Feature Application Guidelines

PART V

FEATURE APPLICATION GUIDELINES

128 CHAPTER 1

A. Read the CROSS-FUNCTIONAL FEATURE – Zara Moves New Clothing Designs from Concept to Store Rack in Two Weeks and identify the strengths of Zara’s business model. Consider how other fashion retailers might respond to protect their market share.

Zara’s ability to respond quickly to trends and its customers is its greatest strength. While most stores take months to get designs through production and into stores, Zara takes only weeks. In addition, the ability to adapt products to customer wants will allow Zara to market well over the Internet as consumers will have the ability to specify exactly what it is they want.

Competitor fashion retailers have several ways of combating this strength and protecting their own markets. One strategy would be to lower prices. Although Zara’s technology allows it to move new fashions more quickly than its competitors, it’s doubtful that its assembly factory in Spain can compete with the low operating costs of other companies in lower wage countries. By forcing Zara to compete on price competitors can maintain higher market share. However, aggressive price competition is likely to have a negative impact on profit margins throughout the industry.

Another strategy would be to follow fashion trends more closely and not allow Zara to take advantage of its ability to keep up with change. Because of the way the fashion industry works it is virtually impossible for a store to sell designs that are too far ahead of its competitors. By slowing down the pace at which new designs are introduced, Zara’s competitors would minimize the threat that the ability to get new designs in stores poses to them.

A more promising competitive strategy may be to focus on distinctive fashions coupled with reducing costs. Hennes & Mauritz (H&M), based in Stockholm, has performed well by offering stylish clothes at very low prices. H&M is a direct competitor of Zara and is expanding in Germany, France, Spain, Italy, the U.K. and Poland. Its mature markets are in Austria, Holland, and Scandinavia.

B. Read the STRATEGY FEATURE – Revolutions in the Music Business and consider what is likely to happen next in the music business. In particular, where do these innovations and new types of competition leave the music production companies?

The music industry has been evolving and changing along with technology. The emergence of music downloading has allowed consumers to purchase music with greater ease and to have more control of exactly what it is they want to buy. Competitive innovations are allowing technology companies like Apple, Dell, Microsoft, and Samsung to increase their market share year after year, while traditional production companies are left with a smaller and smaller market for their music disks. As the cost to purchase iPods and Digital Jukebox’s decline consumers will buy them and will shop for their music online. At some time in the not so different future,

129 it’s possible that customers will no longer purchase music in a physical form like a disk, but will purchase it online the way many people purchase software.

This trend could have a devastating effect on the traditional music production industry. Unless these companies find ways of utilizing the technology that is driving the industry their products could end up being obsolete. On the positive side, purchasing music through a download it not yet the primary way most customers purchase music and production companies have the ability with their cash reserves to change their distribution as consumers change their purchasing habits sometime in the future when such technology will be cheaper for the production companies to purchase. The shift in distribution strategy for music production companies must take place as customer buying habits change. If these changes take place too soon or too late the music production companies could lose profits and market share.

130 CHAPTER 2

A. Review the material in the GLOBAL FEATURE – The A380: A Pan-European Plan. How can the risks being taken by Airbus with this venture be justified? What are the major concerns that should be monitored as the project proceeds?

While the numbers are potentially intimidating in terms of the size of investment and the uncertainty of the market, this is not unusual in industries concerned with high ticket capital- goods products. The countervailing issue is the potentially high profit earnings and stromg market position that is available to Airbus if this project succeeds. Nonetheless, it should also be noted that Airbus has several approaches in its strategy to reducing and ring-fencing its exposure to risk. For example, the use of alliances is a risk-sharing mechanism in situations like these. It should also be noted that Airbus continues to have close involvement with several European governments – the company may be too significant for Europe to allow it to fail, however the A380 project turns out. Risk exposure may not be as high as it first seems.

Nonetheless, it is likely that intensive efforts will continue at Airbus to monitor factors that impact on the A380’s likely success, and in some cases to take action to shape emerging issues in Airbus’ favor. Issues under intense scrutiny at Airbus will include the following:  The attitudes of regulators and governments to airport pollution are of critical importance. The extent to which opinion leaders in the sector accept the desirability of fewer flights out of major airports (to reduce fuel emissions and noise pollution) greatly favors the giant passenger capacity of the A380. Airbus personnel will show close personal contact with such opinion leaders to understand regulatory thinking, and shape opinion where possible.  The customer base represented by the global airlines requires close watching. As different airlines and alliance groups perform differently and develop their international strategies, there will be important implications for the A380. The A380 offers airlines important fuel cost-savings and the ability to move large numbers of people from a smaller number of airport slots. However, the issue remains whether these advantages are critical to the different airlines as they develop their own strategies. The financial performance and viability of individual airlines and alliances is also important to determining the real size of the A380 market.  The behavior of competitors like Boeing must be watched. If Boeing shifts significant airlines’ strategies to towards more point-to-point flying with smaller planes, then the position of the A380 is undermined.  Shifting patterns of behavior in the end-use market are also of critical importance to the A380 project. Numbers of passengers predicted to fly on different routes could provide the platform for the success of the A380 (e.g., if China and India show dramatic growth in numbers flying to the U.S., as a result of changing trade patterns, or they could dramatically undermine the A380 (e.g., economic recession impacts negatively on numbers flying and shifts airline priorities from long-haul to short-haul flights).  The adverse publicity given to the A380 in terms of its huge passenger capacity also remains a cause for concern. As customer demands for higher levels of service increase, and as security concerns remain highly important, then the attractiveness of the A380 to

131 airlines and their customers may reduce. This is an area of significant concern both for monitoring and for actions to shape consumer opinions in favor of the giant aircraft.

B. Consider the points in the STRATEGY FEATURE – BMW: Positioning Premium Automobiles. How would you summarize BMW’s market targeting and positioning strategy? How does it compare to other premium car producers?

The BMW positioning concept for its premium vehicles has been built around performance – fast, high technology, innovative, luxurious cars – and this is the brand image which has been developed and defended. BMW ownership is compared to membership of an exclusive club.

The market target is affluent, aspirational drivers impressed by technology, speed and image – typically managers, entrepreneurs and professionals.

Compared to key competitors for premium vehicles Lexus and Mercedes-Benz, BMW has overtaken both in the U.S. market, though remaining second to Mercedes outside the U.S. A basic problem for BMW is that as a niche player (only 14th in global auto producers), its competitors in the luxury car market are all part of much larger, well-resourced company (e.g., Mercedes has the Daimler-Chrysler resources, and Lexus is part of Toyota).

Dilemmas for BMW underlined by the case material are:

 As a relatively small private company BMW is vulnerable to take-over by the global corporations with which it competes. There are no current signs of the owning family wanting to sell, but the day the company has difficulties paying dividends this may change. Compared to the volume manufacturers, BMW has higher manufacturing costs, more expensive product development processes, and higher purchasing costs. Partly as a result BMW is committed to annual growth in sales at 40% a year until the end of the decade.

 At what point does the growth orientation of BMW under its current leadership seem likely to undermine the exclusivity of the BMW brand and its positioning?

 If BMW turns into a full-line auto producer, as some expect it will, then will the premium BMW cars retain the ability to command premium prices as they do now? Current plans to include inexpensive hatchbacks and minivans in the BMW portfolio provide cause for concern this respect, as does the entry-level 1 Series launched in 2004. The company aims to produce “mass with class”, but traditionally BMWs have commanded a premium price because of their relative scarcity. Worse, the contrast will be very clear to BMW traditionalists if the new mass market vehicles share the same channels of distribution.

 The issue is whether the current strategy at BMW will degrade its brand value.

132  There are also some concerns that the drive for volume may undermine quality – rumors have spread that new BMW models have higher than normal defect rates.

 Furthermore, the 1 Series could well cannibalize the lower-end models of the 3 Series, and the small cars could well reduce BMW’s currently very attractive margins.

133 CHAPTER 3

A. Review the STRATEGY FEATURE – A Wireless World, and describe this industry in terms of the competitive forces we have discussed. Consider the issues to be examined by telecom providers in building a strategic vision for the future.

There are several competitive forces changing the global wireless industry. Consumers are increasingly moving from traditional landline carriers to wireless phones. As this occurs traditional carriers are seeing their profit margins fall. Equipment makers are being forced to lower prices as phone companies apply pressure to keep gear less expensive. There will be less government influence in telecom with the deregulated wireless phone replacing traditional phones. Innovations continue to improve the industry adding better products at cheaper prices. In addition, mobile Internet access is allowing for increased productivity.

In the future, telecom providers will have to be able to offer many different types of wireless services. Many customers will want to use one service for Internet, cable, and other broadband services. Wireless services will need to improve as customers start to depend on them more and more. Dependability could become the most important feature a provider has to offer when customers depend on their services for a primary phone or to transact business. Finally, the competitive environment within telecom is likely to be exponentially more intense in the future with very little governmental bureaucracy to stifle growth and a great deal of technological advancements.

B. Examine the material in the INTERNET FEATURE – How Charles Schwab & Co. Leverages Value-Chain Initiatives. How does the growth of online trading services change the ways in which a company like Schwab should define its market boundaries and competitive arena?

The growth of online trading will change the way Schwab defines its market boundaries and competitive arena in several ways. As online trading grows traditional brokerage firms will move into that business and the competition for online trading customers will increase. As other companies begin to offer similar services to Schwab’s it will be necessary for Charles Schwab to develop new products and online services to stay ahead of competitors.

In addition, Charles Schwab may need to increase the offerings of its offline services to differentiate itself from its competitors. Schwab has threatened competitors with two very different business strategies. The first is the traditional brokerage firm like Merrill Lynch, which offers extensive service and a wealth of information but little direct control and extremely high commission rates. The second is the pure Internet trading company like E*Trade that gives the account holder total and instantaneous control but has little in the way of investment research information or customer service. To stay ahead of its rivals Charles Schwab must offer a better mix of service and price. Charles Schwab must continue to find ways to compete on both price and service to attract new customers and trading revenue.

134 CHAPTER 4

A. Review the material in the STRATEGY FEATURE – Segmentation and Positioning Challenges for Banana Republic. Examine the product ranges at Gap’s three branded store chains (The Gap, Banana Republic, and Old Navy ) by visiting the Gap Inc Web page (www.gapinc.com) and the pages for each type of store. Consider whether the company has succeeded in positioning its three brands in different segments and the challenges in maintaining this separation.

The challenge for Gap in managing its portfolio of brands – each positioned in a different market segment – is considerable. Reviewing the product ranges and design statements on the Web pages clarifies the company’s attempt to maintain separation between their segment offers. The company has already experienced cannibalization, when consumers shifted from The Gap to Old Navy to buy basics at lower prices.

The problem is drift of positioning. The Gap moved away from the Old Navy positioning, with the result it became too close to Banana Republic. As a result, Banana Republic has had to shift its position in the way described in the Feature. It is a matter of judgment whether the company has succeeded in identifying and targeting clearly distinct segments, and whether it has positioned successfully within them – really the jury is out on this question.

In the longer-term, perhaps the greatest challenge in managing the product portfolios and appeals within each brand to avoid excessive overlap. On the other hand, if this cannot be achieved effectively, there is the question about whether cannibalization of sales between the three Gap brands is a better outcome than loss of sales to competitors like H&M, Zara, and the Limited. It may be that the company should consider a strategy of proactive cannibalization to keep consumers with one of its brands, rather than attempting to plan around a segmentation model which may not be stable.

B. Review the BMW Mini case in the GLOBAL FEATURE – The BMW Mini. Do you believe that BMW has built a robust niche or segment strategy, or is the car a fashion item with limited lasting appeal to car buyers, like other “retro” attempts?

The BMW Mini launch has been a global success story with rapid sales growth and positioning in a small but attractive “cool” retro niche in the market. The way the product has been brought to market is very distinctive and unconventional, particularly for a company like BMW.

However, there are a number of questions which can be asked about the longer-term impact of the Mini on BMW. Such questions include:

 There are risks that fashions may change quickly. What was “cool” last year may not have that characteristic this year. BMW has little track record in managing a fashion product, and particularly the stream of innovations that are requited to keep a fashion product alive. The window of opportunity for the Mini may actually be quite limited.

135  While sales have been impressive, the margins on the Mini are substantially lower than on traditional BMW products. The Mini’s success dilutes BMW’s overall profitability.

 There may be concerns about the “fit” of the Mini in BMW’s product-line. The Mini challenges several aspects of the traditional BMW brand image. This is particularly clear in situations where the Mini is sold through distributorships, sitting next to traditional BMW vehicles. The Mini potentially undermines BMW’s main brand.

 It may also be argued that management attention given to the Mini is a resource that would be better applied to managing the main BMW products, and dealing with some of the market problems emerging for the three main product lines (3 Series, 5 Series and 7 Series).

One interesting a relevant debate to have about the BMW Mini is whether it is the company’s greatest triumph, demonstrating its ability to open new markets, or potentially a disaster in the making – diluting profitability, exposing the company to risk, and undermining the BMW brand.

136 CHAPTER 5

A. Revisit the INTERNET FEATURE – The Web and Marketing Information. What are the major advantages of the Web in developing marketing information resources, but what are the potential disadvantages? How do these two lists balance against each other?

There is little doubt that the Internet will continue to have a huge impact on data collection, processing and dissemination practices in the marketing information field, and will replace or supplement many traditional approaches. However, while there are clear advantages, it is important to be aware of disadvantages as well.

In data collection through online surveys, advantages are the speed and economy with which simple data can be collected, and the increasing availability of online services to simplify online data collection. Disadvantages are that the quality of the data collected is difficult to evaluate, response rates can be very low, and surveys may compete with a lot of spam e-mails (which may be screened out by filters and not received by potential respondents). There is also the potential for overloading potential or existing customers with requests for information.

There is also the risk of becoming associated with claims about invasion of privacy with some forms of data collection on clickthroughs and Web routing associated with the use of spyware and cookies downloaded to PCs. There is an ethical issue for managers, but also the tarnishing of company reputation by association the data mining cookies.

However, attention should not be restricted to online surveys. A wide variety of Web resources are relevant to enhancing market intelligence flows and building a company’s market sensing capabilities. The balance between the technical advantages and disadvantages of online data collection should also recognize the learning impact of Web monitoring for intelligence gathering. It may well be that the market sensing aspects of the Internet are more important than particular techniques like online surveys.

B. Examine the marketing information example described in the ETHICS FEATURE – Neuromarketing. Should limits be placed on the ability of commercial organizations to capture and exploit information about individuals for reasons of privacy? Why should such issues concern marketing executives?

The use of MRI technology to establish brain reactions to marketing messages and product offers is an extreme example of the ethical dilemmas facing managers in deciding what forms of data collection are suitable for studying consumers. Images of children being brain scanned to build more effective advertising for toys are likely to delight the press and generate substantial adverse publicity. An interesting debate is concerned with what limits managers as individuals should place on consumer data collection, from an ethical perspective.

137 The issue of formal controls over commercial data collection is separate. Even if some forms of data collection are seen by individual executives as undesirable, the desirability of regulatory controls does not follow. This is part of the general debate about whether business behavior should be subject to growing legal controls, or whether restrictions should be a matter of professional codes of conduct and individual judgments. Associated issues concern the growth of corporate statements and codes relating to acceptable behavior and practices from a social responsibility perspective.

Certainly, executives in the 21st century should be aware that technology is providing them with ways of collecting consumer and market information which may be regarded as invasive and objectionable by some sectors of society. Not least of the issues is controlling access to information once it has been collected, which raises both moral and legal questions. Their thinking has to span their own ethical stand on practices like neuromarketing, the impact which their decisions may have on their colleagues, and the potential adverse impact on corporate reputation and brand image if their decisions are judged poorly by external commentators. However, they also have to balance against these points their duties to their companies, which may imply using all resources legally available to meet commercial goals and objectives.

138 CHAPTER 6

A. Review the GLOBAL FEATURE – Bollywood, and consider what market targeting and strategic positioning choices are faced by Bollywood studio targeting the U.S. marketplace.

There are many considerations that must be taken into account regarding Bollywood’s market targeting and strategic positioning. Even the most popular foreign films make up such a small niche of the U.S. movie industry that it can be difficult to market the films through mainstream channels. In many ways this problem is similar to those of small American production companies. A small budget film that may be capable of earning twenty or thirty times its budget still does not have enough money to market itself with the expensive commercials and publicity that are necessary for an American blockbuster. To attract large U.S. audiences Bollywood studios need to partner with American production companies like small American studios do. Similarly, Bollywood studios can utilize other specialized market channels such as film festivals and road shows to attract core audiences and inform film critics about a film’s merits.

Bollywood could also try to market to its largest audience through strategic placing of its products. Bollywood’s established audience would include Indians and other Asian ethnic groups. By focusing on selling movies to theaters and movie rental stores in areas with high concentration of this established audience (London, for example), Bollywood can increase the number of viewers it attracts.

B. Examine the issues described in the STRATEGY FEATURE – Harley-Davidson, and identify the problem Harley faces concerning positioning in its core market segment while trying to gain business from new segments with different needs. How can the company resolve this dilemma?

The challenge Harley-Davidson faces is that its core market segment, middle aged men, is getting older. Harley would like to also appeal to a more diverse group of consumers such as younger people and women. Harley-Davidson has to be extremely careful in how it markets to other market segments because broadening the appeal of Harley motorcycles could weaken the appeal within the core market segment that has been Harley’s bread and butter for years. For example, the more Harley attempts to attract female customers, the greater the risk that the core customers will see the new image as soft or less powerful.

There are several ways Harley-Davidson can go about marketing to a broader group of consumers without damaging its image with its core customers. One way to do this is to differentiate its products to appeal to different segments. By separating bikes into different grades or marketing specific bikes to female customers, Harley can avoid looking like it’s softening its tough image. Another alternative, albeit an expensive one, would be to sell its bikes to different segments through different stores. Harley could have separate female-Harley or racing bike-Harley (for the younger segment) stores, and avoid hurting their main stores. Many

139 retail stores do this in order to maintain a masculine, feminine, or mature image. Some good examples are The Footlocker and the Lady Footlocker, the Gap and Gap Kids, and The Limited and The Limited, Too. Differentiating between the core market segment and the broader potential customers will allow Harley-Davidson to attract the latter but not at the expense of the former.

Harley’s dealer network is an important asset so any change initiatives should be discussed with a representative sample of dealers. For example, a separate retail chain may be viewed by dealers as a revenue source they would like benefit from.

140 CHAPTER 7

A. Review the airline lists, statistics and news in the GLOBAL FEATURE in this chapter. Examine the changes happening and predicted in airline alliances by searching “airline” alliances on the Internet. What conclusions can be drawn about the strategic vulnerabilities of alliances?

The airline sector is one where the power of strategic alliances as a competitive force is very clear. It is almost impossible for a global carrier to operate outside an alliance. Competition is between alliances, and the alliances have developed their own brands separate from those of the individual members.

However, the history and predictions surrounding airline alliances are also indicative of the issues faced by those in other sectors when considering partnering:

 Many alliances fail. This may be because they were poorly planned in the first place, or prove difficult to manage when they are up and running. Building strategy around a partnership without confronting the rationale for the partnership and the management problems to be anticipated is risky.

 Times change. The rationale for alliance may rest, for at least one of the partners, on conditions which no longer exist. If one partner believes that they are better served by operating independently or as part of another grouping, then the alliance will fail.

 Alliances are shifting, sometimes transitory, organizational forms, and have to be approached in this light.

 Alliances may supercede traditional concepts of competitive position and independence – former rivals may form an alliance regardless of their past. Organizations with no history of antagonism may join rival alliances, and become rivals. Inter-organizational relationships may change dramatically as a result of alliance strategy.

 Management capabilities for managing and sustaining the organizational network created by an alliance may be in short supply in some organizations.

B. Examine the material presented in the CROSS-FUNCTIONAL FEATURE. How can it be possible for Costco to perform well against competitors when it carries a burden of higher labor costs? Are there issues in this case, which may be worth considering in other situations where a company faces strong low-cost, low-price competition?

The issue in comparing Costco and rivals like Wal-Mart is not so much concerned with actual labor costs, but with labor productivity. While Costco labor, health and retirement costs are higher than Wal-Mart’s, Costco’s business model relies on higher labor output also. Key is

141 the positioning of Costco with more affluent consumers and small businesses, and its constant innovation. The business model requires superior labor service-levels, productivity and loyalty. The critical part of comparing Costco with rivals like Wal-Mart is examining the differences in the business model as well as simply labor costs.

The more general point is that faced with low-cost/low-price competition (e.g., from Asian producers) many companies will face a stark choice. One possibility is to meet competition head-on with low prices, and to attempt to cut costs to sustain a low price position. This is very difficult to achieve successfully. Another possibility is to counter low prices with higher productivity and to provide added-value in areas which create a superior value proposition for target markets. Costco illustrates the point that how a company positions its offering in the market is extremely important to the relationship between costs and prices. Far from cutting labor costs to achieve low prices, Costco pays more to build its position in its target market.

The Costco illustration and the more general issues of costs and prices both underline the competitive importance of managing employees and cross-functional relationships in ways which support and enhance the strategy being pursued.

142 CHAPTER 8

A. The Benetton STRATEGY FEATURE describes the potential risks of expanding too far beyond the core business. How should new product planners avoid this problem without disregarding all potential opportunities beyond the core business?

When a company is faced with deciding whether to pursue a strategy there are several ways it can evaluate that strategy. One of the most important aspects it must look at is how the new venture meshes with the company’s corporate mission and product strategy. The mission statement should clarify what the business is and what types of product-markets are consistent with its purpose.

It is also important to examine the industry the company competes in and the environment within that industry. A project that is a great opportunity for a company in one industry might be totally inappropriate for a company in another industry. Product planners must have considerable knowledge of their own company and the industry they are venturing into to make good decisions. By understanding how company size, tolerance for risk, and core competencies will be beneficial or unbeneficial in a given business environment, planners will be able to foresee which projects are likely to be viable and which are not.

In larger companies project planners may not have the time or funds to take in depth looks at all suggested ideas. In this case, a formal screening process can assist decision makers in separating unviable projects from more promising ones. Is the idea compatible with the company mission? Is the idea commercially feasible? These are two of the questions project planners will need to answer when screening ideas.

B. The CROSS-FUNCTIONAL FEATURE describes how the design consultant IDEO assists companies in new product design. Discuss the advantages and limitations of having this activity performed by a consultant rather than internally.

There are both advantages and disadvantages to using a consultant to assist in new product design. One of the advantages is that consultants like IDEO can often shed light on problems because of the different perspectives they bring to a company. As an outsider, a design consultant is less likely to be influenced by the “group think” and company bias than company designers. Oftentimes this will enable them to break away from the status quo or cut the Gordian knot when others too close to a project cannot. The fact that these design consultants have worked on many different projects means that they will be experienced in learning many different techniques for problem solving. This out of the box type thinking is often necessary when companies are in early design stages. In addition, the designers are working as partners with company employees so company ideas are augmented rather than ignored. The creative atmosphere that consultants like IDEO bring to a company can be extremely valuable and a worthwhile investment.

143 There are also, however, limitations to using consultants rather than performing design internally. The most significant of these limitations, besides the expense that’s involved, is that consultants usually don’t have the intimate knowledge of an industry or a market segment that an internal designer that has worked for a company for a long period of time does. If a consultant fails to quickly grasp the nature of an industry or market it’s unlikely that the ideas he or she proposes will be useful. Finally, the designer consultant has less of a stake in the success of a project than designers that work for the company. Even the most dedicated consultant will not have the incentive most employees will in seeing their company succeed, and even if they did, they probably would not be around long enough to bring a project to fruition.

C. Review the content of the INNOVATION FEATURE – Microsoft and Intel Moving in on PC Makers’ Turf. Consider the risks for established companies in developing new products that put them in direct competition with their own customers. Is this an appropriate direction for Microsoft and Intel to go?

There is a great deal of risk involved in competing with customers. A company must be extremely careful when it enters a market that pits it against its own established customers for their customer dollars. A customer that feels threatened by its own supplier is likely to change its purchasing habits. Is the risk worth the possible reward? It depends on the realities of the industry environment. It’s possible that a company that’s strong enough in the supply chain will be able to make itself indispensable to its customers. In the PC industry for example, it’s possible that Microsoft and Intel are too essential to PC makers or alternative suppliers are too hard to come by, for retaliation to be possible. The more essential a company is to its suppliers’ or customers’ business, the more leverage it has in its dealings with them. Microsoft and Intel are each too necessary to their suppliers’ success for these small ventures into electronics to impact them much. Nonetheless, they should be wary of competing too aggressively or expanding their product lines too far or their customers may respond by switching suppliers.

144 CHAPTER 9

A. Review the BMW GLOBAL FEATURE. What are the important issues confronting BMW’s management in managing the company’s brand portfolio? How can a brand portfolio perspective assist in meeting these challenges?

There are many issues involved in creating a brand portfolio. Ideally, a company wants to make products in its brand portfolio that appeal to and capture the different market segments of customers. At the same time the different models should strengthen the company’s brand name and portfolio performance. A strong brand for the overall company will in turn add value to the products. The problem is that what’s good for sales, for example, attracting lower net worth customers and selling them less expensive and less luxurious cars, is often not good for the company brand as a whole. Keeping the strong company brand and a diverse product portfolio in balance is the challenge. The brand portfolio perspective can assist by defining what segments are most important and how existing products and new products can be positioned to appeal to customers most effectively. As can be seen in the BMW portfolio, management is creating new models like the X3 and X5 which are SUVs to meet a growing part of the market, the affluent family. There are also brands like the Rolls Royce that strengthen the public’s perception of BMW as a luxurious and extremely high quality car. The Rolls Royce brand contributes much more to the overall company image than it does to its bottom line.

B. Examine the case described in the GLOBAL FEATURE – Colgate’s Global Brand Strategy. What are the major problems a company faces in taking branded consumer goods into overseas markets – can brand identity and image survive in globalization?

When a company like Colgate takes branded consumer goods to overseas markets it faces many potential problems. With globalization constantly overcoming the barriers of distance and national boundaries, it’s becoming more and more important for companies to be able to use brand identity across borders.

Companies can transfer brand identity and image to foreign markets as demonstrated by the large number of companies who have done so effectively. However, the introduction of a brand into a different culture, not to mention country, is complicated and takes sound marketing decisions to pull off. It’s extremely important for the company introducing the goods to have a firm understanding of the market it is entering, including the wants, values, and customs of the potential customers. Companies that have not yet developed this knowledge will need to work with value chain partners that have this understanding. Recruiting and training marketing personnel are also important. Consultants may be needed in some situations. There are a plethora of companies that have done this successfully for years.

Entering a new international market is challenging because it forces a company to start from scratch and introduce a product or brand that the consumers in the foreign country are not familiar with. This challenge is often difficult for companies to deal with because they have been doing business for some time in an environment where consumers identify and recognize

145 their brand. The differences in maintaining a brand image and building a brand image are vast and when cultural differences are added into the mix, it’s often difficult for companies to adjust.

146 CHAPTER 10

A. In the INNOVATION FEATURE – The Linux Revolution – what has really happened in the value chain for software? Will the impact of open-source software change the way this sector delivers value to customers – if so, the how may this unfold and develop?

The significant change in the Linux strategy is the development of a new business model which contrasts to Microsoft and Sun in several important ways. Firstly, Linux products demonstrate the power of peer-to-peer networking on the Web to enhance the features and performance of the products. Second, the underlying goals of the developers and peer-to-peer networks do not appear to be profit-oriented. Third, the model challenges traditional assumptions of intellectual property right by distributing some products free and others at low prices, and allowing users to enhance products. Fourth, the growth of the Linux position has been facilitated by IBM, Dell and H-P to reduce their dependence on Microsoft.

The effect is that considerable control in the software value chain has moved from the software design and production stage into the hands of users and equipment manufacturers. Clearly, this is very attractive for the equipment producers like IBM and Dell. For corporate, customers, for example, Linux’s value delivery is as much about reducing dependence of Microsoft as it is about cost-savings.

The incredibly strong position that Microsoft in software is under serious threat from a radically different business model. The next unknown factor is how Microsoft will respond to its potential loss of significant market share in key software markets, at a time when the company itself is struggling to regain the innovativeness of its earlier years. It is possible that Microsoft will respond with increased product functionality and/or lower prices. In the longer-term it is likely that the company will have to consider how to adjust to a value chain where the delivery of value to customers is controlled once again by the equipment manufacturers.

B. The GLOBAL FEATURE describes one company’s adaptation of its distribution channel to local market conditions in Tanzania. What adaptations should international marketers review when planning channel strategy in developing countries and how can they find out what is required?

There are a variety of issues that should be addressed by companies in looking at channel strategy in developing countries, which are likely to reflect the characteristics of existing channels in the country, as well as the characteristics of the country itself. These issues are illustrated by the Unilever Tanzania approach, and may include:

 Existing channels are likely to favor the position of existing suppliers (particularly domestic suppliers), and may be unsuited to the brand strategy and logistics of the

147 exporter. Those controlling existing channels – e.g., traditional wholesalers – may resist new sources of competition from outside the country. The choice may be to collaborate with local distribution players (e.g., through joint ventures) or to avoid them (e.g., by building a different route to market).

 International channel strategy may need adjustment not simply because of competitive factors, but also because of the limited infrastructure existing in many developing countries. Supply chain investments in the developed world have made companies substantially more efficient. However, efficient, lean supply chains rely on effective transportation systems, constant power availability, widely-available electronic and Internet access, constant flow of product through modern storage facilities, and for consumer goods, collaboration between supplier and retailer to avoid wholesale functions and achieve constant replenishment of store shelves. In developing some or all of these infrastructural prerequisites are likely to be absent. They may be dramatically absent in cases like that described in the Feature. Lack of infrastructure mandates re-evaluating channel strategy to reach target markets.

 In many overseas markets – especially developing countries – consumers may have quite different perceptions and practices in their purchase behavior, which are unlikely to be easily changed. In the Unilever case in Tanzania, it had to be faced that the very low- income rural consumer buys soap and detergent in very small quantities and on a more frequent basis than consumers in developed countries. Adjusting to this reality is a cost of doing business in such markets.

Understanding the realities of doing business in developing countries is an important role of building effective market sensing capabilities. Conventional market research – population numbers, levels of expenditure, current competitors, leading retailers, etc – may be important to selecting target overseas markets on the basis of their existing and potential attractiveness. However, a real understanding of local problems and opportunities is likely to require: extensive visits to the country; discussions with local management personnel; discussions with local consumers and retailers; experiencing the distribution, purchase and consumption of the product in the target country.

148 CHAPTER 11

A. From the CROSS-FUNCTIONAL FEATURE – develop a list of the pricing issues faced by the executives at Novet. What are the arguments that can be made for avoiding the price cutting option?

Novet has developed and was marketing a product called the Novaton. The Novaton was being outsold by a competitor’s product, the Holycon. Why is Novaton not selling well? It is selling for a higher price than the expected price of the competitor’s brand. One of the issues the executives at Novet faced when formulating a strategy to compete with Holycon was how to position their product. Should the company focus on price or value? Another important question would be how should Novet use its strategic advantages to maximize its market strength? Finally, the executives should try to find whether Novet can compete on price and still be profitable. If not, targeting of one or more market segments may be the best strategy.

Strong arguments can be made against lowering the price. First of all, there is no research to suggest such a price change would increase sales substantially. Maybe price is not a primary concern for most customers. To lower the price without being fairly certain that a customer preference is being addressed could be throwing money away. Other possibilities should be examined as well. Another cause, such as lack of customer awareness, could be the reason for low sales results. Novet needs to investigate this question. The strongest argument against reducing price is that Novet cannot ultimately compete with Holycon on price if the competitor’s costs are lower. Reducing price will only increase competition and the damage to Novet’s bottom line will be out of proportion to any market gains.

B. Think about The Prisoner’s Dilemma described in the STRATEGY FEATURE. What would be the ethical dilemmas for executives across different companies in a sector sharing information to coordinate prices? Why are such practices unlawful in most countries?

Executives working in a sector where companies shared information to coordinate prices would be faced with an ethical dilemma. To begin with, such practices are usually illegal because they undermine the integrity of a free market economy. On the other hand, it would be difficult not to participate if other companies were exchanging information because the lack of knowledge that competitors had access to could hurt the executives’ company. Yet collaboration on pricing with competitors can result in jail terms for the executives involved. It’s even possible that competitors might provide an executive with unsolicited information in an effort to coordinate prices. Then that executive would be faced with a choice of whether to ignore the information or act on it.

To act on it, though, would be illegal. It is against the law for companies to share information to coordinate prices. The reason it is unlawful in most countries is that if hurts consumers. Collusion creates monopolistic type conditions that hinder growth and stifle productivity. Forcing companies to compete with one another over customers and market

149 position tends to strengthen the free market system as a whole. If companies were allowed to coordinate the setting of prices they would focus on their collective bargaining power rather than work to compete by reducing costs, lowering prices, and focusing on customer needs.

150 CHAPTER 12

A. Consider the promotion activities described in the INTERNET FEATURE. Discuss how these initiatives offer compelling advantages over traditional promotion strategies.

There are several advantages of promotional activities and strategies offered by companies on the Internet. Probably the greatest of these would be the ability to create an interactive promotional experience where the customer can choose, through pointing and clicking, what he/she does or does not want to see or read. Most traditional promotional methods cannot offer such an experience. Instead, traditional promotion strategies give all the advertising audience the same information. This may not meet the customer’s needs as well because it is more limiting in how much information can be given out at one time. In addition, older promotional activities are usually repeated over a period of time and sometimes become an annoyance to customers hearing or seeing them over and over again.

Another advantage of Internet promotion is that it allows technology to be utilized to create a multimedia experience. In the case of Twentieth Century Fox, promotional material for movie can be viewed in a very dynamic way. Most customers will be much more likely to respond to this dynamic type of promotion rather than traditional methods.

Finally, the Internet allows companies to target perspective customers more directly, which saves money. Rather than produce a commercial that goes out to a large number of people only a small percentage of which will be interested, this strategy allows companies to target high potential customers almost exclusively.

B. Review the STRATEGY FEATURE concerning the use of the factory as a theme park. Identify other products and markets where this sales promotion method may display favorable benefits and cost relationships.

There are more than a few companies now that use their factory to promote their products. The method is an inexpensive way to appeal to customers that are already interested in the product. In the case of auto makers walking through the plant to watch cars being made, it is a way of exciting potential buyers. Other brands, such as Mattel and Crayola, have special areas where children can play with toys and participate in other events. Food companies such as Nestlé and Hershey may also benefit by using this form of sales promotion. These activities help cultivate brand identity and hopefully will strengthen brand image in the minds of these future customers.

There are other products and markets where this promotion method takes place. For example, in the beverage industry, you can take tours of vineyards or breweries and purchase wine or beer afterwards. The theme park promotion strategy is probably most often used with children because it is focused around play and games, while plant tours use a similar strategy to appeal to adults. Some businesses, such as sports franchises, open sports hall of fame’s to promote their team or business. Even some companies that do not sell directly to tour takers still

151 give tours as a means of building public good will. For example, Lockheed Martin offers tours with full history and plane displays to the public as a means of promoting the company as a whole.

152 CHAPTER 13

A. Review the GLOBAL FEATURE concerning Novartis’ sales force initiatives. Discuss how these changes should be integrated with the drug company’s promotion and marketing strategies.

Novartis must coordinate the changes it has made with its sales force and its marketing strategy. In many ways, the sales force will be the most important component of Novartis’ promotion strategy. This is because the sales persons will be the most common point of contact for the company’s customers. The exponential growth of the sales force will make it necessary to create a training and development program to assimilate new employees and retrain current employees. The more salespeople know about new products that are being introduced, the more effective they will be in demonstrating the superior value offered by the products. In addition, because collaboration was one of the traits found to correlate with high performance, sales persons should be encouraged to work and plan together.

Marketing changes will affect the sales force approach to sales so the more information they have about the promotion strategy, the better. For example, a price change may require an employee to focus more on volume and try to meet with more potential customers rather than focus on relationship building. Likewise, a change in a product might require a sales person to target a different customer. Information and familiarity with products will be essential to a smooth transition in adapting the sales force to a new marketing strategy.

B. The STRATEGY FEATURE highlights several changes in the “language of marketing”. To what extent do these changes suggest marketing to customer end users and business customers may involve several similar strategy characteristics?

The recent changes in marketing language and terminology reflect a paradigm shift in marketing itself. Because of the advancement of technology in general and the Internet specifically, organizations are starting to market to customer end users in ways formerly reserved for business customers. More and more businesses are increasing their flexibility and responsiveness to end user customers. Companies are focusing more attention on customization. Furthermore, the customer relationship allows for the development of future business. In the past marketing to businesses was very different than marketing to individuals, but technology has now progressed so far that some situations companies are able to target individual customers. The ability to narrow a focus so directly on a customer is leading to similarities between consumer and business-to-business selling.

153 CHAPTER 14

A. Compare the organizational approaches described in the STRATEGY FEATURE “Marketing and Sales Teamwork at Johnson Controls” and the INNOVATION FEATURE “Venture Marketing at Starbucks”. Develop a list of the common characteristics of the approaches taken by these companies, and consider what lessons can be learned.

Although they are in very different markets, there are several important issues that link the Features describing Johnson Controls and Starbucks in how they address marketing. A list of similarities will include:

 Both companies make extensive use of teams to innovate and manage customer relationships.

 In both cases the teams are cross-functional collaborations to bring the relevant expertise to bear directly on the issues being addressed.

 These team approaches are institutionalized in both Starbucks and Johnson Controls as a way of getting important things done effectively.

 The teams at both companies are deliberately designed to free executives from the restrictions of traditional functional boundaries and divisions.

 Also in both companies, a team-based approached is associated with growing skills in partnering with other organizations to provide superior customer value.

The “lessons”, or at least issues to consider, focus on the advantages of new organizational processes based around cross-functional teams to overcome the problems of inter- functional communication and coordination, and to deliver superior value to the customer.

B. Review the characteristics of the process organization described in the CROSS- FUNCTIONAL FEATURE – Shifting From A Functional View of Marketing to a Process Orientation (you may find the framework in Exhibit 14-2 is also relevant). Attempt to produce organizational charts describing the structure and relationships in a hybrid, process-type structure, and a horizontal structure. Develop a list of what marketing organization may look like in major companies in ten years time.

It is relatively straightforward to chart what a hybrid, process structure looks like, because it has many similarities with the matrix organizational form. It will look something like this:

154 CEO

Marketing Operations Finance HRM R&D & Sales PROCESS MANAGERS/TEAMS

Customer Business Development

Brand Development

Supplier Relationship Management

F U N C T I O N A L O R G A N I Z A T I O N S T R U C T U R E S

155 However, what is a great deal more challenging is to consider what form a genuinely horizontal structure will take. There are so few companies even approaching this stage of development that there is little guidance available. One subsidiary of a multinational consumer goods company has described its process-based structure in the following form, which may be an interesting basis for discussion:

Business Performance

Brand Development

Business Customer Supplier Planning/ People Development Information Management Strategy

Supply Chain

Total Quality

156 Developing a list of the likely attributes of the marketing organization in major companies in ten years time will draw mainly on several of the key points discussed in the chapter. Issues which should emerge are:

 the trade-off between functional expertise and process-based management as the rationale for organizing marketing

 the impact of flatter organizational structures on the location of marketing responsibilities – possibly the disintegration of conventional marketing departments into small units operating with the divisions/SBUs

 the emergence of new roles in marketing – relationship managers, knowledge managers, multi-channel managers, alliance managers, and others

 possibly the disappearance of the term “marketing” to describe the management responsibility for buyer-seller relationships.

The list may be quite lengthy, and is an interesting issue to debate.

157 CHAPTER 15

A. Review the ETHICS FEATURE describing the environmental strategy implemented at Interfaces Inc. Lists the attractions from a marketing perspective of adopting an environmentally responsible position. Discuss whether companies can undertake environmental initiatives unless there is a commercial advantage.

This Feature serves as a reminder that issues of environmental and “green” issues is firmly on the agenda of most organizations and that senior executives are increasingly taking an ethical stance on such questions. The experience at Interface Inc is illustrative of how senior management views are changing. This company’s experience also underlines that environmentally-friendly policies may save costs as well as fulfilling a social responsibility.

There are several attractions to a company of adopting an environmentally-responsible position regarding its operations and distribution. The list should address issues like:

 meeting the growing demands of vocal consumer groups that companies should act to preserve and protect the physical environment as part of their responsibility to the societies in which they trade

 turning environmental responsibility into a selling point with customers of all kinds, perhaps most especially new generations of consumers with increasingly strong views about the environment

 gaining useful publicity that impacts favorably on corporate reputation

 avoiding placing employees and executives in the position where they are mandated to implement environment-blind policies with which they disagree

 reducing the likelihood of severe regulatory controls by performing well against environmental goals on a voluntary basis.

A more difficult question is whether companies can or should undertake environmental initiatives in the absence of a commercial advantage. On this issue, views are likely to take one of two extremes: some will take the position that the job of managers is to deliver value to their customers and shareholders not to make societal judgments; others will argue that environmental responsibility is an overarching issue that stands above commercial goals (and those who take unacceptable environmental positions will be dragged into line by regulation sooner or later anyway). While this debate cannot be resolved, it is important that executives recognize th diversity and strength of opinions on these kinds of issues.

158 B. Read the CROSS-FUNCTIONAL FEATURE describing the internal marketing efforts at Southwest Airlines. Do “happy employees” always mean “happy customers” – identify and list situations where you do not believe that this is true.

The underlying point is that internal marketing should be about communicating the values and behaviors that are important to marketing strategy, not a general mission to impact on organizational climate and employee motivation. For example, internal marketing at Southwest Airlines is effective because it focuses attention on the teamwork and employee attitudes that drive the airline’s excellent customer service. Interestingly, the “no-frills” airlines in Europe (easyJet and Ryanair) do not compete on customer service only on very low prices. Correspondingly, they do not make the type of investment in internal marketing for which Southwest is well-known.

It is interesting to consider situations where effective strategy implementation does not rest on the positive linkage between “happy employees” producing “happy customers”. Examples can be positioned on the model below as they occur.

The powerful message from this exercise is that internal marketing is a means to an end – superior customer value – not an end in itself. In some situations, imprecise and inappropriate internal marketing activities may actually undermine strategy implementation. The model for organizing examples is as follows:

External Customer Satisfaction

High Low

Synergy Internal Euphoria

“Happy customers “Never mind the High and “happy” customer, what employees about the golf ladder?”

Internal Customer Satisfaction

Coercion Alienation

“You WILL be “Unhappy” Low committed to customers customers - and “unhappy” or else….” employees