marketing homework

O U T L I N E O F C A S E S

3-1 International Marketing Research at the Mayo Clinic

3-2 Swifter, Higher, Stronger, Dearer

3-3 Marketing to the Bottom of the Pyramid

3-4 Continued Growth for Zara and Inditex

3-5 A Sea Launch Recovery?

PA RT S I X

cases 3 ASSESSING GLOBAL MARKET OPPORTUNITIES

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CASE 31 International Marketing Research at the Mayo Clinic

In recent years, however, it has begun to study the international patient population in particular and the international marketplace in general. These studies fall into a few categories and grow in number in proportion to the organization’s understanding (or per- haps greater understanding of how much it does not know) of the international marketplace. First, the Mayo Clinic tracks international patient trends rather carefully, which seems like an obvious place to start. But as in most data tracking, the value of the concept is signifi cantly more straightforward than the logistics of acquiring consistently reliable data. Internal data systems must be coordinated—a signifi cant undertaking for any institution, and particularly hard when deal- ing with a large and complicated infrastructure. To give a simple example, data fi elds must be made uniform—not just on one data system, but on all of them. Rather than a free-text fi eld, for ex- ample, that allows a registrant to enter Venzuela, or Venosuela, or Vensuala, or maybe even Venezuela, the Mayo Clinic pushes for a predefi ned fi eld that provides standardized information. The Clinic monitors international data by the quarter, carefully watching trends over time by country or region, tracking signifi - cant changes in volume, hospitalization rates, and percentage of new patients out of any given market. For example, it knows it has between 9,000 and 10,000 patients, depending on the year, from more than 160 different countries annually. Some are third- generation patients—maybe their grandfather was cured there in the 1930s—and others are brand new. Some are neighbors from Ontario or Monterrey; others come all the way from Indonesia. Some markets are signifi cantly less predictable than others, and some countries deliver more “new” patients than others. The Mayo Clinic probes further to fi gure out why. Second, it conducts research with internal salespeople—the physicians and their support staff who deliver care to international patients. Through carefully moderated focus groups, the Clinic identifi es the things that are going smoothly, as well as the barri- ers to providing excellent care. And where appropriate, it makes recommendations for change. Third, just as with U.S.-based patients, the healthcare insti- tute conducts both quantitative and qualitative research in the international marketplace, including research with patients, in- ternational physicians, and international healthcare consumers, designed to help it understand why people choose to leave their own communities for healthcare, why some of them come to Mayo Clinic, and why others do not. It works hard to under- stand how healthcare decisions are made so it can better as- sist decision makers, physicians, and their staff in providing care. The Clinic positions itself to offer counsel on where to best expend valuable institutional resources, both human and fi nancial.

GLOBAL MARKET RESEARCH The marketing department conducts periodic and ongoing patient satisfaction studies with international patients, measuring their assessment of various aspects of the care provided. To date, the

The Mayo Clinic, known for treating international leaders, re- cently saw the president of a central Africa country in its halls. Teodoro Obiang Nguema Mbasogo, the president of the Republic of Equatorial Guinea, was in Rochester, New York, for a checkup, clinic offi cials confi rmed. Security offi cers and limousines—not an uncommon sight in Rochester—signaled his visit. Nguema Mbasogo assumed the leadership of his country with a coup that overthrew his uncle. His country recently began working with the U.S. Agency for International Devel- opment, under the leadership of a dean of the University of Minnesota’s Hubert H. Humphrey Institute of Public Affairs, to improve Equatorial Guinea’s social services. Dean J. Brian Atwood of the institute is overseeing this effort. He went to Equatorial Guinea in June, and a second meeting is scheduled for this month. The Mayo Clinic has a long international history, providing care to international patients since its inception. Despite its his- tory and reputation, however, the marketing staff continues to monitor the international market to gauge the level of awareness, reputation, and attractiveness of the Mayo Clinic around the world. This institution has used word-of-mouth marketing to maintain its global reputation. Marketing, as most formally defi ned, historically was not a critical factor in delivering patients to Mayo Clinic. Indeed, the marketing department at Mayo Clinic has existed for only the past 20 years, and patients have been coming for care for more than a century. The Clinic believes that the marketing department pro- vides valuable information to physicians and their support staff— information that helps them deliver better care, highlights their patients’ wants and needs, and educates them as to what’s going on in the marketplace. In reality, however, it’s the providers themselves—the doctors, nurses, receptionists, and all the rest of the allied health staff—who bring in business by creating positive experiences for patients. Pa- tients who leave Mayo Clinic highly satisfi ed with their care will return to their communities in the United States and elsewhere and say good things to their family and friends. And these family members and friends in turn travel to Mayo Clinic when they need tertiary or quaternary medical care. Although the marketing divi- sion strives to provide excellent internal support, it is the doctors and other care providers who have created and maintained a brand of healthcare excellence. Despite the hype surrounding what has been presented as the highly lucrative international marketplace, “international” is not something new at Mayo Clinic. Experience and research indicates that “international” is a part of who the Clinic is, as well as how the market defi nes it. Nearly 100 years ago, the founders, a family of physicians named “Mayo,” created an international legacy by traveling around the world to compare notes and surgical approaches with physicians across the globe. In some cases, they even returned with international patients who were in need of additional expertise. As in so many other areas of medical practice, the current Mayo Clinic continues in these traditions.

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Cases 3 Assessing Global Market Opportunities

The power of word of mouth is also confi rmed in the inter- national marketplace. Most international patients indicate that friends or relatives provided their most important infl uence in choosing Mayo Clinic. This fi nding reinforces the most powerful marketing “tool”—satisfi ed patients who say good things about Mayo Clinic and infl uence others’ healthcare decisions. Exhibit 1 indicates the factors infl uencing choice of Mayo Clinic by patients from Latin America and the Middle East. Formal focus groups with international patients and nonpa- tients in six cities around the world attempted to learn more about how those populations make healthcare decisions, and whether the process is the same or different from U.S. healthcare consumers. As it turns out, for most aspects of decision making, the process is very similar to that of U.S. consumers. However, for a few others, the process is quite different. The areas with the most differences across borders relate to the role of health insurance. Three co-sponsored international research projects have provided some good lessons and demonstrated that in- ternational healthcare insurance is as different from that in the United States as it is across countries and regions. Furthermore, many as- sumptions taken for granted in the U.S. market—for example, name recognition—simply do not hold in certain international markets. Exhibit 2 is a graph of responses from a satisfaction study of patients from Latin America and the Middle East, showing the different his- tory of Mayo Clinic brand awareness in those regions Mayo Clinic awareness among patients was much more recent in the Middle East than in Latin America. Other studies, however, showed that awareness among nonpatients—even those who have purchased health insurance policies that offer them Mayo Clinic care as a benefi t—is not as strong. The international healthcare insurance market is expanding rapidly, and many providers view this expansion as a signifi cant opportunity to glean additional patients from outside the United States. Commercial and noncommercial contracts comprise a signifi cant body of business in U.S. healthcare. If this business could be expanded to provide patients from markets outside the United States, all the better. However, healthcare systems vary signifi cantly from country to country, and the knowledge and use of health insurance vary even more. To study these differences in

Mayo Clinic has surveyed nearly 1,500 patients in 20 countries, in four different languages. As any market researcher knows, sound patient satisfaction research requires great attention to detail to ensure reliable data. Not surprisingly, international data collection offers signifi cant additional challenges. For example, according to the Mayo Clinic:

The quality of our own data. The name and address fi elds designed for clean U.S. addresses often are not suffi cient to hold reliable international detail. If we want to do it right, we must manually “clean” thousands of patient records be- fore fi elding our studies.

Varying quality of international postal and telecommuni- cations infrastructure. This variance can create signifi cant problems for either phone or mail surveys; consequently, international studies take a lot more time than U.S.-based studies and require much more patience.

Cultural dynamics. In some countries, individuals may be suspicious of an international call; in others, they may spend a lot of time outside of their homes. In still others, a nonfam- ily “gatekeeper” must be diplomatically convinced to transfer the call to the targeted respondents. These cultural dynamics pose further delays and require special sensitivities.

High standards for quality. Our own standards for quality compel us to maintain high quality language- and culture- specifi c fi elding of our various research projects. These studies, whether managed internally or through an external vendor, require more oversight than we are accustomed to with U.S.-based research.

Despite these challenges, however, this international research has taught the Mayo Clinic a lot. International patient satisfaction studies demonstrate that the key driver of patients’ satisfaction seems to hold across borders. This is excellent care—manifested by listening, explaining, and thoroughness on the part of Mayo Clinic physicians. Other factors in the healthcare experience are important—for example, quality of language interpretation and waiting times—but they do not consistently correlate with overall satisfaction.

Exhibit 1 Which Was Most Important in Your Decision to Choose Mayo Clinic?

International Patient Satisfaction N � 331 Middle Eastern patients; 755 Latin American patients.

0% 10% 20% 30% 40% 50% 60% 70%

Friend or relative

Media (TV, radio, newspaper)

Internet

Government

Doctor at home

Other

Latin America

Middle East

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Part 6 Supplementary Material

Furthermore, when asked to name a leading medical center in the United States, most policyholders (72 percent) did not know a single one. Twenty-fi ve percent (25 percent) named Mayo Clinic, and the other 2 percent named other U.S. medical centers. It was no real surprise that citizens in the studied country were not fa- miliar with Mayo Clinic. However, the Clinic was surprised that policyholders who had purchased an insurance product that very publicly advertised the Mayo Clinic benefi t were unable to name Mayo Clinic as a leading U.S. medical center. As it turned out, many of these policyholders had no intention of leaving their home country for medical care. They were buying insurance to facilitate care in the more desirable private system. Furthermore, most felt that the healthcare in their own country was very good and that there would be little if any reason to ever leave home to obtain care elsewhere. This phenomenon emerges repeat- edly in research with U.S. patients. Most believe in the abilities of their own doctor and feel very confi dent about medical care in their own community. Even though “quality” may be regionally or culturally defi ned, almost everyone considers his or her doctor to be a good one. A second cosponsored study consisted of 353 telephone inter- views with individuals who had purchased a healthcare insurance policy specifi cally for international coverage. Once again, confi - dence in local care was very high—in fact, signifi cantly higher than in the country of the fi rst study. Nonetheless, this group of individuals had purchased a product that offered them coverage for medical care outside their home country, should they decide it was necessary or appropriate. In this study, aided brand rec- ognition among policyholders was higher than in the fi rst; when asked directly whether they had heard of Mayo Clinic, 75 percent responded affi rmatively. But when asked unaided to name the best medical centers in the United States, the vast majority (nearly 70 percent) of policyholders indicated they did not know. And while the majority had heard of Mayo Clinic, fewer than 10 per- cent were aware of any benefi t of their health insurance policy that related to Mayo Clinic.

detail, the Mayo Clinic cosponsored two quantitative studies of healthcare insurance policyholders—in particular, holders of poli- cies that offer some degree of coverage for care at Mayo Clinic. The fi rst study consisted of face-to-face interviews with 400 policyholders in a particular country and delivered a great deal of information regarding policyholders’ preferences, healthcare be- havior, and demographics. In this country, as throughout most of the world, the public healthcare system exists as a universal “safety net” for all citizens. Even in markets where the private insurance market has expanded, the public system continues to offer care for all citizens. Therefore, if a private insurance policy does not offer adequate coverage, especially for high-cost procedures, the public system is used to reduce the consumer’s fi nancial burden. The private policy might cover, for example, access to primary and secondary care at private rather than public clinics as well as the price of a private room, or the option of receiving care at a more upscale facility. But for high-cost, life-threatening procedures, the co-pay or deductible for having these procedures conducted ex- clusively in the private sector remains signifi cant. The end result, of course, is that the lower cost procedures are transferred to the private system, while the higher cost procedures remain in the pub- lic safety net. The implication for U.S. tertiary providers is that, while private insurance might reduce some of the fi nancial risk for traveling out of country for care, in many cases the risk is not completely eliminated. Therefore, the policies might not deliver the volume of patients initially anticipated. Other factors, such as a lack of brand awareness and limited perceived need for U.S. medical care, may be impediments to at- tracting patients in the international healthcare insurance market. In the fi rst study, when the Clinic probed for brand awareness among those 400 consumers who had purchased a health insurance policy touting Mayo Clinic coverage as a benefi t, no unaided recall of that coverage emerged as a benefi t of the policy. (See Exhibit 3.) In an aided list, Mayo Clinic coverage was ranked as the least im- portant benefi t of the policy, on a par with eyeglass coverage at the bottom of the list.

Exhibit 2 How Long Ago Did You First Hear of Mayo Clinic?

International Patient Satisfaction N � 331 Middle Eastern patients; 755 Latin American patients.

0% 10% 20% 30% 40% 50% 60% 70%

For as long as I can remember

Within past 2–5 years

Within past 1–2 years

Within past year

Latin America

Middle East

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Cases 3 Assessing Global Market Opportunities

patients’ wants, needs, preferences, and behavior patterns and learning all that they can about the ever-changing, rich, and di- verse worldwide healthcare market. In the end, outstanding medi- cal care and sensitive service to patients and families will be the most productive marketing strategy, because it creates positive word of mouth about something very important—healthcare. As the stories of satisfi ed patients churn—sometimes for decades—in the minds of their friends and family, Mayo Clinic remains an op- tion if they ever need the care it offers.

QUESTION Assume you are the new marketing vice president at the Mayo Clinic. The CEO and the board have decided to expand their in- ternational sales revenues by 100 percent over the next fi ve years. Write a memo to your staff outlining the marketing research that will be needed to support such a strategy. Be specifi c about sources of secondary data and the best places and media for gathering pri- mary data. Also, be specifi c about the best methods to use.

Sources: Misty Hathaway and Kent Seltman, “International Marketing Research at the Mayo Clinic,” Marketing Health Services, Winter 2001, 21(4), pp. 18–23; Jeff Kiger, “African President Gets Checkup at Mayo Clinic,” Post-Bulletin, September 21, 2007; “Mayo Clinic Builds Center for International Patients,” Post-Bulletin , February 3, 2009, online.

Both of these studies offered substantially more information about the nature of international insurance agreements, policy- holders’ wants and needs, and their disposition toward traveling out of country for medical care. But they also showed that the knowledge of the Mayo brand is limited outside the United States and that a high number of policyholders does not necessarily trans- late into a high number of patients. This research has taught the Clinic to be more selective, to be cautious in expending signifi cant resources to pursue insurance arrangements, and to conduct fur- ther research to expand understanding.

THE FUTURE “International” will continue to be part of who the Mayo Clinic is. Its doctors, hailing from all corners of the globe, will con- tinue to collaborate with their colleagues around the world. Mayo Clinic researchers will conduct clinical trials in collabo- ration with researchers on many continents. Students and resi- dents will continue to offer rich diversity, as Mayo international alumni now number 1,500, representing 67 countries. But most important, Mayo Clinic will strive to provide the best medical care possible to those patients around the world who need it the most. To support that mission, members of the “marketing” de- partment will continue to support the medical staff by studying

Exhibit 3 Recall of Plan Benefits (unaided)

N � 400 individuals who had purchased a health insurance policy advertising Mayo Clinic coverage as a benefit.

0% 10% 20% 30% 40% 50% 60% 70%

Hospitalization

Consult reimbursement

Exams/X-rays/lab tests

General medicine

Ambulatory coverage

High reimbursement %

Serious illness

Can choose clinic

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for anything else. According to Nielsen Media Research, the number of Americans watching the Super Bowl, the main an- nual football championship, averaged 94 million. The top eight television programs in America are all sporting events. Some 3 billion people watched some part of the 2000 Olympiad—over half of mankind. The reason television companies love sport is not merely that billions want to tele-gawk at ever-more-wonderful sporting feats. Sport also has a special quality that makes it unlike almost any other sort of television program: immediacy. Miss seeing a par- ticular episode of, say, The Offi ce , and you can always catch the repeat and enjoy it just as much. Miss seeing your team beat hell out of its biggest rival, and the replay will leave you cold. “A live sporting event loses almost all its value as the fi nal whistle goes,” says Steve Barnett, author of a British book on sport. The desire to watch sport when it is happening, not hours afterward, is universal: A study in South Korea by Spectrum, a British consultancy, found that live games get 30 percent of the audience while recordings get less than 5 percent.

CASE 32 Swifter, Higher, Stronger, Dearer

Television and sport are perfect partners. Each has made the other richer. But is the alliance really so good for sport? Back in 1948, the BBC, Britain’s public broadcasting corpora- tion, took a fateful decision. It paid a princely £15,000 (£27,000 in today’s money) for the right to telecast the Olympic Games to a do- mestic audience. It was the fi rst time a television network had paid the International Olympic Committee (IOC, the body that runs the Games) for the privilege. But not the last. The rights to the 1996 Summer Olympics, which opened in Atlanta on July 19, 1996, raised $900 million from broadcasters round the world. And the American television rights to the Olympiads up to and including 2008 have been bought by America’s NBC network for an amazing $3.6 billion (see Exhibit 1). The Olympics are only one of the sporting properties that have become hugely valuable to broadcasters. Sport takes up a growing share of screen time (as those who are bored by it know all too well). When you consider the popularity of the world’s great tournaments, that is hardly surprising. Sportsfests generate audiences beyond the wildest dreams of television companies

Exhibit 1 Olympic Broadcast Rights Fees, * $bn (world totals)

Source: International Olympic Committee. Used by permission of the International Olympic Committee.

*Rights for 2000 to 2008 Games. Rights for 2010 and 2012 Games packaged. † For winter games two years earlier.

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1980 84 88 92 96 2000 04 08 12

Winter games

Summer games

†

†

†

†

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Cases 3 Assessing Global Market Opportunities

Nothing better illustrates the change taking place in the mar- ket for soccer rights than the vast deal struck in 1997 by Kirch, a German group owned by a secretive Bavarian media mogul. The group spent $2.2 billion for the world’s biggest soccer-broadcast- ing rights: to show the fi nals of the World Cup in 2002 and 2006 outside America. That is over six times more than the amount paid for the rights to the World Cups of 1990, 1994, and 1998. Such vast bids gobble up a huge slice of a television company’s budget. In America, reckons London Economics, a British con- sultancy, sport accounts for around 15 percent of all television- program spending. For some television companies, the share is much larger. The problem is that the value of sport to viewers (“consumer surplus,” as economists would put it) is much larger than the value of most other sorts of programming. Public broadcasters have no way to benefi t from the extra value that a big sporting event offers viewers. But with subscription television and with pay TV, where viewers are charged for each event, the television company will directly collect the value viewers put on being able to watch. Therefore, many people (especially in Europe) worry that popular sports will increasingly be available only on subscription television, which could, they fear, erode the popular support upon which public broadcasters depend. In practice, these worries seem excessive. Although far more sport will be shown on subscription television, especially outside America’s vast advertising market, the most popular events are likely to remain freely available for many years to come, for two reasons. First, those who own the rights to sporting events are rarely just profi t maximizers: They also have an interest in keeping the appeal of their sport as broad as possible. They may therefore refuse to sell to the highest bidder. For example, the IOC turned down a $2 billion bid from Murdoch’s News Corporation for the European broadcasting rights to the Olympic Games between 2000 and 2008 in favor of a lower bid from a group of public broadcasters. Sometimes, as with the sale of World Cup rights to Kirch, the sellers may stipulate that the games be aired on “free” television. Second, the economics of televising sport means that the big- gest revenues are not necessarily earned by tying up exclusive rights. Steven Bornstein, the boss of ESPN, argues that exclu- sive deals to big events are “not in our long-term commercial interest.” Because showing sport on “free” television maximizes the audience, some advertisers will be willing to pay a huge premium for the big occasion. So will sponsors who want their names to be seen emblazoned on players’ shirts or on billboards around the fi eld. It is not only a matter of audience size. Sport is also the most effi cient way to reach one of the world’s most desirable audiences from an advertiser’s point of view: young men with cash to spend. Although the biggest audiences of young men are watching general television, sporting events draw the highest concentrations. Thus, advertisers of products such as beer, cars, and sports shoes can pay mainly for the people they most want to attract. There are other ways in which sport can be indirectly useful to the networks. A slot in a summer game is a wonderful opportunity to promote a coming autumn show. A popular game wipes out the audience share of the competition. And owning the rights to an event allows a network plenty of scope to entertain corporate gran- dees who may then become advertisers.

This combination of popularity and immediacy has created a symbiotic relationship between sport and television in which each is changing the other. As Stephen Wenn, of Canada’s Wilfrid Laurier University, puts it, television and the money it brings have had an enormous impact on the Olympic Games, including on the timing of events and their location. For instance, an Asian Olym- pics poses a problem for American networks: Viewers learn the results on the morning news. The money that television has brought into professional bas- ketball has put some of the top players among the world’s highest- paid entertainers: Many are getting multiyear contracts worth over $100 million. Rugby has begun to be reorganized to make it more television friendly; other sports will follow. And, though soccer and American football draw the largest audiences, television has also promoted the popularity of sports that stir more local pas- sions: rugby league in Australia, cricket in India, table tennis in China, snooker in Britain. What is less often realized is that sport is also changing television. To assuage the hunger for sports, new channels are being launched at a tremendous pace. In America, ESPN, a cable network owned by Capital Cities/ABC, started a 24- hour sports news network in 1997; in Britain, BSkyB, a satellite broadcaster partly owned by Rupert Murdoch, has three sports channels. Because people seem more willing to pay to watch sport on television than to pay for any other kind of program- ming, sport has become an essential part of the business strat- egy of television empire-builders such as Murdoch. Nobody in the world understands the use of sports as a bait for viewers better than he. In particular, sport suggests an answer to one of the big prob- lems that will face television companies in the future: How can viewers, comfortable with their old analog sets, be persuaded to part with the hefty price of a new digital set and a subscription to an untried service? The answer is to create an exclusive chance to watch a desirable event, or to use the hundreds of channels that digital television provides to offer more variety of sports coverage than analog television can offer. This ploy is not new. “Radio broadcasts of boxing were once used to promote the sale of radios, and baseball to persuade people to buy television sets,” points out Richard Burton, a sports marketing specialist at the Lundquist College of Business at Oregon University. In the next few years, the main new outlet for sports programs will be digital television.

GOING FOR GOLD To understand how these multiple effects have come about, go back to those vast sums that television companies are willing to pay. In America, estimates of total spending on sports rights by television companies is about $20 billion a year. Easily the most valuable rights are for American football. One of the biggest sport- ing coups in the United States was the purchase by Fox, owned by Murdoch’s News Corporation, of the rights to a year of National Football League games for about $4 billion. Rights for baseball, basketball, and ice hockey are also in the billion-dollar range. Americans are rare in following four main sports rather than one. America is also uncommon in having no publicly owned net- works. As a result, bidding wars in other countries, though just as fi erce as in America, are different in two ways: They are often fought between public broadcasters and new upstarts, many of them pay channels, and they are usually about soccer.

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Part 6 Supplementary Material

sport the money coming in from television soon fl ows out in heft- ier payments to players. In America, the market for sportsmen is well developed and the cost of players tends to rise with the total revenues of the main sporting organizations. Elsewhere, the market is newer and so a bigger slice of the revenues tends to stick to the television compa- nies. “The big difference between sports and movies is the oper- ating margins,” says Chris Akers, chairman of Caspian, a British media group, and an old hand at rights negotiations. “Hollywood majors have per-subscriber deals. No sports federation has yet done such a deal.” Guided by the likes of Akers, they soon will. Telepiu’s latest three-year soccer contract gives the television fi rm enough rev- enue to cover its basic costs, guarantees the soccer league a mini- mum sum, and then splits the takings down the middle. In Britain, BSkyB is locked in dispute with the Premier League over the terms of the second half of its rights deal: Should the league then be able to opt for half the revenue from each subscriber on top of or instead of a fi xed hunk of net profi ts? The logical next step would be for some clubs or leagues to set up their own pay-television systems, distributing their games directly by satellite or cable. A few people in British soc- cer are starting to look with interest at America’s local sports networks, such as the successful Madison Square Garden cable network, and to wonder whether Europe might move the same way. If it does, not all teams will benefi t equally. In America, foot- ball has an elaborate scheme to spread revenues from national tele- vision across teams. But in other sports, including baseball, the wealth and size of a team’s local market mean large differences in rights from local television. The New York Yankees now make more than $50 million a year from local television rights. At the other end of the scale, the Milwaukee Brewers make $6 million to $7 million a year. Not all players benefi t equally, either. Television has brought to sport the “winner-take-all” phenomenon. It does not cost sub- stantially more to stage a televised championship game than a run-of-the-week, untelevised match. But the size of the audience, and therefore the revenue generated, may be hugely different. As a result, players good enough to be in the top games will earn vastly more than those slightly less good, who play to smaller crowds.

THE REFEREE’S WHISTLE The lure of money is already altering sport and will change it more. Increasingly, games will be reorganized to turn them into better television. British rugby-union offi cials are squabbling over the spoils from television rights. Rugby league, whose audiences had been dwindling, won a contract worth £87 million over fi ve years from BSkyB in exchange for switching its games from win- ter to summer. Purists were aghast. Other reorganizations for the benefi t of television will surely come. Murdoch wants to build a rugby superleague, allowing the best teams around the world to play each other. A European superleague for soccer is possible. “At the moment, Manchester United plays AC Milan every 25 years: it’s a joke,” complains one enthusiast. Sports traditionalists resist changing their ways for the likes of Murdoch. So far, the big sporting bodies have generally held out against selling exclusive pay-television rights to their crown

For the moment, though, advertising revenue is the main recompense that television companies get for their huge invest- ments in sport. Overall, according to Broadcasting & Cable , a trade magazine, sport generates 10 percent of total television ad- vertising revenues in America. The biggest purchasers of sports rights by far in America are the national networks. NBC alone holds more big sports rights than any other body has held in the history of television. It can obviously recoup some of the bill by selling advertising: For a 30-second slot during the Super Bowl, by most estimates networks are now asking and getting around $3 million. Such deals, however, usually benefi t the networks indirectly rather than directly. The Super Bowl is a rarity: It has usually made a profi t for the network that airs it. “Apart from the Super Bowl, the World Series and probably the current Olympics, the big sports don’t usually make money for the networks,” says Arthur Gruen of Wilkowsky Gruen, a media consultancy. “But they are a boon for their affi liate stations, which can sell their advertising slots for two or three times as much as other slots.” Although Fox lost money on its NFL purchase, it won the loyalty of affi liate stations (especially important for a new network) and made a splash. Almost everywhere else, the biggest growth in revenues from showing sports will increasingly come from subscriptions or pay- per-view arrangements. The versatility and huge capacity of digi- tal broadcasting make it possible to give subscribers all sorts of new and lucrative services. In America, DirectTV and Primestar, two digital satellite broad- casters, have been tempting subscribers with packages of sporting events from distant parts of the country. “They have been creating season tickets for all the main events, costing $100–150 per season per sport,” says John Mansell, a senior analyst with Paul Kagan, a California consultancy. In Germany, DF1, a satellite company jointly owned by Kirch and BSkyB, has the rights to show Formula One motor racing. It allows viewers to choose to follow particular teams, so that Ferrari fanatics can follow their drivers, and to select different camera angles. In Italy, Telepiu, which launched digital satellite television in 1997, offers viewers a package in September that allows them to buy a season ticket to live matches played by one or more teams in the top Italian soccer leagues. The system’s “electronic turnstile” is so sophisticated that it can shut off reception for subscribers living in the catchment area for a home game, to assuage clubs’ worries that they will lose revenue from supporters at the gate. In fact, top Italian clubs usually have to lock out their fanatical subscribers to avoid overcapacity. Most skillful of all at using sports rights to generate subscrip- tion revenue is BSkyB. It signed an exclusive contract with the English Premier League that has been the foundation of its suc- cess. Some of those who know BSkyB well argue that £5 billion of the business’s remarkable capital value of £8 billion is attributable to the profi tability of its soccer rights.

WINNER TAKE ALL Just as the purchase of sporting rights enriches television compa- nies, so their sale has transformed the fi nances of the sports lucky enough to be popular with viewers. On the whole, the biggest benefi ciaries have not been the clubs and bodies that run sports but the players. In the same way as rising revenues from fi lms are promptly dissipated in vast salaries to stars in Hollywood, so in

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Cases 3 Assessing Global Market Opportunities

paid $300 million; 1992 in Barcelona—NBC paid $401 million; 1996 through 2008—NBC will pay $3.6 billion; 2010—NBC paid $820 million; 2012 in London—NBC will pay $1.18 billion for its American broadcast rights. Assume you have been charged with the responsibility of determin- ing the IOC and local Olympic Committee’s asking prices for the Rio de Janeiro 2016 television broadcast rights for fi ve different markets: Japan, China, Australia, the European Union, and Brazil. Determine a price for each, and justify your decisions.

2. Your instructor may assign you to represent either the IOC or any one of the television networks in each of the fi ve coun- tries that have been asked to bid for the broadcast rights for the Rio de Janeiro 2016 Games. Prepare to negotiate prices and other organizational details.

Sources: Adapted from The Economist, July 20, 1996, pp. 17–19. Also see Mark Hyman, “The Jets: Worth a Gazillion?” BusinessWeek, December 6, 1999, pp. 99–100; Mark Hyman, “Putting the Squeeze on the Media,” BusinessWeek, December 11, 2000, p. 75; Alan Abrahamson, “NBC Wins Rights to 2010, 2012 Olympics,” Los Angeles Times, June 7, 2003, p. C1; Matthew Futterman and Shira Ovide, “Concern about Prices May Delay Bidding for Olympics,” The Wall Street Journal , January 15, 2010, online.

jewels, and have sometimes deliberately favored public broad- casters. Regulators have helped them, intervening in some coun- tries to limit exclusive deals with pay-television groups. Britain passed a law to stop subscription channels tying up exclusive rights to some big events, such as the Wimbledon tennis cham- pionship. In Australia, a court threw out News Corporation’s attempt to build a rugby superleague as the lynchpin of its pay- television strategy. The real monopolists are not the media companies, however, but the teams. Television companies can play off seven or eight Hollywood studios against each other. But most countries have only one national soccer league, and a public that loves soccer above all other sports. In the long run, the players and clubs hold most of the cards. The television companies are more likely to be their servants than their masters.

QUESTIONS 1. The following are the prices paid for the American television

broadcasting rights of the summer Olympics since 1980: Moscow—NBC agreed to pay $85 million; 1984 in Los Angeles—ABC paid $225 million; 1988 in Seoul—NBC

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intermediaries were bypassed, and ITC gained a direct contact with the farmers, thus improving the effi ciency of ITC’s soy- bean acquisition. To achieve this goal, it had to do much more than just distribute PCs. It had to provide equipment for man- aging power outages, solar panels for extra electricity, and a satellite-based telephone hookup, and it had to train farmers to use the PCs. Without these steps, the PCs would never have worked. The complex solution serves ITC very well. Now more than 10,000 villages and more than 1 million farmers are cov- ered by its system. ITC is able to pay more to farmers and at the same time cut its costs because it has dramatically reduced the ineffi ciencies in logistics. The vast market for cell phones among those at the BOP is not for phones costing $200 or even $100 but for phones cost- ing less than $50. Such a phone cannot simply be a cut-down version of an existing handset. It must be very reliable and have lots of battery capacity, as it will be used by people who do not have reliable access to electricity. Motorola went thorough four redesigns to develop a low-cost cell phone with battery life as long as 500 hours for villagers without regular electricity and an extra-loud volume for use in noisy markets. Motorola’s low-cost phone, a no-frills cell phone priced at $40, has a standby time of two weeks and conforms to local languages and customs. The cell-phone manufacturer says it expects to sell 6 million cell phones in six months in markets including China, India, and Turkey.

BOP MARKETING REQUIRES CREATIVE FINANCING There is also demand for personal computers but again, at very low prices. To meet the needs of this market, Advanced Micro Devices markets a $185 Personal Internet communicator—a basic computer for developing countries—and a Taiwan Company offers a similar device costing just $100. For most products, demand is contingent on the customer having suffi cient purchasing power. Companies have to devise creative ways to assist those at the BOP to fi nance larger pur- chases. For example, Cemex, the world’s third-largest cement company, recognized an opportunity for profi t by enabling lower-income Mexicans to build their own homes. The com- pany’s Patrimonio Hoy Programme , a combination builder’s “club” and fi nancing plan that targets homeowners who make less than $5 a day, markets building kits using its premium- grade cement. It recruited 510 promoters to persuade new customers to commit to building additions to their homes. The customers paid Cemex $11.50 a week and received building materials every 10 weeks until the room was fi nished (about 70 weeks—customers were on their own for the actual build- ing). Although poor, 99.6 percent of the 150,000 Patrimo- nio Hoy participants have paid their bills in full. Patrimonio Hoy attracted 42,000 new customers and is expected to turn a $1.5 million profi t next year.

Marketing to the Bottom of the PyramidCASE 33

Professor C. K. Prahalad’s seminal publication, The Fortune at the Bottom of the Pyramid , suggests an enormous market at the “bottom of the pyramid” (BOP)—a group of some 4 billion peo- ple who subsist on less than $2 a day. By some estimates, these “aspirational poor,” who make up three-fourths of the world’s population, represent $14 trillion in purchasing power, more than Germany, the United Kingdom, Italy, France, and Japan put to- gether. Demographically, it is young and growing at 6 percent a year or more. Traditionally, the poor have not been considered an important market segment. “The poor can’t afford most products”; “they will not accept new technologies”; and “except for the most basic prod- ucts, they have little or no use for most products sold to higher in- come market segments”—these are some of the assumptions that have, until recently, caused most multinational fi rms to pay little or no attention to those at the bottom of the pyramid. Typical market analysis is limited to urban areas, thereby ignoring rural villages where, in markets like India, the majority of the population lives. However, as major markets become more competitive and in some cases saturated—with the resulting ever-thinning profi t margins— marketing to the bottom of the pyramid may have real potential and be worthy of exploration. One researcher suggested that American and European busi- nesses should go back and look at their own roots. Sears, Roe- buck was created to serve the lower-income, sparsely settled rural market. Singer sewing machines fashioned a scheme to make con- sumption possible by allowing customers to pay $5 a month instead of $100 at once. The world’s largest company today, Walmart, was created to serve the lower-income market. Here are a few examples of multinational company efforts to overcome the challenges in marketing to the BOP. Designing products for the BOP is not about making cheap stuff but about making technologically advanced products af- fordable. For example, one company was inspired to invent the Freeplay, a windup self-power–generating radio, when it learned that isolated, impoverished people in South Africa were not getting information about AIDS because they had no electricity for radios and could not afford replacement batteries.

BOP MARKETING REQUIRES ADVANCED TECHNOLOGY The BOP market has a need for advanced technology, but to be usable, infrastructure support must often accompany the technology. For example, ITC, a $2.6 billion a year Indian con- glomerate, decided to create a network of PC kiosks in villages. For years, ITC conducted its business with farmers through a maze of intermediaries, from brokers to traders. The company wanted farmers to be able to connect directly to information sources to check ITC’s offer price for produce, as well as prices in the closest village market, in the state capital, and on the Chicago commodities exchange. With direct access to infor- mation, farmers got the best price for their product, hordes of

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Cases 3 Assessing Global Market Opportunities

single-use sachets of Sunsilk shampoo and Omo laundry de- tergent, which he sells to riverside shopkeepers for as little as 2.5 cents each. At his fi rst stop he makes deliveries to a half dozen small shops. He sells hundred of thousands of soap and shampoo packets a month, enough to earn about $125—fi ve times his pre- vious monthly salary as a junior Communist party offi cial. “It’s a hard life, but its getting better.” Now, he “has enough to pay his daughter’s schools fees and soon . . . will have saved enough to buy a bigger boat, so I can sell to more villages.” Because of aggressive efforts to reach remote parts of the country through an extensive network of more than 100,000 independent sales representatives such as Hon, the Vietnam subsidiary of Unile- ver realized a 23 percent increase in sales last year to more than $300 million.

BOP MARKETING REQUIRES AFFORDABLE PACKAGING As one observer noted, “the poor cannot be Walmartized.” Con- sumers in rich nations use money to stockpile convenience. We go to Sam’s Club, Costco, Kmart, and so on, to get bargain prices and the convenience of buying shampoos and paper towels by the case. Selling to the poor requires just the opposite approach. They do not have the cash to stockpile convenience, and they do not mind frequent trips to the village store. Products have to be made avail- able locally and in affordable units; fully 60 percent of the value of all shampoo sold in India is in single-serve packets. Nestlé is targeting China with a blitz of 29 new ice cream brands, many selling for as little as 12 cents with take-home and multipack products ranging from 72 cents to $2.30. It also features products specially designed for local tastes and prefer- ences of Chinese consumers, such as Nestlé Snow Moji, a rice pastry fi lled with vanilla ice cream that resembles dim sum, and other ice cream fl avors like red bean and green tea. The ice cream products are distributed through a group of small independent saleswomen, which the company aims to expand to 4,000 women by next year. The project is expected to account for as much as 24 percent of the company’s total rural sales within the next few years.

BOP MARKETING CREATES HEALTH BENEFITS Albeit a promotion to sell products, marketing to BOP does help improve personal hygiene. The World Health Organization (WHO) estimates that diarrhea-related diseases kill 1.8 million people a year and noted that better hand-washing habits—using soap—is one way to prevent their spread. In response to WHO urging, Hin- dustan Lever Company introduced a campaign called “Swasthya Chetna” or “Glowing Health,” which argues that even clean- looking hands may carry dangerous germs, so use more soap. It began a concentrated effort to take this message into the tens of thousands of villages where the rural poor reside, often with little access to media. “Lifebuoy teams visit each village several times,” using a “Glo Germ” kit to show schoolchildren that soap-washed hands are cleaner. This program has reached “around 80 million rural folk,” and sales of Lifebuoy in small affordable sizes have risen sharply. The small bar has become the brand’s top seller.

One customer, Diega Chavero, thought the scheme was a scam when she fi rst heard of it, but after eight years of being unable to save enough to expand the one-room home where her family of six lived, she was willing to try anything. Four years later, she has fi ve bedrooms. “Now I have a palace.” Another deterrent to the development of small enterprises at the BOP is available sources of adequate fi nancing for microdis- tributors and budding entrepreneurs. For years, those at the bottom of the pyramid needing loans in India had to depend on local mon- eylenders, at interest rates up to 500 percent a year. ICICI Bank, the second-largest banking institution in India, saw these people as a potential market and critical to its future. To convert them into customers in a cost-effective way, ICICI turned to village self-help groups. ICICI Bank met with microfi nance-aid groups working with the poor and decided to give them capital to start making small loans to the poor—at rates that run from 10 percent to 30 percent. This sounds usurious, but it is lower than the 10 percent daily rate that some Indian loan sharks charge. Each group was composed of 20 women who were taught about saving, borrowing, investing, and so on. Each woman contributes to a joint savings account with the other members, and based on the self-help group’s track re- cord of savings, the bank then lends money to the group, which in turn lends money to its individual members. ICICI has developed 10,000 of these groups reaching 200,000 women. ICICI’s money has helped 1 million households get loans that average $120 to $140. The bank’s executive directory says the venture has been “very profi table.” ICICI is working with local communities and NGOs to enlarge its reach.

BOP MARKETING REQUIRES EFFECTIVE DISTRIBUTION When Unilever saw that dozens of agencies were lending micro- credit loans funds to poor women all over India, it thought that these would-be microentrepreneurs needed businesses to run. Uni- lever realized it could not sell to the bottom of the pyramid un- less it found low-cost ways to distribute its product, so it created a network of hundreds of thousands of Shakti Amma (“empowered mothers”) who sell Lever’s products in their villages through an Indian version of Tupperware parties. Start-up loans enabled the women to buy stocks of goods to sell to local villagers. In one case, a woman who received a small loan was able to repay her start-up loan and has not needed to take another one. She now sells regularly to about 50 homes and even serves as a miniwholesaler, stocking tiny shops in outlying villages a short bus ride from her own. She sells about 10,000 rupees ($230) of goods each month, keeps about $26 profi t, and ploughs the rest back into new stock. While the $26 a month she earns is less than the average $40 monthly income in the area, she now has income, whereas before she had nothing. Today about 1,300 poor women are selling Unilever’s prod- ucts in 50,000 villages in 12 states in India and account for about 15 percent of the company’s rural sales in those states. Over- all, rural markets account for about 30 percent of the company’s revenue. In another example, Nguyen Van Hon operates a fl oating sun- dries distributorship along the Ke Sat River in Vietnam’s Mekong Delta—a maze of rivers and canals dotted with villages. His boat is fi lled with boxes containing small bars of Lifebuoy soap and

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Part 6 Supplementary Material

2. Marketing to the BOP raises a number of issues revolving around the social responsibility of marketing efforts. Write a position paper either pro or con on one of the following:

a. Is it exploitation for a company to profi t from selling soaps, shampoo, personal computers, and ice cream, and so on, to people with little disposable income?

b. Can making loans to customers whose income is less than $100 monthly at interest rates of 20 percent to pur- chase TVs, cell phones, and other consumer durables be justifi ed?

c. One authority argues that squeezing profi ts from people with little disposable income—and often not enough to eat—is not capitalist exploitation but rather that it stimu- lates economic growth.

QUESTIONS 1. As a junior member of your company’s committee to explore

new markets, you have received a memo from the chairper- son telling you to be prepared at the next meeting to discuss key questions that need to be addressed if the company de- cides to look further into the possibility of marketing to the BOP segment. The ultimate goal of this meeting will be to establish a set of general guidelines to use in developing a market strategy for any one of the company’s products to be marketed to the “aspirational poor.” These guidelines need not be company or product specifi c at this time. In fact, think of the fi nal guideline as a checklist—a series of questions that a company could use as a start in evaluating the potential of a specifi c BOP market segment for one of its products.

Sources: C. K. Prahalad, The Fortune at the Bottom of the Pyramid (Philadelphia: Wharton School Publishing, 2004); Stefan Stern, “How Serving the Poorest Can Bring Rich Rewards,” Management Today, August 2004; Kay Johnson and Xa Nhon, “Selling to the Poor: There Is a Surprisingly Lucrative Market in Targeting Low-Income Consumers,” Time , April 25, 2005; Cris Prystay, “India’s Small Loans Yield Big Markets,” Asian Wall Street Journal, May 25, 2005; C. K. Prahalad, “Why Selling to the Poor Makes for Good Business,” Fortune, November 15, 2004; Alison Maitland, “A New Frontier in Responsibility,” Financial Times, November 29, 2004; Normandy Madden, “Nestlé Hits Mainland with Cheap Ice Cream,” Advertising Age, March 7, 2005; Ritesh Gupta, “Rural Consumers Get Closer to Established World Brands,” Ad Age Global, June 2002; Alison Overholt, “A New Path to Profi t,” Fast Company, January 1, 2005; Patrick Whitney, “Designing for the Base of the Pyramid,” Design Management Review, Fall 2004; C. K. Prahalad and Stuart Hart, “Fortune at the Bottom of the Pyramid,” Strategy & Business 26 (2002); C. K. Prahalad and Aline Hammond, “Serving the World’s Poor, Profi tably,” Harvard Busi- ness Review, September 2002; “The Invisible Market,” Across the Board , September/October 2004; Anuradha Mittal and Lori Wallach, “Selling Out the Poor,” Foreign Policy, September/October 2004; G. Pascal Zachary, “Poor Idea,” New Republic, March 7, 2005; “Calling an End to Poverty,” The Economist , July 9, 2005; Susanna Howard, “P&G, Unilever Court the World’s Poor,” The Wall Street Journal, June 1, 2005; Rajiv Banerjee and N. Shatrujeet, “Shoot to the Heart,” Economic Times, July 6, 2005; David Ignatius, “Pennies from the Poor Add Up to Fortune,” Korea Herald, July 7, 2005; Rebecca Buckman, “Cell Phone Game Rings in New Niche: Ultra Cheap,” The Wall Street Journal, August 18, 2005, p. B4; “It’s Good Business, but a Strategy that Saves Lives as Well,” The Boston Globe, June 10, 2007; “Global Executive: See the Poor as Entrepreneurs, Con- sumers,” Star Tribune (Minneapolis, MN, July 30, 2007; “The Right Package; It Started With Shampoo but Now Sachets Have Overtaken Shop Shelves,” India Today, December 31, 2007; “The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profi ts,” South Asian Journal of Management, April 1, 2007; “The Legacy that Got Left on the Shelf–Unilever and Emerging Markets,” The Economist, February 2, 2008.

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chains has zoomed, Zara’s rivals Hennes & Mauritz AB of Sweden and Mango of Spain have also become fi xtures on U.S. shopping streets. In addition to Zara, which makes up 60 percent of its business, Inditex owns seven smaller store brands, including the more up- scale Massimo Dutti and the youth-oriented Bershka. In the last 12 months Inditex added 560 stores, including entering new markets in Croatia, Colombia, Guatemala, and Oman, to reach 3,691 stores in 68 countries. It plans expansion of a similar scope over the next year. The fi rst Zara store opened in 1975 in La Coruña, a port town near Arteixo in a remote corner of northern Spain. Its two key traits were an eye for customer tastes and a production process that started with the fi nal price and worked backward to the most- effi cient production. In the mid-1980s, local business-school professor José Maria Castellano, a technophile, joined Inditex as right-hand man to founder Amancio Ortega Gaona, and the com- pany became a world-class logistical outfi t, peddling “fast fash- ion.” The fi rst foreign store, in Portugal, opened in 1989, followed by New York. In 2001, Mr. Ortega took Inditex public and its stores are now on prime shopping streets around the world. Stores are stocked with new designs twice a week. Collections are small and often sell out, creating an air of exclusivity and cut- ting down on the need for markdowns. The company ships clothes straight from the factory to stores. Unlike competitors who manu- facture most of their wares in Asia, Inditex makes two-thirds of its goods in Spain and nearby countries such as Portugal, Morocco and Turkey. The retailer says the higher labor costs are offset by the fl exibility of having production close to its warehouses and distribution centers, which are all in Spain. At “the Cube,” as employees call their futuristic-looking headquarters outside La Coruña, sales managers sit at a long row of computers, monitoring sales at every store around the world. When a garment sells well—or fl ops—they quickly tell designers sitting nearby to whip up fresh designs. In the base- ment, stylists decide store layouts and window displays. One room is built like a shopping street, its walls lined with lit and decorated store windows that dictate how storefronts will look from New York’s Fifth Avenue to London’s Regent Street. Every two weeks, new decorations are photographed and e-mailed to stores to replicate. To speed up new store openings, Mr. Isla needed to cut start-up costs. Inditex now avoids store openings in slow months such as August. In the past, stores opened year-round, accruing costs from the fi rst day even if sales took longer to build. Mr. Isla’s goal is for Inditex is to reverse a trend of costs growing faster than sales. It met that target in the fi rst half ended July 31, 2007, when costs grew 16 percent over the same period the previous year, while sales increased 19 percent. In another move to cut costs, Mr. Isla installed software in store computers to schedule staff based on sales volume at differ- ent times. As a result, more salespeople work at peak times such as lunchtime or the early evening. Inditex says the more fl exible schedules shaved 2 percent off the hours staff work. Alarm tags

Continued Growth for Zara and InditexCASE 34

CIRCA 2008 ARTEIXO, Spain—Zara stores have set the pace for retailers around the world in making and shipping trendy clothing. Now Pablo Isla, chief executive of parent company Inditex SA, says Zara needs to speed up. As rivals catch up, Mr. Isla is attempting one of the fastest global expansions the fashion world has ever seen, opening hundreds of new stores and entering new markets. To do that, as an economic downturn threatens sales, Inditex is changing the systems that have driven its success at Zara and its other store brands, to save time and money. Among the innova- tions, it is introducing new methods to enable store managers to order and display merchandise faster and adding cargo routes for shipping goods. “There has been a clear change of mentality in the company,” Mr. Isla, a former tobacco executive who arrived at Inditex in 2005, said in an interview at the company’s head- quarters here. The world’s second largest clothing retailer by sales after Gap Inc., Inditex is responding to a predicament shared by other com- panies that come up with game-changing formulas: Eventually competitors catch up, forcing the pioneers to do even better to keep their edge. Low-cost carrier Southwest Airlines Co. is mak- ing big changes to fend off rivals that have copied its effi cient op- erating model. Inventory-control methods at Walmart Stores Inc. are being mimicked around the world, and Google Inc. is updating its search engine to keep users loyal. The consumer slowdown is adding pressure. Inditex shares have fallen nearly 24 percent in the last 12 months, in large part because investors are worried about an economic downturn in Spain, where Inditex generates over a third of its $12 billion in annual sales. The company is pressing ahead with its expansion plans even as consumers are slowing down. In the U.S., retailers had their worst monthly sales results in nearly fi ve years in Janu- ary, and some chains are planning to close stores and cut jobs. U.K. retailer Marks & Spencer PLC recently reported its worst quarterly sales performance in two years, and warned the pain could extend into 2009. The industry is watching the company’s logistical makeover. Though it sells inexpensive trendy clothing—“fast fashion” in industry parlance—Zara has been so successful in luring high- paying customers that luxury fashion brands such as Gucci, Burberry and Louis Vuitton have overhauled their own practices to send new fashions to stores more frequently. “They’re a fan- tastic case study in terms of how they manage to get product to their stores so fast,” Stacey Cartwright, chief fi nancial offi cer of Burberry Group PLC, says of Zara. “We are mindful of their techniques.” In recent years, competitors across the globe have adopted Zara’s methods. Italy’s Benetton Group SpA now replenishes stores up to once a week. Los Angeles-based Forever 21 Inc. and Japanese apparel giant Fast Retailing Co., owner of the Uniqlo chain, can get new looks to their stores within six weeks. Even outdoor clothing maker Patagonia Inc. has doubled the number of new styles it offers every year. As the popularity of cheap-and-chic

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Part 6 Supplementary Material

selling its fast-changing collections online. So it caught many by surprise when it said Wednesday that it will launch online sales next year for Zara’s Autumn/Winter 2010 collection. “There had been some concern that Inditex was falling behind competitors on e-commerce,” said Anne Critchlow, an analyst at Société Générale. Initially, the company plans to launch the online store www .zara.com in Spain, France, Germany, Italy, the U.K. and Portugal. Later, it will roll it out in all of Zara’s remaining markets. In the medium term, Inditex may also launch its other six formats online, said Chief Executive Pablo Isla. “The Internet is becoming a more and more relevant channel, so it would be logical to continue ex- panding online with the other formats,” he said. Neither H&M nor Inditex disclose what proportion of sales comes from their online outfi ts. U.S. rival Gap Inc. generated about 8 percent of its Gap- branded sales in the U.S. on the Web. For the fi rst half ended July 31, Inditex’s net profi t dropped to

375 million ($550.4 million) from 406 million a year earlier, while sales were up 6.6 percent at 4.86 billion. Sales in stores open at least a year, however, shrank by an annual 2 percent in the fi scal fi rst half, compared with a decline of .7 percent in second half, and operating costs grew 8 percent as Inditex continued to expand its empire. The retailer opened 166 new stores in the fi rst half, down from 249 a year earlier. Inditex’s gross margin fell to 55.3 percent of sales from 56.4 percent a year earlier. Analysts at- tributed the decline to a stronger dollar, which is making it more costly to source materials, and pricing pressures in the company’s main market, Spain. The retailer gave a resilient trading outlook, saying sales in the fi rst weeks of its fi scal third quarter were up 9 percent when stripping out currency fl uctuation, the same growth rate as in the fi rst half. Inditex’s much smaller U.K. rival, Next PLC, which launched online sales in 1998, meanwhile, posted a 6.9 percent increase in fi rst-half net profi t. Cost savings helped push net profi t up to £131.8 million ($217.5 million) from £123.3 mil- lion a year earlier, as revenue inched up to £1.51 billion from £1.5 billion. Next, which like Inditex sells clothes and home wares, warned, however, that like-for-like retail sales are likely to decline between 3.5 percent and 6.5 percent in the second half. At Directory, its catalogue and online-shopping business, which generates about 40 percent of operating profi t, Next said it expects sales to rise by up to 2 percent. The retailer nevertheless raised its full-year fore- cast, saying it now expects to deliver pretax profi t “close” to last year’s £429 million, subject to its sales performance in the fourth quarter, which includes Christmas.

CIRCA 2010 Spanish fashion retailer Inditex SA plans to launch its Zara online store in the U.S. next year, seeking to widen its clientele beyond the big cities where it currently operates, chief executive Pablo Isla said Wednesday. Early indications show the online launch may have traction in the U.S. market. A Zara application for Apple Inc.’s cell phone the iPhone has been downloaded by more prospective clients in the U.S. than in any other market, Isla said. Speaking to Dow Jones Newswires after the presentation of Inditex’s 2009 results, Isla said that more than a million iPhone users have downloaded the App since it was fi rst released in December. “It’s a market where Internet sales are very important, and it’s a way of accessing all those clients that are interested in Zara,”

are now attached to garments at the factories. In the past, at a big Zara location such as the four-fl oor store on Madrid’s Alberto Agu- ilera shopping street, 10 people spent an average of 12 hours a week putting on the tags. Now, Inditex estimates, those salespeo- ple spend 3 percent more time serving customers. “In the past, a shipment would come in the morning, and the staff wouldn’t have it unpacked till noon. They were just giving away three hours of prime selling time,” Mr. Isla says. Shipping papers now label the newest collections “NEWC.” Those pieces are often rushed to the shop fl oor on plastic shipping hangers and only later switched to Zara’s customary light wood hangers. Zara regulars know to look for the black plastic hangers with the latest looks, says Dilip Patel, U.K. commercial director for Inditex. Store managers also use new hand-held computers that show how garments rank by sales, so clerks can re-order best- sellers in less than an hour—a process that previously took about three hours. These orders arrive, together with new pieces, two days later. Also, each of the company’s various store brands shipped mer- chandise separately in the past, concerned that mixing even behind the scenes could dilute their images. Combining the brands into larger volumes has allowed Mr. Isla to launch twice-weekly air shipments with Air France Cargo–KLM Cargo. Planes from Zara- goza, Spain, land in Bahrain with goods for Inditex stores in the Middle East, fl y on to Asia, and return to Spain with raw materials and half-fi nished clothes. The company also started new shipments with Emirates Airline. Despite Mr. Isla’s effi ciency gains, some experts caution that Zara faces challenges it is not addressing. Keeping a large amount of production close to home, some warn, loses its benefi ts when a growing number of stores are far away. “The effi ciency of the supply chain is coming under more pressure the farther abroad they go,” says Nirmalya Kumar, a professor at London Business School. For now, the company makes up for some of the cost by charg- ing more for goods sold overseas. In the U.S., for instance, Zara clothes cost up to 40 percent more than they do in Spain. How- ever, that could lead to an inconsistent brand image, a risky strat- egy in a globalizing world, some critics warn. Mr. Isla says that when he joined the company, he considered a logistics center in Asia, where the company produces around a third of its goods, but decided it would only make sense if Zara had more stores in the region. He says the group’s current logistics capacity will suffi ce until 2013.

CIRCA 2009 Inditex SA, Europe’s biggest fashion retailer by revenue, said Wednesday it plans a major push online for its fl agship Zara-brand, as it reported a 7.6 percent decline in net profi t for the fi scal fi rst half. Inditex, which also owns the Massimo Dutti, Pull and Bear, and Bershka brands, is known for savvy use of information technology to tightly control production and inventories. It collects data from its 4,430 stores in 73 countries to detect trends and tweaks prod- ucts based on consumer tastes. Compared with its main competitor, Sweden’s Hennes & Mauritz AB, however, Inditex is a bit of a latecomer to the Internet. It started operating an online store for furnishing brand Zara Home in 2007, but had so far shied away from the Web for Zara clothing because of the complexity of managing and

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Cases 3 Assessing Global Market Opportunities

QUESTIONS 1. What are the ways that Inditex ensures that “fast fashion” is

truly fast?

2. What are the important attributes of a “fast fashion” retailer to customers? To store managers?

3. Why would a retailer introduce their online store country-by- country? Why was Inditex slow to embrace online sales when it Is so tech-savvy in other ways?

4. Briefl y describe fi ve opportunities for continued growth dur- ing the next fi ve years for Zara’s parent, Inditex, SA.

5. Pick one of the fi ve opportunities and outline the advantages and disadvantages of pursuing it.

said Isla. The App allows shoppers to check out what’s new in the Zara collection, and to fi nd the nearest shop. Inditex, based in La Coruna, northwestern Spain, last year soared past Gap Inc. to become the most-selling fashion retailer in the world, with more than 4,600 stores. Zara, which is present in 76 countries, will roll out its online store fi rst later this year in six European countries, and then progressively add the remaining countries where Zara operates. Inditex entered the United States early, in 1994, but has expanded rather slowly, focusing store openings in large cities like New York, Miami and Los Angeles. It currently has 48 stores there. Isla said Inditex plans to grow “selectively” there in the coming three years. “We have to prioritize at every step, and ours are twofold: Growing in Europe and in Asia,” Isla said. Inditex is opening al- most all of its new stores outside its Spanish home market, which currently accounts for 31.8 percent of group sales. By 2013, Indi- tex expects the weight of Spain to drop to 20 percent of total sales, while Europe, excluding Spain, is expected to rise to 50 percent and Asia, 20 percent. The remaining 10 percent will come from the Americas.

Sources: Cecilie Rohwedder, “Pace-Setting Zara Seeks More Speed to Fight Its Rising Cheap-Chic Rivals,” The Wall Street Journal , February 20, 2008, online; Christopher Bjork, “Zara Is to Get Big Online Push,” The Wall Street Journal , September 17, 2009, online; Christopher Bjork, “Zara Has Online Focus for U.S. Expansion, Inditex CEO Says,” Dow Jones Newswires, March 17, 2010, online.

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is already booking payloads for launch in the future. Next year is sold out, according to company offi cials. Sea Launch Home Port is a decommissioned U.S. Navy facil- ity on the tip of a manmade peninsula at the Port of Long Beach. The Sea Launch buildings are all left over from the Navy except for the Payload Processing Facility, which the company built in the late 1990s. The company’s pier is home to two one-of-a-kind vessels—the Sea Launch Commander and the Odyssey launch platform. The Sea Launch Commander carries about 240 people, ranging from rocket technicians and corporate leaders to chefs and helicopter pilots. The Commander houses a state-of-the-art launch control center divided between two sections designed for Ukrai- nian and Russian engineers and American engineers and manag- ers. The cavernous rocket assembly and checkout hall is located on the command ship’s lower deck and stretches nearly the entire length of the vessel. The facility is capable of supporting two simultaneous launch campaigns using staging and integration compartments and a fueling cell. Giant cranes inside the high bays lift rocket stages, which sits on Russian-gauge rails on the fl oor integration room fl oor. The rocket’s ground support equipment inside the Sea Launch Commander is virtually identical to hardware used for Zenit launches at the Baikonur Cosmodrome in Kazakhstan, according to Sea Launch offi cials. The Sea Launch Commander was specially constructed for Sea Launch at a Scotland shipyard by the maritime unit of Kvaerner, then a leading Norwegian industrial company. Measuring 656 feet long and 105 feet wide, the command ship was outfi tted with more than 600 tons of rocket support equipment in Russia before sailing to Long Beach in 1998. The massive ship’s crew quarters are home to Sea Launch’s international employees during their stay in the United States.

CIRCA 2008 Sea Launch engineers say the three-week round-trip journey across the Pacifi c Ocean is the most rewarding part of their jobs. The cruise is the culmination of nearly two months of work pre- paring the rocket, payload, and launch teams for the mission. Prior to operations at Home Port, about 18 months goes into the planning, fl ight design, and logistics. “It’s really nice to know most of the reviews are over and we’re fi nally ready to launch,” said Bill Rujevcan, mission director for the company’s next fl ight. More than 300 people take the trip to the company’s equatorial launch site about 1,400 miles south of Hawaii. The crew includes workers from several nations, including: Ukraine, Russia, Norway, the Philippines, and the United States. Ukraine-based Yuzhnoye and Yuzhmash build the Zenit 3SL rocket’s fi rst and second stages, while Energia of Russia manufactures the Block DM-SL upper stage for the rocket. Norwegian ship offi cers manage marine oper- ations, and Filipino deckhands work on both the Sea Launch Com- mander and the Odyssey launch platform. U.S. employees from the Boeing Co. fi ll management roles and provide the fl ight de- sign, payload fairing, and satellite adapter. Astrotech, a contractor, oversees processing of customer payloads inside a clean room at the company’s Payload Processing Facility at Home Port in Long Beach, California. After 27 missions in nine years of business, Sea Launch is thriving in the do-or-die commercial launch industry. The com- pany’s Zenit 3SL rocket has suffered three setbacks in that time. Two were total failures. The rocket’s success rate places it among the top tier of heavy-lift launchers on the commercial market, and the company’s launch backlog seems to confi rm that. Sea Launch

A Sea Launch Recovery?CASE 35

The Sea Launch Commander and the

Odyssey platform are seen here docked at

Home Port.

Credit: Chris Miller/Spaceflight Now

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Cases 3 Assessing Global Market Opportunities

away from Odyssey a day before launch. A helicopter transfers fi nal personnel and equipment between the vessels. The Zenit 3SL rocket is rolled out of its hangar and erected on the pad about 27 hours before the scheduled launch. Pneumatic pistons power the erector during the 10-minute lifting operation, and techni- cians torque four hold-down bolts to fi rmly attach the rocket to the launch pad. The bolts automatically retract from the booster at liftoff. The countdown enters an automated sequence fi ve hours before launch, and the team serves as watchdogs to ensure no pre- set parameters are breached. The fi nal workers are evacuated from Odyssey about three hours prior to launch. During the fi nal countdown, Odyssey’s marine crew occupies a remote control station on the bridge of the Sea Launch Com- mander . The consoles give the marine offi cers full control of the launch platform three-and-a-half miles away. Fueling of the Zenit 3SL’s three stages with kerosene and liquid oxygen begins two hours and 40 minutes before liftoff. Fuel and oxidizer tanks aboard Odyssey hold enough propellant for three launch attempts, accord- ing to Rujevcan. Managers hold their fi nal poll 36 minutes before launch, and the rocket’s umbilical arm detaches from the rocket at the 17-minute point. The Zenit’s automated sequence reaches a last milestone with one minute to go. “At that point, we are committed to launch unless the sequence tells us to stop,” Rujevcan said. Now on his 18th mission to the equator, Rujevcan is one of three certifi ed Sea Launch mission directors. The mission director is the fi nal authority on whether the launch occurs. “I am the ultimate go guy,” he said. Rujevcan oversees a team of about 50 engineers inside the Launch Control Center. The launch team typically con- ducts three launch rehearsals during each campaign to hone their skills. The launch team monitors the rocket, weather, ship systems, and ground stations to ensure they are all ready for launch. Notices of the launch are issued for vessels traveling in the area to keep at least 25 miles from Odyssey during the fi nal countdown. Sea Launch helicopters and ship-based radar. Offi cials closely watch Odyssey’s exact location during the fi nal moments before launch. Managers allow a tolerance of two kilometers, or about 1.2 miles, from the standard launch site at the intersection of the equator and 154 degrees west longitude. Powerful underwater azimuth thrust- ers hold Odyssey’s heading at launch time. The platform must be within one degree of the expected orientation for launch. A Sea Launch campaign in November was plagued by persistent strong ocean currents and high winds. The underwater thrusters were not enough to match the unruly conditions, and the platform constantly drifted out of position. Offi cials eventually ordered the ships to return to California after more than two weeks on station at the mid-Pacifi c launch site. Engineers have since installed extra generators on Odyssey to increase the amount of time the vessel can stay at sea. The unusual experience with ocean currents is an example of how Sea Launch continues to encounter challenges and learn from experience, Korn said. Rujevcan agreed. “After 27 missions, you just see a little bit of everything,” Rujevcan said. “It’s never really routine to the point of complacency.”

CIRCA 2009, HOW FAST THINGS CAN CHANGE! Sea Launch’s bankruptcy fi ling this week was brought on by recur- ring fi nancial losses, partially stemming from a 2007 rocket failure that helped set off a cascading series of delays and customer defec- tions, according to court records.

As Ukrainian and Russian engineers complete work to ready the Zenit rocket, technicians inside Sea Launch’s Payload Processing Fa- cility are busy preparing the booster’s satellite payload down the road from the docked vessels. When both groups are ready, the spacecraft is transported about 1,000 feet and loaded into the Sea Launch Com- mander’s fi nal assembly hall on the roll-on, roll-off vessel. Already enclosed in the payload fairing, the satellite is attached to the Zenit- 3SL’s upper stage to complete the rocket’s construction. EchoStar 11, the payload for Sea Launch’s mission this month, was rolled from the clean room to the command ship hangar June 25. The 12,150-pound satellite was bolted to the Block DM-SL upper stage a day later. The rocket was next moved to the Odyssey Launch Platform. The launcher, which weighs about 100,000 pounds with- out propellant, is transferred in a high- precision operation more 200 feet above the waters of Long Beach Harbor. The Sea Launch Commander fi rst pulls in front of Odyssey and the rocket is rolled out of the integration hall. The rocket is then hoisted into Odyssey’s hangar, where it stays during the tran- sit from Long Beach to the launch site. Sea Launch then lifts the 200-foot-tall rocket upright on its launch pad for a fi nal series of tests to make sure all systems are ready to set sail for the equator. “That’s our last big test before we leave,” Rujevcan said. Odyssey , the slower of the company’s two ships, usually leaves Long Beach a few days before the Sea Launch Commander . The launch platform left port for the EchoStar 11 campaign last week. With a top speed of about 12 knots, Odyssey’s crew of 70 sailors and engineers serve as caretakers of the Zenit rocket during the 2,882-mile transit to the launch site along the equator at 154 de- grees west longitude. Odyssey is a converted North Sea oil drilling platform built in Japan in 1983. Kvaerner’s maritime division modifi ed the vessel between 1995 and 1997 to support rocket launches, according to Sea Launch. The changes included adding two extra vertical sup- port columns, effectively extending the length of the platform to 436 feet. The deck extension was needed to make room for the Zenit launch pad, an immense hole in Odyssey’s deck with a gas diffuser directly beneath it, said Paula Korn, Sea Launch spokes- person. Workers replaced more than 20 miles of wiring on Odyssey after Sea Launch suffered a failure on the launch pad during a lift- off last year. The platform underwent a slate of repairs, including the replacement of a destroyed gas defl ector and the repainting of the ship, Korn said. The Sea Launch Commander pulled out of port this weekend to begin its trek to the equatorial Pacifi c. The ship will rendezvous with Odyssey at sea later this week. Offi cials keep busy during the trip by completing a handful of fi nal prelaunch reviews, two count- down rehearsals and several other meetings, Rujevcan said. The ships also offer a number of recreational activities for the launch team. The Sea Launch Commander carries basketball and volley- ball courts, a swimming pool, and a movie theater, not to men- tion opportunities to play pool, foosball and air hockey. Crews also enjoy access to DirecTV programming and XM Satellite Radio, two regular customers for Sea Launch. The Sea Launch Com- mander is furnished with a full-service cafeteria and bar, but the booze stops fl owing soon after the ships arrive at the launch site. Odyssey’s ballast tanks are fi lled with seawater to submerge the platform’s pontoons to a depth of about 65 feet to help keep the vessel stable. The command ship pulls alongside Odyssey and technicians move between the vessels using a 115-foot-long link bridge. The team begins the launch countdown three days prior to liftoff. The Sea Launch Commander sails three-and-a-half miles

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Part 6 Supplementary Material

sea and three fl ights under the company’s Land Launch subsidiary. But the delays caused several customers to move their launches to Arianespace and International Launch Services, Sea Launch’s primary competitors, to ensure their satellites could be sent into orbit on time. Arianespace offers dual-payload launches on its Ariane 5 rocket, while ILS uses the venerable Russian Proton booster launched from the Baikonur Cosmodrome in Kazakhstan. “The impact from the failure was largely focused on lost schedule time,” said Paula Korn, a Sea Launch spokesperson. “While we were able to reschedule some of our customers’ missions, a few missions were reassigned or moved off the Sea Launch system to other launch providers.” One customer, Hughes Network Systems, moved their satellite to an Ariane 5 rocket a month after the mis- hap. Hughes also fi led a claim for a $44.4 million reimbursement for advance payments the satellite operator had already paid Sea Launch. After Sea Launch contested the claim, an arbitration deci- sion earlier this year ruled in favor of Hughes, saying the launch provider had to pay the advance payments plus interest, an amount totaling $52.3 million. A standstill agreement brokered in March between Sea Launch and Hughes later expired, and Hughes fi led another petition ear- lier this month to recoup the money. The parties could not reach a payment agreement by the June 22 deadline, the same day Sea Launch fi led its Chapter 11 petition. In a written response to ques- tions, Korn said delays in the delivery of crucial rocket equipment caused further delays, exacerbating Sea Launch’s fi nancial prob- lems. The missed delivery milestones were blamed partly on the world’s fi nancial crisis. The late deliveries also made it more diffi - cult for Sea Launch to meet its customers’ schedule requirements, causing more payloads to jump to other rockets. Sea Launch has lost three more payloads so far this year to the Proton rocket, ac- cording to an ILS statement last week. Carman’s declaration also detailed debts owed Sea Launch’s investors and creditors, includ- ing $119 million in cost overruns still unpaid from the company’s early development work in the late 1990s. Sea Launch is owned by corporate shareholders in the United States, Russia, Norway, and Ukraine. Boeing Co. holds a 40 percent

The launch services provider and fi ve affi liated businesses fi led for Chapter 11 Bankruptcy protection in a Delaware court. In the fi ling, the company said it is unable to repay debt or secure new fi nancing, making bankruptcy reorganization the “best avenue” to keep the company afl oat. Offi cials say they intend to continue normal business operations, including the pursuit of new launch contracts to bring in new revenue. Whether satellite operators will sign with a company in bankruptcy remains to be seen, but Sea Launch leaders attempted to ease their concerns. “We want to as- sure our customers, employees, suppliers and partners that Sea Launch intends to continue to operate after the fi ling,” said Kjell Karlsen, president and general manager of Sea Launch. “Chapter 11 reorganization provides an opportunity for us to continue op- erations and focus on building our future plans. We are grateful for the continued support of our customers and partners while we focus on reorganizing for the future.” Two more launches had been planned for 2009. Sea Launch has contracts for 10 launches through 2012, offi cials said. Sea Launch reported assets between $100 million and $500 million and es- timated debt of almost $2 billion. The company will explore the potential sale of one or more of its business units during the bank- ruptcy proceedings, offi cials said. The company has long been on shaky fi nancial ground and has “struggled to recognize the success envisioned” when it was formed in 1995, according to the fi ling. Offi cials blamed the weak commercial launch industry, sky- rocketing hardware costs, the credit crunch, and intense competi- tion from other launch providers for being unable to “stabilize their business or meet their fi nancial targets,” according to a declaration by Brett Carman, Sea Launch’s vice president and chief fi nancial offi cer. Carman cited Sea Launch’s government-backed competi- tors in Europe and Russia, which snatched commercial satellites left stranded on the ground following a dramatic launch failure in January 2007. That accident destroyed the Zenit 3SL rocket and a Dutch telecommunications satellite before they even left the launch pad. The massive explosion also damaged the company’s Odyssey launch platform and grounded the Zenit rocket for nearly one year. Sea Launch has completed nine launches since return- ing to fl ight in January 2008, including six missions staged from

A fi le image shows a Zenit rocket on the

Odyssey fl oating pad ready for fl ight and the

Commander ship overseeing the countdown

nearby.

Credit: Sea Launch

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Cases 3 Assessing Global Market Opportunities

Sea Launch lost money every year since its fi rst fl ight in 1999 and accumulated some $1.4 billion in losses before fi ling for protection under Chapter 11 of the U.S. bankruptcy code in mid-2009. Karlsen said Sea Launch has three contracts—one from Intelsat of Washington and Luxembourg, and two from Paris- based Eutelsat—on its books. Refurbishing the launch platform and the command ship after months of inactivity would not be expensive, he said, and the commercial launch market—in the form of satellite fl eet operator support for Sea Launch—appears to want Sea Launch back in business. Sea Launch’s investors, led by Boeing, which had a 40 percent equity stake in the company, are now involved in the Chapter 11 bankruptcy court proceedings in Delaware, their lawyers hoping to salvage at least part of these companies’ investment. Boeing also is seeking reimbursement from Sea Launch’s Russian and Ukrai- nian partners for Boeing loans made on behalf of the company. Karlsen said that when it comes to a decision point, Boeing, Aker of Norway, and RSC Energia of Russia and Yuzhnoye of Ukraine will agree it is in their interests to have Sea Launch return to fl ight, even if it means abandoning hope of recouping their investment. The alternative—a Chapter 7 liquidation of Sea Launch’s assets— would fetch between $100 million and $130 million, Karlsen said.

2010, INDIA UPS THE ANTE India plans to cut satellite launch cost by half with the heavy-lift rocket that it is developing, a senior space department offi cial said. The country is also aiming a two-to-three fold increase in the number of spacecraft launches from this year, Chairman of Indian Space Research Organisation K Radhakrishnan said. GSLV-Mk III that ISRO is developing now would bring down the satellite launch cost at least by half, at present, the launch cost is pegged at around USD 20,000 per kilogram, he said. GSLV-Mk III, which would have the capability to launch satellites of four tonne class, nearly twice the mass that ISRO can currently carry to space, is expected to be operational in next two-three years. Delivering the inaugural lecture of IIScAA (Indian Institute of Science Alumni Association), he said India currently has 211 communication tran- sponders, including 195 operational.

QUESTIONS 1. Go to www.space.com/missionlaunches/2010-launch-log.html

and review the history of space launches toward forecasting demand for Sea Launch’s services for the next fi ve years.

2. Assess its competitors.

3. If you had a spare $1 million, would you invest it in Sea Launch? Consider the case of Euro Disney and Iridium.

4. What are the best opportunities for Sea Launch during the next fi ve years?

stake in the partnership, providing support services and hardware for the Zenit rocket’s payload unit. Sea Launch owes Boeing nearly $1 billion in loans, trade debt, and partner liabilities, according to the bankruptcy fi ling. Russia-based Energia, which holds a 25 percent interest, builds the rocket’s Block DM-SL upper stage and supports launch vehicle integration and mission operations. Aker, a Norwegian shipbuilder, constructed the company’s command ship and launch platform and owns 20 percent of the company. Ukrainian rocket manufacturers Yuzhnye and Yuzhnoye control a 15 percent share of Sea Launch. Sea Launch owes more than $1.5 billion to its investors, ac- cording to fi gures provided in court documents. The rest of its debt is in bank loans. The company stopped paying its suppli- ers as its fi nancial health slipped, according to Monday’s fi ling. “Boeing and the other Sea Launch partners support Sea Launch’s effort to explore restructuring alternatives through an orderly bankruptcy court process,” Boeing said in a written statement. Sea Launch and its Land Launch division have carried out 33 missions since 1999. Thirty of those launches were deemed total successes. “We are hoping to get back on our feet and move for- ward, doing what we do best, putting our customers’ satellites in orbit,” Korn said.

CIRCA 2010 Launch services provider Sea Launch Co. is in advanced negotia- tions with two potential strategic investors and expects to emerge from Chapter 11 bankruptcy proceedings by midyear and to re- turn to operations in 2011, Sea Launch President Kjell Karlsen said. Karlsen declined to name one of the investors. The other is Space Launch Services, created by Excalibur Almaz, a company founded to launch astronauts into orbit to stay at a space station based on existing Russian hardware. The company also has been looking at making the Russian-Ukrainian Zenit launch system ca- pable of launching astronauts. Sea Launch uses the Zenit rocket to launch satellites. “It’s a tough market, that’s for certain, and there aren’t a lot of Elon Musks around,” Karlsen said, referring to the Internet entrepreneur who has devoted much of his for- tune to starting the rocket-launch company Space Exploration Technologies. Space Launch Services has been providing Sea Launch with suffi cient cash to carry it through Chapter 11 but has not yet confi rmed whether it has the will or the resources to operate Sea Launch as a business. Space Launch Services offi cials, attending the March 3 World Space Risk Forum in Dubai, said one option they are considering is whether to relocate the Sea Launch ocean- launch platform closer to U.S. territory. A launch from U.S. ter- ritorial waters would have the dual advantage of reducing the time and expense of positioning the fl oating launch platform in the Pa- cifi c Ocean on the equator, and increasing the possibility that Sea Launch could qualify as a U.S. launch system and thereby com- pete for U.S. civil government launch contracts. In an interview, Karlsen said that post-Chapter 11, a Sea Launch operation freed from its debt service could be operated for about $50 million per year. The biggest cost is the Sea Launch Commander control ship, which accompanies the Odyssey launch platform to and from the launch site.

Sources: Stephen Clark, “Sea Launch Follows a Unique but Successful Path to Space,” Spacefl ight Now , July 8, 2008, online; Stephen Clark, “Court Filings De- tail Sea Launch’s Bankruptcy,” Spacefl ight Now , June 24, 2009, online; “Sea Launch Preparing for Bankruptcy Exit,” Space News , March 12, 2010, online; “India to Cut Satellite Launch Cost by Half,” Press Trust of India , April 5, 2010, online.

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