with handheld devices than they do reading magazines, listening to the radio, or watching television. As shown in Exhibit 1.1, consumer usage of traditional media is declining, while the usage of mobile media is on the rise. However, despite the challenge of reaching mass audiences today, media fragmentation does have a big advantage: It is easier to reach small, highly targeted audiences who are more receptive to specific marketing messages.

Changing Value Propositions Even before “The Great Recession” began in 2008, consumers and business buyers were already facing increasing costs associated with energy, food, building

EXHIBIT 1.1 Change in Daily Media Usage by U.S. Adults, 2010–2014.

Percent Change (%) Television 3.7 Desktop Online −13.6 Tablets 676.2 Smartphones 235.0 Radio −15.5 Newspapers −9.4 Magazines −34.9

SOURCE: Statista, “Average Daily Media Use in the United States from 2010 to 2014,” Statista, http://www.statista.com/ statistics/270781/average-daily-media-use-in-the-us/, accessed February 18, 2015.

4 Chapter 1 • Marketing in Today’s Economy

materials, and other essentials. Then, as the economy weakened, buyers were forced to tighten their belts and look for other ways to lower expenses. This trend actually began after the dot-com collapse as consumers saw for the first time that they could bypass some types of firms and do things for themselves. For example, travel agents and real estate agents have been hit hard by e-commerce. Many customers now turn to Travelocity and Expedia, rather than travel agents, for assistance in booking air- line tickets, cruises, or hotel stays. A similar change has taken place in the real estate industry as buyers are moving their house hunting online, while sellers are increas- ingly taking the “for sale by owner” route. Consequently, many marketers learned a tough lesson: In situations where customers see goods and services as commodities, they will turn to the most convenient, least-expensive alternative.

Today, many of these same consumers face pay cuts or losing their jobs in addi- tion to increased expenses. These and other economic hardships have forced con- sumer and business buyers to rethink value propositions and focus on the importance of frugality. The effects on business have been dramatic. For example, Radio Shack filed for Chapter 11 bankruptcy in early 2015 in the face of a highly commoditized market and stiff competition from other electronics retailers, particu- larly Amazon.2 A similar shakeout is happening in the book retailing segment. Bor- ders, for instance, closed its doors after fierce competition from Barnes & Noble, Amazon, Walmart, and Target lured its shoppers away. Likewise, e-book readers, like Amazon’s Kindle, have had a profound impact on traditional book publishing. Because books have become highly commoditized, consumers typically search for the lowest prices rather than the fringe benefits offered by traditional bookstores. E-book readers add to that by being more ecologically advantageous. This is the essence of being frugal, as customers look for ways to cut spending on unnecessary parts of their lives.

Shifting Demand Patterns In some cases, changes in technology have shifted customer demand for certain product categories. News is one well-known example, where traditional newspapers are slowly disappearing while online and mobile news continues to grow. Now, many newspaper companies have folded, some are on the brink of folding, while others have cut publication to only a few days per week. Another example is the explosive growth in the digital distribution of music and video. The success of Apple’s iTunes, YouTube, Spotify, and Netflix, along with the continuing integration of television and computers, has dramatically shifted demand for the music and movie industries. Hol- lywood film studios are grappling with soft demand in theaters and the declining popularity of DVDs as customers increasingly look for online movie options, or for other forms of entertainment such as video games. This trend ultimately led to the demise of industry pioneer Blockbuster video in 2011.

Privacy, Security, and Ethical Concerns Changes in technology have made our society much more open than in the past. As a result, these changes have forced marketers to address real concerns about security and privacy, both online and offline. The fallout from the massive data breach at Tar- get in 2013 is still being felt today. The estimated loss to Target from thieves hacking into its systems is roughly $148 million, not to mention the losses incurred by Target’s customers.3 Further, businesses have always collected routine information about their customers. Now, customers are much more attuned to these efforts and the purposes for which the information will be used. Though customers appreciate the convenience of e-commerce and mobile access to information, they want assurances that their information is safe and confidential. Concerns over privacy and security are especially acute with respect to online businesses such as Facebook, Google, mobile banking,

Chapter 1 • Marketing in Today’s Economy 5

and mobile devices that can potentially track every move we make, literally. These same concerns are also keen with respect to children. For example, many well- known and respected companies, including Mrs. Fields Cookies, Sony BMG, and Her- shey Foods, have been fined for violating the standards of the Children’s Online Pri- vacy Protection Act (COPPA). For example, Playdom, Inc., an online gaming company owned by Disney, paid a $3 million fine to the Federal Trade Commission for collecting, using, and disclosing personal information from children under the age of 13 without their parents’ permission. This was the largest civil penalty ever lev- ied for a violation of COPPA, which is overviewed in Exhibit 1.2.4

Unclear Legal Jurisdiction When a company does business in more than one country (as many Internet-based firms do), that company often faces a dilemma with respect to differing legal sys- tems. Today, this difference is especially keen for firms that do business in both the United States and China. Google, for example, faces a difficult situation in dealing with the Chinese government’s censorship demands. Though Google is a U.S. firm, it must comply with the Chinese request by operating a completely separate search service that censors information considered sensitive by the Chinese government.5

Doing business in China is also an issue with respect to protection of intellectual property rights, where Chinese laws do not offer the same protections found in the United States. For example, the U.S. International Trade Commission estimates that Chinese piracy costs the U.S. economy in excess of $48 billion each year. Most of this is in the information sector, with high-tech and manufacturing also showing sizable losses due to infringements of intellectual property rights by Chinese firms.6

Another important legal issue involves the collection of sales tax for online transactions. In the early days of e-commerce, most online merchants did not collect sales taxes for online transactions—giving them a big advantage against store-based merchants. In fact, a 1992 U.S. Supreme Court decision exempted out-of-state retai- lers from collecting sales taxes in states where they had no physical presence. States countered that they were losing millions in yearly tax revenue, but were poorly organized to mount a collection effort. In 2003, major retailers—including

EXHIBIT 1.2 The Children’s Online Privacy Protection Act (COPPA).

The Children’s Online Privacy Protection Act applies to operators of commercial websites and online services that attempt to collect personal information from children under the age of 13. The law explains what must be included in the firm’s privacy policy, when and how to seek verifiable consent from a parent or guardian, and the firm’s responsibilities to protect children’s privacy and safety. Firms cannot evade the law’s provisions by claiming that chil- dren under 13 cannot visit their sites, nor can they make information optional or ask the visitor’s age.

In implementing the provisions of COPPA, the FTC issued the Children’s Online Privacy Protection Rule, which is designed to give parents control over the information that is col- lected from their children. The rule requires website operators to:

1. Determine if their company is a website or online service that collects personal informa- tion from kids under 13.

2. Post a privacy policy that complies with COPPA. 3. Notify parents directly before collecting personal information from their kids. 4. Get parents’ verifiable consent before collecting information from their kids. 5. Honor parents’ ongoing rights with respect to information collected from their kids. 6. Implement reasonable procedures to protect the security of kids’ personal information.

SOURCE: United States Federal Trade Commission, Bureau of Consumer Protection, http://www.ftc.gov/tips-advice/ business-center/guidance/childrens-online-privacy-protection-rule-six-step-compliance, accessed February 18, 2015.

6 Chapter 1 • Marketing in Today’s Economy

Walmart, Target, and Toys “R” Us—in an agreement with a consortium of 38 states and the District of Columbia, agreed to collect online sales taxes. However, many online merchants still did not charge sales taxes. Today, states—much more orga- nized than before—estimate that they lose a collective $23 billion per year in lost tax revenue. Amazon, for example, still collects sales tax from only 74 percent of U.S. consumers.7

Although the full effect of these challenges will not be recognized for some time, circumstances have forced businesses to move ahead by adjusting their marketing activities at both the strategic and tactical levels. As we review the major marketing concepts and activities in this chapter, we will look at how today’s challenges have affected strategic planning in these areas.

BASIC MARKETING CONCEPTS Marketing is many different things. Many people, especially those not employed in marketing, see marketing as a function of business. From this perspective, marketing parallels other business functions such as production/operations, research, manage- ment, human resources, and accounting. As a business function, the goal of market- ing is to connect the organization to its customers. Other individuals, particularly those working in marketing jobs, tend to see marketing as a process of managing the flow of products from the point of conception to the point of consumption. The field’s major trade organization, the American Marketing Association, has changed the definition of marketing over time to reflect changes in the economic and busi- ness environments. From 1985 until 2005, the AMA defined marketing this way:

Marketing is the process of planning and executing the conception, pric-

ing, promotion, and distribution of ideas, goods, and services to create

exchanges that satisfy individual and organizational objectives. 8

Note how this definition focuses on the four Ps, or the marketing mix (product, price, place, and promotion). In 2005, the AMA changed the definition to better reflect the realities of competing in the marketplace:

Marketing is an organizational function and a set of processes for creat-

ing, communicating, and delivering value to customers and for manag-

ing customer relationships in ways that benefit the organization and its

stakeholders. 9

This definition shifts the focus away from the marketing mix and toward value creation for customers. In 2007, the AMA changed the definition of marketing again:

Marketing is the activity, set of institutions, and processes for creating,

communicating, delivering, and exchanging offerings that have value

for customers, clients, partners, and society at large. 10

Notice that the changes in the definition are not merely cosmetic in nature. The older definitions focused on the process of marketing to deliver value and manage customer relationships. The most recent definition shifts from “value” to “offerings that have value.” Also, the notion of stakeholders is made more explicit. Why would the AMA make these changes? One reason has to do with commoditization as dis- cussed in Beyond the Pages 1.1. Breaking free from commodity status means finding ways to differentiate the offering. The new definition recognizes that differentiation can come from any part of the offering, whereas older conceptualizations of market- ing placed the burden of differentiation on the product itself. The second reason has to do with marketing’s broader role in today’s corporation. Firms don’t just sell pro- ducts; they sell the firm as a whole. Corporate relationships with partners, media, government, investors, employees, and society are every bit as important as relation- ships with customers. These types of relationships—which grow and thrive on

Chapter 1 • Marketing in Today’s Economy 7

exceptional value—are an absolute necessity in the commodity-driven status of many product markets. While the older definitions of marketing had a decidedly transactional focus, the new definition emphasizes long-term relationships that pro- vide value for both the firm and its stakeholders.

A final way to think about marketing relates to meeting human and social needs. This broad view links marketing with our standard of living, not only in terms of enhanced consumption and prosperity, but also in terms of society’s well-being. Through marketing activities, consumers can buy cars from South Korea and wines from South Africa; and organizations can earn a viable profit, making both employ- ees and shareholders happy. However, marketing must also bear responsibility for any negative effects it may generate. This view demands that marketers consider the social and ethical implications of their actions, and whether they practice good citizenship by giving back to their communities. As exemplified in the New Belgium Brewing case associated with this text, firms can successfully meet human and social needs through socially responsible marketing and business practices.

Let’s take a closer look at several basic marketing concepts. As we will see, ongoing changes in today’s economy have forever altered our way of thinking about these foundational aspects of marketing.

What Is a Market? At its most basic level, a market is a collection of buyers and sellers. We tend to think of a market as a group of individuals or institutions that have similar needs that can be met by a particular product. For example, the housing market is a collection of buyers and sellers of residential real estate, while the automobile market includes buyers and sellers of automotive transportation. Marketers or sellers tend to use the word “market” to describe only the buyers. This basic understanding of a market has not changed in a very long time. What has changed, however, is not so much the “what” but the “where” of a market; that is, the location of the buyers and sellers. In both consumer markets (like housing and automobiles) and business markets (like replacement parts and raw materials), the answer to the “where” question is quickly becoming “anywhere” as markets become less defined by geography.

Until recently, marketers have considered a market to be a physical location where buyers and sellers meet to conduct transactions. Although those venues (e.g., grocery stores, malls, flea markets) still exist, technology mediates some of the fastest growing markets. Early in the beginning of the dot-com era, the term marketspace was coined to describe these electronic marketplaces unbound by time or space.11 Today, we refer to these electronic marketplaces as online markets or e-commerce. In e-commerce, physical goods, services, and information are exchanged through the Internet. Some of the largest marketspaces, such as Amazon, eBay, and Monster, are now household names. In fact, Amazon has become the e-commerce equivalent of a shopping mall as the company now sells shoes, apparel, jewelry, beauty aids, and sporting goods in addition to its traditional offerings of books and electronics. E-commerce also exists in the business-to-business realm. The shift from physical to electronic marketplaces has significant ramifications for marketers. The fact that customers can shop, place orders, and exchange informa- tion 24/7 means that these businesses must be capable of operating in that same time frame. In effect, online markets never take a break at closing time—they never close. It also means that firms lose some control over the information that is dissem- inated about their company or products. Through blogs, discussion forums, or even Twitter, customers can exchange information about an online merchant outside the merchant’s own website. Furthermore, the substitution of technology for human interaction can be both a blessing and a curse. Some sites, like CarsDirect, are suc- cessful because they eliminate the hassle of dealing with another human in the buying process. Many customers, however, have been slow to embrace electronic

8 Chapter 1 • Marketing in Today’s Economy

markets because they lack the human element. In these cases, the design and imple- mentation of the online experience is a serious challenge for online firms. Finally, the wealth of information available through e-commerce not only makes customers more educated than ever before, but also gives customers increased power through comparison shopping and price negotiation.

Another interesting shift related to markets is the advent of metamarkets and metamediaries. A metamarket is a cluster of closely related goods and services that center around a specific consumption activity. A metamediary provides a single access point where buyers can locate and contact many different sellers in the metamar- ket.12 Assume for example that you are engaged to be married. How many different buying decisions will you and your fiancé have to make in the coming months? How many newspaper ads, websites, and magazines will you explore? Although the busi- nesses and decisions are diverse, they all converge on the single theme of wedding planning. This is the driving principle behind a metamarket. Exhibit 1.3 shows exam- ples of common metamarkets and metamediaries. Although customers don’t use these terms, they fully understand the concept of finding information and solutions in one place. For example, Parenting.com has become the Internet’s preeminent metamediary for information and advice related to parenting, pregnancy, and chil- dren. Similarly, Edmunds.com is a popular site devoted to all things related to buying and owning a vehicle. Metamediaries like these fulfill a vital need by offering quick access and one-stop shopping to a wide variety of information, goods, and services.

What Is Exchange? Closely related to the concept of a market, our ideas about exchange have changed in recent years. Exchange is traditionally defined as the process of obtaining some- thing of value from someone by offering something in return; this usually entails obtaining products for money. For exchange to occur, five conditions must be met:

1. There must be at least two parties to the exchange. Although this has always been the case, the exchange process today can potentially include an unlimited number of participants. Online auctions provide a good example. Customers who bid on an item at eBay may be one of many participants to the

EXHIBIT 1.3 Common Metamarkets and Participants.

Metamarkets Automotive Home Ownership Parenting

Metamediaries www.edmunds.com www.carsdirect.com www.kbb.com

www.realtor.com www.zillow.com www.bhg.com

www.parenting.com www.babycenter.com newparent.com

Metamarket Participants Buyers Manufacturers Car dealerships Banks Credit unions Credit reporting services Insurance firms Rating services Magazines Television programs Aftermarket parts/accessories Repair services Car rental firms Auction houses

Homeowners Builders Real estate agents Mortgage companies Insurance companies Home inspectors and appraisers Pest control services Magazines Television programs Retailers

Parents Doctors Retailers Baby supply manufacturers Insurance firms Financial planners Educational providers Toy manufacturers Television programs Movies

Chapter 1 • Marketing in Today’s Economy 9

exchange process. Each participant changes the process for the others, as well as the ultimate outcome for the winning bidder. Some auctions include multiple quantities of an item, so the potential exists for multiple transactions within a single auction process.

2. Each party has something of value to the other party. Exchange would be possible, but not very likely, without this basic requirement. The Internet has exposed us to a vast array of goods and services that we did not know existed previously. Today, not only can we buy a television or stereo receiver from a local merchant; we also have access to hundreds of online merchants. Further- more, the ability to comparison shop products and their prices allows customers to seek out the best value.

3. Each party must be capable of communication and delivery. The advan- tages of today’s communication and distribution infrastructure are amazing. We can find and communicate with potential exchange partners anywhere and any- time via telephone, computers, interactive television, and smartphones. We can also conduct arm’s-length transactions in real time, with delivery of exchanged items occurring in a matter of hours if necessary. For example, you can text mes- sage an order to Pizza Hut on your way home from work.

4. Each party must be free to accept or reject the exchange. In the online world, this condition of exchange becomes a bit more complicated. Customers have grown accustomed to the ease with which they can return items to local merchants. Easy return policies are among the major strengths of traditional off- line merchants. Returning items is more difficult with online transactions. In some cases, the ability to reject an exchange is not allowed in online transac- tions. Ordering airline tickets on Priceline.com and winning a bid on an item at eBay are contractually binding acts for the customer. Apple has a no refunds policy in its App Store. In other words, once the actual purchasing process has started, the customer is not free to reject the exchange.

5. Each party believes it is desirable to exchange with the other party. Cus- tomers typically have a great deal of information about, or even a history with, offline merchants. In online exchange, customers often know nothing about the other party. To help resolve this issue, a number of third-party firms have stepped in to provide ratings and opinions about online merchants. Services such as BizRate and Epinions not only provide these ratings, but also provide product ratings and serve as shopping portals. eBay and Amazon go one step fur- ther by allowing buyers and sellers to rate each other. This gives both parties to the exchange process some assurance that reputable individuals or organiza- tions exist on the other side of the transaction.

The bottom line is that exchange has become all too easy in today’s economy. Opportunities for exchange bombard us virtually everywhere we go. Customers don’t even have to trouble themselves with giving credit cards or completing forms for ship- ping information. Most online merchants will remember this information for us if we let them. For example, Amazon’s 1-Click® ordering feature allows customers to purchase products with a single mouse click.13 The ease with which exchange can occur today presents a problem in that individuals who do not have the authority to exchange can still complete transactions. This is especially true for underage customers.

What Is a Product? It should come as no surprise that the primary focus of marketing is the customer and how the organization can design and deliver products that meet customers’ needs. Organizations create essentially all marketing activities as a means toward this end; this includes product design, pricing, promotion, and distribution. In short, an organi- zation would have no reason to exist without customers and a product to offer them.

10 Chapter 1 • Marketing in Today’s Economy

But what exactly is a product? A very simple definition is that a product is some- thing that can be acquired via exchange to satisfy a need or a want. This definition permits us to classify a broad number of “things” as products:

• Goods. Goods are tangible items ranging from canned food to fighter jets, from sports memorabilia to used clothing. The marketing of tangible goods is arguably one of the most widely recognizable business activities in the world.

• Services. Services are intangible products consisting of acts or deeds directed toward people or their possessions. Banks, hospitals, lawyers, package delivery companies, airlines, hotels, repair technicians, nannies, housekeepers, consul- tants, and taxi drivers all offer services. Services, rather than tangible goods, dominate modern economies like the U.S. economy.

• Ideas. Ideas include issues aimed at promoting a benefit for the customer. Examples include cause-related or charitable organizations such as the Red Cross, the American Cancer Society, Mothers Against Drunk Drivers, or the American Legacy Foundation’s campaign against smoking.14

• Information. Marketers of information include websites, magazine and book publishers, schools and universities, research firms, churches, and charitable organizations. Examples include Khan Academy, Wikipedia, and the popular TED Talks. In the digital age, the production and distribution of information has become a vital part of our economy.

• Digital Products. Digital products such as software, music, and movies are among the most profitable in our economy. Advancements in technology have also wreaked havoc in these industries because pirates can easily copy and redistribute digital products in violation of copyright law. Digital products are interesting because content producers grant customers a license to use them, rather than outright ownership.15

• People. The individual promotion of people, such as athletes or celebrities, is a huge business around the world. The exchange and trading of professional ath- letes takes place in a complex system of drafts, contracts, and free agency. Other professions, such as politicians, actors, professional speakers, and news repor- ters, also engage in people marketing.

• Places. When we think of the marketing of a place, we usually think of vacation destinations like Rome or Orlando. However, the marketing of places is quite diverse. Cities, states, and nations all market themselves to tourists, businesses, and potential residents. The state of Alabama, for example, has done quite well in attracting direct investment by foreign firms. Over the last 20 years, Alabama has landed assembly plants from Mercedes, Honda, and Hyundai, as well as many different parts plants and related firms. It’s no wonder that some people think of Alabama as the new Detroit.16

• Experiences and Events. Marketers can bring together a combination of goods, services, ideas, information, or people to create one-of-a-kind experi- ences or single events. Examples include theme parks such as Disney World and Universal Studios, sporting events like the Daytona 500 or the Super Bowl, or stage and musical performances like The Phantom of the Opera or a concert by Rihanna.

• Real or Financial Property. The exchange of stocks, bonds, and real estate, once marketed completely offline via real estate agents and investment compa- nies, now occurs increasingly online. For example, Realtor.com is the nation’s largest real estate listing service, with almost 4 million searchable listings. Like- wise, Schwab.com is the world’s largest and top-rated online brokerage.

• Organizations. Virtually all organizations strive to create favorable images with the public—not only to increase sales or inquiries, but also to generate cus- tomer goodwill. In this sense, General Electric is no different than the United

Chapter 1 • Marketing in Today’s Economy 11

Way: Both seek to enhance their images in order to attract more people (custo- mers, volunteers, and clients) and money (sales, profit, and donations).

We should note that the products in this list are not mutually exclusive. For example, firms that sell tangible goods almost always sell services to supplement their offerings, and vice versa. Charitable organizations simultaneously market them- selves, their ideas, and the information that they provide. Finally, special events like the Daytona 500 combine people (drivers), a place (Daytona), an event (the race), organizations (sponsors), and goods (souvenirs) to create a memorable and unique experience for race fans.

To effectively meet the needs of their customers and fulfill organizational objec- tives, marketers must be astute in creating products and combining them in ways that make them unique from other offerings. A customer’s decision to purchase one product or group of products over another is primarily a function of how well that choice will fulfill their needs and satisfy their wants. Economists use the term utility to describe the ability of a product to satisfy a customer’s desires. Customers usually seek out exchanges with marketers who offer products that are high in one or more of these five types of utility:

• Form Utility. Products high in form utility have attributes or features that set them apart from the competition. Often these differences result from the use of high-quality raw materials, ingredients, or components, or from the use of highly efficient production processes. For example, Ruth’s Chris Steakhouse, consid- ered by many to be one of the nation’s top chain restaurants, provides higher form utility than other national chains because of the quality of beef they use. Papa John’s Pizza even stresses form utility in its slogan “Better Ingredients. Bet- ter Pizza.” In many product categories, higher priced product lines offer more form utility because they have more features or bells-and-whistles. Luxury cars are a good example.

• Time Utility. Products high in time utility are available when customers want them. Typically, this means that products are available now rather than later. Grocery stores, restaurants, and other retailers that are open around the clock provide exceptional time utility. Often the most successful restaurants around college campuses are those that are open 24/7. Many customers are also willing to pay more for products available in a shorter time frame (such as overnight delivery via FedEx) or for products available at the most convenient times (such as midmorning airline flights).

• Place Utility. Products high in place utility are available where customers want them, which is typically wherever the customer happens to be at that moment (such as grocery delivery to a home) or where the product needs to be at that moment (such as florist delivery to a work place). Home delivery of any product, convenience stores, vending machines, and e-commerce are examples of good place utility. Products that are high in both time and place utility are exception- ally valuable to customers because they provide the utmost in convenience.

• Possession Utility. Possession utility deals with the transfer of ownership or title from marketer to customer. Products higher in possession utility are more satisfying because marketers make them easier to acquire. Marketers often com- bine supplemental services with tangible goods to increase possession utility. For example, furniture stores that offer easy credit terms and home delivery enhance the possession utility of their goods. In fact, any merchant that accepts credit cards enhances possession utility for customers that do not carry cash or checks. Expensive products, like a home or a new factory, require acceptable financing arrangements to complete the exchange process.

• Psychological Utility. Products high in psychological utility deliver positive experiential or psychological attributes that customers find satisfying. Sporting

12 Chapter 1 • Marketing in Today’s Economy

events often fall into this category, especially when the competition is based on an intense rivalry. The atmosphere, energy, and excitement associated with being at the game can all create psychological benefits for customers. Con- versely, a product might offer exceptional psychological utility because it lacks negative experiential or psychological attributes. For example, a vacation to the beach or the mountains might offer more psychological utility to some custo- mers because it is seen as less stressful than a vacation to Disney World.

The strategic and tactical planning of marketing activities involves the important basic concepts we have explored in this section. Marketers often struggle with find- ing and reaching the appropriate markets for their products. In other cases, the mar- ket is easily accessible, but the product is wrong or does not offer customers a compelling reason to purchase it. The ability to match markets and products in a way that satisfies both customer and organizational objectives is truly an art and a science. As described in Beyond the Pages 1.2, doing so in an environment of never-ending change creates both opportunities and challenges for even the stron- gest and most respected organizations.

The process of planning marketing activities to achieve these ends is the focus of this book. As we turn our attention to an overview of major marketing activities and decisions, we also want to lay out the structure of the text. The chapters roughly coincide with the major activities involved in developing marketing strategy and writing a marketing plan. Although our approach is orderly and straightforward, it provides a holistic representation of the marketing planning process from one period to the next. As we will see, marketing planning is an evolving process that has no definite beginning or ending point.

MAJOR MARKETING ACTIVITIES AND DECISIONS Organizations must deal with a number of activities and decisions in marketing their products to customers. These activities vary in both complexity and scope. Whether the issue is a local restaurant’s change in copy for a newspaper ad or a large

Vi si on s of

A m er ic a/ G et ty

Im ag es

Sporting events deliver psychological utility that goes beyond the actual competition.

Chapter 1 • Marketing in Today’s Economy 13

BEYOND THE PAGES 1.2

Innovative Marketing Strategies for a Rebounding Economy17

Innovation has long been considered the life- blood of business, especially in terms of growth and new market opportunities. Unfortunately, our economy’s most recent struggles have made it difficult for companies to maintain innovation when they must also cut costs and maintain market standing. The same is true for consumers as they have reigned in spending due to the economy. Still, some companies managed to maintain their creativity and inno- vation even in a hesitant economy. They do so by looking for the new opportunities that come along with changing customer spending pat- terns. Here are three cases in point:

Walmart When customers have fewer dollars to spend, they try to make those dollars go further. In the grocery business, this translates into stron- ger sales for store brands (private labels). Many of Walmart’s store brands are well known: Great Value, Sam’s Choice, Faded Glory, Home- Trends, Ol’ Roy, and Equate. To further take advantage of changing shopping patterns, Wal- mart decided to reinvigorate Great Value—its top-selling private label brand. To do this, Wal- mart improved the quality of roughly 750 food and grocery products, updated the Great Value logo, and freshened the packaging. In one bold move, Walmart pulled Hefty brand storage bags from its shelves in favor of their lower-priced Great Value brand. The company later returned Hefty to the shelves, but only after Hefty agreed to make the Great Value brand for Walmart. Other chains, such as CVS, Walgreens, Kroger, and Target, have copied Walmart’s strategy. Today, many of these store brands are among Consumer Reports highest rated brands in terms of quality and value.

Procter & Gamble One result of a weakened economy is that cus- tomers forgo buying new cars and instead begin taking better care of the cars they currently own. P&G decided to capitalize on this trend by launching a national chain of franchised car washes under its Mr. Clean brand. Since the car wash industry did not have a dominant national brand, P&G hoped that its Mr. Clean units would capture a good share of the

$35 billion industry. To begin, P&G acquired Carnett’s—a small car wash chain. Next, P&G took advantage of lower real estate prices to find suitable locations, and rising unemploy- ment to find talented employees. The result, a 12-unit chain of Mr. Clean Car Wash franchisees (most are in the Atlanta area), has been a suc- cess. Buoyed by this success, P&G now plans to launch 150 Tide-branded dry cleaners over the next four years. One major benefit of the Tide concept is the lower franchise fee. It costs $950,000 to open a Tide Dry Cleaner, but up to $5 million to open a Mr. Clean Car Wash.

Hulu When customers have less money to spend on entertainment, they tend to entertain them- selves more at home. Hulu.com is perfectly poised to take advantage of this trend. A joint venture between Disney-ABC, NBCUniversal, and Fox Entertainment, Hulu is an advertising- supported, online video streaming service that offers prime-time television programming via the Internet and mobile apps. Hulu’s growth comes from a growing trend of watching full- length programming via the Internet instead of network or cable television. The trend is especially prevalent among the prized 18- to 44-year-old demographic—a statistic that has advertisers buzzing. Hulu users spend an average of 256 minutes per month watching videos—each one embedded with advertising from mainstream companies like Best Buy, Bank of America, and Nissan. Customers can also subscribe to Hulu Plus for roughly $8 per month. In only 7 years, Hulu has become one of the top Internet video websites and generates over $1 billion in revenue each year. Hulu’s next push is with original programming, includ- ing programs such as Battleground and Misfits. The company spends over $500 million each year on programming.

What do these three stories teach us? First, companies can still be innovative in a weak- ened economy. The key is to conduct research to closely follow changing customer prefer- ences and spending. Second, it’s not enough to do the research. Good innovation must be accu- rately timed to the market. Third, to be creative, companies will often have to step outside their comfort zones. P&G is a great example. Who would have thought that a packaged goods company could become a service provider?

14 Chapter 1 • Marketing in Today’s Economy

multinational firm launching a new product in a foreign market, all marketing activi- ties have one thing in common: They aim to give customers a reason to buy the orga- nization’s product. In this section, we briefly introduce the activities and decisions that will be the focus of the remaining chapters of this book.

Strategic Planning If an organization is to have any chance of reaching its goals and objectives, it must have a game plan or road map for getting there. A strategy, in effect, outlines the orga- nization’s game plan for success. Effective marketing requires sound strategic plan- ning at a number of levels in an organization. At the top levels of the organization, planners concern themselves with macro issues such as the corporate mission, man- agement of the mix of strategic business units, resource acquisition and assignments, and corporate policy decisions. Planners at the middle levels, typically a division or strategic business unit, concern themselves with similar issues, but focus on those that pertain to their particular product/market. Strategic planning at the lower levels of an organization is much more tactical in nature. Here, planners concern them- selves with the development of marketing plans—more specific game plans for con- necting products and markets in ways that satisfy both organizational and customer objectives.

Although this book is essentially about strategic planning, it focuses on tactical planning and the development of the marketing plan. Tactical planning addresses spe- cific markets or market segments and the development of marketing programs that will fulfill the needs of customers in those markets. The marketing plan provides the out- line for how the organization will combine product, pricing, distribution, and promo- tion decisions to create an offering that customers will find attractive. The marketing plan also addresses the implementation, control, and refinement of these decisions.

To stand a reasonable chance for success, marketing plans should be developed with a keen appreciation of how they fit into the strategic plans of the middle and upper levels of the firm. In Chapter 2, we discuss the connection among corporate, business-unit, and marketing planning, as well as how marketing plans must be inte- grated with the plans of other functions in the organization (financial plans, produc- tion plans, etc.). We also discuss the structure of the marketing plan and some of the challenges involved in creating one.

Research and Analysis Strategic planning depends heavily on the availability and interpretation of informa- tion. Without this lifeblood, strategic planning would be a mindless exercise and a waste of time. Thankfully, today’s planners are blessed with an abundance of informa- tion due to improving technology and the Internet. However, the challenge of finding and analyzing the right information remains. As many marketing planners have found, having the right information is just as important as having the right product.

Marketers are accustomed to conducting and analyzing research, particularly with respect to the needs, opinions, and attitudes of their customers. Although cus- tomer analysis is vital to the success of the marketing plan, the organization must also have access to three other types of information and analysis: internal analysis, competitive analysis, and environmental analysis. Internal analysis involves the objec- tive review of internal information pertaining to the firm’s current strategy and per- formance, as well as the current and future availability of resources. Analysis of the competitive environment, increasingly known as competitive intelligence, involves ana- lyzing the capabilities, vulnerabilities, and intentions of competing businesses. Anal- ysis of the external environment, also known as environmental scanning, involves the analysis of economic, political, legal, technological, and cultural events and trends that may affect the future of the organization and its marketing efforts. Some

Chapter 1 • Marketing in Today’s Economy 15

marketing planners use the term situation analysis to refer to the overall process of col- lecting and interpreting internal, competitive, and environmental information.

The development of a sound marketing plan requires the analysis of information on all fronts. In Chapter 3, we address the collection and analysis of internal, cus- tomer, competitive, and environmental information. We also discuss the challenges involved in finding the right information from an overwhelming supply of available information. The uncertainty and continual change in the external environment also create challenges for marketers (as the Internet boom and bust have shown us). As we will see, this type of research and analysis is perhaps the most difficult aspect of developing a marketing plan.

Developing Competitive Advantage To be successful, a firm must possess one or more competitive advantages that it can leverage in the market in order to meet its objectives. A competitive advantage is something that the firm does better than its competitors that gives it an edge in serv- ing customers’ needs and/or maintaining mutually satisfying relationships with important stakeholders. Competitive advantages are critical because they set the tone, or strategic focus, of the entire marketing program. When these advantages are tied to market opportunities, the firm can offer customers a compelling reason to buy their products. Without a competitive advantage, the firm and its products are likely to be just one more offering among a sea of commoditized products. Apple, for example, has been quite successful in leveraging innovation and the cus- tomer experience to maintain a sizable competitive advantage in computers, smart- phones, and music and movie distribution. A typical Mac computer costs substantially more than a comparable PC running Windows. However, Apple bun- dles multimedia software and a top-rated user experience into the mix. As a result, Apple computers continue to command a price premium, where most PC manufac- turers engage in price wars.

In Chapter 4, we discuss the process of developing competitive advantages and establishing a strategic focus for the marketing program. We also address the role of SWOT analysis as a means of tying the firm’s strengths or internal capabilities to mar- ket opportunities. Further, we discuss the importance of developing goals and objec- tives. Having good goals and objectives is vital because these become the basis for measuring the success of the entire marketing program. For example, Hampton Inn has a goal of 100 percent customer satisfaction. Customers do not have to pay for their stay if they are not completely satisfied.18 Goals like these are not only useful in setting milestones for evaluating marketing performance; they also motivate managers and employees. This can be especially true when marketing goals or objec- tives help to drive employee evaluation and compensation programs.

Marketing Strategy Decisions An organization’s marketing strategy describes how the firm will fulfill the needs and wants of its customers. It can also include activities associated with maintaining rela- tionships with other stakeholders, such as employees, shareholders, or supply chain partners. Stated another way, marketing strategy is a plan for how the organization will use its strengths and capabilities to match the needs and requirements of the market. A marketing strategy can be composed of one or more marketing programs; each program consists of two elements—a target market or markets and a marketing mix (sometimes known as the four Ps of product, price, place, and promotion). To develop a marketing strategy, an organization must select the right combination of target market(s) and marketing mix(es) in order to create distinct competitive advantages over its rivals.

16 Chapter 1 • Marketing in Today’s Economy

Market Segmentation and Target Marketing The identification and selection of one or more target markets is the result of the market segmentation process. Marketers engage in market segmentation when they divide the total market into smaller, relatively homogeneous groups or segments that share similar needs, wants, or characteristics. When a marketer selects one or more target markets, they identify one or more segments of individuals, businesses, or institutions toward which the firm’s marketing efforts will be directed. As described in Beyond the Pages 1.3, marketers increasingly use online social networking as a way to target specific markets.

Advances in technology have created some interesting changes in the ways that organizations segment and target markets. Marketers can now analyze customer-buying patterns in real time via point-of-purchase data collected from sales transactions and credit card usage, as well as by analyzing clickstream data in

BEYOND THE PAGES 1.3

Targeting Consumers via Online Social Networking19

Social networking has proven to be very popu- lar with both users and advertisers. Sites like Facebook, Instagram, Google Plus, LinkedIn, Pinterest, and Twitter allow users to share information, find old friends, or network with like-minded individuals. Most users are teens and young adults who use the sites to trade messages, photos, music, and blogs. The largest of these sites currently is Facebook, which boasts over 1.2 billion active users worldwide. Instagram has over 300 million active users, while Twitter has over 232 million active users. Other sites are also growing rapidly.

While social networks are very popular, they have attracted a fair amount of criticism. Many argue that these sites make it easier for predators to reach teens and children through the use of their online profiles. Business experts have been skeptical of the long-term success of social networking as a business model. They argue that younger audiences are fickle and will leave these sites for the next hot thing on the Internet. For example, analysts estimate that Twitter has over 651 million aban- doned accounts—almost four times the number of active Twitter users.

Despite these criticisms, online social networking appears to have legs for the long- term—forcing media companies and adverti- sers to take notice. The reason is simple: The demographic profile of the social networking audience is extremely lucrative. Facebook’s fastest growing age segment is the 25 and over

crowd. LinkedIn has a different profile of over 347 million registered members with an older, more professional demographic. However, LinkedIn’s profile has been shifting as more stu- dents and recent college graduates join the net- work. Powerful segmentation like this has forced an increasing number of advertisers to consider social networking as a viable media strategy.

In addition to the demographic fortune, social networking also allows firms to carefully target promotions to the right audience and collect a striking amount of information about users. For example, Nike used Facebook Places to target consumers in Portland, Oregon with free athletic jackets for individuals who checked in to a specified location in the city. Vitamin Water used a Facebook campaign ask- ing users to help them choose the next flavor of the popular drink. Domino’s also used Face- book to distribute promotional codes to fans of its page. American Airlines and IBM have had similar success using Twitter to reach potential customers.

Social networking sites have become so successful that they are now the entry point to the Internet for most users. In essence, social networking sites have become one-stop shops for communication, information, and com- merce. Consumers can buy products without having to leave these sites, and marketers are paying attention. For example, when Facebook added the ability to rent movies and buy music directly from its site, competitors such as Amazon, Netflix, and Apple were forced to take notice.

Chapter 1 • Marketing in Today’s Economy 17

online transactions. This allows organizations to target specific segments with prod- uct offers or promotional messages. Furthermore, technology now gives marketers the ability to target individual customers through direct mail and e-mail campaigns. This saves considerable time and expense by not wasting efforts on potential customers who may not be interested in the organization’s product offering. How- ever, these new opportunities for marketers come at a price: Many potential buyers resent the ability of marketers to reach them individually. Consequently, customers and governmental authorities have raised major concerns over privacy and confidentiality.

Chapter 5 discusses the issues and strategies associated with market segmenta- tion and target marketing. In that discussion, we will examine different approaches to market segmentation and look at target marketing in both consumer and business markets. Effective segmentation and target marketing sets the stage for the develop- ment of the product offering and the design of a marketing program that can effec- tively deliver the offering to targeted customers.

Marketing Program Decisions As we will address in Chapter 6, successful marketing programs depend on a care- fully crafted blend of the four major marketing mix elements (i.e., product, price, dis- tribution, and promotion). Earlier in the chapter, we discussed the many different types of products that can be offered to customers. Since the product and its attri- butes fulfill the basic needs and wants of the customer, it is no surprise that the prod- uct and the decisions that surround it are among the most important parts of the marketing program. This importance hinges on the connection between the product and the customers’ needs. Even large corporations fail to make this connection at times. McDonald’s, for example, spent over $100 million in 1996 to launch the Arch Deluxe—a hamburger designed for adult tastes. Considered the fourth worst product failure in history, the Arch Deluxe failed miserably because it was designed for older customers (who are not McDonald’s core market), was expensive, and had a very high calorie content. McDonald’s customers avoided the Arch Deluxe and the sand- wich was eventually discontinued.20 As this example illustrates, marketing is unlikely to be effective unless there is a solid linkage between a product’s benefits and customers’ needs.

Pricing decisions are important for several reasons. First, price is the only ele- ment of the marketing mix that leads to revenue and profit. All other elements of the marketing mix, such as product development and promotion, represent expenses. Second, price typically has a direct connection with customer demand. This connection makes pricing the most overmanipulated element of the marketing mix. Marketers routinely adjust the price of their products in an effort to stimulate or curb demand. Third, pricing is the easiest element of the marketing program to change. There are very few other aspects of marketing that can be altered in real time. This is a huge plus for marketers who need to adjust prices to reflect local mar- ket conditions, or for online merchants who want to charge different prices for dif- ferent customers based on total sales or customer loyalty. Finally, pricing is a major quality cue for customers. In the absence of other information, customers tend to equate higher prices with higher quality.

Distribution and supply chain issues are among the least apparent decisions made in marketing, particularly with customers. The goal of distribution and supply chain management is essentially to get the product to the right place, at the right time, in the right quantities, at the lowest possible cost. Supply chain decisions involve a long line of activities—from the sourcing of raw materials, through the production of fin- ished products, to ultimate delivery to final customers. Most of these activities, which customers take for granted, take place behind the scenes. Few customers, for example, contemplate how their favorite cereal ends up on their grocer’s shelf

18 Chapter 1 • Marketing in Today’s Economy

or how Dell can have a made-to-order computer at your door in days. Customers just expect these things to happen. In fact, most customers never consider these issues until something goes wrong. Suddenly, when the grocer is out of an item or an assembly line runs low on component parts, distribution and supply chain factors become quite noticeable.

Modern marketing has replaced the term promotion with the concept of integrated marketing communication (IMC), or the coordination of all promotional activi- ties (media advertising, social media, direct mail, personal selling, sales promotion, public relations, packaging, store displays, website design, personnel) to produce a unified, customer-focused message. Here, the term “customers” not only refers to customers in the traditional sense, but also includes employees, business partners, shareholders, the government, the media, and society in general. IMC rose to promi- nence in the 1990s as businesses realized that traditional audiences for promotional efforts had become more diverse and fragmented. IMC can also reduce promotional expenses by eliminating the duplication of effort among separate departments (mar- keting, sales, advertising, public affairs, and information technology) and by increas- ing efficiencies and economies of scale.

Branding and Positioning When you think about a company like Southwest Airlines, what comes to mind? Most people will likely say low fares and no bag fees. Others may think of limited routes and destinations. As we will see in Chapter 7, what customers think about a company and its offerings is the focus of branding and positioning strategy. In order to under- stand branding, the marketer must have a clear understanding of how the elements of the marketing program work together to create the brand. While product deci- sions (such as design, style, and features) play a prominent role in branding, so do other program elements such as price/value, availability/exclusivity, and image/repu- tation of both the firm and its offerings. Marketers must also make decisions regard- ing package design, trademarks, and warranties or guarantees. Product positioning involves establishing a mental image, or position, of the product offering relative to competing offerings in the minds of target buyers. The goal of positioning is to distin- guish or differentiate the firm’s product offering from those of competitors by mak- ing the offering stand out among the crowd. As Southwest has shown us, even something as simple as “no bag fees” can be very successful in setting the firm apart from the competition. Another example is the battle between Walmart and Target. The mental image that most customers have of Walmart is associated with everyday low prices. Target has a slightly different position, one that emphasizes value with a stronger sense of style and quality.

Social Responsibility and Ethics The role of social responsibility and ethics in marketing strategy has come to the forefront of important business issues in today’s economy. Our society still reverbe- rates from the effects of corporate scandals at Enron, WorldCom, and ImClone, among others. Although these scandals make for interesting reading, many innocent individuals have suffered the consequences from these companies’ unethical behav- ior. Social responsibility refers to an organization’s obligation to maximize its positive impact on society, while minimizing its negative impact. In terms of marketing strat- egy, social responsibility addresses the total effect of an organization’s marketing activities on society. A major part of this responsibility is marketing ethics, or the prin- ciples and standards that define acceptable conduct in marketing activities. Ethical marketing can build trust and commitment and is a crucial ingredient in building long-term relationships with all stakeholders. Another major component of any firm’s impact on society is the degree to which it engages in philanthropic activities. Many firms now make philanthropy a key strategic activity.

Chapter 1 • Marketing in Today’s Economy 19

In Chapter 8, we discuss the economic, legal, ethical, and philanthropic dimen- sions of social responsibility, along with the strategic management of corporate integrity in the marketing planning process. Although there are occasional lapses, most firms understand their economic and legal responsibilities. However, social and ethical responsibilities, by their nature, are not so clearly understood. Many firms see social responsibility not only as a way to be a good corporate citizen, but also as a good way to build their brands. For example, the Red brand—created by Bono in 2006—has been marketed successfully by firms such as Starbucks, Bank of America, Apple, Beats, SAP, and Coca-Cola. These and other companies market Red brand versions of their products with the aim to donate up to 50 percent of their prof- its to the Global Fund to fight AIDS in Africa.21

Implementation and Control Once a marketing strategy has been selected and the elements of the marketing mix are in place, the marketer must put the plan into action. Marketing implementation, the process of executing the marketing strategy, is the “how” of marketing planning. Rather than being an add-on at the end of the marketing strategy and marketing plan, implementation is actually a part of planning itself. That is, when planning a marketing strategy, the organization must always consider how the strategy will be executed. Sometimes, the organization must revisit the strategy or plan to make revi- sions during the strategy’s execution. This is where marketing control comes into play. Adequate control of marketing activities is essential to ensure that the strategy stays on course and focused on achieving its goals and objectives.

The implementation phase of marketing strategy calls into play the fifth “P” of the marketing program: people. As we will learn in Chapter 9, many of the problems that occur in implementing marketing activities are “people problems” associated with the managers and employees on the frontline of the organization who have responsibility for executing the marketing strategy. Many organizations understand the vital link between people and implementation by treating their employees as indispensable assets. AFLAC, for example, has been named 16 consecutive years by Fortune magazine to its list of the “100 Best Companies to Work for in America.” The Georgia-based company has developed a corporate culture that focuses on caring for employees and providing for their needs.22 Other companies cited as having good relationships with their employees include Google, SAS, Edward Jones, Wegmans Food Markets, and The Container Store.

Developing and Maintaining Customer Relationships Over the last two decades, marketers have come to the realization that they can learn more about their customers, and earn higher profits, if they develop long-term rela- tionships with them. This requires that markers shift away from transactional mar- keting and embrace a relationship marketing approach. The goal of transactional marketing is to complete a large number of discrete exchanges with individual cus- tomers. The focus is on acquiring customers and making the sale, not necessarily on attending to customers’ needs and wants. In relationship marketing, the goal is to develop and maintain long-term, mutually satisfying arrangements where both buyer and seller focus on the value obtained from the relationship. As long as this value stays the same or increases, the relationship is likely to deepen and grow stron- ger over time. Exhibit 1.4 illustrates the basic characteristics of transactional versus relationship marketing. Relationship marketing promotes customer trust and confi- dence in the marketer, who can then develop a deeper understanding of customers’ needs and wants. This puts the marketer in a position to respond more effectively to customer’s needs, thereby increasing the value of the relationship for both parties.

20 Chapter 1 • Marketing in Today’s Economy

The principles and advantages of relationship marketing are the same in both business-to-business and consumer markets. Relationship marketing activities also extend beyond customers to include relationships with employees and supply chain partners. In Chapter 10, we discuss these and other aspects of relationship marketing in greater depth. Long-term relationships with important stakeholders will not mate- rialize unless these relationships create value for each participant. This is especially true for customers faced with many different alternatives among firms competing for their business. Since the quality and value of a marketer’s product offering typically determine customer value and satisfaction, Chapter 10 will also discuss the role of quality, value, and satisfaction in developing and maintaining customer relationships. Issues associated with quality, value, and satisfaction cut across all elements of the marketing program. Hence, we discuss these issues in our final chapter as a means of tying all of the marketing program elements together.

TAKING ON THE CHALLENGES OF MARKETING STRATEGY One of the greatest frustrations and opportunities in marketing is change— customers change, competitors change, and even the marketing organization changes. Strategies that are highly successful today will not work tomorrow. Custo- mers will buy products today that they will have no interest in tomorrow. These are truisms in marketing. Although frustrating, challenges like these also make market- ing extremely interesting and rewarding. Life as a marketer is never dull.

Another fact about marketing strategy is that it is inherently people-driven. Marketing strategy is about people (inside an organization) trying to find ways to deliver exceptional value by fulfilling the needs and wants of other people (customers, shareholders, business partners, society at large), as well as the needs of the organiza- tion itself. Marketing strategy draws from psychology, sociology, and economics to better understand the basic needs and motivations of these people—whether they are the organization’s customers (typically considered the most critical), its employ- ees, or its stakeholders. In short, marketing strategy is about people serving people.

The combination of continual change and the people-driven nature of marketing makes developing and implementing marketing strategy a challenging task. A perfect strategy that is executed perfectly can still fail. This happens because there are very few rules for how to do marketing in specific situations. In other words, it is impossible to say that given “this customer need” and these “competitors” and this “level of govern- ment regulation” that Product A, Price B, Promotion C, and Distribution D should be used. Marketing simply doesn’t work that way. Sometimes, an organization can get

EXHIBIT 1.4 Major Characteristics of Transactional and Relationship Marketing.

Transactional Marketing Relationship Marketing Marketing Focus Customer Acquisition Customer Retention Time Orientation Short-Term Long-Term Marketing Goal Make the Sale Mutual Satisfaction Relationship Focus Create Exchanges Create Value Customer Service Priority Low High Customer Contact Low to Moderate Frequent Commitment to Customers Low High Characteristics of the Interaction Adversarial, Manipulation, Conflict

Resolution Cooperation, Trust, Mutual Respect, Confidence

Source of Competitive Advantage Production, Marketing Relationship Commitment

Chapter 1 • Marketing in Today’s Economy 21

lucky and be successful despite having a terrible strategy and/or execution. The lack of rules and the ever-changing economic, sociocultural, competitive, technological, and political/legal landscapes make marketing strategy a terribly fascinating subject.

Most of the changes that marketers have faced over the past 20 years deal with the basic evolution of marketing and business practice in our society. One of the most basic shifts involves the increasing demands of customers. Today, customers have very high expectations about basic issues such as quality, performance, price, and availability. American customers in particular have a passion for instant gratifi- cation that marketers struggle to fulfill. Some evidence suggests that marketers have not met this challenge. The American Customer Satisfaction Index, computed by the National Quality Research Center at the University of Michigan, indicates that cus- tomer satisfaction has recovered since the Center first computed the index in 1994. As shown in Exhibit 1.5, the airline industry has suffered large declines in customer satisfaction. Satisfaction in other industries, such as the automotive industry and soft drinks, has remained fairly high and stable.

The decline in satisfaction can be attributed to several reasons. For one, custo- mers have become much less brand loyal than in previous generations. Today’s cus- tomers are very price sensitive, especially in commoditized markets where products lack any real means of differentiation (such as airlines). Consequently, customers constantly seek the best value and thrive on their ability to compare prices among competing alternatives. Customers are also quite cynical about business in general and are not that trusting of marketers. In short, today’s customers not only have more power; they also have more attitude. This combination makes them a formida- ble force in the development of contemporary marketing strategy.

Marketers have also been forced to adapt to shifts in markets and competition. In terms of their life cycles, most products compete today in very mature markets. Many firms also compete in markets where product offerings have become commoditized by a lack of differentiation (e.g., customers perceive competing offerings as essentially the same). Some examples include airlines, wireless phone service, department stores, laundry supplies, and household appliances. Product

EXHIBIT 1.5 American Customer Satisfaction Index.

19 94

19 95

19 96

19 97

19 98

19 99

20 00

20 01

20 02

20 03

20 04

20 05

20 06

20 07

20 08

20 09

20 10

20 11

20 12

20 13

20 14

Overall

Airlines

Automobiles

PCs

Soft Drinks

Life Insurance

SOURCE: American Customer Satisfaction Index and the University of Michigan Business School, http://www.theacsi.org, 2012.

22 Chapter 1 • Marketing in Today’s Economy

commoditization pushes margins lower and reduces brand loyalty even further. To meet this challenge, U.S. firms have moved aggressively into foreign markets in an effort to increase sales and find new growth opportunities. At the same time, how- ever, foreign firms have moved into U.S. markets to meet the challenges of matur- ing markets in their own countries.

In the face of increasing competition and maturing markets, businesses have been forced to cut expenses in order to remain competitive. Some businesses do this by eliminating products or product lines. General Motors, for example, dropped its Saturn division—a move similar to its dropping of Oldsmobile and the Hummer H1. Others have maintained their product mix, but have aggressively sought ways to lower their distribution costs. The growth in direct distribution (manufacturer to end user) is a result of these efforts. Still other firms have been forced to take drastic measures, such as downsizing and laying off employees to trim expenses.

Needless to say, developing a viable and effective marketing strategy has become extremely challenging. Even the most admired marketers in the world like McDonald’s, Procter & Gamble, Anheuser-Busch, and Toyota occasionally have pro- blems meeting the demands of the strategic planning process and developing the “right” marketing strategy. Our goal in this book is not to teach you to develop the “right” strategy. Rather, our approach will give you a framework for organizing the planning process, and the ability to see how all of the pieces fit together. Think of it as a mindset or way to think about marketing strategy. The remainder of this text dedicates itself to these goals.

LESSONS FROM CHAPTER 1

Marketing challenges and opportunities in the new economy include:

• a shift in power to customers caused by increased access to information. • a massive increase in product selection due to line extensions and global

sourcing. • greater audience and media fragmentation as customers spend more time with

interactive media and less time with traditional media. • changing customer perceptions of value and frugality. • shifting demand patterns for certain product categories, especially those deliv-

ered digitally. • increasing concerns over privacy, security, and ethics. • unclear legal jurisdictions, especially in global markets.

Marketing:

• is parallel to other business functions such as production, research, manage- ment, human resources, and accounting. The goal of marketing is to connect the organization to its customers.

• is defined as the activity, set of institutions, and processes for creating, commu- nicating, delivering, and exchanging offerings that have value for customers, cli- ents, partners, and society at large.

• has changed in focus over the past 20 years. Today, marketing stresses value and customer relationships, including relationships with all potential stakeholders.

• is linked with our standard of living, not only in terms of enhanced consumption and prosperity, but also in terms of society’s well-being.

Basic marketing concepts include:

• market—a collection of buyers and sellers. • marketplace—a physical location where buyers and sellers meet to conduct

transactions.

Chapter 1 • Marketing in Today’s Economy 23

• marketspace (or online market)—an electronic marketplace not bound by time or space.

• metamarket—a cluster of closely related goods and services that centers on a specific consumption activity.

• metamediary—a single access point where buyers can locate and contact many different sellers in the metamarket.

• exchange—the process of obtaining something of value from someone by offer- ing something in return; this usually involves obtaining products for money. There are five conditions of exchange: 1. There must be at least two parties to the exchange. 2. Each party has something of value to the other party. 3. Each party must be capable of communication and delivery. 4. Each party must be free to accept or reject the exchange. 5. Each party believes it is desirable to exchange with the other party.

• product—something that can be acquired via exchange to satisfy a need or a want.

• utility—the ability of a product to satisfy a customer’s needs and wants. The five types of utility provided through marketing exchanges are form utility, time util- ity, place utility, possession utility, and psychological utility.

Major marketing activities and decisions include:

• strategic and tactical planning. • research and analysis. • developing competitive advantages and a strategic focus for the marketing

program. • marketing strategy decisions, including decisions related to market segmenta-

tion and target marketing, as well as the marketing program (i.e., product, pric- ing, distribution, and promotion) and branding/positioning.

• social responsibility and ethics. • implementing and controlling marketing activities. • developing and maintaining long-term customer relationships, including a shift

from transactional marketing to relationship marketing.

Some of the challenges involved in developing marketing strategy include:

• unending change—customers change, competitors change, and even the market- ing organization changes.

• the fact that marketing is inherently people-driven. • the lack of rules for choosing appropriate marketing activities. • the basic evolution of marketing and business practice in our society. • the increasing demands of customers. • an overall decline in brand loyalty and an increase in price sensitivity among

customers. • increasing customer cynicism about business and marketing activities. • competing in mature markets with increasing commoditization and little real dif-

ferentiation among product offerings. • increasing expansion into foreign markets by U.S. and foreign firms. • aggressive cost-cutting measures in order to increase competitiveness.

NOTES 1. These facts are from Justin Bachman, Mary Schlangenstein, and John Hughes,

“Southwest Charts a New Flight Plan,” BusinessWeek Online, September 29, 2010 (http://www.businessweek.com/magazine/content/10_41/b4198022740823.htm); “Best Buy: How to Break Out of Commodity Hell,” BusinessWeek Online, March 27, 2006

24 Chapter 1 • Marketing in Today’s Economy

(http://www.businessweek.com/magazine/content/06_13/b3977007.htm); Leslie Patton, “Starbucks Targets Folks Who Shun Starbucks,” BusinessWeek Online, April 21, 2011 (http://www.businessweek.com/magazine/content/11_18/b4226026215941.htm); and Robert Safian, “The World’s Most Innovative Companies 2014,” Fast Company Online, (http://www.fastcompany.com/most-innovative-companies/2014/), accessed February 17, 2015.

2. Rebecca R. Ruiz and Michael J. De La Merced, “RadioShack Files for Chapter 11 Bankruptcy After a Deal with Sprint,” New York Times, February 5, 2015 (http://dealbook. nytimes.com/2015/02/05/radio-shack-files-for-chapter-11-bankrutpcy/?_r=0).

3. Rachel Abrams, “Target Puts Data Breach Costs at $148 Million, and Forecasts Profit Drop,” New York Times, August 5, 2014 (http://www.nytimes.com/2014/08/06/business/ target-puts-data-breach-costs-at-148-million.html).

4. William B. Baker, “Sony Pays Record Civil Penalty to Settle COPPA Violations,” Privacy in Focus, January 2009 (http://www.wileyrein.com/publication.cfm? publication_id=14098); and Kevin Khurana, “COPPA Violations? Cop a Settlement for $3 Million,” Proskauer.com, May 18, 2011 (http://privacylaw.proskauer.com/2011/05/ articles/childrens-online-privacy-prote/coppa-violations-cop-a-settlement-for-3-million/).

5. Dan Levin, “China Escalating Attack on Google,” New York Times, June 2, 2014 (http:// www.nytimes.com/2014/06/03/business/chinas-battle-against-google-heats-up.html).

6. “U.S. ITC Report on China Piracy Shows Billions in Losses: Senators Demand Action,” Intellectual Property Watch, May 18, 2011 (http://www.ip-watch.org/2011/05/18/us-itc- report-on-china-piracy-shows-billions-in-losses-senators-demand-action/).

7. Sandra Block, “Momentum Growing for Sales Taxes on Online Purchases, USA Today Online, February 8, 2012 (http://www.usatoday.com/money/perfi/taxes/story/2012-02- 08/online-sales-taxes/53015142/1); and Matt Lindner, “Amazon will soon collect sales tax from 74% of U.S. consumers,” Internet Retailer, January 26, 2015.

8. American Marketing Association, http://www.ama.org. 9. American Marketing Association, http://www.ama.org.

10. American Marketing Association, http://www.ama.org. 11. Jeffrey F. Rayport and Bernard J. Jaworski, e-Commerce (Boston: McGraw-Hill/Irwin,

2001), p. 3. 12. Mohanbir Sawhney, “Making New Markets,” Business 2.0, May 1999, 116–121. 13. http://www.amazon.com 14. http://www.legacyforhealth.org 15. Scott D. Roberts and Kathleen S. Micken (2015), “Marketing Digital Offerings Is

Different: Strategies for Teaching about Digital Offerings in the Classroom,” Journal of Education for Business, 90(2), 96–102.

16. “Automotive Hub of the South,” Amazing Alabama, July 21, 2014 (http://www. amazingalabama.com/key-industry-targets-automotive.html), accessed February 18, 2015.

17. These facts are from Ellen Byron, “Mr. Clean Takes Car-Wash Gig,” Wall Street Journal Online, February 5, 2009 (http://online.wsj.com/article/SB123379252641549893.html); Andria Cheng, “Retailers Try New Tricks Amid Global Downturn,” MarketWatch, March 23, 2009, (http://www.marketwatch.com/news/story/wal-marts-great-value- signals-coming/story.aspx?guid={81136A47-8D95-4FB9-92A4-F98A8F7B1E6A}); Lauren Coleman-Lochner and Mark Clothier, “P&G Looks to Franchise Tide Dry Cleaning,” BusinessWeek Online, September 2, 2010, (http://www.businessweek.com/magazine/ content/10_37/b4194020958182.htm); Andy Fixmer, “Hulu Plans to Raise Money to Fund Expansion into Original Shows,” BusinessWeek Online, January 18, 2012 (http:// www.businessweek.com/news/2012-01-18/hulu-plans-to-raise-money-to-fund-expansion- into-original-shows.html); Mr. Clean Car Wash website (http://mrcleancarwash.com), accessed February 19, 2015; Reena Jana, “P&G’s Trickle-Up Success: Sweet as Honey,” BusinessWeek Online, March 31, 2009 (http://www.businessweek.com/innovate/content/ mar2009/id20090331_127029.htm?chan=innovation_innovation+%2B+design_ innovation+strategy); Parija Kavilanz, “Dumped! Brand Names Fight to Stay in Stores,” Fortune, February 16, 2010 (http://money.cnn.com/2010/02/15/news/ companies/walmart_dropping_brands/index.htm); Jeneanne Rae, “Innovative Ways to Grow During the Downturn,” BusinessWeek Online, April 15, 2009 (http://www. businessweek.com/innovate/content/apr2009/id20090415_238678.htm); and Lucas Shaw, “Hulu Passes $1B in Revenue, Has 5M Hulu Plus Subscribers,” The Wrap,

Chapter 1 • Marketing in Today’s Economy 25

December 18, 2013 (http://www.thewrap.com/hulu-passes-1b-revenue-5m-hulu-plus- subscribers/).

18. Hampton Inn’s Satisfaction Guarantee (http://hamptoninn3.hilton.com/en/about/ satisfaction.html), accessed February 19, 2015.

19. These facts are from Joe Brown, “You Can Rent Movies on Facebook Now,” Gizmodo, August 19, 2011 (http://gizmodo.com/5832713/you-can-rent-movies-on-facebook); Jim Edwards, “Twitter’s ‘Dark Pool’: IPO Doesn’t Mention 651 Million Users Who Abandoned Twitter,” Business Insider, November 6, 2013 (http://www.businessinsider.com/twitter- total-registered-users-v-monthly-active-users-2013-11); Linked In website (https://press. linkedin.com/about-linkedin), accessed February 19, 2015; Matt McKinley, “8 Cool Marketing Campaigns Using Facebook Places,” AdWeek, August 2, 2011 (http://www. adweek.com/socialtimes/8-cool-marketing-campaigns-using-facebook-places/356266); Graeme McMillan, “How Many People Actually Use Twitter? Good Question,” Time Online, August 29, 2011 (http://techland.time.com/2011/08/29/how-many-people- actually-use-twitter-good-question/); “Need Facebook Marketing Inspiration? 20 of the Most Innovative Campaigns,” SimplyZesty.com, February 7, 2011 (http://www. allfacebook.com/8-cool-marketing-campaigns-using-facebook-places-2011-08); and Jeffrey F. Rayport, “Social Networks Are the New Web Portals,” BusinessWeek Online, January 21, 2009 (http://www.businessweek.com/technology/content/jan2009/ tc20090121_557202.htm).

20. These facts are from Mark Kassof & Company, “McDonald’s Arch McFlop,” Research Insights: Lessons from Marketing Flops, Summer 1997.

21. These facts are from http://www.joinred.com, accessed February 20, 2015. 22. These facts are from the Aflac corporate website (http://www.aflac.com/aboutaflac/

pressroom/pressreleasestory.aspx?rid=623), accessed February 20, 2015 and “The 100 Best Companies to Work For 2014,” Fortune (http://www.greatplacetowork.com/best- companies/100-best-companies-to-work-for), accessed February 20, 2015.

26 Chapter 1 • Marketing in Today’s Economy

Strategic MarketingPlanning

INTRODUCTION The process of strategic marketing planning can either be quite complex or rela- tively straightforward. As evidenced in Beyond the Pages 2.1, strategic planning in today’s market often requires partnering with other firms and carefully planning for the actions of others, such as supply sources or competitors. Whether a mul- tinational corporation, like Ford Motor Company, or a sole-proprietorship, like a local bakery, the planning process is the same in many ways. Ultimately, the goals and objectives can be quite similar. Large or small, all marketers strive to meet the needs of their customers while meeting their own business and market- ing objectives.

The marketing planning process typically requires the coordination of broad- based decisions at the top of the corporate hierarchy with more narrowly defined actions at the bottom. At the top are important corporate decisions dealing with the firm’s mission, vision, goals, and the allocation of resources among business units. Planning at this level also involves decisions regarding the purchase or divestment of the business units themselves. Apple’s acquisition of Beats Audio, GM’s closing of its Pontiac division, and Radio Shack’s bankruptcy filing are good examples of the decision-making complexity that is often typical of major corporate decisions. These decisions trickle down the corporate structure to the business-unit level, where planning focuses on meeting goals and objectives within defined product markets. Planning at this level must take into account and be consistent with decisions made at the corporate level. However, in orga- nizations having only one business unit, corporate and business unit strategy are the same. The most specific planning and decision making occurs at the bottom of the structure. It is at this level where organizations make and implement tacti- cal decisions regarding marketing strategy (target markets and the marketing pro- gram) as well as marketing plans.

In this chapter, we examine the planning process at different points in this pro- cess. We begin by discussing the overall process by considering the hierarchy of decisions that must be made in strategic marketing planning. Next, we introduce the marketing plan and look at the marketing plan framework used throughout the text. We also discuss the role and importance of the marketing plan in marketing strategy. Finally, we explore other advances in strategic planning such as strategy mapping and the balanced performance scorecard.

CHAPTER

BEYOND THE PAGES 2.1

Redbox’s Questionable Future1

One buck for one night. That was the initial strat- egy of Redbox, a DVD rental company that distri- butes movies and video games from roughly 35,000 kiosks in supermarkets, drugstores, res- taurants, convenience stores, and other retailers around the country. The idea is simple: With the push of a button and the swipe of a credit card, customers can rent a movie or video game from a bright red machine about the size of a refrigera- tor. Each kiosk holds up to 630 discs and 200 dif- ferent movie and game titles, virtually all of which are 6 months old or less. Customers can reserve movies and games online or with a mobile app before visiting a kiosk, and simply return the rented discs to a Redbox kiosk anywhere in the country. Although the price of a movie rental has risen to $1.50 per day for DVDs and $2.00 per day for Blu-ray (video games start at $3.00 per day), Redbox has been undeniably successful: The company has rented over 3.7 billion discs since it launched. It has 36 million e-mail subscribers, 26 million users of its smartphone app, and 5.4 million SMS subscribers.

Surprisingly, the idea for Redbox began as a new business venture for McDonald’s in 2002. At that time, McDonald’s was experimenting with vending machines to sell a variety of different items. The concept was based on research that indicated customers prefer dealing with machines, rather than people, for some transac- tions (think banking, choosing airline seats, movie tickets at theaters, etc.). By 2009, after the concept proved to be a success, Redbox was sold to Coinstar—a Bellevue, WA company that also operated coin-counting machines and gift card dispensers. Soon after, Coinstar inked deals with Walmart, Kroger, Winn-Dixie, Wal- greens, Kangaroo (gas stations), and other national outlets to place Redbox kiosks in high- traffic locations. As it turned out, the timing couldn’t have been better. As the recession of 2008 lingered, customers began to see Redbox as a bargain compared to their then $15 per month Netflix plans or $5 on-demand movie ren- tals. Redbox’s success also occurred at a time when traditional DVD sales were tanking— down roughly 50 percent from 2009 to 2014. The company’s success was also due to its rapid pen- etration into mainstream America. The company claims that 68 percent of the U.S. population lives within a 5-minute drive of a Redbox kiosk. In 2013, when Redbox’s sales accounted for

89 percent of Coinstar’s revenue, the parent com- pany changed its name to Outerwall, Inc. to better reflect its corporate strategy (i.e., the outer wall of retail stores) and position itself for the future.

Despite its success, Redbox faces two very serious issues moving forward. First and fore- most is its relationship with movie studios. Red- box’s distribution agreements are contentious at best. At one point, Universal Studios and 20th Century Fox asked movie distributors to stop supplying Redbox with DVDs until 6 weeks after their release dates. Redbox fought back by buying new releases from retailers such as Wal- mart—a move that seriously undermined the company’s profit margin per disc. For movie stu- dios, the issue boils down to money and reducing or eliminating the number of previously viewed DVDs in the market. When a customer buys a DVD from Walmart, the studio collects $17 per disc. That number drops to $0.60 for a Redbox rental. Studios receive nothing when a company sells used DVDs. Needless to say, movie execu- tives are afraid that Redbox will continue to erode demand for higher-priced DVD purchases. Several of Redbox’s distribution agreements expire in 2015, so the company could be facing higher prices, further delays in release dates, or even a complete shutdown of distribution rights.

The second, and longer term, issue facing Redbox is the continued growth of convenient and inexpensive video streaming services such as Netflix, Hulu Plus, Amazon Prime, and Apple. These services offer more variety, better service, and cost savings, but it’s the convenience factor that sets them apart. To improve its position, Red- box inked a video-streaming deal with Verizon called Redbox Instant by Verizon. Launched in early2013,the$6permonthserviceofferedaccess to 6,000 movies, as well as movie rentals and pur- chases. Unfortunately, the service never took off and was shut down in October 2014. Outerwall had invested over $63 million in the venture.

The handwriting may literally be on the Out- erwall for Redbox. In late 2014, after the Redbox Instant flop, the company’s stock was down- graded. The company also learned that sales at its kiosks had dropped 11.8 percent in one year. That news was followed in early 2015 by the ouster of Outerwall CEO Scott Di Valero. Citing a lack of strategic direction, Outerwall’s board of directors expects the company to develop a viable digital strategy to resolve the company’s depen- dence on outdated DVD and Blu-ray distribution.

28 Chapter 2 • Strategic Marketing Planning

THE STRATEGIC PLANNING PROCESS Whether at the corporate, business unit, or functional level, the planning process begins with an in-depth analysis of the organization’s internal and external environments—sometimes referred to as a situation analysis. As we will discuss in Chapter 3, this analysis focuses on the firm’s resources, strengths, and capabilities vis-à-vis competitive, customer, and environmental issues. Based on an exhaustive review of these relevant environmental issues, the firm establishes its mission, goals, and/or objectives, its strategy, and several functional plans. As indicated in Exhibit 2.1, planning efforts within each functional area will result in the creation of a strategic plan for that area. Although we emphasize the issues and processes concerned with developing a customer-oriented marketing strategy and marketing plan, we should stress that organizations develop effective marketing strategies and plans in concert with the organization’s mission and goals, as well as the plans from other functional areas. Senior management must coordinate these functional plans in a manner that will achieve the organization’s mission, goals, and objectives.

In this text, we are interested in a particular type of functional plan—the market- ing plan. A marketing plan is a written document that provides the blueprint or outline of the organization’s marketing activities, including the implementation, evaluation, and control of those activities. The marketing plan serves a number of purposes. For one, the marketing plan clearly explains how the organization will achieve its goals and objectives. This aspect of marketing planning is vital—not having goals and objectives is like driving a car without knowing your destination. In this sense, the marketing plan serves as the “road map” for implementing the marketing strategy. It instructs employees as to their roles and functions in fulfilling the plan. It also provides

EXHIBIT 2.1 The Strategic Planning Process.

Business-Unit Strategy

Financial Goals and Objectives

Financial Strategy

Implementation

Evaluation and Control

Financial Plans

Human Resource Goals and Objectives

Human Resource Strategy

Implementation

Evaluation and Control

Human Resource Plans

Other Functional Goals and Objectives

Other Functional Strategies

Implementation

Evaluation and Control

Other Functional Plans

Production Goals and Objectives

Production Strategy

Implementation

Evaluation and Control

Production Plans

Marketing Goals and Objectives

Marketing Strategy

Implementation

Evaluation and Control

Marketing Plans

Business-Unit Situation Analysis

Business-Unit Mission, Goals, and Objectives

Corporate Mission, Goals, and Objectives

Corporate Situation Analysis

Chapter 2 • Strategic Marketing Planning 29

specifics regarding the allocation of resources and includes the specific marketing tasks, responsibilities of individuals, and the timing of all marketing activities.

Although our focus is on marketing planning and strategy, we cannot emphasize enough that marketing decisions must be made within the boundaries of the organi- zation’s overall mission, goals, and objectives. The sequencing of decision stages outlined in the following sections begins with broad decisions regarding the organi- zational mission, followed by a discussion of the corporate or business-unit strategy. It is within these contexts that marketing goals/objectives and marketing strategies must be developed and implemented.

Organizational Mission versus Organizational Vision To adequately address the role of the organizational mission in strategic planning, we must first understand the differences between the organization’s mission and its vision. A mission, or mission statement, seeks to answer the question “What business are we in?” It is a clear and concise statement (a paragraph or two at most) that explains the organization’s reason for existence. By contrast, a vision or vision statement seeks to answer the question “What do we want to become?” For example, Amazon—the world’s largest online retailer—defines its mission this way: “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.” Similarly, Hershey’s states its mission: “Continuing Milton Hershey’s legacy of commitment to consumers, community and children, we provide high-quality HERSHEY’S products while conducting our business in a socially responsible and environmentally sustainable manner.” Note that these mission statements concretely express what each company does in its business operations. In contrast vision state- ments tend to be more nebulous and are often future-oriented. Microsoft’s vision is “to create innovative technology that is accessible to everyone and that adapts to each person’s needs.” 3M’s vision is “Harnessing the chain reaction of new ideas.” These statements provide an overall end-goal for each company, but are less specific in how each might achieve the end goal. Vision statements typically outline where the organization is headed and where it wants to go.2

If you ask many business executives “What is your reason for existence?” their response is likely to be “To make money.” Although that may be their ultimate objec- tive, it is not their raison d’être. Profit has a role in this process, of course, but it is a goal or objective of the firm, not its mission or vision. The mission statement identifies what the firm stands for and its basic operating philosophy. Profit and other performance outcomes are ends, and thus are out of place and confuse the mission of the firm.

Elements of the Mission Statement A well-devised mission statement for any organization, unit within an organization, or single-owner business should answer the same five basic questions. These ques- tions should clarify for the firm’s stakeholders (especially employees):

1. Who are we? 2. Who are our customers? 3. What is our operating philosophy (basic beliefs, values, ethics, etc.)? 4. What are our core competencies or competitive advantages? 5. What are our responsibilities with respect to being a good steward of our human,

financial, and environmental resources?

A mission statement that delivers a clear answer to each of these questions installs the cornerstone for the development of the marketing plan. If the corner- stone is weak, or not in line with the foundation laid in the preliminary steps, the entire plan will have no real chance of long-term success. Exhibit 2.2 outlines several

30 Chapter 2 • Strategic Marketing Planning

EXHIBIT 2.2 The Best Mission Statements.

In their book, Say It and Live It: The 50 Corporate Mission Statements That Hit the Mark, Patricia Jones and Larry Kahaner iden- tified 50 companies that possess outstanding mission statements. This exhibit lists several of these companies, along with their 1995, 2000, and 2015 mission statements. Remember that these organizations customized their mission statements to fit their own needs and goals, not to match the criteria established in this chapter.

Boeing 1995 To be the number one aerospace company in the world and among the premier industrial concerns in terms of quality,

profitability, and growth.

2000 Our mission is bigger and broader than ever. It is to push not just the envelope of flight, but the entire envelope of value relating to our customers and shareholders.

2015 People working together as a global enterprise for aerospace industry leadership.

Leo Burnett 1995 The mission of the Leo Burnett Company is to create superior advertising. In Leo’s words: “Our primary function in life is to

produce the best advertising in the world, bar none. This is to be advertising so interrupting, so daring, so fresh, so engag- ing, so human, so believable and so well-focused as to themes and ideas that, at one and the same time, it builds a quality reputation for the long haul as it produces sales for the immediate present.”

2000 Our Vision: To be an indispensable source of our clients’ competitive advantage. Our Mission: We will work with our cli- ents as a community of star-reachers whose ideas build leadership brands through imagination and a sensitive and deeper understanding of human behavior.

2015 Creativity has the power to transform human behavior. This is the core belief of what we call HumanKind. It’s not about advertising or brand propositions or selling products. It’s about people and purpose. It’s an approach to marketing that serves true human needs, not the other way around. That’s why everything we do for brands is designed with a human pur- pose in mind. A brand without purpose is one that will never be understood or embraced by people. A brand with purpose can be a true agent of change and transform the way people think, feel or act. A brand with a true HumanKind purpose can change the world. Our dream is to be the best creator of ideas that truly move people—bar none.

Celestial Seasonings 1995 Our mission is to grow and dominate the U.S. specialty tea market by exceeding consumer expectations with the best

tasting, 100 percent natural hot and iced teas, packaged with Celestial art and philosophy, creating the most valued tea experience. Through leadership, innovation, focus, and teamwork we are dedicated to continuously improving value to our consumers, customers, employees, and stakeholders with a quality-first organization.

2000 We believe in creating and selling healthful, naturally oriented products that nurture People’s bodies and uplift their souls. Our products must be

• superior in quality, • of good value, • beautifully artistic, and • philosophically inspiring.

Our role is to play an active part in making this world a better place by unselfishly serving the public. We believe we can have a significant impact on making people’s lives happier and healthier through their use of our products.

2015 In 1969, a group of passionate young entrepreneurs founded Celestial Seasonings upon the belief that their flavorful, all- natural herbal teas could help people live healthier lives. They harvested fresh herbs from the Rocky Mountains by hand, and then dried, blended and packaged them in hand-sewn muslin bags to be sold at local health food stores. By staying committed to their vision, the founders of Celestial Seasonings turned their cottage industry into an almost overnight success. Today, Celestial Seasonings is one of the largest specialty tea manufacturers in North America. We serve more than 1.6 billion cups of tea every year, and we source more than 100 different ingredients from over 35 countries to create our delicious, all-natural herbal, green, red, white, chai and wellness teas. But most importantly, we’re still about people and passion.

Chapter 2 • Strategic Marketing Planning 31

mission statements considered to be among the best. As you read these statements, consider how well they answer these five questions.

The mission statement is the one portion of the strategic plan that should not be kept confidential. It should tell everyone—customers, employees, investors, compe- titors, regulators, and society in general—what the firm stands for and why it exists. Mission statements facilitate public relations activities and communicate to custo- mers and others important information that can be used to build trust and long- term relationships. The mission statement should be included in annual reports and major press releases, framed on the wall in every office, and personally owned by every employee of the organization. Goals, objectives, strategies, tactics, and bud- gets are not for public viewing. A mission statement kept secret, however, is of little value to the organization.

Mission Width and Stability In crafting a mission statement, management should be concerned about the state- ment’s width. If the mission is too broad, it will be meaningless to those who read and build upon it. A mission to “make all people happy around the world by provid- ing them with entertaining products” sounds splendid but provides no useful infor- mation. Overly broad missions can lead companies to establish plans and strategies in areas where their strengths are limited. Such endeavors almost always result in failure. Exxon’s past venture into office products and Sears’ expansion into real estate and financial services serve as reminders of the problems associated with poorly designed mission statements. Although a well-designed mission statement should not stifle an organization’s creativity, it must help keep the firm from moving too far from its core competencies.

Overly narrow mission statements that constrain the vision of the organization can prove just as costly. Early in this century, the railroads defined their business as owning and operating trains. Consequently, the railroad industry had no concerns about the invention of the airplane. After all, they thought, the ability to fly had noth- ing to do with trains or the railroad business. Today, we know that firms such as Delta Airlines, Southwest Airlines, UPS, and Federal Express, rather than Burlington, Union Pacific, or Santa Fe, dominate the passenger and time-sensitive freight busi- ness. The railroads missed this major opportunity because their missions were too narrowly tied to railroads, as opposed to a more appropriate definition encompass- ing the transportation business.

Mission stability refers to the frequency of modifications in an organization’s mis- sion statement. Of all the components of the strategic plan, the mission should change the least frequently. It is the one element that will likely remain constant through multiple rounds of strategic planning. Goals, objectives, and marketing plan ele- ments will change over time, usually as an annual or quarterly event. When the mis- sion changes, however, the cornerstone has been moved and everything else must change as well. The mission should change only when it is no longer in sync with the firm’s capabilities, when competitors drive the firm from certain markets, when

EXHIBIT 2.2 (Continued)

Intel Corporation 1995 Do a great job for our customers, employees and stockholders by being the preeminent building block supplier to the

computing industry.

2000 Intel’s mission is to be the preeminent building block supplier to the worldwide Internet economy.

2015 Utilize the power of Moore’s Law to bring smart, connected devices to every person on earth.

SOURCE: Patricia Jones and Larry Kahaner, Say It and Live It: The 50 Corporate Mission Statements That Hit the Mark (New York: Doubleday, 1995); and the websites of these companies.

32 Chapter 2 • Strategic Marketing Planning

new technology changes the delivery of customer benefits, or when the firm identi- fies a new opportunity that matches its strengths and expertise. As we discussed in Chapter 1, the growth of the Internet and electronic commerce has affected many industries. The importance and role of travel agents, stockbrokers, and car dealers has changed dramatically as customers changed the way they shop for travel, finan- cial products, and automobiles. Organizations in these and other industries have been forced to refocus their efforts by redefining their mission statements.

Customer-Focused Mission Statements In recent years, firms have realized the role that mission statements can play in their marketing efforts. Consequently, mission statements have become much more cus- tomer oriented. People’s lives and businesses should be enriched because they have dealt with the organization. A focus on profit in the mission statement means that something positive happens for the owners and managers of the organization, not necessarily for the customers or other stakeholders. For example, a focus on custo- mers is one of the leading reasons for the long running success of Southwest Air- lines. The company’s mission has not changed since 1988:

The mission of Southwest Airlines is dedication to the highest quality of

customer service delivered with a sense of warmth, friendliness, indi-

vidual pride, and company spirit. 3

The mission statement of cultural icon Ben & Jerry’s Ice Cream consists of three interrelated parts, and is a good example of how an organization can work to have a positive impact on customers and society:4

Product Mission: To make, distribute and sell the finest quality all nat- ural ice cream and euphoric concoctions with a continued commitment

to incorporating wholesome, natural ingredients and promoting busi-

ness practices that respect the Earth and the Environment.

A P Ph ot o/ Ch ris

G ar dn er

What business does the railroad industry find itself in today?

Chapter 2 • Strategic Marketing Planning 33

Economic Mission: To operate the company on a sustainable finan- cial basis of profitable growth, increasing value for our stakeholders and

expanding opportunities for development and career growth for our

employees.

Social Mission: To operate the company in a way that actively recog- nizes the central role that business plays in society by initiating inno-

vative ways to improve the quality of life locally, nationally and

internationally.

The infamous 1982 Tylenol cyanide tragedy illustrated the importance of a customer-oriented mission statement. After several deaths occurred as a result of outside tampering with Tylenol capsules, McNeilab and Johnson & Johnson immedi- ately pulled all Tylenol capsules from the market at a direct cost of $100 million. When asked about the difficulty of this decision, executives said that the choice was obvious given Johnson & Johnson’s mission statement. That statement, devel- oped decades earlier by the firm’s founders, established that Johnson & Johnson’s primary responsibility is to the doctors, nurses, patients, parents, and children who prescribe or use the company’s products. Because the mission dictated the firm’s response to the crisis, Tylenol became an even more dominant player in the pain- reliever market after the tragedy.5 Since that time, Johnson & Johnson has faced sim- ilar recalls. In 2010, the company recalled several pain relief products, including Tylenol and Motrin, due to an unusual moldy smell. Similarly in 2012, all infant Tyle- nol was pulled from U.S. shelves when parents complained about the company’s redesigned bottles. In each case, the company’s mission statement was a guiding force in making the recall decisions.6

Customer-focused mission statements are the norm for charities and humanitarian organizations. These nonprofit organizations—just like their for-profit counterparts— strive to fulfill their missions through effective marketing programs. For instance, the mission of the American Red Cross reads:

The American Red Cross prevents and alleviates human suffering in the

face of emergencies by mobilizing the power of volunteers and the gener-

osity of donors.

Unlike other charitable organizations, the American Red Cross holds a key com- petitive advantage: its Congressional charter. This gives the American Red Cross the authority needed to respond no matter the nature or complexity of the crisis. It also requires the Red Cross to carry out responsibilities delegated to it by the federal gov- ernment.7 During the aftermath of Hurricanes Katrina, Rita, and Wilma in 2005, the American Red Cross initiated its single largest disaster response in the organization’s history. Through a massive promotional campaign and significant corporate sponsor- ships, the American Red Cross was able to raise the $2.1 billion needed for relief efforts.8 While it can and often does receive federal funding, the vast majority of the Red Cross’ funding comes from private donors.

Corporate or Business-Unit Strategy All organizations need a corporate strategy, the central plan for utilizing and integrating resources in the areas of production, finance, research and development, human resources, and marketing to carry out the organization’s mission and achieve the desired goals and objectives. In the strategic planning process, issues such as competition, differentiation, diversification, coordination of business units, and envi- ronmental issues all tend to emerge as corporate strategy concerns. In small busi- nesses, corporate strategy and business-unit strategy are essentially the same. Although we use both terms, corporate and business-unit strategy apply to all orga- nizations, from large corporations to small businesses and nonprofit organizations.

34 Chapter 2 • Strategic Marketing Planning

Larger firms often find it beneficial to devise separate strategies for each strategic business unit (SBU), subsidiary, division, product line, or other profit center within the parent firm. Business-unit strategy determines the nature and future direction of each business unit, including its competitive advantages, the allocation of its resources, and the coordination of the functional business areas (marketing, produc- tion, finance, human resources, etc.). Many organizations manage their differing SBUs in ways that create synergies by providing customers a single-branded solution across multiple markets. Sony, for example, has a number of SBUs including Sony Pic- tures Entertainment (Columbia TriStar studios, movie distribution, television), Sony Music Entertainment (record labels such as Columbia, RCA, and Epic), Sony Mobile Communications (Xperia and Sony Ericsson phones), Sony Computer Entertainment (primarily PlayStation), Sony Network Entertainment (digital media delivery ser- vices), Sony Financial Holdings Group, and a number of other technical divisions.9

An important consideration for a firm determining its corporate or business-unit strategy is the firm’s capabilities. When a firm possesses capabilities that allow it to serve customers’ needs better than the competition, it is said to have a competitive, or differential, advantage. Although a number of advantages come from functions other than marketing—such as human resources, research and development, or production—these functions often create important competitive advantages that can be exploited through marketing activities. For example, Walmart’s long-running strate- gic investments in logistics allow the retailer to operate with lower inventory costs than its competitors—an advantage that translates into lower prices at retail. The 3M Company is highly regarded for its expertise in research and development. In fact, 3M defines itself as a science company. Their advantage in research and innovation allows its 100-plus product categories to excel in nine different business units: home and lei- sure; office; manufacturing and industry; transportation; safety, security, and protec- tion; health care; electronics, electrical, and communications; display and graphics; and government.10

Competitive advantages cannot be fully realized unless targeted customers see them as valuable. The key issue is the organization’s ability to convince customers that its advantages are superior to those of the competition. Walmart has been able to convey effectively its low-price advantage to customers by adhering to an every- day low-price policy. The company’s advertising plays on this fact by using “roll back” prices. Interestingly, Walmart’s prices are not always the lowest for a given product in a given geographic area. However, Walmart’s perception of offering low prices translates into a key competitive advantage for the firm.

Functional Goals and Objectives Marketing and all other business functions must support the organization’s mission and goals, translating these into objectives with specific quantitative measurements. For example, a corporate or business unit goal to increase return on investment might translate into a marketing objective to increase sales, a production objective to reduce the cost of raw materials, a financial objective to rebalance the firm’s port- folio of investments, or a human resources objective to increase employee training and productivity. All functional objectives should be expressed in clear, simple terms so that all personnel understand what type and level of performance the orga- nization desires. In other words, objectives should be written so that their accom- plishment can be measured accurately. In the case of marketing objectives, units of measure might include sales volume (in dollars or units), profitability per unit, per- centage gain in market share, sales per square foot, average customer purchase, per- centage of customers in the firm’s target market who prefer its products, or some other measurable achievement.

It is also important for all functional objectives to be reconsidered for each plan- ning period. Perhaps no strategy arose in the previous planning period to meet the

Chapter 2 • Strategic Marketing Planning 35

stated objectives. Or perhaps the implementation of new technology allowed the firm to greatly exceed its objectives. In either case, realism demands the revision of functional objectives to remain consistent with the next edition of the functional area plan.

Functional Strategy Organizations design functional strategies to provide a total integration of efforts that focus on achieving the area’s stated objectives. In production, this might involve strategies for procurement, just-in-time inventory control, or warehousing. In human resources, strategies dealing with employee recruitment, selection, retention, train- ing, evaluation, and compensation are often at the forefront of the decision-making process. In marketing strategy, the process focuses on selecting one or more target markets and developing a marketing program that satisfies the needs and wants of members of that target market. AutoZone, for example, targets do-it-yourself “shade tree mechanics” by offering an extensive selection of automotive replacement parts, maintenance items, and accessories at low prices.

Functional strategy decisions do not develop in a vacuum. The strategy must (1) fit the needs and purposes of the functional area with respect to meeting its goals and objectives, (2) be realistic given the organization’s available resources and environment, and (3) be consistent with the organization’s mission, goals, and objectives. Within the context of the overall strategic planning process, each func- tional strategy must be evaluated to determine its effect on the organization’s sales, costs, image, and profitability.

Implementation Implementation involves activities that actually execute the functional area strat- egy. One of the more interesting aspects of implementation is that all functional plans have at least two target markets: an external market (i.e., customers, sup- pliers, investors, potential employees, the society at large) and an internal market (i.e., employees, managers, executives). This occurs because functional plans, when executed, have repercussions both inside and outside the firm. Even seem- ingly disconnected events in finance or human resources can have an effect on the firm’s ultimate customers—the individuals and businesses that buy the firm’s products.

In order for a functional strategy to be implemented successfully, the organiza- tion must rely on the commitment and knowledge of its employees—its internal tar- get market. After all, employees have a responsibility to perform the activities that will implement the strategy. For this reason, organizations often execute internal marketing activities designed to gain employee commitment and motivation to implement functional plans.

Evaluation and Control Organizations design the evaluation and control phase of strategic planning to keep planned activities on target with goals and objectives. In the big picture, the critical issue in this phase is coordination among functional areas. For example, timely distribution and product availability almost always depend on accurate and timely production. By maintaining contact with the production manager, the marketing manager helps to ensure effective marketing strategy implementation (by ensuring timely production) and, in the long run, increased customer satisfac- tion. The need for coordination is especially keen in marketing where the fulfill- ment of marketing strategy always depends on coordinated execution with other functional strategies.

36 Chapter 2 • Strategic Marketing Planning

The key to coordination is to ensure that functional areas maintain open lines of communication at all times. Although this can be quite a challenge, it is helpful if the organizational culture is both internally and externally customer oriented. Maintain- ing a customer focus is extremely important throughout the strategic planning pro- cess, but especially so during the implementation, evaluation, and control phases of the process. Functional managers should have the ability to see the interconnected- ness of all business decisions and act in the best interests of the organization and its customers.

In some ways, the evaluation and control phase of the planning process is an ending and a beginning. On the one hand, evaluation and control occur after a strat- egy has been implemented. In fact, the implementation of any strategy would be incomplete without an assessment of its success and the creation of control mechan- isms to provide and revise the strategy or its implementation—or both if necessary. On the other hand, evaluation and control serve as the beginning point for the plan- ning process in the next planning cycle. Because strategic planning is a never-ending process, managers should have a system for monitoring and evaluating implementa- tion outcomes on an ongoing basis.

THE MARKETING PLAN The result of the strategic planning process described in the first portion of this chapter is a series of plans for each functional area of the organization. For the mar- keting department, the marketing plan provides a detailed formulation of the actions necessary to carry out the marketing program. Think of the marketing plan as an action document—it is the handbook for marketing implementation, evalua- tion, and control. With that in mind, it is important to note that a marketing plan is not the same as a business plan. Business plans, although they typically contain a marketing plan, encompass other issues such as business organization and owner- ship, operations, financial strategy, human resources, and risk management. Although business plans and marketing plans are not synonymous, many small busi- nesses will consolidate their corporate, business-unit, and marketing plans into a single document.

A good marketing plan requires a great deal of information from many different sources. An important consideration in pulling all of this information together is to maintain a big picture view while simultaneously keeping an eye on the details. This requires looking at the marketing plan holistically rather than as a collection of related elements. Unfortunately, adopting a holistic perspective is rather difficult in practice. It is easy to get deeply involved in developing marketing strategy only to discover later that the strategy is inappropriate for the organization’s resources or marketing environment. The hallmark of a well-developed marketing plan is its abil- ity to achieve its stated goals and objectives.

In the following sections, we explore the marketing plan in more detail, includ- ing the structure of a typical marketing plan. This structure matches the marketing plan worksheets and the sample marketing plan available online. As we work through the marketing plan structure, keep in mind that a marketing plan can be written in many different ways. Marketing plans can be developed for specific pro- ducts, brands, target markets, or industries. Likewise, a marketing plan can focus on a specific element of the marketing program, such as a product development plan, a promotional plan, a distribution plan, or a pricing plan.

Marketing Plan Structure All marketing plans should be well organized to ensure that all relevant information is considered and included. Exhibit 2.3 illustrates the structure or outline of a typical

Chapter 2 • Strategic Marketing Planning 37

marketing plan. We say this outline is “typical,” but there are many other ways to organize a marketing plan. Although the actual outline used is not that important, most plans will share common elements described here. Regardless of the specific outline you use to develop a marketing plan, you should keep in mind that a good marketing plan outline is:

• Comprehensive. Having a comprehensive outline is essential to ensure that there are no omissions of important information. Of course, every element of the outline may not be pertinent to the situation at hand, but at least each ele- ment receives consideration.

EXHIBIT 2.3 Marketing Plan Structure.

I. Executive Summary

a. Synopsis b. Major aspects of the marketing plan

II. Situation Analysis

a. Analysis of the internal environment b. Analysis of the customer environment c. Analysis of the external environment

III. SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats)

a. Strengths b. Weaknesses c. Opportunities d. Threats e. Analysis of the SWOT matrix f. Developing competitive advantages g. Developing a strategic focus

IV. Marketing Goals and Objectives

a. Marketing goals b. Marketing objectives

V. Marketing Strategy

a. Primary (and secondary) target market b. Overall branding strategy c. Product strategy d. Pricing strategy e. Distribution/supply chain strategy f. Integrated marketing communication (promotion) strategy

VI. Marketing Implementation

a. Structural issues b. Tactical marketing activities

VII. Evaluation and Control

a. Formal controls b. Informal controls c. Implementation schedule and timeline d. Marketing audits

38 Chapter 2 • Strategic Marketing Planning

• Flexible. Although having a comprehensive outline is essential, flexibility should not be sacrificed. Any outline you choose must be flexible enough to be modified to fit the unique needs of your situation. Because all situations and organizations are different, using an overly rigid outline is detrimental to the planning process.

• Consistent. Consistency between the marketing plan outline and the outline of other functional area plans is an important consideration. Consistency may also include the connection of the marketing plan outline to the planning process used at the corporate- or business-unit levels. Maintaining consistency ensures that executives and employees outside of marketing will understand the market- ing plan and the planning process.

• Logical. Because the marketing plan must ultimately sell itself to top managers, the plan’s outline must flow in a logical manner. An illogical outline could force top managers to reject or underfund the marketing plan.

The marketing plan structure that we discuss here has the ability to meet all four of these points. Although the structure is comprehensive, you should freely adapt the outline to match the unique requirements of your situation.

Executive Summary The executive summary is a synopsis of the overall marketing plan, with an outline that conveys the main thrust of the marketing strategy and its execution. The purpose of the executive summary is to provide an overview of the plan so the reader can quickly identify key issues or concerns related to his or her role in implementing the marketing strategy. Therefore, the executive summary does not provide detailed information found in the following sections, or any other detailed information that supports the final plan. Instead, this synopsis introduces the major aspects of the marketing plan, including objectives, sales projections, costs, and performance eval- uation measures. Along with the overall thrust of the marketing strategy, the execu- tive summary should also identify the scope and time frame for the plan. The idea is to give the reader a quick understanding of the breadth of the plan and its time frame for execution.

Individuals both within and outside of the organization may read the execu- tive summary for reasons other than marketing planning or implementation. Ulti- mately, many users of a marketing plan ignore some of the details because of the role they play. The CEO, for example, may be more concerned with the overall cost and expected return of the plan, and less interested in the plan’s implementation. Financial institutions or investment bankers may want to read the marketing plan before approving any necessary financing. Likewise, suppli- ers, investors, or others who have a stake in the success of the organization sometimes receive access to the marketing plan. In these cases, the executive summary is critical, as it must convey a concise overview of the plan and its objectives, costs, and returns.

Although the executive summary is the first element of a marketing plan, it should always be the last element to be written because it is easier and more mean- ingful to write after the entire marketing plan has been developed. There is another good reason to write the executive summary last: It may be the only element of the marketing plan read by a large number of people. As a result, the executive summary must accurately represent the entire marketing plan.

Situation Analysis The next section of the marketing plan is the situation analysis, which summarizes all pertinent information obtained about three key environments: the internal environment, the customer environment, and the firm’s external environment. The

Chapter 2 • Strategic Marketing Planning 39

analysis of the firm’s internal environment considers issues such as the availability and deployment of human resources, the age and capacity of equipment or technol- ogy, the availability of financial resources, and the power and political struggles within the firm’s structure. In addition, this section summarizes the firm’s current mar- keting objectives and performance. The analysis of the customer environment exam- ines the current situation with respect to the needs of the target market (consumer or business), anticipated changes in these needs, and how well the firm’s products presently meet these needs. Finally, the analysis of the external environment includes relevant external factors—competitive, economic, social, political/legal, and technological—that can exert considerable direct and indirect pressures on the firm’s marketing activities.

A clear and comprehensive situation analysis is one of the most difficult parts of developing a marketing plan. This difficulty arises because the analysis must be both comprehensive and focused on key issues in order to prevent information overload— a task actually made more complicated by advances in information technology. The information for a situation analysis may be obtained through the firm’s internal data systems, or it may have to be obtained externally through primary or second- ary marketing research. Either way, the challenge is often having too much data and information to analyze rather than having too little.

SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis SWOT analysis focuses on the internal factors (strengths and weaknesses) and exter- nal factors (opportunities and threats)—derived from the situation analysis in the preceding section—that give the firm certain advantages and disadvantages in sat- isfying the needs of its target market(s). These strengths, weaknesses, opportu- nities, and threats should be analyzed relative to market needs and competition. This analysis helps the company determine what it does well and where it needs to make improvements.

SWOT analysis has gained widespread acceptance because it is a simple frame- work for organizing and evaluating a company’s strategic position when developing a marketing plan. However, like any useful tool, SWOT analysis can be misused unless one conducts the appropriate research to identify key variables that will affect the performance of the firm. A common mistake in SWOT analysis is the failure to sepa- rate internal issues from external issues. Strengths and weaknesses are internal issues unique to the firm conducting the analysis. Opportunities and threats are external issues that exist independently of the firm conducting the analysis. Another common mistake is to list the firm’s strategic alternatives as opportunities. However, alternatives belong in the discussion of marketing strategy, not in the SWOT analysis.

At the conclusion of the SWOT analysis, the focus of the marketing plan shifts to address the strategic focus and competitive advantages to be leveraged in the strat- egy. The key to developing strategic focus is to match the firm’s strengths with its opportunities to create capabilities in delivering value to customers. The challenge for any firm at this stage is to create a compelling reason for customers to purchase its products over those offered by competitors. It is this compelling reason that then becomes the framework or strategic focus around which the strategy can be devel- oped. As explained in Beyond the Pages 2.2, a common way to deliver good value to customers is to sell below cost, or even give the product away.

Marketing Goals and Objectives Marketing goals and objectives are formal statements of the desired and expected outcomes resulting from the marketing plan. Goals are broad, simple statements of what will be accomplished through the marketing strategy. The major function of goals is to guide the development of objectives and to provide direction for resource

40 Chapter 2 • Strategic Marketing Planning

allocation decisions. Marketing objectives are more specific and are essential to plan- ning. Marketing objectives should be stated in quantitative terms to permit reason- ably precise measurement. The quantitative nature of marketing objectives makes them easier to implement after development of the strategy.

This section of the marketing plan has two important purposes. First, it sets the performance targets that the firm seeks to achieve by giving life to its strategic focus through its marketing strategy (i.e., what the firm hopes to achieve). Second, it defines the parameters by which the firm will measure actual performance in the evaluation and control phase of the marketing plan (i.e., how performance will actu- ally be measured). At this point, it is important to remember that neither goals nor objectives can be developed without a clearly defined mission statement. Marketing goals must be consistent with the firm’s mission, while marketing objectives must flow naturally from the marketing goals.

BEYOND THE PAGES 2.2

Sell below Cost, They Will Come11

Sometimes the best marketing strategy involves giving the product away for free, especially if the firm is looking for rapid adoption among customers. This has long been the case in com- puter software where manufacturers give away restricted “trial” versions of their software to encourage use and, hopefully, purchase. Adobe, for example, gives away its popular Reader to help bolster the branding of its other software products. McAfee and Norton freely package their antivirus programs with new computer pur- chases in hopes that buyers will subscribe to their continuous update services (priced between $40 and $200 per year based on features). Apple gives away several software programs—including Photos, iMovie, GarageBand, Keynote, Numbers, and Pages—with every Mac or iPhone that it sells. The strategy is also used in consumer pro- ducts. Procter & Gamble gives away (or sells below cost) its razors in the anticipation that it will sell more blades in the future.

The free or below cost strategy is common among products that are sold as platforms. A platform product is one that consists of a base product with numerous add-ons or supplemental products. Video gaming systems are a good example. When Microsoft initially launched the Xbox 360, it did so using a “neutral gross mar- gin” strategy that sold each console at a small loss. When the cost of parts, cables, and control- lers were factored in, Microsoft lost roughly $150 per console. When the follow-up Xbox One was released, Microsoft sold the console and the Kinect sensor at a breakeven $499.

Sony follows a similar strategy with its PlaySta- tion gaming system. Both Microsoft and Sony make up for the losses with higher profit mar- gins on games and accessories, as well as brand licensing. Xbox One games, for example, sell for roughly $60 and are rarely discounted.

A similar model is used in music. For exam- ple, many experts believe that Apple employs a neutral profit strategy in its operation of the iTunes store. It is estimated that for each $1.29 song sold on iTunes, Apple earns only 10 to 20 cents after paying royalties, micropayment fees, and infrastructure fees. Apple must then use that revenue to cover its operating and market- ing costs. However, Apple more than makes up for these losses via the high profit margins of its iPod, iPhone, iPad, Apple TV, and MacBook computers.

There are many other examples of products sold at a loss to stimulate sales of other pro- ducts. Mobile app developers have adopted a “freemium” strategy where the base app is pro- vided free of charge, but a premium is charged for in-app purchases of added features or func- tionality. These “lite” versions, such as Angry Birds Lite, are among the most popular apps available today. Further, inkjet printers are typi- cally sold at or below cost because they stimu- late future sales of ink and toner. Wireless phones are sold at a loss, or are subsidized at lower prices, in exchange for a one- or two- year service agreement. In grocery retailing, this practice is referred to as a loss-leader strat- egy. Common grocery loss leaders include milk, eggs, cereal, and soft drinks.

Chapter 2 • Strategic Marketing Planning 41

Marketing Strategy This section of the marketing plan outlines how the firm will achieve its marketing objectives. In Chapter 1, we said that marketing strategies involve selecting and analyzing target markets and creating and maintaining an appropriate marketing program (product, distribution, promotion, and price) to satisfy the needs of those target markets. It is at this level where the firm will detail how it will gain a com- petitive advantage by doing something better than the competition: Its products must be of higher quality than competitive offerings, its prices must be consistent with the level of quality (value), its distribution methods must be as efficient as pos- sible, and its promotions must be more effective in communicating with target cus- tomers. It is also important that the firm attempts to make these advantages sustainable. Thus, in its broadest sense, marketing strategy refers to how the firm will manage its relationships with customers in a manner that gives it an advantage over the competition.

Marketing Implementation The implementation section of the marketing plan describes how the marketing pro- gram will be executed. This section of the marketing plan answers several questions with respect to the marketing strategies outlined in the preceding section:

1. What specific marketing activities will be undertaken? 2. How will these activities be performed? 3. When will these activities be performed? 4. Who is responsible for the completion of these activities? 5. How will the completion of planned activities be monitored? 6. How much will these activities cost?

Without a good plan for implementation, the success of the marketing strategy is seriously jeopardized. For this reason, the implementation phase of the marketing plan is just as important as the marketing strategy phase. You should remember, too, that implementation hinges on gaining the support of employees: Employees

m ic ha el ju ng /S hu tt er st oc k. co m

Frontline employees are important assets in developing and implementing marketing strategy.

42 Chapter 2 • Strategic Marketing Planning

implement marketing strategies, not organizations. As a result, issues such as leader- ship, employee motivation, communication, and employee training are critical to implementation success.

Evaluation and Control The final section of the marketing plan details how the results of the marketing program will be evaluated and controlled. Marketing control involves establishing perfor- mance standards, assessing actual performance by comparing it with these standards, and taking corrective action if necessary to reduce discrepancies between desired and actual performance. Performance standards should be tied back to the objectives stated earlier in the plan. These standards can be based on increases in sales volume, market share, or profitability, or even advertising standards such as brand name rec- ognition or recall. Regardless of the standard selected, all performance standards must be agreed upon before the results of the plan can be assessed.

The financial assessment of the marketing plan is also an important component of evaluation and control. Estimates of costs, sales, and revenues determine financial projections. In reality, budgetary considerations play a key role in the identification of alternative strategies. The financial realities of the firm must be monitored at all times. For example, proposing to expand into new geographic areas or alter pro- ducts without financial resources is a waste of time, energy, and opportunity. Even if funds are available, the strategy must be a “good value” and provide an acceptable return on investment to be a part of the final plan.

Finally, should it be determined that the marketing plan has not lived up to expectations, the firm can use a number of tools to pinpoint potential causes for the discrepancies. One such tool is the marketing audit—a systematic examination of the firm’s marketing objectives, strategy, and performance. The marketing audit can help isolate weaknesses in the marketing plan and recommend actions to help improve performance. The control phase of the planning process also outlines the actions that can be taken to reduce the differences between planned and actual performance.

Using the Marketing Plan Structure On our text’s website, you will find marketing plan worksheets that expand the mar- keting plan structure into a comprehensive framework for developing a marketing plan. These worksheets are designed to be comprehensive, flexible, and logical. The consistency of this framework with other planning documents will depend on the planning structure used in other functional areas of an organization. However, this framework is certainly capable of being consistent with the plans from other func- tional areas.

Although you may not use every single portion of the worksheets, you should at least go through them in their entirety to ensure that all important information is present. You should note that the sample marketing plan provided on our website uses this same framework. However, this plan does not match the framework exactly because the framework was adapted to match the characteristics of a unique planning situation.

Before we move ahead, we offer the following tips for using the marketing plan framework to develop a marketing plan:

• Plan ahead. Writing a comprehensive marketing plan is very time consuming, especially if the plan is under development for the first time. Initially, most of your time will be spent on the situation analysis. Although this analysis is very demanding, the marketing plan has little chance for success without it.

• Revise, then revise again. After the situation analysis, you will spend most of your time revising the remaining elements of the marketing plan to ensure that

Chapter 2 • Strategic Marketing Planning 43

they mesh with each other. Once you have written a first draft of the plan, put it away for a day or so. Then, review the plan with a fresh perspective and fine- tune sections that need changing. Because the revision process always takes more time than expected, it is wise to begin the planning process far in advance of the due date for the plan.

• Be creative. A marketing plan is only as good as the information it contains and the effort and creativity that go into its creation. A plan developed half-heartedly will collect dust on the shelf.

• Use common sense and judgment. Writing a marketing plan is an art. Common sense and judgment are necessary to sort through all of the information, weed out poor strategies, and develop a sound marketing plan. Managers must always weigh any information against its accuracy, as well as their own intuition, when making marketing decisions.

• Think ahead to implementation. As you develop the plan, you should always be mindful of how the plan will be implemented. Great marketing strategies that never see the light of day do little to help the organization meet its goals. Good mar- keting plans are those that are realistic and doable given the organization’s resources.

• Update regularly. Once the marketing plan has been developed and implemen- ted, it should be updated regularly with the collection of new data and informa- tion. Many organizations update their marketing plans on a quarterly basis to ensure that the marketing strategy remains consistent with changes in the inter- nal, customer, and external environments. Under this approach, you will always have a working plan that covers 12 months into the future.

• Communicate to others. One critical aspect of the marketing plan is its abil- ity to communicate to colleagues, particularly top managers who look to the marketing plan for an explanation of the marketing strategy, as well as for a justification of needed resources, like the marketing budget.12 The marketing plan also communicates to line managers and other employees by giving them points of reference to chart the progress of marketing implementation. A survey of marketing executives on the importance of the marketing plan revealed that:

“… the process of preparing the plan is more important than the docu-

ment itself …. A marketing plan does compel attention, though. It

makes the marketing team concentrate on the market, on the company’s

objectives, and on the strategies and tactics appropriate to those objec-

tives. It’s a mechanism for synchronizing action.” 13

Research indicates that organizations that develop formal, written strategic marketing plans tend to be more tightly integrated across functional areas, more specialized, and more decentralized in decision making. The end result of these marketing planning efforts is improved financial and marketing performance.14

Given these benefits, it is surprising that many firms do not develop formal plans to guide their marketing efforts. For example, a survey of CEOs done by the Ameri- can Banking Association found that only 44 percent of community banks have a for- mal marketing plan.15

Purposes and Significance of the Marketing Plan The purposes of a marketing plan must be understood to appreciate its significance. A good marketing plan will fulfill these five purposes in detail:

1. It explains both the present and future situations of the organization. This includes the situation and SWOT analyses and the firm’s past performance.

44 Chapter 2 • Strategic Marketing Planning

2. It specifies the expected outcomes (goals and objectives) so that the organiza- tion can anticipate its situation at the end of the planning period.

3. It describes the specific actions that are to take place so that the responsibility for each action can be assigned and implemented.

4. It identifies the resources that will be needed to carry out the planned actions. 5. It permits the monitoring of each action and its results so that controls may be

implemented. Feedback from monitoring and control provides information to start the planning cycle again in the next time frame.

These five purposes are very important to various persons in the firm. Line man- agers have a particular interest in the third purpose (description of specific actions) because they are responsible for ensuring the implementation of marketing actions. Middle-level managers have a special interest in the fifth purpose (monitoring and control), as they want to ensure that tactical changes can be made if needed. These managers must also be able to evaluate why the marketing strategy does or does not succeed.

The most pressing concern for success, however, may lie in the fourth purpose: identifying needed resources. The marketing plan is the means of communicating the strategy to top executives who make the critical decisions regarding the productive and efficient allocation of resources. Very sound marketing plans can prove unsuc- cessful if implementation of the plan is not adequately funded. It is important to remember that marketing is not the only business function competing for scarce resources. Other functions such as finance, research and development, and human resources have strategic plans of their own. It is in this vein that the marketing plan must sell itself to top management.

Organizational Aspects of the Marketing Plan Who writes the marketing plan? In many organizations, the marketing manager, brand manager, or product manager writes the marketing plan. Some organizations develop marketing plans through committees. Others will hire professional market- ing consultants to write the marketing plan. However, in most firms, the responsibil- ity for planning lies at the level of a marketing vice president or marketing director.16

The fact that top managers develop most marketing plans does not necessarily refute the logic of having the brand or product manager prepare the plan. However, except in small organizations where one person both develops and approves the plan, the authority to approve the marketing plan is typically vested in upper-level executives. At this stage, top managers usually ask two important questions:

1. Will the proposed marketing plan achieve the desired marketing, business unit, and corporate goals and objectives?

2. Are there alternative uses of resources that would better meet corporate or busi- ness unit objectives than the submitted marketing plan?

In most cases, final approval actually lies with the president, chairperson, or CEO of the organization.17 Many organizations also have executive committees that evaluate and screen marketing plans before submission to the approving executive. In the end, regardless of who writes the marketing plan, the plan must be clear and persuasive to win the approval of the decision makers who make the evaluation. It is also critical that these individuals make efficient and timely decisions with respect to the marketing plan. To give the plan every chance for success, very little time should elapse between the completion of the plan and its implementation.

Once a marketing plan has been approved, it still faces many obstacles before its marketing programs can come to fruition. Exhibit 2.4 outlines some of these obsta- cles. One major hurdle involves the relative time horizon of the organization’s key

Chapter 2 • Strategic Marketing Planning 45

stakeholders, particularly its managers and investors. It is quite common for U.S. firms to ignore long-range strategy and focus on the near term. Typically, this is caused by a compensation structure that rewards executives for short-term financial results such as profit, market capitalization, or stock price. Unfortunately, this mindset can play havoc on many marketing activities—such as advertising to build brand awareness— because their results are only apparent over longer time horizons. Consequently, many firms will shift strategies “midstream” rather than wait for results to emerge.

MAINTAINING CUSTOMER FOCUS AND BALANCE IN STRATEGIC PLANNING In the past two decades, many firms have changed the focus and content of their strategic planning efforts and marketing plans. Of these changes, two stand out: (1) renewed emphasis on the customer and (2) the advent of balanced strategic planning. These changes require shifting focus from the company’s products to the unique requirements of specific target market segments. Firms have also had to become more astute at linking marketing activities to other functional areas.

Customer-Focused Planning Focusing on the customer has not been the hallmark of strategic planning through- out history. Early in the twentieth century, planning focused on production ideals

EXHIBIT 2.4 Major Obstacles to Developing and Implementing Marketing Plans.

Inadequate communication

Harmonizing difficulties across sites/countries

Marketing environment forces

Inadequate information

Senior managers lack business/training skills

Failure to see the whole picture

Lack of understanding of customers

Individual manager’s empire building

Monopoly market position/forces

Top-down approach to planning

Time to conduct planning activities

Poor functional involvement/team commitment

Arrogance/apparent business success

Lack of enthusiasm among non-marketers

Staff turnover or lack of staff

Resistance to change

Fit with corporate strategy

Marketing is equated with promotion

Actioning the plan

No value given to planning

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

SOURCE: Lyndon Simkin, “Barriers Impeding Effective Implementation of Marketing Plans—A Training Agenda,” Journal of Business and Industrial Market- ing, 17 (Winter 2002), 13. Permission granted by Emerald Group Publishing Corp., http://www.emeraldinsight.com.

46 Chapter 2 • Strategic Marketing Planning

such as efficiency and quality. Automobile pioneer Henry Ford has long been cred- ited with the statement that customers could have any color car that they wanted, as long as it was black. This mentality, though it worked well in its day, meant that strategic planning proceeded with little regard for customer needs and wants. Today, cars, trucks, and SUVs come in an array of colors that Henry Ford would have never contemplated. By the middle of the twentieth century, strategic planning focused on selling products to customers rather than making products for customers. Marketing strategies during this time concentrated on overcoming customer resistance and convincing them to buy products whether they needed them or not. Today, we no longer see door-to-door sales of vacuum cleaners, brushes, or encyclopedias.

The cornerstone of marketing thought and practice during the mid-to-late twen- tieth century was the marketing concept, which focused on customer satisfaction and the achievement of the firm’s objectives. Having a market or customer orienta- tion meant putting customers’ needs and wants first. This shift in thinking led to the growth of marketing research to determine unmet customer needs and systems for satisfying those needs. Today’s twenty-first century marketing organizations move one step beyond the marketing concept to focus on long-term, value-added relation- ships with customers, employees, suppliers, and other partners. The focus has shifted from customer transactions to customer relationships, from customers to all stakeholders, and from competition to collaboration. As explained in Beyond the Pages 2.3, Amazon has created a series of relationships with authors, book publish- ers, movie studios, music companies, customers, and potential competitors in the creation of the ecosystem for its Kindle Fire tablets and Kindle e-book readers.

Market-oriented firms are those that successfully generate, disseminate, and respond to market information. These firms focus on customer analysis, competitor analysis, and integrating the firm’s resources to provide customer value and satisfac- tion, as well as long-term profits.18 To be successful, the firm must be able to focus its efforts and resources toward understanding their customers in ways that enhance the firm’s ability to generate sustainable competitive advantages.19 By creating orga- nizational cultures that put customers first, market-oriented firms tend to perform at higher levels and reap the benefits of more highly satisfied customers. Exhibit 2.5 depicts the difference between a traditional and market-oriented organizational structure. Where traditional structures are very authoritative, with decision-making authority emanating from the top of the hierarchy, market-oriented structures decen- tralize decision making.

In a market-oriented organization, every level of the organization has its focus on serving customer needs. Each level serves the levels above it by taking any actions necessary to ensure that each level performs its job well. In this case, the role of the CEO is to ensure that his or her employees have everything they need to perform their jobs well. This same service mentality carries through all levels of the organiza- tion, including customers. Thus, the job of a frontline manager is to ensure that front- line employees are capable and efficient. The end result of the market-oriented design is a complete focus on customer needs.

In today’s business environment, an orientation toward customers also requires that the organization’s suppliers and even competitors be customer oriented as well. Though competing firms can continue to serve customers separately, customers can also be served through cooperative efforts that place market needs ahead of compet- itive interests. For example, Toyota has a number of partnerships with rival car- makers, particularly focused on hybrid technology. Nissan uses Toyota’s hybrid fuel system in its vehicles, while GM has collaborated with Toyota in developing new fuel-cell technologies. Toyota inked agreements with BMW to develop next genera- tion lithium-ion batteries, with Tesla to create the RAV4 EV, and with Ford to develop hybrid technology for light trucks and SUVs. Toyota’s partnership with BMW also includes the use of BMW’s diesel engines in cars destined for the Euro- pean market.20

Chapter 2 • Strategic Marketing Planning 47

BEYOND THE PAGES 2.3

Amazon Is on Fire21

Amazon CEO Jeff Bezos has a history of pushing the envelope by expanding into areas that don’t seem to fit the mold of an online retailer. Once billed as “Earth’s biggest bookstore,” Amazon now sells everything from electronics to fishing gear and cosmetics. Always searching for the next revolutionary product or business process, Bezos is no stranger to failure. The company’s moves into search (with A9) and online auctions are good examples. However, with the launch of the Kindle in 2007, Amazon forever changed book retailing and personal media consumption.

On the surface, the first Kindle was a simple e-book reader. Both it and its successors use an e-ink screen that is very easy to read without causing eyestrain. They offer long battery life and the ability to store thousands of e-books. Although all Kindle models include Wi-Fi capa- bilities, some models also incorporate cell- ular radios that allow customers to download e-books in almost any location. Most newly released e-books sell for $9.99 to $12.99, far less than typical hardcover new releases. News- paper subscriptions are also available for less than $20 per month. The ability to buy an e- book directly from the Kindle without using a computer completely revolutionized book retail- ing and spawned a number of competing pro- ducts, most notably the Apple iPad and Barnes and Noble’s Nook. Today, Amazon offers mil- lions of e-books through its Kindle Store, with over 2 million titles selling for $9.99 or less. That selection, combined with the ease of buy- ing e-books wirelessly, has converted many book purchases into impulse buys. Today, Ama- zon sells more e-book versions than it does hard- back or paperback versions of the same title.

After Apple introduced the iPad in 2010, many began to see traditional e-book readers as passé. After all, the Kindle and its competi- tors lacked a color display, smooth web brows- ing, and the ability to watch video. At the same time, competitors such as Sony, Motorola, and Blackberry had failed to gain any traction against the iPad. One of the main reasons for the iPad’s popularity was and is the tightly inte- grated ecosystem of apps, music, and movies that Apple had built around it. The significance of this was not lost on Bezos and Amazon. Very

quietly, the company began to develop relation- ships with companies in the music and movie industries. Once those were in place, Amazon began to offer music downloads (often at prices that beat the iTunes Music Store), online movie rentals, and a movie streaming service through its Amazon Prime membership program.

With the ecosystem in place, Amazon was poised to move to the next level. Just in time for the 2011 holiday season, Amazon released the Kindle Fire—a 70 tablet based on the Android operating system. The original Kindle Fire and its successors are similar to the iPad in that they can access an expansive library of books, magazines, music, movies, and apps. However, the Kindle Fire ranges in price from $99 to $379, much lower than the $249 to $829 range for the iPad line. Given its features and lower price, no one was surprised when Amazon sold over 5 million Kindle Fire units during the first 6 months. Amazon later expanded the Fire line to include the Fire TV and the Fire TV Stick, both video-streaming devices. The company’s first phone, Fire Phone, was a capable device, but did not sell well due to more popular Android phones from LG and Samsung.

Despite its success, industry analysts sug- gest that the Kindle and Kindle Fire line is vul- nerable to competition, especially from the iPad and highly popular Android tablets from Sam- sung and Google. The main difference between the Kindle Fire tablets and their competitors is the Amazon ecosystem and long list of Amazon services—not the least of which are its Amazon Prime and Kindle Unlimited memberships. To date, only Apple, Amazon, and Google have been able to create the multimedia ecosystem required to support a tablet device. Many believe that the future battle among these and other companies will take place in textbooks for K-12 and colleges/universities. Currently, Ama- zon and Barnes and Noble do very well in selling physical textbooks. However, Apple and its iBooks Author (for creating e-textbooks), as well as Amazon and its Kindle Direct Publishing, will certainly make waves in the industry. The college textbook market alone is a $12 billion- plus annual business. Time will tell whether Amazon can successfully transition from physi- cal textbooks to e-textbooks along with the rest of the industry.

48 Chapter 2 • Strategic Marketing Planning

Balanced Strategic Planning The shift to balanced strategic planning was borne out of necessity. As firms approached the twenty-first century, they realized that traditional planning and mea- surement approaches were not able to capture value created by the organization’s intangible assets. These assets—including such vital issues as customer relation- ships, processes, human resources, innovation, and information—were becoming increasingly important to business success, but they were not being reported through traditional financial measures. One solution to this problem was the development of the balanced performance scorecard by Robert Kaplan and David Norton of Harvard University.22 Their approach to strategic planning is illustrated in Exhibit 2.6.

The basic tenet of the balanced performance scorecard is that firms can achieve better performance if they align their strategic efforts by approaching strategy from four complementary perspectives: financial, customer, internal process, and learning and growth. The financial perspective is the traditional view of strategy and perfor- mance. This perspective is vital, but should be balanced by the other components of the scorecard. The customer perspective looks at customer satisfaction metrics as a key indicator of firm performance, particularly as the firm moves ahead. Financial measures are not suited to this task because they report past performance rather than current performance. The internal process perspective focuses on the way the business is running by looking at both mission-critical and routine processes that drive day-to-day activity. Finally, the learning and growth perspective focuses on people and includes such vital issues as corporate culture, employee training, com- munication, and knowledge management.23

EXHIBIT 2.5 Traditional versus Market-Oriented Organizational Structures.

Customers

Customers and Other Stakeholders

Frontline Employees

Middle Managers

CEO

Competition

Cooperative Alliances

T R A D I T I O N A L STRUCTURE

M A R K E T- O R I E N T E D STRUCTURE

Chapter 2 • Strategic Marketing Planning 49

The balanced scorecard has been used successfully by many public and private sector organizations. Kaplan and Norton found that these successful firms typically adhered to five common principles when implementing the balanced scorecard:24

1. Translate the Strategy into Operational Terms. Successful firms are able to illustrate the cause-and-effect relationships that show how intangible assets are transformed into value for customers and other stakeholders. This provides a common frame of reference for all employees.

2. Align the Organization to Strategy. Successful firms link different functional areas through common themes, priorities, and objectives. This creates synergy within the organization that ensures that all efforts are coordinated.

3. Make Strategy Everyone’s Everyday Job. Successful firms move the strategy from the executive boardroom to the front lines of the organization. They do this through communication, education, allowing employees to set personal objec- tives, and tying incentives to the balanced scorecard.

4. Make Strategy a Continual Process. Successful firms hold regular meetings to review strategy performance. They also establish a process whereby the firm can learn and adapt as the strategy evolves.

5. Mobilize Change through Executive Leadership. Successful firms have com- mitted energetic leaders who champion the strategy and the balanced scorecard. This ensures that the strategy maintains momentum. Good leaders also prevent the strategy from becoming an obstacle to future progress.

The balanced scorecard doesn’t refute the traditional approach to strategic plan- ning. It does, however, caution business leaders to look at strategy and performance as a multidimensional issue. Financial measures, though important, simply cannot tell the whole story. One of the major benefits of the balanced scorecard is that it forces organizations to explicitly consider during strategy formulation those fac- tors that are critical to strategy execution. We cannot stress this point enough. Good strategy is always developed with an eye toward how it will be implemented. Issues within the balanced scorecard such as employee training, corporate culture, organizational learning, and executive leadership are critical to the implementation of any strategy.

EXHIBIT 2.6 The Balanced Performance Scorecard.

Internal Process Perspective “To satisfy our shareholders

and customers‚ what business processes must we excel at?”

Financial Perspective “To succeed financially‚ how should we appear to our shareholders?”

Learning and Growth Perspective “To achieve our vision,how will we sustain our ability to change and improve?”

Customer Perspective “To achieve our vision‚ how should we appear

to our customers?”

Vision and

Strategy

SOURCE: Robert S. Kaplan and David P. Norton, The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Boston, MA: Harvard Business School Press, 2001).

50 Chapter 2 • Strategic Marketing Planning

LESSONS FROM CHAPTER 2

Strategic marketing planning:

• begins with broad decisions, then flows into more specific decisions as the pro- cess proceeds through subsequent planning stages.

• involves establishing an organizational mission, corporate or business-unit strat- egy, marketing goals and objectives, marketing strategy, and ultimately a mar- keting plan.

• must be consistent with the organization’s mission and the corporate or business-unit strategy.

• must be coordinated with all functional business areas to ensure that the organi- zation’s goals and objectives will be considered in the development of each func- tional plan, one of which is the marketing plan.

• establishes marketing-level goals and objectives that support the organization’s mission, goals, and objectives.

• develops a marketing strategy, which includes selecting and analyzing target markets and creating and maintaining an appropriate marketing program to sat- isfy the needs of customers in those target markets.

• ultimately results in a strategic market plan that outlines the activities and resources required to fulfill the organization’s mission and achieve its goals and objectives.

The organizational mission:

• answers the broad question “What business are we in?” • identifies what the firm stands for and its basic operating philosophy by answer-

ing five basic questions:

human, financial, and environmental resources? • is not the same as the organization’s vision, which seeks to answer the question

“What do we want to become?” • should not be too broad or too narrow, thereby rendering it useless for planning

purposes. • should be customer oriented. People’s lives and businesses should be enriched

because they have dealt with the organization. • should never focus on profit. A focus on profit in the mission means that some-

thing positive happens for the owners and managers of the organization, not nec- essarily for the customers or other stakeholders.

• must be owned and supported by employees if the organization has any chance of success.

• should not be kept secret but instead communicated to everyone—customers, employees, investors, competitors, regulators, and society in general.

• should be the least changed part of the strategic plan.

Business-unit strategy:

• is the central scheme or means for utilizing and integrating resources in the areas of production, finance, research and development, human resources, and marketing to carry out the organization’s mission and achieve the desired goals and objectives.

• is associated with developing a competitive advantage where the firm leverages its capabilities in order to serve customers’ needs better than the competition.

Chapter 2 • Strategic Marketing Planning 51

• determines the nature and future direction of each business unit, including its competitive advantages, the allocation of its resources, and the coordination of functional business areas (marketing, production, finance, human resources, etc.).

• is essentially the same as corporate strategy in small businesses.

The marketing plan:

• provides a detailed explanation of the actions necessary to execute the market- ing program and thus requires a great deal of effort and organizational commit- ment to create and implement.

• should be well organized to ensure that it considers and includes all relevant information. The typical structure or outline of a marketing plan includes these elements:

• executive summary • situation analysis • SWOT analysis • marketing goals and objectives • marketing strategies • marketing implementation • evaluation and control

• should be based on an outline that is comprehensive, flexible, consistent, and logical.

• fulfills five purposes:

• explains both the present and future situations of the organization • specifies expected outcomes (goals and objectives) • describes the specific actions that are to take place and assigns responsibil-

ity for each action • identifies the resources needed to carry out the planned actions • permits the monitoring of each action and its results so that controls may be

implemented

• serves as an important communication vehicle to top management and to line managers and employees.

• is an important document, but not nearly as important as the knowledge gained from going through the planning process itself.

• is most often prepared by the director or vice president of marketing, but is ulti- mately approved by the organization’s president, chairman, or CEO.

Customer-focused strategic planning:

• requires that organizations shift focus from products to the requirements of spe- cific target market segments, from customer transactions to customer relation- ships, and from competition to collaboration.

• puts customers’ needs and wants first and focuses on long-term, value-added relationships with customers, employees, suppliers, and other partners.

• must be able to focus its efforts and resources toward understanding customers in ways that enhance the firm’s ability to generate sustainable competitive advantages.

• instills a corporate culture that places customers at the top of the organizational hierarchy.

• finds ways to cooperate with suppliers and competitors to serve customers more effectively and efficiently.

Balanced strategic planning:

• was borne out of necessity since traditional planning and measurement approaches were not able to capture value created by an organization’s

52 Chapter 2 • Strategic Marketing Planning

intangible assets (customer relationships, processes, human resources, innova- tion, and information).

• was advocated strongly by Kaplan and Norton with their creation of the bal- anced performance scorecard.

• considers traditional financial indicators of performance, but also looks at plan- ning from three additional perspectives: customers, internal processes, and learning and growth.

• is used successfully by many public and private sector organizations. Successful firms are those that adhere to five principles when implementing the balanced scorecard: • translate the strategy into operational terms • align the organization to strategy • make strategy everyone’s everyday job • make strategy a continual process • mobilize change through executive leadership

• does not refute the traditional approach to strategic planning, but it does caution business leaders to look at strategy and performance as a multidimensional issue.

• forces organizations to explicitly consider during strategy formulation those factors that are critical to strategy execution. Good strategy is always developed with an eye toward how it will be implemented.

NOTES 1. These facts are from Chris Davies, “Verizon and Redbox Partner on Netflix Streaming

Rival for 2H 2012,” Slashgear, February 6, 2012 (http://www.slashgear.com/verizon- and-redbox-partner-on-netflix-streaming-rival-for-2h-2012-06212204); Rick Munarriz, “Coinstar is Dead: Long Live Outerwall,” The Motley Fool, July 2, 2013 (http://www. fool.com/investing/general/2013/07/02/coinstar-is-dead-long-live-outerwall.aspx); Ryan Nakashima, “Whither Redbox? Hollywood Studios are Conflicted,” BusinessWeek Online, August 7, 2009 (http://www.businessweek.com/ap/tech/D99U8BT00.htm); Dorothy Pomerantz, “Red Menace,” Forbes, March 6, 2009 (http://www.forbes.com/ 2009/03/06/redbox-blockbuster-rentals-business-media-rebox.html); Terry Ponick, “As Redbox Business Fades, Outerwall (OUTR) CEO Takes a Hike,” Communities Digital News, January 23, 2015 (http://www.commdiginews.com/business-2/as-redbox- business-fades-outerwall-outr-ceo-takes-a-hike-33777/); Redbox website, http://www. redbox.com, accessed February 21, 2015; Eli Rosenberg, “DVD Sales Dive, While Netflix Soars,” The Atlantic Wire, May 12, 2011 (http://www.theatlanticwire.com/ national/2011/05/add-dvds-list-dying-industries/37664); Todd Spangler, “Verizon, Redbox to Pull Plug on Video-Streaming Service,” Variety, October 4, 2014 (http://variety.com/ 2014/digital/news/verizon-redbox-to-pull-plug-on-video-streaming-service-1201321484/); Paul Suarez, “Hollywood Hates Redbox’s $1 DVD Rentals,” Macworld, August 10, 2009 (http://www.macworld.com/article/142192/2009/08/redbox.html); and Michael White, “Coinstar Soars on Profit, Buyout of NCR Unit: Los Angeles Mover,” BusinessWeek Online, February 8, 2012 (http://www.businessweek.com/news/2012-02-08/coinstar- soars-on-profit-buyout-of-ncr-unit-los-angeles-mover.html).

2. The material in this section is based on 3M corporate website (http://solutions.3m.com/ wps/portal/3M/en_WW/Corp/Identity/Strategies-Policies/Vision/), accessed February 21, 2015; Amazon corporate website (http://www.amazon.com/Careers-Homepage/b? ie=UTF8&node=239364011), accessed February 21, 2015; Hershey’s corporate website (http://www.hersheys.com/world-travel-retail/about-us/vision.aspx), accessed February 21, 2015; and Microsoft corporate website (http://www.microsoft.com/enable/microsoft/ mission.aspx), accessed February 21, 2015.

3. The Southwest Airlines mission statement is from http://www.southwest.com/html/ about-southwest/, accessed February 21, 2015.

Chapter 2 • Strategic Marketing Planning 53

4. The Ben & Jerry’s mission statement is from http://www.benjerry.com/values, accessed February 21, 2015.

5. “Johnson & Johnson Reincarnates a Brand,” Sales and Marketing Management, January 16, 1984, p. 63; Elyse Tanouye, “Johnson & Johnson Stays Fit by Shuffling Its Mix of Businesses,” Wall Street Journal, December 22, 1992, pp. A1, A4.

6. These facts are from “All Infant Tylenol Recalled by J&J,” CBS News, February 17, 2012 (http://www.cbsnews.com/8301-504763_162-57380543-10391704/all-infant-tylenol- recalled-by-j-j); Parija Kavilanz, “Tylenol Recall: FDA Slams Company,” CNN Money, October 19, 2010 (http://money.cnn.com/2010/01/15/news/companies/over_the_counter_ medicine_recall/index.htm).

7. These facts are taken from the Red Cross website (http://www.redcross.org/about-us/ history/federal-charter), accessed February 21, 2015.

8. These facts are taken from “Turning Compassion into Action—Donor Dollars at Work: Hurricanes Katrina, Rita and Wilma,” Red Cross, http://www.redcross.org/news/ds/ hurricanes/support05/report.html.

9. These facts are from the Sony Corporate website (http://www.sony.net/SonyInfo/ CorporateInfo/Data/organization.html), accessed February 21, 2015.

10. These facts are from the 3M corporate website (http://www.3m.com/3M/ en_US/country-us/all-products), accessed February 21, 2015.

11. These facts are from Arik Hesseldahl, “Microsoft’s Red-Ink Game,” BusinessWeek Online, November 22, 2005 (http://www.businessweek.com/technology/content/ nov2005/tc20051122_410710.htm); Armando Rodriguez, “Biggest News of the Week: Microsoft Xbox 360 Division Loses $31 Million,” 411 Mania, April 27, 2009 (http:// www.411mania.com/games/columns/103060/The-Good-the-Bad-and-the-Ugly-04.27.09: Microsoft,-FFXIII,-Battlefield-1943-and-More.htm); Matt Rosoff, “Microsoft’s Board Is Now Worried About How Much Money Xbox Will Lose,” Business Insider, April 21, 2011 (http://articles.businessinsider.com/2011-04-21/tech/29975028_1_windows-phone- microsoft-nintendo); Paul Tassi, “At $500, Microsoft Says the Xbox One Will Break Even or Make a Profit,” Forbes, September 6, 2013 (http://www.forbes.com/sites/ insertcoin/2013/09/06/at-500-microsoft-says-the-xbox-one-will-break-even-or-make-a-profit/); Christian Zibreg, “Opinion: Apple Should Open Up the iTunes Store,” Geek.com, August 6, 2009 (http://www.geek.com/articles/mobile/opinion-apple-should-open-up-the-itunes-store- 2009086).

12. Howard Sutton, The Marketing Plan in the 1990s (New York: The Conference Board, Inc., 1990).

13. Sutton, The Marketing Plan in the 1990s, p. 9. 14. Cindy Claycomb, Richard Germain, and Cornelia Droge, “The Effects of Formal

Strategic Marketing Planning on the Industrial Firm’s Configuration, Structure, Exchange Patterns, and Performance,” Industrial Marketing Management, 29(May 2000), 219–234.

15. “Marketing Plan Help,” ABA Banking Journal, 95(October 2003), 18. 16. Sutton, The Marketing Plan in the 1990s, p. 16. 17. Sutton, The Marketing Plan in the 1990s, p. 17. 18. Bernard J. Jaworski and Ajay K. Kohli, “Market Orientation: Antecedents and

Consequences,” Journal of Marketing, 57(July 1993), 53–70. 19. Ibid.; Stanley F. Slater and John C. Narver, “Market Orientation and the Learning

Organization,” Journal of Marketing, 59(July 1995), 63–74. 20. These facts are from “Ford, Toyota to Collaborate on Developing New Hybrid System

for Light Trucks, SUVs; Future Telematic Standards,” Toyota Newsroom (http:// pressroom.toyota.com/releases/ford+toyota+hybrid+trucks+suvs+telematics.htm), accessed February 26, 2010; “Nissan Altima Hybrid: A Better Toyota,” The Car Family Blog, July 15, 2008 (http://carfamily.wordpress.com/2008/07/15/nissan-altima-hybrid-a- better-toyota); Jason Siu, “Toyota and BMW Form Official Partnership for Eco-Friendly Projects,” AutoGuide, January 12, 2011 (http://www.autoguide.com/auto-news/2011/12/ toyota-and-bmw-form-official-partnership-for-eco-friendly-projects.html); “Tesla’s Musk Expects Future Partnerships with Toyota,” Bloomberg News, September 8, 2014 (http:// www.newsday.com/classifieds/cars/tesla-s-musk-expects-future-partnerships-with- toyota-1.9257786).

21. These facts are from the Amazon website (http://www.amazon.com), accessed February 21, 2015; “Amazon Unwraps the New Kindle,” BusinessWeek Online, February 9, 2009

54 Chapter 2 • Strategic Marketing Planning

(http://www.businessweek.com/bwdaily/dnflash/content/feb2009/db2009029_964407.htm); Philip Elmer-DeWitt, “Amazon re-Kindles the iPhone,” Fortune Online, May 11, 2009 (http:// apple20.blogs.fortune.cnn.com/2009/05/11/amazon-re-kindles-the-iphone); Douglass MacMillan, “Amazon’s Kindle Is Off to College,” BusinessWeek Online, May 4, 2009 (http:// www.businessweek.com/technology/content/may2009/tc2009054_280910.htm); Brad Moon, “Kindle Fire Sales Surge, But Can Amazon Sustain the Pace?” InvestorPlace, January 2, 2015 (http://investorplace.com/2015/01/amzn-amazon-kindle-fire-tablet-sales/#. VOkDaEKKMdJ); Jeffrey M. O’Brien, “Amazon’s Next Revolution,” Fortune Online, May 26, 2009 (http://money.cnn.com/2009/05/26/technology/obrien_kindle.fortune/index. htm?postversion=2009052605); Trefis Team, “Amazon, Apple and the Case of Converging Tablets,” February 24, 2012 (http://www.forbes.com/sites/greatspeculations/2012/02/24/ amazon-apple-and-the-case-of-converging-tablets).

22. The material in this section is adapted from Robert S. Kaplan and David P. Norton, The Strategy-Focused Organization (Boston, MA: Harvard Business School Press, 2001).

23. Descriptions of each perspective are adapted from “Balanced Scorecard Basics,” The Balanced Scorecard Institute (http://balancedscorecard.org/Resources/About-the- Balanced-Scorecard), accessed February 21, 2015.

24. Kaplan and Norton, The Strategy-Focused Organization, pp. 8–17.

Chapter 2 • Strategic Marketing Planning 55

Collecting and Analyzing Marketing Information

INTRODUCTION In this chapter, we begin the process of developing a marketing plan by examining key issues in collecting and structuring marketing information to assist in the formu- lation of marketing strategies. Managers in all organizations, large and small, devote a major portion of their time and energy to developing plans and making decisions. As shown in Beyond the Pages 3.1, continuous tracking of the buying preferences of target consumers over time is critical. However, the ability to do so requires access to and analysis of data to generate usable information in a timely manner. Staying abreast of trends in the marketing environment is but one of several tasks performed by marketing managers. However, it is perhaps the most important task as practi- cally all planning and decision making depends on how well this analysis is conducted.

One of the most widely used approaches to the collection and analysis of mar- keting information is the situation analysis. The purpose of the situation analysis is to describe current and future issues and key trends as they affect three key environ- ments: the internal environment, the customer environment, and the external envi- ronment. As shown in Exhibit 3.1, there are many issues to be considered in a situation analysis. When viewed together, the data collected during the situation analysis give the organization a big picture of the issues and trends that affect its abil- ity to deliver value to stakeholders. These efforts drive the development of the orga- nization’s competitive advantages and strategic focus as discussed in the next chapter.

In this chapter, we examine several issues related to conducting a situation anal- ysis, the components of a situation analysis, and the collection of marketing data and information to facilitate strategic marketing planning. Although situation analysis has traditionally been one of the most difficult aspects of market planning, recent advances in technology have made the collection of market data and information much easier and more efficient. A wealth of valuable data and information are free for the asking. This chapter examines the different types of marketing data and infor- mation needed for planning, as well as many sources where such data may be obtained.

CHAPTER

BEYOND THE PAGES 3.1

Baby Boomers Are Still Big Business1

Baby boomers—the 77 million people born between 1946 and 1964—have long been the holy grail of marketers aimed at growing their business. The simple numbers have always made boomers a powerful force and a favored target of marketers for decades. However, today’s boomers have reached a critical mile- stone: The youngest boomers are now 50 or older, with the oldest boomers now 70 or older. These numbers are significant because 50 is the typical age at which marketers give up on consumers. Tradition says that by the age of 50, a consumer has developed deeply entrenched buying preferences and brand loy- alty that no amount of marketing can undo. Today’s marketers, however, are finding that tra- dition is wrong.

Marketers have rediscovered baby boomers for a number of reasons. One reason is the incredible buying potential. Thanks to better health and longer life expectancies, most boom- ers plan to continue working well into their 60s in order to shore up their retirement savings. Declines in the stock market and the retirement accounts of most boomers have forced them to look for ways to stay in the workforce longer. That extra earning potential makes boomers even more attractive. Boomers now control over 90 percent of our nation’s net worth and more than 78 percent of all financial assets. They also account for well over half of all con- sumer spending. A second reason is that today’s 50+ consumers are much more active than their parents. Unlike previous generations, boomers are much more likely to change careers, have more children, go back to school, remarry, pur- sue new hobbies, and inherit more money from their parents. Consequently, marketers are find- ing that boomers’ brand preferences and shop- ping habits are not as entrenched as once thought. Finally, marketers cannot give up on boomers due to the relatively smaller number of Generation X consumers—only 50 million strong—that are following behind them. In the years ahead, marketers must continue to reach out to boomers until the 74 million Generation Y consumers (those born roughly between 1982 and 1999) reach their peak earning potential.

The picture is not uniformly rosy, however, as boomers are forced to spend a higher

percentage of their disposable incomes on things like education (college costs have skyrocketed), health care (annual double digit cost increases), mortgages (increased home prices), and caring for their adult children (50 percent of parents support one or more children between the ages of 18 and 39). These trends have caused boomers to cut spending in areas such as food, household furnishings, entertainment, clothing, and luxury items. As their retirement savings have dwindled, boomers today are less interested in buying sec- ond homes, cars, vacations, and other luxury items. This fact has forced most retirement plan- ning professionals to change tactics. For exam- ple, most financial ads targeted at boomers today discuss practical and measured investment strategies rather than spending on “the good life.” In fact, some investment analysts question whether boomers will ever be able to retire.

Reaching out to boomers has become a challenge for many marketers because they have to throw out their stereotypical ideas about 50+ consumers. Gap, for example, tried to reach out to boomers using advertising featur- ing well-known boomer celebrities. That strat- egy backfired, however, because Gap’s clothes do not suit boomers’ tastes. Other marketers have found success simply by catering to boom- ers’ ideals and needs. For example, Dove saw its sales increase after it dropped attractive models from its advertising in favor of ordinary, 40- something women. Cover Girl adopted a similar strategy by launching its first line of makeup tar- geted at older women. Further, Home Depot added renovation services to its mix in addition to its assortment of products for do-it-yourselfers. And even Honda was surprised when it learned that 40 percent of its minivan buyers were older customers who needed to haul grandchil- dren rather than their own children. As a result, Honda introduced a version of its popular Odyssey minivan to cater to the needs of older consumers.

Experts agree that the key to tapping the boomer market is to not assume that they are of one mind. Researchers at Duke University have discovered that boomers are the most diverse of all current generations. Consequently, marketers must continually gather research on boomers to ensure that their marketing reso- nates with the correct boomer segment.

Chapter 3 • Collecting and Analyzing Marketing Information 57

CONDUCTING A SITUATION ANALYSIS Before we move forward in our discussion, it is important to keep in mind four important issues regarding situation analysis. We hope our advice helps you over- come potential problems throughout the situation analysis.

Analysis Alone Is Not a Solution Although it is true that a comprehensive situation analysis can lead to better plan- ning and decision making, analysis itself is not enough. Put another way, a situation analysis is a necessary, but insufficient, prerequisite for effective strategic planning. The analysis must be combined with intuition and judgment to make the results of the analysis useful for planning purposes. Situation analysis should not replace the manager in the decision-making process. Its purpose is to empower the manager with information for more effective decision making.

A thorough situation analysis empowers the marketing manager because it encourages both analysis and synthesis of information. From this perspective, situa- tion analysis involves taking things apart: whether it’s a customer segment (in order to study the heavy users), a product (in order to understand the relationship between its features and customers’ needs), or competitors (in order to weigh their strengths and weaknesses against your own). The purpose of taking things apart is to under- stand why people, products, or organizations perform the way they do. After this dis- section is complete, the manager can then synthesize the information to gain a big picture view of the complex decisions to be made.

EXHIBIT 3.1 Issues to Be Considered in a Situation Analysis.

The Internal Environment

Review of current objectives, strategy, and performance

Availability of resources

Organizational culture and structure

The Customer Environment

Who are our current and potential customers?

What do customers do with our products?

Where do customers purchase our products?

When do customers purchase our products?

Why (and how) do customers select our products?

Why do potential customers not purchase our products?

The External Environment

Competition

Economic growth and stability

Political trends

Legal and regulatory issues

Technological advancements

Sociocultural trends

58 Chapter 3 • Collecting and Analyzing Marketing Information

Data Are Not the Same as Information Throughout the planning process, managers regularly face the question “How much data and information do I need?” The answer sounds simple, but in practice it is not. Today, there is no shortage of data. In fact, it is virtually impossible to know every- thing about a specific topic. Thankfully, the cost of collecting and storing vast amounts of data has dropped dramatically over the past decade. Computer-based marketing information systems and data warehouses are commonplace and afford- able. These data sources allow managers to retrieve data in a matter of seconds. The growth of wireless technology now gives managers access to vital data while in the field. The bottom line is that managers are more likely to be overwhelmed with data rather than face a shortage.

While the vast amount of available data is an issue to be resolved, the real chal- lenge is that good, useful information is not the same as data. Data are easy to collect and store, but good information is not. In simple terms, data are a collection of num- bers or facts that have the potential to provide information. Data, however, do not become informative until a person or process transforms or combines them with other data in a manner that makes them useful to decision makers. For example, the fact that your firm’s sales are up 20 percent is not informative until you compare it with the industry’s growth rate of 40 percent. It is also important to remember that information is only as good as the data from which it comes. As the saying goes, “Garbage in, garbage out.” It is a good idea to be curious about, perhaps even suspi- cious of, the quality of data used for planning and decision making.

The Benefits of Analysis Must Outweigh the Costs Situation analysis is valuable only to the extent that it improves the quality of the resulting marketing plan. For example, data that cost $4,000 to acquire, but improve the quality of the decision by only $3,999, should not be part of the analysis process. Although the costs of acquiring data are easy to determine, the benefits of improved decisions are quite difficult to estimate. Managers must constantly ask questions such as “Where do I have knowledge gaps?”, “How can these gaps be filled?”, “What are the costs of filling these gaps?”, and “How much improvement in decision making will be gained by acquiring this information?”. By asking these questions, managers can find a balance between jumping to conclusions and “paralysis by analysis,” or constantly postponing a decision due to a perceived lack of information. Perpetually analyzing data without making any decisions is usually not worth the additional costs in terms of time or financial resources.

Conducting a Situation Analysis Is a Challenging Exercise Situation analysis is one of the most difficult tasks in developing a marketing plan. Managers have the responsibility of assessing the quality, adequacy, and timeliness of the data and information used for analysis and synthesis. The dynamic nature of internal and external environments often creates breakdowns in the effort to develop effective information flows. This dynamism can be especially troubling when the firm attempts to collect and analyze data in international markets.

It is important that any effort at situation analysis be well organized, systematic, and supported by sufficient resources (e.g., people, equipment, information, budget). However, the most important aspect of the analysis is that it should be an ongoing effort. The analysis should not only take place in the days and weeks immediately pre- ceding the formation of strategies and plans; the collection, creation, analysis, and dis- semination of pertinent marketing data and information must be ingrained in the culture of the organization. While this is not an easy task, if the organization is going to be successful it must have the ability to assess its current situation in real time. This type of live data is especially important when tracking customers and competitors.

Chapter 3 • Collecting and Analyzing Marketing Information 59

A final challenge is the task of tracking all three environments (internal, cus- tomer, external) simultaneously. Although the rapid pace of change in today’s econ- omy is one cause of this difficulty, the relationship among all three environments creates challenges as well. As shown in Exhibit 3.2, the internal, customer, and external environments do not exist independently. Changes in one portion of the external environment can cause subsequent shifts in the customer environment or the internal environment. For example, after Mattel sued MGA Entertainment, Inc. for copyright infringement for its Bratz doll design, Mattel won a $100 million verdict against MGA. The company was ordered to transfer its Bratz line and all intellectual property associated with the product to Mattel. That verdict was eventually over- turned on appeal. Later, MGA won a separate suit against Mattel for theft of intellec- tual property. After 8 years, the case eventually ended in a stalemate with Mattel covering MGA’s $137 million in attorney and court fees. MGA then sued Mattel for unfair business practices and theft of company secrets in a California court. With the outcome still in doubt, this single dispute from the legal environment represents a major threat to both Mattel and MGA Entertainment, and diverts their attention away from other important issues.2

As we turn our attention to the three major components of the situation analysis, keep in mind that data and information about these environments will come from both internal and external sources. Even information about the firm’s internal envi- ronment can be collected via external sources such as third-party analysis and rat- ings, financial commentaries, or customer opinion ratings. Finally, it is important to remember that the type of data and information source is not as important as having ready access to a wide variety of sources.

EXHIBIT 3.2 The Relationship Among the Internal, Customer, and External Environments.

Internal

Environment

Customer

Environment:

Why?

Customer

Environment:

Who?

External Environment:

Economy

External Environment: Competition

External Environment:

Politics

External Environment:

Legal

External Environment: Technology

External Environment: Sociocultural

Customer

Environment:

Where?

Customer

Environment:

When?

Customer

Environment:

What?

60 Chapter 3 • Collecting and Analyzing Marketing Information

THE INTERNAL ENVIRONMENT The first aspect of a situation analysis involves the critical evaluation of the firm’s internal environment with respect to its objectives, strategy, performance, allocation of resources, structural characteristics, and political climate. In Exhibit 3.3, we provide a framework for analyzing the internal environment.

Review of Current Objectives, Strategy, and Performance First, the marketing manager must assess the firm’s current marketing objectives, strategy, and performance. A periodic assessment of marketing objectives is nec- essary to ensure that they remain consistent with the firm’s mission and the changing customer and external environments. It may also be necessary to reas- sess the firm’s marketing goals if the objectives prove to be out-of-date or ineffec- tive. This analysis serves as an important input to later stages of the marketing planning process.

EXHIBIT 3.3 A Framework for Analyzing the Internal Environment.

Review of Current Marketing Objectives, Strategy, and Performance

1. What are the current marketing goals and objectives?

2. Are the marketing goals and objectives consistent with the corporate or business-unit mission, goals, and objectives? Are they consistent with recent changes in the customer or external environments? Why or why not?

3. How are current marketing strategies performing with respect to anticipated outcomes (e.g., sales volume, market share, profitability, communication, brand awareness, customer preference, customer satisfaction)?

4. How does current performance compare to other organizations in the industry? Is the performance of the industry as a whole improving or declining? Why?

5. If performance is declining, what are the most likely causes? Are marketing objectives inconsistent? Is the strategy flawed? Was the strategy poorly implemented?

6. If performance is improving, what actions can be taken to ensure that performance continues to improve? Is the improve- ment in performance due to a better-than-anticipated environment or superior planning and implementation?

Review of Current and Anticipated Organizational Resources

1. What is the state of current organizational resources (e.g., financial, human, experience, relationships with key suppliers or customers)?

2. Are these resources likely to change for the better or worse in the near future? How?

3. If the changes are for the better, how can these added resources be used to better meet customers’ needs?

4. If the changes are for the worse, what can be done to compensate for these new resource constraints?

Review of Current and Anticipated Cultural and Structural Issues

1. What are the positive and negative aspects of the current and anticipated organizational culture?

2. What issues related to internal politics or management struggles might affect the organization’s marketing activities?

3. What is the overall position and importance of the marketing function as seen by other functional areas? Are key executive positions expected to change in the future?

4. How will the overall market- or customer-orientation of the organization (or lack thereof) affect marketing activities?

5. Does the organization emphasize a long- or short-term planning horizon? How will this emphasis affect marketing activities?

6. Currently, are there positive or negative issues with respect to motivating employees, especially those in frontline posi- tions (e.g., sales and customer service)?

Chapter 3 • Collecting and Analyzing Marketing Information 61

The marketing manager should also evaluate the performance of the current marketing strategy with respect to sales volume, market share, profitability, and other relevant measures. This analysis can take place at many levels: by brand, prod- uct line, market, business unit, division, and so on. It is also important to analyze the marketing strategy relative to overall industry performance. Poor or declining perfor- mance may be the result of (1) holding on to marketing goals or objectives inconsis- tent with the current realities of the customer or external environments, (2) a flawed marketing strategy, (3) poor implementation, or (4) changes in the customer or external environments beyond the control of the firm. The causes for poor or declin- ing performance must be pinpointed before marketing strategies can be developed to correct the situation.

For example, in the mid-1990s Pepsi was locked in a seemingly endless market share battle with Coca-Cola. By all accounts, the battle was not going well for Pepsi: its profits trailed Coke’s by 47 percent, while its market value was less than half of its chief rival.3 But losing out to Coke in the cola wars was just the kick that Pepsi needed to regroup. Forced to look outside of the soft drink industry for new growth opportunities, PepsiCo, Inc. moved aggressively into noncarbonated drinks, sports beverages, food, and snacks. Today, PepsiCo’s Aquafina bottled water and Gatorade are dominant over Coke’s Dasani bottled water and Powerade in their respective markets. Pepsi’s Frito-Lay division commands over 60 percent of the U.S. snack food market, and over 72 percent of the tortilla chip market (Doritos and Tostitos). PepsiCo’s other leading brands, such as Tropicana, Lipton, and Quaker, are also doing well. In soft drinks, PepsiCo’s profits have actually fallen of late. Part of the decline is due to a broader dip in the carbonated soft drink market in developed countries. PepsiCo holds a 28.7 percent market share in soft drinks compared to Coca-Cola’s dominating 42.4 percent share. However, soft drinks account for only 17 percent of PepsiCo’s bottom line.4

Availability of Resources Second, the marketing manager must review the current and anticipated levels of organizational resources that can be used for marketing purposes. This review includes an analysis of financial, human, and experience resources, as well as any resources the firm might hold in key relationships with supply chain partners, strate- gic alliance partners, or customer groups. An important element of this analysis is to gauge whether the availability or level of these resources is likely to change in the near future. Additional resources might be used to create competitive advantages in meeting customer needs. If the marketing manager expects resource levels to decline, he or she must find ways to compensate when establishing marketing goals, objectives, and strategies for the next planning period.

In bad economic times, financial shortfalls get most of the attention. However, many experts predict that a shortage of skilled labor will be a major problem in the United States over the next few years. The problem is not the raw number of work- ers, but the skill set that each one brings to the job. After years of increasing techno- logical innovation, workers must now possess the right set of skills to work with technology. Likewise, workers of today must possess knowledge-related skills such as abstract reasoning, problem solving, and communication. Firms are also trying to increase labor productivity by doing the same or more work with fewer employees. Companies in many industries—most notably services—have turned to offshoring jobs to other countries—mostly India—where highly educated, English-speaking employees will work for less pay than their U.S. counterparts. An interesting irony is that the same technology that demands increased skills from employees allows these jobs to be offshored to other countries. Experts suggest that 30 to 80 percent of work for any company can be potentially offshored to other countries.5

62 Chapter 3 • Collecting and Analyzing Marketing Information

Organizational Culture and Structure Finally, the marketing manager should review current and anticipated cultural and structural issues that could affect marketing activities. One of the most important issues in this review involves the internal culture of the firm. In some organizations, marketing does not hold a prominent position in the political hierarchy. This situa- tion can create challenges for the marketing manager in acquiring resources and gaining approval of the marketing plan. The internal culture also includes any antici- pated changes in key executive positions within the firm. The marketing manager, for example, could have difficulty in dealing with a new production manager who fails to see the benefits of marketing. Other structural issues to be considered include the overall customer orientation of the firm (or lack thereof), issues related to employee motivation and commitment to the organization (particularly among unionized employees), and the relative emphasis on long-term versus short-term planning. Top managers who concern themselves only with short-term profits are unlikely to see the importance of a marketing plan that attempts to create long-term customer relationships.

For most firms, culture and structure are relatively stable issues that do not change dramatically from one year to the next. In fact, changing or reorienting an organization’s culture is a difficult and time-consuming process. In some cases, how- ever, the culture and structure can change swiftly, causing political and power strug- gles within the organization. Consider the effects when two organizations combine their separate cultures and structures during a merger. For example, the largest and worst merger in U.S. history took place in 2000 when Time Warner acquired AOL. At the time, the $186 billion merger was hailed as visionary in its combination of old and new media to lead the convergence of communication, entertainment, and media. However, the massive size of the merger, the differences in corporate cultures, and intense competition in the Internet advertising business conspired to lessen the potential payoff from the merger. In fact, the combined company lost a massive $99 billion in 2002 (the largest annual net loss ever reported by any company). By 2009, the two companies split apart. The move, which came on the heels of Time Warner’s spinoff of Time Warner Cable, was designed to refocus Time Warner’s efforts on its core cable networks and magazines. Time Warner Cable was eventually acquired by Comcast.6

THE CUSTOMER ENVIRONMENT In the second part of the situation analysis, the marketing manager must examine the current and future situation with respect to customers in the firm’s target mar- kets. During this analysis, information should be collected that identifies (1) the firm’s current and potential customers, (2) the prevailing needs of current and potential customers, (3) the basic features of the firm’s and competitors’ products perceived by customers as meeting their needs, and (4) anticipated changes in cus- tomers’ needs.

In assessing the firm’s target markets, the marketing manager must attempt to understand all relevant buyer behavior and product usage characteristics. One method that the manager can use to collect this information is the 5W Model: Who, What, Where, When, and Why. We have adapted and applied this model to customer analysis, as shown in Exhibit 3.4. Organizations that are truly market- or customer-oriented should know their customers well enough that they have easy access to the types of information that answer these questions. If not, the organiza- tion may need to conduct primary marketing research to fully understand its target markets.

Chapter 3 • Collecting and Analyzing Marketing Information 63

EXHIBIT 3.4 The Expanded 5W Model for Customer Analysis.

Who Are Our Current and Potential Customers?

1. What are the demographic, geographic, and psychographic characteristics of our customers?

2. Who actually purchases our products?

3. How do these purchasers differ from the users of our products?

4. Who are the major influencers of the purchase decision?

5. Who is financially responsible for making the purchase?

What Do Customers Do with Our Products?

1. In what quantities and in what combinations are our products purchased?

2. How do heavy users of our products differ from light users?

3. Do purchasers use complementary products during the consumption of our products? If so, what is the nature of the demand for these products, and how does it affect the demand for our products?

4. What do our customers do with our products after consumption?

5. Are our customers recycling our products or packaging?

Where Do Customers Purchase Our Products?

1. From what types of vendors are our products purchased?

2. Does e-commerce have an effect on the purchase of our products?

3. Are our customers increasing their purchasing from nonstore outlets?

When Do Customers Purchase Our Products?

1. Are the purchase and consumption of our products seasonal?

2. To what extent do promotional events affect the purchase and consumption of our products?

3. Do the purchase and consumption of our products vary based on changes in physical/ social surroundings, time perceptions, or the purchase task?

Why (and How) Do Customers Select Our Products?

1. What are the basic features provided by our products and our competitors’ products? How do our products compare to those of competitors?

2. What are the customer needs fulfilled by our products and our competitors’ products? How well do our products meet these needs? How well do our competitors’ products meet these needs?

3. Are the needs of our customers expected to change in the future? If so, how?

4. What methods of payment do our customers use when making a purchase? Is the avail- ability of credit or financing an issue with our customers?

5. Are our customers prone to developing close long-term relationships with us and our competitors, or do they buy in a transactional fashion (primarily based on price)?

6. How can we develop, maintain, or enhance the relationships we have with our customers?

Why Do Potential Customers Not Purchase Our Products?

1. What are the basic needs of noncustomers that our products do not meet?

2. What are the features, benefits, or advantages of competing products that cause noncus- tomers to choose them over our products?

3. Are there issues related to distribution, promotion, or pricing that prevent noncustomers from purchasing our products?

4. What is the potential for converting noncustomers into customers of our products?

SOURCE: Adapted from Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning, 6th ed. (Boston, MA: McGraw-Hill/Irwin, 2005).

64 Chapter 3 • Collecting and Analyzing Marketing Information

Who Are Our Current and Potential Customers? Answering the “who” question requires an examination of the relevant characteris- tics that define target markets. This includes demographic characteristics (gender, age, income, etc.), geographic characteristics (where customers live, density of the target market, etc.), and psychographic characteristics (attitudes, opinions, inter- ests, etc.). Depending on the types of products sold by the firm, purchase influen- cers or users, rather than actual purchasers, may be important as well. For example, in consumer markets it is well known that the influence of children is crit- ical for purchases such as cars, homes, meals, toys, and vacations. In business mar- kets, the analysis typically focuses on the buying center. Is the buying decision made by an individual or by a committee? Who has the greatest influence on the purchase decision?

The analysis must also assess the viability of potential customers or markets that may be acquired in the future. This involves looking ahead to situations that may increase the firm’s ability to gain new customers. For example, firms around the world are particularly excited about the further opening of the Chinese mar- ket and its 1.3 billion potential consumers. Many firms, including Procter & Gam- ble, Walmart, Starbucks, and Pepsi, have established a presence in China that they hope to leverage for future growth opportunities. The excitement about the Chinese market stems from its strong middle-class, expected to be 630 million by 2022.7

What Do Customers Do with Our Products? The “what” question entails an assessment of how customers consume and dispose of the firm’s products. Here the marketing manager might be interested in identifying the rate of product consumption (also called the usage rate), differences between heavy and light users of products, whether customers use complementary products during consumption, and what customers do with the firm’s products after consumption. In business markets, customers typically use the firm’s products in the creation of their own products. As a result, business customers tend to pay very close attention to product specifications and quality.

Many firms see China as the world’s most lucrative market with over 1.3 billion potential consumers.

Chapter 3 • Collecting and Analyzing Marketing Information 65

In some cases, marketers cannot fully understand how customers use their products without looking at the complementary products that go with them. In these cases of derived demand—where the demand for one product depends on (is derived from) the demand of another product—the marketer must also examine the consump- tionandusageofthecomplementaryproduct.Forexample,tiremanufacturersconcern themselves with the demand for automobiles, and makers of computer accessories closely watch the demand for desktop and laptop computers. By following the demand for and consumption of complementary products, marketers are in a much better position to understand how customers use their own products.

Before customers and marketers became more concerned about the natural environment, many firms looked only at how their customers used products. Today, marketers have become increasingly interested in how customers dispose of pro- ducts, such as whether customers recycle the product or its packaging. Another post-consumption issue deals with the need for reverse channels of distribution to handle product repairs. Car manufacturers, for example, must maintain an elaborate network of certified repair facilities (typically through dealers) to handle mainte- nance and repairs under warranty.

Sometimes recycling and repair issues come into conflict. The relatively low cost of today’s home electronics leads many customers to buy new televisions, compu- ters, or phones rather than have old ones repaired. As discussed in Beyond the Pages 3.2, this causes a problem: What do consumers do with e-waste, or broken and obsolete electronic devices? Though e-waste makes up only 2 percent of our country’s landfill volume, state governments and local communities have struggled for years with the e-waste that enters our nation’s landfills.

Where Do Customers Purchase Our Products? The “where” question is associated mainly with distribution and customer conve- nience. Until recently, most firms looked solely at traditional channels of distribu- tion, such as brokers, wholesalers, and retailers. Thus, the marketing manager would have concerns about the intensity of the distribution effort and the types of retailers that the firm’s customers patronized. Today, however, many other forms of distribution are available. The fastest growing form of distribution today is nonstore retailing—which includes vending machines; direct marketing through catalogs, home sales, or infomercials; and electronic retailing through the Internet, interactive television, and video kiosks. Business markets have also begun to capitalize on the lower costs of procurement via the Internet. Likewise, many manufacturers have bypassed traditional distribution channels in favor of selling through their own outlet stores or websites. For example, there are now so many different avenues for down- loading or streaming movies, either online or via cable, that the traditional movie rental business is in jeopardy.

When Do Customers Purchase Our Products? The “when” question refers to any situational influences that may cause customer purchasing activity to vary over time. This includes broad issues, such as the season- ality of the firm’s products and the variability in purchasing activity caused by promotional events or budgetary constraints. Everyone knows that consumer pur- chasing activity increases just after payday. In business markets, budgetary con- straints and the timing of a firm’s fiscal year often dictate the “when” question. For example, many schools and universities buy large quantities of supplies just before the end of their fiscal years.

The “when” question also includes more subtle influences that can affect pur- chasing behavior, such as physical and social surroundings, time perceptions, and

66 Chapter 3 • Collecting and Analyzing Marketing Information

BEYOND THE PAGES 3.2

The Ongoing Challenge of E-Waste8

What do you do with an old computer, televi- sion, DVD player, cell phone, or any other con- sumer electronic device when it no longer works? Having the device repaired is typically not justifiable given the high repair cost relative to buying a new item. If you are like most peo- ple, you throw these devices into the trash, a drawer, or give them away. Therein lies the problem with electronic waste, or e-waste, which is a major problem for electronics manu- facturers, state and local governments, and the U.S. Environmental Protection Agency. Recent data show that 80 to 85 percent of discarded electronics (over 2 million tons) ends up in our nation’s landfills. Worldwide, 20 to 50 million metric tons of e-waste are disposed every year. Many of these discarded items contain toxins such as mercury, cadmium, and lead which can contaminate the soil and water if they are not disposed of properly.

Because of the growing problem of e-waste, many state and local governments have taken steps to solve the problem. In 2007, for example, Minnesota required manufacturers to collect and recycle 60 percent of discarded electronics they sold in the state. Oregon followed suit in 2009. Today, many states ban electronics from landfills. California, for example, mandates 100 percent recycling of used electronics, but adds $8 to $25 to the price of new items to help offset the recycling costs. To date, there is no federal law that governs e-waste, though Congress has been looking into the issue. One such proposal adds recycling requirements for electronics retailers as well as manufacturers. Such actions put enormous pressure on these companies, many of which do not have reverse supply chain procedures in place to handle incoming e-waste. Television manufacturers face the big- gest obstacles in recycling. Old televisions are big, heavy, and often very difficult for consu- mers to haul to recycling facilities. Further, the number of recycled televisions is growing rap- idly as consumers switch from analog CRT tele- visions to flat-panel digital models. Consumers are also confused about what they are supposed to do with obsolete and broken electronics.

To handle the growing demands for recy- cling, the industry established the Electronic Manufacturers Recycling Management Company

(MRM), which is funded by its members— including Toshiba, Sharp, and Panasonic. MRM runs recycling programs in 19 states with regula- tory requirements. Other companies use third- party recyclers, such as Waste Management, to handle recycling. Electronic Recyclers Interna- tional, the country’s largest recycler of electronic waste, processes 250 million pounds of e-waste every year at eight locations in seven states. The company has over 2,000 clients, including Best Buy, LG, Samsung, the NFL, and the NCAA. Dell and Goodwill Industries developed an innovative strategy—the Reconnect Partnership—where Dell provides training and financial support to refurbish old computers. Since the program began in 2004, 374 million pounds of computer waste has been kept out of landfills. The strategy is a huge win for Goodwill, which like other char- ities has been inundated with donations of unwanted electronics. E-waste is now a lucrative business for recyclers as the industry generates over $3 billion in annual revenue. Outerwall, Inc. (owner of Redbox) has gotten into the action with ecoATM, a nationwide network of almost 2,000 automated electronics recycling kiosks. Customers receive instant cash when they recycle old phones, MP3 players, and tablets at a kiosk.

E-waste has generated a fair amount of global controversy as well. Some recyclers export e-waste to other countries (mostly Asia, Mexico, and Africa) for disposal. These countries have lax environmental laws that make the e-waste prob- lem much more difficult in communities where the e-waste is stored. Such actions are a violation of the Basel Convention—an international agree- ment that restricts trade in hazardous waste. The United States has yet to ratify the agreement. However, the EPA does require approval before U.S. companies can export CRT displays (com- puter monitors and televisions with picture tubes), which are among the most dangerous types of e-waste. Due to the growing importance of the e-waste problem, many companies—like Dell—have published formal policies regarding e-waste and e-recycling. In addition to electronics manufacturers, retailers and service companies are now on board. Amazon, for example, launched an electronics trade-in program. The company will accept trade-ins for electronic devices (as well as video games, DVDs, CDs, and textbooks) in exchange for Amazon gift cards.

Chapter 3 • Collecting and Analyzing Marketing Information 67

the purchase task. For example, a consumer may purchase a domestic brand of beer for regular home consumption, but purchase an import or microbrew when visiting a bar (physical surroundings), going out with friends (social surroundings), or hosting a party. Customers can also vary their purchasing behavior based on the time of day or how much time they have to search for alternatives. Variation by purchase task depends on what the customer intends to accomplish with the purchase. For exam- ple, a customer may purchase brand A for her own use, brand B for her children, and brand C for her coworker as a gift.

Why (and How) Do Customers Select Our Products? The “why” question involves identifying the basic need-satisfying benefits provided by the firm’s products. The potential benefits provided by the features of compet- ing products should also be analyzed. This question is important because custo- mers may purchase the firm’s products to fulfill needs that the firm never considered. For example, most people think of vinegar as an ingredient in salad dressings. However, vinegar boasts many other uses, including cleaning floors, loosening rusted screws or nuts, tenderizing meat, and softening hard paint brushes.9 The answer to the “why” question can also aid in identifying unsatisfied or undersatisfied customer needs. During the analysis, it is also important to iden- tify potential changes in customers’ current and future needs. Customers may pur- chase the firm’s products for a reason that may be trumped by newly launched competitive products in the future.

The “how” part of this question refers to the means of payment that customers use when making a purchase. Although most people use cash (which also includes checks and debit cards) for most transactions, the availability of credit makes it pos- sible for customers to take possession of high-priced products like cars and homes. The same is true in business markets where credit is essential to the exchange of goods and services in both domestic and international transactions. Recently, a very old form of payment has reemerged in business markets—barter. Barter involves the exchange of goods and services for other goods or services; no money changes hands. Barter arrangements are very good for small businesses short on cash. According to the World Trade Organization (WTO), over $843 billion of interna- tional trade in goods and services is conducted annually on a noncash basis—a num- ber that represents 15 percent of the global economy. Barter has grown at the rate of roughly 10 percent each year, thanks in part to the advent of barter networks on the Internet.10

Why Do Potential Customers Not Purchase Our Products? An important part of customer analysis is the realization that many potential custo- mers choose not to purchase the firm’s products. Although there are many poten- tial reasons why customers might not purchase a firm’s products, some reasons include:

• Noncustomers have a basic need that the firm’s product does not fulfill. • Noncustomers perceive that they have better or lower-priced alternatives, such

as competing substitute products. • Competing products actually have better features or benefits than the firm’s

product. • The firm’s product does not match noncustomers’ budgets or lifestyles. • Noncustomers have high switching costs. • Noncustomers do not know that the firm’s product exists.

68 Chapter 3 • Collecting and Analyzing Marketing Information

• Noncustomers have misconceptions about the firm’s product (weak or poor image).

• Poor distribution makes the firm’s product difficult to find.

Once the manager identifies the reasons for nonpurchase, he or she should make a realistic assessment of the potential for converting noncustomers into customers. Although conversion is not always possible, in many cases converting noncustomers is as simple as taking a different approach. For example, Australian-based Casella Wines was able to convert noncustomers into wine drinkers by fundamentally chang- ing their approach to the wine industry. Through its [yellow tail] brand, Casella con- verted nonwine drinkers by positioning itself as being easy to drink, easy to understand, easy to buy, and fun. [yellow tail] ignored long-held wine attributes such as prestige and complexity to make wine more approachable to the masses. The end result is that [yellow tail] is now the best selling imported wine brand in the United States.11

Once the marketing manager has analyzed the firm’s current and potential custo- mers, the information can be used to identify and select specific target markets for the revised marketing strategy. The firm should target those customer segments where it can create and maintain a sustainable advantage over its competition.

THE EXTERNAL ENVIRONMENT The final and broadest issue in a situation analysis is an assessment of the external environment, which includes all the external factors—competitive, economic, politi- cal, legal/regulatory, technological, and sociocultural—that can exert considerable direct and indirect pressures on both domestic and international marketing activi- ties. Exhibit 3.5 provides a framework for analyzing factors in the external environ- ment. As this framework suggests, the issues involved in examining the external environment can be divided into separate categories (i.e., competitive, economic, legal, etc.). However, some environmental issues can fall into multiple categories.

One such example is the explosive growth in direct-to-consumer (DTC) advertis- ing in the pharmaceutical industry. In 2014, the industry spent roughly $4 billion on DTC advertising through “ask your doctor” style ads aimed at encouraging consu- mers to request drugs by name from their physicians. This promotional strategy has been praised and criticized on a number of fronts. Some argue that DTC advertising plays an important role in educating the population about both disease and available treatments. Critics—including the U.S. Congress—argue that DTC advertising encourages consumers to self-diagnose and is often misleading about a drug’s bene- fits and side effects. In response to these criticisms, the pharmaceutical industry developed a set of guiding principles for DTC advertising. In early 2015, the FDA issued draft guidelines on DTC print advertising to require more consumer-friendly terminology. The goal is to make the print ads easier to understand, especially with respect to a drug’s purpose and risks.12

Issues in the external environment can often be quite complex. For example, a 1997 strike by UPS employees not only put UPS employees out of work, but also led to economic slowdowns in UPS hub cities. The strike also became a political issue for President Bill Clinton as he was continually pressured to invoke the Taft- Hartley Act to force striking UPS employees back to work. Although the effects of the UPS strike were short-lived, some changes have a lasting impact. The tragic events of September 11, 2001 led to many changes in the competitive, economic, political, legal, technological, and sociocultural environments that will be felt for decades to come. Thankfully, complex situations like these occur infrequently. As we examine each element of the external marketing environment, keep in mind that issues that arise in one aspect of the environment are usually reflected in other elements as well.

Chapter 3 • Collecting and Analyzing Marketing Information 69

EXHIBIT 3.5 A Framework for Analyzing the External Environment.

Competition

1. Who are our major brand, product, generic, and total budget competitors? What are their characteristics in terms of size, growth, profitability, strategies, and target markets?

2. What are our competitors’ key strengths and weaknesses?

3. What are our competitors’ key capabilities and vulnerabilities with respect to their market- ing program (e.g., products, distribution, promotion, and pricing)?

4. What response can we expect from our competitors if environmental conditions change or if we change our marketing strategy?

5. How is our set of competitors likely to change in the future? Who are our new competitors likely to be?

Economic Growth and Stability

1. What are the general economic conditions of the country, region, state, and local area in which our firm operates?

2. What are the economic conditions of our industry? Is our industry growing? Why or why not?

3. Overall, are customers optimistic or pessimistic about the economy? Why?

4. What are the buying power and spending patterns of customers in our industry? Are our industry’s customers buying less or more of our products? Why?

Political Trends

1. Have recent elections changed the political landscape within our domestic or international markets? If so, how?

2. What type of industry regulations do elected officials favor?

3. What are we doing currently to maintain good relations with elected officials? Have these activities been effective? Why or why not?

Legal and Regulatory Issues

1. What proposed changes in international, federal, state, or local laws and regulations have the potential to affect our marketing activities?

2. Do recent court decisions suggest that we should modify our marketing activities?

3. Do the recent rulings of federal, state, local, and self-regulatory agencies suggest that we should modify our marketing activities?

4. What effect will changes in global trade agreements or laws have on our international marketing opportunities?

Technological Advancements

1. What impact has changing technology had on our customers?

2. What technological changes will affect the way that we operate or manufacture our products?

3. What technological changes will affect the way that we conduct marketing activities such as distribution or promotion?

4. Are there any current technologies that we do not use to their fullest potential in making our marketing activities more effective and efficient?

5. Do any technological advances threaten to make our products obsolete? Does new technol- ogy have the potential to satisfy previously unmet or unknown customer needs?

70 Chapter 3 • Collecting and Analyzing Marketing Information

Competition In most industries, customers have preferences and choices in terms of the goods and services they can purchase. Thus, when a firm defines the target markets it will serve, it simultaneously selects a set of competing firms. The current and future actions of these competitors must be constantly monitored, and hopefully even anticipated. One of the major problems in analyzing competition is the question of identification. That is, how does the manager answer the question “Who are our current and future competitors?” To arrive at an answer, the manager must look beyond the obvious examples of competition. Most firms face four basic types of competitors:

1. Brand competitors, which market products with similar features and benefits to the same customers at similar prices.

2. Product competitors, which compete in the same product class, but with products that are different in features, benefits, and price.

3. Generic competitors, which market very different products that solve the same prob- lem or satisfy the same basic customer need.

4. Total budget competitors, which compete for the limited financial resources of the same customers.

Exhibit 3.6 presents examples of each type of competition for selected product markets. In the compact SUV segment of the automotive industry, for example, the

EXHIBIT 3.6 Examples of Major Types of Competition.

Product Category (Need Fulfilled) Brand Competitors Product Competitors Generic Competitors Total Budget Competitors Compact SUVs (Transportation)

Jeep Compass Ford Escape Honda CR-V Toyota RAV4

Midsize SUVs Trucks Passenger cars Minivans

Rental cars Motorcycles Bicycles Public transportation

Vacation Debt reduction Home remodeling

Soft Drinks (Refreshment)

Coca-Cola Zero Diet Coke Pepsi Cola Diet Pepsi

Tea Orange juice Bottled water Energy drinks

Tap water Candy Gum Potato chips

Movies (Entertainment)

Hunger Games The Hobbit Star Trek

Cable TV Pay-Per-View Streaming video

Athletic events Festivals Concerts

Shopping Reading Fishing

Colleges (Education)

New Mexico Florida State Alabama

Trade School Community college Online programs

Books CDs Apprenticeship

New Cars Vacations Investments

Sociocultural Trends

1. How are society’s demographics and values changing? What effect will these changes have on our customers, products, pricing, distribution, promotion, and our employees?

2. What challenges or opportunities have changes in the diversity of our customers and employees created?

3. What is the general attitude of society about our industry, company, and products? Could we take actions to improve these attitudes?

4. What social or ethical issues should we be addressing?

Chapter 3 • Collecting and Analyzing Marketing Information 71

Jeep Compass, Ford Escape, Honda CR-V, and Toyota RAV4 are brand competi- tors. However, each faces competition from other types of automotive products, such as midsize SUVs, trucks, minivans, and passenger cars. Some of this product competition comes from within each company’s own product portfolio (e.g., Hon- da’s Pilot SUV, Accord sedan, Odyssey minivan, and Ridgeline truck compete with the CR-V). Compact SUVs also face generic competition from motorcycles, bicycles, rental cars, and public transportation—all of which offer products that satisfy the same basic customer need for transportation. Finally, customers have many alternative uses for their money rather than purchasing a compact SUV: They can take a vacation, install a pool in the backyard, buy a boat, start an invest- ment fund, or pay off debt.

All four types of competition are important, but brand competitors rightfully receive the greatest attention as customers see different brands as direct substitutes for each other. For this reason, strategies aimed at getting customers to switch brands are a major focus in any effort to beat brand competitors. For example, Gatorade, far and away the dominant sports drink, had lost market share to compe- titors such as Vitamin Water, Propel, and Powerade. To refresh the Gatorade brand, Pepsi expanded its reach and positioning from sports drinks (a $7 billion industry) to sports nutrition (a $20 billion industry). Using research from its Florida-based Sports Science Institute, Pepsi expanded the Gatorade line to include energy bars, gels, protein shakes, and other nutrition-related products that athletes use to boost energy, performance, endurance, and recovery. The first outward sign of the shift came in the repackaging of its core G-series lines into 01 Prime (pre-workout pro- ducts), 02 Perform (during-workout products), and 03 Recover (post-workout pro- ducts). The second launch was a line of energy chews designed to boost athletic performance. Gatorade later added protein bars to the mix. The new strategy was a challenge to implement because Gatorade was forced to shift its distribution sys- tem from one solely focused on beverages to one that could handle the assort- ments and sizes of new product lines.13

Competitive analysis has received greater attention recently for several reasons: more intense competition from sophisticated competitors, increased competition from foreign firms, shorter product life cycles, and dynamic environments, particu- larly in the area of technological innovation. A growing number of companies have adopted formalized methods of identifying competitors, tracking their activities, and assessing their strengths and weaknesses—a process referred to as competitive intel- ligence. Competitive intelligence involves the legal and ethical observation, tracking, and analysis of the total range of competitive activity, including competitors’ capabil- ities and vulnerabilities with respect to sources of supply, technology, marketing, financial strength, manufacturing capacities and qualities, and target markets. It also attempts to predict and anticipate competitive actions and reactions in the mar- ketplace.14 Competitive analysis should progress through the following stages:

1. Identification. Identify all current and potential brand, product, generic, and total budget competitors.

2. Characteristics. Focus on key competitors by assessing the size, growth, prof- itability, objectives, strategies, and target markets of each one.

3. Assessment. Assess each key competitor’s strengths and weaknesses, including the major capabilities and vulnerabilities that each possesses within its func- tional areas (marketing, research and development, production, human resources, etc.).

4. Capabilities. Focus the analysis on each key competitor’s marketing capabili- ties in terms of its products, distribution, promotion, and pricing.

5. Response. Estimate each key competitor’s most likely strategies and responses under different environmental situations, as well as its reactions to the firm’s own marketing efforts.

72 Chapter 3 • Collecting and Analyzing Marketing Information

Many sources are available for gathering information on current or potential competitors. Company annual reports are useful for determining a firm’s current performance and future direction. An examination of a competitor’s mission state- ment can also provide information, particularly with respect to how the company defines itself. A thorough scan of a competitor’s website can also uncover informa- tion—such as product specifications and prices—that can greatly improve the com- petitive analysis. Other, clever ways to collect competitive information include data mining techniques, patent tracking to reveal technological breakthroughs, creating psychological profiles of competitors’ key executives, searching consumer review and blog websites, and attending trade shows and conferences.15 Other valuable information sources include business periodicals and trade publications that provide newsworthy tidbits about companies. There are also numerous commercial data- bases, such as ABI/INFORM, InfoTrac, EBSCO, Hoover’s, and Moody’s, which pro- vide a wealth of information on companies and their marketing activities. The information contained in these databases can be purchased in print form, on CD, or online with a data provider such as a school or public library.

Economic Growth and Stability If there is one truism about any economy, it is that it will inevitably change. Therefore, current and expected conditions in the economy can have a profound impact on mar- keting strategy. A thorough examination of economic factors requires marketing man- agers to gauge and anticipate the general economic conditions of the nation, region, state, and local area in which they operate. These general economic conditions include inflation, employment and income levels, interest rates, taxes, trade restrictions, tar- iffs, and the current and future stages of the business cycle (prosperity, stagnation, recession, depression, and recovery). For example, the annual U.S. inflation rate trended downward for 16 years until it began to rise again in 2003. The upward trend ended in 2008 when inflation actually became negative (i.e., deflation). This means that general price levels began to fall during the economic downturn, brought on by contractions in spending by the government and individuals. After bottoming out in 2010, inflation increased for 2 years and has trended downward or flat since that time. Today, inflation is roughly 0.76 percent per year in the United States.16

Equally important economic factors include consumers’ overall impressions of the economy and their ability and willingness to spend. Consumer confidence (or lack thereof) can greatly affect what the firm can or cannot do in the marketplace. In times of low confidence, consumers may not be willing to pay higher prices for premium products, even if they have the ability to do so. In other cases, consumers may not have the ability to spend, regardless of the state of the economy. Another important factor is the current and anticipated spending patterns of consumers in the firm’s target market. If consumers buy less (or more) of the firm’s products, there could be important economic reasons for the change.

One of the most important economic realities in the United States over the last 50 years has been a steady shift away from a tangibles-dominant economy (goods, equipment, manufacturing) to one dominated by intangibles such as services and information. In fact, virtually everyone is aware that the U.S. economy is a knowledge-based economy. However, our methods of measuring and reporting on the economy have not kept pace with this change. Our methods are very good at cap- turing manufacturing output, capital expenditures, and investments in other tangible assets, but they cannot capture investments in intangibles such as innovation, employee training, brand equity, or product design. Consequently, the true nature of our economy is underreported by virtually all current statistics, such as the revered GDP. Innovation, creativity, and human assets—the main drivers behind the success of most U.S. businesses—are not counted as a part of yearly GDP statistics. Further- more, intangible assets are woefully underreported on corporate balance sheets. The

Chapter 3 • Collecting and Analyzing Marketing Information 73

value of intangible assets in public U.S. companies is estimated at $14.5 trillion, over 60 percent of which is not reported on balance sheets. One of the major challenges as we move forward is finding ways of capturing these intangibles in our regular reporting and economic analyses.17

Political Trends Although the importance will vary from firm to firm, most organizations should track political trends and attempt to maintain good relations with elected officials. Organi- zations that do business with government entities, such as defense contractors, must be especially attuned to political trends. Elected officials who have negative attitudes toward a firm or its industry are more likely to create or enforce regulations unfavor- able for the firm. For example, the anti-tobacco trend in the United States has been in full swing since the late 1990s. Today, many states and local communities have passed laws to prevent smoking in public places. One of the most hotly contested business-related political issues of late has been the status of illegal immigrants crossing the U.S. border, especially from Mexico. This single issue has potential rami- fications for our economy (employment, health care, trade), our society (language, culture), and our political relations with other nations. As these examples show, political discussions can have serious, lasting consequences for an industry or firm.

Many organizations view political factors as beyond their control and do little more than adjust the firm’s strategies to accommodate changes in those factors. Other firms, however, take a more proactive stance by seeking to influence elected officials. For example, some organizations publicly protest legislative actions, while others seek influence more discreetly by routing funds to political parties or lobbying groups. Whatever the approach, managers should always stay in touch with the polit- ical landscape.

Legal and Regulatory Issues As you might suspect, legal and regulatory issues have close ties to events in the polit- ical environment. Numerous laws and regulations have the potential to influence mar- keting decisions and activities. The simple existence of these laws and regulations causes many firms to accept this influence as a predetermined aspect of market plan- ning. For example, most firms comply with procompetitive legislation rather than face the penalties of noncompliance. In reality, most laws and regulations are fairly vague (for instance, the Americans with Disabilities Act), which often forces firms to test the limits of certain laws by operating in a legally questionable manner. The vagueness of laws is particularly troubling for e-commerce firms who face a number of ambiguous legal issues involving copyright, liability, taxation, and legal jurisdiction. For reasons such as these, the marketing manager should carefully examine recent court decisions to better understand the law or regulation in question. New court interpretations can point to future changes in existing laws and regulations. The marketing manager should also examine the recent rulings of federal, state, local, and self-regulatory trade agencies to determine their effects on marketing activities.

One of the most profound legislative shifts in corporate governance occurred with President Bush’s signing of the Sarbanes-Oxley Act on July 30, 2002. Sarbanes- Oxley was essentially the federal government’s response to a string of corporate scandals—most notably Enron, Tyco, and WorldCom. The law introduced very strin- gent rules for financial practice and corporate governance designed to protect inves- tors by increasing the accuracy and reliability of corporate disclosures of financial information. An interesting result of Sarbanes-Oxley is the intense media and public attention that it garnered. The accuracy of corporate disclosures is now such a closely watched issue that organizations are forced into compliance both legally and practically. It is estimated that compliance with the law—in the form of new

74 Chapter 3 • Collecting and Analyzing Marketing Information

information and reporting systems—has cost the average company at least $1 million per year in compliance costs. For large companies, the yearly cost can range from $5 million to $10 million.18

Organizations that engage in international business should also be mindful of legal issues surrounding the trade agreements among nations. The implementation of the North American Free Trade Agreement (NAFTA), for example, created an open market of roughly 374 million consumers. Since NAFTA went into effect, many U.S. firms have begun, or expanded, operations in Canada and Mexico. Conversely, national governments sometimes use trade agreements to limit the distribution of certain products into member countries. For example, recurring disagreements between the United States, Canada, and Argentina and the European Union over genetically modified foods (or GMOs, genetically modified organisms) led the EU to impose an outright ban on GMOs in 1998. The United States promptly filed several complaints with the WTO, arguing that the ban lacked scientific support and amounted to an unfair trade barrier. The WTO ruled against the EU in 2006, opening the way for genetically modified foods to enter the EU. However, individual EU nations, such as Germany, continued to ban the use of GMOs. The debate raged until early 2015 when the EU ruled that member states could set their own rules on GMOs. France and Germany remain staunchly opposed to GMOs, while Britain, Spain, and Portugal are in favor of them. Slovakia, Romania, and the Czech Republic allow some GMOs within their borders. Today, only a fraction of EU farmland is used to grow genetically modified food, most of that in Spain. Even if the market eventu- ally opens to U.S. producers, the going will be tough. The vast majority of European consumers believe that genetically modified foods are unsafe for consumption.19

Technological Advancements When most people think about technology, they tend to think about high-tech pro- ducts such as smartphones, mobile Internet access, medical breakthroughs, driver- less cars, or ultra-HD television. However, technology actually refers to the way we accomplish specific tasks or the processes we use to create the “things” we consider as new. Of all the new technologies created in the past 30 years, none has had a greater impact on marketing than advances in computer and information technology. These technologies have changed the way consumers and employees live and the way that marketers operate in fulfilling their needs. In some cases, changes in tech- nology can be so profound that they make a firm’s products obsolete, such as with vinyl long-playing (LP) records, typewriters, cassette tapes, and pagers. We see this process occurring today as consumers slowly shift from CDs, DVDs, and newspapers to digital music, movies, and news.

Many changes in technology assume a frontstage presence in creating new mar- keting opportunities. By frontstage technology, we mean those advances that are most noticeable to customers. For example, products such as smartphones, microwave ovens, and genetic engineering have spawned entirely new industries aimed at fulfill- ing previously unrecognized customer needs. Many frontstage technologies, such as smartphones and GPS satellite navigation systems, aim to increase customer conve- nience. Likewise, companies continue to push toward even more substantial changes in the ways that marketers reach customers through the use of interactive marketing via computers and television.

These and other technological changes can also assume a backstage presence when their advantages are not necessarily apparent to customers. Advances in back- stage technology can affect marketing activities by making them more efficient and effective. For example, advances in computer technology have made warehouse storage and inventory control more efficient and less expensive. Similar changes in communication technology have made field sales representatives more efficient and effective in their dealings with managers and customers.

Chapter 3 • Collecting and Analyzing Marketing Information 75

In some cases, technology can have both a frontstage and a backstage presence. One of the most promising breakthroughs is radio frequency identification (RFID), which involves the use of tiny radio-enabled chips that can be attached to a product or its packaging, or embedded in electronic devices such as smartphones, smart- watches, or fitness trackers. The radio signals emitted or reflected from the chip (or tag) can be used to track inventory levels, prevent theft, or make wireless payments. One form of RFID, near field communication (NFC), can be used for short-range wireless data transmission between smartphones and payment terminals such as vending machines, point-of-sale terminals, and ticket kiosks in subways, movie theaters, or airports. Apple’s launch of Apple Pay is a highly visible version of this technology. Virtually all smartphones today are NFC-enabled and can work with compatible payment systems such as Apple Pay and Google Wallet. RFID technology is also used in other applications such as patient tracking in hospitals, real-time data analysis in Indy racecars, and EZ-Pass systems on the nation’s toll roads.20

Sociocultural Trends Sociocultural factors are those social and cultural influences that cause changes in attitudes, beliefs, norms, customs, and lifestyles. These forces profoundly affect the way people live and help determine what, where, how, and when customers buy a firm’s products. The list of potentially important sociocultural trends is far too long to examine each one here. Exhibit 3.7 illustrates examples of some of these trends. Two of the more important trends, however, are changes in demographics and customer values.

There are many changes taking place in the demographic makeup of the U.S. population. For example, most of us know that the population as a whole has grown older as a result of advances in medicine and healthier lifestyles. As shown in Exhibit 3.8, research suggests that the number of Americans age 65 and older will increase rapidly until 2030, and then level off. By 2050, the population aged 65 and over will almost double from 43.1 million to 83.7 million. The 85 and over age

ZU M A Pr es s, In c. / A la m y

Radio frequency identification (RFID) tags are used in a variety of frontstage and backstage applications.

76 Chapter 3 • Collecting and Analyzing Marketing Information

group will grow even more rapidly, from 5.8 million in 2012 to 17.9 million in 2050.21

Experts project that by 2050, the worldwide population of older people will be larger than the population of children aged 0–14 for the first time in human history. As a result, marketers of health care, recreation, tourism, and retirement housing can expect large increases in demand over the next several decades. Other important changes include a decline in the teenage population, an increasing number of singles and single-parent households, and still greater participation of women in the work- force. The increase in the number of two-income and single-parent families has, for example, led to a massive increase in demand and retail shelf space for convenient

EXHIBIT 3.7 Trends in the U.S. Sociocultural Environment.

Demographic Trends

Aging of the American population

Increasing population diversity, especially in the number of Hispanic Americans

Increasing number of single-member/individual households

Increasing number of single-parent families

Decline in the teen population (as a percentage of the total population)

Population growth in Sun Belt states

Increasing immigration (legal and illegal)

Increasing number of wealthy Americans

Lifestyle Trends

Many Americans are postponing retirement

Clothing has become more casual, especially at work

Growing participation in body modification (e.g., tattoos, piercings)

Americans have less time for leisure activities

Vacationing at home (a “staycation”) is more common

Less shopping in malls, more shopping from home

Continuing focus on health, nutrition, and exercise

Increasing importance of leisure time versus work time

Time spent watching television and reading newspapers has declined

Growing popularity of fuel-efficient hybrid vehicles

Value Trends

Growing disconnect with government

Greater focus on ethics and social responsibility

Increased interest in giving back to the community

Shorter attention spans and less tolerance for waiting

More value-oriented consumption (good quality, good price)

Importance of maintaining close, personal relationships with others

Increasing concerns about the natural environment

Less tolerance of smoking in public places

More tolerance of individual lifestyle choices

Growing skepticism about business

Chapter 3 • Collecting and Analyzing Marketing Information 77

frozen entrees and meals. Our growing focus on health and nutrition has led many of the marketers of these meals to offer lower calorie and carbohydrate content in their products.

One of the other most important demographic changes taking place is the increasing diversity of the U.S. population. The number of legal immigrants coming to the United States has risen steadily during the past 30 years. Between now and 2050, minority population growth will account for a full 90 percent of the growth of the total U.S. population. This trend is especially true among the Hispanic population, which has increased 592 percent since 1970 (the national population has grown 56 percent in the same time frame). Since 2008, however, Asians have been the fastest growing population segment in the United States. It is now expected that the United States will become a majority-minority country in 2044.22

These changes in diversity will create both threats and opportunities for most organizations. A diverse population means a diverse customer base. Firms must alter their marketing practices, including the way they recruit and select employ- ees, to match these changing customer segments. For example, women of color, ignored by cosmetics companies for a long time, used to have a very difficult time finding makeup in shades appropriate for their skin tones. Now, virtually all cosmetics companies offer product lines designed specifically for these previously unserved markets. Furthermore, most well-known companies now specifically tar- get Hispanic consumers. Not only is the Hispanic market growing, it also has a number of positive characteristics such as low household debt, two-income house- holds, and an affinity for branded merchandise. Kraft Foods, for example, recently tripled its ad spending directed at the Hispanic market. On the whole, however, less than 5 percent of total media spending is targeted at Hispanics, suggesting that marketers have a ways to go in reaching out to this lucrative market segment.23

Changes in our cultural values—the guiding principles of everyday life—can also create opportunities and challenges for marketers. Values influence our views of how to live, the decisions we make, the jobs we do, and the brands we buy. In a major study of American values, researchers found that the four most important values regardless of age, gender, race, income, or region are (1) self-respect, (2) hav- ing warm relationships with others, (3) security, and (4) having a sense of accomplishment. Over the past 30 years, self-respect has been the dominant value in the U.S. culture. Having a sense of belonging and the need for security have

EXHIBIT 3.8 Relative Growth in the Number of Older Americans: 2012–2050.

3.5

3.0

2.5

2.0

1.5

1.0 2012

Relative growth

2015 2020 2025 2030 2035 2040 2045 2050

SOURCE: Jennifer M. Ortman, Victoria A. Velkoff, and Howard Hogan, “An Aging Nation: The Older Population in the United States,” Current Population Reports. May 2014 (Washington, DC: U.S. Census Bureau), p. 8.

78 Chapter 3 • Collecting and Analyzing Marketing Information

actually declined in importance over the same time period, despite the tragic events of 9/11 and the most recent economic recession. Interestingly, the fastest growing value with respect to importance over the same time period is fun, enjoyment, and excitement.24 Astute marketers can use this information to reflect our prevailing values in the products they design and the advertising they create.

As you can see, the external environment encompasses a wide array of impor- tant factors that must be analyzed carefully before developing the marketing plan. These issues are so important that most firms have specialists on staff to track emerging trends and develop strategies for dealing with external concerns. These specialists are typically housed in corporate affairs departments as outlined in Beyond the Pages 3.3. Although the external environment is the largest of the three environments we have discussed, it is not necessarily the most important. Depending on the firm, its industry, and the timing, the internal and/or customer environments can be much more important in developing marketing strategy. The important issue is that all three environments must be analyzed prior to developing a marketing strat- egy and marketing plan. Good analysis requires the collection of relevant data and information, our next topic.

COLLECTING MARKETING DATA AND INFORMATION To perform a complete situation analysis, the marketing manager must invest time and money to collect data and information pertinent to the development of the mar- keting plan. This effort will always involve the collection of secondary data, which must be compiled inside or outside the organization for some purpose other than the current analysis. However, if the required data or information are unavailable, primary data may have to be collected through marketing research. Accessing sec- ondary data sources is usually preferable as a first option because these sources can be obtained more quickly and at less cost than collecting primary data. In this section, we will examine the different sources of environmental data and challenges in collecting data.

Secondary Information Sources There are four basic sources of secondary data and information: internal, govern- ment, periodicals/books, and commercial data sources. Most of these sources are available in both print and electronic formats. Let’s look at the major strengths and weaknesses of these sources.

Internal Data Sources The firm’s own records are the best source of data on current objectives, strategy, performance, and available resources. Internal sources may also be a good source of data on customer needs, attitudes, and buying behavior. Internal data also have the advantage of being relevant and believable because the organization itself has responsibility for data collection and organization.

One of the biggest problems with internal data is that it is often not in a readily accessible form for planning purposes. Box after box of printed company records that sit in a warehouse are hardly useful for marketing planning. To overcome this problem, many organizations maintain complex information systems that make data easily accessible and interactive. These systems enable employees to access internal data such as customer profiles and product inventory, and to share details of their activities and projects with other company employees across the hall or the world. These systems also provide an opportunity for company-wide marketing intelligence that permits coordination and integration of efforts to achieve a true market orientation.

Chapter 3 • Collecting and Analyzing Marketing Information 79

BEYOND THE PAGES 3.3

A Corporate Affairs Primer25

What is corporate affairs? In its broadest sense, corporate affairs is a collection of strategic activi- ties aimed at marketing an organization, its issues, and its ideals to potential stakeholders (consu- mers, general public, shareholders, media, gov- ernment, etc.). One way to think about corporate affairs is that it includes all of the organization’s marketing activities not directed at the end users of its products. The activities that define corpo- rate affairs vary; however, most organizations maintain departments that engage in the follow- ing strategic activities:

• Corporate Communication—activities aimed at telling the organization’s story and promoting goodwill among a variety of stake- holders. It includes activities such as public relations, employee relations, corporate image advertising, public affairs, and media relations.

• Government Relations—activities aimed at educating and influencing elected officials, government officials, and regulatory agen- cies with respect to key issues that are perti- nent to the firm. The most visible form of government relations is lobbying.

• Investor Relations—activities designed to promote investment in the organization through the sale of financial instruments such as stocks and bonds. It includes activi- ties such as developing the annual report, planning shareholders’ meetings, and other customer service activities directed at corpo- rate shareholders.

• Corporate Philanthropy—activities aimed at serving the needs of the community at large (either domestically or globally) through product or cash donations, volun- teerism, or support of humanitarian initiatives.

• Corporate Sustainability—activities aimed at reducing the organization’s impact on the environment. It includes activities such as reducing the organization’s carbon footprint, recycling of its products, and promoting envi- ronmental stewardship.

• Policy Analysis—activities designed to influence the national or international dia- logue with respect to public or economic

policy in an industry-related area. It includes research and analysis designed to provide needed information for making policy decisions.

Perhaps the best way to understand corpo- rate affairs is to see what several major organi- zations have to say about it. Here are a few examples:

Microsoft—Legal and Corporate Affairs Group The Microsoft Legal and Corporate Affairs Group works on the cutting edge of business and regulatory issues around the world, playing a proactive and engaged role pioneering new legal and corporate affairs solutions that will advance business goals and also benefit consu- mers, industry partners, and the communities where we live and work.

Tesco—Corporate and Legal Affairs We believe that it’s no longer just price, quality, and convenience that matter—customers want to know exactly what Tesco stands for, and how we have a positive impact on local commu- nities. So we’re here to tell the Tesco story in a new, compelling and relevant way. To show that, as well as creating value for customers, col- leagues, and shareholders, we create value for society as a whole.

SABMiller—Corporate Affairs We are passionate about brewing great beer. We are also committed to managing our operations sustainably, and we work in partnership with the communities where we do business to maxi- mise the economic and social benefits our busi- ness brings to the widest possible range of stakeholders. We aim to be a global leader in sustainable development and we take positive action to encourage consumers to drink beer responsibly.

The Corporate Affairs team engages with government, nongovernmental organisations, investors, the media and other opinion leaders to understand their expectations of the business and to share the results of the work we’re doing. The team also plays a key role in enabling the business to become a more globally integrated organisation through collaboration and internal engagement.

80 Chapter 3 • Collecting and Analyzing Marketing Information

Government Sources If it exists, the U.S. government has collected data about it. The sheer volume of available information on the economy, our population, and business activities is the major strength of most government data sources. Government sources also have the added advantages of easy accessibility and low cost—most are even free. The major drawback to government data is timeliness. Although many government sources have annual updates, some are done much less frequently (e.g., the census every decade). As a result, some government sources may be out-of-date and not particu- larly useful for market planning purposes.

Still, the objectivity and low cost of government sources make them an attractive answer to the data need of many organizations. Some of the best government sources available on the Internet include:

• Federal Trade Commission (ftc.gov) provides reports, speeches, and other facts about competitive, antitrust, and consumer protection issues.

• FedWorld (fedworld.ntis.gov) offers links to various federal government sources of industry and market statistics.

• Edgar Database (sec.gov/edgar.shtml) provides comprehensive financial data (10K reports) on public corporations in the United States.

• U.S. Small Business Administration (sba.gov) offers numerous resources for small businesses, including industry reports, maps, market analyses (national, regional, or local), library resources, and checklists.

Book and Periodical Sources The articles and research reports available in books and periodicals provide a gamut of information about many organizations, industries, and nations. Forget any notion about books and periodicals appearing only in print. Today, many good sources exist only in electronic format. Timeliness is a major strength of these sources, as most are about current environmental trends and business practices. Some sources, such as academic journals, provide detailed results of research studies that may be pertinent to the manager’s planning efforts. Others, such as trade publications, focus on spe- cific industries and the issues that characterize them.

Many of these sources are freely available on the Internet. Most, however, require paid subscriptions. Some of the better examples include:

• Subscription services such as Moody’s (moodys.com), Hoover’s (hoovers.com), Standard and Poor’s (standardandpoors.com), and Dismal Scientist (economy .com/dismal) offer in-depth analyses and current statistics about major industries and corporations.

The expert teams in Corporate Affairs are responsible for a range of work streams includ- ing Media Relations, Investor Relations, Public Affairs, Alcohol Policy, Sustainable Develop- ment, Digital Communications, Internal Engage- ment, and Reputation Management.

IBM—Corporate Citizenship IBM’s global Corporate Citizenship & Corporate Affairs team includes managers in the nearly 170 countries in which we operate. They apply our global service initiatives to address local

needs and help improve the communities where IBMers work and live worldwide.

Given the complexity of the external envi- ronment in today’s economy, strategic planning regarding corporate affairs is every bit as impor- tant as developing sound strategy for reaching the organization’s customers. No organization exists in isolation. Consequently, all organiza- tions must actively manage their relationships with potential stakeholders to ensure continued success.

Chapter 3 • Collecting and Analyzing Marketing Information 81

• Major trade associations such as the American Marketing Association (ama. org) and Sales and Marketing Executives (smei.org) and trade publications such as Adweek (adweek.com) and Chain Store Age (chainstoreage.com) offer a wide range of news and information to their membership and readers.

• Academic journals, such as the Harvard Business Review (hbr.org) and the Sloan Management Review (sloanreview.mit.edu), are good sources of cutting- edge thinking on business and marketing.

• General business publications, such as the Wall Street Journal (wsj.com), Fortune (fortune.com), and Bloomberg Business (bloomberg.com), offer a wealth of information on a wide variety of industries and companies.

The two biggest drawbacks to book and periodical sources are information over- load and relevance to the specific problem at hand. That is, despite the sheer volume of information that is available, finding data or information that pertains to the man- ager’s specific and unique situation can feel like looking for that proverbial needle in a haystack.

Commercial Sources Commercial sources are almost always relevant to a specific issue because they deal with the actual behaviors of customers in the marketplace. Firms such as Nielsen monitor a variety of behaviors from food purchases in grocery stores to media usage characteristics. Commercial sources generally charge a fee for their services. However, their data and information are invaluable to many companies. Some com- mercial sources provide limited information on their websites:

• The Nielsen Company (nielsen.com), IRi (iriworldwide.com), and GfK Media- mark Research and Intelligence (gfkmri.com) supply data and reports on point-of-purchase sales, multimedia audience research, and a wealth of customer demographic, lifestyle, and product usage data to major media and advertising companies.

• The Alliance for Audited Media (auditedmedia.com) provides independent, third party audits of print circulation, readership, and website activity.

• NPD Group (npd.com) uses an online consumer panel to provide information to businesses about the products and services they provide.

The most obvious drawback to these and other commercial sources is cost. Although this is not a problem for large organizations, small companies often cannot afford the expense. However, many commercial sources provide limited, free access to some data and information. Additionally, companies often find “off-the-shelf” stud- ies less costly than conducting primary research.

Primary Data Collection The situation analysis should always begin with an examination of secondary data sources due to their availability and low cost. Since each secondary data source has its advantages and disadvantages, the best approach is one that blends data and infor- mation from a variety of sources. However, if the needed secondary data are not avail- able, out of date, inaccurate or unreliable, or irrelevant to the specific problem at hand, an organization may have little choice but to collect primary data through mar- keting research. Primary marketing research has the major advantages of being rele- vant to the specific problem, as well as trustworthy due to the control the manager has over data collection. However, primary research is extremely expensive and time consuming. There are four major types of primary data collection:

• Direct observation, where the researcher records the overt behaviors of custo- mers, competitors, or suppliers in natural settings. Historically, researchers have

82 Chapter 3 • Collecting and Analyzing Marketing Information

used direct observation to study the shopping and buying behaviors of custo- mers. However, behavior can be observed today through the use of technology such as bar code scanners, RFID tags, and the analysis of clickstream data in online settings. The main advantage of observation research is that it accurately describes behavior without influencing the target under observation. However, the results of observation research are often overly descriptive and subject to a great deal of bias and researcher interpretation.

• Focus groups, where the researcher moderates a panel discussion among a gath- ering of 6 to 10 people who openly discuss a specific subject. Focus group research is an excellent means of obtaining in-depth information about a particular issue. Its flexibility also allows it to be used in a variety of settings and with differ- ent types of panel members (i.e., customers, suppliers, and employees). Focus groups are also very useful in designing a large-scale survey to ensure that ques- tions have the appropriate wording. The main disadvantage is that focus groups require a highly skilled moderator to help limit the potential for moderator bias.

• Surveys, where the researcher asks respondents to answer a series of questions on a particular topic. Surveys can be administered using the paper-and-pencil method, either in person or through the mail; or they can be administered interac- tively via telephone, e-mail, or the Internet. Although surveys are a very useful and time-efficient way to collect primary data, it has become increasingly difficult to convince people to participate. Potential respondents have become skeptical of survey methods due to overly long questionnaires and the unethical practices of many researchers. These concerns are one of the reasons behind the creation of the national Do Not Call Registry for telemarketers (donotcall.gov).

• Experiments, where the researcher selects matched subjects and exposes them to different treatments while controlling for extraneous variables. Because experiments are well suited to testing for cause-and-effect relationships, researchers use them quite often in test marketing programs. Marketers can experiment with different combinations of marketing mix variables to determine which combination has the strongest effect on sales or profitability. The major obstacles to effective experimentation in marketing are the expense and the dif- ficulty of controlling for all extraneous variables in the test.

As with secondary data, often the best approach to primary data collection is to use a combination of data sources. Focus groups and direct observation can be used to gain a more complete understanding of a particular issue or marketing phenome- non. Surveys can then be used to further test for certain tendencies or effects before launching into a full-scale test-marketing program. At this point, the process comes full circle as observation and focus groups can be used to explore the outcomes of the test-marketing program.

Overcoming Problems in Data Collection Despite the best intentions, problems usually arise in collecting data and informa- tion. One of the most common problems is an incomplete or inaccurate assessment of the situation that the gathering of data should address. After expending a great degree of effort in collecting data, the manager may be unsure of the usefulness or relevance of what has been collected. In some cases, the manager might even suffer from severe information overload. To prevent these problems from occurring, the marketing problem must be accurately and specifically defined before the collection of any data. Top managers who do not adequately explain their needs and expecta- tions to marketing researchers often cause the problem.

Another common difficulty is the expense of collecting environmental data. Although there are always costs associated with data collection (even if the data are free), the process need not be prohibitively expensive. The key is to find

Chapter 3 • Collecting and Analyzing Marketing Information 83

alternative data collection methods or sources. For example, an excellent way for some businesses to collect data is to engage the cooperation of a local college or uni- versity. Many professors seek out marketing projects for their students as a part of course requirements. Likewise, to help overcome data collection costs, many researchers have turned to the Internet as a means of collecting both quantitative and qualitative data on customer opinions and behaviors.

A third issue is the time it takes to collect data and information. Although this is certainly true with respect to primary data collection, the collection of secondary data can be quite easy and fast. Online data sources are quite accessible. Even if the manager has no idea where to begin the search, the powerful search engines and indexes available on the Internet make it easy to find data. Online data sources have become so good at data retrieval that the real problem involves the time needed to sort through all of the available information to find something that is truly relevant.

Finally, it can be challenging to find a way to organize the vast amount of data and information collected during the situation analysis. Clearly defining the market- ing problem and blending different data sources are among the first steps toward finding all of the pieces to the puzzle. A critical next step is to convert the data and information into a form that will facilitate strategy development. Although there are a variety of tools that can be used to analyze and organize environmental data and information, one of the most effective of these tools is SWOT analysis. As we will see in the next chapter, SWOT analysis—which involves classifying data and infor- mation into strengths, weaknesses, opportunities, and threats—can be used to orga- nize data and information and used as a catalyst for strategy formulation.

LESSONS FROM CHAPTER 3

Collecting and analyzing marketing information through a situation analysis:

• is perhaps the most important task of the marketing manager because practically all decision making and planning depends on how well he or she conducts the analysis.

• should be an ongoing effort that is well organized, systematic, and supported by sufficient resources.

• involves analysis and synthesis to understand why people, products, and organi- zations perform the way they do.

• is not intended to replace the marketing manager in the decision-making pro- cess, but to empower him or her with information for decision making.

• recognizes that data and information are not the same. Data are not useful until converted into information.

• forces managers to ask continually, “How much data and information do I need?”

• is valuable only to the extent that it improves the quality of the resulting deci- sions. Marketing managers must avoid “paralysis by analysis.”

• should provide as complete a picture as possible about the organization’s cur- rent and future situation with respect to the internal, customer, and external environments.

Analysis of the internal environment:

• includes an assessment of the firm’s current goals, objectives, performance, and how well the current marketing strategy is working.

• includes a review of the current and anticipated levels of organizational resources.

• must include a review of current and anticipated cultural and structural issues that could affect marketing activities.

84 Chapter 3 • Collecting and Analyzing Marketing Information

Analysis of the customer environment:

• examines the firm’s current customers in its target markets, as well as potential customers that currently do not purchase the firm’s product offering.

• can be conducted by using the expanded 5W model: • Who are our current and potential customers? • What do customers do with our products? • Where do customers purchase our products? • When do customers purchase our products? • Why (and how) do customers select our products? • Why do potential customers not purchase our products?

Analysis of the external environment:

• examines the competitive, economic, political, legal and regulatory, technologi- cal, and sociocultural factors in the firm’s external environment.

• includes an examination of the four basic types of competitors faced by all busi- nesses: brand competitors, product competitors, generic competitors, and total budget competitors.

• is often handled by a team of specialists within an organization’s corporate affairs department.

Marketing data and information:

• can be collected from a wide array of internal, government, periodical, book, and commercial sources, as well as through primary marketing research.

• are often collected through four different types of primary research: direct observation, focus groups, surveys, and experiments.

• must be blended from many different sources to be the most useful for planning purposes.

Problems that can occur during data collection include:

• an incomplete or inaccurate definition of the marketing problem. • ambiguity about the usefulness or relevance of the collected data. • severe information overload. • the expense and time associated with data collection. • finding ways to organize the vast amount of collected data and information.

NOTES 1. These facts are from Parija Bhatnagar, “Home Depot Looking to Age Well,” CNNMoney,

January 17, 2006 (http://money.cnn.com/2006/01/17/news/companies/home_depot/index. htm); Sandra Faleris, “Baby Boomer Women Control Most of Nation’s Wealth,” Examiner, May 29, 2012 (http://www.examiner.com/article/baby-boomers-still-control- most-of-nation-s-wealth); Anne Fisher, “Baby Boomers Slowly Growing More Comfortable with Retirement,” Fortune, February 18, 2015 (http://fortune.com/2015/02/ 18/baby-boomers-retirement/); John H. Fleming, “Baby Boomers Are Opening their Wallets,” Gallup Business Journal, January 30, 2015 (http://www.gallup.com/ businessjournal/181367/baby-boomers-opening-wallets.aspx); Karen E. Klein, “Reaching Out to an Older Crowd,” BusinessWeek Online, April 3, 2006 (http://www.businessweek. com/print/smallbiz/content/apr2006/sb20060403_549646.htm); Devin Leonard and Caroline Winter, “In Financial Ads, the Dream Comes Down to Earth,” BusinessWeek Online, October 27, 2011 (http://www.businessweek.com/magazine/in-financial-ads-the- dream-comes-down-to-earth-10272011.html); Janet Novak, “The Biggest Market Losers: The Boomers,” Forbes Online, May 14, 2009 (http://www.forbes.com/2009/05/14/stock- market-losses-survey-personal-finance-retirement-worried-baby-boomers.html); David Serchuk, “Boomers Leave the Table,” Forbes Online, November 21, 2008

Chapter 3 • Collecting and Analyzing Marketing Information 85

(http://www.forbes.com/2008/11/20/intelligent-investing-baby-boomer-retirement-Nov20- panel.html); Halah Touryalai, “Baby Boomer Spending Habits: Here’s What’s Really Hurting Their Retirement,” Forbes, October 15, 2012 (http://www.forbes.com/sites/ halahtouryalai/2012/10/15/baby-boomer-spending-habits-heres-whats-really-hurting-their- retirement/); and Ed Wallace, “The Boomers Stop Buying,” BusinessWeek Online, February 26, 2009 (http://www.businessweek.com/lifestyle/content/feb2009/ bw20090226_384582.htm).

2. These facts are from Tim Cushing, “It’s Finally Over: 8 Years of Mattel vs. Bratz and No One’s Getting Paid but the Lawyers,” TechDirt, January 29, 2013 (https://www.techdirt .com/articles/20121019/17344420768/its-finally-over-8-years-mattel-vs-bratz-no-ones-getting- paid-lawyers.shtml); John Kell, “Bratz Doll Maker MGA Entertainment Sues Mattel,” Wall Street Journal, January 13, 2014 (http://www.wsj.com/articles/SB100014240527023035 95404579318680190603384); “Mattel Tells Federal Jury MGA Stole Bratz Doll Idea, Should Pay,” BusinessWeek Online, April 8, 2001 (http://www.businessweek.com/news/ 2011-04-08/mattel-tells-federal-jury-mga-stole-bratz-doll-idea-should-pay.html); “MGA Asks Appeals Court to Halt Transfer of Bratz,” BusinessWeek Online, May 27, 2009 (http:// www.businessweek.com/ap/financialnews/D98ET0AG3.htm).

3. These facts are from Katrina Brooker, “The Pepsi Machine,” Fortune, February 6, 2006, pp. 68–72.

4. These facts are from Burt Helm, “Blowing Up Pepsi,” BusinessWeek Online, April 23, 2009 (http://www.businessweek.com/magazine/content/09_17/b4128032006687.htm); Duane D. Stanford, “PepsiCo May Boost Marketing Budget to Take on Coca-Cola: Retail,” BusinessWeek Online, January 30, 2012 (http://www.businessweek.com/news/2012-01- 30/pepsico-may-boost-marketing-budget-to-take-on-coca-cola-retail.html); Duane D. Stanford, “PepsiCo to Cut 8,700 Jobs, Spend More on Marketing Brands,” BusinessWeek Online, February 10, 2012 (http://www.businessweek.com/news/2012-02-10/pepsico-to- cut-8-700-jobs-spend-more-on-marketing-brands.html); Trefis Team, “Frito-Lay Dominates U.S. Salty Snacks, But Rising Cracker Sales Could Stall Growth,” Forbes, June 27, 2014 (http://www.forbes.com/sites/greatspeculations/2014/06/27/frito-lay-dominates- u-s-salty-snacks-but-rising-cracker-sales-could-stall-growth/).

5. These facts are from Nanette Byrnes, “The Jobs that Employers Can’t Fill,” BusinessWeek Online, May 29, 2009 (http://www.businessweek.com/careers/ managementiq/archives/2009/05/the_jobs_that_e.html); Bruce Einhorn and Ketaki Gokhale, “India Outsources Feel Unloved in the U.S.,” BusinessWeek Online, November 4, 2010 (http://www.businessweek.com/magazine/content/10_46/ b4203016835355.htm); Robert J. Grossman, “The Truth About the Coming Labor Shortage,” HR Magazine, 50(3), March 2005.

6. These facts are from Mamta Badkar, “The 16 Biggest Corporate Mega-Deals of All Time,” Business Insider, February 23, 2014 (http://www.businessinsider.com/16-biggest- acquisitions-of-all-time-2014-2); Prableen Bajpai, “The Biggest Mergers & Acquisitions in the U.S.,” Investopedia, October 23, 2014 (http://www.investopedia.com/articles/ investing/102314/biggest-mergers-acquisitions-us.asp); Emma Barnett and Amanda Andrews, “AOL Merger Was ‘The Biggest Mistake in Corporate History’, Believes Time Warner Chief Jeff Bewkes,” The Telegraph, September 28, 2010 (http://www.telegraph. co.uk/finance/newsbysector/mediatechnologyandtelecoms/media/8031227/AOL-merger- was-the-biggest-mistake-in-corporate-history-believes-Time-Warner-chief-Jeff-Bewkes. html); Aaron Smith, “Time Warner to Split Off AOL,” CNN Money, May 28, 2009 (http:// money.cnn.com/2009/05/28/technology/timewarner_aol/index.htm).

7. These facts are from Shaun Rein, “China’s Consumers Are Still Spending,” BusinessWeek Online, March 25, 2009 (http://www.businessweek.com/globalbiz/content/mar2009/ gb20090325_370224.htm); Dexter Roberts, “Why China’s Middle Class Can’t Flex Its Buying Power,” Bloomberg Business, February 10, 2015 (http://www.bloomberg.com/news/ articles/2015-02-10/why-china-s-middle-class-can-t-find-its-buying-power).

8. These facts are from “11 Facts About E-Waste,” DoSometing.org (https://www. dosomething.org/facts/11-facts-about-e-waste), accessed February 22, 2015; “Americans’ Need for the Latest Technology Spurs Record-Breaking Smartphone Sales and Buyback Industry Growth,” PR Newswire, February 12, 2015 (http://www.prnewswire.com/news- releases/americans-need-for-the-latest-technology-spurs-record-breaking-smartphone- sales-and-buyback-industry-growth-300035101.html); Susan Carpenter, “Paring Down Our E-Waste Heap: TVs, Cellphones and Other Electronics Don’t Belong in the Trash,” Chicago

86 Chapter 3 • Collecting and Analyzing Marketing Information

Tribune, July 26, 2011 (http://articles.chicagotribune.com/2011-07-26/classified/sc-home- 0718-ewaste-20110723_1_e-waste-electronic-waste-electronic-trash); Gina-Marie Cheeseman, “Amazon Joins the eWaste Trade-In Movement,” TriplePundit, May 23, 2011 (http://www.triplepundit.com/2011/05/amazon-ewaste-trade-in); Dell Reconnect website (http://www.dell.com/learn/us/en/uscorp1/corp-comm/us-goodwill-reconnect? c=us&l=en&s=corp&cs=uscorp1), accessed February 22, 2015; Electronic Manufacturers Recycling Management Company (http://www.mrmrecycling.com/recycling_ethic.htm), accessed February 22, 2015; Electronics Recyclers International (http:// electronicrecyclers.com/about-us/), accessed February 22, 2015; Ben Elgin and Brian Grow, “E-Waste: The Dirty Secret of Recycling Electronics,” BusinessWeek Online, October 15, 2008 (http://www.businessweek.com/magazine/content/08_43/ b4105000160974.htm); Olga Kharif, “E-Waste: Whose Problem is It?” BusinessWeek Online, March 17, 2008 (http://www.businessweek.com/technology/content/mar2008/ tc20080317_718350.htm); Verne Kopytoff, “The Complex Business of Recycling E-Waste,” Bloomberg Business, January 8, 2013 (http://www.bloomberg.com/bw/articles/2013-01-08/ the-complex-business-of-recycling-e-waste); Jessica Mintz, “Dell Bans E-Waste Export to Developing Countries,” BusinessWeek Online, May 12, 2009 (http://www.businessweek. com/ap/tech/D9850TS80.htm); Gerry Smith, “Will E-Waste Recycling Law Compute?” Chicago Tribune, April 3, 2011 (http://articles.chicagotribune.com/2011-04-03/news/ct- met-e-waste-20110403_1_e-waste-recycling-goals-benchmarks).

9. Mary Ellen Pinkham, “20 Surprising Uses for Vinegar” (http://www.ivillage.com/home/ experts/clean/articles/0,,258151_258168,00.html).

10. Dena Kouremetis, “Bartering for Survival—‘Have I Got a Deal for You’,” Forbes, October 22, 2012 (http://www.forbes.com/sites/denakouremetis/2012/10/22/bartering- for-survival-have-i-got-a-deal-for-you/).

11. These facts are from W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy (Boston, MA: Harvard Business School Press, 2005), pp. 24–35; “Yellow Tail Wine Is Best-Selling Imported Wine in US,” Specialty Food, October 31, 2011 (https://www. specialtyfood.com/news/article/83111-yellow-tail-wine-best-selling-imported-wine-us/).

12. These facts are from John LaMattina, “John Oliver’s Big Pharma Rant Is Amusing—But Misleading,” Forbes, February 18, 2015 (http://www.forbes.com/sites/johnlamattina/2015/ 02/18/john-olivers-big-pharma-rant-is-amusing-but-misleading/); John Mack, “Double Dip in DTC Spending Plus 33% Drop in Internet Display Ad Spending!” Pharma Marketing Blog, October 22, 2011 (http://pharmamkting.blogspot.com/2011/10/double-dip-in-dtc-spending- plus-33-drop.html); Kirstie Pickering, “FDA Outlines Its Plan to Simplify DTC Ads for Consumers,” PMLive, February 13, 2015 (http://www.pmlive.com/pharma_news/ fda_outlines_its_plans_to_simplify_dtc_ads_for_consumers_649443); Arlene Weintraub, “Ask Your Doctor If This Ad Is Right for You,” BusinessWeek Online, November 4, 2009 (http://www.businessweek.com/magazine/content/09_46/b4155078964719.htm).

13. These facts are from the Gatorade website (http://www.gatorade.com/products/all- products), accessed February 22, 2015; Duane Stanford, “Gatorade Goes Back to the Lab,” BusinessWeek Online, November 23, 2011 (http://www.businessweek.com/ magazine/gatorade-goes-back-to-the-lab-11232011.html).

14. This definition of competitive intelligence is adapted from Strategic and Competitive Intelligence Professionals (http://www.scip.org), accessed February 22, 2015.

15. Ibid. 16. This information is from http://www.inflationdata.com, accessed February 22, 2015. 17. These facts are from Jane Denny, “The US’s $14.5 Trillion Intangible Economy and a

Failure of Accountancy,” Intellectual Asset Management Blog, November 4, 2011 (http://www.iam-magazine.com/blog/Detail.aspx?g=8426421b-14fc-4227-846f- 78e8f3f4bddc); Ken Jarboe, “Measuring Innovation and Intangibles,” The Intangible Economy, Athena Alliance weblog, January 16, 2009 (http://www.athenaalliance.org/ weblog/archives/2009/01/measuring_innovation_and_intangibles.html); Michael Mandel, “GDP: What’s Counted, What’s Not,” BusinessWeek Online, February 13, 2006 (http:// www.businessweek.com/magazine/content/06_07/b3971010.htm).

18. These facts are from “Court to Review Anti-Fraud Law,” BusinessWeek Online, May 18, 2009 (http://www.businessweek.com/ap/financialnews/D988NL482.htm); Nick Gillespie, “The Worst Ideas of the Decade: Sarbanes-Oxley,” The Washington Post (http://www. washingtonpost.com/wp-srv/special/opinions/outlook/worst-ideas/sarbanes-oxley.html), accessed February 22, 2015; Curtis Nicholls, “Is the Sarbanes-Oxley Act Working?”

Chapter 3 • Collecting and Analyzing Marketing Information 87

Insurance News Net, June 10, 2014 (http://insurancenewsnet.com/oarticle/2014/06/10/is- the-sarbanes-oxley-act-working-a-516096.html#.VOoMlEKztqs); “Sarbanes-Oxley is Here to Stay,” The ERM Current, June 28, 2010 (http://wheelhouseadvisors.com/category/ sarbanes-oxley); The Sarbanes-Oxley Act Community Forum (http://www.sarbanes- oxley-forum.com), accessed February 22, 2015.

19. Kerry Capell, “Now, Will Europe Swallow Frankenfoods?” BusinessWeek Online, February 8, 2006 (http://www.businessweek.com/bwdaily/dnflash/feb2006/nf2006028_3575_db039. htm); Germany Bans Monsanto’s GMO Corn,” BusinessWeek Online, April 16, 2009 (http:// www.businessweek.com/globalbiz/content/apr2009/gb20090416_667169.htm); “Greece Extends Ban on U.S. Biotech Corn Seeds,” BusinessWeek Online, May 27, 2009 (http:// www.businessweek.com/ap/financialnews/D98EL0TG2.htm); “Industry Figures Confirm GM Food Is a Commercial Flop in Europe,” Greenpeace Press Release, February 7, 2012 (http://www.greenpeace.org/eu-unit/en/News/2012/GM-figures); “Update on EU’s GMO Ruling,” AG Professional, January 29, 2015 (http://www.agprofessional.com/news/update- eu’s-gmo-ruling).

20. These facts are from Robert Hof, “Will Apple Pay Be the Next Great Marketing Channel?” Forbes, February 20, 2015 (http://www.forbes.com/sites/roberthof/2015/02/ 20/will-apple-pay-be-the-next-great-marketing-channel/); “Is Google Dumping NFC to Compete with Apple?” PYMNTS.com, February 12, 2015 (http://www.pymnts.com/ news/2015/plaso-googles-slightly-unnerving-answer-to-apple-pay/#.VOoSYEKztqs); Marie Mawad, “Gemalto Plans to Introduce Smart Chip for Mobile Payment,” BusinessWeek Online, February 28, 2012 (http://www.businessweek.com/news/2012-02-28/gemalto- plans-to-introduce-smart-chip-for-mobile-payment.html); RFID Journal (http://www. rfidjournal.com), accessed February 22, 2015.

21. Jennifer M. Ortman, Victoria A. Velkoff, and Howard Hogan, “An Aging Nation: The Older Population in the United States,” Current Population Reports. May 2014 (Washington, DC: U.S. Census Bureau).

22. These facts are from Jens Manuel Krogstad, “With Fewer New Arrivals, Census Lowers Hispanic Population Projections,” Pew Research Center, December 16, 2014 (http:// www.pewresearch.org/fact-tank/2014/12/16/with-fewer-new-arrivals-census-lowers- hispanic-population-projections-2/); Michael Martinez and David Ariosto, “Hispanic Population Exceeds 50 Million, Firmly Nation’s No. 2 Group,” CNN, March 24, 2011 (http://articles.cnn.com/2011-03-24/us/census.hispanics_1_hispanic-population-illegal- immigration-foreign-born?_s=PM:US).

23. These facts are from Ronald Grover, “U.S. Marketers Say Hola! To Hispanic Consumers,” BusinessWeek Online, April 9, 2009 (http://www.businessweek.com/ magazine/content/09_16/b4127076302996.htm); Todd Spangler, “Hispanic TV Summit: Level of Ad Spending is ‘Disgusting’: Vidal’s Ruiz,” VegaPages, September 21, 2011 (http://www.vegapages.com/article/hispanic-tv-summit-level-of-ad-spending-is- disgusting-vidals-ruiz.html).

24. Eda Gurel-Atay, Guang-Xin Xie, Johnny Chen, and Lynn Richard Kahle, “Changes in Social Values in the United States, 1976–2007: ‘Self-Respect’ Is on the Upswing as a ‘Sense of Belonging’ Becomes Less Important,” Journal of Advertising Research, 50 (March), 57–67.

25. The organizational descriptions of corporate affairs are taken from websites of these companies: IBM (http://www.ibm.com/ibm/responsibility/citizenship/); Microsoft (http:// www.microsoft.com/en-us/legal/default.aspx); Tesco (http://www.tesco-careers.com/ Jobs-in-our-Office/Career-Path/Corporate-affairs.aspx); and SABMiller (http://www. sabmiller.com/careers/careers-at-sabmiller/corporate-affairs), all accessed February 22, 2015.

88 Chapter 3 • Collecting and Analyzing Marketing Information

DevelopingCompetitive Advantageand StrategicFocus

INTRODUCTION Situation analysis, as discussed in Chapter 3, can generate a great deal of data and information for marketing planning. But information, in and of itself, provides little direction to managers in preparing a marketing plan. If the analysis does not struc- ture the information in a meaningful way that clarifies both present and anticipated situations, the manager will be unable to see how the pieces fit together. This synthe- sis of information is critical in developing competitive advantages and the strategic focus of the marketing plan. As illustrated in Beyond the Pages 4.1, this synthesis often comes from enhanced innovation, a stronger focus on customer needs, and tighter integration within the firm. Understanding the connectedness of the external environment is vital to enhanced innovation across a number of industries. How should the marketing manager organize and use the information collected during the situation analysis? One widely used tool is SWOT analysis (strengths and weak- nesses, opportunities and threats). A SWOT analysis encompasses both the internal and external environments of the firm. Internally, the framework addresses a firm’s strengths and weaknesses on key dimensions such as financial performance and resources, human resources, production facilities and capacity, market share, cus- tomer perceptions, product quality, product availability, and organizational commu- nication. The assessment of the external environment organizes information on the market (customers and competition), economic conditions, social trends, technol- ogy, and government regulations.

Many consider SWOT analysis to be one of the most effective tools in the analysis of marketing data and information. SWOT analysis is a simple, straightfor- ward framework that provides direction and serves as a catalyst for the develop- ment of viable marketing plans. It fulfills this role by structuring the assessment of the fit between what a firm can and cannot do (strengths and weaknesses), and the environmental conditions working for and against the firm (opportunities and threats). When performed correctly, a SWOT analysis not only organizes data and information, but also can be especially useful in uncovering competitive advantages that can be leveraged in the firm’s marketing strategy. These competi- tive advantages help establish the strategic focus and direction of the firm’s marketing plan.

As a planning tool, SWOT analysis has many benefits, as outlined in Exhibit 4.1. In fact, SWOT analysis is so useful and logical that many underestimate its value in planning. However, this simplicity often leads to unfocused and poorly conducted analyses. The most common criticisms leveled against SWOT analysis are that (1) it allows firms to create lists without serious consideration of the

CHAPTER

BEYOND THE PAGES 4.1

Innovation: The Key to Success1

Innovation is the buzzword of business in the twenty-first century. Of course, innovation has always been important, especially with respect to developing new products. What has changed, however, is the focus of innovation in most com- panies. The twentieth-century model of innova- tion was about quality control, cost cutting, and operational efficiency. Today, innovation is more about reinventing business processes, collaborating and integrating within the firm, and creating entirely new markets to meet untapped customers’ needs. Increasing globali- zation, the growth of the Internet, and more demanding customers are forcing marketers to find innovative ways of conducting business.

An important lesson that many companies have learned is that innovation is not always about technology or offering the latest gee- whiz product. Differences in innovation style are apparent in Business Insider’s most recent list of the World’s Most Innovative Companies. The top 20 companies on the list include both cultural icons and manufacturing giants (U.S. companies except where noted):

Rank Company 1. Apple 2. Google 3. Samsung (South Korea) 4. Microsoft 5. IBM 6. Amazon 7. Tesla Motors 8. Toyota (Japan) 9. Facebook 10. Sony (Japan) 11. Hewlett-Packard 12. General Electric 13. Intel 14. Cisco Systems 15. Siemens (Germany) 16. Coca-Cola 17. LG Electronics (South Korea) 18. BMW (Germany) 19. Ford Motor 20. Dell

Several types of innovation are evident in this list. For example, in launching the iPod, iPhone, iPad, and the App Store, Apple com- bined innovations in product design, branding, strategic alliances, and business model to create a cultural phenomenon. Innovation at Google is based on applications such as Google Now and Google Drive that are not related to its ubiqui- tous search engine. Toyota makes the list due to relentless manufacturing expertise, tight integra- tion within the firm, and advancements in hybrid technology. Asian companies (Samsung, Sony, and LG) and German companies (Siemens and BMW) made a strong showing in the list as well.

One thing that all innovative companies have in common is a laser-like focus on cus- tomer needs. Innovative companies find new ways of learning from customers in addition to traditional methods. For example, many companies closely watch blogs and online communities to learn what customers are thinking. Focusing on customers may not sound innovative, but increasing competition and shorter product cycles are forcing market- ers to shift away from the price- and efficiency- driven approaches of the past. To escape from commodity hell, marketers must find innova- tion in unfamiliar places. For example, Procter & Gamble (number 31 on the list) launched Tide Pods after 8 years of research and 6,000 consumer tests. Tide Pods are ball-shaped, premeasured packages of detergent and fabric softener that consumers simply toss into the wash. A lot of the research for Tide Pods was conducted at P&G’s Beckett Ridge Innovation Center just outside of the com- pany’s Cincinnati headquarters. There, P&G’s researchers watched consumers to learn how to make a laundry detergent that was easier to use, less confusing, and more convenient to carry.

Innovation is also good for the bottom line. Through increased growth, better collaboration, and a broader product mix, the most innovative companies are able to pull their products out of commodity status and increase their operating revenue. It is clear that innovation has become a key driver of competitive advantage and success in today’s market.

90 Chapter 4 • Developing Competitive Advantage and Strategic Focus

issues and (2) it often becomes a sterile academic exercise of classifying data and information. It is important to remember that SWOT analysis, by itself, is not inher- ently productive or unproductive. Rather, the way that one uses SWOT analysis will determine whether it yields benefits for the firm.

MAKING SWOT ANALYSIS PRODUCTIVE Whether a firm receives the full benefits of SWOT analysis depends on the way the man- ager uses the framework. If done correctly and smartly, SWOT analysis can be a viable mechanism for the development of the marketing plan. If done haphazardly or incor- rectly, it can be a great waste of time and other valuable resources. To help ensure that the former, and not the latter, takes place, we offer the following directives to make SWOT analysis more productive and useful. Exhibit 4.2 outlines these directives.

Stay Focused Marketing planners often make the mistake of conducting one generic SWOT analy- sis for the entire organization or business unit. Such an approach produces stale,

EXHIBIT 4.1 Major Benefits of SWOT Analysis.

Simplicity SWOT analysis requires no extensive training or technical skills to be used successfully. The analyst needs only a comprehensive understanding of the nature of the company and the industry in which it competes.

Lower Costs Because specialized training and skills are not necessary, the use of SWOT analysis can actually reduce the costs associated with strategic planning. As firms begin to recognize this benefit of SWOT analysis, many opt to downsize or eliminate their strategic planning departments.

Flexibility SWOT analysis can enhance the quality of an organization’s strategic planning even without exten- sive marketing information systems. However, when comprehensive systems are present, they can be structured to feed information directly into the SWOT framework. The presence of a com- prehensive information system can make repeated SWOT analyses run more smoothly and efficiently.

Integration and Synthesis SWOT analysis gives the analyst the ability to integrate and synthesize diverse information, both of a quantitative and a qualitative nature. It organizes information that is widely known, as well as infor- mation that has only recently been acquired or discovered. SWOT analysis can also deal with a wide diversity of information sources. In fact, SWOT analysis helps transform information diversity from a weakness of the planning process into one of its major strengths.

Collaboration SWOT analysis fosters collaboration and open information exchange between different functional areas. By learning what their counterparts do, what they know, what they think, and how they feel, the marketing analyst can solve problems, fill voids in the analysis, and eliminate potential disagree- ments before the finalization of the marketing plan.

Chapter 4 • Developing Competitive Advantage and Strategic Focus 91

meaningless generalizations that come from the tops of managers’ heads or from press release files. Although this type of effort may make managers feel good and provide a quick sense of accomplishment, it does little to add to the creativity and vision of the planning process.

When we say SWOT analysis, we really mean SWOT analyses. In most firms, there should be a series of analyses, each focusing on a specific product/market combination. For example, a single SWOT analysis for the Chevrolet division of General Motors would not be focused enough to be meaningful. Instead, separate analyses for each product category (passenger cars, trucks, SUVs) or brand (Silverado, Tahoe, Corvette, Impala) in the division would be more appropriate. Such a focus enables the marketing manager to look at the specific mix of competitors, customers, and external factors that are present in a given market. Chevrolet’s Tahoe, for example, competes in the crowded SUV market where com- petitors release new models and competing crossover vehicles at a staggering pace. Consequently, market planning for the Tahoe should differ substantially from market planning for Chevrolet’s Corvette. If needed, separate product/mar- ket analyses can be combined to examine the issues relevant for the entire strate- gic business unit, and business unit analyses can be combined to create a complete SWOT analysis for the entire organization. The only time a single SWOT analysis would be appropriate is when an organization has only one product/market combination.

EXHIBIT 4.2 Directives for a Productive SWOT Analysis.

Stay Focused A single, broad analysis leads to meaningless generalizations. Separate analyses for each product– market combination are recommended.

Search Extensively for Competitors Although major brand competitors are the most important, the analyst must not overlook product, generic, and total budget competitors. Potential future competitors must also be considered.

Collaborate with Other Functional Areas SWOT analysis promotes the sharing of information and perspective across departments. This cross- pollination of ideas allows for more creative and innovative solutions to marketing problems.

Examine Issues from the Customers’ Perspective Customers’ beliefs about the firm, its products, and marketing activities are important considerations in SWOT analysis. The views of employees and other key stakeholders must also be considered.

Look for Causes, Not Characteristics Rather than simply list characteristics of the firm’s internal and external environments, the analyst must also explore the resources possessed by the firm and/or its competitors that are the true causes for the firm’s strengths, weaknesses, opportunities, and threats.

Separate Internal Issues from External Issues If an issue would exist even if the firm did not exist, the issue should be classified as external. In the SWOT framework, opportunities (and threats) exist independently of the firm and are associated with characteristics or situations present in the economic, customer, competitive, cultural, technological, political, or legal environments in which the firm resides. Marketing options, strategies, or tactics are not a part of the SWOT analysis.

92 Chapter 4 • Developing Competitive Advantage and Strategic Focus

Search Extensively for Competitors Information on competitors and their activities is an important aspect of a well- focused SWOT analysis. The key is not to overlook any competitor, whether a cur- rent rival or one on the horizon. As we discussed in Chapter 3, the firm will focus most of its efforts on brand competition. During the SWOT analysis, however, the firm must watch for any current or potential direct substitutes for its products. Prod- uct, generic, and total budget competitors are important as well. Looking for all four types of competition is crucial because many firms and managers never look past brand competitors. Although it is important for the SWOT analysis to be focused, it must not be myopic.

Even industry giants can lose sight of their potential competitors by focusing exclusively on brand competition. Kodak, for example, had always taken steps to maintain its market dominance over rivals Fuji, Konica, and Polaroid in the film industry. However, the advent of digital photography added Sony, Nikon, Canon, and others to Kodak’s set of competing firms. And, as digital cameras became inte- grated into wireless phones, Kodak was forced to add Apple, Motorola, LG, and Sam- sung to its competitive set. Given the significant increase in competitive pressures facing the firm, it is of little surprise that Kodak was forced to declare bankruptcy. A similar trend has occurred in financial services as deregulation has allowed bro- kers, banks, and insurance firms to compete in each other’s traditional markets. State Farm, for example, offers mortgage loans, credit cards, mutual funds, and tra- ditional banking services alongside its well-known insurance products. This shift has forced firms such as Charles Schwab and Wells Fargo to look at insurance compa- nies in a different light.

Collaborate with Other Functional Areas One of the major benefits of SWOT analysis is that it generates information and per- spective that can be shared across a variety of functional areas in the firm. The SWOT process should be a powerful stimulus for communication outside normal channels. The final outcome of a properly conducted SWOT analysis should be a fusion of information from many areas. Managers in sales, advertising, production, research and development, finance, customer service, inventory control, quality con- trol, and other areas should learn what other managers see as the firm’s strengths, weaknesses, opportunities, and threats. This allows the marketing manager to come to terms with multiple perspectives before actually creating the marketing plan.

When combining the SWOT analyses from individual areas, the marketing man- ager can identify opportunities for joint projects and cross-selling of the firm’s pro- ducts. In a large firm, the first time a SWOT analysis takes place may be the initial point at which managers from some areas have ever formally communicated with each other. Such cross-pollination can generate a very conducive environment for cre- ativity and innovation. Moreover, research has shown that the success of introducing a new product, especially a radically new product, is extremely dependent on the ability of different functional areas to collaborate and integrate their differing perspectives. For example, every time BMW develops a new car, they relocate 200 to 300 engineer- ing, design, production, marketing, and finance employees from their worldwide loca- tions to the company’s research and innovation center in Munich, Germany. For up to three years, these employees work alongside BMW’s research and development team in a manner that speeds communication and car development.2

Examine Issues from the Customers’ Perspective In the initial stages of SWOT analysis, it is important to identify issues exhaustively. However, all issues are not equally important with respect to developing competitive

Chapter 4 • Developing Competitive Advantage and Strategic Focus 93

advantages and strategic focus for the marketing plan. As the analysis progresses, the marketing manager should identify the most critical issues by looking at each one through the eyes of the firm’s customers. To do this, the manager must con- stantly ask questions such as:

• What do customers (and noncustomers) believe about us as a company? • What do customers (and noncustomers) think of our product quality, customer

service, price and overall value, convenience, and promotional messages in com- parison to our competitors?

• Which of our weaknesses translate into a decreased ability to serve customers (and decreased ability to convert noncustomers)?

• How do trends in the external environment affect customers (and noncustomers)? • What is the relative importance of these issues, not as we see them, but as custo-

mers see them?

Marketing planners must also gauge the perceptions of each customer segment that the firm attempts to target. For example, older banking customers, due to their reluc- tance to use ATMs and online banking services, may have vastly different perceptions of a bank’s convenience than younger customers. Each customer segment’s perceptions of external issues, such as the economy or the environment, are also important. It mat- ters little, for example, that managers think the economic outlook is positive if custo- mers have curbed their spending because they think the economy is weak.

Examining issues from the customers’ perspective also includes the firm’s internal customers: its employees. The fact that management perceives the firm as offering competitive compensation and benefits is unimportant. The real issue is what the employees think. Employees are also a valuable source of information on strengths, weaknesses, opportunities, and threats that management may have never considered. Some employees, especially frontline employees, are closer to the customer and can offer a different perspective on what customers think and believe. Other key stakeholders, such as investors, the general public, and government officials, should also be considered. The key is to examine every

Sy da

Pr od uc tio ns /S hu tt er st oc k. co m

Collaboration with other functional areas is a necessary ingredient in a well-crafted SWOT analysis.

94 Chapter 4 • Developing Competitive Advantage and Strategic Focus

issue from the most relevant perspective. Exhibit 4.3 illustrates how taking the cus- tomers’ perspective can help managers interpret the clichés they might develop, and then break them down into meaningful customer-oriented strengths and weaknesses.

Taking the customers’ perspective is a cornerstone of a well-done SWOT analy- sis. Managers have a natural tendency to see issues the way they think they are (e.g., “We offer a high-quality product”). SWOT analysis forces managers to change their perceptions to the way customers and other important groups see things (e.g., “The product offers weak value given its price and features as compared against the strongest brand competitor”). The contrast between these two perspec- tives often leads to the identification of a gap between management’s version of real- ity and customers’ perceptions. As the planning process moves ahead, managers must reduce or eliminate this gap and determine whether their views of the firm are realistic.

Look for Causes, Not Characteristics Although taking the customers’ perspective is important, it often provides just enough information to get into serious trouble. That is, it provides a level of detail that is often very descriptive, but not very constructive. The problem lies in listing strengths, weaknesses, opportunities, and threats as simple descriptions or charac- teristics of the firm’s internal and external environments without going deeper to consider the causes for these characteristics. Although the customers’ perspective is quite valuable, customers do not see behind the scenes to understand the reasons for a firm’s characteristics. More often than not, the causes for each issue in a SWOT analysis can be found in the resources possessed by the firm and/or its competitors.

From a resource-based viewpoint, every organization can be considered as a unique bundle of tangible and intangible resources. Major types of these resources include:3

• Financial resources—cash, access to financial markets, physical facilities, equipment, raw materials, systems, and configurations

• Intellectual resources—expertise, discoveries, creativity, and innovation

EXHIBIT 4.3 Breaking Down Managerial Clichés into Customer-Oriented Strengths and Weaknesses.

Clichè Potential Strengths Potential Weaknesses “We are an established firm.” Stable after-sales service

Experienced Trustworthy

Old-fashioned Inflexible Weak innovation

“We are a large supplier.” Comprehensive product line Technical expertise Longevity Strong reputation

Bureaucratic Focused only on large accounts Impersonal Weak customer service

“We have a comprehensive product line.”

Wide variety and availability One-stop supplier Convenient Customized solutions

Shallow assortment Cannot offer hard-to-find products Limited in-depth product expertise

“We are the industry standard.” Wide product adoption High status and image Good marketing leverage Extensive third-party support

Vulnerable to technological changes Limited view of competition Higher prices (weaker value)

SOURCE: Adapted from Nigel Piercy, Market-Led Strategic Change (Oxford, UK: Butterworth-Heineman, 2002).

Chapter 4 • Developing Competitive Advantage and Strategic Focus 95

• Legal resources—patents, trademarks, and contracts • Human resources—employee expertise and skills, and leadership • Organizational resources—culture, customs, shared values, vision, routines,

working relationships, processes, and systems • Informational resources—customer intelligence, competitive intelligence, and

marketing information systems • Relational resources—strategic alliances; relations with customers, vendors,

and other stakeholders; bargaining power; and switching costs • Reputational resources—brand names, symbols, image, and reputation

The availability or lack of these resources are the causes for the firm’s strengths and weaknesses in meeting customers’ needs, and determine which external condi- tions represent opportunities and threats. For example, Walmart’s strength in low- cost distribution and logistics comes from its combined resources in terms of distribution, information, and communication infrastructure, and strong relation- ships with vendors. Likewise, 3M’s strength in product innovation is the result of combined financial, intellectual, legal, organizational, and informational resources. These resources not only give Walmart and 3M strengths or advantages in serving customers, but also create imposing threats for their competitors.

Separate Internal Issues from External Issues For the results of a SWOT analysis to be truly beneficial, we have seen that the ana- lyst must go beyond simple descriptions of internal and external characteristics to explore the resources that are the foundation for these characteristics. It is equally important, however, for the analyst to maintain a separation between internal issues and external issues. Internal issues are the firm’s strengths and weaknesses, while external issues refer to opportunities and threats in the firm’s external environments. The key test to differentiate a strength or weakness from an opportunity or threat is to ask, “Would this issue exist if the firm did not exist?” If the answer is yes, the issue should be classified as external to the firm.

At first glance, the distinction between internal and external issues seems sim- plistic and immaterial. However, the failure to understand the difference between internal and external issues is one of the major reasons for a poorly conducted SWOT analysis. This happens because managers tend to get ahead of themselves and list their marketing options or strategies as opportunities. For example, a manager might state that the firm has “an opportunity to move into global markets.” However, such a move is a strategy or action that the firm might take to expand mar- ket share. In the SWOT framework, opportunities (and threats) exist independently of the firm and are associated with characteristics or situations present in the eco- nomic, customer, competitive, cultural, technological, political, or legal environ- ments in which the firm resides. For example, an opportunity in this case could be “increasing customer demand for U.S. products,” or that a “competitor recently pulled out of the foreign market.” Once the opportunities (and threats) are known, the manager’s options, strategies, or tactics should be based on what the firm intends to do about its opportunities and threats relative to its own strengths and weak- nesses. The development of these strategic options occurs at a later point within the marketing plan framework.

In summary, a SWOT analysis should be directed by Socrates’ advice: “Know thyself.” This knowledge should be realistic, based on how customers (external and internal) and other key stakeholders see the company, and viewed in terms of the firm’s resources. If managers find it difficult to make an honest and realistic assess- ment of these issues, they should recognize the need to bring in outside experts or consultants to oversee the process.

96 Chapter 4 • Developing Competitive Advantage and Strategic Focus

SWOT-DRIVEN STRATEGIC PLANNING As we discussed in Chapter 3, the collection of marketing information via a situation analysis identifies the key factors that should be tracked by the firm and organizes them within a system that will monitor and distribute information on these factors on an ongoing basis. This process feeds into and helps define the boundaries of a SWOT analysis that will be used as a catalyst for the development of the firm’s mar- keting plan. The role of SWOT analysis then is to help the marketing manager make the transition from a broad understanding of the marketing environment to the development of a strategic focus for the firm’s marketing efforts.

The potential issues that can be considered in a SWOT analysis are numerous and will vary depending on the particular firm or industry being examined. To aid your search for relevant issues, we have provided a list of potential strengths, weak- nesses, opportunities, and threats in Exhibit 4.4. This list is not exhaustive, as these items illustrate only some of the potential issues that may arise in a SWOT analysis.

Strengths and Weaknesses Relative to market needs and competitors’ characteristics, the marketing manager must begin to think in terms of what the firm can do well and where it may have defi- ciencies. Strengths and weaknesses exist either because of resources possessed (or not possessed) by the firm, or in the nature of the relationships between the firm and its customers, its employees, or outside organizations (e.g., supply chain partners, sup- pliers, lending institutions, government agencies, etc.). Given that SWOT analysis must be customer focused to gain maximum benefit, strengths are meaningful only when they serve to satisfy a customer need. When this is the case, that strength becomes a capability.4 The marketing manager can then develop marketing strategies that leverage these capabilities in the form of strategic competitive advantages. At the same time, the manager can develop strategies to overcome the firm’s weak- nesses, or find ways to minimize the negative effects of these weaknesses.

A great example of strengths and weaknesses in action occurs in the U.S. airline industry. Big carriers (or network carriers) such as American, Delta, and United have strengths in terms of sheer size, passenger volume, and marketing muscle. However, they suffer from a number of weaknesses related to internal efficiency, labor rela- tions, and business models that cannot compensate for changes in customer prefer- ences. These weaknesses are especially dramatic when compared to low-cost airlines such as Southwest, Virgin America, Allegiant Air, and JetBlue. Initially, these carriers offered low-cost service in routes ignored by the big carriers. Their strengths in terms of internal efficiency, flexible operations, and lower cost equip- ment gave low-cost carriers a major advantage with respect to cost economies. The differences in operating expenses per available seat mile (an industry benchmark) are eye opening: Spirit (9.9¢), Allegiant (10.2¢), Virgin America (10.9¢), Southwest (12.2¢), and JetBlue (12.3¢) versus United (13.6¢), American (14.3¢), and Delta (15.6¢). The ability of low-cost carriers to operate more efficiently and at reduced costs has changed the way customers look at air travel. Today, most customers see air travel as a commodity product, with price being the only real distinguishing fea- ture among competing brands.5

Opportunities and Threats In leveraging strengths to create capabilities and competitive advantages, the mar- keting manager must be mindful of trends and situations in the external environ- ment. Stressing internal strengths while ignoring external issues can lead to an organization that, although efficient, cannot adapt when external changes either enhance or impede the firm’s ability to serve the needs of its customers. Opportunities

Chapter 4 • Developing Competitive Advantage and Strategic Focus 97

and threats exist outside the firm, independently of internal strengths, weaknesses, or marketing options. Opportunities and threats typically occur within the competitive, customer, economic, political/legal, technological, and/or sociocultural environ- ments. After identifying opportunities and threats, the manager can develop strate- gies to take advantage of opportunities and minimize or overcome the firm’s threats.

Market opportunities can come from many sources. For example, when CEO Howard Schultz first envisioned the idea of Starbucks coffeehouses in 1983, he never dreamed that his idea would create an entire industry. Schultz was on a trip to Milan, Italy when he first conceived of a chain of American coffee bars. At that time, there was essentially no competition in coffee, as most consumers considered it a commodity. He knew that the demand for coffee was high, as it is only second to water in terms of consumption around the world. However, the U.S. coffee market was largely found on grocery store shelves and in restaurants. In fact, only 200 cof- feehouses existed in the United States when Starbucks began its expansion. This clear lack of competition gave Schultz the impetus to take Starbucks from its humble Seattle, Washington beginnings to the rest of the world. Today there are almost 22,000 Starbucks coffeehouses in 66 countries around the world—56 percent of them are in the United States. Coffee is now a cultural phenomenon as there are thousands of coffeehouses in the United States today, most being mom-and-pop

EXHIBIT 4.4 Potential Issues to Consider in a SWOT Analysis.

Potential Internal Strengths Abundant financial resources Well-known brand name Number 1 ranking in the industry Economies of scale Proprietary technology Patented products or processes Lower costs (raw materials or processes) Respected company/brand image Superior management talent Better marketing skills Superior product quality Alliances with other firms Good distribution skills Committed employees

Potential External Opportunities Rapid market growth Complacent rival firms Changing customer needs/tastes Opening of foreign markets Mishap of a rival firm New product or process discoveries Economic boom/downturn Government deregulation New technology Demographic shifts Other firms seeking alliances High brand switching Sales decline for a substitute product Evolving business models in the industry

Potential Internal Weaknesses Lack of strategic direction Limited financial resources Weak spending on R&D Very narrow product line Limited distribution Higher costs (raw materials or

processes) Out-of-date products or

technology Internal operating problems Internal political problems Weak market image Poor marketing skills Alliances with weak firms Limited management skills Undertrained employees

Potential External Threats Entry of foreign competitors Introduction of new substitute products Product life cycle in decline Evolving business models in the industry Changing customer needs/tastes Declining consumer confidence Rival firms adopting new strategies Increased government regulation Economic boom/downturn Change in Federal Reserve policy New technology Demographic shifts Foreign trade barriers Poor performance of ally firm International political turmoil Weakening currency exchange rates

98 Chapter 4 • Developing Competitive Advantage and Strategic Focus

businesses that piggyback on Starbucks’ success. Starbucks customers eagerly spend $3 for a cup of coffee, but they get more than a mere drink. Starbucks is a place to meet friends, talk business, listen to music, or just relax. Starbucks’ popular- ity has spread to grocery store shelves where the brand is now a major threat to tra- ditional in-store competitors. The combination of an obvious market opportunity and Schultz’s idea has forever changed the worldwide coffee market.6

The SWOT Matrix As we consider how a firm can use its strengths, weaknesses, opportunities, and threats to drive the development of its marketing plan, remember that SWOT analy- sis is designed to synthesize a wide array of information and aid the transition to the firm’s strategic focus. To address these issues properly, the marketing manager should appraise every strength, weakness, opportunity, and threat to determine their total impact on the firm’s marketing efforts. To utilize SWOT analysis success- fully, the marketing manager must be cognizant of four issues:7

1. The assessment of strengths and weaknesses must look beyond the firm’s resources and product offering(s) to examine processes that are key to meeting customers’ needs. This often entails offering “solutions” to customers’ problems, rather than specific products.

2. The achievement of the firm’s goals and objectives depends on its ability to cre- ate capabilities by matching its strengths with market opportunities. Capabilities become competitive advantages if they provide better value to customers than competing offerings.

3. Firms can often convert weaknesses into strengths or even capabilities by investing strategically in key areas (e.g., customer support, research and devel- opment, supply chain efficiency, employee training). Likewise, threats can often be converted into opportunities if the right resources are available.

va rio

im ag es

G m bH

& Co .K G / A la m y

Starbucks’ founder Howard Schultz seized an open market opportunity and forever changed the coffee industry.

Chapter 4 • Developing Competitive Advantage and Strategic Focus 99

4. Weaknesses that cannot be converted into strengths become the firm’s limita- tions. Limitations that are obvious and meaningful to customers or other stake- holders must be minimized through effective strategic choices.

One useful method of conducting this assessment is to visualize the analysis via a SWOT matrix. Exhibit 4.5 provides an example of this four-cell array that can be used to visually evaluate each element of a SWOT analysis. At this point, the manager must evaluate the issues within each cell of the matrix in terms of their magnitude and importance. As we have stated before, this evaluation should ideally be based on customers’ perceptions. If customers’ perceptions cannot be gathered, the man- ager should base the ratings on the input of employees, business partners, or their own intuition and expertise.

It is not mandatory that the SWOT matrix be assessed quantitatively, but it can be informative to do so. Exhibit 4.6 illustrates how this assessment might be conducted using information from the VirPharm marketing plan example found on our website. The first step is to quantify the magnitude of each element within the matrix. Magni- tude refers to how strongly each element affects the firm. A simple method is to use a scale of 1 (low magnitude), 2 (medium magnitude), or 3 (high magnitude) for each strength and opportunity, and −1 (low magnitude), −2 (medium magnitude), or −3 (high magnitude) for each weakness and threat. The second step is to rate the impor- tance of each element using a scale of 1 (weak importance), 2 (average importance), or 3 (major importance) for all elements in the matrix. The final step is to multiply the magnitude ratings by the importance ratings to create a total rating for each element. Remember that the magnitude and importance ratings should be heavily influenced by customer perceptions, not just the perceptions of the manager.

The elements with the highest total ratings (positive or negative) should have the greatest influence in developing the marketing strategy. A sizable strength in an important area must certainly be emphasized in order to convert it into a capability

EXHIBIT 4.5 The SWOT Matrix.

Strengths

Match Match

Minimize/Avoid Minimize/Avoid

Convert Convert

Weaknesses Threats

Opportunities

SOURCE: Adapted from Nigel Piercy, Market-Led Strategic Change (Oxford, UK: Butterworth-Heineman, 2002).

100 Chapter 4 • Developing Competitive Advantage and Strategic Focus

EXHIBIT 4.6 Quantitative Assessment of the SWOT Matrix.

This analysis was conducted for the VirPharm marketing plan example found on our website. The ratings in each cell have their basis in a thorough analysis of the company and the industry.

Strengths M I R BOPREX approved to treat arthritis, migraine headache, and general pain

3 3 9

Patent exclusivity for three years 3 3 9 New product entry 3 2 6 Prescription-strength pain relief available OTC 3 2 6 Effective migraine treatment 3 2 6 Talented and motivated workforce 2 2 4 Lower cost of raw materials 3 1 3 Wide range of products 1 2 2

Weaknesses M I R Limited marketing budget �3 3 �9 Market position (number 6 in market) �3 3 �9 Weak product differentiation �3 3 �9 Current brand name (new to market) �3 2 �6 Mid-sized company �2 2 �4 BOPREX associated with gastrointestinal side effects �1 3 �3 Variability in offshore suppliers �1 2 �2 Opportunities M I R FDA has approved the transition of prescription NSAIDs into OTC market

3 3 9

Consumers will try new products as they become available 3 3 9 NSAIDs can be used as general pain reliever and fever reducer 3 3 9 Potential market channels not currently exploited 3 3 9 Competing prescription pain relievers have been pulled from the market 3 2 6 Weak product differentiation among OTC competitors 3 2 6 U.S. population is increasingly seeking convenience of online shopping 2 3 6 Increase in aging population 2 2 4

Threats M I R Competition from both prescription pain relievers and OTC pain relievers

�3 3 �9

Extremely crowded OTC market �3 3 �9 Consumer loyalty with existing competitors �3 2 �6 Negative publicity regarding NSAIDs �2 3 �6 Declining physician recommendation of NSAIDs �1 3 �3 OTC NSAIDs not indicated for longterm use �1 2 �2 Regulations on drug advertisements could intensify �1 2 �2

M ¼ magnitude of the element, I ¼ importance of the element, R ¼ total rating of the element. Magnitude scale ranges from 1 (low magnitude) to 3 (high magnitude). Importance scale ranges from 1 (low importance) to 3 (high importance).

Chapter 4 • Developing Competitive Advantage and Strategic Focus 101

or competitive advantage. On the other hand, a fairly small and insignificant opportu- nity should not play a central role in the planning process. The magnitude and impor- tance of opportunities and threats will vary depending on the particular product or market. For example, a dramatic increase in new housing starts would be very important for the lumber, mortgage, or real estate industries, but not as important for industries involving semiconductors or telecommunications. In this example, the magnitude of the opportunity would be the same for all industries; however, the importance ratings would differ across industries.

DEVELOPING AND LEVERAGING COMPETITIVE ADVANTAGES After the magnitude and importance of each element in the SWOT matrix have been assessed, the manager should focus on identifying competitive advantages by matching strengths to opportunities. The key strengths most likely to be con- verted into capabilities will be those that have a compatibility with important and sizable opportunities. Remember that capabilities that allow a firm to serve custo- mers’ needs better than the competition give it a competitive advantage. As out- lined in Exhibit 4.7, competitive advantages can arise from many internal or external sources.

When we refer to competitive advantages, we usually speak in terms of real differ- ences between competing firms. After all, competitive advantages stem from real strengths possessed by the firm or in real weaknesses possessed by rival firms. How- ever, competitive advantages can also be based more on perception than reality. For example, Apple’s iPad dominates the market for tablet computers despite the fact that competing products from Samsung, LG, Google, and Amazon typically match, or even beat, the iPad in terms of features and performance. Customers who are unaware of better tablets (or those that simply don’t care) buy the iPad because of its slick image, integration with iTunes and the App Store, and the availability of third-party accessories. Because consumers maintain the perception that the iPad is better than competing products, competing products have a difficult time breaking through.

Effectively managing customers’ perceptions has been a challenge for marketers for generations. The problem lies in developing and maintaining capabilities and competitive advantages that customers can easily understand, and that solve their specific needs. Capabilities or competitive advantages that do not translate into spe- cific benefits for customers are of little use to a firm. In recent years, many success- ful firms have developed capabilities and competitive advantages based on one of three basic strategies: operational excellence, product leadership, and customer intimacy:8

• Operational Excellence. Firms employing a strategy of operational excellence focus on efficiency of operations and processes. These firms operate at lower costs than their competitors, allowing them to deliver goods and services to their customers at lower prices or a better value. Low-cost airlines, like JetBlue and Southwest Airlines, are a prime example of operational excellence in action. Southwest’s no-frills service and use of nearly identical aircraft keep operating costs quite low compared to other air carriers. Other firms that employ opera- tional excellence include Dell and Walmart.

• Product Leadership. Firms that focus on product leadership excel at technol- ogy and product development. As a result, these firms offer customers the most advanced, highest quality goods and services in the industry. For example, Microsoft, which dominates the market for personal computer operating sys- tems and office productivity suites, continues to upgrade and stretch the tech- nology underlying its software, while creating complementary products, such as the Surface Pro, that solve customers’ needs. Pfizer, Intel, and 3M are other

102 Chapter 4 • Developing Competitive Advantage and Strategic Focus

EXHIBIT 4.7 Common Sources of Competitive Advantage.

Relational Advantages Brand-loyal customers High customer-switching costs Long-term relationships with supply chain partners Strategic alliance agreements Comarketing or cobranding agreements Tight coordination and integration with supply chain partners Strong bargaining power

Legal Advantages Patents and trademarks Strong and beneficial contracts Tax advantages Zoning laws Global trade restrictions Government subsidies

Organizational Advantages Abundant financial resources Modern plant and equipment Effective competitor and customer intelligence systems Culture, vision, and shared goals Strong organizational goodwill

Human Resource Advantages Superior management talent Strong organizational culture Access to skilled labor Committed employees World-class employee training

Product Advantages Brand equity and brand name Exclusive products Superior quality or features Production expertise Guarantees and warranties Outstanding customer service Research and development Superior product image

Pricing Advantages Lower production costs Economies of scale Large-volume buying Low-cost distribution Bargaining power with vendors

Chapter 4 • Developing Competitive Advantage and Strategic Focus 103

examples of companies that pursue a product leadership strategy. Beyond the Pages 4.2 explains some of the secrets to 3M’s product leadership success.

• Customer Intimacy. Working to know your customers and understand their needs better than the competition is the hallmark of customer intimacy. These firms attempt to develop long-term relationships with customers by seeking their input on how to make the firm’s goods and services better or how to solve specific customer problems. Nordstrom, for example, organizes its store layout by fashion and lifestyle rather than by merchandise categories. The company offers high-quality products with impeccable customer service. In fact, Nordstrom is consistently ranked top in customer service among all retail chains.9 Other firms that pursue customer intimacy include Amazon, DHL, and Ritz-Carlton.

To be successful, firms should be able to execute all three strategies. However, the most successful firms choose one area at which to excel, and then actively manage customer perceptions so that customers believe that the firm does indeed excel in that area. To implement any one of these strategies effectively, a firm must possess certain core competencies, as outlined in Exhibit 4.8. Firms that boast such competencies are more likely to create a competitive advantage than those that do not. However, before a competitive advantage can be translated into specific customer benefits, the firm’s target markets must recognize that its competencies give it an advantage over the competition. Exhibit 4.8 includes a list of attributes that customers might use to describe a company that possesses each particular competitive advantage. The core competencies are internal (strength) issues, while specific attributes refer to activities that customers will notice as they inter- act with the firm.

ESTABLISHING A STRATEGIC FOCUS At the conclusion of the SWOT analysis, the marketing manager must turn his or her attention toward establishing the strategic focus of the firm’s marketing program. By strategic focus, we mean the overall concept or model that guides the firm as it weaves various marketing elements together into a coherent strategy. A firm’s strategic focus is typically tied to its competitive advantages. However, depending on the

EXHIBIT 4.7 (Continued)

Promotion Advantages Company image Large promotion budget Superior sales force Creativity Extensive marketing expertise

Distribution Advantages Efficient distribution system Real-time inventory control Extensive supply chain integration Superior information systems Exclusive distribution outlets Convenient locations Strong e-commerce capabilities

104 Chapter 4 • Developing Competitive Advantage and Strategic Focus

BEYOND THE PAGES 4.2

Successful Product Leadership at 3M10

Most people know that 3M is the maker of everyday items such as Post-It Notes and Scotch Tape. Some might know that 3M makes other products such as Scotch-Brite sponges, Clarity braces (for teeth), and Littmann stethoscopes. What most people don’t know about 3M, however, is that the com- pany has been developing innovative products like these for over 113 years. After all that time, what is most amazing about 3M is that the com- pany’s appetite for product innovation has never waned.

3M (Minnesota Mining and Manufacturing) began as an abrasives maker in 1902. However, the company didn’t become well known until the invention of masking tape in 1925. Even then, the company didn’t become a household name until the invention of Post-It Notes in 1980. Today, the company sells an expansive line of Scotch tape products and has innovated Post-It into picture paper and index cards.

What is 3M’s secret to successful product leadership? When Larry Wendling, former vice- president of 3M’s corporate research labs, was asked that question he summed up the com- pany’s success based on a list of seven key factors:

1. Commitment to Innovation. Every employee, from the CEO down, is firmly committed to innovation. 3M backs up this commitment with massive spending on R&D.

2. Active Maintenance of the Corporate

Culture. Probably the main factor in 3M’s success, the company’s culture is based on hiring good people, giving them the freedom to do their work, and tolerating mistakes. A common characteristic of highly innovative companies is that they tolerate failure and try to learn from it. For example, 3M holds “failure forums” to learn from unsuccessful projects.

3. Broad Base of Underlying Technology.

Having a diverse expertise across many dif- ferent technologies allows 3M to apply ideas from one area of the company to another.

This is one of the secrets to why 3M never seems to run out of ideas.

4. Active Networking. 3M actively promotes networking and internal conversations among its scientists and engineers. They host an annual Technical Forum where the roughly 10,000 members of the R&D staff talk and share ideas.

5. Reward Employees for Outstanding

Work. 3M maintains a dual-career track so experienced scientists and engineers can move up the career ladder without moving into corporate management. The company also honors its employees with scientific achievement awards each year.

6. Measure Results. A key benchmark for 3M is the percentage of revenue that comes from products introduced during the past 4 years. This prevents the company from resting on its laurels and allows man- agement to determine if R&D dollars are well spent.

7. Listen to the Customer. 3M employees spend a great deal of time learning about cus- tomer needs and expectations. They take these ideas back to the lab where innovative products are developed. For example, the idea for Post-It Photo Paper came directly from customers.

Wendling argues that innovation at 3M is not an accident. Throughout the company’s history, these seven pillars of innovation have been developed, managed, and nurtured. It is no won- der that 3M regularly appears in the Business- Week rankings of the world’s most innovative and most admired companies.

In addition to innovation, 3M also maintains product leadership through strategic acquisi- tions. For example, the company acquired Avery Dennison’s office and consumer products division, the undisputed market leader in the labeling business. The acquisition gave 3M con- trol over the Avery label brand and other market leading products such as Marks-A-Lot pens and Hi-Liter markers. The addition of the Avery brand rounded out 3M’s own line of office pro- ducts, including the ubiquitous Post-It Notes and Scotch Tape.

Chapter 4 • Developing Competitive Advantage and Strategic Focus 105

EXHIBIT 4.8 Core Competencies Necessary for Competitive Advantage Strategies.

Operational Excellence—Example Firms: Walmart, Southwest Airlines, Dell

Core Competencies • Low-cost operations • Totally dependable product supply • Expedient customer service • Effective demand management Common Attributes of Operationally Excellent Firms • Deliver compelling value through the use of low prices, standardized product offerings,

and convenient buying processes • Target a broad, heterogeneous market of price-sensitive buyers • Invest to achieve scale economies and efficiency-driven systems that translate into

lower prices for buyers • Develop information systems geared toward capturing and distributing information on

inventories, shipments, customer transactions, and costs in real time • Maintain a system to avoid waste and highly reward efficiency improvement

Product Leadership—Example Firms: 3M, Pfizer, Intel

Core Competencies • Basic research/rapid research interpretation • Applied research geared toward product development • Rapid exploitation of market opportunities • Excellent marketing skills Common Attributes of Product-Leading Firms • Focus their marketing plans on the rapid introduction of high-quality, technologically

sophisticated products in order to create customer loyalty • Constantly scan the environment in search of new opportunities; often making their own

products obsolete through continuous innovation • Target narrow, homogeneous market segments • Maintain organizational cultures characterized by decentralization, adaptability,

entrepreneurship, creativity, and the expectation of learning from failure • Have an attitude of “How can we make this work?” rather than “Why can’t we make this

work?”

Customer Intimacy—Example Firms: Nordstrom, Amazon, Ritz-Carlton

Core Competencies • Exceptional skills in discovering customer needs • Problem-solving proficiency • Flexible product/solution customization • A customer relationship management mind-set • A wide presence of collaborative (win-win) negotiation skills Common Attributes of Customer-Intimate Firms • See customer loyalty as their greatest asset as they focus their efforts on developing and

maintaining an intimate knowledge of customer requirements • Consistently exceed customer expectations by offering high-quality products and

solutions without an apology for charging higher prices • Decentralize most decision-making authority to the customer-contact level • Regularly form strategic alliances with other companies to address customers’ needs in

a comprehensive fashion • Assess all relationships with customers or alliance partners on a long-term, even lifetime basis

SOURCE: Adapted from Michael Treacy and Fred Wiersema, The Discipline of Market Leaders (Addison-Wesley, 1995).

106 Chapter 4 • Developing Competitive Advantage and Strategic Focus

situation, the strategic focus can shift to compensate for the firm’s weaknesses or to defend against its vulnerabilities. A firm’s strategic focus can change over time to reflect the dynamic nature of the internal and external environments. The direction taken depends on how the firm’s strengths and weaknesses match up with its external opportunities and threats. Using the results of the SWOT analysis as a guide, a firm might consider four general directions for its strategic efforts:11

• Aggressive (many internal strengths/many external opportunities). Firms in this enviable position can develop marketing strategies to aggressively take on multiple opportunities. Expansion and growth, with new products and new mar- kets, are the keys to an aggressive approach. These firms are often so dominant that they can actually reshape the industry or the competitive landscape to fit their agenda. Google offers a good example of this approach in its development of web-based applications that serve multiple needs and markets. Google Voice, Google Translate, Google Plus, Google Drive, Gmail, and YouTube are a few examples of Google’s offerings.

• Diversification (many internal strengths/many external threats). Firms in this position have a great deal to offer, but external factors weaken their ability to pursue aggressive strategies. To help offset these threats, firms can use mar- keting strategy to diversify their portfolio of products, markets, or even business units. A good example of this strategy in action is the Altria Group, whose divi- sions include Philip Morris USA, U.S. Smokeless Tobacco Company, John Middleton (cigars), Chateau Ste. Michelle Wine Estates, Philip Morris Capital Corporation (leasing), NuMark (e-cigarettes and vapor products), and a 27 per- cent ownership of SABMiller (the world’s second largest brewer). Although Altria owns many of the world’s most recognizable brands (Marlboro, Virginia Slims, Skoal, Copenhagen, Prince Albert), the firm faces innumerable threats from low-cost competitors, taxes, and litigation.12

• Turnaround (many internal weaknesses/many external opportunities).

Firms often pursue turnaround strategies because they find themselves in the situation—often temporary—of having too many internal problems to consider strategies that will take advantage of external opportunities. In these cases, firms typically have to put their own house back in order before looking beyond their current products or markets. For example, GM was once the dominant car- maker in the world. However, a weak product portfolio, high pension costs, stiff competition, and the downturn in the world economy created a perfect storm that forced GM into bankruptcy in 2009. To keep the company solvent, the U.S. government provided a $50 billion bailout and acquired a major ownership stake in GM (which was sold off at the end of 2013). As a part of its turnaround strat- egy, GM sold off or closed four non-core brands—Saturn, Hummer, Pontiac, and Saab—and took steps to drastically reduce costs. Today, GM is once again the world’s leading automaker.13

• Defensive (many internal weaknesses/many external threats). Firms take a defensive posture when they become overwhelmed by internal and external problems simultaneously. For example, pharmaceutical giant Merck was dealt a serious blow in 2004 when it was announced that patients taking the company’s pain reliever Vioxx were at an increased risk of heart attacks. Merck withdrew Vioxx from the market, which marked the beginning of a string of potentially damaging litigation against the firm. However, Merck won 10 out of 15 major lawsuits against them, and then eventually settled all remain- ing suits for $4.85 billion in 2007. Merck also drew criticism for its launch of Gardasil (a vaccine to help prevent cervical cancer) after the company heavily lobbied state lawmakers to make the vaccine mandatory for teenage girls. In a 2009 defensive move, Merck spent $41 billion to acquire Schering-Plough and its development pipeline of 18 new drugs. Today, Merck is betting heavily on

Chapter 4 • Developing Competitive Advantage and Strategic Focus 107

research in biotech to find treatments for chronic ailments such as diabetes and obesity.14

Although these four stances are quite common, other combinations of strengths, weaknesses, opportunities, and threats are possible. For example, a firm may have few internal strengths but many external opportunities. In this situation, the firm cannot take advantage of opportunities because it does not possess the needed resources to create capabilities or competitive advantages. To resolve this problem, the firm might focus all of its efforts toward small niche markets, or it might consider establishing alliances with firms that possess the necessary resources. It is also pos- sible that a firm will possess many internal strengths but few external opportunities. In this situation, the firm might pursue a strategy of diversification by entering new markets or acquiring other companies. This strategy is dangerous, however, unless these new pursuits are consistent with the mission of the firm. Business history is replete with stories of firms that explored new opportunities that were outside of their core mission and values. Sears’ expansion into real estate, financial services, and credit cards in the 1980s should remind us all that stepping beyond core strengths is often a bad idea.

Establishing a solid strategic focus is important at this stage of the planning pro- cess because it lays the groundwork for the development of marketing goals and objectives that follow. Unfortunately, many firms struggle with finding a focus that translates into a strategy that offers customers a compelling reason for purchasing the firm’s products. Firms can use any number of tools and techniques for identifying a compelling strategic focus. We believe that one of the most useful tools is the strat- egy canvas, which was developed by Professors W. Chan Kim and Renee Mauborgne in their book Blue Ocean Strategy.15

In essence, a strategy canvas is a tool for visualizing a firm’s strategy relative to other firms in a given industry. As an example, consider the strategy canvas for Southwest Airlines depicted in Exhibit 4.9.16 The horizontal axis of a strategy canvas identifies the key factors that the industry competes on with the products that are offered to customers. In the case of the airline industry, these factors include price, meals, seating choices, and service among others. The vertical axis indicates the offering level that firms offer to buyers across these factors. The central portion of the strategy canvas is the value curve, or the graphic representation of the firm’s rel- ative performance across its industry’s factors. The key to using the strategy canvas (and the key to developing a compelling strategic focus) lies in identifying a value curve that stands apart from the competition.

As illustrated in the exhibit, Southwest’s strategic focus is based on downplaying the traditional competitive factors used in the airline industry (price, meals, etc.), stressing other factors (service, speed), and creating a new factor upon which to base its competitive advantage (frequent departures). In doing this, Southwest offers a compelling alternative to customers who dislike making the tradeoffs between air travel and car travel. Southwest’s strategic focus, then, is offering fast, friendly, and frequent air travel at prices that appeal to customers who would have customarily opted to travel by car. As we have seen earlier in this chapter, Southwest is able to support this focus through its competitive advantages based on operational excel- lence. It should be no surprise that Southwest has been one of the most successful and profitable carriers in the industry for quite some time.

To use the strategy canvas successfully, the marketing manager must identify a value curve with two major characteristics.17 First, the value curve should clearly depict the firm’s strategic focus. As shown in Exhibit 4.9, Southwest Airlines’ focus on service, speed, and frequent departures is clear. All other competitive factors are downplayed in Southwest’s strategy. Second, the value curve should be distinctively different from competitors. Again, this is the case for Southwest as its combination of competitive factors clearly separates the firm from the competition. More

108 Chapter 4 • Developing Competitive Advantage and Strategic Focus

information on the blue ocean approach to developing a strategic focus can be found in Beyond the Pages 4.3.

The combination of the SWOT matrix and the strategy canvas offers a useful and powerful means of visualizing the firm’s competitive advantage and strategic focus. Clearly articulating the firm’s focus is crucial as the marketing manager moves ahead in developing the marketing plan. In the next phase of the planning process, the man- ager must identify the firm’s marketing goals and objectives in order to connect the strategic focus to the outcomes that are desired and expected. These goals and objec- tives will also be crucial at the latter stages of planning as the manager identifies stan- dards that will be used to assess the performance of the marketing strategy. In the next section, we look at the development of marketing goals and objectives in more detail.

DEVELOPING MARKETING GOALS AND OBJECTIVES After identifying a strategic focus, the marketing manager may have some ideas about potential marketing activities that can be used to leverage the firm’s competi- tive advantages relative to the opportunities available in the market. At this stage, however, there are likely to be many different goals and objectives that coincide with the anticipated strategic direction. Because most firms have limited resources, it is typically difficult to accomplish everything in a single planning cycle. At this point, the manager must prioritize the firm’s strategic intentions and develop specific goals and objectives for the marketing plan.

We reiterate that marketing goals and objectives must be consistent with the overall mission and vision of the firm. Once the firm has a mission statement that clearly delineates what it is, what it stands for, and what it does for others, the mar- keting manager can then begin to express what he or she hopes to achieve in the firm’s marketing program. These statements of desired accomplishments are goals and objectives. Some use the terms “goals” and “objectives” interchangeably.

EXHIBIT 4.9 Strategy Canvas for Southwest Airlines.

High

O ff

e ri

n g

Low Meals Seating

choices Friendly service

Frequent departures

Price Lounges High connectivity

Speed

Other Airlines Southwest Car

SOURCE: W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy (Boston, MA: Harvard Business School Press, 2005), p. 38.

Chapter 4 • Developing Competitive Advantage and Strategic Focus 109

BEYOND THE PAGES 4.3

A Closer Look at Blue Ocean Strategy18

In addition to the strategy canvas discussed in the chapter, Professors Chan and Mauborgne developed a companion tool called the four actions framework. Whereas the strategy canvas graphically depicts the firm’s strategic focus rela- tive to competitors and the factors that define competition within an industry, the four actions framework is a tool for discovering how to shift the strategy canvas and reorient the firm’s strate- gic focus. As shown in the diagram, the four actions framework is designed to challenge tradi- tional assumptions about strategy by asking four questions about the firm’s way of doing business.

As an example of how the four actions framework can be used, Chan and Mauborgne drew on the experiences of Casella Wine’s suc- cessful launch of [yellow tail]. First, Casella eliminated traditional competitive factors such as hard-to-understand wine terminology, aging qualities, and heavy marketing expenditures. Casella reasoned that these factors made wine inaccessible to the mass of buyers who were unfamiliar with wine culture. Second, Casella reduced the importance of other factors such as wine complexity, range of wine selections, and prestige. At launch, for example, Casella introduced only two wines: Chardonnay and Shiraz. They also used a nontraditional label featuring an orange and yellow kangaroo on a black background to reduce the prestige or “snob appeal” common in most wines. Third,

Casella raised the importance of competitive factors such as store involvement. Casella involved store employees by giving them Austra- lian clothing to wear at work. This created a laid-back approach to wine that made the employees eager to recommend [yellow tail] to their customers. Finally, Casella created easy to drink, easy to buy, and fun as new competitive factors. [yellow tail] has a soft fruity taste that makes it more approachable. Casella also put red and white wines in the same-shaped bottle— an industry first. This simple change greatly reduces manufacturing costs and makes point- of-sale displays simpler and more eye catching.

The blue ocean approach is also used successfully by Southwest Airlines, Cirque du Soleil, and Curves (a chain of women only fitness centers), among others. Chan and Mauborgne argue that successfully reorienting a firm’s strategic focus requires the firm to give up long-held assumptions about how business should be conducted. They caution firms to avoid benchmarking and extensive customer research because these approaches tend to create a typical “more for less” mentality that guides the strategic focus of most firms. Instead, the blue ocean approach requires firms to funda- mentally alter their strategic logic. Therein lies the challenge of blue ocean thinking: it is very, very difficult for most businesses to change. Consequently, true blue ocean approaches tend to be a rare occurrence.

A New

Value

Curve

Create Which factors should

be created that the industry has

never offered?

Reduce Which factors should

be reduced well below the industry’s

standard?

Eliminate Which of the factors

that the industry

takes for granted

should be eliminated?

Raise Which factors should

be raised well above the industry’s

standard?

The Four Actions Framework

110 Chapter 4 • Developing Competitive Advantage and Strategic Focus

However, failure to understand the key differences between them can severely limit the effectiveness of the marketing plan. Goals are general desired accomplishments, while objectives provide specific, quantitative benchmarks that can be used to gauge progress toward the achievement of the marketing goals.

Developing Marketing Goals As statements of broad, desired accomplishments, goals are expressed in general terms and do not contain specific information about where the organization pres- ently stands or where it hopes to be in the future. Home Depot, for example, has a goal of having lower prices than the competition. This goal is not specific, however, because it does not specify a benchmark that defines what a lower price is. To achieve this goal, Home Depot offers a price guarantee that matches and then beats competitors’ prices by 10 percent.19 Goals like these are important because they indi- cate the direction in which the firm attempts to move, as well as the set of priorities it will use in evaluating alternatives and making decisions.

It is also important that all functional areas of the organization be considered in the goal-setting process. In developing goals for the marketing plan, it is important to keep in mind that marketing goals should be attainable, consistent, comprehensive, and involve some degree of intangibility. Failure to consider these issues will result in goals that are less effective, and perhaps even dysfunctional. Let’s look more closely at these characteristics.

Attainability Setting realistic goals is important because the key parties involved in reaching them must see each goal as reasonable. Determining whether a goal is realistic requires an assessment of both the internal and external environments. For example, it would not be unrealistic for a firm in second place in market share, trailing the leading brand by just 2 percent, to set a goal of becoming the industry leader. Other things being equal, such a goal could help motivate employees toward becoming “number one.” In contrast, a firm in sixth place, trailing the fifth place firm by 5 percent and the leader by 30 percent, could set the same goal—but it would not be realistic. Unre- alistic goals can be demotivational because they show employees that management is out of touch. Since one of the primary benefits of having goals is to motivate employees toward better performance, setting unrealistic goals can cause major problems.

Consistency In addition to being realistic, management must work to set goals that are consis- tent with one another. Enhancing market share and working to have the highest profit margins in the industry are both reasonable goals by themselves, but together they are inconsistent. Goals to increase both sales and market share would be consistent, as would goals to enhance customer service and customer satisfaction. However, setting goals to reduce inventory levels and increase cus- tomer service are usually incompatible. Goals across and within functional areas should also mesh together. This is a major concern in large organizations, and it highlights the need for a great deal of information sharing during the goal- formulation process.

Comprehensiveness The goal-setting process should also be comprehensive. This means that each func- tional area should be able to develop its own goals that relate to the organization’s

Chapter 4 • Developing Competitive Advantage and Strategic Focus 111

goals. For example, if goals are set only in terms of advancing the technology associ- ated with a firm’s products, members of the marketing department may wonder what role they will play in this accomplishment. The goal should be stated so that both marketing and research and development can work together to help advance the organizational goal of offering the most technologically advanced products. Market- ing will need to work on the demand side of this effort (measuring customer needs and staying attuned to trends in the external environment), while research and devel- opment will focus on the supply side (conducting basic and applied research, as well as staying abreast of all major technological innovations). Goals should help clarify the roles of all parties in the organization. Functional areas that do not match any of the organization’s goals should question their need for future resources and their ability to acquire them.

Intangibility Finally, goals should involve some degree of intangibility. Some planners have been known to confuse strategies, and even tactics, with goals. A goal is not some action the firm can take; rather, it is an outcome the organization hopes to accomplish. Actions such as hiring 100 new salespeople or doubling the advertising budget are not goals, as any firm with adequate resources can accomplish both tasks. However, having “the best-trained sales force in the industry” or “the most creative and effec- tive advertising campaign in the industry” are suitable goals. Note the intangibility associated with the use of terms such as best trained, most creative, and most effec- tive. These terms are motivational because they promote comparisons with rival firms. They also continually push for excellence, as their open-ended nature always leaves room for improvement.

Developing Marketing Objectives Objectives provide specific and quantitative benchmarks that can be used to gauge progress toward the achievement of the marketing goals. In some cases, a particular goal may require several objectives for its progress to be adequately monitored, usu- ally across multiple business functions. For example, a goal of “creating a high- quality image for the firm” cannot be accomplished by better inventory control if accounts receivable makes mistakes and customer complaints about the firm’s sales- people are on the rise. Similarly, the marketing department alone could not have accomplished Home Depot’s phenomenal growth from two Atlanta-based stores in 1979 to over 2,200 worldwide stores today.20 Such an endeavor requires a carefully coordinated effort across many departments.

Goals without objectives are essentially meaningless because progress is impos- sible to measure. A typical marketing objective might be: “The sales division will decrease unfilled customer orders from 3 percent to 2 percent between January and June of this fiscal year.” Note that this objective contains a high degree of specificity. It is this specificity that sets goals and objectives apart. Objectives involve measur- able, quantitative outcomes, with specifically assigned responsibility for their accom- plishment, and a definite time period for their attainment. Let’s look at the specific characteristics of marketing objectives.

Attainability As with goals, marketing objectives should be realistic given the internal and external environments identified during the situation and SWOT analyses. A good objective is one that is attainable with a reasonable amount of effort. Easily attain- able objectives will not motivate employees to achieve higher levels of performance.

112 Chapter 4 • Developing Competitive Advantage and Strategic Focus

Likewise, good objectives do not come from false assumptions that everything will go as planned or that every employee will give 110 percent effort. In some cases, competitors will establish objectives that include taking customers and sales away from the firm. Setting objectives that assume inanimate or inept competitors, when history has proven otherwise, creates objectives that quickly lose their value as employees recognize them as being unreasonable.

Continuity The need for realism brings up a second consideration, that of continuity. Marketing objectives can be either continuous or discontinuous. A firm uses continuous objec- tives when its current objectives are similar to objectives set in the previous planning period. For example, an objective “to increase market share from 20 to 22 percent in the next fiscal year” could be carried forward in a similar fashion to the next period: “to increase market share from 22 to 24 percent in the next fiscal year.” This would be a continuous objective because the factor in question and the magnitude of change are similar, or even identical, from period to period.

An important caveat about continuous objectives: Objectives that are identical, or only slightly modified, from period to period often do not need new strategies, increased effort, or better implementation to be achieved. Marketing objectives should lead employees to perform at higher levels than would otherwise have been the case. Employees naturally tend to be objective oriented. Once they meet the objective, the level of creativity and effort tends to fall off. There are certainly cir- cumstances where continuous objectives are appropriate, but they should not be set simply as a matter of habit.

Discontinuous objectives significantly elevate the level of performance on a given outcome factor, or bring new factors into the set of objectives. If sales growth has been averaging 10 percent, and the SWOT analysis suggests that this is an easily obtainable level, an example of a discontinuous objective might be “to increase sales 18 percent during the next fiscal year.” This would require new strategies to sell addi- tional products to existing customers, to expand the customer base, or at the very least to develop new tactics and/or enhance the implementation of existing strate- gies. Discontinuous objectives require more analysis and linkage to strategic plan- ning than continuous objectives.

Developing discontinuous objectives is one of the major benefits a company can gain from applying for the Malcolm Baldrige National Quality Award. Exhibit 4.10 identifies the elements of the Baldrige performance framework. To demonstrate proficiency in these areas, a firm must first establish benchmarks, which typically are the quantitative performance levels of the leaders in an industry. The firm then develops objectives that center on improving performance in each area. Many com- panies feel that simply applying for the Baldrige Award has positive effects on per- formance, if for no other reason than the process forces the company to set challenging discontinuous objectives. This is also true for organizations that use the Baldrige guidelines as a planning aid.

Time Frame Another key consideration in setting objectives is the time frame for their achieve- ment. Although companies often establish marketing plans on an annual basis, mar- keting objectives may differ from this period in their time frame. Sales volume, market share, customer service, and gross margin objectives may be set for terms less than, equal to, or greater than 1 year. The time frame should be appropriate and allow for accomplishment with reasonable levels of effort. To set a target of dou- bling sales for a well-established company within 6 months would likely be unrea- sonable. On the other hand, objectives having an excessively long time frame may

Chapter 4 • Developing Competitive Advantage and Strategic Focus 113

be attained without any increased effort or creativity. The combination of managerial expertise and experience, along with the information acquired during the situation and SWOT analyses, should lead to the establishment of an appropriate time frame.

For objectives with longer time frames, it is important to remind employees of the objective on a regular basis and to provide feedback on progress toward its achievement. For example, employees at FedEx’s terminal in Memphis, Tennessee can see a real-time accuracy gauge that displays the company’s current performance in terms of getting packages to their rightful destinations. FedEx also uses a nightly countdown clock to remind employees of the speed needed to turnaround packages and load them on outbound cargo planes. Whether a weekly announcement, a monthly newsletter, or a real-time gauge on the wall that charts progress toward the objective, feedback is a critical part of the objective-setting process, particularly for longer-term objectives.

Assignment of Responsibility One final aspect of objectives that sets them apart from goals is that the marketing manager must identify the person, team, or unit responsible for achieving each objective. By explicitly assigning responsibility, the firm can limit the problems of stealing credit and avoiding responsibility. A bank might give the marketing depart- ment the responsibility of achieving an objective of “having 40 percent of its custo- mers list the bank as their primary financial institution within one year.” If by the end of the year, 42 percent of all customers list the bank as their primary financial institution, the marketing department gets credit for this outcome. If the figure is only 38 percent, the marketing department must provide an explanation.

EXHIBIT 4.10 Baldrige Performance Excellence Framework.

Organizational Profile

Strategy

Customers

Leadership

Workforce

Results

Operations

Integration

Measurement, Analysis, and Knowledge Management

SOURCE: Baldrige Performance Excellence Program. 2015. 2015–2016 Baldrige Excellence Framework: A Systems Approach to Improving Your Organization’s Performance. Gaithersburg, MD: U.S. Department of Commerce, National Insti- tute of Standards and Technology (http://www.nist.gov/baldrige).

114 Chapter 4 • Developing Competitive Advantage and Strategic Focus

Moving beyond Goals and Objectives Marketing goals and objectives identify the desired ends, both general and specific, that the organization hopes to achieve during the planning period. However, companies do not fulfill properly set goals and objectives automatically or through wishing and hoping. They set into motion a chain of decisions and serve as a catalyst for the subsequent stages in the planning process. Organiza- tional goals and objectives must lead to the establishment of consistent goals and objectives for each functional area of the firm. Having recognized the desired ends, each area, including marketing, must next determine the means that will lead to these targeted results.

As we move forward, we focus our attention on the means issue as we address marketing strategy development. Although a firm might consider the steps of the market planning process sequentially, in reality the firm must move back and forth between steps. If marketing strategies that have the potential to achieve the market- ing goals and objectives cannot be developed, the goals and objectives may not be reasonable and need to be reevaluated before the development of the marketing strategy. Given that the marketing plan must be a working document, the cycling among planning steps never truly ends.

LESSONS FROM CHAPTER 4

SWOT analysis:

• is considered to be one of the most useful tools in analyzing marketing data and information.

• links a company’s ongoing situation analysis to the development of the market- ing plan.

• structures the information from the situation analysis into four categories: strengths, weaknesses, opportunities, and threats.

• uses the structured information to uncover competitive advantages and guide the selection of the strategic focus for the firm’s marketing strategy.

To make SWOT analysis as productive as possible, the marketing manager should:

• stay focused by using a series of SWOT analyses, each focusing on a specific product/market combination.

• search extensively for competitors, whether they are a present competitor or one in the future.

• collaborate with other functional areas by sharing information and perspectives. • examine issues from the customers’ perspective by asking questions such as

“What do customers (and noncustomers) believe about us as a company?” and “Which of our weaknesses translate into a decreased ability to serve customers (and a decreased ability to convert noncustomers)?” This includes examining the issues from the perspective of the firm’s internal customers, its employees.

• look for causes, not characteristics, by considering the firm’s resources that are the true causes for the firm’s strengths, weaknesses, opportunities, and threats.

• separate internal issues from external issues using this key test to differentiate: “Would this issue exist if the firm did not exist?” If the answer is yes, the issue should be classified as external to the firm.

Strengths and weaknesses:

• exist because of resources possessed (or not possessed) by the firm, or they exist due to the nature of key relationships between the firm and its customers, its employees, or outside organizations.

Chapter 4 • Developing Competitive Advantage and Strategic Focus 115

• must be leveraged into capabilities (in the case of strengths) or overcome (in the case of weaknesses).

• are meaningful only when they assist or hinder the firm in satisfying customer needs.

Opportunities and threats:

• are not potential marketing actions. Rather, they involve issues or situations that occur in the firm’s external environments.

• should not be ignored as the firm gets caught up in developing strengths and capabilities for fear of creating an efficient, but ineffective, organization.

• may stem from changes in the competitive, customer, economic, political/legal, technological, and/or sociocultural environments.

The SWOT matrix:

• allows the marketing manager to visualize the analysis. • should serve as a catalyst to facilitate and guide the creation of marketing strate-

gies that will produce desired results. • allows the manager to see how strengths and opportunities might be connected

to create capabilities that are key to meeting customer needs. • involves assessing the magnitude and importance of each strength, weakness,

opportunity, and threat.

Competitive advantage:

• stems from the firm’s capabilities in relation to those held by the competition. • can be based on both internal and external factors. • is based on both reality and customer perceptions. • is often based on the basic strategies of operational excellence, product leader-

ship, and/or customer intimacy.

Establishing a strategic focus:

• is based on developing an overall concept or model that guides the firm as it weaves various marketing elements together into a coherent strategy.

• is typically tied to the firm’s competitive advantages. • involves using the results of the SWOT analysis as the firm considers four major

directions for its strategic efforts: aggressiveness, diversification, turnaround, or defensiveness.

• can help ensure that the firm does not step beyond its core strengths to consider opportunities that are outside its capabilities.

• can be visualized through the use of a strategy canvas where the goal is to develop a value curve that is distinct from the competition.

• is often done by downplaying traditional industry competitive factors in favor of new approaches.

• is an important stage of the planning process because it lays the ground- work for the development of marketing goals and objectives and connects the outcomes of the SWOT analysis to the remainder of the marketing plan.

Marketing goals:

• are broad, desired accomplishments that are stated in general terms. • indicate the direction the firm attempts to move in, as well as the set of priorities

it will use in evaluating alternatives and making decisions. • should be attainable, realistic, internally consistent, and comprehensive and help

to clarify the roles of all parties in the organization. • should involve some degree of intangibility.

116 Chapter 4 • Developing Competitive Advantage and Strategic Focus

Marketing objectives:

• provide specific and quantitative benchmarks that can be used to gauge progress toward the achievement of the marketing goals.

• should be attainable with a reasonable degree of effort. • may be either continuous or discontinuous, depending on the degree to which

they depart from present objectives. • should specify the time frame for their completion. • should be assigned to specific areas, departments, or individuals who have the

responsibility to accomplish them.

NOTES 1. These facts are from Mae Anderson, “From Idea to Store Shelf: A New Product is

Born,” Associated Press, March 4, 2012 (http://m.apnews.com/ap/db_16026/ contentdetail.htm?contentguid=pieCrAYE); Drake Baer, “The 50 Most Innovative Companies in the World,” Business Insider, October 28, 2014 (http://www. businessinsider.com/most-innovative-companies-2014-2014-10).

2. These facts are from BMW Group website, http://www.bmwgroup.com/e/ 0_0_www_bmwgroup_com/forschung_entwicklung/netzwerk/forschung_technik.html, accessed February 28, 2015; Gail Edmondson, “BMW’s Dream Factory,” BusinessWeek Online, October 16, 2006 (http://www.businessweek.com/magazine/content/06_42/ b4005072.htm).

3. This list and most of this section are based on E. K. Valentin, “SWOT Analysis from a Resource-Based View,” Journal of Marketing Theory and Practice, 9(Spring 2001), 54–69.

4. Shelby D. Hunt, A General Theory of Competition (Thousand Oaks, CA: Sage, 2000), pp. 67–68.

5. These facts are from Bob Hazel, Tom Stalnaker, Aaron Taylor, and Khalid Usman, “Airline Economic Analysis,” Oliver Wyman Consulting, November 2014 (http://www.oliverwyman. com/content/dam/oliver-wyman/global/en/2014/nov/Airline_Economic_Analysis_Screen_ OW_Nov_2014.pdf).

6. These facts are from Starbucks Company 2014 Annual Report (http://phx.corporate-ir. net/External.File?item=UGFyZW50SUQ9NTY3NTYwfENoaWxkSUQ9MjY4MT c0fFR5cGU9MQ==&t=1); Starbuck Company Timeline (http://globalassets.starbucks. com/assets/5deaa36b7f454011a8597d271f552106.pdf), accessed February 28, 2015.

7. George Stalk, Philip Evans, and Lawrence E. Shulman, “Competing on Capabilities: The New Rules of Corporate Strategy,” Harvard Business Review, 70(March-April 1992), 57–69.

8. The material in this section is adapted from Michael Treacy and Fred Wiersema, The Discipline of Market Leaders (Reading, MA: Addison-Wesley, 1995).

9. These facts are from Department Store Rankings, American Customer Satisfaction Index (http://www.theacsi.org/index.php?option=com_content&view=article &id=147&catid=&Itemid=212&i=Department+and+Discount+Stores), accessed February 28, 2015.

10. These facts are from Michael Arndt, “3M’s Seven Pillars of Innovation,” BusinessWeek Online, May 10, 2006 (http://www.businessweek.com/innovate/content/may2006/ id20060510_682823.htm); Thomas Black, “3M Rises Highest Since August on $550 Million Acquisition,” BusinessWeek Online, January 3, 2012 (http://www.businessweek. com/news/2012-01-03/3m-rises-highest-since-august-on-550-million-acquisition.html); Lisa Bodell, “Why You Didn’t Meet Your Innovation Goals in 2014,” Strategy +Business, February 23, 2015 (http://www.strategy-business.com/blog/Why-You- Didnt-Meet-Your-Innovation-Goals-in-2014?gko=b7294); Charlotte Li, “3M: Years of Commitment to Green Business,” BusinessWeek Online, May 14, 2009 (http://www. businessweek.com/magazine/content/09_21/b4132043810940.htm); “Who We Are,” 3M Company website (http://solutions.3m.com/wps/portal/3M/en_US/3M-Company/ Information/AboutUs/WhoWeAre/), accessed February 28, 2015.

Chapter 4 • Developing Competitive Advantage and Strategic Focus 117

11. This material is based on Cornelis A. De Kluyver, Strategic Thinking: An Executive Perspective (Upper Saddle River, NJ: Prentice Hall, 2000), pp. 53–56; Philip Kotler, A Framework for Marketing Management, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 2003), p. 67.

12. These facts are from Altria Group’s website (http://www.altria.com/About-Altria/At-A- Glance/Pages/default.aspx?src=leftnav), accessed February 28, 2015.

13. These facts are from David Goldman, “GM to Sell Saturn to Penske,” BusinessWeek Online, June 5, 2009 (http://money.cnn.com/2009/06/05/news/companies/saturn_penske/ index.htm); James R. Healey, “Government Sells Last of Its GM Shares,” USA Today, December 10, 2013 (http://www.usatoday.com/story/money/cars/2013/12/09/ government-treasury-gm-general-motors-tarp-bailout-exit-sale/3925515/); Tim Higgins, “GM Earns Record $9.19 Billion Net Income; Opel Posts Loss,” BusinessWeek Online, February 17, 2012 (http://www.businessweek.com/news/2012-02-17/gm-earns-record-9- 19-billion-net-income-opel-posts-loss.html).

14. These facts are from Alyssa Abkowitz, “Big Pharma’s New Landscape,” CNNMoney, March 12, 2009 (http://money.cnn.com/2009/03/11/news/companies/pharma.fortune/ index.htm); Ed Silverman, “A Win for Merck? Paper Removes Investigation of Gardasil Side Effects,” Wall Street Journal, February 23, 2015 (http://blogs.wsj.com/pharmalot/ 2015/02/23/a-win-for-merck-paper-removes-investigation-of-gardasil-side-effects/); Luke Timmerman, “Merck Bets $450M on ‘Old School’ Biotech from NGM,” Forbes, February 23, 2015 (http://www.forbes.com/sites/luketimmerman/2015/02/23/merck-bets-450m-on- old-school-biotech-from-ngm/); Arlene Weintraub, “What Merck Gains by Settling,” BusinessWeek Online, November 9, 2007 (http://www.businessweek.com/technology/ content/nov2007/tc2007119_133486.htm).

15. The material in this section is adapted from W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy (Boston, MA: Harvard Business School Press, 2005).

16. The strategy canvas for Southwest Airlines is from Kim and Mauborgne, Blue Ocean Strategy, p. 38.

17. Ibid., p. 39. 18. This information is from Kim and Mauborgne, Blue Ocean Strategy, pp. 29–37. 19. Home Depot website, http://www.homedepot.com/c/SF_MS_In-Store_Low_Price_

Guarantee, accessed February 28, 2015. 20. Home Depot Corporate Profile, http://phx.corporate-ir.net/phoenix.zhtml?

c=63646&p=irol-IRHome, accessed February 28, 2015.

118 Chapter 4 • Developing Competitive Advantage and Strategic Focus

Customers, Segmentation,and TargetMarketing

INTRODUCTION In this chapter, we begin our discussion of marketing strategy by examining custo- mers, segments, and target markets. In Chapter 1, we referred to a market as a col- lection of buyers and sellers. Now, we focus our attention on the buyers who collectively make up the major portion of most markets. From this perspective, we concern ourselves with markets as individuals, institutions, or groups of individuals or institutions that have similar needs that can be met by a particular product offer- ing. As we shall see, firms can attempt to reach all buyers in a market, smaller groups or segments of the market, or even specific buyers on an individual level. Whether the firm aims for the entire market or smaller market segments, the goal of market- ing strategy is to identify specific customer needs, then design a marketing program that can satisfy those needs. To do this effectively, the firm must have a comprehen- sive understanding of its current and potential customers, including their motiva- tions, behaviors, needs, and wants.

The ability to determine in-depth information about customers is a fairly recent phenomenon in marketing. Fifty years ago, for example, technology and marketing know-how were less sophisticated. Marketers of the day were unable to fully under- stand customers’ needs and wants, much less make fine distinctions among smaller segments of the total market. Marketers tended to offer products that came in only one variety, flavor, or style. Today, market segmentation is critical to the success of most firms. Segmentation allows marketers to more precisely define and understand customer needs, and gives them the ability to tailor products to better suit those needs. As discussed in Beyond the Pages 5.1, the level of detailed information avail- able about customers today has changed the way firms do business. However, the use of such information raises concerns about consumer privacy. Still, without seg- mentation we would not enjoy the incredible variety of products available today. Consider the number of choices we have in categories such as soft drinks, cereals, packaged goods, automobiles, and clothing. In many respects, segmentation has improved our standard of living. Customers now expect firms to delve into their needs and wants, and to tailor products accordingly. This fact makes market seg- mentation a vital part of marketing strategy. Until a firm has chosen and analyzed a target market, it cannot make effective decisions regarding other elements of the marketing strategy.

In this chapter, we examine issues associated with buyer behavior in both con- sumer and business markets. We also discuss traditional and individualized approaches to market segmentation, the criteria for successful market segmentation, and specific target marketing strategies. The potential combinations of target

CHAPTER

119

BEYOND THE PAGES 5.1

Companies Learn Our Secrets Through Data Mining1

Consider a world where what you eat, read, wear, listen to, watch, buy, and do can be reduced to a mathematical formula. Every move you make is tracked with such a level of specificity that your entire life can be captured in a computer model. Sound far-fetched? It’s not. Today, the combination of computer science, mathematics, and business is changing our view of consumers and their behavior. The abil- ity to track consumer behavior has never been more advanced than it is today. The new insights gained from the mathematical modeling of consumer behavior is creating new avenues for business, allowing marketers to develop one-to-one relationships with consumers, and causing a fair amount of anxiety. It is also caus- ing a sharp increase in the hiring of math grad- uates from our nation’s universities.

Through advanced math, computer model- ing, and data mining, businesses have been able to track consumer attitudes and behaviors for some time. The difference today is the unprecedented access to data made available via the Internet and other technologies. Over the past 10 years, a sizable portion of the con- suming public has moved its work, play, conver- sation, and shopping online. These integrated networks collect vast amounts of data and store our lives in databases that can be con- nected in ways that allow us to capture a more complete picture of consumer behavior. For example, researchers at companies like Face- book, Yahoo!, Google, and Amazon are develop- ing mathematical models of customers. These firms are also working with other companies and government agencies to develop models that can predict voting behavior, how patients respond to disease intervention, or which employee is best suited for a job assignment. For example, Target’s data mining expertise raised a few eyebrows when the New York Times uncovered that the retailer was able to tell when a customer was pregnant or about to deliver. Target’s statisticians are able to tie mil- lions of purchases together to reveal patterns in their data. One of their insights: When women

become pregnant, they buy a lot of supplements such as calcium, magnesium, and zinc. When their delivery date is close, pregnant women tend to buy a lot of scent-free products, large bags of cotton balls, hand sanitizer, and wash- cloths. Target uses this information to target ads and coupons to the right consumers. Data mining results like these are one of the reasons for Target’s incredible growth from $44 billion in revenue in 2002 to roughly $72.5 billion in 2013.

Retailers are not the only companies that use data mining. The advertising and media industries are perhaps the most affected by this shift. As mass audience advertising has declined, marketers have been looking for ways to target customers more directly. Google is a pioneer in this effort because the company has amassed an unfathomable amount of data on what custo- mers do online. Other companies now provide data mining solutions. In research conducted with SPSS, for example, Italian carmaker Fiat was able to improve customer relations and increase customer retention by 6 to 7 percent. Microsoft uses its own analytical techniques to study the productivity of its workforce. Further- more, Harrah’s Entertainment (a major player in the casino industry) has increased their annual growth rate by using computer models to pre- dict which customers will respond to the com- pany’s targeted advertising and promotional offers.

Of course, all of this sophistication comes at a price. The ability of companies to track custo- mers and model their behavior raises a number of privacy concerns. Although most companies take great pains to protect individual consumer identities and their private information, major issues often arise. For example, that same data warehouse Target uses to reach its customers was hacked in late 2013. The hackers stole per- sonal information and credit card numbers for over 70 million Target customers. Major pro- blems like this are still relatively rare; however, the continuing erosion of consumer privacy is likely to continue. A key question for marketers is at what point will consumers say enough is enough? How far can firms push the boundaries of data collection and analysis before consu- mers mount a backlash?

120 Chapter 5 • Customers, Segmentation, and Target Marketing

markets and marketing programs are essentially limitless. Choosing the right target market from among many possible alternatives is one of the key tests in developing a good marketing strategy.

BUYER BEHAVIOR IN CONSUMER MARKETS Trying to understand the buyer behavior of consumers is a very trying and challeng- ing task. The behavior of consumers is often irrational and unpredictable. Consu- mers often say one thing but do another. Still, the effort spent trying to understand consumers is valuable because it can provide needed insight on how to design pro- ducts and marketing programs that better meet consumer needs and wants. One of the most recent trends in learning about customers is the rising use of ethnography, a qualitative research technique designed to understand cultural phenomena such as communication, shared meanings, and personal interests. Computer maker Lenovo, for example, has used ethnographic research to learn more about how families in India use consumer electronics. One interesting finding is that the family social cen- ter in Indian homes is the parents’ bedroom. The kitchen serves the same social func- tion in American homes. Lenovo uses this type of information to develop consumer electronics that better fit differing family lifestyles in India and the United States. With the continuing growth of the Internet, marketers have been scouring social media such as Facebook, Twitter, and Instagram to gain cultural insights about con- sumers. One of the most useful of these sites is Pinterest, where people can “pin” anything that interests them. Pinterest’s phenomenal growth (up 111 percent in 2014) and its open nature make it a treasure trove of information about American culture. Marketers see Pinterest as a great way to showcase brands, especially among women (42 percent of all women online use Pinterest). The number of male users has also been growing—up 73 percent in 2014.2

In this section, we look at key issues with respect to buyer behavior in consumer markets. Here, we examine the consumer buying process and the factors that alter the ways consumers buy goods and services. As we will see, successful marketing strategy depends on a clear understanding of customers with respect to who they are, what they need, what they prefer, and why they buy. Although this understand- ing clearly has relevance for designing the product offering, it also impacts the pric- ing, distribution, and promotion decisions in the marketing program.

The Consumer Buying Process The consumer buying process shown in Exhibit 5.1 depicts five stages of activities that consumers may go through in buying goods and services. The process begins with the recognition of a need, and then passes through the stages of information search, evaluation of alternatives, purchase decision, and postpurchase evaluation. A marketer’s interest in the buying process can go well beyond these stages to include actual consumption behaviors, product uses, and product disposal after con- sumption. As we consider each stage of the buying process, it is important to keep a few key issues in mind.

First, the buying process depicts the possible range of activities that may occur in making purchase decisions. Consumers, however, do not always follow these stages in sequence and may even skip stages en route to making a purchase. For example, impulse purchases, such as buying a pack of chewing gum or a newspaper, do not involve lengthy search or evaluation activities. On the other hand, complex purchases like buying a home are often quite lengthy as they incorporate every stage of the buying process. Likewise, consumers who are loyal to a product or brand will skip some stages and are most likely to simply purchase the same product they bought last time. Consequently, marketers have a difficult time promoting brand

Chapter 5 • Customers, Segmentation, and Target Marketing 121

switching because they must convince these customers to break tradition and take a look at what different products have to offer.

Second, the buying process often involves a parallel sequence of activities asso- ciated with finding the most suitable merchant of the product in question. That is, while consumers consider which product to buy, they also consider where they might buy it. In the case of name brand products, this selection process may focus on the product’s price and availability at different stores or online merchants. A spe- cific model of Sony television, for example, is often available from many different retailers and may even be available at Sony’s website. Conversely, in the case of private-label merchandise, the choices of product and merchant are made simulta- neously. If a customer is interested only in Gap brand clothing, then that customer must purchase the clothing from a Gap store or the Gap website.

Third, the choice of a suitable merchant may actually take precedence over the choice of a specific product. In some cases, customers are so loyal to a particular merchant that they will not consider looking elsewhere. For example, many older consumers are fiercely loyal to American car manufacturers. These customers will limit their product selection to a single brand or dealership, greatly limiting their range of potential product choices. In other cases, customers might be loyal to a par- ticular merchant because they hold that merchant’s credit card or are a member of its frequent-user customer program. Finally, some merchants become so well known

EXHIBIT 5.1 The Consumer Buying Process.

Stages Key Issues

Need Recognition • Consumer needs and wants are not the same. • An understanding of consumer wants is essential for market segmentation and the development

of the marketing program. • Marketers must create the appropriate stimuli to foster need recognition.

Information Search • Consumers trust internal and personal sources of information more than external sources. • The amount of time, effort, and expense dedicated to the search for information depends on

(1) the degree of risk involved in the purchase, (2) the amount of experience the consumer has with the product category, and (3) the actual cost of the search in terms of time and money.

• Consumers narrow their potential choices to an evoked set of suitable alternatives that may meet their needs.

Evaluation of Alternatives • Consumers translate their needs into wants for specific products or brands. • Consumers evaluate products as bundles of attributes that have varying abilities to satisfy their

needs. • Marketers must ensure that their product is in the evoked set of potential alternatives. • Marketers must take steps to understand consumers’ choice criteria and the importance they

place on specific product attributes.

Purchase Decision • A consumer’s purchase intention and the actual act of buying are distinct concepts. Several factors may prevent the actual purchase from taking place.

• Marketers must ensure that their product is available and offer solutions that increase possession utility.

Postpurchase Evaluation • Postpurchase evaluation is the connection between the buying process and the development of long-term customer relationships.

• Marketers must closely follow consumers’ responses (delight, satisfaction, dissatisfaction, cognitive dissonance) to monitor the product’s performance and its ability to meet customers’ expectations.

122 Chapter 5 • Customers, Segmentation, and Target Marketing

for certain products that customers just naturally execute their buying process with those merchants. Sears, for example, is well known for its selection of name-brand appliances and tools. For many customers, Sears is the natural place to go when they are in the market for a new refrigerator, washer, or wrenches.

Need Recognition The buying process begins when consumers recognize that they have an unmet need. This occurs when consumers realize that there is a discrepancy between their exist- ing level of satisfaction and their desired level of satisfaction. Consumers can recog- nize needs in a variety of settings and situations. Some needs have their basis in internal stimuli, such as hunger, thirst, and fatigue. Other needs have their basis in external stimuli, such as advertising, window shopping, interacting with salespeople, or talking with friends and family. External stimuli can also arouse internal responses, such as the hunger you might feel when watching an advertisement for Pizza Hut.

Typically, we think of needs as necessities, particularly with respect to the necessities of life (food, water, clothing, safety, shelter, health, or love). However, this definition is limited because everyone has a different perspective on what con- stitutes a need. For example, many people would argue that they need a car when their real need is for transportation. Their need for a car is really a “want” for a car. This is where we draw the distinction between needs and wants. A need occurs when an individual’s current level of satisfaction does not equal their desired level of satis- faction. A want is a consumer’s desire for a specific product that will satisfy the need. Hence, people need transportation, but they choose to fulfill that need with a car, rather than with alternative products like motorcycles, bicycles, public transporta- tion, a taxi, or a horse.

The distinction between needs and wants is not simply academic. In any market- ing effort, the firm must always understand the basic needs fulfilled by their products. For example, people do not need drills; they need to make holes or

D av id

R. Fr az ie r Ph ot ol ib ra ry , In c. / A la m y

When consumers purchase products like candy or gum on impulse, they rarely go through each stage of the buying process.

Chapter 5 • Customers, Segmentation, and Target Marketing 123

drive screws. Similarly, they do not need lawnmowers; they need shorter, well- manicured grass. Understanding these basic needs allows the firm to segment mar- kets and create marketing programs that can translate consumer needs into wants for their specific products. An important part of this effort involves creating the appropriate stimuli that will foster need recognition among consumers. The idea is to build on the basic need and convince potential consumers to want your product because it will fulfill their needs better than any competing product.

It is also important to understand that wants are not the same thing as demand. Demand occurs only when the consumer’s ability and willingness to purchase a spe- cific product backs up their want for the product. Many customers want a luxury yacht, for example, but only a few are able and willing to buy one. In some cases, con- sumers may actually need a product, but not want it. So-called “unsought products” like life insurance, cemetery plots, long-term health insurance, and continuing educa- tion are good examples. In these cases, the marketer must first educate consumers on the need for the product, and then convince consumers to want their products over competing products. For example, Allstate’s “Are You in Good Hands?” campaign specifically questions whether potential customers are sure about their insurance coverage. Creating the seed of doubt in the consumer’s mind is a good first step toward educating potential customers about the need for adequate insurance.

Understanding consumers’ needs and wants is an important consideration in market segmentation. Some markets can be segmented on the basis of needs alone. College students, for example, have needs that are very different from senior citi- zens, and single consumers have very different needs than families with small chil- dren. However, the marketing of most products does not occur on the basis of need-fulfillment alone. In the automobile market, for example, essentially no manu- facturer promotes their products as being the best to get you from Point A to Point B (the basic need of transportation). Rather, they market their products on the basis of consumer wants such as luxury (Lexus), image (Mercedes), sportiness (Jaguar), durability (Ford trucks), fuel economy (Honda Civic), and value (Kia). These wants are the hot buttons for consumers, and the keys to promoting further activity in the buying process.

Information Search When done correctly, marketing stimuli can prompt consumers to become interested in a product, leading to a desire to seek out additional information. This desire can be passive or active. In a passive information search, the consumer becomes more attentive and receptive to information, such as noticing and paying attention to auto- mobile advertisements if the customer has a want for a specific car brand. A con- sumer engages in an active information search when he or she purposely seeks additional information, such as browsing the Internet, asking friends, or visiting dealer showrooms. Information can come from a variety of sources. Internal sources, including the personal experiences and memories, are typically the first type of information that consumers search. Information can also come from personal sources, including word-of-mouth advice from friends, family, or coworkers. Exter- nal sources of information include advertising, magazines, websites, packaging, dis- plays, and salespeople. Although external sources are the most numerous, consumers typically trust these sources less than internal and personal sources of information.

The amount of time, effort, and expense dedicated to the search for information depends on a number of issues. First, and perhaps most important, is the degree of risk involved in the purchase. Consumers by nature are naturally risk averse; they use their search for information to reduce risk and increase the odds of making the right choice. Risk comes in many forms, including financial risk (buying a home), social risk (buying the right clothing), emotional risk (selecting a wedding

124 Chapter 5 • Customers, Segmentation, and Target Marketing

photographer), and personal risk (choosing the right surgeon). In buying a car, for example, consumers regularly turn to Consumer Reports magazine, friends, and gov- ernment safety ratings to help reduce these types of risk. A second issue is the amount of expertise or experience the consumer has with the product category. If a first-time buyer is in the market for a notebook computer, they face a bewildering array of choices and brands. This buyer is likely to engage in an extensive information search to reduce risk and narrow the potential set of product choices. The same buyer, sev- eral purchases later, will not go through the same process. Finally, the actual cost of the search in terms of time and money will limit the degree to which consumers search for information. In some situations, such as time deadlines or emergencies, consumers have little time to consult all sources of information at their disposal.

Throughout the information search, consumers learn about different products or brands and begin to remove some from further consideration. They evaluate and reevaluate their initial set of products or brands until their list of potential product choices has been narrowed to only a few products or brands that can meet their needs. This list of suitable alternatives is called the evoked set, and it represents the outcome of the information search and the beginning of the next stage of the buying process.

Evaluation of Alternatives In evaluating the alternative product or brand choices among the members of the evoked set, the consumer essentially translates his or her need into a want for a spe- cific product or brand. The evaluation of alternatives is the black box of consumer behavior because it is typically the hardest for marketers to understand, measure, or influence. What we do know about this stage of the buying process is that consu- mers base their evaluation on a number of different criteria, which usually equate with a number of product attributes.

Consumers evaluate products as bundles of attributes that have varying abilities to satisfy their needs. In buying a car, for example, each potential choice represents a bundle of attributes, including brand attributes (e.g., image, reputation, reliability, safety), product features (e.g., power windows, automatic transmission, fuel econ- omy), aesthetic attributes (e.g., styling, sportiness, roominess, color), and price. Each consumer has a different opinion as to the relative importance of these attributes—some put safety first, while others consider price the dominant factor. Another interesting feature of the evaluation stage is that the priority of each consu- mer’s choice criteria can change during the process. Consumers may visit a dealer- ship with price as their dominant criterion, only to leave the dealership with price dropping to third on their list of important attributes.

There are several important considerations for marketers during the evaluation stage. First and foremost, the firm’s products must be in the evoked set of potential alternatives. For this reason, marketers must constantly remind consumers of their company and its product offerings. Second, it is vital that marketers take steps to understand consumers’ choice criteria and the importance they place on specific product attributes. As we will see later in this chapter, understanding the connection between customers’ needs and product attributes is an important consideration in market segmentation and target marketing decisions. Finally, marketers must often design marketing programs that change the priority of choice criteria or change con- sumers’ opinions about a product’s image. Microsoft, for example, has moved to combat the rapid growth of Apple’s iPad and MacBook Air by aggressively promot- ing its own Surface Pro 3. Microsoft touts the Surface Pro 3 as the first tablet that can replace a laptop by emphasizing uncommon tablet features such as a USB port, pen input, and a kickstand for standing the tablet upright on a desk. With the success of the Surface Pro 3, Microsoft will continue to push forward with a flurry of advertise- ments touting its highly rated tablet.3

Chapter 5 • Customers, Segmentation, and Target Marketing 125

Purchase Decision After the consumer has evaluated each alternative in the evoked set, he or she forms an intention to purchase a particular product or brand. However, a pur- chase intention and the actual act of buying are distinct concepts. A consumer may have every intention of purchasing a new car, for example, but several fac- tors may prevent the actual purchase from taking place. The customer may post- pone the purchase due to unforeseen circumstances, such as an illness or job loss. The salesperson or the sales manager may anger the consumer, leading them to walk away from the deal. The buyer may not be able to obtain financing for their purchase due to a mistake in their credit file. Or the buyer may simply change his or her mind. Marketers can often reduce or eliminate these problems by reducing the risk of purchase through warranties or guarantees, making the purchase stage as easy as possible, or finding creative solutions to unexpected problems.

Assuming these potential intervening factors are not a concern, the key issues for marketers during the purchase stage are product availability and possession utility. Product availability is critical. Without it, buyers will not purchase from you, but from someone else who can deliver the product. The key to availability— which is closely related to the distribution component of the marketing program— is convenience. The goal is to put the product within the consumer’s reach wher- ever that consumer happens to be. Coca-Cola has long understood this issue, and it is the reason for the company’s long-held business mantra to put Cola-Cola “within an arm’s length of desire.” In other words, it should always be very easy for customers to find a Coke.4 This task is closely related to possession utility, or the ease of taking possession of a product. To increase possession utility, the marketer may have to offer financing or layaway for large dollar purchases, delivery and installation of products like appliances or furniture, home delivery of convenience items like pizza or newspapers, or the proper packaging and prompt shipment of items through the mail.

D av id

R. Fr az ie r Ph ot ol ib ra ry , In c. / A la m y

Free delivery is one of the most common ways to increase possession utility during the purchase stage of the consumer buying process.

126 Chapter 5 • Customers, Segmentation, and Target Marketing

Postpurchase Evaluation In the context of attracting and retaining buyers, postpurchase evaluation is the con- nection between the buying process and the development of long-term customer relationships. Marketers must closely follow consumers’ responses during this stage to monitor the product’s performance and its ability to meet consumers’ expecta- tions. In the postpurchase stage, consumers will experience one of these four outcomes:

• Delight—the product’s performance greatly exceeds the consumer’s expectations • Satisfaction—the product’s performance matches the consumer’s expectations • Dissatisfaction—the product’s performance falls short of the consumer’s

expectations • Cognitive Dissonance (Postpurchase Doubt)—the consumer is unsure of the product’s

performance relative to their expectations

Consumers are more likely to experience dissatisfaction or cognitive dissonance when the dollar value of the purchase increases, the opportunity costs of rejected alternatives are high, or the purchase decision is emotionally involving. Firms can manage these responses by offering liberal return policies, providing extensive post-sale support, or reinforcing the wisdom of the consumer’s purchase decision. The firm’s ability to manage dissatisfaction and dissonance not only is a key to creat- ing customer satisfaction, but also has a major influence on the consumer’s inten- tions to spread word-of-mouth information about the company and its products.

Factors that Affect the Consumer Buying Process As we have mentioned previously, the stages in the buying process depict a range of possible activities that may occur as consumers make purchase decisions. Consu- mers may spend relatively more or less time in certain stages, they may follow the stages in or out of sequence, or they may even skip stages entirely. This variation in the buying process occurs because consumers are different, the products that they buy are different, and the situations in which consumers make purchase decisions are different. There are a number of factors that affect the consumer buying process, including the complexity of the purchase and decision, individual influences, social influences, and situational influences. Let’s briefly examine each factor.

Decision-Making Complexity The complexity of the purchase and decision-making process is the primary reason why the buying process will vary across consumers and with the same consumer in different situations. For example, highly complex decisions, such as buying a first home, a first car, selecting the right college, or choosing elective surgery, are very involving for most consumers. These purchases are often characterized by high per- sonal, social, or financial risk; strong emotional involvement; and the lack of experi- ence with the product or purchase situation. In these instances, consumers will spend a great deal of time, effort, and even money to help ensure that they make the right decision. In contrast, purchase tasks that are low in complexity are rela- tively non-involving for most consumers. In some cases, these purchase tasks can become routine in nature. For example, many consumers buy groceries by selecting familiar items from the shelf and placing them in their carts without considering alternative products.

For marketers, managing decision-making complexity is an important consider- ation. Marketers of highly complex products must recognize that consumers are quite risk averse and need a great deal of information to help them make the right decision. In these situations, access to high-quality and useful information should

Chapter 5 • Customers, Segmentation, and Target Marketing 127

be an important consideration in the firm’s marketing program. Firms that sell less complex products do not have to provide as much information, but they do face the challenges of creating a brand image and ensuring that their products are easily rec- ognizable. For these marketers, issues such as branding, packaging, advertising, and point-of-purchase displays are key considerations in the marketing program.

Individual Influences The range of individual influences that can affect the buying process is quite exten- sive. Some individual factors, such as age, life cycle, occupation, and socioeconomic status, are fairly easy to understand and incorporate into the marketing strategy. For the most part, these individual factors dictate preferences for certain types of pro- ducts or brands. Married consumers with three children will clearly have different needs and preferences than young, single consumers. Likewise, more affluent consu- mers will have the same basic needs as less affluent consumers; however, their “wants” will be quite different. These individual factors are quite useful for marketers in target market selection, product development, and promotional strategy.

Other individual factors, such as perceptions, motives, interests, attitudes, opi- nions, or lifestyles, are much harder to understand because they do not clearly coin- cide with demographic characteristics such as age, gender, or income levels. These individual factors are also very difficult to change. For that reason, many marketers adapt their products and promotional messages to fit existing attitudes, interests, or lifestyles. For example, Kia has used human-size rapping hamsters to market its Soul wagon since its introduction in 2008. The hip-hop inspired ads are targeted at a youn- ger, nonconformist demographic that loves music and social activities.5

Social Influences Like individual influences, there is a wide range of social influences that can affect the buying process. Social influences such as culture, subculture, social class, refer- ence groups, and family have a profound impact on what, why, and how consumers buy. Among these social influences, none is more important than the family. From birth, individuals become socialized with respect to the knowledge and skills needed to be an effective consumer. As adults, consumers typically exhibit the brand and product preferences of their parents. The influence of children on the buying process has grown tremendously over the last 50 years.

Reference groups and opinion leaders also have an important impact on consu- mers’ buying processes. Reference groups act as a point of comparison and source of product information. A consumer’s purchase decisions tend to fall in line with the advice, beliefs, and actions of one or more reference groups. Opinion leaders can be part of a reference group or may be specific individuals that exist outside of a ref- erence group. When consumers feel like they lack personal expertise, they seek the advice of opinion leaders, who they view as being well informed in a particular field of knowledge. In some cases, marketers will seek out opinion leaders before trying to reach more mainstream consumers. Software manufacturers, for example, release beta (test) versions of their products to opinion leaders before a full-scale launch. Not only does this practice work the bugs out of the product, it also starts a word- of-mouth buzz about the upcoming software release.

Situational Influences There are a number of situational influences that can affect the consumer buying process. Exhibit 5.2 illustrates some of the most common situational influences, many of which affect the amount of time and effort that consumers devote to the pur- chase task. For example, hungry consumers who are in a hurry often grab the quick- est lunch they can find—even if it comes from a vending machine. This fact accounts for the quick success of Pret a Manger (“ready to eat” in French), a chain of

128 Chapter 5 • Customers, Segmentation, and Target Marketing

grab-and-go restaurants that offers prepackaged meals focusing on fresh, all-natural, and organic foods. The company strives to serve customers in 60 seconds or less.6

Furthermore, consumers facing emergency situations have little time to reflect on their product choices and whether they will make the right decision. Consumers may also devote less time and effort to the buying process if they are uncomfortable. For this reason, sit-down restaurants should be inviting and relaxing to encourage longer visits and add-ons such as dessert or coffee after the meal.

Other situational influences can affect specific product choices. For example, if you have your boss over for dinner, your product choices would likely differ from those you make in everyday purchases of food and drink. Likewise, customers may purchase more expensive items for gifts, or when they shop with friends. Product choices also change when customers make the purchase for someone else, such as buying clothing for children. In fact, many parents will purposely buy less expensive clothing for their children if they are growing rapidly or are exceptionally active. These parents want to save money on clothing that will quickly wear out or become too small.

BUYER BEHAVIOR IN BUSINESS MARKETS As we shift our attention to buyer behavior in business markets, keep in mind that business markets and consumer markets have many things in common. Both contain buyers and sellers who seek to make good purchases and satisfy their personal or

EXHIBIT 5.2 Common Situational Influences in the Consumer Buying Process.

Situational Influences Examples Potential Influences on Buying Behavior Physical and spatial influences Retail atmospherics

Retail crowding Store layout and design

A comfortable atmosphere or ambience promotes lingering, browsing, and buying.

Crowded stores may cause customers to leave or buy less than planned.

Social and interpersonal influences

Shopping in groups Sales people Other customers

Consumers are more susceptible to the influences of other consumers when shopping in groups.

Rude sales people can end the buying process. Obnoxious “other” customers may cause the consumer to leave

or be dissatisfied. Temporal (time) influences Lack of time

Emergencies Convenience

Consumers will pay more for products when they are in a hurry or face an emergency.

Lack of time greatly reduces the search for information and the evaluation of alternatives.

Consumers with ample time can seek information on many different product alternatives.

Purchase task or product usage influences

Special occasions Buying for others Buying a gift

Consumers may buy higher quality products for gifts or special occasions.

The evoked set will differ when consumers are buying for others as opposed to themselves.

Consumer dispositional influences

Stress Anxiety Fear Fatigue Emotional involvement Good/bad mood

Consumers suffering from stress or fatigue may not buy at all or they may indulge in certain products to make themselves feel better.

Consumers who are in a bad mood are exceptionally difficult to please.

An increase in fear or anxiety over a purchase may cause consumers to seek additional information and take great pains to make the right decision.

Chapter 5 • Customers, Segmentation, and Target Marketing 129

organizational objectives. Both markets use similar buying processes that include stages associated with need identification, information search, and product evalua- tion. Finally, both processes focus on customer satisfaction as the desired outcome. However, business markets differ from consumer markets in important ways. One of the most important differences involves the consumption of the purchased products. Consumers buy products for their personal use or consumption. In contrast, organiza- tional buyers purchase products for use in their operations. These uses can be direct, as in acquiring raw materials to produce finished goods, or indirect, as in buying office supplies or leasing cars for salespeople. There are four types of business markets:

• Commercial Markets. These markets buy raw materials for use in producing finished goods, and they buy facilitating goods and services used in the production of fin- ished goods. Commercial markets include a variety of industries, such as aero- space, agriculture, mining, construction, transportation, communication, and utilities.

• Reseller Markets. These markets consist of channel intermediaries such as wholesa- lers, retailers, or brokers that buy finished goods from the producer market and resell them at a profit. As we will see in Chapter 6, channel intermediaries have the responsibility for creating the variety and assortment of products offered to consumers. Therefore, they wield a great deal of power in the supply chain.

• Government Markets. These markets include federal, state, county, city, and local governments. Governments buy a wide range of finished goods ranging from air- craft carriers to fire trucks to office equipment. However, most government pur- chases are for the services provided to citizens, such as education, fire and police protection, maintenance and repair of roads, and water and sewage treatment.

• Institutional Markets. These markets consist of a diverse group of noncommercial organizations such as churches, charities, schools, hospitals, or professional organizations. These organizations primarily buy finished goods that facilitate their ongoing operations.

Unique Characteristics of Business Markets Business markets differ from consumer markets in at least four ways. These differ- ences concern the nature of the decision-making unit, the role of hard and soft costs in making and evaluating purchase decisions, reciprocal buying relationships, and the dependence of the two parties on each other. As a general rule, these differ- ences are more acute for firms attempting to build long-term client relationships. In business markets, buying needed products at the lowest possible price is not neces- sarily the most important objective. Since many business transactions are based on long-term relationships, trust, reliability, and overall goal attainment are often much more important than the price of the product.

The Buying Center The first key difference relates to the role of the buying center—the group of people responsible for making purchase decisions. In consumer markets, the buying center is fairly straightforward: The adult head-of-household tends to make most major pur- chase decisions for the family, with input and assistance from children and other fam- ily members as applicable. In an organization, however, the buying center tends to be much more complex and difficult to identify, in part because it may include three dis- tinct groups of people—economic buyers, technical buyers, and users—each of which may have its own agenda and unique needs that affect the buying decision.

Any effort to build a relationship between the selling and buying organization must include economic buyers—those senior managers with the overall responsibil- ity of achieving the buying firm’s objectives. In recent years, economic buyers have

130 Chapter 5 • Customers, Segmentation, and Target Marketing

become increasingly influential as price has become less important in determining a product’s true value to the buying firm. This has made economic buyers a greater tar- get for promotional activities. Technical buyers—employees with the responsibility of buying products to meet needs on an ongoing basis—include purchasing agents and materials managers. These buyers have the responsibility of narrowing the num- ber of product options and delivering buying recommendations to the economic buyer(s) that are within budget. Technical buyers are critical in the execution of pur- chase transactions and are also important to the day-to-day maintenance of long- term relationships. Users—managers and employees who have the responsibility of using a product purchased by the firm—comprise the last group of people in the buy- ing center. The user is often not the ultimate decision maker, but frequently has a place in the decision process, particularly in the case of technologically advanced products. For example, the head of information technology often has a major role in computer and IT purchase decisions.

Hard and Soft Costs The second difference between business and consumer markets involves the signifi- cance of hard and soft costs. Consumers and organizations both consider hard costs, which include monetary price and associated purchase costs such as shipping and installation. Organizations, however, must also consider soft costs, such as downtime, opportunity costs, and human resource costs associated with the compatibility of systems, in the buying decision. The purchase and implementation of a new payroll system, for example, will decrease productivity and increase training costs in the payroll department until the new system has been fully integrated.

Reciprocity The third key difference involves the existence of reciprocal buying relationships. With consumer purchases, the opportunity for buying and selling is usually a one- way street: The marketer sells and the consumer buys. Business marketing, however, is more often a two-way street, with each firm marketing products that the other firm buys. For example, a company may buy office supplies from another company that in turn buys copiers from the first firm. In fact, such arrangements can be an upfront condition of purchase in purely transaction-based marketing. Reciprocal buying is less likely to occur within long-term relationships unless it helps both parties achieve their respective goals.

Mutual Dependence Finally, in business markets, the buyer and seller are more likely to be dependent on one another. For consumer–marketer relationships, this level of dependence tends to be low. If a store is out of a product, or a firm goes out of business, customers simply switch to another source to meet their needs. Likewise, the loss of a particu- lar customer through brand switching, relocation, or death is unfortunate for a com- pany, but not in itself particularly damaging. The only real exception to this norm is when consumers are loyal to a brand or merchant. In these cases, consumers become dependent on a single brand or merchant, and the firm can become depen- dent on the sales volume generated by these brand loyal consumers.

This is not the case in business markets where sole-source or limited-source buy- ing may leave an organization’s operations severely distressed when a supplier shuts down or cannot deliver. The same is true for the loss of a customer. The selling firm has invested significantly in the client relationship, often modifying products and altering information or other systems central to the organization. Each client relation- ship represents a significant portion of the firm’s profit, and the loss of a single cus- tomer can take months or even years to replace. For example, after Rubbermaid’s relationships with Walmart, Lowe’s, and Home Depot soured in the mid-1990s, these

Chapter 5 • Customers, Segmentation, and Target Marketing 131

retailers pulled Rubbermaid products from their shelves and turned to Sterilite, a small Massachusetts-based manufacturer, to supply plastic products (storage bins, containers, etc.) for their stores. Along with damaging Rubbermaid’s reputation and profits, the considerable buying power of Walmart, Lowe’s, and Home Depot turned Sterilite into a major competitor for Rubbermaid. Today, Sterilite is the world’s largest independent manufacturer of plastic housewares in North America.7

The Business Buying Process Like consumers, businesses follow a buying process. However, given the complexity, risk, and expense of many business purchases, business buyers tend to follow these stages in sequence. Some buying situations can be quite routine, such as the daily or weekly purchase and delivery of raw materials or the purchase of office consum- ables such as paper and toner cartridges. Nonetheless, business buyers often make even routine purchases from prequalified or single-source suppliers. Consequently, virtually all business purchases have gone through the following stages of the buying process at one time or another:

1. Problem Recognition. The recognition of needs can stem from a variety of internal and external sources, such as employees, members of the buying center, or outside salespeople. Business buyers often recognize needs due to special cir- cumstances, such as when equipment or machinery breaks or malfunctions.

2. Develop Product Specifications. Detailed product specifications often define business purchases. This occurs because new purchases must be integrated with current technologies and processes. Developing product specifications is typi- cally done by the buying center.

3. Vendor Identification and Qualification. Business buyers must ensure that potential vendors can deliver on needed product specifications, within a speci- fied time frame, and in the needed quantities. Therefore, business buyers will conduct a thorough analysis of potential vendors to ensure they can meet their firm’s needs. The buyers then qualify and approve the vendors that meet their criteria to supply goods and services to the firm.

4. Solicitation of Proposals or Bids. Depending on the purchase in question, the buying firm may request that qualified vendors submit proposals or bids. These proposals or bids will detail how the vendor will meet the buying firm’s needs and fulfill the purchase criteria established during the second stage of the process.

5. Vendor Selection. The buying firm will select the vendor or vendors that can best meet its needs. The best vendor is not necessarily the one offering the low- est price. Other issues such as reputation, timeliness of delivery, guarantees, or personal relationships with the members of the buying center are often more important.

6. Order Processing. Often a behind-the-scenes process, order processing involves the details of processing the order, negotiating credit terms, setting firm delivery dates, and any final technical assistance needed to complete the purchase.

7. Vendor Performance Review. The final stage of the buying process involves a review of the vendor’s performance. In some cases, the product may flawlessly fulfill the needed specifications, but the vendor’s performance is poor. In this stage, both product and vendor specifications can be reevaluated and changed if necessary. In the end, the result of these evaluations will affect future pur- chase decisions.

Like consumer markets, there are a number of factors that can influence the business buying process. Environmental conditions can have a major influence on buyer behavior by increasing the uncertainty, complexity, and risk associated with

132 Chapter 5 • Customers, Segmentation, and Target Marketing

a purchase. In situations of rapid environmental change, business buyers may alter their buying plans, postpone purchases, or even cancel purchases until things settle down. Environmental conditions not only affect the purchase of products, but also affect decisions regarding the recruitment and hiring of employees.

Organizational factors can also influence corporate buying decisions. These fac- tors include conditions within the firm’s internal environment (resources, strategies, policies, objectives), as well as the condition of relationships with business or supply chain partners. A shift in the firm’s resources can change buying decisions, such as a temporary delay in purchasing until favorable credit terms can be arranged. Like- wise, if a supplier suddenly cannot provide needed quantities of products or cannot meet a needed delivery schedule, the buying firm will be forced to identify and qual- ify new suppliers. Internal changes in information technology can also affect the buy- ing process, such as when technicians integrate electronic procurement systems with the legacy systems of the firm and its vendors. Finally, interpersonal relation- ships and individual factors can affect the buying process. A common example occurs when members of the buying center are at odds over purchase decisions. Power struggles are not uncommon in business buying, and they can bring the entire process to a halt if not handled properly. Individual factors, such as a manager’s per- sonal preferences or prejudices, can also affect business buying decisions. The importance of interpersonal and individual factors depends on the specific buying situation and its importance to the firm’s goals and objectives. Major purchases typi- cally create the most conflict among members of the buying center.

MARKET SEGMENTATION Understanding the processes that consumers and businesses use to make purchase decisions is critical to the development of long-term, mutually beneficial relation- ships with customers. It is also a necessary first step in uncovering similarities among groups of potential buyers that can be used in market segmentation and tar- get marketing decisions. From a strategic perspective, we define market segmentation as the process of dividing the total market for a particular product or product cate- gory into relatively homogeneous segments or groups. To be effective, segmentation should create groups where the members within the group have similar likes, tastes, needs, wants, or preferences, but where the groups themselves are dissimilar from each other. As noted in Beyond the Pages 5.2, the increasing diversity of the U.S. population creates a number of challenges when it comes to segmenting markets.

In reality, the most fundamental segmentation decision is really whether to seg- ment at all. When a firm makes the decision to pursue the entire market, it must do so on the basis of universal needs that all customers possess. However, most firms opt to target one or more segments of the total market because they find that they can be more successful when they tailor products to fit unique needs or require- ments. In today’s economy, segmentation is often mandated by customers due to their search for unique products and their changing uses of communication media. The end result is that customer segments have become even more fragmented and more difficult to reach. Many firms today take segmentation to the extreme by target- ing small niches of a market, or even the smallest of market segments: individuals.

Traditional Market Segmentation Approaches Many segmentation approaches are traditional in the sense that firms have used them successfully for decades. It is not our intention to depict these approaches as old or out-of-date, especially when compared to individualized segmentation strate- gies that we discuss later. In fact, many of today’s most successful firms use these tried-and-true approaches. Some organizations actually use more than one type of segmentation, depending on the brand, product, or market in question.

Chapter 5 • Customers, Segmentation, and Target Marketing 133

Mass Marketing It seems odd to call mass marketing a segmentation approach, as it involves no seg- mentation whatsoever. Companies aim mass marketing campaigns at the total (whole) market for a particular product. Companies that adopt mass marketing take an undifferentiated approach that assumes that all customers in the market have sim- ilar needs and wants that can be reasonably satisfied with a single marketing pro- gram. This marketing program typically consists of a single product or brand (or, in the case of retailers, a homogeneous set of products), one price, one promotional program, and one distribution system. Duracell, for example, offers a collection of different battery sizes (D, C, A, AA, AAA, 9-volt), but they are all disposable batteries marketed to consumers for use in toys and small electronic devices. They also offer a

BEYOND THE PAGES 5.2

The Challenges of Targeting a Diverse Population8

Although there are obvious differences among the members of our population, many people are sur- prised to learn that the United States is more diverse than they would have realized. However, we should not be surprised. After all, the United States was founded as a melting pot of cultures. Thatpot of culturaldifferences createsmanychal- lenges and opportunities in finding and serving target markets. Consider the following statistics:

• Today, roughly one-third of the U.S. popula- tion is a minority. If these consumers were a separate country, they would be the 12th largest in the world. By 2045, approximately half of the U.S. population will be part of a minority group.

• Texas, California, Hawaii, New Mexico, and the District of Columbia now have “majority– minority” populations where more than 50 percent of the population is part of a minority group.

• Minority populations have a large middle- class with strong buying power. For instance, the combined buying power of minorities stands at $2 trillion today. Hispanics alone account for half of that, making the U.S. His- panic population the 15th largest economy in the world.

• The defining characteristics of minority mar- kets are not based on skin color or language. Instead, core values such as family, faith, nationalism, respect for the elderly and com- munity leaders, and cultural institutions are the dominant features that define minority populations.

• Minority populations have stopped trying to “fit in” with traditional U.S. customs. Instead, these groups work hard to preserve their eth- nic values and customs.

• Distinct minority populations have little in common with each other, other than their emotional connections to their own ethnic traditions.

Given these stark facts, it becomes clear that firms will have a hard time reaching a mass audience of U.S. consumers using a one- size-fits-all marketing approach. So, how can a firm reach across segments of society for maxi- mum marketing effectiveness and efficiency? The truth is that most firms don’t bother. Still, targeting specific minority groups has become more difficult. The tactics of yesterday—simple language translation, hiring diverse employees, or using photos of ethnic minorities in promo- tional images—won’t work anymore.

Several companies have been singled out as having successful approaches to reaching the Hispanic market. McDonald’s, for example, uses a consistent focus on Latino research to target Hispanic consumers. The company also employs three separate marketing directors for the Asian American, African American, and His- panic markets. AT&T successfully expanded its branding among millennials by using Spanglish in its ads targeting Hispanic consumers. Toyota’s marketing to Hispanics has been so successful that it has been the top-selling car brand among Hispanic consumers for over 10 years. The success has been based on hiring Hispanic executives to help establish deeper relationships in the Hispanic communities around the country.

134 Chapter 5 • Customers, Segmentation, and Target Marketing

line of rechargeable and ultra-power batteries for high-power devices. Likewise, the WD-40 Company offers an assortment of brands—including WD-40, 3-IN-ONE Oil, Lava Soap, 2000 Flushes, Carpet Fresh, and X14 Cleaner—used in a variety of house- hold tasks.

Mass marketing works best when the needs of an entire market are relatively homogeneous. Good examples include commodities like oil and agricultural pro- ducts. In reality, very few products or markets are ideal for mass marketing, if for no other reason than companies, wanting to reach new customers, often modify their product lines. For most of its existence, Vaseline manufactured and offered a single product. To reach new customers, Vaseline modified this strategy by launch- ing its Intensive Care line of products and extending customers’ perceptions of Vase- line’s uses to various needs in the home, including in the garage/workshop. Furthermore, think of the many products that contain Arm & Hammer Baking Soda, a product that at one time was sold only as a baking ingredient.

Although mass marketing is advantageous in terms of production efficiency and lower marketing costs, it is inherently risky. By offering a standard product to all customers, the organization becomes vulnerable to competitors that offer special- ized products that better match customers’ needs. In industries where barriers to entry are low, mass marketing runs the risk of being seen as too generic. This situa- tion is very inviting for competitors who use more targeted approaches. Mass mar- keting is also very risky in global markets, where even global brands like Coca-Cola must be adapted to match local tastes and customs.

Differentiated Marketing Most firms use some form of market segmentation by (1) dividing the total market into groups of customers having relatively common or homogeneous needs, and (2) attempting to develop a marketing program that appeals to one or more of these groups. This approach may be necessary when customer needs are similar within a single group, but their needs differ across groups. Through well-designed and care- fully conducted research, firms can identify the particular needs of each market seg- ment to create marketing programs that best match those needs and expectations. Within the differentiated approach there are two options: the multisegment approach and the market concentration approach.

Firms using the multisegment approach seek to attract buyers in more than one mar- ket segment by offering a variety of products that appeal to different needs. Firms using this option can increase their share of the market by responding to the hetero- geneous needs of different segments. If the segments have enough buying potential, and the product is successful, the resulting sales increases can more than offset the increased costs of offering multiple products and marketing programs. The multiseg- ment approach is the most widely used segmentation strategy in medium- to large- sized firms. It is extremely common in packaged goods and grocery products. Maxwell House, for example, began by marketing one type of coffee and one brand. Today, this division of Kraft Foods offers 69 different flavor and package varieties under the Maxwell House brand alone. Kraft also markets coffee under the Sanka and Yuban labels, in addition to providing private label brands for retailers. A walk down the cereal aisle of your local supermarket offers additional examples. Firms such as Kellogg’s and Nabisco offer seemingly hundreds of brands of breakfast cer- eals targeted at specific segments, including children (e.g., Fruity Pebbles, Apple Jacks), health-conscious adults (e.g., Shredded Wheat, Total), parents looking for healthier foods for their children (e.g., Life, Kix), and so on.

Firms using the market concentration approach focus on a single market segment. These firms often find it most efficient to seek a maximum share in one segment of the market. For example, Armor All markets a well-known line of automotive cleaners, protectants, and polishes targeted primarily to young, driving-age males.

Chapter 5 • Customers, Segmentation, and Target Marketing 135

The main advantage of market concentration is specialization, as it allows the firm to focus all of its resources toward understanding and serving a single segment. Special- ization is also the major disadvantage of this approach. By “putting all of its eggs in one basket,” the firm can be vulnerable to changes in its market segment, such as eco- nomic downturns and demographic shifts. Still, the market concentration approach can be highly successful. In the arts, where market concentration is almost universal, musical groups hone their talents and plan their performances to satisfy the tastes of one market segment, divided by genres of music such as country, rock, or jazz.

Niche Marketing Some companies narrow the market concentration approach even more and focus their marketing efforts on one small, well-defined market segment or niche market that has a unique, specific set of needs. Customers in niche markets will typically pay higher prices for products that match their specialized needs. One example of successful niche marketing is found in the gym industry. For example, Curves—a health club for women—has 10,000 locations in 90 countries around the world. Other niche gyms for children and the over-55 age group are popping up around the United States. The Little Gym—designed for kids ages 4 months through 12 years— has over 300 locations worldwide. The goal of these gyms is to create highly custom- ized workout experiences for niche markets that don’t fit the profile of a typical health club member.9 As the gym industry has learned, the key to successful niche marketing is to understand and meet the needs of target customers so completely that, despite the small size of the niche, the firm’s substantial share makes the seg- ment highly profitable. An attractive market niche is one that has growth and profit potential, but is not so appealing that it attracts competitors. The firm should also possess a specialization or provide a unique offering that customers find highly desirable.

Individualized Segmentation Approaches Due to advances in communication and Internet technology, individualized segmen- tation approaches have emerged. These approaches are possible because organiza- tions now have the ability to track customers with a high degree of specificity. By combining demographic data with past and current purchasing behavior, organiza- tions can tweak their marketing programs in ways that allow them to precisely match customers’ needs, wants, and preferences. Three types of individualized seg- mentation approaches are one-to-one marketing, mass customization, and permis- sion marketing.

One-to-One Marketing When a company creates an entirely unique product or marketing program for each customer in the target segment, it employs one-to-one marketing. This approach is com- mon in business markets where companies design unique programs and/or systems for each customer. For example, providers of enterprise software—such as Oracle, SAP, and Business Objects—create customized solutions that allow firms to track customers, business processes, and results in real time. Insurance companies or bro- kers, such as Britain’s Sedgwick Group, design insurance and pension programs to meet a corporation’s specific needs. The key to one-to-one marketing is personaliza- tion, where every element of the marketing program is customized to meet the speci- fics of a particular client’s situation.

Historically, one-to-one marketing has been used less often in consumer markets, although Burger King was an early pioneer in this approach, with its “Have It Your Way” effort that continues today. One-to-one marketing is quite common in luxury and custom-made products, such as when a consumer buys a large sailboat, airplane, or a

136 Chapter 5 • Customers, Segmentation, and Target Marketing

custom-built home. In such instances, the product has significant modifications made to it to meet unique customer needs and preferences. Many service firms—such as hairstylists, lawyers, doctors, and educational institutions—also customize their mar- keting programs to match individual consumer needs. One-to-one marketing has grown rapidly in electronic commerce where customers can be targeted very pre- cisely. Amazon, for example, maintains complete profiles on customers who browse and buy from its site. These profiles assist Amazon with the customization of web pages in real time, product suggestions, and reminder e-mails sent to customers.

Mass Customization An extension of one-to-one marketing, mass customization refers to providing unique products and solutions to individual customers on a mass scale. Along with the Inter- net, advances in supply chain management—including real-time inventory control— have allowed companies to customize products in ways that are both cost-effective and practical. For example, Dell builds thousands of custom-ordered computers every day. Each customer gets to choose from a variety of options (storage, screen sizes, colors, etc.) to configure a computer as they want it. Dell gets to take advan- tage of scale economies because it builds thousands of the same basic computer for its other customers. Other firms that use mass customization include 1-800-Flowers.com (custom flower arrangements, plants, or other gifts) and Build- A-Bear Workshop (custom teddy bears or other animals).

Mass customization also occurs in business markets. Through a buying firm’s electronic procurement system, employees can order products ranging from office supplies to travel services. The system allows employees to requisition goods and services via a customized catalog—unique to the firm—where the buying firm has negotiated the products and prices. E-procurement systems like these have become quite popular for good reason: They allow firms to save a great deal of money—not only on prices but also on the costs of placing orders. Selling firms benefit as well by customizing their catalogs to specific buying firms, allowing them to sell more goods and services at a reduced cost.

Permission Marketing Permission marketing, although similar to one-to-one marketing, is different in that customers choose to become part of a firm’s market segment. In permission marketing, customers give companies permission to specifically target them in their marketing efforts. The most common tool used in permission marketing is the opt-in e-mail list, where customers permit a firm—or a third-party partner of the firm—to send peri- odic e-mail about goods and services that they have interest in purchasing. This sce- nario is ubiquitous in business-to-consumer e-commerce, so much so that many consumers fail to notice it. When customers order products online, they receive the option of receiving or not receiving future e-mail notifications about new products. In many cases, the customer must deselect a box at the end of the order form or they will be added to the e-mail list.

Permission marketing has a major advantage over other individualized segmen- tation approaches: Customers who opt-in have already shown interest in the goods and services offered by the firm. This allows the firm to precisely target only those individuals with an interest in their products, thereby eliminating wasted marketing effort and expense. For example, many airlines have the permission of their custo- mers to send weekly e-mail notices of airfare and other travel-related specials. This system is in stark contrast to traditional mass media advertising where only a por- tion of the viewing or reading audience has a real interest in the company’s product.

One-to-one marketing, mass customization, and permission marketing will become even more important in the future because their focus on individual

Chapter 5 • Customers, Segmentation, and Target Marketing 137

customers makes them critical to the development and maintenance of long-term relationships. The simple truth is that customers will maintain relationships with firms that best fulfill their needs or solve their problems. Unfortunately, individual- ized segmentation approaches can be prohibitively expensive. To make these approaches viable, firms must be mindful of two important issues. First, the delivery of the marketing program must be automated to a degree that makes it cost efficient. The Internet makes this possible by allowing for individual customization in real time. Second, the marketing program must not become so automated that the offer- ing lacks personalization. Today, personalization means much more than simply call- ing customers by name. We use the term to describe the idea of giving customers choices—not only in terms of product configuration, but also in terms of the entire marketing program. Firms like Dell and Amazon offer a great deal of personalization by effectively mining their customer databases. Customers can choose payment terms, shipping terms, delivery locations, gift-wrapping, and whether to opt-in to future e-mail promotions. Also, by monitoring click stream data in real time, the best e-commerce firms can offer product suggestions on the fly—while customers visit their sites. This sort of customized point-of-sale information not only increases sales, but also better fulfills customers’ needs and increases the likelihood of estab- lishing long-term customer relationships.

Criteria for Successful Segmentation It is important to remember that not all segmentation approaches or their resulting market segments are viable in a marketing sense. For example, it makes little sense to segment the soft drink market based on eye color or shoe size, as these character- istics have nothing to do with the purchase of soft drinks. Although markets can be segmented in limitless ways, the segmentation approach must make sense in terms of at least five related criteria:

• Identifiable and Measurable. The characteristics of the segment’s members must be easily identifiable. This allows the firm to measure identifying character- istics, including the segment’s size and purchasing power.

• Substantial. The segment must be large and profitable enough to make it worth- while for the firm. The profit potential must be greater than the costs involved in creating a marketing program specifically for the segment.

• Accessible. The segment must be accessible in terms of communication (advertising, mail, telephone, etc.) and distribution (channels, merchants, retail outlets, etc.).

• Responsive. The segment must respond to the firm’s marketing efforts, includ- ing changes to the marketing program over time. The segment must also respond differently than other segments.

• Viable and Sustainable. The segment must meet the basic criteria for exchange, including being ready, willing, and able to conduct business with the firm. The segment must also be sustainable over time to allow the firm to effec- tively develop a marketing strategy for serving the needs of the segment.

It is possible for a market segment to meet these criteria, yet still not be viable in a business sense. Markets for many illegal products, such as illicit drugs or por- nography, can easily meet these criteria. However, ethical and socially responsible firms would not pursue these markets. Other markets, such as gaming or gambling, may be legal in some geographical areas, but are often not in the best interests of the firm. More commonly, firms will identify perfectly viable market segments; however, these segments will rest outside of the firm’s expertise or mission. Just because a market segment is viable or highly profitable does not mean the firm should pursue it.

138 Chapter 5 • Customers, Segmentation, and Target Marketing

IDENTIFYING MARKET SEGMENTS A firm’s segmentation strategy and its choice of one or more target markets depend on its ability to identify the characteristics of buyers within those markets. This involves selecting the most relevant variables to identify and define the target market or markets. Many of these variables, including demographics, lifestyles, product usage, or firm size, derive from the situation analysis section of the marketing plan. However, a new or revised marketing strategy often requires changes in target mar- ket definition to correct problems in the previous marketing strategy. Target markets also shift in response to required changes in specific elements of the marketing pro- gram, such as reducing price to enhance value, increasing price to connote higher quality, adding a new product feature to make the benefits more meaningful, or sell- ing through retail stores instead of direct distribution to add the convenience of immediate availability. In short, the target market and the marketing program are interdependent, and changes in one typically require changes in the other. Beyond the Pages 5.3 outlines how major cereal companies have addressed changing custo- mers’ demands in the cereal market.

Segmenting Consumer Markets The goal in segmenting consumer markets is to isolate individual characteristics that distinguish one or more segments from the total market. The key is to segment the total market into groups with relatively homogeneous needs. As you may recall from our earlier discussion, consumers buy products because the benefits they pro- vide can fulfill specific needs or wants. The difficulty in segmenting consumer mar- kets lies in isolating one or more characteristics that closely align with these needs and wants. For example, marketers of soft drinks do not necessarily concern them- selves with the age or gender of their customers, but rather in how age and gender relate to customers’ needs, attitudes, preferences, and lifestyles.

In the discussion that follows, we look more closely at segmentation in con- sumer markets by examining the different factors that can be used to divide these markets into homogeneous groupings. As Exhibit 5.3 illustrates, these factors fall into one of four general categories: behavioral segmentation, demographic segmen- tation, psychographic segmentation, and geographic segmentation.

Behavioral Segmentation Behavioral segmentation is the most powerful approach because it uses actual consumer behavior or product usage to make distinctions among market segments. Typically, these distinctions are tied to the reasons that customers buy and use products. Con- sequently, behavioral segmentation, unlike other types of consumer segmentation, is most closely associated with consumers’ needs. A common use of behavioral seg- mentation is to group consumers based on their extent of product usage—heavy, medium, and light users. Heavy users are a firm’s bread-and-butter customers, and they should always be served well. Marketers often use strategies to increase prod- uct usage among light users, as well as nonusers of the product or brand. One of the best uses of behavioral segmentation is to create market segments based on specific consumer benefits. Exhibit 5.4 illustrates how benefit segmentation might be applied in the snack food market. Once different benefit segments have been identified, mar- keters can conduct research to develop profiles of the consumers in each segment.

Behavioral segmentation is a powerful tool; however, it is also quite difficult to execute in practice. Conducting research to identify behavioral segments is quite expensive and time consuming. Also, the personal characteristics associated with behavioral segments are not always clear. For example, although some consumers buy a new car solely for transportation, most buy specific makes and models for other reasons. Some consumers want cars that are sporty, fun to drive, and that

Chapter 5 • Customers, Segmentation, and Target Marketing 139

enhance their image. The problem lies in identifying the characteristics of these con- sumers. Are they older or younger, men or women, single or married, and do they live in urban or suburban areas? In some cases, consumer characteristics are easy to identify. Families purchase minivans because they want more room for their chil- dren and cargo. Older consumers tend to opt for comfortable and luxurious models. The key to successful behavioral segmentation is to clearly understand the basic needs and benefits sought by different consumer groups. Then this information can be combined with demographic, psychographic, and geographic segmentation to create complete consumer profiles.

Demographic Segmentation Demographic segmentation divides markets into segments using demographic factors such as gender (e.g., Secret deodorant for women), age (e.g., Abercrombie & Fitch

BEYOND THE PAGES 5.3

Shifting Strategies in the Cereal Market10

Cereal has long been thought of as a healthy breakfast. Yet in terms of sugar, parents might as well feed their children a cookie to start their day. Some sugary cereals are as much as 50 percent sugar. Kellogg’s Honey Smacks, for example, contains 15 grams of sugar per serving, which is 3 grams more than in a glazed donut. In spite of their poor nutritional profiles, it is often the sweetest cereals that are targeted toward children. In response, many upset parents filed lawsuits against cereal companies. In order to deal with the backlash and to gain a competitive advantage, companies like Kellogg’s have worked to reformulate and reposition their cer- eals as healthy breakfast choices.

Cereal companies began specifically mar- keting to children in the 1950s, the same decade in which sugar became a common additive in cereal. As one might imagine, kids gravitated toward these sugary sweets. Cereal companies also introduced cartoon characters to get kids interested in their brands. Tony the Tiger and Tricks, the Trix Rabbit, became beloved child icons. Companies also began placing free toys into cereal boxes. These marketing ploys worked; children craved these fun cereals, mak- ing sugary cereals a popular item on the break- fast table for decades.

In a string of lawsuits filed over the past 20 years, consumers have argued that cereal com- panies, such as Kellogg’s and General Mills, engage in deceptive advertising regarding nutri- tional information and in making exaggerated

claims about physical strength, happiness, or even magical powers. Today, cereal companies have reworked their advertising and most have stopped co-branding their products with well- known cartoon characters. Other lawsuits have focused on nutritional content or labeling, such as a suit filed against Kellogg’s Froot Loops by a woman who was upset that the cereal did not actually contain fruit.

In response to these concerns, Kellogg’s took a proactive stance to shift its marketing strategy. The company stopped advertising cer- eals that do not meet the Institute of Medicine and World Health Organization’s health guide- lines for cereal. No longer will you find a Kellogg’s cereal advertised if it contains over 12 grams of sugar or 200 calories per serving. The company also created guidelines advising consumers to eat sugary cereals in moderation. Other sugary cereals shifted to more health- conscious appeals with claims that they contain essential vitamins and minerals. A few brands, such as Frosted Flakes, introduced reduced sugar versions. In recent years, more nutritious cereals like Special K and the Kashi brand have become popular, although these cereals will never hold the same cache with children as Lucky Charms or Fruity Pebbles. Many major cereal companies are going further to respond to criticisms by listing health benefits prominently on cereal labels. However, even health benefits can land a company in hot water. Kellogg’s, for example, was fined $4 million by the FTC for misleading claims that its Frosted Mini-Wheats would improve kids’ attentiveness, memory, and other cognitive functions.

140 Chapter 5 • Customers, Segmentation, and Target Marketing

clothing for teens and young adults), income (e.g., Lexus automobiles for wealthy consumers), and education (e.g., online executive MBA programs for busy profes- sionals). Demographic segmentation tends to be the most widely used basis for seg- menting consumer markets because demographic information is widely available and relatively easy to measure. In fact, much of this information is easily obtainable during the situation analysis through secondary sources.

Some demographic characteristics are often associated with true differences in needs that can be used to segment markets. In these cases, the connection between demographics, needs, and desired product benefits can make demographic segmen- tation quite easy. For example, men and women have clearly different needs with respect to clothing and health care. Large families with children have a greater need for life insurance, laundry detergent, and food. Children prefer sweeter-tasting food and beverages than do adults. Unfortunately, demographic segmentation becomes less useful when the firm has a strong interest in understanding the motives

EXHIBIT 5.3 Common Segmentation Variables Used in Consumer Markets.

Category Variables Examples Behavioral Segmentation Benefits sought Quality, value, taste, image enhancement, beauty, sportiness, speed,

excitement, entertainment, nutrition, convenience Product usage Heavy, medium, and light users; nonusers; former users; first-time

users Occasions or situations

Emergencies, celebrations, birthdays, anniversaries, weddings, births, funerals, graduation

Price sensitivity Price sensitive, value conscious, status conscious (not price sensitive) Demographic Segmentation Age Newborns, 0–5, 6–12, 13–17, 18–25, 26–34, 35–49, 50–64, 65+

Gender Male, female Income Under $15,000, $15,000–$30,000, $30,000–$50,000, $50,000–

$75,000, $75,000–$100,000, over $100,000 Occupation Blue collar, white collar, technical, professional, managers, laborers,

retired, homemakers, unemployed Education High school graduate, some college, college graduate, graduate

degree Family life cycle Single, married no children, married with young children, married with

teenage children, married with grown children, divorced, widowed Generation Generation Y, Generation X, baby boomers, seniors Ethnicity Caucasian, African American, Hispanic, Asian Religion Protestant, Catholic, Muslim, Hindu Nationality American, European, Japanese, Australian, Korean Social class Upper class, middle class, lower class, working class, poverty level

Psychographic Segmentation Personality Outgoing, shy, compulsive, individualistic, materialistic, civic minded, anxious, controlled, venturesome

Lifestyle Outdoor enthusiast, sports-minded, homebody, couch potato, family- centered, workaholic

Motives Safety, status, relaxation, convenience Geographic Segmentation Regional Northeast, Southeast, Midwest, New England, Southern France, South

Africa City/county size Under 50,000; 50,000–100,000; 100,000–250,000;

250,000–500,000; 500,000–1,000,000, over 1,000,000 Population density Urban, suburban, rural

Chapter 5 • Customers, Segmentation, and Target Marketing 141

or values that drive buying behavior. Often, the motives and values that drive actual purchases do not necessarily have anything to do with demographics. For example, how would you describe the demographic characteristics of a price sensitive, value- conscious consumer? Before you answer, remember that Walmart customers come from all walks of life. Likewise, how would you describe the demographics of an adventuresome, outdoor-oriented consumer? When Honda first introduced its Element utility vehicle, the company targeted adventuresome, high school and college-aged consumers. To its surprise, Honda quickly discovered that the Element was just as popular with 30- and 40-somethings who used it to haul kids and groceries. The problem in understanding consumer motives and values is that these variables depend more on what consumers think and feel rather than whom they are. Delving into consumer thoughts and feelings is the subject of psychographic segmentation.

Psychographic Segmentation Psychographic segmentation deals with state-of-mind issues such as motives, attitudes, opinions, values, lifestyles, interests, and personality. These issues are more difficult to measure, and often require primary marketing research to properly determine the makeup and size of various market segments. Once the firm identifies one or more psychographic segments, they can be combined with demographic, geographic, or behavioral segmentation to create fully developed consumer profiles.

One of the most successful and well-known tools of psychographic segmentation is VALS, developed by Strategic Business Insights.11 VALS, which stands for “values and lifestyles,” divides adult U.S. consumers into one of eight profiles based on their level of resources and one of three primary consumption motives: ideals (knowledge and principles), achievement (demonstrating success to others), or self-expression (social or physical activity, variety, and risk taking). Exhibit 5.5 describes the eight

EXHIBIT 5.4 Benefit Segmentation of the Snack Food Market.

Nutritional Snackers

Weight Watchers

Guilty Snackers

Party Snackers

Indiscriminant Snackers

Economical Snackers

Benefits Sought

Nutritious, all-natural ingredients

Low calorie, quick energy

Low calorie, good tasting

Can be served to guests, goes well with beverages

Good tasting, satisfies hun- ger cravings

Low price, best value

Types of Snacks Eaten

Fruits, vegetables, cheeses

Yogurt, vegetables

Yogurt, cookies, crackers, candy

Potato chips, nuts, crackers, pretzels

Candy, ice cream, cook- ies, potato chips, pretzels, popcorn

No specific products

Snack Consumption Level

Light Light Heavy Average Heavy Average

Percentage of Snackers

23% 15% 10% 16% 16% 19%

Demographic Characteristics

Better educated, have young children

Younger, single Less educated, lower incomes

Middle aged, suburban

Teens Better educated, larger families

Psychographic Characteristics

Self-assured, controlled

Outdoorsy, influential, venturesome

Anxious, isolated Sociable, outgoing

Hedonistic, time deprived

Self-assured, price sensitive

SOURCE: Adapted from Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing, 7th ed. (Mason, OH: Cengage Learning, 2004), p. 224.

142 Chapter 5 • Customers, Segmentation, and Target Marketing

EXHIBIT 5.5 VALS Profiles of U.S. Consumers.

Innovators These consumers have abundant resources and high self-esteem. Innovators are successful, sophisticated consumers who have a taste for upscale, innovative, and specialized goods and services. Innovators are concerned about image as an expres- sion of self, but not as an expression of status or power.

Example products: fine wines, upscale home furnishings, lawn maintenance services, recent technology, luxury automobiles

Thinkers Thinkers are well-educated consumers who value order, knowledge, and responsibility. These consumers like to be as well informed about the products they buy as they are about world and national events. Although Thinkers have resources that give them many choices or options, they tend to be conservative consumers who look for practicality, durability, functionality, and value.

Example products: news and information services, low-emission vehicles, conservative homes and home furnishings

Achievers The lifestyle of an Achiever is focused and structured around family, a place of worship, and career. Achievers are conventional, conservative, and respect authority and the status quo. These individuals are very active consumers who desire established, prestigious products and services that demonstrate their success. Achievers lead busy lives; hence, they value products that can save them time and effort.

Example products: SUVs, family vacations, products that promote career enhancement, online shopping, swimming pools

Experiencers Experiencers are young, enthusiastic, and impulsive consumers who are motivated by self-expression. These consumers emphasize variety, excitement, the offbeat, and the risky. Experiencers enjoy looking good and buying “cool” products.

Example products: fashion, entertainment, sports/exercise, outdoor recreation and social activities

Believers Believers are conservative, conventional consumers who hold steadfast beliefs based on traditional values related to family, religion, community, and patriotism. These consumers are predictable in that they follow established routines centered on family, commu- nity, or organizational membership. Believers prefer familiar and well-known American brands and tend to be very loyal customers.

Example products: membership in social, religious, or fraternal organizations; American made products; charitable organizations

Strivers Strivers are motivated by achievement, yet they lack the resources to meet all their desires. As a group, Strivers are trendy, fun loving, and concerned with the opinions and approval of others. These consumers see shopping as a social activity and an opportunity to demonstrate their purchasing power up to the limits imposed by their financial situations. Most Strivers think of themselves as having jobs rather than careers.

Example products: stylish products, impulse items, credit cards, designer “knock-offs,” shopping as entertainment

Makers Makers, like Experiencers, are motivated by self-expression. However, these consumers experience the world by engaging in many do-it-yourself activities such as repairing their own cars, building houses, or growing and canning their own vegetables. Makers are practical consumers who value self-sufficiency and have the skills to back it up. Makers are also unimpressed by material possessions, new ideas, or big business. They live traditional lives and prefer to buy basic items.

Example products: Auto parts, home-improvement supplies, gardening supplies, sewing supplies, discount retailers

Survivors Survivors live narrowly focused lives and have few resources with which to cope. They are primarily concerned with safety, security, and meeting needs rather than fulfilling wants. As a group, Survivors are cautious consumers who represent a fairly small market for most products. They are loyal to favorite brands, especially if they can buy them on sale.

Example products: Basic necessities and staples; old, established brands

SOURCE: Strategic Business Insights, http://www.strategicbusinessinsights.com/vals/ustypes.shtml, accessed March 1, 2015.

Chapter 5 • Customers, Segmentation, and Target Marketing 143

VALS profiles. Many companies use VALS in a variety of marketing activities includ- ing new product development, product positioning, brand development, promotional strategy, and media placement. There is also a geographic version of VALS, called GeoVALS, which links each consumer profile with geographic information such as ZIP codes. This tool is quite useful in direct marketing campaigns and retail site selection.

Psychographic segmentation is useful because it transcends purely descriptive characteristics to help explain personal motives, attitudes, emotions, and lifestyles directly connected to buying behavior. For example, companies such as Michelin and State Farm appeal to consumers motivated by issues such as safety, security, and protection when buying tires or insurance. Other firms, such as Subaru, Kia, and Hyundai, appeal to consumers whose values and opinions about transportation focus more on economy than status. Online degree programs appeal to consumers whose active lifestyles do not allow them to attend classes in the traditional sense.

Geographic Segmentation Geographic characteristics often play a large part in developing market segments. For example, firms often find that their customers are geographically concentrated. Even ubiquitous products like Coca-Cola sell better in the southern United States than in other parts of the country. Consumer preferences for certain purchases based on geography are a primary consideration in developing trade areas for retai- lers such as grocery stores, gas stations, and dry cleaners. For example, geodemo- graphic segmentation, or geoclustering, is an approach that looks at neighborhood profiles based on demographic, geographic, and lifestyle segmentation variables. One of the best-known geoclustering tools is Nielsen’s PRIZM segmentation system, which classifies every neighborhood in the United States into one of 66 different demographic and behavioral clusters. The “Big Fish, Small Pond” cluster contains older, upper-class, highly educated professionals who enjoy success. The adults in this cluster are typically 55+ years old, empty-nesting couples with a median house- hold income of almost $89,000. They are prime targets for financial services, upscale cars, and charitable causes. PRIZM is useful to marketers because it allows them to focus their marketing programs only in areas where their products are more likely to be accepted. Not only does this make their marketing activities more successful, it also greatly reduces marketing expenditures.12

Segmenting Business Markets One of the most basic methods of segmenting business markets involves the four types of markets we discussed earlier in the chapter: commercial markets, reseller markets, government markets, and institutional markets. Marketers may focus on one or more of these markets, as each has different requirements. However, even within one type of market, marketers will discover that buying firms have unique and varying characteristics. In these cases, further segmentation using additional variables might be needed to further refine the needs and characteristics of business customers. For example, Canon sells a line of wide format printers aimed at CAD and architectural design users, as well as other segments such as fine art, photogra- phy, office, and signage. Each segment has different uses for wide format printing, as well as different requirements with respect to the types of inks used in the printers. In addition to the types of business markets, firms can also segment business buyers with respect to:

• Type of Organization. Different types of organizations may require different and specific marketing programs, such as product modifications, different distri- bution and delivery structures, or different selling strategies. A glass manufac- turer, for example, might segment customers into several groups, such as car

144 Chapter 5 • Customers, Segmentation, and Target Marketing

manufacturers, furniture makers, window manufacturers, or repair and mainte- nance contractors.

• Organizational Characteristics. The needs of business buyers often vary based on their size, geographic location, or product usage. Large buyers often command price discounts and structural relationships that are appropriate for their volume of purchases. Likewise, buyers in different parts of the country, as well as in different nations, may have varying product requirements, specifica- tions, or distribution arrangements. Product usage is also important. Computer manufacturers often segment markets based on how their products will be used. For example, K-12 educational institutions have different requirements for computers and software than do major research universities.

• Benefits Sought or Buying Processes. Organizations differ with respect to the benefits they seek and the buying processes they use to acquire products. Some business buyers seek only the lowest cost provider, while others require exten- sive product support and service. Additionally, some businesses buy using highly structured processes, most likely through their buying center. Others may use online auctions or even highly informal processes.

• Personal and Psychological Characteristics. The personal characteristics of the buyers themselves often play a role in segmentation decisions. Buyers will vary according to risk tolerance, buying influence, job responsibilities, and deci- sion styles.

• Relationship Intensity. Business markets can also be segmented based on the strength and longevity of the relationship with the firm. Many organizations structure their selling organization using this approach with one person or team dedicated to the most critical relationships. Other members of the selling organi- zation may be involved in business development strategies to seek out new customers.

As we have seen, segmentation in business markets addresses many of the same issues found in consumer markets. Despite some differences and additional consid- erations that must be addressed, the foundation remains the same. Marketers must understand the needs of their potential customers and how these needs differ across segments within the total market.

TARGET MARKETING STRATEGIES Once the firm has completed segmenting a market, it must then evaluate each seg- ment to determine its attractiveness and whether it offers opportunities that match the firm’s capabilities and resources. Remember that just because a market segment meets all criteria for viability does not mean the firm should pursue it. Attractive segments might be dropped for several reasons, including a lack of resources, no synergy with the firm’s mission, overwhelming competition in the segment, an impending technology shift, or ethical and legal concerns over targeting a particular segment. Based on its analysis of each segment, the firm’s current and anticipated situation, and a comprehensive SWOT analysis, a firm might consider five basic strat- egies for target market selection. Exhibit 5.6 depicts the following strategies.13

• Single Segment Targeting. Firms use single segment targeting when their capabil- ities are intrinsically tied to the needs of a specific market segment. Many con- sider the firms using this targeting strategy to be true specialists in a particular product category. Good examples include New Belgium Brewing (craft beer), Porsche, and Ray-Ban. These and other firms using single segment targeting are successful because they fully understand their customers’ needs, preferences, and lifestyles. These firms also constantly strive to improve quality and customer

Chapter 5 • Customers, Segmentation, and Target Marketing 145

satisfaction by continuously refining their products to meet changing customer preferences.

• Selective Targeting. Firms that have multiple capabilities in many different product categories use selective targeting successfully. This strategy has several advantages, including diversification of the firm’s risk and the ability to cherry pick only the most attractive market segment opportunities. Procter & Gamble uses selective targeting to offer customers many different products in the fabric and home care, health and grooming, baby, feminine, and family care, and beauty, hair, and personal care markets. Besides the familiar deodorants, laun- dry detergents, and hair care products, P&G also sells products in the cosmetics, cologne, and prescription drug markets. One of the keys to P&G’s success is that the company does not try to be all things for all customers. The company care- fully selects product/market combinations where its capabilities match custo- mers’ needs.

• Mass Market Targeting. Only the largest firms have the capability to execute mass market targeting, which involves the development of multiple marketing pro- grams to serve all customer segments simultaneously. For example, Coca-Cola offers roughly 500 branded beverages across many segments that fulfill different consumer needs in over 200 countries around the world. Likewise, Frito-Lay sells hundreds of different varieties of snack foods around the world.

• Product Specialization. Firms engage in product specialization when their exper- tise in a product category can be leveraged across many different market seg- ments. These firms can adapt product specifications to match the different needs of individual customer groups. For example, many consider Littmann Stethoscopes, a division of 3M, as the worldwide leader in auscultation technol- ogy. Littmann offers high-performance electronic stethoscopes for cardiologists, specially designed stethoscopes for pediatric/infant use, lightweight stetho- scopes for simple physical assessment, and a line of stethoscopes for nursing and medical students. The company also offers a line of veterinary stethoscopes.14

• Market Specialization. Firms engage in market specialization when their intimate knowledge and expertise in one market allows them to offer customized market- ing programs that not only deliver needed products, but also provide needed solutions to customers’ problems. The Follett Corporation is a prime example. Follett specializes in the education market and serves over half of the students in schools, colleges, and universities in the United States and Canada. The com- pany’s vision is based on “empowering education everywhere learning is happening.”15

EXHIBIT 5.6 Basic Strategies for Target Market Selection.

M M M1 2 3

Single Segment Targeting

Mass Market

Targeting

Selective Targeting

Product Specialization

Market Specialization

P = Product Category; M = Market

146 Chapter 5 • Customers, Segmentation, and Target Marketing

In addition to targeting a subset of current customers within the product/market, firms can also take steps to target noncustomers. As we discussed in Chapter 3, there are many reasons why noncustomers do not purchase a firm’s products. These reasons can include unique customer needs, better competing alternatives, high switching costs, lack of product awareness, or the existence of long-held assumptions about a product. For example, products associated with tooth whiten- ing were at one time associated only with dentists. Consequently, consumers were hesitant to use these products due to the expense, effort, and anxiety involved. Oral care companies were able to break this tradition and reach out to noncustomers by developing high-quality, low-price, over-the-counter alternatives that were much easier to purchase. Today, these at-home tooth-whitening products—such as Procter & Gam- ble’s Crest 3D White Whitestrips—are a $3 billion market in the United States.16

As this example illustrates, the key to targeting noncustomers lies in understand- ing the reasons why they do not buy, and then finding ways to remove these obsta- cles. Removing obstacles to purchase, whether they exist in product design, affordability, distribution convenience, or product awareness, is a major strategic issue in developing an effective marketing program. Over the next two chapters, we turn our attention to the important strategic issues involved in creating the market- ing program, including branding and positioning the product offering.

LESSONS FROM CHAPTER 5

Buyer behavior in consumer markets:

• is often irrational and unpredictable as consumers often say one thing but do another.

• can progress through five stages: need recognition, information search, evalua- tion of alternatives, the purchase decision, and postpurchase evaluation.

• does not always follow these stages in sequence and may even skip stages en route to the purchase.

• may be characterized by loyalty where consumers simply purchase the same product that they bought last time.

• often involves a parallel sequence of activities associated with finding the most suitable merchant. That is, while consumers consider which product to buy, they also consider where they might buy it.

• may occur with only one merchant for a particular product category if the con- sumer is fiercely loyal to that merchant.

Keys to understanding consumer needs and wants:

• Defining needs as “necessities” has limitations because everyone has a different perspective on what constitutes a need.

• Needs occur when a consumer’s current level of satisfaction does not equal the desired level of satisfaction.

• Wants are a consumer’s desire for a specific product that will satisfy a need. • The firm must always understand the basic needs fulfilled by its products. This

understanding allows the firm to segment markets and create marketing pro- grams that can translate consumer needs into wants for their specific products.

• Although some products and markets can be segmented on the basis of needs alone, most product categories are marketed on the basis of wants, not need fulfillment.

• Wants are not the same thing as demand, as demand occurs only when the con- sumer’s ability and willingness to pay backs up a want for a specific product.

Chapter 5 • Customers, Segmentation, and Target Marketing 147

The information search stage of the consumer buying process:

• can be passive—where the consumer becomes more attentive and receptive to information—or active—where the consumer engages in a more aggressive information search by seeking additional information.

• depends on a number of issues, including the degree of risk involved in the pur- chase, the amount of expertise or experience the consumer has with the product category, and the actual cost of the search in terms of time and money.

• culminates in an evoked set of suitable buying alternatives.

During the evaluation of alternatives:

• consumers essentially translate their needs into wants for specific products or brands.

• consumers evaluate products as bundles of attributes that have varying abilities to satisfy their needs.

• the priority of each consumer’s choice criteria can change. • marketers must ensure that their product is in the evoked set of potential alterna-

tives by constantly reminding consumers of their company and its product offerings.

During the purchase stage of the buying process:

• it is important to remember that the intention to purchase and the actual act of buying are distinct concepts.

• the key issues for marketers are product availability and possession utility.

During postpurchase evaluation:

• the outcome of the buying process is linked to the development of long-term cus- tomer relationships. Marketers must closely follow customers’ responses to monitor the product’s performance and its ability to meet customers’ expectations.

• consumers will experience one of four potential outcomes: delight, satisfaction, dissatisfaction, or cognitive dissonance.

Overall, the consumer buying process can be affected by:

• the complexity of the purchase and decision-making process. • individual factors, such as age, life cycle, occupation, socioeconomic status, per-

ceptions, motives, interests, attitudes, opinions, and lifestyles. • social influences such as culture, subculture, social class, family, reference

groups, and opinion leaders. • situational influences, such as physical and spatial influences, social and inter-

personal influences, time, purchase task or usage, and the consumer’s disposition.

Business markets:

• purchase products for use in their operations, such as acquiring raw materials to produce finished goods or buying office supplies or leasing cars.

• consist of four types of buyers: commercial markets, reseller markets, govern- ment markets, and institutional markets.

• possess four unique characteristics not typically found in consumer markets:

– the buying center: economic buyers, technical buyers, and users. – hard and soft costs: soft costs (downtime, opportunity costs, human resource costs) are just as important as hard costs (monetary price or purchase costs).

– reciprocity: business buyers and sellers often buy products from each other. – mutual dependence: sole-source or limited-source buying makes both buying and selling firms mutually dependent.

148 Chapter 5 • Customers, Segmentation, and Target Marketing

The business buying process:

• follows a well-defined sequence of stages, including (1) problem recognition, (2) development of product specifications, (3) vendor identification and qualifi- cation, (4) solicitation of proposals or bids, (5) vendor selection, (6) order pro- cessing, and (7) vendor performance review.

• can be affected by a number of factors, including environmental conditions, organizational factors, and interpersonal and individual factors.

Market segmentation:

• is the process of dividing the total market for a particular product or product cat- egory into relatively homogeneous segments or groups.

• should create groups where the members are similar to each other, but where the groups are dissimilar from each other.

• involves a fundamental decision of whether to segment at all. • typically allows firms to be more successful due to the fact that they can tailor

products to meet the needs or requirements of a particular market segment.

Traditional market segmentation approaches:

• have been used successfully for decades, are not out-of-date, and are used by many of today’s most successful firms.

• are sometimes used in combination with newer approaches by the same firm, depending on the brand/product or market in question.

Mass marketing:

• involves no segmentation whatsoever as it is aimed at the total (whole) market for a particular product.

• is an undifferentiated approach that assumes that all customers in the market have similar needs and wants that can be reasonably satisfied with a single marketing program.

• works best when the needs of an entire market are relatively homogeneous. • is advantageous in terms of production efficiency and lower marketing costs. • is inherently risky because a standardized product is vulnerable to competitors

that offer specialized products that better match customers’ needs.

Differentiated marketing:

• involves dividing the total market into groups of customers having relatively common or homogeneous needs, and attempting to develop a marketing pro- gram that appeals to one or more of these groups.

• may be necessary when customer needs are similar within a single group but their needs differ across groups.

• involves two options: the multisegment approach and the market concentration approach.

Niche marketing:

• involves focusing marketing efforts on one small, well-defined market segment or niche that has a unique, specific set of needs.

• requires that firms understand and meet the needs of target customers so completely that, despite the small size of the niche, the firm’s substantial share makes the segment highly profitable.

Individualized segmentation approaches:

• have become viable due to advances in technology, particularly communication technology and the Internet.

• are possible because organizations now have the ability to track customers with a high degree of specificity.

Chapter 5 • Customers, Segmentation, and Target Marketing 149

• allow firms to combine demographic data with past and current purchasing behavior so they can tweak their marketing programs in ways that allow them to precisely match customers’ needs, wants, and preferences.

• will become even more important in the future because their focus on individual customers makes them critical to the development and maintenance of long- term relationships.

• can be prohibitively expensive to deliver. • depend on two important considerations: automated delivery of the marketing

program and personalization.

One-to-one marketing:

• involves the creation of an entirely unique product or marketing program for each customer in the target segment.

• is common in business markets where unique programs and/or systems are designed for each customer.

• is growing rapidly in consumer markets, particularly in luxury and custom-made products, as well as in services and electronic commerce.

Mass customization:

• refers to providing unique products and solutions to individual customers on a mass scale.

• is now cost-effective and practical due to advances in supply chain management, including real-time inventory control.

• is used quite often in business markets, especially in electronic procurement systems.

Permission marketing:

• is different from one-to-one marketing because customers choose to become a member of the firm’s target market.

• is commonly executed via the opt-in e-mail list, where customers permit a firm to send periodic e-mail about goods and services that they have an interest in purchasing.

• has a major advantage in that customers who opt-in are already interested in the goods and services offered by the firm.

• allows a firm to precisely target individuals, thereby eliminating the problem of wasted marketing effort and expense.

Successful segmentation:

• requires that market segments fulfill five related criteria: segments must be identi- fiable and measurable, substantial, accessible, responsive, and viable and sustainable.

• involves avoiding ethically and legally sensitive segments that are profitable but not viable in a business sense.

• involves avoiding potentially viable segments that do not match the firm’s exper- tise or mission.

Identifying market segments:

• involves selecting the most relevant variables to identify and define the target market, many of which come from the situation analysis section of the marketing plan.

• involves the isolation of individual characteristics that distinguish one or more segments from the total market. These segments must have relatively homoge- neous needs.

• in consumer markets involves the examination of factors that fall into one of four general categories:

150 Chapter 5 • Customers, Segmentation, and Target Marketing

– behavioral segmentation—the most powerful approach because it uses actual consumer behavior or product usage that helps to make distinctions among market segments.

– demographic segmentation, which divides markets using factors such as gen- der, age, income, and education.

– psychographic segmentation, which deals with state-of-mind issues such as motives, attitudes, opinions, values, lifestyles, interests, and personality.

– geographic segmentation, which is often most useful when combined with other segmentation variables. One of the best examples is geodemographic segmentation, or geoclustering.

• in business markets is often based on type of market (commercial, reseller, gov- ernment, or institutional) or on other characteristics such as type of organiza- tion, organizational characteristics, benefits sought or buying processes, personal or psychological characteristics, or relationship intensity.

Target marketing strategies:

• are based on an evaluation of the attractiveness of each segment and whether each offers opportunities that match the firm’s capabilities and resources.

• include single segment targeting, selective targeting, mass market targeting, product specialization, and market specialization.

• should also consider issues related to noncustomers such as reasons why they do not buy and finding ways to remove obstacles to purchase.

NOTES 1. These facts are from Stephen Baker, “Data Mining Moves to Human Resources,”

BusinessWeek Online, March 12, 2009 (http://www.businessweek.com/magazine/ content/09_12/b4124046224092.htm); Charles Duhigg, “How Companies Learn Your Secrets,” New York Times, February 16, 2012 (http://www.nytimes.com/2012/02/19/ magazine/shopping-habits.html?_r=2&pagewanted=1&hp); Tim Ferguson, “How Europeans Are Using Data Mining,” BusinessWeek Online, May 17, 2009 (http://www. businessweek.com/globalbiz/content/may2009/gb20090517_529807.htm); Kashmir Hill, “How Target Figured Out a Teen Girl Was Pregnant Before Her Father Did,” Forbes, February 16, 2012 (http://www.forbes.com/sites/kashmirhill/2012/02/16/how-target- figured-out-a-teen-girl-was-pregnant-before-her-father-did); Stephen Baker and Bremen Leak, “Math Will Rock Your World,” BusinessWeek, January 23, 2006; Maggie McGrath, “Target Data Breach Spilled Info on as Many as 70 Million Customers,” Forbes, January 10, 2014 (http://www.forbes.com/sites/maggiemcgrath/2014/01/10/target-data- breach-spilled-info-on-as-many-as-70-million-customers/); Chris Taylor, “Imagining the Google Future,” Business 2.0, February 1, 2006 (http://money.cnn.com/magazines/ business2/business2_archive/2006/01/01/8368125/index.htm); Target 2013 Highlights, Target 2013 Annual Report (https://corporate.target.com/annual-reports/2013/financials/ financial-highlights/), accessed March 1, 2015.

2. These facts are from Martin Beck, “Pinterest Continues Its Manhunt, Touts Growth Among U.S. Males,” Marketing Land, January 23, 2015 (http://marketingland.com/ pinterest-continues-manhunt-115362); Jordan Crook, “This is Everything You Need to Know About Pinterest,” TechCrunch, March 14, 2012 (http://techcrunch.com/2012/03/ 14/this-is-everything-you-need-to-know-about-pinterest-infographic/), accessed March 1, 2015; Don Mathis, “Pinterest’s Growth Is Huge, But Its Future Depends on Deeper Targeting,” Advertising Age, December 29, 2014 (http://adage.com/article/digitalnext/ pinterest-s-future-depends-deeper-targeting/296353/); Grant McCracken, “Pinterest as Free Market Research,” Harvard Business Review Blog, February 17, 2012 (http:// blogs.hbr.org/cs/2012/02/pinterest_is_free_market_resea.html).

3. These facts are from Doug Olenick, “Microsoft’s Big Marketing Push for Surface Tablet Is Starting to Pay Off,” The Street, February 24, 2015 (http://www.thestreet.com/story/ 13055049/1/microsofts-big-marketing-push-for-surface-tablet-is-starting-to-pay-off.html).

Chapter 5 • Customers, Segmentation, and Target Marketing 151

4. Kevin Grandia, “Putting Green in an Arm’s Reach of the Desire to Consume,” Huffington Post Blog, February 22, 2009 (http://www.huffingtonpost.com/kevin-grandia/ putting-green-in-arms-rea_b_160134.html).

5. These facts are from Thomas Chau, “2015 Kia Soul EV Hamster Commercial—What’s the Song?” Pop Crush, August 25, 2014 (http://popcrush.com/2015-kia-soul-ev-hamster- commercial-whats-the-song/); Alan Ohnsman and Sookyung Seo, “Korea’s Kia Is Drawing Drivers,” BusinessWeek Online, November 24, 2010 (http://www. businessweek.com/magazine/content/10_49/b4206023212567.htm).

6. Stephanie Clifford, “Would You Like a Smile with That?” New York Times, August 6, 2011 (http://www.nytimes.com/2011/08/07/business/pret-a-manger-with-new-fast-food- ideas-gains-a-foothold-in-united-states.html?pagewanted=all).

7. These facts are from Matthew Boyle, “Joe Galli’s Army,” Fortune, December 30, 2002, p. 135; the Sterilite Corporate website (http://www.sterilite.com/about_sterilite.html), accessed March 1, 2015.

8. These facts are from “2010 Census Shows America’s Diversity,” U.S. Census Bureau Press Release, March 24, 2011 (http://2010.census.gov/news/releases/operations/cb11- cn125.html); Elli Bishop, “6 Brands That Succeed at Understanding Hispanic Marketing,” Business2Community, October 7, 2014 (http://www.business2community. com/marketing/6-brands-succeed-understanding-hispanic-marketing-01030311); Sam Fahmy, “Despite Recession, Hispanic and Asian Buying Power Expected to Surge in U.S.,” Selig Center for Economic Growth, Terry College of Business, University of Georgia, November 4, 2010 (http://www.terry.uga.edu/news/releases/2010/minority- buying-power-report.html); Karl Greenberg, “Toyota Changes Corp. Comms. to Reflect ‘Total Toyota’,” Media Post, December 21, 2013 (http://www.mediapost.com/ publications/article/216071/toyota-changes-corp-comms-to-reflect-total-toyo.html); Burt Helm, “Ethnic Marketing: McDonald’s Is Lovin’ It,” BusinessWeek Online, July 8, 2010 (http://www.businessweek.com/magazine/content/10_29/b4187022876832.htm); Kunal Tanna, “Buying Power of Minorities in US Economy Growing at ‘Exponential Rate’,” The Red & Black, December 2, 2014 (http://www.redandblack.com/uganews/buying- power-of-minorities-in-us-economy-growing-at-exponential/article_9833a37c-5e1b-11e4- 910d-0017a43b2370.html).

9. This information is from the Curves website (http://www.curves.com/about-curves), accessed March 1, 2015; The Little Gym website (http://www.thelittlegym.com/pages/ our-story.aspx), accessed March 1, 2015; Allison Van Dusen, “Is a Custom Gym Membership for You?” Forbes Online, September 9, 2008 (http://www.forbes.com/2008/ 09/29/custom-gym-popularity-forbeslife-cx_avd_0929health.html).

10. These facts are from Salynn Boyles, “Kids’ Cereals: Some Are 50% Sugar,” WebMD, September 30, 2008 (http://www.webmd.com/food-recipes/news/20081001/kids-cereals- some-are-50-percent-sugar), accessed March 1, 2015; Tara Culp-Ressler, “Kellogg’s Must Pay $4 Million After Falsely Advertising Mini-Wheats’ Health Benefits for Kids,” Think Progress, June 3, 2013 (http://thinkprogress.org/health/2013/06/03/2090951/ kelloggs-false-advertising-settlement/); “Froot Loops Not Made of Real Fruit: The Cereal Lawsuits,” Law Vibe Blog, May 1, 2010 (http://lawvibe.com/froot-loops-not- made-of-real-fruit-the-cereal-lawsuits); Jennifer Mariani and Matt Schottmiller, “2009 Marketing and the Cereal Industry Case,” The University of New Mexico.

11. This discussion is based on information obtained from the VALS website (http://www. strategicbusinessinsights.com/vals), accessed March 1, 2015.

12. These facts are from the PRIZM website (http://www.claritas.com/MyBestSegments/ Default.jsp?ID=70&&pageName=Nielsen%20PRIZM&menuOption=learnmore), accessed March 1, 2015.

13. This material is adapted from Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing, 7th ed. (Mason, OH: South-Western, 2004), pp. 228–231; Philip Kotler, A Framework for Marketing Management, 2nd ed. (Upper Saddle River, NJ: Prentice-Hall, 2003), pp. 181–185.

14. These facts are from http://www.littmann.com, accessed March 1, 2015. 15. These facts are from http://www.follett.com/about-company, accessed March 1, 2015. 16. These facts are from Allison Van Dusen, “The Price of a Perfect Smile,” Forbes,

January 17, 2008 (http://www.forbes.com/2008/01/16/health-smile-perfect-forbeslife- cx_avd_0117health.html); Kathryn Buschman Vasel, “David vs. Goliath: Battle Brewing in Teeth-Whitening Industry,” Fox Business, May 15, 2014 (http://www.foxbusiness. com/2014/05/15/david-vs-goliath-battle-brewing-in-teeth-whitening-industry/).

152 Chapter 5 • Customers, Segmentation, and Target Marketing

TheMarketing Program

INTRODUCTION With a clearly defined target market in hand, the organization turns its attention toward developing a marketing program that will fulfill the target’s needs and wants better than the competition. When we say marketing program, we are referring to the strategic combination of the four basic marketing mix elements: product, price, dis- tribution, and promotion. Although each element is vitally important to the success of the marketing strategy, the product usually receives the most attention because it is most responsible for fulfilling the customers’ needs and wants. However, since customers’ needs and wants are multifaceted, we prefer to think of the outcome of the marketing program as a complete “offering” that consists of an array of physical (tangible), service (intangible), and symbolic (perceptual) attributes designed to sat- isfy customers’ needs and wants. In other words, the best marketing strategy is likely to be one that combines the product, price, distribution, and promotion elements in a way that maximizes the tangible, intangible, and perceptual attributes of the com- plete offering.

Good marketing strategy considers all four elements of the marketing program and the offering rather than emphasizing a single element. We have noted throughout this text how most firms today compete in rather mature markets characterized by commoditization. In these cases, the core product (the element that satisfies the basic customer need) typically becomes incapable of differentiating the offering from those of the competition. Consequently, most organizations work to enhance the service and symbolic elements of their offerings by changing price, distribution, or promotion in order to stand out from the crowd. As described in Beyond the Pages 6.1, this makes marketing strategy even more challenging for the firm. It also requires that the marketing program be considered holistically rather than sequen- tially. This means that products must be designed with an eye toward how they will be priced, distributed, and promoted. It does a company no good to develop a stand- out product that is not price competitive, difficult to ship or store, and hard to con- vey in promotional messages. All four elements of the marketing program must be developed simultaneously.

In this chapter, we examine the four elements of the marketing program in more detail. Issues such as product design, affordability, distribution convenience, and product awareness are major considerations in developing an effective market- ing program. Problems in any one area can create obstacles that customers may be unwilling to overlook as they search for the best offering that will fulfill their needs.

CHAPTER

153

BEYOND THE PAGES 6.1

Can Physical Books Save Barnes & Noble?1

Like many companies in the Internet economy, Barnes & Noble is at a crossroads. The largest U.S. bookstore chain made retailing history when it opened the first category–killer book- store in the late 1980s. At that time, the store was five times the size of a typical bookstore. Customers flocked to the spacious and comfort- able stores that offered a comprehensive inven- tory of books, music, and DVDs. Most of the stores also included a café where customers could have coffee, a snack, and enjoy a good book. Barnes & Noble had successfully con- verted the small, mall-based bookstore to a true destination for book-loving customers.

But that was in the 1980s and 1990s. As the Internet economy took off in the late 1990s and into the 2000s, Barnes & Noble was forced to move online. At the launch of Barnesandnoble. com in 1997, the company offered a staggering 1 million titles for immediate delivery, plus access to a nationwide network offering over 30 million listings from out-of-print, rare, and used book deal- ers. This move came at roughly the same time as the launch of an unusual online bookstore called Amazon.com. Amazon offered a limited selection and was a pure Internet-based company, so few people gave the company any chance of succeed- ing. Plus, Amazon was losing money. At the time, Barnes & Noble wasn’t worried about Amazon because their book superstore concept was a huge success. And, everyone knew that book lovers preferred to browse in the store, sit in com- fortable chairs, and enjoy a coffee. Didn’t they?

Fast-forward to today and we all know that Amazon has been remarkably successful. So much so that other book retailers, namely Borders and Waldenbooks, have since closed. We also know that Amazon sells more e-books than physical books. E-readers such as Amazon’s Kindle and Barnes & Noble’s Nook (plus a variety of tablets like the iPad and Kindle Fire) are wildly popular among a variety of tar- get customers, old and young. In addition, other competitors have entered the market. Apple, for example, offers e-books through its iBooks app on the iPad and iPhone. Google now offers free access to millions of public domain books. The rapid changes in the book retailing market have

forced Barnes & Noble to adapt, and these changes now threaten the future of the once- dominant book retailer.

What can Barnes & Noble do to remain rel- evant and viable in this market? To answer that question, we need to look at the company’s current marketing program:

• Products. Barnes & Noble competes in a highly commoditized product market. Books, whether offered in print or as e- books, are the same no matter where they are purchased. Barnes & Noble does have an advantage in the textbook market, but the differences between its selection and the selection at Amazon are disappearing fast. Amazon, on the other hand, offers a very broad selection of products ranging from electronics to beauty supplies. Barnes & Noble offers a much narrower variety of books, music, movies, and some toys. Both companies’ e-readers are competitively matched in terms of features and benefits.

• Pricing. Given the commoditized nature of the market, price would be one logical place to compete against Amazon and other competitors. However, there is very little price differentiation in the book market. This is especially true with respect to e- books, where prices are roughly the same across multiple competitors.

• Distribution. Barnes & Noble has invested a lot of resources into its distribution system. However, Amazon is also no slouch at supply chain management. One area where Barnes & Noble has a distinct advantage is on col- lege campuses. The company operates over 717 college bookstores serving over 4 million students and 250,000 faculty in all 50 states. The company’s physical footprint also includes roughly 650 traditional Barnes & Noble stores that draw millions of customers annually. These stores are still destinations for true book lovers, something that Amazon cannot copy.

• Promotion. It is very hard to build a competi- tive advantage based on promotion alone, and neither Barnes & Noble nor Amazon stand out per se. Both have strong brands and position- ing. Both also offer membership programs. However, Amazon’s program—Amazon

154 Chapter 6 • The Marketing Program

PRODUCT STRATEGY Of all the strategic decisions to be made in the marketing plan, the design, develop- ment, branding, and positioning of the product are perhaps the most critical. At the heart of every organization lies one or more products that define what the organiza- tion does and why it exists. As we stated in Chapter 1, the term “product” refers to something that buyers can acquire via exchange to satisfy a need or a want. This is a very broad definition that allows us to classify many different things as products: food, entertainment, information, people, places, ideas, etc. An organization’s prod- uct offering is typically composed of many different elements—usually some combi- nation of tangible goods, services, ideas, image, or even people. As we consider product decisions here, it is important to remember that product offerings in and of themselves have little value to customers. Rather, an offering’s real value comes from its ability to deliver benefits that enhance a customer’s situation or solve a cus- tomer’s problems. For example, customers don’t buy pest control; they buy a bug- free environment. Lexus customers don’t buy a car; they buy luxury, status, comfort, and social appeal. Students who frequent a local nightclub are not thirsty; they want to fulfill their need for social interaction. Likewise, companies do not need compu- ters; they need to store, retrieve, distribute, network, and analyze data and informa- tion. Marketers who keep their sights set on developing product offerings that truly meet the needs of the target market are more likely to be successful.

Strategic Issues in the Product Portfolio Products fall into two general categories. Products used for personal use and enjoy- ment are called consumer products, while those purchased for resale, to make other pro- ducts, or for use in a firm’s operations are called business products. Exhibit 6.1 illustrates examples of each type of product category. Although the distinction may seem simplistic, it is important in a strategic sense because the type of product in ques- tion can influence its pricing, distribution, or promotion. For example, marketing strat- egy for consumer convenience products must maximize availability and ease of purchase—both important distribution considerations. The strategy associated with consumer shopping products often focuses more on differentiation through image and symbolic attributes—both important branding and promotion issues. Marketing strategies for raw materials are especially challenging because these products are

Prime—beats Barnes & Noble by a wide mar- gin. For a $99 per year fee, Prime members get free two-day shipping on millions of products, free instant streaming of thousands of movies and television programs, and the ability to bor- row one Kindle e-book each month. By con- trast, Barnes & Noble’s members get free shipping and small discounts on books and Nook e-readers.

It is clear that carving out a strong competi- tive advantage is difficult for any book retailer. Barnes & Noble has an edge in college campus distribution and a loyal customer following. Ama- zon, however, has an edge in terms of the total digital ecosystem and a loyal following of price- conscious customers. In some ways the two com- panies compete using different paradigms.

Although the company continues to lose ground in the digital book market to Amazon, Barnes & Noble’s saving grace is likely to be its retail footprint, especially on college cam- puses. In the college market, Follett leads the way with 940 campus stores (to 717 for Barnes & Noble). However, since 53 percent of colleges and universities still operate their own stores, the market growth potential in the college mar- ket is very large. Barnes & Noble is partnering with these universities to create academic superstores that are much larger than a tradi- tional Barnes & Noble store. These superstores often include larger cafes, more clothing, and stores-within-a-store such as Clinique or Apple. The college store side of Barnes & Noble is so successful that the company plans to spin it off into a separate business in late 2015.

Chapter 6 • The Marketing Program 155

commodities by definition. Here, conformance to exacting product specifications and low acquisition costs are the keys to effective strategy. Many business products are also characterized by derived demand, where the demand for the product is derived from, or dependent upon, the demand for other business or consumer products. For example, the demand for business products such as glass, steel, rubber, chrome, leather, and carpeting is dependent upon the demand for automobiles.

EXHIBIT 6.1 Types of Consumer and Business Products.

Type of Product Examples Consumer Products Convenience Products

Inexpensive, routinely purchased products that consumers spend little time and effort in acquiring.

Soft drinks Candy and gum Gasoline Dry cleaning

Shopping Products Products that consumers will spend time and effort to obtain. Consumers shop different options to compare prices, features, and service.

Appliances Furniture Clothing Vacations

Specialty Products Unique, one-of-a-kind products that consumers will spend considerable time, effort, and money to acquire.

Sports memorabilia Antiques Plastic surgery Luxury items

Unsought Products Products that consumers are unaware of or a product that consumers do not consider purchasing until a need arises.

True innovations Repair services Emergency medicine Insurance

Business Products Raw Materials Basic natural materials that become part of a finished product. They are purchased in very large quantities based on specifications or grades.

Iron ore Chemicals Agricultural products Wood pulp

Component Parts Finished items that become part of a larger finished product. They are purchased based on specifications or industry standards.

Spark plugs Computer chips Pane glass Hard drives

Process Materials Finished products that become unidentifiable upon their inclusion in the finished product.

Food additives Wood sealants Paint colorings

Maintenance, Repair, and Operating Products Products that are used in business processes or operations but do not become part of the finished product.

Office supplies Janitorial services Building security Bathroom supplies

Accessory Equipment Products that help facilitate production or operations but do not become part of the finished product.

Tools Office equipment Computers Furniture

Installations Major purchases, typically of a physical nature, that are based on customized solutions including installation/construction, training, financing, maintenance, and repair.

Enterprise software Buildings Heat and air systems

Business Services Intangible products that support business operations. These purchases often occur as a part of outsourcing decisions.

Legal services Accounting services Consulting Research services

SOURCE: This material is adapted from William M. Pride and O.C. Ferrell, Marketing (Mason, OH: Cengage Learning, 2010), pp. 285–289.

156 Chapter 6 • The Marketing Program

It is very rare for a company to sell only one product. Most firms sell a variety of products to fulfill a variety of different needs. In general terms, the products sold by a firm can be described with respect to product lines and product mixes. A product line consists of a group of closely related product items. As shown in Exhibit 6.2, Procter & Gamble sells a number of famous brands in its Fabric and Home Care line, including Tide, Dawn, and Cascade. Most companies sell a variety of different product lines. The different product lines at General Motors carry well-known brand names like Corvette, Chevrolet, Cadillac, and Buick. Likewise, FedEx offers a number of logistics and supply chain services in its family of brands, such as FedEx Express, FedEx Ground, and FedEx Freight. A firm’s product mix or portfolio is the total group of products offered by the company. For example, Procter & Gamble’s entire product portfolio consists of Beauty, Hair, and Personal Care products; Baby, Femi- nine, and Family Care products; and Health and Grooming products in addition to the products in its Fabric and Home Care line.

Decisions regarding product lines and product mixes are important strategic considerations for most firms. One of these important decisions is the number of product lines to offer, referred to as the width or variety of the product mix. By offer- ing a wide variety of product lines, the firm can diversify its risk across a portfolio of product offerings. Also, a wide product mix can be used to capitalize on the strength and reputation of the firm. Sony, for example, enjoys this advantage as it uses its name to stake out a strong position in electronics, music, and movies. The second important decision involves the depth of each product line. Sometimes called assort- ment, product line depth is an important marketing tool. Firms can attract a wide range of customers and market segments by offering a deep assortment of products in a specific line. Each brand or product in the assortment can be used to fulfill different customer needs. For example, Hilton, Inc. offers 12 different lodging brands—including Hilton, Hilton Garden Inn, Hampton Inn, Conrad, and Embassy Suites—that cater to different segments of the hospitality market.

Although offering a large portfolio of products can make the coordination of marketing activities more challenging and expensive, it also creates a number of important benefits:

• Economies of Scale. Offering many different product lines can create economies of scale in production, bulk buying, and promotion. Many firms advertise using an umbrella theme for all products in the line. Nike’s “Just Do It” and Maxwell House’s “Good to the Last Drop” are examples of this. The single theme covering the entire product line saves considerably on promotional expenses.

EXHIBIT 6.2 Procter & Gamble’s Portfolio of Fabric and Home Care Products.

Product Mix Width (Variety)

Dish Washing Household Cleaners Batteries

Laundry and Fabric Care

Paper Products

Product Mix Depth (Assortment)

Ariel Dawn Cascade

Mr. Clean Swiffer

Duracell* Tide Cheer Bounce Gain Downy Dreft Era Febreze Bold Ace

Charmin

*At the time of publication, P&G planned to sell Duracell to Berkshire Hathaway for $4.7 billion.

SOURCE: From the Procter & Gamble website (http://www.pg.com/en_US/brands/global_fabric_home_care/index.shtml), accessed March 29, 2015.

Chapter 6 • The Marketing Program 157

• Package Uniformity. When all packages in a product line have the same look and feel, customers can locate the firm’s products more quickly. It also becomes easier for the firm to coordinate and integrate promotion and distribution. For example, Duracell batteries all have the same copper look with black and copper packaging.

• Standardization. Product lines often use the same component parts. For exam- ple, GM often shares components across its Buick, GM, and Chevrolet product lines. This greatly reduces GM’s manufacturing and inventory handling costs.

• Sales and Distribution Efficiency. When a firm offers many different product lines, sales personnel can offer a full range of choices and options to customers. For the same reason, channel intermediaries are more accepting of a product line than they are of individual products.

• Equivalent Quality Beliefs. Customers typically expect and believe that all products in a product line are about equal in terms of quality and performance. This is a major advantage for a firm that offers a well-known and respected line of products. For example, Crest’s portfolio of oral care products all enjoys the same reputation for high quality.

A firm’s product portfolio must be carefully managed to reflect changes in custo- mers’ preferences and the introduction of competitive products. Product offerings may be modified to change one or more characteristics that enhance quality, style, or lower the product’s price. Firms may introduce product line extensions that allow it to compete more broadly in an industry. The recent trend of flavored soft drinks, such as Vanilla Coke, Diet Pepsi Vanilla, and Dr. Pepper Cherry Vanilla, is a good example of this. Sometimes, a firm may decide that a product or product line has become obsolete or is just not competitive against other products. When this happens, the firm can decide to contract the product line, as GM did when it dropped its Pontiac, Saturn, and Hummer divisions.

The Challenges of Service Products It is important to remember that products can be intangible services and ideas as well as tangible goods. Service firms such as airlines, hotels, hospitals, movie thea- ters, and hair stylists, as well as nonprofit organizations, charitable causes, and gov- ernment agencies all develop and implement marketing strategies designed to match their portfolio of intangible products to the needs of target markets. Products lie on a continuum ranging from tangible-dominant goods (salt, soap) to intangible-dominant services (education, consulting). Firms lying closer to the intangible end of this spec- trum face unique challenges in developing marketing strategy. These challenges are the direct result of the unique characteristics of services as shown in Exhibit 6.3. Obviously, the primary difference between a good and a service is that a service is intangible. Some services, such as business consulting and education, are almost completely intangible, while others have more tangible elements. The services pro- vided by UPS and FedEx, for example, include tangible airplanes, trucks, boxes, and invoices. Another challenging characteristic of services is that they cannot be stored for future use. This lack of inventory means that service firms experience major problems in balancing service supply (capacity) and service demand. Like- wise, the demand for services is extremely time-and-place dependent because custo- mers must typically be present for service to be delivered. Consider the issues faced by popular restaurants every Friday and Saturday night. The increased demand forces restaurant managers to pre-schedule the right amount of food ingredients and employees to accommodate the increase in guests. And, given that the restau- rant’s capacity is fixed, the manager and employees must serve guests efficiently and effectively in a crowded, noisy atmosphere. This precarious balance is quite common across most industries in the services sector of our economy.

158 Chapter 6 • The Marketing Program

Because of the intangibility of service, it is quite difficult for customers to evalu- ate a service before they actually purchase and consume it. Third-party evaluations and recommendations for services are not as prevalent as they are with respect to tangible goods. Of course, customers can ask friends and family for recommenda- tions, but in many cases a good assessment of quality is hard to obtain. This forces customers to place some degree of trust in the service provider to perform the ser- vice correctly and in the time frame promised or anticipated. This problem is the rea- son for the launch of Angie’s List, a membership-based referral and recommendation service that provides member ratings for local service providers. One way that com- panies can address this issue is by providing satisfaction guarantees to customers. For example, Hampton Inn, a national chain of mid-priced hotels, offers guests a free night if they are not 100 percent satisfied with their stay.2 Midas, H&R Block, and FedEx offer similar guarantees.

Moreover, because most services are dependent upon people (employees, custo- mers) for their delivery, they are susceptible to variations in quality and inconsis- tency. Such variations can occur from one organization to another, from one outlet to another within the same organization, from one service to another within the same outlet, and even from one employee to another within the same outlet. Service qual- ity can further vary from week to week, day to day, or even hour to hour. Also, because service quality is a subjective phenomenon, it can also vary from customer to customer, and for the same customer from one visit to the next. As a result,

EXHIBIT 6.3 Unique Characteristics of Services and Resulting Marketing Challenges.

Service Characteristics Marketing Challenges Intangibility It is difficult for customers to evaluate quality, especially before pur-

chase and consumption. It is difficult to convey service characteristics and benefits in promo-

tion. As a result, the firm is forced to sell a promise. Many services have few standardized units of measurement. There-

fore, service prices are difficult to set and justify. Customers cannot take possession of a service.

Simultaneous Production and Consumption

Customers or their possessions must be present during service delivery.

Other customers can affect service outcomes including service quality and customer satisfaction.

Service employees are critical because they must interact with custo- mers to deliver service.

Converting high-contact services to low-contact services will lower costs but may reduce service quality.

Services are often difficult to distribute. Perishability Services cannot be inventoried for later use. Therefore, unused service

capacity is lost forever. Service demand is very time-and-place sensitive. As a result, it is

difficult to balance supply and demand, especially during periods of peak demand.

Service facilities and equipment sit idle during periods of off-peak demand.

Heterogeneity Service quality varies across people, time, and place, making it very difficult to deliver good service consistently.

There are limited opportunities to standardize service delivery. Many services are customizable by nature. However, customization

can dramatically increase the costs of providing the service. Client-Based Relationships

Most services live or die by maintaining a satisfied clientele over the long term.

Generating repeat business is crucial for the service firm’s success.

Chapter 6 • The Marketing Program 159

standardization and service quality are very difficult to control. The lack of standard- ization, however, actually gives service firms one advantage: Services can be custom- ized to match the specific needs of any customer. Such customized services are frequently very expensive for both the firm and its customers. This creates a dilemma: How does a service firm provide efficient, standardized service at an acceptable level of quality while simultaneously treating every customer as a unique person? This dilemma is especially prevalent in the health care industry today, where care is managed to carefully control both access and cost.

Another major challenge for service marketers is to tie services directly to custo- mers’ needs. Although customers typically have few problems in expressing needs for tangible goods, they often have difficulty in expressing or explaining needs for services. In some cases, the need is vague. For example, you may decide that you need a relaxing vacation, but how do you know which services will best meet your need? Which is best for relaxation: a trip to the beach, a cruise, or a stay at a bed- and-breakfast? The answer depends on how you personally define “relaxing.” Since different customers have different definitions, the vacation provider has a more diffi- cult job in connecting their service offerings to customers’ needs. In other cases, cus- tomers may not understand the need for a specific service. For example, business consultants, insurance agents, financial planners, and wedding consultants often have to educate customers on why their services are needed. This is a necessary first hurdle to overcome before these service providers can offer their products as the solution that will best fulfill the need.

Developing New Products One of the key issues in product strategy deals with the introduction of new pro- ducts. The development and commercialization of new products is a vital part of a firm’s efforts to sustain growth and profits over time. The success of new products depends on the product’s fit with the firm’s strengths and a defined market opportu- nity. Market characteristics and the competitive situation will also affect the sales potential of new products. For example, manufacturers such as Garmin, TomTom, and Magellan are consistently developing new GPS devices. However, the future of standalone GPS devices is unclear given that GPS functionality is now an option on most new cars, and is fully integrated into every smartphone. As these GPS-enabled devices add more features, consumers are going to be much less likely to purchase standalone GPS units. This is why many GPS units can now sync with telephones or serve as music players. Some manufacturers, such as Garmin, have expanded beyond GPS devices into areas such as wearables (health tracking wristbands), action cameras, and smartphone apps.3

Many firms base their new product introductions on key themes such as product or technological superiority. New product introductions in the electronics, com- puter, and automotive industries often take this approach. In other firms and indus- tries, new product introductions may stem from only minor tweaking of current products. This approach is common in packaged goods and household items. Truth- fully, what is considered to be a new product depends on the point of view of both the firm and its customers. Although some product introductions are actually new, others may only be perceived as being new. There are six strategic options related to the newness of products. These options follow, in decreasing degrees of product change:

• New-to-the-World Products (Discontinuous Innovations). These products involve a pioneering effort by a firm that eventually leads to the creation of an entirely new market. New-to-the-world products are typically the result of radi- cal thinking by individual inventors or entrepreneurs. For example, Fred Smith’s idea for an overnight package delivery service gave us FedEx.

160 Chapter 6 • The Marketing Program

• New Product Lines. These products represent new offerings by the firm, but the firm introduces them into established markets. For example, P&G’s launch of a national chain of car washes is a new product line for the company. New product lines are not as risky as true innovation, and they allow the firm to diver- sify into closely related product categories.

• Product Line Extensions. These products supplement an existing product line with new styles, models, features, or flavors. Anheuser-Busch’s introduction of Budweiser Select and Honda’s launch of the Civic Hybrid are good examples. Product line extensions allow the firm to keep its products fresh and exciting with minimal development costs and risk of market failure.

• Improvements or Revisions of Existing Products. These products offer cus- tomers improved performance or greater perceived value. The common “new and improved” strategy used in packaged goods and the yearly design changes in the automobile industry are good examples. Clorox, for example, now offers “splashless” and “anti-allergen” bleach in addition to its perennial “regular” bleach product. The common “shampoo plus conditioner” formulas of many shampoos are another example.

• Repositioning. This strategy involves targeting existing products at new mar- kets or segments. Repositioning can involve real or perceived changes to a prod- uct. An example is Carnival Cruise Line’s effort to attract senior citizens to supplement its younger crowd. Likewise, many design schools have repositioned themselves toward a growing business need for employees who are well versed in the art of innovation. As such, these design schools are now competing with top MBA programs around the country.

• Cost Reductions. This strategy involves modifying products to offer perfor- mance similar to competing products at a lower price. Book publishers use this strategy when they convert hardback books to paperbacks or e-books. Similarly, a firm may be able to lower a product’s price due to improved manufacturing efficiency or a drop in the price of raw materials. For example, many computer manufacturers offer lower-priced products that use standard or slightly dated technology.

The first two options are the most effective and profitable when the firm wants to significantly differentiate its product offering from competitors. However, there are often good reasons to pursue one of the remaining four options, particularly if resource constraints are an issue or if the firm’s management does not want to expose the firm to increased market risk. The key to new product success is to cre- ate a differential advantage for the new product. What unique benefit does the new product offer to customers? Although this benefit can be based on real differences or based entirely on image, it is the customers’ perception of differentiation that is criti- cal. For example, despite Consumer Reports tests that five-blade or battery-powered razors do not provide a closer shave than traditional three-blade razors, many consu- mers believe that they do. This belief is based primarily on the back-and-forth mar- keting battle between Gillette (Fusion razor) and Schick (Quattro and Hydro razors). A number of low-price competitors also exist to serve consumers who do not buy into the new product hype. Whether five blades are truly better than three blades is immaterial. In the battle for supremacy in the razor market, customer per- ceptions are all that matter.

Customer perceptions are also critical in the process of developing new pro- ducts. Although the new product development process varies across firms, most firms will go through the following stages:

• Idea Generation. New product ideas can be obtained from a number of sources, including customers, employees, basic research, competitors, and supply chain partners.

Chapter 6 • The Marketing Program 161

• Screening and Evaluation. New product ideas are screened for their match with the firm’s capabilities and the degree to which they meet customers’ needs and wants. In some cases, prototype products are developed to further test the commercial viability of a product concept. New product concepts are also evalu- ated with respect to projected costs, revenues, and profit potential.

• Development. At this stage, product specifications are set, the product design is finalized, and initial production begins. In addition, the full marketing plan is developed in order to acquire the resources and collaboration needed for a full- scale launch.

• Test Marketing. As a final test before launch, the new product is test marketed in either real or simulated situations to determine its performance relative to customer needs and competing products.

• Commercialization. In this final stage, the product is launched with a complete marketing program designed to stimulate customer awareness and acceptance of the new product.

Many firms try to think outside the box in designing new products. Kia, for exam- ple, turned to Peter Schreyer, a German automotive designer, to reinvigorate the South Korean company’s brand image. When he was hired away from Volkswagen, Schreyer’s first task was to design two new vehicles—the Kia Forte and the Kia Soul—to compete against new designs from Nissan and Scion. He then redesigned Kia’s popular Sorento SUV and the midsize Optima sedan. The increase in Kia’s brand reputation and sales has been impressive.

PRICING STRATEGY There is no other component of the marketing program that firms become more infat- uated with than pricing. There are at least four reasons for the attention given to pric- ing. First, the revenue equation is simple: Revenue equals the price times quantity sold. There are only two ways for a firm to grow revenue: increase prices or increase the volume of product sold. Rarely can a firm do both simultaneously. Second, pricing is the easiest of all marketing variables to change. Although changing the product and its distribution or promotion can take months or even years, changes in pricing can be executed immediately in real time. Real-time price changes are the norm in many industries, including air travel, hotels, and electronic commerce. As illustrated in Beyond the Pages 6.2, prices for the same product vary around the world to account for differences in currencies, taxes/tariffs, and consumer demand.

Third, firms take considerable pains to discover and anticipate the pricing strat- egies and tactics of other firms. Salespeople learn to read a competitor’s price sheet upside down at a buyer’s desk. Retailers send “secret shoppers” into competitors’ stores to learn what they charge for the same merchandise. Even buyers spend con- siderable time comparison shopping to find the best deal. Finally, pricing receives a great deal of attention because it is considered to be one of the few ways to differen- tiate a product in commoditized and mature markets. When customers see all com- peting products as offering the same features and benefits, their buying decisions are primarily driven by price.

Key Issues in Pricing Strategy Given the importance of pricing in marketing strategy, pricing decisions are among the most complex decisions to be made in developing a marketing plan. Decisions regarding price require a tightly integrated balance among a number of important issues. Many of these issues possess some degree of uncertainty regarding the reactions to pricing among customers, competitors, and supply chain partners.

162 Chapter 6 • The Marketing Program

These issues are critically important in establishing initial prices, and to modifying the pricing strategy over time. As we review these issues, keep in mind that they are interrelated and must be considered in the context of the firm’s entire marketing program. For example, increases in product quality or the addition of new product features often come with an increase in price. Pricing is also influenced by distribu- tion, especially the image and reputation of the outlets where the good or service is sold. Finally, companies often use price as a tool of promotion. Coupons, for exam- ple, represent a combination of price and promotion that can stimulate increased sales in many different product categories. In services, price changes are often used to fill unused capacity (e.g., empty airline or theater seats) during nonpeak demand.

BEYOND THE PAGES 6.2

Pricing Around the World4

If you do much traveling around the world, you’ll quickly learn that products are not priced the same in different countries. In fact, despite widespread American sentiment to the contrary, the prices we pay in the United States are among the lowest in the world. In the latest sur- vey done by the Economist Intelligence Unit, New York, the most expensive U.S. city, ranked 26th on the list of the world’s most expensive cities. The top 10 cities, shown below, are domi- nated by Asian and European cities due to their strong currencies, high consumer confidence, and low interest rates. Cities at the bottom of the list are mostly from the Middle East. For example, Mumbai is the least expensive city in the survey with an index of 39.

Rank City Index

1 Singapore 130 2 Paris, France 129 3 Oslo, Norway 128 4 Zurich, Switzerland 125 5 Sydney, Australia 120 6 Caracas, Venezuela 118 7 Geneva, Switzerland 118 8 Melbourne, Australia 118 9 Tokyo, Japan 118 10 Copenhagen, Denmark 117

Note: Index is based on New York at 100.

Differences in pricing across national boundaries are also true with respect to typical purchases. In most cases, the products sold around the world under the same brand name are virtually identical. They are even sold using similar promotional campaigns to the same types of target markets that consume these pro- ducts in roughly the same manner. Yet, the prices set in different markets can vary dramati- cally. Consider these examples noted below.

In some cases, there are logical differences in pricing, such as higher costs of transportation or other extra costs associated with bringing a product to market. Other differences are associ- ated with currency valuation. The U.S. dollar is relatively strong compared to other currencies, so it buys more in some cases. Other differences are based on the tax and tariff structures in each country. The United States and Britain, for example, impose very high taxes on tobacco sales. Firms have a great deal of latitude in set- ting prices, and will often raise prices in some countries simply because consumers are willing to pay the cost to acquire a popular product with few substitutes.

Generally speaking, average prices will be lower in developing countries than in mature, developed countries. This is especially true in services, which are less expensive to deliver due to lower wage rates. The lower cost of labor in developing countries has spawned a groundswell of activity in outsourcing of ser- vices to other countries.

Average U.S. Dollar Price of: Singapore Paris Tokyo Bucharest Damascus Mumbai

Loaf of bread $3.36 $8.44 $7.12 $2.07 $1.88 $0.91 1 bottle wine (750ml) $25.04 $11.45 $12.53 $4.12 $6.47 $20.59 Gas (1 liter) $1.73 $2.50 $1.73 $1.75 $0.78 $1.21

Note: All prices shown in U.S. dollars.

Chapter 6 • The Marketing Program 163

The Firm’s Cost Structure The firm’s costs in producing and marketing a product are an important factor in set- ting prices. Obviously, a firm that fails to cover both its direct costs (e.g., finished goods/components, materials, supplies, sales commission, transportation) and its indirect costs (e.g., administrative expenses, utilities, rent) will not make a profit. Perhaps the most popular way to associate costs and prices is through breakeven pricing, where the firm’s fixed and variable costs are considered:

Breakeven in Units ¼ Total Fixed Costs

Unit Price � Unit Variable Costs

To use breakeven analysis in setting prices, the firm must look at the feasibility of selling more than the breakeven level in order to make a profit. The breakeven num- ber is only a point of reference in setting prices, as market conditions and customer demand must also be considered.

Another way to use the firm’s cost structure in setting prices is to use cost-plus pricing—a strategy that is quite common in retailing. Here, the firm sets prices based on average unit costs and its planned markup percentage:

Selling Price ¼ Average Unit Cost

1 � Markup Percent ðdecimalÞ

Cost-plus pricing is not only intuitive, but also very easy to use. Its weakness, how- ever, lies in determining the correct markup percentage. Industry norms often come into play at this point. For example, average markups in grocery retailing are typi- cally in the 20 percent range, while markups can be several hundred percent or more in furniture or jewelry stores. Customer expectations are also an important consideration in determining the correct markup percentage.

Although breakeven analysis and cost-plus pricing are important tools, they should not be the driving force behind pricing strategy. The reason is often ignored: Different firms have different cost structures. By setting prices solely on the basis of costs, firms run a major risk in setting their prices too high or too low. If one firm’s costs are relatively higher than other firms, it will have to accept lower margins in order to compete effectively. Conversely, just because a product costs very little to produce and market does not mean that the firm should sell it at a low price (movie theater popcorn is a good example). Even if the firm covers its costs, the fact is that customers may not be willing to pay their prices. Hence, market demand is also a critical factor in pricing strategy. In the final analysis, cost is best understood as an absolute floor below which prices cannot be set for an extended period of time.

Perceived Value Both the firm and its customers are concerned with value. Value is a difficult term to define because it means different things to different people.5 Some customers equate good value with high product quality, while others see value as nothing more than a low price. We define value as a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings. A simple formula for value might look like this:

Perceived Value ¼ Customer Benefits Customer Costs

Customer benefits include everything the customer obtains from the product offer- ing such as quality, satisfaction, prestige/image, and the solution to a problem. Cus- tomer costs include everything the customer must give up such as money, time, effort, and all nonselected alternatives (opportunity costs). Although value is a key component in setting a viable pricing strategy, good value depends on much more than pricing. In fact, value is intricately tied to every element in the marketing

164 Chapter 6 • The Marketing Program

program and is a key factor in customer satisfaction and retention. We will discuss the strategic implications of value more fully in Chapter 10.

The Price/Revenue Relationship All firms understand the relationship between price and revenue. However, firms cannot always charge high prices due to competition from their rivals. In the face of this competition, it is natural for firms to see price-cutting as a viable means of increasing sales. Price cutting can also move excess inventory and generate short- term cash flow. However, all price cuts affect the firm’s bottom line. When setting prices, many firms hold fast to these two general pricing myths:6

Myth #1: When business is good, a price cut will capture greater market share.

Myth #2: When business is bad, a price cut will stimulate sales.

Unfortunately, the relationship between price and revenue challenges these assumptions and makes them a risky proposition for most firms. The reality is that any price cut must be offset by an increase in sales volume just to maintain the same level of revenue. Let’s look at an example. Assume that a consumer electronics manufacturer sells 1,000 high-end stereo receivers per month at $1,000 per system. The firm’s total cost is $500 per system, which leaves a gross margin of $500. When the sales of this high-end system decline, the firm decides to cut the price to increase sales. The firm’s strategy is to offer a $100 rebate to anyone who buys a system over the next 3 months. The rebate is consistent with a 10 percent price cut, but it is in reality a 20 percent reduction in gross margin (from $500 to $400). To compensate for the loss in gross margin, the firm must increase the volume of receivers sold. The question is by how much? We can find the answer using this formula:

Percent Change in Unit Volume ¼ Gross Margin %

Gross Margin % � Price Change % � 1

0:25 ¼ 0:50

0:50 � 0:10 � 1

As the calculation indicates, the firm would have to increase sales volume by 25 per- cent to 1,250 units sold in order to maintain the same level of total gross margin. How likely is it that a $100 rebate will increase sales volume by 25 percent? This question is critical to the success of the firm’s rebate strategy. In many instances, the needed increase in sales volume is too high. Consequently, the firm’s gross margin may actu- ally be lower after the price cut.

Rather than blindly use price cutting to stimulate sales and revenue, it is often bet- ter for a firm to find ways to build value into the product and justify the current price, or even a higher price, rather than cutting the product’s price in search of higher sales volume. In the case of the stereo manufacturer, giving customers $100 worth of music or movies with each purchase is a much better option than a $100 rebate. Video game manufacturers, such as Microsoft (Xbox One) and Sony (PlayStation 4), often bundle games and accessories with their system consoles to increase value. The cost of giving customers these free add-ons is low because the marketer buys them in bulk quanti- ties. This added expense is almost always less costly than a price cut. And the increase in value may allow the marketer to charge higher prices for the product bundle.

Pricing Objectives Setting specific pricing objectives that are realistic, measurable, and attainable is an important part of pricing strategy. As shown in Exhibit 6.4, there are a number of pricing objectives that firms may pursue. Remember that firms make money on profit margin, volume, or some combination of the two. A firm’s pricing objectives will always reflect this market reality.

Chapter 6 • The Marketing Program 165

Price Elasticity Price elasticity is perhaps the most important overall consideration in setting effec- tive prices. Simply defined, price elasticity refers to customers’ responsiveness or sen- sitivity to changes in price. A more precise definition defines elasticity as the relative impact on the demand for a product, given specific increases or decreases in the price charged for that product. Firms cannot base prices solely on price elasticity calculations because they will rarely know the elasticity for any product with great precision over time. Further, the same product can have different elasticities in dif- ferent times, places, and situations. Since the actual price elasticity calculation is dif- ficult to pinpoint precisely, firms often consider price elasticity in regard to differing customer behavior patterns or purchase situations. Understanding when, where, and how customers are more or less sensitive to price is crucial in setting fair and profit- able prices.

Generally speaking, customers become much more sensitive to price when they have many different choices or options for fulfilling their needs and wants. Price elasticity is higher (more elastic) in the following situations:

• Availability of Substitute Products. When customers can choose among a number of different substitutes, they will be much more sensitive to price differ- ences. This situation occurs very frequently among name-brand products and in markets where product offerings have become commoditized (airlines, for example).

• Higher Total Expenditure. As a general rule, the higher the total expense, the more elastic the demand for that product will be. This effect is actually easier to see if we look at a low-priced product. A 20 percent increase in the price of a newspaper, from $1.00 to $1.20 for example, would not have a large impact on demand. However, if the price of a $20,000 car increases by 20 percent, then

EXHIBIT 6.4 Description of Common Pricing Objectives.

Pricing Objectives Description Profit-Oriented Designed to maximize price relative to competitors’ prices, the product’s

perceived value, the firm’s cost structure, and production efficiency. Profit objectives are typically based on a target return, rather than simple profit maximization.

Volume-Oriented Sets prices in order to maximize dollar or unit sales volume. This objective sacrifices profit margin in favor of high product turnover.

Market Demand Sets prices in accordance with customer expectations and specific buying situations. This objective is often known as “charging what the market will bear.”

Market Share Designed to increase or maintain market share regardless of fluctuations in industry sales. Market share objectives are often used in the maturity stage of the product life cycle.

Cash Flow Designed to maximize the recovery of cash as quickly as possible. This objective is useful when a firm has a cash emergency or when the product life cycle is expected to be quite short.

Competitive Matching

Designed to match or beat competitors’ prices. The goal is to maintain the perception of good value relative to the competition.

Prestige Sets high prices that are consistent with a prestige or high status product. Prices are set with little regard for the firm’s cost structure or the competition.

Status Quo Maintains current prices in an effort to sustain a position relative to the competition.

166 Chapter 6 • The Marketing Program

the impact is a much more noticeable $4,000. At that rate of change, some custo- mers will look for a different car or pull out of buying all together.

• Noticeable Price Differences. Products having heavily promoted prices tend to experience more elastic demand. Gasoline is a classic example. An increase of 3 cents per gallon is only 45 cents more on a 15-gallon fill-up. However, many customers will drive several miles out of their way to find a lower price (often spending more in gas consumption than they save). Noticeable price differences sometimes occur at specific pricing thresholds. Using the gasoline example, many customers will not notice price increases until gas reaches $4.00 per gal- lon. At this price, these customers suddenly move from an inelastic mindset to an elastic mindset. The move from $3.80 to $3.90 may not have an impact on these customers, but the jump from $3.90 to $4.00 totally changes their mental framework.

• Easy Price Comparisons. Regardless of the product or product category, cus- tomers will become more price sensitive if they can easily compare prices among competing products. In industries such as retailing, supermarkets, travel, toys, and books, price has become a dominant purchase consideration because customers can easily compare prices. It should come as no surprise that these industries have also experienced a shift from physical stores to online sales.

In general, customers become much less sensitive to price when they have few choices or options for fulfilling their needs and wants. Price elasticity is lower (more inelastic) in these situations:

• Lack of Substitutes. When customers have few choices in terms of substitutes, they will be much less sensitive to price. This situation is common in some categories, including baking/cooking ingredients, add-on or replacement parts, one-of-a-kind antiques, collectables or memorabilia, unique sporting events, and specialized vacation destinations. The more unique or specialized the product, the more customers will pay for it.

• Real or Perceived Necessities. Many products, such as food, water, medical care, cigarettes, and prescription drugs, have extremely inelastic demand because customers have real or perceived needs for them. Some product catego- ries are price inelastic because customers perceive those products as true neces- sities. It matters little whether a customer truly has a need for a specific product. If that customer perceives the product as a necessity, then that customer becomes much less sensitive to price increases for that product.

• Complementary Products. Complementary products have an effect on the price sensitivity of related products. If the price of one product falls, customers will become less sensitive to the price of complementary products. For example, when the price of a cruise goes down, the price of shore excursions becomes more inelastic. With more travelers on board, and each having more money to spend, excursion operators realize that travelers are less sensitive to the prices they charge.

• Perceived Product Benefits. For some customers, certain products are just worth the price. For these purchases, the phrase “expensive but worth it” comes to mind. All of us have certain products that we indulge in from time to time, such as fine wines, gourmet chocolates, imported coffee, or trips to a day spa. Since these products do not comprise the bulk of our purchasing activities, customers rarely notice, or simply ignore, price increases.

• Situational Influences. The circumstances surrounding a purchase situation can vastly alter the price elasticity for a product. Many of these situational influ- ences occur because time pressures or purchase risk increase to the point that an immediate purchase must be made (emergencies, for example). Other com- mon situational influences revolve around purchase risk, typically the social

Chapter 6 • The Marketing Program 167

risk involved in making a bad decision. In a general sense, customers tend to be much less price sensitive when they purchase items for others or for gift giving.

• Product Differentiation. Differentiation reduces the number of perceived sub- stitutes for a product. For example, Coke’s differentiation strategy has worked so well that Coke drinkers will buy the soft drink at $2.49 or $3.49 per six-pack. Product differentiation does not have to be based on real differences in order to make customers less price sensitive. Many times the differences are perceptual. Blindfolded, a person may not know the difference between Coke and Pepsi, but consumers do not buy or consume soft drinks blindfolded. The look of the can, the advertising, and prior experiences all come together to differentiate the product.

In a strategic sense, product differentiation is the best way to ensure that custo- mers are not sensitive to price changes. The ultimate goal of this effort is to differen- tiate the product so well that customers perceive that no competing product can take its place. When this happens, customers will become brand loyal and the demand for the product will become very inelastic. Nike, for example, commands extreme brand loyalty because the firm has successfully differentiated its products through techno- logical innovation, effective advertising, and the ubiquitous swoosh. Likewise, Intel has done a great job using real and perceived differentiation to become the dominant supplier of processor chips in the computer industry.

Pricing Service Products When it comes to buying services, customers have a difficult time determining qual- ity prior to purchase. Consequently, service pricing is critical because it may be the only quality cue that is available in advance of the purchase experience. If the service provider sets prices too low, customers will have inaccurate perceptions and expec- tations about quality. If prices are too high, customers may not give the firm a chance. In general, services pricing becomes more important—and more difficult— when:

• Service quality is hard to detect prior to purchase. • The costs associated with providing the service are difficult to determine. • Customers are unfamiliar with the service process. • Brand names are not well established. • The customer can perform the service themselves. • Advertising within a service category is limited. • The total price of the service experience is difficult to state beforehand.

Setting prices for professional services (lawyers, accountants, consultants, doc- tors, and mechanics) is especially difficult as they suffer from a number of the condi- tions in the list above. Customers often balk at the high prices of these service providers because they have a limited ability to evaluate the quality or total cost until the service process has been completed. The heterogeneous nature of these ser- vices limits standardization; therefore, customer knowledge about pricing is limited. Heterogeneity also limits price comparison among competing providers. The key for these firms is to be up-front about the expected quality and costs of the service. This is often done through the use of binding estimates and contractual guarantees of quality.

Due to the limited capacity associated with most services, service pricing is also a key issue with respect to balancing supply and demand during peak and off-peak demand times. In these situations, many service firms use yield management systems to balance pricing and revenue considerations with their need to fill unfilled capac- ity. Exhibit 6.5 depicts an example of yield management for a hotel.

168 Chapter 6 • The Marketing Program

Yield management allows the service firm to simultaneously control capacity and demand in order to maximize revenue and capacity utilization. This is accom- plished in two ways. First, the service firm controls capacity by limiting the available capacity at certain price points. Airlines do this by selling a limited number of seats at discount prices three or more weeks prior to a flight’s departure. Southwest Air- lines, for example, sells limited seats in three categories: Wanna Get Away (the low- est priced seats), Anytime, and Business Select (the highest priced seats).7 Second, the service firm controls demand through price changes over time and by overbook- ing capacity. These activities ensure that service demand will be consistent and that any unused capacity will be minimized. These practices are common in services characterized by high fixed costs and low variable costs, such as airlines, hotels, rental cars, cruises, transportation firms, and hospitals. Since variable costs in these services are quite low, the profit for these firms directly relates to sales and capacity utilization. Consequently, these firms will sell some capacity at reduced prices in order to maximize utilization.

Yield management systems are also useful in their ability to segment markets based on price elasticity. That is, yield management allows a firm to offer the same basic service to different market segments at different price points. Customers who are very price sensitive with respect to travel services—vacation travelers and fami- lies with children—can get a good deal on a hotel if they book it early. Conversely, consultants are less price sensitive because their clients reimburse them for expenses. Likewise, business travelers book flights on the spur of the moment, so they are more forgiving of the higher prices just prior to departure. Other firms can reach different market segments with attractive off-peak pricing. Many customers take advantage of the lower prices at theme parks and beach resorts by traveling during the off-season. Similar situations occur in lower-priced movie matinees and lower prices for lunch items at most restaurants.

EXHIBIT 6.5 Yield Management for a Hypothetical Hotel.

Nights:

100%

50%

Closed for remodeling

Business guests

Transient guests

Weekend package

Groups and conventions

Airline contracts

C a p

a c it

y ( %

r o o m

WEEK 5 (Low Season)

M Tu W Th F S SuM Tu W Th F S Su

Transient guests

WEEK 35 (Peak Season)

W/E package

Business guests

Groups (no conventions)

100%

50%

Airline contracts

SOURCE: Adapted from Lovelock, Christopher, “Services Marketing: People, Technology, Strategy,” 4th ed., © 2001. Electronically reproduced by permis- sion of Pearson Education Inc., Upper Saddle River, New Jersey.

Chapter 6 • The Marketing Program 169

Base Pricing Strategies Although prices for individual products are made on a case-by-case basis, most firms have developed a general and consistent approach—or base pricing strategy—to be used in establishing prices. The relationship between price and other elements of the marketing program dictates that pricing decisions cannot be made in isolation. In fact, price changes may result in minor modifications to the product, distribution, or promotion strategies. As we have discussed, it is not so much the actual price being charged that influences buying decisions as the way that members of the target market perceive the price. This reality reminds us that many of the strategic issues involved in pricing have close ties with customer psychology and information pro- cessing: What customers think about prices is what those prices are to them.

A firm’s base pricing strategy establishes the initial price and sets the range of possible price movements throughout the product’s life cycle. The initial price is crit- ical, not only for initial success, but also for maintaining the potential for profit over the long term. There are several different approaches to base pricing. Some of the most common approaches include:

• Price Skimming. This strategy intentionally sets a high price relative to the com- petition, thereby “skimming” off the profits early after the product’s launch. Price skimming is designed to recover the high R&D and marketing expenses associated with developing a new product. For example, new prescription drugs are priced high initially and only drop in price once their patent protection expires.

• Price Penetration. This strategy is designed to maximize sales, gain wide- spread market acceptance, and capture a large market share quickly by setting a relatively low initial price. This approach works best when customers are price sensitive for the product or product category, research and development and marketing expenses are relatively low, or when new competitors will quickly enter the market. To use penetration pricing successfully, the firm must have a cost structure and scale economies that can withstand narrow profit margins.

• Prestige Pricing. This strategy sets prices at the top end of all competing pro- ducts in a category. This is done to promote an image of exclusivity and superior quality. Prestige pricing is a viable approach in situations where it is hard to objectively judge the true value of a product. Ritz-Carlton Hotels, for example, never compete with other hotels on price. Instead, the company competes only on service and the value of the unique, high-quality experience that they deliver to hotel guests.

• Value-Based Pricing (EDLP). Firms that use a value-based pricing approach set reasonably low prices, but still offer high-quality products and adequate cus- tomer services. Many different types of firms use value-based pricing; however, retailing has widely embraced this approach, where it is known as everyday low pricing or EDLP. Prices are not the highest in the market, nor are they the low- est. Instead, value-based pricing sets prices so they are consistent with the ben- efits and costs associated with acquiring the product. Many well-known firms use value-based pricing, including Walmart, Lowe’s, Home Depot, IKEA, and Southwest Airlines.

• Competitive Matching. In many industries, pricing strategy focuses on match- ing competitors’ prices and price changes. Although some firms may charge slightly more or slightly less, these firms set prices at what most consider to be the “going rate” for the industry. This is especially true in commoditized markets such as airlines, oil, and steel.

• Non-Price Strategies. This strategy builds the marketing program around fac- tors other than price. By downplaying price in the marketing program, the firm must be able to emphasize the product’s quality, benefits, and unique features,

170 Chapter 6 • The Marketing Program

as well as customer service, promotion, or packaging in order to make the prod- uct stand out against competitors, many of whom will offer similar products at lower prices. For example, theme parks like Disney World, Sea World, and Uni- versal Studios generally compete on excellent service, unique benefits, and one- of-a-kind experiences rather than price. Customers willingly pay for these experiences because they cannot be found in any other setting.

Adjusting the Base Price In addition to a base pricing strategy, firms also use other techniques to adjust or fine-tune prices. These techniques can involve permanent adjustments to a product’s price, or temporary adjustments used to stimulate sales during a particular time or situation. Although the list of potentially viable pricing techniques is quite long, five of the most common techniques in consumer markets are:

• Discounting. This strategy involves temporary price reductions to stimulate sales or store traffic. Customers love a sale, and that is precisely the main benefit of discounting. Virtually all firms, even those using value-based pricing, will occasionally run special promotions or sales to attract customers and create excitement. Dillard’s, for example, will hold a quick sale early in a selling season, and then return prices to their normal levels. Near the end of the season, Dillard’s will begin to make these sale prices (or markdowns) permanent as time draws closer to the end-of-season clearance sale.

• Reference Pricing. Firms use reference pricing when they compare the actual selling price to an internal or external reference price. All customers use internal reference prices, or the internal expectation for what a product should cost. As consumers, our experiences have given us a reasonable expectation of how much to pay for a combo meal at McDonald’s or a gallon of gas. In other cases, the firm will state a reference price, such as “Originally $99, Now $49.” These comparisons make it easier for customers to judge prices prior to purchase.

• Price Lining. This strategy, where the price of a competing product is the refer- ence price, takes advantage of the simple truth that some customers will always choose the lowest-priced or highest-priced product. Firms use this to their advan- tage by creating lines of products that are similar in appearance and functionality, but are offered with different features and at different price points. For example, Sony can cut a few features off its top-of-the-line Model A1 digital camcorder, and Model B2 can be on the shelf at $799 rather than the original $999. Cut a few more features and the price can drop to $599 for Model C3. Here, each model in the Sony line establishes reference prices for the other models in the line. The same is true for all competing camcorders from other manufacturers.

• Odd Pricing. Everyone knows that prices are rarely set at whole, round num- bers. The concert tickets are $49.95, the breakfast special is $3.95, and the gallon of gas is $2.799. The prevalence of odd pricing is based mostly on psychology: Customers perceive that the seller did everything possible to get the price as fine (and thus as low) as he or she possibly could. To say you will cut my grass for $47 sounds like you put a lot more thought into it than if you just said, “I will do it for $40,” even though the first figure is $7 higher.

• Price Bundling. Sometimes called solution-based pricing or all-inclusive pric- ing, price bundling brings together two or more complementary products for a single price. At its best, the bundled price is less than if a company sold the pro- ducts separately. Slow moving items can be bundled with hot sellers to expand the scope of the product offering, build value, and manage inventory. All- inclusive resorts, including Sandals and Club Med, use price bundling because many customers want to simplify their vacations and add budget predictability.

Chapter 6 • The Marketing Program 171

Many of these techniques are also used in business markets to adjust or fine-tune base prices. However, there are a number of pricing techniques unique to business markets, including:

• Trade Discounts. Manufacturers will reduce prices for certain intermediaries in the supply chain based on the functions that the intermediary performs. In gen- eral, discounts are greater for wholesalers than for retailers because the manu- facturer wants to compensate wholesalers for the extra functions they perform, such as selling, storage, transportation, and risk taking. Trade discounts vary widely and have become more complicated due to the growth of large retailers who now perform their own wholesaling functions.

• Discounts and Allowances. Business buyers can take advantage of sales just like consumers. However, business buyers also receive other price breaks, including discounts for cash, quantity or bulk discounts, seasonal discounts, or trade allowances for participation in advertising or sales support programs.

• Geographic Pricing. Selling firms often quote prices in terms of reductions or increases based on transportation costs or the actual physical distance between the seller and the buyer. The most common examples of geographic pricing are uniform delivered pricing (same price for all buyers regardless of transportation expenses) and zone pricing (different prices based on transportation to prede- fined geographic zones).

• Transfer Pricing. Transfer pricing occurs when one unit in an organization sells products to another unit.

• Barter and Countertrade. In business exchanges across national boundaries, com- panies sometimes use products, rather than cash, for payments. Barter involves the direct exchange of goods or services between two firms or nations. Countertrade refers to agreements based on partial payments in both cash and products, or to agreements between firms or nations to buy goods and services from each other.

Another important pricing technique used in business markets is price discrimi- nation, which occurs when firms charge different prices to different customers. When this situation occurs, firms set different prices based on actual cost differences in selling products to one customer relative to the costs involved in selling to other customers. Price discrimination is a viable technique because the costs of selling to one firm are often much higher than selling to others.

SUPPLY CHAIN STRATEGY Distribution and supply chain relationships are among the most important strategic decisions for any firm. Walmart, Best Buy, Amazon, and even Starbucks depend on effective and highly efficient supply chains to provide competitive advantage. Unfor- tunately, customers rarely appreciate how companies connect to their supply lines because the processes occur behind the scenes. Customers take supply chain issues for granted and only notice when supply lines are interrupted. The picture is drasti- cally different from the firm’s perspective. Today, most companies rank supply chain concerns at the top of the list for achieving a sustainable advantage and true differ- entiation in the marketplace. Prices can be copied easily, even if only for the short term. Products can become obsolete almost overnight. Good promotion and adver- tising in September can easily be passé when the prime selling season in November and December comes around. The lesson is clear: Supply chain strategy is vital to the success and survival of every firm.

When we think of supply chain management, we tend to think of two interrelated components:

• Marketing channels—an organized system of marketing institutions through which products, resources, information, funds, and/or product ownership flow

172 Chapter 6 • The Marketing Program

from the point of production to the final user. Some channel members or intermediaries physically take possession or title of products (e.g., wholesalers, distributors, retailers), while others simply facilitate the process (e.g., agents, brokers, financial institutions).

• Physical distribution—coordinating the flow of information and products among members of the channel to ensure the availability of products in the right places, in the right quantities, at the right times, and in a cost-efficient man- ner. Physical distribution (or logistics) includes activities such as customer ser- vice/order entry, administration, transportation, storage, and materials handling, (warehousing) inventory carrying and the systems and equipment necessary for these activities.

The term supply chain expresses the connection and integration of all members of the marketing channel. Velocity or the need to speed inventory to and from channel members requires collaborating with technology, transportation, and other outside logistics experts. This supply chain process is designed to increase inventory turns, and get the right products to the right place at the right time maintaining the appro- priate service and quality standards.8 The linchpin of effective supply chain manage- ment in today’s economy is integration. Through informational, technological, social, and structural linkages, the goal of supply chain integration is to create a seamless network of collaborating suppliers, vendors, buyers, and customers. When done cor- rectly, this level of integration results in an extended enterprise that manages value by coordinating the flow of information, goods, and services toward end users, as well as reverse flows away from end users. Creating an extended enterprise requires investments in and commitment to three key factors:9

• Connectivity—the informational and technological linkages among firms in the supply chain network. Connectivity ensures that firms can access real-time information about the flow in the supply chain network.

• Community—the sense of compatible goals and objectives among firms in the supply chain network. All firms must be willing to work together to achieve a common mission and vision.

• Collaboration—the recognition of mutual interdependence among members of the supply chain network. Collaboration goes beyond contractual obligations to establish principles, processes, and structures that promote a level of shared understanding. Firms learn to put the needs of the supply chain ahead of their own, because they understand that the success of each firm separately has a strong connection to the success of other firms, as well as the entire supply chain.

Supply chain integration and creating an extended enterprise are extremely chal- lenging goals. In the most seamlessly integrated supply chains, the boundaries among channel members blur to the point where it is difficult to tell where one firm ends and another firm begins. As shown in Exhibit 6.6, this level of integration requires a tenuous balance of trust, cooperation, interdependence, and stability in order to create mutual benefits.10

Strategic Supply Chain Issues The importance of the supply chain ultimately comes down to providing time, place, and possession utility for consumer and business buyers. Without good distribution and logistics, buyers would not be able to acquire goods and services when and where they need them. However, the expense of distribution and logistics requires that firms balance customers’ needs with their own need to minimize total costs. Exhibit 6.7 provides a breakdown of total logistics costs across key activities. Note that 49 percent of these expenses are associated with warehousing, storing, and

Chapter 6 • The Marketing Program 173

carrying inventory—key factors in ensuring product availability for customers. To manage these costs efficiently, distribution and logistics strategy must balance the needs of customers with the needs of the firm.

Marketing Channel Functions Marketing channels make our lives easier because of the variety of functions per- formed by channel members. Likewise, channel members, particularly manufac- turers, can cut costs by working through channel intermediaries. The most basic benefit of marketing channels is contact efficiency, where channels reduce the number of contacts necessary to exchange products. Without contact efficiency, we would have to visit a bakery, poultry farm, slaughterhouse, and dairy just to assemble the products necessary for breakfast. Likewise, contact efficiency allows companies such as Del Monte Foods to maximize product distribution by selling to select intermediaries. For Del Monte, Walmart stores account for over 31 percent of the

EXHIBIT 6.6 Factors in Successful Supply Chain Integration.

Stability

Reliability

Consistency

Long-term Relationships

Mutual Benefit

Strategic Advantages

Customer Satisfaction

Reduced Costs

Better Prices

Reduced Lead Times

Trust

Trustworthiness

Integrity

Reputation

Faith

Interdependence

Shared Technical Information

Shared Processes

Mutual Goals and Objectives

Cooperation

Commitment

Sense of Fair Play

Giving Extra Effort

SOURCE: Adapted from Davis, Edward W., Speckman, Robert E., The Extended Enterprise: Gaining Competitive Advantage through Collaborative Supply Chains, 1st ed., © 2004. Electronically reproduced by permission of Pearson Education Inc., Upper Saddle River, New Jersey.

174 Chapter 6 • The Marketing Program

company’s sales volume. Del Monte’s next nine largest customers account for another 30 percent of the company’s sales. These percentages will increase if addi- tional consolidation among food retailers and growth of mass merchandisers continues.11

Throughout a marketing channel, some firms are good at manufacturing, some are good at transportation or storage, and others are better at selling to consumers. Given the costs involved, it is virtually impossible for a single firm to perform all channel functions well. As a result, channel intermediaries typically attain a level of specialization in one or more of the following functions:

• Sorting. Manufacturers make one or a few products while customers need a wide variety and deep assortment of different products. By sorting products in the channel, intermediaries overcome this discrepancy of assortment.

• Breaking Bulk. Manufacturers produce large quantities of a product to gain the benefits of economies of scale. However, customers typically want only one of a particular item. By breaking bulk in the channel, intermediaries—particularly retailers—overcome this discrepancy of quantity.

• Maintaining Inventories. Since manufacturers cannot make products on demand, the channel must provide for the storage of products for future pur- chase and use. By maintaining inventories, intermediaries overcome this tempo- ral (time) discrepancy. Note that this does not apply to services—such as haircuts or airline flights—where the product is produced and consumed simultaneously.

• Maintaining Convenient Locations. Since manufacturers and customers are separated geographically, the channel must overcome this spatial discrepancy by making products available in convenient locations.

• Provide Services. Channels add value to products by offering facilitating services (e.g., insurance, storage, financing) and standardizing the exchange process (e.g., payment processing, delivery, pricing).

EXHIBIT 6.7 Breakdown of Total Logistics Costs.

Customer Service/order entry

Administration

Inventory Carrying

Transportation

Warehousing

44%

25%

24%

4% 3%

SOURCE: From “Cost as a Percent of Sales” in Establish Davis Logistics Costs and Service 2013, p. 11, © 2013 Establish, Inc. www.establishinc.com (http://www.establishinc.com/wp-content/uploads/2013/11/Establish-Davis-Logistics- Cost-and-Service-Presentation-2013a.pdf). Reprinted by permission of Establish, Inc., Fort Lee, New Jersey.

Chapter 6 • The Marketing Program 175

With the exception of highly intangible services like consulting, education, or counseling, the fulfillment of these functions occurs in every marketing channel. Also, these functions must be fulfilled in order for the channel to operate effectively. It does not matter which intermediary performs these functions; the fact remains that they must be performed. For example, Sam’s Club does not break bulk in the traditional sense. Sam’s customers buy in large quantities and actually break bulk after purchase. Further, many emerging trends in distribution and supply chain man- agement have blurred the responsibilities of different intermediaries. Today, large retailers are essentially a one-stop channel of distribution. Due to their immense size and bulk buying ability, these firms now fulfill virtually all traditional channel functions.

Marketing Channel Structure There are many strategic options for the structure of a marketing channel; these strategies are often complex and very costly to implement. However, a good distribu- tion strategy is essential for success because once a firm selects a channel and makes commitments to it, distribution often becomes highly inflexible due to long- term contracts, sizable investments, and commitments among channel members. There are three basic structural options for distribution in terms of the amount of market coverage and level of exclusivity between vendor and retailer:

• Exclusive Distribution. Exclusive distribution is the most restrictive type of market coverage. Firms using this strategy give one merchant or outlet the sole right to sell a product within a defined geographic region.

• Selective Distribution. Firms using selective distribution give several mer- chants or outlets the right to sell a product in a defined geographic region. Selective distribution is desirable when customers need the opportunity to com- parison shop, and after-sale services are important.

• Intensive Distribution. Intensive distribution makes a product available in the maximum number of merchants or outlets in each area to gain as much expo- sure and as many sales opportunities as possible.

D en ni s M ac D on al d/ A G E Fo to st oc k

Del Monte Foods is a company that uses contact efficiency.

176 Chapter 6 • The Marketing Program

Channel structure is clearly linked to other elements in the marketing program and can be an integral part of both branding strategy and product positioning. For example, exclusive distribution is commonly associated with prestige products, major industrial equipment, or with firms that attempt to give their products an exclusive or prestige image (e.g., BMW, Jaguar, and Mercedes). Firms that pursue exclusive distribution usually target a single, well-defined market segment. Selective distribution is used across many product categories, including clothing (Tommy Hilfiger), cos- metics (Clinique), electronics (Bose), franchising (McDonald’s), and premium pet food (Science Diet). These and other companies carefully screen the image and sell- ing practices of merchants to ensure that they match those of the manufacturer and its products. Intensive distribution is the best option for most consumer convenience goods, such as candy, soft drinks, over-the-counter drugs, or cigarettes, and for busi- ness office supplies like paper and toner cartridges. To gain this visibility and sales volume, the manufacturer must give up a good degree of control over pricing and product display. If a customer cannot find one firm’s products in a given location, they will simply substitute another brand to fill the need.

Power in the Supply Chain True supply chain integration requires a fundamental change in how channel mem- bers work together. Among these changes is a move from a “win–lose” competitive attitude to a “win–win” collaborative approach in which there is a common realiza- tion that all firms in the supply chain must prosper. Consider the Toro Company that sells turf maintenance equipment, irrigation systems, landscaping equipment, and yard products to both professional and residential markets. This requires many different distributors and dealers (many of which are quite small), as well as supply- ing products to large national retailers such as Home Depot. If one of Toro’s pro- ducts is made available in Home Depot, it is likely to have a lower retail price (due to bulk buying) than the same or similar product at a local tractor supply company. This situation is clearly not in the best interests of the local firm, so it will strive to put its interests ahead of others in the supply chain. However, the local tractor sup- ply company also understands that it must service Toro equipment—no matter where it was purchased—if it is to remain a certified service facility. For the local firm, putting the needs of the supply chain ahead of its own needs is likely to create tension and conflict with the Toro Company. In situations like this, each firm will exhibit a different degree of authority or power in managing or controlling the activi- ties within the supply chain. There are five basic sources of power in a supply chain:12

• Legitimate Power. This power source is based on the firm’s position in the sup- ply chain. Historically, manufacturers held most of the legitimate power, but this power balance shifted to retailers in the 1990s. In today’s economy, retailers still wield a great deal of power, but consumers are clearly in charge.

• Reward Power. The ability to help other parties reach their goals and objectives is the crux of reward power. Rewards may come in terms of higher volume sales, sales with more favorable margins, or both. Individual salespeople at the buyer end of the channel may be rewarded with cash payments, merchandise, or vaca- tions to gain more favorable presentation of a manufacturer’s or wholesaler’s products.

• Coercive Power. The ability to take positive outcomes away from other chan- nel members, or the ability to inflict punishment on other channel members. For example, a manufacturer may slow down deliveries or postpone the avail- ability of some portions of a product line to a wholesaler or retailer. Likewise, a retailer can decide not to carry a product, not to promote a product, or to give a product unfavorable placement on its shelves.

Chapter 6 • The Marketing Program 177

• Information Power. Having and sharing knowledge is the root of information power. Such knowledge makes channel members more effective and efficient. Information power may stem from knowledge concerning sales forecasts, mar- ket trends, competitive intelligence, product uses and usage rates, or other criti- cal pieces of information. In many supply chains, retailers hold the most information power because their close proximity to customers gives them access to data and information that is difficult to obtain from other sources.

• Referent Power. Referent power has its basis in personal relationships and the fact that one party likes another party. It has long been said that buyers like to do business with salespeople they enjoy being around. This is still true, but increas- ingly referent power has its roots in firms wanting to associate with other firms, as opposed to individual one-on-one relationships. Similar cultures, values, and even information systems can lead to the development of referent power.

Powerful channel members have the ability to get other firms to do things they oth- erwise would not do. Depending on how the channel member uses its influence, power can create considerable conflict, or it can make the entire supply chain operate more smoothly and effectively. Today, discount mass merchandise retailers—like Walmart, Costco, and Target—and category focused retailers (also known as category killers)— such as Best Buy, Barnes & Noble, Office Depot, and AutoZone—hold the power in most consumer channels. The sheer size and buying power of these firms allows them to demand price concessions from manufacturers. They also perform their own whole- saling functions; therefore, they receive trade discounts traditionally reserved for true wholesalers. Likewise, their control over retail shelf space allows them to dictate when and where new products will be introduced. Manufacturers typically must pay hefty fees, called slotting allowances, just to get a single product placed on store shelves. Finally, their closeness to millions of customers allows these large retailers to gather valuable information at the point of sale. As mentioned previously, control over infor- mation is a valuable commodity and a source of power in virtually all supply chains.

Trends in Supply Chain Strategy In addition to the strategic supply chain issues discussed to this point, a number of trends have shaped the structure of marketing channels and the ways that supply chains function. In this section, we examine a number of these trends.

Technological Improvements Significant advancements in information processing and digital communication have created new methods for placing and filling orders for both business buyers and con- sumers. The growth of the Internet and electronic commerce is the most obvious sign of these changes. As business buyers and consumers more fully embrace these tech- nologies, the growth of e-commerce will continue to flourish. For example, e-commerce accounted for fewer than 20 percent of transactions in the manufacturing sector in 2002. Today, that number is almost 52 percent. In the wholesaling sector, e-commerce accounts for roughly 26 percent of all transactions. Conversely, e-commerce accounts for only 5.2 percent of all retail transactions, and only 3.1 per- cent of transactions in service-based industries. Still, e-commerce in these consumer markets is growing at roughly 15 percent per year. These statistics show that electronic commerce still has a great deal of room to grow, especially in consumer markets.13

Another promising technology is radio frequency identification (RFID), which involves the use of tiny computer chips with radio transmission capability that can be attached to a product or its packaging. The radio signals reflected from the chip can be used to track inventory levels and product spoilage, or prevent theft. They can also be used for instantaneous checkout of an entire shopping cart of items. As addressed in Beyond the Pages 6.3, large retailers and packaged goods manufacturers have adopted

178 Chapter 6 • The Marketing Program

RFID, which will eventually replace bar codes as a means to manage inventory.14 Inno- vations in web-based communication technologies such as global positioning are also taking rail and truck equipment to a new level of service in supply chain integration.

BEYOND THE PAGES 6.3

Walmart’s Supply Chain Advantages15

Walmart Stores Inc.—the world’s largest retailer— is possibly the most controversial business in America. With over 11,000 stores globally, sales over $482.2 billion in 2015, and approximately 2.2 million employees worldwide, managing stake- holder relationships is a major challenge. The Wal- mart that saves the average family an estimated $2,300 per year has its critics. Walmart claims that it is committed to improving the standard of living for its customers throughout the world. Their key strategy is a broad assortment of quality merchandise and services at everyday low prices (EDLP) while fostering a culture that claims to reward and embrace mutual respect, integrity, and diversity. Walmart uses the data it collects about customers, as well as data collected throughout its distribution system, to maintain its competitive advantage and low costs.

Walmart is not only the world’s largest retailer, it also operates the world’s largest data- center, an organization-wide data collection and storage system that gathers data from all of the firm’s critical operating systems as well as from selected external data sources. Walmart’s data- center contains more than 460 terabytes of data with sales information on every item it sells (roughly 200 million transactions per week).

Walmart collects reams of data about pro- ducts and customers primarily from checkout scanners at its Walmart discount and Sam’s Club membership stores. Clerks and managers may also use wireless handheld units to gather additional inventory data. The company stores the detailed data and classifies it into categories such as product, individual store, or region. The system also serves as a basis for the Retail Link decision-support system between Walmart and its suppliers. Retail Link permits some vendors, like Kraft, to access data about how well their products are selling at Walmart stores.

The mountain of data Walmart collects helps boost efficiency dramatically by matching product supplies to demand. This information, for example, helped the firm determine to stock not only flashlights but also extra straw- berry Pop-Tarts prior to a hurricane strike on

the coast (it seems that Pop-Tart sales increase as much as seven times their normal rate ahead of a hurricane). The data may also help the company track supplier performance, set ideal prices, and even determine how many cashiers to schedule at a certain store on a certain day. Most importantly, it helps the retailer avoid car- rying too much inventory or not having enough to satisfy demand.

Technology is a driving force in operational efficiency that lowers costs for Walmart. The merchandise-tracking system uses RFID to ensure that a product can be tracked from the time it leaves the supplier’s warehouse to the time it enters and leaves a Walmart store. Walmart began the move to RFID in 2004 by insisting that its top 100 suppliers adopt RFID technology. Supplier adoption has been slowed because the cost to suppliers is much larger than the cost to Walmart (suppliers must contin- ually buy RFID tags while Walmart only needs a system to read the tags). The cost to adopt and implement RFID technology has been estimated to be roughly $9 million per supplier.

RFID helps Walmart keep its shelves stocked and curbs the loss of retail products as they travel through the supply chain. RFID at Walmart has directly resulted in a 16 percent reduction in stockouts and a 67 percent drop in replenishment times. As customers go through checkout, the RFID system swiftly com- bines point-of-sale data on their purchases with RFID-generated data on what is available in the stockroom to produce pick lists that are auto- matically created in real time. It also ensures that suppliers are notified when products are sold and can ensure that enough of a product is always at a particular store. This strategy also results in time and labor savings because Walmart associates no longer need to scan shelves to determine what is out of stock; nor do they have to scan cartons and cases arriving at the stockroom. The scanners tag incoming pallets and translate the data into supply chain management database forecasting models to address out-of-stock items and reduce stocking/ restocking mix-ups.

Chapter 6 • The Marketing Program 179

Outsourcing Channel Functions Outsourcing—shifting work activities to businesses outside the firm—is a rapidly growing trend across many different industries and supply chains.16 In the past, out- sourcing was used primarily as a way of cutting expenses associated with labor, transportation, or other overhead costs. Today, though cutting expenses is still a main factor, the desire of many firms to focus on core competencies drives outsour- cing. By outsourcing noncore activities, firms can improve their focus on what they do best, free resources for other purposes, and enhance product differentiation—all of which lead to greater opportunities to develop and maintain competitive advan- tages. The hourly labor costs in countries such as China, India, and Mexico are far less than in the United States or Europe. These developing countries have improved their manufacturing capabilities, infrastructure, and technical and business skills, making them more attractive regions for global sourcing.

On the other hand, the costs and risks of outsourcing halfway around the world must be taken into consideration. Firms that outsource give up a measure of control over key factors such as data security and the quality of service delivered to custo- mers. To combat these issues, many firms have shifted from outsourcing to offshor- ing of their own activities. These companies set up their own offshore operations (called captives) to handle business processes where wage rates are lower. ANZ Bank (Australia and New Zealand Banking Group), for example, uses a captive oper- ation in India to handle back-office processing for credit cards, mortgages, wealth management, human resources, and IT development.17

As illustrated in Exhibit 6.8, information technology is the primary activity out- sourced today. Currently, however, firms are shifting supporting processes to

EXHIBIT 6.8 The Trend in Outsourcing.

Core Functions

Administrative and Support Processes

Information Technology Infrastructure

Core Functions

Administrative and Support Processes

Information Technology Infrastructure

Past Present Future

Motives for Outsourcing

Reduced Costs

Increased Efficiency

In-House Activities

Outsourced Activities

Motives for Outsourcing

Focus on Core Functions

Enhanced Collaboration

24/7/365 Operations

Core Functions

Administrative and Support Processes

Information Technology Infrastructure

SOURCE: Adapted from Edward W. Davis and Robert E. Speckman, The Extended Enterprise (Upper Saddle River, NJ: Prentice Hall Financial Times, 2004), p. 111, based on information from Forrester Research, Inc.

180 Chapter 6 • The Marketing Program

outside businesses. These supporting processes include administrative activities, dis- tribution, human resources, financial analysis, call centers, and even sales and mar- keting. When a firm has significant needs and insufficient in-house expertise, the importance of outsourcing will increase. For example, an entire industry known as 3PLs (third-party logistics providers) has emerged in the United States and Europe as retailers look toward outside expertise as a way to reduce costs and make their products more readily available. In fact, roughly 77 percent of Fortune 500 firms use 3PLs to manage inventories and handle the physical movement of products in the supply chain to ensure that items are in the right amounts and in the right places when needed.18

The Growth of Nontraditional Channels While the traditional marketing channel of manufacturer to wholesaler to retailer is alive and well today, customers’ demands for lower prices and greater convenience have put pressure on all channel intermediaries to justify their existence. Every time a different intermediary handles a product, the cost to the final customer increases. This places a great deal of downward pressure on profit margins as firms struggle to balance their need for profit with the need to offer customers good value and fair prices. Under such circumstances, the channel typically evolves into a more direct form. Keep in mind, however, that channel evolution does not replace or alter the basic functions that all channels must perform (e.g., sorting, breaking bulk, holding inventory, etc.). Even after the elimination of certain channel intermediaries, other firms—or even the customer—will have to step in and fulfill these basic functions.

A number of nontraditional channels have emerged to expand opportunities for more direct distribution. The fastest growing example of this trend is e-commerce. However, there are other forms of direct distribution that occur outside the tradi- tional “bricks-and-mortar” of physical stores:

• Catalog and Direct Marketing. Some of the most popular and successful direct merchants, including Lands’ End, J. Crew, IKEA, Cabela’s, and GEICO Insurance, are catalog and direct marketers.

• Direct Selling. These merchants sell through face-to-face contact with sales associates. Examples include Avon, Amway, Tupperware, Discovery Toys, and Pampered Chef. Amway is far and away the largest with over $10 billion in sales each year.

• Home Shopping Networks. Networks like QVC and the Home Shopping Net- work serve millions of satisfied customers every week.

• Vending. The advantage of vending is 24/7/365 product availability in virtually any location. Though soft drinks account for over 50 percent of vending sales, products such as flowers, toothpaste, movies, and fishing bait can now be pur- chased via vending machines.

• Direct Response Advertising. Many companies sell music, toy, and book pro- ducts via television commercials and 1-800 phone numbers. One of the largest is Time Life, which sells millions of books, CDs, and DVDs each year. Infomercials, a cross between an advertisement, a news program, and a documentary, are also popular programs for products such as exercise equipment and kitchen appliances.

One of the benefits of nontraditional channels for manufacturers is the ability to offer two or more lines of the same merchandise through two or more channels (often called dual distribution), thus increasing sales coverage. For example, Hallmark sells its highly respected Hallmark line of greeting cards primarily through selective distribution at Hallmark stores. They make their Ambassador and Shoebox Greetings card lines available on an intensive basis through supermarkets, drug stores, and discount retailers. In addition, Hallmark offers both cards and

Chapter 6 • The Marketing Program 181

e-cards online. One of the consequences of using multiple channels, however, is that it increases the risk of disintermediation, where customers deal directly with manu- facturers and bypass traditional channel intermediaries. Consequently, the use of multiple channels can create conflict between the manufacturer and its supply chain partners. For example, Apple sells the same products in its online store, its physical stores, at large retailers (Best Buy, Walmart, Target), and at Amazon, among others. It is quite common for customers to look at Apple products in retail stores, but then make the actual purchase online at either Apple or Amazon (some- times even while standing in the store). Amazon’s low prices, free shipping, and lack of sales tax in many states also puts physical stores at a disadvantage. For these rea- sons, manufacturers must carefully weigh the benefits of dual distribution against its potential drawbacks.

INTEGRATED MARKETING COMMUNICATIONS Without a doubt, promotion and marketing communications are the most ubiquitous elements of any firm’s marketing program. This is not surprising because promo- tional activities are necessary to communicate the features and benefits of a product to the firm’s intended target markets. Marketing communications includes conveying and sharing meaning between buyers and sellers, either as individuals, firms, or between individuals and firms. Integrated marketing communications (IMC) refers to the strategic, coordinated use of promotion to create one consistent message across multiple channels to ensure maximum persuasive impact on the firm’s current and potential customers. IMC takes a 360-degree view of the customer that considers each and every contact that a customer or potential customer may have in his or her relationship with the firm. The key to IMC is consistency and uniformity of message across all elements of promotion as shown in Exhibit 6.9.

Due to the many advantages associated with IMC, most marketers have adopted integrated marketing as the basis for their communication and promotion strategies.

EXHIBIT 6.9 Components of IMC Strategy.

Integrated

Marketing

Communication

Advertising Print

Broadcast Online/Interactive

Wireless Direct Marketing

Personal Selling

Account Management

Prospecting

Retail Sales

Sales Promotion

Consumer Promotion

Trade Promotion

Public Relations

Publicity

Press Releases

Newsletters

182 Chapter 6 • The Marketing Program

By coordinating all communication “touch points,” firms using IMC convey an image of truly knowing and caring about their customers that can translate into long-term customer relationships. Likewise, IMC reduces costs and increases efficiency because it can reduce or eliminate redundancies and waste in the overall promo- tional program. Many firms have embraced IMC because mass-media advertising has become more expensive and less predictable than in the past. As discussed in Beyond the Pages 6.4, marketers are being forced to adopt new marketing strategies as advancing technology and customer preferences are threatening to make tradi- tional forms of promotion obsolete. Many firms are also embracing technology in order to target customers directly through product placement and online promotion. This increased focus on individual customers requires that the overall promotional program be integrated and focused as well.

Strategic Issues in Integrated Marketing Communications When selecting elements to include in the IMC program, it is important to take a holistic perspective that coordinates not only all promotional elements but also the IMC program with the rest of the marketing program (product, price, and supply chain strategy). Taking this approach allows a firm to communicate a consistent message to target customers from every possible angle, thereby maximizing the total impact on those customers. For example, if the advertising campaign stresses quality, the sales force talks about low price, the supply chain pushes wide availabil- ity, and the website stresses product innovation, then what is the customer to believe? Not readily seeing that a product can deliver all these benefits, the customer is likely to become confused and go to a competitor with a more consistent message.

All too frequently, firms rush to launch an intensive IMC campaign that has no clear promotional objectives. The vast majority of promotion activities do not create results in the short term, so firms must focus on long-term promotional objectives and have the patience to continue the program long enough to gauge true success. It takes a great deal of time, effort, and resources to build a solid market position. Promotion based on creativity alone, unlinked to the rest of the marketing strategy, can waste limited and valuable marketing resources.

Ultimately, the goals and objectives of any promotional campaign culminate in the purchase of goods or services by the target market. The classic model for out- lining promotional goals and achieving this ultimate outcome is the AIDA model— attention, interest, desire, and action:

• Attention. Firms cannot sell products if the members of the target market do not know they exist. As a result, the first major goal of any promotional cam- paign is to attract the attention of potential customers.

• Interest. Attracting attention seldom sells products. Therefore, the firm must spark interest in the product by demonstrating its features, uses, and benefits.

• Desire. To be successful, firms must move potential customers beyond mere interest in the product. Good promotion will stimulate desire by convincing potential customers of the product’s superiority and its ability to satisfy specific needs.

• Action. After convincing potential customers to buy the product, promotion must then push them toward the actual purchase.

The role and importance of specific promotional elements vary across the steps in the AIDA model. Mass-communication elements, such as advertising and public relations, tend to be used more heavily to stimulate awareness and interest due to their efficiency in reaching large numbers of potential customers. Along with adver- tising, sales promotion activities, such as product samples or demonstrations, are vital to stimulating interest in the product. The enhanced communication

Chapter 6 • The Marketing Program 183

BEYOND THE PAGES 6.4

Fragmentation Forever Changes Media Advertising19

The increasing fragmentation of consumer audi- ences has forever changed the way both media and advertisers do business. The problem is that consumers’ attention is being spread across an increasing array of media and entertainment choices, including the Internet, targeted cable programming, video-on-demand, DVR, smart- phones, tablets, video games, and movies. Today, mass audiences are dwindling fast as consumers spend less time with traditional media such as television, magazines, and news- papers. Consumers now expect to use media whenever and wherever they want, and on any device. They are no longer wed to full-length television programming or to leisurely reading the newspaper. For advertisers, the trend is alarming because their traditional bread- and-butter demographic is fragmenting the most. For example, the number of 18- to 34- year-old men who watch primetime television has declined steadily since 2000. Those who do watch television increasingly use DVR devices to skip advertising or wait for their favorite shows to appear on Netflix or Amazon Prime.

These changes are forcing marketers to adapt by finding newer, more effective ways to reach their target audiences. One way marketers are countering the trend is by linking sales promotion to target markets through strategic integration into related media programming. Com- pany sponsorship of programming or events can allow a close connection between brand and target market. For example, Bravo’s Top Chef has successfully partnered with Toyota, Clorox, Food & Wine Magazine, Campbell Soup, Diet Dr. Pepper, and Quaker. Sponsorship opportu- nities like these work better than traditional advertising, especially with respect to brand recall. Bank of America, for example, achieves an astounding 39 percent average recall when it sponsors a sporting event. Nike (21 percent), Buick (14 percent), American Express (13 per- cent), and FedEx (11 percent) have reported similar successes with sports sponsorships.

In addition to outright sponsorship of popu- lar programs, marketers also make deals with television and cable networks, as well as movie studios, to place their products into actual pro- grams and films. In-program product placements

have been successful in reaching consumers as they are being entertained, rather than during the competitive commercial breaks. Reality pro- gramming in particular has been a natural fit for product placement because of the close inter- change between the participants and the pro- ducts (e.g. Coca-Cola and American Idol; Sears and Extreme Makeover: Home Edition). Further- more, sixteen brands were prominently featured in the hit movie, The Avengers. Acura, in particu- lar, signed a multi-picture deal with Marvel to showcase its cars in upcoming films. The big win- ner in product placement is Apple. Its products appeared in 25 percent of all movies in 2014.

Media companies themselves have also been forced to adapt, most notably by fragmenting their content and business models to match their frag- mented audiences. One way that companies have addressed the problem is by making their content available on multiple platforms. CBS, for example, first experimented with its broadcast of the 2008 NCAA Basketball Tournament by broadcasting live action on the Internet. The service, called March Madness on Demand, attracted roughly 5 million different online viewers and over $30 mil- lion in advertising revenue during the tournament. CBS then switched to a paid model with March Madness Live. For $3.99, fans could watch high- quality streams on their Apple and Android devices. The games were still available for free on CBSSports.com. Today, every game is available for free using the March Madness Live app on Apple, Android, or Windows devices. As these and other examples illustrate, the key to meeting the demands of fragmented audiences is to disaggregate content and make it available a la carte style. Consumers prefer to access content (songs, movies, TV shows, news) when, where, and how they want it without having to purchase entire albums, programs, or networks.

Despite the challenges of reaching fragmen- ted audiences, the trend actually has a big side benefit. The science behind traditional broadcast television ratings and audience measurement has always been uncertain. With on-demand services, advertisers are able to pre- cisely measure audience characteristics whether the content is delivered via the Internet, cable, or wireless devices. This one-two punch of prof- its and precise measurement may mark the death of the traditional 30-second primetime television spot.

184 Chapter 6 • The Marketing Program

effectiveness of personal selling makes it ideally suited to moving potential custo- mers through internal desire and into action. Other sales promotion activities, such as product displays, coupons, and trial-size packaging, are well suited to pushing customers toward the final act of making a purchase.

Alongside the issue of promotional goals and objectives, the firm must also con- sider its promotional goals with respect to the supply chain. In essence, the firm must decide whether it will use a pull strategy, a push strategy, or some combination of the two. When firms use a pull strategy, they focus their promotional efforts toward stimulating demand among final customers, who then exert pressure on the supply chain to carry the product. The coordinated use of heavy advertising, public rela- tions, and consumer sales promotion has the effect of pulling products through the supply chain, hence its name. In a push strategy, promotional efforts focus on mem- bers of the supply chain, such as wholesalers and retailers, to motivate them to spend extra time and effort on selling the product. This strategy relies heavily on per- sonal selling and trade sales promotion to push products through the supply chain toward final customers.

Coordinating promotional elements within the context of the entire marketing program requires a complete understanding of the role, function, and benefits of each element. The advantages and disadvantages of each element must be carefully balanced against the promotional budget and the firm’s IMC goals and objectives. To ensure a constant and synergistic message to targeted customers, the firm must ulti- mately decide how to weigh each promotional element in the overall IMC strategy. The next sections take a closer look at the four key elements that comprise most IMC programs.

Advertising Advertising is a key component of promotion and is usually one of the most visible ele- ments of an integrated marketing communications program. Advertising is paid, nonpersonal communication transmitted through media such as television, radio, magazines, newspapers, direct mail, outdoor displays, the Internet, and mobile devices. Exhibit 6.10 outlines the changing trends in U.S. media advertising. Note the continued growth in Internet advertising while newspapers, magazines, and radio continue to struggle. This spending pattern follows trends in media usage as consumers are spending more time online and less time with traditional media. The major bright spot in recent ad spending figures is the growth in Spanish language advertising. This is not surprising considering the rapid growth of the Hispanic popu- lation in the United States. In addition, Hispanics wield over $1 trillion in buying power—a number expected to increase to $1.7 trillion by 2019.20

As the use of traditional media declines, advertisers are accelerating their use of Internet-based advertising methods. As shown in Exhibit 6.11, the bulk of Internet- based ad spending—which now totals almost $43 billion in the United States— comes from search advertising, followed by display/banner ads and mobile. The fastest growing segment is in mobile advertising, which is up over 110 percent. Most of the top Internet advertisers come from retail (21 percent of spending), finan- cial services (13 percent), and telecom (9 percent) sectors. Although firms in these and other industries enjoy the large number of impressions that can be generated via Internet-based advertising, their efforts suffer from the fleeting nature of most online ads. Getting a potential customer to click on a banner ad or look at a message for more than a few seconds can be quite challenging.

Despite the many advantages of advertising, its use does create a number of challenges for companies. First, the initial expense for advertising is typically quite high, especially for television. Although media buys such as airtime on the Super Bowl gets a lot of attention, the actual production cost for a 30-second commercial can also be expensive (the U.S. average is around $354,000).21 Second, many

Chapter 6 • The Marketing Program 185

EXHIBIT 6.10 Change in U.S. Measured Ad Spending, 2013 vs. 2012.

Media Sector Percent Change Television −0.1

• Network −3.4 • Cable 7.3 • Spot TV −8.1 • Syndication 0.5 • Spanish Language 2.9

Magazines 1.8

• Consumer 2.6 • B-to-B −1.7 • Sunday −2.6 • Local −0.5 • Spanish Language 2.3

Newspaper −3.7

• Local −3.8 • National −3.6 • Spanish Language 1.9

Internet 15.7 Radio −5.6 Outdoor Media 4.4

SOURCE: Kantar Media (http://kantarmedia.us/press/kantar-media-reports-us-advertising-expenditures-increased-09- percent-2013), March 25, 2014.

EXHIBIT 6.11 Internet Ad Revenues by Advertising Format, 2013.

Display/Banner

Mobile

Digital Video

Classifieds

Lead Generation

Rich Media

Sponsorship

TOTAL: $42.8 BILLION

43%

19%

17%

4% 3%

SOURCE: “IAB Internet Advertising Revenue Report 2013,” Interactive Advertising Bureau, April 2014 (http://www.iab.net/ media/file/IAB_Internet_Advertising_Revenue_Report_FY_2013.pdf).

186 Chapter 6 • The Marketing Program

companies struggle to determine the correct amount of money to allocate to adver- tising because the effects of advertising are difficult to measure. There are many fac- tors that can determine a firm’s decision about the appropriate level to fund advertising activities, including the geographic size of the market, the distribution or density of customers, the types of products advertised, sales volume relative to the competition, and the firm’s budget. While setting the budget too high will obvi- ously result in waste and lower profits, setting the budget too low may be worse. Firms that do not spend enough on advertising find it very difficult to stand out in an extremely crowded market for customer attention.

Third, it is usually very difficult to evaluate the effectiveness of advertising. Many of the effects and outcomes of advertising take a long time to develop, espe- cially regarding important outcomes such as enhanced brand image, corporate repu- tation, and positive product attitudes. The effect of advertising on sales lags in some cases, with the effect occurring long after the campaign has ended. The seemingly unending methods that can be used to evaluate advertising effectiveness further complicate the task of measuring advertising results. Some methods include evaluat- ing the achievement of advertising objectives; assessing the effectiveness of advertis- ing copy, illustrations, and layouts; and evaluating the effectiveness of various media. Effectiveness measures can also look at different market segments and their responses to advertising—including brand image; attitudes toward the advertising, the brand, or the firm; and actual customer purchasing behavior.

Finally, most marketers struggle with the fine line between what is permissible and not permissible in advertising. In addition to cultural and stylistic considera- tions, marketers must also carefully consider how they portray their products to potential customers. For example, the Federal Trade Commission fined both Ske- chers ($40 million) and Reebok ($25 million) for false claims about their fitness shoes. The FTC found that both companies misled consumers with ads claiming that using their shoes would lead to a more perfect body.22 Product claims are also important in comparative advertising, which occurs when one firm compares its product with one or more competing products on specific features or benefits. Com- parative advertising is common in product categories such as soft drinks, automo- biles, computers, and over-the-counter medications. In some cases, this comparison is direct, as in Burger King’s “Whopper Virgin” taste test, where the company had people who had never tasted a hamburger before compare a McDonald’s Big Mac with the Burger King Whopper. In other cases, the comparison used in the advertise- ment is indirect or implied. Procter & Gamble uses this tactic when promoting its Gillette razors as “The Best a Man Can Get.” The implied comparison in this case involves all competing razors on the market. Under the provisions of the Trademark Law Revision Act, marketers using comparative advertising must ensure they do not misrepresent the characteristics of competing products.

Public Relations Public relations is one component of a firm’s corporate affairs activities. The goal of public relations is to track public attitudes, identify issues that may elicit public con- cern, and develop programs to create and maintain positive relationships between a firm and its stakeholders. A firm uses public relations to communicate with its stake- holders for the same reasons that it develops advertisements. Public relations can be used to promote the firm, its people, its ideas, and its image and can even create an internal shared understanding among employees. Because various stakeholders’ atti- tudes toward the firm affect their decisions relative to the firm, it is very important to maintain positive public opinion.

Public relations can improve the public’s general awareness of a company and can create specific images such as quality, innovativeness, value, or concern for

Chapter 6 • The Marketing Program 187

social issues. For example, New Belgium Brewery in Fort Collins, Colorado, has a strong reputation for its stance on environmental efficiency and conservation. The brewery takes an aggressive stance toward recycling and uses windmills to generate electricity.23 Likewise, Starbucks has gained international awareness through its fair treatment of employees. The company was also the first coffee retailer to establish a global code of conduct for fair treatment of agricultural suppliers—the small farmers who supply the coffee beans for its products.

Firms use a number of public relations methods to convey messages and to cre- ate the right attitudes, images, and opinions. Public relations is sometimes confused with publicity. Although publicity is one part of public relations, it is more narrowly defined to include the firm’s activities designed to gain media attention through arti- cles, editorials, or news stories. By encouraging the media to report on a firm’s accomplishments, publicity helps maintain positive public awareness, visibility, and a desired image. Publicity can be used for a single purpose, such as to launch a new product or diminish the public’s opinion regarding a negative event, or it can be used for multiple purposes to enhance many aspects of the firm’s activities. Having a good publicity strategy is important because publicity can have the same effect as adver- tising, though typically with greater credibility. There are a number of different meth- ods used in public relations and publicity efforts:

• News (or Press) Releases. A news release is a few pages of typewritten copy— typically fewer than 300 words—used to draw attention to a company event, product, or person affiliated with the firm. News releases can be submitted to newspapers, magazines, television contacts, suppliers, key customers, or even the firm’s employees.

• Feature Articles. A feature article is a full-length story prepared for a specific pur- pose or target audience. For example, a firm building a new production facility in northeast Georgia might supply a feature article to regional and local media outlets, chambers of commerce, local governments, and major firms in the area. Feature articles typically focus on the implications or economic impact of a firm’s actions. They are also very useful when responding to negative events or publicity.

• White Papers. White papers are similar to feature articles; however, they are more technical and focus on very specific topics of interest to the firm’s stake- holders. White papers promote a firm’s stance on important product or market issues and can be used to promote the firm’s own products and solutions. White papers have been used extensively in the information technology field where firms continually work to establish standards and keep up with technolog- ical innovation.

• Press Conferences. A press conference is a meeting with news media called to announce or respond to major events. Media personnel receive invitations to a specific location, with written materials, photographs, exhibits, and even pro- ducts given to them. Multimedia materials may be distributed to broadcast sta- tions in hopes that they will air some of the activities that occurred at the press conference. Firms typically hold press conferences when announcing new pro- ducts, patents, mergers or acquisitions, philanthropic efforts, or internal admin- istrative changes.

• Event Sponsorship. Corporate sponsorship of major events has become an entire industry in itself. Sponsorships can range from local events, such as high school athletics and local charities, to international events such as the Tour de France or NASCAR. Another popular sponsorship strategy involves the naming of sports stadiums and venues, such as Gillette Stadium, home to the New England Patriots.

• Employee Relations. Employee relations are every bit as important as public and investor relations. Employee relations’ activities provide organizational

188 Chapter 6 • The Marketing Program

support for employees with respect to their jobs and lives. Employee relations can encompass many different activities including internal newsletters, training programs, employee assistance programs, and human resource programs.

When these methods generate publicity in the media, the public perceives the message as having more credibility due to the implied endorsement of the media that carries the story. The public will typically consider news coverage more truthful and credible than advertising because the firm has not paid for the media time. One major drawback of public relations activities is that the firm has much less control over how the message will be delivered. For example, many media personnel have a reputation for inserting their own opinions and biases when communicating a news story. Another drawback involves the risk of spending a great deal of time and effort in developing public relations messages that fail to attract media attention.

Personal Selling and Sales Management Personal selling is paid personal communication that attempts to inform customers about products and persuade them to purchase those products. Personal selling takes place in many forms. For example, a Best Buy salesperson who describes the benefits of a HP laptop to a customer engages in personal selling. So does the sales- person who attempts to convince a large industrial organization to purchase photo- copy machines. Some types of personal selling are highly complex and relational in nature. The complexity of these types of contracts requires a long-term, personal relationship between salespeople and companies.

Compared to other types of promotion, personal selling is the most precise form of communication because it assures companies that they are in direct contact with an excellent prospect. Though one-on-one contact is highly advantageous, it does not come without disadvantages. The most serious drawback of personal selling is the cost per contact. In business markets, a single sales presentation can take many months and thousands of dollars to prepare. For instance, to give government offi- cials a real feel for the design and scope of a bridge construction project, Parsons, Inc. (a large engineering and construction firm) must invest thousands of dollars in detailed scale models of several different bridge designs. Personal selling is also expensive due to the costs associated with recruiting, selecting, training, and moti- vating salespeople. Despite the high costs, personal selling plays an increasingly important role in IMC and overall marketing strategy.

The goals of personal selling vary tremendously based on its role in a long-run approach to integrated communications. These goals typically involve finding pro- spects, informing prospects, persuading prospects to buy, and keeping customers satisfied through follow-up service after the sale. To effectively deliver on these goals, salespeople have to be not only competent in selling skills but also thor- oughly trained in technical product characteristics. For example, pharmaceutical salespeople (drug reps) who sell to physicians and hospitals must have detailed training in the technical medical applications of the drugs and medical devices that they sell. In fact, it is not unusual for salespeople who sell medical implants such as knee or hip replacements to have as much technical training about the product as the physicians who actually implant these devices during surgery. Obvi- ously, when the products and buyers are less sophisticated, salespeople will require much less training.

Very few businesses can survive on the profits generated from purely transac- tional marketing (one-time purchases). For long-term survival, most firms depend on repeat sales and the development of ongoing relationships with customers. For this reason, personal selling has evolved to take on elements of customer service and marketing research. More than any other part of the firm, salespeople are closer

Chapter 6 • The Marketing Program 189

to the customer and have many more opportunities for communication with them. Every contact with a customer gives the sales force a chance to deliver exceptional service and learn more about the customer’s needs. Salespeople also have the oppor- tunity to learn about competing products and the customer’s reaction toward them. These relational aspects are important—whether the salesperson makes a sale or not. In today’s highly competitive markets, the frontline knowledge held by the sales force is one of the most important assets of the firm. In fact, the knowledge held by the sales force is often an important strength that can be leveraged in devel- oping marketing strategy.

Because the sales force has a direct bearing on sales revenue and customer sat- isfaction, the effective management of the sales force is vital to a firm’s marketing program. In addition to generating performance outcomes, the sales force often cre- ates the firm’s reputation, and the conduct of individual salespeople determines the perceived ethicalness of the entire firm. The strategic implementation of effective sales management requires a number of activities:

• Developing Sales Force Objectives. The technical aspects of establishing sales force objectives involve desired sales dollars, sales volume, or market share. These sales objectives can be translated into guidelines for recruiting new salespeople as well as setting quotas for individual salespeople. Further, individual sales objectives might be based on order size, the number of sales calls, or the ratio of orders to calls. Ultimately, sales objectives help evaluate and control sales force activities, as well as compensate individual salespeople.

• Determining Sales Force Size. The size of the sales force is a function of many variables including the type of salespeople used, specific sales objectives, and the importance of personal selling within the overall IMC program. The size of the sales force is important because the firm must find a balance between sales expenses and revenue generation. Having a sales force that is too large or too small can lead to inflated expenses, lost sales, and lost profit.

• Recruiting and Training Salespeople. Recruiting the right types of salespeople should be closely tied to the personal selling and IMC strategies. Firms usually recruit potential salespeople from a number of sources including within the firm, competing firms, employment agencies, educational institutions, and direct- response advertisements placed on the Internet, in magazines, or in newspapers. Salesperson recruitment should be a continuous activity because firms must ensure that new salespeople are consistently available to sustain the sales program.

• Controlling and Evaluating the Sales Force. Controlling and evaluating the sales force require a comparison of sales objectives with actual sales perfor- mance. To effectively evaluate a salesperson, predetermined performance stan- dards must be in place. These standards also determine the compensation plan for the sales force. Exhibit 6.12 provides a comparison of various sales force compensation systems.

Across many industries, sales forces have shrunk due to advances in communi- cations technology and mobile computing. The development of integrated supply chains and the procurement of standardized products over the Internet have reduced the need for salespeople in many industries. Although these developments reduce selling costs, they create a major management challenge for most firms: How can firms use new technology to reduce costs and increase productivity while maintain- ing personalized, one-to-one client relationships?

One of the keys to using sales technology effectively is to seamlessly integrate it with customer relationship management systems, competitive intelligence activities, and internal customer databases. By automating many repetitive selling tasks, like filling repeat orders, sales technology can actually increase sales, productivity, and one-to-one client relationships at the same time. Although many firms develop and

190 Chapter 6 • The Marketing Program

maintain their own sales automation systems, others who lack the resources to do so can turn to third-party providers like Salesforce.com—an on-demand, web-based provider of integrated CRM and sales automation solutions. Whether in-house or third party, the key to these solutions is integration. By pushing integrated customer, competitive, and product information toward the salesperson, technology can increase salesperson productivity and sales revenue by allowing the sales force to serve customers’ needs more effectively.

Sales Promotion Despite the attention paid to advertising, sales promotion activities account for the bulk of promotional spending in many firms. This is especially true for firms selling consumer products in grocery stores and mass-merchandise retailers where sales promotion can account for up to 70 percent of the firm’s promotional budget.24 Sales promotion involves activities that create buyer incentives to purchase a product or that add value for the buyer or the trade. Sales promotion can be targeted toward consu- mers, channel intermediaries, or the sales force. Roughly a third of all sales promo- tion expenditures are targeted toward the trade (wholesalers and retailers). Direct mail comprises the next largest expense at between 15 and 20 percent. Regardless of the activity and toward whom it is directed, sales promotion has one universal goal: to induce product trial and purchase.

Most firms use sales promotion in support of advertising, public relations, or per- sonal selling activities rather than as a stand-alone promotional element. Advertising is frequently coordinated with sales promotion activities to provide free product samples, premiums, or value-added incentives. For example, a manufacturer might offer free merchandise to channel intermediaries who purchase a stated quantity of product within a specified time frame. A 7-Up bottler, for example, might offer a free case of 7-Up for every 10 cases purchased by a retailer. On the consumer side,

EXHIBIT 6.12 Comparison of Sales Force Compensation Methods.

Method Most Useful When: Advantages Disadvantages Straight Salary • Salespeople are new

• Salespeople move into new territories

• Products require intense presale and postsale service

• Easy to administer

• Gives salespeople more security

• Greater control over salespeople

• More predictable selling expenses

• Little or no incentive for salespeople

• Salespeople require close supervision

Straight Commission

• Aggressive selling is required

• Nonselling tasks can be minimized

• The firm outsources some selling functions

• Gives salespeople maximum incentive

• Ties selling expenses to sales volume

• Can use differential commissions for different products to boost sales

• Less security for salespeople

• Managers have less control over salespeople

• Small accounts may receive less service

Combination • Sales territories have similar sales potential

• The firm wants to provide incentive and still have some control

• Good balance of incentive and security for salespeople

• Selling expenses are less predictable

• May be difficult to administer

SOURCE: Adapted from William M. Pride and O.C. Ferrell, Marketing (Mason, OH: South-Western: Cengage Learning, 2010), p. 530.

Chapter 6 • The Marketing Program 191

Coca-Cola’s innovative “Don’t Dew it” promotion took steps to increase market share of the company’s Vault brand over Pepsi’s Mountain Dew. In a bold move, Coca-Cola offered free samples of Vault by giving away 16, 20, or 24-ounce Vaults to consumers who purchased a 20-ounce Mountain Dew.25

Consumer Sales Promotion Any member of the supply chain can initiate consumer sales promotions, but manu- facturers and retailers typically offer them. For manufacturers, sales promotion activities represent an effective way to introduce new products or promote estab- lished brands. Coupons and product sampling are frequently used during new prod- uct launches to stimulate interest and trial. Retailers typically offer sales promotions to stimulate customer traffic or increase sales at specific locations. Coupons and free products are common examples, as are in-store product demonstrations. Many retai- lers are known for their sales promotions such as the free toys that come with kid’s meals at McDonald’s, Burger King, and other fast food establishments. A potentially limitless variety of sales promotion methods can be used in consumer markets. Truthfully, developing and using these methods is limited only by the creativity of the firm offering the promotion. However, firms will typically offer one or more of the following types of sales promotions to consumers:

• Coupons. Coupons reduce the price of a product and encourage customers to try new or established brands. Coupons can be used to increase sales volume quickly, to attract repeat purchasers, or even to introduce new product sizes or models. While coupon cutting (cutting coupons from newspapers or direct mail) was once quite common, the practice declined over the years. This mentality changed with the latest economic recession as many consumers returned to using coupons, especially new mobile coupons. Exhibit 6.13 demonstrates the remarkable growth in mobile coupon users and its connection to mobile device ownership.

• Rebates. Rebates are very similar to coupons except that they require more effort on the consumer’s part to obtain the price reduction. Although consumers prefer coupons because of the ease of use, most firms prefer rebates for several reasons. First, firms have more control over rebates because they can be launched and ended very quickly. Second, a rebate program allows the firm to collect important consumer information that can be used to build customer data- bases. The best reason is that most consumers never bother to redeem rebate offers. This allows a firm to entice customers to purchase a product with only a minimal loss of profit.

• Samples. Free samples are one of the most widely used consumer sales promo- tion methods. Samples stimulate trial of a product, increase volume in the early stages of the product’s life cycle, and encourage consumers to actively search for a product. Samples can be distributed through the mail, attached to other products, and given out through personal selling efforts or in-store displays. Samples can also be distributed via less direct methods. For example, free sam- ples of soap, shampoo, coffee, or sunscreen might be placed in hotel rooms to create consumer awareness of new products.

• Loyalty Programs. Loyalty programs, or frequent-buyer programs, reward loyal customers who engage in repeat purchases. These programs are popular in many industries due to their potential to dramatically increase profits over the long term. We are all familiar with the frequent-flier programs offered by major airlines. Other companies, such as hotels, auto rental agencies, and credit card companies, offer free goods or services for repeat purchases. For instance, the Discover Card provides a one percent cash-back bonus to each cardholder at the end of the year, and Hallmark rewards loyal customers with the Hallmark

192 Chapter 6 • The Marketing Program

Gold Crown Card, which allows frequent buyers to accrue points that are redeemable for merchandise and discounts.

• Point-of-Purchase Promotion. Point-of-purchase (POP) promotion includes displays, in-store demonstrations, counter pieces, display racks, or self-service cartons that are designed to build traffic, advertise a product, or induce impulse purchases. POP promotions are highly effective because they are used in a store where consumers make roughly 70 to 80 percent of all purchase decisions.

• Premiums. Premiums are items offered free or at a minimum cost as a bonus for purchasing a product. Examples of premiums include a free car wash with a gas- oline fill-up, a free toothbrush with a purchase of a tube of toothpaste, and the toys offered inside a McDonald’s Happy Meal. Premiums are good at increasing consumption and persuading consumers to switch brands.

• Contests and Sweepstakes. Consumer contests, games, and sweepstakes encourage potential consumers to compete for prizes or try their luck by submit- ting their names in a drawing for prizes. In addition to being valuable informa- tion collection tools, contests and sweepstakes are good at attracting a large number of participants and generating widespread interest in a product. Because

EXHIBIT 6.13 Growth in Adult Mobile Coupon Users.

0 2013

US Adult Mobile Coupon Users and Penetration 2013–2016 millions, % of mobile device users and % of digital coupon users

2014 2015 2016

100

120

Adult mobile coupon users

Note: ages 18+; individuals who used a mobile device to redeem a coupon/code obtained from app, mobile internet, QR code/other mobile barcode or SMS for online or offline shopping at least once during the calender year; includes group buying coupons purchased via mobile device

% of digital coupon users

% of mobile device users

28.4%

61.4%

70.0%

35.7% 41.2%

45.7%

76.5% 82.0%

59.3%

78.7%

92.5%

104.1%

SOURCE: “Mobile Coupons Are Growing in Usage,” Klick Wire, November 19, 2014, via eMarketer (https://www.klick.com/ health/news/blog/mobile/mobile-coupons-are-growing-in-usage/).

Chapter 6 • The Marketing Program 193

they require no skill to enter, sweepstakes are an effective way to increase sales or market share in the short term.

• Direct Mail. Direct mail, which includes catalog marketing and other printed material mailed to individual consumers, is a unique category because it incorpo- rates elements of advertising, sales promotion, and distribution into a coordi- nated effort to induce customers to buy. The use of direct mail has grown tremendously in recent years due to consumer time constraints, relatively low cost, and the advent of sophisticated database management tools.

Firms can use any one or all of these consumer promotion methods in their over- all IMC program. However, the choice of one or more methods must be made in con- sideration of the firm’s IMC objectives. Furthermore, the choice must also consider the use of sales promotions by competitors and whether a particular method involves ethical or legal dimensions. Consumer sweepstakes, in particular, have specific legal requirements to ensure that each entrant has an equally likely chance of winning.

Business (Trade) Sales Promotion Sales promotion in business markets, or trade promotion, is generally the largest expense in a firm’s total sales promotion budget. By targeting channel intermediaries with promotional activities, manufacturers hope to push their products through the channel by increasing sales and encouraging increased effort among their channel partners. Manufacturers use many of the same promotional methods that target con- sumers; however, a number of sales promotion methods are unique to business markets:

• Trade Allowances. Manufacturers offer a number of different trade allowances, or price reductions, to their channel intermediaries. Buying allowances are price reductions for purchasing specified quantities of a product at a single time (the equivalent of a bulk discount). Related to this is a buy-back allowance where the

D ai ly M ai l/ Re x / A la m y

The toy prizes inside a McDonald’s Happy Meal may be the best-known consumer sales promotion of all time.

194 Chapter 6 • The Marketing Program

reduction is proportional to the total amount of product purchased during the time frame of the promotional offer. Finally, a merchandise allowance is a man- ufacturer’s agreement to pay intermediaries a specific sum of money in exchange for specific promotional efforts such as special displays or advertising. In each case, the goal of the allowance is to induce intermediaries to perform specific actions.

• Free Merchandise. Manufacturers sometimes offer free merchandise to intermediaries instead of quantity discounts. Typically, they provide the free merchandise to reduce invoice costs as a way of compensating the intermediary for other activities that assist the manufacturer.

• Cooperative Advertising, Cooperative advertising is an arrangement whereby a manufacturer agrees to pay a certain amount of an intermediary’s media cost for advertising the manufacturer’s products. This is a very popular sales promo- tion method among retailers.

• Training Assistance and Sales Incentives. In some cases, a manufacturer can offer free training to an intermediary’s employees or sales staff. This typically occurs when the products involved are rather complex. Selling incentives come in two general forms: push money and sales contests. The intermediary’s sales staff receives push money in the form of additional compensation to encourage a more aggressive selling effort for a particular product. This method is expensive and should be used carefully to avoid any ethical or legal issues. Sales contests encour- age outstanding performance within an intermediary’s sales force. Sales personnel can be recognized for outstanding achievements by receiving money, vacations, computers, or even cars for meeting or exceeding certain sales targets.

Trade sales promotion encompasses a wide variety of activities and is vital when a manufacturer needs the cooperation and support of the channel to fulfill its own sales and marketing objectives. This is particularly true when a manufacturer must obtain support for a new product launch or a new consumer sales promotion. Given the importance of integrated supply chains, it should not be surprising that effective trade promotion is also vital to fulfilling a firm’s distribution strategy.

LESSONS FROM CHAPTER 6

The marketing program:

• refers to the strategic combination of the four basic marketing mix elements: product, price, distribution, and promotion.

• has as its outcome a complete offering that consists of an array of physical (tangible), service (intangible), and symbolic (perceptual) attributes designed to satisfy customers’ needs and wants.

• strives to overcome commoditization by enhancing the service and symbolic ele- ments of the offering.

Product strategy:

• lies at the heart of every organization in that it defines what the organization does and why it exists.

• is about delivering benefits that enhance a customer’s situation or solve a custo- mer’s problems.

The product portfolio:

• is used in both consumer (convenience, shopping, specialty, and unsought pro- ducts) and business (raw materials, component parts, process materials, MRO supplies, accessory equipment, installations, and business services) markets.

Chapter 6 • The Marketing Program 195

• is used in most firms due to the advantages of selling a variety of products rather than a single product.

• consists of a group of closely related product items (product lines) and the total group of products offered by the firm (product mix).

• involves strategic decisions such as the number of product lines to offer (vari- ety), as well as the depth of each product line (assortment).

• can create a number of important benefits for firms, including economies of scale, package uniformity, standardization, sales and distribution efficiency, and equivalent quality beliefs.

The challenges of service products:

• stem mainly from the fact that services are intangible. Other challenging charac- teristics of services include simultaneous production and consumption, perish- ability, heterogeneity, and client-based relationships.

• include the following issues: • service firms experience problems in balancing supply (capacity) with

demand. • service demand is time-and-place dependent because customers or their

possessions must be present for delivery. • customers have a difficult time evaluating the quality of a service before it is

purchased and consumed. • service quality is often inconsistent and very difficult to standardize across

many customers. • the need for some services is not always apparent to customers. Conse-

quently, service marketers often have trouble tying their offerings directly to customers’ needs.

New product development:

• is a vital part of a firm’s efforts to sustain growth and profits. • considers six strategic options related to the newness of products:

• New-to-the-world products (discontinuous innovations)—which involve a pioneering effort by a firm that leads to the creation of an entirely new market.

• New product lines—which represent new offerings by the firm, but they become introduced into established markets.

• Product line extensions—which supplement an existing product line with new styles, models, features, or flavors.

• Improvements or revisions of existing products—which offer customers improved performance or greater perceived value.

• Repositioning—which involves targeting existing products at new markets or segments.

• Cost reductions—which involves modifying products to offer performance similar to competing products at a lower price.

• depends on the ability of the firm to create a differential advantage for the new product.

• typically proceeds through five stages: idea generation, screening and evalua- tion, development, test marketing, and commercialization.

Pricing:

• is a key factor in producing revenue for a firm. • is the easiest of all marketing variables to change. • is an important consideration in competitive intelligence. • is considered to be the only real means of differentiation in mature markets pla-

gued by commoditization. • is among the most complex decisions to be made in developing a marketing plan.

196 Chapter 6 • The Marketing Program

The key issues in pricing strategy include:

• the firm’s cost structure. • perceived value. • the price/revenue relationship. • pricing objectives. • price elasticity.

The firm’s cost structure:

• is typically associated with pricing through the use of breakeven analysis or cost- plus pricing.

• should not be the driving force behind pricing strategy because different firms have different cost structures.

• should be used to establish a floor below which prices cannot be set for an extended period of time.

Perceived value:

• is a difficult term to define because it means different things to different people. • is defined as a customer’s subjective evaluation of benefits relative to costs to

determine the worth of a firm’s product offering relative to other product offerings.

The price/revenue relationship:

• is usually based on two general pricing myths: (1) when business is good, a price cut will capture greater market share, and (2) when business is bad, a price cut will stimulate sales.

• means that firms should not always cut prices, but should instead find ways to build value into the product and justify the current, or a higher, price.

Price elasticity:

• refers to customers’ responsiveness or sensitivity to changes in price. • can increase under these conditions:

• when substitute products are widely available. • when the total expenditure is high. • when changes in price are noticeable to customers. • when price comparison among competing products is easy.

• can decrease under these conditions: • when substitute products are not available. • when customers perceive products as being necessities. • when the prices of complementary products go down. • when customers believe that the product is just worth the price. • when customers are in certain situations associated with time pressures or

purchase risk. • when products are highly differentiated from the competition.

Pricing strategy in services:

• is critical because price may be the only cue to quality that is available in advance of the purchase experience.

• becomes more important—and more difficult—when: • service quality is hard to detect prior to purchase. • the costs associated with providing the service are difficult to determine. • customers are unfamiliar with the service process. • brand names are not well established. • the customer can perform the service themselves.

Chapter 6 • The Marketing Program 197

• the service has poorly defined units of consumption. • advertising within a service category is limited. • the total price of the service experience is difficult to state beforehand.

• is often based on yield management systems that allow a firm to simultaneously control capacity and demand in order to maximize revenue and capacity utilization.

Major base pricing strategies include:

• price skimming. • price penetration. • prestige pricing. • value-based pricing (EDLP). • competitive matching. • non-price strategies.

Strategies for adjusting prices in consumer markets include:

• discounting. • reference pricing. • price lining. • odd pricing. • price bundling.

Strategies for adjusting prices in business markets include:

• trade discounts. • discounts and allowances. • geographic pricing. • transfer pricing. • barter and countertrade.

Supply chain strategy:

• is one of the most important strategic decisions for many marketers. • has remained essentially invisible to customers because the processes occur

behind the scenes. • is important to providing time, place, and possession utility for consumer and

business buyers. • consists of two interrelated components: marketing channels and physical

distribution. • is only effective when all channel members are integrated and committed to con-

nectivity, community, and collaboration.

Marketing channels:

• are organized systems of marketing institutions through which products, resources, information, funds, and/or product ownership flow from the point of production to the final user.

• greatly increase contact efficiency by reducing the number of contacts neces- sary to exchange products.

• perform a variety of functions: sorting, breaking bulk, maintaining inventories, maintaining convenient locations, and providing services.

Marketing channel structures include:

• exclusive distribution, where a firm gives one merchant or outlet the sole right to sell a product within a defined geographic region.

• selective distribution, where a firm gives several merchants or outlets the right to sell a product in a defined geographic region.

198 Chapter 6 • The Marketing Program

• intensive distribution, which makes a product available in the maximum number of merchants or outlets in each area to gain as much exposure and as many sales opportunities as possible.

Power in the supply chain:

• can lead to conflict as each firm attempts to fulfill its mission, goals, objectives, and strategies by putting its own interests ahead of other firms.

• can result from five different sources: legitimate power, reward power, coercive power, information power, and referent power.

Trends in marketing channels include:

• technological improvements, such as the growth of electronic commerce and the increasing use of radio frequency identification (RFID).

• outsourcing and offshoring of work activities, particularly information technol- ogy operations and supporting functions.

• the growth of nontraditional channels, such as e-commerce, catalog and direct marketing, direct selling, home shopping networks, vending, and direct response advertising.

• the growth of dual distribution, as firms use multiple channels to reach various markets.

Integrated marketing communication:

• includes conveying and sharing meaning between buyers and sellers, either as individuals, firms, or between individuals and firms.

• includes the traditional elements of the promotion mix: advertising, public rela- tions, personal selling, and sales promotion.

• refers to the strategic, coordinated use of promotion to create one consistent message across multiple channels to ensure maximum persuasive impact on the firm’s current and potential customers.

• takes a 360-degree view of the customer that considers every contact that a cus- tomer or potential customer may have in his or her relationship with the firm.

• typically sets goals and objectives for the promotional campaign using the AIDA model—attention, interest, desire, and action.

• can change depending on whether the firm uses a pull or push strategy with respect to its supply chain.

Advertising:

• is identified as paid, nonpersonal communication transmitted through the media such as television, radio, magazines, newspapers, direct mail, outdoor displays, the Internet, and mobile devices.

• is rapidly expanding online as consumers spend less time with traditional media. • offers many benefits because it is extremely cost efficient when it reaches a

large number of people. On the other hand, the initial outlay for advertising can be expensive.

• is hard to measure in terms of its effectiveness in increasing sales.

Public relations:

• is the element of an IMC program that tracks public attitudes, identifies issues that may elicit public concern, and develops programs to create and maintain positive relationships between a firm and its stakeholders.

• can be used to promote the firm, its people, its ideas, and its image and even to create an internal shared understanding among employees.

• can improve the public’s general awareness of a company and can create spe- cific images such as quality, innovativeness, value, or concern for social issues.

Chapter 6 • The Marketing Program 199

• is often confused with publicity; however, publicity is more narrowly defined to include the firm’s activities designed to gain media attention through articles, editorials, or news stories.

• can involve the use of a wide variety of methods, including news or press releases, feature articles, white papers, press conferences, event sponsorship, product placement, and employee relations.

Personal selling:

• is paid, personal communication that attempts to inform customers about pro- ducts and persuade them to purchase those products.

• is the most precise form of communication because it assures companies that they are in direct contact with an excellent prospect.

• has a serious drawback of high cost per contact. • goals are typically associated with finding prospects, informing prospects, per-

suading prospects to buy, and keeping customers satisfied through follow-up service after the sale.

• has evolved to take on elements of customer service and marketing research in order to generate repeat sales and develop ongoing relationships with customers.

• and sales management activities include the development of sales force objec- tives, determining the size of the sales force, recruiting and training salespeople, and controlling and evaluating the sales force.

• has been greatly impacted by technological advances, especially online sales training and sales automation systems that push integrated customer, competi- tive, and product information toward the salesperson.

Sales promotion:

• involves activities that create buyer incentives to purchase a product or that add value for the buyer or the trade.

• can be targeted toward consumers, channel intermediaries, or the sales force. • has one universal goal: to induce product trial and purchase. • is typically used in support of advertising, public relations, or personal selling

activities rather than as a stand-alone promotional element. • directed toward consumers:

• can be initiated by any member of the supply chain, but manufacturers or retailers typically offer them.

• represents an effective way to introduce new products or promote estab- lished brands.

• can include such activities as coupons, rebates, samples, loyalty programs, point-of-purchase promotion, premiums, contests and sweepstakes, and direct mail.

• directed toward the trade (business markets): • is undertaken to push products through the channel by increasing sales and

encouraging increased effort among channel partners. • uses many of the same promotional methods that are targeted toward con-

sumers; however, it involves a number of unique methods including trade allowances, free merchandise, training assistance, cooperative advertising, and selling incentives offered to an intermediary’s sales force.

NOTES 1. “Investor Relations,” Barnes & Noble Corporate website (barnesandnobleinc.com/

for_investors/for_investors.html), accessed March 29, 2015; Matt Townsend, “Barnes & Noble Investor Pushes Management to Spin Off Nook,” BusinessWeek Online,

200 Chapter 6 • The Marketing Program

February 18, 2012 (http://www.businessweek.com/news/2012-02-18/barnes-noble- investor-pushes-management-to-spin-off-nook.html); Phil Wahba, “Barnes & Noble, Microsoft Go Separate Ways as Nook Business Shrinks,” Fortune, December 4, 2014 (http://fortune.com/2014/12/04/barnes-noble-microsoft-go-separate-ways-as-nook- business-shrinks/); Phil Wahba, “In About-Face, Barnes & Noble Now Wants to Keep Nook,” Fortune, February 26, 2015 (http://fortune.com/2015/02/26/barnes-noble-college- prospects/); Phil Wahba, “Who’da Thunk? Physical Books are Barnes & Noble’s Saving Grace,” Fortune, March 10, 2015 (http://fortune.com/2015/03/10/barnes-and-noble/); Tim Worstall, “Barnes and Noble and the Efficient Markets Hypothesis,” Forbes, May 1, 2012 (http://www.forbes.com/sites/timworstall/2012/05/01/barnes-and-noble-and-the- efficient-markets-hypothesis).

2. The Hampton Inn Guarantee (http://hamptoninn3.hilton.com/en/about/why-hampton/ index.html), accessed March 29, 2015.

3. Garmin corporate website (http://www.garmin.com/en-US), accessed March 29, 2015; Sam Mattera, “Apple Could Be About to Devastate Garmin Shareholders,” The Motley Fool, March 17, 2015 (http://www.fool.com/investing/general/2015/03/17/apple-could-be- about-to-devastate-garmin-sharehold.aspx).

4. These facts are from Economic Intelligence Unit, “Worldwide Cost of Living 2014” (http://akgul.bilkent.edu.tr/eiu/WCOL.pdf), accessed March 29, 2015.

5. Valarie A. Zeithaml, “Consumer Perceptions of Price, Quality, and Value: A Means-End Model and Synthesis of Evidence,” Journal of Marketing, 52(July 1988), 2–22.

6. This discussion is based on material from Charley Kyd, “Tempted to Cut Prices? It’s Probably Time to Raise Them,” Today’s Business, Fall 2000, 3.

7. For further information, see the Southwest Airlines website (http://www.southwest. com).

8. Deborah Catalano Ruriani, “Inventory Velocity: All the Right Moves,” Inbound Logistics, November 2005, 36.

9. See Edward W. Davis and Robert E. Speckman, The Extended Enterprise (Upper Saddle River, NJ: Prentice-Hall Financial Times, 2004).

10. See Edward W. Davis and Robert E. Speckman, The Extended Enterprise (Upper Saddle River, NJ: Prentice-Hall Financial Times, 2004), p. 15.

11. “Del Monte Foods Company,” Wikinvest (http://www.wikinvest.com/stock/Del_Monte_ Foods_Company_(DLM)), accessed March 29, 2015.

12. Robert Dawson, Secrets of Power Negotiation, 2nd ed. (Franklin Lakes, NJ: Career Press, 1999).

13. U.S. Census Bureau, E-Stats, May 22, 2014 (http://www.census.gov/econ/estats/2012_ e-stats_report.pdf).

14. Bob Violino, “What is RFID?” RFID Journal (http://www.rfidjournal.com/articles/view? 1339), accessed March 29, 2015.

15. These facts are from EcoSensa, “The Up and Down of Walmart RFID Implementation,” RFID Blog, March 24, 2009 (http://ecosensa.com/rfidblog/2009/03/24/Walmart-rfid- implementation); Constance L. Hays, “What Walmart Knows About Customers’ Habits,” New York Times, November 14, 2004; Hollis Tibbetts, “Integration on the Edge: Data Explosion and Next-Gen Integration,” EbizQ, September 24, 2010 (http://www.ebizq. net/blogs/integrationedge/2010/09/how-fast-things-change.php); Thomas Wailgum, “Walmart is Dead Serious About RFID,” CIO, January 18, 2008 (http://www.cio.com/ article/173702/Wal_Mart_Is_Dead_Serious_About_RFID); Walmart corporate website (http://corporate.walmart.com/our-story/), accessed March 29, 2015.

16. The material in this section is based on Davis and Speckman, The Extended Enterprise, pp. 109–129.

17. These facts are from Mark Atterby, “Captive Outsourcing is Alive and Well,” The Sauce, August 31, 2011 (http://thesauce.net.au/2011/08/captive-outsourcing-is-alive-and-well).

18. Martin Murray, “3PL’s Used by Three Quarters of the Fortune 500,” Martin’s Logistics Blog, January 28, 2009 (http://logistics.about.com/b/2009/01/28/3pls-used-by-three- quarters-of-the-fortune-500.htm).

19. These facts are from Nicholas Cameron, “Sponsorship Overview & Case Studies,” SponsorMap, March 29, 2010 (http://www.slideshare.net/SponsorMap/some- sponsorship-roi-case-studies); Andrew Hampp, “How ‘Top Chef’ Cooks Up Fresh Integrations,” Advertising Age, October 30, 2008 (http://adage.com/madisonandvine/ article?article_id=132146); Pat McDonough, “As TV Screens Grow, So Does U.S. DVR

Chapter 6 • The Marketing Program 201

Usage,” Nielsenwire, February 29, 2012 (http://blog.nielsen.com/nielsenwire/ media_entertainment/as-tv-screens-grow-so-does-u-s-dvr-usage); Abe Sauer, “The Avengers Product Placement Brandcameo Scorecard,” brandchannel, May 7, 2012 (http://www.brandchannel.com/home/post/Brandcameo-050712-The-Avengers.aspx); Adam Stites, “Watch NCAA Basketball Tournament Online with March Madness Live,” SBNation, March 28, 2015 (http://www.sbnation.com/college-basketball/2015/3/28/ 8304053/ncaa-tournament-2015-live-stream-elite-8-saturday); Rich Thomaselli, “How CBS Sports Can Use March Madness Success to Grow Online,” March 11, 2009 (http:// adage.com/digital/article?article_id=135186); Don Walker, “March Madness on Demand Goes to a Pay Model,” Milwaukee Journal Sentinel, February 18, 2012 (http://www. jsonline.com/blogs/sports/139574443.html); Adam Westlake “Apple Tops Movie Product Placement List of 2014,” Slashgear, March 7, 2015 (http://www.slashgear.com/apple- tops-movie-product-placement-list-of-2014-07372565/).

20. Glen Llopis, “Without Hispanics, America’s Corporations Can’t Grow and Compete,” Forbes, March 17, 2015 (http://www.forbes.com/sites/glennllopis/2015/03/17/without- hispanics-americas-corporations-cant-grow-and-compete/).

21. American Association of Advertising Agencies, January 22, 2013 (http://www.aaaa.org/ news/bulletins/Documents/7480.pdf).

22. Brian Hartman, “Reebok to Refund $25 Million for False Advertising,” ABC News, September 28, 2011 (http://abcnews.go.com/blogs/health/2011/09/28/reebok-to-refund- 25-million-for-false-advertising); Jennifer Kerr, “FTC: Skechers Deceived Consumers with Shoe Ads,” Chicago Sun-Times, May 16, 2012 (http://www.suntimes.com/business/ 12574235-420/ftc-skechers-deceived-consumers-with-shoe-ads.html).

Promotion Marketing Association (http://www.pmalink.org/resources/pma2005report. pdf).

25. Nathalie Zmuda, “Coke: Buy 1 Rival, Get our Brand Free,” Advertising Age, March 9 and 16, 2009, pp. 1, 19; “Coke Promotion Gives Free Vault to Mountain Dew Customers,” Convenience Store News, April 10, 2009, p. 1; “Coca Cola Brings Vault Drink Head to Head with Mtn Dew,” yumsugar, March 11, 2009 (http://www.yumsugar. com/2912146).

202 Chapter 6 • The Marketing Program

Brandingand Positioning

INTRODUCTION As the elements of the marketing program come together to create the complete offering, marketers must also consider how the marketing program will be used to create effective branding and positioning. These decisions are critical because they create differentiation among competing offerings in the marketplace. This differenti- ation is the antidote to commoditization; however, it is becoming increasingly diffi- cult for firms to brand and position their offerings in meaningful ways. For the firms that are successful, having a solid branding and positioning strategy is truly priceless. As Beyond the Pages 7.1 illustrates, individuals who purchase a Steinway piano buy much more than a musical instrument. They also get exceptional crafts- manship, unparalleled customer service, a highly prestigious brand name, and over 160 years of technical innovation.

While the concept of a brand may seem relatively simple to understand, brand- ing strategy can actually be quite complex. From a technical point of view, a brand is a combination of name, symbol, term, or design that identifies a specific product. Brands have two parts: the brand name and the brand mark. The brand name is the part of a brand that can be spoken, including words, letters, and numbers (Honda, 7-Eleven, WD-40, GMC, Citi). The brand mark—which includes symbols, figures, or a design—is the part of a brand that cannot be spoken. Good brand marks, like McDonald’s golden arches, Nike’s swoosh, and Prudential’s rock, effectively com- municate the brand and its image without using spoken words. Brand marks are also useful in advertising and product placement, such as when college football broadcasts clearly depict the Nike logo on the clothing and uniforms of both coa- ches and players.

While these technical aspects of branding are important, branding strategy involves much more than developing a clever brand name or unique brand mark. To be truly effective, a brand should succinctly capture the total offering in a way that answers a question in the customer’s mind.2 Good brands are those that immediately come to mind when a customer has a problem to be solved or a need to be fulfilled. Consider these questions that might be asked by a customer:

• Where can I find information quickly? • Where can I get a quick meal and make my kids happy? • Where can I buy everything I need, all at decent prices? • Where can I get the best deal on car insurance? • How do I find a value-priced hotel in midtown Manhattan?

CHAPTER

203

How do you answer these questions? How many customers do you think would give the following answers: Google, McDonald’s, Walmart, GEICO, and Expedia? To successfully develop a brand, the firm should position the offering (which includes all tangible, intangible, and symbolic elements arising from the marketing program) as the answer to questions like these. Customers tend to buy offerings whose combi- nation of attributes is the best solution to their problems. As shown in Exhibit 7.1,

BEYOND THE PAGES 7.1

Steinway: The Finest Piano in the World1

One of the most dominant strengths any firm can possess occurs when the firm enjoys a superior brand image that is backed by patent protection. Such is the case for Steinway and Sons, makers of the world’s finest pianos. For over 160 years, Steinway’s art and craftsmanship have made it the world’s most renowned brand for high-end, “concert hall quality” pianos. In fact, virtually every top pianist in the world per- forms on a Steinway.

The company holds over 130 technical patents and innovations that distinguish its pia- nos from all others. Each piano made in the Astoria (New York) and Hamburg (Germany) factories takes 9 to 12 months to complete and is hand assembled from 12,000 parts—most of them also made by hand. Despite its reputation, Steinway is not a large company. It makes roughly 2,500 pianos a year—a number dwarfed by other firms in the industry. Steinway, how- ever, does not define success in terms of num- bers, but in its reputation. Steinway is the piano of choice for concert halls, composers, pro- fessional musicians, and wealthy customers. Although the company accounts for only 2 per- cent of piano sales in the United States, it earns over 35 percent of the industry’s profit. Custo- mers enjoy the quality, beauty, and reputation of a Steinway piano, and don’t mind paying the $40,000 to $250,000 price tag. In fact, many argue that a Steinway is more akin to a work of art than a musical instrument. The advantages earned from this type of reputation and cus- tomer loyalty are hard to beat.

However, Steinway’s stellar image and repu- tation presented a problem for the company at one point in its history. While Steinway domi- nated the upper end of the piano market, the company did not compete in the rapidly growing and much larger entry-level and mid-level piano markets. These markets were dominated by

Asian brands such as Yamaha and Kawai— good names in their own right, but not in the same league as Steinway. Piano dealers were forced to stock these brands alongside Stein- ways in order to meet the needs of other customer segments. The challenge for Steinway was to find a way to compete in these markets without damaging the brand equity in the Steinway name.

The company’s solution involved the launch of two new brands: “Boston” for the mid-level market and “Essex” for the entry-level market. Both the Boston and the Essex are manufac- tured in Japan and sold through exclusive chan- nels. The decision to launch these new brands was agonizing for Steinway’s management. The company’s top management once said, “There is no such thing as a cheaper Steinway.” With that in mind, the launch of the Boston and Essex represented a real risk for the company. More recently, Steinway introduced the “Spirio”—a player piano system that can play, on its own, over 1,700 recordings across a wide range of musical genres. The player system has no effect on the touch or sound of the piano itself, ensur- ing that the legendary Steinway quality is retained.

Steinway argues that the only way to main- tain brand equity, especially with a name like Steinway, is to take a long-term view and move very slowly. This is the company’s strat- egy with its move into Asian markets—the home turf of Steinway’s less expensive rivals. The company has expanded distribution in Japan and China to the point where it now earns over 30 percent of its business from out- side the United States. Steinway’s sales in China alone are growing at an average of 20 percent each year. Steinway also raises its prices 3 to 4 percent each year—another long-term strategy aimed at maintaining brand equity. The com- pany argues that you cannot put a discounted price on the passion associated with the world- wide icon like Steinway.

204 Chapter 7 • Branding and Positioning

brands may have many different attributes that make up the way customers think about them. For example, the iPhone possesses many different attributes that make up customers’ overall knowledge about the brand: alliances (AT&T, Verizon, Sprint, Gorilla Glass), company (Apple), extensions (iTunes, Beats Audio, accessories),

Ke n W ol te r/ Sh ut te rs to ck .c om

This symbol, recognizable around the world, embodies a number of important branding attributes.

EXHIBIT 7.1 Potential Brand Attributes.

BRAND

Other

Brands

PlacesPeople

Causes

Third-Party

Endorsements Events

Country of

Origin

Channels

Employees

Endorsers

Company Branded

Ingredients ExtensionsAlliances

Things

SOURCE: From Kotler, Philip, and Kevin Keller, A Framework for Marketing Management, 4th ed., © N/A. Electronically reproduced by permission of Pearson Education Inc., Upper Saddle River, New Jersey.

Chapter 7 • Branding and Positioning 205

employees (Tim Cook, Steve Jobs), endorsers (celebrities such as Samuel L. Jackson and Zooey Deschanel), events (Macworld Expo, Apple keynote speeches), and chan- nels (the Apple Store). Other brands are enhanced via strong country-of-origin (Guinness, IKEA), branded ingredients (Dell computers use Microsoft and Intel com- ponents), causes (Ben and Jerry’s), and endorser (Nike) effects.

STRATEGIC ISSUES IN BRANDING When a firm considers its branding strategy, the marketing program, especially the product, becomes a central focus. Before we examine some of the key strate- gic issues in branding strategy, however, we need to discuss the closely related topic of corporate branding. Most firms consider their corporate brands to be equally as important as individual product-related brands. In fact, product-related brands and corporate brands are clearly intertwined. Ben & Jerry’s Ice Cream, for example, is an ardent participant in many social causes such as global warm- ing and social injustice. In this case, the company’s corporate brand clearly plays a role in branding and positioning its ice cream products. In some companies, the corporate brand dominates. For example, IBM advertises that it provides infra- structure and solutions for e-business. Although the company offers a wide array of products for e-business, many of IBM’s advertisements do not name these products or explain how their infrastructure and solutions actually work. Instead, the purpose of the advertisements is to give potential customers the impression that IBM is a company that understands e-business and that has the ability to solve problems.

Corporate branding activities are typically aimed at a variety of stakeholders, including customers, shareholders, advocacy groups, government regulators, and the public at large. These activities are designed to build and enhance the firm’s rep- utation among these groups, and to rebuild the firm’s reputation when unexpected and unfavorable events occur. Corporate branding and reputation are critical to effective product-related branding and positioning as they create trust between the firm and its stakeholders. Exhibit 7.2 lists U.S. firms having some of the strongest and weakest public reputations. Note that firms with lower reputation scores, such as BP and Goldman Sachs, have experienced a number of scandals and legal pro- blems in recent years. Many major financial corporations currently have weak repu- tations because of the financial scandals that recently plagued the industry. Faith in the financial sector is at an all-time low, and it may take years for these companies to rebuild their reputations.

The range of scores in Exhibit 7.2 is quite telling of the effects that positive and negative reputations can have on a firm. Wegmans’ reputation score is closely tied to its treatment of employees, community giving, sustainability practices, and focus on organic products. Contrast this to AIG, which has been at or near the bottom of the ratings for many years. Not only was AIG implicated in financial scandals and required government bailout money, but AIG rewarded top executives with bonuses and hosted conferences in luxurious resorts after receiving the money. AIG’s actions clearly worsened its reputation and made it harder to compete in the competitive financial services industry. These examples demonstrate the important connections between corporate branding and reputation and the activities that companies use to successfully brand and position their product offerings.

Basic Branding Decisions To brand or not to brand: There really is no question. Virtually every product is associated with some type of branding. So-called “generic” products generally don’t exist today, except in some grocery items and perhaps commodities like sugar,

206 Chapter 7 • Branding and Positioning

wheat, and corn. The advantages of branding are so compelling that the real question is not “why?” but “how?” Some of the many advantages of branding include:

• Product Identification. Brands make identifying and locating products easier for customers.

• Comparison Shopping. Brands assist customers in evaluating competing products.

• Shopping Efficiency. Brands speed up the buying process and make repeat purchases easier by reducing search time and effort.

• Risk Reduction. Brands allow customers to buy known products, thereby reducing the risk of purchase.

EXHIBIT 7.2 The Strongest and Weakest U.S. Corporate Reputations.

Rank Company Reputation Quotient®

The Strongest Reputations 1. Wegmans Food Markets 84.36 2. Amazon 83.72 3. Samsung 81.98 4. Costco 81.69 5. Johnson & Johnson 80.88 6. Kraft Foods 80.83 7. L.L. Bean 80.78 8. Publix Supermarkets 80.73 9. Apple 80.69 10. Google 80.44 11. Berkshire Hathaway 80.28 12. Walt Disney Company 80.04 13. Sony 79.93 14. CVS (CVS Health) 79.83 15. Microsoft 79.74

The Weakest Reputations 86. United Airlines 64.91 87. JPMorgan Chase & Co. 63.98 88. General Motors 63.89 89. Citigroup 62.19 90. BP 62.01 91. Bank of America 60.73 92. Charter Communications 60.30 93. Comcast 60.04 94. Koch Industries 59.89 95. Sears Holdings 59.79 96. Halliburton 59.63 97. Monsanto 59.18 98. Dish Network 58.07 99. AIG 55.23 100. Goldman Sachs 55.07

Chapter 7 • Branding and Positioning 207

• Product Acceptance. New products released under a known brand name are accepted and adopted more quickly.

• Enhanced Self-Image. Brands can convey status, image, and prestige. • Enhanced Product Loyalty. Branding increases psychosocial identification

with a product.

In addition to these general benefits of branding, specific branding decisions can also create other benefits. For example, one key branding decision involves the distinction between manufacturer brands and private-label brands (brands owned by the merchants that sell them). Private-label brands, sometimes called store brands (but never generic brands), range from well-known products like Gap clothing and Craftsman tools, to other products such as Walmart’s Ol’ Roy dog food, Equate aspirin, or Sam’s Choice soft drinks. Strategically, the choice to sell manufacturer brands or private-label brands is not an either-or decision. As Exhibit 7.3 illus- trates, both types of brands have important advantages. For that reason, many dis- tributors, wholesalers, and retailers carry both types of brands. For example, department stores carry manufacturer brands—such as Nike, Polo, and Hilfiger— because customers expect to find them. Hence, manufacturer brands are impor- tant in driving customer traffic. They also give customers confidence that they are buying a widely known brand from a respected company. Department stores also carry a number of private label brands because of the increased profit mar- gins associated with them. JCPenney, for example, is well known for its popular private label brands. Roughly half of Penney’s sales come from private-label brands; seven of which—including Arizona, Worthington, and St. John’s Bay— individually sell over $1 billion each year. Penney’s has also added a private brand of clothing and home furnishings called American Living, which is manufac- tured by Polo Ralph Lauren. Further, JCPenney acquired the Liz Claiborne brand (a former manufacturer brand) in late 2011. The move allowed Penney’s to capital- ize on instant national recognition and to expand the Claiborne brand into other categories, such as home goods.3

EXHIBIT 7.3 Manufacturer (Name) Brands vs. Private-Label Brands.

Unique Advantages of Selling Manufacturer (Name) Brands Reduced Costs Heavy promotion by the manufacturer reduces the marketing costs of

the merchant that carries the brand. Built-In Loyalty Manufacturer brands come with their own cadre of loyal customers. Enhanced Image The image and prestige of the merchant are enhanced. Lower Inventory Manufacturers are capable of time-certain delivery, which allows the

merchant to carry less inventory and reduce inventory costs. Less Risk Poor quality or product failures become attributed to the manufacturer

rather than the merchant. Unique Advantages of Selling Private-Label (Store) Brands Increased Profit The merchant maintains a higher margin on its own brands and faces

less pressure to cut prices to match the competition. Less Competition Where manufacturer brands are carried by many different merchants,

private-label brands are exclusive to the merchant that sells them. Total Control The merchant has total control over the development, pricing,

distribution, and promotion of the brand. Merchant Loyalty Customers who are loyal to a private-label brand are automatically loyal

to the merchant.

208 Chapter 7 • Branding and Positioning

A second important branding decision involves individual vs. family branding. A firm uses individual branding when it gives each of its product offerings a different brand name. A number of well-known firms use individual branding, including Sara Lee (Hanes, L’eggs, Jimmy Dean, Ball Park), Reckitt Benckiser (Air Wick, Clearasil, French’s, and Woolite), and Procter & Gamble (Tide, Downy, Cover Girl, Scope). The key advantage of individual branding is that the potential poor performance of one product does not tarnish the brand image of other products in the firm’s portfolio. It is also useful in market segmentation when the firm wants to enter many segments of the same market. Procter & Gamble uses this strategy in the laundry detergent market (Tide, Cheer, Bold, Gain, Ariel).

Conversely, family branding occurs when a firm uses the same name or part of the brand name on every product. For example, every cereal in the Kellogg’s portfolio uses the Kellogg’s name (Kellogg’s Frosted Flakes, Kellogg’s Rice Krispies, etc.). Campbell’s uses the same strategy in its soup portfolio (Campbell’s Tomato Soup, Campbell’s Chunky, etc.) and with many of its other brands such as Pepperidge Farm, Pace, Swanson, and V8. The key advantage of family brand- ing is that the promotion (and brand image) of one product reflects on other pro- ducts under the same family brand. However, in addition to the obvious risk of releasing a poor product under a family brand, family branding also runs the risk of overextension. Too many brand extensions, especially into unrelated areas, can confuse customers and promote brand switching. Examples include Bic perfume (the company is known for pens and lighters), Bayer Aspirin Free Pain Reliever (Bayer is the dominant aspirin maker), and Miller Chill (not exactly the “High Life”).

Strategic Brand Alliances As we have stated in previous chapters, relationships with other firms are among the most important competitive advantages that can be held by an organization. Many of these relationships are based on a variety of brand alliances. For example, cobranding is the use of two or more brands on one product. Cobranding leverages the image and rep- utation of multiple brands to create distinctive products with distinctive differentiation. Cobranding is quite common in processed foods and credit cards. For example, General Mills partners with Hershey’s on its Betty Crocker chocolate cake mixes with Hershey’s cocoa. This brand alliance gives Betty Crocker a distinct advantage over competitors like Duncan Hines. Likewise, credit card companies like Visa and MasterCard offer cobranded versions of their cards emblazoned with the logos of sports teams, universi- ties, professions, or other firms like Delta Airlines and Disney World. Cobranding is quite successful because the complementary nature of the brands used on a single product increases perceived quality and customer familiarity.

Brand licensing is another type of branding alliance. Brand licensing involves a contractual agreement where a company permits an organization to use its brand on non-competing products in exchange for a licensing fee. Although this royalty can be quite expensive, the instant brand recognition that comes with the licensed brand is often worth the expense. Fashion brands such as Calvin Klein, Ralph Lauren, Bill Blass, and Tommy Hilfiger appear on numerous products in a variety of product cat- egories. Licensing is also quite common in toys where manufacturers will license the characters and images from popular movies like Cars or Harry Potter to create a variety of products. Even Jack Daniels and Jim Beam whiskeys have licensed barbe- que sauces that bear their famous brands.

Brand Value What is a brand worth? The answer depends on whether you ask customers or the firm. For customers, brands offer a number of advantages as mentioned above.

Chapter 7 • Branding and Positioning 209

However, customers also have attitudinal and emotional attachments to brands that create value. One of the most common types of customer brand value is brand loy- alty. Brand loyalty is a positive attitude toward a brand that causes customers to have a consistent preference for that brand over all other competing brands in a product category. There are three degrees of brand loyalty:

• Brand recognition—exists when a customer knows about the brand and is con- sidering it as one of several alternatives in the evoked set. This is the lowest form of brand loyalty and exists mainly due to the awareness of the brand rather than a strong desire to buy the brand.

• Brand preference—a stronger degree of brand loyalty where a customer pre- fers one brand to competitive brands and will usually purchase this brand if it is available. For example, a customer may hold a brand preference for Diet Coke. However, if this brand is not available, the customer will usually accept a substitute such as Diet Pepsi or Coke Zero rather than expending extra effort to find and purchase Diet Coke.

• Brand insistence—the strongest degree of brand loyalty, occurs when custo- mers will go out of their way to find the brand and will accept no substitute. Cus- tomers who are brand insistent will expend a great deal of time and effort to locate and purchase their favorite brand.

Marketers clearly want to develop brand insistence for their products. However, brand loyalty is declining overall because of increasing commoditization and the overuse of sales promotion activities. A recent study revealed the top brands having the highest customer loyalty: Amazon, Apple, YouTube, WhatsApp, Google, Kindle, Samsung, and Dunkin’ Donuts.4 Brand loyalty also remains quite high in many prod- uct categories, including cigarettes, mayonnaise, toothpaste, coffee, bath soap, med- icines, body lotion, makeup, soft drinks, ketchup, and diapers. Note that most of these examples include products that customers put in their mouths or on their bodies—a common trait of products that enjoy strong brand loyalty.

The value of a brand to the firm is often referred to as brand equity. Another way of looking at brand equity is the marketing and financial value associated with a brand’s position in the marketplace. Brand equity usually has ties to brand name awareness, brand loyalty, brand quality, and other attributes shown in Exhibit 7.1. Brand awareness and brand loyalty increase customer familiarity with a brand. Cus- tomers familiar or comfortable with a specific brand are more likely to consider the brand when making a purchase. When this familiarity is combined with a high degree of brand quality, the inherent risk in purchasing the brand decreases dramatically. Brand associations include the brand’s image, attributes, or benefits that either directly or indirectly give the brand a certain personality. For example, customers associate 7-Up with “uncola,” Charmin tissue with “squeezably soft,” Michelin tires with family safety, Allstate insurance with “the good hands,” Coca-Cola with “happiness,” and Honeycomb cereal with a “big, big bite.” Associations like these are every bit as important as quality and loyalty, and they also take many years to develop.

Unfortunately, it is also possible for brand associations (and brand equity) to be neg- ative. Although Kia has enjoyed recent success through new product development (especially with the Optima and Sorento), the South Korean carmaker has struggled with a weak quality image associated with its brands. To counteract this negative brand association, Kia backs its products with a 10-year, 100,000-mile powertrain warranty.5

Although brand equity is hard to measure, it represents a key asset for any firm and an important part of marketing strategy. Exhibit 7.4 lists the world’s 25 most valu- able brands. Brands like these take years to develop and nurture into the valuable assets that they have come to represent. This reality makes it easier and less expensive for firms to buy established brands than to develop new brands from scratch. For example, Microsoft’s purchase of Skype and Facebook’s purchase of Instagram

210 Chapter 7 • Branding and Positioning

added powerful brands to each company’s portfolio. The equity associated with these brands would have taken Microsoft and Facebook decades to develop on their own.

Given the value of brands like these, it is no surprise that firms go to great lengths to protect their brand assets. Registering a brand with the U.S. Patent and Trademark Office is only the first step in protecting the value of a brand. While the U.S. legal system provides many laws to protect brands, most of the responsibility for enforcing this protection falls on the company to find and police abuses. Firms must diligently monitor competitive behavior for signs of potential brand infringe- ment that could confuse or deceive customers. For example, Auto Shack was forced to change its name to AutoZone after the Tandy Corporation, owner of Radio Shack, sued the company. McDonald’s also aggressively protects its brand and has brought lawsuits against many companies who use “Mc” in their names. Due to the differing and often lax legal systems in other nations, brand abuse is quite common in foreign markets. It is not surprising that patent, copyright, and intellectual property law has become a growth industry both in the United States and around the world. Without these protections in place, firms run the real risk of having their brand become syn- onymous with an entire product category. Scotch tape, Xerox copiers, Band-Aid adhesive bandages, Coca-Cola, FedEx, and Kleenex constantly fight this battle. To protect their brands, firms obtain trademarks to legally designate that the brand

EXHIBIT 7.4 The World’s Twenty-Five Most Valuable Brands.

Brand Rank Brand Brand Value ($Bil)

1-Year Value Change (%)

Country of Ownership

1 Apple 124.2 19 U.S. 2 Microsoft 63.0 11 U.S. 3 Google 56.6 19 U.S. 4 Coca-Cola 56.1 2 U.S. 5 IBM 47.9 −5 U.S. 6 McDonald’s 39.9 1 U.S. 7 General Electric 37.1 9 U.S. 8 Samsung 35.0 19 South Korea 9 Toyota 31.3 22 Japan 10 Louis Vuitton 29.9 5 France 11 BMW 28.8 4 Germany 12 Cisco 28.0 4 U.S. 13 Intel 28.0 −9 U.S. 14 Disney 27.4 19 U.S. 15 Oracle 25.8 −4 U.S. 16 AT&T 24.9 3 U.S. 17 Mercedes-Benz 23.8 1 Germany 18 Facebook 23.7 74 U.S. 19 Walmart 23.3 7 U.S. 20 Honda 23.2 10 Japan 21 Nike 22.1 22 U.S. 22 Verizon 21.6 11 U.S. 23 Budweiser 21.4 1 Belgium 24 Amazon 21.4 45 U.S. 25 SAP 20.7 6 U.S.

SOURCE: “The World’s Most Valuable Brands,” Forbes (http://www.forbes.com/powerful-brands/list/), accessed April 4, 2015.

Chapter 7 • Branding and Positioning 211

owner has exclusive use of the brand and to prohibit others from using the brand in any way. Former brand names that their parent companies did not protect suffi- ciently include aspirin, escalator, nylon, linoleum, kerosene, and shredded wheat.

Packaging and Labeling At first glance, the issues of packaging and labeling might not seem like important considerations in branding strategy. Although packaging and labeling strategy does involve different goals than branding, the two often go hand-in-hand in developing a product, its benefits, its differentiation, and its image. Consider, for instance, the number of products that use distinctive packaging as part of their branding strat- egy. Obvious examples include the brand names and brand marks that appear on all product packaging. The color used on a product’s package or label is also a vital part of branding, such as Tide’s consistent use of bright orange on its line of laundry detergents. The size and shape of the label is sometimes a key to brand identification. For example, Heinz uses a unique crown-shaped label on its ketchup bottles. The physical characteristics of the package itself sometimes become part of the brand. Coca-Cola’s unique 10-ounce glass bottle, Pringles’ potato chip canis- ter, and the bottles used by Absolut vodka and Crown Royal whiskey are good examples. Finally, products that use recyclable packaging are gaining favor. For example, NatureWorks LLC has developed a biopolymer known as Ingeo—a fully compostable bioplastic made from corn. Ingeo is used in many different packaging applications because it biodegrades easily—usually within 75 to 80 days. Biota Water uses Ingeo for all of its packaging. Similarly, Coca-Cola introduced the PlantBottle, a recyclable bottle made from 70 percent petroleum and 30 percent sugar and molasses. The PlantBottle logo is now featured prominently on the com- pany’s Dasani bottled water.6

Packaging serves a number of important functions in marketing strategy. Custo- mers take some functions—like protection, storage, and convenience—for granted until the package fails to keep the product fresh, or they discover that the package will not conveniently fit in the refrigerator, medicine cabinet, or backpack. Packag- ing can also play a role in product modifications and repositioning. An improved cap or closure, an “easy open” package, a more durable box or container, or the intro- duction of a more conveniently sized package can create instant market recognition and a competitive advantage. Sometimes, a change in package design can create major problems for a brand, as described in Beyond the Pages 7.2. Packaging can also be used as a part of a co-branding strategy. Hillshire Farms, for example, formed an alliance with The Glad Products Company to package its Deli Select line of lunch- meats in GladWare reusable plastic containers. The package is easy to seal and completely reusable once the lunchmeat has been consumed.8

Labeling, in and of itself, is an important consideration in marketing strategy. Product labels not only aid in product identification and promotion; they also con- tain a great deal of information to help customers make proper product selections. Labeling is also an important legal issue as several federal laws and regulations spec- ify the information that must be included on a product’s packaging. The Nutritional Labeling and Education Act of 1990 was one of the most sweeping changes in federal labeling law in history. The law mandated that packaged food manufacturers must include detailed nutritional information on their packaging. The law also set stan- dards for health claims such as “low fat,” “light,” “low calorie,” and “reduced cholesterol.” The Food Allergy Labeling and Consumer Protection Act, passed in 2004, required labeling of any food containing peanuts, soybeans, milk, eggs, shell- fish, tree nuts, and wheat. The U.S. Supreme Court has ruled that manufacturers bear full responsibility for the content of the labeling and warnings on their packag- ing. This ruling also applies to manufacturers of products that are inspected and cer- tified by the government, such as foods and pharmaceuticals.9

212 Chapter 7 • Branding and Positioning

DIFFERENTIATION AND POSITIONING Though we have focused solely on branding issues to this point in the chapter, it is vital to remember that branding is intricately tied to differentiation and positioning within the marketing program. People sometimes confuse differentiation and posi- tioning with market segmentation and target marketing. Differentiation involves creat- ing differences in the firm’s product offering that set it apart from competing offerings. Differentiation typically has its basis in distinct product features, addi- tional services, or other characteristics. Positioning refers to creating a mental image of the product offering and its differentiating features in the minds of the target mar- ket. This mental image can be based on real or perceived differences among compet- ing offerings. Whereas differentiation is about the product and the marketing program, positioning is about customers’ perceptions of the real or perceived bene- fits that the offering possesses.

Although differentiation and positioning can be based on actual product features or characteristics, the principal task for the firm is to develop and maintain a relative position for the product in the minds of the target market. The process of creating a favorable relative position involves several steps:

1. Identify the needs, wants, and preferences desired by the target market. 2. Evaluate the differentiation and positioning of current and potential

competitors. 3. Compare the firm’s current relative position vis-à-vis the competition across the

needs, wants, and preferences desired by the target market.

BEYOND THE PAGES 7.2

Tropicana’s Packaging Debacle7

In January 2009 as a part of a major overhaul of brands in the PepsiCo family, Tropicana dropped the long-familiar labeling of its popular Pure Pre- mium brand of orange juice. That labeling, which contained the familiar logo of a straw sticking out of an orange, was replaced with a more modern, streamlined look with a glass of juice and the “Tropicana” brand written vertically on the pack- aging. The move was a part of a $35 million “Squeeze: It’s a Natural” campaign which pro- moted fresh taste and family imagery.

Unfortunately for Tropicana, the redesigned packaging met with instant criticism and com- plaints from loyal consumers. Many consumers argued that the packaging was “ugly” and that it looked like “a generic or store brand.” Others complained that the new packaging made it harder for consumers to recognize Tropicana on supermarket shelves. In fact, many consu- mers complained that they had bought the wrong orange juice. After less than two months in its redesigned packaging, Tropicana Pure Premium sales fell 20 percent, or roughly $33 million. At the same time, competing

brands—such as Minute Maid, Florida’s Natural, and Tree Ripe—enjoyed double-digit sales growth. Sales of private-label brands also increased.

After the rapid drop in sales and thousands of consumer letters, e-mails, and telephone calls, PepsiCo announced that it would scrap the new packaging and return to the old packaging. Indus- try critics lauded the move and compared it with Coke’s “New Coke” fiasco from 1985. Pepsi, like Coke at the time, had failed to see the deep bond that loyal consumers had with Tropicana’s packaging. Once the old packaging had returned, Tropicana’s sales returned to normal.

While the Tropicana story is an important lesson against meddling with an iconic brand, it also points out the clout that consumers have today. It is easier to connect with, and harder to avoid, customers who can easily and effectively interact with companies and each other through social technologies. Just 10 years ago, it would have taken Tropicana months to determine that there was a backlash against its packaging. Now, through e-mail, Facebook, and Twitter, companies can discover customer reactions in real time.

Chapter 7 • Branding and Positioning 213

4. Identify unique differentiation and positioning not offered by the competition that matches the firm’s capabilities.

5. Develop a marketing program to create the firm’s position in the minds of the target market.

6. Continually reassess the target market, the firm’s position, and the position of competing offerings to ensure that the marketing program stays on track and to identify emerging positioning opportunities.

The concept of relative position can be addressed using a number of tools. One of the most commonly used tools is perceptual mapping. A perceptual map represents customer perceptions and preferences spatially by means of a visual display. A hypo- thetical perceptual map for automotive brands is shown in Exhibit 7.5. The axes rep- resent underlying dimensions that customers might use to form perceptions and preferences of brands. Any number of dimensions can be represented using computer algorithms such as multidimensional scaling or cluster analysis. However, simple two-dimensional maps are the most common form because a limited number of dimensions are typically the most salient for consumers.

A second commonly used tool is the strategy canvas, which we discussed in Chapter 4 and Exhibit 4.9. In addition to its usefulness in the planning process, the strategy canvas is an excellent tool for demonstrating the firm’s relative position in terms of the competitive factors that are important to the target market. In Beyond the Pages 6.1, we discussed the marketing program of Barnes & Noble relative to Amazon, its strongest competitor. A hypothetical strategy canvas for this market is shown in Exhibit 7.6. Note that while Barnes & Noble maintains an advantage in book selection (primarily on the strength of its textbook market) and having a

EXHIBIT 7.5 A Hypothetical Perceptual Map of the Automotive Market.

Expensive/Distinctive

BMW

Porsche

Lincoln Mercedes

Cadillac

Chrysler

Buick

Ford Dodge

Chevy Toyota

Nissan VW

Conservative Sporty

Scion

Honda

Affordable/Practical

214 Chapter 7 • Branding and Positioning

comfortable lounge area for customers, Amazon has dominant advantages in non- book offerings, store hours, and its membership program.

The perceptual map and strategy canvas illustrate two basic issues in positioning strategy. First, they indicate products/brands that are similar in terms of relative mental position. In the example perceptual map, customers are likely to see the offerings of Toyota and Honda as being very similar. Positioning a brand to coincide with competing brands becomes more difficult when many brands occupy the same relative space. In the book retailing market, this is the case with pricing and book selection. Second, these tools illustrate voids in the current mindscape for a product category. In the perceptual map, note the empty space in the bottom-left corner. This indicates that consumers do not perceive any current products to be both conserva- tive and inexpensive. This lack of competition within the mindspace might occur because (1) customers have unmet needs or preferences, or (2) customers have no desire for a product offering with this combination of dimensions. In the case of the strategy canvas, Barnes & Noble has a clear advantage in being a comfortable place to browse, lounge, and enjoy a coffee. However, additional research would be needed to determine whether this feature is more or less important to customers than having a strong book selection or membership program.

Bases for Differentiation Generally, the most important tool of differentiation is the brand. Customer percep- tions of a brand are of utmost importance in differentiation because differences among competing brands can be based on real qualities (e.g., product characteris- tics, features, or style) or psychological qualities (e.g., perception and image). In addition to the brand, other important bases for differentiation include product descriptors and customer support services.

Product Descriptors Firms generally provide information about their products in one of three contexts, as shown in Exhibit 7.7. The first context is product features, which are factual descrip- tors of the product and its characteristics. For example, Apple’s 13-inch MacBook Pro includes key features such as an Intel Core i7 processor and aluminum unibody construction. However, features—although they tell something about the nature of the product—are not generally the pieces of information that lead customers to

EXHIBIT 7.6 Hypothetical Strategy Canvas for the Book Retailing Market.

Pr ice

Bo ok

Se lec

tio n

No n-

Bo ok

Of fer

ing s

St or

e H ou

Me m

be rsh

Pr og

ra m

Lo un

Ar ea

High

Low

Barnes & Noble

Amazon

Chapter 7 • Branding and Positioning 215

buy. Features must be translated into the second context, advantages. Advantages are performance characteristics that communicate how the features make the prod- uct behave, hopefully in a fashion that is distinctive and appealing to customers. The advantages of the MacBook Pro include a lightweight, compact design, fast perfor- mance, and long battery life. However, as we have said before, the real reason custo- mers buy products is to gain benefits—the positive outcomes or need satisfaction they acquire from purchased products. Thus, the benefits of the MacBook Pro include ultimate mobility and rugged entertainment on the road. Other benefits, like increased productivity and connectivity, might also be implied in Apple’s promo- tional program.

One aspect of a product’s description that customers value highly is quality. Product characteristics that customers associate with quality include reliability, durability, ease of maintenance, ease of use, and a trusted brand name. In business markets, other characteristics, such as technical suitability, ease of repair, and com- pany reputation, become included in this list of quality indicators. In general, higher product quality—real or imagined—means that a company can charge a higher price for their product and simultaneously build customer loyalty. In the case of Apple and the MacBook Pro, this is certainly true. The relationship between quality and price (inherent in the concept of value) forces the firm to consider product quality care- fully when making decisions regarding differentiation, positioning, and the overall marketing program.

Customer Support Services A firm may have difficulty differentiating its products when all products in a market have essentially the same quality, features, or benefits. In such cases, providing good customer support services—both before and after the sale—may be the only way to differentiate the firm’s products and move them away from a price-driven commod- ity status. For example, over the past 10 years, small, locally owned bookstores have disappeared at an alarming rate as competition from Barnes & Noble, Books- A-Million, and Amazon has taken its toll. The local stores that have remained in busi- ness thrive because of the exceptional, personalized service they provide to their customers. Many local bookstores create customer loyalty by being actively involved

EXHIBIT 7.7 Using Product Descriptors as a Basis for Differentiation.

Product Features Advantages Benefits Apple MacBook Pro 13-inch Laptop

Intel Core i7 processor Mac OS X operating system Precision aluminum unibody construction Less than 100 thick and only 4.5 lbs High performance Intel HD graphics 7-hour, 63.5 watt lithium-polymer battery

Very lightweight and compact Blazingly fast multimedia performance Out-of-the-box photo, video, and audio editing Long-lasting battery Hassle-free connectivity

Ultimate mobility Rugged entertainment on the road No need to purchase separate photo- or video-editing software Stay connected wherever you are

Chevrolet Camaro

6.2L, 426-horsepower SS V8 Variable-ratio power steering Low, wide, aggressive stance and 50/50 front/rear weight distribution Active fuel management

0 to 60 in 5 seconds Superb handling Better road grip 24 mpg highway

Enhanced self-image Heart-racing performance Easy to drive Fuel-efficient muscle Safety

Bounty Select-a-Size Paper Towels

Sheets can be torn in varying sizes More sheets per roll Increased wet strength

Great for any size cleaning job Less waste Superior absorbency Won’t run out as often

More control over cleaning Reduces cost of buying paper towels Can be sized for use as placemats

216 Chapter 7 • Branding and Positioning

in the community, including contributing to local schools, churches, and charities. Many customers value this level of personalization so highly that they will pay slightly higher prices and remain loyal to their bookstore.

Support services include anything the firm can provide in addition to the main product that adds value to that product for the customer. Examples include assis- tance in identifying and defining customer needs, delivery and installation, technical support for high-tech systems and software, financing arrangements, training, extended warranties and guarantees, repair, layaway plans, convenient hours of operation, affinity programs (e.g., frequent flyer/buyer programs), and adequate parking. If you buy a Kenmore refrigerator, for example, you can expect Sears to provide financing, delivery and installation, and warranty repair service, if necessary. Through research, the firm can discover the types of support services that customers value most. In some cases, customers may want lower prices rather than an array of support services. Low-cost airlines—such as JetBlue and Allegiant Air—and budget hotels—such as Motel 6 and La Quinta—are good examples. The importance of hav- ing the proper mix of support services has increased in recent years, causing many firms to design their customer services as carefully as they design their products.

Regardless of the basis for differentiation, reality is often not as important as per- ception. Firms that enjoy a solid image or reputation can differentiate their offerings based solely on the company or brand name alone. Examples of firms that have this ability include BMW, Mercedes, Michelin, Budweiser, Campbell’s, Ritz-Carlton Hotels, Disney World, and Princess Cruises. But what if the firm doesn’t have this abil- ity? What if there are no credible bases for differentiation? In other words, what if your market is commoditized? In this case, creating a perception may be the firm’s only choice. Consider the car rental industry. In the industry’s early years Hertz not only stood in first place, but also maintained a vast lead over second-place Avis. The management of Avis, intent on capturing a larger portion of Hertz’s customers, asked its advertising agency to develop an effective positioning strategy relative to Hertz. After searching for any advantage that Avis held over Hertz, the agency concluded that the only difference was that Avis was number two. Avis management decided to claim this fact as an advantage, using the theme “We’re number two. We try harder!” Avis rentals soared, putting the company in a much stronger number-two position.

Positioning Strategies A firm can design its marketing program to position and enhance the image of its offer- ing in the minds of target customers. To create a positive image for a product, a firm can choose to strengthen its current position or find a new position. The key to strengthen- ing a product’s current position is to monitor constantly what target customers want and the extent to which customers perceive the product as satisfying those wants. Any com- placency in today’s dynamic marketplace is likely to result in lost customers and sales. For example, a firm known for excellent customer service must continue to invest time, money, talent, and attention to its product position to protect its market share and sales from competitive activity. This is especially true for firms such as Ritz-Carlton and Nord- strom that pursue competitive advantage based on customer intimacy.

Strengthening a current position is all about continually raising the bar of cus- tomer expectations. For example, Honda has always been known for quality and reli- ability. Recently, however, Honda has shifted its positioning focus to wrap quality and value in the context of long-term value. The company’s promotional campaigns explain how its cars have a lower cost of ownership when factors such as insurance, fuel, and maintenance are taken into consideration.10 Honda’s positioning is different than the strategies pursued by Toyota (hybrid technology), Kia (style), and Volkswagen (engi- neering). By tweaking its positioning strategy, Honda understands that it must con- stantly raise expectations about value if it is to hold its position and remain competitive.

Chapter 7 • Branding and Positioning 217

At times, a brand can become too similar to a competing brand. Take Hyundai and Kia for example. Hyundai owns both brands and many customers see their pro- ducts as being very similar (i.e., Kia Optima and Hyundai Sonata). To combat these perceptions, Hyundai embarked on a repositioning campaign to move Hyundai to a higher plane than Kia. While Kia sits squarely in the mid-market along with Toyota and Honda, the company wants Hyundai to be perceived as more luxurious. Its “H Factor” campaign is based on elevating the design of its Genesis and Sonata lines, greatly enhancing Hyundai dealerships, improving “Signature Certification” training for dealers, and launching a new television and online brand campaign. The goal is to deliver products and an experience that greatly exceeds customer expectations.11

Some of the most memorable marketing programs involve attempts to move to new positions. The “Not Just for Breakfast Anymore” campaign for orange juice, the “Pork: The Other White Meat” campaign, and the “Got Milk?” campaign are good exam- ples. A continuing example is Cadillac’s attempt to reposition the brand because of the aging of its traditional target. The erosion of Cadillac’s share of the luxury car market has forced the company to focus on and attract younger audiences to the brand. Cadil- lac’s recent marketing programs have been headlined by the “Fusion of Design and Technology,” “Heritage Reborn,” “Break Through,” “It’s a Lifestyle,” and “Dare Greatly” campaigns. In some cases, repositioning requires a focus on new products. For exam- ple, Sony, the third-largest camera manufacturer in the world (behind Canon and Nikon), was not taken seriously as a camera brand until it acquired Konica Minolta and launched the Alpha—a digital SLR camera aimed at the high-end of the market. Before the Alpha, Sony offered only point-and-shoot models.

MANANGING BRANDS OVER TIME Decisions related to branding and positioning are ongoing strategic issues. So is man- aging the marketing program over time. To address this issue, we use the traditional product life cycle—shown in Exhibit 7.8—to discuss marketing strategy in terms of

EXHIBIT 7.8 Stages of the Product Life Cycle.

Development Stage

Introduction Stage

Growth Stage

Maturity Stage

Industry Sales

Industry Profits

Decline Stage

D ol

la rs

Time

+ 0 –

218 Chapter 7 • Branding and Positioning

the brand or product’s conception, through its growth and maturity, and to its ulti- mate death. Our use of the product life cycle is based on its ability to describe the strategic issues and key objectives that should be considered during each phase of a brand’s life. We note, however, that the product life cycle has many limitations. For one, most new brands and products never get past development and most suc- cessful brands and products never die. Second, the product life cycle really refers to the life of a product/market, industry, sector, or product category—not to specific brands or firms. Hence, if we trace the life cycle of the bricks-and-mortar book retail- ing business, we deal with market characteristics for this sector and not single firms like Barnes & Noble or Books-A-Million. Further, the length of each stage and the time involved in the overall cycle depends heavily on the actions of the firms within the industry. Firms and industries constantly reinvent themselves, which can cause the life cycle to speed up, slow down, or even recycle.

Despite these issues, the product life cycle offers a useful framework for discuss- ing marketing strategy over time. Exhibit 7.9 summarizes the strategic considera- tions for each stage of the life cycle. It is important for firms to consider the stage of their market’s life cycle with respect to planning in the current period, as well as planning for the future. Using the product life cycle as a framework has the distinct advantage of forcing firms to consider the future of their industry and their brand. For example, the traditional DVD rental industry is clearly in the decline phase. The advent of DVD distribution via mail and kiosks, and technological innovations such as video on demand, streaming video content, and the growing use of mobile plat- forms, offers a dramatic increase in convenience for consumers. Given this fact, it

EXHIBIT 7.9 Strategic Considerations During the Product Life Cycle.

Life Cycle Stages Introduction Growth Maturity Decline

Overall Marketing Goals

Stimulate product awareness and trial

Increase market share by acquiring new customers; discover new needs and market segments

Maximize profit by defending market share or stealing it from competitors

Reduce expenses and marketing efforts to maximize the last opportunity for profit

Product Strategy

Introduce limited models with limited features; frequent product changes

Introduce new models with new features; pursue continuous innovation

Full model line; increase supplemental product offerings to aid in product differentiation

Eliminate unprofitable models and brands

Pricing Strategy

Penetration pricing to establish a market presence or price skimming to recoup development costs

Prices fall due to competition; price to match or beat the competition

Prices continue to fall; price to beat the competition

Prices stabilize at a lower level

Distribution Strategy

Gradually roll out product to expand availability; get channel intermediaries on board

Intensify efforts to expand product reach and availability

Extensive product availability; retain shelf space; phase out unprofitable outlets or channels

Maintain a level necessary to keep brand loyal customers; continue phasing out unprofitable channels

Promotion Strategy

Advertising and personal selling to build awareness; heavy sales promotion to stimulate product trial

Aggressive brand advertis- ing, selling, and sales promotion to encourage brand switching and continued trial

Stress brand differences and benefits; encourage brand switching; keep the brand/product fresh

Reduce to a minimal level or phase out entirely

SOURCE: Adapted from William M. Pride and O. C. Ferrell, Marketing (Mason, OH: Cengage Learning, 2010), pp. 290–295.

Chapter 7 • Branding and Positioning 219

is not surprising that traditional rental companies such as Blockbuster and Movie Gallery have closed their doors. Conversely, Netflix embraced newer technologies and now boasts over 50 million streaming customers around the world. Redbox, the dominant player in kiosk-based DVD rentals, has also been growing. In both exam- ples, Netflix and Redbox were able to shift their strategies over time in order to capi- talize on changes in the movie rental industry.

The change in Netflix’s strategy over time also highlights the strong connections between the marketing program and branding. For many years, the Netflix brand stood for easy, convenient access to DVDs through a customizable, and relatively inexpensive, rental program. Distribution and price were the company’s key strengths. Over time, however, movie distributors became threatened by Netflix and became less willing to work with the company over issues such as pricing and distri- bution rights. This caused Netflix’s operating costs to increase. As the technology shifted away from DVDs and more toward digital distribution, Netflix took the oppor- tunity to begin its move in the same direction. This necessitated changes in the mar- keting program in terms of program structure, pricing, and distribution that were not well received by customers. Many protested the changes and over 800,000 cancelled their subscriptions. Suddenly, the Netflix brand was not held in high regard. Over time, customers began to come back to Netflix because, despite the price increases, the Netflix service still offers exceptional value to customers. Looking forward, how- ever, Netflix will have to be mindful of competitive moves by Apple, Amazon, and others if the brand is to remain synonymous with movie streaming and DVD rentals by mail.

Development Stage As Exhibit 7.8 indicates, a firm has no sales revenue during the development stage. In fact, the firm experiences a net cash outflow due to the expenses involved in prod- uct innovation and development. For most innovations, the firm assumes a great deal of financial, market, and opportunity risk due to the uncertainty involved in developing new products and brands. For example, the pharmaceutical industry understands the challenges of new product development like no other industry. Firms such as Merck, Pfizer, and AstraZeneca spend millions each year developing new drugs. Upon identifying a new drug, it takes years of testing before earning FDA approval. Then, once the new drug is on the market, the firm has only a few years to recoup their investment before patent protection expires and the market opens to generic competition. In this highly competitive industry, pharmaceutical firms live or die based on the number and quality of drugs they have in their devel- opment pipelines.

The development stage usually begins with a concept, which has several components: (1) an understanding of the specific uses and benefits that target customers seek in a new product, (2) a description of the product, including its potential uses and benefits, (3) the potential for creating a complete product line that can create synergy in sales, distribution, and promotion, and (4) an analysis of the feasibility of the product concept, including such issues as anticipated sales, required return on investment, time of market introduction, and length of time to recoup the investment. Given the odds stacked against most new pro- ducts, it is not surprising that over 80 percent of all new products fail. This unfortunate fact of life underscores the need to correctly identify target customer needs before developing the product strategy. Through effective test marketing, the firm can gauge customer response to a new product before the full-scale launch. New products that closely match customers’ needs and have strong advantages over competing products are much easier to market as the new prod- uct enters the introduction stage of its life cycle.

220 Chapter 7 • Branding and Positioning

Introduction Stage The introduction stage begins when development is complete and ends when sales indi- cate that target customers widely accept the product. The marketing strategy devised during the development stage is fully implemented during the introduction stage, and should be tightly integrated with the firm’s competitive advantages and strategic focus. Marketing strategy goals common to the introduction stage include:

• Attracting customers by raising awareness of, and interest in, the product offer- ing through advertising, public relations, and publicity efforts that connect key product benefits to customers’ needs and wants.

• Inducing customers to try and buy the product through the use of various sales tools and pricing activities. Common examples include free samples of the prod- uct and the use of price incentives.

• Engaging in customer education activities that teach members of the target mar- ket how to use the new product.

• Strengthening or expanding channel and supply chain relationships to gain suffi- cient product distribution to make the product easily accessible by target customers.

• Building on the availability and visibility of the product through trade promotion activities that encourage channel intermediaries to stock and support the product.

• Setting pricing objectives that will balance the firm’s need to recoup investment with the competitive realities of the market.

Although all elements of the marketing program are important during the intro- duction stage, good promotion and distribution are essential to make customers aware that the new product is available, teach them how to use it correctly, and tell them where to purchase it. Although this is typically a very expensive undertaking, it doesn’t have to be. For example, when Mozilla released its open-source Firefox web browser, it garnered 150 million downloads and 10 million permanent users in only 18 months without any marketing staff. The secret to Mozilla’s success was a word- of-mouth buzz campaign that centered on its SpreadFirefox.com website. Today, through its affiliate program, Firefox users can still post ideas on how to market Firefox or volunteer to put other ideas into action.12

The length of the introduction stage can vary. In business markets, new products often have long introduction periods while buyers become convinced to adopt them. In consumer markets, many products experience an immediate upsurge in sales as consumers and retailers take advantage of special introductory offers. After the introduction, the firm must continually track market share, revenues, store place- ment, channel support, costs, and product usage rates to assess whether the new product pays back the firm’s investment. Even when the firm has patent protection or hard-to-copy technology, it must carefully track competitors’ reactions. Tracking this information is critical if the product is to make the grade, continue along the gradually rising sales curve, and enter the profitable growth stage. Unfortunately, most new product introductions start off very slowly and never enjoy rising demand or profits. Or, they start with a bang and decline rapidly. Failures during introduction are even more expensive than in the development stage, as marketing and distribu- tion costs accrue to the total expenses involved in the product’s launch.

Growth Stage The firm should be ready for the growth stage, as sustained sales increases may begin quickly. The product’s upward sales curve may be steep, and profits should rapidly increase, and then decline, toward the end of the growth stage. The length of the

Chapter 7 • Branding and Positioning 221

growth stage varies according to the nature of the product and competitive reac- tions. For example, disposable diapers had a long growth stage as they experienced over 30 percent yearly growth for a decade. A short growth stage is typical for new technologies, such as the latest iPhone or new video games.

Regardless of the length of the growth stage, the firm has two main priorities: (1) establishing a strong, defensible market position, and (2) achieving financial objec- tives that repay investment and earn enough profit to justify a long-term commitment to the product. Within these two priorities, there are a number of pertinent marketing strategy goals:

• Leverage the product’s perceived differential advantages in terms of branding, quality, price, value, and so on, to secure a strong market position.

• Establish a clear brand identity through coordinated promotional campaigns aimed at both customers and the trade.

• Create unique positioning through the use of advertising that stresses the product’s benefits for target customers relative to other available solutions or products.

• Maintain control over product quality to assure customer satisfaction. • Maximize availability of the product through distribution and promotion activi-

ties that capitalize on the product’s popularity. • Maintain or enhance the product’s ability to deliver profits to key channel and supply

chain partners, especially retailers that control shelf space and product placement. • Find the ideal balance between price and demand as price elasticity becomes

more important as the product moves toward the maturity stage. • Always keep an eye focused on the competition.

During the growth stage, the overall strategy shifts from acquisition to retention, from stimulating product trial to generating repeat purchases and building brand loy- alty. This is true not only for customers, but also for wholesalers, retailers, and other supply chain members. The key is to develop long-term relationships with customers and partners in order to prepare for the maturity stage. As the market matures, the firm will need loyal customers and good friends in the supply chain in order to remain competitive. Maintaining key relationships is a challenging and expensive proposition. For this reason, the growth stage is the most expensive stage for marketing.

Pricing also becomes more challenging during the growth stage. As more competi- tors enter the market, the firm must balance its need for cash flow with its need to be competitive. The relationship between price and perceived quality is a complicating fac- tor, as is the increasing price sensitivity of customers. It is not surprising during the growth stage to see competitors stake out market positions based on premium or value-based pricing strategies. Other firms solve the pricing dilemma by offering differ- ent products at different price points. You can see this strategy in action in the wireless phone market, where each service provider offers tiered service offerings (i.e., minutes and features) at different pricing levels. FedEx implements the same strategy with its tiered service offerings (overnight by 8:30 AM, overnight by 10:30 AM, etc.).

Another major challenge during the growth stage is the increasing number of competitors entering the market. There is a tendency for many firms to pay less attention to competitors during the growth stage. After all, the market has grown rapidly and there is enough business for everyone to have a piece. Why not worry about competitors later? Because growth will eventually end and the market will become mature. To protect itself, the firm must build a defensible market position as it prepares for market maturity. This position may be based on image, price, quality, or perhaps some technological standard. Eventually, the market will go through a shakeout period and the dominant firms will emerge. In the United States, this process can be seen in the wireless phone, airline, and Internet technol- ogy markets.

222 Chapter 7 • Branding and Positioning

Maturity Stage After the shakeout occurs at the end of the growth stage, the strategic window of opportunity will all but close for the market and it will enter the maturity stage. No more firms will enter the market unless they have found some product innovation significant enough to attract large numbers of customers. The window of opportu- nity often remains open, however, for new product features and variations. A good example is the introduction of light, dry, ice, microbrew, low-alcohol, and low-carb products in the beer industry. These variations can be quite important as firms attempt to gain market share. In the face of limited or no growth within the mar- ket, one of the few ways for a firm to gain market share is to steal it from a com- petitor. Such theft often comes only with significant promotional investments or cuts in gross margin because of the lowering of prices. The stakes in this chess match are often very high. For example, just a fractional change in market share in the soft drink industry means millions in additional revenue and profit for the lucky firm.

In the typical product life cycle, we expect maturity to be the longest stage. For the firm that has survived the growth stage, maturity can be a relatively status quo period of time. As long as one maintains sales volume to keep market share constant, a longer-term perspective can be taken due to decreasing market uncertainty. Typi- cally, a firm has four general goals that can be pursued during the maturity stage:

• Generate Cash Flow. By the time a market reaches maturity, the firm’s pro- ducts should be yielding a very positive cash flow. This is essential to recoup the initial investment and to generate the excess cash necessary for the firm to grow and develop new products.

• Hold Market Share. Marketing strategy should stress holding market share among the dominant brands in the market. Firms having marginal market share must decide whether they have a reasonable chance of improving their position. If not, they should consider pulling out of the market.

• Steal Market Share. Any firm in a mature market can pursue this goal; however, it is more likely to be used by firms holding weaker market positions. The key to this strategy is to create incentives that encourage brand switching, even if only temporar- ily. Even small gains in market share can lead to large increases in profits.

• Increase Share of Customer. Share of customer refers to the percentage of each customer’s needs in a particular area met by the firm. This strategy is quite common in financial services. Likewise, many large grocery chains increase share of customer by adding features ranging from ready-to-eat meals to dry cleaning services in an effort to create one-stop shopping for family needs.

To achieve these goals, the firm has at least four general options for strategy selection throughout the maturity stage: (1) develop a new product image, (2) find and attract new users to the product, (3) discover new applications and uses for the product, or (4) apply new technology to the product. Kraft Foods, for example, launched a massive promotional campaign to create a new product image for Jell-O after a long decline in sales. Today, Jell-O has once again achieved gourmet status with America’s children. Similarly, Whirlpool used product innovation to shake itself free from the “sea of white,” a phrase that is often used to describe the bland range of offerings in household appliances. Whirlpool’s Duet washers and dryers—industry leaders in design, ease of use, and energy efficiency—now command 40 percent of the front-loading market.13 Finally, as described in Beyond the Pages 7.3, Nintendo used a rebranding strategy to attract casual gamers to its handheld and home gaming systems.

Stealing customers away from the competition involves creating incentives for noncustomers to try the firm’s product. This may entail heavy expenditures in sales

Chapter 7 • Branding and Positioning 223

promotion activities such as product sampling, couponing, or trade promotion to encourage prominent display of the product on the store’s shelves. In some cases, once the brand switch has been accomplished, customers can be locked in through the use of contractual agreements. This is common among wireless phone providers, health clubs, and satellite television providers. A more common approach is to sim- ply match competitive prices, as is the case among many competing retail firms. For example, most pizza chains will accept competitor’s coupons and match their promotional incentives to gain business.

Decline Stage A product’s sales plateau will not last forever, and eventually a persistent decline in revenue begins. A firm has two basic options during the decline stage: (1) attempt to postpone the decline or (2) accept its inevitability. Should the firm attempt to post- pone the decline, the product’s demand must be renewed through repositioning, developing new uses or features for the product, or applying new technology. For example, despite the decline in sales of muscle cars over the past two decades, Ford, Chrysler, and GM have successfully launched redesigned versions of their famous brands. The Ford Mustang Shelby GT 500 was introduced in 2007 to eager buyers willing to pay $20,000 over sticker (which was around $40,000) to get the first Shelbys produced. Chrysler’s Dodge Challenger debuted in 2008, with GM’s Chevy Camaro launching in 2009.15 Today, all three brands are still selling quite well. Postponing a product’s decline in this manner takes a great deal of time and a substantial investment of resources. Many firms, however, do not have the resources or opportunity to renew a product’s demand and must accept the inevitability of decline. In such instances, the firm can either harvest profits from the product while demand declines or divest the product, taking steps to abandon it or sell it to another firm.

The harvesting approach calls for a gradual reduction in marketing expenditures, and uses a less resource-intensive marketing mix. A harvesting strategy also allows the firm to funnel its increased cash flow into the development of new products. For example, GM phased out the Oldsmobile brand over several years by offering dis- counts and other special incentives, such as longer product warranties, to allay cus- tomer fears of limited product support. A company using the divesting option

Et ha n M ill er /G et ty Im ag es

Whirlpool was able to breathe new life into a stagnant market through the use of innovative product design.

224 Chapter 7 • Branding and Positioning

BEYOND THE PAGES 7.3

Nintendo’s Rebranding Strategies14

Admit it. You’ve always thought of Nintendo’s line of game systems as being strictly for kids. You’re not alone. Most people associate the Nintendo 64, GameCube, Wii, GameBoy, DSi, and 3DS with famous characters such as Mario, Luigi, and Princess Peach. However, after several years of sales declines, Nintendo embarked on a rebranding strategy to change everyone’s opinions about video games and the gamers that enjoy them. The company discov- ered that casual gamers, and even non-gamers, were a much larger market than hard-core gamers. Since hard-core gamers already pre- ferred the Xbox and PlayStation, Nintendo took a Blue Ocean Strategy approach to remake the company and specifically target the casual and non-gamer markets.

Nintendo’s first step toward rebranding occurred in early 2006 with the redesign of its original DS handheld game system. Dubbed the DS Lite, the handheld was a smaller, lighter, brighter-screened, and distinctly iPod-looking version of the original DS system. It boasted a touch sensitive screen, a stylus, long battery life, and the ability to play all DS and GameBoy Advance games. To coincide with the launch, Nintendo rebranded many of its popular puzzle and skill-building games under the “Touch Gen- erations” label. Titles in the series—including Brain Age, Big Brain Academy, Tetris DS,

Nintendogs, Magnetica, Electroplankton,

Sudoku Gridmaster, and True Swing Golf— had been available for a while; however, they had not been collectively branded and targeted toward a particular audience. That audience included 40- and 50-something men and women in the so-called causal gamer market. Unlike younger gamers that enjoy playing for long periods of time, casual gamers prefer to play games in smaller portions: waiting for the kids to finish dance class, riding in mass transit, or as a fun way to fill 10 minutes before a meet- ing. At the time of launch, Nintendo’s Touch Generations website stated this market’s needs perfectly:

Not a hard-core gamer? That’s OK.

We’ve made games for you in mind.

Nintendo’s Touch Generations series,

exclusive to the Nintendo DS handheld

game system, allows you simple,

engaging interaction with games

that promote production over destruc-

tion, contemplation over domination.

No complex instructions. No steep

learning curve. Play a little. Play a

lot. It’s up to you.

Nintendo’s second step toward rebranding occurred in late 2006 with the launch of the Wii home gaming console. The defining charac- teristic of the Wii was its wireless controller— the Wii Remote. It allowed gamers to play games interactively by moving their arms and body in distinct game-like motions (such as playing tennis, baseball, or driving a car). Nin- tendo also expanded the Touch Generations brand to include Wii games such as Wii Fit, Wii Music, and Big Brain Academy. After launch, both the DS Lite and the Wii quickly became the best-selling gaming platforms in the world.

In 2009, Nintendo further refined its strategy with the launch of the DSi handheld gaming sys- tem. Although the system looked very much like the DS Lite, it incorporated larger screens, front- and rear-facing cameras, an online game store, removable storage, and picture-editing software. The handheld was further updated in 2011 to the 3DS featuring 3D graphics. Together, these changes made the DSi and 3DS much more social than the original system. In fact, Ninten- do’s goal was to create a system that did more than play games. The company wanted to create a system that enriched people’s lives. This shift necessitated a change in Nintendo’s marketing about Touch Generations:

The Touch Generations family of

software lets people from all walks

of life connect with each other

through fun and engaging interac-

tive experiences—no matter what

their age, gender, or background.

Titles like Wii Fit ™ Plus and Art Acad-

emy ™

can bring families together in

new and exciting ways. After all, fun

is a universal idea. Just look for the

distinctive orange logo on the game

box at your local retailer.

Although Nintendo retired the Touch Gen- erations brand in 2011, many of the games are

Chapter 7 • Branding and Positioning 225

withdraws all marketing support from the product. It may continue to sell the product until it sustains losses, or arrange for the product to be acquired by another firm. For example, Procter & Gamble dropped its Oxydol brand laundry detergent and sold it to Redox Brands (now known as CR Brands) for $7 million. Though P&G had sold Oxy- dol for 73 years, the company decided to delete the brand after its sales fell from a high of $64 million in 1950 to only $5.5 million just before the sale. CR Brands now markets Oxydol in both liquid and powder versions and targets Generation X customers using vibrant packaging and catchy scents such as “Bingo Bango Mango.”16

There are several factors that the firm should take into consideration before deciding on an appropriate marketing strategy during the decline stage:

• Market Segment Potential. The firm might have loyal customer segments that will continue to buy the product. If these segments are viable and profitable, the firm should postpone the decline or slowly harvest the product. For example, despite the decline in the DVD rental market, a substantial number of customers like Redbox for its convenience and low prices.

• The Market Position of the Product. A product in a leading market position with a solid image may be profitable and generate excess cash by attracting cus- tomers from competitors’ abandoned products.

• The Firm’s Price and Cost Structure. If the firm is a low cost producer in the industry and can maintain its selling price, the product can remain viable even in a declining market. The firm’s cost structure could also be enhanced by no longer having to invest in the product’s marketing program.

• The Rate of Market Deterioration. The faster the rate of market deteriora- tion, the sooner the firm should divest the product.

Although the firm should carefully consider these factors, it should not be senti- mental about dropping a failing product or brand. On the other hand, the firm should not quickly dismiss a renewal attempt, particularly if the firm does not have a better alternative use for its resources.

Throughout the product life cycle, it is imperative that the firm stays focused on changes in the market, not on its products or brands. Products and brands have life cycles only because markets and customers change. By focusing on changing mar- kets, the firm can attempt to create new and better quality products to match custo- mers’ needs. Only in this way can a firm grow, prosper, remain competitive, and continue to be seen as a source of solutions by the target market.

LESSONS FROM CHAPTER 7

Branding strategy:

• is critical to the effective differentiation and positioning of the complete offering. • involves selecting the right combination of name, symbol, term, or design that

identifies a specific product or firm. • has two parts: the brand name (words, letters, and numbers) and the brand mark

(symbols, figures, or a design).

still available on the 3DS platform. Nintendo strives to take advantage of key trends in the gaming market and offer games for all ages and market segments. The average age of frequent game purchasers is 40, with a full 25 percent of all gamers being over the age of 50. Nintendo still

believes there is large segment of “dormant” gamers in the market who enjoyed playing Pac- Man and Pong as children or young adults. Many experts agree and point to the huge success of The Sims as an example of a game that appeals to this market.

226 Chapter 7 • Branding and Positioning

• involves more than developing a brand name or brand mark. To be truly success- ful, a brand should succinctly captures the product offering in a way that answers a question in the customer’s mind.

• involves the many different attributes that make up the way customers think about brands: people (employees and endorsers), places (country of origin and channels), things (events, causes, and third-party endorsements), and other brands (alliances, branded ingredients, the company, and extensions).

• also involves corporate branding, which includes activities aimed at a variety of stakeholders to build and enhance the firm’s reputation.

• is important because of the many advantages of branding, including making it easier for customers to find and buy products.

• involves decisions such as selling manufacturer vs. private-label brands. Although private-label brands are generally more profitable, manufacturer brands have built-in demand, recognition, and product loyalty.

• involves decisions related to individual vs. family branding. • involves managing strategic brand alliances, such as cobranding or brand licens-

ing, that involve developing close relationships with other firms. • involves developing customers’ loyalty to brands. Brand loyalty is a positive atti-

tude toward a brand that causes customers to have a consistent preference for that brand over all other competing brands in a product category. Three levels of loyalty include brand recognition, brand preference, and brand insistence.

• involves building the brand’s value to the firm with respect to its equity, or the marketing and financial value associated with a brand’s position in the marketplace.

• also involves taking steps to protect brand names and brand marks from trade- mark infringement by other firms.

Packaging and labeling:

• are important considerations in branding strategy because packaging often goes hand-in-hand in developing a product, its benefits, its differentiation, and its image.

• include issues such as color, shape, size, and convenience of the package or the product’s container.

• are often used in product modifications or cobranding to reposition the product or give it new and improved features.

• are vital in helping customers make proper product selections. • can have important environmental and legal consequences.

Differentiation and positioning:

• involves creating differences in the firm’s product offering that set it apart from competing offerings (differentiation), as well as the development and mainte- nance of a relative position for a product offering in the minds of the target market (positioning).

• can be monitored through the use of several tools including perceptual mapping (a visual, spatial display of customer perceptions on two or more key dimen- sions) and the strategy canvas (a visual tool that depicts how the firm stacks up against the competition across several competitive factors that are important to the target market).

• is fundamentally based on the brand, but can include other bases for differentia- tion including product descriptors (features, advantages, benefits) and customer support services.

• includes the positioning strategies to strengthen the current position and repositioning.

Chapter 7 • Branding and Positioning 227

Managing brands over time:

• can be addressed via the traditional product life cycle, which traces the evolu- tion of a product’s or brand’s development and birth, growth and maturity, and decline and death over five stages: • development—a time of no sales revenue, negative cash flow, and high risk • introduction—a time of rising customer awareness, extensive marketing

expenditures, and rapidly increasing sales revenue • growth—a time of rapidly increasing sales revenue, rising profits, market

expansion, and increasing numbers of competitors • maturity—a time of sales and profit plateaus, a shift from customer acquisi-

tion to customer retention, and strategies aimed at holding or stealing market share

• decline—a time of persistent sales and profit decreases, attempts to post- pone the decline, or strategies aimed at harvesting or divesting the product

• can be influenced by shifts in the market, or by the actions of the firms within the industry as they constantly reinvent themselves.

NOTES 1. These facts are from Fred Mackerodt, “Defending a Brand Isn’t Easy,” CEO Magazine,

April/May 2006, pp. 54–55; Maya Roney, “Steinway: Worth Much More Than a Song,” BusinessWeek Online, March 6, 2007 (http://www.businessweek.com/bwdaily/dnflash/ content/mar2007/db20070305_637888.htm); Steinway corporate website (http://www. steinway.com/about), accessed April 4, 2015; Liz Stinson, “Steinway’s New Piano Can Play a Perfect Concerto by Itself,” Wired, April 1, 2015 (http://www.wired.com/2015/04/ steinways-new-piano-can-play-perfect-concerto/); Chen Yingqun and Yang Yang, “Music to Their Ears,” China Daily USA, March 30, 2012 (http://usa.chinadaily.com.cn/weekly/ 2012-03/30/content_14947510.htm).

2. These concepts are adapted from Jennifer Rice’s Brand Blog, Mantra Brand Consulting (http://brand.blogs.com).

3. Douglas A. McIntyre, “JCPenney Buys Liz Claiborne, a Brand No One Else Wants,” 24/7 Wall Street, October 13, 2011 (http://247wallst.com/2011/10/13/jcpenney-buys-liz- claiborne-a-brand-no-one-else-wants); Mark J. Miller, “JCPenney Re-Refreshes Brand— Third Time’s the Charm?” brandchannel, January 26, 2012 (http://www.brandchannel. com/home/post/JCPenney-Rebrands-012612.aspx); Phil Wahba, “J.C. Penney’s Secret Comeback Sauce? Its Own Brands,” Fortune, December 22, 2014 (http://fortune.com/ 2014/12/22/jc-penney-private-label/).

4. Robert Passikoff, “Which Brands Have the Most Loyal Customers,” Forbes, October 20, 2014 (http://www.forbes.com/sites/robertpassikoff/2014/10/20/the-2014-brand-keys-loyalty- leaders-list/).

5. Kia website (http://www.kia.com/us/en/content/why-kia/quality/warranty), accessed April 4, 2015.

6. These facts are from BIOTA Spring Water website (http://www.biotaspringwater.com/ index3811.html?q=bottle), accessed April 4, 2015; Coca-Cola PlantBottle website (http://www.coca-colacompany.com/plantbottle-technology/), accessed April 4, 2015; the NatureWorks LLC website (http://www.natureworksllc.com/The-Ingeo-Journey), accessed April 4, 2015.

7. These facts are from Stuart Elliott, “Tropicana Discovers Some Buyers Are Passionate about Packaging,” New York Times, February 22, 2009 (http://www.nytimes.com/2009/ 02/23/business/media/23adcol.html); David Kiley, “Arnell Strikes Again: Orange You Glad You Hired Him Tropicana?” BusinessWeek Online, February 27, 2009 (http:// www.businessweek.com/the_thread/brandnewday/archives/2009/02/arnell_strikes. html); David Kiley, “More Piling on Arnell’s Tropicana Fiasco,” BusinessWeek Online, March 18, 2009 (http://www.businessweek.com/the_thread/brandnewday/archives/2009/ 03/more_piling_on.html); David Kiley, “Tropicana Fiasco from Arnell Is Gift That

228 Chapter 7 • Branding and Positioning

Keeps Giving,” BusinessWeek Online, April 3, 2009 (http://www.businessweek.com/ the_thread/brandnewday/archives/2009/04/tropicana_fiasc.html).

8. “Lunchmeats Launch in Reusable PP Containers,” Packaging World, June 2, 2003 (http://www.packworld.com/package-type/thermoformed-packaging/lunchmeats- launch-reusable-pp-containers).

9. Eric Greenberg, “Drug Makers Not Preempted from Lawsuits,” Packworld, April 17, 2009 (http://www.packworld.com/webonly-27416).

10. Brian Morrissey, “Honda Touts Value Message,” Adweek, April 6, 2009 (http://www .adweek.com/aw/content_display/esearch/e3iff50ba6951560a30c30555cab2e882ef).

11. These facts are from “Hyundai Launches New Brand Positioning Campaign,” PR Newswire, January 13, 2015 (http://www.prnewswire.com/news-releases/hyundai- launches-new-brand-positioning-campaign-290363581.html).

12. Firefox Affiliates Program (https://affiliates.mozilla.org/en-US/), accessed April 4, 2015; “Open-Source Ad Campaigns,” Business 2.0, April 2006, p. 92; the Firefox website (https://affiliates.mozilla.org/en-US), accessed May 25, 2012.

13. Corporate Design Foundation, “Branding that Speaks to the Eyes,” BusinessWeek Online, March 16, 2006 (http://www.businessweek.com/innovate/content/mar2006/ id20060316_504093.htm).

14. Kenji Hall, “Has Nintendo Peaked?” BusinessWeek Online, May 7, 2009 (http://www .businessweek.com/globalbiz/content/may2009/gb2009057_844946.htm); Reena Jana, “Nintendo’s Brand New Game,” BusinessWeek Online, June 22, 2006 (http://www. businessweek.com/innovate/content/jun2006/id20060622_124931.htm); Sarah Lacy, “Social Gaming Scores in the Recession,” BusinessWeek Online, April 30, 2009 (http:// www.businessweek.com/technology/content/apr2009/tc20090429_963394.htm); Nintendo’s Touch Generations website (http://www.nintendo.com/games/ touchgenerations), accessed May 25, 2012.

15. Alex Taylor III, “Bankruptcy Baby: 2010 Chevrolet Camaro Coupe,” Fortune, June 2, 2009 (http://thewheeldeal.blogs.fortune.cnn.com/2009/06/02/bankruptcy-baby-2010- chevrolet-camaro-coupe); Peter Valdes-Dapena, “Shelby Mustangs: $20,000 Over Sticker,” CNNMoney.com (Autos Section), May 19, 2006 (http://www.cnn.com/2006/ AUTOS/05/17/shelby_over_sticker/index.html).

16. These facts are from CR Brands Oxydol website (http://www.oxydol.com/Products. html), accessed April 4, 2015; Matthew Swibel, “Spin Cycle,” Forbes, April 2, 2001, p. 118; Randy Tucker, “Liquid Oxydol Aimed at Gen X,” Cincinnati Inquirer, May 3, 2001 (http://www.enquirer.com/editions/2001/05/03/fin_liquid_oxydol_aimed.html).

Chapter 7 • Branding and Positioning 229

EthicsandSocial Responsibilityin MarketingStrategy

INTRODUCTION The importance of marketing ethics and social responsibility has grown in recent years, and their role in the strategic planning process has become increasingly important. Many firms have seen their images, reputations, and marketing efforts destroyed by problems in these areas. The failure to see ethical conduct as part of strategic marketing planning can destroy the trust and customer relationships that are necessary for success. Ethics and social responsibility are also necessary in light of stakeholder demands, and many aspects of ethics can become legal issues. For example, price fixing, bribery, conflicts of interest, fraud, and deceptive advertis- ing and sales practices all have legal implications. Marketing ethics does not just hap- pen by hiring ethical people; it requires strategic decisions that become a part of the overall marketing strategy and culture of the firm.

The traditional view of marketing holds that ethics and social responsibility are good supplements to business activities but may not be essential. Some marketers believe that ethics and social responsibility initiatives drain resources that could be better used for other marketing activities. Yet research has shown that ethical behavior can not only enhance a company’s reputation, but also contribute significantly to its bottom line.1 As demonstrated by Salesforce.com’s success in Beyond the Pages 8.1, social responsibility and sustainability are becoming increasingly popular among busi- nesses as a way to reduce a company’s carbon footprint and create a positive image among stakeholders. Ample evidence demonstrates that ignoring stakeholders’ demands for responsible marketing can destroy customers’ trust and even prompt increased government regulation. Irresponsible actions that anger customers, employ- ees, or competitors may jeopardize a firm’s financial standing and also lead to legal repercussions. For instance, Pfizer paid $400 million to settle lawsuits from share- holders accusing the firm of marketing several drugs for uses not approved by the Food and Drug Administration (known as off-label marketing).3 Today, most CEOs recognize that companies must do better. As Indra Nooyi, chairperson and CEO of PepsiCo, states: “performance without purpose is not a long-term sustainable formula.”4

In this chapter, we look at the dimensions of ethics and social responsibility, sus- tainability issues in marketing, the role of ethics and social responsibility in connec- tion to marketing strategy, and the challenges of ethical behavior. We also address specific ethical issues within the firm’s marketing program, as well as organizational and self-regulating methods of preventing misconduct. We examine the organiza- tional context of marketing ethics, including codes of ethics and the impact of ethical leadership. Additionally, we show the role of ethics and social responsibility in

CHAPTER

230

improving both marketing and financial performance. Finally, we discuss how ethics and social responsibility can be incorporated into strategic planning.

ETHICS AND SOCIAL RESPONSIBILITY IN MARKETING STRATEGY In response to customer demands, along with the threat of increased regulation, firms increasingly incorporate ethics and social responsibility into the strategic marketing planning process. Any organization’s reputation can be damaged by poor

BEYOND THE PAGES 8.1

Salesforce.com Adopts a Stakeholder Orientation2

Salesforce.com truly believes in sharing the wealth. Salesforce.com is a cloud computing organization that provides software, such as cus- tomer relationship management applications, to a variety of clients including Dell, Qualcomm, NBC Universal, and Symantec. The various applications in the Salesforce.com platform bring people and data together to provide infor- mation the sales force needs to be successful. Additionally, Salesforce.com is a known and respected leader in social responsibility.

Believing that employees are largely respon- sible for making Salesforce.com what it is today, Salesforce.com provides large bonuses to its top performers, pays for “incentive trips” to Hawaii, and allows some of its employees to own stock in the company. The average base salary is more than $90,000, and the average sales commission is over $74,000.

To hold the company accountable to its investors, Salesforce.com has implemented sev- eral policies to ensure objectivity and account- ability. Most of the company’s board members are independent, reducing the chance that board members might experience conflicts of interest in their responsibilities. The company has also adopted an ethics code and has an ethics office to ensure that the company’s ethi- cal expectations are met.

Additionally, Salesforce.com views the environment as an important stakeholder. The company continually strives to reduce its envi- ronmental impact. Its buildings meet LEED (Leadership in Energy and Environmental Design) standards, and Salesforce.com com- municates its environmental expectations throughout the company and its supply chain. Salesforce.com also creates products to help its

customers measure their environmental impact. The company claims that its cloud-computing model reduces greenhouse gas emissions by 95 percent compared to traditional hardware or soft- ware. Salesforce.com also discloses its carbon emissions data for independent assessment. The Carbon Disclosure Institute, which analyzes S&P 500 companies on its carbon emissions data, awarded Salesforce.com 85 percent for its disclo- sure. Although Salesforce.com still has many ways it can improve its efforts toward sustain- ability, its willingness to disclose information about the sustainability of its operations demon- strates the company’s commitment toward the environment.

In 2014, for the seventh consecutive year, Salesforce.com was named as one of the “World’s Most Ethical” companies by the Ethi- sphere Institute. Much of this has to do with Salesforce.com’s 1/1/1 Model, which stands for 1 percent time (in which employees are given 1 percent time to volunteer), 1 percent equity (in which 1 percent of its capital is given to the Salesforce.com Foundation), and 1 percent product. As a result of its integrated philan- thropy program, Salesforce.com has donated more than 500,000 employee hours to commu- nity causes, has donated or discounted licenses for its products to more than 25,000 programs (many of them nonprofits), and has awarded more than $80 million in grants. By integrating corporate social responsibility into the company culture, Salesforce.com hopes to make a posi- tive difference in communities and nonprofit organizations.

All of these ethical initiatives have not dimin- ished Salesforce.com’s profitability. In fact, it’s quite the contrary. Salesforce.com has experi- enced rapid growth and was added into the S&P 500 in 2008. Social responsibility has appeared to pay off for the company’s bottom line.

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 231

performance or ethical misconduct. Obviously, stakeholders who are most directly affected by negative events will have a corresponding shift in their perceptions of a firm’s reputation. However, even those indirectly connected to negative events can shift their attitudes toward the firm. Some scandals may lead to boycotts and aggres- sive campaigns to dampen sales and earnings. For example, strikes were launched against McDonald’s, Dollar General, Dollar Tree, BP, and Sunoco over wages. In the largest fast-food strike to date, employees from 190 cities walked off their jobs. They demanded $15 per hour wages and the right to unionize.5 To address low wages at Walmart, the company raised its minimum wage to $10 per hour in 2015.

Dimensions of Social Responsibility Social responsibility is a broad concept that relates to an organization’s obligation to maximize its positive impact on society while minimizing its negative impact. As shown in Exhibit 8.1, social responsibility consists of four dimensions: economic, legal, ethical, and philanthropic.6

Economic and Legal Responsibilities From an economic perspective, firms must be responsible to all stakeholders for financial success. The economic responsibility of making a profit serves employees and the community at large due to its impact on employment and income levels in the area that the firm calls home. Firms also have expectations, at a minimum, to obey laws and regulations. This is a challenge because the legal and regulatory environment is hard to navigate and interpretations of the law change frequently.

EXHIBIT 8.1 The Pyramid of Corporate Social Responsibility.

Ethical

Responsibilities

Legal Responsibilities

Economic Responsibilities

Philanthropic

Responsibilities

Be a Good Corporate Citizen Contribute resources to the community;

improve quality of life

Be Ethical Obligations to do what is right,

just, and fair; avoid harm

Obey the Law Law is society’s codification of right

and wrong; play by the rules

Be Profitable The foundation upon which all other responsibilities rest

SOURCE: From Archie Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons 34(4) (July/August), p. 42. Copyright © 1991 Elsevier. Reprinted with permission of Elsevier.

232 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

Laws and regulations are designed to keep U.S. companies’ actions within the range of acceptable conduct and fair competition. When customers, interest groups, or competitors become concerned over what they perceive as misconduct on the part of a marketing organization, they may urge their legislators to draft new laws to reg- ulate the behavior or engage in litigation to force the organization to “play by the rules.” For example, the Federal Communications Commission passed net neutrality laws to regulate wired and wireless broadband similar to how telecommunications services are regulated. The intent is to prevent providers from blocking web traffic, which includes slowing Internet speed or developing “fast lanes.” An industry lawsuit was filed against the government, as companies such as AT&T believe the laws will overregulate the Internet.7 Economic and legal responsibilities are the most basic levels of social responsibility for a good reason: Failure to consider them may mean that a firm is not around long enough to engage in ethical or philanthropic activities.

Ethical Responsibilities At the next level of the pyramid, marketing ethics refers to principles and standards that define acceptable marketing conduct as determined by the public, government regulators, private-interest groups, competitors, and the firm itself. The most basic of these principles have been codified as laws and regulations to induce marketers to conform to society’s expectations of conduct. However, it is important to understand that marketing ethics goes beyond legal issues: Ethical marketing decisions foster trust, which helps build long-term marketing relationships. Marketing ethics includes decisions about what is right or wrong in the organizational context of planning and implementing marketing activities in a global business environment to benefit (1) organizational performance, (2) individual achievement in a work group, (3) social acceptance and advancement in the organization, and (4) stakeholders. This definition of marketing ethics recognizes that ethical decisions occur in a com- plex social network within a marketing organization. Marketers are often asked by upper-level management to help make the numbers by reaching almost impossible sales targets. In fact, most marketing misconduct is done to help the organization. Being a team player and bending the rules to make targets may result in a promotion. On the other hand, it has destroyed the careers of some of those willing to do any- thing that they are asked to do.

Evidence shows that ignoring ethical issues can destroy stakeholder trust and prompt government intervention. When firms engage in activities that deviate from accepted principles to further their own interests, continued marketing exchanges become difficult, if not impossible. The best way to deal with such problems is dur- ing the strategic planning process, not after major problems materialize. For exam- ple, Pom Wonderful’s marketing claims that pomegranates help combat heart disease, erectile dysfunction, and prostate cancer was an important part of its strat- egy. When the Federal Trade Commission ruled this advertising as deceptive, the company took the issue to a federal appeals court. Again, it was ruled that there was not enough evidence to make these health claims, requiring Pom Wonderful to change its promotional strategy.8

Discussing and addressing potential problems during the strategic planning pro- cess could save a company millions in the long term. As a result, more and more companies create extensive ethics and compliance programs to identify problems early on. For instance, Lockheed Martin, a technology aerospace manufacturer and global security company, has a comprehensive ethics program. These programs address the key ethical risks facing marketing. Every firm has unique risks based on the industry and the firm’s unique marketing strategy. For example, in the direct sell- ing industry, recruiting and compensating sales representatives requires transparent and truthful communication. Therefore, the self-regulatory Direct Selling Association has developed a code of ethics to deal with this as well as other risk areas.

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 233

Ethical and socially responsible behavior requires commitment. Some firms sim- ply ignore these issues and focus instead on satisfying their economic and legal responsibilities with an eye toward the overall bottom line of profits. Although the firm may do nothing wrong, it misses out on the long-term strategic benefits that can be derived from satisfying ethical and philanthropic responsibilities. Firms that choose to take these extra steps concern themselves with increasing their overall positive impact on society, their local communities, and the environment, with the bottom line of increased goodwill toward the firm, as well as increased profits. The focus on ethical and philanthropic dimensions has the potential to build trust and long-term customer loyalty. These should be the goals of every effective marketing program.

Philanthropic Responsibilities At the top of the pyramid are philanthropic responsibilities. These responsibilities, which go beyond marketing ethics, are not required of a company, but they promote human welfare or goodwill above and beyond the economic, legal, and ethical dimensions of social responsibility. Many companies demonstrate philanthropic responsibility, which is evidenced by the more than $335 billion in annual corporate donations and contributions to charities.9 Even small companies participate in phi- lanthropy through donations and volunteer support of local causes and national charities, such as the Red Cross and the United Way. For example, Charlotte-based firm Boingo Graphics is a small printing company that developed a program to pro- vide free printing services to organizations such as nonprofits that would not other- wise be able to afford them.10

More companies than ever are adopting a strategic approach to corporate phi- lanthropy. Many firms link their products to a particular social cause on an ongoing or short-term basis, a practice known as cause-related marketing. Fifth Third Bancorp developed a cause-related marketing campaign in which it partnered with the orga- nization NextJob to seek employment for unemployed customers. The campaign was specifically targeted toward bank customers who were behind on their pay- ments due to unemployment. As part of the campaign, the organizations created a website that featured job seekers that employers could easily find.11 Such cause- related programs tend to appeal to consumers because they provide an additional reason to “feel good” about a particular purchase. Marketers like these programs because they often increase sales and create feelings of respect and admiration for the companies involved. Indeed, research suggests that 91 percent of consu- mers are likely to switch to a brand that supports a good cause if price and quality are the same.12

On the other hand, some companies are beginning to extend the concept of cor- porate philanthropy beyond financial contributions by adopting a strategic philanthropy approach, the synergistic use of organizational core competencies and resources to address key stakeholders’ interests and achieve both organizational and social bene- fits. Strategic philanthropy involves employees, organizational resources and exper- tise, and the ability to link those assets to the concerns of key stakeholders, including employees, customers, suppliers, and social needs. Strategic philanthropy involves both financial and nonfinancial contributions to stakeholders (employee time, goods and services, company technology and equipment, etc.), while also benefiting the company.13 For instance, California-based apparel company Patagonia incorporates environmental concerns into its operations. Patagonia uses environ- mentally friendly materials such as organic cotton or recycled polyester. In addition, the company recycles garments that have reached the end of their life. Patagonia also believes it must be an active participant in preserving the environment. The company donates 1 percent of its sales toward preserving and restoring the environment.14

234 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

Another type of philanthropic activity that is gaining in importance is termed social entrepreneurship. Social entrepreneurship occurs when an entrepreneur founds an organization that strives to create social value rather than simply earn profits.15

Grameen Bank in Bangladesh is a popular social enterprise that offers small loans to individuals so they can start their own companies and gain the opportunity to rise out of poverty. Social enterprises can be a for-profit, nonprofit, government entity, or a hybrid organization. Toms, for instance, is a for-profit and nonprofit hybrid that offers a pair of shoes to a child in need for each pair of shoes sold. The nonprofit arm of the organization distributes the shoes. The company has been so successful in its social mission that it has expanded its model to eyewear and coffee. Social entrepreneurship is similar to strategic philanthropy, but a major difference is that companies’ strategic philanthropy programs are not the primary purpose of the organizations or reason for their existence.16 Many social entrepreneurs tend to view marketing as unnecessary since their mission is for social change. However, as with all organizations marketing is necessary to help consumers understand the cause, the organization’s social mission, and how their purchase of products will help advance that mission.17

Philanthropic activities make very good marketing tools. Thinking of corporate philanthropy as a marketing tool may seem cynical, but it points out the reality that philanthropy can be very good for a firm. Estée Lauder, for example, has donated $340 million to help individuals impacted by HIV/AIDS as well as $38 million in clean drinking water. Estée Lauder’s senior vice president of global philanthropy and corporate citizenship believes philanthropy boosts the bottom line. She is hoping to work more closely with Estée Lauder’s competitors to study how corporate phi- lanthropy impacts their industry.18

Sustainability One of the more common ways marketers demonstrate social responsibility is through programs designed to protect and preserve the natural environment. Sustainability includes the assessment and improvement of business strategies, eco- nomic sectors, work practices, technologies, and lifestyles—all while maintaining the natural environment. Many companies make contributions to sustainability by

JO N H RU

SA /E pa /N ew

sc om

Philanthropic activities are not only good for society, they can also be useful in promoting the corporation.

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 235

adopting more eco-friendly business practices and/or supporting environmental initiatives. For instance, Walmart has taken steps to reduce waste and decrease greenhouse gas emissions in its supply chain. Walmart’s example is convincing other large retailers to take similar actions.19 Another green practice many compa- nies adopt involves building new facilities that adhere to Leadership in Energy and Environmental Design (LEED) standards. These standards provide a framework for incorporating greener building materials and more efficient operations into construc- tion.20 Starbucks announced a goal to build 75 percent of new company-owned stores sustainably so as to achieve LEED certification.21 Because buildings produce 40 percent of greenhouse gas emissions, green building construction can have a sig- nificant impact toward sustainability. Such efforts generate positive publicity and often increase sales for the companies involved.

Many products have been certified as “green” by environmental organizations such as Green Seal and carry a special logo identifying their organization as green marketers. Lumber products at Home Depot, for example, may carry a seal from the Forest Stewardship Council to indicate that they were harvested from sustain- able forests using environmentally friendly methods.22 Likewise, most Chiquita bananas are certified through the Rainforest Alliance’s Better Banana Project as hav- ing been grown with more environmentally friendly and labor-friendly practices.23 In Europe, companies can voluntarily apply for the EU Ecolabel to indicate that their products are less harmful to the environment than competing products, based on sci- entifically determined criteria.

The emphasis on sustainability has led many firms to engage in green marketing, a strategic process involving stakeholder assessment to create meaningful long-term relationships with customers, while maintaining, supporting, and enhancing the nat- ural environment. In contrast, some companies choose to engage in a deceptive mar- keting practice called greenwashing, which involves misleading a consumer into thinking that a good or service is more environmentally friendly than it actually is. This generally takes the form of misleading product labels, which can range from making environmental claims that are required by law and are therefore irrelevant (e.g., saying that a product is CFC-free when CFCs have been banned by the govern- ment) to puffery (exaggerating environmental claims) to fraud.24 Firms need to be careful when using words like green, sustainable, or environmentally friendly so as not to mislead consumers and face potential litigation. The federal government has taken a tougher stand on environmental issues, and as greenwashing becomes more prevalent, it is likely that legal action will increase. Since one-third of consumers rely exclusively on labels to decide if a product is environmentally friendly, it is impor- tant that labels tell the truth.25

Some organizations have developed a certification system to help consumers make informed decisions when buying supposedly green products. For example, the Carbon Trust offers a certification that validates claims about reducing carbon output. However, certification organizations are not always trustworthy either. Some of them charge a fee and do not hold products to rigorous standards. As explained in Beyond the Pages 8.2, the best way for consumers to be informed about eco-friendly products is to do their research before going shopping.

Despite the problem of greenwashing, many firms are taking proactive steps to become more sustainable. Toyota began selling the first mass-produced car using hydrogen technology. The Mirai’s hydrogen-cell technology does not release harmful emissions and can go three times the driving range of electric vehicles.27 Other firms are choosing to experiment with alternative energy solutions as a form of social responsibility. IKEA is using geothermal energy, or energy derived from the natural heat inside the Earth, to power some of its stores, while Walmart is experi- menting with solar energy.28 As support for sustainability continues to increase, companies are quickly recognizing that sustainability initiatives are a smart market- ing move.

236 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

Marketing Ethics and Strategy Marketing ethics includes the principles and standards that guide the behavior of individuals and groups in making marketing decisions. Marketing strategy must con- sider stakeholders—including managers, employees, customers, government regula- tors, suppliers, shareholders, the community, and special-interest groups—all of whom contribute to accepted standards and society’s expectations. The most basic of these standards have been codified as laws and regulations to encourage compa- nies to conform to society’s expectations of business conduct. These laws were usu- ally passed due to societal concerns about misconduct that was damaging to competition or to consumers.

The standards of conduct that determine the ethics of marketing activities require both organizations and individuals to accept responsibility for their actions and to comply with established value systems. Repeated ethical misconduct in a particular business or industry sometimes requires the government to intervene,

BEYOND THE PAGES 8.2

Finding the Real Green Products26

What makes a green product green? This ques- tion is actually quite complicated. The growing popularity of eco-friendly products is encourag- ing businesses to create and sell more green items. However, some businesses are cutting corners by touting their products as green when they really are not—a form of misconduct known as greenwashing. Greenwashers make unjustifiable “green” claims about their products to appeal to the eco-friendly consumer. One study determined that as many as 95 percent of products marketed as green were guilty of at least one form of greenwashing. As a result, many consumers claim they do not know how to ensure that a company is really eco-friendly.

One common way that companies engage in greenwashing is by sustainably sourcing one product ingredient while the other ingredients remain unsustainable. This might be akin to a company claiming that its product is green since one of the ingredients is organic cotton, while simultaneously glossing over the fact that the product also consists of nonrecyclable pro- ducts or chemicals. Unfortunately, the subjec- tive nature of greenwashing makes it harder to detect, as consumers themselves differ on what is green and what is greenwashing. For instance, some consumers feel misled by Cascadian Farm’s logo of a small idyllic farm when they discover that the brand is actually owned by General Mills. Others are unconcerned as long as the brand’s organic claims are true. Being green often requires tradeoffs as well—some of which consumers might find to be unacceptable.

Compact fluorescent light bulbs save energy, but they also contain mercury that could harm consumers if they break. The question of how far to go to create a green product can be controversial.

The issue of greenwashing has become so pervasive that it is prompting government intervention. The Federal Trade Commission has released green guidelines to define what is acceptable in green advertising. The FTC has also begun cracking down on companies for making false claims. For example, it took action against six companies that made biodegradable plastic claims about their products that were unsubstantiated. It filed a $450,000 penalty against AJM Packaging Corporation for violating a 1994 agreement that it would not claim its packaging was biodegradable unless supported by scientific evidence. However, guidelines do not have the same effect as laws, particularly as individual consumers may have their own views of what constitutes a “green” product. The best way consumers can avoid greenwash- ing is to investigate green claims for themselves. Such an investigation could include looking for third-party certification of a product’s “green- ness,” paying attention to ingredient lists, and looking for information on trustworthy websites. At the same time, it is important for consumers to realize that all products have some effect on the environment. Rather than looking for a 100 percent green product, consumers could instead look for ways that companies have increased sustainability throughout their operations to decrease their negative environmental impact.

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 237

a situation that can be expensive and inconvenient for businesses and consumers. Early in the 21st century, business ethics appeared to be improving after Enron, WorldCom, and the passage of the Sarbanes-Oxley Act in 2002. However, miscon- duct in the financial and banking sectors created a dramatic erosion of consumer confidence and trust. Product quality issues have also lowered consumer confidence in recent years. For instance, bacteria contamination in ice cream from Blue Bell Creameries resulted in a massive recall and the deaths of three people.29 Marketing deceptions, such as lying or misrepresenting information, increase consumer distrust of some businesses and industries. Lumber Liquidators, the largest retailer of hard- wood flooring in the United States, was criticized after tests found that its laminate made in China had higher levels of formaldehyde than was considered safe. This was discovered after the laminate had already been installed in thousands of homes. Lumber Liquidators denied that there was a problem.30 Without a shared view of appropriate and acceptable business conduct, companies often fail to balance their desires for profits against the wishes and needs of society.

Those occupying sales positions have a key responsibility for ethical behavior. Increasingly, it is the sales department that is gaining more influence among all func- tions in firms.31 This may be because the sales areas are directly responsible for driv- ing revenue. For example, bribery can be used to secure business. Lying to customers and withholding important information can be an issue. Salespeople have a responsibility to understand the product sold and the long-term impact on customers. Therefore, salespeople cannot turn a blind eye to how it fits into the firm’s business strategy and overall ethical performance.

When companies deviate from the prevailing standards of industry and society, the result is customer dissatisfaction, lack of trust, and legal action. The reputation of the firm is one of the most important considerations for consumers. Marketers should be aware of stakeholders and the need to build trust. When marketing activi- ties deviate from accepted standards, the exchange process can break down, result- ing in customer dissatisfaction, lack of trust, and lawsuits. A recent study shows that only about 57 percent of global consumers trust businesses today, which can signifi- cantly affect the relationship between consumers and business.32 Trust is an impor- tant concern for marketers since it is the foundation for long-term relationships. The questionable conduct of high-profile financial institutions and banks has caused many consumers to critically examine the conduct of all companies. Trust must be

Si m io n M ar ia n/ A la m y

While consumers increasingly demand environmentally friendly products, marketers must avoid “greenwashing” and ensure that their products truly are green.

238 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

built or restored to gain the confidence of customers. Exhibit 8.2 describes the trust global consumers have for different institutions. Once trust is lost, it can take a life- time to rebuild. The way to deal with ethical issues is to address them proactively during the strategic planning process, not after major problems materialize.

Given that so much of a company’s success depends on the public’s perceptions of the firm, a firm’s reputation is one of its greatest internal resources that directly affect the success of the marketing strategy. The value of a positive reputation is dif- ficult to quantify, but it is very important and once lost can be difficult to regain. Con- sider that a significant percentage of Disney’s market value—more than $35 billion— is based on intangible assets such as licensing arrangements, brand value, and good- will.33 A single negative incident can influence perceptions of a firm’s image and rep- utation for years afterward. Corporate reputation, image, and branding are more important than ever and are among the most critical aspects of sustaining relation- ships with key stakeholders. Although an organization does not control its reputation in a direct sense, its actions, choices, behaviors, and consequences do influence its reputation. For example, BP had years of building a reputation touting its Beyond Petroleum image destroyed by the Gulf oil spill disaster.

The Challenges of Being Ethical and Socially Responsible Although most consider the values of honesty, respect, and trust to be self-evident and universally accepted, business decisions involve complex and detailed discus- sions in which correctness may not be so apparent. Both employees and managers need experience within their specific industry to understand how to operate in gray areas or to handle close calls in evolving areas, such as Internet privacy. For example, how much personal information should be stored on a firm’s website with- out customers’ permission? In Europe, a “Right to be Forgotten” law was passed that allows Internet users in the EU to have unwanted links removed from Google’s search results.34 In the United States, firms have more freedom to decide how to collect and use customers’ personal data, but advancing technology raises new

EXHIBIT 8.2 Global Trust in Different Institutions.

57% 53%

78%

48% 51%

63%

Business overall

Banks Technology Government Media NGOs

SOURCE: Edelman, 2015 Edelman Trust Barometer Global Results, http://www.edelman.com/insights/intellectual-property/ 2015-edelman-trust-barometer/ (accessed April 18, 2015).

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 239

questions every day. As businesses continue to push the limits of privacy, the govern- ment has begun to crack down on what it sees as privacy infringement. It charged messaging app Snapchat with making deceptive claims because the app could save messages without users’ knowledge. This was in spite of Snapchat’s reassurances that messages would be deleted. The company was forced to implement a privacy program to be monitored by a third party for the next 20 years.35 Issues related to personal privacy, unsolicited e-mail, and misappropriation of copyrighted intellec- tual property cause ethical problems. Protecting trademarks and brand names becomes more difficult as digital communication and social media expands.

Individuals who have limited business experience often find themselves required to make sudden decisions about product quality, advertising, pricing, bribery, hiring practices, privacy, and pollution control. For example, how do advertisers know when they make misleading statements as opposed to simple puffery or exaggera- tion? Bayer claims to be “the world’s best aspirin”; Hush Puppies are “the earth’s most comfortable shoes”; and Firestone (before its famous recall of 6.5 million tires) promised “quality you can trust.”36 Red Bull experienced this problem when customers filed a class-action lawsuit against it claiming that its slogan “gives you wings” was misleading. Although this is arguably a type of puffery, the lawsuit main- tained that the claims hinted at enhanced physical or athletic prowess—something that Red Bull has not proved. Red Bull paid $13 million to settle the lawsuit.37

The personal values learned through socialization from family, religion, and school may not provide specific guidelines for these complex business decisions. In other words, a person’s experiences and decisions at home, in school, and in the community may be quite different from the experiences and the decisions that he or she has to make at work. Moreover, the interests and values of individual employees may differ from those of the company in which they work, from industry standards, and from society in general. When personal values are inconsistent with the configu- ration of values held by the work group, the potential for ethical misconduct increases. Exhibit 8.3 provides an overview of the most common types of observed misconduct in organizations.

EXHIBIT 8.3 Types of Misconduct Observed in Organizations.

2011 (%) 2013 (%) Abusive behavior 21 18 Lying to employees 20 17 Conflict of interest 15 12 Violating company Internet use policies 16 12 Discrimination 15 12 Violations of health/safety regulations 13 10 Lying to outside stakeholders 12 10 Retaliation against someone reporting misconduct 10 Falsifying time reports or hours worked 12 10 Stealing 12 9 Employee benefits violations 12 9 Delivery of substandard goods or services 10 9 Abuse of substances such as drugs at work 11 9 Employee privacy breach 11 8 Improper hiring practices 10 7

SOURCE: Ethics Resource Center, 2013 National Business Ethics Survey ® of the U.S. Workforce (Arlington, VA: Ethics Resource Center, 2014), p. 41.

240 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

Although Exhibit 8.3 documents many types of issues that exist in organizations, due to the almost infinite number of ways that misconduct can occur, it is impossible to identify every conceivable ethical issue. It is also important to note that most of these potential issues are not clearly obvious to customers. However, any type of manipulation, deceit, or even just the absence of transparency in decision making can potentially create issues that become evident to customers, supply chain part- ners, or other important stakeholders. With that in mind, we now turn our attention to specific ethical issues in the marketing program.

ETHICAL ISSUES IN THE MARKETING PROGRAM An ethical issue is an identifiable problem, situation, or opportunity that requires an individual or organization to choose from among several actions that must be evalu- ated as right or wrong, ethical or unethical. Any time an activity causes marketing managers or customers to feel manipulated or cheated, an ethical issue exists, regardless of the legality of that activity. It is therefore imperative that firms become familiar with many of the ethical issues that can potentially occur in the marketing program so that these issues can be identified and resolved when they occur. Some examples of potential ethical issues in the marketing program appear in Exhibit 8.4. These and other issues can develop into legal problems if they are not addressed in the strategic planning process.

While customers and other stakeholders may think a firm is engaged in unethical conduct, the final decision is usually determined by legal action or a self-regulatory body such as the Better Business Bureau (BBB). The National Advertising Division (NAD), a division of the Better Business Bureau, reviews complaints about unfair advertising and recommends whether the advertising in question should be discontinued. For instance, NAD determined that there was not enough evidence to support the claims of Pursuit of Research, LLC to market its dietary supplements as effective in fighting autism, attention deficit disorder, and strokes. The NAD recommended that the company immediately discontinue making these unsubstantiated claims.38

Regardless of the reasons behind specific ethical issues, marketers must be able to identify those issues and decide how to resolve them. Doing so requires familiarity with the many kinds of ethical issues that may arise in marketing. Research suggests that the greater the consequences associated with an issue, the more likely it will be recognized as an ethics issue and the more important it will be in making an ethical decision.39 Let’s look at several potential ethical issues in more detail.

Product-Related Ethical Issues Product-related ethical issues generally arise when the firm fails to disclose risks associated with a product or information regarding the function, value, or use of a product. These issues are common in many industries, including automobiles, toys, pharmaceuticals, and other industries where safety or design issues come into play. General Motors came under fire after faulty ignition switches in some of its vehicle models caused accidents. Internal documents showed that engineers at the company had known about the defect for years, but a recall was never issued.40 The incident became so serious that CEO Mary Barra was called before Congress to testify.

Ethical issues can also arise in product design as pressures build to substitute inferior materials or product components to reduce costs. Many companies use Bisphenol A (BPA) as a component in plastics because it makes sound plastic and is relatively inexpensive. However, there have been studies that suggest BPA could negatively impact fetal development, cancers, obesity, and fertility. Although the U.S. Food and Drug Administration claims that BPA is safe in the levels humans usually

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 241

encounter, the fact that it could harm an individual’s health has convinced many stakeholders to call for a ban on the use of BPA plastics. This is therefore an ethical issue even though it is not currently illegal.41 Similarly, ethical issues can arise when the firm fails to inform customers about changes in quality or quantity of product sold. For example, if a cereal maker reduced the amount of cereal in the package without reducing the package size or the price, the company would have a serious ethical issue on its hands.

Another common product-related ethical issue involves counterfeit products. Counterfeit products abound today, particularly in the areas of clothing, audio and video products, and computer software. Any product that can be easily copied is

EXHIBIT 8.4 Potential Ethical Issues in the Marketing Program.

Overall Misrepresenting the firm’s capabilities Manipulation or misuse of data or information Exploitation of children or disadvantaged groups Invasion of privacy Anticompetitive activities Abusive behavior Misuse of firm resources

Product Issues Misrepresentation of goods or services Failure to disclose product defects Counterfeit or gray market products Misleading warranties Reducing package contents without reducing package size

Pricing Issues Price deception Reference pricing claims Price discrimination Predatory pricing Fraudulent refund policies

Distribution (Supply Chain) Issues Opportunistic behavior among members of the supply chain Exclusive distribution arrangements Slotting fees Tying contracts Failure to honor product and promotional support

Promotion Issues False or misleading advertising or selling Bait-and-switch advertising High-pressure sales tactics Entertainment and gift giving Stereotypical portrayals of women, minorities, or senior citizens Failure to honor sales promotion promises

242 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

vulnerable to counterfeit activities. Some people argue that only manufacturers become injured when consumers purchase counterfeit products. This is clearly mis- taken reasoning. For example, the loss of tax revenues has a huge impact on govern- ments, as they cannot collect both direct and indirect taxes on the sale of counterfeit products. Likewise, counterfeits leach profits necessary for ongoing product devel- opment away from the firm, as well as thousands of jobs at legitimate companies. Customers also feel the impact of counterfeit products, as their quality almost never lives up to the quality of the original. Faced with increasing risks for product knock- offs, eBay has technology that uses algorithms to identify fraudulent listings on its site. Companies also hire brand protection firms to identify fake versions of their products on the Internet. Unfortunately, the Internet has made it easier for counter- feiters since consumers do not often have a chance to closely examine the product until after it is shipped to their home.42

Pricing-Related Ethical Issues Pricing is one of the most heavily watched and regulated of all marketing activities. Given that a difference in price can create such a significant competitive advantage, any effort to artificially give one company an edge over another is subject to legal or regulatory intervention. The emotional and subjective nature of price creates many situations where misunderstandings between the seller and buyer cause ethical pro- blems. Firms have the right to price their products to earn a reasonable profit, but ethical issues may crop up when a company seeks to earn high profits at the expense of its customers. Some pharmaceutical companies, for example, have been accused of price gouging, or pricing products at exorbitant levels, and taking advantage of customers who must purchase the medicine to survive or to maintain their quality of life. Likewise, various forms of bait and switch pricing attempt to gain consumer interest with a low-priced product, and then switch the buyer to a more expensive product or add-on service. While there is an endless potential for ethical violations in pricing strategy, four key issues garner the most attention: price discrimination, price fixing, predatory pricing, and superficial discounting.

Price discrimination occurs when firms charge different prices to different custo- mers. This is fairly common in consumer markets, such as when cable and satellite companies offer lower prices to new customers, or when fast-food restaurants offer lower-priced meals for children. Price discrimination is very common in business markets where it typically occurs among different intermediaries in the supply chain. In general, price discrimination is illegal, unless the price differential has a basis in actual cost differences in selling products to one customer relative to another (such as volume discounts and competitive price matching). The overriding question in cases of price discrimination is whether the price differential injures competition. The Robinson-Patman Act and the Clayton Act both regulate discrimi- natory pricing. The intent of these regulations is to provide a level playing field for all competitors.

Price fixing occurs when rival firms collaborate to set prices. Although such arrangements are illegal under the Sherman Act, price fixing is exceedingly difficult to prove. Usually, one firm in an industry will be a price leader and others will be the price followers. The Justice Department has determined that, while following a com- petitor’s lead in an upward or downward trend is acceptable, there can be no signal- ing of prices to competitors in this process. Sizable fines and prison terms for those convicted of price fixing are the norm. Tire manufacturer Bridgestone paid a $425 million criminal fine after executives allegedly colluded on prices for parts sold to Toyota, Nissan, Suzuki, and other automobile makers.43

Predatory pricing occurs when a firm charges very low prices for a product with the intent of driving competition out of business or out of a specific market. Prices then return to normal once the competitors have been eliminated. Predatory pricing is

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 243

illegal; however, like price fixing, it is extremely difficult to prove in court. The chal- lenge in predatory pricing cases is to prove that the predatory firm had the willful intent to ruin the competition. The court must also be convinced that the low price charged by the predator is below their average variable cost. The variable cost defi- nition of predatory pricing is a major reason why very few lawsuits for predatory pricing are successful. The reality is that large firms with lean, efficient cost struc- tures dominate today’s competitive landscape. These firms have lower variable costs that allow them to legitimately charge lower prices than the competition in many cases. This is the reason that large retailers such as Walmart, Home Depot, and Lowe’s have slowly and methodically put smaller retailers out of business. These large firms are not necessarily guilty of predatory pricing—they are only guilty of being more efficient and competitive than other firms.

Superficial discounting occurs when a firm advertises a sale price as a reduction below the normal price when it is not the case. Typically, the firm does not sell the product at the regular price in any meaningful quantities, or the sale price period is excessively long. This pricing tactic is clearly an ethical issue because most custo- mers are not aware that they are being intentionally misled. Most of the legal activity regarding superficial discounting has taken place at the state attorney general level. To avoid legal action, a firm should offer a product at the original price, discount the price in a specified dollar amount for a specified period, and then revert to the origi- nal price at the end of that period. If the product is a discontinued item, that fact should be noted in the advertisement.

Supply Chain–Related Ethical Issues Managing ethical issues in distribution and supply chain strategy is one of the great- est difficulties in marketing today. The reasons deal with the complexity of most sup- ply chains and the fact that supply chains today are global. For instance, the chocolate industry has been criticized for sourcing from suppliers that use child labor on cocoa plantations. McDonald’s sales in China reduced significantly when it was found that one of its suppliers had been packaging old meat.44 Supply chain issues can occur in any industry. Even Apple, the top brand in terms of both value and reputation, has experienced instances of forced overtime, underage workers, explosions, and improperly disposed waste in its suppliers’ factories. Although Apple has a Supplier Code of Conduct, problems at its supplier factories have continued.45

The issues that McDonald’s and Apple have faced highlight the numerous risks that occur in global supply chains. Although companies often create a Supplier Code of Conduct, they are required to conduct regular audits to ensure that factories are following compliance standards—which in turn can incur significant costs to companies in both time and finances. Countries with lax labor laws, such as China and Russia, require even more diligent monitoring. Often suppliers hire subcontrac- tors to do some of the work, which increases a company’s network of suppliers and the costs of trying to monitor all of them. Finally, company compliance requirements may conflict with the mission of the procurement office. Because it is the procure- ment division’s job to procure resources at the lowest price possible, the division may opt to source from less expensive suppliers with questionable ethical practices rather than from more expensive ethical suppliers. Nike faced this problem during the 1990s when it was highly criticized for worker abuses in its supplier factories.46

Managing supply chain ethics is important because many stakeholders hold the firm responsible for all ethical conduct related to product availability. This requires the company to exercise oversight over all of the suppliers used in producing a prod- uct. Developing good supply chain ethics is important because it ensures the integ- rity of the product and the firm’s operations in serving customers. For instance, Novation, a leading healthcare supply company, has been recognized for its strong

244 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

corporate governance and reporting mechanisms in its supply chain. To encourage its suppliers to report misconduct, the company has instituted a vendor grievance and feedback system. This allows vendors to report potential problems before they reach the next level of the supply chain, which reduces the damage such problems will cause if the products continue down the supply chain unchecked. The company also instituted a Business in Ethics Integrity Award awarded at its annual Supplier Summit.47

Fortunately, organizations have developed solutions to promote ethical sourcing practices. First, it is essential for all companies who work with global suppliers to adopt a Global Supplier Code of Conduct and ensure that it is effectively commu- nicated to their suppliers. Additionally, companies should encourage compliance and procurement employees to work together to find ethical suppliers at reasonable costs. Marketers must also work to make certain that their company’s supply chains are diverse. This can be difficult because sometimes the best product manufacturers are located in a single country. Although it is expensive to diversify a company’s sup- ply chain, disasters can incapacitate a firm. Third-party verification of supplier ethi- cal standards is becoming an accepted way of maintaining compliance. For instance, Verify is a leading third-party evaluator of suppliers that assures suppliers are meet- ing the ethical, environmental, quality, and social responsibility standards consistent with the firm’s ethics and compliance program.48 Finally, and perhaps most impor- tantly, companies must perform regular audits on their suppliers and, if necessary, discipline those found to be in violation of company standards.

Promotion-Related Ethical Issues Marketing practices that are false or misleading can destroy customers’ trust in an organization. The Federal Trade Commission (FTC) monitors businesses for decep- tive practices and takes disciplinary action when needed. It filed a lawsuit against DirecTV, claiming that the company committed fraud through false advertising. According to the FTC, DirecTV advertised a 12-month plan for as little as $19.95 each month but did not make clear that a two-year contract was required. The com- pany also did not inform consumers that they needed to cancel premium channels during the first 3 months of a packaged deal or their credit cards would be charged automatically. DirecTV denied that it engaged in misconduct.49 No matter how vigi- lant, it is difficult for the FTC to catch all forms of deceptive marketing, particularly in the area of promotion.

Ethical issues also arise when firms use ambiguous statements, in which claims are so weak that the viewer, reader, or listener must infer the advertiser’s intended message. Because it is inherently vague, using ambiguous wording allows the firm to deny any intent to deceive. The verb “help” is a good example (as in expressions such as “helps prevent,” “helps fight,” or “helps make you feel”). Consumers may view such advertisements as unethical because they fail to communicate all the information needed to make a good purchasing decision or because they deceive the consumer outright. In another example, the FTC and other agencies now monitor more closely the promotions for work-at-home business ventures. Consumers lose millions of dollars each year responding to ads for phony business opportunities such as those promising $50,000 a year for doing medical billing from a home computer.

Personal selling provides many opportunities for ethical misconduct. Bribery occurs when an incentive (usually money or expensive gifts) is offered in exchange for an illicit advantage. Even a bribe that is offered to benefit the organization is usu- ally considered unethical. Because it jeopardizes trust and fairness, it hurts the orga- nization in the long run. As a result, laws have been passed to prevent bribery. The U.S. Foreign Corrupt Practices Act (FCPA) prohibits American companies from making illicit payments to foreign officials in order to obtain or keep business.

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 245

Under the U.K. Bribery Act, companies can be found guilty of bribery even if the bribery did not take place within the United Kingdom, and company officials without explicit knowledge about the misconduct can still be held accountable. The law applies to any business with operations in the United Kingdom.50 The U.K. Bribery Act has convinced many multinational organizations to update their ethical codes of conduct to avoid ambiguity in this area.

Fraudulent activity has dramatically increased in the area of direct marketing, in which companies use the telephone and nonpersonal media to communicate informa- tion to customers, who then purchase products via mail, telephone, or the Internet. Each year consumers report billions of dollars in losses resulting from fraud, many of them from direct-marketing scams. About 13 percent are associated with identity theft and 11 percent are associated with third-party and creditor debt collection. Other common types of marketing fraud include those involving prizes, sweepstakes, and lotteries; Internet auctions; credit cards; and shop-at-home and catalog sales.51

MANAGING AND CONTROLLING ETHICAL ISSUES Given the conflicting priorities among concerned stakeholders and the nature of most marketing decisions, even the best-designed marketing programs will eventu- ally encounter ethical issues. Since ethical issues can never be completely elimi- nated, most enlightened firms instead take steps to manage and control ethical issues before they arise. In this section, we look at a number of ways that firms can go about this process.

Regulating Marketing Ethics Many firms attempt to regulate themselves in an effort to demonstrate ethical responsibility and prevent regulation by federal or state governments. In addition to complying with all relevant laws and regulations, many firms choose to join trade associations that have self-regulatory programs. Although such programs are not a direct outgrowth of laws, many became established to stop or delay the development of laws and regulations that would restrict the associations’ business practices. Some trade associations establish codes of conduct by which their members must abide or risk rebuke or expulsion from the association.

Perhaps the best-known self-regulatory association is the Better Business Bureau (BBB). The BBB’s 112 local bureaus oversee businesses and charities across the United States and Canada, and help resolve problems for millions of consumers each year.52 Each bureau works to champion good business practices within a com- munity, although it usually does not have strong tools for enforcing its rules of busi- ness conduct. When a firm violates what the BBB believes to be good business practices, the bureau warns consumers through local newspapers or broadcast media. If the offending organization is a member of the BBB, it may be expelled from the local bureau. The BBB also has a website (http://www.bbb.org) to help con- sumers identify businesses that operate in an ethical manner. BBB members who use the site agree to binding arbitration with regard to online privacy issues.

Self-regulatory programs like the BBB have a number of advantages over gov- ernment regulation. Establishment and implementation of such programs are usually less costly, and their guidelines or codes of conduct are generally more practical and realistic. Furthermore, effective self-regulatory programs reduce the need to expand government bureaucracy. However, self-regulation also has several limitations. Non- member firms are under no obligation to abide by a trade association’s industry guidelines or codes. Moreover, most associations lack the tools or authority to enforce their guidelines. Finally, these guidelines are often less strict than the regula- tions established by government agencies. Still, in many cases, government oversight is essential to ensure the public’s trust. Beyond the Pages 8.3, for example, discusses

246 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

BEYOND THE PAGES 8.3

The Consumer Financial Protection Bureau Aims to Build Trust in the Banking System53

Financial products are often complex instru- ments that can be difficult to understand, not only for consumers but also for businesses as well. This inability to understand the risks of financial products and lending practices contrib- uted to the 2008–2009 financial meltdown, the massive government bailouts of companies to save them from bankruptcy, and the subsequent recession. To try to prevent similar problems in the future, the U.S. government formed the Con- sumer Financial Protection Bureau (CFPB).

The CFPB became a reality as a component of the Dodd-Frank Act signed into law in July 2010. Established by Harvard Law Professor Elizabeth Warren, the bureau is designed to mimic the independent Consumer Product Safety Commission, which aims to keep unsafe con- sumer products out of the hands of individuals. Instead of consumer products, however, the CFPB’s authority involves financial products. The CFPB has rule making authority and super- visory power over the credit market. Its goal is to make financial products easy to understand in terms of costs, risks, and product comparisons. It also aims to curtail unfair lending and credit card practices, to check the safety of financial

products before they are launched into the mar- ket, and to require changes to those financial pro- ducts deemed to be too risky. The CFPB works proactively to supervise lenders by regularly checking their books and working together with both attorneys general and the American people. When necessary, the CFPB will step in to enforce new rules on those not complying.

Although the CFPB sounds like a good idea, critics point out potential problems. Banks are worried that the CFPB might increase costs and inhibit their decision-making authority to serve the market effectively. Critics believe the CFPB will create burdensome regulations, such as capping the interest rates that financial insti- tutions can apply. This could harm borrowers because riskier applicants could be denied loans if rates are capped. Some have criticized the power of the CFPB and believe it will not be held accountable for the decisions it makes.

The standoff became so great that President Obama placed former attorney general Richard Cordray as the new head of the CFPB instead of Elizabeth Warren. However, criticism continues. Some have proposed appointing a board of directors over the agency rather than a single person to keep any one person from gaining too much power. Until the conflict is settled, the powers of the CFPB to enact widespread change in the financial sector might be limited.

N et Ph ot os /A la m y

The Better Business Bureau is the best known self-regulatory association in the U.S. and Canada.

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 247

how the U.S. government is trying to maintain trust in the banking system in light of ethical and legal lapses in the financial sector.

Codes of Conduct To meet the public’s escalating demands for ethical marketing, firms need to develop plans and structures for addressing ethical considerations. Although there are no universal standards that can be applied to organizational ethics programs, most com- panies develop codes, values, or policies to guide business behavior. It would be very naive to think that simply having a code of ethics would solve any ethical dilemmas a firm might face. In fact, the majority of firms that experience ethical or legal pro- blems usually have stated ethics codes and programs. Often, the problem is that top management, as well as the overall corporate culture, has not integrated these codes, values, and standards into daily operations.

Without ethics training and uniform standards and policies regarding conduct, it is hard for employees to determine what conduct is acceptable within the company. In the absence of such programs and standards, employees will generally make deci- sions based on their observations of how coworkers and superiors behave.54 To improve ethics, many organizations have developed codes of conduct (also called codes of ethics) that consist of formalized rules and standards that describe what the company expects of its employees. Most large corporations have formal codes of conduct, but codes are not effective unless they are properly implemented. In addition, codes must be periodically revised to identify and eliminate weaknesses in the company’s ethical standards and policies.

Most codes address specific ethical risk areas in marketing. For instance, IBM’s code of conduct has a bribery policy that prohibits accepting gifts of nominal value if the gift in any way influences IBM’s business relationship with the giver. However, employees are allowed to accept promotional premiums or gifts of nominal value if based upon bonus programs (such as with hotels and airlines) or if the gift is rou- tinely offered to all other parties with similar relationships to the gift giver.55 Codes like IBM’s promote ethical behavior by reducing opportunities for unethical behav- ior; however, codes of conduct do not have to be so detailed that they take every sit- uation into account. Instead, the code should provide guidelines that enable employees to achieve organizational objectives in an ethical manner. The American Marketing Association Code of Ethics, for example, does not cover every possible ethical issue, but it provides a useful overview of what marketers believe are sound principles for guiding marketing activities.56 This code serves as a helpful model for structuring an organization’s code of conduct. Exhibit 8.5 lists the key considera- tions in developing and implementing a code of ethical conduct.

EXHIBIT 8.5 Key Considerations in Developing and Implementing a Code of Ethical Conduct.

1. Examine high-risk areas and issues.

2. State values and conduct necessary to comply with laws and regulations. Values are an impor- tant buffer in preventing serious misconduct.

3. Identify values that specifically address current ethical issues.

4. Consider values that link the organization to a stakeholder orientation. Attempt to find overlaps among organizational and stakeholder values.

5. Make the code of conduct understandable by providing examples that reflect values.

6. Communicate the code frequently and in language that employees can understand.

7. Revise the code every year with input from a wide variety of internal and external stakeholders.

248 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

Research has found that corporate codes of ethics often have five to seven core values or principles in addition to more detailed descriptions and examples of appro- priate conduct. Six core values are considered to be highly desirable in any code of ethical conduct: (1) trustworthiness, (2) respect, (3) responsibility, (4) fairness, (5) caring, and (6) citizenship.57 These values will not be effective without distribu- tion, training, and the support of top management in making them a part of the cor- porate culture and the ethical climate. Employees need specific examples of how these values can be implemented.

Codes of conduct will not resolve every ethical issue encountered in daily opera- tions, but they help employees and managers deal with ethical dilemmas by prescrib- ing or limiting specific activities. Many firms have a code of ethics, but sometimes they do not communicate their code effectively. A code placed on a website or in a training manual is useless if the company does not reinforce it on a daily basis. By communicating both the expectations of proper behavior to employees as well as punishments they face if they violate the rules, codes of conduct curtail opportu- nities for unethical behavior and thereby improve ethical decision-making.

Ethical Leadership There is increasing support that ethical cultures emerge from strong leadership. Many agree that the character and success of the most admired companies emanate from their leaders. The reason is simple: Employees look to the leader as a model of acceptable behavior. As a result, if a firm is to maintain ethical behavior, top manage- ment must model its policies and standards. In fact, maintaining an ethical culture is near impossible if top management does not support ethical behavior. For example, in an effort to keep earnings high and boost stock prices, many firms have engaged in falsifying revenue reports, sometimes involving the marketing area to overstate sales in a specific quarter. Channel stuffing involves shipping surplus inventory to whole- salers and retailers at an excessive rate, typically before the end of a quarter. The practice may conceal declining demand for a product or inflate financial statement earnings, which misleads investors.58 Top executives in these firms may encourage the behavior because they hold stock options and can receive bonus packages tied to the company’s performance. Thus, higher reported revenues mean larger execu- tive payoffs. Marketing is often seen as the most flexible area to influence sales and earnings.

In the realm of marketing ethics, great leaders (1) create a common goal or vision for the company; (2) obtain buy-in, or support, from significant partners; (3) motivate others to be ethical; (4) use the resources that are available to them; and (5) enjoy their jobs and approach them with an almost contagious tenacity, pas- sion, and commitment.59 Along with strong ethical leadership, a strong corporate culture in support of ethical behavior can also play a key role in guiding employee behavior. Ninety-four percent of respondents to a survey conducted by business con- sulting firm LRN said it was very important for them to work for an ethical company, with 82 percent saying they would prefer to be paid less if it meant working in an ethical corporate environment.60 Additionally, another survey revealed that the most common reason employees give for leaving a company is because their super- visors do not trust them, followed by company expectations that they work during off-time hours.61 Organizational culture, coworkers and supervisors, and the oppor- tunity to engage in unethical behavior influence ethical decision-making. Ethics training can affect all three types of influence. Full awareness of the philosophy of management, rules, and procedures can strengthen both the organizational culture and the ethical stance of peers and supervisors. Such awareness also arms employ- ees against opportunities for unethical behavior and lessens the likelihood of misconduct. If adequately and thoughtfully designed, ethics training can ensure that everyone in the firm (1) recognizes situations that might involve ethical

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 249

decision-making, (2) understands the values and culture of the firm, and (3) can eval- uate the impact of ethical decisions on the firm in the light of its value structure.62

RELATIONSHIP TO MARKETING AND FINANCIAL PERFORMANCE One of the most powerful arguments for including ethics and social responsibility in the strategic planning process is the evidence of a link between ethics, social respon- sibility, and financial performance.63 An ethical climate calls for organizational members to incorporate the interests of all stakeholders, including customers, in their decisions and actions. Hence, employees working in an ethical climate will make an extra effort to better understand the demands and concerns of customers. One study found that ethical climate is associated with employee commitment to quality and intra-firm trust.64 Employee commitment to the firm, customer loyalty, and profitability have also been linked to increased social responsibility. These find- ings emphasize the role of an ethical climate in building a strong competitive posi- tion. For example, Whole Foods is one of the most successful food retailers in the nation. The company has strong employee benefits including gym membership, dis- counts on food, and healthcare benefits for full-time workers and part-time workers that meet certain service hour thresholds. The company also offers loans to artisanal food entrepreneurs. Whole Foods has found that placing customers and employees first is integral to its success.65

As employees perceive an improvement in the ethical climate of their firm, their commitment to the achievement of high-quality standards also increases. They become more willing to personally support the quality initiatives of the firm. These employees often discuss quality-related issues with others both inside and outside of the firm, and gain a sense of personal accomplishment from providing quality goods and services. These employees exhibit effort beyond both expectations and requirements in order to supply quality products in their particular job or area of responsibility. Conversely, employees who work in less ethical climates have less commitment to providing such quality. These employees tend to work only for the pay, take longer breaks, and are anxious to leave work every day.

Stakeholder Orientation A natural progress from a market orientation is to view all stakeholders as important. The degree to which a firm understands and addresses stakeholder demands can be referred to as a stakeholder orientation. This orientation contains three sets of activities: (1) the organization-wide generation of data about stakeholder groups and assess- ment of the firm’s effects on these groups, (2) the distribution of this information throughout the firm, and (3) the organization’s responsiveness as a whole to this intelligence.66 This is very similar to the step involved in a market orientation, but the firm becomes more concerned about all stakeholders, including employees, sup- pliers, shareholders, regulators, and the community.

Generating data about stakeholders begins with identifying the stakeholders who are relevant to the firm. Relevant stakeholder communities should be analyzed on the basis of the power that each enjoys as well as by the ties between them. Next, the firm should characterize the concerns about the business’s conduct that each rel- evant stakeholder group shares. This information can be derived from formal research, including surveys, focus groups, Internet searches, or press reviews. The responsiveness of the organization to stakeholder intelligence consists of the initia- tives that the firm adopts to ensure that it abides by or exceeds stakeholder expecta- tions and has a positive impact on stakeholder issues. Such activities are likely to be specific to a particular stakeholder group (e.g., family-friendly work schedules) or to a particular stakeholder issue (e.g., pollution-reduction programs). These processes

250 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

typically involve the participation of the concerned stakeholder groups. Kraft, for example, includes special-interest groups and university representatives in its pro- grams to become sensitized to present and future ethical issues.

A stakeholder orientation can be viewed as a continuum in that firms are likely to adopt the concept to varying degrees. To gauge a given firm’s stakeholder orienta- tion, it is necessary to evaluate the extent to which the firm adopts behaviors that typify both the generation and dissemination of stakeholder intelligence and respon- siveness to it. A given organization may generate and disseminate more intelligence about certain stakeholder communities than about others and, as a result, may respond to that intelligence differently.

Marketing Financial Performance A climate of ethics and social responsibility also creates a large measure of trust among a firm’s stakeholders and enhances the reputation of the firm in a positive direction. The most important contributing factor to gaining trust is the perception that the firm and its employees will not sacrifice their standards of integrity.67 In an ethical work climate, employees can reasonably expect to be treated with respect and consideration by their coworkers and superiors. Furthermore, trusting relation- ships with key external stakeholders can contribute to greater efficiencies and pro- ductivity in the supply chain, as well as a stronger sense of loyalty among the firm’s customers. Customers want to develop relationships with firms that provide quality products and engage in socially responsible conduct.68

Research indicates a strong association between social responsibility and cus- tomer loyalty in that customers are likely to keep buying from firms perceived as doing the right thing. Further, a direct association exists between corporate social responsibility and customer satisfaction, profits, and market value.69 In a survey of global consumers, 55 percent indicated they are willing to pay more for products from organizations committed toward social and environmental responsibility. The study showed that sales increased 2 percent for organizations that promoted sustain- able packaging for their products and 5 percent for organizations that promoted sus- tainable actions in their marketing programs.70 One explanation for these observations may be that good-citizen firms are responsive to customers’ concerns and have a sense of dedication to treating them fairly. By gauging customer satisfac- tion, continuously improving the quality and safety of products, and by making cus- tomer information easily accessible and understandable, ethical and socially responsible firms are more likely to serve customers’ needs satisfactorily. Recogni- tion is growing that the long-term value of conducting business in an ethical and socially responsible manner far outweighs short-term costs.71

INCORPORATING ETHICS AND SOCIAL RESPONSIBILITY INTO STRATEGIC PLANNING Companies that fail to incorporate ethics and social responsibility into their organizational culture may pay the price with poor marketing performance and the potential costs of legal violations, civil litigation, and damaging publicity when ques- tionable activities are made public. Because marketing ethics and social responsibility are not always viewed as organizational performance issues, many managers do not believe they need to consider them in the strategic planning process. Individuals also have different ideas as to what is ethical or unethical, leading them to confuse the need for workplace ethics and the right to maintain their own personal values and ethics. Although the concepts are undoubtedly controversial, it is possible—and desirable— to incorporate ethics and social responsibility into the planning process.

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 251

Many firms integrate ethics and social responsibility into their strategic planning through ethics compliance programs or integrity initiatives that make legal compli- ance, ethics, and social responsibility an organization-wide effort. Such programs establish, communicate, and monitor a firm’s ethical values and legal requirements through codes of conduct, ethics offices, training programs, and audits. One of the best examples of this process in action occurs at Texas Instruments (TI). As a large multinational firm, TI manufactures computers, calculators, and other high-technology products. Its code of ethics resembles that of many other organiza- tions. The code addresses issues related to policies and procedures; government laws and regulations; relationships with customers, suppliers, and competitors; the acceptance of gifts, travel, and entertainment; political contributions; expense reporting; business payments; conflicts of interest; investment in TI stock; handling of proprietary information and trade secrets; use of TI employees and assets to per- form personal work; relationships with government officials and agencies; and the enforcement of the code. TI’s code emphasizes that ethical behavior is critical to maintaining long-term success and that each individual is responsible for upholding the integrity of the company. TI’s values and ethics statement puts it this way:72

Our reputation at TI depends upon all of the decisions we make and all

the actions we take each day. Our values define how we will evaluate our

decisions and actions … and how we will conduct our business. We are

working in a difficult and demanding, ever-changing business environ-

ment. Together we are building a work environment on the foundation

of Integrity, Innovation and Commitment. Together we are moving our

company into a new century … one good decision at a time. Our high

standards have rewarded us with an enviable reputation in today’s

marketplace … a reputation of integrity, honesty and trustworthiness.

That strong ethical reputation is a vital asset … and each of us shares

a personal responsibility to protect, to preserve and to enhance it. Our

reputation is a strong but silent partner in all business relationships.

Integrity is the foundation on which TI is built. There is no other char-

acteristic more essential to a TIer’s makeup. It has to be present at all

levels. Integrity is expected of managers and individuals when they

make commitments. They are expected to stand by their commitments

to the best of their ability.

For maximum effectiveness, the marketing plan should include distinct elements of ethics and social responsibility. Marketing strategy and implementation plans should be developed that reflect an understanding of (1) the risks associated with ethical and legal misconduct, (2) the ethical and social consequences of strategic choices, and (3) the values of organizational members and stakeholders. To help ensure success, top managers must demonstrate their commitment to ethical and socially responsible behavior through their actions—words are simply not enough. In the end, a marketing plan that ignores social responsibility or is silent about ethi- cal requirements leaves the guidance of ethical and socially responsible behavior to the work group, which risks ethical breakdowns and damage to the firm.

LESSONS FROM CHAPTER 8

Marketing ethics and social responsibility:

• have grown in importance over the last few years because many firms have seen their image, reputation, and marketing efforts destroyed by problems in these areas.

252 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

• have become necessities in light of stakeholder demands and changes in federal law.

• improve marketing performance and profits. • are important considerations in the development of marketing strategy.

Social responsibility:

• is a broad concept that relates to an organization’s obligation to maximize its positive impact on society while minimizing its negative impact.

• includes the economic responsibility of making a profit to serve shareholders, employees, and the community at large.

• includes the legal responsibility of obeying all laws and regulations. • includes the ethical responsibility to uphold principles and standards that define

acceptable conduct as determined by the public, government regulators, private- interest groups, competitors, and the firm itself.

• includes the philanthropic responsibility to increase the firm’s overall positive impact on society, the local community, and the environment.

• includes activities related to sustainability, or programs designed to protect and preserve the natural environment.

• as it relates to sustainability includes green marketing activities and avoiding the deceptive practice of greenwashing.

Marketing ethics:

• includes the principles and standards that guide the behavior of individuals and groups in making marketing decisions.

• requires that both organizations and individuals accept responsibility for their actions and comply with established value systems.

• can lead to violations of public trust when ethical standards are not upheld. • involves complex and detailed decisions in which correctness may not be so

clear cut. • deals with experiences and decisions made at work, which may be quite differ-

ent from the ethical decisions made away from work. • comes into play any time that an activity causes managers, employees, or custo-

mers in a target market to feel manipulated or cheated.

Ethical issues in the marketing program:

• include identifiable problems, situations, or opportunities that require an individ- ual or organization to choose from among several actions that must be evaluated as right or wrong.

• come into play any time that an activity causes managers, employees, or custo- mers in a target market to feel manipulated or cheated.

• have the potential to become legal issues if they are not addressed in the strate- gic planning process.

• include product-related issues such as failure to disclose risks associated with a product, substituting inferior materials or components to reduce costs, and counterfeit products.

• include pricing-related issues such as price gouging, bait-and-switch tactics, price discrimination, price fixing, predatory pricing, and superficial discounting.

• include supply chain–related issues such as sourcing from suppliers who engage in unfair labor practices, sourcing components that damage the natural environ- ment, and the need to conduct regular supply chain audits.

• include promotion-related issues such as communication that deceives, manipu- lates, or conceals facts in order to create a false impression, exaggerated claims or statements about a product or firm that cannot be substantiated, ambiguous statements in which claims are so weak that the viewer, reader, or listener must infer the advertiser’s intended message, product-labeling issues such as

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 253

false or misleading claims on a product’s package, and selling abuses such as intentionally misleading customers by concealing facts or bribery.

Managing and controlling ethical issues:

• is best done via self-regulatory mechanisms, such as the Better Business Bureau or an industry association, rather than waiting for government regulation to con- trol marketing activities.

• can be handled by establishing a code of conduct (i.e., code of ethics), but only if the code becomes integrated into daily decision-making.

• depends to a great extent on the ethical leadership exhibited by top manage- ment. Great ethical leaders: • create a common goal or vision for the company • obtain buy-in, or support, from significant partners • motivate others to be ethical • use the resources that are available to them • enjoy their jobs and approach them with an almost contagious tenacity,

passion, and commitment.

A code of conduct (code of ethics):

• is not truly effective unless it has the full support of top management. • should have six core values: (1) trustworthiness, (2) respect, (3) responsibility,

(4) fairness, (5) caring, and (6) citizenship. • will not resolve every ethical issue encountered in daily operations, but it can

help employees and managers deal with ethical dilemmas by prescribing or lim- iting specific activities.

The connection between ethics/social responsibility and marketing performance:

• can cause employees to become more motivated to serve customers, more com- mitted to the firm, more committed to standards of high quality, and more satis- fied with their jobs.

• can cause customers to become more loyal to the firm and increase their pur- chases from the firm.

• can lead to increased trust among the firm’s stakeholders. The most important contributing factor to gaining trust is the perception that the firm and its employ- ees will not sacrifice their standards of integrity.

Stakeholder orientation:

• refers to the degree to which a firm understands and addresses stakeholder demands.

• is composed of three sets of activities: (1) the organization-wide generation of data about stakeholder groups and assessment of the firm’s effects on these groups, (2) the distribution of this information throughout the firm, and (3) the organization’s responsiveness as a whole to this intelligence.

• consists of the initiatives that the firm adopts to ensure that it abides by or exceeds stakeholder expectations and has a positive impact on stakeholder issues.

The connection between ethics/social responsibility and strategic planning:

• is so strong that firms that fail to incorporate ethics and social responsibility into their organizational cultures may pay the price with poor marketing perfor- mance and the potential costs of legal violations, civil litigation, and damaging publicity when questionable events are made public.

• is typically done through ethics compliance programs or integrity initiatives that make legal compliance, ethics, and social responsibility an organization-wide effort.

254 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

• should be vested in the marketing plan, which should include distinct elements of ethics and social responsibility.

• is based on an understanding of (1) the risks associated with ethical and legal misconduct, (2) the ethical and social consequences of strategic choices, and (3) the values of organizational members and stakeholders.

NOTES 1. Isabelle Maignan, Tracy L. Gonzalez-Padron, G. Tomas M. Hult, and O. C. Ferrell,

“Stakeholder Orientation: Development and Testing of a Framework for Socially Responsible Marketing,” Journal of Strategic Marketing, 19(4) (July 2011), 313–338.

2. “2010 World’s Most Ethical Companies—Company Profile: Salesforce.com,” Ethisphere, Q1, p. 32, 33; Ethisphere Institute, “2014 World’s Most Ethical Companies,” Ethisphere (http://ethisphere.com/worlds-most-ethical/wme-honorees/), accessed March 31, 2015; Salesforce Foundation Home Page (http://www.salesforcefoundation. org/), accessed March 31, 2015; Salesforce.com website (http://www.salesforce.com/ company/), accessed March 31, 2015; “Sustainability,” Salesforce.com (http://www. salesforce.com/company/sustainability/), accessed March 31, 2015; Salesforce.com, Sustainability at Salesforce.com (http://www.sfdcstatic.com/assets/pdf/datasheets/ DS_salesforcedotcom_Environmental_Policy_Q2FY11.pdf), accessed March 31, 2015; Eric Martin, “Salesforce.com, Fastenal to Replace Fannie, Freddie in S&P 500,” Bloomberg, September 9, 2008 (http://www.bloomberg.com/apps/news? pid=newsarchive&sid=abSHUiBFprac&refer=us), accessed March 31, 2015; Time Warner Inc., “100 Best Companies to Work For,” Fortune, 2015 (http://fortune.com/ best-companies/salesforce-com-8/), accessed March 31, 2015; Forbes.com LLC, “10 Companies That Pay Salespeople Really Well,” Forbes, 2015 (http://www.forbes.com/ pictures/efkk45jgd/salesforce-com-4/), accessed March 31, 2015; Benjamin Snyder, “These 10 Companies Offer Big Incentives for Volunteering,” Fortune, March 21, 2015 (http://fortune.com/2015/03/21/companies-offer-incentives-for-volunteering/), accessed March 31, 2015; Suzanne DiBianca, “Salesforce.com Employees Reach 500,000 Volunteer Hours,” Salesforce Blog, July 29, 2013 (http://blogs.salesforce.com/company/ 2013/07/salesforce-foundation.html), accessed March 31, 2015; “Salesforce.com Named as ‘Rising Star’ in S&P 500 Carbon Survey,” cloudapps (http://www.cloudapps.com/ salesforce-carbon-reporting/), accessed March 31, 2015.

3. Ed Silverman, “Pfizer to Pay $400M to Settle Shareholder Suit Over Off-Label Marketing,” Wall Street Journal, January 27, 2015 (http://blogs.wsj.com/pharmalot/ 2015/01/27/pfizer-to-pay-400m-to-settle-shareholder-suit-over-off-label-marketing/), accessed March 27, 2015.

4. Indra Nooyi, “The Responsible Company,” The Economist, March 31, 2008, p. 132. 5. Christine Birkner, “Taking Care of Their Own,” Marketing News, February 2015,

pp. 44–49; Emma Margolin, “Fast Food Workers’ Strike Fueled by Other Low-Wage Employees, Eric Garner,” MSNBC, December 4, 2014 (http://www.msnbc.com/msnbc/ fast-food-workers-strike-fueled-other-low-wage-employees-eric-garner), accessed March 31, 2015.

6. Archie Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons, 34(4) (July/August 1991), 39–48.

7. Jim Puzzanghera, “Net Neutrality Regulations Released by FCC; Industry Lawsuit Expected,” Los Angeles Times, March 12, 2015 (http://www.latimes.com/business/la-fi- net-neutrality-fcc-20150312-story.html), accessed March 31, 2015; Brian Fung, “Here Are All 400 Pages of the FCC’s Net Neutrality Rules,” Washington Post, March 12, 2015 (http://www.washingtonpost.com/blogs/the-switch/wp/2015/03/12/here-are-all-400-pages- of-the-fccs-net-neutrality-rules/), accessed March 31, 2015; CNN Money, “Verizon and AT&T-Backed Trade Group Sues Government Over Net Neutrality,” March 24, 2015 (http://money.cnn.com/2015/03/24/technology/net-neutrality-telecom-lawsuit/), accessed March 31, 2015.

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 255

8. Andrew Zajac, “POM Wonderful Loses Bid to Block FTC Deceptive-Ad Claims,” Bloomberg Businessweek, January 30, 2015 (http://www.bloomberg.com/news/articles/ 2015-01-30/pom-wonderful-loses-bid-to-block-ftc-deceptive-ad-claim), accessed March 31, 2015.

9. “Giving USA: Americans Gave $335.17 Billion to Charity in 2013 in 2013; Total Approaches Pre-Recession Peak,” Lilly Family School of Philanthropy, Indiana University, June 17, 2014 (http://www.philanthropy.iupui.edu/news/article/giving-usa- 2014), accessed March 27, 2015.

10. “Helping Non-profits Succeed Through Print,” Boingo Cares (http://www.conecomm. com/2013-global-csr-study-release), accessed March 27, 2015.

11. Christine Birkner, “Fully Engaged,” Marketing News, September 2014, pp. 8–10. 12. Cone Communications, “Cone Releases the 2013 Cone Communications/Echo Global

CSR Study,” May 22, 2013 (http://www.conecomm.com/2013-global-csr-study-release), accessed March 27, 2015.

13. Debbie Thorne McAlister, O. C. Ferrell, and Linda Ferrell, Business and Society: A Strategic Approach to Social Responsibility, 5th ed. (Chicago, IL: Chicago Business Press, 2015).

14. Patagonia website (http://www.patagonia.com/us/home), accessed March 27, 2015. 15. Samer Abu-Saifan, “Social Entrepreneurship: Definition and Boundaries,” Technology

Innovation Management Review, February 2012, pp. 22–27. 16. Sean Stannard-Stockton, “The Effective Strategic Philanthropist,” Tactical

Philanthropy, March 16, 2011 (http://www.tacticalphilanthropy.com/2011/03/the- effective-strategic-philanthropist/), accessed February 25, 2015; Sean Stannard- Stockton, “The Social Entrepreneur,” Tactical Philanthropy, March 15, 2011 (http:// www.tacticalphilanthropy.com/2011/03/the-effective-social-entrepreneur/), accessed February 25, 2015.

17. Ira Kalb, “Marketing: The Missing Ingredient in Social Entrepreneurship,” The Huffington Post, April 1, 2015 (http://www.huffingtonpost.com/ira-kalb/marketing-the- missing-ing_b_6973658.html), accessed April 3, 2015.

18. http://fortune.com/2014/10/29/estee-lauder-exec-wants-to-revolutionize-corporate-giving/, accessed March 31, 2015.

19. Christine Birkner, “Green Global Brands,” Marketing News, September 30, 2011, pp. 12–16.

20. U.S. Green Building Council, LEED website (http://www.usgbc.org/leed), accessed March 31, 2015.

21. Starbucks Corporation, “Goals and Progress: Green Building,” 2015 (http://www. starbucks.com/responsibility/global-report/environmental-stewardship/green-building), accessed March 27, 2015.

22. Home Depot, “Eco Options” (http://www.ecooptions.homedepot.com/), accessed March 31, 2015.

23. PR Newswire, “Chiquita Achieves Major Milestone in Environmental and Social Certification of Banana Farms,” Chiquita, November 16, 2000 (http://investors.chiquita. com/phoenix.zhtml?c=119836&p=irol-newsArticle&ID=132904), accessed March 31, 2015.

24. Traci Watson, “Eco-Friendly Claims Go Unchecked,” USA Today, June 22, 2009, p. A1. 25. Linda Ferrell and O. C. Ferrell, Ethical Business (London: Dorling Kindersley Limited,

2009), pp. 38–39. 26. Paul Keegan, “The Trouble with Green Ratings,” CNNMoney, July 13, 2011 (http://money.

cnn.com/2011/07/12/technology/problem_green_ratings.fortune/index.htm), accessed March 31, 2015; Bruce Geiselman, “Aisle 7 for Eco Options,” Waste News, April 30, 2007, p. 35; Federal Trade Commission, Part 260—Guides for the Use of Environmental Marketing Claims (https://www.ftc.gov/sites/default/files/attachments/press-releases/ftc- issues-revised-green-guides/greenguides.pdf), accessed March 31, 2015; Gwendolyn Bounds, “Misleading Claims on ‘Green’ Labeling,” Wall Street Journal, October 26, 2010 (http://online.wsj.com/article/SB10001424052702303467004575574521710082414.html), accessed March 31, 2015; Laura Petrecca and Christine Dugas, “Going Truly Green Might Require Detective Work,” USA Today, April 22, 2010, pp. 1B–2B; Laura Petrecca and Christina Dugas, “Groups Help Consumers Find ‘Real’ Green Products,” USA Today, April 22, 2010, p. 2B; Julie Deardorff, “How to Spot Greenwashing,” Chicago Tribune, May 7,

256 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

2010 (http://featuresblogs.chicagotribune.com/features_julieshealthclub/2010/05/how-to- spot-greenwashing.html), accessed March 31, 2015; Greenwashing Index (www. greenwashingindex.com), accessed March 31, 2015; Julie Deardorff, “Eco-friendly Claims: When Is ‘Green’ Really Green?” Chicago Tribune, May 7, 2010 (http://featuresblogs. chicagotribune.com/features_julieshealthclub/2010/05/ecofriendly-claims-when-is-green- really-green.html), accessed March 31, 2015; Federal Trade Commission, “FTC Cracks Down on Misleading and Unsubstantiated Environmental Marketing Claims,” October 29, 2013 (https://www.ftc.gov/news-events/press-releases/2013/10/ftc-cracks-down- misleading-unsubstantiated-environmental), accessed March 31, 2015.

27. Duane Shimogawa, “Toyota Hawaii to Sell ‘Mirai’ Hydrogen Fuel Cell Car Here in 2016: Slideshow,” Pacific Business News, March 5, 2015 (http://www.bizjournals.com/pacific/ news/2015/03/10/toyota-hawaii-to-sell-mirai-hydrogen-fuel-cell-car.html?page=all), accessed March 27, 2015.

28. Krista Mahr, “Digging Deep for Smarter Heat,” Time, September 20, 2010, p. 74; Walmart, “Walmart to Generate Solar Energy at More Than 75 Percent of Its Stores in California,” September 21, 2011 (http://news.walmart.com/news-archive/2011/09/21/ walmart-to-generate-solar-energy-at-more-than-75-percent-of-its-stores-in-california), accessed March 31, 2015.

29. Jillian Sederholm, “Blue Bell Ice Cream Recall After Listeriosis Linked to 3 Deaths,” NBC News, March 13, 2015 (https://www.google.com/?gws_rd=ssl#q=blue+bell%2C +product+defect), accessed April 7, 2015.

30. Anderson Cooper, “Lumber Liquidators Linked to Health and Safety Violations,” CBS News, March 1, 2015 (http://www.cbsnews.com/news/lumber-liquidators-linked-to- health-and-safety-violations/), accessed April 7, 2015.

31. Christian Homburg, Arnd Vomberg, Margit Enke, and Philipp H. Grimm, “The Loss of the Marketing Department’s Influence: Is It Really Happening? And Why Worry?” Journal of the Academy of Marketing Science, 43(1) (2015), 1–13.

32. Edelman, 2015 Edelman Trust Barometer Global Results (http://www.edelman.com/ insights/intellectual-property/2015-edelman-trust-barometer/trust-and-innovation- edelman-trust-barometer/global-results/), accessed March 27, 2015.

33. “Walt Disney Co. (DIS),” Stock Analysis on Net, 2015 (https://www.stock-analysis-on. net/NYSE/Company/Walt-Disney-Co/Analysis/Goodwill-and-Intangible-Assets), accessed March 31, 2015.

34. Mark Scott, “‘Right to Be Forgotten’ Should Apply Worldwide, E.U. Panel Says,” New York Times, November 26, 2014 (http://www.nytimes.com/2014/11/27/technology/right- to-be-forgotten-should-be-extended-beyond-europe-eu-panel-says.html?_r=0), accessed March 27, 2015.

35. Andrea Peterson, “Snapchat Agrees to Settle FTC Charges That It Deceived Users,” Washington Post, May 8, 2014 (http://www.washingtonpost.com/blogs/the-switch/wp/ 2014/05/08/snapchat-agrees-to-settle-ftc-charges-that-it-deceived-users/), accessed March 31, 2015.

36. Barry Newman, “An Ad Professor Huffs Against Puffs, But It’s a Quixotic Enterprise,” Wall Street Journal, January 24, 2003, p. A1.

37. Oliver Duggan, “$13m Lawsuit Proves Red Bull Doesn’t Give You Wings,” Telegraph, October 11, 2014 (http://www.telegraph.co.uk/news/worldnews/northamerica/usa/ 11155731/13m-lawsuit-proves-Red-Bull-doesnt-give-you-wings.html), accessed March 27, 2015.

38. ASRC, “NAD Recommends Pursuit of Research Discontinue All Challenged Claims for Supplement Marketed as ‘Cures’ for Brain Injury, ADHD, Autism,” June 19, 2014 (http:// www.asrcreviews.org/2014/06/nad-recommends-pursuit-of-research-discontinue-all- challenged-claims-for-supplement-marketed-as-cures-for-brain-injury-adhd-autism/), accessed March 31, 2015.

39. Tim Barnett and Sean Valentine, “Issue Contingencies and Marketers’ Recognition of Ethical Issues, Ethical Judgments and Behavioral Intentions,” Journal of Business Research, 57(4) (2004), 338–346.

40. Hilary Stout, Bill Vlasic, Danielle Ivory, and Rebecca R. Ruiz, “General Motors Misled Grieving Families on a Lethal Flaw,” New York Times, March 24, 2014 (http://www. nytimes.com/2014/03/25/business/carmaker-misled-grieving-families-on-a-lethal-flaw. html), accessed March 27, 2015.

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 257

41. Douglas Main, “BPA Is Fine, If You Ignore Most Studies About It,” March 4, 2015 (http://www.newsweek.com/2015/03/13/bpa-fine-if-you-ignore-most-studies-about-it- 311203.html), accessed March 31, 2015.

42. Kelli B. Grant, “Can Alibaba Knock Out Knockoffs?” CNBC, September 18, 2014 (http:// www.cnbc.com/id/102010154), accessed March 31, 2015.

43. Reuters, “One Current, Two Former Bridgestone Executives Indicted for Price-Fixing,” April 15, 2014 (http://www.reuters.com/article/2014/04/15/us-bridgestone-executives- indicted-idUSBREA3E1RW20140415), accessed March 27, 2015.

44. “China Meat Supplier Probe Hurting McDonald’s Asia Sales,” Bloomberg, August 5, 2014 (http://www.bloomberg.com/news/articles/2014-08-04/mcdonald-s-results-hurt-by- china-supplier-investigation), accessed March 31, 2015.

45. Charles Duhigg and David Barboza, “Apple’s iPad and the Human Costs for Workers in China,” New York Times, January 25, 2012 (http://www.nytimes.com/2012/01/26/ business/ieconomy-apples-ipad-and-the-human-costs-for-workers-in-china.html? pagewanted=all), accessed March 31, 2015.

46. Ibid. 47. PR Newswire, “Leading Health Care Supply Contracting Company Novation Earns

Ethics Inside® Certification,” Ethisphere, November 8, 2011 (http://www.prnewswire. com/news-releases/leading-health-care-supply-contracting-company-novation-earns- ethics-inside-certification-133402963.html), accessed March 31, 2015; Ethisphere Institute, “The 2014 World’s Most Ethical Companies,” Ethisphere, April 2014, pp. 41–46.

48. Verify website (https://www.vscnet.com/), accessed April 7, 2015. 49. CNN Money, “DirecTV Charged with False Advertising,” March 11, 2015 (http://money.

cnn.com/2015/03/11/news/companies/directv-false-advertising/), accessed March 31, 2015.

50. Julius Melnitzer, “U.K. Enacts ‘Far-Reaching’ Anti-Bribery Act,” Law Times, February 13, 2011 (http://www.lawtimesnews.com/201102148245/Headline-News/UK-enacts-far- reaching-anti-bribery-act), accessed March 31, 2015.

51. Federal Trade Commission, “Identity Theft Tops FTC’s Consumer Complaint Categories Again in 2014,” February 27, 2015 (https://www.ftc.gov/news-events/press- releases/2015/02/identity-theft-tops-ftcs-consumer-complaint-categories-again-2014), accessed March 27, 2015.

52. Council of Better Business Bureaus, “About,” 2015 (http://www.bbb.org/council/about/ council-of-better-business-bureaus/?id=184871), accessed March 31, 2015.

53. These facts are from Binyamin Appelbaum, “Former Ohio Attorney General to Head New Consumer Agency,” New York Times, July 17, 2011 (http://www.nytimes.com/ 2011/07/18/business/former-ohio-attorney-general-picked-to-lead-consumer-agency. html), accessed March 31, 2015; Drake Bennett and Carter Dougherty, “Elizabeth Warren’s Dream Becomes a Real Agency She May Never Get to Lead,” Bloomberg Businessweek, July 11–17, 2011, pp. 58–64; Jennifer Liberto and David Ellis, “Wall Street Reform: What’s in the Bill,” CNNMoney, June 30, 2010 (http://money.cnn.com/ 2010/06/25/news/economy/whats_in_the_reform_bill/index.htm), accessed March 31, 2015; Sudeep Reddy, “Elizabeth Warren’s Early Words on a Consumer Financial Protection Bureau,” Wall Street Journal, September 17, 2010 (http://blogs.wsj.com/ economics/2010/09/17/elizabeth-warrens-early-words-on-a-consumer-financial- protection-bureau/), accessed March 31, 2015; Joseph Lawler, “Incoming GOP Majority Would Target Elizabeth Warren’s CFPB,” Washington Examiner, October 21, 2014 (http://www.washingtonexaminer.com/incoming-gop-majority-would-target-elizabeth- warrens-cfpb/article/2555055), accessed March 31, 2015.

54. O. C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 9th ed. (Mason, OH: Cengage Learning, 2013).

55. IBM, Business Conduct Guidelines (Armonk, NY: International Business Machines Corp., 2011).

56. American Marketing Association, “Statement of Ethics” (http://www.marketingpower. com/AboutAMA/Pages/Statement%20of%20Ethics.aspx), accessed March 31, 2015.

57. McAlister, Ferrell, and Ferrell. 58. Stephen Taub, “SEC Probing Harley Statements,” CFO.com, July 14, 2005 (http://www.

cfo.com/article.cfm/4173321/c_4173841?f=archives&origin=archive), accessed March 31, 2015.

258 Chapter 8 • Ethics and Social Responsibility in Marketing Strategy

59. Thomas A. Stewart, Ann Harrington, and Maura Griffin Sol, “America’s Most Admired Companies: Why Leadership Matters,” Fortune, March 3, 1998, pp. 70, 71.

60. “LRN Ethics Study: Employee Engagement,” LRN, 2007 (http://www.ethics.org/files/u5/ LRNEmployeeEngagement.pdf), accessed March 31, 2015.

61. Graham Winfrey, “Top 5 Reasons Employees Quit (Infographic),” Inc. (http://www.inc. com/graham-winfrey/5-reasons-employees-leave-their-jobs.html), accessed March 31, 2015.

62. Diane E. Kirrane, “Managing Values: A Systematic Approach to Business Ethics,” Training and Development Journal, 44(11) (November 1990), 53–60.

63. O. C. Ferrell, Isabelle Maignan, and Terry Loe, “Corporate Ethics + Citizenship = Profits,” The Bottom Line: Good Ethics Is Good Business (Tampa, FL: Center for Ethics, University of Tampa, 1997).

64. Terry Loe, “The Role of Ethical Climate in Developing Trust, Market Orientation, and Commitment to Quality,” unpublished dissertation, University of Memphis, 1996.

65. Forbes, “Most Admired 2015,” 2015 (http://fortune.com/worlds-most-admired- companies/whole-foods-market-18/), accessed March 31, 2015; Whole Foods, “Why We’re a Great Place to Work” (http://www.wholefoodsmarket.com/careers/why-were- great-place-work), accessed March 31, 2015; Susanna Kim, “11 Companies Offering Health Care Benefits to Part-Time Workers,” ABC News, January 23, 2014 (http:// abcnews.go.com/Business/top-11-companies-offering-health-care-benefits-perks/story? id=21625982#1), accessed March 31, 2015.

66. Isabelle Maignan and O. C. Ferrell, “Corporate Social Responsibility: Toward a Marketing Conceptualization,” Journal of the Academy of Marketing Science, 32(1) (January 2004), 3–19.

67. Christine Moorman, Gerald Zaltman, and Rohit Deshpande, “Relationships Between Providers and Users of Market Research: The Dynamics of Trust Within and Between Organizations,” Journal of Marketing Research, 29(3) (August 1993), 314–328.

68. “Cone LLC Releases the 2010 Cone Cause Evolution Study,” Cone, September 15, 2010 (http://www.conecomm.com/contentmgr/showdetails.php/id/3351), accessed March 31, 2015.

69. Marjorie Kelly, “Holy Grail Found: Absolute, Definitive Proof That Responsible Companies Perform Better Financially,” Business Ethics, Winter 2004, pp. 4, 5; Xueming Luo and C. B. Bhattacharya, “Corporate Social Responsibility, Customer Satisfaction, and Market Value,” Journal of Marketing, 70(4) (October 2006), 1–18; Isabelle Maignan, O. C. Ferrell, and Linda Ferrell, “A Stakeholder Model for Implementing Social Responsibility in Marketing,” European Journal of Marketing, 39(9/10) (September/October 2005), 956–977.

70. Nielsen, “Global Consumers Are Willing to Put Their Money Where Their Heart Is When It Comes to Goods and Services from Companies Committed to Social Responsibility,” June 17, 2014 (http://www.nielsen.com/us/en/press-room/2014/global- consumers-are-willing-to-put-their-money-where-their-heart-is.html), accessed March 31, 2015.

71. Stefan Ambec and Paul Lanoie, “Does It Pay to Be Green? A Systematic Overview,” Academy of Management Perspective, 22(4) (November 2008), 47; Mary K. Pratt, “The High Cost of Ethics Compliance,” ComputerWorld, August 24, 2009 (http://www. computerworld.com/article/2550326/it-industry/ethics–harder-in-a-recession-.html), accessed May 9, 2012.

72. Texas Instruments, The Values and Ethics of TI, 2011 (http://www.ti.com/lit/ml/ szza066/szza066.pdf), accessed March 27, 2015.

Chapter 8 • Ethics and Social Responsibility in Marketing Strategy 259

Marketing Implementation and Control

INTRODUCTION Throughout the history of business, many firms and their top executives have emphasized strategic planning at the expense of strategic implementation. Histori- cally, and even today, this emphasis on planning occurs because many executives believe that strategic planning, by itself, is the key to marketing success. This belief is logical because a firm must have a plan before it can determine where it is going. Although many firms are quite good at devising strategic marketing plans, they are often unprepared to cope with the realities of implementation.

Marketing implementation is the process of executing the marketing strategy by cre- ating and performing specific actions that will ensure the achievement of the firm’s marketing objectives. Strategic planning without effective implementation can pro- duce unintended consequences that result in customer dissatisfaction and feelings of frustration within the firm. Likewise, poor implementation will most likely result in the firm’s failure to reach its organizational and marketing objectives. Unfortu- nately, many firms repeatedly experience failures in marketing implementation. Out-of-stock items, overly aggressive salespeople, long checkout lines, malfunction- ing websites, and unfriendly or inattentive employees are examples of implementa- tion failure that occur all too frequently today. These and other examples illustrate that even the best-planned marketing strategies are a waste of time without effective implementation to ensure their success.

To track the implementation process, firms must have ways of evaluating and controlling marketing activities, as well as monitoring performance to determine whether marketing goals and objectives have been achieved. As illustrated in Beyond the Pages 9.1, implementation, evaluation, and control go hand-in-hand in determining the success or failure of the marketing strategy, and ultimately the entire firm. One of the most important considerations in implementing and control- ling marketing activities involves gaining the support of employees. Because a mar- keting strategy cannot implement itself, all firms depend on employees to carry out marketing activities. As a result, the firm must devise a plan for implementation, just as it devises a plan for marketing strategy.

In this chapter, we examine the critical role of marketing implementation and control in the strategic planning process. First, we discuss a number of important strategic issues involved in implementation, including the major components of implementation that must work together in order for a strategy to be executed suc- cessfully. Then, we examine the advantages and disadvantages of major marketing implementation approaches. This discussion also describes how internal marketing

CHAPTER

260

BEYOND THE PAGES 9.1

Keurig Green Mountain Gets It Done1

Keurig Green Mountain, Inc. is a leader in the specialty coffee industry. The company from Waterbury, VT uses a coordinated multichannel distribution network that is designed to maxi- mize brand recognition and product availability. Green Mountain roasts high-quality Arabica beans and offers nearly 400 coffee selections including single-origins, estates, certified organ- ics, Fair Trade Certified™, proprietary blends, and flavored coffees sold under the Green Mountain Coffee Roasters® name and roughly 60 other brands. Its products come in a variety of packages including whole bean, fractional packages, premium one-cup coffee pods, Vue Packs, and Keurig® K-Cup® single-serving coffee cartridges. Green Mountain also sells other pro- ducts including iced coffee, teas, cider, and hot chocolate. The company operates an active e-commerce business at www.keurig.com.

In achieving its early success, Keurig Green Mountain pursued three key strategies: boosting market share, expanding into new markets, and making key acquisitions. To increase market share and expand, the company relied on direct relationships with farms, coffee estates, coopera- tives, and other parties to ensure a consistent supply and price of 75 different varieties of high-quality coffee beans. This, combined with a custom-roasting process, allows Green Mountain to differentiate its coffee offerings. One of Green Mountain’s key acquisitions was Keurig—the company that made its K-Cup® coffee cartridges. While Keurig had been a dominant player in the office coffee service segment, its expansion into the home market under Green Mountain has been extraordinary—more than one in five U.S. households has a Keurig single-serve coffee maker. Green Mountain also acquired Tully’s—a Seattle-based coffee company in 2009. Today, Keurig Green Mountain accounts for 30 percent of all retail coffee sales in the United States and sells more than $5 billion per year in K-Cups.

One of the major reasons for Green Moun- tain’s success is its overall focus on implementa- tion. The company signed a number of strategic partnerships, including agreements with Dunkin’ Donuts, Krispy Kreme, Swiss Miss, Starbucks, and Tazo to make their products available via

the patented K-Cup system. Green Mountain also has agreements with Breville, Cuisinart, and Mr. Coffee to make branded single-cup cof- fee makers that use the K-Cup system. Inter- nally, the company employs roughly 6,600 people but has a very flat organizational struc- ture. This promotes open communication, pas- sion, and commitment among employees. Worldwide, the company has only a 10 percent employee turnover rate. As a part of the com- pany’s evaluation and control system, Green Mountain uses a process called the after-action review—a process adapted from the U.S. Army. The goal of the review is to answer four key questions: What did we set out to do? What hap- pened? Why did it happen? What are we going to do about it? Most of the effort is spent on this last question to ensure that the company learns from both its successes and failures. Employees are empowered to apply these lessons and encouraged to share their views in a “constella- tion of communication” that ensures a collabo- rative style of getting things done. Green Mountain has consistently appeared on Forbes’ list of the “200 Best Small Companies in America,” Fortune’s list of the “100 Fastest- Growing Small Companies in America,” and Business Ethics magazine’s list of the “100 Best Corporate Citizens.” In addition, the Soci- ety of Human Resource Management has recog- nized Green Mountain for its socially responsible business practices.

Not all things are perfect for Keurig Green Mountain, however. The company’s patent on K-Cups expired in September 2012, leading to an avalanche of competing single-serve cups that work in Keurig machines. In response, Keurig Green Mountain introduced the Vue brewing system that added the ability to brew café beverages, such as lattes and cappucci- nos, in addition to coffees, teas, chocolate, and cider. The Vue system also allows more customization than the K-Cup system in terms of strength, temperature, and size. In addition, Vue packs are recyclable. The environmental impact of the company’s K-Cups has been widely bemoaned by both competitors and environmentalists. Each year, Keurig produces enough K-Cups to circle the Earth more than 10 times. In fact, John Sylvan, the inventor of

Chapter 9 • Marketing Implementation and Control 261

can be used to motivate employees to implement marketing strategy. Finally, we look at the marketing evaluation and control process.

STRATEGIC ISSUES IN MARKETING IMPLEMENTATION Marketing implementation is critical to the success of any firm because it is respon- sible for putting the marketing strategy into action. Simply put, implementation refers to the “how” part of the marketing plan. Marketing implementation is a very broad concept, and for that reason it is often misunderstood. Some of this misunder- standing stems from the fact that marketing strategies almost always turn out differ- ently than expected. In fact, all firms have two strategies: their intended strategy and a realized strategy.2 Intended marketing strategy is what the firm wants to happen—it is the firm’s planned strategic choices that appear in the marketing plan itself. The realized marketing strategy, on the other hand, is the strategy that actually takes place. More often than not, the difference between the intended and the realized strategies is a matter of the implementation of the intended strategy. This is not to say that a firm’s realized marketing strategy is necessarily better or worse than the intended marketing strategy, just that it is different in execution and results. Such differences are often the result of internal or external environmental factors that change during implementation.

The Link Between Planning and Implementation One of the most interesting aspects of marketing implementation is its relationship to the strategic planning process. Many firms assume that planning and implementation are interdependent but separate issues. In reality, planning and implementation inter- twine within the marketing planning process. Many of the problems of marketing implementation occur because of its relationship to strategic planning. The three most common issues in this relationship are interdependency, evolution, and separation.

Interdependency Many firms assume that the planning and implementation process is a one-way street. That is, strategic planning comes first, followed by implementation. Although it is true that the content of the marketing plan determines how it will be implemen- ted, it is also true that how the marketing strategy is to be implemented determines the content of the marketing plan.

Certain marketing strategies will define their implementation by default. For example, a firm such as Southwest Airlines with a strategy of improving customer

the K-Cup, has stated that he wishes he had never created them. Keurig Green Mountain has pledged to make all K-Cups recyclable by 2020.

The most recent issue for Keurig Green Mountain is the fallout over its Keurig 2.0 sys- tem, introduced in late 2014. The new brewers use a special system that reads the ink on the lids of K-Cups and only allows those made by the company to work in its brewers. While this move protects Keurig Green Mountain’s profits,

it locks competing cups out of the market. Sev- eral competitors have filed suit against Keurig Green Mountain to end the practice. One of the most vocal critics, California-based and family- owned Rogers Coffee Company, has gone as far as creating the “Freedom Clip,” a plastic gizmo that attaches to a Keurig 2.0 brewer and fools the system into accepting rival brands. Keurig Green Mountain argues that its system ensures the freshest, best cup of coffee possible. So far, consumers seem to agree.

262 Chapter 9 • Marketing Implementation and Control

service may turn to employee training programs as an important part of that strat- egy’s implementation. Through profit sharing, many Southwest employees are also stockholders with a vested interest in the firm’s success. Employee training and profit-sharing programs are common in firms that depend on their employees’ com- mitment and enthusiasm to ensure quality customer service. However, employee training, as a tool of implementation, can also dictate the content of the firm’s strat- egy. Perhaps a competitor of Southwest, who is in the process of implementing its own customer service strategy, realizes that it does not possess adequate resources to offer profit sharing and extensive training to its employees. Maybe the company simply lacks the financial resources or the staff required to implement these activi- ties. Consequently, the company will be forced to go back to the planning stage and adjust its customer service strategy. These continual changes in marketing strategy make implementation more difficult. Clearly, a SWOT analysis and strategic thrust conducted with an eye toward what the company can reasonably implement can reduce, but not completely eliminate, this problem.

Evolution All firms face a simple truth in planning and implementation: Important environmen- tal factors constantly change. As the needs and wants of customers change, as com- petitors devise new marketing strategies, and as the firm’s own internal environment changes, the firm must constantly adapt. In some cases, these changes occur so rap- idly that once the firm decides on a marketing strategy, it quickly becomes out- of-date. Because planning and implementation are intertwined, both must constantly evolve to fit the other. The process is never static because environmental changes require shifts in strategy, which require changes in implementation, which require shifts in strategy, and so on.

A related problem is that executives often assume there is only one correct way to implement a given strategy. This is simply not true. Just as strategy often results from trial and error, so does marketing implementation. Firms that are truly customer-oriented must be flexible enough to alter their implementation on the fly to fully embrace customer intimacy and respond to changes in customers’ prefer- ences. In the airline industry, for example, competitors quickly alter their pricing strategies when one firm announces a reduction in fares on certain routes. These rapid changes require that firms be flexible in both marketing strategy and implementation.

A P Im ag es /J ac qu el in e D or m er

Long waiting lines are a common symptom that can be tied to problems in strategy, implementation, or both.

Chapter 9 • Marketing Implementation and Control 263

Separation The ineffective implementation of marketing strategy is often a self-generated problem that stems from the way that planning and implementation are carried out in most firms. As shown in Exhibit 9.1, middle- or upper-level managers often do strategic planning; however, the responsibility for implementation almost always falls on lower-level managers and frontline employees. Top executives often fall into a trap of believing that a good marketing strategy will implement itself. Because there is dis- tance between executives and the day-to-day activities at the frontline of the firm, they often do not understand the unique problems associated with implementing mar- keting strategy. Conversely, frontline employees—who do understand the challenges and hurdles of implementation—usually have a limited voice in planning the strategy.

Another trap that top executives often fall into is believing that frontline man- agers and employees will be excited about the marketing strategy and motivated to implement it. However, because they are separated from the planning process, these managers and employees often fail to identify with the firm’s goals and objectives, and thus fail to fully understand the marketing strategy.3 It is unrealistic for top executives to expect frontline managers and employees to be committed to a strat- egy they had no voice in developing, or to a strategy that they do not understand or feel is inappropriate.4

The Elements of Marketing Implementation Marketing implementation involves a number of interrelated elements and activities, as shown in Exhibit 9.2. These elements must work together for strategy to be imple- mented effectively. Because we examined marketing strategy issues in previous chapters, we now look briefly at the remaining elements of marketing implementation.

Shared Goals and Values Shared goals and values among all employees within the firm are the “glue” of successful implementation because they bind the entire organization together as a single,

EXHIBIT 9.1 The Separation of Planning and Implementation.

Very Much

Very Little

Chief Executive

Officer

Mid-Level Marketing Managers

Frontline Marketing Managers

Time Spent on Planning

Time Spent on Implementation

264 Chapter 9 • Marketing Implementation and Control

functioning unit. When all employees share the firm’s goals and values, all actions will be more closely aligned and directed toward the betterment of the organization. Without a common direction to hold the organization together, different areas of the firm may work toward different outcomes, thus limiting the success of the entire organization. For example, one of the reasons for the tremendous success of the New Belgium Brewery is the fact that all employees have a commitment to make excellent craft beer in ways that conserve environmental resources.5 Other firms, such as FedEx, Google, and ESPN, are well known for their efforts to ensure that employees share and are committed to corporate goals and values.

Institutionalizing shared goals and values within a firm’s culture is a long-term process. The primary means of creating shared goals and values is through employee training and socialization programs.6 Although creating shared goals and values is a difficult process, the rewards are worth the effort. Some experts have argued that creating shared goals and values is the single most important element of implemen- tation because it stimulates organizational commitment where employees become more motivated to implement the marketing strategy, to achieve the firm’s goals and objectives, and to serve more fully the needs of the firm’s customers.7

Marketing Structure Marketing structure refers to the methods of organizing a firm’s marketing activities. Marketing structure establishes formal lines of authority as well as the division of labor within the marketing function. One of the most important decisions that firms make is how to divide and integrate marketing responsibilities. This decision typi- cally comes down to the question of centralization versus decentralization. In a cen- tralized marketing structure, the top of the marketing hierarchy coordinates and manages all marketing activities and decisions. Conversely, in a decentralized

EXHIBIT 9.2 The Elements of Marketing Implementation.

Systems

Resources People

Leadership

Marketing Strategy

Marketing Structure

Shared Goals

SOURCE: Adapted from Lawrence R. Jaunch and William F. Glueck, Strategic Management and Business Policy, 3rd ed. (New York: McGraw-Hill, 1988), p. 305.

Chapter 9 • Marketing Implementation and Control 265

marketing structure, the frontline of the firm coordinates and manages marketing activities and decisions. Typically, decentralization means that frontline marketing managers have the responsibility of making day-to-day marketing decisions.

Both centralized and decentralized marketing structures have advantages. Cen- tralized structures are very cost-efficient and effective in ensuring standardization within the marketing program. These advantages can be particularly critical to firms whose competitiveness depends upon maintaining a tight control over market- ing activities and expenses.8 For example, firms employing a strategy of operational excellence, such as Walmart or Dell, may find a centralized structure beneficial to ensuring operational efficiency and consistency. Decentralized marketing structures have the important advantage of placing marketing decisions closer to the frontline where serving customers is the number one priority. By decentralizing marketing decisions, frontline managers can be creative and flexible, allowing them to adapt to changing market conditions.9 For this reason, firms that employ a strategy of cus- tomer intimacy, such as Ritz-Carlton or Nordstrom, may decentralize to ensure that they can respond to customers’ needs in a timely manner. The decision to centralize or decentralize marketing activities is a trade-off between reduced costs and enhanced flexibility. However, there is no one correct way to organize the marketing function. The right marketing structure will depend on the specific firm, the nature of its internal and external environments, and its chosen marketing strategy.10

Systems and Processes Organizational systems and processes are collections of work activities that absorb a variety of inputs to create information and communication outputs that ensure the consistent day-to-day operation of the firm.11 Examples include information systems, strategic planning, capital budgeting, procurement, order fulfillment, manufacturing, quality control, and performance measurement. At IBM, for example, research engi- neers are evaluated on 1- and 3-year time frames. Employees receive bonuses based on the 1-year evaluation, but are awarded rank and salary based on the 3-year time frame. This unique system is designed to encourage innovation by minimizing the risk of failure in any single yearly evaluation.12 As we discussed in Chapter 6, many of these systems and processes are now outsourced to other firms. However, their important role in implementation means that the firm must be very diligent in how these activities are managed.

Resources A firm’s resources can include a wide variety of assets that can be brought together during marketing implementation. These assets may be tangible or intangible. Tangible resources include financial resources, manufacturing capacity, facilities, and equip- ment. Although not quite as obvious, intangible resources such as marketing expertise, customer loyalty, brand equity, corporate goodwill, and external relationships/strate- gic alliances are equally important. In Chapter 7, we addressed the importance of branding and corporate reputation in the marketing program. These issues are equally important in the implementation of the strategy, especially in leveraging strategic part- nerships to ensure that marketing activities are done effectively and efficiently.

Regardless of the type of resource, the amount of resources available can make or break a marketing strategy. However, a critical and honest evaluation of available resources during the planning phase can help ensure that the marketing strategy and marketing implementation are within the realm of possibility. Upon completion of the marketing plan, the analyst or planner must seek the approval of needed resources from top executives. This makes the communication aspects of the actual marketing plan document critical to the success of the strategy. Top executives allo- cate scarce resources based on the ability of the plan to help the firm reach its goals and objectives.

266 Chapter 9 • Marketing Implementation and Control

People (Human Resources) The quality, diversity, and skill of a firm’s human resources can also make or break the implementation of the marketing strategy. Consequently, human resource issues have become more important to the marketing function, especially in the areas of employee selection and training, evaluation and compensation policies, and employee motivation, satisfaction, and commitment. In fact, the marketing depart- ments of many firms have taken over the human resources function to ensure that employees have a correct match to required marketing activities.13 A number of human resource activities are vitally important to marketing implementation:

• Employee Selection and Training. One of the most critical aspects of market- ing implementation is matching employees’ skills and abilities to the marketing tasks to be performed.14 It is no secret that some people are better at some jobs than others. We all know individuals who are natural salespeople. Some indivi- duals are better at working with people, while others are better at working with tools or computers. The key is to match these employee skills to marketing tasks. A weakening economy and tightening job market in recent years have forced firms to become more demanding in finding the right employee skills to match their required marketing activities.

Employee diversity is an increasingly important aspect of selection and training practices. As the U.S. population becomes more ethnically diverse, many firms take steps to ensure that the diversity of their employees matches the diversity of their customers. Many firms also face challenges with genera- tional diversity in that most middle and upper managers are Baby-Boomers (born 1946–1964) or Generation X (born 1965–1980), whereas most entry-level positions consist of Millennials (born after 1980). In many cases, these younger employees have better training, more technological sophistication, and fewer political inclinations than their older bosses. Managers must recognize these issues and adapt selection and training practices accordingly.

• Employee Evaluation and Compensation. Employee evaluation and compen- sation are also important to successful marketing implementation. An important decision to be made in this area is the choice between outcome- and behavior- based systems.15 An outcome-based system evaluates and compensates employ- ees based on measurable, quantitative standards such as sales volume or gross margin. This type of system is fairly easy to use, requires less supervision, and works well when market demand is fairly constant, the selling cycle is relatively short, and all efforts directly affect sales or profits. Conversely, behavior-based systems evaluate and compensate employees based on subjective, qualitative standards such as effort, motivation, teamwork, and friendliness toward custo- mers. This type of system ties directly to customer satisfaction and rewards employees for factors they can control. However, behavior-based systems are expensive and difficult to manage because of their subjective nature and the amount of supervision required. The choice between outcome- and behavior- based systems depends on the firm, and its products, markets, and customers’ needs. The important point is to match the employee evaluation and compensa- tion system to the activities that employees must perform in order to implement the marketing strategy.

• Employee Motivation, Satisfaction, and Commitment. Other important fac- tors in the implementation of marketing strategy are the extent to which employ- ees have the motivation to implement the strategy, their overall feelings of job satisfaction, and the commitment they feel toward the organization and its goals.16 For example, one of the major contributors to Google’s success is the strong social culture fostered by the company’s leaders. Google provides its employees with things such as paid childcare, onsite laundry service, free

Chapter 9 • Marketing Implementation and Control 267

transportation, gourmet food, onsite haircuts, and time off for personal activi- ties. In return, Google’s employees reward the company with exceptionally strong motivation and commitment.17

Though factors such as employee motivation, satisfaction, and commitment are critical to successful implementation, they are highly dependent on other elements of implementation, especially training, evaluation/compensation systems, and lead- ership. Marketing structure and processes can also have an impact on employee behaviors and attitudes. The key is to recognize the importance of these factors to successful marketing implementation and to manage them accordingly.

Leadership The leadership provided by a firm’s managers and the behaviors of employees go hand-in-hand in the implementation process. Leadership—often called the art of managing people—includes how managers communicate with employees as well as how they motivate their people to implement the marketing strategy. As discussed in Beyond the Pages 9.2, today’s business leaders must be courageous enough to take a long-term view of corporate success—one that often sacrifices short-term gains for the sake of the future.

Leaders have responsibility for establishing the corporate culture necessary for implementation success.19 A good deal of research has shown that marketing imple- mentation is more successful when leaders create an organizational culture charac- terized by open communication between employees and managers. In this way, employees are free to discuss their opinions and ideas about the marketing strategy and implementation activities. This type of leadership also creates a climate where managers and employees have full confidence and trust in each other.

APPROACHES TO MARKETING IMPLEMENTATION Whether good or bad, all leaders possess a leadership style, or way of approaching a given task. Managers can use a variety of approaches in implementing marketing strategies and motivating employees to perform implementation activities. In this section, we examine four of these approaches: implementation by command, imple- mentation through change, implementation through consensus, and implementation as organizational cultural.20

Implementation by Command Under this approach, the firm’s top executives develop and select the marketing strategies, which are transmitted to lower levels where frontline managers and employees implement them. Implementation by command has two advantages: (1) it makes decision-making much easier and (2) it reduces uncertainty as to what is to be done to implement the marketing strategy. Unfortunately, this approach suffers from several disadvantages. The approach places less emphasis on the feasibility of implementing the marketing strategy. It also divides the firm into strategists and implementers: Executives who develop the marketing strategy are often far removed from the targeted customers it is intended to attract. For these reasons, implementa- tion by command can create employee motivation problems. Many employees do not have motivation to implement strategies in which they have little confidence.

Implementation by command is quite common in franchise systems. For exam- ple, McDonald’s use of this approach creates a great deal of ongoing tension between the corporate office and its franchisees around the globe. In some cases, the tensions become so hostile that franchisees have flatly refused to implement some corporate strategies, such as the company’s dollar menu promotion. Other strategies, such as

268 Chapter 9 • Marketing Implementation and Control

BEYOND THE PAGES 9.2

The New Rules of CEO Leadership18

As we have discussed throughout this text, the rules of the road in marketing have changed in today’s economy. Customers now hold most of the power due to increasing access to informa- tion, massive product selection and its associated competition, and increasingly mature markets characterized by commoditization. The dynamic nature of today’s marketplace has touched all sectors of the global economy. Nowhere is this truer than in the executive suite of today’s cor- porations. Many CEOs struggle with managing their monolithic organizations in an increasingly fast-paced environment.

There is a good reason for the challenges facing today’s CEOs: Many of them operate using a set of rules developed in the 1980s and 1990s glory days of corporate expansion and global domination. Many of those rules were developed by the celebrity CEOs of the day such as Jack Welch (GE), Lou Gerstner (IBM), Al Dunlap (Sunbeam), and Roberto Goizueta

(Coca-Cola). Of these, Jack Welch was the iconic leader. Most major corporations adopted his rules for business during the 1980s and 1990s. Welch’s rules focused on corporate growth, maximizing market share, and the pre- eminence of quarterly earnings. However, those rules are ill suited for today’s market because the rapid pace of change and increasingly relent- less competition force CEOs to take a long-term view of competitiveness. That view is less about market share and stock price and more about making decisions that ensure the viability and long-term survival of the corporation. Today’s problems are different than those of 10 to 30 years ago. Consequently, old solutions no longer work.

In order to highlight the importance of the issue, Fortune published a set of seven new rules for business that contradict virtually all of the old-school rules advocated by CEOs both past and present. These new rules argue for a dramatic shift away from short-term results in favor of long-term survival:

Old Rules New Rules Examples Big dogs own the street Agile is best; being big

can bite you Big pharmaceutical companies are losing to smaller biotech firms; the decline of major U.S. automakers such as General Motors; Samsung’s rise above Sony

Be #1 or #2 in the market Find a niche, create something new

Energy drinks are more profitable than traditional soft drinks; the growth of Starbucks from a niche player to a coffee powerhouse

Shareholders rule The customer is king Businesses are better at managing earnings rather than the goods and services that produce those earnings; major scandals at firms like Enron and WorldCom

Be lean and mean Look outside, not inside Innovation drives today’s success (i.e., smart- watches, mobile payments); the drive for quality and efficiency only improves current processes—it does not promote innovation

Rank your players; go with the A’s

Hire passionate people Employees want purpose and meaning in their work; the growth in hiring employees with passion (Apple, ESPN, Genentech)

Hire a charismatic CEO Hire a courageous CEO Today’s CEOs must have the fortitude to make decisions that have long-term payoffs, not the quick fixes that are rewarded by Wall Street investors

Admire my might Admire my soul Powerful corporations are increasingly targeted by activists on a number of fronts; it is better to be a company with a long-term vision that legitimizes its role in society

Chapter 9 • Marketing Implementation and Control 269

keeping stores open 24 hours, offering free Wi-Fi, and adding new products such as frozen drinks, McWrap sandwiches, and McCafé coffee stations, significantly increase costs for franchisees. Rising costs have forced many would-be McDonald’s franchisees to reconsider the investment.21

Implementation through Change Implementation through change is similar to the command approach except that it focuses explicitly on implementation. The basic goal of implementation through change is to modify the firm in ways that will ensure the successful implementation of the chosen marketing strategy. For example, the firm’s structure can be altered; employees can be transferred, hired, or fired; new technology can be adopted; the employee compensa- tion plan can be changed; or the firm can merge with another firm. Mergers and acqui- sitions are common today in many industries, particularly in technology and pharmaceuticals. Given the enormous expense of developing new drugs, many phar- maceutical firms have decided that it is easier and less expensive to offer new pro- ducts or enter new markets by acquiring firms that already possess those capabilities.

The manager who implements through change is more of an architect and politician, skillfully crafting the organization to fit the requirements of the marketing strategy. There are many good historical examples of implementation through change: Lee Iacocca (Chrysler), Fred Smith (FedEx), and Steve Jobs (Apple) come to mind. One of the best success stories, however, is Samsung. Once recognized as a cheap, high-volume supplier of computer chips, circuit boards, and electronic components, Samsung has emerged as a dominant player in the consumer electronics market. The major change at Samsung was a shift in operational focus from production to marketing. Samsung also changed by drop- ping its 50-plus low-budget brands in favor of a single master Samsung brand. The shift has been so successful that Samsung has been continuously ranked as one of the world’s fastest growing brands since 2000. In fact, Samsung is the top electronics manufacturer in the world by revenue and is more successful than Sony, Nokia, and other electronics man- ufacturers in many different product categories. For example, despite Apple’s success, Samsung is actually the top mobile phone company in the world.22

Because many business executives are reluctant to give up even a small portion of their control (as is the case with the next two implementation approaches), they often favor implementation through change. The approach achieves a good balance between command and consensus, and its successes are quite evident in business today. However, despite these advantages, implementation through change still suf- fers from the separation of planning and implementation. By clinging to this power- at-the-top philosophy, employee motivation often remains an issue. Likewise, the changes called for in this approach often take a great deal of time to design and implement (e.g., it took Samsung over a decade to reach the top of the electronics market). This can create a situation where the firm becomes stagnant while waiting

Of these rules, hiring a courageous CEO may be the most critical. CEOs who adopt Fortune’s new rules for business must be willing to make investments that will not pay off for years—when that CEO is no longer in charge. The old ways of doing business—such as driving down costs through efficiency, growth through mergers and acquisitions, and careful manipula- tion of financial and accounting decisions—are solutions that simply do not work any longer. Anne Mulcahy, former CEO of Xerox, puts it this way: “You have to change when you’re at

the top of your game in terms of profit. If you’re not nimble, there’s no advantage to size. It’s like a rock.”

Unfortunately, Wall Street gives today’s CEOs little incentive to change. A study by Booz Allen found that CEOs become vulnerable to being fired if their company’s stock price falls below the S&P 500 by an average of 2 percent. To be courageous in the face of this obstacle, today’s CEOs must be willing to take risks and stand up for what they believe is in the long- term interest of their firm.

270 Chapter 9 • Marketing Implementation and Control

on the strategy to take hold. As a result, the firm can become vulnerable to changes in the marketing environment.

Implementation through Consensus Upper- and lower-level managers work together to evaluate and develop marketing strategies in the consensus approach to implementation. The underlying premise of this approach is that managers from different areas and levels in the firm come together as a team to collaborate and develop the strategy. Each participant has dif- ferent opinions as well as different perceptions of the marketing environment. The role of the top manager is that of a coordinator, pulling different opinions together to ensure the development of the best overall marketing strategy. Through this col- lective decision-making process, the firm agrees upon a marketing strategy and reaches a consensus as to the overall direction of the firm.

Implementation through consensus is more advantageous than the first two approaches in that it moves some of the decision-making authority closer to the frontline of the firm. For this reason, this implementation approach is used exten- sively in service organizations. For example, Royal Caribbean uses a team approach in developing and implementing strategy for any initiative, such as building a new ship, adding a new computer system, or changing the marketing program. CEO Michael Bayley then gives the teams milestones to keep them on track.23 This approach is based on the simple truth that lower-level employees have a unique per- spective on the marketing activities necessary to implement the firm’s strategy (in the case of Royal Caribbean, the strategy is enhanced amenities and complete cus- tomer satisfaction). These employees are also more sensitive to the needs and wants of the firm’s customers. In addition, because they are involved in the strategic process, these employees often have a stronger motivation and commitment to the strategy to see that it is properly implemented.

Implementation through consensus tends to work best in complex, uncertain, and highly unstable environments. The collective strategy-making approach works well in this environment because it brings multiple viewpoints to the table. However, implementation through consensus often retains the barrier between strategists and implementers. The end result of this barrier is that the full potential of the firm’s human resources is not realized. Thus, for implementation through consensus to be truly effective, managers at all levels must communicate openly about strategy on an ongoing, rather than an occasional, basis.

Implementation as Organizational Culture Under implementation as organizational culture, marketing strategy and its implementation become extensions of the firm’s mission, vision, and organizational culture. In some ways, this approach is similar to implementation through consensus, except that the barrier between strategists and implementers completely dissolves. When personnel see implementation as an extension of the firm’s culture, employees at all levels have permission to participate in making decisions that help the firm reach its mission, goals, and objectives.

With a strong organizational culture and an overriding corporate vision, the task of implementing marketing strategy is about 90 percent complete.24 This occurs because all employees adopt the firm’s culture so completely that they instinctively know what their role is in implementing the marketing strategy. At The Ritz-Carlton, for example, the firm’s culture is supported and sustained through daily 15-minute meetings among employees—called “line-ups”—where they share stories and edu- cate each other on better ways to serve customers. Ritz-Carlton employees can design their own work procedures and can personally attend to any guest’s request.25 This extreme form of decentralization is often called empowerment.

Chapter 9 • Marketing Implementation and Control 271

Empowering employees means allowing them to make decisions on how to best per- form their jobs. The strong organizational culture and a shared corporate vision ensure that empowered employees make the right decisions.

Although creating a strong culture does not happen overnight, it is absolutely nec- essary before employees can be empowered to make decisions. Employees must be trained and socialized to accept the firm’s mission and to become a part of the firm’s culture.26 Despite the enormous amount of time involved in developing and using this approach to implementation, its rewards of increased effectiveness, efficiency, and increased employee commitment and morale are often well worth the investment.

To summarize, firms and their managers can use any one of these four approaches to implement marketing strategy. Each approach has advantages and disadvantages as outlined in Exhibit 9.3. The choice of an approach will depend heavily on the firm’s resources, its current culture, and the manager’s own personal preferences. Many managers don’t want to give up control over decision-making. For these managers, connecting implementation and culture may be out of the question. Regardless of the approach taken, one of the most important issues that a manager must face is how to deal with the people who have responsibility for implementing the marketing strategy. To examine this issue, we now turn our attention to internal marketing—an increas- ingly popular approach to marketing implementation.

INTERNAL MARKETING AND MARKETING IMPLEMENTATION As more firms come to appreciate the importance of employees to marketing imple- mentation, they have become disenchanted with traditional implementation approaches. Several factors have caused this change: U.S. businesses losing out to foreign competitors, high rates of employee turnover and its associated costs, and continuing problems in the implementation of marketing strategy. These problems have led many firms to adopt an internal marketing approach to marketing implementation.

The practice of internal marketing comes from service industries, where it was first used as a means of making all employees aware of the need for customer satis- faction. Internal marketing refers to the use of a marketing-like approach to motivate, coordinate, and integrate employees toward the implementation of the firm’s mar- keting strategy. The goals of internal marketing are to (1) help all employees under- stand and accept their roles in implementing the marketing strategy, (2) create motivated and customer-oriented employees, and (3) deliver external customer sat- isfaction.27 Note that internal marketing explicitly recognizes that external customer satisfaction depends on the actions of the firm’s internal customers—its employees.

The Internal Marketing Approach In the internal marketing approach, every employee has two customers: external and internal. For retail store managers, for example, the people who shop at the store are external customers, whereas the employees who work in the store are the manager’s internal customers. In order for implementation to be successful, the store manager must serve the needs of both customer groups. If the internal customers do not receive proper information and training about the strategy and are not motivated to implement it, then it is unlikely that the external customers will be satisfied completely.

This same pattern of internal and external customers takes place throughout all levels of the firm. Even the CEO is responsible for serving the needs of his or her inter- nal and external customers. Thus, unlike traditional implementation approaches where the responsibility for implementation rests with the frontline of the firm, the internal marketing approach places this responsibility on all employees regardless of their level within the firm. In the end, successful marketing implementation comes

272 Chapter 9 • Marketing Implementation and Control

from an accumulation of individual actions where all employees have responsibility for implementing the marketing strategy. Walmart founder Sam Walton was keenly aware of the importance of internal marketing. He visited Walmart stores on a regular

EXHIBIT 9.3 Advantages and Disadvantages of Implementation Approaches.

Implementation by Command Basic Premise: Marketing strategies are developed at the top of the organizational hierarchy and then passed to

lower levels where frontline managers and employees are expected to implement them. Advantages: Reduces uncertainty and makes decision-making easier

Good when a powerful leader heads the firm Good when the strategy is simple to implement

Disadvantages: Does not consider the feasibility of implementing the strategy Divides the firm into strategists and implementers Can create employee motivation problems

Implementation through Change Basic Premise: The firm is modified in ways that will ensure the successful implementation of the chosen

marketing strategy. Advantages: Specifically considers how the strategy will be implemented

Considers how strategy and implementation affect each other Used successfully by a large number of firms

Disadvantages: Clings to a “power-at-the-top” mentality Requires a skilled, persuasive leader Changes can take time to design and implement, leaving the firm vulnerable to changes in the marketing environment

Implementation through Consensus Basic Premise: Different areas of the firm come together to “brainstorm” and develop the marketing strategy.

Through collective agreement, a consensus is reached as to the overall direction of the firm. Advantages: Considers multiple opinions and viewpoints

Increases firm-wide commitment to the strategy Moves some decision-making closer to the front line of the firm Useful in complex, uncertain, and unstable environments

Disadvantages: Some managers will not give up their authority Can lead to groupthink Slows down the strategy development and implementation process Requires open horizontal and vertical communication

Implementation as Organizational Cultural Basic Premise: Marketing strategy is a part of the overall mission and vision of the firm; therefore, the strategy is

embedded in the firm’s culture. Top executives manage the firm’s culture to ensure that all employees are well versed in the firm’s strategy.

Advantages: Eliminates the barrier between strategists and implementers Increases employee commitment to organizational goals Allows for the empowerment of employees Can make marketing implementation much easier to accomplish

Disadvantages: Must spend more money on employee selection and training Creating the necessary culture can be painful and time-consuming Quickly shifting to this approach can cause many internal problems

Chapter 9 • Marketing Implementation and Control 273

basis, talking with customers and employees about how he could better serve their needs. He felt so strongly about the importance of his associates (his term for store personnel) that he always allowed them the opportunity to voice their concerns about changes in marketing activities. Sam had strong convictions that if he took good care of his associates, they would take good care of Walmart’s customers.

The Internal Marketing Process The process of internal marketing is straightforward and rests on many of the same principles used in traditional external marketing. As shown in Exhibit 9.4, internal marketing is an output of and input to both marketing implementation and the external marketing program. That is, neither the marketing strategy nor its implementation can be designed without a consideration for the internal marketing program.

The product, price, distribution, and promotion elements of the internal market- ing program are similar to the elements in the external marketing program. Internal products refer generally to marketing strategies that must be “sold” internally. More specifically, however, internal products refer to any employee tasks, behaviors, attitudes, or values necessary to ensure implementation of the marketing strategy.28

EXHIBIT 9.4 The Internal Marketing Process.

Corporate Mission, Goals, and Objectives

Marketing Goals, Objectives, and

Strategy

Marketing Implementation

Internal Marketing Program

Product Price

Distribution Promotion

Target Groups within the

Organization

External Marketing Program

Product Price

Distribution Promotion

External Customer

Groups or Targets

SOURCE: Adapted from Nigel F. Piercy, Market-Led Strategic Change (Stoneham, MA: Butterworth-Heinemann, 2008), pp. 496–501.

274 Chapter 9 • Marketing Implementation and Control

Implementation of a marketing strategy, particularly a new strategy, typically requires changes on the part of employees. They may have to work harder, change job assignments, or even change their attitudes and expand their abilities. The increased effort and changes that employees must exhibit in implementing the strat- egy are equivalent to internal prices. Employees pay these prices through what they must do, change, or give up when implementing the marketing strategy.

Internal distribution refers to the internal interactions that disseminate the market- ing strategy throughout the firm. Planning sessions, workshops, formal reports, and personal conversations are all examples of internal distribution. Internal distribution also includes employee education, training, and socialization programs designed to assist in the transition to a new marketing strategy. Finally, all communication aimed at informing and persuading employees about the merits of the marketing strategy comprise internal promotion. Internal promotion can take the form of executive speeches, video presentations, blogs, podcasts, or internal company newsletters. Given the growing diversity of today’s employees, it is unlikely that any one medium will communicate with all employees successfully. Firms must realize that telling employees important information once in a single format is not good communica- tion. Until the employees “get the strategy,” communication has not taken place.

Successfully using an internal marketing approach requires an integration of many factors already discussed in this chapter. First, the recruitment, selection, and training of employees must be considered an important element of marketing imple- mentation, with marketing having input to these human resource and personnel activities as necessary.29 This ensures that employees will be matched to the market- ing tasks to be performed. Second, top executives must be completely committed to the strategy and the overall marketing plan. It is naive to expect employees to be committed when top executives are not. Simply put, the best-planned strategy in the world cannot succeed if the employees responsible for its implementation do not believe in it or have a commitment to it.30

Third, employee compensation programs must be linked to the implementation of the marketing strategy. This means that employees should be rewarded on the basis of behaviors consistent with the marketing strategy. Fourth, the firm should be characterized by open communication among all employees, regardless of their level in the firm. Through open, interactive communication, employees come to understand the support and commitment of top executives, and how their jobs fit into the overall marketing implementation process. Finally, the firm’s structure, poli- cies, and processes should match the marketing strategy to ensure that the strategy can be implemented in the first place. On some occasions, the firm’s structure and policies constrain the ability of employees to implement the strategy effectively. Although eliminating these constraints may mean that employees should be empow- ered to creatively fine-tune the strategy or its implementation, empowerment should be used only if the firm’s culture can support it. However, if a company uses empow- erment correctly as a part of the internal marketing approach, the firm can experi- ence more motivated, satisfied, and committed employees, as well as enhanced customer satisfaction and improved marketing performance.31

EVALUATING AND CONTROLLING MARKETING ACTIVITIES A marketing strategy can achieve its desired results only if implemented properly. Properly is the key word. It is important to remember that a firm’s intended market- ing strategy often differs from the realized strategy (the one that actually takes place). This also means that actual performance is often different from expectations. Typically, there are four possible causes for this difference:

1. The marketing strategy was inappropriate or unrealistic. 2. The implementation was inappropriate for the strategy.

Chapter 9 • Marketing Implementation and Control 275

3. The implementation process was mismanaged. 4. The internal and/or external environments changed substantially between the

development of the marketing strategy and its implementation.

To reduce the difference between what actually happened and what the com- pany expected—and to correct any of these four problems—marketing activities must be evaluated and controlled on an ongoing basis. Although the best way to handle implementation problems is to recognize them in advance, no manager can successfully recognize all of the subtle and unpredictable warning signs of imple- mentation failure.

With that in mind, it is important that the potential for implementation failures be managed strategically by having a system of marketing controls in place that allows the firm to spot potential problems before they cause real trouble. Exhibit 9.5 out- lines a framework for marketing control that includes two major types of control: formal controls and informal controls.32 Although we discuss each type of marketing control separately, most firms use combinations of these control types to monitor strategy implementation.

Formal Marketing Controls Formal marketing controls are activities, mechanisms, or processes designed by the firm to help ensure the successful implementation of the marketing strategy. The ele- ments of formal control influence the behaviors of employees before and during implementation, and to assess performance outcomes at the completion of the implementation process. These elements are referred to as input, process, and out- put controls, respectively.

Input Controls Actions taken prior to the implementation of the marketing strategy are input con- trols. The premise of input control is that the marketing strategy cannot be imple- mented correctly unless the proper tools and resources are in place for it to succeed. Recruiting, selecting, and training employees are among the most impor- tant input controls. Another critical input control deals with financial resources. These control activities include resource allocation decisions (manpower and financial), capital outlays for needed facilities and equipment, and increased expen- ditures on research and development. Financial resources can make or break a marketing strategy or its implementation. For example, General Motors was quite slow to infuse additional capital into its Saturn division after it was first launched. For years, Saturn was unable to compete effectively due to constrained resources that limited its ability to develop and market new vehicles. A case in point: Saturn did not enter the highly profitable SUV market until 2002—long after its competi- tors. By the time GM did give Saturn additional resources, it was too late to repair the brand’s tarnished image. GM later closed the Saturn division as a part of its corporate restructuring.

Process Controls Process controls include activities that occur during implementation, designed to influence the behavior of employees so they will support the strategy and its objec- tives. Although the number of process controls is potentially limitless and will vary from one firm to the next, Exhibit 9.5 provides some examples of universal process controls that all firms must employ and manage well.

The process control that stands out above all others is management commitment to the strategy. Several research studies have confirmed that management commit- ment to the marketing strategy is the single most important determinant of whether

276 Chapter 9 • Marketing Implementation and Control

the strategy will succeed or fail.33 This commitment is critical because employees learn to model the behavior of their managers. If management is committed to the marketing strategy, it is more likely that employees will be committed to it as well. Commitment to the marketing strategy also means that managers must be committed to employees and support them in their efforts to implement the strategy.

Another important process control is the system used to evaluate and compen- sate employees. In general, employees should be evaluated and compensated based on criteria relevant to the marketing strategy.34 For example, if the strategy requires that salespeople increase their efforts at customer service, they should be rewarded

EXHIBIT 9.5 A Framework for Marketing Control.

Formal Controls: Control Activities Initiated by Management Input controls—actions taken prior to implementation of the strategy

• Employee recruitment, selection, and training processes • Human resource allocations • Allocation of financial resources • Capital outlays • Research and development expenditures

Process controls—actions taken during implementation of the strategy

• Employee evaluation and compensation systems • Employee authority and empowerment • Internal communication programs • Lines of authority/structure (organizational chart) • Management commitment to the marketing plan • Management commitment to employees

Output controls—evaluated after implementation of the strategy

• Formal performance standards (for example, sales, market share, and profitability) • Marketing audits

Informal Controls: Unwritten Control Activities Initiated by Employees Employee self-control—control based on personal expectations and goals

• Job satisfaction • Organizational commitment • Employee effort • Commitment to the marketing plan

Social control—small-group control based on group norms and expectations

• Shared organizational values • Social and behavioral norms in work groups

Cultural control—cultural control based on organizational norms and expectations

• Organizational culture • Organizational stories, rituals, and legends • Cultural change

SOURCE: Adapted from Bernard J. Jaworski, “Toward a Theory of Marketing Control: Environmental Context, Control Types, and Consequences,” Journal of Marketing, 52 (July 1988), 23–39.

Chapter 9 • Marketing Implementation and Control 277

on the basis of this effort, not on other criteria such as sales volume or the number of new accounts created. Further, the degree of authority and empowerment granted to employees is another important process control. Although some degree of empower- ment can lead to increased performance, employees given too much authority often become confused and dissatisfied with their jobs.35 Having good internal communi- cation programs—another type of process control—can help to alleviate these problems.

Output Controls Output controls ensure that marketing outcomes are in line with anticipated results. The primary means of output control involves setting performance standards against which actual performance can be compared. To ensure an accurate assessment of marketing activities, all performance standards should be based on the firm’s mar- keting objectives. Some performance standards are broad, such as those based on sales, profits, or expenses. We say these are broad standards because many different marketing activities can affect them. Other performance standards are quite specific, such as many customer service standards (e.g., number of customer complaints, repair service within 24 hours, overnight delivery by 10:00 a.m., on-time airline arri- vals). In most cases, how the firm performs relative to these specific standards will determine how well it performs relative to broader standards.

But how specific should performance standards be? Standards should reflect the uniqueness of the firm and its resources, as well as the critical activities needed to implement the marketing strategy. In setting performance standards, it is important to remember that employees are always responsible for implementing marketing activities, and ultimately the marketing strategy. For example, if an important part of increasing customer service requires that employees answer the telephone by the second ring, then a performance standard should be set for this activity. Standards for the performance of marketing personnel are typically the most difficult to estab- lish and enforce.

One of the best methods of evaluating whether performance standards have been achieved is to use a marketing audit to examine systematically the firm’s

Ch ris 10 2/ Sh ut te rs to ck .c om

Time-based performance measures are commonly used in evaluating and controlling marketing activities.

278 Chapter 9 • Marketing Implementation and Control

marketing objectives, strategy, and performance.36 The primary purpose of a market- ing audit is to identify problems in ongoing marketing activities and to plan the nec- essary steps to correct these problems. A marketing audit can be long and elaborate, or it can be short and simple. Exhibit 9.6 displays a sample marketing audit. In prac- tice, the elements of the audit must match the elements of the marketing strategy. The marketing audit should also be used to gauge the success of ongoing implemen- tation activities—not just when problems arise.

Regardless of the organization of the marketing audit, it should aid the firm in evaluating marketing activities by:

1. Describing current marketing activities and their performance outcomes. 2. Gathering information about changes in the external or internal environments

that may affect ongoing marketing activities. 3. Exploring different alternatives for improving the ongoing implementation of

marketing activities. 4. Providing a framework to evaluate the attainment of performance standards, as

well as marketing goals and objectives.

The information in a marketing audit is often obtained through a series of ques- tionnaires that are given to employees, managers, customers, and/or suppliers. In some cases, outside consultants perform this ongoing evaluation. Using outside audi- tors has the advantages of being more objective and less time consuming for the firm. However, outside auditors are typically quite expensive. A marketing audit can also be very disruptive, especially if employees are fearful of the scrutiny.

Despite their drawbacks, marketing audits are usually quite beneficial for the firms that use them. They are flexible in that the scope of the audit can be broad (to evaluate the entire marketing strategy) or narrow (to evaluate only a specific ele- ment of the marketing program). The results of the audit can be used to reallocate marketing efforts, correct implementation problems, or even to identify new oppor- tunities. The end results of a well-executed marketing audit are usually better mar- keting performance and increased customer satisfaction.

Informal Marketing Controls Formal marketing controls are overt in their attempt to influence employee behavior and marketing performance. Informal controls, on the other hand, are more subtle. Informal marketing controls are unwritten, employee-based mechanisms that subtly affect the behaviors of employees, both as individuals and in groups.37 Here, we deal with personal objectives and behaviors, as well as group-based norms and expectations. There are three types of informal control: employee self-control, social control, and cultural control.

Employee Self-Control Through employee self-control, employees manage their own behaviors (and thus the implementation of the marketing strategy) by establishing personal objectives and monitoring their results. The type of personal objectives that employees set depends on how they feel about their jobs. If they have high job satisfaction and a strong commitment to the firm, they are more likely to establish personal objectives that are consistent with the aims of the firm, the marketing strategy, and the firm’s goals and objectives. Employee self-control also depends on the rewards employees receive. Some employees prefer the intrinsic rewards of doing a good job rather than the extrinsic rewards of pay and recognition. Intrinsically rewarded employees are likely to exhibit more self-control by managing their behaviors in ways that are con- sistent with the marketing strategy.

Chapter 9 • Marketing Implementation and Control 279

EXHIBIT 9.6 A Sample Marketing Audit.

Marketing Activities

1. In what specific marketing activities is the company currently engaged? • Product activities: research, concept testing, test marketing, quality control, etc. • Customer service activities: installation, training, maintenance, technical support, complaint handling, etc. • Pricing activities: financing, billing, cost control, discounting, etc. • Distribution activities: availability, channels used, customer convenience, etc. • Promotion activities: media, sales promotion, personal selling, public relations, etc.

2. Are these activities conducted solely by the company, or are some provided by outside contractors (either domestically or offshore)? If outside contractors are used, how are they performing? Should any of these outside activities be brought in-house?

3. What marketing activities do our competitors conduct that we do not offer? What additional marketing activities do customers want, need, or expect?

Standard Procedures for Each Marketing Activity

1. Do written procedures (manuals) exist for each marketing activity? If so, are these procedures (manuals) up to date? Do employees fully understand and follow these procedures (manuals)?

2. What oral or unwritten procedures exist for each marketing activity? Should these procedures be formally included in the written procedures or should they be eliminated?

3. Do marketing personnel regularly interact with other functional areas to establish standard procedures for each activity?

Performance Standards for Each Marketing Activity

1. What specific quantitative standards exist for each activity?

2. What qualitative standards exist for each activity?

3. How does each activity contribute to customer satisfaction within each marketing program element (i.e., product, pricing, distribution, promotion)?

4. How does each activity contribute to marketing goals and objectives?

5. How does each activity contribute to the goals and objectives of the company?

Performance Metrics for Each Marketing Activity

1. What are the internal, profit-based measures for each marketing activity?

2. What are the internal, time-based measures for each marketing activity?

3. How is performance monitored and evaluated internally by management?

4. How is performance monitored and evaluated externally by customers?

Evaluation of Marketing Personnel

1. Are the company’s current recruiting, selection, and retention efforts consistent (matched) with the requirements of the marketing activities?

2. What are the nature and content of employee training activities? Are these activities consistent with the requirements of the marketing activities?

3. How are customer-contact personnel supervised, evaluated, and rewarded? Are these procedures consistent with customer requirements?

4. What effect do employee evaluation and reward policies have on employee attitudes, satisfaction, and motivation?

5. Are current levels of employee attitudes, satisfaction, and motivation adequate?

280 Chapter 9 • Marketing Implementation and Control

Social Control Social, or small group, control deals with the standards, norms, and ethics found in workgroups within the firm.38 The social interaction that occurs within these work- groups can be a powerful motivator of employee behavior. The social and behavioral norms of workgroups provide the “peer pressure” that causes employees to conform to expected standards of performance. If employees fall short of these standards, the group will pressure them to align with group norms. This pressure can be both posi- tive and negative. Positive group influence can encourage employees to increase their effort and performance in ways consistent with the firm’s goals and objectives. However, the opposite is also true. If the workgroup’s norms encourage slacking or shirking of job responsibilities, employees will feel pressured to conform, or risk being ostracized for good work.

Cultural Control Cultural control is very similar to social control, only on a much broader scale. Here, we are interested in the behavioral and social norms of the entire firm. One of the most important outcomes of cultural control is the establishment of shared values among all members of the firm. Marketing implementation is most effective and efficient when every employee, guided by the same organizational values or beliefs, has a commitment to the same organizational goals.39 Companies such as Lockheed Martin and Lexmark have strong organizational cultures that guide employee behavior. Unfortunately, cultural control is very difficult to master, in that it takes a great deal of time to create the appropriate organizational culture to ensure implementation success.

It is important to note that the formal controls employed by the firm affect, to a great extent, the informal controls that occur within an organization. However, the premise of informal control is that some aspects of employee behavior cannot be influenced by for- mal mechanisms, and therefore must be controlled informally through individual and group actions. Beyond the Pages 9.3 describes how formal and informal controls over- lap to promote risk management principles in today’s astute organizations.

Scheduling Marketing Activities Through good planning and organization, marketing managers can provide purpose, direction, and structure to all marketing activities. However, the manager must understand the problems associated with implementation, understand the coordina- tion of the various components of implementation, and select an overall approach to implementation before actually executing marketing activities. Upon taking these steps, the marketing manager with the responsibility for executing the plan must establish a timetable for the completion of each marketing activity.

Evaluation of Customer Support Systems

1. Are the quality and accuracy of customer service materials (e.g., instruction manuals, brochures, letters, etc.) consistent with the image of the company and its products?

2. Are the quality and appearance of physical facilities (e.g., offices, furnishings, layout, store decor, etc.) consistent with the image of the company and its products?

3. Are the quality and appearance of customer service equipment (e.g., repair tools, telephones, computers, delivery vehicles, etc.) consistent with the image of the company and its products?

4. Is the record keeping system accurate? Is the information always readily available when it is needed? What technology could be acquired to enhance record keeping abilities (e.g., bar code scanners, RFID, notebook computers, wireless telephones or smartphones)?

Chapter 9 • Marketing Implementation and Control 281

BEYOND THE PAGES 9.3

Managing Risk through Culture40

Given the many examples of corporate miscon- duct and lapses in managerial judgment over the past 5 to 10 years, top executives have become keenly aware of the importance of managing corporate risk. The risks faced by today’s orga- nizations come in many forms: financial risk, insurance risk, operational risk, product liability risk, strategic risks, reputational risks, etc. As top executives try to better understand the stakes in enterprise risk management, they are beginning to realize that managing risk involves more than making the right decisions in the boardroom. True risk management involves assessing the risk culture of the entire firm.

Experts define risk culture as a system of values and behaviors within an organization that shape risk decisions. An organization’s risk cul- ture influences everyone, whether they are aware of it or not. It is this lack of awareness that creates potential problems. Even seemingly small decisions can have implications for corpo- rate risk. The key is to ensure that all employees have a common understanding of risk, and how it is potentially connected to their day-to-day activities.

Sadly, the evidence suggests that most organizations do a poor job of nurturing their risk cultures. While 84 percent of firms include risk management in C-suite discussions, 58 percent of top executives stated that their middle- and lower-level employees had little to no understanding of their company’s risk exposure. One-third said that even top man- agers had no formal risk training. Without train- ing and an open dialogue about risk, organizations cannot ensure that well-informed and consistent decisions about risk occur throughout the firm.

How can an organization inspire a risk cul- ture? Some suggested guidelines include:

• Set the Tone at the Top and the Middle. A key axiom of management is that leaders communicate their priorities through what they measure, discuss, praise, and criticize. These aspects of “setting the tone” are impor- tant because they provide examples for other employees to follow. However, this tone must emanate from all managers, not just those in the boardroom. The organization

and its leaders must have a clearly articulated risk policy as well as clear penalties for non- compliant behavior.

• Understand the Difference Between

Good and Bad Risk. Risk management has the potential to stifle an organization’s crea- tivity. Thus, it is critical that all employees understand the difference between accept- able risk based on innovation and reckless behavior that jeopardizes the organization. The firm must also encourage and be willing to tolerate mistakes, and then learn from them.

• Promote Open Communication About

Risk. Creating the proper risk culture requires consistent messages to employees about risk, and the importance of managing risk as a part of daily operations. This means that collaboration is essential in order to mitigate the ambiguity and compet- itiveness that typically lead to overly risky decisions.

• Give Employees Incentives to Manage

Risk. Giving proper incentives to manage risk is important. However, it is often more important to eliminate any incentives that reward reckless behavior. This applies to everyone in the organization—from the boardroom to the mailroom.

• Consider the Risk Cultures of Potential

Partners. To manage risk fully, an organiza- tion must ensure that its vendors, suppliers, and strategic partners share its risk toler- ances. Risk should always be a consideration in choosing new partners or suppliers. Note that this also applies to the company’s most important partners—its employees. Risk should always be a consideration in the hir- ing process.

Having a strong risk culture means that everyone knows the principles and boundaries within which the organization operates. It means that risk is openly discussed and weighed in all decisions. It ensures that everyone stays on the right path. However, creating this type of culture takes a great deal of patience and time. But then again, the crises that result from poor risk management are often far more costly in terms of time, money, and corporate reputation.

282 Chapter 9 • Marketing Implementation and Control

Successful implementation requires that employees know the specific activities for which they are responsible and the timetable for completing each activity. Cre- ating a master schedule of marketing activities can be a challenging task because of the wide variety of activities required to execute the plan, the sequential nature of many activities (some take precedence over others and must be performed first), and the fact that time is of the essence in implementing the plan.41 The basic steps involved in creating a schedule and timeline for implementation include:

1. Identify the Specific Activities to Be Performed. These activities include all marketing program elements contained within the marketing plan. Specific implementation activities, such as employee training, structural changes, or the acquisition of financial resources, should be included as well.

2. Determine the Time Required to Complete Each Activity. Some activities require planning and time before they can come to fruition. Others can occur rather quickly after the initiation of the plan.

3. Determine Which Activities Must Precede Others. Many marketing activities must be performed in a predetermined sequence (such as creating an advertising campaign from copywriting, to production, to delivery). These activities must be identified and separated from any activities that can be performed concurrently with other activities.

4. Arrange the Proper Sequence and Timing of All Activities. In this step, the manager plans the master schedule by sequencing all activities and determining when each activity must occur.

5. Assign Responsibility. The manager must assign one or more employees, teams, managers, or departments to each activity and charge them with the responsibility of executing the activity.

A simple, but effective way to create a master implementation schedule is to incorporate all marketing activities into a spreadsheet, like the one shown in Exhibit 9.7. A master schedule such as this can be simple or complex depending on the level of detail included within each activity. The master schedule will also be unique to the specific marketing plan tied to it. As a result, a universal template for creating a mas- ter schedule does not truly exist.

Although some activities must be performed before others, other activities can be performed concurrently with other activities or later in the implementation pro- cess. This requires tight coordination between departments—marketing, production, advertising, sales, and so on—to ensure the completion of all marketing activities on schedule. Pinpointing those activities that can be performed concurrently can greatly reduce the total amount of time needed to execute a given marketing plan. Because scheduling can be a complicated task, most firms use sophisticated project manage- ment techniques, such as PERT (program evaluation and review technique), CPM (critical path method), or computerized planning programs, to schedule the timing of marketing activities.

LESSONS FROM CHAPTER 9

Marketing implementation:

• is critical to the success of any firm because it is responsible for putting the mar- keting strategy into action.

• has been somewhat ignored throughout the history of business as most firms have emphasized strategic planning rather than strategic implementation.

Chapter 9 • Marketing Implementation and Control 283

• is the process of executing the marketing strategy by creating and performing specific actions that will ensure the achievement of the firm’s marketing objectives.

• goes hand-in-hand with evaluation and control in determining the success or fail- ure of the marketing strategy, and ultimately for the entire firm.

• is usually the cause for the difference between intended marketing strategy— what the firm wants to happen—and realized marketing strategy—the strategy that actually takes place.

• maintains a relationship with strategic planning that causes three major pro- blems: interdependency, evolution, and separation.

The elements of marketing implementation include:

• Marketing strategy—the firm’s planned product, pricing, distribution, and pro- motion activities.

• Shared goals and values—the glue of implementation that holds the entire firm together as a single, functioning unit.

• Marketing structure—how the firm’s marketing activities are organized. • Systems and processes—collections of work activities that absorb a variety of

inputs to create information and communication outputs that ensure the consis- tent day-to-day operation of the firm.

• Resources—include a wide variety of tangible and intangible assets that can be brought together during marketing implementation.

• People—the quality, diversity, and skill of a firm’s human resources. The people element also includes employee selection and training, evaluation and compen- sation, motivation, satisfaction, and commitment.

• Leadership—how managers communicate with employees, as well as how they motivate their employees to implement the marketing strategy.

EXHIBIT 9.7 A Hypothetical Three-Month Marketing Implementation Schedule.

Month March April May

Activities Week 1 2 3 4 1 2 3 4 1 2 3 4 Product Activities

Finalize package changes ● Production runs ● ● ● ● ● ●

Pricing Activities Hold 10% off sale at retail ● Hold 25% off sale at retail ●

Distribution Activities Shipments to warehouses ● ● ● ● ● ● Shipments to retail stores ● ● ● ● ● ●

10% quantity discount to the trade ● ● ● ● ● ● ● ● ● ● ● ●

Promotion Activities Website operational ● Ongoing sponsorship ● ● ● ● ● ● ● ● ● ● ● ● Television advertising ● ● ● ● ● ●

Online advertising ● ● ● ● ● ● Mobile coupon ● ●

In-store displays ● ● ● ● ● ● ● ● Product placement ● ● ● ● ● ● ● ● ● ● ● ●

284 Chapter 9 • Marketing Implementation and Control

Approaches to implementing marketing strategy include:

• Implementation by command—marketing strategies are developed and selected by the firm’s top executives, then transmitted to lower levels where frontline managers and employees are expected to implement them.

• Implementation through change—focuses explicitly on implementation by mod- ifying the firm in ways that will ensure the successful implementation of the cho- sen marketing strategy.

• Implementation through consensus—upper- and lower-level managers from differ- ent areas of the firm work together to evaluate and develop marketing strategies.

• Implementation as organizational culture—marketing strategy and implementa- tion are seen as extensions of the firm’s mission, vision, and organizational culture. Employees at all levels can participate in making decisions that help the firm reach its mission, goals, and objectives.

Internal marketing:

• refers to the use of a marketing-like approach to motivate, coordinate, and inte- grate employees toward the implementation of the firm’s marketing strategy.

• explicitly recognizes that external customer satisfaction depends on the actions of the firm’s internal customers—its employees. If the internal customers are not properly educated about the strategy and motivated to implement it, then it is unlikely that the external customers will be satisfied completely.

• places the responsibility for implementation on all employees regardless of their level within the firm.

• is based on many of the same principles used in traditional external marketing. The product, price, distribution, and promotion elements of the internal market- ing program are similar to the elements in the external marketing program.

In evaluating and controlling marketing activities:

• the firm’s intended marketing strategy often differs from the realized strategy for four potential reasons: (1) the marketing strategy was inappropriate or unrealis- tic, (2) the implementation was inappropriate for the strategy, (3) the implemen- tation process was mismanaged, or (4) the internal and/or external environments changed substantially between the development of the marketing strategy and its implementation.

• it is important that the potential for implementation failures be managed strate- gically by having a system of marketing controls in place.

• firms design and use formal input, process, and output controls to help ensure the successful implementation of the marketing strategy.

• firms use output controls, or performance standards, extensively to ensure that marketing outcomes are in line with anticipated results.

• employees individually (self-control), in workgroups (social control), and throughout the firm (cultural control) use personal objectives and group-based norms and expectations to informally control their behaviors.

Scheduling marketing activities:

• requires that employees know the specific activities for which they are responsi- ble and the timetable for completing each activity.

• can be a challenging task because of the wide variety of activities required to execute the plan, the sequential nature of many marketing activities, and the fact that time is of the essence in implementing the plan.

• involves five basic steps: (1) identifying the specific activities to be performed, (2) determining the time required to complete each activity, (3) determining which activities must precede others, (4) arranging the proper sequence and tim- ing of all activities, and (5) assigning responsibility to employees, managers, teams, or departments.

Chapter 9 • Marketing Implementation and Control 285

NOTES 1. These facts are from “Coffee Wars Heat Up: Rivals Sue Keurig Over Pod Design,” New

York Daily News, March 17, 2015 (http://www.nydailynews.com/life-style/coffee-rivals- sue-keurig-pod-design-article-1.2152762); Keurig Green Mountain, 2014 Annual Report (http://files.shareholder.com/downloads/GMCR/1554082x0x800137/17B2E475-5C40- 47AE-A563-C65C86B282DF/2014_Keurig_Annual_Report.pdf), accessed April 5, 2015; Keurig Green Mountain website (http://www.keuriggreenmountain.com/OurCompany/ Overview.aspx), accessed April 5, 2015; Leslie Patton, “Green Mountain’s Expiring K-Cup Patents Attract Coffee Rivals,” Bloomberg BusinessWeek, November 21, 2011 (http://www.businessweek.com/news/2011-11-21/green-mountain-s-expiring-k-cup- patents-attract-coffee-rivals.html); Leslie Patton, “Green Mountain Introduces Nestle- Rival Keurig Latte Brewer,” Bloomberg BusinessWeek, February 15, 2012 (http://www. businessweek.com/news/2012-02-15/green-mountain-introduces-nestle-rival-keurig-latte- brewer.html); Victoria Taylor, “Keurig K-Cup Inventor: I ‘Feel Bad’ for Making the Non- Recyclable Coffee Pods,” New York Daily News, March 4, 2015 (http://www. nydailynews.com/life-style/eats/keurig-k-cup-inventor-feel-bad-making-article- 1.2137491).

2. Orville C. Walker, Jr. and Robert W. Ruekert, “Marketing’s Role in the Implementation of Business Strategies: A Critical Review and Conceptual Framework,” Journal of Marketing, 51 (July 1987), 15–33.

3. Frank V. Cespedes, Organizing and Implementing the Marketing Effort (Reading, MA: Addison-Wesley, 1991), p. 19.

4. Robert Howard, “Values Make the Company: An Interview with Robert Haas,” Harvard Business Review, 68 (September–October 1990), 132–144.

5. See the New Belgium Brewery website (http://www.newbelgium.com). 6. Michael D. Hartline, James G. Maxham, III, and Daryl O. McKee, “Corridors of

Influence in the Dissemination of Customer-Oriented Strategy to Customer Contact Service Employees,” Journal of Marketing, 64 (April 2000), 35–50.

7. Ibid. 8. Cespedes, Organizing and Implementing the Marketing Effort, pp. 622–623. 9. Robert W. Ruekert, Orville C. Walker, Jr., and Kenneth J. Roering, “The Organization

of Marketing Activities: A Contingency Theory of Structure and Performance,” Journal of Marketing, 49 (Winter 1985), 13–25.

10. Hartline, Maxham, and McKee. 11. Michael Hammer and James Champy, Reengineering the Corporation: A Manifesto for

Business Revolution (New York: Harper Business, 1993), p. 35. 12. Jena McGregor, “How Failure Breeds Success,” BusinessWeek Online, July 10, 2006

(http://www.businessweek.com/magazine/content/06_28/b3992001.htm? chan=innovation_innovation+%2B+design_the+creative+corporation).

13. Myron Glassman and Bruce McAfee, “Integrating the Personnel and Marketing Functions: The Challenge of the 1990s,” Business Horizons, 35 (May–June 1992), 52–59.

14. Michael D. Hartline and O. C. Ferrell, “Service Quality Implementation: The Effects of Organizational Socialization and Managerial Actions on Customer-Contact Employee Behaviors,” Marketing Science Institute Working Paper Series, Report No. 93–122 (Cambridge, MA: Marketing Science Institute, 1993).

15. Richard L. Oliver and Erin Anderson, “An Empirical Test of the Consequences of Behavior- and Outcome-Based Sales Control Systems,” Journal of Marketing, 58 (October 1994), 53–67.

16. Hartline, Maxham, and McKee. 17. Google Careers (https://www.google.com/about/careers/lifeatgoogle/benefits/),

accessed April 5, 2015. 18. These facts are from Ram Charan, “The New (Recovery) Playbook,” Fortune

(CNNMoney.com), August 13, 2009 (http://money.cnn.com/2009/08/11/news/economy/ new_rules_recovery.fortune/index.htm); Betsy Morris, “The New Rules,” Fortune, July 24, 2006, pp. 70–87; Betsy Morris, “Tearing Up the Jack Welch Playbook,” Fortune (CNNMoney.com), July 11, 2006 (http://money.cnn.com/2006/07/10/magazines/fortune/ rules.fortune/index.htm).

286 Chapter 9 • Marketing Implementation and Control

19. W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy (Boston, MA: Harvard Business School Press, 2005).

20. The material in this section has been adapted from L. J. Bourgeois III and David R. Brodwin, “Strategic Implementation: Five Approaches to an Elusive Phenomenon,” Strategic Management Journal, 5 (1984), 241–264; Steven W. Floyd and Bill Wooldridge, “Managing Strategic Consensus: The Foundation of Effective Implementation,” Academy of Management Executive, 6 (November 1992), 27–39.

21. These facts are from Trefis Team, “McDonald’s Sales Sizzle But Franchisees Get Fried by Lower Profit Margins,” Forbes, January 13, 2011 (http://www.forbes.com/sites/ greatspeculations/2011/01/13/mcdonalds-sales-sizzle-but-franchisees-get-fried-by-lower- profit-margins); Emily Bryson York, “Franchisee Survey Shows Growing Discord at McDonald’s,” Chicago Tribune, April 16, 2013 (http://articles.chicagotribune.com/2013- 04-16/business/chi-franchisee-survey-shows-growing-discord-at-mcdonalds- 20130416_1_dollar-menu-mcwrap-janney-analyst-mark-kalinowski); Emily Bryson York, “McD’s Dollar-Menu Fixation Sparks Revolt,” Advertising Age, 79 (June 2, 2008), 1, 2.

22. These facts are from “Brand-Led Marketing: Samsung Viewpoint,” Marketing Week, July 2, 2009, p. 18; Karlene Lukovitz, “Fastest-Growing Brands Are ‘Ideal-Driven’,” Marketing Daily, January 18, 2012 (http://www.mediapost.com/publications/article/ 165965/fastest-growing-brands-are-ideal-driven.html); “What Samsung’s Success Means for Apple,” Forbes, May 9, 2012 (http://www.forbes.com/sites/investor/2012/05/09/what- samsungs-success-means-for-apple).

23. George Bradt, “Royal Caribbean’s CEO Exemplifies How to Leverage Milestones,” Forbes, March 23, 2011 (http://www.forbes.com/sites/georgebradt/2011/03/23/royal- caribbean-cruise-lines-ceo-richard-fain-exemplifies-how-to-leverage-milestones-to-build- ships-and-teams).

24. Bourgeois and Brodwin. 25. Carmine Gallo, “Wow Your Customers the Ritz-Carlton Way,” Forbes, February 23,

2011 (http://www.forbes.com/sites/carminegallo/2011/02/23/wow-your-customers-the- ritz-carlton-way).

26. Hartline, Maxham, and McKee. 27. This information is from Mohammed Rafiq and Pervaiz K. Ahmed, “Advances in the

Internal Marketing Concept: Definition, Synthesis and Extension,” Journal of Services Marketing, 14 (2000), 449–463.

28. This information is from Mohammed Rafiq and Pervaiz K. Ahmed, “Advances in the Internal Marketing Concept: Definition, Synthesis and Extension,” Journal of Services Marketing, 14 (2000), 449–463.

29. Glassman and McAfee. 30. Howard. 31. Hartline and Ferrell. 32. This section is based on material from Hartline, Maxham, and McKee; Bernard J.

Jaworski, “Toward a Theory of Marketing Control: Environmental Context, Control Types, and Consequences,” Journal of Marketing, 52 (July 1988), 23–39.

33. This section is based on material from Hartline, Maxham, and McKee; Bernard J. Jaworski, “Toward a Theory of Marketing Control: Environmental Context, Control Types, and Consequences,” Journal of Marketing, 52 (July 1988), 23–39; Brian P. Niehoff, Cathy A. Enz, and Richard A. Grover, “The Impact of Top-Management Actions on Employee Attitudes and Perceptions,” Group & Organization Studies, 15 (September 1990), 337–352.

34. Michael D. Hartline and O. C. Ferrell, “The Management of Customer-Contact Service Employees: An Empirical Investigation,” Journal of Marketing, 60 (October 1996), 52–70.

35. Ibid. 36. Ben M. Enis and Stephen J. Garfein, “The Computer-Driven Marketing Audit,” Journal

of Management Inquiry, 1 (December 1992), 306–318; Philip Kotler, William Gregor, and William Rodgers, “The Marketing Audit Comes of Age,” Sloan Management Review, 30 (Winter 1989), 49–62.

37. Jaworski. 38. Ibid. 39. Hartline, Maxham, and McKee. 40. These facts are from John Michael Farrell and Angela Hoon, “What’s Your Company’s

Risk Culture,” BusinessWeek Online, May 12, 2009 (http://www.businessweek.com/

Chapter 9 • Marketing Implementation and Control 287

managing/content/may2009/ca20090512_720476.htm); Kevin Kelly, “The Key to Risk: It’s All About Emotion,” Forbes, February 23, 2009 (http://www.forbes.com/2009/02/23/risk- culture-crisis-leadership-management_innovation.html); Karen E. Klein, “Using Risk Management to Beat the Downturn,” BusinessWeek Online, January 9, 2009 (http:// www.businessweek.com/smallbiz/content/jan2009/sb2009018_717265.htm); Arvin Maskin, “Creating a Culture of Risk Avoidance,” BusinessWeek Online, March 6, 2009 (http://www.businessweek.com/managing/content/mar2009/ca2009036_914216.htm); Max Rudolph, “What Do Risk Officers Worry About?” Reuters, May 18, 2012 (http:// blogs.reuters.com/great-debate/2012/05/18/what-do-risk-officers-worry-about).

41. Jack R. Meredith and Scott M. Shafer, Introducing Operations Management (New York: John Wiley and Sons, 2003), p. 458.

288 Chapter 9 • Marketing Implementation and Control

Developingand MaintainingLong-Term CustomerRelationships

INTRODUCTION To this point in the text, we have examined the process of strategic planning from its initial stages through the implementation of the marketing plan. At this point, how- ever, we take the opportunity to step back from the process to look at it holistically. Firms often lose sight of the big picture as they rush to complete product develop- ment and test marketing, or put the finishing touches on a media campaign. All of the activities involved in developing and implementing the marketing program have one key purpose: to develop and maintain long-term customer relationships. However, as we have seen, implementing a marketing strategy that can effectively satisfy customers’ needs and wants has proven difficult in today’s rapidly changing business environment. The simple fact is that thorough research, strong competitive advantages, and a well-implemented marketing program are often not enough to guarantee success.

In times past, developing and implementing the “right” marketing strategy was all about creating a large number of transactions with customers in order to maximize the firm’s market share. Companies paid scant attention to discov- ering customers’ needs and finding better ways to solve customers’ problems. In today’s economy, however, that emphasis has shifted to developing strategies that attract and retain customers over the long term. As illustrated in Beyond the Pages 10.1, 1-800-Flowers does this effectively through a comprehensive understanding of its customers, including their expectations, motivations, and behaviors. With this knowledge in hand, firms like 1-800-Flowers can then offer the right marketing program to increase customer satisfaction and retain custo- mers over the long term.

In this chapter, we examine how the marketing program can be leveraged as a whole to deliver quality, value, and satisfaction to customers. We begin by reviewing the strategic issues associated with the customer relationship manage- ment process. Developing long-term customer relationships is one of the best ways to insulate the firm against competitive inroads and the rapid pace of envi- ronmental change and product commoditization. Next, we address the critical topics of quality and value as we concern ourselves with how the entire market- ing program is tied to these issues. Finally, we explore key issues with respect to customer satisfaction, including customer expectations and metrics for tracking customer satisfaction over time.

CHAPTER

289

MANAGING CUSTOMER RELATIONSHIPS As we briefly mentioned in Chapter 1, creating and maintaining long-term customer relationships requires that organizations see beyond the transactions that occur today to look at the long-term potential of a customer. To do this, the organization must strive to develop a relationship with each customer rather than generate a

BEYOND THE PAGES 10.1

1-800-Flowers Focuses on Customers1

Customer service. Trust. One-to-one customer interactions. Customer loyalty. These are the foundations of the steady growth of 1-800- Flowers for over 35 years. Since the company went online in 1992, CEO Jim McCann has used a laser-like focus on customers to make 1-800-Flowers the number one floral retailer in the world. In addition to flowers, the company offers fruit baskets, popcorn, gourmet food pro- ducts, and other gifts under brands such as Harry & David, The Popcorn Factory, Fannie May Berries, Fruit Bouquets, and Cheryl’s. McCann’s company earns over $756 million each year, is essentially debt free, and enjoys almost $20 million in free cash flow each year.

1-800-Flowers uses the Internet to connect to customers and puts a lot of effort into creat- ing a 360-degree, holistic view of each one. The company collects customer information at every point where it contacts a customer—sales, loy- alty programs, surveys, direct mail advertising, sales promotions (contests and sweepstakes), and affiliate programs (with florists, credit card companies, and airlines)—and uses it to create customized communications and product offerings for the millions of customers in its database. 1-800-Flowers uses a sophisticated segmentation system that analyzes transactional behaviors (recency, frequency, monetary) and combines it with gift buying behaviors. This information is then tied to each customer’s psy- chographic profile to create targeted messages for each customer segment. The company then uses a variety of different metrics—financial, customer retention and acquisition, brand awareness, purchase intentions, and customer recommendations—to measure performance.

To increase customer loyalty, 1-800-Flowers uses Celebrations Rewards, a free, point-based loyalty program. Customers earn one point for every dollar they spend, and then receive a $20 savings pass via e-mail when they have accumulated 200 points. For $29.99 per year,

customers can upgrade to the Celebrations Pass- port program that offers free shipping and no minimum order size. In addition to increasing customer loyalty, the Rewards and Passport programs allow the company to collect more in-depth information from customers. 1-800- Flowers also offers a 100 percent Smile Guarantee:

Everyone at 1-800-FLOWERS.COM

is passionate about delivering

flowers and gifts that bring smiles.

And we mean everyone. Like the

president of 1-800-FLOWERS.COM,

our growers, our fantastic floral

designers, even me, the guy writing

the customer service section of this

website. So if you OR the person

who received your gift calls us with

any sort of issue, it’s a big deal to

us. All of us. And we’ll jump to make

it right—no matter what, no ques-

tions asked. We’re happy when you’re

smiling.

For 1-800-Flowers, the key to success has been its ability to integrate and leverage the massive amount of data that it collects from its customers. However, CEO McCann also favors the old-school approach to understanding custo- mers. McCann states that his training as a social worker helps him to understand the importance of solid relationships. True to his background, McCann regularly goes into the field to talk with customers. On key occasions such as Mother’s Day and Valentine’s Day, McCann and other executives answer the phones, deliver pro- ducts, and work in the company’s retail stores. McCann puts it this way: “Our competitors are all about the sales, we’re about relationships. We are helping our customers connect with the important people in their lives through flowers and gifts created and designed for specific rela- tionships, occasions, and sentiments. That’s the difference.”

290 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

large number of discrete transactions. Before a relationship can be mutually benefi- cial to both the firm and the customer, it must provide value to both parties. This is one of the basic requirements of exchange noted in Chapter 1. Creating this value is the goal of customer relationship management (CRM), which is defined as a business philos- ophy aimed at defining and increasing customer value in ways that motivate custo- mers to remain loyal.2 In essence, CRM is about retaining the right customers. It is important to note that CRM does not focus solely on end customers. Rather, CRM involves a number of different groups:

• Customers. The end users of a product, whether they be businesses or individ- ual consumers.

• Employees. Firms must manage relationships with their employees if they are to have any hope of fully serving customers’ needs. This is especially true in ser- vice firms where employees are the service in the eyes of customers. Retaining key employees is a vital part of CRM.

• Supply Chain Partners. Virtually all firms buy and sell products upstream and/ or downstream in the supply chain. This involves the procurement of materials or the sale of finished products to other firms. Either way, maintaining relation- ships with key supply chain partners is critical to satisfying customers.

• External Stakeholders. Relationships with key stakeholders must also be managed effectively. These include investors, government agencies, the media, nonprofit organizations, or facilitating firms that provide goods or services that help a firm achieve its goals.

Delivering good value to customers requires that firms use CRM strategies to effectively manage relationships with each of these groups. This effort includes find- ing ways to integrate all of these relationships toward the ultimate goal of customer satisfaction.

To fully appreciate the concepts behind customer relationship management, orga- nizations must develop a new perspective on the customer—one that shifts the empha- sis from “acquiring customers” to “maintaining clients” as shown in Exhibit 10.1. Although this strategic shift has been underway for some time in business markets, technological advancements allow CRM to be fully embraced in consumer markets as well. Firms that are exceptionally good at developing customer relationships are said to possess “relationship capital”—a key asset that stems from the value generated by the

EXHIBIT 10.1 Strategic Shift from Acquiring Customers to Maintaining Clients.

Acquiring Customers Maintaining Clients Customers are “customers” Customers are “clients” Mass marketing One-to-one marketing Acquire new customers Build relationships with current customers Discrete transactions Continuous transactions Increase market share Increase share of customer Differentiation based on groups Differentiation based on individual customers Segmentation based on homogeneous needs

Segmentation based on heterogeneous needs

Short-term strategic focus Long-term strategic focus Standardized products Mass customization Lowest-cost provider Value-based pricing strategy One-way mass communication Two-way individualized communication Competition Collaboration

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 291

trust, commitment, cooperation, and interdependence among relationship partners. With respect to competitive advantages, many see relationship capital as the most important asset that an organization can possess, as it represents a powerful advantage that can be leveraged to make the most of marketing opportunities.3

Developing Relationships in Consumer Markets Developing long-term customer relationships can be an arduous process. Over the life of the relationship, the firm’s goal is to move the customer through a progression of stages, as shown in Exhibit 10.2. The objective of CRM is to move customers from having a simple awareness of the firm and its product offering through levels of increasing relationship intensity to the point where the customer becomes a true advocate for the firm and/or its products. Note that true CRM attempts to go beyond the creation of satisfied and loyal customers. Ultimately, the firm will possess the highest level of relationship capital when its customers become true believers or sponsors for the company and its products. For example, Harley-Davidson, which is now over 100 years old, is a great example of a firm that enjoys the highest levels of customer advocacy. Harley owners exhibit a cult-like love for the brand that most other companies do not possess. Other firms such as Starbucks, Apple, Coca-Cola, and Nike also enjoy a high degree of customer advocacy.4

In consumer markets, one of the most viable strategies to build customer relationships is to increase the firm’s share of customer rather than its market share.

EXHIBIT 10.2 Stages of Customer Relationship Development.

Relationship Stage CRM Goals Examples Awareness Promote customer knowledge and

education about the product or company. Prospect for new customers.

Product advertising Personal selling (cold calls) Word of mouth

Initial purchase Get product or company into customers’ evoked set of alternatives. Stimulate interest in the product. Stimulate product trial.

Advertising Product sampling Personal selling

Repeat customer Fully satisfy customers’ needs and wants. Completely meet or exceed customers’ expectations or product specifications. Offer incentives to encourage repeat purchase.

Good product quality and value-based pricing Good service before, during, and after the sale Frequent reminders and incentives

Client Create financial bonds that limit the customer’s ability to switch products or suppliers. Acquire more of each individual customer’s business. Personalize products to meet evolving customer needs and wants.

Frequent customer cards Frequent-flier programs Broad product offering

Community Create social bonds that prevent product or supplier switching. Create opportunities for customers to interact with each other in a sense of community.

Membership programs Affinity programs Ongoing personal communication

Advocacy Create customization or structural bonds that encourage the highest degree of loyalty. Become such a part of the customer’s life that he or she is not willing to end the relationship. Think of customers as partners.

Customer events and reunions Long-term contracts Brand-related memorabilia

292 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

This strategy involves abandoning the old notions of acquiring new customers and increasing transactions to focus instead on more fully serving the needs of current customers. Financial services are a great example of this strategy in action. Most consumers purchase financial services from different firms. They bank at one institu- tion, purchase insurance from a different institution, and handle their investments through another. To counter this fact of life, many companies now offer all of these services under one roof. For example, Regions Financial Corporation offers retail and commercial banking, trust, securities brokerage, mortgage, and insurance pro- ducts to customers in a network of over 1,600 offices in 16 states across the South, Midwest, and Texas.5 Rather than focus exclusively on the acquisition of new custo- mers, Regions tries to more fully serve the financial needs of its current customers, thereby acquiring a larger share of each customer’s financial business. By creating these types of relationships, customers have little incentive to seek out competitive firms to fulfill their financial services needs. This relationship capital gives Regions an important strategic asset that can be leveraged as it competes with rival banks and financial institutions, both locally and online.

Focusing on share of customer requires an understanding that all customers have different needs; therefore, not all customers have equal value to a firm. The most basic application of this idea is the 80/20 rule: 20 percent of customers provide 80 percent of business profits. Although this idea is not new, advances in technology and data collection techniques now allow firms to profile customers in real time. In fact, the ability to track customers in detail can allow the firm to increase sales and loyalty among the bottom 80 percent of customers. The goal is to rank the profitabil- ity of individual customers to express their lifetime value (LTV) to the firm. Some customers—those that require considerable handholding or those that frequently return products—are simply too expensive to keep given the low level of profits they generate. These bottom-tier customers can be “fired” or required to pay very high fees for additional service. Banks and brokerages, for example, slap hefty main- tenance fees on small accounts. This allows the firm to spend its resources to more fully develop relationships with its profitable customers.

The firm’s top-tier customers (those that fall into the top 20 percent) are the most obvious candidates for retention strategies. These customers are the most loyal and the most profitable, so the firm should take the necessary steps to ensure their continuing satisfaction. Customers that fall just outside of this tier, or second- tier customers, can be encouraged to be better customers or even loyal customers

Lu ca s Sc hi fr es /G et ty

Im ag es

Apple enjoys one of the highest levels of customer advocacy around the world.

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 293

with the right incentives. Exhibit 10.3 outlines strategies that can be used to enhance and maintain customer relationships. The most basic of these strategies is based on financial incentives that encourage increased sales and loyalty. However, financial incentives are easily copied by competitors and are not typically good for retaining customers in the long run. To achieve this ultimate goal, the firm must turn to strate- gies aimed at closely tying the customer to the firm. These structural connections are the most resilient to competitive action and the most important for maintaining long- term customer relationships.

Developing Relationships in Business Markets Relationship management in business markets is much like that in consumer markets. The goal is to move business buyers through a sequence of stages, where each stage represents an increasing level of relationship intensity. Although business relationships may not approach the cult-like, emotional involvement found in some

EXHIBIT 10.3 Strategies for Enhancing and Maintaining Customer Relationships.

Financial

Incentives Social Bonding

Enhanced

Customization Structural Bonding

Strategy Using financial

incentives to increase

customer loyalty

Using social and

psychological bonds to

maintain a clientele

Using intimate customer

knowledge to provide one-

to-one solutions or mass

customization

Creating customized

product offerings that

create a unique delivery

system for each client

Examples • Volume discounts

• Coupons

• Frequent-customer programs

• Membership programs

• Customer-only events

• Community outreach programs

• Customer reminder notifications

• Personal recommendations

• Personal shopping programs

• Structured, lock-step programs

• Automated electronic transactions

• Contractual relationships

Used by • Airlines

• Grocery retailers

• Music clubs

• Health clubs

• Churches

• Credit cards

• Auto service centers

• Electronic retailers

• Department stores

• Professional services

• Colleges and universities

• Banks

• Bundled telecom services

Advantages • Effective in the short term

• Easy to use

• Difficult for competitors to copy

• Reduces brand switching

• Promotes strong loyalty and greatly reduces

brand switching

• Very difficult for competitors to copy

customer knowledge

• Ultimate reduction in brand switching

• Products become intertwined in customers’

lifestyles

Disadvantages • Easily imitated

• Hard to end incentives once

started

• Can promote continual brand

switching

• Social bonds take time to develop

• Customer trust is critical and

must be maintained

at all times

• Can be quite expensive to deliver

• Takes time to develop

• Customer resistance

• Time-consuming and costly to develop

Increasing Relationship Intensity

SOURCE: Based on Leonard L. Berry and A. Parasuraman. Marketing Services: Competing Through Quality (New York: The Free Press, 1991), pp. 136–148; Valerie Zeithaml, Mary Jo Bitner, and Dwayne Gremler. Services Marketing: Integrating Customer Focus Across the Firm. (New York: McGraw-Hill/Irwin, 2013), pp. 160–166.

294 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

consumer markets, businesses could nonetheless become structurally bound to their supply chain partners. These relationships can give both parties an advantage with respect to relationship capital: One firm maintains a loyal and committed customer; the other maintains a loyal and committed supplier. Both parties may also consider each other to be strong partners or advocates within the entire supply chain.

Although our discussion certainly involves generalizations (e.g., some consumer marketers are better at building relationships than many business marketers), rela- tionship development in business markets can be more involving, more complex, and much riskier than relationships in consumer markets. This occurs because busi- ness buyers typically have fewer options to choose from, and the financial risks are typically higher. For example, Apple’s Mac line of laptops and desktops has used Intel processors since 2006. However, in 2010 when Apple developed its first custom chip, the A4, to power the iPad, many in the industry suggested that Apple would eventually dump Intel in the Mac. Such a move would save Apple a lot of money. However, as the world’s leader in chip technology, Intel offers many advantages that Apple would have a hard time recreating (i.e., engineering know-how, compati- bility with Windows). The relatively small number of players in this industry means that firms like Apple and Intel are tightly integrated. This is also important due to the presence of long-term contractual obligations and the sheer dollars involved. These types of business relationships must be built on win–win strategies that focus on cooperation and improving the value of the exchange for both parties, not on strict negotiation strategies where one side wins and the other side loses.6

Business relationships have become increasingly complex, as decisions must be made with an eye toward the entire supply chain, not just the two parties involved. In these cases, the relationships that are developed enhance the ability of the entire supply chain to better meet the needs of final customers. Over the past several years, a number of changes have occurred in business relationships, including:

• A Change in Buyers’ and Sellers’ Roles. To build stronger relationships, buyers and sellers have shifted away from competitive negotiation (trying to drive prices up or down) to focus on true collaboration. This represents a major change for many companies.

• An Increase in Sole Sourcing. Supplier firms will continue to sell directly to large customers or move to selling through systems suppliers that put together a set of products from various suppliers to deliver a comprehensive solution. The continuing growth in online e-procurement systems is one result of this trend.

• An Increase in Global Sourcing. More than ever, buyers and sellers scan the globe in search of suppliers or buyers that represent the best match with their specific needs and requirements. The relationship building process is so costly and complex that only the best potential partners will be pursued.

• An Increase in Team-Based Buying Decisions. Increasingly, teams from both buying and supplying firms make purchase decisions. These teams consist of employees from different areas of expertise that are central to the success of both firms. Increasingly, senior management of both firms will be represented on these teams as economic buyers, for both sides play a major role in setting goals and objectives.

• An Increase in Productivity Through Better Integration. Firms that closely align their buying and selling operations have the capacity to identify and remove any inefficiency in the process. This increased productivity leads to a reduction in both hard and soft costs, thereby enhancing the profitability of both firms. This integration can be extended throughout the supply chain. In the future, only the most efficient supply chains will survive, particularly as more procurement moves into the electronic arena.

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 295

These fundamental changes in the structure of most business relationships will lead to dramatic changes in the way that organizations work together. Only those firms willing to make strategic, as opposed to cosmetic, changes in the way they deal with their customers or suppliers are likely to prosper as we move forward in this century.

QUALITY AND VALUE: THE KEYS TO DEVELOPING CUSTOMER RELATIONSHIPS To build relationship capital, a firm must be able to fulfill the needs of its customers better than its competitors. It must also be able to fulfill those needs by offering high- quality goods and services that are a good value relative to the sacrifices customers must make to acquire them. When it comes to developing and maintaining customer relationships, quality is a double-edged sword. If the quality of a good or service is poor, the organization obviously has little chance of satisfying customers or maintain- ing relationships with them. The adage of “trying something at least once” applies here. A firm may be successful in generating first-time transactions with customers, but poor quality guarantees that repeat purchases will not occur. On the other hand, good quality is not an automatic guarantee of success. Think of it as a necessary but insufficient condition of successful customer relationship management. It is at this point where value becomes critical to maintaining long-term customer relationships.

Understanding the Role of Quality Quality is a relative term that refers to the degree of superiority of a firm’s goods or services. We say that quality is relative because it can only be judged in comparison to competing products, or when compared to an internal standard of excellence. The concept of quality also applies to many different aspects of a firm’s product offering. The total product offering of any firm consists of at least three interdependent com- ponents, as illustrated in Exhibit 10.4: the core product, supplemental products, and symbolic and experiential attributes.

The Core Product The heart of the offering, the core product, is the firm’s raison d’etre, or justification for existence. As shown in Exhibit 10.4, the core can be a tangible good—such as a Chevy Silverado—or an intangible service—such as the Verizon Wireless communi- cation network. Virtually every element of the marketing program has an effect on the quality (or perceived quality) of the core product; however, the firm’s product and branding strategies are of utmost importance. Since the core product is the part of the offering that delivers the key benefits desired by customers, the form utility offered by the core product is vital to maintaining its quality. For example, the qual- ity of an entrée in a restaurant depends on the form utility created through the com- bination of quality raw ingredients and expert preparation. In service offerings, the core product is typically composed of three interrelated dimensions:7

• People. The interaction among the customer, the firm’s employees, and other customers present during service delivery.

• Processes. The operational flow of activities or steps in the service delivery pro- cess. Processes can be done through technology or face-to-face interaction.

• Physical Evidence. Any tangible evidence of the service including written mate- rials, the service facility, people, or equipment. Includes the environment in which the service is delivered.

As a whole, service firms struggle daily with maintaining the quality of their core service offerings. Because services are so people-intensive, effective implementation

296 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

of the marketing strategy (through shared goals, employee motivation, and employee skills) is a major factor that helps to ensure consistency and quality. The quality of service also depends more on issues such as responsiveness to customer requests, consistent and reliable service over time, and the friendliness and helpfulness of the firm’s employees. The quality of tangible goods depends more on issues such as durability, style, ease of use, comfort, or suitability for a specific need.

Whether a good or a service, the firm has little chance of success if its core prod- uct is of inferior quality. However, even providing a high-quality core product is not enough to ensure customer satisfaction and long-term customer relationships. This occurs because customers expect the core product to be of high quality or at least at a level necessary to meet their needs. When the core product meets this level of expected quality, the customer begins to take it for granted. For example, customers take their telephone service for granted because they expect it to work every time. They only take notice when clarity becomes an issue, or when the service is unavail- able. The same thing can be said for a grocery retailer who consistently delivers high- quality food and service. Over time, the core product no longer stands out at a level that can maintain the customer relationship in the long term. It is at this point where supplemental products become critical.

Supplemental Products Supplemental products are goods or services that add value to the core product, thereby differentiating the core product from competing product offerings. In most cases, supplemental products are extra features or benefits that enhance the total product experience; however, they are not necessary for the core product to function cor- rectly. In many product categories, the true difference between competing products or brands lies in the supplemental products provided by the firm. For example, every hotel is capable of delivering the core product—a room with a bed in which to spend the night. Although the quality of the core product varies among hotels, the impor- tant differences lie in the supplemental products. Upscale hotels such as Hyatt or Hil- ton offer many amenities—such as spas, restaurants, health clubs, valet parking, and room service—that budget hotels like Motel 6 or Econolodge do not. Wireless phone

EXHIBIT 10.4 Components of the Total Product Offering.

Core Product Supplemental Products Symbolic and Experiential Attributes Chevrolet Silverado 1500

Transportation Hauling/towing

Accessories GMAC financing Replacement parts OnStar

“The most dependable, longest-lasting full-size pickup on the road” “Chevy Runs Deep” “Like a Rock”

Verizon Wireless Communication Phone options Rate plan options “The More Everything Plan” 4G LTE

“The Nation’s largest and most reliable network” “Rule the Air” “It’s the Network”

John Deere Lawn Tractor

Lawn and garden maintenance

Accessories Financing Delivery

John Deere “Green” “Nothing Runs Like a Deere”

Michelin Tires Tires Safety

Broad availability Installation Financing

“A Better Way Forward” “Because a lot is riding on your tires” The Michelin Man

Waldorf Astoria New York City

Lodging Mid-Manhattan location on Park Avenue Restaurants Room service

“Peerless service and indulgent comfort” The first “Grand Hotel”

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 297

service is another example. All wireless firms can fulfill their customers’ communica- tion needs; however, customers use supplemental products such as different phone options, rate plans, and special packages that combine minutes, texting, and data to differentiate one product offering from another. In business markets, supplemental services are often the most important factor in developing long-term relationships. Services such as financing, training, installation, and maintenance must be of top quality to ensure that business customers will continue to maintain a relationship with the supplier firm.

It is interesting to note that companies do not market many products with the core product in mind. When was the last time an automaker touted a car or truck on its ability to fulfill your transportation needs (i.e., getting you from Point A to Point B)? Rather, they focus on supplemental product attributes such as special financing, roadside assistance, and warranties. Supplemental products such as these depend heavily on the product, pricing, and distribution elements of the mar- keting program. For example, in addition to selling a wide range of name brand pro- ducts, Amazon also offers its own credit card and free shipping on many orders of $35 or more, or free shipping with an Amazon Prime membership. These supplemen- tal services, along with 24/7 access and competitive pricing, make Amazon a formida- ble competitor in many different product categories.

Symbolic and Experiential Attributes Marketers also use symbolic and experiential differences—such as image, prestige, and brand—to differentiate their products. These features are created primarily through the product and promotional elements of the marketing program. Without a doubt, the most powerful symbolic and experiential attributes are based on branding. In fact, many brands—like Mercedes, Ritz-Carlton, Coca-Cola, Rolex, Disney World, and Ruth’s Chris Steak House—only need their names to get the message across. These brands have immense power in differentiating their products because they can project the entire product offering (core, supplemental, and symbolic/experiential) with one word or phrase. Other types of products don’t necessarily rely upon branding, but on their uniqueness to convey their symbolic and experiential nature. Major sporting events, such as the Super Bowl, the NCAA Final Four, or the Tour de France, are certainly good examples of this. Even local athletic events, such as high school football games, can have symbolic and experiential qualities if the rivalry is intense.

Delivering Superior Quality Delivering superior quality day in and day out is one of the most difficult things that any organization can do with regularity. In essence, it is difficult to get everything right—even most of the time. During the 1980s and 1990s, strategic initiatives such as total quality management, ISO 9000, and the advent of the Baldrige Award were quite successful in changing the way businesses thought about quality. As a result, virtually every industry saw dramatic improvements in quality during that time.

Today, however, most businesses struggle with improving the quality of their products, whether they are the core product or supplemental products. As we dis- cussed in Chapter 1, this has happened because (1) customers have very high expec- tations about quality, (2) most products today compete in mature markets, and (3) many businesses compete in markets with very little real differentiation among product offerings. As products become further commoditized, it becomes very diffi- cult for marketers to make their products stand out among a crowd of competitors. A great deal of research has been conducted to determine how businesses can improve the quality of their products. These four issues stand out:8

• Understand Customers’ Expectations. It is not surprising that the basis of improving quality is also the starting point for effective customer relationship

298 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

management. The delivery of superior quality begins with a solid understanding of customers’ expectations. This means that marketers must stay in touch with customers by conducting research to better identify their needs and wants. Although this research can include large-scale efforts such as surveys or focus groups, it can also include simple and inexpensive efforts such as customer com- ment cards or having managers interact in a positive fashion with customers. Advances in technology have greatly improved the ability to collect and analyze information from individual customers. New tools such as data warehousing and data mining hold great promise in enabling firms to better understand custo- mers’ expectations and needs.

• Translate Expectations Into Quality Standards. Firms that can successfully convert customer information into quality standards ensure that they hear the voice of the customer. If customers want better ingredients, friendlier employ- ees, or faster delivery, then standards should be set to match these desires. It is often the case, however, that managers set standards that meet organizational objectives with no consideration for customer expectations. As discussed in Beyond the Pages 10.2, this commonly occurs when managers set standards based on productivity, efficiency, or cost reductions rather than quality or cus- tomer service. In these cases, the temptation is to focus on internal benchmarks such as cost control or speed rather than customer benchmarks such as quality and satisfaction.

• Uphold Quality Standards. The best quality standards are of little use if they are not delivered accurately and consistently. At issue is the ability of managers and employees to deliver quality that is consistent with established standards. Greeting customers by name, answering the phone on the second ring, and deliv- ering a hot pizza within 30 minutes are all examples of quality standards that may, or may not, be achieved. Successfully achieving these standards depends mostly on how well the strategy is implemented. However, it also depends on the ability of the firm to fully fund the quality effort. For example, many retailers—including Walmart—at one time had standards for opening additional checkout lanes when there were more than three people in line. However, these retailers failed to deliver on this standard due to the expense of staffing addi- tional employees to operate the registers.

• Don’t Overpromise. It goes without saying that customers will be disappointed if an organization fails to deliver on its promises. The key is to create realistic customer expectations for what can and cannot be delivered. All communication to customers must be honest and realistic with respect to the degree of quality that can be delivered. Intentionally misleading customers by making promises that cannot be kept is a guaranteed recipe for disaster.

Of these four issues, having a thorough understanding of customer expectations is the most critical because it sets the stage for the entire quality improvement effort. Customer expectations are also vital to ensuring customer satisfaction. We will look more closely at customer expectations later in this chapter.

Understanding the Role of Value Earlier, we stated that quality is a necessary, but insufficient, condition of effective customer relationship management. By this we mean that exceptionally high product quality is of little use to the firm or its customers if the customers cannot afford to pay for it or if the product is too difficult to obtain. In the context of utility (want satisfac- tion), sacrificing time, place, possession, and psychological utility for the sake of form utility may win product design awards, but it will not always win customers.

Value is critical to maintaining long-term customer relationships because it allows for the necessary balance among the five types of utility and the elements of the

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 299

BEYOND THE PAGES 10.2

Customer Service versus Efficiency9

As consumers, we are supposed to be living the good life. After all, we have access to an unprec- edented variety and assortment of goods and services from around the globe. Everything we need is practically at arm’s length and available 24/7. If things are so great, then why do we still suffer from poor service, long wait times, ignored complaints, and the feeling that we are just another number to most firms? In other words, why is customer service so bad? Are we just spoiled or do companies not care anymore?

While we may be spoiled and some compa- nies might not care about service, the truth is that our own demands for convenient, fast, and low priced products are at odds with our demands for better customer service. As firms look to drive down costs and increase speed, they focus more on internal efficiency benchmarks based on costs and time-based measures of performance. This means they focus less on customer-driven benchmarks like quality, value, or satisfaction. This tendency is also driven by human nature: It is much easier to measure costs and time than something as subjective as customer satisfaction. As a result, more and more firms must continuously walk a fine line between service and operational efficiency.

Some companies successfully walk this line (Southwest Airlines is a good example). Others, however, have damaged customer relationships in their attempt to reduce costs. In some cases, firms have been forced to reduce customer ser- vice to maintain or improve profitability. Four recent examples are discussed below:

Hertz and Avis After laying off 4,000 employees, Hertz’s custo- mers were faced with a shortage of customer service personnel. The company reduced its “instant return” hours at smaller airports, along with reducing the number of personnel at all locations. Avis took a similar route to reduce expenses during the economic downturn. The company cut service, reduced staff, and moved most of their instant return staff to airport coun- ters. The result for customers: longer lines, increased wait time, and declining customer sat- isfaction. The result wasn’t what Hertz and Avis

had hoped for either. Both companies saw many of their most loyal customers move to compet- ing rental companies. In time, both Hertz and Avis reversed their policies and increased the number of agents for their instant return customers.

Home Depot After years of record growth and profits, Home Depot shifted its strategy to focus on expanding its contractor supply business and increasing efficiency through cost cutting and streamlined operations. Along the way, customer service slipped on the company’s list of priorities. Full- time employees were replaced by part-timers, employee incentives for good service were cut, and the employee profit-sharing pool declined from $90 million to $44 million in 1 year. The end result: Home Depot slipped to dead last in customer satisfaction among major U.S. retai- lers. More importantly, the company found itself 6 percentage points behind Lowe’s, which pursued a strategy that promoted more customer-friendly stores. After launching a major customer service program and abandon- ing many of its command-and-control practices, Home Depot’s customer service improved. The key to the change was redefining employees’ roles to focus clearly on customers.

Costco and Sam’s Club While Sam’s Club (and its parent company Walmart) is well known for offering low prices, virtually every customer survey indicates that Costco provides better customer service than Sam’s Club. The reason? Costco treats its employees better. In addition to providing better benefit packages, Costco pays its employees more on average than Sam’s Club. While more costly to implement, Costco’s treatment of employees pays off in terms of better service to customers. For starters, better pay and bene- fits usually leads to more satisfied employees. In addition, Costco’s employee turnover rate ranges from 6 to 20 percent per year, far lower than Sam’s Club rate of 20 to 50 percent each year. This means that Costco’s employees are more experienced and better able to serve the company’s customers. Increased employee loy- alty has another side benefit: Costco’s recruit- ing, hiring, and training costs are lower.

300 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

marketing program. As a guiding principle of marketing strategy, value is quite useful because it includes the concept of quality, but is broader in scope. It takes into account every marketing program element and can be used to consider explicitly customer perceptions of the marketing program in the strategy development pro- cess. Value can also be used as a means of organizing the internal aspects of market- ing strategy development.

In Chapter 6, we defined value as a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings. To see how each marketing program element is related to value, we need to break down customer benefits and costs into their component parts, as shown below and in Exhibit 10.5:

Perceived Value ¼ ðCore Product Quality þ Supplemental Product Quality þ Experiential QualityÞ

ðMonetary Costs þ Nonmonetary CostsÞ

Different buyers and target markets have varying perspectives on value. Although monetary cost is certainly a key issue, some buyers place greater impor- tance on other elements of the value equation. To some, good value is about prod- uct quality. To these customers, the product element of the marketing program is the most crucial to achieving good value. To others, value hinges on the availability and quality of supplemental products. Here, the firm’s product, customer service, pricing, and distribution strategies come together to create value. For other buyers, good value is all about convenience. These customers place greater emphasis on distribution issues such as wide product availability, multiple locations, 24/7 access, or even home delivery to achieve good value. The relationships among mar- keting program elements must constantly be managed to deliver good value to cus- tomers. It is important for managers to remember that any change in one program element will have repercussions for value throughout the entire marketing program.

Core Product, Supplemental Product, and Experiential Quality The relationship between quality and value is most apparent in the quality of the cus- tomer benefits depicted in the top portion of the value equation. Here, good value depends on a holistic assessment of the quality of the core product, supplemental products, and experiential attributes. Although each can be judged independently, most customers look at the collective benefits provided by the firm in their

Dell Dell’s strategy and its success have long been tied to internal efficiency. Its business model of selling via phone and Internet is a textbook example of supply chain integration and opera- tional excellence. In recent years, however, Dell has pursued cost cutting with a vengeance. The reason is competition. Virtually all of Dell’s competitors match the company on pricing and product availability. Unfortunately, Dell’s moves alienated its customers, especially in the company’s call center operations, which Dell outsourced to firms in foreign countries. Not surprising, Dell’s customer satisfaction rat- ings, along with its market share, fell dramati- cally. To turn things around, Dell initiated a $100 million program to improve customer

service. The company began by appointing a new director of customer service, who immediately expanded the size of Dell’s call centers from 1,000 to 3,000 reps. Dell also invested $1 billion to open new data centers, including 12 global solution centers, which focus on sales, customer service, and technical support.

If business can learn anything from these examples, it’s that they can never win the fight between customer service and efficiency. Cost cutting that reduces customer service almost always has to be reinstated once customers start demanding better quality, more attention, and increased value for their money. Customer expectations are simply too high—and competi- tors too plentiful—for businesses to ignore.

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 301

assessments of value. Consequently, firms are able to create unique combinations of core, supplemental, and experiential benefits that help drive value perceptions. Con- sider a hotel stay at the Hyatt versus Motel 6. Despite their obvious differences, both can deliver the same value to different customers at different points in time. The Hyatt may offer better form utility and caché, but Motel 6 may be less expensive and closer to attractions. The overall perception of value is driven by customer needs, expectations, and the sacrifices required in obtaining the benefits provided by each firm.

Monetary and Nonmonetary Costs Customer costs include anything that the customer must give up to obtain the bene- fits provided by the firm. The most obvious cost is the monetary cost of the product, which comes in two forms: transactional costs and life cycle costs. Transactional costs include the immediate financial outlay or commitment that must be made to

EXHIBIT 10.5 Connections between Value and the Marketing Program.

Marketing Program Elements Value Components Product Strategy Pricing Strategy Distribution Strategy IMC Strategy Core Product Quality

Product features Brand name Product design Quality Ease of use Warranties Guarantees

Image Prestige

Availability Exclusivity

Image Prestige Reputation Personal selling

Supplemental Product Quality

Value-added features Accessories Replacement parts Repair services Training Customer service Friendliness of employees

Financing Layaway Image Prestige

Availability Exclusivity Delivery Installation On-site training

Friendliness of employees Personal selling

Experiential Quality

Entertainment Uniqueness Psychological benefits

Image Prestige

Convenience Retail atmosphere Retail décor 24/7 availability Overnight delivery

Image Prestige Reputation Personal selling

Monetary Transactional Costs

Quality Exclusive features

Selling price Delivery charges Installation charges Taxes Licensing fees Registration fees

Delivery charges Installation charges Taxes

Image Prestige Reputation Personal selling

Monetary Life Cycle Costs

Durability Reliability Product design

Maintenance costs Cost of consumables Repair costs Costs of replacement parts

Availability of consumables Availability of replacement parts Speed of repairs

Reputation Personal selling

Nonmonetary Costs

Durability Reliability Minimize opportunity costs

Guarantees Return policy

Convenience Wide availability 24/7 access

Reputation Reinforce purchase decision

302 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

purchase the product. Other than the purchase price of the product, examples of these costs include sales taxes, usage taxes, licensing fees, registration fees, and delivery or installation charges. For example, appliance or furniture retailers can increase value by offering free delivery or installation when their competitors charge for these services. Life cycle costs include any additional costs that customers will incur over the life of the product, such as the costs of consumable supplies, mainte- nance, and repairs. Hyundai and Kia, for example, offer long-term warranties on their cars, vans, and SUVs that significantly reduce life cycle costs for their customers. Product quality, warranties, and the availability of repair services all play into the equation when customers judge monetary costs. Firms that have the capability to reduce transactional or life cycle costs can often provide a better value than their competitors.

Nonmonetary costs are not quite as obvious as monetary costs, and customers sometimes ignore them. Two such costs include the time and effort customers expend to find and purchase goods and services. These costs are closely related to a firm’s distribution activities. To reduce time and effort, the firm must increase product availability, thereby making it more convenient for customers to purchase the firm’s products. The growth in nonstore and electronic retailing is a direct result of firms taking steps to reduce the time and effort required to purchase their pro- ducts, thereby reducing customers’ nonmonetary costs. The sheer number of pro- ducts that customers can have delivered directly to their homes is a testament to the growing importance of customers’ time.

Offering good basic warranties or extended warranties for an additional charge can reduce risk, another nonmonetary cost. Retailers reduce risk by maintaining lib- eral return and exchange policies. Personal safety and security risks come into play when customers purchase products that are potentially dangerous. Common exam- ples include tobacco products, alcohol, firearms, and exotic products like skydiving, bungee jumping, and dangerous pets. The final nonmonetary cost, opportunity cost, is harder for the firm to control. Customers incur opportunity costs because they forgo alternative products in making a purchase. Some firms attempt to reduce opportunity costs by promoting their products as being the best or by promising good service after the sale. To anticipate opportunity costs, marketers must consider all potential competitors, including total budget competitors that offer customers alternatives for spending their money.

Competing on Value After breaking down value into its component parts, we can better understand how a firm’s marketing strategy can be designed to optimize customer value. By altering each element of the marketing program, the firm can enhance value by increasing core, supplemental, or experiential quality and/or reducing monetary or nonmone- tary costs. This effort must be based on a thorough understanding of customers’ needs and wants, as well as an appreciation for how the firm’s customers define value.

In consumer markets, retailers offer good examples of how value can be deliv- ered by altering one or more parts of the value equation. Convenience stores offer value to customers by reducing nonmonetary costs (time and effort) and increasing monetary prices. These high-priced (in dollars) stores stay in business because cus- tomers value their time and effort more than money in many situations. Online retai- lers offer a similar mix of value by reducing time and effort costs, and in some cases by reducing monetary costs through free shipping or by not collecting sales taxes. Customers who want the best quality may be willing to spend large sums of money and/or spend more time searching because they consider their nonmonetary costs to be less important. These consumers are likely to shop at retailers such as Macy’s, Nordstrom, or Saks rather than discount chains. Finally, specialty stores,

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 303

like Victoria’s Secret or Banana Republic, offer an attractive mix of value in terms of quality clothing, fashionable styling, excellent service, and attractive décor, albeit at higher monetary prices.

Those in business markets often define value in terms of product specifications, availability, and conformity to a delivery schedule, rather than in terms of price or convenience. Business customers must ensure that the products purchased will work right the first time, with minimal disruption to ongoing operations. In some cases, products have value not only because of their features or quality, but because the buying firm has a long-standing relationship with the supplying firm. Business buyers tend to become loyal to suppliers that consistently meet their expectations, solve their problems, and cause them no headaches. All of this is not to say that mon- etary considerations are not important. In fact, unlike most consumers, business buyers are keenly aware of total transactional and life cycle costs as they seek to reduce the total lifetime expenditure associated with a particular purchase. Business customers will quite often pay more in up-front costs if the total lifetime cost can be reduced.

Obviously, different market segments will have different perceptions of good value. The key is for the marketer to understand the different value requirements of each segment and adapt the marketing program accordingly. From a strategic per- spective, it is important to remember that each marketing program element is vital to delivering value. Strategic decisions about one element alone can change per- ceived value for better or worse. If a decision lowers overall value, the firm should consider modifying other marketing program elements to offset this decrease. For example, an increase in price may have to be offset by an increase in customer ben- efits to maintain the value ratio.

CUSTOMER SATISFACTION: THE KEY TO CUSTOMER RETENTION In the final part of this chapter, we look at customer satisfaction and the role it plays in maintaining long-term customer relationships. To maintain and manage customer satisfaction from a strategic point of view, managers must understand customer expectations and the differences between satisfaction, quality, and value. They must also make customer satisfaction measurement a long-term, continuous commit- ment of the entire organization.

Understanding Customer Expectations Although customer satisfaction can be conceived in a number of ways, it is typically defined as the degree to which a product meets or exceeds the customer’s expecta- tions about that product. Obviously, the key to this definition lies in understanding customer expectations and how they are formed. Marketing researchers have dis- covered that customers can hold many different types of expectations as shown in Exhibit 10.6. Customer expectations can vary based on the situation. For example, expectations are likely to be very high (i.e., closer to the ideal end of the range) in situations where personal needs are very high. In highly involving situations such as weddings, birthdays, or funerals, customers will demand a great deal from the firm. Expectations also tend to be higher when customers have many alternatives for meeting their needs. This connection between expectations and alternatives is one reason that serving customers in highly commoditized markets is so challenging. Other situations can cause customer expectations to be lower (i.e., closer to the tol- erable end of the range), such as when the purchase is not involving, or when the monetary or nonmonetary prices are low. Customers can also become more tolera- ble of weak or poor performance when they have fewer product alternatives, or when the poor performance is beyond the control of the firm (e.g., bad weather, excessively high demand, natural disasters).

304 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

The Zone of Tolerance The difference between the upper and lower end of the range of possible customer expectations is an important strategic consideration in managing customer satisfac- tion. Marketers often refer to the upper end of expectations as desired performance expectations (what customers want) and the lower end of the range as adequate performance expectations (what customers are willing to accept). As shown in Exhibit 10.7, the extent of the difference between desired and adequate performance is called the zone of tolerance.10 The width of the zone of tolerance represents the degree to which customers recognize and are willing to accept variability in perfor- mance (i.e., quality, value, or some other measurable aspect of the marketing pro- gram). Performance can fall above the zone of tolerance, within the zone of tolerance, or below it:

• Customer delight—occurs when actual performance exceeds the desired per- formance expectation. This level of performance is rare and quite surprising when it occurs. Therefore, customers find it to be memorable.

• Customer satisfaction—occurs when actual performance falls within the zone of tolerance. Satisfaction levels vary based on where performance falls within the zone (high or low).

• Customer dissatisfaction—occurs when actual performance falls below the adequate performance expectation. Depending upon the severity of the perfor- mance level, customers may go beyond dissatisfaction to become frustrated or even angry. This too can be very memorable for customers.

We addressed these three issues in Chapter 5 as being a consequence of the buy- ing process. Now, with the marketing plan developed and implemented, we can think of these issues in a strategic sense by considering the zone of tolerance as a moving target. If the zone is narrow, the difference between what customers want and what they are willing to accept is also narrow. This means that the marketer will have a relatively more difficult time matching performance to customer expectations. Hence, customer satisfaction is harder to achieve when the zone of tolerance is nar- row. Conversely, customer satisfaction is relatively easier to achieve when the zone of tolerance is wide. In these instances, the marketer’s hurdle is lower and the

EXHIBIT 10.6 Range of Customer Expectations.

Type of Expectation Descriptive Example Typical Situations Expectation Range

Ideal Expectations “Everyone says this is the best MP3

player on the market. I want to get

my sister something special for her

birthday.”

Highly involving purchases

Special occasions

Unique events

High (Desired)

Low (Adequate)

Normative

Expectations

“As expensive as this MP3 player is,

it ought to hold a lot of music and come

with several included accessories.”

Shopping comparisons

Value judgments

Experience-Based

Expectations

“I bought this brand of MP3 player

last time and it served me very well.”

Frequent purchase

situations

Brand loyalty

Minimum Tolerable

Expectations

“I know it’s not the best MP3 player

out there. I only bought it because it

was inexpensive.”

Price-driven purchases

Low-involvement purchases

SOURCE: Adapted from James H. Myers, Measuring Customer Satisfaction (Chicago, IL: American Marketing Association, 1999); Valarie A. Zeithaml, Leonard L. Berry, and A. Parasuraman, “The Nature of Determinants of Customer Expectations of Service,” Journal of the Academy of Marketing Science, 21 (January 1993), 1–12.

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 305

satisfaction targets are easier to hit. Delighting the customer by exceeding desired expectations is an exceedingly difficult task for any marketer. And, causing cus- tomer dissatisfaction by failing to meet even adequate expectations is a situation that should be avoided at all times.

Customers will typically hold different expectation levels and zones of tolerance for different factors of performance. In a restaurant, for example, customers might have a narrow zone of tolerance for food quality, an even narrower zone of tolerance for service quality, an average zone of tolerance for wait time, and a relatively wide zone of tolerance for cleanliness. From the marketer’s point of view, two issues are important. First, the firm must clearly understand the relevant performance factors about which customers will hold performance expectations. Customers can have expectations for just about anything, though there are typically only a few factors that are critical for most customers. Many firms look first at factors dealing with product strategy; however, critical performance factors can cut across the entire marketing program. Second, the firm must track expectations and performance over time. Tracking performance levels vis-à-vis expectations and the zone of toler- ance is a useful diagnostic tool for both strategic planning and the management of customer satisfaction. The approach is also useful for tracking the effectiveness of

EXHIBIT 10.7 The Zone of Tolerance.

Typical Zone of Tolerance

(Performance Factors of

Average Importance)

Wide Zone of Tolerance

(Performance Factors of Less

Importance)

Narrow Zone of Tolerance

(Performance Factors of

Highest Importance)

Adequate Expectations

Desired Expectations

Marketing

Performance

Adequate Expectations

Desired Expectations

Marketing

Performance Desired Expectations

Marketing

Performance

Adequate Expectations

Customer Delight

(Performance Exceeds Desired

Expectations)

Customer Satisfaction

(Performance within Zone of

Tolerance)

Customer Dissatisfaction

(Performance Falls Below

Adequate Expectations)

306 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

performance improvements, and in assessing the performance of new goods or ser- vices. In the end, tracking both expectations and performance is an important way to ensure that customer satisfaction remains stable or improves over time. Declining customer satisfaction suggests a need for immediate corrective action.

Managing Customer Expectations Many marketers ask two key questions as they work toward managing customer expectations: (1) Why are customer expectations unrealistic? and (2) Should we strive to delight our customers by consistently exceeding their desired expectations? Although it is true that customers are more demanding today than ever (especially American consumers), their expectations are typically not that unrealistic. Most customers are looking for the basics of performance—things that a firm is supposed to do or has promised to do.11 For example, flights should take off and land on time, meals in a restaurant should taste good and be prepared as ordered, new cars should be hassle free throughout the warranty period, and your soft drink should be cold and fresh. On these and other basic factors of perfor- mance, it is essentially impossible for the firm to exceed customer expectations. These basic factors represent the bare minimum: If the firm wants to exceed expec- tations, it has to go above and beyond the call of duty. Beyond the Pages 10.3 explains how exceeding customer expectations is an important component of cus- tomer loyalty.

The second question about delighting the customer is a bit more controversial. Firms should always strive to exceed adequate expectations. After all, this is the basic delineation between satisfaction and dissatisfaction. The tougher question is whether the firm should try to exceed desired expectations. The answer depends on several issues. One is the time and expense involved in delighting customers. If delighting a customer does not translate into stronger customer loyalty or long-term customer retention, then it is not likely to be worth the effort. It may also not be a good investment if delighting one customer lowers performance for other customers. Another issue is whether continually delighting customers raises their expectations over time. To be effective, customer delight should be both surprising and rare, not a daily event. Firms should look for small ways to delight customers without elevating expectations beyond what can reasonably be delivered. Finally, the firm must be aware of whether its initiatives to delight the customer can be copied by competi- tors. If customer delight is easily copied, it ceases to be a key means of differentia- tion for the firm.

Satisfaction versus Quality versus Value Now that we better understand customer expectations, let’s look at how satisfaction differs from quality and value. The answer is not so obvious because the concepts overlap to some extent. Since customer satisfaction is defined relative to customer expectations, it becomes difficult to separate satisfaction from quality and value because customers can hold expectations about quality or value or both. In fact, cus- tomers can hold expectations about any part of the product offering, including seem- ingly minor issues such as parking availability, crowding, or room temperature in addition to major issues like quality and value.

To solve this dilemma, think of each concept not in terms of what it is, but in terms of its size. The most narrowly defined concept is quality, which customers judge on an attribute-by-attribute basis. Consider a meal at a restaurant. The quality of that meal stems from specific attributes: the quality of the food, the drink, the atmosphere, and the service are each important. We could even go so far as to judge the quality of the ingredients in the food. In fact, many restaurants, like Ruth’s Chris Steakhouse, promote themselves based on the quality of their ingredients.

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 307

BEYOND THE PAGES 10.3

Satisfied, But Not Loyal12

Generally speaking, American consumers are a satisfied lot. At least that’s what survey after sur- vey reveals. Sure there are ups and downs, and some industries or firms fair better than others, but the general tendency is a positive one. Despite this good news, however, research indi- cates that roughly 30 percent of satisfied custo- mers would switch to a new company if given a good reason to do so. This begs the question: Why will satisfied customers leave a firm for a competitor? The answer is that customer satis- faction is not the same thing as customer loyalty.

Customer satisfaction by itself tells a firm very little about where it stands with customers. There are two issues at work: relative satisfac- tion and customer expectations. Relative satis- faction tells a firm where it ranks against the competition. For example, Outback Steak- house’s satisfaction rating of 80 says little about the firm and its products until that score is compared with Olive Garden (80), Red Lob- ster (78), Applebee’s (78), and Chili’s (74). Simi- larly, Samsung might consider its most recent satisfaction score of 81 to be somewhat low until that score is compared to Apple (79), Nokia (77), Motorola (77), HTC (75), Blackberry (74), and LG (73). Comparisons like these are important because customers make similar com- parisons when making purchase decisions. A customer may be satisfied with a specific prod- uct or company, but will switch if they believe they will be better satisfied (via higher quality, a better user experience, or a better value) by another firm. For this reason, satisfied custo- mers are not necessarily loyal customers.

To increase loyalty, firms must look at the second issue: customer expectations. Customer expectations are key because they serve as the anchor points for customer satisfaction. Research suggests that firms that simply meet customer expectations do little to create loyalty. Thus, while customers may have no complaints, the firm’s products probably do not stand out in any meaningful way. In other words, loyalty comes from providing products that exceed cus- tomer expectations. Loyalty can be especially strong in situations where customers believe the firm’s performance is better than can be

expected from a competitor. In this situation, the customer has little incentive to switch.

Most firms do a good job of tracking cus- tomer satisfaction over time. However, many do a rather poor job in tracking customer expec- tations. Research indicates that 47 percent of customers believe that company executives do not understand their expectations or what they experience in day-to-day contact with their firms. Another 41 percent don’t believe that companies take their complaints seriously. Fur- ther, half of customers who do complain will leave the firm if their complaints are not resolved. The other half may stay, but they spread negative word-of-mouth either in person or via online forums. Across all industries, 17 percent of customer interactions result in a lost customer.

As we have seen, to promote genuine loyalty to the firm, executives must have a full under- standing of their customers’ expectations. Then, the firm must set out to deliver on those expectations and create value beyond the norm for the industry. Some tips on how to make this happen include:

• Seek Out Negative Feedback. In addition to carefully considering customer com- plaints, firms must look outside to gather information from dissatisfied customers who do not complain. This can be done via websites, blogs, message boards, and third- party rating services.

• Manage from the Outside In. This involves leveraging customer information (both posi- tive and negative) to improve business prac- tices. Firms must take what customers tell them and use it to improve the customer experience.

• Recognize That One Size Does Not Fit

All. Different customers have different pre- ferred avenues to meeting their expectations. For example, some customers prefer high automation, or even self-service, with respect to the customer experience. Young customers are a good example. Others prefer a personal, customized experience. Older customers, for instance, prefer to bank with live tellers than use automation.

• Put Service Over Personalization. The majority of customers—78 percent—place

308 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

When the customer considers the broader issue of value, they begin to include things other than quality: the price of the meal, the time and effort required getting to the restaurant, parking availability, and opportunity costs. In this case, even the best meal in a great restaurant can be viewed as a poor value if the price is too high in terms of monetary or nonmonetary costs.

When a customer considers satisfaction, he or she will typically respond based on his or her expectations of the item in question. If the quality of the food is not what the customer expected, then the customer will be dissatisfied with the food. Similarly, if the value of the meal is not what the customer expected, the customer will be dissatisfied with the value. Note that these are independent judgments. It is entirely possible for a customer to be satisfied with the quality of the meal, but dis- satisfied with its value. The opposite is also true.

However, most customers do not make independent judgments about satisfac- tion. Instead, customers generally think of satisfaction based on the totality of their experience without overtly considering issues like quality or value. We are not saying that customers do not judge quality or value. Rather, we are saying that customers think of satisfaction in more abstract terms than they do quality or value. This hap- pens because customers’ expectations—hence their satisfaction—can be based on any number of factors, even factors that have nothing to do with quality or value. Continuing with our restaurant example, it is entirely possible for a customer to

more importance on good service than per- sonalized service. This means that firms must be able to address customers’ needs on the first try. Simply knowing the custo- mer’s name is not enough.

Research shows that about 33 percent of a firm’s customers feel loyal to the firm and show their loyalty by making most of their purchases in a category with the firm. Unfortunately, the same research shows that only 20 percent of the firm’s customers are profitable, and that

most of the company’s profitable customers are not loyal. To get past this enigma, executives must ask three questions about their customers: (1) Which loyal customers are good for our business? (2) How do we retain these custo- mers? and (3) How do we get more customers like them? Customers who do not meet this pro- file are simply not worth having as customers. In the end, most executives will discover that even some of their most satisfied and loyal customers are not worth the effort.

U lri ch

Ba um

ga rt en /G et ty

Im ag es

Toyota typically scores well in both customer and third-party ratings of customer satisfaction.

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 309

receive the absolute best quality and value, yet still be dissatisfied with the experi- ence. The weather, other customers, a bad date, and a bad mood are just a few exam- ples of non-quality and non-value factors that can affect customers’ expectations and cloud their satisfaction judgments.

Customer Satisfaction and Customer Retention Customer satisfaction is the key to customer retention. Fully satisfied customers are more likely to become loyal customers, or even advocates for the firm and its pro- ducts. Satisfied customers are less likely to explore alternative suppliers, and they are less price sensitive. Therefore, satisfied customers are less likely to switch to competitors. Satisfied customers are also more likely to spread positive word- of-mouth about the firm and its products. However, the way that customers think about satisfaction creates some interesting challenges for marketers. It is one thing to strive for the best in terms of quality and value, but how can a firm control the uncontrollable factors that affect customer satisfaction? Certainly, marketers cannot control the weather or the fact that their customers are in a bad mood. However, there are several things that marketers can do to manage customer satisfaction and leverage it in their marketing efforts:

• Understand What Can Go Wrong. Managers, particularly those on the front- line, must understand that an endless number of things can and will go wrong in meeting customers’ expectations. Even the best strategies will not work in the face of customers who are in a bad mood. Although some factors are simply uncontrollable, managers should be aware of these factors and be ready to respond if possible.

• Focus on Controllable Issues. The key is to keep an eye on the uncontrollable factors, but focus more on things that can be controlled. Core product quality, customer service, atmosphere, experiences, pricing, convenience, distribution, and promotion must all be managed in an effort to increase share of customer and maintain loyal relationships. It is especially important that the core product be of high quality. Without that, the firm stands little chance of creating cus- tomer satisfaction or long-term customer relationships.

• Manage Customer Expectations. As we have seen, managing customer expec- tations is more than promising only what you can deliver. To manage expecta- tions well, the firm must educate customers on how to be satisfied by the firm and its products. These efforts can include in-depth product training, educating customers on how to get the best service from the company, telling customers about product availability and delivery schedules, and giving customers tips and hints for improving quality and service. For example, the U.S. Postal Service routinely reminds customers to mail early during the busy holiday season in November and December. This simple reminder is valuable in managing custo- mers’ expectations regarding mail delivery times.

• Offer Satisfaction Guarantees. Companies that care about customer satis- faction back up their offerings by guaranteeing customer satisfaction or product quality. Exhibit 10.8 provides several examples of customer satisfaction guaran- tees. Guarantees offer a number of benefits. For the firm, a guarantee can serve as a corporate vision, creed, or goal that all employees can strive to meet. A good guarantee is also a viable marketing tool that can be used to differentiate the firm’s product offering. For customers, guarantees reduce the risk of buying from the firm and give the customer a point of leverage if they have a complaint.

• Make It Easy for Customers to Complain. Over 90 percent of dissatisfied customers never complain—they just go elsewhere to meet their needs. To counter this customer defection, marketers must make it easy for customers

310 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

to complain. Whether by mail, phone, e-mail, or in person, firms that care about customer satisfaction will make customer complaints an important part of their ongoing research efforts. However, tracking complaints is not enough. The firm must also be willing to listen and act to rectify customers’ problems. Complain- ing customers are much more likely to buy again if the firm handles their com- plaints effectively and swiftly.

EXHIBIT 10.8 Examples of Customer Satisfaction Guarantees.

Hampton Inn

Friendly Service, clean rooms, comfortable surroundings, every time. If you’re not satisfied, we don’t expect you to pay. That’s our commitment and your guarantee. That’s 100% Hampton.

Our 100% Hampton Guarantee® is boldly etched on our front desk so that it is constantly visible to our employees and our guests. Our guarantee epitomizes the pride we take in our brand, our hotels, and our service to you, our guest. We’ll do whatever it takes to make our guests feel welcome, relaxed, and completely comfortable.

L.L.Bean

Our products are guaranteed to give 100% satisfaction in every way. Return anything purchased from us at any time if it proves otherwise. We do not want you to have anything from L.L.Bean that is not completely satisfactory.

Our guarantee is based on something as simple as a handshake—the deal that you’ll be satisfied with a purchase, and if you are not, we’ll make it right. We guarantee that we’ll hold up our end of the bargain. It’s just how we do business. If your purchase isn’t completely satisfactory, we’re happy to accept your exchange or return at any time.

FedEx Express

We will, at our option, and upon request, either refund or credit to the applicable invoice only your transportation charges if we deliver a shipment 60 seconds or more after the applicable delivery commitment time.

Xerox

If you are not totally satisfied with any Xerox-brand Equipment delivered under this Agreement, Xerox will, at your request, replace it without charge with an identical model or, at Xerox’s option, with Xerox Equipment with comparable features and capabilities. This Guarantee applies only to Xerox-brand Equipment that has been continuously maintained by Xerox under this Agreement or a Xerox maintenance agreement.

Midas

We believe that auto care should be a hassle-free experience. For over 50 years, we have built trusted customer relationships based on Midas reliability and professional service. And because we know that quality parts and services are important to you, we stand behind them with our guarantees.

In fact, we guarantee all our work. And, we’re known for our lifetime-guaranteed brake pads, shoes, mufflers, and shocks and struts. Our limited lifetime guarantee is valid for as long as you own your car.

Eddie Bauer

Every item we sell will give you complete satisfaction or you may return it for a full refund.

Publix Supermarkets

We will never knowingly disappoint you. If for any reason your purchase does not give you complete satisfaction, the full purchase price will be cheerfully refunded immediately upon request.

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 311

• Create Relationship Programs. As we discussed earlier, firms can use rela- tionship strategies to increase customer loyalty. Today, loyalty or membership programs are everywhere: banks, restaurants, supermarkets, and even book- stores. The idea behind all of these programs is to create financial, social, cus- tomization, and/or structural bonds that link customers to the firm.

• Make Customer Satisfaction Measurement an Ongoing Priority. If you don’t know what customers want, need, or expect, everything else is a waste of time. A permanent, ongoing program to measure customer satisfaction is one of the most important foundations of customer relationship management.

Customer Satisfaction Measurement There are a number of different methods for measuring customer satisfaction. The simplest method involves the direct measurement of performance across various fac- tors using simple rating scales. For example, a customer might be asked to rate the quality of housekeeping services in a hotel using a 10-point scale ranging from poor to excellent. While this method is simple and allows the firm to track satisfaction, it is not diagnostic in the sense that it permits the firm to determine how satisfaction varies over time. To do this, the firm can measure both expectations and perfor- mance at the same time. Exhibit 10.9 illustrates how this might be done for a hypo- thetical health club.

The ongoing measurement of customer satisfaction has changed dramatically over the last decade. Although most firms track their customer satisfaction ratings over time, firms that are serious about customer relationship management have

EXHIBIT 10.9 Measuring Expectations and Performance for a Hypothetical Health Club.

The Lowest Adequate Level of Service I Expect Is:

The Highest Desired Level of

Service I Expect Is:

The Actual Performance of

this Health Club is: When it comes to…. Low High Low High Low High The quality and variety of exercise equipment provided

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

The amount of time I have to wait for a specific piece of exercise equipment

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

The quality and variety of exercise classes offered

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

The availability of specific exercise classes

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

The availability of facilities, such as racquetball or basketball courts, the running track, or the pool

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

Having a clean, attractive, and inviting facility

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

Having a comfortable atmosphere (temperature, lighting, music)

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

The overall helpfulness and friendliness of the staff

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

Having convenient hours of operation

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

Having plenty of available parking 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

312 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

adopted more robust means of tracking satisfaction based on actual customer behav- ior. Advances in technology, which allow firms to track the behaviors of individual customers over time, provide the basis for these new metrics. Some of these new metrics include:13

• Lifetime Value of a Customer (LTV). The net present value of the revenue stream generated by a specific customer over a period of time. LTV recognizes that some customers are worth more than others. Companies can better leverage their customer satisfaction programs by focusing on valuable customers and giv- ing poor service or charging hefty fees to customers with low LTV profiles to encourage them to leave.

• Average Order Value (AOV). A customer’s purchase dollars divided by the number of orders over a period of time. The AOV will increase over time as cus- tomer satisfaction increases and customers become more loyal. E-commerce companies use AOV quite often to pinpoint customers that need extra incentives or reminders to stimulate purchases.

• Customer Acquisition/Retention Costs. It is typically less expensive to retain current customers than to acquire new customers. As long as this holds true, a company is better off keeping its current customers satisfied.

• Customer Conversion Rate. The percentage of visitors or potential customers that actually buy. Low conversion rates are not necessarily a cause for concern if the number of prospects is high.

• Customer Retention Rate. The percentage of customers who are repeat pur- chasers. This number should remain stable or increase over time. A declining retention rate is a cause for immediate concern.

• Customer Attrition Rate. The percentage of customers who do not repurchase (sometimes called the churn rate). This number should remain stable or decline over time. An increasing attrition rate is a cause for immediate concern.

• Customer Recovery Rate. The percentage of customers who leave the firm (through attrition) that can be lured back using various offers or incentives. Companies that sell products via contract or subscriptions (e.g., wireless phone service, magazines, satellite radio or television) frequently offer special incen- tives to lure back former customers.

• Referrals. Dollars generated from customers referred to the firm by current customers. A declining referral rate is a cause for concern.

• Social Communication. Companies can track satisfaction by monitoring custo- mers’ online commentary. The number of blogs, newsgroups, chat rooms, and general websites where customers praise and complain about companies is staggering.

Firms also have another research method at their disposal: the focus group. Long used as a means of understanding customer requirements during product development, companies use focus groups more often to measure customer satisfac- tion. Focus groups allow firms to more fully explore the subtleties of satisfaction, including its emotional and psychological underpinnings. By better understanding the roots of customer satisfaction, marketers should be better able to develop mar- keting strategies that can meet customers’ needs.

LESSONS FROM CHAPTER 10

The “right” marketing strategy:

• is not necessarily about creating a large number of customer transactions in order to maximize market share.

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 313

• is one that attracts and retains customers over the long term. • considers customers’ needs, wants, and expectations in order to ensure cus-

tomer satisfaction and customer retention. • develops long-term relationships with customers in order to insulate the firm

against competitive inroads and the rapid pace of environmental change.

Customer relationship management:

• requires that firms look beyond current transactions to examine the long-term potential of a customer.

• is based on creating mutually beneficial relationships where each party provides value to the other party.

• is a business philosophy aimed at defining and increasing customer value in ways that motivate customers to remain loyal to the firm.

• is about retaining the right customers. • involves a number of stakeholders in addition to customers including employ-

ees, supply chain partners, and external stakeholders such as government agen- cies, investors, the media, nonprofits, and facilitating firms.

• shifts the firm’s marketing emphasis from “acquiring customers” to “maintaining clients.”

• involves the creation of relationship capital—the ability to build and maintain relationships with customers, suppliers, and partners based on trust, commit- ment, cooperation, and interdependence.

CRM in consumer markets:

• is a long-term process with the goal of moving consumers through a series of stages ranging from simple awareness, through levels of increasing relationship intensity, to the point where consumers become true advocates for the firm and its products.

• attempts to go beyond the creation of satisfied and loyal customers to create true believers and sponsors for the company.

• is usually based on strategies that increase share of customer rather than market share.

• abandons old notions of acquiring new customers and increasing transactions to focus more on fully serving the needs of current customers.

• is based on the precept that all customers have different needs; therefore, not all customers have equal value to the firm.

• involves estimating the worth of individual customers to express their lifetime value (LTV) to the firm. Some customers are simply too expensive to keep given the low level of profits they generate.

• not only involves strategies to retain top-tier customers; it also involves finding ways to encourage second-tier customers to be even better customers.

• involves the use of four types of relationship strategies: financial incentives, social bonding, enhanced customization, and structural bonding.

CRM in business markets:

• also involves moving buyers through a sequence of stages, where each stage represents an increasing level of relationship intensity.

• is based more on creating structural bonds with customers or supply-chain partners.

• creates win–win scenarios where both parties build relationship capital; one firm maintains a loyal and committed customer, the other maintains a loyal and committed supplier.

• is typically more involving, more complex, and much riskier due to the nature of business buying, the presence of long-term contractual obligations, and the sheer dollars involved in many business purchases.

314 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

• leads to many changes in the way that companies conduct business, including a change in buyers’ and sellers’ roles, as well as increases in sole sourcing, global sourcing, team-based buying decisions, and productivity through better integra- tion of operations.

As one of the keys to customer relationship management, quality:

• is a relative term that refers to the degree of superiority of a firm’s goods or services.

• is a double-edged sword: Good quality can successfully generate first-time trans- actions, but poor quality guarantees that repeat purchases will not occur.

• is not an automatic guarantee of success—it is a necessary but insufficient con- dition of customer relationship management.

• is affected by every element in the marketing program. However, the firm’s prod- uct and branding strategies are of utmost importance.

• depends heavily on the form utility offered by the core product. In service offer- ings, the core product is typically based on a combination of people, processes, and physical evidence.

• is often taken for granted in the core product because customers expect the core product to be of high quality, or at least at a level necessary to meet their needs.

• is critical in supplemental products that add value to the core product. In most cases, these supplemental products, not the core product, are responsible for product differentiation.

• is often found in the symbolic and experiential attributes of a product. Charac- teristics such as image, prestige, or brand have immense power in differentiating product offerings.

• is hard to maintain with regularity because (1) customers have very high expec- tations about quality, (2) most products today compete in mature markets, and (3) many businesses compete in markets with very little real differentiation among product offerings.

• is difficult to continuously improve over time. Delivering superior quality involves understanding customers’ expectations, translating expectations into quality standards, upholding quality standards, and avoiding the tendency to overpromise.

As one of the keys to customer relationship management, value:

• is critical to maintaining long-term customer relationships because it allows for the necessary balance among the five types of utility and the elements of the marketing program.

• is a useful guiding principle of marketing strategy because it takes into account every marketing program element and can be used to consider explicitly cus- tomer perceptions of the marketing program in the strategy development process.

• is defined as a customer’s subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings.

• breaks down into customer benefits (e.g., core product quality, supplemental product quality, experiential quality) and customer costs (monetary and non- monetary costs).

• can vary across different situations or points in time depending on a customer’s expectations and needs.

• depends on much more than the selling price of a product. Value perceptions are also affected by transaction costs (taxes, fees, other charges), life-cycle costs (maintenance, repairs, consumables), and nonmonetary costs (time, effort, risk, opportunity costs).

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 315

• can be altered by changing one or more parts of the marketing program. If a change lowers overall value, the firm should consider modifying other marketing program elements to offset this decrease.

Customer expectations:

• are at the core of customer satisfaction. • can be described as ideal (essentially perfect performance), normative (“should

be” or “ought to be” performance), experience-based (based on past experi- ences), or minimum tolerable (lowest acceptable performance).

• can be examined strategically by considering the zone of tolerance between desired performance expectations and adequate performance expectations. The zone of tolerance represents the degree to which customers recognize and are willing to accept variability in performance.

• as measured against the zone of tolerance can lead to three outcomes: • customer delight—actual performance exceeds desired expectations • customer satisfaction—actual performance falls within the zone of tolerance • customer dissatisfaction—actual performance falls below adequate

expectations

• are typically not unrealistic. Customers are looking for the basics of perfor- mance—things that the firm is supposed to do or has promised to do.

• can be increased over time if the firm is not mindful of its initiatives aimed at delighting customers on a continuous basis.

Customer satisfaction:

• is defined as the degree to which a product meets or exceeds the customer’s expectations about that product.

• is typically judged by customers within the context of the total experience, not just with respect to quality and value. Customer satisfaction can also include any number of factors that have nothing to do with quality or value.

• is the key to customer retention. Fully satisfied customers are: • more likely to become loyal customers or even advocates for the firm • less likely to explore alternative suppliers • less price sensitive • less likely to switch to competitors • more likely to spread good word-of-mouth about the firm and its products.

• creates some interesting challenges for marketers. Some of the steps that mar- keters can take to manage customer satisfaction include: • understand what can go wrong • focus on controllable issues • manage customer expectations • offer satisfaction guarantees • make it easy for customers to complain • create relationship programs • make customer satisfaction measurement an ongoing priority

• can be measured using simple rating scales to directly measure performance across various factors in the marketing program.

• can be tracked diagnostically by measuring both expectations and performance at the same time.

• is now tracked using a number of new metrics based on actual customer behav- ior, including lifetime value of a customer; average order value; customer acqui- sition/retention costs; customer conversion, retention, attrition, and recovery rates; referrals; and social communication.

316 Chapter 10 • Developing and Maintaining Long-Term Customer Relationships

NOTES 1. These facts are from the 1-800-Flowers corporate website (http://www.1800flowers.

com/about-us-company-overview), accessed April 19, 2015; 1-800-Flowers 2014 Annual Report (http://investor.1800flowers.com/AR2014/index.html#1/z), accessed April 19, 2015; Barbara Ortutay, “Flower Shop Launches First Facebook Store, BusinessWeek Online, July 29, 2009 (http://www.businessweek.com/ap/tech/D99O5K680.htm); Rebecca Reisner, “Mixing Up the Bouquet at 1-800-Flowers.com,” BusinessWeek Online, April 7, 2009 (http://www.businessweek.com/managing/content/apr2009/ ca2009047_439174.htm).

2. Jill Dyché, The CRM Handbook. (Boston, MA: Addison-Wesley, 2002), pp. 4–5. 3. “Relationships Rule,” Business 2.0, May 2000, 303–319. 4. G. B. Kumar, “Being Customer Focused: The Customer Advocacy Imperative,” Cisco

Blog (http://www.cisco.com/web/IN/about/leadership/gbkumar_customer.html), accessed June 19, 2012.

5. This information is taken from the Regions website (http://www.regions.com), accessed April 19, 2015.

6. Daniel Eran Dilger, “Five Barriers That Might Hold Apple Back from Moving Intel Macs to Custom ARM Chips,” Apple Insider, January 16, 2015 (http://appleinsider.com/ articles/15/01/16/five-barriers-that-might-hold-apple-back-from-moving-intel-macs-to- custom-arm-chips).

7. Adapted from Valarie Zeithaml, Mary Jo Bitner, and Dwayne Gremler, Services Marketing, 6th edition (Boston, MA: McGraw-Hill/Irwin, 2013), pp. 25–27.

8. This material is adapted from Valarie A. Zeithaml, A. Parasuraman, and Leonard L. Berry, Delivering Quality Service: Balancing Customer Perceptions and Expectations (New York: The Free Press, 2001).

9. These facts are from M. Joy Hayes, “Bad Customer Service? Blame the Bosses’ Bad Policies,” Daily Finance, May 25, 2012 (http://www.dailyfinance.com/2012/05/25/bad- customer-service-blame-the-bosses-bad-policies); Brian Hindo, “Satisfaction Not Guaranteed,” BusinessWeek Online, June 19, 2006 (http://www.businessweek.com/ magazine/content/06_25/b3989041.htm); Jena McGregor, “Marvin Ellison: Home Depot’s Mr. Fixit?” BusinessWeek Online, May 7, 2009 (http://www.businessweek.com/ magazine/content/09_20/b4131054579392.htm); Jena McGregor, Aili McConnon, and David Kiley, “Customer Service in a Shrinking Economy,” BusinessWeek Online, February 19, 2009 (http://www.businessweek.com/magazine/content/09_09/ b4121026559235.htm); Erica Ogg, “A Modest Proposal to Fix Dell’s Customer Service,” CNET News, May 9, 2008 (http://news.cnet.com/8301-10784_3-9939821-7.html); Aaron Ricadela, “Dell Will Spend $1 Billion on Data Centers, Customer Labs,” BusinessWeek, April 7, 2011 (http://www.businessweek.com/news/2011-04-07/dell-will-spend-1-billion- on-data-centers-customer-labs.html); Harold L. Sirkin, “Serving Customers in a Downturn,” BusinessWeek, July 31, 2009 (http://www.businessweek.com/managing/ content/jul2009/ca20090731_913928.htm).

10. Information in this section is based on James H. Myers, Measuring Customer Satisfaction (Chicago, IL: American Marketing Association, 1999); Valarie A. Zeithaml, Leonard L. Berry, and A. Parasuraman, “The Nature and Determinants of Customer Expectations of Service,” Journal of the Academy of Marketing Science, 21 (January 1993), 1–12.

11. A. Parasuraman, Leonard L. Berry, and Valarie A. Zeithaml, “Understanding Customer Expectations of Service,” Sloan Management Review, 32 (Spring 1991), 42.

12. These facts are from the American Customer Satisfaction Index, Scores by Industry (http://theacsi.org/industries), accessed April 19, 2015; Andrea J. Ayers, “Executives Have No Idea What Customers Want,” Forbes, March 10, 2009 (http://www.forbes.com/ 2009/03/10/consumers-executives-disconnect-leadership-managing-convergys.html); Kevin P. Coyne, “The Customer Satisfaction Survey Snag,” BusinessWeek Online, June 19, 2009 (http://www.businessweek.com/managing/content/jun2009/ca20090619_272945. htm); Timothy Keiningham and Lerzan Aksoy, “When Customer Loyalty Is a Bad Thing,” BusinessWeek Online, May 8, 2009 (http://www.businessweek.com/managing/ content/may2009/ca2009058_567988.htm).

13. Adapted from Judy Strauss, Adel El-Ansary, and Raymond Frost, E-Marketing, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2003), pp. 435–437.

Chapter 10 • Developing and Maintaining Long-Term Customer Relationships 317

USA Today: Innovation in an Evolving Industry

Synopsis: As the entire newspaper industry sits on the brink of collapse, Gannett and USA Today are working to avoid disaster and transform the nation’s most read newspaper into tomorrow’s best resource for news and information. This case reviews the history of USA Today, including its continued use of innovation to stay on top of the technological and sociocultural shifts that are rapidly changing the newspaper industry. In the face of continual competition across a variety of media sources, the future of USA Today depends on its ability to continually push the envelope of innovation and offer value-added, proprietary content to ensure continued differentiation and the future of the USA Today brand.

Themes: Product strategy, innovation, target marketing, distribution strategy, changing technology, changing sociocultural patterns, customer relationships, competition, differentiation, strategic focus, SWOT analysis

USA Today, subtitled “The Nation’s Newspaper,” debuted in 1982 as America’s first national general-interest daily newspaper. The paper was the brainchild of Allen H. Neuharth, who until 1989 was Chairman of Gannett Co., Inc., a diversified international news, information, and communications company. In 2014 Gannett split into two publicly traded companies—Gannett Broadcasting, which includes its broadcast media channels and digital sites such as CareerBuilder, and Gannett Pub- lishing, which includes USA Today. Gannett is a global information juggernaut that publishes 81 daily community newspapers and affiliated websites as well as 35 U.S. Community Publishing (USCP) local print editions. Gannett is currently the largest U.S. newspaper group in terms of circulation. Gannett Publishing estimates that more than 73.5 million unique desktop, smartphone, and tablet visitors access its online USA Today monthly. Over 21 million downloads of the USA Today mobile application have been carried out. Additionally, Gannett estimates that 30 million unique visitors visit its USCP digital media.

When USA Today debuted in 1982, it achieved rapid success due to its innova- tive format. No other media source had considered a national newspaper written in shorter pieces and sprinkled with eye-catching, colorful photos, graphs, and charts. Designed to address the needs of a sound-byte generation, readers found USA Today’s content refreshing and more engaging than other papers. Circulation grew rapidly from roughly 350,000 in 1982 to approximately 4.1 million today. USA Today remains the number one print newspaper, with 1.08 million daily papers and 1.6 million “branded editions” in circulation, and USA Today’s website, www.USAToday.com, is one of the Internet’s top sites for news and information. However, as newspapers struggle to stay relevant amidst technical and cultural changes, USA Today must continue to deliver innovative content and continuously improve its marketing strategies.

THE HISTORY AND GROWTH OF USA TODAY In February 1980, Allen Neuharth met with “Project NN” task force members to discuss his vision for producing and marketing a unique nationally distributed daily newspaper. Satellite technology had recently solved the problem of limited geographical distribu- tion, so Neuharth was ready to take advantage of two trends in the reading public: (1) an increasingly short attention span among a generation nurtured on television, and (2) a growing hunger for more information. Neuharth believed that readers faced

CASE

318

a time crunch in a world where so much information is available, but there is so little time to absorb it. His vision for USA Today positioned the paper as an information source that would provide more news about more subjects in less time.

Research suggested that USA Today should target achievement-oriented men in professional and managerial positions who were heavy newspaper readers and frequent travelers. While the New York Times targeted the nation’s intellectual elite, thinkers, and policy makers, and the Wall Street Journal targeted business leaders, USA Today was targeted to Middle America—young, well-educated Americans who were on the move and cared about current events.

By early 1982, a team of news, advertising, and production personnel from the staffs of Gannett’s daily newspapers developed, edited, published, and tested several different prototypes. Gannett sent three different 40-page prototype versions of USA Today to almost 5,000 professional people. Along with each prototype, they sent readers a response card that asked what they liked best and least about the proposed paper, and whether they would buy it. Although the content of each prototype was similar, the layout and graphics presentations differed. For example, one prototype included a section called “Agenda” that included comics and a calendar of meetings to be held by various professional organizations. According to marketplace feedback, readers liked the prototypes. The Gannett Board of Directors unanimously approved the paper’s launch. On April 20, 1982, Gannett announced that the first copies of USA Today would be available in the Washington and Baltimore areas.

USA TODAY LAUNCHES On September 15, 1982, 155,000 copies of the newspaper’s first edition hit the news- stands. On page one, founder Neuharth wrote a short summary of USA Today’s mission statement, explaining that he wanted to make USA Today enlightening and enjoyable to the public, informative to national leaders, and attractive to advertisers. The first issue sold out. A little over a month following its debut, USA Today’s circulation hit 362,879—double the original year-end projection. In April 1983, just seven months after its introduction, the newspaper’s circulation topped the 1 million mark. Case Exhibit 1.1 compares the circulation of USA Today with its top competitors, the Wall Street Journal and the New York Times. The typical reader turned out to be a professional, usually a manager, about 40 years old, well educated, with an income of about $60,000 a year. The typical reader was also a news or sports junkie.

Compared to other newspapers, USA Today was truly unique. Designed for the TV generation, the paper was laid out for easy access and quick comprehension by time-pressed readers. Examples of this formatting included extensive use of briefs, columns, secondary headlines, subheads, breakouts, at-a-glance boxes, and informational graphics. These techniques captured the most salient points of a story and presented them in a format that readers appreciated. Gannett’s research had shown that readers got most of their information from such snippets and that they were just as interested in sports, movie reviews, and health information as they were in traditional news. Each issue presented four sections: News, Money, Life, and Sports. The paper’s motto fit its design: “An economy of words. A wealth of information.”

Because USA Today was nontraditional, its critics were numerous and fierce. In their view, the paper was loaded with gimmicks—tight, short stories; no jumps from page to page, except for the cover story (stories that jump to another page are one of newspaper readers’ major complaints); splashy, colorful graphics everywhere; a distinctive, casual writing style; a colorful national weather map; a round-up of news items from each state, one paragraph each; summary boxes; little charts and statistics-laden sports coverage; and a focus on celebrity and sports, with more detailed sports stories than almost any other paper in the nation. There was no foreign staff and little coverage of the world outside the United States. USA Today was quickly

Case 1 • USA Today : Innovation in an Evolving Industry 319

derided for its shallowness by journalists and labeled “McPaper”—junk-food journalism or the fast food of the newspaper business—due to its terse, brash writing style and its short coverage of complex issues. Even within Gannett, Neuharth met with bitter resistance from some senior executives. Nevertheless, readers admired the paper for its focus on brevity and clarity, short sentences, and short words.

Clearly, the newspaper filled a gap in the market, satisfying several unmet needs and wants. USA Today’s success came from listening to its readers and giving them what they wanted. The paper communicates with readers on a personal level very quickly (many of the short, fact-filled stories are under 250 words), clearly, and directly, in an upbeat and positive way. The color is riveting and gives the paper a contemporary look, and so is the space-defying number of stories, factoids, larger than usual pictures, bar graphs, and charts, all squeezed onto each page without seeming too crowded. Instead of confusion, readers get neatness and order. The paper’s dependably consistent organization enables readers to go directly to any one of USA Today’s major sections. As a result, it takes an average of only 25 minutes for a reader to peruse the paper.

MARKETING PROGRAM INNOVATION In spite of its critics, USA Today’s circulation surpassed 1.4 million by late 1985 as the paper expanded to 56 pages in length. The cover price had also increased to 50 cents, double its original price of 25 cents per issue. By this time, USA Today had become the second-largest paper in the country, with a circulation topped only by the Wall Street Journal. Although Neuharth had predicted that USA Today would quickly turn a profit, it took about 5 years to move into profitability, with the news- paper losing an estimated $600 million during its first decade. By 1993, however, USA Today’s profits were approximately $5 million. One year later profits doubled to about $10 million.

During its early growth, the paper unearthed a class of newspaper reader few others had stumbled upon: the business traveler. Airline deregulation had led to a large general price decline for airline tickets, inducing a swell in business travel. On-the-road business

CASE EXHIBIT 1.1 Circulation of Nation’s Top Three Newspapers

4,500,000

4,000,000

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

To ta

l A

v e ra

g e D

a il y C

ir c u

la ti

o n

0 USA Today Wall Street Journal

Newspapers

New York Times

SOURCE: Alliance for Audited Media, 2014.

320 Case 1 • USA Today : Innovation in an Evolving Industry

travelers wished to keep abreast of both world and national news as well as what was going on in their home state and how their local sports teams were doing. USA Today rushed in to fill the void, but in doing so quickly entered direct competition with the Wall Street Journal. By this time, hardline newspapers, including the New York Times, began adding color; shorter, more tightly written stories; and beefed up circulation campaigns to compete with “The Nation’s Newspaper.” The Wall Street Journal followed suit by introducing two new sections—Money & Investing and Marketplace—to broaden the paper’s coverage of media, marketing, technology, and personal investing. In the face of this competition, as well as an awareness of changing reader needs, USA Today responded through innovation of its own.

Product Innovation To stay ahead of the imitative competition, USA Today decided to become a more serious newspaper with improved journalism. The shift from primarily soft news to hard news began with the space shuttle Challenger disaster in 1986. By 1991 editors began focusing much more sharply on hard news rather than soft features, and by 1994, under president and publisher Tom Curley, there was a massive drive to upgrade the paper to be a more serious, more responsible news-oriented product.

Gannett also incorporated less traditional value-added features to keep readers interested. The paper added 1-800 and 1-900 “hot-line” numbers that readers could call for expert information on financial planning, college admissions, minority busi- ness development, taxes, and other subjects. Thousands of readers responded to reader-opinion polls and write-in surveys on political and current event issues. Edito- rial pages were also redesigned to provide more room for guest columnists and to encourage debate. Gannett also initiated a high school “Academic All Star” program that was later expanded to include colleges and universities. The increasing ubiquity of the Internet in the late 1990s also resulted in some changes in content. For instance, the Money section began to focus more on technology issues and to look at business through an ecommerce perspective.

The first major redesign in USA Today’s history occurred in 2000 as the paper moved from a 54-inch to a 50-inch width. The goal of the redesign was to make the paper easier to read and cleaner in design. The pages were slimmer and easier to handle, especially in tight spaces like airplanes, trains, buses, and subways, and the paper fit more readily into briefcases, reflecting what Gannett had learned from focus groups.

In 2012 USA Today went through another redesign. The year marked the news- paper’s 30th anniversary, and the company hoped that an innovative design would make it more appealing to readers. Design firm Wolff Olins was hired to help with the redesign. The redesign included more color pages and the addition of a “tech” page. Perhaps the biggest change was to USA Today’s logo. The company replaced its blue-boxed logo that it had featured since its founding with a more dynamic “ball icon” infographic that varied in color depending on the section of the paper. For instance, the news section has a blue icon, while the money section icon is green. The infographic changes daily depending upon the major news story in that section. The USA Today website and mobile apps were also redesigned, and digital platforms were overhauled to feature more live video coverage, bigger images, and stories with more graphics. Although some were skeptical of this wide-scale design change, the design won Fast Company’s 2013 Innovation by Design Awards.

Promotional Innovation USA Today also innovated in its promotional activities. Historically, the paper had limited its promotion to outdoor advertising and television. However, in the late 1980s Neuharth undertook a “BusCapade” promotion tour, traveling to all 50 states

Case 1 • USA Today : Innovation in an Evolving Industry 321

to talk with people about USA Today. Neuharth succeeded in raising public aware- ness of his paper, which was credited for USA Today’s move into profitability. Encouraged by his success, Neuharth forged ahead with a “JetCapade” campaign where he and a small news team traveled to 30 countries in 7 months, stimulating global demand for the paper. During a visit to the troops of Operation Desert Storm in the Persian Gulf in 1991, General Norman Schwarzkopf expressed a need for news from home. USA Today arranged for delivery of 18,000 copies per day. The overseas success of USA Today led to the publication of USA Today International, which is now available in more than 60 countries in Western Europe, the Middle East, North Africa, and Asia.

Early on, USA Today faced a challenge in selling ad space because advertisers were not convinced that it would pay to advertise in the paper. Gannett’s first strategy for enlisting advertisers was the Partnership Plan, which provided 6 months of free space to those who purchased 6 months of paid advertising. USA Today also began to accept regional advertising across a wide variety of categories such as travel, retail, tourism, and economic development. Color advertisements could arrive as late as 6:00 pm the day before publication, giving local advertisers increased flexibility. The paper also moved aggressively into “blue-chip circulation,” where bulk quantities of USA Today are sold at discounted prices to hotels, airlines, and restaurants, and are provided free of charge to customers.

USA Today pulled off another promotional first in 1999 when it broke one of the most sacred practices of daily newspapers and began offering advertising space on the front page (1-inch strips across the entire width of the bottom of the page). This highly sought after front-page position was sold through 1-year contracts for $1 million to $1.2 million each, with each advertiser taking 1 day a week. As USA Today continued to prosper, advertisers became attracted to the paper’s large volume of readers. To help cope with advertiser demand, the paper implemented the technology to allow advertisers to transmit copy electronically 24 hours per day.

Distribution Innovation Fast delivery has always been important to USA Today. By the late-1990s, the paper was earning kudos for its ability to deliver timely news, thanks to its late deadlines. For instance, in many parts of the country USA Today could print later sports scores than local or regional papers. In hard news, USA Today was able to offer more up-to-date coverage by rolling the presses over 4 hours earlier than the Wall Street Journal and almost 3 hours later than the New York Times. The paper added print sites around the world in a move to further speed up distribution. An innovative readership program was also added that brought USA Today to more than 160 college campuses around the nation. Likewise, technological advances allowed the paper’s production to become totally digital. A new computer-to-plate technology was implemented to give newsrooms later deadlines and readers earlier delivery times.

USA TODAY MOVES ONLINE A decade after USA Today’s launch, Gannett found itself in the enviable position of owning one of America’s most successful newspapers. USA Today was the most widely read newspaper in the country. However, rising distribution and promotion costs were beginning to make the newspaper slightly unprofitable. Print sales were falling dramatically as consumers increasingly turned toward the Internet to get their news. This has required USA Today to adapt and embrace the digital realm.

To reverse this trend, USA Today created several spin-offs, including its first special interest publication, Baseball Weekly. During its first month of operation, Baseball Weekly’s circulation reached 250,000 copies. Baseball Weekly was eventually expanded

322 Case 1 • USA Today : Innovation in an Evolving Industry

to include a variety of sports coverage and was renamed Sports Weekly. At the end of 2007, Sports Weekly was ranked the highest sports magazine in newsstand sales. Due to the success of the Sports Weekly format, USA Today launched a similar magazine in March 2009. USA Today’s Open Air magazine was geared toward the “busy, well-informed, affluent customer” and designed to inspire “millions of readers to find adventure and its rewards in their everyday lives.” According to USA Today, “Open Air offers a compelling new look at the possibilities for adventure that surround us each day—from regular activities like improving your golf game with a stretch the pros use, or finding the best gear for your next softball tournament, to once-in-a-lifetime opportunities like a six-day hike into the spectacular Rio Grande Gorge in New Mexico.” However, rather than marketing the publication as a stand-alone product, Open Air was used to increase demand in the print sector and made available four times a year in Friday editions of USA Today. Also, venturing into news media, USA Today joined with CNN to produce a football TV program and launched SkyRadio to provide live radio on commercial airline flights.

The major spin-off, in terms of current success and future potential, was USA Today Online, which the company introduced on April 17, 1995. The online version was seen as a natural companion to the print version of USA Today, given the paper’s worldwide distribution. The first version was available through CompuServe’s Mosaic browser and required special software, a CompuServe Network connection, and a monthly subscription of $14.95 plus $3.95 per hour. By June 1995, USA Today Online converted to a free service that worked with any web browser and Internet service provider. The “online” was later dropped in favor of USAToday.com.

Like its print sister, USAToday.com is bright, upbeat, and full of nugget-sized news stories. The online version allows readers to receive up-to-the-moment news that incorporates colorful visuals and crisp audio. It provides one of the most extensive sites on the Internet, featuring thousands of pages of up-to-the-minute news, sports, business and technology news, 4-day weather forecasts, and travel information available 24 hours a day, 7 days a week.

Another revenue generator, launched in 1998 in response to frequent reader requests for archived material, was the pay-per-view archives service (http://pqasb. pqarchiver.com/USAToday/search.html). The USA Today Archives section allows readers to do a free, unlimited search of the paper’s articles that have appeared since April 1987. Articles may be downloaded for $3.95 per story or as a part of the site’s daily, monthly, and yearly access plans.

In the past few years, USA Today has undergone even more changes in the digital area. For instance, it developed mobile applications users can download on their mobile phones or tablet computers so they can receive the latest information on the go. Within 18 months, USA Today ranked fourth place in digital traffic. USA Today also offers a sports app for sports enthusiasts. Another way in which USA Today has increased traffic to its sites is by adding online commentary from columnists such as Michael Wolff.

In the process of converting stories into print and digital form, USA Today must understand the reading habits of its audience as it utilizes print and digital sources. For instance, a long narrative in a print article will not work on a tablet or smartphone. Digital content must often be condensed for ease of use and readability. USA Today has been widely successful in developing engaging stories through digital networks that make for easy access.

USA TODAY PROVIDES ON-DEMAND NEWS AND INFORMATION USAToday.com has evolved from an online news media source to an on-demand, information-rich community. This movement toward online media was the result of rising newsprint costs, which, in fact, forced virtually all newspaper firms to add online news to increase readership and cut distribution expenses. In addition, to

Case 1 • USA Today : Innovation in an Evolving Industry 323

align with the advancing pace of communication and technology, former Gannett CEO Craig Dubow announced his commitment to “getting news and information into the hands of consumers faster than ever before.” To aid the company in this initiative, USAToday.com added blogs, RSS (really simple syndication), and podcasts to ensure that its news stayed relevant to busy and mobile readers. Gannett also purchased interest in a company with unique technology that aggregated news on the Internet and categorized the information into 300,000 topics. Other acquisitions included PointRoll, a service that allowed Internet advertisers to expand their online space. One innovative way Gannett leveraged this service was to help advertisers to direct consumers to local merchants. When a user rolled their cursor over an ad, the ad expanded to reveal information about the closest retailer.

Also, in an effort to become the one-stop shop for all types of information, USAToday.com began providing readers and site visitors with the opportunity to search for their unique interests and connect with like-minded individuals. For instance, in the first quarter of 2008, USAToday.com introduced a site that combines professionally created content from USA Today writers, with consumer-generated content, comments, and recommendations, as well as instant message news alerts and advanced search functions. The company also created online communities with discussion forums, polls, and other interactive content. Today, USAToday.com’s online community groups continue to expand, with forums targeting individuals interested in topics such as MMA (Mixed Martial Arts), cars (“Open Road”), and video gaming.

In addition, USAToday.com launched nearly 200,000 unique online topics pages available via links threaded in the story pages or through a stand-alone topics section. According to Jeff Webber, publisher of USAToday.com, “USA Today has always focused on what America is talking about and provides the content that fuels the nation’s conversation. Our new topics pages go in-depth into subjects ranging from Sarah Palin to Starbucks; Barack Obama to Bono; and American Idol to the iPhone, all the things that make America tick.”

BRAND EXTENSIONS AND PARTNERSHIPS A key part of USA Today’s marketing strategy is forming partnerships to expand their reach. In 2008, USA Today began to look beyond the scope of daily news media and ventured into brand extensions by way of retail locations and television. As an attempt to capture more share of customer (rather than market share), USA Today opened three USA Today Travel Zone retail locations in airport terminals in late 2008. These retail shops carry all products travelers expect to find, including reading materials, sundries, travel accessories, and other convenience items. To align with the current look and feel of the paper its customers recognize, sections of the store are clearly identified and utilize colors representing USA Today’s signature sections: News (blue), Money (green), Sports (red), and Life (purple).

In January 2011, USA Today acquired Reviewed.com, a company that tests and rates consumer electronics such as cameras, camcorders, and HD televisions. USA Today also worked with Learning.com in 2012 to give teachers and students better access to digital teaching resources and educational content. Other recent partnerships include major league baseball, Doritos, Seat Geek, and National Geographic. These brand extensions are part of USA Today’s strategy to develop an “integrated consumer media strategy” and add more value to its products.

USA TODAY—TODAY AND TOMORROW Looking at the total national newspaper market, USA Today has been quite successful. It has seen more than 30 years of success and is one of the most widely read newspapers in the United States. Together, USA Today and USAToday.com have 7 million daily

324 Case 1 • USA Today : Innovation in an Evolving Industry

readers. It is a leader in mobile applications with 21 million downloads. Although the newspaper’s print circulation has declined, USA Today still has the largest print circulation with 3 million daily readers. Paid subscribers total 2.9 million. The print edition of USA Today trails slightly behind the Wall Street Journal, at 1.2 million (the Wall Street Journal has 1.4 million). However, USA Today is more popular among online readers. The fact that digital content can be accessed for free has given it a boost over its competitors the Wall Street Journal and the New York Times, which have paywalls. The number of readers accessing USA Today over mobile devices increased 50 percent in a 1-year period.

USA Today continues to face fierce competition in both print and digital sales. With more media turning toward digital, USA Today has been gaining new rivals in online information distribution through television and magazine sites, blogs, and podcasts. Internet-based companies like Yahoo! and Google have moved into the advertising market. The multitude of choices for both consumers and advertisers means that USA Today will have to work harder at innovation, finding a way to differentiate its products from the sea of competition. This will be a challenging task given the continuing decline in newspaper readership and the growing consumer demand for free online news.

As USA Today looks ahead, a number of issues must be considered. The following sections describe some of the key issues that the company faces as it plans for its future.

USA TODAY ’S CUSTOMERS The overwhelming majority of USA Today’s circulation is within the United States. Most USA Today readers work in middle- to upper-management positions and are often purchasing decision makers for their offices and households, as well as technological junkies and sports fans. They also participate in a wide range of leisure activities such as attending movies and traveling. One study found that print news- paper’s readers are 65 percent male and 35 percent female, with an average age of 50 and an average income of $89,731. Just over a third of print readers are consid- ered to be professional or managerial, although 44 percent of readers are college graduates. When USAToday.com’s readers are included, the median age of readers is 49 with an average household income of $91,725. Newspaper readership tends to be higher among consumers with higher levels of education. However, these trends are shifting as more young people access the news on mobile devices. Mobile news readers tend to be younger in age, and it is estimated that print readers are on average 17 years older than those who typically access the news through mobile devices.

Important players in the purchase process are subscribers, single-copy buyers, and third-party sponsors, often referred to as blue-chip buyers. USA Today’s most loyal customers are print subscribers, who buy Sunday or daily newspapers delivered directly to their home or office for $275 in the first 12 months. Subscribers also include consumers who pay for full access to USAToday.com. Single-copy buyers tend to pur- chase the paper out of daily routine (heavy users) or on occasion based on specific newsworthy events (light users). Single-copy editions of USA Today are distributed via newsstand retailers, large grocery store chains, bookstores, and coin-operated vending machines. Twenty percent of paid copies are purchased by third parties, which distribute complimentary copies to end users to add value to their own goods or services. For example, hotels, restaurants, banks, college campuses, airports, and other service organizations offer customers the opportunity to enjoy a copy of USA Today during breakfast or while waiting in the lobby. USA Today content is also available in electronic formats from USAToday.com, mobile devices, and e-mail updates. The e-edition costs $99 per year. The availability of USA Today via electronic distribution may deter some consumers from purchasing the print product.

Case 1 • USA Today : Innovation in an Evolving Industry 325

COMPETITION Gannett has competitors from several fields, including other national newspapers such as the Wall Street Journal and the New York Times, cable networks, nationally syndicated terrestrial and satellite radio providers such as Sirius/XM, Internet sites such as Yahoo! and Google, and blogs such as the Huffington Post.

The Wall Street Journal USA Today’s biggest newspaper competitor is the Wall Street Journal, owned by Dow Jones & Co. Inc. The Wall Street Journal targets influential business readers as its primary audience. The company’s product lines include newspapers, newswires, magazines, websites, indexes, television, and radio. The Wall Street Journal’s website, www.wsj. com, adds over 1,000 news stories per day and includes price information on over 30,000 stocks and funds worldwide. The Wall Street Journal has strategic alliances with other information companies, including CNBC, Reuters, and SmartMoney.

Total print and digital circulation for the Wall Street Journal version is 2.3 million, which includes 1.4 million in print circulation and 916,000 online paying customers. The large number of paid subscribers causes the Wall Street Journal to beat USA Today in print circulation. About 26 percent of the online newspaper’s readers are employed as top management, and 87 percent are college graduates. The average household income is $248,828 and the average household net worth is $1.3 million. Seventy-one percent of online readers are male, and the average reader is 45 years old.

Dow Jones has made several improvements to the Wall Street Journal in an attempt to make it more competitive. It added a Weekend Edition in 2005, designed to help advertisers reach the paper’s audience at home on the weekends. The Wall Street Journal also implemented compact 48-inch width and new design. The news- paper followed USA Today’s lead and added ads to the front page, showing that this practice is becoming more common as newspapers look for ways to increase revenue.

The New York Times In addition to the New York Times, the New York Times Co. owns other newspapers and related websites, two New York City radio stations, and eight television stations. The newspaper’s target market is the intellectual elite. As explained in their press kit, “The New York Times—Influential people read it because influential people read it.” Like USA Today and the Wall Street Journal, the New York Times is available both in print and online at www.nytimes.com.

Total circulation for the New York Times is 2.2 million, with print circulation at 680,905. Its digital circulation is 916,000 and requires monthly subscriptions. The New York Times readers are 59 percent male, 86 percent college graduates, and 69 percent professional/managerial, and have a median age of 42. The median house- hold income is $158,186.

The company has recently made changes in an attempt to be more profitable. The New York Times raised its home-delivery rates and reduced the number of pages in its stock section. Additionally, the paper has implemented cost-savings poli- cies including staff reductions, reducing the width of its print version. However, while circulation has increased due to digital subscriptions, the New York Times has seen profits drop in recent years due to a decline in print advertising.

Other Media Competitors USA Today also faces competition for audience attention and advertising dollars from companies outside its industry, including network and cable television, television

326 Case 1 • USA Today : Innovation in an Evolving Industry

news websites, and Internet news aggregators. As shown in Case Exhibit 1.2, more people are accessing their news through television and the Internet than through print sources. This demonstrates how crucial it is for national news organizations to utilize digital media in their marketing mixes.

More and more Americans, especially younger people, are turning to new sources of media consumption. Internet information providers or news aggregators are another source of competition for USA Today. Over 3 billion people globally have access to the Internet at home or work. Most Internet information providers make their money through subscriptions, advertising, or both. It is important to note that the Internet as a communications and advertising medium is no longer tied to desktop computers. Virtually all major Internet providers and content developers now make their content available via handheld devices, including USA Today.

ECONOMIC WOES USA Today and other newspapers have been struggling with falling revenues and increased costs for several years. Both print and online advertising revenues have been falling steadily, declining 50 percent in the past 5 years alone. Although digital advertising has increased, it is not fast enough to replace the revenue lost from print ads. Case Exhibit 1.3 shows the drop in print advertising revenue and the increase in digital advertising.

In addition, the high cost of newsprint is also a problem for newspapers. The average cost per ton of newsprint consumed increased by 13 percent in 2011, but the effects of price increases were partially offset by a decline in print newspaper consumption. In an attempt to mitigate the print cost increases, Gannett continues to moderate newsprint consumption and expenses through press web-width reductions and the use of lighter-weight and recycled papers.

These costs have forced numerous newspapers to close, reduce publication days, lay off employees, reduce salaries, or adopt an online-only format. Gannet has

CASE EXHIBIT 1.2 Sources of News for U.S. Adults

100

% U

s in

g E

a c h

M e d

iu m

L a

s t

W e e k

0 Television Laptop or

computer Radio Paper

newspapers or magazines

Cell phone Tablet Smart TV or game console

E-reader

SOURCE: American Press Institute, “How Americans get their news,” Harris Interactive, March 17, 2014, http://www. americanpressinstitute.org/publications/reports/survey-research/how-americans-get-news/ (accessed May 13, 2015).

Case 1 • USA Today : Innovation in an Evolving Industry 327

started to focus on diminishing its newspapers’ reliance on print sales. In August 2010, USA Today restructured its newsroom to adjust to changes in the economy and the newspaper industry. The company made major changes to the circulation, finance, and news divisions, created 10 new executive positions, and cut 9 percent of its staff. The remaining staff was broken up into “content rings” instead of the News, Sports, Money, and Life sections. In addition, in 2012 Gannett named media industry veteran Larry Kramer as CEO of USA Today. Kramer is responsible for implementing a corporate strategy focused on digital media, starting with re-launching USA Today’s online, mobile, and tablet products.

To respond to rising costs and the loss of adverting revenue, USA Today and other newspapers are attempting to find new ways to generate revenue through their pricing strategies. After years of offering online news for free, a growing number of newspapers, including USA Today and other Gannett newspapers, have implemented metered pay walls, which give readers online access to a few free stories before requiring them to sign up for a digital subscription. Readers are limited to five to 15 free stories a month and can have digital access by purchasing at least a Sunday print subscription. Gannett is also raising single-copy prices by as much as a third for its printed newspapers. By reducing their print costs and pushing digital media, the company expects to add $100 million in annual profit.

CHANGING TECHNOLOGY Technology has changed the way people access information. Consumers now have a variety of ways to get the latest news—print media, 24-hour television networks, news websites, mobile devices, search engines, blogs, and social media sites all provide up-to-the-minute news.

Not only does technology give consumers more options, but it also allows consumers to customize the news they receive at a level they were never able to do before. These changes have led to a marked decline in newspaper circulation as people use the Internet and other means to get timely news and information. In just 1 year, the digital audience for newspaper content rose 10 percent. Those who access digital news only from their mobile devices increased 53 percent. Another trend among digital newspaper readers is they tend to be younger than the Internet audience as a whole.

As mentioned earlier in the case, USAToday.com capitalized on the growth of mobile devices. For smartphone and tablet users (including the Amazon Kindle and the Apple iPad), the company created multiple applications. The USA Today applica- tions provide readers with access to the latest news stories, weather, and photos at the exact same time the paper hits newsstands. The apps also feature interactive polls, and users can share News, Money, Sports, Life, Tech, and Travel articles via

CASE EXHIBIT 1.3 Newspaper Media Revenue

$ Billions Pct. Change

Total Revenue $37.59 −2.60% Advertising Revenue $23.57 −6.50% Newspaper Print $17.30 −8.60% Digital Advertising $3.42 1.50% Direct Marketing $1.40 2.40% Niche/Non-Daily $1.45 −5.80% Circulation Revenue $10.87 3.70% New/Other Revenue $3.15 5.00%

SOURCE: Newspaper Association of America, 2013.

328 Case 1 • USA Today : Innovation in an Evolving Industry

e-mail, text message, Facebook, or Twitter. Both USA Today’s iPhone and iPad applications lead the news category; the iPhone application has over 3.6 million downloads, the iPad application has over 1.8 million downloads, and the Android application has 2.6 million downloads. The USA Today application is one of the top 10 news apps.

In addition, USA Today offers several other mobile apps, including games and trivia. The company partnered with Hampton Hotels to offer the AutoPilot application, targeting business and travel consumer groups. The AutoPilot app offers users the ability to easily track trip and flight itineraries, utilize GPS capabilities in real time, get information on airport delays, monitor departing and arriving flight information, and access current and future weather conditions. The company’s mobile strategy appears to be working; average monthly readers on the USA Today mobile app increased almost 50 percent in 2014.

USA Today is also taking advantage of the rise of social media sites. It has an active presence on Facebook, Twitter, LinkedIn, YouTube, RSS, Google+, Tumblr, Instagram, Pinterest, TuneIn Radio, and SoundCloud. TuneIn Radio and SoundCloud feature audio clips of stories that most interest the audience. USA Today also entered a partnership in which its Tech section became a host and sponsor of Fark.com, a news aggregator and social networking site. The partnership features USA Today technology news on Fark’s “Geek” page. Through research USA Today has found that the majority of readers of its digital content are conversationalists who want to share interesting news information with other people. This viral nature of digital media is crucial for the company as more and more people spend time on social networking sites. USA Today’s digital marketing strategy makes it convenient for customers to access news and adds a social aspect to reading the news.

Overall, technology may have initiated the decline of the newspaper industry, but it also offers USA Today opportunities to maintain and even expand its reader- ship. Technology allows USA Today and other newspapers to deliver news in more cost-efficient, customizable, direct, and useful ways than will ever be possible using newsprint. In particular, mobile technology has allowed USA Today to literally execute former CEO Dubow’s vision of “getting news and information into the hands of consumers faster than ever before.”

CULTURAL SHIFTS The decline of the USA Today and other print newspapers is part of a wider cultural trend. People are increasingly getting their news from the Internet. The Pew Research Center shows that circulation for print newspapers declined by 3 to 4 percent while podcasting grew 41 percent in the same period. This trend reflects both the growth of digital media and the gradual decline in newspapers’ readership. This trend is even stronger among younger people. Seventy-three percent of 18- to 29-year-olds cite the Internet as one of their main sources of news.

To take advantage of this trend, newspapers are attempting to attract new and younger readers, offering more interactive and social components. The transition is a difficult one, however, because there are significant differences between the inter- ests of current newspaper readers (mostly Baby Boomers) and younger consumers. Baby Boomers are most interested in major news stories and local news coverage, while younger readers are more interested in sports, entertainment, and comics.

EVOLVING TO MEET THE FUTURE Although increasing digital options for news and information have some industry observers bemoaning the death of newspapers, some feel that newspapers will thrive if they develop a healthy online presence and adapt to evolving media consumption

Case 1 • USA Today : Innovation in an Evolving Industry 329

patterns. New technologies, shifts in readership, and increased printing costs present challenges to USA Today as well as opportunities to expand its reach to new customers and mediums. For over 30 years, the newspaper has met the needs of its customers in new and unexpected ways. In the face of competition in both print and digital markets, the future of USA Today depends on its ability to innovate and adapt according to changing needs of the market. To remain successful, USA Today must continue to use a value-added strategy to further enhance distribution of its proprietary content and ensure continued product differentiation.

QUESTIONS 1. What opportunities in the marketing environment did Gannett seize in launching

USA Today? How did the company learn about and respond to these opportunities? Answer these same questions for USAToday.com.

2. How has a continuous strategy of marketing innovation proved successful for USA Today and USAToday.com? Do you believe that USA Today is well positioned for the future? Explain.

3. What are the SWOT implications for USA Today as it looks toward its future? What strengths and opportunities can USA Today leverage as it looks for a com- petitive advantage in the distribution of news and information?

4. Based on USA Today’s experiences with print and online news, evaluate the long- term potential of printed news and the newspaper publishing industry. Do you believe printed newspapers will continue to survive despite digital competition?

330 Case 1 • USA Today : Innovation in an Evolving Industry

Consumers Take a Shine to Apple, Inc.*

Synopsis: Few companies have been able to master the arts of product innovation, a “cool” brand image, and customer evangelism like Apple. After nearly collapsing under a cloud of bankruptcy in the mid-1990s, late Apple CEO Steve Jobs was able to save the company he created through product innovation, a masterful marketing program, and an entrepreneurial corporate culture. This case reviews Apple’s history and remarkable comeback with an eye toward the marketing strategies that created the company’s success. The case also examines many of the challenges faced by a company that continually pushes the boundaries of marketing practice to stay on top of the consumer electronics and computer industries.

Themes: Product innovation, marketing program, prestige pricing, competition, changing technology, differentiation, customer loyalty, foreign sourcing, intellectual property, privacy issues, corporate culture, sustainability

Few companies have fans who sleep outside its doors in order to be the first to snag its newest products, but this is common at Apple Inc. For instance, 30 minutes after the release of the Apple Watch, most models were sold out. Headquartered in Cupertino, California, Apple went from near bankruptcy, with a 1997 share price of $3.30, to having a share price of $130 a share in the first half of 2015. Apple is one of the world’s most valuable companies and has a cult-like status among tech enthusiasts. In 2015 it became the first $700 billion company in the United States.

Many companies have tried to copy Apple’s strategies, but none have discovered what it is that makes Apple such an icon. Some believe Apple’s success stems from a combination of several factors, including the leadership qualities of former CEO Steve Jobs, a corporate culture of enthusiasm and innovation, and the revolutionary products for which Apple has become known. While every organization has to acquire resources and develop a business strategy to pursue its objectives, Apple has excelled in its management. One of the company’s most important resources is its employees, and the company has effectively recruited, trained, and compensated employees to create loyalty. Another resource is suppliers, and Apple has created a highly efficient and effective supply chain with most of its production in China. Apple has also mastered core research and development skills that have allowed the company to translate its technological capabilities into products that consumers want and are willing to pay a premium price to acquire. The capstone of Apple’s strategy is its retail stores that have become a role model for its competitors to sell consumer electronics. Such factors have allowed Apple to revolutionize the technology and retail industries.

This case examines the marketing strategies that have contributed to Apple’s success. It analyzes how Apple has used a combination of smart marketing tactics to create an effective business and marketing strategy. We start by providing a brief history of Apple Inc. and its products. Next, this case examines how Apple uses certain pricing, promotion, and distribution strategies to create a loyal fan base of Apple users and how the corporate culture at Apple influences its marketing. We then analyze several marketing challenges for Apple, including competition, privacy, pricing, intellectual property, supply chain management, and sustainability. Finally, we focus upon Apple as it moves forward.

CASE

*Jennifer Sawayda, University of New Mexico, and Harper Baird, University of New Mexico, prepared this case under the direction of O. C. Ferrell for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation.

331

THE HISTORY OF APPLE, INC. When Apple was founded in 1976, it would have been unrecognizable to its diehard fans of today. Apple’s first product, the Apple I, was essentially a computer kit that lacked a graphic user interface as well as a keyboard and display (users had to provide their own). Co-founders Steve Jobs and Steve Wozniak released the Apple I for $666.66. Apple Inc., known then as Apple Computer, was officially born. Jobs and Wozniak continued to create innovative products. Because Steve Jobs viewed Apple computers from the user’s point of view, these products resonated with consumers. A few years later, Apple had more than $1 million in sales. The company was off to a promising start.

Yet Apple’s initial success did not last. Its downturn started during the 1980s with a series of product flops and CEO changes. Steve Jobs was ousted in 1985 due to internal conflicts within the company. By the mid-1990s, the company was approaching bankruptcy. Dell Computer founder Michael Dell commented about Apple’s future, saying, “I’d shut it down and give the money back to the shareholders.”

The return of Steve Jobs in 1997 instituted major changes for Apple. The com- pany successfully adopted a market orientation in which it was able to gather intelli- gence about customers’ current and future needs for certain features—even before the customers themselves knew they needed them. Apple expanded into the elec- tronics industry and began to release innovative products that resonated deeply with customers. For instance, the creation of the iPod and iTunes met customer needs for an efficient way to download a variety of music and listen to it on the go. Apple has become skilled at recognizing strategic windows of opportunity and acting upon them before the competition.

In 2007 Jobs announced that Apple Computer, Inc. would be renamed Apple Inc. Some perceived this to be a shift away from computers toward consumer electron- ics. However, it may be more accurate to say that Apple is reinventing computers. With the introduction of the iPad, Apple took market share away from top competi- tors in the computer industry. Its presence in the smart watch industry is expected to grab a large share of the market.

Thanks to its innovative products and marketing strategies, Apple has grown into one of the most admired and successful brands in the world. To millions of con- sumers, the Apple brand embodies quality, prestige, and innovation.

APPLE’S PRODUCTS Although the Apple products of today are high in demand, this was not always the case. Apple went through its share of product failures in its past. Several of these failures can be attributed to a failure to accurately predict consumer behavior. For instance, even though Apple products are generally priced high, the Apple Lisa and Cube were judged as too expensive for the mass market.

Apple has become the leader in developing new products that enhance its prod- uct mix and depth to its product lines. While introducing new products is expensive and risky, Apple has reinvented the concept of a new product. While many Apple products provide a function that was already on the market, Apple products are dif- ferent, distinctive, and are often viewed as superior to the competition. After intro- ducing new products such as the iPod, iPhone, and iPad, these products undergo product modification, or changes to the products’ features, quality, or aesthetics, on a regular basis to create the illusion that consumers have to have the newest model. For example, each modified version of the Apple iPad has new features and creates new benefits and the perception of an improved product. The sixth generation of the iPad, the iPad Air 2, had a thinner frame than previous generations and had access to Apple’s mobile payment service Apple Pay. Few companies have been able to exploit the concept of product modification as effectively as Apple.

332 Case 2 • Consumers Take a Shine to Apple, Inc.

Today, Apple has honed its ability to produce iconic products that consumers desire. The company’s product strategy is based on innovative designs, ease-of-use, and seamless integration. Not only has Apple created highly successful products that have catapulted it into prominence, but also new products keep coming, sometimes to the surprise of consumers and competitors. Some of its popular products are described below.

Mac Computers Apple first made a name for itself in the personal computer industry, and even though it has since expanded into the consumer electronics industry, its Mac computers are still a strong asset to Apple’s product mix. Many computer owners identify themselves as either Mac or PC users. Major differences between Macs and PCs lie with their processors and interfaces. Mac enthusiasts often prefer the superior video and graphic software as well as the look and feel of Macs. Mac laptops also tend to last longer than the average 2-year life span of other laptops. For these reasons, Macs are priced much higher than other PCs. Apple sells two types of Macs: desktop and laptop computers. Desktop Macs include the iMac, Mac Pro, and Mac Mini, while its laptops include the MacBook, MacBook Pro, and MacBook Air.

iPod and iTunes In 2001 Apple launched the iPod—a portable music player that forever changed the music industry. The company also introduced iTunes, a type of “jukebox” software that allows users to upload songs from CDs onto their Macs and then organize and manage their personalized song libraries. Two years later Apple introduced the iTunes Store, in which users could download millions of their favorite songs for $0.99 each online.

Both the iPod and iTunes became market leaders in their respective industries. There are approximately 800 million accounts on iTunes alone. However, iPod sales have declined in recent years as consumers have begun to favor more superior technology. Because Apple’s iPhone can also play music, analysts say iPhones likely cannibalized some of the iPod sales. Even CEO Tim Cook has remarked that the “iPod is a declining business.” The current Apple iPod product line includes the iPod touch, iPod nano, and iPod shuffle.

iPhone The Apple iPhone debuted in 2007 and quickly became a favorite among mobile phone users. The iPhone combined smartphone technology with a straightforward operating system, an easy-to-use touch screen, iPod features, and a simple design. Each new generation is highly anticipated by Apple fans eager to use the iPhone’s newest features. For example, the iPhone 4s and its successors include a built-in “personal assistant” called Siri. Siri recognizes voice commands and can answer with the appropriate response. The iPhone has been a resounding success, especially in the United States and China. In 2015, iPhone market share was nearly tied with Android smartphones in the United States. The iPhone 6 comprised nearly half of all new smartphone sales. China is the second largest market for the iPhone.

iPad In April 2010 Apple introduced the iPad, a tablet computer designed for simple inter- action with electronic media and the Internet. Sometimes described as a larger iPhone, the iPad targets the product gap between smartphones and netbooks. It had a 9.7-inch touch screen, accelerometers, ambient light sensors, speakers, a microphone, and GPS capabilities. Newer generations included technology upgrades and two-way cameras for video calling. The iPad was incredibly popular; Apple sold over 1 million

Case 2 • Consumers Take a Shine to Apple, Inc. 333

iPads in 4 weeks. Less than 6 months later, retailer Best Buy reported that the iPad had reduced laptop sales by 50 percent. Less than 2 years after its release, consumers had purchased over 25 million iPads. However, the growth in tablet computers appears to be diminishing. While tablet computers like the iPad are convenient, desktops and laptops still tend to be used more at workstations. Approximately 50 percent of iPad customers are first-time iPad buyers. The iPad Air 2 is the sixth generation of the iPad. The seventh generation is underway.

App Store The App Store (iOS) was launched in 2008 to provide applications for Apple’s mobile products. In its first year, the App Store had 1.5 million downloads and then continued to grow rapidly. By 2014 the number had increased to 75 billion downloads, largely fueled by the growth of the iPhone, iPod touch, and iPad. The App Store made down- loading applications easier, which encouraged downloads. Smartphone consumers between the ages of 25 and 44 use an average of 29 apps per month. The majority of all apps cost less than $2. Independent developers can distribute their original apps through the App Store, and Apple shares profits with them. In 2014 billings at Apple’s App Store rose 50 percent and generated $10 billion for app developers.

Other Products Apple has developed many other high-tech products that make it a formidable player in the technology field. Its newer products include cloud services, music streaming, mobile payments, and smart watches. In 2011 the company launched its iCloud service, which shares personal information across all Apple devices through cloud- based storage. The company reached agreements with record labels to allow consu- mers to create and listen to their music collections without having to upload individ- ual songs. The iCloud is also another incentive for users to buy more Apple products. Apple TV, a device that lets users stream a variety of digital media directly to their televisions, is another Apple product that connects to the cloud.

Apple Music is an app offering that allows subscribers to stream music on demand. Released in 2015, the service provided users with free music for the first three months. Those who wanted to continue would be charged $9.99 per month. Apple Music soon drew the ire of musicians, particularly singer Taylor Swift, because it initially planned to avoid paying artists for the three-month free trial. Taylor Swift responded with an online letter criticizing Apple’s decision. The letter expressed her belief that even though Apple was not being paid during the three-month free trial, it was still using artists’ works to grow its business. The note prompted Apple to change its mind and agree to compensate artists during the free trial. Rather than being a public relations disaster for Apple, the incident helped create awareness about its new service offering. It also caused Taylor Swift to praise Apple for treating her work with respect.

Apple Pay is a digital wallet service users can use to make payments through their smartphone devices. Introduced in 2014, Apple Pay is slowly being expanded throughout the United States and internationally. The service substitutes the need to carry around credit and debit cards. When the consumer wants to check out, he or she can use the smartphone to communicate the payment information to the terminal and make the transaction. Banks have been eager to offer Apple Pay and initially offered the service at a lower rate than traditionally accepted from credit card transactions. In spite of the promising opportunities of Apple Pay, Apple and its financial partners will have to work to ensure safeguards are in place to guard against hackers. Additionally, some retailers have rejected Apple Pay in favor of another payment system that gives retailers more power in processing payments.

A new product that has received much attention is the Apple Watch. The Apple Watch is a wearable computer (called a smart watch) as well as a fashion accessory.

334 Case 2 • Consumers Take a Shine to Apple, Inc.

It can be used to track exercise and syncs with other Apple products such as Apple Pay. Like a smartphone the Apple Watch has apps for different activities, such as games and making travel reservations. It was in such high demand that it sold 2.5 million watches in pre-orders even before its official launch. Although these products do not yet generate much revenue for the company, they help to further differentiate Apple in a competitive marketplace.

APPLE’S MARKETING STRATEGIES In addition to its revolutionary products, Apple’s success in pricing, promotion, and distribution have also contributed to its popularity. Marketing is such an important part of Apple that former CEO John Sculley once commented that Apple was, first and foremost, a marketing company. Apple has a clear sense of who its customers are and what the brand represents, which helps it to align its pricing, promotion, and distribution with its overall goals.

Pricing Apple products are traditionally priced high compared to competitors. For example, the iPad retails for $499 (although models with additional gigabytes are more expensive), while the Amazon Kindle Fire retails for $200. Apple’s Mac computers often cost over $1,000. Most of Apple’s profit comes from the high margins on its hardware devices. Yet rather than dissuading consumers from adopting the products, the high price point provides Apple with an image of prestige. Apple also stresses the convenience of its products as well as the revolutionary new capabilities they have to offer. Thus, it attempts to create value for customers, prompting them to pay more for Apple brands than for its competitors’.

Promotion Apple encourages demand for its products through several types of promotion, including word-of-mouth marketing. The company relies on hit products and high- impact rollouts (often after months of rumors) to stimulate emotional buying.

The company positions itself as the technology provider for creative people. Like Apple’s products, its advertisements are often simple, artistic, and instantly recognizable. For example, several brightly colored iPod commercials featured the silhouettes of dancers wearing the company’s iconic white earbuds. Apple’s ads sometimes directly attack its competitors, as in the “I’m a Mac” television campaign. The ads pitted a cool, young Mac character against a Microsoft PC portrayed as a goofy businessman.

Apple also supports “evangelism” of its products, even employing a chief evangelist to spread awareness about Apple and spur demand. Corporate evangelists refer to people who extensively promote a corporation’s products, acting as both employees and loyal customers. Successful evangelists spread enthusiasm about a company among consumers. These consumers in turn convince other people about the value of the product. Through product evangelism, Apple created a “Mac cult”—loyal customers eager to share their enthusiasm about the company with others.

Apple’s promotion strategy has led to a perception that Apple products are part of a consumer’s identity. When asked why they would want to buy an iPad, over 42 percent of consumers responded that it has a cool factor. However, Apple products still remain a niche product; 95 percent of consumers do not consider Macs when buying new computers.

Distribution Apple distributes its products to consumers via retailers, the company’s online store, and Apple stores. Apple stores have enhanced the brand and changed Apple’s distribution strategies. Originally created to give Apple more control over product displays and

Case 2 • Consumers Take a Shine to Apple, Inc. 335

customer experiences, the Apple store model was a huge success and grew faster than any other retailer in history. It currently has over 450 locations.

Apple stores differentiate themselves significantly from other retailers; in fact, Apple took the concept of retail in an entirely new direction. Apple stores are a place where customers can both shop and play. Everything in the store is carefully planned to align with the company’s image, from the glass-and-steel design reminis- cent of the company’s technology to the stations where customers can try out Apple products. Customer service is also important to the Apple store image. Employees are expected to speak with customers within 2 minutes of them entering the store. Each employee has received extensive training and often receives greater compensa- tion than those at other retail stores to encourage better customer service.

Apple executives constantly look for ways to improve stores, enhance customer service, and increase the time that customers spend in-store. For instance, after the iPad came out the company began to install iPad stations within its stores. The iPads feature a customer service app designed to answer customer questions. If the cus- tomer requires additional assistance, he or she can press a help button on the app. The app changes the customer service experience because rather than the customer seeking out the sales representative, the representative comes straight to the customer.

APPLE’S CORPORATE CULTURE In addition to its products, pricing, promotion, and distribution, Apple’s corporate cul- ture is an important part of its marketing success. Many people attribute Apple’s suc- cess to Steve Jobs’s remarkable leadership abilities, Apple’s highly skilled employees, and its strong corporate culture. Apple markets itself as a fast-paced, innovative, and collaborative environment committed toward doing things “the right way.” The organi- zation has a flat structure, lacking the layers of bureaucracy of other corporations. Apple also emphasizes that it does not adhere to normal work environments in which employees are at their stations from 9:00 a.m. to 5:00 p.m. By offering both challenges and benefits to applicants, Apple hopes to attract those who fit best with its corporate culture.

Successful evangelism can only occur with dedicated, enthusiastic employees who are willing to spread the word about Apple. When Jobs returned to Apple, he instituted two cultural changes: he encouraged debate on ideas, and he created a vision that employees could believe in. By implementing these two changes, employees felt that their input was important and that they were a part of something bigger than themselves.

Additionally, in order to maintain its competitive advantage, Apple also fosters a culture of secrecy. Secrecy is necessary to prevent damage to sales of existing products because if consumers learn about a future upgrade, they may delay their purchases. Certain places at Apple are off-limits to most employees, and employees are not allowed to discuss their work unless everyone in the room knows about the project. This lack of transparency challenges traditional conceptions of what makes a company successful. However, employees say that they remain passionate about their work and are part of a unique experience.

On the other hand, not all employees have been so satisfied with Apple. Former employees filed a lawsuit against Apple claiming that it had made an agreement with other tech firms not to “poach” or hire away each other’s employees. According to a 2007 document that surfaced, Steve Jobs allegedly threatened the former CEO of Palm with patent litigation if Palm did not cease hiring away Apple employees. Similar agreements appear to have occurred with Adobe, Google, Intel, Intuit, and Pixar. The U.S. Department of Justice filed an antitrust lawsuit and forced the companies to disband the agreement as such behavior was deemed anticompetitive and unfair to employees. Interestingly, battery maker A123 Systems filed a lawsuit against Apple in

336 Case 2 • Consumers Take a Shine to Apple, Inc.

2015 accusing the company of aggressively poaching its employees amidst rumors that Apple might enter the electric-car industry.

APPLE’S MARKETING CHALLENGES Although Apple has consistently won first place as the World’s Most Admired Com- pany, it has experienced several ethical issues within recent years. These issues could have a profound effect on the company’s future success. Apple’s sterling repu- tation could easily be damaged by serious misconduct or a failure to address risks appropriately.

Competition Apple faces competition on a variety of fronts. Although a diverse product mix miti- gates the risk of any one product failing, it also increases Apple’s number of competi- tors. Rivals include Hewlett-Packard Blackberry, Dell, Lenovo, and ASUS for computers; Samsung and Xiaomi for smartphones; Amazon, Samsung, and Lenovo for tablets; Google and Amazon for cloud storage services; and Samsung and Motorola for smart watches. Apple is a dominant player in the smartphone industry, with its iPhone 6 and 6 Plus models surpassing Samsung in market share. Apple’s superior products have also taken market share away from competitors such as BlackBerry Limited. Many BlackBerry users opted to exchange their Blackberrys for iPads when the tablet first emerged.

However, rivals are striving to catch up. Chinese company Xiaomi intends to become a top competitor for Apple. After celebrating a blockbuster year in 2014, Xiaomi became the third largest phone manufacturer in the world. Xiaomi has announced its desire to expand beyond China and has released its first smartphone outside of the country, called the Mi 4i. With a value of $45 billion, Xiaomi does not intend to stop with smartphones. It also wants to compete against Apple in smart watches and headphones. Although Apple products are highly successful in China, Xiaomi products are significantly less expensive and are more likely to appeal to the price-conscious consumer.

Samsung’s Galaxy smartphones remain a formidable competitor to Apple’s iPhones. The “dominant player” in the smartphone industry is often a toss-up between Samsung and Apple. In fact, the two companies have fought an outright legal war regarding whether Samsung had infringed on intellectual property rights held by Apple. Specifically, Apple claimed that Samsung had copied features of its iPad and iPhone. The legal battle lasted for years, and in 2014 Apple was awarded $119.6 million—a small fraction of the penalties it had sought against Samsung. Although it appears friction between the two rivals may decrease with Samsung agreeing to manufacture the main chip for the next iPhone, the intense competition in the smartphone industry will likely remain.

Customer Privacy Privacy is another major concern for Apple. In 2011 Apple and Google disclosed that certain features of their cell phones collect data on the phones’ locations. Consumers and government officials saw this as an infringement on user privacy. The companies announced that users have the option to disable these features on their phones. However, this was not entirely true for Apple as some of its phones continued to collect location information even after users had disabled the feature. Apple attrib- uted this to a glitch that it remedied with new software. Both Google and Apple defend its data-collection mechanisms, but many government officials disagree. The government is considering passing legislation on mobile privacy, actions which could have profound effects on Apple and other electronics companies. Apple Pay represents another risk area for Apple as it expands into the mobile payments indus- try. The potential for hackers to steal information from mobile payment systems is a major area of concern for both companies and regulators.

Case 2 • Consumers Take a Shine to Apple, Inc. 337

Price Fixing In 2013 a judge found that Apple had conspired to fix prices on electronic books (e-books) with five major book publishers. The judge determined that Apple was part of a deal requiring publishers to provide Apple’s iTunes store with the best deals in the marketplace for e-books. More specifically, Apple allegedly allowed publishers to set the e-book prices for the iPad and received 30 percent of the proceeds (known as the “agency model”). The agency model is less competitive than the whole- sale model, in which retailers and publishers negotiate on pricing. Under the agreement, if a competitor was found selling the e-book for less, Apple was to be offered the same lower price. This scheme is more commonly referred to as a most-favored-nation clause. Many believe that it is anticompetitive because companies can use it to keep competitors out of the market. After striking the deal with Apple, publishers approached Amazon about participating in the contract. In court, Apple faced fines totaling $450 million as part of a settlement agreement. Apple denied wrongdoing and acknowledged only passive association with the deal to set e-book prices. As of 2015, the case was still in the appeals process.

Intellectual Property With the many products Apple releases each year, it makes sense for it to protect its technology from theft. Apple is serious about keeping its proprietary information a secret to prevent other companies from stealing its ideas. This has led to many pat- ent and copyright lawsuits between Apple and other technology firms, including Franklin Computer Corporation, Microsoft, Cisco Systems, Samsung, and HTC.

However, Apple is also the target of lawsuits. Kodak filed a lawsuit against Apple and Research in Motion (now BlackBerry Limited), alleging that the companies infringed on its patent on digital-imaging technology. In response, Apple countersued Kodak by claiming it violated Apple’s patents. Kodak later sold 1,100 digital imaging and processing patents to Apple, Google, Facebook, and other technology firms, which resolved the lawsuits. Additionally, Proview Electronics filed a lawsuit alleging that Apple fraudulently acquired the iPad trademark by creating a fake company to purchase the trademark and not disclosing its intent. Apple paid Proview $60 million to settle the dispute.

Apple’s aggressiveness regarding patent protection has led it to file lawsuits against some powerful companies. As mentioned earlier, the company filed a lawsuit against Samsung, claiming that Samsung had copied the designs of its iPhone and iPad for its own products. It also filed a lawsuit against HTC Corporation, a Taiwanese smartphone manufacturer that makes phones for Google’s Android products. Apple accused HTC of replicating a range of cellphone features protected under Apple’s patents. The companies eventually settled the dispute and embarked on a 10-year licensing agreement.

Although the outcomes of some of these lawsuits have provided technology companies with more extensive intellectual property protections, they also bring attention to the legitimacy of Apple’s claims. Is it pursuing companies that it honestly believes infringed on its patents, or is it simply trying to cast its competitors in a bad light so it can become the major player in the market? Although it might seem that Apple is being too aggressive, companies that do not set boundaries and protect their property can easily have it copied by their competitors, who can then use it to gain market share.

Supply Chain Management Many of Apple’s product components are manufactured in countries with low labor costs. This means that the potential for misconduct is high due to varying labor stan- dards and less direct oversight. As a result, Apple makes each of its suppliers sign its sup- plier code of conduct and perform factory audits to ensure compliance. To emphasize its

338 Case 2 • Consumers Take a Shine to Apple, Inc.

commitment toward responsible supplier conduct, Apple releases an annual Sup- plier Responsibility Progress Report that explains expectations for suppliers, the results of its audits, and corrective actions the company will take against facto- ries where violations have occurred. In addition, Apple claims it has empowered over 6 million workers by teaching them about their rights and increased the number of suppliers it audits each year. Apple discovered a correlation between improved compliance and the number of audits—facilities audited twice, instead of once, showed a 25 percent gain in compliance ratings, while three audits resulted in a 31 percent compliance score improvement.

Despite these measures, Apple has faced scrutiny for its manufacturing processes. Suppliers claim that Apple’s manufacturing standards are hard to achieve because suppliers are only allowed slim profit margins. In contrast, competitors like Hewlett- Packard allow suppliers to keep more profits if they improve worker conditions. Apple’s focus on the bottom line can cause suppliers to find other ways to cut costs, usually by requiring employees to work longer hours and using less expensive but more dangerous chemicals.

In such an environment, mistakes and safety issues become more common. Past problems at Apple suppliers such as Foxconn, also known as Hon Hai Limited, have included noncompliance with working-hours limits, failure to prevent worker inju- ries, failure to follow hazardous-substance management practices, the use of under- age workers, falsified records, overcrowded worker dormitories, and other labor violations. Apple claims that suppliers who violate company policies have 90 days to address the problem. Apple has dropped 18 suppliers since 2007.

Several high-profile events at Apple factories generated criticism of its supply chain and prompted Apple to take action to improve monitoring and compliance. In January 2010, over 135 workers fell ill after using a poisonous chemical to clean iPhone screens. In 2011, aluminum dust and improper ventilation caused two explo- sions that killed 4 people and injured 77. Additionally, over a dozen workers have committed suicide at Apple supplier factories. Much of the media attention focused on the conditions at Foxconn, Apple’s largest supplier with a sordid background of labor violations and the site of one of the explosions and several of the suicides. Foxconn continues to assert that it is in compliance with all regulations, despite the reports.

Apple claims it is significantly improving supplier conditions and becoming more transparent about its labor processes. CEO Tim Cook visited Foxconn personally to oversee conditions. However, some blamed Apple’s culture of innovation and the need to release new or improved products each year, which requires suppliers to work quickly at the expense of safety standards. Foxconn and Pegatron, another Chinese supplier, are only a handful of facilities in the world with the capacity to build iPods and iPads, which makes it difficult for Apple to switch suppliers should noncompliance continue. Additionally, inconsistent international labor standards and high competition mean that virtually every major electronic producer faces similar manufacturing issues.

As media and consumer scrutiny increase, Apple must continue to address its supply chain management issues. However, as one current Apple executive told the New York Times, “Customers care more about a new iPhone than working conditions in China.” In spite of the pressures to develop new products at low costs, Apple has been recognized by the Fair Labor Association (FLA) for dramatically improving the conditions at Foxconn and completing 280 of the FLA’s recommendations.

Sustainability Apple has taken steps to become a greener company, such as reducing its environ- mental impact at its facilities. However, the company admits that the majority of its emissions (98 percent) come from the life cycle of its products. Apple’s success hinges on constantly developing and launching new products, which leads to

Case 2 • Consumers Take a Shine to Apple, Inc. 339

planned obsolescence—pushing people to replace or upgrade their technology whenever Apple comes out with an updated version. Since Apple constantly releases upgraded products, this could result in older technology being tossed aside.

Apple takes different approaches to this environmental problem. The company builds its products with materials that are suitable for recycling, it builds its products to last, and it recycles responsibly. To encourage its customers to recycle, Apple created an in-store recycling program where customers can trade in old products and receive various discounts. However, despite this recycling program, many consumers feel that tossing out their old products is more convenient, particularly if they have no value. E-waste will remain a significant issue as long as consumers continue to throw away their old electronics.

Apple has also publicly stated its achievements in reducing toxic chemicals within its products. The company eliminated cathode-ray tubes—which contain lead—from its products and constructs iPods with light-emitting diodes (LEDs) rather than fluorescent lamps (which contain mercury). The company has also eliminated the use of different toxic chemicals from its products.

Apple’s Impact on Marketing Apple’s corporate culture of innovation and loyalty has created a company that massively impacts the marketing strategies of consumer electronics firms and other industries. Apple’s iPhone increased competition in the smartphone and tablet computer industries. It also popularized the concept of mobile marketing. The iPhone’s easy-to-use features and applications allowed consumers to shop from home or in-store. This provided new opportunities for retailers to introduce their own iPhone apps and create customized marketing messages delivered over mobile devices. Brands are utilizing Apple’s platform to create product awareness and/or generate repeat business. Apple’s advances in mobile marketing have not only changed the way that customers interact with mobile devices but also enhance customer relationships between business and consumer.

No company has mastered the concept of product differentiation better than Apple. While products such as the iPod and iPhone provided functions and benefits similar to competing products, Apple’s technology and user-friendly interface pro- vided a consumer perception of a completely new product. Apple retail stores and service help create a total product that was unlike any available in the marketplace. The Apple brand name became a cultural icon with loyal followers devoted to Apple’s products. Cultural branding results in consumers exhibiting almost cult-like loyalty to products. Companies such as Coca-Cola, Harley Davidson, and Nike are examples of companies with strong cultural branding. The product becomes a part of their self-concept and image when interacting with others. Once a product becomes so important to an individual, he or she is less sensitive to price and quickly adopt new Apple products that are brought to the market. Few companies have been able to develop cultural branding and a cult-like following like Apple.

Additionally, many companies are seizing upon the opportunity to learn from Apple. Due to the immense success of Apple stores, other companies are attempting to imitate its retail model. Microsoft and Sony opened some of their own stores. Other companies now use Apple products to enhance their businesses as well. For instance, some pharmaceutical and car salespeople have adopted the iPad to aid in business transactions, and some restaurants even use the iPad to show menu items.

THE FUTURE OF APPLE The death of Steve Jobs concerned some people about the future of Apple. To many customers, Jobs appeared to be a savior who brought the company back from near bankruptcy and who was the driving force behind its innovative products. In the

340 Case 2 • Consumers Take a Shine to Apple, Inc.

past, whenever rumors of Jobs’s health reached the public, Apple’s share prices dropped. However, his entrepreneurial spirit remains embedded in Apple’s culture, and the company remains optimistic.

Although Tim Cook has a long road ahead in maintaining the high reputation Apple enjoyed under Jobs, the loyalty fans feel for the company remains high. The company has created a cult following of consumers intensely loyal to Apple products. Apple’s products are meant to offer superior solutions to those of competitors. Seizing upon new opportunities can increase Apple’s share of the music and consumer electronics markets.

Over the last decade, Apple has excelled at keeping pace with the quickly evolving industry of computers and consumer electronics. Its diversification, collaborative corporate culture, and product evangelism propelled it to heights that could not have been envisioned when Jobs and Wozniak sold their first computer kit in 1976. The company shows no signs of stopping its momentum, while consumers have shown few signs of reducing their admiration for Apple.

On the other hand, Apple will face many challenges in the future. Not only has it been criticized for violations in its supply chain, but it has also been questioned about why it offshores most of its production. Since Apple makes such high profits and reportedly received tax breaks earlier in its history, some politicians have suggested that Apple bring production jobs back to the United States. As concerns over outsourcing continue, Apple may experience increasing pressure from stakeholders to create more manufacturing opportunities in the United States.

QUESTIONS 1. How has Apple developed extreme loyalty among consumers that has resulted in

an almost cult-like following? 2. Describe the role of Apple stores as an important part of its marketing strategy. 3. What will Apple need to do to maintain product innovation and customer loyalty?

Case 2 • Consumers Take a Shine to Apple, Inc. 341

Monsanto Balances the Interests of Multiple Stakeholders*

Synopsis: This case focuses on Monsanto’s desire to balance the many significant benefits that its products bring to society (and the company’s resulting profits) with the interests of a variety of stakeholders. The case examines Monsanto’s history as it shifted from a chemical company to one focused on biotechnology. Monsanto’s development of genetically modified seeds is discussed, along with the safety and environmental concerns expressed by a number of Monsanto’s stake- holders around the world. Some of Monsanto’s ethical and patent-enforcement issues are addressed, along with the company’s major corporate responsibility initiatives. The case concludes by examining the challenges and opportunities that Monsanto may face in the future.

Themes: Ethics and social responsibility, sustainability, product strategy, product liability, corporate affairs, stakeholder relationships, product labeling, government regulation, legal environment, global marketing

The Monsanto Company is the world’s largest seed company, with sales of over $15.9 billion. It specializes in biotechnology, or the genetic manipulation of organisms. Monsanto scientists have spent the last few decades modifying crops, often by inserting new genes or adapting existing genes within plant seeds, to meet certain objectives such as higher yield or insect resistance. Monsanto products can survive weeks of drought, ward off weeds, and kill invasive insects. Monsanto’s genetically modified (GM) seeds have increased the quantity and availability of crops, helping farmers worldwide increase food production and revenues.

Today, 90 percent of the world’s GM seeds are sold by Monsanto or by companies that use Monsanto genes. Monsanto also holds a 70 to 100 percent market share on certain crops. Yet, stakeholders as diverse as governments, farmers, activists, and advocacy groups have criticized Monsanto. Monsanto supporters say the company creates solutions to world hunger by generating higher crop yields and hardier plants. Critics accuse the multinational giant of trying to take over the world’s food supply and destroying biodiversity. Since biotechnology is relatively new, critics also express concerns about the possibility of negative health and environmental effects from biotech food. A Harris Poll shows that Monsanto is considered to be the fourth most hated company in the United States. However, these criticisms have not kept Monsanto from becoming one of the world’s most successful businesses.

MONSANTO’S HISTORY: FROM CHEMICALS TO FOOD The original Monsanto was very different from the current company. It was started by John F. Queeny in 1901 in St. Louis and was named after his wife, Olga Monsanto Queeny. The company’s first product was the artificial sweetener saccharine, sold to Coca-Cola. Monsanto followed by selling Coca-Cola caffeine extract and vanillin, an artificial vanilla flavoring. At the start of World War I, company leaders realized the growth opportunities in the industrial chemicals industry and renamed the company The Monsanto Chemical Company. The company began specializing in plastics, its

CASE

*Jennifer Sawayda and Danielle Jolley prepared this case under the direction of O. C. Ferrell and Linda Ferrell. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management.

342

own agricultural chemicals, and synthetic rubber. Due to its expanding product lines, Monsanto’s name was changed to the “Monsanto Company” in 1964. By this time, Monsanto was producing such diverse products as petroleum, fibers, and packaging. A few years later, Monsanto created its first Roundup herbicide, a successful product that would propel the company even more into the limelight.

During the 1970s, however, Monsanto hit a major legal snare. The company had produced a chemical known as Agent Orange that was used during the Vietnam War to quickly deforest the thick Vietnamese jungle. Agent Orange contained dioxin, a chemical that caused a legal nightmare for Monsanto. Dioxin was found to be extremely carcinogenic, and in 1979, a lawsuit was filed against Monsanto on behalf of hundreds of veterans who claimed they were harmed by the chemical. Monsanto and several other manufacturers agreed to settle for $180 million. The repercussions of dioxin would continue to plague the company for decades.

In 1981, Monsanto’s leaders determined that biotechnology would be the company’s new strategic focus. Monsanto’s quest for biotechnology continued for over a decade, and in 1994, Monsanto introduced the first biotech product to win regulatory approval. Soon the company was selling soybean, cotton, and canola seeds that were engineered to be tolerant to Monsanto’s Roundup herbicide. Many other herbicides killed the good plants as well as the bad ones. Roundup Ready seeds allowed farmers to use the herbicide to eliminate weeds while sparing the crop.

In 1997, Monsanto spun off its chemical business as Solutia, and in 2000, the company entered into a merger and changed its name to the Pharmacia Corporation. Two years later, a new Monsanto, focused entirely on agriculture, broke off from Pharmacia, and the companies became two separate legal entities. The company before 2000 is often referred to as “old Monsanto,” while today’s company is known as “new Monsanto.”

The emergence of new Monsanto was tainted by some disturbing news that the company had been covering up decades of environmental pollution. For nearly 40 years, the Monsanto Company had released toxic waste into a creek in Anniston, Alabama. It had also disposed of polychlorinated biphenyls (PCBs), a highly toxic chemical, in open-pit landfills in the area. The results were catastrophic. Fish in the creek were deformed, and the population had elevated PCB levels that shocked environmental health experts. A paper trail showed that Monsanto leaders had known about the pollution since the 1960s but had not stopped production. Once the cover-up was discovered, thousands of plaintiffs from the area filed a lawsuit against the company. In 2003, Monsanto and Solutia agreed to pay $700 million to more than 20,000 Anniston-area residents.

When current CEO Hugh Grant took over in 2003, scandals and stakeholder uncertainty had tarnished the company’s reputation. The price of Monsanto’s stock had fallen almost 50 percent, down to $8 a share. The company had lost $1.7 billion the previous year. Grant knew the company was fragile; yet through a strategic focus on GM foods, the company has recovered and is now prospering. Monsanto became so successful with its GM seeds that it acquired Seminis, Inc., a leader in the fruit and vegetable seed industry. The acquisition transformed Monsanto into a global leader in the seed industry. Today, Monsanto employs more than 21,000 people in 160 countries and has been recognized as a top employer in Argentina, Mexico, India, and Brazil.

THE SEEDS OF CHANGE: MONSANTO’S EMPHASIS ON BIOTECHNOLOGY Although the original Monsanto made a name for itself by manufacturing chemicals, the new Monsanto took quite a different turn. After switching its emphasis from chemicals to food, today’s Monsanto owes its more than $15.9 billion in sales to biotechnology, specifically to the sale of GM plant seeds. These seeds have revolutionized the

Case 3 • Monsanto Balances the Interests of Multiple Stakeholders 343

agriculture industry. Not content with resting on its laurels, Monsanto continues to use its $1.5 billion research budget for investigating new methods of farming at its 1.5-million-square-foot complex in Missouri.

Throughout history, weeds, insects, and drought have been the banes of the farmer’s existence. In the past century, herbicides and pesticides were invented to ward off pests. Yet, applying these chemicals to an entire crop was both costly and time-consuming. Monsanto scientists, through their work in biotechnology, were able to implant seeds with genes to make the plants themselves kill bugs. They also created seeds containing the Roundup herbicide, an herbicide that kills weeds but spares the crop. Since then Monsanto has used technology to create many innovative products, such as drought-tolerant seeds for dry areas like Africa.

The company uses its technological prowess as a form of marketing. Monsanto’s laboratory in St. Louis allows farmers to tour the facility and see how the seeds are selected. One of the technologies that farmers are shown is known as the corn chipper, a machine that picks up seeds and takes genetic material from them. That material is then analyzed to see how well the seed will do if planted. The “best” seeds are the ones Monsanto sells for planting. Impressing farmers with its technology and the promise of better yields is one way that Monsanto promotes its products to potential customers. Monsanto is extending its reach into the computing industry as well. The company offers software and hardware that make use of big data to yield important information for helping farmers in the field. It even provides recommendations on when and where to plant. It also arranges tours for its critics to help them understand the process of GM crops and their implications.

However, GM crops are not without critics. Opponents believe influencing the gene pools of the plants we eat could result in negative health consequences. Others worry about the health effects on beneficial insects and plants, fearing that pollinating GM plants could affect nearby insects and non-GM plants. CEO Hugh Grant decided to curtail the tide of criticism by focusing biotechnology on products that would not be directly placed on the dinner plate, but instead on products such as animal feed and corn syrup. In this way, Grant was able to reduce some of the opposition. Today, the company invests largely in four crops: corn, cotton, soybeans, and canola.

Farmers who purchase GM seeds can grow more crops on less land and with less left to chance. GM crops have saved farmers billions by preventing loss and increasing crop yields. For example, in 1970 the average corn harvest yielded approximately 70 bushels an acre. With the introduction of biotech crops, the average corn harvest increased to roughly 150 bushels an acre. Monsanto predicts even higher yields in the future, possibly up to 300 bushels an acre by 2030. According to Monsanto CEO Hugh Grant, this increase in productivity will increase crop yields without taking up more land, helping to meet the world’s growing agricultural needs.

Monsanto’s GM seeds have not been accepted everywhere. Attempts to introduce them into Europe met with consumer backlash. The European Union banned most Monsanto crops except for one variety of corn. Consumers have gone so far as to destroy fields of GM crops and arrange sit-ins. Greenpeace has fought Monsanto for years, especially in the company’s efforts to promote GM crops in developing countries. Even China placed bans on certain GM corn imports, although it has since relaxed the ban and appears to be encouraging more acceptance of GM crops among its citizens. This animosity toward Monsanto’s products is generated by two main concerns: the safety of GM food and the environmental effects of genetic modification.

CONCERNS ABOUT THE SAFETY OF GM FOOD Of great concern for many stakeholders are the moral and safety implications of GM food. Many skeptics see biotech crops as unnatural, with Monsanto scientists essentially “playing God” by controlling what goes into the seed. Also, because GM crops are

344 Case 3 • Monsanto Balances the Interests of Multiple Stakeholders

relatively new, critics maintain that the health implications of biotech food may not be known for years to come. They also contend that effective standards have not been created to determine the safety of biotech crops. Some geneticists believe the splicing of these genes into seeds could create small changes that might negatively impact the health of humans and animals that eat them. Although the FDA has declared biotech crops safe, critics say they have not been around long enough to gauge their long-term effects.

One concern is toxicity, particularly considering that many Monsanto seeds are equipped with a gene to allow them to produce their own Roundup herbicide. Could ingesting this herbicide, even in small amounts, cause detrimental effects on consumers? Some stakeholders say yes, and point to statistics on glyphosate, Roundup’s chief ingredient, for support. According to an ecology center fact sheet, glyphosate exposure is the third most commonly reported cause of illness among California agriculture workers, and glyphosate residues can last for a year. Yet, the Environmental Protection Agency (EPA) lists glyphosate as having low skin and oral toxicity, and a study from the New York Medical College states that Roundup does not create a health risk for humans.

In March 2013, over 250,000 people signed a petition in response to President Barack Obama’s signing of H.R. 933 into law. The new law, called the Agricultural Appropriations Bill of 2013, contains a provision that protects GM organisms and genetically engineered seeds from litigation concerning their health risks. In other words, courts cannot bar the sale of GM food even if future health risks are revealed. Critics of the provision claim that the provision was slipped in at the last moment and that many members of Congress were not aware of it. For consumers, questions pertaining to the health risks associated with GM crops have gone unanswered and are the primary reason the petition was started. Many people have called this bill the “Monsanto Protection Act” and believe it will help protect the survival of biotech corporations. Critics also say that the continuing resolution spending bill will no longer allow the court system to protect consumers, which could create a further disconnect between consumers and producers.

Despite consumer concerns, the FDA has proclaimed that GM food is safe to consume. As a result, it also has determined that Americans do not need to know when they are consuming GM products. Thus, this information is not placed on labels in the United States, although other countries, most notably Great Britain and the European Union, do require GM food products to state this fact in their labeling. Some states in the United States, however, have entered the fight to have GM food labeled. However, a new law in Vermont was passed that now makes it mandatory for GM food to be labeled. Organizations that would be negatively impacted by the law have sued Vermont, claiming that the law creates burdensome costs for companies without any provable advantages to the consumer. Hawaii also tried to curb types of GM crops and require labeling, but a federal judge overturned the law.

CONCERNS ABOUT THE ENVIRONMENTAL EFFECTS OF MONSANTO’S PRODUCTS Some studies have supported the premise that Roundup herbicide, which is used in conjunction with the Roundup Ready seeds, can be harmful to birds, insects, and particularly amphibians. Such studies have revealed that small concentrations of Roundup may be deadly to tadpoles, which is a major concern, as frog and toad species are rapidly disappearing around the globe. Other studies suggest that Roundup might have a detrimental effect on human cells, especially embryonic, umbilical, and placental cells. Monsanto has countered these claims by questioning the methodology used in the studies, and the EPA maintains that glyphosate is not dangerous at recom- mended doses. On the other hand, the World Health Organization (WHO) ruled that glyphosate probably does have the potential to cause cancer in humans. The finding

Case 3 • Monsanto Balances the Interests of Multiple Stakeholders 345

caused Monsanto shares to drop 2 percent. Monsanto has challenged this assertion and wants to meet with WHO officials to discuss the findings.

As honeybees have begun to die off, critics are blaming companies like Monsanto and Bayer. They believe the companies’ pesticides are killing off the good insects as well as the bad ones. While there is no definitive evidence that the honeybees are dying off due to pesticide use, opposition against Monsanto has arisen as the honeybee population continues to decline. One of the projects in which Monsanto has invested is working with the Defense Advanced Research Projects Agency (DARPA) in developing mechanical bee-like drones that can be used to pollinate crops. Nicknamed Robobees, these drones could help with pollinating crops, which could lead to an increase in food crops. Opponents, on the other hand, claim that Monsanto is killing the bees and will obtain even more power by gaining control of their mechanical substitutes.

Another concern with GM seeds in general is the threat of environmental con- tamination. Bees, other insects, and wind can carry a crop’s seeds to other areas, sometimes to fields containing non-GM crops. These seeds and pollens might then mix with the farmer’s crops. Organic farmers have complained that GM seeds from nearby farms have “contaminated” their crops. This environmental contamination could pose a serious threat. Some scientists fear that GM seeds’ spread to native plants may cause those plants to adopt the GM trait, thus creating new genetic variations of those plants that could negatively influence (through genetic advantages) the surrounding ecosystem. A major dispute has arisen between vegetable farmers and Monsanto for just this reason. Monsanto and its competitor Dow Chemical are developing seeds to be resistant to stronger herbicides because plants are starting to become resistant to Roundup. However, these stronger herbicides have been known to drift to other farms after a farmer sprays his or her crops. While the special-interest group Save Our Crops successfully convinced Dow to reformulate its herbicide to decrease the likelihood of drift, Monsanto maintains its resistant seeds will be able to coexist with other crops without a contamination problem.

Another controversy involved the discovery of a field in Oregon filled with an experimental form of Monsanto’s GM wheat. The wheat was not approved by the U.S. Department of Agriculture. The discovery of this wheat raised concern over whether it could have contaminated U.S. wheat supplies. As a result, Japan temporarily instituted a ban on U.S. wheat. Initial investigations revealed that the wheat had been stored in a Colorado facility but were unable to provide an explanation for how it showed up in an Oregon field. Monsanto denied involvement and stated that it suspected someone had covertly obtained the GM wheat and planted it. The company also claims that this incident was an isolated occurrence. The altered wheat is not believed to have caused any damage, and Japan lifted the ban. However, some farmers filed lawsuits against Monsanto seeking class-action status.

Monsanto has taken action in addressing environmental and health concerns. The company maintains that the environmental impact of everything it creates has been studied by the EPA and approved. Monsanto officials claim that glyphosate in Roundup rarely ends up in ground water, and when it does contaminate ground water, it is soluble and will not have much effect on aquatic species. The firm has stated that it will not file lawsuits against farmers if GM crops accidentally mix with organic. Monsanto has also partnered with Conservation International in an effort to conserve biodiversity. Stakeholders are left to make their own decisions regarding GM crops.

RESISTANCE TO PESTICIDES AND HERBICIDES Another environmental problem that has emerged is the possibility of weed and insect resistance to the herbicides and pesticides on Monsanto crops. Critics fear that continual use of the chemicals could result in “super weeds” and “super bugs,”

346 Case 3 • Monsanto Balances the Interests of Multiple Stakeholders

much like the overuse of antibiotics in humans has resulted in drug-resistant bacteria. The company’s Roundup line, in particular, has come under attack. Monsanto points out, and rightly so, that Roundup herbicide has been used for 30 years, largely without resistance issues. However, GM plants labeled “Roundup Ready” are genetically engineered to withstand large doses of the herbicide. As Roundup has been used more frequently and exclusively, significant numbers of Roundup-resistant weeds have been found in the United States and Australia.

To combat “super bugs,” the government requires farmers using Monsanto’s products to create “refuges” in which they plant 20 percent of their fields with a non-GM crop. The theory is that this allows nonresistant bugs to mate with those that are resistant, preventing a new race of super bugs. To prevent resistance to the Roundup herbicide, farmers are supposed to vary herbicide use and practice crop rotation. However, because Roundup is so easy to use, particularly in conjunction with Roundup Ready seeds, many farmers do not take the time to take these preventative measures. When they do rotate their crops, some will rotate one Roundup Ready crop with another. As a result, agricultural pests such as rootworm are becoming resistant to genes in GM crops intended to kill them. This resistance is causing some farmers to turn toward more traditional herbicides and pesticides. For the first time, regulators in the United States are encouraging limits on certain kinds of GM corn to prevent the spread of resistant bugs. The EPA acknowledges that farmers and seed companies have not done enough to curb resistance. It is recommending that 35 percent of fields should be planted with another crop other than biotech corn. This is of particular concern in Latin America, Africa, and Asia, where farmers may not be as informed of the risks of herbicide and pesticide overuse.

MONSANTO ADDRESSES ETHICAL AND LEGAL ISSUES In addition to concerns over the safety of GM seeds and environmental issues, Monsanto has had to deal with concerns about organizational conduct. Organizations face significant risks from strategies and employees striving for high performance standards. Such pressure sometimes encourages employees to engage in illegal or unethical conduct. All firms have these concerns. In the case of Monsanto, patents and other legal issues have resulted in legal, ethical, and reputational consequences.

PATENT ISSUES As bioengineered creations of the Monsanto Company, Monsanto’s seeds are protected under patent law. Under the terms of the patent, farmers using Monsanto seeds are not allowed to harvest seeds from the plants for use in upcoming seasons. Instead, they must purchase new Monsanto seeds each season. By issuing new seeds each year, Monsanto ensures it secures a profit as well as maintains control over its property. This patent protection has become a controversial subject among farmers and has led to numerous litigation battles for Monsanto.

Throughout agricultural history, farmers have collected and saved seeds from previous harvests to plant the following year’s crops. Critics argue that requiring farmers to suddenly purchase new seeds year after year puts an undue financial burden on them and gives Monsanto too much power. However, the law protects Monsanto’s right to have exclusive control over its creations, and farmers must abide by these laws. When they are found guilty of using Monsanto seeds from previous seasons, either deliberately or out of ignorance, the farmers are often fined.

Because it is fairly easy for farmers to violate the patent, Monsanto has found it necessary to employ investigators to look into suspected violations. The resulting investigations are a source of contention between Monsanto and accused farmers.

Case 3 • Monsanto Balances the Interests of Multiple Stakeholders 347

According to Monsanto, investigators approach the farmers suspected of patent infringement and ask them questions. The investigators must practice transparency with the farmers and tell them why they are there and who they represent. If suspicions still exist after the initial interview, investigators may pull the farmer’s records (after assuring the farmer they will do so in a respectful manner). Sometimes they bring in a sampling team, with the farmer’s permission, to test the farmer’s fields. If found guilty, the farmer often pays a fine to Monsanto. However, some farmers tell a different story about Monsanto and its seed investigators, calling the investigators the “seed police” and even referring to them with such harsh words as “Gestapo” or “mafia.”

In 2007, Monsanto sued Vernon Bowman, an Indiana farmer who Monsanto claims used second-generation Monsanto seeds to plant soybeans. Monsanto claimed their patent protection reaches past first-generation seeds and Mr. Bowman infringed upon their patent. In 2009, the court ruled in favor of Monsanto and ordered Bowman to pay $84,000 in damages. Mr. Bowman did not accept defeat, and in 2013 brought his case before the Supreme Court. The Supreme Court ruled in favor of Monsanto, representing a great victory for biotechnology companies.

Monsanto is not limiting its investigations to farmers, however. It filed a lawsuit against DuPont, the world’s second-largest seed maker, for combining DuPont technology with Roundup Ready. Monsanto won the lawsuit, but was countersued by DuPont for anticompetitive practices. Accusations of anticompetitive practices have garnered the attention of federal antitrust lawyers. With increased pressure coming from different areas, Monsanto agreed to allow patents to expire on its seeds starting in 2014. This will allow other companies to create less expensive knockoffs of Monsanto seeds. However, Monsanto announced that it would continue to strictly enforce patents for new versions of its products, such as Roundup Ready 2 soybeans.

LEGAL ISSUES Many major companies have government and legal forces to deal with, and Monsanto is no exception. Recently, the government has begun to examine Monsanto’s practices more closely. In 1980, the Supreme Court for the first time allowed living organisms to be patented, giving Monsanto the ability to patent its seeds. Despite this legal victory, Monsanto has now come under the attention of the American Antitrust Institute for alleged anticompetitive activities. The institute suggested that Monsanto is hindering competition, exerting too much power over the transgenic seed industry, and limiting seed innovation. When Monsanto acquired DeKalb and Delta Land and Pine, it had to obtain the approval of antitrust authorities, and gained that approval after agreeing to certain concessions. As a result of complaints, the Department of Justice (DOJ) began a civil investigation into Monsanto’s practices. Although the DOJ eventually dropped the antitrust probe, concerns over Monsanto’s power continue. Monsanto must be careful to ensure that its activities cannot be seen as anticompetitive.

In early 2013, Monsanto settled with local residents in Nitro, West Virginia, after claims of health problems became persistent in a now-closed Agent Orange plant. The company agreed to spend up to $93 million on medical testing and local cleanup of as many as 4,500 homes. It also agreed to establish a medical monitoring program and will make additional money available to continue the program’s operation for 30 years.

The most talked about litigation involving Monsanto is its constant battle with competitor DuPont. In the past, DuPont has filed multiple lawsuits against Monsanto. One lawsuit claimed that Monsanto used its power and licenses to block DuPont products. In March 2013, the battle for dominance between these two companies was settled. A patent-licensing deal was reached and DuPont agreed to pay Monsanto at least $1.75 billion over the next 10 years. This payment enables DuPont to have rights and access to technology for genetically engineered soybeans that resist herbicides.

348 Case 3 • Monsanto Balances the Interests of Multiple Stakeholders

DuPont will also obtain rights to combine patented genes from Monsanto with other genes to develop multiple crop traits. On the opposing side, Monsanto is given access to DuPont patents for corn defoliation and crop-disease resistance techniques. This settlement will hopefully create positive results for farmers and enable the development of technologies that will aid in higher crop yields for years to come.

CORPORATE RESPONSIBILITY AT MONSANTO Despite criticisms levied against Monsanto, a study has provided evidence that GM crops have greatly benefited farming. The study estimated that farmers who adopted GM crops have seen their profits increase to 69 percent higher than those who did not. Today, the public generally expects multinational corporations to advance the interests and well-being of the people in the countries where they do business. Monsanto has given millions of dollars to improve communities in developing countries. In fact, Corporate Responsibility Magazine ranked Monsanto number 38 on its 100 Best Corporate Citizens list.

Monsanto created a Code of Business Conduct to provide guidance on the firm’s ethical expectations and is concerned with maintaining integrity among its many different stakeholders. In 2003, the company adopted an additional Code of Conduct for its chief executives and financial officers and a Human Rights Policy in 2006 to ensure the rights of Monsanto employees and those in its supply chain. The company’s Business Conduct Office is responsible for investigating cases of alleged misconduct as well as maintaining the company’s anonymous hotline.

As part of Monsanto’s culture, the company wrote a pledge informing stake- holders about what it sees as its ethical commitments. According to Monsanto, the pledge “helps us to convert our values into actions, and to make clear who we are and what we champion.” Case Exhibit 3.1 provides the values Monsanto pledges to uphold, including integrity, dialogue, transparency, sharing, benefits, respect, acting as owners to achieve results, and creating a great place to work.

As an agricultural company, Monsanto must address the grim reality facing the world in the future: The world’s population is increasing at a fast rate, and the amount of available land and water for agriculture is decreasing. Some experts believe that our planet will have to produce more food in the next 50 years to feed the world’s population than it has grown in the past 10,000 years, requiring us to double our food output. As a multinational corporation dedicated to agriculture, Monsanto is expected to address these problems. The company has also developed a three-tiered commitment policy: (1) produce more yield in crops, (2) conserve more resources, and (3) improve the lives of farmers. The company hopes to achieve these goals by taking initiatives in sustainable agriculture and philanthropy.

SUSTAINABLE AGRICULTURE Monsanto CEO Hugh Grant has said, “Agriculture intersects the toughest challenges we all face on the planet. Together, we must meet the needs for increased food, fiber,

and energy while protecting the environment. In short, the world needs to produce

more and conserve smarter.” Hugh Grant, Monsanto CEO, comments on GMO foods and pesticide use among growers in this video Monsanto is quick to point out that its biotech products added more than 100 million tons to worldwide agricultural production in a 10-year period, and the company estimates that this has increased farmers’ incomes by $33.8 billion. Monsanto also created partnerships between non- profit organizations across the world to enrich the lives of farmers in developing countries. The company’s goal is to double its core crop yields by 2030. Monsanto intends to achieve this goal through new product innovations such as drought-tolerant

Case 3 • Monsanto Balances the Interests of Multiple Stakeholders 349

seeds and better technology. Two regions Monsanto is now focusing on are India and Africa.

The need for better agriculture is apparent in India, where the population is estimated to hit 1.3 billion by 2017. Biotech crops have helped improve the size of yields in India, and Monsanto has estimated that Indian cotton farmers using biotech crops earn approximately $176 more in revenues per acre than their non-biotech contemporaries. Monsanto launched Project SHARE, a sustainable yield initiative created in conjunction with the nonprofit Indian Society of Agribusiness, to improve the lives of 10,000 cotton farmers in 1,050 villages.

In Africa, Monsanto partnered with organizations, scientists, and philanthropists to develop and introduce drought-tolerant and virus-resistant seeds for African farmers. For instance, the Monsanto Fund is working with scientists to develop cassava plants that are resistant to two common types of viruses. The cassava is an important food

CASE EXHIBIT 3.1 The Monsanto Pledge

Integrity Integrity is the foundation for all that we do. Integrity includes honesty, decency, consistency, and courage. Building on those values, we are committed to:

Dialogue We will listen carefully to diverse points of view and engage in thoughtful dialogue. We will broaden our understanding of issues in order to better address the needs and concerns of society and each other.

Transparency We will ensure that information is available, accessible, and understandable.

Sharing We will share knowledge and technology to advance scientific understanding, to improve agriculture and the environment, to improve crops, and to help farmers in developing countries.

Benefits We will use sound and innovative science and thoughtful and effective stewardship to deliver high- quality products that are beneficial to our customers and to the environment.

Respect We will respect the religious, cultural, and ethical concerns of people throughout the world. The safety of our employees, the communities where we operate, our customers, consumers, and the environment will be our highest priorities.

Act as Owners to Achieve Results We will create clarity of direction, roles, and accountability; build strong relationships with our customers and external partners; make wise decisions; steward our company resources; and take responsibility for achieving agreed-upon results.

Create a Great Place to Work We will ensure diversity of people and thought; foster innovation, creativity, and learning; practice inclusive teamwork; and reward and recognize our people.

SOURCE: Monsanto Corporation, Monsanto Code of Business Conduct, http://www.monsanto.com/SiteCollectionDocu- ments/Code-of-Business-Conduct-PDFs/code_of_conduct_english.pdf (accessed April 20, 2015).

350 Case 3 • Monsanto Balances the Interests of Multiple Stakeholders

product for many African communities. As CEO Hugh Grant writes, “This initiative isn’t simply altruistic; we see it as a unique business proposition that rewards farmers and shareowners.” But not all view Monsanto’s presence in Africa as an outreach in corporate responsibility. Some see it as another way for Monsanto to improve its bottom line. Opponents see the company as trying to take control of African agriculture and destroy African agricultural practices that have lasted for thousands of years.

PHILANTHROPY The Monsanto Fund contributes to educational opportunities and the needs of com- munities across the world. One recipient of the Monsanto Fund is Nanmeng Village in China. The company is helping to train farmers in the area about ways to improve agricultural methods and infrastructure development. The Monsanto Company also committed $10 million to provide fellowship opportunities for Ph.D. students seeking to get their degree in rice or wheat plant breeding.

Another program implemented by the company is the Matching Gifts Program. This program matches employee contributions to charitable and educational organizations, dollar-for-dollar, by the Monsanto Fund. The program matches a maximum of $5,000 per employee every year and includes organizations supporting the environment, arts and culture, and disaster relief, among many others.

In the first decade of the twenty-first century, Monsanto supported youth programs and donated nearly $1.5 million in scholarships to students wanting to pursue agriculture-related degrees. The company supports 4-H programs and the program Farm Safety 4 Just Kids, a program that teaches rural children about safety while working on farms. Monsanto also partnered with the organization Agriculture Future of America (AFA), providing more than $100,000 in scholarships to youth in eight states who want to pursue agricultural careers.

THE FUTURE OF MONSANTO Monsanto faces challenges that it must address, including lingering concerns over the safety and the environmental impact of its products. The company needs to enforce its code of conduct effectively to avoid organizational misconduct. Monsanto also faces increased competition from other companies. The seed company Pioneer Hi-Bred International, Inc., uses pricing strategies and seed sampling to attract price- conscious customers. Chinese companies are formidable rivals for Monsanto since their weed killers began eating into some of Monsanto’s Roundup profits. As a result, Monsanto announced plans to restructure the Roundup area of the business.

Yet despite the onslaught of criticism from Monsanto detractors and the challenge of increased competition from other companies, Monsanto has numerous opportunities to thrive in the future. The company is currently working on new innovations that could increase its competitive edge as well as benefit farmers worldwide. For example, Monsanto has teamed up with a Danish biotechnology firm to develop microscopic organisms that could be used to aid plant growth and ward off pests. These microorganisms could be a possible alternative to GM seeds. The company is also taking advantage of big data and its potential uses for farming. Monsanto’s inroads into the computing industry are likely to grow in the coming years.

Although Monsanto has made ethical errors in the past, it is trying to portray itself as a socially responsible company dedicated to improving agriculture. As noted, the company still has problems. The predictions from Monsanto critics about biotech food have not yet come true, but that has not eradicated the fears among stakeholders. Non-GM food products are becoming more popular, despite their increased costs. Sales of non-GM food grew 28 percent in 1 year to about $3 billion. Faced with the

Case 3 • Monsanto Balances the Interests of Multiple Stakeholders 351

increasing popularity of organic food and staunch criticism from opponents, Monsanto needs to continue working with stakeholders to promote its technological innovations and eliminate fears concerning its industry.

SOURCES “$700 Million settlement in Alabama PCB lawsuit,” New York Times, August 21, 2001, http://www. nytimes.com/2003/08/21/business/700-million-settlement-in-alabama-pcb-lawsuit.html (accessed April 20, 2015); Associated Press, “Another wheat lawsuit,” Kansas City Star, July 8, 2013, http://www. kansascity.com/2013/07/08/4334882/another-wheat-lawsuit-filed-against.html (accessed April 20, 2015); Donald L. Barlett and James B. Steele, “Monsanto’s harvest of fear,” Vanity Fair, May 5, 2008, http:// www.vanityfair.com/politics/features/2008/05/monsanto200805 (accessed April 20, 2015); Drake Bennett, “What are they doing at Monsanto?” Bloomberg Businessweek, July 3, 2014, pp. 52–59; Dennis K. Berman, Gina Chon, and Scott Kilman, “Monsanto pushes deeper into China,” Wall Street Journal, July 11, 2011, pp. B1–B2; Ian Berry, “The future of patent law rest in a farmer’s hands,” Wall Street Journal, February 15, 2013, p. B1; Ian Berry, “Monsanto’s seeds sow a profit,” Wall Street Journal, January 7, 2011, p. B3; Ian Berry, “Pesticides make a comeback,” Wall Street Journal, May 21, 2013, http://online. wsj.com/article/SB10001424127887323463704578496923254944066.html (accessed April 20, 2015); Reverend Billy, “The promised land of the Robobee, Monsanto and DARPA,” Huffington Post, August 3, 2014, http://www.huffingtonpost.com/reverend-billy/the-promised-land-of-the-_b_5441190.html (accessed April 20, 2015); Lindsey Boerma, “Critics slam Obama for protecting Monsanto,” CBS NEWS, March 28, 2013, http://www.cbsnews.com/8301-250_162-57576835/critics-slam-obama-for-protecting- monsanto/ (accessed April 20, 2015); Jacob Bunge, “EPA urges limits on GMO corn; bug adapts,” Wall Street Journal, March 6, 2015, p. B1; Jacob Bunge, “GMOs, under assault, have a new defender,” Wall Street Journal, September 4, 2014, pp. B1–B2; Jacob Bunge, “Judge overturns GMO crop curbs in Hawaii,” Wall Street Journal, August 26, 2014, p. B1; Jacob Bunge, “Monsanto slams weed-killer finding,” Wall Street Journal, March 24, 2015, p. B2; Jacob Bunge, “Monsanto strikes deal to develop plant microbes,” Wall Street Journal, December 11, 2013, p. B4; Jacob Bunge, “U.S. corn exports to China dry up over GMO concerns,” Wall Street Journal, April 11, 2014, p. B1; “China GMO corn approval seen spurring recovery in U.S. imports,” Bloomberg, December 18, 2014, http://www. bloomberg.com/news/articles/2014-12-18/china-gmo-corn-approval-seen-spurring-recovery-in-u-s-imports (accessed April 20, 2015); “CR’s 100 best corporate citizens 2014,” CR Magazine, March/April 2014, pp. 1-7; “DuPont and Monsanto agree to end lawsuits,” Bloomberg, March, 26, 2013, http://www.bloomberg. com/news/2013-03-26/dupont-monsanto-agree-to-end-lawsuits.html (accessed April 20, 2015); Nina Easton, “Why the march on genetically modified food hurts the hungry,” Fortune, June 10, 2013, p. 64; Economist Staff, “Field research,” Economist, November 8, 2014, p. 82; “Even small doses of popular weed killer fatal to frogs, scientist finds,” ScienceDaily, August 5, 2005, http://www.sciencedaily.com/ releases/2005/08/050804053212.htm (accessed April 20, 2015); E. Freeman, “Seed police?” Monsanto, November 10, 2008, http://www.monsanto.com/newsviews/Pages/Seed-Police-Part-4.aspx (accessed April 20, 2015); Crystal Gammon and Environmental Health News, “Weed-whacking herbicide proves deadly to human cells,” Scientific American, June 23, 2009, http://www.scientificamerican.com/article. cfm?id=weed-whacking-herbicide-p&page=3 (accessed April 20, 2015); David Alire Garcia and Adriana Barrera, “Mexico postpones approval of large-scale GM corn fields,” Reuters, November 22, 2012, http://www.reuters.com/article/2012/11/23/us-mexico-corn-idUSBRE8AM00O20121123 (accessed April 20, 2015); Annie Gasparro, “GMO fight ripples down food chain,” Wall Street Journal, August 8, 2014, p. A1; Ellen Gibson, “Monsanto,” BusinessWeek, December 22, 2008, p. 51; Carey Gillam, “UPDATE 1- Monsanto unapproved GMO wheat stored in Colorado through ‘11,” Reuters, June 28, 2013, http://www. reuters.com/article/2013/06/28/monsanto-wheat-idUSL2N0F40QR20130628 (accessed April 20, 2015); Seralini Gilles-Eric, Emilie Clair, Robin Mesnage, Steeve Gress, Nicolas Defarage, Manuela Malatesta, … Joel Spiroux de Vendomois (2013), “Long term toxicity of a roundup herbicide and a roundup- tolerante genetically modified maize,” Food and Chemical Toxicology, 57, March, 476–483; “GMOs under a microscope,” Science and Technology in Congress, October 1999, http://www.aaas.org/spp/cstc/ pne/pubs/stc/bulletin/articles/10-99/GMOs.htm (accessed March 25, 2009); Michael Grunwald, “Monsanto hid decades of pollution,” Washington Post, January 1, 2002, p. A1; Jean Guerrero, “Altered corn advances slowly in Mexico,” Wall Street Journal, December 9, 2010, p. B8; Georgina Gustin, “Justice Department ends Monsanto antitrust probe,” St. Louis Post-Dispatch, November 19, 2012, http://www. stltoday.com/business/local/justice-department-ends-monsanto-antitrust-probe/article_667ceab6-e568- 57c8-a110-3d99efc31c4c.html (accessed April 20, 2015); Brian Hindo, “Monsanto: Winning the ground war,” BusinessWeek, December 5, 2007, pp. 35–41; “India’s Green Counter-Revolution,” Wall Street, February 13, 2010, http://online.wsj.com/article/SB10001424052748704140104575058383515565108.html (accessed April 20, 2015); Jutia Group, “Monsanto mania: the seed of profits,” iStockAnalyst, http:// www.istockanalyst.com/article/viewarticle.aspx?articleid=1235584&zoneid=Home (accessed April 20, 2015);

352 Case 3 • Monsanto Balances the Interests of Multiple Stakeholders

Jack Kaskey, “Monsanto says rogue wheat in Oregon may be sabotage,” Bloomberg, June 5, 2013, http:// www.bloomberg.com/news/2013-06-05/monsanto-says-rogue-wheat-didn-t-contaminate-oregon-seed.html (accessed April 20, 2015); Jack Kaskey, “Monsanto sets a soybean free,” Bloomberg Businessweek, February 1–8, 2010, p. 19; Jack Kaskey, “Monsanto ‘Warrior’ grant fights antitrust accusations, critics,” Bloomberg Businessweek, March 4, 2010, http://www.bloomberg.com/apps/news? pid=newsarchive&sid=axVdNmPtSgts (accessed April 20, 2015); Margie Kelly, “Top 7 genetically modified crops,” Huffington Post, October 30, 2012, http://www.huffingtonpost.com/margie-kelly/ genetically-modified-food_b_2039455.html (accessed April 20, 2015); Scott Kilman, “Monsanto’s net profit declines by 45%,” Wall Street Journal, July 1, 2010, p. B7; Mark Memmot, “Supreme Court rules for Monsanto in case against farmer,” NPR, May 13, 2013, http://www.npr.org/blogs/thetwo-way/2013/05/ 13/183603368/supreme-court-rules-for-monsanto-in-case-against-farmer (accessed April20, 2015); John W. Miller, “Monsanto loses case in Europe over seeds,” Wall Street Journal, July 7, 2010, p. B1; Monsanto Company, “Backgrounder: glyphosate and environmental fate studies,” http://www.monsanto. com/glyphosate/documents/glyphosate-and-environmental-fate-studies.pdf (accessed April 20, 2015); Monsanto Company, “India cotton success,” http://www.monsanto.com/improvingagriculture/pages/ celebrating-bollgard-cotton-india.aspx (accessed April 20, 2015); Monsanto Company, “Code of ethics for chief executives and senior financial officers,” February 19, 2003, http://www.monsanto.com/ whoweare/Pages/code-of-ethics.aspx (accessed April 20, 2015); “Monsanto Company—company profile, information, business description, history, background information on Monsanto Company,” http:// www.referenceforbusiness.com/history2/92/Monsanto-Company.html (accessed April 20, 2015); Monsanto Company, “Corporate profile,” http://www.monsanto.com/investors/Pages/corporate-profile. aspx (accessed April 20, 2015); Monsanto Company, “Do GM crops increase yields?” http://www. monsanto.com/newsviews/Pages/do-gm-crops-increase-yield.aspx (accessed April 20, 2015); Monsanto Company, “Financial highlights,” http://www.monsanto.com/investors/pages/financial-highlights.aspx (accessed April 20, 2015); Monsanto Company, “Is Bt or GMO cotton the reason for Indian farmer suicides,” http://www.monsanto.com/newsviews/pages/india-farmer-suicides.aspx (accessed April 20, 2015); Monsanto Company, “Monsanto code of business conduct,” http://www.monsanto.com/ SiteCollectionDocuments/Code-of-Business-Conduct-PDFs/code_of_conduct_english.pdf (accessed April 20, 2015); Monsanto Company, “Virus resistant cassava for Africa (VIRCA),” http://www.monsanto.com/ improvingagriculture/pages/virus-resistant-cassava-for-africa.aspx (accessed April 20, 2015); Monsanto Company, “What is Monsanto doing to help?” http://www.monsanto.com/improvingagriculture/Pages/ what-is-monsanto-doing-to-help.aspx (accessed April 20, 2015); Monsanto Company, “Youth and education,” http://www.monsanto.com/whoweare/Pages/youth-and-education.aspx (accessed August 15, 2014); The Monsanto Fund website, http://www.monsantofund.org/ (accessed April 20, 2015); Akane Otani, “America’s most loved and most hated companies,” Bloomberg, February 5, 2015, http://www. bloomberg.com/news/articles/2015-02-05/america-s-most-loved-and-most-hated-companies (accessed April 20, 2015); Claire Oxborrow, Becky Price, and Peter Riley (2008), “Breaking free,” Ecologist, 38(9), November, 35–36; “The parable of the sower,” Economist, November 21, 2009, pp. 71–73; Mark Peters and Kris Maher, “Monsanto settles lawsuits,” Wall Street Journal, February 25–26, 2012, p. B3; Michael Pollan, “Playing god in the garden,” New York Times Magazine, October 25, 1998, http://www. michaelpollan.com/article.php?id=73 (accessed April 20, 2015); Nancy Remsen, “Lawsuit challenges Vermont’s GMO labeling law,” USA Today, June 12, 2014, http://www.usatoday.com/story/news/nation/ 2014/06/12/lawsuit-challenges-vermonts-gmo-labeling-law/10402301/ (accessed April 20, 2015); Matt Ridley, “The perils of always ignoring the bright side,” Wall Street Journal, http://online.wsj.com/article/ SB10000872396390444004704578030340322277954.html (accessed April 20, 2015); Connor Adam Sheets, “Farmers and food safety advocates lead Monsanto backlash,” Salon, March 27, 2013, http://www.salon. com/2013/03/27/farmers_and_food_safety_advocates_lead_monsanto_backlash_ partner/ (accessed April 20, 2015); Elizabeth Weise, “Monsanto in dispute with veggie farmers,” USA Today, March 18, 2014, p. 7B; G. M. Williams, R. Kroes, and I. C. Monro, “Safety evaluation and risk assessment of the herbicide roundup and its active ingredient, glyphosate, for humans,” NCBI, April 2000, http://www.ncbi.nlm.nih.gov/pubmed/10854122 (accessed April 20, 2015); World Health Organization, “Food security,” http://www.who.int/trade/glossary/story028/en/ (accessed April 20, 2015).

QUESTIONS 1. If you were Monsanto’s CEO, how would you best balance the conflicting

needs of the variety of stakeholder groups that Monsanto must successfully engage?

2. Companies, like Monsanto, that can offer technology to improve human lives are often said to have a moral obligation to society. How can Monsanto best fulfill

Case 3 • Monsanto Balances the Interests of Multiple Stakeholders 353

this moral obligation while also protecting society and the environment from the potential negative consequences of its products?

3. Monsanto has developed a differentiated, patent-protected product that pro- duces superior yields when compared to traditional seeds. How has this success- ful marketing strategy been impacted by the potential negative side effects and the potential negative environmental impact of genetically modified seeds?

4. What can Monsanto do to alleviate stakeholder concerns? How could these actions be woven into the marketing strategy for the company’s products?

354 Case 3 • Monsanto Balances the Interests of Multiple Stakeholders

New Belgium Brewing (A): Social Responsibility as Competitive Advantage*

Synopsis: From its roots in a Fort Collins, Colorado, basement, New Belgium Brewing has always aimed for business goals loftier than profitability. The company’s tremendous growth to become the nation’s third-largest craft brewery and ninth-largest overall has been guided by a steadfast brand- ing strategy based on customer intimacy, social responsibility, and whimsy. The company’s pro- ducts, especially Fat Tire Amber Ale, have always appealed to beer connoisseurs who appreciate New Belgium’s focus on sustainability as much as the company’s world-class brews. Despite its growth and success, New Belgium has managed to stay true to its core values and brand authenticity—the keys to its marketing advantage in the highly competitive craft brewing industry.

Themes: Customer intimacy, competitive advantage, social responsibility, sustainability, branding strategy, product strategy, distribution strategy, marketing implementation, customer relationships

Many companies that are frequently cited as examples of successful businesses are large corporations. However, the success of small businesses can be just as notewor- thy, while often having the greatest impact on local communities and neighborhoods. These businesses create jobs and provide goods and services for customers in smal- ler markets that larger corporations often are not interested in serving. Moreover, they also contribute money, resources, and volunteer time to local causes. By serv- ing these markets, small businesses are not only being socially responsible but are also seizing upon a lucrative opportunity to sell goods and services to underserved consumers.

One such small business is the New Belgium Brewing Company, based in Fort Collins, Colorado. The New Belgium brand has become known for two things: its high-quality, Belgian-style beers and its commitment toward sustainability. Its socially responsible initiatives have contributed greatly to NBB’s success. In fact, New Belgium’s business model has been so successful that it is increasingly easy to find its beers around the country as more consumers embrace what the company stands for. Studies have shown that the stock prices of ethically and socially respon- sible companies as a whole outperform those on the S&P 500 index. Although New Belgium is not a public company and thus does not offer publicly owned stock, it seems to follow this trend of success. The company has become the seventh-largest brewery in the nation (and the third-largest “craft” brewery).

HISTORY OF THE NEW BELGIUM BREWING COMPANY The idea for the NBB began with a bicycling trip through Belgium—home to some of the world’s finest ales, many of which have been brewed for centuries in that coun- try’s monasteries. As Jeff Lebesch, an American electrical engineer, cruised around

CASE

*O. C. Ferrell and Jennifer Sawayda, University of New Mexico, prepared this case for classroom dis- cussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. We appreciate the input and assistance of Greg Owsley, New Belgium Brewing, in developing this case. All sources used for this case were obtained through publicly avail- able material and the New Belgium Brewing website.

355

that country on his fat-tired mountain bike, he wondered whether he could produce such high-quality beers back home in Colorado. After acquiring the special strain of yeast used to brew Belgian-style ales, Lebesch returned home and began to experi- ment in his Colorado basement. When his beers earned thumbs up from friends, Lebesch decided to market them.

The NBB opened for business in 1991 as a tiny basement operation in Lebesch’s home in Fort Collins. Lebesch’s wife at the time, Kim Jordan, became the firm’s mar- keting director. They named their first brew “Fat Tire Amber Ale” in honor of Lebesch’s bike ride through Belgium. Initially, getting New Belgium beer onto store shelves was not easy. Jordan often delivered the beer to stores in the back of her Toyota station wagon. However, New Belgium beers quickly developed a small but devoted customer base, first in Fort Collins and then throughout Colorado. The brewery soon outgrew the couple’s basement and moved into an old railroad depot before settling into its present custom-built facility in 1995. The brewery includes two brew houses, four quality assurance labs, a wastewater treatment facility, a canning and bottling line, and numerous technological innovations for which New Belgium has become nationally recognized as a “paradigm of environmental efficiencies.” In 2015, it opened its second brewery in Asheville, North Carolina.

Under the leadership of Kim Jordan, who has since become CEO, NBB currently offers a variety of permanent and seasonal ales and pilsners. The company’s stan- dard line includes Sunshine Wheat, Blue Paddle, 1554, Ranger IPA, Abby, Shift, Trip- pel, Rampant, Slow Ride IPA, Snapshot, and the original Fat Tire Amber Ale, still the firm’s bestseller. Some customers even refer to the company as the Fat Tire Brewery. The brewery’s seasonal ales include Skinny Dip, Portage Porter, and Accumulation. The firm also started a Lips of Faith program, where small batch brews such as La Folie, Gruit, and Salted Belgian Chocolate Stout are created for internal celebrations or landmark events. Additionally, New Belgium is working in collaboration with other craft brewers to come up with new products. Through this, they hope to create improved efficiency and experimentation and take collaborative strides toward the future of American craft beer making. Some products resulting from these collabora- tions are a beer brewed with Anaheim and Marash Chilies in collaboration with Cigar City Brewing.

NBB’s most effective form of advertising has always been its customers’ word of mouth, especially in the early days. Indeed, before New Belgium beers were widely distributed throughout Colorado, one liquor-store owner in Telluride is purported to have offered people gas money if they would stop by and pick up New Belgium beer on their way through Fort Collins. Although New Belgium has expanded distribution to a good portion of the U.S. market, the brewery receives numerous e-mails and phone calls every day inquiring when its beers will be available in other parts of the country.

Although still a small brewery when compared to many beer companies, such as fellow Coloradan Coors, NBB has consistently experienced strong growth with esti- mated sales of more than $180 million (because New Belgium is a private firm, detailed sales and revenue numbers are not available). It now has its own blog, Twit- ter, and Facebook pages. The organization sells more than 800,000 barrels of beer per year and has many opportunities for continued growth. For instance, while total beer consumption has remained flat, the craft brewing industry is now at 11 percent. Growth for craft beer is likely to continue, as new generations of beer drinkers appear to favor beers that are locally brewed.

Currently, New Belgium’s products are distributed in 37 states plus the District of Columbia, British Columbia, and Alberta. It plans to begin distribution in Hawaii and Kentucky in 2015. Beer connoisseurs that appreciate the high quality of NBB’s products, as well as the company’s environmental and ethical business practices, have driven this growth. For example, when the company began distribution in Minnesota, the beers were so popular that a liquor store had to open early and

356 Case 4 • New Belgium Brewing (A): Social Responsibility as Competitive Advantage

make other accommodations for the large amount of customers. The store sold 400 cases of Fat Tire in the first hour it was open.

With expanding distribution, however, the brewery recognized a need to increase its opportunities for reaching its far-flung customers. It consulted with Dr. Douglas Holt, an Oxford professor and cultural branding expert. After studying the company, Holt, together with former Marketing Director Greg Owsley, drafted a 70- page “manifesto” describing the brand’s attributes, character, cultural relevancy, and promise. In particular, Holt identified in New Belgium an ethos of pursuing creative activities simply for the joy of doing them well and in harmony with the natural environment.

With the brand thus defined, NBB worked with New York advertising agency Amalgamated to create a $10 million advertising campaign. The campaign would tar- get high-end beer drinkers, men aged 25 to 44, and highlight the brewery’s down- to-earth image. The grainy ads focused on a man, Charles the Tinkerer, rebuilding a cruiser bike out of used parts and then riding it along pastoral country roads. The product appeared in just 5 seconds of each ad between the tag lines, “Follow Your Folly … Ours Is Beer.” With nostalgic music playing in the background, the ads helped position the growing brand as whimsical, thoughtful, and reflective. NBB later re-released its Tinkerer commercial during the U.S. Pro Challenge. The re- released commercial had an additional scene with the Tinkerer riding part way next to a professional cyclist contestant, with music from songwriter and Tour de Fat enthusiast Sean Hayes. The commercial was featured on the National Broadcasting Company television network.

In addition to the ad campaign, the company maintains its strategy of promotion through event sponsorships and digital media. To launch its Ranger IPA beer, New Belgium created a microsite and an online video of its NBB sales force dressed as rangers performing a hip-hop number to promote the beer. The only difference was that instead of horses, the NBB rangers rode bicycles. The purpose of the video was to create a hip, fun brand image for its new beer, with the campaign theme “To Pro- tect. To Pour. To Partake.”

New Belgium Embraces Social Responsibility According to New Belgium, the company maintains a fundamental focus on the ethi- cal culture of the brand. Although consumer suspicion of business is at an all-time high, those in good standing—as opposed to those trading on hype—are eyed with icon-like adoration. Today, businesses that fully embrace citizenship in the commu- nities they serve can forge enduring bonds with customers. At New Belgium, the syn- ergy between branding and corporate citizenship occurred naturally as the firm’s ethical culture (in the form of core values and beliefs) and was in place long before NBB had a marketing department.

Back in early 1991, when New Belgium was just a fledgling home-brewed busi- ness, Jeff and Kim took a hike into Rocky Mountain National Park. Armed with a pen and a notebook, they took their first stab at what the company’s core purpose would be. If they were going forward with this venture, what were their aspirations beyond profitability? What was at the heart of their dream? What they wrote down that spring day, give or take a little editing, was the core values and beliefs you can read on the NBB website today. More importantly, ask just about any New Belgium employee and he or she can list for you many, if not all, of these shared values and can inform you which are the most personally poignant. For NBB, branding strate- gies are as rooted in its company values as in its other business practices. For instance, as a way to live out its values, the company adopted a triple bottom line (TBL) approach to business. TBL incorporates economic, social, and environmental factors into its business strategies. In other words, the company looks at its impact upon profits, people, and the planet rather than simply on the bottom line. New

Case 4 • New Belgium Brewing (A): Social Responsibility as Competitive Advantage 357

Belgium’s dedication to quality, the environment, and its employees and customers is expressed in its mission statement and core values:

Mission Statement:

To operate a profitable brewery which makes our love and talent manifest.

Company Core Values and Beliefs:

1. Remembering that we are incredibly lucky to create something fine that enhances people’s lives while surpassing our consumers’ expectations.

2. Producing world-class beers. 3. Promoting beer culture and the responsible enjoyment of beer. 4. Kindling social, environmental, and cultural change as a business role model. 5. Environmental stewardship: minimizing resource consumption, maximizing

energy efficiency, and recycling. 6. Cultivating potential through learning, participative management, and the pur-

suit of opportunities. 7. Balancing the myriad needs of the company, staff, and their families. 8. Trusting each other and committing ourselves to authentic relationships, com-

munications, and promises. 9. Continuous, innovative quality and efficiency improvements. 10. Having fun.

Employees believe that these statements help communicate to customers and other stakeholders what New Belgium, as a company, is about. These simple values developed roughly 25 years ago are just as meaningful to the company and its custo- mers today, even though there has been much growth.

Responsibilities to the Environment New Belgium’s marketing strategy involves linking the quality of its products, as well as its brand, with the company’s philosophy of environmental friendliness. As chair of the sustainability subcommittee for its trade group the Brewers Association, NBB is at the forefront in advancing eco-friendly business processes among companies in its industry. Co-workers and managers from all areas of the organization meet monthly to discuss sustainability ideas as part of NBB’s natural resource manage- ment team. From leading-edge environmental gadgets and high-tech industry advancements to employee-ownership programs and a strong belief in giving back to the community, New Belgium demonstrates its desire to create a living, learning community.

NBB strives for cost-efficient energy-saving alternatives for conducting its busi- ness and reducing its impact on the environment. In staying true to the company’s core values and beliefs, the brewery’s employee-owners unanimously agreed to invest in a wind turbine, making New Belgium the first fully wind-powered brewery in the United States. NBB has also invested in the following energy-saving technologies:

• A smart grid installation that allows NBB to communicate with its electricity pro- vider to conserve energy. For example, the smart grid alerts NBB to nonessential operational functions, allowing the company to turn them off and save power.

• The installation of a 20 KW photovoltaic array on top of the packaging hall. The array produces three percent of the company’s electricity.

• A brew kettle, the second of its kind installed in the nation, which heats sheets of wort instead of the whole kettle at once. This kettle heating method conserves energy more than standard kettles do.

358 Case 4 • New Belgium Brewing (A): Social Responsibility as Competitive Advantage

• Sun tubes that provide natural daytime lighting throughout the brew house all year long.

• A system to capture its wastewater and extract methane from it. This can con- tribute up to 15 percent of the brewery’s power needs while reducing the strain on the local municipal water treatment facility.

• A steam condenser that captures and reuses the hot water that boils the barley and hops in the production process to start the next brew. The steam is redir- ected to heat the floor tiles and de-ice the loading docks in cold weather.

In April 2014, New Belgium was featured in a half-page advertisement supporting the EPA clean water rule that was introduced on March 26, 2014. Andrew Lemley, New Belgium’s Government Relations Director, was quoted in an EPA news release championing continued support for the Clean Water Act while also associating qual- ity water with quality beer.

In addition to voicing political support for environmental protections, New Belgium also takes pride in reducing waste through recycling and creative reuse strategies. The company strives to recycle as many supplies as possible, including cardboard boxes, keg caps, office materials, and the amber glass used in bottling. The brewery also stores spent barley and hop grains in an on-premise silo and invites local farmers to pick up the grains, free of charge, to feed their pigs. Going further down the road to producing products for the food chain, NBB is working with part- ners to take the same bacteria that create methane from NBB wastewater and con- vert them into a harvestable, high-protein fish food. NBB also buys recycled products when it can, and even encourages its employees to reduce air pollution by using alternative transportation. Reduce, Reuse, Recycle—the three R’s of environmental stewardship—are taken seriously at NBB. The company has been a proud member of the environmental group Business for Innovative Climate & Energy Policy (BICEP), and it signed BICEP’s Climate Declaration in 2013, which calls for American businesses, stakeholders, and regulators to address climate change. Case Exhibit 4.1 depicts New Belgium’s recycling efforts.

CASE EXHIBIT 4.1 New Belgium’s Recycling Efforts

WASTE DIVERSION

Spent Grain Recycling Landfill Compost

THE BREAKDOWN

90%

98%

SOURCE: Information obtained from the New Belgium Brewing website, http://www.newbelgium.com/Sustainability/ Environmental-Metrics/Waste.aspx (accessed May 5, 2015).

Case 4 • New Belgium Brewing (A): Social Responsibility as Competitive Advantage 359

Additionally, New Belgium has been a long-time participant in green building techniques. With each expansion of the facility, it has incorporated new technologies and learned a few lessons along the way. In 2002, NBB agreed to participate in the U.S. Green Building Council’s Leadership in Energy and Environment Design for Existing Buildings (LEED-EB) pilot program. From sun tubes and day lighting throughout the facilitytoreusingheatinthebrewhouse,NBBcontinuestosearchfornewwaystoclose loops and conserve resources.

NBB has made significant achievements in sustainability, particularly compared to other companies in the industry. For one, NBB’s goal is to use only 3.5 gallons of water to make 1 gallon of beer, which is more than 20 percent less than most other companies. The company is attempting to create a closed-loop wastewater system with its own Process Water Treatment Plant, in which microbes are used to clean the wastewater. NBB recycles over 99.9 percent of its waste, and today 100 percent of its electricity comes from renewable energy sources. Despite these achievements, it has no intention of halting its sustainability efforts. By 2015, the company hopes to reduce carbon emissions by 25 percent per barrel. To encourage sustainability throughout the supply chain, NBB adopted Sustainable Purchasing Guidelines. The Guidelines allow them to pinpoint and work closely with eco-friendly suppliers to create sustainability throughout the entire value chain. For its part, NBB conducts life-cycle analysis on its packaging components while continually seeking more efficient refrigeration and transportation technology that can be incorporated into its supply chain.

Responsibilities to Society Beyond its use of environmentally friendly technologies and innovations, New Bel- gium also strives to improve communities and enhance people’s lives through corpo- rate giving, event sponsorship, and philanthropic involvement. Since its inception, NBB has donated more than $7 million to philanthropic causes. For every barrel of beer sold the prior year, NBB donates $1 to philanthropic causes within their distri- bution territories. The donations are divided between states in proportion to their percentage of overall sales. This is the company’s way of staying local and giving back to the communities that support and purchase NBB products. NBB participates in 1 Percent for the Planet, a philanthropic network to which the company donates 1 percent of its profits. NBB employees also partnered with Habitat for Humanity to build a house for a family who had lost their home to a fire.

Funding decisions are made by NBB’s Philanthropy Committee, which com- prises employees throughout the brewery, including employee owners, area leaders, and production workers. NBB looks for nonprofit organizations that demonstrate creativity, diversity, and an innovative approach to their mission and objectives. The Philanthropy Committee also looks for groups that involve the community to reach their goals.

Additionally, NBB maintains a community bulletin board in its facility, where it posts an array of community involvement activities and proposals. This community board allows tourists and employees to see the different ways they can help out the community, and it gives nonprofit organizations a chance to make their needs known. Organizations can even apply for grants through the NBB website, which has a link designated for this purpose. The company donates to causes with a partic- ular emphasis on water conservation, sensible transportation and bike advocacy, sustainable agriculture, and youth environmental education, among other areas.

NBB also sponsors a number of events, with a special focus on those that involve “human-powered” sports that cause minimal damage to the natural environment. Through event sponsorships, such as the Tour de Fat, NBB supports various environ- mental, social, and cycling nonprofit organizations. In the Tour de Fat, one participant hands over his or her car keys and vehicle title in exchange for an NBB commuter bike and trailer. The participant is then filmed for the world to see as he or she promotes

360 Case 4 • New Belgium Brewing (A): Social Responsibility as Competitive Advantage

sustainable transportation over driving. In the course of 1 year, New Belgium can be found at anywhere from 150 to 200 festivals and events across the nation.

Responsibilities to Employees Recognizing employees’ role in the company’s success, New Belgium provides many generous benefits for its employees. In addition to the usual paid health and dental insurance and retirement plans, employees who stay with the company for 5 years earn an all-expenses paid trip to Belgium to “study beer culture.” Employees are also reimbursed for 1 hour of paid time off for every 2 hours of volunteer work that they perform. Perhaps most importantly, employees can also earn stock in the pri- vately held corporation, which grants them a vote in company decisions. Employees currently own 100 percent of company stock. Open book management allows employees to see the financial costs and performance of the company. Employees are provided with financial training so they can understand the books and ask ques- tions about the numbers.

New Belgium also wishes to get its employees involved not only in the company but in its sustainability efforts as well. To help their own sustainability efforts, employ- ees are given a fat-tired cruiser bike after 1 year’s employment so they can ride to work instead of drive. An onsite recycling center is also provided for employees. Addition- ally, each summer New Belgium hosts the Tour de Fat, where employees can dress in costumes and lead locals on a bike tour. Other company perks include inexpensive yoga classes, free beer at quitting time, and a climbing wall. To ensure that workers’ voices are heard, NBB has a democratically elected group of co-workers called POSSE. POSSE acts as a liaison between the board, managers, and employees.

Responsibility Breeds Success New Belgium Brewing’s efforts to live up to its own high standards have paid off with a very loyal following—in fact, the company recently expanded the number of tours it offers of its facilities due to such high demand. The company has also been the recipient of numerous awards. Past awards for NBB include the Business Ethics Magazine’s Business Ethics Award for its “dedication to environmental excellence in every part of its innovative brewing process,” its inclusion in the Wall Street Jour- nal’s 15 best small workplaces, and the award for best midsized brewing company of the year and best midsized brewmaster at the Great American Beer Festival. New Belgium has taken home medals for three different brews: Abbey Belgian Style Ale, Blue Paddle Pilsner, and La Folie specialty ale.

According to David Edgar, former director of the Institute for Brewing Studies, “They’ve created a very positive image for their company in the beer-consuming pub- lic with smart decision-making.” Although some members of society do not believe that a company whose major product is alcohol can be socially responsible, NBB has set out to prove that for those who make a choice to drink responsibly, the com- pany can do everything possible to contribute to society. NBB also promotes the responsible appreciation of beer through its participation in and support of the culi- nary arts. For instance, it frequently hosts New Belgium Beer Dinners, in which every course of the meal is served with a complementary culinary treat.

Although NBB has made great strides in creating a socially responsible brand image, its work is not done. It must continually reexamine its ethical, social, and environmental responsibilities. In 2004, it received the Environmental Protection Agency’s regional Environmental Achievement Award. It was both an honor and a motivator for the company to continue its socially responsible goals. After all, there are still many ways for NBB to improve as a corporate citizen. For example, although all electric power comes from renewable sources, the plant is still heated in part by using natural gas. There will always be a need for more public dialogue on avoiding

Case 4 • New Belgium Brewing (A): Social Responsibility as Competitive Advantage 361

alcohol abuse. Additionally, continued expansion requires longer distances to travel for distributing the product, which increases the use of fossil fuels. Perhaps as a way to deal with these longer distances and expand production capacity, NBB opened its second brewery in Asheville, North Carolina, in 2015. Practically speaking, the com- pany has a never-ending to-do list.

NBB executives acknowledge that as its annual sales increase, so do the chal- lenges to remain on a human scale and to continue to be culturally authentic. How to boldly grow the brand while maintaining its humble feel has always been a chal- lenge. Additionally, reducing waste to an even greater extent will take lots of work on behalf of both managers and employees, creating the need for a collaborative pro- cess that will require the dedication of both parties toward sustainability.

NBB also faces increased competition from other craft breweries. It still remains behind Boston Beer Co. (maker of Sam Adams beer) and Sierra Nevada in market share. Like NBB, Boston Beer Co. and Sierra Nevada have plans to expand, with Boston Beer allocating $35 million for capital investment projects at breweries in Massachusetts, Pennsylvania, and Ohio in 2012. NBB must also compete against craft beer alternatives released by traditional breweries, such as MillerCoor’s New Moon Belgian White. It must constantly engage in environmental scanning and competitive analysis to compete in this increasingly competitive environment.

Every six-pack of New Belgium Beer displays the phrase, “In this box is our labor of love. We feel incredibly lucky to be creating something fine that enhances people’s lives.” Although Jeff Lebesch and Kim Jordan are divorced and Lebesch has left the company to focus on other interests, the founders of NBB hope this state- ment captures the spirit of the company. NBB’s most important asset is its image—a corporate brand that stands for quality, responsibility, and concern for society. Defining itself as more than a beer company, the brewer also sees itself as a caring organization that is concerned for all stakeholders.

SOURCES “The 2011 world’s most ethical companies,” Ethisphere, Q1 2011, pp. 37–43; The facts of this case are from Peter Asmus (1999), “Goodbye coal, hello wind,” Business Ethics, 13, July/August, 10–11; “A tour of the New Belgium brewery—Act One,” LiveGreen Blog, April 9, 2007, http://www.livegreensd.com/ 2007/04/tour-of-new-belgium-brewery-act-one.html (accessed April 13, 2012); Robert Baun, “What’s in a name? Ask the makers of fat tire,” [Fort Collins] Coloradoan.com, October 8, 2000, pp. E1, E3; Beerpulse.com, “New Belgium 2014 update: Groundbreaking Hawaii, Kentucky, 3 Floyds Grätzer, FOCOIIab,” March 25, 2014, http://beerpulse.com/2014/03/new-belgium-2014-update-hawaii-kentucky- 2745/ (accessed August 18, 2014); The Brewer’s Association, “Craft brewer volume share of U.S. beer market reaches double digits in 2014,” March 16, 2015, http://www.brewersassociation.org/press- releases/craft-brewer-volume-share-of-u-s-beer-market-reaches-double-digits-in-2014/ (accessed April 7, 2015); Leigh Buchanan, “It’s all about ownership,” Inc., April 18, 2013,http://www.inc.com/audacious- companies/leigh-buchanan/new-belgium-brewing.html (accessed April 7, 2015); Karen Crofton, “How New Belgium brewery leads Colorado’s craft brewers in energy,” GreenBiz, August 1, 2014, http://www. greenbiz.com/blog/2014/08/01/how-new-belgium-brewery-leads-colorados-craft-brewers-energy (accessed August 18, 2014); Robert F. Dwyer and John F. Tanner, Jr., Business Marketing (Burr Ridge, IL: McGraw-Hill/Irwin, 1999), p. 104; Garrett Ellison, “New Belgium’s Biere de Garde, a collaboration with Brewery Vivant of Grand Rapids, hits shelves,” Michigan Live, December 10, 2012, http://www.mlive. com/business/west-michigan/index.ssf/2012/12/new_belgiums_biere_de_garde_a.html (accessed August 18, 2014); Environmental Protection Agency, “Here’s what they’re saying about the Clean Water Act proposed rule,” March 26, 2014, http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb8525 7359003fb69d/3f954c179cf0720985257ca7004920fa!OpenDocument (accessed August 18, 2014); Mike Esterl, “Craft brewers tap big expansion,” Wall Street Journal, December 28, 2011, http://online.wsj. com/article/SB10001424052970203686204577114291721661070.html (accessed August 18, 2014); “Four businesses honored with prestigious international award for outstanding marketplace ethics,” Better Business Bureau, press release, September 23, 2002, http://www.bbb.org/alerts/2002torchwinners.asp; Julie Gordon, “Lebesch balances interests in business, community,” Coloradoan.com, February 26, 2003; Del I. Hawkins, Roger J. Best, and Kenneth A. Coney, Consumer Behavior: Building Marketing Strategy, 8th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2001); “How New Belgium Brewing is positioning itself to

362 Case 4 • New Belgium Brewing (A): Social Responsibility as Competitive Advantage

remain independent,” Denver Post, January 15, 2013, http://blogs.denverpost.com/beer/2013/01/15/new- belgium-positio/7872/ (accessed April 16, 2013); “Industry profile: breweries,” First Research, October 17, 2011, http://www.firstresearch.com (accessed February 17, 2012); David Kemp, Tour Connoisseur, New Belgium Brewing Company, personal interview by Nikole Haiar, November 21, 2000; Dick Kreck, “Strange brewing standing out,” Denver Post, June 2, 2010, http://www.denverpost.com/lifestyles/ ci_15198853 (accessed August 18, 2014); Devin Leonard, “New Belgium and the battle of the microbrews,” Bloomberg Businessweek, December 1, 2011, http://www.businessweek.com/magazine/ new-belgium-and-the-battle-of-the-microbrews-12012011.html (accessed August 18, 2014); Karlene Lukovitz, “New Belgium Brewing gets ‘hopped up’,” Media Post News, February 3, 2010, http://www. mediapost.com/publications/article/121806/new-belgium-brewing-gets-hopped-up.html (accessed August 18, 2014); NBB Films, “NBBspotsonNBC,” NBB Films, YouTube, http://www.youtube.com/watch? v=KCnzyX-x-WQ (accessed August 18, 2014); New Belgium Brewing website, http://www.newbelgium. com (accessed August 18, 2014); “New Belgium Brewing announces Asheville as site for second brewery,” Denver Post, April 5, 2012, http://marketwire.denverpost.com/client/denver_post/release.jsp? actionFor=1595119 (accessed April 19, 2012); “New Belgium Brewing Company, Inc.,” Businessweek, http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=919332 (accessed August 18, 2014); New Belgium Brewing, Corporate Sustainability Report, New Belgium Brewing website, http://www.newbelgium.com/culture/alternatively_empowered/sustainable-business-story.aspx (accessed April 13, 2012); New Belgium Brewing, New Belgium Brewing: Follow Your Folly, May 9, 2007, http://www.newbelgium.com/Files/NBB_student-info-packet.pdf (accessed August 18, 2014); New Belgium Brewing, New Belgium Brewing Packaging Reduction Goals, 2014, http://www.newbelgium. com/files/sustainability/NBBPackagingReductionGoals2014.pdf (accessed April 7, 2015); New Belgium Brewing, Our Sustainable Success Story,http://www.newbelgium.com/files/sustainability/New_Belgium_ Sustainability_Brochure.pdf?pdf=sustainabilityreport (accessed April 7, 2015); New Belgium Brewing, “Philanthropy,” http://www.newbelgium.com/sustainability/Community/Philanthropy.aspx (accessed August 18, 2014); “New Belgium Brewing wins ethics award,” Denver Business Journal, January 2, 2003, http://www.bizjournals.com/denver/stories/2002/12/30/daily21.html (accessed August 18, 2014); One Percent for the Planet, “FAQ,” http://onepercentfortheplanet.org/about/faq-about-1ftp/ (accessed August 18, 2014); Greg Owsley, “The necessity for aligning brand with corporate ethics,” in Sheb L. True, Linda Ferrell, and O. C. Ferrell, eds., Fulfilling Our Obligation, Perspectives on Teaching Business Ethics (Atlanta, GA: Kennesaw State University Press, 2005), pp. 128–132; Steve Raabe, “New Belgium Brewing turns to cans,” Denver Post, May 15, 2008, http://www.denverpost.com/breakingnews/ ci_9262005 (accessed August 18, 2014); Steve Raabe, “Plans brewing for New Belgium facility on East Coast,” Denver Post, December 22, 2011, http://www.denverpost.com/business/ci_19597528 (accessed August 18, 2014); Bryan Simpson, “New Belgium Brewing: Brand building through advertising and public relations,” Michaelcoronado.com, http://www.michaelcoronado.com/michaelcoronado/images/ pdf/NBB_research/new_belgium_brewing.pdf (accessed August 18, 2014); Mike Snider, “Big brewers happy to go hoppy,” USA Today, October 30, 2013, p. 4B; Mike Snider, “Sales of craft beer are still bubbling up,” USA Today, April 3, 2014, p. 3B; Kelly K. Spors, “Top small workplaces 2008,” Wall Street Journal, February 22, 2009, http://online.wsj.com/article/SB122347733961315417.html (accessed August 18, 2014); “Tour de New Belgium,” Brew Public, November 23, 2010, http://brewpublic.com/places-to- drink-beer/tour-de-new-belgium/ (accessed April 16, 2013).

QUESTIONS 1. What environmental issues does the New Belgium Brewing Company work to

address? How has NBB taken a strategic approach to addressing these issues? Why do you think the company has taken such a strong stance toward sustainability?

2. Do you agree that New Belgium’s focus on social responsibility provides a key competitive advantage for the company? Why or why not?

3. What are the challenges associated with combining the need for growth with the need to maintain customer intimacy and social responsibility? Does NBB risk losing focus on its core beliefs if it grows too quickly? Explain.

4. Some segments of society contend that companies that sell alcoholic beverages and tobacco products cannot be socially responsible organizations because of the nature of their primary products. Do you believe that New Belgium’s actions and initiatives are indicative of a socially responsible corporation? Why or why not?

Case 4 • New Belgium Brewing (A): Social Responsibility as Competitive Advantage 363

New Belgium Brewing (B): Developing a Brand Personality*

Synopsis: This case, a follow up to New Belgium (A), discusses how New Belgium Brewing expanded its branding and communication strategy from a focus on word of mouth and event spon- sorship to include television advertising, web-based communication, and social media. The develop- ment of New Belgium’s “Brand Manifesto” is reviewed, along with the company’s decisions regarding media selection, messaging components, and advertising production. Despite the com- pany’s continued growth in terms of both distribution and promotional complexity, New Belgium has remained focused on its core values of customer intimacy, sustainability, whimsy, and fun.

Themes: Integrated marketing communication, branding strategy, positioning, advertising, customer intimacy, distribution strategy, sustainability, marketing implementation, customer relationships

The idea for the New Belgium Brewing Company began with a bicycling trip through Belgium. Belgium is arguably home to many of the world’s finest ales, some of which have been brewed for centuries in that country’s monasteries and small artisan brew- eries. As Jeff Lebesch, an American electrical engineer by trade and a home brewer by hobby, cruised around that country on his fat-tired mountain bike, he wondered whether he could produce such high-quality beers back home in Colorado. After acquiring the special strain of yeast used to brew Belgian-style ales, Lebesch returned home and began to experiment in his Colorado basement. When his beers earned thumbs up from friends, Lebesch decided to market them.

The New Belgium Brewing Company (NBB) opened for business in 1991 as a tiny basement operation in Lebesch’s home in Fort Collins. Lebesch’s wife at the time, Kim Jordan, handled all the marketing, sales, and deliveries from her station wagon. NBB beers quickly developed a small but devoted customer base, first in Fort Collins and then throughout Colorado. The brewery soon outgrew the couple’s basement and moved into an old railroad depot before settling into its present custom-built facility in 1995. The company’s standard product line has grown to include Sunshine Wheat, Blue Paddle Pilsner, 1554 Black Ale, Ranger IPA, Abby, Shift, Trippel, Rampant, Slow Ride IPA, Snapshot, and the original Fat Tire Amber Ale, still the firm’s bestseller. Today, NBB is America’s third-largest craft brewer; with Sam Adams (owned by Boston Beer Company) number one and Sierra Nevada number two. The craft beer market accounts for more than 5.5 percent of the total U.S. beer market. However, it is the fastest growing segment of the U.S. alcoholic beverage market. Case Exhibit 5.1 illustrates that craft beer’s overall market share has increased more than 100 percent in the last decade, with market share rising rap- idly since 2005. Today the market share of craft beers is at 11 percent.

CASE

*Bryan Simpson, New Belgium Brewing, 500 Linden Street, Fort Collins, CO 80524. All rights reserved. This case was prepared for classroom discussion rather than to illustrate effective or ineffective han- dling of an administrative situation. Jennifer Sawayda, University of New Mexico, provided editorial assistance.

364

NEW BELGIUM’S INITIAL MARKETING STRATEGY When a company grows as rapidly as NBB, the tendency is not to mess with a good thing. This applies to the beer portfolio, the culture, and the marketing process. For many years, the brewer, best known for Fat Tire Amber Ale, thrived on word- of-mouth communication to sell the brand. In fact, for the first 4 years of its exis- tence, NBB’s marketing consisted of traveling to beer festivals and handing out free samples. Relational marketing, done barstool to barstool, launched the advent of its Ranger Team—a sales staff who acts as brand stewards throughout the U.S. distribu- tion network. Each ranger has his or her own Facebook page as a way to enhance relationship marketing with the company’s customers.

When Greg Owsley was hired as marketing director in 1996, NBB became more focused and proactive in its marketing efforts. Festivals and sponsorships, coupled with print media in alternative weeklies, increased brand sales to over 100,000 bar- rels annually by 1998. (Ten years later, this number hit nearly 500,000 barrels, while today NBB sells more than 800,000 barrels of beer annually.) Owsley and his team introduced such signature NBB events as the multicity philanthropic bike festival, Tour de Fat. They launched an educational “Beerstream” in the form of a traveling slide show and beer tasting in an old Airstream trailer. NBB developed engaging con- tests such as “What’s Your Folly?” to invite consumers to pitch their Beerdream (an adventure enhanced by NBB beers) to win immortal fame on an NBB postcoaster (mailable postcard and coaster). All events, sponsorships, and interactive games have been bolstered by strategic purchase of print media advertising.

In 2003, as NBB expanded into northern California, it became evident that new avenues would have to be considered to effectively reach the increasingly far-flung consumer base. For the first time, NBB looked to a more formalized and systematic approach to analyzing its audience. A consulting firm conducted research in Color- ado and in other markets and suggested a mind-share approach to branding. How- ever, Owsley rejected the consulting firm’s suggestion and continued researching branding’s foremost progressive thinkers, eventually coming across the works of Douglas Holt.

CASE EXHIBIT 5.1 Craft Beer’s Share of the U.S. Beer Market

12%

10%

0% 1999

2.43% 2.92%

3.79%

5.70%

11%

2005 2007 2011 2014

SOURCE: Brewers Association, Boulder, Colorado.

Case 5 • New Belgium Brewing (B): Developing a Brand Personality 365

DEVELOPING A BRAND MANIFESTO Holt, then of Harvard Business School and currently with Oxford, is the leading pro- ponent of “cultural branding”—a philosophy of branding that tries to speak to ten- sions within society. Owsley contacted Holt after reading some of his published work online. The two agreed to meet, and Holt was hired as a consultant in Septem- ber 2003. Holt came to NBB on several occasions to study the brand and immerse himself in the brewery’s unique culture. This process led to the creation of a brand manifesto—a 70-page document, coauthored over many months by Owsley and Holt, describing the brand’s attributes, character, cultural relevancy, and potential. This opened the door to a relationship with Amalgamated, Inc., a young upstart advertising agency in New York. In discussing the brand with the agency, NBB’s cre- ative team collaborated with Amalgamated to flesh out the brand’s cultural contribu- tions and messaging components.

Television Commercial Working with the manifesto as a guide, Amalgamated explored a wide array of possi- bilities within a somewhat restrictive budget. Television, with its low cost per viewer and wide reach, quickly rose as the preferred option. It also seemed more authentic to embrace the medium where consumers expected to see advertising interwoven with entertainment.

Creating a television campaign for a craft brewer provided a litany of challenges and opportunities. The “Big Three” brewers—Anheuser-Busch Anheuser-Busch (now a wholly owned subsidiary of Anheuser-Busch InBev), Coors, and Miller have long dominated mainstream televised beer advertising in the United States. Boston Brewing’s foray into television several years back presented an interesting case study. The makers of Sam Adams started a campaign with founder Jim Koch deliver- ing a folksy voice-over that positioned Sam Adams as a beer of the highest quality. Over time, this morphed into televised spots that looked more and more like the positioning of America’s Big Three brewers.

Message Development NBB understood at the inception that the power of television could work to bolster or undermine the brand with equal efficacy. If the spots did not ring true to the NBB character, they could alienate the core consumers who had helped build the com- pany to this point. Within the ethos of NBB, Holt unearthed a mindset where a highly creative activity or avocation is pursued for the intrinsic value of doing it, as well as performed in a balanced manner with nature. It is the cultural counterpoint to the “urban professional.” The mindset personified is the mountain local who eschews a high-dollar job in Denver to pursue a simpler existence. It is the unsigned musician who writes songs just to entertain her friends. It is the amateur bread maker who bakes experimental breads and then hand delivers them on his bike. It is the juxtapo- sition of traditional American values that often compels workers into a position of compromising their true selves in order to exist within a modern technopoly—those people who live their lives in a way that emphasizes experience for the sake of expe- rience rather than for the sake of profit.

With these shared attributes in mind, the audience for NBB’s commercials would likely be the professional who follows the traditional route of existing within a capi- talist economy but still has artistic leanings and desires. These are the executives, lawyers, and accountants who live in Kansas or Missouri but come to Colorado for a ski week every year to indulge in the mountain lifestyle. These are folks who look at the mountain local and envy his dedication but could never fathom making that career sacrifice. The cultural tension then can be seen as the compromise between

366 Case 5 • New Belgium Brewing (B): Developing a Brand Personality

living the life one wants with balancing the economic needs of existing within a tech- nopoly. NBB beers could be positioned as a manifestation of that lifestyle. It would be possible to pop a cap off a Fat Tire in Springfield, Missouri, and travel metaphori- cally to the Colorado mountains and the mountain local’s life.

With this understanding, Amalgamated developed a series of storyboards for the commercials featuring the “Tinkerer,” a character who discovers an old cruiser bike that has been customized, modernized, and ultimately left for scrap. The Tinkerer then proceeds to strip the cruiser bike back down to its bare elements. The original boards featured three complete narratives with a potential fourth when Amalgam- ated flew to NBB to present its material at the company’s monthly staff meeting. True to a culture based on employee ownership and ownership mentality, every NBB employee was offered the opportunity to weigh in on the storyboards.

The NBB team reacted positively to the presentation with the exception of Amal- gamated’s suggested tagline: “Follow Your Folly… Ours Is Beer.” Several people sug- gested that folly had too negative a connotation or undermined the science and technology it took to produce such consistently high-quality beers. The debate built steam over several weeks, with the creative team suggesting that a word like folly had fallen so far from the vernacular that it was ripe for reinterpretation and a fresh new definition. Following one’s folly also aptly alluded to the ideal of offbeat endea- vors versus the traditional “follow the money” thinking that created the social ten- sions inherent to potential consumers’ lives. After a healthy volley of emails from nearly every NBB department, the creative team won out and “Follow Your Folly” became the campaign’s tagline.

Advertising Production At this stage in the process, a search for the right director for the commercials ensued. Amalgamated reviewed dozens of highlight reels and passed the most likely fits along to NBB. Much of the work represented had great visual power with big budget, 70-millimeter sheen. In the end, NBB went with Jake Scott, who suggested shooting the spots on grittier 16-millimeter film stock and giving the work a timeless feel influenced by the photography of the 1960s documentarian William Eggelston. Scott flew to the brewery to learn about NBB and then jumped into a car and scouted locations throughout Colorado. He sent still photos from a variety of locales, and ulti- mately the group committed to shooting in and around Hotchkiss and Paonia. After reviewing a tape of locals for potential casting shots outside bike shops in Fort Collins and Boulder, Scott decided on Boulder craftsman Charles Srbecky to play the Tinkerer. Srbecky, formerly of the Czech Republic, was an atypical choice with tousled hair, weathered features, and a maturity not seen in contemporary U.S. beer advertising.

In September 2004, members of NBB, Amalgamated, and the production company RSA out of Los Angeles met in Hotchkiss and commenced shooting over a 3-day period. Much of the talent and crew came from surrounding Colorado communi- ties. The production quickly took on a collaborative and improvisational feel reflective of NBB’s culture. Although great attention was paid to fulfilling the promise of Amalgamated’s storyboards, spontaneous opportunities were embraced as they arose. This led to no fewer than nine potential spots coming out of the 3-day shoot.

Amalgamated returned to New York to begin postproduction of the spots with NBB’s input. Choosing a musical bed quickly developed into the next creative chal- lenge. Editors at Whitehouse Post in New York tried a variety of genres, from pro- gressive to country alternative, and landed on an artist in the category of “Freak Folk” by the name of Devendra Banhart. Banhart’s tunes added a haunting sense of cheerful nostalgia to the works. With the 16-millimeter film stock giving a mid-1970s feel buoyed by Banhart’s acoustic tunes, the campaign took a far more muted and poignant tone than the ubiquitous mainstream beer advertising seen elsewhere. The

Case 5 • New Belgium Brewing (B): Developing a Brand Personality 367

NBB product appeared only in the final 5 seconds of film between the taglines, “Fol- low Your Folly… Ours Is Beer.” Quick to embrace the latent talents of their own crew, NBB allowed brewery employees to compose a reggae-like score for one of the 15-second spots—a playful little film called Joust.

Maintaining a Local Touch Even as NBB decided to speak to a wider audience through television, the roots-style marketing that launched the company could not be abandoned. It became even more important to speak to the insiders who helped build the brand in the same authentic and personal tone they had come to know and embrace. Rather than redirect ener- gies from event sponsorship to media, events became an even greater opportunity to maintain that vital dialogue. Rather than test the spots on focus groups, NBB turned to insiders in the bike community and friends of the brewery with some personal his- tory and knowledge of the brand. The theory was that television would reach those faraway outposts where Ranger sales staff penetration was difficult and not cost- effective. In mature markets, the personal touch would be redoubled.

The spots first aired in Arizona in January 2005, with a summer campaign to fol- low throughout the rest of the western United States. After viewing the NBB spots at a brewing industry conference in March 2005, Miller SAB vice president of market- ing, Bob Mikulay, had this to say:

At its heart, the basic proposition of beer has to be about fun. The small brewers have always done this well… often with great irreverence, quirkiness or just plain silliness… but always with a strong, instinctive understanding of the unique person- ality of their brands. And we need them to keep it coming… and even step it up a bit. In fact, I was encouraged to see New Belgium actually taking their brand of fun into a television spot.

Now humility will probably prevent Kim [Kim Jordan, CEO of New Belgium] from saying this later… but I believe that’s a truly great piece of advertising. Is there anybody who doesn’t now have a very good idea about what Fat Tire is all about? So the specialty and other small brewers are showing every sign that they are ready to fulfill their role in the industry better than ever.

In the end, NBB’s first television-based advertising campaign—approached with a great deal of inner reflection—mirrored well the craft brewer’s personality. In a sea of loud, flashy beer advertising aimed seemingly at a youthful demographic, NBB positioned itself as whimsical, thoughtful, and reflective. The bicycling imagery shot in Colorado gave a palpable sense of place to the brand among viewers on the coasts and in the plains. The iconic cruiser bike itself harkened the idea of creative play. The act of rescuing the bike from bad technology and neglect can be read as meta- phor for NBB’s efforts to recycle and reuse materials to the point of 98 percent diver- sion of their waste stream. The Tinkerer himself pays homage to the bicycle tour that NBB’s founder Jeff Lebesch took through Belgium that inspired his home-brewing shift toward Belgian-based beers. Even the texture of the film and the musical tone capture the ideals of whimsy and joy inherent to NBB’s philosophy of brewing and quality of life. At a time when marketers were seeking more insidious means to cut through the clutter, NBB chose to redefine a category in a very traditional medium where ads are acceptable and the rare good ones can still be groundbreaking, thoughtful, and effective.

Another television advertising campaign would not be launched until 8 years later. While NBB’s first television campaign was deemed very successful, and increases in sales in major markets were attributed to the campaign, the company believed that it had accomplished its advertising objectives. The advertising helped reinforce the brand manifesto developed by Greg Owsley and Doug Holt. The fun, folly, and whimsical image of the NBB brand were strengthened through the advertisements.

368 Case 5 • New Belgium Brewing (B): Developing a Brand Personality

In 2013, NBB decided to release another television advertising campaign called “Pairs Well with People.” The 30-second television advertisement was directed by skateboard pro Stacy Peralta and adopted the soundtrack from the March Fourth Marching Band. The ad described NBB as a company, highlighting the fact that it is environmentally conscious and 100 percent employee-owned. The campaign launched on four major networks in San Diego, Raleigh-Durham, Detroit, Grand Rapids, Chicago, Dallas, Atlanta, Milwaukee, Minneapolis, Fort Worth, and Indiana- polis. The major intent of the campaign was to spread awareness in markets that might be unfamiliar with the NBB brand, which is why the advertisement was not aired in Colorado and other places where NBB is well known. The campaign also featured four 15-second online videos of bar patrons that demonstrated how NBB’s beer “pairs wells with people.” The bar patrons acting in the video were all NBB employees.

NEW MEDIA, CONSISTENT BRAND MESSAGING Over the years, NBB has used a variety of different media to advertise its products and establish brand recognition. Although the type of media may change, NBB’s prin- ciples and brand image have remained the same. To reach audiences more efficiently and effectively, NBB has launched a series of web and print campaigns to promote NBB’s sustainability practices. NBB’s interactive website (http://www.newbelgium. com) provides visitors with an in-depth understanding of the company’s activities, goals, and values. When users first log on to the site, they are asked to provide their birthday to make sure they are 21 or older. Once on the site, visitors can choose from the topics of Beer, Brewery, Sustainability, Events, Grand Cru, and Shop. Its Grand Cru tab gives information about NBB’s reward program, which provides rewards for visiting NBB’s website, sharing the website through social networks, using NBB’s Beer Mode app, and going to NBB tours and events. Visitors that click on the Brew- ery tab can connect to NBB’s blog, whereas the Sustainability tab displays NBB’s philosophy and provides access to its goals and progress in environmental sustainability.

Today, NBB is using new forms of media to promote its brand while still main- taining its overall branding philosophy. Although the company has not ruled out new television advertisements, NBB has focused on other forms of “new media” such as social networking sites and digital videos to attract consumers to the brand. Often these digital marketing initiatives are supplemented by traditional media. When NBB released its Ranger IPA ale, for example, the company took out advertise- ments in Wired and Rolling Stone. It also created a digital marketing campaign incor- porating its own microsite and Facebook to encourage the information to go viral. The microsite featured a video of the NBB sales force dressed in tan-and-olive ranger uniforms performing a hip-hop number to promote the product, with the tagline “To Protect. To Pour. To Partake.” Rather than riding horses, however, the rangers rode bicycles to link the campaign to the brand. The microsite also included a “Ranger Yourself?” function that allowed users to paste a photo of their face to the body of a ranger and post the picture to their Facebook walls. According to NBB director of public relations, Bryan Simpson, the intent was to create a hip identity for the prod- uct and brand as a whole. Digital videos have been an important part of NBB’s mar- keting strategy to reach consumers from various parts of the nation. Many of its videos can be viewed on the company’s YouTube channel.

NBB also uses a range of other digital networking tools to promote its products. For instance, the firm has abandoned its newsletter in exchange for a blog, to which viewers can subscribe and receive news articles and feeds. NBB is jumping on the mobile marketing bandwagon with the development of the Beer Mode app. The app gives users access to exclusive content such as what beers are coming out, preselects

Case 5 • New Belgium Brewing (B): Developing a Brand Personality 369

messages for posting on social media sites during times when they are enjoying their beers, and enables users to locate retailers selling NBB beers in their immediate vicin- ity. NBB also posts photos in the mobile photo-sharing site Instagram and is active on Twitter. The Twitter team responds to NBB’s more than 227,000 followers in what web developer Kurt Herrman calls “a two-way street” of communication.

NBB is widely popular on Facebook as well. Facebook has been such an impor- tant digital marketing tool for NBB that the firm decided to monetize just how much its Facebook fans are worth to the company—and was pleasantly surprised at the results. After conducting a study, the organization found that its Facebook fans con- tribute $50.7 million in sales annually. NBB has become an expert at using digital media tools effectively to both attract and understand its customer base.

Although NBB may vary the types of media it utilizes, the company’s goals to be a truly sustainable brand have remained the same. Its message is, and always has been, that consumers can be environmentally conscious and still have fun. Some people scoff at the idea that a company that sells alcohol can be a socially responsi- ble brand, but with each new social and environmental initiative, NBB seeks to prove its critics wrong.

SUSTAINABLE BRANDING STRATEGY PRINCIPLES NBB has always remained committed to its initial mission of being a fun, socially, and environmentally responsible company. For instance, to learn more about the consumption habits and desires of its consumers, NBB developed and distributed a survey to 612 beer drinkers. The results indicate that 39 percent of beer consumers will make extra efforts to buy from and support sustainable companies. Larger stud- ies outside NBB suggest that as many as 60 million consumers frequently support businesses that broadcast their sustainable practices.

Studies also reveal that environmentally conscious consumers are on the look- out for deceptive business practices, such as greenwashing and spin doctoring, or as former NBB Marketing Director Greg Owsley put it, “casual dating between core values and brand [that] leaves both short of their optimal potential.” Because NBB has focused on sustainable business practices since the company’s inception, the authenticity of NBB’s environmentally conscious actions and messaging is solid. However, the challenge for NBB, and for other sustainable companies as well, is to convince the public of the genuineness of these claims, particularly because the pub- lic is often inundated with deceptive claims from businesses that want to appear green. To help businesses take a genuine approach to sustainability and communi- cate this approach to the public, NBB has adopted five principles that it calls its sus- tainable branding strategy:

• Walk before talk. This principle is perhaps the most apparent, but certainly no less challenging, as it requires the business to live up to its sustainable claims. The business must practice sustainability before promoting its environmentally friendly practices.

• Admit the flaws. Even NBB admits that its sustainable business practices are far from perfect. Instead of covering up flaws in their sustainability plans, busi- nesses should own up to them. Intelligent green consumers are likely to investi- gate a company’s green claims, and they will undoubtedly find areas that need improving. Preparing responses about how to address these flaws will convince consumers that the company recognizes the problems in their plan and will take a proactive stance to address them.

• Provide the smile. Green businesses should be optimistic, seeking to make their customers feel good about making a positive difference by being green rather than causing them to feel pessimistic and guilty about their actions.

370 Case 5 • New Belgium Brewing (B): Developing a Brand Personality

• Go slow to go fast. Be empathetic to the customer by not bogging them down with all the company’s core values at once. The purpose is communication: Make sure the customer clearly understands these values, which requires the company to go slow rather than throwing everything at the consumer.

• Make ripples. Starting out as a small company, NBB could not immediately expect its marketing efforts to take hold all at once. Companies must have a clear purpose and show commitment to the cause. Cause-based marketing is particularly useful because it convinces the company’s public that its advertise- ments are not just to promote its brand, but to create a positive difference as well. Of course, the public must be able to trust that a company’s cause-based marketing is sincere, which requires the previous steps to convince consumers of the company’s sustainable authenticity.

CONCLUSION NBB has strived to live out these principles, even when it means admitting mistakes. For instance, in 2005 an ex-employee accused NBB of greenwashing, or exaggerating its green marketing claims. He alleged that NBB’s claims of being “100 percent wind- powered” was misleading because the company still uses electricity and gas in its operations while purchasing energy-saving credits. While NBB initially dismissed the employee’s claims, it later admitted that it was in the wrong and modified its “100 percent wind-powered” statements. The company also began releasing sustain- ability reports, which are available on its website, to allow consumers to see both the company’s progress in sustainability and where the company still needs improve- ment. In so doing, NBB has followed its first two principles, admit the flaws and walk the talk, while increasing transparency into its operations.

Kim Jordon and NBB employees are quick to point out that NBB has been a long but joyful ride. The company has made much progress since it first started out as a small basement brewery. “For me brand is absolutely everything we are. It’s the peo- ple here. It’s how we interact with one another. And then there’s the other piece of that creativity, obviously, which is designing beers,” Kim Jordan said. The company consists of highly creative and innovative people to expand NBB’s sphere of influ- ence as a role model. Although Greg Owsley has since left the company, talented individuals such as Jenn Vervier, the Director of Strategy and Sustainability at NBB, are taking a leadership role in moving the company forward. NBB desires to spread its values of sustainability, quality, and folly among its stakeholders.

Although NBB is a much larger company than it was when it started more than two decades ago, its mission and core values have remained the same. Although employee numbers have increased, product offerings are more diverse, and market- ing media are ever-changing, NBB remains an example of a company that continues to have a strong, stable brand image—one that consumers continue to trust.

SOURCES Cotton Delo, “New Belgium toasts to its Facebook fans,” Advertising Age, February 13, 2012, http:// adage.com/article/news/belgium-toasts-facebook-fans/232681/ (accessed May 6, 2015); The Egotist Network, “New Belgium pairs well with people in new campaign from Denver’s cultivator,” Denver Egotist, May 20, 2013, http://www.thedenveregotist.com/news/local/2013/may/20/new-belgium-pairs-well- people-new-campaign-denvers-cultivator (accessed May 6, 2015); Janet Forgrieve from Rocky Mountain News, “Sales of craft beer make biggest jump in decade,” HighBeam Research, August 23, 2006, http:// www.highbeam.com/doc/1G1-149883191.html (accessed May 6, 2015); Jeremy Mullman, “Craft beer steps into wine country,” Advertising Age, June 19, 2006; New Belgium Brewing website, http://www. newbelgium.com (accessed May 6, 2015); New Belgium Brewing, “Beer mode,” http://www.newbelgium. com/app.aspx (accessed May 6, 2015); “New Belgium Brewing,” New Belgium, http://twitter.com/#!/

Case 5 • New Belgium Brewing (B): Developing a Brand Personality 371

newbelgium (accessed May 6, 2015); New Belgium Brewing, “Beer mode: A brand (spanking) new mobile app! For your consideration…,” April 23, 2013, http://wwwt.newbelgium.com/community/Blog/ 13-04-23/Beer-Mode-a-brand-spanking-new-mobile-app-For-your-consideration.aspx (accessed May 6, 2015); “New Belgium Brewing launches follow your folly campaign integrating web and print,” PRWeb, February 20, 2007, http://www.prweb.com/releases/2007/02/prweb506247.htm (accessed May 6, 2015); “New Belgium Brewing selects backbone to handle media,” New Belgium Brewing Social Media Release, September 10, 2008, http://legacy.pitchengine.com/newbelgiumbrewing/new-belgium-brewing- selects-backbone-to-handle-media (accessed May 6, 2015); “New Belgium new expansion,” Probrewer.com, May 30, 2006, http://www.probrewer.com/new-belgium-new-expansion/ (accessed April 19, 2012); Greg Owsley, “Sustainable branding: five steps to gaining the approval of the environmentally-conscious consumer,” Advertising Age, June 25, 2007; Greg Owsley, “The necessity for aligning brand with corporate ethics,” in Sheb True, Linda Ferrell, and O. C. Ferrell, eds., Fulfilling Our Obligation (Kennesaw, GA: Kennesaw State University Press, 2005); Ciara O’Rourke, “Brewer learns lesson about green marketing,” New York Times, February 3, 2009, http://green.blogs.nytimes. com/2009/02/03/brewer-learns-lesson-about-green-marketing/ (accessed May 6, 2015); Jonathan Shikes, “New Belgium airs TV commercials for the first time in eight years, but not in Colorado,” Westword, May 21, 2013, http://www.westword.com/restaurants/new-belgium-airs-tv-commercials-for-the-first-time- in-eight-years-but-not-in-colorado-5728121 (accessed May 6, 2015).

QUESTIONS 1. New Belgium has effectively used integrated marketing communications over

the last 20 years. Evaluate the use of one major advertising campaign to fortify and enhance its brand image.

2. NBB seemed to agonize over the use of the word “folly” in its advertising cam- paign. What do you make of the company’s struggle with this decision? Also, how do you personally feel about its use of the word?

3. NBB’s focus on sustainability, whimsy, and fun is clearly rooted in its Colorado- based culture and the ethos of its founders and employees. As NBB’s distribution continues to expand away from that locale, how can the company make its branding and messaging resonate with consumers in different parts of the country?

4. Currently, NBB has been much more successful using social media than compe- titors Boston Brewing Co. and Sierra Nevada. Evaluate how social media has contributed to the firm’s marketing strategy, and make suggestions for the use of social media in the future.

372 Case 5 • New Belgium Brewing (B): Developing a Brand Personality

Mattel Confronts Its Marketing Challenges*

Synopsis: As a global leader in toy manufacturing and marketing, Mattel faces a number of potential threats to its ongoing operations. Like most firms that market products for children, Mattel is ever mindful of its social and ethical obligations and the target on its corporate back. This case sum- marizes many of the challenges that Mattel has faced over the past decade, including tough compe- tition, changing consumer preferences and lifestyles, lawsuits, product liability issues, global sourcing, and declining sales. Mattel’s social responsibility imperative is discussed along with the company’s reactions to its challenges and its prospects for the future.

Themes: Environmental threats, competition, social responsibility, marketing ethics, product/branding strategy, intellectual property, global marketing, product liability, global manufacturing/sourcing, marketing control

It all started in a California garage workshop when Ruth and Elliot Handler and Matt Matson founded Mattel in 1945. The company started out making picture frames, but the founders soon recognized the profitability of the toy industry and switched their emphasis to toys. Mattel became a publicly owned company in 1960, with sales exceeding $100 million by 1965. Over the next 50 years, Mattel went on to become one of the world’s largest toy companies in terms of revenue. Today, Mattel, Inc. is a global leader in designing and manufacturing toys and family products. Well known for brands such as Barbie, Fisher-Price, Disney, Hot Wheels, Matchbox, Cabbage Patch Kids dolls, and board games, the company boasts nearly $6 billion in annual revenue. Headquartered in El Segundo, California, Mattel is the second-largest toy maker in the world. Today, approximately 46 percent of its sales are from interna- tional customers.

In spite of its overall success, Mattel has had its share of losses over its his- tory. During the mid- to late 1990s, Mattel lost millions to declining sales and bad business acquisitions. In January 1997 Jill Barad took over as Mattel’s CEO. Barad’s management style was characterized as strict and her tenure at the helm proved challenging for many employees. While Barad had been successful in building the Barbie brand to $2 billion by the end of the twentieth century, growth slowed in the early twenty-first. Declining sales at outlets such as Toys “R” Us marked the start of some difficulties for the retailer, responsibilities for which Barad accepted and resigned in 2000.

Robert Eckert replaced Barad as CEO. Aiming to turn things around, Eckert sold unprofitable units and cut hundreds of jobs. In 2000, under Eckert, Mattel was granted the highly sought-after licensing agreement for products related to the Harry Potter series of books and movies. The company continued to flourish and build its reputation, even earning the Corporate Responsibility Award from UNICEF in 2003. Mattel released its first Annual Corporate Responsibility Report the follow- ing year. Eckert retired as CEO in 2011 and was replaced by former COO Bryan Stockton.

CASE

*This case was prepared by Debbie Thorne, John Fraedrich, and OC Ferrell. Copyright © 2015. Jennifer Sawayda and Jennifer Jackson provided editorial assistance. This case is meant for classroom discus- sion and is not meant to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly avail- able materials.

373

MATTEL’S CORE PRODUCTS Mattel has a number of well-known brands under the Mattel and Fisher-Price names. Fisher-Price focuses more on toys for infants and has been a subsidiary of Mattel since 1993. Some of Mattel’s more popular brands through the years have included Barbie, Hot Wheels, and Cabbage Patch Kids dolls. This section will briefly describe these brands and their major influence on the success of Mattel. More recently, Mattel has partnered with DC Comics and Warner Bros. to launch a line of female action figures targeted toward girls aged 6 to 12.

Barbie and American Girl Among its many lines of popular toy products, Mattel is famous for owning top girls’ brands. In 1959, Mattel introduced a product that would change its future forever: the Barbie doll. After seeing her daughter’s fascination with cutout paper dolls, Ruth suggested that a three-dimensional doll should be produced so that young girls could live out their dreams and fantasies. This doll was named “Barbie,” the nickname of Ruth and Elliot Handler’s daughter. The first Barbie doll sported open- toed shoes, a ponytail, sunglasses, earrings, and a zebra-striped bathing suit. Fash- ions and accessories were also available for the doll. Although buyers at the annual Toy Fair in New York took no interest in the Barbie doll, little girls of the time cer- tainly did. The intense demand seen at the retail stores was insufficiently met for sev- eral years. Mattel just could not produce the Barbie dolls fast enough. Today, Barbie is Mattel’s flagship brand and its number one seller—routinely accounting for approximately half of Mattel’s profits. This makes Barbie the best-selling fashion doll in most global markets. Annual sales of the doll net approximately $1 billion. The Barbie line today includes dolls, accessories, Barbie software, and a broad assortment of licensed products such as books, apparel, food, home furnishings, home electronics, and movies.

Although Barbie is still a top brand among girls, sales have decreased in recent years. First, the changing lifestyles of today’s young girls are a concern for Mattel. Many young girls prefer to spend time with music, movies, or the Internet than play with traditional toys like dolls. Second, Barbie has suffered at the hands of new and innovative competition, including the Bratz doll line that gained significant market share during the early 2000s. The dolls, which featured contemporary, ethnic designs and skimpy clothes, were a stark contrast to Barbie and an immediate hit with young girls. By 2005, 4 years after the brand’s debut, Bratz sales were at $2 billion. In an attempt to recover, Mattel introduced the new line of My Scene dolls aimed at “tweens.” These dolls are trendier, look younger, and are considered to be more hip for this age group who is on the cusp of outgrowing playing with dolls. In spite of Mattel’s efforts, the doll industry has remained highly competitive. In 2014, Disney’s FrozenTM dolls were cited as a major reason for why Barbie sales had declined that year.

To supplement the Barbie line, in 1998 Mattel acquired a popular younger type of doll. Mattel announced it would pay $700 million to Pleasant Co. for its high-end American Girl collection. American Girl dolls are sold with books about their lives, which take place during important periods of U.S. history. The American Girls brand includes several book series, accessories, clothing for dolls and girls, and a magazine that ranks in the top 10 American children’s magazines.

The American Girl collection is popular with girls in the 7- to 12-year-old demo- graphic. The dolls have a wholesome and educational image that offsets Barbie’s image. This move by Mattel represented a long-term strategy to reduce reliance on traditional products and to take away the stigma surrounding the “perfect image” of Barbie. Each American Girl doll lives during a specific time in American history, and all have stories that describe the hardships they face while maturing into young

374 Case 6 • Mattel Confronts Its Marketing Challenges

adults. For example, Felicity’s stories describe life in 1774 just prior to the Revolu- tionary War. Likewise, Josefina lives in New Mexico in 1824 during the rapid growth of the American West.

Hot Wheels Hot Wheels roared into the toy world in 1968. Cofounder Elliot Handler recognized the potential demand for die-cast cars among boys and decided to create a toy that would compete with British company Lesney’s Matchbox toys (Lesney was later acquired by Mattel). The original hot wheels were 1:64 scale, but in 1970 they were expanded to include cars that were 1:43 scale. More than 45 years later, the brand is hotter than ever and includes high-end collectibles, NASCAR (National Association for Stock Car Auto Racing) and Formula One models for adults, high-performance cars, track sets, and play sets for children of all ages. The brand is connected with racing circuits worldwide. More than 15 million boys aged 5 to 15 are avid collectors, each owning 41 cars on average. Two Hot Wheels cars are sold every second of every day, and annual sales total approximately $755 million. The brand began with cars designed to run on a track and has evolved into a “lifestyle” brand with licensed Hot Wheels shirts, caps, lunch boxes, backpacks, and more.

Much like Barbie, there are many adult collectors of Hot Wheels. Many of these collectors were avid fans of Hot Wheels as children and continue to hold a favorable view of the toys as adults. Adult collectors are estimated to have about 1,550 cars on average. As a result, Mattel has created a Hot Wheels website for collectors. The website discusses upcoming Hot Wheels releases, special events, and other Hot Wheels news. Together, Hot Wheels and Barbie generate 25 percent of Mattel’s reve- nue in North America.

Fisher-Price Acquired in 1993 as a wholly owned subsidiary, Fisher-Price is the umbrella brand for all of Mattel’s infant and preschool lines. The brand is trusted by parents around the world and appears on everything from children’s software to eyewear, and books to bicycles. Some of the more classic products include the Rock-a-Stack, Power Wheels vehicles, and Little People play sets. Through licensing agreements, the brand also develops character-based toys such as Sesame Street’s Elmo, Disney’s Winnie the Pooh, and Nickelodeon’s Dora the Explorer.

Fisher-Price has built trust with parents by creating products that are educa- tional, safe, and useful. For example, the brand has earned high regard for innovative car seats and nursery monitors. Fisher-Price keeps pace with the interests of today’s families through innovative learning toys and award-winning products. One example is its Thomas & FriendsTM TrackmasterTM Avalanche Escape Set, which won Time to Play Magazine’s 2014 People’s Play Awards and Good Housekeeping Magazine’s 2014 Best Toys.

Cabbage Patch Kids Since the introduction of mass-produced Cabbage Patch Kids in 1982, more than 90 million dolls have been sold worldwide. In 1994, Mattel took over selling these beloved dolls after purchasing production rights from Hasbro. In 1996, Mattel cre- ated a new line of Cabbage Patch Kids doll, called Snacktime Kids, which was expected to meet with immense success. The Snacktime Kids had moving mouths that enabled children to “feed” them plastic snacks. However, the product backfired. The toy had no on/off switch and reports of children getting their fingers or hair caught in the dolls’ mouths surfaced during the 1996 holiday season. Mattel voluntar- ily pulled the dolls from store shelves by January 1997, and offered consumers a cash

Case 6 • Mattel Confronts Its Marketing Challenges 375

refund of $40 on returned dolls. The U.S. Consumer Product Safety Commission applauded Mattel’s handling of the Snacktime Kids situation. Mattel effectively man- aged a situation that could easily have created bad publicity or a crisis situation. In 2001, Toys “R” Us took over the Cabbage Patch brand from Mattel.

MATTEL’S COMMITMENT TO ETHICS AND SOCIAL RESPONSIBILITY Mattel’s core products and business environment create many ethical issues. Because the company’s products are designed primarily for children, it must be sen- sitive to social concerns about children’s rights. It must also be aware that the inter- national environment often complicates business transactions. Different legal systems and cultural expectations about business can create ethical conflicts. Finally, the use of technology may present ethical dilemmas, especially regarding consumer privacy. Mattel has recognized these potential issues and taken steps to strengthen its commitment to business ethics. The company also purports to take a stand on social responsibility, encouraging its employees and consumers to do the same.

Privacy and Marketing Technology One issue Mattel has tried to address repeatedly is that of privacy and online technol- ogy. Advances in technology have created special marketing issues for Mattel. The company recognizes that, because it markets to children, it must communicate with parents regarding its corporate marketing strategy. Mattel has taken steps to inform both children and adults about its philosophy regarding Internet-based marketing tools, such as the Hot Wheels website. This website contains a lengthy online privacy policy, part of which is excerpted below:

At our websites, online services or Apps directed to children under 13, we do not collect personal contact information (like full name, e-mail address, phone number or home address) without consent of a parent or legal guardian except in special, limited circumstances described below. We do not ask for more information than is necessary for a child to participate in the activity. We take steps to prevent children from posting or publicly disclosing personal contact information, like name, phone number or e-mail address, online, without parental consent.….1

Expectations of Mattel’s Business Partners Mattel, Inc. also makes a serious commitment to business ethics in its dealings with other industries. In late 1997 the company completed its first full ethics audit of each of its manufacturing sites as well as the facilities of its primary contractors. The audit revealed that the company was not using any child labor or forced labor, a problem plaguing other overseas manufacturers. However, several contractors were found to be in violation of Mattel’s safety and human rights standards and were asked to change their operations or risk losing Mattel’s business. The company now conducts unannounced audits in manufacturing facilities periodically.

In an effort to continue its strong record on human rights and related ethical standards, Mattel instituted a code of conduct entitled “Global Manufacturing Princi- ples” in 1997. One of these principles requires all Mattel-owned and contracted manufacturing facilities to favor business partners committed to ethical standards comparable with those of Mattel. Other principles relate to safety, wages, and

1Mattel, Inc., Online Privacy Policy, http://corporate.mattel.com/privacy-policy.aspx (accessed May 14, 2015).

376 Case 6 • Mattel Confronts Its Marketing Challenges

adherence to local laws. Mattel’s audits and subsequent code of conduct were designed as preventative, not punitive measures. The company is dedicated to creat- ing and encouraging responsible business practices throughout the world.

Mattel also claims to be committed to its workforce. Mattel cares deeply about increasing its employees’ skill sets and providing opportunities to excel. This reflects Mattel’s concern for relationships between and with employees and business partners. The company’s code is a signal to potential partners, customers, and other stake- holders that Mattel has made a commitment to fostering and upholding ethical values.

Legal and Ethical Business Practices Mattel prefers to partner with businesses similarly committed to high ethical standards. At a minimum, partners must comply with the local and national laws of the countries in which they operate. In addition, all partners must respect the intellectual property of the company, and support Mattel in the protection of assets such as patents, trade- marks, or copyrights. They are also responsible for product safety and quality, protect- ing the environment, customs, evaluation and monitoring, and compliance.

Mattel’s business partners must have high standards for product safety and quality, adhering to practices that meet Mattel’s safety and quality standards. Also, because of the global nature of Mattel’s business and its history of leadership in this area, the company insists that business partners strictly adhere to local and interna- tional customs laws. Partners must also comply with all import and export regula- tions. To assist in compliance with standards, Mattel insists that all manufacturing facilities provide the following:

• Full access for on-site inspections by Mattel or parties designated by Mattel. • Full access to those records that will enable Mattel to determine compliance

with its principles. • An annual statement of compliance with Mattel’s “Global Manufacturing Princi-

ples,” signed by an officer of the manufacturer or manufacturing facility.

With the creation of the Mattel Independent Monitoring Council (MIMCO), Mattel became the first global consumer products company to apply such a system to facilities and core contractors worldwide. The company seeks to maintain an inde- pendent monitoring system that provides checks and balances to help ensure that standards are met.

If certain aspects of Mattel’s manufacturing principles are not being met, Mattel will try to work with the factories to help them fix their problems. New partners will not be hired unless they meet Mattel’s standards. If corrective action is advised but not taken, Mattel will terminate its relationship with the partner in question. Overall, Mattel is committed to both business success and ethical standards, and it recog- nizes that it is part of a continuous improvement process.

Mattel Children’s Foundation Mattel takes its social responsibilities very seriously. Through the Mattel Children’s Foundation, established in 1978, the company promotes philanthropy and community involvement among its employees and makes charitable investments to better the lives of children in need. Funding priorities have included building a new Mattel Children’s Hospital at the University of California, Los Angeles (UCLA), sustaining the Mattel Family Learning Program, and promoting giving among Mattel employees.

In November 1998, Mattel donated a multiyear, $25 million gift to the UCLA Chil- dren’s Hospital. The gift was meant to support the existing hospital and provide for a new state-of-the-art facility. In honor of Mattel’s donation, the hospital was renamed Mattel Children’s Hospital at UCLA.

Case 6 • Mattel Confronts Its Marketing Challenges 377

The Mattel Family Learning Program utilizes computer learning labs as a way to advance children’s basic skills. Now numbering more than 80 throughout the United States, Hong Kong, Canada, and Mexico, the labs offer software and technology designed to help children with special needs or limited English proficiency.

Mattel employees are also encouraged to participate in a wide range of volunteer activities. Employees serving on boards of local nonprofit organizations or helping with ongoing nonprofit programs are eligible to apply for volunteer grants support- ing their organizations. Mattel employees contributing to higher education or to non- profit organizations serving children in need are eligible to have their personal donations matched dollar for dollar up to $5,000 annually.

Global Manufacturing Principles As a U.S.-based multinational company owning and operating facilities and contract- ing worldwide, Mattel’s “Global Manufacturing Principles” reflect not only its need to conduct manufacturing responsibly but also to respect the cultural, ethical, and phil- osophical differences of the countries in which it operates. These principles set uni- form standards across Mattel manufacturers and attempt to benefit both employees and consumers.

Mattel’s principles cover issues such as wages, work hours, child labor, forced labor, discrimination, freedom of association, and working conditions. Workers must be paid at least minimum wage or a wage that meets local industry standards (whichever is greater). No one under the age of 16 or the local age limit (whichever is higher) may be allowed to work for Mattel facilities. Mattel refuses to work with facilities that use forced or prison labor, or to use these types of labor itself. Addi- tionally, Mattel does not tolerate discrimination. The company states that an individ- ual should be hired and employed based on his or her ability—not on individual characteristics or beliefs. Mattel recognizes all employees’ rights to choose to associ- ate with organizations without interference. Regarding working conditions, all Mattel facilities and its business partners must provide safe working environments for their employees. In 2013, when China Labor Watch reported concerns that workers were being overworked and underpaid in Chinese factories making Mattel toys, Mattel launched an investigation to determine whether the allegations were true.

MATTEL FACES PRODUCT RECALLS Despite Mattel’s best efforts, not all overseas manufacturers have faithfully adhered to its high standards. Mattel has come under scrutiny over its sale of unsafe pro- ducts. In September 2007 Mattel announced recalls of toys containing lead paint. The problem surfaced when a European retailer discovered lead paint on a toy. An estimated 10 million individual toys produced in China were affected. Mattel quickly stopped production at Lee Der, the company officially producing the recalled toys, after it was discovered that Lee Der had purchased lead-tainted paint to be used on the toys. Mattel blamed the fiasco on the manufacturers’ desires to save money in the face of increasing prices. Mattel CEO Robert Eckert indicated that rising labor and raw material costs and the resulting pressure it created likely caused manufacturers to cut corners in order to save money.

The situation began when Early Light Industrial Co., a subcontractor for Mattel owned by Hong Kong toy tycoon Choi Chee Ming, subcontracted the painting of parts of Cars toys to another China-based vendor. The vendor, named Hong Li Da, decided to source paint from a nonauthorized third-party supplier—a violation of Mattel’s requirement to use paint supplied directly by Early Light. The products were found to contain “impermissible levels of lead.”

378 Case 6 • Mattel Confronts Its Marketing Challenges

On August 2, 2007, it was announced that another of Early Lights subcontrac- tors, Lee Der Industrial Co., used the same lead paint found on Cars products. China immediately suspended the company’s export license. Afterward, Mattel pin- pointed three paint suppliers working for Lee Der—Dongxin, Zhongxin, and Mingdai. This paint was used by Lee Der to produce Mattel’s line of Fisher-Price products. It is said that Lee Der purchased the paint from Mingdai due to an intimate friendship between the two company’s owners. On August 11, 2007, Zhang Shuhong, operator of Lee Der, hung himself after paying his 5,000 staff members.

Later that month, Mattel was forced to recall several more toys because of pow- erful magnets in the toys that could come loose and pose a choking hazard for young children. If more than one magnet is swallowed, the magnets can attract each other inside the child’s stomach, causing potentially fatal complications. Over 21 million Mattel toys were recalled in all, and parents filed several lawsuits claiming that these Mattel products harmed their children.

Mattel’s Response At first, Mattel blamed Chinese subcontractors for the huge toy recalls, but the com- pany later accepted a portion of the blame for its troubles, while maintaining that Chinese manufacturers were largely at fault. The Chinese view the situation quite dif- ferently. As reported by the state-run Xinhua news agency, the spokesman for Chi- na’s General Administration of Quality Supervision and Inspection and Quarantine (AQSIQ) stated that the importers were simply doing their jobs and that the toys con- formed to the necessary regulations when created. The spokesman placed the blame on Mattel’s quality control. Mattel also faced criticism from many of its consumers, who believed Mattel was denying culpability by placing much of the blame on China. Mattel was later awarded the 2007 “Bad Product” Award by Consumers International.

How did this crisis occur under the watch of a company praised for its ethics and high safety standards? Although Mattel had investigated its contractors, it did not audit the entire supply chain, including subcontractors. Such oversights left room for these violations. Mattel has also moved to enforce a rule that subcontractors can- not hire suppliers two or three tiers down. In a statement, Mattel says it has spent more than 50,000 hours investigating its vendors and testing its toys. Mattel also announced a three-point plan. This plan aimed to tighten Mattel’s control of produc- tion, discover and prevent the unauthorized use of subcontractors, and test the pro- ducts itself rather than depending on contractors.

The Chinese Government’s Reaction Chinese officials eventually did admit the government’s failure to properly protect the public. The Chinese government promised to tighten supervision of exported products, but effective supervision is challenging in such a large country that is so burdened with corruption. In January 2008 the Chinese government launched a 4-month-long nationwide product quality campaign, offering intensive training courses to domestic toy manufacturers to help them brush up on their knowledge of international product standards and safety awareness. As a result of the crack- down, AQSIQ announced that it had revoked the licenses of more than 600 Chinese toymakers. As of 2008 the State Administration for Commerce and Industry (SACI) released a report claiming that 87.5 percent of China’s newly manufactured toys met quality requirements. While this represents an improvement, the temptation to cut corners remains strong in a country that uses price, not quality, as its main competitive advantage. Where there is demand, there will be people trying to turn a quick profit.

Case 6 • Mattel Confronts Its Marketing Challenges 379

MATTEL VERSUS MGA In 2004, Mattel became embroiled in a bitter intellectual property rights battle with former employee Carter Bryant and MGA Entertainment, Inc. over rights to MGA’s popular Bratz dolls. Carter Bryant, an on-again/off-again Mattel employee, designed the Bratz dolls and pitched them to MGA. A few months after the pitch, Bryant left Mattel to work at MGA, which began producing Bratz in 2001. In 2002, Mattel launched an investigation into whether Bryant had designed the Bratz dolls while employed with Mattel. After 2 years of investigation, Mattel sued Bryant. A year later MGA fired off a suit of its own, claiming that Mattel was creating Barbies with looks similar to those of Bratz in an effort to eliminate the competition. Mattel answered by expanding its own suit to include MGA and its CEO, Isaac Larian.

For decades, Barbie has reigned supreme on the doll market. However, Bratz dolls gave Barbie a run for her money. In 2005, 4 years after the brand’s debut, Bratz sales were at $2 billion. At the same time, Barbie was suffering from declining sales. Although still widely popular, many analysts believe that Barbie has reached the maturity stage of its product life cycle. Concerns have increased in recent years as Barbie sales continue to drop significantly. This is requiring Mattel to try and pop- ularize Barbie in other markets, such as China.

Four years after the initial suit was filed, Bryant settled with Mattel under an undisclosed set of terms. In July 2008 a jury deemed MGA and its CEO liable for what it termed “intentional interference” regarding Bryant’s contract with Mattel. In August 2008 Mattel received damages in the range of $100 million. Although Mattel first requested damages of $1.8 billion, the company seemed pleased with the princi- ple behind the victory.

In December 2008 Mattel appeared to win another victory when a California judge banned MGA from issuing or selling any more Bratz dolls. However, the tide soon turned on Mattel’s victory. In July 2010 the Ninth U.S. Circuit Court of Appeals threw out the ruling. Eventually, the case came down to whether Mattel owned Bryant’s ideas under the contract he had with the company. In April 2011 a California federal jury rejected Mattel’s claims to ownership. In another blow to Mattel, the jury also ruled that the company had stolen trade secrets from MGA. According to the allegations, Mattel employees used fake business cards to get into MGA showrooms during toy fairs. Mattel was ordered to pay $85 million in liabilities, plus an additional $225 million in damages and legal fees. MGA CEO Isaac Larian also announced that he was filing an antitrust case against Mattel. Mattel continues to claim that Bryant violated his contract when he was working for the company.

Although the conflict appeared to be settled, the fight between MGA and Mattel continued. The antitrust suit against Mattel was dismissed, and in January 2013 the U.S Court of Appeals overturned MGA’s victory over Mattel concerning the theft of trade secrets. However, the court maintains that Mattel is responsible for paying MGA’s legal fines totaling $137.2 million. MGA CEO Isaac Larian was determined to contest this issue in court again and has referred to the people at Mattel as “crooks.” He filed another lawsuit seeking $1 billion in damages. According to Larian, Mattel had used bullying tactics and lied both in and outside of the court. Interestingly, the Bratz dolls have declined significantly in popularity since the early 2000s.

MATTEL LOOKS TOWARD THE FUTURE Like all major companies, Mattel has weathered its share of storms. The company has faced a series of difficult and potentially crippling challenges, including the law- suits with MGA regarding ownership of the Bratz dolls. During the wave of toy recalls, some analysts suggested that the company’s reputation was battered beyond repair. Mattel, however, has refused to go quietly. Although the company admits to

380 Case 6 • Mattel Confronts Its Marketing Challenges

poorly handling recent affairs, it is attempting to rectify its mistakes and to prevent future mistakes as well. The company appears to be dedicated to shoring up its ethi- cal defenses to protect both itself and its customers. Mattel’s experiences should teach all companies that threats could materialize within the marketing environment in spite of the best-laid plans to prevent such issues from occurring.

Today, Mattel faces many market opportunities and threats, including the rate at which children are growing up and leaving toys, the role of technology in consumer products, and purchasing power and consumer needs in global markets. The con- tinuing lifestyle shift of American youth is of particular concern for Mattel. The phe- nomenal success of gaming systems, portable media devices, smartphones, and social networking sites among today’s youth is a testament to this shift. Children and teens are also more active in extracurricular activities (i.e., sports, music, and volunteerism) than ever before. Consequently, these young consumers have less time to spend with traditional toys. There has also been an upsurge in demand for Lego products. In 2014, Lego surpassed Mattel as the world’s largest toymaker.

Despite these concerns, Mattel has a lot to offer to both children and investors. Barbie remains the number one doll in the United States and worldwide. Further- more, all of Mattel’s core brands are instantly recognizable around the world. Hence, the ability to leverage one or all of these brands is high. A few remaining issues include Mattel’s reliance on major retailers, such as Walmart, Target, Toys “R” Us, and Amazon (which lessens Mattel’s pricing power), volatile oil prices (oil is used to make plastics), and increasing competition on a global scale. However, analysts believe Mattel has a great growth potential with technology-based toys, especially in international markets, in spite of changing demographic and socioeconomic trends.

For a company that began with two friends making picture frames, Mattel has demonstrated marketing dexterity and longevity. The next few years, however, will test the firm’s resolve. Mattel is hard at work restoring goodwill and faith in its brands, even as it continues to be plagued with residual distrust over the lead paint scandal and its alleged theft of trade secrets. Reputations are hard won and easily lost, but Mattel appears to be steadfast in its commitment to restoring its reputation.

SOURCES American Girl, http://www.americangirl.com (accessed August 15, 2014); Lisa Bannon and Carlta Vitzhum, “One-toy-fits-all: How industry learned to love the global kid,” Wall Street Journal, April 29, 2003, http://online.wsj.com/article/SB105156578439799000.html (accessed August 15, 2014); David Barboza, “Scandal and suicide in China: A dark side of toys,” New York Times, August 23, 2007, http:// www.nytimes.com/2007/08/23/business/worldbusiness/23suicide.html?pagewanted=all (accessed August 15, 2014); David Barboza and Louise Story, “Toymaking in China, Mattel’s way,” New York Times, July 26, 2007, http://www.nytimes.com/2007/07/26/business/26toy.html?pagewanted=1&_r=3&hp (accessed August 15, 2014); Brooks Barnes, “Thomas the Tank Engine to receive a multimillion dollar sheen,” New York Times, December 30, 2012, http://www.nytimes.com/2012/12/31/business/media/mattel-to-give- thomas-the-tank-engine-a-multimillion-dollar-sheen.html (accessed August 15, 2014); “Bratz loses battle of the dolls,” BBC News, December 5, 2008, http://news.bbc.co.uk/2/hi/business/7767270.stm (accessed August 15, 2014); Abram Brown, “The nasty Bratz-versus-Barbie legal battle isn’t over,” Forbes, January 15, 2014, http://www.forbes.com/sites/abrambrown/2014/01/15/the-nasty-bratz-versus-barbie-legal-battle- isnt-over/ (accessed May 14, 2015); Christina Cheddar Berk, “Tattooed Barbie sparks controversy, media frenzy,” CNBC, October 21, 2011, http://www.cnbc.com/id/44990466/Tattooed_Barbie_Sparks_ Controversy_Media_Frenzy (accessed August 15, 2014); Adam Bryant, “Mattel CEO Jill Barad and a toyshop that doesn’t forget to play,” New York Times, October 11, 1998; Laurie Burkitt, “In China, Mattel tries ‘Violin Soloist’ Barbie,” Wall Street Journal, November 8, 2013, p. B3; Laurie Burkitt, “Mattel plants face scrutiny in China,” Wall Street Journal, October 17, 2013, p. B3; Kim Carollo and Serena Marshall, “Mattel to make ‘bald friend of Barbie’,” ABC News, March 29, 2012, http://abcnews.go. com/blogs/health/2012/03/29/mattel-to-produce-bald-friend-of-barbie/ (accessed August 15, 2014); Nicholas Casey, “Mattel prevails over MGA in Bratz-doll trial,” Wall Street Journal, July 18, 2008, pp. B18, B19; Nicholas Casey, “Mattel to get up to $100 million in Bratz case,” Wall Street Journal, August 27, 2008, http://online.wsj.com/news/articles/SB121978263398273857 (accessed August 15, 2014);

Case 6 • Mattel Confronts Its Marketing Challenges 381

“Here comes tattoo Barbie,” CBS News, October 29, 2011, http://www.cbsnews.com/8301-207_162- 20127453/here-comes-tattoo-barbie/ (accessed August 15, 2014); Andrea Chang, “Mattel must pay MGA $310 million in Bratz case,” Los Angeles Times, August 5, 2011, http://articles.latimes.com/2011/aug/05/ business/la-fi-mattel-bratz-20110805 (accessed August 15, 2014); Shu-Ching Chen, “A blow to Hong Kong’s toy king,” Forbes, August 15, 2007; http://www.forbes.com/2007/08/15/mattel-china-choi-face- markets-cx_jc_0815autofacescan01.html (accessed August 15, 2014); Consumers International, International Bad Product Awards 2007, http://marketing.by/webroot/delivery/files/InternationalBad ProductsAwards-pressbriefing.pdf (accessed August 15, 2014); Jacob Davidson, “Lego is now the largest toy company in the world,” Time, September 4, 2014,http://time.com/money/3268065/lego- largest-toy-company-mattel/ (accessed May 14, 2015); Tom DiChristopher, “DC and Mattel look to turn girls into superhero fans,” CNBC, April 26, 2015, http://www.cnbc.com/id/102615537 (accessed May 14, 2015); Bill Duryea, “Barbie-holics: They’re devoted to the doll,” St. Petersburg Times, August 7, 1998; Rachel Engers, “Mattel board members buy $30 million in stock: Insider focus,” Bloomberg, December 22, 2000; The Ethisphere Institute, “World’s most ethical companies—Honorees,” Ethisphere,http:// ethisphere.com/worlds-most-ethical/wme-honorees/ (accessed August 15, 2014); Miranda Hitti, “9 Million Mattel toys recalled,” WebMD, August 14, 2007, http://children.webmd.com/news/20070814/ 9_million_mattel_toys_recalled (accessed August 15, 2014); Fisher Price, “Thomas & Friends™ TrackMaster™ Avalanche Escape Set,” http://www.fisher-price.com/en_US/brands/thomas/products/ Thomas-and-Friends-TrackMaster-Avalanche-Escape-Set (accessed May 14, 2015); Gina Keating, “MGA ‘still accessing’ impact of Bratz ruling: CEO,” Yahoo! News, December 4, 2008, http://www.reuters.com/ article/2008/12/05/us-mattel-larian-idUSTRE4B405820081205 (accessed August 15, 2014); “Learning from Mattel,” Tuck School of Business at Dartmouth, http://mba.tuck.dartmouth.edu/pdf/2002-1-0072.pdf (accessed August 15, 2014); Judith Levy, “Third toy recall by Mattel in five weeks,” Business Standard, September 5, 2007, http://seekingalpha.com/article/46374-mattel-announces-third-toy-recall (accessed August 15, 2014); Shan Li, “Mattel CEO Robert Eckert to be replaced by COO Bryan Stockton,” Los Angeles Times, November 21, 2011, http://latimesblogs.latimes.com/money_co/2011/11/mattel-ceo- robert-eckert-steps-down-bryan-stockton.html (accessed August 15, 2014); “Mattel and U.S. Consumer Product Safety Commission announce voluntary refund program for Cabbage Patch Kids Snacktime Kids dolls,” U.S. Consumer Product Safety Commission, Office of Information and Public Affairs, Release No. 97-055, January 6, 1997; “Mattel awarded $100M in doll lawsuit,” USA Today, August 27, 2008, p. B1; Mattel Customer Service, “Product recall,” April 1, 2008, http://service.mattel.com/us/recall. asp (accessed April 1, 2008); Mattel, Inc., 2013 Annual Report,http://corporate.mattel.com/PDFs/ 2013_AR_Report_Mattel%20Inc.pdf (accessed October 15, 2014); Mattel, Inc., “About us,” Mattel, http:// corporate.mattel.com/about-us/ (accessed February 19, 2013); Mattel Inc., 2014 Annual Report, 2015, http://files.shareholder.com/downloads/MAT/3400947343x0x820303/68C602DD-88F3-47F8-ABB5- 46635E8495D8/Mattel_-_Bookmarked_2014_Annual_Report_Final_.PDF (accessed May 14, 2015); Mattel, Inc., Annual Report 2011, http://files.shareholder.com/downloads/MAT/2319434112x0x555821/ 3C654248-30D8-4A8D-A8FC-53A89560A3C3/2011_Mattel_Annual_Report.pdf (accessed August 15, 2014); Mattel, Inc., “Barbie,” http://www.barbie.com/ (accessed August 15, 2014); Mattel, Inc., “Hot Wheels,” http://www.hotwheels.com/ (accessed August 15, 2014); Mattel, Inc., “Independent Monitoring Council completes audits of Mattel plants in China and Mexico,” May 7, 2001, http://investor.shareholder.com/ mattel/releasedetail.cfm?releaseid=43066 (accessed August 15, 2014); Mattel Inc., Mattel Annual Report 2008, 2009, http://files.shareholder.com/downloads/MAT/2328843115x0x283677/D4E18CB7-C8B4-4A28- BCE9-C114B248A26D/MattelAnnualReport2008.pdf (accessed August 15, 2014); Mattel, Inc., “Mattel Children’s Foundation,” http://corporate.mattel.com/about-us/philanthropy/childrenfoundation.aspx (accessed August 15, 2014); Mattel, Inc., “Mattel, Inc. online privacy statement,” 2013, http://corporate. mattel.com/privacy-statement.aspx (accessed February 19, 2013); Marla Matzer, “Deals on hot wheels,” Los Angeles Times, July 22, 1998; Benjamin B. Olshin, “China, culture, and product recalls,” S2R, August 20, 2007, http://www.s2r.biz/s2rpapers/papers-Chinese_Product.pdf (accessed August 15, 2014); Kim Peterson, “As sales plunge, can Barbie stay relevant?” CBS News, February 3, 2014, http://www. cbsnews.com/news/as-sales-plunge-can-barbie-stay-relevant/ (accessed August 15, 2014); Edvard Pettersson, “Mattel wins dismissal of MGA entertainment’s $1 billion antitrust lawsuit,” Bloomberg, February 22, 2012, http://www.bloomberg.com/news/2012-02-22/mattel-wins-dismissal-of-mga- entertainment-s-1-billion-antitrust-lawsuit.html (accessed August 15, 2014); Edvard Petterssen and Karen Gullo, “MGA Bratz win over Mattel partly erased by appeals court,” Bloomberg, January 24, 2013, http://www.bloomberg.com/news/2013-01-24/mga-bratz-win-over-mattel-partly-erased-by-appeals-court. html (accessed February 13, 2013); PR Newswire, “Independent Monitoring Council completes audits of Mattel manufacturing facilities in Indonesia, Malaysia and Thailand,” November 15, 2002, http://www. prnewswire.com/news-releases/independent-monitoring-council-completes-audits-of-mattel- manufacturing-facilities-in-indonesia-malaysia-and-thailand-76850522.html (accessed August 15, 2014); PR Newswire, “Mattel, Inc., launches global code of conduct intended to improve workplace, workers’ standard of living,” November 20, 1997, http://www.prnewswire.com/news-releases/mattel-inc-launches- global-code-of-conduct-intended-to-improve-workplace-workers-standard-of-living-77630507.html (accessed August 15, 2014); S. Prakash Sethi, Emre A. Veral, H. Jack Shapiro, and Olga Emelianova (2011), Mattel, Inc.: Global Manufacturing Principles (GMP)—A life-cycle analysis of a company-based code of conduct in the toy industry,” Journal of Business Ethics, 99, 483–517; Jack A. Raisner (1997),

382 Case 6 • Mattel Confronts Its Marketing Challenges

“Using the ‘ethical environment’ paradigm to teach business ethics: The case of the Maquiladoras,” Journal of Business Ethics, 16, 1331–1346; Patricia Sellers, “The 50 most powerful women in American business,” Fortune, October 12, 1998; Frank Shyong and Andrea Chang, “Award is tossed in Bratz lawsuit,” Los Angeles Times, January 25, 2013, http://articles.latimes.com/2013/jan/25/business/la-fi- bratz-mattel-20130125 (accessed August 15, 2014); Laura S. Spark, “Chinese product scares prompt US fears,” BBC News, July 10, 2007, http://news.bbc.co.uk/2/hi/americas/6275758.stm (accessed August 15, 2014); Staff Reports, “A history of hot wheels,” Albert Lea Tribune, February 3, 2008, http://www. albertleatribune.com/2008/02/03/a-history-of-hot-wheels/ (accessed August 15, 2014); “Toymaker Mattel bans child labor,” Denver Post, November 21, 1998; United States Government Accountability Office, “The United States has not restricted imports under the China safeguard,” September 2005, http://www. gao.gov/new.items/d051056.pdf (accessed August 15, 2014); U.S. Consumer Products Safety Commission, “Mattel recalls Batman™ and One Piece™ magnetic action figure sets,” August 14, 2007, http://service.mattel.com/us/recall/J1944CPSC.pdf (accessed August 15, 2014); Mandy Velez, “Mattel agrees to produce more bald Barbie ‘Ella’ for little kids with cancer,” Huffington Post, July 1, 2014, http://www.huffingtonpost.com/2014/07/01/mattel-to-continue-bald-ella-doll_n_5548672.html (accessed August 15, 2014); Parker Waichman LLP, “Magnetic toy sets defective project injury lawsuits,” http:// www.yourlawyer.com/topics/overview/magnetic_toy_sets (accessed August 15, 2014); Karen Weise, “Briefs: Mattel—Must pay for stealing Bratz secrets,” Bloomberg Businessweek, August 15–28, 2011, p. 22; Michael White, “Barbie will lose some curves when Mattel modernizes icon,” Detroit News, November 18, 1997; Ann Zimmerman, “Mattel loses in Bratz spat,” Wall Street Journal, April 22, 2011, http://online.wsj.com/article/SB10001424052748703983704576276984087591872.html (accessed August 15, 2014); Paul Ziobro, “Mattel puts a target on Lego,” Wall Street Journal, March 1–2, 2014, p. B3; Abram Brown, “Toy wars,” Forbes, November 18, 2013, pp. 82–88.

QUESTIONS 1. Do manufacturers of products for children have special obligations to consu-

mers and society? If so, what are these responsibilities? 2. How effective has Mattel been at encouraging ethical and legal conduct by its

manufacturers? What changes and additions would you make to the company’s global manufacturing principles?

3. To what extent is Mattel responsible for issues related to its production of toys in China? How might Mattel have avoided these issues?

Case 6 • Mattel Confronts Its Marketing Challenges 383

Mistine: Direct Selling in the Thai Cosmetics Market*

Synopsis: This case summarizes the growth of Better Way (Thailand) and its highly successful Mistine brand of cosmetics. From its meager beginnings in 1991, Mistine has risen to become the dominant brand in Thailand’s direct selling cosmetics market. The brand’s value-based positioning (high quality at affordable prices), along with successful target marketing and a tightly integrated marketing program, has kept the company at the top of the market despite strong competition. Mistine’s success has allowed Better Way to expand its efforts into other countries, most notably in Asia, Europe, the Middle East, and Africa. Better Way is now looking to further expand its operations, perhaps into Western countries and China.

Themes: Direct selling, global marketing, branding strategy, value, positioning, distribution strategy, integrated marketing communication, marketing implementation

Under the principle “to create a better way of life” for Thai people, Dr. Amornthep Deerojanawong, Thailand’s king of direct selling, in partnership with Boonyakiat Chokwatana, founded Better Way (Thailand) in 1988. In 1991, the company launched its Mistine brand and began its rapid ascent as a key player in Thailand’s direct sell- ing cosmetics industry. Mistine started with fewer than 10 employees and less than 100 products at a time when the Thai people were not familiar with the direct selling model for cosmetics. Direct selling is the marketing of products to consumers through face-to-face sales presentations at home or in the workplace. Based on Mis- tine’s success, direct selling now accounts for over 60 percent of the market and is the preferred method of selling and distributing cosmetics in Thailand. Mistine and Better Way quickly became the leader in the Thai direct selling cosmetics market— a position it has held since 1997. The company’s distribution warehouses, among the largest in Asia, handle nearly 10,000 products under the Mistine umbrella. These warehouses distribute products to 900,000 Mistine sales representatives around the globe and more than 1 million members of Mistine’s membership program. The com- pany generates more than $400 million in net sales.

MISTINE’S MARKETING PROGRAM Mistine spends approximately 10 percent of its revenue on marketing and plans to increase its marketing budget as the company continues to grow. Company execu- tives believe that Mistine’s double-digit growth will continue over the next few years, although weaker purchasing power in Thailand has resulted in less than antic- ipated sales growth in its domestic market. Their main concerns are primarily related to political situations in the countries where it does business, to the worldwide vola- tility of oil prices (oil is a key ingredient in many cosmetics), and to natural disasters such as flooding.

CASE

*This case has been compiled and developed by Jennifer Sawayda based on information supplied by Ekachai Wangprapa, Nuntiya Ittiwattanakorn, Rawadee Mekwichai, and Supishsha Sajjamanochai (Thammasat University, Thailand) with additional information from a project conducted in MIM XXI, Thammasat University, 2012. The case was developed under the direction of O. C. Ferrell and Linda Ferrell (University of New Mexico) for classroom discussion rather than to illustrate effective or inef- fective handling of an administrative situation.

384

To attain its status as a leading direct seller in the cosmetics industry, the company had to select the right mix of products, price, distribution, and promotion. Mistine must regularly evaluate each of these components in order to maintain its competitive positioning.

Product Cosmetics under the Mistine brand are divided into five categories and target mar- kets: Body Care, Personal Care, Makeup, Fragrance, and Skin Care. An experienced production team develops hundreds of new and unique products each year. At least two to three new products are launched each month. Customers can be sure that they will receive only the highest quality, “value-for-money” products. All of Mistine’s cosmetics are produced by manufacturers who are certified by ISO 9001, 9002, and Good Manufacturing Practices espoused by the U.S. Food and Drug Administration. These international standards ensure the quality of Mistine’s products. Every Mistine product is thoroughly inspected and tested before being delivered to the warehouse. In addition, every Mistine product comes with a satisfaction guarantee that if for any reason a customer is unsatisfied with his or her purchase, Mistine will replace the product or offer a full refund without condition.

To combat its key competitors, Mistine positions itself as an Asian company that produces products that are developed and formulated especially for Asian women. Mistine products are created to blend well with Asian complexions and skin tones. They are also made to suit the warmer and more humid climate of the Asian region, so that the product stays on longer and looks fresher throughout the day.

Mistine’s products are popular among Thai housewives, factory workers, teenagers, and consumers with a monthly household income of $200 or less. Yet as Mistine has gained prominence, it has also begun to reach out to higher-income pro- fessionals with new product offerings. In 2010, the organization introduced Blemish Balm (BB) cosmetics through a partnership with Korean firm Klomar Korea Co., Ltd. Since its introduction, the BB line has become a popular cosmetics line for Mistine. The cosmetics industry in Thailand has exhibited a growing trend toward Korean cosmetics, particularly among teenagers. Thai men and women view Korean actresses and movie stars as being among the most beautiful women in Asia, and teenagers and younger people view Korean models and actresses as the ultimate Asian beauties. Mistine is therefore collaborating with Korean firms to develop more Korean-type cosmetics for the Thai market.

Mistine’s parent company Better Way also decided to introduce an entirely new line of products under its own name, Faris by Naris. Faris by Naris products are imported from Japan, another country highly admired for its quality cosmetics. Unlike the Mistine brand, Faris by Naris products are sold using a premium pricing strategy. This shift toward more prestigious products implies that Mistine is looking to expand its target market to women in the middle to upper classes.

Pricing Mistine’s core market, which accounts for 70 to 80 percent of sales, includes house- wives with a high school diploma, an occupational certificate level or high occupa- tional certificate level of education, and a monthly household income of about U.S. $125 to $200. The company also targets professional women who earn U.S.$200 to $300 per month. While Mistine has traditionally priced its cosmetics to focus more upon the middle- to lower-income market, the company is expanding its emphasis to women making above average incomes at more than U.S.$480 per month. Mistine hopes to increase its number of sales to middle- and upper-class markets from 25 to 50 percent of sales. Furthermore, Mistine wants to fully leverage its product quality, popularity, and market-leading position.

Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market 385

As a result, the company has started to increase prices. Historically, 80 percent of Mistine’s sales were for products that cost an average of U.S.$3 each. By boosting the average price to U.S.$6, Mistine estimated the average order would increase from U.S.$27 to U.S.$45. Wage increases mandated by Thai law will also significantly impact Mistine’s pricing strategy. Since 20 percent of production costs go toward wages, wage increases increase Mistine’s prices even further by approximately 6 to 10 percent.

Distribution Mistine was the first domestic cosmetics company to use the direct selling model in Thailand. The company continues to sell the majority of products through direct sales but has also expanded into retail and e-commerce. Although the company does not own its own stores, Mistine products can be found in Tesco Lotus, Boots, Lotus Express, and 7-11 convenience stores. Consumers can also purchase Mistine products through the company’s Internet site or through its Mistine catalogue. An advanced computer system tracks sales, and Mistine’s fleet of trucks can deliver the product within 1 week of ordering. Mistine has also built a distribution center, which will make it easier to export to other countries. Parent company Better Way wants to use the distribution center to reposition itself as a business solutions provider for the ASEAN market. Not only does the center provide logistics services for Mistine, but it is also being used to provide logistics services to Thai and international firms.

Mistine is also extending its reach globally. Although international markets com- prise only 2 to 3 percent of Mistine’s sales revenue, the potential for increased global sales is enormous. In addition to Thailand, Mistine products are sold in many Asian, European, Middle Eastern, and African markets, including countries such as Ghana, Iran, South Africa, and the Democratic Republic of the Congo. A trade agreement called the Association of Southeast Asian Nations (ASEAN) will help to increase Mistine’s global reach into other Southeast Asian countries. ASEAN is a trade agree- ment between Thailand, Cambodia, Myanmar, the Philippines, Malaysia, Singapore, Indonesia, Brunei, Laos, and Vietnam. As part of the agreement, tariffs between mem- ber states have been reduced or eliminated. This increases the opportunities for com- panies such as Mistine to expand their distribution. Additionally, in 2010 ASEAN members developed an agreement with China called ACFTA (ASEAN–China Free Trade Area) for free trade between the nations. This creates a lucrative opportunity for Mistine to tap into the world’s largest market of consumers. In anticipation of these increased growth opportunities, Mistine plans to build a new plant in Vietnam.

Promotion Direct selling companies normally depend on word of mouth to develop brand awareness, recruit salespeople, and encourage product purchases. Better Way decided to do things differently by being the first direct selling company in the world to use mass media advertising. The company’s continuous advertising cam- paigns build its brand image and position Mistine in customers’ minds. In addition, Better Way also developed many advertising campaigns to recruit salespeople.

When the company first started, Dr. Deerojanawong used his credibility to advertise Mistine during interviews with the media and at seminars with educational institutions. People applied as district managers with the company mainly because of his reputation. He was certain that the district managers would be able to establish a large network of salespeople. To increase knowledge about the company, however, Mistine wanted to reach greater audiences. This eventually led it to move into televi- sion advertising.

“Mistine is here!” was launched as the company’s first television campaign with the objectives to communicate to the public that Mistine is a direct selling cosmetics business and to create a brand character of beauty for Mistine’s products. Using the

386 Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market

message “Mistine is here!” was an effective way for the public to envision a salesper- son coming to visit them with Mistine products. After only 2 months, the campaign generated an incredible buzz as it increased brand awareness from 10 percent to roughly 70 percent. As Mistine continues to globalize, “Mistine is here!” has been translated into Burmese with plans to translate the slogan into Bahasa Indonesia and Tagalog. The company also markets itself as “The Asian brand for Asian women” as a way to promote the fact that its products are made to complement Asian skin tones.

Mistine’s second advertising campaign was designed to assist district managers in their efforts to recruit new salespeople. This campaign consisted of two advertise- ments. The message of the first ad was that it was possible to buy a car by becoming a Mistine salesperson. Within 3 months, a total of 30,000 people applied to be sales- people, and sales rose by 100 percent. The message of the second ad was that it was possible to buy a house by becoming a Mistine salesperson. Again, the company suc- ceeded in creating stronger brand awareness through this campaign.

Based on this success, the company decided that the next step was to increase its customers’ confidence in Mistine products, as well as generate more product trial. As such, “If you’re not satisfied, we will give you your money back” was the concept for the third campaign. This campaign was not only successful in stimulating product trial, but it also created a great deal of brand switching from competitors’ products to Mistine products. In the end, there were few cases of product dissatisfaction or customers requesting their money back.

Mistine has remained a first mover in the direct selling market by launching advertising campaigns featuring popular actresses, actors, and bands as Mistine brand ambassadors. Many of these celebrities have been featured on Channel 7 or RS Entertainment, Thai television channels with soap operas popular among Mistine’s core market. For instance, Mistine used Urassaya “Yaya” Sperbund and Chalida “Mint” Vijitvongthong—both popular Thai actresses—to represent their Mistine I Am collection. Mistine has become an expert at choosing celebrities that resonate with these target markets. To take advantage of the favorable impressions of Korean cosmetics (especially among teenagers), Mistine used a famous Korean band to promote its BB Powder. The company has also created its own Facebook page to extend its worldwide reach.

Due to its extensive marketing campaigns, the Mistine brand is one of the best- known brands in Thailand. In 2011, the brand won a Superbrands award as the “brand most accepted by Thai consumers.” This high level of brand awareness has helped propel Mistine to a market leadership position in the Thai cosmetics industry.

KEY COMPETITORS Cosmetics are the number one product sold through direct selling channels in Thailand. According to the World Federation of Direct Selling Associations, global retail sales for the direct selling industry are estimated at more than U.S.$178 billion. Of that amount, the cosmetics market accounts for roughly 60 percent of all products sold via direct selling channels. In terms of direct selling market share, the top four cosmetics companies are Mistine, Avon, Giffarine, and Amway. However, domestic brands and Asian competitors have begun to challenge the top four for dominancy. Price, quality, and attractive packages are the three most important criteria for Thai consumers when buying cosmetics. Mistine has four main competitors:

• Avon Founded in 1978, AVON Cosmetics (Thailand) Co., Ltd., is the 22nd branch of AVON Products, Inc., USA. It was the first company in Thailand to use a single-level marketing direct selling approach for Thai consumers. With the company’s motto—The Company for Women—Avon targets teenagers and

Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market 387

working women. Avon cosmetics are truly high-quality products for which the brand is recognized throughout the world. As such, it is not difficult for Avon Thailand to sell its products and gain the confidence of consumers. The com- pany has a team of representatives known as Avon Members who are headquar- tered in Bangkok and visit all the customers in their areas of responsibility. Not only do they sell products, but these Avon Members also provide beauty tips, customer service, and ensure that customers are satisfied with the products.

• Giffarine Giffarine Skyline Unity Co., Ltd., was founded in 1966 by a team of Thai doctors and pharmacists. The company’s medical roots translate into its positioning today: Giffarine’s products are developed and tested with the highest standards of quality. However, like Mistine, the company also focuses on afford- able pricing. Giffarine’s portfolio includes a wide range of cosmetics, body treat- ments, household items, diet supplements, and health food products. Giffarine’s success can be attributed to several factors. In addition to product quality, the company places a great deal of emphasis on social responsibility and ethics in the treatment of both customers and employees. Giffarine is also a master of multilevel marketing, which extends to how it structures its sales force. Giffarine also announced it would launch a direct selling channel to better target the Thai population.

• Amway Established in May 1988, Amway (Thailand) Co., Ltd., sells various consumer products in addition to cosmetics, using a multilevel marketing approach. The company’s most popular products include health products, herbal products, air purifiers, and water purifiers. Amway offers nutritional supple- ments under the Nutrilite brand and cosmetics products under the Artistry brand, both of which have high brand awareness among Thai consumers. The company has received ISO 14001 certification for environmental management systems and ISO 9001 certification for quality service standards. The company has also received awards for promoting social and environmental causes along with outstanding industrial relations and employee welfare. Unlike Mistine, Amway owns shops in Thailand. These shops exist to provide inventory for salespeople to sell to consumers. Although Amway products are more expen- sive, they are also perceived to be of high quality.

• Others As the cosmetic industry within Thailand grows, domestic competitors are challenging Mistine’s market dominancy. U Star is a cosmetic firm estab- lished in 2002 through a collaboration between a cosmetics firm and the enter- tainment company GMM Grammy Music Records. The company is certified by ISO 9001 and Good Manufacturing Practices. Its distribution channels include direct selling and company-owned retail stores. The SSUP Company owns the cosmetic brands Cute Press and Oriental Princess. Established in 1976, Cute Press is sold in more than 250 retail stores. Oriental Press is sold mainly through retail channels and targets upper-class consumers. Consumer products company Aim Star also sells cosmetics as one of its product lines. It is the first Thai direct selling company to become successful in America. Mistine also faces competi- tion from other Asian brands. Korean brands are perceived as more prestigious than domestic brands and are growing throughout the region. This is based on the fact that Korean movie stars and models are viewed as among the most beau- tiful Asian women.

MISTINE’S DIRECT SELLING OPERATIONS Mistine’s single-level marketing approach to its direct sales operations is simple and efficient. It is also suitable to the Thai culture and lifestyle. The company recruits district managers who in turn recruit as many salespeople as he/she can handle.

388 Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market

Each day the salespeople make their rounds to meet customers and prospective customers. Once a sale is confirmed, the salesperson submits a purchase order. Each salesperson earns a full 25 to 30 percent commission without having to share his or her earnings with others. The more sales a salesperson makes, the more income he or she receives. Each district manager earns a fixed salary plus commis- sion based on sales generated by the salespersons under his or her responsibility. In addition, to increase morale, mobility, and efficiency, the company provides a car to each of its district managers and pays for their gas.

In the direct selling business, the length of a selling period is critical and shapes the operation of the business. A selling period starts when the product catalog is sent to the sales force. The selling period ends when the sales force submits purchase orders to the company. Normally, direct selling companies use a 3-week selling period, totaling 18 periods within a year. Although Mistine used this approach, the company found that most salespeople did not begin selling products to customers until the last week of the selling period. As such, most of the customers’ purchase orders were generated from sales during the third week of the selling period. Accord- ingly, Mistine’s management decided to reduce the selling period to 2 weeks, result- ing in 26 selling periods per year.

The change was a challenge for Mistine’s operations. Because as many as 20,000 purchase orders are submitted to the company each day, the company was forced to implement an efficient mail traffic management plan to control and balance the workload. Within a 2-week selling period, personnel had only 10 days to work. If order processing was not completed each day, sales personnel would not be able to deliver the products as promised. After some time, the new operating plan worked smoothly and was a resounding success. Sales increased, and salespeople became more active in selling products. The impressive sales were not only a result of reduc- ing the distribution cycle but were also due to the positive attitude created through- out the company. The company’s pledge—“We will make Mistine No. 1”—was successful in motivating salespeople and office personnel to adapt to the changes and cooperate with the company’s direction.

Mistine welcomes anyone, male or female, with free time, who would like to earn money, make new friends, and develop self-confidence. Salespeople can plan their own schedule and movement in order to reach target sales and obtain rewards. Mistine’s turnover rate for salespeople once averaged 200 percent per year because most salespeople sell Mistine products as a second job. However, the company was able to reduce turnover by 30 percent through simple improvements in order proces- sing and fulfillment that streamlined many of the mundane, time-consuming tasks for salespeople. One example is the “Mistine Corporate Solution,” a strategic alliance with DTAC, a major Thai telecommunications provider. The system greatly increases efficiency and productivity by enabling salespeople to call the 24-hour Mistine Call Center for free when using the DTAC network. This innovative alliance not only made Mistine sales reps happier, it also cut Better Way’s phone expenses by U.S. $25,000 per month.

With the belief that the salespeople can live without Mistine, but Mistine cannot live without its salespeople, Mistine has launched several programs to maximize employee loyalty. The company provides life insurance with coverage of U.S. $50,000 to each salesperson. Nonmonetary rewards and recognition incentives for salespeople include crystal trophies, photos in the Hall of Fame, and prizes such as a gold necklace for achieving target objectives. Salespeople also have a chance to earn extra for surpassing sales goals.

SWOT Analysis In less than 30 years, Mistine cosmetics have grown to be the market leader in the Thai cosmetic industry. Its then revolutionary idea to market its products through

Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market 389

direct selling channels was a hit with Thai consumers, spurring competitors to adopt similar channels of distribution. Mistine’s influence has caused the direct selling industry in Thailand to flourish. The company has succeeded in forming strengths that are hard for rivals to replicate and has become adept at seizing upon marketing opportunities.

On the other hand, the increase in competition, both domestically and interna- tionally, means that Mistine must not remain idle. Rather, the company must con- stantly adapt to ensure that it retains its competitive advantages and market leadership position. Doing so requires Mistine to identify its internal weaknesses and external threats. Occasionally, what could be an opportunity for Mistine could also hold threats if the company does not seize upon it. Case Exhibit 7.1 provides a SWOT analysis of Mistine’s competitive position.

Strengths As mentioned earlier, Mistine has high brand awareness and a loyal following among Thai consumers. The company is skilled at being able to meet its customer needs while leveraging ways to be more efficient. For instance, its expertise at recruiting celebrities to be brand ambassadors and its recognition of emerging trends (i.e., the growing popularity of Japanese and Korean cosmetics) are effective ways to spread awareness of Mistine among its target markets. The short selling period and the quick time it takes to deliver the products to customers enables Mistine to create more efficient direct selling operations and increase customer satisfaction.

Mistine has also created strong partnerships with other countries, which could expand its global reach and perhaps decrease its production costs. For instance, Mistine is working with a dealer in Ghana to sell its products in the country and has created a joint venture with a firm in Burma to build a second factory there. A joint

CASE EXHIBIT 7.1 Mistine SWOT Analysis

Strengths Weaknesses

• Wide variety of products • High brand awareness • Highest market share in domestic market • Short selling period • Affordable price • CSR program • Certifications for quality and environmental standards • Expertise at recruiting effective ambassadors • Different channels make products more accessible to

consumers • Strong partnerships with foreign companies

• Low-quality image • High employee turnover rate • Large dependence on direct selling channel • Failure to capitalize on ecommerce channels • Multiple channels of distribution might potentially

alienate sales force

Opportunities Threats

• High growth rate in the cosmetics industry and direct selling market

• Popularity of Korean and Japanese cosmetic trends • Removal of tariffs through ACFTA • Expanding purchasing power in developing countries

• Growing competition from domestic brands • Potential for increased competition from new foreign

entrants • Flooding and other natural disasters • Economic or political uncertainty • New minimum wage law • Rising commodity costs

390 Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market

venture in Laos will open inroads for expansion into the country. Mistine is also eye- ing Indonesia as a potential prospect and has been in talks with a domestic business to sell cosmetics. However, Mistine will likely not use the “Mistine” name in Indone- sia, as Indonesian consumers are unfamiliar with the brand name. Building a produc- tion base in Indonesia could reduce costs for Mistine by 10 percent and provide a major supply of raw materials. The company has already made lucrative partner- ships with firms in Japan and Korea to collaborate on projects and import cosmetic products.

Mistine has become adept at using the marketing mix to create competitive advantages. Affordable prices and multiple distribution channels make Mistine pro- ducts accessible to a wide variety of stakeholders. Consumers can trust that Mistine products adhere to high quality standards. Mistine has also created a corporate social responsibility (CSR) program. The company founded the Dr. Amornthep Deerojana- wong Foundation to give back to the community and provide relief for victims of natural disasters. These CSR initiatives serve to create stronger relationships with Thai consumers as well as to enhance the reputation of the Mistine brand.

Weaknesses Like all major companies, Mistine also has several weaknesses it must address to compete in the cosmetics market. Some of these weaknesses involve the very ele- ments that Mistine has used to gain a competitive advantage. For instance, its low prices have made Mistine products accessible to a wide variety of stakeholders, but they have also added to the perception that Mistine products might be of lower qual- ity. Mistine’s emphasis on the lower and middle classes has contributed to the idea that Mistine is a brand for those with lower incomes. This is becoming a challenge as Mistine tries to extend its reach to consumers with higher incomes. Better Way is trying to counter this perception of lower quality by raising prices (partially to offset the increase in labor wages) and investing in products with a more favorable percep- tion, such as BB Powder and the brand Faris by Naris. However, price increases could backfire if they alienate the company’s core market of lower-income consu- mers. Mistine’s target market is more price-sensitive and may decide to switch brands if prices are raised too high.

The high salesperson turnover rate is also a problem for Mistine, although its initiatives have successfully reduced the turnover rate by 30 percent. Many distribu- tors work at Mistine as a second job and are thus less committed to staying with the company. Higher turnover rates increase costs for Mistine because it must spend more resources to train new salespeople. The company’s dependence on its sales force to sell products further increases this risk. Perhaps to mitigate this risk and compete against its established rivals, Mistine has adopted other distribution chan- nels, including retail outlets and web sales. While this may turn out to be a significant strength for Mistine, it could also alienate its sales force. Salespeople may feel that by adopting other distribution channels, Mistine is taking sales away from them. Mistine must work hard to balance the benefits that come with adopting multiple distribution channels with the needs and morale of its sales force.

As social networking and digital communication become more important chan- nels for direct selling, Mistine recognizes that it must use digital communication to keep up with these changing technological trends. The company created its own Facebook page and allows consumers to order products through its website. How- ever, consumers have pointed out that the Mistine website is not satisfactorily equipped to handle orders. For instance, the main website, http://www.mistine.co. th, does not immediately allow consumers to order products. Instead, it has a section entitled “How to Order.” Users who click on “Online Purchase” will be redirected to the Better Way website, http://www.bworder.com, to make their purchases. The use of two different sites could be confusing for customers. Because the professional

Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market 391

class tends to rely more upon the Internet, Mistine should work to make its website more user-friendly as it expands into higher-income markets.

Opportunities Mistine has significant opportunities for growth in both the domestic and interna- tional markets. Direct selling is growing rapidly in other countries; the industry grew 23 percent in China in 1 year. The purchasing power of consumers in countries such as China is increasing as well. This will likely increase the demand for cos- metics and other fashion items. The trend toward Korean and Japanese cosmetics provides Mistine with an opportunity to enhance its brand image of quality.

Perhaps one of Mistine’s most notable advantages is its ability to profit from the ASEAN and ACFTA trade agreements. This gives domestic companies a significant advantage over foreign brands such as Amway and Avon. As a Southeast Asian com- pany, Mistine can take advantage of reduced trade barriers to export its products to other countries in the region. By leveraging its inclusion in ASEAN and its partner- ships in other countries, Mistine has the chance to gain a profound competitive edge over its foreign rivals.

Threats In spite of its strengths and opportunities, Mistine faces many threats in the future. The growing competition from domestic cosmetic brands will force Mistine to watch its rivals SSUP, Aim Star, and U Star closely, particularly as they too will be able to benefit from the ACFTA trade agreement. Additionally, while these trade agreements provide Mistine with an opportunity to enter foreign Asian markets more easily, it also provides foreign brands with greater ease of entry into the Thai market. Hence, Mistine may have more foreign competitors with which to contend. Korean and Japanese cosmetics brands could become a major threat due to the growing popularity of these brands among Thai consumers.

As Mistine expands internationally, it will also likely run into barriers of trade. Some of the countries in which it wants to expand have obstacles that Mistine will need to overcome if it wants to succeed. For instance, many African countries have poor infrastructure, which may hinder distribution. Iran, another country in which Mistine wants to expand, has a high inflation rate. Mistine also faces barriers in its own home country with political uncertainty, the threat of natural disasters such as flooding, and higher production costs. The government-mandated wage increases will force Mistine to increase how it compensates its work force, which will likely translate into increased prices for Mistine products that could dissuade price- sensitive customers. Additionally, weaker purchasing power in Thailand has caused sales to grow slower than expected, giving Mistine an incentive to increase its inter- national reach. Mistine must make the decision on whether to pass these increases onto consumers through higher-priced products or find alternative ways to reduce its production costs.

Looking Ahead Mistine successfully conquered Thailand’s direct selling cosmetics market within a very short period of time. The company’s success is based on Dr. Deerojanawong’s clear vision and determination. Since his death in 2000, his son Danai has been at the helm of Better Way. Danai’s contribution to the Better Way vision has been to take the Mistine brand into the modern era via an aggressive strategy of expansion into foreign markets. Considering the relationship of Thailand to its neighboring coun- tries, its geographic proximity, and Thailand’s position in Asia, foreign markets are

392 Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market

an extremely interesting prospect for Mistine. The company opened manufacturing sites in the Philippines and Vietnam, and has successfully offered products for sale in Cambodia, Laos, Myanmar, and several Middle Eastern and African countries. These successes are due to Mistine’s affordable prices that match the income of the people in these countries. Moreover, Mistine’s advertising campaigns use popular actresses who are also well known to people in these countries.

However, Mistine faces many challenges as it continues to grow. For instance, the firm has missed its growth targets during some years because of natural disasters or decreased consumer purchasing power. Mistine must keep this in mind when setting growth targets and sales goals.

Danai knows that there will be many bumps on the road ahead, with strong com- petitors at Mistine’s doorstep. In looking ahead to the next 10 years, Danai is consid- ering the best ways to take Mistine farther into the global arena. How can Mistine leverage its current strengths to take advantage of global opportunities? How can the company maintain its number one position in Thailand while it simultaneously looks outside its borders, particularly in China, Russia, and even Western nations? Should Mistine invest in more technological innovations such as mobile apps to target the more technologically savvy professional market? As Danai considers these issues, his father’s words—“Face what you fear!”—echo in his mind.

SOURCES “Aim Star News,” Aim Star Network, http://www.aimstarnetwork.com/th/massmedias/default2554-2011. html (accessed May 12, 2015); Atthasit, Dutsadee, Jiarawut, Kritika, and Natchar, Mistine, Group 4, MIM XXI 2012, Thammasat University; Avon Thailand website, http://www.avon.co.th (accessed May 12, 2015); “‘Amway’ most lavishly,” Siamturakij, January 2010, http://www.siamturakij.com/home/news/ display_news.php?news_id=413342493 (accessed May 12, 2015); Amway (Thailand) Ltd., “About Amway,” https://www.amwayshopping.com/amwayshopping-frontend/shopping/contentPage?id=178 (accessed May 12, 2015); Amway (Thailand) Ltd., “Amway Thailand,” https://www.amwayshopping.com/ amwayshopping-frontend/shopping/contentPage?pageKey=amway.office.aboutamway.history (accessed May 12, 2015); T. Arunnee, C. Eakthana, W. Manisa, B. Sarat, and S. Sawika, Mistine’s Competitive Marketing Strategy, Group 3, MIM XXI 2012, Thammasat University; ASTV Manager Journal, “Miss first month amount individually nayot 8 fall Alliance strengthen army year grown 11%,” September 7, 2011, Manager Online, http://www.manager.co.th/business/viewnews.aspx?NewsID=9540000113722 (accessed May 12, 2015); ASTV Manager Journal, “Mistine offensive alliance pump sales,” Daily News, September 7, 2011, http://mgr.manager.co.th/Daily/ViewNews.aspx?NewsID=9540000113691 (accessed May 12, 2015); Better Way, “Better Way Internet order,” http://www.bworder.com (accessed May 12, 2015); “BB is coming!,” Positioning, December 12, 2010; Pichaya Choochuenchaimongkol, Pimpatr Wongnongtoey, Ponglada Paniangwet, Poramin Tanwattana, and Saifon Hanchaikul, Competitive Marketing Strategy: Mistine Assignment, Group 10, MIM XXI 2012, Thammasat University; “Cosmetic for the Asian Woman,” Health-Fitness-Beauty.com, http://www.health-fitness-beauty.com/Cosmetic_for_the_Asian_ Woman.htm (accessed May 12, 2015); “Cute Press: Intense market penetration,” Than Setthakit, March 18, 2010, www.thanonlin.co.th (accessed January 21, 2012); “Danai good roll through family direct sales mogul,” Positioning, November 2005, http://www.positioningmag.com/magazine/details.aspx?id=41548 (accessed May 12, 2015); Anuwat Dharamadhaj, “How direct selling is regulated and managed in different markets in Thailand,” Asian Symposium on Direct Selling, 2003; “Direct sale: Market analysis,” Ta-Lad-vi-kod, 14(311), 2012, pp. 1–15; “Direct sale war,” Manager Online, November 24, 2011, http://www.gotomanager.com/news/details.aspx?id=42915 (accessed March 29, 2012); “Direct sale war,” Siam-Rad, June 7–8, 2010, http://www.brandage.com/Asset/BrandAge-Siamrath/75.pdf (accessed March 29, 2012); “Direct selling,” Marketeer, 43 (September 2003), p. 62; Direct Selling News, “Better Way Co. Ltd.,” Direct Selling News Blog, http://dsnblog.com/tag/mistine/ (accessed May 12, 2015); “Direct selling war,” Bangkok Business News, March 24, 2003, http://www.bangkokbiznews.com (accessed January 21, 2009); “Direct-sales intense war in 2012,” Talad Vi Kro, January 1–15, 2012, http://www.taladvikrao.com/311news/directsale01.html (accessed March 29, 2012); Euromonitor, “Beauty and personal care in Thailand,” Euromonitor International, August 2014, http://www. euromonitor.com/beauty-and-personal-care-in-thailand/report (accessed May 12, 2015); Euromonitor, “Direct selling in Thailand,” Euromonitor International, June 2014, http://www.euromonitor.com/direct- selling-in-thailand/report (accessed May 12, 2015); Giffarine Thailand website, http://www.giffarine.com/ th/index.php (accessed May 12, 2015); “Global Networks, ‘Dream Big’ Danai D. Robert and Family,” Bangkokbiznews.com, January 21, 2009, http://www.bangkokbiznews.com/ (accessed October 16, 2009);

Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market 393

Sujintana Hemtasilpa, “Mobile phones, appliances join growing Mistine cosmetics lineup in Thailand,” Bangkok Post, October 2004, http://www.highbeam.com/doc/1G1-123104464.html (accessed May 12, 2015); Ratanawalee Indraphuag, Sarun Vatjanajaroenrat, Vichak Jirisant, Vimolyos Sawadsaringkarn, and Mike Heijstek, Mistine Case Study, Group 15, MIM XXI 2012, Thammasat University; Industrial Research Institute Co., Ltd., Health & Beauty Care Marketing in Thailand 2009, NNA Japan Co., Ltd., 2009; Pitsinee Jitpleecheep, “Better Way positions its business,” Bangkok Post, January 17, 2013, http:// www.bangkokpost.com/print/331203/ (accessed May 12, 2015); Korntheap Kangwanpiboon, Nopphatsorn Sribooneak, Patarinee Bovonratwet, Patcharapa Wannasumrerng, and Suparat Kosolsuk, Mistine, Group 8, MIM XXI 2012, Thammasat University; Jaturong Kobkaew, King of Direct Sales (Bangkok: Thai Public Relations and Publishing, 2002); Pitch Laosrisakdakul, Supachot Wangchinda, Supreecha Mahagittilarb, Tanita Watprasong, and Caroline Wisniewski, Competitive Strategies in Marketing: Mistine, Group 13, MIM XXI 2012, Thammasat University; Preawphan Lertnaitum, Sasipim Tansatru, Teerapath Pongsapas, Thai Boontae, and Noemie Frachon, Competitive Strategies in Marketing, Group 14, MIM XXI 2012, Thammasat University; Rachchakrit M., Tippawan Y., Tuangploi C., Yuji Y., Maxime H., and Vitantonio S., Mistine Competitive Strategies, Group 16, MIM XXI 2012, Thammasat University; Mistine website, website http://www.mistine.co.th (accessed May 12, 2015); Mistine, “Company history,” http://www.mistine.co.th/en/Company/history.php (accessed May 12, 2015); “Mistine cosmetics,” Mistine, http://www.mistinecosmetics.com/ (accessed May 12, 2015); “Mistine entering into multi-channel Modern Trade,” Pracachat.net, October 2, 2010, http://www.prachachat.net/ news_detail.php?newsid=1285937922&grpid=00&catid=no (accessed May 12, 2015); “Mistine sale 2011,” Leader Time, 9(191) (2012), 16–31; “Mistine to target A investment up 10%,” Krungthep Turakit, http:// www.krungthebturakit.co.th (accessed March 29, 2012); “Move: Artistry essentials,” Marketeer, http:// www.marketeer.co.th/inside_detail.php?inside_id=7507 (accessed January 21, 2012); “New trend media use for direct sale,” Ta-Lad-vi-kod, 14(312), 2012, 16–31; Katherine B. Ponder, “Direct selling’s billion- dollar markets,” Direct Selling News, March 1, 2011,http://directsellingnews.com/index.php/view/ direct_sellings_billion_dollar_markets/P1 (accessed May 12, 2015); Pimpichcha Pongpornsakul, Poomphatt Visavavetmethee, Saranya Wattanatrakulchat, Thitiched Mungkiatskul, and Emmanuel Froim, MK 701: Competitive Strategies in Marketing, Group 12, MIM XXI 2012, Thammasat University; Achara Pongvutitham, “Better Way has big plans for Mistine in ASEAN markets,” The Nation, January 20, 2012, http://www.nationmultimedia.com/business/Better-Way-has-big-plans-for-Mistine-in-Asean- mark-30174717.html (accessed May 12, 2015); Kwanchai Rungfapaisarn, “Bright future awaits Thai cosmetics industry,” The Nation, March 26, 2011, http://www.nationmultimedia.com/2011/03/26/ business/Bright-future-awaits-Thai-cosmetics-industry-30151799.html (accessed May 12, 2015); Kwanchai Rungfapaisarn, “Direct sales firms satisfied with 2010 performance amid negative factors,” The Nation, January 8, 2011, http://www.nationmultimedia.com/2011/01/08/business/Directsales-firms-satisfied-with- 2010-performance–30145912.html (accessed May 12, 2015); Kwanchai Rungfapaisarn, “Mistine supplier aims to double sales in five years,” September 8, 2011, The Nation,http://www.nationmultimedia.com/ 2011/09/08/business/Mistine-supplier-aims-to-double-sales-in-five-year-30164754.html (accessed May 12, 2015); Kwanchai Rungfapaisarn, “Thai cosmetics firm eyes foreign markets,” Asia News Network, March 29, 2012, http://www.asianewsnet.net/home/news.php?sec=2&id=29110 (accessed May 12, 2015); Thomas Schmid, “Article: Cosmetics firm debuts Thailand’s longest TV commercial,” HighBeam Research, September 1, 2002, http://www.highbeam.com/doc/1G1-106646831.html (accessed May 12, 2015); SSUPGroup website, http://www.ssup.co.th/ssup/index.php (accessed May 12, 2015); SSUP Group, “Our brands,” http://www.ssup.co.th/ssup/brands.php (accessed May 12, 2015); “Success story,” nationejobs.com, http://www.nationejobs.com/content/worklife/worklife/template.php?conno=522 (accessed March 29, 2012); “Surgery strategies cosmetics counters j brand VS brand application in consumer theory,” Manager Weekly 360?, September 15, 2011, http://www.manager.co.th/mgrweekly/ viewnews.aspx?NewsID=9540000117344 (accessed May 12, 2015); Kittikarn Tantanasarid, Patcharapan Vanadurongwan, Pattrawan Muongrattana, Piyapoj Rojanasopondist, and Polwat Luengsupabul, MK 701: Competitive Strategies in Marketing: Mistine, Group 9, MIM XXI 2012, Thammasat University; Kong Teerachutimanant, Nattamon Coo-iead, Nawatta Kimwong, Sureeyapat Sereeumnuoi, and Yodyuth Chaisuwan, Mistine’s Competitive Marketing Strategy, Group 6, MIM XXI 2012, Thammasat University; “Thailand-based Better Way invests in logistics,” Global Supply Chain Council, April 16, 2010, http://www.supplychains.com/en/art/3583 (accessed March 29, 2012); “Thailand direct selling,” Competitive Strategies in Marketing, Thammasat University, Thailand, 2004; “Thailand top direct sale 2008,” http://guru.google.co.th/guru/thread?tid=52886fdbc6e4cae8 (accessed January 21, 2012); “‘Together as one’—A new joint venture between Mistine and DTAC,” Thailand Press Release News, November 23, 2003 http://www.thailand4.com/.comm/2003-11-24/t4-53054/ (accessed May 12, 2015); “The top sale 2011,” Leader Time Magazine, 12(134), 2012; “Asean mutual recognition arrangement of product registration approval for cosmetics,” The Seventeenth Meeting of the Asean Free Trade Area (AFTA) Council, 2003; Andrea Tortora, “Billion dollar markets,” Direct Selling News, October 1, 2014, http://directsellingnews.com/index.php/view/billion_dollar_markets#.VVI5S45Viko (accessed May 12, 2015); Nalin Viboonchart, “Better Way shifts focus to boost revenue,” The Nation, August 22, 2009, http://www.nationmultimedia.com/home/2009/08/22/business/Better-Way-shifts-focus-to-boost-revenue- 30110418.html (accessed May 12, 2015); “Weak purchasing power hits Mistine,” Bangkok News, March 18, 2014, http://www.bangkokpost.com/business/news/400357/weak-purchasing-power-hits-mistine

394 Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market

(accessed May 12, 2015); Ara Wilson (1999), “The empire of direct sales and the making of Thai entrepreneurs,” Critiques of Anthropology, 19, 402–22; World Federation of Direct Selling Associations, “Global direct selling industry announces record sales and sales force figures,” July 28, 2014, http:// www.wfdsa.org/press/index.cfm?fa=show_release&Document_id=814 (accessed May 12, 2015).

QUESTIONS 1. What are the major SWOT considerations in Mistine’s attempt to continue its

growth and dominance in the Thai market? 2. How can Better Way stay on top in Thailand while it looks to expand

internationally? 3. What specific marketing initiatives would you recommend over the next 5 years?

Case 7 • Mistine: Direct Selling in the Thai Cosmetics Market 395

BP Struggles to Repair Its Tarnished Reputation*

Synopsis: In the wake of the Deepwater Horizon disaster in the Gulf of Mexico, BP faces a monu- mental task in reestablishing its sustainability-based branding strategy and repairing its tarnished reputation. This case examines the history of BP, its efforts to rebrand the company to focus on sus- tainability, and its environmental and ethical lapses preceding the Deepwater Horizon accident. BP had realized the need to become more environmentally responsible and was the first energy com- pany to recognize the presence of global warming and launch initiatives to produce cleaner forms of energy. Unfortunately, the company’s questionable safety and environmental record effectively undermined its branding initiatives. To move beyond the Gulf oil spill, BP must find ways to repair its damaged reputation through a commitment to integrity and an authentic concern for both the environment and the company’s many stakeholders.

Themes: Ethics and social responsibility, sustainability, corporate branding and positioning, corpo- rate affairs, stakeholder engagement, strategic thrust

BP has experienced a lot of ups and downs over its hundred-year history—from nearly bankrupting its founder William D’Arcy to becoming one of the world’s largest energy companies. BP has also experienced its fair share of controversies regarding business practices, environmental damage, hazards to workers, and greenhouse gases. For some time, BP has attempted to turn a page in its history book toward a more environmentally friendly future through investments in renewable energy and ethics initiatives. British Petroleum changed its name to BP and then tried to rebrand itself as Beyond Petroleum. This rebranding was a signal to stakeholders that it was focused on sustainability and the need to move beyond nonrenewable energy sources.

Changes in demand patterns for energy products require that firms respond to the value desired by a target market. BP was trying to position its products as not just commodities, but as differentiated products that support sustainability and other social responsibility concerns. One of the key concerns when such claims are made involves maintaining a product that is authentic and trustworthy. By using the Beyond Petroleum positioning, BP presented itself as being committed to investing in renewable energy, which has gained a great deal of popularity among consumers and other members of society concerned about the planet’s future. A marketing strat- egy has to be built on a solid foundation of supportable claims about the true nature of the product. However, BP’s efforts backfired on April 20, 2010 when the explosion of the Deepwater Horizon oil rig, operated under the oversight of BP, created one of the greatest offshore oil disasters in history.

This case provides an opportunity to observe the past efforts of BP to improve its image, along with how these efforts were eclipsed by the oil spill. Certain disas- ters resulting from company negligence are detailed in this analysis, and although BP made efforts to establish itself as a socially responsible company, the recent oil spill crisis undid many of BP’s marketing initiatives. While BP has experienced other disasters related to its social responsibility, before the 2010 oil spill, BP was garner- ing a better reputation as a socially responsible oil company. It became the first oil

CASE

*O.C. Ferrell and Jennifer Sawayda, University of New Mexico, developed this case for classroom dis- cussion rather than to illustrate effective or ineffective handling of an administrative situation.

396

company to recognize the presence of global warming and to launch initiatives to produce cleaner forms of energy. This one disaster has tainted BP’s brand image, causing the company to lose billions of dollars and the reputation it worked so hard to build.

THE HISTORY OF BP BP was founded more than a century ago by William D’Arcy, a wealthy British gentleman who had invested all his savings in the quest for oil in the Middle East. While experts and scientists had encouraged D’Arcy to pursue the venture, after more than 6 years of drilling, both his patience and finances were running low. Finally, in 1908, the drillers had reached almost 1,200 feet when a fountain of oil spewed out. After long years of disappointment, the Anglo-Persian Oil Company, what would become BP, was born. The company quickly opened trade on the stock market, and D’Arcy, who had lost nearly his entire net worth, became rich.

A naphtha field in Iran, located around 130 miles from the mouth of the Persian Gulf, was the first place where the Anglo-Persian Oil Company established a refinery. (Naphtha refers to any sort of petroleum product; in this case, the Anglo-Persian Oil Company was pumping crude oil.) George Reynolds, D’Arcy’s head manager for all the miners, quickly discovered that navigating this rugged land could take months. To facilitate transportation of the oil, BP started building a pipeline through the area, and many of the necessary supplies had to be shipped from the United States. The huge scope of the undertaking drew workers from across the world—all of which were seeking work in helping to build the largest refinery in the world.

By 1914, BP was about to go bankrupt again. The company had a lot of oil, but demand for that oil was low. The automobile had not become a mass-market product yet, and companies in the New World and Europe had first-mover advantages in the industrial oils market. An even worse problem was the strong smell of Persian oil, which eliminated it from the heating and kerosene lamp markets.

Winston Churchill, who was at the time the British First Lord of the Admiralty, changed all that. He felt that the British navy, which was the envy of the world, needed a reliable and dedicated source of oil. Oil executives had been courting the navy for some years, but until Churchill, commanders had been reluctant to abandon coal. Churchill was adamant that only Anglo-Persian, because it was a British-owned company, could adequately protect British interests. Parliament overwhelmingly agreed and soon was a major shareholder in the oil company. Thus began the debate over the repercussions of involving politics in the oil industry, a debate that only became louder throughout World War II, the Persian Gulf War, and the Iraq War.

The twentieth century saw enormous growth in the oil industry, along with mas- sive power shifts in the Middle East. In 1969, Muammar al-Gaddafi led a coup in Libya, promptly demanding a tax increase on all oil exports. Gaddafi eventually nationalized BP’s share of an oil operation in Libya. This move led other oil-rich countries in the Middle East, including Iran, Saudi Arabia, United Arab Emirates, and Qatar, to eventu- ally nationalize. The effect on BP was massive—between 1975 and 1983, the oil pro- duction in the Middle East fell from 140 million to 500,000 barrels.

In order to survive, BP had to find new places to drill for oil. The Forties Field off the coast of Scotland, capable of producing 400,000 barrels of crude oil a day, and Prudhoe Bay in Alaska, where BP had tapped its largest oil field yet in 1969, were the two great hopes for BP’s future at this time. However, transportation of the oil was a problem. The remoteness of BP’s best sites would challenge not only BP’s engineering capabilities, but also more importantly its commitment to the environment. The Forties Field pipeline would eventually become the largest deep-water pipeline ever constructed, a project that required special attention due to the harsh weather. The Trans-Alaska pipeline system would become the largest civil engineering project in

Case 8 • BP Struggles to Repair Its Tarnished Reputation 397

North America, measuring nearly 746 miles long. The company performed extensive research to identify any potential environmental risks, making sure the pipeline included long above-water stretches to ensure that the warm oil transporting through it would not melt the permafrost. BP also had to take steps to ensure that habitat dis- ruption would be minimal. The company tried to assure concerned stakeholders that the environment was a serious matter to them, which they would address with an intense level of focus and commitment.

QUESTIONS ABOUT BP’S ETHICAL AND SOCIAL CONDUCT Unfortunately, BP’s actions have not always coincided with its words. The com- pany’s promises to act as a responsible environmental steward have been marred by numerous instances of questionable behavior. As the company’s operating envi- ronment became more complex and chaotic, BP often lost sight of its responsibilities to the environment, employees, society, and shareholders.

In March 2005, a huge explosion occurred at a BP-owned oil refinery in Texas that killed 15 employees and injured another 170 people. The company was found guilty by the Southern District of Texas for a one-count felony for violating the Clean Air Act and ordered to pay $50 million in criminal fines. The explosion was the result of a leak of hydrocarbon liquid and vapor, which then ignited. BP admitted that it had ignored several procedures required by the Clean Air Act for ensuring mechanical integrity and a safe startup between 1999 until the explosion in 2005. The BP case was the first prosecution under a section of the Clean Air Act, which was created to help prevent injuries from such accidental leaks of explosive substances.

The company was also charged with violating the Clean Water Act when Alaskan oil pipelines leaked crude oil into the tundra and the frozen lake. The leaks occurred in March and August of 2006, after BP failed to respond to numerous red flags. One of these flags was the dangerous corrosion of the pipes that went unchecked for more than a decade before the Clean Water Act violation. A contract worker discovered the first pipeline leak in March of 2006. This leak resulted in more than 200,000 gallons of crude oil spilling onto the fragile tundra and a nearby frozen lake and was the larg- est spill to ever occur on the North Slope. A second 1,000-gallon leak occurred shortly after the first, in August of 2006. Although it was small, the second leak led to the shut- down of oil production in the east side of Prudhoe Bay until BP could guarantee that the pipelines were fit for use. The fines resulting from these infractions included $12 million in criminal fines, $4 million in payments to the National Fish and Wildlife Foundation, and $4 million in criminal restitution to the state of Alaska. BP would later pay an additional $25 million for violating clean-water and clean-air laws. Regular routine cleaning of the pipes is simple and would have prevented the 2006 oil leaks in Alaska. Nevertheless, in October 2007, BP recorded yet another spill near Prudhoe Bay. This time it was 2,000 gallons of toxic methanol, a deicing agent that spilled onto the tundra and killed many plants and animals.

In the Northern District of Illinois, BP was charged with conspiring to violate the Commodity Exchange Act and also to commit mail fraud and wire fraud. The fraud involved purchasing more than the available supply of TET propane, and then selling it to other market participants at a price inflated well above market value. BP was forced to pay large fines for this market manipulation. The company had to pay $100 million in criminal penalties, $25 million to the U.S. Postal Inspection Consumer Fraud Fund, and restitution of $53 million. Additionally, BP had to pay a civil penalty of $125 million to the Commodity Futures Trading Commission. Furthermore, four former employees were indicted in February 2004 for conspiring to manipulate the propane market at an artificially high price. The estimated loss to consumers who paid over market value exceeded $53 million dollars. The violation resulted in a 20-count indictment by a federal grand jury in Chicago.

398 Case 8 • BP Struggles to Repair Its Tarnished Reputation

BP TRIES TO REPAIR ITS IMAGE THROUGH BRANDING AND SUSTAINABILITY BP’s environmental, legal, and ethical transgressions demonstrate that the company has a history of disregarding the well-being of stakeholders. The mistakes of BP and similar companies have caused many types of stakeholders to become more wary, especially after decades of repeated violations and misconduct across many differ- ent industries. Being an energy company, however, BP also finds itself in the midst of a key debate over the future of the world’s energy supply and such key issues as global warming and greenhouse gas emissions. In this regard, BP has taken major steps toward repairing its tattered image.

One way BP worked to repair its damaged image was by changing its name from British Petroleum to simply BP and increasing alternative energy offerings in its prod- uct mix. John Browne, former BP chief executive, proclaimed “we are all citizens of one world, and we must take shared responsibility for its future and for its sustainable development.” BP was the first global energy firm to publicly announce its recognition of the problem of climate change. While its primary product is still petroleum, BP accepts that global warming is human-made, and it has begun to seek alternative reve- nue streams in wind farms and other lower-emissions energy sources.

To adapt to a changing world, BP launched its Alternative Energy business in 2005. While still a small part of its overall company, BP sees “going green” as an increasingly important part of its business, which it will expand as it becomes more profitable to do so. The company has invested $8.3 billion in alternative energy. Due to the Deepwater Horizon crisis, however, BP has had fewer resources to dedicate toward investigating types of renewable energy. For instance, while it still has invest- ments in wind and biofuel energy, it has exited its solar and carbon sequestration projects.

In 2013 BP announced it was going to sell its wind power projects to focus more heavily on its existing assets. However, BP later reversed its decision. Instead, the company continues to develop wind energy through the operation of wind farms across the nation. In the United States, BP-operated wind farms have a total capacity of 2,600 MW. By 2015, BP Wind Energy had interests in 16 wind farms operating in nine states with two more under construction. BP’s wind farms produce enough energy to power up to 775,000 homes.

BP became the single largest foreign stockholder in a Brazilian bioethanol com- pany when it purchased a 50 percent stake in Tropical Energia S.A. In 2011, BP acquired the remaining 50 percent stake in Tropical Energia S.A. as well as an 83 per- cent stake in Brazilian ethanol producer Companhia Nacional de Acucar e Alcool. Today BP has three mills in Brazil focused on producing ethanol from sugar cane. BP also entered into a joint venture with DuPont to develop biobutanol, a biofuel with higher energy content than bioethanol. Since 2006, BP has invested $3 billion in the research and development of biofuels.

Beyond alternative energy sources, BP is also looking to save energy through better planning and implementation of its many operations around the world. The BP Zhuhai (BPZ) PTA plant is setting an example by using more efficient forms of energy. This development of more efficient, cleaner energy and the reduction of CO2 emissions is an increasing priority in China. BPZ is working to set new stan- dards and make a greater contribution in this area. A sequence of heat recovery pro- jects has allowed the plant to optimize the use of steam as a way to reduce liquefied petroleum gas (LPG) consumption significantly. This has saved energy and reduced emissions. Additionally, by reducing fuel consumption, BPZ also has reduced the road safety and operational risks associated with delivery and unloading of LPG. The BPZ plant has been so successful that a second and third plant has been added. In 2014, BP set up its third plant with a capacity of 1.25 million tons per year.

Case 8 • BP Struggles to Repair Its Tarnished Reputation 399

BP has also unveiled a carbon offset program called BP Target Neutral, a not- for-profit organization. BP Target Neutral was established to help individuals and businesses calculate their carbon footprint and advise them on ways they could reduce their impact. BP also provides carbon offsets for stakeholders to purchase. Carbon offsets are ways that stakeholders can “offset” the carbon they emit by sup- porting projects that reduce carbon emissions (e.g., a wind farm project). Partici- pants provide payments to BP Target Neutral, which in turn invests the money in carbon reduction projects. Both FedEx and the British Olympic Association have participated in the BP Target Neutral program.

In addition to its Alternative Energy program, BP has implemented environmen- tal awareness programs in Britain to help stakeholders understand the impacts of global warming and the importance of sustainability issues. BP Educational Service (BPES) initiated the distribution of the Carbon Footprint Toolkit, an award-winning program designed to help high school students understand the effects of climate change and their own carbon footprint. Developed in conjunction with teachers and BP’s experts, the toolkit enables students to examine their school’s carbon footprint and to help develop carbon reduction plans for their schools. The Carbon Footprint Toolkit was originally developed as a response to teachers’ demands that came out of a series of “green” workshops that BP held. The toolkit received a prestigious award for e-learning at the International Visual Communications Association (IVCA) awards in 2007.

BP ESTABLISHES A CODE OF CONDUCT To help deal with BP’s growing reputation for ethical misconduct, BP’s Ethics and Compliance team organized the creation, publication, and distribution of a company code of conduct in 2005, entitled “Our Commitment to Integrity.” The code was dis- tributed to BP employees around the globe and is also publicly available online at the BP website. Given the multinational nature of the BP business, the code seeks to unite its diverse employees behind a set of universal standards of behavior. The cross-functional team that drafted the code of conduct faced many major challenges, like how to agree upon and communicate consistent standards for all BP employees regardless of location, culture, and language. The code of conduct was the largest mass communications exercise ever attempted at BP.

To ensure that BP employees are familiar with the code, the company holds awareness meetings to help employees understand its contents. Perhaps the most important role of the code is that it put BP’s ethical and legal expectations in writing for the first time. BP’s intension was to give clear guidelines for individuals covering five key areas: health, safety, security, and the environment; employees; business partners; government and communities; and company assets and financial integrity.

It is now clear that BP’s code of conduct was not equipped to prevent the worst environmental disaster along the Gulf Coast. Regardless of the degree of comprehen- siveness, ethical codes should always reflect upper management’s desire for compli- ance with values, rules, and policies. Most importantly, legal staff has to be called upon to ensure that the code correctly assesses key areas of risk. The BP code of conduct was not designed to resolve every legal and ethical issue encountered in daily operations, but the code should have helped employees and managers deal with ethical dilemmas in high-risk areas by prescribing or limiting specific activities.

THE WORST OIL SPILL IN U.S. HISTORY Despite BP’s efforts to repair its image, safety violations continued at its facilities. In early 2010, U.S. regulators fined the oil giant $3 million for safety problems at an Ohio factory. The Occupational Safety and Health Administration (OSHA) found

400 Case 8 • BP Struggles to Repair Its Tarnished Reputation

that workers might be exposed to injury or death should explosive or flammable che- micals be released at the factory. This violation was not an isolated event. Just 4 months earlier, OSHA had fined BP a record $87 million for not correcting safety problems that were identified after the 2005 explosion at its Texas refinery. These instances of safety violations culminated with the explosion at the Deepwater Hori- zon oil rig in April 2010.

THE EXPLOSION It all started with an opportunity to tap into a new, highly profitable oil reservoir. The reservoir was dubbed “Macondo,” after the doomed town in Gabriel Garcia Marquez’s novel One Hundred Years of Solitude. To tap the reservoir, BP hired an oil rig from Transocean, Ltd. By April the project was behind schedule, but BP was convinced it would lead to success. Then on April 20, 2010, an explosion rocked the rig, killing 11 employees. The burning rig sank 2 days later.

The situation quickly worsened because the well, located nearly a mile below the surface, was damaged in the explosion. Thousands of gallons of crude oil gushed into the Gulf of Mexico. BP sent submarine robots to the seabed in an attempt to acti- vate the switch-off valve on the well. The entire process soon became a public rela- tions nightmare, with BP sending out conflicting messages. One company official informed Fox News that BP had successfully activated part of a failed blowout preventer, which was slowing the oil flow. The announcement turned out to be false. BP’s underwater robot did in fact trigger a device, but the device did not stop the oil flow.

The primary event that caused the explosion is unknown. However, investiga- tions have suggested that BP’s actions made the well more vulnerable. One investiga- tion implies that BP cut short procedures and quality testing of the pipe—tests that are meant to detect gas in the well. Some experts hypothesize that one of the final actions in installing the pipe—which involved cementing the steel pipe in place— was the catalyst for the explosion. A government panel investigating the crisis also concluded that BP, Transocean, and Halliburton—some of the major firms involved in the drilling—failed to adequately consider risks or communicate with one another on major decisions involving the well.

One of the many criticisms levied against BP is its decision to use a less costly well design that some congressional investigators have deemed “risky.” Installation of this design is easier and costs are lower. However, it also provides a better path for gas to rise outside of the pipe. While this did not cause the explosion, investiga- tors believe it may have contributed to the well’s vulnerability. Although BP did not break any laws by using such a design, it ignored safer alternatives that might have prevented, or at least hindered, the accident.

The next few months unleashed a series of failed efforts by BP to stop the flow. Oil washed up on the coasts of Louisiana, Texas, Alabama, Mississippi, and Florida, disrupting the livelihoods of fishermen and others who depended on the Gulf for income. A constant stream of finger pointing took place among the administration and the public as everyone tried to decide who bore the most blame for the tragedy. With all eyes on BP, company actions were scrutinized, and often criticized, through- out the duration of the disaster.

FAILURE TO MANAGE RISKS The main question on everyone’s mind after the disaster was how BP could have overlooked the risks associated with the Deepwater Horizon. The ocean rig did have safety systems in place, but these systems were not as safe as they could have

Case 8 • BP Struggles to Repair Its Tarnished Reputation 401

been. For instance, the rig did not have a remote-control shut-off switch that would have been used as a last resort in a major oil leak disaster. However, neither Transo- cean (the rig’s owner) nor BP was breaking any laws by not having one; the Minerals Management Service (MMS), a federal agency charged with oversight of the nation’s offshore oil-and-gas industry, did not require such a device as long as the rig had a backup control system that could shut off the well in case of an emergency. Some suggest that this represented a lapse in regulatory oversight on the government’s part.

Yet this cannot explain other lapses in BP’s risk management strategy. Some suggest that BP cut corners in risk management to save time and money. For example, records reveal that nearly three of every four incidents that caused fed- eral investigations into safety on deep-sea drilling rigs in the Gulf of Mexico were owned by Transocean. As the biggest client of Transocean in the Gulf of Mexico, BP had a responsibility to properly oversee that appropriate precautions were taken to prevent a disaster. Later investigations also revealed that BP’s disaster recovery plan was inadequate. The plan contained several inaccuracies. For instance, one of the wildlife experts who was listed as an emergency responder had been dead since 2005. The plan also estimated that should a spill occur, the company would be able to recover about 500,000 barrels of oil per day. In reality, it took BP months to contain the leak, at a spill rate of much less than what was listed in the contingency plan. The inaccuracies in BP’s disaster recovery plan highlight how unprepared the company was for a disaster like the Deepwater Horizon spill.

REPERCUSSIONS OF THE DISASTER The BP oil spill has had and will continue to have wide-ranging repercussions for both BP and the oil industry. The financial toll on BP alone is extensive. BP share prices plunged over 50 percent after the accident. BP was also held liable for cleanup costs and damages. Under current legislation, the most BP would have to pay for economic damage would be $75 million, as mandated by the Oil Pollution Act of 1990. However, BP chose to go beyond what was required by law. Estimates place cleanup costs at $40 billion.

The Justice Department launched a civil lawsuit against BP, Transocean, Cameron International, Halliburton, and other companies, alleging that they know- ingly took risks and disregarded safety rules. BP was ordered to pay a record $4.5 billion in fines and faced 14 counts of criminal acts, including felony manslaugh- ter. It faces as much as $13.7 in fines for violating the Clean Water Act.

Drilling contractors and oil service companies also suffered from the spill because of plummeting stock values. The Obama administration issued a 6-month moratorium on deepwater and oil gas drilling in the Gulf of Mexico, which shut down 33 deepwater rigs. With one-third of America’s oil coming from the Gulf, the repercussions stemming from the spill would be felt for years to come.

One of the most immediate consequences of the disaster was the resignation of BP CEO Tony Hayward. Despite an impressive track record, including a net profit of $6.08 billion in the first quarter of 2010 and a seemingly dedicated attempt to “turn things around” at BP, Hayward became the face of the worst oil spill in U.S. history—and perhaps the scapegoat as well. Experts believe that it was Hay- ward’s verbal blunders, his lack of visible empathy, and failed crisis management that triggered his downfall. For instance, his comments on how he wanted “his life back” and his attendance of a yacht race made him appear unsympathetic to the Gulf crisis. With the heavy criticism Hayward had generated, the company felt that he would not be able to restore BP’s credibility.

402 Case 8 • BP Struggles to Repair Its Tarnished Reputation

THE LONG ROAD TO RECOVERY After years of rebranding initiatives aimed at sustainability, it took only a few months for BP’s hard work to unravel. It took several wide-scale efforts to contain the oil leaking into the Gulf. In the interim, thousands of marine animals died in the oily waters, white sand beaches turned to black, and hundreds of people that depended upon the Gulf of Mexico lost part of their income. In August 2010—over 100 days after the disaster began—BP plugged the leak and dug relief wells to effectively “kill the well.” However, the damage done to stakeholders was not over. More than 640 miles of shorelines across several states were “tarred” with oil.

To compensate stakeholders that depend on the Gulf, BP set aside a $20 billion escrow fund. A government-appointed administrator oversaw the claims. As always, though, compensating the right people for the right amounts is tricky. For example, how far from the coast should a claimant be in order to have an effective claim? What about the many workers without sufficient documentation to prove they worked in the Gulf? Although the escrow fund will serve to compensate some indivi- duals, others will likely receive little or no compensation.

Several investigations have been subsequently launched to determine where the blame lies. After performing an internal investigation of the incident, BP admitted fault but placed much of the blame on its contractors Transocean and Halliburton. A report by the National Commission came to a different conclusion. While it places some of the responsibility on Transocean and Halliburton, the panel found that lapses in management and oversight on BP’s part contributed to the disaster. The commission also placed some blame on the government, stating that the administra- tion was too slow to respond and then created a liability by overreacting. The panel’s findings have led some to call for massive overhauls in oil industry regulation.

Another investigation sheds additional light on why the oil spill became such a large-scale environmental disaster. Engineers discovered that the blowout preventer was indeed faulty. Instead of sealing the pipe completely, the blowout preventer blades got stuck in the pipe, leaving enough space for oil to leak out. BP filed law- suits against the manufacturer of the blowout preventer, Cameron International Corp. Cameron settled with BP for $250 million.

Perhaps the best news for BP was that the oil began biodegrading faster than expected due to bacteria, which fed on the methane in the crude. Although nature seems to be bouncing back, scientists have detected evidence of oil across several thousand square miles of seafloor. BP’s own recovery does not seem to be running so smoothly either. With its role in the disaster along with its public relations blun- ders, the company’s reputation had undergone a severe blow. BP has virtually become synonymous with oil spill in the minds of many stakeholders. Even with a renewed focus on energy-saving technologies, BP’s marketing efforts might be viewed as little more than an attempt to regain credibility without any serious dedi- cation to the environment. The company will need to work doubly hard to convince stakeholders that its marketing messages are authentic and sincere.

Yet efforts are already underway. After the ousting of BP CEO Tony Hayward, American Bob Dudley took over operations. While BP originally appeared to down- play the catastrophe, Dudley freely admitted that the incident was a serious “catas- trophe” and that the company was committed to the cleanup. BP hired former Federal Emergency Management Agency chief James Lee Witt and his public safety and crisis management consulting firm to help manage the incident and establish plans for long-term recovery. BP also created a safety organization that has been given authority to stop operations whenever danger is detected.

Although BP encountered a $40 billion cleanup bill, a slew of negative publicity, and a 2010 loss of $4.9 billion, the company is striving to rebuild its reputation. In addition to a new safety division at BP, CEO Dudley appointed a board member with knowledge of process safety. The company is intent on attaining growth and

Case 8 • BP Struggles to Repair Its Tarnished Reputation 403

will pay smaller dividends in order to spend more on oil exploration. Dudley also promised to make BP into the safest offshore energy operator in the business. Unfor- tunately, a day after this announcement, a U.K. safety regulator reprimanded BP for safety issues on three of its North Sea rigs—which draws BP’s commitment into question.

IMPLICATIONS FOR BP’S MARKETING STRATEGY BP’s “Beyond Petroleum” positioning backfired due to the Deepwater Horizon envi- ronmental disaster. A firm can spend many years building a reputation, and it can be tarnished in a single day through an event that destroys the confidence of customers and other stakeholders. In this case, BP became the target of almost every group on the Gulf Coast negatively impacted by the environmental effects of the oil spill. BP’s attempt to move its product away from being a commodity like those of its competi- tors failed. In fact, about the only strategy available for BP was to apologize and try to compensate the victims of the disaster. One of the worst things that can happen is to make claims of being a sustainable company and then be involved in a disaster that is just the opposite. A priority for BP’s future marketing strategies, at least for its consumer products, is to restore its reputation as much as possible and build a foundation for more realistic and authentic marketing activities to build strong rela- tionships and trust with consumers.

Another area where BP’s marketing strategy has to be improved is its public rela- tions activities with various stakeholders such as regulators, local government enti- ties, business communities, and those who earn their living directly from the Gulf Coast environment. The company has taken action by investing heavily in advertis- ing about the recovery from the disaster and the restored Gulf Coast beaches and hospitality industry. As BP does a good job with its public relations and compensa- tion programs, it is attempting to create the groundwork for developing better rela- tionships with customers in the future.

From the beginning, BP proved it was able to overcome significant obstacles. It went from near bankruptcy to being one of the largest energy companies worldwide. BP has worked hard to overcome its negative image through sustainability marketing initiatives and social responsibility. However, BP’s emphasis on environmental responsibility backfired after the Deepwater Horizon disaster. Although it made great strides in repositioning its brand, it failed to properly manage its brand as a socially responsible company.

The damage to BP’s Beyond Petroleum marketing strategy is not easy to repair. The development of trust is based on a firm’s commitment to integrity, transparency, and a concern for all stakeholders. In the future, BP needs to develop a marketing strategy that is seen as authentic in the face of the socially responsible corporation that it claims to be.

SOURCES Jeffrey Ball, “BP spill’s next major phase: Wrangling over toll on Gulf,” Wall Street Journal, April 13, 2011, http://online.wsj.com/article/SB10001424052748704013604576248531530234442.html (accessed May 15, 2015); Jeffrey Ball, “Strong evidence emerges of BP oil on seafloor,” Wall Street Journal, December 9, 2010, A20; Jeffrey Ball, Stephen Power, and Russell Gold, “Oil agency draws fire,” Wall Street Journal, May 4, 2010, p. A1; Joel K. Bourne, Jr., “The deep dilemma,” National Geographic, October 2010, p. 40; BP, “BP gets government go-ahead for PTA plant in Zhuhai, China,” June 18, 2013, http:// www.bp.com/en/global/corporate/press/press-releases/bp-gets-government-go-ahead-for-pta-plant-in- zhuhai–china.html (accessed May 15, 2015); BP, “Generating low carbon energy,” http://www.bp.com/ en/global/corporate/about-bp/what-we-do/generating-low-carbon-energy.html (accessed May 15, 2015); BP, Our Code, Our responsibility, 2014, http://www.bp.com/content/dam/bp/pdf/code-of-conduct/ bp_code_of_conduct_en.pdf (accessed May 15, 2015); BP, Sustainability Report 2014,

404 Case 8 • BP Struggles to Repair Its Tarnished Reputation

http://www.bp.com/content/dam/bp/pdf/sustainability/group-reports/Sustainability_Report_2014.pdf (accessed May 15, 2015); BP Target Neutral website, http://www.bptargetneutral.com (accessed May 15, 2015); “BP to expand activities in biofuels, buying out remaining shares in Brazil’s Tropical Bioenergia S.A.,” BP Alternative Energy, September 14, 2011, http://www.bp.com/genericarticle.do? categoryId=9024973 &contentId=7070981 (accessed May 15, 2015); BP, “Wind and biofuels,” http:// www.bp.com/en_us/bp-us/what-we-do/wind.html (accessed May 15, 2015); “BP’s spill contingency plans vastly inadequate,” CBS News, June 9, 2010, http://www.cbsnews.com/stories/2010/06/09/national/ main6563631.shtml (accessed May 15, 2015); Department of Justice, “British petroleum to pay more than $370 million in environmental crimes, fraud cases,” October 25, 2007, http://www.justice.gov/ archive/opa/pr/2007/October/07_ag_850.html (accessed May 15, 2015); John M. Broder, “Blunders abounded before Gulf spill, panel says,” New York Times, January 5, 2011, http://www.nytimes.com/ 2011/01/06/science/earth/06spill.html?_r=2&ref=gulfofmexico2010 (accessed May 15, 2015); John Browne, “Breaking ranks,” Stanford Business, 1997, http://www.gsb.stanford.edu/community/bmag/ sbsm0997/feature_ranks.html (accessed July 25, 2012); Ben Casselman, “Rig owner had rising tally of accidents,” Wall Street Journal, May 10, 2010, http://www.wsj.com/articles/SB1000142405274870 4307804575234471807539054 (accessed May 15, 2015); Ben Casselman and Russell Gold, “BP decisions set stage for disaster,” Wall Street Journal, May 27, 2010,http://www.wsj.com/articles/SB1000 1424052748704026204575266560930780190 (accessed May 15, 2015); Guy Chazan, “BP comeback is sidetracked in arctic,” Wall Street Journal, April 19, 2011, p. B5; Guy Chazan, “BP dividend takes back seat to growth,” Wall Street Journal, November 3, 2010, pp. B1–B2; Guy Chazan, “BP faces fine over safety at Ohio Refinery,” Wall Street Journal, March 9, 2010, p. A4; Guy Chazan, “BP feels shareholder heat after string of setbacks,” Wall Street Journal, September 7, 2011, p. B1; Guy Chazan, “BP’s worsening spill crisis undermines CEO’s reforms,” Wall Street Journal, May 3, 2010, p. A1; “Day 64: Latest oil disaster developments,” CNN, June 22, 2010, http://news.blogs.cnn.com/2010/06/22/day-64- latest-oil-disaster-developments/ (accessed May 15, 2015); Louise Downing, “BP ends renewables energy target after $8.3 billion spend,” Bloomberg, March 19, 2014, http://www.bloomberg.com/news/articles/ 2014-03-19/bp-ends-renewables-energy-target-after-8-3-billion-spend (accessed May 15, 2015); Jessica Durando, “BP’s dudley: Time for ‘scaleback’ in BP cleanup,” USA Today, July 30, 2010, http://content. usatoday.com/communities/greenhouse/post/2010/07/bp-hayward-gulf-oil-spill/1#.VVYOX_lViko (accessed May 15, 2015); Peter Elkind, David Whitford, and Doris Burke, “‘An accident waiting to happen’,” Fortune, February 7, 2011, pp. 107–132; Tom Fowler, “BP slapped with record fine,” Wall Street Journal, November 16, 2013, pp. A1, A6; Tom Fowler, “BP spill saga far from over,” Wall Street Journal, March 5, 2012, p. A3; Tom Fowler, “Cameron will pay BP to settle spill claims,” Wall Street Journal, December 17–18, 2011, p. B4; Tom Fowler, “U.S. readies attack on BP,” Wall Street Journal, February 24, 2012, p. A2; Tom Fowler and Russell Gold, “Engineers deny charges in BP spill,” Wall Street Journal, November 19, 2012, p. A6; Darcey Frey, “How green is BP?” New York Times, December 8, 2002, http://www.nytimes.com/2002/12/08/magazine/how-green-is-bp.html?pagewanted=all&src=pm (accessed May 15, 2015); Daniel Gilbert and Justin Scheck, “Oil prices to play into BP fine,” Wall Street Journal, January 18, 2015, http://www.wsj.com/articles/oil-prices-to-play-into-bp-fine-1421610065 (accessed April 1, 2015); Russell Gold, “BP sues maker of blowout preventer,” Wall Street Journal, April 21, 2011, p. B1; Angel Gonzalez and Brian Baskin, “‘Static kill’ begins, raising new hopes,” Wall Street Journal, August 4, 2010, http://online.wsj.com/article/SB1000142405274870354560457540 7251664344386.html (accessed May 15, 2015); Russell Gold and Tom McGinty, “BP relied on cheaper wells,” Wall Street Journal, June 19, 2010, http://www.wsj.com/articles/SB1000142405274870 4289504575313010283981200 (accessed May 15, 2015); James Herron, “BP rapped over North Sea Rig safety,” Wall Street Journal, February 2, 2011, http://online.wsj.com/article/SB10001424052748 703960804576119631110061702.html (accessed May 15, 2015); “History of BP,” BP International website, http://www.bp.com/multipleimagesection.do?categoryId=2010123 &contentId=7059226 (accessed May 15, 2015); Siobhan Hughes, “BP deposits $3 billion in spill fund,” Wall Street Journal, August 9, 2010, http://online.wsj.com/article/SB1000142405274870438850457541 9281620436778.html (accessed May 15, 2015); Neil King, Jr., “BP-claims chief faces knotty task,” Wall Street Journal, July 17–18, 2010, p. A5; Kevin Johnson and Rick Jervis, “Justice Dept. sues BP, others,” USA Today, December 16, 2010, p. 3A; Amy Judd, “British Petroleum ordered to pay $180 million in settlement case,” NowPublic, February 19, 2009, http://www.nowpublic.com/environment/british-petroleum-ordered-pay-180-million-settlement-case (accessed May 15, 2015); Monica Langley, “U.S. drills deep into BP as spill drama drags on,” Wall Street Journal, July 21, 2010, pp. A1, A14; David Leonhardt, “Spillonomics: Underestimating risk,” New York Times, May 31, 2010, http://www.nytimes.com/2010/06/06/magazine/06fob-wwln-t.html (accessed May 15, 2015); Bruce Orwall, Monica Langley, and James Herron, “Embattled BP Chief to exit,” Wall Street Journal, July 26, 2010, pp. A1, A6; Greg Palast, “British Petroleum’s ‘smart pig’,” Greg Palast: Journalism and Film, August 9, 2006, http://www.gregpalast.com/british-petroleums-smart-pig (accessed May 15, 2015); Jim Polson, “BP oil is biodegrading, easing threat to East Coast,” BusinessWeek, July 28, 2010, http://www.businessweek.com/news/2010-07-28/bp-oil-is-biodegrading- easing-threat-to-east-coast.html (accessed May 15, 2015); Stephen Power and Ben Casselman, “White House probe blames BP, industry in Gulf blast,” Wall Street Journal, January 6, 2011, p. A2; Stephen Power and Tennille Tracy, “Spill panel finds U.S. was slow to react,” Wall Street Journal, October 7, 2011, p. A6; James Quilter, “BP does u-turn on 2.6GW portfolio sale,” Wind Power Monthly,

Case 8 • BP Struggles to Repair Its Tarnished Reputation 405

July 30, 2013, http://www.windpowermonthly.com/article/1193230/bp-does-u-turn-26gw-portfolio-sale (accessed May 15, 2015); Paul Sonne, “Hayward fell short of modern CEO demands,” Wall Street Journal, July 26, 2010, p. A7; Cassandra Sweet, “BP will pay fine in spills,” Wall Street Journal, May 4, 2011, p. B3; John Upton, “Chevron and BP are pulling out of wind and solar,” Grist, May 30, 2014, http://grist.org/news/chevron-and-bp-are-pulling-out-of-wind-and-solar/ (accessed May 15, 2015); Vivienne Walt, “Can BP ever rebuild its reputation?” TIME, July 19, 2010, http://www.time.com/time/ business/article/0,8599,2004701-2,00.html (accessed May 15, 2015).

QUESTIONS 1. Analyze BP’s efforts to improve sustainability and its reputation prior to the

Deepwater Horizon disaster. Was the company on the right track? Why or why not?

2. Because most BP products can be viewed as commodities, do you think consu- mers will avoid purchasing from BP because of its track record and the Deepwater Horizon disaster? Why or why not?

3. How can BP prove to its stakeholders that it is serious about social responsibil- ity, sustainability, and ethics, and that its efforts are not just a public relations ploy? What strategic issues would you focus on in trying to repair the company’s reputation?

406 Case 8 • BP Struggles to Repair Its Tarnished Reputation

Chevrolet: A Century of Product Innovation*

Synopsis: This case examines Chevrolet’s history of product innovation, branding strategy, and successful product mix in connection with its relationship to parent General Motors and its rivalry with Ford. Chevrolet has a long history of success in developing and marketing cars, trucks, and SUVs that are practical, sporty, and affordable. The brand’s relationship with General Motors is both a strength and a weakness, especially in the aftermath of the federal government’s financial bailout of General Motors in 2008. Government demands for improved fuel economy and ever- changing customer needs and preferences will be constant challenges as Chevrolet looks toward its next 100 years. Massive product recalls due to ignition issues and other problems have also created the need for GM to reestablish its reputation for customer safety.

Themes: Product innovation, product mix, branding, product strategy, competition, corporate reputation, evolving technology, customer loyalty, government regulation, international marketing

General Motors’ (GM) Chevrolet brand celebrated its 100th anniversary in 2011. Throughout its history, Chevrolet has launched many different vehicle models, some of them widely successful and others deleted from the product mix shortly after introduction. Over the years, the company has transitioned from an American icon into a worldwide brand known for quality and durability. On the other hand, wide-scale recalls from GM, many of them involving Chevrolet brands, has some- what tarnished the brand’s reputation. GM will have to work hard to reestablish con- fidence in its brands and reassure consumers that future vehicle models are safe to drive. Despite numerous successes and failures in its history, including the recent bankruptcy and bailout of parent company GM, Chevrolet is still going strong after more than a century of product innovation.

A HISTORY OF PRODUCT INNOVATION Ironically, Chevrolet exists because of its top competitor, Ford Motor Company. William Durant founded Chevrolet in 1911 to compete head on with Ford’s popular Model T. Durant had formed GM in 1908 but was ousted from the company 3 years later. To compete against Ford’s single model of vehicle, Durant realized that GM would need to create several different models. He applied this idea to his new com- pany, Chevrolet. The brand was named after Louis Chevrolet, a top racer who was hired to design the first Chevrolet. Chevrolet’s initial model cost $2,000. This was a high-priced vehicle at the time, which Durant disliked because he wanted to compete directly against Ford on price. A disagreement between the two men resulted in Chevrolet leaving the company, but the name of the brand stuck. In 1915, Chevrolet released a less expensive model priced at $490, the same price as a Ford Model T. The company was acquired by GM in 1918 after Durant gained controlling shares in both companies, and Chevrolet went on to become one of GM’s most popular brands. Durant once again became GM’s president but was ousted a final time in 1920.

CASE

*Jennifer Sawayda, University of New Mexico, prepared this case under the direction of O.C. Ferrell for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation.

407

With the Chevrolet brand, GM was able to give Ford a run for its money. In 1912, Chevrolet sold 2,999 vehicles, a mere 1 percent market share in the United States. By 1920, Chevrolet was selling over 100,000 vehicles, and in 1927, it surpassed Ford in number of cars sold. Five years later, one-third of cars sold in America were Chevro- lets, although the Great Depression significantly weakened company sales. Over the ensuing decades, Chevrolet attempted to position its products as cutting-edge, equip- ping its vehicles with innovative technologies and even forming a joint venture with competitor Toyota in 1984 to learn more about Toyota’s famous production system (in turn, Toyota was able to gain entry into the U.S. market). The partnership, called New United Motor Manufacturing, Inc., lasted until 2010.

From its beginning with namesake Louis Chevrolet, the company had a penchant for racing. Chevrolet continued courting racecar drivers as endorsers, and racing greats Junior Johnson, Mark Donohue, Tony DeLorenzo, Dale Earnhardt, and Jeff Gordon all won races driving Chevrolet models. The Chevrolet Cruze, one of the company’s most popular models, won the Driver’s Championship and Manufac- turer’s Championship in the 2010 World Touring Car Championship races. Chevro- let’s association with racecar driving has established many of its models as sporty, high-quality vehicles. Chevrolet also provided the engines for the 2012 Indy Racing League. In 2015, it sponsored the Chevy Indy Dual in Detroit. By reentering the Indy Racing League, Chevrolet has reinforced its racing heritage and brand image.

CHEVROLET’S PRODUCT MIX For more than 100 years, the Chevrolet brand has been associated with almost every type of vehicle on the road. The company has developed large trucks; delivery vans; full-size, mid-size, compact, and sub-compact automobiles; sports cars; and even racecars. This broad portfolio of products falls under the Chevrolet brand because of the strong brand equity that Chevrolet has developed over the last century. A vehi- cle’s brand provides many intangible attributes related to quality, design, utility, and self-image for the buyer. It is not uncommon for consumers to have extreme brand loyalty to either Chevrolet or Ford, especially in the purchase of light trucks. There- fore, most of the vehicles sold under the Chevrolet brand name start with a competi- tive advantage over many other existing brands of vehicles. This is why GM uses the Chevrolet brand name on a broader diversity of their vehicles than any other brand. For instance, Cadillac, Buick, and GMC have much narrower portfolios of vehicles and more distinct brand images. Consequently, the Chevrolet brand is an asset to the launch of a new vehicle such as the Volt, an electric vehicle (EV).

Over the years Chevrolet has had many models, and not all of those models are discussed in this case. Case Exhibit 9.1 shows the entire portfolio of Chevrolet

CASE EXHIBIT 9.1 Chevrolet Models Sold within the United States

Cars SUVs/Crossovers Trucks/Vans Electric Vehicles

Sonic Equinox Colorado Volt Cruze Traverse City Express Spark EV Malibu Tahoe Silverado Corvette Suburban Express Camaro Trax Impala Spark

SOURCE: Based on Chevrolet website (http://www.chevrolet.com), accessed April 24, 2015.

408 Case 9 • Chevrolet: A Century of Product Innovation

vehicle models sold in the United States. Here, we look at a number of models that represent the diversity of the Chevrolet product mix that exists today.

Chevrolet is credited with being the first carmaker to create the idea of planned product obsolescence. Based on this concept, Chevrolet introduces a new car model each year, a type of product modification. This marketing strategy allowed Chevrolet to overtake Ford in sales. Many consumers look forward to each new model and are often encouraged to trade in cars every year.

Like all established companies, Chevrolet vehicles underwent several suc- cesses and failures. Some vehicles that Chevrolet thought would succeed failed miserably. The 1962 Chevy Corvair was a popular Chevy vehicle until Ralph Nader published Unsafe at Any Speed, which pointed out safety issues with the Corvair’s steering. The car was eventually deleted from Chevrolet’s product mix. The Chevy Vega was another product failure after complaints of the car’s poor quality and product recalls created negative publicity. On the other hand, many Chevrolet vehicles became immensely popular, and some, such as the sporty Cor- vette, still exist today. The following vehicles helped cement Chevrolet’s reputation as an icon.

Chevy Corvette The Chevy Corvette is one of Chevrolet’s most important milestones. The Corvette, first revealed at a car show in 1953, was GM’s initial foray into the sports car world. Despite initial enthusiasm for the Corvette, the first ones were not very popular. The introduction of the small-block V8 engine in 1955 changed that. GM engineer Zora Arkus-Duntov began to work with the engine to turn the Corvette into a racing vehi- cle. One year later, Arkus-Duntov raced the revamped Corvette at the Pikes Peak Hill Climb race. Arkus-Duntov won the race for his class and set a new record for stock cars. The 1957 Corvette achieved a reputation for speed, achieving 60 miles per hour (mph) in 5.7 seconds. The Corvette had embarked upon its reputation as “America’s sports car.”

Chevrolet attempted to position the Corvette as a combination of sportiness and luxury. For instance, one of its early taglines was “looks like a sports car … feels like a sports car … performs like a sports car … how come it’s a luxury car?” The Cor- vette has gone through seven generations, with each successive model undergoing additional modifications in quality and style.

The Corvette has attracted many fans over the years, both on and off the racetrack. Corvette owners have included Alan Shepard (astronaut), Johnny Carson, Jeff Gordon, Jay Leno, and Vice President Joe Biden. The Corvette’s fame has made it into a prestigious product with models selling from $50,000 to over $100,000. To celebrate its 100th birthday in 2012, Chevrolet announced the release of the Corvette Centennial edition, available only in carbon flash metallic.

Although the Corvette is still going strong, it has reached the maturity stage due to product innovations on newer Chevrolet models and changing customer tastes. The maturity stage occurs when growth begins to slow. In the case of the Corvette, the average owner is in his or her fifties, which means that younger people are not purchasing them as much, perhaps because they perceive the Corvette as the car that their parents or grandparents drove. In 2009, Corvette sales were the lowest they had been since 1961, and Corvette sales had decreased 48.3 percent since the year before. Some speculated that interest in sports cars was waning. However, this does not necessarily mean the Corvette is going away anytime soon. In 2014, the sev- enth generation of the Corvette, the Corvette Stingray, was released. In an attempt to appeal to a younger market, the Stingray incorporates more modern features such as a digital instrument panel and leather interiors. Chevrolet also created a digitized version of the Corvette for the video game Gran Turismo. The Chevrolet Corvette

Case 9 • Chevrolet: A Century of Product Innovation 409

Stingray was nominated as Car of the Year in 2014. Loyal fans and the Corvette’s reputation as America’s sports car could keep the Corvette going strong for many more years.

Chevrolet Camaro The Camaro is the story of a car model that would not be conquered. GM released the Camaro in 1967 to directly compete against the Ford Mustang. The competitive intent behind the Camaro was soon clear; when asked what the name of the small sportster meant, product managers stated that it was the name of an animal that ate mustangs. The model has gone through five generations and many ups and downs in popularity over its 35-year run. Toward the turn of the century, it became clear that GM was considering discontinuing the Camaro, as new lineups did not have signifi- cant changes in design from previous ones. In 2002, the Camaro line was officially discontinued. Eight years later, due to the pressure from dedicated fans, GM resur- rected the Camaro with the release of the 2010 model. The new Camaro blended design elements from the 1960s with modern features, including Bluetooth connec- tivity, USB connectivity, and OnStar. It also took advantage of car lovers’ demands for speed. The car went on to win the 2010 World Car Design of the Year award. In fact, the Camaro was attributed to keeping the sports car industry from floundering. The car sold well even during the Great Recession, with sales of over 60,000 vehicles.

When the new Camaro was announced in 2009, demand was so high that GM strived to create enough supply. Enthusiasts were paying $500 to $2,500 above the sticker price. Although demand has stabilized somewhat, the Camaro seems to be in the growth stage of the product life cycle. In 2009, when convertible sales were at a low, the Chevy Camaro sold well. Two years later it outsold the Ford Mustang. Resurrecting the Camaro appears to be a smart move on Chevrolet’s part, but grow- ing competition from the Mustang and rapidly changing consumer tastes will require the company to modify its product to maintain its competitive advantage.

Chevrolet Impala The Chevrolet Impala was introduced in 1958 and went on to become one of Chevrolet’s best-known brand names. As a full-size family sedan, the Impala is one of Chevrolet’s larger car models. The Impala experienced extreme growth during the 1960s. Its 1963 model, with its small-block V8 engine and front bucket seats, is now considered to be a collector’s item. The Impala’s best-selling year occurred in 1965 with sales of 1 million vehicles. Its popularity continued throughout the 1970s, and it was named the best-selling car in 1973.

The Chevy Impala has undergone 10 generations of new models. Its 1994–1996 models have also become collector’s items largely due to their luxurious design and strong horsepower. The Impala is a common sight in the NASCAR races after it replaced the Monte Carlo, a car model discontinued by GM. However, the Impala has encountered a number of challenges during its long life span. The Impala began losing sales to mid-sized cars in the 1980s and continues to contend with its smaller rivals to this day. In addition, a suspension problem in Impala vehicles sold in 2007 and 2008 caused a class-action lawsuit to be filed against GM.

Despite these challenges, the Impala remains an industry leader in its segment. The amount of space the Impala offers and its better fuel efficiency gives it a compet- itive advantage. Yet its 2012 model received lackluster reviews and was criticized for using “cheap interior materials and construction.” Its 2014 model, however, sported a redesigned logo and sleeker look. It was nominated as number one among the top family cars for 2015. The 2015 version was released as a micro hybrid with a stop- start system that saves gas. Whether consumers perceive this newer vehicle more positively will determine if sales of the Chevy Impala will grow or stagnate.

410 Case 9 • Chevrolet: A Century of Product Innovation

Chevrolet Cruze The Chevrolet Cruze was a risk that paid off for Chevrolet. This five-seat sedan designed to replace the unpopular Chevy Cobalt jumped almost immediately from the introductory to the growth stage. The success of the Cruze shocked industry experts. Within its first year of sales, the Cruze ranked as the 10th most popular vehi- cle within the United States. In June 2011, it became the nation’s best-selling car. It continued to be ranked among the top 20 best-selling vehicle 3 years later.

The Cruze was released as a global vehicle. It was introduced in Europe in 2009 and has since expanded to the United States, India, China, Mexico, Egypt, South Korea, and South America. The sedan combines safety, technology, speed, and greater fuel efficiency. The Chevrolet Cruze can get 42 mpg on the highway. Improved fuel economy is particularly important in light of impending federal legisla- tion mandating that vehicles get better mileage. Chevrolet claims that its Cruze Clean Turbo Diesel released in 2015 gets 46 mpg due to its clean diesel technology. It also emits 90 percent less nitrogen oxide and particulate emissions.

In its initial promotion of the Cruze, Chevrolet released a series of advertisements voiced by actor Tim Allen that told viewers to “get used to more” while touting the Cruze’s technological advances and price tag of $17,000. The company chose to take an adversarial approach to the competition; its “Dear Corolla” advertisements subtly criticized the Toyota Corolla for not offering the latest technology in its vehicles. Such an approach recognizes the highly competitive industry the Chevy Cruze occupies.

In spite of its initial success, the Ford Focus and Hyundai Sonata are giving the Cruze a run for its money. In many ways, the increasingly competitive nature of the auto industry has shortened the life cycles of many vehicle brands; whereas vehicles such as the Corvette have experienced long periods of growth, a competitive envi- ronment and increased government regulation could significantly shorten the Cruze’s growth period to a small number of years. It remains to be seen whether Chevrolet will be able to maintain the Cruze’s growth over the long-term or quickly lose to better-adapted rivals.

Chevrolet Silverado Chevrolet’s pickup trucks are even more popular than its cars. After introducing its first truck in 1918, sales of Chevrolet pickup trucks surpassed car sales in 1989. Chevrolet positions its trucks as strong and durable. It used the successful ad slogan “Like a Rock” in all its truck commercials for a decade. Its most popular truck is the Silverado. According to USA Today, sales of the Silverado surpass the gross domes- tic product of several countries. Successive models of the Silverado have been man- ufactured to ensure a smoother ride, increased towing capacity, and improved fuel economy. For instance, the Silverado HD increased fuel efficiency by 11 percent. Improvements to the Chevrolet Silverado pickup have appealed to consumers.

The Silverado is available as three different types of pickup truck: light duty, heavy duty, and hybrid. The Silverado was the second best-selling vehicle and won the Truck of the Year award in 2014. For those who love big trucks but hate the large amounts of emissions they generate, the Silverado HD comes equipped with a system that reduces nitrogen oxide emissions.

Chevrolet is trying to discover the right blend between America’s love for big trucks (the two best-selling vehicles in 2014 were trucks) and being environmentally friendly. As a result, it began manufacturing a hybrid Silverado. The hybrid Silverado has many of the same characteristics of a traditional Silverado, including high torque and horsepower, yet it can get 18 mpg in the city and 24 mpg on the highway with its 5.3 L EcoTec3 engines. By making the Silverado greener, Chevrolet is not only pre- paring itself for tougher emissions regulations but also appealing to the market’s demand for less-polluting trucks.

Case 9 • Chevrolet: A Century of Product Innovation 411

Chevrolet SUV/Crossover Vehicles SUVs, or sports-utility vehicles, became a hit during the 1990s as they provided own- ers with a sense of prestige and power. To meet this demand, GM created several SUV lines such as the Hummer. However, because SUVs require so much fuel, rising gas prices and greater concern for the environment contributed to their decline. As a result, GM discontinued its Hummer line along with several of its Chevrolet SUVs.

Although SUVs seemed to be on the decline, they appear to be gaining in popu- larity once more. In 2008, when fuel prices were high, many consumers began switching to hybrid vehicles and smaller cars with greater fuel efficiency. However, when gas prices dropped to under $4 a gallon, SUVs made a comeback—with some slight modifications. Auto companies such as GM began manufacturing SUVs with better fuel efficiency. The safety of SUVs has also improved. Thanks to the addition of stability control within SUV models, studies indicate that drivers of SUVs are less likely to die in a crash than those driving smaller cars; the death rate for SUV drivers dropped 66 percent after newer models were introduced.

This is good news for Chevrolet’s SUVs, which include the Suburban and the Tahoe. First emerging in 1936, the Suburban is the oldest surviving vehicle model in the United States. Today the Suburban appears to be in the growth stage as a favorite among families. One likely reason is due to its safety features, which include up to seven airbags and OnStar Automatic Crash Response. The Tahoe is targeted more toward those who need lots of space and who travel in more rugged terrain. The Tahoe has been one of the most popular SUV models since the 1990s and was nomi- nated as one of the best family cars of 2015. To attract eco-conscious consumers, the Tahoe model gets 23 mpg on the highway.

Chevrolet also combines features of smaller cars with those of SUVs through its crossover vehicles. One of its more recent successes is the Chevrolet Traverse. Released in 2008, the Chevrolet Traverse is targeted toward families. The Traverse seats eight and received high scores in crash safety from the National Highway Traf- fic Safety Administration. The Chevrolet Equinox crossover vehicle is unique as it is powered by hydrogen fuel cells, making it more fuel-efficient than its contemporar- ies. The Equinox is Chevrolet’s second best-selling model after the Silverado. A newer high-tech model was released in 2016.

Chevrolet Volt Chevrolet’s product mix would not be complete without venturing into the EV industry. Its Chevrolet Volt, unleashed in 2010, runs on a battery but also uses gasoline once the electrical charge is depleted. The Volt’s battery allows the vehicle to travel 38 miles on battery, and it has a total range of 380 miles.

Initial reviews of the Volt seemed positive. In 2011, it was named as the winner of the World’s Green Car award. However, the Volt may take longer than anticipated to go from the introductory to the growth stage of the product life cycle. GM initially sold fewer vehicles than originally anticipated. Many Chevrolet dealers were hesitant to sell the Volt due to a perceived lack of local demand. Such obstacles are not uncommon with new products, as both dealers and consumers need to learn more about the product before making a commitment to purchase it. The high price tag of $41,000 also increased the risk of purchase. While the current interest in EVs is high, demand may take longer to catch up due to the high level of perceived pur- chase risk.

The Volt faced a more serious challenge when its lithium-ion battery proved to be problematic in crashes. The battery caught on fire after three government crash tests, but the fires themselves would not occur until days or weeks after the crashes. Further investigations revealed that the coolant line got damaged during the crash tests. Coolant leaked onto the battery wires, eventually causing a fire.

412 Case 9 • Chevrolet: A Century of Product Innovation

After these safety issues came to light, GM took quick action to address the problem. It created a plan to increase the reinforcement surrounding the battery pack and issued a voluntary recall on more than 7,000 Volts already sold as well as more than 4,000 in its showrooms. It also provided loaner cars for consumers to use until their Volts were modified and offered to buy Volts back from customers who no longer wanted them. Although this quick action might have saved the Volt from an early demise, the initial safety challenges still had a significant effect on demand.

The safety issues have also provided threats and opportunities for the Chevy Volt’s prime competitor, the Nissan Leaf. Although both the Leaf and the Volt are EVs, they are positioned differently. The Nissan is a truly electric car, whereas the Volt will run on gasoline if needed. GM’s VP of marketing saw this as a major advan- tage, using it to position the Volt as “a car first and electric second” and claimed that the Volt can give drivers the peace of mind that they will not become stranded if they use up the electricity reserves. However, the battery fires reduced faith in the Volt and cast doubt on the EV industry as a whole. Nissan was quick to respond to these safety concerns by detailing the triple layer safety structure of its batteries. The Nissan Leaf appears to be in the lead in number of EVs sold, experiencing a sales record in 2014. With analysts predicting that only one will win in grabbing the majority of the U.S. market share, the stakes are high.

CHEVROLET’S BRANDING STRATEGY Although the Chevrolet brand has evolved over the years, it maintains many of the same themes it started out with a century ago: a quality vehicle with deep roots in America’s past. When Durant first envisioned Chevrolet, his desire was to create a low-priced vehicle that could compete head on with Ford. Therefore, one of its first slogans, “Quality at low cost,” comes as no surprise. As Chevrolet vehicles became more popular with Americans, minus a dip during the Great Depression, the com- pany wanted to firmly entrench the brand as a key part of American culture. It found part of this solution by associating itself with American sporting events. In 1935, Chevrolet started sponsoring the All-American Soap Box Derby, which it would continue to support for the next decade. Chevrolet vehicles driven by drivers such as Jeff Gordon and Jimmie Johnson would go on to become a common sight in racing circuits.

On the promotional side, Chevrolet adopted a patriotic theme with taglines such as “America’s Best Seller, America’s Best Buy” and “Baseball, hot dogs, apple pie and Chevrolet.” One of its most popular taglines “Like a Rock” began in 1991 to describe its Chevrolet pickup truck. The tagline imbued the brand with a sense of strength and durability. Chevrolet would continue its American theme with its “An American Revolution” tagline adopted in 1994, “Chevy Runs Deep,” and its most recent “Find New Roads.”

The Chevrolet brand resonates with consumers, so much so that the company’s marketers must exert caution when implementing changes. For instance, in 2010 GM decided the company would stop using the popular American nickname Chevy and only use Chevrolet in corporate communications and advertising. Although Ameri- can consumers were encouraged to still use the popular nickname, employees were not to use Chevy internally. The reasoning behind this was that international buyers of Chevrolet tended to get “Chevy” and “Chevrolet” confused, believing that they were different cars. However, consumer backlash and managerial changes con- vinced GM to drop this plan.

Changing the tagline to “Chevy Runs Deep” was not free from criticism either. Chevrolet fans did not feel that the slogan was as strong as previous ones, and others were unsure about what it meant. This confusion caused GM to begin overhauling its

Case 9 • Chevrolet: A Century of Product Innovation 413

marketing to clear up the confusion. It dropped the tagline in favor of “Find New Roads” to emphasize a more global perspective.

While Chevrolet modifies its taglines to fit certain countries, many of its taglines are used for multiple countries to create strong brand cohesiveness. Globally, the company positions its vehicles along four values: durability, value, practicality, and friendliness. In South Africa, Chevrolet commercials have emphasized familial values as well as excitement. Taglines include “Captiva. Made for Memories.” and “Where Will Chevrolet Take You?” Although Chevrolet has adopted more of a global brand strategy, it still customizes its branding to appeal to certain markets.

General Motors’ Rivalry with Ford General Motors is one of the “Big Three” carmakers in the United States, along with Ford and Chrysler. Although Ford and Chrysler are formidable competitors to Chev- rolet, most view Ford as being the more serious rival. Ford and Chevy vehicles are both considered to be practical and affordable cars, and although Chevy is generally viewed as being sportier than Ford, Ford’s sports vehicles like the Mustang are direct competitors to Chevy’s sports cars. While Chrysler came onto the scene later during the 1920s, Ford and Chevrolet are closer in age and have been competing since the inception of Chevrolet.

This highly competitive rivalry has challenged many of Chevrolet’s branding strategies. For instance, Ford is also deeply entrenched in American culture. Many view the Model T as the first American car, although it would be more accurate to say it was the first one produced for the masses. The unproven statement by founder Henry Ford regarding the Model T, “You can paint it any color, so long as it’s black,” is remembered nearly a century later. Ford also claims that its Ford Aerospace engineers and technicians helped place a man on the moon by helping to design and provide services for NASA’s Mission Control Center. Supporters of Ford are more likely to view Ford as a greater part of America’s heritage than Chevrolet.

From the beginning, Ford has also made a name for itself in racing history, start- ing with founder Henry Ford’s 1901 win against professional driver Alexander Win- ton in a vehicle he manufactured himself. Ever since racing has become an important part of Ford’s DNA. The car company has had a notable presence in the Indy 500, Formula One, and NASCAR series, with drivers like Tom Kendall, Jacques Villeneuve, John Force, and even Paul Newman choosing to race Ford vehicles. Cre- ating solid connections to America’s past is an important part of Ford’s branding strategy.

Ford and GM also take different approaches toward marketing. For instance, Ford takes a family branding approach to its vehicles, placing the Ford name along with the brand of the vehicle on the car. GM, however, began embracing invisible brand architecture beginning in 2009. Prior to this time, GM was placing its “Mark of Excellence” logo on its vehicles to connect them with the parent company. But in 2009, GM expressed its intention of allowing its vehicles to stand on their own. New Chevrolet vehicles did not have visible affiliation with GM, nor did GM’s other brands. This branding strategy has both advantages and disadvantages. Family branding informs consumers when the same company offers a slate of different vehi- cles. If the consumer has a favorable impression of the company or even an individ- ual model, then he or she is likely to carry that perception over to another company model. On the other hand, family branding risks contaminating the entire family if one product in the mix is perceived to be inferior. In the case of GM, the company’s bankruptcy and subsequent bailout had the ability to contaminate its brands of vehi- cles, in spite of their individual merits. By adopting invisible brand architecture, GM is reducing the risk of brand contamination.

414 Case 9 • Chevrolet: A Century of Product Innovation

INTERNATIONAL MARKETING Chevrolet sold nearly 10 million vehicles worldwide in 2014, its second year for record global sales. While Chevrolet has tried to create a consistent brand image across the world, its products differ by market. For instance, South Africa Chevrolet’s product line includes the Chevrolet Spark, Spark Lite, Aveo Sedan, Aveo Hatch, Utility, Cruze, Orlando, Sonic, Captiva, and Trailblazer. In Brazil Chevrolet’s product line includes the Camaro as well as the Chevrolet Cruze, Prisma, Cruze Sport6, Celta, Cobalt, Onix, and Classic. The different models appeal to the differing tastes of Chevrolet’s various target markets.

Although for years Chevrolet has portrayed itself as an American brand, in reality the brand has become truly globalized. In fact, marketers at Chevrolet are now trying to embed the Chevrolet brand into other cultures just as they set off to make it a core part of American culture. In an attempt to create greater brand awareness, GM rebranded Daewoo—a South Korean brand that GM acquired in the early 2000s—as Chevrolet. Despite the fact that sales of Daewoo vehicles had increased in recent years, GM recognized that many South Koreans lacked awareness of the Chevrolet brand. It hopes that recasting Daewoo as Chevrolet will increase awareness and allow Chevrolet to compete against competitors.

Chevrolet’s sales are still highest in the United States, followed by China. China is now the second largest market for Chevrolet and is the largest market in the world for vehicles. Chevrolet sells a variety of vehicles in China, including the Volt, Camaro, Malibu, Trax, Epica, Cruze, Aveo, and Sail 3. GM has entered into several joint ventures with Chinese companies in order to sell Chevrolet vehicles within the country. China is also a lucrative market for EVs, and Chevrolet is opti- mistic about how the Chevy Volt will fare. Yet the company also faces many chal- lenges in its plans to introduce EVs into China. The Chinese government has mandated that foreign EV automakers enter into joint ventures with domestic companies to produce EVs in China. Such joint ventures offer many advantages but also require Chevrolet to share some of its trade secrets with its partners. For this reason, GM has decided to import the Chevy Volt, forgoing certain benefits rather than sharing the Volt’s technologies. However, manufacturing within the country is still a future possibility.

Another challenge for Chevrolet relates to customization. Customizing vehicles to different markets takes time, and GM managers want to increase production and decrease the commercialization process. This has led GM to consider a new design for its vehicles that incorporates “global core architecture.” Such a move would enable GM brands to create a more standardized design with slight adaptations for different markets. This would save GM both time and money, but because cultural tastes can significantly differ, a globalized design is not without risks. It is uncertain whether Chevrolet can create a standardized vehicle that will be accepted by several different cultures.

CHALLENGES AND RECOVERY After nearly a century in business, Chevrolet faced its greatest threat with GM’s bankruptcy in 2008. The company required a massive $50 billion government bailout, and although GM has rebounded, its reputation took a while to recover. According to former GM CEO Dan Akerson, the company “failed because we failed to innovate.” Ford, the only one of the Big Three automakers that did not accept a government bailout, took a combative approach against its competitors in its advertising. The company filmed one ad of a customer who had just bought a new Ford pickup truck as saying, “I wasn’t going to buy another car that was bailed out by our

Case 9 • Chevrolet: A Century of Product Innovation 415

government. I was going to buy from a manufacturer that’s standing on their own: win, lose, or draw.” Although the commercial was later pulled from the air (Ford stated that it had run its course), this viewpoint represented the sentiments of many Americans who felt that GM and Chrysler had overextended themselves and then depended upon taxpayers to bail them out for their mistakes.

Despite these dark times for GM, company leaders viewed Chevrolet as an inno- vation powerhouse and believed the brand would bring GM back from the brink of collapse. The recovery, however, was painful for GM. The company dropped half its brands from its product mix, including Pontiac, Hummer, Saturn, and Saab. Although this gives customers fewer vehicle brands from which to choose, it might benefit Chevrolet in the long run as GM can now focus more upon modifying its remaining brands.

Such modifications will be important as environmental conditions in the market continue to change. For instance, new and impending regulations require auto- makers to create vehicles that are more fuel efficient. By 2025 vehicles must be able to reach 54.5 mpg. Such changes will be costly and demand that GM take action now. Thus, new Chevrolet vehicles are likely to be lighter and possess more energy saving technologies. Such modifications are essential to ensuring that Chevrolet meets both consumer demands and the regulatory demands of the government.

2014 PRODUCT RECALLS Despite GM’s recovery from the recession, the year 2014 dealt another major blow to GM’s reputation. In January 2014, Dan Akerson stepped down as CEO of GM. He was replaced by Mary Barra, who had served as GM’s Executive Vice President of Global Product Development, Purchasing and Supply Chain. Mary Barra became the first female CEO of GM as well as the first female to lead any major automobile company.

Shortly after Barra assumed leadership, GM issued a recall of 2.6 million Chevy Cobalts. The problem involved a flaw with the ignition that could cause it to inadver- tently switch to the accessory position. This could cause the vehicle to stall sud- denly, disabling safety features such as the airbag, power steering, and braking. The initial recalls were just the beginning. More recalls were issued on other models for similar reasons. Estimated deaths attributed toward accidents caused by ignition switch malfunctions vary between 13 and 31. Many of these recalls involved Chevy vehicles. Case Exhibit 9.2 describes the vehicles and the reasons behind their recall.

Although recalls are a serious issue, the situation became more problematic when evidence surfaced that employees had known about the defective components since 2004. Despite this knowledge, a decade passed before any sort of recall was issued. This seriously jeopardized driver safety, and GM faced a resulting maelstrom of criticism. The company had developed a snap-on cover to prevent the switches from inadvertently switching to the accessory position but failed to issue a recall. Instead, it told its dealers to install the covers if customers complained. Car owners were not informed of the potential dangers.

This knowledge changed the recall from a product quality issue into a case of wide-scale misconduct that harmed the well-being of consumers. CEO Mary Barra was called before Congress to testify about how much GM knew about the issue and why a recall was not issued until 10 years after the defects were first discovered. More than 80 lawsuits were filed against GM.

GM conducted an internal investigation and found that the company had been negligent in its duties toward consumers. The culture of GM had taken an indiffer- ent attitude toward safety issues and even dissuaded employees from bringing bad

416 Case 9 • Chevrolet: A Century of Product Innovation

news to the attention of management. One whistleblower claimed that he was demoted after he pressed for recalls due to vehicle defects. Other employees indi- cated they feared retaliation for bringing up product quality issues. About 15 employees were dismissed for their failure to take action after becoming aware of the defects.

The recalls have come at a bad time for GM. While it faces strong demand in overseas markets, its market share in the United States is at historic lows, and the company has weaker profit margins than rivals. News of the recalls caused GM stock to decrease 14.6 percent during the year, while Ford’s rose 0.5 percent. Per- haps most damaging is the blow to GM’s reputation. Controversy continues to sur- round how much top management knew about the issue. According to Mary Barra, top management executives issued the recall as soon as they learned about the prod- uct defects in early January 2014. She also explained that in the early 2000s people had different views of stalling and believed that a car without power steering could still be steered. It was not until later that the real dangers were finally realized. She reassured the public that the company’s crisis management team was taking steps to respond more quickly to problems and would prevent similar defects from reoccurring.

In the beginning of 2015, GM again issued three vehicle recalls due to ignition switch problems. More than 2,200 claims have been filed against GM, and it was listed as number 13 on America’s Most Hated Companies list, according to a Harris poll. However, despite the massive negative publicity, the company has also been admired for its leadership during the crisis. Mary Barra was praised for how she handled the situation, and many members of the public believe she reacted with honesty and compassion for those who were affected. Under her leadership, it is entirely possible that GM can weather the storm and restore confidence in the Chevrolet brand.

CASE EXHIBIT 9.2 Sample of 2014 Chevrolet Recalls

Car Model Problem

Chevrolet Caprice (2011–2013) Ignition switch flaw Chevrolet Impala (2014) Electrical issue could cause power steering to malfunction

when vehicle is started Chevrolet Malibu (1997–2005); Impala and Monte Carlo (2004–2008)

Key can be bumped out of position when driving

Chevrolet Silverado HD (2007–2011) Electrical systems in vehicles equipped with auxiliary battery may overheat and cause a fire

Impala (2006–2014); Monte Carlo (2006–2007) Ignition switch flaw could cause to turn off unexpectedly, disabling safety features and power steering and breaking

Camaro (2010–2014) Key can be bumped out of position when driving Malibu (2004–2012); Malibu Maxx (2004–2007) Wiring flaw can cause brake lights to fail, disable other systems Cobalt (2005–2010); Chevrolet HHR (2006–2011 Ignition cylinder flaw can cause key to suddenly fall out Malibu and Malibu Maxx (2004–2006); Malibu (2008–2009); Cobalt (2010); Chevrolet HHR (2009–2010)

Sudden loss of power steering can lead to crash

Chevrolet HHR (2008–2011); Cobalt (2008–2010) Ignition switch problems Cobalt (2005–2007); Chevrolet HHR (2006–2007) Ignition switch flaw can cause vehicles to turn off unexpectedly,

disabling safety features and power steering and braking

SOURCE: Gregory Wallace, “Every General Motors recall in 2014,” CNN Money,October 8, 2014, http://www.cnn.com/interactive/2014/05/us/gm-recalls/ (accessed April 24, 2015).

Case 9 • Chevrolet: A Century of Product Innovation 417

CONCLUSION The Chevrolet brand is a model to which marketers aspire. Unlike so many other brands, it has lasted for more than a century due to its innovative product modifica- tions and ability to rebound from failures. Despite the recent setbacks with vehicle recalls, strong leadership is helping GM navigate through the crisis. It must continue to seize market opportunities, constantly modify its products, and adapt its brand to changing customer tastes—all while assuming its responsibility for driver safety and a quality product. Successfully meeting these criteria could enable the Chevrolet brand to succeed for another century.

SOURCES “50 Most powerful women,” Fortune, February 24, 2014, pp. 66-71; AUSmotive.com, “Chevrolet Camaro —World Car Design of the Year 2010,” April 8, 2010, http://www.ausmotive.com/2010/04/08/chevrolet- camaro-world-car-design-of-the-year-2010.html (accessed April 24, 2015); Autoline Detroit, “Chevy Cruze: The most important car in GM history,” YouTube, September 16, 2010, http://www.youtube.com/ watch?v=87WlQU23WgY (accessed April 24, 2015); Keith Barry, “Ground control: Celebrating astronauts and their Corvettes,” Wired, May 9, 2011, http://www.wired.com/autopia/2011/05/astronauts- chevrolet-corvette (accessed April 24, 2015); Jeff Bennett, “GM to recall 8.45 million more vehicles in North America,” Wall Street Journal, June 30, 2014, http://online.wsj.com/articles/gm-to-recall-7-6- million-more-vehicles-in-u-s-1404153705 (accessed July 10, 2014); Jeff Bennett, “Marketing decoder: Chevrolet Impala emblem,” Wall Street Journal, April 10, 2013, http://www.wsj.com/articles/ SB10001424127887323741004578414740286356354 (accessed April 27, 2015); Jeff Bennett, “New set of GM recalls involves pickups, SUVs,” Wall Street Journal, June 9, 2014, p. B3; Jeff Bennett and Sara Murray, “Insider is GM’s first female chief,” Wall Street Journal, December 11, 2013, p. A1; Jim Bernardin, “About old Chevy ads,” February 7, 2008, http://oldchevyads.blogspot.com/2008/02/63- corvette-magazine_1336.html (accessed April 24, 2015); Sebastian Blanco, “Nissan Leaf sales double Chevy Volt to close out winning 2014,” Auto Blog, January 5, 2015, http://www.autoblog.com/2015/01/05/ december-2014-nissan-leaf-chevy-volt-sales/ (accessed April 27, 2015); Keith Bradsher, “G.M. plans to develop electric cars with China,” New York Times, September 20, 2011, http://www.nytimes.com/2011/ 09/21/business/global/gm-plans-to-develop-electric-cars-with-chinese-automaker.html (accessed April 24, 2015); Dale Buss, “Chevrolet to ‘find new roads’,” Forbes, January 8, 2013, http://www.forbes.com/sites/ dalebuss/2013/01/08/chevrolet-to-find-new-roads-as-it-drops-chevy-runs-deep/ (accessed April 27, 2015); Dave Caldwell, “Monte Carlo off the track,” New York Times, November 25, 2007, http://www.nytimes. com/2007/11/25/automobiles/25MONTE.html (accessed April 24, 2015); “Chevrolet,” http://www. superbrands.com/za/pdfs/CHEV.pdf (accessed April 24, 2015); Chevrolet website, http://www.chevrolet. com (accessed April 24, 2015); Chevrolet, “100 Years of icons,” Chevrolet Culture, http://www.chevrolet. com/culture/article/iconic-chevys.html (accessed April 24, 2015); Chevrolet, “Chevrolet achieves record global sales in 2013,” January 13, 2014, http://media.chevrolet.com/media/us/en/chevrolet/news.detail. html/content/Pages/news/us/en/2014/Jan/0113-chevy-global-sales.html (accessed April 27, 2015); Chevrolet China website, http://www.chevrolet.com.cn/brandsite (accessed April 24, 2015); Chevrolet South Africa, “Chevrolet Captiva Gold commercial,” YouTube, June 14, 2011 http://www.youtube.com/ watch?v=uogbShJddNY (accessed April 24, 2015); Chevrolet, “The top 10 moments in Chevrolet Motor Sports,” http://www.chevrolet.com/culture/article/chevy-racing-history.html (accessed July 27, 2012); “Chevrolet turns 100,” Automobile, November 2011, pp. 53–97; CNN Money, “GM recall’s $1.7 billion windfall,” CNN Money, May 22, 2014, http://money.cnn.com/2014/05/22/news/companies/gm-recall- windfall/index.html (accessed April 27, 2015); Bill Connell, “Astronauts and Corvettes,” Corvette Blog, September 2, 2007, http://www.corvetteblog.com/2007/09/celebrity-corvettes-astronauts-and-corvettes (accessed April 24, 2015); Kevin Cool, “Heavy metal,” Stanford Magazine, September/October 2004, http://alumni.stanford.edu/get/page/magazine/article/?article_id=35646 (accessed April 24, 2015); Matt Davis, “2011 World Car Awards: How close it was,” Auto Blog, April 27, 2011, http://www.autoblog.com/ 2011/04/27/2011-world-car-awards-how-close-it-was (accessed April 24, 2015); Economist staff, “From 0 to 100,” Economist, October 29, 2011, p. 76; Edmunds.com Inc., “Chevrolet Camaro history,” http:// www.edmunds.com/chevrolet/camaro/history.html (accessed April 24, 2015); Edmunds.com Inc., “Chevrolet Corvette history,” http://www.edmunds.com/chevrolet/corvette/history.html (accessed April 24, 2015); Edmunds.com Inc., “Chevrolet Impala review,” http://www.edmunds.com/chevrolet/impala (accessed April 24, 2015); Edmunds.com, “Chevrolet Suburban review,” http://www.edmunds.com/ chevrolet/suburban (accessed April 24, 2015); Edmunds.com Inc., “Chevrolet Tahoe review,” http:// www.edmunds.com/chevrolet/tahoe (accessed April 24, 2015); Edmunds.com, “Corvette drops to 50- year sales low as sports cars sputter, reports Edmunds’ AutoObserver.com,” January 21, 2010 http:// www.edmunds.com/about/press/corvette-drops-to-50-year-sales-low-as-sports-cars-sputter-reports- edmunds-autoobservercom.html (accessed April 24, 2015); Paul A. Eisenstein, “Chevy steers 2014

418 Case 9 • Chevrolet: A Century of Product Innovation

Corvette stingray into luxury market,” NBC News, August 16, 2013, http://www.nbcnews.com/business/ chevy-steers-2014-corvette-stingray-luxury-market-6C10930051 (accessed August 27, 2013); Paul A. Eisenstein, “GM recalls about 3.2 million cars for ignition problems,” NBC News, June 16, 2014, http:// www.nbcnews.com/storyline/gm-recall/gm-recalls-about-3-2-million-cars-ignition-problems-n132511 (accessed April 27, 2015); Lindsey Fisher, “Corvette sales reach 19-month record high in April,” Corvette Online, May 5, 2011, http://www.corvetteonline.com/news/corvette-sales-reach-19-month- record-high-in-april (accessed April 24, 2015); Michael A. Fletcher, “General Motors recalls another 2.7 million vehicles,” Washington Post, May 15, 2014, http://www.washingtonpost.com/business/economy/ general-motors-recalls-another-27-million-vehicles/2014/05/15/f8bce616-dc40-11e3-bda1- 9b46b2066796_story.html (accessed July 10, 2014); Ford Motor, “Our history,” Ford website, http:// corporate.ford.com/company/history.html (accessed April 24, 2015); Burton W. Fulsom, “Billy Durant and the founding of General Motors,” Mackinac Center for Public Policy, September 8, 1998, http:// www.mackinac.org/article.aspx?ID=651 (accessed April 24, 2015); Greg Gardner, “GM CEO Mary Barra still goes grocery shopping,” USA Today, January 15, 2015, http://www.usatoday.com/story/money/cars/ 2015/01/15/mary-barra-gm/21834271/ (accessed April 27, 2015); Ben Geier, “GM’s Mary Barra: Crisis manager of the year,” Fortune, December 28, 2014, http://fortune.com/2014/12/28/gms-barra-crisis- manager/ (accessed April 27, 2015); General Motors, “Ten Chevrolet trucks that built a global brand,” November 22, 2011, http://media.gm.com/content/media/us/en/chevrolet/news.detail.html/content/Pages/ news/us/en/2011/Nov/1121_truckhistory (accessed July 27, 2012); General Motors, “GM delivers its second consecutive year of record global sales,” January 14, 2015, http://media.gm.com/media/us/en/gm/ news.detail.html/content/Pages/news/us/en/2015/Jan/0114-gm-2014-global-sales.html (accessed April 27, 2015); Jon Gertner, “How do you solve a problem like GM, Mary?” Fast Company, October 2011, pp. 104–108, 148; Allyson Harwood, “2011 Motor trend truck of the year: Chevrolet Silverado HD,” Motor Trend, December 12, 2010, http://www.motortrend.com/oftheyear/truck/ 1102_2011_motor_trend_truck_of_the_year_chevrolet_silverado_hd/ (accessed April 24, 2015); James R. Healy, “100 Years of Chevy,” USA Today, October 31, 2011, pp. 1B, 2B; James Healey, “2012 Chevy Cruze Eco: Mileage gain, no pain,” USA Today, May 27, 2011 http://www.usatoday.com/money/autos/ reviews/healey/2011-05-26-chevrolet-cruze-eco-test-drive_n.htm (accessed April 24, 2015); James R. Healey, “Test drive disagrees: Slick Chevrolet Impala has hiccups,” USA Today, July 25, 2014, http:// www.usatoday.com/story/money/cars/2013/07/25/2014-chevy-impala-chevrolet-needs-work-htest-drive/ 2588021/ (accessed April 27, 2015); James R. Healey and Fred Meier, “Lawsuit: GM knew of Cobalt ignition problem,” USA Today, February 19, 2014, http://www.usatoday.com/story/money/cars/2014/02/ 18/gm-cobalt-g5-faulty-ignition-switches-recall-deaths-airbags/5582241/ (accessed July 10, 2014); Tim Higgins and Nick Summers, “If only they had listened,” Bloomberg BusinessWeek, June 18, 2014, pp. 48-53; Dan Ikenson, “Ford pulling anti-bailout ad shows ongoing ripples from Washington,” Forbes, September 27, 2011, http://www.forbes.com/sites/beltway/2011/09/27/ford-pulling-anti-bailout-ad-shows- ongoing-ripples-from-washington/ (accessed April 24, 2015); IndyCar, “Fan info–INDYCAR 101–The Car Dallara–Chevrolet,” 2015, http://www.indycar.com/Fan-Info/INDYCAR-101/The-Car-Dallara/Chevrolet (accessed April 27, 2015); Chris Isidore and Emily Fox, “Chevrolet Corvette Stingray wins Car of the Year honors,” CNN Money, January 13, 2014, http://money.cnn.com/2014/01/13/autos/car-and-truck-of- the-year/ (accessed April 27, 2015); J. D. Power and Associates, McGraw Hill Financial, “2010 Chevrolet Camaro preview,” JDPower.com, http://www.jdpower.com/content/detail.htm?jdpaArticleId=759 (accessed July 27, 2012); Cheryl Jensen, “Forecast says China provides opportunities and competition,” New York Times, August 23, 2010, http://wheels.blogs.nytimes.com/2010/04/23/forecast-says-china- provides-opportunities-and-competition (accessed July 27, 2012); Bradley Johnson, “From ‘See the USA in your Chevrolet’ to ‘Like a Rock,’ Chevy ads run deep,” Advertising Age, October 31, 2011, http:// adage.com/article/special-report-chevy-100/100-years-chevrolet-advertising-a-timeline/230636/#2000 (accessed April 24, 2015); Ashby Jones, “General Motors recall cases consolidated,” Wall Street Journal, June 9, 2014, http://online.wsj.com/articles/general-motors-recall-cases-consolidated- 1402329826 (accessed July 10, 2014); Ashby Jones, “Plaintiff lawyers take aim at GM,” Wall Street Journal, June 9, 2014, p. A1; Kelley Blue Book, “15 Best family cars of 2015,” February 4, 2015, http:// www.kbb.com/car-news/all-the-latest/best-family-cars-2015/2000011644/ (accessed April 27, 2015); Hyunjoo Kim, “GM rebrands GM Daewoo as Chevrolet in S. Korea,” Reuters, January 19, 2011, http:// www.reuters.com/article/2011/01/20/gmdaewoo-chevy-idUSTOE70I05A20110120 (accessed April 24, 2015); Soyoung Kim, “GM bans use of ‘Chevy’ brand name internally,” Reuters, June 10, 2010, http:// www.reuters.com/article/2010/06/10/gm-chevy-idUSN1024152620100610 (accessed April 24, 2015); Jeremy Korzeniewski, “Report: New slogan ‘Chevy Runs Deep’ coming this fall [w/poll],” AutoBlog, October 25, 2010, http://www.autoblog.com/2010/10/25/report-new-slogan-chevy-runs-deep-coming-this- fall-w-poll (accessed April 24, 2015); Charles Krome, “2011 Chevrolet Impala: The same as ever,” Autobytel, February 15, 2011, http://www.autobytel.com/chevrolet/impala/2011/car-buying-guides/2011- chevrolet-impala-same-as-it-ever-was-104636 (accessed April 24, 2015); Katie LaBarre, “2012 Suburban safety,” US News, March 7, 2012, http://usnews.rankingsandreviews.com/cars-trucks/ Chevrolet_Suburban/Safety (accessed July 27, 2012); Katie LaBarre, “Chevrolet Tahoe review,” US News & World Report, February 3, 2012, http://usnews.rankingsandreviews.com/cars-trucks/ Chevrolet_Tahoe (accessed July 27, 2012); MotorTrend Magazine, “New Chevrolet Corvette reviews, specs, & pricing,” Motor Trend, http://www.motortrend.com/new_cars/04/chevrolet/corvette (accessed

Case 9 • Chevrolet: A Century of Product Innovation 419

July 27, 2012); Joann Muller, “Ford looks hypocritical in new anti-bailout commercial,” Forbes, September 19, 2011, http://www.forbes.com/sites/joannmuller/2011/09/19/ford-looks-hypocritical-in-new- anti-bailout-commercial/ (accessed April 24, 2015); Joann Muller, “The best-selling vehicles of 2011,” MSNBC, November 9, 2011, http://www.msnbc.msn.com/id/45165770/ns/business-forbes_com/t/best- selling-vehicles (accessed April 24, 2015); Dan Neil, “Brand-new and almost out of date,” Wall Street Journal, July 31, 2010, http://online.wsj.com/article/SB10001424052748703578104575397271724890814. html (accessed April 24, 2015); Jayne O’Donnell, “Chevrolet races to meet demand for 2010 Camaro,” USA Today, June 29, 2009, http://www.usatoday.com/money/autos/2009-06-28-camaro-chevrolet-2010_N. htm (accessed April 24, 2015); Jayne O’Donnell and Rachel Roubein, “SUVs safer than ever, but small cars still perilous,” USA Today, June 9, 2011, http://www.usatoday.com/money/autos/2011-06-09-suv- crash-death-rates-drop_n.htm (accessed April 24, 2015); Akane Otani, “America’s most loved and most hated companies,” Bloomberg, February 5, 2015, http://www.bloomberg.com/news/articles/2015-02-05/ america-s-most-loved-and-most-hated-companies (accessed April 27, 2015); Mike Ramsey and Sharon Terlep, “Americans embrace SUVs again,” Wall Street Journal, December 2, 2011, http://online.wsj.com/ article/SB10001424052970204012004577072132855087336.html (accessed April 24, 2015); Mark Riston, “What marketers can learn from ford,” Branding Strategy Insider, August 13, 2010, http://www. brandingstrategyinsider.com/2010/08/what-marketers-can-learn-from-ford.html (accessed April 27, 2015); Aaron Robinson, “2008 Chevrolet Equinox fuel cell,” Car and Driver, September 2006, http://www. caranddriver.com/news/2008-chevrolet-equinox-fuel-cell-car-news (accessed April 24, 2015); Patricia Sellers, “With GM’s new chief,” Fortune, February 24, 2014, pp. 73-75; Norihiko Shirouzu, “China spooks auto makers,” Wall Street Journal, September 16, 2010, http://online.wsj.com/article/ SB10001424052748704394704575495480368918268.html (accessed April 24, 2015); Chris Shunk, “Video: Chevrolet Cruze ads ramps up,” AutoBlog, September 8, 2010, http://www.autoblog.com/2010/09/08/ video-chevrolet-cruze-ads-ramp-up/#continued (accessed April 24, 2015); Chuck Squatriglia, “Feds OK GM’s fix for Volt battery pack,” Wired, January 5, 2012, http://www.wired.com/autopia/2012/01/feds-ok- gms-redesign-of-volt-battery-pack (accessed April 24, 2015); Jonathon Stempel, “GM says bankruptcy excuses it from Impala repairs,” Reuters, August 19, 2011, http://www.reuters.com/article/2011/08/19/gm- impala-lawsuit-idUSN1E77I0Z820110819 (accessed April 24, 2015); Alex Taylor III, “Chevy Volt vs. Nissan Leaf: Who’s winning?” CNNMoney, September 15, 2011, http://tech.fortune.cnn.com/2011/09/15/ chevy-volt-vs-nissan-leaf-whos-winning (accessed April 24, 2015); Sharon Terlep, “The secrets of the GM diet,” Wall Street Journal, August 5, 2011, http://online.wsj.com/article/SB1000142405311190345450 4576487822808431928.html (accessed April 24, 2015); Sharon Terlep, “Slow sales dogged Volt before fires,” Wall Street Journal, December 5, 2011, http://online.wsj.com/article/SB10001424052970204 903804577078692310067200.html (accessed April 24, 2015); TheHenryFord.com, “The Model T,” Showroom of Automotive History, http://www.hfmgv.org/exhibits/showroom/1908/model.t.html (accessed April 24, 2015); David Thomas, “Chevy drops ad campaign ‘Like a Rock’,” AutoBlog, August 8, 2004, http://www.autoblog.com/2004/08/08/chevy-drops-ad-campaign-like-a-rock (accessed April 24, 2015); Chrissie Thompson, “Chevrolet Cruze’s success shocks the auto industry,” USA Today, November 6, 2011, http://content.usatoday.com/communities/driveon/post/2011/11/chevrolet-cruze- general-motors-gm-big-sales/1 (accessed April 24, 2015); David Undercuffler, “Car review: 2014 Corvette Stingray shifts away from tradition,” LA Times, August 17, 2013, http://articles.latimes.com/2013/aug/17/ business/la-fi-autos-chevrolet-corvette-stingray-review-20130817 (accessed August 27, 2013); U.S. News Rankings & Reviews, “Chevrolet Equinox review,” US News & World Report, February 27, 2012, http:// content.usatoday.com/communities/driveon/post/2011/11/chevrolet-cruze-general-motors-gm-big-sales/1#. VTrSuyFViko (accessed April 24, 2015); Peter Valdes-Dapena, “GM dumps Chevy for Chevrolet,” CNN Money, June 10, 2010, http://money.cnn.com/2010/06/10/autos/gm_no_chevy/index.htm (accessed April 24, 2015); Bill Vlasic, “G.M. inquiry cites years of neglect over fatal defect,” New York Times, June 5, 2014, http://www.nytimes.com/2014/06/06/business/gm-ignition-switch-internal-recall-investigation-report. html (accessed July 10, 2014); David Welch, “GM looking to reboot Chevrolet advertising campaign after a slow start,” Bloomberg, August 31, 2011, http://www.bloomberg.com/news/2011-08-31/gm- looking-to-reboot-chevrolet-advertising-campaign-after-a-slow-start.html (accessed April 27, 2015); Andrew Wendler, “Magnus Numeris: Here are the 21 bestselling vehicles of the year,” Car and Driver, http://www.caranddriver.com/flipbook/magnus-numeris-here-are-the-21-bestselling-vehicles-of-the- year#22 (accessed April 27, 2015); Chris Woodyard, “Chevrolet add more glitz to its Equinox SUV,” USA Today, February 13, 2015, http://www.usatoday.com/story/money/cars/2015/02/11/chevrolet-equinox- chicago-auto-show/23275237/ (accessed April 27, 2015); Chris Woodyard, “Chevrolet Impala becomes latest ‘micro hybrid’,” USA Today, May 23, 2014, http://www.usatoday.com/story/money/cars/2014/05/23/ stop-start-cars/9468495/ (accessed April 27, 2015); Chris Woodyard, “General Motors to remove its ‘Mark of Excellence’ logos from new cars,” USA Today, August 26, 2009, http://content.usatoday.com/ communities/driveon/post/2009/08/68497806/1 (accessed April 27, 2015); Chris Woodyard, “Chevrolet Volt outsells Nissan Leaf,” USA Today, December 4, 2011, http://content.usatoday.com/communities/ driveon/post/2011/12/electric-wars-chevrolt-volt-outsells-nissan-leaf-last-month/1#.VT6NgrPTBVI (accessed April 27, 2015); Chris Woodyard, “Sales shockers: Chevrolet Camaro whipping Ford

420 Case 9 • Chevrolet: A Century of Product Innovation

Mustang,” USA Today, April 4, 2011, http://content.usatoday.com/communities/driveon/post/2011/04/ sales-shockers-chevrolet-camaro-whipping-ford-mustang/1#.VT6NRLPTBVI (accessed April 27, 2015); Chris Woodyard, “Volt loses some potential buyers,” USA Today, December 8, 2011, p. 1A; Chris Woodyard, “Corvette revs its image to attract younger buyers,” USA Today, August 20, 2013, pp. 1B-2B.

QUESTIONS 1. Evaluate the diversity of vehicle types and sizes that are sold under the

Chevrolet brand name. What strengths and weaknesses are evident in Chevy’s product mix?

2. How has Chevrolet strategically managed its brand and reputation over the last 100 years? What opportunities and threats will affect Chevy’s branding and repu- tation in the future?

3. What specific marketing strategies would you recommend that might help Chevrolet last another 100 years? How important is Chevy’s legacy of innovation to the brand’s future?

Case 9 • Chevrolet: A Century of Product Innovation 421

Wyndham Worldwide Adopts a Stakeholder Orientation Marketing Strategy*

Synopsis: From its founding in 1981, Wyndham Worldwide has emerged as a global powerhouse in the lodging, timeshare, and rental industry. Along the way, Wyndham struggled through several mergers and acquisitions and an inconsistent branding strategy. After struggling through the reces- sion of 2008, Wyndham moved quickly to reinvigorate its core brands and launch new lodging con- cepts, all with a laser focus on a stakeholder orientation marketing strategy. This case briefly reviews Wyndham’s history and challenges that the company faced in becoming the powerful brand that it is today. Wyndham’s multifaceted stakeholder orientation marketing strategy is also reviewed with consideration for how Wyndham’s brands have become synonymous with quality, ethical leadership, customer satisfaction, and sustainability.

Themes: Stakeholder orientation, marketing strategy, branding strategy, ethics, sustainability, social responsibility, corporate reputation, customer satisfaction, international marketing

Wyndham Worldwide, headquartered in Parsippany, New Jersey, is a leading global provider of travel-related services, including lodging, timeshare exchange, and ren- tals. The company can be broken down into three components: Wyndham Hotel Group, Wyndham Vacation Ownership, and Wyndham Exchange & Rentals. Each of these parts comprises different companies and brands that are well known in their own right. Despite the many services the organization offers, Wyndham Worldwide is best known for its hotel chains. Wyndham Hotel Group consists of more than 7,670 franchised hotels, including well-known brands such as Days Inn, Howard Johnson, Super 8, Ramada, and Wingate by Wyndham. Case Exhibit 10.1 provides an overview of Wyndham’s product mix.

Since Wyndham Worldwide became an independent company in 2006, the com- pany has achieved a solid reputation for quality and strong stakeholder management. Many different stakeholders view Wyndham Worldwide as a company that truly cares about their needs and concerns. The company’s stakeholder initiatives and strong ethics and compliance programs are role models for practices within the hotel and resort industry.

HISTORY AND BACKGROUND Trammel Crow founded Wyndham Hotel Corporation in 1981. The company grew rapidly and merged with Patriot American Hospitality, Inc. in 1998. The newly merged company was renamed Wyndham International, Inc. The new Wyndham embarked upon an aggressive acquisition strategy by acquiring other hotels and companies. However, the organization made the common mistake of growing too

CASE

*Harper Baird and Jennifer Sawayda, University of New Mexico, developed this case, with assistance from Chandani Bhasin and Cassondra Lopez, under the direction of O.C. Ferrell and Linda Ferrell, Uni- versity of New Mexico. The case is intended for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation.

422

rapidly, acquiring massive debt in the process. Patriot American sought a $1 billion bailout from private investor groups. The company underwent an extensive restruc- turing process, in which Patriot became a wholly owned subsidiary of Wyndham International.

In 2005, Cendant Corp. bought the Wyndham hotel brand. The stock price of Cendant had remained stagnant since its merger with CUC International in 1997—a company that was later implicated in one of the largest accounting frauds of its time. Unfortunately for Cendant, the acquisition of Wyndham did not do much to raise its stock price. One year later, Cendant spun off its lodging, vacation exchange, and rental businesses to create Wyndham Worldwide, and the Cendant name was offi- cially retired.

Despite these changes, Wyndham Worldwide continued to face challenges. For instance, its hotel brands had earned a reputation for inconsistency. Each hotel seemed to differ from the other, making it difficult for Wyndham to establish a solid brand identity. CEO Stephen Holmes blamed its identity crisis on ineffective market- ing by previous investors. Holmes believed the key to success was to create a consis- tent look for the brand and hired designer Michael Graves to redesign its hotels. Then the recession hit. With hotel demand decreasing, Wyndham posted a quarterly loss of $1.36 billion in 2009 and was forced to sell more shares to raise needed funds. However, the CEO for its hotel division, Eric Danziger, continued to work to create a more consistent brand image for Wyndham hotels. In creating its new image, the company also began expanding its international reach by acquiring hotel brands in major international cities. Today, Wyndham Worldwide is located on six continents and employs 34,400 people globally.

CASE EXHIBIT 10.1 Wyndham’s Product Mix

Wyndham Hotel Group Wyndham Exchange and Rentals

Wyndham Hotels and Resorts Wyndham Grand Wyndham Garden Hotels TRYP Wingate Hawthorn Suites Microtel Inn & Suites Ramada Worldwide Baymont Inn & Suites Days Inn Super 8 Howard Johnson Travelodge Knights Inn Dolce Hotels and Resorts

RCI The Registry Collection

Wyndham Vacation Ownership Wyndham Vacation Rentals Club Wyndham Wyndham Vacation Resorts WorldMark Shell Vacations Club Margaritaville Vacation Club

Wyndham Vacation Rentals Landal GreenParks Novasol James Villa Holidays Hoseasons cottages4you

SOURCE: Wyndham Worldwide website, http://www.wyndhamworldwide.com/category/our-brands (accessed June 13, 2015).

Case 10 • Wyndham Worldwide Adopts a Stakeholder Orientation Marketing Strategy 423

WYNDHAM’S BRANDING STRATEGY For some time, many people considered the quality of service and benefits at Wyndham hotels to be inconsistent. Hotel Group CEO Eric Danziger believed that past marketing initiatives conflicted with one another to muddle the company’s brand identity. As part of the company’s redesign, Wyndham sought to create a solid identity for each hotel chain that captured the feel of the chain’s history and purpose. The company’s goal was to create a “customer-centric lifestyle experience that will be relevant to guests across all tiers.”

As part of its new brand strategy, each Wyndham hotel chain was redesigned with customers in mind. For instance, the Howard Johnson hotel chain’s longer his- tory prompted Wyndham to create an “iconic” atmosphere for these hotels that tar- get leisure travelers and families. The experiential benefits of the Howard Johnson chain therefore include a family-friendly environment and being able to stay in a clas- sic hotel at a reasonable price. On the other hand, Wyndham’s more upscale hotel chains offer a completely different experience. Its TRYP hotels are located in some of the world’s largest cities in Europe, South America, and North America. The hotels are designed to fit in with the local environment and thus range from modern- istic to historical designs. The hotels are meant to be an extension of the city in which they are located, enabling visitors to experience the excitement of the city even before leaving the hotel’s doors. Wyndham hoped that the new identities for each hotel chain combined with consistent marketing would help solidify the brand and attract more customers.

WYNDHAM’S STAKEHOLDER ORIENTATION Wyndham Worldwide’s vision is “to be the world’s premier branded-hotel operat- ing company.” To help it achieve this goal, the company has adopted a stakeholder orientation marketing strategy to address the demands of a wide range of primary and secondary stakeholders. Stakeholder orientation in marketing involves activi- ties and processes that create value through relationships with multiple stake- holders such as customers, suppliers, employees, shareholders, regulators, and the local community. Wyndham relies on its primary stakeholders for its contin- ued success.

In order to satisfy relevant stakeholders, Wyndham gathers information, both formally and informally, to ascertain relevant issues of concern. However, a stake- holder orientation is not complete unless it includes activities that address specific stakeholder issues that reach or exceed expectations. This has led Wyndham to develop a number of initiatives, including benefits to its loyal customers and employ- ees, community programs, and environmentally friendly practices. Wyndham gauges its stakeholder orientation through feedback from stakeholders and generation of data from across the organization, which then results in the assessment of the firm’s effect on these groups.

Wyndham is aware that a stakeholder orientation is connected to market share performance, financial performance, reputation, and employee commit- ment. The company works “to maintain social responsibility, as a way of living, working and playing that fully encompasses the vision and values that Wyndham Worldwide has incorporated.” A climate of ethics and social responsibility creates a large measure of trust among a firm’s stakeholders. Wyndham Worldwide has therefore adopted five core values of corporate social responsibility including integrity, respect, individual opportunity and accountability, improving customer lives, and community support. These values guide how Wyndham interacts with its stakeholders.

424 Case 10 • Wyndham Worldwide Adopts a Stakeholder Orientation Marketing Strategy

Relationships with Customers When customers consider the Wyndham brand, they most likely think of upscale hotel chains that cater to wealthy vacationers and businesspeople. In reality, Wynd- ham targets travelers from across all segments of the price spectrum. Hotels carrying the Wyndham name tend to be luxury chains—Wyndham Hotels and Resorts, Wynd- ham Garden, and Wyndham Grand Collection. However, Wyndham also owns the budget hotel chains Howard Johnson, Days Inn, Super 8, Travelodge, and others. The diversity in hotel chains enables Wyndham to target a wide range of travelers. This strategy allows Wyndham to avoid brand confusion by omitting the Wyndham name from its budget hotels.

Wyndham offers its customers many different benefits to increase customer loy- alty. For instance, Wyndham’s Rewards program awards points and air miles to cus- tomers for staying at its 7,670 hotels and resorts worldwide. Those customers with enough points can receive free nights at Wyndham hotels. Wyndham’s ByRequest program provides a more personalized benefits package; members get free Internet access, expedited check-in, and—after three nights—a snack and drink, extra items such as higher quality pillows, and the option to have the room personalized to the customer’s preferences.

In addition, Wyndham strives to encourage travel among businesswomen and make their stays more comfortable. Since 1995, Wyndham has run Women on Their Way, a program that specifically targets female business travelers. The program’s website offers advice and special packages for businesswomen planning their trips. Wyndham also prides itself on being one of the first chains to conduct research on the woman traveler when it was still an underserved area. Wyndham claims that its research and feedback from its female travelers prompted the hotel chain to offer improved ameni- ties in the hotel rooms, such as full-length mirrors, coffee pots, and healthier menu options. The company has its own female advisory board and periodically conducts sur- veys and research in what it sees as an important market for future success.

Wyndham has great faith in its hotels’ abilities to meet and exceed customer expectations. In addition to being the first hotel company to implement fully online customer service satisfaction tracking, each of the company’s websites displays rat- ings and feedback from TripAdvisor, a travel website where customers can share their opinions. Because 40 to 60 percent of Wyndham’s customers refer to TripAdvi- sor, this move shows that Wyndham understands the importance of customers’ experiences.

Relationships with Employees The corporate culture at Wyndham Worldwide focuses extensively on employee well-being. The company considers its employees crucial to its success. For this rea- son, Wyndham offers a range of employee benefits, including health and welfare, retirement planning, employee discounts, education assistance, employee assis- tance, adoption reimbursement, flexible work arrangements, and domestic partner benefits. Wyndham also has several unique programs for employees:

• University Relations, which provides students with information regarding intern- ship and job opportunities at Wyndham.

• The Be Well program, which aims to improve the holistic health of employees and advocates for exercise, lifestyle management, emotional wellness, financial health, and the quality of the work environment through programs such as weight management and stress reduction.

• The Count On Me! Service Promise, which holds employees accountable to one another in fulfilling Wyndham’s core service values of responding to customer needs, being respectful, and delivering a great experience.

Case 10 • Wyndham Worldwide Adopts a Stakeholder Orientation Marketing Strategy 425

Wyndham Worldwide also realizes that one of the best benefits it can offer its employees is knowledge. The company believes its employees have the chance to embark on long-term careers in the hospitality industry, and Wyndham wants to cul- tivate these skills. In so doing, Wyndham not only helps its employees learn the nec- essary skills but also creates benefits for the company as well, because more skilled employees translate into better service for customers.

Relationships with Shareholders As a publicly traded company, Wyndham must create value for its shareholders, which the company has achieved in recent years. Wyndham Worldwide’s stock price has steadily increased, and the stock hit a 52-week high in 2015. Bottom-line profits improved by $97 million. Its Hotel Group is a leading franchiser of hotels, its Exchange & Rentals Group is the leading timeshare exchange and rental company, and its Vacation Ownership Group is the leading timeshare developer. Its high cash flows and diversity of goods and services makes it uniquely positioned in the lodging industry.

Although the lodging industry lagged in the years following the recession, it has picked up once again. The strengthening U.S. economy, increases in corporate and government hotel bookings, and expansion into international markets will drive room rates higher. However, unstable global economic conditions may continue to hinder growth. Going forward, Wyndham must be certain to carefully survey its com- petition. Four large competitors that represent potential threats to Wyndham include Marriot Hotels, Starwood Resorts, Wynn Resorts, and MGM Mirage. All of these hotels are widely admired and score high on brand awareness. To improve its com- petitive position and thus its value to shareholders, Wyndham will need to identify, monitor, and react to threats and opportunities in a rapidly changing business environment.

Relationships with Communities One of Wyndham Worldwide’s corporate values is to support its communities. The company states that, “As a large company, we provide employment that helps out the communities in which we operate. But the Wyndham philosophy is that is not enough. We need to give back to our communities to improve the world around us.” This led the company to create several ethical and philanthropic programs.

Wyndham is committed to protecting the human rights of the people within the company’s “sphere of influence.” The company adopted a Human Rights Policy Statement in 2007 and focuses on the ethical treatment of all workers. Wyndham aims to provide a safe working environment, rejects all forms of forced labor (espe- cially child labor), and supports the rights of employees to form unions.

Wyndham Worldwide has a number of philanthropic programs to address the needs of its stakeholders. Its philanthropic arm is Wishes by Wyndham, which works to support charities that help women and children through donations, volun- teerism, fundraising, and raising awareness. The company has adopted three charities:

• The SeriousFun Children’s Network, an organization that provides free pro- grams to children with serious medical illnesses.

• The Christel House, a learning center for children founded by Wyndham employee and board member Christel DeHann, who realized that helping people by providing food and clothing was only a temporary solution to the much bigger problem of poverty.

• Wishes by Wyndham, which awards funding to nonprofit organizations.

426 Case 10 • Wyndham Worldwide Adopts a Stakeholder Orientation Marketing Strategy

In addition to its corporate support of these programs, Wyndham strongly encourages its employees to contribute toward its philanthropic endeavors and gets its customers involved by giving them a chance to donate their rewards points to charity.

Relationship with the Environment Wyndham Worldwide recognizes that its work practices have an immense impact on the environment. The company believes that using more eco-friendly products and reducing its environmental impact will not only help the environment but also save it money in the form of energy savings—contributing to the financial performance of the company. It therefore aims to reduce its negative impact and support sustainable initiatives. Wyndham Worldwide emphasizes the following goals:

• Educate, influence, and provide value to internal and external stakeholders. • Reduce energy and water consumption and track performance. • Recycle and increase waste diverted from landfills. • Improve air quality. • Minimize waste by recycling and reusing materials. • Use green innovation techniques to develop new programs, products, and

services that promote sustainability. • Participate in local community environmental programs that contribute to the

wellness of our environment. • Implement sustainable procurement practices.

Just as Wyndham has teams devoted to ethics and compliance, it also has a team committed toward improving the company’s sustainability. The company also colla- borates with a variety of institutions to increase green practices in the hotel and lei- sure industry.

Thus far, nearly half of Wyndham’s real estate has received green certification. To become a greener company in every aspect of its operations, Wyndham World- wide sets individual goals for each of its hotel brands. These goals target important subjects such as energy conservation, water conservation, recycle-reuse, education, and innovation. Some of Wyndham’s major energy conservation initiatives include replacing incandescent lights with energy-efficient bulbs, upgrading to more energy- efficient appliances, and using the ENERGY STAR® tracking system to measure energy use. Although many of these devices are expensive, most of them pay for themselves in a few years. Afterward, the company gets the increased benefit of energy savings. For example, Wyndham has installed an energy-saving DECTRON system in the hotel pools of its Hawthorne Suites by Wyndham. This device saved Wyndham an estimated $20,000 over 2 years.

Wyndham attempts to conserve water through a variety of initiatives, including the EarthSmart® linen and towel program; low-flow faucets, toilets, and other appli- ances; the Ozone Laundry System; drip irrigation and drought-resistant landscaping; and EPA WaterSense® certified products. Although some of these initiatives appear small in nature, the company has advanced significantly in water conservation. For instance, low-flow fixtures have reduced water consumption at Wyndham’s Vacation Ownership by 20 percent.

Wyndham uses several recycled products (including pens, key cards, coffee cups, and laundry bags) throughout its hotels to reduce its impact on the environ- ment. One unique way in which Wyndham has reused materials is in its employee uniforms. At some Wyndham Hotel & Resorts, the uniforms of front-desk staff con- sist of recycled 2-L plastic bottles. By making genuine attempts to recycle and reuse materials, Wyndham has been able to reduce the amount of construction waste that ends up in landfills by 88 percent at its New Jersey headquarters.

Case 10 • Wyndham Worldwide Adopts a Stakeholder Orientation Marketing Strategy 427

Wyndham views the education of consumers on sustainability as a key driving force in achieving environmental success. In order to achieve its educational goals, Wyndham Worldwide takes steps such as educating guests and employees regarding environmental certification programs, green technologies, and ways to protect their natural environment. The Wyndham Worldwide green website (http://www.wynd- hamworldwide.com/category/environment-sustainability) educates consumers by outlining important facts regarding energy conservation, removal/cleanup guidelines for compact fluorescent light bulbs, consumer product rebates, and tax incentives and rebates offered by state governments. Wyndham has adopted a proprietary online environmental management system called Green Toolbox to track and mea- sure the environmental progress of its real estate. In addition, the company’s Global Best Practices guide educates businesses about environmentally friendly initiatives.

WYNDHAM’S ETHICS AND COMPLIANCE PROGRAMS To maintain a strong corporate culture, Wyndham has implemented an extensive compliance program to reinforce ethics throughout the organization. A climate of ethics and social responsibility creates a large measure of trust among a firm’s stake- holders. The company has drafted a thorough Code of Business Conduct that has received top scores from the Ethisphere Institute for its comprehensiveness and availability to stakeholders.

Codes of conduct have several purposes. For employees, the code of conduct (or code of ethics) helps them to become familiar with the company’s expectations for them. It also provides an essential reference for employees when faced with diffi- cult decisions. Research suggests that employees in organizations with ethical codes of conduct are less accepting of potential misconduct toward stakeholders. For sta- keholders in general, a code expresses the company’s commitment to corporate social responsibility and ethical conduct. In addition, a code of conduct is an impor- tant way to share information about stakeholder issues. Therefore, the clarity and comprehensiveness of a company’s code of conduct is an important signal of a com- pany’s dedication toward ethics, compliance, and stakeholder relationships. Wynd- ham received high scores for the company’s values and commitments within its Code of Business Conduct, its coverage of risk topics, and the code’s availability to stakeholders.

In addition to its strong code of conduct, Wyndham has created an Ethics and Compliance Program, a Compliance Governance Board, and a Compliance and Ethics Leadership Team. The audit committee on Wyndham’s Board of Directors is also involved with the Ethics and Compliance Program and receives quarterly updates on the program’s progress. The program is designed and directed by the Compliance Governance Board, which is made up of the company’s CEO, Chief Financial Officer, Chief Human Resources Officer, and the General Counsel. The Compliance and Ethics Leadership Team helps to keep the company on its ethical course. They receive updates regarding the ethics and compliance program, collect feedback, assess the company’s global risks, and train employees. All of these differ- ent positions and programs demonstrate an ethical tone at the top. In other words, Wyndham Worldwide believes that ethical programs must start with ethical leaders to be successfully implemented throughout the organization.

Wyndham Worldwide’s efforts have not gone unnoticed. The company has received many awards regarding its ethical initiatives. Recently, Newsweek magazine ranked Wyndham Worldwide as one of the 100 Greenest Big Companies and won the 2015 ACE (Achievement in Customer Excellence) Community Service Award from the Amer- ican Resort Development Association. Additional awards include the following:

• The Lodging Sustainability Award for “Lodging Brand of the Year.” • Fortune magazine’s World’s Most Admired Companies for 2013.

428 Case 10 • Wyndham Worldwide Adopts a Stakeholder Orientation Marketing Strategy

• DiversityInc.’s Top 50 Companies for Diversity. • U.S. Veterans Magazine’s 2014 Best of the Best Award for supplier diversity. • Ethisphere’s World’s Most Ethical Companies.

Wyndham Worldwide’s numerous initiatives in sustainability and corporate responsibility are key factors in enhancing Wyndham’s reputation and contributing to future success.

WYNDHAM’S FUTURE Wyndham has achieved great success with its stakeholder orientation marketing strategy. The company’s ability to adapt its marketing strategies to suit its various chains has provided it with unique advantages that make it a formidable competitor to rival hotel companies.

Wyndham’s hotel brands are at different levels of the life cycle. The company’s TRYP brand, for example, is in the introductory and growth stages, while its Howard Johnson, Super 8, and Days Inn chains are mature brands. Despite heavy marketing to promote awareness of its newer brands, Wyndham has not neglected its more mature brands. For example, the company has worked hard to portray Howard John- son as an iconic brand and continues to offer benefits packages to encourage fami- lies to stay at the chain. Wyndham makes sure to adjust its marketing strategies to suit both the brand’s image and its stage in the product life cycle.

One opportunity for Wyndham that could prove profitable is expansion into emerging economies. Approximately 10 percent of Wyndham Worldwide hotels are in emerging markets such as India and China. With property prices at a low and a rising middle class in these countries, the disposable income makes these countries increasingly lucrative markets to capture. Entering emerging markets will create new marketing challenges, and Wyndham must continue to adapt its brand strategies to new groups of stakeholders.

The company has demonstrated its concern for a variety of stakeholders by embracing a stakeholder orientation and focusing on competitive advantage. Although Wyndham seems to be on the right track, it still faces a variety of risks and competitive threats in the hospitality industry. Since these issues are inevitable in large corporations, Wyndham must ensure that it has plans in place to address these risks. Additionally, Wyndham must avoid complacency in its continued efforts to inte- grate its corporate culture into its global operations. Now more than ever, Wyndham should leverage its competitive advantage in ethics and social responsibility to enhance its reputation. As consumers become increasingly concerned with value and a quality experience, Wyndham’s strong stakeholder relationships and reputation will likely prove a valuable asset that gives it a competitive edge over its rivals.

SOURCES American Resort Development Association, “2015 ARDA Awards winners and finalists,” http://www. arda.org/meetings-awards/awards/past-winners/2014.aspx (accessed May 22, 2015); “America’s Greenest Companies 2014,” Newsweek, 2014, http://www.newsweek.com/green/americas-greenest-companies- 2014 (accessed May 22, 2015); Bloomberg News, “Wyndham posts $1.36 billion loss,” New York Times, February 13, 2009, http://www.nytimes.com/2009/02/14/business/14wyndham.html? ref=wyndhamworldwidecorporation (accessed May 22, 2015); Breaking Travel News, “Wyndham is tops for customer service,” Breaking Travel News, May 10, 2004, http://www.breakingtravelnews.com/news/ article/btn20040510083409820 (accessed May 22, 2015); Christel House, “About us,” http://www. christelhouse.org/about-us (accessed May 22, 2015); “Court approves RCI settlement,” Timesharing Today, Issue 109, January/February 2010, 1; Barbara De Lollis, “Wyndham hotels embrace TripAdvisor reviews,” USA Today, March 6, 2012, http://www.usatoday.com/story/hotelcheckin/2012/10/09/wyndham- tripadvisor-consumer-reviews/1622111/ (accessed May 22, 2015); DiversityInc, “No. 29 Wyndham

Case 10 • Wyndham Worldwide Adopts a Stakeholder Orientation Marketing Strategy 429

Worldwide DiversityInc top 50,” http://www.diversityinc.com/wyndham-worldwide/ (accessed May 22, 2015); Ethisphere Institute, “The 2011 world’s most ethical companies,” Ethisphere, Q1 2011, pp. 37–43; O. C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 8th ed. (Mason, OH: South-Western Cengage Learning, 2011), p. 248; G. T. M. Hult, Jeannette A. Mena, O.C. Ferrell, and Linda Ferrell (2011), “Stakeholder marketing: a definition and conceptual framework,” AMS Review, 1(1), 44–65; IndUS Business Journal, “Cendant buys Wyndham hotel brand for $100m,” IndUS Business Journal, October 15, 2005, http://www.indusbusinessjournal.com/ME2/dirmod.asp? sid=&nm=&type=Publishing&mod=Publications%3A%3AArticle&mid=8F3A7027421841978F18BE895F87 F791&tier=4&id=217E6E851DF84383B6141F0B73912F24 (accessed May 22, 2015); Susan Knox, “The RCI Christel House Charity Golf Event 2011–Escaping poverty is not easy unless you are taught how,” Perspective, March 29, 2011, http://www.theperspectivemagazine.com/the-rci-christel-house-charity-golf- event-2011-%e2%80%93-escaping-poverty-is-not-easy-unless-you-are-taught-how-014653 (accessed May 22, 2015); Isabelle Maignan, Tracy L. Gonzales-Padron, G. Tomas M. Hult, and O.C. Ferrell (2011), “Stakeholder orientation: development and testing of a framework for socially responsible culture,” Journal of Strategic Marketing, 19, 313–338; Joseph A. McKinney, Tisha L. Emerson, and Mitchell J. Neubert (2010), “The effects of ethical codes on ethical perceptions of actions toward stakeholders,” Journal of Business Ethics, 97, 505–516; RCI Europe, “About RCI,” RCI, https://www.rci.com/pre-rci- en_GB/discover-rci/about-rci.page (accessed May 22, 2015); SeriousFun Children’s Network, “About us,” http://www.seriousfunnetwork.org/About (accessed May 22, 2015); Christopher Sindik, “50 Asian companies & the world’s most ethical companies,” Ethisphere, Q1 2011, pp. 15–17; Tess Stynes, “Wyndham profit rises on improved demand,” Wall Street Journal, February 9, 2011, http://online.wsj. com/article/SB10001424052748703310104576134783753550522.html); TRYP by Wyndham, http://www. tryphotels.com/en/index.html (accessed July 28, 2012); Wyndham Worldwide website, http://www. wyndhamworldwide.com (accessed May 22, 2015); Wyndham Worldwide, “Cendant Corporation announces filing of Wyndham Worldwide Corporation registration statement,” Wyndham Worldwide, May 11, 2006, http://www.wyndhamworldwide.com/news-media/cendant-corporation-announces-filing- wyndham-worldwide-corporation-registration-statement (accessed May 22, 2015); Wyndham Worldwide, “About Wyndham Green,” http://www.wyndhamworldwide.com/category/about-wyndham-green (accessed May 22, 2015); Wyndham Worldwide, “Green Awards,” http://www.wyndhamworldwide.com/ category/green-awards (accessed May 22, 2015); Wyndham Worldwide, “Green Toolbox,” http://www. wyndhamworldwide.com/category/green-toolbox (accessed May 22, 2015); Wyndham Worldwide, “Women on their way,” http://www.womenontheirway.com/about (accessed July 28, 2012); Wyndham Worldwide, “Wyndham Worldwide achieves two more LEED certifications from U.S. Green Building Council,” April 1, 2014, http://www.wyndhamworldwide.com/news-media/wyndham-worldwide-achieves- two-more-leed-certifications-us-green-building-council (accessed May 22, 2015); “Wyndham Worldwide earns Best of the Best Award by U.S. Veterans Magazine for supplier diversity,” August 20, 2014, http:// workplacediversity.com/wyndham-worldwide-earns-best-of-the-best-award-by-u-s-veterans-magazine-for- supplier-diversity/ (accessed May 22, 2015); Wyndham Worldwide, “Wyndham Worldwide named as a 2015 world’s most ethical company by the Ethisphere Institute,” March 12, 2015, http://www. wyndhamworldwide.com/news-media/press-releases/wyndham-worldwide-named-2015-world%E2%80% 99s-most-ethical-company-ethisphere (accessed May 22, 2015); Roger Yu, “New spinoff Wyndham hopes to re-establish hotels with fresh look,” USA Today, August 2, 2006, http://www.usatoday.com/money/ biztravel/2006-08-01-wyndham-usat_x.htm (accessed May 22, 2015); Roger Yu, “Travel Q&A: Wyndham CEO Eric Danziger,” USA Today, January 29, 2009, http://www.usatoday.com/travel/hotels/2009-01-29- qa-eric-danzinger_N.htm (accessed May 22, 2015); Zacks Equity Research, “Wyndham (WYN) hits a 52- week high on consistent growth,” Zacks, http://www.zacks.com/stock/news/166430/wyndham-wyn-hits-a- 52week-high-on-consistent-growth (accessed May 22, 2015).

QUESTIONS 1. How does Wyndham’s stakeholder orientation create a strategic marketing

advantage? 2. How do Wyndham’s diverse brands contribute to customer satisfaction and mar-

keting performance? 3. Do the awards and recognition that Wyndham has received for social responsi-

bility and ethics contribute to its financial performance? If so, how?

430 Case 10 • Wyndham Worldwide Adopts a Stakeholder Orientation Marketing Strategy

NASCAR: Can’t Keep a Good Brand Down*

Synopsis: This case discusses NASCAR’s successful branding strategy and how it became one of the top sports in America. The history of NASCAR is reviewed, followed by an overview of NASCAR’s marketing and branding strategies. Despite its unparalleled success, NASCAR has faced a number of challenges and criticisms over the past decade, including declining ratings. The case examines many of the challenges that NASCAR must address if it is to sustain its branding juggernaut and retain its top spot in the motorsports arena.

Themes: Branding strategy, branding alliances, brand image, pricing strategy, integrated marketing communication, sports marketing, differentiation, social responsibility

In the past 65 years, the National Association for Stock Car Auto Racing, better known as NASCAR, has become the top auto racing series in the United States and the number one spectator sport in America. It has also become well known for its branding alliances, with drivers sporting everything from coffee to deodorant logos on their cars and jumpsuits. The sport currently comprises three national series: the NASCAR Nationwide Series, the NASCAR Sprint Cup Series, and the NASCAR Camp- ing World Cup Series, along with some regional and international series. Although primarily a U.S. sport, NASCAR has held races in Mexico, Canada, Australia, and Japan. It currently sanctions over 1,200 races in more than 30 U.S. states, Canada, Mexico, and Europe.

NASCAR’s popularity soared over the past 10 years, partially due to extensive media coverage. Drivers such as Jeff Gordon and Dale Earnhardt, Jr., have become heroes of the auto racing industry, and many NASCAR drivers have made appear- ances in movies and television. NASCAR’s growth has been so dramatic that it is now second only to the National Football League (NFL) in popularity. Despite its immense success, the sport has had to overcome challenges in its 65-year history and will likely have to face many more because of declining attendance and other difficulties such as diversity, safety, and its impact on the environment. Still, its strong brand image and brand alliances with other companies will likely keep the sport afloat through these tough times.

NASCAR’S HISTORY NASCAR began with the vision of one man, a worker at an automobile dealership named William Henry France. France was already in love with auto racing when he moved to Daytona Beach, Florida, during the 1930s. Daytona Beach was the perfect place for auto racing enthusiasts like France, as the beach’s open expanses and flat ground offered a perfect area for races. In fact, by the time of NASCAR’s founding over a decade later, automobile racing had become popular in places like Florida, Ala- bama, and North Carolina. Many sources give bootleggers the credit for promoting

CASE

*Timothy Aurand, Northern Illinois University, and Kimberly Judson, Illinois State University, prepared this case for classroom discussion rather than to illustrate effective or ineffective handling of an admin- istrative, ethical, or legal decision by management. Jennifer Sawayda contributed editorial assistance. A student team including Joe Izral, Rhonda McCormick, Alex Mbuthia, Jamie Scott, and Felix Villa con- tributed to the development of this case. All sources used for this case were obtained through publicly available materials.

431

auto racing during the 1920s and 1930s, as moonshine cars had to be built to go fast in order to evade the law. The popular idea of bootleggers racing from the law is etched in racing mythology as one of the precursors of stock car racing, although in reality its influence on stock car racing is likely overemphasized. Auto racing continued to increase in popularity in the early decades of the twentieth century.

France recognized the potential popularity and profitability that auto racing offered. Yet at the time, this lucrative movement lacked what it needed to become a professional sport, including promoters, racetracks, rules, or respectability on the part of the racers. Therefore, in 1947 France met with owners, drivers, and mechan- ics at the Streamline Hotel to launch his idea of creating a professional sport out of stock car racing. Over the next few days, they worked on the details for the organiza- tion. The first race of the newly formed organization—held on February 15, 1948— was won by stock car racer Red Byron. A few days later on February 21, NASCAR was officially incorporated, with France serving as president and CEO. What is today known as the NASCAR Sprint Cup Series was created in 1949.

Racing fans flocked to the tracks, and soon NASCAR names such as Lee Petty, the Flock brothers, and Fireball Roberts became household names among NASCAR enthusiasts. Originally, many of the races were held on simple makeshift tracks, but in 1959 France opened Daytona International Speedway, which offered a paved racetrack. The 2.5-mile racetrack provided an enclosure and more accommodations for spectators. Ten years later, France opened the Talladega Superspeedway in Ala- bama, a 2.7-mile racetrack that is the largest oval track in the world. France would serve as NASCAR president and CEO until 1972, when his son William France, Jr., took over. NASCAR continues to remain largely under the control of the France family to this day, a source of some contention among NASCAR fans and critics.

In the late 1960s and 1970s, NASCAR tracks began to emerge outside of the South- east. Tracks were built in Delaware and Pennsylvania. Since then, NASCAR has tried to become more of a national sport, building racetracks in many U.S. states.

EARLY CORPORATE SPONSORS OF NASCAR NASCAR’s growth really took off when it partnered with automakers Ford, General Motors (GM), and Chrysler in the 1950s. The automakers hoped their support of NASCAR would boost their own sales. The marketing phrase “Win on Sunday, Sell on Monday” became popular with the automakers as it was believed that success in the races meant greater success for their companies. In 1971, the R.J. Reynolds Tobacco Company’s Winston brand became a sponsor of NASCAR. During that time period, NASCAR also formed limited sponsorships with Union 76, Goodyear Tires, and Pepsi. Anheuser-Busch began to sponsor NASCAR’s Budweiser Late Model Sportsman Series in 1984. NASCAR would soon become famous for its brand- ing partnerships, and the support of major sponsors and brands has contributed to NASCAR’s well-known image.

NASCAR’S JUMP IN ATTENDANCE NASCAR began to experience unprecedented growth in the 1990s, coming a long way from its 1.4 million attendees in 1976. To help with this growth, it launched its first website in 1995, which offered up-to-date news on NASCAR activities and even had a NASCAR community where members could chat online and post opinions and videos. In 5 years, NASCAR attendance increased by 57 percent to over 6.3 million. Its television viewership grew 48 percent between 1993 and 2002, and by 2006 about 6 percent of U.S. households watched NASCAR races on television, compared to less than 2 percent for its competitor, the Indy Racing League. New, younger NASCAR

432 Case 11 • NASCAR: Can’t Keep a Good Brand Down

stars such as Ryan Newman, Kyle Petty, and Kurt Busch began emerging, which helped attract the youth market to the sport. Women also began racing for NASCAR, including drivers Tina Gordon, Deborah Renshaw, and Kelly Sutton, the only NASCAR driver with multiple sclerosis. Consequently, female NASCAR fans grew to roughly 40 percent of its fan base.

Today NASCAR has approximately 70 million fans and has the second-highest television ratings for regular season sports. NASCAR fans are believed to be the most brand-loyal of any sport, and one estimate claims that fans spend over $2 billion in licensed product sales. For this reason, NASCAR has attracted the attention of numerous Fortune 500 companies. Currently, NASCAR is broadcast in over 150 countries in over 30 languages.

NASCAR’S BRANDING STRATEGY Early on, NASCAR worked hard to promote its brand name. It has been largely suc- cessful in its endeavors by integrating multiple marketing initiatives into a well-organized branding strategy. Part of this strategy dealt with partnering and cobranding with other companies. Driver jumpsuits and racecars are filled with the logos of various companies that NASCAR has formed brand alliances with. At the same time, NASCAR has successfully differentiated its own brand and, through the launch of campaigns, has effectively marketed its brand throughout the world.

TELEVISION BROADENS NASCAR’S REACH Before the mid-1970s, the only way to watch a NASCAR racing event was to attend a race in person. During the mid- to late-1970s, NASCAR began to receive sporadic television coverage, and in 1979 the Daytona 500 was the first NASCAR event tele- vised in its entirety. NASCAR started to rely on television as a branding medium, and by 1989 all races on the Winston Cup schedule were televised (later changed to the NASCAR Nextel Cup and then the Sprint Cup). This did not mean that television did not introduce some problems for NASCAR. Each track negotiated its own televi- sion contract, which meant that each race could potentially be shown on a different network. This hindered NASCAR’s exposure and presented a problem that NASCAR was not able to overcome until the turn of the century.

In 2001, NASCAR took a proactive stance by signing a comprehensive television contract with FOX and NBC that was worth $2.4 billion and enabled the televising of all the NASCAR races that season. Just 4 years later, another contract was signed for $4.48 billion, providing broadcasts in a total of 167 countries including Thailand, Pakistan, New Zealand, and Venezuela. Such media coverage has, in part, accounted for NASCAR’s large fan base.

CO-BRANDING ENHANCES PROFITS AND BRAND IMAGE NASCAR also recognized the benefits of co-branding relationships. It realized that a successful branding alliance can give the companies involved a greater competitive advantage. In the early 1970s, NASCAR was primarily sponsored by R. J. Reynolds Tobacco Company. Today, NASCAR has marketing and sponsorship deals with a wide range of Fortune 500 companies such as Sunoco, Coca-Cola, 3M, Sherwin Williams, Bank of America, and Coors Light. In 2004, Nextel replaced R. J. Reynolds as the series’ sponsor, with Nextel paying NASCAR $70 million annually for the title rights. Nextel later merged with Sprint, and Sprint became the third title sponsor in NASCAR’s history. The former Busch Grand National Series, which had been spon- sored by Anheuser-Busch since 1984, became the Nationwide Series in 2007. In 2015,

Case 11 • NASCAR: Can’t Keep a Good Brand Down 433

it underwent another name change—the Xfinity series—after Comcast’s XFINITY became its new entitlement partner.

NASCAR takes its sponsorship deals very seriously. A sponsor may spend several million dollars for a race team and then spend just as much on promotional events. It is not a task to be taken lightly. Brian France even has a team that runs seminars to help sponsors get the greatest advantage out of their sponsorships. Of course, the relationship between NASCAR and its sponsors changes over time as their needs change and the economy ebbs and flows. During the last recession, NASCAR lost several sponsors due to financial reasons. More recently, Sprint announced that it would not renew its title partnership with NASCAR for 2017. This will cause some challenges for NASCAR as Sprint has been a strong supporter and has worked to create a number of innovations to market the races, including Miss Sprint Cup and the NASCAR Sprint Cup Mobile wireless app.

One potential weakness of NASCAR’s co-branding is that some experts feel that the sport is becoming flooded with sponsorships. It has about 50 league sponsors and numerous team sponsors. This creates a cluttered environment of signage at the racetracks. Sponsorship has also increased in price within the last few decades, which means sponsors are now expecting more from drivers. Drivers are now expected not only to race well but also to show up for marketing functions and appear early on the morning of the race to sign autographs and answer questions. The pressure is on to win races, not only for the glory of the driver and for NASCAR but to retain the sponsor as well. New teams, even when legendary racecar drivers own them, also have a hard time attracting sponsors, despite the teams’ talent. NASCAR driver Jeff Gordon, for example, had a difficult time finding sponsors for his new team featuring novice driver Jim Johnson despite Gordon’s legendary status.

Sponsors find that co-branding with NASCAR is extremely profitable, saving them from having to promote themselves through traditional media. And, because NASCAR fans are some of the most brand-loyal consumers to be had, NASCAR- sponsored products have benefitted from sizable sales and market share increases. As a result of its co-branding alliances, NASCAR itself offers a plethora of consumer products either as brand extensions or through a direct relationship with other firms. Currently, NASCAR has licensing and merchandising rights for watches, clothes, chairs, tables, grills, hats, clocks, flags, door mats, blankets, auto accessories, sunglasses, and even food products.

DIFFERENTIATION SEEKS NEW AUDIENCES In spite of its various brand partnerships, NASCAR has worked hard to differentiate its brand from other companies, particularly from competing racing circuits. This often takes place in the form of well-coordinated marketing campaigns, such as the lavish campaign NASCAR launched to celebrate its 50th anniversary. One of the strongest differentiating factors for NASCAR is the experience of the race. NASCAR fans like the constant, unpredictable, and even dangerous action. Crashes, live enter- tainment, and danger all make up the NASCAR experience.

With only a single driver per racecar, NASCAR also offers a human touch in the bargain. The driver provides a face and personality to fans, allowing them to strongly identify with NASCAR. Additionally, NASCAR lets several drivers share the spotlight throughout the race. From an owner’s perspective, it is more efficient to manage the public relations opportunities of one driver as opposed to an entire team of athletes.

A similar dynamic can be observed in advertising and sponsorship during the competition. Within the NASCAR culture, a large amount of sponsorship signage around the track and on the drivers’ cars has historically been acceptable and is perceived to be part of the NASCAR experience. Although clutter is an issue that

434 Case 11 • NASCAR: Can’t Keep a Good Brand Down

sponsoring organizations must consider, it does not appear to be viewed as nega- tively by the NASCAR fan base as it is viewed in professional golf and tennis, which are more conservative and traditional sports.

NASCAR also differentiates its sport through connections cultivated within the media and Hollywood. Brian France, CEO of NASCAR, realizes that to remain successful, NASCAR must continuously attract new fans. He understands that to attract and retain a young fan base year after year, the promotional strategy requires the support of Hollywood and films such as Talladega Nights. The film features stra- tegic brand placement that includes the official NASCAR logo and the logos of many corporate sponsors.

NASCAR has also attempted to further differentiate itself in order to attract other, more diverse market segments. In recent years, NASCAR has made it a prior- ity to create awareness among diverse ethnic groups and among women. Called the “Drive for Diversity,” this program gives minority and female drivers the opportunity to compete with a NASCAR team. NASCAR is also pursuing the Hispanic market in the United States, Mexico, and Latin America. In addition to holding races in Mexico, NASCAR routinely creates Hispanic-themed promotions before races held near large Hispanic communities, such as in southern California. Additionally, Mexican NASCAR racer Daniel Suarez is also garnering attention from different segments of the population. Suarez was an alumnus of the NASCAR Next and Drive for Diversity programs. In 2010, he received the Mexico Series Rookie of the Year. He now races full-time for NASCAR’s Xfinity Series. NASCAR hopes Suarez’s success will portray it as a diversified sports venue as well as attract more Hispanic fans. This integration of racers, sponsors, and fans from the United States, Latin America, and South America seeks to expand NASCAR’s popularity and audience over different countries, which separates it from other sports mainly geared toward American audiences.

Due to lower TV ratings and competition from other sports venues, NASCAR attempted to generate greater fan interest in the Sprint Cup Series by implementing the Chase for the Cup in 2004. The format was later changed in 2007 and again in 2011. After 26 regular season races, the top 10 drivers, plus two wild card drivers, advance to contend for the Cup championship. Prior to the Chase format, the overall champion was usually determined well in advance of the end of the season. This pre- sented a problem for NASCAR since the timing coincided with the start of football season each fall. With these changes, each of the 12 drivers who contend for the Cup has a legitimate chance of winning. NASCAR’s Chase for the Cup turned out to be so popular that the Professional Golfers’ Association adopted a similar format. In 2014, a new system was introduced that expanded it to 16 teams.

Innovative co-branding relationships have also helped differentiate the NASCAR brand and catapult it into new markets. The partnership between NASCAR and Har- lequin (romance novels) launched in 2006 created awareness among women who may not have even been otherwise exposed to the sport. It also provided a way for NASCAR to tap into emotional branding strategies. Another effort to attract women and younger people to NASCAR includes a joint venture between the rock band Three Doors Down and Dale Earnhardt, Jr., in which he participated in a music video and the band members drove his car in a race. Additionally, the partnership between The Cartoon Network and NASCAR emphasizes sponsorship diversification directed at the younger consumer.

NASCAR’S BRAND EQUITY AND BRAND LOYALTY NASCAR’s brand equity is the value that is added to a good or service by having the NASCAR brand attached to the offering. As a result, many companies choose to sport the NASCAR logo on their products. A 2005 study by James Madison University revealed that fans appreciate the sponsorship associated with NASCAR.

Case 11 • NASCAR: Can’t Keep a Good Brand Down 435

Approximately 93 percent feel that corporate sponsors are “very important” to NASCAR, and 51 percent said that when they buy a NASCAR product, they feel as if they are supporting the sport. A full 40 percent of fans would switch to a product that sponsored NASCAR. Numbers like these account for over $2 billion that fans spend on NASCAR-licensed products. A whopping 47 percent of fans claimed they appreciate a sponsor’s brand more because it sponsors NASCAR, giving companies a major incentive to sponsor NASCAR. Finally, unlike some sports figures who are seen as endorsing products just for the money, 57 percent of fans believed that NASCAR drivers use the products they endorse, which further increases the respect- ability of the drivers in their fans’ eyes.

Despite all the efforts made by NASCAR to engage the customer, fan interest has begun to decline in the past decade. This situation was exacerbated during the last recession. The median income of NASCAR fans is below that of the national average, making it harder for fans to afford to attend the races. In addition to lowering the cost of tickets, NASCAR also cut the costs of food at its events. To show that it cares about its fans, NASCAR reimbursed the difference to fans at Daytona who had bought tickets before NASCAR began offering lower ticket offerings. NASCAR is clearly making significant efforts to maintain its brand equity and its loyal fan base. However, attendance and television ratings have continued to decline. In addi- tion to lower incomes, it is thought that the retirements of racing legends Tony Stew- art, Dale Earnhardt, Jr., and other bigwigs might have contributed somewhat to the lower ratings. As the economy improves and newer drivers become popular, it is probable that enthusiasm for NASCAR will rise once again.

NASCAR fans are loyal for several reasons. One reason is the sense of commu- nity NASCAR fans feel when engaged in the sport. NASCAR’s brand is embodied in its drivers. When fans feel connected to the drivers, a bond is created that promotes the sport’s brand image. NASCAR recognizes the sense of community that fans expe- rience as a competitive advantage. One way it connects with its fans is through its NASCAR Mobile app. For an annual subscription of $24.99, NASCAR fans can down- load the app and receive premium content including driver audio, access to in-car cameras, and advanced leaderboards. Thus, the strong sense of community between NASCAR fans and between the organization and its audience is a driving force behind NASCAR. NASCAR also cashes in on brand loyalty by using loyal fans as brand ambassadors and by establishing an emotional component with the brand.

NASCAR’S CHALLENGES Despite NASCAR’s immense success, the road has not always been an easy one. As with all major companies, the organization has had its share of criticisms and challenges. As NASCAR looks toward its future, a number of significant challenges remain.

OWNERSHIP AND STRUCTURE One major criticism involves the control the France family has over NASCAR. A descendent of William France has been CEO of NASCAR ever since the sport was founded in 1948. In 1972, William France’s son Bill France, Jr., took over as CEO of the company, and in 2003 his grandson followed suit. The family continues to be the majority stockholder of the company, allowing them to call many of the shots. Indeed, even those within NASCAR refer to the sport as a “benevolent dictatorship.” Some argue that this gives the France family too much power. For instance, William France was known for replacing drivers that would try to unionize. So far, business decisions made by the France family have seemed to work out well for the sport. Many of the marketing strategies and changes the France CEOs have implemented have served to effectively promote NASCAR and attract an increased fan base. Still, some view the

436 Case 11 • NASCAR: Can’t Keep a Good Brand Down

dictatorial style of the France family with concern because it depends largely upon the leadership abilities and business savvy of a few.

SAFETY CONCERNS Another major issue involves vehicle safety. Critics claim that NASCAR often does not implement safety precautions until after a disaster has happened, even if those safety features have been around for years. Its own drivers have expressed concerns over the lack of appropriate medical care received after a crash. NASCAR drivers who have died in crashes include Adam Petty, Tony Roper, Kenny Irwin, and per- haps most publicized, Dale Earnhardt. Earnhardt’s death in 2001 was perhaps the most influential in convincing NASCAR to implement more safety features. After Earnhardt’s death, NASCAR made it mandatory for drivers to wear a head-and-neck support system, known as HANS, with a seat-belt restraint system. Cars were also equipped with a fire-suppressant system and equipment that measures the forces placed on driver’s heads in a crash.

One of NASCAR’s most visible safety initiatives is the Research and Design Cen- ter in Concord, NC, where the Car of Tomorrow was designed for the Sprint Cup Series. The new car, which became mandatory for all Sprint Cup teams in 2008, extended safety measures and set standard tolerances that brought greater equality to the sport. Before the Car of Tomorrow debuted, dominant teams were able to pro- duce cars specifically tailored for each racetrack. NASCAR inspects each car using a coordinate measuring machine to ensure that all teams have cars within required specifications. Yet despite the high hopes for the Car of Tomorrow, fans thought the car looked too boxy and drivers had more difficulty handling the car. The Car of Tomorrow was replaced in 2013 with the Gen-6 model. CEO Brian France admits that the Car of Tomorrow was probably his biggest regret and that NASCAR had not received enough necessary feedback from drivers, engineers, owners, and car manufacturers to make a successful and aesthetically pleasing design for the Car of Tomorrow.

Since 2005, Steel and Foam Energy Reduction (SAFER) barriers have been installed in all of NASCAR’s tracks. Developed by the Midwest Roadside Safety Facil- ity at the University of Nebraska, SAFER barriers absorb energy among vehicle impact and distribute the energy among the wall without forcing the vehicle back into traffic. This technology offers hope that fewer cars will be involved in a single accident incident, thus decreasing the probability of endangering other drivers.

A more controversial safety measure is the use of restrictor plates, a piece of equipment used on superspeedways like the Daytona and Talladega racetracks to reduce speeds of the cars. Drivers have accused NASCAR of trying to manipulate the races with these, but NASCAR insists they are a necessary safety measure. Critics argue that restrictor plates only make superspeedway races boring.

Some drivers, including Dale Earnhardt, Jr., and Jeff Burton, have been recruited by Chevrolet to promote safety on and off the track to young children, teens, and care- takers. Working with the National Highway Traffic Safety Administration (NHTSA) and the National SAFE KIDS Campaign, they have successfully aired public announcements regarding using safety belts and child seats properly. This is a posi- tive initiative because NASCAR is one of the highest sports viewed among teens.

Interestingly, the increased safety regulations of NASCAR vehicles have also elicited criticism for doing what they are intended to accomplish—make racecar driving safer. It is believed that NASCAR has lost some of its edge among the 18 to 34-year-old age bracket because the safety features make the races less exciting. Younger fans want to be thrilled, and part of the thrill involves the danger of racecar driving. NASCAR must strike a balance between excitement and safety, investigating ways it can keep racecar driving packed with thrills while also keeping drivers safe.

Case 11 • NASCAR: Can’t Keep a Good Brand Down 437

ENVIRONMENTAL IMPACT Environmentalists have cited NASCAR for its lack of environmental responsibility. NASCAR estimates that it uses 6,000 gallons of fuel during a race weekend, which comes out to about 216,000 gallons for one season. It also used leaded gasoline for years after the Environmental Protection Agency (EPA) asked it to quit. Because a law makes NASCAR exempt from the EPA’s regulation on gasoline, NASCAR is under no obligation to comply. Yet the pressures to go green have caught up with NASCAR, and in the past few years it has instituted many changes to improve its environmental footprint. NASCAR eventually partnered with the EPA and its fuel supplier Sunoco to phase in unleaded gasoline in 2006 and switch to unleaded gaso- line in 2007. In an attempt to carry its green efforts further, NASCAR hired Mike Lynch in 2008 to head the company’s new green initiative. NASCAR adopted a higher ethanol blended gasoline for its vehicles. This blend consists of gasoline with 15 percent ethanol. This position has paved the way for the ethanol industry to be in sponsorship with NASCAR, and opened opportunities to connect the NASCAR brand with American farmers who supply the corn. This connection allows for new waves of support for the sport in general.

Another big step was the move to fuel-injected engines versus carburetors. Fuel injection systems create higher fuel efficiency while increasing power within engines. According to CEO Brian France, “fuel injection excites the manufacturers, it excites technology companies.” Fuel-injected engines are expected to increase fuel efficiency while maintaining and even improving horsepower.

Off the track, NASCAR has taken several initiatives to create a “greener” envi- ronment reflecting greater social responsibility. NASCAR has agreed to plant 10 trees for every green flag dropped in the Sprint Cup Series races. During the month- long initiative, approximately 150,000 trees are planted across the nation. NASCAR has also implemented a recycling program at all of its tracks. Such cosponsors of this movement are Coca-Cola, UPS, Coors Light, and Office Depot.

DIVERSITY NASCAR has also been criticized for its lack of its driver diversity. The majority of NASCAR drivers are white males, which has caused concern among some minor- ity fans. There are still few women in the NASCAR driver populace, even though 40 percent of NASCAR fans are women. Sexual discrimination allegations have also been a problem. In 2008, NASCAR official Mauricia Grant won a $225 million lawsuit for racial discrimination (Grant is African-American), sexual discrimination, and wrongful termination. Additionally, NASCAR has not had many African-American drivers. In 2006, Bill Lester became the first African-American driver in almost 20 years to qualify for a race in NASCAR’s top series. According to Lester, many African-Americans are secret NASCAR fans, but are not comfortable coming to the races because they cannot identify with the drivers. Indeed, only a few African- American drivers have participated in the Cup series in its history. In an effort to attract minority and female fans, NASCAR launched the “Drive for Diversity” pro- gram in 2004. “Drive for Diversity” is an academy style program where participants learn racing skills in the developmental series: NASCAR K&N Pro Series and NAS- CAR Whelen All-American Series.

NASCAR has also tried to recruit interesting and recognizable drivers to attract new fans. Most notably, female driver Danica Patrick has been racing full-time since her debut in the Sprint Cup at the Daytona 500 in February 2012. Patrick’s participation in NASCAR is important not only for diversity reasons, but also for branding. Danica Patrick is 233 percent more recognizable than the average NASCAR driver, and her activities generate far more media buzz, TV ratings, and race attendance than any

438 Case 11 • NASCAR: Can’t Keep a Good Brand Down

other driver. Additionally, African-American Michael Cherry won an event at the Tri- County Speedway in Hudson, NC, in 2010. By winning this race, Cherry opened the door for other African-Americans to become interested in joining NASCAR.

In 2015, NASCAR took a stand for women’s issues in its suspension of driver Kurt Busch when it was revealed he had committed domestic violence against an ex-girlfriend. NASCAR acted quickly to discipline its driver and show that it has no toleration for domestic violence. NASCAR’s quick disciplinary action against a popu- lar driver demonstrates the seriousness it places on the misconduct. This could further appeal to female racecar enthusiasts.

FINANCIAL CONCERNS The impact of the last recession introduced new challenges for NASCAR. One major problem was the financial situation of NASCAR’s sponsors and partners. The “Big Three” automakers, GM (through Chevrolet), Ford, and Chrysler, experienced extreme financial setbacks. Additionally, other NASCAR sponsors felt the crunch and did not renew their NASCAR contracts, some of which totaled $15 million. Eco- nomic woes also affected NASCAR fans. In the onset of the recession, NASCAR experienced a decrease in attendance and a significant drop in television ratings. The downturn in attendance during the NASCAR race at the Atlanta Motor Speed- way in 2009 shocked some racers, as the stands were only two-thirds full. NASCAR was forced to respond by laying off some workers in order to cut costs.

As the economic issues lingered, NASCAR continued to face problems. In addi- tion to decreased viewership, attendance also declined at many races that were once consistent sellouts. The Bristol Motor Speedway, for example, enjoyed a 55-race sellout streak until March 2010. The prolonged recession made it difficult for fans to afford a weekend at the races. Although many of the major tracks reduced ticket prices, the cuts did not improve attendance.

The economic downturn was especially hard on NASCAR because of its revenue sources. Sponsorship alone is worth over $1.5 billion annually to NASCAR. In 2014, the Daytona 500 fell to a record low, and 18 of 21 Sprint Cup races saw ratings decline. However, there are signs of life on the economic front. TV viewership has started returning, and more sponsors appear to be showing an interest in NASCAR. Low gas prices also bode well for NASCAR. Currently, two-thirds of NASCAR’s reve- nue comes from sponsors, so maintaining strong relationships with sponsors is crucial. NASCAR also has valuable teams that generate a significant amount of spon- sorship interest. Case Exhibit 11.1 depicts NASCAR’s most valuable teams.

CONCLUSION Branding has evolved to represent the personality of a company, and NASCAR is a shining example of an organization that successfully embraces the branding mantra. Throughout its 65-plus years of existence, NASCAR has developed and implemented a branding strategy that encompasses a wide range of marketing initiatives. Brands are built on powerful emotional connections through an extremely wide variety of touch points. NASCAR delivers these connections through event marketing, emotional branding, brand communities, customer understanding, drivers, differenti- ation, co-branding, and the understanding that once a brand has been created, it must be monitored and allowed to continuously evolve.

However, in spite of NASCAR’s highly successful branding strategy, the future of NASCAR is uncertain. The most recent economic recession hit NASCAR hard, and it has still not fully recovered. The majority of sports are suffering as sponsors pull their endorsements. Yet for NASCAR, which depends so much on its brand alliances

Case 11 • NASCAR: Can’t Keep a Good Brand Down 439

and partnerships with other companies, the pullout of sponsors has had an even greater impact.

The lower attendance at NASCAR events is also a concern. As consumers strive to save money, discretionary spending on entertainment is one of the first budget items to be cut. NASCAR has taken a proactive stance toward the issue by lowering ticket and concession prices, changing the racing structure, and working with com- munities to offer incentives to get fans to travel to the events. Whether these actions will be successful remains to be seen, but the intense brand loyalty of fans certainly lies in NASCAR’s favor.

SOURCES Associated Press, “Auto Racing | Former NASCAR official files $225 million suit,” Seattle Times, June 11, 2008, http://www.seattletimes.com/sports/other-sports/auto-racing-former-nascar-official-files-225- million-suit/ (accessed May 27, 2015); Associated Press, “Lester hopes he inspires more blacks into NASCAR,” ESPN, March 18, 2006, http://sports.espn.go.com/rpm/news/story?seriesId=2&id=2373984 (accessed May 27, 2015); Associated Press, “Toyota racing officials expects cutbacks in NASCAR program,” Times News, January 14, 2009, http://www.timesnews.net/article/9011038/toyota-racing- official-expects-cutbacks-in-nascar-program (accessed May 27, 2015); Ken Belson, “Reacting to its stalled popularity, NASCAR checked under the hood,” New York Times, February 23, 2012, http://www. nytimes.com/2012/02/24/sports/autoracing/nascar-takes-steps-to-regain-its-following.html? pagewanted=all (accessed May 26, 2015); Viv Bernstein, “NASCAR remains low on its main fuel,” New York Times, February 25, 2012, http://www.nytimes.com/2012/02/26/sports/daytona-500-nascars- sponsors-still-cautious.html?_r=2 (accessed May 26, 2015); Viv Bernstein, “Driver’s seat elusive for black racers,” New York Times, May 19, 2012, http://www.nytimes.com/2012/05/20/sports/autoracing/ nascar-stuggles-with-diversity-as-drivers-seat-eludes-black-racers.html?pagewanted=all (accessed May 26, 2015); Matthew T. Bodie (2011), “NASCAR Green: The problem of sustainability in corporations and corporate law,” Wake Forest Law Review, 46(3), 491–522; “Bootlegging roots,” All About Racin’, http:// nascarfans.wikifoundry.com/page/Bootlegging+Roots (accessed May 26, 2015); Kenny Bruce, “Expansions, eliminations highlight Chase changes,” Nascar.com, January 30, 2014, http://www.nascar. com/en_us/news-media/articles/2014/1/30/nascar-announces-changes-to-chase-for-the-nascar-sprint-cup- format.html (accessed May 27, 2015); Kenny Bruce, “NASCAR names Xfinity as new series sponsor,”

CASE EXHIBIT 11.1 NASCAR’s Most Valuable Teams

$400 $350

201 186 170

150

Teams

132

70 62 49

$350

$300

$250

$200

$150

$100

$50

He nd

ric k M

oto rsp

or t

M il li o

n s o

f d

o ll a

Jo e G

ibb s R

ac ing

St ew

ar t-H

as s R

ac ing

Ric ha

rd C

hid re

ss R

ac ing

Ro us

h F en

wa y R

ac ing

Te am

Pe ns

Mi ch

ae l W

alt rip

R ac

ing

Ch ip

Ga na

ss i R

ac ing

Ric ha

rd Pe

tty M

oto rsp

or ts

Fro nt

Ro w

Mo tor

sp or

SOURCE: Chris Smith, “NASCAR’s most valuable teams,” Forbes, February 18, 2015, http://www.forbes.com/sites/chris- smith/2015/02/18/nascars-most-valuable-teams/ (accessed May 26, 2015).

440 Case 11 • NASCAR: Can’t Keep a Good Brand Down

Nascar.com, September 3, 2014, http://www.nascar.com/en_us/news-media/articles/2014/9/3/nascar- names-xfinity-series-2015-10-year-agreement-technology-partner.html (accessed May 27, 2015); David Caraviello, “NASCAR ticket prices can be a source of contention,” NASCAR.com, October 25, 2008, http://www.nascar.com/2008/news/opinion/10/25/inside.line.dcaraviello.ticket.prices/index.html (accessed July 28, 2012); Liz Clarke, “In wake of lower TV ratings and sagging attendance, NASCAR looks for some fast buzz,” Washington Post, May 31, 2009, http://www.washingtonpost.com/wp-dyn/ content/article/2009/05/30/AR2009053001696.html (accessed May 26, 2015); Kavitha A. Davidson, “Nascar takes lead on women’s issues,” Bloomberg, February 24, 2015, http://www.bloombergview.com/ articles/2015-02-24/nascar-takes-the-lead-on-combating-domestic-abuse (accessed May 27, 2015); Larry DeGaris, “NASCAR fans have unparalleled awareness of sport’s sponsors, new study finds,” James Madison University, February 7, 2005; “Fan loyalty to NASCAR sponsors,” Marketing at 200 MPH, http://it.darden.virginia.edu/itpreview/Nascar/128/html/fanloyal.htm (accessed July 28, 2012); Mark Finney, “Like the cars, fuel goes fast in NASCAR,” azcentral.com, January 2, 2006; Jenna Fryer, “NASCAR to begin phasing in unleaded fuel,” USA Today, June 19, 2006, http://www.usatoday.com/ sports/motor/nascar/2006-06-19-unleaded-fuel_x.htm (accessed May 27, 2015); Jack Gage, “NASCAR’s trouble at the track,” Forbes, February 9, 2009, http://www.forbes.com/2009/02/09/nascar-france- advertising-business-sportsmoney_0209_nascar.html (accessed May 27, 2015); Sean Gregory, “NASCAR: A once hot sport tries to restart its engine,” Time, April 26, 2010, http://www.time.com/time/magazine/ article/0,9171,1982299,00.html (accessed May 27, 2015); Sean Gregory and Steve Goldberg, “Daytona drag: NASCAR tries to outrace the recession,” Time, February 12, 2009, http://www.time.com/time/ business/article/0,8599,1879136-2,00.html (accessed May 27, 2015); Andrew Giangola, “Drive for diversity introduces 2009 drive lineup,” The Stanley News and Press Online, January 27, 2009, http:// www.thesnaponline.com/archives/drive-for-diversity-introduces-driver-lineup/article_79e762ee-de66- 5a7b-a097-3d8678d2c76b.html (accessed May 27, 2015); “Growth of the sport,” All About Racin’, http:// nascarfans.wetpaint.com/page/The+Growth+of+the+Sport (accessed July 28, 2012); Ed Hinton, “Drive for diversity shifts out of neutral,” ESPN, January 21, 2009, http://sports.espn.go.com/rpm/nascar/cup/ columns/story?columnist=hinton_ed&id=3850027 (accessed May 27, 2015); Godwin Kelly, “How NASCAR, ISC prospered with France Jr. at the helm,” The Daytona Beach News Journal, June 5, 2007, http://www.news-journalonline.com/special/billfrancejr/newHEAD08060507.htm (accessed June 5, 2007); Godwin Kelly, “Despite economy, NASCAR rallying revenue, fan base,” The Daytona Beach News Journal, July 6, 2011, http://www.news-journalonline.com/columns/motorsports/2011/07/06/despite- economy-nascar-rallying-revenue-fan-base.html (accessed July 28, 2012); Dave Juday, “Beware NASCAR’s ethanol endorsement,” Detroit News, November 18, 2014, http://www.detroitnews.com/story/ opinion/2014/11/18/nascar-endorses-ethanol/19189377/ (accessed May 27, 2015); Ben Klayman, “NASCAR expects lower attendance in 2009,” Reuters, February 11, 2009, http://www.reuters.com/ article/reutersEdge/idUSTRE51B03J20090212 (accessed May 27, 2015); J. W. Lee, M. J. Bernthal, W. A. Whisenant, and S. Mullane (2010), “NASCAR: Checkered flags are not all that are being waved,” Sport Marketing Quarterly, 19(3), 170–179; Tim Lemke, “Future starts now for NASCAR; tweaks designed to halt decline in attendance and ratings,” Washington Times, February 8, 2007, http://www.highbeam. com/doc/1G1-159039606.html (accessed May 27, 2015); Tripp Mickle, “NASCAR’s sponsorship revenue growing by 10 percent,” Sporting News, December 7, 2010, http://www.sportingnews.com/nascar/story/ 2010-12-07/nascars-sponsorship-revenue-growing-by-10-percent (accessed May 27, 2015); Zoe Mintz, “NASCAR changes: Race, gender, youth fan base growth key to sport’s financial future,” International Business Times, http://www.ibtimes.com/nascar-changes-race-gender-youth-fan-base-growth-key-sports- financial-future-1639406 (accessed May 27, 2015); NASCAR, “About NASCAR,” Nascar.com, February 10, 2015, http://www.nascar.com/en_us/news-media/articles/about-nascar.html (accessed May 27, 2015); “NASCAR history,” All About Racin’, http://nascarfans.wetpaint.com/page/NASCAR+History (accessed July 28, 2012); NASCAR, “NASCAR 101,” NASCAR.com, http://www.nascar.com/kyn (accessed July 28, 2012); NASCAR, “NASCAR mobile,” Nascar.com, http://www.nascar.com/en_us/nascar-mobile-products. html (accessed May 27, 2015); NASCAR, “NASCAR racing series,” NASCAR.com, April 28, 2008, http:// www.nascar.com/news/features/nascar.series/index.html (accessed April 28, 2008); NASCAR, “Official sponsors series entitlement sponsors,” Nascar.com, http://www.nascar.com/en_us/sponsors.html (accessed May 27, 2015); NASCAR, “What are the subscription costs for NASCAR MOBILE?” Nascar.com, http://support.nascar.com/link/portal/5456/5483/Article/1003/-What-are-the-subscription- costs-for-NASCAR-MOBILE (accessed May 27, 2015); NASCAR Staff, “NASCAR tree planting initiative hits six figures,” Nascar.com, May 2, 2013, http://www.nascar.com/en_us/news-media/articles/2013/05/ 02/nascar-race-to-green-trees-planting.html (accessed May 27, 2015); Ted Palmer, “Daniel Suarez makes transition to NASCAR racing in U.S.,” The Kansas City Star, May 7, 2015, http://www.kansascity.com/ sports/nascar-auto-racing/article20464818.html (accessed May 27, 2015); Nate Ryan, “Pinch on automakers could leave NASCAR ‘truly hurting,’” USA Today, December 21, 2008, http://www.usatoday. com/sports/motor/nascar/2008-12-21-cover-automakers_N.htm (accessed May 27, 2015); Nate Ryan, “Lower prices, promotions don’t stop NASCAR attendance drop,” USA Today, May 7, 2010, http://www. usatoday.com/sports/motor/nascar/2010-05-06-nascar-attendance_N.htm (accessed May 27, 2015); Nate Ryan, “Did NASCAR go too far in promoting driver safety?” USA Today, February 20, 2011, http://www. usatoday.com/sports/motor/nascar/2011-02-18-safety_N.htm (accessed May 27, 2015); Lee Spencer,

Case 11 • NASCAR: Can’t Keep a Good Brand Down 441

“Can NASCAR up the pace in 2012?” Fox Sports, January 27, 2012, http://msn.foxsports.com/nascar/ story/nascar-state-of-the-sport-address-brian-france-mike-helton-robin-pemberton-2012-means-bigger- changes-012612 (accessed May 27, 2015); Lee Spencer, “McLaren coming to NASCAR,” Fox News, June 6, 2014, http://www.foxsports.com/nascar/story/NASCAR-expected-to-announce-move-to-fuel-injection- in-2012-021011 (accessed May 27, 2015); Lee Spencer, “What NASCAR fans can expect in 2012,” Fox Sports, February 7, 2012, http://msn.foxsports.com/nascar/story/nascar-daytona-500-nascar-sheds-light- on-technical-and-rules-changes-as-2012-season-nears-020612 (accessed May 27, 2015); Sporting News Wire Service, “NASCAR’s TV ratings rise after three-year decline,” NASCAR.com, June 14, 2011, http:// www.nascar.com/en_us/news-media/articles/2011/06/14/ratings-increase-2011.html (accessed May 27, 2015); Talladega Superspeedway, NASCAR, “The best deal in 40 years–Talladega reduces NASCAR Sprint Cup Series tickets to $40,” Talladega Superspeedway, January 7, 2009, http://www. talladegasuperspeedway.com/Articles/2009/01/The-Best-Deal-In-40-Years-Talladega-Reduces-NASCAR- Sprint-Cup-Series-Tickets-To-40.aspx (accessed May 27, 2015); Robert Tuchman, “What has happened to the once high-flying sport of NASCAR?” February 23, 2015, http://www.forbes.com/sites/roberttuchman/ 2015/02/23/what-has-happened-to-the-once-high-flying-sport-of-nascar/ (accessed May 27, 2015); Jared Turner, “Brian France reveals his biggest failure as Chairman,” Fox Sports, March 20, 2015, http://www. foxsports.com/nascar/story/brian-france-nascar-chairman-biggest-failure-car-of-tomorrow-032015 (accessed May 27, 2015); Jared Turner, “Sprint won’t remain title sponsor of top NASCAR series past ’16,” Fox Sports, December 16, 2014, http://www.foxsports.com/nascar/story/sprint-won-t-remain-title- sponsor-of-nascar-s-top-series-beyond-2016-121614 (accessed May 27, 2015); Steve Waid, “Despite great competition, NASCAR must still deal with an ongoing problem,” Motorsports Unplugged, December 18, 2011, http://motorsportsunplugged.com/?p=5315 (accessed May 27, 2015); Nolan Weidner, “NASCAR thriving with some variety; five years later, the organization’s drive for diversity is bearing fruit,” The Post-Standard (Syracuse, NY), August 13, 2005, p. D1.

QUESTIONS 1. Evaluate NASCAR’s branding strategy in relation to its overall marketing strat-

egy. Could NASCAR have done anything differently to insulate itself against the economic downturn?

2. Conduct a strategic SWOT analysis for NASCAR at this point in its history. What opportunities are available for NASCAR to take advantage of given its many sig- nificant strengths?

3. What strategies do you recommend to counter the criticisms leveled against NASCAR? Should the company become more involved in sustainability initia- tives? If so, how might that be tied in with NASCAR’s branding strategies?

4. What strategies can you offer to move NASCAR to the next level in its evolution? How can the company maintain, or even increase, its sponsor and fan base?

442 Case 11 • NASCAR: Can’t Keep a Good Brand Down

IndyCar: Seeking a Return to Motorsports’ Fast Lane*

Synopsis: Auto racing is the fastest growing spectator sport in the United States. Unfortunately, open-wheel racing has experienced a period of decline while other forms of auto racing—most notably NASCAR—have grown. After years of damaging competition, the Indy Racing League and Champ Car (CART) have finally reunified. New sponsors, new business opportunities, and a new television contract are positive signs for IndyCar, but the league remains a distant third to NASCAR in terms of popularity in the motorsports market. IndyCar must address this issue and several other concerns in order to strengthen its standing in the American motorsports market, continue the task of reconnecting with former fans, and build connections with new fans and sponsors.

Themes: Competition, market segmentation, product and branding strategy, sports and event marketing, sponsorship, global marketing, corporate governance, marketing implementation

The origins of IndyCar can be traced back to the formation of Championship Auto Racing Teams (CART) in 1978. Several automobile racing team owners created CART as a sanctioning body for open-wheel racing in the United States. Open- wheel racing refers to cars whose wheels are located outside the body of the car rather than underneath the body or fenders as found on streetcars. Also, they have an open cockpit, also called a pod, with the engine housed at the rear of the vehicle. The United States Auto Club (USAC) had sanctioned the sport since the mid-1950s, but many racing teams were dissatisfied with USAC’s administration and promotion of open-wheel racing. Consequently, CART was founded when 18 of the 21 team owners left USAC to form the new league.

GROWTH AND DIVISION OF U.S. OPEN-WHEEL RACING For the first 17 years of its existence, CART dominated auto racing in the United States, and open-wheel racing enjoyed greater notoriety than other forms of racing, including stock car racing. However, not everyone associated with open-wheel rac- ing in the United States welcomed the success enjoyed by CART. One person with major concerns about the direction of CART was Anton H. “Tony” George, the presi- dent of the Indianapolis Motor Speedway. George’s family had founded the Indiana- polis 500 and developed it into the premier American auto race and an event of worldwide significance. George was concerned that CART was beginning to lose sight of the interests of American open-wheel racing by holding events in foreign countries, putting too much emphasis on racing at road courses instead of oval tracks, and focusing too much on promoting top foreign drivers as CART stars.

In 1994 George announced that he was creating a new open-wheel league that would compete with CART beginning in 1996 called the Indy Racing League (IRL) (the forerunner to today’s IndyCar). The new league was divisive to open-wheel racing in the United States, as team owners were forced to decide whether to remain with CART or move to the new IRL. Only IRL members would be allowed to race in the Indianapolis 500. CART teams responded by planning their own event on the

CASE

*Don Roy, Middle Tennessee State University, prepared this case for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation. Jennifer Sawayda provided editorial assistance. Copyright © 2015.

443

same day as the Indianapolis 500. CART held the U.S. 500 at the Michigan Interna- tional Speedway on Memorial Day weekend, 1996, and drew over 100,000 spectators to the event. The rift between CART and the IRL moved to the courts when lawsuits were filed over use of the terms “IndyCar” and “Indy car,” which CART had licensed from the Indianapolis Motor Speedway for several years. The result of the lawsuit was that neither party could use the terms until December 31, 2002.

The IRL–CART feud distracted both leagues and stock car racing solidified its standing as the favorite motor sport in the United States. A 2001 ESPN Sports Poll survey found that 56 percent of American auto racing fans said stock car racing was their favorite type of racing, with open-wheel racing third at 9 percent (drag racing was second at 12 percent). The diminished appeal of open-wheel racing con- tributed to additional problems with sponsor relationships. Three major partners left CART, including Honda and Toyota, which provided engines and technical support to CART and its teams. In addition, FedEx discontinued its title sponsor relationship with CART after the 2002 season. During the same time, the IRL struggled to find cor- porate partners as a weakened economy and a fragmented market for open-wheel racing made both the IRL and CART less attractive to sponsors.

The IRL experienced ups and downs in the years following the split. Interest in IRL as measured by television ratings took a noticeable dip between 2002 and 2004, with 25 percent fewer viewers watching races in 2004 than just 2 years earlier. The declining television audience was a factor in the IRL’s inability to sell naming rights for its series. The IRL went without a title sponsor for the series from 2002 through 2009. In contrast, NASCAR (National Association of Stock Car Auto Racing) signed a blockbuster deal with Nextel that called for more than $700 million over 10 years beginning in 2004. Industry experts believed that the most the IRL could command for its title sponsorship as long as it competed with CART was about $50 million over 10 years.

In response to declining interest in the IRL, marketing initiatives were taken to reverse the trend. The IRL beefed up its marketing staff. The league did not even have a dedicated marketing staff until 2001. In 2005 the IRL launched a new ad cam- paign that targeted 18- to 34-year-old males. The focus of the ads was different, too. Instead of focusing on the cutting-edge technology found in IRL cars, as had been done in previous ad campaigns, the focus shifted to drivers and the drama created on the track. The campaign was part of a broader strategy to expand the association of IRL beyond a sport for middle-aged midwestern males. The idea was to position the brand as hip and young.

In support of this effort, two developments can be noted. First, the IRL followed a trend observed in NASCAR and got several celebrities involved in the sport through team ownership. Among the celebrities involved with the IRL are talk show host David Letterman, NBA star Carmelo Anthony, former NFL quarterback Jim Harbaugh, and actor Patrick Dempsey. Another celebrity involved with the IRL is rock star Gene Simmons. He is a partner in Simmons Abramson Marketing, who was hired to help the IRL devise new marketing strategies. The firm’s entertainment marketing savvy was tapped to help the IRL connect with fans on an emotional level through its drivers, whom Simmons referred to as “rock stars in rocket ships.”

Second, driver personalities began to give the IRL some visibility. The emer- gence of Danica Patrick as a star in the IRL broadened the appeal of the league and assisted its efforts to reach young males. In 2005 Patrick was a 23-year-old IRL rookie, who finished fourth in the Indianapolis 500. The combination of the novelty of a female driver and her captivating looks and personality made her the darling of American sports that year. Patrick’s effect on the IRL was very noticeable; the IRL reported gains in event attendance, merchandise sales, website traffic, and television ratings during Patrick’s rookie season. Patrick has drawn the interest of many companies that have hired her as a product endorser, including Motorola, Go Daddy, Boost Mobile, and XM Radio. In addition, she appeared in photo shoots in FHM and the 2008 and 2009 Sports Illustrated swimsuit issues. Another driver that

444 Case 12 • IndyCar: Seeking a Return to Motorsports’ Fast Lane

has gained notoriety is Helio Castroneves, a Brazilian driver who won the Indianapo- lis 500 in 2001, 2002, and 2009. He enhanced his celebrity status by appearing on the popular television show Dancing with the Stars in 2007, winning the competition.

THE MOTORSPORTS MARKET Although many forms of motorsports exist, competition for IndyCar can be narrowed to two properties: Formula 1 and NASCAR. Each competitor is discussed below.

FORMULA 1 Formula 1 is an open-wheel series that has the greatest global reach in terms of race venues and races exclusively on road courses. Formula 1’s 20-race schedule includes eight races in Europe as well as races in Australia, Bahrain, Brazil, Canada, China, India, Japan, Malaysia, Singapore, South Korea, United Arab Emirates, and the United States. A Formula 1 race is known as a Grand Prix, with each race taking on the name of the country hosting a particular race (e.g., Grand Prix of Spain). For- mula 1 was the first racing league in the Western hemisphere to stage an event in the lucrative Chinese market. Formula 1’s drivers have an international flavor. Most hail from European countries, although there are also drivers from Australia, Brazil, and Japan. The winner of the Formula 1 season series is referred to as the “Formula 1 World Driver Champion,” further reinforcing Formula 1 as a global racing league.

NASCAR The clear leader in the U.S. motorsports market is NASCAR. It was founded in the early 1950s, approximately the same time period when USAC was founded. NASCAR fields three racing circuits in the United States: The Sprint Cup Series, the Xfinity Series, and the Camping World Truck Series. The Sprint Cup Series is NASCAR’s premier circuit. Its 36 races are held primarily on oval tracks and exclusively in U.S. markets. Like Indy- Car, NASCAR has a strong regional following, with the southeast United States being a long-time hotbed for the league. NASCAR was predominantly a southern U.S. sport until the 1990s as exposure provided by cable television and the emergence of strong driver personalities such as Dale Earnhardt and Jeff Gordon led to an explosion in NASCAR’s popularity. The league has become even more popular as it has focused on marketing drivers, especially young drivers often referred to as NASCAR’s “Young Guns.” League and sponsor promotion of drivers such as Dale Earnhardt, Jr., Jimmie Johnson, Ryan Newman, and Kasey Kahne has vaulted NASCAR to a level of popularity in the United States second only to the National Football League.

Today, NASCAR towers over IndyCar in the United States in terms of sponsor support and audiences. NASCAR has sought to expand to become a truly national sport, adding races in Chicago, southern California, and Texas while eliminating races in smaller markets such as Rockingham, North Carolina. Future expansion plans include adding events in the Pacific Northwest and the New York City area. As a result of NASCAR’s popularity growth, it was able to negotiate a lucrative, mul- tibillion dollar contract with Fox and ESPN, while IndyCar struggled to secure a favorable television deal.

REUNIFICATION Many racing observers believe that open-wheel racing could have been as popular as NASCAR is today. In the 1980s and early 1990s, it was CART that enjoyed greater popularity and television ratings. The split in open-wheel racing that led to the

Case 12 • IndyCar: Seeking a Return to Motorsports’ Fast Lane 445

formation of the IRL was a setback to open-wheel racing in general. The split resulted in a dilution of competition quality, sponsor dollars, and fan support. Many experts believed a reunification of open-wheel racing was the only way to compete against NASCAR.

The long awaited reunification of U.S. open-wheel racing occurred before the beginning of the 2008 season. Champ Car’s operations (CART had changed owner- ship and its name in 2007) were on the verge of ceasing following the cancellation of its final event in 2007 and uncertainty whether a 2008 schedule would be run. Tony George’s IRL bought the assets of Champ Car for a mere $10 million and pro- vided a $30 million capital investment for equipment and incentives to bring Champ Car teams into the IRL fold.

After reunification, the IRL rebranded as IndyCar, and its reunified open-wheel racing circuit was branded the IndyCar Series. Decisions had to be made about the markets and racing courses that the IndyCar Series would target following the merger of Champ Car and IRL. The 2015 schedule included 16 races—less than one- half the number of NASCAR Sprint Cup Series races (see Case Exhibit 12.1). One change has been an increase in the number of street and road course races. The IndyCar Series added street races in markets that had been very successful for CART/Champ Car: Long Beach, California, and Toronto, Ontario. Road/street races make up 10 of the 16 races on the IndyCar Series schedule. In contrast, only two of the 36 races in the NASCAR Sprint Cup Series are held on road courses. This charac- teristic of IndyCar’s schedule is drastically different than the product of the old IRL, which ran on oval tracks exclusively between 1996 and 2008.

In addition to the influence of Champ Car’s strategy of more street/road courses, another feature of Champ Car that IndyCar sought to leverage was the positioning of races as entertainment events. The race itself is only one piece of the product. Champ Car used the term “Festival of Speed” to position its events. In addition to the race, fans can often partake in such activities as kids’ zones, beach volleyball, wine tasting, or live concerts. One description of this approach is, “We throw a party and a race breaks out. We don’t want people to come out and sit in metal grandstands for three hours and get sweaty and get sunburned and go home. We

CASE EXHIBIT 12.1 2015 IndyCar Series Racing Schedule

Date Race

March 29 Firestone Grand Prix of St. Petersburg (St. Petersburg, FL) April 12 Grand Prix of Louisiana (Avondale, LA) April 19 Toyota Grand Prix of Long Beach (Long Beach, CA) April 26 Honda Indy Grand Prix of Alabama (Birmingham, AL) May 9 Grand Prix of Indianapolis (Indianapolis, IN) May 24 Indianapolis 500 (Indianapolis, IN) May 30 Dual in Detroit—Race 1 (Detroit, MI) May 31 Dual in Detroit—Race 2 (Detroit, MI) June 6 Firestone 600 (Fort Worth, Texas) June 14 Honda Indy Toronto (Canada) June 27 MAVTV 500 (Fontana, CA) July 12 ABC Supply Wisconsin 250 (Milwaukee, WI) July 18 Iowa Corn Indy 300 (Newton, IA) Aug. 7 Honda Indy 200 at Mid-Ohio (Lexington, OH) Aug. 23 Pocono IndyCar 500 (Long Pond, PA) Aug. 30 GoPro Grand Prix of Sonoma (Sonoma, AZ)

SOURCE: ESPN, “2015 IndyCar Series schedule,” http://espn.go.com/racing/schedule/_/series/indycar (accessed May 28, 2015).

446 Case 12 • IndyCar: Seeking a Return to Motorsports’ Fast Lane

want stuff going on everywhere.” The festival concept has been a success. Street races in Long Beach and Toronto annually draw more than 150,000 people over the course of a 3-day race schedule.

Another positive development for the IndyCar Series was a new television broadcast partner. ABC has televised the Indianapolis 500 for 45 years, and IndyCar continues that relationship. For most of the other races on the schedule (at least 13 per season), IndyCar broke ties with ESPN and signed a 10-year, $67 million contract with VERSUS—rebranded in 2011 as the NBC Sports Network. While the NBC Sports Network has a smaller audience than ESPN, it covers fewer sports and gives the IndyCar Series more coverage (at least 10 hours per week during the racing season) than ESPN did when it owned the broadcast rights. The expanded coverage has helped IndyCar move beyond merely broadcasting races to tell the story of its drivers and the series.

STEPS FORWARD, BACKWARD Both optimism and uncertainty existed as IndyCar moved beyond reunification. A primary concern for IndyCar following reunification was top leadership. Tony George resigned his top positions with both IndyCar and the Indianapolis Motor Speedway in July 2009. His role in causing the split in open-wheel racing was never forgotten, and many people within the industry believed a reunified league would benefit from a new leader. In 2010 Randy Bernard joined IndyCar as CEO following a highly successful tenure leading Professional Bull Riders (PBR). Bernard created excitement around PBR events and marketed riders’ personalities. He had similar priorities for IndyCar. Bernard wanted to raise the profile of IndyCar drivers, to make them “bigger than life.” More elaborate driver introductions were produced at races to spotlight drivers, and the league invested in an office responsible for placing IndyCar and drivers in television and movies. Bernard’s commitment to marketing was apparent in the successes IndyCar had signing new sponsors and moving into new markets in the United States (Baltimore) as well as Brazil and China. Despite his successes, after 3 years at the helm Bernard stepped down as CEO amidst rumors of conflicts with team owners. During his tenure, Bernard had to deal with the fallback that came when two-time Indianapolis 500 winner Dan Wheldon died in a crash in 2011. However, his resignation was heavily criticized by fans and racing owner Roger Penske, who supported Bernard’s efforts at revitalizing the sport. The next few years introduced marketing challenges for IndyCar. The marketing strategy appeared to be inconsistent, and the deal with VERSUS was criticized because it was viewed as being less visible than ESPN.

In 2013 Mark Miles, former president of the ATP tennis tour, assumed the role of CEO. One of Miles’s plans was to expand IndyCar globally, increasing its presence in major international events starting in 2015. Miles was able to secure $100 million in tax revenue to restore the Indianapolis Motor Speedway over a 20-year period, made changes to the racing schedule, and secured a new title sponsor, Verizon, to replace IZOD. In spite of these successes, some team owners such as Mario Andretti have been urging IndyCar to increase the marketing of drivers. With some of the big hur- dles such as title sponsorship out of the way, Miles has announced the organization will commit more time to marketing driver development.

NEW BUSINESS OPPORTUNITIES Optimism also exists in new business opportunities IndyCar is realizing. For instance, IndyCar has made important gains in sponsorships. Sponsors include Avis, Firestone, Sirius XM, Tag Heuer, Sunoco, Honda. A partnership with Mattel brought Hot Wheels

Case 12 • IndyCar: Seeking a Return to Motorsports’ Fast Lane 447

branded IndyCars to retail stores and IndyCar Series events, promoting drivers and the Series schedule by including it on product packaging. Sponsors have been happy to see that their money is going to good use. The IndyCar races featured on NBC saw an average rating increase of 34 percent in viewership from the year before.

In 2010 the IndyCar Series landed a title sponsor for the first time since 2001 when IZOD began a 6-year deal for the IZOD IndyCar Series. IZOD immediately realized ben- efits of its IndyCar sponsorship. Using a variety of performance metrics including brand familiarity and digital impressions, IZOD concluded that the first year of the sponsor- ship in 2010 delivered a 350 percent return on investment. IZOD focused its marketing efforts on advertising, in-store displays, and special events. In particular, IZOD felt it had achieved desired impacts among a key demographic: 25- to 35-year-old males.

While IZOD has contributed significantly to IndyCar’s promotion, a leadership change at the company caused it to exit its partnership with IndyCar a year earlier than anticipated. Verizon replaced IZOD as a title sponsor in 2014. The partnership deal will last for the next 10 years. As a Fortune 500 company that contends with AT&T in the spot of top telecommunications company in the United States, Verizon has strong marketing clout. It is expected that the telecommunications giant will commit large amounts of resources to its promotion of IndyCar.

Another step forward for IndyCar is increasing its presence beyond tracks and race broadcasts. IndyCar was prominently featured in the DreamWorks movie “Turbo,” a story of a snail that dreams of being fast enough to win the Indianapolis 500. The movie featured the Indianapolis Motor Speedway as well as several IndyCar teams, drivers, and sponsors. Also, a weekly television series “INDYCAR 36” follows a driver at the track and away from it over a 36-hour period that gives fans a more intimate view of some of the personalities of IndyCar.

GLOBAL EXPANSION IndyCar executives see potential benefits in global expansion, although not all car owners are bullish on adding more races outside of North America. China and Brazil have been considered possible venues for international expansion, and the first race of 2015 was scheduled to be held in Brasilia, Brazil. However, the event was cancelled when local authorities claimed the city did not have enough financial resources for the event. The cancellation was a disappointment for IndyCar, and CEO Mark Miles claims that the gov- ernment dynamic in Brazil concerns him as IndyCar tries to set up a race within the coun- try. On the other hand, Brazil offers a major opportunity for racing with excellent drivers, high ratings, and corporate involvement. Brazil remains a lucrative expansion opportunity for IndyCar in the future. IndyCar has learned that it must carefully analyze the political, legal, and social environment of the countries in which it wants to hold races.

However, not all teams share the enthusiasm for global expansion. Established teams with sponsors whose base of operations is primarily North America say that global expansion hurts exposure for their sponsors and television ratings as races are broadcast either live in early-morning hours or rebroadcast after the outcome is known. The consensus among car owners is that while an international presence is beneficial to the IndyCar Series, its efforts must focus on growing the business in North America. Adding a race in Canada is appealing to IndyCar because of the suc- cess of races in Toronto and Edmonton. Vancouver, Calgary, and Quebec City have been mentioned as possible additions to future IndyCar schedules.

FAN ENGAGEMENT Another marketing priority for IndyCar has been to enhance engagement with fans, both at and away from the tracks. Developing a consistent presentation for all events has enhanced the fan experience at IndyCar Series races. The IndyCar Fan Village

448 Case 12 • IndyCar: Seeking a Return to Motorsports’ Fast Lane

debuted in 2011 and includes involvement from several sponsors in the form of pavi- lions that gave fans opportunities to interact with sponsors’ products, play games, and visit exhibits. The decision to go with a league-operated experience was made because of an inconsistent presence of interactive areas for fans—some race venues had many exhibits while others had few interactive opportunities. A key feature of the IndyCar Fan Village is that admission requires fans to be a member of IndyCar Nation. Membership is free; the purpose of the membership requirement is to enable IndyCar to collect more data about fans that attend races.

Improving the fan experience has not been limited to efforts at the tracks. A redesign of the IndyCar.com website connected fans with content on the league’s social media sites (Facebook, Twitter, YouTube, and Flickr) as well as bloggers from other sites writing about IndyCar. Also, the profile of sponsors was elevated as league partners were featured on the website. IndyCar uses social networking to engage fans beyond providing news and information. The league also partnered with Cie Games, a gaming company that created the Facebook game “Car Town.” IndyCar’s presence in “Car Town” included cars that players could buy and a pit-stop challenge with an Indianapolis 500 theme. IndyCar and Cie Games shared revenue from IndyCar-related purchases made by “Car Town” players. “Car Town” lasted for 4 years on Facebook and generated over 7 million “likes.”

Like NASCAR, IndyCar is challenged to get young people interested in the sport. Among the steps taken to target youth have been lowering the age to enter the garage area to as young as 9 years old. Also, the Indianapolis Motor Speedway offered children 12 and under a free general admission ticket to the race with a paid adult ticket. Creating value by offering interactive, entertaining experiences at races at customer-friendly prices has potential strategic benefits for IndyCar. Michael Andretti, a former IRL driver and now IndyCar team owner, believes the cost advantage of attending IndyCar races compared to NASCAR gives the league an upper hand in a difficult economic environment.

IRL’S CURRENT MARKETING STRATEGY Despite the positive developments for IndyCar, the long-term future is unclear. One concern is the mix of racetracks and target markets. The 2015 schedule has nearly twice as many road/street races than oval track races. IndyCar touts the mix of races as challenging to drivers, forcing them to master a variety of tracks in order to win the IndyCar season championship. Critics fear fewer oval tracks will take the IndyCar series away from its roots. However, oval track racing is more popular with fans in the United States as evidenced by NASCAR’s popularity.

The trend toward scheduling more races outside the United States is another concern. While the 2015 schedule did not contain many markets outside of the United States (the Brazil race was cancelled), CEO Mike Miles has announced the intention of expanding into other countries. Some observers feel that IndyCar is not doing enough to market itself in the United States nor adequately promoting Ameri- can drivers. The IndyCar driver roster has a more global flavor to it than NASCAR, with drivers hailing from Brazil, Canada, England, France, New Zealand, Spain, and Switzerland, in addition to American drivers. The strong Midwestern U.S. influence of IndyCar seems to be at odds with the globalization of auto racing in general and the desires of IndyCar leadership in particular.

Another challenge faced by IndyCar has been to bring stability to its schedule. American markets such as Cincinnati and Nashville were dropped as IndyCar sought to find the best locations and tracks for its events. The anticipated 2015 Brazilian race was cancelled due to a lack of financial resources. IndyCar was not able to find a replacement for the Brazil race in such a short time period, and the race roster was reduced from 17 to 16. The Brazil race is not the first international race that has

Case 12 • IndyCar: Seeking a Return to Motorsports’ Fast Lane 449

been cancelled due to conflicts. Financial problems of race promoters created head- aches for IndyCar to meet its planned race schedule. In 2012 the first-ever IndyCar race in China had to be canceled when the race promoter could not meet the finan- cial requirements to hold the race.

Maintaining continuity in drivers has been an issue facing Indy racing for years as successful drivers have left to pursue more lucrative opportunities in NASCAR. Tony Stewart, Sam Hornish, Jr., and Robby Gordon all left for NASCAR, and the most popular IndyCar driver in two decades, Danica Patrick, left IndyCar to compete in NASCAR in 2012. Marketing top drivers can be an effective strategy, but those efforts can be negated if a driver leaves for another series. Despite winning only one race in 7 years, Patrick had brought great interest to the league with a combina- tion of attractiveness and determination. Her popularity brought Patrick many endorsement deals, making her very appealing to sponsors seeking to reach the large audience that NASCAR has. However, despite Danica Patrick’s popularity and visibility as the face of IndyCar, some insiders believe that her departure will actually benefit the league. Patrick’s presence overshadowed other drivers like four-time IndyCar Series champion Dario Franchitti (Franchitti was forced to retire for health reasons in 2013 after a high-speed crash). Now, the league can be more diverse in its marketing of drivers and personalities.

Like all forms of auto racing, safety is a continuous issue for IndyCar. Racecar driving is a dangerous profession, and crashes are not uncommon. In 2011 at the season-ending race in Las Vegas, racecar driver Dan Wheldon was killed in a horrific crash just 11 laps into the race. His death called into question the safety of racing on oval tracks, which were built for stock car racing such as NASCAR. IndyCars reach speeds of more than 220 miles per hour, significantly faster than stock cars. Many people in the racing industry said that IndyCar should discontinue racing on ovals. The decision is complicated by the fact that American auto racing fans prefer racing on oval tracks.

IndyCar has implemented safety measures to reduce the risk of fatal crashes. The Holmatro safety team is a team of 30 safety personnel, including paramedics, firefighters, trauma physicians, and more. The team was instrumental in saving the life of racecar driver James Hinchcliffe who crashed at the Indianapolis Motor Speedway in 2015. That same year racecar champion Helio Castroneves also walked away from a crash sustained during an Indy 500 practice. Although IndyCar has taken measures to increase the safety of its drivers, it should continue to actively find ways to reduce the risks of fatal crashes. Then again, because racecar driving is an inherently dangerous sport, IndyCar is unlikely to ever totally reduce the risk for harm.

CONCLUSION Auto racing has been the fastest growing spectator sport in the United States in recent years. Unfortunately, open-wheel racing has experienced a period of decline while other forms of auto racing have grown. For example, Formula 1 racing still appears to be very popular. IndyCar is a distant second to NASCAR in terms of pop- ularity. While NASCAR focuses exclusively on the North American market, espe- cially concentrated in the southeast, IndyCar is trying to become more global. A number of the more popular drivers come from Brazil, New Zealand, Colombia, Canada, as well as the United Kingdom. There is no doubt that these international drivers, if properly promoted, will develop a great deal of interest and support from race fans in their countries. An important challenge is to determine how global Indy- Car should be and how to overcome some of the obstacles for international races that are sometimes cancelled due to financial resource issues. Another marketing decision is how to deploy resources to promote this sport. For example, should

450 Case 12 • IndyCar: Seeking a Return to Motorsports’ Fast Lane

more promotion create a following for specific drivers so fans will want to follow specific drivers in the races? IndyCar cannot succeed without finding the best mar- keting strategy for fan engagement that will trigger attendance and television viewership.

IndyCar is optimistic about its future, especially as ratings and viewership has risen in recent years. The league must continue to strengthen its standing in the American motorsports market. With the two major open-wheel leagues reunified, IndyCar must reconnect with fans and sponsors as well as build new relation- ships. And, it must ensure the safety of its greatest marketing asset—the IndyCar drivers.

SOURCES American City Business Journals, “IndyCar CEO Randy Bernard breaks his silence, says now is time to be leader,” Sports Business Daily, October 26, 2011, http://www.sportsbusinessdaily.com/Daily/Issues/ 2011/10/26/Leagues-and-Governing-Bodies/IndyCar.aspx?hl=IndyCar&sc=0 (accessed May 28, 2015); American City Business Journals, “IndyCar CEO Randy Bernard is optimistic race in Vegas will create more fans,” October 14, 2011, http://www.sportsbusinessdaily.com/Daily/Issues/2011/10/14/Events-and- Attractions/IndyCar.aspx?hl=IndyCar&sc=0 (accessed May 28, 2015); American City Business Journals, “IndyCar renews Toronto race through ‘14, looks to add more Canadian races,” Sports Business Daily, May 15, 2012, http://www.sportsbusinessdaily.com/Daily/Issues/2012/05/15/Leagues-and-Governing- Bodies/Indy-Car.aspx (accessed May 28, 2015); American City Business Journals, “Wheldon’s death puts spotlight on IndyCar for wrong reasons,” Sports Business Daily, October 18, 2011, http://www. sportsbusinessdaily.com/Daily/Issues/2011/10/18/Leagues-and-Governing-Bodies/IndyCar.aspx? hl=IndyCar&sc=0 (accessed May 28, 2015); “Andretti has eye on regaining market share,” Street & Smith’s Sports Business Journal, May 18, 2009, http://m.sportsbusinessdaily.com/Journal/Issues/2009/ 05/20090518/SBJ-In-Depth/Andretti-Has-Eye-On-Regaining-Market-Share.aspx (accessed May 28, 2015); Associated Press, “Randy Bernard steps down as IndyCar CEO, will stay with series in an advisory role,” Fox News, October 28, 2012, http://www.foxnews.com/sports/2012/10/28/randy-bernard-steps- down-as-indycar-ceo-will-stay-with-series-in-advisory-role/ (accessed May 28, 2015); Steve Ballard, “Championship auto racing teams’ board votes to accept buyout,” Indianapolis Star, December 16, 2003, http://www.highbeam.com/doc/1G1-119497409.html (accessed May 28, 2015); BBC, “Dario Franchitti: Indycar champion forced to retire on medical advice,” BBC, November 14, 2013, http://www. bbc.com/sport/0/motorsport/24950798 (accessed May 28, 2015); Theresa Bradley, “Racing League gears hip events at youth,” Knight Ridder Tribune Business News, March 23, 2006, p. 1; “Car Town app page,” Facebook, https://www.facebook.com/CarTown/timeline?ref=page_internal (accessed May 28, 2015); Curt Cavin, “IndyCar cannot find replacement for canceled Brazil race,” USA Today, February 2, 2015, http://www.usatoday.com/story/sports/motor/indycar/2015/02/02/indycar-no-replacement-race-for- brazilia-brazil-opener/22772081/ (accessed May 28, 2015); Curt Cavin, “March 14: Verizon reaches millions of people,” IndyStar, March 14, 2014, http://www.indystar.com/story/curt-cavin/2014/03/14/ verizon-reaches-millions-of-people/6409893/ (accessed May 28, 2015); Curt Cavin, “Verizon becomes title sponsor for IndyCar,” IndyStar, March 14, 2014, http://www.indystar.com/story/sports/motor/indy- car/2014/03/13/verizon-becomes-title-sponsor-for-indycar/6389195/ (accessed May 28, 2015); “Celebrities who are revved up over racing,” Street & Smith’s Sports Business Journal, May 22, 2006, p. 27; Tony DiZinno, “IZOD leaving IndyCar at end of 2013,” MotorSportsTalk, September 27, 2013, http:// motorsportstalk.nbcsports.com/2013/09/27/izod-leaving-indycar-at-end-of-2013/ (accessed May 28, 2015); Tony Fabrizio, “Racer Danica Patrick embraces celebrity exposure,” Tampa Tribune, February 27, 2009, http://tbo.com/sports/auto-racing/racer-danica-patrick-embraces-celebrity-exposure-115990 (accessed May 28, 2015); Shawn Fenner, “IRL sees significance of selling product to U.S. market,” Richmond Times-Dispatch, June 23, 2009, http://www.richmond.com/sports/article_ae72af5f-225a-5fa7- a6cd-5dc7512cbca0.html (accessed May 28, 2015); “Helio Castroneves heading back to dancing with the stars,” Autoweek, July 27, 2012, http://www.autoweek.com/article/20120727/INDYCAR/120729846 (accessed May 28, 2015); Reggie Hayes, “What’s next for IndyCar?” Fort Wayne News-Sentinel, July 1, 2009, http://www.news-sentinel.com/apps/pbcs.dll/article?AID=/20090701/SPORTS/907010339 (accessed May 28, 2015); “Hot wheels announces partnership with the IndyCar Series, Indianapolis 500,” Entertainment Newsweekly, April 24, 2009, p. 140; IndyCar, “Fan info–INDYCAR 101–safety–Holmatro Safety Team,” Verizon IndyCar Series, http://www.indycar.com/Fan-Info/INDYCAR-101/Safety/ Holmatro-Safety-Team (accessed May 28, 2015); Firestone, “IndyCar fan village,” April 14, 2014, http:// www.firestoneracing.com/articles/racing/2014/indycar-fan-village (accessed May 28, 2015); Brant James, “IndyCar CEO Mark Miles wary about possible return to Brazil,” USA Today, January 30, 2015, http:// www.usatoday.com/story/sports/motor/indycar/2015/01/30/indycar-ceo-mark-miles-says-too-early-to-

Case 12 • IndyCar: Seeking a Return to Motorsports’ Fast Lane 451

reschedule-brazil-race/22602351/ (accessed May 28, 2015); Luke Kerr-Dineen, “Helio Castroneves walks away from horrifying crash in Indy 500 practice,” USA Today, May 13, 2015, http://ftw.usatoday.com/ 2015/05/helio-castroneves-horrifying-f1-crash-indy-500 (accessed May 28, 2015); Terry Lefton, “Ad sales encouraging as IRL launches season,” Street & Smith’s Sports Business Journal, March 30, 2009, p. 8; Dave Lewandowski, “Filippi joins CFH Racing for road/street courses,” Verizon IndyCar Series, January 30, 2015, http://www.indycar.com/News/2015/01/1-30-Filippi-joins-CFH-Racing (accessed May 28, 2015); Bruce Martin, “Hinchcliffe pays tribute to Holmatro Safety Team that saved his life,” Fox Sports, May 26, 2015, http://www.foxsports.com/motor/story/hinchcliffe-pays-tribute-to-holmatro-safety- team-that-saved-his-life-052615 (accessed May 28, 2015); Tripp Mickle, “IndyCar offering deal to eventually replace sponsor Izod,” Sports Business Journal, June 11, 2012, p. 1; Tripp Mickle, “IndyCar’s China Race in doubt over fee,” Sports Business Journal, June 11, 2012, p. 8; Tripp Mickle, “IndyCar turbocharged over animated film,” Sports Business Journal, March 12, 2012, p. 3; Tripp Mickle, “IndyCar moves beyond tragedy, targets growth,” Sports Business Journal, February 13, 2012, p. 6; Tripp Mickle, “Final-race fatality overshadows season of growth in ratings and attendance for IndyCar,” Sports Business Journal, October 31, 2011, p. 7; Tripp Mickle, “IndyCar faces push-back on global plans,” Sports Business Journal, October 10, 2011, p. 6; Tripp Mickle, “5 Keys to IndyCar’s Growth,” Sports Business Journal, May 16, 2011, p. 17; Tripp Mickle, “IndyCar Moves into Facebook’s ‘Car Town’,” Sports Business Journal, April 11, 2011, p. 9; Tripp Mickle, “Versus Boosts IndyCar Coverage with Expanded live race windows and shoulder programming,” Sports Business Journal, March 21, 2011, p. 5; Tripp Mickle, “It takes a village, and IndyCar is planning one,” Sports Business Journal, March 7, 2011, p. 6; Tripp Mickle, “Izod: 350% return in first year of IndyCar deal,” Sports Business Journal, November 15, 2010, http://www.sportsbusinessdaily.com/Journal/Issues/2010/11/20101115/This- Weeks-Issue/Izod-350-Return-In-First-Year-Of-Indycar-Deal.aspx?hl=IndyCar&sc=0 (accessed May 28, 2015); Jeff Olson, “IndyCar CEO reveals plan to expand international slate,” USA Today, October 17, 2013, http://www.usatoday.com/story/sports/motor/indycar/2013/10/17/indycar-2014-schedule-mark-miles- brazil-doubleheaders/2999877/ (accessed May 28, 2015); John Ourand, “Early IRL numbers small, but please Versus,” Street & Smith’s Sports Business Journal, May 18, 2009, p. 18; John Ourand, “IRL to get at least 7 hours weekly on Versus,” Street & Smith’s Sports Business Journal, February 23, 2009, p. 7; Nate Ryan, “Dan Wheldon’s death raises questions for IndyCar circuit,” USA Today, October 18, 2011, http://www.usatoday.com/sports/motor/indycar/story/2011-10-17/indycar-faces-questions-about- future-after-death-of-dan-wheldon/50807480/1?csp=ip (accessed May 28, 2015); Nate Ryan, “IndyCar’s new leader: ‘We have a lot of work to do’,” USA Today, March 21, 2013, http://www.usatoday.com/ story/sports/motor/2013/03/20/izod-indycar-series-mark-miles-ryan-reynolds-jeffrey-katzenberg- dreamworks/2004517/ (accessed May 28, 2015); Anthony Schoettle, “IndyCar leaders feeling vindicated by NASCAR’s new TV deal,” Indianapolis Business Journal, July 24, 2013, http://www.ibj.com/blogs/4- the-score/post/42603-indycar-leaders-feeling-vindicated-by-nascar-s-new-tv-deal (accessed May 28, 2015); Anthony Schoettle, “IndyCar TV ratings up, sponsors want more,” Indianapolis Business Journal, September 5, 2014, http://www.ibj.com/blogs/4-the-score/post/49383-indycar-tv-ratings-up-sponsors-want- more (accessed May 28, 2015); Michael Smith, “New IndyCar site geared to help fans make connections,” Sports Business Journal, March 15, 2010, http://www.sportsbusinessdaily.com/Journal/ Issues/2010/03/20100315/This-Weeks-News/New-Indycar-Site-Geared-To-Help-Fans-Make-Connections. aspx?hl=IndyCar&sc=0 (accessed May 28, 2015); Michael Smith, “United Series begins long trek of rebuilding,” Street & Smith’s Sports Business Journal, March 3, 2008, p. 5; Alan Snel, “Kiss Rocker lends voice to Indy races,” Knight Ridder Tribune Business News, April 1, 2006, p. 1; J. K. Wall, “Indy Racing League sets sights on marketing dollars,” Knight Ridder Tribune Business News, May 27, 2004, p. 1; Scott Warfield, “Danica Patrick provides sizzle to IRL,” Street & Smith’s Sports Business Journal, May 23, 2005, p. 1; Scott Warfield, “IRL in line to court young males,” Street & Smith’s Sports Business Journal, November 29, 2004, p. 4; Matt Weaver, “Critics of Mark Miles urge IndyCar to focus on driver development,” SB Nation, February 4, 2014, http://www.sbnation.com/indycar/2014/2/4/5378104/mark- miles-indycar-driver-development-mario-andretti-derek-daly (accessed May 28, 2015); Jeff Wolf, “George’s ouster clouds IRL’s future,” Las Vegas Review-Journal, July 3, 2009, http://article.wn.com/view/2009/07/ 03/JEFF_WOLF_Georges_ouster_clouds_IRLs_future (accessed May 28, 2015).

QUESTIONS 1. Identify the external factors that have impacted and continue to impact IndyCar

and its marketing efforts. Which factors appear to be IndyCar’s greatest opportu- nities and threats?

452 Case 12 • IndyCar: Seeking a Return to Motorsports’ Fast Lane

2. What are IndyCar’s greatest strengths? Which weaknesses would you recom- mend IndyCar attempt to convert into strengths? How might these weaknesses be converted?

3. What advantages does IndyCar possess over NASCAR? How should these advan- tages be used by IndyCar to compete with NASCAR?

4. What can IndyCar learn from NASCAR’s success? Are there elements of NAS- CAR’s marketing strategy that IndyCar could adopt?

Case 12 • IndyCar: Seeking a Return to Motorsports’ Fast Lane 453

Zappos: Delivering Happiness*

Synopsis: This case examines Zappos’s unique marketing strategy and corporate culture, both of which focus on delivering happiness to the company’s varied stakeholders. Despite a few stumbles along the way, Zappos has been a role model of success since its founding in 1999. The company survived the dot-com collapse because its charismatic CEO, Tony Hsieh, created a corporate culture that put its customers and employees ahead of financial success. The case looks at Zappos’s business model and how it influences the company’s relationships with customers, employees, the environment, and its communities. The case also discusses some of the challenges the company faces and how it plans to move into the future.

Themes: Marketing strategy, ecommerce, branding, long-term customer relationships, customer satisfaction, corporate culture, employee relations, social responsibility, customer loyalty, corporate reputation

Can a company focused on happiness be successful? Zappos, an online retailer, is proving that it can. Tony Hsieh, Zappos’s CEO, says, “It’s a brand about happiness, whether to customers or employees or even vendors.” Zappos’s zany corporate culture and focus on customer satisfaction has made it both successful and a model for other companies.

THE HISTORY OF ZAPPOS Nick Swinmurn founded Zappos in 1999 after a fruitless day spent shopping for shoes in San Francisco. After looking online, Swinmurn decided to quit his job and start a shoe website that offered the best selection and best service. Originally called ShoeSite.com, the company started as a middleman, transferring orders between customers and suppliers but not holding any inventory. The website was soon renamed Zappos, after the Spanish word for shoes (zapatos).

In 2000, entrepreneur Tony Hsieh became the company’s CEO. Hsieh, 26 at the time, was an early investor in Zappos, having made $265 million selling his startup company to Microsoft in 1998. Hsieh wasn’t initially sold on the idea of an Internet shoe store. He told Inc. Magazine, “It sounded like the poster child of bad Internet ideas … but I got sucked in.” After becoming CEO, Hsieh made an unconventional decision to keep Zappos going, even selling his San Francisco loft to pay for a new warehouse and once setting his salary at just $24.

Zappos struggled its first few years, making sales but not generating a profit. The dot-com crash forced Zappos to lay off half its staff, but the company recovered. By the end of 2002, Zappos had sales of $32 million but was still not profitable. In 2003, the company decided that in order to offer the best customer service, it had to con- trol the entire value chain—from order to fulfillment to delivery—and began holding its own inventory. Zappos moved to Las Vegas in 2004 to take advantage of a larger pool of experienced call center employees. The company generated its first profit in 2007 after reaching $840 million in annual sales. Zappos also started to be recognized for its unique work environment and approach to customer service.

CASE

*Harper Baird, Bernadette Gallegos, Beau Shelton, and Jennifer Sawayda developed this case under the direction of O.C. Ferrell and Linda Ferrell. It is intended for classroom discussion rather than to illus- trate effective or ineffective handling of administrative, ethical, or legal decisions by management. All sources used for this case were obtained through publicly available materials. ©O.C. Ferrell and Linda Ferrell, 2015.

454

In 2010, Amazon bought the company for $1.2 billion. Although Hsieh had rejected an offer from Amazon in 2005, he believed that this buyout would be better for the company than management from the current board of directors or an outside investor. Hsieh said, “With Amazon, it seemed that Zappos could continue to build its culture, brand, and business. We would be free to be ourselves.” Amazon agreed to let Zappos operate independently and to keep Hsieh as CEO (at his current $36,000 annual salary). Hsieh made $214 million from the merger, and Amazon set aside $40 million for distribution to Zappos employees. After the merger, the company restruc- tured into 10 separate companies organized under the Zappos Family. Zappos was able to keep its unique culture and core values.

ZAPPOS’S BUSINESS MODEL AND OPERATING PHILOSOPHY Zappos has 10 core values that guide every activity at the company and form the heart of the company’s business model and culture:

• Deliver WOW through service. • Embrace and drive change. • Create fun and a little weirdness. • Be adventurous, creative, and open-minded. • Pursue growth and learning. • Build open and honest relationships with communication. • Build a positive team and family spirit. • Do more with less. • Be passionate and determined. • Be humble.

Zappos’s core values differ from those of other companies in a couple of ways. In addition to being untraditional, the core values create a framework for the com- pany’s actions. This is exemplified in the company’s commitment to their customers’ and employees’ well-being and satisfaction.

ZAPPOS’S CUSTOMER-FOCUSED BUSINESS MODEL The Zappos business model is built around developing long-term customer relation- ships. Zappos does not compete on price because it believes that customers will want to buy from the store with the best service and selection. The company strives to create a unique and addicting shopping experience, offering a wide selection of shoes, apparel, accessories, and home products, free shipping to the customer, free shipping and full refunds on returns, and great customer service.

Shopping and Shipping Zappos strives to make the shopping experience enjoyable. The website is stream- lined for an easy shopping experience. Products are grouped in specialized seg- ments, with some (like outdoor products) on their own minisites. Customers can view each product from multiple angles thanks to photographs taken at the com- pany’s studio, and Zappos employees make short videos highlighting the product’s features. Zappos analyzes how customers navigate the site to improve features, adapt search results, and plan inventory.

This spirit of simplicity, innovation, and great service extends to Zappos’s inven- tory and distribution systems as well. Zappos has one of the few live inventory sys- tems on the web. If the Zappos website displays an item, it is in stock. Once the

Case 13 • Zappos: Delivering Happiness 455

company sells out of an item, the listing is removed from the website. This helps to reduce customer frustration. Its inventory and shipping systems are linked directly to the website via a central database, and all its information systems are developed in-house and customized to the company’s needs. Their warehouses operate around the clock, which allows them to get a product to the customer faster. Fast shipping creates an instant gratification that is similar to shopping in a physical store.

Most companies have a negative view toward returns, but Zappos’s mentality is the complete opposite. It sees returns as the ability to maintain customer relation- ships and to increase its profits. Zappos offers a 100% Satisfaction Guaranteed Return Policy. If a customer is not satisfied with a purchase, he or she can return it within 365 days for a full refund. The customer can print a prepaid shipping label that allows all domestic customers to return the product for free. This return policy encourages customers to order several styles or different sizes and return the items that do not work out.

While this strategy seems expensive, it actually works to Zappos’s advantage. The average industry merchandise return rate is 35 percent, but Zappos’s most prof- itable customers tend to return 50 percent of what they purchase. The customers who have the higher return percentages are the most profitable because they have experienced Zappos’s customer service and return policy, which create loyalty to the company. These customers are likely to make purchases more often and to spend more on each purchase. This is what makes Zappos so successful.

Customer Service What really makes the Zappos business model unique is the company’s focus on cus- tomer service. The company has established a method of serving customers and handling their issues that is distinctive from the rest of the industry. Zappos believes great customer service is an opportunity to make the customer happy. Customers are encouraged to call Zappos with any questions. The number is displayed on every page of the website. Hsieh says, “… At Zappos, we want people to call us. We believe that forming personal, emotional connections with our customers is the best way to provide great service.” Customer service representatives also actively use social media sites such as Facebook and Twitter to respond to customer issues.

Another key aspect of Zappos’s customer service model is that nothing is scripted. Employees have free reign in their decision-making and are expected to spend as much time as they need to “wow” customers. They help customers shop, even on their competitors’ websites, encourage them to buy multiple sizes or colors to try (since return shipping is free), and do anything it takes to make the shopping experience memorable.

Zappos’s customer service representatives try to develop relationships with their customers and make them happy. Stories about great customer service include cus- tomer support calls that last for hours, sending flowers to customers on their birth- days, and surprise upgrades to faster shipping. Some extreme cases have included Zappos hand-delivering shoes to customers who have lost luggage and to a groom who forgot the shoes for his wedding. Zappos has even sent pizzas to the homes of customers who have tweeted to the company about being hungry.

Zappos believes that great customer experiences encourage customers to use the store again. In addition, Zappos’s long-term strategy is based on the idea that great customer service will help them expand into other categories. While around 80 percent of Zappos’s orders come from shoes, the markets for housewares and apparel are much larger. The company says it will expand into any area that it is pas- sionate about and that meets their customers’ needs.

The company also considers word-of-mouth marketing to be the best way to reach new customers. With over 75 percent of purchases made by repeat customers,

456 Case 13 • Zappos: Delivering Happiness

it is evident that Zappos’s mission to “provide the best customer service possible” is working well for the company.

CORPORATE CULTURE AND WORK ENVIRONMENT The corporate culture at Zappos sets it apart from nearly every other company. As Amazon’s CEO, Jeff Bezos, says, “I’ve seen a lot of companies, and I have never seen a company with a culture like Zappos.” Zappos’s unorthodox culture is the work of CEO Tony Hsieh, an innovative and successful entrepreneur. Hsieh built the culture on the idea that if you can attract talented people and employees enjoy their work, great service and brand power will naturally develop.

Zappos is famous for its relaxed and wacky atmosphere. Employee antics include Nerf ball wars, office parades, ugly sweater days, and donut-eating contests. The headquarters features an employee nap room, a wellness center, and an open mic in the cafeteria. Other quirky activities include forcing employees to wear a “reply-all” hat when they accidentally send a company-wide e-mail. This environment isn’t just fun; it’s also strategic. According to Zappos, “When you combine a little weirdness with making sure everyone is also having fun at work, it ends up being a win-win for everyone: Employees are more engaged in the work that they do, and the company as a whole becomes more innovative.”

Hiring and Training The key to creating a zany work environment lies in hiring the right people. The job application features a crossword puzzle about Zappos and asks employees questions about which superhero they’d like to be and how lucky they are. They may also check how potential employees treat people like their shuttle driver. Zappos is look- ing for people with a sense of humor who can work hard and play hard. Potential employees go through both cultural and technical interviews to make sure they will fit with the company. However, even Hsieh admits that finding great employees is tough. “One of the biggest enemies to culture is hyper-growth. You’re trying to fill seats with warm bodies, and you end up making compromises,” says Hsieh.

All new employees attend a 5-week training program, which includes 2 weeks on the phones providing customer service and a week fulfilling orders in a warehouse. To make sure that new employees feel committed to a future with the company, Zap- pos offers $2,000 to leave the company after the training (called the “The Offer”). Amazon has since adopted a similar practice. Even after the initial training is over, employees take 200 hours of classes—with the company covering everything from the basics of business to advanced Twitter use—and read at least nine business books a year.

Benefits Another aspect of Zappos that is unique is the benefits that it provides to its employ- ees. The company has an extensive health plan, where it pays 100 percent of employ- ee’s medical benefits and on average 85 percent of medical expenses for employees’ dependents. The company also provides employees with dental, vision, and life insurance. Other benefits include a flexible spending account, prepaid legal services, a 40 percent employee discount, free lunches and snacks, paid volunteer time, life coaching, and a car pool program.

Along with the extensive benefits package, Zappos has developed a compensa- tion model for its “Customer Loyalty Team” (call center representatives) that incenti- vizes employee development. At Zappos the goal is to answer 80 percent of customer inquiries within 20 seconds, although employees are encouraged to take the time

Case 13 • Zappos: Delivering Happiness 457

needed to ensure quality service. Initially, employees were paid $11 per hour for the first 90 days. After 90 days, the employee moved to $13 per hour. To move beyond $13 an hour, employees had to demonstrate growth and learning by completing specific skill set courses that allow employees to specialize in certain areas of the call center. Employees were given freedom to choose the shifts they wanted based on seniority. Although the reasoning for Zappos’s compensation model is to motivate employees and promote personal growth, the base pay was less than the national hourly average of $15.92 earned by call center representatives.

Zappos determined that the pay structure and the process for employee shift sign-ups were inefficient for the company’s needs. With Hsieh’s encouragement, the company adopted scheduling software called Open Market. Under this new system, call center employees would be given 10 percent time flexibility to pursue their own projects. Employees could decide when to work, but the compensation system was revamped to mimic the surge-time pricing of popular ride-sharing service Uber. With this compensation system, call center employees working during periods of high demand would receive higher pay. In other words, Zappos hourly compensation for its call center employees would be based on demand. Zappos hopes to expand this system to all departments eventually. For seniority-based jobs, this system holds risks. For instance, seniority-based incentives also take into account company loy- alty, camaraderie with co-workers, and dedication that are also important to work productivity. However, Zappos believes the system works well for its call center employees because many are employed for shorter periods.

Work–Life Integration One of Zappos’s core values is “Build a positive team and family spirit,” so the com- pany expects employees to socialize with each other both in and out of the office. In fact, managers spend 10 to 20 percent of their time bonding with team members out- side of work. Zappos outings include hiking trips, going to the movies, and hanging out at bars. Hsieh says that this increases efficiency by improving communication, building trust, and creating friendships.

Along with creating friendships, employees are encouraged to support each other. Any employee can give another employee a $50 reward for great work. Zappos employees compile an annual “culture book” comprising essays on the Zappos cul- ture and reviews of the company. The culture book helps employees to think about the meaning of their work and is available unedited to the public.

This positive work environment comes with the expectation that employees will work hard. Employees are evaluated on how well they embody the core values and inspire others. Zappos will fire people who are doing great work but don’t fit with the culture of the company. Hsieh says, “We definitely don’t want anyone to feel that they’re entitled to employment for life. It’s more about us creating an environment and growth opportunities for our employees such that they want to be employees for life.”

Transparency As with its customers, the foundation of Zappos’s relationships with its employees is trust and transparency. The company wants its employees, like its customers, to actively discuss any issues or concerns that may come up. Hsieh does not have an office; he sits in an open cubicle among the rest of the employees. He believes that “the best way to have an open-door policy is not to have a door in the first place.” Zappos’s management is very open with employees by regularly discussing issues on the company blog. Employees receive detailed information about the company’s performance and are encouraged to share information about the company. Zappos believes that employees should develop open and honest relationships with all

458 Case 13 • Zappos: Delivering Happiness

stakeholders with the hope that this will assist in maintaining the company’s reputa- tion. Hsieh uses Facebook and Twitter to share information with employees and cus- tomers (he has over 2.78 million followers).

Despite the benefits of transparency, it can also be painful at times. In October 2008, Sequoia Capital, a venture capital firm and controlling investor in Zappos, told the company to “cut expenses as much as possible and get to profitability and cash flow positive as soon as possible.” As a result, Hsieh had to make a difficult decision and lay off 8 percent, or 124, of Zappos’s employees. Hsieh strived to handle the lay- offs in a respectful and kind manner. He sent an e-mail notifying employees of the layoff and was honest and upfront about the reasons behind the decisions, even discussing the move on Twitter and his blog. Employees who were laid off received generous severance packages, including 6 months of paid COBRA health insurance coverage. Because of the company’s honesty and transparency, employees and customers were more understanding of the tough decision Hsieh and Zappos had to make. Although some companies may hesitate to open themselves to public criti- cism, Zappos feels it has nothing to hide. In fact, most of the public posts on Zappos’s social media sites are praise from customers.

CORPORATE SOCIAL RESPONSIBILITY Zappos also takes an unconventional approach to corporate social responsibility and philanthropy. Many companies have CSR programs that are dedicated to a certain area or cause such as education, but Zappos prefers to support a variety of programs based on the needs of communities and the interests of employees.

Zappos is involved in a variety of philanthropic efforts. Programs include donat- ing shoes and gifts as well as giving gift cards to elementary school students. Zappos donates money to organizations such as the Shade Tree, a nonprofit that provides shelter to women and children, and the Nevada Childhood Cancer Foundation. The company even partnered with Britney Spears to hold an event at the zoo to raise money for the foundation. Zappos also has a donation request application available on its website.

Zappos also started a campaign to improve the company’s impact on the envi- ronment. A group of employees created the initiative, which is known as Zappos Leading Environmental Awareness for the Future (L.E.A.F.). The campaign focuses on several environmental efforts, including a new recycling program, community gardens, and getting LEED certification for the company. For instance, Zappos cre- ated an annual children’s art contest that awards prizes for the best drawing involv- ing a recycling-based theme. The winner is awarded a $50 Zappos.com Gift Card. Like the rest of the company, L.E.A.F. is open, with its progress posted on its Twitter account and blog.

Another area on the company’s blog is a section on “Eco-friendly Products.” Here, the company highlights new products that are organic or were manufactured using environmentally friendly procedures. The postings also list ways that custo- mers can live more sustainable lifestyles, including tips on how to throw an eco- friendly party.

ZAPPOS’S NEW STRUCTURE In 2015, Tony Hsieh made a controversial decision to completely change the structure of the organization. For the past year, the company had been transi- tioning toward an organizational structure that abandons the top-down manage- rial hierarchy in favor of a redistribution of power. Called a Holacracy, this organizational structure places empowerment at the core of the organization.

Case 13 • Zappos: Delivering Happiness 459

Every employee becomes their own leader with their own roles. To be effective, a Holacracy requires periodic governance meetings where each employee under- stands his or her roles and responsibilities. Teams hold tactical meetings to dis- cuss key issues. While governance meetings focus on clarity and role structure, tactical meetings are used to “sync and triage next actions.” It is believed that this distributed authority increases clarity and transparency and decreases cog- nitive dissonance by recognizing tensions before they become a problem.

As Zappos continues to grow, there is a risk its expansion will make it harder to manage employees and control productivity. Hsieh cites statistics that demon- strate how growth often causes innovation and productivity per employee to go down. However, he also claims that when cities double in size, productivity and innovation per resident increases by 15 percent. Hsieh believes that the key to sus- tainable growth at Zappos is to operate more like a city than a business. He feels the best way to handle growth is to become a Teal organization, starting out by using a Holacracy structure and evolving from there. In his book Reinventing Organizations, Frédéric Laloux uses a color scheme to describe the development of human organizations, with Teal being the highest. The concept of a Teal organi- zation is based on three premises: self-management developed through peer rela- tionships; involving the whole person in the work; and allowing the organization to grow and adapt instead of being driven. A Teal organization is structured under the premise that all units will work “together to support the whole.” For Zappos, this involves adopting a new structure promoting self-organization and self- management.

The transformation of Zappos’s organizational structure started off slowly. How- ever, Hsieh believed this slow transition was hindering the company’s transforma- tion toward self-organization and self-management. Hsieh sent an e-mail to all 1,500 employees to inform them that the organization was going to take immediate action to transform Zappos into a Teal organization. This involved eliminating bosses and the traditional functions of finance, technology, marketing, and merchandising to create task-oriented circles structured around specific businesses. Managers became employees and no longer engaged in traditional management functions, although their salaries stayed the same throughout 2015.

Hsieh handled the e-mail carefully, making sure to praise traditional managers for their past contributions but stating they are no longer required for a Teal organi- zation. He realized there was likely going to be much resistance from managers and other employees who did not agree with the new system. To address these concerns, Hsieh extended “The Offer.” Zappos agreed to provide employees who wanted to leave severance pay for 3 months. Approximately 14 percent of employees chose to take the package.

This will have strong implications for Zappos, but Hsieh believes employees must be committed to the changes and acknowledges that some will not feel that the new structure is right for them. It is clear that this new organizational approach has divided up the company, but Hsieh believes this approach is necessary to handle Zappos’s growth and maintain the same quality service and zany culture that have made it so successful.

ZAPPOS’S MARKETING CHALLENGES Like any company, Zappos has faced some challenging business and ethical issues in the past. When these issues occur, Zappos attempts to handle situations in a profes- sional and efficient manner. However, the transparency at Zappos makes some busi- ness and ethical issues more complex as the company strives to solve problems while keeping its stakeholders informed.

460 Case 13 • Zappos: Delivering Happiness

MERGER WITH AMAZON In 2009, Zappos was acquired by e-commerce giant Amazon.com. Many Zappos cus- tomers were confused by the unexpected move and expressed concerns about the future of the company’s culture and customer service. Most CEOs would not have felt any obligation to address customer concerns over the merger, but Tony Hsieh valued the support of Zappos’s employees and customers.

Shortly after the acquisition, Hsieh issued a statement about why he sold Zappos to Amazon. In the statement, Hsieh discussed the disagreement between Zappos and Sequoia Capital over management styles and company focus. Specifically, Hsieh said, “The board’s attitude was that my ‘social experiments’ might make for good PR but that they didn’t move the overall business forward. The board wanted me, or whoever was CEO, to spend less time on worrying about employee happiness and more time selling shoes.” Hsieh and Alfred Lin, Zappos’s CFO and COO, were the only two members on the board committed to preserving Zappos’s culture. The board could fire Hsieh and hire a new CEO who would focus more on profits.

Hsieh decided that the best way to resolve these issues was to buy out the board, but he could not do this on his own. After meeting with Amazon CEO Jeff Bezos, Hsieh committed to a full acquisition, as long as Zappos could operate independently and continue to focus on building its culture and customer service. Many customers were concerned that Amazon was not a good fit for Zappos, but Hsieh addressed those concerns, saying, “Amazon wants to do what is best for its customers—even, it seemed to me, at the expense of short-term financial performance. Zappos has the same goal. We just have a different philosophy about how to do it.” Although consu- mers were not pleased with the acquisition, they at least understood why it occurred. Moreover, Hsieh’s commitment to his beliefs and management style resonated with customers and employees.

MORE THAN SHOES CAMPAIGN To bring awareness to the fact that Zappos sells more than just shoes, Zappos created a marketing campaign in 2011 that was designed to catch people’s atten- tion. The company released several advertisements that featured people who appeared to be naked doing daily activities such as running, hailing a cab, and driving a scooter. The creative advertisements had certain parts of models’ bodies blocked off with a box that said “more than shoes.” The campaign received criti- cism from several groups because of its sexual nature. However, the catch with these ads was that the subjects of the ads were not actually nude; they wore bath- ing suits or small shorts that were later covered by the box. Because of the nega- tive attention, Zappos pulled the ads and released an apology that explained the production process.

TECHNICAL DIFFICULTIES Also in 2011, Zappos experienced some technical difficulties that resulted in delays and problems in customers’ orders and shipments. Zappos upgraded one of its pro- cessing systems, and in the process many orders were deleted or delayed. Some orders had the incorrect shipping information, and products were shipped to the wrong location. Although this upset several customers, Zappos handled the pro- blems and reassured customers that it would get their merchandise as soon as possi- ble. The company also offered different perks, depending on the circumstances of each customer experience.

Another problem Zappos encountered was that every item from 6pm.com, one of its websites, was priced at $49.95 for 6 hours in 2010. The company had to shut down

Case 13 • Zappos: Delivering Happiness 461

the website for a few hours to solve the problem. Zappos honored all the orders from the pricing mistake, which resulted in a $1.6 million loss.

In 2012, hackers broke into Zappos’s computer system, and the company had to respond to the theft of 24 million customers’ critical personal information. The stolen data included customers’ names, e-mail addresses, shipping and billing addresses, phone numbers, and the last four digits of their credit cards. Zappos immediately addressed the situation by sending an e-mail to customers notifying them of the secu- rity breach. Zappos assured customers the servers containing their full credit card information were not hacked. Zappos’s next move was to disconnect its call center, reasoning that the expected number of calls would overload its system.

While Zappos has a reputation for delivering customer service that is unmatched by any competitor, some customers were unhappy with how Zappos handled the hacking. Many customers were upset by their information being hacked, but the situation was made worse by Zappos’s action of disconnecting its call center. Although this situation caused problems for Zappos and blemished its customer ser- vice record, the company has worked to restore its reputation.

THE FUTURE OF ZAPPOS Zappos remains committed to serving its customers and employees. So far, the com- pany has retained its unique culture and continues to expand into new product catego- ries. In one interview, Hsieh talked about the growth of Zappos and how he believes that expanding into the clothing and merchandise market will help the company to grow. Hsieh says that “the sky is the limit” for Zappos, and that growing and expanding into many different types of businesses is Zappos’s future. Hsieh continues to look for talented and creative individuals. He has pledged $1 million in partnership with Ven- ture for America to bring at least 100 graduates to the Las Vegas area over a 5-year period. As Zappos expands, it will have to work harder to hire the right people, avoid ethical issues, and maintain its quirky culture. The company’s new organizational struc- ture and compensation system for its call center employees are major steps to expand without compromising Zappos’s unique culture. Although many employees ended up leaving the company, Zappos believes these moves are the right ones to make and will enable the firm to continue growing both in employees and productivity.

Leadership is a key factor in the success of any company, and for Zappos, having Tony Hsieh as a leader is a strong indicator for future success. Hsieh has expressed that he will do whatever it takes to make his employees, customers, and vendors happy. The future for any company looks bright when its leadership is committed to such strong values. However, Zappos needs to make sure that it continues to focus on its stakeholders and its long-term vision with or without Hsieh.

Ultimately, Zappos intends to continue to deliver happiness to its stakeholders. Hsieh says,

At Zappos, our higher purpose is delivering happiness. Whether it’s the

happiness our customers receive when they get a new pair of shoes or the

perfect piece of clothing, or the happiness they get when dealing with a

friendly customer rep over the phone, or the happiness our employees

feel about being a part of a culture that celebrates their individuality,

these are all ways we bring happiness to people’s lives.

Zappos’s success and innovative business model have caught the attention of many other companies. The company has appeared on several prestigious lists including Fortune’s “Best Companies to Work For,” Fast Company’s “50 Most Innovative Companies,” BusinessWeek’s “Top 25 Customer Service Champs,” and Ethisphere’s “World’s Most Ethical Companies.” Zappos’s business model is so successful that the company offers tours and workshops. Its 3-day culture camp

462 Case 13 • Zappos: Delivering Happiness

costs $6,000 and teaches participants about the Zappos culture and how to develop their own successful corporate cultures. The company also created Zappos Insights, an online service that allows subscribers to learn more about Zappos’s business practices through blogs and videos. These programs have high profit potential for the company because they are built on what Zappos already does best. As the com- pany continues to gain recognition for its efforts in creating a vibrant and transpar- ent corporate culture and business model, Zappos’s success among its varied stakeholders looks promising.

SOURCES Scott Adams, “Refreshing honesty on why Zappos sold to Amazon,” Tech Dirt, 2010, http://www. techdirt.com/articles/20100607/0014299706.shtml (accessed May 18, 2015); Yinka Adegoke, “24 million customer accounts hacked at Zappos,” Reuters, January 17, 2012, http://www.reuters.com/article/2012/ 01/17/us-zappos-hacking-idUSTRE80F1BD20120117 (accessed May 18, 2015); Peter Bernard, “Zappos hacking could cause consumer problems later,” The Tampa Tribune, January 16, 2012, http://tbo.com/ news/business/zappos-hacking-could-cause-consumer-problems-later-348177 (accessed May 18, 2015); Diane Brady, “Tony Hsieh: Redefining the Zappos’ business model,” Bloomberg Business, May 27, 2005, http://www.businessweek.com/magazine/content/10_23/b4181088591033.htm (accessed May 18, 2015); David Burkus, “The tale of two cultures: Why culture trumps core values in building ethical organizations,” The Journal of Values Based Leadership, Winter/Spring 2011, http://www. valuesbasedleadershipjournal.com/issues/vol4issue1/tale_2culture.php (accessed May 18, 2015); Brian Cantor, “How Zappos escaped outrage over customer service problems,” Customer Management, October 11, 2011, http://www.customermanagementiq.com/operations/articles/how-zappos-escaped- outrage-over-customer-service-p (accessed May 18, 2015); Max Chafkin, “How I did it: Tony Hsieh, CEO, Zappos.com,” Inc., September 1, 2006, http://www.inc.com/magazine/20060901/hidi-hsieh.html (accessed May 18, 2015); Max Chafkin, “The Zappos way of managing,” Inc., May 1, 2009, http://www. inc.com/magazine/20090501/the-zappos-way-of-managing.html (accessed May 18, 2015); Andria Cheng, “Zappos, under Amazon, keeps its independent streak,” MarketWatch, June 11, 2010, http://www. marketwatch.com/story/zappos-under-amazon-keeps-its-independent-streak-2010-06-11 (accessed May 18, 2015); Michael Dart and Robin Lewis, “Break the rules the way Zappos and Amazon do,” BusinessWeek.com, May 2, 2011, p. 2; Eric Engleman. “Q&A: Zappos CEO Tony Hsieh on life under Amazon, future plan,” Tech Flash: Seattle’s Technology News Source, 2010, http://www.techflash.com/ seattle/2010/09/qa_zappos_ceo_tony_hsieh_on_life_under_amazon_and_moving_beyond_shoes.html (accessed May 18, 2015); Ethicsphere Institute, “2011 World’s most ethical companies,” Ethisphere, http://ethisphere.com/worlds-most-ethical/wme-honorees/ (accessed May 18, 2015); Richard Feloni, “Inside Zappos CEO Tony Hsieh’s radical management experiment that prompted 14% of employees to quit,” Business Insider, May 16, 2015, http://www.businessinsider.com/tony-hsieh-zappos-holacracy- management-experiment-2015-5 (accessed May 18, 2015); Cheryl Fernandez, “Zappos customer loyalty team-pay, benefits, and growth opportunities,” October 26, 2010, http://www.youtube.com/watch? v=OB3Qog5Jhq4 (accessed May 18, 2015); Fortune, “100 Best companies to work for,” 2013, http:// archive.fortune.com/magazines/fortune/best-companies/2013/snapshots/31.html (accessed May 18, 2015); Fortune, “Whitewater rafting? 12 Unusual perks. Best companies rank,” 2012, http://archive.fortune. com/galleries/2012/pf/jobs/1201/gallery.best-companies-unusual-perks.fortune/3.html (accessed May 18, 2015); Ed Frauenheim, “Jungle survival,” Workforce Management, September 14, 2009, Vol. 88, Issue 1018–1023; Carmine Gallo, “Delivering happiness the Zappos way,” BusinessWeek, May 13, 2009, http:// www.businessweek.com/smallbiz/content/may2009/sb20090512_831040.htm (accessed May 18, 2015); Rebecca Greenfield, “Zappos CEO Tony Hsieh: Adopt Holacracy or leave,” Fast Company, March 30, 2015, http://www.fastcompany.com/3044417/zappos-ceo-tony-hsieh-adopt-holacracy-or-leave (accessed May 18, 2015); “Holacracy,” Zappos Insights, http://www.zapposinsights.com/about/holacracy (accessed May 18, 2015); HolacracyOne, LLC, “How it works,” http://holacracy.org/how-it-works; http://www. zapposinsights.com/about/holacracy (accessed May 18, 2015); Tony Hsieh and Max Chafkin, “Why I sold Zappos,” Inc., June 2010, pp. 100–104; Tony Hsieh, “Zappos: Where company culture is 1,” Presentation, May 26, 2010, http://www.youtube.com/watch?v=bsLTh9Gity4 (accessed May 18, 2015); Harold Jarche,”Reinventing organizations–Review,” May 19, 2014, http://jarche.com/2014/05/reinventing- organizations-review/ (accessed May 26, 2015); John R. Karman III, “Zappos plans to add 5, 000 full- time jobs in Bullitt County,” Business First, October 28, 2011, http://www.bizjournals.com/louisville/ print-edition/2011/10/28/zappos-plans-to-add-5000-full-time.html (accessed May 18, 2015); Aneel Karnani, “The case against corporate social responsibility,” MIT Sloan Management Review, August 23, 2010, http://www.wsj.com/articles/SB10001424052748703338004575230 112664504890 (accessed May 18, 2015); Sara Lacy, “Amazon-Zappos: Not the usual Silicon Valley M&A,” BusinessWeek, July 31, 2009, http:// www.bloomberg.com/bw/technology/content/jul2009/tc20090730_169311.htm (accessed May 18, 2015);

Case 13 • Zappos: Delivering Happiness 463

Greg Lamm, “Zappos up-front with challenges of new ordering system,” Tech Flash: Seattle’s Technology News Source, October 8, 2011, http://www.techflash.com/seattle/2011/10/zappos-up-front- with-challenges.html (accessed May 18, 2015); Nevada Childhood Cancer Foundation, “Wild night at the zoo presented by Britney Spears & Zappos.com,” http://www.nvccf.org/news.cfm?id=303 (accessed May 18, 2015); Jeffrey M. O’Brien, “Zappos knows how to kick it,” Fortune, February 2, 2009, Vol. 159, Issue 2, pp. 54–60; Joyce Routson. “Hsieh of Zappos takes happiness seriously,” Stanford Center for Social Innovation, November 4, 2010, http://csi.gsb.stanford.edu/hsieh-zappos-takes-happiness-seriously (accessed May 18, 2015); Rachel Emma Silverman, “At Zappos, some employees find offer to leave too good to refuse,” Wall Street Journal, May 7, 2014, http://www.wsj.com/articles/at-zappos-some- employees-find-offer-to-leave-too-good-to-refuse-1431047917 (accessed May 18, 2015); Aman Singh, “At Zappos, getting fired for not contributing to company culture,” Forbes, 2010, http://www.forbes.com/ sites/csr/2010/11/23/at-zappos-getting-fired-for-not-contributing-to-company-culture (accessed May 18, 2015); Sun staff, “Henderson-based Zappos earns honors for ethics,” Las Vegas Sun, 2009, http://www. lasvegassun.com/news/2009/apr/13/henderson-based-zappos-earns-honors-ethics/ (accessed May 18, 2015); Brad T., “2014 Children’s recycling art contest winner announced,” Zappos Blog, December 1, 2014, http://blogs.zappos.com/taxonomy/term/786 (accessed May 18, 2015); Bill Taylor, “Why Amazon is copying Zappos and paying employees to quit,” Harvard Business Review, April 14, 2014, https://hbr. org/2014/04/why-amazon-is-copying-zappos-and-paying-employees-to-quit/ (accessed May 18, 2015); William Wei, “The future of Zappos: From shoes to clothing to a Zappos Airline,” Business Insider, October 22, 2010, http://www.businessinsider.com/zappos-shoes-clothing-airline-2010-10 (accessed May 18, 2015); Samantha Whitehorne, “Cultural lessons from the leaders at Zappos.com,” ASAE, August 2009, http://www.asaecenter.org/Resources/ANowDetail.cfm?ItemNumber=43360 (accessed May 18, 2015); Marcie Young and Erin E. Clack, “Zappos milestone: Focus on apparel,” Footwear News, May 4, 2009, http://about.zappos.com/press-center/media-coverage/zappos-milestone-focus-apparel (accessed May 18, 2015); “Zappos CEO gives $1M to lure grads to Las Vegas,” 8 News Now KLAS-TV Las Vegas, December 4, 2012, http://www.8newsnow.com/story/20260504/zappos-ceo-gives-1m-to-lure-grads-to- vegas (accessed May 18, 2015); “Zappos gives up lunch to give back to the community,” Blogs.Zappos.Com, 2008, http://blogs.zappos.com/blogs/inside-zappos/2008/09/09/zappos-gives-up-lunch- to-give-back-to-community (accessed May 18, 2015); Masha Zager, “Zappos delivers service … with shoes on the side,” Apparel Magazine, January 2009, Vol. 50, Issue 5, pp. 10–13; Claire Zillman, “Zappos is bringing Uber-like surge pay to the workplace,” Fortune, January 28, 2015, http://fortune.com/2015/ 01/28/zappos-employee-pay/ (accessed May 18, 2015).

QUESTIONS 1. How would you define Zappos’s target market, and how would you describe its

strategy to serve this market? 2. Has Zappos’s emphasis on customer satisfaction contributed to its profitability?

Explain. 3. Has Zappos developed long-term customer relationships that provide a competi-

tive advantage in the purchase of shoes and other products?

464 Case 13 • Zappos: Delivering Happiness

Netflix Fights to Stay Ahead of a Rapidly Changing Market*

Synopsis: In the face of changing technology and shifting customer preferences with respect to movie distribution, video rental giant Blockbuster fell to its competition. Meanwhile, Netflix has grown to become the top rent-by-mail and video streaming company, while other strong competitors have emerged to dominate movie distribution via kiosks (Redbox) and online (Apple, Amazon, Hulu, and others). Looking to the future, Netflix’s survival depends on its ability to adapt to and adopt new technology and marketing practices—issues Blockbuster failed to navigate due to its reactive, rather than proactive, stance toward a rapidly changing market. Netflix faces an uncertain future as the DVD rental sector approaches the end of its life cycle. However, the company is poised to dominate the video streaming sector for the foreseeable future. The problem is that the future changes rapidly in this industry.

Themes: Changing technology, changing consumer preferences, competition, competitive advan- tage, product strategy, product life cycle, services marketing, pricing strategy, distribution strategy, non-store retailing, customer relationships, value, implementation

Technology has played a leading role in the evolution of the movie and rental indus- try. Several of the major movie production companies have now opted to bypass the theater experience and instead promote a selection of their movies directly to the home viewing audience via on-demand services, broadband downloads, or online streaming. Through increasing disintermediation (bypassing theaters and rental chains), movie studios stand to increase profit margins dramatically. Today there are at least 20 major competitors in the sales and rental industry that compete with Netflix. These include major retail firms such as Walmart, Target, Best Buy, Amazon, and Time Warner. In the rental sector, Netflix faces intense competition from Red- box, and a variety of online-only services such as Apple, Amazon, Google, and Hulu.

NETFLIX’S HISTORY CEO Reed Hastings told Fortune he got the idea for the DVD-by-mail service after paying a $40 late fee for Apollo 13 in 1997. Although VHS was the popular format at the time, Hastings heard that DVDs were on the way, and he knew there was a big market waiting to be tapped. At first he and fellow software executive Marc Ran- dolph attempted a rent-by-mail service that didn’t require a subscription, but it was very unpopular. The company launched the subscription service on September 23, 1999 with a free trial for the first month and found that 80 percent of customers renewed after the trial ended. Netflix turned its first profit in 2003 in the same quar- ter that it reached one million subscribers. Hastings said the company was named Netflix because they saw the industry’s future moving from the DVD format to Inter- net streaming in the long run. Netflix introduced streaming services in 2007 after reaching more than 6.3 million members.

CASE

*Kelsey Reddick, Florida State University, Jacqueline Trent, University of New Mexico, and Jennifer Sawayda, University of New Mexico, prepared this case under the direction of Michael Hartline and O. C. Ferrell. This case was developed for classroom discussion, rather than to illustrate either effective or ineffective handling of an administrative situation.

465

Intense competition from Netflix was a main reason that Blockbuster dropped its late-fee program in 2005 (a shift that led to a $400 million loss in revenue for Blockbuster). In 2006, Hastings set a goal of reaching 20 million subscribers by 2012 —a goal they would exceed. Its launch in Canada in September 2010 helped them reach the 20 million subscriber goal sooner than expected. Quarterly sales topped $320 million in late 2008, followed by $394 million during the first quarter of 2009. Even more impressive, Netflix managed to increase sales at a time when the entire movie rental industry experienced an 8 percent sales decline.

Today, with more than 62 million members, Netflix touts itself as the world’s largest online entertainment subscription service, with operations in more than 50 countries. It also announced it was making its streaming video service available in Cuba in light of the improving relations between the United States and Cuba. Although this is more of a formality since Cubans do not have credit cards and the island has low-quality Internet service, Netflix predicts that Cuban economic condi- tions will improve and become a viable market for the organization.

EARLY STRATEGY Netflix built its success around online movie rentals with expedited delivery of DVDs. DVDs were first introduced to the United States in March of 1996. In 1997, few American households owned DVD players as they cost more than $1,000 at the time. In addition, few movie titles were available on DVD. However, Hastings and Randolph successfully predicted that the format would quickly replace the compara- tively low quality, bulky, and cumbersome VHS format among American consumers. A key factor in Netflix’s strategy was that the DVD’s compact size made the U.S. Postal Service a viable delivery method. It experimented with 200 different mailing packages in order to perfect the packages for disc safety, shipping cost, and reliabil- ity. On April 14, 1998, Netflix officially opened for business with 30 employees and 925 titles—the majority of DVDs in print at the time. Initially, Netflix offered a 7-day rental for $4 plus $2 in shipping, with per item prices decreasing with each additional title. They offered no-hassle “time-extensions” rather than punitive and costly “late- fees,” which had been the industry standard and a big revenue generator.

During the initial period, when demand was low, Netflix formed strategic rela- tionships that were important in expanding the DVD market and ensuring its early success. The company forged cross-promotional agreements with DVD hardware manufacturers and studios, offering free Netflix rentals with purchases of DVD players from manufacturers such as Toshiba, Hewlett-Packard, Pioneer, Sony, and Apple to help get DVD players in American homes. It also teamed with studios to pro- mote high-profile films and with online movie information/review providers to funnel movie-interested Internet traffic directly to Netflix. The company also enjoyed signif- icant positive publicity in 1998 when it offered videos of President Bill Clinton’s grand jury testimony for 2 cents, plus $2 shipping and handling.

In September of 1999, Hastings announced that Netflix had achieved economies of scale and could now offer subscription services. A few months later in early 2000, it dropped the pay-per-title model entirely and began to market itself as an unlimited subscription service, completely free of due dates, late fees, shipping charges, and per-title fees. At that time, Netflix charged $19.99 per month for three DVDs at a time and added its less expensive one- and two-DVD options a short time later.

Bob Pisano, a former MGM executive and sitting president of the Screen Actors Guild, joined the Board of Directors of Netflix in 2000. Pisano cultivated relation- ships with the studios, and in December, Netflix signed revenue sharing agreements with Warner Home Video and Columbia Tri-Star. This enabled Netflix to consistently and more profitably fill the short-lived new release demand peak. Agreements with other studios would soon follow.

466 Case 14 • Netflix Fights to Stay Ahead of a Rapidly Changing Market

OPTIMIZING DISTRIBUTION In 2002, Netflix reached the milestone of 500,000 subscribers. It made its initial pub- lic offering in March, raising $82.5 million on 5.5 million shares. On June 20, 2002, Netflix announced the opening of 10 additional warehouses throughout the country. The company situated its warehouses to supply as many customers as possible with overnight first-class DVD delivery because its per-capita subscription rates were much higher in markets with overnight delivery. As competitors entered the market over the next couple of years, Netflix was already refining its processes and opening more distribution centers to better serve its expanding subscriber base more prof- itably and quickly.

The location of these distribution centers has always remained a mystery. Net- flix employees sign confidentiality agreements when hired, and the exterior of the warehouses themselves are nondescript and are designed expressly to camouflage the building’s function. Although Netflix was concerned with trade secrets early on, former Vice President of Communications Steve Swasey explained in 2009 that Net- flix was already so ahead of the competition that it was not worried about industrial espionage. Rather, it is more worried about the possible disruption of processes when customers show up and expect to be able to drop off the DVDs directly at the warehouse, rather than through the U.S. Postal Service.

In 2003, Netflix hit one million subscribers. Customers appreciated the low-cost subscription fees, the ease of returning DVDs, and the elimination of late fees. In 2003, Netflix was awarded a patent for its preference tracking software and by mid- summer possessed a library of 15,000 titles.

TAKING DOWN A GIANT Entrepreneur David Cook opened Blockbuster, formerly the dominant movie rental company, in 1985. Noting the opportunities in the rental market, investor Warne Hui- zenga invested $18 million in the startup and helped the company expand from 130 stores to more than 1,500 in about 3 years. When former Walmart CEO Bill Fields took over in 1996, Blockbuster was repositioned as a retail establishment. This vision, as well as Fields’s tenure, was short-lived. John Antioco, Fields’s successor who took over in mid-1997, refocused the company on video and game rentals; this strengthened and solidified the firm’s strategy and allowed Blockbuster to success- fully navigate the transition from VHS to DVDs in the late 1990s through the early 2000s.

The home entertainment business continued to evolve, and Blockbuster’s revised mission was to be “the complete resource for movies and games.” Recogniz- ing the growing threat posed by Netflix, Blockbuster began to experiment with a nonsubscription online rental service with a postal delivery component in the United Kingdom. Most of Blockbuster’s success during this period was attributed to its suc- cessful positioning as the market leader, combined with strong growth trends in the gaming industry. In 2004, Blockbuster finally entered the online movie rental busi- ness in a bid to compete more directly with increasingly competitive Netflix. How- ever, Blockbuster continued its focus on its bricks-and-mortar stores by offering online renters the option of two free in-store rentals each month, designed to cater to impulse home entertainment demand. The mix of in-store rentals and Blockbus- ter’s new online offering was considered a competitive advantage over Netflix.

Antioco unexpectedly left Blockbuster in 2007 and was replaced by James Keys, previously the “turnaround artist” for 7-Eleven. When Keyes began as CEO, Block- buster was facing serious difficulties: its stock price had fallen more than 83 percent in the years between 2002 and 2007, and it had made the strategic decision to close nearly 300 stores in both 2007 and 2008. Netflix had quickly become one of

Case 14 • Netflix Fights to Stay Ahead of a Rapidly Changing Market 467

Blockbuster’s most serious competitors. Due to competition from Netflix, Block- buster chose to drop its late fees; this resulted in an astounding $400 million loss for Blockbuster, as well as legal problems. Even as the movie rental industry began to lose its growth trajectory and move into the decline phase, Netflix enjoyed strong growth. Netflix’s advantages over Blockbuster’s offerings included renters’ access to an unlimited number of movies upon subscribing; convenient, automatic, and free shipping once a movie is returned via the postal service; extremely fast turnaround; and a broad distribution network.

In the end, Blockbuster failed to adapt to the changing market and declared bankruptcy in 2010 after facing $1 billion in debt. That same year, Netflix reached 20 million members, up 63 percent from 2009, and launched services in Canada. Blockbuster was eventually purchased by Dish Network, but this failed to save the firm. Blockbuster shuttered its final 300 stores, although it continued offering Block- buster on Demand video streaming.

NETFLIX CHANGES ITS BUSINESS MODEL Netflix CEO Reed Hastings correctly anticipated the new technology entering the home entertainment industry. A study from IHS Screen Digest suggested that by 2012, online movie streaming in the United States would exceed both DVD and Blu- ray use. Hastings expected that Netflix’s DVD subscriptions would decline steadily over each quarter as new technology diffused into consumers’ homes. At that point, Hastings made a strategic decision that he would later regret.

In 2011, Netflix attempted to move its DVD-by-mail business into a new subsidi- ary called Qwikster that would focus solely on DVD-by-mail services. This move would free Netflix to focus on the streaming side of the operation. While this sup- ported Hastings’s vision of an all-streaming future, it led to a price increase of 60 per- cent and took away the convenient and valued one-stop shopping experience for subscribers who used both DVD-by-mail and streaming.

Netflix suddenly announced the decision to split the services in 2011. Ironically, in the past, Netflix had used focus groups to research how the market might respond to a particular decision. This time, however, Netflix relied on data showing that 75 percent of consumers preferred streaming. While this data is likely true, it failed to account for how consumers would react to the change. In addition to splitting into two companies, Netflix announced a price increase for one of its most popular sub- scription packages. Instead of paying $9.99 per month to receive movies either via streaming or DVD-by-mail service, interchangeably, customers would now pay $7.99 per month for each service. Netflix implemented the price adjustment and started the process of spinning off Qwikster in August 2011.

The customer backlash was swift and dramatic. Customers were angry at what they perceived to be a drastic price increase. The outrage worsened after e-mails were sent to Netflix subscribers containing an apology from Hastings for not explain- ing the reasoning behind raising prices. The e-mail also announced the splitting of the two companies. Rather than placating customers, many became angrier. They did not like the idea of moving between two websites—Qwikster for DVDs and Net- flix for streaming. The company lost 405,000 paid subscribers in a matter of weeks. Investors doubted the move, and Netflix’s stock price plummeted by 26 percent in a single day following the release of the third-quarter financial report.

Qwikster was given the boot after only 3 weeks as Netflix finally acknowledged that the change would be inconvenient for customers. Yet, the blunder cost Netflix its status as a Wall Street darling. The company traded at almost $300 per share before the Qwikster announcement. By the third quarter of 2012, it traded in the $50 to $60 range. Although Netflix chose to stay as one company, it maintained the price increase for its subscription package, forcing customers who only want to

468 Case 14 • Netflix Fights to Stay Ahead of a Rapidly Changing Market

pay $7.99 per month to choose either DVDs or streaming. Despite the Qwikster fail- ure, the price increase has led to modest success for the company. In 2012, Netflix reported a 1.7 percent decrease in paid subscriptions and an 11.9 percent increase in revenue per customer. This resulted in a net increase in revenue of 10 percent and a 15.4 percent increase in profit margin.

Netflix was able to recover from this debacle, finishing 2011 with earnings above expectations. Yet the company received another blow when it settled a class action lawsuit over consumer privacy issues. The lawsuit claimed that Netflix was retaining records of subscribers’ DVD and streaming videos 2 years after subscribers can- celled. According to the lawsuit, this violated a provision of the Video Protection Pri- vacy Act stating that personally identifiable information must be deleted after 1 year of cancellation. Netflix reached a $9 million settlement without admitting guilt.

INTENSE COMPETITION IN THE MOVIE RENTAL INDUSTRY In the movie rental industry, many companies have come and gone since the 1980s. Netflix has always been the number one DVD-by-mail rental company, but as the market continues to evolve and streaming becomes the preferred format, the com- pany finds itself in an ever-changing market. The onset of competitors in both the DVD rental industry and the online streaming industry has created new challenges for Netflix to address.

REDBOX Whether you are getting gas at 7-Eleven, buying groceries at Walmart, or picking up a prescription from Walgreens, your favorite movie or video game may be available for a few dollars at a Redbox kiosk. Each kiosk holds 630 discs, with about 200 different movie titles. Customers pay around $1.50—$3.00 for video games—and can return movies to any Redbox kiosk anywhere in the country. Customers can even reserve movies online before visiting a kiosk. Since its initial launch with just 12 kiosks, Red- box has grown to more than 40,000 kiosks nationwide. That level of penetration max- imizes convenience for customers, who now rent movies while they are out doing other things.

Surprisingly, the idea for Redbox began as a new business venture for McDo- nald’s in 2002. At that time, McDonald’s was experimenting with vending machines to sell a variety of different items. After the concept proved to be a success, Redbox was sold to Coinstar—a Bellevue, Washington, company that also operates coin- counting machines and gift card dispensers. Soon after, Coinstar developed deals with Walmart, Kroger, Winn-Dixie, Walgreens, Kangaroo (gas stations), and other national outlets to place Redbox kiosks in high-traffic locations. As it turned out, the timing couldn’t have been better. As a consequence of the most recent economic recession, customers who began to reconsider their $15 per month Netflix plans or $5 DVD rentals from Blockbuster suddenly saw the $1 Redbox rentals as a bargain (prices later increased to $1.50).

Redbox has achieved strong sales growth in a short time: from 200 million cumu- lative rentals in 2008, to 500 million in 2009, to 1.5 billion total rentals in 2012. How- ever, Redbox’s growth has remained relatively flat since then as DVD rentals have declined due to the increase in streaming services. In 2014, Redbox responded with a new customer loyalty program called Redbox Play Pass. The program gives fre- quent users one free night’s rental for every 10 rentals.

After Blockbuster declared bankruptcy in 2010, NCR acquired the company’s Blockbuster Express kiosks. NCR then sold Blockbuster Express to Redbox for $100 million in 2012. Meanwhile, to remain competitive with streaming, Redbox

Case 14 • Netflix Fights to Stay Ahead of a Rapidly Changing Market 469

attempted to introduce a streaming service called Redbox Instant by Verizon. How- ever, the service failed to catch on and was shut down in less than a year.

Interestingly, when Redbox initially announced a 20 percent price increase from $1.00 to $1.20, the company experienced a far different outcome than Netflix experi- enced. Redbox handled the announcement more smoothly than Netflix, stating that the change was necessary due to new regulations on debit card fees passed in the Dodd–Frank Wall Street Reform and Consumer Protection Act (consumers pay using their credit or debit cards). The regulations increased the cost of using a debit card for small purchases. However, Redbox actually raised its prices higher than what was needed to offset the debit card cost increase. Yet, by positioning it as a nec- essary move, Redbox avoided consumer backlash. While it is currently struggling to maintain growth against streaming services from Netflix and other competitors, Red- box maintains a 38 percent stake in all movie rentals. One major benefit that custo- mers appreciate is that Redbox receives new releases nine to 10 months before they are available for streaming.

FULLY DIGITAL COMPETITORS If trends in the movie rental industry continue, digital downloads will replace DVDs as the de facto standard for movie rentals. While Netflix clearly recognizes this trend and is making changes to establish a competitive advantage, so are many of its com- petitors. Recently, the market has become crowded with offerings from Apple, Ama- zon, Hulu, YouTube, and Google Play.

A number of well-known firms offer downloadable movie rentals. Apple, for example, offers thousands of titles in both standard and high-definition formats via its iTunes store. Apple’s key advantage is that iTunes works seamlessly with the mil- lions of iPods, iPhones, and iPads that have sold in recent years. What Apple is miss- ing, however, is an easy way to connect its handheld devices to older televisions— many of which do not have wireless connectivity or even HDMI ports.

Amazon offers titles for rent via its Instant Video service. Amazon’s original advantage was its partnership with Roku’s Digital Video player that allows consu- mers to wirelessly stream Amazon movies to their televisions. The Roku, starting at $49, now supports Hulu Plus, Netflix, Amazon Instant Video, HBO GO, and more. Amazon Prime Instant Video can be streamed via Internet, Kindle Fire, Roku, PlayS- tation 3, and on connected TVs and Blu-ray players. With the addition of their sub- scription service Amazon Prime, which provides members with free 2-day shipping for $79 annually, customers can also enjoy Prime Instant Video titles.

In 2007, NBCUniversal, Fox Entertainment Group, and Disney-ABC Television Group joined forces on a new venture called Hulu (www.hulu.com), which has expe- rienced a steady growth since its inception. Hulu is an ad-supported, web-based ser- vice that provides access to movies and traditional broadcast shows such as Grey’s Anatomy, The Office, Glee, and 30 Rock free of charge. Hulu also offers a video menu exceeding 350 content companies, including such names as ABC, NBC, FOX, MGM, and Sony. The company launched Hulu Plus, an ad-supported subscription service, in November 2010 for $7.99 a month. Unlike its free online service, Hulu Plus allows users to watch programs on connected TVs and Blu-ray players, gaming consoles, set-top boxes like Roku, mobile phones, and computers with limited advertising. While Hulu.com typically offers the five most recent episodes of a series in standard definition, Hulu Plus generally offers all episodes in the current season, in high defi- nition when available. Its competitive advantage is that it offers access to more tele- vision programming than Netflix (its television catalog consists of over 2,900 TV series).

YouTube and Google Play rental service are other major competitors in the digi- tal realm. Paramount Films added 500 films to the site, which now sits at thousands

470 Case 14 • Netflix Fights to Stay Ahead of a Rapidly Changing Market

of titles. Paramount joined Disney, Sony, Warner Brothers, NBCUniversal, and 20th Century Fox in partnerships with YouTube. Google also began to sell movies through Google Play, a new one-stop entertainment shop. With Google Play, users can rent or purchase high definition movies, accessible via any Android device or through the web. Users can also purchase music, download Android apps, and purchase e-books to read on a tablet, phone, e-reader, or the web. Google Play stores all music purchases and up to 20,000 songs from the purchaser’s iTunes, Windows Media Player, or folders with the help of the Google Play Music Manager.

While Netflix might have had first-mover advantages, other companies seem to be catching up in terms of their digital product offerings. Netflix will need to con- stantly innovate in order to remain one step ahead of the competition.

ANALYZING NETFLIX’S MARKETING STRATEGY Netflix’s target market includes consumers with Internet access and a penchant for movies. Netflix has been moving away from its DVD-by-mail service—although it is still an important part of its strategy—and emphasizing its streaming services. Its website promotes its streaming services for $7.99 per month, while its DVD services seem more secondary. Netflix currently has 62 million subscribers for streaming in the United States, Canada, the United Kingdom, Ireland, Latin America, and more. Netflix is also eyeing the Chinese market, which would significantly boost its number of subscribers.

Many analysts now consider Netflix’s multiplatform streaming capability to be one of its major competitive advantages. Netflix streaming can take place on televi- sions, iPhones, Nintendo Wii, iPads, Xboxes, or online. The process is seamless, meaning that a consumer can easily move from one platform to another. A study jointly conducted by CBS, The Nielsen Company, and The Cambridge Group found that two segments, amounting to 40 million U.S. households, have high demand for multiplatform streaming content. The demand for multiplatform streaming continues to grow, making this a high potential growth segment for Netflix.

Netflix continues to expand the content it offers to subscribers. While Netflix must wait a certain period for new DVD releases, it has developed lucrative partner- ships with movie studios and content providers. DreamWorks began licensing its films and shows to Netflix in 2013 and agreed to release its new animated series exclusively through Netflix. According to financial reports, Netflix spent approxi- mately $3 billion on television and film content in 2014. Considering the rising cost of content licensing and the ability of original cable television programming to attract subscribers, Netflix is adding original programming to its streaming offerings. Unlike with Qwikster, however, Netflix has returned to its policy of performing mar- ket research. For instance, it conducted an experiment adding an original program to its streaming service. The program received enough views for Netflix to declare the experiment a success and commit to more programs. Netflix released its popular television series Orange is the New Black and has begun to partner directly with producers to develop films such as Crouching Tiger, Hidden Dragon: The Green Legend.

While competition for Netflix has been increasing, Netflix is showing that it will not give up market share without a fight. According to a recent consumer sat- isfaction survey, Netflix rates higher than video-on-demand and premium broad- cast channels because of its comparatively low cost and viewing flexibility. Although the company’s market share in physical DVD rentals is dwindling (Net- flix did not allocate any money to market its DVD business in 2014), it has about 58 percent of the video streaming market share. The cost and multiplatform flexi- bility benefit that Netflix offers is significant enough to affect consumer decisions.

Case 14 • Netflix Fights to Stay Ahead of a Rapidly Changing Market 471

NETFLIX’S FUTURE As Netflix looks toward the future, the decline of the DVD will continue to present a challenge. Although Qwikster was an instant flop, the company will eventually have to phase out its DVD-by-mail business when it is no longer profitable. The continued growth of streaming options, from Amazon Instant Video to Google Play, and rental kiosk giant Redbox offer increases in movie-renting convenience for consumers. However, Netflix continues to maintain its competitive edge with significant market share in online videos, streaming, and video rentals. Its decision to develop its own original content demonstrates its willingness to embrace market opportunities.

The backlash that Netflix experienced after its price increase and failed plan to split the company shows that the company must carefully evaluate its marketing strategy. Failing to accurately predict consumer reaction could lead to future deba- cles. Netflix will also have to foster various content provider relationships and proac- tively search for newer, better opportunities. The heart of this challenge is simple in concept but difficult to execute in practice: Will Netflix remain innovative enough to compete in such a highly saturated market?

SOURCES Alyssa Abkowitz, “Secrets of my success: CEO Reed Hastings,” CNNMoney, January 28, 2009, http:// archive.fortune.com/2009/01/27/news/newsmakers/hastings_netflix.fortune/index.htm (accessed May 27, 2015); Thomas K. Arnold, “Economic downturn may be behind a rise in DVD rentals,” USA Today, May 4, 2009, http://www.usatoday.com/life/movies/dvd/2009-05-04-rentals-recession_N.htm (accessed May 27, 2015); Claire Atkinson, “Disney-Hulu puts focus on CBS,” Broadcasting and Cable, May 4, 2009, p. 3; Lauren Barack, “Blockbuster pushes fast forward: CEO James Keyes has a vision for his company— and it’s not going back to the videotape,” On Wall Street, September 1, 2007, p. 1; Elizabeth Barber, “Netflix to release first original movie,” Time, September 30, 2014, http://time.com/3447312/netflix-to- release-first-original-movie/ (accessed May 27, 2015); Brook Barnes and Brian Stelter, “Netflix secures streaming deal with DreamWorks,” New York Times, September 25, 2011, http://www.nytimes.com/ 2011/09/26/business/media/netflix-secures-streaming-deal-with-dreamworks.html?_r=1&pagewanted=all (accessed May 27, 2015); Tim Beyers, “Why I bought Netflix,” Daily Finance, September 26, 2011, http://www.dailyfinance.com/2011/09/26/why-i-bought-netflix- (accessed May 27, 2015); Christopher Borrelli, “How Netflix gets your movies to your mailbox so fast,” Chicago Tribune, August 4, 2009, http://articles.chicagotribune.com/2009-08-04/entertainment/0908030313_1_dvd-by-mail-warehouse-trade- secrets (accessed May 27, 2015); Andrea Cheng, “Roll credits: Dish shuttering its remaining 300 Blockbuster stores,” MarketWatch, November 6, 2013, http://blogs.marketwatch.com/ behindthestorefront/2013/11/06/roll-credits-dish-shuttering-its-remaining-300-blockbuster-stores/ (accessed May 27, 2015); Amit Chowdhry, “Redbox’s streaming video service is shutting down,” Forbes, October 7, 2014, http://www.forbes.com/sites/amitchowdhry/2014/10/07/redbox-instant-shutting-down/ (accessed May 27, 2015); CNNMoney, “Netflix takes a leap of faith on Cuba,” CNNMoney, February 11, 2015, http://money.cnn.com/2015/02/11/technology/netflix-cuba/ (accessed May 27, 2015); Dan Cryan, “Online movies: The future, today,” IHS Technology, March 22, 2012, https://technology.ihs.com/345118/ online-movies-the-future-today (accessed May 27, 2015); Cliff Edward and Ronald Grover, “Can Netflix regain lost ground?” BusinessWeek, October 19, 2011, http://www.businessweek.com/magazine/can- netflix-regain-lost-ground-10192011.html (accessed May 27, 2015); David Goldman, “Verizon and Redbox team up to battle Netflix,” CNNMoney, February 6, 2012, http://money.cnn.com/2012/02/06/technology/ verizon_redbox/index.htm?iid=HP_River (accessed May 27, 2015); Rob Golum, “Netflix rises 5% after report on market share: Los Angeles makeover,” Bloomberg, June 19, 2012, http://www.bloomberg.com/ news/2012-01-19/netflix-rises-5-after-report-on-market-share-los-angeles-mover.html (accessed May 27, 2015); Jefferson Graham, “Netflix looks to future but still going strong with DVD rentals,” USA Today, July 1, 2009, http://www.usatoday.com/tech/products/2009-06-30-netflix-future_N.htm (accessed May 27, 2015); Peter Grant, “Telecommunications; outside the box: As broadband connections proliferate, so do the opportunities for niche video-content providers,” Wall Street Journal, December 19, 2005, p. R11; Dan Graziano, “Online movie streaming in U.S. to top DVDs for the first time in 2012,” Boy Genius Report, March 26, 2012, http://www.bgr.com/2012/03/26/online-movie-streaming-in-u-s-to-top-dvds-for- the-first-time-in-2012 (accessed May 27, 2015); Todd Haselton, “Upset investors file class action lawsuit against Netflix,” Boy Genius Report, January 17, 2012, http://www.bgr.com/2012/01/17/upset-investors- file-class-action-lawsuit-against-netflix (accessed May 27, 2015); Alex Hern, “Who are the 6 million people still getting Netflix by mail? I’m one of them,” Guardian, July 22, 2014, http://www.theguardian. com/media/2014/jul/22/netflix-dvds-mail-subscription (accessed May 27, 2015); Bruce Horovitz,

472 Case 14 • Netflix Fights to Stay Ahead of a Rapidly Changing Market

“McDonald’s wades deeper into DVDs,” USA Today, May 23, 2004, http://www.usatoday.com/money/ industries/retail/2004-05-23-mcdvd_x.htm (accessed May 27, 2015); Richard Hull, “Content goes Hollywood: How the film industry is struggling with digital content,” EContent, October 2004, p. 22; Lauren Indvik, “Soon you may be able to buy, not just rent, movies from Google,” Mashable, March 23, 2012, http://mashable.com/2012/03/23/google-selling-films (accessed May 27, 2015); Lauren Indvik, “500 Paramount films coming to YouTube,” Mashable, April 4, 2012, http://mashable.com/2012/04/04/ paramount-youtube-rentals (accessed May 27, 2015); International Directory of Company Histories, Vol. 58 (St. James Press, 2004); Kevin Kelleher, “The rise of Redbox should spook Netflix,” CNNMoney, February 10, 2012, http://tech.fortune.cnn.com/2012/02/10/the-rise-of-redbox-should-spook-netflix (accessed May 27, 2015); Brent Lang, “Netflix CEO Reed Hastings: ‘We expect DVD subscribers to decline forever,’” Reuters, January 25, 2012, http://www.reuters.com/article/2012/01/26/ idUS257021289720120126 (accessed May 27, 2015); Brent Lang, “Redbox makes up half of DVD rental market, Exec says,” Variety, June 5, 2014, http://variety.com/2014/film/news/redbox-makes-up-half-of- dvd-rental-market-exec-says-1201214188/ (accessed May 27, 2015); David Lieberman, “DVD Kiosks like Redbox have rivals seeing red,” USA Today, August 13, 2009, http://www.usatoday.com/money/media/ 2009-08-11-rental-dvd-redbox_N.htm (accessed May 27, 2015); Michael Liedtke, “Blockbuster to stream video rentals on Samsung TVs,” USA Today, July 14, 2009, http://www.usatoday.com/tech/news/2009-07- 14-blockbuster-samsung_N.htm (accessed May 27, 2015); Michael Liedtke, “Netflix class action settlement: Service pays $9 million after allegations of privacy violations,” Huffington Post, February 10, 2012, http://www.huffingtonpost.com/2012/02/11/netflix-class-action-settlement_n_1270230.html (accessed May 27, 2015); Michael Liedtke, “Netflix users watched a billion hours last month,” USA Today, July 4, 2012, http://www.usatoday.com/tech/news/story/2012-07-03/netflix-online-video/56009322/ 1 (accessed May 27, 2015); Katie Marsal, “Viacom deal brings MTV, comedy central, Nickelodeon shows to Amazon prime,” AppleInsider, February 8, 2012, http://www.appleinsider.com/articles/12/02/08/ viacom_deal_brings_mtv_comedy_central_nickelodeon_shows_to_amazon_prime.html (accessed May 27, 2015); Anna Wilde Mathews, “E-Commerce (a special report): Selling strategies—Stop, thief! Movie studios hope to slow widespread online piracy before it takes off; they’re convinced they can,” Wall Street Journal, April 28, 2003, p. R6; Maggie McGrath, “Amazon and Hulu could slow Netflix growth in 2014, Morgan Stanley says,” Forbes, January 7, 2014, http://www.forbes.com/sites/maggiemcgrath/2014/ 01/07/amazon-and-hulu-could-slow-netflix-growth-in-2014-morgan-stanley-says/ (accessed May 27, 2015); Jessica Mintz, “Redbox’s machines take on Netflix’s red envelopes,” USA Today, June 22, 2009, http:// www.usatoday.com/tech/news/2009-06-22-redbox_N.htm (accessed May 27, 2015); Timothy J. Mullaney, “Netflix,” BusinessWeek, May 25, 2006, http://www.businessweek.com/smallbiz/content/may2006/ sb20060525_268860.htm (accessed May 27, 2015); Timothy J. Mullaney, “The mail-order movie house that clobbered Blockbuster,” BusinessWeek, June 5, 2006, pp. 56–57; Rick Aristotle Munarriz, “Puss in boots enlisted to rescue DreamWorks animation,” Daily Finance, January 14, 2015, http://www. dailyfinance.com/2015/01/14/puss-boots-gets-netflix-series/ (accessed May 27, 2015); Netflix, Inc., Hoovers Company Capsules, http://www.hoovers.com/company/Netflix_Inc/rffkhti-1.html (accessed May 27, 2015); “Netflix to rise on 61% online streaming share,” Seeking Alpha, May 14, 2012, http:// seekingalpha.com/article/585631-netflix-to-rise-on-61-online-streaming-share (accessed May 27, 2015); Netflix, “Overview,” Netflix website, http://ir.netflix.com (accessed May 27, 2015); Netflix website, http://www.netflix.com (accessed May 27, 2015); Jeffrey O’Brien, “The Netflix effect,” Wired, December 2002, http://www.wired.com/wired/archive/10.12/netflix.html?pg=1&topic=&topic_set= (accessed May 27, 2015); Terrence O’Brien, “Redbox snatches up NCR’s entertainment division, swallows Blockbuster express business,” Engadget, February 6, 2012, http://www.engadget.com/2012/02/06/redbox-snatches- up-ncrs-entertainment-division-future-of-block (accessed May 27, 2015); Annika Olson and Eddie Yoon, “Netflix will rebound faster than you think,” Harvard Business Review, January 26, 2012, http://blogs. hbr.org/cs/2012/01/netflix_will_rebound_faster_th.html (accessed May 27, 2015); Julianne Pepitone, “Netflix tops Apple in online video sales,” CNNMoney, June 1, 2012, http://money.cnn.com/2012/06/01/ technology/netflix-online-video-revenue/index.htm (accessed May 27, 2015); Redbox, “Facts about Redbox,” Redbox website, http://www.redbox.com/facts (accessed May 27, 2015); Redbox website, http://www.redbox.com (accessed May 27, 2015); Lisa Richwine, “Mobster show gives Netflix an idea it can’t refuse, Reuters, April 24, 2012, http://www.reuters.com/article/2012/04/24/us-netflix-programs- idUSBRE83N1GQ20120424 (accessed May 27, 2015); Lisa Richwine, “RPT-HBO Nixes idea of Netflix partnership,” Reuters, July 25, 2012, http://www.reuters.com/article/2012/07/25/netflix-hbo- idUSL2E8IP10020120725?type=companyNews (accessed May 27, 2015); Greg Sandoval, “YouTube wants to offer film rentals,” CNET News, September 2, 2009, http://news.cnet.com/8301-1023_3- 10337004-93.html (accessed May 27, 2015); Greg Sandoval, “Redbox pays $100 million for NCR’s Blockbuster express,” CNET News, February 6, 2012, http://news.cnet.com/8301-31001_3-57372197-261/ redbox-pays-$100-million-for-ncrs-blockbuster-express (accessed May 27, 2015); Amy Schien, Hulu, LLC, Hoovers Company Capsules, http://www.hoovers.com/company/Hulu_LLC/rhscyci-1-1NJHW5.html (accessed August 9, 2012); Patrick Seitz, “Redbox Q3 profit growth surprises, adds loyalty program,” Investors.com, October 31, 2014, http://news.investors.com/technology-click/103114-724429-redbox- parent-outerwall-reports-mixed-third-quarter.htm (accessed May 27, 2015); Mike Snider, “Netflix axes Qwikster; kills plan to split in two,” USA Today, October 10, 2011, http://www.usatoday.com/tech/news/ story/2011-10-10/netflix-axes-qwikster/50723084/1; Mike Snider, “Blu-ray Grows, but DVD slide nips

Case 14 • Netflix Fights to Stay Ahead of a Rapidly Changing Market 473

home video sales,” USA Today, January 9, 2012, http://www.usatoday.com/tech/news/story/2012-01-10/ blu-ray-sales-2011/52473310/1 (accessed May 27, 2015); Todd Spangler, “Amazon streams more video than Hulu or Apple, but it’s still miles behind Netflix,” Variety, April 8, 2014, http://variety.com/2014/ digital/news/amazon-streams-more-video-than-hulu-or-apple-but-its-still-miles-behind-netflix-1201154130/ (accessed May 27, 2015); Mark Sweney, “Netflix to spend $3bn on TV and film content in 2014,” Guardian, February 5, 2014, http://www.theguardian.com/media/2014/feb/05/netflix-spend-3-billion-tv- film-content-2014 (accessed May 27, 2015); Chris Welch, “Redbox will close over 500 of its movie-rental kiosks this year,” Verge, May 23, 2014, http://www.theverge.com/2014/5/23/5745288/redbox-will-uninstall- over-500-rental-kiosks-this-year (accessed May 27, 2015); Sue-Lin Wong, “Netflix eyes entering tricky China market on its own,” Reuters, March 2, 2015, http://www.reuters.com/article/2015/03/02/us-netflix- china-idUSKBN0LY10I20150302 (accessed May 27, 2015).

QUESTIONS 1. What role will Redbox play in the development of Netflix’s strategic plans? How

threatening is Redbox to Netflix’s future 2. How will new competition from digital content providers force Netflix to alter its

strategy? 3. What new opportunities do you see in the movie streaming business, or the

entertainment industry as a whole? 4. Do you think Netflix will remain the dominant force in both streaming and movie

rentals? Why or why not? 5. What could Netflix have done differently to ensure Qwikster’s success?

474 Case 14 • Netflix Fights to Stay Ahead of a Rapidly Changing Market

Gillette: Why Innovation May Not Be Enough*

Synopsis: Gillette has long been known for innovation in both product development and marketing strategy. In the highly competitive, but mature, razor and blade market, Gillette holds a commanding worldwide market share. The peak of its innovation occurred in 2006 with the introduction of the Fusion 5-bladed razor. Today, innovation in razors and blades is thwarted by a lack of new technol- ogy and increasing consumer reluctance to pay for the “latest and greatest” in shaving technology. Gillette must decide how to put the razor wars behind it and maintain or increase its share of the global razor market.

Themes: Product leadership, product innovation, pricing strategy, integrated marketing communica- tion, segmentation, competition, sports marketing, global marketing, strategic focus

Since its inception in 1901, Gillette has always prided itself on providing the best shaving care products for men and women. In fact, the company was so visionary that it didn’t have any serious competition until 1962, when Wilkinson Sword intro- duced its stainless-steel blade. Since that time, the Wilkinson Sword-Schick Com- pany has evolved into Gillette’s primary competitor. Through the years, Gillette has strived to stay on the cutting edge of shaving technology in a market that thrives on innovation. This focus led to a game of one-upsmanship with Schick as each com- pany introduced three-bladed (Gillette’s Mach3), four-bladed (Schick’s Quattro), and five-bladed (Gillette’s Fusion) razors in rapid succession. Now, under the ownership and guidance of Procter & Gamble, Gillette faces a saturated U.S. market that fluctu- ates only when newer, more innovative products are introduced. However, many analysts believe that Gillette and Schick have reached the end of truly meaningful product innovation. Additionally, new competition from subscription-based services such as Dollar Shave Club is eating into Gillette’s profits.

Given these challenges, Gillette faces the challenge of further expanding its already dominant 66 percent share of the $12.8 billion global market. And in a market that thrives on innovation, Gillette must determine how to balance the continued investment of resources in research and development, searching for “the next big thing” in the global shaving market, and capturing more consumers who have become increasingly sensitive to the high prices associated with innovative shaving technology.

THE HISTORY OF INNOVATION AT GILLETTE Born in Fond du Lac, Wisconsin in 1855, King Camp Gillette learned from an early age the importance of self-sufficiency, innovation, and invention. After his family’s home was destroyed in the Chicago Fire of 1871, Gillette left home at 16 years of age to become a traveling salesman. His experiences in his position led him to Wil- liam Painter, the inventor of the disposable Crown Cork bottle cap, who assured

CASE

*Michael D. Hartline, Florida State University, prepared this case for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation. Editorial assistance was pro- vided by Jennifer Sawayda, University of New Mexico, and Florida State University MBA students Leanne Davis, Brent Scherz, Matthew Cagiolosi, Daniel Breiding, Nicole Dyche, Colin Roddy, and Ryan Wach.

475

him that a successful invention was one that was purchased over and over again by a satisfied customer. In 1895, after several years of considering and rejecting possible inventions, Gillette suddenly had a brilliant idea while shaving one morning. It was an entirely new razor and blade that flashed in his mind—a razor with a safe, inex- pensive, and disposable blade. According to reports, Gillette’s idea wasn’t immedi- ately successful, as technical experts said it would be impossible to produce steel that was hard, thin, and inexpensive enough for commercial development of the dis- posable razor blade. However, in 1901, with the technical partnership of MIT gradu- ate William Nickerson, Gillette produced the original Gillette safety razor and blade, establishing the foundation for the Gillette Safety Razor Company.

Since 1901, the Gillette Company has led the personal care and grooming indus- try through manufacturing efficiency and exceptional marketing. By offering “consu- mers high-quality shaving products that would satisfy basic grooming needs at a fair price,” Gillette effectively captured more than half of the entire razor and blades mar- ket across the globe. In fact, in the 1920s Gillette said the following of his razor prod- uct: “There is no other article for individual use so universally known or widely distributed. In my travels, I have found it in the most northern town in Norway and in the heart of the Sahara Desert.”

Gillette’s success in this market carried the company through economic droughts in the 1920s and 1930s, as well as allowed it to weather the storm brought on by World War II. Encouraged by the successful development of his razor pro- ducts, Gillette felt inclined to challenge his entrepreneurial spirit with the acquisition of two unrelated ventures: the Toni Company, maker of do-it-yourself home permanent-wave kits, and the Paper Mate Pen company, producer of retractable, refillable ballpoint pens. Although seemingly profitable at first, both acquisitions proved to be unsuccessful as sales and revenue waned due to declining demand and innovative competitors, such as Bic’s low-priced disposable (nonrefillable) pens from France. As a result, Gillette’s unblemished track record for success became tarnished as net profits slumped to $1.33 per share in 1964.

Despite this fact, Gillette reigned as a visionary monopoly in the personal shav- ing market until 1962, when English firm Wilkinson Sword introduced its stainless- steel blade. Distracted by its experimental ventures with the Toni Company and Paper Mate, Gillette neglected to foresee the impact this small company could have on its core business of razors and blades and began to lose a substantial portion of market share. Although Gillette retained 70 percent of the market at the time, the arrival of Wilkinson Sword’s stainless-steel blade initiated a transition in niche mar- kets. For the first time, Gillette executives were unsure how to respond. Should they introduce their own stainless-steel blade or ignore the rival and hope that its market niche would remain small? Fortunately for Gillette, Wilkinson Sword lacked the resources necessary to exploit the niche markets it had penetrated and where it com- peted with Gillette. Eventually, Wilkinson Sword sold much of its blade business to Gillette. Unfortunately, by this time Gillette had already begun to feel the impact of competition as its market share had dipped to an all-time low of 49 percent.

To revive Gillette’s market share and bounce back from unsuccessful product ventures into do-it-yourself permanent-wave kits and refillable ballpoint pens, Gill- ette’s new CEO Vincent Ziegler spearheaded an acquisition and product develop- ment campaign. Ziegler was often described as aggressive, marketing oriented, and ambitious for the company, believing in diversification through the acquisition of companies in other business segments. Under Ziegler’s leadership, Gillette pur- chased the following companies: Braun AG (German manufacturer of small appli- ances), S.T. Dupont (French maker of luxury lighters), Eve of Roma (high-fashion perfume), Buxton Leather goods, Welcome Wagon, Inc., Sterilon hospital razors, and Jafra Cosmetics (home sales). Unfortunately, four of these acquisitions proved to be unprofitable or unsuitable and were divested, and the other three yielded low profits by Gillette’s standards. These ill ventures exposed the company to

476 Case 15 • Gillette: Why Innovation May Not Be Enough

competitive pressures, especially in the form of Bic’s disposable razors and lighters. In addition, Bic’s 19-cent disposable stick pens particularly affected the Paper Mate line of refillable pens and drove Paper Mate’s share of the retail ballpoint pen market from more than 50 percent down to 13 percent. In 1975, Gillette retaliated with the introduction of its new Write Brothers line of disposable pens and salvaged a good portion of the lost market share with heavy price promotions.

Despite these pressures, Gillette experienced moderate successes under the leadership of Ziegler with the introduction of Cricket disposable lighters and Soft & Dri antiperspirant (until the industry experienced a sharp decline in sales of the spray product due to the belief that aerosols destroy the ozone layer). Furthermore, the introduction of the Trac II razor was deemed a “great success” and thus contin- ued Gillette’s dominance in this market. Other successful product developments came under the leadership of Colman Mockler, Gillette’s next CEO, whose strategy was to cut costs and invest more money into advertising and product development. Under Mockler, Gillette experienced some of its greatest successes including memo- rable innovations such as the Atra razor, the Good News! disposable razor, and the Daisy razor for women. After these product additions, Gillette held roughly 75 per- cent of the global market in razors and blades, including a majority of the U.S. shav- ing market (razors, blades, and the leading shaving cream). By the end of 1980, Gillette’s sales rose above $2 billion for the first time in the company’s history.

The foundation of this success was the introduction of new products for the razor and blade market developed in Gillette’s home laboratories. As previously mentioned, Gillette’s Atra-Plus shaving system, which featured a refillable Atra car- tridge with a lubricating strip, overtook the Trac II as the number one selling razor. In addition, to directly compete with Bic and other razor companies, Gillette updated its Good News! line to include a disposable razor with a lubricating strip. Further- more, in the personal care segment, Gillette made several introductions, including Aapri facial care products, Dry Idea deodorant, Bare Elegance body lotion, Mink Dif- ference hair spray, White Rain hair care products, and Silkience shampoo and moist- urizers. These additions had mixed results and left Gillette still searching for the keys to success in this business segment. In the writing instruments segment, Gillette achieved moderate success with the development of Eraser Mate erasable, dispos- able pens. Also, the steady sales of Paper Mate pens and Liquid Paper correction fluids helped to maintain company performance.

THE RAZOR WARS By 1990, Gillette found itself in the interesting position of cannibalizing its own suc- cessful products with the launch of the Sensor razor. The Sensor soared in sales globally and quickly dominated the market, only to be succeeded by the Sensor Excel in 1993. This was not the first competing product produced by Gillette; how- ever, it represented the first product that was able to effectively shift consumer demand and sales away from the Atra and Trac II—Gillette’s leading products. A sim- ilar effect occurred in the women’s razor market with the development of the Sensor for Women in 1992 and the Sensor Excel for Women in 1996. As to be expected, the continued success of the Sensor family of shaving systems led to the gradual decline of the Atra and Trac II twin-blade shaving systems. However, despite this decline, the Atra and Trac II razors continued to hold decent market share positions worldwide. In addition, holding steady since 1976, Gillette’s Good News! brand maintained its position as the best-selling disposable razor in its product category worldwide.

Gillette’s internal competition heated up with the introduction of the Mach3 razor in 1998. Touting three thin blades designed to provide a closer shave with fewer strokes and less irritation, the Mach3 became Gillette’s most successful new product ever as sales rose to $1 billion in the first 18 months. Recognized for its

Case 15 • Gillette: Why Innovation May Not Be Enough 477

innovative design (blades on tiny springs), the Mach3 was named winner of the American Marketing Association’s Grand Edison Award for the best new product of 1998. Similar to the marketing strategy employed for the Sensor and Sensor Excel products, Gillette sequentially produced the Mach3 Turbo for men and the Venus system for women in an attempt to further expand the reach of Mach3 technology and market share.

In 2003, the razor wars got ugly as Gillette faced a new, more threatening com- petitor: Schick and the Quattro—the world’s first four-bladed razor. Before Schick introduced the Quattro to the market, Gillette sued Energizer holdings and its Schick division, arguing that the Quattro illegally used the same “progressive geometry” technology as the Mach3. However, despite the lawsuit, Schick was allowed to launch the Quattro. To combat the suit, Schick countersued Gillette, claiming that Gillette’s advertisements stating “the world’s best shave” and “the best a man can get” were misleading. While Gillette and Schick engaged in a legal ping-pong match, consumer preferences and purchases were changing. In addition to Schick’s Quattro for men, its Intuition for women began to encroach upon Gillette’s hold of the women’s shaving market. Schick’s total share of the U.S. market had risen 2.9 per- cent to 17 percent, while Gillette’s total share of the razor and blades market had fallen 4.3 percent to 63 percent.

To fight back, Gillette aggressively established a two-fold plan of attack for recapturing market share. This strategy included converting consumers to higher- priced razors and blades, such as the Sensor, Sensor Excel, and Mach3 lines, from the single- and twin-blade razors, and geographically expanding into the areas of Romania and the former Yugoslavia, the Soviet Union, and the Czech Republic. At the forefront of Gillette’s strategy sat its secret weapon: the Fusion—the world’s first 5 (+1) blade razor, introduced in 2006. Using a unique five-blade design with a single blade on the back of the cartridge for use in trimming moustaches and side burns, the Fusion exploded off the shelves and sold more than 4 billion razors within the first 2 months. Furthermore, the Fusion razor represented the first product intro- duction since Procter & Gamble finalized its purchase of The Gillette Company and its subsidiaries, including Braun, Duracell, and Oral-B.

Although the Fusion represented a victory for Gillette and P&G, the hype sur- rounding its initial success was quickly fleeting. Other than being more expensive than the Mach3 (each cartridge costing 75 cents to $1 more than the Mach3 car- tridge), critics questioned why five blades were needed to get the best shave when Gillette had touted its three-bladed Mach3 as “the best a man can get” since the late 1990s. In addition, Consumer Reports concluded that there were no additional per- formance benefits provided by the five-bladed Fusion, especially when compared to the Mach3. However, what was the most concerning for Gillette was the fact that sales reports indicated that the razors were outselling the cartridge refills. This trans- lated to a consumer perception akin to a “novelty” product with a lack of staying power and product loyalty. Further, from a financial standpoint, Gillette feared not reaching the sales potential for the product combination, because it is well known that razor manufacturers earn most of their profits from blade refills, not the initial razor purchase. Despite these concerns, the Fusion line continued to be a successful revenue generator for Gillette and P&G.

THE QUEST FOR CONTINUED INNOVATION Rather than continue the razor wars by producing a six- or seven-blade razor, Gill- ette focused on releasing complementary products, enhancing its existing product lines and expanding its intensely successful marketing strategy. To complement its already successful razor and blades division, Gillette sought to expand its prod- uct portfolio inside the shower doors to create the full “shower experience.” For

478 Case 15 • Gillette: Why Innovation May Not Be Enough

example, the launch of Gillette Hair Care and Body Wash for men, as well as its Clinical Strength deodorant, represented the most significant Gillette brand exten- sions outside of the razor and blades division, and aimed to reinforce the brand’s standing as the world’s leading male-grooming authority. “We’ve earned the trust of the more than 600 million men who start their day with a Gillette razor,” said Chip Bergh, Group President, Global Personal Care, Procter & Gamble. “By offer- ing superior deodorant, body washes, and shampoos, we are able to reward that trust by giving guys what they want and need in other areas of their grooming routines.”

Because razors and blades are in the maturity stage of their product life cycle, focusing on these complementary products allows the company to increase its share of customer. Defined, share of customer refers to the percentage of each cus- tomer’s needs in a particular area met by the firm and is exploited when a company with brand loyalty effectively capitalizes on that preference to market other pro- ducts. Gillette’s ability to increase its share of customer is greatly enhanced due to the resources available at Proctor & Gamble. According to Clayton C. Daley, Jr., for- mer Vice Chairman and Chief Financial Officer of P&G, “One of the objectives of the Gillette integration has been to leverage the strengths and technologies of both com- panies to develop new products. We’re generating revenue synergies by combining our superior science and male-grooming expertise to introduce these adjacent Gillette-branded products.”

In addition to complementary products, Gillette’s primary focus has been on the extension of its core business and the marketing programs that support it. Going beyond simple brand advertising, many of the initiatives and activities introduced by Gillette created a synergy between product development and marketing strategy. For example, building off the success of the Fusion and Fusion Power razor and blades, Gillette released the Fusion Power Phantom (Stealth in the United Kingdom) in February 2007. The Phantom razor featured a redesigned handle and a darker color scheme than the original Fusion Power. In addition, in February 2008, Gillette released another revision, the Fusion Power Phenom, redesigned with a metallic blue and silver satin chrome handles color scheme. In 2009, Gillette launched the gaming-inspired Fusion Power Gamer razor at the EA SPORTS Champions of Gam- ing Tournament.

Despite these advances in shaving technology, Gillette’s market research indi- cated that most men still experienced discomfort during and after shaving. In response, Gillette released the Gillette Fusion ProGlide shaving system in 2010. The ProGlide and ProGlide Power were built on the original Fusion platform and included new innovations such as 15 percent thinner and finer blades, a blade stabi- lizer, comfort guard, a 25 percent larger lubrastrip, a microcomb, a redesigned preci- sion trimmer, and a redesigned handle. Gillette’s testing with consumers showed that the Fusion ProGlide family was preferred 2-to-1 over the Gillette Fusion, which was already the world’s best-selling razor. The ProGlide family was also named Best Razor of 2011 by Men’s Health magazine. Chip Bergh speaks to the motivation and results of their efforts, “By taking the world’s number one selling razor and making it better—dramatically better—we are defining a new standard for the more than 600 million men around the world who trust their faces to Gillette.” These strategies of innovation and global expansion enabled Gillette and its products to grow market share. Today Gillette is one of the world’s most valuable brands with an estimated value of $20.4 billion.

In January 2012, Gillette launched the Fusion ProGlide Styler in conjunction with a new “Masters of Style” campaign. The campaign focused on three celebrities known for their facial hair styles, namely André 3000 Benjamin (a musician), Adrian Brody (an actor), and Gael García Bernal (an actor). The ProGlide Styler was designed to simplify facial hair styling, a complex process involving trimmers, scis- sors, and razors. P&G combined the best attributes of its Gillette and Braun brands

Case 15 • Gillette: Why Innovation May Not Be Enough 479

to develop a single, three-function product that trims, edges, and shaves. P&G also developed a new ProGlide Clear Shave Gel to accompany the 3-in-1 styling tool.

In 2014, Gillette fired the next salvo in the razor wars with its introduction of the Fusion ProGlide with Flexball technology. The Fusion ProGlide with Flexball has two pivots that allow the cartridge to swivel or pivot in three directions. The razor has six blades including the back trimmer. Gillette spent approximately $200 million in marketing materials for the razor. According to Gillette, the new razor leads to 20 percent fewer missed hairs, 23 percent increased skin contact, and cut hairs that are 23 microns shorter. The razor retailed in the United States between $11.49 and $ 12.59. Despite the hype of the new razor, the product did not receive wide-scale pos- itive reviews within the United States.

While Gillette’s bread-and-butter has always been male consumers, the company has also made great strides in appealing to the needs of women. In 2010, Gillette won the Most Profitable Solution to a Business Problem—Gold Award for its women’s Venus razor. In the past, most women’s razors were simply pink-colored men’s razors. Gillette changed the game by tackling women’s shaving issues head-on. The Venus was the first wet-shaving product designed specifically for women, and was considered to be the first shaving product that actually improved the daily shaving experience for billions of women around the world.

MARKETING STRATEGIES Gillette’s lethal combination of marketing and product development stemmed from the fact that when it came to blades and razors, Gillette was not content with merely having an innovative product. The company virtually turned its marketing into a quantitative science, pouring time and resources into marketing plans that were almost military in their precision and implementation. Gillette’s stellar marketing strategies date back to the Sensor and Sensor Excel products and can be attributed, in large part, to the success of its current market position and yearly sales volume. Focused heavily on male-dominated sports marketing activities, Gillette’s marketing program includes the following major elements:

• Gillette Stadium, home to the NFL’s New England Patriots and soccer’s New England Revolution, seats nearly 70,000 fans and has hosted numerous MSL Cup, World Cup, and NFL championships. Gillette’s sponsorship of the stadium allows it to reach a worldwide audience, as both soccer and the NFL are tremen- dously popular in Latin America and European countries. This is important because 60 percent of Gillette’s sales are generated outside the United States. Given the importance of the stadium sponsorship, Gillette extended its naming rights until 2031.

• Gillette Young Guns, which is aimed at fans of NASCAR, the NFL, and MLB, is designed to drive sales for Gillette’s premium razors and shave care products. The Young Guns campaign, which includes noted athletes such as Denny Ham- lin, Kyle Busch, Matt Ryan, Carlos Gonzalez, and Evan Longoria, promotes the fast and furious life of men though television, print, online, public relations, and event marketing tactics.

• Team Gillette is the company’s tie-in with the Olympic games. For the 2012 Sum- mer Games in London, Team Gillette consisted of 24 world-class athletes from 18 countries, including U.S. athletes Ryan Lochte (swimming) and Tyson Gay (track and field). Interestingly, 4 of the 24 athletes were from Brazil, a country where Gillette is making a strong push to promote advanced shaving technology.

• Gillette began its social media presence in 2007 when it launched on Facebook. However, the company did not take social media seriously until 2011. Gillette

480 Case 15 • Gillette: Why Innovation May Not Be Enough

now actively coordinates its marketing campaigns with Facebook and Twitter. Its U.S. Facebook page has over 1.9 million likes. Gillette also maintains active Facebook pages for India (over 2.8 million likes), Argentina (over 650,000 likes), and Venus (over 1.3 million likes). All of Gillette’s Facebook pages feature instructional videos, photos, and sweepstakes. Gillette has over 68,200 followers of its U.S. Twitter feed and over 73,500 following its Brazil feed.

One of the major reasons that Gillette focuses on sports in its marketing efforts is that sport resonates with consumers all around the globe. In virtually every world- wide market, Gillette is the dominant brand in both men’s and women’s shaving. Given that dominance, and the always present need for shaving equipment and sup- plies, it is vital that Gillette maintains top-of-mind awareness in every market that it enters. The company feels that sports marketing and sponsorship are the best ways to meet this need.

GLOBAL EXPANSION P&G discovered that the best way to gain an understanding of customer needs around the world is to perform R&D where the end product will be sold. A case in point is the Indian market. In 2005, before Gillette was acquired by P&G, it set out to market a new razor for Indian men. Many Indian men shave only a couple of times a week, often with a basin. To test its new razor, Gillette conducted product testing with Indian students at the Massachusetts Institute of Technology (MIT), who responded with rave reviews. However, the students shaved with running water, something not readily available in the Indian market. Consequently, the prod- uct launch failed. Later, however, after a product redesign and local market testing, Gillette launched the Gillette Guard to unprecedented demand among Indian men. Within 3 months of the launch, Gillette Guard became the best-selling razor in India. It now holds a 50 percent market share. The success of the Gillette Guard also pro- moted sales of Gillette’s other brands, most notably the Mach3.

Today, P&G invests about $2 billion a year in R&D—60 percent more than its closest competitor. Much of that R&D effort occurs in nations other than the United States. For instance, P&G opened the Beijing Innovation Center (BJIC) in China—a $70 million home for P&G’s regional R&D efforts. P&G now has more than 25 R&D centers around the globe aimed at creating product innovations to serve the needs of customers regionally. The success has been evident as P&G has made product launches globally in untapped markets that have allowed their share of the razors and blades market to reach 70 percent. Shipments of both the Fusion and Mach3 have been increasing in global markets at a fast pace.

PRICING STRATEGY Since 2007, Gillette has acknowledged that product quality and efficient marketing are the core value propositions that set the pace for the success of Gillette’s product lines. “If you have a significantly and demonstrably superior product or service, it really is quite meaningful,” said Benson P. Shapiro, a marketing consultant in Con- cord, Massachusetts. However, “If you don’t put it into language that gives a promise of something better, people won’t try it.” Gillette learned this firsthand during the lat- est economic recession. Despite the company’s stellar marketing efforts, U.S. unit sales of Gillette’s blade cartridges fell roughly 10 percent every month from 2008 through 2009. When combined with the fact that Gillette consistently raised prices to offset higher production costs, it became clear that U.S. consumers had slowed their purchases of Gillette’s razor products. This was especially evident when

Case 15 • Gillette: Why Innovation May Not Be Enough 481

compared to the sales of private-label disposable razors, which increased 19 percent over the same time frame. Still, Gillette’s solid gains in foreign markets offset some of the decline in the U.S. market.

Approximately 1.3 billion men worldwide shave with a razor blade. Within the United States, 94 million men ages 15 years and older remove hair in some fashion. Of these, 85 percent prefer to wet shave with a razor blade. The average American male begins to shave between the ages of 14 and 16 and continues to shave for the majority of his life. In addition, 100 million women in the United States, ages 13 years and older, remove hair in some fashion. Of these women, 94 percent prefer to shave with a razor blade. On average, men in the United States shave 5.33 times per week, or 24 times a month, and spend approximately $20 to $25 per month for razors, blades, and shave preparations.

These statistics point to a potential vulnerability in Gillette’s pricing strategy. The retail price of a Fusion ProGlide razor for men and a four-pack of replacement cartridges is almost $29. Step up to Fusion ProGlide Power with Flexball technology and the price increases to about $35. Gillette claims that the ProGlide cartridge will last up to 5 weeks with daily use. Although the veracity of this claim is up for debate, evidence shows that most men and women like less expensive three-blade razors just as well. A Consumer Reports test showed that 18 of 26 men who tested the Fusion razor would not switch from their regular three-blade razor. Reviews for the Fusion ProGlide razor on Amazon.com are mixed, with a four-star average. A price comparison of various brands in the men’s and women’s wet-shaving market is shown in Case Exhibit 15.1.

Gillette’s own research shows that men try to reduce the cost of shaving by cleaning their razors with toothbrushes or in the dishwasher to make the blades last longer. The high cost of shaving has led to a number of start-ups that are attempting to shake up the market. For example, the Dollar Shave Club (www.dollarshaveclub. com) signed up 12,000 customers in its first 48 hours of operating online. Customers can choose from three service offerings: The Humble Twin ($1.00 per month, plus $2 shipping and handling, for five twin-blade cartridges), The 4X ($6.00 per month for four four-bladed cartridges), or The Executive ($9.00 per month for four six-bladed cartridges). The company explains its service this way:

Like most good ideas, The Dollar Shave Club started with two guys who were

pissed off about something and decided to do something about it.

We got tired of spending $15-$20 every time we bought razor blades. We asked

ourselves, did we really need all this fancy technology in our shave: a vibrating

handle, LED guide-lights, 8-blades, and grip that could steady a 9-iron? The

answer was a defiant “No”!

We felt like we’d been over-marketed to. “Big Shave” companies keep telling us

we need more expensive equipment, but why? Shaving should be simple. It sure

used to be. Look at old photos of your father & grandfather. They didn’t have

extreme shave gear, and they look pretty handsome, don’t they?

So… we teamed up with one of the world’s leading blade manufacturers and

created signature 2, 4, and 6 blade razors. They’ve got everything you need in a

shave: stainless steel blades, lubrication bars, and pivoting heads.

But we didn’t stop there… We thought: You know what also sucks… for-

getting to pick up razor blades at the store and then making excuses about why we

look like we slept in a motel last night. Razor blades are one of the most regular pur-

chases we make. Someone should just send us our blades once a month.

And just like that, the Dollar Shave Club was born! For as little as $1/

month, a great shave delivered right to your door. No more superfluous shave tech.

No more stubble in the status meeting. Just a great shave for a low-commitment.

The Dollar Shave Club has been so successful that it went from generating $4 million in sales in 2012 to $65 million just 2 years later. Dollar Shave Club claims it

482 Case 15 • Gillette: Why Innovation May Not Be Enough

CASE EXHIBIT 15.1 Wet-Shaving Products and Prices

Brand Initial Price of Razor Price of Replacement

Cartridges

Men’s Products Gillette Mach3 $8.59 5 for $15.49

12 for $29.69 Mach3 Turbo $8.99 5 for $17.49

10 for $29.29 Fusion $9.49 4 for $16.99

8 for $29.09 Fusion Power $12.99 4 for $15.99

8 for $31.99 Fusion ProGlide $9.99 4 for $18.99

12 for $46.79 Fusion ProGlide Power Flexball $13.99 4 for $21.79

8 for $36.99 Schick Hydro 5 $11.99 4 for $15.79

8 for $26.79 Hydro 5 Sensitive $11.99 4 for $15.79 Quattro Titanium $10.99 4 for $13.79

8 for $20.99 Bic Comfort 3 Sensitive 8 for $6.99

Comfort Twin 10 for $6.99 Twin Select Sensitive 10 for $3.99 Flex 3 4 for $7.29 Flex 4 3 for $7.29

Women’s Products Gillette Venus Embrace $6.99 4 for $17.99

6 for $22.99 Venus Swirl with FlexBall razor $9.99 4 for $20.99 Venus & Olay 5 $11.99 6 for $36.99

Schick Hydro Silk Sensitive Care $13.49 4 for $19.99 Quattro for Women $9.99 4 for $14.99

8 for $23.99 Intuition Revitalizing Moisture $13.99 3 for $17.99 Intuition Pure Nourishment for Dry Skin

$12.99 3 for $14.99

Bic Silky Touch 3 4 for $3.99 Soleil Original 4 for $6.99 Soleil Bella 3 for $7.29 Soleil Savvy 4 for $8.29

SOURCE: Lowest posted prices at Drugstore.com, http://www.drugstore.com and CVS.com, http://www.cvs.com (accessed May 29, 2015).

Case 15 • Gillette: Why Innovation May Not Be Enough 483

sells 5.4 percent of razor cartridges in the United States. A similar company, RazWar.com, has launched in Belgium with similar funding from venture capitalists. Another company is planned in the United Kingdom. Not to be outdone, Amazon offers Gillette Mach3 Cartridges for as low as $2.06 each if customers agree to regu- lar shipments. ProGlide cartridges are also available. Gillette responded with new advertising focusing on the value and long-lasting attributes of the ProGlide system. However, early signs show that Gillette’s U.S. market share is declining. To counter the Dollar Shave Club and similar competitors, Gillette introduced its own online subscription-based service. It claims that for $1 a week, men can use pricier blades that are higher in quality than rivals’. With the trend in online razor purchases, it is clear that Gillette and P&G will face significant pressure on their premium pricing strategy as more consumers learn about other options.

LOOKING TOWARD THE FUTURE To succeed in the future and effectively win the razor wars and beyond, Gillette must find new ways to innovatively out-produce or out-market the competition. In essence, the challenge for Gillette is to push the envelope without creating innovations that are seen as trivial. This requires massive expenditures on R&D that lead to products capa- ble of recouping their investments. As Gillette looks to future technological innova- tions, the company must be concerned about broad consumer acceptance and whether its research investment can be recovered in a reasonable time frame.

Similarly, when considering possible increased global expansion, Gillette must consider the roles that culture, religion, and Western influences play in shaving behav- ior. For example, internationally, 15 percent of the world’s male population does not shave due to discomfort from shaving; 7 percent do not shave for religious reasons; and 3 percent simply do not care to shave. Being aware of these behavioral and cul- tural characteristics will allow Gillette to effectively segment and target those they will be most successful in transforming into customers. Similarly, although some women in European countries choose not to shave for cultural reasons, others now prefer to engage in the activity as they increasingly embrace Western lifestyles. For example, younger generations of European women are being influenced by American movies and television that depict women with sleek underarms and legs. By fostering adoption of the shaving lifestyle, Gillette can effectively capitalize on this trend. In fact, if European women embraced hair elimination at the same pace as American women, total blade sales would increase by hundreds of millions each year.

In many ways, Gillette and Procter & Gamble are in an enviable position. Gill- ette’s products dominate the global wet-shaving market. The company continues to grow, although slowly, in many markets. Still, many industry analysts wonder if Gill- ette has reached the end of its historical innovation in wet-shaving technology. Thus far, Schick has not responded to the Fusion ProGlide with a breakthrough innovation of its own; however, it did respond by creating its own five-bladed razor called the Hydro. Given that the wet-shaving market is mature, Gillette must depend on innova- tion to perpetuate its dominance (whether in product design or marketing), as well as create an appeal that entices customers to try and purchase its products. By align- ing that appeal with what customers value, Gillette has the potential to establish a position of long-term product maturity and market dominance. In that position, it won’t matter how many blades a competitor puts on a razor.

SOURCES Jenn Abelson, “Gillette sharpens its focus on women,” Boston Globe, January 4, 2009, http://www. boston.com/business/articles/2009/01/04/gillette_sharpens_its_focus_on_women/?page=3 (accessed May 29, 2015); “A competitive edge in a cutthroat market,” BusinessWeek, November 22, 2005, http://www.

484 Case 15 • Gillette: Why Innovation May Not Be Enough

businessweek.com/stories/2005-11-22/a-competitive-edge-in-a-cutthroat-market (accessed May 29, 2015); Business Wire, “Gillette launches new facial hair styling tool with three masters of style,” BusinessWire, January 18, 2012, http://www.businesswire.com/news/home/20120118005270/en/Gillette- Launches-Facial-Hair-Styling-Tool-Masters (accessed May 29, 2015); Business Wire, “Gillette reaches agreement to sell White Rain Brand, St. Paul Manufacturing Center,” Gillette News Release, March 23, 2000, http://www.thefreelibrary.com/Gillette+Reaches+Agreement+to+Sell+White+Rain+Brand,+St. +Paul…-a060583068 (accessed May 29, 2015); Business Wire, “Gillette reaches definitive agreement to sell stationery products business,” Gillette News Release, August 22, 2000, http://www.thefreelibrary. com/Gillette+Reaches+Definitive+Agreement+to+Sell+Stationery+Products…-a064460868 (accessed May 29, 2015); Business Wire, “Gillette rings in new era as world’s leading male grooming brand,” Reuters, July 11, 2008, http://www.reuters.com/article/pressRelease/idUS119120+11-Jul-2008 +BW20080711 (accessed May 29, 2015); Ellen Byron, “Gillette sharpens its pitch for expensive razor,” Wall Street Journal, October 6, 2008, http://online.wsj.com/article/SB122325275682206367.html (accessed May 29, 2015); Mercedes M. Cardona, “Gillette’s Mach3 captures top prize at Edison Awards,” Advertising Age, March 22, 1999, p. 54; Scott Cendrowski, “How long does a razor really last? Gillette comes clean,” CNNMoney, June 7, 2012, http://management.fortune.cnn.com/2012/06/07/gillette- razor-lifespan (accessed May 29, 2015); “Cutting Edge: Moore’s Law for razor blades,” Economist, March 16, 2006, p. 8; CVS website, Personal Care, Shaving, http://www.cvs.com/shop/Personal-Care/ Shaving/_/N-3tZ54aZ2k?pt=CATEGORY (accessed May 29, 2015); Dollar Shave Club, About Us, http:// www.dollarshaveclub.com/about-us (accessed May 29, 2015); Drugstore.com website, Personal Care, Shaving & Hair Removal, http://www.drugstore.com/personal-care/shaving-and-hair-removal/qxg180638-0 (accessed May 29, 2015); Forbes.com LLC, “The world’s most valuable brands: #26 Gillette,” Forbes, http://www.forbes.com/companies/gillette/ (accessed May 29, 2015); Chris Gayomali, “I shaved with Gillette’s New Fusion ProGlide with FlexballTM Technology Razor, and lived to bloodily tell about it,” Fast Company, April 30, 2014, http://www.fastcompany.com/3029800/i-shaved-with-gillettes-new-fusion- proglide-with-flexball-technology-razor-and-lived-to-bloo (accessed May 29, 2015); Gillette Corporate website, http://www.gillette.com (accessed May 29, 2015); “Gillette’s edge,” BusinessWeek, January 19, 1998, pp. 70–77; Emily Glazer, “A David and Gillette story,” Wall Street Journal, April 12, 2012, http:// online.wsj.com/article/SB10001424052702303624004577338103789934144.html (accessed May 29, 2015); Jeff Gluck, “Only two NASCAR drivers make the cut for new Gillette ‘Young Guns’ class,” SB Nation, January 8, 2011, http://www.sbnation.com/nascar/2011/1/8/1922795/gillette-young-guns-denny-hamlin- kyle-busch-matt-ryan-ray-rice-evan-longoria-carlos-gonzalez-2011 (accessed May 29, 2015); Vijay Govindarajan, “P&G innovates on razor-thin margins,” Harvard Business Review Blog Network, April 16, 2012, http://blogs.hbr.org/cs/2012/04/how_pg_innovates_$on_razor_thin.html (accessed May 29, 2015); “History of Gillette razors,” The Executive Shaving Company, http://www.executive-shaving.co. uk/gillette-history.php (accessed May 29, 2015); Mike Isaac, “Where profit margins are hefty, online upstarts muscle in,” New York Times, September 23, 2014, http://www.nytimes.com/2014/09/24/ technology/24shave.html (accessed May 29, 2015); Jeremy Kahn, “Gillette loses face,” Fortune, November 8, 1999, pp. 147–152; Adam Lashinsky, “The cutting edge of care,” Fortune, March 9, 2015, http://fortune.com/2015/03/09/dollar-shave-club/ (accessed May 29, 2015); Mark Maremount, “Gillette’s new strategy is to sharpen pitch to women,” Wall Street Journal, May 11, 1998, p. B1; Mark Maremount, “Gillette to shut 14 of its plants, lay off 4,700,” Wall Street Journal, September 29, 1998, p. A3; Mark Maremount, “Gillette to unveil women’s version of Mach3 razor,” Wall Street Journal, December 2, 1999, p. B14; Theo Merz, “Gillette unveils a new weapon in the shaving Cold War,” Telegraph, February 16, 2015, http://www.telegraph.co.uk/men/fashion-and-style/11411297/Gillette-unveils-a-new-weapon-in- the-shaving-Cold-War.html (accessed May 29, 2015); Jack Neff, “Gillette shaves prices as it’s nicked by rivals both new and old,” Advertising Age, April 9, 2012, http://adage.com/article/news/gillette-shaves- prices-nicked-rivals/234019 (accessed May 29, 2015); Robert Passikoff, “The best razor on earth (underwater, too),” Forbes, May 20, 2014, http://www.forbes.com/sites/robertpassikoff/2014/05/20/the- best-razor-on-earth-underwater-too/ (accessed May 29, 2015); Molly Prior, “Fighting for the edge in shaving (blade wars: shaving report),” March 8, 2004, http://www.accessmylibrary.com/article-1G1- 114404714/fighting-edge-shaving-blade.html; “The power of fusion?” Consumer Reports Health (subscription required for access), July 2006, http://www.consumerreports.org/health/healthy-living/ beauty-personal-care/skincare/shaving/gillette-fusion-razor-7-06/overview/0607_fusion-razor_ov.htm (accessed July 31, 2012); Proctor & Gamble 2011 Annual Report, http://www.pg.com/annualreport2011/ index.shtml (accessed May 29, 2015); Razor Gator, “Shaving stats for men,” Razor-Gator.com, http:// www.razor-gator.com/ShavingFacts/shaving_stats_for_men.htm (accessed May 29, 2015); RazWar website, http://www.razwar.com (accessed May 29, 2015); Jennifer Reingold, “Can P&G make money where people earn $2 a day?” CNNMoney, January 6, 2011, http://features.blogs.fortune.cnn.com/2011/ 01/06/can-pg-make-money-in-places-where-people-earn-2-a-day (accessed May 29, 2015); Christina Rexrode, “As US slows, P&G turns to developing markets,” Inquirer Business, February 2, 2012, http:// business.inquirer.net/42663/as-us-slows-pg-turns-to-developing-markets (accessed May 29, 2015); Glenn Rifkin, “Mach3: Anatomy of Gillette’s latest global launch,” Strategy + Business, April 1, 1999, http:// www.strategy-business.com/article/16651?gko=927cc (accessed May 29, 2015); Mark Ritson, “5 Reasons Gillette is the best a brand can get,” Branding Strategy Insider, June 23, 2009, http://www. brandingstrategyinsider.com/2009/06/5-reasons-gillette-is-the-best-a-brand-can-get.html (accessed May

Case 15 • Gillette: Why Innovation May Not Be Enough 485

29, 2015); Mike Sandoval, “The benefits of traditional wet shaving,” Shaving 101, October 14, 2010, http://www.shaving101.com/index.php/education/double-edge-shaving/164-money-magazine-got-it-wrong. html (accessed May 29, 2015); E. B. Solomon, “Schick cuts into Gillette’s market share,” St. Louis Business Journal, April 20, 2012, http://www.bizjournals.com/stlouis/print-edition/2012/04/20/schick- cuts-into-gillettes-market-share.html?page=all (accessed May 29, 2015); William Symonds, “Gillette’s five-blade wonder,” BusinessWeek, September 15, 2005, http://www.businessweek.com/bwdaily/dnflash/ sep2005/nf20050915_1654_db035.htm; Paul Ziobro, “Gillette subscription service takes aim at Dollar Shave Club,” Wall Street Journal, April 29, 2014, http://blogs.wsj.com/corporate-intelligence/2014/04/29/ gillette-subscription-service-takes-aim-at-dollar-shave-club/ (accessed May 29, 2015); Paul Ziobro and Serena Ng, “Gillette’s new weapon in razor arms race,” Wall Street Journal, April 18, 2014, http://www. wsj.com/articles/SB10001424052702304626304579507933926905704 (accessed May 29, 2015).

QUESTIONS 1. Evaluate product innovation at Gillette throughout its history. Has Gillette been

a victim of its own success? Has product innovation in the wet-shaving market come to an end? Explain.

2. What do you make of the razor wars, first between Gillette and Schick, and now with online competitors? Does Gillette face a serious threat from competitive inroads? Explain.

3. What actions would you recommend over the next 5 years that could help Gill- ette maintain its worldwide dominance in the shaving market? What specific marketing program decisions would you recommend? Should Gillette be wor- ried about its pricing strategy? Explain.

486 Case 15 • Gillette: Why Innovation May Not Be Enough

IKEA Slowly Expands Its U.S. Market Presence*

Synopsis: IKEA is known around the world for its stylish, quality, and low-cost furniture and home furnishings. The company’s success is based on a strategy of operational excellence in production, supply chain operations, and marketing. IKEA—wildly popular in Europe—has leveraged its brand reputation to penetrate markets in other countries. However, its penetration of the U.S. market has been hampered by a weakened economy and the inconsistency between the traditional U.S. furni- ture market and IKEA’s low-cost operating philosophy. IKEA must find a balance between its opera- tional excellence strategy and U.S. consumers’ demands for customization, good service, convenience, and quality.

Themes: Operational excellence, target marketing, product design, branding strategy, positioning, global marketing, pricing strategy, supply chain strategy, retailing, implementation, customer rela- tionships, SWOT analysis, strategic focus

When 17-year-old Ingvar Kamprad founded IKEA in 1943, he could not have imag- ined that his company would become one of the world’s most popular and iconic brands or the world’s largest home furnishings retailer. The IKEA name is a combina- tion of Kamprad’s initials (IK) and the first letters of the farm (Elmtaryd) and village (Agunnaryd) in southern Sweden where he grew up. From the beginning, IKEA was founded on different principles—namely frugality and low cost. Most furniture companies offer personalized service and advice in lavish showrooms where sales- people compete for sales commissions. Kamprad, however, recognized that custo- mers are willing to trade-off typical amenities to save money. Today, the no-frills frugality is the cornerstone of the IKEA caché and one of the reasons for its immense popularity.

IKEA operates under a unique corporate structure. When Kamprad founded the company, he wanted to create an independent organization that would be sustain- able for the long term. Since 1982, the Stichting INGKA Foundation, a Netherlands- based charitable foundation, has owned the IKEA Group. Many estimates peg the foundation as one of the world’s wealthiest charities—worth an estimated $36 billion. INGKA Holding B.V., also based in the Netherlands, is the parent company for all IKEA Group companies. The IKEA Group includes IKEA of Sweden (which designs and develops all IKEA products), Swedspan (which makes environmentally friendly wood panels), Swedwood (which makes all IKEA furniture), the sales companies that operate IKEA stores, and all purchasing and supply chain functions. This type of ownership is unique in that the foundation is a nonprofit organization designed to promote innovation in architectural and interior design. Some criticize IKEA’s ownership as an arrangement that leverages the uniqueness of Dutch law to avoid taxes and prevent a hostile takeover attempt.

Today, IKEA is Sweden’s best-known export. The company had 2014 worldwide sales totaling EUR 28.7 billion. Roughly 69 percent of IKEA’s sales come from opera- tions in Europe, with North America and Russia/Asia/Australia contributing 16 and 15 percent, respectively. The company has 147,000 employees and more than 360 IKEA stores in 45 countries, with 315 stores in 27 countries belonging to the IKEA

CASE

*Christin Copeland and Michael D. Hartline, Florida State University, prepared this case for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation.

487

Group. The remaining stores are owned and operated by franchisees. The first U.S. IKEA store opened in Philadelphia in 1985. Today, there are 51 stores in North America. IKEA had originally planned to have 50 stores operating in the United States by 2010, but the last worldwide economic recession slowed IKEA’s plans.

THE IKEA CONCEPT The backbone of IKEA’s success is “The IKEA Concept,” which serves as both the company’s vision and core operating philosophy:

The IKEA Concept: Provide functional, well-designed furniture at prices

so low that as many people as possible will be able to afford them. Creat-

ing a better everyday life for the many people.

The IKEA Concept guides every aspect of how the company’s products are designed, manufactured, transported, sold, and assembled. To transform the IKEA Concept into reality, the company provides stylish, functional, low-cost home fur- nishings that customers must assemble themselves. Furniture products are shipped in flat packs to save money on manufacturing and distribution, which IKEA then passes on to customers in the form of lower prices at retail. To compensate for the customer having to “do it yourself,” IKEA offers other services that make this propo- sition a little more attractive. These extra services include in-store child-care and play areas, restaurants, and longer store hours. To help visitors prepare for this expe- rience, IKEA provides its customers with pencils, paper, tape measures, store guides, catalogs, strollers, and shopping bags. IKEA even offers delivery for the bulky items that customers cannot carry themselves. For those who want to carry their own bulky furniture home, IKEA rents carracks for convenience. IKEA stores are designed as a circle so that everything can be seen no matter in what direction the customer is headed. The aisles are wide to reduce traffic congestion that could occur when customers stop to look at different showrooms and displays.

PRODUCTION IKEA’s key objective regarding production is to establish and maintain long-term supplier relationships. When designing new products, IKEA actually begins with a target retail price in mind, and then works with thousands of suppliers in over 50 countries to find the lowest cost way to manufacture that product. Its oldest suppli- ers are Swedish; however, other major suppliers are located in China (23 percent), Poland (18 percent), Italy (8 percent), and Lithuania (4 percent). IKEA accounts for approximately 10 percent of the furniture market in each country where its products are manufactured.

One strategy that IKEA has implemented is to place its trading offices in coun- tries around the world to localize operations. This gives IKEA leverage to increase production capacity (that is, labor hours and purchasing materials) when needed. The strategy also allows IKEA to closely monitor manufacturing performance. Producing high-quality products at the lowest possible cost drives IKEA’s production mentality. In addition to local trading offices, IKEA also manages production through long-term contractual relationships based on bulk buying. Committing to high- volume purchases over a longer time frame allows IKEA to dramatically cut costs. Additionally, IKEA is in a position to offer its suppliers financial assistance if neces- sary. This optimization is key to achieving the low-cost business model that IKEA wants to maintain.

Cost consciousness dominates all aspects of IKEA’s operations. In land acquisi- tion, IKEA locates stores on property just outside of target cities. In production, the

488 Case 16 • IKEA Slowly Expands Its U.S. Market Presence

remnants of fabric and wood used for products are used to create more products. IKEA uses natural colors to cut production costs and increase social responsibility to the environment through the manufacturing process. Across its distribution cen- ters, flat packages are used to efficiently transport the large bulk of products from suppliers to IKEA stores. The use of flat packages lowers warehousing and distribu- tion costs and the environmental impact throughout the supply chain.

IKEA’s production goals also include a strong sustainability component. The com- pany has partnered with the World Wildlife Federation and the Forestry Stewardship Council to ensure that raw materials (primarily wood and cotton) come from responsi- bly managed and sustainable sources. IKEA helps educate cotton farmers in India, China, Pakistan, and Turkey to use sustainable methods, such as reducing water, pesti- cides, and fertilizers. Currently, 41 percent of wood materials and 76 percent of cotton materials come from sustainable sources. In addition, IKEA has a goal to obtain 100 per- cent of its energy from renewable resources. The company operates its own wind tur- bines and solar systems to power both stores and distribution centers. Approximately 32 percent of palm oil that IKEA purchased comes from segregated, certified sources.

MARKETING IKEA’s marketing program has four focal areas: product design, catalogs, advertis- ing, and public relations/promotions. IKEA’s product designs are arguably the most important part of its brand image. Customers love the clean lines, frugal styling, and caché that ownership affords. IKEA admits that creating stylish and inexpensive pro- ducts is a challenging task. To fulfill its vision, the company’s full-time and freelance designers work closely with in-house production teams to pair the appropriate mate- rials with the least costly suppliers. Though the work is tedious, IKEA is well known for its product innovation.

IKEA’s main marketing focus is its printed catalog, where the company spends the majority of its annual marketing budget. The 300- to 400-page catalog is produced in 38 different editions in 17 languages for 28 countries. New for 2013, the IKEA catalog fea- tured special symbols that are readable by IKEA’s iPhone and Android apps. When users scan the symbols, they are presented with an augmented reality experience that allows customers to see the company’s products more in depth. The apps also offer 3D models of products and how-to videos. A similar experience is available online where customers can view products and download free programs to help redesign kitchens, bathrooms, and bedrooms. The website also provides information about each store’s local events and promotions, services, and product specials. Because the website offers limited online purchasing capabilities, customers are often forced to visit the stores to buy products. About 10,000 products are featured online.

In addition to the catalog, IKEA also uses television, radio, and Internet-based communication to reach its target customers. The company’s advertising is intended to increase both brand awareness and store traffic. Some of the company’s advertis- ing is controversial, especially ads that portray gay customers or sexually suggestive storylines. IKEA has even taken its advertising to the streets in Italy (with a graffiti campaign) and in Paris (where a complete IKEA furnished apartment was installed in the Paris underground). Advertising, however, is not a major focus of IKEA’s pro- motional efforts. The company prefers to rely on word-of-mouth communication. This is reflected in its use of social media. For example, IKEA’s Facebook pages provide up-to-date information on company activities, sales, and local store events. IKEA’s U.S. Facebook page boasts over 4 million “likes,” while its international pages have several hundred thousand “likes” each. Several thousand fans typically follow each local store page.

Local store events are another key marketing focus for IKEA. The San Diego, California, store offers birthday parties for children on the first Tuesday of every

Case 16 • IKEA Slowly Expands Its U.S. Market Presence 489

month. The Atlanta, Georgia, store features activities such as culinary tasting events, face painting, college student activities, and fundraising events for local charities. In a unique promotion prior to the grand opening of the Atlanta store, IKEA managers invited locals to apply for the post of Ambassador of Kul (Swedish for “fun”). The five winners of an essay contest received $2,000 in vouchers, had to live in the store for 3 days, sleep in the bedding department, and participate in contests. Finally, the entire IKEA family holds “Antibureaucracy Weeks” on a regular basis. These are times when executives work on the shop floor or stockroom, operate cash registers, and even load trucks and cars for IKEA customers. This simple step goes a long way in upholding the IKEA culture and maintaining employee morale.

IKEA’s marketing program is designed to be thrifty but still effective. In fact, all of IKEA’s marketing activities are designed to maintain a downward pressure on operating expenses. For example, in most stores, IKEA does not accept checks— only cash or credit cards, including its own “IKEA Card.” This helps to reduce IKEA’s accounts receivable and eliminates the need to maintain an expensive collec- tions operation. With policies like these, it is not surprising the company’s operating margin of 10 percent is among the best in the home furnishings industry. And, despite its low-cost and price model, IKEA aims to cut prices by an average of 2 to 3 percent every year.

THE FUTURE OF IKEA’S U.S. EXPANSION IKEA considers the United States an important part of its plans for global expansion. The U.S. standard of living is higher than most countries; however, most American consumers actively buy into the cost-conscious mentality. The value of the U.S. dollar is stable and not prone to wide exchange rate fluctuations. The United States has very high Internet usage, and IKEA’s sustainability efforts are welcomed by a wide margin of the consuming public. Another factor that makes the United States favorable to IKEA is its melting pot of cultures. The IKEA Concept can appeal to the different lifestyles and ways of life found in the United States.

Despite these advantages, IKEA must address two key issues regarding U.S. expansion. The first is the need to adapt to the preferences of U.S. consumers. American consumers are very demanding and tend to reward marketers that go out of their way to address individual tastes and needs. Further expansion into the U.S. market will require IKEA to adapt its offerings and stores to local tastes—a market- ing strategy that is much more expensive to deliver and contrary to IKEA’s cost-conscious operating philosophy. IKEA’s franchised structure is well suited to this task. This allows IKEA to get closer to customers by hiring local employees that represent the same values, cultures, and lifestyles of the local area. Another adaptation issue involves IKEA’s promotional strategy, which must be tailored to U.S. standards. For example, most of IKEA’s television commercials are considered too “edgy” for American viewers.

The second key issue is quality. Although American consumers are increasingly value-driven, they also demand quality products. In this regard, IKEA’s low-cost, do-it-yourself concept misses the mark for many potential furniture consumers. Many Americans view self-assembled furniture as being lower in quality, and similar to the types of furniture one might buy at Walmart or Target. The particleboard construction often used in these products has tarnished consumers’ perceptions of do-it-yourself furniture.

Facing these challenges, IKEA’s U.S. expansion has moved slowly. The company opened only two U.S. stores in 2014 in Miami and Kansas City. It plans to focus expansion in upcoming years on the Midwest, with plans to open a store in St. Louis, Missouri, in 2015 and another store in Columbus, Ohio, in 2017. IKEA’s low-cost, do-it-yourself marketing strategy is not a perfect match for U.S. tastes in

490 Case 16 • IKEA Slowly Expands Its U.S. Market Presence

furniture retailing, nor does the company have the financial resources and marketing experience to roll out a large number of products and stores simultaneously. The most recent economic conditions have not helped either. As the company looks toward further expansion into the U.S. market, it must consider a number of relevant issues in both its internal and external environments.

IKEA’S STRENGTHS Low-Cost Structure IKEA’s low-cost structure has been the very essence of its success. Being that low- cost measures are ingrained into IKEA’s corporate DNA, the company does not have a hard time tailoring its operations around this business model. This model also pairs nicely with customers who appreciate IKEA’s operating style. Further- more, IKEA’s low-cost structure has kept the company profitable while competitors, such as Pier 1 in the United States, are struggling. Despite the state of the economy, IKEA has continued to see positive revenue growth. IKEA has continued to use every possible avenue to maintain its low-cost structure and competitiveness without compromising customer value.

Corporate Culture IKEA values antibureaucracy in its operations, and strongly follows worker and environmental protection rules. These tenets are codified in the company’s code of conduct known as “The IKEA Way.” The company’s culture is based on the core values of togetherness, cost consciousness, respect, and simplicity. Kamprad once said, “Work should always be fun for all colleagues. We all only have one life; a third of life is work. Without desire and fun, work becomes hell.” To ensure the com- pany culture is upheld, the company looks for very specific traits in potential employees. IKEA’s managers look for people who “display a desire to learn, motiva- tion to do things better, common sense, and the ability to lead by example.” The com- pany believes in keeping employees happy by engaging in activities throughout the year that promote well-being and job satisfaction. These are all reasons that IKEA has been ranked in Fortune magazine’s annual list of “100 Best Companies to Work For” on many occasions.

Do-It-Yourself Approach IKEA maintains its low-cost business model by creating a different furniture shopping experience. IKEA supplies customers with all possible materials needed to complete their shopping when they enter the store (that is, measuring tape, paper, and pencils). The floor has showrooms displaying IKEA furniture with multi- ple accessories that will accentuate the style. With this approach, customers do not have to be bothered with salespeople who work on commission. Customers can pick and choose among the different options of accessories that they would like to use with furniture. Many customers appreciate the feeling of accomplishment that comes from doing things for themselves. For those customers who do not like the DIY approach, IKEA offers assembly services and home delivery options.

Added Amenities Although IKEA is not set up as a traditional furniture store, the company does provide several added amenities. IKEA rents car racks that customers can use to get bulky items to their homes. IKEA also provides child-care services to give

Case 16 • IKEA Slowly Expands Its U.S. Market Presence 491

parents time to shop. Once their children are in a safe place, parents will delegate more time to browsing and purchasing IKEA furniture and accessories. The com- pany also provides restaurants in some of its stores to encourage customers to stay a little longer. Offering breakfast, lunch, and dinner, the restaurants also generate strong profits for the company each year. Customers can also schedule consultations with professional designers. In sum, the IKEA experience is designed to make the stores destinations in themselves. IKEA wants the customer to feel as if there is not a rush to leave the store and customers can do more than just shop for furniture.

Brand Image There is no denying that brand image is a key strength for IKEA. Even if they have not been in a store, most people around the globe recognize the blue and yellow logo as a symbolic representation of trendy, modern, and fashionable furniture. Customers flock to the furniture giant to experience what BusinessWeek has referred to as the “IKEA world, a state of mind which revolves around contemporary design, low prices, wacky promotions, and an enthusiasm that few institutions can muster.”

Part of IKEA’s brand strength comes from its wide array of products that exude a high-quality, low-cost focus. The company offers home furnishings and appliances for the bedroom, bathroom, and kitchen, as well as furniture for business offices. In addition to home furnishings, the company sells accent pieces and everyday products such as rugs, linens, and kitchen utensils. Some of the company’s newest ventures include home building materials. Customers can build an IKEA home with reasonably priced, environmentally friendly materials.

Strong Focus on Sustainability IKEA considers the environmental impact of every step in its business processes by making products that are environmentally conscientious and cost-effective. Suppli- ers are required to comply with strict environmental standards and to use as much renewable, reusable, and recycled materials as possible. With wood as a primary source of material, IKEA also employs field specialists to ensure the wood obtained comes from responsibly managed forests. From product design to disposal, the organization truly practices what it preaches in terms of its environmental responsibilities.

IKEA’S WEAKNESSES Do-It-Yourself Approach Some customers may not appreciate IKEA’s do-it-yourself approach. IKEA targets young, cost-conscious customers who want stylish furniture. However, these same consumers also like convenience and usually have the money to pay for it. For them, the time and effort involved in shopping for furniture, bringing it home, and assembling it may not be worth it. Furthermore, some customers enjoy having a con- versation with a salesperson and getting individual ideas and advice from employees. These customers may continue to buy furniture from traditional retailers.

Limited Customization To ensure alignment with its low-cost structure and easy-assembly promise, IKEA’s products are very basic and simple in terms of both structure and design. The ability for individualized customization is limited. Many American consumers prefer items with more style, accent, and color options.

492 Case 16 • IKEA Slowly Expands Its U.S. Market Presence

Limited Promotional Expenditures IKEA does not spend an enormous amount of money on promotion. Instead, the company depends on word of mouth and catalogs to generate a buzz among cus- tomers. Sadly, most U.S. consumers are not highly responsive to catalog market- ing, making IKEA’s bread-and-butter promotion less efficient and cost-effective for the U.S. market. American consumers also watch television and use the Inter- net more often than consumers in other countries. However, most of IKEA’s television commercials are unknown outside of the United Kingdom. Further, many of the company’s ads are controversial and not suitable for a U.S. audi- ence. As a result of these issues, IKEA may be missing out on a larger potential customer base.

Weak Online Support Many aspects of the company’s website leave much to be desired. Although product descriptions are available, many of the items shown cannot be ordered online. IKEA basically forces consumers to shop at their nearest brick-and-mortar locations. Because IKEA’s physical presence in the U.S. market is small, the company is losing valuable sales due to its lack of online buying options.

IKEA’S MARKET OPPORTUNITIES Economic Conditions IKEA’s low-cost, high-quality strategy fits with a relatively weak economy, helping it to overcome economic downturns. As many consumers look for ways to cut per- sonal spending, IKEA is well positioned to be a logical choice for home furnishings for the cost-conscious customer. Most American consumers still ascribe to a value- dominant logic when it comes to purchasing goods and services. However, these customers want not only high quality at a good price but also convenient access and time-saving services. IKEA can play into this buying logic but may have to expand its service offerings to increase customer convenience.

Demand for Convenience The number of consumers shopping online continues to rise. With the average sched- ule getting busier, technically savvy consumers increasingly enjoy the convenience and ease of online shopping. Comparison shopping is also a convenience afforded by the Internet that could allow IKEA to dominate the low-cost, quality furnishing sector. Offering convenient online shopping experiences would fit well with IKEA’s low-cost structure because it would allow them to sell items using a distribution network instead of a complete reliance on physical stores and their higher overhead costs. Convenience factors within IKEA’s stores, such as restaurants and daycare, are already well suited to customer needs.

Popularity of Stylish, but Sustainable, Products Swedish design—the simple, futuristic, edgy, and fashionable designs offered by IKEA—is popular among consumers overall. In addition to style, consumers are also interested in “green” products that enhance the sustainability of natural resources. The recent corporate movement toward “green” practices is becoming more prevalent, and consumers are becoming more aware of a company’s carbon footprint. IKEA is well positioned to take advantage of this trend.

Case 16 • IKEA Slowly Expands Its U.S. Market Presence 493

IKEA’S MARKET THREATS Competition Several other large retailers are vying for the do-it-yourself furniture segment. As consumers become more cost conscious in today’s economy, the offerings of tradi- tional bricks-and-mortar stores such as Home Depot, Target, and Walmart become more acceptable. IKEA also faces online competitors such as BluDot.com and Furniture.com. BluDot is a direct IKEA brand competitor that also claims to offer quality, unassembled furniture at low prices. It too offers simply designed and modern furniture. Furniture.com is a product competitor that uses the traditional furniture store concept but offers the ease and convenience of online price and product comparison.

Changing Customer Needs/Tastes Customers’ needs and tastes constantly change. At some point, customer interest in Swedish design and do-it-yourself furniture will wane. This is especially true as the U.S. population continues to age. The typical baby-boomer consumer demands quality, values his or her time, and appreciates convenience more than saving a few dollars. Overall, there are relatively fewer younger customers—IKEA’s main target market—as compared to baby boomers. The end result is a likely decline in demand for trendy, low-cost furniture. IKEA’s low-cost and high-quality designs might appeal to some baby boomers, but the inconveniences associated with the company’s DIY approach probably send them looking elsewhere.

Mature Market Preferences Most American consumers have preconceived notions of what the “best of the best” is when it comes to specialty furniture and furnishings purchases. For example, the average consumer may not purchase a mattress from IKEA because it is not a Select Comfort, Sealy, or Simmons mattress. Although IKEA focuses strongly on high-quality products, in the U.S. market the company must compete with well-established companies that have earned significant brand awareness.

SOURCES Roberto Baldwin, “IKEA’s augmented reality catalog will let you peek inside furniture,” Gadget Lab, July 20, 2012, http://www.wired.com/gadgetlab/2012/07/ikeas-augmented-reality-catalog-lets-you-peek- inside-the-malm (accessed May 29, 2015); Meera Bhatia and Armorel Kenna, “IKEA has slowest sales growth in more than a decade,” Bloomberg, September 17, 2009, http://www.bloomberg.com/apps/ news?pid=20601085&sid=aSvPmp60dCL8 (accessed May 29, 2015); Katherine Boccaccio, “Ikea continues U.S. expansion with new Ohio store,” Chain Store Age, January 27, 2015, http://www. chainstoreage.com/article/ikea-continues-us-expansion-new-ohio-store (accessed May 29, 2015); “Business: Flat-pack accounting; IKEA,” Economist, May 13, 2006, p. 76; Kerry Capell, “IKEA: How the Swedish retailer became a global cult brand,” BusinessWeek, November 13, 2005, http://www. businessweek.com/stories/2005-11-13/ikea (accessed May 29, 2015); Kerry Capell, “Online extra: Sweden’s answer to Sam Walton,” BusinessWeek, November 13, 2005, http://www.businessweek.com/ stories/2005-11-13/online-extra-swedens-answer-to-sam-walton (accessed May 29, 2015); Cora Daniels, “Create IKEA, make billions, take bus,” CNNMoney, May 3, 2004, http://money.cnn.com/magazines/ fortune/fortune_archive/2004/05/03/368549/index.htm (accessed May 29, 2015); Sarah Firshein, “IKEA unleashes brand-new graffiti-art campaign in Italy,” Curbed, April 23, 2012, http://curbed.com/archives/ 2012/04/23/ikea-unleashes-new-graffitiart-campaign-in-milan-subway.php (accessed May 29, 2015); IKEA website, http://www.ikea.com (accessed May 29, 2015); IKEA San Diego website, http://www.ikea.com/ us/en/store/san_diego (accessed May 29, 2015); Inter IKEA Systems B.V. website, http://franchisor.ikea. com/ (accessed May 29, 2015); Inter IKEA Systems B.V., “About IKEA catalogue,” IKEA, http://m.ikea. com/ms/en_JP/customer_service/faq/help/about_ikea/ikea_catalogue.html (accessed May 29, 2015); Inter

494 Case 16 • IKEA Slowly Expands Its U.S. Market Presence

IKEA Systems B.V., “About the IKEA Group,” IKEA, http://www.ikea.com/ms/en_US/this-is-ikea/ company-information/#sustainable-growth (accessed May 29, 2015); Inter IKEA Systems B.V., “FAQ,” IKEA, http://www.ikea.com/us/en/customerservices/faq#/faqAnswers2-1 (accessed May 29, 2015); Inter IKEA Holding, “Franchise division,” Inter IKEA Group, http://inter.ikea.com/en/divisions/franchise/ (accessed May 29, 2015); Inter IKEA Systems B.V., IKEA 2011 yearly summary, http://www.ikea.com/ ms/en_US/pdf/yearly_summary/Welcome_inside_2011.pdf (accessed May 29, 2015); Inter IKEA Systems B.V., “IKEA breaks ground on Swedish retailer’s future St. Louis store, opening Fall 2015, as expansion in Midwestern U.S. continues,” IKEA, January 24, 2014, http://www.ikea.com/us/en/about_ikea/ newsitem/fy14_wk26_IKEA_breaks_ground_stlouis (accessed May 29, 2015); Inter IKEA Systems B.V., IKEA Group Sustainability Report FY14, 2014, http://www.ikea.com/ms/en_US/pdf/sustainability_ report/sustainability_report_2014.pdf (accessed May 29, 2015); Inter IKEA Systems B.V., IKEA Group Yearly Summary FY13,http://www.ikea.com/ms/en_US/pdf/yearly_summary/ikea-group-yearly-summary- fy13.pdf (accessed May 29, 2015); Inter IKEA Systems B.V., “Store locations,” IKEA, http://www.ikea. com/ms/en_JP/about_ikea/facts_and_figures/store_openings.html (accessed May 29, 2015); Erika Kinetz, “IKEA to Invest $1.9B in India to Open 25 Stores,” Seattle Times, June 22, 2012, http://www. seattletimes.com/business/ikea-to-invest-19b-in-india-to-open-25-stores/ (accessed May 29, 2015); Philip Reynolds, “IKEA cleans house,” Forbes, June 25, 2009, http://www.forbes.com/2009/06/25/ikea- redudancies-furniture-markets-equities-retail.html (accessed May 29, 2015); Casey Ross, “IKEA pulls plan for Somerville Store in Assembly Square,” Boston.com, July 20, 2012, http://www.boston.com/ realestate/news/2012/07/19/ikea-pulls-plan-for-somerville-store/PfHS9vViEaT8p5rcBmWuxO/story.html (accessed May 29, 2015); “Sweden’s IKEA posts record earnings, growth slows,” Bay Ledger News Zone, September 16, 2009, http://www.blnz.com/news/2009/09/17/Swedens_Ikea_posts_record_earnings_ 8604.html (accessed August 14, 2012); Swedspan website, http://www.swedspan.com (accessed May 29, 2015).

QUESTIONS 1. Given the SWOT analysis presented in the case, what are IKEA’s key competitive

advantages? What strategic focus should the company take as it looks to further expand into the U.S. market?

2. What factor is the biggest reason for IKEA’s growth and popularity: value or image? Which is more important in the U.S. market? Why?

3. What strategic alternatives would you suggest IKEA employ to further penetrate the U.S. market?

4. Speculate on what will happen at IKEA stores as they are adapted to fit local tastes. Is the company’s trade-off of service for low cost sustainable in the long term?

Case 16 • IKEA Slowly Expands Its U.S. Market Presence 495

Uber: The Opportunities and Challenges of Market Disruption*

Synopsis: By seamlessly connecting consumers and independent contractors (drivers) through its smartphone app, Uber has changed the ride-sharing landscape for consumers and the traditional taxi and limousine industries. The company has experienced incredible success in a short period of time, but not without a fair amount of criticism and backlash. Uber faces a number of challenges including internal struggles, legal and regulatory challenges, and global issues. In the United States, major cities are considering regulating Uber, while some foreign countries are considering outright bans on Uber’s services. Uber will have to adapt its marketing strategy to address both domestic and international challenges.

Themes: Marketing strategy, mobile marketing, branding, legal/regulatory environment, risk assessment, pricing issues, customer safety, market expansion, global marketing

Uber Technologies, Inc. (Uber) is a tech startup that provides ride-sharing ser- vices by facilitating a connection between independent contractors (drivers) and riders with the use of an app. Uber has expanded its operations to 58 countries around the world and is valued at around $41 billion. Because its services cost less than taking a traditional taxi, in the few years it has been in business Uber and similar ride-sharing services have upended the taxi industry. The company has experienced resounding success and is looking toward expansion both domes- tically and abroad.

However, Uber’s rapid success is creating challenges in the form of legal and regulatory, social, and technical obstacles. The taxi industry, for instance, is arguing that Uber has an unfair advantage because it does not face the same licensing requirements as they do. Others accuse Uber of not vetting their drivers, creating potentially unsafe situations. An accusation of rape in India has brought this issue of safety to the forefront. Some major cities are banning ride-sharing services like Uber because of these various concerns. Additionally, Uber has faced various law- suits, including a lawsuit filed against them by its independent contractors. Its pres- ence in the market has influenced lawmakers to draft new regulations to govern these ride-sharing systems. Legislation can often hinder a company’s expansion opportunities because of the resources it must expend to comply with regulatory requirements.

Uber has been highly praised for giving independent contractors an opportunity to earn money as long as they have a car while also offering convenient ways for con- sumers to get around at lower costs. Its “Surge Pricing” technique has been criticized for charging higher fares during popular times, but it is also becoming a model for other companies such as Zappos in how they compensate their call center employ- ees. The biggest issues Uber faces include legal action because drivers are not licensed, rider and driver safety, protection and security of customer and driver information, and a lack of adequate insurance coverage. To be successful Uber must address these issues in its marketing strategy so it can reduce resistance as it expands into other cities.

CASE

*Noushin Laila Ansari, Lecia Weber, Sederick Hood, Christian Otto, and Jennifer Sawayda developed this case under the direction of O. C. Ferrell and Linda Ferrell, University of New Mexico. This case was prepared for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation. ©O. C. Ferrell and Linda Ferrell, 2015.

496

BACKGROUND In 2009, Travis Kalanick and Garrett Camp developed a smartphone application to connect drivers-for-hire with people needing rides to a destination in their city. This innovative service was originally founded as UberCab, Inc., a privately held company. It was renamed Uber Technologies, Inc. in 2010. Co-founders Kalanick and Camp designed the mobile-app for iPhone and Android smartphones, enabling customers to get an estimated time of arrival from the driver on their smartphone with the use of an integrated GPS system.

Consumers liked the Uber app because of its convenience and ease-of-use. After the mobile-app is downloaded to their smartphones, passengers can pay for the rides- for-hire service through a third party, known as a Transportation Network Company (TNC), using the UberX platform that scans or takes a picture of their credit card with the smartphone’s camera. Uber does not maintain automobile inventory for drivers, such as a fleet of taxicabs or limousines. Instead, each driver-for-hire supplies his or her own personal automobile, gas, insurance, and maintenance of his or her own car. Drivers can drive their own cars where they want when they want, providing them with significant freedom to run their own small businesses. A surge pricing model is used during times of peak demand. While Uber initially charged about a 20 percent commission, it later introduced a tiered structure in some cities that charged different commission rates depending upon the number of hours worked. For instance, in San Francisco a driver pays Uber a 30 percent commission on the first 20 rides in the week, 25 percent on the next 20 rides, and 20 percent on rides after that.

Due to the increased demand in the rides-for-hire industry, Uber predicts $10 billion in revenue, with an estimated total valuation of $40 billion. Uber recently relocated to new headquarters in San Francisco, providing office space for nearly 700 employees. In the near future, it plans to expand to two 10-story buildings, increasing its total square feet of office space utilization to more than 700,000 square feet.

Uber Technologies, Inc. provides rides-for-hire services to 57 countries and more than 250 cities worldwide. Uber maintains a presence in major U.S. cities including Los Angeles, San Francisco, New York City, Chicago, Washington D.C., and Boston. These cities have the most driver–partners, although many other cities also have driver–partners. Uber technology-based products are available under these various brands: Uber, UberX, UberXL, UberPOP, UberBLACK, UberSUV, UberTAXI, UberLUX, and the logistics-request brands referred to as UberRUSH, UberFRESH, and UberEATS. Uber has also upgraded its current navigation service (Google and Apple) with deCarta Mapping Company. This new mapping system will continue to improve Uber’s navigation and location technologies.

UBER’S MARKETING PROGRAM Like all companies, Uber must understand its target market and maintain a strong mar- keting mix to be successful. Due to its technology, Uber does not have as many con- straints as taxicabs, although it has encountered regulatory obstacles and some public resistance. The Uber business model takes advantage of the smartphone technology of consumers and links them with independent drivers as their cabs. This provides a more potentially efficient and less expensive way to purchase transportation.

PRODUCTS Uber’s service products are digitally mediated via a smartphone app that consumers download. When they want to request a ride, they can use the app to contact a driver in the near vicinity. The Uber app allows consumers to track the location of the car and alerts them to when the car arrives.

Case 17 • Uber: The Opportunities and Challenges of Market Disruption 497

Uber offers a few different services to customers based upon their preferences. Its most used service is UberX, the low-budget option. Drivers use their own vehicles to transport passengers. UberTAXI is an app that connects licensed taxi drivers to passengers. UberBLACK is for consumers who desire to have their own private driver in a high-end sedan. UberSUV connects users with SUVs, while UberLUX is the most expensive service with luxury vehicles. UberXL is similar to UberSUV but costs 50 percent less. Other low-cost options include UberPool, which allows passengers to share rides and split the costs, and UberPOP, a service costing less than UberX because it utilizes nonprofessional drivers and smaller cars. Despite the opportunities UberPOP provides, its use of nonprofessional drivers has led to regula- tory issues in different countries.

Uber is also attempting to expand into other services. Its UberRUSH app launched in New York is used for package deliveries. UberFRESH and UberEATS are meal delivery apps that partner with local restaurants to offer meals to consu- mers within 10 minutes. These new services are allowing Uber to branch out and expand its services into different businesses.

DISTRIBUTION One major reason Uber is so popular is because its app allows users to contact any drivers in the near vicinity. Drivers use the Uber app to provide them with directions. It is estimated that Uber has more than 162,000 “active” drivers in the United States who make at least four trips. The number of drivers has doubled every 6 months for the past 2 years. Los Angeles, San Francisco, New York, Chicago, Washington D.C., and Boston have the most drivers in the United States. Most Uber drivers offer their ride-sharing services on a part-time basis.

To be successful, Uber engages in strategic partnerships with other companies. In the United States, it has partnered with American Express. Card members enrolled in American Express’s Membership Rewards program can earn points with Uber for rides. Strategic partnerships with local firms are especially important as Uber expands internationally because it allows the company to utilize the resources and knowledge of domestic firms familiar with the country’s culture. Uber has partnered with Times Internet in India, Baidu in China, and America Movil in Latin America.

PRICING Uber uses its app to determine pricing. Once the passenger completes his or her ride with an Uber partner–driver, the person’s credit card is charged automatically. Fees charged for speeds over 11 miles per hour are charged by the distance traveled. Uber operates on a cost leadership basis, claiming that it offers lower rates than taxis. However, the app OpenStreetCab suggests that Uber might be more cost-efficient only when the fare is more than $35.

Uber uses an algorithm to estimate fees charged when demand is high. Called surge pricing, Uber has even applied for a patent for this type of system. This “peak pricing” strategy is not too different than when utilities or flights charge higher prices when demand is high. Passengers are alerted during times where the price is higher. However, the extent of the pricing increase has been questioned, as some consumers believe Uber uses this high demand to “price gouge” passengers.

In some situations, Uber’s surge pricing has led to considerable criticism. During one New Year’s Eve, pricing surged up to seven times the normal price. During a hostage crisis in Sydney, Australia, Uber charged as much as four times the normal price as an influx of people struggled to evacuate. During ice storms and

498 Case 17 • Uber: The Opportunities and Challenges of Market Disruption

snowstorms, surge pricing may be applied. Uber responded by claiming its price hikes encouraged more drivers to pick up passengers in the area, but consumers were outraged about the hostage crisis situation. Within an hour Uber agreed to refund users in the area who paid the higher prices. In extreme shortages, prices are sometimes hiked to as high as 6 to 8 percent. On the one hand, it can be argued that surge pricing increases the number of drivers during times of high demand. It is estimated that the number of drivers increases by 70 to 80 percent due to surge pric- ing. On the other hand, consumers believe this is a form of price gouging and that Uber capitalizes on emergency situations such as the Sydney hostage crisis. Uber has to reconcile these different situations in order to create a pricing strategy consid- ered fair by its users.

PROMOTION Uber has engaged in a number of promotional activities to make its brand known. Often it adopts buzz-marketing strategies to draw attention to its services. For instance, to celebrate National Ice Cream Month, Uber launched on-demand ice cream trucks in seven major cities. In one promotion, Uber partnered with General Electric to offer free DeLorean rides to San Francisco users reminiscent of the movie Back to the Future. Uber also uses promotion to portray its benefits compared to its rivals. For instance, Uber assumed a combative advertising approach to its major rival Lyft through a Facebook ad campaign. Uber advertising often stresses the con- venience and low cost of its ride-sharing services.

However, like all companies, Uber must take care to ensure that its advertising could not be construed as misleading. A lawsuit was filed in the U.S. District Court in San Francisco stating that Uber violated the 1946 Lanham Act that prohibits false advertising. Taxi companies claimed, for instance, that Uber’s drivers do not have to undergo fingerprinting in California as part of background checks, and yet it uses advertising such as “the safest ride on the road” and sets “the strictest safety stan- dards possible,” as well as Uber’s $1 “Safe Rides Fee.” According to the taxi drivers, these deceptive advertising practices take customers away from their services and are therefore leading to economic harm.

UBER FACES CHALLENGES Uber faces a number of challenges including internal struggles, legal and regulatory challenges, and global issues. In the United States, major cities are considering regu- lating Uber. However, it faces even more challenges as it expands internationally as some countries are opting to ban Uber or certain services that it offers. Uber will have to adapt its marketing strategy to address both domestic challenges within the United States as well as to the various laws enforced in different countries.

INTERNAL CHALLENGES—DRIVER SATISFACTION Uber operates in an industry where trust between strangers is vital. This trust ensures a safe and comfortable ride for both passenger and driver. Uber has devel- oped a rating system to help assure this trust and reliability between passengers and drivers, called a rideshare ratings system. Rideshare rating systems pose a unique challenge for Uber because of the way they are set up and the level of rider objectivity. Uber’s insistent policy of maintaining a five-star fleet can put drivers at a disadvantage. Uber rivals have similar policies; for instance, Lyft tells customers that anything less than five stars indicates unhappiness with the ride.

Case 17 • Uber: The Opportunities and Challenges of Market Disruption 499

Low driver scores can mean drivers are forced to take remedial classes where they learn about safe driving techniques and driver etiquette. Those who fail to increase their scores risk suspension or permanent deactivation. Because consu- mers have different views of what constitutes quality, it can be argued that Uber dri- vers are placed at the mercy of the consumer’s mood.

Drivers have also expressed unhappiness with Uber’s pay. Uber will often lower fare rates in order to gain a competitive advantage in different markets, which cuts into driver earnings. Additionally, drivers are driving their own cars and spending their personal funds on upkeep and insurance. In 2014, drivers working with Team- sters Local 986 launched the California App-based Drivers Association (CADA), an Uber drivers’ Union. More cities have started their own unions.

Uber has begun to guarantee hourly earnings of $10 to $26 per hour for its drivers, but to qualify drivers have to comply with Uber’s rules including accepting 90 percent of ride requests, doing one ride per hour, and being online 50 out of 60 minutes. Critics say these restrictions effectively keep drivers from working for other ride-sharing services. Uber drivers are independent contractors and not employees of the company, so they have the option to work for competitors. However, these new criteria may be a way to keep drivers working for Uber and no one else.

This independent contractor status has also created controversy for drivers. Dri- vers claim that Uber’s requirements make them more employees than independent contractors. For instance, Uber has certain rules about types of car and soliciting business. Disgruntled drivers have staged protests and filed lawsuits against the firm. Although these lawsuits are limited to California, they can set a precedent for other lawsuits throughout the country. If the juries decide Uber drivers qualify as employees, Uber would either have to compensate them according to their employee status or relinquish some control over driver requirements.

LEGAL CHALLENGES Regulation is a constant challenge for Uber. As it becomes more popular, Uber will become subject to more legal and regulatory requirements common to other big businesses. For instance, the Americans with Disabilities Act is becoming a chal- lenge for Uber. Since the Uber service is usually operated within a driver’s personal vehicle, many of the vehicles are not wheelchair friendly.

Taxi lobbying groups are also pressuring local governments to block Uber in many cities. They claim that Uber hurts their business and has an unfair advantage, as Uber drivers are not subject to the same restrictions as licensed taxi drivers. Cities have taken action against Uber by blocking ordinances that provide a path to legali- zation for mobile ride-booking apps and issuing cease-and-desist orders. Some U.S. airports such as Salt Lake City have restrictions on Uber.

In addition to having an unfair competitive advantage, another accusation levied against Uber is that it does not adhere to proper safety standards. Allegedly, Uber drivers were involved in three rapes in Delhi, India; Chicago; and Boston. These rapes have harmed Uber’s reputation and cast its safety into serious question. A law- suit was filed against Uber in San Francisco for the wrongful death of a 6-year-old girl. The lawsuit alleged that a driver was distracted using the UberX app when he struck and killed the girl. Uber responded by claiming that the driver was not an agent for Uber and was not en route or transporting a passenger at the time of the accident. Once again, this brings up the issue of how much Uber should be responsible for its drivers as independent contractors.

To reestablish its reputation for safety, Uber has added a “safe ride checklist” to its app that is a pre-pickup notification that encourages riders to confirm the license plate number and verify their driver’s name and appearance before entering a

500 Case 17 • Uber: The Opportunities and Challenges of Market Disruption

vehicle. They have also added a team of safety and fraud experts to authenticate dri- vers and a dedicated incident-response team to address rider issues in India.

Insurance is another criticism. Although Uber’s website claims that it offers $1 million in liability insurance plans for its drivers, some states are issuing warnings stating that rideshare insurance may not cover them should there be an accident. Many states are reconsidering insurance requirements in light of this issue, and insurance firms such as GEICO and MetLife have begun offering insurance packages for ride-sharing services.

GLOBAL EXPANSION Uber has adopted the motto “Available locally, expanding globally” to describe the opportunities it sees in global expansion. International expansion is a major part of Uber’s marketing strategy, and it has thus far established the ride-sharing service in 57 countries. Uber is correct in assuming that consumers from other countries would also appreciate the low cost, convenience, and freedom that its app services offer.

Even though it is successful in some countries, many countries have regulatory hurdles that have caused trouble for Uber to successfully operate in these areas. Per- haps the biggest is failure to obtain licenses even though they offer many of the same services as a taxi. Case Exhibit 17.1 highlights all countries where Uber (a) is driving with no restriction, (b) experiences legal problems, is in a legal dispute, or is threat- ened by a ban, or (c) has been banned. As it can be seen, the most restrictions are outside of the United States.

Many, if not all, of the instances involve banning Uber or Uber services due to the lack of professional licenses for drivers. For instance, in Taiwan authorities claim that Uber services violate highway laws by not having transport-licenses to operate legally. The ministry of Economic Affairs has looked into the possibility of revoking Uber’s business registration. In Spain, Uber shut down its ride-sharing service after a judge ruled that Uber drivers are not legally authorized to transport passengers by unfairly competing against licensed taxi drivers. In Australia, Victoria

CASE EXHIBIT 17.1 Geographic Scope of Uber’s Legal Challenges

SOURCE: Taxi Deutschland.

Case 17 • Uber: The Opportunities and Challenges of Market Disruption 501

and New South Wales ruled Uber’s app to be illegal due to safety concerns. Police in Cape Town, South Africa, impounded 33 cars operating with the Uber app because the drivers did not have a taxi license. Bans have also been instituted in France, India, and Germany.

FRANCE In 2011, Paris became the first city outside of the United States where Uberset up operations. However, an attempt was made to ban UberPOP because drivers do not need to be licensed. French police even raided Uber’s Paris office. A French law was passed mandating that operating a service that connects passengers to nonlicensed drivers is punishable with fines over $300,000 and up to 2 years in prison. Hundreds of Uber drivers in France were issued fines for operating illegally.

Uber challenged that law, claiming that it is unconstitutional because it hinders free enterprise. A French court decided against banning UberPOP and sent the case to a higher court. This has generated strong criticism from taxicab officials in France as they claim that they have to license drivers while Uber is currently free from this restriction.

INDIA India is Uber’s second largest market after the United States. India rejected Uber’s application for a taxi license. In New Delhi a woman’s rape allegation led to a ban against app-based services without radio-taxi permits in the capital. In response to the alleged rape, Uber began installing “panic button” and tracking features to its app. Uber also began offering its service in New Delhi without charging booking or service fees.

Despite these changes, Uber continued to run afoul of Indian authorities. India asked Internet service providers to block Uber’s websites because it continued to operate in the city despite being banned. However, it did not ban the apps them- selves because doing so would require it to institute the ban across the entire coun- try. Uber must tread carefully to seize upon opportunities in India without violating regulatory requirements. This is more difficult as Uber drivers are independent contractors who set their own schedules and make their own decisions about whether to work.

GERMANY Uber provides its ride-sharing service in Germany’s five biggest cities, namely Frank- furt, Berlin, Hamburg, Munich, and Düsseldorf. In 2014, Frankfurt’s court filed an injunction against Uber. A nationwide ban was instituted against Uber’s UberPOP services after taxicab operators asked for an emergency injunction, but it was over- turned because the judge determined they waited too long to file the injunction.

However, in 2015 a German court banned Uber services if they used unlicensed drivers. Uber argued in court that the company itself is only an agent to connect driver and rider. Rules that apply to taxi services supposedly do not apply, and all services are deemed to be legal, according to Uber. The court ruled that Uber’s busi- ness model clearly infringes the Personal Transportation Law, because drivers trans- port riders without a personal transportation license. The injunction includes a fine of more than $260,000 per ride for noncompliance. If the injunction is breached, drivers could go to jail for up to half a year, in addition to an imposition of fines. The German Taxi Association (Taxi Deutschland) was pleased with the outcome,

502 Case 17 • Uber: The Opportunities and Challenges of Market Disruption

claiming that taxi services will remain in the hands of qualified people and keep everyone safer.

Despite the ruling, an Uber spokesperson said that the company would not give up on Germany because UberBLACK and UberTAXI services will remain unaffected by the District Court’s verdict. UberBLACK and UberTAXI use licensed taxis and lim- ousine drivers.

CONCLUSION The long-term viability of Uber depends on managing future risks in five key areas:

• Drivers: The number of disgruntled drivers could get out of control if Uber increases its profit share deductions. With recent laws mandating healthcare insurance, drivers may require healthcare coverage. Training programs to improve driving skills could reduce risk from negligent drivers, and decrease liability insurance costs.

• Competitors: Uber’s business model can be found in similar rides-for-hire services, such as Lyft, Sidecar, and Curb. More rides-for-hires could emerge, in addition to the everyday competition from taxicabs, limos, rental car businesses, air travel, trains, and city and chartered buses.

• Customer Base: Increasing the demand for rides-for-services is a continuous or future challenge that requires attention primarily to safety improvements and rates that have a cost/benefit to both passengers and drivers. Unpredictable demand is a future risk that could be met with product diversification. Currently, Uber offers technology-oriented products, and it must continue to be competi- tive in an industry where there is intense competition for rates.

• Technology: Customers are wary of downloading apps, and some online busi- nesses have been hacked for credit card information. Uber could upgrade its database security system to reduce financial or personal account information risks.

• Customer satisfaction: Some customers experience long waits, inexperienced drivers, and even sexual harassment. Better Business Bureau complaints mainly involve pricing and problems with service. Uber might use the Internet to check consumer complaints and address them to improve customer satisfaction.

The emergence of Uber has influenced many services to follow the Uber business model. There are similar firms that offer ride-sharing services, and there are firms that want to be an Uber-type business in the way they deliver goods and services. For example, Cargomatic has developed an app to help fill space on trucks. Cargomatic, which now operates in California and New York, has been called the Uber for truckers because it connect shippers with drivers who are looking for extra shipments to haul. This is signaling a shift in the industry in which people are the infrastructure rather than buildings or fleets of vehicles.

Uber faces a number of marketing challenges including regulatory and legal issues both inside and outside of the United States. Laws that protect consumers specifically target taxi services, whereas Uber defines its services as “ride sharing” and Uber as an “agent” of their “individual contractors.” However, many courts do not view its services in the same way and are forcing Uber to comply with licensing laws or stop business in certain areas.

Despite Uber’s challenges, the company has become widely popular among consumers and independent contractors. Supporters claim that Uber is revolutioniz- ing the transportation service industry. Investors clearly believe Uber is going to be strong in the market in the long run.

Uber has a bright future and expansion opportunities are great. It is therefore important for Uber to ensure the safety of their riders and the drivers. They should

Case 17 • Uber: The Opportunities and Challenges of Market Disruption 503

also adopt controls to ensure that independent contractors using their app obey rel- evant country laws. Uber has to address these issues to uphold the trust of their cus- tomers and achieve long-term market success.

SOURCES Chloe Albanesius, “Uber rolling out on-demand ice cream trucks,” PC Magazine, July 12, 2012, http:// www.pcmag.com/article2/0,2817,2407069,00.asp (accessed May 22, 2015); American Express Company, “Frequently asked questions,” https://sync.americanexpress.com/Uber/Faq\ (accessed May 22, 2015); Eric Auchard and Christoph Steitz, “German court bans Uber’s unlicensed taxi services,” Reuters, March 18, 2015, http://www.reuters.com/article/2015/03/18/us-uber-germany-ban-idUSKBN0ME1L8 20150318 (accessed May 21, 2015); Emily Badger, “Now we know how many drivers Uber has–and have a better idea of what they’re making,” Washington Post, January 22, 2015, http://www. washingtonpost.com/blogs/wonkblog/wp/2015/01/22/now-we-know-many-drivers-uber-has-and-how- much-money-theyre-making%E2%80%8B/ (accessed May 22, 2015); BBC, “Judge overturns Uber ride- sharing ban in Germany,” BBC, September 16, 2014, http://www.bbc.com/neThews/technology-29221372 (accessed May 22, 2015); Nick Bilton, “Disruptions: Taxi supply and demand, priced by the mile,” New York Times, January 8, 2012, http://bits.blogs.nytimes.com/2012/01/08/disruptions-taxi-supply-and- demand-priced-by-the-mile/ (accessed May 22, 2015); Kristen V. Brown, “Uber shifts into mid-market headquarters,” SFGate; San Francisco Chronicle, June 2, 2014, http://www.sfgate.com/technology/ article/Uber-shifts-into-Mid-Market-headquarters-5521166.php (accessed May 21, 2015); Joshua Brustein, “Uber’s other legal mess: Drivers sue over missing tips,” Bloomberg, August 29, 2013, http://www. bloomberg.com/bw/articles/2013-08-29/ubers-other-legal-mess-drivers-sue-over-missing-tips (accessed May 21, 2015); Michael Carney, “Playing favorites: Uber adds new security features, but only in select; crisis-riddled markets,” PandoDaily, January 2, 2015, http://pando.com/2015/01/02/playing-favorites- uber-adds-new-security-features-but-only-in-select-crisis-riddled-markets/ (accessed May 21, 2015); Amit Chowdhry, “Uber is acquiring mapping company deCarta,” Forbes; March 4, 2015, http://www.forbes. com/sites/amitchowdhry/2015/03/04/uber-acquires-decarta/ (accessed May 21, 2015); Susan Decker and Serena Saitto, “Uber seeks to patent pricing surges that critics call gouging,” Bloomberg, December 18, 2014, http://www.bloomberg.com/news/articles/2014-12-18/uber-seeks-to-patent-pricing-surges-that- critics-call-gouging (accessed May 22, 2015); Cotton Delo, “In quest for ride-sharing supremacy, Uber takes on Lyft with Facebook ads,” Advertising Age, January 17, 2014, http://adage.com/article/digital/ uber-takes-lyft-facebook-attack-ads/291158/ (accessed May 22, 2015); Karen Demato, “Uber and auto insurance: Regulators weigh in,” Wall Street Journal, March 31, 2015, http://blogs.wsj.com/totalreturn/ 2015/03/31/uber-and-auto-insurance-regulators-weigh-in/ (accessed May 22, 2015); Lydia DePillis, “No, driver lawsuits won’t destroy the ‘Uber for X’ business model,” Forbes, March 13, 2015, http://www. washingtonpost.com/blogs/wonkblog/wp/2015/03/13/no-driver-lawsuits-wont-destroy-the-uber-for-x- business-model/ (accessed May 22, 2015); Matt Flegenheimer, “For now, taxi office says, cab-hailing apps aren’t allowed,” New York Times, September 6, 2012, http://www.nytimes.com/2012/09/07/ nyregion/cab-hailing-apps-not-allowed-by-new-york-taxi-commission.html?_r=0 (accessed May 21, 2015); Anja Floetenmeyer, “Taxi Deutschland - Taxi Deutschland app got Uber banned throughout Germany,” Taxi Deutschland, http://www.taxi-deutschland.net/index.php/pressemitteilung/121-taxi-deutschland- app-got-uber-banned-throughout-germany (accessed May 21, 2015); Anna Gallegos, “The four biggest legal problems facing Uber, Lyft and other ridesharing; services | LXBN,” LXBN, June 4, 2014, http:// www.lxbn.com/2014/06/04/top-legal-problems-facing-uber-lyft-ridesharing-services/ (accessed May 21, 2015); Jefferson Graham, “App greases the wheels,” USA Today, May 27, 2015, p. 5B; Steven Gursten, “What’s the difference between Uber Black and UberX, and what are my rights if I am injured in an Uber car crash?” Legal Examiner, March 28, 2014, http://detroit.legalexaminer.com/automobile- accidents/uber-black-uberx-rights-if-injured/ (accessed May 21, 2015); Felicitas Hackmann, “uberPOP, Uber’s ride-sharing service, pops up in more EU cities,” VentureBeat, April 15, 2014, http://venturebeat. com/2014/04/15/uberpop-ubers-peer-to-peer-service-pops-up-in-more-eu-cities/ (accessed May 22, 2015); Ellen Huet, “Uber’s clever, hidden move: How its latest fare cuts can actually lock in its drivers,” Forbes, http://www.forbes.com/sites/ellenhuet/2015/01/09/ubers-clever-hidden-move-how-fare-cuts- actually-lock-in-its-drivers/ (accessed May 21, 2015); Ellen Huet, “Uber tests taking even more from its drivers with 30% commission,” Forbes, May 18, 2015, http://www.forbes.com/sites/ellenhuet/2015/05/18/ uber-new-uberx-tiered-commission-30-percent/ (accessed May 21, 2015); Kat Kane, “The big hidden problem with Uber? Insincere 5-star ratings,”; Wired, March 19, 2015, http://www.wired.com/2015/03/ bogus-uber-reviews/ (accessed May 21, 2015); Karun, “Times Internet and Uber enter into a strategic partnership,” Uber Blog, March 22, 2015, http://blog.uber.com/times-internet (accessed May 22, 2015); R. Jai Krishna and Joanna Sugden, “India asks Internet service providers to block Uber website in Delhi,” Wall Street Journal, May 14, 2015, http://www.wsj.com/articles/india-asks-internet-service- providers-to-block-uber-website-in-delhi-1431606032 (accessed May 21, 2015); Tracy Lien, “California taxis sue Uber, allege unfair advertising, unfair competition,” Los Angeles Times, March 18, 2015, http://

504 Case 17 • Uber: The Opportunities and Challenges of Market Disruption

www.latimes.com/business/technology/la-fi-tn-taxi-uber-unfair-competition-lawsuit-20150318-story. html#page=1 (accessed May 22, 2015); Douglas MacMillan, Sam Schechner, and Lisa Fleisher, “Uber snags $41 billion valuation,”; Wall Street Journal, December 5, 2014, http://www.wsj.com/articles/ubers- new-funding-values-it-at-over-41-billion-1417715938 (accessed May 21, 2015); Pamela MacLean, “Judges back drivers in lawsuits against Uber, others,” Boston Globe; March 12, 2015, http://www.bostonglobe. com/business/2015/03/11/uber-lyft-drivers-are-roll-push-for-employee-status/XVOgSEkF6KlXM1VT35 RcHL/story.html (accessed May 21, 2015); Making Sen$e Editor, “What it’s really like to be an Uber driver,” PBS, October 6, 2014, http://www.pbs.org/newshour/making-sense/what-its-really-like-to-be-an- uber-driver/ (accessed May 21, 2015); Devan McClaine, “Rider seeking taxi driver,” San Francisco Business Times, February 3, 2012, http://www.bizjournals.com/sanfrancisco/print-edition/2012/02/03/ rider-seeking-taxi-driver.html (accessed May 21, 2015); Patrick McGroarty, “Cape Town impounds 33 Uber cars,” Wall Street Journal, January 6, 2015, http://www.wsj.com/articles/cape-town-impounds-33- uber-cars-1420557450 (accessed May 22, 2015); Christopher Mims, “At startups, people are ‘new infrastructure’,” Wall Street Journal, March 8, 2015, http://www.wsj.com/articles/at-startups-people-are- new-infrastructure-1425858978 (accessed May 21, 2015); Eric Newcomer, “Cash burns fast for Uber-like startups that grow city by city,” Bloomberg, March 12, 2015, http://www.bloomberg.com/news/articles/ 2015-03-12/cash-burns-fast-for-uber-like-startups-that-grow-city-by-city (accessed May 21, 2015); “ObamaCare’s individual mandate: What is the tax penalty for not having health insurance,” ObamaCare Facts, http://obamacarefacts.com/obamacare-individual-mandate/ (accessed May 21, 2015); Krystal Peak, “Uber pulls in another $32M for app-based car service,” VatorNews, December 7, 20111, http://vator.tv/news/2011-12-07-uber-pulls-in-another-32m-for-app-based-car-service (accessed May 22, 2015); Saritha Rai, “Uber gets serious about passenger safety in India, introduces panic button,’ Forbes, February 12, 2015, http://www.forbes.com/sites/saritharai/2015/02/12/uber-gets-serious-about-passenger- safety-in-india-introduces-panic-button/ (accessed May 22, 2015); Brad Reed, “Meet the brilliant app that neither Uber nor cab companies want you to know about,” BGR, March 18, 2015, http://bgr.com/2015/ 03/18/uber-vs-taxi-cost/ (accessed May 22, 2015); Reuters, “Uber sued over driver data breach, adding to legal woes,” Fortune, March 13, 2015, http://fortune.com/2015/03/13/uber-sued-data-breach/ (accessed May 21, 2015); Kate Rogers, “What the Uber, Lyft lawsuits mean for the economy,” CNBC, March 16, 2015, http://www.cnbc.com/id/102503520 (accessed May 21, 2015); Sam Schechner and Tom Fairless, “Europe steps up pressure on tech giants,” Wall; Street Journal, April 2, 2015, http://www.wsj.com/ articles/europe-steps-up-pressure-on-technology-giants-1428020273 (accessed May 21, 2015); Joana Sugden and Aditi Malhotra, “Indian officials drafting national rules for Uber, other; taxi apps,” Wall Street Journal, April 7, 2015, http://www.wsj.com/articles/indian-officials-drafting-national-rules-for-uber- other-taxi-apps-1428427528 (accessed May 21, 2015); Taylor Sopper, “Uber for picture framing: Mountary launches service in Seattle, brings; experts to your door,” April 7, 2015, http://www.geekwire. com/2015/uber-for-picture-framing-mountary-launches-service-in-seattle-brings-experts-to-your-door/ (accessed May 21, 2015); Carolyn Said, “Taxis sue Uber for misleading ads on safety,” SFGate; March 18, 2015, http://www.sfgate.com/business/article/Taxis-sue-Uber-for-misleading-ads-on-safety-6142760. php (accessed May 21, 2015); Sam Schechner, “Uber wins French court reprieve over legality of low- cost service,” Wall Street Journal, March 31, 2015, http://www.wsj.com/articles/uber-wins-french-court- reprieve-over-legality-of-low-cost-service-1427794312 (accessed May 22, 2015); Samantha Shankman, “Uber gets into ride-sharing game in Paris,” Skift, February 4, 2014, http://skift.com/2014/02/04/uber- gets-into-the-ride-sharing-game-in-paris/ (accessed May 21, 2015); Aditi Shrivastava, “Uber resumes operations in Delhi post 1.5 months ban,” Economic Times, January 23, 2015, http://articles. economictimes.indiatimes.com/2015-01-23/news/58382689_1_indian-taxi-market-radio-taxi-scheme-uber- spokesman (accessed May 22, 2015); Spiegel, “Vermittlung Privater Fahrer: Gericht Verbietet Uber deutschlandweit,” http://www.spiegel.de/wirtschaft/unternehmen/uber-urteil-gericht-verbietet-uber- deutschlandweit-a-1024214.html (accessed May 21, 2015); Taxi Deutschland, “Uber legal problems worldwide,” http://www.taxi-deutschland.net/images/presse/Infografik_Uber-legal-issues_EN_v12_2015- 02-06_final.pdf (accessed May 21, 2015); Uber website, https://www.uber.com/ (accessed May 21, 2015); Uber, “Announcing UberPOOL,” http://blog.uber.com/uberpool (accessed May 22, 2015); Uber, “Introducing UberXL: Our low-cost SUV option,” May 12, 2014, http://blog.uber.com/uberxlsf (accessed May 21, 2015); Kale Williams, “Uber denies fault in S.F. crash that killed girl,” SFGate, May 7, 2014, http://www.sfgate.com/bayarea/article/Uber-denies-fault-in-S-F-crash-that-killed-girl-5458290.php (accessed May 22, 2015); Kale Williams and Kurtis Alexander, “Uber sued over girl’s death in S.F.,” SFGate, January 28, 2014, http://www.sfgate.com/bayarea/article/Uber-sued-over-girl-s-death-in-S-F- 5178921.php (accessed May 22, 2015).

Case 17 • Uber: The Opportunities and Challenges of Market Disruption 505

QUESTIONS 1. What are the strengths and weaknesses of the apps and firms that offer ride-

sharing services? 2. Since Uber is using a disruptive business model and marketing strategy, what are

the threats that the company will have to overcome to be successful? 3. Because Uber is so popular and the business model is being expanded to other

industries, will these companies be able to overcome the challenges for market success?

506 Case 17 • Uber: The Opportunities and Challenges of Market Disruption

Scentsy, Inc.: A Successful Direct Selling Business Model*

Synopsis: Scentsy was born out of a chance meeting between a near-bankrupt entrepreneur and an upstart wickless candle company. Now, over a decade later, Scentsy is the 38th largest direct selling firm in the world with over $2.2 billion in sales since its founding. Scentsy uses a direct selling party plan business model to distribute a variety of household goods such as scented wax and candle warmers, room sprays, soaps, laundry products, hand sanitizers, and bath/body products. After an incredible growth run, Scentsy is showing signs of product maturity, declining revenues, and increasing competition. To move forward, Scentsy must develop new products, maintain an appropriate product mix to serve its core customers, and find new growth opportunities.

Themes: Entrepreneurship, direct selling, multi-level marketing, product life cycle, product innova- tion, product mix, ethical marketing, philanthropy

Scentsy is a direct seller of scented candle-warmers based in Meridian, Idaho. It is the 38th largest global direct selling firm in the world, with revenues of $419 million and more than 200,000 independent consultants in the United States, Europe, and Australia. Independent consultants use a party plan direct selling model that involves throwing a Scentsy “party” to display samples and product catalogs. Today Scentsy is positioned as a home and personal products company. The diversity of products includes decorative ceramic warmers and scented wax, room sprays, fresheners, soaps, laundry products, and hand sanitizers. A number of bath and body products include shower products, lotions, perfumes, and care products. The company has even sold chocolates and cheese and has expanded into the Scentsy Commons Kitchen, operated by Guckenheimer to offer ready-made dinners and daily sack lunches. Scentsy will continue to offer new products to maintain sales growth and serve the needs of consumers.

Scentsy owes its success to a chance meeting between Orville Thompson and two entrepreneurs at a home show. Orville and his wife Heidi were close to bank- ruptcy after a failed business venture. At the show, Orville came across a booth selling wickless candles that uses a low-watt bulb to melt the scented wax. The can- dle warmers gave off a pleasant fragrance without the worries of a fire. Unlike can- dles, they could be kept on all day. Orville was quick to recognize the product’s promising possibilities and purchased the inventory from the products’ creators. The Thompsons decided to adopt a direct selling/party plan because it offered a strong distribution channel at lower costs. The Thompsons utilized independent consultants who would sell Scentsy products as their own business and receive commissions and bonuses based on their sales. The trademark wickless candle products were a hit, exceeding $2.2 billion in its first decade of existence.

BACKGROUND While Scentsy owes its widespread success to the business acumen of Orville and Heidi Thompson, the creation of Scentsy is credited to entrepreneurs Kara Egan and her sister Colette Gunnell. The team of women founded Scentsy in Salt Lake

CASE

*Jennifer Sawayda, University of New Mexico, developed this case under the direction of O. C. Ferrell and Linda Ferrell. This case is meant for classroom discussion and is not meant to illustrate either effective or ineffective handling of an administrative situation. © O.C. Ferrell and Linda Ferrell, 2015.

507

City in July 2003. The product became immensely popular—so popular, in fact, that the sisters had trouble keeping up with demand. The sisters had developed a product that consumers liked but had not developed a marketing strategy to reach mass markets.

A year later Orville Thompson was selling video game controllers at a home show in Salt Lake City when he came across the sisters’ products. Thompson was an entrepreneur in the truest sense of the word. As a child he had convinced his dad to let him purchase his own sheep flock, which he successfully bred and sold at auctions and to farmers. After marrying, Thompson worked with his mother-in-law to sell a car wax formula at fairs and trade shows. This led Orville and his wife Heidi to start their own business, Event Sales, which sold car wax, video controllers, and shammies.

After the failure of a car wax infomercial, the Thompsons were nearing bank- ruptcy. When Orville attended the home show in Salt Lake City, he had no money in the company account to pay for a booth so he made a deal with the show’s promoter to pay them at the end of the show for what he earned from selling the video control- lers. His booth was across from Egan and Gunnell. Their scented wickless candle products caught his eye. Orville recognized the uniqueness of the product and felt like with the right business model, it would become a major success. Heidi found that the scent of the bars created an emotional experience that elicited feelings and memories. The Thompsons decided to take a risk and bought out the entire remain- ing inventory from Scentsy’s owners with limited financial resources and ability to acquire loans.

Soon the Thompsons were $700,000 in debt and were borrowing money from friends and family to pay the royalty payments to Scentsy’s original owners. They started to run their business from their Idaho sheep farm. Selecting a method of dis- tribution was a top priority for the Thompsons, leading them to research different types of business models. Heidi was attracted by the Direct Selling Association’s (DSA) Code of Business Ethics and attended one of their national meetings. Impressed with how the DSA supports its members, the couple decided to adopt a direct selling party plan.

The adoption of a party plan was advantageous for many reasons. The nature of the product itself is experiential; therefore, the personal touch inherent in direct selling fits well with the scented wickless candles. With a party plan, consultants can host Scentsy parties in their homes, creating a comfortable and authentic envi- ronment where they can share their experiences with the product. Additionally, a direct selling model allows for independent consultants to operate their own busi- nesses selling Scentsy products, providing them with the flexibility and the entrepre- neurial drive to run their businesses as they see fit. This also eliminated the need for Orville and Heidi to pay salaries or taxes for employees.

The Thompsons’ first selling party only generated sales of $75. However, their second was more successful, with sales reaching $1,000. Consumers were drawn to the product. Not only did it elicit the scented fragrance of a candle, but also because the wax was melted with a light bulb they could keep their candle warmers on all day without a fire hazard. Scentsy’s revenue grew 2,904 percent over a 3-year period to more than $550 million. Over a decade these sales have exceeded $2.2 billion.

It did not take long for Scentsy to outgrow its headquarters on the Thompsons’ Idaho farm. After moving to several different sites and outgrowing them, today Scentsy has an $88 million headquarters situated on a 73-acre property. As for the original co-founders of Scentsy, both work as independent distributors of their own companies selling Scentsy products. Together with her husband, Kara Egan manages a team of approximately 42,000 consultants with group wholesale volume (GWV) of about $5 million per month.

508 Case 18 • Scentsy, Inc.: A Successful Direct Selling Business Model

SCENTSY’S BUSINESS MODEL Scentsy’s signature product is its flameless candle warmers and scented wax. Each can- dle warmer uses a low-watt light bulb to melt the wax and costs approximately $35 to $40. Scentsy also sells accessory items that go with certain product lines, such as $7 frames for its Silhouette Collection and $10 shadow inserts for its Shadow Selection.

Scentsy sells more than 80 fragrances, including French Lavender, Clean Breeze, Peony Petals, Rosemary Mint, Simply Vanilla, and Sunkissed Citrus. Scentsy also has a seasonal line. For instance, autumn and winter fragrances include Autumn Sunset, Cozy Fireplace, and Clove & Cinnamon. If these fragrances seem too feminine, Scentsy offers a line of fragrances targeting men, including Route 66, Vanilla Suede, Atlas Cedar, Shaka, and Business Casual. On a smaller scale, Scentsy offers plug-in warmers for approximately $20.

While its candle warmers and scented wax are the most popular of Scentsy’s products, the company has since expanded into other areas. Its products for the home include its signature candle warmers and wax, room sprays, fresheners, laun- dry care, soaps and sanitizer, and Scentsy Buddies. Buddies are small stuffed animals in which consumers can insert Scent Paks to make them smell good when squeezed. Scentsy also offers a line of bath and body products including Shower & Bath, Lotion, Perfume, and Lips & Head. Its on-the-go line includes products for the car, purse, and pocket.

THE MULTILEVEL DIRECT SELLING PARTY PLAN STRATEGY Scentsy products are sold through independent consultants using what is commonly referred to as a party plan. Selling through party plans involves direct selling, which occurs when products are marketed or sold outside of a fixed retail location. There are many reasons that parties are appealing to Scentsy, not least because the face- to-face interactions that occur at parties between the seller and the prospect, as well as the interactions between the prospects themselves, create a more intimate, friendly environment that fits well with the product.

While parties are extremely beneficial to independent consultants, they also appeal to fans of Scentsy that do not want to take on direct selling as a job. For instance, parties are popular among Scentsy lovers who want discounts. Consumers who have a successful party can receive up to four products at half-price and earn 15 percent product credit equal to the party’s sales ($1,000 in sales or more). Those interested in hosting a party can contact their nearest consultant through the Scentsy website. The consultant will help the host schedule a date for the party and work out the details. Consumers also have the option to host a party online.

The party plan faces three major challenges. Brand fatigue occurs when the nov- elty has worn off. Commoditization can be a challenge when competition increases and similar products enter the market, especially mass-produced products. Finally, generational adaptations can result from changing social trends as a new generation like Millennials enter the market. Millennials, for example, may have similar values but communicate and socialize differently than those from the previous generations. On the other hand, parties continue to provide a fun social environment for interested buyers, and new technology such as social media has made organizing parties easier.

To assist with party planning, the Scentsy website offers an online Party Planner that enables hosts to send out invitations and track RSVPs easily. Scentsy also offers what is akin to an awards program for party hosts who spread the word. If a Scentsy party host convinces one of his or her guests to host a party, the initial host receives another half-priced item from Scentsy simply for attending. This incentive encourages Scentsy hosts to spread the word to their friends and family.

Case 18 • Scentsy, Inc.: A Successful Direct Selling Business Model 509

In addition to attending a party, interested consumers can contact an indepen- dent consultant through Scentsy’s website. Independent consultants are also com- monly found manning booths at fairs or other events. Scentsy’s corporate headquarters and its thousands of independent consultants are adept at using digital media sites to promote products and encourage word-of-mouth marketing. Digital media sites are increasingly being used to build up a direct seller’s social network of contacts. Scentsy’s main website features links to its corporate blog, Facebook page, Twitter page, Pinterest boards, Instagram photos, and YouTube channel. This is in addition to the numerous personal website and social media pages of its inde- pendent consultants. Some orders and reorders take place online or by phone. For example, some consultants offer online shopping through Scentsy approved sites.

A major benefit of direct selling is that it requires much less capital than selling through retail channels. Direct sellers of Scentsy’s products essentially act as entre- preneurs running their own businesses, which frees Scentsy from having to pay taxes and employee benefits. Although selling Scentsy products is a good investment for those who desire to make a career out of it, many independent distributors are not full-time direct sellers. Reasons for becoming an independent distributor include making extra money on the side, selling as a hobby, and even receiving discounts on Scentsy products, which they may buy on a regular basis. Therefore, not everyone will achieve career success as a Scentsy independent consultant. Like any job direct selling takes skills and hard work. Many consultants enjoy the social interaction and meeting others through the party plan. Some want to learn more about running a business themselves and are able to gauge their aptitude and potential for success at party events.

As a direct selling company, Scentsy has adopted a multilevel marketing com- pensation model. Under this model, an independent distributor receives commis- sions on what he or she sells as well as commissions from the sales of their recruits. This encourages independent distributors to build their own networks of recruits that become part of the Scentsy family. It is important to note that commis- sions are based entirely upon product sales. An independent distributor does not receive a commission simply for recruiting someone and he or she is never allowed to coerce or force others to buy a product they really do not want. Often the more people a distributor recruits, the higher the commissions they will receive on sales. These commissions act as an inducement to direct sellers to recruit others into the network, but it in no way compels them to do so. Direct sellers still receive commis- sions on their own sales whether or not they seek to actively recruit others.

Scentsy encourages independent consultants to relay orders to the company rather than holding their own inventory. It is not uncommon for Scentsy independent consultants to only hold as much inventory as they need to do product demonstra- tions. In this way, Scentsy has been able to provide inventory so independent consul- tants can operate with a limited investment. There are almost no financial barriers to becoming a Scentsy independent consultant.

BECOMING AN INDEPENDENT CONSULTANT Entrepreneurs interested in becoming independent consultants can pay $99 for a starter kit. The starter kit includes more than 80 scent testers, demonstration pro- ducts including candle warmers, catalogs and order forms, and business materials. Scentsy provides support for new independent consultants with a personal website that is free for the first 3 months (consultants must pay $10 afterward if they wish to continue), sales training, an online workstation to help run the business, and phone support.

Independent consultants start off on the first level, which is called an Escential Consultant. These consultants earn 20 percent of commissions on their personal

510 Case 18 • Scentsy, Inc.: A Successful Direct Selling Business Model

retail volume (PRV). PRV is a system that is convertible to currency; currently, 1 PRV equals $1. Consultants that reach a PRV of 1,000+ monthly receive 25 percent com- mission on sales. Consultants increase their commission by recruiting other success- ful consultants. There are eight titles a consultant can have as he or she continues to rise to higher levels and starts generating commissions based not only on PRV, but also on GWV and team wholesale volume (TWV). The highest rank a consultant can receive is the title of SuperStar director. In a month, SuperStar directors earn 500 PRV, 80,000 GWV, 10,000 TWV, as well as three Active Frontline Consultants and four First-Generation Directors. At this stage, the entrepreneur has become a sales manager, with an emphasis on managing a sales force rather than personally selling products.

High-performing independent consultants are also rewarded with trips to places such as the Bahamas and Greece. Scentsy tries to emphasize that becoming an inde- pendent consultant can be both profitable and rewarding as they give entrepreneurs the chance to be their own boss.

MEMBERSHIP IN THE DSA From the onset, the DSA had impressed Heidi Thompson. After attending one of their workshops, she and her husband Orville opted to adopt a direct selling business model and join the DSA. DSA is a national trade association of direct sellers and comprises approximately 200 companies. The purpose of DSA is to protect their members, consumers, and the businesspeople who sell member products.

As a proud member of the DSA, the company must adhere to the DSA Code of Ethics. As members of the DSA, direct sellers must undergo a yearlong screening pro- cess to ensure the credibility and trustworthiness of their operations. Scentsy realizes that in order to be successful, it must be a company that consumers can trust. It emphasizes values such as truth in advertising, ethical recruiting practices, accurate financial statements, support and accountability, and consumer protection.

In 2013, Scentsy won the DSA Ethos Award, meant to recognize the highest ideals of excellence in the direct selling industry. Scentsy won the award for its social media program Backstage Pass, launched at its Scentsy Family Convention. Backstage used the digital media tools of Instagram, Facebook, Pinterest, and Twit- ter both before and during the convention to gather online feedback from attendees and Scentsy enthusiasts. Scentsy’s purpose was to create community engagement with its brand and company. The company achieved this goal with 15 million Face- book and 20.8 million Twitter impressions.

SCENTSY FAMILY FOUNDATION Scentsy considers the value of its community stakeholders through the Scentsy Family Foundation. Scentsy claims that its most cherished value is generosity, and the Scentsy Family Foundation is meant to make this value manifest. The foundation has three primary ways it contributes to communities: scholarships, direct giving, and sales of cause-related products.

Scentsy scholarships are a way that the company gives back to its consultants. Every year it contributes a certain number of $2,000 scholarships to provide higher education opportunities to qualifying children of Scentsy consultants and employees. Those who are interested can download and submit a scholarship application online.

Scentsy also provides donations to family-oriented charitable organizations and invites stakeholders to get directly involved in the process. On the Scentsy Founda- tion website, customers, organizations, consultants, and vendors are invited to submit requests for program donations or sponsorships for family-oriented charitable

Case 18 • Scentsy, Inc.: A Successful Direct Selling Business Model 511

organizations in their area. The foundation will then review the request and see whether it meets its areas of focus. Scentsy has four areas of emphasis for its charita- ble contributions: arts, health, youth programs, and self-sufficiency. Organizations that Scentsy has supported include March of Dimes March for Babies, Big Brothers/ Big Sisters Magical Moments, and Life’s Kitchen.

Finally, the Scentsy Foundation also releases limited-edition products to support specific causes. During the holiday season, it released its Ribbons of Hope candle warmer. The warmer features a pink ribbon, and Scentsy donates $7 from each warmer sold to the National Breast Cancer Foundation. In Canada, $8 for every warmer sold is contributed to Rethink Breast Cancer. In the summer of 2014, Scentsy released its Charitable Cause Buddy Roosevelt the Rabbit to support nonprofit organizations in the United States and Canada. In the United States, $6.50 of each Roosevelt the Rabbit sale went to support the March of Dimes campaign to help mothers have healthy, full-term pregnancies. In Canada, Scentsy donated $7.50 from each product sold to the Starlight Children’s Foundation. It also contributes to academia. Its Campus Collection candle warmers feature the logo and school colors of 32 universities. Part of the proceeds from this collection is donated to the univer- sities—Scentsy has donated more than $2.1 million thus far. Scentsy has successfully integrated cause-related marketing and philanthropic contributions into its opera- tional strategy.

CHALLENGES AND THE SEARCH FOR NEW PRODUCTS Despite Scentsy’s incredible rate of growth, recent years have seen a decline in sales. Sales declined in 2013, demonstrating that Scentsy’s products are likely entering the maturity stage. From 2004 to 2008, Scentsy experienced a high rate of growth at 267 percent. However, Orville Thompson recognized that such growth was not sustain- able and the company would have to investigate new products. In the United States, sales of Scentsy products have basically peaked, and even expansion into Australia and Europe has not been able to make up for the shortfall. Competition in the fragrance candle industry has also increased from such rivals as Yankee Candle. Yankee Candle has retail stores nationally as well as online shopping with aggressive price promotions. Yankee Candle sells wickless candles and traditional candles. The company competes with an efficient distribution strategy of store shopping as well as an online website. Yankee Candle has the advantage of reaching consumers who walk by a store and learn about its products while in a shopping center.

Scentsy expanded its fragrance line by adopting body, laundry, and spray products. However, these have not been as successful as Scentsy’s trademark wickless candle product, which continued to consist of approximately 94 percent of Scentsy sales. The company was faced with the decision of which new product lines to adopt. Products that were too far from the Scentsy core product might not be successful. More recently, it decided to expand into handbags and jewelry as well as kitchenware and fondue.

In adopting these new product lines, Scentsy decided to use an individual brand- ing strategy. Its handbag and jewelry line were sold under the brand name Grace Adele, while its kitchenware is sold under the brand name Velata. The advantage of individual branding is that the image of one brand would not necessarily extend to the Scentsy brand name. These brands would also be managed under the Scentsy Family parent organization.

Grace Adele and Velata were launched in 2012. Grace Adele was launched with the concept of providing customers with a customized fashion experience. Customers would pick the color of the bag they wanted, choose the bag, and style it. Velata initially focused on fondue. Its purpose was to make great-tasting fondue a simple process to make. The brand later expanded into other forms of kitchenware and

512 Case 18 • Scentsy, Inc.: A Successful Direct Selling Business Model

food products including ready-made dinners. Both brands were sold utilizing the direct selling/party plan.

Although Scentsy hoped these brands would jumpstart growth, their fragrance line continues to make up the majority of Scentsy’s sales. In 2014, the Grace Adele brand was discontinued. Most people continue to associate Scentsy with fragrances, and it is proving challenging to expand into other product lines even under individu- alized branding. On the other hand, Scentsy is a trusted brand name with more than 200,000 independent consultants. Customer loyalty is high, and independent consul- tants believe in the product. The challenge is to find the right product mix to serve a target market of household consumers who enjoy the party plan method of buying.

CONCLUSION Scentsy is one of the most successful small businesses to be launched in the last 12 years, according to its Inc. 500 ranking. The company appeals to a target market that appreciates the uniqueness and fashion elements of its safe, scented wickless elec- tric candles. The marketing strategy based on direct selling appears to be the ideal distribution and promotion method to reach this target market. Scentsy uses a multi- level direct selling structure utilizing the party plan model for customer contact. The creative use of social media and independent consultant websites has extended sales beyond the face-to-face direct selling party plan. There is no doubt that the party plan sales method matches the product and target market. With a variety of Scentsy products, guests at party plan events exchange information on decorating and the use of household products.

While the success of Scentsy has been great, as with all businesses, challenges exist. There is a need to create innovative new products to maintain sales growth. These new products need to fit with the firm’s strengths and tap into opportunities that exist in the marketplace. Therefore, it appears that household products that appeal to the current target market and are appropriate for the direct selling party plan marketing strategy provide the best opportunities. Threats to new products relate to competition and changing social and economic trends. For example, Elec- tric Wax at Amazon.com includes many competitors selling scented wickless electric wax candle products. Flameless and electric candles can also be found on many online websites. Yankee Candle is an example of a retail store and online shopping competitor.

International expansion provides opportunities to increase sales. Careful selec- tion of new markets will require understanding the acceptance of the direct selling party plan distribution strategy as well as cultural competition with the product. Many countries in Asia embrace purchases through direct selling. The local culture and acceptable price points will determine the opportunity for product expansion.

The challenge for Scentsy is to balance its strengths and rapid sales growth with a sustainable product mix that can help achieve sales objectives. Scentsy needs to be less dependent on its successful scented wickless candle product line and find new product lines appropriate for its target market. A major strength is the leadership of Orville and Heidi Thompson and their ability to manage the growth of their company. Their high integrity and involvement in contributing and giving back to their stake- holders is a strong asset.

SOURCES Holly Beech, “Scentsy’s profits continue to rise sharply,” Idaho Press-Tribune, October 12, 2011, http:// www.idahopress.com/blogs/business_to_business/scentsy-s-profits-continue-to-rise-sharply/article_ d88c535e-f43f-11e0-9bf4-001cc4c002e0.html (accessed November 24, 2014); Direct Selling Association,

Case 18 • Scentsy, Inc.: A Successful Direct Selling Business Model 513

“About DSA,” http://www.dsa.org/about-dsa/about-dsa (accessed November 24, 2014); Direct Selling News, “2015 DSN Global 100 List,” April 8, 2015, http://directsellingnews.com/index.php/view/ 2015_dsn_global_100_list#.VWSxXLlViko (accessed May 26, 2015); Zach Kyle, “Has Scentsy peaked?” Idaho Statesman, May 4, 2014, http://www.idahostatesman.com/2014/05/04/3167695/scentsy-still-smells- success.html (accessed November 24, 2014); Ted Nuyten, “Kara Egan–Scentsy top earner interview,” Business For Home, August 8, 2012, http://www.businessforhome.org/2012/08/kara-egan-scentsy-top- earner-interview/ (accessed November 24, 2014); Courtney Roush (May 2015), “The pulse of today’s party,” Direct Selling News, 11(5), 18-22; Scentsy blog, http://scentsyblog.com/scentsy-blog/entryid/34. aspx (accessed November 24, 2014); Angela Tippets, I Am Wickless,http://www.iamwickless.com/2014/ 07/scentsy-ribbons-of-hope-breast-cancer-warmer.html (accessed November 24, 2014); Scentsy website, http://scentsy.com/ (accessed November 24, 2014); Scentsy Family Foundation website, http://www. scentsyfamilyfoundation.com/ (accessed November 24, 2014); Scentsy, “Compensation plan,” http:// scentsy.com/portals/6/Images/Join/join-compensation-chart.png (accessed November 24, 2014); Scentsy, “Inc. 500 5000 recognizes Scentsy, Inc. as one of the country’s fastest-growing companies–Again,” Scentsy Family, September 1, 2012, https://scentsyfamily.com/en-us/scentsy-newsroom/press-releases/ articletype/articleview/articleid/393/inc-5005000-recognizes-scentsy-inc-as-one-of-the-countrys-fastest- growing-companies–again.aspx (accessed November 24, 2014); Scentsy, “Our company: Direct selling association,” Scentsy Family, https://scentsyfamily.com/en-us/scentsy-company/direct-selling- association.aspx (accessed November 24, 2014); Scentsy, Scentsy Catalog,http://scentsy.com/Portals/8/ Images/catalog/FW14/Scentsy-Catalog-FW14-US-English.pdf (accessed November 24, 2014); Scentsy, “Scentsy, Inc. wins direct selling association’s top sales promotion award with ‘Backstage Pass’,” Scentsy Family, June 17, 2013, https://scentsyfamily.com/en-us/scentsy-newsroom/press-releases/ articletype/articleview/articleid/557/scentsy-inc-wins-direct-selling-associations-top-sales-promotion- award-with-backstage-pass.aspx (accessed November 24, 2014); Barbara Seale, “Selling the sweet scent of success,” Direct Selling News, April 2010, http://www.directsellingnews.com/index.php/site/ comments/selling_the_scents_of_success/ (accessed December 9, 2011); Velata website, http://velata. com/ (accessed November 24, 2014);Velata Catalog, Summer 2012, https://imagelive.scentsy.com/ CMSImages/files/Resource%20Library/Velata/R1_0112_ VelCatalog_EN_Final_LO_3_12.pdf (accessed November 24, 2014).

QUESTIONS 1. What are the key elements of Scentsy’s marketing strategy that help create mar-

ket success? 2. Evaluate Scentsy’s direct selling multilevel party plan method of distribution for

reaching its target market. 3. How can Scentsy expand its product mix to sustain sales growth? What product

lines provide the greatest opportunity for growth?

514 Case 18 • Scentsy, Inc.: A Successful Direct Selling Business Model

Sigma Marketing: Strategic Marketing Adaptation*

Synopsis: This case reviews the growth of a small, family-owned business, from a regional provider of generic printing services to a global provider of specialty advertising products and commercial printing services. Throughout its history, Sigma Marketing has exhibited the uncanny ability to understand market opportunities and to adapt its strategic focus accordingly. As its marketing envi- ronment changes, Sigma Marketing gathers information from existing and potential customers to develop the most effective marketing strategy possible. Even in the face of changing technology, communication, and advertising methods, Sigma Marketing has managed to reinvent its mindset and strategies in order to remain successful.

Themes: Changing marketing environments, market opportunities, strategic focus, product strategy, direct marketing, promotion, personal selling, implementation, customer relationships, family-owned business

In 1967, Don Sapit purchased a small printing company in Streator, Illinois, as a hands-off personal investment that would later grow into what is today a successful commercial printing business located in Orange Park (Jacksonville), Florida. Sigma Marketing has a unique identity that has evolved over the past 45 years from a small- town printing company to a marketing services company with a diverse, multina- tional clientele. Sigma’s marketing history is an excellent example of the strategic shift from a production orientation to a market orientation.

Don Sapit was president of Weston Laboratories, a small research facility in Ottawa, 80 miles southwest of Chicago, when he had an opportunity to acquire Dayne Printing Company. Sapit had been a Dayne client for several years. When Dayne was on the verge of bankruptcy, Don bought the company as an investment while still focusing most of his day-to-day efforts on Weston Labs. The managers of Dayne at the time were willing to stay on and handle the operations with little outside help. Don felt that with the increased volume that Weston would provide, the operation could become profitable within a 12-month period. To enhance the corporate image, the name was changed to Sigma Press, Inc. A new sales manager was hired to focus on the sales aspect of the business, while Sapit took the position of absentee owner. Over the next few years, their efforts provided only minimal increases in sales volume. The business survived, but made little progress—typical results for an absentee-owned business. In addition, Sigma mainly focused on the production process and selling generic printing services.

In spite of the slow progress, Sapit saw the potential for turning Sigma into a quality-oriented printing business that could make substantial gains against its local competition. The area served by the shop covered a radius of approximately 30 miles around the city of Streator and had a number of major manufacturing plants that were potential users of substantial quantities of printing. Unfortunately, most of these plants were headquartered in other cities and did not have authority for local purchasing of anything beyond the basic necessities required for daily plant

CASE

*Mike Sapit, President, Sigma Marketing (http://www.sigmamktg.com), with assistance from O. C. Ferrell and Jennifer Sawayda, University of New Mexico, prepared this case for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation.

515

operations. Although Sigma could do custom printing, the small firm did not have a unique niche other than its quality and service.

THE DESK CALENDAR: A STRATEGIC OPPORTUNITY In seeking alternatives to improve sales, Sapit and Sigma’s staff developed an adver- tising desk pad calendar for distribution as a customer gift. Its purpose was to keep the Sigma name, phone number, and list of services in front of the customer as a constant reminder of its existence. It was freely offered to any customer thought to have sufficient volume potential to justify the expense of the calendar and its distribution costs. At the time, Sigma thought of the calendar as a promotional tool for its own business and did not consider the calendar as a product that could poten- tially differentiate the company and give it a competitive edge.

One of the customers that received the calendar, Oak State Products, an Archway Cookie Bakery, asked whether Sigma could produce similar calendars for them with the Archway advertisement printed at the top. Sigma filled this initial order, and it proved popular with Archway’s customers. The next year, Archway asked whether the calendars could be produced with a color photo of the plant in the ad space. This version was so well received that Oak State recommended the use of the calendar as a marketing tool to other Archway Bakeries around the country. Sigma recognized that the opportunity for a new marketing strategy was developing. The small printer with a generic product identified an opportunity to expand its market beyond its small geographic service area.

The sales volume realized from the calendar was not substantial, but Sapit saw in it a good possibility for a totally new marketing strategy, removed from the limita- tions imposed by Sigma’s present sales territory. Furthermore, he conceived a direct marketing effort that would permit sales penetration into a much larger geographical area than was practical to serve with Sigma’s limited sales staff.

At this time, Weston Laboratories was sold and Sapit was forced to make a deci- sion to leave the company due to philosophical differences with the new owners. Although Sigma was starting to show potential for very modest profitability and good growth, it was still just barely able to support itself. After a family council meet- ing in 1971, the decision was made to “tough it out.” Sapit chose to enter the Sigma operation on a full-time basis and to prove that it really could become a first-class operation based on a new marketing strategy.

After coming aboard full time, Sapit assumed all marketing and management responsibilities himself. Previously, sales representatives had been making calls on a hit-or-miss basis with no real continuity. Sapit developed a general marketing strat- egy, which included defining specific sales territories and developing target markets and sales prospect databases. He also implemented a scheduled mailing program as part of the strategy. On the commercial printing side, a sample “job of the month” was sent to customers and prospects at regular intervals. On the calendar side, direct mail materials promoting the desk calendar to specific target markets were utilized. At that time, direct mail promotion of printing services was relatively unheard of in the printing industry. Most of Sigma’s competitors performed custom printing based on the needs and projects that the customer desired, and did not promote specific products.

The advertising desk calendar was marketed on the theme of “constant exposure advertising.” It was given the product name “Salesbuilder,” which moved Sigma into the specialty advertising business. Each customer was offered a standard calendar format with an individual ad imprint customized to fit the needs of the company’s business. The imprint could contain line drawings, photos, product lists, or any special information necessary to convey the company’s message to customers. Sigma’s willingness to encourage attractive and creative designs received immediate

516 Case 19 • Sigma Marketing: Strategic Marketing Adaptation

attention and acceptance by customers. It set the company apart from the competi- tion, which allowed only “four lines of block type, not to exceed 32 letters.” In effect, Sigma was at the forefront of a new specialty-advertising product.

Within a year of Sapit’s entry into the business, total volume was up 50 percent; even more important, the response to the calendar marketing effort was starting to show real promise. As a result, Sigma was experiencing the need for additional capi- tal to finance the growth. Capital was obtained through the private sale of one-third of the company to Sapit’s friend and colleague, who was a local attorney. The new investor was not involved in the daily operations of the business, but served as cor- porate secretary, legal counsel, board member, and advisor. The cash raised from the stock was used to help fund the day-to-day operations and expand accounts receivable resulting from the increased volume.

By late 1972, Sigma’s commercial printing sales were gaining at a modest rate of increase, but calendar sales were increasing at a rate of 40 percent per year. It was becoming apparent that larger manufacturing facilities would be required in the immediate future or the sales efforts would have to be scaled back. The company purchased a more visible and accessible 5-acre site in Ottawa, Illinois, and con- structed a new facility with a focus on improved production as well as image. Sapit decided to capitalize on the new visibility and image by changing the strategic emphasis of the business.

SIGMA EXPANDS ITS STRATEGY Over the next few years, Sigma’s strategy was oriented toward building a reputation for producing the most creative and highest quality printing in its service area, which had a 35- to 40-mile radius around Ottawa. Sapit anticipated that this new direction would give his firm a solid reputation as a quality printer, one that fully justified the higher prices it charged. Several of the larger local companies obtained permission from their corporate offices to procure their printing locally. The downstate division of Carson Pirie Scott & Company, a large department store chain, chose Sigma for the production of its catalogs. The new marketing strategy paid off, and total sales volume had increased 220 percent by 1976.

Calendar sales increased slowly but steadily. Management wanted growth, but in an orderly and controlled manner. Management also wanted its growth to be more profitable than the industry average of approximately 5 percent on sales. It was becoming obvious that to be successful in the printing business, Sigma needed to specialize. After long and deliberate discussion during 1976, company management wrote a 3-year corporate plan.

The corporate plan emphasized marketing, which at this time was considered unique for a small commercial printer. The marketing plan focused a major share of the sales and marketing effort on building a market for the “Salesbuilder” desk calen- dar. The target market consisted primarily of smaller corporate accounts, while the marketing program emphasized a quality product and advertising with an internal sales staff, direct marketing distribution, and a superior price point. Space advertis- ing in sales and marketing-oriented publications created substantial numbers of inquiries, but sales levels did not follow. Direct mail, primarily to manufacturers, pro- duced a much higher response and return on investment. Sigma had created a unique product that was very flexible in terms of unique designs, advertising messages, pho- tographic techniques, and other special requirements. In short, “Salesbuilder” became a highly effective marketing tool.

Within the next few calendar seasons, large accounts such as Serta Mattress, Domino Sugar, and Borden, Inc., were added to the list of satisfied customers. Reor- der rates were very high, usually in the 88 to 90 percent range. Quantities ordered by individual companies tended to increase annually for 3 or 4 years and then level off.

Case 19 • Sigma Marketing: Strategic Marketing Adaptation 517

Total calendar sales had increased at a rate of approximately 40 percent per year during the 1976–1980 period, during which time commercial printing sales increased at a rate of about 15 percent annually.

A STRATEGIC SHIFT Because of the success of the new strategy, production capacity was being taxed. In 1979–1980, major capital commitments were made to add a new high-speed two- color press and to purchase, redesign, and rebuild a specialized collating machine to further automate calendar assembly, previously assembled by hand. This opened the way to mass marketing of the “Salesbuilder” calendar line. Direct mail techniques were improved to allow selection of prospects by SIC number and sales volume. A toll-free 1-800 number encouraged direct response by interested parties. Whenever possible, Sigma responded to inquiries by sending a sample calendar that contained advertising ideas related to the respondent’s line of business. The sample would be followed up with a personal phone call within 2 to 3 weeks. Calendar sales continued to improve until, by 1983, they represented 50 percent of total sales and approxi- mately 75 percent of net profit.

In spite of the success of the calendar marketing programs and attractive profit levels, Sapit was disturbed by trends in the printing industry that pointed toward a diminishing market and increased competition for the commercial segment, particu- larly in Sigma’s local Rust Belt area. Rapid development of new technology and high-speed equipment had caused industry-wide investments in new equipment well beyond immediate need, creating excess capacity. The result was cost cutting and reduced margins.

Sigma’s management had for some time been considering selling the commercial portion of its business in favor of becoming an exclusive marketer of calendar pro- ducts. Through its membership in the Printing Industry of Illinois, a buyer was found for the plant, equipment, and the goodwill of the commercial portion of the business. The buyer agreed to enter into a long-term contract to handle the majority of calen- dar production for Sigma, using the same plant and staff that had been handling the production for the previous 10 years. The sale was completed in June 1983. This sig- naled the strategic move from a company based on production to one based on marketing.

Sigma’s management now found itself free of the daily problems of production and plant management and able to commit all its efforts to creating and marketing new calendar products. Sapit had a long-standing personal desire to move the business to the Sun Belt for the better weather and, more importantly, for the better business climate. In May 1985, Sigma’s corporate offices were moved to Orange Park, Florida. Concurrently, Sapit’s son, Mike, a graduate of Illinois State University in graphic arts management, joined the business.

STRATEGIC REFINEMENTS To take advantage of Sigma’s marketing expertise, the company took actions to expand its product line to include several additional personalized calendar items. The new items included a year-at-a-glance wall planning calendar, desk diary, pocket diary, and a smaller version of the original desk calendar.

Sigma had built its calendar business on products that were basically “off- the-shelf” formats that could be imprinted with the customer’s advertising message. In the late 1980s and into the 1990s, Sigma began to see a growing demand for products that were totally customized not only in graphic design but in product specifications as well. Sigma’s management saw a market for a new line of “super

518 Case 19 • Sigma Marketing: Strategic Marketing Adaptation

customized” calendars targeted to medium-to-large corporations with a substantial customer base. These companies were service oriented with large advertising bud- gets, thus creating the potential for very large orders. The market was relatively small in terms of number of companies, but very large with respect to total sales potential. It would require a totally different marketing approach than previously utilized.

Test advertisements for custom-designed calendars were run in Advertising Age and in several marketing trade journals. These advertisements appealed to larger cor- porate accounts. In addition, the Sigma sales staff became much more aggressive in searching out individual accounts that appeared to have high potential as customized calendar customers. Prospects were researched, and contacted by phone and mail, to determine the individual with the responsibility to specify and authorize this type of purchase. Unsolicited samples of several different customized products were sent via FedEx in order to attract attention. Each prospect was followed up by a phone call within a few days to confirm interest and provide additional information.

The goal was to establish Sigma as a publisher of high-quality, creatively designed custom calendars. Initial response to the new marketing strategy was good, with indi- cations that the blue chip companies could, in fact, be reached through this approach. To reach its growth goals, Sigma felt it had to be successful in this marketing strategy. This type of highly customized product design was very demanding on the creative staff. Because only 10 to 15 new accounts of this type could be handled each year, it was important that creative time be spent on high-potential accounts. The new strat- egy was successful in landing substantial orders from Nabisco, Fidelity Investments, and FedEx. Realizing that these blue chip companies were consumers, Sigma focused the entire organization on meeting five customer needs: (1) flexibility, (2) production of a quality product consistent with the client’s image and marketing goals, (3) personal service and attention from beginning to end, (4) fair pricing, and (5) timely, efficient fulfillment.

SIGMA’S TOTAL SERVICE PACKAGE With the blue chip accounts, Sigma realized that it had to be able to offer its products on a turnkey, or concept-through-fulfillment, basis. Many of these corporations wanted to use a calendar program, but were not able to devote staff, time, or exper- tise to such a project. Sigma offered the solution—handling the entire calendar pro- motion, including conception, design, production, and delivery—so that customers could devote their time to more productive efforts, confident that their calendar pro- gram was running smoothly and efficiently. They dubbed this the “Total Service Package.”

In order to provide total service effectively, Sigma installed new computer equipment and programs to enable comprehensive order fulfillment for a variety of programs. Special shipping manifest programs were developed to simplify the handling of large quantities of drop shipments. From established customer lists or those generated through Sigma’s direct order programs, calendars could be shipped to as many as 20,000 locations for a single account. This was particularly helpful to accounts that had dealers or customers scattered across the country.

The business grew rapidly from 1985 to 1990, and by 1991, Don and Mike Sapit saw a new opportunity to expand the business again. After carefully analyzing the characteristics of its buyers and their buying decisions, Sigma found new market opportunities. During its first 15 years in the promotional calendar business, Sigma focused on large companies that usually distributed their promotional calendars through their sales forces to customers. These companies usually supplied Sigma with the basic idea for their calendar promotion, including an imprint or art design for the firm’s individualized calendar.

Case 19 • Sigma Marketing: Strategic Marketing Adaptation 519

With its own computer order tracking and manifest system in place, Sigma was able to offer its customers and prospects an efficient and cost-saving order and dis- tribution system. With a customer-supplied list, Sigma began marketing the calen- dars directly to the customer’s distributors. Flyers and samples were produced and mailed by Sigma. Orders were then returned directly to Sigma. This process allowed individual distributors or a single branch to include its own imprint on the calendar. A customer list may have over 10,000 names, and a single order may consist of over 1,000 different imprints. Because each customer has its own requirements, a staff member dedicated to personalized service is assigned to each customer. Sigma learned how its customers made decisions about specialty advertising purchases such as promotional calendars and then developed a program to satisfy the needs of purchasing agents and buyers in large organizations. The strategy was very successful, and during the 1990s, the company added prime accounts such as Milwaukee Electric Tool Corporation, Hoffman LaRoche, Inc., International Paper Company, and Nabisco Brands, Inc.

AN EMPHASIS ON IMPLEMENTATION After focusing on the “Total Service Package” approach as its primary marketing strategy, Sigma experienced a large increase in corporate clientele with very spe- cialized product and service requirements. The “Salesbuilder” orders that were the foundation of the business became secondary to “programs”—larger corporate accounts with networks of dealers, franchises, or sales representatives to place orders—as well as multiple products and services offered as part of their calendar promotion. Sigma’s reputation was bolstered by strong clientele references and testimonials. Companies were drawn to the custom calendar vendor known for high-quality products and a staff with tremendous flexibility and creativity. In an effort to distance itself from competitors, Sigma improved on the “Total Service Package,” which had become an important part of its marketing strategy. Custo- mers were surveyed before and after they received the product, and large corpo- rate account contacts received a visit from their account representative early in the year to review the previous year’s program and begin laying groundwork on the upcoming promotion. In addition, international promotions and shipping became important aspects of several large accounts. Account representatives began developing large corporate accounts by promoting multiple products, while some promotional items beyond calendars were produced in an effort to maintain exclusivity with a client.

The company continued to add to its list of satisfied customers such prime accounts as Unisource, xpedx, Volvo Cars, Volvo Trucks, Ditch Witch, and Enter- prise Leasing. Mega-accounts also came on board, such as Yellow Freight Systems (including all of its subsidiaries) and CNH, the parent company that brought along the business of its multiple operating divisions including Case IH/Case Construction and New Holland Agricultural/New Holland Construction.

After many instances of being asked by corporate clients to include additional advertising products as companion pieces to their calendar program, management began to consider the viability of becoming an ASI (Advertising Specialty Institute) dealer distributor. The annual cost was acceptable, considering the cost savings to be realized in purchasing specialty items and specialized printing products wholesale through ASI vendors. Sigma became an ASI distributor in March of 2000, providing new and useful resources to enhance the calendar programs and meet specific needs of established customers. The ASI resources opened up new markets for addi- tional business from many of their existing customers, without the need to aggres- sively sell the specialty promotions segment of business and without diluting the focus on calendar programs.

520 Case 19 • Sigma Marketing: Strategic Marketing Adaptation

Customer demand led to changes and the expansion of the sales and administra- tive areas, as well as the graphics department. A stronger focus on the service aspect of the business was a strategic move for the sales and administrative areas, resulting in the creation of a dedicated customer service department. Sigma also saw tremen- dous growth in its graphics capabilities—a response to the major technical changes in the printing industry itself, as well as the needs of its customers.

Despite the additional staff and resources, the demand from program accounts was so great that the company was in danger of overselling its production capabili- ties. Recognizing that possibility, Sigma became more selective in its marketing efforts for program accounts. The company also began to reevaluate the potential of smaller, easy-to-produce, and profitable “Salesbuilder” calendar orders as a prod- uct to be marketed on their corporate e-commerce website, suitable for smaller com- panies that could not support a completely customized program.

LINKING TECHNOLOGY TO THE MARKETING PROGRAM In the late 1980s and early 1990s, Sigma offered limited in-house design/layout services. Prior to desktop publishing, type was set, paste-ups were created, and film was shot manually on a camera. Graphic needs beyond the company’s capabilities were outsourced to service bureaus. Even though Sigma’s capabilities were limited, very few of its customers had complex needs or technologically capable marketing departments.

With the onset of the digital age, Sigma’s technology was forced to change. Sigma’s prepress capabilities were transformed over a 10-year period. Graphics work- stations became an integral part of the business, with increasing storage capacity and applications to handle larger and more complex files. In the mid-1990s, a digital image setter replaced the old camera and film technology. That evolved in less than 10 years to a direct-to-plate workflow with color management, digital color proofing, and mul- tiplatform capability. Photos are now almost completely digital—scanning is becom- ing a thing of the past—and many customers have their own in-house design and graphics staff that work closely with Sigma’s graphics department. The sophisticated technology created the need for advanced training and continued education and upgrades. Sigma’s management has maintained a commitment to stay in the forefront of graphics technology through strong staffing and investment in equipment and software applications.

The mid-1990s also ushered in the company’s Internet presence and online capa- bilities. A corporate identity on the Internet is absolutely essential in today’s market- place, and Sigma has taken the additional steps to utilize the Internet for e-commerce, namely product promotion and ordering capabilities. Many of the company’s larger clients demand online ordering and communications with their networks in order to maintain their accounts.

Upgrading technology on the administrative side has allowed the company to bet- ter serve its customers. A centralized file and information system has integrated many previously separate functions and increased flexibility among the staff. Sigma is now online with several transportation companies, making package tracking an easy task. The company has added many features with the improved technology, such as direct invoicing, credit card sales, digital faxing, and proofing online or via e-mail.

SIGMA’S CURRENT AND FUTURE MARKETING STRATEGY During Sigma’s expansion period, Don began to turn over the daily operations of the business to his son Mike. In early 1996, the transition was complete, with Mike in full charge of the business. Don has retired but remains chairman of the board, acting in

Case 19 • Sigma Marketing: Strategic Marketing Adaptation 521

an advisory capacity. Stock was purchased back from Don’s attorney/colleague who had invested in the company many years ago, and Sigma issued stock to key employ- ees, creating a greater sense of ownership and commitment to the business. A major concern was to develop personnel strategies and a succession plan in the event of Mike’s death or disability. Key employees with long tenure will soon be considering retirement, and the skills held by management and key employees would need to be taught and transferred to newer employees. In 2007, a succession plan was developed for the company to ensure its continuation.

In 2009, Jeff Sapit joined Sigma as marketing production manager, the third generation of his family to become involved in the business. Jeff has a different edu- cational background focusing more on management and marketing. While his father Mike Sapit’s college education was in graphic arts—and initially he was much more concerned with operations and production—Jeff brings a perspective to the firm that differs from both his father and grandfather. Mike’s goal is to allow his son consider- able freedom in contributing to the strategic plans on Sigma. Mike wants to allow Jeff to apply his education and experience in developing new products and expand- ing Sigma’s markets.

Annual marketing meetings have been scheduled each year since 1991 for staff members to meet and review the past year, addressing and solving both internal and external problems. The meetings encourage teamwork, foster company loyalty, and increase employees’ knowledge about Sigma’s status in the marketplace. In addi- tion to the business meetings, the company has also conducted a number of pleasure trips for employees (sometimes with their spouses and/or families) to promote stron- ger personal relationships and interaction. The employees have visited a number of resort complexes and major cities, and even sailed together on a cruise ship to the Caribbean. These events have contributed to a strong sense of community and teamwork among the employees. Sigma has constructed a diverse team of people with a wide range of skills, each playing a key role in the overall success of the com- pany. Sapit believes that the knowledge and skills of his employees are an important part of what gives Sigma its edge.

One of Sigma’s many strengths is the ability to understand market opportu- nities and to develop and continue to adapt its strategic focus. This ability has enabled the company to maintain a 90 percent repeat customer rate. As the envi- ronment changes, Sigma gathers information from existing and potential custo- mers to develop the most effective marketing strategy. For example, as more companies became concerned about sustainability issues, particularly renewable resources, Sigma responded. In 2008, Sigma became a Chain-of-Custody (CoC) certified company with the Forest Stewardship Council (FSC)—a designation that ensures the integrity of the paper supply chain (forest to mill) by certifying that the paper used by Sigma comes from responsibly managed forests. The fol- lowing year, the company became certified with the Sustainable Forestry Initia- tive (SFI) and the Program for the Endorsement of Forest Certification (PEFC). CoC certification was a response to the demands of Sigma’s customers and the company’s own desires to reduce its environmental impact. However, in 2015 Sigma determined that the certifications were unnecessary due to a lack of need by its clientele as well as its ability to utilize Sigma Graphic certifications. This allowed Sigma to keep costs down and save on internal administration resources.

The latest recession led to changes for both Sigma and its competitors. It hit the customized calendar industry particularly hard as companies began to reduce their salesforces and cut their marketing budgets. The rising use of social media also led to a decrease in demand. More than 7 years later, the customized calendar industry has not fully recovered to prerecession levels, with many organizations opting to go with less-customized calendars to avoid spending as much money on elements such as photo shoots. Several of Sigma’s major competitors underwent mergers, reducing

522 Case 19 • Sigma Marketing: Strategic Marketing Adaptation

their sales staff in the process. This downsizing also impacted the customized calen- dar industry. Because many of Sigma’s customers are extremely loyal to the com- pany, most stayed with the firm but decreased the volume of their orders due to the economic crunch.

These changing environmental conditions have once again led Sigma to adapt its strategy. Sigma responded to these changes by focusing more on regular com- mercial printing services for the market. For instance, Sigma offers printing services for promotional materials such as letterhead, envelopes, business cards, three-part forms, and other general commercial needs. Within the last 3 years, Sigma has purchased two printing companies to expand its operations. These two acquired companies are used solely for production and have no retail walk-in. Sigma also made the decision to become more self-reliant by purchasing more equipment so the company could rely less on its vendors. This equipment consists of color digital laser production printers and small bindery equipment, such as a cutter, folder, punch, and other binding equipment. By producing most of its promotional materi- als (such as brochures, flyers, order forms, and envelopes for direct mail) in its Orange Park office, as well as some of the actual calendar products or components themselves, Sigma is able to realize substantial savings in production costs. Sigma is also able to better control the quality and timely distribution of materials produced in-house.

By targeting specific customers who have regular projects that are well suited for Sigma’s equipment (such as newsletters, brochures, flyers, reports, business cards, booklets, and postcards), Sigma hopes to maximize the production value of the equipment and staff, particularly during the time of year when calendar produc- tion is paused. This is a swing back to Sigma’s commercial printing roots with a twist: using digital technology and targeting a specific market with compatible print- ing needs.

Mike Sapit sees Sigma today as a service-oriented firm that works to meet all of a firm’s commercial printing needs. Although the calendar business continues, Sigma has expanded significantly into commercial printing as well as design, pro- motion, and distribution. The companies Allstate and Ryder are both major clients of Sigma. Allstate uses Sigma’s mailing services, whereas Ryder has used Sigma’s capabilities to develop its quarterly newsletter. Sigma will sometimes work in close conjunction with other firms’ marketing teams on production, design, and promo- tion of these marketing materials. Today the only element that Sigma continues to outsource is its calendar production, which it outsources to Sigma Graphics and locally.

In the future, there will be new challenges, including the changing environment related to technology, communication, and methods of advertising. Sigma’s team is aware that the industry is constantly changing, and that to survive, the company must adapt. Throughout its history Sigma has proven adept at monitoring the marketing environment and making changes to its marketing strategy to meet consu- mers’ evolving needs.

CONCLUSION Throughout its history, Sigma Marketing has exhibited the uncanny ability to under- stand market opportunities and to adapt its strategic focus accordingly. As its mar- keting environment changes, Sigma Marketing gathers information from existing and potential customers to develop the most effective marketing strategy possible. Even in the face of changing technology, communication, and advertising methods, Sigma Marketing has managed to reinvent its mindset and strategies in order to remain successful. Sigma’s long-held philosophy is “always be prepared.” In the words of Mike Sapit, “The future is bright.”

Case 19 • Sigma Marketing: Strategic Marketing Adaptation 523

SOURCES The facts of this case are from the personal knowledge of the author; Sigma Marketing website, http:// www.sigmamktg.com (accessed July 2, 2015); “Up close with Mike Sapit, president of Sigma Marketing,” HPxpressions, pp. 14–15.

QUESTIONS 1. Discuss potential key changes in technology, communications, and competition

that Sigma will face in the future. Which will have the most impact on Sigma’s future marketing strategies?

2. Prepare a SWOT analysis for long-term strategic planning at Sigma Marketing. 3. Suggest some possible strategic initiatives that Sigma could pursue to continue

its growth.

524 Case 19 • Sigma Marketing: Strategic Marketing Adaptation

Belle Meade Plantation: A Social Entrepreneurship Marketing Strategy*

Synopsis: Founded in 1807 as a horse-breeding plantation, Belle Meade Plantation survived the U.S. Civil War to eventually become a museum focusing on nineteenth-century history. This case focuses on the challenges in 2004 when Alton Kelley, executive director, and his wife, Sheree, were facing the monumental task of securing adequate, long-term funding to maintain Belle Meade Plantation. After 5 years of declining revenues and donations, the Kelleys needed an out-of-the-box solution to put the plantation on solid financial footing. Their solution was to use a social entrepreneurship strategy by recreating the historical winery operations at the plantation.

Themes: Strategic planning, social entrepreneurship, SWOT analysis, target marketing, marketing program, customer relationships

In 1807, John Harding founded Belle Meade Plantation in Nashville, Tennessee. By the time of the U.S. Civil War, the Plantation had become famous as a 5,400-acre stud farm that produced some of the best racehorses in the United States. Following the Civil War, much of the thoroughbred industry moved to the Lexington, Kentucky area, though Belle Meade continued to run a successful thoroughbred plantation that was among the best in the nation. After the plantation was sold early in the twentieth century, the grounds of Belle Meade were converted into a museum focusing on its history. Today, Belle Meade operates as a nonprofit to preserve its history and provide an opportunity to experience life in the nineteenth century.

A BRIEF HISTORY OF BELLE MEADE PLANTATION The roots of Belle Meade extend back to its successful breeding of thoroughbreds. As early as 1816, founder John Harding placed advertisements in Nashville newspa- pers to promote his horses. In 1820, he commissioned a brick home in the Federal style on his farm and officially named the estate “Belle Meade.” By this time, he became interested in racing his horses locally. John registered his own racing silks with the Nashville Jockey Club in 1823 and was training horses on the track at another of his properties, McSpadden’s Bend Farm. By the time John Harding’s son, William Giles Harding, assumed management of Belle Meade, he already shared his father’s interest in breeding and racing. Even though the Civil War interrupted both breeding and horse-racing in the southern United States, Belle Meade was large enough in acreage to elude Union troops by hiding the prized horses at various loca- tions throughout the heavily wooded nearby hills.

CASE

*Robert P. Lambert and Joe Alexander, Belmont University © 2014. Alton Kelley, Executive Director of Belle Meade Plantation, and Sheree Kelley, Belle Meade Winery Manager, participated in developing this case. Jennifer Sawayda assisted in editing a version of this case, which was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through personal inter- views, publicly available material, and the Belle Meade website.

525

After the Civil War, Harding became famous for winning more purses with his horses than any man living at that time in the United States—even though much of the thoroughbred industry had moved to Kentucky. He was also the first in Tennes- see to use the auction system for selling thoroughbreds. With the auction system, he became the most successful thoroughbred breeding farm and distributor in Tennes- see. Belle Meade’s breeding lineage has boasted some of the best-known thorough- bred horses in U.S. history, including Bonnie Scotland, Secretariat, Seabiscuit, Barbaro, and 2014 Kentucky Derby winner California Chrome. When General Hard- ing died in 1886, The Spirit of the Times praised him as having done as much to pro- mote breeding interests as any American in the nineteenth century.

After Harding’s death, his son-in-law General William Hicks Jackson and oldest daughter assumed one-third ownership of the horse farm. General Jackson’s flair for entertaining and his confident, outgoing nature helped the farm attract thousands of people to the yearling sales. He later modernized the mansion’s interior. By the time the plantation was sold in the early twentieth century, it had hosted a number of American historical figures, including President Grover Cleveland, Robert Todd Lin- coln, General Ulysses S. Grant, General William T. Sherman, General Winfield Scott Hancock, and Adlai E. Stevenson.

Today, the Greek revival-styled mansion is the centerpiece of the affluent Belle Meade region of Nashville, with the historic homestead surrounded by 30 acres of manicured lawns and shade trees. A long driveway leads uphill to the mansion, fronted by six columns and a wide veranda. Inside, the restored building is furnished with nineteenth-century antiques that illustrate the elegance and wealth that the Southern gentility enjoyed in the late 1800s. Tours are provided to the general public, with costumed guides following a theme that changes every 3 months with the sea- sons. These themed tours are intended to provide fascinating glimpses into the lives of the people who once lived at Belle Meade. During the tour, visitors are able to see the numerous historic facilities on the property, including a log cabin, smokehouse, and creamery. The tour makes the nineteenth century come alive and provides an opportunity to experience life in the nineteenth century. Belle Meade’s park-like grounds have made it a popular site for festivals throughout the year.

NONPROFITS EMBRACE SOCIAL ENTREPRENEURSHIP Recent decades have led to challenges for nonprofits like Belle Meade. Since the last economic downturn reduced household incomes and lowered investors’ and consu- mers’ confidence in the economy, nonprofit contributions plummeted. Most nonpro- fits’ incomes dwindle during recessionary periods based on a variety of factors: (1) corporate and individual donations decrease, (2) federal, state, and local funding sources decline, and (3) earnings from endowments shrink with their capital market values. At the same time, economic downturns also put added demands on nonpro- fits’ already dwindling resources, including (1) a typical increase in the frequency of client requests for financial or service needs, and (2) a decrease in the number of individuals who, based on concerns regarding their own household incomes, are either unable or unwilling to volunteer their time in support of organizational mis- sion. As a result, nonprofits tend to focus their dollars more directly into client ser- vices. Charitable contributions to nonprofits bottomed out in 2009. The average rate of growth in charitable giving during 2010 and 2011 was at its lowest in 40 years. Even as the economy began to improve, many nonprofits continued to report that their contributions had either decreased or remained stable.

Belle Meade faced the same problems. At the time, existing funding sources for the operations of Belle Meade were as follows (in descending revenue order): (1) ticket sales from visiting tourists, (2) hosting special events, (3) corporate and private donations, and (4) sales of items from the gift shop, including a line of

526 Case 20 • Belle Meade Plantation: A Social Entrepreneurship Marketing Strategy

private-label products, such as cheese, country ham, grits, and a variety of souvenirs. For the fifth consecutive year, donations from corporations and individuals had declined to the lowest levels in memory, and the Kelleys believed they had little choice but to look for solutions that were well outside of the proverbial box. The organization and its board of directors could no longer rely solely on corporate dona- tions for the ongoing operations of the Belle Meade Plantation.

Nonprofit organizations, facing cuts in donations from individuals and organiza- tions, have been experimenting with new ways to strengthen their bottom lines. In addition to cutting costs and eliminating waste, nonprofit leaders such as the Kelleys had to think more creatively about their fundraising strategies and consider the role of nontraditional philanthropic organizations or individuals. Even at significant levels of visitor traffic at Belle Meade, base admission ticket revenues were not nearly enough to fully support the site’s operation. According to the Kelleys, “Every time there is a new charity in Nashville, the ‘giving pie’ gets thinner.” The Kelleys therefore began to consider the idea of social entrepreneurship. Social entrepreneur- ship occurs when an entrepreneur founds a business with the purpose of creating social value. In this case, Belle Meade could sell a product and then use the proceeds to support the nonprofit. Generating its own revenue would reduce the dependence on outside contributions and make the nonprofit less susceptible to economic downturns.

The Kelleys knew that management clearly had no choice but to consider sub- stantive changes in its revenue model in order to ensure long-term survival. The question involved deciding upon what product would be appropriate to sell to gener- ate revenue and align with Belle Meade’s strong historical roots. Management knew from historical research that Muscadine grapes were grown on the plantation back into the 1800s. The Hardings, Belle Meade’s nineteenth-century founders, actually produced wine from the vineyards on its property. Curator John Lamb confirmed the story: “There are numerous invoices from the 1800s that show the Hardings pur- chased and served fine wines and also purchased empty wine bottles—presumably to fill with wines made on the property.”

After evaluating and discarding a variety of other alternatives, the Kelleys set about pursuing an ambitious plan to use social entrepreneurship to generate revenue for maintaining the nonprofit. Their solution was to build and operate a nonprofit winery on the historic site to help sustain current and future long-term financing needs. The idea was bold, given that there were no other known nonprofit wineries in the United States. However, the Kelleys believed that if they could successfully navigate through the numerous legal and market-based challenges, this social enter- prise would provide the necessary funding required for supporting the property’s ongoing operations. The first step occurred in 2009 when The Harding House Restau- rant opened on the grounds, immediately adjacent to the mansion, to replace the popular “Martha’s at the Plantation.” The restaurant is an independent operation and pays rent to Belle Meade with all profits remaining in the restaurant.

The winery at Belle Meade would become the only winery registered in Nashville and the only nonprofit winery in the United States. Although it would operate as a nonprofit—reinserting profits into the maintenance and operation of the museum— the winery would effectively develop a strategic business approach and implement a successful revenue model.

THE MARKET FOR WINE IN TENNESSEE The wine industry in Tennessee was dealt a blow with Prohibition during the 1920s, so until 1975 the state had no formal modern wineries. In the late 1970s, Judge Wil- liam O. Beach championed legislation that enabled the State’s wine industry to move forward more rapidly. Another industry leader was Fay Wheeler, who was

Case 20 • Belle Meade Plantation: A Social Entrepreneurship Marketing Strategy 527

instrumental in assuring passage of the Wine and Grape Act of 1977. In 1980, she started Tennessee’s first licensed winery, and to many, Wheeler is considered the founder of Tennessee’s contemporary wine industry. By 1995 Tennessee had 15 win- eries, and in the next 10 years this number would double to 27. As of 2010, Tennessee boasted 45 registered wineries, with the likelihood of continued growth. Belle Meade recognized that these strong growth opportunities would be beneficial toward its decision to open a nonprofit winery.

There are, at present, between 500 and 750 acres of wine grapes grown in Ten- nessee—a number that is on the rise. Many vineyards are small (i.e., less than 5 acres), which is a challenge to growers, since wineries juggle the decision to buy small quantities locally or purchase larger quantities from outside the state’s borders.

Finally, it is worth noting that not all wines are produced from grapes. Several Tennessee fruit-bearing trees or bushes are commonly used to produce what are accordingly referred to as “fruit wines.” The more common take advantage of fruits such as black raspberries, peaches, blackberries, strawberries, rhubarb, and apples —all of which grow well within a portion of the geographic areas included within the State. For example, one of the wines that Belle Meade offers is a blackberry wine.

THE BEGINNING OF THE WINERY Belle Meade did understand the challenge of developing a successful winery. It was not enough just to sell wine with a Belle Meade label. To align with Belle Meade’s mission, the product would have to fit with the organization’s historical background. “There was a lot of brainstorming among staff to come up with new ideas,” the Kel- leys claim. “And as we continue to believe, it is important that everything we do is connected to the site’s heritage. We just look for ways to modernize what the original owners did and make money to support the site.”

With a desire to narrow viable possibilities to those that fit with the historical nature of the plantation’s roots, the seeds of a winery concept began to germinate. A decision was subsequently made to visit the Biltmore Estate’s Winery in Ashville, North Carolina, as it is the most visited winery in the United States. “We were look- ing for best practices,” the Kelleys said. These practices would be used to establish its own winery to support its nonprofit mission.

While the Kelleys’ initial concept for a winery in Nashville was relatively small compared to Biltmore’s, they saw incredible potential for such an operation since there were currently no wineries in Nashville. They also learned that at Biltmore, one of five guests to the estate made a wine purchase before leaving the property. This further fueled its beliefs that a winery would generate the revenue needed to operate Belle Meade. Its next decision was to locate the winery on the Belle Meade property.

The Kelleys presented its proposal for a winery at the next meeting with the board of directors. Through its research, the Kelleys had determined that an existing building on the property built in 1998 as an education venue could be converted into the winery and a gift shop. However, this would not come without financial risk. In order to get the winery operational, an investment of $250,000 would be required. The Kelleys had determined that in the first year of operation, all of the bottling activ- ities would be done by hand using employees of the historic plantation, the winery, and volunteers. If sales increased beyond $1,000,000, mobile bottling equipment would be used for the higher volume.

The Kelleys provided the board with projected revenues for the first 5 years, along with the planned operation’s anticipated expenses. Two of the board members were presidents of local banks and were convinced that the proposed winery was a fairly low-risk investment. The remaining board members concurred, and ultimately a final vote yielded approval for the project.

528 Case 20 • Belle Meade Plantation: A Social Entrepreneurship Marketing Strategy

The winery at Belle Meade first opened to visitors touring the mansion in November 2009. The building housing the winery made it a reasonably good fit for serving as the initial start-up site. By 2009, the directors of the historic plantation ren- ovated the building for use as a combination winery and tasting room, and Brian Hamm was appointed as the winemaker. The staff began to research which wines should be produced to meet plantation revenue objectives. Advice from the local wine-making community informed it that if its objective was “status,” then dry wines should be the target. However, they advised Belle Meade to adopt sweeter wines if its objective was to make money. It is no secret that Belle Meade’s current portfolio of wines leans heavily to the sweet end of the spectrum. This fits with its objectives to generate revenue for the plantation.

A major start-up hurdle for Belle Meade turned out to be the issue of where to store the bottled wine. Ideally, the location needed to be secure and near the point- of-sale as well as of sufficient size to accommodate growth in volume over time. It also needed to be “climate-friendly” to minimize significant variations in temperature to protect the product. The best solution turned out to be the historical dairy located right there on the property. It was a large building located relatively close to the man- sion. Because it was made out of stone, it created an almost ideal environment for storing the cases of wine. This became Belle Meade’s bonded storage facility.

When the idea of a winery was first conceived, the Kelleys immediately realized that the existing 250,000 annual visitors to the historic property were going to be the primary initial market for the wines produced at the winery. Property tours were redesigned to conclude with an opportunity for guests to be escorted to the tasting room for a complimentary tasting. Each wine would be presented to include the background on its composition and properties, along with any relevant historical facts that aligned with what had been presented on the earlier tour. Each bottle comes in Belle Meade specific packaging with thoroughbred horse designer labels to connect it with the plantation’s past. Because of the unique vintages produced at the winery, tourists often purchase multiple bottles and sometimes cases to take back to their family and friends.

According to Sheree Kelley, Belle Meade Winery Manager, “We are different because people come to see the plantation and then discover the winery.” As with all social entrepreneurships, the main purpose is to create social change. As the Belle Meade website explains, the site makes history real for visitors by educating them about its historical roots. The winery profits are used for historical preserva- tion of the plantation and educational initiatives on-site. One such educational initia- tive involves hosting summer camps for children. During the school year, the nonprofit also underwrites many school trips to the plantation, enabling children to experience and learn about the history of the 1800s.

SUCCESS BEYOND EXPECTATIONS: TOURS, TASTINGS, AND SOCIAL MEDIA An official tour of Belle Meade begins as guests enter the front doors of the mansion. The mansion is maintained as closely as possible to how it is believed to have existed in the 1890s. Upon entering the mansion, visitors enter a dark, subdued foyer deco- rated with framed pictures of racing horses to emphasize the plantation’s history in thoroughbred breeding and racing. Since the 1990s, every horse that has run the Kentucky Derby has been a blood descendent of Belle Meade. Many of these legendary horses grace the various Belle Meade labels on their wine bottles.

After touring the grounds, visitors are invited to wine tastings in Belle Meade’s tasting room. The interior of the tasting room fits in with the historical roots of the plantation, from the medium dark wood supported by a stone base to a wood- burning fireplace to add ambience to the room. Glass windows allow visitors a direct

Case 20 • Belle Meade Plantation: A Social Entrepreneurship Marketing Strategy 529

view into the tank room where the wine is stored prior to bottling. To enhance its warmth and hospitality, the room also includes a dessert counter with Peanut Butter Pecans, artisanal chocolates, and other confectionaries. These desserts also serve as added revenue for the nonprofit. A wine garden is available outside the doorway for visitors who want to purchase a bottle of wine and enjoy it on the premises. Since opening in 2009, the winery has become an all-staff effort. The winery has been an overwhelming success, exceeding the first year’s 10,000-bottle sales goal with sales topping 54,000 bottles. Case Exhibit 20.1 shows an illustration of the company’s hand-bottling efforts during the first year of operation. Belle Meade ensures that everyone on its staff is knowledgeable about the winery process. “Some of the grapes are grown and crushed in Middle Tennessee, and the juice is brought to our tanks on site. Everyone on staff knows how to bottle wine—it’s a great team-building exercise,” the Kelleys explain.

The winery’s annual revenues have grown to approximately $3.0 million, with an additional $200,000 in wine-related merchandise. Case Exhibit 20.2 presents a pro forma income statement summarizing the winery’s first 4 years of operations. How- ever, despite its success, the Kelleys are careful to note that “starting a winery is a monumental decision. It’s not for the faint of heart!”

PROMOTING THE SOCIAL ENTERPRISE Belle Meade’s staff does nd to engage in marketing. The winery sells all of its output each ot rest on its laurels. Like any business, they recognize the neeyear at current prices, with the ability to sell more if storage and warehousing become available. The primary means of marketing the winery is through the organization’s own web- site (www.bellemeadewinery.com), tourist visits, local press/media, social media, and word of mouth. Because of current demand for its products, the winery has not undertaken any traditional advertising. However, it does make extensive use of social media for no-cost promotions with a quick turn-around time.

CASE EXHIBIT 20.1 Illustration of Hand-Bottling—Year One of Operations

530 Case 20 • Belle Meade Plantation: A Social Entrepreneurship Marketing Strategy

“In 2011, we started a Groupon promotion in the third week of January,” stated the Kelleys. “We offered two tours and two free wine tastings at half-price and sold 1,300 tickets. That is 2,600 people who have 60 days to redeem their voucher.” Groupon’s success prompted another discount voucher promotion through Living Social. A Valentine’s Day special resulted in the sale of 1,000 tickets. Even more impressive, these incentives generated record sales in Belle Meade’s slowest months. The winery also hosts several events for the local community, such as Jazz on the Lawn during the summer and Tennessee’s largest Kentucky Derby Party.

The organization is also examining market trends to improve demand for its tours. “We were looking at travel trends, and we know that people want to be more involved than just taking a tour,” said the Kelleys. As a result, Belle Meade is intro- ducing a Southern culinary experience using graduate students from the University of Mississippi’s Southern Foodways program to create the tour. The plan is to use the original kitchen to give visitors the chance to taste Southern biscuits, beaten bis- cuits, and cornbread. The experience includes a tour of the root cellar and smoke- house where visitors will learn why the South’s heat and humidity created a need for food preservation techniques such as curing ham.

New tours are also being planned that further incorporate the winery. With help from Belmont University’s MBA students, a marketing plan was developed suggest- ing an event called the Progressive Wine Tour. This event would provide guests with a tour of the historic Belle Meade mansion and a personalized walking tour of histor- ical points of interest on the plantation property. During the tour, guests would be treated to five of the Belle Meade premium wines paired with light appetizers at focal points throughout the property.

The winery has become exceedingly popular. Many local prominent restaurants in Nashville have requested that Belle Meade wines become the official wine of their restaurants. The winery has been forced to decline to sell to restaurants due to limited supply. The winery also sells its products online and is available in over 15 states.

CHALLENGES FACING BELLE MEADE PLANTATION While the winery has experienced phenomenal success since opening, there are still significant risk factors that it must address. One of the major challenges involves managing future growth. The winery is constrained by liquor laws that require the production of wine be done on-site where the wine is sold. An off-site storage facility is not legal in the state of Tennessee. Because visitation to the plantation has grown

CASE EXHIBIT 20.2 Pro Forma Income Statement—Belle Meade Winery 2010–2014

2010 2011 2012 2013 2014* Revenue: Wine sales $456,485 $1,019,346 $1,536,865 $2,001,223 $3,050,000 Gift shop sales 31,500 42,478 45,650 53,275 60,100

Total revenue $487,985 $1,061,824 $1,582,515 $2,054,498 $3,110,100

Expenses: Cost of sales $165,212 $375,620 $566,552 $736,714 $915,000 Other expenses 91,234 122,925 173,500 195,800 298,595

Total expenses $256,446 $498,545 $730,052 $932,514 $1,213,595 Net income 231,539 $563,279 $852,463 $1,121,984 $1,896,505

*Projected based on data through August 2014.

Case 20 • Belle Meade Plantation: A Social Entrepreneurship Marketing Strategy 531

at a record pace and approached capacity limits, handling the growing crowds and staffing at Belle Meade has proven to be a challenge.

Currently, Belle Meade Winery is the only nonprofit winery located in Nashville. However, like any entrepreneurial endeavor success tends to create more competi- tion. Belle Meade must be on the lookout for rivals who might choose to establish themselves in Nashville. While the company has seen great success with social media, to date it has done little in the way of formal promotional spending. Its excel- lent sales staff, outstanding products, captive audience, social media marketing, and a lack of direct competition eliminates the need for formal spending on promotion, but this might change if competitors enter the same area. It is also possible that other historic properties in Nashville, such as The Hermitage or Belmont Mansion, might try to pursue similar social entrepreneurship opportunities. Belle Meade still faces competition from other historic sites that capture consumers’ time and money.

In line with its entrepreneurial spirit, Belle Meade management and staff have recognized the importance of recognizing its strengths, weaknesses, opportunities, and threats (SWOT). A SWOT analysis is helpful for organizing and evaluating a com- pany’s strategic position. Strengths are internal factors that the firm has as capabili- ties or assets. Weaknesses are internal factors unique to the firm, which the firm may not always be able to control but can often adjust to diminish or eliminate the nega- tive aspects. Opportunities are external factors that relate to the environment in which the firm operates. Threats are also environmental and uncontrollable. Case Exhibit 20.3 shows a SWOT analysis conducted for Belle Meade. The organization hopes that identifying its strengths, weaknesses, opportunities, and threats will help to improve operations, capitalize on strengths, recognize weaknesses, neutralize threats, and understand opportunities.

CASE EXHIBIT 20.3 Belle Meade SWOT Analysis

Strengths Historic location Preserved antiques/ambience Only nonprofit winery (unique positioning) Important history and rich culture Knowledgeably diverse staff Strong demand for wine products Self-sufficient, all-inclusive location Products tied to plantation’s unique history (wines named after famous horses raised on the plantation) Themed tours and special holiday specials Harding House restaurant location Excellent sales staff Captive audience Music events Southern culinary experience

Weaknesses Not enough capacity to meet demand Winery is the only permanent source of funding Lack of space for expansion Frequent sell-outs of wine products Restricted to activities fitting the historic nature of the plantation Decrease in volunteers Narrow niche brand positioning Limited promotional budget

Opportunities Growing interest in wine throughout the state Low cost of social media Families that want children to experience history Consumer willingness to pay more for a unique product/ experience Growing food movement in Middle Tennessee Hotbed for New Age chefs Growing interest in festivals

Threats Competition from other nonprofits for consumer dollars Slowing growth rate in charitable giving The rise of other social entrepreneurship ventures Strict regulations limiting the storage and production of wine Biltmore plantation winery in North Carolina (privately owned) Economic fluctuations

532 Case 20 • Belle Meade Plantation: A Social Entrepreneurship Marketing Strategy

CONCLUSION Belle Meade’s adoption of business principles in the form of social entrepreneurship demonstrates how all organizations—whether for-profit or nonprofit—must use activities such as promotion, marketing strategy, and customer relationship manage- ment to be successful. For-profit firms can also develop a business with a social mis- sion. Toms, for instance, is a for-profit that donates one pair of shoes to children in need for each pair of shoes it sells. Warby Parker donates money to its partners based upon number of glass sold to train men and women in developing countries on how to sell glasses and provide basic eye exams. This demonstrates that social entrepreneurship is not limited solely to nonprofits.

By leveraging its wine-making venture, Belle Meade has tapped into new reve- nue to support the plantation without having to rely simply on donations or ticket sales. This better prepares Belle Meade to thrive during times when other nonprofits are struggling due to decreased funding streams. The wine can also provide public support and awareness of the historic plantation.

Despite its success, maintaining its mission will require Belle Meade to adapt and investigate new ways to reach consumers. With Nashville as the epicenter of the food movement, Belle Meade is faced with more decisions regarding whether to pair local foods and wines within its operations. Both the challenges and opportunities that Belle Meade faces illustrate how the plantation operates with the same business con- cepts as for-profit organizations. Social entrepreneurship rests on a sound business strategy that can be used to effectively advance change. The SWOT analysis provides a good foundation for continuing to develop a highly successful marketing strategy.

SOURCES Robert Barro, Crisis of governments: The ongoing global financial crisis and recession, 2011, http:// www.iea.org.uk/sites/default/files/publications/files/Crises%20of%20Government.pdfB (accessed August 27, 2014); Belle Meade, “The history of Belle Meade,” bellemeadeplantation.com/history (accessed August 27, 2014); Belle Meade, “The winery at Belle Meade plantation,” bellemeadewinery.com (accessed August 27, 2014); Woods Bowman (Fall 2011), “Financial capacity and sustainability of ordinary nonprofits,” Nonprofit Management Leadership, 22(1), 37–51; Julianne Gassman, Norma A. Dolch, Ann Marie Kinnell, Regan Harwell Schaffer, Sue Ann Strom, and Amy Costliow, “A three year study of the nonprofit sector’s response to the economic challenges in six cities across the nation,” Center for Nonprofit Strategy and Management, Baruch College, The City University of New York, June 2012; GuideStar, “Late Fall 2011 nonprofit fundraising study,” 2014, http://www.guidestar.org/rxg/ news/publications/nonprofits-and-economy-late-fall-2011.aspx (accessed August 27, 2014); Michelle Nichols, “Charities still struggling in wake of recession,” Fiscal Times, June 19, 2012, http://www. thefiscaltimes.com/Articles/2012/06/19/Charities-Still-Struggling-in-Wake-of-Recession (accessed August 27, 2014); Lisa M. Sontag-Padilla, Lynette Staplefoot, and Kristy Gonzalez Morganti, Financial Sustainability for Nonprofit Organizations; A Review of the Literature, 2012, Rand Corporation, Arlington, VA, p. 2; Terry Sullivan and Kathy Sullivan, “Tennessee,” Wine Trail Traveler, http:// winetrailtraveler.com/tennessee/tennessee.php (accessed August 27, 2014); Warby Parker, “Buy a pair, give a pair,” https://www.warbyparker.com/buy-a-pair-give-a-pair (accessed April 6, 2015); “Welcome to Tennessee Wine Country,” Tennessee Wines, http://www.tennesseewines.com/ (accessed August 27, 2014)

QUESTIONS 1. Analyze the SWOT analysis indicating the current situation of Belle Meade’s mar-

keting strategy. 2. Given the success of the current Belle Meade Winery, how can Belle Meade

effectively address the challenges facing the winery for future growth? 3. Understanding the success of the Belle Meade Winery, how could other organi-

zations use social entrepreneurship to improve their marketing strategies?

Case 20 • Belle Meade Plantation: A Social Entrepreneurship Marketing Strategy 533

Coca-Cola: Integrated Marketing Communications*

Synopsis: Coca-Cola displays an extensive understanding of integrated marketing communications. In conjunction with traditional marketing, the company uses a number of newer promotional tools to increase brand awareness, such as social media marketing. Perhaps the best example of Coca-Cola’s use of integrated marketing occurs through its partnership with the Olympics. This case examines Coca-Cola’s IMC strategies and looks at the benefits and costs of being a major Olympic corporate sponsor.

Themes: Integrated marketing communications, promotion strategy, marketing program, branding, positioning, sponsorships, sports marketing

Marketers have traditionally relied on television, radio, and print media to transmit advertising content. However, in the past decade technological advances have led to the creation of new platforms to reach consumers. For instance, over 50 percent of American adults now own a smartphone and tablet computer. These devices allow users to stay constantly connected to social media sites and create opportunities for marketers to reach consumers with real-time targeted advertisements. These new technologies have increased integrated marketing opportunities for major compa- nies. Integrated marketing communications refer to the coordination of promotion and other marketing efforts to ensure maximum informational and persuasive impact on customers. This concept of an all-encompassing marketing strategy ini- tially emerged at the American Association of Advertising Agencies conference in 1989. It allows an organization to coordinate and manage its promotional efforts to transmit consistent messages. Integrated marketing communications also enable synchronization of promotion elements and can improve the efficiency and effective- ness of promotion budgets. Thus, this approach fosters not only long-term customer relationships but also the efficient use of promotional resources. Since so many factors are involved in a marketing strategy, the concept should incorporate all aspects of marketing communications such as advertising, sales promotion, public relations, and direct marketing to obtain promotional objectives.

For this reason, an effective integrated marketing strategy tends to combine dif- ferent elements of the promotion mix—advertising, public relations, personal selling, and sales promotion—that combine more traditional forms of marketing (e.g., print advertisements) with newer forms of marketing (e.g., QR codes). Based on the understanding that a unified and broad strategy is the most effective way to market its brand, Coca-Cola approaches marketing strategically, using both newer and more traditional marketing media to encourage growth. This organizational behavior has become a key part of the company culture of Coca-Cola and has contributed to its becoming one of the most admired companies in the world. Although Coca-Cola leverages many of its resources to market its products and brand, traditional media outlets provide a foundation to build upon.

Coca-Cola provides content through multiple communication channels, ranging from traditional media (billboards, television, and sponsorship) to more modern

CASE

*Timothy Aurand, Associate Professor of Marketing at Northern Illinois University, prepared this case. Jennifer Sawayda, University of New Mexico, and Julian Mathias, University of New Mexico, provided editorial assistance. This case is provided for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation.

534

channels (social media, digital coupons, and mobile advertisements). Over the past couple of decades, technological advancements in the media landscape have driven dramatic changes and alterations in organizational marketing strategies. Due to the continuous evolution of media platforms and communication channels in recent years, traditional marketing outlets such as print, radio, television, and partner- ships/sponsorships have progressed to more modern technologically driven chan- nels such as e-mail, Internet advertisements, e-catalogs, social media, and mobile communications. These different types of promotion work together as a unified force rather than individually, increasing the company’s promotional reach. For instance, as part of its marketing strategy, Coca-Cola has utilized a content market- ing technique with advertisements that cater to specific audiences when promoting the brand. Coca-Cola is an excellent example of a company that effectively inte- grates traditional and modern channels as part of a broad marketing strategy.

COCA-COLA COMPANY OVERVIEW Since its debut in 1886, The Coca-Cola Company (Coca-Cola) has grown into a $48 billion multinational corporation. The company is the largest worldwide manufac- turer, marketer, and distributor of nonalcoholic beverage concentrates and syrups in over 200 countries. Coca-Cola has thrived for over 125 years. Today its net income of $8 billion and gross profit of $28.5 billion demonstrate its financial success.

CORPORATE HISTORY The Coca-Cola formula was invented by pharmacist Dr. John Pemberton, who sold the beverage at Jacobs’ Pharmacy in Atlanta, Georgia, for five cents a glass. In its first year, Coca-Cola averaged sales of nine glasses a day. Today, more than 1.8 billion servings of Coca-Cola products are consumed each day in over 200 countries. Coca-Cola has continually evolved since 1886, but its formula has stood the test of time for over a century.

Coca-Cola began promoting its brand with coupons for complimentary samples (a type of sales promotion) as well as the placement of clocks and calendars display- ing the Coca-Cola logo in different pharmacies. In 1915, the signature contour bottle was created to be easily recognizable and prevent imitators from copying the brand. The company continued to grow over the years and launched many new products including Diet Coke, Sprite, and Fanta Orange. Evolving from its original promo- tions, Coca-Cola spent millions of dollars on billboard advertising in rural areas, along highways, and on the sides of buildings. Today, Coca-Cola’s beverage concen- trates and syrups are used to produce more than 500 beverage brands.

PRODUCTS For 70 years the only beverage created and sold by Coca-Cola was its traditional Coca-Cola product. In 1955, Coca-Cola expanded its product offering when a bottler in Italy began selling Fanta Orange. Since this time, the company has continued to add a wider variety of beverages and portion sizes for every consumer that appeals to different lifestyles, life stages, and life occasions.

Coca-Cola sells more than 3,500 beverages in numerous categories that include regular carbonated soda, low- and no-calorie sparkling beverages, fruit juices and fruit drinks, bottled water, sports and energy drinks, and ready-to-drink teas and coffee. Prior to introducing a new product to the market, Coca-Cola performs nearly 450 different taste tests to ensure the ingredients and packaging quality meet the company’s standards.

Case 21 • Coca-Cola: Integrated Marketing Communications 535

Coca-Cola is always on the lookout for new product categories or technologies. For instance, the company entered into an agreement with Keurig Green Mountain, the creator of the popular Keurig one-cup coffee brewer, to develop and introduce Coca-Cola products on Keurig Green Mountain’s newest machine. This collaboration will result in carbonated and noncarbonated beverages such as soft drinks, teas, and juices through their Keurig machines. Muhtar Kent, Coca-Cola’s Chief Executive Officer, claims the deal will provide the company with access to new business oppor- tunities. Consequently, Coca-Cola became the largest shareholder in Keurig Green Mountain. The partnership and financial stake in Keurig Green Mountain offer Coca-Cola an opportunity to enhance its bottling system and expand in the single serve soda and coffee market.

CORPORATE STRATEGY Coca-Cola’s mission and vision statements guide the strategy of the company by describing its business emphasis and future goals. For instance, its three-tiered mission statement involves (1) to refresh the world, (2) to inspire moments of optimism, and (3) to create value and make a difference. Coca-Cola’s vision state- ment further supports its mission with its emphasis on the six Ps: people, portfolio, partners, profit, planet, and productivity.

Using these statements as a foundation for its business, Coca-Cola created its strategic integrated marketing plan known as 2020 Vision. While some of the main objectives of this plan will directly benefit Coca-Cola’s bottom line, other objectives focus on building a strategic business model that relies on developing and strength- ening partnerships while being environmentally conscious.

One of the main goals of the 2020 Vision strategy is to increase Coca-Cola’s ser- vings to consumers by 3 billion servings per day. In order to achieve another 2020 Vision goal of reaching everyone in the world, Coca-Cola will leverage an estimated $4 billion advertising and marketing budget annually. The content of Coca-Cola’s integrated marketing strategy relies on principles outlined in its Responsible Market- ing Policy. This includes refraining from placing advertising in programs where more than 35 percent of the audience are children less than 12 years of age. The com- pany also does not buy advertising on the Internet that directly targets children and refrains from advertising in schools.

INTEGRATED MARKETING THROUGH OLYMPIC PARTNERSHIP From early in its history, Coca-Cola recognized the importance of partnering with the Olympic Games as a public relations strategy. In 1928, Coca-Cola traveled with Team USA for the first time to the Olympics in Amsterdam and has been a sponsor for every Olympic team since. Coca-Cola’s continuous Olympic sponsorship makes it the longest running corporate sponsor in Olympic history. Fans of the Olympics can accurately predict that when the Olympic Games begin, Coca-Cola will inevitably be there. Such a strong relationship has helped Coca-Cola become a household brand name. Its brand is estimated to be worth more than $80.6 billion.

A major goal of integrated marketing strategy is to send consistent messages to customers that will strongly impact them. Because various units both inside and out- side most companies have traditionally planned and implemented promotional efforts, customers have not always received consistent messages. To help create syn- ergistic effects among Coca-Cola’s numerous marketing channels, Coca-Cola employs a strategy known as content marketing. Content marketing is an approach that centers on educating audiences with valuable and reliable information in an effort to indirectly drive sales.

536 Case 21 • Coca-Cola: Integrated Marketing Communications

In an effort to emphasize more modern marketing techniques, Coca-Cola launched the Open Happiness campaign in 2009, which used various forms of communication to bring happiness to the consumer. Additionally, to further advance the idea of content marketing, Coca-Cola geared its 2012 Olympics cam- paign toward content rather than brand awareness. At the 2008 Beijing Olympics, Coca-Cola’s promotions consisted of fewer than 10 unique posters and themed ads. Only 4 years later for the next Olympics, Coca-Cola created and dispersed over 120 pieces of advertising content, which included traditional media such as TV shows and documentary film as well as newer media including mobile applica- tions. The customized ads were a corporate effort to cater to more specific target audiences, rather than just universally promoting the Coca-Cola brand. Coca-Cola also implemented a no-waste strategy during the 2012 Olympics in which all bot- tles sold were recyclable and the company used biogas trucks and coolers without harmful chemicals.

MARKETING IN PARTNERSHIP WITH THE OLYMPIC GAMES In many locations where Coca-Cola is consumed, the availability of modern technol- ogy is limited, which restricts the ability to leverage social media. As a result, the company’s marketing department continues to rely heavily on traditional forms of marketing. While many companies are moving away from traditional marketing tech- niques in favor of social media, there is still a need to integrate new marketing plat- forms so that they synergistically enhance or improve upon the existing traditional marketing foundation.

“To refresh the world,” as stated in Coca Cola’s mission statement, highlights the company’s desire to have its products available everywhere in the world. What better way to reach mass audiences than to advertise on the biggest global stage, the Olym- pic Games? As the longest continuously running corporate sponsor of the Olympic Games, Coca-Cola has mastered the art of effectively employing promotion through its Olympic sponsorship.

TELEVISION COMMERCIAL ADVERTISING Although many companies are prioritizing social media and Internet-driven plat- forms to reach customers, multinational corporations, including Coca-Cola, continue to see the value in television advertising. This is an incredibly important marketing channel for the Olympics, as television advertising is one of its premier marketing platforms because Olympic broadcasts are syndicated worldwide.

During the 2012 London Olympic Games, the company created the Coca-Cola 8-Pack of Olympic and Paralympic Athletes commercial series featuring eight Olympic stars: David Boudia (Diving), Henry Cejudo (Wrestling), Marlen Esparza (Boxing), John Isner (Tennis), Shawn Johnson (Gymnastics), Jessica Long (Para- lympic Swimming), Alex Morgan (Soccer), and David Oliver (Track & Field). The commercials highlighted their stories and accomplishments in reaching the Olym- pic Games, while simultaneously emphasizing Coca-Cola’s values. The goal was to create product loyalty by having its audience empathize with each athlete’s story. Henceforth, customers were urged to buy products featuring limited-edition pack- aging that supported individual athletes. This advertising campaign allowed custo- mers to feel connected to the Games and Olympic athletes through Coca-Cola products.

For the 2014 Winter Olympics in Sochi, Russia, Coca-Cola released a 60-second television commercial called “It’s Beautiful” that featured the song “America the Beautiful” sung in seven languages. The advertisement linked Coca-Cola to America but also stressed the multicultural nature of the American population. Behind- the-scenes videos of the cast were also released on YouTube. The advertisement

Case 21 • Coca-Cola: Integrated Marketing Communications 537

was meant to elicit good feelings among the audience and emphasize that Coca-Cola is for everyone. Two other television commercials Coca-Cola featured for the Sochi Olympics included its fourth iteration of its “Ceremony” commercial, which high- lights Olympic medal moments throughout the Games’ history, as well as a more humorous, fun-loving commercial called “Fountain Pour,” featuring a customer stealing extra sips at a soda fountain.

PRODUCT DISPLAY ADVERTISING Among its use of traditional media, Coca-Cola adopts special product packaging to coincide with the Olympic Games. Its ultimate goal is to provide information to cus- tomers and other stakeholders to initiate and develop long-term relationships. Due to its partnership, Coca-Cola receives sponsorship rights to brand products with the Olympic name and symbols, such as the rings and torch of the games. This strategic product placement strongly connects the company with the worldwide popularity of the Games.

Each campaign also reflects the culture and values of the host country while distinctly highlighting the Coca-Cola brand. As an example, Coca-Cola created unique cans for both the London and Beijing Olympic Games. At the 2008 Olympics in Beijing, Coca-Cola designed a can to celebrate the Chinese culture featuring Olympic themes with accents of red. In China, red symbolizes joy, fortune, success, and good luck. The specialized can not only had Olympic themes but also clouds and kites to represent further aspects of Chinese culture. Clouds represent good luck, and kites are an ancient Chinese invention that symbolizes the spirit of the Chinese people and the teamwork necessary for the Beijing Olympics to be a success. In the 2012 Olympic Games in the United Kingdom, Coca-Cola partnered with famous photographer Rankin to create a limited edition bottle for Great Britain featuring one of his images.

The 2014 Winter Olympics in Sochi, Russia, proved problematic for Coca-Cola with its product display advertising. For its “Share a Coke” promotional campaign, Coca-Cola released an online interactive feature that would allow consumers to place messages to cheer on Olympic athletes. While the campaign itself was not at fault, the location of the Olympics caused a public relations nightmare. Although Coca-Cola has been consistently sponsoring the Olympics for years, it was heavily criticized by LGBT activists for supporting the Olympics because they were held in Russia. Russia’s law banning homosexual “propaganda” caused outrage among global consumers. Therefore, what might have been a good idea turned into a major mistake when LGBT activists began encouraging global consumers to use the inter- active feature to write messages about Russian brutality against homosexuals. It became such a problem that Coca-Cola shut down the feature. Additionally, a video of a Coca-Cola commercial from 1971 was edited to show Russian brutality against homosexuals. The video went viral. Finally, Coca-Cola was eliminated from that year’s shortlist at the awards ceremony of a popular gay magazine. This debacle demonstrates the darker side of sponsorship, when one highly criticized brand influ- ences the perception of the other brand. These are risks Coca-Cola must assume in its continual sponsorship of the Olympics.

LARGE DISPLAY AND SIGNAGE ADVERTISING Traditional marketing includes the use of large displays, such as billboards, signs, and symbols. Coca-Cola became well known for its display and signage advertise- ments during the 2008 Olympics. In building anticipation for the Beijing Olympics, Coca-Cola created a 50-foot tall, high-tech LED screen version of its classic glass coke bottle. The LEDs were used to display positive messages consistent with Coca-Cola’s “happiness” marketing campaign that used positive words to help

538 Case 21 • Coca-Cola: Integrated Marketing Communications

promote the brand. Coca-Cola was attempting to draw upon the emotional elements surrounding China’s hosting of the Olympics, hoping to win over the hearts of new consumers. Coca-Cola featured the display all over China in hopes of bringing loyalty and trust to their brand.

During the Olympics, advertising signage is not permitted inside the Olympic stadiums. In accordance with the legal limits, Coca-Cola creatively executed several advertising tactics to gain exposure. In addition to its billboard campaign, Coca-Cola partnered with retail stores to display televisions featuring Coca-Cola products and advertisements. Other displays included large inflatable Coca-Cola bottles featuring Chinese Olympic athletes, which created photo opportunities for tourists. Another clever way that Coca-Cola created awareness was by handing out Coca-Cola branded foam fingers to fans as they were entering stadiums. This allowed Coca- Cola to advertise within the Olympic stadiums indirectly and legally.

MUSIC AND RADIO ADVERTISING For its sponsorship of the 2012 U.K. Olympics, Coca-Cola introduced the “Move to the Beat” music campaign. The campaign, which started airing in July 2012, focused on blending the music and sounds of Olympic events. Coke targeted the campaign toward teenagers, hoping to create enthusiasm for the Olympics by combining the Games with popular music. In one advertisement, a drumbeat was replaced by the sound of an arrow finding its target. The advertisement also combined the sounds of gymnasts launching off vaults, runners on a track, table tennis players during a match, and martial artists—all in combination with Coca-Cola’s famous jingle.

To launch the campaign, Coca-Cola unveiled the Beat Wall in East London fea- turing urban art consisting of work from world-renowned young artists to depict the synthesis of music and the sounds of sports. A billboard and television commer- cials were used to highlight the “Move to the Beat” campaign during the London games. Coca-Cola also created Coca-Cola Radio, which gave DJs and other music enthusiasts an opportunity to participate in the Olympic festivities. Coca-Cola also used digital media to enhance the impact of the “Move to the Beat” campaign, as the next section demonstrates.

DIGITAL MARKETING CAMPAIGNS The 2008 Olympics in China were the first Games in which digital media were used extensively as a marketing tool. Coca-Cola seized upon this opportunity. Its cam- paign “Design the World a Coke” encouraged consumers to build their own packag- ing designs for virtual Coke bottles. Coca-Cola also launched its “Coca-Cola Virtual Torch Relay” on the Chinese social network QQ, one of the most popular among Chi- nese consumers at the time. Participants could participate in these virtual relays through instant messaging. Within 2 weeks, 17 million individuals had participated.

Coca-Cola also used social media heavily in its 2012 “Move to the Beat” cam- paign discussed earlier. It introduced a Facebook app called Track the Beat that encouraged teens to download the app through Coca-Cola’s website and then collect “beats” on Facebook to create their own versions of the song. Participants were awarded prizes and had the ability to download wallpapers and screen savers, preview the Move to the Beat commercial on Facebook before it was shown on television, as well as other incentives. More than 3.5 million original versions of the song were created as a result of the campaign.

Unfortunately for Coca-Cola, its digital campaign for the 2014 Winter Olympics was a disaster due to the controversy over Russia’s treatment of homosexual propa- ganda. Another criticism levied against Coca-Cola was the allegation that the word “gay” was not accepted by Coca-Cola’s online interactive feature when individuals

Case 21 • Coca-Cola: Integrated Marketing Communications 539

were customizing their Coca-Cola cans. However, the word “straight” was accepted. Coca-Cola admitted that its South African website did have this problem, although it was an unintentional glitch. Coca-Cola apologized for the issue and pulled the web- site. This public relations mishap demonstrates the care that companies must take when implementing digital media campaigns.

CONTINUED SPONSORSHIP WITH OTHER ORGANIZATIONS Further supporting Coca-Cola’s inclusivity and diversity, the company has been a sponsor of the Special Olympics since 1968, as well as the sole founding partner. As a special tribute to the Special Olympics community, Coca-Cola donated copies of Mark Shriver’s biography, A Good Man, in which Shriver details his personal journey to understanding and accepting his father’s legacy. The legacy his father provided was instilling within his five children the calling to serve the community. For its 2013 Special Olympics Games in Bath, England, the company released a billboard marketing campaign that featured 12 of the athletes in the Special Olympics. Coca- Cola’s support helps rally the community to take pride in itself and the people close to it. In return, Coca-Cola develops a positive image among community members. In addition to its sponsorship of the Olympics and Special Olympics, Coca-Cola began associating and partnering with FIFA, Rugby World Cup, the NBA, and NASCAR dur- ing the 1990s.

BENEFITS AND COSTS OF THE OLYMPIC PARTNERSHIP Event sponsorship accounts for a significant portion of Coca-Cola’s marketing expenditures. Coca-Cola spent $29.9 million to promote its products at the 1984 Olympic Games in Los Angeles. Furthermore, during the 1996 Olympics in Atlanta, the company was the leading advertiser, spending $73.6 million. As a partner of all 2014 National Olympic Committees and their teams, Coca-Cola has developed a strong tradition of creating programs and events to bring the spirit of the Games to consumers around the world. As a result, the company spent an estimated $100 mil- lion for its sponsorship rights for the 2014 Olympic Games in Sochi. It is estimated that for every dollar of sponsorship fees, a company will typically spend an addi- tional $3 to $4 on new marketing campaigns and advertising.

In addition to monetary costs, Coca-Cola is also at risk for bad publicity like it faced in the 2014 Sochi games. As with any sponsorship, bad press affecting the sponsored brand is likely to affect the sponsoring organization as well. Coca-Cola’s choice of a digital marketing campaign proved inappropriate for the Games due to the Russian controversy regarding homosexuality. As a result of the bad publicity, Coca-Cola was forced to take quick action before it snowballed into a major scandal.

Despite the costs and risks of sponsorship, Coca-Cola views the benefits as being much greater. Although an official return on investment (ROI) is hard to calcu- late, Coca-Cola’s sponsorship allows it to build global awareness of the company over a longer period of time. Its stated reasoning for continuous sponsorship goes hand-in-hand with this concept. In a statement on Coca-Cola’s U.K. website, the com- pany cited deeper customer relationships as a major factor in perpetual Olympic sponsorship. The Olympics provides one of the largest stages in the world with over 200 countries competing and billions of viewers. The brand awareness generated by the Olympic Games sponsorship is what Coca-Cola refers to as “social value” and is highly significant. Coca-Cola has been working with an outside company, Demos, to try to place a monetary value on social value and better understand the impact it has on the company’s profits.

Coca-Cola states that sponsorship is more about building brand awareness and customer relationships than it is about ROI. However, one observational study

540 Case 21 • Coca-Cola: Integrated Marketing Communications

considered all the publicly traded Olympic advertisers and partners’ stock prices for the 4 weeks of the Olympic Games from 2000 to 2010. The study results indicated that the companies that advertised during the Olympic broadcasts outperformed the S&P 500. It also suggests that companies that partner with the Olympics, as well as advertise during the broadcast, outperform the S&P 500 by an even greater mar- gin. The results of the study support the notion that there are tangible benefits that arise from sponsoring the Olympic Games. For these reasons, Coca-Cola signed an agreement with the Internal Olympic Committee in 2005 to continue its partnership and have Coca-Cola products be a part of the Olympics until 2020.

CONCLUSION Coca-Cola integrates traditional and modern marketing strategies in the Olympics to promote its vast brand assortment and create global awareness. Its many promo- tional campaigns during the Olympics have helped make it one of the most dominant and recognizable companies in the world. The company effectively integrates a wide range of promotional media, including television advertising, product display adver- tising, and digital marketing, to bring its brand to the attention of Olympic viewers.

Maintaining and continuing to build one of the most recognized brands in the world requires constant adaptations and improvements. Multinational corporations like Coca-Cola need to constantly evaluate how they can better integrate marketing platforms to ensure that consistent messages are reaching customers. Coca-Cola should continue to monitor the environment to understand what issues are impor- tant to Olympic viewers. By understanding the global market, Coca-Cola can develop effective campaigns and avoid issues like the digital marketing failure in the Sochi Olympics. As Coca-Cola continues to sponsor the Olympics, its brand will become even more intertwined with the symbolic spirit behind the Games.

SOURCES “2013 World’s Most Admired Companies,” 2013, Fortune, http://archive.fortune.com/magazines/fortune/ most-admired/2013/list/ (accessed February 20, 2015); Ad Age Staff, “For top CMOs, TV remains surest bet for advertising,” Advertising Age, April 18, 2011, http://adage.com/article/special-report-tv-upfront/ top-cmos-tv-remains-surest-bet-advertising/227011/ (accessed February 20, 2015); Lisa Baertlein and Phil Wahba, “Coca-Cola takes $1.3 billion stake in Green Mountain,” Reuters, February 5, 2014, http://www. reuters.com/article/2014/02/06/us-greenmountain-cocacola-idUSBREA1423020140206 (accessed February 20, 2015); Bloomberg Interview Video, “Bottom line,” Coca-Cola Journey, December 16, 2011, http:// www.coca-colacompany.com/our-company/coca-cola-marketing-tops-4-billion-tripodi-says (accessed February 20, 2015); Business Wire, “Coca-Cola launches refreshing new programming celebrating london 2012 Olympic Games,” July 5, 2012, http://www.businesswire.com/news/home/20120705005656/ en/Coca-Cola-Launches-Refreshing-Programming-Celebrating-London-2012#.VOdXFnnTBVI (accessed February 20, 2015); Meg Carter, “The 12 best ads of the 2012 Olympics,” Fast Company,http://www. fastcocreate.com/1681309/the-12-best-ads-of-the-2012-olympics (accessed February 20, 2015); Marietta Cauchi, “Companies seek Olympic legacy,” Wall Street Journal, August 21, 2012, http://online.wsj.com/ news/articles/SB10000872396390443855804577602903405838094 (accessed February 20, 2015); “Coca- Cola,” Olympic.org, 2014, http://www.olympic.org/sponsors/coca-cola (accessed February 20, 2015); “Coca-Cola,” Twitter, https://twitter.com/cocacola (accessed February 20, 2015); Coca-Cola Company, 20/20 Vision: Roadmap for winning together: TCCC & our bottling partners, http://assets.coca- colacompany.com/22/b7/ba47681f420fbe7528bc43e3a118/2020_vision.pdf (accessed February 20, 2015); Coca-Cola Company, 125 Years of sharing happiness: A short history of the Coca-Cola Company, 2011, Blanchette Press, http://assets.coca-colacompany.com/7b/46/e5be4e7d43488c2ef43ca1120a15/ TCCC_125Years_Booklet_Spreads_Hi.pdf (accessed February 20, 2015); Coca-Cola Company, “About us–Coca-Cola® beverages and products,” http://www.worldofcoca-cola.com/coca-cola-facts/coca-cola- beverages-and-products/ (accessed February 20, 2015); Coca-Cola Company, “Coca-Cola sponsorships: London 2012 Olympic Games,” January 1, 2012, http://www.coca-colacompany.com/stories/coca-cola- sponsorships-london-2012-olympic-games (accessed February 20, 2015); Coca-Cola Company, Form 10-K 2012, December 21, 2012,http://assets.coca-colacompany.com/c4/28/d86e73434193975a768f3500 ffae/2012-annual-report-on-form-10-k.pdf (accessed February 20, 2015); Coca-Cola, The history of the

Case 21 • Coca-Cola: Integrated Marketing Communications 541

secret formula, http://assets.coca-colacompany.com/11/e3/dcfce4724abda9b66d010a449d55/History%20of %20the%20Secret%20Formula%20Timeline.pdf (accessed February 20, 2015); Coca-Cola Company, “Mission, vision & values,” Coca-Cola Journey, http://www.coca-colacompany.com/our-company/ mission-vision-values (accessed February 20, 2015); Coca-Cola Company, “Special Olympics take centre stage,” Coca-Cola Great Britain, 2010, http://www.coca-cola.co.uk/community/special-olympics/special- olympics-national-summer-games-billboards.html (accessed February 20, 2015); Coca-Cola Company, “Why does Coca-Cola sponsor the Olympic Games?” Coca-Cola Great Britain,http://www.coca-cola.co. uk/faq/olympic-games/why-does-coca-cola-sponsor-the-olympic-games.html (accessed February 20, 2015); Content Marketing Institute, “What is content marketing?” http://contentmarketinginstitute.com/ what-is-content-marketing/ (accessed February 20, 2015); Coca-Cola Company, “What is happiness?” http://us.coca-cola.com/happiness/ (accessed February 20, 2015); Avi Dan, “How does Coca-Cola reinvent itself in a changed world?” Forbes, October 7, 2013, http://www.forbes.com/sites/avidan/2013/ 10/07/just-how-does-coca-cola-reinvent-itself-in-a-changed-world/ (accessed February 20, 2015); Mike Esterl, “Olympic sponsors go for the young,” Wall Street Journal, July 2, 2012, http://www.wsj.com/ articles/SB10001424052702303933404577502473609467112 (accessed February 20, 2015); Dana Flavelle, “Olympic sponsors strike gold,” Toronto Star, February 25, 2010, http://www.thestar.com/business/2010/ 02/25/olympic_sponsors_strike_gold.html (accessed February 20, 2015); Dan Hanover, “Coke moves to the Olympic beat,” Event Marketer, August 7, 2012, http://www.eventmarketer.com/article/coke-s- olympic-activation-bests-everyone/ (accessed February 20, 2015); Virginia Harrison, “Olympic sponsorship: Is it worth it?” CNN Money, January 29, 2014, http://money.cnn.com/2014/01/29/news/ companies/sochi-sponsors-investment/ (accessed February 20, 2015); Constance L. Hays, The real thing: Truth and power at the Coca-Cola Company (New York: Random House, 2004); Interview with Joel Morris (2012), “You have to look more broadly at the benefits that sponsors deliver,” Marketing Week, 35(40), 38; Journey Staff, “America is beautiful and Coca-Cola is for everyone,” Coca-Cola Journey, February 7, 2014, http://www.coca-colacompany.com/stories/america-is-beautiful-and-coca- cola-is-for-everyone (accessed February 20, 2015); Journey Staff, “Responsible marketing policy,” Coca- Cola Journey, January 1, 2012, http://www.coca-colacompany.com/stories/responsible-marketing-policy (accessed February 20, 2015); Ashish Kumar, “Managing marketing mix and communications in a digital era: The role of traditional and new media in a multichannel environment,” ProQuest Dissertations and Theses, 2012, http://search.proquest.com/docview/1112071177?accountid=12846 (accessed February 20, 2015); Laura Lake, “Integrated Marketing Communications (IMC),” About.com, 2015, http://marketing. about.com/od/marketingglossary/g/imcdef.htm (accessed February 20, 2015); Johnny K. Lee, “Marketing and promotion of the Olympic games,” U.S. Sports Academy, March 4, 2008, http://thesportjournal.org/ article/marketing-and-promotion-of-the-olympic-games/ (accessed February 20, 2015); Fang Liu and Willem Smit, “Social media strategy: Learning from the online Cola war,” European Business Review, May 20, 2012, http://www.europeanbusinessreview.com/?p=3541 (accessed February 20, 2015); Shahnaz Mahmud, “Coke designs Olympic push,” AdWeek, July 21, 2008, http://www.adweek.com/news/ advertising-branding/coke-designs-olympics-push-96391 (accessed February 20, 2015); Allen Marber, Paul M. Wellen, Michael Wurtz, and Xiaoke Yi (2012), “Marketing warfare: A case study from the 2008 Beijing Olympics,” International Journal of Business & Public Administration, 9(2), 11-18; Millward Brown, “BrandZ top 100 most valuable global brands ranking,” 2014, https://www.millwardbrown.com/ brandz/2014/Top100/Docs/2014_BrandZ_Top100_Chart.pdf (accessed February 20, 2015); Modern Marketing Partners, “Integrated marketing communications: A modern take on IMC,” Mach 2, 2012, http://www.modernmarketingpartners.com/blog/modern-integrated-marketing-communications#. Uu5gm7StwXU (accessed February 20, 2015); Morningstar, Inc., “The Coca-Cola company,” Financial data provided by Morningstar; David Moth, “Coca-Cola reveals lessons learned from its London Olympics marketing,” Econsultancy, February 6, 2013, https://econsultancy.com/blog/62023-coca-cola- reveals-lessons-learned-from-its-london-olympics-marketing/ (accessed February 20, 2015); “Move to the Beat of London 2012 Commercial,” YouTube, July 27, 2012, https://www.youtube.com/watch? v=_bgVbBvp4X8 (accessed February 20, 2015); James Michael Nichols, “Coca-Cola apologizes for ‘Share a Coke’ promotion deemed homophobic,” Huffington Post, January 28, 2014, http://www. huffingtonpost.com/2014/01/28/coca-cola-apologizes-share-a-coke_n_4682878.html (accessed February 20, 2015); Laura O’Reilly, “Coca-Cola extends Olympic legacy push,” Marketing Week, March 25, 2013, http://www.marketingweek.com/2013/03/25/coca-cola-extends-olympic-legacy-push/ (accessed February 20, 2015); Russell Parsons, “Coke to communicate ‘more pointed’ diversity messages,” Marketing Week, November 19, 2013, http://www.marketingweek.com/2013/11/19/coke-to-communicate-more-pointed- diversity-messages/ (accessed February 20, 2015); Pew Research Center, “Mobile technology fact sheet,” January 2014, http://www.pewinternet.org/fact-sheets/mobile-technology-fact-sheet/ (accessed February 20, 2015); Chris Pleasance, “Coca-Cola axed from gay magazine awards’ shortlist over sponsorship of Sochi Olympics despite Russian homosexual propaganda law,” Daily Mail, January 27, 2014, http://www.dailymail.co.uk/news/article-2546608/Sochi-Olympic-sponsors-Coca-Cola-embarrassed- website-glitch-users-banned-writing-gay-cans-wake-Russian-homosexual-propaganda-law.html (accessed February 20, 2015); PR Newswire, “Coca-Cola supports unique tribute to special Olympic athletes and their dads,” June 15, 2012, http://www.prnewswire.com/news-releases/coca-cola-supports-unique-tribute- to-special-olympic-athletes-and-their-dads-159252215.html (accessed February 20, 2015); José Roitberg, “2008 Coca-Cola 355ml can Beijing Olympics Torch Relay,” Flickr, May 18, 2010, http://www.flickr.com/

542 Case 21 • Coca-Cola: Integrated Marketing Communications

photos/roitberg/4619617658/ (accessed February 20, 2015); Sheila Shayon, “Coca-Cola continues to open happiness, from Coke machine to truck to table,” Brand Channel, September 19, 2012, http:// www.brandchannel.com/home/post/2012/09/19/Coca-Cola-Open-Happiness-091912.aspx (accessed February 20, 2015); Michelangelo Signorile, “Olympic sponsors were warned about Sochi; Now McDonald’s and Coca-Cola are having a PR nightmare,” Huffington Post, January 28, 2014, http://www. huffingtonpost.com/michelangelo-signorile/olympic-sponsors-were-war_b_4679919.html (accessed February 20, 2015); Craig Simons and Joe Guy Collier, “Coke pours a lot into China games; Great Wall of advertising,” Sponsorship.com, July 20, 2008, http://www.sponsorship.com/About-IEG/IEG-In-The- News/Coke-Pours-A-Lot-into-China-Games;-Great-Wall-of-A.aspx (accessed February 20, 2015); Jacquelyn Smith, “London 2012 Olympic sponsorship roundup,” Forbes, July 18, 2012, http://www. forbes.com/sites/jacquelynsmith/2012/07/18/london-2012-olympic-sponsorship-round-up/ (accessed February 20, 2015); J. Walker Smith (2005), “New marketing the traditional way,” Marketing Management, 14(2), 56; Greg Sterling, “Pew: 50 Percent in US now own tablet or E-Reader,” Marketing Land, January 16, 2014, http://marketingland.com/pew-50-percent-in-us-now-own-tablet-or-e-reader- 70765 (accessed February 20, 2015); Andrew Sung, “Coca-Cola launches move to the BeatTM London 2012 Olympic Games campaign with unveiling of Beat Wall,” Coca-Cola Journey, February 16, 2012, http://www.coca-colacompany.com/press-center/press-releases/coca-cola-launches-move-to-the-beat- london-2012-olympic-games-campaign-with-unveiling-of-beat-wall (accessed February 20, 2015); Courtney Thompson, “Coca-Cola aims for China domination with towering Coke bottle,” Biz Bash, January 24, 2008, http://www.bizbash.com/coca-cola_aims_for_china_domination_with_towering_ digital_bottle/new-york/story/9717/ (accessed February 20, 2015); Allen Tomlinson (2005), “The commercialization of the Olympics: Cities, corporations and the Olympic commodity,” in Kevin Young and Kevin B. Wamsley (Eds.), Research of the sociology of sport, Vol. 3, Global Olympics (pp. 179-200), San Diego: Elsevier; Lesa, Ukman, “Getting Olympic sponsorship right: Coca-Cola’s winning formula,” Sponsorship.com, August 6 2012, http://www.sponsorship.com/About-IEG/Sponsorship-Blogs/Lesa- Ukman/August-2012/Getting-Olympic-Sponsorship-Right–Coca-Cola-s-Win.aspx (accessed February 20, 2015); Rama Yelkur, Chuck Tomkovick, and Julia Pennington (2012), “The alchemy of Olympics advertising & sponsorship,” Journal of Management Policy and Practice, 13(2), 34-45.

QUESTIONS 1. Why is Olympic sponsorship such a crucial part of Coca-Cola’s marketing

strategy? 2. Describe how Coca-Cola uses various marketing tools to develop consistent and

impactful messages during the Olympics. 3. What do the marketing issues that Coca-Cola encountered during the 2014 Sochi

Olympics imply about careful planning of promotional campaigns?

Case 21 • Coca-Cola: Integrated Marketing Communications 543

Index A

academic journals, 82 accessory equipment, 156 achievers, 143 action, 183 advantages, 216 advertising

of brand/branding, 367–368 Coca-Cola, 537–539 cooperative, 195 defined, 185 direct response, 181 direct-to-consumer, 69 integrated marketing communications and, 185–187

Internet, 185 media, 184

advocacy, 292 aggressiveness, 107 AIDA model, 183 alliances, 209 allowances, 172

trade, 194–195 alternatives, evaluation of, 125 Amazon, Zappos merger with, 461

American Customer Satisfaction Index, 22

American Girl, 374–375 Amway (Thailand) Co., Ltd., 388

Apple, 331–341 App Store, 334 corporate culture of, 336–337

future of, 340–341 history of, 332 impact on marketing, 340 iPad, 333–334 iPhone, 333 iPod, 333 iTunes, 333 Mac computers, 333 marketing challenges, 337–340

marketing strategies, 335–336

products of, 332–335

assessment, as competitive analysis stage, 72

assortment, 157 attainability, marketing goals/ objectives, 111, 112–113

attention, 183 audience, media fragmentation and, 4

Average Order Value (AOV), 313

Avon, 387–388 awareness, 292

B baby boomers, 57 backstage technology, 75 balanced performance scorecard, 49–50

balanced strategic planning, 49–50

Barbie, 374–375 barter, 172 base prices/pricing, 170–172 behavioral segmentation, 139, 140

believers, 143 Belle Meade Plantation, 525–532 challenges for, 526–527, 531–532

history of, 525–526 promotions of, 530–531 success of, 529–530 winery at, 528–529

Beyond Petroleum (BP), 396–404 branding of, 399–400 code of conduct of, 400 ethical conduct of, 398 history of, 397–398 marketing strategy of, 404 social conduct of, 398 sustainability, 399–400

bids, 132 biotechnology

herbicides, 346–347 Monsanto, 343–344 pesticides, 346–347

blue ocean strategy, 110 book sources, 81–82 BP oil spill, 400–401

initial explosion, 401 recovery following, 403–404 repercussions of, 402 risks, failure to manage, 401–402

brand associations, 210 brand/branding

advantages of, 207–208 alliances, 209 attributes of, 205 of BP, 399–400 of Chevrolet, 413–414 corporate, 206 decisions for, 206–209 decline stage of, 224, 226 defined, 203 development stage of, 220 equity, 435–436 family, 209 growth stage of, 221–222 individual, 209 insistence of, 210 introduction stage of, 221 labeling and, 212 loyalty to, 210, 435–436 management of, 218–226 manufacturer vs. private- label, 208

marketing strategy decisions on, 19

maturity stage of, 223–224 of NASCAR, 433–434 of New Belgium Brewing, 366–369

packaging and, 212 positioning and, 203–226 preference, 210 recognition of, 210 strategic issues in, 206–212 technical aspects of, 203–206

values, 209–212 Wyndham Worldwide, 424

brand competitors, 71 brand equity, 210 brand licensing, 209 brand mark, 203

544

brand name, 203 breakeven pricing, 164 bribery, 245–246 bulk breaking, as marketing channel function, 175

business buying process, 132–133 bids, 132 order processing, 132 problem recognition, 132 product development, 132 for vendor, 132

business markets/marketing, 7 business buying process in, 132

buyer behavior in, 129–133 characteristics of, 130–132 developing relationships in, 294–296

fundamental changes to, 2–7

segmentation of, 144–145 business model

customer-focused, 455–457 of Netflix, 468–469 of Scentsy, Inc., 509 of Zappos, 455–457

business partners, with Mattel, 376–377

business products defined, 155 types of, 156

business sales promotions, 194–195

business services, 156 business-unit strategy, 34–35 buyer behavior

in business markets, 129–133

in consumer markets, 121–129

buying center, 130–131

C Cabbage Patch Kids, 375–376 capabilities, 72, 97 cash flow, 166, 223 catalog marketing, 181 cause-related marketing, 234 cereal market, 140 CFPB. See Consumer Financial Protection Bureau (CFPB)

characteristics, as competitive analysis stage, 72

Chevrolet, 407–417 branding strategy of, 413–414

Camaro, 410 challenges of, 415–416 Corvette, 409–410 Cruze, 411 Ford, rivalry with, 414 history of, 407–408 Impala, 410 international marketing of, 415

product mix of, 408–413 product recalls, 416–417 recovery of, 415–416 Silverado, 411 SUVs/Crossover vehicles, 412

Volt, 412–413 Children’s Online Privacy Protection Act (COPPA), 6

client-based relationships, 159 cobranding/co-branding, 209, 433–434

Coca-Cola, 534–541 corporate history of, 535 corporate strategy of, 536 digital marketing campaigns, 539–540

integrated marketing through olympic partnership, 536–537

music and radio advertising, 539

overview of company, 535 product display advertising, 538–539

products of, 535–536 sponsorship with other organizations, 540

television commercial advertising, 537–538

codes of conduct, 248–249 of BP, 400

coercive power, 177 cognitive dissonance, 127 collaboration, 93, 173 commercial markets, 130 commercial sources, 82 commoditization, 2 commodity hell, 2 communication

about risk, 282 corporate, 80 during exchange, 10

communications social, 313

community, 173 customer relationship management within, 292

extended enterprise in, 173 stakeholders, relationship with, 426–427

comparison shopping, 207 competition

with Apple, 337 in external environment, 71–73

with IKEA, 494 with Netflix, 469–471 SWOT analysis and, 93 in today’s society, 1 with USA Today, 326–327

competitive advantage defined, 16, 35, 102 developing/leveraging, 102–104

in marketing, 16 sources of, 103–104 strategic focus and, 89–115 strategies, core competencies for, 106

competitive intelligence, 15 competitive matching, 166, 170 competitors, types of, 71 complementary products, 167 component parts, 156 comprehensiveness, marketing goals, 111–112

connectivity, 173 consistency,marketinggoals,111 consumer buyer process, 121–129 alternatives, evaluation of, 125

factors affecting, 127–129 information search, 124–125

need, recognition of, 123–124

postpurchase evaluation, 127

purchasing decisions, 126 stages of, 122

Consumer Financial Protection Bureau (CFPB), 247

consumer markets buyer behavior in, 121–129 customer relationships in, 292–294

Index 545

consumer market segmentation, 139–144 behavioral segmentation, 139, 140

demographic segmentation, 140–142

geographic segmentation, 144

psychographic segmentation, 142–144

consumer products defined, 155 types of, 156

consumers. See also customers needs and wants of, 124 sales promotions for, 192–194

consumer sales promotion, 192–194

contact efficiency, 174 contests, consumers, 193–194 continuity, marketing objectives, 113

control cultural, 281 marketing implementation and, 20, 260–284

of marketing plan/planning, 36–37, 43

controls input, 276 output, 278–279 process, 276, 277–278 social, 281

convenience products, 156 cooperative advertising, 195 COPPA. See Children’s Online Privacy Protection Act (COPPA)

core product, 296–297, 301, 302

corporate affairs, 80–81 corporate branding, 206 corporate codes of ethics, 249 corporate communication, 80 corporate culture

of Apple, 336–337 of IKEA, 491 of Zappos, 457–459

corporate philanthropy, 80, 234–235

corporate social responsibility, 231 of Monsanto, 349 of Zappos, 459

corporate strategy, 34–35 corporate sustainability, 80 cost-plus pricing, 164 cost structure of firm, 164, 226 countertrade, 172 coupons, 192 cultural control, 281 cultural values, 78 customer focus

competitive advantage and, 109–115

SWOT analysis and, 91–92 customer-focused business model, 455–457

customer-focused mission statements, 33–34

customer-focused planning, 46–47

customer relationship management (CRM), 291–292

customer relationships. See also customer satisfaction in consumer markets, 292–296

developing/maintaining, 289–313

introduction to, 289 managing, 290–296 in marketing, 20–21 quality of, 296–304 value of, 296–304

customers, 291 attrition rate, 313 conversion rate, 313 current, 65 delight, 127, 305 dissatisfaction of, 305 environment for, 63–69 expectations of, 298–299, 304–307

intimacy, 104, 106 potential, 65 power shift to, 3 privacy of, 337 recovery rate, 313 repeat, 292 retention of, 304–313 retention rate, 313 stakeholders, relationship with, 425

stealing, 223–224 strengths of, 95 of USA Today, 325 weaknesses of, 95

customer satisfaction, 304–313 customer expectations and, 304–307

customer retention and, 304–313

guarantees, 311 measurement of, 312–313

customer service efficiency vs., 300–301 at Zappos, 456–457

customer support services, 216–217

D data mining, 120 data vs. information, 59 decisions/decision-making process for branding, 206–209 complexity of, 127–128 marketing and, 13–21 in marketing program, 18–19

decline stage, products, 224, 226 defensive, 107–108 demands, 5 demographic segmentation, 140–142

derived demand, 66 desirable exchange, 10 desire, 183 development stage, products, 220

differential advantage, 35 differentiated marketing, 135–136

differentiation, 213–218, 434–435 bases for, 215–217 defined, 213

digital marketing campaigns, Coca-Cola, 539–540

direct mail, 194 direct marketing, 181 direct observation, 82–83 direct selling, 181 direct-to-consumer (DTC) advertising, 69

discounts/discounting, 171, 172 superficial, 244 trade, 172

dissatisfaction, 127 distribution

of Apple, 335–336 exclusive, 176, 177

546 Index

intensive, 176, 177 internal, 275 of Mistine, 386 selective, 176, 177 supply chain management and, 18

of Uber Technologies, Inc., 498

of USA Today, 322 diversification/diversity, 107

in NASCAR, 438–439 population, 134

divesting option, 224, 226 do-it-yourself approach, 492

E economic growth, in external environment, 73–74

economic mission statement, 34 economic responsibilities, 232–233

economic stability, in external environment, 73–74

Edgar Database, 81 efficiency

customer service vs., 300–301

elected officials, 74 employee relations, 188–189 employees, 291

commitment of, 267–268 compensation for, 267 evaluation of, 267 motivation of, 267–268 satisfaction of, 267–268 selection of, 267 self-control, 279 stakeholders, relationship with, 425–426

training of, 267 environment

for customers, 63–69 external (see external environment)

internal, 61–63 stakeholders, relationship with, 427–428

environmental scanning, 15 ethical climate, 250 ethical issues, in marketing program, 241–246 defined, 241 managing/controlling, 246–250

pricing-related, 243–244 product-related, 241–243 promotion-related, 245–246 supply chain-related, 244–245

ethical leadership, 249–250 ethics

of BP, 398 business practices and, 377 challenges of, 239–241 marketing, 19 of marketing strategies (see of marketing strategies)

Mattel’s commitment to, 376–378

social responsibility and, 19–20, 231–241

strategic planning and, 251–252

sustainability and, 235–236 training on, 248 Wyndham Worldwide, 428–429

event sponsorship, 188 evoked set, 125 evolution, 263 e-waste, 67 exchange

communication during, 10 defined, 9–10 desirable, 10 rejection of, 10 two-party, 9–10 value of, 10

exclusive distribution, 176, 177 executive summary, 39 expectations

of customers, 298–299, 304–307

experiencers, 143 experiential attributes, 298 experiential quality, 301, 302 experiments, 83 extended enterprise, 173 external environment, 69–79

competition in, 71–73 economic growth in, 73–74

economic stability in, 73–74

framework for analyzing, 70–71

legal and regulatory issues in, 74–75

political trends in, 74

sociocultural trends in, 76–79

technological advancements in, 75–76

external stakeholders, 291

F family branding, 209 feature articles, 188 Federal Trade Commission, 81 FedWorld, 81 financial performance, marketing and, 250–251

financial resources, 95 Fisher-Price, 375 5W Model, for customer analysis, 63–64

focus groups, 83 Ford, rivalry with Chevrolet, 414

formal marketing controls, 276–279

Formula 1, 445 form utility, 12 fragmentation, 184 free merchandise, 195 frontstage technology, 75 functional strategies, 36

G general business publications, 82

generalizations, 295 generic competitors, 71 geographic pricing, 172 geographic segmentation, 144 Giffarine Skyline Unity Co., Ltd., 388

Gillette, 475–484 future of, 484 history of innovation at, 475–480

marketing strategies of, 480–484

razors of, 477–478 government markets, 130 government relations, 80 government sources, 81 Great Recession, 4–5 green products, 237 greenwashing, 236 growth stage, products, 221–222

Index 547

H hard costs, 131 harvesting approach, 224 herbicides, 346–347 heterogeneity, of service, 159 home shopping networks, 181 Hot Wheels, 375 human resources, 96, 267–268

I identification, as competitive analysis stage, 72

IKEA, 487–494 added amenities of, 491–492

brand image, 492 competitors, 494 concept of, 488 corporate culture of, 491 do-it-yourself approach, 492 low-cost structure of, 491 marketing of, 489–490 market opportunities of, 493

market threats, 494 production, 488–489 strengths of, 491–492 sustainability of, 492 U.S. expansion, 490–491 weaknesses of, 492–493

IMC. See integrated marketing communications (IMC)

implementation as organizational culture, 271–272

implementation by command, 268, 270

implementation through change, 270–271

implementation through consensus, 271

in-depth information, 119 individual branding, 209 individual influences, 128 IndyCar, 443–450

marketing strategy of, 449–450

motorsports market and, 445 reunification of, 445–447 U.S. open-wheel racing and, 443–445

informal marketing controls, 279, 281

information. See also marketing information data vs., 59 in-depth, 119 power, 177 searching for, 124–125 secondary sources of, 79–82

informational resources, 96 information power, 177 initial purchase, 292 innovation, 90

at Gillette, 475–480 of marketing strategies, 14

innovators, 143 input controls, 276 installations, 156 institutional markets, 130 intangibility, marketing goals, 112

intangibility, of service, 159 integrated marketing communications (IMC), 19, 182–195 advertising and, 185–187 personal selling and, 189–191

public relations and, 187–189

sales management and, 189–191

sales promotion and, 191–195

strategic issues in, 183, 185

intellectual property, 338 intellectual resources, 95 intended marketing strategy, 262

intensive distribution, 176, 177 interdependency, 262–263 interest, 183 internal analysis, 15 internal data sources, 79 internal distribution, 275 internal environment, 61–63 internal prices, 275 internal products, 274 internal promotion, 275 international marketing, with Chevrolet, 415

Internet advertising, 185 introduction stage, products, 221

investor relations, 80

L labeling, 212 leadership, 102, 104, 105, 106, 268 ethical, 249–250

Leadership in Energy and Environmental Design (LEED), 236

legal business practices, 377 legal issues

in external environment, 74–75

Monsanto, 348–349 legal jurisdiction, 6–7 legal resources, 96 legal responsibilities, 232–233 legitimate power, 177 life cycle costs, 303 lifetime value (LTV), 313 local touch, 368–369 loyalty

brand, 210, 435–436 products, 208

loyalty programs, 192–193

M maintenance products, 156 makers, 143 manufacturer brands, 208 market

deterioration of, 226 specialization in, 146

market concentration, 135–136 marketing

of Apple, 335–336 challenges of, 2–7 concepts of, 7–13 decision-making and, 13–21 defined, 7 and financial performance, 250–251

as function of business, 7 fundamental changes to, 2–7

goals of (see marketing goals)

IKEA, 489–490 introduction to, 1 objectives of, 40, 41 opportunities in, 2–7 standard of living, link to, 8 stimuli in, 124 strategic planning and, 15

548 Index

strategies (see marketing strategies)

structure of, 265–266 in today’s economy, 1–23 traditional view of, 230 in Uber Technologies, Inc., 497

of USA Today, 320–322 marketing activities

and decisions, 13–21 evaluating and controlling, 275–284

planning of, 13 scheduling, 281, 283, 284 strategic, 13

marketing audit, 278–281 marketing challenges

of Apple, 337–340 marketing channels

functions of, 174–176 structure of, 176–177 supply chain management and, 172–173

marketing ethics, 19 regulating, 246, 248 and strategy, 237–239

marketing goals, 7 attainability, 111 comprehensiveness, 111–112

consistency, 111 developing, 109–115 intangibility, 112 marketing plan/planning and, 40, 41

marketing implementation. See also marketing activities approaches to, 268–272, 273 by command, 268, 270 control and, 20, 260–284 defined, 260 elements of, 264–268 of functional strategies, 36 internal marketing and, 272, 273–275

marketing plan/planning and, 36, 42–43, 262–264

as organizational culture, 271–272

strategic issues in, 262–268 through change, 270–271 through consensus, 271

marketing information, 56–84 collection of, 79–84

customer environment, 63–69

external environment (see external environment)

internal environment, 61–63 introduction to, 56 situational analysis, 58–60

marketing mix, 7 marketing objectives

assignment of responsibility, 114

continuity, 113 developing, 112–114 marketing plan/planning and, 40, 41

time frame, 113–114 marketing plan/planning, 27–50

business-unit strategy for, 34–35

comprehension of, 38 consistency of, 39 control of, 36–37, 43 corporate strategy for, 34–35

customer-focused, 46–47 defined, 15 evaluation of, 36–37, 43 executive summary and, 39 flexibility of, 39 functional goals of, 35–36 functional strategy of, 36 implementation of, 42–43 introduction to, 27 logical manner of, 39 marketing goals and, 40, 41 marketing implementation and, 36, 42–43, 262–264

marketing objectives and, 40, 41

marketing strategy for, 42 objective goals of, 35–36 organizational aspects of, 45–46

of organizational mission, 30–34

of organizational vision, 30–34

process for, 27, 29–37 purpose of, 44–45 requirements for, 27 significance of, 44–45 situation analysis of, 39–40 structure of, 37–44 SWOT analysis of, 40 tactical, 15

marketing program, 153–195 decision-making and, 18–19 defined, 153 ethical issues in, 241–246 integrated marketing communications in, 182–195

introduction to, 153 pricing strategy in, 162–172 product strategy in, 155–162

supply chain strategy in, 172–182

marketing strategies, 230–252 BP, 404 challenges of, 21–23 decisions about, 16–19 development of, 1 ethics and, 231–241 Gillette, 480–484 implementation of, 1, 20 of IndyCar, 449–450 innovative, 14 intended, 262 introduction to, 230–231 for marketing plan/ planning, 42

marketing strategies and, 231–241

market specialization as, 146

mass market targeting as, 146

of Netflix, 471 of New Belgium Brewing, 365

people-driven, 21–22 planning of, 1 product specialization as, 146

realized, 262 selective targeting as, 146 Sigma Marketing, 517–523 single segment targeting as, 145–146

social responsibility in, 231–241

traditional ideas about, 4 markets

defined, 8–9 demand within, 166 four P’s of, 7

market segmentation, 133–138 consumer (see consumer market segmentation)

Index 549

market segmentation (Continued)

criteria for successful, 138 defined, 17, 133 identification of, 139–145 individualized approaches to, 136–138

potential of, 226 target marketing and, 17, 18

traditional approaches to, 133–136

market share, 166, 223 marketspace, 8 mass customization, 137 mass fragmentation, 4 mass marketing, 134–135 mass market targeting, 146 Mattel, 373–381

ethical responsibilities of, 376–378

future of, 380–381 Global Manufacturing Principles, 378

product recalls faced by, 378–379

products, 374–376 social responsibility of, 376–378

vs. MGA Entertainment, Inc., 380

Mattel Children’s Foundation, 377–378

maturity stage, products, 223–224

media advertising, 184 media fragmentation, 4 media to advertise, New Belgium Brewing products, 369–370

media usage, changes in, 4 metamarket, 9 metamediary, 9 MGA Entertainment, Inc., Mattel vs., 380

mission/mission statement customer-focused, 33–34 defined, 30 elements of, 30, 32 width and stability, 32–33

Mistine, 384–393 competitors of, 387–388 direct selling operations, 388–393

future of, 392–393

marketing program for, 384–387

product, 385 monetary costs, 302–303 Monsanto, 342–352

and biotechnology, 343–344 corporate responsibility at, 349

environmental effects of, 345–346

ethical issues, 347–348 future of, 351–352 history of, 342–343 legal issues, 348–349 philanthropy, 351 and safety implications of GM food, 344–345

sustainability of, 349, 350–351

motorsports market, 445 multisegment approach, 135 mutual dependence, 131–132

N NAFTA. See North American Free Trade Agreement (NAFTA)

NASCAR (National Association for Stock Car Auto Racing), 431–439 branding strategy of, 433–434

challenges of, 436–439 corporate sponsors of, 432

history of, 431–432 motorsports market for, 445

National Quality Research Center at the University of Michigan, 22

near field communication (NFC), 76

needs, recognition of, 123–124 Netflix, 465–472

business model of, 468–469 competitors with, 469–471 distribution centers, 467 future of, 472 history of, 465–466 marketing strategy of, 471 strategy of, 466

New Belgium Brewing, 355–362 brand/branding of, 366–369 history of, 355–357

marketing strategies of, 365 media to advertise, 369–370 social responsibility of, 357–362

sustainability of, 370–371 news releases, 188 New York Times, 326 NFC. See near field communication (NFC)

niche marketing, 136 nonmonetary costs, 302–303 nontraditional channels, 181–182

North American Free Trade Agreement (NAFTA), 75

O odd pricing, 171 on-demand information, 323–324

on-demand news, 323–324 one-time purchases, 189 one-to-one marketing, 136–137 online social networking, 17 operating products, 156 operational excellence, 102 opinion leaders, 128 order processing, 132 organizational characteristics, 145

organizational culture, 63 organizational mission, 30–34 organizational resources, 96

availability of, 62 organizational structures, traditional vs. market- oriented, 49

organizational vision, 30–34 organizations, types of, 144 output controls, 278–279 outsourcing, 180–181

P packaging, 212 patents, 347–348 people, 267–268 people-driven marketing strategies, 21–22

perceived differential advantages, 222

perceived necessities, 167 perceived value, 164–165

550 Index

perceptual map, 214, 215 periodical sources, 81–82 perishability, of service, 159 permission marketing, 137–138 personal characteristics, 145 personal selling, 189–191 pesticides, 346–347 philanthropy

corporate, 80, 234–235 Monsanto, 351 strategic, 234

physical distribution, 173 place utility, 12 point-of-purchase (POP) promotion, 193

policy analysis, 80 political trends, in external environment, 74

population diversity, 134 portfolio, products, 155–158 positioning

branding and, 203–226 defined, 213 differentiation and, 213–218 strategies for, 217–218

possession utility, 12 postpurchase doubt, 127 power shift to customer, 4 predatory pricing, 243–244 premiums, 193 press conferences, 188 press releases, 188 prestige, 166 prestige pricing, 170 price discrimination, 243 price elasticity, 166–168 price fixing, 243 price lining, 171 prices/pricing

of Apple, 335 around world, 163 base, 170–172 breakeven, 164 bundling, 171 cost-plus, 164 decisions about, 18 differences, 167 and ethical issues, 243–244 geographic, 172 Gillette strategy, 481–484 internal, 275 of Mistine, 385–386 non-price strategies, 170–171

objectives, 165–166

odd, 171 penetration, 170 predatory, 243–244 prestige, 170 reference, 171 revenue and, 165 service products, 168–169 skimming, 170 strategy (see pricing strategy)

structure of, 226 transfer, 172 of Uber Technologies, Inc., 498–499

value-based, 170 pricing strategy, 162–172

base, 170–172 key issues in, 162–168 for service products, 168–169

primary data collection, 82–84 privacy, 5–6 private-label brands, 208 problem recognition, 132 process controls, 276, 277–278 process materials, 156 product competitors, 71 product descriptors, 215–216 product leadership, 102, 104, 105, 106

product line, 157 product mission statement, 33 product mix, 157

of Chevrolet, 408–413 product-related ethical issues, 241–243

products acceptance, 208 classifications of, 11–12 of Coca-Cola, 535–536 complementary, 167 convenience, 156 core, 296–297, 301, 302 decline stage of, 224, 226 defined, 10–13 development stage of, 220 differentiation, 168 digital, 11 and ethical issues, 241–243 events as, 11 experiences as, 11 features of, 215–216 financial property as, 11 four P’s of, 16 goods as, 11

green, 237 growth stage of, 221–222 ideas as, 11 identification of, 207 IKEA, 488–489 information as, 11 internal, 274 introduction stage of, 221 life cycle of, 219–220 loyalty, 208 maintenance, 156 market position of, 226 Mattel, 374–376 maturity stage of, 223–224

Mistine, 385 new, strategy for development, 160–162

operating, 156 organizations as, 11–12 people as, 11 perceived benefits, 167 places as, 11 portfolio for, 155–158 positioning of, 19 purchase of, 66, 68–69 real property as, 11 repair, 156 selection of, 4, 68 services as, 11 shopping, 156 specialization as, 146 specialty, 156 specifications for, 132 strategy (see product strategy)

substitute, 166 supplemental, 297–298, 301, 302

Uber Technologies, Inc., 497–498

unsought, 156 usage of, 65–66 USA Today, 321 utilities of, 12–13

product strategy, 155–162 for new products development, 160–162

for product portfolio, 155–158

for service products, 158–160

profit-oriented objectives, 166 promotion

of Apple, 335

Index 551

promotion (Continued) of Belle Meade Plantation, 530–531

ethical issues related to, 245–246

internal, 275 of Mistine, 386–387 of Uber Technologies, Inc., 499

of USA Today, 321–322 proposals, 132 psychographic segmentation, 142–144

psychological characteristics, 145

psychological utility, 12–13 public relations, 187–189 pull strategy, 185 purchasing decisions, 126 push strategy, 185

Q quality

defined, 296 delivering superior, 298–299

role of, 296–298

R radio frequency identification (RFID), 76, 178–179

raw materials, 156 reality, 217 realized marketing strategy, 262 real necessities, 167 rebates, 192 rebranding, 225–226 reciprocity, 131 recruitment, of salespeople, 190 Redbox, 469–470 reference groups, 128 reference pricing, 171 referent power, 177 referrals, 313 regulatory issues, in external environment, 74–75

relational resources, 96 relationship capital, 291 relationship marketing, 20–21 relationships

client-based, 159 intensity of, 145

repair products, 156 repeat customer, 292 reputational resources, 96 research and analysis, 15–16 reseller markets, 130 resources, 266 response, as competitive analysis stage, 72

revenue, prices and, 165 reward power, 177 RFID. See radio frequency identification (RFID)

risks, 207, 282

S sales force, 190, 191 sales incentives, 195 sales management, 189–191

strategic implementation of, 190

sales promotions business/trade, 194–195 consumer, 192–194 defined, 191 integrated marketing communications and, 191–195

samples, 192 Sarbanes-Oxley Act 2002, 74 satisfaction, 127 Scentsy, Inc., 507–513

background of, 507–508 business model of, 509 challenges for, 512–513 as independent consultants, 510–511

selling party plan strategy of, 509–510

Scentsy Family Foundation, 511–512

secondary information sources, 79–82

security, 5–6 selective distribution, 176, 177 selective targeting, 146 self-image, 208 separation, 263 shared goals and values, 264–265

shareholders, relationship with stakeholders, 426

shopping efficiency, 207

shopping products, 156 Sigma Marketing, 515–523

desk calendar of, 516–517 marketing strategies of, 517–523

total service package of, 519–520

single segment targeting, 145–146

situational analysis, 16, 29, 56 issues regarding, 57–60 of marketing plan/planning, 39–40

SWOT analysis and, 89, 91 situational influences, 128–129, 167–168

slotting allowances, 177 social communication, 313 social control, 281 social entrepreneurship, 235 social influences, 128 social mission statement, 34 social networking, 17 social responsibility

challenges of, 239–241 defined, 232 dimensions of, 232–235 ethics and, 19–20 marketing strategies and, 231–241

of Mattel, 376–378 of New Belgium Brewing, 357–362

strategic planning and, 251–252

sustainability and, 235–236 sociocultural trends, in external environment, 76–79

soft costs, 131 sorting, as marketing channel function, 175

specialty products, 156 stakeholder orientation, 250–251

stakeholders marketing strategies and, 250–251

of Wyndham Worldwide, 424–428

standard of living, 8 status quo, 166 strategic business unit (SBU), 35

strategic focus, 106, 107–109

552 Index

strategic philanthropy, 234 strategic planning

marketing and, 15 opportunities for, 97–99 situation analysis of, 29 social responsibility and, 251–252

strengths of, 97 SWOT analysis and, 97–102 SWOT matrix and, 99–102 threats and, 97–99 weaknesses of, 97

strategy defined, 15 marketing ethics and, 237–239

strategy canvas, 108–109, 214–215

strengths, of strategic planning, 97

strivers, 143 subscription services, 81 substitute products, 166 superficial discounting, 244 supplemental products, 297–298, 301, 302

supply chain, 18 defined, 173 and ethical issues, 244–245

management of, 172–173, 338–339

power in, 177–178 supply chain partners, 291 supply chain strategy, 172–182

issues in, 173–178 trends in, 178–182

surveys, 83 survivors, 143 sustainability

of Apple, 339–340 of BP, 399–400 corporate, 80 ethics and, 235–236 of Monsanto, 349, 350–351 of New Belgium Brewing, 370–371

sweepstakes, 193–194 SWOT analysis

benefits of, 91 directives for, 92 effectiveness of, 89, 91 internal vs. external issues, 96

issues, from customers’ perspective, 93–95

marketing plan/planning and, 40

potential issues to consider in, 98

productive, 91–96 situational analysis and, 89, 91

strategic planning and, 97–102

SWOT matrix, 99–102 quantitative assessment of, 101

and strategy canvas, 109 symbolic attributes, 298

T tactical planning, 15 target markets

defined, 17 market segmentation and, 17, 18

strategies, 145–147 Tennessee, wine industry in, 527–528

thinkers, 143 time frame, marketing objectives, 113–114

time utility, 12 total budget competitors, 71 total expenditure, 166–167 total service package, of Sigma Marketing, 519–520

trade allowances, 194–195 trade associations, 82 trade discounts, 172 trade sales promotions, 194–195 training

assistance with, 195 salespeople, 190

transactional costs, 302 transactional marketing, 20, 21 transfer pricing, 172 turnaround, 107 two-party exchange, 9–10

U Uber Technologies, Inc., 496–503 background of, 497 challenges for, 499–501

distribution of, 498 in France, 502 in Germany, 502–503 in India, 502 marketing program, 497 pricing strategy, 498–499 products, 497–498 promotion of, 499

unsought products, 156 U.S. open-wheel racing, 443–445

U.S. Small Business Administration, 81

USA Today

competition with, 326–327 customers of, 325 growth of, 318–320 history of, 318–320 information provided by, 323–324

launching of, 319–320 marketing of, 320–322 news provided by, 323–324 online, 322–323 present and future of, 324–325

utility defined, 12 form, 12 place, 12 possession, 12 psychological, 12–13 time, 12

V VALS, psychographic segmentation tool, 142–144

value-based pricing (EDLP), 170 value proposition, 4–5 values

brand, 209–212 competing on, 303–304 cultural, 78 defined, 164, 299 of exchange, 10 perceived, 164–165 role of, 299, 301–303 shared goals and, 264–265

variety, product mix, 157 vending, 181 vendors, 132 vision/vision statement, 30 volume-oriented objectives, 166

Index 553

W Wall Street Journal, 326 wants, 123, 124 weaknesses, of strategic planning, 97

white papers, 188 work environment, of Zappos, 457–459

Wyndham Worldwide, 422–429 background on, 422–423 branding strategy of, 424 compliance programs of, 428–429

ethicalprogramsof,428–429

future of, 429 history of, 422–423 stakeholder orientation of, 424–428

Y yield management, 169

Z Zappos, 454–463

business model of, 455–457

corporate culture at, 457–459

corporate social responsibility of, 459

future of, 462–463 history of, 454–455 marketing challenges, 460

merger with Amazon, 461

operating philosophy of, 455

structure of, 459–460 zone of tolerance, 305–307

554 Index

This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed

content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For

valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN, author, title, or keyword for

materials in your areas of interest.

Important notice: Media content referenced within the product description or the product text may not be available in the eBook version.

Cover��
Contents��
Preface��
About The Authors��
Chapter 1: Marketing In Today's Economy��

The Challenges And Opportunities Of Marketing In Today's Economy��

Power Shift To Customers��
Massive Increase In Product Selection��
Audience And Media Fragmentation��
Changing Value Propositions��
Shifting Demand Patterns��
Privacy, Security, And Ethical Concerns��
Unclear Legal Jurisdiction��

Basic Marketing Concepts��

What Is A Market��
What Is Exchange��
What Is A Product��

Major Marketing Activities And Decisions��

Strategic Planning��
Research And Analysis��
Developing Competitive Advantage��
Marketing Strategy Decisions��
Social Responsibility And Ethics��
Implementation And Control��
Developing And Maintaining Customer Relationships��

Taking On The Challenges Of Marketing Strategy��
Lessons From Chapter 1��
Notes��

Chapter 2: Strategic Marketing Planning��

The Strategic Planning Process��

Organizational Mission Versus Organizational Vision��
Corporate Or Business-unit Strategy��
Functional Goals And Objectives��
Functional Strategy��
Implementation��
Evaluation And Control��

The Marketing Plan��

Marketing Plan Structure��
Using The Marketing Plan Structure��
Purposes And Significance Of The Marketing Plan��
Organizational Aspects Of The Marketing Plan��

Maintaining Customer Focus And Balance In Strategic Planning��

Customer-focused Planning��
Balanced Strategic Planning��

Lessons From Chapter 2��
Notes��

Chapter 3: Collecting And Analyzing Marketing Information

Conducting A Situation Analysis��

Analysis Alone Is Not A Solution��
Data Are Not The Same As Information��
The Benefits Of Analysis Must Outweigh The Costs��
Conducting A Situation Analysis Is A Challenging Exercise��

The Internal Environment��

Review Of Current Objectives, Strategy, And Performance��
Availability Of Resources��
Organizational Culture And Structure��

The Customer Environment��

Who Are Our Current And Potential Customers��
What Do Customers Do With Our Products��
Where Do Customers Purchase Our Products��
When Do Customers Purchase Our Products��
Why (and How) Do Customers Select Our Products��
Why Do Potential Customers Not Purchase Our Products��

The External Environment��

Competition��
Economic Growth And Stability��
Political Trends��
Legal And Regulatory Issues��
Technological Advancements��
Sociocultural Trends��

Collecting Marketing Data And Information��

Secondary Information Sources��
Primary Data Collection��
Overcoming Problems In Data Collection��

Lessons From Chapter 3��
Notes��

Chapter 4: Developing Competitive Advantage And Strategic Focus

Making Swot Analysis Productive��

Stay Focused��
Search Extensively For Competitors��
Collaborate With Other Functional Areas��
Examine Issues From The Customers’ Perspective��
Look For Causes, Not Characteristics��
Separate Internal Issues From External Issues��

Swot-driven Strategic Planning��

Strengths And Weaknesses��
Opportunities And Threats��
The Swot Matrix��

Developing And Leveraging Competitive Advantages��
Establishing A Strategic Focus��
Developing Marketing Goals And Objectives��

Lessons From Chapter 4��
Notes��
Developing Marketing Goals��
Developing Marketing Objectives��
Moving Beyond Goals And Objectives��

Chapter 5: Customers, Segmentation, And Target Marketing

Buyer Behavior In Consumer Markets��

The Consumer Buying Process��
Factors That Affect The Consumer Buying Process��

Buyer Behavior In Business Markets��

Unique Characteristics Of Business Markets��
The Business Buying Process��

Market Segmentation��

Traditional Market Segmentation Approaches��
Individualized Segmentation Approaches��
Criteria For Successful Segmentation��

Identifying Market Segments��

Segmenting Consumer Markets��
Segmenting Business Markets��

Target Marketing Strategies��
Lessons From Chapter 5��
Notes��

Chapter 6: The Marketing Program

Product Strategy��

Strategic Issues In The Product Portfolio��
The Challenges Of Service Products��
Developing New Products��

Pricing Strategy��

Key Issues In Pricing Strategy��
Pricing Service Products��
Base Pricing Strategies��
Adjusting The Base Price��

Supply Chain Strategy��

Strategic Supply Chain Issues��
Trends In Supply Chain Strategy��

Integrated Marketing Communications��

Strategic Issues In Integrated Marketing Communications��
Advertising��
Public Relations��
Personal Selling And Sales Management��
Sales Promotion��

Lessons From Chapter 6��
Notes��

Chapter 7: Branding And Positioning

Strategic Issues In Branding��

Basic Branding Decisions��
Strategic Brand Alliances��
Brand Value��
Packaging And Labeling��

Differentiation And Positioning��

Bases For Differentiation��
Positioning Strategies��

Mananging Brands Over Time��

Development Stage��
Introduction Stage��
Growth Stage��
Maturity Stage��
Decline Stage��

Lessons From Chapter 7��
Notes��

Chapter 8: Ethics And Social Responsibility In Marketing Strategy

Ethics And Social Responsibility In Marketing Strategy��

Dimensions Of Social Responsibility��
Sustainability��
Marketing Ethics And Strategy��
The Challenges Of Being Ethical And Socially Responsible��

Ethical Issues In The Marketing Program��

Product-related Ethical Issues��
Pricing-related Ethical Issues��
Supply Chain–related Ethical Issues��
Promotion-related Ethical Issues��

Managing And Controlling Ethical Issues��

Regulating Marketing Ethics��
Codes Of Conduct��
Ethical Leadership��

Relationship To Marketing And Financial Performance��

Stakeholder Orientation��
Marketing Financial Performance��

Incorporating Ethics And Social Responsibility Into Strategic Planning��
Lessons From Chapter 8��
Notes��

Chapter 9: Marketing Implementation And Control

Strategic Issues In Marketing Implementation��

The Link Between Planning And Implementation��
The Elements Of Marketing Implementation��

Approaches To Marketing Implementation��

Implementation By Command��
Implementation Through Change��
Implementation Through Consensus��
Implementation As Organizational Culture��

Internal Marketing And Marketing Implementation��

The Internal Marketing Approach��
The Internal Marketing Process��

Evaluating And Controlling Marketing Activities��

Formal Marketing Controls��
Informal Marketing Controls��
Scheduling Marketing Activities��

Lessons From Chapter 9��
Notes��

Chapter 10: Developing And Maintaining Long-term Customer Relationships

Managing Customer Relationships��

Developing Relationships In Consumer Markets��
Developing Relationships In Business Markets��

Quality And Value: The Keys To Developing Customer Relationships��

Understanding The Role Of Quality��
Delivering Superior Quality��
Understanding The Role Of Value��
Competing On Value��

Customer Satisfaction: The Key To Customer Retention��

Understanding Customer Expectations��
Satisfaction Versus Quality Versus Value��
Customer Satisfaction And Customer Retention��
Customer Satisfaction Measurement��

Lessons From Chapter 10��
Notes��

Cases��

Case 1: Usa Today: Innovation In An Evolving Industry
Case 2: Consumers Take A Shine To Apple, Inc
Case 3: Monsanto Balances The Interests Of Multiple Stakeholders
Case 4: New Belgium Brewing (A): Social Responsibility As Competitive Advantage
Case 5: New Belgium Brewing (B): Developing A Brand Personality
Case 6: Mattel Confronts Its Marketing Challenges
Case 7: Mistine: Direct Selling In The Thai Cosmetics Market
Case 8: BP Struggles To Repair Its Tarnished Reputation
Case 9: Chevrolet: A Century Of Product Innovation
Case 10: Wyndham Worldwide Adopts A Stakeholder Orientation Marketing Strategy
Case 11: Nascar: Can’t Keep A Good Brand Down
Case 12: IndyCar: Seeking A Return To Motorsports’ Fast Lane
Case 13: Zappos: Delivering Happiness
Case 14: Netflix Fights To Stay Ahead Of A Rapidly Changing Market
Case 15: Gillette: Why Innovation May Not Be Enough
Case 16: IKEA Slowly Expands Its U.S. Market Presence
Case 17: Uber: The Opportunities and Challenges Of Market Disruption
Case 18: Scentsy, Inc.: A Successful Direct Selling Business Model
Case 19: Sigma Marketing: Strategic Marketing Adaptation
Case 20: Belle Meade Plantation: A Social Entrepreneurship Marketing Strategy
Case 21: Coca-Cola: Integrated Marketing Communications

Index��

1. 2017-10-13T15:47:52+0000
2. Preflight Ticket Signature