Build-A-Bear: Build-A-Memory

The Product

On paper, it all looks simple. Maxine Clark opened the first company store in 1996. Since then, the company has opened more than 370 stores and has custom-made tens of millions of teddy bears and other stuffed animals. Annual revenues reached $474 million for 2007 and are growing at a steady and predictable 15 percent annually. After going public in November of 2004, the company’s stock price soared 56 percent in just two years. Annual sales per square foot are $600, roughly double the average for U.S. mall stores. In fact, Build-A-Bear Workshops typically earns back almost all of its investment in a new store within the first year, a feat unheard of in retailing. On top of all this, the company’s Internet sales are exploding. But what all these numbers don’t illustrate is how the company is achieving such success. That success comes not from the tangible object that children clutch as they leave a store. It comes from what Build-A-Bear is really selling: the experience of participating in the creation of personalized entertainment. When children enter a Build-A-Bear store, they step into a cartoon land, a genuine fantasy world organized around a childfriendly assembly line comprised of clearly labeled work stations.

The process begins at the “Choose Me” station where customers select an unstuffed animal from a bin. At the “Stuff Me” station, the animal literally comes to life as the child operates a foot pedal that blows in the amount of “fluff” that she or he (25 percent of Build-A-Bear customers are boys) chooses. Other stations include “Hear Me” (where customers decide whether or not to include a “voice box”), “Stitch Me” (where the child stitches the animal shut), “Fluff Me” (where the child can give the animal a blow-dry spa treatment), “Dress Me” (filled with accessories galore), and

The outside observer might assume that Build-A-Bear is competing with other toy companies or with other makers of stuffed animals, such as the Vermont Teddy Bear Company. Touting its product as the only bear made in America and guaranteed for life, Vermont Teddy Bear hand-makes all of its bears at a central factory in Vermont. Customers choose their bears through a catalogue or Web site, receiving their bear in the mail without the experience of having taken part in the creation of the bear. Quality is the key selling point (reinforced by its price of $50–$100). Although Vermont Teddy Bear has achieved great success since it sold its first bear in 1981, Maxine Clark does not consider it to be a serious Build-A-Bear competitor. “Our concept is based on customization,” says Clark. “Most things today are high-tech and hard-touch. We are soft-touch. We don’t think of ourselves as a toy store—we think of ourselves as an experience.” It is widely recognized in many industries that the personalization feature builds fiercely loyal customers. As evidence, Clark points out that unlike the rest of the toy industry, Build-A-Bear sales do not peak during the holiday season, but are evenly distributed throughout the year. Although not very common in the toy industry, Maxine Clark asserts that personalization is emerging because it lets customers be creative and express themselves. It provides far more value for the customer than they receive from mass-produced products.

“It’s empowerment—it lets the customer do something in their control,” she adds. Build-A-Bear has capitalized on this concept by not just allowing for customization, but by making it a key driver of customer value. The extensive customer involvement in the personalization process is more of the “product” than the resulting item.

In the late 1990s, it was all about the dot.coms. While venture capital poured into the high-tech sector and the stock prices of dot.com start-ups rose rapidly, the performance of traditional companies paled in comparison. That era seemed like a bad time to start a chain of brick-and-mortar mall stores selling stuffed animals. Indeed, when Maxine Clark founded Build-A-Bear

Workshop in 1996, many critics thought that she was making a poor business decision.

But with its first decade of doing business behind it, Build-ABear Workshop now has more cheerleaders than naysayers. In the last few years, it has won numerous awards, including being named one of the five hottest retailers by one retail consultancy. The company hit number 25 on BusinessWeek’s Hot Growth list of fast-expanding small companies. And founder and CEO Maxine
Clark won Fast Company’s Customer-Centered Leader Award.
How does a small start-up company achieve such accolades?

“Name Me” (where a birth certificate is created with the childselected name). Unlike most retail stores, waiting in line behind other customers is not an unpleasant activity. In fact, because the process is much of the fun, waiting actually enhances the experience. By the time children leave the store, they have a product unlike any they’ve ever bought or received. They have a product that they have created. More than just a stuffed animal that they can have and hold, it’s imbued with the memory created on their visit to the store. And because of the high price-to-delight ratio (bears start as low as $10 and average $25), parents love Build-A-Bear as much as the kids.

Maxine Clark has been viewed as the strategic visionary—and even the genius—who has made the Build-A-Bear concept work. But her success as CEO derives from more than just business skills relating to strategy development and implementation. Clark

attributes her success to “never forgetting what it’s like to be a customer.” Given that Clark has no children of her own, this is an amazing feat indeed. Although understanding customers is certainly not a new concept, Clark has employed both low-tech and high-tech methods for making Build-A-Bear a truly customercentric organization. To put herself in the customer’s shoes, Clark walks where they walk. Every week, she visits two or three of the more than

370 Build-A-Bear stores. She doesn’t do this just to see how the stores are running operationally. She takes the opportunity to interact with her customer base by chatting with preteens and parents. She actually puts herself on the front line, assisting employees in serving customers. She even hands out business cards.

As a result, Clark receives thousands of e-mails each week, and she’s added to the buddy lists of preteens all over the world. Clark doesn’t take this honor lightly, and tries to respond to as many of those messages as possible via her BlackBerry. Also, to capitalize on these customer communications, she has created what she calls the “Virtual Cub Advisory Council,” a panel of children on her e-mail list. And what does Clark get in return from all this high-tech communication? “Ideas,” she says. “I used to feel like I had to come up with all the ideas myself but it’s so much easier relying on my customers for help.”

But growth for Build-A-Bear will come from more than just these improvements to same-store sales. Clark’s expansion efforts include building a base of at least 350 stores in the United States, 120 stores in Europe, and franchising an additional 300 stores in other parts of the world. And Clark is taking action on the flood of “build-your-own” concepts that have come across her desk since the first Build-A-Bear Workshop opened. She will give much more attention to a new line of stores called “Friends 2B Made,” a concept built around the personalization of dolls rather than stuffed animals. She’s opened up the first “Build-A-Dino” stores. And Build-A-Bear has a 25 percent ownership stake in the start-up “Ridemakerz,” a make-and-outfit your own toy car shop.

Although Maxine Clark may communicate with only a fraction of her customers, she sees her efforts as the basis for a personal connection with all customers. “With each child that enters our store, we have an opportunity to build a lasting memory,” she says. “Any business can think that way, whether you’re selling a screw, a bar of soap, or a bear.”

The elevated end held a removable cap into which the user placed bait (cheese, dog food, or some other aromatic tidbit). The front end of the tube had a hinged door. When the trap was “open,” this door rested on two narrow “stilts” attached to the two bottom corners of the door. (See Exhibit 1.)
The simple trap worked very efficiently. A mouse, smelling the bait, entered the tube through the open end. As it walked up the angled bottom toward the bait, its weight made the elevated end of the trap drop downward. This action elevated the open end, allowing the hinged door to swing closed, trapping the mouse. Small teeth on the ends of the stilts caught in a groove on the bottom of the trap, locking the door closed. The user could then dispose of the mouse while it was still alive, or the user could leave it alone for a few hours to suffocate in the trap.

Martha believed the trap had many advantages for the consumer when compared with traditional spring-loaded traps or poisons. Consumers could use it safely and easily with no risk of catching their fingers while loading it. It posed no injury or poisoning threat to children or pets. Furthermore, with Trap-Ease, consumers avoided the unpleasant “mess” they often encountered with the violent spring-loaded traps. The Trap-Ease created no “clean-up” problem. Finally, the user could reuse the trap or simply throw it away.

Martha’s early research suggested that women were the best target market for the Trap-Ease. Men, it seemed, were more willing to buy and use the traditional, spring-loaded trap. The targeted women, however, did not like the traditional trap. These women often stayed at home and took care of their children.

Thus, they wanted a means of dealing with the mouse problem that avoided the unpleasantness and risks that the standard trap created in the home.
To reach this target market, Martha decided to distribute TrapEase through national grocery, hardware, and drug chains such as Safeway, Kmart, Hechingers, and CB Drug. She sold the trap directly to these large retailers, avoiding any wholesalers or other middlemen.

The traps sold in packages of two, with a suggested retail price of $2.49. Although this price made the Trap-Ease about five to ten times more expensive than smaller, standard traps, consumers appeared to offer little initial price resistance. The manufacturing cost for the Trap-Ease, including freight and packaging costs, was about 31 cents per unit. The company
paid an additional 8.2 cents per unit in royalty fees. Martha priced the traps to retailers at 99 cents per unit (two units to a package) and estimated that, after sales and volume discounts, Trap-Ease would produce net revenue from retailers of 75 cents per unit.

To promote the product, Martha had budgeted approximately $60,000 for the first year. She planned to use $50,000 of this amount for travel costs to visit trade shows and to make sales calls on retailers. She planned to use the remaining $10,000 for advertising. So far, however, because the mousetrap had generated so much publicity, she had not felt that she needed to do much advertising. Still, she had placed advertising in Good

Housekeeping (after all, the trap had earned the Good Housekeeping Seal of Approval) and in other “home and shelter” magazines. Martha was the company’s only salesperson, but she intended to hire more salespeople soon.
Martha had initially forecasted Trap-Ease’s first-year sales at five million units. Through April, however, the company had only sold several hundred thousand units.

Back to The Drawing Board

In these first few months, Martha had learned that marketing a new product was not an easy task. Some customers were very
demanding. For example, one national retailer had placed a large order with instructions that Trap-Ease America was to deliver the order to the loading
dock at one of the retailer’s warehouses between 1:00 and 3:00 p.m. on a specified day. When the truck delivering the order arrived after 3:00 p.m., the retailer had refused to accept the shipment. The retailer had told Martha it would be a year before she got another chance.

As Martha sat down at her desk, she realized she needed to rethink her marketing strategy. Perhaps she had missed something or made some mistake that was causing sales to be so slow. Glancing at the quotation again, she thought that perhaps she should send the picky retailer and other customers a copy of Emerson’s famous quote.

Company Case

Americans love their cars. In a country where SUVs have dominated the roads for more than a decade and the biggest sport is stockcar racing, it seems unlikely that a small, sluggish, hybrid vehicle would become such a hit. But against all odds, the Toyota Prius has become one of the top 10 selling vehicles in America. Introducing a fuel sipper in a market where vehicle size and horsepower have reigned led one Toyota executive to profess, “Frankly, it was one of the biggest crapshoots I’ve ever been involved in.” Considering these issues, it is nothing short of amazing that only five years later, the president of Toyota Motor Sales U.S.A., Jim Press, dubbed the Prius “the hottest car we’ve ever had.”

The Nuts And Bolts of The Prius

Like other hybrids currently available or in development, the Prius combines a gas engine with an electric motor. Different hybrid vehicles employ this combination of power sources in different ways to boost both fuel efficiency and power. The Prius runs on only the electric motor when starting up and under initial acceleration. At roughly 15 mph, the gas engine kicks in. This means that the auto gets power from only the battery at low speeds, and from both the gas engine and electric motor during heavy acceleration.

Once up to speed, the gas engine sends power directly to the wheels and, through the generator, to the electric motor or battery. When braking, energy from the slowing wheels—energy that is wasted in a conventional car—is sent back through the electric motor to charge the battery. At a stop, the gas engine shuts off, saving fuel. When starting up and operating at low speeds, the auto makes no noise, which seems eerie to some drivers and to pedestrians who don’t hear it coming! The Prius first sold in the United States in the 2001 model year. It was a small, cramped, slow compact car with a dull design. Three years later, the second-generation Prius benefited from a modest power increase. But it was still anything but a muscle car. However, there were countless other improvements. The sleek, Asian-inspired design was much better looking than the first generation Prius and came in seven colors. The interior was roomy and practical, with plenty of rear leg room and gobs of storage space.

The Gen II Prius also provided expensive touches typically found only in luxury vehicles. A single push button brought the car to life. A seven-inch energy monitor touch screen displayed fuel consumption, outside temperature, and battery charge level. It also indicated when the car was running on gas, electricity, regenerated energy, or a combination of these. Multiple screens within the monitor also provided controls for air conditioning, audio, and a satellite navigation system. And whereas the first Prius averaged an astounding 42 miles per gallon, its successor did even better at 48.

Apparently, consumers liked the improvements. In its inaugural year, the Prius saw moderate sales of just over 15,000 units—not bad considering that Toyota put minimal promotional effort behind the new vehicle. But sales for the carbon fuel miser have increased exponentially ever since. In 2007, Toyota sold 181,000 Priuses in the United States alone, a 70 percent increase over 2006 sales. That makes the Prius Toyota’s third-best-selling passenger car following the Camry and Corolla. Perhaps more significantly, in May of 2008, Toyota announced that it had sold a total of 1,028,000 Prius cars worldwide since the vehicle first went on sale in Japan in 1997.

The rapid increase in demand for the Prius created a rare automotive phenomenon. During a period when most automotive companies had to offer substantial incentives to move vehicles, many Toyota dealers had no problem getting price premiums of up to $5,000 over sticker price for the Prius. Waiting lists for the Prius stretched up to six months. At one point, spots on dealers’ waiting lists were being auctioned on eBay for $500. By 2006, the Prius had become the “hottest” car in the United States, based on industry metrics of time spent on dealer lots, sales incentives, and average sale price relative to sticker price. In fact, according to Kelley Blue Book, demand for new Priuses became so strong that, even after one year and more than 20,000 miles, a Prius could fetch thousands more than its original sticker price. There are many reasons for the success of the Prius. For starters, Toyota’s targeting strategy has been spot-on from the beginning. It focused first on early adopters, techies who were attracted by the car’s advanced technology. Such buyers not only bought the car but found ways to modify it by hacking into the Prius’s computer system. Soon, owners were sharing their hacking secrets through chat rooms such as Priusenvy.com, boasting such modifications as using the dashboard display screen to play video games, show files from a laptop, watch TV, and look at images taken by a rear-view camera. One savvy owner found a way to plug the Prius into a wall socket and boost fuel efficiency to as much as 100 miles per gallon.

In addition to Toyota’s effective targeting tactics, various external incentives helped to spur Prius sales. For example, some states issued permits for hybrids to drive in HOV (High Occupancy Vehicle) lanes, even if they only had one occupant. Some cities, including Albuquerque, Los Angeles, San Jose, and New Haven, provide free parking. But the biggest incentives were monetary.

Chapter 3

The federal government gave huge tax breaks amounting to thousands of dollars. Some state governments gave additional tax breaks, in some cases matching the federal tax break. On top of all that, some eco-friendly companies such as Timberland, Google, and Hyperion Solutions also joined in the incentive game, giving employees as much as $5,000 toward the purchase of hybrids.

But after some time, the early adopter market had been skimmed and the government incentives were slowly phased out. Just as these changes were taking place, Toyota was already well into a $40 million campaign targeting a different set of consumers, the environmentally conscious and those desiring greater fuel efficiency. With the accuracy of a fortune teller, Toyota hit the nail right on the head. Gas prices skyrocketed, first to $3 a gallon, then past $4. By the spring of 2008, Prius hysteria had reached an all-time high. Just as demand for full-sized SUVs began to tank, waiting lists and dealer mark-ups over sticker for the Prius once again became the norm.

“I’m selling every one I can get my hands on,” said Kenny Burns, a general sales manager at a California Toyota dealer. With a 30-day waiting list for a new Prius, “The day the car comes in is the day the car goes out.”

The overall category of gas-electric vehicles in the United States is hotter than ever. Although hybrids accounted for only about 3 percent of total U.S. car sales in 2007, their share is growing rapidly. For the first quarter of 2008, hybrid sales were up 25 percent over the previous year. In April of that year, sales jumped a whopping 58 percent. The Prius alone commands more than 50 percent of the market and is largely responsible for category growth. While various hybrid models have hit the market in recent years, it appears that consumers like their green cars very green. Sales of the ultra-high-mileage Prius and Civic have grown significantly each year since their introductions. But less efficient (and more expensive) hybrid models such as the Honda Accord (now discontinued), the Ford Escape, and the Mercury Mariner have not fared nearly as well. Some analysts believe it is because consumers are doing the math and realizing that even with better fuel efficiency, they may not save money with a hybrid. In fact, a widely publicized 2006 report by Consumer Reports revealed that of six hybrid models studied, the Prius and the Civic were the only two to recover the price premium and save consumers money after five years and 75,000 miles. But as the price of gas rises, the break-even period for the price of a hybrid gets shorter and shorter. That may just mean greater demand for all hybrid models as consumers perceive that even the less efficient hybrids make financial sense.

Almost every automotive nameplate now wants a piece of the growing pie. In 2008, there were 15 hybrid models available in the United States from 9 different brand nameplates.

General Analyzing the Marketing Environment

Motors offers both the only full-sized SUV hybrid in the Tahoe and the lowest priced hybrid option at $2,000 for the Saturn Vue and Aura. GM plans to extend the Saturn hybrid line to almost every vehicle in the lineup while continuing to introduce hybrids in other divisions. Ford plans to produce 250,000 hybrids a year by 2012. And while Subaru, Hyundai, and Honda are all promoting upcoming hybrid models, Audi, BMW, and numerous others are busy developing hybrid vehicles of their own.

Even with all the activity from these automotive brands, Toyota is currently the clear leader in hybrid sales and likely will be for some time to come. It makes 6 of the current 15 U.S. hybrid models (including 3 Lexus models). And with market conditions changing, Toyota is also showing its ability to adapt. In addition to the increased level of competition, the Prius faces more internal competition from new Toyota models like the Camry. Toyota faces a greater challenge in ramping up production to meet demand than from external competition.

All indications show that Toyota plans to maintain its hybrid momentum, doubling its line to 12 models and increasing its worldwide hybrid sales to 1 million vehicles per year by the early 2010s. At that time, it plans to unleash an entirely new lineup of hybrids based on next-generation lithium-ion batteries, which pack more power than the current nickel-metal-hydride batteries. If the past is any indication, Toyota’s future looks very green.

Measuring Service Quality

Kevin Kirkman wheeled his shiny blue BMW coupe into his driveway, put the gearshift into park, set the parking brake, and got out to check his mailbox as he did every day when he returned home. As he flipped through the deluge of catalogs and credit card offers, he noticed a letter from Enterprise Rent-A-Car. He wondered why Enterprise would be writing him.

Tracking Satifaction

Kevin tossed the mail on the passenger’s seat and drove up the driveway. Once inside his house, he opened the Enterprise letter to find that it was a survey to determine how satisfied he was with his rental. The survey itself was only one page long and consisted of 13 questions (see Exhibit 1). Enterprise’s executives believed that the company had become the largest rent-a-car company in the United States (in terms of number of cars, rental locations, and revenue) because of its laserlike focus on customer satisfaction and because of its concentration on serving the home-city replacement market. It aimed to serve customers like Kevin who were involved in wrecks and suddenly found themselves without a car. While the more wellknown companies like Hertz and Avis battled for business in the cutthroat airport market, Enterprise quietly built its business by cultivating insurance agents and body-shop managers as referral agents so that when one of their clients or customers needed a replacement vehicle, they would recommend Enterprise.

Although such replacement rentals accounted for about 80 percent of the company’s business, it also served the discretionary.

Meanwhile, back at Enterprise’s St. Louis headquarters, the company’s top managers were interested in taking the next steps in their customer satisfaction program. Enterprise had used the percentage of customers who were completely satisfied to develop its Enterprise Service Quality index (ESQi). It used the survey results to calculate an overall average ESQi score for the company and a score for each individual branch. The company’s branch managers believed in and supported the process.

However, top management believed that to really “walk the walk” on customer satisfaction, it needed to make the ESQi a key factor in the promotion process. The company wanted to take the ESQi for the branch or branches a manager supervised into consideration when it evaluated that manager for a promotion. Top management believed that such a process would ensure that its managers and all its employees would focus on satisfying

Enterprise’s customers. However, the top managers realized they had two problems in taking the next step. First, they wanted a better survey response rate. Although the company got a 25 percent response rate, which was good for this type of survey, it was concerned that it might still be missing important information. Second, it could take up to two months to get results back, and Enterprise believed it needed a process that would get the customer satisfaction information more quickly, at least on a monthly basis, so its branch managers could identify and take action on customer service problems quickly and efficiently.

Enterprise’s managers wondered how they could improve the customer-satisfaction-tracking process.

Then he remembered. Earlier that month, Kevin had been involved in a wreck. As he was driving to work one rainy morning, another car had been unable to stop on the slick pavement and had plowed into his car as he waited at a stoplight. Thankfully, neither he nor the other driver was hurt, but both cars had sustained considerable damage. In fact, he was not able to drive his car. Kevin had used his cell phone to call the police, and while he was waiting for the officers to come, he had called his auto insurance agent. The agent had assured Kevin that his policy included coverage to pay for a rental car while he was having his car repaired. He told Kevin to have the car towed to a nearby auto repair shop and gave him the telephone number for the Enterprise Rent-A-Car office that served his area. The agent noted that his company recommended using Enterprise for replacement rentals and that Kevin’s policy would cover up to $20 per day of the rental fee.

Once Kevin had checked his car in at the body shop and made the necessary arrangements, he telephoned the Enterprise office. Within 10 minutes, an Enterprise employee had driven to the repair shop and picked him up. They drove back to the Enterprise office, where Kevin completed the paperwork and rented a Ford Taurus. He drove the rental car for 12 days before the repair shop completed work on his car.

“Don’t know why Enterprise would be writing me,” Kevin thought. “The insurance company paid the $20 per day, and I paid the extra because the Taurus cost more than that. Wonder what the problem could be?” market (leisure/vacation rentals), and the business market (renting cars to businesses for their short-term needs). It had also begun to provide on-site and off-site service at some airports.
Throughout its history, Enterprise had followed founder Jack Taylor’s advice. Taylor believed that if the company took care of its customers and employees first, profits would follow. So the company was careful to track customer satisfaction. About 1 in 20 randomly selected customers received a letter like Kevin’s. An independent company mailed the letter and a postage-paid return envelope to the selected customers.

Customers who completed the survey used the envelope to return it to the independent company. That company compiled the results and provided them to Enterprise.

Victoria’s Secret Pink: Keeping the Brand Hip

When most people think of Victoria’s Secret, they think of lingerie. Indeed, the Limited Brands division has done a very good job of developing this association by placing images of supermodels donning its signature bras, panties, and “sleepwear” in everything from standard broadcast and print advertising to the controversial prime-time television fashion shows that the company airs each year. Such promotional tactics have paid off for Victoria’s Secret, a subsidiary of Limited Brands, which continues to achieve healthy sales and profit growth.

How does a successful company ensure that its hot sales don’t cool off? One approach is to sell more to existing customers. Another is to find new customers. Victoria’s Secret is doing plenty of both. One key component in its quest to find new customers is the launch and growth of its sub-brand, Pink.

Victoria’s Secret launched its line of Pink products in 50 test markets in 2003. Based on very positive initial results, the company expanded the sub-brand quickly to a national level. With the Pink introduction, Victoria’s Secret hoped to add a new segment to its base: young, hip, and fashionable customers. “Young” in this case means 18 to 30 years of age. More specifically, Pink is geared toward college coeds. According to company spokesman

Anthony Hebron, “It’s what you see around the dorm. It’s the fun, playful stuff she needs, but is still fashionable.”
The company classifies the Pink line as “loungewear,” a very broad term that includes sweatpants, T-shirts, pajamas, bras and panties, pillows and bedding, and even dog accessories. In keeping with the “young and fun” image, the product line includes bright colors (Pink is not a misnomer) and often incorporates stripes and polka-dots. The garments feature comfortable cuts and mostly soft cotton fabrics. To keep things fresh for the younger segment, stores introduce new Pink products every three or four weeks.

According to those at Victoria’s Secret, in sharp contrast to the sexy nature of the core brand, Pink is positioned as cute and playful. “It’s spirited and collegiate. It’s not necessarily sexy—it’s not sexy at all—but young, hip, and casual. It’s fashionforward and accessible,” said Mary Beth Wood, a spokeswoman for Victoria’s Secret. The Pink line does include underwear that some might consider to be on par with standard

Victoria’s Secret items. But management is quick to point out that the designs, such as heart-covered thongs, are more cute than racy. Displays of Pink merchandise often incorporate stuffed animals, and many articles display Pink’s trademark mascot, a pink dog. Originally, Pink was considered to be a store-within-a-store concept. But Pink sales have surpassed expectations. To date, Victoria’s Secret has opened six stand-alone Pink stores. In 2007, Pink revenues hit $900 million, almost one-sixth of the company’s $5.6 billion take for the year. Because of this, the company is giving far more serious consideration to expanding the presence of Pink lifestyle shops in several markets.

Limited Brands has been experiencing good times, and executives have been quick to recognize that Victoria’s Secret is a huge part of that success. In fact, the Victoria’s Secret and Bath & Body Works divisions have accounted for roughly 70 percent of revenue (Victoria’s Secret alone was good for more than 50 percent) and almost all the profit in recent years.

But Limited Brands CEO Les Wexner is not content to let the chain rest. “The Victoria brand is really the power of the business,” he says. “We can double the Victoria’s Secret business in the next five years.” This would mean increasing the division’s sales to more than $10 billion. The umbrella strategy for achieving this growth is to continually broaden the customer base. This will include a focus on new and emerging lines, such as IPEX and

Angels Secret Embrace (bras), Intimissimi (a line of Italian lingerie for women and men appealing to younger customers), and a new line of fitness apparel called VSX. Pink is a key component of this multibrand strategy.

The future of Victoria’s Secret will also include a move toward bigger stores. Currently, the typical Victoria’s Secret store is approximately 6,000 square feet. More than 80 percent of Victoria’s Secret stores will be remodeled over the next five years, nearly doubling its average store size to 11,000 square feet. Larger stores will allow the company to give more space and attention to the store-within-a-store brands, such as Pink.

Understanding the Marketplace and Consumers

Natalie Weathers, assistant professor of fashion-industry management at Philadelphia University, says that Victoria’s Secret is capitalizing on a trend known as co-shopping—mothers and tweens shopping together. “They are advising their daughters about their purchases, and their daughters are advising them,” she said. This type of activity may have been strange 20 years ago, but according to Weathers, the preteens of today are more savvy and, therefore, more likely to be shopping partners for moms. “They are not little girls, and they aren’t teenagers, but they have a lot of access to sophisticated information about what the media says is beautiful, what is pretty, what is hot and stylish and cool. They are very visually literate.”

In general, introducing a brand to younger consumers is considered a sound strategy for growth and for creating long-term relationships. Marketers of everything from packaged foods to shampoo use this strategy. In most cases, it’s not considered controversial to engender aspirational motives in young consumers through an entry-level product line. But many critics have questioned the aspirations that Pink engenders in tweens. Specifically, to what does it make them aspire? Based on years of experience working as a creative director for ad agencies in New York, Timothy Matz calls Pink “beginner-level lingerie.” Matz does not question the practice of gateway marketing (getting customers to use the brand at an earlier age). But he admits that a “gateway” to a sexy lingerie shop may make parents nervous: “Being a 45-year-old dad, do I want my 10-year-old going to Victoria’s Secret?”

Thus far, Victoria’s Secret has avoided the negative reactions of the masses who opposed Abercrombie & Fitche’s blatant marketing of thong underwear to preteens. Perhaps that’s because it adamantly professes its exclusive focus on young adults. But it may also be because Victoria’s Secret is not alone in its efforts to capitalize on the second-fastest growing apparel category (loosely defined as “lingerie”) by focusing on the younger target market. An almost exhaustive list of retailers are expanding their lingerie lines. Companies that specifically target the same Pink segment include the Gap, Kohl’s, Macy’s, and J.C. Penney. But the biggest competition comes from fellow mall store American Eagle Outfitters, which has rolled out its own new Aerie line of “fun lingerie.” And like Victoria’s Secret Pink, the brand has opened stand-alone Aerie stores. In fact, results have been so good for American Eagle that it has opened a whopping 56 new Aerie stores in just a couple of years.

But Victoria’s Secret was the first to market with lingerie for young adults and still has the greatest presence. And whether Pink’s appeal to the preadult crowd is intentional or unintentional, many critics question the effort. Big tobacco companies have been under fire for years for using childlike imagery to draw the interest of youth to an adult product. Is Pink the Joe Camel of early adolescent sexuality? Are Pink’s extreme lowrise string bikini panties the gateway drug to pushup teddies and Pleasure State Geisha thongs? These are questions that Victoria’s Secret may have to address more directly at some point in the near future.

Two such 11-year-olds, Lily Feingold and Brittany Garrison, were interviewed while shopping at a Victoria’s Secret store with Lily’s mother. As they browsed exclusively through the Pink merchandise, the two confessed that Victoria’s Secret was one of their favorite stores. Passing up cotton lounge pants because each already had multiple pairs, both girls bought $68 pairs of sweatpants with the “Pink” label emblazoned on the derriere. The girls denied buying the items because they wanted to seem more grown up, instead saying that they simply liked the clothes. The executives at Victoria’s Secret are quick to say that they are not targeting girls younger than 18. Perhaps that is due to the backlash that retailer Abercrombie & Fitch experienced not long ago for targeting teens and preteens with sexually charged promotional materials and merchandise. But regardless of Victoria’s Secret’s intentions, Pink is fast becoming popular among teens and “tweens.” Most experts agree that by the time children reach 10, they are rejecting childlike images and aspiring to more mature things associated with being a teenager. Called “age compression,” it explains the trend toward preteens leaving their childhoods earlier and giving up traditional toys for more mature interests, such as cell phones, consumer electronics, and fashion products. Tweens are growing in size and purchasing power. While the 33 million teens (ages 12 to 19) in the United States spend more than $179 billion annually (more than 60 percent have jobs), the 25 million tweens spend $51 billion annually, a number that continues to increase. But perhaps even more telling than the money being spent directly by teens is the $170 billion per year spent by parents and other family members directly for the younger consumers who may not have as much income as their older siblings. “Parents are giving them money or credit cards and children make most of the decisions about whatever purchases are made for them, whether it’s toiletries, a bedspread or undergarments,” said James McNeal, a former professor of marketing at Texas A&M University and author of Kids as Customers: A Handbook of Marketing to Children.

With this kind of purchasing power, as they find revenue for their older target markets leveling off, marketers everywhere are focusing on the teen and tween segments. “Right now, every retailer is looking for growth opportunities,” said Marshall Cohen, an industry analyst. And more young women are wearing loungewear, not just at home, but to school and the mall.

“Pajamas are streetwear. Slippers are shoes,” Cohen continued. “It’s amazing how casual we’ve gotten. This retail segment could get very competitive.”
Although executives at Victoria’s Secret deny targeting the youth of America, experts disagree. David Morrison, president of marketing research agency Twentysomething, says he is not surprised that Victoria’s Secret denies marketing to teens and preteens: “If Victoria’s Secret is blatantly catering to seventh and 05 Chapter.

Chapter 5

Questions for Discussion

1. Analyze the buyer decision process of a typical Pink customer.
2. Apply the concept of aspirational groups to Victoria Secret’s Pink line. Should marketers have boundaries with regard to
   this concept?
3. Explain how both positive and negative consumer attitudes toward a brand like Pink develop? How might someone’s
   attitude toward Pink change?
4. What role does Pink appear to be playing in the self-concept

Sources: Suzanne Ryan, “Would Hannah Montana Wear It?” Boston Globe, January 10, 2008, p. D1; Heather Burke, “Victoria’s Secret to Expand Its Stores,” International Herald Tribune, August 13, 2007, p. F15; Ann Zimmerman,
“Retailers’ Panty Raid on Victoria’s Secret New Lines Target Hot Fashion Lingerie,” Wall Street Journal, June 20, 2007, p. B1; Fae Goodman, “Lingerie Is Luscious and Lovely—For Grown-Ups,” Chicago Sun Times, February 19, 2006, p. B02; Vivian McInerny, “Pink Casual Loungewear Brand Nicely Colors Teen Girls’ World,” Oregonian, May 7, 2006, p. O13; Jane M. Von Bergen, “Victoria’s Secret? Kids,” Philadelphia Inquirer, December 22, 2005.

Think about the biggest purchase that you’ve ever made. Was it a car? A computer? A piece of furniture or an appliance? Think about the time you put in to researching that decision, all the factors that you considered in making your choice, and how much the purchase ultimately cost.

Now imagine that you are part of a buying team for a major airline considering the purchase of multiple commercial jets, each costing over $100 million. A slightly different situation? Such are the customers that Boeing deals with every day. Selling commercial and military aircraft involves some of the most complicated transactions in the world. At those prices, a single sale can add up to billions of dollars. And beyond initial prices, Boeing’s clients must consider numerous factors that affect longer-term operating and maintenance costs. As a result, the airplane purchase process is nerve-rackingly slow, often taking years from the first sales presentation to the day Boeing actually delivers an airplane. For such purchases, Boeing knows that it takes more than fast talk and a firm handshake to sell expensive aircraft—it takes a lot of relationship building. So Boeing invests heavily in managing customer relationships.

Individual salespeople head up an extensive team of company specialists—sales and service technicians, financial analysts, planners, engineers—all dedicated to finding ways to understand and satisfy airline customer needs. These teams work closely with clients through the lengthy buying process. Even after receiving an order, salespeople stay in almost constant contact to keep make certain the customer stays satisfied. The success of customer relationships depends on performance and trust. “When you buy an airplane, it is like getting married,” quips Alan Mallaly, the head of Boeing’s commercial airplane division. “It is a long-term relationship.”

But even with this care in managing customer relationships, Boeing has experienced more than its share of challenges over the past decade. For starters, its only major rival, France-based Airbus, began to overtake Boeing in product innovation during the 1990s. In the wake of September 11, 2001, Boeing lost its industry lead in commercial airplane sales to Airbus. To make matters worse, Boeing soon found itself in the midst of a series of ethical scandals. In the early 2000s, the company faced two separate cases of cheating to win defense contracts with the U.S. Air Force. The scandals resulted in a Department of Justice investigation, the ousting of Boeing’s CEO, prison terms for two other executives, and the loss of billions of dollars in business. To make matters even worse, in the face of a scandalous extramarital affair, the next CEO stepped down as well.

With its reputation sullied and its financial situation suffering, Boeing got back to the business of serving its corporate clients. In April 2004, the giant airplane maker announced the program launch of its 787 Dreamliner, Boeing’s first all-new aircraft since the 777, launched a decade earlier. The Dreamliner is not the world’s biggest passenger jet—Airbus’s A380 and even Boeing’s own 747 are bigger. But with the 787, Boeing saw more potential in the midsized wide-body market. From the beginning, it set out to create a jet with groundbreaking innovations that would translate into true benefits for its customers, the type of benefits that really stand out to buyers and executives at major airlines. Some 50 percent of the Dreamliner’s fuselage is made from lightweight carbon-fiber materials. The plane is also made in one single piece, eliminating 40,000 to 50,000 fasteners and 1,500 aluminum sheets and putting it in a design class with the B-2 stealth bomber. Combined with other weight-saving design features and advanced engine technologies, the 787 is the world’s lightest and most fuel efficient passenger jet, using 20 percent less fuel than comparably sized planes.
Another major benefit that the Boeing 787 Dreamliner brings to its category is flexibility. The 787 line is designed for multiple configurations that carry between 210 and 330 passengers. The plane also offers increased cargo capacity, a fuel range of up to 8,500 nautical miles, and a maximum speed of Mach .85. Thus, the 787 brings big-jet speed, range, and capacity to the midsize market, rivaling the jumbo jets.

Dream or Nightmare?

As if massive revenue success weren’t enough, Boeing was riding high for other reasons as well. In 2005, when Jim McNerney took over as CEO for Boeing, he instituted a massive cost-cutting program that resulted in an 84 percent increase in company earnings on an 8 percent increase in revenue for 2007. Combined with the soaring orders, Boeing’s stock price peaked at a record $107 in July of 2007. With over $60 billion in revenue, Boeing once again reigned as the world’s biggest aerospace company and the USA’s largest exporter. But Mr. McNerney knew better than to revel in the glory of the then-current successes. Across the Atlantic, Airbus had committed severe production blunders resulting in its first jumbo A380s being delivered 22 months late, leading to a major shakeup in management at the French firm. Boeing had projected that it would deliver its first 787 to All Nippon in May of 2008. With that date still more than a year away, McNerney knew that his biggest challenge would be to keep the Dreamliner on track. McNerney had good reason for concern. The Dreamliner was not only an innovative design, it was being built by an innovative process that outsourced 70 percent of the work to dozens of partnering firms. Boeing’s promises with respect to deadlines and delivery dates could only be met if all the pieces of the puzzle came together as planned. Even though it had so many orders secured, customers were counting on Boeing to make good. The last thing that it needed was for customer relationships to be rocked by delays or other problems.

But by mid-2007, the 787 production process was plagued with problems. Parts shortages and other bottlenecks led suppliers to ship incomplete sections of the first few planes to Boeing’s final assembly line in Everett, Washington. By mid2008, the date of the first 787 delivery had been pushed back three times. All Nippon would not take possession of its first plane until at least 15 months past the original deadline. To make matters worse, Boeing announced that it would only deliver 25 Dreamliners in the first year, rather than the previous estimate of 109.
Months later, Boeing Commercial Airplanes president Scott Carson announced that Boeing had made solid progress in overcoming start-up issues. He apologized and promised that the company would work closely with each customer to minimize the impact of the delays. Boeing also suggested that it would offer incentives and penalty payments as part of that process (some analysts estimate that Boeing could be liable for as much as $4 billion in concessions and penalties). Still, understandably, Boeing’s commercial customers quickly grew impatient. The delays began raising havoc with customer relationships. Boeing’s biggest customer, All Nippon, stated, “We are extremely disappointed: This is the third delay in the delivery of the first aircraft and we still have no details about the full delivery schedule. We would urge Boeing to provide us with a 120 percent definitive schedule as soon as possible.”

As Boeing’s customers consider what is happening in the purchase process, it is easy to see how each might become seriously conflicted. On the one hand, they see the promise of a Dreamliner that they believe strongly will provide tremendous benefits, perhaps unlike any previous aircraft. On the other hand, every delay costs them dearly. The delays upset plans to begin new routes and retire old aircraft, events that translate directly into revenue and profits. Customer options are limited—there’s only one competitor, and its product in this class is substantially inferior to the Dreamliner. And even if customers switch, Airbus does not have planes sitting on the shelves waiting to be purchased. However, Boeing’s customers still have the option of canceling orders and making do with what they have.

Riding Out the Storm

Regardless of what its customers do, the way Boeing handles the 787 crisis will most certainly affect customer relations and future orders. Boeing has a lot on its side. The innovativeness of the current product line, expertise in supply chain management, and the strength of its sales teams in managing customer relationships will all help to resolve the problems with the Dreamliner program. But Boeing had these things going for it before the crisis began. The question is, what will Boeing do differently in the future. In a 2008 memo to employees, CEO McNerney said, “The simple reality is that it’s time to get it done—and done right.” McNerney has made it very clear that he expects more from everyone involved in the 787 Dreamliner program, from the top down. He has reached deeply into the company’s executive roster, reports maintenance requirements to ground-based computer systems.

Whereas the airlines will certainly notice all of these improvements, airline passengers will also approve of many new 787 design features. The interior of the Dreamliner is designed to reduce long-haul flying misery and to better imitate life on the ground. The Dreamliner is 60 percent quieter than other planes in its class. It features more legroom, lighting that automatically adjusts to time zone shifts, and higher cabin pressure and humidity, making the flying experience more comfortable and reducing common flying symptoms like headaches, dry mouth, and fatigue. The Dreamliner also boasts the largest-ever overhead storage bins, 19-inch self-dimming windows, and a wireless Internet and entertainment system.

“We looked at every aspect of the flying experience,” says Tom Cogan, chief project engineer for the 787. “It’s not just an evolutionary step. From my
perspective it almost borders on revolutionary.” Opinions of industry insiders support Cogan’s statement. Many analysts strongly believe that the 787 Dreamliner will one day be regarded as the plane that charted the next age of commercial aviation.

Boeing officially launched the 787 program in April of 2004. Even with the stratospheric list price of $162 million and the fact that Boeing was not promising delivery for at least four years, companies scrambled to place orders. Japan’s All-Nippon Airways jumped in first with a record order for 50 Dreamliners. To date, 56 companies from six continents have lined up with orders for 892 of Boeing’s newest aeronautic darling. That makes the

Dreamliner the most successful new aircraft launch and the fastest selling plane in the history of the industry. Combined with record sales for its 737 and freighter lines, Boeing’s annual sales soared. In 2005, Boeing shattered its records with orders for 1,002 commercial airplanes, edging
within inches of Airbus’s lead. That number is even more striking considering that Boeing and Airbus combined for a total of 622 orders in 2004. The sales spike was so dramatic that no one in the industry expected the numbers to repeat. But in 2006, Boeing reclaimed its title as the industry sales leader by surpassing Airbus with orders for 1,044 more jets. Even more stunning, 2007 brought the third straight record-breaking year for Boeing with 1,413 orders.

Chapter 6 plucking a team from Boeing’s defense unit to straighten out the Dreamliner process. He is pushing executives to act more aggressively. This includes sticking their noses into suppliers’ operations, even stationing Boeing employees on the factory floors of every major supplier.

McNerney himself is more directly involved with the 787 program. He gets daily briefings on the plane’s progress. He frequently makes his presence known on factory floors and even visits with assembly line workers. “We’ve got 240 programs in the company, and there’s one that’s got more of my attention right now than any one, and that’s the 787,” Mr. McNerney said. “I hope we are [eventually] defined by the 787. Just not right this instant.”

Mr. McNerney took over as CEO well after the Dreamliner program was under way, so the current problems are not being attributed to him. But customers and others throughout the industry are watching him closely to see how he handles the situation. Says Charlie Smith, chief investment officer with Fort Pitt Capital Group, “No matter what other successes Jim McNerney has at Boeing, he will be judged on how he handles the 787. He’s either going to win big or lose big,” he said. And McNerney’s outcome will be directly shared by the Boeing Corporation, including the teams that must deal day in and day out with anxious and frustrated customers.

Saturn: An Image Makeover

Things are changing at Saturn. The General Motors brand had only three iterations of the same compact car for the entire decade of the 1990s. But over the last couple of years, Saturn has introduced an all-new lineup of vehicles that includes a midsized sport sedan, an 8-passenger cross-over vehicle, a 2-seat roadster, a new compact sport sedan, and a compact SUV. Having anticipated the brand’s renaissance for years, Saturn executives, employees, and customers are beside themselves with joy.

But with all this change, industry observers wonder whether Saturn will be able to maintain the very characteristics that have distinguished the brand since its inception. Given that Saturn established itself based on a very narrow line of compact vehicles, many believe that the move from targeting one segment of customers to targeting multiple segments will be challenging. Will a newly positioned Saturn still meet the needs of one of the most loyal cadres of customers in the automotive world?

From its beginnings in 1985, Saturn set out to break through the GM bureaucracy and become “A different kind of car. A different kind of company.” As the single-most defining characteristic of the new company, Saturn proclaimed that its sole focus would be people: customers, employees, and communities. The company’s focus on employees included an unprecedented contract with United

Auto Workers (UAW) that focused on progressive work rules, benefits, work teams, and the concept of empowerment. It established a ground-breaking dealer network structure, reversing long-held customer perceptions of dealers as a nemesis. Saturn also received awards and recognition for socially responsible policies that were beneficial to employees, communities, and the environment.

But in addition to establishing an image as a people-oriented company, Saturn put significant resources into product development. The first Saturn cars were made “from scratch,” without any allegiance to the GM parts bin or suppliers. The goal was to produce not only a high-quality vehicle, but one known for safety and innovative features that would “wow” the customer.

When the first Saturn vehicles rolled off the assembly line on July 30, 1990, the company offered a sedan, a coupe, and a wagon in two trim levels each, all based on a single compact vehicle platform. Despite this minimal approach, sales quickly exceeded expectations. By 1992, Saturn had sold 500,000 vehicles. That same year, the company achieved the highest new car sales per retail outlet, something that had not been done by a domestic car company for 15 years.

Indeed, customers were drawn to all the things that Saturn had hoped they would be. They loved the innovations, like dent resistant body panels, the high-tech paint job designed to resist oxidization and chipping longer than any in the industry, and safety features like traction control, anti-lock brakes, and unparalleled body reinforcements. They were overwhelmed by the fresh sales approach that included no-haggle pricing, a 30-day return policy, and no-hassle from the non-commissioned sales associates.

During Saturn’s early years of operations, the accolades rolled in. The list included “Best Car” picks from numerous magazines and organizations, along with awards for quality, engineering, safety, and ease-of-maintenance. But the crowning achievement occurred in 1995 as the 1,000,000th Saturn took to the road. That year, Saturn ranked number-one out of all automotive nameplates on the J.D. Power and Associates Sales Satisfaction Index Study, achieving the highest score ever given by the organization. It would be the only company ever to achieve the highest marks in all three categories ranked by the satisfaction index (salesperson performance, delivery activities, and initial product quality). Saturn earned that honor for an astounding four consecutive years, and it was the only non-luxury brand to be at or near the top of J.D. Power’s scores for the better part of a decade.

The Honeymonn Ends

Looking back, Saturn unquestionably defied the odds. To launch an all-new automotive company in such a fiercely competitive and barrier-entrenched industry is one thing. To achieve the level of sales, the customer base, and the list of awards that Saturn achieved in such a short period of time is truly remarkable. But despite all of Saturn’s initial successes, one thing was always missing from the GM division. Profit. As the new millennium dawned, GM had yet to earn a nickel of return on billions of dollars invested in the brand. Saturn sales peaked early in 1994 at 286,000 and settled in at an average of about 250,000 units per year.

Customer-Driven Marketing Strategy: Creating Value for Target Customers

The lack of continued growth may have been due partly to the fact that Saturn released no new models in the 1990s. GM finally introduced the midsized L-series and compact SUV Vue for 2000 and 2002 respectively. It replaced the original S-series with the Ion in 2003. But while these new vehicles addressed the issue of a lack of model options, they brought with them a new concern. Saturn’s history of high quality and its long-cherished J.D. Power ratings began to slide. In the early part of the new millennium, not only was Saturn’s J.D. Power initial-quality rating not near the top, it fell to below the industry average.

Even with the new models, Saturn’s sales did not improve. In fact, they declined. This was partly due to an industrywide downturn in sales wrought by a recession. But Saturn’s general manager, Jill Lajdziak, has conceded that, for too long Saturn sold utilitarian vehicles. In 2005, Saturn sales fell to a record low of 213,000 units, only about 1 percent of the overall market. It seems that sales of the L-series and Vue were coming almost entirely from loyal Saturn customers who were trading up to something different, something bigger, and, unfortunately, something not as good.

Given the troubles that Saturn was experiencing, it came as a surprise when in 2008, GM executives announced expectations that Saturn would be its growth brand in the ensuing years. GM hoped to perform a makeover similar to the one it achieved with Cadillac earlier in the decade, infusing another $3 billion into its importfighter nameplate. Given that GM had just experienced a record loss of $38 billion, the world’s biggest carmaker was clearly putting faith in one of its smallest brands to help turn the tide. Jill Lajdziak said “Saturn’s initial image as a smart innovation small-car company was blurred by bumps in quality and slow model turnover. We didn’t grow the portfolio fast enough, and [now] we’re growing it in a huge way.” At Vancouver’s Pacific International Auto Show in spring 2007, Lajdziak introduced one shiny new model after another: the 2007 Sky two-seat roadster, the 2007 Outlook crossover wagon, the completely redesigned 2008 Vue, the 2007 midsized Aura sedan, and the 2008 Astra. Not a single one of these models had been available in January 2006.

“By the end of this year, the oldest product in a Saturn showroom will be the Sky,” said Lajdziak. Of GM’s investment, she remarked, “We’ve asked for beautifully designed products with a level of refinement, interiors, vehicle dynamics—we think we have it all. And we’ve got that married up with what consumers believe is the best industry experience in the marketplace.” Commenting on the magnitude of the changes at Saturn, she continued, “Nobody else has ever tried to grow the portfolio and turn it over as fast as we are, maintain industry-best customer satisfaction, and obviously deliver the [profit] results all at the same time.” At the heart of this makeover is something else all new to Saturn: taking advantage of the GM family of vehicles and parts bins to achieve efficiencies of scale and increase profit margins. In fact, the new Saturn models are largely rebranded Opels, GM’s European division. In the future, new product development will be carried out in a joint-venture way between the two divisions. For a company that in the past has been known as making the “car for people who hate cars,” this is a 180-degree turnaround. With a new lineup of European engineered vehicles, Saturn is intent on repositioning its brand image with its “Rethink” campaign. The print and TV ads are designed to change consumers’ perceptions of Saturn as a bland, functional, economy car. Saturn may have the advantage of youth in this undertaking. Some industry analysts suggest it can reposition itself more easily than other brands because it is such a young company.

As for the new positioning, GM makes it clear that with Saturn, it’s not trying to make another Chevrolet. Chevrolet will remain the only GM brand positioned as “all things to all people.” Along with the other GM brands, Saturn will play a niche roll and target a specific market segment. In fact, GM says, it’s just trying to help Saturn do more of what it has been doing all along—reach the type of import-buying customer it can’t reach with any of its other brands. Indeed, top executives at GM acknowledge that many Saturn owners already believe their car is an Asian brand, not a domestic one. “Saturn has always been the one brand in the GM lineup suitable for attracting importintenders,” commented one GM executive.

Swimming or Sinking?

GM set a lofty 2007 sales goal for Saturn of 400,000 vehicles, far more than the division had ever sold. However, it didn’t even come close to that goal, selling only 240,000 vehicles. With so many new models, it is struggling to create brand awareness for each one. But although Saturn fell short of its goal, unit sales represented a 12 percent increase over the previous year. At a time when the entire industry was struggling, this was a notable achievement. Much more significant, however, was the fact that the average price of a Saturn transaction skyrocketed by a whopping $7,000. This translated into a huge 24 percent increase for dealer profitability. “We’re seeing more cross-shopping than ever,” said Lajdziak. “Our retailers are seeing people they’ve never seen before in their showrooms, in terms of demographics and what they are trading in.” And better yet, Saturn is not cannibalizing other GM brands. Saturn sales appear to be increasing at the expense of Honda, Nissan, and Toyota. In fact, not a single GM model ranks among the top ten vehicles cross-shopped by potential Saturn buyers. The new Saturn strategy is a big change: new positioning, new vehicles, even a new advertising agency. But despite all this change, Saturn is remaining focused on the core elements that have always made Saturn a different kind of car company: innovation, social responsibility, a focus on employees, and creating and maintaining strong customer relationships. This unique combination of change and consistency may just result in Saturn fulfilling GM’s expectations of a growth brand.

ESPN: The Evolution of an Entertainment Brand

In the 2004 movie Anchorman character Ron Burgundy (Will Ferrell) auditions for a position on SportsCenter with the very new and little known network, ESPN (Entertainment and Sports Programming Network). The year was 1979. After pronouncing the name of the network “Espen,” he then is shocked to find out that ESPN is a round-the-clock sports network. Through his laughter, he asserts that the concept is as ridiculous as a 24-hour cooking network or an all-music channel. “Seriously,” he shouts. “This thing is going to be a financial and cultural disaster. SportsCenter . . . that’s just dumb!” While this comical sketch is fictitious, when a young college graduate named George Bodenheimer took a job in the mailroom at ESPN it 1981, it was for real. Today, Mr. Bodenheimer is president of the network that has become one of the biggest franchises in sports, not to mention one of the most successful and envied brands in the entertainment world. As a cable network, ESPN commands $2.91 from cable operators for each subscriber every month. Compare that to $1.67 for Fox Sports, 89 cents for TNT, and only 40 cents for CNN. The core ESPN channel alone is currently in more than 96 million homes. With that kind of premium power, it’s no wonder that ESPN shocked the world in 2006 by becoming the first cable network to land the coveted TV contract for Monday Night Football, which went on to become the highest rated cable series ever.

But even with its three sibling channels (ESPN2, ESPNEWS, and ESPN Classic), the ESPN cable network is only one piece of a bigger brand puzzle that has become Bodenheimer’s $6 billion sports empire. Through very savvy strategic planning, Bodenheimer is realizing his vision of taking quality sports content across the widest possible collection of media assets to reach sports fans wherever they may be. Employing a hands-off management style, Bodenheimer has cultivated a brand that is brash, tech savvy, creative, and innovative. He tells employees that ESPN belongs to all of them. He gives them the freedom to come up with their own ideas and push them forward. His only rule is that every new idea must focus on fulfilling ESPN’s mission of reaching sports fans and making them happy. In the process, ESPN has become as recognized and revered by its customers as other megabrands such as Tide, Nike, and Coca-Cola are to theirs.

Bodenheimer’s career-spanning dedication has grown ESPN to well over 50 businesses. The all-sports network has become a truly multiplatform brand, a rarity for any TV network. This growth has given ESPN tremendous reach. ESPN.com alone reaches 22.4 million viewers a week. But even more stunning is the fact that during any seven-day period, 120 million people ages 12 to 64 interact with some ESPN medium. Here’s a rundown of ESPN’s portfolio of brands: Television: ESPN has sprawled into six cable channels and other TV divisions that give it both a local (ESPN Regional Television) and global (ESPN International and ESPN Deportes) presence. It was one of the first networks to break new ground in HDTV with simulcast service for ESPN and ESPN2 and it still maintains the most HD programming content and highest level of HD viewership in sports. Cable operators and viewers alike consistently rank ESPN, ESPN2 and ESPN Classic above all other channels with respect to perceived value and programming quality.

But perhaps one of the most innovative moves in all of television sports occurred in 2003, when ESPN content was integrated into its sibling network ABC. ESPN on ABC is now the home for the NBA Finals, NASCAR, NCAA football, NCAA basketball, World Cup Soccer, British Open, and the IndyCar Series. Although ESPN has numerous cable channel brands, one program stands out as a brand in its own right. SportsCenter was ESPN’s first program. And with as many as 93 million viewers each month, it remains the network’s flagship studio show. SportsCenter is the only nightly, full-hour sports news program. And whereas, in the past, ESPN has rebroadcast taped episodes of SportsCenter during the day, a new schedule incorporating nine straight hours of live SportsCenter everyday from 6 a.m. to 3 p.m. will begin in the fall of 2008. Outside the United States, ESPN airs 14 local versions of SportsCenter broadcast in eight languages.

Products, Services, and Brands: Building Customer Value 8 Chapter

Radio: Whereas many radio formats are suffering, sports radio is thriving. And ESPN Radio is the nation’s largest sports radio network with 750 U.S. affiliates and more than 335 full-time stations. In addition to college and major league sports events, the network broadcasts syndicated sports talk shows, providing more than 9,000 hours of content annually.

Publishing: ESPN The Magazine launched in 1998 and immediately began carving out market share with its bold look, bright colors, and unconventional type, a combination consistent with its content. With the dominance of Sports Illustrated, many didn’t give ESPN’s magazine venture much of a chance. Within its first year, ESPN The Magazine was circulating 800,000 copies. Today, that number has ballooned two-and-a-half times to 2 million, whereas Sports Illustrated has remained at a stagnant 3.3 million. At the same time, ESPN is making headway into one of the oldest of all media: books. Although ESPN Books is still waiting for a megaseller, because of the cross-marketing opportunities with the other arms of ESPN, this small division has considerable marketing clout in a struggling industry. “If they didn’t have the TV stuff and everything else, they’d be as hardpressed as other publishers to make these books into major events,” said Rick Wolff, executive editor at Warner Books. Internet: ESPN.com is the leading sports Web site, and ESPNRadio.com is the most listened to online sports destination, boasting live streaming and 32 original podcasts each week. But the rising star in ESPN’s online portfolio is ESPN360.com, a subscription-based broadband offering that delivers highquality, customized, on-demand video content. Not only can fans access content carried on ESPN’s other networks, but they also get exclusive content and sports video games. For the true sports fan, there’s nothing like it—it allows viewers to watch up to six different events at the same time choosing from live events for all major professional and college sports. Since ESPN360.com began service in 2006, this broadband effort has doubled its distribution and now reaches 20 million homes.

Beyond working through its own Web sites, ESPN is exploring the limits of the Internet through an open distribution venture with AOL. By providing ESPN content via a branded ESPN video player in AOL’s portal, viewers have more access to ESPN’s content. But advertisers also benefit from a larger online audience than ever before.

Mobile: In 2005, ESPN ventured in to one of its trickiest and riskiest brand extensions to date. Mobile ESPN was designed as ESPN’s own cell phone network, putting content into sports fans’ pockets 24/7. But after a year, the venture was far from breaking even and ESPN shut it down. However, even though Mobile ESPN is down, it’s not out. ESPN has capitalized on the lessons learned and started over with a different strategy. Today, ESPN provides real-time scores, stats, news, highlights, and even programming through every major U.S. carrier, with premium content available through Verizon Wireless and Qualcomm.

Mobile ESPN also reaches an international audience of mobile customers through more than 35 international carriers. ESPN’s mission with its mobile venture is to “serve the sports fan any time, anywhere, and from any device.” In fall 2007, it reached a major milestone in that goal when more
people sought NFL content from its mobile-phone Web site than from its PC Web site. “We’re having extraordinary growth on ESPN.com’s NFL pages, but we’re also seeing extraordinary usage with mobile devices as well,” said Ed Erhardt, president of ESPN Sports customer marketing and sales. Mr. Erhardt sees great potential in mobile, saying that it is “a big part of the future as it relates to how fans are going to consume sports.”

Bodehnheimer and his team see no limit to how far they can take the ESPN brand. In addition to the above ventures, ESPN extends its reach through event management (X Games, Winter X Games, ESPN Outdoors & Bass), consumer products (CDs, DVDs, ESPN Video Games, ESPN Golf Schools), and even a chain of ESPN Zone restaurants and SportsCenter Studio stores. ESPN content is now reaching viewers through agencies that place it in airports and on planes, in health clubs, and even in gas stations. “Now you’re not going to be bored when you fill up your tank. It gives new meaning to pulling into a full-service station,” says Bodenheimer. “I’ve been on flights where people are watching our content and don’t want to get off the flight.”

A powerful media brand results not only in direct revenues from selling products but also in advertising revenues. Advertising accounts for about 40 percent of ESPN’s overall revenues. With so many ways to reach the customer, ESPN offers very creative and flexible package deals for any marketer trying to reach the coveted and illusive 18–34 year old male demographic. “Nobody attracts more men than we do,” asserts Bodenheimer. “We’ve got a product and we know how to cater to advertisers’ needs. The merchandising opportunities we provide, whether it’s working with Home Depot, Wal-Mart, or Dick’s Sporting Goods, we want to partner if you want young men.”

As amazing as the ESPN brand portfolio is, it is even more amazing when you consider that it is part of the mammoth ABC portfolio, which in turn is a part of The Walt Disney Company portfolio. However, it is no small piece of the Disney pie. ESPN revenues alone accounted for about 18 percent of Disney’s total in 2007. Since obtaining ESPN as part of the 1995 ABC acquisition, because ESPN has delivered on the numbers, Disney has allowed ESPN to do pretty much whatever it wants to do. Just a few years after the acquisition, Disney’s then-CEO Michael Eisner told investors, “We bought ABC media network and ESPN for $19 billion in 1995. ESPN is worth substantially more than we paid for the entire acquisition.” And Disney leverages that value every way that it can, from Mouse House advertising package deals to conditionally attaching its cable channels to the ESPN networks through cable operators.

Nintendo: Reviving a Company, Transforming a Market

In the world of video games, Nintendo has been a household name for nearly three decades. After all, it was one of the pioneers of home video game consoles with the Nintendo Entertainment System in the early 1980s. It continued as the market leader with its Super Nintendo and Nintendo 64 systems. But in the mid-1990s, all that began to change. Along came Sony with its Playstation and Playstation 2, and Microsoft introduced the xBox. Before long, Nintendo was reduced to a fraction of its former glory, running a distant third in a highly competitive market.

What happened? In certain respects, Nintendo fell prey to the industry model that it had created. More advanced technology led to the creation of more powerful gaming consoles, which in turn paved the road for more sophisticated games with more realistic graphics. As each new generation of
product hit the market, Nintendo found that it could not keep up with more technologically advanced rivals. While more than 120 million Sony PS2s became fixtures in homes, apartments, and dorm rooms around the world, Nintendo moved just slightly more than 20 million GameCubes. As the most recent generation of gaming platforms from the gaming industry’s “big three” came to market, many industry insiders figured Nintendo was destined to continue its downward path. Sony’s PS3 and Microsoft’s xBox 360 were so advanced that it looked like Nintendo was due for another drubbing.

Oh what a difference a couple of years makes. For Nintendo, everything is now coming up Super Mario Bros. “flowers.” Last year, revenues and profits were up by 73 percent and 67 percent, respectively. In the last couple of years, during a time in which the Nikkei Stock Average fell nearly 25 percent, Nintendo’s stock price tripled. In fact, Nintendo’s stock price rose so high during 2007 that its market capitalization exceeded that of the Sony Corporation. On that measure alone, Nintendo became the second largest corporation in Japan, trailing only Toyota Motor Company. How did this struggling number three player go from product loser to product leader in such a short time?

Most people probably don’t know that Nintendo was founded way back in 1889. Obviously, Nintendo did not make video games back then. It began as a playing cards manufacturer. But it also found success in hotels, packaged foods, and toys. When it came time to revive itself as a veteran in the video game industry, Nintendo did something that it had done time and time again. It focused on customers to find true opportunities.

For the video game industry, “the customer” typically means one of two groups: the 18 to 35-year old hard-core gamers and the children/teenagers. The industry earns most of its revenue and profits from these core consumers who spend a great deal of time and money enhancing their virtual skills. Over the years, as hardware became more sophisticated and games more realistic, these tech junkies were all the more pleased.

In the process, Nintendo watched its revenues slide and its rivals strengthen. It realized that it could not compete against technologically superior products. So when it set out to develop the Wii console, it didn’t even try. Instead, it focused on something the others were ignoring. It set its sites on the masses. “Nintendo took a step back from the technology arms race and chose to focus on the fun of playing rather than cold tech specs,” said Reggie Fils-Aimé, president and COO of Nintendo of America. “We took a more intuitive approach and developed something that could be fun for every member of the family.”

Designing a Customer Driven Strategy and Mix

Although the Wii was an instant smash hit, many analysts wondered whether or not its appeal would hold up. That speculation began to subside when retailers were still having trouble keeping the Wii in stock more than a year after it was introduced. In its first 18 months, Nintendo moved more
than 24 million Wiis. Even though the xBox 360 had been on the market a full year longer, it had sold only 19 million units. And Sony, once the undisputed industry champ, placed only 12 million PS3s.

Nintendo’s willingness to reinvent what a video gaming system can mean continues to drive Wii sales. For example, the Wii can scan weather, news, and Web sites through a wireless Internet connection. Through the Wii Shop Channel, an iTunesstyle store, customers can download classic Nintendo games as well as games from independent developers.

But in its pursuit to break gaming boundaries, Nintendo has also relentlessly pursued new applications for the basic motionsensing technology. A plastic rifle contraption allows users to realistically play shooting gallery games. Snapping the Wii controller into a steering wheel has made driving games all the more electrifying. And tiny in-controller speakers add touches like the sound of an arrow being shot while the TV makes the “thwack” of that arrow hitting its target.

But perhaps one of the greatest strokes of creative genius in Nintendo’s continuing stream of new applications is the Wii Fit, an add-on device targeted directly at women wanting to lose weight or keep in shape. The idea for the Wii Fit came to Takao Sawano, general manager of development for Nintendo, as he watched sumo wrestlers being weighed in for a television match. The tubby athletes were so heavy that they had to have each foot placed on a separate scale. The light bulb went on as Sawano thought about the possibility of tracking a user’s shifting weight on a game pad as they shimmied and twisted their way through virtual worlds.

That game pad is now called the Balance Board and lies at the heart (or rather the foot) of the Wii Fit’s portfolio of exercise applications. Users can do aerobic, strength training, balancing, and yoga exercises all in realistic virtual settings. “It is now possible to go beyond the fingertip controls of past games and now use your whole body,” Sawano told a crowd of game developers. The Wii Fit also facilitates exercise programs as it tracks and analyzes individual performance over time as well as keeping track of stats like weight and body-mass index.

Perhaps the most promising part of the Wii Fit is not that it continues to broaden an ever-growing market segment. In addition, the Balance Board component has the potential to be integrated into a nearly limitless number of applications. Already, Nintendo has developed ski jump and slalom games. It’s only a matter of time before Nintendo develops a Balance Board version for just about every sport imaginable.

Releasing hit after hit, Nintendo has vaulted to the top of the Wall Street Journal’s latest Asia 200 survey. Placing first in the “Innovative in Responding to Customer Needs” category, the company placed second overall, trailing only Toyota. For a company that hadn’t placed in the top 10 since 2002, the sudden turnaround is a telling demonstration of consumer confidence.

Although the success of the Wii has largely been attributed to attracting non-traditional gamers, hardcore gamers have hardly been absent. In fact, many of the industry faithful saw the Wii as a relatively cheap second gaming platform—as a nice diversion from more graphic-intensive games. The Wii also has the nostalgic advantage of appealing to the gaming elite with characters they grew up with, such as those from the Mario and Zelda franchises.

But developers and executives at Nintendo are not content to sit back and risk having hardcore gamers lose interest. Part of Nintendo’s future strategy includes games focused on more serious gamers. CEO Satoru Iwata shocked the industry last year when he announced that Nintendo would soon add games from two Sony allies: Capcom’s Monster Hunter series and Square Enix’s Final Fantasy Crystal Chronicles. The release of these titles will do more than appeal to traditional gamers. It will elevate the Wii’s image from that of a machine with little firepower to one that will run the industry’s most advanced games. Said one game industry analyst at a tradeshow sneak preview, “It’s symbolic. I didn’t think the Wii could handle this type of game. Everyone in the room today saw that it can.”

As Nintendo has successfully attracted an untapped audience of gamers over the past few years, it has done more than revive its business. It has transformed a market. The competitors that once trounced Nintendo now find that they must play catch-up. Both Sony and Microsoft are now developing easierto-play games that depart from their usual fast-action fare. Game publishers, including powerhouses such as Electronic

Arts Inc., have started putting more resources into developing games for the Wii. And even small, independent shops are getting into the action as Nintendo’s download channel reduces barriers to entry. All this is causing an already huge $30 billion industry to swell.

9 Chapter

For the Wii, this meant that Nintendo had to do more with less. The Wii boasts a humble combination of low-powered processors and a standard optical disc drive. Compared to the powerful, state-of-the-art chips and high definition lasers contained in the PS3 and xBox 360, the Wii’s graphics are out right scrawny.

But at the core of the Wii’s broad appeal lies a revolutionary motion-sensing wireless technology that forces the once sedentary gamer to get up off the couch and get into the game. The Wii controller resembles a television remote. This feature was no accident as Wii designers correctly speculated that the familiarity of a TV remote would be more inviting than the more typical and complex video game controllers. The Wii’s basic software also allows users to custom design avatars from a seemingly infinite combination of characteristics. With this configuration, users play tennis, go bowling, and hit the links by swinging the controller like a racket, ball or golf club, all with characters resembling themselves.

The Wii met with immediate and drastic success. Entering the market after the release of the xBox 360 and the PS3, Wii consoles flew off the shelves. Not only did the Wii’s contain an enticing combination of features, it also had a cost advantage. Microsoft and Sony had priced their offerings in the stratosphere. And even at $599 for the top and most popular PS3 model, Sony was still losing hundreds of dollars on each unit that it sold! Nintendo’s low-tech approach allowed it to earn a hefty profit and be the low-price leader at only $250. With such a favorable benefit-to-cost ratio, the Wii easily won the launch phase, outselling each of the two competing consoles by nearly two-to-one in the first few months.

Sources: Robert Levine, “Fast 50 2008: Nintendo,” Fast Company, February 19, 2008, accessed online at www.fastcompany.com; Yukari Iwatani Kane, “Nintendo Captures Top Spot in Japan For Innovation,” Wall Street Journal, June 27, 2008, accessed online at www.wsj.com; Yukari Iwatani Kane, “Nintendo is Ahead of the Game, But Sustaining May Be Hard,” Wall Street Journal, April 15, 2008, p. C3; Yukari Iwatani Kane, “Wii Sales Help Nintendo Net Rise 48 Percent,” Wall Street Journal, April 25, 2008, p. B8; Kenji Hall, “Nintendo: Calling All Players,” BusinessWeek, October 10, 2007, accessed online at www.businessweek. com; Brian Caulfield, “Nintendo’s Sumo-Inspired Hit,” Forbes, February 21, 2008, accessed online at www.forbes.com.

Southwest Airlines: Staying Ahead in the Pricing Game

In the early 1970s, when Herb Kelleher and a partner sketched a business plan on a cocktail napkin, they had no idea that
Southwest Airlines would become the most successful U.S. airline. In 2003, the company earned $442 million—more than all the other U.S. airlines combined. From 1972 through 2002, Money magazine indicated that Southwest was the nation’s bestperforming stock—growing at a compound annual rate of 26 percent over the period! It has been profitable every year since its founding, something no other U.S. airline can claim. By 2008, Southwest had 35,000 employees and $9.1 billion in revenue. It has never laid off employees or cut wages in an industry plagued by mergers, downsizing, labor squabbles, and bankruptcies.

Most people didn’t give upstart Southwest Airlines much of a chance. Southwest’s strategy was the complete opposite of the industry’s conventional wisdom. Its planes flew from “point-topoint” rather than using the major airlines’ “hub-and-spoke” pattern. This gave it more flexibility to move planes around based on demand. Southwest did not serve the major airports dominated by the major airlines, preferring instead to serve second-tier destinations where costs were lower. Southwest served no meals, only snacks. It did not charge passengers a fee to change same-fare tickets. It had no assigned seats. It had no electronic entertainment, relying on humorous flight attendants to entertain passengers. The airline did not offer a retirement plan; rather, it offered its employees a profit-sharing plan, thus keeping its fixed costs low. Because of all these factors, Southwest had much lower costs than its competitors and was able to crush the competition with its low-price strategy. Moreover, it consistently stuck with its strategy. That is, until 2004.

In July 2004, Gary Kelly, a 21-year Southwest veteran, took over the CEO role from Mr. Kelleher. Despite Southwest’s success, Kelly told analysts that it was “time for a little remodeling” of its strategy. He realized Southwest would no longer be able to cruise above the turbulent storm clouds buffeting the U.S. airline industry. In fact, as one analyst noted, it appeared to be “boxed in by its strategy of frequent flights and rapid growth in a weak domestic market.” In early 2004, Southwest had already ditched its strategy of not attacking the major carriers in their main hubs as it launched service to Philadelphia, the home of US Airways. It also began service to other higher-cost airports such as Denver. At the same time, other discount airlines, such as Jet Blue, were tearing pages out of Southwest’s playbook by offering low prices and enhanced services, such as in-flight television, thereby eating into its market share. Further, Southwest was losing its cost advantage. Many major airlines had declared bankruptcy and restructured or had merged with other airlines and emerged with lower cost structures that allowed them to challenge Southwest’s fares. Southwest’s aging workforce had become one of the highest paid in the industry. To make matters worse, rapidly escalating fuel prices were making its fuel-price hedging strategy, a key factor in its cost advantage since 1999, less effective.

To respond, Kelly entered Southwest’s first code-sharing agreement with discount carrier ATA Airlines. The agreement allowed the two carriers to expand their networks by selling tickets on each other’s flights and earned Southwest millions of dollars of additional revenue. Further, although Southwest had built customer loyalty by offering frequent flights between many of the 63 cities it served in 32 states, Kelly began to evaluate underperforming routes and developed new software to shift planes to more profitable routes. At the same time, he also announced that Southwest would curb its expansion plans. Kelly also began to raise prices aggressively—increasing prices six times in 2006, an 11.4 percent average fare increase.

Perhaps Kelly’s boldest move yet was the decision to target business travelers. Although 40 percent to 50 percent of Southwest’s customers were bargain-hunting business people, other airlines were being more successful catering to business travelers who were often willing to pay higher prices if an airline offered last-minute tickets, assigned seating, first-class cabins, and private airport lounges—none of which Southwest had. To grow revenue in the increasingly competitive industry, Kelly realizes that he needs more business travelers but that these customers will be harder to attract. To implement the new strategy, Southwest announced a new fare category, Business Select, in late 2007. These fares are $30 to $50 higher for a round-trip ticket. The tickets, however, offer the customer preferential boarding, bonus frequent-flier credits, and a free cocktail on each flight. Business Select customers board first, ahead of the regular-fare customers herded in the airline’s famous A, B, and C queuing stalls.

Southwest changed its Web site, which used to offer five fare categories with headings like “refundable anytime” and “discount fare,” to offer only three fares: “Business Select,” “Business,” and “Wanna Get Away.” Southwest will also offer more nonstop routes and more frequent flights that work with business travelers’ schedules. It is renovating boarding areas and installing roomier seats, power outlets, workstation counters, and flat-screen TVs broadcasting CNN.

To encourage companies to begin to use Southwest, the airline increased its business sales force from five to 15 members who meet with corporate travel managers to promote the new offerings. The staff points out that Southwest maintains one of the industry’s best customer-service and on-time performance records—important considerations for business travelers. The company has also begun to make its tickets available through computer systems that the travel managers use to book tickets, counter to its long-standing strategy of only selling tickets directly through its Web site and toll-free number. It has also begun to negotiate discounted contracts with businesses, something it had always avoided.

The strategic question for Southwest becomes how its traditional customers will react to all this change. Will those customers who logged on its Web site 24 hours before a flight to get a low boarding number be upset when they see business customers boarding first and taking all the good seats? Will budget-minded leisure travelers be upset when they see that two of the three ticket classes target business travelers? Will loyal customers who liked Southwest’s egalitarian, democratic system like all these changes? Southwest wants to use its new business-focused strategy to generate $100 million of the $1 billion it wants to add to its revenue by 2010. It is also considering international flights and inflight Internet service. And, like other airlines, it is beginning to charge extra fees for things, such as extra luggage, that airlines used to include in the basic airfare.

Southwest’s vice president of marketing notes that, “We have changed, and the environment we are in has changed. There are a lot of times where that one-size approach is appropriate. When it comes to customers, it becomes more difficult.” Perhaps Advertising Age best sums up the challenges Southwest, Wal-Mart, and other “power discounters” face: If one thing defined the marketing landscape of the 1990s, it was the power of cheap. …The power discounters are paying the price for their own success. They have reached the end of the frontier for easy growth and made their rivals stronger. Now they are all trying…to adapt their marketing and business models to the new, tougher competitive landscape they’ve helped spawn. One thing Southwest has learned. No matter how successful, the only constant in marketing and pricing strategy is change.

Questions for Discussion

1. What has been Southwest’s traditional pricing strategy? Why has this pricing strategy been so successful throughout
   the airline’s first three decades?
2. What values do airline customers—both business and leisure travelers—seek when they buy air travel tickets? Has
   Southwest done a better job than competitors of meeting
   the needs of these air travelers? In what ways?
3. What internal and external factors affect airline pricing decisions? What impact are these factors now having on airline pricing and profitability?
4. What is Southwest’s current pricing strategy? Does his strategy differentiate Southwest from its competitors? Is the strategy sustainable?
5. What marketing recommendations, including pricing recommendations, would you make to Southwest as it moves into the next decade?

Sources: Excerpts and quotes from: Scott McCartney, “Unusual Route: Discount Airlines Woo Business Set,” The Wall Street Journal, February 19, 2008, p.D1; Jack Neff, “How the Discounters Hurt Themselves,” Advertising Age, December 10, 2007, p.12; Melanie Trottman, “New Route: As Competition Rebounds, Southwest Faces Squeeze,” The Wall Street Journal, June 27, 2007, p. A1. See also: Melanie Trottman, “Southwest’s New Flight Plan: Win More Business Travelers,” The Wall Street Journal, November 27, 2007, p. B1.

Payless ShoeSource: Paying Less for Fashion

When you think of New York’s Fifth Avenue, what retailers come to mind? Tiffany? Gucci? Armani? One name that probably doesn’t come to mind is Payless. But for the past few years, Payless ShoeSource has been operating one of its low-priced shoe stores on this avenue of luxury retailing. In fact, Payless is now well on its way to placing stores in more than 100 higher-end malls around the country.

Although the discount shoe peddler still focuses on selling inexpensive shoes to the masses, Payless is now moving upscale. It’s on a mission to “democratize fashion”—to make truly fashionable products more accessible by applying its cost-effective model to a product portfolio infused with well-known brand labels and some of the hottest high-end designers in the business. Sound like a hair-brained scheme? Well, you might change your mind after hearing the whole story.

Founded in 1956 in Topeka, Kansas, Payless grew rapidly based on what was then a revolutionary idea: selling shoes in a self-service environment. Fifty years later, Payless had become the largest shoe retailer in the Western Hemisphere, with over 4,500 stores in all 50 states and throughout the Americas.

Targeting budget-minded families, Payless was serving up more than 150 million pairs of shoes each year, roughly one in every 10 pairs of shoes purchased in America. However, although all seemed rosy for the choose-it-yourself shoe store, by 2005, Payless was losing market share and closing stores. The retail landscape had changed, and giant discount onestop shops like Wal-Mart, Target, and Kohl’s had become the vendors of choice for budget conscious shopper’s buying shoes. Said one industry insider, “You can no longer produce the same boring shoes year after year and hope that price alone will get customers to your door.” With thrift as its only positioning point, Payless had lost its edge.

Designing a Customer Driven Strategy and Mix Company Cases

Beyond these changes in presentation, Rubel focused on the ultimate product. He implemented a “House of Brands” strategy, shifting the Payless product line from one comprised almost entirely of store brands to one dominated by well-known national brands. Payless now sells shoes under numerous brand names that it either owns or licenses, including Airwalk, Champion, Spalding, Dexter, Shaquille O’Neal-endorsed Dunkman, and various Disney brands. Rubel also acquired the Stride Rite chain and all its associated brands. To organize the new corporate structure and keep track of all the brands, he created a holding company (Collective Brands) as an umbrella over Payless, Stride Rite, and all the licensing activities for the company’s brands.

To develop products that would resonate better with consumers, Payless stepped up its emphasis on fashion. The Payless Design Team, an in-house design group, dedicated itself to developing original footwear and accessory designs to keep new styles on target with changing fashion trends. Top designers from Kenneth Cole and Michael Kors where hired as full-time employees to head the new team. But in perhaps the biggest move to raise the caché of the brand, Rubel started what it calls “Designer Collections.” Aiming for the highest levels of haute couture, Payless has forged relationships with four top New York-based designers—Laura Poretzky, Lela Rose, Stacey Bendet, and Patricia Field. The four are designing everything from pumps to boots to handbags for Payless under the brands Abaete, Lela Rose, alice + olivia, and Patricia Field.

To support this design effort and the new Fashion Lab store format, Payless has done something really out of character. After signing its first designer, Laura Poretzky, Payless took its designs to the runway of New York’s Fashion Week, the invitation-only event where designers debut fall fashions for the industry. In another first, Payless began running full-page ads in Elle, Vogue, and W, featuring the tagline, “Look Again.”

Can Payless’s luxury-meets-low-price strategy work? Or will this go down as a disaster of two drastically different worlds that When actresses Sophia Bush (One Tree Hill) and Brittany Snow (Hairspray) landed backstage in Lela Rose’s showroom at New York Fashion Week, they swooned over the designer’s new shoe collection that was about to debut on the runway. Rose, best known for $1,500 frocks, happily handed pairs of navy peep-toe pumps and polka-dot round-toe pumps over to the young celebs, who would soon be flaunting them on the sidelines of the catwalk.

“Did they know they were Payless shoes?” says Rose, who’s now designing her fifth exclusive line for the discounter. “Absolutely. They didn’t care. They looked cute to them and that’s all that mattered.” Additionally, Payless is not the first to try this new direction. In fact, co-branded designer lines for retailers date back decades. But in recent years, the trend is proliferating. Karl Lagerfield has designed for Britain’s H&M, Vera Wang has
teamed up with Kohl’s, Ralph Lauren has put store brands on JCPenney’s shelves, and Todd Oldham has stepped out with Old Navy, to name just a few. Although many ventures such as these have failed miserably, some have been wildly successful. Lela Rose claims that she would never have considered her arrangement with Payless if it hadn’t been for the success of Target’s alliance with Isaac Mizrahi. Mizrahi’s couture career was pretty much on the rocks. Then, he started designing preppy cashmere sweaters, cheerful jersey dresses, and trendy trench coats for Target, all priced at under $40. With the low-rent strategy, Mizrahi became more popular and famous than ever. After that, he once again had high-end retailers knocking on his door. Since Mizrahi’s successful entry to the mainstream in 2003, more than two dozen designers have co-branded with mass retailers.

So in June of 2005, Payless made its first move to turn things around. It hired a new CEO, Matt Rubel. Rubel knew that to regain its market leadership, Payless would have to design shoes that Sex in the City’s Carrie Bradshaw would drool over but at prices that Roseanne could afford. It had to change its image from the dusty dungeon of cheap footwear into the fun, hip merchant of fashion. “We have the ability to make shoes at the most affordable prices anywhere in the world, and we want to marry that with the greatest creativity,” Rubel said in a statement reflecting the company’s new strategy.

Rubel wasted no time in making big changes. To reflect the new image and communicate change to consumers, Payless redesigned its logo for the first time in 20 years. It then launched new “Fashion Lab” and “Hot Zone” store formats. Both were a drastic improvement, making the stores more open, light, and airy, with a more satisfying consumer experience built around style and design rather than price. Of the new store atmosphere, Rubel said, “It makes the $12 shoe look like a $20 shoe.” Rubel hopes that the new formats will not only attract more customers, but that customers will be willing to pay a little bit more than they have in the past. All new Payless stores now have one of the two new formats and old stores are being progressively remodeled.

“There’s nothing cool about shopping at Payless,” says skeptic Marian Salzman, a trends forecaster at a major ad firm. “It gets the cash-strapped working girl.” But Rubel refutes this view, quickly pointing out that Payless shoppers have median household incomes that are higher than those of both Wal-Mart and Target. “All we’ve done is bring Payless into the 21st century. We’re…speaking with greater clarity to who our customer already is.”
Maxine Clark, former president of Payless and now CEO of Build-A-Bear Workshop, also recognizes the potential of the new strategy. “The customer who wants to buy Prada will not come to Payless. But this will energize the old customers who they lost and attract new ones.” Mardi Larson, head of public relations for Payless, claims that the trendy new image is perfect for existing customers. “We target the 24-year-old demographic, because women in their 40s who shop for their family are nostalgic about that time in their lives, while [at the same time] teenagers aspire to that age group.”

But what about that potential new customer? Does this risky venture into high-fashion stand a chance of appealing to those who have never crossed the threshold of a Payless store? Rubel admits going after new customers. The “cheap chic” approach is attempting to lure 20-to-30-year-old women who are looking for something trendy. Given that such fashion-conscious females buy 50 percent more shoes than most current Payless customers, going after new customers make sense.

Paying Less or Paying More?

There’s more in it for Payless than just making the brand more attractive to both old and new customers. The company is looking to move its average price-point up a notch or two. Whereas “higher price” is a relative term when most of a stores product line is priced below $15, higher margins are higher margins. Rubel has suggested that in many cases, price increases may be as little as 50 cents per pair of shoes. But the expansion of its brand portfolio to include famous labels will certainly give Payless greater pricing flexibility. And the designer collections will allow for some of the highest priced products that have ever graced its shelves—think $25 for pumps and up to $45 for boots. Whereas that is a substantial price increase from its Payless’s average, it’s a bargain for fashion-conscious consumers.

One industry insider declares, “Fashion isn’t a luxury, it’s a right.” With Rubel’s mission to democratize fashion, it seems that this right is becoming a reality in the shoe world. The benefits of such democracy are plentiful. The designers get tremendous exposure, a large customer base, and the power and budget of a mass retailer. Payless gets brand caché, almost certain to transform its outdated image. And consumers get runway styles they can afford. Payless is banking that making everyone happy will ring up the sales and profits it needs.

Zara: The Technology Giant of the Fashion World

One global retailer is expanding at a dizzying pace. It’s on track for what appears to be world domination of its industry. Having built its own state-of-the art distribution network, the company is leaving the competition in the dust in terms of sales and profits, not to mention speed of inventory management and turnover. Wal-Mart you might think? Dell possibly? Although these two retail giants definitely fit the description, we’re talking here about Zara, the flagship specialty chain of Spain-based clothing conglomerate, Inditex. This dynamic retailer is known for selling stylish designs that resemble those of big-name fashion houses, but at moderate

prices. “We sell the latest trends at low prices, but our clients value our design, quality, and constant innovation,” a company spokesman said. “That gives us the advantage even in highly competitive, developed markets, including Britain.” More interesting is the way that Zara achieves its mission.

Fast Fashion – The Newest Wave

A handful of European specialty clothing retailers are taking the fashion world by storm with a business model that has come to be known as “fast-fashion.” In short, these companies can recognize and respond to fashion trends very quickly, create products that mirror the trends, and get those products onto shelves much faster and more frequently than the industry norm. Fastfashion retailers include Sweden’s Hennes & Mauritz (H&M), Britain’s Top Shop, Spain’s Mango, and the Netherland’s Mexx. Although all of these companies are successfully employing the fast-fashion concept, Zara leads the pack on virtually every level. For example, “fast” at Zara means that it can take a product from concept through design, manufacturing, and store-shelf placement in as little as two weeks, much quicker than any of its fast-fashion competitors. For more mainstream clothing chains, such as the U.S.’s Gap and Abercrombie and Fitch, the process takes months.

This gives Zara the advantage of virtually copying fashions from the pages of Vogue and having them on the streets in dozens of countries before the next issue of the magazine even hits the newsstands! When Spain’s Crown Prince Felipe and Letizia Ortiz Rocasolano announced their engagement, the brideto-be wore a stylish white trouser suit. This raised some eyebrows, given that it violated royal protocol. But European women loved it and within a few weeks, hundreds of them were wearing a nearly identical outfit they had purchased from Zara.

But Zara is more than just fast. It’s also prolific. In a typical year, Zara launches about 11,000 new items. Compare that to the 2,000 to 4,000 items introduced by both H&M and Gap. In the fashion world, this difference is huge. Zara stores receive new merchandise two to three times each week, whereas most clothing retailers get large shipments on a seasonal basis, four to six times per year.

As part of its strategy to introduce more new items with greater frequency, Zara also produces items in smaller batches. Thus, it assumes less risk if an item doesn’t sell well. But smaller batches also means exclusivity, a unique benefit from a massmarket retailer that draws young fashionistas through Zara’s doors like a magnet. When items sell out, they are not restocked with another shipment. Instead, the next Zara shipment contains something new, something different. Popular items can appear and disappear within a week. Consumers know that if they like something, they have to buy it or miss out. Customers are enticed to check out store stock more often, leading to very high levels of repeat patronage. But it also means that Zara doesn’t have to follow the industry pattern of marking products down as the season progresses. Thus, Zara reaps the benefit of prices that average much closer to the list price.

The Vertical Secret To Zara’s Success

Just how does Zara achieve such mind-blowing responsiveness? The answer lies in its distribution system. In 1975, Amancio Ortega opened the first Zara store in Spain’s remote northwest town of La Coruña, home to Zara’s headquarters. Having already worked in the textile industry for two decades, his experience led him to design a system in which he could control every aspect of the supply chain, from design and production to distribution and retailing. He knew, for example, that in the textile business, the biggest mark-ups were made by wholesalers and retailers. He was determined to maintain control over these activities.

Chapter 12

Ortega’s original philosophy forms the heart of Zara’s unique, rapid-fire supply chain today. But it’s Zara’s high-tech information system that has taken vertical integration in the company to an unprecedented level. According to CEO Pablo Isla, “Our information system is absolutely avant-guard. It’s what links the shop to our designers and our distribution system.”

Zara’s vertically integrated system makes the starting point of a product concept hard to nail down. At Zara’s headquarters, creative teams of more than 300 professionals carry out the design process. But they act on information fed to them from the stores. This goes far beyond typical point-of-sales data. Store managers act as trend spotters. Every day they report hot fads to headquarters, enabling popular lines to be tweaked and slow movers to be whisked away within hours. If customers are asking for a rounded neck on a vest rather than a V neck, such an item can be in stores in seven to ten days. This process would take traditional retailers months.

Managers also consult a personal digital assistant every evening to check what new designs are available and place their orders according to what they think will sell best to their customers. Thus, store managers help shape designs by ensuring that the creative teams have real-time information based on the observed tastes of actual consumers. Mr. Ortega refers to this as the democratization of fashion.

When it comes to sourcing, Zara’s supply chain is unique as well. Current conventional wisdom calls for manufacturers in all industries to outsource their goods globally to the cheapest provider. Thus, most of Zara’s competitors contract manufacturing out to low wage countries, notably Asia. But Zara makes 40 percent of its own fabrics and produces more than half of its own clothes, rather than relying on a hodgepodge of slow-moving suppliers. Even things that are farmed out are done locally in order to maximize time efficiency. Nearly all Zara clothes for its stores worldwide are produced in its remote Northeast corner of Spain.

As it completes designs, Zara cuts fabric in-house. It then sends the designs to one of several hundred local co-operatives for sewing, minimizing the time for raw material distribution. When items return to Zara’s facilities, they are ironed by an assembly line of workers who specialize in a specific task (lapels, shoulders, on so on). Clothing items are wrapped in plastic and transported on conveyor belts to a group of giant warehouses. Zara’s warehouses are a vision of modern automation as swift and efficient as any automotive or consumer electronics plant. Human labor is a rare sight in these cavernous buildings. Customized machines patterned after the equipment used by overnight parcel services process up to 80,000 items an hour. The computerized system sorts, packs, labels, and allocates clothing items to every one of Zara’s 1,495 stores. For stores within a 24-hour drive, Zara delivers goods by truck, whereas it ships merchandise via cargo jet to stores farther away.

The same philosophy that has produced such good results for Zara has led parent company Inditex to diversify. Its other chains now include underwear retailer Oysho, teen-oriented Bershka and Stradivarius, children’s Kiddy’s Class, menswear Massimo Duti, and casual and sportswear chain Pull & Bear. Recently, Inditex opened its first non-clothing chain, Zara Home. Each chain operates under the same style of vertical integration perfected at Zara.

Making speed the main goal of its supply chain has really paid off for Inditex. In only three years, its sales and profits more than doubled. Last year, revenues increased over 15 percent over the previous year to $14.5 billion. Not bad considering retail revenue growth worldwide averages single-digits, and many major retailers were feeling the effects of slowing economies worldwide. Perhaps more importantly, Inditex’s total profits grew by 25 percent last year to $1.8 billion. Most of this performance was driven by Zara, now ranked number 64 on Interbrand’s list of top 100 most valuable worldwide brands.

Although Inditex has grown rapidly, it wants more. Last year it opened 560 new stores worldwide (most of those were Zara stores) and plans to do the same this year. That’s even considering an entry into the fast-growing Indian market. Global retailers are pushing into India in droves in response the India’s thirst for premium brands. Zara can really capitalize on this trend. With more than one ribbon-cutting ceremony per day, Inditex could increase its number of stores from the current 3,890 to more than 5,000 stores in more than 70 countries by the end of this decade. European fast-fashion retailers have thus far expanded cautiously in the United States (Zara has only 32 stores stateside). But the threat has U.S. clothing retailers rethinking the models they have relied on for years. According to one analyst, the industry may soon experience a reversal from outsourcing to China to “Made in the USA”: “U.S. retailers are finally looking at lost sales as lost revenue. They know that in order to capture maximum sales they need to turn their inventory much quicker. The disadvantage of importing from China is that it requires a longer lead time of between three to six months from the time an order is placed to when the inventory is stocked in stores.

By then the trends may have changed and you’re stuck with all the unsold inventory. If retailers want to refresh their merchandise quicker, they will have to consider sourcing at least some of the merchandise locally.” So being the fastest of the fast-fashion retailers has not only paid off for Zara, the model has reconfigured the fashion landscape everywhere. Zara has blazed a trail for cheaper and cheaper fashion-led mass retailers, has put the squeeze on mid-priced fashion, and has forced luxury brands to scramble to find ways to set themselves apart from Zara’s look-alike designs. Leadership certainly has its perks.

Questions for Discussion

1. As completely as possible, sketch the supply chain for Zara from raw materials to consumer purchase.
2. Discuss the concepts of horizontal and vertical conflict as they relate to Zara.
3. Which type of vertical marketing system does Zara employ? List all the benefits that Zara receives by having adopted this system.
4. Does Zara experience disadvantages from its “fast-fashion” distribution system? Are these disadvantages offset by the advantages?
5. How does Zara add value for the customer through major logistics functions?

Sources: James Hall, “Zara Helps Fashion Profit for Inditex,” The Daily Telegraph, April 1, 2008, p. 12; Christopher Bjork, “New Stores Boost Inditex’s Results,” Wall Street Journal, June 12, 2008, p. B4; “The Future of Fast-fashion,” The Economist, June 18, 2005, accessed online at www. economist.com; John Tagliabue, “A Rival to Gap that Operates Like Dell,” New York Times, May 30, 2003, p. W1; Elizabeth Nash, “Dressed For Success,” The Independent, March 31, 2006, p. 22; Sarah Mower, “The Zara Phenomenon,” The Evening Standard, January 13, 2006, p. 30; also see www.inditex.com, accessed July 2008.

Whole Foods: A Whole-istic Strategy

It’s tough to compete in the grocery business these days. What was once a landscape littered with hundreds of local and regional players has now
become an industry dominated by the megachains. Wal-Mart, Kroger, and Safeway have each taken their own approach to expanding as far and wide as possible with one goal: sell massive amounts of groceries to mainstream consumers at the lowest possible prices. Sure, there are still some small, regional grocers. But they exist mostly because some segment of customers wants to support local businesses. It’s getting harder and harder for such grocers to stay alive or avoid getting gobbled up by the big dogs on the block.

So how does a smaller chain not only survive but thrive in such a dog-eat-dog environment? Perhaps the worst strategy is trying to out-Wal-Mart Wal-Mart. Instead of competing head-tohead, smart competitors choose their turf carefully. Rather than competing directly with the volume and price leaders, some have succeeded by reducing emphasis on price and focusing instead on providing something that the low-price, high-volume competitors simply can’t supply.

The grocer that’s doing this best job of this is Whole Foods Market. Growing from a single store in 1980, Whole Foods has gone far beyond the status of “regional player.” It now operates more than 270 stores in 36 states, Canada, and the UK. Although that’s tiny compared to Kroger’s 2,500 stores or Wal-Mart’s 7,300, Whole Foods is thriving and expanding.

How does Whole Foods do it? Through careful positioning— specifically, by positioning away from the industry giants. Rather than pursuing mass-market sales volume and razor-thin margins, Whole Foods targets a select group of upscale customers and offers them “organic, natural, and gourmet foods, all swaddled in Earth Day politics.” As one analyst puts it, “While other grocers are looking over their shoulder, watching and worrying about Wal-Mart, Whole Foods is going about business as usual. The tofu is still selling; the organic eggs are fresh in the back dairy cooler; and meats are still hormone free.” The value package that Whole Foods offers to its unique customers is best summed up in its motto: “Whole Foods, Whole People, Whole Planet.”

Customers that enter Whole Food’s doors are looking for the highest quality, least processed, most flavorful and naturally preserved foods. Whole Foods claims that “Food in its purest state is the best tasting and most nutritious food available.” One journalist captures the essence of Whole Foods’ mission based on her own experience: Counters groan with creamy hunks of artisanal cheese. Medjool dates beckon amid rows of exotic fruit. Savory
breads rest near fruit-drenched pastries, and prepared dishes like sesame-encrusted tuna rival what’s sold in fine restaurants. In keeping with the company’s positioning, most of the store’s goods carry labels proclaiming “organic,” “100% natural,” and “contains no additives.” Staff people smile, happy to suggest wines that go with a particular cheese, or pause to debate the virtues of peanut butter maltballs. And it’s all done against a backdrop of eyepleasing earth-toned hues and soft lighting. This is grocery shopping? Well, not as most people know it. Whole Foods Market has cultivated its mystique with shoppers…by being anything but a regular supermarket chain. Whole Foods is, well, special.

The Whole Foods Web site reinforces the company’s positioning. The site offers up recipes for healthy and gourmet eating, such as “Sweet Potato Pancakes with Creamy Dill Sauce,” “Baked Basmati & Currant Stuffed Trout,” and “Beginner’s Tips for Tofu, Tempeh, and Other Soy Foods.”
One aspect of Whole Foods’ strategy that allows it to deliver products that foodies love might seem like a step back in time in the supply-chain driven grocery industry. The bigger chains are centralized, sourcing their products from all over the world in identical batches through various distribution centers. But Whole Foods uses a more local approach. Each geographic division, headed by its own president, handles its own store network.
Thus, in addition to gathering some foods globally, Whole Foods obtains a significant portion of its goods locally, often from small, uniquely dedicated food artisans. The company backs its talk with action on this issue. Its Local Producer Loan Program doles out $10 million annually in long-term, low-interest loans to local suppliers.

Whole Foods customers appreciate the fact that the store’s quality commitment reaches far beyond what’s on its shelves. In its “Declaration of Interdependence,” the company recognizes that living up to its “Whole Foods, Whole People, Whole Planet” motto means doing more than simply selling food. It means caring about the well-being and quality of life of everyone associated with the business, from customers and employees, to suppliers, to the broader communities in which it operates.

Nowhere is this more evident than in the way that Whole Foods treats employees. For 11 consecutive years, Whole Foods has been listed among Fortune magazine’s “Top 100 Companies to Work for in America.” Ranked as high as fifth, it is one of only 14 companies ranked every year since the list’s inception. Said Whole Foods CEO and co-founder, John Mackey: “To be among only 14 companies in the nation to be named as one of the Best Companies to Work For since the listing began is an amazing achievement and a validation that we are honoring our core value of ‘Supporting Team
Member Excellence and Happiness’ by creating an empowering work environment.” “Empowering work environment,” “self-directed teams,” and “self-responsibility”—all sound like corporate catch phrases that get tossed around by management without permeating the culture. But at Whole Foods, employees believe in these pillars of the company’s mission. In fact, two-thirds of Fortune’s ranking is based on survey responses from randomly selected employees. Just ask Shateema Dillard, who after two years as an employee is a supervisor and proud owner of two stock option grants. Even though these grants are worth less than $200, Dillard feels “well-paid and confident that opportunities for growth are phenomenal.”
Whole Foods is one of a shrinking number of companies that still pay 100 percent of their employees’ health-care premiums. It also ranks very high on the diversity of its employee team. Out of a sense of teamwork and fairness, it caps the salaries of its highest-paid team members at 19 times the average total compensation of all full-time team members in the company.

Whole Planet

“We believe companies, like individuals, must assume their share of responsibility as tenants of Planet Earth,” professes the company’s value statement. While this might seem simple, the extensiveness of Whole Foods’ environmental program illustrates just how complex a genuine “Earth first” philosophy can be.

For starters, Whole Foods actively supports organic farming on a global basis. This, it believes, is the best way to promote sustainable agriculture and protect both the environment and farm workers. This policy supports Whole Foods’ core product offering, but it’s just the tip of the company’s sustainability iceberg. In January of 2006, Whole Foods became the first Fortune 500 company to offset 100 percent of its electricity use with the purchase of wind energy credits. The credits cover its stores, bakehouses, distributions centers, offices, and every other facility. Beyond energy conservation, Whole Foods has committed to completely eliminating disposable plastic grocery bags, not only conserving resources but also reducing nonbiodegradable wastes. No other U.S. grocer has made this commitment.

Such efforts represents a tremendous corporate-wide commitment to environmental protection. However, the Whole Planet culture reaches right down to the store level. Each and every store has a Green Mission Team, a task force comprised of team members who meet often to improve environmental actions for their stores. This has led many Whole Foods stores to serve as collection points for plastic bag recycling. Most stores also participate in composting programs for food waste and compostable paper goods. One store in Berkley, California, even gets most of its electrical power from roof-top solar panels. Under the Whole Planet mantra, Whole Foods also supports the local communities in which it operates. It believes that local efforts will create healthier and more productive societies at the micro level, resulting in less need to ship products and waste long distances. This, in turn, lowers pollution and carbon emissions. Whole Foods supports food banks, sponsors neighborhood events, and even provides financial support for employees doing voluntary community service. Perhaps most telling of Whole Foods community commitment: It donates 5 percent of its aftertax profits to not-for-profit organizations.

So, Whole Foods can’t compete directly with the Wal-Marts of the world. It can’t match Wal-Mart’s massive economies of scale,
incredible volume purchasing power, ultraefficient logistics, wide selection, and hard-to-beat prices. But then again, it doesn’t even try. Instead, it targets customers that Wal-Mart can’t serve, offering them value that Wal-Mart can’t deliver. And while Whole Foods’ future is not without challenges, it has found its own very profitable place in the world by positioning away from the grocery behemoths. Says Whole Foods chief executive, “Not everyone is concerned with getting mediocre food at the lowest price.”

Each element of the three-part philosophy underlying the Whole Foods strategy just happens to appeal strongly to a carefully targeted segment of consumers. Whole Foods is not for everyone— intentionally. Whole Foods customers are affluent, liberal, educated people living in university towns such as Austin, Texas, Boulder, Colorado, and Ann Arbor, Michigan. Their median annual household income exceeds the U.S. average by almost $8,000. Whole Foods customers live a health-conscious lifestyle, care about the food they eat, and worry about the environment. They tend to be social do-gooders who abhor soulless corporate greed. Whole Foods doesn’t really need to compete with mass merchandisers such as Wal-Mart for these customers. In fact, a Whole Foods customer is more likely to boycott the local WalMart than to shop at it. But something beyond great food, environmental conscience, and human rights draws these people to Whole Foods. A store visit is more than just a shopping trip—it’s an experience. And the experience is anything but what you’d find at Kroger. “We create store environments that are inviting, fun, unique, informal, comfortable, attractive, nurturing, and educational,” the company claims. “We want our stores to become community meeting places where our customers come to join their friends and to make new ones.” Whole Foods’ concern for customers runs deep. “We go to extraordinary lengths to satisfy and delight our customers,” says a company spokesperson. “We want to meet or exceed their expectations on every shopping trip.”

Questions for Discussion

1. Define Whole Foods’ “product.” How does it deliver value to customers? Organic food are becoming very popular. Many chains, including Wal-Mart, have begun offering and expanding their selection of organics. Does this pose a competitive threat to Whole Foods?
2. With respect to Whole Foods’ targeting and positioning strategies, what challenges will the company face in the future as it continues to grow and expand?
3. In California, Whole Foods is commonly known as “Whole Paycheck.” While the firm has clearly positioned itself away from pricing issues, can it avoid this element of the marketing mix forever? Why or why not?
4. 5. What other trends in the future of retailing do you think will have an impact on Whole Foods?

Sources: David Kesmodel, “Whole Foods Net Falls,” Wall Street Journal, May 14, 2008, p. B5; Staff writer, “The Fast 50 Companies,” Fast Company, March, 2008, p. 111; Diane Brady, “Eating Too Fast at Whole Foods,” BusinessWeek, October 24, 2005, p. 82; Samantha Thompson Smith, “Grocer’s Success Seems Entirely Natural,” The News & Observer, May 21, 2004, p. D1; Marianne Wilson, “Retail as Theater, Naturally,” Chain Store Age, May 25, 2005, p. 182; Carl Gutierrez, “Court Frees Whole Foods To Swallow Wild Oats,” Forbes, August 23, 2007, accessed online at www.forbes.com; also see www.wholefoodsmarket.com.

In early 2004, as Burger King’s CEO Brad Blum reviewed the company’s 2003 outcomes, he decided once again that he had to do something to spice up BK’s bland performance. Industry leader McDonald’s had just reported a 9 percent sales jump in 2003 to a total of $22.1 billion while number-two BK’s U.S. sales had slipped about five percent to $7.9 billion. Further, number-three Wendy’s sales had spiked 11 percent to $7.4 billion, putting it in a position to overtake BK.

Blum surprised the fast-food industry by abruptly firing the firm’s advertising agency, Young & Rubicam (Y&R) and awarding its global creative account to a small, Miami-based, upstart firm Crispin Porter + Bogusky (Crispin). The switch marked the fifth time in four years that BK had moved its account! Ad agency Y&R had gotten the $350 million BK account only 10 months earlier. To help revive BK’s sales, it had developed a campaign with the theme “The Fire’s Ready,” which focused on BK’s flame-broiled cooking method versus frying. However, observers found the message to be flat and uninspiring, and the declining sales sealed Y&R’s fate. With the move to Crispin, there was no shortage of speculation that the fickle Burger King would soon move again. Many saw BK as a bad client, impossible to work for. Others predicted that the “win” of this account would ruin Crispin’s quirky culture. But in announcing the Crispin selection, Blum indicated he had challenged the firm to develop “groundbreaking, next-level, results-oriented, and innovative advertising that strongly connects with our core customers.” BK automatically became the small firm’s largest client but Crispin was not without an impressive track record. The creative shop was known for its offbeat, unorthodox, and even irreverent promotions. Because its clients often had little money for advertising, Crispin found inexpensive ways to gain attention, veering away from the traditional mass media.

Crispin had produced award-winning, low-budget campaigns for BMW’s Mini Cooper, IKEA furniture, Sunglass Hut, and Virgin Atlantic Airways, forging a reputation as an out-of-thebox, results-oriented agency. Along the way, Crispin developed some loose “rules.” Among them were:

• zero in on the product
• kick the TV commercial habit
• find the sweet spot (the overlap between product characteristics and customer needs) • surprise = buzz = exposure
• don’t be timid
• think of advertising as a product rather than a service.

It was these rules that guided Crispin’s work for BK. Within a month of getting the burger giant’s account, Crispin recommended going back to the firm’s “Have It Your Way” tagline, developed by BK’s second advertising agency, BBDO, way back in 1974. Crispin argued that it could take that old phrase and make it relevant to today’s customers. Although Crispin’s initial pitch may have initially seemed “same-old,” it was anything but. Uncharacteristic of its past campaigns, Crispin kicked off the new BK campaign with TV commercials. In a series of off-beat ads that were a takeoff on the comedy series, The Office, office workers competed and compared their “made my way” BK burgers, reinforcing the message that each customer could have a custom-made burger—no matter how unusual it might be.

A Viral Turnaround

Largely because of years of poor performance, tension had been mounting between Burger King’s franchisees and the corporation. Initially, the new direction of its ad campaigns didn’t help. Franchisees hated the viral Web campaigns, as they did an earlier Crispin campaign featuring an eerie bobblehead-looking King with a gargantuan ceramic head.

But at Burger King’s 2006 annual franchisee convention, the feeling in the air was “long live the king.” CEO Blum debuted a new Crispin ad entitled, “Manthem.” A parody of the Helen Reddy Song, “I Am Woman,” the spot was yet another example of BK’s strategy to unapologetically embrace the young, male, fast-food “super fan.” “Manthem’s” lyrics spurned “chick food” and gleefully exalted the meat, cheese, and more meat and cheese combos that turn “innies into outies,” all the while showing guys burning their briefs and pushing a minivan off a bridge. After openly revolting at the convention the year before, BK’s restaurant operators rose to their feet in a thunderous ovation, demanding an encore. They now embraced the kind of uncomfortably edgy advertising that they had rejected not so long before. Why this sudden change of heart?

Perhaps it was because Burger King was on the verge of a public offering. Or maybe it was because sales and profits go a long way in healing wounds. “I feel much better this year than I have in the last three, four, or five years,” said Mahendra Nath, owner operator of 90 stores in the upper Midwest and Florida.

With sales up multiple years in a row, another franchisee, Alex Salgueiro, said, “I think our competitors are scared of the King … they should be. They say, ‘What’s with the King?’ and my answer is ‘It’s better than clowns.’”

With BK’s fortunes apparently changing, franchisees were much less likely to question the irreverent Crispin promotional tactics, whether they liked them or not. And why would they? With the young male demographic providing nearly half of all Burger King visits, Mr. Salguiero said it best: “All opinions boil down to traffic and sales. Once that happens, everybody has to shut up with their opinion. We have a very old franchisee base at this point and some of us don’t understand our customers. We have a lot of gray hair.”

The creative ads have continued to flow, including the humorous series to promote the Western Whopper. The spots, based on the tagline, “Bring out your inner cowboy,” featured people from all walks of life developing huge handlebar mustaches after eating Burger King fare. The ads were accompanied by a link to www.petmoustache.com, where people could register, upload a photo, and design a custom mustache. The mustache would
then take on a life of its own. “It sends you e-mails that say, ‘Hey, I miss you and why haven’t you waxed me?’ If you neglect it, it grows willy-nilly and wild,” explained Rob Reilly, a creative director for Crispin. But the most recent BK/Crispin promotional tactic took things to a whole new level. For the 50th anniversary of the Whopper, Crispin created the “Whopper Freakout” campaign. In doing so, Crispin did something it had never done before. Mr. Reilly explained the reasoning behind what can only be described as Whopper deprivation: If you really want to prove [that the Whopper is still
America’s favorite burger] put your money where your mouth is and let’s take it off the menu and film natural reactions from people. We knew technically we could pull it off, but this is really a social experiment, that’s the new ground we’re breaking, using a social experiment as marketing. There’s no fake dialogue, no fake customers. We were really testing this: If you deprive people of a thing they love, even down to a hamburger, will they react with a thing that’s visceral?

Visceral is truly what they got. The eight-minute film is taken from the perspective of hidden cameras in a real Burger King restaurant. After being told by employees that the Whopper had been discontinued, customers revolt in a way that only truly distraught brand-loyal fans could. In the movie, customers scoff, twitch, roll their heads, demand to speak to managers, and even yell. Some of the more wistful subjects give folksy anecdotes about family bonding and passage into manhood, all based on the Whopper. Crispin plugged the film’s Web site with 30-second spot ads and then let the viral marketing forces take over. The results were nothing short of astounding. The microsite received more than one million visits at an average logged time of 8:33. But what really stood out was that visitors watched the video in its entirety four million times, meaning that most visitors watched several times. Multiple parodies of the ad emerged on the Web, including one based on an animated Michael Jackson and an R-rated version called “Ghetto Freakout” (which racked up more than three million views on YouTube). The campaign won a 2008 Creativity magazine award. And IAG research found recall of the campaign to be the highest of any it had seen in its six-year history.

Crispin planned an entire package of promotions around the new-old theme, including everything from in-store signage to messages on cups.
Although The Office ads were unusual and catchy, they were also mainstream media. However, the TV campaign created an environment for the real Crispin approach to emerge. To promote BK’s TenderCrisp chicken, Crispin launched a microsite, www.subservientchicken.com. Among other things, the site featured a man dressed in a chicken suit who would respond by performing any commands that visitors typed in to a text box. The only indication that the site was sponsored by Burger King was a small icon marked, “BK Tendercrisp.” When Crispin launched the site, it told only 20 people – all of whom were friends of people who worked at the agency. Within the first 10 days, 20 million people visited the site, with the average visitor spending more than seven minutes.

As a follow-up to the Subservient Chicken promotion, Crispin created a campaign to launch a new BK product, Chicken Fries. The promotion was based on a faux heavy metal band called Coq Roq (the lead singer’s name was Fowl Mouth). The whole idea was to create the charade of a real band, complete with songs, videos, cell phone ring tones, and promotional merchandise. Crispin targeted this campaign squarely at what it perceived to be the main BK target market—young men. Whatever those young men thought of Coq Roq, it led them to buy more than 100 million orders of Chicken Fries in the first four weeks of the new product launch.

Crispin clearly demonstrated with both the Subservient Chicken and Cog Roq campaigns that it was a master at viral marketing—using unusual methods to get attention and to generate buzz and word-of-mouth. Despite the success of these campaigns in producing lots of Web site hits, many analysts wondered if they would turn around BK’s sliding market share. There was also speculation as to whether or not Crispin could continue to produce ideas that would keep BK strong in the fastfood fights.

But all these measures amount to very little if the overall objective is not achieved. On that score, Crispin has delivered in spades for the flame-broiler. Burger King is in its fourth consecutive year of same-store sales growth. Not only is it growing, but BK is currently delivering a solid thrashing to McDonald’s and Wendy’s, who are blaming the recession, housing crisis, and fuel prices for sluggish growth. BK 2007 systemwide revenue reached $13.2 billion, up nearly 60 percent since CP+B assumed the account. Burger King is also showing healthy profits, rising stock prices, and strong international growth.

Many analysts are giving Crispin’s promotional efforts a lion’s share of the credit for Burger King’s success. “They’re doing a super job on the advertising front,” said UBS analyst David Palmer. “They’re clearly connecting with the super fan that is the young, hungry male.”Despite the previous speculation that CP+B would fail, the firm is now into its fifth year as Burger King’s promotional agency, with no sign of being shown the
door. As long as Crispin continues to hit home runs with its creative promotions, its franchisees, shareholders, and customers alike will continue to shout, “Long live the King.”

Coca-Cola: Another Advertising Hit

When you think of Coca-Cola, want comes to mind? It wouldn’t be surprising if you thought first of Coke ads. In the history of advertising, perhaps no other company has had such a strong and continuous impact on society through advertising. Not only have Coke’s ads been successful at selling its soft drinks, but decade after decade Coca-Cola’s ads and campaigns have influenced our very culture by making their way into the hearts and minds of consumers.

In the 1920s, Coca-Cola shifted its advertising strategy, focusing for the first time on creating brand loyalty. It began advertising the soft drink as fun and refreshing. Coke’s 1929 campaign slogan was, “The Pause that Refreshes.” To this day, that slogan remains number two on Advertising Age’s top 100 slogans of all time. How about those famous Coca-Cola Santa Clause print ads?

Most people have probably seen an example of such. What most people don’t realize is that our modern-day vision of Santa as a jolly old man with a white beard in a red suit and hat is to some extent a result of those Coke ads that began emerging in popular magazines in 1931. Before that, the world’s image of Santa was fragmented, with physical portrayals of the legendary holiday visitor ranging from a pixie to a leprechaun to even a frightening gnome! But Coca-Cola’s long-running series of ads solidified what was becoming a common U.S. image, making our beloved Santa Clause recognizable around the world.

Those Coca-Cola campaigns were probably a little before your time. But what about Coca-Cola’s 1971 “Hilltop” campaign. Perhaps you remember its lyrics, “I’d like to teach the world to sing, in perfect harmony. I’d like to buy the world a Coke, and keep it company.” The song was sung by a choir of young people from all over the world, perched high on a hilltop, each holding an icon hourglass-shaped bottle of Coke. Within months, Coca-Cola and its bottlers received more than a hundred thousand letters about the ad. The ad actually received requests at radio stations; so many in fact, that a version of the song was released as a pop-music single. The jingle’s tagline, “It’s the real thing,” served as the foundation for Coke ads for years.
Still too long ago for you? Maybe you’ve heard of Coke’s ad showing a bruised and battered Mean Joe Green tossing his shirt to a young fan after the boy shares his Coke with the pro football player. The ad appears consistently at the top of “Best Super Bowl Ads” lists. Or how about “Coke is it?” “Can’t Beat the Feeling?” Certainly you would remember the jingle made famous in the 1990s, “Always Coca-Cola.” And who doesn’t make some association between the sweet, dark, bubbly beverage and polar bears? Innovative animation technology put those lovable creatures in only a handful of ads, but they are forever etched in the memories of consumers everywhere.

These are only some highlights of Coca-Cola’s long advertising history, stretching back to the company’s origin in 1886. With so many hits and such a huge impact on consumers, it’s hard to imagine that the beverage giant ever gets in to an advertising rut. But as the new millennium began to unfold, many considered that Coke had lost its advertising sizzle. The company was struggling to create ads that resonated with younger folks while at the same time appealing to older consumers. And the company’s ads we’re routinely out-pointed by those of rival Pepsi. Coca-Cola needed some new advertising fizz.

Where does a company turn when it wants to make a big ad splash? For Coca-Cola, its thoughts turned to the marquee of all advertising events—the Super Bowl. The company had certainly had success with the ad venue before. But scoring big with a Super Bowl ad isn’t guaranteed. In fact, many cynics view the ad venue as a waste of money. One team of researchers found that average brand recall one week after the 2008 Super Bowl was an unimpressive 7 percent. Recall for specific commercials and the brand represented therein was even worse at only 4 percent. That doesn’t speak very highly for a 30-second ad that cost $2.7 million dollars to air, and perhaps even more to produce. The Super Bowl has its share of critics who think it is far too costly for a single event, regardless of how many people tune in. But for all the misses, there have been plenty of hits. In 1999, HotJobs.com blew half of its $4 million advertising budget for the year on a single 30-second spot. The result? Traffic on its Web site immediately shot up 120 percent, choking its network and server system. Monster.com saw similar results that same year. And hundreds of advertisers throughout the Super Bowls’ history have been very satisfied with the results of their ads.

For its 2008 campaign debut, Coca-Cola was confident that the Super Bowl was just right for its broad target market. It assigned Wieden + Kennedy the task of crafting a sixty second commercial. Hal Curtis, one of the top creative directors for the agency, took charge of the project. Two years before, Mr. Curtis had come up with an idea for an ad while working on a different campaign. He thought the idea was perfect for Coke.

By now, you’ve probably seen the ad. Titled “It’s Mine,” the spot is set at Macy’s Thanksgiving Day Parade in New York City, a parade famous for its blimp-sized balloons marched through the Central Park area on long tethers. The Coke ad focuses on two particular characters, Stewie Griffin from Fox’s Family Guy and the classic cartoon character Underdog. Both balloons sidle up to a huge Coke balloon. The two characters begin fighting over the Coke, bouncing around in a kind of slow-motion ballet against the New York skyline, bumping up against buildings. As the scuffle progresses above the streets, moving higher and higher, New Yorkers look on from hot dog stands, cabs, and even inside buildings. At the story’s climactic moment, a giant Charlie Brown balloon emerges from nowhere, swooping in and claiming the giant Coke, leaving Stewie and Underdog empty-handed.

The spot cost Coca-Cola $2.3 million to make and more than double that to air. It was also the most difficult ad that Mr. Curtis had ever produced. For starters, he encountered mounds of red tape in negotiating the rights to use the well-known cartoon characters in the ad. Choreographing and shooting footage of giant balloons in one of the world’s biggest cities brought its own set of challenges. At one point, bad whether forced the project indoors and all the way across the country to the Paramount studios on the west coast. The post-shoot animation was considered yet a third shoot for the ad. It all added up to four months of production and postproduction. When asked about the challenge of simultaneously reaching consumers of all ages with an advertisement, Mr. Curtis responded, “A good story appeals to everyone. And a story that is well told appeals to young and old. Certainly, there are times where we want to skew a message younger, but for this spot that wasn’t part of the thinking.” Pio Schunker, Coca-Cola’s head of creative excellence, added, “We are at our best when we speak to universal values that appeal to everyone rather than try and skew it to specific segments.”

According to Mr. Schunker, the universal value referred to here was that “Good really wins in the end,” a point that he thought was made strongly with the contrast of Charlie Brown over a character like Stewie. In fact, Curtis originally pitched the ad with an ending that had the Coke bottle getting punctured on a flagpole and neither balloon getting it. But Coca-Cola wanted something that was emotionally more positive, something that expressed optimism. “I felt it was such a downer of an ending to have these characters chase the Coke and not get it,” stated Mr. Schunker. It was Curtis’s 12-year-old son, Will, who gave him the idea for what became the ending when he said, “Why can’t another balloon get it?” For Hal Curtis, the next logical step was Charlie Brown. Everyone was happy with the end result. Both Coca-Cola and Wieden + Kennedy felt that the ad communicated the desired message perfectly while bringing out the kind of warm emotions that had emanated from Coca-Cola ads for decades.

The hunches of these ad veterans proved correct. The day after the game, Coke’s balloon ad had 350 blog posts while Pepsi’s ads had only 250. A week after that, the Charlie Brown ad was the most talked about ad online. SuperBowl-Ads.com had it rated as the top ad of the dozens that aired on the 2008 gridiron matchup. And later in the year, the spot won a Silver Lion at the Cannes Lions festival, the most prestigious award event in the industry.

There’s no doubt that the “It’s Mine” ad achieved more buzz and more sizzle than Coca-Cola’s ads in recent history. But that’s only a first step to advertising success. In the end, the only result that really matters is whether or not the ad has the intended effect on consumers. Although the impact of Coca-Cola’s “It’s Mine” ad or its history of other outstanding ads on actual beverage sales may never be known, one broader conclusion is clear. Every year, Interbrand publishes the premier ranking of global brands based on monetary value. And every year since Interbrand began publishing the list in 2001, Coca-Cola has held the top spot. At $65 billion, Coca-Cola is the world’s most valuable brand. Thus, it’s pretty easy to make the connection between Coca-Cola’s brand value and more than 100 years of stellar advertising.

As the big-box retailers get bigger and bigger, they also grow more complex. Take companies such as Wal-Mart or Target. How can a vendor like P&G ever fully understand such a customer? These complex organizations have so many arms and legs that it becomes nearly impossible to get a full and firm grasp on their operations and needs.

To deal with such customer complexities, P&G organizes its sales representatives into customer business development teams. Rather than assigning reps to specific geographic regions or products, it assigns each CBD team to a P&G customer. For the company’s biggest customer, Wal-Mart (which tallies a massive 20 percent of all P&G sales) the CBD team consists of some 350 employees. For a customer like Family Dollar, the nation’s second largest dollar store chain, the CBD team has only about 30 employees.

Regardless of the team’s size, the strength of the CBD concept derives from the fact that each team, in and of itself, is a complete customer-service unit, containing at least one support specialist for every important business function. In addition to a general CBD manager and several sales account executives (each responsible for a specific category of P&G products), each CBD team includes a marketing strategy, operations, information systems, logistics, finance, and human resources specialist. This “multifunctional” structure enables each team to meet the multiple and vast needs of its customer, whether the needs revolve around those of a chief finance officer or an entire IT department. A real strength of the CBD teams is that team members function as a collaborative whole, rather than as individuals performing their own tasks in isolation. Team members share information, organizational capabilities, and technologies. “I have all the resources I need right here,” says Amy Fuschino, a HealthCare and Cosmetics account executive. “If I need to, I can go right

For starters, P&G’s CBD structure is broader and more comprehensive, making it more multifunctional than similar team structures employed by other companies. But perhaps more important, P&G’s structure is designed to accomplish four key objectives. So important are these objectives that they are referred to internally as the “core work” of CBD. These four objectives are:

• Align Strategy—create opportunities for both P&G and the customer to benefit by collaborating in strategy development.
• Create Demand—to build profitable sales volume for P&G and the customer through consumer value and shopper satisfaction.
• Optimize Supply—to maximize the efficiency of the supply chain from P&G to the point of purchase to optimize cost and responsiveness.
• Enable the Organization—to develop capabilities to maximize business results by creating the capacity for frequent breakthrough.
• More than just corporate catch-phrases jotted down in an employee handbook, for CBD employees, these are words to live by.

P&G trains sales employees in methods of achieving each objective and evaluates their effectiveness in meeting the objectives. In fact, the CBD concept came about through the recognition that, in order to develop true win-win relationships with each customer, P&G would need to accomplish the first objective. According to Bill Warren, a CBD senior account executive, “The true competitive advantage is achieved by taking a multi-functional approach from basic selling to strategic customer collaboration!”

Strategic collaboration starts with annual joint business planning. Both the P&G team and the customer come to the table focused on the most important thing: how can each best provide value for the final consumer? The team and customer give much attention during this planning phase to how products can best be presented and placed in the retail setting. This is because P&G and its customers know that the end consumer assesses value within the first three to seven seconds of seeing that product on the shelf. At P&G, this is known as “winning the first moment of truth.” If customers quickly perceive that a product will meet their needs, they will likely purchase it.

It seems that when it comes to personal selling, the term “win-win” gets thrown around so much that it has become a cliché. But at Procter & Gamble, the sales concept that the company benefits only as much as the customer benefits is a way of life. Since William Procter and James Gamble formed a family-operated soap and candle company in 1837, P&G has understood that if the customer doesn’t do well, neither will the company.

That’s why even though P&G boasts a massive sales force of more than 12,000 employees worldwide, P&G people rarely utter the term “sales.” At P&G, it’s called “customer business development,” or CBD. The title alone pretty much says it all. Rather than just selling detergent or toothpaste, P&G’s philosophy is to grow its own business by growing the business of its customers. In this case, customers are the thousands of retailers and wholesalers that distribute P&G’s brands throughout the world. P&G isn’t just a supplier. It’s a strategic business partner with its customers. “We depend on them as much as they depend on us,” says Jeff Weedman, a CBD manager down the hall and talk with someone in marketing about doing some kind of promotional deal. It’s that simple.”

But the multifunctional nature of the CBD team also means that collaboration extends far beyond internal interactions. Each time a CBD team member contacts the customer, he or she represents the entire team. For example, if during a customer call a CBD account executive receives a question about a promotional, logistical, or financial matter, the account executive acts as the liaison with the appropriate CBD specialist. So, although not each CBD member has specialized knowledge in every area, the CBD team as a unit does.

Competitors have attempted to implement some aspects of P&G’s multifunctional approach. However, P&G pioneered the CBD structure. And it has built in some unique characteristics that have allowed it to leverage more power from its team structure than its rivals can.

Communicating Customer Value: Personal Selling and Sales Promotion

But P&G is so committed to the principle of developing the customer’s business as a means of developing its own, it is open to the possibility that the best way to serve the customer may be through a competitors product. The CBD team’s primary goal is to help the customer win in each product category. Sometimes, analysis shows that the best solution for the customer is “the other guy’s product.” For P&G, that’s okay. P&G knows that creating the best situation for the retailer ultimately brings in more customer traffic, which in turn will likely result in increased sales for other P&G products in the same category. Because most of P&G’s brands are market leaders, it stands to benefit more from the increased traffic than competitors. Again, it’s a win-win situation. This type of honesty also helps to build trust and strengthen the company/customer relationship. The collaborative efforts between P&G and each of its customers not only involve planning and the sharing of information. They may also involve cooperative efforts to share the costs of different activities. “We’ll help customers run these commercials or do those merchandising events, but there has to be a return-oninvestment,” explains Amy Fuschino. “Maybe it’s helping us with a new distribution or increasing space for fabric care. We’re very willing if the effort creates value for us in addition to creating value for the customer and the consumer.”

An example of such a joint effort is the recent rollout of Prism. P&G partnered with Wal-Mart to implement this system of infrared sensors that counts the number of times shoppers are exposed to product displays, banners, and video monitors. The goal with Prism is to improve the effectiveness of in-store marketing, making consumers more aware of the value provided by P&G’s products.

If the CBD team can effectively accomplish the first objective of aligning strategy and collaborating on strategic development, accomplishing the other three objectives will follow more easily. For example, if strategic planning leads to winning the first moment of truth, not only does the consumer benefit, but both the retailer and P&G achieve higher revenues and profits as well. Through proper strategic planning, it is also more likely that both P&G and the customer will create greater efficiencies in the supply chain.

As a result of collaborating with customers, P&G receives as much or more than it gives. Among other things, P&G receives information that helps in achieving the fourth CBD objective, enabling the organization to achieve innovation. Where the research and development process is concerned, this means creating better products. This is one reason why, at the 2007 Product of the Year awards held in London, P&G cleaned up, winning 10 of the 32 categories and taking home a special prize for “most innovative company.” P&G’s dominance in innovation is no one-time fluke. Gianni Ciserani, vice president and managing director of P&G UK & Ireland, claims that some of P&G’s strongest innovations are yet to come. “We have shared this portfolio with the key retailers and got strong collaboration on how we can drive these ideas forward.” In the five years leading up to 2008, P&G’s profits doubled, revenues nearly doubled, and stock price increased by more than 50 percent. Not only is P&G the world’s largest consumer products firm with $76 billion in revenues, it ranks 23rd among all U.S. companies in the most recent Fortune 500 ranking. P&G manages a whopping 23 brands that each bring in over $1 billion every year. Last year, Pampers sales exceeded $7 billion, a figure that would have placed the leading diaper brand all by itself as number 350 on Fortune’s prestigious list.

Many factors have contributed to P&G’s growth and success. But the role that CBD plays can’t be overestimated. And as P&G moves forward, Mr. Weedman’s words that “We depend on them as much as they depend on us” ring ever truer. As P&G’s megacustomers grow in size and power, developing P&G’s business means first developing its customers’ business. And the CBD sales organization lies at the heart of that effort.

StubHub: Ticket Scalping, A Respectable Endeavor?

As the rock band KISS returned to the United States for the final performances of its “Alive/35” tour in the summer of 2008, Roger felt like reliving some old memories. Just because he was in his 50s didn’t mean he was too old to rock. After all, he was an original KISS fan dating back to the 70s. It had been years since he had gone to a concert for any band. But on the day the KISS tickets went on sale, he grabbed a lawn chair and headed to his local Ticketmaster outlet to “camp out” in line. Roger knew that the terminal, located inside a large chain music store, wouldn’t open until 10 a.m. when tickets went on sale. He got to the store at 6 a.m. to find only three people ahead of him.

“Fantastic,” Roger thought. With so few people in front of him, getting good seats would be a snap. Maybe he would even score something close to the stage. By the time the three people in front of him had their tickets, it was 10:13. As the clerk typed away on the Ticketmaster computer terminal, Roger couldn’t believe what he heard. No tickets were available. The show at the Palms Resort in Las Vegas was sold out. Dejected, Roger turned to leave. As he made his way out the door, another customer said, “You can always try StubHub.” As the fellow KISS fan explained what StubHub was, it occurred to Roger that the world had become a very different place with respect to buying concert tickets. Indeed, in this Internet age, buying tickets for live events has changed dramatically since Roger’s concert-going days.

Originators such as Ticketmaster now sell tickets online for everything from Broadway shows to sporting events. Increasingly, however, event tickets are resold through Web sites such as eBay, RazorGator, TicketsNow, Craigslist, and StubHub, the fastest growing company in the business. Various industry observers estimate that as many as 30 percent of all event tickets are resold. This secondary market for online sports and entertainment tickets has grown to billions of dollars in annual revenues.

And although prices are all over the map, tickets for sold-out shows of hot events routinely sell for double or triple their face value. In some cases, the markup is astronomical. The nationwide average price for kids to see Miley Cyrus was $249, up from about $50 for the highest face value seat. A pair of tickets to see Bruce Springsteen at D.C.’s Verizon Center set some back as much as $2,000. Prices for a seat at Superbowl XLII in Phoenix, one of the hottest ticket resale events of all time, sold for as high as $13,000. And one UK Led Zeppelin fan with obviously far too much money on his hands paid over $160,000 for a pair of Led Zeppelin tickets, close enough to see a geriatric Robert Plant perspire. Extreme cases? Yes. But not uncommon. When most people think of buying a ticket from a reseller, they probably envision a seedy scalper standing in the shadows near an event venue. But scalping is moving mainstream. While the Internet and other technologies have allowed professional ticket agents to purchase event tickets in larger numbers, anyone with a computer and broadband connection can instantly become a scalper. And regular folks, even fans, are routinely doing so. “Because we allowed people to buy four [tickets], if they only need two they put the other two up for sale,” said Dave Holmes, manager for Coldplay. This dynamic, occurring for events across the board, has dramatically increased the number of ticket resellers.

Stubhub Enters The Game

With the ticket resale market booming, StubHub started operations in 2000 as Liquid Seats. It all started with an idea by two first-year students at the Stanford Graduate School of Business. Eric Baker and Jeff Fluhr had been observing the hysteria on the ticket resale market. In their opinion, the market was highly fragmented and rampant with fraud and distorted pricing. Two buyers sitting side-by-side at the same event might find they’d paid wildly different prices for essentially the same product. Even with heavy hitter eBay as the biggest ticket reseller at the time, Baker and Fluhr saw an opportunity to create a system that would bring buyers and sellers together in a more efficient manner.

They entered their proposal in a new-business plan competition. Fluhr was utterly convinced the concept would work—so much so that he withdrew the proposal from the competition and dropped out of school in order to launch the business. At a time when dot.coms were dropping like flies, this might have seemed like a very poor decision. But Fluhr ultimately became CEO of StubHub, the leader and fastest-growing company of a $10-billion-a-year industry. Home to over 300 employees, StubHub utilizes 20,000 square feet of prime office space in San Francisco’s pricey financial district, seven satellite offices, and two call centers. Even more telling is the company’s growth. In November of 2006, a little over six years after starting, StubHub sold its five millionth ticket. Just over one year later, it sold it’s 10 millionth. And six months after that in June of 2008, StubHub rewarded the buyer and seller of the 15 millionth ticket sold with a pair of $5,000 gift certificates for its Web site. In its first few years of operations, StubHub posted a staggering growth rate of more than 3,200 percent. According to comScore Networks, a firm that tracks Web traffic, StubHub.com is the leading site among more than a dozen competitors in the ticket-resale category.

StubHub’s model is showing that buying a ticket on the aftermarket doesn’t have to mean paying a huge price premium. Sharing his own experience, a New York Times writer provides his own StubHub experience: To test the system I started with the New York Yankees. A series with the Seattle Mariners was coming up, just before the Yankees left town for a long road trip.

From the beginning, Baker and Fluhr set out to provide better options for both buyers and sellers by making StubHub different. Like eBay, StubHub has no ticket inventory of its own, reducing its risk. It simply provides the venue that gives buyers and sellers the opportunity to come together. But it’s the differences, perhaps, that have allowed StubHub to achieve such success in such a short period of time.

One of the first differences noticed by buyers and sellers is StubHub’s ticket-listing procedure. Sellers can list tickets by auction or at a fixed price, a price that declines as the event gets closer. Whereas some sites charge fees just to list tickets, StubHub lists them for free. Thus, initially, the seller has no risk whatsoever. StubHub’s system is simpler than most, splitting the fee burden between buyer and seller. It charges sellers a 15-percent commission and buyers a 10-percent fee. StubHub’s Web site structure also creates a marketplace that comes closer to pure competition than any other reseller’s Web site. All sellers are equal on StubHub, as ticket listings are identical in appearance and seller identify is kept anonymous. StubHub even holds the shipping method constant, via FedEx. This makes the purchase process much more transparent for buyers. They can browse tickets by event, venue, and section. Comparison shopping is very easy as shoppers can simultaneously view different pairs of tickets in the same section, even in the same row.

Although prices still vary, this system makes tickets more of a commodity and allows market forces to narrow the gap considerably from one seller to another. In fact, while tickets often sell for high prices, this reselling model can also have the effect of pushing ticket prices down below face value. Many experts believe that the emergence of Internet resellers such as StubHub is having an equalizing effect, often resulting in fair prices determined by market forces. Unlike eBay, StubHub provides around the clock customer service via a toll-free number. But perhaps the biggest and most important difference between StubHub and competitors is the company’s 100-percent FanProtect guarantee. Initially, it might seem more risky buying from a seller whose identity is unknown. But StubHub puts the burden of responsibility on the seller, remaining involved after the purchase where competing sites bow out. Buyers aren’t charged until they confirm receipt of the tickets. “If you open the package and it contains two squares of toilet paper instead of the tickets,” Baker explains, “then we debit the seller’s credit card for the amount of the purchase.” StubHub will also revoke site privileges for fraudulent or unreliable sellers. In contrast, the eBay system is largely self-policing and does not monitor the shipment or verification of the purchased items.

When StubHub was formed, it targeted professional ticket brokers and ordinary consumers. In examining individuals as sellers, Baker and Fluhr capitalized on the underexploited assets of sport team season ticket holders. “If you have season tickets to the Yankees, that’s 81 games,” Mr. Baker said. “Unless you’re unemployed or especially passionate, there’s no way you’re going to attend every game.” StubHub entered the equation, not only giving ticket holders a way to recoup some of their investment, but allowing them to have complete control over the process rather than selling to a ticket agent.

It quickly became apparent to StubHub’s founders that the benefits of season ticket holders selling off unused tickets extended to the sports franchises as well. Being able to sell unwanted tickets encourages season ticket holders to buy again. It also puts customers in seats that would otherwise go empty— customers who buy hot dogs, souvenirs, and programs. Thus, StubHub began entering into signed agreements with professional sports teams. The company has signed agreements with numerous NFL, NBA, and NHL teams to be there official secondary marketplace for season ticket holders. But most recently, StubHub scored a huge breakthrough deal by becoming the official online ticket reseller for Major League Baseball and its 30 teams. Given that an estimated $10 billion worth of baseball tickets are resold each year, this single move will likely bring tremendous growth to Stub Hub. “This is the final vindication for the secondary ticketing market,” StubHub spokesman Sean Pate said. “That really puts the final stamp of approval on StubHub.”

Revenues from sporting events account for more than half of all StubHub sales. So it’s not surprising that the company continues to pursue new partnerships with collegiate sports organizations and even media organizations, such as AOL, Sporting News, and CBS Sportsline. However, it has arranged similar contractual agreements with big-name performers such as Madonna, Coldplay, the Dixie Chicks, Justin Timberlake, Jessica Simpson, and country music’s rising star, Bobby Pinson.

Arrangements allow StubHub to offer exclusive event packages with a portion of the proceeds supporting charities designated by the performer.
The reselling of event tickets is here to stay. With the rise of safe and legal reseller Web sites and the repeal of long-standing antiscalping laws in many states, aftermarket ticket reselling continues to gain legitimacy.

There are numerous hands in the fastgrowing cookie jar that is the secondary ticket market. StubHub founder Eric Baker left the company and formed Viagogo, a European ticket reseller site that is entering the U.S. market. Even Ticketmaster—the longstanding dominant force in primary ticket sales—has jumped into the act. Not only has the ticket powerhouse turned to auctioning a certain portion of premium tickets to the highest bidders, but it has its own resale arm, TicketExchange. Although there is more than one channel to buy or sell, Stubhub’s future looks bright. The company’s model of entering would be scarce. I went to StubHub. Lots of tickets there, many priced stratospherically. I settled on two Main Box seats in Section 313, Row G. They were in the right-field corner, just one section above field level. The price was $35 each, or face price for a season ticketholder. This was
tremendous value for a sold-out game. I registered with StubHub, creating a user name and password, ordered the tickets, then sealed the deal by providing my credit card number. An e-mail message arrived soon after, confirming the order and informing me that StubHub was contacting the seller to arrange for shipment. My card would not be charged until the seller had confirmed to StubHub the time and method of delivery. A second e-mail message arrived a day later giving the delivery details. The tickets arrived on the Thursday before the game, and the seller was paid by StubHub on confirmation of delivery. On Saturday, under a clear, sunny sky, the Yankees were sending a steady stream of screaming line drives into the right-field corner.

Marketing: Building Direct Customer Relationships

Into partnerships with event producing organizations is establishing it as “the official” ticket reseller. In fact, in an “if you can’t beat ’em, join ’em,” move, rival reseller eBay bought StubHub last year for over $300 million, allowing it to continue to function as its own entity. At this point, there is no end in sight to Stubhub’s growth curve. Who knows, at some point, ticketseeking consumers may even think of StubHub before thinking of Ticketmaster.

Questions for Discussion

1. Conduct a brief analysis of the marketing environment and the forces shaping the development of StubHub.
2. Discuss StubHub’s business model. What general benefits does it afford to buyers and sellers? Which benefits are most important in terms of creating value for buyers and sellers?
3. Discuss StubHub as a new intermediary. What effects has this new type of intermediary had on the ticket industry?
4. Apply the text’s e-marketing domains framework to StubHub’s business model. How has each domain played a role in the company’s success?
5. What recommendations can you make for improving StubHub’s future growth and success?
6. What are the legal or ethical issues, if any, for ticketreselling Web sites?

Sources: Ethan Smith, “StubHub Enlisted in Resale of Madonna Concert Tickets,” Wall Street Journal, May 9, 2008, p. B6; Neil Best, “Want Super Bowl Tickets? Sell or Rent the House,” Newsday, January 25, 2008, p. A70; Joe Nocera, “Internet Puts a Sugarcoat on Scalping,” New York Times, January 19, 2008, p. C1; Amy Feldman, “Hot Tickets,” Fast Company, September 1, 2007, p. 44; “Ticket Reseller StubHub Hits a Home Run,” Reuters, August 2, 2007; William Grimes, “That Invisible Hand Guides the Game of Ticket Hunting,” New York Times, June 18, 2004, p. E1; Steve Stecklow, “Can’t Get No … Tickets?” Wall Street Journal, January 7, 2006, p. P1; Steve Stecklow, “StubHub’s Ticket to Ride,” Wall Street Journal, January 17, 2006, p. B1; and information from www.stubhub.com, accessed September 2008.

Bose: Competing by Being Truly Different

Recently, Forrester Research announced the results of its semiannual survey ranking consumer electronics and personal computer companies on consumer trust. Based on a poll of more than 4,700 customers as to their opinions of 22 of the bestknown consumer technology brands, the company drew this conclusion: “Americans’ trust in consumer technology companies is eroding.” Why is consumer trust important? Forrester vice president Ted Schadler answers that question this way: “Trust is a powerful way to measure a brand’s value and its ability to command a premium price or drive consumers into a higher-profit direct channel. A decline in trust causes brand erosion and pricedriven purchase decisions, which in turn correlates with low market growth.”

But despite the decline in trust for most technology companies, Forrester made another surprising finding. Consumer trust in the Bose Corporation is riding high. In fact, Bose far outscored all other companies in Forrester’s survey. That’s not bad, considering that it was the first time the company had
been included in the survey. Forrester points out that these results are no fluke, noting that Bose has 10 million regular users but more than 17 million consumers who aspire to use the brand (compared to 7 million for next highest Apple).

These high levels of consumer trust result from philosophies that have guided Bose for nearly 50 years. Most companies today focus heavily on building revenue, profits, and stock price. They try to outdo the competition by differentiating product lines with features and attributes that other companies do not have. While Bose doesn’t exactly ignore such factors, its true competitive advantage is rooted in the company’s unique corporate philosophy. Bose president Bob Maresca provides insights on that philosophy: “We are not in it strictly to make money,” he says. Pointing to the company’s focus on research and product innovation, he continues, “The business is almost a secondary consideration.”

You can’t understand Bose the company without taking a look at Bose the man. Amar Bose, the company’s founder and still its CEO, has been in charge from the start. In the 1950s, Mr. Bose was working on his third degree at the Massachusetts Institute of Technology. He had a keen interest in research and studied various areas of electrical engineering. He also had a strong interest in music. When he purchased his first hi-fi system—a model that he believed had the best specifications—he was very disappointed in the system’s ability to reproduce realistic sound. So he set out to find his own solution. Thus began a stream of research that would ultimately lead to the founding of the Bose Corporation in 1964. From those early days, Amar Bose worked around certain core principles that have guided the philosophy of the company. In conducting his first research on speakers and sound, he did something that has since been repeated time and time again at Bose. He ignored existing technologies and started entirely from scratch, something not very common in product development strategies.

In another departure from typical corporate strategies, Amar Bose plows all of the privately held company’s profits back into research. This practice reflects his avid love of research and his belief that it will produce the highest quality products. But he also does this because he can. Bose has been quoted many times saying, “if I worked for another company, I would have been fired a long time ago,” pointing to the fact that publicly held companies have long lists of constraints that don’t apply to his privately held company. For this reason, Bose has always vowed that he will never take the company public. “Going public for me would have been the equivalent of losing the company. My real interest is research—that’s the excitement—and I wouldn’t have been able to do long-term projects with Wall Street breathing down my neck.”

This commitment to research and development has led to the high level of trust that Bose customers have for the company. It also explains their almost cult-like loyalty. Customers know that the company cares more about their best interests—about making the best product—than about maximizing profits. But for a company not driven by the bottom line, Bose does just fine.

According to market information firm NPD Group, Bose leads the market in home speakers with a 12.6 percent share. And that
market share translates into financial performance. Although figures are tightly held by the private corporation, the most recent known estimate of company revenue was $1.8 billion for 2006. While that number doesn’t come close to the $88 billion that Sony reported last year, it does represent a 38 percent gain in just two years.

Groundbreaking Products

Look, I love your speaker but I cannot sell it because it makes me lose all my credibility as a salesman. I can’t explain to anyone why the 901 doesn’t have any woofers or tweeters. A man came in and saw the small size, and he started looking in the drawers for the speaker cabinets. I walked over to him, and he said, ‘Where are you hiding the woofer?’ I said to him, ‘There is no woofer.’ So he said, ‘You’re a liar,’ and he walked out. Bose eventually worked through the challenges of communicating the virtues of the 901 series to customers through innovative display and demonstration tactics. The product became so successful that Amar Bose now credits the 901 series for building the company.

The list of major speaker innovations at Bose is a long one. In 1975, the company introduced concert-like sound in the bookshelf-size 301 Direct/Reflecting speaker system. Fourteen years of research lead to the 1984 development of acoustic waveguide speaker technology, a technology today found in the award winning Wave radio, Wave music system, and Acoustic Wave music system. In 1986, the company again changed conventional thinking about the relationship between speaker size and sound.

The company that started so humbly now has a breadth of product lines beyond its core home audio line. Additional lines target a variety of applications that have captured Amar Bose’s creative attention over the years, including military, automotive, homebuilding/remodeling, aviation, and professional and commercial sound systems. It even has a division that markets testing equipment to research institutions, universities, medical device companies, and engineering companies worldwide. The following are just a few of the products that illustrate the innovative breakthroughs produced by the company. Speakers: Bose’s first product, introduced 1965, was a speaker. Expecting to sell $1 million worth of speakers that first year, Bose made 60 but sold only 40. The original Bose speaker evolved into the 901 Direct/Reflecting speaker system launched in 1968. The speaker was so technologically advanced that the company still sells it today.

The system was designed around the concept that live sound reaches the human ear via direct as well as reflected channels (off walls, ceilings, and other objects). The configuration of the speakers was completely unorthodox. They were shaped like an eighth of a sphere and mounted facing into a room’s corner. The speakers had no woofers or tweeters and were very small compared to the high-end speakers of the day. The design came much closer to the essence and emotional impact of live music than anything else on the market and won immediate industry acclaim.

However, Bose had a hard time convincing customers of the merits of these innovative speakers. At a time when woofers, tweeters, and size were everything, the 901 series initially flopped. In 1968, a retail salesman explained to Amar Bose why the speakers weren’t selling:

Acoustimass system enabled palm-size speakers to produce audio quality equivalent to that of high-end systems many times their size. And most recently, Bose has again introduced the state-ofthe-art with the MusicMonitor, a pair of compact computer speakers that rival the sound of three-piece subwoofer systems. It may sound simple, but at $399, it’s anything but.

Headphones: Bob Maresca recalls that, “Bose invested tens of million of dollars over 19 years developing headset technology before making a profit. Now, headsets are a major part of the business.” Initially, Bose focused on noise reduction technologies to make headphones for pilots that would block out the high level of noise interference from planes. Bose headphones didn’t just muffle noise, they electronically cancelled ambient noise so that pilots wearing them heard nothing but the sound coming through the phones. Bose quickly discovered that airline passengers could benefit as much as pilots from its headphone technology. Today, the Bose QuietComfort series, used in a variety of consumer applications, is the benchmark in noise canceling headphones. One journalist considers this product to be so significant that it made his list of “101 gadgets that changed the world” (some of the other inventions on the list included aspirin, paper, and the light bulb. Automotive suspensions. Another major innovation from Bose has yet to be introduced. The company has been conducting research since 1980 on a product outside of its known areas of expertise: automotive suspensions. Amar Bose’s interest in suspensions dates back to the 1950s when he bought both a Citroen DS-19 C and a Pontiac Bonneville, each riding on unconventional air suspension systems. Since that time, he’s has been obsessed with the engineering challenge of achieving good cornering capabilities without sacrificing a smooth ride. “In cars today, there’s always a compromise between softness over bumps and roll and pitch during maneuvering,” Bose said in a recent interview. The Bose Corporation is now on the verge of introducing a suspension that it believes eliminates that compromise.

The basics of the system include an electromagnetic motor installed at each wheel. Based on inputs from road sensing monitors, the motor can retract and extend almost instantaneously. If there is a bump in the road, the suspension reacts by “jumping” over it. If there is a pothole, the suspension allows the wheel to extend downward, but then retracts it quickly enough that the pothole is not felt. In addition to these comfort producing capabilities, the wheel motors are strong enough to keep a car completely level during an aggressive maneuver such as cornering or stopping. In a recent interview about this system, Dr. Bose said, “This system provides absolutely better handling than any sports car, and the most comfortable ride imaginable.”

Thus far, Bose has invested more than $100 million and 27 years in its groundbreaking suspension. And while it is ready to take the product to market, it is staying true to its philosophy by not rushing things. Bose plans first to partner with one automotive manufacturer in the near future. The cost of the system will put it in the class of higher-end luxury automobiles. But eventually, Bose anticipates that wider adoption and higher volume will bring the price down to the point where the suspension could be found in all but the least expensive cars.

At an age when most people have long since retired, 78-yearold Amar Bose still works every day, either at the company’s headquarters in Framingham, Massachusetts, or at his home in nearby Wayland. “He’s got more energy than an 18-year-old,” says Maresca. “Every one of the naysayers only strengthens his resolve.” This work ethic illustrates the passion of the man who has shaped one of today’s most innovative and yet most trusted companies. His philosophies have produced Bose’s long list of groundbreaking innovations. Even now, as the company prepares to enter the world of automotive suspensions, it continues to achieve success by following another one of Dr. Bose’s basic philosophies: “The potential size of the market? We really have no idea. We just know that we have a technology that’s so different and so much better that many people will want it.”

Questions for Discussion

1. Based on the business philosophies of Amar Bose, how do you think the Bose Corporation goes about analyzing its competition?
2. Which of the text’s three approaches to marketing strategy best describes Bose’s approach?
3. Using the Michael Porter and Treacy and Wiersema frameworks presented in the text, which basic competitive marketing strategies does Bose pursue?
4. What is Bose’s competitive position in its industry? Do its marketing strategies match this position?
5. In your opinion, is Bose a customer-centric company?
6. What will happen when Amar Bose leaves the company?

Sources: Jeffrey Krasner, “Shocks and Awe,” The Boston Globe, December 3, 2007, p. E1; Simon Usborne, “101 Gadgets That Changed the World,” Belfast Telegraph, November 5, 2007, accessed online at www.belfasttelegraph.co.uk; Brian Dumaine, “Amar Bose,” Fortune Small Business, September 1, 2004, accessed online at www.money.cnn. com/magazines/fsb/; Olga Kharif, “Selling Sound: Bose Knows,” Business Week Online, May 15, 2006, accessed online at www.businessweek.com; Mark Jewell, “Bose Tries to Shake Up Auto Industry,”
Associated Press, November 27, 2005; “Bose Introduces New QuietComfort 3 Acoustic Noise Cancelling Headphones,” Business Wire, June 8, 2006; Forrester Research Reveals The Most Trusted Consumer Technology Brands,” press release accessed online at www.forrester.com; also see, “About Bose,” accessed online at www.bose.com, June, 2008.

Connected World

What brand of cell phone do you have? If you’re living in the United States, chances are it isn’t a Nokia. But if you’re living anywhere else in the world, it probably is. While the Finnish electronics company grabs only a single-digit slice of the U.S. cell phone pie, it dominates the global cell phone market with close to a 40 percent share.

Few companies dominate their industries the way that Nokia does. Half of the world’s population holds an active cell phone— one in three of those phones is a Nokia. In 2007 alone, Nokia sold 437 million phones. That’s 26 percent more phones than it sold the year before and almost as many phones as were sold by its four closest rivals—Samsung, Motorola, Sony-Ericsson, and LG— combined! You might think that Nokia has accomplished this feat by being the product leader, always introducing the latest cuttingedge gadget. But Nokia has actually been slow to take advantage of design trends such as clamshell phones, “candy-bar” phones that slide open and closed, and ultrathin, blingy, multifunction phones. Rather, Nokia has risen to global dominance based on a simple, age-old strategy: sell basic products at low prices. Although Nokia markets a huge variety of cell phone models, it is best known for its trademarked easy-to-use block handset. Nokia mass produces this basic reliable hardware cheaply and ships it in huge volumes to all parts of the world.

While Finland’s largest company is leads the world’s most high-tech industry, it is not a new company. In fact, Nokia started humbly in 1865 as a wood-pulp mill. A few mergers and a hundred years or so later, the Nokia Corporation was making not only paper products, but bicycle and car tires, footwear, computers, televisions, and communications cables and equipment. Starting in the 1960s, one Nokia division made commercial and military mobile radios, a business unit that ultimately morphed into the cell phone giant that Nokia is today.

In 1984, Nokia marketed one of the world’s first transportable phones, the Talkman. It weighed 11 pounds. Within three years, Nokia had slimmed the phone down to only 28 ounces. But that smaller model, the Cityman, cost a whopping $5,000! Believe it or not, even at that price, Nokia could hardly keep up with demand. But the 1990s brought on a mobile phone explosion that vastly exceeded even the most optimistic predictions. The growth was accompanied by many challenges. During that period, Nokia focused on logistics and scale, two competencies that now serve as Nokia’s major competitive.

Based in Finland, Nokia’s single most profit- and revenuegenerating region is Europe. But the company’s global strategy has been likened to that of the Honda decades ago. Honda started by focusing on developing markets with small motorbikes. As the economies of such countries emerged and people could afford cars, they were already loyal to Honda. Nokia has followed that same model. It sells phones in more than 150 countries. In most of those countries, it is the market leader. Nokia has a real knack for forging regional strategies based on the overall needs of consumers. But Nokia has filled its coffers by understanding the growth dynamics of specific emerging markets. Soren Peterson, Nokia’s Senior Vice President of mobile phones, understands that concept more than anyone.

Capitalizing on Market Leadership

Just as Honda used strength gained from selling motorbikes in emerging countries to establish itself as a manufacturer of virtually every kind of passenger vehicle, Nokia aims to do the same in the mobile industry. Although Nokia remains committed to the entry-level market and to emerging
nations, it has developed a comprehensive global strategy. According to the company’s own vision statement, that strategy has three facets: growing the number of people using Nokia devices, transforming the devices people use, and building new businesses.

For the first part of this plan, Nokia projects that global cell phone usage will almost double by 2015 to 5 billion users. Even if Nokia simply holds its current share of the market, that means that approximately 1.7 billion people will be holding Nokia phones, 67 percent more than today.
As for transforming the devices that people use, Nokia is becoming more than just an entry-level phone provider. Of its 112,000 employees, 30,000 of them work in research and development. Nokia hopes that as its customers in developing nations gain the resources, they will trade-up and stay with Nokia. It’s also aware of the changing needs and trends in Europe, the United States, and the rest of the developed world.

To that end, Nokia may just become the first company to release a serious contender to Apple’s iPhone. Internally codenamed the “Tube,” Nokia’s new phone should hit the market in the second half of 2008. The company says only that its smartphone will feature many of the trademarks associated with its next-generation series of phones, including a global positioning system, Java application support, Web browsing, 3G data transmission speeds, and of course, a touch-screen. Whereas Apple’s iPhone sales of more than four million units in less than a year have more than met expectations, one Nokia vice president was heard to say, “We’ve done that since we’ve had dinner last Friday.” But whereas Apple’s sales represent a very small share of the total market, Nokia’s answer to this product indicates a recognition that this niche may grow into something much more substantial.

Nokia has also been experimenting with nanotechnology and flexible materials. At the Museum of Modern Art in New York, it recently unveiled a phone called the “Morph” as part of a “Design and the Elastic Mind” exhibit. The phone literally flexes and twists—you can wrap it around your wrist like a watch. Although this exact phone may never reach the market, it suggests that future Nokia phones might become far thinner, more stretchable, more durable, and more energy-efficient.

Nokia also recognizes that the biggest trends in mobile devices are music, navigation, and gaming. Focusing on these activities, it is collaborating with the best minds in the business to find ways to add value to the consumer. Nokia appears poised to take advantage of the convergence of the Internet, media, and the cell phone. In fact, at its 2008 stockholder meeting, Nokia announced a shift to the Internet business as a whole. It no longer wants to be seen as just a phone company. It wants to be a company that keeps people connected to everything important in their lives, whether that’s other people, information, commerce, or entertainment.

This new emphasis creates a very logical transition to the third leg of Nokia’s strategy, building new businesses. Last year, Nokia sold more than 200 million camera phones (far more Canon’s camera sales) and 146 million music phones (Apple sold only 52 million iPods). Thus, through its mobile handsets, Nokia can claim to sell more computers, portable music players, and cameras than any other company. However, it has yet to find a way to secure a steady income stream from its devices once they are in place.

Nokia is spending a lot of money and resources on an ambitious plan that it calls “Ovi.” The goal is to accomplish something that has eluded many mobile network operators—building a profitable business in mobile services. Nokia has acquired software companies, like digital map maker Navteq. It hopes that satellite location services will be big in the future, charting a new path to sales and profits. Nokia has also lured executives from Yahoo, Microsoft, eBay, and IBM to help build this business venture.

Recognizing the need to make less expensive cell phones, Petersen is on a crusade throughout his company. Although it has been a bit of a battle, Petersen has convinced others that Nokia can make as much profit as the competition without charging more than $72 retail per phone. As a result, Nokia has relentlessly pursued the goal of bringing down costs and making phones less expensive. Petersen cites an example of one cost-cutting tactic that sparked a chain of events at Nokia. While on a visit to Kenya, he stopped by an “excessively rural storefront,” where he noticed that all products were displayed in plastic bags. When he asked the merchant where the boxes and manuals had gone, the man replied, “Make good fire.”

Petersen quickly realized that packaging for many areas of the world barely needed to “last the journey.” Packaging changes resulted in a savings of $147 million a year. “These numbers alone lit up a whole new drive within the business for these kinds of things,” Petersen reported. Illustrating the magnitude of the large-scale manufacturer, Petersen explained that one cent in cost represents a million dollars for Nokia.

Among other notable discoveries for emerging markets, Petersen recognized that although many such customers spend a significant portion of their salary on one device, many of them will never know how to read or write. This led to an icon-based address book rather than the usual text-based version. Now, millions of people around the world identify their contacts by simple pictures, such as a soccer ball or a flower. And once it realized that many people in less-developed countries share their phones with up to a half-dozen other people, Nokia also added multiple phonebooks to its devices.

Because cell phone demand is growing so rapidly in emerging nations, Nokia will do well if it just holds its current market share in such countries. In India, for example, millions of people each month are buying their first cell phone. But Nokia isn’t just holding on in such countries. In China alone, Nokia sold more than 70 million phones in 2007, a 38 percent increase over the previous year and a 35 percent share of the Chinese market. China also represented one-sixth of Nokia’s unit sales.

Nokia shipped 150 million phones to emerging markets in 2007. For every five phones Nokia sells, one of them is an entrylevel device, up from one in ten only two years ago. Most of those entry-level phones end up in developing countries. So whereas Europe accounts for 39 percent of Nokia’s net sales, Asia, Latin America, Africa, and the Middle East account for 56 percent. The United States, with its market structure driven by the network carriers, produces only 5 percent of Nokia sales. With cell phone volume growing faster in developing regions, the gap will likely widen even more in coming years.

In expanding beyond the borders of its more traditional business, Nokia has a lot going for it. Beyond selling lots of phones, it is also one of the most trusted brands in the world. With a brand value of more than $33 billion, Nokia is now the fifth most valuable brand in the world. “The trust is so high, it has less trouble than other brands getting a customer back who may have tried out a competing brand,” says a branding expert. And Anssi Vanjoki, head of Nokia’s multimedia business group, quickly points out that the company’s push into new products and services is not a case of the brand stretching for acceptance in new segments, like Volkswagen trying to sell luxury cars. Rather, it is all simply a natural extension of the company’s product line to better meet the needs of its customers. “[We’re] delivering on what our customers expected from us all along – there’s a big difference in terms of managing your brand.”

Questions for Discussion

1. Does Nokia have a truly global strategy, rather than just a series of regional strategies? Explain.
2. Consider the different global marketing environments discussed in the text. How do these environments differ in developing versus developed countries?
3. Discuss Nokia’s global strategy in terms of the five global product and communications strategies.
4. Can competitors easily replicate Nokia’s global strategy? Why or why not?
5. Will Nokia’s planned expansion into other products and services work? Explain.

Sources: Lionel Laurent, “Nokia Still Looks Strong,” Forbes, April 17, 2008, accessed online at www.forbes.com; Matt Kapko, “Nokia World: Strategies for the U.S., Emerging Markets,” RCR Wireless News, December 17, 2007, p. 16; James Ashton, “Emerging Markets Help Nokia to Win Race For Mobile Supremacy,” The Sunday Times (London), January 27, 2008, p. 11; David Kiley, “Best Global Brands,” BusinessWeek, August 6, 2007, p. 56; Lionel Laurent, “Nokia Intends to Take a Bite Out of Apple,” Forbes, April 9, 2008, accessed online at www. forbes.com; and www.nokia.com, accessed September 2008.

Responsibility in a Commodity Market

Although the many parties disagree on where to place the blame for skyrocketing gas prices, there is a high level of consistency among economists and industry observers. They agree that crude oil and even gasoline are commodities. Like corn and pork bellies, there is little if any differentiation in the products producers are turning out. And even though ExxonMobil has tried hard to convince customers that its gasoline differs from other brands based on a proprietary cocktail of detergents and additives, consumers do not generally perceive a difference. Thus, the market treats all offerings as the same.

Walter Lukken, a member of the U.S. Commodity Futures Trading Commission, has stated publicly what many know to be true about the pricing of commodities. In testimony before Congress on the nature of gasoline prices, Mr. Lukken said, “The commission thinks the markets accurately reflect tight world energy supplies and a pickup in growth and demand this year.” But is it really as simple as demand and supply?

Let’s look at demand. In the early 2000s, when oil was cheap, global demand was around 70 million barrels a day (mbd). Eight years later, world consumption had risen to 87 mbd. Many environmentalists point the finger at the driving habits of North Americans and their gas-swilling SUVs—and with good reason. The United States continues to be one of the world’s leading petroleum consumers, with an appetite that grows every year. And as much as U.S. consumers cry about high gas prices, they’ve done little to change how much gas they consume.

However, although the United States consumes more gas than any other country, this consumption has grown only moderately. Over the past decade, the rise in global demand for oil has been much more the result of the exploding needs of emerging economies. The biggest contributors are China and India, which together account for 37 percent of the world’s population. Both countries have a growing appetite for oil that reflects their rapid economic growth. With manufacturing and production increasing and with more individuals trading in bicycles for cars, China and India have the fastest growing economies in the world, with annual growth rates of 10 percent and 8 percent, respectively.

One fine spring day in 2008, Joe Tyler watched the numbers on the gas pump speedily climb higher and higher as he filled up his 2002 Toyota at the neighborhood Exxon station. When his tank was full, what he saw shocked him right down to the core of his wallet. It had just cost him $43.63 to fill up his economy car. How could this be? Sure, the tank was completely empty and took almost 11 gallons. And, yes, gas prices were on the rise. But at $4.04 per gallon, this was the first time that a fill-up had cost him more than $40.

In the past, Joe hadn’t usually looked at his gas receipts. Even though gas prices had risen dramatically over the past few years, it had still been relatively cheap by world standards; still cheaper than bottled water. And his Toyota rolled along consistently at 32–34 miles per gallon. Until now, Joe didn’t think that his gas expenses were affecting his budget all that much. But crossing the $40 line gave him a wake-up call. Although it was far less than the $100 fill-ups he’d heard about for SUV drivers in places like Los Angeles where gas prices were among the highest in the country, it didn’t seem that long ago that he’d routinely filled his tank for not much more than $10. In fact, he remembered paying around $1.20 a gallon to fill this same car when it was new in early 2002. Now, he was starting to feel the frustration expressed by so many other gas buyers. What had happened?
Not long before Joe’s epiphany about gas prices, a man named Lee Raymond was retiring after 13 years as the chairman and CEO of ExxonMobil. He probably wasn’t too concerned about how much it cost him to fill up his own car—or his jet for that matter. Including all his pension payoffs and stock options, Raymond’s retirement package was valued at a mind-boggling $400 million. And why not? While at the helm of the giant oil company, Raymond had kept ExxonMobil in one of the top three spots on Fortune’s 500 list year after year. By the end of 2007, ExxonMobil had been the most profitable company in America, setting a new record every year. While Joe and other consumers were going through pain at the pumps, Exxon had racked up $40 billion in profits on $372 billion in sales. ExxonMobil’s fourthquarter revenues alone exceeded the annual gross domestic product of some major oil producing nations, including the United Arab Emirates and Kuwait.

Was it just a coincidence that ExxonMobil and the other major oil companies were posting record numbers at a time when consumers were getting hit so hard? Most consumers didn’t think so—and they cried “foul.” In an effort to calm irate consumers, politicians and consumer advocates were calling for action. Maria Cantwell (D-WA) was one of four U.S. senators who backed legislation that would give the government more oversight of oil, gas, and electricity markets. “Right now excuses from oil companies on why gas prices are so high are like smoke and mirrors,” Senator Cantwell said. “The days of Enron taught us the painful lesson that fierce market manipulation does happen and I don’t want American consumers to have to experience that again.” In a House of Representatives hearing in 2008, Congresswoman Maxine Waters (D-CA) even threatened the CEOs of the largest oil companies with nationalizing their companies if things did not change. Several state attorney generals also launched investigations. Even the Bush administration demanded a federal investigation into gasoline pricing. In a speech to the country, President Bush said, “Americans understand by and large that the price of crude oil is going up and that [gas] prices are going up, but what they don’t want and will not accept is manipulation of the market, and neither will I.” But no investigation into the pricing activities of U.S. oil companies had ever produced any evidence of substantial wrongdoing. The FTC had found isolated examples of price gouging, as in the wake of 2005 hurricanes Katrina and Rita. But most of those were explainable and the FTC had never found evidence of widespread market manipulation.

Now, let’s look at supply. Recent spikes in the global price of crude are occurring at a time when rising demand coincides with constrained supply. Supply constraints exist at various levels of production, including drilling, refining, and distributing. In past decades, oil companies have had little incentive to invest in exploration and to expand capacity. Oil has been cheap, and environmental regulations created more constraints. Oil producing countries claim that they are producing at or near capacity. Many analysts support this, noting that global consumption of oil is pressing up against the limits of what the world can produce. Similar constraints place limits on other stages of the supply chain. For example, U.S. refineries no longer have the capacity to meet the country’s demand for petroleum-based fuels. Not only has no new refinery been built in over 30 years, but the total number of refineries has actually shrunk. Many point to government regulation and public resistance as the reasons for this. And as regulations dictate more gasoline blends for different regions, refineries feel an even greater pinch, and distribution lines experience bottlenecks. But as much as supply and demand account for fluctuations in gas prices, there is a third factor. At a time when supply is stretched so tightly across a growing level of demand, price volatility may result more from the global petroleum futures trading than from anything else. Modern futures markets function on speculation. When factors point to a rise in prices, traders buy futures contracts in hopes of profiting. When oil seems overvalued, they sell. The net effect of all the buying and selling is a constant tweaking of oil prices, which reflects both the fundamental supply-demand situation as well as the constantly changing risk of a major political crisis or natural disaster.

Some policymakers and consumer advocates have pointed to speculative futures trading as a cause of high gas prices. But according to Walter Lukken, “Blaming the futures markets for high commodity prices is like blaming a thermometer for it being hot outside.” Although it is true that the oil futures trading can artificially inflate prices in the short term, economists have found that such activities have more of a stabilizing effect in the long run. Speculators absorb risk, often stepping in when nobody else wants to buy or sell. In fact, as with other commodities, the more traders in a given commodity market, the smaller the gap between the buying and selling price for petroleum. This reduces costs for companies at all stages of the value chain, which should ultimately lower prices for customers. Accordingly, if not for the global oil futures market, price spikes and crashes would probably be even bigger and occur more frequently.

Consumers like Joe Tyler wonder not only what makes the price of gas go up, but just how much of the price of each gallon they buy goes into Big Oil’s coffers. They might be surprised to learn the breakdown on the price of a gallon of gas. Roughly 58 percent of the retail price of gas covers the cost of crude. In 2004, the price of crude was only about $35 a barrel. That price nearly quadrupled by 2008. Thus, it should come as no surprise that gasoline prices have risen in tandem.

Of course, there are other costs that contribute to the price of a gallon of gas. Distribution and marketing swallow 10 percent. Refining costs are good for another 8.5 percent. And then there are taxes. In the United States, the excise tax on gasoline varies from state to state. But on average, state and federal sales taxes account for 15 percent of the retail price.

This leaves less for oil companies than most consumers might imagine. In 2007, the oil industry as a whole made a net profit of about 8.5 percent. Although this was higher than the average for all industries, it was less than half the profit margins for health care, financial services, and pharmaceuticals. Still, the absolute profits for big oil companies are among the highest of all industries. ExxonMobil representatives are quick to point out a simple reason: scale. ExxonMobil had the highest profits in 2007 because it had the highest revenues. And when a company like General Motors (number four on the Fortune 500) actually loses $38 billion, ExxonMobil’s $40 billion net profit really stands out.

What To Do?

If gas prices are determined in the way that so many experts say, it seems odd that so many people point the finger of scandal. Yet, given the impact of gas prices on personal budgets and national economies, it is understandable that people want answers. But even if the investigations were to actually produce evidence of wrongdoing, many experts believe that this would only distract from examining the real factors that govern the price of oil. Proposed solutions for gas price woes span a very broad spectrum. At one end, some call for extreme government intervention and regulation. On the other end are those who suggest that no action be taken. “I don’t think the government should be involved, trying to change the supply-and-demand equation here,” said Evan Smith, a fund manager with U.S. Global Investors in San Antonio. “I really don’t think anything they might do will [make] much of a difference anyway.” In a time of such turmoil, ExxonMobil must consider not only how it might help alleviate the problem, but also how actions by others might impact its operations.

Questions for Discussion

1. Consider and discuss the impact of the rising price of gasoline on as many other products and services as possible.
2. How does the information in this case relate to the common criticism that marketing causes prices to be higher than they normally would?
3. Is ExxonMobil acting responsibly with respect to pricing its product? Can it keep its prices stable (or even lower them)
   when the market price is increasing? Should it even try?
4. From the perspective of social responsibility, what role does the consumer play in the price of gas?
5. How would you “fix” the problem of rising gas prices?
6. Consider solutions for different groups, including governments, corporations, nonprofit groups, and consumers. What are the advantages and disadvantages of your proposed solutions?

Sources: Peter Coy, “First Housing, Now Oil,” BusinessWeek, June 9, 2008, accessed at www.businessweek.com; “A Primer on Gasoline Prices,” brochure from the Energy Information Administration, May 2008, accessed at www.eia.doe.gov; Patricia Hill, “Market Fuel Prices Drop, Relief Ahead as Demand Slows and Supplies Rise,” Washington Times, April 28, 2006, p. A01; Katherine Reynolds Lewis, “Oil Market Is Running on Fear,” New Orleans Times-Picayune, May 6, 2006, p. M1; “High Gasoline Prices Not Due to Manipulation, Regulators Say,” Calgary Herald, April 28, 2006, p. E5; and “High Oil Prices Drive Up Exxon Mobil’s Profit,” Associated Press, May 3, 2006, accessed at www.msnbc.com.