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MKTG−UB.55 Tulin Erdem New York University Fall 2015

MKTG−UB.55, Erdem, Fall 2015 New York University

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MKTG−UB.55, Erdem, Fall 2015 Table of Contents

“Product Team Cialis: Getting Ready to Market. Color Case” by Ofek, Elie XanEdu Extra

An Excel−formatted spreadsheet containing the exhibits for the case above is available at

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“Barco Projection Systems (A): Worldwide Niche Marketing” by Moriarty, Rowland T., Jr.; McQuade, Krista

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“Omnitel Pronto Italia” by Lal, Rajiv; Knoop, Carin−Isabel; Raju, Suma XanEdu Extra

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“U.S. Retail Coffee Market (A)” by Yip, George S.; Williams, Jeffrey R. XanEdu Extra

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“Ontela PicDeck (A): Customer Segmentation, Targeting, and Positioning” by Sawhney, Mohanbir; Grayson, Kent; Duprss, Patrick; Hsu, Christine; Metzger, Ryan; Obuchi, Fuminari; Sundaram, Arum; Wilson, Kari

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“Ontela PicDeck (B): Customer Segmentation, Targeting, and Positioning” by Sawhney, Mohanbir; Grayson, Kent; Duprss, Patrick; Hsu, Christine; Metzger, Ryan; Obuchi, Fuminari; Sundaram, Arum; Wilson, Kari

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105

“Burberry. Color Case” by Moon, Youngme XanEdu Extra

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http://content.xanedu.com/hs/582087p2.xls

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“Biopure Corp.” by Gourville, John T. XanEdu Extra

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131

“Coca−Cola's New Vending Machine (A): Pricing to Capture Value, or Not?” by King, Charles; Narayandas, Das

149

“Dove: Evolution of a Brand” by Deighton, John XanEdu Extra

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159

“Cunard Line Ltd.: Managing Integrated Marketing Communications” by Greyser, Stephen A.; Young, Robert F.

173

“Hewlett−Packard Imaging Systems Division: Sonos 100 C/F Introduction” by Cespedes, Frank V.; Bell, Marie

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199

“Samsung Electronics Co.: Global Marketing Operations” by Quelch, John A.; Harrington, Anna

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Bibliography 251

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ELIE OFEK

HARVARD BUSINESS SCHOOL

9-505-038 REV: JULY 28, 2010

Product Team Cialis: Getting Ready to Market

It was early 2002, and Mark Barbato, the executive director and global product team leader for Cialis, knew he faced a daunting task: launching a medicine for the treatment of male impotence in a market with an established leader-Viagra.l Not only had Viagra been generating over $1 billion in sales annually for its parent company Pfizer for three consecutive years, but it also enjoyed the highest brand recognition ofany other pharmaceutical drug in the world.

Despite the huge success of Viagra, Barbato and his team were very optimistic about the future prospects for Cialis (active ingredient is tadalafil). The innovative new drug, developed through a joint venture (Lilly ICaS LLC) between Eli Lilly, the pharmaceutical giant, and ICaS, a young biotech upstart, showed promising clinical results. At an upcoming prestigious urology conference, to be held in the spring of 2002, medical investigators would present data showing that a 20mg oral dose of Cialis improved the ability of up to 81% of men suffering from male impotence to respond to sexual stimulation over an extended period of time, even 36 hours after taking the drug. Since Viagra's effect lasts approximately four hours after dosing, the new treatment offered such men a significantly greater window of opportunity to choose the right moment of intimacy. Furthermore, the body's ability to absorb Viagra was diminished when the drug was taken during or after a high-fat meal, potentially leading to slower onset time.2 In contrast, the absorption of Cialis was not affected by food intake. Cialis demonstrated a generally favorable safety profile, similar to that seen with Viagra. Both drugs were not to be taken in conjunction with nitrates, which may be given to treat select heart problems. The incidence ofvisual irregularities, a side effect of Viagra, was notably rare for Cialis.3

Following Cialis's successful phase III clinical trials, a new-drug application (NDA) was submitted to the U.s. Food and Drug Administration (FDA) on June 28, 2001, and a similar application was filed in July with the European Agency for the Evaluation of Medicinal Products. With the approval process taking an average 12-18 months in both jurisdictions, the Lilly ICaS LLC board members, comprising both Lilly and ICaS top management, were hoping for a launch in 2002. In preparation for the launch, a brand council was scheduled for January 18. The brand council would bring together top Lilly marketing representatives from around the world, all eager to learn how Cialis would be differentiated from the competition and how they should promote the new drug once it was approved. With the meeting less than two weeks away, the global marketing director for the Cialis product team, Rob Brown (from Lilly), and Leonard Blum, vice president of sales and marketing at ICaS, had their work cut out for them. They had to come up with a strategy that would guide all

1Cialis is a trademark of Lilly ICOS LLC. Viagra is a trademark of Pfizer, Inc.

2 Lower peak blood levels can also result. The regulatory guidelines used to determine the presence or absence of a food interaction (for package inserts/labels) are based on a very specifically defined high-fat meal.

3 "Giving Viagra a Run For Its Money," BusinessWeek, October 23, 2000.

Professor Elie Ofek prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources ofprimary data, or illustrations of effective or ineffective management.

Copyright © 2004, 2006, 2009, 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means-electronic, mechanical, photocopying, recording, or otherwise-without the permission ofHarvard Business School.

505-038 Product Team Cialis: Getting Ready to Market

future marketing activity. In particular, they had to clearly identify a target market for the drug and a way to position it against the competition. Brown and Blum were contemplating three possible approaches: Cialis could either follow a “niche” strategy, whereby a specific and relatively narrow segment would be identified and targeted; it could follow a direct “compete” strategy and go head- to-head with Viagra’s positioning; or it could follow a “beat” strategy and try to come up with a differentiated positioning that would allow it to pursue a broad market.

ED—A Treatable Medical Condition

When Pfizer created a little blue pill called Viagra, it produced a widely used oral treatment for a medical condition rarely discussed in public—male impotence, or erectile dysfunction (ED). For men who suffer from ED, the process by which increased blood can flow to tissue necessary for attaining an erection is impaired. Most cases of ED are associated with another medical disease, certain medications, or lifestyle factors such as smoking or excessive alcohol consumption. (Primary morbidities linked to ED are shown in Exhibit 1.) The nature and incidence of these diseases tend to produce a strong age correlate with the ED condition. As for psychological factors, such as stress and depression, experts believe they account for roughly 20% of ED cases. An estimated 30 million men in the United States and 150 million worldwide experience chronic ED. Furthermore, the National Institutes of Health estimates that as many as 50% of all men between the ages of 40 and 70 experience some form of ED.4

Viagra (active ingredient is sildenafil citrate) temporarily inhibits the phosphodiesterase type 5 (PDE5) enzyme that normally interferes with the increased blood-flow process necessary for attaining an erection. Viagra is a prescription medication, in the form of 25, 50, and 100mg tablets, that can be taken up to once daily. It has a 30-minute to one-hour onset time (time from taking the pill until it becomes effective) and requires sexual stimulation for it to produce an erection. Viagra’s half-life was three to five hours.5 Pfizer studies indicated that Viagra improves erection in approximately 80% of men who suffer from ED. Viagra is not safe to take with nitrates used to treat certain heart conditions and has a list of common side effects. These include facial flushing, headaches, indigestion, and blue- tinted vision. In the United States, Viagra costs around $10 per pill at retail (when no coverage from health insurance is provided).6

Viagra’s Launch

Viagra had a notably successful launch. A total of 600,000 prescriptions were filled in the first month (April 1998), and its brand name immediately became the common noun for the symptom it said it would treat—erectile dysfunction.7 Its recognition far transcended the circles of ED patients. It quickly mushroomed into a cultural phenomenon, becoming the subject of dinner-table conversations and late-night television comedy (see Exhibit 2 for examples of how Viagra was portrayed in popular magazines). When Pfizer introduced Viagra, it used Bob Dole, a 75-year-old, well-known former politician, to support Viagra on TV. The Bob Dole ads urged men with ED to have checkups. For many older people, Dole emerged as a hero who displayed a rare combination of 4 “Urology Channel,” Business Wire, May 21, 2001. 5 A drug’s half-life measures the time it takes for the drug’s concentration in the blood stream to reach exactly one-half of its initial concentration and is a common metric for the duration of effectiveness. Package inserts contained information on a drug’s half-life. 6 “The New Era of Lifestyle Drugs,” BusinessWeek, May 11, 1998. 7 BrandEra.com, from “How Viagra Revived After a Cold Shower,” BusinessWeek, August 20, 2000, http://www.brandera.com/ digests/00/08/23.

Product Team Cialis: Getting Ready to Market 505-038

determination, courage, and humor. In a 1998 interview on CNN’s “Larry King Live,” Dole revealed he had taken part in clinical trials for Viagra to treat the impotency resulting from the removal of his cancerous prostate in 1991.8

Six months after Viagra went on the market, however, things turned sour. The FDA received reports of 130 deaths of patients taking Viagra; over half of the incidents were cardiovascular related. Prescriptions plummeted immediately. Pfizer understood there had to be an orderly process to combat the legitimate safety fears. The first step was to retest the drug to assure policymakers and the public that Viagra would not place the user at risk. A follow-up study on Viagra’s safety was conducted in Sweden immediately after the controversy erupted. Patients with both cardiovascular disease and erectile dysfunction took the drug in a carefully controlled test. Viagra was effective, while the heart attack rate was no greater for its users or the control group that was given a placebo. Pfizer made a concerted effort to communicate these findings to key decision makers and experts in the medical community.9 Pfizer then rolled out a $53 million advertising blitz, and its sales force made close to 700,000 doctor visits to push the medication throughout 1999. The aggressive marketing turned around the downward spiral as sales that year topped $1 billion.

Developing the Next ED Drug

It all began when ICOS, a small biotech start-up based in Bothell, Washington, was trying to develop therapeutically useful inhibitors of the phosphodiesterase family of enzymes. To achieve this goal, ICOS teamed up with Glaxo Wellcome, a large pharmaceutical company based in the U.K. After a few years of codevelopment, several potentially valuable compounds materialized. However, in the mid-1990s, the collaboration ended, leaving each party free to pursue the research and development (R&D) of PDE inhibitors independently. One specific molecule under development at ICOS, designated IC351, represented a structurally novel class of PDE5 inhibitors and in initial phase II trials showed it was effective at improving erections in men suffering from ED (provided they were sexually stimulated). Early experiments also indicated an onset time of 30 minutes and a half-life of over 17 hours, significantly greater than that of Viagra. Furthermore, IC351 was chemically narrowly targeted on the PDE5 enzyme, and it did not significantly inhibit other PDE enzymes, particularly PDE6. It was believed that inhibition of this enzyme was the reason for Viagra’s blue-vision side effect. Encouraged by these results, ICOS initiated additional phase II clinical trials (see Exhibit 3 for a description of the required phases leading to FDA approval). ICOS management realized it was time to start thinking ahead. But while the company felt it had honed its R&D skills by this time, it had never taken any product to market. With no experience in FDA registration trials and no marketing capabilities, ICOS was once again in search of a partner.

The Lilly ICOS Joint Venture Initially, there was a temptation to enter a royalty agreement and simply hand off IC351 to

another company that would take full control of the final stages of testing and market launch. But George Rathmann, CEO of ICOS at the time, had a different objective in mind. With several other drugs in advanced stages of development and trials, he realized that if ICOS were ever to become a self-sufficient biotech company, it would need to possess its own clinical development and marketing capabilities. This called for finding a partner company that would be willing to work with ICOS in a collaborative joint venture, sharing responsibilities and involving ICOS personnel in key decision making. In the fall of 1998, after talks with several major pharmaceuticals, the ideal partner was found—Eli Lilly and Company. 8 Fred Brock, “A Dose of Sense from Viagra’s Spokesman,” The New York Times, June 4, 2000. 9 “How Viagra Revived After a Cold Shower,” BusinessWeek, August 28, 2000.

505-038 Product Team Cialis: Getting Ready to Market

At Lilly, forging successful partnerships with other firms was seen as a strategic capability worth cultivating. In the words of Sidney Taurel, chairman of the board, president, and CEO of Lilly: “Successful alliances are more critical than ever to our strategy. We are working hard to be recognized as the pharmaceutical industry's premier partner by consistently creating value for our partners and for Lilly.”10 The promising results IC351 had shown thus far, the committed management of ICOS, and its earnest desire to leverage Lilly resources made this a mutually attractive alliance. The Lilly ICOS LLC joint venture was signed on September 30, 1998, with a board of managers comprising four representatives from Lilly and four from ICOS. Profits from future sales of the drug in North America and Europe would be split 50/50 between the two companies.11 Soon after the signing of the agreement, a dedicated product team was formed (see Exhibit 4 for an organizational chart). The team had several immediate challenges. On the medical side, phase II human trials needed to be completed, and phase III human trials had to be carefully designed and carried out. These trials would give the team a better understanding of the medical effects of the drug on ED patients and more clearly define its safety profile. On the marketing side, though completion of these clinical phases was not expected anytime soon, there was a sense of urgency with respect to the need for conducting market research. Given Lilly’s resources, it would lead this endeavor. ICOS, though fully taking part in all key decisions, would gradually ramp up its marketing presence on the team, using Lilly as a “scaffolding’’ upon which to build its own marketing competence.

Marketing Competence at Lilly

In the mid to late 1990s, Lilly had essentially rethought the way marketing should be integrated into product development and introduction. Several reasons contributed to this shift. First, many of the big pharmaceutical companies were embracing a high-risk high-return strategy, with product development efforts concentrated on finding the next big blockbuster drugs. Lilly was particularly focusing on the discovery and development of innovative drugs (i.e., “first-”or “best-in-class” vs. “me-too” alternatives). Also, CEO Taurel specifically instructed his Lilly employees not to bother with any drug unlikely to top $500 million in annual sales.12 Second, alongside spending on finding cures for chronic and life-threatening medical conditions (such as cancer, cardiovascular diseases, and high cholesterol), industry resources were increasingly being allocated to the development of “quality-of-life” medicines. Such drugs treat chronic conditions that are not life threatening or severely debilitating (such as male baldness, male erectile dysfunction, female sex disorder, or skin rejuvenation) and are hence typically not covered by most health plans. For these drugs, marketing’s role in identifying attractive market segments and convincing both doctors and patients to embrace them was of great importance and could build on Lilly’s strategy of innovation. Third, the FDA revised the rules on prescription drug promotion in 1997. This facilitated direct-to-consumer (DTC) advertising and particularly affected the ability of pharmaceutical companies to use TV media to influence the demand for their offerings beyond the traditional detailing of doctors.13 After only four years the results were quite dramatic. Studies showed that nearly a third of all adults initiated discussion with their doctors about drugs they saw advertised on TV, with 44% of those adults then receiving a prescription.14

10 http://alliances.lilly.com/ (Lilly website). 11 Profits in all other regions were to be retained by Lilly, after a royalty was paid to the joint venture. 12 “Eli Lilly: Life After Prozac,” BusinessWeek, July 23, 2001. 13 Detailing sessions are visits to doctors’ offices by sales reps to give physicians information about the appropriate use, efficacy, dosage, side effects, contraindications, and studies regarding new and existing prescription drugs. 14 “Pushing Prescription Drugs,” CBS News Healthwatch, November 30, 2001.

Product Team Cialis: Getting Ready to Market 505-038

GMSO

As a result of the above trends, Lilly management made a conscious effort to get marketing much more involved in the product development cycle, while taking care not to run afoul of the company’s ethical and regulatory obligations. To facilitate this process, a separate body within the firm, called the Global Marketing Sales Organization (GMSO), was set up. GMSO had three subfunctions— Global Marketing Planning (GMP), Global Market Research (GMR), and Global Marketing Sales Training (GMST). In the initial stage of new-product planning, when Lilly scientists would experiment with several chemical compounds that could potentially have medical benefits, GMSO had two roles. First, it would funnel ideas for research projects based on the ongoing input from sales reps visiting physicians and market needs identified by GMR. Second, for projects that seemed to have medical effectiveness in phase I and II clinical trials, GMP would forecast market potential to see whether these projects should be terminated or moved forward. Projects that looked promising would then be assigned a fully dedicated cross-functional product team, with medical, marketing, registration, and logistics functions. In this stage, phase III clinical trials would be completed, with the end goal of registering the drug with the FDA. Given that the results of trials would ultimately impact the medical claims that could be made about a particular drug, the product team’s marketing function would be involved in the initial planning of these trials. But more importantly, its role was to translate the medical implications of the drug into future commercial success. In these more advanced stages of product development, GMSO personnel would act as consultants to the product team by providing marketing research resources and assistance in putting together five-year forecasts. GMSO would also conduct brainstorming sessions for the product team, called “deep dives.” Mark Kershisnik, executive director of GMP, elaborated:

The pharmaceutical industry is in many ways about the marketing of negatives. By taking a drug, a person is reminded she or he has a problem, that something is wrong with them. It is important when thinking about how to take a drug to market to be cognizant of possible scenarios that involve physician, patient, public, or competitor reactions. Through the ongoing experience gained in the GMSO, we can help the product team effectively prepare for these scenarios and in many cases preempt them.

Affiliates

To effectively manage all promotional, sales, and after-sales activities worldwide, Lilly organized its efforts geographically by creating distinct affiliates with regional responsibilities. For Cialis, primary affiliates included the United States, five major countries in Europe, Canada, Australia, Mexico, and Brazil. Affiliates would get involved with a new drug through a series of “brand councils” held at Lilly headquarters in Indianapolis. The purpose of these meetings was to let the product team present its vision for the positioning and branding of the new drug and lay out key drivers of success. GMSO would prepare sales forecasts and provide a common reporting format for post-launch tracking. The brand councils allowed the affiliates to get a clear picture of how to maximize profits in their respective region and ensured all parties involved were aligned.

At any given time, affiliates would handle numerous Lilly drugs at various stages in the life cycle. Affiliates had dedicated resources and personnel and received budgets to reflect the level of activities for all the products (or brands) under their control. The affiliates enjoyed a certain degree of flexibility to manage their budgets across the portfolio of drugs. Chad McBride and Ryan Ranck, senior members of GMP assigned to Cialis, explained: “An affiliate could not simply decide to not carry an assigned product and was generally committed to the success of all products. However, the exact amount of spending, the allocation of salespeople, the choice of sponsorship events [e.g., local symposia and conferences], and management time were discretionary across products. This meant

505-038 Product Team Cialis: Getting Ready to Market

that if a product team was able to do a more convincing job in the brand councils, their brand was likely to get a higher priority with the affiliates.”

In the case of Cialis, the joint venture’s management would have tighter control of the total budget allocated to the territories in which profits would be shared between Lilly and ICOS. In addition, given that the U.S. market was recognized as being particularly important, the U.S. affiliate brand team, headed by Matt Beebe, was made an integral part of the product team’s marketing function.

Understanding the ED Market

It was evident to the product team that a prerequisite for a successful launch was solid up-front market research, even if such a launch was three or four years down the road. One of the first challenges the product team faced was coming up with a name for the new drug. Brown, the global marketing director, advocated a neutral name that did not convey any strong connotations, so that a brand meaning could later be molded into the product once the team understood the market better. After testing numerous alternatives, checking for potential negative associations in many languages and ensuring no trademark conflicts, the name “Cialis” was chosen.15

Physicians

It seemed natural to begin with a preliminary understanding of how physicians viewed ED treatment. In early 1999, a preliminary conjoint study was performed with 350 doctors, with a roughly even split between urologists and primary-care physicians (PCPs).16 Across both sets of doctors, the study revealed that efficacy (the fraction of patients for whom the drug would be effective) was the most important attribute, followed by safety. These two attributes accounted for a relative importance of roughly 70%. The duration attribute (indicating how long one dosage of the drug can improve ability to achieve an erection) was noted by the respondents to have a relative importance of less than 10%.17

To get a better sense of attitudes toward the treatment of ED, a set of interviews was conducted with physicians at several medical conferences. The interviews revealed that knowledge about ED varied between urologists and PCPs. As expected, urologists were quite familiar with the medical causes and incidence of ED and were comfortable talking about it with patients. PCPs, however, were a different story. The interviews revealed that the majority of PCPs would not feel comfortable discussing sexual problems with their patients during yearly checkups. This was true even if the individual suffered from one of the diseases associated with ED (see Exhibit 1) and hence was at higher risk of incurring erectile disorders. Many expressed apprehensions about prescribing a drug like Viagra to patients who had entrusted them with their health, citing the recent deaths associated with the use of Viagra. The inability to perform sexually was secondary in their opinion to the potential risks arising from the drug. Of those that did prescribe medication for ED, close to 90% said

15 Interestingly, most pharmaceuticals use the generic drug name prior to FDA approval (for example, Viagra was publicly referred to as sildenafil citrate prior to FDA approval). But “Cialis” would be used by Lilly and ICOS to refer to their product throughout the later stages of the clinical trials and approval process (and not referred to by its generic name of tadalafil). 16 Primary-care physicians care for the general health needs of their patients. They coordinate referrals to specialists and arrange for applicable testing and hospitalization when necessary. Primary-care physicians are trained in internal medicine (diagnosis and treatment of the adult population), pediatric medicine (diagnosis and treatment of children and adolescents), or family practice medicine (diagnosis and treatment of both adults and children). 17 Results from the conjoint study were transformed so that the importance of each attribute was given as a percentage. The other attributes in the study related to onset time and side effects.

Product Team Cialis: Getting Ready to Market 505-038

the patient had initiated the request for the drug. These doctors also confessed they would typically not proactively follow up on the drug’s success.

Patients

Though Cialis would definitely be a prescription drug, Brown pushed for a better understanding of the ED patient perspective. As a result, in June of 1999 GMR undertook a six-month study to explore how consumers in the United States and Europe (France, Germany, Italy, Spain, and the United Kingdom) viewed ED and its treatment. To do so, a screening survey was administered to 32,644 patients visiting their PCPs (across all countries). Of the original sample, 28,022 replied they did not suffer from ED, 2,450 reported suffering ED but had not sought treatment, while the remaining 2,172 sought treatment for their condition. The screening phase revealed some interesting statistics on ED prevalence by age and country and other demographic information (see Exhibits 5 and 6). As expected, the prevalence of ED increases with age. In all countries the average ED patient was in his 50s, with over 80% having a sexual partner. The U.S. ED patients seemed to be more highly educated than in other countries.

To gain a deeper understanding of the drivers of consumer behavior, a follow-up questionnaire was then administered to those screened to have ED. The first set of questions aimed to establish how individuals who perceived they had ED progressed through the six stages (or nodes) of dealing with their condition, through what Lilly marketers termed the “Health Care Transaction Model” (HCTM) (see Figure A). Each node in the model represents the fraction of patients from the node above to have continued to the current stage of the model.

Figure A Health Care Transaction Model

Perception Consultation Treatment Delivery Compliance Evaluation

Source: Lilly ICOS.

The results revealed that fewer than half of those who perceived they had ED consulted a physician and that the type of physician consulted varied by country (Exhibit 7a). A variety of factors were found to influence ED patients to seek treatment (Exhibit 7b), with spouse or sex partner the most highly cited. Probing on the barriers to seeking treatment revealed that different reasons figured prominently depending on age (see Exhibit 8). In particular, younger men expressed higher levels of embarrassment in talking about the condition and were waiting for it to go away, while for older men the belief that this was a normal phenomenon of aging seemed to create a reluctance to seek treatment. According to the study, for those who did seek treatment, Viagra was the most commonly suggested medication. Most patients filled the first prescription they received (see Exhibit 9 for information on the location and payment for the prescription).

The level of satisfaction with Viagra, among all those who had tried it, was measured. The results, presented in the table below, revealed that a substantial percentage of males were not entirely satisfied with Viagra.

Perceive they have condition

Consult their doctor about condition

Receive a prescription

Fill the prescription

Actually take the medication

Intend to refill prescription

505-038 Product Team Cialis: Getting Ready to Market

Table A Satisfaction with Viagra

Satisfaction Level U.S. (%) France (%) Germany (%) Italy (%) Spain (%) U.K. (%) Very satisfied 24 23 27 28 29 23 Somewhat satisfied 34 49 57 51 37 36 A little satisfied 19 20 14 16 14 11 Not at all satisfied 23 8 3 5 19 30

Source: Lilly ICOS.

Future intent to use Viagra was broken down into three groups based on past usage behavior: Viagra current users, Viagra dropouts (used Viagra at least once in the past but discontinued usage), and those who had never used Viagra. In the United States, 91% of current Viagra users expressed high/very high intent to continue taking the drug in the future, 46% of Viagra dropouts reported high/very high intent to use the drug in the future, and only 39% of those who never tried Viagra reported intent to ask for it in the future. The trend was similar in other countries.

The second set of issues in the survey explored more directly how the end patient would value Cialis. Respondents first gave their relative importance for four different attributes associated with an ED drug. The results were broken down by Viagra usage (see Exhibit 10). In addition, subjects were asked for their interest in trying Cialis in the future (based on the drug’s written profile). The relatively high willingness to try Cialis across countries (see Table B) was encouraging.

Table B Interest in Trying Cialis (%)a

U.S. France Germany Italy Spain U.K.

Viagra current users 90% 97% 97% 58% 70% 100% Viagra dropouts 84 68 89 52 70 100

Source: Lilly ICOS.

aPercentages represent respondents who agreed or strongly agreed with the statement: “I am willing to try this new drug.” Written profile described Cialis as having a 30-minute onset time, allowing a 24-hour window of opportunity, and that it could not be taken with nitrate.

The extensive survey was also complemented by more qualitative input. Mark Blakely, who was managing GMR’s involvement with Cialis, helped the product team conduct a series of 45-minute in-depth interviews with ED patients. Even though half of those interviewed were current Viagra users and half non-Viagra users (with a mix of Viagra dropouts and those who never tried the drug), Blakely was struck by the common “downward spiral” dynamic characterizing the ED condition:

The interviews revealed that in most ED cases, when a man first experiences inconsistent ability to perform sexually, there is feeling of personal embarrassment. If the condition persists, the individual often begins questioning his role in the relationship, accompanied by a sense of unfairness to the female partner; the relationship may become strained. Over time, not only does the ED patient feel insecure and detached from his partner, but his self-identity suffers. This causes him to question his role in other contexts of his life, including his interactions with friends or even colleagues at work. Thus, what started as a relatively noncritical physical condition spirals into a psychological anxiety problem considerably affecting the individual’s

Product Team Cialis: Getting Ready to Market 505-038

identity and even his sense of place in the world. Clearly, there appeared to be more associated with ED than a sufferer’s inability to get an erection.

Partners

Given that the vast majority of men with ED reported they were in a relationship (see Exhibit 6), market research was also conducted on ED partners. A set of 104 in-depth interviews was carried out with women married to ED sufferers between the ages of 35 and 65. Care was taken to select a roughly even split between those with a male partner who had used Viagra and those who had not yet consulted a doctor about the condition. A common aspect of partners’ responses across countries was the lack of information on ED prevalence and the potential reasons for its occurrence. Some women believed that ED was caused by stress, particularly work-related stress. Others recognized medical conditions (predominantly diabetes) as the cause. Several interviewees felt that they were the main cause for their husband’s ED, because they felt they were no longer attractive. As for the outcome of their male partner suffering from ED, most women reported less physical intimacy of any kind. This included less hugging and less kissing. Their relationship was described as more tense since the time their partner had begun showing signs of ED. For most couples, joint discussions of ED were uncomfortable and “off limits.” Partner knowledge of Viagra was largely passive, with the two most common sources of information being media reports and word of mouth. (The type of information women received in each medium is summarized in Table C.)

Table C Partner Knowledge of Viagra by Source

Media Reports Word of Mouth

Focus on “scares,” such as reports of men dying of heart attacks after taking Viagra

Jokes

Viagra associated with use by older men Sensationalistic stories (such as men being sexually stimulated for three hours)

Image of Viagra as a “playboy” drug

Source: Lilly ICOS.

The study also revealed that partners’ satisfaction with Viagra was mixed. Virtually all women acknowledged inconveniences with the drug, as reflected in the following statements:

– “My partner must awkwardly ask me if he should take the pill.”

– “Once my partner takes the Viagra tablet, I no longer feel I can refuse having sex.”

– “Because my partner must ultimately take the tablet, I usually don’t initiate sex.”

Despite these grievances, most women preferred their male partner take Viagra than nothing at all. In terms of its role in the HCTM (see Figure A), partner impact was discovered to be high in the perception phase (helping men recognize they suffer from ED), moderate in prompting one’s partner to consult a doctor and seek treatment, and very low in the delivery and compliance nodes of the model. Partner impact started rising again in the evaluation stage, by partners encouraging their spouses to persist with treatment.

505-038 Product Team Cialis: Getting Ready to Market

Dan Lockhart, a senior researcher with GMR, complemented the partner study by conducting an extensive survey of academic literature on the sexual habits of couples. He discovered that the frequency of sexual activity was significantly higher on weekends than weekdays and typically occurred at night. Furthermore, it was well established that conjugal functioning was an important aspect of people’s lives during retirement.

Recent Competitive Developments

As the Cialis team was moving forward quickly in terms of clinical trials, the FDA submission, and marketing research in preparation for the launch, its competitors were not sitting idly. Pfizer kept aggressively promoting Viagra, and a new competitor, Bayer, was on the horizon (see Exhibit 11 for selected financials for these companies). The Cialis product team, with the help of GMR, closely monitored these competitive forces.

Pfizer—Pumping Up the Marketing Machine

With drugs like ED-treatment Viagra and cholesterol-fighter Lipitor, Pfizer set an industry record in 2000 as eight of its products generated sales of more than $1 billion each (see Exhibit 12). Even so, Pfizer had been steadily expending more R&D resources. In 2002 the company announced plans to invest $5.3 billion in R&D, up from the $4.8 billion spent in 2001.18 But Pfizer was also known for its marketing prowess, in particular, its fierce and sustained marketing campaigns post launch. Pfizer employed the largest sales force in the industry, boasting 30,000 salespeople worldwide visiting doctors and transferring information about its products.19 With a philosophy that convincing doctors of the safety and efficacy of drugs often comes down to poise and aggressiveness, Pfizer often hired ex-soldiers, former Army officers and West Point graduates, to its sales force.20 In addition to the detailing of physicians by salespeople, direct-to-consumer advertising was an important part of Pfizer’s communication mix. On Viagra alone, Pfizer was reported to have spent $108 million in 2000 on advertising.21 While early ads featured Bob Dole as a well-known and respected figure advocating the drug, recent ads took a far more vigorous tone. In the fall of 2001 Viagra TV ads featured Mark Martin, a well-known NASCAR race driver now in his 40s. The ads showed Martin’s #6 Viagra- sponsored Taurus zooming on the track and urged men to visit their doctor and see if a “six-pack” free sample of Viagra was right for them. Pfizer had also begun running print ads in national news magazines featuring the female partner. One such ad, with a close-up of a couple in their 30s or 40s, suggested that if there has been a decline in sexual activity, it may be the result of underlying health conditions. The ad prompts the female partner to have her male partner see their doctor. The ad reminded the reader that Viagra is a proven treatment by emphasizing in bold letters that 9 million men have used the drug. It also gave a toll-free number and Viagra’s website address for obtaining more information.22

Viagra sales reached nearly $1.5 billion in 2001, with gross margins of 90%. Coincidentally it was found that for every million patients who asked for Viagra, approximately 30,000 had untreated diabetes, 140,000 had untreated high blood pressure, and 50,000 had untreated heart disease.23

18 Pfizer fourth-quarter earnings release, January 23, 2002. 19 Pfizer 2000 annual report. 20 “Science and Savvy,” Forbes Magazine, January 11, 1999. 21 Justin Gillis, “2 New Drugs to Compete with Viagra; Companies See Untapped Market,” The Washington Post, August 12, 2001. 22 Time Magazine, February 2001. 23 Fred Brock, “A Dose of Sense from Viagra’s Spokesman,” The New York Times, June 4, 2000.

Product Team Cialis: Getting Ready to Market 505-038

Beyond the raw data on overall Viagra sales (see Exhibit 13 for quarterly sales by country), GMR also tracked the makeup of these sales over the three-year period since Viagra’s launch by analyzing data from a sample of pharmacies. It was discovered that the average prescription size in 2001 was 6.5 tablets and that prescriptions were refilled on average every 55 days. That said, one year after initiating treatment, only about 25% of patients were still using Viagra.

Levitra from Bayer

In November 2000, the German pharmaceutical giant Bayer released results of phase II clinical trials for its own ED drug, Levitra.24 The drug proved to be very effective at lower dosages than Viagra (as low as 5 and 10mg). Bayer also designed trials to focus on showing good results in diabetic men, considered a hard-to-treat segment. The duration of Levitra’s effect, however, was roughly the same as that of Viagra’s (with a half-life of four to six hours).25

In addition, Bayer conducted market research and reported that 76% of ED patients surveyed claimed they would be interested in a new treatment (other than Viagra) that works reliably.26 Encouraged by these results, Bayer began thinking about commercialization. While in Europe Bayer had very good marketing coverage, its U.S. presence was relatively weak; the U.S. sales force had only 1,250 representatives.27 Given the huge importance of the U.S. market to the success of Levitra, a marketing partnership was explored. After months of talks with several companies, in November 2001 Bayer signed a copromotion agreement with GlaxoSmithKline (the newly formed Anglo- American pharmaceutical giant).28 ICOS management viewed this agreement with considerable irony, given that Glaxo had decided not to pursue the ED market several years earlier.

As 2001 had been a disappointing year for Bayer, with a 2% decrease in total sales and a first-ever net quarterly loss,29 the company was hoping that Levitra would boost its bottom line after a string of failures with other drugs.

Getting Ready for the Launch

The success of Cialis was important for both parent companies. For Lilly, the expiration of the Prozac® (fluoxetine HCI) patent in August of 2001 (three years ahead of plan) was straining earnings, and for ICOS this would be the first drug to be launched after more than 10 years in existence. By late 2001, executives at both companies had been extremely content with the functioning of the joint venture. Lilly brought its experience and resources to the table, while ICOS brought the nimbleness and sense of urgency of a start-up. Product team leader Barbato was particularly pleased with the efficiency of collaboration; the interface was managed seamlessly, with no duplication of effort nor any sense of time squandered due to the dual company involvement. In fact, the NDA submission for Cialis (following completion of phase III trials) was done in record time from Lilly’s standpoint. Paul Clark, current CEO of ICOS, was pleased with its ability to gradually hire marketing personnel, who

24 In the fall of 2002 Bayer and GlaxoSmithKline announced the selection of Levitra (active ingredient is vardenafil hydrochloride [HCI]) as the global trade name for vardenafil (Reuters News, September 23, 2002). 25 Bayer press release, June 1, 2001, and pharmaceutical report, February 15, 2002 (School of Pharmacy, University of Washington). 26 Bayer press release, June 1, 2001. 27 “Why Bayer Turned to a Giant: As A Marketing Partner, GlaxoSmithKline will Ensure that Vardenafil Succeeds,” Med Ad News, February 1, 2002. 28 GlaxoSmithKline press release, January 2002. 29 “Bayer Reflects on ‘Sobering’ 2001, but Strongly Hopeful for 2002,” Marketletter, March 18, 2002.

505-038 Product Team Cialis: Getting Ready to Market

assumed important responsibilities in the global and U.S. teams. Clark declared that his company was “now at a point where we are perfectly prepared financially and operationally to bring products to market solely on our own.”30

The collaboration also functioned exceptionally well in terms of working closely with the scientific community during the prelaunch period. ICOS and Lilly identified worldwide opinion leaders among urologists, psychologists, and other physicians with a focus on men’s health-care issues. These physicians were convened as advisory boards. Their advice was sought on clinical development plans for the drug as well as how to position the drug in the marketplace. Medical experts with the team, as well as investigators themselves, also presented research findings at several key conferences.

The Challenges Ahead

As a big part of the medical activity associated with Cialis culminated in the application to the FDA in June of 2001, attention was now focused on the marketing challenges that lay ahead. In preparation for the upcoming brand council, Brown and Blum reviewed the results of the extensive market research conducted over the past two and a half years. Several issues needed to be resolved for the product team to be able to present a coherent strategy to the affiliates. First, it was important to agree on the patient target market. On the one hand, it seemed logical to consider Viagra usage status in any segmentation scheme. After all, someone who discontinued using that drug was probably dissatisfied with it for some reason or another. Given that by the end of 2001 there were an estimated 6 million to 7 million Viagra dropouts in the U.S. (compared to 3 million Viagra current users), this seemed fertile ground. On the other hand, age and comorbidities seemed potentially relevant as well. Furthermore, it was important to understand which product benefits to emphasize and how. Would the longer duration of Cialis be equally valued by all ED patients? Was the lack of interaction with high-fat meals important? Should the answer to these questions differ for Europe vs. the U.S.?

Second, given that the marketing budget for all affiliates was not unlimited, there was a need to understand the relative emphasis to be placed on physicians vs. patients. Without doctors signing for Cialis, no patient would realistically be able to get hold of it. Yet, given that Cialis was considered a “quality-of-life” drug, it was becoming clear that doctors alone might not hold the key to success. Even if the correct balance between these two parties was found, should the same benefits highlighted to doctors also be highlighted to men suffering from ED? Kershisnik (executive director, GMP) also prompted consideration of the role, if any, partners should play in the marketing of Cialis. Some, like Beebe, the U.S. brand leader, saw a potential risk in alienating men if too many messages were directed to partners.

Third, there were competitive pressures to take into account. While clinically both drugs were well tolerated by patients (despite the much longer half-life of Cialis), Brown estimated that Viagra would take full advantage of its nearly five years of being tried and tested. With Viagra years past its initial “death-scare” episode, it was not clear how easy it would be to convince doctors to switch. Recent discussions with many primary-care physicians revealed a certain degree of contentment with Viagra. The drug enabled many men to have sex, did not linger in their body, and hence could be considered a reasonable solution to the medical problem.

Given the similarity of the product profile of Levitra to that of Viagra, some industry observers predicted Bayer would go for a niche strategy by targeting diabetic patients with ED.31 At any rate,

30 The Wall Street Transcript, October 12, 2001. 31 Based on a quote from Helge Wehmeir, president and CEO of Bayer Corp., in Drug Store News, February 13, 2002.

Product Team Cialis: Getting Ready to Market 505-038

the Cialis team was well aware of analyst predictions for a fierce marketing war between all three companies that would make ED drugs, in the United States at least, the most heavily advertised category of pharmaceuticals.32

In addition to addressing the above issues, there were several other decisions to be made. There was a debate on whether Cialis should be priced higher than Viagra’s $10 per pill to reflect its longer duration, or lower, due to the fact that for the vast majority of ED patients the drug would not be fully covered by their health insurance plan (see Exhibit 9a). With respect to direct-to-consumer advertising, the central theme of TV ads that would be produced over the summer had yet to be decided. Should Cialis ads also have a sports-related theme? Should they feature celebrities? If so, which ones?

As Brown, Blum, and Beebe were getting ready to make their final recommendations to Barbato— and then to the Lilly ICOS LLC board—in advance of the January brand council, they likened their decision on how to position the Cialis brand to that of a baseball player stepping up to the plate: “We feel like we have just been handed the baseball bat, and, as the ball is getting closer, we have to decide whether to take the risk and try to swing for a home run or, at the other extreme, be more conservative and merely try to reach first base.”

32 Justin Gillis, “2 New Drugs to Compete with Viagra; Companies See Untapped Market,” The Washington Post, August 12, 2001.

505-038 Product Team Cialis: Getting Ready to Market

Exhibit 1 Comorbidities Associated with ED

Condition U.S. (%)

France (%)

Germany (%)

Italy (%)

Spain (%)

U.K. (%)

High blood pressure 43 20 29 42 21 33 High cholesterol 43 19 35 31 20 20 Enlarged prostate (not cancer) 20 6 25 32 18 7 Heart trouble (including angina) 18 8 14 8 5 18 Ongoing feelings of anxiety 17 20 7 30 14 28 Diabetes 17 6 11 20 6 15 Ongoing feelings of depression 17 6 9 12 6 18 Heart attack or heart surgery 17 7 8 6 4 16 Hardening of the arteries 7 6 11 13 6 5 Spinal cord injury 3 10 1 2 9 5 Prostate cancer 2 2 1 3 1 1

Source: Internal Lilly ICOS document.

Product Team Cialis: Getting Ready to Market 505-038

Exhibit 2 Reactions to Viagra in the Popular Media

Source: Image: Christian Kargle, Getty Images.

505-038 Product Team Cialis: Getting Ready to Market

Exhibit 3 The Food and Drug Administration (FDA) Chart of Clinical Trials

The Food and Drug Administration (FDA) Chart of Clinical Trials

Initial Legislation The foundation of the modern clinical trial process was enacted in 1938 with the Federal Food, Drug, and Cosmetic Act. This act required that drugs be proven safe prior to marketing. The manufacturers of drugs had to provide scientific proof of safety by submitting an Investigational New Drug (IND) filing prior to human trials, and a New Drug Application (NDA) before marketing new drug products.

Pre-clinical Trials The IND must provide pre-clinical data of sufficient quality to justify the testing of the drug in humans. The drug approval process starts in the laboratory with pre-clinical trials. Studies using the compound in cell cultures, isolated tissues, and laboratory animals are conducted. This gives researchers a pretty good idea of what to expect in human trials. On average, only one compound in a thousand will actually make it to human testing. When the company receives FDA approval, the company moves the drug on to Phase I testing in human subjects. At this point, the compound has a one-in-five chance of eventually reaching the market.

Phase I Trials The human subjects in the study are normally healthy volunteers. The sample is normally not more than 100 patients. The basic goal of Phase I is to determine how the drug is absorbed, distributed in the body, metabolized, and excreted. If the company moves on to begin Phase II trials, the drug’s chance of eventually making it to market improves to just under 30%.

Phase II Trials Phase II trials consist of small, well-controlled experiments that continue to evaluate the drug’s safety and assess side effects. The drugs are given to volunteers (usually between 100 and 300 patients) who actually suffer from the disease or condition being targeted by the drug. Statistical end points are established for the drug that represent the targeted favorable outcome of the study. The current standard of cure for the medical condition can be used as a benchmark in setting the end point. A drug that moves on to begin Phase III testing has about a 60% chance of being approved by the FDA.

Phase III Trials Phase III is intended to verify the effectiveness of the drug against the condition it targets. The study also continues to build the safety profile of the drug and record possible side effects and adverse reactions resulting from long term use. Phase III studies are tightly controlled, double-blind studies with a sample size of at least 1,000 patients. Normally two pivotal trials are required to ensure the validity of the studies. Assuming the drug reaches the desirable end point in Phase III trials the company will then file a New Drug Application. At this point the drug has better than a 70% chance of being approved by the FDA. Approval of the NDA averages 18- 24 months. Upon approval, the company may begin to market and distribute the drug.

Cost of Clinical Trials Estimates regarding the cost of pushing a drug through clinical trials range from $350 million to $500 million.

Source: Adapted from “Clinical Trials” published by U.S. Food and Drug Administration.

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Product Team Cialis: Getting Ready to Market 505-038

Exhibit 6 Demographic Indicators of ED Patients

Demographic Indicators U.S. France Germany Italy Spain U.K.

Age Mean 58.4 50.7 53.5 55.4 50.7 56.9

% % % % % % Employment

Employed full time 50 61 54 54 68 40 Employed part time 4 5 3 6 10 4 Student <1 <1 1 2 1 2 Retired 44 26 35 35 <1 44 Not currently employed 2 8 7 3 22 10

Marital Status Single, never married 7 12 10 12 15 7 Married or living together 80 77 73 74 75 80 Widower 2 2 3 6 3 2 Divorced or separated 12 10 14 8 7 11

Sexual Partner Yes 86 92 85 91 86 87 No 15 8 15 9 14 13

Attendance at religious services

Every week (or almost) 33 Not Asked Not Asked 20 14 13 Once or twice a month 11 Not Asked Not Asked 20 7 4 Few times a year or less 34 Not Asked Not Asked 39 34 35 Never 21 Not Asked Not Asked 20 45 49

Education Primary 9 54 55 36 29 59 Secondary 24 29 11 42 39 17 Post Secondary 67 17 34 21 31 17

Yearly Income Low (<~$25K) 21 73 58 80 76 53 Mid 44 23 37 16 20 34 High (>~$60K) 35 4 5 5 4 13

Source: Lilly ICOS.

505-038 Product Team Cialis: Getting Ready to Market

Exhibit 7a Physician Consulted

Physician Consulted U.S. (%)

France (%)

Germany (%)

Italy (%)

Spain (%)

U.K. (%)

Family doctor 74 79 37 45 40 95 Urologist or men’s specialist 40 36 81 72 74 23 Cardiologist 4 11 4 3 -- 5 Psychiatrist 2 16 6 4 5 2 Internet doctor 1 2 -- -- 1 --

Exhibit 7b Key Drivers Influencing Treatment Seeking

Key Drivers of Seeking Treatment U.S. (%)

France (%)

Germany (%)

Italy (%)

Spain (%)

U.K. (%)

My spouse or sex partner 43 50 36 29 51 49 Newspaper or magazine article 19 23 22 27 28 18 TV, radio or movie commercial 15 1 7 1 11 2 A TV or radio show 9 22 12 18 10 6 A newspaper or magazine ad 9 4 4 5 14 7 A friend or relative 8 10 7 14 13 7 Something that was mailed to me 8 2 -- 1 1 3 A sex counselor or psychologist 2 8 1 3 11 2 Pharmacist 2 1 <1 4 9 4 Telephone/information help line <1 4 -- -- 5 2 The Internet 1 <1 3 2 6 2 Sought treatment entirely on their own 30 30 43 39 23 34

Source: Internal Lilly ICOS document.

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Product Team Cialis: Getting Ready to Market 505-038

Exhibit 9a Payment for Viagra

Payment for Viagra U.S. (%)

France (%)

Germany (%)

Italy (%)

Spain (%)

U.K. (%)

Individual paid full cost 46 81 90 90 90 40 Costs were shared 33 -- -- 3 1 15 Individual got it free 18 19 10 6 10 -- National or private insurance paid full cost 4 -- -- -- -- 45

Exhibit 9b Where Respondents Got Viagra

Where Respondents Got Viagra U.S. (%)

France (%)

Germany (%)

Italy (%)

Spain (%)

U.K. (%)

From a local drugstore 67 41 68 38 58 74 Directly from a doctor 19 20 11 5 11 8 From a mail-order drugstore 6 -- -- -- -- -- From a drugstore that I don’t usually use 4 36 14 49 19 15 Somebody got it for me 2 -- 2 7 2 -- In another country -- 4 3 1 9 --

Source: Lilly ICOS.

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Product Team Cialis: Getting Ready to Market 505-038

Exhibit 11 Selected Financials—Eli Lilly, Pfizer, Bayer—1996–2000 ($ millions)

Company Date Net Sales SGAa R&D Net Income Net Income as % Sales

Eli Lilly 1996 7,346.6 3,181.4 1,189.5 1,523.5 21% 1997 8,517.6 3,696.4 1,382.0 (385.1)b -- 1998 9,236.8 4,397.2 1,738.9 2,097.9 23% 1999 9,912.9 4,541.2 1,783.6 2,721.0 27% 2000 10,862.2 5,246.8 2,018.5 3,057.8 28% Pfizer 1996 11,306.0 6,050.0 1,684.0 1,929.0 17% 1997 12,504.0 6,884.0 1,928.0 2,213.0 18% 1998 13,544.0 7,829.0 2,279.0 3,351.0 25% 1999 16,204.0 9,127.0 2,776.0 3,179.0 20% 2000 29,574.0 15,877.0 4,435.0 3,726.0 13% Bayer 1996 31,590.3 10,251.5 2,344.8 1,771.0 6% 1997 30,571.8 9,893.8 2,203.2 1,634.6 5% 1998 32,923.8 10,938.2 2,351.3 1,893.8 6% 1999 25,370.4 8,653.1 2,156.0 2,016.0 8% 2000 27,915.2 10,414.1 2,236.2 1,704.9 6%

Source: Standard & Poor’s Compustat® data.

aSales General & Administrative. bReflects $2.4 billion noncash charge to adjust the carrying value of the long-lived assets of PCS’s health-care management business.

Exhibit 12 Pfizer Worldwide Human Pharmaceutical Revenue for Major Products (2000)

Therapeutic Lines Billions of Dollars

Cardiovascular Diseases Lipitor $5.0 Norvasc 3.4 Infectious Diseases Zithromax 1.4 Diflucan 1.0 Central Nervous System Disorder Zoloft 2.1 Neurontin 1.3 Viagra 1.3 Celebrex 1.2

Source: Pfizer 2000 Annual Report.

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9 - 5 9 1 - 1 3 3 R E V : M A Y 9 , 2 0 0 2

________________________________________________________________________________________________________________

Research Associate Krista McQuade prepared this case under the supervision of Professor Rowland T. Moriarty. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Historical information has been condensed. This version of the case was revised by Professor Benson P. Shapiro.

Copyright © 1991 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

R O W L A N D T . M O R I A R T Y

Barco Projection Systems (A): Worldwide Niche Marketing

On Saturday morning, September 23, 1989, Erik Dejonghe, Frans Claerbout, and Bernard Dursin were drafting a crucial presentation that Dejonghe was scheduled to make to the Barco N.V. board of directors on Monday. As senior vice president and chief operating officer (COO) of Barco N.V., with responsibility for Barco’s Projection Systems Division (BPS), Dejonghe had to respond to a competitor’s recent move that threatened the heart of the division’s sales. Claerbout, the general manager of BPS, and Dursin, in charge of managing Barco’s distribution subsidiaries and coordinating worldwide marketing of projectors, had both worked closely with Dejonghe to formulate the company’s options.

One month earlier, the Sony Corporation surprised BPS and the rest of the industry by unveiling its 1270 “superdata” projector at the Siggraph trade show in Boston. At Siggraph, Sony’s product seized first place as the industry’s highest-performing projector from BPS’s BG400. More damaging, the 1270 was rumored to be priced 20% to 40% below the established market price in its performance class. The industry saw the 1270’s positioning as an attempt to widen the market through lower prices. For BPS—a small, batch manufacturer—the 1270’s combination of low price and high performance threatened both to collapse its traditional market segmentation and drop prices to untenable levels. Dejonghe estimated that BPS stood to lose as much as 75% of its forecast 1990 profits.

The 1270 introduction had been timed to prevent competitive response; the industry’s most important trade show, Infocomm, was scheduled to take place in the United States in January 1990. Major customers, industry analysts, and dealers would be there, and BPS’s performance would determine its sales for the rest of the year.

Barco’s Projection Systems Division

Barco Projection Systems (BPS) was the second-largest division of Barco N.V., with 350 employees, and turnover of 1.39 billion Bfr ($35 million)1 in 1988 (Exhibit 1). Headquartered in Belgium, the

1For this case, one U.S. dollar is equal to 40 Belgian francs (Bfr). The actual value of the dollar was extremely volatile during the period covered.

591-133 Barco Projection Systems (A): Worldwide Niche Marketing

division had been formed in the early 1980s to pursue the emerging technology of video projection. The division had grown rapidly throughout the 1980s. In 1988 it represented 23% of Barco N.V.’s turnover

Background: Barco N.V.

Barco N.V. began in 1934 as a producer of radio broadcast receivers. In 1948, it built its first television receiver, and from then on consumer TV formed the bulk of its sales. As a small company, Barco competed successfully by carving out a market on the basis of its R&D strength and product quality. From 1955 to 1975, the company grew rapidly, expanding into broadcast monitors and professional video equipment. At the end of the 1970s, however, during the global recession that followed the 1977 oil supply shock, demand for Barco’s consumer products sagged. In response, the company redefined its focus from consumer to industrial markets. In 1989, Hugo Vandamme, Barco’s president and CEO, recalled that period:

We knew that as a small, batch manufacturer we could not have continued to survive in markets for consumer products. Instead, we redrew our strategy to focus on top-of-the-line products in niche markets. In one instance, in 1983, we went as far as to say “no” to a customer asking for 15,000 computer monitors. We were able to turn that order down because we had spread our operations out and become involved in other markets. We had a clear vision of who we wanted to be, how we wanted to operate, and where we wanted to compete. Vision is what counts.

The company’s strategy throughout the 1980s comprised three main elements. First, Barco committed itself to becoming a leader in a variety of distinct, but complementary, niche markets. The company entered a new activity only if it had an in-depth knowledge of the market and the technology involved and if it could be among the top three manufacturers. Second was a strong commitment to research and development; throughout the 1980s, between 8% and 10% of its annual turnover and 15% of the company’s employees were dedicated to R&D. And third, in addition to growth in its businesses, the company sought to expand its international presence in sales, product development, and production. In 1988, Barco launched a global expansion campaign for acquisitions and joint ventures abroad. Three major acquisitions in the first half of 1989 totaled 4.4 billion Bfr ($110 million). In that same year, Barco reorganized its operations into seven autonomous divisions, each with its own research, product development, production, marketing, and sales.

In 1989, with 2,400 employees, Barco N.V. was one of the top three worldwide manufacturers in each of its product lines: automated production control systems, graphic arts, computer-aided design, and industrial projection. As a result of the company’s early 1989 acquisitions and expanding sales in several key markets, turnover was expected to grow 50% in 1989. A number of international awards testified to Barco’s technological lead in several fields. In 1988, for example, the company received the international Emmy Award for its studio monitors. The year after, BPS won the Hi-Vi Silver Award in Japan, given for the product contributing the most to electronic visualization technology.

BPS Organization Within Barco N.V.

As part of the divisionalization of Barco N.V.’s operations in 1989, President Hugo Vandamme and Senior Vice President Erik Dejonghe divided responsibility for products between them; BPS reported to the latter. Dejonghe, who assumed his current position at the time of reorganization, was part of the team that propelled Barco’s industrial projection activities throughout the 1980s. Joining Barco in the early 1980s, he was promoted in 1983 to president of the division that fabricated TVs and large screen projectors. Frans Claerbout was head of the division’s R&D department, while Bernard

Barco Projection Systems (A): Worldwide Niche Marketing 591-133

Dursin was in charge of marketing and sales. Dejonghe, Claerbout, and Dursin worked closely together on projectors throughout the decade.

In 1989, Claerbout was promoted to vice president of Barco N.V. and named general manager of BPS. Dursin, also named a Barco N.V. vice president, became general manager of Barco International, a group that managed the marketing of certain Barco product lines worldwide, including projectors. Claerbout’s and Dursin’s offices remained within shouting distance of each other, however, and they continued to collaborate on projectors. Dursin managed relations with the division’s distributors, and, in addition, played a leading role in setting prices for projectors worldwide. Three regional marketing managers, who reported directly to Claerbout, were responsible for sales support to all of the division’s distributors. (See Exhibit 2 for BPS’s organization chart.)

BPS Products

BPS designed, manufactured, and marketed sophisticated video projectors for industrial applications. Video projectors recreated an image electronically, and Barco’s offerings could be connected to TVs, VCRs, and most recently to computers. They were used to project images and information onto large screens, for large-audience viewing (see Exhibit 3 for a diagram of the unit). BPS did not invent video projection, but throughout the 1980s, it played a key role in the development of niche market applications for the technology. By 1989, BPS had developed three lines of projectors: video, data, and graphics.

All based on the same design, BPS’s projectors comprised three major components—tubes (3), lenses (3), and electronics. The division’s product line was built primarily around a 7” tube. BPS’s traditional strength was in electronics; given the same lens and tube combination, BPS could achieve measurably better performance than its competition in each of the main areas of evaluation. In 1989, the most important considerations for evaluating an industrial projector’s performance were brightness (measured in lumens), image quality, and resolution. A projector’s three components worked together to provide particular results. In general, the tubes, lenses, and electronics represented 15%, 20%, and 50% of the projector’s cost structure, respectively. The housing and mechanics constituted an additional 15%.

What differentiated BPS’s product lines was scan rate, which measured the speed at which a projector was able to read and process incoming electronic signals. BPS used scan rate to segment its markets; as the sophistication of the application for BPS projectors increased, so did scan rate. BPS’s video projectors were designed for compatibility with standard video sources, such as broadcast TV and VCR, and scanned at 16 kilohertz (kHz), or 16,000 lines per second.2 Its data projectors scanned at 16 kHz to 45 kHz, and could display input from personal computers as well as video sources. Its graphics projectors, BPS’s most sophisticated products, scanned from 16 kHz to well above 64 kHz, and accepted input from powerful computer-aided design and manufacturing (CAD/CAM) systems, as well as from video and data sources. A projector needed to match the scan rate of its source to produce a clear picture; Barco’s graphics projectors would not be compatible with any computer scanning higher than 64 kHz. BPS was continually upgrading the scan rates of its most sophisticated projector line to match advances in computer technology.

In 1989, BPS was well established in a variety of entertainment, training, and presentation markets. Board rooms, training centers, discotheques, classrooms, airplanes, and betting shops around the world had installed Barco projectors. The monthly sales log of one of BPS’s European distributors, for example, listed the sale of four data projectors to the Commission of the European

216 kHz = 30 frames of information per second x 533.3 lines per frame.

591-133 Barco Projection Systems (A): Worldwide Niche Marketing

Economic Community (E.E.C.) for video conferencing, five video projectors to a chain of resorts for entertainment rooms, and five data projectors to Groupe Bull, a large French computer company, for training centers. IBM had been one of BPS’s best customers throughout the 1980s, having decided in 1984 to equip all its U.S. training centers with Barco projectors.

In addition, BPS was pursuing a number of more specialized markets such as process control and simulation, which used data and graphics projectors. In 1989, BPS installed a series of projectors in the process control room of the U.S. Union Pacific Railroad, which displayed more than 23,000 km of track on a 200-foot-wide screen. Barco projectors were also found at the process control centers for the English Channel tunnel project, in factories, and in flight simulation rooms for military and aerospace applications.

Evolution of BPS’s Product Lines and Markets

Barco N.V.’s involvement in projection systems began in 1981, when it developed a video projector for showing motion pictures in airplanes. The projector, called the BarcoVision 1 (BV1), was priced at 450,000 Bfr ($11,250), and sold strongly in the U.S. and European markets. As the company began to investigate other applications for its technology, Dejonghe, Claerbout, and Dursin presented their views on the future of projection to Barco’s board of directors. They believed the company could pursue one of three directions: (1) it could downgrade its technology to suit consumer video applications; (2) it could upgrade its technology for long-distance, high-performance video projection; (3) or, it could enter the untested market for computer applications.

In their presentation, Dejonghe, Claerbout, and Dursin related their discussions of a possible computer-compatible projector with IBM. Developing the computer application, they learned, was feasible, but scan rates would have to be increased to match a computer’s faster electronics. Moreover, the projector would have to be designed with enough flexibility so that computer companies with different standard scanning frequencies could use it. But Dejonghe and the others felt that the complexity of the application would work to Barco’s advantage by keeping larger firms out of the market. They also thought the application could expand projection markets significantly. The board voted to follow their suggestion and made Dejonghe the new president of the TV and projector division.

In 1983, the division’s sales were split 80%/20% between TV and projectors. Dejonghe set out to reverse that ratio. By the end of 1983, BPS had introduced the BarcoData 1 (BD1)�the first computer- compatible projector in the marketplace. Priced at 540,000 Bfr ($13,500) and able to scan to 18 kHz, the BD1 was immediately successful in corporate presentation markets and elsewhere. In 1984, BPS introduced two more projectors—the BV2 (395,000 Bfr, $9,875) and the BD2 (590,000 Bfr, $14,750), which incorporated engineering advances permitting higher scan rates and, thus, broader compati- bility. From 1984 on, BPS’s video and data lines continued to evolve, keeping pace with breakthroughs in design, improved components, and, in the case of data projectors, with ever- changing computer technology. In 1986, BPS began work on a graphics application for its technology.

BPS developed its graphics projectors to handle input from CAD/CAM sources, which required upgrading a data projector’s scanning frequency to 64 kHz and above. (BPS’s most powerful data projector at that time, the BD3, scanned up to 32 kHz.) Dejonghe recalled how the division’s market segmentation scheme was formalized:

I remember when we decided to create a graphics segment with a machine scanning at 64 kHz and above. Limiting the scan rate on our data projectors would frustrate some end-users.

Barco Projection Systems (A): Worldwide Niche Marketing 591-133

Our plan was to respond to that frustration by offering a graphics projector. We could have made it one machine, but not sold it for the highest price.

Dejonghe, Claerbout, and Dursin decided to limit video-only projectors to a scan rate of 16 kHz; data projectors to a scan range of 16 kHz to 45 kHz; and graphics projectors, their newest line, to a scan range of 16 kHz to 64 kHz and above. In June 1987, BPS introduced its first graphics projector, the BarcoGraphics 400 (BG400), for 1 million Bfr ($25,000). The BG400 was the industry’s most sophisticated projector, scanning at up to 72 kHz. By 1989, the price of the BG400 had come down to 960,000 Bfr ($24,000). (Exhibit 4 displays a time chart of BPS’s product evolution.)

By September 1989, BPS was looking toward its next generation of products—digitally controlled projectors. Currently, all adjustments to BPS projector settings were carried out manually. The new projectors would incorporate digital technology to allow a projector’s mechanisms to be controlled by a hand-held remote. BPS planned to first introduce the technology in the data segment, and then into the graphics and video segments. BPS engineers had field-tested its first digital data projector, to be called the BD700, and were completing all modifications. The BD700, to be priced at 640,000 Bfr ($16,000), was scheduled for full production and delivery in October 1989.

Frans Claerbout summed up the forces driving the evolution of Barco’s projection product line throughout the 1980s as (1) the constant search for the best possible image; (2) flexibility toward inputs; and (3) increasing user-friendliness. Product evolution, he explained, was “more a result of engineering solutions to problems that arose than of a specific development plan.” Barco’s competition in industrial projection had adopted its practice of segmenting markets by scan rate. Video, data, and graphics had become the standard definition for each market by 1989.

Projector Markets

Through 1994, the worldwide market for projectors was expected to grow 8.5% per year. Growth rates for the product and geographic segments of the market, however, varied widely (see Table A and Table B).

Table A Product Segment Growth, 1988

1988 (% units) Predicted Annual Growth, 1989-1994

Price Range

Video 63% .8% 200,000-280,000 Bfr. ($5,000-$7,000) Data 33% 12.3% 320,000-600,000 Bfr. ($8,000-$15,000) Graphics 4% 40.2% 800,000-960,000 Bfr. ($20,000-$24,000) Total 100.0% 8.5% 200,000-960,000 Bfr. ($5,000-$24,000)

Table B Geographic Segment Growth

1988 (% units)

Predicted Annual Growth, 1989-1994

United States 50% 9.0% Western Europe 36% 11.5% Asia 12% 18.0%

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BPS in 1989

In September 1989, the data segment represented the heart of BPS’s sales for both units and revenues (see Table C). Because the video segment was moving toward commodity, BPS was concentrating less and less effort there. BPS was the acknowledged technological leader in the high end.

BPS anticipated that the worldwide market for industrial projection would continue to expand for at least five more years before being superseded by new technologies. In 1989, the division’s principal products were the BD600, which scanned to 45 kHz, and the BG400, which scanned to 72 kHz. The two projectors sold in 1989 for 480,000 Bfr ($12,000) and 960,000 Bfr ($24,000), respectively (Exhibit 5). BPS’s main line of video projectors sold for 280,000 Bfr ($7,000). BPS sold 4,400 units in all three categories in 1988.

Table C BPS Sales by Segment, 1988

% units

% revenues

% margins

BPS Market Share (%)

BPS Projected Annual Unit Growth Rate 1989-

1994 (%) Video 35 23 20 8 1.4 Data: 53 54 51 23 12.3

% BD600 of BPS total data 79 67

Graphics: 12 23 29 55 25.0 % BG400 of BPS total graphics 85 80

Total 100 100 100

Distribution

In 1989, BPS had a two-step distribution system, with 45 distributors and approximately 400 dealers worldwide.3 The division owned four of its distributors—in Belgium, France, the United Kingdom, and the United States; the other 41 operated independently but were Barco-exclusive for projectors. Fully-owned distributors represented 61% of BPS’s total unit sales, 61% of its revenues, and 59% of its margins. By individual product, they represented 57% of video unit sales; 61% of data units; and 75% of graphics units.

BPS established a distributor price in Belgian francs for each product. The distributors, in turn, set their own price to dealers. On average, prices in the United States were 15% lower than in Europe. The typical pricing relation appears in Table D.

Table D BPS’s Pricing Index

List Price Actual Price Comments BPS 100 100 41% direct cost, 59% gross margin Distributor 142 142 30% margin, 12% import duties and freight Dealer 204 173-184 List price calculated with 30% margin Street price

incorporates discounts of 10%-15%

3BPS could only estimate the number of dealers carrying its products worldwide, since most independent distributors were reluctant to disclose exact figures.

Barco Projection Systems (A): Worldwide Niche Marketing 591-133

Dealers carrying Barco projectors ranged from “box” dealers to systems dealers. The box dealers, normally found in large cities, sold projectors on the basis of cost alone, providing no service or expertise. Twenty percent of BPS’s dealers were “box,” and 90% of box sales were video projectors. Systems dealers, at the other extreme, had the know-how to integrate and install equipment packages according to the end-user’s individual needs. Often these systems involved more than one brand of equipment. Given the complexity of Barco projectors—particularly its data and graphics models— 80% of the company’s dealers were the systems type.

Projector dealers typically carried three manufacturers’ projectors, selecting a line for the low, middle, and high ends of the market—although these could overlap. These dealers also rounded out their sales with other audio-visual equipment such as overhead projectors, lighting, screens, and consumer electronics. A typical dealer in the United States had turnover ranging from 120 million Bfr ($3 million) to 800 million Bfr ($20 million). About 8% to 10% of revenue came from after-sales service.

Although a dealer’s ideal margin on projectors was 30%, fierce competition resulted more often in margins of 15% to 20%; occasionally a dealer might go as low as 5% to preserve a customer. Dealer overhead, however, averaged greater than 5%. Margins on service were higher, typically 25% to 35%, and sometimes as high as 70%. Dealers processed information from manufacturers, held vendor fairs and training sessions, and sent out mailings. Barco’s dealers were required to attend sales and technical courses given by the distributor, and to hire a certain number of Barco-approved technicians. In return, BPS promised price protection for unsold units when prices dropped, and stable pricing between the time of first customer contact and final order, generally three to six months.

Barco projectors had a dealer reputation for the highest quality final image and excellent reliability once fully installed. Dealers complained, however, that the machines were unnecessarily complex— designed to win awards, not be end-user friendly. Dealers frequently encountered complications in installing equipment. End users, too, often found BPS’s control panels and instructions too complex. BPS’s engineers contended that many of the problems arose when the instruction manual was disregarded.

The typical end user purchased a new projector every five years. With an eye to ever-increasing computer scan rates, customers tended to purchase more performance in a projector than they needed.

Competition

In 1989, three companies competed with Barco in the data and graphics segments of the market for industrial projection: Sony, Electrohome, and NEC. Several other firms, including Panasonic, Mitsubishi, and General Electric, competed primarily in the video and low-scanning data segments and were not considered major competitors to BPS. In data projection, Sony held the largest percentage of the marketplace, followed by Barco, Electrohome, and NEC. In graphics, BPS was in first place with 55% of the market. BPS’s only major competition in the graphics segment was Electrohome, with 44% (see Table E). Exhibit 6 lists the products of each major competitor.

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Table E Market Share of the Major Competitors, 1988 (as % of total units sold)a

Barco Sony E.H. NEC Other Europe Data 35 35 8 6 16

Graphics 55 -- 43 -- 2 North America Data 16 62 14 8 --

Graphics 60 -- 40 -- -- Far East Data 15 30 7 23 25

Graphics 15 -- 80 -- 5 General Total Data 23 49 11 9 8

Graphics 55 -- 44 -- 1 TOTAL

b 25 45 14 8 8

aTo be read horizontally: “Barco held 35% of the market for data projectors in Europe, versus Sony’s 35%, Electrohome’s 8%,” etc.

bOmits video

The Sony Corporation, headquartered in Tokyo, Japan, was a diverse manufacturer of consumer electronics, with 1988 turnover of 460 billion Bfr ($11.5 billion). Industrial projectors, manufactured at the Sony Projectors division, were estimated to represent 1% of the total company’s turnover. Sony was the main player in the video segment of the projection marketplace, with 50% of all units sold. In data, Sony held 49% of total units sold; however, its most powerful projector in 1989, the 1031, scanned at only 35 kHz. In 1988, the company’s product mix was 66% video and 34% data, on a total of 15,000 units.

Typically, Sony projectors were positioned below Barco’s in terms of performance (scan rate, brightness, image quality, and resolution), and were, on average, 15% lower in price. BPS guessed, in addition, that Sony had fewer engineers dedicated to projection than BPS. BPS expected Sony’s next product introduction to be a higher-performance data projector, to be unveiled in the fall of 1989, with an upper scanning limit between 46 kHz and 50 kHz. The division also expected Sony to enter the market with a graphics projector in late 1990.

Sony sold projectors through its worldwide network of captive commercial video distributors. In turn, these distributors worked with more than 1,500 dealers across the globe. It was estimated that 50% of Sony’s dealers were box dealers. Its extensive dealer coverage—Sony had 500 dealers in the U.S. market versus BPS’s 100—resulted in a low street price for Sony projectors. Although dealers used 30% margins to figure list prices for both Sony and Barco projectors, Sony units were typically discounted 15% for the final sale, while Barco units were discounted 10%. Dealers tended to prefer to sell Barco because they received not only a higher price, but a higher percentage of that price. In general, however, dealers did a higher volume with Sony. In 1989, few dealers could survive without the Sony volume; an estimated 80% to 90% of professional audiovisual dealers worldwide carried Sony video equipment. Sony had a reputation for reliability and low price among dealers.

Sony Components and BPS Sony entered industrial projection in 1985 with its 1020 video projector. Although the 1020 was slower than Barco’s video projectors at that time, it had a sharper focus, indicating a better quality tube. Upon closer examination, BPS engineers found the tube, manufactured in-house at Sony Components (a Sony division), to be far superior in quality to Clinton’s, BPS’s U.S.-based supplier.

In late 1985, Frans Claerbout traveled to Japan to investigate buying from Sony Components. The division, which remained independent from Sony Projectors up to the chairman’s level, agreed to supply Barco, and six months later the first Sony tube was introduced in the Barco Data 3 (BD3).

Barco Projection Systems (A): Worldwide Niche Marketing 591-133

Measured by lumens, Barco was able to achieve better brightness with Sony’s tube than Sony itself. Barco terminated its supply relationship with Clinton, and Sony became its sole supplier. Claerbout commented on the relationship:

Our relationship with Sony is a strange one. We are competitors with Sony projectors yet we source from their in-house supplier. To obtain tubes that suit our needs, we share a certain amount of technical and developmental information with Sony Components, while they keep us abreast of their latest developments. The fact that we rely on them for an important component makes us vulnerable, but at the same time we think that they value our business because we bring their manufacturing costs down. I would say that over the course of our relationship, Sony Components has treated us fairly.

In one instance in 1987, however, Sony introduced a video projector with a tube that Barco had not seen; BPS subsequently purchased the tube, which appeared in its BD600.

By 1989, BPS was actively seeking other tube suppliers. All other tubes available on the market were either inferior to Sony’s, more expensive, or both. Many firms manufactured tubes suited to consumer video applications, including Hitachi, Toshiba, Thomson, and Philips, but only the Sony tube had the quality necessary for high-end video projection. Sony, Barco, and Electrohome all sourced tubes from Sony Components. To protect itself against a sudden supply freeze, BPS kept a three-month supply of tubes in-house, and two months of orders in transit from Sony.

BPS spent 90 million-100 million Bfr ($2.25 million to $2.5 million) annually for approximately 20,000 Sony tubes, which represented around one-fifth of Sony Component’s projector tube business. One tube cost between 5,000 Bfr ($125) and 18,000 Bfr ($450), depending on size and quality, and BPS negotiated continuously with Sony to get the prices down. Altogether, perhaps 35% of Sony Component’s business was noncaptive. BPS’s operations manager observed: “Any time Sony wanted to squeeze us out, they could raise the price of their tubes. We would be dead in the water six months before finding another source. But I don’t think they will. When we discuss other suppliers, we are taken seriously.” Erik Dejonghe agreed:

Sony has told me that their ultimate goal is to be 50% an industrial supplier, and 50% a consumer supplier—not to beat Barco in projection. I am making a bet that they continue to supply us reliably. They need competition to survive, and we are the only competition with whom they make substantial money.

In February 1989, Sony Components contacted BPS about a new 8” tube it was developing. BPS received its first sample of the product in June, and its engineers were running tests on the product’s performance capabilities. The face of the tube was square, rather than the conventional rectangular shape, and the product was significantly more costly than the 7” tubes BPS was currently sourcing from Sony. BPS engineers had considered incorporating the new tube in the BD700 data projector, but decided against the idea because to do so would involve redesigning the shape of the projector’s chassis and sourcing a new lens to match.

Other Competitors

Electrohome Electrohome was a privately held Canadian electronics manufacturer, with 1988 turnover of 5.6 billion Bfr ($139.8 million). Industrial projectors were the most successful group in its Electronics division, which had turnover of 2.5 billion Bfr ($62.5 million) in 1988. Electrohome operated in the data and graphics segments of the marketplace only, and was BPS’s largest competitor in graphics. Electrohome was the third-largest player in unit sales behind Sony and

591-133 Barco Projection Systems (A): Worldwide Niche Marketing

Barco, with 1,585 units sold in 1988. Its product mix was 73% data and 27% graphics. Worldwide, the company had an estimated 11% of total data units sold and 44% of graphics units.

Electrohome was estimated to have distribution strength comparable to BPS’s, with nearly 100 dealers in the U.S. market; 80% of Electrohome’s dealers were systems specialists. Given the intense competition between BPS and Electrohome in graphics, it was rare to find the two manufacturers’ products sold by the same dealer. In general, Electrohome’s products were priced just below BPS’s. Together with BPS, it was viewed as having higher quality projectors than Sony.

NEC A major Japanese electronics manufacturer with 1988 turnover of 876 billion Bfr ($21.9 billion), NEC sold video and data projectors, with a product mix divided 48% and 52% between the two. NEC had pioneered digital convergence technology in the marketplace, introducing a digital data projector in 1987 that became the market standard. The company had not captured as much market share as expected, however, in part due to its inefficient distribution network. Originally, NEC projectors had been sold through the company’s well-established network of computer dealers. When sales proved disappointing, NEC granted an OEM agreement to the U.S.-based General Electric Corporation (GE). In 1988, the company sold 1,799 units through its own network and another 1,200 through GE. The company was estimated to hold 4% (units) of the video market worldwide and 9% of the data market.

The Sony 1270 Introduction

In August 1989, at the Siggraph trade show in Boston, Sony previewed a projector whose performance shocked Barco and the rest of the industry. Introduced as a “superdata” projector, Sony’s new model—the 1270—had the power to scan to 75 kHz, placing it in the market for high- performance graphics applications that BPS could not enter. In addition, the 1270 featured the new 8” Sony tube, which gave it higher marks than the BG400 in brightness, image quality, and resolution. Price rumors at Siggraph, however, placed the unit in BPS’s data range, at 600,000 Bfr to 800,000 Bfr ($15,000 to $20,000). If these rumors proved true, such performance had never been available on the market for such a low price. Erik Dejonghe, Bernard Dursin, and the U.S. regional marketing manager were the Barco representatives at Siggraph that afternoon. The regional manager described the scene:

Sony had chosen the U.S. market for its kick-off preview. They had one pre-production unit set up in a very small booth, and their presentation was quite low-key. But the 1270 was a show-stealer. It was a magnificent product. I spent two days at the booth, in a crowd of people, trying to find out as much as I could.

Dejonghe and the others were not surprised as much by a Sony introduction as by the type of projector the 1270 turned out to be. There had been rumors, spread mostly by dealers, about an impending Sony introduction earlier in 1989. He explained:

Barco had a pretty good idea that Sony was bringing out a new product, but we had expected it to be a direct competitor for the BD600. We thought it would be a 46-50 kHz machine, priced 10% to 15% lower than ours. In response, we planned to introduce a 64 kHz digital upgrade of the BD600 (the BD700) by October. We planned to maintain the 960,000 Bfr ($24,000) price tag on our BG400 until we introduced a digital version (the BG800) in late 1990. Then, we expected Sony to introduce a 75 kHz graphics projector in 1990, priced somewhere near 800,000 Bfr ($20,000). All our projections, however, were based on the assumption that

Barco Projection Systems (A): Worldwide Niche Marketing 591-133

Sony would respect our “vision” of the marketplace. The 1270 did just the opposite. Its positioning threatened to take a great deal of money out of the industry.

Sony announced that it would roll out the 1270 in its major markets in November. The company planned the largest-ever publicity campaign in industrial projection history; for example, 15,000 customers, dealers, and distributors had been invited to the 1270’s preview in France, and 5,000 to the preview in Belgium. BPS’s regional marketing manager commented:

It is obvious that Sony is not interested in competing with Barco and Electrohome for a few hundred projectors per year in the graphics segment. Instead, their aim is to reconquer our data and graphics markets, and, to do so, they need to break their market image as a mass producer of low-end products.

Although the price reports on the projector could not be confirmed, confusion reigned in the marketplace. Dealers were panicked about the possibility of a low-priced graphics projector from Sony, while Barco distributors were anxious to know how Barco planned to react. In early September, in an effort to calm the market, Barco had spread the word that it did not believe the rumors about the low price of the 1270. Privately, however, BPS management was worried about the potential for significant erosion of its market share. On the plane ride home from the Siggraph show, Dejonghe calculated that BPS stood to lose as much as 75% of its forecast 1990 profits.

Saturday, September 23, 1989

As Saturday morning turned into afternoon, Dejonghe, Claerbout, and Dursin continued to weigh options. Mindful of what BPS risked losing, they had yet to reach agreement.

Pricing Options

Sony’s 1270 targeted the U.S. and European markets—markets that represented 83% of BPS graphics revenues and 91% of its data revenues. In the month since, Siggraph, Dejonghe, Claerbout, and Dursin had given considerable thought to the potential impact of the 1270 for the rest of 1989 (October, November, and December) and 1990. By their estimations, if the BG400’s price remained unchanged and the 1270 was priced at 800,000 Bfr ($20,000), the BG400 could lose 30% of its market share, or 153.8 million Bfr ($3.85 million).4 At 600,000 Bfr ($15,000), the Sony 1270 threatened to capture 60% of the BG400’s market share, or 307.5 million Bfr ($7.69 million). In addition, at this lower price point, Dejonghe and the others were concerned that the 1270 would cause significant share erosion of the BD600, priced at 480,000 ($12,000).

How should the BG400 and the BD600 be priced in response to the Sony 1270? For each machine, there were the questions of how much, if any, of a price change to implement, which markets to lower prices in, and over what time frame. Dursin reported that BPS’s German distributor was feeling the pressure of the 1270 most severely, and had been calling for a significant price decrease since Siggraph. In early September, the president of the distributorship had declared:

4BPS estimated that graphics sales for the last three months of 1989 would reach 106.7 million Bfr ($2.67 million), making the total for the year 426.8 million Bfr ($10.67 million). Assuming 25% growth for the following year, the 1990 graphics revenue estimate was 533.5 million Bfr ($13.34 million). The 15-month revenue estimate was thus 640.7 Bfr ($16.02 million), of which 80%, or 512.56 million Bfr ($12.8 million), could be assumed to be sales of the BG400. A 30% loss in sales of the BG400 would total 153.8 million Bfr ($3.85 million), while a 60% loss would total 307.5 million Bfr ($7.69 million).

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Germany is the second-largest BG400 market in the world. Our dealers inform us that Sony is taking advance orders on its 1270 in Germany. We need to protect this market by dropping the price on the projectors drastically and immediately.

The French distributor, too, was experiencing market pressure to announce a price decrease on the BG400. In the U.S. market, however, the distributor was adamantly opposed to lowering the price. The BPS regional marketing manager described the reasoning behind this opposition:

It goes without saying that Barco cannot win a price war against Sony. Lowering our price might drive Sony to lower theirs further, and we could not follow. We might never be able to recover our price positioning on graphics machines. In addition, a drastic price drop would damage our reputation among recent, and hopefully repeat, BPS customers. Our only option is to develop a competitive projector.

Frans Claerbout was concerned about moving too quickly to lower the BG400 price—in markets where Sony was not coming out strongly, it would be the equivalent of giving away profit. He wanted to wait for confirmation of the Sony price before making any pricing decisions. In direct contrast, Dursin felt strongly that BPS should preempt the pricing of the 1270.

Product Development Options

The three men also had a series of product development options to consider in light of the 1270. Early in 1989, BPS’s development plan had been sketched out according to expectations of increased competition in the data segment of the market. The plan called for the introduction of the digital BD700 by October, followed by the development of the digital BG800 for a late 1990 introduction. Twenty-seven person-months were required to complete the BD700 project, while 180 person-months had already gone into the project. In addition, BPS engineers were working concurrently on four other projector-related projects.

BPS could continue its development schedule as planned, introducing the BD700 on time in October for immediate production and delivery. BPS’s first digital model, the projector, also incorporated an improved generator and a scanning frequency of 64 kHz. BD700 sales in 1990 were expected to increase 25% in incremental sales over the forecast revenue of the BD600, representing some 171.7 million Bfr ($4.3 million)5. By September, BPS’s German distributor and several others already had orders for the BD700, priced at 640,000 Bfr ($16,000), on their books. Claerbout understood how important it was to complete the BD700 project on time for both his engineers’ and his customers’ morale. At the same time, the BD700 would not beat the 1270’s performance at the Infocomm show in January 1990.

Alternatively, BPS could use the advances made in the BD700 development as a springboard to a digital graphics projector, the BG700. Dejonghe estimated that BPS engineers could develop a graphics version in two to three months, working from the BD700’s chassis, tubes, and lenses, with the sole addition of higher scanning frequency to match that of the 1270. If this option were pursued, the introduction of the BD700 would need to be postponed until December, causing delay in its delivery to advance-order customers. Also, with BPS’s standard 7” tube, the digital graphics projector would still be inferior to the 1270 in terms of light output, picture quality, and resolution.

5Data revenues were predicted to reach 912.7 million Bfr ($22.8 million) in 1989, and, assuming 12.3% growth for the next year, 1,025 million Bfr ($25.6 million) in 1990. Sixty-seven percent or 686.8 million Bfr ($17.2 million) in 1990, could be assumed to be sales of the BD600. The BD700 was expected to increase data sales 25% over the BD600, representing 171.7 million Bfr ($4.3 million).

Barco Projection Systems (A): Worldwide Niche Marketing 591-133

BPS’s third option was to turn immediately to the development of the BG800. As originally planned, it was to be a digital upgrade of the BG400. Faced with the threat from Sony, however, the BG800 now had to be designed to surpass the 1270’s performance. This would require a scanning frequency well above that of the 1270’s—at least 90 kHz—as well as the incorporation of the Sony 8” tube for the best possible performance. Dejonghe had received confirmation from Sony Components that it could begin supplying the tube immediately. The 8” tube required a special lens, however, and BPS’s traditional lens supplier, U.S. Precision Lens of Cincinnati (USPL), had no compatible product. Although in the past Barco and Sony sourced lenses from the same supplier, Sony worked with a Japanese firm, Fujinon, to develop the lens in the 1270. Dejonghe was not sure that Fujinon would supply Barco as well.

Claerbout estimated that developing the BG800 with at least 90 kHz of scanning frequency and new tubes would require at least 80 person-months. In addition, he felt strongly that the projector would have to be ready in time for Infocomm if it was to be effective against the 1270. Meeting that deadline would require stopping all other BPS development projects from October 1 on, including the BD700. He voiced a number of concerns about such a drastic move:

My engineers have been working overtime on the development of the BD700 since mid- summer. Now, we’re considering a move that would require the indefinite postponement of the BD700 project, and an even greater commitment on their part. Overtime would be a given, but they’d also need to give up vacation days until Infocomm at least. We have the capability to produce a great machine, one that is superior to the 1270. But the compression of its development could have repercussions on the quality of the final product. In addition, we don’t know yet when the 1270 will actually hit the marketplace, how it will be priced, or how the customers will respond to it.

In addition to these considerations, Claerbout gave the BG800 only a 40% chance of making the Infocomm deadline.

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Exhibit 1 Key BPS Financial Data, 1988-1989 (in millions of Bfr)

1988 (Bfr) $U.S. 1989E (Bfr) $U.S.

Turnover a

1,387 34.7 1,983 49.6 Direct production costs 772 19.3 815 20.4 Total production overhead 40 1.0 45 1.1 Marketing and R&D 130 3.3 170 4.3 Depreciation and charges 138 3.5 329 8.2 Income before taxes 307 7.7 624 15.6

Source: BPS

aIn addition to sales of video, data, and graphics projectors, BPS turnover recorded sales of projector accessories. In 1988, this category amounted to 168.5 million Bfr ($4.2 million); in 1989 it was 239.3 million Bfr ($6 million)

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591-133 Barco Projection Systems (A): Worldwide Niche Marketing

Exhibit 3 Projector Diagram

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Barco Projection Systems (A): Worldwide Niche Marketing 591-133

Exhibit 4 BPS Product Evolution, 1982-1989

Video Data Graphics

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Note: This diagram contains principal 7# projector introductions only; modifications and special-application projectors are not included.

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Barco Projection Systems (A): Worldwide Niche Marketing 591-133

Exhibit 6 Products of the Major Manufacturers, August 1989

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Barco BD600 16-45 600 1,600 480,000 12,000 BG400 16-72 400 2,000 960,000 24,000

Sony VPH1031 16-35 300 1,100 420,000 10,500

Electrohome ECP2000 16-36 400 1,280 344,000 8,600 ECP3000 16-50 650 1,280 580,000 14,500 ECP4000 16-70 650 1,280 960,000 24,000

NEC DP1200 16-35 475 800 420,000 10,500 GP3000 16-54 600 1,100 640,000 16,000

Source: BPS

Note: Light output and resolution were used in addition to scan rate to measure a projector’s performance on the world marketplace. Brightness increased with the number of lumens; however, the human eye could discern only large increases. For example, the eye perceived a 1,000 lumen projector as 50% brighter than a 100 lumen projector. With resolution, the larger the number of lines, the better the quality of our final image. Barco believed that its projectors had the highest light output of all the competitors; however, due to differences in the standards used to calculate lumens, light output was difficult to compare between companies.

9 - 5 0 1 - 0 0 2 R E V : S E P T E M B E R 2 6 , 2 0 0 5

________________________________________________________________________________________________________________ Professor Rajiv Lal, Carin-Isabel Knoop, Executive Director, Global Research Group, and Senior Researcher Suma Raju prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2000 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

R A J I V L A L

Omnitel Pronto Italia

Our vision at Omnitel is to position the cellular phone in a manner akin to the positioning of the wristwatch. We want the cellular phone to be personal and indispensable. Like the wristwatch, it will be a possession that stays close to you from morning to night, and even at night, it won’t be too far away from you. At Omnitel, we want to dramatically change the rules: cellular phones are going to be the primary mode of communication. There is going to be a paradigm shift in the perception of the cellular phone.

— Omnitel’s Vision Statement

In early June 1996, Fabrizio Bona, Omnitel’s marketing director, prepared for his meeting the next

morning with Francesco Caio, Omnitel’s CEO, to discuss his proposal for a new pricing strategy for Italy’s second mobile phone service provider. He leafed through the folder containing the results of Omnitel’s recently conducted market research. The survey indicated that customers were very happy with Omnitel’s customer service. The results had also overwhelmingly indicated that the Italian consumers viewed the monthly usage fee as a tax and resented it deeply. They did not even want to pay an activation fee. Instead, they wanted to pay a fee only when they used the phone.

The results not only excited Bona but also made him a little nervous. On this basis, he had drawn up an innovative but radical proposal that he felt would enable Omnitel to compete effectively with Telecom Italia Mobile (TIM). The state-owned and operated TIM had had a monopoly over the Italian telecommunications market until Omnitel’s February 1995 entrance into the market.

Bona’s plan, christened “LIBERO,” eliminated the monthly fee completely from “free time” and let customers pay only when they used their cellular phones. The plan would charge Lit. 1,595 ($1=Lit. 1,603) for calls made during peak hours and Lit. 195 for calls made during off-peak hours. Bona anticipated average usage to be 193 minutes per month, consisting of 93 minutes of outgoing calls (13 minutes at peak and 80 minutes at offpeak) and 100 minutes of incoming calls (25 minutes at peak and 75 minutes at offpeak). The total revenue per customer per month would also include the setup charges, which amounted to Lit. 10,000. Bona realized that his new proposal was radically different from anything that had been offered previously, not only in Italy but also in the rest of Europe. Enticing customers with highly subsidized handsets in exchange for their agreeing to sign a contract for a year or two seemed to be the accepted method for acquiring new customers, especially in countries that had more than one cellular phone operator. In fact, in 1995, dealers in the United Kingdom had been very successful in acquiring new customers (an increase in the customer base of almost 2 million from the previous year) by offering attractive handset subsidies to their customers

501-002 Omnitel Pronto Italia

when they signed up for access to cellular service. But the customers were required to pay a minimum monthly fee for a fixed period of time.

Bona wondered how he could convince Caio to continue to sell phones at full price but drop the monthly fee. He knew Caio would have several objections and raise more than a few questions. He could already hear Caio telling him, “If we do not charge a recurring monthly fee, we will never be able to get high-quality customers. Customers will just buy the phone and hold on to it without making any calls, and we will end up with very low-end customers.” Caio had been especially impressed with the success that several other cellular operators in Europe had had when they offered subsidized handsets. Bona knew that Caio was definitely considering replicating their techniques. At their last meeting together, Caio had stated:

I think it’s a great idea to offer our customers handset subsidies in exchange for their signing a contract with us. Not only will more people sign up because of the subsidy, but we will also be guaranteed a constant revenue stream from the monthly fees. Best of all, it’s not too risky for us to replicate this strategy because it has already been tested and proved successful in several countries.

Bona also wanted to support his proposal through an advertising campaign, with a budget of Lit. 40 billion ($25 million) that he intended to spend in less than three months, two times higher than TIM’s budget for the same period. His vision was to completely blanket Italy with LIBERO posters and billboards. The ambitious campaign would stimulate usage as well as completely change the customer’s mind-set regarding cellular phones.

Underlying all these issues was the main concern that TIM should in no way view Omnitel’s proposal as a price cut and risk setting off a price war. Would it be possible to convince Caio that the new proposal would not lead Omnitel into a price war with TIM? Would Caio even take his radical plan seriously, Bona wondered, or would he think that his plan was too risky to implement, especially for such a young company as Omnitel, which had a loss of Lit. 128 billion in 1995 ($79.8 million). Omnitel would definitely be treading on uncharted territory if it completely eliminated its monthly fee. Although Bona had heard Caio state at many a meeting about the need for Omnitel to be different from other cellular companies, he was unsure that Caio would agree to so radical a change. Bona felt he was right. Now he had to convince Caio.

The Mobile Telephony Market in Italy

In 1987, the European Commission had completed a study on the $150 billion European telecommunications industry, dominated at the time by 12 state-owned telecom behemoths. In 1993, the commission declared that by January 1998, all member states would have to open their markets and guarantee competition in the telephony markets. Under pressure from business interests, the EC liberalized cellular telephony by January 1994, but liberalization was subject to interpretation by the country involved.1 Omnitel was only able to obtain a GSM2 license in December 1994. Further, while Italy’s Telecom Italia, the state-owned telecom monopoly, did not have to pay for a license, the

1 For more details, see Professor Michael Watkins and Ann Leamon, “Telecommunications and Privatization in Europe and Italy,” HBS Case No. 800-297.

2 Global system for mobile communications (GSM) was a digital cellular radio network. Since GSM was a wireless platform, GSM users were fully mobile and could do wireless data computing anywhere, without worrying about adapters, telephone jacks, cables, and so on.

Omnitel Pronto Italia 501-002

second provider, Omnitel, had to purchase a GSM license. Omnitel paid Lit. 750 billion ($469 million) for a GSM license in December 1994.

Omnitel’s entrance not only increased competition but also enhanced awareness about cellular products among Italians.3 Cellular penetration in Italy was 7.5% by the end of the first quarter of 1996 and was expected to increase to 22.8% by the end of 2000.4 Although Italy’s cellular penetration was lower than that of several European countries (see Exhibit 1), analysts were predicting strong growth in the Italian cellular market for the next few years.

Telecom Italia Mobile (TIM)

TIM was formed in July 1995 when it divested from Telecom Italia and began to be listed separately on the Italian stock exchange. With over 4 million customers by the end of the first quarter in 1996, TIM enjoyed a strong hold over the Italian cellular market. TIM offered two types of tariffs. (See Exhibit 2 for TIM’s tariffs.) The first, Eurofamily, charged a very high rate of Lit. 1,524 per minute during its peak hours between 7:30 a.m. and 8:30 p.m. and a very low rate of Lit. 170 per minute during its off-peak hours, in addition to a monthly fee of Lit. 10,000. TIM particularly benefited from the calls made by Eurofamily subscribers as well as from calls made to Eurofamily subscribers5 from fixed lines at peak times, since revenue from calls made during the peak hours was essential to TIM if it were to profit from this tariff system.6 The second, Europrofessional, targeted toward business customers, had rates ranging from Lit. 663 per minute during peak hours to Lit. 206 per minute during off-peak hours, in addition to a monthly fee of Lit. 50,000. Europrofessional was structured in a complicated manner, with different rates over five small time periods.

Since TIM had enjoyed a monopoly over the Italian telecommunications market until Omnitel’s recent entrance (generating 97% of Italy’s 7.5% penetration), its marketing costs had been lower than those of its European counterparts.7 Further, because of the lack of competition, TIM had not felt the need to offer handset subsidies to attract customers. The handsets cost between Lit. 700,000 and Lit. 1.20 million depending on the model.8 With Omnitel’s entrance, TIM expected its marketing costs to increase substantially.9 TIM also expected to see an increase in its customer-acquisition costs, as it would have to compete with Omnitel for every subscriber.

When TIM had a monopoly, its distribution included the “Il Telefonino” chain of stores including 20 TIM-owned shops and 150 Telecom Italia stores.10 In addition, it had 1,500 exclusive dealers all over Italy.11 But with Omnitel’s entrance, TIM became more aggressive in acquiring customers. At a shareholders meeting in early 1996, TIM proposed purchasing up to 30 million of its ordinary shares to distribute to dealers as a reward for meeting certain sales targets. In addition, TIM was planning to

3 “Italy-Telecoms,” IMI Sigeco research report, April 15, 1996.

4 Salomon Brothers European Equity Research, analyst report, May 17, 1996.

5 The party that initiated the call paid charges, but the caller paid the rate that was applied to the party that received the call.

6 A local call at the pay phone cost Lit. 200.

7 “Italy-Telecoms,” IMI Sigeco research report, April 15, 1996.

8 Ibid.

9 Ibid.

10 Salomon Brothers European Equity Research, analyst report, May 17, 1996.

11 Ibid.

501-002 Omnitel Pronto Italia

launch its first prepaid card in September 1996, named “Ready to Go.” TIM was planning to target this card toward low-end customers, customers who would not qualify for subscription service because of their credit histories and customers who did not have regular sources of income. This new card would be valid for three months, and calls would be charged at Lit. 2,016 during peak hours and Lit. 224 during off-peak hours.12

TIM’s marketing strategy was to cater primarily to the upper echelons of Italian society, touting the cellular phone as a status symbol, an item of indulgence. “TIM’s message through its advertising is, ‘you have a cellular phone, and you are somebody,’” Vittorio Colao (HBS 1990 and then consultant to Omnitel Pronto Italia) explained.

Omnitel Strategy

After Omnitel received its license to become Italy’s second GSM operator, it launched its commercial service in December 1995, with network coverage of 40% of Italian territory. (See Exhibit 3 for a history of Omnitel and Exhibit 4 for Omnitel’s launch advertising.)

During its initial six months of operations, Omnitel offered plans similar to TIM’s (see Exhibit 2 for Omnitel’s tariffs) but had focused primarily on its high-quality customer service. As a new entrant into the telecom market, Omnitel had no intention of reducing prices; instead, its initial strategy had been to position itself as a telecom company that provided high-quality customer service. The company felt that its superior customer care would be its competitive advantage over the former Italian monopoly, TIM.

However, by May 1996, Omnitel had only signed up 180,000 subscribers, and Omnitel was dissatisfied with its market share of 4%. Though customers were very pleased with the quality of customer service that they received, it had not resulted in a corresponding increase in market share as Omnitel had hoped it would. Omnitel charged its customers a monthly fee of Lit. 10,000 in addition to charging Lit. 1,524 for calls made during peak hours and Lit. 170 for calls made during off-peak hours. All customers also paid a setup fee per call that resulted in additional revenue of about Lit. 10,000 per customer per month.

The average usage rate was 188 minutes per month per subscriber and consisted of 88 minutes of outgoing calls (13 minutes at peak and 75 minutes at offpeak) and 100 minutes of incoming calls (25 minutes at peak and 75 minutes at offpeak). How could Omnitel differentiate itself from TIM in a meaningful way without getting into a price war? “We cannot afford to get into a price war with TIM since they are financially so much stronger than we are,” Bona’s associate, Margherita Della Valle, marketing analysis manager, had cautioned. “If we give TIM the impression that we are trying to undercut its prices, it will result in TIM slashing its prices too, and we will end up in a no-win situation.”

Customer Service

From the outset, Omnitel strove to use its customer service as its major competitive advantage over TIM. Customer service focused on three main areas. First, the operator’s approach: a polite operator always answered the customer’s call. Bona explained, “We have taken a very American

12 “Italy-Telecoms,” IMI Sigeco, research report, April 15, 1996.

Omnitel Pronto Italia 501-002

approach: ‘Hi, I am so and so. How may I help you, or what can I do for you today?’ In contrast, TIM’s operators say, ‘This is operator number 25367.’ It’s very impersonal.”

Second, the company tried to minimize a customer’s waiting time during a call—85% of Omnitel’s customer service calls were answered in less than 20 seconds, and the company goal was to have zero waiting time. Third, Omnitel tried to offer one-stop calling. Operators were trained to answer all of a customer’s questions and tried to avoid transferring a call to another operator.

Furthermore, Omnitel endeavored to maintain a low churn rate of 10% to 15% per year.13 The average churn rate in the United States, in contrast, was in excess of 30% in 1995 and was expected to be over 40% by the end of 1996.14 “Omnitel is built around customer satisfaction, so the company was obsessed about churn. A high churn is a bad indication. It means customers are dissatisfied,” Colao stated. Churn also resulted in additional hidden costs. Colao explained:

Churn is a killer in our industry. One point of churn was then worth almost $10 million. The real problem with churn is that it’s even worse than it appears. When you lose a customer, you first try to convince him not to go away, then you have to disconnect his or her service. You have to pay the commissions to the trader, and the trader is upset because we keep producing customers without really seeing a [net] increase. In addition, we also have to go through administrative procedures with the closing of each account.

Subscriber Acquisition Costs

Omnitel’s shareholders, especially the American shareholders,15 were comfortable with the idea of incurring high customer-acquisition costs and believed they were an essential investment. One of its American shareholders commented, “A customer is very valuable over his lifetime. You can afford to spend a lot of money acquiring high-quality customers; it will pay for itself very quickly.” Offering handset subsidies increased customer-acquisition costs. Della Valle, however, remained unconvinced that incurring higher acquisition costs through subsidies in order to get the “high-quality” customer was relevant to the Italian market. She felt that subsidizing cell phone costs would not substantially increase subscriptions, as Italians were willing to pay full price for their handsets:

It’s not as simple as Omnitel just making a significant investment in each customer in the beginning and reaping its benefits later. The Italian market is different. Here, people seem quite willing to pay for the access. People like to show off to their friends that they have the most fancy, most expensive, most technologically advanced handset available, and they are willing to pay the price for it. People here would be embarrassed to be seen with some of the phones that are sold in the U.S. and Germany because they are so fashion conscious. The kind of phone one uses is an expression of one’s personality.

Colao agreed:

You have to understand the Italian mind-set: Italians are far more impulsive in their purchases than Americans, for example. Americans are more rational in their purchases. They will set aside a Saturday afternoon to go to the mall to make a purchase. In Italy, the layouts of

13 Churn rate for the given time period is defined as the number of customers disconnecting the service divided by the average number of customers enrolled in the service.

14 Kris Szaniawski, “Mobile Communications,” 1996 Pearson Professional Ltd., September 5, 1996.

15 Bell Atlantic International Inc., Air Touch International Inc., Cellular Communications International Inc., and Lehman Brothers Holding Inc.

501-002 Omnitel Pronto Italia

the cities are such that you are constantly passing by a lot of stores where you can see these phones displayed. If people see something they like in a store window, they will be more inclined to make an impulse purchase.

Cellular Phone Distribution

Omnitel sold its handsets through 2,000 shops that sold consumer electronics goods and telecommunications goods and services. Both TIM and Omnitel paid the cellular phone distributors a Lit. 40,000 commission for each account that they activated, and neither made any profit on the handsets sold. When Omnitel was encountering difficulties in expanding its customer base, some distributors approached Omnitel and said, “Give us more commissions, and we will promote your product over TIM’s.” Both Bona and Della Valle opposed this idea. “What’s the point? If we increase commissions, tomorrow TIM will also increase its commissions. Only the dealers will win out, while we get into a war with TIM about dealer commissions,” Bona explained. Rather, Bona felt that the key to solving Omnitel’s distribution problem was the customer. “It is the customer who needs to go into a store and say, ‘You don’t sell Omnitel phones, I am looking for an Omnitel phone.’ But we first need to create that desire in the customer to own an Omnitel phone.”

Exploring Options

Market Research

In an effort to increase its market share, Omnitel decided to conduct market research, interviewing more than 5,000 current and potential customers. “We wanted to better understand the minds of the customers,” Bona explained. “What their expectation was from a new entrant like Omnitel and what they thought about our positioning in terms of customer service.” The results indicated that the customers were very happy with Omnitel’s customer service.

However, an overwhelming majority of those surveyed resisted paying the monthly fee. One customer seemed to speak for many:

I like the way Omnitel has positioned itself because I have never heard a polite word from TIM’s customer service. But what I’d really like to have in terms of cellular phone service is not to have to pay a monthly fee. Why should I have to pay a tax every month to use the phone? I want to pay for the service when I use it; I don’t want to spend money when I am not using it. With a monthly fee, I am charged a minimum whether or not I use the cellular phone.

The above statement was in direct contrast to consumers’ experience in the United Kingdom. Bona related what he had heard from a U.K. customer:

When I first signed up for a cellular phone, I got the phone for free, but I had to sign a contract for a year, which seemed all right at that time. But I was shocked to see my bill at the end of the first month. It was so very high. It included the connection fee, the activation fee, and the monthly fee. I felt duped because of all these other charges. I discontinued the service as soon as the contract was up.

As the results were compiled, it was clear to both Della Valle and Bona that the monthly fee was an issue of contention. But eliminating it would not be an easy task. Della Valle explained:

Omnitel Pronto Italia 501-002

First, if Omnitel eliminates the monthly fee, TIM will view it as a price cut, and the last thing we want to do is give TIM the impression that we want to engage in a price war. Second, how will the economics work? Only if customers start using their phones a lot more will eliminating a monthly fee not hurt us. It is, after all, the monthly fee that saves our economics when customers buy the phone and never use it. Third, there is the issue of dealer commissions. We pay the dealers a commission for each phone that they sell. This system works well if there is a monthly fee, because the customer is bound to a contract to pay us a minimum each month for a certain period of time. However, if we eliminate the fee, we will pay dealers up front, without any guarantee of future revenue from a customer because the customer can buy the phone and not make any calls on it. All three issues are big risks for us.

However, Bona believed that by eliminating the fee and implementing several of the strategies that he had charted out in his proposal, Omnitel could increase both the number of subscriptions and the volume of usage.

The market research results also indicated that customers liked to talk on their fixed-line phones in the morning until they got in their cars. In the evenings, since the off-peak period for cellular phones did not start until 8:30 p.m., they were using their fixed-line phones to make their calls. Indeed, the peak period on fixed lines was in the early evening. The market research further revealed the perception of the Italian people toward cellular phones. Since TIM had always marketed the cellular phone as a status symbol, it was exactly how the Italian consumer perceived it: the cellular phone was a possession that was both expensive and exclusive, something that only people of a certain stature had the right to own. Bona and Della Valle felt that this perception was obvious throughout in the market research. “Customers seem to have a psychological barrier against cell phones because of the image that TIM has created in the market,” Bona stated. “Omnitel is going to completely alter that perception.”

Conjoint Analysis16

Omnitel also conducted a conjoint analysis. Conjoint analysis was a research tool used to uncover consumer preferences for alternative product designs and pricing options. With this methodology, Omnitel analyzed the relative importance of different attributes to current users of cellular services. Individuals taking part in the analysis were given a set of product descriptions in terms of cellular services attributes such as tariffs, service, and peak/off-peak rates and were asked to rank these product profiles in order of preference. Next, using cluster analysis,17 the individuals studied were divided into four value-based segments—those loyal to the brand, those sensitive to service, those sensitive to cost, and finally those sensitive to the monthly charge and peak rates. (The relative importance of the different attributes for these four segments, segment size, and segment-specific characteristics are available in Exhibit 6.) A similar exercise was repeated for prospects as well as for those who had considered but rejected cellular services recently. (See Exhibits 5 through 8 for details.)

The results of the conjoint analysis also indicated that customers wanted a different set of tariffs for local calls, long-distance calls, and international calls. At the time, TIM offered its customers Lit. 170 per minute regardless of whether the call was local, long distance, or international. The analysis

16 Conjoint analysis information has been extracted from Professor Robert J. Dolan, “Conjoin Analysis: A Manager’s Guide,” HBS Case No. 590-059.

17 Cluster analysis is a procedure by which the data matrix containing the value system of each individual can be clustered. See Dolan, HBS Case No. 590-059.

501-002 Omnitel Pronto Italia

also indicated that customers did not mind paying more than Lit. 170 per minute up to Lit. 200 per minute.

Trends in Europe

For Omnitel managers, analyzing mobile trends in Europe was another way to generate and evaluate options. The European cellular industry was still at its infancy at year-end 1995. Overall penetration was at 5.0%, with 22.5 million customers. (See Exhibit 1 for penetration rates.) The Scandinavian countries led the pack with an average penetration of over 20% while France, Belgium, and Spain had penetration levels at 2.1%.18 Analysts expected strong growth in the European cellular market for the next several years. (See Exhibit 1 for subscriber growth.) Research analyst Stuart Birdt19 explained at an analyst forum:

First, cellular penetration rates are relatively modest both in absolute terms and relative to GDP [gross domestic product] per capita. Second, “value for money” of the service continues to increase due to the combination of reduced cost of the service and improved quality of service. Third, all cellular operators in Europe have adopted the GSM digital standard, which allows customers to use their cellular phones throughout Europe and many other parts of the world. Fourth, many European countries are beginning to have more than one mobile operator—leading to increased marketing of cellular services, which should improve customer awareness and help stimulate demand.

The issues facing Europe are similar to those elsewhere in the world. As overall penetration rates increase, average revenue per customer should continue to decline due to lower revenues per marginal customer. In order to achieve the projected penetration rates, cellular operators will increase their overall marketing efforts, which could increase subscriber acquisition costs. Also, the emergence of additional mobile operators and a more competitive market could place downward pressure on prices and upward pressure on costs. However, we remain very positive on the growth prospects for cellular services in Europe.

The Omnitel managers also had their eyes on the specific European countries where several strategies and trends were emerging in the mobile phone market. (See Exhibit 9 for country and market statistics.)

Scandinavia

All three Scandinavian countries had very high penetration rates primarily due to their highly educated and wealthy populations (see Exhibit 9 for GDP per capita), which had always been early adopters of technology. Mobile phones were also more cost effective than fixed-line phones in Scandinavia because of the countries’ vast size and low population density.20 Also, because of a high standard of living, many Scandinavians had second, weekend homes and preferred to just use a mobile phone at their second home.

18 The Analyst Forum, Goldman Sachs Global Research, December 12, 1995.

19 Stuart Birdt, Goldman Sachs.

20 “Survey: Telecommunications: To the Finland Base Station,” The Economist, October 9, 1999.

Omnitel Pronto Italia 501-002

Finland The telecommunications market in Finland was the most sophisticated in Europe with a high degree of liberalization starting in 1985, which led to increased competition and a high-quality infrastructure. The increased competition forced players to offer new and innovative products to their customers. Two operators dominated the cellular market in Finland. The first, Telecom Finland, had roughly two-thirds of the market. The second, Finnet Group, through its associate company Radiolinja, had the remaining share.

Cellular operators had reached a penetration rate of 20% by year-end 1995. In addition to the reasons mentioned above, Finland’s high penetration rate was attributed to the presence of the popular mobile phone vendor Nokia, which had its base in Finland.21 Market penetration was expected to increase to 41.3% by 2000. Cellular operators in Finland competed primarily on service quality rather than prices. The average usage rate per subscriber in Finland was much higher than the average usage rate for Europe. Finnish operators were different from other European cellular operators because they offered negligible dealer commissions and no handset subsidies (offering a handset subsidy was illegal in Finland).22 Fixed charges, connection fees, and monthly charges were low in Finland, largely due to the lack of subsidies.23 In addition, Finland’s churn rate, at 12%, was one of the lowest in Europe. Analysts expected to see continued expansion of the customer base, although they expected the proportion of lower-spending customers to increase primarily due to increasing volumes among existing customers.24 (See Exhibit 10 for tariffs.)

Sweden The Swedish telecommunications market had a penetration rate of 23.4% by year-end 1995 and was expected to increase to 55% over the next 10 years. Sweden’s usage rate was between 100 and 110 minutes per month per subscriber.25 Sweden had very high acquisition costs because of high dealer commissions and handset subsidies as well as a high churn rate of 20.5% during 1995. Both handset subsidies and dealer commissions had been instrumental in attracting new customers.26 Handset prices were expected to fall, and analysts predicted that operators would be able to reduce their dealer commissions without restraining subscriber growth.27 In addition, analysts expected to see significant reduction in prices of lower-end services as opposed to regular mobile services as cellular phones slowly replaced fixed-line phones.28

Liberalization in Sweden enabled the entrance of a large number of cellular operators. The country had three prominent players in its mobile telecom market. The first, Telia, the dominant telecom company with a market share of 71.6% at year-end 1995, started in 1981. In an effort to stay competitive, Telia was looking at international expansion as well as vertical expansion. The second, Europolitan, had a market share of 7.3%. The third, Comviq, commenced operations in 1981 as an analog operator and began digital operations in September 1992. Comviq had the remaining share of the market. The three operators had different strategies. Telia capitalized on its significant financial

21 Ibid.

22 “Cellular Growth Analyser,” SBC Warburg Dillon Read, October 23, 1997.

23 Telecom Finland Annual Report, 1996.

24 Helsinki Telephone: Handelsbanken Markets, January 1998.

25 “NetCom Systems AB: Telecommunications Sweden,” SBC Warburg, June 11, 1997.

26 Ibid.

27 Ibid.

28 Telia: Handelsbanken Markets, October 1997.

501-002 Omnitel Pronto Italia

resources and long-standing relationships with large business users.29 Europolitan primarily focused on high-end business users and, as a result, had fewer subscribers but higher revenue per subscriber than Comviq.30 Comviq viewed its wireless business as a mass-market product and attempted to attract both business and private users.31 (See Exhibit 11 for tariffs.)

Norway The Norwegian mobile phone market had a penetration rate of approximately 25.1% at the end of 1995. Norway had two key players competing in the mobile telecommunications market: TeleNor and Netcom Asa. TeleNor began its operations in 1982 and had a majority market share of 65%. Netcom Asa, which launched its service in 1993, had the remaining market share of 35%. A majority of Netcom’s customers were private or non-business customers whom Netcom attracted through aggressive marketing efforts.32 Netcom also targeted its marketing efforts toward small and midsized companies with up to 500 employees. TeleNor, on the other hand, had considerable control over the market for large companies.

To increase traffic, both operators had begun to reduce their tariffs. (See Exhibit 12 for tariffs.) Both operators, like most of their European counterparts, faced a high churn rate of 22% during early 1996. To combat this problem, the operators were focusing on creating loyalty among their high-end customers through quality service, rather than offering further price reductions to their low-end customers.33 The low-end customers were much more sensitive to changes in prices and often chose and changed subscriptions according to the prices they were offered.34 The operators marketed their services directly to the end user through dealers whom they controlled or with whom they had close relationships.35 The operators paid the dealers responsible for selling the handsets a commission to encourage sales. Operators also offered subsidies on handsets but expected subsidies to decline since phone prices were also expected to fall over the next few years.

United Kingdom

In the United Kingdom, the mobile market had a penetration of 9.3% by December 1995, with continued strong growth expected in the next 10 years. The cellular companies hoped to stimulate demand by offering lower handset prices and continued subsidies. The usage rate ranged from 160 to 170 minutes per month per subscriber.

Vodafone and Cellnet were the dominant players in the United Kingdom’s mobile market, with 43.0% and 42.3%, respectively. Along with two other companies—Orange, with a 7.3% market share, and Mercury One2One, with a 7.4% market share—they totaled 5.4 million subscribers by year-end 1995.36 Both Vodafone and Cellnet had a geographic coverage of over 89% within the United Kingdom and roaming access to over 120 networks in 70 countries. Neither of the other two competitors came close to offering this breadth of coverage.

29 “NetCom Systems AB: Sweden Research,” Goldman Sachs, September 10, 1996.

30 Ibid.

31 Ibid.

32 Ibid.

33 “Netcom ASA,” Enskilda Securities, August 18, 1997.

34 Ibid.

35 “Netcom GSM: Norway Research,” Goldman Sachs, April 1, 1996.

36 “Orange plc: U.K. Research,” Goldman Sachs, January 19, 1996.

Omnitel Pronto Italia 501-002

The emergence of Orange caused a significant change in the pricing, usage, and growth in the U.K. wireless industry.37 Vodafone introduced a series of new tariffs that included “bundled” minutes, with lower prices, in response to the success Orange had in attracting customers; other operators offered special promotions, including a fixed number of free minutes of airtime per month for a specified number of months.38 (See Exhibit 13 for tariffs.) Although cellular phones were mostly used by high-end business customers, companies were beginning to target the less wealthy business community.39 The subscriber acquisition costs were high in the United Kingdom because of the huge subsidies on handsets. The top-of-the-range handsets received subsidies of up to £25040 (£1= $1.58). In addition, a study by Andersen Consulting in early 1996 indicated that the United Kingdom had the highest churn rate in western Europe at 28%. 41

Telecommunications in the United Kingdom was regulated; therefore, it had a special structure whereby dealers purchased airtime at wholesale rates from the cellular operators and retailed the cellular service to their subscribers.42 These dealers sold not only their own service but also branded services like Vodafone’s, earned commissions for signing up new customers, and retained a percentage of the revenues generated by the customers. In addition to selling services to customers, they sold handsets and were responsible for the billing of the service (and assumption of the risk of bad debt and fraud) as well as all customer service functions.

LIBERO: The New Proposal

Armed with results of the market research and conjoint analysis, Della Valle and Bona were very conscious that they needed to avoid getting into a price war with TIM under any circumstance. Rather, they wanted to focus on building Omnitel’s market share through segmentation and pricing innovation. Since TIM offered only two different plans (Eurofamily and Europrofessional), Della Valle saw a definite opportunity for Omnitel. “If we can further segment the market in terms of needs, attitudes, pattern of usage, demographics, and certain other characteristics,” she explained, “we can achieve greater penetration by creating customer loyalty." The new proposal that Bona had prepared with Della Valle’s help would not only be a major commercial launch for Omnitel but also its first step toward pricing innovation.

Della Valle and Bona wanted an Italian name for Omnitel’s next new plan, and LIBERO seemed like the perfect name. LIBERO meant “free” in Italian, and they wanted to market the name to mean that it was a plan “free of taxes and monthly fees.”

No monthly fee By eliminating the fee, Omnitel would be able to increase not only the number of subscriptions but also the volume of usage. The per minute charge of Lit. 195 would be higher than TIM’s rate of Lit. 170 per minute. Bona and Della Valle did not want to focus on the price of the plan but on the concept of no monthly fees.

37 Ibid.

38 Ibid.

39 “Vodafone Group,” Smith Barney Analyst Report, September 9, 1996.

40 “Telecom Italia Mobile,” SBC Warburg Analyst Report, September 25, 1996.

41 Kris Szaniawski, “Mobile Communications: 1996,” Pearson Professional Ltd., September 5, 1996.

42 “Orange plc: U.K. Research,” Goldman Sachs, January 19, 1996.

501-002 Omnitel Pronto Italia

Advertising and distribution Bona’s proposal included opening shops in strategic locations such as downtown Milan and the Milan airport as well as through franchising. Bona explained:

If we are able to create a demand for the Omnitel cellular service, then the rest of the distribution will need to carry Omnitel phones because otherwise they will lose sales. So, instead of offering dealers increased commissions to promote our services, we are going to put that money into our advertising campaign to create this incredible demand for Omnitel’s cellular phones. With LIBERO, we will not offer any handset subsidies nor will we increase commissions to dealers, even though some dealers have been asking us for more commissions. With the no-monthly-fee concept, we will greatly increase our customer base, because that’s what customers want. So, even though dealers won’t be making large commissions, they will be making more of them. This increase in our customer base is also going to build traffic in the dealers’ stores. They are going to thank us one day for the tremendous volume we will bring them if we implement the LIBERO plan.

Next Steps

Bona wanted to dramatically change the rules. He believed that cellular phones would become the main mode of communication. To accomplish this goal, Omnitel could pursue one of two options. The first option, which Bona supported, would include eliminating the monthly fee but charging full price for the handset. The other option, which Caio seemed partial to but Bona thought was not the appropriate path for Omnitel and the Italian market, would include offering a heavily subsidized handset to customers in exchange for signing a contract for a certain period with Omnitel and paying monthly fees.

Bona knew that if he wanted Caio to seriously consider his proposal, he would have to convince Caio of three things. First, eliminating the monthly fee would not lead Omnitel into a price war with TIM. Second, eliminating the much-detested monthly fee would increase Omnitel’s customer base far more than if it were to offer handset subsidies. Third, even without the minimum monthly fee from its customers, Omnitel would be able to receive more revenues because of the sheer increase in the overall call volume. Finally, even if he could find satisfactory answers to these questions, he still had to worry about how to communicate this plan to the end users and get the support of the dealer network. With these thoughts in mind, Bona leafed through his statistics (Exhibits 14 and 15) and began wondering if he needed any last-minute modifications to LIBERO.

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Omnitel Pronto Italia 501-002

Exhibit 3 History of Omnitel

Date Event

1990:

June................................. Omnitel Sistemi Radiocellulari Italiani established.

December ........................ Omnitel presents to the PTT Ministry its request to run a GSM cellular license in Italy.

1994:

January............................ Omnitel and Pronto Italia agree to form Omnitel Pronto Italia.

November ....................... PTT Ministry considers request.

1995:

January............................ An extraordinary shareholders’ meeting agrees to increase capital from Lit. 650 billion to Lit. 1,450 billion.

February .......................... A presidential decree officializes agreement between Omnitel and Ministry.

May.................................. First advertising campaign for Omnitel

Agreement with Telecom Italia on carrier charges/usage of fixed network

July .................................. “Preoperation” announcement

October............................ Agreement with TIM on national roaming

November ........................ Raises fund for project financing

December ........................ Public service begins on December 7 on 40% of territory or 60% of Italian population; 1.3% of market.

1996:

January............................ Omnitel has 60,000 clients in its first month of service.

May.................................. Coverage extended to 50% of territory.

Source: Company.

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Omnitel Pronto Italia 501-002

Exhibit 5 Random Sample Structure (percentage)

Basea

Research Sample

Age:

18–24 8 18 25–34 34 24 35–44 25 18 45–54 15 20 55–64 18 20

Sex:

Male 59 45 Female 41 55

Education:

Elementary degree 3 22 Junior high school degree 23 29 Senior high school degree 60 38 University 14 10

Social Class:

High 11 18 Medium/High 32 23 Medium 57 59

Occupation:

Professionals 14 5 Employees 38 34 Self-employed 21 18 Housewives 13 18 Students 5 10 Retired 6 10 Others 3 6

Source: Omnitel market research.

aBase: 18–64 years old, social class at least medium, living in towns of 10,000-plus people, excluding blue collars.

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501-002 Omnitel Pronto Italia

Exhibit 11 Sweden Tariff Comparison

Consumer Plan Comviq Telia Mobiltel Europolitan Connection feea $30.00 $0.00 $0.00 Monthly subscriptionb 18.80 22.46 22.46 Airtime peak 0.66 0.72 0.72 Airtime off peak 0.12 to 0.24 0.24 0.24

Source: Extracted from “NetCom Systems AB: Sweden Research,” Goldman Sachs, September 10, 1996.

Note: Exchange rate: US$1 = SEK 6.68.

aOne-time fee charged to subscribers to initiate service.

bMonthly subscription fee covers call costs up to the amount of the monthly fee.

Exhibit 12 Norway Tariff Comparison

Consumer Plan NetCom asa Telenor Mobil Connection feea $57.00 $40.72 Subscription 8.14 8.14 Airtime peak 1.14 1.14 Airtime off peak 0.49 0.49

Source: Extracted from “NetCom GSM: Norway Research,” Goldman Sachs, April 1, 1996.

Note: Exchange rate: US$1 = NOK 6.14.

aOne-time fee charged to subscribers to initiate service.

Omnitel Pronto Italia 501-002

Exhibit 13 U.K. Tariff Comparison

Call Chargesb Operator/Consumer Plan

Connection Chargea

Monthly Charge

Inclusive Minutes Peak Off Peak

Charge Periodc

Orange

Talk 15d $47.40 $23.70 15 0.40 0.30 1 second Talk 60d $47.40 $39.50 60 0.32 0.16 1 second Vodafone (GSM)

Personal Worldb $39.50 $23.70 None 0.55 0.24 60 sec/30 sec Personal World Extra $47.40 $35.55 50 0.47 0.16 1 second Cellnet (GSM)

Frequent Caller-Plus $79.00 $39.50 None 0.40 0.16 60 sec/30sec Regular Caller-Plus $39.50 $23.70 None 0.55 0.24 60 sec/30 sec Mercury One2Onee

Bronze Service $47.40 $23.70 None 0.40 0.08 1 second Silver Service $47.40 $39.50 None 0.24 0.08 1 second Gold Service $47.40 $55.30 None 0.24 0.08 1 second

Source: Extracted from “Orange plc: U.K. Research,” Goldman Sachs, January 14, 1996.

Note: Exchange rate: US$1 = £0.63.

aA one-time fee charged to subscribers to initiate service.

bThese tariff schemes provide loyalty discount of 5% after one year and 10% after two years.

cInitial minimum charge period and billing increment thereafter.

dNumber of free minutes included in the fixed monthly charge.

eMercury One2One tariff schemes include weekend free local calls.

501-002 Omnitel Pronto Italia

Exhibit 14 European Mobile Markets

Subscribers Prior to

Competition (000s)

Subscribers June 1996

(000s) Net Change

(000s)

Subscribers of New

Operators (000s)

New Operator Market Share

Denmark 210 1,254 1,044 461 44% Finland 356 1,335 979 230 24 France 170 1,961 1,791 744 42 East Germany 840 2,140 1,300 700 54 West Germany 2,140 4,953 2,813 390 14 Italy 3,800 5,220 1,420 502 35 Netherlands 480 846 366 140 38 Portugal 27 451 424 237 56 Sweden 675 2,328 1,653 712 43 United Kingdom 1,900 6,198 4,298 1,067 25

Total/Average 9,758 25,847 16,089 5,183 32

Source: Extracted from Société Générale Strauss Turnbull Securities Ltd., October 1996.

Exhibit 15 Estimated European Cellular Subscribers Growth, 1995–2004E

Year-end 1995 Year-end 1998E Year-end 2004E 1994– Country

Sub- scribers Penetration

2004E CAGR

Belgium 212 2.1% 573 5.6% 1,603 15.5% 29%

Denmark 659 12.7 1,049 20.0 1,869 35.1 14

Finland 1,024 20.1 1,462 28.4 2,162 41.3 13

France 1,371 2.3 4,125 7.0 11,455 19.2 29

Germany 3,471 4.2 7,613 9.3 18,333 22.2 22

Italy 3,794 6.5 8,050 14.1 17,350 30.4 23

Netherlands 503 3.3 1,261 8.1 3,361 20.8 26

Norway 1,090 25.1 1,633 37.4 2,093 47.4 14

Portugal 293 2.8 658 6.7 1,323 13.2 23

Spain 871 2.2 2,832 7.2 6,932 17.5 33

Sweden 2,066 23.4 2,911 32.6 4,046 44.5 11

United Kingdom 5,416 9.3 11,988 20.3 19,765 32.7 18

Source: Extracted from Mobile Communications, November 30, 1995.

Harvard Business School 9-582-087 Rev. August 1, 1985

Assistant Professor George S. Yip and Jeffrey R. Williams, research assistant, prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 1982 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

U.S. Retail Coffee Market (A)

On the evening of July 17, 1975, an icy wind blew up from Antarctica across southern Brazil, destroying over one billion coffee trees in the nation that supplied one-third of the world's coffee. This disastrous frost was followed closely by civil war in Angola, an earthquake in Guatemala, and a drought in Colombia—events that took their toll on those countries' coffee production. Between coffee years 1975–1976 and 1976–1977, total exportable world production dropped 20%. Green coffee prices moved rapidly from a prefrost $0.70/lb to a peak of $3.40/lb. in April 1977.

Before the frost the U.S. coffee market of the 1970s had been declining gradually in unit volume. Retail prices had risen on average 9.5% per year from 1970 to 1975. Per capita cup consumption had continued to decline from its 1962 peak of 3.1 cups per day, reaching 2.2 in 1975.

The frost aggravated this situation. Average retail prices jumped from about $1.19 per "equivalent pound" in 1975 to a high of $3.94 in June 1977. (One "equivalent pound" is 16 oz. of ground roast coffee or about 4 oz. of instant, or soluble, coffee.) These price increases led some American coffee consumers to organize boycotts; a group of New Yorkers carrying signs reading "Don't Let Brazil Grind You" and "I'm Stewing, Not Brewing" ceremoniously dumped a pound of coffee into the Hudson River in a symbolic New York Coffee Party. Sales plummeted; total monthly market volume in mid-1977 fell by a third from levels a year before.

By mid-1978, however, world coffee supplies had recovered to 90% of prefrost levels, and the average price of green coffee had declined to $1.96 per pound. Nevertheless, it was doubtful that prices would ever return to their prefrost levels. Monthly sales volume was also recovering, although still about 20% below levels of two years before.

In this context, in mid-1978, U.S. coffee producers were evaluating the prospects for the coffee market and their individual positions in it.

582-087 U.S. Retail Coffee Market (A)

Coffee Bean Growth and Exportation

The coffee bean grew on trees and was commercially produced in 79 countries and territories, generally in the tropics. Export coffee left grower countries primarily in the form of green beans, which were roasted and processed in consuming countries. Most producing countries belonged to the International Coffee Organization (ICO), whose main objective was to support coffee prices.

Product Terminology

The terms ground, soluble, spray-dried, freeze-dried, and so on, were used by producers, not necessarily by consumers. A 1977 study by a major producer reported considerable consumer confusion about both product form and type, with "freeze-dried" generating the most confusion. Decaffeinated was the only term broadly understood by consumers. Ground roast coffees were referred to in many ways: perked, percolated, ground, and drip. Instant was perceived as a generic description of soluble coffee (including freeze-dried), although soluble was definitely not a consumer term.

Coffee Products and Production

Ground roast coffee. Before the 1830s the American coffee consumer could purchase only green coffee beans, to be roasted and ground at home. By the 1880s commercial coffee roasters were widespread, and at the turn of the century branded ground roast coffees, such as Maxwell House, began to appear. (Exhibit 1 shows coffee market milestones.)

Apart from some technological advances, ground roast coffee manufacture in 1978 used the process developed a century earlier. The green coffee beans were roasted in ovens with revolving cylinders. After roasting they were cooled, then mixed with other varieties in a predetermined blend. By manipulating the blend, a roaster could vary not only the flavor but also the price of the final product. Finally, the roasted beans were ground. Approximately 1.2 lbs. of green beans made 1 lb. of ground roast coffee.

Different brewing methods required different grinds. In 1978 two brewing methods predominated: percolator and drip.

Machine Usage Ground Coffee Users

Electric drip 38% Electric percolator 29 Regular percolator 15 Drip pot 8 Other 10

A percolator, electric or regular (stove-top), cycled hot water repeatedly through the coffee and required a coarser grind, known as regular or electric perk grind. A drip coffee maker passed hot water once through coffee in a filter and required a relatively fine grind, known as drip or automatic drip. This latter had grown increasingly popular in the 1970s with the advent of automatic electric drip coffee makers, such as the Mr. Coffee unit promoted in TV advertising by Joe DiMaggio, the American baseball star of the 1940s and 1950s. The taste of liquid coffee, whether ground or soluble, depended a great deal on the water used to make it.

U.S. Retail Coffee Market (A) 582-087

Soluble coffee. The manufacture of soluble coffee required substantially more processing than did ground. After the green beans were roasted, blended, and ground, the soluble solids in the coffee were extracted through percolation. It took about 2.5 lbs. of green beans to make 1 lb. of soluble coffee.

The resulting coffee extract was then either spray-dried or freeze-dried. The high temperatures of spray-drying unavoidably diminished the flavor. Some spray-dried coffees were packaged in powder form, but most went through two additional steps: agglomeration, in which the powder was formed into small chunks resembling ground coffee, and aromatization, in which volatile aromatic compounds usually lost in processing were recovered to give more fresh-ground aroma.

Freeze-drying, although considerably more expensive, preserved more flavor than spray- drying because it subjected the coffee to less heat. Maxwell House had introduced freezedried coffee to a test market in 1964 with the Maxim brand; Nestlé had quickly followed with Taster's Choice, resulting in rapid growth of this coffee form.

Decaffeinated coffee. Among the soluble solids in the coffee bean was a white, tasteless powder called caffeine. Coffee had long been prized for caffeine's stimulant properties, but in the twentieth century concerns arose that caffeine might, for some people, be associated with nervous tension and/or difficulty sleeping. As a result, processes were developed to remove it from coffee; the first decaffeinated coffee, Sanka, was introduced in 1926. The decaffeination process did not materially affect the weight of the green beans; the same weight was needed to make either caffeinated or decaffeinated coffee.

Later studies had suggested that methylene chloride, the most commonly used solvent in decaffeination, might be a carcinogen. Coffee processors disputed this, citing other studies which found no health risks. Nonetheless, in 1978 most were considering alternate decaffeination methods.

Other modified coffees. The postfrost rise in coffee prices had resulted in two types of coffees that allowed more cups per pound or a lower price per cup. Extended coffee combined ground coffee with roasted grain or chicory, yielding a beverage that approximated the taste of 100% coffee. (Except for long-established regional brands, such as Luzianne in New Orleans, the market for this type of coffee historically declined significantly when price levels receded.) The second type, increased-yield coffee, applied a technological solution: By puffing the beans before grinding, or by rolling or slicing the beans into flakes, more coffee cells could be exposed to the brewing water, enabling extraction of a higher percentage of soluble solids. Coffees of this type, such as Folger's Flaked, were packaged in 13- oz. cans and promised the same number of cups as a full pound of regular coffee.

Flavored coffees, such as General Foods (GF) International Coffees, contained soluble coffee flavored with sugar, chocolate, cinnamon, orange, or licorice.

Packages and Prices

Ground roast coffee, whether caffeinated or decaffeinated, was most often vacuum-packed in 1-, 2-, or 3-lb. cans, with size preferences varying regionally. A vacuum bag, long popular in Canada, was in 1978 well established only in the southeastern United States. Soluble coffee was packaged in glass sealed with a carbon dioxide purge to prevent oxidation. Jars ranged from 2 oz. to 14 oz., with 10 oz. the most popular size for spray-dried and 8 oz. the most popular for freeze-dried and decaffeinated. A few soluble coffees, such as GF International Coffees, came in tins.

582-087 U.S. Retail Coffee Market (A)

Retail prices varied with green coffee prices and market conditions; July 1978 average retail prices are shown in Table A.

Table A Average Retail Coffee Prices, July 1978

Ground (1 1b.)

Freeze-Dried (4 oz.)

Spray-Dried (4 oz.)

Brand Caff. Decaff. Caff. Decaff. Caff. Decaff.

Major national $2.96 $3.67 $2.75 $2.97 $2.05 $2.75 Regional 2.72 na na na na na Private label 2.70 na na. na 1.78 na Extended 2.48 na na. na 1.87 na Increased yield 2.55 na na na na na

Prices for individual brands could also vary by region. A regional roaster, for example, might price at parity, with the national brands in markets where its consumer franchise was strong, but as a bargain brand in markets where it had no loyal following.

It was difficult to compare directly the prices of different forms of coffee, because different quantities of each were needed to make liquid coffee of equivalent strength. Producers had developed the "equivalent unit" to match the three forms according to the average number of cups consumers made from each. These equivalents reflected not only the greater concentration of soluble coffee, but the average tendency of soluble's drinkers to make their coffee weaker, thereby getting even more cups for a given weight. The equivalents were national averages (consumers in the eastern United States made stronger coffee).

An equivalent unit constituted 12 lbs. of ground roast or 3 lbs. of spray-dried or freeze-dried coffee. Thus, on average, consumers made about four times as many cups from soluble, per given weight. Because soluble had a retail price of about two and a half to three times that of ground on a per-ounce basis, but made four times as many cups, the average per-cup cost of soluble was between 45% and 75% that of ground. Coffee marketers were uncertain about whether consumers understood these price comparisons. Furthermore, consumers had been making their coffee weaker since the frost. Historically the average had been about 60 to 70 cups per pound of ground, or per 4 oz. of soluble, but it had risen to perhaps 90 cups by 1978.

Consumption Patterns

Coffee versus Other Beverages

Despite a 15-year decline, coffee was, in 1978, still Americans' favorite beverage. Eighty percent of those over 10 years of age drank coffee sometimes, and almost 60% drank it on any given day. This preference was followed by soft drinks, milk, and juices (see Table B). The incidence of coffee drinking was highest among those over 30, and soft drink and milk consumption was highest for those under 30.

U.S. Retail Coffee Market (A) 582-087

Table B Regional Beverage Consumption, 1978

1. Percent Drinking Beverages on a Given Day

Census Regiona

Total Northeast North Central South West

% of Population 100 22 27 32 19 % Drinking:

Coffee 58 65 57 55 56 Tea 33 34 28 40 25 Soft drinks 54 48 57 60 45 Milk, milk drinks 49 43 56 43 57 Cocoa, hot chocolate 2 3 2 1 2 Fruit and vegetable juices 39 46 36 36 39 Beer 12 13 13 11 12 Liquor, cocktails 11 14 10 9 14 Other 1 1 1 1 1

2. Total Percent Drinking Beverages "Yesterday" by Age Group

Age Coffee Tea Soft Drinks Milk Drinks Juices

10-14 5% 22% 70% 89% 49% 15-19 15 27 78 74 39 20-24 40 30 71 56 38 25-29 52 37 69 43 38 30-39 72 36 57 44 38 40-49 83 33 46 34 35 50-59 89 34 37 35 36 60-69 83 35 28 37 44 70 & over 77 40 17 36 39

Total 58% 33% 54% 49% 39%

Source: Winter 1979 ICO study. (This, and other ICO studies, interviewed about 7,500 respondents by telephone.)

Note: Base is all persons aged 10 or over (about 190 million in 1978). Question was asked for a specific day, "yesterday. " a. The Northeast census region extended from Pennsylvania and Delaware to Maine; North Central was bounded by North Dakota, Kansas, and Ohio; South stretched from Texas through Kentucky and Maryland and all points south of those states; West included Montana, Wyoming, Colorado, and New Mexico.

Coffee Usage

Time and place of consumption. Most coffee drinkers (75% of volume) drank most of their coffee at home, and almost half of all coffee was consumed at breakfast. Forty percent drank their coffee without sweeteners or lighteners (cream or milk), 25% with lighteners only, 10% with sweeteners only, and 25% with both.

Coffee drinkers' attitudes. Research studies suggested that coffee drinkers knew what they wanted in a cup of coffee. The most important qualities cited were taste, value, sociability, absence of negative side effects, convenience in making, and intangible benefits of relaxation. Moreover, a significant number of drinkers felt that their brand of coffee was lacking in some of these qualities (see Exhibit 2).

Ground versus soluble. Users of ground coffee seemed to attach more importance to coffee as part of their life-style, probably because of their heavier usage (Exhibit 2). Moreover, consumers of ground coffee appeared to feel more strongly about this form's ability to deliver important sensory and social benefits. Soluble users, on the other hand, seemed to have made a tradeoff between these

582-087 U.S. Retail Coffee Market (A)

attributes and convenience. Dual users of ground and soluble drank the most coffee per day. The Winter 1979 ICO study, which sampled 7,500 respondents, revealed the following:

Percent Coffee Drinkers

Cups/Day/Drinker

Ground only 53% 4.1 Soluble only 34 3.0 Dual users 13 5.1

There were also demographic differences between users of ground and soluble coffee.

Age. There were more ground coffee than soluble coffee drinkers, at all age groups, except 70 and over.

Sex. More men than women drank ground coffee, and they drank more of it. More women drank soluble. Women made 80% to 85% of purchases by volume.

Location. Usage was more widespread in the Northeast, but North Central users drank more cups per day.

Education and income. Ground coffee users were somewhat more upscale than soluble users. There was also a marked decrease in coffee usage as education level increased.

Caffeinated versus decaffeinated. Only 13% of the U.S. population over 10 years of age regularly drank decaffeinated coffee, compared with total coffee usage of 58%. Decaffeinated usage was higher among women, and in the Northeast. The same 1979 ICO study showed:

Total Percent Drinking

Total Coffee Decaffeinated

Total 58% 13% Female 58 15 Male 59 11 Northeast 65 17 North Central 57 12 South 55 11 West 56 11

Decaffeinated users tended to be older than caffeinated users. Exclusively decaffeinated households were smaller and had fewer female heads (FHH) employed. Exclusively caffeinated users were somewhat better educated and had higher incomes. Dual users, those who drank both caffeinated and decaffeinated, were more upscale than either group (see Table C). Table D shows that dual users also drank more cups of coffee in an average day than the exclusive groups, although consumption patterns by time of day were similar for all groups.

Some consumers believed that coffee led to specific health and emotional problems; many limited the caffeinated coffee they drank because of these fears. In one study 82% of exclusively decaffeinated users and 71% of dual users cited health factors as their reason for starting to drink decaffeinated. Other reasons cited were taste, sociability, convenience, and economy.

Conversely, among exclusively caffeinated users, the major barrier to decaffeinated usage was taste (over 50% cited it in one study). In addition, 55% of caffeinated users in that study did not believe caffeine was really bad for one's health.

U.S. Retail Coffee Market (A) 582-087

Table C Profile of Caffeinated- and Decaffeinated-Coffee Drinkers

Total Percent Drinking Exclusively

Caffeinated

Dual Exclusively

Decaffeinated

Age Under 25 4% 2% – 25-34 20 19 11% 3549 33 29 27 50-64 24 32 35 65 and over 18 17 28

Education High school or less 70 59 75 Beyond high school 30 41 25 % FHH employed 40% 39% 25%

Number in household (mean) 3.1 3.1 2.8 Income (mean in $000) $15.2 $17.9 $13.9

Table D Coffee Consumption Data

Total Percent Drinking

Percent Coffee Drinkers

Cups/Day/ Drinker

Total Coffee Drinkers 59% 100% 3.9 Exclusive caffeinated 48 81 3.7 Exclusive decaffeinated 8 14 2.8 Dual 3 5 4.6a

Source: 1978 ICO study. Sample 7,500. a. I.e., 2.3 caffeinated, 2.3 decaffeinated

Market Trends

Total U.S. Coffee Market

Before the American Revolution tea and coffee drinking had been roughly equal in North America. The Boston Tea Party and subsequent events made it highly unpopular to drink tea; thus coffee, by default, became the beverage of choice.

Per capita consumption grew from 3 lbs. green equivalent in 1830 to an all-time high of 20 lbs. in 1946. From then on, because of rising prices, increasing use of soluble coffee, greater cup-per-pound efficiencies, and the encroachment of substitutes, per capita consumption began a steady decline. A sharp drop, from 12.7 lbs. in 1976 to 9.5 lbs. in 1977, occurred as consumers reacted to record price increases after the 1975 Brazilian frost. Another measure of consumption, cups per day per capita, reached a peak of 3.1 cups in 1962, but had declined 33% by 1977.

The volume of the U.S. retail coffee market had peaked in 1963 at 175 million equivalent units and fallen by 8% to 161 million units in 1976, before the frost dropped it to 133 million units (Exhibit 3).

582-087 U.S. Retail Coffee Market (A)

In contrast to coffee, most other popular beverages had increased consumption. One source estimated the following changes in per capita consumption between 1964 and 1974:

Coffee 15% ! Tea " 23% Soft drinks 65 " Juices " 78 Milk 7 ! Distilled spirits " 43 Beer 33 " Wine " 70

Both demographic and taste changes had contributed to the decline in total coffee consumption. The under-30 population, which had the lowest incidence of coffee drinking, had increased most in size. At the same time, both the total percentage of the population drinking coffee and cups per drinker had declined since 1963 for all age groups (Exhibit 4), with particularly dramatic declines in incidence among younger age groups. Other reasons for the decline of consumption included both life-style and demographic trends and product changes (Exhibit 5). In 1978 coffee marketers forecast continuing declines in incidence and cups per drinker, but they also predicted some demographic amelioration as the "baby bulge" group aged (see Table E).

Table E Population and Consumption Data (forecast, 1978)

Population, 10 Yrs. and Over

(millions)

Total Incidence (% drinking coffee on

a given day)

Total Cups/Day/

Drinker

1963 153 72% 4.1 1973 167 64 3.6 1978 191 60 3.5

1983 200 55 3.5 1988 207 52 3.4

Source: Estimates by a major coffee marketer. Population forecasts are based on data from U.S. Census Bureau. Consumption data are not from the Winter 1978 ICO study.

Coffee Market Form Segments

There were also extensive changes among the different form segments of the coffee market (Exhibits 6 and 7).

Ground versus soluble. The split between ground and soluble coffee had held steady at 70/30 throughout the 1960s. The introduction of freeze-dried coffee in the mid-1960s had boosted soluble's share to 38% by the mid-1970s. Price increases for all coffee forms since then appeared to have been the major factor in further boosting soluble's share to nearly 44% in 1978. They had greatly widened the absolute price differential between ground and soluble and had also adversely affected freeze-dried's share within soluble coffee. Consumers seemed less willing to pay the price premium of about 33% per ounce for freeze-dried over spraydried. Freeze-dried's share within the soluble segment had peaked at 30% in 1973 and 1974, and in 1977 was down to 28%.

Caffeinated versus decaffeinated. Decaffeinated had made rapid gains in the late 1960s and early 1970s, more than doubling its share of total coffee from about 4% in 1960 to between 13% and 14% in 1975. Its share had held at 13% since, and marketers believed that its price premium had hurt decaffeinated with the subsequent high prices.

U.S. Retail Coffee Market (A) 582-087

Market Structure

The Institutional Market

Although most coffee was consumed, at home, large amounts were also consumed in public places. This institutional market accounted for about 42% of the green coffee imported in 1977—up from 33% in 1966; this increase reflected the general trend to eat out more frequently.1

The institutional market was supplied by food service distributors and a specialized channel—coffee services—that provided and maintained their clients' coffee machines and distributed coffee. In ground coffee, 11 firms shared two-thirds of the market; two major retail coffee firms, General Foods and Nestlé, held 9% and 4% respectively. The institutional soluble segment was much more concentrated; GF and Nestlé held 45% and 40% shares respectively.

The Retail Market

The retail (household consumption) coffee market was served primarily by supermarkets and convenience stores. A typical large supermarket might sell 25 branded forms of coffee, including national and regional brands, as well as its own house brand (private label).

Trade perceptions. Coffee was carried in almost every food retail outlet; its sales represented 1.5% to 2.0% of all-commodity volume for U.S. food retailers. Coffee was a staple which also received strong manufacturer advertising and promotional support and thus generated high consumer interest. In short, it was an ideal traffic builder. In the 1970s, while overall trade advertising levels had decreased, trade coffee advertising had increased, and at least one brand of coffee featured with a price promotion in an end-of-aisle display was a common sight in supermarkets across the country.

Retail inventory turnover for coffee was high (about 18 times a year), but margins were thin. Compared with the average gross margin of 22% for grocery chains in 1978, coffee typically offered about 8% for ground, 12% for soluble, and high margins of about 20% only for specialty brands (such as GF International Coffees). In fact, as retail coffee prices peaked in June 1977, the average retail price was only $3.94/lb., compared with an average factory price of $4.00.

Under these circumstances, retailers were reluctant to devote shelf space to new coffee brands. Typically, a roaster had to be very aggressive, either with high up-front advertising support or significant price reductions, to win retailer support. Nevertheless, shelf space (or linear feet) devoted to coffee had increased from year to year, because of national expansion by regional brands and product line extensions by established competitors. Because of the importance of distribution and trade support, all producers worked hard at their relationships with the trade

Coffee shelves generally were separated into ground roast and soluble sections; the amount of space devoted to each reflected the ratio of usage in a given region. Thus, a roaster wishing to expand into the West would find it easier to enter with a ground roast product because westerners were heavy ground users and available shelf space for solubles was therefore limited.

Private labels. Many supermarket chains offered house brand coffee at prices significantly below those of the national brands. These private labels held 12% of the overall coffee market in 1977. Most independent grocers did not have house brands, but tended to promote coffee more heavily than did the chains. The private labels of a few retail chains—A&P, Safeway, and Kroger—had market shares

1 The 1977 sales volume of the institutional market was only $1.5 billion, in contrast to the $4.8 billion retail market.

582-087 U.S. Retail Coffee Market (A)

exceeding those of many regionals. Many producers with their own brands also supplied the private-label sector.

National producers. Branded producers did, however, have strong share positions in the retail coffee market. In ground roast coffee in 1978, 12 firms held 81% of the market, with 5 of those holding 66%. The retail soluble coffee market was even more concentrated: 11 firms held 87%, with 3 of those—the Maxwell House Division of General Foods, the Nestlé Company, subsidiary of the Swiss Nestlé S.A., and the Folger Coffee Company, division of Procter & Gamble (P&G)—holding 81%. These 3 companies dominated U.S. coffee on a national average basis. However, market by market, there were very strong regional brands. Further, the national brands tended to have sharp regional skews. Maxwell House shares, for example, ranged from 40%–plus in parts of the East to under 10% in parts of the West.

Together the national brands held 68% of the total market, led by Maxwell House with 40%, Folger's 15%, and Nestlé 13%. None of these supplied private labels. All of their U.S. coffee businesses were parts of huge international corporations: GF had $5.4 billion in revenues in its fiscal 1978, P&G $8.1 billion in its fiscal 1978, and Nestlé S.A. $9.1 billion in its fiscal 1977. In normal times these coffee businesses earned net profit margins of around 10% to 15% on sales.

The remaining retail market was shared by small national brands, such as Hills Bros. and Chock Full O' Nuts, as well as regional brands and private labels (see Exhibit 8). Hills was the third- largest producer of ground coffee, with a 6% share (it had a 1% share of the soluble market). Hills's share of ground had halved in the years following; in mid-1976 its American owners had sold control to a Brazilian agricultural cooperative. In 1978 the company was emphasizing supply of private-label coffee. Chock Full O' Nuts had a 5% share of the ground and a 2% share of the soluble market.

Regional producers. The industry trend was toward greater consolidation. In 1963 there had been 324 roasters in the United States; by 1972 there were only 213. For firms of 20 employees or more, the numbers were 133 and 104 respectively. Most of these were regional roasters—small producers of ground roast coffee serving one or a few markets or selling to private-label or coffee services.

Regional roasters differed from their giant competitors in many aspects. Most were privately held, although some larger ones were subsidiaries of larger corporations: the Maryland Club and Butternut brands were owned by the Coca-Cola Company, the world's largest soft-drinks supplier, with 1977 corporate revenues of $3.6 billion; the Chase & Sanborn brand was owned by Standard Brands, a $3 billion diversified consumer products company.

Few regionals manufactured soluble or decaffeinated coffees; thus their asset bases were small, relative to sales. (The minimum investment in equipment for soluble coffee processing was about 150 times the minimum for roasting and grinding.) Moreover, regionals' inventories were smaller in contrast to those of majors, which maintained a finished goods inventory pipeline equal to almost 20 weeks' sales. Regionals also did not advertise. On average, their brands were about 5% to 10% cheaper than national ones.

Distribution

The major national coffee producers maintained networks of distribution centers and each maintained sales forces of 500–600, organized regionally. These sales forces sold only coffee, although Nestlé also sold its Nestea instant tea. All three sales forces (Maxwell House, Nestlé, and Folger's) called on individual retail outlets as well as on wholesaler and retail chain head offices. The nationals, however, called only on outlets with sales of $1–2 million or more per year, leaving wholesalers' sales forces to service the smaller outlets. Folger's slightly larger sales force and lesser geographic coverage allowed it to service more and smaller stores in a region than did Maxwell House. Regional roasters generally did not maintain large sales forces, but depended on wholesalers or food brokers.

U.S. Retail Coffee Market (A) 582-087

Marketing Activities

Brands

The three major producers marketed 14 individual brands in 1978 (see Exhibit 9), but their number of stockkeeping units exceeded 100 because of multiple forms, grinds, and package sizes (see Exhibit 10). The market shares of each brand by form are given in Exhibit 11.

The structural shifts among segments which took place at this time had affected each brand's share of the total market. In addition, several actions by the major producers had affected individual brand shares. Most notably, after 1972 Folger's had been making major efforts to expand its ground coffee share and distribution eastward from its traditional base west of the Mississippi. Maxwell House had resisted each effort, so a continuing series of market-by-market competitive battles was being fought with advertising, price discounts, and promotion. By April 1978 the previous 12 months' market shares by region were as shown in Table F.

Table F Regional Market Shares, April 1978

Percent of Total Coffee Sales East South Central West

Ground Maxwell House 36% 37% 15% 7% Folger's 8 12 29 30

Soluble Maxwell House 28 30 20 8 Folger's 1 6 17 13 Taster's Choice 11 10 11 15

A major consequence of the expansion battle had been a drastic decline in smaller companies' market shares. For example, Folger's entry into the Pittsburgh market in the early 1970s precipitated a competitive battle which drove Breakfast Cheer, a local brand, completely out of the retail business. Previously, Breakfast Cheer had 18% share of its local market. Upon its demise, its prior owner filed a private antitrust suit against P&G, alleging unfair competition. Hills Bros. had seen its market share halved in a few years. Standard Brands, the owner of Chase & Sanborn, had declared that it did not make sense to spend money on the coffee business when companies like P&G and GF were dominating the market. Another consequence of the Folger's expansion battle occurred in July 1976 when the Federal Trade Commission issued a complaint against GF charging it with promotional activities that violated antitrust laws. General Foods denied these charges.

The frost had slowed Folger's expansion, having created supply and price problems resulting in severe impact on profitability. Industry analysts estimated that Folger's had lost about $60 million in 1977, primarily because of its last-in, first-out inventory valuation method. In contrast, GF had fared much better with its "average" valuation method, although it suffered drastically reduced profits. Nestlé used a first-in, first-out method. In 1978, however, the new falling prices for coffee beans were favoring Folger's inventory method. Folger's resumed its eastward expansion at the end of 1977 and by July 1978 was heavily engaged in the New York area. Industry analysts expected P&G to expand Folger's Instant eastward if the ground expansion proved successful.

Other brand events since 1972 included the introduction of seven new major brands or major brand variants: Taster's Choice Regular (freeze-dried), introduced by Nestlé in 1972; Brim (ground and freeze-dried decaffeinated) by GF in 1972; GF International Coffees in 1973; Taster's Choice Decaffeinated in 1973; High Point (decaffeinated ground and instant) by Folger's in 1975 (test market); Mellow Roast, the first extended coffee, by GF in 1977; and Folger's Flaked (ground), the first

582-087 U.S. Retail Coffee Market (A)

high-yield coffee, in 1978. In contrast, 1945 to 1971 saw only three major product introductions (see Exhibit 1).

Advertising

Coffee marketers in fiscal 1978 (April 1977 to March 1978)2 spent almost $100 million on advertising, compared with the $190 million spent on advertising soft drinks, and about $200 million on beer. Close to 90% of total coffee advertising dollars went for television. Of this, more than half was spent on spot (local) television, reflecting the regional nature of coffee competition.

The advertising messages of the two leading ground brands, Maxwell House and Folger's, were remarkably similar. Both employed a matronly grandmother type as their spokesperson. Maxwell House's "Cora" stressed her brand's dependable, consistent great taste ("Good to the last drop"), while Folger's expatriate Norwegian, "Mrs. Olsen," extolled the virtues of her brand's rich mountain-grown flavor. In fiscal 1978 Maxwell House ground regular spent over $13 million on media, and Folger's spent about $7 million each on its ground regular and flaked brands.

Because ground coffee provided the consumer's benchmark for quality, most soluble or decaffeinated brands established their credentials by claiming parity with ground roast flavor. The epitome of this strategy was Nestlé’s Taster's Choice Freeze-Dried: "looks, smells, tastes like ground roast." Other messages included Sanka's caffeine/health focus and Nescafé's boast that it was "the world's largest selling instant."

Promotion

Consumer promotion expenditures for fiscal 1978 totaled $205 million. Promotional devices included coupons, rebate and premium offers, and reusable or decorator packaging. Many of these were featured in a brand's print advertising, in hopes of maximizing the overall sense of value.

Coffee tended to be heavily promoted both because of its role as a traffic builder and because of its consumers' price sensitivity. Indeed, a coffee consumer was considered "brand loyal" if as little as 60% of his or her purchases were of the principal brand; for the other 40% it was expected that competitors' price promotions would lure the consumer away. Even the major brands sold between 40% and 60% of their volume on deal.

Trade promotion, another major marketing tool, had total expenditures of $350 million in fiscal 1978: $244 million for ground caffeinated brands, $82 million for soluble caffeinated, and $12 million each for all decaffeinated and all extended brands. Expenditures were primarily in the form of price discounts to the trade, with the primary objective of obtaining featured price support (retail price reductions). There was intense competition among producers to get their brands featured; and there was intense competition among retailers to have a coffee price promotion, because of the impact of such a big-ticket item. The caffeinated ground form was the main vehicle of such promotions. The level of trade promotion expenditure by manufacturers fluctuated greatly, because their strategy was closely tied to pricing and primarily determined by the difference between the green bean price and manufacturer's list price. Manufacturers usually netted out trade price discounts before recording revenues.

In fiscal 1978 the major coffee marketers reacted to the sales decline by increasing combined advertising and consumer promotion expenditures from $220 million in fiscal 1977 to $300 million and increasing the emphasis on consumer promotion from 62% of expenditures to 68%. Omitting the

2 Fiscal year of a major producer

U.S. Retail Coffee Market (A) 582-087

almost $52 million (advertising and consumer promotion) spent in fiscal 1978 on the introduction of new, mostly extended or increased-yield brands, advertising expenditures for established brands fell 10.5% from fiscal 1977 to fiscal 1978, while consumer promotional expenditures gained almost 30% (Exhibit 12). In fiscal 1978 regular ground Maxwell House had spent $12 million on a consumer promotion, and Folger's regular ground had spent $15 million.

Frost Impact on Prices and Sales

Price increases induced by the frost had a particularly adverse effect on sales of decaffeinated coffee. Because each decaffeinated form was priced higher than its caffeinated equivalent, decaffeinated brands were always the first to cross the key price centiles of $2.00, $3.00, $4.00, $5.00, and $6.00. For example, the one-pound can of ground Sanka or ground Brim went from under $2.00 in mid-1976 to over $4.00 in late 1977, crossing three psychological price points. It 'was estimated that decaffeinated's key one-pound packages lost 0.2 share points each time they crossed a centile.

Perhaps even worse, distribution was lost with these volume drops. The 3-lb. size of caffeinated ground and the 2-lb. size of decaffeinated ground had lost virtually all distribution, which was not recovered when prices declined later on. The key 8-oz. soluble size for spray-dried Sanka had crossed the $3.00, $4.00 and $5.00 centiles, losing an estimated 0.5 share points each time. Freeze-dried Sanka and Brim in 8-oz. packages had crossed the $4.00, $5.00, and $6.00 centiles, losing an estimated 0.4 share points percentile. Consumers appeared averse to paying over $6.00 for a jar of decaffeinated instant coffee when they could remember a $2.00 range for regular instant only one year before. In July 1978 prices fell back to a retail average of about $3.48 for one-pound ground Sanka and ground Brim, about $5.53 for freeze-dried Sanka and Brim, and about $5.24 for spray-dried Sanka.

Although average prices had peaked at $3.94 per equivalent pound in June 1977, the average for fiscal 1978 was only $2.99. One major producer predicted continuing price declines in fiscal 1979 to an average of about $2.55, followed by some increase to about $2.70 in fiscal 1980 and 1981. Prices might then be expected to inflate at the same rate as the U.S. Consumer Price Index, barring supply disruptions.

582-087 U.S. Retail Coffee Market (A)

Exhibit 1 Coffee Market Milestones

1683 Turkish armies besieging Vienna introduced coffee to western Europe.

1773 Boston Tea Party boosted American coffee consumption.

1830s Commercially roasted coffee became available in the United States.

1902 Maxwell House coffee introduced.

1926 Sanka (first decaffeinated coffee) introduced.

1928 Maxwell House acquired by General Foods (GF).

1932 Sanka acquired by GF.

1936 Folger's coffee introduced.

1939 Nescafé (first instant coffee) introduced.

1944 Yuban acquired by GF.

1946 Instant Maxwell House introduced. Peak for pounds per capita.

1962 Peak for cups per day per capita.

1963 Peak for total market volume. Procter & Gamble acquired Folger's.

1964 Maxim (first freeze-dried coffee) test-marketed by GF.

1968 Maxim made national. Instant Maxwell House agglomerated.

1969 Freeze-dried Sanka added.

1970 Brim test-marketed by GF.

1972 Taster's Choice Regular introduced by Nestlé. Brim introduced. Ground Folger's eastward expansion began.

1973 GF International Coffees introduced. Taster's Choice Decaffeinated introduced.

1975 The frost. Instant High Point test-marketed by Folger's.

1976 Prices started rising and volume falling. Instant Maxwell House aromatized. Hills Bros. sold to Brazilian cooperative.

1977 Prices peaked, volume hit 20-year low. Mellow Roast (first extended coffee from a national producer) introduced.

1978 Ground Folger's eastward expansion put into high gear. Flaked Folger's (first increased-yield coffee) introduced.

U.S. Retail Coffee Market (A) 582-087

Exhibit 2 Coffee Drinkers' Attitudes

Source: 1976 study by a major producer.

Note: Total sample was 500 women and men in personal interviews. a. E.g., 27% of Maxwell House ground users cited dissatisfaction with one or more taste attributes. Of these, 31% cited dissatisfaction with "pleasant taste." b. E.g., 34% of ground users thought it important that coffee be served at social gatherings, as did 25% of soluble users, 42% of heavy users, and 22% of light users.

582-087 U.S. Retail Coffee Market (A)

Exhibit 3 Total Retail Coffee Market

a. Years are 12 months ending March, i.e., FY61 covers April 1960 to March 1%1, except for population and Consumer Price Index changes, which are for prior calendar year. b. Revised to reflect sample improvement. Percent change remains the same.

U.S. Retail Coffee Market (A) 582-087

Exhibit 4 Coffee Purchase Volume and Consumption Trends

Source: Estimates by a major producer.

Note: Years are fiscal years ending March.

582-087 U.S. Retail Coffee Market (A)

Exhibit 5 Long-Term Factors Reducing Coffee Consumption

Source: Study by a major coffee marketer.

U.S. Retail Coffee Market (A) 582-087

Exhibit 6 Share of Total U.S. Coffee Market

Source: Retail audit data supplied to a major producer.

Note: The cells in each year's matrix here cover the same categories as the columns in Exhibit 7.

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U.S. Retail Coffee Market (A) 582-087

Exhibit 8 Share Trends for Major Coffee Producers (% of total market)

Source: Retail audits supplied to a major producer. a. Years are 12 months ending in March.

582-087 U.S. Retail Coffee Market (A)

Exhibit 9 Brands of Major Coffee Producers in 1978

General Foods' Brands

Maxwell House. Ground roast brand introduced in 1902 and acquired by GF in 1928. Advertising slogan: "Good to the last drop."

Instant Maxwell House. Spray-dried soluble version of Maxwell House introduced in 1946. First soluble brand to be agglomerated in 1968, aromatized in 1976.

Yuban. Premium ground roast (100% Colombian) acquired by GF in 1944. Enjoys greatest popularity in western United States. Also available in spray-dried soluble form. Advertising slogan: "Richness worth a second cup."

Maxim. First freeze-dried soluble. In test market in 1964; rolled out nationally in 1968. Advertising slogan: "Freshly percolated coffee taste."

Sanka. Ground roast decaffeinated brand acquired by GF in 1932. Also available as spray-dried soluble. Soluble form leads institutional decaffeinated soluble sales. Advertising slogan: "Enjoy your coffee and enjoy yourself."

Freeze-Dried Sanka. First freeze-dried decaffeinated brand, introduced in 1969. Brim. Premium (65% Colombian) ground roast and freeze-dried decaffeinated brand, introduced

in 1972. Advertising slogan: "Tastes so good you won't believe it's decaffeinated." Max-Pax. Convenience ground roast premeasured and sealed in filter paper pouch for electric

percolator use. Mellow Roast. Extended brand, coffee and grain beverage introduced in 1977. Advertising

slogan: "Great coffee taste without bitterness." General Foods International Coffees. Spray-dried soluble coffee mixed with flavorings (Cafe

Vienna, Suisse Mocha, Orange Cappuccino, Café Francais, Cinnamon, Irish Mocha Mint). Introduced in 1973.

Procter & Gamble's Brands

Folger's. Ground roast brand introduced in 1936. Folger's Coffee Company acquired by P&G in 1963. Originally a western brand, Folger's had been expanding into the eastern United States since 1972. Advertising slogan: "Mountain-grown taste and flavor."

Folger's Flaked. Increased-yield version of Folger's, introduced in 1978. Folger's Instant. Spray-dried soluble version of Folger's. High Point. Spray-dried decaffeinated soluble. In test market beginning 1975. Advertising

slogan: "The flavor to decaffeinate the ones you love."

Nestlé's Brands

Nescafé. Spray-dried caffeinated introduced in 1939. World's first commercially successful "instant" coffee; in 1978 still world's largest-selling soluble.

Nescafés Decaffeinated. Decaffeinated version of Nescafé introduced in 1974. Decaf. Decaffeinated, spray-dried soluble introduced in 1972. Taster's Choice Regular. Freeze-dried caffeinated soluble introduced in 1972. Advertising slogan:

"Looks, smells, tastes like ground roast coffee." Taster's Choice Decaffeinated. Freeze-dried decaffeinated soluble introduced mid-1973. Sunrise. Extended soluble; coffee and chicory beverage. Introduced in 1977. Advertising slogan:

"Coffee mellowed with chicory."

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582-087 U.S. Retail Coffee Market (A)

Exhibit 11 Coffee Brand Market Shares (as % of total market)

Note: Years ending March 31, 1975 and March 31, 1978.

U.S. Retail Coffee Market (A) 582-087

Exhibit 12 Advertising and Consumer Promotion Expenditures ($ millions)

Source: Estimates by a major producer

Note: Years ending March 1977 and March 1978. a. Taster's Choice decaffeinated and Nescafé decaffeinated expenditures included under soluble caffeinated.

5-309-505(A)

©2009 by the Kellogg School of Management, Northwestern University. This case was prepared by Patrick Dupree, Christine Hsu, Ryan Metzger, Fuminari Obuchi, Arun Sundaram, and Kari Wilson under the supervision of Professor Mohanbir Sawhney. It was revised by Professor Kent Grayson. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 847-491-5400 or email [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management.

MOHANBIR SAWHNEY

Ontela PicDeck (A): Customer Segmentation, Targeting, and Positioning

In April 2008 Joe Levy, the director of carrier marketing for the technology start-up Ontela, was considering how to position the company’s first offering, PicDeck. Ontela’s PicDeck was a technology service that allowed wireless subscribers to seamlessly transfer pictures from their mobile devices to their computers, email inbox, and other networking devices and services (see Exhibit 1). The service had been well received in the media. An article in Telephony magazine lauded the service as “helping bridge the gap between phone and PC.”1

Ontela’s technology offered value to end users (wireless subscribers) by providing a more convenient mobile imaging experience. This in turn was expected to increase sales of high- margin data services for Ontela’s wireless carriers, its direct customers. By encouraging consumers to transfer pictures from their mobile devices, this new service was expected to increase consumer use of wireless carrier services. Ontela sold its technology to wireless carriers, who were responsible for branding and pricing the service and marketing it to wireless subscribers. These subscribers paid a monthly fee to carriers for the PicDeck service, and Ontela received a portion of this subscription revenue.

To develop a compelling positioning strategy for the PicDeck service, Levy needed to identify target segments within the wireless customer base. He faced several major questions: What was the best way to determine the appropriate target audience? Which segment(s) would provide the biggest opportunity for both Ontela and the carriers? How could he balance the needs of subscribers with the carrier’s goals of decreasing churn and increasing average revenue per user (ARPU)? As Levy thought about these questions, he knew that his company’s future depended on his ability to answer them.

1 Sarah Reedy, “Say ‘Cheese’ and Send,” Telephony Online, April 14, 2008, http://telephonyonline.com/wireless/news/ telecom_future_seen_technology_118.

ONTELA PICDECK (A) 5-309-505(A)

2 KELLOGG SCHOOL OF MANAGEMENT

Background: Mobile Services and Media Convergence

Mobile Phone Services

The U.S. mobile phone service industry earned $150 billion in revenues in 2007, making it one of the largest sectors of the U.S. economy. Within this market, the data services segment— which included Internet data plans, text messaging, picture messaging, and other multimedia transfers—had grown exponentially. With the continued growth in data revenue, voice revenues were expected to decrease as a percentage of total ARPU. Therefore, wireless carriers would be increasingly dependent on unique and high-value data services for profits and competitive differentiation.2

Camera Phones and Media Convergence

The concept of the camera phone was developed by Daniel A. Henderson in 1993 under the name “Intellect.”3 Since its inception, cameras had become a ubiquitous feature on cellphones worldwide. Advancements included increased megapixel capability as well as video capability. Photos were generally saved on the camera as JPEG files. Major manufacturers of camera phones included Nokia, Motorola, Samsung, LG Electronics, and Siemens.

As handset manufacturers began to offer cellphones with large screens and high-resolution cameras, various types of digital media began to converge. Content such as music, videos, pictures, and games had become ubiquitous for wireless users. Additional evidence of this movement toward convergence was the booming popularity of smartphones, such as Apple’s iPhone. Smartphone handset sales represented 34 percent of the total wireless communication handset market in 2007.4

Social networks, such as MySpace and Facebook, demonstrated Web-based media integration. Many of these sites, under pressure to differentiate themselves from one another, specialized in a certain type of media, such as picture storage or business networking connectivity. Facebook, for example, partnered with Google’s Picasa to provide seamless integration between Picasa Web Albums and Facebook Albums.

The PicDeck Service Current methods for transferring photos taken on camera phones to other media or users were

complex and limited in capability. Consumers had a number of unappealing options for transferring pictures from their phones to their computers, including:

2 Mintel International Group Ltd., “Mobile Phone Services—US,” November 2007. 3 Press release, “National Museum of American History Acquires Wireless Picturephone Prototypes,” October 24, 2007, http://americanhistory.si.edu/news/pressrelease.cfm?key=29&newskey=611. 4 Mintel International Group Ltd., “Portable Media Devices—US—Smartphones,” December 2007.

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! Transfer via USB cord from phone to computer

! Send wirelessly from phone via MMS messaging or Bluetooth to another user or device

! Send as an email via data plan service from a mobile device

! Upload photos via wireless network to carrier’s proprietary Web site

Ontela’s PicDeck offered seamless transfer of pictures from camera phones to other networked devices and services. The technology allowed for the transfer of pictures to any pre- designated destination without the need to press any extra buttons (see Exhibit 2). These destinations could include the user’s personal computer, email inbox, and Web sites such as Facebook and Picasa.

As of April 2008, the technology had been picked up by two regional wireless carriers— Cellular South and Cincinnati Wireless—and, more recently, by the national carrier Alltel. Matt Phillips, senior marketing manager at Cincinnati Wireless, stated:

In Cincinnati, Internet photo galleries are very popular—people go online after happy hours to see pictures after different events. We also sponsor many big events in Cincinnati and use radio as a medium, getting endorsements from DJs. This will help because the product is complicated to understand and needs to be explained. A DJ helps to explain it and make it innovative and cool for early adopters.

The success of Cincinnati Wireless’s marketing approach had been validated by Cellular South. As the first provider to adopt this technology, it branded the technology as “PicSender.” Jim Richmond, director of corporate communication, stated:

We do sports marketing such as sponsoring women’s tennis tournaments. In addition, we host a music festival in Memphis. At both, we demo PicSender and offer consumers the opportunity to try PicSender. Target customers take pictures at the events and send them to Web albums. Afterwards, we show that picture is on a Web album through a PC on the premises. Because these are outdoor events, this approach makes picture taking ideal, and it’s easy to make people understand what the service is and build awareness of it.

Additionally, Richmond noted:

Our customer talks, on average, twice as much and texts six times as much as the average U.S. customer. Fourteen percent of the U.S. population has a cellular phone only; in our case, 25 percent of our customers have only wireless. The applications for these users should be affordable and make their lives easier. PicSender really fits this requirement.

As the wireless industry began to pick up the technology, Ontela was optimistic about the future growth of PicDeck. However, Joe Levy realized that in order to maximize growth opportunities he would have to deliver a solid value proposition to national wireless carriers.

Segmentation Research: Customer Personas Levy and his team had conducted qualitative research on end-user behavior in mobile

devices. He had combined the insights from this research with his knowledge of the industry

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conversations with mobile carriers to develop three customer personas that represented key customer segments: Sarah, the parent; Steve, the young professional; and Regina, the teen.

Persona 1: Sarah, the Parent

Sarah is married, 42, and a mother of a 15-year-old, a 10-year-old, and an 8-year-old. She works part-time during the day from home, but is mainly focused on parenting and taking care of her home. Sarah is not a computer whiz, but she can use email, Google, and on occasion will send an IM from the MSN account her kids set up for her. Her older kids have been wild about the social networking craze, but it scares her when she sees the news reports about predators.

Sarah has been thinking about upgrading her wireless phone, which is three years old and has a grainy camera attached. She bought a digital camera two years ago and uses it to take all of the family pictures now, but she admits that the memory is filled to the limit because she hates taking them off and putting them on the PC. She finds herself asking her husband or children for help every time she needs to move the pictures to free up the camera memory again.

With her job and her life as a wife and mother, Sarah wants things like pictures to be easy. She has played with her phone in the past trying to get pictures off of it, but she abandoned the endeavor after only fifteen minutes. She would love her pictures from her phone to “just appear” on her computer, but never thought that such a thing was really an option.

Persona 2: Steve, the Young Professional

Steve is 27 years old and a successful real estate agent. He is constantly out on the road showing houses, both on weekdays and weekends. He usually has very little time to himself.

Steve was in high school when the Internet really began to grow, but he was never as hardcore as most of his friends. He uses email at work, but prefers the phone. He has always been the last one of his friends to get up on the latest technology, but he does not think it affects his work. He believes that in his business, it is better to do things the old-fashioned way because it is a people business, and he is good at talking to people.

Steve has an older model cellphone. He is hesitant to upgrade because he doesn’t want to lose simple things like his contacts and isn’t sure how they will transfer over. However, he has seen how some of his colleagues use their phones to take pictures of houses to save and send to clients, which people seem to like a lot. He has thought recently that he might want to get caught up on technology so he doesn’t lose a step in the market.

Steve is usually not actively looking for better technology solutions to improve his life. However, he likes things that are simple. If having a camera phone meant not always having to carry a digital camera, he is all for it.

Persona 3: Regina, the Teen

Regina is 16 years old and comes from a middle-class family. She is a good student and popular, with many friends and a boyfriend. Regina has lived entirely through the Internet Age

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and has gone through all of the iterations of online communication, from email to social networking. She has profiles now on Facebook and MySpace that are updated regularly. Regina also keeps an account at PhotoBucket, but uses it less and less.

Regina has a phone that is less than a year old, and it takes pretty good pictures. She likes that she always has it with her so she can take spontaneous pictures of herself and her friends, or funny things she wants to show people later. She sends between twenty and thirty picture messages a month, but she doesn’t load her pictures from her phone to her PC because it is a pain.

Regina wants to be able to have her mobile photos on her PC instantly because in the Internet Age, speed and convenience are expectations. However, she wants to be able to screen and monitor what is on her sites so she won’t look silly in front of her friends. She would also love to be able to manage her pictures easily once they are on her PC. Additionally, she wants to be able to do it all from her phone so she doesn’t have to wait to have her pictures on MySpace for her friends to see.

Assignment Questions 1. Based on the three customer personas, which customer segment should Ontela target?

2. Create a positioning statement for your chosen target persona and identify the key themes that should be emphasized in the messaging for the PicDeck service to this segment.

3. What are the risks of using qualitative personas to select target customer segments?

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Exhibit 1: PicDeck Technology—Technical Details

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Exhibit 2: PicDeck Technology—Consumer Overview

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Ontela PicDeck (B): Customer Segmentation, Targeting, and Positioning

The Quantitative Customer Segmentation Study Although Joe Levy felt that the customer persona provided a good starting point to begin

thinking about PicDeck’s segmentation, he believed that he needed quantitative data to get a more precise understanding of the relative attractiveness of different customer segments. This would require data on end users regarding their preferences and behaviors related to mobile devices and imaging. He therefore hired a market research firm to conduct a quantitative customer segmentation study.

The firm conducted a national survey of 2,000 respondents who were selected from lists of mobile telephone customers aged 15 and older. The questions in the survey ranged from respondents’ current mobile phone behavior and camera experience to general technology aptitude and price sensitivity. The survey questions are listed in Exhibit 1. The research firm used a random sampling approach to ensure that the respondent sample accurately represented nationwide wireless subscribers.

Analysis of Customer Survey Data

Identifying Segments—Cluster Analysis of Preference Data

The research firm performed a cluster analysis on the responses. A cluster analysis is a statistical technique that identifies groups of customers who have similar survey response patterns. The number of clusters is determined in part by how different the response patterns are. If all survey respondents tend to give the same responses, then only one cluster is identified.

For this survey, six clusters of respondents were identified, each with a different response pattern. Details of each cluster are provided in Exhibit 2, which lists the mean responses to each question for each cluster.

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Profiling Segments—Demographic and Media Choice Information

In addition to the preference data, the research firm also asked the same respondents a series of questions related to demographics and media habits. The demographics and media habit questions are shown in Exhibit 3, and the profiles of the six clusters are reported in Exhibit 4.

Assignment Questions 1. Based only on the cluster analysis data, which preference-related variables are most useful

for segmentation identification and evaluation? Which variables are least useful?

2. Keeping in mind what you know about each cluster before you look at Exhibit 3 and Exhibit 4, create descriptive profiles for the customer segment represented by each cluster. Label each segment with a title that best describes that cluster. To what extent does this new information reinforce or challenge your previous assumptions about the segments in this market?

3. Now, use the profiling information in Exhibit 4 to create a revised profile for each cluster. Is this profile different from what you “guessed” based only on the preference data?

4. Which segment(s) would you recommend as a target for PicDeck? Explain the logic behind your choice.

5. Develop a positioning statement for your selected target customer(s) that defines the key benefits of the PicDeck service and how the service is differentiated from alternatives that customers might consider.

6. Develop a positioning statement for wireless carriers that Ontela can use to communicate the value of the PicDeck service for wireless carriers.

7. Suggest a media plan that you feel would be most effective in promoting the PicDeck service to your selected target customer(s) and to convert them to paying customers.

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Exhibit 1: Preference Questions in Segmentation Survey

These questions were intended to provide information about consumer perceptions of the PicDeck service and the problems that it solves.

Please tell me how much you agree or disagree with the following questions (1 = strongly disagree; 5 = strongly agree)

Q1: I think it is easy to upload photos taken from my phone to a computer or Web site. Q2: I would take more photos on my camera phone if it were easier to transfer them to a Web site or my computer. Q3: I would take more photos on my camera phone if the quality of the pictures were better. Q4: I would replace my digital camera with my camera phone if the process for transferring photos were easier. Q5: I would replace my digital camera with my camera phone if the quality of the photos were better.

Assuming there is a simple process for transferring data from your camera phone, please tell me how much you agree or disagree with the following statements (1 = strongly disagree; 5 = strongly agree)

Q6: I value making sure the photos on my phone are saved so if I lose my phone I don’t lose them. Q7: I value getting the photos on my email so I can forward them to friends and family. Q8: I value getting the photos on my desktop so I can edit, crop, and print them. Q9: I value getting the photos onto photo-sharing sites (Facebook, Photobucket, Flickr, MySpace, etc.). Q10: When I am deciding on which new technology product to buy (TV, computer, MP3 player), how easy it is to set up is a major factor in my decision. Q11: Whenever new consumer technologies emerge, I am among the first to adopt them. Q12: After I have made the decision to buy a new technology product, I spend a lot of time searching for the best price.

I would like to describe a new service that will soon be available to wireless subscribers. Any time you take a picture on a camera phone, this service automatically sends it to your PC and your favorite Web sites. You can turn it on or off at any time. You can add or remove Web sites at any time. It’s secure and the process does not degrade the quality of your photo.

Q13: If this service were only offered for a monthly fee, how much would you be willing to pay each month for unlimited use?

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Exhibit 2: Cluster Analysis of Customer Preference Data

Based on customer answers to the questions reported in Exhibit 1, six clusters were identified, each with distinct response patterns. Below are the mean responses by each cluster to each of the questions.

Clusters

Survey Question 1 2 3 4 5 6 Overall

Average Q1 It is easy to upload phone photos 3.07 3.19 2.65 4.06 2.29 3.00 3.04 Q2 Would take more phone photos if transfer

were easier 4.33 3.37 3.96 2.43 3.86 2.36 3.49

Q3 Would take more phone photos if quality were better

4.67 4.28 4.21 4.20 4.12 2.75 4.11

Q4 Would replace digital camera if phone transfer were easier

4.11 1.72 2.06 2.31 3.24 1.58 2.66

Q5 Would replace digital camera if phone photo quality were better

4.69 1.81 3.10 3.76 3.59 1.89 3.34

Q6 I value saving phone photos so they are not lost

4.60 3.57 3.75 3.20 3.04 2.42 3.55

Q7 I value sending photos by email 4.53 3.94 4.02 3.22 3.02 2.25 3.61 Q8 I value having photos on my desktop 4.55 4.07 3.92 3.18 2.94 2.31 3.60 Q9 I value sharing photos on Facebook, etc. 3.95 3.69 3.83 3.00 2.98 2.22 3.36 Q10 When deciding on new tech, easy setup is a

factor 3.84 3.44 2.71 3.27 3.37 2.83 3.27

Q11 When new technologies emerge, I am first to adopt

3.13 2.07 3.52 2.65 1.96 2.17 2.69

Q12 When buying new tech, I search for best price

4.45 3.76 4.40 3.98 3.06 3.58 3.95

Q13 Monthly fee $5.75 $6.64 $7.93 $3.90 $8.31 $1.67 $5.79 Percentage of respondents in each cluster 24% 12% 19% 16% 15% 14% 100%

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Exhibit 3: Demographic and Media Questions Z1: Median age Z2: Age > 40 (% older than 40) Z3: Age < 25 (% younger than 25) Z4: Sex (% male) Z5: Married (% married) Z6: Children (% with children) Z7: DataPlan (% with DataPlan on their cellphone) Z8: MessagePack (% with MessagePack subscriptions for their cellphone) Z9: Family Plan (% belonging to a Family Plan for their cellphone) How interested are you in the following kinds of magazines? (5 = strongly interested … 1 = strongly disinterested)

Z10: Tech magazines and/or Web sites Z11: Celebrity magazines and/or Web sites Z12: Fashion magazines and/or Web sites Z13: Women’s magazines and/or Web sites Z14: Homemaking magazines and/or Web sites Z15: Sports magazines and/or Web sites

Z16: How many hours per day do you spend on the Internet? (1 = less than 1 hour … 4 = more than 3 hours) Z17: Pay own bill (% that pays their own cellphone bill)

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Exhibit 4: Demographic and Media Profile of Clusters Clusters

Variable 1 2 3 4 5 6 Weighted Average

Z1 Median age 42 41 22 30 39 55 37.53 Z2 Age > 40 25% 27% 12% 19% 28% 43% 25% Z3 Age < 25 23% 18% 55% 31% 16% 12% 27% Z4 Male 52% 48% 43% 58% 49% 41% 49% Z5 Married 48% 71% 22% 34% 64% 67% 49% Z6 Children 27% 46% 11% 21% 35% 39% 28.1% Z7 DataPlan 72% 15% 22% 42% 27% 11% 36% Z8 MessagePack 45% 35% 61% 65% 39% 18% 45% Z9 Family Plan 26% 54% 66% 17% 37% 12% 35% Z10 Tech mags and/or Web sites 4.17 1.46 1.26 3.70 2.68 2.18 2.71 Z11 Celebrity mags and/or Web sites 1.77 3.33 4.54 1.39 2.50 3.80 2.82 Z12 Fashion mags and/or Web sites 2.12 2.65 3.65 2.51 1.89 1.25 2.38 Z13 Women’s mags and/or Web sites 2.34 2.64 2.85 2.10 2.57 2.90 2.55 Z14 Homemaking mags and/or Web sites 1.38 2.57 1.55 1.32 1.99 2.62 1.81 Z15 Sports mags and/or Web sites 3.00 2.57 2.10 4.47 2.91 1.90 2.85 Z16 Internet use 3.85 1.66 3.12 3.50 2.01 1.42 2.78 Z17 Pay own bill 91% 84% 45% 93% 92% 95% 82%

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________________________________________________________________________________________________________________ Professor Youngme Moon, Erika Kussmann, Emma Penick, and Susan Wojewoda (MBAs ’03), and Research Associate Kerry Herman, Global Research Group, prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

Y O U N G M E M O O N

Burberry

It was the summer of 2003, and Rose Marie Bravo, the chief executive of Burberry, was reflecting on the past five years. Much had changed since Bravo had assumed leadership of the company in 1997. Prior to her arrival, Burberry had been a brand heavily reliant on licensing and distribution arrangements and a limited set of products. But Bravo and her team had spent most of their energy over the last few years “redirecting” things—everything from overhauling the company’s distribution strategy to revamping the company’s product line. The results had been sensational: Burberry was now considered one of the leading luxury brands in the world.

Sales at Burberry reflected the renewed popularity of the label; revenues had grown from about £225 million in fiscal 2000 to almost £600 million in fiscal 2003. (See Exhibits 1 and 2 for Burberry financials.) Bravo had even managed to successfully steer Burberry through an initial public offering of 22.5% of its shares in the summer of 2002 amid choppy market conditions.

Still, Bravo and her team knew that the next five years were going to be crucial. Bravo’s goals were to maintain the currency and cachet of the brand across its broad customer base, while entering new product categories and expanding distribution.

History

Burberry was founded in 1856, when 21-year-old Thomas Burberry opened a draper’s shop in Basingstoke, England. Shortly thereafter he invented gabardine, a waterproof and breathable fabric that quickly became the fabric of choice for anyone venturing out into extreme conditions. Burberry’s trench coat was chosen to be the official coat of the British Army in World War I, and a 1930s marketing campaign declared, “For safety on land, in the air or afloat, there is nothing to equal the Burberry coat.” (See Exhibit 3 for Burberry timeline.)

The Burberry check pattern—a camel, black, red, and white plaid design—was introduced in the 1920s as a lining to its signature trench coat, and became a registered trademark. Over the ensuing years, celebrities, well-known adventurers, and politicians were often seen in the Burberry “check.” The trench coats were worn by Humphrey Bogart and Ingrid Bergman in Casablanca, by Peter Sellers in The Pink Panther, and by Audrey Hepburn in Breakfast at Tiffany’s. They were also donned by famous aviators, balloonists, and expeditionists seeking to conquer the South Pole and Everest. Burberry’s original designs and uncompromising quality even made the brand popular with British royalty; King Edward VIII, a regular Burberry wearer, was known to say: “Give me my Burberry!” As a result, the brand increasingly became a symbol of both luxury and durability.

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In 1955, Great Universal Stores Plc. (GUS)—a British holding company that ran a home-shopping network and other businesses—bought Burberry. By the 1970s, the Japanese had discovered the brand’s iconic check, and GUS management had agreed to license the brand in Japan through Mitsui and Sanyo. Over the next decade, Burberry continued to grow worldwide, primarily through additional licensing and distribution agreements.

But as the Burberry brand became licensed across a range of categories (from wallpaper to chocolate), the price, design, and quality of products began to vary across local markets, in part because the company exercised limited control over its licensees. In addition, “parallel trading”—in which wholesalers sold to unauthorized distributors, who then sold products at prices, channels, and locations without respect to the brand image—started to become common, particularly in Asia.

By the 1990s, Burberry’s product line was being sold in retail environments inconsistent with its quality proposition. The company had become overly reliant on a narrow base of core products (e.g., outerwear and umbrellas), and its customer base had become heavily concentrated among older males and Asian tourists. The brand had lost much of its exclusivity, and the Far East accounted for a disproportionate 75% of sales. Bravo remarked:

By the mid-90s, the company was facing a number of strategic and structural issues. Although the business was profitable, earnings quality was low. The brand was stodgy- looking and conservative, and skewed to an older customer base. The company not only lacked a cohesive vision, it lacked the discipline necessary for a luxury goods retailer.

The Rose Marie Bravo Era

When I first started at Burberry, our goal was to make it great from a global perspective. I told my husband I was going into a tunnel where I’d be digging and digging to get to the roots, and that I wouldn’t be coming out for months.

— Rose Marie Bravo

The reinvention of Burberry began in 1997 when Bravo came on board as chief executive. Bravo, a native New Yorker, came to the company with significant expertise based on her previous tenure as president of Saks Fifth Avenue. With 25 years of experience in the industry, Bravo was one of the most well-respected executives in the retail and fashion trade.

Bravo’s goal was to transform Burberry from a tired outerwear manufacturer into a luxury lifestyle brand that was aspirational, stylish, and innovative. She began by bringing in a top management team made up of A-list industry talent. “I was looking for people who had worked in stores, on shop floors, and in fitting rooms,” she said. “I needed people who knew what it took to succeed in a retail environment, people who knew what customers wanted, what price points people wanted, where the gaps were.”

Stan Tucker, head of menswear at Burberry, was recruited by Bravo from Saks:

I never in my wildest dreams thought I’d be living in England or taking a company that was 150 years old and turning it around. Getting your hands around all of the challenges was monumental. It was like pushing an elephant uphill thinking, “Please don’t sit down,” because otherwise you were dead. Rose Marie was instrumental—she pushed us and put stepping- stones in front of us and cleaned out other steps that didn’t need to be prioritized. It was remarkable.

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Some of Bravo’s immediate changes were cosmetic—for example, the company’s name was changed from Burberry’s to Burberry and a contemporary logo and packaging were introduced. In addition, the new chief executive and her team made a number of strategic decisions that ended up transforming virtually every aspect of the business.

Repositioning the Brand

The first decision Bravo and her team made was to reposition the brand, the goal being to attract younger customers while retaining Burberry’s core customer base. “We set our sights on becoming one of the luxury greats,” Bravo elaborated, “so we began by surveying the market and identifying the gaps. Next, we needed to figure out whether we could position ourselves within one of those gaps while remaining true to our core brand values.”

Bravo eventually decided that there was a niche for Burberry between labels such as Polo Ralph Lauren and Giorgio Armani in apparel, and between Coach and Gucci in accessories. “We focused on a particular price point and a particular bracket,” she said. “We knew we didn’t want to be cutting- edge fashion; that was too tough, too rarified, too fickle, and too antithetical to Burberry. We also knew that we didn’t want to be just classic because there were enough of those brands.”

Pat Doherty, senior vice president of marketing worldwide, added, “We wanted Burberry to represent ‘accessible luxury.’ What separated us from other luxury brands was our functionality—a trench coat has a purpose, to keep you warm and dry. So our point of difference was that we were aspirational, but also functional.”

Updating the Product Line

The next step was to update the product line. Bravo and her team began by slashing the number of product stock-keeping units (SKUs) from 100,000 to 24,000 to eliminate outdated designs and pave the way for a consistent look across products. Bravo also hired a new design team to redesign Burberry’s traditional products and to extend the Burberry image to a new range of products.

By 2003, the new product line ranged from bandanas to miniskirts to spike-heeled boots. Furthermore, all products were now classified as continuity or fashion-oriented. Continuity products—e.g., the classic trench, duffle coats, certain handbags and scarves—had life cycles that were expected to last over a number of years. Fashion-oriented products were designed to be responsive to fashion trends; they were introduced on a collection-by-collection basis.

Burberry now had three primary collections: womenswear, menswear, and accessories. (See Exhibit 4 for product ranges.)

! Womenswear. Burberry introduced 450 to 500 women’s apparel styles each season, including outerwear, knitwear, casual wear, tailored garments, swimwear, and underwear. In keeping with the brand’s rough weather heritage, the womenswear line traditionally focused on the autumn/winter season; however, it had evolved in recent years to include apparel for warmer climates. The spring/summer 2000 collection had even featured Burberry check bikinis, which had proven to be enormously popular.

Michele Smith, head of womenswear, noted, “Burberry stands for sporty, functionality, and protection; that’s our heritage and young people like the realness, the authenticity. The trench, for example, is quintessential Burberry. But we’re also trying to achieve broader appeal by evolving our icon.”

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! Menswear. Burberry addressed the needs of its male customers with tailored suits, raincoats, trousers, and shirts. The company offered 330 to 350 styles per season, and the collection had been updated to include a wider assortment of fashion-influenced apparel. Still, the menswear collection used the iconic Burberry plaid in a more understated manner because, as Stan Tucker, head of menswear, put it, “Wearing a big checked coat down the street is not something most guys would do.”

The menswear collection targeted a broad range of customers. Tucker explained, “We’re very cross-generational. We want to appeal to the young, 25-year-old guy who’s on his first job—the guy who wants to wear something really hot, but we also want to appeal to a 60- year-old investment banker—the guy who wants great quality and a modern, classic look.”

! Accessories. The accessories collection included “soft” accessories such as scarves, shawls, and ties, as well as “hard” accessories such as handbags, small leather goods (belts and wallets), women’s shoes, luggage, umbrellas, eyewear, and timepieces. As Pamela Harper, head of accessories, explained, “Accessories are a piece of the dream”; their wide range of price points made them an accessible entry point for potential new customers. In addition, accessories afforded higher margins than apparel, in part because they were less fashion- oriented and therefore less risky, and in part because there were no size variations to accommodate. (See Exhibit 5 for additional details.)

With non-licensed products, Burberry exercised control over everything from design to sourcing, manufacturing, and distribution. When specific expertise was required that was outside of Burberry’s core skills (e.g., fragrances, eyewear, timepieces, childrenswear), the company worked with licensees who had the right to design, manufacture, and distribute products under the Burberry name. License royalties—about 10% of Burberry’s revenues—were calculated on the basis of their recommended retail value; they typically ranged from 3% to 12% of retail value.

In addition, Bravo and her team had reined in many of the older licensing agreements to curb inconsistencies in price, design, and quality across markets. The company had also taken tighter control over distribution—buying some distributors, ending relationships with some, and renegotiating contracts with others.

By 2002, the company had 3,162 wholesale doors worldwide, including 434 department stores and 2,728 specialty stores. Burberry also operated more than 132 company-owned stores, including newly opened flagship stores in London, Barcelona, and New York City. These stores were designed to display the full product range, showcase the vision, and act as a testing ground for new concepts and designs. (See Exhibit 6 for details about Burberry’s distribution network. See Exhibit 7 for New York and Barcelona flagship store photos.)

Prices had been raised to reflect the brand’s new positioning; gross margins were now 56% compared with 47% in 2000. Christopher Bailey, who had taken over as creative director, remarked:

Our biggest design challenge is to create a consistent brand image. The lifestyle of a teenager is very different from the lifestyle of someone who lives in the English countryside, just as the lifestyle of a banker is very different from the lifestyle of a fashionista. So unless we have a strong vision and speak with a consistent voice, we run the risk of losing our brand credibility.

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Expanding the Brand Portfolio: Burberry Prorsum

Burberry London was the company’s core label. In some countries, the company also offered a lower-priced label designed to appeal to a younger, more fashion-conscious customer. For example, the Thomas Burberry line was available only in Spain and Portugal, and the Burberry Blue and Black labels, for young women and men, respectively, were available only in Japan.

At the high end, Bravo and her team had recently decided to expand the brand portfolio with a label called Prorsum as a way to reinforce Burberry’s new positioning in the luxury market. Products within the Prorsum collection were hand-tailored from innovative fabrics, and featured the kind of quality and detail associated with haute couture. Bravo explained the Prorsum introduction this way: “We needed to tell people that something new was happening at Burberry. The idea was to introduce a high-profile, high-end brand, and do it in a first-class way, by putting it in the best stores in the world.”

Doherty added, “The Prorsum introduction was our way of communicating the idea that Burberry was a brand with the stature to appear on runways alongside the fashion greats. It provided us with the opportunity to showcase our new image to the top industry journalists and get editorial press for our collections.”

Burberry staged its first catwalk show for the Prorsum collection in September 1998 during London Fashion Week; it was later honored as British Classic Design Collection of the Year. Following that introduction, Prorsum showed semiannually at Milan Fashion Week alongside other major luxury brands. “Prorsum has become a modern vision for our company,” said creative director Bailey. “It provides us with a laboratory for ideas about fabrics, silhouettes, and constructions that we can filter down to other areas of the business. We have very limited distribution of Prorsum—it’s not meant to be a brand for millions of people; it’s for people who are truly interested in fashion.” (See Exhibit 8 for Prorsum products.)

Advertising

To promote the new Burberry brand image, Bravo and her team had hired a famed team that included photographer Mario Testino, whose work had appeared in Vogue, The Face, and Vanity Fair, and creative director Fabien Baron and advertising agent David Lipman. The trio was given a £10 million advertising budget to produce a new advertising campaign; the task was to address the problem of Burberry’s stodgy reputation by associating the brand with a more trend-conscious, modern look. At the same time, “It was important that we stay true to our heritage,” said Bravo. “The reason Mario was the perfect partner for us was that he understood the importance of a heritage brand. He also understood Englishness; after all, he lived in London.”

The Testino advertising campaign had been introduced in two phases. The first ad flight had launched in 1998; it had featured a British aristocrat (model Stella Tenant) in Burberry outerwear in an outdoor setting. (See Exhibit 9 for sample ads.) “I loved the seminal campaign,” said Bravo. “All we had were raincoats, and yet we were able to build a story that conveyed our brand values—classic and chic and fun and witty—around the simple idea of Stella outdoors in the rain. There was a zaniness there—the chandelier hanging from the tree, the chickens, and the British landscape.” “Stella was the perfect choice,” agreed Doherty. “She was so clearly aristocratic, so obviously of the right pedigree. She looked like her parents would have worn Burberry.”

In the autumn/winter of 1999, Tenant had been joined by model Kate Moss. Tenant had continued to be featured in Burberry’s campaigns in black-and-white photographs on motorcycles

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and windswept beaches in Burberry trench coats and suits. However, Moss had brought a different look to Burberry’s campaigns; as Bravo put it, a spring 2000 shot of Moss in a Burberry check bikini had introduced an image “that wiped years off the average age of our customer.” (See Exhibits 10 and 11.) Doherty added:

When we introduced Kate in our ads, we were really able to communicate our more modern, fashion-oriented side. The best ads were the ones in which we used the two of them together; it was almost like good girl, bad girl. There was something incredibly compelling about it. It’s not that Kate was “bad,” she was just a little bit naughty. Stella was aristocratic but sexy, too.

The Next Five Years

By 2003, it was evident that Bravo and her team had succeeded in turning the Burberry brand around. Burberry had not only become popular among a younger demographic, it had become positively hip. Madonna and her daughter had recently been photographed in Burberry check, and it was not uncommon for hip-hop celebrities to be seen with Burberry pants, shirts, scarves, and cell phone covers. The cofounder of a record label had even upholstered the seats of his 2003 red Corvette in the classic Burberry check.

The company had also received the Contemporary Design Collection of the Year Award by the British Fashion Council. Burberry had previously won the Classic Design Collection of the Year, leading Bravo to note, “There are not many international luxury brands that could be considered classic as well as contemporary. Burberry, thanks to its great history and British heritage, is one of them.”

On a personal level, Bravo had further cemented her reputation as one of the top executives in the industry; in 2002, she had been named Time magazine’s Fashion CEO of the year, and for two consecutive years she had topped the list of Wall Street Journal Europe’s Annual Women in Business Awards, given to executives who thrive in adverse environments. In 2003, the Council of Fashion Designers of America honored Bravo for outstanding contributions to fashion.

Now, looking forward, Bravo remarked: “We have certainly reached a certain playing field where we can be mentioned in the same breath as some of the greats. But I still don’t believe the brand has reached its full potential; we still have a lot of refining to do. Over the next five years, our focus will be on taking Burberry to the next level.” In this regard, Bravo and her team faced a number of key decisions.

Product Categories

The first issue had to do with what new product categories Burberry should be entering. Product extensions were considered a key part of the company’s growth plan. In autumn 2003, for example, Burberry planned to launch Burberry Brit, a new perfume line featuring a bottle with the check design. (See Figure A below.) According to the company, Burberry Brit personified a woman in her 30s, English, and charismatic. Burberry managers hoped that the fragrance extension would have the kind of lasting impact as Chanel No. 5.

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Figure A Burberry Brit Perfume

Source: Burberry.

The company was also in the process of developing its childrenswear line. Other product categories under expansion included footwear and Thomas Burberry.

Popularity of the Brand Among Non-Target Consumers

A second issue had to do with the appropriation of the brand by non-target customers. By 2003, Burberry items, both legitimate and counterfeit, had become increasingly popular among urban youth and hip-hop musicians. A member of the house in the reality TV series Big Brother had worn Burberry constantly. Although this brand affiliation was viewed a positive sign that Burberry had achieved aspirational status among youth, there was a concern that this affiliation could eventually alienate Burberry's core customers. To date, Burberry had not made any official statements about how it planned to deal with these emerging customer bases.

The Role of the Check

A related issue had to do with the ubiquity of the Burberry check. Over the past several years, the check had appeared everywhere—on socks, scarves, shoes, hats, coats, pants, jackets, bikinis, umbrellas, eyeglass cases, even chiffon underwear. (See Exhibit 12 for examples.) About 10% of all apparel sales overtly featured check; another 10% featured the check in a seasonal color variation; a further 40% used the check subtly (e.g., in the lining or piping); the remaining 40% did not feature the check at all. In accessories, 60% to 70% of all sales were check. It was estimated that 25% of all company revenue was directly derived from prominent check products. As Bravo noted, “If I show you our check, you know it’s Burberry. The key is to bring some soul to the thing.” This meant managing the pervasiveness of the check in a strategic way.

For her part, Bravo felt it was important that the company transition to a more restrained use of the check over the next few years. She was advocating a “check under cover” philosophy in which customers had to “hunt for the pattern under a collar or inside a coat.” She also believed that the company should be selling a greater number of products with no check at all.

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At the same time, she recognized that there were some customers who bought Burberry specifically for the check. “We have a lot of one-item aspirational check owners,” she acknowledged. “We also have customers who don’t feel like they’re buying a Burberry unless the plaid is really prominent.” Tucker added, “Check management is a daily discipline. Everyone in the world who deals with us falls in love with it and wants to put it on everything.”

Sustainability of the Brand Positioning

A final issue had to do with the sustainability of Burberry’s brand positioning. As Bravo described it, “We’ve succeeded in positioning ourselves right in the middle. We’re wedged between lifestyle, represented by Ralph Lauren, and fashion, represented by Gucci.” Still, she wondered how easy it was going to be to straddle both ends of the continuum over the long term. (See Exhibits 13 through 17 for competitive comparisons.)

Complicating the issue was the fact that Burberry’s brand positioning not only placed it in competition with both lifestyle brands and fashion brands but, as Eugenia Ulasewicz, president of U.S. Operations, noted, “Everyone is a competitor now. Even Target is a competitor. People shop everywhere; high-income people shop at discount warehouses and middle-income people shop at luxury retailers.”

In this context, Bravo knew that, as demanding as the previous five years had been, the next five years could prove to be even more difficult. She remarked:

Our challenges are very different now. Five years ago, our task was to fix a brand that was broken. We’ve accomplished that; today, the Burberry brand is healthier than it has ever been. Now the task is to manage the popularity of the brand in a way that lays the foundation for long-term growth. The last thing we want is to become the victim of our own success. The question is, how do we continue to grow the brand without risking customer burnout?

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Exhibit 1 Burberry Financials (fiscal year ends in March)

2000 2001a 2002 2003

£ mil % £ mil % £ mil % £ mil %

Revenues Retail 99.1 43.9% 143.2 33.5% 156.9 31.4% 228.4 38.5% Wholesale 95.8 42.4% 238.8 55.8% 288.8 57.9% 306.9 51.7% License 30.8 13.7% 45.8 10.7% 53.5 10.7% 58.3 9.8% Total 225.7 427.8 499.2 593.6

Cost of Sales (120.1) (53.2%) (223.1) (52.2%) (248.1) (49.7%) (261.3) (44.0%)

Gross Profit 105.6 46.8% 204.7 47.8% 251.1 50.3% 332.3 56.0%

Operating Expenses Distribution, administration and other (87.1) (38.6%) (139.6) (32.6%) (165.7) (33.2%) (222.0) (37.4%)

Operating Profit 18.5 9.2% 65.1 15.2% 85.4 17.1% 110.3 18.6%

Source: Company data.

aReflects acquisition of Spanish licensee.

Exhibit 2 Burberry Sales Breakdown (fiscal year ends in March)

2000 2001 2002 2003 £ mil % £ mil % £ mil % £ mil %

Total Sales 225.7 427.8 499.2 593.6

By channel of distribution Retail 99.1 43.9% 143.2 33.5% 156.9 31.4% 228.4 38.5% Wholesale 95.8 42.4% 238.8 55.8% 288.8 57.9% 306.9 51.7% License 30.8 13.7% 45.8 10.7% 53.5 10.7% 58.3 9.8%

By product category

Womenswear 63.4 28.1% 134.7 31.5% 165.2 33.1% 197.9 33.3% Menswear 73.8 32.7% 142.4 33.3% 149.4 29.9% 162.8 27.4% Accessories 50.2 22.2% 98.0 22.9% 125.8 25.2% 169.5 28.6% Othera 7.5 3.3% 6.9 1.6% 5.3 1.1% 5.1 0.9% License 30.8 13.7% 45.8 10.7% 53.5 10.7% 58.3 9.8%

By geography: destination

Europe 115.5 51.2% 259.0 60.6% 286.7 57.4% 302.7 51.0% North America 62.3 27.6% 90.9 21.2% 110.5 22.1% 140.5 23.6% Asia Pacific 40.8 18.1% 74.6 17.4% 100.1 20.1% 147.0 24.8% Other 7.1 3.1% 3.3 0.8% 1.9 0.4% 3.4 0.6%

Source: Company data. aOther primarily includes Burberry’s fabric manufacturing operation and miscellaneous products.

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Exhibit 3 Burberry Timeline

Source: Casewriter research; Burberry.

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Exhibit 4 Product Ranges (for Burberry London label only)

Womenswear Menswear Accessories Licensed Products Outerwear Outerwear Handbags Fragrance Knitwear Casualwear Hats Eyewear Casualwear Tailored garments Shoes Timepieces Tailored garments Sportswear Belts & wallets Childrenswear Swimwear Luggage Men’s tailored clothing Underwear Large leather goods Umbrellas Silk scarves Shoes Ties

Source: Company reports.

Exhibit 5 Burberry Core Accessories (Sales, as a percentage of Total Accessory Sales; Fiscal Year ends in March. Includes only Burberry London label.)

41% 36%

16% 7%

25%

49%

18%

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

Scarves/Mufflers Handbags Small Leather Goods Silks

1999 2003

Source: Adapted from Colonna et al., “Burberry. Bursting with Potential,” Merrill Lynch, September 16, 2002, p. 17.

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Exhibit 6 Burberry’s Distribution Network (fiscal year ends in March)

2000 2001 2002 2003 Wholesale Network (No. of Doors) U.S. 186 352 414 Europe 2,455 2,145 1,779 Asia 184 175 168 Total 2,825 2,672 2,361 N/A Retail Network Flagship Stores -- 1 1 4 Directly Operated Stores 45 33 40 43 Concessions 6 6 10 62a Designer Outlets/Factory Shops 14 17 18 23 Total 65 57 69 132

Source: Adapted from Colonna et al., “Burberry. Bursting with Potential,” Merrill Lynch, September 16, 2002, p. 29.

aIndicates added doors due to acquisitions of distributors.

Exhibit 7 Burberry Flagship Stores

Source: Burberry.

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Exhibit 8 Burberry Prorsum Label

Source: Burberry.

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Exhibit 9 Burberry Advertisements Featuring Stella Tennant (Spring 1998)

Source: Burberry.

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Exhibit 10 Burberry Advertisement Featuring Kate Moss (Autumn/Winter 2000)

Source: Burberry.

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Exhibit 11 Burberry Advertisements (Tennant and Moss below), Spring/Summer 2003

Source: Burberry.

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Exhibit 12 The Burberry Check on Selected Products

Source: Burberry.

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Exhibit 13 Top 10 Global Luxury Goods Players (market share by sales, 2001)

Players 2001 LVMH 14.4% Polo Ralph Lauren 9.1% Richemont 6.4% Burberry 5.2% Gucci Group 4.4% Swatch Group 4.3% Chanel 3.7% Giorgio Armani 3.5% Rolex 3.2% Tiffany 3.1%

Source: Adapted from Merrill Lynch estimates, based on aggregate consolidated revenues of the top 100 luxury goods players.

Exhibit 14 Accessories and Apparel Sales for Top Luxury Brands (2001; Brand sales for Burberry, Hugo Boss; Wholesale sales for Polo Ralph Lauren; consolidated sales for all others in EURmn.)

EUR(mn) Estimated Market Share

Accessories Louis Vuitton 2,640 23% Gucci Division 1,394 12% Hermes 945 8% Coach 705 6% Prada 513 4% Ferragamo 507 4% Polo Ralph Lauren 484 4% Burberry 445 4% Chanel 356 3% TOD’s 319 3%

Apparel

Polo Ralph Lauren 3,621 9% Hugo Boss 1,072 3% Burberry 988 3% Max Mara 950 3% Giorgio Armani 661 2% Ermenegildo Zegna 474 1% Chanel 356 1% Versace 283 1% Gucci Division 255 1% Escada Brand 245 1%

Source: Adapted from Euromonitor, Merrill Lynch.

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Exhibit 15 Apparel Pricing Survey (in US$; Burberry data reflect prices from Burberry London label only.)

Burberry

Banana Republic

Brooks Brothers

Emporio Armani Hugo Boss

Ralph Lauren

Womenswear

Black Wool Pants 340 98 128 218 335 198 Casual Cotton Pants 170 68 78 188 125 75 Fashion Skirt 220 98 98 228 270 125 Cotton Blouse 195 68 60 — 165 190 Pant Suit 845 266 326 806 695 525 Black Dress 650 148 168 498 495 — Trench Coat 950 — 168 — — 245 Wool Overcoat 950 228 428 598 930 425

Menswear

Polo Shirt 70 45 45 108 59 53 Dress Shirt 150 68 50 148 75 98 Suit 895 416 798 895 795 913 Trench Coat 825 — — 228 595 — Wool Overcoat 895 198 598 895 695 895 Wool Sweater 250 60 80 348 185 145

Source: Adapted from Bear, Stearns & Co. (2002), based on random store visits in London and New York City.

Exhibit 16 Accessories Pricing Survey (in US$; Burberry data reflect prices from Burberry London label only.)

Burberry Coach Gucci Hermes Ralph

Lauren Prada

Accessories Leather Handbag 495 298 790 4,000 — 895 Iconic/Logo Tote 395 258 625 4,000 — 550 Women’s Silk Scarf 210 38 250 250 — — Wool Scarf 100 58 225 — 40 225 Men’s Silk Tie 110 — 125 108 75 118 Women’s Watch 325-650 150-395 495-995 — — —

Source: Adapted from Bear, Stearns & Co. (2002), based on random store visits in London and New York City.

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Exhibit 17 Advertising Expenditures (2002E), Selected Fashion Companies

EUR(mn) % of Sales Anne Klein 13 4% Burberry 98 3% Giorgio Armani 72 6% Gucci Division 111 6% Hermes 83 6% Hugo Boss 79 7% Louis Vuitton 169 6% Polo Ralph Lauren 100 4% Prada Group 122 7% Yves Saint Laurent Couture 32 25% Average 70 8%

Source: Adapted from Colonna et al., “Burberry. Bursting with Potential,” Merrill Lynch, September 16, 2002, p. 38.

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Harvard Business School 9-598-150 Rev. May 27, 1999

Professor John Gourville prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Some nonpublic data have been disguised and some business details have been simplified to aid in classroom discussion.

Copyright © 1998 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

Biopure Corporation

It was February 5, 1998, as Carl Rausch, president and CEO of Biopure Corporation, opened his Boston Globe and read about the U.S. government’s final approval of Oxyglobin (see Exhibit 1). Oxyglobin was the first of two new “blood substitutes” on which Biopure’s future depended— Oxyglobin for the veterinary market and Hemopure for the human market. While Oxyglobin was ready for launch, Hemopure was still two years away from final government approval. This timing was the source of an ongoing debate within Biopure.

Ted Jacobs, vice president for Human Clinical Trials at Biopure, argued that the release of Oxyglobin should be delayed until after Hemopure was approved and had established itself in the marketplace (see Exhibit 2 for an organizational chart of Biopure). Given that the two products were almost identical in physical properties and appearance, he felt that Oxyglobin would create an unrealistic price expectation for Hemopure if released first. As he made clear in a recent management meeting,

... [T]he veterinary market is small and price sensitive. We’ll be lucky to get $150 per unit. The human market, on the other hand, is many times larger and we can realistically achieve price points of $600 to $800 per unit. But as soon as we come out with Oxyglobin at $150, we jeopardize our ability to price Hemopure at $800. Hospitals and insurance firms will be all over us to justify a 500% price difference for what they see as the same product. That’s a headache we just don’t need. We’ve spent $200 million developing Hemopure—to risk it at this point is crazy. We should just shelve Oxyglobin for now.

At the same time, Andy Wright, vice president for Veterinary Products, had his sales organization in place and was eager to begin selling Oxyglobin. He argued that the benefits of immediately releasing Oxyglobin outweighed the risks,

Oxyglobin would generate our first revenues ever—revenues we could use to launch Hemopure. And while the animal market is smaller than the human market, it is still attractive. Finally, I can’t stress enough the value of Oxyglobin in learning how to “go to market.” Would you rather make the mistakes now, with Oxyglobin, or in two years, with Hemopure?

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While Carl Rausch listened to this debate, he also considered his colleagues’ growing desire to take Biopure public in the near future. He wondered whether a proven success with Oxyglobin might not have a greater impact on an IPO than the promise of success with Hemopure.

An Overview of Biopure

Biopure Corporation was founded in 1984 by entrepreneurs Carl Rausch and David Judelson as a privately owned biopharmaceutical firm specializing in the ultrapurification of proteins for human and veterinary use. By 1998, this mission had taken Biopure to the point where it was one of three legitimate contenders in the emerging field of “blood substitutes.”1 Blood substitutes were designed to replicate the oxygen-carrying function of actual blood, while eliminating the shortcomings associated with the transfusion of donated blood. Through the end of 1997, no blood substitute had received approval for use anywhere in the world.

Biopure’s entries into this field were Hemopure, for the human market, and Oxyglobin, for the animal market. Both products consisted of the oxygen-carrying protein “hemoglobin” which had been removed from red blood cells, purified to eliminate infectious agents, and chemically modified to increase its safety and effectiveness. What distinguished Hemopure and Oxyglobin from other “hemoglobin-based” blood substitutes under development was the fact that they were “bovine- sourced” as opposed to “human-sourced”—they were derived from the blood of cattle. To date, Biopure had spent over $200 million in the development of Oxyglobin and Hemopure and in the construction of a state-of-the-art manufacturing facility.

Both of Biopure’s products fell under the approval process of the United States government’s Food and Drug Administration (FDA), which required that each product be proven safe and effective for medical use (see Exhibit 3 for an overview of the FDA approval process). In this regard, Oxyglobin had just received final FDA approval for commercial release as a veterinary blood substitute, while Hemopure would soon enter Phase 3 clinical trials and was optimistically expected to see final FDA approval for release as a human blood substitute sometime in 1999.

This recent FDA approval of Oxyglobin brought to a peak a long-simmering debate within Biopure. With its primary goal being the development of a human blood substitute, Biopure’s entry into the animal market had been somewhat opportunistic. During Pre-Clinical trials for Hemopure, the benefits of a blood substitute for small animals became apparent. In response, Biopure began a parallel product development process which resulted in Oxyglobin. However, there was little question within Biopure that Oxyglobin was an ancillary product to Hemopure.

As it became apparent that Oxyglobin would gain FDA approval prior to Hemopure, Carl Rausch and his management team discussed how best to manage Oxyglobin. As the first “blood substitute” of any type to receive full government approval, Rausch was eager to get the news out. With this in mind, Andy Wright and a small marketing team had been assembled to bring Oxyglobin to market. However, Ted Jacobs and others questioned whether the immediate release of Oxyglobin might not impinge on Biopure’s ability to optimally price Hemopure. After months of debate, it was time to decide on the fate of Oxyglobin.

1 While the term blood substitute has historically been used to describe this class of product, Biopure and the medical community increasingly have used the term oxygen therapeutic to describe the latest generation of product. For simplicity, however, we will continue to use the term blood substitute in this case.

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The Human Blood Market

Blood is essential for life. It performs many functions, the most acutely critical of which is the transportation of oxygen to the organs and tissues of the human body. Without oxygen, these organs and tissues will die within minutes.

That portion of blood responsible for oxygen transportation are the red blood cells (RBCs). RBCs capture inhaled oxygen from the lungs, carry that oxygen to the cells of the body, release it for use where needed, capture expended carbon dioxide from those cells, and carry that carbon dioxide back to the lungs, where it is released. The key to this process is “hemoglobin,” the iron-containing protein found within each RBC to which oxygen and carbon dioxide molecules bind.

The adult human body contains 5,000 milliliters (ml) or about 10 pints of blood. An individual can naturally compensate for the loss of up to 30% of this volume through some combination of increased oxygen intake (i.e., faster breathing), increased flow of the remaining blood (i.e., faster heart rate) and the prioritization of blood delivery to vital organs. In cases of blood loss of greater than 30%, however, outside intervention is typically required—generally in the form of a “blood transfusion.”

Human Blood Transfusions

A blood transfusion entails the direct injection of blood into a patient’s bloodstream. As of 1998, the most common form of blood transfusion was the intravenous transfusion of donated RBCs.2 Typically, a healthy individual would donate 1 unit or 500 ml of “whole” blood, which would be tested for various infectious diseases, sorted by blood type, and separated into its usable components (e.g., plasma, platelets, and RBCs). This process would yield 1 unit or 250 ml of RBCs, which then would be stored until needed by a patient. 3

While potentially lifesaving, the transfusion of donated RBCs has limitations. These include

• The need for exact blood typing and cross-matching between donor and recipient. The RBCs of each human may contain specific blood sugars, or antigens. The existence or absence of these antigens creates a complex set of allowable transfusions between donor and recipient, as shown in Exhibit 4. Transfusions outside of those outlined can be fatal to the recipient.

• The reduced oxygen-carrying efficiency of stored RBCs. RBCs stored for 10 days or more are only about 50% efficient at transporting oxygen in the first 8 to 12 hours after transfusion.

• The limited shelf-life for stored RBCs. RBCs can be safely stored for only about 6 weeks, after which time they are typically discarded.

• The need for refrigeration. For optimal shelf-life, RBCs must be stored at 4° Celsius (~40° F).

2 Historically, whole blood transfusions were the norm. Since the 1970s, however, whole blood increasingly had been separated into RBCs, platelets and plasma, allowing for (1) several patients to benefit from a single unit of donated blood and (2) a reduced likelihood of negative reaction for any given patient.

3 In blood medicine, 1 unit is defined in terms of its therapeutic value. Therefore, “1 unit” or 250 ml of RBCs provides the oxygen-carrying capacity of “1 unit” or 500 ml of whole blood. Similarly, “1 unit” of a blood substitute (i.e., typically 125 ml) provides the same oxygen-carrying capacity of “1 unit” of RBCs or whole blood.

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• The risk of disease transmission. While donated blood is tested for infectious agents, there still exists the risk of disease transmission. For example, the risk of AIDS is 1:500,000, the risk of Hepatitis B is 1:200,000, and the risk of Hepatitis C is 1:100,000.

Autologous transfusions In an attempt to overcome some of these limitations, the use of “autologous” or self-donated RBCs has become increasingly common. In an autologous RBC transfusion, a medically stable patient who anticipates the need for RBCs would have his or her own blood drawn weeks in advance, separated into its components, and saved until needed. Research has shown this process to significantly reduce a patient’s rate of complication and post-operative infection, thereby hastening recovery and shortening his or her stay in the hospital.

Human Blood Supply and Demand

Human blood supply Fourteen million units of RBCs were donated by 8 million people in 1995 in the United States. Approximately 12.9 million of these units came from individuals who voluntarily donated to one of over 1,000 nonprofit blood collection organizations. By far, the largest of these organizations was the American Red Cross, which collected half of all the blood donated in the United States in 1995 through a network of 44 regional blood collection centers. Typically, the Red Cross and the other blood collection organizations supported “blood mobiles,” which traveled to high schools, colleges, and places of employment to reach potential donors. The remaining 1.1 million units of RBCs were autologous donations made directly to a hospital blood center.

Increasingly, blood collection was a struggle. While 75% of all adults qualified as a donor, fewer than 5% actually donated in a given year. Historically, reasons for donating included altruism and peer pressure, while reasons for not donating included fear of needles and lack of time. Since the mid-1980s, an additional reason for not donating involved the misconception that donating put one at risk for contracting AIDS. Public education had failed to counteract this misconception.

Given the low rate of donation and the relatively short shelf-life of RBCs, it was not uncommon for medical facilities and blood banks to experience periodic shortages of RBCs. This was especially true during the winter holidays and the summer months, periods which routinely displayed both increased demand and decreased rates of donation.

Human blood demand Of the 14 million units of RBCs donated in 1995, 2.7 million were discarded due to contamination or expiration (i.e., units older than 6 weeks). Another 3.2 million units were transfused into 1.5 million patients who suffered from chronic anemia, an ongoing deficiency in the oxygen-carrying ability of the blood. The remaining 8.1 million units were transfused into 2.5 million patients who suffered from acute blood loss brought on by elective surgeries, emergency surgeries, or trauma. Exhibit 5 offers a breakdown of RBC transfusions in 1995.

In elective and emergency surgeries, RBCs were routinely transfused in situations where blood loss was greater than two units, as was typical in heart bypass and organ transplant surgeries. In surgeries with blood loss of one to two units, however, RBCs typically were not transfused in spite of their potential benefit. In these “borderline” transfusion surgeries, doctors typically avoided transfusions for fear of disease transmission or negative reaction caused by the transfused RBCs. There were approximately 1 million “borderline transfusion” surgeries in the United States each year.

RBC transfusions were also required in the approximate 500,000 trauma cases which occurred every year in the United States. These cases were characterized by the massive loss of blood due to automobile accidents, gunshot wounds, etc. However, due to the resources required to store, type, and administer RBCs, only 10% of trauma victims received RBCs “in the field” or at the site of the accident. Blood transfusions for the remaining 90% of victims were delayed until the victim arrived at a hospital emergency room. This delay was often cited as a contributing factor to the 30% fatality

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rate seen in these trauma cases, as evidenced by the 20,000 trauma victims who bled to death each year prior to reaching the hospital. As one doctor put it,

... [T]hose first few minutes after a trauma are known as the “Golden Hour.” Life and death often depends on how fast the lost blood is replaced in this period.

Looking forward, while the demand for RBCs to treat chronic anemia was expected to remain stable, the demand for RBCs to treat acute blood loss was expected to rise with the aging U.S. population. Individuals over 65 years of age comprised 15% of the adult population in 1995 and received over 40% of all “acute blood loss” transfusions. By the year 2030, this over-65 segment was expected to double in absolute numbers and to grow to 25% of the adult population.

Human blood pricing Since the AIDS crisis, it has been illegal for an individual to sell his or her blood in the United States. As such, all blood donations are unpaid. In turn, to cover their expense of collection and administration, blood collection organizations sell this donated blood to hospitals and medical centers. Once obtained, hospitals incur additional costs to store, handle, transport, screen, type, cross-match and document the blood. Estimates for these costs are outlined in Exhibit 6. Typically, these costs are passed on to the patient or to the patient’s insurance provider.

The Veterinary Blood Market

The role of RBCs for animals is biologically identical to its role for humans: RBCs transport oxygen to an animal’s tissues and organs. In practice, however, the availability and transfusion of blood was considerably more constrained in the veterinary market than it was in the human market.

Veterinary market structure There were approximately 15,000 small-animal veterinary practices in the United States in 1995. Of these, about 95% were “primary care” practices which provided preventative care (e.g., shots, checkups), routine treatment of illness (e.g., infections, chronic anemia), and limited emergency care (e.g., simple surgery and trauma). The remaining 5% of practices were “emergency care” or “specialty care” practices. Approximately 75% of primary care practices referred some or all of their major surgery and severe trauma cases to these emergency care practices. Across both the primary care and emergency care practices, patient volume was concentrated in dogs (~50% of patient volume) and cats (~35% of volume). Exhibit 7 provides a staffing and patient profile of small-animal veterinary clinics in the United States.

Veterinary blood demand In practice, blood transfusions in the veterinary market were infrequent. In 1995, for example, the average veterinary practice was presented with 800 dogs suffering from acute blood loss. About 30% of these dogs would have benefited significantly from a transfusion of blood, but only about 2.5% were deemed “critical cases” and received a transfusion.

The incidence of these acute blood loss cases was relatively concentrated, with 15% of veterinary practices handling 65% of all canine surgeries and 10% of practices handling 55% of all canine trauma cases. Not surprisingly, these “high incident” practices tended to be the larger primary care practices and the emergency care practices. This concentration was also evident in blood transfusions. In 1995, an average of 17 units of canine blood were transfused by each primary care practice, while an average of 150 units were transfused by each emergency care practice.

Veterinary blood supply4xxx Historically, the biggest constraint to veterinary transfusions was the lack of an adequate blood supply. In contrast to the human market, there existed few animal blood

4 Unlike the human market, transfusions in the animal market still tended to be “whole blood” transfusions.

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banks. As a result, the sole source of blood for most veterinary practices were donor animals which were housed at the practice for the expressed purpose of donating blood. When a dog or cat was in need of blood, blood was drawn from a donor dog or cat and then transfused into the animal in need. For primary care practices, donor animals provided 93% of all transfused blood, while blood banks provided the remaining 7%. In emergency practices, these proportions were 78% and 22%.

About 15% of veterinary practices found the “donor animal” system to be administratively or financially prohibitive and did not offer it as a service. Of the 85% of practices that did use a donor system, few had a good sense of its cost. In particular, few practices explicitly tracked the cost of housing the donor animal or the time required to draw the blood. As a proxy for these costs, practices typically looked to the price of a unit of blood from an animal blood bank. In 1995, that cost was $50 to $100. In turn, a typical primary care practice charged a pet owner $80 to $120 per unit and a typical emergency care practice charged a pet owner $130 to $170 per unit.

Finally, most practices that conducted transfusions lacked the time and resources to properly type both the donor and recipient blood. According to one estimate, only one-tenth of practices reported always typing the blood of both the donor and recipient animal. While complications due to incompatible blood types were not nearly as severe for dogs as they are for humans, this lack of blood typing and cross-matching was shown to prolong the recovery of a patient animal.

These factors resulted in many veterinarians viewing the transfusion of animal blood as the treatment of last resort, with 84% of veterinary doctors reporting overall dissatisfaction with the blood transfusion alternatives currently available in the marketplace.

Human Blood Substitutes

Originally conceived as a vehicle to treat wounded soldiers in battlefield settings, the potential for a human blood substitute for nonmilitary use became increasingly apparent since the 1950s. This period saw a significant rise in auto accidents, the advent of open heart and organ transplant surgeries, and the AIDS crisis, which called into question the safety of the blood supply.

By 1998, several companies appeared to be on the verge of a viable blood substitute with a class of product called “hemoglobin-based blood substitutes.” These products attempted to exploit the natural oxygen-carrying capabilities of hemoglobin while eliminating the limitations associated with donated RBCs. Each of these companies was attempting to (1) extract the hemoglobin found within human or animal RBCs, (2) purify that hemoglobin to eliminate infectious agents, and (3) modify the otherwise unstable free hemoglobin molecule to prevent it from breaking down. These purification and modification processes were nontrivial and represented the bulk of blood substitute research conducted over the past 20 years.

Product benefits In theory, these hemoglobin-based blood substitutes eliminated many of the limitations associated with donated RBCs. In particular, they were

• “Universal” blood substitutes, eliminating the need for blood typing and cross-matching.

• Free of infectious agents and contamination.

• Increased shelf life. These blood substitutes could be safely stored for up to 2 years.

• Immediately 100% efficient at transporting oxygen. Unlike whole RBCs, modified hemoglobin did not require a period of time to achieve peak oxygen-carrying efficiency.

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In addition to these “anticipated” benefits, hemoglobin-based blood substitutes were displaying several “unanticipated” benefits which companies were only just beginning to investigate. In particular, given that hemoglobin molecules were significantly smaller than RBCs, they were able to flow to regions of the body that RBCs might not be able to reach. It was believed that this could lead to improved treatments in cases of stroke and heart attack—cases where RBCs often were slowed or restricted from reaching vital organs either due to artery blockages or decreased blood pressure.

Product shortcomings At the same time, these “hemoglobin-based” blood substitutes did have some shortcomings, including:

• A short half-life. While donated RBCs remained in the body for up to two months after transfusion, these blood substitutes were excreted from the body within 2 to 7 days.

• The potential for higher toxicity. While the human body could tolerate the limitless and continuous replacement of one’s blood with donated blood, the safety of these blood substitutes had been demonstrated only up to transfusion levels of 5 to 10 units.

In spite of these shortcomings, Dr. C. Everett Koop, the former Surgeon General of the United States, proclaimed,

When the history of 20th-century medicine is written, the development of blood substitutes will be listed among the top ten advances in medicine. … [B]ecause of its purity, efficacy and convenience, this product class has the potential to revolutionize the practice of medicine, especially in critical-care situations. … [T]he next generation will not know how tough it was for those of us in medical practice before this technology became available. 5

Others were less optimistic. One industry analyst presented a less attractive scenario for hemoglobin-based blood substitutes:

... [W]e feel that there is no urgent need for blood substitutes since donated human blood is, for the most part, safe and effective. The expectation that blood substitutes will command vast markets and high price premiums is based on the assumptions that blood substitutes will prove safer and more effective than donated blood. While only time will tell if this is true, it will be an uphill battle given the widespread acceptance of donated blood.

The FDA Approval Process

Human blood substitutes fell under the strict regulation of the U.S. government’s Food and Drug Administration (FDA), which required that a product be proven safe and effective for medical use before being approved for commercial release (refer back to Exhibit 3). By early 1998, three companies had products that were in the final stages of this process. These products differed in their source of raw hemoglobin and in the process by which that hemoglobin was purified and modified. The FDA approval process was sensitive to these differences. Short of beginning the FDA approval process anew, each company was limited in its ability to substantially alter either the source of their hemoglobin or the process by which that hemoglobin was purified and modified. In addition, given that most of the companies had patented their purification and modification processes, there was little opportunity for a new entrant to quickly gain FDA approval.

5 Biopure company website.

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Competitors for a Human Blood Substitute

As of 1998, Baxter International and Northfield Laboratories were the only other companies in late-stage development of a hemoglobin-based blood substitute. All other competitors were either several years behind in their development of a hemoglobin-based product or were pursuing a less promising technology.

In contrast to Biopure’s use of cattle as its source of hemoglobin, both Baxter and Northfield relied on human blood as their source of hemoglobin. In particular, both companies had developed a technology to extract raw hemoglobin from “outdated” human RBCs (i.e., RBCs intended for transfusion, but which had been stored for more than 6 weeks). While their production processes and their pending FDA approval did not preclude them from using fresh RBCs, it was the stated intention of both companies to initially rely on outdated human RBCs. Through 1998, Baxter had an agreement with the American Red Cross to obtain outdated RBCs at a cost of $8 per unit. Until recently, Northfield had a similar $8 per unit agreement with Blood Centers of America, another national blood collection agency. However, in early 1997, Blood Centers of America raised their price to Northfield to $26 per unit for outdated RBCs.

In addition to their reliance on human blood, the products of Baxter and Northfield also differed from Biopure’s in that they needed to be frozen or refrigerated until used. Biopure’s Hemopure was shelf-stable at room temperature.

Baxter International With over $5.4 billion in sales and $670 million in net income in 1996, Baxter was an acknowledged leader in the development, manufacture and sale of blood-related medical products, ranging from artificial heart valves to blood-collection equipment. In addition, Baxter had a long history of product breakthrough, having developed the first sterile blood collection device in 1939, the first commercially available artificial kidney machine in 1956, and the first Factor VIII blood- clotting factor for the treatment of hemophilia in 1966.

“HemAssist,” Baxter’s patented blood substitute, was expected to add to this string of breakthroughs. Representing 30 years and $250 million in effort, HemAssist was the first human blood substitute to proceed to Phase 3 clinical trials in June 1996. Initially, these trials were expected to lead to full FDA approval by late 1998. However, in October 1997, Baxter revised its estimate to late 1999 or early 2000—an announcement that was followed by a 10% dip in Baxter’s stock price.

Despite this delay, Baxter recently constructed a $100 million facility with a production capacity of 1 million units of HemAssist per year. Aside from its variable cost of source material, Baxter was expected to incur production costs of approximately $50 million per year, independent of production volume. While still just industry speculation, it was anticipated that Baxter would price HemAssist between $600 and $800 per unit.

Northfield Laboratories Northfield Laboratories of Illinois also had recently entered Phase 3 trials with a hemoglobin-based blood substitute. Northfield’s product, “PolyHeme,” was very similar to Baxter’s HemAssist in its production and usage profile. Based on early positive results from its Phase 3 trials, Northfield anticipated full FDA approval in late 1999.

In contrast to Baxter, Northfield was a small, 45-person firm that was founded in 1985 for the sole purpose of developing a human blood substitute. As such, PolyHeme represented its only product. Analysts expected PolyHeme to be priced comparably to HemAssist upon release.

By early 1998, Northfield had spent $70 million in its development of PolyHeme and in the construction of a pilot production facility with an output capacity of 10,000 units per year. While this facility was sufficient to satisfy demand during clinical trials, Northfield management recognized the need for a full-scale production facility. With this in mind, they hoped to construct a $45 million

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facility with a capacity of 300,000 units per year. With this factory in place, aside from the cost of raw material, production costs were expected to be about $30 million per year, independent of production volume. By early 1998, selection of a factory site and plant construction had not yet begun.

Animal Blood Substitutes

Through early 1998, Biopure was the only company that was actively engaged in the development of a blood substitute for the small-animal veterinary market. And while there was little to prevent Baxter or Northfield (or anyone else) from attempting to enter the veterinary market, any company wishing to do so would have to initiate an FDA-approval process specific to the veterinary market. By one estimate, assuming a company immediately began such a process, it would take 2 to 5 years to bring a product to market.

Biopure and Its Blood Substitutes

Hemopure and Oxyglobin were nearly identical in terms of physical characteristics and production processes. The only difference between the two products was in the size of the hemoglobin “clusters” that were contained in the final products. In the production of Oxyglobin, both large and small clusters of hemoglobin molecules were naturally formed. However, the small clusters tended to cause minor gastrointestinal problems and discoloration of urine. While considered acceptable in the animal market, these side effects were undesirable in the human market. As a result, Hemopure followed the same production process as used to make Oxyglobin, with a final step added to remove the small hemoglobin clusters.

Biopure had a single manufacturing facility, with an output capacity varying by the production mix of Oxyglobin and Hemopure. The same equipment was used to produce either product, but only one product could be produced at a time. This resulted in an annual capacity of 300,000 units of Oxyglobin or 150,000 units of Hemopure or some linear combination inbetween. The lower output for Hemopure reflected the facts that (1) the added step to remove the small hemoglobin clusters decreased the rate of production, and (2) the removal of the small hemoglobin clusters decreased yield.

To support these levels of output, aside from the cost of raw material, Biopure anticipated overall production costs of $15 million per year, independent of volume. For raw material, it anticipated a ready supply of bovine blood priced at $1.50 per unit. Biopure paid this money to cattle slaughterhouses to collect and transport the blood of cattle that were being processed for their meat— blood that otherwise would have been discarded. It was estimated that 10,000 cattle could supply enough raw material to support full production in Biopure’s existing manufacturing facility.

Status of Hemopure

As of early 1998, Hemopure was in Phase 3 clinical trials in Europe, with FDA approval for Phase 3 trials in the United States appearing imminent. In anticipation of this approval, Biopure had established sites for Phase 3 trials and was ready to proceed immediately upon approval. While acknowledging the potential pitfalls of any clinical trials, Biopure was confident that the Phase 3 trials would be successful and that the FDA would grant full approval sometime in 1999. Biopure expected to commercially release Hemopure sometime in late 1999 or early 2000.

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In line with the anticipated price of Baxter’s HemAssist, Biopure planned to price Hemopure at $600 to $800 per unit. However, little systematic testing had been done by Biopure to determine the acceptability of these prices. In particular, little was known of the price sensitivity of medical personnel, insurance providers, or of patients when it came to human blood substitutes.

Status of Oxyglobin

In 1997, Biopure established the Veterinary Products Division and hired Andy Wright to oversee the marketing and sale of Oxyglobin. Working under the assumption that Biopure would begin selling Oxyglobin immediately upon approval, Wright faced a host of decisions, including how to price and how to distribute Oxyglobin. Supporting him in these decisions was a team of seven employees—one director of marketing, one technical service representative (to answer technical questions and complaints), two customer service representatives (to support ordering and billing), and three sales representatives (to make sales calls and generate orders).

The pricing of Oxyglobin Some members of Wright’s sales team argued for Oxyglobin to be priced at $80 to $100 per unit. These team members pointed to the price sensitivity of the vet market, arguing that few pet owners carried health insurance on their animals. They also noted that the average cost of a visit to the vet was only about $60, with few procedures costing more than $100 (see Exhibit 8). Finally, they noted that vets tended to use a simple “doubling rule” when pricing a medical product to the pet owners, bringing the end-user price of Oxyglobin to $160 to $200 per unit.

Other members of Andy Wright’s sales team felt that Oxyglobin should carry a premium price of up to $200 per unit, reflecting the many advantages of Oxyglobin relative to donated animal blood. These team members pointed out that while the average cost of a visit to a primary care practice might be only $60, the cost of a visit to an emergency care practice could easily run from $200 to over $1,000. They also questioned whether veterinary doctors would just blindly double the price of Oxyglobin without regard for its high dollar contribution. Finally, they noted that at a low price, Biopure could never hope to recoup the massive cost of product development.

To better understand the channel’s willingness to pay for an animal blood substitute, Biopure conducted two surveys in 1997—one survey of 285 veterinarians and another of 200 dog owners. Table A offers results of the veterinarian survey and Table B offers results of the owner survey.

In reviewing these surveys, Wright reminded himself that veterinarians often played the role of gatekeeper when it came to potential treatments, recommending less-expensive over more- expensive treatments in an effort to save their clients’ money. At the same time, 90% of pet owners reported that they wanted to be made fully aware of all the alternatives available to treat their pets.

Table A xxx Veterinarians’ Reported Willingness to Trial Oxyglobin

Price to Veterinarian % of Veterinarians Who Would Trial Product Noncritical Cases Critical Cases

$50 per unit 95% 100% $100 per unit 70% 95% $150 per unit 25% 80% $200 per unit 5% 60%

Source: Biopure company records

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Table Bxxx Pet Owners’ Willingness to Trial Oxyglobin

Price to Pet Owner % of Pet Owners Who Would Trial Product Noncritical Cases Critical Cases

$100 per unit 60% 90% $200 per unit 40% 85% $300 per unit 35% 75% $400 per unit 30% 65%

Source: Biopure company records

The distribution of Oxyglobin Andy Wright also had to decide how best to sell and distribute Oxyglobin and how to educate veterinarians on its use. In approaching this question, he looked to the current distribution practices for medical products in the veterinary market.

In 1997, $1.2 billion worth of product was sold to veterinary practices through a network of 200 independent distributors—each of whom sold and distributed the products of many manufacturers. Two of these independent distributors were national in scope, 18 were regional (e.g., New England), and 180 were local (e.g., metropolitan Boston). Table C provides a sales and staffing profile for these distributors. A manufacturer might contract with one national distributor, several nonoverlapping regional distributors, and many nonoverlapping local distributors. In return for their selling and distribution efforts, a distributor would receive 20% of the manufacturer selling price on a more-established product and 30% of the selling price on a less-established or new product.

Table C xxx Profile of Independent Distributors of Veterinary Medicines

Type of Distributor Number % of Total Sales Avg. Number of Sales Reps

National 2 25% 100

Regional 18 60% 40

Local 180 15% 1.5

Source: Biopure company records

A veterinary practice could expect one 15-minute visit per week from the sales representatives of its primary distributor. These 15-minute visits would entail a focused discussion of current promotions on existing products and a more limited discussion of products new to the market. Typically, a sales rep might introduce 100 new products in a given year. To educate a particular distributor’s sales reps on a new product, a manufacturer might set up a series of training sessions. These training sessions would be conducted for groups of about 10 sales representatives each and last anywhere from 1 to 4 hours, depending on the complexity of the new product.

Another $300 million worth of products were sold directly to veterinary practices through manufacturer salesforces. Termed “manufacturer direct,” this type of distribution often was used by manufacturers with either high-volume, well-established products or products which required a very sophisticated sales pitch. If Biopure chose this route, in addition to the cost of maintaining a salesforce, Andy estimated the cost to physically distribute Oxyglobin to be $10 to $15 per unit.

Andy Wright also considered trade publications and trade shows as another means by which to educate veterinarians about the existence and benefits of Oxyglobin. A quick investigation revealed that five journals had almost universal coverage across veterinarians and tended to be well-read. In addition, six large veterinary trade shows held in the United States each year attracted 2,000 to 10,000 veterinarians each. Typically, these trade shows were taken seriously by attendees and were a valued source of information. Andy wondered if either of these avenues made sense for Biopure.

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Biopure’s Decisions

While Andy dealt with the question of how best to market Oxyglobin, Carl Rausch wrestled with the larger question of whether and when to launch Oxyglobin. Should he listen to Ted Jacobs and postpone the launch of Oxyglobin until after Hemopure had established itself in the marketplace? Or should he listen to Andy and immediately launch Oxyglobin and reap the near-term benefits?

Not lost on Carl was the potential impact of Oxyglobin on a possible initial public offering of Biopure stock. To this point, Biopure had remained a privately held firm with very little debt. And while they currently had no revenues, a recent round of capital venture financing had provided them with $50 million—enough money to support operations for another two years. Nevertheless, many stakeholders in Biopure were anxious to take the company public. In this regard, Carl wondered whether a veterinary product with small but steady sales might not prove more attractive to investors than a human product still under development. He was especially sensitive to this issue in light of some recent, high-profile product failures in the Massachusetts biotechnology community (see Exhibit 9).

With all of this in mind, as president and CEO of Biopure, Carl Rausch pondered how best to leverage the opportunity offered by Oxyglobin without jeopardizing the potential of Hemopure.

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Exhibit 1 Excerpts from The Boston Globe Article, February 5, 1998

Biopure’s Blood Substitute for Dogs OK’d

Veterinarians scrambling to find blood for badly injured dogs now have a blood substitute. Biopure Corp. of Cambridge said yesterday it received federal regulatory approval to market oxygen-carrying blood derived from the blood of cows.

Tested in over 250 dogs, the company’s blood substitute, called Oxyglobin, is initially aimed at the [canine blood transfusion market], according to Andrew W. Wright, vice president of Biopure’s veterinary products.

The US Food and Drug Administration approval makes Oxyglobin the first blood substitutes for dogs, designed for dogs needing blood transfusions because of blood loss from accidents, surgeries, parasite infections, or rare anemia cases.

“This is breakthrough development because it quickly gets oxygen into tissue and organs and buys time for the dog’s own regenerative red blood cells to come back,” said Dr. Robert Murtaugh, professor of veterinary medicine and section head for emergency and critical care services at the Tufts University School of Veterinary Medicine.

The canine version is designed to largely replace drawing blood from donor dogs some veterinarians use in emergency situations.

Unlike blood that contains red blood cells, Biopure’s technology uses a highly purified bovine hemoglobin that does not require blood typing or cross- matching. [Oxyglobin] can be stored in a veterinarian’s storage area at room temperature for up to two years. A single bag—equivalent to a pint of whole blood—is sufficient for small to medium-sized dogs; two bags might be needed for larger dogs.

Reprinted with courtesy of The Boston Globe.

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Exhibit 2 The Organizational Structure at Biopure Corporation

Source: Biopure company records

a Numbers in parenthesis represents the total number of employees that fall under a particular position’s span of

control. Thus, 140 employees either directly or indirectly report to Carl Rausch.

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Exhibit 3 The United States FDA Approval Process

Phase Goals Characteristics

Pre-Clinical Trials Safety in animals – Typical length = 5 - 10 years – Need to show safety – Hope to show efficacy – Testing animals include mice, rats, dogs, sheep, etc.

Phase 1 Clinical Trials

Safety in healthy human subjects

– Typical length = 2 - 3 years – 20 - 100 individuals – Single-site testing location

Phase 2A & 2B Clinical Trials

2A - Safety in human patients

2B - Safety & efficacy in human patients

– Typical length = 1 - 2 years – 100 - 200 individuals – Single-site or multi-site testing locations

Phase 3 Clinical Trials

Large-scale safety & efficacy In use

– Typical length = 1 - 2 years – 100 - 500 individuals – Multi-site testing locations – Double-blind testing (i.e., neither patient nor doctor

aware of specific product or brand)

Source: Biopure company records

Exhibit 4 Human Blood Typing and Allowable Transfusionsa

Donor Blood Type

% of Population

Acceptable Recipients

AB 4% AB b

A 40% A, AB

B 11% B, AB

O c

45% O, A, B, AB

Source: The American Red Cross a In addition to ABO blood typing, RBCs are either Rh+ or Rh-,

further complicating allowable transfusions. b AB is often referred to as the “universal recipient.”

c O is often referred to as the “universal donor.”

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Exhibit 5 Red Blood Cell Donations and Transfusions in the United States in 1995

Use of Red Blood Cells Units (in 000s)

Acute Blood Loss:

Elective Surgery:

Anonymous Donations 5,800

Autologous Donations a,b

1,100

Emergency Surgery (in hospital) 1,000

Trauma (in field administration) 200

Acute Blood Loss Subtotal 8,100

Chronic Anemia 3,200

Not Transfused

Due to Rejection 1,200

Due to Expiration 1,500

Not Transfused Subtotal 2,700

Total: 14,000

Source: Stover & Associates LLC a Autologous donations are in elective surgery only. All other uses

of RBCs represent anonymous donations. b Autologous donations include both those units transfused and

those unused units discarded.

Exhibit 6 Cost to Patient of Donated Human Blood

Low Estimate (per Unit)

High Estimate (per Unit)

Anonymous Donations:

Hospital Acquisition Cost $ 75 $150

Screening/Typing/Crossmatching 25 40

Transportation/Administration 25 35

Final Price of Anonymous $125 $225

Autologous Donations:

Added Administration and Handling + 150 + 200

Final Price of Autologous $275 $425

Source: Stover & Associates, LLC

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Exhibit 7 Profile of the 15,000 Veterinary Practices in the United States (1995)

Class of Average No. Relative Average Monthly Case Load Average Gross Practice of Doctors Frequency Dogs Cats Other Revenues

Primary Care:

1 Doctor Practices 1 25% 200 125 80 $265,000

2 Doctor Practices 2 30% 300 200 120 $460,000

3+ Doctor Practices 4.6 40% 450 300 160 $800,000

Average Primary Care 2.7 95% 412 265 140 $570,000

Emergency Care:

Avg. Emergency Care 4.0 5% 400 240 130 $770,000

Source: Biopure Company Records

Exhibit 8 Small-Animal Veterinary Fees for Typical Procedures in Primary Care Practices in 1995

Procedure Average Fee

Average Charge per Visit $58

Office Call—Average Minimum Charge $25

Boarding $10

Hospitalization $19

Anesthesia $45

X-rays $40

Blood Transfusion $100

Hysterectomy $80

Heartworm treatment $250

Annual Vaccinations $27

Rabies Vaccination $12

Lab Tests—Average $23

Dental Cleaning $75

Deworming $15

Source: Veterinary Economics, October, 1996, p. 45

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Exhibit 9 xxx Massachusetts Biopharmaceutical Companies’ Proposed Drugs Sidelined in the 2nd Quarter, 1997

Firm/location Date Problem Status of company

ImmunoGen Norwood, MA

March 18 Oncolysin B cancer drug halted after Phase 3 trial failure

Significantly downsized operations, extensive layoffs, major restructuring, sold biomanufacturing plant, and relocated corporate offices

OraVax Cambridge, MA

March 19 HNK20, a nosedrop designed to reduce hospitalization for lower respiratory infections caused by respiratory virus in infants, failed in a pivotal overseas clinical trial

Layoff of 20 people in April as part of a corporate reorganization

AutoImmune Lexington, MA

April 21 Myloral, an oral multiple sclerosis drug, did no better than placebo in Phase 3 trial

Major restructuring, now employs 20, down from 90 employees

Genzyme Cambridge, MA

May 5 Sepracoat, a surgical antiadhesion coating, was rejected by FDA advisory committee for lack of sufficient evidence of clinical effectiveness

Company selling Sepracoat in Europe; has FDA approval on related Seprafilm product

Cambridge Neuroscience

Cambridge, MA

June 24 Cerestat clinical trial is halted over safety concerns by corporate partner, Boehringer Ingelheim

Six-month investigation begins to find reasons for concern

Source: The Boston Globe

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________________________________________________________________________________________________________________ Professor John Deighton prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Advertising images are copyright Unilever. Copyright © 2007, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

J O H N D E I G H T O N

Dove: Evolution of a Brand

In 2007, Unilever’s Dove was the world’s number-one “cleansing” brand in the health and beauty sector, with sales of over $2.5 billion a year in more than 80 countries. It competed in categories that included cleansing bars, body washes, hand washes, face care, hair care, deodorants, anti-perspirants, and body lotions. It competed with brands like Procter and Gamble’s Ivory, Kao’s Jergens, and Beiersdorf’s Nivea.

Dove had recently launched what it termed a Masterbrand campaign under the title of The Dove Campaign for Real Beauty. For some marketing observers the campaign was an unqualified success, giving a single identity to the wide range of health and beauty products. But the vivid identity owed much to the campaign’s use of the unruly, unmapped world of Internet media.1 Were there risks to putting the “Real Beauty” story out on media like YouTube, where consumers were free to weigh in with opinion and dissent? On blogs and in newsletters, marketing commentators argued that Dove’s management was abdicating its responsibility to manage what was said about the brand, and was putting its multibillion-dollar asset at risk.2

Unilever

A leading global manufacturer of packaged consumer goods, Unilever operated in the food, home, and personal care sectors of the economy. Eleven of its brands had annual revenues globally of over $1 billion: Knorr, Surf, Lipton, Omo, Sunsilk, Dove, Blue Band, Lux, Hellmann’s, Becel, and the Heartbrand logo, a visual identifier on ice cream products. Other brands included Pond’s, Suave, Vaseline, Axe, Snuggle, Bertolli, Ragu, Ben and Jerry’s, and Slim-Fast. With annual revenues of $50 billion, Unilever compared in size to Nestle ($69 billion), Procter and Gamble ($68 billion), and Kraft Foods ($34 billion.)

Unilever was formed in 1930 when the U.K.-based Lever Brothers combined with the Dutch Margarine Unie, a logical merger given that both companies depended on palm oil, one for soaps and the other for edible oil products. By the 1980s Unilever’s palm oil dependence had shrunk, but its British colonial and Dutch trading heritage continued to shape the highly multinational enterprise. It operated on every continent and had particular strengths in India, Africa, Latin America, and Southeast Asia. It described itself as combining local roots with global scale.

159

508-047 Dove: Evolution of a Brand

Global decentralization brought strengths through diversity, but also problems of control. In particular, the company’s brand portfolio had grown in a relatively laissez-faire manner. In ice cream, for example, Unilever was the world’s largest producer but lacked a unified global identity. It produced ice cream under the Wall’s brand in the U.K. and most parts of Asia, the Algida brand in Italy, Langnese in Germany, Kibon in Brazil, Ola in the Netherlands, and Ben & Jerry’s and Breyers in the United States. Other product categories had similarly checkered identities. In February 2000 Unilever embarked on a five-year strategic initiative called “Path to Growth.” An important part of this initiative was a plan to winnow its more than 1,600 brands down to 400. Among the surviving brands, a small number would be selected as “Masterbrands,” and mandated to serve as umbrella identities over a range of product forms. Previously Unilever had managed brands in a relatively decentralized fashion, allowing direction to be set by brand managers in each of the geographic regions in which the brand was marketed. Now, for the first time, there would be a global brand unit for each Masterbrand, entrusted with responsibility for creating its global vision and charged with inspiring cooperation from all geographic markets.

Dove: The Functional Benefits Era

Dove was a brand with its origins in the U.S. in the post-World War II era. The first Dove product, called a beauty bar, was launched in 1957 with the claim that it would not dry out your skin the way soap did, because it was not technically soap at all. Its formula came from military research conducted to find a non-irritating skin cleaner for use on burns and wounds, and it contained high levels of natural skin moisturizers. Dermatological studies found it milder than soap-based bars.

The 1957 launch advertising campaign for Dove was created by the Ogilvy and Mather advertising agency. The message was, “Dove soap doesn’t dry your skin because it’s one-quarter cleansing cream,” and the claim was illustrated with photographs that showed cream being poured into a tablet. This simple proposition was expressed in television, print, and billboards; soon, Dove became one of America’s most recognizable brand icons.

Exhibits 1, 2, and 3 show early and later examples of Dove advertising. In time there were minor changes in slogan—for example, the term “cleansing cream” was replaced with “moisturizing cream”—but Dove stayed with the claim not to dry skin, and the refusal to call itself a soap, for over 40 years. The advertising aspired to project honesty and authenticity, preferring to have natural- looking women testifying to Dove’s benefits rather than stylized fashion models. In the 1980s, the Dove beauty bar was widely endorsed by physicians and dermatologists to treat dry skin. Until 2000, the brand depended on claims of functional superiority backed by the product’s moisturizing benefit.

Dove was tapped to become a Masterbrand in February 2000. In that role, it was called on to lend its name to Unilever entries in personal care categories beyond the beauty bar category, such as deodorants, hair care products, facial cleansers, body lotions, and hair styling products. While much of the advertising for these entrants spoke of functional benefits, communication to build the Masterbrand needed to do something different—it had to establish a meaning for Dove that could apply to and extend over the entire stable of products. No longer could Dove communicate mere functional superiority, because functionality meant different things in different categories. Unilever decided, instead, that Dove should stand for a point of view. A search for that point of view began right away. A process of exploratory market research, consultation with experts, conversations with women, and message testing led to “The Campaign for Real Beauty.”

160

Dove: Evolution of a Brand 508-047

A Brand With a Point of View

The origins of the idea began in 2002. Silvia Lagnado, the Greenwich, Connecticut-based global brand director for Dove, led a worldwide investigation into women’s responses to the iconography of the beauty industry, and unearthed deep discontent. “Young, white, blonde and thin” were the almost universal characteristics of women portrayed in advertising and packaging, but for many

women these were unattainable standards, and far from feeling inspired they felt taunted. In the search for an alternative view of the goal of personal care, Unilever tapped two experts. Nancy Etcoff was a Harvard University psychiatrist working at the Massachusetts General Hospital, author of the book, Survival of the Prettiest. Suzy Orbach was a London-based psycho- therapist best known for having treated Lady Diana Spencer and was the author of the book, Fat is a Feminist Issue. Philippe Harousseau, vice president for brand development at Dove, explained, “Working with psychologists was a real plus and the payoffs were enormous. By comparison, focus groups would have just scratched the surface.” Unilever made some use of surveys. It went to 3,000 women in 10 countries and explored some of the hypotheses generated by the psychologists.

Among the findings was the fact that only 2% of respondents worldwide chose to describe themselves as beautiful (Exhibit 4).

Informed by the research, Lagnado initiated the first exploratory advertising executions. She hired British photographer John Rankin Waddell, an avant guarde fashion photographer well-known

for using ordinary people in supermodel contexts and for books of nudes featuring plain- looking models. The result was the so-called Tick-Box campaign. In this campaign, billboards were erected and viewers were asked to phone 1-888-342-DOVE to vote on whether a woman on the billboard was “outsized” or “outstanding.” A counter on the billboard showed the votes in real time. The campaign attracted keen public interest, as “outsized” first raced ahead and then fell back.

The next series of Dove ads, in June 2005, were known

Source: Unilever.

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508-047 Dove: Evolution of a Brand

internally as the Firming campaign because they promoted a cream that firmed the skin. They featured six “real” women cheerfully posing in plain white underwear. Dove marketing director for the U.S., Kathy O’Brien, told the press that the company wanted the ads to “change the way society views beauty,” and “provoke discussion and debate about real beauty.” Todd Tillemans, the general manager for Unilever’s North American Skin Business, commented, “This ad, in retrospect, was an easy transition away from functionality. We were selling a skin-firming cream, and here we were delivering a functional benefit.”

But as the campaign developed, concerns within the brand team began to grow. The argument that Tillemans heard was that work under the ‘Campaign for Real Beauty” banner risked moving the brand to a positioning that was at odds with its heritage. “When you talk of real beauty, do you lose the aspirational element? Are consumers going to be inspired to buy a brand that doesn’t promise to take you to a new level of attractiveness? Debunking the beauty myth brings with it the danger that you are debunking the whole reason to spend a little more money for the product. You’re setting yourself up to be an ordinary brand.”

The next step in the campaign was particularly controversial. At a Dove leadership team offsite meeting, an effort was made to engage executives in the idea behind The “Campaign for Real Beauty” by filming their own daughters discussing their self-esteem challenges. The impact was enormous, and the Ogilvy and Mather advertising agency quickly turned the idea behind the film into an ad. At one point, the ad focused on a young girl with freckles with the caption, “Hates her freckles.” At another, a shot of an Asian pre-teen was superimposed by the caption, “Wishes she were blonde.” The ad itself was widely admired, but controversy erupted over the fact that it mentioned no product. How would it earn a return on the investment in media? Tillemans commented, “Here was a brand in the health-and-beauty category, blatantly out to debunk the dream that supermodel beauty was within your grasp. We were saying that the beauty industry was portraying an unattainable and stereotypical image of beauty, and yet there we were in the beauty industry.” Nevertheless, supporters of the ad prevailed and it ran in the 2006 broadcast of the Superbowl football game between the Pittsburgh Steelers and the Seattle Seahawks.

Stage four of the Real Beauty campaign involved not an advertisement, but a film. In Canada, the Dove regional brand-building team was running self-esteem workshops for women, and the Toronto office of advertising agency Ogilvy and Mather developed a 112-second film to drive traffic to the workshops. The North American brand-building team saw the film and decided it deserved a wider audience. The resulting digital film was known as “Evolution.” It showed the face of a young woman as cosmetics, hair styling, and Photoshop editing transformed it from plainness to billboard glamour. Given its unusual length, television was not an option, and in October 2006 the film was posted to YouTube, a popular video-sharing website. Within three months, it had been viewed three million times.

Unilever crafted a mission statement to serve as an anchor to the variety of creative initiatives that unified “The Campaign for Real Beauty.” The statement read:

Dove’s mission is to make more women feel beautiful every day by broadening the narrow definition of beauty and inspiring them to take great care of themselves.

Source: Unilever.

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The mission statement’s purpose was summed up by Harousseau:

If you are not crystal clear what the brand’s mission is, you cannot control what happens when people amplify it. Everyone working on Dove knows these words by heart. They know that the mission statement does not say Dove is about women feeling more beautiful, but . . . about more women feeling beautiful. Our notion of beauty is not elitist. It is celebratory, inclusive, and democratic.

From the Brand’s to the Consumer’s Point of View

In late 2006 the Dove brand builders in North America announced a contest, titled Real Ads by Real Women, to invite consumers to create their own ads for Dove Cream Oil Body Wash, a new product scheduled to be launched in early 2007. Winning commercials would air during a commercial break on the 79th annual Academy Awards broadcast on network television on February 25, 2007. The rules included a list of “thought-starters” for those thinking of entering the competition:

• Try the product. When you’re using Dove Cream Oil Body Wash in the shower, take note of what you feel, smell, see and hear. Are you reminded of any pleasant experiences or interesting places?

• Look up “luxury” in the dictionary. What does it mean? What could it mean?

• Explore the world around you. What luxuries do you find in your world? Frozen yogurt after a hard workout, a moment of quiet after a long, hectic day, the sight of a brightly colored bird outside your window.

The contest website was hosted by AOL, and the ads of finalists for the top prize were posted to http://dovecreamoil.com/.

Media Planning

Harousseau described Unilever’s media plan for “The Campaign for Real Beauty” as breaking every rule in the company. “We learned as we went forward,” he said. The Firming campaign used a blitz of paid media. “We bought every billboard in Grand Central Station. We were out to build a buzz. We knew we had succeeded when on July 14, 2005, Katie Couric spent 16 minutes on the Today Show with our firming girls. You just can’t buy that kind of exposure. You can’t buy pop culture.”

Yet he was shocked when his team proposed a Superbowl media buy for the “Hates her freckles” ad. “Over my dead body,” he said. “The Superbowl’s where you sell beer. Do you want to show our message there? They came back at me: If you want to tell America that women suffer from low self- esteem, what better place to tell 90 million of them than the Superbowl?” The impact was extraordinary. News programs echoed the message of the ad, and Oprah Winfrey devoted a full show to self-esteem, with the advertisement as a centerpiece. Jay Leno ran a parody of the ad on his late-night talk show and Wal-Mart developed a version of the ad featuring its employees.

When the advertising agency brought the Evolution advertisement idea to Unilever, it was prepared to go forward without paid media at all. The ad was released to YouTube, and never ran on television except in the context of news and commentary programs such as Good Morning America. However it was among the most downloaded commercials ever to appear on YouTube, and its

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popularity was the subject of considerable newspaper, radio and television coverage. It generated volumes of discussion on chat rooms, with contributions on topics like anorexia and heartfelt interchanges between fathers and daughters.

Public Relations

Unilever’s public relations strategy was an element, together with advertising, media planning, consumer promotions, and customer marketing, in an integrated approach to marketing planning.

A public relations channel strategy was crafted by Stacie Bright, Unilever Senior Communications Marketing Manager, and Edelman, the Dove brand’s public relations agency, in several countries including the U.S., to generate broad awareness for “The Campaign for Real Beauty” and establish an emotional connection with women. Embedded in a set of aggressive media relations benchmarks was an overarching goal: to spark a dialogue and debate about beauty that would ultimately penetrate popular culture. “The world of communications has changed dramatically since the first Dove marketing campaign in 1957,” commented Bright. “The media landscape is increasingly fragmented and people are no longer passively consuming media. We had a great opportunity to build a framework to spark a debate and to meet the challenges we knew we’d meet when we tried to share control of the message with the media and the public.”

The plan was grounded in research. The global survey (Exhibit 4) was the underpinning for all external communications. It lent scientific credibility to the team’s hypothesis that the definition of beauty had become limiting and unattainable.

The plan needed to account for media dissent. Some media outlets took issue with the brand’s “real women are beautiful” premise. For example, a Chicago Sun Times editorialist, Richard Roeper, wrote: “Chunky women in their underwear have surrounded my house. . . . I find these ads a little unsettling. If I want to see plump gals baring too much skin, I’ll go to Taste of Chicago, OK?” Unilever and the public relations team had to decide whether to steer clear of this kind of controversy, or embrace and fuel the debate. They chose to do the latter. In this instance, the team took steps to ensure that local broadcasters in Chicago and other major markets saw Roeper’s story. The team continued to build coverage and interest with more than 200 local news programs and more than 60 national broadcast and print outlets like People magazine, which ran a cover story on the campaign.

Influencers played a central role in building advocacy and generating discussion among the media elite. For example, before the launch of the Firming campaign, the team identified the Dove Two Dozen, a group of women in media and entertainment that the team thought would share its philosophy, and sent them tailored interactive packages that teased the campaign. The brand also developed a strategic partnership with an advocacy organization, American Women in Radio and Television, and created the “Dove Real Beauty Award” for the organization’s annual gala.

The final pillar of the plan was to “walk the talk.” Unilever established the global Dove Self- Esteem Fund to raise the self-esteem of girls and young women. In the U.S., the fund supported uniquely ME!, a partnership with the Girl Scouts of the USA that helped build self confidence in girls aged 8 to 17 with educational resources and hands-on activities. Communications for the campaign linked to campaignforrealbeauty.com, which invited visitors to learn more and share their views on a message forum, as well as to download tips and tools for developing self-esteem.

“We knew we were well on our way to achieving our goals when the media began covering the media covering the campaign,” said Bright. On September 4, 2005, Rob Walker of the New York Times

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magazine wrote an essay entitled, “Social Lubricant—How a marketing campaign became the catalyst for a societal debate.” In it, he remarked, “. . . the more intriguing fact is that it is a marketing campaign—not a political figure or a major news organization or even a film—that ‘opened a dialogue’. . . .”

Organizing for Brand Management

Historically, Unilever had organized the work of marketing in a manner similar to its main competitor, Procter & Gamble, known as the brand management system. Within a product category the firm often offered multiple brands, each led by a brand manager. In effect, each brand operated as a separate business, competing with its siblings as well as the products of other firms. A staff of brand assistants executed the policies of the brand manager. Each brand manager was charged with the responsibilities of a general manager in relation to the brand, including design of strategy, delivery of profit targets, and power over many of the day-to-day marketing decisions such as advertising and trade promotions that were needed to achieve profitability.

In 2000, guided by the Path to Growth initiative, Unilever began to split responsibility for a brand between two groups, one charged with development of the brand and the other charged with building the brand in specific markets. Brand Development was centralized and global in scope. Brand Building was decentralized according to the major geographic regions in which Unilever operated.

Brand Development took responsibility for developing the idea behind a brand, for innovation, and for evolving the idea into the future. It was accountable for medium- to long-term market share, for brand health, for measures of innovativeness, and for creating value in the category. It had responsibility for television advertising strategy, and for deciding which non-traditional media the brand should explore. It developed the brand plan. It was usually located in the region of the world in which the brand was strongest.

Brand Building was replicated in each of Unilever’s major markets around the world. Managers in the brand-building chain of command were charged with bringing the brand to life in their marketplace. They were accountable for growth, profit, cash flow, and short-term market share. Working within the mission inherited from brand development, they had the freedom to use imagination to break through their particular market’s media clutter. They managed public relations and informal communications, and made decisions on what level of spending to put behind the media advertising campaigns that they received from brand development. Brand builders reported to a general manager for a collection of brands, who in turn reported to a country or region manager.

Conclusion

In September 2006, Landor Associates identified Dove as one of 10 brands with the greatest percentage gain in brand health and business value in the past three years.3 It computed that the brand had grown by $1.2 billion. Much of the growth was attributable to its extension into new personal care categories, and exactly how much could be credited to “The Campaign for Real Beauty” was not a question anyone had evidence to answer. What was clear, however, was that the campaign had touched a nerve with the public. Thousands of blogs and Internet chat forums showed a rich diversity of public dialog. There were declarations by fathers to daughters on themes like self- esteem, and there were endorsements of Dove’s stand against stereotypes of beauty. Parody advertising abounded on websites that let people post and share videos, such as YouTube, Google

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Video, and Grouper. Some of the parodies were respectful of the brand or gently humorous, but others were more edgy. Some parodies and Internet postings raised questions about Unilever’s sincerity, its objectivity, and its motives. Then there were the professional marketers and consultants, trying to make sense of the strategy of a brand that was building meaning by courting controversy.

Alicia Clegg, blogging on Brandchannel.com, summed up her view of the Dove strategy as follows:

Taking up the cudgels for reality is a risky strategy for Dove. The underlying idea is appealing; the difficulty is in how to express it. When Dove ran its Masterbrand advertising, it was criticized by some for choosing unrepresentative “real” women—a 96-year-old, described by one marketer as: “the old lady equivalent of a super-model”; a heavily freckled, but enviably cute, 22- year-old, and so on. The latest campaign has a harder edge, tipping the balance away from aspiration toward realism. It may be more honest, but does its honesty leave women enough freedom to dream?” Seth Stevenson, a columnist for the popular online magazine Slate, went further: “Talk about real beauty all you want—once you’re the brand for fat girls, you’re toast.”4

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Exhibit 1 Dove Advertisement

Source: Unilever.

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Exhibit 2 Dove Advertisement

Source: Unilever.

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Exhibit 3 Dove Advertisement

Source: Unilever.

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Exhibit 4 Extracts from “The Real Truth About Real Beauty: A Global Report,” prepared by Dr. Nancy Etcoff, Dr. Susie Orbach, Dr. Jennifer Scott, and Heidi D’Agostino, September 2004.

Study Highlights

BRA ARG USA CAN GBR ITA FRA NLD PRT JPN

Women who are beautiful have greater opportunities in life 68% 52% 44% 28% 37% 50% 49% 40% 50% 39%

Physically attractive women are more valued by men 69% 60% 59% 51% 50% 63% 71% 40% 73% 57%

The media and advertising set an unrealistic standard of beauty that most women cannot ever achieve 66% 77% 81% 69% 74% 80% 72% 72% 62% 20%

I wish the media did a better job of portraying women of diverse physical attractiveness - age, shape and size 91% 86% 80% 75% 75% 81% 77% 69% 66% 41%

Beauty can be achieved through attitude, spirit, and other attributes that have nothing to do with physical appearance 88% 82% 87% 82% 64% 76% 74% 72% 81% 57%

I do not feel comfortable describing myself as beautiful 40% 49% 44% 35% 54% 45% 41% 34% 36% 41%

Source: Unilever PLC.

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Endnotes

1 Grant McCracken, “Is marketing now cheap, fast and out of control?” This Blog Sits at the Intersection of Anthropology and Economics, www.cultureby.com, October 27, 2005.

2 Gerry Lantz, “This brand has started a genuine conversation that they don’t have control of,” http://www.stevedenning.com/Conferences/SmithsonianMay07.htm, accessed July 9, 2007, and “The interesting thing here is the risky bet Dove is making,” in Seth Stevenson, “When Tush Comes to Dove,” Slate, August 1, 2005.

3 Fortune magazine, September 18, 2006.

4 Seth Stevenson, “When Tush Comes to Dove.”

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Harvard Business School 9-594-046 Rev. August 29, 1994

Northeastern University Professor Robert F. Young and Harvard Business School Professor Stephen A. Greyser prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 1994 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

Cunard Line, Ltd.: Managing Integrated Marketing Communications

One of our major challenges in the current economic environment is to balance the strategic need and resources for image-building for the ships (and for Cunard) with the tactical need and resources to continue to obtain passengers for individual ships and cruises now.

In mid-1992, Eleanor Leslie, vice president for corporate and marketing communications of Cunard Line, Ltd., pointed proudly to Cunard’s marketing and financial success over the firm’s entire 150-year history, including recent years. Despite this, she articulated some concerns as the company headed into the mid-1990s. Leslie thought that some portion of the firm’s continuing success could be attributed to the high recognition and image of elegance which the Cunard name enjoyed. Yet in the past few years, due to competitive pressures, economic conditions, and also the structure of Cunard’s organization, an increasing portion of funds had been allocated to the marketing budgets of individual ships (rather than in behalf of the Cunard group overall). Further, an increasing proportion of these funds was being devoted to tactical marketing. Thus there had been less and less “left over” for the reinforcement or support of the Cunard brand name. She also thought that prospective internal organizational change might add to these problems.

The Company and Its Ships

Cunard Line, Ltd., was a wholly owned subsidiary of Trafalgar House, a large London-based conglomerate. It had been in the cruise and steamship business since its founding in 1840. It was widely considered to be the last of the great steamship lines, and had successfully adapted to the contemporary marketplace.

Prior to the advent of jet travel, the firm had been an important worldwide provider of travel services, particularly between Europe and North America. The growth of convenient airplane service on international routes had changed the basic character of its business. Cunard now was in the luxury vacation business. While destinations were still part of the service provided, particularly in Caribbean cruising, it was the on-board service and recreation that constituted most of the appeal to Cunard’s clientele. Customers were treated to a wide variety of activities, entertainment, and sumptuous food while they were at sea. The appeal to the user was to experience luxury and fun while cruising among interesting vacation-oriented ports.

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Cunard offered cruising on seven ships. Five of them were in the luxury (5-star) category, and two were in the premium (4-star) category. Each had its own distinctive image and positioning:

a) The QE 2 was considered by many to be the finest cruise ship in the world. It offered ultra-luxury accommodations and exquisite service. It was marketed as the ultimate in cruising. (See Exhibit 1.) In addition to traveling between New York and Europe, it was used in the Caribbean and made one round-the-world trip each year. The QE 2 had a capacity of 1,850 passengers.

b) The “ultra-deluxe” Sagafjord and Vistafjord were five-star cruisers. They were positioned as ultra-luxury cruisers and offered services at approximately the same level as the QE 2. (See Exhibit 2.) In 1992 the Sagafjord was scheduled primarily out of American ports for cruising in the Caribbean, Alaska, and the South Pacific. The Sagafjord also scheduled one annual round-the-world cruise. The Vistafjord was based in Europe and was used primarily in that area. The capacity of these ships was approximately 550 and 750 passengers, respectively.

c) The Cunard Countess and the Cunard Princess were less formal and less expensively priced cruise ships. They were considered 4-star (premium) cruise ships. Both were positioned as casual, and the marketing for them tended to be more oriented to their destinations. For 1992 the Cunard Countess was being used primarily to cruise among well-known Caribbean ports. The Cunard Princess was being used in Europe and the Mediterranean. Each of these ships had a capacity of approximately 800 passengers.

d) The Sea Goddess I and Sea Goddess II were yacht-like ships for “intimate” ultimate deluxe cruising. Each had a capacity of only 58 couples. An attempt was made to create the atmosphere of a wealthy person’s yacht. Formal wear was required for evening meals, and attempts were made to develop a congenial atmosphere among the passengers. There was little on-board entertainment, in contrast to the QE 2. The Sea Goddess I sailed six months in the Caribbean and six months in Europe. The Sea Goddess II was used six months in the Orient and South Seas, and six months in the Mediterranean. These ships’ cruises were priced at approximately $800 per person per day. This was in the same price range as the most expensive cabins on the QE 2, and about twice the price of the Sagafjord and Vistafjord.

Cunard’s ships sailed out of ports throughout the world. About 40% of the passengers sailed from Europe, 55% from North America, and 5% from other places around the globe. However, approximately 60% of the company’s business was with passengers domiciled in the United States. When cruising from a non-U.S. port, passengers typically flew from the United States to the port of embarkation. Some 95% of Cunard’s customers booked their cruises through travel agents.

The Industry and Cunard’s Segments

Overall the cruise industry consisted of approximately four million boardings per year. The luxury segment (5-star) comprised approximately 8% of that total. In that segment Cunard executives estimated that their company had about a 50% share of market.

The luxury ship category was still a relatively small one, consisting of only 10 ships. In addition to Cunard’s 5-star ships in 1992, Seaborne had two, Royal Viking two, and Crystal one. However, the top-grade cabins on approximately 30 4-star ships (some 5 to 40 cabins per vessel) were frequently of 5-star “luxury level” calibre and price. These typically appealed to people who had

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previously traveled on an existing 5-star ship, but who were looking for a somewhat different experience or for a particular destination not being served by a 5-star that season. A major difference between 5-star and 4-star ships was in the dining arrangements. On a true 5-star, one’s table was reserved for the entire mealtime, rather than only for a particular “sitting” for part of the mealtime. Luxury (5-star) ships also provided more personalized services than did premium (4-star) ships.

Luxury cruises were expensive. For example, in high season, prices for cabins on the QE 2 ranged from $3,000 to $15,000 per person for a 13-day cruise. In the low season, the range was $2,400 to $12,000 per person for a cruise of the same length. On the 4-star Cunard Countess and Cunard Princess, comparable high season prices ranged from $ 1,700 to $ 6,500.

For some 20 years prior to 1991, the luxury segment of the cruise business had grown at an average compounded rate of 10% per year. This portion of the industry was generally considered to be “supply driven.” As more luxury ships came into service, there was a stream of additional customers available to purchase cabins.

In 1990, as in the previous year, the Cunard cruise ships consistently achieved approximately 90% occupancy. Also, of all passengers, some 65% paid the full list price. Cunard’s performance on these two measures was considered high for the cruise industry and was indicative of the success the firm had been achieving.

By late 1991, however, it was becoming apparent that industry capacity was exceeding demand. This had been aggravated by the Iraq War, which affected all companies with Mediterranean and European travel. As a consequence, discounting and price promotion, long prevalent in other sectors of the industry, were being employed in the luxury and premium sectors to try to fill empty cabins.

Cunard Marketing and Marketing Communications

According to company executives, at the core of Cunard’s success was a corporate culture that defined the manner in which both ship operations and marketing communications were executed. There was a shared belief throughout the firm that excellence and elegance should dominate all of its undertakings. As one executive explained, “Everything we do is very British and very, very proper.” In the operations end of the business this translated to excellence in service and the avoidance of anything in bad taste. For marketing communications it meant employing approaches intended to sell the cruise benefits and experiences very tastefully, and carefully avoiding anything that might be viewed as “glitzy” or hard sell.

The marketing communications department created all external marketing communications for Cunard ships. Its mission was to develop and maintain the Cunard image (see Exhibit 3 for a Cunard corporate identity advertisement) and also to support each of the ships’ planning managers in their marketing activities. In that latter role, the objectives were to create demand and to fill each cruise to 100% occupancy or as close to it as possible.

About half of Cunard’s overall marketing communications budget of approximately $20 million was considered “strategic” (i.e., oriented toward building the brand or developing the distinctive image of each ship). The remainder was considered “tactical” (i.e., directed to stimulating bookings on a particular cruise). However, there was considerable discussion within the executive ranks that a higher percentage should be spent on short-term sales stimulation or sales promotion. Throughout the industry, even for the luxury ships and especially for the premium ones, there was a definite trend toward more promotional marketing activities.

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Marketing communications activities were budgeted by ship. Across all Cunard ships, the breakdown among the major communications elements was approximately as follows:

Direct Mail — 25%

Mass Media Advertising in magazines and newspapers — 35% (of this 70% was traditionally considered strategic and 30% tactical, but in 1991-1992 the mix was closer to half and half)

Brochures and Travel Agent Co-operative Spending — 35%

Public Relations and Promotional Activities — 5%

Target Markets

The target markets for the several ships differed somewhat. For the luxury (five-star) ships it was people over 55 years of age and in the top 3%-5% income. For the four-star ships, the target population was 45 years old and up and in the upper 20%-25% of income. Target market individuals were also very well educated, married, and heavy magazine readers.

Media and Message

The goal of the magazine advertising for the cruise ships was to create the “look, touch, and feel” of cruising on the particular ships. This was done through four-color advertisements which illustrated the ship, its food, its activities, and/or satisfied customers. The photography was “rich” and the copy laced with superlatives. Leslie considered this advertising to be strategic and oriented to maintaining and building the long-term image of the ships and their Cunard identity, as reflected in Exhibits 1 and 2.

Direct marketing was used primarily as the reservation deadline for a cruise approached. These mailings were intended to act as a “closer” and thus were tactical in their orientation. However, they also were intended to maintain the “feel” of the magazine ads. For example, mailings for the QE 2 carried a four-color picture similar to that used in the magazine ads. (An example of a cover letter and a brochure cover in a mailing for the QE 2 appears as Exhibit 4.)

The brochures were used for two purposes: (1) to educate the potential customer regarding the specifics of the various ships, and (2) to create the desired image for each ship.

Newspaper advertising was used principally as tactical marketing. While the same look of elegance and “proper” message was retained, the objectives were to create immediate or near-term inquiry and sales for specific ships and cruises. (Exhibits 5, 6, 7, and 8 are illustrative Cunard newspaper advertisements for the QE 2.)

Direct Marketing

Increasingly, direct marketing and associated database management activity were becoming important factors in Cunard’s marketing planning and programs. “Database management is now a vital part of our process of targeting prospects for our cruises,” stated Ronald Santangelo, Cunard’s

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senior vice president for Worldwide Marketing and Sales. He continued: “At the core of the database are past Cunard customers. From on-board questionnaires, we know their demographics and some of their psychographics. We also have names gathered from other sources, such as those requesting brochures, people recommended by cruise customers as prospects, and so forth. Through database analytics, we can profile our past customers, both generally and by individual ship. These demographics and psychographic profiles can be matched with census data [e.g., for focusing direct marketing by zip code areas] and with proprietary lists such as travel magazine subscribers. This enables Cunard to narrow its targeting even within our primarily upscale audiences. For some of our ships, the income target is people with over $250,000 annual income. And people who live in port cities are better-than-average prospects.”

Cunard also invested in maintaining the freshness of its database. First-class outgoing postage to specific names and addresses (never “occupant”), and postage return for mailings helped keep the list “clean,” as did the company’s use of a national change-of-address tracking service.

Santangelo noted that receptiveness by Cunard’s prospects to direct mail for cruises was no doubt enhanced by the carefully and tastefully designed mailing “package” of letter and brochure as shown in Exhibit 4. He said the direct marketing programs seemed to be more effective for the five- star ships than for four-star ones. For the luxury ships, the direct marketing budget was almost equal to the media advertising budget.

Budgeting

The marketing budgeting process was “bottom-up.” Each ship’s marketing planning manager assembled a budget which included both sales revenue targets and detailed marketing expenditures. After review by all the line managers, these went forward to top management for further review and revision. The approved budget was then sent back through the organization to the marketing planning manager for each ship. Leslie played a key advisory role in these deliberations and was ultimately responsible for spending the marketing communications budgets agreed upon for individual ships.

In addition to each ship’s budget, a small amount (approximately $500,000) was spent each year on the Cunard corporate name. (Exhibits 1 and 9 are illustrative corporate advertisements.)

Integrated Marketing Communications

Senior executives at Cunard considered it important that the firm achieve integrated marketing communications along several dimensions.

In the first place, they thought there should be a common “look and feel” to all of Cunard’s promotional efforts. In effect this was the establishment and support of an “umbrella” brand name— CUNARD. Regardless of which ship was being promoted it was considered desirable to have a common “family” visual impact.

Secondly, there was the need to achieve a consistent look and message between strategic and tactical marketing communications. While all managers agreed that elegance was appropriate in both the magazine advertisements and the brochures, there was pressure to create more “sales-oriented” advertising and promotion, particularly with the newspaper advertising and the direct mail efforts. This was especially true in the early 1990s because of the worldwide recession as well as more aggressive promotional efforts by the competition. There was substantial pressure on Cunard’s ship

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managers to fill the ships; consequently there was a temptation to resort to more price-oriented appeals.

Overall, top management supported Leslie’s contention that integrated marketing communications were important to Cunard’s continuing success. However, making that statement was easier than its continuing implementation. Indeed, the issue of balance between strategic and tactical messages was a continuing challenge, as was the matter of how to implement the tactical messages. The quote at the beginning of the case reflects these issues.

To try to achieve integration Leslie had instituted several mechanisms and devices. One of the first steps had been to create a common graphics approach. To accomplish this, Leslie’s group had published a manual which detailed how the Cunard name should be displayed as well as the various uses of the logo for both Cunard and the individual ships. Included in the manual were examples of a wide variety of communications materials, including stationery, baggage tags, blank menus, and logotypes for print advertisements. The manual was produced to coincide with Cunard’s 150th anniversary (1990) and the celebration attendant to that event. This graphics manual, in her view, had gone a long way toward establishing common graphics and copy approaches. (Exhibit 10 is the letter introducing users to the manual.)

Leslie had also secured the support of Cunard’s chairman in her effort to promote consistent communications and graphics approaches. Her office not only created all marketing communications material but also had gained respect throughout the organization for its judgment in these matters.

Separately, with the assistance of Cunard’s advertising agency (Margeotes, Fertitta, and Weiss) Leslie had developed a very distinctive approach to the layout of magazine advertising, the firm’s most visible mass communications vehicle. Cunard had adopted a “page plus a column” size for its magazine advertisements. (See Exhibit 11 for an example on behalf of Sea Goddess I.) In the full-page portion of the advertisement the firm continued to use its glossy, elegant four-color photographs. For all of the ships and regardless of the particular copy objective, the same look and graphics were employed. Thus the corporate message, logo, and “look” were maintained, and each ship had a consistent individually tailored paragraph. In a single column on the facing page there was latitude for different specific messages. This area was used for destination information, features of specific ships, or special pricing programs. The media schedule rotated different ships, so that all were featured over a period of months.

Current Concerns

In mid-1992 it appeared that most of the communications vehicles had been integrated into a reasonably consistent look and that the image Cunard projected was generally consistent across the media spectrum. This was largely due to the coordinating efforts of Leslie’s office as well as the ongoing support she had received from senior executives.

Despite these achievements, concern remained about tactical promotion. There was continual pressure to use more promotional efforts to generate short-term sales. Along with this was the temptation to move away from the “high-brow” image created in the magazine advertisements in order to make the ads more action-oriented.

To meet these challenges Cunard devoted some 25% of its marketing communications budget to direct mail in order to “close the sale.” As noted above, these mailings were designed to create urgency among potential customers while maintaining the Cunard image.

Other efforts were made to use integrated communications to achieve tactical goals. As an example, in the spring of 1992 a “one day sale” was undertaken. On February 26 a mailgram

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promoting “cruising to the sun” was sent to all the key travel agents in five “cold cities”: Minneapolis, Chicago, and Albany, Buffalo, and Rochester, N.Y. This communication alerted the travel agents to watch for an important announcement in the upcoming Sunday newspaper. On March 1 (Sunday) newspaper ads were run which announced special price breaks if the reader acted “now” (by Wednesday), as shown in Exhibit 12. Cunard had also worked with the newspaper travel editors in each of the five cities to publicize the event. Articles appeared in the same Sunday editions. That same Monday the special one-day sales also received mentions on television shows in the five cities. Meanwhile, the Cunard sales force was “blitzing” the travel agents in the selected cities. (Publicity also played an image support role for Cunard. As illustrated by Exhibit 13, from Town & Country magazine, publicity could serve to reinforce the Cunard image with the target audience.)

As a result of the coordinated effort, the one-day sale was considered a great success. Revenue attributed to the effort was estimated at approximately ten times greater than the cost. Although enthusiastic over these results, executives wondered whether they could be replicated, and also whether continued use of this promotional device would dilute Cunard’s carefully nurtured image.

The continuing challenge facing Leslie and her colleagues was how to create the urgency and persuasiveness of price-promotional advertising without detracting from the carefully crafted image portrayed in the magazine ads. Because of its distinctive image, Cunard executives thought that the company had more to lose by aggressive price promotion than did other cruise lines. Leslie thought that price did have to be mentioned, but in an understated manner. An example of this was the May 27, 1992 ad for what was in effect a half-price sale (see Exhibit 14). While this particular ad was considered to be tastefully executed, Leslie wondered whether even harder-sell techniques could and should be employed. She was also aware that Cunard was not entirely immune from the competitive pressures offered by mass market cruise lines. For instance, it was estimated that Carnival Cruise Line would spend $40 million to promote its “Fun Ships” in 1992.1 Also, this segment of the industry was prone to more price discounting than was the upper part of the market. As one executive of a competing line was quoted as saying: “I am selling $10,000 cars for $5,000.”2

Impending Organizational Change

Leslie also wondered about the prospective impact on marketing communications of an upcoming reorganization within the company. In recent years each ship had been marketed by a marketing planning executive. This individual (one per ship) had responsibilities similar to those of a product manager. For instance the marketing planning manager for the QE 2 was responsible for that ship’s revenue, pricing, marketing efforts, and gross margin. While overall responsibility was vested in that person, the actual development and execution of advertising programs as well as other marketing communications activities such as public relations and brochure development was done by the marketing communications staff reporting to Leslie.

Under consideration was a different organizational alignment. The ships were to be grouped according to type of cruise or kind of service offered. The four groups would be:

• Elegant, 5-star cruising — the QE 2

• Ultra deluxe cruising 5-star — Sagafjord and Vistafjord

1Advertising Age, February 3, 1992, p. 16. 2Ibid.

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• Less formal, somewhat less expensive cruising (destination oriented; 4-star) — the Cunard Countess and the Cunard Princess

• Yacht-like (luxury cruising; 5-star) — Sea Goddess I and Sea Goddess II

Each of these categories would be oriented to a particular target market and have a distinctive appeal. Within each of these groups would be an executive responsible for both strategic and tactical marketing planning on behalf of the ships within the group. Marketing communications activities would continue to be services provided through Leslie’s group for all these groups.

The logic behind this proposed organization was that each business group would be able to focus its resources on a particular target market with a specific product concept and message. This would also assist travel agents to know each ship (or group) distinctively. One of Leslie’s concerns was that this new organization might lead to further dilution of the overall Cunard brand. She speculated that with this new arrangement resources would be used more to develop the consumer’s knowledge and attitudes toward the individual products rather than toward Cunard. In addition, with profit responsibility centered on these new groups, she thought that perhaps there would be less central control over the specifics of marketing communications. She also was concerned that the integration of marketing communications among the products and across various media would be more difficult to maintain. Over the last several years she had accomplished a rather high level of integration of marketing communications for the firm’s product offerings, as described above. The new organization might create pressures to weaken that integration.

Leslie’s Dilemmas

Thus, a major challenge facing Leslie was to maintain the effectiveness, integration, and coordination of Cunard’s marketing communications efforts. It was a particularly difficult task because each of the ships had a distinctly different appeal albeit within upper-income categories. Thus, a logical argument could be made that different appeals should be utilized. Likewise, the pressure to achieve immediate sales results meant that the short-term, promotional vehicles should be used for more price-oriented promotion and that they should dominate the media schedule. This particular pressure was even more prevalent for the marketing challenges facing those ships less well known than the QE 2. Even for the QE 2, low-price “add-ons” were developed to provide incentives for passengers in the 1992 poor economic climate. For example, discounted tie-in stays at London’s Ritz Hotel and $299 Concorde return flights to the U.S. were being offered in conjunction with cruises on the QE 2.

Another ongoing issue was the budgeting for the corporate Cunard effort. Leslie thought it was important to “articulate a defensible, rational formula” for marketing several ships together, promoting the Cunard name as an umbrella, since each ship “pays” its portion of the corporate budget on the basis of volume. Her philosophy was for this budget to provide full-page magazine ads in order to create and sustain the corporate feeling from the series, and create one such ad (in the series) for each ship. Each ship would be charged directly for its single column on the facing page.

As she pondered these issues, Leslie noticed an ad that had been placed in her in-box. It was run that day by Holland America Lines, and announced in a bold headline a “$1,000 off” sale on all of their (4-star) Bermuda and Caribbean cruises.

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Cunard Line, Ltd. List of Exhibits

Exhibit 1 Magazine Advertisement, Queen Elizabeth 2

Exhibit 2 Magazine Advertisement, Vistafjord

Exhibit 3 Magazine Advertisement, Cunard Corporate Identity

Exhibit 4 Example of Direct Mail Promotion, January 1991

Exhibit 5 Newspaper Advertisement, QE2 “European Holidays”

Exhibit 6 Newspaper Advertisement, QE2 “Holiday Sail”

Exhibit 7 Newspaper Advertisement, QE2 “Life is Short”

Exhibit 8 Newspaper Advertisement, QE2 “Standby”

Exhibit 9 Magazine Advertisement, Cunard Corporate Identity

Exhibit 10 Letter introducing users to the Cunard corporate communications manual

Exhibit 11 Magazine Advertisement, “page plus a column” for Sea Goddess I

Exhibit 12 Newspaper Advertisement, “One-Day Sale” Promotion

Exhibit 13 Illustrative Magazine Publicity

Exhibit 14 Newspaper Advertisement, QE2 “Over and Back”

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Harvard Business School 9-593-080 Rev. September 6, 1994

Professor Frank V. Cespedes and Research Associate Marie Bell prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Certain data have been disguised.

Copyright © 1993 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

Hewlett-Packard Imaging Systems Division: Sonos 100 C/F Introduction

In August 1992, Cynthia Danaher, Marketing Manager for the Imaging Systems business unit (ISY) at Hewlett-Packard Medical Products Group, was considering issues raised by the upcoming U.S. introduction of a new cardiac imaging product. Ms. Danaher commented:

Sonos 100 C/F (color flow) is an important product for us. Certain segments of cardiac imaging are expected to grow significantly in coming years, and the product is a chance to recoup lost ground in a key area. But the product also means new marketing requirements for ISY. Making the sales channel as effective as possi- ble with this product, as soon as possible, will be crucial. And there are differing opinions about the best way to do this.

Industry and Company Background

Hewlett-Packard, with fiscal 1991 revenues of $14.5 billion, manufactures and markets electronic products and systems for measurement and computation. The Medical Products Group (MPG) had 1991 revenues of about $900 million derived from a variety of product lines including patient monitoring systems, operating room systems, perinatal monitoring devices, and clinical information systems. ISY, a profit center within MPG, manufactured diagnostic ultrasound devices for cardiologists and vascular surgeons.

In a 1988 meeting with security analysts, MPG’s stated goal was to be “the ultrasound company” on a worldwide basis. Key elements of the strategy outlined at that meeting included: a) leadership in chosen segments in terms of clinical contribution, technical performance, and quality; b) differentiated products; and c) lower costs. An important part of MPG’s product policy was its commitment to upgradability. As one executive observed, “This allows customers to add new modalities to their existing equipment and the assurance of not obsoleting current systems in a market characterized by rapid technological change; and it provides MPG with substantial revenues from upgrades. In the past decade, we have provided over 20 product upgrades without obsoleting any of the systems we have ever sold to customers.”

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Ultrasound Imaging

Ultrasound imaging uses high-frequency sound waves (above the audible range) to create images of the body’s interior. Sound waves transmitted through the body reflect off tissues of interest and return as an echo to the transducer (a device attached to the ultrasound computer system). The echo contains information about tissue characteristics, and can be electronically converted into two-dimensional images for medical analysis. Because high-frequency sound waves cannot penetrate bone or air, they are especially useful in imaging soft tissues and fluid-filled spaces such as abdominal organs, heart, pelvis, eye, thyroid, arteries, and fetus.

In 1992, the diagnostic ultrasound market was over $2 billion, with the United States accounting for 41%, Europe 33%, and Japan 12%. In the United States (see Exhibit 1), the market was divided into three broad groups of product applications: radiology (diagnosis of the kidneys, liver, pancreas, gall bladder), about 40% of the market; cardiology (heart diagnosis), 35%; and other (including OB/GYN and other applications). A high-end color ultrasound system could be purchased for $150,000 to $250,000 in 1992, while other imaging technologies such as cat-scans and magnetic resonance imaging units cost over $1 million and typically took much longer than the 30-50 minutes required for ultrasound diagnosis. The test could be completed in a non-invasive manner (nothing injected into the body) and without potentially dangerous exposure to radiation or agents with harmful side effects, permitting repeated tests over time with no risk to the patient. Ultrasound equipment also involved less training time for technicians, less downtime and service, and was in 1992 the only imaging technology that offered real-time display of moving structures such as the heart.

Echo-cardiography, a specialty in cardiology, used ultrasound to analyze the movement of heart walls, the presence of abnormal tissue, and (with color-flow capabilities) the direction and velocity of blood flow. Patient costs of $400-$700 per test in 1991 were currently fully paid by most U.S. medical insurance providers, and (depending upon patient demand) the addition of ultrasound equipment could generate substantial incremental revenues for a hospital, private practitioner, or group medical practice. However, a 1991 study found no evidence that hospitals added ultrasound systems and then “promoted” utilization of the machine. Both radiology and cardiology were specialties dependent upon patient referrals by other physicians. Heart disease remained the leading cause of death in the United States, and an aging population was expected to increase ultrasound usage in hospital and non-hospital settings.

Technology and Product Segments

Until the early 1980s, ultrasound equipment produced two-dimensional, black-and-white images using mechanical transducers. In 1981, Hewlett Packard entered the cardiology market with an electronic, phased array system. Over time, this technology increased the number of channels in the transducer from 48 to 64 to 128, increasing image quality in the process. In 1984, Irex (a subsidiary of Johnson & Johnson) introduced color ultrasound systems to the cardiology market, allowing for better detection of heart abnormalities. (By 1990, 40% of all ultrasound units shipped either had color or were color upgradable.) In 1986, MPG successfully combined Doppler technology with color for its high-performance cardiology systems. Doppler systems detect blood flow via frequency shifts reflected from moving blood cells; this allows medical specialists to monitor the direction and velocity of blood flow in the heart. In 1988, Acuson introduced Doppler color-flow capabilities for its radiology systems.

By 1992, Doppler color-flow was the standard in high-end ultrasound systems in both radiology and cardiology. But an industry observer noted that “Color flow technology is still at an early stage of development. A number of companies are working on new color-flow technologies that would allow for much improved tissue analyses. Three-dimensional imaging will become a

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commercial reality soon, especially in cardiology applications. And it’s likely that some manufacturers will introduce 192 or 256 channel systems within the next three years. These developments increase the potential clinical applications of high-performance ultrasound systems.”

The ultrasound imaging market was typically segmented by product performance across the two major application areas: radiology and cardiology. Radiology, about 45% of the worldwide ultrasound market, was considered to be the more profitable segment. Internationally, the market leader was Toshiba. But in the United States, Toshiba had a 9% market share while Acuson had a leading 44% share. In cardiology (35% of the worldwide ultrasound market), HP was the worldwide leader with an estimated 43% share in the United States.

High-performance products in 1992 were “full feature” systems, with color-flow and 96 or 128 channel capabilities providing superior image quality. List prices were $180,000 or more per unit in radiology and $150,000 or more in cardiology. In 1991, these products accounted for nearly 60% of radiology units sold in the United States (47% of cardiology units) and 75% of revenues (64% in cardiology).

Mid-performance products used either phased-array or older technologies, with 48 or 64 channels that provided images of lesser quality than high-performance systems. Mid-range radiology products sold for $130,000-$180,000 in 1991 and cardiology products for $90,000-$150,000. These products were about 18% of radiology units sold in the United States in 1991 (16% in cardiology) and 15% of revenues (17% in cardiology).

Low-performance products provided images of lesser quality and often lacked color-flow capabilities. In 1991, low-performance radiology products selling for less than $130,000 accounted for 23% of units sold in the United States and 10% in segment revenues; about 10% of these low - performance radiology products had color-flow capabilities. Low-performance cardiology products selling for $55,000-$90,000 were 37% of units sold in the United States and 20% of cardiology segment revenues; about 80% of these units had color-flow capabilities.

Customers

High and mid-performance ultrasound systems were generally purchased by hospitals or imaging clinics. Lower performance products were generally purchased for physician offices, out- patient settings and, except for some emergency room uses, other non-hospital settings.

In the United States, 2000 hospitals with more than 100 beds traditionally represented the core market for ultrasound systems. For cardiology systems, the buying process usually began when the cardiology department perceived a need for an ultrasound machine, based either on increased patient referrals, a planned extension of services, or a desired technology upgrade. The hospital’s Chief of Cardiology was a key decision maker but required budgetary approval from hospital administrators. Based on the need determination, a group of vendors would be on the “short list” assembled for product and price evaluations. Product demonstrations were always required, and vendors’ clinical specialists performed such demonstrations by conducting on-site tests at the prospective customer with cardiologists and sonographers (hospital personnel who actually operated the equipment). An MPG sales manager noted that “Both the sonographer’s ability to produce a good image and the cardiologist’s ability to read the image are skills that develop over time. Hence, user-friendliness is intimately tied to product performance.”

Clinical specialists had extensive training and, at MPG, their fully-burdened costs were significant. For equipment typically purchased by hospitals, product demonstrations required specially-equipped vans to transport systems of 450+ pounds to the hospital site. Based on the demonstration, the cardiology department then narrowed the list to two-three vendors and

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submitted it (often but not always with a recommendation) to hospital administration for final approval. An MPG salesperson commented:

Selling in the hospital market is a two-stage process and the buying cycle ranges from 3-12 months. In the first stage, I deal with the medical professionals: the cardiologists and sonographers. They are most concerned with image quality, product reliability, and service. I must establish relationships and awareness of our products’ functionality and reliability with a number of people, and the product demonstration is crucial.

The second stage is negotiations with administrators, who are more driven by price and cost issues. Fortunately, at $400-$700 per exam and with exams covered by Medicare, ultrasound is a revenue generator for hospitals with the right patient load. We have seen paybacks of five-nine months for hospitals that purchase $100,000+ ultrasound products. But much depends on the hospital’s situation. For example, if a hospital is renowned for cancer treatment, they want the best available systems in that area and are more price sensitive with other equipment. If cardiology is their specialty, then performance is important.

Another aspect of hospital buying behavior is the role of key accounts. A pyramid of influence operates in this market, with smaller and medium-sized hospitals often relying on larger research and teaching hospitals for technology cues. Therefore, maintaining a strong position in influential hospitals is critical.

About 13,000 cardiologists conducted tests in non-hospital settings such as group practices, health maintenance organizations, mobile health labs, and clinics throughout the United States. An MPG sales manager noted reasons why these physicians were interested in ultrasound:

As in hospitals, ultrasound has been a proven revenue generator, with reimbursement for each test. Also, once referred to another facility for testing, there is a risk that patient will not return to the originating practitioner. Physicians in group practices that can perform these tests in-house are more likely to keep patients and generate future revenues, both from testing and future office visits. Finally, despite appointment delays, most physicians realize they are in a service business and that patient inconvenience can be avoided with in-house testing.

The hospital cardiologist is a physician and administrator; the non-hospital cardiologist is a physician and business person. The latter are interested in image quality and reliability, but must be convinced that ROI from an imaging system will be greater than many alternative uses of their limited capital.

Non-hospital buying also required product demonstrations but the lower-performance equipment was less technically sophisticated, did not require a trained clinical specialist to operate, and demonstrations were often conducted by salespeople. If configured for a tabletop, smaller 120-pound ultrasound systems could be transported in the trunk of a salesperson’s car. The demonstration was generally given to the cardiologist and an office nurse or receptionist (who often conducted the tests in non-hospital settings), and did not require the extensive post-demonstration evaluations and discussions conducted in hospitals. A salesperson commented:

In hospitals, it’s a longer-range consultative sale where technical knowledge is initially paramount. Outside the hospital, the selling cycle can be 30 days or less, and price negotiations are key from the start. Also, 60% of non-hospital systems are leased, and competitors often discount on a one-on-one basis with customers, not (as in the hospital market) with planned promotions. So, the salesperson must create

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financial packages and contact with Marketing (which controls product pricing) is more frequent and more important. At the same time, because the equipment is lower price, selling efficiencies are also important.

Regulations concerning reimbursement procedures had the potential to change the nature of demand for medical equipment. In 1983, a prospective payment system (PPS) for Medicare patients (40% of all hospital patient days) was mandated by the U.S. government. With PPS, hospitals were reimbursed for tests based on constantly up-dated national and regional costs, not on the individual hospital’s costs. One result was slow growth for in-patient services at hospitals and growth in out- patient services conducted at both hospital and non-hospital locations.

Nonetheless, health-care expenditures climbed much faster than inflation during the 1980s, reaching $733 billion (12.5% of U.S. GNP) in 1991. Reforms in 1991 were aimed at extending PPS to capital purchases. Previously, capital-related costs for inpatient services were reimbursed 85% of what hospitals spent on equipment multiplied by the portion of total hospital days spent treating Medicare patients. Beginning in October 1991 (with a ten-year phase-in schedule), the government limited reimbursement for capital expenditures to a fixed amount dependent on the number of Medicare patients served by a hospital. An executive commented: “The new rules are very complex, and the 10-year phase-in means that many changes are likely once there is experience with the program. But hospitals face a new era of capital planning, and the uncertainty will probably slow their equipment purchases, especially at the high end.”

At the same time, the government agency in charge of Medicare had announced an intention to adopt a new method of physician reimbursement. Previously, physicians had been reimbursed according to a system of “customary, prevailing, and reasonable” fees for a procedure. The essence of the new system was to base fee reimbursement on the time and effort physicians actually devoted to a medical procedure, with each procedure computed according to a complex formula. This system was to be phased-in starting in 1993 with payment for all services based on the new fee schedule by 1996. This announcement was greeted by intense lobbying by various medical groups, especially the American College of Cardiology and American Society of Echocardiography, who argued for modified payment schedules for their specialties. In 1992, the outcome of these efforts was uncertain. But some observers believed that, under the currently proposed rules, many physicians whose incomes would be reduced by the new fee schedule would seek to perform in their offices or outpatient clinics procedures they previously had performed in hospitals. One observer commented: “Many private insurers will eventually adopt the government’s fee structure, and that will accelerate the impact. In the past, successful physicians left the business of owning and operating outpatient clinics to others and were satisfied with professional fees for their services. But that may change. More physician groups may operate their own outpatient clinics so they can recoup lost income and broaden their revenue base.”

Competition

In the U.S. ultrasound market, MPG competed primarily with Acuson, Toshiba, and ATL in high and mid-performance segments and with Interspec, Biosound, and Vingmed in low- performance segments.

Acuson, founded in 1979 by a former HP engineer, shipped its first product in 1983. Acuson had concentrated on high-end radiology systems but entered the cardiology segment in 1988. In 1991, Acuson had $336 million in sales ($258 million in the United States), 67% from radiology and 22% from cardiology systems. This made Acuson the world’s second largest ultrasound company and, with a 25% U.S. share, the domestic market leader. In the United States, the company had 75 salespeople, a 15% market share in cardiology units in 1991 (including share gains in 1991), and a much higher share in radiology.

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Toshiba was the world’s leading seller of ultrasound equipment, with 1991 sales of $380 million (about $64 million in the United States, 53% in radiology and 40% in cardiology). Toshiba entered the U.S. ultrasound market in 1985 and increased its share during the later 1980s. Toshiba’s medical business had reported directly to Tokyo headquarters, but in 1989 Toshiba America Medical Systems became a separate company, with a product line focused on mid- to high-performance systems with prices below competing high-performance systems. Toshiba reportedly had the largest R&D budget of any ultrasound company (about $55 million in 1991), but had not been a leader in new technology. In 1991, Toshiba’s radiology units showed little growth, but its U.S. cardiology sales grew from an estimated $17 million to $24 million.

ATL (Advanced Technology Laboratories) had $280 million in sales in 1991 (down from $287 million in 1990), 60% from the United States. More than 50% of ATL’s U.S. sales came from radiology systems, 23% from OB/GYN ultrasound, and less than 10% from cardiology. In early 1991, ATL disbanded its cardiology sales force and transferred some of those salespeople to its radiology sales force. According to one executive, “ATL felt it did not have a competitive product for the hospital cardiac market and was experiencing little, if any, growth, in the non-hospital market with its older Ultramark 7 line.” ATL lost six share points in cardiology in 1991, but was expected to introduce a new high-performance cardiology system in 1993.

Interspec had $41 million in worldwide sales in 1991, 65% from the United States and 95% from cardiology. After introducing its compact office market cardiology system in 1984, Interspec ranked among the top-10 U.S. ultrasound firms by 1986. Its 1990 annual report emphasized that the company would continue “to focus on the cardiology market segment while expanding technology into radiology and other specialized markets.” Interspec’s major products were the CX cardiology system for the private office market and the CX 200 for hospitals, both sold through a direct sales force.

Biosound, a single product company, competed in the low-performance segment of U.S. cardiology ultrasound. Its Genesis product, at $51,000, offered the lowest price in this segment, but with image quality and other features judged to be less than competing products. In 1991, Biosound had an 8% share in units (4% in revenues) in the U.S. cardiology market.

Vingmed was a Norwegian company, acquired by Interspec in 1987 and then sold to Diasonics in November 1991. Its major product, the CFM 750, was a feature-rich cardiology system that, at $80,000-$100,000/unit, was the highest priced and highest-performing system in the non- hospital segment.

The U.S. ultrasound market had witnessed major shifts in the market share rankings of leading competitors (Exhibit 2). Some market leaders in the 1970s had exited in the 1980s. Market positions also varied in cardiology versus radiology (Exhibit 3). In addition to the companies discussed here, moreover, units of corporations such as GE, Hitachi, Philips, and Siemens also sold ultrasound equipment, primarily high-end systems in both cardiology and radiology. Concerning the industry in 1992, an observer commented:

Growth was high in the 1980s but slower in recent years, and R&D and marketing expenses have risen while prices have, in real terms, remained flat or declined in some segments. Depending upon the impact of reimbursement changes, we may have too many manufacturers chasing too few customers over the next few years. That probably means more concentration among fewer manufacturers, each of whom seeks out new segments in order to grow.

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Imaging Systems Division

HP’s Medical Products Group was organized as indicated in Exhibit 4. HP entered the ultrasound imaging field in 1980 with its Model 77020 system meant for both radiology and cardiology applications. With only limited success in radiology, however, the company began to concentrate on cardiology in 1982 and soon became the acknowledged leader in this segment. ISY became a business unit profit center within MPG in 1981. In 1991, the majority of ISY’s revenues were in the United States with an emphasis on cardiology systems.

Through much of the 1980s, ISY continued to improve the Model 77020 system, making numerous image quality enhancements and adding Doppler color-flow capabilities in 1987. All enhancements were made available to customers as field upgrades as well as new systems. In 1988, Acuson challenged ISY’s leadership in the cardiology segment with the Acuson 128 XP, which offered 128 channels. ISY countered the same year with a product line consisting of three major systems: the SONOS 1000, a new high-performance 128-channel phased-array system; the SONOS 500, a re-vamped version of the older Model 77020 which was upgradable to the SONOS 1000; and the SONOS 100, a lower-cost, black & white, mechanical scanner for the non-hospital market. Deliveries of the SONOS 100 began immediately. Deliveries of the Sonos 1000 were shipped late and failed to meet quality expectations, requiring three revisions to achieve traditional HP standards and quality. Originally priced at $165,000/unit, the SONOS 1000 was selling for $130,000 by 1991. An MPG executive commented:

The ISY culture had been technology-driven and R&D had failed to meet the competition. The initial euphoria over the SONOS 1000 rapidly evaporated. After a lengthy delay, products became available for side-by-side demonstrations (i.e., the same patient is “imaged” by competing systems, the primary measure of system performance), and high customer expectations were not met. An independent and fiercely confident sales force became defensive.

In addition, the movement from a single high-end product to multiple products created positioning issues. Field people reported spending much time competing with our old system platform. R&D was in the center of the storm, working non-stop to close a performance deficit and improve product reliability at the same time they were adopting a new hardware environment. Concurrently, slower market growth, and a difficult corporate financial situation in the late 1980s, put pressure on costs across all business units and functional areas at HP.

In 1990, MPG dropped the SONOS 500 designation for the Model 77025 and introduced an improved version as the SONOS 1000 Basic. In 1991, SONOS 1500 was introduced, with features and reliability judged to be the best in class. However, as a product manager noted, “Our initial problems with the SONOS 1000 allowed competition to establish positions and bracket us on the high-end and mid-range. This continues to challenge our positioning and product strategies. Also, cardiac imaging is now widely accepted, and applications continue to expand in various departments in hospitals. This challenges our ability to manage limited resources for divergent applications, while some lower-overhead competitors focus on specific applications.”

ISY segmented the cardiology ultrasound market by product and customer type (Exhibit 5). Al Kyle, general manager of ISY since 1991, noted that “Acuson’s entry into cardiology has focused on the high-end and performance-driven customers, while Toshiba has pursued the price/ performance buyer. It’s unclear if Toshiba is making money or if they care about profits at this point. But this competition is part of a transition we face in moving from a high-growth, technology-driven company to a slower-growth, market-driven, multiple product company with a more balanced focus on price, reliability and performance for different segments. This is difficult when you’re facing cost pressures and many aspects of the organization are geared to competing purely on performance.” In

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the United States, ISY sought to be the vendor of choice in all ultrasound cardiology segments. “Resource issues come into play,” noted Ms. Danaher, “and a focus on cardiology is supported by our strong commitment to upgradability. But in a more mature market, the speed with which we execute this strategy is important.”

ISY Marketing and Sales Organizations

Reporting to Ms. Danaher were managers for marketing communications (responsible for ads, direct mail, and product literature), technical marketing (responsible for customer engineering support), product management, and business development. Due to corporate budget constraints, a freeze on headcount applied across MPG marketing and sales units in 1992.

Product management included managers for all major markets and technologies. Mark Low, product manager for the Sonos 100, noted that “The roles and responsibilities of product managers vary. But the central role is to shepherd a product through development to introduction. This means working with R&D, engineering, and manufacturing on product definition, design, and specifications, as well as with these functions and sales on the marketing plan for the product.”

Business Development, headed by Gary Abrahams, was the main liaison between sales and marketing, responsible for product training, competitive analysis, price exceptions, trade shows, national account support, and customer visits to the factory. (Customers who visited MPG’s manufacturing plant included hospital consultants and purchasing group representatives, and such visits were seen as a strong closing tool by the sales force.) Mr. Abrahams noted that “We provide feedback about products from field groups to product management. Conversely, product marketing views us as a main vehicle for delivering messages to the sales force.” Abrahams had been a district sales manager before becoming head of Business Development in 1990 (when Danaher moved from that position to Director of Marketing). He noted that “The field’s assumption is that headquarters is out-of-touch, and you establish credibility by traveling with the sales reps, attending trade shows and conferences, sharing a drink, and finding other ways to establish a bond. That’s important, because the essence of Business Development’s job is to be the conduit and translator between the factory and the field. That often means presenting programs to the sales force in their terms, not in terms of product management’s segmentation criteria.”

ISY’s sales force was one of eight sales groups within U.S. Field Operations, which reported to the general manager of MPG and was measured as a cost center. Four sales groups focused on patient monitoring systems; the others focused on healthcare information systems, clinical information systems, diagnostic cardiology, or ultrasound imaging. MPG estimated fully-burdened costs in excess of $400,000 per salesperson. Since November 1991, the imaging group consisted of a national sales manager (Phil Kash, located in Atlanta), six district managers, 42 sales representatives, and a national support manager. The support organization involved eight “repair” districts and four “application” districts where customer engineers repaired equipment and clinical specialists performed product demonstrations and post-sale support.

During the past year, U.S. Field Operations had evolved from full-line sales representatives located in four regions, to the current organization, where sales units focused on different products sold by MPG’s major business units. “This brought together sales and support units within the same district, improve customer focus, and increase our market share,” noted Steve Swenson, U.S. Field Operations Manager at MPG. “It also eliminated a management layer.” Before November, 1991 sales managers at MPG had overall sales goals and, according to Mr. Kash, “the focus within a region ultimately depended on an individual’s familiarity with a product. Most had grown up selling our patient monitoring equipment, where the selling process differs significantly from imaging. You call on different hospital departments, and because patient monitoring equipment isn’t a revenue generator, the selling process is more administrative.” In that organization, moreover, ISY’s Business Development group was directly involved in supporting, training, and (as Abrahams described it)

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“drumming-up attention for our product line in the field. Because there was no national sales manager focused on imaging, Cynthia and I became de facto sales managers, often speaking daily with district managers and sales reps about product matters, competitive developments, and sales tactics at an account.”

Mr. Kash became imaging national sales manager (NSM) in November 1991. He had been with MPG for over 20 years, as sales representative and later an Area and Regional Sales Manager, and was part of MPG’s ultrasound start-up team in 1980. He noted that “when imaging was in its infancy, we focused some district managers only on imaging and established leadership. But when growth slowed, imaging was pronounced a ‘mature’ business and those districts were rolled into the overall sales structure. The focus was lost and ‘maturity’ became a self-fulfilling prophecy. A major challenge when I became NSM was to have sales and service relearn a business they didn’t know. I needed to instill a mentality that everybody sells. Service may fix systems but, especially in a business where support and upgrades are crucial, they also sell our capabilities to customers.” Mr. Kash also revised the sales compensation system. Traditionally, MPG sales compensation was 50% salary and 50% commission, based on dollar volumes sold. Each year, a target revenue quota was assigned to districts who translated this into a target income for the salesperson, who was guaranteed 80% of targeted income irrespective of actual quota achievement. “In the mid-1980s when growth was high,” noted Kash, “most salespeople exceeded quotas and the guarantee was not an issue. But when growth slowed and Acuson entered the cardiology market, many salespeople failed to make quota yet still received 80% of targeted income. We needed more discipline and more incentive in a difficult market.” Mr. Kash eliminated the targeted income guarantee and changed the compensation formula to 70% salary and 30% commission (based on dollar volumes of systems sold).

Reporting to Mr. Kash were district sales managers (DSMs) who received annual revenue and expense targets and assigned revenue quotas to imaging sales reps. Based on revenue targets, ISY Marketing paid to Sales a cost-per-order-dollar (which averaged about $.23 for a rep with a $3 million quota). This money became the basis for the annual expense budgets allocated to DSMs. One DSM noted that “I have two key responsibilities. The first is to support and motivate my salespeople. The second is to manage my business effectively by ensuring that quotas are met within budgeted levels. Budgets have tightened in recent years, and headcount freezes require cost-effective allocation of limited sales resources.” The 42 imaging salespeople included former clinical specialists, but most had been full-line reps within the previous organization. In general, MPG salespeople were known for their technical selling skills. According to one manager, “Our orientation has been to focus on what systems can do for the patient and the cardiologist, and only secondarily on what ultrasound might mean for hospital revenues and administrators. The attitude is, the more on-site demonstrations, the more sales. That’s an expensive approach which relies on demonstrable product performance superiority, but it’s established our strong position in the top 200 hospitals.”

Commenting on the recent sales reorganization, an ISY marketing manager noted that “We have a sales group targeted at the imaging business and Phil Kash is a born leader who is respected highly in the field.” Another commented: “The new organization eliminates a layer in the field, but creates another layer between headquarters and the field. Roles and responsibilities are still unclear in some areas, metrics differ between marketing and sales, and the previous organization never really developed a clear process for resolving conflicts or differences.” A third noted that “Sales, Support, and Marketing are reinvigorated, but the reality is many plans competing for the same resources. At the same time, the increasing breadth and complexity of clinical applications require closer, faster coordination among these groups.” A veteran sales manager commented: “MPG’s sales force has always marched to its own drummer. Only programs supported by the rank and file will succeed; programs thrust upon the sales force by top management are doomed to failure.”

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SONOS 100 Color/Flow

The Sonos 100 B/W (black & white) was launched in December 1987 and targeted at the non- hospital segment of cardiology. It sold well for some months but was soon superseded by competing systems that offered color flow and annular or phased array capabilities. A salesperson commented:

In 1987, Interspec was the leader in the non-hospital cardiology segment, but the market was looking to us for a product that would offer better performance with the service and security of the HP brand name. We had the opening, but ISY dropped the ball. When Sonos 100 was introduced, Interspec dropped its prices on existing systems and, less than a year later, introduced a color-flow product.

A marketing manager commented:

Initially, the Sonos 100 was best-in-class, something our salespeople can relate to from their experience in the high-end segment of the market. But when the product was no longer best-in-class, it quickly lost sales attention. In addition, our sales force was not well equipped to tackle the non-hospital market.

ISY recognized the product limitations but was unable to devote resources to re-engineering the product until 1991, due to issues concerning the Sonos 1000 product, the development of the Sonos 1500, and Acuson’s continuing threat in the high-performance cardiology segment. By 1992, however, the Sonos 100 had been re-engineered to provide color-flow technology, high reliability, and other features (see Exhibit 6), with product introduction scheduled for November, 1992. The U.S. non-hospital cardiac ultrasound market was an estimated $80 million in 1992, and Sonos 100 was targeted at the low and mid-level segments, estimated at about $40 million. Abrahams noted that the market was significant for MPG:

Technical trends in ultrasound now make smaller systems important in the industry, as does the probable fall-out from reimbursement changes in health care. Also, the hospital market is flat; we need gains in non-hospital segments. Globally, moreover, the product is crucial. In the United States, MPG pursues a vertical strategy of providing a full range of cardiology products. Internationally, where there is less demand for high-end systems, we have a horizontal strategy of providing imaging systems across the price sensitive segments of cardiology, vascular, and radiology. In the United States, therefore, Sonos 100 fills-out an important price point and internationally it is the key cardiology offering.

In 1992, Mark Low became product manager for Sonos 100 C/F and developed a marketing plan with the following key elements.

Product. Sonos 100 C/F used mechanical arrays to produce two-dimensional color-flow images. “In product development,” noted Mr. Low, “we decided that leapfrogging competition technologically would have delayed the product’s introduction significantly (in a segment where we were already a few years late with color flow), and would have added manufacturing costs without contributing greatly to customer satisfaction in this segment.”

ISY had conducted extensive clinical tests of Sonos 100 C/F against three competing products that currently accounted for over 90% of sales in the target segment. Based on the tests, user needs surveys, and personal interviews, each system was evaluated across categories weighted by their importance in the non-hospital ultrasound market. The categories were (in order of importance): performance, price, useability, reliability/uptime, range of applications, upgrade potential, features, and company image. With the highest possible score being 800, the results were: Interspec Apogee CX: 576; HP Sonos 100 C/F: 573; Vingmed CFM 750: 550; Biosound Genesis CFM: 479. Interspec’s

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system had annular array technology and so scored slightly higher than Sonos in image quality and multiple applications. Vingmed’s system had the highest performance rating but ranked low in useability. Biosound’s product was the least expensive but scored poorly in performance and reliability. Sonos 100 C/F ranked equal or better than all other systems in color-flow abilities, and scored highest in useability, reliability, and company image. In addition to these firms, Acuson, GE, and Toshiba also sold some high-performance cardiology systems in the non-hospital market.

Price. Sonos 100 C/F would be priced at $55,000/unit. Competitors’ comparably equipped systems sold for: Vingmed CFM 750, $82,000; Interspec Apogee CX, $68,000; Biosound Genesis CFM, $51,000. “We have high goals and a need to re-establish ourselves firmly in the non-hospital segment,” noted Mr. Low. “So, we’ve priced the product as the best value in the class.”

Promotion. Major forums for ultrasound product introductions were the European College of Cardiology and American Heart Association meetings. Sonos 100 C/F would be exhibited at both conferences in November. Marketing communications stressed that “The HP Sonos 100 C/F is an affordable color flow ultrasound system that enables the private office physician or internist to perform comprehensive cardiac as well as general diagnostic imaging conveniently and at low cost.” A direct mail campaign was planned to the Sonos 100 B/W installed base of customers and a list of cardiologists supplied by the American Medical Association. Additional selling tools included product literature, a promotional video, and technical data sheets.

By August 1992, the outstanding issue was the nature of the distribution channel for Sonos 100 C/F. Interspec and Biosound (the #1 and #2 companies in this segment) each had about 20 direct salespeople in the United States, generating from $500,000-$1,000,000 in annual sales with an average of about $800,000 per salesperson. Field Operations management estimated their fully-burdened costs/rep at about $200,000 annually, which meant that their selling costs were 25-30% of sales. Ms. Danaher noted that, at ISY, “We have investigated a range of channel options, including dealers and adding new sales reps to focus solely on the non-hospital segment. But many dealers lack the clinical expertise and sales skills to deal with the product, while budget constraints make it impossible to add more salespeople. Therefore, the choice comes down to using the present direct sales channel or utilizing independent Manufacturers’ Reps who focus on this segment. There are strong opinions on both sides.”

Sales Channels

Of the 13,000 non-hospital cardiologists in the United States, five cities (New York, L.A., Chicago, San Francisco, Miami) accounted for 60% and 15 cities for 85%. Cardiology exams were also conducted in many small rural hospitals and clinics and by a number of the c. 50,000 Internal Medicine physicians in the country. A marketing manager noted that “An effective sales channel in this segment must reach geographically dispersed customers with a product that, because of its pricing, must be sold efficiently.” Both Biosound and Interspec had used Manufacturers Reps (MRs), but (according to ISY sales executives) had switched to direct sales forces due to problems with MR turnover, the costs of training and monitoring MRs, and “customers’ desires for a long-term relationship with the vendor. After switching to direct sales a few years ago, both firms doubled their sales volumes. The drawback is two-three years of investment in fixed selling costs with only a gradual return on investment.”

Many ISY sales managers believed the Sonos 100 C/F should be sold exclusively through a direct sales force. “We now have a dedicated imaging sales force,” said one manager, “which is well- trained and knows the full product line. They can offer a complete solution to any cardiologist interested in ultrasound. And, while non-hospital customers are price-sensitive, ultrasound equipment is a lot of money relative to their budgets; so they expect direct representation, especially when our key competitors are calling on them with a direct sales force.” Another noted that “The Sonos 100 C/F is likely to be the most technically sophisticated and highest-priced product offered by

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an MR, who typically sells a broad range of diagnostic products. They work on commission and won’t spend a lot of time developing a market or providing demonstrations and follow-up service. If this market is going to grow, we should leverage our skills in this area. ISY reps may need more training on negotiations, pricing, and reimbursement practices in the private-office market; but these skills can be taught. Loyalty to HP cannot.” A DSM commented that “It’s the sales force, not MRs, who can capitalize on any trade-up potential in the non-hospital market, especially since many of these cardiologists also work in the major hospitals where we’re strong. Also, in a flat hospital market, more of my reps see the private-office market as a source of incremental revenues that’s important in meeting quota.”

Many marketing managers favored use of MRs for the Sonos 100 C/F. “The product has been designed for ease of use, and an MR is very capable of demonstrating it in the physician’s office,” noted one manager. “Also, most MRs who call on non-hospital accounts are former sales managers of the major companies, including Interspec and Biosound. They may not have the technical knowledge of our reps, but they’re experienced salespeople with great negotiating skills and detailed knowledge of physician reimbursement procedures.” Another noted that “The hospital and non-hospital cardiology markets are very different. Non-hospital customers don’t care about our value-added services, and few are candidates for a trade-up. The time our reps might spend trying to sell a Sonos 100 to a private-office cardiologist could be better spent at a hospital account.” A third commented that “Some DSMs want to retain the full line on the assumption that, if times get tough, they can allocate more effort to the non-hospital market. But product demonstrations are required in both markets, and reps needing to make quota will always treat the Sonos 100 at $55,000/unit as a second or third priority behind a Sonos 1000 at $130,000/unit or the 1500 at $190,000/unit.”

In the industry, MRs were paid a 15% commission on equipment sold and most did not sell competing products within a category. The manufacturer also provided MRs with product training, inventory on consignment, and credit and collection services. When these costs were added, ISY marketing managers estimated the cost-per-order-dollar for sales through MRs at $.28 -$.30. A sales executive noted that “MRs vary tremendously in their selling expertise and professionalism, and must be located, recruited, and supervised on an on-going basis. To do this, you need at least one program manager devoted full-time to an MR channel. This raises the MR cost-per-order-dollar closer to $.40.” A marketing manager commented that “The $.30 figure is a good one for MR sales. It includes administrative overhead and also factors in some pre-sale support costs that are utilized by direct reps in hospital accounts but are much less likely to be utilized at non-hospital accounts. Also, the bulk of MR costs are variable expenses.”

Several MPG sales districts had utilized MRs in the past with varied results. “For the DSM,” noted one manager, “an MR organization requires training, demonstration equipment, and commissions that come out of Sales’ budget; and the MR is not under the direct control of the sales manager. For example, a DSM cannot, under current law, require a MR to write a sales plan or submit monthly forecasting. The result is that MRs were often treated as second-class citizens, without joint programs, qualified leads, telemarketing support, and easy access to demo equipment. The DSM would rather invest in the higher-end equipment than the low-end equipment used by an ‘outsider’.” Another executive stated: “ISY, as a profit center, may view the issue as an investment decision for a new product. But any decision must be implemented in the field, which is a cost center facing a tougher market and budget pressures.”

Conclusion

The planning cycle at HP concluded on September 1 for a new fiscal year starting on November 1. Funding decisions for products, marketing programs, and sales channels would therefore be made soon. Ms. Danaher noted that “We have a limited window of opportunity with the Sonos 100 C/F and need to cover its market as efficiently and effectively as possible.” A meeting with ISY product management, sales management, and general management was scheduled for the

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next week, at which Ms. Danaher and others would make recommendations concerning the Sonos 100 C/F introduction.

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Exhibit 1 U.S. Diagnostic Ultrasound Imaging Market

Unit and Dollar Shipments ($ Value in millions; ASP = average selling prices in thousands)

Total Color Doppler Systems Year Equipment Upgrades $ Value Units $ Value Units ASP

1980 $147 $ 3 $150 2,725 - - - 1981 217 2 219 3,785 - - - 1982 242 1 243 4,660 - - - 1983 268 1 269 5,350 - - - 1984 304 2 306 5,760 $ 2 10 $175 1985 339 11 350 6,550 7 40 175 1986 412 20 432 6,950 22 145 152 1987 505 35 540 7,475 134 925 145 1988 619 44 663 8,380 256 1,665 148 1989 722 79 801 8,975 467 3,040 154 1990 765 71 836 9,510 549 3,730 147 1991 813 95 908 9,950 621 4,485 139

Radiology and Cardiology Segments Radiology Equipment Units ASP $ Value

Cardiology Equipment Units ASP $ Value

1990 2,245 $139 $311 1990 2,130 $111 $235 1991 2,305 138 317 1991 2,225 116 258

Upgrades Upgrades

1990 - - 23 1990 - - 43 1991 - - 38 1991 - - 50

Color Flow vs. Non-Color Product Sales Color Flow Units ASP $ Value Non-Color Units ASP $ Value

1990 3,730 $147 $549 1990 5,780 $37 $218 1991 4,485 139 621 1991 5,465 35 192

Hospital vs. Non-Hospital Segments (1991) Hospital Non-Hospital

Radiology

• $ Value of equipment sold (in millions) $238 $79 • Units sold 1,515 790 • Average selling price (in thousands) $157 $100 • Number of Installed Units 10,455 5,670 • Average number of annual scans/unit 1,100 800 • Total number of exams (in millions) 11.5 4.5

Cardiology

• $ Value of equipment sold (in millions) $176 $82 • Units sold 1,230 995 • Average selling price (in thousands) $143 $83 • Number of Installed Units 8,350 6,940 • Average number of annual scans/unit 950 675 • Total number of exams (in millions) 7.9 4.7

Source: Industry Reports

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Exhibit 2 U.S. Market Share Positions of Leading Ultrasound Manufacturers, 1983-1991

Company 1991 1990 1989 1988 1987 1986 1985 1984 1983

Acuson 1 1 2 2 2 3 6 6 - HP 2 2 1 1 1 1 1 4 4 ATL 3 3 3 3 3 2 2 1 1 Toshiba 4 4 4 7 6 6 10 10 10 Diasonics 5 5 5 4 4 4 4 2 2 Aloka 6 7 7 6 8 11 - - - GE 7 6 6 5 5 5 5 5 7 Siemens 8 8 17 15 - - - - - Interspec 9 9 8 8 7 7 13 - - Hitachi 10 11 11 12 - - - - - AI/Dornier 11 10 9 - - - - - - Biosound 12 12 13 9 10 9 8 8 8 Bruel & Kjaer 13 13 12 11 9 12 - - - Teknar 14 14 14 - - - - - - Philips 15 15 16 16 - 10 8 7 5 Quantum - - 10 10 11 - - - - Kontron - - 18 17 - - - - - JJU - - - - - 8 3 3 3 Ekoline - - - - - - - - 6 Picker - - - - - - 10 9 9

1991 1990 Company Rank (Millions) Market Share Rank (Millions) Market Share

Acuson 1 $223 24.6% 1 $194 23.2% HP 2 185 20.4 2 172 20.6 ATL 3 136 15.0 3 134 16.0 Toshiba 4 64 7.1 4 53 6.3 Diasonics 5 39 4.3 5 40 4.8 Aloka 6 38 4.2 7 35 4.2 GE 7 32 3.5 6 34 4.1 Siemens Quantum 8 25 2.8 8 22 2.6 Interspec 9 22 2.4 9 22 2.6 Hitachi 10 21 2.3 11 16 1.9 AI/Dornier 11 14 1.5 10 17 2.0 Biosound 12 13 1.4 12 11 1.3 Bruel & Kjaer 13 11 1.2 13 11 1.3 Teknar 14 10 1.1 14 9 1.1 All Others 75 8.2 66 8.0

$908 100.0% $836 100.0%

Source: Industry Reports

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Exhibit 3

Leading Manufacturers of Cardiac Ultrasound Systems: U.S. Unit Sales & Market Shares, 1990 & 1991

1991 1990 Company Rank (Units) Market Share Rank (Units) Market Share

HP 1 960 43.1% 1 945 44.4% Acuson 2 325 14.6% 4 250 11.7 Interspec 3 295 13.3 2 380 17.8 Biosound 4 180 8.1 6 90 4.2 Toshiba 5 175 7.9 5 115 5.4 ATL 6 130 5.8 3 255 12.0 GE 7 60 2.7 - 25 1.2 All Others 100 4.5 70 3.3

Total 2,225 100.0% 2,130 100.0%

Leading Manufacturers of Radiology Products: U.S. Unit Sales & Market Shares, 1990 & 1991

1991 1990 Company Rank (Units) Market Share Rank (Units) Market Share

Acuson 1 660 28.6% 1 560 24.9% ATL 2 430 18.7 2 395 17.6 Toshiba 3 240 10.4 4 240 10.7 Diasonics 4 240 10.4 3 275 12.3 AI 5 125 5.4 5 145 6.5 Hitachi 6 115 5.0 6 120 5.3 Siemens Quantum 7 115 5.0 8 90 4.0 Philips 8 100 4.3 7 120 5.3 All Others 280 12.2 300 13.4

Total 2,305 100.0% 2,225 100.0%

Source: Industry Reports

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Exhibit 5 Competing Product Offerings in U.S. Cardiology Ultrasound

Primary Target

Cardiology Products Prices Features

Sales Channels

Primary Competitors

• Urban Hospitals > 400 beds

• Teaching Hospitals

Sonos 1500

Sonos 1000 Enhanced

Acuson 128XP Xcelerator

Toshiba SSH-140AC

> $150K

Phased array

96 or 128 channel

Superior image quality

Color flow, Doppler

Direct Sales Force

HP Acuson

• Urban Hospitals 200 - 400 Beds

• Rural Hospitals

Sonos 1000 Basic

ATL Ultramark 9

Toshiba 140A

$90-150K

Annular or phased array

48-64 channels

Moderate image quality

Color flow Doppler

Direct Sales Force

HP Toshiba

• Small Hospitals < 200 Beds

• Private Sector • HMOs • Group Practices • Mobile Units • Individual • Practices

Sonos 100 Basic

Interspec Apogee

Vingmed CFM750

Biosound Genesis

$50-90K

Mechanized, annular or phased arrays

48-64 channels

Acceptable image quality

Color-flow or Black & White

Direct Sales Force

HP Interspec Vingmed Biosound

216

Exhibit 6

Hewlett-Packard Imaging Systems Division: Sonos 100 C/F Introduction 593-080

217

218

9 - 5 0 4 - 0 5 1 R E V : J A N U A R Y 1 6 , 2 0 0 8

________________________________________________________________________________________________________________ Professor John Quelch and Research Associate Anna Harrington prepared this case with the assistance of the HBS Asia Pacific Research Center. HBS cases are developed solely as the basis for class discussion. Certain details have been disguised. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004, 2005, 2007, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

J O H N Q U E L C H

A N N A H A R R I N G T O N

Samsung Electronics Company: Global Marketing Operations

In August 2003, Eric Kim, executive vice president for global marketing operations at Samsung Electronics Company (SEC), was delighted about Samsung’s latest position in BusinessWeek’s annual ranking of the world’s most valuable brands: “We are number 25 this year with an estimated valuation of $10.8 billion, up from number 34 and $8.3 billion last year. We are the only Korean brand on the top 100 list, we were the fastest-growing of all 100 brands in 2002, and we’re closing in on Sony, which is ranked at 20 this year with a $13.2 billion valuation compared to 21 and $13.9 billion last year.”

When Kim became the head of marketing in 2000, Samsung was not even ranked. “Ten years ago, Samsung was a third-tier commodity brand with very little product differentiation,” noted Kim. “Now, we’re knocking on the door of the premier league, earlier than I ever thought possible.” Kim and the top management of Samsung would be meeting soon to discuss how Samsung could reach the top 10 by 2005, completing the company’s transformation from an also-ran into a blockbuster brand. Kim’s job was to lead Samsung’s global-marketing and brand-building efforts in order to achieve this goal. As Kim explained: “Achieving a high level of awareness is the first step. We have done this. But becoming a truly preferred brand is a whole different challenge.”1

Company Background and Strategy

The Samsung conglomerate’s roots dated back to 1938 when the company produced agricultural products. In the 1970s, the company focused on shipbuilding, chemicals, and textiles.

Samsung Electronics Company (SEC)2 was founded in 1969, primarily as a low-cost manufacturer of black and white televisions. In the 1970s, Samsung acquired a semiconductor business, thereby setting the stage for future growth in electronics. Throughout the 1980s, SEC supplied global markets with massive quantities of commodity products such as televisions, VCRs, and microwave ovens. The company sold its products to original equipment manufacturers (OEMs) that resold them under their

1 “Samsung Electronics Marketing Special: Brand Reloaded—analyzing the world’s fastest growing brand,” CLSA Emerging Markets, May 2003.

2 All references to Samsung or SEC refer to Samsung Electronics Company and not to other affiliate companies or the Samsung conglomerate.

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own, better-known brand names. During this time, the company’s mission increasingly emphasized manufacturing quality and technical leadership, especially leadership among consumer electronics companies. Profits from these activities were reinvested in research and development (R&D) and in state-of-the-art manufacturing and supply-chain activities.

In 1997, in the wake of the Asian financial crisis, SEC sales were $16 billion with negative net profits. At this time, the very survival of the company seemed in jeopardy, prompting major restructuring efforts. Samsung’s debt of $15 billion in 1997 had been dramatically reduced to $4.6 billion by 2002. In this period, net margins rose from –3% to 13%.

In fact, the Asian financial crisis provided the impetus necessary for change, forcing company executives to dismiss 29,000 workers and to sell off $2 billion worth of corporate assets. As Kim explained, “The economic crisis, in my view, impressed upon people the need for a system that could create a resilient and enduring value proposition unique to Samsung—products that would distinguish us from our competitors.”3

In 2002, Samsung recorded net profits of $5.9 billion on sales of $44.6 billion, compared with $2.8 billion and $28 billion in 1999. (Exhibit 1 shows the growth in revenues and profits between 1997 and 2002.)

By 2003, Samsung was the most widely held stock among all emerging market companies due in part to relatively transparent disclosure practices. Over half of Samsung shares were held outside Korea, and the stock price had increased tenfold between 1997 and 2002. The company had a market capitalization of $41 billion in 2002, making it the largest Asian electronics company by this measure.

SEC Chairman Kun Hee Lee led the transformation. In 1993, Lee launched the “new management initiative,” which set out to remake Samsung as a global business leader. It was the changes that followed from this initiative that saved the company during the Asian financial crisis and streamlined the company into a profitable enterprise. Throughout the 1990s, Lee demanded the rethinking of key fundamentals and set the stage for long-term commitment to investment in innovative, premium products and brand value. Following the chairman’s new management initiative and the appointment of Yun Jong Yong as vice chairman in 1997, the company pursued a bold combination of strategies, many of which seemingly contradicted conventional wisdom.

Vertical Integration

Instead of outsourcing production to external suppliers and thereby transferring the capital investment and inventory risk, Samsung remained committed to manufacturing as a core competence. “If we get out of manufacturing, we will lose,” Yun stated. “Everyone can get the same technology now. But that doesn’t mean they can make an advanced product.”4

Between 1998 and 2003, Samsung invested $19 billion in new chip factories. In June 2003, the company unveiled plans to invest $17 billion in manufacturing facilities for TFT-LCDs (used in products such as flat-screen TVs and computer screens) over the next 10 years. Samsung ensured that its plants remained competitive by forcing them to compete with outside companies for internal business. For example, an internal manufacturing group competed with Sumitomo Chemical Company of Japan to supply the company with its color filters.

3 “Samsung Electronics Marketing Special: Brand Reloaded—analyzing the world’s fastest growing brand,” CLSA Emerging Markets, May 2003.

4 Quoted in Cliff Edwards et al., “The Samsung Way,” BusinessWeek, June 16, 2003, pp. 56–64.

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Samsung was also flexible in its choice of plant locations. For example, to keep costs low, the company operated 12 manufacturing plants in China by 2003. Similarly, R&D facilities were set up in India to take advantage of the country’s abundance of relatively low-cost human capital, especially in the technology sector.

Commoditization and downward pressure on prices and margins argued against vertical integration. To avoid the commoditization trap, Samsung customized as much production as possible. For example, over half of its memory chips were special orders for Dell, Microsoft, and even Nokia. As a result of customization and reliable, timely supply of chips, Samsung’s average prices were 17% above industry levels. The mobile telephone market was another category in which Samsung prices were higher than the industry average.

Samsung viewed vertical integration and the investment in manufacturing facilities and research and development not as a fixed cost but rather as a source of flexibility and control over the entire production process. While the typical model was to outsource manufacturing and focus on core competencies, Samsung emphasized manufacturing as a core competency in its own right.

Hardware Focus

Unlike rivals such as Sony and Apple, Samsung decided not to develop proprietary software and content such as music, movies, and video games. Industry experts contended that, because hardware life cycles were becoming even shorter, content offered higher margins. Samsung’s strategy, however, was to focus on hardware and devices and to collaborate with content providers when appropriate. Samsung executives argued that this “open architecture” approach resulted in customers being able to access more software through its devices than its competitors’ products. In addition, they pointed to the increasing challenges associated with protecting proprietary content from piracy.

By 2000, Samsung’s top executives contended that they wanted to be as strong as Sony by 2005. Software was becoming an increasing part of Sony’s overall business, differentiating it from Samsung. Kim commented on Sony’s strategy as follows:

Sony has had 20 years more than Samsung to build its global brand and spends three times as much as us on advertising each year. But, make no mistake, they have done a great job. We all remember the Sony Trinitron TV and the Sony Walkman as great, consumer-driven innovations. At Samsung, we see no reason why we can’t have as strong a brand as Sony’s. We’re more diversified technologically than Sony, which gives us a better chance to exploit digital convergence. Sony makes as many of its products in China as Samsung does. On the other hand we have not invested in software and entertainment content, and we are not involved in computer games, which, through PlayStation, represent one of Sony’s most profitable categories. Perhaps as a result, Sony has more of a hip image than Samsung and a stronger appeal to the youth market.

Product Breadth

Samsung’s product diversification differentiated the company from its competitors, many of which focused on a single category. Nokia, for example, specialized in cell phones and was the worldwide share leader. Sony was known best for consumer electronics, and Intel focused on chip production. By contrast, Samsung R&D and manufacturing spanned multiple categories, as indicated by the breakdown of sales and profits in Table A.

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Table A Breakdown of Samsung Sales and Operating Profits, 2002

Sales Operating Profits Semiconductors $ 11 B $ 3.1 B Telecommunications $ 11 B $ 2.5 B Digital Media $13.9 B $ 0.6 B

Digital Appliances $ 3.8 B $ 0.2 B Other $ 4.8 B $ 0.4 B

Source: Samsung Electronics Company.

The company had come a long way from the mid-1980s when it made cheap home appliances including televisions, microwaves, and VCRs. Following SEC Chairman Lee’s 1993 new management initiative, Yun refocused the company on innovation of higher-quality products across all categories in 1997. This paid off. By 2003, the company was associated with the latest products, such as LCD televisions and video cell phones. In 2002, the company received five awards for industrial design excellence, tying for first place in number of awards. In all of its major product categories, Samsung was one of the top three brands by market share (see Table B).

Table B Samsung Market Position by Category

Category Global

Market Share Samsung

Rank Key Competitors Big-Screen TVs 32% 1 Sony (25%), Mitsubishi (25%) Cell Phones 10% 3 Nokia (36%), Motorola (15%)

Flash Memory 14% 2 Intel (27%), Toshiba (11%), Advanced Micro (10%)

LCD Displays 18% 1 LG Philips (17%) MP3 Players 13% 3 Sonicblue (18%), Apple (17%), Creative (12%)

DRAM Chips 32% 1 Micron (19%)

DVD Players 11% 3 Toshiba (15%), Sony (14%), Panasonic (10%) Microwave Ovens 25% 1 LG (22%), Galanz (19%)

Source: Adapted from “The Samsung Way,” BusinessWeek, June 2003, pp. 56–64.

Samsung was the number one global manufacturer of DRAM (the semiconductor chips primarily used in PCs), SRAM (used in cell phones and handhelds), and NAND flash chips (used in products such as digital cameras and MP3 players). This diversity enabled Samsung to ride out chip cycles. NAND chips produced by Samsung were increasingly preferred over the NOR chips produced by Intel because they could store three times the information for the same price. Samsung already controlled over half of the NAND market, which was projected to reach sales of $7 billion by 2005. Due to the increasing popularity of NAND technology, Samsung was closing in on Intel in terms of flash chip revenues (see Exhibit 2).

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In the telecommunications arena, Samsung was the leading provider of the newest CDMA5 digital phones and of thin-film LCD displays, preferred for PCs, cell phones, and televisions. As a result, Samsung became the preferred provider of cell phones to Sprint. In 1997, Sprint began selling SEC phones carrying the Samsung brand name, like the SCH-3500, an extremely popular, silver clamshell model.

In the $60 billion cellular phone industry, Samsung was a strong number three, closing in on Motorola at number two. Samsung held 10% of the global market in 2002 (versus 2.7% in 1999). Unlike other major cell phone manufacturers, Samsung was growing rapidly despite its higher prices. Samsung produced only midrange and high-end cell phones, enabling the company to command higher-than-average prices (approximately 20% higher) than either of the top two players, Nokia and Motorola. Samsung was the first to introduce color-screen phones into the United States, in 2002. While Samsung sales grew 51% in 2002, Motorola’s grew a meager 4%, and Nokia’s sales flat-lined. Furthermore, while Samsung was number three in terms of handsets sold, it had recently surpassed Motorola in terms of revenue. Mobile phones accounted for an increasing share of Samsung’s overall sales.

Samsung had been a long-standing leader in liquid crystal display (LCD) televisions due to its ability to mass-produce them at low cost. In 2003, Sony, the global share leader in televisions for decades, entered into a joint venture with Samsung to produce LCDs to avoid the extra capital outlays needed to do its own LCD manufacturing. As Exhibit 3 demonstrates, high-end LCD televisions were a growth category, and Samsung was reaping the benefits of its decision to mass- produce them. In 2003, Samsung unveiled a groundbreaking 57-inch LCD television, a size previously untouched by this technology.

Digital Product Innovation

Under the guidance of the chairman, Lee, SEC management decided in the late 1990s that the expected transition from analog to digital technology gave Samsung a once-in-a-lifetime chance to catch its better-known rivals. He and his colleagues all but bet the company on digital technology. Six years later, this resulted in a relentless flow of new digital products from the 17,000 scientists, engineers, and designers who worked in Samsung’s R&D centers, an effort that cost $2.45 billion annually. The investment in digital technologies through attracting and retaining top scientific talent paved the way for Samsung’s focus on premium products.

The most promising four or five new products in any year were designated pillar products and received incremental marketing support. There were usually around 20 candidates for pillar-product status. Developing a pillar product was a badge of honor for Samsung designers and engineers. According to Lee, “In the past year alone, Samsung has brought to market a dazzling array of products that represent ‘world-firsts’ in their respective industries. In addition to leading the way technologically, Samsung products are also setting new standards for quality performance and award-winning design.”6

5 Code division multiple access (CDMA) was the leading digital wireless technology offered for cell phones in the U.S., South Korea, Japan, and China. CDMA technology offered users several advantages including clearer voice communication and more traffic on the network at higher speeds. Estimates indicated that over 100 million customers worldwide already used CDMA technology on mobile devices.

6 Samsung Annual Report 2002.

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Thanks to the multiple technology capabilities of its many designers and engineers, speedier decision-making processes, and fewer levels of organizational bureaucracy, Samsung could move a concept from drawing board to commercialization in five months (compared with 14 months five years earlier), twice as fast as its Japanese rivals. As a result, Samsung could refresh its product line twice as often. Product life cycles shortened, and prices quickly fell as competitive products caught up with the innovator. Yun labeled this the “Sashimi theory,” likening new technology products to fish; they sell at high prices on the first day when they are fresh, but prices decline dramatically thereafter.7

Yun explained: “In the analog era, it was hard enough for the latecomer to catch up.” Now, in the digital era, “If you are two months late, you’re dead. So speed and intelligence are what matter. The jury is still out as to who the winners in the digital era will be.”8

Digital Convergence

Due to its focus on digital products across multiple categories, Samsung stood poised to become a leader in the era of digital convergence.

The concept of digital convergence referred to two trends: the merging of different technologies into one major product, and multiple technologies linked by one major network. Examples of the former included the Palm OS-based Smart Phone, combining features of a cellular telephone and Palm pilot, the “Dick Tracy” Watch Phone, and the SPH-i700 Camera Phone. Camera phones were projected to reach 14% of the global cellular phone market by year-end 2003. The wireless handset was thus becoming much more than a phone, and Samsung envisioned countless applications. In front of the television, the device could function as a remote control and be used for programming. Outside the home, the device could be used as a road map.

By 2003, Samsung had already brought a degree of convergence to many of its products, providing groundbreaking innovations in many areas. The Wireless Home AV center allowed consumers to surf the Web from their television screens. The “Systems-in-Package” semiconductor combined a mobile central processing unit (CPU) NAND flash memory, and SDRAM for use in mobile products. (A Samsung presentation on how digital convergence could impact consumers’ lives is reproduced in Exhibit 4.)

On a broader scale, Samsung envisioned a future when a single device could control all the electronic devices in a household. To this end, Seoul’s Tower Place apartment complex was created to demonstrate the possibilities of the digital household of the future. “We’re making the Jetsons a reality,”9 boasted Kim. Among many electronic amenities, the digital apartment complex offered touch-pad recognition screens instead of keys and a remote-control Home PAD operating all electronic devices within the home.

Samsung envisioned that digital devices would themselves converge, as networks and services had done. Single devices integrating multiple services would replace multiple devices. In addition, digital convergence would lead to increasing connectivity of devices through wired and wireless

7 Pete Engardio and Moon Ihlwan, “Samsung’s ‘Sashimi Theory’ of Success,” BusinessWeek, June 11, 2003.

8 Quoted in Cliff Edwards et al., “The Samsung Way,” BusinessWeek, June 16, 2003, pp. 56–64.

9 Quoted in Hae Won Choi, “Samsung is Aiming to Make the Jetsons’ World a Reality—Electronics Maker’s Big Push in Home-Networking Market is a Bold Gamble to Beat Rivals,” The Wall Street Journal, September 16, 2003, p. B1.

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networks such as broadband. As a result, the number of services available to each user and, consequently, potential revenue streams would both expand.

As Yun stated:

Digital convergence will lead to the ubiquitous network. Computing power will be transplanted into devices we use personally and be applied to virtually everything we encounter in our day-to-day lives. Samsung is uniquely positioned to exploit the potential synergy that comes from being a leader in memory and displays, components, and wireless and consumer electronics. We intend to be squarely at the center of this future society.

At this time, Samsung believed it was in a crucial race to capture the digital home.

Nevertheless, several challenges existed before digital convergence could become a reality including product standardization and simplification as well as customer education on the benefits of convergence. Additionally, digital convergence might render obsolete many existing Samsung products, while others might well be cannibalized.

Marketing at Samsung

Historically, Samsung had been a product-driven company that focused on manufacturing existing products at lower cost than competitors and thereby built market share through scale economies. In the early 1990s, the Samsung brand was not widely known outside of Korea; the company sold its products primarily to OEMs rather than to consumers. At this time, there was only nominal interest in developing the Samsung brand image globally. Around the world, Samsung’s brand message was fragmented, and its logo and presentation were inconsistent. Marketing budgets, controlled by product managers, tended to be allocated to “below-the-line” price promotions designed to meet short-term sales targets, rather than to long-term “above-the-line” brand building.

This changed with the 1993 “new management initiative” issued by the chairman, Lee. To transform Samsung from a “cheap OEM” to a “high value-added products provider,” Samsung had to develop strong brand power. Once costs were brought under control and new products began to flow out of Samsung’s R&D pipeline, it became evident that Samsung could extract higher margins by going to market under its own brand name, just as Sony had done. After his appointment in 1997, Vice Chairman Yun led the companywide effort to convert the company’s product line from an emphasis on low-end commodities to high-end premium goods.

To be recognized as a premium brand required repositioning through an increased emphasis on marketing. In 1999, Yun therefore recruited an accomplished Korean-born general manager, Eric Kim, as executive vice president of global marketing. Kim was born in Korea but had pursued a successful business career in the United States in the technology sector, most recently as CEO of Pilot Software.

Kim’s mission was to build the corporate brand image across 200 country markets and SEC’s 17 product-focused business units worldwide. Kim stressed the importance of viewing the brand as a core strategic asset, “one that needs to be thought of strategically and built over time.” The objective was to create a global brand; the Korean origin of the brand was not emphasized.

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Top executives’ support for brand building was critical to Kim’s success. Kim stated: “There was a clear conviction, from the very top, that the brand was one of the most important assets in the company and that they were prepared to support someone like me to make it grow.”10

Nevertheless, Kim faced major internal challenges. Despite prior efforts to emphasize the importance of branding, the true value of marketing was not widely appreciated at Samsung when Kim arrived. Kim realized that internal education about marketing would be fundamental to achieving change:

Our managers believed that good products sell themselves, that marketing was nothing more than selling, and that selling was only needed when you had a me-too or weak product. I have worked hard for four years to educate our divisional managers on the role of marketing and the value of developing and communicating superior solutions for our target customers.

We have made progress, but many Samsung managers responded initially with a “show me” attitude. Not only have we had to develop marketing planning and budgeting processes from scratch for both new and existing products, for headquarters and field operations, we have had to show the divisions that following these new approaches impacts the effectiveness of their marketing expenditures especially because, as manufacturing costs have gone down, marketing has become, next to R&D, the largest expense on their books.

At the same time, we have had to elevate the perceived professional stature of marketing within Samsung and develop a marketing career path to attract, train, and retain top-quality marketers who can make the case for marketing expenditures to our general managers, many of whom still remain skeptical.

Kim believed that everyone inside the organization had to understand the essence of the Samsung brand name before it could be sensibly promoted externally. Translating internal education into a communicable message was in part captured by the use of three words: “wow,” “simple,” and “inclusive.” “Wow” referred to groundbreaking innovations that intrigued consumers. They represented key features of any pillar product. There were, in fact, targets for the number of wow products each business unit had to launch each year. “Simple” and “inclusive” referred to the ease of use and accessibility along with ubiquity, availability, and affordability of Samsung’s products to the consumer. Samsung designers emphasized visual simplicity as well as functional performance in arriving at new product designs.

Marketing Organization

Kim headed the corporate Global Marketing Operations (GMO) unit, established in 1999 and based at world headquarters in Seoul. Comprising around 90 staff, the GMO coordinated Samsung’s marketing efforts and was responsible for developing the corporate marketing program for the Samsung brand outside Korea (a separate group was responsible for brand building in Samsung’s home market). There were three major teams in the GMO, the Marketing Strategy Team, the Regional Strategy Team, and the Product Strategy Team, each with different responsibilities.

Marketing Strategy Team

• Developed global marketing strategy

10 Maija Pesola, “From microwaves to The Matrix,” The Financial Times, September 11, 2003, p. 8.

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• Controlled the GMO budget

• Controlled the global brand campaign, in coordination with Samsung’s in-house agency (Cheil) and its outside advertising agency (Foote, Cone & Belding)

• Controlled the Samsung.com Web site and developed Internet-related partnerships with service providers and other corporations

• Oversaw global customer relationship management (CRM) strategies and shared marketing best practices across subsidiaries

Regional Strategy Team

• Planned strategic direction for regional markets

• Interfaced with line managers to set the marketing budgets by region

Product Strategy Team

• Conducted market research and gathered and analyzed information on competitors

• Planned corporate marketing exhibits at trade shows

• Conceived and implemented strategic marketing alliances and “killer” new product concepts

In 2001, under Kim’s leadership, the GMO implemented the initiative to consolidate SEC advertising with a single agency to deliver a consistent brand message worldwide. Previously, various units of SEC were using more than 55 advertising agencies worldwide, and Samsung products were advertised using 20 different slogans. Kim explained:

We consolidated our advertising with a single global agency, Foote, Cone & Belding [FCB]. We developed worldwide guidelines for our logo and for its presentation in all SEC communications from letterheads to product packaging to billboards. FCB also developed a unique brand essence for Samsung to differentiate us in the marketplace and boost internal morale. Consolidating agencies has also helped us to gradually strip away sub-brands, which had distracted management and diverted resources.

Allocation of Marketing Resources

In addition to improving marketing education and organization, the GMO changed the way marketing budgets were set. As of 2003, marketing funds were available from the GMO (around $400 million in 2003) and from each of SEC’s 17 worldwide business units (around $600 million). GMO funds could only be used for advertising and other brand franchise-building activities. Business-unit funds were mainly used for temporary price promotions directed at consumers and the trade. The GMO recommended to SEC’s regional headquarters how to prioritize and allocate its funds and those of the business units by country and by product category. Under Kim, the GMO allocated 70% of its funds in this fashion, reserving 30% to support opportunities as they emerged during the year.

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Historically, marketing budgets at Samsung were set as a percentage of current sales rather than in relationship to growth potential. Kim accomplished substantial budget reallocations by deploying a computer program, M-Net, to help determine where funds could reap the highest returns. Eighteen months were spent gathering data on Samsung sales, margins, market shares, and marketing expenditures by country and by product category into a central database. The M-Net program analyzed the results of past marketing plans to recommend where marketing dollars should be spent by country and by category. Pricing adjustments were also recommended.

Kim explained the value of the program:

It was clear from our analyses that we could no longer allocate marketing resources the way we had in the past. We needed a more systematic approach to ensure that our marketing investments were targeted at the highest return opportunities. The entire, approximately $1 billion budget may sound like a lot of money, but it’s spread across multiple countries and products.

The M-Net program revealed three opportunities for improvement:

1. SEC was overspending in regions like North America and Russia that did not have high growth potential. While 45% of the current budget was spent in these areas, spending should have been closer to 35%.

2. Some regions with high growth potential were correspondingly receiving less investment than appropriate. In particular, Europe and China were receiving 31% of the marketing budget but should have been allocated more like 42%.

3. Similar misallocations existed at the product level: Mobile phones, vacuum cleaners, and air conditioners were receiving more than their share of the marketing budget, while camcorders, DVD players, televisions, PC monitors, and refrigerators were not getting enough.

These changes recommended by M-Net—if followed in their entirety—amounted to a $150 million reallocation in the marketing budget. M-Net allowed GMO staff to analyze different scenarios for marketing budget allocation; see Exhibit 5 for an example.11

Despite initial resistance from regional and product managers to major changes in the allocation of marketing funds, the positive results achieved on measures such as brand preference, market share, and operating profit showed that marketing dollars could be spent better. To complement the new system, Kim also backed changes in management incentives to ensure that line managers were rewarded in part for global performance rather than just their own region-specific or product-specific results.

Market-Driven Change

Kim’s marketing initiatives complemented a sweeping set of companywide changes collectively referred to as market-driven change (MDC). MDC helped Samsung managers view marketing as an important business function rather than as a series of one-off advertising campaigns and promotions. Kim commented:

11 Marcel Corstjens and Jeffrey Merrihue, “Optimal Marketing,” Harvard Business Review, October 2003. For full discussion of M-Net and related changes, see this article.

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MDC is injecting a much greater focus on customer insight into the new-product development process. Rather than merely imitating competitive products or going with an engineer’s gut feel, we set out to identify customer segments that are willing to pay higher prices for particular functional or aesthetic innovations. For example, in 2001, we launched the world’s first dual-screen folder handset. It was designed to be very compact and targeted the female/fashion-oriented segment of the cell phone market. We sold $750 million worth in nine months.

Research for the MDC initiative revealed that the Samsung brand lacked stature and that the brand image lacked emotion and a human face. With FCB’s help, a new umbrella campaign was launched in 2002 and backed by a new emphasis on the use of “DigitAll—Everyone’s Invited” in brand campaigns. Kim explained:

Samsung is generating tremendous brand visibility worldwide with its DigitAll campaign. The rationale behind DigitAll is simple: It says that Samsung is uniquely positioned to bring together communication, entertainment, and information in easy-to-use digital devices. Through digital convergence and simple practical design, Samsung products can empower people from all walks of life to enjoy a better experience.12

Exhibit 6 shows examples of cooperative advertisements with Samsung customers for the DigitAll campaign. See Exhibit 7 for product-specific advertisements under the DigitAll umbrella. Exhibit 8 summarizes the reactions from consumer focus groups of “mobile professionals” and “Generation Y” (in their 20s) consumers to the DigitAll campaign.

After the successful launch of the DigitAll campaign, Samsung took its branding activities to the next level by launching a comarketing campaign with the Warner Brothers blockbuster movie The Matrix Reloaded, a science fiction thriller that opened in May 2003. A Samsung phone played a key role in the movie as the gateway between the physical and virtual worlds.13 Samsung arranged to produce the phone designed by the Wachowski Brothers for the Matrix sequel and sold the phone from the movie in limited quantities in selected markets. Several other new Samsung products were promoted in a billboard and print-advertising campaign as depicted in Exhibit 9. Featured products included a flat-screen computer monitor, a digital camcorder, a flat-screen TV, and a rotating camera phone. This sponsorship was designed to promote the Samsung brand among the 20- to 30-year-old- segment, who were important consumers of new electronic products and whose brand preferences were not yet solidified. The campaign video game, “Enter the Matrix,” included over 200 impressions of the Samsung brand. Samsung’s Matrix microsite increased traffic to the Samsung.com Web site by 65%.

In addition, Samsung signed an agreement with the International Olympic Committee (IOC) in 1997 to be a worldwide Olympic sponsor in the wireless equipment category. Samsung was an official Olympic sponsor for the 2000 Sydney Olympic Games and leveraged this sponsorship internally as well, inviting senior executives from its operating units and key distributors from around the world. Sponsorship of the 2002 Winter Olympic Games in Salt Lake City continued the effort. The company had already agreed to sponsor the 2004 Summer Games in Athens, the 2006 Winter Games in Torino, and the 2008 Summer Games in Beijing.

12 Samsung Annual Report 2002.

13 A Nokia cell phone was featured in the original Matrix movie.

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Samsung’s Market Position

Domestic Market Dominance

Samsung dominated the South Korean market with over 50% share in almost all its product markets and high repeat-purchase rates. Although only 15% of total Samsung sales were in South Korea, the country offered two special advantages as a launch market for new products. First, as a mountainous country, South Korea presented a tough challenge for cell phone usage, forcing development of more sensitive wireless technology. Second, partly because almost three-quarters of South Koreans lived in urban areas, 70% of South Korean households were already wired for broadband by 2003 (compared with 15% of households in the United States and 8% in Europe).

The brand was almost 40 years old in Korea and was well-known, thanks to its widespread presence on home appliances. In this respect, it was comparable to the GE brand in the United States.

Samsung’s market penetration in Korea permitted it to launch sub-brands for specific segments of the domestic market. In other markets where the Samsung brand was less developed, a focus on the corporate brand image was deemed paramount. As Kim explained: “Given our high market share in Korea, we have to address all age groups, so we implement a multibrand, multisegment strategy. We’ve been able to launch sub-brands without compromising the master brand.”

International Expansion

Kim recognized that the Samsung brand was at different stages of development in different country markets. Managers disagreed, however, about how much local adaptation of marketing and brand-building communications strategies and tactics was necessary. All agreed, however, that country markets could be grouped into three categories (see Exhibit 10 for more details):

1. Accelerator: Markets where the main objective was to build Samsung brand awareness, both aided and unaided

2. Turning point: Markets where awareness was good, generating significant demand in some product categories, but where the brand image had to be reinforced to improve repeat- purchase probabilities

3. Advanced: Markets where Samsung’s unaided brand awareness and brand reputation were strong across all categories and where loyalty needed to be reinforced further

Kim described the position of the Samsung brand in various country markets as follows:

In the U.S., the Samsung brand is at the turning-point stage. We’ve made good progress, but our unaided awareness and brand loyalty are still below those of first-tier brands like Sony. We have added new partnerships with chains like Best Buy and Circuit City to supplement our earlier relationships with Wal-Mart and Target. Although we are still seen by many consumers as a value brand, we’re increasingly viewed by consumers and trade partners alike as reliable, up-and-coming, and credible, given the breadth of our product line and our flow of new products. We’re working heavily in the U.S. on customer relationship management to strengthen our partnerships with the channel leaders, especially since the top 10 chains account for 60% of consumer electronics sales nationwide.

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In Europe, the Samsung brand is stronger in the southern countries like Spain and Italy than in northern Europe. Consumers in these countries don’t have such entrenched brand preferences as they do in northern Europe. The Germans in particular are fiercely loyal to German brands, and the fragmentation of retail distribution makes it harder for us to enter with sufficient sales volume to make the market attractive.

The Samsung brand was stronger in emerging than in developed markets. In Russia, for example, Samsung had been voted the “people’s brand” several years in a row. Kim explained:

Our success stems from the late 1980s and early 1990s when we continued to supply Russia from warehouses in Finland with value-priced products which weren’t the most technologically advanced but which matched the market’s needs at the time and consumers’ ability to pay. Samsung is now moving beyond the turning-point stage. We need to upgrade our image and be recognized for product leadership and innovation. That’s why we’ve just opened a showcase retail outlet on Red Square.

The Samsung brand had made even more progress in China, which was transitioning from the turning-point stage to the advanced stage. Kim said:

We cannot make any profit at the low end in China, but between a quarter and a third of the Chinese market [in value terms] is available to us. Chinese consumers value quality brands, and purchasing power at our end of the market is concentrated conveniently in major cities. We have a national marketing coordinator in Beijing with regional sales and marketing teams in Beijing, Guangzhou, and Shanghai.

In China, an estimated 5 million new customers signed up for cellular telephone service each month in 2002. In Latin America, mobile Internet usage was projected to increase to include 47 million people by 2005. India represented another major market opportunity, as Kim explained: “In India, we found that value-added resellers are very important in putting together personal computer packages for consumers. India is an increasingly sophisticated and fast-growing information technology market. Samsung has become a major supplier of computer peripherals, and our brand recognition is actually greater than that of Intel or Microsoft.”

Consumer Research

FCB began working with SEC in 1999 to understand the company’s brand image. To this end, FCB had developed a proprietary model, the “relationship monitor,” which identified: (1) 13 relational dimensions through which customers connected, to a greater or lesser extent, with a brand; and (2) seven relationship styles that described, in summary form, different types of customer-brand relationships (which each implied different levels of brand loyalty). The dimensions and associated styles are summarized in Exhibits 11a through 11c. The relationship monitor study involved asking consumers to rate one or more brands on a battery of attitude and opinion statements associated with each of the 13 dimensions.

In 2000, FCB examined consumers’ relationships with Samsung and key competitive brands in six country markets: Brazil, China, Germany, Hong Kong, the United Kingdom, and the United States. In China, Hong Kong, and the United States, Samsung cell phones were rated separately, in addition to the Samsung brand as a whole. The index scores for each of the six country markets (see Exhibits 12a through 12c) show Samsung’s relationship profile versus the all-brand average.

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The results indicated that the Samsung brand was at different degrees of development in different countries. In China, for example, the Samsung brand was strong on “delights me” but not on “perfect fit,” except in the case of cell phones. In contrast, in the United States, the overall brand was more “price based,” though, once again, Samsung cell phones had developed a stronger position, for example, in the “delights me” category.

FCB executives advised that Samsung should focus in weaker markets on establishing the brand’s leadership credentials through new-product development, since perceived category leadership gave consumers a reason to buy into the franchise. In stronger Samsung markets, where the customer base was already significant, the focus of marketing communications should be, it was argued, on moving more consumers into the “delights me” and “perfect fit” relationship categories. However, questions lingered about the communications strategies that could move consumers from one stage to another on the relationship style ladder.

In addition to country comparisons, the FCB analysis compared Samsung to its major competitors. Exhibit 13 summarizes consumer perceptions of the brand personalities of five companies along with the implications for Samsung’s strategy. Furthermore, competing companies were compared on the basis of the seven relationship styles used in the country analysis. (See Exhibits 14a through 14d.) The strong performance of Samsung cell phones gave the brand a promising starting point from which to build brand leadership.

Taking the analysis a step further, Samsung executives were determined that the brand image be shaped in light of future consumer trends rather than merely respond to those currently in vogue. They wanted Samsung to be the brand of choice among “vanguard consumers,” young opinion leaders around the world. A 2002 series of interviews with industry experts in 11 countries identified the following six consumer trends:

• Living on demand and in control

• From consumers to “experiences”

• Technology has gone from “wow” to “oh”

• Living the converged life

• Milking the moment

• Moving by instinct

Exhibit 15 details each of these trends and the implications for Samsung’s future efforts to build its brand image. For example, “living on demand and in control” implied tailoring services to meet personal preferences, perhaps through a personal preference chip or code to transfer voice and data between devices. This further implied a higher degree of customer segmentation to accommodate variations in consumer preferences than Samsung had been used to in the past. Meanwhile, the shift in technology from “wow” to “oh” emphasized that digital devices should not become mundane but had to retain their “delight factor,” while also fitting into everyday life.

Conclusion

Kim was encouraged by positive consumer response to the global DigitAll advertising campaign. He planned to run this campaign through the end of 2004, but he wondered whether it would be

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enough to propel Samsung into the premier league of global brands. He recalled some of the comments he had heard from Samsung line managers in his travels during 2003:

• “There is no substitute for a constant stream of bigger and better new products. Money spent on R&D is always a better investment than money spent on advertising.”

• “Samsung’s consumers in my country are pretty mainstream, satisfied, and ready to repurchase. Too much emphasis on youth and creativity is inappropriate.”

• “Let’s not overspend on advertising and promotion just for the sake of beating Sony in some BusinessWeek ranking. The brand will gain consumer credibility naturally, at its own pace. You can’t force it.”

• “The global image campaign is only useful if it helps move products at retail next Monday morning. I’m not convinced that it does.”

• “Even if we have the best product, say in LCD televisions, the shelf space is so cluttered with options that we need the strong brand to break through.”

In addition to pondering these views, Kim worried about whether Samsung needed to embrace a more complex customer segmentation in its marketing planning. Samsung had, up to this point, used a “one-size-fits-all” approach, advertising broadly to “the sensible brand buyer.” But market research pointed toward increasing demand for personalized, customized devices and, therefore, for more segmentation. This might call for new sub-brands beyond the Samsung name targeted at premium-value segments in one or more categories and for segmented advertising campaigns. However, such initiatives would be hard to justify if they reduced the cost efficiency of current marketing expenditures.

Kim had a week to consolidate his thoughts before presenting to Samsung’s top management his plan for how Samsung could become a blockbuster brand by 2005. He mused: “To be number one, it’s not enough just to be known, you have to be loved.”14

14 Maija Pesola, “From microwaves to The Matrix,” The Financial Times, September 11, 2003, p. 8.

233

504-051 Samsung Electronics Company: Global Marketing Operations

Exhibit 1 Samsung Revenue and Profit Growth, 1997–2002

-10

1997 1998 1999 2000 2001 2002

U S

$ B

ill io

n s

Revenue

Net Profit

Source: Samsung company records.

Exhibit 2 Revenue in the Flash Market Exhibit 3 LCDs Increasing Share of Television Market

2002 2003

100

200

300

400

500

600

3Q 4Q 1Q 2Q

U S

$ B

ill io

Intel Samsung

2002 2003

100

200

300

400

500

600

3Q 4Q 1Q 2Q

U S

$ B

ill io

Intel Samsung

120

140

160

180

200

2002 03* 04* 05* 06*

TV s

N um

be r

of u

ni ts

(m )

Projection Plasma LCD CRT

Source: Adapted from Don Clark, “Samsung Closes Flash-Chip Gap on Intel,” The Wall Street Journal, September 11, 2003, p. B6.

Source: Adapted from Richard Waters, “Converging on the living room: digital technology’s rise breaks down barriers between PC’s and consumer electronics,” The Financial Times, October 3, 2003, p. 11.

234

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236

Samsung Electronics Company: Global Marketing Operations 504-051

Exhibit 6 DigitAll Ad Campaign: Cooperative Advertisements with Samsung Customers

Source: Samsung company records.

237

50 4-

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238

Samsung Electronics Company: Global Marketing Operations 504-051

Exhibit 8 Consumer Reactions to DigitAll Campaign Concept and to “Everyone’s Invited” Television Advertising Campaign

DigitAll Concept:

• “I think it’s a great name. I think it really encompasses what they are trying to do, which is combining different tech gadgets into one piece of equipment.”

• “It means all digital. Digital to everybody and all digital, I think it has these two meanings.”

• “To me it means whatever the product is, we can make it digital, we can make it compact, we can advance the technology, we are a company you can trust—so one day when you can afford the product, we are the company to turn to.”

• “Everybody is included, you know from the poor to the richer. All products are digital.”

• “It all comes together in one place, both on a level of the technology itself, but in another way it is quite clever, the way that even in my mind, as cynical as I am, it all comes under one roof—Samsung’s roof.”

Everyone’s Invited Campaign:

• “I’m usually intimidated by technology, but when I see different people using it, I think it may be easier to use. And the fact that they admit there is confusion, they make it easier. I thought that was appealing.”

• “It’s available to everybody, it is easy to get. Diverse products for diverse people. There is

sort of an international feel about it . . . you can see that it is from the east and trying to marry the east and west together—it’s a fast-moving thing.”

• “High tech with ordinary people.” • “Everyone is equal, in a digital world, everyone is equal.”

• “Fusion, integration, convenience, and well-being. Integration means state of the art, but they have to deliver.”

• “Puts Samsung in a new light—lively, high tech, in the top league.”

• “It’s telling you that you just wanted simple things, simple improvements in life from technology, but it got so complex that now you’re sitting in your chair and don’t know which way to turn, and Samsung is gonna make it so simple that people all over the world with very different cultures can benefit.”

Source: FCB future-focus consumer interviews for Samsung, 2002.

239

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242

Samsung Electronics Company: Global Marketing Operations 504-051

Exhibit 11 Design of FCB Relationship Monitor Survey

Exhibit 11a 13 Dimensions that Build Stronger Consumer Relationships

Secure Relationships

Stepping Stones

Acquisition

Transacting

Attraction

Connection

Bonding

Cost Ambivalence

Stature Chemistry

Satisfaction Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Secure Relationships

Stepping Stones

Acquisition

Secure Relationships

Stepping Stones

Acquisition

Transacting

Attraction

Connection

Bonding

Transacting

Attraction

Connection

Bonding

Transacting

Attraction

Connection

Bonding

Cost Ambivalence

Stature Chemistry

Satisfaction Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Cost Ambivalence

Stature Chemistry

Satisfaction Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Exhibit 11b Example of Detailed Opinion Statements for Each Dimension

Recognition

! This brand is receptive to my feedback

! This brand values me and treats me accordingly

! This brand treats me well

! This brand treats me as an individual

! This brand goes out of its way to provide extra valueCost

Ambivalence

Stature Chemistry

Satisfaction Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Recognition

! This brand is receptive to my feedback

! This brand values me and treats me accordingly

! This brand treats me well

! This brand treats me as an individual

! This brand goes out of its way to provide extra valueCost

Ambivalence

Stature Chemistry

Satisfaction Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Cost Ambivalence

Stature Chemistry

Satisfaction Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Exhibit 11c Seven Relationship Styles Derived from 13 Dimensions

Cost Ambivalence

Stature

Chemistry

Satisfaction

Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Attraction

Connection

Bonding Perfect Fit

Reliant

Caring

Follow the Leader

Price Based

Non-Committal

Delights Me

Cost Ambivalence

Stature Chemistry

Satisfaction Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Transacting

L o y a l t y

Cost Ambivalence

Stature

Chemistry

Satisfaction

Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Cost Ambivalence

Stature

Chemistry

Satisfaction

Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Attraction

Connection

Bonding Perfect Fit

Reliant

Caring

Follow the Leader

Price Based

Non-Committal

Delights Me

Cost Ambivalence

Stature Chemistry

Satisfaction Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Cost Ambivalence

Stature Chemistry

Satisfaction Recognition Empathy Sensitivity

Devotion Trust Involvement Compatibility Comfort

Transacting

L o y a l t y

Source: Samsung Relationship Monitor, 2000.

243

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so na

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co m

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So u

rc e:

m su

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245

50 4-

05 1

28 -

E xh

ib it

s 14

a– 14

d Sa

m su

n g

R el

at io

n al

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le b

y C

ou n

tr y

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p ar

ed t

o Se

le ct

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om p

et it

or s

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ib it

14 A

: B ra

zi l

23 %

9% 18 %

4% 26 %

7% 13 %

P er

fe ct

F it

95 12

7 97

D el

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e 10

2 92

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ed 86

81 87

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m itt

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1 79

23 %

9% 18 %

4% 26 %

7% 13 %

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fe ct

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xh ib

it 14

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17 %

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fe ct

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18 %

246

Samsung Electronics Company: Global Marketing Operations 504-051

Exhibit 15 Key Findings of FCB Study on Samsung’s Future Focus

2002 Key Findings: Samsung’s Future Focus

• Consumers want everything on their terms – Focus on controlling and managing the increased amount of available

information and data due to technology • The magic of the “off” button • Self-programming of media • Filters and synthesizers of information • Cliff notes learning • Quality shortcuts • “I want what I want when I want it.”

Living On Demand and In Control

From Consumers to ìExperiencersî

2002 Key Findings: Samsung’s Future Focus

• Consumers have become acquirers of experiences or “experiencers”

– The acquisition of experiences is as important as the acquisition of things

• Experiences come in a variety of forms – Virtual or real, owned or borrowed, created or purchased – Always non-routine (using a mobile phone is routine, using a mobile

phone to send a video is non-routine…for awhile) – Simulated experience is expected to provide the exact same benefit as

real • Invites you in and involves you • Is embedded in emotion and senses

Living On Demand and In Control

2002 Key Findings: Samsung’s Future Focus

• Speeding up to slow down – New life balance based on feeling that what I want to do is okay

• DIY/DMW (Do-it-yourself and Do-it-My-Way) mentality in all areas of life

– No waiting, do it now – Feel a sense of accomplishment and pride – All about creating their own reality/space on their own timetable

• Consumers continue to segment into smaller target niches due to plethora of options in manufacturers and retail outlets

– Preference for aligning themselves with what they want when they want it, not for following the masses

From Consumers to ìExperiencersî

2002 Key Findings: Samsung’s Future Focus

• Owning a brand or product is considered an experience if it resonates with your life

– Provides an emotional response/feeling or visceral benefit – Is a manifestation of expertise or knowledge – Helps to define or convey your personality, image or lifestyle

• Consumers don’t buy technology they buy experiences – Technology behind the experience has been eclipsed by the experience – The brand point of view becomes a key point of differentiation

Living On Demand and In Control

2002 Key Findings: Samsung’s Future Focus

SAMSUNG IMPLICATION

• Development of personal “preference” chips/cards that move between devices and screen “my” world for “my” information and communication

• Incorporate DIY/DMW design/programming opportunities

• Communicate a personal vision of technology that simplifies rather than overwhelms, and clarifies rather than confuses

From Consumers to ìExperiencersî

2002 Key Findings: Samsung’s Future Focus

SAMSUNG IMPLICATION

• Differentiate the brand with the Samsung experience of technology – Create a Samsung “flavor” with a fully developed personality, attitude, and

vision – Create a lifestyle community, e.g.,

Harley Davidson, Apple

• Leverage all parts of the purchase and usage cycle where you can develop a Samsung brand experience, e.g.,

– Augment usage of product – Create retail centers of experience – Develop branded experience experts – Create a no-regrets experience

247

50 4-

05 1

30 -

E xh

ib it

1 5

(c on

ti n

u ed

)

Te ch

no lo

g y

H as

G on

e Fr

o m

ì W

ow î

to ì

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20 02

K ey

F in

d in

g s:

S am

su n

g ’s

F u

tu re

F o

cu s

• T

he “

w ow

’’ is

g on

e –

“W o w

” is

a b o u

t fe

a tu

re s

a n d

e ve

ry o n e h

a s

th e

m –

P u sh

a b

u tt o n a

n d it

w o rk

s –

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te re

st e d in

h o w

it w

o rk

• D

ig ita

l t ec

h n o lo

g y

is n

o t

in n

o va

tiv e

– It ’s

n o t w

h a

t co

n su

m e rs

e xp

e ct

in n o va

tio n t o

lo o k/

fe e

l l ik

e …

it’ s

lik e a

a p p lia

n ce

– G

o n e f

ro m

c o

n tr

ib u tin

g t o

m y

lif e t o

w o ve

n in

to m

y lif

e …

se a m

le ss

in te

g ra

te d

a n d w

ir e le

• C

o n st

a n t,

co n si

st e n t

in n

ov at

io n f

u e ls

a p

er so

n a l t

e ch

n ol

o g

y e vo

lu tio

n a

n d e

xp e

ct a tio

n –

C o n su

m e

rs e

xp e ct

p e rs

o n a l t

e ch

n o

lo g y

to c

h a n g e

li tt le

b y

lit tle

– O

n ly

m e d ic

a l s

ci e

n ce

t e ch

n o lo

g y

m a y

se e r

e vo

lu tio

n a ry

c h a n g

Te ch

no lo

g y

H as

G on

e Fr

o m

ì W

ow î

to ì

O hî

20 02

K ey

F in

d in

g s:

S am

su n

g ’s

F u

tu re

F o

cu s

• T

e ch

n o lo

g ic

a l p

ar ity

r es

ul ts

in “

m e -t

o o ”

m ar

ke t s

at u ra

tio n

–

D ig

ita l i

s a c

o st

o f

e n

tr y,

a n

o n

-d iff

e re

n tia

to r

– P

le n tit

u d e

o f

o p

tio n s,

in m

a n

y d

iff e re

n t b

u n d

le s,

is c

a u

si n g s

o m

co n su

m e r

co n fu

si o n

a n d d

is sa

tis fa

ct io

n •

“P ow

e r”

u se

rs w

a n

t a ll

op tio

n s

in o

ne d

ev ic

e …

se em

s a

s if

o ne

k ey

fe a

tu re

a lw

ay s

m is

si n

g •

M o

st (

m a

ss )

u se

rs w

an t

to k

n ow

t he

y ha

ve a

ll th

e o

p tio

n s

• S

om e

s a

y th

e y

w an

t to

b u

ild t

he ir

o w

n o

p tio

n s

bu nd

le •

A f

ew o

n th

e f

rin g

e s

a y

th ey

w a

n t a

n o

-f ril

ls c

h o

ic e

… b

u t p

ro ba

b ly

r e

a lly

ju st

a n

t so

m e

th in

g e

a sy

t o

o pe

ra te

Te ch

no lo

g y

H as

G on

e Fr

o m

ì W

ow î

to ì

O hî

20 02

K ey

F in

d in

g s:

S am

su n

g ’s

F u

tu re

F o

cu s

• C

o ns

u m

er s

se e

k th

e “

d e

lig h

t fa

ct or

” in

w ha

t d ig

ita l t

ec hn

o lo

g y

br in

gs t

o th

e ir

li ve

s –

D e si

g n a

n d s

ty le

• C

o n

su m

e rs

in cr

ea si

ng ly

fo cu

s o

n d

e si

g n

a nd

a e

st he

tic s,

d e

vi ce

s m

u st

fi t

d e

co ra

tin g

s ch

em e

, st

yl e

b e

co m

e s

a d

e ci

d in

g f

a ct

o r

fo r

th e

m a

ss m

a rk

e t

– Im

a g e

a n d a

tt e n

tio n

• C

o n

su m

e rs

d e

lig h

t in

e xp

re ss

in g

th em

se lv

e s

w ith

m ob

ile d

ev ic

e s

a nd

g e

tt in

g a

tte n

tio n

f ro

m o

th e

rs f

o r

w ha

t th

ey c

a rr

– E

xp e ri

e n ce

s •

C o

n su

m e

rs e

xp e

ct to

b e

d e

lig h

te d

b y

ho w

th e

to ta

l b ra

nd e

xp e

rie n

e n

ha n

ce s

th e

ir liv

e s

Te ch

no lo

g y

H as

G on

e Fr

o m

ì W

ow î

to ì

O hî

20 02

K ey

F in

d in

g s:

S am

su n

g ’s

F u

tu re

F o

cu s

S A

M S

U N

G IM

P L

IC A

T IO

• In

cu m

b e n t t

h a t t

h e b

ra n

d c

ar ry

th e

d el

ig ht

s in

ce te

ch n

ol o

g y

ca n n

o t

d e

liv e

r th

e “

w o w

” a n d t

h a t t

h e th

e b

ra n d s

ta ys

r el

ev a

n t

in th

e “

o h

” e n

vi ro

n m

e n t

– P

la ce

le ss

f o cu

s o n t

h e d

e ta

ils o

f th

e t e

ch n o

lo g y

in si

d e a

n d

m o re

o n w

h a t

th e t e ch

n o lo

g y

p ro

d u ce

s o

n t h e

o u ts

id e …

th e e

xp e ri

e n ce

– E

n tic

e a

c o n su

m e r’ s

“w a n t”

v e

rs u s

tr y

to f

ill a

n e e d

• D

ev e

lo p

a nd

c om

m un

ic at

e a

b ra

n d

p er

so n

al ity

a n

d vi

si o

n a

s w

a y

of e n

ri ch

in g t

h e t

e ch

n o

lo g

y e xp

e ri

e n ce

– E

vo lv

e f ro

m h

ig h -t

e ch

t o p

e rs

o n a l- te

Te ch

no lo

g y

H as

G on

e Fr

o m

ì W

ow î

to ì

O hî

20 02

K ey

F in

d in

g s:

S am

su n

g ’s

F u

tu re

F o

cu s

S A

M S

U N

G IM

P L

IC A

T IO

• C

on tin

u e

f oc

u s

o n

s ty

le a

n d

er go

no m

ic s

– In

te g ra

te m

o re

p e rs

o n

a lit

y th

a n p

u re

-t e ch

n o lo

g y

in to

d e si

g n

a n

a e st

h e tic

• In

e ss

e n ce

: t h in

k lik

e th

e a

u to

m ot

iv e

in d u st

– D

e vi

ce s

th a t tr

a n sp

o rt

d iff

e re

n tia

te t h

e m

se lv

e s

b a se

d o

n a

b ra

n d

e d

in te

g ra

tio n

o f

p e

rf o rm

a n ce

, d e si

g n ,

im a

g e a

n d

li fe

st yl

e …

b a se

d o

n p e rc

e p tio

n s

a n d e

xp e ri e

n ce

248

Samsung Electronics Company: Global Marketing Operations 504-051

Exhibit 15 (continued)

2002 Key Findings: Samsung’s Future Focus

• Convergence means blended life experiences not combined product features/services

– It’s about what I do with it not what options or features it has – If it’s not seamless in operation it’s not converged

Living the Converged Life

CONVERGENCE IS:

Enjoying the movie theater experience in home

Suspending belief in reality

Being in two places at one time when something cool happens by sharing images

Being an original music video producer

Making social commentary

CONVERGENCE IS NOT:

Integration of surround sound with HDTV with flat panel monitor

Compatibility of DVD player with latest Dolby or dts standard

Taking a picture on a camera with my mobile phone and sending it to someone

Downloading, infared beeping, editing, compatibility and distribution

Sending photos and movies of international travel to friends imbedded in email

Milking the Moment

2002 Key Findings: Samsung’s Future Focus

• Consumers live in the moment – Instantaneous life…short attention span – Seek maximization of every moment

• Consumers live on a moment’s notice due to technology – Instant gratification expectation – Less long-term planning, increased value in spontaneity

• Efficient mobility maximizes the moments – Increased pressure to keep on the move and up to date – Increased focus on working smarter not harder via technology – Desire for never-fail memory and battery charge

2002 Key Findings: Samsung’s Future Focus

• A converged life requires reconfigured personal “spaces” – Consumers actively rearranging personal “space” to:

• Support their multi-tasking and multiple roles • Support their mobility • Support their desire to “be” in multiple places at one time, e.g., movie theater

at home, on vacation and at home • Deliver real emotional benefits

Living the Converged Life

• Moments and experiences are increasingly created virtually – More virtual connections create a desire for more real

connections…natural law of paradoxes – Consumers desire visceral and tactile experiences, seeking intimacy and

reality – Virtual reality experiences expected to deliver real stimulation and

emotions

• Technology, especially the personal mobile device, is a vital lifeline – Seeking relief from more of the “need to do” events in life so there are

more moments for the “want to do” – Push towards pervasive wireless connection

Milking the Moment

2002 Key Findings: Samsung’s Future Focus

Living the Converged Life

2002 Key Findings: Samsung’s Future Focus

SAMSUNG IMPLICATION

• Facilitate and enable the converged life experience via: – Development and marketing of the first personal experience mobile device

• A data transmission and sharing device that carries voice versus a voice transmission device that also carries data

• Docking stations in stationary spaces: cars, homes, office, etc. • Multiple preference chips/cards for customization

– Offer customizing features/services that will put a unique personal brand on the blended life experience

Milking the Moment

2002 Key Findings: Samsung’s Future Focus

SAMSUNG IMPLICATION

• Fuel this living in the moment lifestyle by providing products and features that deliver intensified moments

– Multi-sensory experiences – Multi-location experiences – Increased quantity opportunities, e.g., communicating with IM, SMS, and

land line concurrently – Tailored programming, e.g., make it as loud or scary as you want

• Facilitate intimate and instantaneous connections with mobile personal device experiences

– Capture, store and share life’s moments in real time

249

504-051 Samsung Electronics Company: Global Marketing Operations

Exhibit 15 (continued)

2002 Key Findings: Samsung’s Future Focus

• Consumers move without thinking, rely on second nature to get through the day

– Intuiting patterns – Interacting with machines with ease – Facilitating their style/personality with design

• Technology drives this second nature – New languages and interfaces developed – Quality short cuts employed

Moving by Instinct

2002 Key Findings: Samsung’s Future Focus

• They develop loyalty to brand protocols, patterns and designs – One time only learning curving; easy adoption by following accepted or

known protocol – Feeling of expertise and comfort developed with a specific “system” – Specific design/style expresses personal style

• Technology must keep up with consumer second nature versus consumers keeping up with technology

– Technology taking cues from the consumer…senses how the consumer thinks, operates…and then adapts itself

• Smarter AI

– Second nature includes integration of voice commands into technology

2002 Key Findings: Samsung’s Future Focus

SAMSUNG IMPLICATION

• Develop Samsung brand protocol that facilitates adoption, while simplifing and differentiating the experience – Consider this part of the Samsung “flavor” or brand experience

• Opportunities with consumer/device interaction using voice recognition

Moving by Instinct

Source: FCB future-focus study, 2002.

250

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"Omnitel Pronto Italia." Lal, Rajiv; Knoop, Carin−Isabel; Raju, Suma. Case No. 9−501−002. Published 08/28/2000, Revised 09/26/2005. Harvard Business School Publishing, (24 pages).

"U.S. Retail Coffee Market (A)." Yip, George S.; Williams, Jeffrey R. Case No. 9−582−087. Published 02/10/1982, Revised 08/01/1985. Harvard Business School Publishing, (25 pages).

"Ontela PicDeck (A): Customer Segmentation, Targeting, and Positioning." Sawhney, Mohanbir; Grayson, Kent; Duprss, Patrick; Hsu, Christine; Metzger, Ryan; Obuchi, Fuminari; Sundaram, Arum; Wilson, Kari. Case No. 5−309−505(A). Published 12/1/2009, Kellogg School of Management, Northwestern University, (7 pages).

"Ontela PicDeck (B): Customer Segmentation, Targeting, and Positioning." Sawhney, Mohanbir; Grayson, Kent; Duprss, Patrick; Hsu, Christine; Metzger, Ryan; Obuchi, Fuminari; Sundaram, Arum; Wilson, Kari. Case No. 5−309−505(B). Published 12/1/2009, Kellogg School of Management, Northwestern University, (6 pages).

"Burberry. Color Case." Moon, Youngme. Case No. 9−504−048. Published 10/01/2003, Revised 04/05/2004. Harvard Business School Publishing, (20 pages).

"Biopure Corp." Gourville, John T. Case No. 9−598−150. Published 05/29/1998, Revised 05/27/1999. Harvard Business School Publishing, (18 pages).

"Coca−Cola's New Vending Machine (A): Pricing to Capture Value, or Not?" King, Charles; Narayandas, Das. Case No. 9−500−068. Published 02/07/2000, Revised 12/12/2000. Harvard Business School Publishing, (9 pages).

"Dove: Evolution of a Brand." Deighton, John. Case No. 9−508−047. Published 10/10/2007, Revised 03/25/2008. Harvard Business School Publishing, (13 pages).

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"Hewlett−Packard Imaging Systems Division: Sonos 100 C/F Introduction." Cespedes, Frank V.; Bell, Marie. Case No. 9−593−080. Published 02/22/1993, Revised 09/06/1994. Harvard Business School Publishing, (19 pages).

"Samsung Electronics Co.: Global Marketing Operations." Quelch, John A.; Harrington, Anna. Case No. 9−504−051. Published 03/02/2004, Revised 01/16/2008. Harvard Business School Publishing, (32 pages).

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Front Cover
Title Page
Table Of Contents
Product Team Cialis: Getting Ready to Market. Color Case
Barco Projection Systems (A): Worldwide Niche Marketing
Omnitel Pronto Italia
U.S. Retail Coffee Market (A)
Ontela PicDeck (A): Customer Segmentation, Targeting, and Positioning
Ontela PicDeck (B): Customer Segmentation, Targeting, and Positioning
Burberry. Color Case
Biopure Corp.
Coca-Cola's New Vending Machine (A): Pricing to Capture Value, or Not?
Dove: Evolution of a Brand
Cunard Line Ltd.: Managing Integrated Marketing Communications
Hewlett-Packard Imaging Systems Division: Sonos 100 C/F Introduction
Samsung Electronics Co.: Global Marketing Operations
Bibliography
Back Cover