Strategic Market Management Global Perspectives, First Edition ,Damien Mcloughlin , David A Aaker Te by Ace Test Banks

Strategic Market Management Global Perspectives, First Edition By Damien Mcloughlin ,David A. Aaker

Email: richard@qwconsultancy.com

OBJECTIVE QUESTIONS Note – These objective questions cover the material from the book. In general, a false answer is markedly at odds with material in the book. However, it may not be at odds with other written material. Therefore, it is important to position these questions as a test of a student’s competence with the book material. Chapter 1 – Strategic Market Management: An Overview . 1.1 Five management tasks used to develop strategic competencies do not include the following: a. Strategic analysis b. Manage multiple business units *c. Identify competitors d. Develop a sustainable advantage e. Develop a growth platform Identifying competitors is valuable but not one of the 5 management tasks. 1.2 The book suggests that many markets are dynamic and require new strategic models. a. T. *b. F. The book asserts that all markets are dynamic. 1.3 To develop a sustainable competitive advantage (SCA) in dynamic markets, a company must create multiple business units. a. T. *b. F. There are two routes to creating SCA’s, developing assets and competencies and creating and leveraging organizational synergies between multiple business units. 1.4 A business is generally an organizational unit that has a distinct business strategy and a manager with sales and profit responsibility. *a. T. b. F. 1.5 Synergy occurs when two businesses can reduce costs by sharing some asset such as a sales force or logistics system. *a. T. b. F. 1.6 A strategy should only involve one value proposition – otherwise chaos will occur.

a. T. *b. F. Most successful strategies involve more than one – for example, a customer value proposition that involves innovation and customer intimacy such as Virgin Atlantic Airways. 1.7 A strategic market management system will have more value for an organization that is not engaged in complex markets with multiple channels and regional variation in channels and products. a. T. *b. F. A strategic market management system is designed to help a company (complex or not) to deal with the rapid changes that can occur in a firm’s external environment. 1.8 The elements of strategy can be capsulated into four core elements--the product-market investment decision, functional area strategies, the customer value proposition, and the sustainable competitive advantage. a. T. *b. F. The four elements are: 1) the product-market investment strategy 2) the customer value proposition, 3) assets and competencies and synergies, and 4) functional area strategies. So while a sustainable competitive advantage is the goal of a business strategy it is not one of the elements that make up a good business strategy. 1.9 A strategic competency is what a business unit does exceptionally well, such a manufacturing, promotion, distribution, etc. which has strategic importance to the business. *a. T. This is the definition of a strategic competency. b. F. 1.10 According to the book, strategic marketing management has six objectives which include all except one of the following: a Precipitate the consideration of strategic choices. *b Contribute to the bottom line success of the firm. c Force a long-range view. d Make visible the resource allocation decision. e Provide methods to aid in strategic analysis and decision-making.

There is nothing that will guarantee the success of a business. In fact, it is interesting to discuss that a strategy is evaluated after implementation; that is when it is known whether a strategy is successful or not. . 1.11 The four elements of a business strategy for a firm are the product-market investment decision, the functional strategies and program, the customer value proposition, and the __________ and _________. Answer: assets and competencies. 1.12 The scope of a business is defined by the products it offers and chooses not to offer, by the markets it does and does not seek to serve, by the competitors it chooses to compete with or to avoid, and by its level of vertical integration. *a. T. This is the definition of a business scope. b. F. 1.13 Strategic marketing is involved in making decisions, some of which include investment decisions. Of the following which is not an investment decision: a Invest for growth b Milk c Maintain d Liquidate *e Innovation Innovation is a strategic option. 1.14 An external analysis includes the analysis of the customers, the competitors, the markets/submarkets and the environment. *a. T. b. F. 1.15 According to the book, customer analysis involves identifying the organization’s customer segments and each segment’s motivations and priority needs. a. T. *b. F. See Figure 1.3. 1.16 Strategic market management is a system designed to help management both precipitate and make strategic decisions, as well as create strategic visions. *a. T. This is the definition of strategic market management.

b. F. 1.17 Marketing’s role in strategy includes being the primary driver of strategic analysis. *a. T. b. F. 1.18 The strategic plan should be developed annually. a. T. *b. F. It should be continuously refined.

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b. F. 1.6 A strategy should only involve one value proposition – otherwise chaos will occur. a. T. *b. F. Most successful strategies involve more than one – for example, a customer value proposition that involves innovation and customer intimacy such as Virgin Atlantic Airways. 1.7 A strategic market management system will have more value for an organization that is not engaged in complex markets with multiple channels and regional variation in channels and products. a. T. *b. F. A strategic market management system is designed to help a company (complex or not) to deal with the rapid changes that can occur in a firm’s external environment. 1.8 The elements of strategy can be capsulated into four core elements--the product-market investment decision, functional area strategies, the customer value proposition, and the sustainable competitive advantage. a. T. *b. F. The four elements are: 1) the product-market investment strategy 2) the customer value proposition, 3) assets and competencies and synergies, and 4) functional area strategies. So while a sustainable competitive advantage is the goal of a business strategy it is not one of the elements that make up a good business strategy. 1.9 A strategic competency is what a business unit does exceptionally well, such a manufacturing, promotion, distribution, etc. which has strategic importance to the business. *a. T. This is the definition of a strategic competency. b. F. 1.10 According to the book, strategic marketing management has six objectives which include all except one of the following: a Precipitate the consideration of strategic choices. © 2010 John Wiley & Sons

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*b c d e

Contribute to the bottom line success of the firm. Force a long-range view. Make visible the resource allocation decision. Provide methods to aid in strategic analysis and decision-making. There is nothing that will guarantee the success of a business. In fact, it is interesting to discuss that a strategy is evaluated after implementation; that is when it is known whether a strategy is successful or not. .

1.11 The four elements of a business strategy for a firm are the product-market investment decision, the functional strategies and program, the customer value proposition, and the __________ and _________. Answer: assets and competencies. 1.12 The scope of a business is defined by the products it offers and chooses not to offer, by the markets it does and does not seek to serve, by the competitors it chooses to compete with or to avoid, and by its level of vertical integration. *a. T. This is the definition of a business scope. b. F. 1.13 Strategic marketing is involved in making decisions, some of which include investment decisions. Of the following which is not an investment decision: a Invest for growth b Milk c Maintain d Liquidate *e Innovation Innovation is a strategic option. 1.14 An external analysis includes the analysis of the customers, the competitors, the markets/submarkets and the environment. *a. T. b. F. 1.15 According to the book, customer analysis involves identifying the organization’s customer segments and each segment’s motivations and priority needs. © 2010 John Wiley & Sons

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a. T. *b. F. See Figure 1.3. 1.16 Strategic market management is a system designed to help management both precipitate and make strategic decisions, as well as create strategic visions. *a. T. This is the definition of strategic market management. b. F. 1.17 Marketing’s role in strategy includes being the primary driver of strategic analysis. *a. T. b. F. 1.18 The strategic plan should be developed annually. a. T. *b. F. It should be continuously refined. Chapter 2 – External and Customer Analysis 2.1 A strategic uncertainty identifies the most important strategic options. a. T. *b. F. Strategic uncertainties focus on specific unknown elements that will affect the outcome of strategic decisions. 2.2 An external analysis process should be able to affect strategy and to generate or evaluate strategic decisions. *a. T. The external analysis process should not be an end in itself. It should be motivated throughout by a desire to affect strategy, to generate or evaluate strategic decisions. b. F.

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b. F. 2.4 A scenario is an alternative view of the future environment that is usually prompted by an alternative possible answer to a strategic uncertainty or by a prospective future event or trend. *a. T. This is the definition of a scenario. b. F. 2.5 In a strategic context, segmentation means the identification of customer groups that respond differently from other groups to competitive offerings. *a. T. This is the definition of segmentation. b. F. 2.6 One of the tasks in customer motivation analysis is to determine the relative importance of the motivations. *a. T. The importance of the motivation will help determine the strategic role that motivation will play in the business strategy. b. F. 2.7 A customer analysis consists of three components; segmentation, customer motivation, and ________________. Answer: Unmet needs. This is the definition of customer analysis. Customer analysis can be usefully partitioned into an understanding of how the market segments, an analysis of customer motivations, and an exploration of unmet needs. 2.8 Uncertainty can be handled by precipitating a strategic decision, by obtaining information to reduce the uncertainty, and by ___________. Answer: Scenario analysis. The three ways of handling uncertainty are: 1) a strategic decision can be precipitated because the logic for a decision is compelling and/or because a delay would be costly or risky. Second, it may be worthwhile to attempt to reduce the uncertainty by information acquisition and analysis of an information-need area. Third, the uncertainty could be modeled by a scenario analysis.

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2.9 To gain customers as active partners, managers should do all of the following except: a. Co-create personalized experiences b. Encourage active dialogue *c. Ignore the complainers d. Mobilize customer communities e. Manage customer diversity Customers are increasing becoming active partners in the buying process, rather than being seen as passive targets of product development and advertising. 2.10 The retro-sexual is an affluent urban sophisticate aged 20 to 40. a. T. *b. F. See The Male Shopper page 29. 2.11 In obtaining a list of motivations, a set of 10 individual interviews will generate 90 to 95% of the list. a.. T. *b. F. See page 32. 2.12 Ethnographic research is used in B-to-B companies like GE. *a. T. b . F.

Chapter 3 – Competitor Analysis 3.1 One way to identify competitors is to group competitors according to the degree they compete for a buyer’s choice. *a. T. There are two ways to group competitors; one based on the customer’s perspective and the other is based on competitor’s strategies. b. F. 3.2 A strategic group is a customer segment that is strategically important to the business. a. T. © 2010 John Wiley & Sons

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*b. F. A strategic group is a group of firms that over time pursue similar competitive strategies, have similar characteristics, and have similar assets and competencies. 3.3 One of the benefits of competitor analysis is that an understanding of the current strategy and the strengths and weaknesses of a competitor can suggest opportunities and threats that will merit a response. *a. T. b. F 3.4 According to the book, mobility barriers are barriers inhibiting the movement of a person from one social class to another. a. T. *b. F. Each strategic group has mobility barriers that inhibit or prevent businesses from moving from one strategic group to another. 3.5 The competitive strength grid lists the product-markets served by each competitor and identifies for each product market the strengths of each competitor. a. T. *b. F. The competitive strength grid is a scale of the major competitors based on assets and competencies. It serves to summarize the position of the competition with respect to assets and competencies. 3.6 The value chain analysis is based upon the cost-benefit of the product as perceived by the customer. a. T. *b. F. The value chain is a tool to identify the value-add components of competitor. A business’s value chain consists of two types of value-creating activities that should be considered in assessing a competitor – support activities and primary activities. 3.7 © 2010 John Wiley & Sons

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The eight dimensions of competitor analysis include: current and past strategies; cost structure; exit barriers; objectives and commitment; size, growth and profitability; ______ and ______, ________, and ________; and _____ and _________. Answer: Image and positioning, organization and culture, strengths and weaknesses. 3.8 In conducting a competitor analysis, which of the following is not relevant: *a. Accounting methodologies b. Market share c. Image d. Positioning strategy e. Objectives and commitments Competitor analysis consists of an analysis of a competitor’s: image and positioning; objectives and commitment; current and past strategies; organization and culture; exit barriers; strengths and weaknesses; size, growth and profitability, 3.9 Exit barriers are crucial to a firm’s ability to exercise an exit alternative. Which of the following is not an exit barrier? a. Managerial pride b. Government or social barriers c. Specialized assets *d. High market growth rate e. Fixed costs High growth markets in most cases would not be an exit barrier. Exit barriers include: specialized assets, fixed costs, relationships with other business units, government or social barriers, and managerial pride. 3.10 In completing a checklist on competitor assets and competencies, some of the areas to be considered include all but one of the following: a. Company culture b. Innovation c. Manufacturing d. Management *e. Strategic programming Analysis of a competitor’s strengths and weaknesses include: innovation, manufacturing, finance-access to capital, management, marketing, and customer base. 3.11

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In addition to current competitors, it is important to consider potential market entrants such as firms that might engage in all but one of the following: a. Retaliatory or defensive strategies b. Market expansion c. Forward integration *d. Low-cost strategies e. Backward integration Potential market entrants might engage in the following: market expansion, product expansion, backward integration, forward integration, the export of assets, and competencies or retaliatory or defensive strategies. 3.12 The competitor analysis in almost all cases will benefit from considering both direct and indirect competitors. *a. T. By explicitly considering indirect competitors, the strategic horizon is expanded, and the analysis more realistically mirrors what the customer sees. b. F. 3.13 Potential market entrants might use all but one of the following to enter a market: a. Market expansion *b. Market penetration c. Product expansion d. Backward/forward integration e. Export assets or competencies A company practicing market penetration is already in the market (market penetration involves increasing customer usage in an existing market). 3.14 Nintendo did not try to compete with Sony’s in terms of high tech digital graphics. *a. T. b. F. 3.15 Some of the benefits of strategic groups include all but one of the following: a. Makes the process of competitor analysis more manageable. b. Refines the strategic investment decision. c. Includes a set of mobility barriers. d. They will be affected by and react to industry developments in similar ways. *e. They produce strategic options. Strategic groups do not themselves produce strategic options because strategic groups are tools used by the strategist to group similar competitors for analysis purposes. © 2010 John Wiley & Sons

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Chapter 4 – Market/Submarket Analysis 4.1 A user gap is caused when one segment uses more of a product than another segment. a. T. *b F. A new use, new user group, or more frequent usage could dramatically change the size and prospects for the market. It is not an evaluation of one segment versus another. 4.2 One goal of market and submarket analysis is to understand the dynamics of the market. *a. T. b. F. 4.3 Porter’s five factor model provides insight into the present and future profitability of an industry. *a. T. b. F. 4.4 Key success factors are assets and/or competencies that provide the basis for any competitor to be successful in an industry. *a. T. b. F. 4.5 One of the most serious risks of high growth markets is the fact that the number of competitors attracted is likely to be high. *a. T. b. F. 4.6 Avoiding the small market can mean that a firm must later overcome the first-mover advantage of others. *a. T. b. F. © 2010 John Wiley & Sons

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4.7 Porter’s five factor model involves--the intensity of competition, competition among existing firms, _________, _________, and __________. Answer: Threat of substitute products, bargaining power of suppliers and bargaining power of customers. . 4.8 Ghost potential occurs when competitors get scared from competitive intensity and abandon a market. a. T. *b. F. Ghost potential occurs when a market seems so topical that the need is so apparent that growth seems assured but in fact the potential has ghost-like qualities caused by factors inhibiting or preventing its realization. 4.9 Which of the following is not an indicator of market maturity or decline? a. Customer disinterest b. Price Pressure c. Saturation *d. Predictions for high growth e. Buyer sophistication and knowledge The fact that the market is in the maturity stage would suggest that growth trends have diminished. 4.10 Which of the following is not a risk of a high growth market? a. Overcrowding b. Superior competitive entry *c. Projected high growth d. Changing KSFs e. Resource constraints High growth isn’t a risk; it is a positive force that should drive the market. 4.11 Niche businesses can be economically unviable when choices are too abundant making marketing costs crippling. *a. T. b. F. © 2010 John Wiley & Sons

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4/12 The Long Tail refers to the long sales flow obtained from a loyal customer. a. T. *b. F. 4.13 Wal-Mart has a high level of customer power. *a. T. b. F. 4.14 In forecasting market growth, the potential of technologies tend to be undervalued. a. T. *b. F. Chapter 5 – Environmental Analysis and Strategic Uncertainty 5.1 One of the three components of environmental analysis is internal analysis. a. T. *b. F. The components of environmental analysis are: technological, government/ economic, and consumer trends. 5.2 The goals of environmental analysis are to identify fads, trends and events that will only affect strategy in a direct way. a. T. *b. F. The goals are to identify and evaluate only trends and events that will affect strategy directly and indirectly. 5.3 The three forms of innovation are ___________, ___________ and ___________. Answer: Three forms of innovations are incremental, substantial and transformational innovation.

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5.4 Innovations that are transformational or substantial tend to be employed by new participants in an industry rather than established players. a. T. *b. F. 5.5 A company who wants to gain credit for “green” programs can effectively ensure the ability to do so with _______________. Answer: Branding. 5.6 A reason to incorporate green programs into strategy or business models is cost savings. *a. T. b. F. 5.7 Demographic trends can be a strong indicator of the growth of a market and it can be predictable. *a. T. b. F. 5.8 It has been shown that, on average, increasing marketing budgets in recessions pays off during the recession and after as well. *a. T. b. F. 5.9 The key to understanding trends is to interact with people of all types. *a. T. b. F. 5.10 There are three types of scenario analysis. a. T. *b. F. There are two: decision-driven scenarios and strategy-developing scenarios.

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5.11 A strategic uncertainty should be evaluated with respect to its impact and relevance to future strategy. a. T. *b F. The extent to which a strategic uncertainty should be monitored and analyzed depends on its impact and immediacy. 5.12 Scenario analysis provides an alternative to investing in information to reduce uncertainty that is often an expensive and futile process. *a. T. b. F. 5.13 There are two types of scenario analyses: strategy-developing scenarios and decision-driven scenarios. *a. T. b. F. 5.14 A new generation of products such as the Airbus A-380 would be considered a transformation innovation. a. T. *b. F. Pages 81-82 show that the Airbus A-380 would be considered a substantial innovation. Chapter 6- Internal Analysis 6.1 The goal of analysis is to develop strategies that either exploit a firm’s strengths or correcting / compensating for weaknesses. *a. T. b. F. 6.2 ROA is return on sales times asset turnover.

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*a. T. It can also be expressed by dividing profits by the assets. b. F. 6.3 ________________ is comparing the performance of a business component such as warehouse operations with similar operations in other companies. Answer: Benchmarking. 6.4 Performance measures reflecting long-term profitability include all but one of the following: *a. Outsourcing ability b. Product/service quality c. Customer satisfaction d. New product activity e. Relative cost 6.5 One of the more important assets of many firms is the size of the customer base. a. T. *b. F. See Figure 6.1 6.6 All the following are guidelines for measuring customer satisfaction except __________. a. Identify causes of dissatisfaction that motivate customers to change brands b. Evaluate the lifetime value of customer to the product c. Track measures and compare to competitors *d. Differentiate between dissatisfaction and dislike of product Differentiate between absence of dissatisfaction and true affection or loyalty is not a guideline for measuring customer satisfaction. 6.7 According to the book, strategies should be driven by three factors—organizational strengths and weaknesses, market needs, and environmental trends. a. T. *b. F. A successful strategy occurs when an organization’s strengths are matched against market needs and competitor weaknesses.

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6.8 All the following are ways to increase shareholder value except: *a. Invest in products that are low risk b. Reduce the cost of capital by increasing debt to equity ratio c. Earn more profit by reducing costs d. Use less capital e. Increase revenue without using more capital To increase shareholder value, an organization does all of the above choices, except invest in products that are low risk. 6.9 Shareholder value analysis holds that the flow of profits emanating from an investment should exceed the cost of capital. *a. T. b. F.

6.10 One strength of shareholder value analysis is that it encourages priority to be given to other stakeholders. a. T. *b. F. It is a danger, not strength. 6.11 Competences should be evaluated based on strength and revenue potential. a. T. *b. F. Competences should be evaluated based on strength and impact. Chapter 7 – Creating Advantage, Synergy, and Strategic Philosophies 7.1 Among the critical determinants of an SCA is the choice of the product-market and the identity and nature of competitors. *a: T. The sustainable competitive advantage is determined by: the way a firm competes, the basis of competition, where a firm competes, and whom the firm competes against. b. F.

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7.2 An effective sustainable competitive advantage needs to be both meaningful and sustainable. And it should be substantial to make a difference. *a. T. b. F. 7.3 In the survey of 248 business managers, the most frequently mentioned SCA was financial resources. a. T. *b. F. Quality reputation is the correct answer. 7.4 The assets and competencies of an organization represent the most sustainable element of a business strategy, because these are usually difficult to copy or counter. *a. T. b. F. 7.5 If two businesses have synergy, their profitability operating together will be higher than if they operated separately. *a. T. b. F. 7.6 Synergy will result in one or more of the following: decreased revenues, increased operating costs, or increased investment. *a. T. b. F. As a result of synergy, the combined SBUs will have one or more of the following: (1) increased sales; (2) lower operating costs; and (3) reduced investment requirements. 7.7 Synergy in practice is difficult because it can be difficult to predict whether synergy will actually emerge. *a. T. b. F. 7.8 © 2010 John Wiley & Sons

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Strategic commitment is superior to strategic opportunism. a. T. *b. F. Both may work but require different systems, people, and culture. 7.9 Strategic intent is a sustained obsession with winning which involves a stretch of the organization and real innovation. a. T. *b. F. 7.10 An organization implementing a strategic commitment should have an on-line information system and be capable of fast response. a. T. *b. F. The response time is long term and not fast. Strategic vision is based on forward thinking and a long term perspective. 7.11 Strategic drift is associated with an orientation toward the present. *a. T. Strategic drift results in investment decisions being made incrementally in response to opportunities (the present) versus being directed by a vision (long term). b. F. 7.12 To successfully manage a strategic commitment, a firm should have four characteristics--a clear future strategy, assets, competencies, and resources to implement the strategy, and _________, and _________. Answer: Buy-in throughout the organization and patience. 7.13 To successfully manage a strategic commitment, a firm should have four characteristics. Which of the following is not one of the four? *a. Senior management with MBAs b. Buy-in throughout the organization c. Assets, competencies, and resources to implement it d. Patience e. A clear future strategy © 2010 John Wiley & Sons

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7.14 A sustainable competitive advantage has several characteristics. Which of the following is not one of them? a. Sustainability b. They can be leveraged c. They should be supported by assets and competencies d. They cannot easily be neutralized by competitors *e. They are easily copied An SCA should not be easy to match or be neutralized by a competitor. 7.15 Synergy between firms can provide an SCA that is truly sustainable because it is based on the characteristics of a firm that are probably unique. *a. T. b. F. 7.16 Four factors are required for the creation of a sustainable competitive advantage. Which of the following is not one of those factors? a. Whom you compete against b. Basis of competition c. Where you compete *d. Your strategic intent. e. The way you compete 7.17 The four strategic philosophies are strategic commitment, strategic opportunism, strategic vision and strategic intent. a. T. *b. F. The four strategic philosophies are strategic commitment, strategic opportunism, and strategic adaptability. 7.18 Key success factors (KSF’s) and sustainable competitive advantages (SCA’s) are different in that an SCA is necessary to compete and a KSF is the basis for a continuing advantage. a. T. *b. F. The KSF is actually necessary to compete and the SCA is the basis for a continuing © 2010 John Wiley & Sons

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advantage. 7.19 A key success factor can be a point of parity. *a. T. b. F. 7.20 Which of the following is not one of the three philosophies of developing strategy? *a. Strategic Drift b. Strategic Opportunism c. Strategic Adaptability d. Strategic Commitment Strategic drift is a flaw of the strategic opportunism philosophy. 7.21 Strategic commitment has a long term perspective, while strategic opportunism is short term and strategic adaptability is medium term. *a. T. b. F. 7.22 In an organization that subscribes to a strategically adaptable mentality, it is okay to fail. *a. T. These organizations are entrepreneurial and encourage experimentation. b. F. 7.23 Strategic intent recognizes the essence of winning, involves stretching an organization to continue to improve old SCA’s or develop new ones, and requires real innovation. *a. T. b. F. Chapter 8 – Alternative Value Propositions 8.1 A value proposition is often an umbrella concept under which the supporting assets and competences and functional strategies and programs can be grouped. *a. T. b. F. © 2010 John Wiley & Sons

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8.2 Business strategies should offer a clear value proposition to customers and be supported by assets and competencies and functional strategies and programs. *a. T. b. F. 8.3 A business strategy should be challenged with respect to whether it contains a real and perceived value proposition and whether that value proposition is relevant, ________ and ________. Answer: sustainable, and feasible. 8.4 Value should be determined by the firm and not by the customer. a. T. *b. F. Value is more likely to be real if it is driven from the customer’s perspective rather than from the perspective of the business. 8.5 In the business-to-business space, more companies are trying to move from being component suppliers to being systems solution players because systems-based organizations will more likely to be more cost effective. a. T. *b. F. These companies are making this move because a systems-based organization will be more likely to control the customer relationship. 8.6 It is believed that corporate social responsibility does not create shareholder value but rather just enhances a brand image. a. T. *b F. In one survey more than 90% thought that socially responsible management creates shareholder value. 8.7 © 2010 John Wiley & Sons

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Firms that chose customer relationship as a value proposition just need to provide good functional benefits of their product or service. a. T. *b. F. Firms that create intimacy deliver an experience that goes beyond functional benefits. 8.8 The six quality dimensions include: performance, conformance to specifications, features, customer support, process quality, and _________. Answer: Aesthetic design. 8.9 In order for the quality option to be effective, a firm doesn’t need senior management commitment, because the quality department is in charge of the total quality management program. a. T. *b. F. See text under TQM. 8.10 Most quality dimensions, such as performance, durability, reliability, and serviceability, are easy for buyers to evaluate. a. T. *b. F. Most quality dimensions, such as performance, durability reliability, and serviceability, are difficult if not impossible for buyers to evaluate. 8.11 With the experience curve, the total cost of a product will decline at a predictable rate as experience in building the product accumulates. *a. T. b. F. The experience curve suggests that a firm accumulates experience in building a product, its costs in real dollars (net of inflation) will decline at a predictable rate. 8.12 A signal of high quality for clothing is price. *a. T. © 2010 John Wiley & Sons

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b. F. 8.13 Schlitz improved its market position with its aggressive low-cost strategy. a. T. *b. F. Schlitz’s decision to reduce costs led to a loss of perceived quality that was disastrous. 8.14 The experience curve is automatic and occurs over time. a. T. *b. F. The experience curve is not automatic. It must be proactively managed. 8.15 A successful low cost strategy is usually multifaceted and supported by a cost-oriented culture. a. T. *b. F. 8.16 Niche specialists are successful because their strategies are based on commitment to a single product line or part of the market. *a. T. b. F. 8.17 To obtain significant operational economies, it is useful to examine the value chain and look for inherently high-cost components that could be eliminated or reduced. *a. T. b. F. 8.18 CSR refers to customer social relationship management. a. T. *b. F. CSR refers to Corporate Social Responsibility.

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8.19 An experience curve strategy will usually enhance product innovation. *a.. T. b. F. 8.20 The low-cost strategic option consists of all of the approaches below except: a. Scale economies b. No-frills product/service *c. Delivery of superior customer service d. Production/operations e. Experience curve Delivery of superior customer service. Customer service costs money. 8.21 Perceived value can be created without compromising the brand. *a. T. b. F. Chapter 9—Building and Managing Brand Equity 9.1 The three types of brand assets are brand awareness, brand equity and brand loyalty. a. T. *b. F. The three types of brand assets are brand awareness, brand associations and brand loyalty. 9.2 Brand awareness serves to differentiate brands along a recall/familiarity dimension. *a. T. b. F. 9.3 Brand awareness does not provide competitive advantages, only key success factors. a. T. *b. F.

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Brand Awareness does provide SCA’s: signal of presence, commitment and substance, brand provides consumer with a sense of familiarity and salience that will determine consumer’s recollection at time of purchase. 9.4 Organizations can increase their likelihood of brand awareness by extending their presence outside the conventional media channels and using methods such as promotions, publicity and sampling. *a. T. b. F. 9.5 The Datsun name was just as strong as the Nissan name four years after the name change primarily because brand awareness is an asset that can be extremely durable and thus sustainable. *a. T. b. F. 9.6 Which of the following is not a competitive advantage included in brand loyalty: a. Reducing marketing costs b. Entry to barrier *c. Increased name recall at time of purchase d. Satisfied customer base projects successful product e. Provides time to respond to competitive moves Increased name recall at time of purchase. This characteristic is competitive advantage of brand awareness, not brand loyalty. 9.7 The ultimate measure of brand loyalty is that customers will recommend the brand to others. *a. T. b. F. 9.8 To manage customer loyalty, organizations will measure loyalty of existing customers, manage customer touch points, conduct exit interviews, maintain communication with customers, have a customer culture, measure the lifetime value of a customer, _______________ and _______________. Answer: Reward loyal customers and make customers feel a part of the organization. 9.9 Brand association is anything directly related to the consumer’s memory to a brand.

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a.. T. *b. F. Brand association is anything directly and indirectly related to the consumer’s memory to a brand. 9.10 Firms dependent on brand association position based on certain attributes are vulnerable to competitor innovation and shouting matches that lead to lost credibility. *a. T. b. F. 9.11 Maintaining relevance is the battle to stay associated with the product category in which the customer is interested. *a. T. b. F. 9.12 The extremes on the relevance spectrum are ____________ and ____________. The middle of the spectrum belongs to ____________. Answer: Trend neglectors and trend drivers; trend followers. 9.13 The strongest brands often offer emotional benefits. They are about the “I feel” statement. Other strong brand benefit offerings are a self-expressive benefits, which are all about the “I am.” *a. T. b. F. 9.14 Brand identity is a set of current brand associations that the firm aspires to create or maintain. a. T. *b. F. A brand identity is an aspirational external brand image, which may not include elements that are currently present in the image. Brand image is the current image. 9.15 The three steps of creating a brand identity are _____________, _____________, and _____________.

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Answer: Identifying characteristics that brand should stand for, defining the core identity and communicate the brand internally (the core essence.) 9.16 Brand identity serves to drive and guide strategic initiatives throughout organizations, drive the communication program and support the expression of the organization’s values and culture. *a. T. b. F. 9.17 Proof points are programs, initiatives, and assets that are planned to provide substance to the strategic position. a. T. *b. F. This statement is true we must add that proof points help communicate the strategic position. 9.18 A strategic imperative is an investment in an asset or program that is essential if the promise to the customers is to be delivered . *a. T. b. F. 9.19 Virgin has extended its brand into dozens of business areas including cola and jeans. *a. T. b. F. Chapter 10—Energizing the Business 10.1 All of the following are examples of ways to stimulate basic business except: a. Expand buyer base b. Expand the loyal customer base c. Improve customer experience *d. Eliminate inefficiencies e. Develop home-run marketing programs Eliminating inefficiencies is a method to improve organizational performance, but is not considered a way to “energize business.” 10.2 © 2010 John Wiley & Sons

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According to the book methods for increasing product usage include motivating heavy users to use more, making the use easier, providing incentives, remove or reduce reasons not to buy, provide reminder communications, reduce undesirable consequences of frequent use, and finding new uses. *a. T. b. F. 10.3 Differentiation is increasingly difficult to create and maintain as competitors proliferate products and quickly copy advances. *a. T. b. F. 10.4 A branded differentiator is an actively managed branded feature, ingredient or technology, service or program that creates a meaningful, impactful sustainable competitive advantage for a branded offering over an extended period of time. a. T. *b. F. It creates a meaningful, impactful point of differentiation. The brand equity around the point of differentiation creates a basis for an SCA, but is not the definition of the differentiator. 10.5 A branded energizer is defined in the book as a branded product or sponsorship that by association significantly enhances and energizes a target brand. a. T. *b. F. A branded energizer is a branded product, sponsorship, endorser, promotion, symbol, social program, CEO, or other entity that by association significantly enhances and energizes a target brand. The branded energizer and its association with the target brand are actively managed over an extended time period. 10.6 Branded energizers are defined to be part of the master brand offering, but do not promise any functional benefits. a. T. *b. F. Branded energizers are not part of the master brand offering and are connected to the © 2010 John Wiley & Sons

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master brand, but do not promise any functional benefits. 10.7 According to the book, celebrity endorsers should have five qualities—an appealing image, onbrand associations, the potential for a long-term relationship, a large following, and the absence of a negative reputation. a. T. *b. F. The first three are correct—the last two are potential to create programs around the endorser and being cost effective and available. 10.8 The four ways to grow a business are to go global, to energize the business, and to __________ and ____________. Answer. Leverage the business and create a new business. 10.9 A business can be energized by getting the brand to have a retail presence. *a. T. b. F. 10.10 A branded differentiator should add differentiation, communication benefits and _____________ to the master brand. Answer—credibility. 10.11 A branded energizer should add energy, personality, and credibility to the master brand. a. T. *b. F. Credibility is not added, but associations are the third added characteristic. 10.12 Existing product markets are often attractive growth avenues because a firm has a base on which to build and momentum that can be exploited *a. T. b. F. Chapter 11—Leveraging the Business © 2010 John Wiley & Sons

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11.1 Four questions were suggested in the book as being a good source of growth options. One was asking whether brand extensions are possible. Another was whether new distribution channels are available. a. T. *b. F. Which assets and competencies can be leveraged? What brand extensions are possible? Can the scope of the offering be expanded? Do viable new markets exist? 11.2 In leveraging an existing brand to move into a new market, the new brand may seek distance and autonomy from the existing brand. However with that distance, the risk of the venture increases. *a. T. b. F. 11.3 Three steps to determine which assets and competencies should be leveraged were suggested. The first was to inventory assets and competencies, the second was to find an area where the assets and competencies can be applied to generate advantage and the third was to analyze the potential synergy. a. T. *b. F. The third advantage is incorrect in the statement above. The correct answer is address implementation problems. 11.4 Brand extension evaluation asks three questions according to the book. Which of the following is not a brand extension question among the three? *a. Will the brand extension be profitable? b. Will the extension enhance the brand name and image? c. Does the brand fit the new context? d. Does the brand add value to the offering in the new product class? 11.5 Sub brands and endorsed brands are created when the parent company wants to prevent existing brands from damage and when an entirely new brand is not feasible based on lack of resources. a. T. *b. F.

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11.6 Entering into new markets or launching new products are met with the challenges of resistance to new products, lack firm’s assets and competencies in the new product’s market and organizational access to resources necessary for launches. *a. T. b. F. 11.8 When there is a real potential synergy, it will happen—otherwise it will simply be a hope. a. T. *b. F. Implementation problems get in the way. 11.9 BMW’s acquisition of Rover to access the 4X4 market with its superior technology via the Land Rover brand was a good example of real synergies arising between car companies a. T. *b. F. BMW miscalculated the integration of the two businesses and resulting synergies were never realized, with BMW selling off Rover at a loss and keeping the Mini and Land Rover brands. 11.10 According to Zook around one-third of successful sustainable growth companies had one or two repeatable formulas. a. T. *b. F. 11.11 According to the book, market development is based on the premise that the right people are available for implementing the leveraged business. a. T. *b. F. Market development is based on the premise that the business is operating successfully; there is no point in exporting failure or mediocrity. Chapter 12—Creating New Business

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12.1 Blue ocean businesses and red ocean businesses both generally allow for above average earnings. a. T *b. F. See pages 231-232. 12.2 Barriers to long-term success in existing product-markets do not include which of the following: a. Markets are so dynamic that this is easy to bet behind and become less relevant. b. Overcapacity in existing markets. c. Transparency issues. d. Fast responses by competitors *e. Low cost benefit ratio for incumbent organizations. 12.3 Innovation can create what is often termed as __________. Answer: First mover advantage. 12.4 Innovator’s advantage provides the competitive advantages such as competitors’ inability to respond in a timely manner, competitors’ inability to respond at all, or that the innovator cultivates a customer loyalty with its position in the market. *a. T. b. F. 12.5 True market pioneers often survive because they enter the market first and build position and are able to withstand technological advances. a. T. *b. F. True market pioneers CAN survive because they enter the market first and build position BUT frequently aren’t able to withstand technological advances. 12.6 Successful early market leaders survive the difficulties of a first mover advantage by envisioning the mass market, maintaining managerial persistence, financial commitment, _____________ and _____________. Answer: Relentless innovation and asset leverage.

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12.7 Many blue ocean businesses can take one of two approaches to lower price points: ____________ or ____________. Answer: Low-end disruptive innovation and focus on non-consumers (new-market disruptive innovation). 12.8 Low-end disruptive innovation is where industries are altered by emerging products that feature a price that appears dramatically low. Incumbent firms often employ this strategy. a. T. *b. F. It is usually newcomers to the market, not incumbent firms. 12.9 Curses that plague new businesses include success and substantial availability of resources. *a. T. More curses located on page 242. b. F. 12.10 Drucker advises innovators to try to innovate for the future. a. T. *b. F. See Page 236. 12.11 Transformational new business arenas can be based on offering a dramatically lower price point, analyzing alternative industries to find white space, offering a systems rather than components, building on customer insights or market trends and by collaborating with other people and firms. *a. T. b. F. 12.12 The highest rated brand on perceived innovativeness was iPod. a. T. *b. F. It was Bluetooth. Page 235.

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12.13 The book suggests that one of six ways that new business is typically formed involves new distribution channels. a. T. *b. F. 12.14 Kirin was unable to compete with Asahi in part because of the authentic label. *a. T. b. F. Chapter 13 – Global Strategies 13.1 A global strategy is a multinational strategy in which separate strategies are developed for different countries. a. T. *b. F. A global strategy is conceived and implemented in a worldwide setting. 13.2 Among the eight motivations for global strategies is to cross-subsidize businesses and to obtain scale economies. *a. T. b. F. 13.3 Accessing low-cost labor and materials is not a motivation for global strategies. a. T. *b. F. 13.4 Strong motivations for a standardized global brand and position are media spillover and crosscountry customer travel. *a. T. b. F. 13.5

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A strategic alliance is a collaboration leveraging the strengths of two or more organizations to achieve strategic goals. *a. T. b. F. 13.6 One of the benefits of a strategic alliance is that it can help a firm overcome trade barriers. Another is that it can compensate for the absence of or weakness in any of the needed key success factors for a market. *a. T. b. F. 13.7 The key to success of strategic alliances is to maintain strategic value for each of the participants. *a. T. b. F. 13.8 The eight motivations for global strategies are: to cross-subsidize, to dodge trade barriers, to access low cost labor/materials, to create global associations, to obtain global innovation, _________, __________, and ___________. Answer: Obtain scale economies, access strategic markets, and access national incentives. 13.9 A frequently unforeseen consequence of global expansion is that healthy markets, especially the home market, are put at risk by the diversion of resources. *a. T. b. F. 13.10 Four conditions under which organizations expanded globally and survived are: a repeatable formula for expansion, customer differentiation that travels, _____________, and _____________. Answer: A strong core and industry economics. 13.12 An organization should enter countries in a sequential order. a. T. *b. F. © 2010 John Wiley & Sons

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The strategy to enter countries sequentially should be based on the strategic preferences of the organization. There are compelling factors to enter countries simultaneously as well. 13.13 Standardizing brand strategy leads to global market leadership. a. T. *b. F. 13.14 Johnnie Walker’s advertising campaign for its whiskey products across Europe demonstrates the benefits of standardization. a. T. *b. F. See page 255. Chapter 14—Setting Priorities for Businesses and Brands—The Exit, Milk, and Consolidate Options 14.1 Cash cows are units that should no longer absorb investments aimed at growing the business. *a. T. b. F. 14.2 The GE model is less complex than the BCG model. a. T *b. F. 14.3 An exit decision should be considered if the market demand, competitive intensity, or strategic fit is regarded unfavorably.

14.4

*a. T. Market demand and competitive intensity are not correct. Strategic fit, market attractiveness, and business position should be considered in an exit decision if these are regarded unfavorably. b. F.

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Motivations for exiting include avoidance of drain on profits by dog businesses in portfolio and purging businesses that do not fit the strategy of the firm. *a. T. b. F. 14.5 Implementing an exit decision is often delayed by managers who attempt to turn around a struggling business. *a. T. b. F. 14.6 Exit strategies should be considered in all of the following situations except: a. When the business position is weak. *b. When a firm’s reputation is at stake. c. When demand is diminishing quickly with no impending resurgence. d. When the strategic direction of the firm has changed. Though this may be a factor, this is not a defining characteristic for employing an exit strategy. 14.7 Biases inhibiting exit decisions are ______________ and ______________. Answer: Reluctance to give up and confirmation bias. Reluctance to give up alludes to emotional ties that make the decision difficult, while the confirmation bias refers to the notion that people seek information that confirms their initial position. 14.8 A milk or harvest strategy aims to generate cash flow by reducing investment and operating expenses to a minimum. *a. T. b. F. 14.9 ____________ would be disciplined about minimizing the expenditures toward the brand and maximizing the short-term cash flow, while ___________ would sharply reduce long-term investment, but continue to support marketing and service operating areas. Answer: A fast milking strategy; slow milking strategy 14.10 A hold strategy will be superior to a milk strategy when the market prospects and/or the business position is not as grim.

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*a. T. b. F. 14.11 A hold strategy may prevent a firm from making investments that would help retain product relevance. *a. T. b. F. 14.12 Strategic brand consolidation process includes five distinct steps: determiniing the relevant brand set, assessing the brands, ______________, creating a revised brand portfolio strategy and ______________. Answer: Prioritizing brands and designing a migration strategy. 14.13 Business portfolio analysis provides a structured way to evaluate business units on two key dimensions: the attractiveness of the market involved and the strengths of competitor’s in that market. a. T *b. F. The two key dimensions are attractiveness of the market involved and the strength of the firm’s position in that market. 14.14 Some of the conditions that favor a milking strategy include a price structure that is stable at a level that is profitable for efficient firms. *a. T. b. F. 14.15 Confirmation bias occurs when the objective information cast doubt on the sales projections of a business. a. T. *b. F. See pages 269-270. 14.16

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Andy Grove made the decision to get out of memory by pretending he was a new CEO brought in from the outside. *a. T. b. F. Chapter 15 – Organizational Issues 15.1 One dimension of organizational structure is the budgeting system. a. T *b. F. The four key components of the organizational structure are: structure, systems, people, and culture. 15.2 The four dimensions of an organization include people, structure, ________, and _________. Answer: culture and systems. 15.3 The virtual corporation is a team of people and/or organization formed for a particular client or job. *a. T. b. F. 15.4 An organizational culture involves three elements: a set of shared values, a set of norms of behavior, and a context or environment. a. T. *b. F. See Figure 15.3. 15.5 Of the following, which were among the six silo problems discussed in the book: i. Marketing resources are misallocated ii. Marketing management competence is weakened iii. People are not able to rotate throughout the organization Select one of the following a. None of the above © 2010 John Wiley & Sons

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b. One of the above *c. Two of the above d. Three of the above. Point iii is not among the set. 15.6 In dealing with the silo problem, a CMO should be aggressive. Just being a facilitator is not going to get the job done. a. T. *b. F. In most cases, the CMO should take up nonthreatening roles, not be aggressive. 15.7 It is optimal to have the same planning system used by all silos. *a. T. b. F. 15.8 To make progress on the silo challenge, it is necessary to centralize and standardize. a. T *b. F. Pages 285-286. 15.9 In addition to knowledge of marketing, markets, and products, the central marketing staff needs to have knowledge of brands and the organization. *a. T. b. F. 15.10 The CMO and the CMO staff are best sourced from inside the organization because of the value of relationships. a. T. *b. F. 15.11 In a matrix organization, everyone has a dotted line reporting arrangement with the CMO.

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a. T. *b. F. A matrix organization allows a person to have two or more reporting links. 15.12 Norms can vary with respect to their intensity and with respect to the degree of consensus or consistency with which they are shared. *a. T. b. F. 15.13 Organizational culture provides the key to strategy implementation because it is such a powerful force for providing focus, motivation, and norms. *a. T. b. F. 15.14 Four key constructs that describe the organization include all but one of the following: a. People *b. Competitor’s commitment c. Systems d. Culture e. Structure 15.15 An organization’s culture involves all but one of the following: a. Symbolic actions b. Shared values c. Norms of behavior *d. Managerial style of the CEO e. Symbols 15.16 According to the book, among the ways for the CMO to get the CEO on board with respect to silos is to make the silo problems visible, align the role of marketing with growth objectives, and get easy and visible wins. *a. T. b. F.

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ESSAY QUESTIONS 1.

What is the objective of external analysis? How would you distinguish between an effective and an ineffective external analysis? What would you say would be the most useful way to conduct an external analysis? Why? -Chapter 1 & 2The external analysis is undertaken to identify those factors outside of the organisation that will affect its choice of strategy. It begins with customer and competitive analysis, because these help define the relevant industry. External analysis also includes market/submarket analysis and environmental analysis. Through effective external analysis, management can then identify threats, strategic uncertainties and trends that will in conjunction with internal strengths, weaknesses, liabilities, problems, constraints and uncertainties will allow the firm to create adapt and implement an appropriate strategy. The external analysis is not an end in itself. It should be conducted periodically rather than annually but should be done so with direction. It should address questions such as whether an existing business should be liquidated, milked or maintained. It should identify value propositions, and what assets and competencies ought to be developed or maintained. As a result it should also address questions related to positioning strategy, segmentation, distribution, brand-building and manufacturing strategies. In so doing, good external analysis will identify customer motivations providing insights into what assets and competencies are required to compete as well as indicating sources of Sustainable Competitive Advantage. Crucially, good analysis will also help identify unmet needs that represent opportunities and indeed potential threats to the firm’s current business strategy.

Describe and give examples of a well-developed business strategy including the four characteristics. -Chapter 1Before describing each of the four key dimensions, it should be acknowledged the integrated nature of strategic planning such that firms need to develop corporate level strategy, brand and product level strategies informed by the overarching central corporate strategy. For example there needs to be a strategy for Volkswagen the company, for each of its brands including Volkswagen, Audi, Bentley, SEAT and Skoda as well as for the VW Golf. Four dimensions define the business strategy: the product-market investment strategy, the customer value proposition, the assets and the competencies, and the functional strategies and programs. This first dimension refers to the issue of where to compete and what markets to compete in over the coming years. In addition the firm will need to identify and develop a customer value proposition from a range of possibilities including, value quality, ethical commitment, innovation etc. Well-defined and good use of assets and competencies can become a source of Sustainable Competitive Advantage or at least as points of parity with the competition. Competencies are those things the firm does exceptionally well and assets are those resources such as a brand name that is strong relevant to the competition. Understanding how to protect these from copying by competitors will be crucial to maintaining that advantage in the long-term. Finally the firm needs to identify the functional activities that will support the overall strategy and drive change whether that is a brand-building program, a communications strategy, a global strategy, a sourcing or distribution strategy or any of a number of other options presented

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in the book. Key to selecting the appropriate business strategy is to ask a series of six question regarding the return on investment, the sustainability of the SCA identified, the longevity of the strategy under future constraints, the feasibility of the strategy and finally the fit with other strategies expounded by the firm. 3.

Discuss the advantages of a customizing rather than a standardizing marketing program in the context of a global strategy. When would customizing make sense? -Chapter 13On first glance standardisation presents many advantages to firms considering global markets. Essentially the economics of simplicity and standardization seems to overshadow the complexities of localized strategies. For example, standardization in production or communications can help generate economies of scale. Standardised brands may be easier to manage – developing a clear well-articulated brand strategy. Despite these benefits there are few truly standardized brands operating globally. Even McDonald’s tailors menus and communications to suit local needs. The result is that there are several contexts where a standardized brand makes little sense and instead customization appears a more appropriate strategy. There is a comprehensive list of examples in the book (pp.253-255) including where the firm has different market share positions or different brand images, different distribution channels, different social heritages and customer responses to name but a few. All these contextualities indicate that tailoring the market strategy to some extent is optimal even if the customer value proposition is generic enough to transcend cultural barriers. This is because it may be extremely difficult to identify a strategy that supports a global brand due to the lack of human resources, creativity, information or simply execution skills. Instead firms should consider brand leadership – that is creating strong local brands everywhere that take advantage of synergies arising from coordinated efforts across markets.

Consider the implementation problems of merging Sears and Walt Disney. What synergy would you expect? How could you make sure that it materialized? -Chapter 7 & 15As a result of synergy the combined businesses should have increased customer value, increased sales, lowered costs, reduced investment or a combination of these outcomes. Generally synergy arises because the firms have managed to leverage some area of commonality such as channels of distribution, customer base, staff and operating systems or R&D efforts to name a few. But while theoretical synergies may abound, in practice it may never materialize. Sometimes this is because the synergy never really existed and at other times it is because of implementation problems or even a clash of corporate cultures. Aside from such considerations, such a merger may encounter problems with respect to organisational structure and the notion of silos preventing the fluid sharing of resources and information, communication and efficiencies in operations. Essentially there are four organisational levers that will affect strategy – people, culture, systems and structures. A merger between two companies like Sears and Disney would encounter challenges in each of these respects, simply because they are two entirely different businesses operating in entirely different product markets. Ensuring that synergies materialized as a

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result of such a merger would depend on the firms’ abilities to address silo-driven problems as outlined in chapter 15, and how they use those four organizational levers to help execute strategy. 5.

Describe scenario analysis using one of the cases discussed in the course as a vehicle to illustrate. What implementation problems would you expect if scenario analysis were to be adopted at Apple Computer? -Chapter 5Scenario analysis helps deal with uncertainty and does by providing a more cost-effective alternative to investing in information to reduce information. It is important to acknowledge that there are two different types of scenario analysis but that in either case, the process will generally be a 3-step one, beginning with the creation of scenarios, moving on to relating those scenarios to existing or potential strategies and finally assessing the probability of those scenarios. Firms can either undertake strategy- developing scenarios to provide insights into future competitive contexts, or it can engage in decision-driven scenarios whereby a strategy is proposed and tested against several strategies that have been developed. In the first instance the objective is to generate contingency plans in anticipation of future events. In the second type of scenario, management is concerned with testing a strategy against a number of scenarios with a view to making go/no-go decisions. Generally it is optimal to work with two or three scenarios, otherwise the process becomes unwieldy. 6.

American business have been accused of being short-sighted, looking at short-term financial performance instead of taking a longer-term view. What can a manager do to make sure that he or she is managing for the long term? How would you go about advising a department store to generate indicators of long-term success? Be specific. Not available.

What are assumptions underlying the growth-share matrix? When are these assumptions likely to hold? What is the historical contribution of the growth-share matrix? -Chapter 14All firms should regard their businesses as a portfolio of business units. Additionally, firms should then learn to prioritise those business units in terms of contributions to the firm’s bottom line and the prospects of if continuing to do so. The growth share matrix proposed to analyse these business units along the parameters of market share and market growth rate and assumed that by categorizing firms into one of four resulting quadrants, a firm could develop an effective portfolio strategy allowing it to make investment, divestment, milking and holding strategies across a range of business units. While simplistic, the growth matrix did highlight the issue of allocating resources across business units- with some e.g. Cash Cows effectively subsidising less established units such as those in the Problem Children category.

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Discuss the considerations involved in making the decision to expand or broaden the product line. -Chapter 12Whether the innovation is transformational, incremental or substantial, to begin with the firm could ask of itself a series of questions about whether the market is real, whether the product is real and could be competitive, whether the company can be competitive, whether the product would be profitable at an acceptable level of risk and whether launching the product makes strategic sense. With any such proposal there are a number of fatal biases that can curtail success: short term financial pressure, the silo curse, the curse of success, the curse of being an incumbent in a market, the commitment curse and finally the curse of size. Management need to address these potential challenges in considering expanding or broadening the product line.

Describe the distinctions between strategic commitment, strategic opportunism, and strategic adaptability. -Chapter 7These three represent different strategic approaches whose primary differences can be expressed according to several organizational characteristics including management perspective, orientation, leadership style, organizational structure, future perspectives, people and risk. Strategic commitment is concerned with continuous improvement requiring a charismatic leadership style and a centralized organizational structure with a long-term view enacted by people trained to be alert. Strategic opportunism is more focused on fast responses instead of a committed orientation. Leadership styles tend to be more tactical in a more decentralized structure that focuses on the short-term enacted by human resources that tend to be more entrepreneurial than well-trained. Finally, strategic adaptability is about adapting to changes in the marketplace and being relevant. Leadership styles tend to be more visionary than tactical operating in a flat organizational structure with a medium-term view of the market enacted by a diverse staff with a range of skills and expertise. Whereas strategic commitment approaches can lose relevance over time, strategically adaptive approaches can falter by misreading trends.

10.

Describe and illustrate the following terms: -Scenario analysis - chapter 5 -Strategic uncertainties – chapter 2 -Synergy – chapter 7&15 -Strategic opportunism – chapter 7 -Strategic drift – chapter 7 -Key success factors – chapter 4&7 -Experience curve – chapter 8 -Silo barriers – chapter 15

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-Scenario analysis: The process of making strategic decisions to reduce uncertainty through envisioning and possibly creating scenarios against which strategies can be tested or upon which contignecy plans can be developed. Scenario analysis is a three stage process that begins with identifying scenarios, relating scenarios to existing proposed strategies and finally estimating scenarios possibilities. -Strategic uncertainties: Focus on particular unknown elements that will affect the outcome of strategic decisions. -Synergy: is the concept that whole is greater than the sum of its parts or that two businesses working together will either increase the customer value, lower operating costs or reduce investments. For example synergies may arise whereby offering a set of products will generate a higher return than would be possible if each product was sold separately for example coffee and cookies. -Strategic opportunism: Is a strategic approach that is characterized by entrepreneurialism, short-term thinking, tactical leadership styles and a decentralized organizational structure that allows it exploit opportunities quickly and relatively easily compared to other strategic approaches. -Strategic drift : Is a risk for firms that engage in strategic opportunism. Essentially it means that as a firms acts continuously in the short-term it can incrementally drift off course of the general market trends and find itself out of sync with developments in its industry and customer base. -Key success factors: Are those assets and competencies that provide the basis for competing successfully. There are two types: strategic necessities and strategic strengths. The former are the minimum that is required to compete and the latter are those that at which a firm excels providing a base for competitive advantage. -Experience curve: Is a classic proven concept which indicates that the more often a firm executes a task or performs an activity the more efficient it will become at doing it, as such costs will decline at a predictable rate. It is based on the fact that over time people learn to do things better, technologies improve and products and processes are designed tending toward simplicity. The Ford Model T is a classic example of the experience curve taking effect, dropping in price dramatically over its lifecycle and expanding the market considerably as a result. -Silo barriers: Problems with information sharing and communication internally in an organization can arise due to the potential for silo units to occur. In respect of marketing this can result in several problems that deflate synergies and can eliminate competitive advantage.

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11.

You have been given the task to evaluate a market opportunity for a firm. Give specific examples of the dimensions you would use to determine the attractiveness of a given market. -Chapter 14In this case, the analyst could use a modified Business Growth Matrix to identify and qualify a market opportunity. In so doing, two parameters should be used – market attractiveness and the firm’s ability to compete. Each of these can be categorized as high, medium or low, resulting in nine possible combinations. Three of these scenarios represent situations where it is advisable to invest or to grow a business, the other options being to engage in selective investment or even divestment. When either market attractiveness, business position or both parameters are high then a firm should invest in a market opportunity. When either or both are low, a firm should harvest or divest and otherwise the firm should engage in selective investment. Specifically, the firm’s ability to compete depends on factors such as the organization, growth , its market share by segment, the margins it earns, patents, marketing, distribution and technology skills, customer loyalty and organizational flexibility. Market attractiveness is affected by size, growth, customer satisfaction levels, nature of competition, price levels, profitability, government intervention and regulations, sensitivity to economic trends and the level of technology in the sector.

12.

13.

Discuss Competitor Analysis. In your discussion include the following: the objectives of competitor analysis and the elements of competitor analysis. You should use information from the course including articles, cases, and textbook material to support your answer. -Chapter 3Competitor analysis is the second phase of external analysis. Its main goal is to generate insights that will influence the development of successful business strategies and as such the analysis should focus on identifying threats, opportunities and strategic uncertainties that have been created by emerging, existing or potential competitor moves, weaknesses or strengths. It begins with identification of competitors followed by evaluation of those identified. The identification process can either place competitors in strategic groups on the basis of their competitive strategy or alternatively, they can be grouped according to the degree to which they compete for a buyer’s choice. In terms of evaluating competitors there are eight elements to consider: image and positioning; objectives and commitment; current and past strategies; organization and culture; exit barriers; cost structure; strengths and weaknesses and finally size growth and profitability. Further a firm may engage a competitive strength grid to generate a compact summary of its competitors based on their assets and competencies. Discuss Environmental Analysis. In your discussion include the following: the objectives of environmental analysis; the dimensions of environmental analysis; and how to deal with strategic uncertainty. Use information from the course including articles, cases, and textbook material to support your answer. -Chapter 5This is the last and broadest area of external analysis the firm will conduct. From here, management should identify strategies for dealing with strategic uncertainties. While it is such a wide topic, one can say the overall goal of environmental analysis is to identify any

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trend that could potentially influence the firm’s strategy. There are five main areas of interest- technological trends including their impact, consumer trends, government and economic trends and finally general external analysis. From these the firm may then engage in scenario analysis which will help reduce strategic uncertainties. Typically many strategic uncertainties will have emerged from the environmental analysis and what remains is for the firm to group and prioritise these into clusters based on their immediacy and the depth of their impact on the firm. From here, the firm may then conduct scenario analysis to estimate scenario probabilities. 14.

What at the payoffs to creating a new business? What are the risks? -Chapter 12The primary payoff is that the innovator earns more than the average firm due to the innovator’s advantage. This may be due to first-mover advantage, or because competitors are not able to respond, thirdly because the innovator can create enhanced customer loyalty. While generating innovator’s advantage requires investment and quick actions, there are also several common characteristics of successful innovators: they tend to envision the mass market, display managerial persistence, engage in relentless innovation, exhibit financial commitment and leverage assets effectively. Creating a new business can mean the firm enters what Kim and Mauborgne described as the blue ocean- where competition does not yet exist and the firm is free to capture the bounty of the market by virtue of its innovative strategies. Whether it can sustain those advantages is another thing, because there are a number of dangers including the curse of success, the shortterm financial pressure curse, the incumbent curse, the commitment curse and the size curse – all factors the firm needs to anticipate and deal with if it engages in creating a new business.

15.

Discuss Internal Analysis. In your discussion include the following: the objectives of internal analysis; the benefits of conducting an internal analysis; and the elements of internal analysis. Use information from the course including articles, cases, and textbook material to support your answer. -Chapter 6Organisational analysis is undertaken to identify organizational strengths, weaknesses and constraints and ultimately to develop responsive strategies by either exploiting strengths or fixing and or compensating for weaknesses. Conducting such an analysis will help management answer questions about whether the existing strategy should be enhanced or altered or even replaced. The level and depth of information available to management will be rich and varied but can be categorized into four main areas – financial performance, strengths and weaknesses, threats and opportunities and finally other dimensions such as customer satisfaction, brand association, relative costs, employee capability to name a few.

16.

Discuss the concept of customer value proposition and give examples. -Chapter 8-

Test Questions & Answers

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The customer value proposition is the way an offering appeals to new and existing customers. It should be offered in a relevant and meaningful way reflected in the positioning of the product and should be sustainable over time being easily differentiated from competitive value propositions. In that respect firms must address a number of issues in determining which propositions to pursue. For example they must determine if the customer value proposition is real and whether it is perceived by the customer, remaining relevant to the customer. Further the firm must decide whether that value proposition is sustainable and if the firm can execute the strategy to realize that position. Having done so the firm faces a number of alternative value propositions. It can become a niche specialist, offer value or quality, promote brand familiarity, highlight product attributes and benefits, act globally, provide systems solutions, engage in corporate social responsibility programs or provide superior customer service to name a but a few. 17.

How could you energize a business? Illustrate your answer. -Chapter 10There are three essential ways a firm can energise the business. It can innovate to improve the offering. Secondly it can energise the brand and the marketing. Thirdly it can increase the existing customer’s usage of its products or services. In terms of innovating the offering, the firm can improve the customer experience, enhance the product through innovation or introduce line extensions, In that respect branding the innovations helps with communication and adds credibility providing potential to own an innovation so that it can be used as a point of differentiation over time. This is the essence of branded differentiators, which augment the product offering. These can be either features, ingredients, technologies or services that affect the offering. When energizing the brand through marketing, there are a number of ways to energise the brand including involving the customer, going directly to retail, engaging in publicity events or promotions to attract new customers. Companies can also employ a branded energizer such as a celebrity or a high-profile CEO, or engage in activities like branded social programs to garner credibility and heightened awareness. Finally customer can be encouraged to increase usage in a number of ways: by motivating heavy users to consume more, by making use easier, by providing incentives, by removing the reasons not to buy, by providing reminder communications, by positioning for regular or frequent use or finally by finding new uses for the offering.

19.

What role does innovation have in strategy making? Give examples of firms who have a history of doing well with innovation and discuss the impact that has had on them. -Chapter 1, 5, 10, & 12Innovation plays a central and fundamental role in strategy making. From the very early stages of strategic analysis whereby the level of innovation inside the company and outside must both be assessed by means of internal and external analyses. For example technological trends identified as part of the environmental analysis and competitor analysis will contribute to the firms understanding its strategic requirements. In that respect innovation will also play a role in the firm’s own strategic plans – it can be a source of

Test Questions

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revitalization for energizing the business by means of enhancing the product through innovation, extending product lines, improving the customer experience or indeed creating branded differentiators. Also, innovation can lead to a competitive advantage if the firm can leverage its innovation capabilities to leave the red ocean of established business models and enter newer blue oceans defined by innovative business offerings. 20.

What is the innovator’s advantage? How can a firm enhance the chances that the innovator advantage will materialize? -Chapter 12The innovator’s advantage is the reason new business innovators tend to earn more than the average firm in an industry. The innovator’s advantage can be attributed to the company simply taking advantage of being the first to move, or it may be that they have created a competitive offering that competitors simply cannot emulate. Thirdly it can be because the firm can create enhanced customer loyalty. To ensure that it materializes the innovator must enter the market early and invest to build its position. Similarly there are a number of characteristics that the successful firm exhibits. They tend to envision the mass market, management are persistent exhibiting financial commitment, engaging in relentless innovation and leveraging assets. There are also a number of risks to consider when bringing the idea to market such as the dangers of a short-term financial focus, the risks inherent in silo structures, the curse of success, the curse of being the incumbent, the commitment curse and the curse of size.

Test Questions & Answers

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JBS SA 2010 In January 2009 Wesley Batisita, CEO of JBS, spoke to the attendees at the annual Harvard Business School Agribusiness programme. He appeared as the leader of the world’s largest beef processor and began his presentation by recounting how his father had grown the business from a handful of steers in Brazil in the 1950’s. He emphasised how he and other family members, had been introduced to the business from the ground up, with his father emphasising the need to understand how value must be extracted from every carcass if success was to be achieved in the margin thin beef processing sector. These two insights remained central to JBS and its future strategy.

JBS had caught the attention of the global food industry following its acquisition of Swift & Co., the third largest beef processor in the US. It had been expected in the industry that one of the domestic giants, Tyson, Cargill or Smithfield, would be the buyer. When JBS emerged as the buyer, people were curious about this new player and intrigued about whether they could make a success of their new acquisition. They also had to contend with the fact that JBS was now the largest beef processor in the world.

After the acquisition of Swift there was a lot of excited chatter in the industry. What was actually possible for JBS? How would they finance their growth? Did they have the depth of management team required to successfully integrate this acquisition? Few, however, anticipated what was to come next.

JBS Acquisition History JBS SA had begun to use acquisition for growth in the mid 1990’s, making more than 30 acquisitions between then and 2010, the most significant of these are shown in table one below. However, its first international acquisition was only in 2005 when it acquired two Argentinean beef firms, this was followed by a further Argentinean acquisition in 2006. In 2007, two further Argentinean acquisitions and the Swift deal gave JBS exposure to the US market and also Australia. ©2010 John Wiley & Sons

Table One – Significant JBS mergers and acquisitions

Year

Company

Location

Sector

Price

2010 (March)

Rockdale Beef

Australia

Integrated beef

Undisclosed

producer 2010 (February)

Tatiara Meat

Australia

Company

Australia’s largest

US$27m

exporter of chilled lamb

2009 (September)

Bertin (merger)

Brazil

N/A

2009 (September)

Pilgrim’s Pride

USA

Poultry

US$800m

2009 (July)

Five processing

Brazil

N/A

Brazil

Leather

US$26.8m

plants 2009 (August)

JBS Couros*

capitalisation 2008 (March)

Tasman Group

Australia

Australia’s largest

AUD$160M (@

multispecies meat

US$150m at April

processor

2010 exchange rates)

2008 (March)

Smithfield Beef

USA

Group (inc. Five

Beef processing

US$565m

and cattle feeding

Rivers Ranch Cattle Feeding) 2007

Inalca

Italy

Meat packer

50% of equity for €600m (@ US$840m in 2007)

2007

Swift Foods

USA

Beef processing

US$1.4bn

Company

In 2008 the firm made two acquisitions in the US, Smithfield Beef and Five Rivers. 2009 was also a busy year for JBS both in Brazil and the United States. Two of its moves were particularly noteworthy, the acquisition of Pilgrim’s Pride and the merger with Bertin SA.

Pilgrim’s Pride JBS acquired Pilgrim’s Pride for US$800m in December 2009. The acquisitions of 64% of Pilgrim’s came following a post-bankruptcy restructuring of the business which had seen it return to profitability. The cash was used to pay creditors, reducing the overall level of debt carried by the firm. The particular attraction of Pilgrim’s for JBS was the opportunity it provided for access to the poultry market. At the time of acquisition, Pilgrim’s had 4,500 contract growers, 41,000 employees, 33 plants in the US, three in Mexico and one in Puerto Rico, and was the largest poultry integrator in the United States. The slightly smaller second place player was Tyson Foodsi. While the processing capacity was attractive to JBS, Pilgrim’s also sold chicken and chicken products to the foodservice and retail customers in the US and 80 other countriesii. By the end of 2009 US$95m of synergies had already been secured, with the expectation that US$2-300m in savings were possible in a full year.iii

Bertin SA Second was the merger with Bertin SA, a Brazilian rivaliv. Announced immediately after the Pilgrims Pride acquisition, the new organisation was to hold all JBS companies and Bertin interests in beef processing, milk production and hides/leather. The new entity would be 60% controlled by JBS with the remainder held by Bertin. The joint venture offered access to new segments, in particular the dairy industry. It was also anticipated that the combined operation could find cost reductions of US$500m by 2011v. The deal created the largest multi-protein company in the world.

JBS Strategy JBS strategy since 2005 has been built on an incremental, four stage process which reflected the elegant simplicity of much of JBS’s thinking, but also its ambition to achieve and maintain its position as the leading global protein firm with geographical diversification and a strong growth profile. This was usually the backdrop to investor presentation and conference callsvi. The four stages were:

Stage two 2007 & 2008: Develop a global production platform. This to be created in South America, North America, Australia and the European Union. The objective being to secure global access to raw materials, scale and costs improvements and to secure leadership in exports globally.

Stage three 2009 & 2010: Create and integrate global sales and distribution platform. Drive margin improvement by integrating sales and distribution platforms to serve retail and foods service customers in North and South America, Europe, Middle East and Africa (EMEA) and Asia.

Stage four 2011 & 2012: Invest in value added products and branding. Drive margin improvement through investing in expanding the existing value added products portfolio, product localisation and marketing investment.

A further feature of investor presentations notes the foundations of JBS strategy going forward as: • Financial Structure • Experienced Management • Cost Reduction, productivity, process managements, and, • Risk management Using these foundations and reflecting the four stage strategy above, the firm intends to drive average margin achievement in its activities from 4% in production, 8% in sales and distribution to the higher margins of 12% in value added products and the 50% margins enjoyed in branded goods.

Financial Performance At an investor meeting in May 2009, Joesley Batisita highlighted that JBS was ready to grow and was in a strong cash position, while competitors were concerned about leverage. He boldly declared “I wouldn’t like to be competing against JBS”. A chilling statement for its competitors around the globevii.

In April 2010, JBS announced plans to offer up to 270 million new common shares on the Sao Paolo marker with the potential to raise up to US$1.23bn. The objective of this fundraising is to finance working capital, but more than two-thirds will be set aside to expand the direct sales business. This announcement followed the January 2010 decision to delay a US$2bn IPO of the JBS USA business.

The Future Joesley Batistsa, the board members of JBS and the Batista family clearly feel that the future for the business is bright and that their brand of entrepreneurial growth is the key to the future. Growth through acquisition has been a notoriously difficult strategy to maintain. Can JBS pull it off?

Questions 1. How would you evaluate JBS’ strategy of industry consolidation? 2. How would you compete against JBS? 3. What must they do in order to make a long term success of their strategy of growth through acquisition?

Smith, Rod (2010) “Pilgrims emerges from bankruptcy”, Feedstuffs, January 4th, page 7. Smith, Rod (2010) “Pilgrims emerges from bankruptcy”, Feedstuffs, January 4th, page 7. iii http://www.jbs.com.br/ir/index.html Conference call 4Q09 ii

http://www.meattradenewsdaily.co.uk/news/170909/brazil___jbs_buy_rival_bertin_sa_who_kill__cattle_per _day.aspx v http://www.jbs.com.br/ir/index.html Conference call 4Q09 vi Investor Presentation, January 2010. Sourced: 10th of April 2010 vii “World’s largest beef producer JBS in ‘strong cash position’ for distribution expansion”, Feedinfo news Service, 13th May 2009.

Kindle and the Book Industry With some 350,000 titles available to download almost instantly for $9.99 per book, Amazon’s electronic reading device, the Kindle 2 was grabbing attention among readers and publishers alike. Exploiting first-mover advantage, Amazon’s Kindles dominated the US e-reader market with an estimated 60% share. The advent of the e-reader had been dubbed “the I-Pod moment”1 for the world’s book industry, referring to the fundamental changes in the music industry with the launch of Apple’s I-Pod digital music player. Launching the Kindle in November 2007, Amazon CEO Jeff Bezos’ statement “the book is the last bastion of the analog”2 really belied the revolution his Kindle had sparked. In less than three years a range of new devices, technologies and publishing standards had arisen prompting one commentator to ask “does the future of book reading lie in dedicated devices like the Kindle, or in more versatile gadgets like mobile phones?”3

The Global Book Industry The global book industry was estimated at $114 billion per annum for consumer and educational books4. In 2008, e-books accounted for less than 1% of total turnover, 1

Well read: Electronic books are becoming popular. Will newspapers follow? In the Economist February

12h 2009, http://www.economist.com/node/13109804 2

The book is dead. Long live the book (in some form) in the Economist, November 20 th 2007,

http://www.economist.com/node/10164693 3

Cellphone Apps Challenge the Rise of E-Readers by Motoko Rich and Brad Stone in New York Times,

November 17th, 2009, http://www.nytimes.com/2009/11/18/technology/18reader.html?_r=1&scp=1&sq=KINDLE%20and%20th e%20BOok%20Industry&st=cse 4

Brought to book by Ben Fenton and Salamander Davoudi in Financial Times, October 15 th 2009,

http://www.ft.com/cms/s/0/f11b8bbc-b9b6-11de-a747-00144feab49a.html

however. While growth rates seemed rocket-fuelled, they were starting from a low base. On the other hand analysts expected e-books to capture 20-25% of the book market within 10 years. But opinions within the industry differed as to the reality of such forecasts. Arnaud Nourry, Chief Executive of Hachette Livre, a leading international publisher was not convinced of devices like the Kindle 2 “it is something for the upperclass, people over 45, big readers, big travellers, early adopters. They are not 25 per cent of the book market. The core of the market is people who buy 3-6 books a year. You can’t buy a machine for that”5. But some publishers were more progressive, “whether it’s Apple or Sony, we’d like to see as many entities come in to build this market”, stated Brian Murray Chief Executive of HarperCollins6, another leading international publisher.

Maintaining 1st Mover Advantage Amazon had built a reputation as an online retailer providing a highly organised and consumer-focused service for Internet shoppers. But the move into developing an ereader proposition was not so radical as it might have seemed, leveraging that same expertise in service excellence as they did. Designed exclusively for reading, the original Kindle had a long battery life, always-on 3G Internet connectivity to allow quick downloads and a large 6 inch user friendly screen that was easy on the eyes. Using the proprietary AMZ file format, customers could purchase digital books from Amazon’s growing catalogue and download directly to their Kindle devices, storing virtually a lifetime’s worth of reading on the tablet.

Brought to book by Ben Fenton and Salamander Davoudi in Financial Times, October 15 th 2009,

http://www.ft.com/cms/s/0/f11b8bbc-b9b6-11de-a747-00144feab49a.html 6

Great expectations for Amazon’s Kindle by Kenneth Li in Financial Times online, February 9 th 2009,

http://www.ft.com/cms/s/0/d18212e2-f6f9-11dd-8a1f-0000779fd2ac.html

By 2009 there were an estimated 6 million e-reader devices in circulation in a year that was “the tipping point when this market really started”7 with the entrance of a variety of digital book reading propositions. The forecast sales for 2010 were expected to reach 12 million units8. It seemed Amazon had performed excellently as a market maker with competitors rushing in with alternative products and services, many, including Google using the open EPUB standard that allowed for e–books to be read across a variety of formats. The AMZ format only worked with Kindles. But already Amazon had consolidated its position in the market, followed by Sony with 35% and a host of others accounting for the remaining 5%. Meanwhile consumer research had indicated the optimal price for a mass-market e-reader was about $999, while the cheapest Kindle, Kindle 2 retailed for $259 in the US market and $279 internationally.

The second-generation Kindle, Kindle 2 was launched February 2009 retailing for just over 60% of the original Kindle 1’s price tag while featuring a range of enhancements to improve the user-experience. In the same year, Barnes and Noble, the bricks and mortar book store released the Nook e-reader, Amazon launched a Kindle application for the Apple I-Phone allowing users to read Amazon book formats on their mobile phones and Sony was among a handful of manufacturers to introduce new devices to a rapidly segmenting market based on factors like price, network connectivity and added functionality. Meanwhile Google had also launched a mobile version of its Google Book website, making 400,000 titles available to mobile phone users at the touch of a button.

The plot thickens: E-books will move further towards the mainstream in the Economist, November 13 th

2009, http://www.economist.com/node/14742603 8

The plot thickens: E-books will move further towards the mainstream in the Economist, November 13 th

2009, http://www.economist.com/node/14742603 9

Digital publishing making its bookmark: Google wants to shake up the digital book market in the

Economist October 22nd 2009, http://www.economist.com/node/14678817

E-Books vs P-Books The scale of the impact e-books could have on the book industry was enormous, in terms of cost structures, content development, talent sourcing and of course distribution. Inevitably roles within the industry would change however. With less emphasis on physical activities like printing, warehousing and shipping, publishers could focus their efforts on sourcing and marketing talent while exploiting new business networks with online retailers. It seemed that in the longer term, those within the industry who could adapt to emerging business models could exploit e-books as a source of added value rather than as a cannibalisation threat to published books or pbooks.

E-books and their distribution platforms represented opportunities to generate added value by supplying extra content, for example the background story to Bram Stoker’s Dracula. E-book designs could leverage video and animation to create interactive dustcovers enhancing marketing and positioning in online stores. Secondly, word of mouth marketing and social networking would play a greater role in driving online sales.

Dispensing of paper, printing and binding and consequently warehousing and physical distribution networks presented opportunities for innovation in e-book pricing and cost structures as well. It was estimated that e-books could cost less than half as much as a published book; way below Amazon’s $9.99 threshold. Further, non-fiction e-books could be sold piecemeal as required while bestsellers could be priced at a premium to exploit pent up demand, with discounts ensuing over time.

But during the transition period where the industry straddled both online and physical publications the potential cost savings were marginal because “it’s 1 per cent of our business but our old cost structure hasn’t gone down 1 per cent just because of the growth of e-books” according to Brian Murray Chief Executive of HarperCollins ©2010 John Wiley & Sons

publications10. As such Amazon’s $9.99 price tag per book was deemed to be part of an unsustainable loss-leader strategy that was vulnerable to innovative pricing structures from potential competitors like Google and Apple.

Issues facing Amazon More competition would inevitably benefit the consumer with more choice of devices, features and pricing structures. Overall, three factors would play decisive roles in shaping the future of the e-reader market. Device prices would continue to drop while technology improved. Already Sony was offering e-readers close to the magic $99 price, but many mobile phones were also already in that price range complicating segmentation decisions for Amazon’s Kindle range. Disputing the threat of mobile phones to his business, Ian Freed, Vice President for the Kindle division at Amazon pointed out:

“The Kindle is for people who love to read. People use phones for lots of things. Most often they use them to make phone calls. Second most often they use them to send text messages or e-mail. Way down on the list, there’s reading”11.

Further, it was widely believed that Amazon’s $9.99 price per book was unsustainable but market forces were pulling in both directions. Consumers accustomed to free online content would conflict with publisher interests aiming to maximise their revenue streams.

Great expectations for Amazon’s Kindle by Kenneth Li in Financial Times online, February 9th 2009,

http://www.ft.com/cms/s/0/d18212e2-f6f9-11dd-8a1f-0000779fd2ac.html 11

Cellphone Apps Challenge the Rise of E-Readers by Motoko Rich and Brad Stone in New York Times,

November 17th, 2009, http://www.nytimes.com/2009/11/18/technology/18reader.html?_r=1&scp=1&sq=KINDLE%20and%20th e%20BOok%20Industry&st=cse

Secondly publishing standards would become a pertinent issue. Amazon’s closed system appeared to be a weakness in a nascent industry where others had embraced the open EPUB and PDF formats. With 400,000 books in its catalogue compliant with the EPUB standard, Google Books for instance, seemed well placed to quench Amazon’s Kindle.

Finally it remained to be seen what course of action Apple would follow between introducing its own e-reading technology or exploiting relationships with existing businesses like Amazon’s Kindle or Google Books. By exploiting its expertise in making technology with mass-market appeal as well as its established online retailing models ITunes and the App Store, Apple was extremely well positioned for the next chapter in the digital book industry’s story.

If the move toward e-books really was inexorable, analysts were left wondering what moves Amazon could make to defend its market leadership position and what role would other formats and technologies play in shaping that market.

Questions: 1. Is e-reading a fad or a trend? How long will it be before it becomes a mainstream activity? 2. What must Kindle do to maintain its first mover advantage? 3. How can Kindle compete with the Apple iPad? Using its Brand? Through technology? One price?

References:

The plot thickens: E-books will move further towards the mainstream in the Economist, November 13th 2009, http://www.economist.com/node/14742603

The book is dead. Long live the book (in some form) in the Economist, November 20 th 2007, http://www.economist.com/node/10164693

Guest Column : The Kindle—Igniting the Book Business, by Peter Olson and Bhrat N Anand in the Book Business Magazine online, June 1st 2009, http://www.bookbusinessmag.com/article/amazons-kindle-has-raised-issues-bookpublishers-such-appropriate-pricing-options-e-books-407856_1.html

Is Kindle Burning the Book Industry? By Kaitlin Tambuscio in TCN Journal, October 23 rd, 2001, http://www.tcnj.edu/~unbound/article.php?id=891

Amazon’s Kindle to go international, by Jonathan Birchall, Tim Bradshaw and David Gelles in Financial Times online, October 7th, 2009, http://www.ft.com/cms/s/0/df0bf168-b2ff-11de-ac13-00144feab49a.html

Great expectations for Amazon’s Kindle by Kenneth Li in Financial Times online, February 9th 2009, http://www.ft.com/cms/s/0/d18212e2-f6f9-11dd-8a1f0000779fd2ac.html

Digital publishing making its bookmark: Google wants to shake up the digital book market in the Economist October 22nd 2009, http://www.economist.com/node/14678817

Well read: Electronic books are becoming popular. Will newspapers follow? In the Economist February 12h 2009, http://www.economist.com/node/13109804

Cellphone Apps Challenge the Rise of E-Readers by Motoko Rich and Brad Stone in New York Times, November 17th, 2009,

http://www.nytimes.com/2009/11/18/technology/18reader.html?_r=1&scp=1&sq=KIN DLE%20and%20the%20BOok%20Industry&st=cse

Brought to book by Ben Fenton and Salamander Davoudi in Financial Times, October 15th 2009, http://www.ft.com/cms/s/0/f11b8bbc-b9b6-11de-a747-00144feab49a.html

Kraft and Cadbury 2010 In the summer of 2009, Kraft, one of the world’s largest consumer food manufacturers was deep into a revitalisation program that involved a management shake-up, corporate re-branding, new product lines and a string of potential acquisitions. That program began in 2006, the day Irene Rosenfeld assumed the position as CEO and Chairperson of Kraft Foods. When asked about her company’s interest in purchasing Cadbury’s, the world’s second largest confectioner, Rosenfeld replied characteristically, “Why now? The answer is simple: Why wait?”1. But for Cadbury’s the answer was not so concise. In a letter of response2, Cadbury’s Chairman Roger Carr was emphatic:

“Under your proposal, Cadbury would be absorbed into Kraft’s low growth, conglomerate business model, an unappealing prospect which contrasts sharply with our strategy to be a pure-play confectionery company”.

The markets responded to the prospect of a hostile takeover with speculation and favourable analysis forcing Cadbury’s share price to jump almost 32%3. Indeed analysts believed the proposal made commercial sense, and despite Cadbury’s rejection of Kraft’s overtures, the two seemed at least to share a common set of values based on innovation and consumer-focus. If successful, the deal would create the world’s largest

Woman in the News: Irene Rosenfeld by Jonathan Birchall in Financial Times online, September 11th,

2009, http://www.ft.com/cms/s/0/0838c682-9f01-11de-8013-00144feabdc0.html 2

Cadbury reiterates rejection of Kraft bid in Reuters online, September 12th, 2009,

http://www.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUSLC34154220090912 3

Kraft – Cadbury Hershey weighs $17bn bid for Cadbury by Justin Baer and Jonathan Birchall in Financial

Times November 21st, 2009, http://www.ft.com/cms/s/0/ff447dd2-d632-11de-b80f00144feabdc0,dwp_uuid=da5b2be8-9c6b-11de-ab58-00144feabdc0.html

confectionery operator controlling 15% of the market4 with brands like Toblerone, Milka, Dairy Milk and Trident Gum5. What remained to be seen was whether any deal would result in a win-win situation for both organisations in the longer term.

Cadbury’s Founded as a tea and coffee shop in 1824 by John Cadbury, a Quaker, it was seven years before the family business began making and selling cocoa drinking products. In 1905, John’s grandson produced the first Cadbury’s Dairy Milk chocolate bar when he mixed cocoa solids and fresh milk: a revolution in chocolate consumption. Later, in the 1920’s other brands like Crunchie, Crème Egg and Flake were developed that have since stood the test of time.

Dairy Milk was the foundation upon which the global confectioner’s business was built. In 1918 the company also took-over another UK chocolate maker: Fry’s, makers of Turkish Delight. Together, their brands were distributed across the British Commonwealth. Cadbury’s first real diversification took place in 1969 when the company acquired Schweppes, a manufacturer of tonic drinks. In 1988 it entered into an agreement allowing Hershey’s the US confectioner to manufacture Cadbury’s chocolate for the US market. Later in 2003 Cadbury’s successfully purchased Adams, maker of Trident chewing gum and Halls’ cough sweets. By that time Cadbury was the largest confectionery group in the world. It went on to acquire fast growing niche organic chocolate maker Green & Black’s for a reported £20 million in 2005 pledging to operate it as a separate business that could benefit from access to global markets as a result of

Kraft set for hostile move on Cadbury by Jenny Wiggins and Kate Burgess in Financial Times November

6ht, 2009, http://www.ft.com/cms/s/0/8cda0890-cb1d-11de-97e0-00144feabdc0,s01=1.html

the purchase. Commenting on the acquisition, Todd Stitzer CEO of Cadbury’s remarked: “our businesses share a passion for quality products and ethical values”6.

The return to its confectionery roots was completed when Todd Stitzer CEO divested Cadbury’s of Schweppes in 2008 the same year Mars, then number two sweet maker, purchased Wrigley’s Chewing Gum to replace Cadbury’s in the top spot. Around this time Cadbury engaged in some cost-saving measures including the shift of production from its Keynsham factory to other plants in England and Poland as well as the substitution of palm oil for cocoa butter in its Dairy Milk brand. By August 2009, in response to consumer outcry Cadbury’s reverted to using cocoa butter and announced it would source its cocoa beans through Fair Trade channels.

Kraft Founded in the USA in 1903 by Canadian born James L. Kraft, Kraft was perhaps the second largest food manufacturer in the world after Nestle. It started out selling cheese products and after several difficult years the company gained a foothold in the market embracing advertising early on in its history. In 1915 the company won massive contracts to supply the US army having invented a pasteurization process for cheese that extended its shelf-life and dispensed of refrigeration. The company’s growth throughout the 20th Century was characterised by constant innovation in dairy products, snack foods, beverages and convenience foods. For example it was the first to introduce frozen pizza to the US market, and had also created ‘Lunchables’ – an entirely new category of healthy snacks for children. While Kraft Foods had internationalised in 1924 the USA still remained its core market in 2009 where it sold literally dozens of brands.

By the time Irene Rosenfeld assumed the CEO position in 2006, Kraft had been engaged in a series of cost-cutting measures to maintain profitability, at the expense of quality. In 6

Cadbury gobbles up organic rival in BBC news online, May 13th 2005,

http://news.bbc.co.uk/2/hi/business/4543583.stm

her own words she felt the company “had lost its heart and soul” when Kraft had cut the cheese content in its famous Macaroni and Cheese pre-packaged dinners7. Generally, the company had become slow to innovate, encumbered by a centralised decision making process where strategy had become “rooted in the comfortable market dominance of leading domestic brands such as Oreo’s, Jell-O and Kraft’s Macaroni and Cheese”8. But Rosenfeld seemed to have the right stuff:

“What makes her so effective is that she understands all aspects of the business: consumers, customers, competition, the manufacturers and the technology. She is not one-dimensional”9.

In revitalising Kraft, Rosenfeld brought in management talent from outside the company to sit on the executive committee, removing five of the ten incumbents. She championed a corporate re-branding that replaced the familiar old blue white and red logo with a multi-coloured floral pattern featuring pastel hues of the spectrum. Employees were encouraged to “keep things simple”, be honest in their communications and become “open and inclusive”. The company’s redrafted statement of purpose shifted the focus to the consumer: “Consumers inspire us” it began. Deeper aspects of corporate cultures nevertheless, were typically slow to adapt to new ways and norms and Kraft’s reputation for one had not been built on humility10. 7

Woman in the News: Irene Rosenfeld by Jonathan Birchall in Financial Times online, September 11 th,

2009, http://www.ft.com/cms/s/0/0838c682-9f01-11de-8013-00144feabdc0.html 8

Kraft seeks to overhaul its image by Jonathan Birchall in Financial Times, September 15 th 2009,

http://www.ft.com/cms/s/0/09f1f1b8-a219-11de-81a6-00144feabdc0.html 9

Woman in the News: Irene Rosenfeld by Jonathan Birchall in Financial Times online, September 11 th,

2009, http://www.ft.com/cms/s/0/0838c682-9f01-11de-8013-00144feabdc0.html 10

Kraft seeks to overhaul its image by Jonathan Birchall in Financial Times, September 15 th 2009,

http://www.ft.com/cms/s/0/09f1f1b8-a219-11de-81a6-00144feabdc0.html

Within nine months of taking over, Rosenfeld had reorganised Kraft11; bidding successfully for Danone’s biscuit business and selling off its own cereal business. Decentralising decision making, power shifted to her subordinates with each unit responsible for all aspects of their profit and loss activities, including marketing, innovation and manufacturing. Soon the company began launching new products like Oreo’s Cakesters - which was a cake version of the famous cream and chocolate cookies – and ‘live’ versions of Kraft cheeses, targeting the trend toward functional foods.

Issues Price was perhaps the most obvious issue concerning the proposed takeover. Kraft’s initial offer, valuing Cadbury’s at £10.2 billion, was deemed too low and unfair because it involved both cash and a share swap. Since that announcement Kraft share prices had dropped; discounting the value of the proposed bid from 745 pence per share to 707 pence12. Investors disagreed with the original valuation:

“We are in the middle of a phoney war. Kraft says its offer is fair and true while Cadbury asserts it has a viable independent future. Neither situation is tenable. We believe the next step is a new raised offer from Kraft which will force the Cadbury defence to change from an argument about an independent future to value maximisation”13.

Woman in the News: Irene Rosenfeld by Jonathan Birchall in Financial Times online, September 11 th,

2009, http://www.ft.com/cms/s/0/0838c682-9f01-11de-8013-00144feabdc0.html 12

Cadbury reiterates rejection of Kraft bid in Reuters online, September 12 th, 2009,

http://www.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUSLC34154220090912 13

Investors urge Kraft to raise Cadbury bid to 850p by Richard Wachman in the Guardian online

September 22nd 2009, http://www.guardian.co.uk/business/2009/sep/22/cadbury-kraft-takeoverpressure

But in November 2009 Kraft began to play hardball, issuing a formal bid for an even lower offer price, valuing Cadbury’s at £9.8 billion. Responding to the overtly hostile takeover, Carr underscored the importance of acquisitions being mutually beneficial, “we didn’t invite this. We fill a well-defined hole in the Kraft structure…but for us they offer nothing”14.

Secondly, overshadowing the proposed acquisition was a conflict in strategic priorities. Kraft was eager to exploit growth opportunities and strengthen its presence in international markets reducing its reliance on the domestic US market15. Cadbury’s, as a British institution and as a focused confectioner preferred to remain independent. It was estimated that Kraft could boost profits at Cadbury’s by up to 70% because of revenue synergies and cost-rationalisation and because of very few overlaps in their respective businesses16. This was another factor that seemed to justify a higher purchase price than what was on offer.

Furthermore, it seemed that Kraft was due to benefit more than Cadbury’s from the proposed takeover, acquiring prestigious international market presence, which they could then trade off in acquiring world-class talent:

Kraft set for hostile move on Cadbury by Jenny Wiggins and Kate Burgess in Financial Times November

6ht, 2009, http://www.ft.com/cms/s/0/8cda0890-cb1d-11de-97e0-00144feabdc0,s01=1.html 15

Kraft seeks to overhaul its image by Jonathan Birchall in Financial Times, September 15 th 2009,

http://www.ft.com/cms/s/0/09f1f1b8-a219-11de-81a6-00144feabdc0.html 16

Investors urge Kraft to raise Cadbury bid to 850p by Richard Wachman in the Guardian online

September 22nd 2009, http://www.guardian.co.uk/business/2009/sep/22/cadbury-kraft-takeoverpressure

Kraft is all about big: big manufacturing, big distribution, big sales and big marketing talent…and they have not had some place to put their top-tier talent in international business for a long, long time”17.

There was also debate about how Kraft would organise Cadbury’s after any takeover deal was arranged. Inevitably the prospect of being relocated to Kraft headquarters in Illinois was anathema to fans of the British chocolate brand, but there was also the fear of rationalisation. Despite Kraft’s reassurances that the US giant wished to save jobs in Britain, it had cut many jobs at Terry’s in York City, Northern England some years previously when it took over the makers of Terry’s Chocolate Orange.

Finally, there was the issue of corporate cultures: in addition to strategic planning cultural integration was a key factor to determining the long-term success of any acquisition. One of Cadbury’s primary concerns as expressed by Roger Carr was being absorbed into the organisational structure of Kraft, losing its identity as well as its ability to innovate and thereby compete with rivals Mars for example. But Rosenfeld’s revitalisation program, decentralising power and encouraging innovation appeared to be paying dividends at Kraft already and represented an ideal structure in which to nurture a distinct business sector while remaining part of a larger organisation and the benefits that accrued.

Unresolved Whether Cadbury’s liked it or not, it was a takeover target. By November 2009, the company had requested the UK Takeover Panel to force Kraft either to make a formal bid or to pull back for a period of six months. Such an action would also give potential white knight bidders an opportunity to express their interest in competing for a chunk of

Kraft seeks to overhaul its image by Jonathan Birchall in Financial Times, September 15 th 2009,

http://www.ft.com/cms/s/0/09f1f1b8-a219-11de-81a6-00144feabdc0.html

the British confectionery giant18. Of those, there were only three real candidates: Nestle, Hershey’s and Ferrero.

Of these only Nestle could afford the cash to acquire Cadbury’s but would have to satisfy anti-monopolisation issues in the process. Both Hershey’s and Ferrero appeared to suit best in terms of complimentarity, but neither could afford the £10 billion price tag on its own19. Meanwhile Hershey’s had both a complicated ownership structure and limited experience outside of the US while Ferrero, a privately owned Italian company had limited experience of managing acquisitions.

Whereas those three companies all had expertise in international markets and confectionery, Kraft’s experience was limited, having acquired a handful of established international brands. It was difficult to assess the ultimate benefit to the consumer from the acquisition but for Patrick Garot a long-serving consultant with Kraft, the crux of the issue was clear: “Confectionery is a very different category from what Kraft does. Kraft will have to respond to Cadbury’s knowledge and authority in how to run that business”20.

June 2010 After several months of hostile wrangling, the two companies had eventually agreed an acquisition price of £11.6 billion in January 2010. The slightly higher than anticipated

Investors urge Kraft to raise Cadbury bid to 850p by Richard Wachman in the Guardian online

September 22nd 2009, http://www.guardian.co.uk/business/2009/sep/22/cadbury-kraft-takeoverpressure 19

Kraft set for hostile move on Cadbury by Jenny Wiggins and Kate Burgess in Financial Times November

6ht, 2009, http://www.ft.com/cms/s/0/8cda0890-cb1d-11de-97e0-00144feabdc0,s01=1.html 20

Kraft seeks to overhaul its image by Jonathan Birchall in Financial Times, September 15th 2009,

http://www.ft.com/cms/s/0/09f1f1b8-a219-11de-81a6-00144feabdc0.html

price was to be funded from Kraft’s substantial cash reserves but would also necessitate tighter annual cost cutting measures than previously planned. Such developments had prompted official government comment with Prime Minister Gordon Brown urging Kraft to keep Cadbury jobs in the UK. Despite reassurances in the lead up to the deal, Kraft was forced to announce the closure of Cadbury’s Somerdale factory less than one week after the takeover was completed. Commenting on the fiasco, head of Kraft Europe, Mike Clarke reflected, “consumers love our brands, and now we need to do a bit of work on our corporate reputation”21. In fact, much of Kraft’s revenue growth for 2010 was attributable to its acquisition of Cadbury, something Rosenfeld felt vindicated her initial decision to acquire the chocolate manufacturer. But a subsequent series of highprofile senior executive departures seemed to cast the longer-term prospects of corporate and cultural integration into doubt. Those resignations had included Cadbury’s Chief Strategy Officer and its UK Marketing Director among others. But Kraft remained adamant it had created the right structure and plan to generate the synergies envisioned. Only the markets could tell whether Rosenfeld’s plan would come to fruition in the longer-term.

This case lends itself well to a debate around the question of whether Kraft should have acquired Cadbury or not.

References:

Cadbury gobbles up organic rival in BBC news online, May 13th 2005, http://news.bbc.co.uk/2/hi/business/4543583.stm

History, distinctive taste at stake in Cadbury bid, in Reuters online, Septermber 11th, 2009,

Cadbury helps Kraft to 26% rise in revenues, Greg Farrell and Elizabeth Rigby in the Financial Times, May 6 2010, http://www.ft.com/cms/s/0/a153ff94-595f-11df-99ba-00144feab49a.html

http://www.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUSLA336372009 0911?pageNumber=1&virtualBrandChannel=11617

Cadbury reiterates rejection of Kraft bid in Reuters online, September 12 th, 2009, http://www.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUSLC341542200 90912

Woman in the News: Irene Rosenfeld by Jonathan Birchall in Financial Times online, September 11th, 2009, http://www.ft.com/cms/s/0/0838c682-9f01-11de-801300144feabdc0.html

Kraft and Cadbury: the Brands, in the Guardian online, September 7 th 2009, http://www.guardian.co.uk/business/2009/sep/07/kraft-cadbury-brands

Investors urge Kraft to raise Cadbury bid to 850p by Richard Wachman in the Guardian online September 22nd 2009, http://www.guardian.co.uk/business/2009/sep/22/cadbury-kraft-takeover-pressure

Kraft seeks to overhaul its image by Jonathan Birchall in Financial Times, September 15 th 2009, http://www.ft.com/cms/s/0/09f1f1b8-a219-11de-81a6-00144feabdc0.html

Kraft set for hostile move on Cadbury by Jenny Wiggins and Kate Burgess in Financial Times November 6ht, 2009, http://www.ft.com/cms/s/0/8cda0890-cb1d-11de-97e000144feabdc0,s01=1.html

Sweet taste of Cadbury draws suitors by Jenny Wiggins, Lina Saigol and Kate Burgess in Financial Times November 18th 2009, http://www.ft.com/cms/s/0/03981fde-d47a-11dea935-00144feabdc0,dwp_uuid=da5b2be8-9c6b-11de-ab58-00144feabdc0.html

Shares boost for Cadbury as rivals nibble in The Irish Times November 24 th, 2009, http://www.irishtimes.com/newspaper/finance/2009/1124/1224259337218.html

Cadbury is sweet on takeover by Hershey by Jenny Wiggins and Justin Baer in Financial Times, November 22nd 2009, http://www.ft.com/cms/s/0/57ab84d0-d79a-11de-b57800144feabdc0,dwp_uuid=da5b2be8-9c6b-11de-ab58-00144feabdc0.html

Kraft – Cadbury Hershey weighs $17bn bid for Cadbury by Justin Baer and Jonathan Birchall in Financial Times November 21st, 2009, http://www.ft.com/cms/s/0/ff447dd2d632-11de-b80f-00144feabdc0,dwp_uuid=da5b2be8-9c6b-11de-ab5800144feabdc0.html

Nokia Fights Back Commenting on the launch of its first ever laptop, the Nokia 3G netbook executive vice president Kai Oistamo was confident his company was poised for an exciting future. “If you go back a few years, the market changed suddenly and we were not fast enough changing with it. We have an aggressive plan now”1. That plan was focused on transforming the Finnish telco into a services-oriented company generating added-value from media sales and software applications2. But analysts and industry experts believed Nokia had a long way to go before realising that change.

The Nokia netbook launch was the latest in a flurry of announcements from the Finnish manufacturer, market leader in mobile phones and the emerging smartphone sector. In the previous two years, Nokia had announced deals with partners as varied as Microsoft, Facebook, Intel, Google and Linux – the open source operating system in a bid to become “undisputed number 1”3. Further it continued to launch new handsets including four smartphone models in the weeks before the netbook introduction. Despite this activity its share-price had halved over 2008 leaving investors sceptical that Nokia really was better at anything other than ‘connecting people” as its slogan suggested.

Nokia fights back for share of smartphone market by Abhinav Ramnarayan in the Guardian online,

September 2nd 2009, http://www.guardian.co.uk/business/2009/sep/02/nokia-smartphones-appleiphone-music-mobiles 2

Nokia takes high-end aim at Apple, by Andrew Ward in Financial Times, September 2nd, 2009,

http://www.ft.com/cms/s/0/ee34584e-97f0-11de-8d3d-00144feabdc0.html 3

Nokia aims to seize smartphone limelight by Andrew Ward in Financial Times, September 3 rd 2009,

http://www.ft.com/cms/s/0/efcf7c34-98b2-11de-aa1b-00144feabdc0.html

Convergence Product life cycles in the telecommunications industry were short and only getting shorter. “Two years is a lifetime in gadget land”4 - characterised by innovation and rapid diffusion of technologies, the industry was in a state of perpetual flux; its future probably best described as one of convergence where traditional mobile handsets and Internet enabled computing devices were merging to create new business model opportunities and industry sectors such as the fledgling smartphone category. In contrast, the core mobile phone sector of the market, accounting for more than 80% of all handsets sold, was expected to shrink 4% to 1.2 billion units in 20095, after 15 years of almost uninterrupted growth6. Nokia’s share of this market had slipped from 42% to 38% since the introduction of the Apple I-Phone in 20077, but this was still a higher percentage than its share of the overall mobile market. In fact the smartphone sector was the only area demonstrating steady growth during that same period with sales expected to grow 27% to 177 million units in 20098.

One of the primary reasons for this counter-trend was that smartphones acted like simple computers offering access to email, Internet and a host of programs or ‘apps’ developed by third parties specifically for those handsets and their operating systems. 4

Nokia in Financial Times online, June 2nd 2009, http://www.ft.com/cms/s/3/6071789c-4f4e-11de-a692-

00144feabdc0.html 5

Smart-phone wars: Pre-conceived in the Economist June 11th, 2009,

http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_TPRPNPPR 6

Nokia braces for drop in phone sales by Andrew Parker in Financial Times, November 14 th, 2009,

http://www.ft.com/cms/s/0/ad23044c-b257-11dd-bbc9-0000779fd18c.html 7

Nokia in Financial Times online, June 2nd 2009, http://www.ft.com/cms/s/3/6071789c-4f4e-11de-a692-

00144feabdc0.html 8

Smart-phone wars: Pre-conceived in the Economist June 11th, 2009,

http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_TPRPNPPR

As such smartphones typically offered an enhanced media experience for consumers living in an online world. Apple’s I-Phone had set the standard in the sector with its touchscreen, attractive graphical interface and versatility, while Research in Motion’s (RIM) Blackberry seemed most favoured by business customers. Apart from these aspects, Apple’s success primarily stemmed from its ‘apps’ store: an online shop with close to 90,000 individual applications available for download, many for free. Within one year of opening for business the store had clocked 1.5 billion individual downloads as users customised their handsets. By contrast Nokia’s own Ovi app store offered a mere 4,500 applications for its 75 different types of smartphone handsets.

Combined, the two competitors, Apple and RIM had increased their share from one fifth to approximately one third of total share in less than a year9. But Nokia was slow to respond. “There’s no such thing as a silver bullet that is going to kill the I-Phone” commented one consultant in discussing the nascent smartphone wars10. In an attempt to surf the trend toward convergence, the Finnish company had set in motion a number of changes to help switch focus away from manufacturing toward service provision. Management believed significant future revenue streams and growth could be generated from Ovi, Nokia’s online app store, setting a goal to gain 300 million users by 2012 downloading music, maps and useful programs from its web shop 11. At the launch of Nokia’s N97 – the company’s answer to the Apple I-Phone, Olli-Pekka Kallasvuo

Nokia in Financial Times online, June 2nd 2009, http://www.ft.com/cms/s/3/6071789c-4f4e-11de-a692-

00144feabdc0.html 10

Nokia aims to seize smartphone limelight by Andrew Ward in Financial Times, September 3rd 2009,

http://www.ft.com/cms/s/0/efcf7c34-98b2-11de-aa1b-00144feabdc0.html 11

Nokia fights back for share of smartphone market by Abhinav Ramnarayan in the Guardian online,

September 2nd 2009, http://www.guardian.co.uk/business/2009/sep/02/nokia-smartphones-appleiphone-music-mobiles

announced Nokia would make smartphones “a reality for the masses, not just for the elite of this planet”12.

Innovation One of the problems for Nokia was that it was following market trends rather than shaping consumer preferences13. Such a position ultimately placed the company at risk of being caught in the middle between the high-end smartphone sector and the costfocused end of the market. Success in the more profitable smartphone category was critical to reversing the decline in margins and average selling prices for Nokia phones. It was an unenviable outcome in danger of becoming the “Dell of mobile” as one analyst described such a situation whereby Nokia would have to lower prices to maintain market shares and ultimately be associated with value for money instead of innovation and design14.

Some advocated a radical overhaul of R&D at Nokia recommending it adopt a “Skunk Works” approach to innovation15 – a radical move organising engineers to collaborate on projects in small independent cells answerable only to the CEO and thereby bypassing much of the bureaucracy that could hamper true breakthroughs. But Kallasvuo was convinced he had implemented the correct strategy engaging in partnerships with technology firms like Microsoft, Linux and Google to develop phones

Nokia takes high-end aim at Apple, by Andrew Ward in Financial Times, September 2nd, 2009,

http://www.ft.com/cms/s/0/ee34584e-97f0-11de-8d3d-00144feabdc0.html 13

Nokia in Financial Times online, June 2nd 2009, http://www.ft.com/cms/s/3/6071789c-4f4e-11de-a692-

00144feabdc0.html 14

Services hold key to Nokia’s future by Andrew Parker and Andrew Ward in Financial Times online, August 23rd, 2009,

http://www.ft.com/cms/s/0/14bca458-9008-11de-bc59-00144feabdc0.html 15

Services hold key to Nokia’s future by Andrew Parker and Andrew Ward in Financial Times online, August 23 rd, 2009,

http://www.ft.com/cms/s/0/14bca458-9008-11de-bc59-00144feabdc0.html

that ran on their proprietary operating systems while hiring in talent but retaining the traditional organisational structure.

This umbrella strategy of working with everybody in the operating systems world seemed to fit with the goal of “democratising the smartphone” as Kallasvuo had described it. Specifically the deal with Microsoft would create a “formidable challenge for RIM more than anyone else” according to Oistamo16. Meanwhile, Nokia’s N900 was the first Nokia phone to run on Linux the open source operating system that would allow developers the world over to create applications for the device easily and with less cost than was the case for I-Phones whereby developers were tied into purchasing special development software and paying a registration fee. Finally phones working on Google’s highly innovative Android operating system, another open-source system, would present a further alternative to the I-Phone’s appeal as a product and as a development platform for programmers.

Additionally the deal with microprocessor manufacturer Intel indicated Nokia was committed to moving into mobile computing. Even the European mobile phone networks like Vodafone and O2 once adverse to services like Ovi competing with their own media services, had warmed to the prospect of revenue sharing deals for media products their telephone customers purchased on Nokia’s Ovi store using their mobile telecommunications networks17. This was mainly because their own services had failed to gain much traction with customers due to high data download prices. Finally, Nokia was preparing internally: many new staff for its 3,000 strong services unit had been recruited from companies like Google, Yahoo! and Apple. Gradually Nokia was

Microsoft and Nokia target corporate market by Andrew Parker and Maija Palmer in Financial Times

online, August 12th, 2009, http://www.ft.com/cms/s/0/251bb9f0-8726-11de-9280-00144feabdc0.html 17

Services hold key to Nokia’s future by Andrew Parker and Andrew Ward in Financial Times online,

August 23rd, 2009, http://www.ft.com/cms/s/0/14bca458-9008-11de-bc59-00144feabdc0.html

assembling a network of partnerships and expertise to enable the internal transformation, but already it was feeling the pinch on margins due to lower prices as customers migrated over to I-Phones en masse in 2008 and 2009.

Looking Ahead Despite this shock to the Nokia system Kallasvuo was convinced the company was best placed to take advantage of the medium term opportunities in the global smartphone sector. As smartphones became more mainstream, Nokia could leverage its scale, lowcost base, brand equity, superior logistics and segmentation to generate a sustainable competitive advantage across all markets. In the meantime, what remained uncertain was whether Nokia could actually reposition itself as a services oriented firm – a goal possibly best measured by the amount of subscribers to its Ovi suite of online services. With the target set at 300 million by 2012 and only 59 million members in late 200918, there remained a long way to going beyond “connecting people”. For Nokia management the critical decision became how to balance its corporate vision of democratising the smartphone with the strategic realities of the market place dynamics in which it competed.

Questions 1. What lessons can market leaders draw from Nokia’s experience in dealing with change in the phone market? 2. How would you describe their strategy for future growth? Particularly evaluate its ambition to build a service business. 3. What new capabilities will they have to acquire in order to implement this strategy?

Services hold key to Nokia’s future by Andrew Parker and Andrew Ward in Financial Times online,

August 23rd, 2009, http://www.ft.com/cms/s/0/14bca458-9008-11de-bc59-00144feabdc0.html

References:

Nokia fights back for share of smartphone market by Abhinav Ramnarayan in the Guardian online, September 2nd 2009, http://www.guardian.co.uk/business/2009/sep/02/nokia-smartphones-apple-iphonemusic-mobiles

Nokia braces for drop in phone sales by Andrew Parker in Financial Times, November 14th, 2009, http://www.ft.com/cms/s/0/ad23044c-b257-11dd-bbc9-0000779fd18c.html

Nokia in Financial Times online, June 2nd 2009, http://www.ft.com/cms/s/3/6071789c4f4e-11de-a692-00144feabdc0.html

Nokia takes high-end aim at Apple, by Andrew Ward in Financial Times, September 2nd, 2009, http://www.ft.com/cms/s/0/ee34584e-97f0-11de-8d3d-00144feabdc0.html

Services hold key to Nokia’s future by Andrew Parker and Andrew Ward in Financial Times online, August 23rd, 2009, http://www.ft.com/cms/s/0/14bca458-9008-11debc59-00144feabdc0.html

Nokia aims to seize smartphone limelight by Andrew Ward in Financial Times, September 3rd 2009, http://www.ft.com/cms/s/0/efcf7c34-98b2-11de-aa1b00144feabdc0.html

Nokia pledges smartphone assault on Apple by Andrew Parker and Andrew Ward in Financial Times online, August 23rd 2009, http://www.ft.com/cms/s/0/2b1204ea-900911de-bc59-00144feabdc0.html

Microsoft and Nokia target corporate market by Andrew Parker and Maija Palmer in Financial Times online, August 12th, 2009, http://www.ft.com/cms/s/0/251bb9f0-872611de-9280-00144feabdc0.html

Nokia weighed down by networks venture by Andrew Ward in Financial Times online, October 15th 2009, http://www.ft.com/cms/s/0/b3891f24-b97c-11de-abac00144feab49a.html

Nokia in Financial Times online, September 30th, 2009, http://www.ft.com/cms/s/3/322ef8ba-ad9a-11de-bb8a-00144feabdc0.html

Nokia flags slowdown in mobile market by David Ibison and Maija Palmer in Financial Times online, April 17th 2009, http://www.ft.com/cms/s/0/f30fc2aa-0c68-11dd-86df0000779fd2ac.html

Delay reveals Nokia’s smartphone dilemma by Andrew Ward in Financial Times online, October 23rd, 2009, http://www.ft.com/cms/s/0/34db4d54-bffe-11de-aed200144feab49a.html

Nokia weighed down by networks venture by Andrew Ward in Financial Times online, October 15th, 2009, http://www.ft.com/cms/s/0/b3891f24-b97c-11de-abac00144feab49a.html

Smart-phone wars: Pre-conceived in the Economist June 11th, 2009, http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_TPRPNPPR

Nokia turns to Android in smartphone wars by Richard Wray in the Guardian online, July 6th 2009, http://www.guardian.co.uk/global/2009/jul/06/nokia-mobile-internet-phones

Billabong – tapping into global youth culture Established in 1973 on Australia’s Gold Coast by surfer and surfboard shaper, George Merchant with his partner, Billabong’s pedigree as a surf brand was second to none. But since that time, the market for surf wear had evolved and changed, and companies competing in newly globalized markets such as the boardsports and lifestyle apparel sectors were experiencing new and persistent challenges with managing sustainable growth and profitability. For Billabong in 2010, senior management faced a number of strategic issues: currency fluctuations, seasonality of the brand and over-exposure to the US market. But Derek O’Neill, CEO of Billabong, was confident that non-surfing markets like Eastern Europe and parts of Asia would be keys to his company’s continued success.

Board Sports The market was large. In the US alone, surf and snowboarding each were valued at $3 billion, while skateboarding was worth about $5.5 billion with about 23 million hardcore or ‘core’ consumers. Along with Quicksilver and Rip Curl, Billabong dominated the world market for surf lifestyle products and indeed the larger board-sports category. All three companies had originated in Australia although Quicksilver had since changed ownership and relocated to the USA. Board-sports including skateboarding and snowboarding had exploded in popularity around the world during the 1990’s and 2000’s, riding a wave of globalized youth culture. They were sports that appealed to both young men and women alike: typically energetic, highly experiential and intrinsically anti-establishmentarian – boardsports were an optimal vehicle for expressing a young person’s identity. As a result, many leading surf brands diversified into new product markets, following core consumers as they took up new board sports.

launched by practitioners of the sports, often pro-athletes such as Tony Hawk and Jamie Thomas in the case of skateboarding for example. A brand’s credibility could be irreparably damaged by ‘selling out’ – whether selling a brand on to a larger corporation, selling bad quality product or selling through inappropriate distribution channels – brand equity was intrinsically linked to retaining credibility with the target audience.

It was for similar reasons that companies like Nike and Reebok had failed to penetrate the board-sports market to any great extent – essentially due to a lack of pedigree. Nike’s most recent attempt was to market a range of footwear, SB, to skateboarders in the US exclusively through existing skateboard shops rather than its other mainstream distribution channels. Reebok instead entered into a licensing agreement with leading skate brand Dirty Ghetto Kids (DGK) to create a range of skate footwear that would help it penetrate the sector. Commenting on brand equity, Lora Bordmer, a spokesperson for Action Sports Retailing USA explained “selling out is not about profits…it’s about distribution. That’s a big deal in our industry – exclusivity”.

But with success, the leading surf brands entered the mainstream and the profiles of the market seemed to change. Much of the growth in board-sports during the 1990’s was attributed to the boom in females taking up surfing and other sports. Perhaps more fundamentally, however, it was estimated only about half of consumers purchasing boardsports apparel were actively participating in those sports, the remainder were buying into the image and lifestyles the brands represented instead.

Billabong’s Strategy Billabong’s initial internationalisation activity was to target the US surfing community in the 1980’s. Later that decade it expanded through licensing to South Africa, Japan and New Zealand, places where surfing was established. Around the beginning of the 1990’s

it expanded into Europe, tapping into the surging interest in surfing culture there, but the US remained its primary international market.

In 1999 sales reached $110 million and the company prepared for a public listing. In 2000 the company was listed on the Australian Stock Exchange allowing it access to resources to pursue strategic growth and retain brand equity with the burgeoning boardsports global community. It did so by diversifying through acquisitions such as Von Zipper sunglasses in 2001, Element Skateboards in 2002, Kustom footwear in 2004, Nixon watches and Beachworks retail concept stores in 2006, and Xcel wetsuits and Tigerlily, an exclusive girls surf wear brand, in 2007. By 2009, having also acquired Sector 9 skateboards and DaKine, a premium boardsports accessories brand, turnover reached $1.67 billion. At about this time, the company’s intangible assets rose from $800 million to $1 billion, representing about 45% of their total assets. Through careful and consistent sponsorship of events such as men’s and women’s professional international surfing competitions and athletes, Billabong had built a brand profile that extended far beyond the surfing community, and indeed across borders.

By 2007, approximately 70% of profits were earned in foreign markets, up from 30% five years previously. And with over 40% of revenue coming from the US alone in 2008 or $500 million in sales, much of the company’s fortunes were precariously balanced on its ability to manage foreign exchange options. These currency fluctuations were particularly troublesome due to developments in its distribution strategy in the US. Globally, Billabong used both own-brand stores and wholesalers to achieve market penetration. In the US, it had somehow reconciled the issue of exclusive distribution in using Pacific Sunwear’s network of 900 stores to reach the mass market nationwide. When the economic recession began to take its toll on US retail sales in 2008, such fruitful relationships changed, however. As Pacific Sunwear experienced drops in sales and closed stores, it looked to rationalise product lines and reduce inventory, ultimately proposing a value price driven business model. Furthermore, in-store merchandising ©2010 John Wiley & Sons

suffered as a result impacting sales for premium brands like Billabong. Faced with the option to discount prices or seek alternative channels, management believed the latter offered more opportunity in the long-term. By 2009, contribution to the group’s US turnover by sales achieved through Pacific Sunwear had dropped to 10%, half of previous levels. As profits plunged for the Australian multinational, it was time for Derek O’Neill to announce wherein lay Billabong’s future fortunes: Europe – “we got great momentum in that market and I think we can grow substantially over the next five years in Europe”, he predicted.

Non-traditional Markets Europe was the second largest boardsports market outside of the USA. It also had some idiosyncrasies of which Billabong could take advantage. For example, erratic snowfalls in recent years did not seem to affect the sale of winter outerwear like jackets and gloves. Similarly boardshorts were popular despite a relatively small surfing community. But markets like Germany and Italy were not traditional surf markets. For Billabong to succeed in penetrating Europe, some believed, it would have to tweak its marketing strategy. Industry analysts believed key to Billabong’s success in the region was the development of retail opportunities to drive growth and the targeting of female consumers. At the time Billabong had 47 company-owned stores and another 21 operating under licence. By comparison its main competitor, Quicksilver, managed about 300 in Europe. Furthermore Quicksilver’s Roxy brand was the market leader for the women’s segment. As a benchmark, sales for Roxy USA had eclipsed sales for Quicksilver for men in the USA. Billabong’s recent acquisition of Tigerlily presented the company with the opportunity to engage directly with female consumers.

By 2008 sales in Europe had responded to the firm’s revised marketing strategy despite further currency fluctuations. The sales growth through own brand stores, taking advantage of its diversified product range to capitalise on heavy snowfalls that winter. The success compensated somewhat for a poorer than average performance in the USA. ©2010 John Wiley & Sons

But 2008 brought further surprises as O’Neill announced his intention to expand deeper and further into Eastern Europe and Russia. It was two years since Quicksilver had announced a joint venture with a Russian partner to distribute Roxy and Quicksilver products in the market. The announcements reflected the growing popularity of surf brands in non-traditional markets: the Czech Republic, Hungary, Poland and Estonia for example together contributed about 1% of Billabong’s global sales. Confident in his plans however, O’Neill explained, “with internet and satellite TV today the kids in areas like Russia are as informed about trends and brands and music as anyone”.

Looking Ahead By 2010, the US market was still recovering. Business was performing better through its own retail operations than through the wholesale level. In Europe, sales had increased by 20% through the company’s own retail stores, taking advantage of its diversified portfolio to capitalise on heavy snowfalls that winter, industry analysts were impressed with Billabong’s sales performance and European profits. Meanwhile sales growth in South America of about 10% indicated much untapped potential in markets like Brazil where surfing and beach culture were established facets of life. Despite sales growth in key markets, a strong Australian dollar was eating into Billabong’s bottom line. In 2009 it had announced another rights issue to fund future growth and O’Neill was keen to maintain the pace. By 2010, Billabong was present in over 100 countries worldwide and was investigating entry modes for India, China, Taiwan and Korea that would optimise market penetration and control over the marketing mix. Surf culture and boardsports lifestyles were reaching youth audiences in these markets as well. The challenge for Billabong was how to tap into that potential in a way that remained profitable in light of the cultural and currency differences between headquarters and those new markets.

Questions: 1. Why is Billabong a ‘cool’ brand? Can the brand continue to grow while maintaining this aspect of its brand equity? 2. How can traditional sports brands compete with brands such as Billabong? 3. How could Billabong tweak its marketing strategy to improve sales in nontraditional markets?

Brazil Gets the Olympics Winning the competition to host the 2016 Olympic Games in Rio de Janeiro stirred mixed emotions among the populace one of the world’s largest economies. In a way it seemed quite fitting Brazil’s chosen slogan for 2016 was Live Your Passion – it was expected 100,000 people would throng Copacabana beach in Rio to celebrate the good news1. Credited with championing Brazil’s submission, it was however, President Lula da Silva’s tears of joy that attracted much attention from international journalists. Drying his eyes with a handkerchief at a press conference, the victory seemed more profound than a mere sporting win when Lula, as he was commonly known, exclaimed, “our hour has arrived. It has arrived”2. It was the first Olympiad to be held in South America and seemed a marketing coup positioning Rio and Brazil on the world stage, beating Madrid and favourites Chicago in the process. In tandem with winning the bid for the 2014 FIFA World Cup, the latest victory sent a message to the global community: Brazil was open and ready for business and of course, leisure.

On the other hand, scepticism as to the true value of hosting the Games was not far away. “It would be a haemorrhage of public money, just as with the Pan American Games”3, commented one newspaper columnist Juca Kfouri on the estimated $14 billion 1

Rio declares holiday for Olympics announcement by Andrew Downie, in Financial Times onlne,

September 30th 2009, http://www.ft.com/cms/s/0/e77bdb76-adbc-11de-bb8a00144feabdc0.html?nclick_check=1 2

Rio de Janeiro to host 2016 Olympics, in CNN online, October 2nd 2009,

http://edition.cnn.com/2009/WORLD/europe/10/02/olympics.2016/index.html 3

Rio declares holiday for Olympics announcement by Andrew Downie, in Financial Times onlne,

September 30th 2009, http://www.ft.com/cms/s/0/e77bdb76-adbc-11de-bb8a00144feabdc0.html?nclick_check=1

direct and $50 billion indirect spend. With 5% annual growth in 2009, nearly $225 billion in foreign reserves and a newly discovered oil field in the Atlantic Ocean primed for commercialisation, Brazil could well afford to host the Games. But a number of fundamental issues seemingly synonymous with Brazilian culture threatened to tarnish not only the success of the 2016 Olympiad but also the country’s reputation as a potential super power. They were safety, planning and infrastructural investment.

Live Your Passion Marketing Rio successfully as the choice venue for the 2016 Games was a combination of timing, effort and passion. Brazil was a rising star in the global economy, poised to become the world’s 5th largest economy sometime after 2014, surpassing France and the UK in the process4. Further, it was also the only one of four competing nations and the biggest economy in the world never to have hosted the Olympics. Conversely Rio was not favoured to win, burdened as Brazil was by poor infrastructure, a reputation for crime and a history of poor planning. In addressing these key issues, the Brazilian team implemented a compelling $50 million proposal to portray a progressive culture where life was lived to the full by its residents known as Cariocans.

The plan was to locate Games in four main zones across the city: Copacabana, Deodoro, Maracaná and finally Barra an up-and-coming suburb to the south of the main metropolis. The opening and closing ceremonies would take place in an upgraded Maracaná football stadium, where once some 200,000 people attended a match during the 1950 FIFA World Cup. Rio was renowned as a beautiful city, lined with beaches and nestled among mountains at the mouth of a picturesque river estuary that was surrounded by coastal rainforests. On the other hand this peculiar geography presented challenges for urban planning. This would be the backdrop to a state-of-the-art

Brazil takes off in the Economist online, November 12th 2009, http://www.economist.com/opinion/displaystory.cfm?story_id=14845197

infrastructure of sporting facilities, extensive hotel capacity, an enhanced metro system, upgraded tunnels and highways to process Rio’s legendary traffic jams more efficiently.

In addressing its reputation for violence and crime, particularly in the slums, or ‘favelas’ of Rio, the Olympic committee commissioned Oscar-nominated Fernando Meirelles, one of Brazil’s leading directors to produce a film showcasing the positive aspects of the city, focusing on Cariocans’ enthusiasm for sports and partying. Secondly, in outlining an $800 million security plan for the Games as part of a $3.5 billion 4 year crackdown on drug gang-related violence in the city’s favelas, one of Rio’s highest ranking policewomen met with IOC officials to present a plan for a safer Rio de Janeiro. Commenting on the impact of the Games, Rio’s mayor Eduardo Paes forecast that “the Olympics is going to lead to an urbanisation of poor communities and a lot of jobs. The city will get wealthier”5.

In his role as champion of the proposal, President Lula successfully lobbied other Latin American leaders and even French President Nicolas Sarkozy to support Rio’s bid. In addition to drafting internationally renowned Brazilian celebrities like football legend Pelé and author Paulo Coelho, Lula also personally wrote, to each member of the IOC ruling committee, a letter that was hand-delivered by a Brazilian ambassador in each case.

Brazil’s Rising Star Brazil’s emergence on the world stage was a slow steady process that began in the 1990’s with a set of policies that reined in inflation, liberalised the Central Bank’s role, privatised industries and opened up the country to foreign trade. Coupled with Russia, India and China under the acronym BRIC by investment bank Goldman Sachs, experts believed growth in these four countries would drive global economic development in 5

Violence mars Rio de Janeiro's reputation ahead of 2016, by Ashling O’Connor in Financial Times October 19th 2009, http://www.timesonline.co.uk/tol/sport/olympics/article6881528.ece

the early 21st Century. As president, Lula, an ex-union representative who never completed primary school, inherited a fiscal system characterised by prudence and conservatism – traits he carried on, pursuing infrastructural development and the redistribution of wealth equitably. In 2007 his government also announced the Growth Acceleration Program to drive almost $360 billion in infrastructural development including the construction of airports, ports and highways by 2010. Additionally, the minimum wage had increased by 45% in real terms between 2001 and 20086.

As a result of its fiscal management efforts, Brazil had prospered thanks in part to high prices for soy beans, iron ore and steel, gaining an investment grade rating for the country’s sovereign debt in 2008. Further, it was also quite energy self-sufficient, generating 90% of its requirements from renewable sources such as hydroelectric power. Unlike other countries, Brazil had emerged out of the global recession early with forecasted 5% growth for 20107.

Signs of investor confidence had already appeared: following the announcement that Brazil would stage both events, Coca-Cola committed to investing $5 billion in what would become a key market for the soft-drinks company. Meanwhile other industries like tourism remained underexploited for a number of reasons. Per annum Brazil received an equivalent number of visitors as Australia, yet only one quarter of the income, despite having 8,000 kilometres of beaches, hundreds of tropical islands and the Amazon Forest to offer visitors. It was estimated Brazil accounted for less than 3% of total tourist income in the Americas as a whole8. The underdevelopment in the Brazil’s 6

Olympics Won, Brazil's Work Begins, by Geri Smith October 2 nd 2009 in Business Week,

http://www.businessweek.com/globalbiz/content/oct2009/gb2009102_557862.htm 7

Olympics Won, Brazil's Work Begins, by Geri Smith October 2 nd 2009 in Business Week,

http://www.businessweek.com/globalbiz/content/oct2009/gb2009102_557862.htm 8

Aspiration: World Class Destination by David White, in Financial Times online, November 4 th, 2009, http://www.ft.com/cms/s/0/fdffc82a-c8d9-11de-8f9d-00144feabdc0.html

tourism sector echoed some of the deeper issues haunting the 2016 Games: security, infrastructure and planning.

In addition to the hotel industry being largely geared to the domestic market, the shutdown of national airline Varig had dampened international traffic volumes. Meanwhile outbreaks of drug gang violence in Rio’s favelas in 2009 only reinforced perceptions of Brazil in general as a dangerous destination. Finally with the establishment of a ministry of tourism in 2003, it was hoped a national plan to improve facilities, training and market segmentation could help boost annual growth beyond rates as low as 2% and 3%. While the Olympics would certainly help stimulate international interest and visitor numbers, it was acknowledged that such events typically served to encourage tourists who had intended on travelling anyway to visit at a specific time, namely during the event instead of at a later date.

Mixed Economic Impact The mixed economic impact of the Olympics was not limited to tourism alone however. The key problem with measuring the economic impact of large sporting events was their very scale and a question of what time period to use. As such it seemed to be a question of perspective. One report published in 2009 affirmed that both winning and losing bidders gained economically from participating in the submission process9, while at least one prominent economist believed hosting events such as the Olympics represented a “high cost low reward proposition”10.

Olympics has positive economic impact on both winning – and losing bidders, by Heather Stewart in the

Guardian April 14th 2009 http://www.guardian.co.uk/uk/2009/apr/14/olympic-games-economics-exports 10

The Olympic Games Ring Quartet in the Economist, September 24th, 2009,

http://www.economist.com/world/international/displaystory.cfm?story_id=14515386

Certainly large events encouraged public and private investment in infrastructure that may otherwise have remained on the back burner but such spending in line with tight deadlines could also raise prices and divert capital from other investment projects. Similarly, large scale sporting infrastructural investments had limited resource uses, which might not have suited the overall long-term plan for a given city. Finally rising prices and costs due to over-crowding could also negatively impact on consumer’s experiences of the host city as a tourist destination11. Despite these issues, Rio was keen to emulate the model demonstrated by Barcelona for the 1992 Olympics – a landmark event that transformed the city to its benefit with a lasting impact on tourism and business sectors. “Barcelona got the most out of the Games. It became another city; that’s what we want to do in Rio” explained mayor Paes in an interview12.

While the vision of a progressive tourism and business destination captured the headlines, others pondered concrete goals that Rio could have incorporated into this transformative process. “Why don’t we make eliminating poverty in Rio and pacifying all the violent slums our goal for 2016?”13 asked Andre Urani from the Institute for Studies on Labour and Society, a Rio think-tank and consultancy. While no such plans had been made, it was hoped the boom in construction and ancillary industries would generate employment in those same favelas.

Running on the Spot Despite ambitious plans to transform the city, perhaps into a gateway to Latin America, harsh reality kept hanging on to the dream. In scenes reminiscent of an overblown

The Olympic Games Ring Quartet in the Economist, September 24th, 2009,

http://www.economist.com/world/international/displaystory.cfm?story_id=14515386 12

Violence mars Rio de Janeiro's reputation ahead of 2016, by Ashling O’Connor in Financial Times October 19th 2009, http://www.timesonline.co.uk/tol/sport/olympics/article6881528.ece 13

Brazil and the Olympics: Rio’s Expensive new rings, in the Economist, October 8 th, 2009, http://www.economist.com/world/americas/displaystory.cfm?story_id=14587915

Hollywood action movie where the bad guys kept winning, an estimated 2 policemen were killed in a gun battle that involved the shooting down of a police helicopter over one of Rio’s worst favelas. The incident marked a long line of such violence in the leadup to the IOC’s announcement in Copenhagen. While Rio’s officials believed it could quell such chaos with enhanced police presence as it had done for the Earth Summit in 199214 it seemed other crises filled the void. In October, a massive electricity blackout plunged 60 million Brazilians in and around the cities of Rio and Sao Paulo as well as all of Paraguay into darkness overnight. The incident prompted a national investigation as to why so many people could be dependent on one, albeit massive hydroelectric power station, Itáupu. It was quickly established that while the power station remained fully functional, all output was being channelled through one line creating a critical weak link in the supply that was easily broken resulting in temporary havoc across the dangerous city streets of Rio and Sao Paulo.

Even if Brazil managed to address such issues its track record with planning for the PanAmerican Games in 2007 left cause for concern. Running over budget by a factor of ten times the original estimate15, the project left behind under-used venues and failed to deliver on other promises including 54 kilometres of new metro tracks and a light rail system circling the city. With such a history, analysts and commentators could be forgiven for being nervous and cautious about Brazil’s prospects and for those of the 2016 Games. But at least in the words of one professional who had worked on the successful bid, “it will be one big party. It will be glorious”16.

Olympics Won, Brazil's Work Begins, by Geri Smith October 2 nd 2009 in Business Week,

http://www.businessweek.com/globalbiz/content/oct2009/gb2009102_557862.htm 15

Brazil and the Olympics: Rio’s Expensive new rings, in the Economist, October 8 th, 2009, http://www.economist.com/world/americas/displaystory.cfm?story_id=14587915 16

Brazilians celebrate as Rio de Janeiro grabs 2016 Olympic Games, By Tom Philips October 2 nd 2009, http://www.guardian.co.uk/sport/2009/oct/02/olympics-2016-rio-brazil

Questions 1. How would you understand Brazil as a nation brand? 2. How can Brazil use the 2016 Olympics to enhance their national brand? 3. How can Brazilian brands take advantage of the 2016 Olympics to build their international sales? References: Beijing Olympics: 'Negligible' Economic Impact, by Chi Lo in Business Week, August 13th 2008, http://www.businessweek.com/globalbiz/content/aug2008/gb20080813_511418.htm Violence mars Rio de Janeiro's reputation ahead of 2016, by Ashling O’Connor in Financial Times October 19th 2009, http://www.timesonline.co.uk/tol/sport/olympics/article6881528.ece Olympics has positive economic impact on both winning – and losing bidders, by Heather Stewart in the Guardian April 14th 2009 http://www.guardian.co.uk/uk/2009/apr/14/olympic-games-economics-exports Olympics Won, Brazil's Work Begins, by Geri Smith October 2nd 2009 in Business Week, http://www.businessweek.com/globalbiz/content/oct2009/gb2009102_557862.htm Coca-Cola to Invest $5.8B in Brazil Through 2014, Associated Press, November 12 th 2009, http://www.nytimes.com/aponline/2009/11/12/business/AP-US-Coca-ColaBrazil.html?scp=4&sq=brazil%202016&st=cse Rio de Janeiro to host 2016 Olympics, in CNN online, October 2nd 2009, http://edition.cnn.com/2009/WORLD/europe/10/02/olympics.2016/index.html The Olympic Games Ring Quartet in the Economist, September 24th, 2009, http://www.economist.com/world/international/displaystory.cfm?story_id=14515386 Rio’s victory is a victory for Lula da Silva too by Tom Watkins, October 3rd, 2009, http://edition.cnn.com/2009/WORLD/americas/10/02/brazil.lula.olympics/index.html?i ref=topnews Brazil Blackout Raises More Questions for the Olympics by Andrew Downie in Time Magazine online, November 11th, 2009, http://www.time.com/time/world/article/0,8599,1938011,00.html?xid=rss-topstories

Rio declares holiday for Olympics announcement by Andrew Downie, in Financial Times onlne, September 30th 2009, http://www.ft.com/cms/s/0/e77bdb76-adbc-11de-bb8a00144feabdc0.html?nclick_check=1 Brazil takes off in the Economist online, November 12th 2009, http://www.economist.com/opinion/displaystory.cfm?story_id=14845197 Aspiration: World Class Destination by David White, in Financial Times online, November 4th, 2009, http://www.ft.com/cms/s/0/fdffc82a-c8d9-11de-8f9d-00144feabdc0.html Brazil and the Olympics: Rio’s Expensive new rings, in the Economist, October 8 th, 2009, http://www.economist.com/world/americas/displaystory.cfm?story_id=14587915 The Olympic Games: Rio’s sporting carnival in the Economist October 2nd 2009, http://www.economist.com/world/americas/displaystory.cfm?story_id=14576023 Brazilians celebrate as Rio de Janeiro grabs 2016 Olympic Games, By Tom Philips October 2nd 2009, http://www.guardian.co.uk/sport/2009/oct/02/olympics-2016-riobrazil

Bulmer’s Sunshine Effect Addressing members of the Irish food industry at a national conference in 2006, the message, Maurice Breen, Marketing Director for C&C plc delivered was simple: building a successful brand takes time and money. As producers of Bulmer’s Original Irish Cider, C&C plc was well placed it seemed, to advise other Irish companies on branding. The beverages manufacturer had successfully repositioned the once tired Bulmer’s brand as a traditional handcrafted premium category drink aimed at up-and-coming professionals. In the process Bulmer’s had revitalised the entire cider sector, endowing the golden juice with respectability and aspirant values. With advertising capitalising on good summer weather and long evenings, cider sales had soared as consumers flocked to the prospect of socialising with friends over a refreshing bottle of Bulmer’s Cider poured over ice.

That halcyon association had been dubbed the ‘Sunshine Effect’ by the UK’s National Association of Cider Makers, its sparkle catching on in the UK as C&C stormed the largest cider market in the world during the hot summers of 2005 and 2006. While initially successful ultimately the Sunshine Effect proved to be both the making and breaking of the Irish company’s market strategy for the years that followed. After 3 years of sales decline, its new CEO John Dunsmore, recruited in mid-2008 from competitor Scottish & Newcastle1, was left wondering what options did the Irish cider brand face in international markets.

Nothing Added But Time Differentiating Bulmer’s from the typical prejudices surrounding cider, C&C had focused on four core concepts: Time, Heritage, Tradition and Nature. Values associated with these ideas were infused into all marketing communications for the cider, including packaging and price. The alcohol content was reduced from 6.5% to 5%, the packaging 1

C&C Shares rise as Dunsmore appointed CEO, The Irish Times, November 11 2008, http://www.irishtimes.com/newspaper/breaking/2008/1110/breaking15.html

was upgraded and revamped and C&C invested heavily in creating high quality advertising campaigns around those four themes. With Nothing Added But Time, C&C developed the character and personality of their flagship brand along these dimensions of purity and quality. Primarily targeting young busy professionals, Bulmer’s represented a nostalgic link to quieter times before the frenzy of the Celtic Tiger economic boom in Ireland. Over successive campaigns the company began to explore and nurture the relationship with nature and purity. Advertisements evolved over the years, first set to pensive guitar music and depicting apple-pickers harvesting beautiful orchards by hand and eventually sunny evenings with friends, good times and pouring suggestions scored to upbeat soulful tracks. It was not long before the trend of pouring Bulmer’s over ice cubes in a glass caught on and was incorporated into the advertising to reflect the birth of an entirely new category of drink: ice chilled ciders2.

Strategic Focus The repositioning strategy was implemented in 1991 when cider had a 3% share of the market, taking just a few years to catalyse growth in cider demand. Bulmer’s dominated the category outright in both on-trade (pubs and bars) and off-trade (supermarkets and alcohol shops) commanding a premium price over competing brands. By 2000 it accounted for 88% of the Irish cider market, which itself grew to account for 10% of beer sales3. It was C&C’s star product in a diversified portfolio which management began to reassess in 2004 with the prospect of a stock exchange listing. Bulmer’s contributed the vast majority of C&C’s revenue streams and the company felt confident that strategic focus on the brand’s international development offered C&C the best prospects for longer term profitability and growth. Soon after the firm’s IPO in 2004 it began divesting itself of ancillary businesses such as Tayto, an established Irish snack food. The sights had been set on the international stage and Bulmer’s Original Irish Cider was the star.

2 3

Source: Brand Republic www.brandrepublic.com August 9th 2006, Cider brand rules. Institute of Advertising Practitioners in Ireland ADFX Grand Prix Award Winner Case Study 2000

Internationalisation The company had first internationalised in 1999, exporting to Northern Ireland. This was followed by entry to the US market, targeting ex-pats and American Irish living along the eastern seaboard. Prior to focusing on the UK in 2005, C&C plc had also test-marketed Bulmer’s Original Irish Cider in Munich and Barcelona as part of a five-year plan.

The UK was the largest cider market in the world with consumption approaching 1 billion pints in 20064. It was however, one characterised by price-based competition. Breen summarised the situation in the UK as a “battle between two major brands, who had been in a fight to reach the lowest price…we felt we had to shake up people’s preconceptions, that it was okay to drink cider”. Culturally the two countries shared commonalities in terms of values and lifestyles. Research had identified four particular areas of convergence: ‘perceptions of quality’, ‘lifestyles’, ‘time vs money’ and ‘pace of change in life’. With a population of 60 million, the UK dwarfed the Irish market, however, and was far more complex in terms of the structure and dynamics of its alcoholic beverages industry.

Unlike the Irish industry, there was a significant degree of vertical integration in the UK drinks market. Only one third of the 60,000 pubs operating in the UK were independent businesses. Of the remainder, several breweries owned networks of pubs and bars. Scottish & Newcastle, a €6 billion brewer with dozens of brands in its portfolio including market leader Strongbow Cider, owned 2,000 licensed pubs nationwide. Similarly, franchising was another feature of the UK industry, with pub-companies accounting for about half of all pubs. Generally, even when breweries did not maintain exclusivity, their sales strategies and after-sales service were incentive enough to influence the pub landlord’s buying decisions.

BBC News Service www.bbc.co.uk April 2007 Cider firms look to build on boom

Each of the leading brewers produced a range of brands targeting distinct segments, categories and price brackets. C&C plc would be competing with Aston Manor’s five cider brands, Scottish & Newcastle’s portfolio of ten and Gaymer’s Cider’s eleven brands. One of the reasons for the proliferation of cider brands was that in terms of tastes, UK consumers remained quite regionalised. In addition an old law stipulating that cider producers with output of less than 7,000 litres per annum were exempt from paying excise duty made local cider milling a popular cottage industry, producing cheap local brews at a community level.

It was clear C&C’s primary competitive threat would come from Scottish & Newcastle, however. Among the company’s arsenal of cider brands, the Strongbow range accounted for about 60% of all cider drunk in the UK. Furthermore, the brewer owned the rights to the Bulmer’s brand in the UK, a significant issue for C&C who only owned the rights to use the brand name outside of the UK market. This complicated history stemmed from the fact that the original HP Bulmer company had sold the rights to the Irish market to Irish cider maker William Magner separately to the UK market rights in 1937. As a result, Bulmer’s Original Irish Cider would be re-branded Magner’s Original Irish Cider for its UK launch.

Magner’s Original Irish Cider Positioned as a premium cider to be distributed in its distinctive brown-glass pint-sized bottle, much of C&C’s advertising budget for the Magner’s launch was invested in placement to gain cut-through with the target market, affluent young males living and working in London’s financial services sector. Promoting the novel cider-over-ice concept was key to the success of the message: Magner’s was a sophisticated and fashionable refreshment. In addition to astute advertising and placement, Breen’s team engaged in sponsorship of London Wasps rugby club which he reasoned would make “people sit up and take notice of a brand and a category that has been under-invested in

for the last five to ten years”5. The deal soon paid off with London Wasps winning the high profile, televised European Rugby Championship for 2006-2007.

Sunshine Effect The launch of Magner’s in the UK had been extremely successful. Sales in the new ciderover-ice category sky-rocketed 130% in 2005, virtually all of which was Magner’s. Its success had a catalysing effect on the entire sector where previously cider “had become extremely unfashionable, but Magner’s repositioned the cider market”. It was not long before Scottish & Newcastle reacted with its own proposition: Bulmer’s Original, Born For Ice. Flanked by a revamped image and new advertising campaigns for Strongbow, Strongbow Sirrus Ice and Strongbow Extra Cold, Bulmer’s Original would go head to head with Magner’s. Through clever and witty takes on nature documentaries, the campaign clearly claimed the position for Bulmer’s Ice as the Original ice chilled cider.

It was too easy for C&C to dismiss the Bulmer’s Original Born for Ice strategy as a ‘metoo’ product6. From a distance, the two bottles looked very similar and even the labelling looked cut from the same cloth. But Bulmer’s Original retailed at a significant discount to its rival – selling at between 8-10% discount in pubs and at least 20% in the off-trade sector. Despite the threat, C&C had cause for optimism; by 2006 Magner’s sales had grown 225% and had captured almost 1.7% of the national market and a similar figure in London – figures nearly double its original objectives. The summer of 2006 was hot, with record temperatures and sunshine hours and it was well known that any period of good weather sent sales soaring7. Turnover at the Irish plant in Clonmel had risen 27% to €981.5 million and margins had increased to almost 22%. The plan to capture 4% of the UK market over five years looked to be on track and the markets had responded well to financial statements from the company. Looking to 2007, C&C was 5

Checkout Magazine October 2005 Brand New Profits Magners steps up battle with copycats, by John Murray Brown in Financial Times online, January 20 th, 2008, http://www.ft.com/cms/s/0/718f7cf8-c793-11dc-a0b4-0000779fd2ac.html 6

forecasting 15-25% operating growth as it aimed to expand market share for Magner’s. To achieve these goals, management decided to commit €200 million to double capacity at the Clonmel plant to 500 million litres per annum. The future was bright and then of course, there was always the summer to follow.

Premium Category or Fad Whereas 2006 was unusually warm and sunny for the UK and Ireland, 2007 brought a summer wetter if not drearier than average. Revenues and profits at C&C took a tumble, prompting commentators to speculate that cider over ice was simply a fad. Defensive to remarks that Magner’s was simply a “2005 thing”, a C&C spokesman was categorical,

“We have spent 15 years carefully positioning Bulmer’s in Ireland as a mainstream brand with no fashion cues. Consumers say they like it because it’s traditional, natural and has heritage. We have worked very hard to keep the fashion element out of Magner’s”8.

Financial statements for the year-end 2007 cited three reasons for the disappointing results: poor weather, increased competition and increased costs. Loss of market share in the UK was exacerbated by the loss of exclusive distribution arrangements. Further, sales volumes for Bulmer’s Original Irish Cider in Ireland had dropped. Meanwhile cider as a category in the UK continued to grow – Scottish & Newcastle had estimated by about 15% while Magner’s sales in the UK had grown by just 2% by July of 2007. Bulmer’s Original supported by Sirrus Ice and Strongbow Extra Cold had been eating up market share in the over ice category. It was becoming increasingly difficult for Magner’s to justify its premium pricing, but that is what Pratt remained adamant the company would do instead opting to reduce costs so as to maintain the desired margins for the company. It seemed the problems facing C&C were more fundamental than simply bad weather or increased competition, however.

Source: Brand Republic www.brandrepublic.com August 9th 2006, Cider brand rules.

The gloom hung over C&C’s stock market price as analysts downgraded the company’s shares from ‘buy’ to ‘hold’9. In autumn 2007, the company’s shares were trading at about half of their 2006 high and management embarked on a major share repurchasing scheme. It was a move later questioned by stock market analysts in light of subsequent profit warnings. Essentially, C&C plc was fast becoming a cheap takeover target for bigger drinks companies like SAB Miller and even Scottish & Newcastle. In an interview later in 2007, the company confirmed thta C&C was committed to a 5-year market strategy and as a result would be curtailing capacity investment to €115 million, cutting its workforce by 10% and reducing marketing spend on cider for 2008. But such moves could have been dismissed as attempts to restore investor confidence. To some critics, the priorities of the brand and the interests of the stock market had come into conflict.

Fortunes continued to worsen as sales declined throughout 2008 both in UK and the maturing Irish market. Irrespective of weather conditions, loyalty to the brand was slipping as consumer preferences changed and the choice of brands in the cider category expanded. In addition to the over-ice category, pear ciders were enjoying a renaissance with brands like Sweden’s Kopparberg engaging with both male and female drinkers.

With revenues and profits in seeming terminal decline, it was hoped a management shake-up at board level would help revitalise C&C’s prospects in an ailing cider market. John Dunsmore led a team of other ex-executives from Scottish & Newcastle tasked with reviving the company’s fortunes. Previously tarred as a one-trick pony, Dunsmore realised C&C was dangerously exposed to volatility in the cider market and competitive pressures. The first move toward a recovery was to instigate a restructuring of the company’s finances and operations, followed by several acquisitions of smaller but established players in the UK alcoholic drinks market including Tennents and later

BBC News www.bbc.co.uk January 11th 2007, C&C shares down on cider sales estimate

Gaymer’s Cider. Fleshing out the company’s brand portfolio, it appeared Dunsmore was emulating Scottish & Newcastle’s diversification strategy10. The Bulmer’s story had taken a significant turn. Its history in Ireland had demonstrated building a brand took time and investment, but other forces quickly eroded that added value in a matter of a year’s competition on the open market. What could C&C have done to avoid such a situation? Should it have exploited other markets first? Did it misjudge the potential of Magner’s in the UK? Did it misjudge the sustainability of the over-ice category? Or was it simply unlucky? John Dunsmore was not prepared to wait and find out. Instead he preferred to hedge his bets on a portfolio of likely cash cows in a maturing drinks market.

Questions 1. C&C appeared to follow all of the rules of marketing in establishing the Bulmers/Magners brand, why did it not have the textbook outcome? 2. Is there a downside to strong brand equity such as that developed by Bulmers/Magners? 3. How would you advise John Dunsmore to proceed?

C&C pays £45m for Gaymers cider by John Murray Brown in Financial Times online, December 1 st 2009, http://www.ft.com/cms/s/0/ba0c638a-dddd-11de-b8e2-00144feabdc0.html C&C snaps up Tennent’s brand in £180m deal, by Philip Stafford in Financial Times online, August 27 th 2009, http://www.ft.com/cms/s/0/c5f3821a-92d7-11de-b146-00144feabdc0.html