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Marketing is vital to the functioning of an organization. It generates revenues and profits that influence its growth and survival. Organizations are confronted with social, economic, and technological issues in the wake of globalization.

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Marketing Management

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Marketing Management

This document is authorized for internal use only at IBS campuses- Batch of 2012-2014 - Semester I. No part of this publication may be reproduced, stored in a retrieved system, used in a spreadsheet, or transmitted in any form or by any means - electronic, mechanical, photocopying or otherwise - without prior permission in writing from IBS Hyderabad.

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C HAPTER 1

Defining Marketing and the Marketing Process

Introduction: Marketing is vital to the functioning of an organization as it generates revenues and profits that influence its growth and survival. Organizations are confronted with social, economic, and technological issues in the wake of globalization. In wake of globalization and liberalization, organizations are confronted with social, economic, political and technological challenges in meeting their objectives and goals. In the post globalization era, companies and marketers deal with the rapid technological advancements and intense competition through various marketing activities. Marketers are following new strategies like customization, target marketing, integrated marketing communication, etc. to deal with the advancements in technology. In this chapter, we will discuss the concept of marketing and evolution of business through different stages of marketing. We shall then move on to discuss companies marketing strategies and responses to the technological advancements and increasing competition. Finally, we will discuss the significance of marketing to various industries.

Marketing

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Section1

Defining Marketing
Definition of Marketing According to American Marketing Association (AMA), the term marketing can be defined as: the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. Video 1.1.1: Marketing The objective of marketing is: (1) to attract new customers and, (2) to retain existing customers by profitably meeting their needs and preferences. Customer orientation: Firms constantly need to change and modify their products to satisfy the varying needs and preferences of the customers. Long-term profitability: Apart from generating profits to sustain themselves, firms should also engage in detailed analyses of issues, such as market research, product development and promotion to reap longterm profits. Functional integration: The marketing concept is not limited to the marketing department alone. Proper coordination must exist between the marketing department and various other departments such as R & D, personnel, finance and manufacturing. Marketing is too important to be left only to the marketing department as it entails processes that focus on delivering customer value to customers. Marketing uses promotion, discounts and distribution network to provide to customers with goods, services and ideas that meet their needs and preferences.

The marketing concept includes customer orientation, long-term profitability and functional integration.

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Goods are physical entities that we can touch and feel. For example, watches and spectacles are goods. A service is an intangible product that cannot be felt, seen, tasted or heard before making a purchase. For example, hotels provide hospitality service that cannot be experienced before purchase. Idea is a formulated thought, a plan or action or opinion. For example, an architect sells the blue print of a house to a client. Marketing involves creating an atmosphere where an exchange takes place between a buyer and a seller. In other words, a buyer gains value by purchasing and consuming a product and the seller gains value by making a profit. However, the exchange is based on needs and wants. Therefore, marketing should be based on customers perceptions of a need or want. The extent, to which these needs or wants are satisfied, is called utility. Marketers provide four types of utility to customers such as form utility, time utility, place utility and possession utility (Refer keynote 1.1.1 for further explanation). Product, Price, Place and Promotion are the four Ps of marketing referred to as marketing mix. Marketing mix is a list of tools or marketing variables that are used by marketing managers to create exchanges and satisfy individual and organizational objectives. The four Ps of marketing mix Product, Price, Place and Promotion are considered as the holy quadruple of the marketing faith, which has become an indisputable paradigm in Marketing.

The marketing mix refers to a mixer of ingredients to optimize the organizations profit function. Keynote 1.1.1: Types of Utility

Figure 1.1.1: Marketing Mix

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References:

R EVIEW 1.1
Interactive image 1.1.1: Marketing Mix of Education
Product Price

Question 1 of 5
________ is the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organizational goals.

Promotion

A. Selling
Place

B. Manufacturing C. Marketing
1 2 3 4

D. Advertising.

Principles of Marketing Marketing Mix

Check Answer

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Section 2

Marketing Evolution and Marketing Process

The concept of marketing came into focus with the Industrial Revolution. Since then, organizations have passed through three stages of marketing. Consequently, the concept of customer satisfaction also evolved through these different eras or stages that are discussed below. Production Orientation: It began in the seventeenth century with the Industrial Revolution and continued till the late 1920s. Manufacturing was given importance and it was assumed that all that is produced gets sold. Product features were not a priority and the emphasis was on faster and efficient production at low prices. For example, Henry Ford said, You can have any color car you want, as long as it is black. Product Orientation: In this era, the marketing beliefs were that consumers will favor those products that offered good quality, performance, or innovative features. Although both production and product are important in the overall mix of healthy marketing, there can be a problem with the remnants of both the production and product era, as they can lead to a symptom called marketing myopia.

Gallery: Evolution of Marketing Production orientation: Here, a company mainly tries to increase production irrespective of demands of the customer. For example, Ford Assembly Line.

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Note: Professor Theodore Levitt coined the term Marketing Myopia to refer to the short-sightedness about business. Product orientation or excessive attention to production creates myopia about the actual needs of the customers and this leads to wrong or inadequate understanding of the business, market and the marketplace. Prof. Theodore Levitt suggested that organizations should maintain itself with the changing needs of the customers and business. For instance, the airways should define their business as transportation; the movie makers should define their business as entertainment, etc.

Societal Marketing Orientation

Marketing Process:

Sales Orientation: It spans the period from the late 1920s to the mid 1950s. With the production process gaining efficiency, competition emerged. Organizations realized the importance of selling their products using advertising, promotion and distribution strategies. Marketing Orientation: It began in the mid 1950s and is still evolving. It signifies the shift in organizations, from product selling to customer satisfaction. The concept of marketing management has gained importance with the organizations focusing on customer needs and preferences. Societal Marketing Orientation (SMO) Firms, in the process of offering products to please customers, fulfill societal objectives as well. Therefore, firms marketing efforts should be directed beyond satisfying customers needs and earning profits. The concept of Societal Marketing Orientation (SMO) seeks to achieve equilibrium between profit making objectives, customer satisfaction and societys interest.

The marketing process of a company, typically, involves identifying the viable and potential marketing opportunities in the environment, developing strategies to effectively utilize these opportunities, evolving suitable marketing strategies and Video on Marketing Process supervising by Mohan Sawhney implementation of these strategies. Value delivery sequence: Michael J Lanning and Edward G Michaels of McKinsey stated that there are two types of value delivery sequences. They are: Focus on product: Here, the organization emphasizes on manufacturing the product first, followed by fixing the price and, finally, attempting to sell it. This is the traditional value delivery activity.

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Focus on customer: Here, the organization emphasizes on customer needs and preferences, and develop marketing processes and strategies to create and deliver value to the customers. Steps in the Planning Process The following are the steps in the planning process:

Example for focus on customer

Planning marketing programs: Organizations have to devise appropriate marketing programs for effective implementation of their marketing strategies. The management must take into consideration the 4Ps of marketing, viz., product, price, place, and promotion while drafting an effective marketing program. Managing the marketing effort: A marketing program has to be properly managed for its successful implementation. The management must continuously monitor the marketing program and take measures to correct deviations, if any, and any other wrong steps. However, the success of marketing depends upon the collaborative efforts of all the employees of the organization. Marketing Dynamics Technological advancements have resulted in a dynamic market where products keep changing. The use of technology has decreased production cost per unit. However, as the same technology is used by different companies, retaining competitive advantage becomes an issue. On the other hand, customers are also benefited by advancement in technology and obtain information about various brands through the Internet. To deal with this situation, both the company and the marketers, need to make certain responses and adjustments such as Company Responses and Adjustments & Marketer Responses and Adjustments (Refer keynote diagram for detail aspects).
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Analyzing marketing opportunities: An organization must evaluate and understand the environment in which it is functioning and recognize the marketing opportunities available to it. For example, Coca-Cola India (Coke) identified the increasing growth prospect of the juice market. Therefore, it began positioning the drink Maaza as a juice drink. In addition, the company also introduced two new flavors Maaza Pineapple and Maaza Orange to further push Maazas growth initiatives. Developing marketing strategies: Marketing strategies are developed after analyzing market opportunities and product development. Every company has to tailor its strategies to suit the specific needs of the target market. For example, Coke recognized that the target customers for its product Maaza are home consumers and, accordingly, began selling it in large family pack PET bottles.

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Keynote1.2.1: Company Responses and Adjustments

Review 1.2

Question 1 of 6
Businesses have gone through different phases or stages of marketing over the years. Identify the correct sequence from the following options.

A. Production era - Product era - Sales era - Marketing era B. Product Era - Production Era - Sales era - Marketing Era C. Product Era - Production Era - Marketing Era - Sales Era D. Production Era - Product Era - Marketing Era - Sales Era.

References:
Check Answer

Marketing myopia Different eras in marketing

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Section 3

Case Study: Grove Fresh Ltd Marketing Organic Juices

This case was written by Sachin Govind, under the direction of S.S.George, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

! 2006, IBS Center for Management Research. All rights reserved. To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: [email protected]

www.icmrindia.org
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Many companies have already stopped producing organic grapefruit juice, because there is not enough supply. The same thing is happening now with orange juice,1 Amarjit Sahota, Director, Organic Monitor in 2005. The British and French organic juice markets are to show the lowest growth rates. The organic juices market in these countries showed very high growth in the late 1990s and market expansion has slowed due to consumer demand stabilising. Retail penetration is reaching saturation in these countries with most food retailers offering organic juices. 2 A research publication analyzing the future prospects for organic juices in the UK in 2002 INTRODUCTION In April 2005, Grove Fresh Ltd. (GFL) was ranked 68th in the Fast Track 2005 Profit Track 100. The rankings, published in The Sunday T i m e s , w e r e Figure 1.1: Sales Growth based on profit growth over a three year period ending 2003. G F L s p r o f i t s rose from 0.9 million in 2000 to 3.2 million in Source: www.productchain.com 2003; the company registered

a 52 % year-on-year growth in its profits in 2003. The company was also admired for its high-quality products and innovative marketing. However, the situation, as of 2006, is quite different. Competition in the UK organic juices market has become severe. Though GFL posted healthy sales growth, the market for organic juice, especially in the UK, was expanding at a much slower rate. This was expected to affect sales in the near future. Besides, GFL has also been facing supply shortages. BACKGROUND Grove Fresh Limited (GFL) was founded by John Taylor (Taylor) in 1994 to market chilled organic fruit and vegetable juices. Prior to his foray into the organic juices market, Taylor owned a successful bakery business, Freshbake Foods, which he sold to Borthwicks, a food and drink flavoring supplier for several million pounds. However, Borthwicks soon faced financial problems. Taylor re-purchased his business from Borthwicks for a token payment of 1. He brought the company back to profitability and subsequently sold it to Campbell Soup Company in 1988 for about 100 million. After selling off his bakery business, Taylor was living a life of semi-retirement in Florida, in a house surrounded by orchards. Possibly inspired by his surroundings, he decided to enter the then nascent market for organically grown fruit juices. Aiming to bring a wide assortment of high-quality organic fruit juices to the UK, he established GFL with its headquarters in Surrey, UK in 1994. Taylor spent his first two years in the business convincing orchard owners and growers in Florida to shift to organic farming and building the supply
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chain through to the UK. In 1996, GFL became the first company to market organic juices in the UK. In 1998, GFL acquired the Germany-based FSP Frische and its French subsidiary Fraicheur for a sum of 1.3 million. With this acquisition, the company entered the European non-organic fruit juice market as well. The company further strengthened its position in the non-organic fruit juice market by acquiring Fruity King, a Dutch company, in 2000. Subsequently, Taylor retired but he continued to own United Foods International (UFI), the holding company of GFL, Frische and Fruity King, through a trust registered in the Isle of Man. The acquisitions, together with increasing sales and profits due to a marked increase in the demand for organic products in the UK, pushed UFI to the 3rd rank in the 2001 Fast Track 100, a ranking of British businesses with the highest sales growth. The company had achieved a sales growth of 185% with total sales reaching 18 million in 2000. In the 2000s, GFLs sales continued their healthy growth (Sales turnover of GFL). However, by then, organic juices constituted only 10 percent Figure 1.2: Sales Turnover of of UFIs sales. This Grove Fresh Ltd. was because with its acquisitions in continental Europe, the companys sales of non-organic juices were growing. The growth in demand for Source: www.productchain.com organic juices in continental Europe (especially Germany and

France) was not as high as in the UK. MARKETING GROVE FRESH GFL marketed its organic juices under the Grove Fresh brand. The company targeted middle-aged people, especially those who came under the empty nesters group. At the same time, the company found that the youth, especially those who were health-conscious, were taking to organic juices in a big way, too. Andrew Shupick (Shupick), Managing Director, GFL, said, The key consumer group for organic juice is the over-35s whose children have left home and who are indulging themselves with the best quality food and drink available, now that they have more disposable income. However we are seeing a growing number of younger consumers becoming regular purchasers of organic juices.3 By 2006, the company had come a long way from its beginnings in 1996, when the UK was experiencing a surge in the demand for organic juices. Demand for organic juices had stabilized and GFL had to operate in this very different market where phenomenal growth no longer seemed likely. PRODUCTS GFLs juices were not made from concentrates diluted with water, which in the company's opinion, did not qualify as organic. It prided itself on selling pure organic juices Grove Fresh packs contained only the juice from fruits or vegetables, without any added water, sugar, preservatives, colorings, or additives. The company got its products certified to Soil Association standards.
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GFL also introduced juices from unusual combinations of fruits and vegetables, such as Apple & Cranberry, Carrot, Tomato & Red Pepper, Tomato, Celery, Carrots, Beetroot & Onions, etc. The variety of its juice combinations has been another factor differentiating the companys products from other products in the UK market. PRICING Typically, organic products commanded a premium over products grown using conventional farming techniques, because consumers were willing to pay Gallery 1.1: : Different Fruit extra for the health Juices advantages that they supposedly derived from products grown without the use of pesticides and chemical fertilizers. Moreover, organics were Source: www.holosfoods.com considered environmentally friendly and by buying them customers felt that they were making a positive choice to safeguard the environment. When asked why she chose organic products, a customer said, I choose organic for my health and for the environment because organic food is free from pesticides.4 Surveys indicated that customers were willing to pay a premium of 20-30 % for organic products over conventionally grown products.

Like other marketers of organic products, GFL too followed a premium pricing approach. By following a differentiation strategy both in terms of variety and quality - the company could price a 1 liter pack of juice between 2.29-2.59 (depending upon the fruit and retail outlet). At the same time, the company maintained price parity with competitors who operated in the premium segment (Competing brands and prices). DISTRIBUTION GFL sold its products through supermarket chains, which dominated the UK market for organic products. In spite of the stiff competition from the supermarkets own lower priced brands, GFL had not only managed to hold its own, but had also created for itself a loyal customer base.

Table 1.3.1: Competing Brands and Prices S.No 1 2 3 4 Brand Luscombe Devon Sainsburys Pure# Duchy Originals Refresher Tesco Pure# Price for 1 liter 3.80* 98 pence 2.60* 99 pence

Source: www.guardian.observer.co.uk. * - approximately, # - supermarket brands

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In the 2000s, e-retailing emerged as a distribution alternative for organic produce. The UK had a mix of specialist e-retailers and mainstream retailers with internet operations. GFL sold its merchandise through specialist e-retailers like Simply Organic, a major player which operated only via the internet and sold a wide assortment of organic products. GFL also distributed its products through other e-retailers like goodnessdirect.co.uk, organicdelivery.co.uk, beanstalkorganix.co.uk etc. and through the internet divisions of supermarket chains like Waitroses and Boothss . PROMOTION The company displayed its trademark The Organic Juice Co. (The company logo) prominently in its packing. Ad agency HDM Total Communications was engaged for promotions and marketing. GFL placed ads in the print media, especially the w e e k e n d s u p p l ements of national Figure 1.3: GFL Company Logo newspapers, womens magazines and food titles. The company also gave out free samples of its juices at supermarkets and other retail outlets to en- Source: www.productchain.com courage trial. In late 2005, GFL released a set of four posters (Copies of the posters) as part of its marketing campaign. However, The Blackmoor Estate Ltd.,

a commercial apple grower, the Crop Protection Association (an organization which represented members active in crop protection) and a m e m b e r r e p r e- Gallery 1.2: : Grove Fresh Postsenting the pub- ers lic, complained to the Advertising Standards Authority (ASA) against GFLs advertising. The controversial posters contained the following messages - Insects Wont Eat Fruits Sprayed with Pest i c i d e s , W h y Source: www.slideshare.net Would You? & Fruit Juice - Now Available in NonPesticide Flavour. The complainants argued that the messages were misleading, irresponsible and denigrated growers who used pesticides to protect their crop. Though ASA found most of the objections unwarranted, it directed GFL to avoid using the Fruit Juice Now poster as it seemed to suggest that pesticide residues affected the taste of fruit juice; ASA declared that this was misleading. The other posters had the following messages - With 2.5 Kgs of Organic Fruit in Every Carton, Theres No Room for Pesticides and We Spend a Lot of Time Adding Nothing to Our Fruit.
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CHALLENGES The UK market for organic juices began to slow down in the mid 2000s. It was a far cry from the torrid pace of growth witnessed in the early 2000s (The UK market for organic NFC citrus juice). Moreover, the number of players operating in the organic segment of the juice market had also seen an increase. As if these difficulties werent enough, the organic citrus market had become increasingly vulnerable to supply shortages. The organic citrus juice market, especially orange juice, accounted for around 40% of GFLs sales. The shortage in the supply of organic fruits also affected the development of new products at GFL. Shupick said, The main obstacle we face with npd (new product development) is sourcing organic ingredients that match our very exacting standards.5 These forces were expected to have a direct impact on GFLs sales in the future. Like many of its competitors in the UK, GFL imported the fruit for its juices from USA and other countries, prompting a debate whether the imported produce was being analyzed and checked thoroughly enough. The whole approach of organic standards is to minimize the risk of someone using chemicals, but the further a field it is, the more difficult it is to be sure what is happening,6 said Francis Blake, Standards and Technical Director, Soil Association. The certification standards also seemed wanting. In the light of these, some analysts wondered whether the premium that companies like GFL charged for their organic products was justified. Some analysts even went so far as to declare that, in terms of health benefits, it really didnt make a difference whether the

food was organic or not (Additional information on marketing organics). OUTLOOK In spite of the challenges, GFL, with its high-quality products, wide assortment, strong distribution, and appealing communication has been trying hard to retain its position as the leading organic juice brand in the UK. In 2004-05, it breached the 5 million mark in sales. In the same year, the company introduced organic vegetable juices under the sub-brand - V Juice. By early 2006, V Juice was registering strong sales at health stores thus helping GFL to post year on year sales growth of 65% at these stores. Overall, GFL sales grew at 30%, outperforming the market, which expanded by 9.5%. The company was planning to organize consumer shows throughout the UK in the summer of 2006 with a marketing budget of over 1 million. In these shows, the company planned to give away free samples of its juices to persuade customers to switch to organic juices. Shupick said, Our research shows that once someone has tasted organic juice they rarely go back to standard products because the flavour and freshness is so much better, so we consider this activity a sound investment in the future of the brand and the organic sector as a whole.7 As of early 2006, the company continued to dominate the UK organic juice market with a market share exceeding 60%.8 Of his companys success, Shupick once said, The key to our successful growth is our commitment to refreshing the range in order to maintain consumer interest,8 However, the com16

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pany would have to think of ways to counter the slowing market growth, mounting competition and supply problems to remain ahead in the race. Footnotes: 1. Organic marketing stunted by undersupply, says consultancy firm, www.nutraingredients-usa.com, December 19, 2005. The European Market for Organic Juices, October 2002, www.organicmonitor.com. Juice steals share from traditional breakfast beverage, www.nexnet.co.uk, March 1, 2006. Organic food: the facts they dont want you to know, www.symbio-organic.com, June 18, 2000. Juice Steals Share from Traditional Breakfast Beverage, www.nexnet.co.uk, March 1, 2006. Organic food: the facts they dont want you to know, www.symbio-organic.com, June 18, 2000. V Juice Attracts New Shoppers to Specialist Health Stores, www.nexnet.co.uk, March 1, 2006. V Juice Attracts New Shoppers to Specialist Health Stores, www.nexnet.co.uk, March 1, 2006. Juice Steals Share from Traditional Breakfast Beverage, www.nexnet.co.uk, March 1, 2006.

Additional Reading & References: 1. 2. 3. 4. 5. 6. 7. 8. 9. V Juice attracts New Shoppers to Specialist Health Stores, www.nexnet.co.uk, March 1, 2006. Juice Steals Share from Traditional Breakfast Beverage, www.nexnet.co.uk, March 1, 2006. Larger Packs Mean Increased Turnover from the Chiller, www.nexnet.co.uk, February 20, 2006. Growth Accelerates for Grove Fresh, www.nexnet.co.uk, January 28, 2006. First Prune Variety will Accelerate Growth of Chilled Juice Sector, www.nexnet.co.uk, January 5, 2005. Competing Strategies in the Organic Juices Industry, www.organicmonitor.com, 2006. Non-broadcast Adjudication, January 11, 2006, www.asa.org.uk. Marketing Organic Foods, www.dpi.qld.gov.au, July 14, 2005. Unclear Organic Labelling Confuses Consumers, www.checkout.ie, November 2002.

2. 3. 4. 5. 6. 7. 8. 9.

10. The European Market for Organic Juices, October 2002, www.organicmonitor.com. 11. Organic Food: The Facts they dont want You to Know, www.symbio-organic.com, June 18, 2000.
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12. World Markets for Organic Fruit and Vegetables, FAO Corporate Document Repository, www.fao.org. 13. A G u i d e t o M a r k e t i n g O r g a n i c P r o d u c e , www.aggie-horticulture.tamu.edu. 14. P r o d u c i n g a n d M a r k e t i n g O r g a n i c P r o d u c e , www.marketingoutreach.usda.gov. 15. www.grovefresh.co.uk. 16. www.asa.org.uk 17. www.naturalproductsonline.co.uk. 18. www.waitrose.com. 19. www.booths-supermarkets.co.uk. 20. www.productchain.com. 21. www.fao.org. 22. www.goodnessdirect.co.uk. 23. www.fastrack.com.

The UK Market for Not-fromConcentrate Citrus Juice

Volu Reven Reve Volume me ues nue Year s (000 Grow (US$ Grow liters) th (%) mn) th (%) 1998 1999 2000 2001 2002 2003 2004 822 2660 3903 4500 4864 5107 5362 224 47 15 8 5 5 2.47 6.78 9.16 10.35 11.07 11.63 12.21 175 35 13 7 5 5

Source: www.fao.org

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Marketing Organic Foods

Marketers, channel members and customers have divergent views with respect to the long-term success and growth of organic produce. While some marketers have found marketing organic produce very protable, others have reservations about their protability. Still others feel that the market needs time to evolve. Among the reasons why optimistic marketers were willing to market organic produce were that: they could be sold on the reduction of health risks plank; and also on the better for the environment plank; besides, the increasing acceptance and demand for organic produce are other reasons why marketers feel these products will continue to sell. A survey of organic retailers, wholesalers and processors in the US brought to focus the two greatest obstacles in the market acceptance of organic produce undersupply/inconsistent supply, and cost. These were the issues channel members felt needed most urgent attention. A growing awareness among consumers about food safety issues like chemical residue has led many to opt for organic produce. A survey indicated that for 57% of customers who bought organic produce, cost is not a consideration. However, reports questioning the safety of organics and the certication process have created doubts in the minds of customers in respect of organic produce as well.
Compiled from various sources.

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Section 4

Case Study: Haldirams Group Seeking the Right Marketing

This case was written by K. Prashanth, under the direction of Vivek Gupta, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

! 2003, IBS Center for Management Research. All rights reserved. To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: [email protected] www.icmrindia.org
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It is far easier to sell something that the consumer is already accustomed to. The company (Haldirams) caters to the Indian palate, which is its primary driver of success. - Neeraj Garg, Associate, AT Kearney.1 INTRODUCTION Over a period spanning six and a half decades, the Haldirams Group (Haldirams) had emerged as a household name for ready-to-eat snack foods in India. It had come a long way since its relatively humble beginning in 1937 as a small time sweet shop in Bikaner, in the Rajasthan state of India. In 2001, the turnover of the Haldirams was Rs 4 billion. The group had presence not only in India but in several countries all over the world. Till the early 1990s, Haldirams comprised of three units, one each in Kolkata, Nagpur and New Delhi. The Agarwals family that owned Haldirams were always conscious of the need to satisfy customers in order to grow their business. The company offered a wide variety of traditional Indian sweets and snacks at competitive prices that appealed to people belonging to different age groups. Haldirams had many firsts to its credit. It was the first company in India to brand namkeens. The group also pioneered new ways of packaging namkeens. Its packaging techniques increased the shelf life of namkeens from less than a week to more than six months. It was also one of the first companies in India to open a restaurant in New Delhi offering traditional Indian snack food items such as panipuri, chatpapri, and so

on, which catered to the needs of hygiene conscious nonresident Indians and other foreign customers. Since the very beginning, the brand Haldirams had been renowned for its quality products. The company employed the best available technology in all its manufacturing facilities in India. Given the increasing popularity of Haldirams products, the group planned to expand its operations. However, some analysts felt that Haldirams still had to overcome some hurdles. The company faced tough competition not only from sweets and snack food vendors in the unorganized market but also from domestic and international competitors like SM Foods, Bakemans Industries Ltd, Frito Lay India Ltd.(Frito Lay) and Britannia Industries Ltd. Moreover, the group had to overcome internal problems as well. In the early 1990s, because of the conflict within the Agarwals family, Haldirams witnessed an informal split between its three units as they started operating separately offering similar products and sharing the same brand name. In 1999, after a court verdict these units started operating as three different companies with clearly defined territories. This split had resulted in aggressive competition among themselves for a higher share of domestic and international markets. BACKGROUND NOTE In 1937, Ganga Bishen Agarwal, (popularly known as Haldiram), opened a small sweet shop in Bikaner, a small district in Rajasthan. Bikaner had a large number of sweet shops selling sweets as well as namkeens. Bhujia sev, a salty snack pre21

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Figure 1.1 The Original Haldirams Shop in Bikaner

Source:www.outlookindia.com

pared by Ganga Bishen, was very popular among the residents of Bikaner and was also purchased by tourists coming to Bikaner. In 1941, the name Haldirams Bhujiawala was used for the first time.

In 1950, Prabhu Shankar Agarwal (Prabhu), along with his father Rameshwar Lal Agarwal (son of Ganga Bishen), expanded the business by establishing a small manufacturing unit for sweets and namkeens in Kolkata. The success of this unit motivated Prabhu to upgrade its machinery to improve the quality of its products. As demand for Haldirams products increased, it was decided to scale up the companys manufacturing and distriFigure 1.2: Haldirams nambution activities. In keen Nazrana 1970, a large manufacturing unit was set up in Nagpur in the state of Maharashtra (India). In 1983, a retail outlet was set up in New Delhi. The Source:www.alltimegifts.com outlet became very popular not only among the Delhiites but also among tourists visiting Delhi.

Haldirams was able to achieve significant growth during the 1980s and 1990s. In 1992, a manufacturing unit with a retail outlet attached to it was set up in the outskirts of Delhi. A year later, Haldirams syrups and crushes were successfully launched in the Indian market. In 1995, a restaurant was opened in New Delhi. In 1997, realizing the potential of namkeens, the company set up a manufacturing unit in Delhi exclusively for making namkeens. To add potato products to its existing product portfolio, machinery was imported from the US. Haldirams maintained high quality standards at every stage of the production process. All its food items were prepared and packaged in a very hygienic environment. In the mid 1990s, Haldirams added bakery items, dairy products, sharbats and ice creams to its portfolio. At the beginning of the 21st century, Haldirams products reached millions of consumers not only in India, but also in several other countries, including the US, Canada, UK, UAE, Australia, New Zealand, Sri Lanka, Nepal, Japan and Thailand. Analysts felt that the growing popularity of Haldirams products could be attributed to its constant focus on all the elements of the marketing mix. An article posted on the APEDAs website apeda.com quoted some of the companys strengths, To sustain in the competitive market, Haldirams has endeavored stress on its product quality, packaging, shelf life, competitive price with a special emphasis on consumers satisfaction and its lingering taste is amongst the best available in the world.

THE MARKETING MIX

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PRODUCTS Haldirams offered a wide range of products to its customers. The product range included namkeens, sweets, sharbats, bakFigure 1.3: Haldirams ery items, dairy products, pa- Rose Syrup pad and ice-creams (See Exhibit I for details of product range). However, namkeens remained the main focus area for the group contributing close to 60% of its total revewww.shahindia.com.au nues. By specializing in the manufacturing of namkeens, the company seemed to have created a niche market. While the Nagpur unit manufactured 51 different varieties of namkeens, the Kolkata unit manufactured 37 and the Delhi unit 25. The raw ma-

terials used to prepare namkeens were of best quality and were sourced from all over India. Haldirams sought to customize its products to suit the tastes and preferences of customers from different parts of India. It launched products, which catered to the tastes of people belonging to specific regions. For example, it launched Murukkus, a South Indian snack, and Chennai Mixture for south Indian customers. Similarly, Haldirams launched Bhelpuri, keeping in mind customers residing in western India. The company offered certain products such as Nazarana, Panchratan, and Premium only during the festival season in gift packs. These measures helped Haldirams compete effectively in a market that was flooded with a variety of snack items in different shapes, sizes and flavors. PRICING Haldirams offered its products at competitive prices in order to penetrate the huge unorganized market of namkeens and sweets. The companys pricing strategy took into consideration the price conscious nature of consumers in India. Haldirams launched namkeens in small packets of 30 grams, priced as low as Rs.5. The company also launched namkeens in five different packs with prices varying according to their weights (Refer Table I). The prices also varied on the basis of the type of namkeens and the raw materials used to manufacture it. The cost of metallized packing also had an impact on the price, especially in the case of snack foods. The company revised the prices of its products up-

Gallery 1.1: Haldirams Products Catering to Regional Tastes

Source: http://ecx.images-amazon.com

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wards only when there was a steep increase in the raw mateTable 1: Price Range of Namkeens Offered by Haldirams Pack Weight 30 gms 85 gms 180 gms 250 gms 400 gms 500 gms 1kg
Source: IBS Center for Management Research

pur unit had 25 C&F agents and 375 distributors. Haldirams also had 35 sole distributors in the international market. The Delhi and Nagpur units together catered to 0.6 million retail outlets in India. C&F agents received a commission of around 5%, while distributors earned margins ranging from 8% to 10%. The retail outlets earned margins ranging from 14% to 30%. At the retail outlet level, margins varied according to the weight of packs sold. Retailers earned more margins ranging from 25% to 30% by selling 30 gms pouches (priced at Rs.5) compared to the packs of higher weights. Apart from the exclusive showrooms Figure 1.4: A Haldi- owned by Haldirams, the company offered its products through retail outrams Exclusive Showroom lets such as supermarkets, sweet shops, provision stores, bakeries and ice cream parlors. The products were also available in public places such as railway stations and bus stations that accounted for a sizeable amount Source:http://t3.gstat of its sales. Haldirams products enic.com joyed phenomenal goodwill and stockists competed with each other to stock its products. Moreover, sweet shops and bakeries stocked Haldirams products despite the fact that the companys products were competing with their own products.

Price (in Rs) 5 10 18-35 40-70 95-200

rial costs or additional taxes were imposed. PLACE Haldirams developed a strong distribution network to ensure the widest possible reach for its products in India as well as overseas. From the manufacturing unit, the companys finished goods were passed on to carrying and forwarding (C&F) agents. C&F agents passed on the products to distributors, who shipped them to retail outlets. While the Delhi unit of Haldirams had 25 C&F agents and 700 distributors in India, the Nag-

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vide information such as the name of the train, its likely time of arrival at Nagpur, their names and coach and seat numbers.

just another sweet maker but it has moved into trained brands first by improving the product quality and packaging. Through its clever products and brilliant distribuGallery 1.2: A Haldirams Mailer tion it had moved into the star category of brands.2 Haldirams earned recognition both in India and abroad. The Nagpur unit of Source: http://1.bp.blogspot.com Haldirams was conferred the International Food Award by the Trofeo International Alimentacion of Barcelona, Spain for having maintained high standards in quality and hygiene, at its manufacturing unit. The Delhi unit was awarded the Keshalkar Memorial Award by the All India Food Preservers Association in the mid 1980s in recognition of its efforts for popularizing ethnic Indian foods in India and abroad. In 1994, the unit was awarded the International Award for Food & Beverages by the Trade Leaders Club in Barcelona, Spain. The unit also received the Brand Equity Award in 1998. Manoharlal Agarwal, who played a key role in the success of the Delhi unit, was included in the eighth edition of Distinguished Leadership by the Board of Registrars of The American Biographical Institute. Haldirams was also admitted as the member of Snack Food Association, US.

Haldirams restaurants in Delhi also Source: www.nagpurpulse.com used innovative ways to attract customers. The restaurant located at Mathura road had special play area for children. To cater to NRIs and foreign tourists, who hesitated to consume snack foods sold by the roadside vendors since it was not prepared in a hygienic manner, the Haldirams restaurant located in South Delhi used specially purified water to make snack foods including pani puri and chat papri. These promotional strategies helped Haldirams to compete effectively with local restaurant chains such as Nathus, Bikanerwala and Agarwals and with western fast food chains such as McDonalds and Pizza Hut. POSITIONING The above initiatives helped Haldirams to uniquely position its brand. Haldirams also gained an edge over its competitors by minimizing promotion costs. Appreciating the companys efforts at building brand, an analyst said, Haldiram once was

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THE ROAD AHEAD In the financial year 2001-2002, the combined turnover of all three units of Haldirams was estimated at Rs. 4 billion. The company targeted a growth of 15% for the financial year 2002-2003. Analysts felt that, given the competition in the industry, Haldirams needed to develop new initiatives achieve this growth. The competition in the ready-to-eat snack foods market in India was intensifying. Frito Lay India Ltd. (Frito Lay), one of Haldirams major competitors, was expanding its market share. Instead of directly competing with the market leader Haldirams, the company launched innovative products in the market and backed them with heavy publicity. Frito Lays product range consisted of a mixture of traditional Indian and western flavors which appealed to younger and older generations. Its products included Leher Namkeens, Leher Kurkure (snack sticks), Lays (flavored Chips), Cheetos (snack balls), Uncle Chips and Nutyumz (nut snacks). Frito-Lay was the first company to launch small 35 gm packs namkeens priced at Rs. 5 and also the first company in the organized sector to launch Aloo Bhujia. Another competitor, SM Foods, introduced a range of innovative products. The company launched Indias first non-wafer chips in 1988. SM offered products under two main brands Peppy and Piknik. Under Peppy, it had sub brands such as Cheese Balls, Ringos, Hi Protein Crispies, Potato Rackets, Hearts, Veggie Treat, Mixtures and Minerette. Under Piknik, it had Protein Pin, Junior and Corn Puffs. Haldirams also faced tough competition from domestic players such as Britannia Industries Ltd., Bikaner-

wala Foods and ITC. In addition, FMCG major HLL had also announced plans to enter the snack food market. Analysts felt that Haldirams lagged behind competitors in offering snack foods targeted at children, who were always eager to try new flavors in every product category. They felt that the company concentrated too much on traditional Indian items such as Bhujia Sev and Moong Dal. Haldirams had in fact, taken steps to fill the gaps in its portfolio. Rajendra Agarwal, the owner of the Nagpur unit said, We want to expand our market by introducing snacks that will appeal to younger people. There will be no growth in the traditional snacks category.3 The unit planned to launch products such as flavored readyto-eat popcorn and a product similar to Leher Kurkure. Though Haldirams had increased its focus on advertising and promotion in the last couple of years, still more initiatives in this direction were necessary. Frito Lays expenditure on product promotion was much higher. With successful ad campaigns such as control nahin hotha (it is irresistible) for the Leher brand of namkeens, the company made sure that it attracted the attention of viewers. According to media reports, Haldirams lagged behind competitors in the area of customer service. A report in Deccan Herald that Prabhu Shankar Agarwal, the owner of the Kolkata unit, was arrested on charges of manhandling customers only reiterated this opinion. The report also mentioned that few of the companys restaurants did not possess the minimum requirements, such as sufficient seating arrangements and adequate parking lots.
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Haldirams also had to deal with problems created by spurious products. Some companies claiming to be close associates of the original Haldirams of Bikaner used the Haldirams brand name in their products. For example the Haldiram Madanlal company claimed that its proprietor, Anil Kumar Agarwal, belonged to the Haldirams family of Bikaner. The manufacture of spurious products threatened to dilute the Haldirams brand image apart from affecting the sales. According to some analysts, many of the problems facing Haldirams arose due to an informal split between its three units in the early 1990s. The split occurred when Prabhu Shankar Agarwal, who was heading the Kolkata unit of Haldirams, filed a complaint in the court against the Delhi and Nagpur units, alleging breach of contract when they opened a sweet shop in New Delhi in 1991. This led to a bitter court battle for many years. The court delivered a final verdict in 1999, when Haldirams units were formally split as three separate companies with specific business territories. The consequences of the split were a matter of concern. Though on paper, the three companies had clearly defined boundaries within which they should operate, in practice, they did not stay within their boundaries. They penetrated each others territories and competed among themselves for a larger share of the snacks market. Analysts felt that competitors would take advantage of this split. Since the scope for increasing market share in India was limited, these companies began to compete aggressively in inter-

national markets. They used the internet, not only to market their products but also compete with each other. Each company claimed that its products were superior to those of the others in terms of quality. For instance, an advertisement in haldiramusa.com, a web portal that sold the products of the Delhi company in the US, read, Our items come speFigure 1.11: The Website Adcially packed from the Origivertisement nal Haldirams of Delhi offering superior taste and superior quality, the only Haldiram approved by the US FDA (Food and Drug Administration). Try the Delhi stuff and you will never touch the Nagpur Haldiram packets that most grocery stores store. Analysts were of the opinion that the internal rivalry Source:www.exlinkbar.com among its own companies may lead to dilution of Haldirams brand equity. QUESTIONS FOR DISCUSSION: 1. The company caters to the Indian palate, which is its primary driver of success. In light of this statement, critically examine the marketing strategies adopted by Haldirams to capture a sizeable market share of the organized namkeens and sweets market in India.
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3. 2. In the modern competitive scenario, promotion is a key element in the marketing mix of a company. Critically analyze the promotion strategies adopted by Haldirams. What other efforts must the company take to effectively promote its products? Namkeens contribute a major share of the revenues of Haldirams. Given the competitive scenario in the salty snack foods market in India, where competitors such as Frito Lay are introducing several innovative products, what measures must Haldirams take to remain competitive? Explain in detail. 4. 5. 6. 3. 7. 8. 9. Footnotes: 1. 2. 3. In an article It all snacks up in Brand Equity, Economic Times dated December 11, 2002. In an article titled Brands and Bollywood, on the website www.indiainfoline.com. In an article It All Snacks Up in Brand Equity, Economic Times dated December 11, 2002. 10. 11. 12. 13. 14. Additional Readings and References: 1. 2. Haldiram launches Summer Sip, www.financialexpress.com, April 22, 2000. Bhushan Ratna, Bakemans plans foray into salty snacks, www.blonnet.com, June 1, 2000. 15. 16. 17. 18.

About competition and their strategies, www.blonnet.com, June 15, 2000. Shatrujeet N, Lehar Namkeen: Controlling the pack game, www.apeda.com, October 23, 2000. Chatterjee, Purvita All pep and picnic, www.blonnet.com, January 4, 2001. Pepsi nuts over new nut snack, The Economic Times, November 22, 2001. Kumar, Ramesh Selling Smartly Against the Odds, www.blonnet.com, December 27, 2001. Mother Dairy, Bikanerwala tie up to launch namkeens, www.financialexpress.com, January 2, 2002. Unorganized markets and marketing mix elements (FMCG), www.blonnet.com, March 22,2002. It's snack time folks!, www.blonet.com, June 15, 2002. Bhushan, Ratna Snacking gets Cracking, www.blonnet.com, November 14, 2002. Kaul, Pummy ITC Munches on Snack Foods Business, Launches Brand i, Financial Express, November 20, 2002. Kukreja, Shalini It all Snacks Up, Brand Equity, Economic Times, December 11, 2002. Unauthorized use of trademark lands distributor in trouble, www.deccanherald.com. Exporter of Indian Snacks and Sweets, www.business.vsnl.com. The Savoury story, www.haldiram.com. uthentic Haldiram's Delights Guaranteed Fresh, A www.haldiramsusa.com. Brands & Bollywood, www.indianinfoline.com,

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19. Melwani, Lavina, India has a habit of growing on you, www.littleindia.com. 20. H L L e y e s n e w c o n s u m e r c a t e g o r i e s , www.franchiseindia.com. 21. ww.asianvendors.com w 22. ww.rediff.com w 23. ww.cities.sify.com w 24. ww.haldiram.hypermart.net w 25. ww.the-week.com w 26. ww.haldiram.com w 27. www.haldirams.com 28. www.haldiramcal.com 29. www.chennaiflowersgifts.com 30. www.mumbaiflowersgifts.com 31. www.indiatimes.com 32. www.indiamart.com

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C HAPTER 2

Analyzing the Marketing Environment

Introduction The marketing environment in which a firm operates whether commercial, charity or public sector is never static and predictable, and is influenced by a variety of factors. The environment changes and continues to change under the influence of the various factors. Unless the marketing manager understands the changing environment, the firm can not plan effectively for the future. The best way to understand environment is to consider the degree to which the organization is influenced by these factors and the degree to which the organization can influence the various forces acting on it. The marketing environment of the firm consists of both internal and external environment. Figure 2.1 illustrates the factors that affect the marketing environment. As always the customer is the centerpiece and may be immediately influenced by the actions of the company, the competitor and the associate companies that work with the supply of the products to the company and customers. The customers and the company are indirectly influenced by macro-environmental factors, which include demographic, political, socio-cultural, economic, technological, natural and legal environments.

Figure 2.1: Marketing Environment

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Section 1

Understanding External and Internal Environment

I. Understanding External Environment
The external environment consists of Macro and Video 2.1.1: Marketing Micro Environments. Environment Macro-environment consists of the demographic, political, economic, technological, socio-cultural, natural and legal forces that have relatively less direct influence on the company. These forces affect all the companies in the industry. They tend to have an impact upon the companies, specifically, in the long-run. The macro-environment is characterized by two features. First, the elements do not have an immediate impact on an organizations performance, although it might have an impact in the long-term. Second, it is not possible to control these factors even-though they can influence an organization.

A. Understanding Macro-environment
Figure 2.1.1: Macroenvironment

Macro economic factors affect all the companies in an industry. They tend to have an impact on the companies, specifically, in the long-run. By proactively adapting to changes in the macro-environment, companies can gain a competitive edge. Figure 2.1.2 illustrates the macro-

environment.

1. The Demographic Environment

Demography is the study of population characteristics, such as size, density, and gender. Marketers study these variables to understand the changing needs of consumers. With an increase in population and average disposable incomes of people, the expenditure also increases. For

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by other firms. For example, the cement industry in India is characterized by a few large players, and at times, they can form cartels to Video 2.1.2: Market structures influence prices. Monopolistic competition: In monopolistic competition, there are many firms and the market share is divided among t h e m . To increase their share, firms try to differentiate their product by using various components of the marketing mix. For example, marketers may attempt to differentiate their products from those of competitors, by showing differences in product quality, prices, features, and packaging. This is very evident in the fast moving consumer goods (FMCG) industry. In fact, companies like Procter & Gamble (P&G) and Hindustan Unilever Limited (HUL) offer various brands of oral hygiene products in different variants (viz., sizes, colors, flavors, connoting different benefits) to differentiate their products from others. Pure competition: Pure competition structure is idealistic in nature, with a large number of buyers and sellers selling homogenous products. There are no entry barriers in this structure. The agricultural sector in India comes closest to this type of market. In the agricultural sector, there are many

Micro-environment under competition: The marketing environment is affected by the level of competition. The market structure determines the level of competition in an industry. Monopoly: In monopoly structure, the supply and the price of a product are completely controlled by one firm and the product does not have any close substitutes. Due to the presence of one player in the industry, entry barriers can be created to prevent competition. For example, the railways in India are controlled by the Indian government. Oligopoly: Oligopoly structure includes a few players in the market, with controlled supply of products. The industry has high entry barriers. In this market, the decision taken by one firm influences and is also influenced by the decisions taken

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buyers/consumers and sellers/producers (farmers). The farmers sell the same produce to all the buyers at the prevailing market price. In fact, no single producer can influence the market prices. Furthermore, entry barrier does not exist. Monitoring competition: Firms need to assess their competitors, customers and market trends on a regular basis. Studying competitors strategies will aid them in critically analyzing their own market strategies. Consequently, they will not only modify their current marketing strategy, but also formulate new ones that would give them a competitive advantage.

Indian market. MNCs primarily entered India either through alliances with Indian companies or through their wholly owned subsidiaries. The MNCs invested their resources and set up manufacturing facilities in India. As a result, they generated employment opportunities in India. For example, Hyundai has set up its manufacturing plant near Chennai. As MNCs bring with them the latest technology (e.g., in the production process), they also help in developing and enhancing the skill set of people in the host country. References: Market environment Macro environment PEST analysis

II. Understanding Internal Environment

The internal environment is concerned with the capabilities and potential of the organizations systems, human resources, financial, marketing and operational resources. An analysis of internal environment should focus on absolute nature of the resource and its relative strengths and weaknesses. The internal environment creates value to the customers depending on how the management controls, manages and uses them.

Indian Business Environment and MNCs in India

The liberalization policy of 1991 opened the gates for foreign companies to invest in certain areas of the Indian industrial sector. This led to many MNCs entering the
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Review 1.2

Question 1 of 12
Identify the statement that does not hold good for macro environmental forces.

A. They influence the marketing abilities of the firm B. These forces have an immediate and direct impact on a company C. They affect all players in the industry D. These forces are complex in nature and interdependent.

Check Answer

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Section 2

Case Study: Case Study: ITC Foods Growth and Future

This case was written by Ishani Chakraborty and Sachin Govind, under the direction of S.S.George, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

2006, IBS Center for Management Research. All rights reserved. To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: [email protected] www.icmrindia.org
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There is no other country in the world than India, which has such a wide variety of food. All over the world people are getting health conscious and India offers them a great choice. Thus, we do not want to export the brand Kitchens of India but want to establish the brand as the brand of the mainstream consumer in the global market.1 - Ravi Naware, chief executive, foods division, ITC Ltd., on April 24, 2006. Im very bullish. Over the next couple of years, we expect it (ITC Foods) to turn profitable.2 - Nikhil Vora, vice president (Research), SSKI Securities, on February 03, 2006. Unlike in the ready-to-eat segment which is still small and the onus is more on growing the category than getting share, in the other categories ITC has to contend with entrenched competition. Success will depend on how much patience it has to drive growth over a period of time.3 - Ravi Nigam, president, Tasty Bite Eatables Ltd., in 2004.

F IGURE 2.1 The Biscuit Manufacturing Unit at Haridwar in Uttaranchal

Source:www.fabs.co.in

manufacturing capacity of 2,000 tons per month was to become operational by March 2007. In early 2006, ITC Foods, with a market share of 5.3%, trailed behind Parle and Britannia, the market leaders in the Indian biscuits market (organized sector). However, the company was expanding its distribution network aggressively and was

F IGURE 2.2 Ready-To-Cook Products Under the Kitchens of India (KoI) brand

INTRODUCTION On May 3, 2006, ITC Foods, the foods division of ITC Ltd, a major Indian conglomerate, announced its plan to set up a biscuit manufacturing unit at Haridwar in Uttaranchal with an investment of over Rs.700 million. The proposed plant with a

Source: www.thehindubusinessline.in

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F IGURE 2.3 ITCs confectionery,

staples, and snack food segments

set to introduce new biscuit variants to improve its market share.

The ITC Group had entered the branded and packaged food business in August 2001 with the launch of Source: http://4.bp.blogspot.com ready-to-cook products under the Kitchens of India (KoI) brand. This was followed up by product launches in the confectionery, staples, and snack food segments within a year. As of early 2006, it had emerged as a major player in the foods business. Analysts observed that its heavy investment in manufacturing and infrastructure indicated that ITC was bullish on the prospects of its foods business. ITC developed new product lines in its foods business drawing on its competencies in brandbuilding, R&D, packaging, and distribution. However, market analysts were not sure whether ITC would achieve success in all the food categories that it had entered. According

to a consultant at Quadra Advisory, apart F IGURE 2.6 ITCs Imported Cigafrom the ready-to-eat rettes category, ITC Foods was likely to face hurdles in every other f o o d c a t e g o r y, a n d especially so in the biscuits and confectionery category, due to intense Source: http://2.bp.blogspot.com competition. However, more recent reports suggested that even in the ready-to-eat category, the competition was heating up. BACKGROUND NOTE ITC was established on August 24, 1910 as the Imperial Tobacco Company of India Limited in Kolkata. Initially, the company was involved in the trading of imported cigarettes. In F IGURE 2.5 The Welcomgroup 1925, in a backward Chola Sheraton at Madras integration move, the company started a packaging and printing business. The name of the company was changed t o I n d i a To b a c c o Company Limited (I.T.C.
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F IGURE 2.4 Imperial Tobacco Company to India Tobacco Company

Source: http://media2.intoday.in

Source: http://img.otel.com

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Exhibit I - ITC Balance Sheet In million Rs S. No. 1 Shareholders funds a) capital b) Share capital suspense c) Reserves and surplus 2 Loan funds a) Secured loans b) Unsecured loans 3 Deferred tax net TOTAL 886.9 1566.7 2453.6 3760.9 85170.6 315.6 892.9 1208.5 877.4 66186.5 2482.2 12.1 76461.8 78956.1 2476.8 61623.8 64100.6 March, 2005 March, 2004

Profit and Loss Account For the Year ended March For the Year ended March 31, 2005 (Rs. in Millions) 31, 2004 (Rs. in Millions) IA. GROSS INCOME IB. NET INCOME Gross Sales Less: Excise Duties and Taxes on Sales of Products and Services Net Sales (after Considering provision for taxes of Rs. 214.75 Crores) Other Income II. OTHER EXPENDITURE Raw Materials etc. Manufacturing, Selling etc. Expenses Depreciation 135853.9 133495.8 57101.3 76394.5 2358.1 78752.6 27695.5 21197.7 3128.7 52021.9 120399.2 118150.4 53446.0 64704.4 2248.8 66953.2 23877.8 1,7468.6 2416.2 43762.6 Contd
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Contd III. PROFIT Profit before Taxation and Exceptional items Provision for Taxation Profit after Taxation before Exceptional Items Exceptional items (net of taxes) Profit after taxation Profit brought forward Transfer to Hotel Foreign Exchange Release from Hotel Foreign Exchange Earnings Reserve Available for appropriation IV. APPROPRIATIONS Release from Debenture Redemption Reserve General Reserve Proposed Dividend Income on proposed dividend (2005 including Rs. 1.27 crores for earlier years) Profit Carried Forward Earnings per Share (Face Value Rs.10.00 each) On profit after taxation before exceptional items Basic Diluted On Profit after Taxation Basic Diluted
Source: www.itcportal.com.
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26730.7 8360.0 18370.7 3543.3 21914.0 3878.4 25792.4 151.4 151.4 25943.8 11000.0 7732.5 1097.2 6114.1 25943.8 10000.0 4953.6 634.7 3878.4 19357.3 -50.0 40.0

23190.6 7262.1 15928.5

3438.8 19367.3 -10.0 19357.3 109.4

Rs.73.74 Rs.73.52 Rs.87.97 Rs.87.70

Rs.64.34 Rs.64.22 Rs.64.34 Rs.64.22

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S.No. Division 1 Cigarettes & Leaf Tobacco 2 Packaging And Printing

3 4

Hotels Business Paperboard s& Specialty Papers Agri Exports

Greeting, Gifting & Stationary Lifestyle Retailing

8 9

Safety Matches Incense Sticks (Agarbattis)

Exhibit II - The ITC Group Description Cigarettes and leaf tobacco business is the primary business of ITC. ITC is the undisputed market leader in the Indian cigarette market, with more than 70% market share in the filtered cigarettes category. ITC is also the number one buyer, processor and exporter of cigarette tobaccos in India. The companys popular brands include Wills, India Kings, Gold Flake, Navy Cut, Scissors, Capstan, Berkeley, and Bristol. ITC provides value-added packaging solutions for several industries like food and beverages, personal products, cigarettes, liquor, etc. Over the years it has emerged as one of the largest converter of paperboard into packaging. Its product range includes flip-top boxes, display outers, shells and slides, soft cup and strap, labels, bundle wraps, flap boxes, inner frames, coupon inserts, folding cartons, shoulder boxes, and pre-printed cork tipping. ITCs chains of hotels include the high-end WelcomHeritage hotels, and the Fortune hotels targeted at mid-level business and leisure travelers. In early 2006, it owned over 60 hotels across more than 50 destinations in India. ITCs paperboard products include packaging boards like coated folding box boards, solid bleached sulphate boards, white lined chipboards, liquid packing boards, poly extruded coated boards for food and barrier packaging and cast coated papers and boards. At the end of 2005, it had a manufacturing capacity of 360,000 tons. ITCs market share in paperboards industry grew from 17% in 2004-05 to 25% in 2005-06.27 In 2005-06, the division was one of Indias largest exporters of agri-commodities with exports worth more than Rs.5 billion. ITC was the first Indian company to receive the $100,000 Development Gateway Award 2005 for its e-Choupal initiative. It deals mainly with exports of feed ingredients, food grains, edible nuts, marine products, and processed fruits. The product range includes gift wrappers, autograph books and slam books, notebooks and stationary products for school, college and office use. At the end of 2005, greeting cards were available at over 11,500 multi-brand outlets over 700 cities in India. The Lifestyle Retailing Business Division (LRDB) was set up in 2000 to exclusively retail the Wills Sport brand. The retail outlets were named Wills Lifestyle. In 2002, the product range was expanded to include formal wear (Wills Classic). And in 2003, a new line of evening wear (Wills Clublife) was introduced. Both were targeted at the premium consumer. Wills Lifestyle also offers a wide range of designer accessories to complement its fabrics. In 2003, another brand John Players was introduced. The popular brands are iKno, Mangaldeep, VaxLit, Delite, and Aim. Mangaldeep matches target housewives where as the other four brands targeted smokers. ITC has two brands called Spriha and Mangaldeep in this category with a wide range of fragrances like rose, jasmine, bouquet, sandalwood, madhur, mogra, etc. Mangaldeep brand is exported to the US, UAE, Bahrain, Nepal, Singapore, and Malaysia.
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Source: www.itcportal.com

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F IGURE 2.7 ITC Bhadrachalam Paperboards Ltd. (IBPL) Manufacturing Unit

Ltd.) in 1974. In 1975, I.T.C. Ltd., through ITCWelcomgroup, tied up with the US-based Sheraton Corporation to enter the hospitality industry. It acquired its first hotel in Madras (later renamed Chennai) in Tamil Nadu and called it the Welcomgroup Chola

F IGURE 2.9 Ads of ITCs cigarette

brand -Wills

retailing business by extending its well known cigarette brand Wills. The retail outlets were called Wills Lifestyle and offered premium leisure wear for men and women under the Wills Sport brand.

Source: http://1.bp.blogspot.com

Sheraton. I.T.C. Ltd. established ITC Bhadrachalam Paperboards Ltd. (IBPL) in 1975. The company started production at its integrated pulp and paper/board manufacturing facility at Bhadrachalam, Andhra Pradesh, in 19794. F IGURE 2.8 paper/board manufacIn 1990, I.T.C. Ltd. set up an International Business Division (IBD) for export of agri-commodities. I.T.C. started a greeting cards business under the brand name Expressions in the year 2000. In the same year, I.T.C. also entered the fashion turing

In September 2001, the company was renamed ITC Ltd. (without full stops, and with no meaning attributed to the alphabets). In 2001, ITC made an entry into the foods business, and entered the business of safety matches, where it could use the same distribution network as that of its cigarette brands, in 2002. In 2002, IBPL was amalgamated with ITC to form the Paperboards & Specialty Papers Division of ITC. This was done to harness strategic and operational synergies. In 2002, the company launched another
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Source: www.cuttingthechai.com

F IGURE 2.10 ITC Expression

Cards

Source: www.itcgreenpapers.com

Source: http://1.bp.blogspot.com

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F IGURE 2.11 Wills Lifestyle

clothing brand, John Players, which targeted the urban youth. In 2003, ITC started marketing incense sticks manufactured by small scale and cottage units.

F IGURE 2.13 ITCs Clothing Brand

- John Players

ITCs financials and Exhibit II for more details on ITCs businesses). ITC FOODS: TASTING SUCCESS?

In 2004, ITC was one of eight Indian companies to make it to the Forbes A List which featured 400 of the worlds best big companies. In March 2005, the board of directors of ITC approved the companys five-year business plan (2005-06 to 2009-10) which involved an investment of Rs. 140 billion. The plan included setting up of new plants and upgrading existing ones in its tobacco, foods, apparel, F IGURE 2.12 ITCs Safety Matches paperboards, packaging, and hotels businesses. As of early 2006, ITC was one of Indias most valued and respected private sector companies with a market capitalization of over US$ 7 billion (Refer Exhibit I for

Source: www.imagesfashion.com

Entering the foods business was a strategic decision for ITC. While ITCs core business, Source: www.itcportal.com tobacco, was under pressure owing to several factors like government bans on advertising cigarettes and on smoking in public places (from February 2001), hikes in the excise duty for cigarettes, and antitobacco campaigns, the liberalization of the Indian economy had thrown open several opportunities which the F IGURE 2.14 ITCs Incense Sticks company was eager to Brand - Mangaldeep exploit. Being a cashr i c h c o m p a n y, I T C planned to deploy its surplus in the packaged food business where it saw huge business potential. With a population of over one billion, 300 million of whom
Source: www.itcportal.com

Source: www.itcportal.com

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belonged to the middle class, India was a large market for food products. By the early 2000s, rapid urbanization, increase in literacy levels, greater media exposure, and rising per capita incomes resulted in increased demand in most categories of foods. ITC was eager to capitalize on the business opportunities in this segment by leveraging the strength of the groups other businesses. It also expected to gain a competitive advantage in marketing from its extensive distribution network and advanced procurement system. Other businesses like Paperboards, Packaging & Printing were to support the foods business by providing state-of-the-art packaging at cost-effective rates. The hotels business was to help the company in its ready-to-eat & ready-to-cook business by making available its cuisine expertise. ITC forayed into the branded and packaged foods business in 2001 with the KoI brand of ready-to-cook products. S u b s e q u e n t l y, t h e company entered other F IGURE 2.15 KOI Bukhara Dum categories like Pukht and Dakshin Brands confectionery, staples, and biscuits. READY-TO-EAT In 2001, ITC launched the KoI brand of readyto-cook gourmet dishes under sub-brands Bukhara, Dum Pukht,

and Dakshin - popular cuisines from specialty restaurants of the same names at ITC Welcomgroup hotels. With prices ranging from Rs.150 to Rs.200 for a 450g pack, they were positioned as premium products for the food connoisseur, with target groups including tourists, NRIs, etc. Ravi Naware (Naware), CEO, ITC Foods, said Its actually ready-to-eat gourmet cuisine from ITCs Bukhara, Dakshin and Dum Pukht restaurants. KoI is a premium range in the ready-to-eat category targeted at tourists, consumers who order at home, NRIs and women in the age group 25 plus.5 The preservatives-free products were available in retort pouches with a shelf life of twelve months. In 2003, the product line was extended to include Gharana within the same price range (Refer Exhibit III for the complete range of KoI products). In the same year, ITC started an exclusive website for the KoI brand - www.kitchensofindia.com to provide product information and to facilitate online buying. Also, ITC entered into tie-ups with leading web portals like rediff.com for the online advertising of the b r a n d . A t o l l f r e e F IGURE 2.16 Sweets under KOI number was put in brand place for home delivery in metros like Delhi, Mumbai, Kolkata, Chennai, and Hyderabad. KoI brand sweets were introduced in 2003 (Refer Exhibit IV for a

Source: http://3.bp.blogspot.com

Source: www.kitchensofindia.com
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S. No. Category 1 Ready-To-Eat (Heat and Eat products)

Exhibit III Products under Kitchens of India

Variety Dal Bukhara (dal bukhara), Dum Pukht (mirch ka salan), Dakshin (chicken chettinad, chicken stew), and Gharana (paneer darbari, chicken darbari, murgh methi), Biryani (Noor mahal, Bohri, Yakhni pulao, Hyderabad biryani, etc).

2 3 4 5

Curry Pastes (Ready made pastes made by Butter chicken curry paste, Hyderabadi biryani paste, Fish curry paste, blending different types of spices) Vegetable biryani paste, Chicken curry paste, and Mutton curry paste. Conserves (Fruit and spice preserves) Strawberry and mint, Pineapple and green pepper, Apple and cinnamon, Plum and star anise conserve.

Chutneys (A kind of thick syrup made of Shredded mango chutney, Tamarind and date chutney, Mango and jeera different kinds of fruits and vegetables) chutney, Mango and garlic chutney. Desserts (Traditional sweet dishes from Jodhpuri moong dal halwa, Hazoori petha halwa, Awadhi badam halwa, Shahi different regions of India) jamun, Khoya mutter.

Source: www.itcportal.com.

photograph of the product) and were priced at Rs.150. To encourage larger take-offs, ITC promoted them as a corporate gift during festival seasons (Diwali, New Year, etc). It also came up with innovative packs that looked like Exhibit IV - Kitchens of India Desserts treasure chests to attract corporate customers. The chests could be customized with the customer companys message and logo. Agents were appointed to promote Source: www.kitchensofindia.com. the KoI sweets as a better alternative to

traditional sweets. In 2003, ITC also started exporting KoI brand products to the USA, Canada, the UK, Switzerland, and Australia. By 2003, the ready-to-eat category saw a growth rate of 30% due to several factors like convenience, constantly changing food habits, and the increase in the number of double-income nuclear families who demanded high-quality, hygienic convenience foods and were willing to pay more. Jagdeep Kapoor, managing director, Samsika Marketing Consultants, said, Four reasons for the runaway growth of this (ready-to-eat) market are convenience, taste, health, and aspiration among the young.6

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Source: www.globalpackagegallery.com

ITC aimed to capture a significant share of the ready-to-eat market. However, owing to its premium positioning, the KoI brand couldnt bring in volumes. ITC F IGURE 2.17 Aashirvaad Readywanted to expand the Meals Packs market without diluting the premium image of the KoI brand. Therefore in June 2003, it extended its Aashirvaad brand, which had till then Source: www.itcportal.com been used for ITCs staples like salt and

w h e a t f l o u r, t o t h e ready-to-eat category, F IGURE 2.18 ITC Branded Spices with the launch of a Product Range variety of dishes under the Aashirvaad ReadyMeals label. The ready-to-eat segment is just beginning to grow. According to estimates, this is growing at 30% Source: www.aashirvaad.com per annum. We would like to be the leader in the category and aim to achieve all-India coverage in the first year (of the launch of Aashirvaad). Aashirvaad will now be the ready-to-eat solution for the time-pressed family,7 said Naware. The products were priced Rs. 35- 40 for a 285g pack. Analysts felt that the competitive pricing would widen the market by including middle class buyers as well. Naware said at the launch, While Aashirvaad will enable Indian women to F IGURE 2.19 ITC Cooking Pastes nurture a wholesome and Conserves Product Range tasty meal instantly ready, it will be an easy option for bachelors and single people.8 In 2004, the company launched KoI brand fruits and spice

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Exhibit V - Products under Aashirvaad S. No. Category 1 Variety

Ready-to- Rajma Masala, Nav Ratan Korma, Dal Eat Makhani, Aloo Mutter, Palak Paneer, Pindi Chana, Pav Bhaji, Mutter Paneer, etc. C o o k i n g A multipurpose cooking paste using onion, paste tomato, ginger, garlic, etc. Staples Spices Wheat flour, Salt. Chilli, Turmeric, Coriander powder.

Aashirvaad brand (Refer Exhibit V for the complete product list under Aashirvaad).

F IGURE 2.20 Aashirvaad Instant

Mix Packs

2 3 4 5

I n s t a n t Rice Idli, Rava Idli, Rice Dosa, Gulab Jamun Mixes and Khaman Dhokla.

Source: www.itcportal.com.

conserves and cooking pastes. The fruits and spice conserves, inspired by the traditional chhunda (combination of fruit and spices) from Gujarat, were developed jointly with Karen Anand, a food expert. Priced at Rs. 70, these were targeted at the premium segment. The KoI cooking pastes, which were priced at Rs.30 for a 100g pack, also targeted the high-end market. Multi-purpose cooking pastes was also launched under the Aashirvaad brand and these were priced at Rs.10 for an 80g pack. The manufacturing of these products was outsourced to contract manufacturers. In 2004, ITC won the National Excellence Award for its readyto-eat products. It was conferred the title - King of Ready-ToEat Products. ITC entered the branded spices market in 2005 and the Instant Mix segment in 2006, both under the

As of April 2006, the total turnover in the Indian ready-to-eat and ready-to-cook segments was only Source: www.itcportal.com around Rs. 700 million, but it continued to post an annual growth of 20%. Ready-to-eat is still a niche market in India but changing lifestyles and lack of (culinary) skills are factors that can increase volumes in this segment,9 said Naware. By early 2006, though ITC had captured a 35% market share in the ready-to-eat segment, MTR was the clear market leader with close to 60% in market share. ITC exported 40-50% of KoI brand products (in terms of volumes)10 to the US, Canada, the UK, Switzerland, and Australia. In May 2006, ITC was reportedly planning to introduce ten more varieties under the KoI brand within a price range of Rs. 35 to Rs. 98. ITC was also very optimistic with regard to its Instant Mix products. According to company estimates, the size of the instant mix market in India was about Rs.1.5 billion with an annual growth of 15%. The company was aiming for a 20% share of the market in 2006-07. CONFECTIONERY
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ITC entered the confectionery market by F IGURE 2.21 ITCs Confectionery a c q u i r i n g M i n t - O , a Products compressed mint tablets brand, from the Delhibased Candico India Limited in 2002 and relaunching the brand with new packaging and improved quality. MintOs were available in six Source: http://1.bp.blogspot.com and twenty mini roll packs and were priced at Rs.2 and Rs.5 respectively. They came in mint and orange flavors. At the end of 2003, ITC launched Candyman in the boiled sugar candy segment in banana, mango, and orange flavors. They were priced at 50 paise per unit. Initially, they were launched in Uttar Pradesh and Tamil Nadu. The Mint-O brand was extended to the hard-boiled candy segment as Mint-O-Fresh in 2004. Video : One of The Mint-O These were priced at 50 paise Fresh TVC each, targeting the impulse purchase segment. Mint-O was positioned as a youthful cool product, whereas Mint-O-Fresh focused on fresh breath. Advertisements for the brand appeared on major TV channels. In 2005, ITC launched Cofitino, a

F IGURE 2.22 ITCs Cofitno Toffee

Source: www.itcportal.com

coffee-flavored toffee. Company personnel claimed that Cofitino contained natural extracts of Robusta coffee beans instead of spray dried instant coffee which was supposedly used by other companies. Later, other flavors like butterscotch and pineapple were added.

ITCs confectionery sales benefited from the companys cigarette distribution network covering more than 1.5 million retail outlets across the country. Naware, said, We have achieved a good growth in the confectionery segment with one of the products (Mint-O) getting a 17 per cent share within 15 months of its launch.11 F IGURE 2.23 ITCs Staple ProdAs of 2005-06, ITC ucts had an 8-9% market share in the Indian confectionery market. In a market which was estimated to be worth around Rs. 19 billion, ITC was the fourth largest in terms of Source: www.indigomart.com market share, after Perfetti, Nutrine, and
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Parrys. STAPLES ITC entered the staples market in 2002 with wheat flour under the Aashirvaad brand. In the same year, the Government of Indias proposal to remove restrictions on the movement of agricommodities across states gave a boost to the trade in wheat flour. In 2003, ITC extended the Aashirvaad brand to edible salt. ITC positioned its wheat flour on the health & hygiene and value for money planks. Success in the staples business, especially in the branded and packaged wheat flour business, depended on two factors an effective distribution network and the quality of the product. As Sinchan Banerjee, procurement and logistic manager, ITC Foods said, Hygiene is a big issue. You need to keep the transit times as low as possible. F IGURE 2.24 ITCs e-Choupal You should not be out of stocks but at the same time the stocks should remain fresh. 12 Therefore, ITC attempted to ensure that the supply chain was responsive, and laid Source: www.itcportal.com emphasis on making accurate sales forecasts using inputs from distributors, sales personnel and a well-managed MIS system. The order to remittance cycle was kept at 7-10

days and some buffer stocks were also kept at the distributor level. To maintain freshness of the product, the company strove to minimize the transit time by regulating the shippers to maintain company-specific transit Source: www.aashirwad.co.nz norms. Non-adherence to the transit norms resulted in penalties for the shippers. The physical aspects of the supply chain like warehouses and trucks were closely monitored to maintain cleanliness.

F IGURE 2.25 Innovative Packaging

ITC also enjoyed cost advantages over its competitors owing to its electronic procurement system called e-Choupal (Refer Table I for more information on e-choupal) and its printing and packaging business, which provided the staples F IGURE 2.26 Other Leading Playbusiness with high- ers in the Organised Salt Market quality, cost-effective, and innovative packaging. The wheat flour was packed in PET recyclable polypacks, with a Madhubani painting Source: http://thanishonline.com depicting the farming process on the outer
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Table I - E-Choupal ITC initiated the e-choupal project in 2000 in order to establish a strong agricultural product supply chain. E-choupals were internet kiosks providing real time information to the farmer regarding weather, commodity prices and better farming practices in local languages. Choupal in Hindi means village meeting place. E-choupal was meant to be a virtual meeting place for the producer and the processor where farmers can transact directly with the processor and can realize better prices for their produce. In the conventional value chain, the farmers used to sell their produce to intermediaries who took them to the processing unit. In this system, the procurement cost for the processor increased with the increase in the number of intermediaries as profit margins were added at each level. The farmers received the lowest margin in the whole value chain, in spite of the fact that they did the most work. Also, the intermediaries blocked the flow of market information to farmers. E-choupal allowed the farmer to get a larger share of profit by minimizing the number of levels of intermediaries and helped them to become market oriented by providing information. For ITC, it was an effective way of strengthening its rural distribution network and deriving cost benefits through lower purchase rates. In the e-choupal set up, a level of intermediary called sanchalak acts as an interface between the processor and the farmer. ITC accumulates information regarding weather, modern farming practices, and market prices from various sources like the Meteorological Department, agri-universities, mandis (regional markets), etc, and uploads them on the e-choupal web site. All information is customized according to the local farmers requirements and provided in the local language through computers set up by ITC in the sanchalaks house. The sanchalak accesses this information and facilitates its dissemination to farmers. The sanchalak works as the aggregator for small farmers produce which is then bought by ITC. The e-choupal initiative also procures farm inputs like seeds, fertilizers, pesticides, etc at the lowest rates which are then sold to the farmers. In August 2004, ITC opened Chaupal Sagar, a village shopping complex in Rafiqganj, Madhya.Pradesh. It served as a retail outlet for a number of products starting from toiletries to motorcycles and tractors. Also, ITC used it as a warehouse for storing farm produce that the company bought through its e-choupals. As of early 2006, ITCs e-choupal network covered Madhya Pradesh, Karnataka, Andhra Pradesh, Uttar Pradesh, Maharashtra, Rajasthan and Kerala. The e-choupal operation has reduced the procurement, transit and material handling costs of the company, as farm produce can be purchased at the farmers doorstep through the sanchalak. In the process, ITC has also created a better supply chain for its food and agri-business.

Compiled from various sources.

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F IGURE 2.27 ITCs Biscuits Range

cover, making it both aesthetic and environment-friendly. It introduced carton packaging with vacuum sealing in its 5kg premium pack.

mothers, Sunfeast Orange Marie and Marie Light were targeted at housewives/families. Sunfeast Cream (orange, butterscotch, and Table II -Sunfeast Product Weight (grams) Glucose 100, 75, 19 Orange Marie 200 Marie light 200, 400 Butterscotch cream 100 Milky magic 100, 150 Strawberry cream 100 Pineapple cream 100 Coconut 100 Snacky 75 Golden Bakes 100 (butter, cashew, honey) Price (Rs.) 4, 3, 1 13 13, 19 10 7, 10 12 12 12 6 10, 12, 13

By early 2006, ITC had a 40% market share in Source: www.instablogsimages.com the Rs. 6 billion packaged flour business13. Its closest competitor HLLs Annapurna brand was trailing behind with a market share of 18%. The market was growing at 12%. In the Rs. 4 billion organized salt market (as of 2006), Tata Salt was the market leader with a 28% market share14. Though ITC had only a 5% share of the market, it was optimistic of growth in future. Other players in this business were HLL (Knorr, Annapurna), Nirma (Shudh), Marico Industries (Saffola), etc. Video: Sunfeast Hara Banao Campaign TVC BISCUITS ITC entered the biscuits market with Sunfeast in 2003, with three varieties of biscuits glucose, marie, and cream. While Sunfeast Glucose targeted children in the age group 4-14 years and their

* The list is not exhaustive. Source: www.itcportal.com.

bourbon) was also targeted at children.15 The Orange Marie and butterscotch cream variants were introduced after a year long product R&D effort and extensive sampling covering 14,000 consumers. Gradually, the product line was expanded (Refer Table II for the product list in 2006). Television advertisements for the Sunfeast brand appeared way before the actual launch of the product. The advertisements, which appeared on both national and regional channels, essentially focused on product attributes. The production of the biscuits was initially outsourced to contractors in different states like West Bengal and Maharashtra, to keep costs low.

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According to estimates, the organized segment dorsing Sunfeast Products of the Indian biscuits industry in 2004 was growing at a rate of 13.5% in terms of value16. ITCs strategy was to increase market Source: www.india-travel-secrets.com share by launching new products, backed by heavy promotion, to fill every product segment. As a part of the strategy, Sunfeast Milky Magic was launched in 2004. Initially, it was marketed in Tamil Nadu. It also launched three more variants - Sunfeast Strawberry Cream, Sunfeast Pineapple Cream, and Sunfeast Coconut - in the same year.

F IGURE 2.28 Shah Rukh Khan En-

70,000 students from F IGURE 2.30 Sunfeast Hara Baover 100 schools. Under nao Campaign the campaign, ITC also organized a sapling plantation drive in Khammam, Andhra Pradesh. Overall 300,587 saplings were planted by 15,907 farmers within 20 minutes. This set a Source: www.opinionpoll.in record which found a place in The Guinness Book of World Records. (Click here for more information on the World Record)

In 2005, ITC signed on the popular Hindi film star Shah Rukh Khan as the brand ambassador for Sunfeast. It also organized a number of promotional activities in the period. F IGURE 2.29 The Sunfest Open I T C s p o n s o r e d T h e 2005 Sunfeast Open 2005, a womens tennis event, held in Kolkata. It also launched an environmental awareness program Sunfeast Hara Banao Campaign - in Mumbai which attracted a Source: http://img379.imageshack.us participation of over

Plant saplings at Bhimuni Gudem in Khammam district on September 05, 2005 as part of ITC's `Hara Banao' campaign. Source: www.hindu.com
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In 2005, ITC expanded Sunfeast Golden Bakes and Sunfeast Snacky, in the cookies and salted crackers segments - both of which were showing strong growth rates. The cookies segment grew at 30% in 2005 and the total size of the segment was pegged at Rs.5 billion.17

its product line with the launch of

F IGURE 2.31 Sunfeast New Biscuit

Variants

Exhibit VI Market Shares in the Indian Organized Biscuits Market Market Share in % Company 2004-05 2005-06 ITC Parle Britannia* Surya 2.7 42.2 35.8 6.4 3.9 1.9 7.1 5.3 40.3 31.6 5.7 3.9 1.5 11.7

Souce: www.desistores.net

Anmol Priya Others

The biscuits market was highly competitive with a presence of strong players like Britannia and Parle. Hence ITC had to create new and differentiated products in each and every segment. We decided not to play on our competitors turf; our aim was to create new markets for ourselves. Thus, we introduced an Orange Marie, a butterscotch cream biscuit, chilli flakes in a biscuit and even honey flavor under the Sunfeast brand,18 said Hemant Malik, head of marketing, ITC Foods. Sunfeast had a market share of 5-6% in the biscuits market in 2005-06, which was double its market share of 2.7% in 2004-05 (Refer Exhibit VI for market shares in the organized biscuits market). In March 2005, ITC Foods launched Sunfeast Pasta, a whole wheat based product targeted at children. It was expected to compete with products like Nestles Maggie noodles. Within a few months of the launch, Sunfeast Pasta had secured a 6%

*Includes Kwality. Source: ACNielsen Retail Audit, Financial year data.

share in the branded noodles and pasta market (based on volumes). In March 2006, the excise duty on pasta was slashed from 16% to nil. This was expected to support F IGURE 2.32 Sunfeast Pasta its growth. In 2006, ITC Foods tied up with New York-based Company House of Spices to launch Sunfeast across the US. To a n n o u n c e Sunfeasts foray into the US, we are beaming
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television commercials featuring Shah Rukh Khan on Indian channels in the US,19 said Naware. In March 2006, ITC had decided to set up its own manufacturing facilities in Karnataka and Uttaranchal to produce biscuits. The total capacity of these two factories was estimated to be around 10,000 tons per month. This decision was part of the March 2005 investment plan. Under the plan, the foods division was to invest close to Rs.4.5 billion between 2006 and 2008. CHALLENGES Traditionally, the foods business has been a low-margin business in India, while building brands required huge amount of money. As a result it often took several years to earn returns on investments made in the foods business. However, ITC was expecting to break even in 2007. The unorganized sector was a formidable force in the foods business. Unorganized players incurred very low marketing and selling costs owing to their limited area coverage. Also, more often than not, they used low quality ingredients and didnt always follow regulations, which helped them to keep their operational costs low. As a result, they could price their products lower than the players in the organized sector. ITC faced tough competition from the unorganized sector in the categories of biscuits, staples, and spices. In the ready-to-eat segment, ITC faced competition from companies like MTR and Tasty Bites (Refer Exhibit VII for the list of competitors). At the end of 2005, MTR was the market leader in this segment with around 60% market share. They were also

F IGURE 2.33 ITCs Major Competitiors in the Ready- To-Eat Segment

exporting their products to countries like the USA, Singapore, Japan, and Australia.

The confectionery business was a highly price sensitive market with intense Source: www.mtrfoods.com competition from regional as well as national players (Refer Exhibit VIII for the list of competitors). Hence, profit margins were low and sales volumes were critically important. But here too, building a brand entailed huge expenditures on advertising. The annual per capita consumption of biscuits in India (about 1.52 kg) was much lower than in developed countries (about 12 kg). However, in the 2000s, more focused advertising, new product launches targeting age-specific markets and upgraded packaging resulted in healthy growth in the Indian biscuit industry. Reduction in excise duty from 16% to 8% in the year 2004-05 also boosted growth. At the end of 2005, the Indian biscuit market recorded a growth of 12%.20 Yet, India had a long way to go to catch up with industrialized countries. Till then, companies, including ITC, had to spend heavily to expand the market. In the biscuits business, Britannia Industries Ltd. (Britannia) and Parle Products Ltd. (Parle) were the market leaders, far ahead of ITC in market share. In terms of value, Parle and Britannia
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S. No. 1

2 3

4 5

Exhibit VII ITCs Competitors in the Ready-to-Eat Segment Company Description MTR (Mavalli Tiffin The market leader in the ready-to-eat sector, MTR had a humble start as a small food outlet at Rooms) Bangalore in 1924. MTR Foods launched its packaged and processed food products in the late 1970s. The products were Rava Idli mix and Khara Bhaath Mix. In the next three decades, it expanded its range of products and by 2006, it had a varied product range with 15 curries and seven south Indian specialties. Satnam Overseas One of Indias largest exporters of basmati rice under the flagship of Kohinoor brand, Satnam had Limited entered the packaged food market with heat-and-eat North Indian curries and lentils in 1989. It has regional appeal, especially in the state of Punjab. Tasty Bites Tasty Bites was incorporated in 1987 but it was not able to make much headway and the products were Eatables Limited withdrawn after a year. It was taken over by US multinational Preferred Brands Inc. in 1998. The Rs. (TBEL) 200 million export-driven company offers nine curries and six south Indian ready-to-eat dishes like avial and pongal and also ready-to-cook curry pastes. Priya Foods Priya Foods was incorporated in 1980 by the Ramoji group. It offers a variety of products in categories like pickles, spice powder, culinary pastes, instant mixes, etc. Gits Gits Food Products Pvt. Ltd was established in 1963. It markets a wide range of Indian food specialties like snacks, ready-to-eat meals, desserts, dairy products and biscuits. had market shares of around 40.3% and 31.6% respectively. While Britannia catered to the mass market segment with its Tiger brand and aggressively tapped the rural market, Parle had Parle-G, the largest selling biscuit brand in India. Parle was planning to launch Parle-G in Russia and Bangladesh as well. We are focused on catering to the masses and our products are available in the smallest markets, 21 said a Parle spokesperson. Unlike Britannia and Parle, ITC did not have a

Compiled from various sources.

F IGURE 2.34 Market Leaders of

Buscuits Industry

F IGURE 2.35 Major Regional Players Competing with the Players of Organised Sector (Wheat Flour)

Source: www.gwebmart.com

Source:http://product-image.tradeindia.co m

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Exhibit VIII ITCs Competitors in the Confectionery Market S. No. 1 Company Perfetti Van Melle: It started operations in India in 1994, and by 2006, had emerged as the market leader in sugar confectionery in India with 30% market share. Nutrine Confectionery Company Limited: Founded in 1952 by Sri Venkatarama Reddy, the company has more than 72 varieties of candies, toffees, lozenges, etc, with 26% share in the total confectionery market, as of 2006. Parrys Confectionery Limited: The company, originally a part of the Murugappa Group, started manufacturing confectionery in 1954. It was acquired by Lotte Confectionery Limited in 2003. Parle: It started manufacturing sweets and toffees in 1929 near Mumbai. A decade later in 1939, it entered into the business of manufacturing biscuits. It has a 15% share of the total confectionery market. Joyco India: It is a subsidiary of Joyco International, Spain. Product Category Brands

Sugar confectionery, Alpenliebe, Big Babool, Center shock, Chlor-mint, Gums Cofitos, Happydent, Center-fresh, Chatar-patar, Choco-tella, Mentos, Fruit-tella, etc. Sugar confectionery, Gums, Fruit bars Mahalacto, Kokonaka, Aasay, Wild Koffy, Chocolate Eclairs, Aam ras, Nutrine Gold, Caramella, etc.

Sugar confectionery Lacto King, Coconut Punch, Coffy Bite, Caramilk, Shakti, etc.

Sugar confectionery

Melody, Mango Bite, Kismi Toffee Bar, Poppins, Peppermint, Rol-a-Cola, etc.

Gum, sugar confectionery

Solano, Boomer, Bonker, Actimint, Pim Pom

Compiled from various sources.

blockbuster mass product. Analysts felt that to grow in the biscuits business, the mass market was the key. As of early 2006, the overall biscuit industry was facing the problem of an increase in production costs, mostly due to an increase in wheat prices. Biscuits industry in the country is facing acute hardships and heavy losses due to steep increase in the

prices of wheat and consequently of wheat flour,22 said B P Agarwal, President, Federation of Biscuit Manufacturers of India (FBMI). The FBMI requested Sharad Pawar, Union Minister for Agriculture, to allow import of wheat at zero customs duty. The prices of other inputs like sugar (20-30%), and fuel (30%) had also increased in 2005-06, contributing to higher production costs.
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From April 2004, biscuits were subjected to 8% excise duty23. With the imposition of Value Added Tax (VAT) from April 2005 at a rate of 12.5%, the biscuits industry was adversely affected. Despite the VAT Empowered Committee recognizing the importance of food processing for agriculture in particular and the economy in general, and suggesting 4% VAT rate for all processed foods, most states imposed a rate of 12.5%. Moreover, several states imposed local taxes over and above the VAT. Although there is a growing demand for branded and packaged wheat flour, the unorganized sector accounts for a large Table III List of Competitors in the Branded Wheat Flour Market Company Brand USP HLL Annapurna Fortified with iron and vitamins Pillsbury Pillsbury Healthy heart Agrotech Healthy world High protein and vitamin contents, sugar control atta for diabetes Cargill Nature fresh Purity
Compiled from various sources.

The foods industry was considered the next sunrise industry in India. In terms of total output addition (value), foods industry surpassed IT and pharmaceuticals in the period 1993-2000. The governments high priority on commercialization and value addition to agricultural produce led to liberal reforms and tax benefits in late 1990s, which had a positive impact on the growth of the industry. At the end of 2005, the overall growth rate of the foods industry was estimated to be between 10 and 15%. The reduction of excise duty on packaged food from 16% to 8% and the exemption of excise duty on instant food mixes in budget 2006 were expected to boost ITCs cost competitiveness, considering that it already enjoyed cost advantages in packaging and logistics. According to food and beverage industry reports in 2006, the government was planning to set up Food Parks across the country to attract foreign direct investment (FDI) in the food processing sector. It declared a total assistance of around Rs.1 billion to implement the Food Parks scheme F IGURE 2.36 Chaupal Sagar and so far 50 food parks were approved for assistance. 24 In addition to pro-active measures, the GoI was expected to pass legislation to allow large scale farming and contract farming Source: www.itcportal.com which were expected to encourage growth in
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proportion of the market. In general, Indian consumers are price sensitive, especially in the case of daily consumables like wheat flour. Most people prefer to buy loose atta priced around Rs. 14-15 a kg instead of the branded wheat flour priced at Rs.20-21 a kg. ITC and other players in the organized sector also faced tough competition from regional players like Shakti Bhog atta and Rajdhani atta (Refer Table III for the list of competitors). THE ROAD AHEAD

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the food processing industry. However, this was expected to attract foreign companies as well, intensifying the competition in the segment. ITCS PROSPECTS ITC was planning to expand its reach over the rural market with the planned opening of over 30 Chaupal Sagars, its rural hypermarket. Fifteen Chaupal Sagars were to be set up by the end of 2006. This was expected to generate revenues of around Rs.200-300 million annually. Within a span of 10 years, ITC planned to set up 700 Chaupal Sagars. It also intended to extend its e-choupal network to 5,200 installations which would eventually serve 31,000 villages and 3 million farmers. These initiatives were expected to strengthen ITCs distribution and procurement networks and cost-competitiveness. ITC was also planning to get into newer product categories like packaged fruit pulps and organically grown branded fruits. We are already exporting organic fruit pulps to institutions and the export turnover is estimated at Rs. 4 crore (Rs.40 million). We could soon launch organic fruits and pulps in the domestic market,25 said S Sivakumar, head of ITCs agri-business. However, as of March 2006, the company had not decided on the specifics of the project, like the brand name for the products and the plan of action on the sales and distribution front. ITCs Foods division was optimistic of breaking even in 2007. Its turnover in the foods business was around Rs. 8 billion in 2005-06. But the company had larger ambitions. We want to become the number one foods company in India within the next

five years,26 said Naware. However, given the intensity of competition facing the company, this was not going to be easy.

Footnotes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Pritie S. Jadhav, ISA Seminar Day 2: There is more to India than IT, www.exchange4media.com. Ve n k a t e s h B a b u , H u n g r y f o r m o r e , www.business-today.com, February 03, 2006. Purvita Chatterjee, ITCs thought for foods, www.blonnet.com, September 09, 2004. www.hdfcsec.com. Lalitha Srinivasan, ITC Foods plans online initiatives for Ready-to-Eat snacks, www.fe.com, February 28, 2003. Kiran Pandya, Ready-to-Eat meals gaining popularity, ww1.mid-day.com, November 6, 2003. ITC launches Aashirvaad Readymeals, www.economictimes.com, July 09, 2003. ITC launches Aashirvaad Readymeals, www.economictimes.com, July 09, 2003. ITC adds 10 more items to Kitchens of India, www.fnbnews.com, May 13, 2006.

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10. ITC adds 10 more items to Kitchens of India, www.fnbnews.com, May 13, 2006. 11. ITC foods plans own facility to make biscuits, www.thehindubusinessline.com, March 27, 2006. 12. How ITC ate competitions lunch, www.safexpress.com, September 05, 2004. 13. V e n k a t e s h B a b u , H u n g r y f o r m o r e , www.business-today.com, February 03,2006. 14. V e n k a t e s h B a b u , H u n g r y f o r m o r e , www.business-today.com, February 03, 2006. 15. ITC launches Sunfeast range of biscuits, www.itcportal.com, July 30, 2003. 16. FICCI Food and beverages survey, press release, www.ficci.com, September 2004. 17. ITC Foods forays into cookies segment,www.sify.com, August 11, 2005. 18. V e n k a t e s h B a b u , H u n g r y f o r m o r e , www.business-today.com, February 03,2006. 19. Shah Rukh to launch ITCs Sunfeast in US, www.fe.com, March 22, 2006. 20. FICCI Food and Beverages Survey www.ficci.com. February 2006,

21. Shah Rukh to launch ITCs Sunfeast in US, www.fe.com, March 22, 2006. 22. Sabyasachi Samajdar, Biscuit makers seek relief, www.fnbnews.com, Feb 04, 2006. 23. Union budget 2003-04, www.indiainfoline.com. 24. www.ibef.org. 25. Now, ITC to launch organically farmed branded fruits, www.timesofindia.com, March 25, 2006. 26. Surajeet Das Gupta, The amazing story of ITCs rise, www.rediff.com, October 31, 2005. 27. Sumana Guha Reddy, ECF misthi boxes help ITC board sales, Business Standard, January 29, 2006.

Additional Reading and References: 1. 2. 3. 4. ITC adds 10 more items to Kitchens of India, www.fnbnews.com, May 13, 2006. Pritie S. Jadhav, ISA Seminar Day 2: There is more to India than IT, www. exchange4media.com, April 24, 2006. ITC Foods plans own facility to make biscuits, www.thehindubusinessline.com, March 27, 2006. Now, ITC to launch organically farmed branded fruits, www.timesofindia.com, March 25, 2006.

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5. 6. 7. 8. 9.

Shah Rukh to launch ITCs Sunfeast in US, www.fe.com, March 22, 2006. Sabyasachi Samajdar, Biscuit makers seek relief, www.fnbnews.com, February 4, 2006. Venkatesh Babu, Hungry for more, www.business-today.com, February 3, 2006. Surajeet Das Gupta, The amazing story of ITCs rise, www.rediff.com, October 31, 2005. ITC Foods forays into cookies segment, www.sify.com, August 11, 2005

18. www.myiris.com. 19. www.mtrfoods.com. 20. www.lotteindia.com. 21. www.perfettivanmelle.in. 22. www.ibef.org.

10. Purvita Chatterjee, ITCs thought for foods, www.blonnet.com, September 09, 2004. 11. How ITC ate competitions lunch, www.safexpress.com, September 05, 2004. 12. Kiran Pandya, Ready-to-Eat meals gaining popularity, ww1.mid-day.com, November 06, 2003. 13. I T C l a u n c h e s A a s h i r v a a d R e a d y m e a l s , www.economictimes.com, July 09, 2003. 14. Food and beverages survey, www.ficci.com. 15. www.itcportal.com. 16. www.indiainfoline.com. 17. www.kitchensofindia.com.

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C HAPTER 3

Marketing Research and Marketing Information Systems (MkIS)

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2. Developing Objectives of the Research

The study should be properly outlined so that the purpose, methodology and information needs should be clear. Different kinds of research problems need different kinds of methodologies for data collection and analysis. Marketing problems can be addressed either through qualitative or quantitative approaches.

based on primary sources like interviewing and secondary sources like magazines, journals and case histories. For example, IBM, Infineon Raceway, and Macronix launched an exploratory research to identify the potential market for new form of computer memory technology called phasechange memory (PCM). Descriptive research identifies the extent of the problem. Causal research involves analysis of cause and effect relationships. Research Instruments: The research instruments are used to collect primary data. This data is useful in conducting marketing research. The following are the different kinds of research instruments: Quantitative Research Instruments: 1. Questionnaire / Survey: It is a set of questions that is aimed at providing information. These questions should be carefully worded and sequenced to achieve the required objectives. Questionnaires are used generally in mall intercepts, telephonic interviews and in personal interviews. Questionnaires can be used as both qualitative as well as quantitative research instruments. Questionnaires that ask for agreement on a Likert scale (for e.g. 5-point scale of (1) highly agree, (2) agree, (3) neither agree no disagree (4) disagree, (5) highly disagree) are quantitative whereas questionnaires which seek for description (e.g.,
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Source:www.surveygizmo.com/wp

3. Designing an Effective Research Plan

The design of a research plan can be exploratory, descriptive, or causal. Exploratory research identifies the possible opportunities and threats for an organization. It is

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What factors did you consider while purchasing your new laptop?) are qualitative. 2. Mechanical Instruments: Galvanometers and tachistoscope are instruments that are used to identify the level of responses on parameters like emotions and interests.
Galvanometer Tachistoscope

Table 3.2.1: Data Collection Techniques

Primary data collection techniques Secondary data collection techniques

When companies collect information Primary data is the firsthand information collected through published sources, it is by the marketer known as secondary data collection. Primary data can be collected with the help of mail interviews, telephonic interview, personal interviews and observation. Internal sources of information could be sales reports and annual report. When compared to primary data collection Companies may also collect data from external sources like magazines, journals, legal documents, and government gazettes.

Source://www.lie2me .net/sitebuilderconten t

Source:www.healthyinfluen ce.com/wordpress/wp-cont ent/uploads/2010/01/Tachi stoscope.jpg

Less reliable and suitable as More reliable and suitable to the enquiry because the someone else has done that job of investigator himself collects collection which may not serve the it. purpose Primary data collection is expensive and time consuming. No extra precautions are required. Secondary data collection is cheaper and less time consuming. Secondary data need more care and attention.

3. Qualitative Research Instruments: They includefocus groups, depth interviews, projective techniques, observation techniques, etc. 4. Data Collection Techniques: Data can be collected from primary and secondary sources. 5. Evaluating the Data and Preparing a Research Report:The collected data is edited, coded, and tabulated for evaluation. Data is evaluated by using certain statistical tools. The evaluated data is converted into a research report. This research report

has to be aligned with the objectives set for the research process.

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Section 3

Meaning and Scope of Marketing Information System (MkIS)

S ECTION 3

recurring information, MkIS supplies information to the marketers on a periodic basis and includes information related to market share and customer satisfaction. The information that is obtained by scanning the environment (industry trends and competitor moves), on a continuous basis, is known as monitoring information. Requested information is the information that is provided in response to the explicit request by the marketing department. This information could be on competitors or level of customer satisfaction. Source:www.rjbglobalenterprizes.com The American Marketing Association defined MkIS as, the systematic gathering,, and analyzing of data about problems relating to the marketing of goods and services. Through MkIS, the employees of an organization collect, evaluate, analyze, sort and tabulate data to prepare a report that helps managers in effective decision-making. MkIS provides marketers with three types of information. They are recurring, monitoring and current information. In

MkIS Components
The following are the components of MkIS: Internal record system: It provides information about demand and supply, price, and stock status. The internal record system has the following components: Order to payment scale: Provides information about the companys supply and logistics system. This information can be used by the company in serving its customers at the right time and at the right place.
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Sales reporting system: Companies receive the latest information about their products and customers from sales personnel. In return, companies send the latest information about prices and product specifications to the sales personnel.
Keynote 3.3.1: Marketing Intelligence System

Marketing decision support system: It involves collecting and processing data with the help of computer

Source:www.docs.oracle.com

software programs, advanced statistical tools and other such techniques with a view to obtain a scientific solution to marketing problems.

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R EVIEW 3.1
Question 1 of 4
The information obtained by scanning of information sources on a continuous basis is known as_________.

A. Recurrent information B. Monitoring information C. Requested information D. None of the above.

Check Answer

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Section 4

Market Research
Companies conduct market research with a view to identify the market potential of a product, acceptance levels of buyers, sales patterns and, most importantly, to forecast the future sales of a product. Example: McBride PLC Using Demand Planning Software
McBride PLC (McBride) is a private label supplier in the UK and Europe. It supplies large supermarkets like Tesco and Asda. McBride uses demand solutions software that help it to save millions of dollars every year. Demand solutions, is demand planning software that includes complete supply chain forecasting. James Saunders, logistics manager of Robert McBride Ltd. at Manchester, England, which is a part of McBride PLC stated, Weve been using Demand Solutions since 1992 as our core statistical engine. Weve improved through refining our business process and have used the software to help us do it.
Adapted from http://www.demandsolutions.com/articles/ mcbride.html.

to the number of consumers who are likely to become customers, and buy the products of the company. Different types of markets are explained in the keynote given below:

Keynote 3.4.1: Market Classification

Market Classification
Markets are classified based on the size of the market the marketer is planning to enter. The size of the market refers
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The Concept of Market Demand for Marketing

The market demand for a product under a specified marketing activity is the sales volume of the product in the target market, for a specified time period, in a particular region. Market Potential Market potential refers to the optimum sales that can be reached, where any further increase in marketing efforts will not lead to any significant increase in sales, in the given environment. Company Demand When companies measure their demand in comparison to the competitors products, it is known as company demand. Company Sales Forecast This refers to the volume of sales the company expects to obtain with the help of a particular marketing plan, in a specified marketing environment. Sales Quota and Sales Budget The sales quota is the budget that has been set for a particular marketing parameter. For example, the parameter could be the sales of a particular product, required to be achieved within a specified period.

Companies prepare their sales budget based on the estimates of the sales forecast. Often, the sales budget is prepared in such a manner that the expenditure involved in sales and promotional activities is optimal. Current Demand Estimation The current demand is estimated with the help of environmental factors, such as total market potential, area market potential, and total industry sales. The total market potential is the maximum market available to an industry, under a given set of conditions. Future Demand Estimation Estimation of future demand helps marketers in taking effective steps to obtain sales. Demand estimation can be performed effectively, with the help of different techniques that are explained in the following keynote: Keynote 3.4.2: Demand Estimation Techniques

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R EVIEW 3.2
Question 1 of 7
Marketing Research provides information about various markets and consumer reaction to various products, prices, distribution, and promotion strategies. How does the American Marketing Association define Marketing Research? A. It is a process of finding solution to a problem through use of scientific tools or techniques B. It is a process which helps marketers to make business decisions effectively and efficiently C. It is a process of collection of data in organized manner to meet organizational needs D. It refers to the systematic gathering, recording, and analyzing of such data that will help the business manager in effective decision making process
Check Answer

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Section 5

Case Study: Unilevers Real Beauty Campaign for Dove

This case was written by Debapratim Purkayastha, under the direction of Rajiv Fernando, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

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We want to challenge the definition of beauty. We believe that beauty has become too narrow in definition. We want to defy the stereotype that only the young, blond and tall are beautiful.
1

DEFYING BEAUTY STEREOTYPES In June 2005, consumer products major Unilever launched an ad campaign in the US for its Dove Intensive Firming range (Firming range) of products. This campaign, which featured regular women (non-models), was part of Doves Campaign for Real Beauty (CFRB). According to the company, the main purpose of CFRB was to challenge the stereotypes set by the beauty industry over the years. The beauty industry, it was felt, had showcased an image of women, too perfect for most women to aspire for. The CFRB was launched as a global campaign by Unilever in September 2004 to promote its Dove range of personal care products. The Dove brand was one of Unilevers leading personal care brands, with products like soap, body-wash, shampoo, etc. The stated aim of the campaign was to act as a catalyst to broaden the definition of beauty and encourage discussion about its aspects. Unilevers consumer research studies had indicated that beauty advertising was out of sync with its consumers. Beauty advertisers bombarded consumers with idealized images of models, super-models and celebrities, which left the consumers feeling bad about their own body image and hurt their self-esteem. These insights prompted Unilever to launch a campaign in the early part of 2004 in Europe featuring non-models. The ads were for its Dove Firming Lotion (Firming Lotion) and featured six women of various body types. The campaign raised a nationwide debate on beauty stereotypes in the countries it was launched. The growth in sales for the Dove brand was also
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- Philippe Harousseau, Dove's marketing director, in January 2005. No doubt, the rewards will be huge. In just a month, this campaign has significantly raised the profile of the brand(Dove); legions of women are looking to reward Dove for taking the step away from hollow-cheeked models by stocking their bathroom cabinets with Dove products. 2 - Martha Berletta, author, Marketing to Women, in September 2005. They might get the consumers attention but only briefly. Using real people in ad campaigns cannot work in the long-term because the job of advertising is to create fantasy images that people will aspire for. People want to escape from reality. I personally think women will want to be more fashionably South Beach than overweight middle America. Who wants to see a big butt on a billboard? I personally think that these are compensation ads for the countrys ever increasing obesity issue and gives out the message that it is ok if you are fat.3 - Gerald Celente, Director of the Trends Research Institute, in September 2005.

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phenomenal. It was reported that after the campaign, the sale of Firming Lotion in the UK rose by 700 percent.4 In the first phase, CFRB was started with the intention of only positioning the Dove brand and featured no products. It showed five images of women of different shapes, sizes and ages, who were each beautiful in their own way, but did not fit in with the conventional beauty stereotypes. Each of these ads was posted on billboards and the print media and the public were asked to make judgment about the looks of the women. For The Gray and Gorgeous instance, an ad showing a Ad woman with gray hair asked the public to choose between Gray and Gorgeous? The public were invited to the website Campaignforrealbeauty.com (CFRB website) to participate Source: http://adsoftheworld.com in the poll and take part in discussions about what constitutes beauty. Interactive billboards were also set up at Times Square in New York, USA, to increase participation. In addition to this, a Self-Esteem Fund was started for young girls to protect and bolster their self-esteem through various tools, programs and funds. Click here to know more about the Dove Self-Esteem Fund. The ads for the Firming range in the US were the second phase of the CFRB. The ads sparked off a debate in the media. Ogilvy & Mathers (O&M) marketing director Philippe Harousseau (Ha-

rousseau) said. Some people are surprised, even shocked. ... We decided to bring this campaign to life because the survey told us women were ready for it.5 Though many people felt that these ads were a step in the right direction, there were others who felt that the campaign was contradictory in nature. On the one hand, the campaign was asking women to celebrate who they really were, and on the other, the ads were aimed at selling a range of products that would help women reduce their cellulite (or body fat). Besides, critics said that, though Unilever was using the reality plank in selling its Dove brand, its other brands used the regular beauty stereotypes. The debate gave Dove a lot of free publicity, and its sales rose sharply. Unilever said that the campaign was not contradictory. It was committed to changing beauty stereotypes, but at the same time it wanted women to take care of their bodies. Branding and advertising experts were also divided on the issue. While some experts felt that the campaign was revolutionary, others felt that Dove was taking a big marketing risk. Beauty advertising had always used aspirational messages and images, where consumers use a product to look like the model portrayed in the ads. By undermining this aspirational aspect, Dove was at the risk of being positioned as the brand for fat girls, the last thing a beauty brand wanted. Unilever was quick to point out that Dove had always used real women in their ads, and that it perceived no risk for the brand. Rather it was a step in the right direction.

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On June 8, 2006, Doves CFRB was awarded the Grand EFFIE for advertising effectiveness. In the same month it also received the PRSA Silver Anvil award for PR. The success of Dove prompted some analysts to opine that this campaign would spark off a trend in beauty advertising. But experts were skeptical that a copycat strategy would be good for competitors. Others opined that this was not part of a larger trend, and models and celebrities would continue to be the mainstay in beauty advertising. BACKGROUND NOTE As of 2005, Dove was the worlds largest cleansing brand with annual sales of 2.5 billion euros in more than 80 countries.6 Doves product portfolio included soap bars, body washes, face care products, antiperspirant/deodorants, hair care products, and styling aids. Dove was a very important part of Unilevers brand portfolio and the only big brand in personal care EXHIBIT II : Doves Logo that was showing a double digit growth. In 2005, the personal care segment accounted for 26 percent of the groups turnover and 34 percent of operating profits (Refer to Exhibit I for a brief Source: www.dove.com. note on Unilever and Exhibit II for Doves logo). Unilever developed the

formula for the Dove Soap Bar in 1940. During World War II, it was used for cleaning wounds before treatment. It did not irritate the skin and became recognized as a mild soap. In the 1950s, the formula was further refined and the original Dove Beauty Bar was developed. It was launched in the market in the 1960s. In the 1970s, Doves popularity increased as an independent clinical dermatological study proved that Dove Beauty Bar was milder than 17 other leading soap brands at that time. In the following decade, Dove Beauty Bar became the leading brand of cleaning bars recommended by physicians. In the early 1990s, Unilever launched Dove Beauty Wash, a body wash product, which was a success in the market despite being priced at a 50 percent premium over other body wash brands.7 In 1995, the company extended the Dove range by introducing Dove Moisturizing Body Wash, Dove Sensitive Skin Bar, Dove Facial Care Cleanser, Dove Facial Cleaning Scrub and Dove Facial Care Daily Moisturizer. Dove recorded high growth during the 1990s. Analysts credited this to the fact that Dove had quickly extended its brand across different product lines and expanded to new geographical markets. By 1999, sales had reached around US$ 1 billion and the brand was growing at 20 percent per annum.8 In 2001, the Dove Antiperspirant / Deodorant line was launched. In 2003, the company extended the brand further with the Dove Hair Care line. In 2004, it introduced Dove Massage Body Wash and Cool Moisture Body Wash and Bar. The Dove Body Firming line was also launched in the same year. However, since the early 2000s, even though the brands product range had increased, women were not buying the brand in more
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than one or two categories. Increased competition from other brands and the resulting advertising clutter made it difficult to communicate effectively to the customer. Since the brand was more than 50 years old, the brand image too had to evolve so that it became more relevant to modern times. Unilever was faced with the twin challenges of evolving the brand without losing the existing customer base, as well as driving aggressive growth, for this mature brand. Doves main competitors were Olay from Procter & Gamble Co, Nivea from Beiersdorf AG, and Neutrogena from Johnson & Johnson. DOVE LISTENS TO WOMEN In early 2004, Dove conducted a global study on the perceptions and attitudes of women with regard to their personal beauty and well-being. The study was done in partnership with StrategyOne and in collaboration with Nancy Etcoff (Etcoff) and the Massachusetts General Hospital/Harvard University Program in Aesthetics and Well Being, and Susie Orbach (Orbach) of the London School of Economics. The study surveyed around 3,200 women from 10 countries (Argentina, Brazil, Canada, France, Italy, Japan, Netherlands, Portugal, the UK, and the US), in the age group of 18 to 64. According to the findings, published in a report titled, The Real Truth about Beauty: A Global Report, only 2 percent of the women surveyed considered themselves as beautiful, while only 9 percent felt comfortable describing themselves as attractive. Most of the women had used words like natural (31 percent) and average (29 percent) to describe their looks. Another finding was that four in ten women around the world strongly agreed that they do not feel comfortable describing them-

selves as beautiful. Commenting on these findings, Etcoff wrote, Studies of well-being and self esteem show that people in western cultures (but not East Asia) rate themselves as better than average on everything from kindness, intelligence, and popularity to their skills as a mate or parent or as an employee or a driver. Average is an unusually low rating. Indeed, the study shows that women are less satisfied with their beauty than with almost every other dimension of life except their financial success. There is enormous room for improvement.9 Click here for the report The Real Truth about Beauty: A Global Report. Another finding was that 68 percent of the respondents strongly agreed that the media and advertisers set an unrealistic standard of beauty that most women cant ever achieve, while 47 percent strongly agreed that only the most physically attractive women are portrayed in popular culture.10 Many respondents strongly agreed that beauty could be achieved through attitude and spirit, and an overwhelming 85 percent said that every woman had something beautiful about her. Orbach explained, What women in this study tell us is that a sense of legitimacy and respect is wrapped up with beauty in todays world. Whether this sentiment dismays or delights us, it poses a serious challenge. And it is this in the first instance: For the idea of beauty to become truly democratic and inclusive, then beauty itself must be revitalized to reflect women in their beauty as they really are rather than as portrayed in the current fictions that dominate our visual culture.11 Doves brand management team felt that it was clear from the study that women were feeling pressured by the stereotypes set
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by mass-market communication and advertising in the beauty industry. The ads seemed to tell women that they should look like the super model who personified beauty as established by societys narrow definition of beauty. The implication was that women considered themselves as somewhat imperfect when compared to these idealized models and the product advertised was the answer to their desire to look beautiful. While the ads showed stereotypical models and made exaggerated beauty promises, the viewers were left feeling insecure as they could not match up to these ideals. Etcoff explained, Beauty is visual, but in most media images, it is the same visual the eye popping features and stunning proportions of a few hand-picked beauty icons. When only a minority of women is satisfied with their body weight and shape in a society captivated by diet and makeover programs, it is time for a change.12 LETS CELEBRATE CURVES In April 2004, when Unilever initially launched its new Dove Firming Lotion in the UK, it decided to try out a new marketing approach. The ads named Lets celebrate curves, featured six women of various body types in their underwear. The ad was photographed by Ian

Rankin (Rankin), a leading fashion and celebrity photographer. The advertising was designed by O&M and the PR was handled by Edelman. (Refer to Exhibit III for Doves ad for Firming Lotion). The consumer research study had revealed that, even though women agreed that curves were an essential part of being a woman, they had inhibitions about exposing their body parts (particularly the hips and thighs) that had lost firmness and had cellulite. Some consumers also felt that the ads of some of the competitor products were ridiculous portraying the use of firming lotion on perfect, young bodies!13 Unlike the industry norm, t h e i m a g e s o f t h e s e An Ad with the Tagline New w o m e n w e r e n o t r e- Dove Firming. As tested on Real touched or digitally en- Curves. hanced in any way. Each ad had the tagline New Dove Firming. As tested on Real Curves. Jo Riley, brand action manager for Dove Firming, said, We wanted to produce images of real women that were Source: http://graphics8.nytimes.com aspirational as well as being attainable without using models or airbrushing techniques.14 Outdoor media channels like billboards were prominently used in this campaign. The marketing team also decided on 8- and 12-page bound inserts in leading beauty and style magazines. A documentary-style TV commercial showing how the ads were
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Exhibit III - Doves Ad for Firming Lotion

Source: www.ogilvy.com.

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shot, was aired. The media communications strategy for this advertising campaign was a huge departure from traditional beauty advertising that generally adopted a TV-led advertising strategy. The campaign banked heavily on PR. Anja Guckenberger of Edelman, Doves PR agency, explained, Breaking new ground entailed an element of uncertainty and the danger of Dove being marked down as a brand for fat people by press and consumers. The PR program had to minimize that risk and provide credibility. The trick to unlocking the potential of PR was to place a question mark over existing beauty stereotypes in the public eye in such a way that everybody formed and voiced their own individual opinion on the subject and to communicate Doves longterm commitment to debunking beauty stereotypes.15 In the UK, Lexis PR started the debate on beauty even before the ads were first featured in April 2004. The Times was given an exclusive on the campaign. Interviews were arranged with Rankin and the women featured in the ads. Another exclusive on celebrity role models was given to the Evening Standard. Psy- The Ad Featuring the Male chologist Linda Papadopoulos Members was commissioned to help explain why women feel so disheartened by traditional advertising. TV channels were provided with behind-the-scenes action of the photo-shoot. Ads were deliberately placed near the offices of major newspapers so that they got maximum Source: http://adland.tv attention from the press. As the

campaign gained attention and evoked a successful response, the women in the Dove marketing team in UK did a poster of their own, clad in their underwear. This ad adorned a billboard outside their office in Kingston, UK. The male members in Ogilvy Dsseldorf, Germany also followed suit with their own ad placed on billboards and the sides of buses. The ad was successful in sparking off a debate about societys narrow definition of beauty. As people from various walks of life discussed the issue, it generated plenty of free publicity for Dove. In the UK, the campaign was covered by TV networks, radio stations, newspapers and Internet sites. Almost 4.6 million worth of media space was generated by this press coverage alone.16 The ads also received huge publicity in Germany, France, and The Netherlands.17 Feedback studies conducted throughout Europe found that the campaign was well-received by consumers. The result on sales was phenomenal. In the UK, newspapers reported that the sales of Firming Lotion had doubled within a month. The sales of Firming Lotion in the first six months of 2004 had shot up to 2.3 million bottles, when compared to 280,000 bottles in 2003.18 In June 2004, sales of the product in Western Europe surpassed its projected forecasts by 110%.19 Click here for the full report on the feedback studies. The success of its campaign for Firming Lotion in Europe and the results of these studies inspired Unilever to launch a global campaign for Dove that would be more in sync with the target audience.

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GOING GLOBAL In September 29, 2004, Dove formally launched the global campaign called Campaign for Real Beauty (Refer to Table I for Doves campaign manifesto). The ad campaign was designed by O&M and the PR was handled by Edelman. The integrated campaign strove to raise consciousness of the issues surrounding beauty and to challenge long-held stereotypes. According to the company, the campaign was intended to make more women feel beautiful everyday celebrating diversity and real women by challenging todays stereotypical view of beauty.20 Silvia Lagnado (Lagnado), senior vice president, Dove, said, By questioning the accepted definition of beauty, we hope to help women change the way they perceive their bodies and encourage them to feel beautiful every day.21 Table 1 Doves Campaign Manifesto For too long, beauty has been defined by narrow, stifling stereotypes. Women have told us its time to change all that. Dove agrees. We believe real beauty comes in many shapes, sizes and ages. That is why Dove is launching the Campaign for Real Beauty. Doves global Campaign for Real Beauty aims to change the status quo and offer in its place a broader, healthier, more democratic view of beauty. A view of beauty that all women can own and enjoy everyday.
Source: Behind the Hype: Doves Real Beauty Campaign, www.cbc.ca, 2005.

The launch event in New York on September 29, 2004, included a sixmember panel discussion co-hosted by American Women in Radio and Television, Inc. with several women executives of the entertainSource: http://realbeauty2010.files.wordpress.com ment industry. According to Lagnado, the company wanted debate to be an integral part of the campaign. She said that the campaign would only spotlight the brand positioning, and would not refer to specific products. Lagnado opined that a marketing campaign could be both altruistic and effective at growing sales. If it touches womens hearts, it will work,22 she said. The Ad Featuring a Woman with Freckles The Campaign for Real Beauty was launched throughout Europe, the US, Canada, Argentina, and BraThe Ad Featuring the 95-Year-Old zil. Outdoor and print African-American Woman media were used extensively. The ads in these campaigns featured women who defied the stereotypical norms of beauty. Among the ads was one, which featured a woman who Source: http://realbeauty2010.files.wordpress.com was much shorter and
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curvier than the typical Exhibit IV : First Series of CFRB model (5 foot 11 and ADS 100 pounds). Another ad featured a woman with freckles, while one ad had a 95 year old woman. The photographs were shot by Rankin. The ads asked the viewers to make a Source: www.unilever.com. judgment about the looks of the model featured in the ad. The viewers had two options, one more in tune with current stereotypes, the other challenging them. For instance, in one ad featuring a full-figured woman, audiences were asked to choose whether she was Overweight or Outstanding? The tagline asked, Does true beauty only squeeze into a size 6? Another ad featuring the 95y e a r - o l d A f r i c a n - Exhibit V: Screenshot of the CFRB A m e r i c a n w o m a n Website asked the audience to choose whether she was Wrinkled or Wonderful? Similarly, the tagline asked, Will society ever accept old can be beautiful? (Re- Source: www.campaignforrealbeauty.com. fer to Table II for the first series of ads chal-

lenging stereotypes and Exhibit IV for the first series of CFRB ads). Table II The First Series of Ads Challenging Stereotypes Ad Model Question

Irene Sinclair, 95, of Will society ever Wrinkled? London, England with accept old can be Wonderful? a wrinkled face beautiful? Gray? Gorgeous? Merlin Glozer, 45, of Why arent women London, England with glad to be gray? gray hair

Tabatha Roman, 34, of Does true beauty Oversized? New York, a plus-size only squeeze into a Outstanding? woman size 6? Esther Poyer, 35, of Does sexiness Half empty? Half London, England with depend on how full full? small breasts your cups are? Flawed? Flawless? Leah Sheehan, 22, of Does beauty mean London, England with looking like marks on her body everyone else?

Source: Only Two Percent of Women Describes Themselves as Beautiful, www.dove.com, September 29, 2004.

The public were invited to the website, www.campaignforrealbeauty.com (CFRB website), to cast their
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vote (Refer to Exhibit V for screenshot of CFRB website). The CFRB website launched by Dove provided a forum for a global debate on beauty, in which people could connect with others and express their views on beauty stereotypes. The site soon became a public forum to debate the issue. The website had discussion boards and research studies about beauty. Consumers could also view other ads, which communicated Doves point of view in other beauty categories such as hair care. The ads about hair care urged the woman to reassess the beauty of her hair and realize that her beauty lay in what she already had, rather than what she didnt have. In the US, an Interactive billboard was set up at Times The Billboard Featuring the Wrinkled? Wonderful? Ad Square, New York City. The billboard featured the Wrinkled? Wonderful? ad and kept the public aware of the latest scores in the poll. For this, O&M worked with Mobile 365 to offer what was the first-ever outdoor mobile marketing campaign in the US. Mobile 365 provided two short codes (across all major U.S. carri- Source: ers) so that people could http://converget.files.wordpress.com participate in the campaign by voting on individual graphics on mobile billboards being driven throughout New York City and Los Angeles. The responses were tabulated and almost immediately put on the inter-

active billboard. The respondents were also invited to visit the CFRB website. Gary Towning, senior partner at O&M said, We believe that invitational mobile marketing is the next wave for brands to reach target audiences. With this mobile messaging component; we have been able to add a real-time, interactive element to the Campaign for Real Beauty.23 Dove also partnered with the Woodhull Institute for Ethical Leadership, to organize a panel discussion on the subject of beauty in Atlanta (October 8-10, 2004) and Chicago (November 12-14, 2004), in the US. This further emphasized the importance of debate to Doves advertising campaign. Joerg Herzog of O&M commented: Public Relations was an essential part of the camVideo: A Promotional paign and Dove provoked a Video About the Camdebate which sparked inter- paign for Real Beauty est from the press. This was supported by a strong presence in outdoor and posters. The media mix was somewhat unusual for both the category and Dove. TV was used, at least a third of the budget was spent on press Source: www.youtube.com and posters. Posters would let Dove take its conventionbusting message out onto the street to be loud and proud.24 In addition to this, a Dove Self-Esteem Fund (DSEF) was created with the objective of building the self-esteem of young girls. It was found that many young girls had developed low self89

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esteem regarding their looks, which could lead to the improper development of their personality and prevent them from reaching their full potential later in life. The DSEF aimed at educating them about the wider definition of beauty. It also raised funds that were donated to organizations such as National Eating Source: www.youtube.com Disorder Information Centre (NEDIC), Girl Scouts of the United States of America, etc. For instance, Dove and the Girl Scouts of the USA co-developed a program, Uniquely ME! that aimed to foster self-esteem in girls between the age of 8 and 17 years. The program ran between July 7 and July 31, 2005. Dove pledged to donate US$1 to the program for every person who signed the Campaign for Real Beauty pledge, up to US$ Video: A Body Talk Video 50,000. Another program named Body Talk aimed to inform and educate young schoolgirls about perceptions of beauty and boost their selfesteem. The long-term goal of this program was to put selfesteem on the curriculum of Source: www.youtube.com schools across the world. Video: A Promotional Video about the Dove Self-Esteem Fund

However, Lagnado clarified that the campaign was not about self-acceptance. The company had thought real hard before starting the campaign as it was a major departure from the beauty ethos of the industry. Lagnado was confident that this campaign makes the brand positioning (of Dove) more expressive, and more confident and would help grow the brand while broadening the definition of beauty at the same time.25 DOVE CONTINUES TO LISTEN AND ACT In 2005, Dove commissioned another global study to understand the perceptions of women with regard to beauty. Around 3,300 women, between the ages of 15 and 64, were interviewed in Brazil, Canada, China, Germany, Italy, Japan, Mexico, Saudi Arabia, the UK, and the US. This study further reaffirmed the findings of the previous study conducted in 2004. The study also revealed that almost half the women surveyed globally and 60 percent of women in the US felt that their weight was too high. National Eating Disorders Association said that the average fashion model in the US was 6 feet 1 and weighed 117 pounds, while the average woman in the US was 5 feet 4 and 140 pounds.26 A study by British Medical Association revealed that the body fat of models and celebrities portrayed in massmedia was at least 10 percent less than that of an active, healthy woman. Some analysts opined that the word real, used in Doves campaign, also seemed to have found a fit with the consumers. Linda Wells, editor of Allure magazine, wrote The most sought after look is the natural look. We just did a study [of 1,000 respondents] and the words they used most often to describe their looks were natural and real. Those words were used far
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more than beautiful and pretty and even higher than sexy and glamorous. Thats a shift.27 In June 2005, Dove Intensive Firming range was launched in the US. The ad campaign featured six women in their underwear just like the initial ads in Europe. Source: Seth Stevenson, When Tush The women wore Comes to Dove, wwww.slate.com, August 1, 2005. sizes from 4 to 12, when compared to the models who wore size 2. The women who featured in the campaign were nonmodels, who were brought together from various regions in the US by Doves scouting teams (Refer to Table III for the list of women featured in the Dove Firming ads; reExhibit VI (B) : Doves Firming Ad fer to Exhibit VI (A) and Exhibit VI(B) for Dove firming ads). Exhibit VI (A): Doves Firming Ads The newly introduced Firming range included Intensive Firming Lotion, Intensive Firming Cream and Firming Body Wash (Refer to Exhibit VII for packshots of the Dove FirmStacy Nadeau Shanel Lu Sigrid Sutter Julie Arko Lindsey Stokes Gina Crisanti

Table III Women Featured in the Dove Firming Ads Student, Michigan Manucurist, Maryland Administrative Assistant, California Kindergarten teacher, North Carolina Retail Assistant, Maryland A Texan working in a Chicago coffee shop

Compiled from various sources.

Source: www.campaignforrealbeauty.com.

ing range). The products were reported to have glycerin, seaweed extract and elastin peptides that had skin-firming properties and would help reduce the appearance of cellulite. Taglines such as Lets face it, firming the thighs of a size 2 supermodel is no challenge, New Dove Firming: As Exhibit VII : Pack-Shots of the Dove t e s t e d o n r e a l Firming Range curves, etc., strove to provoke the target a u d i e n c e t o c h a llenge their preconceived notions about beauty and make women feel beautiful Source: www.dove.com. the way they were.

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A Billboard with the Tagline Lets face it, firming the thighs of a size 2 supermodel is no challenge

Source: http://adland.tv

The ads appeared in print media that included womens health and general interest magazines, giant outdoor billboards. The ads were also placed at highly visible spots like major transportation hubs in Boston, Chicago, Washington D.C., Dallas/Ft. Worth, Los Angeles, Miami/Ft. Lauderdale, New York, and San Francisco, and on the sides of buses.

their body image. The ad Video: The 45-Second went on to say that every Spot girl deserves to feel good about herself.29 The spot aimed to raise awareness of some of the self-esteem issues that young girls were facing with regard to their appearance (Refer to Exhibit VIII for the DSEF Super Bowl ad). Source: www.youtube.com Unilever cited data from various research studies that revealed that low self-esteem and a negative body image can start at a Exhibit VIII:Doves Super Bowl DSEF Advertisement young age for girls (Refer to Table IV). On the Dove campaign website, the company stated that, The Dove Self-Esteem Fund is helping girls overSource: www.adpunch.org. come lifedamaging hangups by putting the 30 beauty world into perspective. Dawn Currie, professor of sociology at University of British Columbia, felt that the beauty ideals showed in the media often
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After this campaign, Doves sales in the second business quarter for 2005 in the US went up by 11.4 percent when compared to the first business quarter of 2005. Total sales for the Dove brand rose six percent to US$ 0.5 billion. The campaign increased the number of people visiting the Dove website by 200 percent and the number of calls to its consumer call center at Unilever had also increased. According to Deb Boyda (Boyda), managing partner at O&M, Chicago, the US$ 3 billion Dove brand witnessed a healthy double-digit growth.28 CONTINUOUSLY EVOLVING THE CAMPAIGN Dove aired a commercial during the Super Bowl XL (Super Bowl) in February 5, 2006, for the DSEF. The 45-second spot showed images of small girls who were dissatisfied with their looks. For instance, a girl with freckles Hates her freckles, a girl with black hair Wishes she were blonde, a thin girl was Afraid shes fat? etc. The ad strove to show that it was very common for girls of this age to suffer from complexes regarding

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had an adverse impact on the self-esteem of females, even on small girls. She said, The media is so pervasive and contributes to the naturalisation [of images of femininity] and becomes like the air we breathe. Women themselves are some of the most severe sensors of each others dress and appearance.31 Harousseau said that Dove wanted to help in this area. The existing narrow definition of beauty is not only unrealistic and unattainable, but clearly it also creates hangups that can lead girls to question their own beauty. Its time to free the next generation from these stereotypes and give girls the tools they need to discover their own definition of beauty.32 According to the company, the ad aired at the Super Bowl was the next phase of the campaign that focused on walking the talk. It was very important, after we started the discussion and after we promised to take a leadership role in the debate, that we walk the walk,33 said Stacie Bright, Unilevers marketing communication manager. The CFRB website had various tools that helped bolster self-esteem including a self-check quiz, True You (a free downloadable self- esteem building mother-daughter workbook), articles by leading self-esteem experts and self-esteem discussion boards. Through its BodyTalk program, Dove provided educational packs including DVDs for schools. Some analysts appreciated Dove as it evolved its campaign. A new campaign for Dove Natural Glow lotion, showed a husband telling viewers all about what it was that made his wife beautiful. This ad too was a departure from the usual ads which showed women talking to women. This marketing campaign is in a constant state of ad evolution - always with the

same core message but told from different perspectives,34 said Michele Miller (Miller), a partner in the marketing firm, Wizard of Ads. Table IV One-third of all girls in grades nine to 12 think they are overweight, and 60 percent are trying to lose weight. Only 56 percent of seventh graders say they like the way they look. 57 percent of girls have fasted, gone on diets, used food substitutes, or smoked more cigarettes to lose weight. Messages girls receive from the media can damage their feelings of self-worth and negatively affect their behavior. More than one in four girls surveyed feel the media pressure them to have a perfect body. Girls who watch TV commercials featuring underweight models lose self-confidence and become more dissatisfied with their own bodies. As a result, girls question their own beauty: between 50 and 70 percent of girls of normal weight believe they are overweight.
Source: Dove Campaign for Real Beauty to Help Foster SelfEsteem in Girls, www.sevprnewswire.com, January 27, 2006.

The campaign was successful in generating a huge buzz in the media. It was featured prominently in many TV channels and in over 800 articles in leading newspapers and womens magazines in the US.35 Eight different stories were aired on
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CNN. The campaign earned a place on the cover of People magazine and appearances on The Ellen DeGeneres Show and The Oprah Winfrey Show. Click here for an image of Dove girls at the Oprah Winfrey Show. A STEP IN THE RIGHT DIRECTION? Many people, including experts, appreciated Doves efforts toward changing perceptions of beauty in advertising through the use of refreshing ads that made women feel good about themselves. (Refer to Figure I for the results from a survey titled, What do you think of real women ad campaigns?). For example, Wendy Shanker, national spokeswoman for Love Your Body Day of the National Organization for Women Foundation, said, Im going to buy their lotion... because theyre trying to get my dollar by making me feel good instead of trying to make me feel bad.36 Many felt that the ads were a step in the right direction as experts had long drawn a link between unrealistic beauty ideals and the rise of eating disorders such as anorexia nervosa and bulimia. Dove was appre-

ciated for daring to be different and for going against the ultrathin image in the beauty industry. We see in excess of 1,200 ads per week of women who bear very little resemblance to us, and it becomes a sort of visual pollution that gets under our skin and affects us,37 said Orbach. WOLF IN SHEEPS CLOTHING? Some critics felt that Doves Real Beauty campaign was contradictory to the very ideas espoused by it. This was because it aimed to convince women to buy Doves Firming range, a product that was designed to reduce cellulite. Psychologist and author Mary Pipher explained, Any change in the culture of advertising that allows for a broader definition of beauty and encourages women to be more accepting and comfortable with their natural appearance is a step in the right direction. But embedded within this is a contradiction. They are still saying you have to use this product to be beautiful.38 Dove was also accused of being hypocritical in exploiting its consumers to push its products. According to Barbara Altman Bruno, a clinical social worker who specializes in body image issues, Doves intention of selling firming products through this campaign was a wolf-in-sheeps-clothing approach.39 Guerrero said, what bothers me most about the ads is the hypocrisy. The folks at Dove want us to embrace our real beauty and love who we are no matter what we look like. If that's the case, why are they selling firming cream?40 Some critics felt that Dove had consciously created this campaign to generate widespread publicity, something that would
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Figure I

Source: http://www.msnbc.msn.com/id/8758821/

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have taken many years under the conventional marketing approach. Others felt that it was a cosmetics ad and thus played on womens obsession with their bodies. They felt that the women featured in the ads were all good looking and attractive in their own way. Even the largest of the women in the ads was slimmer than the average American woman. They wondered whether Dove would be ready to feature people who were really unattractive. Though the women featured in the ads were not as glamorous as supermodels, they were still featured as models and glamorized. Some experts also felt that it was an odd experience to face women in their underwear in public places whether the women were normal or supermodels. They alleged that the campaign contributed to the objectification of women in media. Even the ads shown during the Super Bowl event were criticized. Seth Stevenson (Stevenson) of Slate said, this is the most cynical ad campaign of the last several years. Women, do not be duped! Dove is not selflessly interested in your (or your daughters) well-being. It is a multinational beauty-products company, which hopes to sell expensive cellulite cream to these same little girls just a few years down the road.41 Some people were concerned that Unilever was using its Body Talk program as another strategy to enter into classrooms and market its products to children. Critics also pointed out that Unilever used idealized images and stereotypes in its other brands like Slim-Fast, Lynx, AXE, Lux, and Sunsilk. While the global campaign for real beauty was launched in 2004, a Slim-Fast ad by Grey Worldwide was aired that played on the insecurity of British women about how they

look in bikinis as compared to French women. Unilever is a really large company that owns a lot of brands. There are a lot of different types of people in the world, and I think thats how those campaigns live in the same company,42 said Bright. The AXE Body Spray line of products relied heavily on gender stereotypes and stereotypes of beauty. The Japanese Campaign Ad Critics also pointed out that the Japanese campaign did not feature women of different sizes and shapes. All the seven women featured in the ads were thin, and they were not representative of the average Japanese woman.43 The campaign in Hong Kong also Source: www.conbinibento.com featured thin models. A REVOLUTIONARY CAMPAIGN Many marketing analysts felt that CFRB was a revolutionary campaign because the ads showed ordinary women who were confident and happy with themselves. The ads had succeeded at grabbing the attention of consumers. They felt that the campaign was a refreshing change as it challenged existing conventions and showed alternative images of beauty and images of women that were not sexualized. Despite their being in their underwear, the women were not being presented as something sexual. This was quite different from the conventional approach in the beauty industry, where products were sold by idolizing
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beauty and playing on the desires of women who aspired to look like them. Some experts lauded Dove for listening to their consumers, Women have been telling researchers and advertisers for years that they would be more responsive to real women and, finally, theyve been heard,44 said Martha Berletta (Barletta), an expert on issues in marketing to women. Analysts felt that the campaign had raised the profile of the brand and that many women connected with the ads. It was believed that Doves focus on real women would appeal to the average female consumer. The reward for Dove was that it would sell more of its products. Moreover, by doing away with celebrities, Dove ensured that the product would remain the main focus of the campaign. Many analysts thought that it was a clever piece of branding that differentiated Dove from other competitors. Self-confident women of today wanted to see images of people like themselves being celebrated in advertising. People feel under pressure to improve their appearance, even at times, such as childhood, pregnancy and later in life, when, traditionally, it was OK not to bother,45 says Tamar Kasriel, head of knowledge venturing at the Henley Centre, a strategic marketing consultancy firm. Some analysts were impressed at how Dove was successful in combining selling a product and at the same time making a statement. The campaign induced many people to talk about it and even helped some women to feel better about their body image. The campaign had re-invigorated the brand. The huge amount of positive publicity had given Dove the image of a do-gooder

brand in consumer perception. Moreover, the free publicity had given Dove greater exposure than it would have got through paid advertising.46 The campaign earned rave reviews from media. BusinessWeek commented: Why did Doves Real Women ad campaign make such a splash? Because it broke one of the golden rules of the advertising business: Only sexy models sell. Doves ads featured everyday women -- not supermodels, or even models, for that matter -- with all the bumps and curves normal females have.47 Amanda Austen of BBC Twos The Money Programme said, Soap company Doves Real Beauty campaign has been a marketing phenomenon, striking a chord with increasing numbers of women fed up with the unattainable images of beauty they have been sold by the cosmetics giants.48 The campaign had also won many advertising and PR awards. In June 2006, O&M was awarded the Grand EFFIE for the campaign for effectiveness at the 38th Annual EFFIE Awards ceremony at the Marriott Marquis in New York. In June 2006, the campaign also won the 2006 Best of Silver Anvil Award from the Public Relations Society of America (PRSA). The campaign had also won a host of other awards more notably the European Association of Communications Agencies EACA EURO-EFFIEs and the Epica awards in 2005. OR IS IT A RISKY PROPOSITION FOR THE BRAND? Marketing messages in the beauty industry are largely aspirational. It is also common marketing knowledge that people are attracted to the attractive images shown in these ads and make an unconscious connection between the models appearance
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and the products. Some experts felt that Doves campaigns had a significant marketing risk as it had to convince women that they need Dove products to become even better. The interesting thing here is the risky bet Dove is making. Beauty-product marketing has almost always been aspirational: I wish I could look like her perhaps if I buy this lip gloss, I will! But Dove takes a wildly different approach: That chick in the ad sort of looks like me, and yet she seems really happy and confident perhaps if I buy this Dove Firming Cream, Ill stop hating myself!,49 wrote Stevenson. Some experts felt that by showing images of regular women, Dove had made their product a brand for fat girls.50 According to Stevenson if a beauty brand is positioned that way, it would be the end of the brand. Melissa Pye, founder of the marketing consultancy W Communications Group said: Women are saying they dont want to see skinny models but nor do they want to see a woman in her curlers in a pair of daggy track pants. There still needs to be an element of aspiration its important that they want to look like that person.51 Others pointed out that a consumers behavior may be quite different to what she says in a focus group. According to Mary Lou Quinlan (Quinlan), CEO of Just Ask a Woman, there is a difference between saying I like her and I want to be like her. She said, Women may sit in focus groups and tell the Dove people We hate airbrushed models; we hate young models in an antiwrinkle ad. But look at what we spend on.52 Gerald Celente, director and founder of Trends Research Institute, a consultancy said, Using the average person wont sell anything. The purpose of real advertising is to create desire beyond what the product can actually deliver. Do you want to see

the floppy Big Mac that the fast food worker actually packages up and hands to you, or the perfect airbrushed billboard version? People are living lives of desperation; they dont want to be themselves.53 Cause related marketing itself is a risky strategy to adopt as it leaves the brand vulnerable to criticisms. For instance, in this campaign Dove was criticized by some for choosing unrepresentative real women. THE COMPANYS VIEW Doves marketing team dismissed some of these criticisms, especially the one that the campaign was contradictory by nature. Boyda said, We are telling them we want them to take care of themselves, take care of their beauty. That is very different from sending them the message to look like something theyre not.54 Bright said that the product is for women of all shapes and sizes, and a lot of women want firming products. Its about feeling good about yourself. And thats about bringing products that matter to women Lets face it, if you had a firming product, and you had a size 2 woman selling it, that would really be the contradiction.55 Unilever also contended that Dove had used real women in their ads for a long time so there was no risk for the brand. Maureen Shirreff, creative director at O&M, said, [Previously] theres been a more passive voice in the marketplace,but these commercials are really noticed. [Doves voice in the market has changed] yet they have stayed true to who they are.56 The marketing team felt that Dove had an established image in the market as it was an old and successful brand and that the new campaign represented the ethos of what the the brand stood for.
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The team felt that the campaign succeeded, as it was an integrated campaign that fostered a lot of debate. Many consumers echoed their views. Some analysts as well as consumers did not read much into the criticisms that Dove was after all selling its Firming Lotions; they reasoned that that was its basic business. Lisa Francis, a Dove public relations representative said that they were getting a lot of positive messages from consumers. Women were calling and sending e-mails saying Thanks for showing these images. Theres a need for genuine and real imagery [in advertising],57 she said. There were also reports of parents of teenage girls calling up the O&M office to express their gratitude for their efforts. Barletta was confident that Dove would remain a successful brand in the long term. With the ageing of the baby boomer generation, it was expected that Dove would have a large market for its products in the years to come. By focusing on real women, Dove was working toward becoming the preferred brand for a large segment of women. OUTLOOK Unilever contended that the real beauty campaign was much more than pure product marketing. It strove to challenge stereotypes set by the beauty industry and help women feel more positive about themselves. The company said that the DSEF was a part of its long-term growth strategy for the brand. It also aimed to reach 1 million children with its Body Talk program by 2008. Due to the success of this campaign, the management committee of Unilever recommended to the board that corporate social

responsibility should be integrated into other parts of its business as well. Industry analysts felt that Dove was successful in revitalizing a 50-year-old brand and building up a loyal customer base through this unconventional campaign. But some felt that though Unilever was successful in catching the imagination of consumers in the short term, it remained to be seen if the momentum of the campaign could be sustained over the long term. They reckoned that this would largely depend on whether Dove would be able to change peoples perceptions and attitudes to beauty. Remodeling consumers perceptions and attitudes would be quite difficult. Founder of Revlon, Charles Revson had famously said In our factory we make cosmetics. In the store we sell hope.58 The beauty industry is driven by the dreams and aspirations of the consumers. Undermining this aspirational essence in itself is a big risk. Buying behaviors are influenced by individual as well as environmental factors. Among environmental factors reference groups are big influencers of buying behavior, and these idealized models are often the reference group for women. Reference groups have a powerful influence on the socialization and the desire to fit in with the crowd. For personal care items the urge to fit in is particularly strong as consumers construct their social identities through the products they consume. Thus, for long idealized images adorned various media as such images have been quite effective in driving the sales of beauty products. There was also a debate among advertising and media experts as to the impact of Doves campaign on future advertising
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trends in the beauty industry. Some opined that if the campaign continued to be successful, Doves competitors would be bound to follow suit. There were already instances of plans to use real women to promote beauty products. Doves brand manager, Briar Taylor, said, I dont expect LOral and Garnier to change but Nivea and Olay have seen how successful Dove has been [abroad] and are moving closer to our style of advertising,59 she said. It was reported that Revlon was already on the lookout for a real women for its Age Defying make-up line.60 The changing attitudes of people regarding beauty and self-esteem, and the growing diversity would have to be considered by marketers in order to strike the right chord among consumers. However, some experts believed that the campaign was not part of a larger trend. Creative director of Doneger Creative Services and trend expert David Wolfe felt that the campaign would fade away as it lost its novelty. We are so driven to worship perfection, which at the moment happens to be in the guise of celebrities.61 John Holohan (Holohan) of the Institute of Advertising Practitioners also echoed this view: Fashion is all about trends; there is always going to be plenty of work for models like Kate Moss. I would be very surprised if we ever see a Prada collection modeled by real women.62 But some experts felt that beauty advertising would demand more reality, at least in the short term. Marian Salzman, director of strategic content with ad agency JWT says, Were not in for a complete end to traditional beauty advertising, but empowered femininity will demand more reality than less in the near term.63

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Exhibit I A Brief Note on Unilever Unilever, an Anglo-Dutch company, was formed in 1930 by the merger of British soapmaker Lever Brothers and Dutch margarine producer Margarine Union. The merged unit formed two separate entities known as Unilever Plc in London and Unilever NV in Rotterdam, the Netherlands. By the start of the new millennium, Unilever was the leading manufacturer and marketer of consumer product brands in foods, beverages, cleaning agents, and personal care products. Some of its big brands are Knorr, Lipton, Flora, Becel, Bertolli, Slimfast, Hellmanns, Birds Eye, Omo, Domestos, Surf, Radiant, etc. Its personal care brands included Dove, Vaseline, Sunsilk, Signal, Rexona, AXE, Lux, Ponds, and Lifebuoy. Unilevers revenues for 2005 were 39.67 billion (just over US $50 billion) and it employed over 206,000 people worldwide.

G ALLERY 3.1 Product Segmentwise Breakup of Revenues

G ALLERY 3.2 Product Segmentwise Breakup of Operating Profit

*International Financial Reporting Standards. Source: Unilever Charts, www.unilever.com, 2005.

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Footnotes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Embracing Real Beauty, www.ad-rag.com, January 18, 2005. Martha Berletta, "Why Dove is Lucky to be Known as 'The Fat Brand'," www.adage.com, September 19, 2005. Sudha Menon, "Big, Real, and Beautiful," www.thehindubusinessline.com, September 01, 2005. Stephen Brook, "96-years-old Stars in Beauty Ads," www.media.guardian.co.uk, January 4, 2005. Dove 'Real Beauty' Campaign Getting Under Your Skin? www.msmusings.net, July 21, 2005. http://www.unilever.com/ourbrands/personalcare/dove.asp John Noble, "Are brands a force for good?" www.britishbrandsgroup.org.uk, 2004. Brand Stretch - or Brand Ego Trip? http://media.wiley.com. The Real Truth about Beauty: A Global Report, www.campaignforrealbeauty.com, September 2004.

13. Inge Selawry, "How Real Curves Can Grow Your Brand," www.ogilvy.com, 2005. 14. Dove Campaign Takes Off with 'Real Women' Up on the Boards, www.archives.tcm.ie, April 9, 2004. 15. Real Beauty in the Age of Extreme Makeover, www.holmesreport.com, July 17, 2006. 16. Inge Selawry, "How Real Curves Can Grow Your Brand," www.ogilvy.com, 2005. 17. Inge Selawry, "How Real Curves Can Grow Your Brand," www.ogilvy.com, 2005. 18. JupiterResearch, "European Online Advertising Forecast, 2005 To 2010," www.notabene.net, 2005. 19. Inge Selawry, "How Real Curves Can Grow Your Brand," www.ogilvy.com, 2005. 20. Real women Bare their Curves as part of Dove's Global C a m p a i g n t o W i d e n t h e D e f i n i t i o n o f B e a u t y, www.unileverusa.com, June 23, 2005. 21. R e a l W o m e n B a r e t h e i r R e a l C u r v e s , www.campaignforrealbeauty.com, June 23, 2005. 22. Molly Prior, "Dove Ad Campaign Aims to Redefine Beauty," www.parsintl.com, October 8, 2004. 23. Mobile 365 and OgilvyOne Use Mobile Element in Dove Campaign, www.mmaglobal.com, November 19, 2005.

10. Inge Selawry, "How Real Curves Can Grow Your Brand," www.ogilvy.com, 2005. 11. Only Two Percent of Women Describes Themselves as Beautiful, www.dove.com, September 29, 2004. 12. R e a l W o m e n B a r e t h e i r R e a l C u r v e s , www.campaignforrealbeauty.com, June 23, 2005.

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24. Half Empty? Half Full? www.ourmedia.org, February 4, 2006. 25. Molly Prior, "Dove Ad Campaign Aims to Redefine Beauty," www.parsintl.com, October 8, 2004. 26. Behind the Hype: Dove's Real Beauty Campaign, http://www.cbc.ca, 2005. 27. Dove's Real Beauty Campaign, www.cba.ca, 2005. 28. Pallavi Gogoi, "From Reality TV to Reality Ads," www.businessweek.com, August 17, 2005. 29. Dove Super Girl Ad for Real Beauty in Super Bowl Wins Hearts, www.adpunch.org, February 7, 2006. 30. Heather Travis, "Dove's Every Women: A Contradictory Campaign," www.ubyssey.bc.ca, August 28, 2005. 31. Heather Travis, "Dove's Every Women: A Contradictory Campaign," www.ubyssey.bc.ca, August 28, 2005. 32. Dove Campaign for Real Beauty to Help Foster SelfEsteem in Girls, www.sevprnewswire.com, January 27, 2006. 33. Real Beauty in the Age of Extreme Makeover, www.holmesreport.com, July 17, 2006. 34. Michele Miller, "The Evolution of Dove's Ad Campaign," www.amazon.com, May 17, 2006. 35. http://www.unilever.com/ourbrands/personalcare/dove.asp.

36. Jennifer Siegel, "Full-bodied Women Firm Up Support for Ad Campaign," www.forward.com, August 5, 2005. 37. A d r i a n n e H a r t l e y , " T h e B u z z o n B e a u t y , " www.calgarysun.com, October 10, 2004. 38. Dove's New Campaign, www.fitsisters.com, August 20, 2005. 39. Dove's Real Beauty Campaign, www.cba.ca, 2005. 40. Dove's New Campaign, www.fitsisters.com, August 20, 2005. 41. Seth Stevenson, "Super Bowl Special: The Best and Worst Ads This Year," www.slate.com, February 6, 2006. 42. Jack Neff, "In Dove Ads, Normal is the New Beautiful," www.adage.com, September 27, 2004. 43. Real Beauty is Anything But, www.conbinibento.com, June 1, 2006. 44. Martha Berletta, "Why Dove is Lucky to be Known as 'The Fat Brand'," www.adage.com, September 19, 2005. 45. Alicia Clegg, "Dove Gets Real," www.brandchannel.com, April 18, 2005. 46. Amanda Fraser, "Women Join Search for 'Real Beauty'," www.novanewsnet.ukings.ns.ca, November 2, 2005. 47. Branding Stories, www.businessweek.com, December 27, 2005.
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48. A m a n d a A u s t e n , " T h e B e a u t y B a c k l a s h , " www.news.bbc.co.uk, June 23, 2006. 49. Seth Stevenson, "When Tush Comes to Dove," www.slate.com, August 1, 2005. 50. Janice Shaw Crouse, "Dove's Latest Darlings," www.cwfa.org, September 20, 2005. 51. Julian Lee, "That Figures: Women Buy When Ad Gets Real," www.smh.com.au, October 3, 2005. 52. D i a n n D a n i e l , " R e a l B e a u t y = R e a l S a l e s , " www.cmomagazine.com, 2005. 53. D i a n n D a n i e l , " R e a l B e a u t y = R e a l S a l e s , " www.cmomagazine.com, 2005. 54. 'Real Beauty' - or Really Smart Marketing? www.salon.com, July 22, 2005. 55. 'Real Beauty' - or Really Smart Marketing? www.salon.com, July 22, 2005. 56. Christie Casalino, "Dove Team Discusses Real Beauty Campaign," www.brandrepublic.com, September 30, 2005. 57. Amanda Fraser, "Women Join Search for 'Real Beauty'," www.novanewsnet.ukings.ns.ca, November 2, 2005. 58. Sally Dibb, "Dove's New Beauty," www.open2.net, June 19, 2006. 59. Julian Lee, "That Figures: Women Buy When Ad Gets Real," www.smh.com.au, October 3, 2005.

60. " D o v e ' s C a m p a i g n f o r R e a l B e a u t y , " www.media-awareness.ca, 2006. 61. Molly Prior, "Dove Ad Campaign Aims to Redefine Beauty," www.parsintl.com, October 8, 2004. 62. Dove Campaign Takes Off with 'Real Women' Up on the Boards, www.parsintl.comw.archives.tcm.ie, April 9, 2004. 63. Theresa Howard, "Dove Ads Enlist All Shape, Style, Sizes," www.ustoday.com, August 28, 2005.

References and Suggested Readings 1. Dove Campaign Takes Off with Real Women Up on the Boards, www.archives.tcm.ie, April 9, 2004. 2. Real Woman Ad Set New Trend, www.news.bbc.co.uk, July 29, 2004. 3. Jack Neff, In Dove Ads, Normal is the New Beautiful, www.adage.com, September 27, 2004. 4. Only Two Percent of Women Describes Themselves as Beautiful, www.dove.com, September 29, 2004. 5. The Real Truth about Beauty: A Global Report, www.campaignforrealbeauty.com, September 2004. 6. Molly Prior, Dove Ad Campaign Aims to Redefine Beauty, www.parsintl.com, October 8, 2004.
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7. A d r i a n n e H a r t l e y , T h e B u z z o n B e a u t y , www.calgarysun.com, October 10, 2004. 8. J o h n N o b l e , A r e b r a n d s a f o r c e f o r g o o d ? www.britishbrandsgroup.org.uk, 2004. 9. Stephen Brook, 96-years-old Stars in Beauty Ads, www.media.guardian.co.uk, January 4, 2005. 10. Embracing Real Beauty, www.ad-rag.com, January 18, 2005. 11. Alicia Clegg, Dove Gets Real, www.brandchannel.com, April 18, 2005. 12. R e a l W o m e n B a r e t h e i r R e a l C u r v e s , www.campaignforrealbeauty.com, June 23, 2005. 13. Real women Bare their Curves as part of Doves Global C a m p a i g n t o W i d e n t h e D e f i n i t i o n o f B e a u t y, www.unileverusa.com, June 23, 2005. 14. Theresa Howard, Ad Campaign Tells Women to Celebrate Who They Are, www.usatoday.com, July 7, 2005. 15. Dove Real Beauty Campaign Getting under Your Skin? www.msmusings.com, July 21, 2005. 16. R e a l B e a u t y o r R e a l l y S m a r t M a r k e t i n g ? www.salon.com, July 22, 2005.

17. Doves Campaign for Beauty, www.xixstar.com, July 23, 2005. 18. Doves Ads Part Duex, www.scenegasm.com, July 29, 2005. 19. S e t h S t e v e n s o n , W h e n Tu s h C o m e s t o D o v e , www.slate.com, August 1, 2005. 20. Jennifer Siegel, Full-bodied Women Firm Up Support for Ad Campaign, www.forward.com, August 5, 2005. 21. M a g a z i n e S h o u l d S h o w R e a l W o m e n , www.thedailystar.com, August 10, 2005. 22. Pallavi Gogoi, From Realty TV to Realty Ads, www.businessweek.com, August 17, 2005. 23. Doves New Campaign, www.fitsisters.com, August 20, 2005. 24. Heather Travis, Doves Every Women: A Contradictory Campaign, www.ubyssey.bc.ca, August 28, 2005. 25. Theresa Howard, Dove Ads Enlist All Shape, Style, Sizes, w w w. u s t o d a y. c o m , August 28, 2005. 26. S u d h a M e n o n , B i g , R e a l , a n d B e a u t i f u l , www.thehindubusinessline.com, September 01, 2005. 27. Julian Lee, Industry Resistant to Real Woman, www.smh.com, September 8, 2005.

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28. Martha Berletta, Why Dove is Lucky to be Known as The Fat Brand, www.adage.com, September 19, 2005. 29. J a n i c e S h a w C r o u s e , D o v e s L a t e s t D a r l i n g s , www.cwfa.org, September 20, 2005. 30. Christie Casalino, Dove Team Discusses Real Beauty Campaign, www.brandrepublic.com, September 30, 2005. 31. Julian Lee, That Figures: Women Buy When Ad Gets Real, www.smh.com.au, October 3, 2005.Amanda Fraser, Women Join Search for Real Beauty, www.novanewsnet.ukings.ns.ca, November 2, 2005. 32. Mobile 365 and OgilvyOne Use Mobile Element in Dove Campaign, www.mmaglobal.com, November 19, 2005. 33. Branding Stories, www.businessweek.com, December 27, 2005. 34. D i a n n D a n i e l , R e a l B e a u t y = R e a l S a l e s , www.cmomagazine.com, 2005. 35. Doves Real Beauty Campaign, www.cba.ca, 2005. 36. Inge Selawry, How Real Curves Can Grow Your Brand, www.ogilvy.com, 2005. 37. Jennifer L Pozner, Doves Real Beauty Backlash, www.wimnonline.com, Fall, 2005. 38. JupiterResearch, European Online Advertising Forecast, 2005 To 2010, www.notabene.net, 2005.

39. Sanjib Dutta and Ajith Sankar RN, Dove: Campaigning for Real Beauty, www.icmrindia.org, 2005. 40. Unilever Charts, www.unilever.com, 2005. 41. Dove Campaign for Real Beauty to Help Foster SelfEsteem in Girls, www.sevprnewswire.com, January 27, 2006. 42. Rachel Corbett, Doves Larger Models Spur Sales and Attention, www.womensenews.org, January 29, 2006. 43. Half Empty? Half Full? www.ourmedia.org, February 4, 2006. 44. Seth Stevenson, Super Bowl Special: The Best and Worst Ads This Year, www.slate.com, February 6, 2006. 45. Dove Super Girl Ad for Real Beauty in Super Bowl Wins Hearts, www.adpunch.org, February 7, 2006. 46. F r a n K e l l y , D o - g o o d e r B r a n d s , www.thebreakawaybrand.com, March 29, 2006. 47. Michele Miller, The Evolution of Doves Ad Campaign, www.amazon.com, May 17, 2006. 48. Real Beauty is Anything But, www.conbinibento.com, June 1, 2006. 49. G r a n d E F F I E G o e s t o D o v e s R e a l B e a u t y , www.mpdailyfix.com, June 8, 2006.

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50. Doves Campaign for Real Beauty Wins at PRSA A w a r d s , w w w. s t r a t e g i y. c o m , June 12, 2006. 51. Sally Dibb, Doves New Beauty, www.open2.net, June 19, 2006. 52. A m a n d a A u s t e n , T h e B e a u t y B a c k l a s h , www.news.bbc.co.uk, June 23, 2006. 53. Real Beauty in the Age of Extreme Makeover, www.holmesreport.com, July 17, 2006. 54. D o v e A d s w i t h R e a l Wo m e n G e t A t t e n t i o n , www.msnbc.msn.com, August 3, 2006. 55. Paul R. La Monica, Super Bowl advertisers hope for extralarge laughs, www.houblon.net, 2006. 56. D o v e s C a m p a i g n f o r R e a l B e a u t y , www.media-awareness.ca, 2006. 57. B r a n d S t r e t c h o r B r a n d E g o T r i p ? www.media.wiley.com. 58. M y r n a G u t i e r r e z , M i r r o r, M i r r o r o n t h e Wa l l , www.latinastyle.com. 59. www.adpunch.org. 60. www.awrt.org. 61. www.campaignforrealbeauty.com. 62. www.dove.com.

63. www.effie.org. 64. www.en.wikipedia.org. 65. www.euro-effie.com. 66. www.glossary-of-terms.net. 67. www.msnbc.msn.com. 68. www.nedic.ca. 69. www.ogilvy.com. 70. www.prsa.org. 71. www.sourcewatch.com. 72. www.thefreedictionary.com. 73. www.unilever.com

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C HAPTER 4

Understanding Consumer Buying Behavior

Video 4.1:Consumer behavior products or services, the process that they go through while purchasing and the factors that influence purchase of products and services.

Introduction
The needs and preferences of consumers change constantly. Thus it is important for marketing managers to identify and understand these changes in order to develop a proper marketing mix that meets the customer needs satisfactorily and profitably. It is critical to have a comprehensive knowledge of how consumers purchase, consume and dispose the products or services to satisfy their needs and wants. Consumer behavior describes why individuals buy

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Section 1

The Consumer Decision-making Procmarketers should be clear about the buying roles of individuals. The various buying roles of individuals are: a) Initiator A person who initiates the idea of buying a product. b) Influencer A person whose views affect the buying decision. In the case of costlier products, more significance is attached to the purchase decision and there will be more number of influencers. c) Decider A person who takes the final decision on the purchase. d) Buyer A person who actually buys the product. The consumer decision process depends upon various roles played by the members of a family. Sometimes, the buyer and the user may be two different individuals. For example, parents buy candy or chocolates for their children. Here, parents are the buyers, but the ultimate users or consumers are the children. Therefore, e) User A person who actually uses the product. f) Maintainer A person who repairs or services the product. g) Disposer A person who disposes the product.

Video 4.1.1: Consumer Buying Decision

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Video 4.1.2: Buying Decision Process

Problem Recognition At this stage, a customer has an unsatisfied need that he/ she wishes to fulfill. The trigger for this need may be external or internal. External triggers are from advertisement or product packaging and internal triggers can be from within a person. Marketers try to create needs in customers, and fulfill those needs through their products. For example, marketers of fairness creams create a need to look fair and, then, aim at satisfying this need through their products. Information Search Once the need is established, the customer gathers all information to satisfy the need. For this purpose, he/she may use personal sources (family, friends), commercial sources (print media, television), public sources (articles in newspapers and journals) and experiential sources (Free trials). Usually, customers awareness level

www.google.com

The consumer buying decision process has five distinct stages: problem recognition, information search, evaluation of alternatives, purchase decision, and postpurchase decision. Consumers do not have to pass through all stages in buying a product. For example, for products or services bought routinely, the customer can skip the problem identification, information search and evaluation of alternatives. However, for expensive products or non-frequently purchased products, customers can go through all the stages in buying the product or service.

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increases after gathering information, which helps them to evaluate the product. Evaluation of Alternatives At this stage, the customer evaluates the various alternatives available to him/her, based on the information gathered by him/her. However, evaluation will differ depending upon the level of customer involvement. In the case of low involvement products, limited analysis is done by the customer. Purchase Decision The evaluation of alternatives will aid the customer in taking a decision. Purchase decisions can also be influenced by: seller and location of the store, size of the product, time of purchase, price of the product, delivery and warranty period, payment methods and service mechanisms. Post Purchase Behavior A customer evaluates a product after consuming it. If he/ she is satisfied, it results in repeat purchase and a positive image of the product. This is essential as dissatisfaction may lead to negative word of mouth by the customer about the product, leading to a negative image about the product in peoples minds. Post purchase satisfaction: Customer satisfaction occurs if the product performance is in line with customer expectations. Customer delight occurs if the satisfaction of

the customer exceeds his/her expectations. Marketers should aim at delighting the customer by adding features and improving product performance. Post purchase dissonance: If a customer feels that competitors products have better features than the product he/she has purchased, it leads to dissatisfaction in the customer with regard to his/her purchase decision. In this case, marketers should provide reassurance to the customer about the product. Post purchase use and disposal: Marketers should note the use of the product by customers. Sometimes, customers discover new uses for a product. This may result in enhanced utility of the product. Many companies encourage reuse or recycling of their products as a means of disposal. For example, companies like Chrysler Corporation and General Motors saved millions of dollars by using reusable containers in their business processes.

Buying Behavior
There are differences in buying behavior depending upon the involvement of the individual in the buying process and perceived differences about the brands and involvement in buying. Furthermore, the product type also influences buying behavior. We shall examine three kinds of buying behavior.

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Extensive problem solving behavior: This is displayed when purchasing an expensive product. The buyer develops a belief about the product, and his/her attitude regarding the purchase decision is based upon this belief. He/she makes a planned decision after evaluating all available alternatives to the product. To secure such behavior, marketers should clearly explain the distinct features of their product and use promotions for increasing visibility of their brand. For example, this sort of behavior is seen when individuals are involved in buying a music system. Routinized buying behavior: This sort of buying behavior is displayed by individuals for low cost regular purchases. Here, customers continue to buy familiar brands, and product features do not assume significance. Decisions are made fast, and the customer is not much involved in decision making. For example, buying monthly groceries is a routine activity, where there is low involvement of the buyer with regard to decision making. Variety seeking behavior: For certain products, customers seek differentiation, and evaluate the product during consumption. For example, some customers prefer to switch brands for shampoos. Impulse buying is a term that is used when customers take immediate decisions, based on instinct. Products that are bought on impulse are often marketed at a low price or at a discount. For example, Bru offered its Cappuccino coffee mix in sachets at a low price. These were displayed prominently at the cash counters of well known departmental stores to prompt impulse buying.

References: http://coffeeanddonuts.co.in/les/book%20review.pdf

R EVIEW 4.1
Question 1 of 4
What term is used to denote a person who chooses where, when, why and how to buy a product?

A. Maintainer B. Decider C. Buyer D. User

Check Answer

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Section 2

Factors Influencing Consumer Buying BeThe consumers buying decision and process is influenced by cultural, social, personal and psychological factors.
Figure 4.2.1: Factors influencing consumer buying behavior

Cultural Factors
Culture
This refers to the set of attitudes, values and beliefs associated with a category of customers. Customers perceptions influence their buying behavior. Therefore, international marketers need to take into account the diverse cultures across the world, while designing their strategies.
Video 4.2.1: Cultural Factors Affecting Consumer Behavior

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Example: In India, McDonalds has focused on innovative products and has changed its menu to suit the tastes of local consumers. It launched India-specific items, such as McVeggie burger, McAloo Tikki burger, Veg. Pizza McPuff and Chicken McGrill burger. Taking into account Indian preferences and sensibilities, the company does not offer pork and beef items at its outlets in India. On the other hand, it offers egg-less sandwich sauces to vegetarian customers, and vegetarian items are prepared at a separate counter at its outlets.

Upper middle class: These customers are well-educated and hold good positions in various organizations. They prefer goods appropriate to their social status. For example, malls like Shoppers Stop and Lifestyle cater to such customers. Middle class: These customers, usually, work at the middle and junior levels in organizations. They want value for money. Advertisements of products like Tide, are targeted at such customers. Lower class: These customers are primarily bluecollared workers with little or no education. They have no savings.

Subculture
Within a culture, there may be subcultures that contain similar habits, attitudes, and beliefs. Marketing mix needs to be altered according to the requirements of subcultures in a particular area. Advertising strategy is also influenced by subcultures. For example, a sari manufacturer may like to advertise his Kanjeevaram silk sarees more in Chennai than in Delhi, due to cultural preferences.

Social Factors
There are different social structures based on status. They influence the buying Video 4.2.2: Social Class effecting pattern of Consumer Behavior customers. Friends fall under the informal group, and this group has an effective influence on the buying decisions of customers.
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Social Class
This divides a society into different social structures based on status. There are primarily four categories of social class. Upper class: This class consists of customers who possess a large amount of wealth and buy from exclusive branded stores.

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Figure 4.2.2: Social Factors

Aspiration reference group: An individual wants to be part of that group and tries to incorporate the attitudes and buying behavior of that group. Disclaimant reference group: In this case, although an individual is a member of a particular group, the individual does not want to copy the actions of the group. Therefore, his buying behavior will not be influenced by this group. Avoidance group: In this case, an individual neither holds membership to a particular group nor likes the values and beliefs of the group. Secondary reference group: These may be religious groups, trade unions, or professional associations. Each of these groups has opinion leaders who influence the buying behavior of its members. For example, Max New York Life distributed its products in rural areas through gram sahayaks like teachers and social workers who were opinion leaders in villages. Family Family members influence the buying decisions of each other, significantly. In India, parents decide for their children and spouses decide for each other. For example, a working woman influences the eating patterns of her family. Marketers need to adjust the marketing mix elements depending upon the key influencer of their product in the family. The roles of husband and wife have also changed over time, which have to be reflected in the marketing

www.google.com

Reference Groups
A customers buying decision depends upon the reference group the customer belongs to. In this context, there are two types of reference groups, primary and secondary. Primary reference group: This can be further divided into four categories. They are: Membership reference group: Individuals hold membership to certain groups where they frequently interact with other members of the group. These interactions directly influence their buying decisions.

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strategies. For example, a commercial on television shows a man putting his baby to sleep.

Figure 4.2.3 : Personal Factors

in India included F IGURE 4.1 Kelloggs initial offer- cornflakes, wheat flakes and Basmati ings in India rice flakes. Despite offering good quality products and being supported by the technical, managerial and Source: www.kellogghistory.com financial resources of its parent, Kelloggs products failed in the Indian market. Even a high-profile launch backed by hectic media activity failed to make an impact in the marketplace. Meanwhile, negative media coverage regarding the products increased, as more and more consumers were rejecting the taste. There were complaints that the products were not available in many cities. According to analysts, out of every 100 packets sold, only two were being bought by regular customers; with the rest 98 being first-time buyers. Converting these experimenters into regular buyers had become a major problem for the company. By September, 1995, sales had virtually stagnated. Marketing experts pointed out various mistakes that Kellogg had committed and it was being increasingly felt that the company would find it extremely difficult to sustain itself in the Indian market.

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THE MISTAKES Kellogg realized that it was going to be tough to get the Indian consumers to accept its products. Kellogg banked heavily on the quality of its crispy flakes. But pouring hot milk on the flakes made them soggy. Indians always boiled their milk unlike in the West and consumed it warm or lukewarm. They also liked to add sugar to their milk. When Kellogg flakes were put in hot milk, they became soggy and did not taste good. If one tried having it with cold milk, it was not sweet enough because the sugar did not dissolve easily in cold milk. The rice and wheat versions did not do well. In fact, some consumers even referred to the rice flakes as rice corn flakes. In early 1996, defending the companys products, Managing Director Avronsart said, True, some people will not like the way it tastes in hot milk. And not all consumers will want to have it with cold milk. But over a period of time, we expect consumer habits to change. Kellogg is a past master at the art, having fought and won against croissant-and-coffee in France, biscuits in Italy and noodles in Korea. A typical, average middle-class Indian family did not have breakfast on a regular basis like their Western counterparts. Those who did have breakfast, consumed milk, biscuits, bread, butter, jam or local food preparations like idlis, parathas etc. According to analysts, a major reason for Kelloggs failure was the fact that the taste of its products did not suit Indian breakfast habits. Kellogg sources were however quick to assert that the company was not trying to change these habits; the idea was only to launch its products on the health platform and make consumers see the benefit of this healthier alternative. Avron-

sart remarked, Kellogg India is not here tional Merchandise (US) to change breakfast eating habits. What t h e c o m p a n y p r oposes is to offer consumers around the world a healthy, nutritious, convenient and Source: www.mrbreakfast.com easy-to-prepare alternative in the breakfast eating habit. It was not just a question of providing a better alternative to traditional breakfast eating habits but also developing a taste for grain based foods in the morning. Another mistake Kellogg committed was on the positioning front. The companys advertisements and promotions initially focussed only on the health aspects of the product. In doing this, Kellogg had moved away from its successful fun-andtaste positioning adopted in the US. Analysts commented that this positioning had given the brand a health product image, instead of the fun/health plank that the product stood on in other markets. (In the US for instance, Kellogg offered toys and other branded merchandise for children and had a Kelloggs fan club as well.) Another reason for the low demand was deemed to be the premium pricing adopted by the company. At an average cost of Rs 21 per 100 gm, Kellogg products were clearly priced way above the product of its main competitor, Mohans Cornflakes (Rs 16.50 for 100 gm). Vinay Mohan, Managing Director, Mo-

F IGURE 4.2 Kelloggs Promo-

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han Rocky Springwater & Breweries, the makers of Mohans cornflakes said, Kellogg is able to cater only to the A-Class towns or the more affluent consumers whereas Mohuns caters to the mass market. Another small-time brand, Champion was selling at prices almost half of that of Kellogg. This gave the brand a premium image, making it seem unattainable for the average Indian consumer. According to one analyst, When Kellogg tried a dollar-to-rupee pricing for its products, the company lost out on getting to the mass consumer. Even the customers at the higher end of the market failed to perceive any extra benefits in Kelloggs products. A Business Today report said that like other MNCs, Kellogg had fallen into a price trap, by assuming that there was a substantial latent niche market in India for premium products. In most Third World countries pricing is believed to play a dominant role in the demand for any product. But Kellogg did not share this view. Avronsart said, Research product must taste good. F IGURE 4.3 Kelloggs CompetiMost consumers view tors in India quality as they view taste, but with a very high standard. We approach pricing on a case-to-case basis, always consistent with the total value delivered by each product. He also Source:www.mygrahak.com said, Local brands are selling only on the price platform. We believe that

were demanding the right price for the value we offer. If the consumer wants quality, we believe he can afford the price. Thus, it was not surprising that the company went ahead with its plans of increasing the price of its products by an average of 28% during 1995-98. Before the product was made available nationally in March, 1995, the demand from Mumbai had been very encouraging. Within a year of its launch in Mumbai, Kellogg had acquired a 53% market share. Following this, the company accelerated its national expansion plans and launched the product in 60 cities in a 15-month period. However, Kellogg was surprised to see the overall demand tapering off considerably. A Mumbai based Kellogg distributor explained, Why should somebody sitting in Delhi be deprived of the product? So there was considerable movement from Mumbai to other parts of the country. As the product was officially launched countrywide, the company realized that the tremendous response from the Mumbai market was nothing but the disguised demand from other places being routed through Mumbai. Kellogg had also decided to focus only on the premium and middle-level retail stores. This was because the company believed that it could not maintain uniform quality of service if it offered its products at a larger number of shops. What Kellogg seemed to have overlooked was the fact that this decision put large sections of the Indian population out of its reach. SETTING THINGS RIGHT Disappointed with the poor performance, Kellogg decided to launch two of its highly successful brands - Chocos (September 1996) and Frosties (April 1997) in India. The company hoped to repeat the global success of these brands in the Indian market.
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Chocos were wheat scoops coated with F IGURE 4.4 Frosties & Chocos chocolate, while Frosties had sugar frosting on individual flakes. The success of these variants took even Kellogg by surprise and sales p i c k e d u p s i g n i f iSource:http://cdn5.wn.com cantly. (It was even reported that Indian consumers were consuming the products as snacks.) This was followed by the launch of Chocos Breakfast Cereal Biscuits. The success of Chocos and Frosties also led to Kelloggs decision to focus on totally Indianising its flavors in the future. This resulted in the launch of the Mazza series in August 1998 - a crunchy, almond-shaped corn breakfast cereal in three local flavors Mango Elaichi, Coconut Kesar and Rose. Developed after a one-year extensive research to study consumer patterns in India, Mazaa was positioned as a tasty, nutritional breakfast cereal for families. Kellogg was careful not to repeat its earlier mistakes. It did not position Mazza in the premium segment. The glossy cardboard packaging was replaced by pouches, which helped in bringing down the price substantially. The decision to reduce prices seemed to be a step in the right direction. However, analysts remained skeptical about the success of the product in the Indian market. They pointed out that Kellogg did not have retail packs of different sizes to cater to the

needs of different consumer groups. To counter this criticism, the company introduced packs of suitable sizes to suit Indian consumption patterns and purSource: www.slstop.com chasing power. Kellogg introduced the 500gm family pack, which brought down the price per kg by 20%. Also, Mazza was introduced in 60gm pouches, priced at Rs 9.50. Kelloggs advertising had not been very impressive in the initial years. Apart from Jago jaise bhi, lo Kelloggs hi, the brand had no long- F IGURE 4.6 Chocos Breakfast Ceterm baseline lines. Later, real Biscuits Kellogg attempted to Indianise its campaigns instead of simply copying its international promotions. The rooster that was associated with the Kellogg brand the world over was missing from its Source: http://4.bp.blogspot.com advertisements in India. One of its campaigns de-

F IGURE 4.5 Kelloggs Pouches

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picted a cross section of individuals ranging from a yoga instructor to a kathakali dancer attributing their morning energy and fitness to Kellogg. The advertisement suggested that cornflakes could be taken with curds, honey, and banana. In April 1997, Kellogg launched The Kellogg Breakfast Week, a community-oriented initiative to generate awareness about the importance of breakfast. The program focussed on prevention of anemia and conducted a series of nutrition workshops activities for both individuals and families. The program was launched in Chennai, Delhi and Mumbai. The company tied up with the Indian Dietetic Association (IDA) to launch a nation-wide publicservice initiative to raise awareness about iron deficiency problems. Nutritionists and dieticians from the country participated in a day-long symposium in Calcutta to deliberate on the causes and impact of anemia caused by iron deficiency. This program was in line with the companys global marketing strategy which included nutrition promotion initiatives such as symposiums, educative programs and sponsorship of research. Emphasizing Kelloggs commitment to nutrition F IGURE 4.7 Kelloggs Breakfast education, Avronsart Cereal - Local Flavors remarked, Product modification, particularly the addition of iron fortification in breakfast cereals is how Kellogg responds to the nutritional needs of the conSource: http://magicemart.com sumers. In this spirit, Kellogg India is taking a major step to im-

prove the nutritional status of consumers in the country, the specific opportunity being iron fortification for which we have undertaken major initiatives to promote the awareness of the importance of iron in the diet. Kellogg also increased its focus on promotions that sought to induce people to try their product and targeted schools across the country for this. By mid-1995, the company had covered 60 schools in the metros. In March, 1996, the company offered specially-designed 50 gm packs free to shoppers at select retail stores in Delhi. This was followed by a house-to-house sampling exercise offering one-serving sachets to housewives in the city. The company also offered free pencil-boxes, water bottles, and lunch boxes with every pack. Plastic dispensers offering the product at discounted rates were also put up in petrol pumps, super markets, airports etc. Kellogg identified distribution as another major area to address in order to increase its penetration in the market. In 1995, Kellogg had 30,000 outlets, which was increased to around 40,000 outlets by 1998. Avronsart said, We have increased Video: Kelloggs Campaign in our reach only slightly, but India we are now enlarging our coverage. Considering that it had just one plant in Taloja in Maharashtra, the company was considering plans to set up more manufacturing units. Kelloggs also began working towards a better positioning plank for its products. The companys research showed that
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the average Indian consumer did not give much importance to the level of iron and vitamin intake, and looked at the quantity, rather than the quality, of the food consumed. Avronsart commented, The Kellogg mandate is to develop awareness about nutrition. There is a lot of confusion between nourishment and nutrition. That is something that we have to handle. Kellogg thus worked towards changing the positioning of Chocos and Frosties which were not positioned on the health platform but, instead, were projected as fun-filled brands. Kellogg then launched the Chocos biscuits, claiming that cereals being a narrow category, the foray into biscuits would create wider awareness for the Kellogg brand. Biscuits being a mass market product requiring an intensive distribution network, Kelloggs decision to venture into this competitive and crowded market with stalwarts like Britannia, Parle and Bakeman, was seen as a bold move not only in India, but also globally. Avronsart said, We are ready to develop any food based on grain and nutrition that will satisfy consumer needs. THE RESULTS In 1995, Kellogg had a 53% share of the Rs 150 million breakfast cereal market, which had been growing at 4-5% per annum till then. By 2000, the market size was Rs 600 million, and Kelloggs share had increased to 65%. Analysts claimed that Kellogg entry was responsible for this growth. The companys improved prospects were clearly attributed to the shift in positioning, increased consumer promotions and an enhanced media budget. The effort to develop products specifically for the Indian market helped Kellogg make significant inroads into the Indian market.

However, Kellogg continued to have the Indian Market the image of a premium brand and its consumption was limited to a few well-off sections of the Indian market. The company had Source: www.kanoriacorp.com to face the fact that it would be really very difficult to change the eating habits of Indians. In 2000, Kellogg launched many new brands including Crispix Banana, Crispix Chocos, Froot Loops, Cocoa Frosties, Honey Crunch, All Bran and All Raisin. Kellogg also launched Krispies Treat, an instant snack targeted at children. Priced on the lower side at Rs 3 and Rs 5, the product was posit i o n e d t o c o m p e t e F IGURE 4.9 New Brands of Kelagainst the products in loggs in India the impulse snacks category. According to some analysts, the introduction of new cereals and the launch of biscuits and snacks could be attributed to the fact Source: http://bargainbriana.co that the company had been forced to look at alternate product cate-

F IGURE 4.8 Kelloggs targeting

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gories to make up for the below-expectation performance of the breakfast cereal brands. Kellogg sources however revealed that the company was in India with long-term plans and was not focusing on profits in the initial stages. In Mexico the company had to wait for two decades, and in France nine years, before it could significantly influence local palates. With just one rival in the organized sector (Mohan Meakins) and its changed tactics in place, what remained to be seen was how long it would take Kellogg to crack the Indian market. QUESTIONS FOR DISCUSSION: 1. What were the reasons behind the poor performance of Kellogg in the initial stages? Do you agree that a poor entry strategy was responsible for the companys problems? Give reasons to support your answer. Analyze Kelloggs efforts to revamp its marketing mix and comment on the initiatives taken regarding each element of the marketing mix. Do you think the companys decision to launch biscuits and snacks was a right one? Give reasons for your answer.

Narayan Sanjay & Bhandari Bhupesh, Business World, October, 22, 1997. Chhaya, Can Kellogg India sustain the crackle?, Business Today, October, 22, 1998. Dubey Chandan, Instant snack - Kellogg India launches Krispies Treat, Financial Express, May, 17, 2000. Kulkarni Jatar Nita, Kelloggs India dream, Business Today, June, 22, 2000. www.kelloggs.com

Additional Readings & References: 1. Chhaya, A second helping, Business Today, April. 7, 1997. 2. Kellogg Breakfast Week in Calcutta, Business Standard, April, 17, 1997.
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C HAPTER 5

Organizational Markets and Organizational Buying Behavior

Introduction
While for many of us, marketing is concerned with consumer products that are bought and consumed on a regular basis, there is also a huge business market that is concerned with marketing to other business organizations. This is referred to as business-to-business marketing (B2B) where the organizations market their products and services to other business organizations. For example, in order to manufacture a car, an automobile company buys a variety of finished and semifinished products from original equipment manufacturers (OEM). This is referred to as business market. The marketing activities and actions undertaken by the OEMs to influence the automobile manufacturer to select their products over the competitors products constitute B2B marketing. Organizational buying is influenced by a variety of factors like environmental, organizational, social and personal factors. Different categories of people namely initiators, influences, users, deciders, approvers, buyers and gatekeepers are involved in organizational buying process and each of them play a different role in the decision process.

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Section 1

Concept and Dimensions of Organizational Buying

Organizational buying differs from consumer buying, in involving more systematic decision making. The organizational purchases include a range of items from routine stationery to complex machinery. The managers time and involvement in the purchase decision would be more for items like equipment and less for items like stationery. Table 5.1.1: Differences between organizational markets and consumer markets
Basis Time of purchase process Number of buyers Quantity of products Organization Consumer

Figure 5.1.1: Organizational Buying Situations

Source:www.rohan.sdsu.edu

Less

Types of organizational buying situations and situational factors

There are three kinds of organizational buying situations. They are new task, modified rebuy, and straight rebuy. New task: This involves purchasing a good for the first time.

Few Higher

Large Lower

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Modified rebuy: The purchase manager buys the same goods as earlier, but with slight modifications in specification, delivery schedule, and other aspects. This involves more interaction between the buyer and the supplier, but less than that in a new task. Straight rebuy: This involves purchasing a product, regularly. Therefore, there are no changes in the agreement between the approved supplier and the organization. Another buying situation is known as system buying, where the organization has one supplier for its raw material requirements.

Dimensions of organizational buying

Organizational buying can extend from small equipments to big machinery. In an organization, the purchase decision, specifically, in the case of complex and expensive goods, is taken after consultation with various members. Here, buying decisions are taken through techniques like material requirement planning and Justin-time management. Under material requirement planning, the production schedule is based on forecasting. This schedule forms the basis for ordering raw material. Under the just-in-time method, minimum inventory levels are maintained and raw materials are purchased on the basis of customer demand. Example: To reduce the supply chain inventory, Maruti Udyog Ltd. (MUL) introduced a Delivery Instruction

system through which vendors received advance notice about the companys schedule. Through this measure, the company ensured that vendors supplied goods on time. This helped in reducing holding costs and prevented wastage for the company. The company shifted from monthly to daily schedules to meet the fluctuation in demand. This also helped in meeting the competition. These schedules were supplemented by an electronic card system provided to the vendors. The company sent an indent card to its vendors whenever there was a need for replenishment. Therefore, the vendors were clear about supplies and built up inventory only upto the required level. This procedure marked a transition to the Just-in-Time concept, at MUL. The benefits became evident when JK Industries, a supplier to MUL, had a reduction in tyre inventory from 30,000 to 10,000 units. Cost of raw materials influence the profitability of a firm. The quality of raw materials is upheld by reverse marketing, where the organization specifies the quality norms to be followed by suppliers. Suppliers get suggestions from the organization on quality levels and timely delivery as the production process depends upon the procurement of raw material. Other factors during purchase include negotiations for a better price and checking a sample before purchase. The selection of a supplier depends upon the ability to deliver quality products on schedule. Geographical location also plays an important role as proximity to the supplier helps, when

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the material needs to be delivered within a short period of intimation. Fluctuations in demand affect the amount of raw materials required by organizations.
Video 5.1.1: Inelastic Demand

wants. These products include DVD players and DVDs, car and fuel, and cotton and textiles. The increase or decrease in the demand of a product has a similar effect on the demand of its complementary product. Fluctuating demand This depends upon the changing demand of the end customers.

Demand may be classified into four categories as given below: Inelastic demand A change in the price of raw material does not affect the demand for the product.

Derived demand Derived demand is based on consumers demand for the products produced by an organization. Demand for raw material depends upon customers demand for the organizations final Video 5.1.2: Derived product.
Demand and Joint Demand

Joint demand Demand for a particular product is affected by the demand for a related product. Joint demand arises when two or more products have to be c o n s u m e d t o g e t h e r, t o satisfy consumer needs or
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R EVIEW 5.1
Question 1 of 4
The concept of organizational buying is quite different from that of consumer buying. Identify the alternative which is definitely not a characteristic of organizational buying.

A. It involves thorough and deep analysis B. The purchase managers experience influences the decision-making process C. It involves an unsystematic decisionmaking process D. Managers deal with personnel with varied responsibilities, before actually buying a product

Check Answer

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Section 2

Classification of Organizational Markets

Organizational markets consist of producers, resellers, governments and institutions. We shall discuss each of these in detail in the following keynote:
Keynote 5.2.1: Classification of Organizational Markets

Factors Influencing Organizational Buying

Traditionally, marketers believed that economic factors like cost of the product or impulse purchase of managers affect organizational buying. However, this view lacks an overall perspective of the organizational purchase process. The factors affecting organizational buying include environmental, organizational, social, and personal factors. Environmental Factors The purchase process can get affected by climatic conditions, location, or ecological concerns. Legal factors such as laws enacted by the government affect the purchase process. Economic factors like the general market situation, growth rate, and unemployment rate also influence the buying process. The other influencers are technology and political environment. Organizational Factors The purchase decision taken by an organization reflects the procedures, rules and purchase policy of the organization. Four aspects of an organization influence its pur132

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chase process. These are: individual and collective responsibilities, work flow, current and future technologies, and employees. Social Factors Marketers should identify the roles of all members involved in the purchase process of an organization. They should then interpret and analyze the relationships among these members and their relation with external individuals. Based on these factors, marketers can plan effective strategies. Personal Factors Individuals who take purchase decisions in an organization play an important role in the organizational buying process. Individuals perceptions, attitudes, and knowledge about the product influence their purchase decisions. Therefore, the marketer should take these personal factors into account before approaching an organization.

R EVIEW 5.2
Question 1 of 5
The producer market can be divided into three segments. Identify the correct combination of segments.

A. OEM, Industrial dealers, Individual users B. OEM, Industrial dealers, Industrial users C. OEM, Retailers, Individual users D. OEM, Retailers, Industrial users

Check Answer

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Section 3

Participants in Organizational Buying and Stages of Buying

Each individual involved in a purchase decision, plays a different role. Marketers stand to benefit from an understanding of these roles. These roles can be classified into the following seven categories: Interactive Image 5.3.1: Organizational Buying Roles
Initiators Gatekeepers Inuencers

Procurement Process
Product managers of organizations, usually, have a good knowledge about suppliers. They facilitate the procurement process by identifying the appropriate suppliers. However, technical and legal factors should also be taken into account by companies, during purchase. Efficiency in procurement is achieved through techniques like material requirement planning and just-in-time management. Buying

Users Buyers Deciders Approvers

The purchasing department has assumed great significance in recent times. Organizations have realized that strategic decisions pertaining to the purchase process play an important role in enhancing the profits of an organization. The purchase department needs to ensure that suppliers maintain certain quality standards. Organizations are also focusing on building long-term relations with suppliers. Supply Management Orientation

1 of 8

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This refers to an organizations efforts to improve its supply chain, right from the suppliers to the customer. Through this, the organization can achieve better quality and supply of raw material, which will affect the quality and supply of the final product. The distributors would also have an edge in the market by supplying good quality products. Supply management orientation enables the company to improve its value in the entire value chain. Example: Cemex, a major cement company, had a problem in delivering the ready-mixconcrete to the construction site. Once loaded in a truck, the ready-mix concrete needed to be delivered to the construction site within 90 minutes to ensure the effectiveness of the mix. Factors like traffic delays, poor roads and weather conditions, and equipment failures delayed the delivery of the orders. Cemex developed an adaptive solution called dynamic synchronization of operations (SDO) system in 1995, which used CemexNet as its communication backbone. Under SDO, each truck was fitted with a computer and Global Positioning System (GPS) locators that linked them with the central control center. With these components in place, central dispatchers could know the location, speed, and direction of each truck. This helped the dispatchers to assign the order to the nearest truck driver and mixing plant. These systems also provided information on weather conditions, traffic situation, inventory at the plants, and customer location. This, in turn, helped the dispatchers in taking decisions like rerouting the trucks during traffic jams. The SDO system helped Cemex in reducing the

delivery time to 20 minutes from three hours. Cemex used this system as a competitive advantage and promised customers of timely delivery.

Stages of Buying
Keynote 5.3.1: Stages of Buying

Most buying processes in organizations go through certain stages. A typical organizational buying process usually consists of nine stages which are explained with the help of the following keynote:
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R EVIEW 5.3
Question 1 of 5
During the organizational buying process, a panel of senior managers evaluates the need to purchase a product or service and approves the proposed decision. Who plays this role in the buying process?

A. Initiator B. Influencer C. Approver D. Gatekeeper.

Check Answer

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Section 4

Case Study: Cummins India Consumer Driven Modularization Strategy

This case was written by K. Yamini Aparna, under the direction of Vivek Gupta, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

2005, IBS Center for Management Research. All rights reserved. To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: [email protected] www.icmrindia.org

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Over the years, consumer packaged-goods companies have reduced their products unit size in emerging markets to unlock demand among consumers who cant afford bigger portions What if companies took this approach with more expensive purchases? Cummins, the producer of diesel engines and power generators, recently did just that in India. By modularizing a product for the distinct needs of different kinds of customers and channel partners, the company cut the total cost of ownership and of sales in the channel. The result: higher demand for Cummins products.1 John Hagel III and John Seely Brown, The McKinsey Quarterly 2005, Number I.

problems like unauthorized usage, theft and loss of power in transit have aggravated the power shortage problems. Moreover, there are often significant voltage fluctuations in the power supply which can damage household and industrial electrical equipment. Not only the industries and agriculturists but household consumers, too, have been severely affected by the chronic power shortages. The Electricity (Supply) Act 1948 was amended in 1991, permitting private power producers to start their own power projects to meet the increasing power demand. The Government of India (GOI) also broadened its power policies to permit the use of diesel engine based power generating units (Refer Table I for end user profile for engines).

GENSETS IN INDIA In 2004, India was the worlds sixth largest energy consumer, consuming about three per cent of the worlds total energy production. Indias population is growing at a rate of about 1.6 per cent per annum and is expected to reach 1.16 billion by the year 2010. The countrys projected increase in electricity consumption, between 2.6 per cent and 4.5 per cent per annum till 2020, is the highest for any major developing country in the world. The increase in population coupled by rapid economic growth means that Indias energy requirements would be much above the countrys energy production capacity. Indias power and energy industry has faced problems of under capacity production due to heavy reliance on hydro electricity, which in turn depends on unpredictable and sometimes insufficient rains. In 2005, the under capacity utilization resulted in a 12% shortage in electricity production. Apart from this, other

Table I End-user Profile for Engines Segment Capacity Application Areas Small Range Medium Range 2-20 HP 20-300 HP Pumpsets, agriculture machinery Tractors, gensets for construction and small industrial applications. Mainly from commercial establishments and service sectors Captive power plants and large industrial applications especially from process industries, marine

Large Range

300-270 0 HP

Source: www.blonnet.com

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Large manufacturing companies have been building captive power plants running on diesel since they are more economical and take short period to build. While many industrial consumers pay well over 10 cents per unit (kilowatts per hour) to the State Electricity Boards (SEBs), power through captive diesel plants can result in savings of around 3.5 cents per unit. This translates into very significant cost savings, especially for power intensive industries such as cement, chemicals and steel. Moreover, the reliability and quality of power is also better. Agricultural, office and residential consumers have been meeting the deficiency of power supplies by buying portable power generating sets, popularly known as gensets, operating on diesel. Diesel gensets took off in India, especially after 1991 when the GOI formulated a policy to encourage private investment in the power sector. A number of companies, generally joint ventures involving foreign investors, began to manufacture diesel engines that powered F IGURE 5.1 Major Players in the Incaptive generators, or dian Genset Industry in 1991 assembled and installed the gensets themselves. Companies which were already operating in the industry expanded their operations. Some of the major players in the genset industry included

F IGURE 5.2 Major Players in the

Genset Industry

Honda Siel Power Products Limited, Birla Ya m a h a L i m i t e d , Hindustan Power Plus, Wartsila Diesel India Limited (Finland) and Cummins (US) (Refer Exhibit I for details on the major players in Indian genset industry).

Cummins entered India in 1962 to manufacture diesel engines. It was a leading genset manufacturer concentrating on high-end power intensive industries. From early 2000 onwards, Cummins
Source: http://image.made-in-china.com

India Ltd (CIL) also started to concentrate on medium and low horsepower (HP) gensets to cater to farmers, hospitals, small retailers and domestic users since these consumer segments were expanding rapidly. The company adopted a new technique called modularization i.e. customizing each product to meet the unique requirements of each consumer segment. BACKGROUND NOTE Cummins was founded on February 03, 1919 as The Cummins Engine Company by William Glanton Irwin, an investment banker and Clessie Lyle Cummins (Clessie), an auto-mechanic. Clessie was convinced that an engine technology invented by Rudolph Diesel in the 1890s, which was still unproven, commercially held great promise for its fuel economy and durability. He used a
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Exhibit I - Major Players in the Indian Genset Industry

Over 100 Indian companies manufacture diesel gensets. Local diesel gensets production consists of a wide range of equipment starting from 5 HP -30 HP engines, manufactured by a number of small and medium sized Indian companies. The organized sector manufactures diesel engines, mainly in the 25 to 90 HP range. For 90 HP to 1,500 HP range, there are only 6-7 manufacturers including Kirloskar Oil Engines Limited (KOEL), Greaves, Wartsila and Hindustan Power Plus Limited (HPL). Beyond 1,500 HP, companies import completely knocked down or completely built units. Some of the leading manufacturers of diesel engines are: Birla Yamaha Ltd is a joint venture, formed in 1986, between the Birla Power Solution Ltd., of the Yash Birla Group of India and Yamaha Ltd., of Japan. This company launched the first portable genset in India and is considered the pioneer of genset technology in India. It manufactures two stroke as well as four stroke engines, catering to the power requirements between 500W to 5.5 K.W. It was the first company to roll out self start gensets and the first company to launch emission compliant generators under the brand name Birla Ecogen. Honda Siel Power Products Ltd is a joint venture, formed in 1985, between the Siel Power Products Ltd., of the Shriram Group of India and the Honda Motor Company of Japan. The company manufactures a range of power products such as portable gensets, portable engines, portable water pumping sets and lawnmowers. Its gensets are provided with voltage and frequency options on request. The company specializes in four stroke technology. Its Honda Gen-X with 1-1.5 KVA, released in 2003, is considered the quietest genset in its class. Wartsila Diesel India (WDI), being the largest player in the diesel generator segment, has benefited immensely from the sharp increase in the demand for captive power plants. Deriving its strength from Oy Wartsila Diesel (OWD) of Finland, WDI has emerged as the market leader in the 3-6 MW segments, with a market share of over 75 per cent. WDI assembles engines in the range of 3-6 MW. The higher capacity range engines are imported from group companies in Europe. Hindustan Powerplus Limited (HPL) is a joint venture firm established between CK Birla group and Caterpillar Inc., U.S. It produces 1,800 engines annually in 200 -2500 HP range. Deriving major strength from Caterpillar, HPL is emerging as a strong player in the medium and largerange engine sector. Caterpillar engines seem to have the advantage of higher fuel efficiency and hence are well accepted in the domestic market. HPL has increased its production capacity and entered into higher range segment of 910 KVA to 1,944 KVA. While this has strengthened its product portfolio, it will also enable HPL to capitalize on the growing large captive power market. Greaves Cotton Ltd leads the field in the manufacture of diesel engines (15-816 HP) used for diesel generating sets, barges, pilot launches, compressors, construction equipment, cranes, forklifts and various defense applications. The companys Y series gensets are available in 7.5-125 KVA and the D series gensets are available in 125-520 KVA. The gensets are available in Gas and dual fuel (gas+ diesel) engines also.
(Contd...)

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(Contd...)

Kirloskar Oil Engines Ltd (KOEL), established in 1946, is a part of the century old Kirloskar group promoted by S L Kirloskar. It manufactures a wide range of diesel engines from 5-11,000HP. The company operates in 3 main sub-divisions, engines, auto components and others. The engines segment caters to the agriculture sector and industrial sector, whereas the auto components segment, which comprises of engine bearing and valves, caters to the automobile sector.
Compiled from various sources. The company also entered into power generation business FY03. This

diesel engine with a Packard limousine creating the first diesel powered car of the US. Later, Clessie made various prototypes to make diesel car the most efficient mode of transportation. He brought the new product nearer to the F IGURE 5.3 The Cummins Engine masses by conducting Company during 18th Century coast-to-coast drives and setting speed records and endurance records highlighting the engines durability and efficiency. By 1937, Source: www.cummins.com.br the US economy began to recover from the great depression of the 1930s and Cummins too started making profits.

After World War II, Cummins engines F IGURE 5.4 Packard limousine with a diesel engine were in great demand, and by the late 1950s, the company recorded sales of over US$100 mn. During the 1960s, the company ventured in foreign markets and by the end of the decade it had 2,500 Source: www.autogiftgarage.com dealers in 98 countries. During the 1980s and 1990s, Cummins undertook a restructuring program and invested around US$1.3 bn in new plants, equipments and engine designs. In 2000, the company shortened its name from Cummins Engine Company to Cummins Inc. By early 2000s, Cummins had emerged as the global leader in engine technology and service solutions across power generation, industrial and automotive applications. It designed, manufactured,

bring down per unit production costs and this helped in averaging out the extra expenses incurred in manufacturing addons. The basic model was supplied to the distributors in readyto-assemble kits; the add-on features were separately packed and could be purchased by the customers only if they needed them. This turned out to be a win-win proposition for all the parties involved distributors were not required to source the add-ons themselves, the company reduced its operating costs and the customers got a tailor-made solution for their special needs without investing a huge amount of money. Exhibit IV CIL also observed that while demand from the industrial plants was diminishing, demand from the service sector, such as hotels, hospitals, residential complexes, fast-food joints, etc., which required medium-to-low range gensets, was gradually increasing. Economic surveys in 2000 showed that the service sector would grow by 7.5-10 per cent in the next few years. Therefore, this sector offered lucrative prospects for genset business.

Keeping the changing trends in the industry in view, CIL started catering to the power backup needs of the services sector too. The Caf Coffee Day chain across India was one such customer from the service sector. Comfort and life style was the unique selling proposition (USP) of these coffee shops. What the coffee chain considered a trouble-free coffee experience required abundant supply of coffee to its customers within the cool comfort of its outlets. To promote such atmosphere they needed uninterrupted, quality power. Genset backup was essential since the regular grid power was not reliable. However, the problem with these coffee outlets was that they operated in compact, oneroom shops with little place to spare. Since comfort and style were important they could not afford the drone of gensets in operation. Another problem was that each outlet needed a different load requirement. They wanted compact, lightweight generators with minimum noise levels, customized to meet the load requirements of each outlet. CIL stepped in with its customized solutions. Cummins team of engineers made a study of the loading patterns, layout of each outlet and offered S&B gensets, which were compact and had minimum noise and vibration levels and low maintenance costs (Refer Exhibit IV for product specifications of S&B series engines). The unique Ready-to-Use design of this range facilitated installation in quick time and with minimum fuss. The gensets were strategically installed in the back of the premises so as not to cramp the floor-space of the outlet or interfere with its trendy look. The healthcare industry was another lucrative market segment for diesel gensets. CIL supplied gensets with least noise levels to
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the hospitals. However, one particular request from a blood bank in Gujarat called for the modularizing expertise of CIL. The Prathma Blood Centre ran a mobile blood bank which collected 15 units of blood everyday. But the blood so collected needed to be preserved carefully so that it would be fit for use. Therefore, the mobile blood bank needed the most efficient cold storage facility with absolutely no interruptions which could be operated only on a genset. The limited space in the van to accommodate the genset unit, minimum noise and vibration levels and low maintenance costs- since it was a non-profit venture- were the constraints. CIL came out with its X series 15 KVA genset which met all the above criteria (Refer Exhibit V for Product Specifications of X series engines). It was the most compact engine with minimum sound levels in its class. The RTU design enabled quick installation with easy access for regular servicing and maintenance. The unit was provided with a two-year warranty and 24x7 after sales service and spares support. Expressing his satisfaction with the performance of the genset, Unnikrishnana, Executive Maintenance of Prathma Blood Centre said, We never thought that such reliable power backup was possible from such a small package. Truly, Cummins has outlived all our expectations.2 The growing residential complexes in metropolitan areas were another profitable area of business for genset industry. However, the load requirements of each complex differed depending on the magnitude of the project and the number of residents in the complex. To cater to this market segment, CIL engineers carried out load mapping for each project to arrive at the optimum genset rating. Operating cost was another constraint for the residential complexes since the builder took care of only

installation and the generator maintenance costs had to be borne by the residents once the construction was complete. CIL gensets met all these requirements and the company also provided after sales service and spares support for the residential complex gensets. Industry experts felt that the success of modularizing techniques of CIL was ultimately measured by the companys improved business performance. The companys products were highly appreciated by satisfied customers. Appreciating CILs genset, the site manager of a well-known real estate company in Maharashtra state, said, The customer is more knowledgeable, discerning and demanding nowadays. It makes business sense to go in for top quality products like Cummins Exhibit V Generators because it increases the saleability of our projects.3 THE FUTURE Since Indias energy needs were growing Source: www.cummingsindia.com. faster than its production capacity, power problems seemed to be here to stay in the country. The recurring power shortages, with an average and peak power deficit of 7 per cent and 14 per cent respectively, coupled with low quality power supplied by the SEBs in almost all the states meant that alternative power sources would inevitably be needed. Dieselbased gensets turned out to be the most popular choice for both
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industrial as well as domestic users as they were faster and easier to install and also economical to operate. The diesel gensets were used in various end-user segments such as automobiles, compressors, pump sets and power generators. But the increasing power shortage problems meant that power generation and backup would continue to be the key growth areas. Industry studies showed that the agriculture sector offered a large market for the gensets upto the 20 HP range. Every year nearly 400,000 units were sold on an average exclusively for the agriculture sector and this figure was expected to grow by five per cent per annum in the coming years. Therefore, the market for low HP range would remain profitable as long as agriculture and domestic users continued to depend on power backup. The medium range (between 20 HP and 300 HP) was generally used in tractors, construction, power generation and smaller industrial applications. The demand for this range did not show any promising increase for a long period. However, with the rapid growth of services sector, demand for medium range gensets in hotels, hospitals, telecom sector and information technology sectors had been fast increasing. Industry experts felt that gensets would find maximum growth in the medium HP range. On an average, the demand for medium range gensets was expected to increase by 10 per cent per annum in the coming years. While the low and medium range served as back up in case of power failure, the large genset segment between 300 HP and 2000 HP catered to the power generation needs of the large industrial applications. Studies had shown that only 20 per cent of the gensets were used in power generation whereas the

remaining 80 per cent were part of a standby or backup arrangement. The growth in the high HP range was predicted to be much less as compared to the medium and low HP range because the growth of power-intensive large scale industries had slowed down. However, there is some concern that a steep increase in diesel prices in the near future might increase the operating costs of diesel-based gensets and in turn affect their sales. To meet this contingency, CIL has lined up gensets functioning on natural gas which comply with all the prescribed emission standards. It remains to be seen whether the natural gas-based engines will be as popular with the Indian customers as the diesel-based gensets. For now, CIL has decided to concentrate on providing spares and servicing facilities, which seem likely to generate strong revenues in the future. Footnotes: 1. John Hagel III and John Seely Brown, Innovation Blowback: Disruptive Management Practices from Asia, www.mckinseyquarterly.com, 2005 Number I. www.cumminsindia.com. www.cumminsindia.com.

2. 3.

Additional Readings and References: 1. 2. Dadhich, Pradeep, Indian Power Sector, www.teriin.org, Shilpa Krishnan, What I Like About Cummins, www.indiainfoline.com, July 03, 2000.
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3. 4. 5. 6.

Srikant A, Industry Turbulence Is Settling Down -- Cummins India, www.blonnet. com, July 09, 2000. Srikant A, Diesel Engines -- Struggling To Rev Up, www.blonnet.com, July 9, 2000. Out Of the Box, Business India, August 21, 2000. Foote, Nathaniel W; Galbraith, Jay; Hope, Quentin; and Miller, Danny, Making Solution The Answer, McKinsey Quarterly 2001, Issue 3. Bahl, Himalee; Datta, Nandita; and Patel, Sagar, Taking Wing, www.outlookmoney.com, December 14, 2001. Cummins India A Silent Revolution In The Making, www.indiainfoline.com, December 19, 2002. Cummins India A Play On Indias Fastest Growing Sectors? www.indiainfoline.com, January 21, 2003.

14. Plant Power India, www.tve.org, February 2005. 15. www.cumminsindia.com. 16. www.epnet.com. 17. www.engineersandengineers.com. 18. www.egsa.org. 19. www.domain-b.com. 20. www.equitymaster.com. 21. www.pcstats.com. 22. www.powermin.nic.in.

7. 8. 9.

10. Cummins Launches Emission Compliant N14 Series Of Engines, www.economictimes.indiatimes.com, January 07, 2004. 11. Vaidyanathan, P, Industry Sector Analysis Diesel Generating Sets, www.stat-usa.gov, April 28, 2004. 12. Trouble Shooting At Cummins, www.evolution.skf.com, November 03, 2004. 13. Hagel III, John and Brown, John Seely Innovation Blowback: Disruptive Management Practices from Asia, www.mckinseyquarterly.com, 2005, Number I.
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C HAPTER 6

Customer-Driven Marketing Strategy: Creating Value for Target Customers

Introduction Organizations use market segmentation to effectively serve customers who have diverse taste and preferences. Market segmentation refers to the process of dividing a market into groups of customers who have homogenous tastes and preferences. Market segmentation could be done at different levels including mass marketing (assumes all customers to have similar preferences), segment marketing (assumes difference clusters of customers with similar tastes and preferences within the cluster but diverse tastes and preferences with other clusters), niche marketing (subsegments of clusters that seek distinctive tastes and preferences), local marketing (segment of customers in local area such as neighborhoods or regions) and individual marketing (assumes each individual has distinct tastes and preferences). Market segmentation can be carried out on the basis of geographic, demographic, psychographic and behavioral characteristics of the customers. An effective segmentation is one that is measurable, accessible, substantial, differentiable and actionable. After evaluating segment attractiveness, marketers select target market. The last step in developing a market segmentation strategy is developing positioning strategy. Positioning strategy focus on how products and services affect consumers and how they are better than competitors products and services. Positioning involves defining marketing mix variables such that target market has a clear, distinctive and desirable understanding of the products with respect to competing products.

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Section 1

Market Segmentation

Need for Segmenting Markets Modern day consumers are more aware of their needs and are always on the look-out for products that suit their requirements. Hence a greater need for market segmentation arises. It is considered to be the best strategy for targeting markets. If the organization decides which segment to target, it could design its product mix in such a way as to appeal customers of the target segment. The concept of segmentation raises questions like whether the products of the same firm in different segments will reduce the market share of the firm. Market Segmentation Levels Marketers can adopt different levels of market segmentation based on their marketing approach and nature of products. These levels are segment marketing individual marketing, niche marketing and local

marketing (Refer levels of market segmentation figure 6.1.1 for details).

Figure 6.1.1: Levels of Segmentation

The Selection of Segmentation Variables Criteria for segmenting consumer market: Before segmenting the market, the company has to evaluate factors such as the profitability of the segment, its size,

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and accessibility. The size of the market segment should be optimal. The segmentation of consumer markets is based on features like the geographic, demographic, psychographic and behavioral patterns of customers (Refer keynote diagram for consumer market segmentation in detail). Keynote 6.1.1: Consumer Market Segmentation

segmentation of organizational markets as suggested by Bonoma and Shapiro are demographics, operating Keynote 6.1.2: Organizational Market Segmentation

variables, purchasing approaches, situational factors and personal characteristics of the purchasers. (Refer keynote diagram for organizational market segmentation in detail). Criteria for segmenting organizational markets: The segmentation of organizational markets is more complex than that of consumer markets. The variables for Effective Segmentation If all the potential customers exhibit homogeneous needs and wants, the market need not be segmented. But when
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After segmentation, marketers should target those market segments which are most relevant for their products. Evaluating the market segments: While evaluating market segments, marketers should consider the potential of the segment and their ability to tap it. The evaluation of a particular segment by marketers should be in accordance with the fulfillment of organizational objectives. Selecting the market segments: A company should evaluate the different market segments before selecting a particular segment. Targeting the right market segment is tough in the highly competitive business environment. Marketers should select those segments with optimum potential to cater to the target customers. Single segment concentration: Targeting a single segment can benefit the marketer with high sales as all his

marketing efforts are concentrated on the segment. However, if the customers of the segment stop patronizing the product for some reason, the marketer will face severe losses. The marketer can serve a single segment successfully if improvisations are made to the product in keeping with changes in the tastes and preferences of customers. Selective specialization: When a company selects a few market segments to operate in instead of a single segment, it is called selective specialization. The company develops products to fulfill the needs of a few selected segments, thereby minimizing the risk of depending on a single segment. Even if one segment becomes unattractive, other segments can compensate for the overall profits of the organization. For example, HLL has

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different detergent brands like Rin, Wheel, and Surf Excel, each of which targets people of different income levels. Product specialization: Specializing in the manufacture of a single product category and supplying it successfully to different segments of the market earns a company a good reputation. However, there is a risk involved in product specialization. If a competing firm develops a breakthrough technology, it can replace the existing product in the market. Market specialization: Market specialization is different from product specialization in that it involves concentrating on a customer group and becomes a intermediary for additional products catering to different needs. The innate risk in concentrating on a specific market is that if there is a downturn in the market due to external environmental factors, the companys performance gets adversely affected. Full market coverage: Some companies target the full market instead of concentrating on segments. For example, Hewlett Packard offers printers for all segments from home usage to heavy duty color printers at costs ranging from Rs 3,000 to Rs 100,000. Other considerations: The other considerations of marketers in targeting markets are discussed below: Ethical choice of market targets: Marketers should not try to influence people to consume products which are not good for them. For example, it is unethical to encourage children to consume high-fat foods or to promote lotteries to poor people.

Segment interrelationships and super segments: Marketers can take the advantage of the interrelationships between segments by targeting all the related segments as a super segment. They should use the similarity in segments to increase sales. Segment-by-segment invasion plans: Marketers can plan to invade one segment after another so as to finally capture the super segment. This helps in not revealing the steps of organizations to competitors. Inter-segment cooperation: With mutual cooperation and information sharing between various segments targeted by the marketer, developing marketing programs to serve customers of each segment efficiently is possible.

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Section 3

Differentiation and Positioning

Differentiation: Differentiating the product in marketing parlance means stating how the current product is different from its competitors. Product could be differentiated on superior performance, or design or ingredients used in making the product. A product could also be differentiated on non functional aspects also (See Reid & Taylor advertisement). Product differentiation is a concept that is discussed in the context of m a r k e t e r. M a r k e t e r s b e l i e v e t h a t p r o d u c t differentiation adds more value to the product. In some cases, a differentiated product might not add value or even subtract value from the product. One such example could be the case of Crystal Pepsi. Pepsi introduced a new variant called Crystal Pepsi into market stating that a transparent (see through) Pepsi might connote the benefits of caffeine free, healthy cola, however consumers did not perceive

such benefits and the entire exercise turned out to be futile. Companies try to differentiate themselves from competitors on the basis of product, service, distribution channel, image and positioning. Product Differentiation The scope for differentiation of products varies with the nature of the products. Some products like steel, cement, etc. have less scope for differentiation than products in the categories of consumer durables. Marketers find it tough to make a decision about product differentiation when there are many features of a product which can be used for differentiation. For example, a washing machine can be differentiated based on its capacity (3kg, 5kg, etc.) or mode of loading clothes like front loading, top loading, etc. Further, it can also be differentiated on the basis of additional features like timer, automatic drying, and

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various technological aspects such as interactive washing, sixth sense cleaning, etc. Product differentiation can be based on form, design, features, quality, durability, size, reparability, etc. Service Differentiation Differentiation based on physical and tangible attributes is very difficult in the case of some products. In such cases, rivals can easily imitate the products physical features. Therefore, some companies differentiate themselves from competitors through intangible attributes i.e. services. Service differentiation can be done through ordering ease, delivery, installation, ease of payment, customer training, financial arrangements, guarantees, maintenance, repair, and disposal. Both the tangible and intangible attributes of a product can be used in service differentiation. Personnel Differentiation In the competitive business environment, companies try to differentiate themselves from competitors in various ways. As the technology used by companies can be acquired easily by competitors also, companies depend on regular innovation of products, strategies, and processes for differentiation. As people are an integral part of innovation, organizations can gain a competitive advantage through their personnel. Providing efficient training to staff can help organizations to have a competitive edge over rivals. Personnel differentiation has prominence in the service industry. For example, hotels and restaurants, airline

companies, etc., train their employees to serve customers efficiently. Differentiation of an organization can be based on the qualities of personnel like courteousness, competence, c r e d i b i l i t y, r e l i a b i l i t y, r e s p o n s i v e n e s s a n d g o o d communication skills. Channel Differentiation A firm can use a distinct distribution channel for differentiating its products from those of its competitors. Value can be added to the products of the company by channels that carry the product. Channel differentiation can be attained through the use of various distribution channels for reaching markets. When the product is made readily available to customers, it reduces their effort in the search process and makes them habitual buyers. For example, Dell Computers replaced traditional distribution channels for distributing computers with a new distribution channel known as direct marketing. The company began to directly takes orders and make sales based on telephone calls from customers. Online marketing firms use a different distribution channel to supply goods as and when the order is received from customers. For instance, Amazon.com ships books and other products to customers worldwide when they place an order after visiting the website on the Internet. Image Differentiation
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The image of a company and its brand name influence the purchase decision of many consumers. Companies spend large amounts on promoting their features and this builds up their image. Maintaining the image is important for all sizes of organizations. Both the big and small companies need to maintain a positive image in the market for better prospects. But it takes lot of effort on the part of companies to maintain a consistent image. Companies communicate their image to customers through their management, symbols, company logo, atmosphere, events, etc. Positioning Positioning is a term used initially by Al Ries and Ja ck Tro u t i n 1972. They were of the opinion that positioning relates more to influencing the mind of customers than doing anything to a product. Marketers and advertisers adopt various positioning strategies to give their products an edge over competitors products.
Video 6.3.1: Positioning (Part 1)

Differentiation and positioning are closely related concepts, w h e r e Video 6.3.1: Positioning (Part 2) differentiation is discussed from the context of marketer, brand positioning is discussed from the context of individual consumer. Positioning entails creating a distinctive space in the minds of the consumers. After target segments are identified by the marketer, product has to be positioned on those attributes which targeted segment(s) see as relevant. Objective of positioning exercise is to create an image for the product that is different from rest of its competitors. This could be done in various ways as discussed below: Attribute-based positioning : Colgate active salt promotes its tooth paste as the only toothpaste that has salt in it. Benefits of salt are further illustrated. Benefits-based positioning: Lux bath soap has been positioned as secret of the beauty of film stars. Applications-based positioning: In this form of positioning, product is being portrayed for its ability to be used for more than one application. For example, iPad is featured as a device that can be used for multiple purposes such as surfing internet, watching movies, playing games and reading books.
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How to position?

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User based positioning: Bacardi ads emphasize upon its users alone. A typical Bacardi consumer is portrayed as the one who is young urban and actively enjoys night life. No mention is made about the ingredients of this drink or its taste. Competitor-based positioning: In this form of positioning, a brand is promoted as better than its competitors. Lifebuoy shampoo is promoted as an alternative that is better when compared to soaps and benefits of using Lifebuoy shampoo are further illustrated. Value-based positioning: This form of positioning relies on more value for money. Big Bazaar is positioned on these lines. Its tag line is best quality at low prices. Positioning tool: Perceptual Map
Video 6.3.2: Perceptual Map

represented on this map in a particular location depending upon the performance of that brand upon the set of attributes. Positioning gap may be understood as the space in map that is occupied by relatively less number of competitors or having no competitors at all. Depending upon feasibility and relevance, company might want to occupy this space. In positioning terms this space translates to as the space in minds of consumers that is not yet occupied by existing brands and if any new brand occupies such space, it is most likely to be perceived as a different from others. Communicating and delivering the chosen position: Every attempt should be made to live up to what is promised in terms of product positioning. For example, Nordstrom story. Maintain the position with focus and not move away from it. For example, Harley Davidson story Should match to changes of in preferences of consumers. For example, Black berry story. References: Listen from Guru of Positioning about little ladders in mind Read Positioning the battle for your mind by Al Ries and Jack Trout. This book is rated as one of the best marketing classics which every marketing manager should read.

Perceptual map is generally a two dimensional graph having four quadrants. Positioning map allows brands to be compared on set of attributes. Each competitor brand is

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Section 4

Case Study: BMWs Company of Ideas Campaign: Targeting the Creative Class

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We are eager to unveil this smart and original campaign that communicates BMWs culture of creativity so thoroughly. BMW has carved out a unique niche in the industry by placing a premium on constant innovation and inspiration, and this campaign will reveal the company behind The Ultimate Driving Machine.1 Jack Pitney, Vice President, Marketing at BMW of North America LLC, in 2006. What a load of manure. BMW long lived by the power of the idea of performance driving. Now theyve decided to jettison that history in favor of New Age marketing mumbo-jumbo Theyve sold their birthright for a bunch of Bangled pottage. A great pity.2 Professor Stephen Bainbridge, law professor at UCLA, in 2006. FIXING WHAT AINT BROKEN? In May 2006, BMW of North America LLC (BMW LLC), the North American arm of German Video: BMW Company automobiles major BMW AG, released a new advertising campaign of Ideas Campaign promoting itself as a company of ideas. This move took many by surprise. The tone and tenor of the new campaign were a huge departure from the companys communications in the past. The series of new ads no longer stressed BMWs performance, but strove to project its design prowess and corporate culture that fostered innovation. In doing so, the company said that they wanted to take

their brand beyond yuppies and attract Figure : BMW Tagline used for the a wider section of last three decades the affluent class. Many analysts were surprised as 2005 had been a good year for BMW in the US, and companies didnt usually deviate from a strategy Source:www.automanualsonline.com or formula that had proved successful. In 2005, BMW LLC reported record annual sales of 307,020 vehicles (BMW and MINI brands combined) in the US, up 4% over the 296,111 vehicles sold in 2004. The annual sales in 2005, for the BMW brand (BMW automobiles and BMW SAV combined), was 266,200 units, up 2.4% when compared to 260,079 units in 2004. Tom Purves (Purves), Chairman and CEO of BMW (US) Holding Corp., commented: This is a strong finish to a year marked with numerous model changeovers. Weve only had full availability of our new award-winning 3 Series sedans in the past two to three months. Given that, and changeovers in the 7 Series and 5 Series, we are especially pleased with the annual increases.3 Despite the good sales performance, Jack Pitney (Pitney), vice president, marketing at BMW LLC felt that almost 75% of luxury car buyers in the US were not considering BMW as they still strongly associated it with the yuppie phenomenon of the 1980s. Thus, the company was banking on this new company
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of ideas ad campaign to redress this situation and expand its market. Though the ads received rave reviews from various quarters, some analysts felt that BMW was losing its soul by moving away from the theme of driving and performance. According to marketing expert Al Ries (Ries), BMW owned the word driving and this had been etched in the minds of consumers over a period of three decades with the tagline The Ultimate Driving Machine. Others felt that the ads fell under the heading of preventive maintenance as it came at a time when there was no real need for BMW to upset the cart. A few other analysts felt that BMW was losing its soul by trying to be everything to everyone. BACKGROUND NOTE BMW Group AG BMW was founded in 1913, when Karl Friedrich Rapp (Rapp) set up Bayerische Flugzeug-Werke to manufacture aircraft engines in the Munich district of Germany. In 1916, during World War I, the company entered into a contract to manufacture aircraft engines Video: BMW Prole (Part I) for the Austria-Hungarian army. In 1917, to meet the need for additional funds, Rapp gained the support of Camillo Castiglioni and Max Friz and the company rechristened as Bayerische Motoren Werke GmbH. In the same year, the company ran into difficulties because of over-expansion. It was taken over by Franz Josef Pope and in 1918 he named it BMW AG.

Video: BMW Profile (Part II)

F IGURE 6.1 BMW - 328 Roadster

ing experts like Ries had decried the fact that BMW was moving away from its core brand proposition. Some analysts felt that BMW had taken a big risk by moving away from its core brand proposition and giving in to new age marketing mumbo jumbo. Footnotes: 1. BMW Unveils New Ad Campaign, www.strategiy.com, May 9, 2006. 2. BMW Losing its Soul, www.professorbainbridge.com, May 8, 2006. 3. BMW Sets All Time Annual Sales Record in 2005, www.internetautoguide.com, January 4, 2006. 4. Al Ries and Laura Ries, The 22 Immutable Laws of Branding, 2000. 5. Al Ries and Laura Ries, The 22 Immutable Laws of Branding, 2000. 6. D a v i d K i l e y, B M W Ta r g e t s N e w D r i v e r s , www.businessweek.com, May 5, 2006. 7. Neal E Boudette and Gina Chon, Brawny BMW Seeks the Idea Class, www.moneyweb.co.za, August 2, 2006. 8. David Kiley, BMW Chooses Texas-based GSD&M as its New Ad Agency, www.businessweek.com, November 14, 2005. 9. Richard Florida, The Rise of the Creative Class, Basic Books, 2002. 10. Richard Florida, The Rise of the Creative Class, Basic Books, 2002. 11. D a v i d K i l e y, B M W Ta r g e t s N e w D r i v e r s , www.businessweek.com, May 5, 2006. 12. Richard Florida, The Rise of the Creative Class, Basic Books, 2002.

13. BMW Unveils New Ad Campaign, www.strategiy.com, May 9, 2006. 14. Claudia Grisales, GSD&M Takes Different Road with New BMW Ads, www.statesman.com, May 09, 2006. 15. B M W U n v e i l s N e w A d C a m p a i g n , www.theautochannel.com, May 8, 2006. 16. Neal E Boudette and Gina Chon, Brawny BMW Seeks t h e I d e a C l a s s , w w w. m o n e y w e b . c o . z a , August 2, 2006. 17. B M W U n v e i l s N e w A d C a m p a i g n , www.theautochannel.com, May 8, 2006. 18. BMW's New Ad Campaign Brilliant? Should GM be Listening? www.autospies.com, May 10, 2006.

Additional Readings and References: 1. Al Ries and Laura Ries, The 22 Immutable Laws of Branding, 2000. 2. Richard Florida, The Rise of the Creative Class, Basic Books, 2002. 3. Mukund and Neela Radhika, BMW: Going on the Offensive, www.icmrindia.org, 2003. 4. Mukund and Neela Radhika, BMWs Innovation Strategies, www.icmrindia.org, 2003. 5. Mukund and Neela Radhika, Innovation at BMW, www.icmrindia.org, 2003. 6. Brief, the Impossible Brief An Open Letter to BMW, www.jaffejuice.com, August 11, 2005. 7. BMW Films No More, www.jaffejuice.com, September 30, 2005. 8. David Kiley, BMW Chooses Texas-based GSD&M as its
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New Ad Agency, www.businessweek.com, November 14, 2005. 9. Sanjib Dutta and Shirisha Regani, Mass Customization The BMW Way, www.icmrindia.org, 2005. 10. BMW Sets All Time Annual Sales Record in 2005, www.internetautoguide.com, January 4, 2006. 11. Jeremy Mullman, GSD&M, Publicis Win BMW Dealers Creative Ad Account, www.adage.com, April 7, 2006. 12. D a v i d K i l e y , B M W Ta r g e t s N e w D r i v e r s , www.businessweek.com, May 5, 2006. 13. Richard Williamson, BMW Targets Creative Class www.adweek.com, May 5, 2006. 14. BMW Losing its Soul, www.professorbainbridge.com, May 8, 2006. 15. B M W U n v e i l s N e w A d v e r t i s i n g C a m p a i g n , www.bmwusa.com, May 8, 2006. 16. BMW Unveils New Ad Campaign, www.strategiy.com, May 9, 2006. 17. Jenny Munro, BMWs New Ad Campaign Features Upstate Plant, www.greenvilleonline.com, May 9, 2006. 18. Claudia Grisales, GSD&M Takes Different Road with New BMW Ads, www.statesman.com, May 09, 2006. 19. BMWs New Ad Campaign Brilliant? Should GM be listening? www.autospies.com, May 10, 2006. 20. BMW Targets Creative Class, www.designtaxi.com, May 10, 2006. 21. Jim Burt, BMW Goes for Kindler and Gentler, www.thecarconnection.com, May 15, 2006. 22. B M W G i v e s Y u p p i e s t h e H e a v e - H o , www.gminsidenews.com, May, 2006.

23. Neal E Boudette and Gina Chon, Brawny BMW Seeks the Idea Class, www.moneyweb.co.za, August 2, 2006. 24. BMW Group AG Annual Report, 2005, www.bmw.com, 2006. 25. Financial Statements of BMW AG - Financial Year 2005, www.bmwgroup.com. 26. www.answers.com. 27. www.autospies.com. 28. www.bmw.com. 29. www.bmwcca.org. 30. www.bmwgroupna.com. 31. www.bmwmotorradusa.com. 32. www.bmwusa.com. 33. www.bmwworld.com. 34. www.en.wikipedia.org. 35.

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F IGURE 6.17
Exhibit II BMW Headquarters

F IGURE 6.18:
Exhibit I The BMW Logo

Source: www.en.wikipedia.org.

Source: www.bmw.com.

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Exhibit III: BMWs Key Financials (2001-05) 2001 Vehicle Production (Units) BMW MINI Rolls-Royce Motorcycles Deliveries to Customers (Units) BMW MINI Rolls-Royce Motorcycles Workforce at end of year (All financial figures are in Euros million) Revenues Capital expenditure Depreciation and amortization Cash flow Operating cash flow 4,304 Profit before taxs Net Profit Source: BMW Group AG Annual Report, 2005. 3,242 1,866 4,553 3,297 2,020 4,970 3,205 1,947 6,157 3,583 2,242 6,184 3,287 2,239 0.4 -8.3 -0.1 38,463 3,516 2,159 4,202 38,463 4,042 2,143 4,374 41,525 4,245 2,370 4,490 44,335 4,347 2,672 5,187 46,656 3,993 3,025 5,602 5.2 -8.1 13.2 8 880,677 24,980 84,713 97,275 913,225 144,119 92,599 101,395 913,225 176,465 300 92,962 104,342 1,023,583 184,357 792 92,266 105,972 1,126,768 200,428 796 97,474 105,798 10.1 8.7 0.5 5.6 -0.2 904,335 42,395 90,478 930,221 160,037 93,010 944,072 174,366 502 89,745 1,059,978 189,492 875 93,836 1,122,308 200,119 692 92,012 5.9 5.6 -20.9 -1.9 2002 2003 2004 2005 Growth 2005-2004 (%)

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Section 5

Case Study: Obesity Concerns: Burger Kings Product Revamp

This case study was written by M Dakshi under the guidance of T Phani Madhav, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources.

2005, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.
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The whole point about fast food is to get people to eat in a hurry, while our advice to avoid obesity is to eat more slowly. So there is an inherent contradiction there.1 Marion Nestle, Author, Food Politics Every major foodmaker is terrified about lawsuits. All big food companies are re-examining their product lines and how they market them.2 Marion Nestle, Author, Food Politics A large majority of our customer base still enjoy fully loaded, high-quality cheeseburgers, so we dont see this as some kind of sea change. But its a change that we felt was warranted in order to give all our customers options they feel comfortable with in terms of diet.3 Russ Klein, Chief Marketing Officer, Burger King Introduction In 1999, research conducted by Centers for Disease Control and Prevention, the US Federal Agency for protecting the health and safety of people, revealed that about 61% of US adults and 15% of children and adolescents aged between 6 19 years were either obese or overweight.4 Gradually, obesity became a major health crisis that many in the medical community referred to as an epidemic. The rising obesity levels resulted in a situation where the focus shifted on to fast food, with health experts projecting it as a health menace comparable to alcohol and tobacco. Critics alleged that the fast food companies were aggressively marketing and serving foods

that were high in calorie content with little nutritional value. In mid-2002, a lawsuit was filed against four big fast food companies McDonalds Corporation, Burger King Corporation, Wendys and KFC Corporation, charging that their fatty foods were responsible for obesity crisis and health-related problems. Though the lawsuit was dismissed later, there was a growing consciousness about obesity and health among most Americans. Consequently, the same-store sales at fast food chains such as McDonalds Corporation and Burger King Corporation (Burger King) began to decline. Miami-based Burger King, the worlds second largest fast food chain,5 witnessed continual slump in its sales for five years. The companys sales in US reached $7.75 billion in 2003, down from $10.3 billion in 1998. Burger Kings hamburger market share fell from 18.5% in 2001 to 15.6% in 2003.6 Though Burger King had problems on many fronts (like price wars among the fast food chains, untidy restaurants and menu problems), analysts attributed the companys association with unhealthy foods as one of the reasons for its declining sales.7 As part ofrevamping strategy, Burger King initiated a slew Video: Burger King Have it Your Way TVC of 1974 of changes in its menu to enter the health food segment. The company introduced its new fresh-baked baguette sandwich line with a valuemeal option of salad and bottled water. It also came up with a bunless burger for the low-carb dieter. The company
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also rolled out a new nutrition information guide, both in-store and online. In addition, it reintroduced its 1974 advertisement slogan Have It Your Way, which highlighted that consumers could customise their own items as per their requirements. Analysts mentioned that the new products and new campaign had been instrumental in increasing the revenues of the company after five years of declining sales. In May 2004, the same-store sales at company-owned stores increased by 7.5% compared to same period in 2003.8 Burger King sources mentioned that the company had not seen such high gains in same-store sales since November 1999. The company attributed the success to the introduction of new products, the launch of new advertising and improved focus on restaurant operations.9 Obesity and Fast Food Industry Centers for Disease Control and Prevention found that the obesity rate in US was rising at an alarming rate. A study undertaken by the agency in 1999 revealed that an F IGURE 6.19 Obesity and Fast estimated 30% of US Food Industry in the US 1976-2002 adults aged 20 years and older nearly 59 million people were obese (having a body mass index of 30 or more). The study also showed that Americans had increased Source: http://1.bp.blogspot.com their calorie and carbohydrate intake over the

past 30 years. The average daily calorie intake of women was 1,877 calories (1,542 in 1971) and that of men was 2,618 calories (2,450 in 1971).10 Moreover, the US food industry produced about 3,800 calories a day per person, which was about 30% more than what a man needed and nearly double of what a woman needed per day. Lack of proper exercise and the increase in the average daily intake of calories resulted in an average weight gain of 22 pounds per year for men and 11 pounds for women. Some research studies linked obesity to an increased risk of developing a number of health problems like heart disease, diabetes and some cancers (Exhibit-I). The US Surgeon General mentioned that in 2000, health costs related to obesity totalled $117 billion $61 billion in direct costs and $56 billion in indirect costs.11 According to an estimate by Centers for Disease Control and Prevention, obesity led to 400,000 deaths annually in US.12 Traditionally, maintaining ones weight was considered an issue of personal responsibility. However, with the widespread attention obesity was getting, there was a transition from blaming individuals to blaming society and the fast food industry in particular. Attention was drawn towards more than $110 billion spent on fast food in 2000 by the Americans. That was more than their combined expenditure on movies, books, magazines, recorded music and videos (They had spent only $6 billion on fast food in 1970). As the pace of American lifestyles increased, people did not find enough time to cook their meals. Analysts stated that because most of the fast food was quite tasty, cheap, convenient and readily available, consumers preferred them to regular meals. While the proportion of food consumed away-from-home increased from 16% to 27% be181

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Exhibit-I Health Problems Associated with Obesity Research studies showed that obesity increased the risk of developing a number of health problems such as: Premature death Type 2 diabetes Heart disease Stroke Hypertension Gallbladder disease Osteoarthritis (degeneration of cartilage and bone in joints) Sleep apnea Asthma Breathing problems Cancer (endometrial, colon, kidney, esophageal, and postmenopausal breast cancer) High blood cholesterol Complications of pregnancy Menstrual irregularities Hirsutism (presence of excess body and facial hair) Stress incontinence (urine leakage caused by weak pelvic-floor muscles) Increased surgical risk Psychological disorders such as depression Psychological difficulties due to social stigmatization

Source: Physical Activity Fundamental To Preventing Disease, www.aspe.hhs.gov, June 20th 2002
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EXHIBIT II - Away-From-Home Calorie and Fat Intake

Source:Eskin, Sandra B. and Hermanson, Sharon Nutrition Labeling at Fast-Food and Other Chain Restaurants, www.research.aarp.org

tween 1978 and 1995, away-fromhome calorie i n t a k e i ncreased from 18% to 34% and fat intake from awayfrom-home foods also increased from 19% to 38% between the same period

F IGURE 6.20 Fast Food and Obesity Interlinked

ries. The larger size also provided almost three-quarters of a days worth of arteryclogging saturated fat.

(Exhibit-II). Moreover, super-size bags and value meals became popular since consumers got a greater quantity of food at a comparatively lesser price. Fast food was usually bundle priced; a hamburger, fries and a soft drink cost less if bought together rather than separately. As a result, consumers were getting accustomed to bigger meals. A report titled From Wallet To Waistline: The Hidden Costs of Super Sizing by the National Alliance for Nutrition and Activity revealed that the practice of bundling turning a fast-food sandwich into a value meal by adding items like fries and a soft drink was responsible for some of the largest increases in calorie content. The report indicated that:13 Upgrading from a 3-ounce Minibon to a Classic Cinnabon cost only 24% more, yet delivered 123% more calo-

Switching from 7-Elevens Source: http://assets.treesd.com Gulp to a Double Gulp cost 42% more, but provided 300% more calories. Those 37 extra cents delivered 450 extra calories more than you would get in a McDonalds Quarter Pounder. It cost 8 cents more to purchase a McDonalds Quarter Pounder with Cheese, small French fries, and small Coke (890 calories) separately than it cost to buy the Quarter Pounder with Cheese large Extra Value Meal, which came with large fries and large Coke (1,380 calories). McDonalds actually charges customers more to buy a smaller, lower-calorie meal, said Margo Wootan, Director of nutrition policy at the Center for Science in the Public Interest. Moving from a small to a medium bag of movie theater popcorn cost about 71 cents and 500 calories. A 23% increase in price provided 125% more calories and two
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to get a lot more food. Getting more for your money is ingrained in the American psyche. But bigger is rarely better when it comes to food.15 In addition, fast f o o d c o m p a n i e s i ncreased their spending on advertisements to attract more customers. The US food industry spent about $33 billion a year on advertisements and promotion of junk foods. Marion Nestle, author of Food Politics said, When you have $33 billion of marketing aimed at you, challenging you to eat more at all times, its difficult not to eat too much.16 EXHIBIT III
Obesity prevalent among Children Source: www.livelightobesity.org

days worth of saturated fat. (And thats unbuttered popcorn!) Furthermore, the researchers at the University of North Carolina revealed that the average portion size in America grew 60% from the late 1970s to the mid-1990s. Soft drink sizes grew by 50% or 49 calories; hamburger portions increased by 23% or 97 calories; and French-fried potatoes increased by 16% or 68 calories.14 In the context of increase in portion sizes, Margo Wootan said, Americans are constantly induced to spend a little more money

Obesity was not only prevalent among adults, it was also widespread among children. It was found that in 1999, an estimated 15% of children and adolescents aged between 619 years were either obese or overweight (Exhibit-III). Health experts felt that there were three major factors contributing to the rising levels of obesity among children: the increase in portion sizes, the availability of foods and beverages at schools as well as the discontinuation of physical education as part of the curriculum. The fast food companies also targeted their advertisements at children (An average American child watched 19 hours and 40 minutes of TV per week). In 1987, an average of 225 commercials were aired during Saturday morning cartoon hours. But in the mid1990s, the number of commercials had increased to 997 and

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EXHIBIT IV

two-third of those advertisements promoted candies and fast food.

There was also a rapid increase in the number of fast food outlets in schools. In the early 1990s, only 2% of US Source: Low Carb: The New Fat Free?, www2.acnielsen.com schools offered brand-name fast food. But by late 1990s, 13% of the schools sold fast foods. It was found that on days when kids ate fast food, they consumed an average of 187 more calories than on days without fast food. Since, on an average, an American kid ate a fast-food meal one out of every three days, that accounted for an extra six pounds of weight gained a year.17 The calorie and fat rich menu of the fast food companies attracted a lot of criticism from weightwatchers and parents of obese children (Exhibit-IV). The alarming rate of increase in obesity and weight-related problems among US populace led to numerous protests and anti-obesity campaigns. Public Outcry against Fast Food Companies In mid-2002, a New York City lawyer, Samuel Hirsch filed a lawsuit in New York State Supreme Court in Bronx against the four big fast food companies McDonalds Corporation, Burger King, Wendys and KFC Corporation charging that their fatty foods were responsible for his clients (Caesar Barber, a 56-

year-old maintenance worker) obesity and health- related problems. He alleged that the four big fast food chains were irresponsible and deceptive in posting the nutritional information and jeopardised his clients health with their greasy, salty and sugary fare. The lawsuit claimed that fast food chains were negligent in selling food high in fat, salt, sugar, and cholesterol content despite studies showing a link between consuming such foods and obesity. Caesar Barbers lawsuit was the first broad-based allegation made against the fast food industry for contributing to obesity. He said, The fast food restaurants did not properly disclose the ingredients of their food and the risks of eating too much. They never explained to me what I was eating.18 However, the proponents of food industry opposed the claims made in the lawsuit. John Doyle, co-founder of Center for Consumer Freedom, a restaurant industry group, said, He must be aware that fully twothirds of all foods consumed in America are consumed in peoples homes. Is he proposing that we sue Americas moms?19 On the other hand, some nutrition advocates and some doctor groups insisted that the food industry, which spent billions of dollars each year on advertising junk foods and sugary drinks, should at least share some blame for the creeping problem of obesity.20 Some industry experts said that the class action lawyers saw a big opportunity like that of lawsuits against tobacco giants who had to pay $246 billion in 1998. Analysts opined that there were some important similarities between smoking and overeating. Both were causes of poor health; both were associated with very large social cost; both were heavily promoted; and both had specific marketing efforts targeted at young people.21 Some
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EXHIBIT V Sales Comparison of some Fast Food Companies FY 2002 Sales ($m) % growth No. of outlets % change Sales / outlet ($000) Presence in countries Focus McDonalds 41526 2% 31108 3% 1335 118 Global Yum! Brands 24219 8% 32924 8% 736 >100 Global Burger King 11300 1% 11401 0% 991 58 Global Wendys 9356 13% 8811 7% 1062 2 Regional Quick 679 0% 411 -5% 1652 4 Regional Brinker Intl 3402 12% 1268 11% 2683 22 Regional Panera Bread 755 43% 478 30% 1579 1 Local Subway 5773 12% 18499 17% 312 73 Global Quiznos 726 67% 1963 36% 370 13 Regional

Source: Naik, Sapna Can fastfood be healthy?, www.rabobank.com, June 2003:

other analysts felt that lawsuits against fast food companies would adopt a similar approach to that used against tobacco firms: targeting the way companies marketed their products. And as in the tobacco suit, lawyers might claim that fast food could be addictive suggesting fats and sugars might have addictive qualities similar to nicotine or heroin.22 Some industry experts felt that the possibility of class-action lawsuits created a strong incentive for lawyers. Attorneys could make huge amount of money by winning class actions, as exemplified by the tobacco settlement. Some lawyers who had earlier focussed on tobacco industry began to target the fast food industry.

At the same time, the awareness about obesity-related problems and health among most Americans began to increase when the US Surgeon General mentioned that health costs related to obesity totalled $117 billion in 2000. With the rise in obesity-related health problems, the Americans started blaming the fast food chains for promoting high fat and high calorie foods with less nutritional value. Consequently, the same-store sales at many fast food chains were declining (Exhibit-V). A new business called fast casual started gaining popularity. Typically, the fast casual restaurants were Mexican outlets that attracted traditional American diners with their healthier and high quality menus comprising of fresh and varied foods like gourmet
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sandwiches, salads and soups. With sales of $5 billion a year, fast casual was tiny compared to the $153 billion fast food industry, but it was growing by 12% a year.23 It was observed that spending on natural and organic food was also increasing. About 48% of US consumers used organic products at least occasionally and retail sales of organic products reached about $9 billion in 2001. Analysts predicted that the retail sales of organic products would grow by about 20% a year and would reach $20 billion by 2005.24 Observing the consumers preference for health foods and to counter the lawsuits (which presented the fast food chains in a poor light), the fast food companies initiated an image makeover by focussing on health food segment. McDonalds Corporation introduced salads under the Premium Salads range like Fiesta and California Cobb salads in addition to white meat and other healthy options. It also came up with promotional campaigns highlighting the benefits of a healthy lifestyle and physical activity. SUBWAY Restaurants came up with sandwiches that provided a healthy mix of nutrients. The company also made changes to its Kids Pak meal, which included a 100% juice instead of a soft drink, a fruit roll-up instead of a cookie and a toy that encouraged physical activity. In addition, the restaurants provided Jareds Steps to Healthier Kids information cards. The restaurant also launched a web site that included educational games and health information.25 Schlotzskys also came up with a menu that featured 13 items with nine or lesser grams of fat. Consequently, by mid-2004, revenues of McDonalds Corporation, SUBWAY Restaurants, Panera Bread, and Quiznos were growing at a faster rate due to the newer healthier options they provided to their consumers.

Burger King The Image Makeover In 2002, a research study conducted by Center for Science in the Public Interest, a Washington-based health advocacy group, identified Burger King as the top provider of worst fast foods. The top five in the worst fast food list included:26

F IGURE 6.21 Burger Kings Top Five included in the

Worst Fast Food List

Source: www.lifewithgames.com

Burger King Old Fashioned Ice Cream Shake: It looked like an ordinary shake. But, a medium (22 oz.) Ice Cream Shake had 760 calories and 29 grams of fat (1 12 days worth). A large (32 oz.) Ice Cream Shake contained 1,200 calories and 42 grams of saturated plus trans fat that increased the chances of getting heart diseases. Burger King managed to design a drink that was worse for heart than even the worst burgers. Burger King Fries: Burger Kings French Fries were the worst. A King Size order had 600 calories and 30 grams of fat, 16 of which were saturated plus trans fat. Fries
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might look like a side dish, but when it came to calories and heart-threatening fat, they were really burgers in disguise. Burger King Hash Browns: This breakfast side order could ruin your diet for the entire day. A large order had 15 grams (three-quarters of a days worth) of saturated plus trans fat. Burger King Double Whopper with Cheese: A wider burger and a wider bun made a single Whopper worse than a Quarter Pounder with Cheese or a Big Mac. A second slab of beef brought the total to 1,150 calories and 33 grams of saturated plus trans fat. Value Meals: All Value Meals offered an economic incentive to stuff your gut, and Burger Kings were the worst. A Burger King Whopper Value Meals calories ranged from 1,300 to 1,800 depending on the size of the soft drink and the fries. A Double Whopper ranged from 1,600 to 2,100 calories. The Chicken Whopper Jr. Value Meal cut some saturated fat, but with the fries and soda, it was a long way from a healthy diet. With competitors like McDonalds Corporation and SUBWAY Restaurants shifting their focus to genuinely healthy food items like salads and sandwiches, Burger King unveiled a new strategy to enter into health food category. Burger King had earlier introduced a range of health foods in the late 1980s, but all its products had flopped at that time. The company had initially experimented with veggie burgers, but it

was withdrawn from the market because of lack of demand. In the early 1990s, the company teamed up with weight watchers to offer frozen meals but that were pulled out of market.27 By all accounts, in the light of public outcry against fast food companies, selling unhealthy products was difficult, but selling healthy foods could be tough too, as Burger King had discovered in the late 1980s. But a market survey conducted by Burger King found that consumers got frustrated when they could not find healthy food to eat in a fast food restaurant. In 2000, the company began a new policy of chiding consumers that workers could identify as being obese. This is the first move of its kind. We will still offer the same great-tasting food that our customers love, but our more over-weight patrons will be given incentives to either purchase healthier items on the menu or go on suing some other major corporation,28 said Dennis Malamatinas, the then CEO of the company. However, the industry experts opined that the move by the company was an attempt to usurp McDonalds Corporation to become the leader in fast food franchises by encouraging healthier eating habits. In 2003, having observed the consumers shift in preference for health foods, Burger King stepped up its efforts to cater to increasingly healthconscious diners. Burger King developed special menu items for diners who were conscious of their calorie, carbohydrate and fat intake. On September 18th 2003, the company introduced a new line of low-fat, fire-grilled, baguette-style chicken sandwiches. The new grilled chicken sandwich, topped with grilled vegetables and one of three savoury sauces, contained only five grams of fat and 350 calories. In contrast, a Whopper with cheese
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had 780 calories and 47 grams of F IGURE 6.22 Burger King low fat fat. The chicken sandwiches sandwich baguette line was available i n t w o d i ff e r e n t value-meal options: The sandwiches could be ordered as part of a tradiSource: http://s3-media4.ak.yelpcdn.com tional value meal (a soft drink and medium fries) or as a part of Lite Combo Meal with a side salad and a bottle of water. The company also promoted the new sandwiches focussing on its low fat content flavor from grilling, not from fat. It also signed up celebrities to endorse the new sandwiches. Chef Rick Bayless of Chicago, who had won top culinary awards for his Mexican cuisine promoted the sandwiches in a commercial. Research studies had shown that consumers typically perceived healthy fast food items to taste bad. The company partnered with some chefs like Rick Bayless to give its health foods good taste. The only way were going to build our business over the long term is theyre going to have to taste good,29 said Bradley D. Blum, the then CEO of Burger King. An article by Marion Burros in New York Times stated that Burger Kings Smoky Barbeque and Santa Fe chicken sandwiches w e r e t h e w i n n e r s o f t h e n e w h e a l t h y c r o p .30 In January 2004, Burger King introduced a low-carbohydrate version of Whopper hamburger omitting the bun. The lowcarbohydrate Whoppers could be ordered as part of a value

meal with a side salad and diet soda. It was sold in plastic salad bowls with knife and fork. The bunless Whopper had three grams of carbohydrates, compared with 52 for a regular Whopper. The company published a full-page advertisement of the productin USA Today. It also introduced Whopper meals that substituted salads for French fries and bottled water for soft drinks. Company sources expressed that an increased number of requests from the customers over the years had led the company to introduce the product. However, some industry experts predicted that bunless burgers would not be a successful health food. An analyst said, This wont be a big segment of the (burger) market. I dont see it lasting very long.31 Some other analysts opined that the price of the new product seemed to be unappealing to customers, as it remained the same with or without bun. In March 2004, Burger King rolled out its new salad line, which included a pouch that kept the meat or seafood toppings hot. The company also provided more fruit, vegetable and yoghurt options. It also introduced a new fried-chicken sandwich called TenderCrisp, which was served on a bun that looked more like it came from Panera Bread than from a fast food restaurant.32 During the same period, after changing five advertisement agencies in five years, the company hired Miami- based advertising agency, Crispin Porter + Bogusky. Though the agency had never handled a client with a huge advertisement budget, it was widely regarded as the advertising worlds reigning creative hot shop.33 The company changed the advertising campaign and reintroduced its 1974 slogan Have It Your Way, which denoted that consumers could customise their items as per their requirements.
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Crispin Porter + Bogusky also discovered that the marketplace was getting increasingly cynical and detached and so, it embarked on a branding campaign to get personal with the customer. The first advertisement that was aired on television featured a group of young office workers who were between eighteen to twenty-four years old. They stand around while a coworker handed out lunches from a big Burger King bag. Exercising their rights to have it their way, they competed with each other to come up with the most outlandish and innovative sandwich. All the packaging, design and policies reflected the Have It Your Way philosophy. The company also introduced a new ethos No Make Fun Policy, in which the F IGURE 6.23 Burger Kings Three employees would New Products not make fun of customers, no matter how weird or finicky the order they placed.34 The results for April 2004 showed that Source; http://singapore-promotions.com the sales at company restaurants had increased by 7.3%, year on year and franchise sales had increased by 3.4%, also year on year. While there is still much work to be done, were beginning to see results. We are encouraged that February 2004 marked the first time the system had positive sales comparisons in 21 months, and April 2004 was the single high-

est positive comparative month for company restaurants since November 1999. In the past three months, 5,000 BURGER KING restaurants in the United States experienced sales comp growth of +9 percent,35 said Bradley D. Blum. The company attributed the success to the introduction of new products, the launch of new advertisements and improved focus on restaurant operations.36 In May 2004, the same-store revenues at company-owned stores increased by 16%.37 The company sources revealed that the sales of three new products TenderCrisp and Spicy TenderCrisp chicken sandwiches, the Angus Steak Burger and Fire-Grilled Salads had exceeded the companys expectations. In comparison to Wendys chicken sandwiches, diners indicated that the Burger King sandwiches (TenderCrisp and Spicy TenderCrisp chicken sandwiches) were preferred. The consumer reaction to Fire-Grilled Salads was also equally positive. Bradley D. Blum noted, In initial product testing, the vast majority of consumers rated our Fire-Grilled Salads better than or equal to those salads offered by McDonalds and Wendys.38 The selection of advertising agency Crispin Porter + Bogusky also was producing solid results. According to industry sources, ranging from the Wall Street Journal to AdWeek, Burger Kings new advertising to the companys core consumers was setting the national ad curve for recall, memorability and likeability key measurements that helped to determine the effectiveness of advertising.39 Industry analysts opined that in early 2004 Have It Your Way slogan had helped in increasing the same-store sales by 4.4%.40 Meanwhile, the company also designed a new interactive Nutrition Guide that provided nutritional information in brochures and
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on its web site Exhibit VI Nutritional Information on (Exhibit-VI). The Burger Kings Food Items Guide allowed diners to access nutritional information on each menu item, create their own meals and calculate nutritional content of customised Source: www.burgerking.com items. In addition, it unveiled new easyto-follow nutrition information posters in its stores and web site resources. Symbols on the posters guided customers on fat, carbohydrate and calorie-conscious diets to customise their meals. In addition, the restaurant sponsored 207 schools nationwide to participate in the Presidents Challenge, the physical activity and fitness awards programme of the Presidents Council on Physical Fitness and Sports.41 In June 2004, same-store revenues at company-owned stores rose by 16%.42 Analysts opined that the new health food products and new advertising slogan had been instrumental in increasing the companys sales. The critics had also praised the companys initiatives to curb the growing obesity epidemic. Despite this, some other analysts felt that the company was still promoting high calorie and fat foods. They said, Creating value meals by combining seemingly healthy items with unhealthy items like fries and soft drinks, as Burger King does,

lets people continue to make bad eating decisions while feeling as if they are doing something healthy.43 Footnotes: 1. May, Patrick What Will the McMenu of the Future Look L i k e ? , S a n J o s e M e r c u r y N e w s ( w w w. eyetrack.morris.com) Horovitz, Bruce Under fire, food giants switch to healthier fare, www.usatoday.com, July 1st 2003 Roberson, Jeff A bunless diet revolution? Fat chance, Associated Press (www.msnbc.msn.com), January 15th 2004 Wells, Melanie Pepsis New Challenge, www.forbes.com, January 20th 2003 Burger King sale back in balance, www.news.bbc.co.uk, November 18th 2002 Grow, Brian Fats In The Fire For This Burger King, www.businessweek.com, November 8th 2004 Ibid. Walker, Elaine Burger King shows new signs of life, The Miami Herald (www.highbeam.com), June 3rd 2004 Ibid.

2. 3.

4. 5. 6. 7. 8. 9.

10. Wagner, Lisa Van Obesity and the retailers role, www.fmi.org, April 2004
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11. Institute on the Costs and Health Effects of Obesity, www.wbgh.com 12. Ibid. 13. From Wallet To Waistline, www.cspinet.org 14. Tharoor, Shashi Fat ... under fire, The Hindu, June 6th 2004 15. From Wallet To Waistline, op.cit. 16. Raeburn, Paul, Forster, Julie, Foust, Dean and Brady, Diane Why Were So Fat, www.businessweek.com, October 21st 2002 17. Wa l l i s , C l a u d i a T h e O b e s i t y Wa r r i o r s , Ti m e (www.highbeam.com), June 7th 2004 18. S e a l e y, G e r a l d i n e W h o p p e r o f a L a w s u i t , www.abcnews.go.com 19. Fat Americans sue fast food firms, www.news.bbc.co.uk, July 25th 2002 20. Sealey, Geraldine Fast-Food Chains Blamed for Obesity, Illnesses, www.edietz.com, July 26th 2002 21. Senauer, Benjamin The Obesity Crisis: Challenge to the Food Industry, www.agribusinesscenter.org, August 2003 22. Table Set For Fast Food Fight, www.cbsnews.com, July 2nd 2003 23. Not so fast, www.economist.com, December 5th 2002

24. The next McDonalds?, www.springwise.com 25. Market-Driven Solutions, www.restaurant.org, October 25th 2004 26. CSPI Picks the Best and Worst Fast Foods, www.cspinet.org, August 21st 2002 27. What Will the McMenu of the Future Look Like?, op.cit. 28. Borchert, Scott Burger King Orders Employees To Scold Obese Customers, www.enduringvision.com 29. Pressler, Margaret Webb Burger King Will Offer Healthier Food; Lighter Meals Part of Industry Trend, The Washington Post (www.highbeam.com), September 19th 2003 30. Crane, Dan McNasty, www.slate.msn.com, November 25th 2003 31. Carpenter, Dave Will Burger Kings move start a bunless revolution? Fat chance, www.ajc.com, January 15th 2004 32. Horovitz, Bruce Burger King zaps menu, image Investors give CEO of No. 2 chain three years to turn it around, USA Today (www.highbeam.com), March 22nd 2004 33. Ibid. 34. Swearingen, Wendy Guild Can Burger King Rekindle the Sizzle?, www.hbswk.hbs.edu, May 3rd 2004 35. Burger King Corporation Chief Executive Officer Brad Blum Reports Progress at Annual Franchisee Meeting, PR Newswire (www.highbeam.com), May 5th 2004
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36. Burger King shows new signs of life, op.cit. 37. OConnell, Patricia Greg Brenneman: The New Burger King, www.businessweek.com, July 13th 2004 38. Burger King Corporation Chief Executive Officer Brad Blum Reports Progress at Annual Franchisee Meeting, op.cit. 39. Ibid. 40. Grow, Brian, Arndt, Michael and Zellner, Wendy Burgers Kings Reign of Error, www.businessweek.com, March 29th 2004 41. Market-Driven Solutions, op.cit. 42. Greg Brenneman: The New Burger King, op.cit. 43. McNasty, op.cit.

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C HAPTER 7

Products, Services, and Brands: Building Customer Value

Introduction Product is considered to be an important element in the 4Ps of marketing. Product can be in the form of goods, services, ideas, or a combination of any of these. A product has core as well as associated features. Theodore Levitt differentiated products into generic, expected, augmented, and potential products. A product can also be classified depending upon characteristics like durability, tangibility, and usage. The set of all the products that an organization has to offer its customers is called product mix and a product mix consists of a number of product lines. Companies use branding to attract customers to buy their products and services. Brand is the name, term, sign, symbol, design or a combination of these used by companies to convey the identity of its goods and services to customers. Companies practice different brand strategies like line extension, brand extension, brand rejuvenation, brand re-launch, brand proliferation, etc. to deliver the value associated with a brand to the customer. Packaging involves developing a design and a container for a product. Labeling involves exhibiting important information on the products package. The importance of services marketing has been increasing. The main difference between a product and service is that service is intangible. Certain characteristics of services like intangibility, inseparability, heterogeneity, and perishability set them apart from products. Marketers must focus on three additional Ps, viz., people, process, and physical evidence apart from the 4Ps of marketing while formulating marketing strategies for services. Due to the unique characteristics of services it becomes difficult to differentiate services from the services of competitors.

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Section1

Products
A product is anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need. A product consists of the following components: Core features: Marketers have to explain the core features offered by the product to the customers. Core benefit are the features that satisfy the basic needs of consumers. Associated features: These are the additional features offered with a product that enhance customer satisfaction. In other words, the associated features add value to the product. A companys brand name, packaging and labeling of product are important associated features of a product. Nature of the Product: According to Theodore Levitt, a product must be differentiated depending upon the value it is providing to the customer. He differentiated products into generic product, expected product, augmented product and potential product (Refer the keynote diagram for further details).

Keynote 7.1.1: Product Levels

Product Hierarchy: It is defined as an organizational chart that depicts the assortment of products offered in a given

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Product Policy
Keynote 7.1.2: Classification of Products

Product mix: A product mix consists of all the products an organization offers to its consumers. Width: It is the total number of product lines a company carries. Length: It is the total number of items in the mix. Depth: It is the assortment of sizes, colors, and variations offered in each product in the product line. Consistency: It refers to the closeness exhibited by the product lines in the production requirements, distribution, end usage, etc. Managing product lines Product line analysis: A company must observe the sales generated by the various products in its product line. The company must also keep an eye on the competitors moves in relation to its product line. Such an analysis would help companies take the right decision at the right time. It is through this analysis that companies take crucial decisions like dropping a product from the existing range or adding a new product, etc. Product line length: A product line length can determine the profitability of a company. A firm should carry only those many products in its product line that can maximize its profits. If there are lesser number of products in the
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market. Product hierarchy consists of product class, product form, variations in the product form and brands. Products can be classified depending upon characteristics such as durability and tangibility, and usage. Durability and tangibility: Depending upon durability and tangibility, products can be classified into durables, nondurables and services. Usage: Depending upon the usage products can be classified into consumer products and industrial products . (Refer keynote diagram for detailed classification).

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product line then profits can be improved by adding more products to the product line. Similarly, some of the products can also be removed from the product line. The product line length can be increased by line stretching and line filling, which are discussed below. Line stretching: It occurs when the company tries to stretch its existing range of products either upwards or downwards. The product range can also be extended both upwards and downwards. A firm tries to stretch its product line downwards when it is positioned in the middle market and wants to introduce products at a lower price. Similarly a company tries to stretch its product line upwards when it wishes to enter the high end of the market. For instance, HLLs detergent products are available for a premium price (Surf Excel) as well for an affordable price range (Wheel). Line filling: When marketers add more products to their existing range of products, it is known as line filling. For instance, P&G added Rejoice to its existing range of shampoo brands Pantene and Head & Shoulders. Product line modernization: Manufacturers using outdated machinery and producing products that are not very contemporary have to adapt to the changing market conditions and modernize their product line in order to stay competitive. Product line pruning: Manufacturers dispose off certain products that no longer contribute to the overall profitability of the organization. In this way, companies can

optimally divert the resources spent on such products to more profit generating products. Reasons for line extension: Marketers perceive line extension as a means to cater to a wide variety of customer segments. Line extensions provide something new and extra to the customers thereby helping marketers in retaining customers and in attracting new ones. Adding new products to existing product lines involves lesser costs than developing a totally new product. Limitations of line extension: The product line may become saturated due to the introduction of too many products in the line. Brand loyalty may be diluted when many products are introduced under the same brand name. Sometimes products are introduced under existing brand names even when they have the potential to be introduced as new ones in the market. Line proliferation distracts the attention of the R&D department from developing new products and generating new ideas.

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R EVIEW 7.1
Question 1 of 4
An organizational chart that depicts the array of products offered in a given market; identify the concept defined here.

A. Product hierarchy B. Product personality C. Product classification D. Product policy

Check Answer

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Section 2

Brands

Brand as a Concept and its Significance Duane E. Knapp, author of The Brand Mindset, defines a genuine brand as the internalized sum of all the impressions received by the customers and consumers resulting in a distinctive position in their minds eye based on perceived emotional and functional benefits. Brands convey different messages to different consumers, depending on their perceptions, they are created by marketers over a period of time. A brand can convey different levels of meanings to customers as attributes, Benefits, Values, Culture, Users and Personality: (Refer gallery for explanation and examples). Value and Significance of a Brand Brands are of great value to companies and many companies spend a lot of time, money and energy on brand building. Without a brand name, products may not get noticed in a competitive market. In fact, brands give the Gallery 7.2.1: A Brand can Convey Different Meanings

Attributes:Marketers highlight the attributes of brands so as to retain existing customers and also to attract new customers. For example, the attributes of Titan- Sonata watches are affordability, looks, their being waterproof, and durability.

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products a unique identity. However, some companies have a narrow view toward brands and feel that they are just symbols or logos of an organization. Companies should realize that brands are much more; that they are the means of gaining a competitive advantage in the market. Brands are, in fact, a result of the combination of marketing, promotional, service, and distribution efforts undertaken to differentiate a companys product from competitors products. Brands should be developed carefully to convey specific details to customers through name, symbol, visual identity, etc. Types of Brands and their Challenges The major types of brands are as follows: Manufacturers brands are brands directly owned by manufacturers. For example, Cinthol, Pepsodent, Pepsi, Raymonds, Surf, etc. are owned by the manufacturers. Private brands are developed and owned by resellers. For instance, retailers like Lifestyle, Big Bazar, Shoppers Stop, etc. have their own brands. Generic brands are not specifically advertised and are sold by grocery stores at a price lower than those of identical private brands. Usually, rice, wheat, sugar, pulses, etc., are sold as generic brands in the Indian market. Brand challenges Conventionally, goods and services were sold in the markets without branding. But with the increased number of players in the market, branding the products became very important.

However, branding faces many challenges and marketers have to brand their products taking certain factors into consideration. For instance, the decision about branding should be made after analyzing the feasibility of branding the product. Another challenge is to decide whether it should be a manufacturers brand or a private brand. Repositioning of a brand is also crucial to sustain oneself in the market. Brand Equity Brand equity is the combination of assets and liabilities associated with a brand that enhances or depreciates its value. The brand equity of a product or service is determined by the awareness of the customers, quality perception, loyalty, patents and trademarks. Companies often use brand equity of established brands to enter other categories of products. Professor Osborn, author of Strategic Brand Management, identified ten characteristics of the most popular brands in the world. Selection of a Brand Name The selection of an appropriate name is important for the success of a brand. The factors to be considered before selecting the name are that people should find it easy to pronounce and easy to remember, at the same time, ensuring that it helps in distinguishing the brand from other brands. Further, it should be legal, ethical and protected.

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Brand Sponsorship Brand sponsorship stands for linking the organizations name with a particular event. Sponsorship is usually done for activities which involve a large public gathering. Many companies sponsor sports events to gain publicity. Companies even sponsor individuals or teams to gain publicity. For example, MRF sponsors cricketer Sachin Tendulkar, the GVK group sponsors tennis player Sania Mirza and Samsung sponsors the Indian cricket and hockey teams. Sponsorship includes advertising and sales promotion activities. It can be effective when the company is clear about the benefits it is trying to derive by sponsoring a particular event. The benefits could be in the form of visibility or awareness of the brand during the event. The company should choose to sponsor an event which it can easily associate with. Moreover, companies should look out for having longterm relationship with an event. Brand Strategy Decision The brand strategy of companies should help in delivering to customers the value associated with a brand. Brand building should be done considering the identification, availability of resources, and the commitment of the company. The strategic implication of building a brand is that it should help improve the business of the organization. The brand strategy decision should be taken in accordance with the business strategies of the organization (Refer keynote diagram for brand strategies).
Keynote 7.2.1: Brand Strategy Decision

Brand management has seen several developments in recent times. Established companies like Procter & Gamble (P&G) and HLL are concentrating on a set of popular brands termed as power brands. Power brands are brands built over time by the firms and have a huge value in the market. Companies are also discarding brands which are not profitable. More and more companies are using semiotics, a science of signs and/or sign systems to enter the comfort area in the subconscious minds of people. A firm tries to ensure that the brand sustains the curiosity of people by positioning it in such a way that it has some cultural, actual and historical relevance. For example, the apple, symbol of Apple Com201

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puters, has relevance to Adam and Eve, scientific relevance in terms of Newtons gravitational theory and is considered to be a fruit of genius. A study has revealed that only brands with constant innovation and advertising could perform well in the market. Packaging and its Importance in Marketing Packaging of a product adds value to the product by enabling easier handling and secure usage. Packaging helps in increasing the sales of a product by attracting customers to make repeat purchase of the product. An easy-to-use and secure packaging has a positive influence on the purchase decision of the customer. Packaging plays an important role in preserving products from getting spoiled if exposed to the external environment for a long time. Specifically for FMCG products, packaging should be done in such a way that it appeals to a customer instantly as customers usually spend only a short time in picking up products from the shelves of retail outlets. Packaging should attract customers visually and psychologically. If the size, color, or other features of packaging are altered to make it more attractive, it will influence the minds of the people positively toward the product. Therefore, marketers should take a lot of care over packaging design in the early stages of brand introduction. International companies should be careful to adopt a single packaging design across the world so that customers will not get confused. Maintaining consistency in packaging throughout the world enables

Video 7.2.1: Importance of Packaging

customers to recognize products irrespective of the place at which the products are being sold. Packaging and Marketing Strategies Packaging is given importance while developing marketing strategies since appropriate and convenient packaging can give a product a competitive advantage. Marketers also make changes to packaging as and when required to remain competitive in the market. Sometimes the packaging may need to be changed as when it gets obsolete or when the competitors have changed the packaging of their products so that they are more attractive and convenient.

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Firms adopt different packaging techniques to increase the consumption of their products by consumers. According to a study conducted by the Marketing Institute in Cambridge, a large sized package encourages customers to consume more of the product as their perception is that they have bought a larger quantity of product for a reduced rate. On the contrary, the study also revealed that consumers would not use some products in large quantities if they felt that this would lead to damage of other related products as for instance, excessive detergent use leading to clothes getting spoiled. Labeling Labeling is a legally essential process of displaying important information on the products package. Labeling should include instructions about the usage of the product and about ingredients of the product. Especially in the case of food products, proper labeling helps consumers who are health conscious to choose products according to the products calorie content. The Government of India encourages manufacture of eco-friendly products by providing the labeling with an Eco-Mark for products meeting certain criteria. Labeling regulations are issued by the government from time to time. For instance, labeling of injurious products like cigarettes have to contain a statutory warning. Universal Product Codes Universal product codes are used in labeling products. They consist of a unique sequence of lines which help an elec-

tronic scanner to identify a product. The black and white lines of the code absorb and reflect light rays and this helps in identifying the product. Universal product codes are also known as bar codes and are used by manufacturers and retailers for efficient pricing and inventory controls. Bar codes do not help firms in effective tackling of piracy or imitations but can reduce the amount of data entry work. European Article Number (EAN), a Delhi-based organization, issues bar codes for products, which the Government of India has made compulsory for exporters. A technological development in the concept of universal product codes is the Radio Frequency Identification (RFID) tag. An RFID tag consists of an electronic circuit and an antenna. Radio frequency communications are used to identify the objects. RFID tags have varied amounts of storage capacities. Some RFID tags have the capacity of storing data related to the date of manufacture, conditions in which the product is stored, the details of the shipment, and data added at every stage of the supply chain. Through this data, information related to where the product has been till it reaches the consumer can be traced. However, there is a limitation for the scanners, as they will not be able to identify a large number of RFID tags in the area covered by a single antenna. The RFID technology needs further enhancement for universal applicability. References:

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Review 1.2

http://www.youtube.com/watch?v=fXTKX4ms3PM&fe ature=related 2. Brand Planning

Question 1 of 8
Consumers identify a brands distinctive capabilities based on the awareness created by marketers over a period of time. The brand conveys many aspects. Which of the following is not conveyed by the brand?

A. Value proposition B. Personality status C. Process attributes D. User segments

Check Answer

1. V i d e o o n t y p e s o f p a c k a g i n g :
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Section 3

Services Marketing

The importance of the service industry has been growing over the years due to the improved economic well being of people which, in turn, increases the demand for services, changing life style, complexity of the product, etc. Characteristics of Services There are certain characteristics of services that set them apart from physical goods. They are intangibility, inseparability, heterogeneity and perishability (Refer gallery for explanation). Developing Marketing Strategies for Services Service Profit Chain A key difference between products and services is that services are intangible in nature. Because of this, judging the quality of service by customers before consuming the same makes it a difficult and challenging task. Integrated

Gallery 7.3.1: Characteristics of Services

Services intangibility means that services cannot be seen, tasted, heard or smelled before they are bought. People undergoing cosmetic surgery cannot see the result before the purchase.

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marketing mix strategies applied to market product are not sufficient to position services in an effective way in the target consumer group. It requires additional marketing approaches. Service Profit Chain (SPC) is one such approach that is heavily used by service marketers. In service businesses, there is a high level of interaction between customers and service employees. But the level of effective interaction and output from such an interaction (measured in terms of service value and customer satisfaction) depend upon the interaction and customer handling skills of the front line employees and the existing support process backing these employees. Thus the attention of service business should ideally be distributed not only on customers but also on the employees who serve those customers. The SPC helps in establishing relationships between profitability, customer loyalty and employee satisfaction, loyalty and productivity. Internal Service Quality: Sound employees selection and training mechanism, good working environment, strong backup through operational processes for front line employees serving customers. Satisfied and Productive Service Employees: Value for more satisfied and loyal employees with high levels of motivation and increased productivity. Greater Service Value: More enriched value creation for the customers by satisfied and productive employees.

Quality of service delivery becomes more effective and efficient. Satisfied and Loyal Customers: More value delivered to customer generates strong satisfaction, trust and loyalty towards the service organization. It leads to more word-of-mouth, repeat purchases, etc.
Figure 7.3.1: Service Prot Chain

Profitability and Growth: More satisfied and loyal customer with high levels of repeat purchases increases sales of the service firm. As sales increase, profitability and growth also increases. When a service firm grows with strong profitability, it simultaneously develops the potential of investing more money towards developing backup process that eventually helps in developing a better platform to deliver high quality service. Besides SPC, service firms also require other marketing approaches in order to position quality service to target
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customers in an effective way. Those approaches are Internal Marketing and Interactive Marketing. Internal Marketing Service businesses must orient and motivate the front line employees who regularly interact with customers so that it enables them to work as a team focused on developing satisfied customers. Internal marketing should take place even before the firm starts doing external marketing. It's important that a company Figure 7.3.2: Three recruits the right people. Marketing companies want people that are motivated by its products and services. Take Apple for example. If you visit an Apple store there is a purposefully designed customer experience, part of which is communicated by the Apple people. They are enthusiastic and very knowledgeable and actually uphold Apple principles and brand. Internal marketing also ensures that internal staff now link with external customers in a customer relationship. Internal marketing meets external marketing. The basic chain links internally so the concept of the internal customer sees everybody within the organization treating each other as customers. The Logistics manager would see a customer services function as his internal customers. The customer service function would see field engineers as their customers.
Types of Service Marketing

The research and development team would see the manufacturing team as their customers. The relationship works in both directions, up and down the supply chain. Interactive Marketing Interactive Marketing is the evolution of marketing where the consumer is empowered, entrusted, and recruited to aid in the strategy. Imagine if we had a chance to talk to the fish and see what bait they like and when theyd like to eat. Perhaps wed throw some good stuff out on the pond so that they would entice their friends to come feed with them next time. In a typical service setting, the service delivery environment is characterized service encounter situations where the front line employees heavily interact with customers. As inseparability (which means services could only be consumed when the deliverer and the receiver of the services are both present at the same time and at the same place) is another salient characteristic of services (other than intangibility), service quality thus depends on these frequent interactions. Service marketers thus need to focus cautiously on interactive marketing skills of service employees. With a slightest mistake in the service delivery process by the employee, the customer would not hesitate in bad mouthing the firm. Service Differentiation The unique characteristics of services such as intangibility, heterogeneity, inseparability, and perishability make it difficult
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for marketers to distinguish their services from that of the competitor. Nevertheless, marketers search for opportunities and means that help them in setting their services as distinct from the competitors and also to position their services as superior to the competitors offerings. Offer: Every organization offers a primary level of service to its customers. However, the key to success lies in the fact that the companies identify the additional needs or demands of the customers and accordingly cater to these needs. It is through customization of offers that marketers can achieve service distinction and also customer loyalty. For instance, Singapore Airlines offers personal entertainment systems, video-on-demand in all cabins, hot meals, etc., to its customers. Delivery: Consider this, you go to a restaurant and order food. Although you relished the food served, you felt that the waiter was rude to you. Would you like to go back to the restaurant? may be not. The success of service also depends a great deal on its execution. As service and service provider are inseparable, marketers take extra precaution in the delivery of the service. The employees are trained to understand the needs and specifications of the customers and deliver service accordingly. Further, the management must also offer rewards or awards to exceptional performers, in order to motivate them to continue their good services. Image: Building reputation and brand image is another way of distinguishing between services. Brand image of the company can be conveyed in the form of logos, mascots, etc. For instance, Air India communicates its brand image with the

help of its mascot, the Maharaja. The Taj Group of Hotels communicates its message in advertisements featuring a lady, with the tag line She is the Taj. Marketers also distinguish their company by establishing its reputation as one of the best in their respective industries. For instance, in the Indian hotel industry, ITC Welcome Group and the Taj Group of Hotels are renowned for their superior quality services. However, this is a long-term process and can be achieved only through dedication to provide excellent customer service. Managing Service Quality Service quality pertains to the comparison of service expectations to the actual service experience and the satisfaction or dissatisfaction that may result from doing so. Since, the service experience differs from one customer to another it is difficult to measure service quality. Hence, managing service quality is essential for marketers. Success in the service industry depends on the following key aspects Strategic Concept: Marketers must formulate a service concept and a strategic concept. While the service concept focuses on designing effective ways of satisfying customer needs, the strategic concept focuses on devising a distinctive strategy for the service delivery process that aids in attaining a competitive advantage. Commitment of the Top Management: The top management must be committed towards maintaining high standards of service quality. Only then it gets reflected upon the employees of the organization.

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ment from The Shansby Group, a private equity investment partnership. Initially, companies like Pepsi and CocaCola dismissed the Glacau products as a passing fad, but with the product gaining popularity and outselling their products like

Source: http://behance.vo.llnwd.net

F IGURE 7.4 The Glaceau Vitaminwater Bottles

Dasani and Aquana in areas like New York and the Northeast of the US, the giants were forced to sit up and take notice. In 2002, Coca-Cola introduced fortied water, F IGURE 7.6 1. Dasani Nutriwater 2. Aquana Essentials Dasani Nutriwater, and Pepsi came up with Aquana Essentials. However, neither fared well in the market and both products were later discontinued. By 2005, Glacaus prod- Source: http://whitelightdesign.com ucts were being sold in all the 50 states in the US. Compared to January 2004, the sales had grown by 80% in value terms in January
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2005. As of 2005, the company was selling around two million bottles per day, with vitaminwater accounting for 75% of the total sales. For the year ending January 2006, the companys revenues registered a growth of 90%. In August 2006, India-based business conglomerate, the Tata Group acquired a stake of 30% in Glacau for US$ 677 million. Tata acquired the stake from TSG consumer partners. In 2005, Tata Groups revenues in the US stood at US$ 1.97 billion. The companys products in the US included Tetley Tea, Good Earth Tea, and Eight OClock Coffee. The companys association with the Tata Group, at a time when companies like Coca-Cola and Pepsi were making efforts to acquire Glacau, came as a surprise to industry observers. According to Bikoff, Were not in the Coke system and were not in the Pepsi system domestically, to speak of, but we are in what youve referred to as the independent system, and Im hoping that after todays announcement, were all going to agree to rebrand that independent network, the Glacau network.10 After the agreement with the Tata Group, Bikoff, his associates, and distributors held 50% of the company and venture capitalists held the remaining 20%. By then, the company had more than 760 employees. THE MARKETING STRATEGIES Glacaus products were priced higher than the other soft drinks, at US$ 1.49 per 20-ounce bottle while Coke was priced at 50 cents. Glacau targeted consumers who were ready to pay a premium for healthy alternatives to soft drinks. It defended

the higher price citing the higher value that the product provided. Energy Foods had always maintained a close contact with the consumers in order to understand their tastes and preferences. According to Rohan Oza (Oza), Senior Vice-president, Marketing, Glacau, The insight came from consumers. When you start with the consumer giving you the answer, its always easier. But you have to spend a lot of time with consumers to do that. Whenever our folks go into stores, we talk to people, talk to retailers, chat with consumers at the shelf11 For the 52-week period ending April 2006, Glacau vitaminwater was among the top 10 bottled waters in the US, when sales through food, drug, and mass merchandisers was taken

F IGURE 7.7 Innovative Label

Source: http://bevwire.les.wordpress.com

into consideration (Refer to Exhibit I for top bottled waters in the US). Several factors like new innovative product features, right from the label to the content of the bottle, unique promotional strategies, and distribution helped the company in connecting with the customer. ENHANCED WATER
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Exhibit I Top Bottled Water Brands (2006)* Brand Aquana Private Label Dasani Poland Spring Propel Arrowhead Dannon Deer Park Glaceau vitaminwater Ozarka Sales in US$ 000 472,807 459,662 393,605 227,367 193,928 159,511 156,874 121,857 116,411 86,882 Market Share (%) 14.3 13.9 11.9 6.9 5.9 4.8 4.8 3.7 3.5 2.6

were looking for healthier alternatives to high calorie soft drinks. Instead of using articial sweeteners, Glacau used crystalline fructose, a puried sweetener derived from fruits. For making vitaminwater, avors, vitamins, natural colors, and other nutrients were added to Smartwater. The product was positioned as water with additives that were good for the consumer. According to Bikoff, Youve got a lot of people stuck on soft drinks who know they should be drinking more water, but theyre not ready to give up the avor and variety that comes with soft drinks. How do you help those people get to bottled water? In my mind, the answer was to build a bridge, and vitaminwater has become the bridge for millions of people.12 Once vitaminwater was ready, instead of sticking to the usual names, the company came up with names that suggested their p ro p e r t i e s , l i k e Power-C for water with Vitamin C, Endurance for peach mango avored water with Vitamin E, and Multi V for multivitaminwater. Vitaminwater was available in several avors, each with a distinct name and color

Exhibit II : Vitaminwater Formula 50

* For 52 weeks ending July 16, 2006, sales through food drug and mass merchandise (excluding Wal-Mart). Source: Information Resource Inc. The products from Glacau were targeted at health-conscious customers. The launch of the products coincided with the growing health consciousness among the consumers in the US, who

Source: www.amazon.com

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(Refer to Exhibit II for visual of vitaminwater). Each avor was for consumption at a specic time. For examF IGURE 7.8 Glaceau Vitaminple, vitaminwater Eswaters for the Entire Day sential had a deep orange color, and had to be consumed in the morning and contained calcium and Vitamin C. Vitaminwater Source: http://static.guim.co.uk Focus contained Vitamin A and Leutin. It

Exhibit III Vitaminwater Flavors Flavor Power C Dragonfruit Focus Kiwi Strawberry Balance Cran Grapefruit Essential Orange Endurance Peach Mango Energy Tropical Citrus Vital T Lemon Tea Rescue Green Tea Multi V Lemonade Defense Raspberry Apple Revive Fruit Punch Formula 50% Grape Ingredients Vitamin C + Taurine Vitamin A + Lutein Vitamin C + Glucosamine Vitamin C + Calcium Vitamin E + Ribose Vitamin B + Guarana Vitamin C, E B Complex + Chamomile Essential Vitamins and minerals from A to Zinc Vitamin C + Zinc Vitamin B + Potassium 50% of Vitamin B, C, E + Folic acid required every day

had a dark pink color with a kiwi strawberry avor, and was to be consumed during the afternoons (Refer to Exhibit III for the details of different avors of vitaminwater). Glacau used packaging as a means of communication and to build a bond with its customers. The bottles were made of clear plastic so that the color of the water could be seen through it. The labels were in simple black and white, with a

F IGURE 7.9 A Glaceau Bottle Label

Source: http://blackberrycreative.ca

Adapted from www.vitaminwater.com. color stripe running through them. Gary Hemphill, Managing Di218

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rector of Beverage Marketing Corp, a research and consulting rm in Manhattan, said, The packaging is great. People walk into a store because theyre thirsty, and they dont know what theyre going to buy until they open up

F IGURE 7.11 Glaceau Product Labels (Humor - A Constant)

gaging in their own forms of strenuous activities, like, well, becoming a dungeon master or playing a game of full-contact pictionary. Vitamins + water = all you need.14 Another label read, Recommended for gymnasts, ballerinas, tight-rope walkers, people who do yoga, clowns who ride unicycles while juggling chain saws, ninjas, peg-legged pirates and/or individuals simply requiring equilibrium in their lives.15 All the labels had details about the ingredients, their use, total calorie count, and a table of nutritional facts. The bottom of the label read, The inside is natural, the outside is plastic. From time to time, the labels on the bottles were changed and this generated lot of interest in the consumers, who looked forward to the next change. According to Mike Repole (Repole), President, Glacau, Our brands have personality, people bond with our personality because of the great packaging and the little surprise they get when they read the label. I think that sets us apart.16 (Refer to Exhibit IV for some of the labels of vitaminwater). FOR CELEBRITIES, SPORTS STARSAND EVERYONE Initially, Glacau did not spend much on advertising and the promotional activities were limited to giving away free samples. Another aspect that helped the company in its initial years was the backing by the celebrities. Several celebrities including pop stars Britney Spears, Madonna, Eve, actress Nicole Kidman, and socialite Paris Hilton were photographed sipping vitaminwater. Some of the popular magazines featured top ce219

Source:www.vitaminwatercanada.ca

the cooler. The packaging plays a role in selling the product.13 Humor was a part of all Glacau products. The label on one of the bottles read, Note: although this product contains more of the right electrolytes you need, its not just for serious athletes.

F IGURE 7.10 Details on a Glaceau

Product Label

Sure, jocks seeking more oomph to go extra innings, play a fth-set tie-breaker or nail a triple axel benet from drinking this beverage. However, it has been said that the athletically challenged can also use it while en-

Source:www.glaceau.hk

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lebrities having vitaminwater. It was widely publicized that actor Dustin Hoffman always stocked up on vitaminwater while shooting. It took Glacau four years to launch a major ad campaign for which the company spent US$ 10 million. The promotional campaigns were initiated by Oza and Matt Kahn, Director, Brand Marketing. Oza joined Glacau in 2002 as Vice President, Marketing, after his experience with Sprite and F IGURE 7.12 Glaceau Billboards Powerade. Oza and Kahn were responsible for launching CocaColas energy drink, KMX. The rst national advertising campaign was

Exhibit V Mediums Used for Promoting Vitaminwater

Vehicle Marketing Program, Glacau vitaminwater Tasting Vehicle, with 10 hydration trucks. The trucks resembled television news vehicles and were decorated with several images. These trucks were stationed at different locations, and gave away free samples and provided information about the products.

Retail sampling program, called hydrology, where 100 hydrologists trained by the company were stationed at the locations of the leading retailers and spread information about the product to the consumers.

Source:http://i.huffpost.com
Point-of-sale materials like banners and posters in English and Spanish, table tents, information pamphlets, etc.

launched in 2004 and was titled, every day needs more. For the rst phase of the campaign, Glacau allocated a budget of US$ 5 million. The billboards of vitaminwater were placed in major metro markets including New York, San Francisco, Los Angeles, Miami, Chicago, Philadelphia, Boston, Seattle, and Detroit. All round promotional programs involved various interactive sessions with the consumers (Refer to Exhibit V for the different mediums used by the company). The campaign, created by the marketing department in Glacau with the support of a creative agency located in New York, aimed at educating the consumers

Signage, banners, and other merchandising materials distributed at several events.

Campus Ambassadors a college outreach program. Source: www.bvnet.com.

about the features of vitaminwater like low calories and enhanced vitamins. It illustrated the functionality of the vitamin220

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water through animated gures. The humorous advertisements caught the attention of the consumers all across the country. One of the billboards for vitaminwater Energy had a picture of a mother pulling a shopping cart full of kids and read Drink Energy. Handle More. According to Oza, The Exhibit VI: Advertisement OJ Found Guilty campaign will give (consumers) who havent experienced Glacau vitaminwater an opportunity to get turned on to it and curSource:http://buffaloickr.blogspot.com rent drinkers even more reasons to drink it.17 Another advertisement released later,

known as Glacau Tasting Vehicles. The vehicles were parked at some busy locations and a Microphone Jockey played music and invited passers-by to taste the products. In the retail stores, Glacau set up hydrology booths, F IGURE 7.14 50 Cent Endorsing where the custom- Formula 50 ers were educated about the benets of vitaminwater. In a commercial for Reebok, Rap artist 50 Cent appeared Source: www.urban-drinks.co.uk

holding a bottle of vitaminwater, after which Glacau decided to team up with him to create a new grape avored vitaminwater called Formula 50. The product was released along with a pop album by 50 Cent. Video: Vitaminwater Celebrity The endorsements with TVC celebrities continued and in 2005, several athletes and entertainers were chosen to endorse Glacaus products. These included Kelly Clarkson, who co-created
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read OJ Found Guilty (of being high in sugar that is) (Refer to Exhibit VI for the Advertisement). The advertisements helped in attracting the customers and in maintaining contact with them. Glacau launched 39 tasting vans, popularly

F IGURE 7.13 Glacau Tasting Vehicles

Source: www.vitaminwatercanada.ca

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F IGURE 7.15 Celebrity Endorsements

a limited edition label with Glacau, David Wright, Kasey Kahne, and Allen Iverson (Refer to Exhibit VII for Advertisement featuring Kasey Kahne). In mid-2006, Glacau launched a program VitaminSchool to pro-

VitaminSchool took its shape from an idea generated by Bikoff, who said I was visiting school lunch cafeF IGURE 7.16 The 2011 Grand Fiteria trade shows, nale and I had something of an epiphany, realizing just how appalling the food was that was being sold to the schools, I know I wouldnt eat any of that food, and I cerSource: http://img32.imagevenue.com

Source: http://i111.photobucket.com

mote healthy eating among school children. In this two week, coast-to-coast road show with 12 stops, Glacau conducted a competition for schoolchildren in which they were asked to prepare nutritious meals and snacks that could be served in the school cafeteria. In each of the 12 stops, a panel of celebrities chose three of the recipes. The panel contained a nutritionist, a retail partner of Glacau, and a celebrity. The recipes were judged on their taste and nutritional value. Exhibit VII Advertisement Featuring Kasey Kahne

tainly wouldnt give any to my kids.18 The company then began educating the school children about a nutritious diet by allowing them to prepare their own meal. The nalists whose recipes made it to the top three at each stop were given US$ 5,000. One winner from each of the stops was sent to a grand nale in New York. The winner in the grand nale was given a US$ 100,000 college scholarship. In February 2007, Metro in New York, which had a circulation of 450,000 a day, provided a freestanding insert, with a scratchand-sniff advertisement of vitaminwater. These inserts gave the users a chance to sample products like perfumes and avored foods before purchasing them. As a part of its stay healthy, play hooky campaign, Glacau advertised its dragon fruit scented Power-C Vitaminwater through a freestanding insert.
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DISTRIBUTING VITAMINWATER Being a category creator had its own advantages and disadvantages for vitaminwater, as far as distribution was concerned. The supermarkets and retailers demanded slotting fees, sometimes running into thousands of dollars, for displaying new products. Bikoff avoided supermarket chains till he could afford the slotting fee, concentrating instead on mom-and-pop stores. He then realized that in order to enhance the reach of the product, it was necessary to move to delis and other smaller stores to cater to different customers. From there, vitaminwater moved on to organic food stores and retailers like Whole Foods, who gave a chance to small vendors to display their products. Vitaminwater was later F IGURE 7.17 Glaceau Vitaminsold in Albertsons water Bottles in Stores and Safeway stores. Just getting the product placed on the shelf was not enough; it was important to ensure that consumers bought the product. In a deliberate plan, Bikoff made the distributors place vita-

minwater along with bottled water rather than sports beverages. Vitaminwater with its bright color stood out from the scores of water bottles. Instead of tackling several markets at once and going in for a national launch, vitaminwater was launched in one market at a time. After the product was successful in New York, it was launched in California. Citing the distribution network in New York, Bikoff convinced the distributors in California to distribute the products. Vitaminwaters launch in California was a highly publicized event, in which Bikoff told the sales force of the distributor to start selling the product near the beach. Soon several celebrities in California were photographed holding bottles of vitaminwater. To establish a good market position in California, Glacau conducted a competition between two of their distributors in 2003, to see who could open more new accounts in a span of one week. In order to lend their support to the distributors, all the staff from Glacau headquarters, including the top executives and receptionists, in New York were own in to California and they worked with the distributors. The competition was called Mike-Ro Classic, with Mike referring to Repole, then executive Vice-president at Glacau, and Ro referring to Oza, who headed the two distribution teams. According to Repole, Every market is different. The easiest thing we could have done would have been to hire more people in these markets. But for us, its more about taking the people who know about the brand best and who are passionate about it to the markets themselves. If we want to connect with consumers in LA and
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San Francisco, we have to be in LA and San Francisco. We have our entire team out here to build the brand. We even have our nance and operations people out in the trade actually selling cases, merchandising, attending samplings and being part of the blitz team.19 The support was provided by Glacau in terms of free samples that were distributed through Glacau Tasting Vehicles in high trafc locations, DJ events in the local radio stations, and other in-store activities like tasting and setting up hydrology booths, where the people operating the booths told the consumers about the merits of vitaminwater. The distributor who opened the maximum number of new accounts was declared the winner, and the best salespeople from the winning distributors team were own by Glacau to New York for a holiday. Through this strategy, multi-product distributors, who had earlier been reluctant to channel their resources to one product, were made to direct their efforts toward vitaminwater. This resulted in vitaminwater making its way to several new territories. The fact that the companys employees were also involved in the competition encouraged the distributors to put in even more effort. The results were better than expected. According to Bikoff, We went from shipping 1,000 cases a month to 100,000 a month. With the success of the rst Mike-Ro Classic, every year, Glacau conducted a similar event in different locations. By 2004, Glacau had identied ten target markets, in which to locate marketing managers. These markets were New York, San Francisco, Los Angeles, Boston, Chicago, Detroit, Miami,

Philadelphia, Seattle, and Washington. The marketing managers were responsible for carrying out sampling activities and coordinating media activities in the area. In April 2005, the Mike-Ro Classic targeted the Midwest and Southern regions in the US. The southern team was headed by Repole and it conducted the promotional events in Miami, Tampa, Orlando, and Fort Lauderdale. The Midwest team headed by Oza conducted the events in Chicago, Minneapolis, Columbus, and Cincinnati. The employees of Glacau pitched in to extend support to the teams. Retailers like Dominicks, Kroger, White Hen, Jewel, 7-Eleven, Albertsons, and Certied Oil participated in the event and extended their support. The event had a positive effect on sales. In Orlando, 7-Eleven, in order to promote Formula-50, gave a full tank of gas for 50 cents for the rst 50 customers who asked for vitaminwater. During the promotional event, Glacau opened 1,500 new accounts and sold more than 50,000 cases of vitaminwater. Analysts termed the event as grassroots, guerilla marketing. They said Glacau had been successful in bringing the customers into the retail stores for its product through this event. It also illustrated the fact that without a huge advertising campaign, small niche players could create a buzz around the product. By the end of 2005, Glacau had more than 250 distributors, serving several thousand retailers all across the US. Bikoff was a rm believer in maintaining the personal touch with distributors. Instead of a cooler bag, he used his cooler tted Cadillac Escalade to take Glacau products to the distribu224

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tors. This helped him maintain contact with the distributors and small retailers, who were the ones who helped him break into the market in the initial years. Many small retailers supported Glacau and refused to sell other products in a similar category. By 2005, several big and small retailers across the US began selling vitaminwater. Walgreens started selling the products through its 4,800 outlets spread across the US in early 2005. In early 2006, Glacau targeted the Middle America market through beer distributors and other small beverage distributors. By late 2006, vitaminwater was available all across the US, through 50,000 freestanding branded coolers. From early 2007, vitaminwater was made available across 5,000 Wal-Mart stores in the US. THE ROAD AHEAD! With the rising demand for vitaminwater, there were several instances of the products being sold out within no time. At the same time, the company was trying to increase its shelf space among the retailers in the US. Vitaminwater was also facing a challenge from some exclusive stores, which provided specialized products with natural ingredients and lower calories. With the capital infused by the Tata Group, analysts opined that Glacau would be able to expand its operations further and could consider entering international markets. By 2011, Glacau was estimated to be a US$ 10 billion company. By the end of 2005, vitaminwater accounted for more than 80% of the total sales of Glacau. Fruitwater and Smartwater were

available only at specialty food stores and not through a direct store delivery network. The company entered into a distribution deal with Dr Pepper/Seven Up with which the availability of Smartwater and Fruitwater was expected to improve. Glacaus next target was the captive market, where the soft drink majors had entered into exclusive contracts with several high-end stores, schools, airports, and stadiums. These stores did not stock the products of the competitors and the customers were forced to buy the stocked products. Several schools in the US, which were looking for healthy alternatives to colas, opted for vitaminwater. The demand from the schools was expected to increase further especially after Alliance for Healthier Generation, a combined initiative of William J. Clinton Foundation and American Heart Foundation, worked out an arrangement with the soda makers. As per the arrangement, the vending machines in schools would provide only low calorie and nutritious beverages. By mid-2006, Glacau was selling ve million bottles a day. The sales through drug stores increased by 280%, in grocery stores by 100%, and through convenience stores by 130% as compared to 2005 according to Information Resources. As of 2006, the health and wellness market in the US was valued at US$ 22 billion, according to Richard Perkal, Senior Managing Director specializing in retail deals in Bear Stearns Merchant Banking (Refer to Exhibit VIII for a note on health and wellness market in the US). With several established and new players entering the market, the competition was increasing day by day. Glacaus competitors included established players
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Exhibit VIII Health and Wellness Beverage Industry in the US

With growing health concerns, people all across the globe prefer food and drinks that support healthy living. Foods that promote weight loss are among the fastest growing food categories in the world. The US and the UK markets account for over 30% each and Japan for 20% in the worldwide health and wellness foods market. Most of the consumers in the US prefer foods that promote heart health and weight loss. Health and wellness products like natural and organic foods, nutritional supplements, and low carb items, which were earlier limited to specialty stores, are being stocked by retailers due to the growing demand for them. In the US, the consumption of milk, sports and energy drinks, and bottled water was at 19 billion gallons in 2005. The consumers in the US prefer soy-based products, bars, cereals, and beverages. According to Beverage Marketing, New York, the sales of functional and wellness beverages stood at US$ 41 billion in 1999 and grew to US$ 55 billion in 2005. With consumers preference shifting away from carbonated drinks having sugar and high calories, the market for functional and wellness beverages is estimated to grow further. In 2006, the largest beverage category in terms of volume was carbonated drinks, with Coca-Cola and Pepsi dominating the market. The other major players in this category are Pepsis Mountain Dew and Cadbury Schweppes Dr.Pepper. The second largest category among beverages is bottled water, followed by fruit beverages, sports drinks, and ready-to-drink teas. The other major categories are energy drinks and ready-to-drink coffee. Beverage manufacturers across the world are looking at providing users something in addition to refreshment. In 2007, several drinks that would induce weight loss and contain natural energy and low calories are being launched. In order to take advantage of the growing demand for energy drinks, Coca-Cola and Pepsi have a slew of products in the pipeline. In 2007, Pepsi planned to launch more than 12 products which include Pepsi Natura, Sierra Mist Essence, Tava, Tropicana Essentials, Ocean Spray Refreshers, Lipton pure leaf tea, Propel power packets, Tropicana Organics, and SoBe Essentials. The products that Coca-Cola planned to launch include Enviga green tea, H2Odwalla enhanced water, the nutraceutical version of diet coke, full throttle Blue demon, Respect, and Swiftwater. Other smaller companies are not far behind; coming from Glacau is vitaminwater Triple X, and there is Snapples Out of the Blueberry.

Source: Compiled from various sources.

like Pepsi, Coca-Cola, Snapple, and Gatorade and new players like Vitamin Shoppe, which provided specialized products with low calories. In March 2007, Tropicana planned to

launch Fruit squeeze, a combination of water and fruit juice with just 50 calories. Glacau was looking at consolidating its position in the US market and then expanding into other markets like Canada,
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Mexico, and the Caribbean. With its association with the Tata Group, Glacau was expected to explore other markets in which Tata had a strong presence like India and the UK in the coming years. Though vitaminwater was marketed as a drink to promote healthy living, it was still high on calories with a 20-ounce bottle having 125 calories (12 ounces of Coke had 140 calories). Health experts warned that consumption of enhanced water was not benecial. According to Shan James, Physiologist at Duke Health and Fitness Center, The sugar levels in these drinks can actually inhibit the bodys water- and vitaminabsorption and cause stomach cramping. Analysts felt that the major threat Glacau faced was competition from Pepsi, Coca-Cola, and Cadbury Schweppes which were entering the enhanced water market. They opined that these players with their wider reach and distribution network could get ahead of vitaminwater in no time. Glacau had only around 200 independent distributors selling its products, and to expand its distribution it would require an additional investment. In the long run, it could become necessary for Glacau to enter into an alliance with the distributors of Coca-Cola and Pepsi. The established players could also challenge Glacau in terms of its price. The long-term sustenance of Glacau could depend on bringing out new products in different categories and widening its customer base. Footnotes:

1. 2. 3. 4. 5. 6.

Caroline Wilbert, Enhanced Waters Popularity has Many Taking the Plunge, Cox News Service, December 28, 2005. Heather Todd, Rising Stars, Beverage World, January 15, 2005. Pepsi, Energy Brands Settle, SoBe Label to Change, Reuters, September 05, 2006. Laurie Russo, Water a-Go-Go, Beverage Aisle, October 15, 2000. Laurie Russo, Water a-Go-Go, Beverage Aisle, October 15, 2000. Rob Walker, The Way We Live Now: 8-22-04: Consumed; A Spoonful of Attitude, The New York Times, August 22, 2004. Laurie Russo, Water a-Go-Go, Beverage Aisle, October 15, 2000. Homa Mojtabai, Glacau Founder and CEO Shares Tips for Start-up Success, The Wharton Journal, December 04, 2006. Rishi Modi, Vitaminwater Entrepreneur Visits the RSB, www.themsj.com, November 07, 2005.

7. 8.

10. Glacau Investment Means DSD Dividends, Beverage Spectrum, www.bevinsights.com, September 2006. 11. Sarah Theodore, Marketers in the Spotlight: Creating a Category, Beverage Industry, January 2003. 12. Becky Aikman, Trendy, Successful Vitaminwater has LI Roots, www.newsday.com, October 01, 2006.

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13. Becky Aikman, Trendy, Successful Vitaminwater has LI Roots, www.newsday.com, October 01, 2006. 14. Eric Creamer, Vitaminwater Packs in Daily Essentials, www.zwire.com, August 24, 2005. 15. Karen Herzog, Caffeine Concoctions are the Latest Buzz, JS Online, May 22, 2001. 16. Eric Creamer, Vitaminwater Packs in Daily Essentials, www.zwire.com, August 24, 2005. 17. Kenneth Hein, Glacau Puts More into Message, Brandweek, June 28, 2004. 18. Bob Phillips, Back to School, Progressive Grocer, June 01, 2006. 19. Jeff Cioletti, Go West, Beverage World, August 15, 2003. Suggested Readings & References: 1. Laurie Russo, Water a-Go-Go, Beverage Aisle, October 15, 2. 3. 4. 2000. Gerry Khermouch, Handbags, Cognac --and Water, BusinessWeek, April 02, 2001. Karen Herzog, Caffeine Concoctions are the Latest Buzz, JS Online, May 22, 2001. Laurie Joan Aron, Making Waves in Bottled Water, Crains N e w Yo r k B u s i n e s s , August 13, 2001. Kenneth Hein, A Day in the Trade, Brandweek, August 12, 2002. Carole Buia, Water, Water Everywhereand Calories Too, Time, August 19, 2002.

7. Hillary Chura, Oza Wants Vitaminwater to be a 'Category Creator', Advertising Age, December 16, 2002. 8. Sarah Theodore, Marketers in The Spotlight: Creating A Category, Beverage Industry, January 2003. 9. Christine Y. Chen, Darius Bikoff vs. Coke and Pepsi, Fortune, February 03, 2003. 10. Jeff Cioletti, Go West, Beverage World, August 15, 2003. 11. Kenneth Hein, Energy Forties Glacau With Another Coke Alum, Brandweek, November 17, 2003. 12. Kenneth Hein, Glacau Puts More into Message, Brandweek, June 28, 2004. 13. Jonah Bloom, Vitamin Water Thrives with Sampling, Just a Bit of Cheek, Advertising Age, July 05, 2004. 14. Vitaminwater Launches Hip New Campaign, Beverage Aisle, August 15, 2004. 15. Rob Walker, The Way We Live Now: 8-22-04: Consumed; A Spoonful of Attitude, The New York Times, August 22, 2004. 16. Michael Applebaum, Brand on the Campaign Trail, Brandweek, November 15, 2004. 17. Heather Todd, Rising Stars, Beverage World, January 15, 18. 19. 20. 21. 2005. Kenneth Hein, Repole Gets a Presidential Nod, Brandweek, February 14, 2005. Don Longo, Grassroots Blitz Drives Higher Beverage Rings, Convenience Store News, June 20, 2005. Eric Creamer, Vitaminwater Packs in Daily Essentials, www.zwire.com, August 24, 2005. Don Longo, Reporters Notebook: On the Road, with Super
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Water, Progressive Grocer, September 01, 2005. 22. Kate MacArthur, Pepsi Picks Water Fight with Surging Glaceau, Advertising Age, October 17, 2005. 23. Rishi Modi, Vitaminwater Entrepreneur Visits the RSB, w w w. t h e m s j . c o m , November 07, 2005. 24. Caroline Wilbert, Enhanced Waters Popularity has Many Taking the Plunge, Cox News Service, December 28, 2005. 25. Gwendolyn Bounds, Winning Shelf Space in a Competitive Market, The Wall Street Journal Online, February 01, 2006. 26. Bob Phillips, Back to School, Progressive Grocer, June 01, 2006. 27. Andrea Foote, Victory for Vitaminwater, Beverage World, June 15, 2006. 28. Kenneth Hein, Note to Coke: Glacau Biz Plan is Heating Up, Brandweek, August 07, 2006. 29. Steve Rosenbush, Tata Takes a Swing of Vitaminwater, Busin e s s We e k O n l i n e , August 24, 2006. 30. Glacau Investment Means DSD Dividends, Beverage Spectrum, www.bevinsights.com, September 2006. 31. I Made the Brand For Myself: EBI Chief, The Times of India, September 02, 2006. 32. Pepsi, Energy Brands Settle, SoBe Label to Change, Reuters, September 05, 2006. 33. Surajeet Das Gupta, Why the Tatas 'Bought a Piece of the Future', Business Standard September 09, 2006.

34. Purvita Chatterjee, Testing the Waters, The Hindu Business Line, September 14, 2006. 35. Becky Aikman, Trendy, Successful Vitaminwater has LI Roots, www.newsday.com, October 01, 2006. 36. Homa Mojtabai, Glacau Founder and CEO Shares Tips for Start-up Success, The Wharton Journal, December 04, 2006. 37. Kenneth Hein, Pepsi Squeezes out Another Enhanced Water Entry, Brandweek, February 05, 2007. 38. Nicole Smith, Metro New York to Run Scent-Strip Insert Ads, www.dmnews.com, February 15, 2007. 39. www.glaceau.com.

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Exhibit IV Vitaminwater Labels

Product Energy Label We rebut any offers by professional sports leagues to become the ofcial water of anything. Although this is a great alternative to sports drinks we do not believe in succumbing to commercialism. Unless, of course, theres a lot of cash. Then well talk. Professional athletes have not endorsed this product ... excessive use will not lead you to have a desire to be like Mike, Magic or even athletes named Ned. In a recent government study that cost our country billions of dollars, a bunch of science guys . . . came to this brilliant conclusion: people dont eat right . . . we created this product . . . so you dont feel so bad next time you get an urge to indulge in a bloomin onion. Multi v Lemonade Here is lemonades story: Remember the Jetsons? All they had to do was push a button to get dressed, microwave a pill to eat a three-course meal and throw Astro out on that treadmill thingy to walk him. Talk about the good life. Well, we created this all-in-one product containing more of the nutrients you need from vitamins A to Zinc. Think of it as a drinkable Swiss army knife. Ok, so we didnt invent the ying car or legless robot maids, but come onlike thats ever gonna happen. Inspired by todays most talked about artist, hottest record producer, and soon-to-be movie star, this notso-hypnotic tonic contains (hint, hint) 50 percent of many of the important vitamins that you need every day.

Endurance

Formula 50% Grape

Power C Dragonfruit

Despite having the word dragon in its name, no actual dragons were harmed in the making of this product.

Vital T Essential

Grow up but dont grow old, thats why weve created this drink packed with antioxidants to keep you looking and feeling young at heart. Although this product is not part of a so-called nutritious breakfast, it does contain many vitamins.

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C HAPTER 8

New Product Development and Product Life-Cycle Strategies

Introduction Marketers need to constantly innovate and come up with new products or improved versions of the existing products to meet the demands of modern customers. The development of new products is fraught with risks and should be done with lot of care. Companies deploy people/entities like product managers, product committees, product departments, and product venture teams for new product development process. A product goes through a number of stages of development before it is introduced into the market. These stages are: idea generation, screening, concept testing and business analysis, product development, test marketing, and commercialization. A product goes through four stages in its . They are: introduction, growth, maturity and decline.

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Section1

New Product Development

Challenges in New Product Development According to Booz, Allen and Hamilton, a leading consulting firm, new products can be categorized as: New to the world products These are products that create a new market and which have not been introduced earlier. New product lines It implies that companies enter an established market with the help of new products. Additions to existing lines Introducing products with slight variations in size, color, etc., to the existing product line. Improvement and revision of existing products- These include improved versions of the existing products that offer improved performance.

Repositioning - Targeting the existing products into new markets or newer market segments. Cost reduction- Introducing new products that provide the same benefits at a lower cost. Developing new products is essential for marketers. However, it also entails lot of risk. The fate of the new product in the market is unpredictable. For instance, PepsiCo., developed the soft drink Pepsi Blue after undertaking more than a 100 fusion cola test concepts. In addition, the company also conducted extensive market research prior to the launch of the new product. However, the product (Pepsi Blue) failed to make an impact in the market. It is also possible that wrong marketing strategies adopted by companies to promote their new product can lead to a products failure. For instance, New Coke introduced by Coca-Cola Company to replace its core brand Coke tasted bitter failure. Research conducted

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by the company indicated that customers were unwilling to accept New Coke as a substitute for the original Coke. The process of new product development must be taken up with utmost care, or it can have serious repercussions on the companys image and performance in the market. Studies have indicated that almost 33 to 60 percent of new products either fail in the market or after the company has invested substantial amount of resources in its development. Organizing the Product Development Process n general, companies organize their product development process with the help of the following people/ entities: Product Managers A product manager describes the product for development, drafts a business strategy for the product and also takes the responsibility for implementing the business strategy. Product Committees Organizations may also appoint high-level management committees responsible for reviewing and approving proposals for new product development. Product Departments Organizations may set up a separate product department specifically meant for product innovation and development. Product Venture Teams Organizations may set up a team consisting of members from various departments. This team is then given the responsibility of developing a new product for a specific business.

Stages of New Product Development The new product development process includes stages such as idea generation, idea screening, concept testing
Keynote 8.1.1: New Product Development Process

and analysis, product development, product testing, test marketing and commercialization (Refer keynote diagram for detail stages of new product development).

References: 1. Video on new product development: http:// www.youtube.com/watch? v=77nlewzswZM&feature=related

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2. Video on new product development: http:// www.youtube.com/watch?v=a1OHJcWewA&feature=related 3. New product development process: http:// tutor2u.net/business/presentations/marketing/ newproductdevelopment/default.html

Review 1.2

Question 1 of 8
Colgate Palmolive wants to introduce a toothpaste brand in the market. The company plans to undertake product testing to evaluate feedback from users. The company selects a group of target audience from within its employees for this exercise. What type of product testing method is being used by company?

A. Beta testing B. Gamma testing C. Alpha testing D. None of the above

Check Answer

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Section 2

Product Life-Cycle Strategies

According to the concept of Product-Life Cycle (PLC), every product goes through four stages in its life. They are: introduction stage, growth stage, maturity stage and decline stage. Introduction: This is the first stage in PLC. In this stage, marketers introduce the product in the market. The introduction stage is a rather difficult stage for marketers due to the following reasons: the expenses incurred in R&D, marketing and launch are very high for introductory products the risk of a new product failure is very high This stage is characterized by high expenses, negligible sales and zero or even negative profits. Strategies for introduction stage: With regard to price and promotion, a marketer may adopt any of the following strategies during the introduction stage. Rapid skimming: Companies may price their products very high and also promote the products at a higher level. This strategy is applied with a view to skim the market as quickly as possible. The rapid skimming strategy is useful when consumer knowledge about the product is low.

Video 8.2.1: Product Strategies

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Slow skimming: Marketers use this strategy when the product is not new to the market and there is no threat of competition. Producers offer their products at a higher price and the products are supported by a limited promotional budget. Rapid penetration: When the product is unknown to the market and the market size is relatively large, companies adopt the rapid penetration strategy. Marketers offer the product at a very low price and the product promotion budget is large. Slow penetration: Marketers may offer the product at lower prices and the product is supported by a limited promotional budget. The strategy is adopted when the product is well known to consumers and when the market is very large in size. Growth: This is the second stage in PLC. In this stage, the product gains huge demand, which is followed by an increase in sales. As a result, the product delivers huge profits. However, marketers of these products face threat of competition from new companies who introduce similar products with added features. Although, the profits are at their peak initially in this stage, they gradually tend to decline towards later stages in this phase. Also, the initial increase in profits can be attributed to the costs incurred on promotions that are spread over large volume of output produced and also to the cost per unit of product manufactured is reduced (economies of scale).

Companies resort to various strategies such as aggressive pricing, product quality optimization, distribution network optimization, etc., to sustain as well as to improve the sales of the product. Maturity: By now, the market is characterized by too many players and it leads to a decline in the sales of the product. However, sales decline steadily i.e. the sales grow initially then stabilize and finally begin to decline. The company also faces competition from other players and hence invests heavily in R&D to improve the quality of the product. Companies also devise various marketing strategies such as increased advertising and communication to sustain the profitability of the product. Decline: In the last stage of a products life-style, the sales and profits decline at a fast pace. The reason for decline could be the inability of the marketers to cope up with the increasing competition, advancements in technology that lead to introduction of better products, shift in tastes and preferences of consumers, etc. In this stage, marketers reduce the spending on the product by cutting down the promotional budget, reducing the distribution channels, etc. Marketers may also withdraw their products from the market during this stage. Limitations of the PLC concept: Not all products undergo their life-cycle in a uniform pattern, some products may quickly rise and fall, while some others may take a long time, increase in the promotional activities during the maturity or decline stage may prolong the life of the
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product in these stages. The product life-cycle only outlines the different phases of a product, but it cannot help in determining the duration of each of these phases. References: 1. Product strategies 2. New product development & Product strategies

Review 1.2

Question 1 of 3
The stages in the product follow which of the following sequences?

A. Introduction, Growth, Decline, Maturity B. Introduction, Maturity, Growth, Decline C. Growth, Maturity, Decline, Introduction D. Introduction, Growth, Maturity, Decline.

Check Answer

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Section 3

Case Study: New Product Development at Schwan Food Company: Innovation through Communication
This case was written by A. Mukund, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

2004, IBS Center for Management Research. All rights reserved. To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: [email protected] www.icmrindia.org
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One of the first things we did was arrive at a process that would allow us to develop world-class products through crossfunctional teams.1 - Joe Gruber, New Product Development Manager, Schwan Food Company, in April 2003. This patent-pending technology, proprietary crust, triangular shape and microwave susceptor make it the only retail product of its kind.2 - David Rettey, Senior Product Development Technologist, Schwan Food Company, in October 2003. AN EFFORT WELL-REWARDED In October 2003, Prepared Foods declared the US-based snack foods company Schwan Food Company (Schwan), as the winner of the 2003 Spirit of Innovation Awards. Schwan was given this award in the retail category for its newly launched product, Red Baron Stuffed Pizza Slices. Another leading industry publication, Stagnitos New Products Magazine too adjudged this product as the best new product of the year. To top all these achievements, the renowned publication, Refrigerated & Frozen Foods named Schwan the 2003 Processor of the Year. For the year 2002, Schwan also led the entire US food industry in terms of the maximum increase in the number of new products launched. The company was way ahead of seasoned food giants such as Kraft Foods, PepsiCo and Unilever (Refer Table I). Interestingly, it was the only brand among the top nine rank holders that was not popular at the global level.

Video: The Schwan Food Company

Video:Review on Red Baron Stuffed Pizza Slices

Video:Kraft Foods Christmas TV Ad From 1994

Video:Food Gaint Pepsi

These developments meant a lot to Schwan since it had reportedly been working hard for over two years towards introducing Red Baron Stuffed Pizza Slices. Thanks to these awards and recognitions, the $3 billion, privately-held company established itself firmly as one of the most innovative players in the intensely competitive US frozen foods business. In mid 2003, the company was the worlds largest frozen pizza processor, and in terms of market shares, was next only to the countrys largest food company, Kraft Foods.

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Table I -Top New Product Launching Food Companies in the US Number of New Rank Products Launched % Company Change (2002) 2002 2001 6 Schwan 106 65 63 3 General Mills (including 151 114 32 Pillsbury) 1 Kraft Foods 228 184 24 2 ConAgra 157 143 9 5 7 4 8 9 PepsiCo Unilever Nestl USA Kellogg USA (including Keebler) Campbell Soup (Pepperidge Farm) 111 105 137 79 74 106 101 136 83 108 5 4 1 (5) (31)

Darci Eckerman (Eckerman), the National Brand Manager for the Red Baron brand, had this to say about the product development efforts behind the Red Baron Stuffed Pizza Slices, This is the most significant and innovative of Red Barons products to date. The product is a prime example of long-term strategy and teamwork.3 BACKGROUND NOTE ABOUT SCHWAN Schwan was started as Schwans Home Service (SHS), an icecream home delivery business in March 1952 by the Marshallbased (in Minnesota, US) Marvin Schwan (Marvin). The primary motive for starting I NTERACTIVE 8.1 The Schwan Food Company this venture was to help Head Quarters Map Marvins family dairy business survive in the wake of unfavorable changes in the regulatory set-up. Focused efforts on the part of the family helped SHS grow rapidly. In 1965, Marvin started selling frozen pizza as well from the ice-cream delivery trucks to expand his product portfolio. The frozen pizza business proved to be very successful and Marvin decided to further explore the possibilities in this area. In 1969, SHS acquired a pizza factory in Salina (Kansas) and started selling pizzas to retailers as well as to institutional buyers such as schools, universities and hospitals. Over the next
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Source: www.preparedfoods.com

More importantly, many of the new products introduced by Schwan were reportedly doing well in the US market. Red Baron Stuffed Pizza Slices got off to a very good start with customers across the US taking to them in a major way. In an industry where 75% of the new products launched failed, this was indeed appreciable. Industry observers were unanimous in their opinion that Schwan had taken the exercise of new product development to never-before heights. Schwan sources too agreed that its customer-centric approach towards developing new products was a unique one in that it involved the entire company as well as certain external parties.

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three decades, the company grew largely through the acquisitions route. The SHS label marketed frozen pizzas under three brand names: Tonys, Freschetta and Red Baron. The Red Baron range was introduced in 1976 as an umbrella brand to offer throughout the day snacking solutions to customers. The brand earned the distinction of being one of the first nationally available frozen pizza offerings. As SHS expanded on a regular basis to various parts of the country, leading retail grocery stores F IGURE 8.1 The Red Baron Range across almost all the introduced in 1976 states in the US began stocking its products. The companys global expansion thrust began in the 1980s as it established manufacturing Source: http://s.ecrater.co and retailing businesses in the United Kingdom (UK, in 1989), France (in 1996) and Germany (in 1998). According to the companys website, Schwan had expanded to as many as 50 countries by the early 21st century. It was the largest frozen food producing company in the US with over 24,000 employees across the globe. Also, it was the market leader in the business of manufacturing and distributing frozen dessert and premium ice creams. The company dealt in the technology integration and foodservice equipment businesses as well. President and CEO, M. Lenny Pippin, said, As a com-

pany, we have every reason to be proud of our distinguished history of innovation and customer service. The Schwan Food Company is a leader in every market segment in which we compete today, and we are poised to achieve even greater success.4 Schwan operated through three primary business units: SHS, Schwans Global Consumer Brands (SGCB) and Schwans Food Service Group (SFSG). SHS operated in the direct-tohome food delivery business; SGCB, the retail-grocery division, took care of the premium frozen food business, and SFSG provided value-added frozen food to the food service industry (commercial as well as non-commercial). SHS was the countrys largest direct-to-home food delivery service, offering over 300 frozen food products (Refer Exhibit II for a list of the companys leading brands/products). In addition to ice-cream and pizza, it provided meat, seafood and other desserts. This unit sold its products through a toll-free number and the website www.schwans.com also. SGCB comprised two divisions: Schwans Consumer Brands North America (SBNA) and Schwans Europe. SBNA served the North American market with products under five brands Tonys, Red Baron, Freschetta, Pagoda and Larrys. Schwans Europe comprised three companies, Schwans France, Schwans Food GmbH and Schwans Consumer Brands UK Ltd. This division served the European Union with two brands Chicago Town and Freschetta. SFSG also had two constituent units: Schwans Food Service and Schwans Bakery. This unit offered products like pies, des241

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Exhibit II Schwan Food Company Product/Brand Prole* Brand Product/Category Arctic Express Ice-creams and ice-cream dispensers. Chicago Town Frozen pizzas and frozen meals. Coyote Grill Premium quality Southwestern entres (rst course of a meal) for the foodservices sector. Edwards Gourmet desserts (pies and pie-slices)

F IGURE 8.2 SFSGs Products Under Its Two Constituent Units

Source: http://i.walmartimages.com

Freschetta Frozen pizzas. H e i d i s G o u r m e t Gourmet desserts (cakes, cheesecakes and Desserts other desserts). Larrys Minh Mrs. Smiths Pagoda Proof Perfect Red Baron Schwans Schwans Select Tonys Western Country Pies Zings Microwave-ready side dishes. Frozen Asian foods. Frozen pies. Frozen Asian foods and egg-rolls. Premium pizza dough. Frozen pizza and snacks. Complete meal choices. Meals sold via mail. Frozen pizzas. Pies. Over 22 varieties of appetizers.

brands such as Edwards, Mrs. Smiths, Minh, Coyote Grill and Heidis Gourmet Desserts. Its customer base included institutional buyers such as schools, universities, restaurants, chain stores and healthcare facilities. Schwans Food Service was the division responsible for

the food service equipment business. In addition to these three core business divisions, Schwan had three subsidiaries that operated in various related/unrelated business areas. These were Explore Information Services, Bi-Phase Technologies and Schwans Call Center. Explore Information Services offered information technology (IT) solutions to automobile insurance underwriters and the government. Bi-Phase was involved in the alternative automotive fuels Exhibit III Schwan Food Company b u s i n e s s . F i n a l l y, The Structure Schwans Call Center provided inbound and outbound customer contact services to corporate clients (Refer Exhibit III for a look at Adapted from information available on Schwans company www.schwanfoodcompany.com.
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* The list is not exhaustive; a large number of individual brands are offered under the above categories. Source: www.schwanfoodcompany.com

serts, ethnic specialties, pizza, pasta and sandwiches through

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The Schwan Food Company Logo

structure and its logo). In the early 21st century, the company entered into various strategic alliances to grow. As a result of this initiative, leading brands such as Edwards Fine Foods and Mrs. Smiths Bakeries came under its fold. Schwan became the countrys largest supplier of frozen pizza to schools and the largest frozen Asian specialty foods proc-

As the pizza market evolved over the next two decades, Schwans decision to expand its presence in the frozen pizza segment proved to be a winning proposition. Though the company sold frozen pizzas under three labels (Red Baron, Tonys and Freschetta), the three brands were clearly differentiated in terms of the consumer segment they targeted. While Tonys was positioned as a good value brand, Freschetta was the upper-premium offering. From the beginning, Red Baron was positioned as a family product for busy mothers looking for quality snacks that were priced reasonably (Refer for the Red Baron logo). Starting with the Classic 12 Pizza, the range went on to encompass a wide variExhibit IV A Few Products from ety of snacks by the the Red Baron Stable early 21st century (Refer Table II for product offerings under the Red Baron label and Exhibit IV for a look at some of these products). The tagline From Morning to Night, for Every Appetite was used to highlight the brands suitability as a snacks solution for every part of the day. It was one of the largest brands in the industry in its category with over 98 million pizzas sold in 2001. Though Red Baron and other frozen pizza brands from Schwan were doing reasonably well, the company was aware of the changing dynamics of the frozen pizza business in the
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Source: www.schwanfoodcompany.co m

essor as well. ABOUT RED BARON

F IGURE 8.3 The Red Baron Logo

The frozen pizza business started by Schwan in 1965 had grown considerably by the mid 1970s, with US customers taking to pizza as a product category in a major way. Source: www.redbaron.com Though the product category was still in the nascent stages, the company decided to increase its presence in it. The move to launch the Red Baron frozen pizza range in 1976 was apparently in line with this decision. It was the first such product that was made nationally available.

Source: www.redbaron.com

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Table II - Red Baron Product Offerings Product Classic 12 Pizza Pizzeria Style Pizza Deep Dish Singles Deep Dish Mini Pizzas Breakfast Singles Pastry Pouches Variants Four Cheese, Special Deluxe, Sausage & Pepperoni, Supreme, Sausage, Pepperoni, Hamburger, Canadian Style Bacon (With Natural Juices), and Mexican Style Supreme. Pepperoni, Supreme, Four Cheese, Meat Trio, Sausage and Special Deluxe. Four Cheese, Special Deluxe, Sausage, Pepperoni, Supreme, Meat Trio, Cheese and Vegetable. Pepperoni, Cheese, Supreme, Pepperoni & Sausage. Ham Scramble, Sausage Scramble, Bacon Scramble, Western Scramble and Sausage Gravy.

Ham and Cheese Pastry Pouches, Philly Steak and Cheese Pastry Pouches, Turkey, Cheddar & Bacon Pastry Pouches, and Chicken, Broccoli & Cheddar Pastry Pouches. Deli Pouches Barbeque Beef Deli Pouches, Bacon Cheeseburger Deli Pouches, Chicken Fajita Deli Pouches, and Italian Style Meatball Deli Pouches. Deep Dish Pan Style Pizzas Four Cheese, Meat Trio, Pepperoni and Supreme. Pizza Pouches Pepperoni Pizza Pouches, Supreme Pizza Pouches, Sausage & Pepperoni Pizza Pouches, and Meat Trio Pizza Pouches.
Source: www.redbaron.com

Table III - US Frozen Food Industry Early 21st Century Trends 1. Retail sales of frozen foods in 2001: $26.6 billion (up 6.1% from 2000). 2. Frozen food sales in 2001 ($40 billion) were one-third of total foodservice sales. 3. Over 96% of restaurant owners planned to use frozen food for their table service operations. 4. For quick service operations, 100% of restaurant owners planned to use frozen food. 5. Developments in food technology were expected to make differentiating between frozen and non-frozen food (after preparation) extremely difficult in the near future. 6. On an average trip to the supermarket, 94% shoppers sometimes purchased frozen food. 7. Of the total number of shoppers, 30% always bought frozen food. 8. By 2003, the market for frozen appetizers and snacks was expected to increase to $662 million from $411 million (1998 figure).
Adapted from information available on www.affi.com.

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Table IV -US Frozen Food Industry Category-wise* Growth (2001) Category Meat/Seafood Baked Goods Pizza Prepared Foods Ice-cream Vegetables Breakfast Foods
* The list is not exhaustive. Source: www.af.com

Sales (in $ billion) 2.4 1.4 2.47 7.2 4.5 2.9 1.05

% Change (Over 2000) 13 9 6.4 6.1 5.7 4.3 4.1

country. THE NEED FOR PRODUCT INNOVATION The US pizza business had grown at a healthy pace since its inception in the 1960s (Refer Exhibit V for information on the pizza business till the 1960s). In 1985, pizza was ranked as the fifth most popular food in the country. By the late 1990s, the industry was growing at 8% per annum with yearly sales of $2 billion. In 1999, pizza became the most popular food in the US.5 Significantly, of the four broad segments, dine-in, take-away, homedelivery and frozen, the last was growing at the fastest rate. In fact, frozen pizza was growing the fastest within the entire US frozen food industry (Refer Table III for information on frozen food industry trends and Table IV for a comparative look at frozen pizza segments growth).

The reason behind the fast growth of the frozen pizza segment was the introduction of the rising crust technology in the mid 1990s. By using this technology, it became possible for customers to get restaurant/take-away/home-delivery quality pizza at home. Prior to this, the taste of frozen pizzas prepared at home was perceptibly inferior to the other categories. After the leading brands adopted this technology, customers took to frozen pizza in a big way. Jamie Sheffield (Sheffield), Brand Manager for a leading brand, said, The advent of rising crust pizza has expanded the consumer base for pizza in general, and as those consumers came back to the aisle, they got re-educated about what frozen pizza had to offer.6 By 2001, the frozen pizza segment was beginning to eat into the business of the other three segments, most notably the restaurants (Refer Table IV for a look at the 2001 sales of top eight pizza chains in the US and Table V for the segments performance). This was largely due to factors including lower prices, product innovations that rivaled the offerings of dine-in pizza com245

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panies and increased convenience. The frozen pizza segment was reportedly valued at $2.7 billion for the year, around 10% of the overall $26 million pizza business. The business had grown at a rate of 29.2% between 1995 and 2000. In 2001, the onslaught of this segment prompted one industry source to comment, In 2001, the pizza industry felt the effects of cheese that approached $2 a pound, skyrocketing gas prices last summer, the fallout from the terrorist attacks on the World Trade Center, not to mention the frozen pizza monster.7

Table V -US Pizza Chains Is the Growth Slowing Down? Chain Name Pizza Hut Dominos Pizza Papa Johns Little Caesars Pizza Chuck E Cheeses Pizza Hut (Mergeco) Sbarro Round Table Franchise Corp.
Source: www.pmq.com

US Pizza Sales (2001, $ % Change Vs. in 000s) 2000 5,000,000 2,817,000 1,747,000 1,250.000 630,054 523,261 470,041 364,500 0.00 6.41 4.67 (3.85) 7.36 5.88 (1.77) 1.99

F IGURE 8.4 Product Variants of Red Baron

Table VI -US Packaged* Pizza Business 1990 Sales as % of total Pizza Sales in the US 10.2 2000 11.8 2005** 13

Source: http://target.scene7.com 1 of 11

* Packaged pizza includes frozen pizzas, refrigerated pizzas and drymixes. ** Projected gure. Source: www.pmq.com

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EXHIBIT V - THE PIZZA INDUSTRY IN THE US EARLY DAYS

Customers across the world classify pizza under different product categories while some refer to it as a snack food, some eat it as a complete meal in itself. It is essentially an open, flat wheat-bread with a baked crust, usually 12-20 diameter in size. This bread is topped with tomato sauce, cheese, spices, vegetables and meats in different combinations. It is believed to have originated in Italy as the food of the working class in the 1800s. The credit for introducing pizza to the US market goes to Italian immigrants, one of whom opened a pizzeria (a pizza shop) in New York in 1905 (some reports state that the first US pizzeria became operational in the 1890s). Since it was possible to customize the toppings as per locally available products and tastes, pizza became Americanized to a great extent. Soon, the taste and popularity of pizza spread across the entire country. A www.foodprocessing.com article stated, no other food on the planet lends itself to variations in form and flavor quite like pizza. Apart from variations in toppings and spices, the size, shape and texture of the bread/pie also varied based on the type of flour used and the baking method. The use of tomato sauce and cheese, however, remained an inseparable part of pizza making. By the 1950s, pizzerias had evolved from small outlets to restaurants, offering pizzas in various price ranges and variants. The concept of mobile/convenient food too emerged around pizzas as the take-out (collect the pizza and eat elsewhere) and homedelivery (order on telephone) models became popular. Pizza became more than a food item it became a part of the everyday informal life of Americans. Its popularity transcended all age, religion and sex barriers. However, it was especially popular with children, pre-teens, teenagers and young adults. The corporate sector soon noticed the huge potential of this business. While fast food outlets such as McDonalds had been operational for quite some time then, there were no national level offerings in this business. The first organized sector pizza franchise set up was Shakeys, which began operations in 1954. Over the next few decades, many more companies entered the pizza business including Pizzeria Uno, Pizza Hut and Dominos. These players offered a wide variety of options to the customers in terms of product (taste variants) and service delivery mode (dine-in, take-away and home-delivery). While Pizza Hut focused on creating a restaurant experience around its pizza, Dominos made home-delivery its unique selling proposition. These two companies even expanded globally, making pizza popular in many parts of the world. By the beginning of the 1960s, technological developments in the food industry had led to the concept of frozen foods (products such as ice-creams, juices/drinks, snacks, meat/seafood, poultry and vegetables among others) becoming increasingly popular. Since pizzas were essentially linked to the convenience plank, the concept of frozen pizzas made a lot of sense. People looking for hot pizzas sitting in their homes just had to take a pizza straight out of the freezer and bake it. One of the first players in this segment of the business was Totinos. Schwans Red Baron was the first national level player. Soon, many other brands joined the fray such as Celeste Pizza-For-One, Stouffers, DiGiorno and Tombstone. Some companies also offered pizza cooking solutions such as pizza sauce, pizza crust and pizza dough mixes.
Compiled from various sources.
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Another reason for the rapid growth towards the early 21st century was the advent of singleVideo: The Rising Crust serve pizzas [also referred to as Pizza TVC pizza for one (PFO) and handhelds]. Taking convenience to a greater level, this new product was intended to serve a single person looking for a snack at any time of the day. Thus, unlike the regular pizza, wherein an entire pizza had to be prepared and consumed, single-serves catered to the needs of individuals. Rhonda Jordan, Vice-President (Marketing) of Kraft Foods said, There are opportuniF IGURE 8.5 Leading Players in the ties in virtually every Single-Serves Business segment of frozen pizza, whether it is stuffed crust or rising crust, but singleserve gets you to different usage occasions and different demographics than Source: http://farm6.static.flickr.com you might get with large sizes.8 By 2000, single-serves accounted for 95% of the total annual volume for one of the leading brands in the US, Celeste.

Attracted by the growing popularity of single-serves, most of the players began focusing on this segment. Besides Schwan, the other leading players in the business included Kraft Foods with its DiGiorno, Tombstone, Jacks Pizza and California Pizza Kitchen brands; Pillsbury, with its Totinos and Jenos brands, Aurora Foods with its Celeste brand, Frozen Specialties Inc with the Mr. Ps, FoxDelux, G&W and a few private label brands. Private label brands (from retailers such as Safeway and Kroger among others) were offered by many players all over the country. Prices ranged from $0.80 (for some private labels) to around $7 (for large-size and premium offerings). Competition became very intense with Schwan and Kraft Foods even becoming involved in a corporate espionage controversy. Since pricing, promotion and distribution innovations were replicated very quickly in the industry, product innovation emerged as the single-largest factor that gave a significant competitive advantage to companies. The thrust that Schwan gave to new product development (for Red Baron and the other brands as well) was in line with the above industry trend. Towards this end, the company set up a $15 million R&D center in Marshall, with R&D plant support outfits in three other locations. THE RED BARON STYLE OF NEW PRODUCT DEVELOPMENT While it was true that competition made it important for Schwan to focus on developing new offerings, there was another factor that fueled its decision to launch a truly innovative product. The company was quick to realize that the single-serve segment lacked a good quality, convenient and universally appealing product. It wanted to fill this product gap by leveraging upon its
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expertise in the frozen pizza business and its manufacturing capabilities. Schwan knew that if it wanted its new product to stand out from among the plethora of brands available in the market, it had to give its customers an attractive value proposition. The company decided to concentrate on making a snack that could be microwaved. This was expected to be a major innovation since most of the frozen pizza snacks available were not supposed to be prepared using a microwave (the crust remained soft after the pizza was microwaved). Therefore, many leading brands recommended that their product be baked directly in an oven. Also, typical pizzas needed to be baked for 11 minutes to 17 minutes. Schwan believed that if it could cut down on this time, it would be able to lure a lot of customers. The company began working on a microwaveable hand-held snack that could be prepared within a shorter time. The management commissioned a team of internal experts to work on this concept under a project that was code-named Project Razor. This team was the core group that was to remain on this project all through the development stage till the products commercialization. In addition, various cross-functional teams were also assigned to the project. These included personnel from the following departments: process engineering (PE), product development [PD, a part of the overall research and development (R&D) set up], regulatory affairs, sensory, applied research and culinary. In addition to the above, the manufacturing, sales and marketing, packaging services and corporate engineering departments were also involved in different ways.

Interestingly, the company involved a few external parties as well in the team (such as the packaging and equipment suppliers). Reportedly, these were entities of strategic importance with respect to the product development exercise. The reason why all these entities were involved was that Schwan wanted all parties concerned in any way with the new product, to work together. Company sources referred to the above exercise as creation of an architecture that facilitated innovation through communication. According to Jo Gruber (Gruber), New Product Development Manager, One of the first things we did was arrive at a process that would allow us to develop world-class products through cross-functional teams. Gruber added, From the very beginning, the business strategy is fully communicated to R&D and operations so they can be mindful of the directions we are considering.9 According to analysts, this (inviting outsiders) showed that the innovation angle was evident from the idea conception stage itself. Company sources claimed that innovation was a way of life at Schwan since it was an integral part of the corporate statement of purpose, The Schwan Food Company will be a strong, solid, well-managed, fast growing, exciting, innovative company with high business ethics and an excellent reputation a company that offers great opportunities and a place where people like to work.10 As per an industry report, Schwan had created a hybrid organization that was guided by the twin forces of innovation and execution excellence. The product development exercise began with a crossfunctional team sitting together to discuss the product being de249

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veloped (Schwan referred to this as the exploratory concept stage). All the team members from various disciplines were kept abreast of the proceedings and clearly informed of the design criteria. Above all, they had clearly earmarked responsibilities vis--vis their deliverables to the project. This ensured that all team members treated optimal resource (time and money) utilization as a priority issue. The key to managing this team efficiently was communication Schwan kept the communication channels within the team and between the company and team running smoothly. Joni Klimek (Klimek), Senior Product Development Technologist, said, One of the most important functions of this team was effective communication. Bringing people in early building team support, momentum, excitement and enthusiasm saved us a lot of development time.11 The teams discussions and ideas took concrete shape in the form of triangular stuffed pizza slices. Thereafter, Red Baron developed protocepts (referred to as gold standard protocepts by the company). These were then made into prototypes with the help of the PD and PE departments this involved translating the prototypes into a manufactured product as well. During the above process, Red Baron officials made use of various tools to eliminate the possibility of defects creeping into the design. These tools included focus group studies, concept testing, creating what-if scenarios and consumer testing. At each step, the prototype was modified as required to ensure optimal results. However, as the concept moved to the development stage, the team faced a few hurdles with respect to product design.

Foremost among these were issues related to the dough for the pizza slices, the process flows involved and the toppings. The manufacturing process for the slices involved the following steps: placement of the bottom part of the rolled out dough, dispensing the right amount of filling, covering the filling with the upper layer of the dough, cutting the above into the desired shape, and finally, adding the toppings. Since the design was new for Schwan, it had to develop a suitable manufacturing line from scratch. The installation of the new high-tech production line was completed in secrecy to prevent the innovative idea from being leaked. The installation was finished in roughly nine months. To add the toppings, the company developed a new substance (food starch) to help the toppings remain in the same place through all the processes that the product passed through (that is, baking, freezing, packaging and shipping). At this stage, the sensory group stepped in to check whether the products attributes matched the needs of the targeted consumer segment or not. The culinary groups contribution was in terms of helping the product meet Schwans pre-determined standards of taste and other related attributes. Product Development Manager Kristie Heis (Heis), said, The fact that we have culinary help is a tremendous asset to us; together we can work hand-in-hand. Once this groups suggestions were implemented, the regulatory affairs group examined the entire exercise to check whether all necessary regulatory guidelines had been complied with. Since the approach was customer-centric, inputs were taken regularly from the consumer research and marketing people.
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Each milestone in the project was evaluated against the expectations (perceived) of the target market. The entire exercise was reportedly co-coordinated through the Marshall-based R&D center. Facilities at this center included a research kitchen, a culinary kitchen, a lecture kitchen, five productdevelopment laboratories, sensory laboratories, an evaluation and tasting room, a focus-group laboratory (for consumer feedback) and general meeting rooms. Talking of the R&D centers design, its Vice President, Kati Fritz-Jung, said, It is designed to bring in customers and suppliers to help us work together to develop new products with them.19 All these facilities were utilized to the fullest extent possible. Commenting on this, Heis said, Figure II The Red Baron Stuffed We centralized Pizza Slices Box the operation in cul i n a r y, s e n s o r y, regulatory, process engineering, product development a n d a p p l i e d r esearch in Marshall. Source: www.redbaron.com Each of those resources is valuable for every project. Each function plays a key role, and communication between them is the key to successful product development.12 Based on research findings, the slices were given a vented, triangular sleeve that made it possible for the crust to become crisp after being put in the microwave. This was a significant

technological breakthrough. The choice of fillings was made keeping in mind the most popular pizza toppings. Red Baron Stuffed Pizza Slices were offered in these variants: Pepperoni, Five Cheese & Tomato, Italian Sausage & Pepperoni, Supreme, Italian Sausage Pizza with Roasted Red Onions and Garlic Chicken. The packaging was in line with the industry norms brightly colored boxes with pictures of the product displayed prominently (Refer Figure II for the Red Baron Stuffed Pizza Slices box). The boxes were priced at $2.99, with each box containing two slices. Schwan decided to cover its entire spectrum of retail outlets for selling the pizza slices. After over two years of exhaustive efforts and an expenditure of $25 million, Red Baron Stuffed Pizza Slices were launched on schedule13 in October 2002. Schwan sources claimed that this product was the first such since it actually looked like a slice of pizza (due to its triangular shape). At the launch, Eckerman said, Red Baron Stuffed Pizza Slices offer a unique, convenient way for families to enjoy their favorite pizza any time even when they are on the run.14 The launch was supported by a comprehensive marketing communications plan that primarily aimed at introducing Americans to the products innovative attributes. Sampling exercises were carried out across the US besides television commercials, point-of-sale promotions, public relations exercises, a dedicated website and a tie-up with a national publication. INNOVATING ITS WAY INTO THE FUTURE

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Though detailed information on the sales performance of Red Baron Stuffed Pizza Slices was not available in late 2003, media reports indicated that customers had taken to the innovative and convenient product in a major way. Some analysts believed that the slices could be a major revenue generator for Schwan in the near future. Meanwhile in November 2003, Schwan revealed plans to double overall sales by 2008. This was to be done on three fronts globalization, product innovation and marketing. The company was to adopt a three-pronged approach in this context: Improving operational efficiency, increasing employee involvement, and reducing waste; optimizing marketing and product development synergies; and leveraging R&D to develop new products. In 2004, SGCB was to expand its presence in Europe to build on Schwans number three position in the regions frozen pizza business. While UK, Germany and France were already covered, the latest plan envisaged tapping more countries in the European Union. Schwan was open to the idea of acquisitions as well in order to establish itself strongly in this region. In addition to strengthening the R&D center, Schwan employed many culinary chefs to help on the innovation front. The Executive Vice President for SBNA, Bill McCormack, said, Industry leadership and growth is our opportunity for growth as a company. We will achieve that through new product innovation that responds to and anticipates customer demand.15

The company was expecting SGCB to derive 25% of its revenues in 2003 from newly introduced products. In 2003, other new offerings (Freschetta Brick Oven Pizza and new variants under brands such as Tonys, Larrys and Pagoda) were also generating a lot of interest in the industry. Many talented executives were reported to have joined the company, attracted by its track record in terms of launching new products. The thrust on marketing involved fine-tuning the existing marketing mix and increasing the advertising expenditure. John Beadle (Beadle), SGCBs President and COO, said, We really do want to build up brand equity more than we have ever done before.16 Commenting on the grand strategy behind these initiatives, Beadle said, Our defining goal is that Schwan will become the biggest, the best and strongest provider of frozen-food solutions on the face of the Earth. Interestingly enough, one of Schwans first steps towards executing the above plan involved Red Baron Stuffed Pizza Slices these were to be distributed to grocery retailers in Canada in 2004. While it was true that the product had received many accolades from industry observers, the role that it seemed to be playing in the companys evolution in late 2003 was perhaps its biggest achievement till date. Click here to view the case analysis in brief QUESTIONS FOR DISCUSSION:
1.

What were the factors that made Schwan focus extensively on innovative product development initiatives? Answer with reference to the companys expertise in the fro252

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zen pizza business and the changes taking place in the industry.
2.

5. 6. 7.

As mentioned in Pizza Reigns Supreme, www.frozenfoodage.com, January 07, 2000. A Singular Sensation, www.frozenfoodage.com, November 01, 2000. Pizza Power 2002, www.pmq.com (website of the leading US pizza industry publication, Pizza Marketing Quarterly), 2000. A Singular Sensation, www.frozenfoodage.com, November 01, 2000. R e d B a r o n S o a r s w i t h Te a m w o r k , www.foodprocessing.com, April 2003.

Explain how Schwan organized the new product development exercise for Red Baron Stuffed Pizza Slices. What hurdles were encountered while moving from the idea development stage to the concept-strategy formation stage? How were these challenges overcome? Critically analyze the role played by Schwans crossfunctional teams in developing Red Baron Stuffed Pizza Slices. In what way did the various teams contribute in the project? In the light of the fact that a majority of the new products fail in the market, how do you think Schwans efforts would fare? What issues do companies need to keep in mind while developing new products in order to minimize the risk of failure?

8. 9.

10. www.schwanfoodcompany.com. 11. The Slice of Life, www.preparedfoods.com, October 2003. 12. Producing a Winner, Refrigerated & Frozen Foods, September 2003. 13. R e d B a r o n S o a r s w i t h T e a m w o r k , www.foodprocessing.com, April 2003. 14. Schwans Introduces Red Baron Stuffed Pizza Slices, www.redbaron.com, October 2002. 15. Producing a Winner, Refrigerated & Frozen Foods, September 2003. 16. S c h w a n B a k e s P l a n t o D o u b l e S a l e s , www.bizjournals.com, November 17, 2003.
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Footnotes: 1. 2. R e d B a r o n S o a r s w i t h Te a m w o r k , www.foodprocessing.com, April 2003. The Slice of Life, www.preparedfoods.com, October 2003. A susceptor refers to a metallic patch that is attached to microwaveable food packages. R e d B a r o n S o a r s w i t h Te a m w o r k , www.foodprocessing.com, April 2003. www.schwanfoodcompany.com.

3. 4.

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Additional Readings & References: 1. 2. 3. Hartnett Michael, Pizza Reigns Supreme, www.frozenfoodage.com, January 07, 2000. Hartnett Michael, A Singular Sensation, www.frozenfoodage.com, January 11, 2000. Gallun Alby, Kraft Takes Aim at Red Baron in Pizza Spy Fight, Crains Chicago Business, Vol. 24, Issue 8, February 19, 2001. Roberts A. William, Jr., An Appetizing Revolution, www.preparedfoods.com, May 2001. Hartnett Michael, Top Pizza Brands Create an Uprising, Frozen Food Age, Vol. 50, Issue 4, November 2001. Consumer Reports Lauds Frozen Pizzas, www.frozenfoodage.com, January 02, 2002. Pizza, www.findarticles.com, 2002. Pizza Power 2002, www.pmq.com, 2002. Riell Howard, Snacks by the Slice, Frozen Food Age, Vol. 51, Issue 6, January 2003.

12. G a r r i s o n B o b , P r o d u c i n g A W i n n e r , www.refrigeratedfrozenfood.com, September 2003. 13. R o b e r t s A . W i l l i a m , J r. , T h e S l i c e o f L i f e , www.preparedfoods.com, October 2003. 14. 2 0 0 3 S p i r i t o f I n n o v a t i o n A w a r d s , www.preparedfoods.com, October 2003. 15. Garrison-Sprenger Nicole, Schwan Bakes Plan to Double Sales, www.bizjournals.com, November 17, 2003. 16. www.affi.com 17. www.schwanfoodcompany.com 18. www.redbaron.com

4. 5. 6. 7. 8. 9.

Related Case Studies: 1. 2. BMWs Innovation Strategies, Reference No: 303-190-1 Allen Solly Entering the Indian Womens Western Wear Market, Reference No: 503-014-1.

10. Dornblaser Lynn, Top 20 Companies: Synergistic Acquisitions Pay Off, www.preparedfoods.com, March 2003. 11. Ennen Steve, Red Baron Soars with Teamwork, www.foodprocessing.com, April 01, 2003.
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Section 4

Case Study: Lifebuoy in India: Product Life-Cycle Strategies

Background Reading: Chapter 10, Positioning The Market Offering Through the Product , Topic 4, Product Marketing Strategies, Marketing Management (Philip Kotler)

This case study was written by C.V. Chiranjeevi, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources.

2009, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.
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Just as people go through infancy, childhood, adult hood and old age, so too do products and brands.1 While prediction is always hazardous and seldom very accurate, it is undoubtedly far better than not trying to predict at all. In fact, every product strategy and every business decision inescapably involves making a prediction about the future, about the market, and about competitors. To be more systematically aware of the predictions one is making so that one acts on them in an offensive rather than a defensive or reactive fashion this is the real virtue of preplanning for market stretching and product life extension.2 Theodore Levitt, Professor, Harvard Business School The iconic soap brand, LifeVideo: Lifebuoy Campaign of buoy, in the new millen1992 nium, started targeting Indian women shifting its traditional marketing focus from macho Indian male by coining a new marketing strategy that Lifebuoys use would help her family combat germs and keep diseases at bay. Having completed more than 110 years of , the brand still enjoys a strong consumer faith in Fast Moving Consumer Goods (FMCG) markets. The brand ranked top 9th in a survey Brand Equity Most Trusted Brands of 2008, according to an annual survey undertaken by Economic Times.3 Lifebuoy passed through troubled waters during 1999

when it started losing top-line growth at a rate of 15%20% per year. Its brand management strategies convey how brands can breathe new life and extend s without shifting from their core positioning. Its jingling campaign Tandurusti ki raksha karta hai Lifebuoy... (Lifebuoy offers protection of health...) was so powerful during 20th century that it still lingers down the memories of loyal consumers. The story of brick red cresylic, perfumed carbolic soap ended in 2002, paving way for new products in the category and integrating the brand into the social fabric and societys value system. How did Lifebuoy manage to rejuvenate the ? The Beginning of Lifebuoys Indias association with soap could be traced back to late 19th century when Unilever (Lever) exported its soap product Sunlight in 1888 followed by Lifebuoy in 1895. Lifebuoy entered Indian shores as an effective disinfectant, when the F IGURE 8.6 Sunlight Soaps Exported by Unilever during 19th Cencountry was under tury severe grip of plague during mid- 1890s. Its positioning in the market was clear with a promise that it kills germs a n d k e e p s t h e Source: http://farm2.staticickr.com body healthy. By mid-1930s, the
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demand for LifeF IGURE 8.7 Lifebuoy Positioned as buoy increased to Health Soap in India such an extent that Lever started manufacturing Lifebuoy at several places in India. Lever established its first Indian subSource: sidiary Hindustan http://image0-rubylane.s3.amazonaws.com Vanaspati Manuf a c t u r i n g C o mpany in 1933. Further, it established Lever Brothers India Limited followed by another firm called United Traders Limited in 1935. The three firms merged to form Hindustan Lever Limited (HLL) in 1956, a first foreign subsidiary company in India to go public with 10% equity offer. The corporate philosophy of HLL was to remain an invisible multinational and a loyal, good citizen brand of every F IGURE 8.8 One of the Print Ad of country in which it op- Lever Brothers India Limited erated. Since inception, Lifebuoy was a major contributor to HLLs total revenues. The brands positioning in health and hygiene platform with Source:www.advertisementsindia.com no substitute product in that platform, en-

Source: http://static.c2w.com

abled it to capture a huge market share in the rural markets of India. During mid-20th century, technological developments were at a slower pace and most of the Multinational Company (MNC) brands enjoyed monopoly in markets. Advertising efforts were limited due to high costs involved in print and other media sources. Advertising was limited to radio commercials, print ads, posters, hoardings and small clippings in cinema halls. The era of post-independence in India created an enormous demand for consumer products but the supply was less with consumers preferring functional products and services. Advertising focused majorly on hard working, savings minded and economic class of people. Lifebuoy coined a distinct and jingling advertising campaign during that period, Tandurusti ki raksha karta hai Lifebuoy..., which survived for several decades. The advertisement was focused on sweaty men representing hard work and heroic deeds of the period. The period belonged to famous patriotic slogans like Jai Jawan (soldier) and
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Exhibit I Lifebuoys Advertisement: Implying the Idea

Source: Brands and Advertising, www.business-standard.com/general/pdf/indi a60/6june%20%20brandsand%20marketing.pdf , June 6th 2007

Jai Kisaan (farmer) as people believed that a soldier is the one who saves the country from enemies attacks and the latter who feeds the nation with his hard work. Indias rural population, which accounted for about 70% of the total population adopted Lifebuoy as a routine and day-to-day require-

F IGURE 8.9 A 1963 Print Ad of Lifebuoy - positioned as Soap for Children.

ence was unclear. Consumers perceived Lifebuoy as an icon of health care product and sufficient in meeting the functional benefits of a soap product.

ment. Lifebuoys Changes in India Lifebuoy was originally positioned targeting blue-collared workers and later children but never the women. Its core positioning enabled the brand to enjoy glorious periods of growth in its for several decades during the mid-20th century. By 1963, Lifebuoy was the most popular body soap in India contributing a major share to the companys profits. HLL launched a new product called Lifebuoy Special as a line extension with a distinct perfume that would convey the deodorant properties along with its main stream of strong medicinal carbolic smell. But its test sales in a North Indian city, Lucknow proved unsuccessful, as the brands positioning in identifying the target audi-

In general, consumers form perceptions with Source: http://3.bp.blogspot.com respect to the positioning strategies of the product such as Lifebuoy The health soap, Pears The gentle soap and Lux The beauty soap of film stars. Consumers association with Lifebuoy as a brand offered a psychological pleasure with its distinct perfume and benefits.By 1967, HLLs Lifebuoy and Sunlight brands expanded rapidly and the company ranked one among the top five private sector firms in F IGURE 8.10 Positioning Strateterms of sales with a gies of Lifebuoy, Pears and Lux turnover of INR 932.8 million, strength of 7,000 employees and six factories in India.4 During that period most of the consumers in rural areas Source: http://2.bp.blogspot.com were illiterate and unable to read English. They remembered
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the products with certain Exhibit II distinct feaUsage of Colours and Symbols for Brand t u r e s , c o lRecall o u r s , s y mbols and pictures such as red soap for Lifebuoy and a palm Compiled by the author from: tree for http://www.unilever.com/sustainability/?topic=3 and D a l d a ( E xhttp://rajhoney.com/gallery/ vanaspati.htm hibit II). Manufacturers deliberately added colours, fragrances and symbols to enable consumers to identify and remain loyal to their brands. The difference between a product and brand becomes confusing when the brand itself starts acting as a product. Few products intertwine with the brand in such a way that consumers perceive the product as brand. For example, Colgate toothpaste became so popular during second half of 20th century in North India that rural consumers perceived only Colgate as a toothpaste. Rural consumers often asked Colgate kiya kya...? (Did you do Colgate?) Similarly, Lifebuoy carbolic soap became so popular during the period that any red coloured bath soap was perceived by rural consumers as Lifebuoy (Exhibit III). During late 1970s, Lifebuoy witnessed the signs of maturity with sales growing, but at a slower pace compared with the

previous years. Most of the consumer prodExhibit III ucts during that period Brand Communication: Lifebuoy faced marketing shake-ups due to increased number of competitors in the industry. As competitors identified new touch points in the soap inSource: Chatterjee Purvita, A Lifeline for Lifebuoy?, dustry, consumers http://www.thehindubusinessline.com/catalys found more choices of t/2003/05/15/stories/ brands from compa2003051500080100.htm, May15th 2003 nies like P&G, Godrej and Nirma in markets. Conversely, the sales of Lifebuoy, which enjoyed a huge market share from rural markets, witnessed a squeeze in sales due to increased competition. Further, the advent of colour television during 1980s transformed the sphere of advertising by bringing consumers close to the brands. Lifebuoys marketing strategies which were originally aimed at rapid penetration of markets with low pricing and low promotional strategies were challenged by new local marketers. Similar to its strategies, Nirma entered the market fray, initially in the detergent soap segment and later moved to toilet soap manufacturing. Nirmas aggressive marketing strategies by 1977 made it the second-largest volume seller and a potential rival to HLL in the country.

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With liberalisation of markets during 1990s, the soap industry witnessed rapid growth and consumer markets flooded with wide variety of new soap products. This picture of a sweaty, hardworking man bathing with a hard, red carbolic soap, on the tandurusti (health) platform somehow stood the test of time and continued till well into the 1990s.5 But its monopoly was challenged by new brands with more value prepositions such as freshness, beauty care, nature-care, and deodorant in soap bar manufacturing. Further, the high growth rates of services sector at the rate of 10.5% during 1999 2000 compared with 7.1%during199319946 played a significant role in changing consumer needs. With services sector performing consistently high, income levels increased and many people migrated from rural to urban areas. As the income levels increased, consumers preferred expensive soaps. During 1992, Nirma offered tough combat to Lifebuoy by launching Nirma Bath (carbolic soap) offering more value for money in the rural markets. With consumers demanding more benefits in soap market, the sales of Life- F IGURE 8.11 Nirma Detergents buoys carbolic soap and Toilet Soaps started diminishing in rural markets. By 1996, soaps, detergents and household care products of HLL fell from the heights of 69% in 1992 to 45% in 1996 (Exhibit IV). Ru- Source: http://2.bp.blogspot.com ral consumers query, why do I need Life-

buoy when all soaps clean was indicative of the decline of the brand.7 By the end of the 20th century, Lifebuoy witnessed a steady decline in market share. A New Life Line in Lifebuoys

EXHIBIT IV HLL Sales by Segment: 1992-2001

Source: HLL Reports and Accounts 2001, http://www.hul.co.in/investor/Annual%20Re ports/2001/ Annual%20Report%20-%202001.pdf

The new millennium opened with rapid expansion of economy with growing income levels, prompting consumers to spend more in many new avenues. Further, the steep decline in interest rates from 18% to 8% during that period led to an explosive demand for consumer durables like two wheelers, automobiles, mobile phones and other white goods by restricting their expenditure on FMCG products. Though HLL posted a profit growth of 22.42% to INR 1,310 crore in 2000 as compared to INR 1,070 crore in 1999, its net sales moved up with a marginal growth of 4.5% to INR 10,604 crore as compared to INR 10,142 crore of previous fiscal year.8 The reason for slow down of growth was due to fall in sales of Lifebuoy soap. Competition from low-cost producers hurt Lifebuoy and dragged the market share by value of Levers soap business to 59.1% in 2000 from 62.7% in the previous year.9 Dr. Noel Capon, faculty, Marketing, Harvard Business School, defined the decline phase of PLC, by decreases in annual sales growth that may range from very gradual to steep.10 Lifebuoys marginal growth of 4.5% during 2000 marked a decline
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of its PLC leaving managers in a dilemma of brand development. In general, brand managers shrewd enough to prevent the dip of sales growth initiate measures to avert the decline of the . How can products of iconic brands escape such an inevitable stage of decline phase in product ?In order to continue , the brands must move the times to stay relevant to modern consumers. Brand development is an art and science of building and developing the brand image by understanding the needs of modern consumers. Successful MNCs like Sony, Dell, ColgatePalmolive, Nestle, Cadbury, P&G, HLL, etc., constantly studied the changing needs of modern consumer and developed new products to keep them afresh and competitive in the industry.Understanding the needs of modern consumers, Sony manufactured radios, cassette players, tape- recorders, VCD, DVD Players, Hi-Fi music systems and so on. With the rapid development of technology in audio systems, it offered various product line extensions and next generation products to fulfil the consumer needs. Managing the lifecycle of a brand means anticipating and preparing for brand after- life. Line extensions, innovative methods of delivery, next generation products are fast becoming the new after-lifeblood of the industry.11 The concept of PLC may be applied to a brand but it may be as short as a few months or long as a century or more for products like HLLs Lifebuoy soap or P&Gs Ivory. By early 21st century, the PLC of carbolic soap entered a decline phase bringing along the brand to suffer a similar fate. But the marketing strategies of HLL enabled the brand to rejuvenate its by repositioning the brand with several new products. In order to extend the of the brand it adopted a strategy of brand rejuvenation without getting away from its core positioning.

Backed by high advertising budgets, it injected new products targeting higher segments of Indian society (Exhibit V). Rejuvenation would be undertaken if the customer target is different and the positioning remain the same as before.12 In a bid to drive growth in the sluggish soap market, HLL launched Lifebuoy Active during the second Exhibit V half of 2001. The new Lifebuoys Product and Brand Rejuproduct was launched venation with a shift in positioning from a male brand to a family brand by offering new fragrance, extra lather and a new Active-B formulation that offered Source: Babu Venkatesh, Issues of Brand Rejuvenation Strategies, protection against www.brandchannel.com/images/papers/ germs that cause infec297_Brand_Rejuvenation.pdf, page 10 tions in the stomach, eye and in cuts and bruises. Lifebuoy offered several variants of new soaps like Lifebuoy Total, Deofresh, Nature, Care, Activefresh, International plus, International Gold and specialised products like Lifebuoy Handwash, and Lifebuoy clear skin which provides treatment and protection against acne (Exhibit VI). Active Green, Lifebuoy Hand Wash, Lifebuoy Talcum Powder and so on. Introducing the Lifebuoy talc, Sanjay Dube, category head, Mass Markets remarked, For over 100 years, Lifebuoy has been synonymous with health and value. We are now further strengthening this brand with the
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launch of talc that inF IGURE 8.12 Lifebuoy Active Posi- hibits the growth of tioned as a Family Brand germs causing body odour. This wellresearched and proven formulation provides tangible benefits of health for the user and his family.13 To commuSource: /www.p-wholesale.com nicate awareness about health and hygiene, during 2001, HLL set up 14 stalls at Maha Kumbh Mela in Allahabad city to notify the significance of washing hands through product demonstrations. In 2002, Lifebuoy launched a 5-year massive rural health and hygiene programme across eight states of India, with an investment of $5.4 million called Lifebuoy Swastya Chetna (LSC) to create awareness about the importance of washing hands with soap. The need for s u c h s o c i a l p r o- Variants of Lifebuoy Soap in 2001 gramme arose from the fact that diarrhoea is a major cause of death in the world, claiming the life of one child every 10 seconds and one-third of these deaths occurring in India.

According to HLL, the campaign, LSC was not a philanthropic activity, but a marketing programme with a social benefit. HLL sought to grow the Lifebuoy brand in India by attracting those consumers who never Source: http://innovindia.blogspot.com/ used soap. In the process, the company sought to bring about a behavioral change by convincing people to use soaps more frequently, thus creating more users for its brand.14 Exhibit VI Lifebuoys Repositioning in the New Millennium Consequently, the sales of Lifebuoy grew by 20% in 2003 2004 in these eight states covered under the programme.15 During 2005, the goodwill of the comF IGURE 8.13 Lifebuoy Swastya pany increased conChetna programme 2002 siderably among consumers, the government and the media and Lifebuoy sales increased by 10%. 16 The campaign covered about Source: http://htmlimg4.scribdassets.com 17,000 villages and 20 lakh children across the selected
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about the threat caused by germs and necessary hygiene practices reSource: http://knowledge.wharton.upenn.edu/ quired to counter the threat.17 By creating the health and hygiene awareness in rural areas, Lifebuoy targeted to promote social awareness and reach the poor in rural markets who constituted a major chunk of population. Unlike many MNCs that target the rich segment of consumer markets, HLL had been the most effective consumer brand companies in reaching the poorest of the poor in India and other developing countries. It is Indias largest exporter of branded consumer products and Forbes Global has named it the best consumer households company worldwide.18 C.K. Prahalad, professor of corporate strat- Video of the Lifebuoy Krrish TVC egy at the University of Michigan Business School in his book The Fortune at the Bottom of the Pyramid, Despite the fact that these people subsist on annual per capita incomes of less than $1,500, this bottom of the pyramid represents a multi-trillion-dollar market. Taken together, nine developing nations China, India, Brazil, Mexico, Russia, Indonesia, Turkey, South Africa and Thailand have a combined GDP that is larger, in purchasing power par-

Audio: CK Prahalads Quote from the book The Fortune at the Bottom of the Pyramid

states in creating awareness

Exhibit VIII Changing Income Patterns: Effects on Consumer Buying

ity, than the combined GDPs of Japan, Germany, France, the UK and Italy.19

Further, in most of the categories of FMCG, the growth in urban markets is saturated due to intense competiSource: CLSA Conference Investor Presentation, forcing compation, nies to focus on rural www.hul.co.in/investor/presentation/2008/ markets. In 2006, inCLSA_HK_Sep24_2008.pdf, September 24th 2008 dustry analysts remarked that India constitutes 6.27 lakh villages covering 72% of total population and are potential growth markets where the race for market share needs to be focused.20 Lifebuoys focus on the bottom of pyramid that constitutes a major section of rural population is a reason for HLL to believe that the brand has a prolonged in the consumer markets (Exhibit VII). In an aggressive marketing initiative in June 2006, HLL decided to use the big budgeted film Krrish for co-branded promotion of Lifebuoy, by printing Krrishs character on Lifebuoy packs. It also planned to appoint Pantaloon Retail to create products such as masks and tattoos, cashing in on the popularity of the film.21 Explaining the reasons why Lifebuoy had chosen Krrish for its promotion, a HLL official remarked, We chose Lifebuoy over the other brands since the brand is all about protection and Krrishs character is also about protecting
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Lifebuoy diversified from carbolic soap to various models, keeping in view that the income scenario in the rural and urban population Source: HUL ghting the challenge in the would change in the growing FMCG market, years to come. The www.cse.iitm.ac.in/~nishanth/downloads/ income pattern of marketing_pres.pptx consumers, which was pyramidal during 2003, is likely to change into a diamond shape with huge surge in aspirer group of consumers from 46 in 2003 to 124 by 2013 (Exhibit VIII). HLLs foray into underpenetrated markets with new products resulted into strong year-on-year growth in quarterly sales at 16.8% in December 2007 and 19.17% in March 2008 compared with previous 35 quarters. Its best sales growth was 14.36% in December, while in a worst scenario, sales declined by 11.5% in March 2002.22 HLL intends to drive the mileage of the brand by using LSC as a tool of social change and marketing in rural areas. The programme conveys that people spend huge amounts of money on treatment of easily preventable diseases like diarrhoea with simple precautionary measures like washing hands.

Exhibit VII Consumer Soap Buying Behaviour Sections of Population

the world from enemies.

Finding the spaces in marketing, Lifebuoys strategies enabled the brand to extend the indefinitely, with a set of promises and values that meet the needs of new generation customers. While iconic brands like Oldsmobile, Polaroid and Cadillac failed to meet the changing consumer needs and witnessed a natural death, brands like BMW, Usha Lexus, Lifebuoy, Lux A Jigsaw Puzzle for Students

and Sunsilk entered related contemporary product category and strengthened the existing equity of brand. Sen Shunu, CEO of Quadra Advisory a strategic marketing consultancy remarked that unlike a product , brand is infinite and depends on the vision and capabilities of the team managing the brand.23 He advised the brand builders, Remember that brands that dont keep up get lost quickly. They first become irrelevant, then invisible and then theyre gone.24
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Footnotes:
1. 2. Product Managing Your Product to Maximise Success, http://www.mindtools.com/pages/article/newSTR_80.htm L e v i t t T h e o d o r e , Te d L e v i t t o n M a r k e t i n g , http://books.google.co.in/ books?id=dGAYqicydTkC&pg=PA17&lpg=PA17&dq=Prod uct+life+cycle+and+brand+life+cycle+++Theodore+Levitt&source=bl&ots=NaVT6mgg1H&sig=Br W3Oi_fCTmkGCNlhE4n7JAMLQo&hl=en&ei=8WDgSZHe C4Sw&sa=X&oi=book_result&ct=result&resnum=8#PPP1 ,M1, 2006, page 39 BE survey: Nokia is Indias Most Trusted Brand,http:// economictimes.indiatimes.com/articleshow/msid-3115558, prtpage- 1.cms, June 10th 2008 Jones Geoffrey, Managing Governments: Unilever in Ind i a a n d Tu r k e y, 1 9 5 0 - 1 9 8 0 , www.hbs.edu/research/pdf/06-061.pdf ,2006, page 19 Pande Shamni, Heed Those Jingles ; What Has Worked in Communication, and What Has Not? Heres a Sampling of Some Choice Servings of the Sublime and the Ridiculous,http://www.istockanalyst.com/article/ viewiStockNews/articleid/2823152 , November 16th 2008 7.

Indian Economy: Economic Sector in India,http:// india.mapsofindia.com/indian-economy/major-economic-s ectors.html HLL plans rural campaign to reposition Lifebuoy To pitch on hygiene platform, http://thehindubusinessline.com/bline/ 2002/02/13/stories/2002021300580600.htm, February 13th 2002 HLL profit rises 22.42%, sales growth slows down, http://www.indianexpress.com/ie/daily/20010216/ibu16040 .html, February 16th 2001 Ibid.

10. C a p o n N o e l , P r o d u c t , utopia.duth.gr/~gk7844/moustakis/M1-2007-08/product_lif e_cycle.pdf, August 16th 1985 11. Robins Rebecca, Building Better Brands: Brand lifecycle management, myth or reality?, http://www.brandchannel.com/ papers_review.asp?sp_id=632 12. Babu Venkatesh, Issues of Brand Rejuvenation Strateg i e s , w w w. b r a n d c h a n n e l . c o m / i m a g e s / p a p e r s / 297_Brand_Rejuvenation.pdf, page 10 13. Chatterjee Purvita, A lifeline for Lifebuoy?, http://www.blonnet.com/catalyst/2003/05/15/stories/20030 51500080100.htm, May 15th 2003

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14. L i f e b u o y s S w a s t y a C h e t n a I n i t i a t i v e , http://www.businessinsights.biz/Business%20Insights%20I nternational/ Business%20Updates/lifebuoy.htm 15. I didnt know soap could save lives. I didnt even know a b o u t g e r m s . w w w. u n i l e v e r. c o m / I m a g e s / es_Lifebuoy_promotes_handwashing_tcm181-13301.pdf 16. Ibid. 17. HLLs Lifebuoy becomes first Indian brand to have a special postal cover news, http://www.domainb.com/companies/ companies_h/hind_lever/20060407_Indian.htm, April 7th 2006 18. Marketers Must Seek Their Fortune at the Bottom of the Pyramid, http://knowledge.wharton.upenn.edu/india/ article.cfm?articleid=4030, March 10th 2004 19. Ibid. 20. H L L , I T C t a k e b a t t l e t o V i l l a g e s , http://www.financialexpress.com/news/hll-itc-take-battle-tovillages/147386/0, February 20th 2006 21. Chatterjee Purvita, HLL to ride on film Krrish to market Lifebuoy, http://www.thehindubusinessline.com/2006/06/24/stories/2 006062401550500.htm, June 24th 2006

22. Chhabria Vishal, Big Is Beautiful Pound Wise, http://www.business-standard.com/india/storypage.php?au tono=324686, June 2nd 2008 23. S e n S h u n u , N i m b l e b r a n d s s t a y e t e r n a l , http://www.blonnet.com/catalyst/2002/07/25/stories/20020 72500180400.htm, July 25th 2002 24. Ibid.

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C HAPTER 9

Pricing and Marketing

and selecting the pricing policy. Companies adopt a pricing pattern based on several aspects. The common methods adopted by marketers to fix the price of products and services are: geographical pricing, promotional pricing, discriminatory pricing, discounts and allowances, experience curve pricing, and product mix pricing.

Check Answer

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Section 2

The Process of Product/Service Pricing

The process of product/service pricing involves the following steps:

Figure 9.2.1: Process of Product/ Service Pricing

Setting Pricing Objectives: The pricing objectives of

a company should be in line with its overall objectives. Pricing objectives vary from company to company. While one company may price its products with a view to gain a huge market share, another might aim for long-term sustainability, etc. Some of the pricing objectives of companies are discussed below. Survival: Setting prices with a view to survive in a highly competitive environment is a short-term objective. Here, marketers might resort to price cuts in order to combat the competition. Profit: Marketers price the products with a view to attain profits. They analyze various pricing alternatives and arrive at a pricing strategy that would give maximum profits to the company. Return on investment: Companies may also price their products with an objective of getting a return on their investment. Market share: Most companies price their products with a view to capture a considerable market share. According to
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them, an increase in market share would lead to increase in profits. Status quo: Sometimes, companies maintain stability in the price of their product/services. This helps in stabilizing the demand for the product in the market and also helps in reducing the potential threat from competition. Product quality: Companies may also set prices to reflect the quality of the product. The price of the product may also include the costs incurred on R&D to improve the quality of the product. Also, for some customers high priced goods imply good quality. Therefore, companies try to link price to product quality. For instance, Lakme Lever offers cosmetics products under the brand names Lakme and Elle 18. While Lakme is positioned in the premium range, Elle 18 is targeted at teenage girls as a trendy yet easily affordable product.
Example: Marutis Pricing Strategy for Swift In July 2005, Maruti Udyog Ltd., launched its much talked about Swift car with a price tag of Rs.3.87 lakhs, much to the chagrin of its competitors Hyundai, Ford and General Motors. Swift was supposedly launched to compete with Hyundais Getz, General Motors Corsa and, Fords Fusion range of cars. While Getz was priced at Rs.4.5 lakhs, Corsa cost Rs.4.2 lakhs, with Fusion being the costliest at Rs.6 lakhs. However, the company maintained that the price was only introductory and that the offer would extend only up to three months.
Compiled from various sources.

Demand Determination: Forecasting the demand for

product/services in the market is essential for marketers before determining prices. Companies determine the demand for the product/services with the help of market research teams and sales forecasts. Price sensitivity: In general, the price of goods reduces when there is decrease in demand and increases when there is increase in demand. However, this does not always hold true as consumer preferences, perceptions and tastes also influence the price to a great extent. For instance, consumers tend to be less price sensitive under these conditions when the product is new and offers a unique proposition, when they are unaware of substitute products, when the product is perceived of high quality and so on. Although, it must be noted that modern consumers are very demanding and becoming increasingly price sensitive.
Figure 9.2.1: Demand Curve

Demand curve: Demand curve can be used as a tool by marketers to analyze the price-demand relationship of a product. Organizations use a variety of methods such as analyzing past data (sales and demand), conduct consumer surveys, etc., to analyze the pricedemand relationship.

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Price elasticity of demand: It is the percentage change in quantity demanded of a commodity divided by the percentage change in the price of that commodity. Marketers can easily set the price of their products once they determine price elasticity of demand. The price elasticity of demand is given by
% Change in Quantity Demanded % Change in Price

Sometimes, companies may also bring down the prices of the products in comparison to the prices offered by the
Example: P&Gs Crest White Strips The success of P&Gs dental care product Crest White Strips is largely credited to the consumer survey that the company conducted prior to the launch of the product. As the product was priced at $44 (considered a high price for a dental care product), the company was concerned about the whether the product would be accepted in the market. Hence, P&G decided to conduct a consumer survey to garner the reactions of the consumers towards the product. Accordingly, the company created a website called www.whitestrips.com, and also launched an eightmonth long promotional campaign encouraging consumers to visit the website. P&G also made the product available for sale on the website. To the surprise of the company, the consumers liked the product. P&G sold an estimated 1,44,000 Crest White Strips within eight months of the promotional campaign.
Compiled from various sources

Video 9.2.1: Price Elasticity of Demand

competitors.

Analyzing Competitors pricing: Every marketer must assess

and analyze the competitive environment the firm is operating in. This is necessary because consumer demand pattern is also influenced to a large extent by the pricing strategies of the competitors. Therefore, it is essential that companies analyze the pricing strategies of competitors and accordingly react to the competitors moves. A marketer may react either by maintaining the status quo or set prices equal to that of the prices offered by the competitor.

The selection of a pricing method: Companies can

choose any of the following pricing methods: Mark-up pricing: In mark-up pricing, marketers fix a selling price that generally exceeds the cost incurred in manufacturing that product. For example, if a company has incurred around Rs. 78 as the cost to make a product then it might add-up a margin of some amount, say, Rs. 22 and sell the product at Rs. 100.
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Markup expressed as a percentage of cost = Markup/cost Markup expressed as a percentage of selling price = Markup/Selling price Target return pricing: With this method, marketers fix the price of the product with a view to get back returns on the investment made in manufacturing the product. Target return pricing can be obtained with the help of the following formula: Target Return Price = unit cost + (desired return X invested capital) / unit sales Perceived value pricing: Companies may also set prices based upon the consumers perceived value of the product. Perceived value is calculated as a weighted average of the products perceived attribute scores. Going rate pricing: In this method of pricing, marketers set the prices depending upon the prevailing pricing patters in the market. Companies may also adopt the same pricing strategy as that of the competitors. Sealed bid pricing: This method of pricing is more suitable for industrial products. In this method of pricing, the price of the product or service is usually quoted in a sealed cover. This method is generally adopted for those products that do not have a designated a market price or when it becomes difficult to fix the price because of changing levels of quality parameters and specifications demanded by the customers.

Differentiated pricing: In this method, marketers adopt different prices for the same products at different locations or even for different customers. For instance, petrol is priced differently in different states in India. Value pricing: In this method of pricing, marketers offer high quality products or services for low prices. Value pricing helps the customer perceive that they are getting high quality products at a low price. Market skimming: When companies come up with an innovative or a breakthrough technology, they adopt the market skimming strategy. In this method of pricing, marketers set high prices while launching the products/services into the market in order to recover their costs as early as possible.

The selection of pricing policy: The pricing policy is

dependent upon the internal and external environment in which the company is functioning. Marketers adopt a variety of pricing policies for their companies. The following are some of the pricing policies a company may adopt:

Psychological pricing: It is observed that consumers perceive higher priced products to be of good quality. For instance, consumers may feel that higher the cost of a silk sari better will be its quality. Interestingly, a study observed that consumers are more inclined toward buying a product with a price that ends with an odd number, more precisely 5 or 9. Studies conducted in the US indicated that of the two catalogues published (one containing prices ending in 00 cents and the other con274

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tained prices ending in 99 cents), consumers were more likely to place orders from the catalogue containing prices ending in
Example: From Teh Bazaar to China Bazaar
Teh Bazaar, a pavement market, situated at Chandni Chowk, Delhi, offers a range of goods within a price range of Rs.10 to Rs.125. The pavement markets origins can be traced back to the reign of the last Moghul emperor Bahadur Shah Zafar. It was during this period that the Teh Bazaar was renowned as a market for the poor consumers. Since then the market had its abode in the streets of Chandni Chowk. Typically, the Teh Bazaar starts at 7 p.m. in the evening and continues until midnight. One can find goods such as toys, kitchenware, footwear, clothes, fashion wear, noodles, etc. In this bazaar all the goods are priced between Rs10 to Rs125. In fact, the age-old market with its diverse product range and irresistible price range still continues to lure the price conscious consumers. China Bazaar situated in various major cities of India are increasingly becoming popular with the modern price conscious Indian consumers. Though, these markets have nothing in common with China, not even the products range. In fact, China Bazaar are markets that stock a wide variety of goods ranging form footwear to fashion wear, from gift articles to household items that are outsourced from different markets within India. Generally, these bazaars offer their entire product range for a standard price of Rs. 65. The bazaars resemble small exhibitions and are located at prime footfall areas such as cross roads, flyovers, etc. Price sensitive consumers are highly attracted to these markets as the bazaars offer items such as purses, stuffed toys, hot packs, buckets, mops, tubs, glasses, pillows, coffee mugs, lamps, kitchen racks steel, utensils, toys, bins, etc., for just Rs.65. Compiled from various sources.

organization, the price charged for the goods is called transfer pricing.

R EVIEW 9.2
Question 1 of 7
In which pricing method the price of the product is set after fixing the required return on investment?

A. Differentiated pricing B. Value pricing C. Target return pricing D. Going rate pricing.

99 cents.

Check Answer

Transfer pricing: When one division of an organization transfers or sells goods or services to another division of the same
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This case study was written by J. Shalom Jenifer under the direction of Lekha K.C.Ravi, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources.

2 0 0 8 , I B S C D C . No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.
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The first adopters always pay a premium. I am one of them. I am used to that. But that one was too soon, too harsh.1 Steven Wozniak, Cofounder of Apple Computers Apple Inc., one of the most renowned companies in the world for computer technology, ranked 121st in F IGURE 9.1 Various Apple Products the Fortune 500 in 2007.2 Apple Inc., with its focus on design and manufacture of consumer electronics, earned revenues of$19,315.0million3 in 2007.Apple products Source: http://images.apple.com include Apple TV, iPod and iMac. These products have earned a reputation for being highly priced as also of high quality. On June 29th 2007, amidst much fanfare and keen anticipation from its customers, Apple launched the iPhone.4 The iPhone was touted as a revolutionary device, which combines, for the convenience of the user, the features of a mobile phone and an iPod. Within 2 months of the gadgets entry into the market on September 5th 2007, Apple lowered the price of its 8 gigabyte (GB) storage iPhone from $599 to $399.5 (To know more about iPhones price cut story click here).This created a furore among customers and other players in the industry. In the technology industry, where the product lifecycle is short and the market is highly sensitive, many experts ponder if the price cut was the right move.

iPhone: A Revolutionary Invention The technology influencing moVideo: Apple's iPhone Introbile phones sprang into promiduction nence in the mid-20th century. Mobile phones are becoming absolutely indispensable in the developing world6, said Robert Conway (Conway), head, GSM Association. The first mobile telephony service started in Sweden was a form of radio telephony tested by the Swedish police for use in police cruisers. This form of radio telephone was a two-way radio, which was widely used in taxis and police cruisers. In 1946, American AT&T and Southwestern Bell brought out the first commercial mobile telephone service, which was used in communication devices. The modern mobile phone was developed, researched and experimented in the 1970s.7 In the late 1980s, the mobile phone industry started developing rapidly, attracting more users. In 2003, there were approximately 1.52 billion mobile phone users around the world.8 The technology is experiencing a faster growth and mobile phones are getting more and more sophisticated (Annexure I). Applications of mobiles are expanding as mobile phones assist in security systems and surveillances. According to Conway, The technology is a gravitational force that brings into its orbit a huge amount of innovators.9 Adoption of technology has only increased the number of users using different gadgets and it has showed no signs of slowing down even in developing nations. As consumers advance
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through different stages of their lives, the interest levels, usage patterns, spending habits, and brand preferences for mobile and other technological products and services constantly change. Un1976 - First mobile phones, used in Chicago derstanding lifestyle changes and what the consumer wants are the key elements in forecasting the target 1 of 12 market in mobile technologies and services. The iPod, for example, was a new revolutionary model from Apple. Apple was the first company to fully exploit the home computer market and launched the iPod, F IGURE 9.2 iPod in Different Forbringing digital music mats to the masses. With the introduction of the iPod, the company created a userfriendly product, where the user could download music from the Internet and transSource: http://images.apple.com fer it onto the player. Apple uses its technoANNEXURE I Evolution of Mobile Phones (Compiled by the Author)

logical expertise to improvise its products, based on consumer needs. According to Richard Jameson, analyst, GfK NOP10, Apples history proves that it has the magic touch when it comes to product development and marketing.11 After its launch, Apple totally redesigned its iPod and introduced the iPod Nano, a fullfeatured iPod in a small size that changed the rules for the entire portable music market. After the introduction of iPod Nano, the iPod continued its run as Apples single most successful product. As the market was moving towards convergence between various devices, the most fashionable amongst Apples products, the iPod Nano made a strategic move, with optional accessories including lanyard headphones. The iPod Nanos also came with a price drop. A 4GB version of the device was priced at $149, $50 below the cost of the current version with the same memory. An 8GB version was priced at $199, also $50 less than the current model.12 Following the phenomenal success of its iPod, Apple planned the launch of the iPhone, a combination of an iPod and a mobile phone. Apple wished to make a breakthrough with consumers in terms of design and user interface with its iPod. The launch of iPhone pro- Video: A Closer Look At The voked so much hype and de- iPhone bate like no other product launch in the past. The hugely anticipated new technological gadget iPhone, launched on June 29th 2007, revolutionised the tech-savvy market. Apples iPhone entered the highly volatile cell phone market combining telephony,
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MP3, Web surfing and video watching. It was the most awaited gadget by both the technology enthusiasts and mainstream media. The shipments during the holiday season of 2007 were expected to top the previous years 21 million units.13 iPhone proved to be a revolution as it had reformulated the way people interact with computers. It features a 2-megapixel camera, headset and audio jacks, an iPod dock, Wi-Fi, stereo Bluetooth and a speakerphone (Exhibit I). The divice weighs about 135g, which is a little heavier than a standard mobile phone but lighter than many devices with a QWERTY keyboard. The thin design has a touch screen and does not have a keypad. Users have to use onscreen soft keys to dial numbers, enter web addresses and type e-mails and text messages. All menu navigation and data entry from typing messages to dialling phone numbers is done on the touch screen, which makes it appealing to the less tech-savvy user. The phone also supports a digitalmusic player that syncs with iTunes. Apples voicemail system formulates good use of its visual interface to let users pick just the message they want to listen to. The iPhone has a built-in rechargeable battery that offers a talk time of up to 8 hours and standby time of up to 250 hours. However, browser sessions on GPRS rapidly depletes the battery. The battery life would be shortened if the iPhone is used as an iPod music player by users. Apple iPhone has unique features and does most functions with single contact and works with long standby time unlike other phones. It supports features like multitasking wherein the user can read a web page while downloading e-mail in the background over Wi-Fi or EDGE. The interface is unique with a large multi-touch display and innovative new software that allows controlling everything with the touch of a finger. It combines the fea-

EXHIBIT I The Apple iPhone

Features Multi-touch support 3.5-inch 480 x 320 touch screen display 2 megapixel cam 4GB or 8GB of storage Bluetooth 2.0 with EDR and A2DP WiFi that automatically engages when in range Quad-band GSM radio with EDGE Runs OS X with support for Widgets, Google Maps, and Safari, and iTunes (of course) with CoverFlow out of the gate 5 hours of battery life for talk or video, with full 16 hours in music mode. Source: Ziegler Chris, The Apple iPhone http://www.engadget.com/2007/01/09/the-apple-iphone/, January 9th 2007

tures of multiple tools into one handheld device and appear in a grid of colourful icons. The four chief functions -Phone, Mail, Safari web browser and iPod appear in a separate strip along the
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Apple iPhone (8GB) Appearance Multi-touch support 3.5-inch 480 x 320 touchscreen display 2 megapixel camera QWERTY keyboard

Exhibit II - Comparison of Features of Popular Mobile Devices Blackberry Pearl (8100) Nokia e-Series (E61) Dimensions are 107 x 51 x 14.5mm 90g1.3MegaPixels Camera, memory card slot, music player and voice dialling QWERTY keyboard Network with GSM 850/ 900/ 1800/1900 EDGE data, Bluetooth 2.0, SureType text keypad and push email 1.9GHzand 800 MHz digital. 320x240pixels, 58 x 45 mm QWERTY keyboard with fiveway scroll key 117x69.7x14mm, 108 cc and weight 144 g

imate 8150 1.75inches wide, 4.25 inches long, and about 0.75 inches thick with joystick 176x22065Kcolor reflective TFT screen, and IrDA 120MHz,ARMv5 processor 16MBRAM, 32MB ROM Unlocked QuadBand 3G/ EDGE/WiFi.

Browser and Technology Wi-Fi that automatically engages when in range RunsOSXwith support for Widgets, Google Maps, and Safari, and iTunes (of course) with CoverFlow out of the gate Quad-band GSM radio with EDGE Bluetooth2.0with EDR and A2DP. Storage 4GB or 8 GB of storage 5 hours of battery life for talk or video, with a full 16hours in music mode. UMTS/GSM850/ 900/ 1800/1900 Edgewith 10,236.8 kbps Wi-Fi802.11i/e/g, VoIP over WLAN MP3/AAC/ MPEG4 player

64 MB flash memory Battery with 900 mAh Li-Ion 360 hours standby.

Standard battery, LiPo1500mAh (BP-5L) Standby Upto 260h Talktime Upto 7 h 128 MB shared memory. $357

Price $399.00 (Reduced price)

Compiled by the author

$229.95

$799.95
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bottom. All these sophisticated features made the iPhone a much sought after device. There was, however, tough competition from the other players as well. Though there were overlapping features with the top mobiles, the Apple iPhone continued to enjoy a niche market (Exhibit II). The iPhone combined the features of an iPod music and a video player with that of a mobile telephone and was available through AT&T Wireless Services. The iPhone had been locked by the service provider AT&T in the US in a 2-year service agreement. In countries like India, customers cannot use the iPhones even if they purchase it in the US or UK, as they have to reload the software to use it. The demand for iPhone was relatively strong and it has been rated higher than the demand for any other Apple product that has ever been shipped.14 According to iSuppli, iPhone was the best-selling handset, among the 270,000 smart phones and feature phones sold to US consumers during the first month of its sale in July 2007.15 Market analysts pointed out that Apple had created a strong brand and customer loyalty, which it capitalised on by adopting a skimming strategy in pricing. They also felt that Apples customers accept its highly priced products with equanimity. To go a step further, they consciously expect it to be so. iPhone: Banking on Pricing The iPhone had entered the market with a stock of about 300,000 iPhones and a manufacturing capacity of roughly 150,000 a month.16 The 8 GB iPhone was available for $399 in the US through Apples retail and online stores and AT&T retail stores. The iPhone 4GB models were sold only till the supplies lasted.17 Apple had launched its iPhone during the holiday season (when spending was on a high) to make it affordable for

more customers. The Apple iPod, which was launched in October 2001 was a success story and was priced at $349 (as of 2007) for 160 GB. Though relatively high priced for an MP3 player, it was hugely in demand and remains popular till date though there was a price slash in 2005. The new ipod shuffle with 512 MB, which was introduced later, has a unique appeal and its price starts at $99 and $149 for 1GB.18 Joe Wilcox, analyst at Jupiter Research observed that the lower- priced iPod is a part and parcel of Apples new mass-market strategy using which the company could sell its one-millionth piece before the end of September 2007. 19 Steve Wozniak, cofounder of Apple Computers, said, Nobody expects a product to drop that much in price in such a short time.20 He criticised Steve Jobs (Jobs), the chief executive of Apple Inc., for his decision to drop the price of the iPhone by $200 within 68 days after being launched. Jobs, in his letter on the companys website, acknowledged that Apple had disappointed some of its customers by the sudden price cut of the iPhones 8GB model and said he had received hundreds of e-mails complaining about the price cut. According to Apple executives, the move had been planned long ago and felt that the pricing strategy was conceived in part to keep the iPhones pricing in line with its new iPod Touch. But the sharp price cut suggested that even Apple, which has long-lived in a pricing bubble insulated from other personal computer makers, is not immune to the brutal pressures of the cellular phone business.21 My suspicion is that they got to 750,000 really quickly, and then it started to slow down,22 said Van Baker, an industry analyst at Gartner Group. Following the price cut, share price of Apple dropped by 5% and stood at $136.76 on September 5th 2007.23
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Jobs issued an apology after a surge in the consumer complaints on September 6th 2007, the next day after its price cut for those who purchased the product at high price (Annexure II). It refunded the $200 difference for those who bought the phone within 14 days of the reduction. After protests over the decision to reduce the price of the iPhone, the company offered $100 credit at Apple stores in a move to make peace with those who had purchased the higher-priced phone before that period.24 EXHIBIT III - Retail Price of 8GB iPhone Countries US UK Germany India Australia
Compiled by the author

Initial Price $599 $537 $553 -

Release Date June 2007 October 2007 November 2007 2008 2008

Protests against Apple went to the extent of consumers filing cases against the company. Dongmei Li (Li), a customer of Apple, filed a case on September 24th 2007 in the US District Court against the company for violating price discrimination laws claiming that it should stop selling the $499 4GB model.25 Li had waited for the launch of iPhone and then found that the store had only 4GB iPhones in stock and had subsequently purchased one. Much to her chargin, Apple then slashed the price of the 8GB iPhone and stopped selling the 4GB model. Hundreds of customers like Li who paid the full price did not expect the sudden reduction and complained bitterly. Li went on to sue Apple on

the ground that the price reduction badly affected F IGURE 9.3 Prada phone KE850 early purchasers, as they could not resell the product for the same profit as those who bought the cell phone following the price cut. The complaint mentioned that Li was only offered the $100 store credit Source: www.mobilegazette.com while those who had purchased their iPhones 2 weeks prior to the price cut were refunded $200 in cash. The historical analysis of Apples stock price (which Li provided in the eight-page complaint) outlined Apples incredible stock market gains in the time period following the price cut. Apple, however, had no financial reason to cut prices, but to gain more customers during F IGURE 9.4 Nokia N800 the holiday season.26 By the end of September 2007, Apple had sold 1.4 million iPhones and also launched the device in the UK, Germany, and France.27 In Asia and Australia, iPhone was scheduled Source: www.gizmos.es for release in 2008 (Exhibit III).
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ANNEXURE II APOLOGY LETTER SENT BY STEVE JOBS TO IPHONE CUSTOMERS To all iPhone customers: I have received hundreds of emails from iPhone customers who are upset about Apple dropping the price of iPhone by $200 two months after it went on sale. After reading every one of these emails, I have some observations and conclusions.First, I am sure that we are making the correct decision to lower the price of the 8GB iPhone from $599 to $399, and that now is the right time to do it. iPhone is a breakthrough product, and we have the chance to go for it this holiday season. iPhone is so far ahead of the competition, and now it will be affordable by even more customers. It benefits both Apple and every iPhone user to get as many new customers as possible in the iPhone tent. We strongly believe the $399 price will help us do just that this holiday season.Second, being in technology for 30+ years I can attest to the fact that the technology road is bumpy. There is always change and improvement, and there is always someone who bought a product before a particular cutoff date and misses the new price or the new operating system or the new whatever. This is life in the technology lane. If you always wait for the next price cut or to buy the new improved model, youll never buy any technology product because there is always something better and less expensive on the horizon. The good news is that if you buy products from companies that support them well, like Apple tries to do, you will receive years of useful and satisfying service from them even as newer models are introduced.Third, even though we are making the right decision to lower the price of iPhone, and even though the technology road is bumpy, we need to do a better job taking care of our early iPhone customers as we aggressively go after new ones with a lower price. Our early customers trusted us, and we must live up to that trust with our actions in moments like these.Therefore, we have decided to offer every iPhone customer who purchased an iPhone from either Apple or A T&T, and who is not receiving a rebate or any other consideration, a $100 store credit towards the purchase of any product at an Apple Retail Store or the Apple Online Store. Details are still being worked out and will be posted on Apples website next week. Stay tuned.We want to do the right thing for our valued iPhone customers. We apologize for disappointing some of you, and we are doing our best to live up to your high expectations of Apple.Steve JobsApple CEO.
Source: To all iPhone customers, http://www.apple.com/hotnews/openiphoneletter/

Apple has indicated in the past that its one price fits them all strategy is to assist the evolution of the youth market and make this form of buying more attractive to consumers28 (Exhibit IV). Apple no longer accepts cash purchases for iPhone and it limits the sale of the cell phone to two per person to stop people from reselling them.

While the company was dealing with the price cut controversy, its competitors were working on developing models that could compete with the iPhone. Apples competitor LG was working on iPhone killers. Its new product Prada phone KE850 attempts to offer unbeatable combinations of style, features and price.29 It costs 300 ($614) (Annexure III). Nokia with its N800 was already

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Exhibit IV Price Comparison of Different Brands

Laptop Apple Sony Dell HP Pavilion dv6500tse Samsung Creative LG Prada Nokia Blackberry Pearl
Compiled by the author

Annexure III - Competitors of iPhone

iPhone $599 US$780 $276.64 $229.95

iPod and Mp3 $290.90 $173.11 $303.01 $200

$1,999 $1,760 $1,424 $1,522

a tough competitor to Apples iPhone with a niche market. The iPhone price cut caught the media attention in a big way and Video: Analysts Speak After raised questions about the de- iPhone Sales Triple After vices continued success. How- Price Cut. ever, there are also some advantages to Apples price cut (Exhibit V). The Price cut has raised the question as to whether Apple needed to stimulate demand, as it is the most valued gadget in history, by reducing the price drastically soon after its release. Experts observe that Apple is switching from a price-skimming strategy to

Samsung F700 Features: 5 megapixel camera, Touch pad technology, 7.2 Mbps impressive downloads, QWERTY Keyboard, 2.78" Color Display, Bluetooth

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Exhibit V Excerpts from Several Advantages To Apples iPhone Price new subscribers. Eventually, Apple 1.Attract more non-AT&T (T) customers to switch carriers. Apple receives bonus revenue for Cut will have to offer the iPhone to other carriers, but while its exclusive to AT&T Apple can capture high margin revenue. Service revenues fall straight to the bottom line, thus it makes sense for Apple to ramp up adoption as much as possible before their exclusive carrier agreement expires. 2.A high initial price meant that the early adopters would be mostly die-hard Apple loyalists. This consumer segment has significant Apple bias, thus those users will talk very positive about the product, hence generating significant buzz. In addition, loyalists wont focus on any drawbacks, for they focus on all the strong points of the device. Thus, Apple is less likely to receive negative word of mouth from the product release. 3.The initial high selling price means fat margins that can be allocated toward the recapture of up-front development costs. The sooner these development costs are recovered, future margins will expand at a faster pace. 4.The new iPod Touch is essentially an iPhone, without the phone capabilities. Thus, both the new iPod and iPhone will share the same components, which will drive scale efficiencies. The shared costs between the two products will aid in offsetting the margin decline stemming from the lowered selling price. Increase in volume spreads fixed costs over more units, which improves the incremental profit margin per unit. 5.The lower price point of the iPhone should dramatically boost adoption. According to a ChangeWave Alliance survey of 3,000 non-owners, one-third stated high price as the reason for not buying an iPhone. Roughly 25% of those respondents indicated they would likely purchase an iPhone in the future, which one-third said they were waiting for the price to come down. 6.Apple is switching from a price-skimming strategy to a market penetration strategy. Apple will be able to expand market share quicker; this will strengthen competitive barriers.
Source: Muller Turley, Several Advantages To Apples iPhone Price Cut, http://seekingalpha.com/article/46827-several- advantages-to-apple-siphone-price-cut, September 10th 2007

market penetration strategy. They felt that it would be able to expand market share more rapidly and competitive barriers could be strengthened through the change in strategy.

Road Ahead In spite of its popularity, the iPhone is said to suffer a few shortcomings. Apple iPhone lacks certain features like user-changeable battery, voice dialing, voice recording, video recording, instant
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messaging, MMS, copy and paste and common Bluetooth file transfer (OBEX). It is hard to use the on-screen keyboard because of its small-sized surface.30 Further, the iPhone is available only through AT&T service provider and not through third parties. It comes with 2-year service agreement in the US because of which customers of other countries like India have to reload the software to use it. Many users opine that though it boasts of a very clear and sharp screen, Apples user interface is finger driven and the screen rapidly becomes covered in unsightly fingerprints. Apart from these limitations, Apple had to tackle the consequent criticism following the price cut of the iPhone. Stephen Hoch, marketing professor at Wharton University, observed, The reversal on Apples iPhone may have been more dramatic because the company has marketed itself as consumer friendly. People have strong positive feelings about Apple. They feel they are part of the Apple family. When Jobs announced the price decrease, people felt betrayed.31 According to Wharton faculty and analysts, the iPhone episode reveals the perils of pricing in a marketplace where constant innovation, fierce competition and globalisation are changing the rules of the game.32 John Zhang, marketing professor at Wharton University, said, The product lifecycle is short and the market is moving quickly. You dont have a lot of time to learn from your mistakes. You have to price the product right the first time.33 Jobs, while speaking to reporters, defended his move stating that his price cut was directed to attract new customers in the holiday season with more aggressive pricing. He added that it benefits both Apple and every iPhone user to get as many new customers as possible in the iPhone tent.34 Jobs observed, ...even though we are making the right decision to lower the price of iPhone, and

even though the technology road is bumpy, we need to do a better job taking care of our early iPhone customers as we aggressively go after new ones with a lower price. Our early customers trusted us, and we must live up to that trust with our actions in moments like these.43 Greg Joswiak, Apples worldwide vice president of iPod and iPhone product marketing, also agreed with Jobs and observed that there was no better time for the price cut and he also added that it was that time of the year that was most important and an opportunity to come into the holidays with a fresh and aggressive product line.35 Keeping in mind Apples range of high-priced products which gives them an aura of exclusivity, was Jobs decision to reduce the price a right one? As demand for the elusive iPhone soars, analysts are closely watching the fallout of the price cut. Jagdish Rebello, director and principal analyst, iSuppli, said, With a 50 percent gross margin, Apple is setting itself up for aggressive price declines going forward.36

FOOTNOTES: 1. Burke Steven, Apple Legend Woz Blasts iPhone Price Drop And Refund Policy, http://www.crn.com/hardware/202100333, September 22nd 2007 2. F o r t u n e 5 0 0 , http://money.cnn.com/magazines/fortune/fortune500/2007/full _list/101_200.html 3. Ibid. 4. iPhone Premieres This Friday Night at Apple Retail Stores, http://www.apple.com/pr/library/2007/06/28iphone.html, June 28th 2007
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8. 9. 10.

11.

12.

13.

14.

Apple Sets iPhone Price at $399 for this Holiday Season, http://www.apple.com/pr/library/2007/09/05iphone.html, September 5th 2007 Mobile phone technology turns 20, http://news.bbc.co.uk/2/hi/technology/6983869.stm, September 7th 2007 H i l l I a n , M o b i l e P h o n e - E v e r y d a y C l e v e r , http://www.abc.net.au/southqld/stories/s1482448.htm, October 11th 2005 Ibid. Mobile phone technology turns 20, op.cit. A p p l e i P h o n e t o o e x p e n s i v e , s a y c o n s u m e r s , http://www.telegraph.co.uk/connected/main.jhtml?xml=/conne cted/2007/ 11/23/dliphone23.xml, November 23rd 2007 Crum Rex, Apple revamps entire iPod line, cuts iPhone price: Shares drop on worries about low iPhone demand; touchscreen iPod debuts, http://www.marketwatch.com/news/story/apple-shares-fall-iph one-price/story.aspx?guid=%7b1AD005D1- E60C-456498C3-9842358467B7%7d&print=true&dist=printTop, September 5th 2007 Krazit Tom, Apples iPhone takes center stage, http://www.news.com/Year-in-review-Apples-iPhone-takes-ce nter-stage/ 2009-1041_3-6222156.html, December 17th 2007 Krazit Tom, Apples iPhone price cuts leave mixed feelings, http://asia.cnet.com/reviews/mobilephones/ 0,39050603,62032012,00.htm, September 10th 2007 Apples iPhone price cuts leave mixed feelings, op.cit.

15. Howe Karl, Apples iPhone Price Cut is Smart Marketing, http://seekingalpha.com/article/46620-apple-s-iphone-price- cut-is-smart-marketing, September 7th 2007 16. Apple Sets iPhone Price at $399 for this Holiday Season, op.cit. 17. Jennifer LeClaire, Apple Shuffles Price Strategies with New iPod Model, http://www.macnewsworld.com/story/39590.html, November 11th 2005 18. Apple Shuffles Price Strategies with New iPod Model, op.cit. 19. Apple Legend Woz Blasts iPhone Price Drop And Refund Policy, op.cit. 20. Darlin Damon, Apple cuts iPhone price and revamps iPods, http://www.nytimes.com/2007/09/05/technology/05cnd- apple.html?em&ex=1189310400&en=1e18a6b4c2fb4789&ei= 5087%0A, September 5th 2007 21. Ibid. 22. Apple cuts iPhone price and revamps iPods, op.cit. 23. Robertson Jordan and Wong May, Apples Jobs Sorry for iPhone Price Cut, http://www.washingtonpost.com/wp-dyn/ content/article/2007/09/06/AR2007090601766.html, September 6th 2007 24. Jose San, Woman Sues Over Apples iPhone Price Cut, http://abcnews.go.com/print?id=3676420 25. Woman sues iPhone trio over price cuts - Steve Jobs, A p p l e , AT & T a l l n a m e d i n l a t e s t l a w s u i t , http://www.intomobile.com/ 2007/09/29/man-sues-iphone-trio-over-price-cuts-steve-jobs-

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26. 27.

28.

29.

30.

31. 32. 33.

34. 35.

36.

apple-att-all-named-in-latest-lawsuit.html, September 29th 2007 Apples iPhone takes center stage, op.cit. Delahunty Dela James, NBC denies Apples claims, http://www.afterdawn.com/news/archive/10950.cfm , September 2nd 2007 MacLeod Murdo, All I Want for Christmas Is the Smartest Mobile Phone, http://www.macnewsworld.com/story/iphone/ 59572.html, September 30th 2007 Apple iPhone, http://lifestyle.headlinesindia.com/nokiaphone/apple-ipho ne.html The Price Is Right. But Maybe Its Not, and How Do You Know? http://knowledge.wharton.upenn.edu/ article.cfm?articleid=1813, August 21st 2007 Ibid. Ibid. Krazit Tom, Apple to offer $100 store credit to iPhone customers, http://www.news.com/8301-13579_3-9773207- 37.html, September 6th 2007 To a l l i P h o n e c u s t o m e r s , http://www.apple.com/hotnews/openiphoneletter/ Apple revamps entire iPod line, cuts iPhone price: Shares drop on worries about low iPhone demand; touchscreen iPod debuts, op.cit. A n a l y s t s : I P h o n e P r i c e s M a y G o D o w n , http://www.washingtonpost.com/wp-dyn/content/article/20

07/01/18/ AR2007011801360.html, January 18th 2007

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Section 5

Case Study: Moser Baers Pricing Strategies: Competence-based and Value-driven?

This case study was written by Parveen Sultana and Fathima Reshma Taj H. under the direction of Saradhi Kumar Gonela, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources.

2 0 0 9 , I B S C D C . No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.
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Why should a newly released Hindi film not be available on the streets of New York at $2 against a pirated version at $4 or an original at $20?1 Harish Dayani, CEO, Moser Baer Entertainment Limited By the end of 2009, Moser Baer India Limited (MBIL) became the worlds second-largest manufacturer of optical storage media MBIL - Optical Storage Melike CDs and DVDs with a 20% dia Manufacturer global market share.2 It is the first company to market the advanced storage formats like Blu-ray discs and High Density (HD) DVDs. MBIL is a multitechnology organisation with presence in Solar Energy, Home Entertainment, PC Per i p h e r a l s a n d C o n s u m e r Source: http://media2.intoday.in Electronics.3 It produces 4 billion discs a year and exports them to 82 countries through its marketing offices in India, US, Europe and Japan. It also has strong tie-ups with major global technology players like Sloveniabased Solar value Proizvodnja and OM&T B.V a specialised Research and Development (R&D) 100% subsidiary in Netherlands. Moser Baer Entertainment Limited (MBEL), a wholly-owned subsidiary of MBIL, offers home video titles in various Indian languages at unmatched prices and is also engaged in media content creation. MBEL has acquired rights for 10,000 titles in 18 Indian languages and has released close to 3,000 titles in the mar-

ket as of 2008. The company also offers non-film titles, such as devotional, classical, health, tourism and educational series. MBEL offers its products through carrying and forwarding agents, distributors, owned and franchised outlets and online sales. It acquired copyright licenses for a wide range of movies and sold DVDs/VCDs for rock bottom prices giving the pirates a run for their money. With its low pricing strategy, it gained a considerable market share in the home video market. But with the other major companies like Big Home Video, Sony Entertainment and Phoonk also capturing the market with low pricing strategies, competition in the home entertainment industry is all set to heatup, benefitting the customers. Indian Home Entertainment Industry An Overview The Indian entertainment industry has witnessed a phenomenal growth in the last three decades of the previous century from content development to delivery mechanisms. With sweeping changes in technology and innovation during the 20th century, the art of music, drama, and street plays that ruled the Indian entertainment industry for centuries lost their grip on the Indian audience paving way for films, radio, television and cable network. Prior to Indias independence, the sources of home entertainment were negligible as technological developments were in nascent stages. The only source of home entertainment was radio which entertained the Indian masses for most part of the 20th century. Though Indian radio debuted in 1924, its real operations began only after Indias independence when the All India Radio (AIR) was created as a separate department under the Ministry of Information and Broadcasting (MIB) in 1947. Its primary objectives were National Integration and National Consciousness to
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overcome the political instability and act as an inlet for the flow of modern ideas, following independence. Broadcasting during the period was strongly believed to harness the benefits of political and national building. It was due to this particular objective, that the government, during 1950s was averse to investing in the television industry. Further, it was felt that the country needed to build sources of self-reliance rather than investing in the medium of entertainment. By September 1959, television broadcast commenced in Delhi as a part of AIRs services. Televisions first expansion began in 1972 when it started its second broadcasting station at Bombay. By 1975, its relay stations expanded to Srinagar, Amritsar, Calcutta, Madras and Lucknow. With the growing complexity of television broadcasting system, Indian government constituted Doordarshan in 1976 as a separate department and a national television network which was to be under the direct control of MIB. For about 17 years since its inception, Doordarshan was the only prime channel that entertained people with its black & white transmission programmes. In 1982, India hosted Asian Games and with that, colour transmission was introduced for the first time for the games coverage. Radio and television provided music and entertainment to people, by regularly upgrading their technology and content. Although, various programmes pertaining to agriculture, poultry, education etc., were broadcasted on radio and television, people mostly preferred listening to film songs and watching movies by staying at home. The success factor behind radio and television during the period was undoubt-

edly the Indian film industry which entertained people with its movies and songs. While television and film industry were growing at a rapid pace during the late 20th century, the growth of Information Technology (IT) played a major role in integrating the two media by inventing necessary devices to enable households play movies on the TV sets. The first device in this category was the Video Cassette Player (VCP). The ease in operating the VCP and the choices that it provided in the luxury of the living room made the device popular. However, the real boost for home entertainment market was the invention of Compact Disk Read-only Memory (CD-ROM) in 1972. Until late 1980s, CDs were mostly used for data transportation for personal and organisational requirements as its usage could not gain significant momentum in the initial period. Music was sold in pre-recorded audio cassette and music record players were used for listening to the music. By late 1980s, audio cassettes were losing ground to CDs, but the low storage capacity and quality of CD hampered its growth to a large extent. In 1987, Indias first musical album named Shagufta sung by famous Indian ghazal singer Pankaj Udhas was launched in a CD form by Music India.4 By early 1990s, television industry harnessed sweeping changes by providing entertainment with commercial programmes and reaching millions of viewers with international satellite broadcasting. This period also witnessed proliferation of privately-owned channels like Star TV, Zee TV, ESPN, MTV Asia, Channel V, etc., which provided huge impetus to home en294

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tertainment market in India by extending the reach of television beyond geographical borders. Technological changes brought revolutionary changes across all industries making traditional products and processes obsolete. One such product that became obsolete was the audio and video cassette. During 1993, the first version of Digital Versatile Disc (DVD) was developed by Toshiba and Sony as Super Density Discs and Multi Compact Discs, respectively. These discs were superior to CDs in terms of storage space and quality output (a standard CD could hold 700 Megabyte (MB) of data while a DVD had a storage capacity ranging from Exhibit I: Storage Capacity: CD vs 4.17 Gigabyte (GB) to DVD as high as 17GB (Exhibit I). In November 1996, worlds first DVD playerSD-3000 DVD was put up for sale in Japan. As the Source: The CD is dead; long live the development of DVDs DVD!http://www.thehindu.com/thehindu/ was still in its nascent seta/2002/02/07/stories/ s t a g e , C D - R O M s 2002020700090500.htm, February 7th 2002 were mostly preferred for storage and data transportation. Although, the usage of CD-ROMs started growing rapidly, cassettes in audio and video segments ruled the Indian home entertainment industry for most part of the 1990s. While sales of audio cassettes grew from 155 million units in 1991 to 353 million units in 1996, sales of music

CDs grew from 50,000 units to 4.4 million units during the same period (Exhibit II). According to a report in 1997 by the Londonbased, International Federation of the Phonographic Industry (IFPI), India was the largest market for audio cassettes in the world. By 1999, analysing the market potential of data storage market, MBIL set up a manufacturing plant of Recordable Compact Disks (CD-Rs) and Recordable Digital Versatile Disks (DVD-R) with a production capacity of 150 million units. With the dawn of digital age in 21st century, the complex and bulky cassettes turned into sleek, portable and huge digital data storage devices. DVD players offered flexibility, clarity and eroded the grip of VCRs that were on the forefront of home entertainment industry until the end of 20th century. During 2002, DVD hardware and software, grew at a rate of 200% globally compared to any other consumer durables in the world.5 Sushil Kumar Agrawal, managing director of Ultra Distributors remarked, An indication of the segments growing popularity globally is that it took DVDs merely four years to reach the 20 million mark, while CD players took eight years and VCRs took 12 years.6 The year 2004 was marked as the year of consolidation, realignment and growth in most segments of the entertainment industry in India. Film and television experienced unprecedented growth, along with the emergence of animation and gaming industry. Further, the popularity of film industry led to the increased production and expansion of CD and DVD market. According to a latest report by KPMG and Federation of Indian Chambers of Commerce and Industry (FICCI), the sector grew 15% annually in the last five years to a $11.68 billion (INR 584 billion) industry in
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Exhibit II Sales of Pre-recorded Music in India (19911996) Retail Values (in million)

2008, the growth rate is expected to remain subdued at 7.5% in 2009 and 10% in 2010,7 (Exhibit III). Despite having huge potential and growth, the home entertainment industry was crippled with piracy. Piracy has been plaguing the film and music industry due to high purchase price, high DVD rentals and low replication costs. According to a study conducted by US-India Business Council (USIBC), the Indian economy loses approximately $4 billion in revenues and over 800,000 jobs due to piracy in the Indian entertainment industry. It also estimated that 50% of the music and 60% of movies sold are pirated.8 Targeting piracy as the key area of business interest, companies like MBIL developed low-cost manufacturing and distinctive pricing strategies as its business model and offered products at the lowest rate compared to the prices of similar legitimate products in the industry. Though the year 20072008, proved to be profitable for optical storage media manufacturers like MBIL, demand for CD-R continued to remain flat. But DVD-R maintained a positive growth trend with robust demand from developed as well as developing countries. To optimally utilise its core competencies, MBIL devised a strategic plan by converting its capabilities into profitable goals. It slashed the prices of its DVDs to below INR 30 to capture the CD market from cheaper pirated CD sellers. MBIL may not have reached its goal yet, but the first step of reducing prices of its CDs and DVDs in itself is a laudable fete.

Sales in Units (in million) Year Cassettes CDs Records Total

INR

1991

155

0.5

156

180.3

4,100

1992

190

0.8

190.8

194.4

5,300

1994

270

2.4

272.4

254.4

7,980

1995

321

325

292.9

9,564

1996

353

4.4

357.4

298

10,561

Compiled by the author from http://www.education.nic.in/ cr_piracy_study/cpr4.asp

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Exhibit III Performance and Projections of Indias Media & Entertainment Industry Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 Size (in $ billion) 7.72 8.9 10.4 11.68 12.56 13.94 15.82 18.22 21.04 Growth (%) 15.28 16.85 12.31 7.53 10.99 13.49 15.17 15.48

Moser Baers Excellence in Optical Storage Products Manufacturing The cost competitiveness of our R&D ensures that we dont lag behind our competitors.9 Ratul Puri, executive director, Moser Baer Corporate History MBIL was established in the year 1983 in technical collaboration with Maruzen Corporation, Japan and Moser Baer Sumiswald, Switzerland. The company was wholly engaged in assembling and manufacturing of timekeeping machines of Moser Baer Switzerland. In 1985, Deepak Puri, co-founder of MBIL identified the potential for data storage devices in India and ventured into the data storage industry in India. He purchased all the shares of his Indian unit from the Swiss manufacturer and went public with an Initial Public Offer (IPO) in 1987. Being the first Indian company in this segment, it was facing huge challenges from Japanese and Taiwanese manufacturers in the global market. It diversified its product range of manufacturing magnetic media i.e., floppy diskettes (discs), compact discs and DVDs. Initially MBIL manufactured magnetic media i.e., 5.25-inch floppy diskettes with a limited manufacturing capacity of 60,000 discs per month due to license restrictions given by the Government of India.10 Thereby, the insufficient capacity to handle large orders from international customers hampered its growth. In 1987, it started producing 3.5-inch Micro Floppy Diskettes (MFD).
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Source: The Next Five Years are promising, http:// www.theindusview.com/vol4Issue4/ specialreport.html

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The 1990s also proved to be a challenging time for MBIL because of issues such as technological changes, increased cost of raw materials, limited in-house R&D and engineering capacity. MBIL improved its capabilities by concentrating on R&D. Due to technological changes, magnetic media became obsolete by the end of 1990s. In 1999, MBIL, in order to sustain its business, made a transition into optical storage manufacturing. MBIL made a smooth transition to the optical media in 1999 when floppies were gradually becoming obsolete. During the MBILs DVD-Rs same period, the company had set up a 150 million unit capacity plant to manufacture CD-Rs and DVD-Rs. Although the company was a late entrant in the field of optical storage media, it was successful in competing in the world markets through qual- Source: http://farm4.static.flickr.com ity CDs conforming to stringent international quality standards and cost-effectiveness. In 20002001, the companys exports accounted for more than 80% of its sales and the companys floppy discs and CD-R production capacity increased to 130 million and 650 million discs per annum respectively.11 Due to its robust performance and increased sales in key European markets in addition to new business acquisitions, the companys revenue increased by 124% (Exhibit IV). It became the fourth largest, low cost producer of CD-Rs in the world due to its low manpower costs, usage of property dye

MBILs DVD-Rs

coating process, capital cost advantages and strong R&D capabilities.

During 2000s, MBIL had a 10% share in the global optical storage market and was able to notch-up an impressive customer profile, including eight Source: http://farm4.static.flickr.com top Original Equipment Manufacturers (OEMs).12 The strategy adopted for optical media project was similar to diskette business on the global platform in terms of size, technology, quality, product flexibility and process integration.1In Moser Baer Pro Protection Plus CDR Pack 2003, after the success of CD-Rs, MBIL entered into the production of CDRewriters (RW) and DVD-RW. The company sold its products with a brand name Moser Baer Pro in India (Exhibit V). This range uses the Protection Plus technology developed by MBIL to ensure extra protection Source: http://shop.superiordocument.com and long shelf life.14 It came up with new
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Exhibit IV Moser Baers Gross Revenue and Net Profit (20002009) (in INR million) Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Gross Revenue 1,567 3,513.5 6,785.99 10,855.2 15,792.2 13,528.6 17,319 20,740.3 19,582 22,045 Net Profit 441.1 1,385 2,213 2,372.7 3,238.5 607.2 46.66 1,097.9 -789.1 -1,508.7 Product Moserbaer Pro CD-R

Exhibit V Moser Baers Products Description First and only 52x CD-Rs to be launched in India with high thermal sensitivity and capability to maintain data integrity without degradation in any way

These CDs can be written over and over while Moserbaer maintaining high durability and are designed Pro CD-RW for writing at speed of 4x-10x Moserbaer Pro DVD These DVDs can hold up to 4.7 gigabytes of data and can be written at speeds up to 8x for DVD-Recordables and 2.4x for DVD Rewritables

Moserbaer These provide better portability, while Pro Mini CD- maintaining superior recording and playback characteristics and compatibility R Magnetic Data Storage Media These include compact cassettes, microfloppy disks and digital audio tapes

Source: Moser Baer India Ltd, http://www.ibef.org/download/ Moser_Baer_India.pdf

Compiled by the authors from the Annual Reports of the company

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Moser Baer Pro CD-RW

Source: http://shop.superiordocument.com

range of Gold and Platinum CD-Rs with enhanced durability and resistance to both environmental and human hazards like temperature changes and scratches. It evolved as the market leader with more than 40% market share in India. It concentrated on manufacturing and distribution of its products to wholesalers, thereby ignoring retail selling.

dition, it also worked with National Aeronautics and Space Administration (NASA) for developing discs for use in space shuttle thus extending its reach from mass market consumer to corporate data storage applications. The year 2005 witnessed migration of data storage from CDRWs to DVD-RWs. Considering the growth potential in this segment, MBIL started scouting for opportunities in Blu-ray/HDDVDs segment in order to develop advanced high capacity storage format. The company faced severe competition from Taiwanese manufacturers such as Ritek Corp., CMC Magnetics Corp. and Prodisc Systems in the optical media business. It was also facing challenges in terms of alternate secondary storage devices such as pen drives. To retain its position and to counter the global slowdown in the optical storage media business, MBIL diversified and transformed itself into a multi-technology firm. In Inside a Moser Baers Pho2005, it forayed into Solar En- tovoltaic Plant ergy Photovoltaic optics business. In 2006, it entered the home entertainment segment and in 2007 into IT peripherals & consumer electronics segment. During this period, MBIL had increased its global market share from 10% to 17.5%.17 Source: www.ecoseed.org Moser Baer was able to attain its leading position with the help of reliable suppliers of raw materials such as polycarbonate plastics, aluminium and acrylic. With its core competency in manufacturing, the company expanded its sales from about $22 million in 1998 to more than $355 million in
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During the same year, MBIL entered into a strategic long-term sourcing deal worth $100 million per annum with Imation Corp., one of the largest players in the optical media storage industry in the world.15 In addition to sourcing media, it also entered into a strategic joint venture to carry R&D as well as market optical storage media products in emerging markets like Africa, the Middle East and South America and also in new markets.16 MBIL capitalised on its mass manufacturing, engineering and development capabilities to emerge as one of the worlds most profitable players in the removable optical storage media industry. On the marketing front, the company further expanded its market reach and moved into high growth Indian market for branded storage products. In 2004, to stay relevant and to adapt itself to the changing technologies, MBIL tied up with Hewlett-Packard (HP) to manufacture optical media, using the latters Light Scribe technology which enables labels to be written on the disc surface with the same drive that reads and burns information on it. In ad-

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2003.18 In May 2006, MBIL signed a Memoran- Inside a Moser Baers Photovoltaic Plant dum of Understanding with Institute of TechnologyDelhi and Banaras Hindu University (BHU) to jointly work in the area of fundamental and applied R&D for optical storage media and photovoltaic technology. By 2008, Source: http://business.outlookindia.com it had a production capacity of 3 billion units in the optical storage media.19 In November 2006, to complement its existing business of optical media, MBIL introduced a range of Universal Serial Bus (USB) Flash drives. Bhaskar Sharma, executive vice president, MBIL opined that the launch complements our existing optical media business and we will leverage our strong branding and marketing network to emerge as the top player with a sigAn MBIL USB Flash Drive nificant market share in this segment also.20 During the same month, the Ministry of Science and Technology (MST) approved MBILs inhouse R&D centre. The efforts of R&D centre helped the company to become the Source: http://images.techtree.com first company in the world to ship out the HD DVD-R for-

mat and extend the technology leadership in the Blu-ray media. This format provided MBIL a significant competitive advantage over industry peers. Moser Baers business model was predominantly OEM-centric. As a result, 80% of its revenues were from sales to OEMs in the global markets.21 Being OEM-centric, it concentrated on majorly two functions innovation and quality manufacturing with its strong R&D base. In an effort to diversify into related businesses, MBIL forayed into entertainment industry via home video market through the launch of content distribution in December 2006. The companys entry into entertainment business, proved advantageous for the production and distribution network of already established business of the company. MBIL is the first pan-India company to offer home videos in 18 popular regional languages.22 The use of existing technology and brand name of optical media benefited the entertainment unit. Home entertainment business of the company ensures 75% capacity utilisation of its storage device manufacturing segment.23 The company makes 10 million discs a day enjoying the economies of scale.24 The core competency of the company rests in manufacturing larger quantities of DVDs than any other company in the country.25 In addition to this, it also uses best label printing technology and customised packaging solutions. While the Indian home video market grew at a staggering rate of 15% per annum in 20072008, MBIL pegged its market share between 50%60% indicating its commanding presence in India. 26 In home video market, MBIL carefully evaluated and acquired the content at the right price levels. The home video market dou301

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bled to INR 8.63 billion in 2008 and is expected to increase to INR 16.06 billion in 2013, thereby showing a growth of 13.2% CAGR.27 With considerable growth opportunities in the Indian entertainment industry, there are new revenue generation streams like animation, gaming, merchandise, etc., creating new business opportunities. However, this segment has been facing a stiff competition with existing players and pirates. With the entry of high capacity DVDs in the entertainment segment, the pirates have stepped up their activities and MBIL is the leading company which is intensely trying to curb piracy. Moser Baers Foray into the Home Video Market India is considered as the worlds largest producer and consumer of films with the production of 1132 feature films in comparison to 520 Hollywood films in 2007.28 The Indian film industry and home video market are highly fragmented and are rampant with piracy. According to a research study, India has over 26 million DVD/ VCD users and had witnessed a growth rate of over 25% during 2008.29 Despite this huge potential, the home video market accounted for only 7% of the INR 79 billion film industry, which is a poor share when compared to other developed countries like US, which derives 40% revenues from home video sales.30 According to Pricewaterhouse Coopers (PwC) the domestic home video market will grow at a CAGR of 31% to INR 2,500 crore by 2011.31 Being the largest producer and consumer, the Indian home video market has failed to capture its potential on a wider scale. To grab this opportunity in this segment, MBIL set up a separate entertainment business division in December 2006 with the launch of a new initiative in content distribution MBEL. It re-

leased video content on DVD and CD formats using its proprietary and patented technology with enhanced quality and reduced cost. With this, the company planned to take comparative advantage with regard to quality and price parity and offer unprecedented value to its customers. MBEL adopted an aggressive pricing strategy thereby taking piracy head-on by forward integration, ensuring better margin protection. MBEL launched its VCDs and DVDs at INR 28 and INR 34 respectively at an early stage in order to penetrate into Indian home video markets. During this period, the cost of a regular VCD was in the price range of INR 160INR 200, the cost of a regular DVD was in the range of INR 300INR 400 and the movie rentals were about INR 50INR 100 per DVD (Exhibit VI). T h e p r i c e w a r i n D V D / V C D i n d u s t r y s t a r t e d w h e n o t h e r c o m p a n i e s l i k e T - S e r i e s Ltd., Ultra Video Ltd., etc., lowered their prices to survive the competition. Industry players such as Shemaroo Video Pvt. Ltd., Eros Entertainment, Excel Home Video and Sony Pictures also reduced the prices, but they were higher in comparison to MBELs prices. According to the industry estimates, the cost of replicating movies on a CD is around INR 14. Distribution and tax costs amount to another INR 3 and INR 2 respectively, bringing the total cost to INR 19. But Harish Dayani (Dayani), CEO of MBEL, claims that Moser Baer has in-house facilities to replicate CDs for Rs 10.32

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Exhibit VI Comparison of CD/DVD Prices in the Home Video Market (2007) Prices (in INR) Company VCD Moser Baer Entertainment Ltd. Shemaroo Video Pvt. Ltd. Eros Entertainment Excel Home Video DVD

He states, Our production cost is only Rs 13, and the resultant margin is enough for us to profit. We will launch new movies, too, at identical rates. That means MBEL is claiming a margin of INR 15 (against the estimated industry standard of INR 9) per CD, which is still far below that of rivals INR 150 (minimum).The cost per DVD of a typical DVD manufacturer is tabulated in Exhibit VII. I n o r d e r t o e x p a n d i t s p r e s e n c e , M B E L a c q u i r e d c o p y r i g h t s / e x c l u s i v e l i c e n s e f o r a r o u n d 1 0 , 0 0 0 m o v i e t i t l e s i n a l m o s t a l l t h e m a j o r I n d i a n l a n g u a g e s l i k e H i n d i , Te l u g u , Ta m i l , K a n n a d a , M a l a y a l a m , B h o j p u r i , e t c . , i n 2 0 0 7 . O n t h e d i s t r i b u t i o n f r o n t , M B E L h a d a s t r o n g w e l l - o r g a n i s e d , m u l t i - t i e r e d d i s t r i b u t i o n c h a n n e l t h a t m a d e i t s t i t l e s a v a i l a b l e i n o v e r 2 0 0 , 0 0 0 o u t l e t s a c r o s s t h e c o u n t r y . 3 3 T h o u g h a late entrant, with its pricing s t r a t e g i e s M o s e r A Hindi Movie VCD distribBaer made a dent in film uted by Moser Baer v i d e o m a r k e t s . I t adopted a low-margin strate g y i n t h e h o m e entertainment market. It fixed the price of its CDs and DVDs less than movie tickets (more than INR 50), cheaper than a pirated disc (which is available at INR 80INR 100) and even lower than a rented Source: http://www.induna.com/ disc (rent for a new release is
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counter four to five pirated movies for around the same price.52 (Exhibit IX). Exhibit IX Moser Baer Super DVD Prices Films Gujarati Bengali Hindi Other languages INR per DVD 22 25 27 30

lywood movies. As Big Home Video is backed by Reliance Big brand, which has various businesses in entertainment space, it helps Big Home video in acquiring new movie rights and capturing the home video market. At one end where old players like Bombino Video Pvt. Lt., Indus Video Pvt. Ltd. and Ultra Video Pvt. Ltd., etc., are quitting the market due to huge losses from pirates who constitute nearly 90% of the market, on the other end there is emergence of new players with new business models to curb piracy and establish themselves in the space created by the old players. Every home video company is trying to reduce pirates sale with their business strategies. Since MBEL has been the first to make this move in this stream by reducing its prices, the other companies have also followed suit. As the companies are trying to grab maximum share of home video market from pirates and create a number one slot in the market for themselves, how far will MBEL be successful in its strategy? To what extent will it further reduce price? Can the price reduction strategy help MBEL to capture the market share for a longer time? Can it compete with pirated DVDs, which are offered at rock bottom prices as they do not pay license fee?

Source: Moser Baer Cuts super DVD prices, http:// www.deccanherald.com/ content/19617/moser-baer-cutssuper- dvd.html, September 18th 2009

The Road Ahead for Moser Baer Over the years, MBEL has been a consistent performer in generation of revenues and margins. Given the current price points, the companys management expects to break even in less than 18 months of hitting the market for each movie title. The company expects to drive its business on volumes and expects to have its own rights on at least 50% of the movies released in India. There is intense competition in the home video market with the entrance of Big Home Video as it has struck three major deals with the Hollywood Studios Universal, Paramount and Warner Brothers making it a major content owner of 60% Hol-

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Footnotes: 1. Dagar S. Shalini, Moser Baer: Hello movies, h t t p : / / b u s i n e s s t o d a y. i n t o d a y. i n / ndex.php?option=com_content&task=view&id=8401&issueid =64, October 30th 2008 Moser Baer India Ltd., corporate profile, http://moserbaer.com/writereaddata/mediaresources/Corporat eProfile.pdf Ibid. First Compact Disc Launched in India, http://www.thecolorsofindia.com/interesting-facts/music/first-c ompact-disc-launched- in-india.html Kaushik Neha, Virtual versatility, http://www.thehindubusinessline.com/catalyst/2002/03/21/stor ies/ 2002032100130100.htm, March 21st 2002 Ibid. T h e N e x t F i v e Ye a r s a r e P r o m i s i n g h t t p : / / www.theindusview.com/vol4Issue4/specialreport.html Combating Counterfeiting and Grey Market A Challenge for Indian Corporates, http://www.in.kpmg.com/TL_Files/ Pictures/Counterfeiting%20In%20India(1).pdf, December 22nd 2008, page 7 Chandramouli Balaji, The Innovation Imperative,http:// archives.digitaltoday.in/businesstoday/20061022/cover8.html

10. M o s e r B a e r I n d i a L i m i t e d , http://ibef.org/download/Moser_Baer_India.pdf, page 1 11. M o s e r B a e r ( I n d i a ) , http://www.financialexpress.com/news/moser-baer-india/4881 5/0, June 9th 2002 12. Moser Baer (India), op.cit. 13. M o s e r B a e r I n d i a , http://www.moserbaer.com/overview_history.asp 14. M o s e r B a e r I n d i a R e w r i t i n g t h e F u t u r e , http://www.ibef.org/download/Moser_Baer_India.pdf, page 2 15. Moser Baer India Ltd, op.cit., page 4 16. Ibid. 17. Bakshi Moumita and Thiagarajan Krishnan, Drives will thrive, http://www.thehindubusinessline.com/ew/2005/05/30/stories/ 2005053000070100.htm, May 30th 2005 18. Luthra Shashank, et al., When to make India a manufacturing base, The McKinsey Quarterly, September 2005 19. Storage Media Overview, http://www.moserbaer.in/ 20. M o s e r B a e r L a u n c h e s U S B F l a s h d r i v e s , http://www.moserbaer.com/mediaroom.asp?id=33&mth=&yea r=2006&sec= , November 2006 21. Moser Baer India Limited, op.cit., page 1
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6. 7. 8.

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22. Moser Baer Entertainment & SONY BMG Music join hands, http://www.cinefundas.com/2008/07/20/moser-baer- entertainment-sony-bmg-music-join-hands, December 28th 2009 23. G u p t a S o v i d , M o s e r B a e r , http://www.valuenotes.com/fairwealth/fairwealth_MoserBaer_ 01Jun09.pdf, May 25th 2009 24. Das Sibabrata and Pinto Ashwin, Indiantelevision.coms interview with Moser Baer (entertainment business) CEO Harish Dayani, http://www.indiantelevision.com/interviews/y2k7/executive/har ish_dayani_interview.php, June 11th 2007 25. G u p t a S h u b h r a , M o v i e s i n m y g r o c e r y l i s t , http://www.thehindubusinessline.com/life/2009/08/21/stories/ 2009082150120400.htm, April 21st 2009 26. M i t r a A s h i s h , P o p u l a r i s i n g H o m e V i d e o , http://www.screenindia.com/news/popularising-home-video/3 12644/,May 23rd 2008 27. O v e r v i e w , http://moserbaer.com/writereaddata/pdfs/MB_Annual_Report _2009.pdf, page 38 28. T h a k u r A t u l , I n d i a D o m i n a t e s w o r l d o f f i l m s , http://timesofindia.indiatimes.com/india/India-dominates-world -of-films/ articleshow/4827912.cms, July 28th 2009

29. T h e H o m e V i d e o M a r k e t , http://theviewspaper.net/the_home_video_market/, January 30th 2008 30. Fernando Rajiv, THE CASE :Cracking the home video market, http://www.financialexpress.com/news/cracking-the-home- video-market/194917/0, March 24th 2007 31. The Home Video Market, op.cit. 32. The Home Video Market, op.cit. 33. Overview, op. cit., page 15 34. Pinto Ashwin, DVD market on the cusp of change, http://www.indiantelevision.com/special/y2k7/dvd_feature.php , September 22nd 2007 35. Ibid. 36. Jaitly Tarun, et al., Reinventing the Future: Moser Baer Ltd, http://www.scribd.com/doc/16245450/Initiating-CoverageMoser-Baer, November 18th 2008, page10 37. Overview, op.cit., page 32 38. Seshan Govindkrishna, Spinning new strategies, http://www.business-standard.com/india/storypage.php?auton o=281358, April 17th 2007 39. Shahid Aliyah, Piracy in Indias entertainment industry causes huge losses to economy,

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http://www.livemint.com/2008/03/ 31121923/Piracy-in-India8217s-entert.html, March 31st 2008 40. Moser Baer -Hello Movies, op.cit. 41. Pitalwalla A. Yassir & John Reji, Moser Baer takes films to doorsteps in small towns, http://www.mydigitalfc.com/ companies/moser-baer-takes-films-doorsteps-small-towns462, April 9th 2009 42. Ravikumar R.,Ten films in Moser Baers production kitty for 2009", http://www.thehindubusinessline.com/2009/03/10/ stories/2009031051161500.htm, March 10th 2009 43. Ibid. 44. M o s e r B a e r , http://www.superbrandsindia.com/images/superbrands_book _2008/Moser%20Baer.pdf, page 2 45. Bhandari Rohini, We dont believe in the me too model Moser Baer Entertainment CEO Harish Dayani, http:// www.businessofcinema.com/news.php?newsid=7606, March 28th 2008 46. Ahuja Jyotika and Sundaraman Shruti, Moser Baer and UTV forge strategic alliance for home video distribution of UTV m o v i e s , http://www.utvmotionpictures.com/press-releases/utv-press-r elease-36.pdf, December 16th 2008 47. Moser Baer takes films to doorsteps in small towns, op.cit.

48. Sekhri Arhun, Interview with Harish Dayani of Moser Baer, http://www.indianentertainment.info/2009/06/27/interview- with-harish-dayani-of-moserbaer.html, June 27th 2009 49. Moser Baer takes films to doorsteps in small towns, op.cit. 50. Toshiba sues Moser Baer, 7 other firms for DVD patent violation, http://www.domain-b.com/companies/companies_t/ Toshiba/20090519_toshiba.html, May 19th 2009 51. Moser Baer takes films to doorsteps in small towns, op.cit. 52. M o s e r B a e r C u t s s u p e r D V D p r i c e s , http://www.deccanherald.com/content/19617/moser-baer-cuts -super-dvd.html , September 18th 2009

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C HAPTER 10

Channels of Marketing
Introduction
Marketing channels facilitate the exchange process between the buyer and the seller. The nature of marketing channels is diverse and complex and may range from a simple channel to a complex one upon the layers of distributors linking the producer to the end consumer. Marketing channels perform several functions like facilitating the exchange process, alleviating discrepancies, standardizing transactions, matching buyers and sellers, and providing customer service. Marketing channels be effectively designed. The factors that the marketer should consider when designing a distribution channel are: cost effectiveness, target market coverage, and adaptability in the long run. Marketers also need to face several issues in channel management like selecting and training the channel members; training, motivating, and evaluating the channel members; legal and ethical issues. Channel members need to integrate their functions under the channel leader, either horizontally or vertically in order to achieve economies of scale, stabilize supplies, achieve proper coordination, etc. Multi-channel is a concept where a single firm uses more than one marketing channels to reach one or more market segments.
Video 10.1: Distribution Channels

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Section 1

Nature, Role and Functions of Marketing Channels

Nature of marketing channels is diverse and complex, and ranges from a simple channel linking the producer and consumer directly to a complex one where there are several layers of distributors linking the producer to the end consumer. The diverse nature of marketing channels poses a challenge to marketers with regard to the selection of an appropriate channel. Proper planning can help managers in selecting suitable channel/s for distributing their products. Marketing channels should be adjusted as per the dynamic changes in the needs of customers, so as to maintain a competitive advantage.

Time gaps arise because of difference in the time of production and consumption of goods. For instance, consumers may use a toilet soap of a company at least a month later to the date of production. Space gaps occur in marketing channels, if production is carried at one location or across a small number of locations. Space gap may result as the final consumers may not be close to the place of production. Quantity gaps arise as the manufacturers produce in large quantities and there is need to break these large quantities into smaller quantities to fulfill the needs of individual customers. Variety gaps occur as the consumers may look out for more variety in products than what a manufacturer produces. Marketing channels play a significant role in reducing these gaps and promoting the products. Various techniques used for promotion of products are discounts, promotional schemes, etc.

Role of Marketing channels

The role of a marketing channel consists of a set of activities or behavior of various intermediaries in a channel system. An important role of a marketing channel is to fill the gaps between the production and consumption process. These gaps can be in relation to time, space, quantity and variety.

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Channel flow The role played by marketing channels to fill the above discussed gap between producers and customers includes: Keynote 10.1.1: Channel Levels

Gallery 10.1.1: Channel Flow

Possession: when goods are physically transferred from the producer to the final customer possession takes place.

Exclusive distribution involves a limited number of intermediaries between a producer and the consumer. It helps producers to market their products exclusively

Channel levels: There are different levels of marketing

channels which are explained with the help of following keynote: Depending on the level of channel, distribution can be intensive, exclusive or selective. Intensive distribution involves distribution through as many outlets as possible. This type of distribution enables easy availability of products to customers. Products like soaps, chocolates, etc., are distributed through this method.

Source:ww2.nscc.edu

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without having sell them along with competitors products. Products such as apparels, automobiles and their accessories are sold through exclusive distribution. Selective distribution falls in between intensive and exclusive distributions. Through this form of distribution, manufacturers select more than one channel to distribute their goods. For example, suitcases of companies like VIP, Aristocrat, etc., are sold through exclusive showrooms of companies and also through other retail outlets.

Keynote 10.1.2 : Functions of Marketing Channels

Service Sector Channels

Distribution of services is undertaken along with distribution of products by the channel members. When customers need services, companies can provide them through the marketing channels. Advancement in technology has enabled producers to provide services to customers through the Internet. Services like online reservation, online banking, etc., are easily reaching the customers.

References: 1. h t t p : / / w w w . y o u t u b e . c o m / w a t c h ? v=dq8bg1CwNig&feature=results_main&playnext=1&li st=PL9D239492A2635F85 2. http://www.youtube.com/watch?v=ib3tIGDjygU

Functions of Marketing Channels

The functions of marketing channels are explained in the following keynote:

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R EVIEW 10.1
Question 1 of 5
Depending on the number of intermediaries required at each level, there are various ways of distributing a product. Which of the following is not a major option of distribution available to producers?

A. Intensive distribution B. Selective distribution C. Exclusive distribution D. Inclusive distribution

Check Answer

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Section 2

Designing Distribution Channels

Designing of the distribution channels deals with the decisions that are associated with forming a new distribution channel or modifying an existing one. An efficiently designed distribution channel helps a company in maintaining a competitive advantage in the market. Designing a marketing channel is similar to developing a competitive strategy for a company. The basic factors that a marketer consider when designing a distribution channel include cost effectiveness, target market coverage, and adaptability in the long-run to help in the efficient distribution of the products of a company. Analyzing Customer Expectations of Service Output A marketing channel should be designed after thorough analysis of target customers expectations. The buying decisions of customers can be categorized into four types of channel output utilities such as lot size, convenience, selection and service which are explained in the following keynote:

Keynote 10.2.1: Channel Output Utilities

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Formulating Objectives Distribution channels should be designed based on objectives, which may vary with the size of the firm. The objectives of smaller firms might be to serve a limited market area whereas a larger firm may have objectives to make its presence in different markets. In designing a marketing channel the company should also consider SWOT analysis to assess the strengths and weaknesses of intermediaries. The firm should also analyze channel members sales volume, profitability, product portfolio, , brand associations along with analysis of managerial capabilities, performance, attitude, etc. Evaluation of Distribution Environment Evaluation of distribution channel can be through analyzing, observing, and forecasting the external factors, which would influence the channel environment. The changing market trends should be observed by the marketers to manage uncertainty efficiently. Coordination between channel members should be maintained to serve the customers effectively. Evaluating Channel Alternatives Evaluation of channel alternatives by a company should be based on three criteria, viz., economic, control and adaptive.

Economic Criteria Firms should evaluate channel alternatives and choose a channel member, which can generate more sales while incurring minimum costs for the distribution of products. Usually, companies prefer to use an external sales force for sales when the sales volume is low. However, it is better to develop a companys own sales force as the sales volume increases. Control Criteria Companies are usually not self-sufficient and depend upon the services of external agencies for distribution of products. Selection of an intermediary should be made maintaining a balance between a companys desire to control important functions and the need for external agencies for market coverage. Adaptive Criteria Adaptive nature of the relationship between manufacturer and the distributor is one of the criteria for the evaluation of a distribution channel. Both sides should have an agreement on the commitment levels before starting the business.

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Section 3

Channel Management
Channel management issues of a company include the selection of channel members, their training, motivation and evaluation, modifying the channel arrangement, and the legal and ethical issues. products offer distributor training programs to help distributors increase their efficiency.

Member Motivation and Evaluation

After carefully selecting the channel members and assigning responsibilities, manufacturers need to continuously motivate their channel members to improve their performance. Motivation can be through relationship marketing wherein a manufacturer tries to maintain better relations with distributors so that they perform their best. Channel members can also be motivated by the company by helping them improve their supply chain, reduce operating costs etc.

Channel Member Selection

Companies should strengthen their core competencies to sustain in the highly competitive business environment. Outsourcing of non-core activities such as distribution to outside agencies (distributors), which can efficiently perform helps a firm to concentrate on developing core competencies. Relationships between channel members should be maintained favorably for the progress of the firm. Selection of channel members should be based on evaluation of the channel members sales efficiency, product knowledge, experience, administrative ability, and the risk factors involved.

Modifying Channel Arrangement

channel members, or lack of clearly defined roles and responsibilities, or if the manufacturer and channel members compete in the same market. Managing Channel Conflicts Channel conflicts can be managed through various methods such as negotiation, problem-solving strategies, persuasive mechanisms, legalistic strategies such as arbitration and settlement, climate management, and by developing cooperation and coordination between channel members. Figure 10.5.1: Channel Conicts

Example: AppleConflict with Resellers Apple Computer Inc., (Apple) an established computer equipment manufacturer, was caught in a conflict with its reseller stores when the company started an online store in 1999 to supply products directly to the customers and started opening retail stores in 2001. The authorized resellers of Apple alleged that their business was affected adversely by the Apple retail stores. They claimed that their customers are being diverted to Apple stores by offering special discounts. The resellers further alleged that the new products launched by Apple are not being made available to them and are sold to customers directly through the online store. With all these allegations a group of resellers filed a lawsuit in 2004 against Apple, blaming the company for unfair business practices.
Compiled from various sources.

Source:www.i-f.com

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R EVIEW 10.3
Question 1 of 7
The foods division of ITC Ltd is on the lookout for alternative distribution channels for some of its ready-to-eat products. On what criteria must ITC evaluate the various distribution channels to select the appropriate one?

A. Economic, social and control criteria B. Economic, adaptive and control criteria C. Economic, legal and control criteria D. Political, economic and technological criteria.

Check Answer

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Section 6

Case Study: Channel Conflict at Apple

This case was written by Mylavarapu Vinaya Kumar, under the direction of Ramalingam Meenakshisundaram, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

! 2005, IBS Center for Management Research. All rights reserved. To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: [email protected]

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www.icmrindia.org "Our strategy isn't to put our resellers out of business, but to work side by side with them." - CEO Steve Jobs, during the launch of Apples retail stores in May 2001.1 "We love Apple's innovative products! Our case is a matter of business ethics and simply doing the right thing!" - Opening lines on the website started by Apple resellers to document the channel conflict.2 INTRODUCTION Apple Logo in 1976

iPod (2001)

iPod, launched in October 2001.

Until the mid-seventies, computers were considered as just business-related equipment. This perception changed after Apple Computer, Inc. (Apple) launched its computers for perSource: www.applegazette.com sonal use in 1976. Since then iPod (2001) the company leveraged on its strong innovation capabilities not only to endure difficult times but also to grow. Its main strength was its revolutionary products that were backed by loyal fans, and hundreds of authorized resellers. In fact, the resellers played a huge part in promoting Apples

When Apple started its online store in 1997, the resellers feared that it would eat into their business. In May 2001, Apple opened its first retail store Source: http://museumvictoria.com.au in a suburb of Washington D.C., and went on to open several other such stores across the US. In 2003, Tom Santos, an Apple reseller, filed a lawsuit against the company accusing it of showing unfair preference to its own retail and online stores The First Apple Retail Store while ignoring reseller stores during the shipment of new goods. He also accused the company of following unethical business practices with an intention to divert sales to its own stores. A number of other resellers also joined him subsequently. As of June 2005, the plaintiffs were waiting for the Source: http://images.apple.com allocation of a trial date at the Superior Court of the county of Santa Clara, California. THE DAWN OF APPLE Apple was founded on April 1, 1976, by Steve Paul Jobs (Jobs) and Steve Wozniak (Wozniak) in Jobs garage. Jobs and Wozniak were introduced to each other by a common friend Bill
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Source: http://images.businessweek.com

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Fernandez in 1971. In 1972, Jobs joined Reed College but dropped out after the first semester. In 1974, he joined as a video game designer at Atari, one of the pioneers of video gaming. During the same year, he went to India in search of spiritual enlightenment and returned to California in the autumn. He later became a member of the Homebrew Computer Club (Club), of which Wozniak, an electronics genius working with HewlettPackard (HP), was already a member. In 1975, Wozniak, purely as a hobby, manufactured a microcomputer that was cheaper than the existing microcomputers like the Altair 8800. When Wozniak demonstrated the machine at the Club, Jobs, who had always been interested in starting a business, persuaded him to manufacture personal computers (PCs) for sale. To start with, Jobs and Wozniak built the prototype at Jobs garage and named it Apple I. Unlike other computers that Video: Apple over the Years were built on Intel 8080 processor, Apple I was based on the MOStek 6502 processor and was offered at US$666.66, a price which was lower than the prices of other computers. It had relatively fewer parts Source: www.youtube.com than any other computer manufactured at that time; a television was used as the display unit. In May 1976, Jobs and Wozniak demonstrated Apple I at the Club. A local computer dealer who saw the demonstration ordered about 25 units on the condition that the machine would be assembled for the customers. On Jobs suggestion, Wozniak

quit HP and joined Apple. In the next ten months, the two friends sold about 200 Apple I computers. Apple I was mostly marketed to individuals with an interest in computers and electronics -- such as members of the Homebrew Computer Club; its sales in 1977 were about US$774,000.3 Apple Computer was incorporated on January 03, 1977. In the same year, during the first West Coast Computer Fair in San Francisco, Apple II was shown to the public as a general purpose computer. Priced at US$1,298, it was built on the same 6502 processor, but had color graphics, and used an audio cassette drive for storage with 4 KB RAM. In 1978, the cassette drive was replaced by a floppy disk drive while the RAM was increased to 48 KB. Further, the built-in circuitry of Apple II allowed it to interface directly with a color video monitor. Apple II raked in about US$139 million within the first three years of its launch. FROM APPLE TO LISA AND MACINTOSH In 1980, Apple III was launched with eight applications, including a text and graphics feature. It was priced between US$4,340 and US$7,800, depending on the configuration. However, technical problems resulted in its temporary withdrawal from the market. The problems were rectified and Apple III was re-launched in 1981. The new model had 128 KB RAM, updated system software, and was offered at a lower price (US$3,495) than the earlier release. However, it was not successful. International Business Machines Corporation (IBM) introduced IBM PC (model 5150) on August 12, 1981. IBM PC was built on
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Intels microprocessors and used PC-DOS Operating System (O/S), licensed from Microsoft Corporation (Microsoft). IBM PCs contained only one proprietary component - BIOS. Hence other manufacturers were able to clone them. The non-IBM computers used MS-DOS, also available from Microsoft. On the other hand, Apple computers used proprietary technology. Moreover, DOS was not compatible with Apple computers. Thus, users gravitated toward IBM and its clones; this affected Apples status as the market leader in PCs. Even before the launch of Apple III, Apple engineers started working on the development of a computer with innovative features such as a hand-held mouse and a Graphical User Interface (GUI). This new product was codenamed Lisa. It is said that Apple recruited many engineers from Xerox Corporations Palo Alto Research Center (PARC) and involved them in the development of Lisa. Lisa was aimed mainly at large businesses. Released in January 1983, Lisa was expected to take the computer industry by storm. However, its price tag of US$9,995 prevented it from selling in large numbers. According to Jobs, Apple and IBM had an almost equal share of the PC market in the US by the year 1983; each sold approximately US$1 billion in that year. Many large businesses were using IBM computers while smaller businesses preferred Apple computers. All the three computer models of Apple ran on different operating systems; this limited its market share. Apple realized this and began working on developing a new computer and an operating system for it. Apple pooled highly talented hardware and software designers and created an atmosphere where their creativity could flourish. The result was a computer called Macintosh (Mac) with 128 KB memory and a 32-bit microprocessor. Mac

was released in 1984 along with its operating system, Mac OS. Mac OS could run on all Apple computers. Mac, priced at US$2,495, was the first affordable computer that used GUI. Mac was much smaller and less expensive than the earlier models of Apple. Moreover, it was user-friendly, adaptable, and flexible. It could perform creative work (graphics), unlike ordinary PCs that were used mostly for doing logical tasks such as calculations. The launch of Mac was accompanied by an aggressive advertisement campaign titled 1984. Launched on Super Video: The 1984 TV Ad Bowl Sunday, the advertisement (Refer to Exhibit I) went on to become one of the most memorable commercials in the US. However, Mac had its own share of problems, the biggest being its incompatibility with IBM PCs. Apple therefore Source: www.youtube.com found it difficult to sell its computers to big corporations that were already using IBM systems. EXIT OF JOBS AND THE DECLINE OF APPLE In the meanwhile, Jobs management style attracted criticism from various quarters including the board of Apple. The board members were not happy with Jobs for spending most of the company resources on developing Macs. To add to these, Mac sales were only 20,000 units; 60,000 units short of the projected 80,000 for the year 1984. By March 1985, Mac sales were averaging only 2,500 a month.
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In 1985, Jobs was ousted from Apple citing low sales of Mac and bad leadership. Jobs left Apple and started NeXT. After eight unsuccessful years, NeXT entered the growth phase in 1993. While NeXT was growing, Apples market share and stock were declining. The lack of innovative products, falling hardware and software prices, and growing competition from imitators resulted in a decrease in the companys market-share. Apples worldwide market share fell drastically from 11%4 in the mid 1980s to 7.4% in 1995. It further slipped to 5.3% by the second quarter of 1996. RE-ENTRY OF JOBS In late 1996, Apples CEO Gil Amelio (Gil) convinced Jobs to work as an informal advisor at Apple, with no contractual commitments. Apple also purchased NeXT for US$400 million. In a years time, Apple posted profits in three consecutive quarters starting from the last quarter of 1997. In 1998, Apples board appointed Jobs as the interim CEO. Jobs led Apple to launch the low cost iMac (Internet Macintosh) computer in mid-1998. iMac was designed for the first time buyers of computers and also to win back the customers who were shifting from Mac to other computers. The iMac went on to become a success and sold 2 million units in just one year. In January 2000, Jobs took over as CEO and concentrated on increasing Apples market share. In the subsequent years, Apple released new models of Macs -- iMac G5 (2004) and Mac Mini (2005).

THE INTRODUCTION OF iPod In October 2001, Apple forayed into the digital music market by launching iPod, a hard drive based music player. iPod had 5 GB of storage space that could hold around a thousand songs and was superior to all the contemporary flash memory-based players that could store only around 30 songs. It was smaller than most of the tape decks and Source: http://scm-l3.technorati.com used a 1.8 hard drive. With iPod, listening to music will never be the same again, Jobs said5 when he introduced the product. It was priced at US$339, which analysts felt would limit its sales. However, iPod belied their predictions and proved to be successful, generating subVideo: Steve Jobs Introducstantial sales. Resellers ing the iPod played an important role in aggressively promoting the product. In the fourth quarter of 2001, Apple sold around 125,000 iPods.6 Apple Logo in 2001 In March 2002, Apple introduced another model of iPod with a storage capacity of 10 Source: www.youtube.com GB and offered it for US$499.
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In the same year, it made some technical changes, Video: Apples iPod Pre-Launch Communication Campaign increased the storage capacity to 20 GB, and also decreased the prices of the 5 GB and 10 GB models. In 2003, Apple introduced the iPod (Dock Connector). On April 28, 2003, Apple started the iTunes Music
Source: www.youtube.com

Exhibit I Macintosh Advertisement - 1984 The Mac commercial 1984 was launched on January 22, 1984. It depicted a totalitarian society, in which a lady in orange shorts and Apple t-shirt runs with a sledgehammer in her hand and throws it at a computer image of the Big Brother (implying IBM). The commercial ended with the message On January 24th, Apple Computer will introduce Macintosh. And you'll see why 1984 won't be like '1984'. Then the Apple logo appeared on a black background. The commercial was based on the popular political novel Nineteen Eighty-Four, written by George Orwell. The novel described an Orwellian society -- a nighmarish situation where perfect confirmity among the people was enforced through severe punishments and fear, closely monitored by the authority - called Big Brother.
Adapted from <http://en.wikipedia.org/wiki/1984_ %28television_commercial%29>

Video: Apples Promotional Video about the iTunes Music Store

Store (iTMS), a paid online music service available only in the US. iTMS allowed customers to pay and download music through Macs, and store it on their hard drives. However, it was later modified and made available to consumers in other countries also, including users of Microsoft Windows.

On January 11, 2005, Apple introduced iPod Shuffle, which used a flash memory. iPod Shuffle became popular and captured 58%7 of the flash player market in the US by May 2005. As on May 2005, Apple held 90%8 of the hard-disk player market share in the US.

Source: www.youtube.com

THE APPLE ONLINE STORE Traditionally, Apple products were sold through a network of authorized Apple resellers, retail chains like Sears and Roebuck & Co (Sears), and a few large electronic resellers like MacMall, MacZone and Best Buy. Even corporate accounts were managed by these channel members. In mid-1997, Apple severed its relationship with Sears and Best Buy due to poor sales
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support. To increase its market share and sales, Apple opened a 24-hour online store called the Apple Store (http://www.apple.com/store), on November 10, 1997. The stores provided a build-to-order system through which computers were manufactured according to specifications given by customers. Apple permitted only a few of its big volume electronic resellers such as MacMall and MacZone to sell online but did not allow its authorized resellers to do so. Apple resellers protested against the move and said that the build-to-order system would eat into their sales. However, Apple promised that its online stores would not offer competition to the dealers. The online store proved successful and did a business of US$12 million in its first thirty days of operation. The Apple Store is now one of the top e-commerce sites on the Internet, said Jobs9. During the same time, Apple planned to develop a strong re- An Apple Shop in lationship with CompUSA, one CompUSA of America's leading retailers of computers, electronics, upgrades, and services. CompUSA agreed to open an Apple store within a store in all its 140 stores across the US. In 1998, Apple resumed its relationship with Best Buy Source: www.ifoapplestore.com and permitted it to sell iMacs. However, the relationship ended in 1999, when Best Buy refused to stock all the colors of iMac. In 1999, Apple re-entered into an agreement with Sears to sell its products across the 800 Sears outlets in the US.

In early 1999, the online store started selling the new iMacs and PowerBook laptops, before they were stocked with resellers. Further, new products such as Lime iBook laptops were available only on Apples web store. This irked many Apple authorized resellers who raised their voices against Apple. Finally, Apple permitted its authorized resellers to sell Apple products through their own websites from April 1, 2000, but only to their existing customers. APPLE GOES RETAIL During the first half of 1999, Apples efforts to make it big through its online store induced speculation on whether the company might soon open its physical stores to reduce the involvement of middlemen and give a boost to its sales. The speculations received further support in January 2000, when Apple hired Ron Johnson (Johnson), former vice-president of merchandising at Target Stores, the second most successful discount retailer in the US after Wal-Mart. Johnson was given the responsibility of building a chain of stores, chalking out their sales strategy, and also quickly making them profitable with an investment of US$700 million.10 In the fourth quarter of 2000, the online stores contributed to around one-third of Apples revenues, a 13% increase over the previous years figure during the same quarter. In early 2001, several Apple resellers - both domestic and foreign - saw a fall in their first quarter revenues. Some of them even had to shut down their businesses. According to analysts, a number of customers were buying from Apples online stores rather than from the resellers. However, Apple contended that its products were
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available at thousands of outlets worldwide and that it was not uncommon for some stores to go out of business every year. In January 2001, Tim Cook, Apple senior vice president, informed analysts that the company might sever ties with some retailers. He said, We'll cut some channel partners that may not be providing the buying experience Apple wants. We're not happy with everybody.11 In March 2001, Apple announced that it would discontinue its partnership with Sears. In this scenario, when Apple confirmed that it would open company-owned retail stores in May 2001, the already apprehensive resellers were more concerned about their future as Apples authorized resellers. On May 19, 2001, Apple opened its first retail store at Tysons Corner Center, a large mall in McLean, Virginia. The store was leased for a period of ten years at a cost of US$5.3 million. A number of enthusiastic customers waited Source: www.youtube.com for hours in front of the stores for the opening ceremony. The store did business of around US$599,000 within the first two days. That same week, Apple opened its second store at the Glendale Galleria in Glendale, California. The stores stocked around 500 different items along with third-party peripherals and software titles. Apple also had plans to start another 25 such stores during the same year across the US at an average of one store every ten days. (Exhibit II shows the scene outVideo: Apples First Retail Store

side, before the opening of an Apple store.)

Video: Apples Opening of its Second Retail Store

The resellers complained that Apple had not informed them about its new business plan. Several resellers expressed fears that the stylish ambience of Apples stores could easily pull customers away Source: www.youtube.com Exhibit II Photograph of the Crowd at 7 A.M. in Front of a New Apple Store in Pennsylvania - The opening ceremony of the store was to take place at 10 A.M. (Pittsburgh, September 2004) from their stores. Though they agreed that the stores were necessary to lift Apples sales in the highly competitive PC market, they were worried about losing business to the company stores. Scott Grenz, general manager of Capitol Mac, an Apple reseller, said12, It's going to hurt us, but it's a necessary evil. The biggest fear of the resellers was that Apple might concentrate
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Jonathan Terleski, www.base2.org. Reprinted with permission.

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more on filling its own stores with new products rather than supplying to them. Jobs said Apple had about 3,000 resellers and its new stores would represent less than 1% of the reseller outlets. He said the company-owned retail stores would help resellers by creating more brand awareness among the people and assured that all Apple products would be available to the resellers. He added that Apple stores would work with the resellers, and would not replace them. Jobs said that the stores, by employing long time Mac users, would enable Apple to have greater control over the sale of its products than when they were sold through resellers and retailers, most of whom did not display Apple products properly. He said that the salesmen at those stores were not equipped well to explain the benefits and features of Macs to the customers. (Refer to Exhibit III for a description of Apples retail stores.) Jobs expected the stores to break even at the end of that year (2001) and show a small profit the next year. According to Jobs, Apples move toward retailing was primarily to increase its computer market share of 5% in the US. He said a study conducted by the company had revealed that about 95% of the people did not even consider Apple while buying a personal computer. He added, If only 5 of those remaining 95 people switch, we'll double our market share.13 Further, only 11 million out of the 25 million worldwide Mac users had upgraded to Macs with G3 and G4 processors and so the rest of them had to be induced to think about upgrading their Macs. For this, Apple planned to start a new newspaper ad campaign called five down, 95 to go a reference to its market share. It also planned to open most of its stores at high traffic locations, to make them more approachable. Another important reason for

Apple opening its own stores was to make the most of the growing use of computers along with other digital equipment. Apple stores were to offer solutions to customers through a group of well-trained salespersons, who would show them how to use Macs along with MP3 players, digital camcorders, etc. While Apple was planning to increase its market share through its stores, industry analysts and commentators felt that the stores might create unnecessary problems for the company. They felt that the cost of leasing stores in major cities like Chicago, Boston, etc., would make it necessary for Apple to sell products worth US$12 million per year at each store. This target was US$4 million more than the annual turnover per store at Gateway, the retail giant. The analysts said that the stores would take away sales from the resellers and this might create a rift between the company and its resellers. Further, analysts pointed out that retail chains such as ComputerWare and The Computer Store, which sold only Macs, reported lower sales and eventually went out of business in 2001. The slowdown in the PC market affected even companies like Dell and Compaq. Further, the prevailing lower profit margins on PC sales made analysts wonder about the rationale behind Apples venture into retailing. David A. Goldstein, president of Channel Marketing Corp, said, I give them two years before they're turning out the lights on a very painful and expensive mistake.14 On the other hand, analyst Stephen Baker praised Apples strategy and said that a limited number of stores would work really well for Apple in creating brand awareness.

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Exhibit III Store Description According to Steve Jobs, Apple designed its retail strategy depending on a list of nine success factors. Apple had previous experience in six of these factors -- Concept, New product pipeline, Financing, Marketing/brand names, Supply chain management, and Information systems. However, the company had no prior experience in the remaining success factors -- Real estate, Store design, and Store operation. The stores were divided into segments to make shopping easy for customers. These segments were: Products, Home, and Pro: These sections showcased the full range of Macs and other devices. They featured Macs that were used to burn MP3 to CD, turn video into an iMovie, surf the Web, etc. Genius Bar: Apple staff fielded various questions from the customers and answered them. If they could not respond to any of the customer queries they contacted their head office for immediate help. Software: This segment contained more than 300 Mac software titles. Adapted from <http://www.apple.com/retail/vr/> Solutions: Staff in this section demonstrated all the functions that the Mac could perform. Theater: In the theater, the latest developments in Mac were demonstrated to customers on a digital screen. Etcetera: This section contained products such as scanner, cables, ink, papers, and other accessories.
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THE TROUBLE BEGINS MACadam Computer, Inc. (MACadam), located in San Francisco, was a long time authorized Apple reseller. Tom Santos (Santos), president of MACadam, complained that ever since Apple had started its own stores, it had become difficult for him to procure iBooks with CDTom Santos rewritable/DVD combination drives from the company. He said all these products were, however, available at all Apple retail stores. He also charged that Apple gave only a few copies of Mac OS X 10.1 update CDs to the resellers while stockSource: http://imgs.sfgate.com ing its own stores with a number of free copies. Responding to this charge, Apple said that it treated everyone equally. This was followed by allegations by many Apple resellers that the company had made it really difficult for them to procure new products, while it filled its own stores with them. They said that Apple shipped new models of its products first to its own stores, thereby putting the resellers at a disadvantage. Santos said that Apples salesmen ran down the authenticity and integrity of authorized resellers to customers and asked them to buy only from Apple stores. Further, he said that Apple had a faulty accounting and quality control system, which billed him even for products that he had returned. I have documents proving that they mis-billed us in more than 1,000 cases, he said15.

Santos alleged that Apple had unfairly fixed the upper limit on the value of faulty goods to be returned to the company by the resellers. While this cap had been fixed at 1% of the dollar volume per quarter, Santos said that the value of faulty goods received from the consumers was more than the prescribed percentage, forcing the resellers to repair and sell those products at a lower price. Further, Santos alleged that the company got out of paying him for the repairs undertaken on products under warranty, by stating that the products were out of warranty. As a result, in January 2003, Santos filed a multi-million dollar lawsuit against Apple, accusing the company of fraud, breach of contract, unfair competition, false advertising, and even including charges under the Federal Racketeer Influenced and Corrupt Organizations Act (RICO Act). The suit also charged that the company gave discounts to its customers without giving discounts to its resellers and thus was engaged in predatory practices. Santos said that he had obtained 5,300 invoices for products that were sent to Apple stores between January 2002 and June 2002, from an Apple website. On comparing these with the invoices for the same products that were sold to him, he found significant price variation (Refer to Exhibit IV). For example, he said, a three-year AppleCare extended warranty on a PowerBook which was listed for US$349, was sold to a reseller at US$244 whereas the same was sold for US$10.0616 to an Apple store. For more information about the RICO Act, click here. Santos said Apple procured information about the resellers customers when they provided their details while signing up for an AppleCare extended warranty. Apple then contacted these cus341

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tomers and offered them discounts on buying from the Apple stores located near the reseller stores. He claimed that he had evidence in the form of a recorded conversation between him and an Apple sales representative, in which the representative made unfavorable remarks about Apple resellers. Several other resellers such as MacTech Systems of Bend, Oregon, and Los Angeles-based Computer International joined Santos and filed lawsuits in February 2003 against Apple for similar reasons. In March 2003, a long-term reseller Thomas Armes (Armes), owner of Elite Computers, of Cupertino, California, filed a lawsuit charging Apple for breach of contract, unfair competition, false advertising, and fraud and claimed US$5 million in compensation from the company. (Refer to Exhibit V). Armes said that he and other resellers had requested Apple to develop a plan for revamping their stores, but to no avail. All the suits were filed in the Superior Court of the County of Santa Clara. APPLE REVISES THE TERMS AND CONDITIONS By the end of March 2003, Apple had opened more than fifty stores all over the US, even as the total number of resellers who filed lawsuits against Apple went up. Apple signed yearly contracts with its resellers, making it mandatory for them to renew the contracts every year. During March 2003, as the old contract expired, Apple issued new contracts to its resellers. The due date for signing the contracts was fixed as March 25, 2003. Thinksecret.com obtained a copy of the contract and published some of the important sections of the new contract on its website. According to this, Apple had laid down a new dispute settlement process, which initially gave sixty days time to the com-

panys senior management members to resolve the dispute once a reseller (or resellers) gave a written notice of dispute. If the dispute was not resolved, then both the parties were entitled to a non-binding mediation process for another sixty days. Even after this, if the parties could not find a solution, then litigation may commence. However, the contract did not give the resellers a right to a jury trial. The resellers found this clause unacceptable. Apple made these dispute resolution terms valid even for the earlier disputes that the resellers had with the company. The new contract also made it mandatory for the resellers to provide their business and inventory reports and even their list of customers to Apple whenever requested. It also gave Apple the right to inspect locations and facilities of any dealer during business hours. Even if the contract had been terminated or had expired, this section was valid for five years during which Apple could check the stores of the resellers and request business details. Regarding damages to be paid in any dispute between Apple and a reseller, the contract limited Apples liability (as well as the resellers liability) to not more than US$100,000; this upper limit varied according to the value of purchases made by the resellers from the company. It also gave Apple the right to sell its products to any person including the customers of the resellers. Many resellers stated that the new contract was clearly aimed at decreasing Apples liability and was a reaction to the lawsuits filed earlier that year.

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Exhibit IV Price Variation Product iMac Titanium PowerBook 12-inch 1,599 1,471 1,287 PowerMac G4 2,699 2,429 2,173 eMac iBook

Minimum Advertised Price (US$) Independent Resellers (US$) Apple Retail Stores (US$)

1,779 1,655 1,547

2,559 2,339 2,092

1,099 1,011 966

1,299 1,195 1,117

The hardware items listed in the table are a 1GHz 17-inch iMac, a Titanium PowerBook G4, a 12-inch PowerBook, a 1.42GHz PowerMac G4, a 700MHz eMac, and a 900MHz iBook.
www.thinksecret.com. Reprinted with permission. Source: <http://thinksecret.com/news/retailaccounting.html>

Exhibit V Elite Computers Thomas Armes (Armes), owner of Elite Computers, of Cupertino, California, had been selling Apple products since 1989. He had five retail stores that sold Apples products. He had a habit of selling new products even before they were introduced in the market by Apple, through a midnight party. These parties were a huge success and people thronged his stores, making him one of the best resellers of the computer company. In 2002, Apple rolled out Operating System X version 10.2, code-named Jaguar. Armes announced a midnight party as usual to sell the product but was astounded to find that only around eighty people attended the party. When Armes went to a nearby Apple retail store at midnight, he found a large number of customers waiting outside to enter the store. On enquiry, Armes found that Apple had e-mailed all the customers to purchase the operating system directly from its stores. In another incident, Armes had around 500 customers on hand for Apples flat-panel display for the iMac, a new Apple product. Some of the customers even paid money in advance, but according to Armes, the flat-panel displays were never sent by Apple. When customers came to know that Apple retail stores had the stock, most of them canceled their orders with Armes. Armes business was severely affected; in May 2003, he shut down all his stores.
Adapted from T. C. Doyle, Inside the channel's battle with Apple, www.varbusiness.com, January 10, 2005.
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Around fifty resellers - including Santos, Armes, and companies such as Dell and Target which sold Apples iPods - made some changes to the contract and submitted it to the company. Apple rejected their proposal and canceled all their dealerships. These resellers were permitted to sell the Apple products that remained at their stores, but could not order new products from the company or from its distributors. Apple said that the resellers whose dealership had been cancelled collectively accounted for less than 1.5% of Apple's worldwide revenue in 2002. After negotiations, some resellers like Santos and Target agreed to sign contracts with Apple. Santos attached a letter to his contract stating that he had signed it under duress. Resellers like Buy.com, MicroCenter, MACadam, and Elite Computers were removed from the list of authorized resellers. Santos filed a motion asking for a temporary order to reinstate MACadam as a reseller. On December 19, 2003, the court rejected this appeal and both the parties were in discovery. Around the same period, Apple answered Computer Internationals complaint and refuted all the allegations. According to Thinksecret.com, in March 2004, Apple again issued contract agreements to its resellers and service providers and asked them to submit the contracts by April 02, 2004. According to the website, the contract gave Apple the right to discriminate between its retail stores and the reseller stores. As per the new contract, Apple could allocate the available inventory to its physical stores, online stores, and other dealers before considering the resellers. Many resellers condemned this and said that the contract had put Apple stores at an unfair competitive advantage. Resellers said the revised contract restricted them from using Apples trademarks on promotional equipment such as pens, key chains, etc., that served as an endorsement by the company. The

resellers added that the contract forbade them from upgrading their stores to match Apples. The new contract revised Apples maximum liability to the resellers from US$100,000 to US$300,000. Apples liability varied from one reseller to another and was limited to the previous years total amount paid by the reseller to Apple or US$100,000, whichever was greater. THE CONFLICT GATHERS MOMENTUM On March 31, 2004, Apple resellers started a website (www.TellOnApple.org) which contained articles regarding their conflict with Apple that had been published in various magazines and newspapers. The site was also intended to collect and share any information pertaining to Apples unethical practices even from customers and employees. We want to uncover any skeletons that exist at Apple, the website said. The site was said to have attracted around 2 million hits by the end of 2004. The website also contained a list of amended complaints that were posted by the resellers against Apple. During the website launch, Santos said that even though lawsuits had been filed separately against Apple, all the resellers were coordinating during the discovery phase. On April 22, 2004, Apple held its shareholders meeting at its headquarters at Cupertino, California. Around ten resellers protested in front of the headquarters and carried placards. Armes carried a placard that read Steve youre fired, and gave leaflets to the shareholders. The resellers said that their aim was to inform the shareholders of Apples predatory policies. Apple did not comment on the issue and said that it followed a policy of not commenting on pending litigations (trial date for the case had not yet been fixed). During the meeting, Armes, who was also a
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shareholder, asked why Apple was trying to put resellers at risk by opening its own stores. Tim Cook, an Apple executive, replied that Apples indirect sales channel represented about 58% of Apple's revenue and that the channel was very important to the company. On June 04, 2004, Santos filed a fourth amended complaint against Apple in the same court. The complaint claimed more than US$70,000 from Apple as a part of unpaid monies owed by the company and another US$7.5 million17 in damages for breach of contract, fraud, negligent misrepresentation, false advertising, trade libel, defamation, and many other counts. In reply, Apple filed a demurrer, objecting to certain causes of action in the amended complaint. On August 26, 2004, the Santa Clara Superior Court ruled that there was sufficient evidence to proceed with charges of fraud and negligent misrepresentation against Apple. The court also dismissed Apples objections to allegations of unfair competition (in its retail division) and illegal receipt of funds of resellers. However, the court ruled that there was insufficient evidence to support the other charges framed against Apple. Till December 2004, around five lawsuits were filed against Apple by various resellers and all were waiting for trial dates to be allotted. Meanwhile, Santos announced the closure of MACadam. He wrote a letter to his customers, thanking them for their support for sixteen years, and blaming Apple for not acting on his requests for help. This decision did not come easy. In fact, it came as possibly the most difficult thing I have ever done, Santos wrote.18

CONSUMERS AND DEALERS FILE A CLASS ACTION LAWSUIT For the fiscal year that ended in September 2004, Apple retail stores recorded sales worth US$1.185 billion (Refer to Exhibit VI) with a profit of US$39 million. On February 17, 2005, three days after Armes filed his third amended complaint, a five-member group of consumers and dealers filed a class-action lawsuit. The 26-page lawsuit accused Apple of selling Exhibit VI used products after refurbishing them. The plaintiffs claimed that they had evidence to prove that Apple was guilty of selling used products. Some cus- Adapted from tomers said they found <http://ifoapplestore.com/stores/charts_gr aphs.html> names of other customers on some of the new Apple products they bought. Further, they charged that Apple had deliberately reduced its warranty coverage by making the warranty period effective from the day the product was shipped by Apple to the dealer (instead of from the day the product was sold by the dealer to the consumer). The allegations of these resellers were nearly the same as those made by Santos and other resellers in their civil lawsuits. The resellers alleged that Apple attracted their customers by giving unfair discounts and other offers and also said that the company
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charged them for the parts for machines under warranty. The damages and losses claimed by the three consumers in the lawsuit was nearly US$75,000. As of May 2005, this lawsuit, along with the previous ones, was waiting for a trial date to be awarded by the Court. Meanwhile, Apple introduced a new scheme called Price Matching program, under which it promised to offer its products to the US-based small and medium business customers at prices lower than that of resellers and other stores. (Refer to Exhibit VII) CONCLUSION As a part of its overall growth strategy, Apple continued to open more retail stores. By the end of April 2005, Apple had about 103 retail stores including three stores outside the US in London, Tokyo, and Osaka. Apple also planned to open around 25 new stores across the world in 2005. Resellers in other countries such as Australia, Canada, and Taiwan alleged that they were also hit by Apples unfair treatment. Some resellers in these countries said that Apple products were delivered mostly to big volume resellers while authorized small resellers were given nominal volumes. Further, Apple planned to open a chain of retail stores in Canada. The first store was opened in May 2005, creating ripples among the Canadian reseller community. According to Paul Tyrrell, a columnist in the Financial Times, The iPod now accounts for one-third of Apples revenues and its halo effect has contributed to a 35% increase in sales of the companys Macintosh computers over the past year.19 Industry observers wondered whether Apples retail strategy had contributed significantly to this revenue growth.

Exhibit VII Price Matching Program In the latter half of 2004, Apple advertised on its website that the company would offer up to ten percent less than what was offered by an authorized Apple reseller or other websites. The offer was valid only to US-based small and medium business customers who purchased online. Consumers, educational institutions, and resellers of Apple products, were not eligible to participate in this program. The program was applicable only to Apple branded hardware (preconfigured and configured-to-order) and software products, and were subject to availability of products at Apple Store (online). Products that took more than three weeks to deliver were excluded from the program. Customers interested in availing of the offer had to submit the facts pertaining to the price offered by other resellers to Apple. Further, Apple reserved the right to validate these facts. Apple also started mailing customers asking them to buy directly from Apple retail or online stores to avail themselves of the discount opportunities.
Source: http://www.apple.com/r/store/business/pricematch/

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Footnotes: 1. Dennis Sellers, Apple retail stores aimed to grow Mac market share, www.macworld.com, May 15, 2001. www.TellOnApple.org. < http://www.sba.gov/INV/apple.html > Brooke Shelby Biggs, Apple continues bruising as market share slips, www.bizjournals.com, August 16, 1996. <http://www.designchain.com/coverstory.asp?issue=summer 02> <http://www.designchain.com/coverstory.asp?issue=summer 02> <http://www.macnn.com/articles/05/05/04/merill.on.aapl/> <http://www.macnn.com/articles/05/05/04/merill.on.aapl/> <http://www.uc.edu/ucitnow/winter_98/apple.html>

13. Joe Wilcox, 25 Apple stores to sprout this year, www.news.com, May 15, 2001. 14. Cliff Edwards, Commentary: Sorry Steve, heres why Apple stores wont work, www.businessweek. com, May 21, 2001. 15. Henry Norr, Apple dealers biting back, www.SFGate.com, February 3, 2003. 16. R o b e r t M u l l i n s , A p p l e r e s e l l e r s i n m u t i n y, www.sanjoze.bizjournals.com, April 02, 2004. 17. D e t a i l s o n A p p l e r e s e l l e r l a w s u i t e m e r g e , www.MacNN.com, Wednesday, June 16, 2004. 18. Ryan Katz, Two California Apple resellers shut down, blame Apple, www.thinksecret.com, February 12, 2005. 19. Paul Tyrrell, Smart cos show intrapreneurial spirit, Business Standard, July 28, 2005.

2. 3. 4. 5. 6. 7. 8. 9.

10. <http://forums.appleinsider.com/showthread.php?s=&threadi d=44982> 11. Ian Fried, Apple to pull out of Sears, www.news.com, March 15, 2001. 12. Ian Fried, Mac dealers keep eyes on Apple stores, www.news.com, October 4, 2001.

Additional Readings and References: 1. Biggs, Brooke Shelby. Apple Continues Bruising as Market Share Slips. www.bizjournals.com. 16, August, 1996, 17 May 2005. Jastrow, David. Core Challenge. www.crn.com. 04, February, 1999, 17 May 2005.

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3. 4. 5. 6. 7. 8. 9.

Smith, Tony. Apple Ponders Own US Retail Chain. www.theregister.co.uk. 03, June, 1999, 17 May 2005. S m i t h , To n y. A p p l e P l o t s D i r e c t - O n l y S a l e s . www.theregister.co.uk. 25, October, 1999, 17 May 2005. Smith, Tony. Apple Opens Online Sales to Small Resellers. www.theregister.co.uk. 03, March, 2000, 17 May 2005. Fried, Ian. More Signs that Apple may Open Stores. www.news.com. 29, September, 2000, 17 May 2005. Fried, Ian. Apple to Open First Store. www.news.com. 07, May, 2001, 17 May 2005. Wilcox, Joe. 25 Apple Stores to Sprout This Year. www.news.com. 15, May, 2001, 17 May 2005. Wilcox, Joe. Does Apple Have a Future in Retail? www.news.com. 15, May, 2001, 17 May 2005.

14. Fried, Ian. Retail Pro behind Apple Stores. www.news.com. 0 5 , O c t o b e r, 2 0 0 1 , 1 7 May 2005. 15. Sherman, Erik. Inside the Apple iPod Design Triumph. www.designchain.com. 2002, 17 May 2005. 16. Norr, Henry. Apple Dealers Biting Back. www.SFGate.com. 0 3 , F e b r u a r y, 2 0 0 3 , 1 7 May 2005. 17. Vance, Ashlee. Apple Exporting Retail Stores. www.theregister.co.uk. 21, May, 2003, 17 May 2005. 18. Sellers, Dennis. Australian Resellers Unhappy with Apple Online Store. www.macworld.com. 13, June, 2003, 17 May 2005. 19. Salkever, Alex. Apple Respect Your Resellers. www.businessweek.com. 17, January, 2004, 17 May 2005. 20. Gibson, Brad. Apple Dealers Launch 'Tell on Apple' Web Site. www.macobserver.com. 02, April, 2004, 17 May 2005. 21. Dalrymple, Jim. Jobs, Apple Shareholders Talk Marketshare, Real, More. www.MacCentral.com. 23, April, 2004, 17 May 2005. 22. D e t a i l s o n A p p l e R e s e l l e r L a w s u i t E m e r g e . www.MacNN.com. 16, June, 2004, 17 May 2005, 17 May 2005.

10. Sellers, Dennis. Apple Retail Stores Aimed to Grow Mac Market Share. www.macworld.com. 15, May, 2001, 17 May 2005. 11. Wilcox, Joe. Apple Store Opening Draws Rave Reviews. www.news.com. 19, May, 2001, 17 May 2005. 12. Edwards, Cliff. Commentary: Sorry Steve, Heres Why Apple Stores Wont Work. www.businessweek.com. 21, May, 2001, 17 May 2005. 13. Fried, Ian. Mac Dealers Keep Eyes on Apple Stores. www.news.com. 04, October, 2001, 17 May 2005.

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23. O a t e s , J o h n . A p p l e R e s e l l e r s a r e R e v o l t i n g . www.theregister.co.uk. 16, June, 2004, 17 May 2005. 24. Jade, Kasper. Court Throws out Allegations in MACadam vs. Apple Case. www.appleinsider.com. 31, August, 2004, 17 May 2005. 25. Doyle T.C. Inside the Channel's Battle with Apple. www.varbusiness.com. 10, January, 2005, 17 May 2005. 26. Vaughan J Steven & Nichols, Apples Rotten Resellers Ways. www.findarticles.com. January, 2005, 17 May 2005. 27. C l a s s A c t i o n L a w s u i t F i l e d a g a i n s t A p p l e . www.MacNN.com. 18, February, 2005, 17 May 2005. 28. Lambert, Emily. Class-Action Suit Filed against Apple. www.forbes.com. 18, February, 2005, 26 June 2005. 29. Gibson, Brad. Consumer, Dealer Class Action Lawsuit Filed against Apple (UPDATE). www.macobserver.com. 18, February, 2005, 17 May 2005. 30. Yi, Matthew. Lawsuit against Apple Class-Action Status Sought over Firm's Business Practices. www.SFGate.com. 19, February, 2005, 17 May 2005. 31. B e s t , J o . A p p l e S t o l e O u r S e c r e t s . www.management.silicon.com. 21, February, 2005, 17 May 2005. 32. L a h e y, L i a m . H o w d o y o u l i k e ' d e m A p p l e s ? www.integratedmar.com. 27, March, 2005, 17 May 2005.

33. Tyrrell, Paul. Smart cos show intrapreneurial spirit. Business Standard. 28, July, 2005, 17 May 2005. 34. Apple Retail Stores First Look. www.coolmacintosh.com. 35. <http://applemuseum.bott.org/sections/history.html> 36. <http://db.tidbits.com/getbits.acgi?tbart=04585> 37. <http://dictionary.law.com> 38. <http://encarta.msn.com/encyclopedia_761566825/Internati onal_Business_Machines_ Corporation.html> 39. <http://en.wikipedia.org/wiki/Apple_Computers> 40. <http://forums.appleinsider.com/showthread.php?s=&thread id=44982> 41. <http://inventors.about.com/library/weekly/aa051599.htm> 42. <http://www.apple.com/r/store/business/pricematch/> 43. <http://www.apple.com/retail/vr/> 44. <http://www.apple.com/store> 45. <http://www.appleinsider.com/article.php?id=927> 46. <http://www.apple-history.com/frames/> 47. <http://www.geocities.com/SiliconValley/Lakes/7588> 48. <http://www.ifoapplestore.com/stores/charts_graphs.html> 49. <http://www.ifoapplestore.com/the_stores.html>
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50. <http://www.landsnail.com/apple/local/design/standards.ht ml> 51. <http://www.macminute.com/2003/11/26/ginza - 26k> 52. <http://www.macnn.com/articles/05/05/04/merill.on.aapl/> 53. <http://www.sba.gov/INV/apple.html> 54. <http://www.uc.edu/ucitnow/winter_98/apple.html> 55. <http://www.uiowa.edu/~commstud/adclass/1984_mac_ad. html> 56. www.About.com. 57. www.atariarchives.org 58. www.thinksecret.com.

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S ECTION 7 Section 7

Case Study: PepsiCos Distribution and Logistics Operations : Pep-

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PEPSICOS LOGISTICS OPERATIONS In order to manage its distribution F IGURE 10.3 The Earlier systems effectively, PepsiCo had Pepsi-Cola Logo put in place advanced logistics systems. PepsiCo sold beverage concentrate to bottlers, who added carbon dioxide, sweetener and water to make beverages and beverage syrup. Syrup was either sold directly to the fountain accounts or was combined with carbonated water for bottling. Bottling companies were (with a few
Source: http://skibossubs.com

Americas operated in nine countries in three regions Central Europe, the Caribbean and the Central Corridor in the US. Bottlers had to confirm to the product quality and uniformity standards prescribed by PepsiCo. PepsiCos logistics two main Source: www.packagingdigest.com phases were giving the syrup to the bottlers, and distribution of bottles/cans to the retail outlets. A Pepsi Bottling Ventures Plant BEVERAGE MANUFACTURING UNIT TO BOTTLERS PepsiCos refreshment beverage manufacturing unit, Pepsi-Cola North America (PCNA) produced and sold beverages and beverage concentrate to bottling companies in the US and Canada. PCNA owned 60 plants that produced beverages/beverage concentrates, which were sold/ distributed through 450 li- A Pepsi Bottling Ventures censed territories. Through Plant its mammoth network, PCNA accounted for 60% of PepsiCos beverages sold in the US and Canada. PCNAs main responsibility was to ensure that the concentrate reached the bottlers in time so that they could Source: www.packagingdigest.com carry on their task of convert358

A Pepsi Bottling Ventures Plant

Source: www.packagingdigest.com

exceptions) owned and operated by local companies in the countries where PepsiCo operated. These companies were authorized to sell PepsiCos soft drinks within specified territorial boundaries. PepsiCos leading bottlers were Pepsi Bottling Group (PBG), Pepsi Bottling Ventures and Pepsi Americas Inc. Typically, the bottlers were allotted regions and were supposed to operate in the countries within those regions. For instance, Pepsi

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A Pepsi Bottling Ventures Plant

ing it into ready-for-sale soft drinks. PCNA had a two-fold objective for managing the movement of products to the bottling plants. Its first objective was to reach accuracy levels of over 99.1% in terms of timely delivery. The other objective was to reduce the costs involved in transportation.

In order to achieve these objectives, PCNA tied up with a Source: www.packagingdigest.com third-party logistics company, Penske Logistics (Penske). Penske offered transportation solutions. Penske also offered warehouse management services to two of PepsiCos distribution centers in North America. The task required a team of experienced personnel capable of implementing transportation solutions and achieve optimum performance levels. In 2000, Penske replaced PepsiCos transportation management technology, with its own software, incorporating the i2 transportation optimization solution (TOS). By implementing the new TOS, PCNA was able to closely monitor the movement of its products from its facilities to the bottling plants. TOS kept the company posted about the shipments and helped it in making the necessary changes in the routes and schedules to tackle unexpected situations. Under such circumstances, PepsiCo could put in place alternative solutions to prevent delays. As a consequence, PCNA achieved delivery accuracy levels higher than 99.1%.

Apart from timely delivery, PCNA also focused on mini- A Pepsi Bottling Ventures mizing the costs involved in Plant transportation. In order to achieve this, Penske employed several measures. One significant measure was to centralize PCNAs transportation to a single location. This facilitated better control over the delivery system. Source: www.packagingdigest.com PCNA also employed Six Sigma quality processes. The performance of operations was constantly measured resulting in enhanced efficiencies and lower costs for the company. A Pepsi Bottling Ventures Plant PCNA with the help of Penske negotiated shipping rates on a nation-wide scale and evaluated the service levels of various carriers. This enabled the company to reduce costs and achieve the objective of timely delivery. One of the most significant developments was order optimization. TOS facilitated the electronic receipt of orders and helped in planning appropriate delivery routes and schedules in quick time. It also en359

Source: www.packagingdigest.com

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abled the company to identify the shippers offering the lowest shipping costs and spot the best routes and consolidate shipments. By working out the optimal load configuration, PCNA was able to maximize load in each truck. By delegating its logistics activities to Penske, PepsiCo was able to achieve significant cost improvements. Penske also helped PCNA in performing activities such as making payments, invoicing and reporting. Penske prepared a detailed invoice of all monetary transactions conducted on PCNAs behalf. BOTTLERS TO RETAIL OUTLETS PepsiCos bottlers delivered the companys products to thousands of retail outlets in their region. Pepsi Americas (PAS) was the second largest Pepsi-Cola bottler with revenues of $3.2 billion in the fiscal 2002-03. PAS produced, distributed and promoted major PepsiCo brands such as Pepsi, Diet Pepsi, Cadbury Schweppes and other major brands in the countries in which it operated. In the US, PAS had 100 distribution centers each served by around 50 trucks. The company distributed its products in a variety of packaging options including 20-ounce bottles, two-liter bottles, 12-ounce cans, 12-packs, 24-packs, and so on. PAS had to ensure the timely dispatch of goods, as well as ensure full capacity utilization of its trucks, and quicker inventory replenishment at the stores. The ultimate objective was to ensure that the stores were stocked with the required quantities of products at the right time. The aim was to continuously increase sales and productivity levels.

In order to achieve the above goals, PAS decided to make a clear distinction between its sales and delivery operations in major US territories, on an experimental basis. Under the new system (known as the pre-sell method), each day, the Account Sales Managers (ASMs) went to the retail outlets to gauge their requirements, promote products and receive orders. The following day, the delivery agents (DAs) delivered the orders as per the outlets requirements. PAS also decided to replace its various disparate business systems with an integrated ERP package developed by People Soft. The package assisted the company in its various functions, such as sales, merchandizing, CRM, procurement and so on. PAS also employed a mobile computing system using Wireless Local Area Network (WLAN) and Wireless Wide Area Network (WWAN). Before shifting to the new ERP system, the companys DAs had used DOS-based handheld computers that were not wirelesscompatible. Each day, before embarking upon a route, the DAs used to place the handheld computers into a communications cradle at the distribution center. This was required to download key information such as product information, order position, etc, which assisted them in their work. The DAs fed the orders into the handhelds. Once the days work was over, the DAs placed their handhelds into the communications cradle to feed the route accounting information into the sales system of PAS. Under the new system, PAS replaced the previous handheld computers with PDT 8000 computers made by Symbol. The PDTs were equipped with integrated barcode scanners and a numeric keyboard. The ASMs used them to feed customer orders.
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Each day, the ASMs fed the F IGURE 10.4 Symbols PDT order information into the 8000 Computer sales system at the distribution centers (DCs) through wireless network in areas where the wireless coverage was available. In areas where wireless coverage was not available or where it was difficult to get wireless connectivity, the ASMs connected the computers to a modem to send order information through the Internet Source:www.barcodediscount.com to the DCs using the traditional telephone lines. This enabled the staff at the DC to do the necessary groundwork for the next days orders. On the next day, the DA delivered the ordered quantity of goods at the retail outlets. The method used was in contrast to the earlier one, where in the DAs went about distributing the products depending upon their availability in the trucks rather that what the retail outlets wanted. Using the handheld computers, the ASMs could also make attractive sales pitches and show the latest Pepsis ads, apart from transmitting order information. For the DAs, the new handheld computers offered better features than the previous ones. The PDTs weighed less, and could process data at a higher speed on a real-time basis. The main difference over the previous computers was that the DAs were not required to wait in queues at the DCs to upload/download

data at the cradles. They simply transmitted the data almost instantly through WLAN. Another advantage of using the wireless connectivity was that the cost of maintaining the infrastructures for handhelds (cradles, cables, etc.) was significantly reduced. The DAs were also given portable printers to print invoices. The new system simplified the sales and delivery functions for PAS. The company changed the way its sales and delivery teams operated. Earlier, PAS employees were responsible for receiving orders manually while at the same time distributing products to the retail stores (supermarkets, general merchandize stores, and so on). They did not have a proper routing schedule or a route plan. The truck drivers simply distributed products to the stores which fell in their routes. The bottler also faced problems with inventory management. Earlier, by using its own proprietary technology, PAS was not able to gauge customer demand accurately. As a result, it was frequently noticed that the trucks which returned to the warehouses, were still around one-third full. This meant unnecessarily high fuel and labor costs (for loading and un-loading of trucks). There was also an increased risk of goods getting damaged due to frequent loading and un-loading. The inventory levels at the warehouses were also continuously increasing. They increased from 55 Stock Keeping Units (SKUs) in the early 1990s to 300 SKUs by 2002. The new system helped PepsiCo to sort out these issues, as the delivery quantities, routes and schedules were clear to the DAs even prior to heading for work. The system enabled the DAs to plan out their daily routes and take the products on the stores appropriately. The ASMs could view data relating to the market trends, through which they could
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identify consumer buying habits and make comparisons of store sales in various areas. They could also give advice to the retail outlets regarding what should be done to increase sales. The ASMs could also plan out the strategies to adopt in order to increase sales to existing customers. By implementing the new wireless mobile solutions, PAS was able to achieve significant improvements in the way it handled its logistics operations, resulting in enhanced efficiency and precision. There was a significant gain in productivity recorded by sales personnel, DAs and also the distribution centers. This enabled the company to serve its customer better. The sales personnel were able to make more customer calls, rather than wasting their time at the retail outlets. Encouraged by its success, PAS planned to implement the wireless mobile solution at all its facilities in the US by the first quarter of 2004. THE EFFORTS CONTINUE Through their use of the most modern technology in recent years, PepsiCo and its bottlers were able to improve their distribution and logistics management operations significantly. To further improve the market penetration of its products globally, PepsiCo launched two new distribution methods in the initial years of the new millennium. These were the chilled DSD system and the hybrid system. The chilled DSD system was a relatively small distribution method, created for items which required continuous refrigeration. This was primarily created for the fruit juices product line. However, PepsiCo intended to extend it to other beverage brands as well sometime in the future. The hybrid system was

formed by pooling the various distribution systems of PepsiCo. This was undertaken to facilitate PepsiCo in serving a large number of retailers in emerging markets like India and China. In spite of the benefits involved in employing advanced IT applications, various PepsiCo group companies and its bottlers functioned more or less independently. All five of PepsiCos major units, including Pepsi, Frito-Lay, Quaker Oats, Tropicana and the bottlers invested in their own wireless technology. There was no ERP system connecting these units. They had separate distribution systems (except for a few minor regional tie-ups), even though they served the same retail outlets. Efforts and resources were not pooled together. Analysts felt that this lacuna would affect PepsiCos profitability adversely and it was an area which required maximum attention to enable the company to compete effectively with its competitors. Enricos proposed combination of PepsiCos selling operations with its distributions and logistics functions, termed the Power of One, has not yet been implemented. Dismissing the proposals as mere pep talk, an analyst commented, Theyve been talking forever about how theyre going to streamline operations and integrate systems, and theyre still talking. The commitment just hasnt been there.2

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Exhibit I
PepsiCo Group of Companies The PepsiCo group serves the markets across the world with its family of six companies: Frito-Lay North America (FLNA), Frito-Lay International (FLI), Pepsi-Cola North America (PCNA), Gatorade/Tropicana North America (GTNA), PepsiCo Beverages International (PBI), Quaker Foods North America (QFNA) Frito-Lay North America (FLNA) Frito-Lay North America (FLNA) manufactures, markets, sells and distributes branded snacks. These snacks include Lays potato chips, Doritos flavored tortilla chips, Cheetos cheese flavored snacks, Fritos corn chips, Tostitos tortilla chips, Ruffles potato chips, Rold Gold pretzels, branded dips, Quaker Chewy granola bars, Sun chips multigrain snacks, Grandmas cookies, Quaker fruit and oatmeal bars, Quaker Quakes corn and rice snacks, Quaker rice cakes, Cracker Jack treats and Go Snacks. Frito-Lay International (FLI) In addition to many of the FLNA and Quaker branded snacks sold in North America, Frito-Lay International (FLI) also manufactures and sells a number of leading snack brands including Sabritas, Gamesa and Alegro brands in Mexico, Walkers and Wotsits brands in the United Kingdom and Smiths brand in Australia. These products are manufactured by consolidated businesses, as well as by non-controlled affiliates. FLNA and FLI branded products are sold to independent distributors and retailers. The companys snacks businesses measure physical volume growth on a system-wide basis, which includes the volume sold by non-controlled affiliates. Pepsi-Cola North America (PCNA) Pepsi-Cola North America (PCNA) manufactures; markets and sells beverage concentrates, and sells fountain syrups and finished goods, under the brands Pepsi, Mountain Dew, Sierra Mist, Mug, Slice, FruitWorks, SoBe and Dole. PCNA manufactures; markets and sells ready-todrink tea and coffee products through joint ventures with Lipton and Starbucks. PCNA sells concentrate and finished goods for these brands to licensed bottlers. PCNA also licenses the Aquafina water brand to its bottlers. The franchise bottlers sell PCNA brands as finished goods to independent distributors and retailers. Gatorade/Tropicana North America (GTNA) Gatorade/Tropicana North America (GTNA) manufactures; markets and sells Gatorade sports drinks, Tropicana Pure Premium, Dole, Tropicana Seasons Best and Tropicana Twister juices and juice drinks and Propel fitness water. These branded products are sold to independent distributors and retailers. Contd...

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QUESTIONS FOR DISCUSSION:

Contd... PepsiCo Beverages International (PBI) PepsiCo Beverages International (PBI) manufactures; markets and sells beverage concentrates, fountain syrups and finished goods under the brands Pepsi, 7UP, Mirinda, Mountain Dew, Gatorade and Tropicana outside North America. Generally, PBIs brands are sold to franchise bottlers. However, in certain markets, PBI operates bottling plants and distribution facilities. PBI also licenses the Aquafina water brand to certain of its franchise bottlers. Quaker Foods North America (QFNA) Quaker Foods North America (QFNA) manufactures; markets and sells cereals, rice, pasta and other branded products. QFNAs products include Quaker oatmeal, Capn Crunch and Life readyto-eat cereals, Rice-A-Roni, Pasta Roni and Near East side dishes, Aunt Jemima mixes and syrups and Quaker grits. These branded products are sold to independent distributors and retailers.
Source: PepsiCo Annual Report 2002, www.pepsico.com.

Analysts felt that one of the key reasons for PepsiCos dominance in the beverages and snack foods markets was its efficient distribution system. Describe PepsiCos distribution system and the channels used, in detail. Discuss the strengths and weaknesses of the companys distribution operations. Give suggestions to overcome the weaknesses you have discussed. Prior to the implementation of the wireless mobile solutions, PAS faced several problems in its logistics operations. Describe how the implementation of wireless solutions helped in solving the problems of PAS. What measures must PAS take to further improve its logistical efficiency? Analysts felt that PepsiCo could reap significant cost benefits by integrating and streamlining the operations of its group companies (beverages, snack foods and bottling). Prepare an operational plan for PepsiCo to achieve this task. Make suitable assumptions to answer the question.

Footnotes: 1. As quoted in the article, PepsiCo Joins UCC net for Global Services, posted on knowledgebase.uccnet.org, dated December 12, 2003. As quoted in the article, PepsiCo: No Deposit, No Return, by Kim S. Nash and Mel Duvall, posted on www.eweek.com, dated May 1, 2003.

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Additional Readings & References: 1. 2. Benezra, Karen, Pepsi: Void Between Somers and Shelves, BrandWeek, July 18, 1994. Kelley, Kristine Portno, Beverage Distribution Heads Down the Information Highway, Beverage Industry, November 1994. Chirls, Stuart, The Pepsi Challenge, Sales & Marketing Management, March 1996. Wireless WAN Helps Pepsi Move Cans, Sales, Automatic I.D. News, November 1997. Springsteel, Ian, Pepsi's Next Generation of Purchasing, CFO, December 1997. Walter, Charles, New Recipe for IT Implementation, www.informationweek.com, September 27, 1999 Pepsi-Cola General Bottlers Chooses Truck Stops Routing System, Fleet Equipment, June 2000. Deierlein, Bob, Beverage Delivery, Fleet Equipment, September 2000. Fabey, Michael, Post-Reform Strategies, Traffic World, October 2, 2000.

11. Barrese, Robert, Routing System Centralizes, Optimizes Delivery Routes, Food Logistics, January / February 2001. 12. Clark, Philip B, Bottlers Pour into New Exchange, B to B, February 19, 2001. 13. News Briefs, Beverage Industry, November 2001. 14. Dawson, Havis, Do We Get it? Beverage World, December 15, 2001. 15. D o u g l a s , M e r r i l l , S C M f o r a N e w G e n e r a t i o n , www.inboundlogistics.com, August, 2002. 16. Hayes Ian, Meeting Business Needs with Wireless Technology, www.cutter.com, November 19, 2002. 17. Microsoft, The Pepsi Bottling Group and Shelf link Announce New Mobile Solution Built on the .NET Compact Framework, www.microsoft.com, March 19, 2003. 18. Mans, Jack, Multipurpose Pepsi bottling, Packaging Digest, April 2003. 19. Stepanek, Marcia; DAgostino, Debra; Field, Anne, The Pepsi Challenge, CIO Insight, April 2003. 20. Waters, John K, Pepsi Bottling Group Has a Thirst for Rich Data, www.adtmag.com, May 2003. 21. Moyer, Louise, Pepsi-Penske Partnership Satisfies Consumer Demand, World Trade, September 2003.

3. 4. 5. 6. 7. 8. 9.

10. Deierlein, Bob, PBG Goes High-Tech, Beverage World, October 15, 2000.

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22. Pepsi Bottling Group, the Pocket PC Application Helps the Pepsi Bottling Group Sell Soda More Effectively, www.microsoft.com. 23. Pepsi Annual Reports (1998-2003), www.pepsico.com.

Related Case Studies: 1. 2. 3. 4. 5. Wal-Marts Supply Chain Management Practices (A), Reference No. 603-003-1. Wal-Marts Supply Chain Management Practices (B). Dominos India Logistics Management, Reference No. 603-004-1. Sears Logistics Management Practices. FedEx The Leading Supply Chain Solutions Provider.

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C HAPTER 11

Retailing and Wholesaling

Introduction Retailing involves selling of products/services to customers for their non-commercial, individual or family use. Retailing constitutes the last stage of the distribution process. Retailing can be classified into four categories based on ownership, extent of product lines handled, services vs. goods mix in retail strategy and non-store based retailing. There are different elements involved in a retail strategy which help the retailer to effectively conduct his business like situation analysis, setting the objectives, identification of target markets and consumers, etc. Franchising is an agreement between a franchiser and franchisee where the franchisor lends his trademark, trade name, product or service to the franchisee for a fee. There are three major types of franchises like product distribution franchise, business format franchise and trade name franchise.

Wholesaling refers to all the transactions that take place with intermediaries. A wholesaler is one in whose case more than 50 percent of the total sales are to other intermediaries rather than to final customers. There are two types of wholesalers: merchant wholesalers and functional wholesalers.

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Section 1

Retailing
Types of Retailers

Retailers are usually classified on the basis of ownership, number of product lines handled, services vs. goods mix in retail strategy and non-store based retailing (Refer keynote for detail explanation and examples). Implications of Merchandising Merchandising is becoming increasingly complex. If retailers store small quantities of products, they may run short of supply when consumers ask for the product. On the other hand, overstocking is also a problem. To handle merchandising efficiently advanced software tools like SAP are being used by retailers to organize purchase, stock, price of products and predict future supply and demand of each item in the store.

Keynote 11.1.1: Types of Retailers

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Franchising Franchising is a contractual and legally binding agreement between a franchiser and a franchisee. The franchiser gives the franchisee the right to do business using the trademark, trade name, product, or service of franchiser. The franchisee pays an initial amount to the franchiser and also pays a fixed portion of the monthly income on sales to the franchiser. A license or a franchise agreement is laid down, with specifications binding on the two parties. The factors to be considered by companies prior to franchising are to establish the companys brand in the market and to choose franchisees based on experience and local knowledge. The franchiser should also try to work through a long-term contract with the franchisee so that the commitment will be greater. Major Types of Franchising The three major types of franchises are: Product distribution franchise is a type of franchising in which the franchisee is allowed to distribute the manufacturers products in a wholesale or retail form within a specified geographical area. The franchising agreement specifies the geographical area in which franchisee can sell the products of franchiser. For example, dealers of petrol and gas are product distribution franchisees. In business format franchising, a franchisee has the freedom to modify the franchisers product or produce a new product with a license from franchiser. A franchisee

operates in a specified market area by using the trademark of the franchiser as well as the franchiser's methods of production, operational standards, marketing plans, etc. An example of business format franchising is Baskin Robbins. Trade name franchising allows franchisee to use the franchiser s trade name or license for products manufactured at franchisees plant. The franchisees have the freedom to sell the products produced under franchisers trade name in a predetermined market area. Soft drink bottlers are an example in this category. Advantages and Disadvantages of Franchising There are advantages and disadvantages to both franchiser and franchisee in franchising. Advantages to the Franchiser Advantages that accrue to franchisers include: low capital to be invested and low risk of opening distribution outlets in new markets, speedier expansion of business, extended market penetration, automatic motivation of the franchisee to improve business since his/her investment in the business is involved and ease in controlling quality when the business expands since day-today operational activities are taken care of by the franchisees, which leaves him/her with sufficient time to maintain quality. Disadvantages to a Franchiser One of the major disadvantages of this model is that the franchiser loses business control to franchisees, which
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may cause damage to the brands image in case the franchiser fails to have a concrete business agreement with the franchisee. Also, the franchise model entails significant expenses, for the franchisor, in terms of legal documentation of agreements, financial audit of company records, advertising expenses to attract potential franchisees, and so on; these costs have to be weighed against the benefits that the franchiser would get in the form of business success and market expansion. Advantages to a Franchisee A franchisee may derive benefits like reduced business risk when compared to independent businesses, operational advantages with the assistance of franchiser, easy financing of the business, psychological happiness of being an entrepreneur without having to take too much business risk and ease of resale of business. Disadvantages to a Franchisee Possible disadvantages to the franchisee include: limited freedom as the franchisers standards in business are to be maintained, fee payment to franchiser in the form of onetime payment or recurring payment or in the form of royalty as prescribed by franchiser and the fact that if the franchiser's business does badly at the overall level, it would adversely affect the success of the franchisee. Strategic Issues in Retailing

The strategic issues in retailing include retail strategy, location, store image decisions and market decisions (Refer keynote for detailed explanation). Global Trends in Retailing Global retailing industry has undergone substantial changes over the years. Analyzing these changes will help predict future trends in retailing. Retailing in the conventional form was through local merchandisers, who maintained huge inventories and offered extended credit
Keynote 11.1.2 : Strategic Issues in Retailing

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periods to customers. But the prices of products were high due to provision of these benefits to customers. Many retailing innovations are primarily explained by the wheel-ofretailing concept. The primary change in the retail industry has been the development of departmental stores which were a convenience for customers as they offered many products at one place. Later developments such as catalogue retailing, discount departmental stores, and internet marketing have also brought significant changes to the retail industry. Catalogue retailing was initially targeted at rural customers but later became a successful model for the entire retailing industry. Discounted departmental stores used to offered lower prices all through the year. In places like the US, outlets were established where real estate prices were low thus reducing operational costs. Internet marketing has been a disruptive development in the retailing industry. Companies offer a variety of products to customers through websites. The stockholding costs for companies are very low and customers can shop from their homes or offices at any convenient time. Online retailers are expanding their businesses into a departmental store format, so that customers don't need to browse various specialized sites. Internet marketing has the potential to change the future of retailing. However, some products

which the customers want to feel and touch cannot be offered through the internet. Trends in Retailing in India The retail industry in India was largely unorganized till the 1980s. However, later, with increased realization among the established organization regarding the future growth potential of the sector, they entered the sector in a big way. Starting from 2001-02, the Indian retail industry is poised to grow at 28 percent per annum over a period of five years. Factors such as increased urbanization, penetration of branded goods into market and the growth in customers demand for new and varied products have helped the growth of the retail industry in India. In the year 2000, strong growth was seen in the retailing of home appliances and consumer electronics as well as food outlets in the country. As competition has increased in the Indian retail industry, retail outlets are adopting differentiation strategies in store layouts. Stores are being designed to reflect the culture of the area in which they are set up. Advances in technology are helping to improve merchandise management, inventory management, sales forecasting, etc., for retailers. Retailers are increasingly focusing on television shopping and online shopping. Corporate giants like the Tatas, Ambanis, Rahejas, Piramals, RPG Group and others have entered the retailing business in India over the last few years. Organized retailing in India is growing substantially. The government of India is

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considering whether to completely open up retailing for Foreign Direct Investment (FDI). References: 1. The Future of of the Retail industry 2. Advantages and Disadvantages of Franchising 3. RFID technology in retail 4. The ten most important retail technologies

Review 1.2

Question 1 of 9
Big Bazar, a major retailer in India, has rented some space to Big Shoppy, another small retailer dealing in electric and electronic appliances. For the leased space, Big Shoppy pays Big Bazar a predetermined percentage of its sales. What type of retailing based on ownership is this?

A. Consumer cooperatives B. Chain retailership C. Vertical marketing units D. Leased department

Check Answer

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Section 2

Wholesaling

Growth of Wholesaling In the process of wholesaling, companies sell goods to intermediaries who further resell the goods to other intermediaries (e.g., selling goods to retailers) and not to the final consumers. In other words, wholesalers facilitate the process of transferring the goods from producer to the final consumer. While it was once believed that wholesaling as a part of the logistics process would soon become extinct, companies later began to realize the benefits of enhanced and improved wholesaling processes. As wholesalers are in close contact with the customers, they can help companies understand the changing needs and preferences of the customers in a better way and also help them in manufacturing in-demand products. Wholesalers can also devise localized marketing strategies by virtue of their proximity to consumers. Classification of Wholesalers

Classification of wholesalers and retailers is done on the basis of who the purchasers are, and not on the amount of purchase that has to be made. Put simply, if more than 50 percent of the purchasers are final consumers then the intermediary is known as retailer, otherwise if more than 50 percent of the sales are made to other intermediaries then the intermediary is known as wholesaler. The following are the different types of wholesalers: Merchant wholesalers: Wholesalers who purchase goods from other intermediaries or directly from the firms with a view to resell them are called as merchant wholesalers. Merchant wholesales possess the title to the goods purchased from the manufacturer. Agents and Brokers Agents: These are intermediaries who act as a bridge between the buyers and sellers. They do not possess title to goods. Agents negotiate the selling process
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between the buyers and sellers and sell the goods immediately. The agents are paid for their services in the form of commission. The various types of agents are manufacturers agents, selling agents, commission merchants and auction houses. Brokers: Brokers are those who negotiate with the buyers and sellers, take minimal of risks and have minimum participation in intermediary activities. Manufacturers sales branches and offices: These branches are owned by the manufacturers. The branches are required to sell goods to the buyers and are also responsible for providing support to manufacturers sales people. These offices are situated at a different place from the production plant. They also do not carry any inventory. Market Decisions The following are the different market decisions involved in the wholesaling process Target market: Wholesalers in the modern business environment are increasingly concentrating on responding proactively to the changing needs and requirements of the market. Wholesalers have started identifying and targeting the most profitable segments. As a result one can find wholesalers targeting new markets such as institutional markets (hospitals, hotels, etc.) and other niche markets.

Price: Wholesalers believe that the prices of goods should be fixed in such a manner that they (wholesalers) can earn sufficient returns and also sell them in large volumes. Hence they feel that they should be given a chance to voice their opinion regarding decisions such as reviewing the credit policies, decreasing the credit periods, etc. Promotion: In general, companies provide wholesalers with trade displays, advertisements, catalogues, etc., to facilitate the promotional process. However, some wholesalers prefer to formulate their own promotional strategies in a bid to differentiate themselves from other wholesalers. Place: Wholesalers should make sure that the products are easily available to customers. For this, the wholesalers are required to take advantage of location. Changing Patterns in Wholesaling Wholesaling in present business environment is a valuable link in the supply chain. This is due to the developing trends in the wholesaling process that are resulting in more efficient operations. Wholesale consolidation: The traditional method of product distribution is divided into four steps manufacture, wholesale, retail and consumption. However, of late, these divisions are becoming blurred due to the gradual integration of these processes through

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wholesale franchising, conglomerations and joint ventures. Productivity and quality: Technology has revolutionized the way modern wholesalers are dealing with their processes. The use of computers and other software technologies has paved the way for an efficient distribution management system. The advancements made in technology are also enabling wholesalers to tailor their services to the requirements of the manufacturers. Global expansion: Globalization has also enabled wholesalers to offer their services to customers spread across the world. References: 1. Wholesaling 2. Retailing, Wholesaling and Strategic Planning ppt slides. 3. Wholesaling ppt slides Review 1.2

Question 1 of 3
What is the characteristic of wholesale transactions?

A. Business transactions take place with intermediaries except final consumers B. Business transactions take place with either final consumers or intermediaries C. Business transactions take place with both final consumers and intermediaries D. Business transactions take place only with final consumers

Check Answer

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Section 3

Case Study: Westside The Indian Retailing Success Story

This case was written by Vandana Bhatia, under the direction of Sanjib Dutta and K. Subhadra, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

! 2003, IBS Center for Management Research. All rights reserved. To order copies, call +91-8417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: [email protected] www.icmrindia.org
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Our biggest strength is that we keep on refining ourselves and improving our offering - both product- and service-wise, correcting our mistakes, and this keeps us going. - Simone Tata, Chairperson Trent Being a brand retailer, we are able to develop our style and image in a manner whereby customers can build a relationship with us. - Himanshu Chakrawarti, General Manager Trent WESTSIDE LOOKS NORTH In 2002, Westside signed on a leading Indian cricket player, Yuvraj Singh, as its celebrity endorser for a period of 3 years. Westside sources announced that Yuvraj Singh would promote WestF IGURE 11.1 Yuvraj Singh side stores in Bangalore, Chen- Endorsing Westside nai, Hyderabad, Kolkata, Mumbai, Pune and Delhi. Commenting on signing on Yuvraj Singh, Himanshu Chakrawarti (Chakrawarti), general manager, marketing, Trent, said, Yuvraj epitomizes the Westside name in every aspect, he is stylish and trendy, Yuvraj personifies all the qualities that a modern successSource: www.tata.com ful India needs indomitable spirit, abundance of talent, great energy and uncontrollable enthusiasm. This move surprised industry analysts, as it was the first time an Indian retailer was going in for a celebrity endorsement. In addition to this, Westside launched marketing campaigns on televi-

sion and in the print media, with an allocated budget of Rs 200 million. According to company sources, the new media initiatives were aimed at increasing brand awareness among consumers, and enhancing the image of Westside as a retailer offering fashionable products at affordable prices. Analysts attributed Westsides success to its focus on styling, affordability and quality, and its retail model. Unlike its competitors Shoppers Stop and Globus ( Refer Exhibit I) who targeted the upper class, Westside focused on middle and upper middle class consumers, who constituted a large portion of Indias population. BACKGROUND NOTE In 1952, the Tatas entered the cosmetics business through Lakme Ltd. By the 1990s, Lakme was the leading cosmetics brand in Indian as well as in international markets. In 1996 Lakme entered into a joint venture with Hindustan Lever for the marketing and distribution of Lakme brands. In 1997, the Tatas sold their stake in Lakme to HLL for Rs 2 billion. After selling off their stake in Lakme, the Tatas scouted for business opportunities and decided to venture into retailing. Retailing was at a nascent stage in the late 1990s, and it was expected to be a booming business in India in the following decade (Refer Exhibit II for note on retailing industry). In 1998, the Tatas ventured into retailing, acquiring the Britain-based Littlewoods retail stores in Bangalore. The company was renamed, Trent Ltd., and the Littlewoods stores were renamed Westside. Along with the Littlewoods stores, the Tatas acquired the firms
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warehouse and infrastructure. These provided an established supply chain and trained personnel for Westside. By 1999, Westside had expanded its operations to Chennai, Mumbai and Hyderabad, F IGURE 11.2 The Mumbai Westside Store and by 2001 it had a second store in Mumbai, and a store each in Pune, Kolkata and Delhi. In 2001, Westside had average sales of just above Rs 5,000 per sq ft. in all its stores. By 2002, it had a store in Nagpur and a second store Source: www.tata.com in Delhi. In 2002, Westside reported a net profit of Rs 102.2 million (Refer to Exhibit III) and it also reported cash break-even in the same year. Analysts felt that the surplus cash reserves from the sale of Lakme provided the financial back-up for Trent-Westside. With cash reserves of around Rs 1.61 billion (on 31st March 2000), Trent had the option of avoiding high interest debts for its expansion. The company planned to increase its retailing space to 0.3 million sq ft. by 2003, from 0.12 million sq ft. in 2001. The firm wanted to expand Westsides operations to other cities. Trent announced that it would enter food retailing by the end of 2003 with an estimated investment of Rs 400 million. It planned to establish a chain of 100 grocery and food stores under a new brand name within five years from 2003. The stores would sell mainly food and non-food items. The company planned on a total floor space of around 1,000-plus sq ft for its stores.

Trent also announced that it would try to build its own brand in the food retailing business, but initially it would sell all brands. The food retail chain would be launched in the western region and then in other parts of the country. The firm planned to acquire an established chain of stores instead of setting up its own stores. According to reports, the company was Source: 3.bp.blogspot.com talking to two South India-based food retail chains Bangalorebased Nilgiris and Chennai-based Subhiksha, in this regard. The Westside Store in Hyderabad (Pls. Note: The timeline of the case precedes the timeline of the picture) THE WESTSIDE MODEL Before entering the Indian retailing segment, Westside conducted market research on retailing trends in the domestic and international markets. It was observed that in India, garment retailers generally stocked both store-owned brands and other brands in the ratio of 30:70, as it was easy to attract customers for the established brands. However, many major international retailers stocked only their own brands because of high returns, increased store loyalty and less restriction in terms of display, price and promotion. Stocking of only store-owned brands for Indian retailers posed certain problems, however. Though they of

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Exhibit I Profile of Competitors of Westside SHOPPERS STOP Shoppers Stop Ltd. (SSL) is the pioneer in Indias retail revolution. SSL redefined the concept of shopping, by trying to provide Indian consumers with an international shopping experience. SSL was promoted by the K. Raheja Corp Group (Raheja Group) of companies in 1991. It started operations with the redevelopment of one of the groups properties in Mumbai, Maharashtra, setting it up as the first Shoppers Stop outlet. The group identified SSLs vision as follows: To be a global retailer in India and maintain the number 1 position in the Indian market in the department store category. Its first store was a menswear store with a floorspace of just around 4,000 sq.ft. in Mumbai. Later, other fashion and lifestyle products and accessories were included. Around 85% of SSLs merchandise was branded and it stocked more than 150 national and international brands. Within a short period SSL emerged as the largest single retailer for Levis, Pepe, Lee, Arrow, Zodiac, Reebok, Nike, Parker, Ray-Ban, Swatch, Chambor, Revlon, Lego, Mattel and many other leading brands. The company monitored closely the movement of all the brands, and if any failed to meet customer expectations, it was phased out. SSL also launched a range of private labels like Life, Kashish and Karrot in the premium classic, value classic and value fashion segments. A team of designers was recruited from Indias premier fashion design institutes to develop private labels SSL established its stores in all the major cities in India, with store space ranging from 18,000 sq.ft. to 60,000 sq.ft. It opened its Bangalore outlet in 1995, the Hyderabad outlet in 1998 and the Delhi and Jaipur outlets in 1999. In its drive to become the number 1 retailer, it focused strongly on quality, and was the only retailer in India to become a member of the Intercontinental Group of Departmental Stores (IGDS) consisting of 29 experienced retailers from all over the world. GLOBUS STORES Globus Stores Pvt. Ltd., (Globus) was launched in 1998, by the Rajan Raheja Group. Its target customers are from the middle and upper middle class, and it sells various lifestyle products. The first store was opened at Indore (Madhya Pradesh) and the second store was opened at T-Nagar in Chennai in 1999. The third store was opened in Mumbai in November 2001. By 2003, Globus had four stores - two in Madras and one each in Mumbai and Indore, with a around 1,00,000 sq. ft of retail space.
Contd...
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Contd...

Globus categorized products under 7 product departmentsmenswear, ladies wear, kids wear, denim, leather, sportswear and novelties. Globuss Indian wear and Western wear for women were reported to be its fastest-moving products. Together with established brands, Globus also stocked its storeowned brands Globus, and F21 the unisex fashion brand targeting younger generation. Globus recruited designers from the National Institute of Fashion Technology and the National Institute of Design to design its in-house brands. In cosmetics, Globus stocked foreign brands like Maybelline, Escada and Burberrys, as well as Indian brands like Shahnaaz Hussain herbals and Fem Botanica. In menswear, it stocked established brands such as Van Heusen, Peter England, Louis Phillipe and GreSen Channel and its own brands like Oak Valley and Twilight. It also used technology productively. Globus installed a supply chain system, costing Rs. 100 million, supported by ERP software from the US company, JD Armstrong. In 2003, the group announced plans to set up 25 stores over the next five years covering all metros and A-class towns.
Source: IBS Center for Management Research

fered high margins, retailers suffered on account of poor economies of scale (until they established many outlets) and heavy investment in brand building. While all major Indian retail chains stocked established brands, Westside decided to push its own brand. This would help the company to earn high margins as own brands generally return higher margins. Westside had more control over the manufactures, quality and distribution of its own brand. To ensure the quality of its products, Westside implemented strict quality control procedures in raw material sourcing, designing as well as manufacturing. By selling the products under the Westside brand, the company was able to eliminate intermediaries and saved on intermediaries commissions, leading to higher margins compared to other stores. These savings were directly transferred to customers by selling at much lower prices. Westside faced many problems initially. One of them was the expensive real estate. In order to save costs on real estate, Westside decided to get shop-space on lease. This saved it some money till it was able to build up its finances. Another challenge for the company was to find sufficiently spacious locations for its showrooms a difficult task in the metros. To overcome shortage of space, Westside adopted a free form retail layout, also known as a boutique layout, which arranged fixtures and aisles asymmetrically (Refer Figure I). The stores were like grand living rooms where the merchandise was displayed at two levels on a single floor. Thus when customers entered the stores, they felt that a huge range of goods was available. Merchandise was kept in separate clusters. Though there were individual product sections, no attempt was made to separate out the sections. For ex380

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ample, womenswear Figure 1: Westside Layout and womens accessories were all displayed at one place, rather than stocking cosmetics at one level and ladies wear at another level; this enabled customers to complete their shopping quickly. Source: www.tata.com The stores had adequate space ranging from 10,000 to 20,000 sq ft. so that customers could move around and select items. Westside categorized its retail business into two divisions the apparels division and the products division, and these divisions were further categorized into seven departments. The apparels division dealt with menswear, womenswear, lingerie, and kidswear, while the products division dealt with household accessories, gifts and other accessories. The product categories were further divided into classes of goods; for example, menswear was classified into formal and informal. Each class had a sub-class, which was related to various fits and each sub-class had a line, which specified the design, colour, size, and dimensions of the product. All the lines had individual Stock Keeping Units (SKUs). All the seven departments offered a complete range, with every store stocking a total of 30,000 SKUs of the various products, on an average. Westside sourced all its merchandise from 250 ven-

dors, and most of them exporters from Delhi, Mumbai and Bangalore, looking for an opportunity in the domestic market. Westside adopted the scheme of centralized buying for all its product categories, except for perfumes and cosmetics, which were locally purchased, to avoid sales tax levies. It was reported that Westside carried 63 days of stock days, which compares favorably with international companies like Gap and Nordstrom, which carry 67 and 89 days of stock respectively. The seven departmental heads had to report to the head of merchandising. Every department had a buyer and a merchandiser. The assistant buyers, specialized in the individual classes in each department, assisted the buyer. The merchandiser played an important role in product allocation to the stores, and the maintenance of merchandise and other data of each store. The merchandiser also sourced the new designs and fashions to be offered in the stores. Westsides apparel section contributed 79% of its total F IGURE 11.3 Another Image sales when compared to of Assymetric Aisles in WestShoppers Stops 73% and side Pantaloons 91% in February 2002 (Refer to Table I). In apparels, while 75% of Shoppers Stop sales came from established brands, around 95% of Westsides sales came from its in- store brands: Westsport, Stone

Source: ww.thehindubusinessline.in
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Table I Share of Various Product Categories in Total Sales (Feb. 2002; in %) Westsi Pantaloo Ebony de n Apparel Footwear Jewellery + Wristwear + Fashion accessorie s Cosmetics + Fragrance Home fashion Toys Games & Misc 79 60 3 91 Shopper s Stop 73 2

River Classics and Westside. Westside positioned its products in the value for money segment by offering premium quality products at affordable prices. It priced its products at the same level as, or in some cases, lower than, its competitors. It offered high quality, contemporary designs and a range of products to give customers a pleasurable shopping experience. According to Chakrawarty, Being a brand retailer, we are able to develop our style and image in a manner whereby customers can build a relationship with us. He further said, We also have the flexibility of pricing and are able to fulfill the promise of affordable style.1 Westsides focus on price was one of the reasons for its increased sales in October-December 2001 by 71 percent over the same period in the year 2000. Other than cosmetics and toys, all products were sold under the Westside brand. Trent had an agreement with Littlewoods to carry its brands in India for a limited period. Thus Westside stores also carried Stone River Classic, along with the store brand Westside. The quality of the Westside brand matched those of premium brands, and their apparel was priced at a discount compared to leading brands. Westsides in-store brands used exclusive designs and materials, which made it difficult for others to copy them; this led to a unique positioning for its products. Westside realized that along with affordable products, good store ambience played an important role in retailing. It also realized that many consumers were not comfortable when they shopped at large departmental stores, as they had to struggle to find what they wanted in overloaded shelves. In order to provide a better shopping experience, Westside focused on the consumer's com382

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Source: Images India Retail Report 2002

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fort. It took care that the shelves were not loaded with unsold and outdated merchandise. Westside focused on providing a pleasing store ambience and convenience so that customers went home with an I-got-a-quality-product-at-a-reasonableprice feeling. Westside catered to a wide range of age-groups with different tastes and requirements. In womens wear, there were Western casuals, Western formals and Ethnic wear, with the Westside label. In Western wear, the range had great depth right from basic lines to casual wear. The focus was on a clean and clear style and the look was vibrant. Flat-front trousers, three-fourth-length tops, cotton-linen blended shirts in bright colours, multiplefunction jacket suits, and long wrap-around skirts were some of F IGURE 11.4 Westside Womens Wear the items included in Western wear. Along with its in-store brands, Westside introduced its designer range of merchandise by offering outfits from some of Indias best- Source: www.tata.com known fashion designers like Wendell Rodericks, Anita Dongre, Krishna Mehta, Monisha Bajaj and Mona Pali, who were prepared to work within the chains price points.

The kids garments had F IGURE 11.5 Westside Western a sporty and internaWear tional look that was hip and trendy, and catered to a wide age-group right from infants to early teens. Funky kids wear included clothes in the Gypsy, Sporty and the Gunsn Roses lines for girls, and the Source: www.tata.com Skull and Studd lines for boys, plus the Harry potter collection. In Menswear, the range extended from formals, casuals, ethnic and sportswear to party wear in the latest styles. In the Household section, every item was exclusive and unique. The household range included towels, bathroom sets, bed linen, table linen, and crockery. The merchandise was well coordinated and customers could mix and match. The range was changed frequently (there were new introductions every F IGURE 11.6 Some of Westsides Ethnic Wear week) so that people could choose from new designs. Westside also offered range of handbags, jewelry, scarves and accessories. The gift section had plenty of items to choose from, including terracotta pots, Source: www.tata.com urns, and diyas in various col383

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F IGURE 11.7 A
Westside Jewellery Piece

ours, shapes and sizes. The store had also introduced a new range of furniture and other household goods like cabinets, butler trays and mirrors with antique wooden frames. A range of utility items in wrought iron and rope was introduced, including magazine racks, folding stools, jam pots on trays, and Ganesha idols in brass and terracotta.

When it wanted to enter a new city, Westside focused first on market research. It had a five member in-house team consisting of senior managers in charge of this area. The team collected information about the population, the demand potential of the city, the buying patterns, purchasing potential, car ownership and lifestyles in a potential location. Besides its in-house research team, Westside also approached other Tata companies such as Titan, the Taj group, Voltas, Tata F IGURE 11.8 Westside Gift Items AIG and Tata Engineering for details about consumers in the city.
Source: ww.tata.com

customer behavior, and this in turn helped the chain build cus- F IGURE 11.9 Some Westsides Utility Items tomer loyalty. Westside personnel did not ask questions nor did it demand aa bill, when a customer wanted to return goods or exchange them. The stores trust in its customers reflected the confidence they had in their own product, and this helped Source: www.tata.com them develop customer loyalty. Commenting on the focus on customer service at Westside, Simone Tata said, Weve learned enormously through the years. It is absolutely essential to listen to customers what they want in terms of style and price, and to understand the demographics of it all. Its continuous learning.2 Westside realized that to offer good customer service, it was important to have good employees. Hence Westside focused on recruiting young and smart people with a pleasant personality and good communication skills. The company provided continuous training to its salespeople in ways to deal with customers and to improve their communication skills. Westside provided continuous feedback to employees about their performance, to help them to improve further. It encouraged employees to participate in company activities and gave importance to employee suggestions regarding customer preferences and latest styles. It also introduced a new computerized system, which enabled the employees to access the information about the availability of colors, fashions in the store, faster, and this helped the employees to service customers faster.
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Westside focused on customer feedback for attracting repeat customers. It conducted research and surveys to understand

Source: www.tata.com

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The importance of IT was also recognized. The company used the software package Retail Pro at the POS (points of sale). IT was used in functions at all levels and increased Westsides efficiency greatly. Westside had a sophisticated electronic system that kept the level of shoplifting and sales manipulation at less than 1%, compared to other retailers with a level of 6% each year. PROMOTING WESTSIDE Westside gave a high priority to marketing in order to increase F IGURE 11.10 Westsides In-Store Promotions brand awareness among consumers. The company focused on two parameters - style and affordability - to communicate to potential customers. The company realized that these were the two pillars based on which it could make an impact on customers.The stores were posiSource: www.tata.com tioned on the fashion at affordable pricing platform. The store level promotions were integrated with external communication through advertising. In-store promotions were used to give the shopper a feeling of getting greater value, to offer a good shopping experience. Westsides total advertisement spending was 8 percent of its sales. Westside did its regular brand building through advertisements in the media and also through its in-house promotions, which peaked during summer, Diwali and Christmas. During the Diwali season in 2000, Westside launched a Festival of De-

lights program which gave each shopper a F IGURE 11.11 Westsides In-Store Promotions During Christmas scratch-and-win card. The first prize was a Tata Safari (a multiutility car) at the Mumbai store, and Tata Indicas were offered at the 4 other stores in the country. The 2nd Source: www.tata.com and 3rd prizes included 2 scooters per store, refrigerators and air conditioners. The Bumper prize in the same season in 2001 was a Mercedes-Benz. Most of the store promotions were based on a theme, with matching decorations, live bands and other attractions. In the year 2001, Westside signed up the Revlon girl, Fleur Xavier (one of Indias top models) for an exclusive one-year advertising contract, to promote its stores in Bangalore, Chennai, Hyderabad, Kolkata, F IGURE 11.12 Fleur Mumbai, Pune and Delhi. Xavier Along with heavy advertising and promotions, Westside offered benefits to its regular customers. It launched Clubwest in May 2001. This went on to become the fastest growing loyalty program in the retail segment in India by end of 2002. Clubwest allotted points to its members, under two pro- Source: www.hindu.com
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grams - Clubwest Classic & Clubwest Gold, depending on the value of purchases made. The membership was valid for two years, and members enjoyed the benefits across all Westside stores in India. The members received mailings six to eight times a year. These included the announcements of special promotions for apparel, home furnishings and other Westside merchandise, and contests. Clubwest rewarded its members with invitations to special sales, rebates at restaurants of the Taj group, and holiday packages. By 2002, Clubwest had about 80,000 active customers as members. FUTURE OUTLOOK The greatest challenge for Westside is from the unorganized sector (98 per cent of Indias retail garment industry operated in the unorganized sector) and to a lesser extent, from similar organized players. According to Chakrawarti, The main job was to get people to visit organized stores such as Westside instead of buying from unorganized players. The general perception in India is that organized retailers are more expensive than unorganized ones. Westside responded to this by connecting price to quality. It had to make customers realize that they were getting the latest style at very good prices, and in a comfortable environment. The other challenge for Westside will be to compete with other retail fashion businesses in India (both Indian and foreign) such as Wills Sport, Raymonds (Be), Globus, Nike, Crocodile, Mango and Marks & Spencer.

QUESTIONS FOR DISCUSSION: 1. While most major Indian retailers sold established brands to a greater extent than their own brands, Westside retailed its own brands to a very large extent. Examine the reasons for Westsides decision to sell its own brands rather than established brands? What are the advantages and disadvantages of stocking store-owned brands? Give reasons to support your answer. 2. Discuss the Westside retail model in detail, examining its retail layout, its focus on market research and customer feedback, the positioning of its products and its heavy advertising and promotions. Which of the above strategies have contributed critically to the success of Westside? How far are those advantages sustainable in the long run? 3. While the retail clothing industry is predominantly unorganized, competition between organized players is still acute, with many leading Indian business houses evolving and international players showing interest. Analyze the competition in the retail clothing and lifestyle products industry with special reference to Westside. What strategies would you recommend for Westside to position itself effectively against the competition? 4. Westside decided to make a foray into food retailing by end2003. Do you think Westside should venture into food retailing, or it should remain focused on its current line of business?

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Exhibit II
For many decades, regional players dominated the retailing sector in India. There were no players with national presence in the Indian retailing. In the 1980s, Indian retailing sector witnessed some action with textile companies like Bombay Dyeing, Raymonds, S Kumars and Grasim establishing retail chains. It was only in the late 1990s that pure retailers, who focused only on the retailing business unlike previous players who even had manufacturing facilities entered the retail scene. These new entrants targeted consumers on the platform of lifestyles. According to Economic Times report on Retailing segment, in 2001 Food occupied the largest chunk of total retailing market in India. Food retailing saw some action at the national level with players like Foodworld and Subhiksha, establishing their stores all over India in late 1990s. However, it was the non-food sector that saw tremendous action and development in the Indian retailing sector, with introduction of more product segments. The new segments included the lifestyle/fashion segments (Shoppers Stop, Globus, Westside and LifeStyle), apparel/accessories (Pantaloon, Levis and Reebok), books/music/gifts (Archies, MusicWorld, Crosswords, Landmark, Planet M) and pharmacy (Health and Glow, and Apollo). By 2000-01, the organized retail market had the following segments: Organized retail by segment Textiles and Clothing Jewelry Consumer Durables Footwear Food & Personal Care Non-store retail Luggage, watches and Tyres Books & Music Market Size 2000-01 (In Rs billion) 40 20-25 15 13-15 10 9 5 3.9

Source: PriceWaterHouseCoopers Retail & Consumer From New Delhi to New Zealand- October 2002

The emergence of new segments also resulted in new store formats. The new store formats in retailing are mentioned below: ! Hypermarts ! Large Supermarkets (3,500 5,000 sq. ft) Contd...
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Contd...

! Mini Supermarkets (1,000 2,000 sq. ft)

! Convenience Stores (750 1000 sq. ft) ! Discount/shopping list Grocer Grocery retailing witnessed slow growth in the organized retail market because generally, an urban household placed orders on the phone to its nearby kirana store, with the grocer even arranging for home delivery and extending credit to customers. However, in early 2000, food retailing too saw increased action due to the increasing number of nuclear families with both husband and wife working. The population increase in cities and the related difficulty in commuting also triggered the demand for one-stop shops, which offered a wide range of products at one place. In addition to above factors, increased economic growth, consumerism and rapid urbanization also fueled the growth of organized retailing in India. The growth rate of Indias gross domestic product in 2001-2002 was 5.4% and the purchasing power of the urban middle class also increased in this period. In the organized retail market, the players belonged to various categories; some of them were real estate developers who converted their properties, which were not in prime areas into retail stores of high value, for example, the Rahejas of Mumbai (Globus and Shoppers Stop) and the D.S. Group of Delhi (Ebony). The manufacturer-retailers included Raymonds, Arvind Mills and Titan (watches). With retailing emerging as a sunrise sector, many corporates also diversified into the retail business. For instance, RPG diversified into retailing with its Foodworld, Music World, and Health & Glow stores. The Tatas entered retailing with Westside, while Bennett Coleman & Co. launched Planet M, and the Piramals entered with Pyramid. The low real estate prices in 1990s, boosted the growth of retailing, especially low real estate prices in south India increased retailing activity in south, when compared to North India where the real estate prices were high. Another factor that boosted organized retailing was the governments move to allow FDI in the retailing sector with a limit of 49% in 2000. Upto the 1980s, there were very few foreign players like Nike, Reebok, Bata and Benetton in the Indian retailing sector. This was due to restrictions on entry and that is why the Indian retail market did not develop. However with reductions in tariffs on imported goods and fewer restrictions on foreign ownership, more global players began entering India in 2002. According to a survey by Price Waterhouse Coopers in India, in the year 2002, there were 12 million retail establishments in India employing 20 million people. In the same year, the retail market in India was worth around US$ 180 billion, approx. Rs 9,000 billion and organized retail business was valued at only Rs 150 billion, or 1.6% of the total retail sales. An estimate showed that the organized retail market would be worth Rs 1,600 billion in 2005, constituting 15% to 20% of the total retail market, and that it would grow to 30% of the total retail sector by the year 2006-2007.

A Note on Indian Retail Industry

Adapted from various newspaper and magazine articles.
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Contd... Westside Income Statements for the Year Ended 31st March 2002 (In Rs million) Particulars Total Income Profit before Taxes and diminution in value of long-term investments Provision for taxation Profit after Taxes and before diminution in Value of long-term investments Provision for diminution in value of longterm Investments Profit after taxes and provision for diminution in value of long-term investments Excess Tax Provision for prior years (net) Net Profit Balance brought forward from previous year Balance available for appropriation Interim Dividend Exhibit III
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Final Dividend Tax on Dividend Transfer to general Reserve Profit carried forward

10.3 90.9 166.8

78.7 8 10.2 64.6 161.5

20012002 906 130.4 12.1 0.2 118.3 149.8 20

2000-2001 661.3 150

Sales and Profitability Summary 0.2 Year 149.8 149.8 50 2000 0.336 0.400 0.683 217.3 19.0 70.7 2001 2002 1998 1999 Sales (In Rs billion) 0.258 0.106 Sales Growth (in %) 8.2 -59.0

98.3 3.9 102.2 64.6 166.8 65.6

99.8 1.9 101.7 59.8 161.5 -

Contd...
Source: www.indiainfoline.com

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Footnotes: 1. The Westside Story: Fashioned to Succeed, Sujatha Agarwal, www.tata.com, May 31, 2002. 2. The Westside Story: Fashioned to Succeed, Sujatha Agarwal, www.tata.com, May 31, 2002. Additional Readings & References: 1. Westside Wears A Festive Look, November 5, 2000. 2. Trent To Foray Into Grocery Retailing, The Hindu Business Line, May 19, 2001. 3. www.tata.com, October 17, 2001. 4. Westside Signs Up Fleur Xavier, www.tata.com, March 18, 2002. 5. Agarwal Sujata, The Westside Story Fashioned to Succeed, www.tata.com, May 31, 2002 6. Trent To Pump More Funds Into Westside, The Hindu Business Line, August 14, 2002. 7. Retail IT Mantra Gets Real: Think Beyond US Model, www.financialexpress.com, August 26, 2002. 8. Home Sweet Home, Westside Style, www.tata.com, August 27, 2002. 9. Glitz and glamour unleashed, www.domain-b.com, August 27, 2002. 10. Too Much Fashion www.domain-b.com, August 27, 2002. 11. Westside Signs Up Dashing Left-Hander Yuvraj Singh, www.tata.com, August 29, 2002. 12. Agarwal Sujata, Helping Turn Westside Into a Winner, www.tata.com, November 30, 2002.

13. Jain Namita, Westside Story, Business Standard The Strategist, February 18, 2003. 14. Somayaji Usha, Jagannathan. V, Celebrating the Season at Westside, www.domain-b.com. 15. www.indiainfoline.com 16. www.tata.com 17. www.domain-b.com 18. www.equitymaster.com

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C HAPTER 12

Communicating Customer Value: Integrated Marketing Communications Strategy

Introduction Marketers use promotion to communicate with the existing as well as the potential consumers regarding their products. The marketing communication process has several components like communication source, receiver, coding process, medium of transmission, etc. The promotional channels could either be personal channels like face-to-face interactions, emails or nonpersonal channels like electronic media, print media, and outdoor advertising. Marketers can use different types of promotional tools like advertising, sales promotion, public relations, direct marketing, etc. The communication message is affected by several factors like message content, structure, format and source. For a marketing program to be effective, marketers should develop marketing communication mix by considering factors such as product market, pull-push strategies, product and effectiveness of advertising.

Source: www.3.bp.blogspot.com

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Section1

Communication and Promotion Process

Video 12.1.1: Integrated Marketing Communication

In the marketing communication process, a sender sends the encoded message through a medium for a receiver to receive and decode. Often, the marketing communication is followed up by some form of feedback. For instance, a sales person visits a customer and makes a sales presentation with a view to sell his companys product. In the event, that the sales person makes a good presentation, the customer may choose to purchase the product. Feedback is generally in the form of the customers response to the product. The Communication Process: The communication process has the following components Communication source: The communication process is initiated by the sender, when he / she intends to communicate a message to the receiver. Therefore, the source of communication is the sender and the destination is the receiver. The sender may use any kind of medium to facilitate communication such as telephone, e-mail, face-toface interaction, etc. In the marketing communication process, the message must be conveyed appropriately

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because any form of miscommunication would lead to the products failure in the market.
Figure 12.1.1: Communication Process

Decoding process: In decoding process, the receiver analyzes or interprets the information that has been sent by a sender. Noise: The effectiveness of the communication process is hindered by the disturbance during coding, transmission and decoding process. The receiver may not receive the intended message accurately due to n o i s e in the communication process. For instance, during a telephonic conversation, the message might be distorted by a bad connection. Feedback: A receiver feedback helps the sender in recognizing and analyzing the receivers perception of a message. This further helps the sender to take any c o r r e c t i v e a c t i o n s , i f n e c e s s a r y, t o m a k e t h e communication process more effective.

http://www.mbaknol.com/wp-content/uploads/2010/0 4/communication-process-mbaknol.gif Receiver: The receiver is the destination of the message sent by the sender. The perceptions of the receiver play a vital role in the manner in which the message is received. Coding process: It involves the selection of the right amount of information, the type of information and the organization of information that has to be sent to the receiver. Medium of transmission: Senders choose a variety of medium to communicate their message depending upon the type of message. Marketers can choose any media like print, online, television, etc. Of late, marketers are leveraging the use of SMS as a popular medium of communication.

Types of Communication Channels Communication channels can be categorized into Personal channels: Personal communication channels include face-to-face interactions, telephone conversations, communicating through mailers, e-mails, etc. The message can be personalized to the audiences tastes and preferences. Non-personal channels: Non-personal communication channels are electronic media (television, the Internet, mobile phones, radio, etc.), print media (newspapers, magazines, journals, etc.), and outdoor advertising (hoardings, sign boards, banners, etc.). Promotional Tools
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The different types of promotional tools that marketers make use of to facilitate the marketing communication process are: Advertising Sales Promotion Public Relations and publicity Personal Selling Direct Marketing Advertising: It is a paid form of non-personal presentation of goods or services produced by a firm. Marketers can advertise their products on television, print or electronic media. For instance, one can find the advertisements of HLLs cosmetic product Fair & Lovely in the newspaper (print), on television as a commercial, etc. The advent of the Internet and increase in the number of Internet users has resulted in the rising popularity of online advertising. Advertising is a favorite promotion tool of marketers. Advertising helps them reach a wider audience cost effectively. A company can also tailor its promotional strategy to suit the target audience. Although advertising is a very helpful and economical tool for reaching a wide audience, its interactivity with the audience is negligible. Also, the response and feedback in advertising is indirect in nature. Sales promotion: In this method of promotion, firms offer incentives such as coupons, rebates, discounts, samples, etc., along with the main product. Sales promotion is a popular tool used by the marketers to improve their short term sales. However, it is observed that sales promotional activities like trade shows, event sponsorships do have long term benefits for the company. Examples for sales

promotion can be: offering a suitcase on purchase of a washing machine, allowing a certain discount on the prices of the products, offering a combination package that contains a related product along with the main product (for instance, offering a tooth brush free on the purchase of a tooth paste), offering additional amount of the product for same price, etc. Public relations: Public relations is a non-paid form of communicating information about the company or the product, or both as a news article in newspapers or television or other media. The main objective of public relations program is to build a positive image for the firm in the eye of the public. Public relations help the company in creating a suitable environment and build goodwill in the market. Personal selling: Personal selling is the form of selling a product or a service directly to the consumer by demonstrating the features of the product to him/her. In this method, the salesperson details the features of the product/service to the customer. For instance, Eureka Forbes in India is very popular for its personal selling initiatives. The companys salespersons go door-to-door explaining the product features and also demonstrating product usage to potential customers in order to close a deal. Life Insurance Corporation of India (LIC) is another organization that relies on personal selling through the use of the companys agents to sell its insurance policies. Direct marketing: Direct marketing, as the name suggests, involves selling products and services directly to the customers. However, unlike personal selling, this method does not involve a face-to-face interaction with the customer. Companies market their products by sending mailers, catalogues, placing telephone calls, etc. With the advent of the Internet, direct marketing is gaining increased popularity as more and more consumers are
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becoming net savvy. The Internet is proving to be a boon for marketers as they can send personalized e-mails to potential customers. References: 1. Integrated Marketing Communications 2. Integrated Marketing Communications

Review 1.1

Question 1 of 8
The marketing communication process consists of all the following components except one. Identify the wrong component.

Source Coding and decoding processes Noise Situational analysis

Check Answer

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Section 2

Developing a Communication Program

Marketers cannot afford to utilize all the tools to promote their products or services as the costs would be too huge. Therefore, marketers need to identify the right mix of promotional tools that would ensure that the communication reaches the consumer at the right time and right place. For this, it is necessary that marketers develop a proper communication program. Target audience identification: It is essential that marketers identify the target market and its needs accurately. This would help them in devising a successful marketing program. While attempting to identify the target customers, marketers should keep in mind such aspects as age, gender, occupation, income, etc. In addition, marketers must also attach relevance to lifestyle and psychographics of the target audience. However, it is not feasible for a marketer to target each and every customer. Therefore, marketers identify groups of customers who have similar attributes so that they can be targeted more effectively.

Determination of communication objectives: The marketer must know exactly in what stage the consumer is. The marketer will then be able to develop communication objectives by deciding what type of communication should be at what stage. These objectives should be in tune with the companys marketing strategies. The following constitute the different communication objectives of marketers such as awareness, knowledge, liking, preference, conviction and purchase (Refer gallery for detail aspects). Developing marketing communication budget: Companies may follow any of the following methods for effectively formulating a marketing communication budget . Objective and task method: In this method, the company first determines the objectives of the communication and accordingly sets the tasks that need to be done to accomplish the objectives. Finally, the company devises a

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comprehensive budget depending upon the tasks of the communication program.

Gallery 12.2.1: Communication Objectives

Affordable method: The marketers set the communication budget as per the affordability of the company. Factors influencing the designing of communication message: The following factors influence the design of communication message Message content: The content of the message should be appealing in order to capture the fancy of the consumers. Marketers generally use three types of appeals to convey their message. They are Rational appeal: According to this approach marketers believe that the consumers make logical and rational decisions. Therefore, they attempt to communicate the various benefits that the product promises to deliver. For instance, Idea Cellular Services advertising in print, television and other media insisted that the consumers would get a true paid connection. This implied that the cellular services company promises to deliver value for the money paid by the customer on purchasing its prepaid cards.

Competitive parity method: In this method, the marketers budget is equivalent to the budget set by the competitor. Percentage of sales method: The marketers estimate the current and future sales of the company and accordingly allocate a budget as a certain percentage of the estimated sales.

Emotional appeal: A company may make use of emotional appeal in a positive or negative manner in order to convert potential consumers into buyers. For instance, the advertisements of Hutch Cellular Services with the tag line Wherever You Go Our Network Follows featuring a little boy and a dog, bank upon the emotional appeal to attract consumers. The ad attempts to convey to the
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customers that they would be the happy and satisfied owners of a cellular service that promises to deliver quality service with superior technology. Moral appeal: Through this communication approach, the marketer conveys moral or ethical values to consumers. Message structure: According to Philip Kotler, a communication message must address the following three structure issues: Whether the message must draw a conclusion or should it be left to the discretion of consumers Whether the message must show both positive as well negative aspects of a product or service or should the message be confined to positive aspects alone, and Whether to put forth the strongest points first or the weakest in the message Message format: The format of the message should be strong and supportive of the type of medium being used for communication i.e., print, television or online. Message source: Consumers lay great importance on the communicator of the message. They accept the message only when they believe that message is being delivered by a credible source. This is the reason why most companies insist that their sales personnel are in formal attire while making presentations to the customer.

Many marketers sign celebrities to endorse their products, as the consumers are more inclined to accept the credibility of a product when it is endorsed by their favorite celebrity. Marketing Communication Mix A marketing program is effective only when the marketer develops a marketing communication mix by taking into consideration factors such as product market, pull push strategies, the product , and effectiveness of advertising. Product market type: The communication strategy varies according to the type of product market. Product market can be categorized into consumer markets and industrial markets. Pull-Push strategy: In a pull strategy all the communication efforts are aimed at the consumer. The marketers design the promotional program to directly influence the demand for the product. In push strategy all the promotional efforts are directed toward the intermediaries. Marketers try to attract distributors, wholesalers, and others through discounts, recognition and awards, etc. The product : The stage of product in which the product is situated also influences the marketing communication program. For instance, a product in the introductory stage of its needs an aggressive promotional support to build awareness.

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Effectiveness of advertising: As buyers follow a typical purchasing process, the effectiveness of a communication program depends on which stage of the purchasing process, the buyers are in. References: 1. Video on Integrated Marketing Communication: http://www.youtube.com/watch?v=5YtJjuSywPU&f eature=related

Review 1.2

Question 1 of 4
Johnson & Johnson plans to use the print media to make people aware of its new shampoo for adults. What kind of message format would be most appropriate for print ads to gain maximum attention from readers?

A. Use of short, crisp and sweet words with clear pronunciation B. Focus on the text of the message, its alignment and placement, pictures to be used C. Focus on audio visual effects D. Focus on the text of the message.

Check Answer

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Section 3

Case Study: Marketing and Communication Strategy of Titan Industries Watch Division

This case was written by Sachin Govind, under the direction of Sanjib Dutta, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

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There has been a perceptible shift in consumer attitudes, which has tilted towards established brands. More and more people are actually willing to buy branded timepieces at a premium to flaunt them. Today, watches are all about style and statement1 - Manoj Dhanwani, Managing Director, Megan Impex Pvt. Ltd. in 2005. With the re-invention of Fastrack, what we are going to be seeing in the future is certainly a lot more investment in the brand, a lot more in terms of product collections, which will come in, in both watches and sunglasses and hopefully a more unified campaign that will span both categories.2 - Bijou Kurien, Chief Operating Officer (Watches), Titan Industries Ltd. in 2005. The association with Aamir Khan was mainly due to the brand values that both Titan and the actor are associated with. We are both known for our commitment and obsession towards perfection, quality, innovativeness, setting new trends and our market leadership.3 -Bijou Kurien, Chief Operating Officer (Watches), Titan Industries Ltd. in 2004.

INTRODUCTION In October 2004, Titan Industries Ltd. (TIL), a leading manufacturer and marketer of watches, jewelry, eye wear, and other lifestyle products, appointed Aamir Khan (Aamir) as the brand ambassador for its Titan range of watches. Bijou Kurien (Kurien), F IGURE 12.1 Aamir Khan Chief Operating Officer (Watches), TIL, said, There is a perfect fit between Aamir and Titan - their stature, timelessness, and the love and trust they both share with the people, both nationally and internationally, makes this an ideal partnership. Moreover, Aamir has a universal appeal that extends to everyone, across age groups, just as our watches do.4 With the celebrity endorsement, TIL hoped to pro- Source:www.realbollywood.com mote the latest trends in the industry. The idea was to make watches that would be seen as style and fashion accessories rather than just utilitarian devices. The company decided to use Aamir in brand and product communication on television and in the print and outdoor media. Though the vast distribution and service network of TIL had served as an effective entry barrier in the 1990s, foreign brands were becoming increasingly popular in the early 2000s, thanks to the paradigm shifts in the retail scenario and the growing affluence of the Indian consumers. And TIL found that it was not safe
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even at the bottom of the pyramid. The grey market with cheap Chinese imports and the unorganized sector had cornered a sizable chunk of the low-end market. The appointment of Aamir Khan as brand ambassador for the Titan brand was seen as an attempt to broad base the appeal of the Titan brand. In 2004, besides appointing a brand ambassador, TIL made several attempts to revitalize its sub-brands. It introduced several collections/ranges under each of its sub-brands. Moreover, it participated in the retail boom that the country was experiencing. It opened several outlets in the huge malls and hypermarkets that were mushrooming in the big cities. It also paid attention to its communication strategies. And its attempts seemed to have paid off -- the company posted good annual profits (Refer to Exhibit I for TILs financials) and its image was rejuvenated. BACKGROUND NOTE TIL, a joint venture between the Tata Group and the Tamil Nadu Industrial Development Corporation, commenced operations in 1987 under the name Titan Watches Limited (TWL). With the diversification of TWL into jewelry in 1994, the company changed its name to TIL. In June 2004, the company diversified into other lifestyle products like eyewear by extending its watch sub-brand Fastrack. The main manufacturing plants of the company were situated at Hosur in Tamil Nadu. It also had an assembly unit at Dehradun in Uttaranchal and a unit that produced electronic circuitry for quartz watches in Goa. TIL reported a turnover of Rs.9.58 billion for the year ended 2003-04. Till 2004, TIL had sold more than 60 million watches. TILs brands were sold from more than 5,000 multi-brand outlets and 175 exclusive World of Titan outlets. In

2004, TIL manufactured and marketed more than 7 million watches. It was Indias leading producer of watches and the sixth largest global player in the category of manufacturer brands. Its watches were sold in about 40 countries through its marketing subsidiaries based in London, Dubai, and Singapore. TIL also made watches for international labels. TILS COMMUNICATION STRATEGY TILs communication strategy evolved over time. In 1987, the company was known only for the parent brand. Through the 1990s, the company introduced several collections and subbrands for different segments of the market. Though innovative and appealing, the marketing and communication efforts of these sub-brands were not integrated. Initially, they were advertised under the mother brand, but with the development of the market, it became necessary for TIL to develop separate communication and marketing campaigns for its sub-brands. TIL realized that the sub-brands had to be given a more significant role in improving volumes. It was felt that since the sub-brands spoke directly to their target segments, they would be able to increase sales in that segment better than Titan could. But TIL had to balance its communication without diluting or disturbing the image of Titan. The job of communicating a plethora of sub-brands/collections was getting complicated. TITAN When the first Titan quartz range was launched in March 1987, it was accompanied by heavy advertising. The first advertisement described the Titan quartz as the international watch one could pay for in rupees. Later campaigns emphasized that to find such
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Video: One of the Initial Titan Quartz Advertisements

watches it was not necessary to go toEurope, Japan, America, or a duty-free shop. Titans communication efforts during the early years were clearly centered on the brand.

In the early stages, the advertising for Titan carried lifestyle overtones and the umbrella approach provided economies of Source: www.youtube.com scale. At the same time, the company was careful to maintain a consistent and synergistic brand image. The advertisements in the 1990s showed Titan as an apt gift for any occasion. Music was an integral part of these campaigns. Typical giftingads featured members of a Video: A Titan Ad about a Girl Coming Home to Rejoin family (parents, spouses, sibher Parents lings, etc) coming together for a special occasion (marriage, convocation, etc). The atmosphere was almost always awkwardly emotional. One person would cut through the awkwardness by giving the other a wrapped box. Once the box was Source: www.youtube.com o p e n e d , a Ti t a n w a t c h emerged and Mozart could be heard playing in thebackground.

But in the early 2000s, with a Video: A Titan Ad about a flood of electronic and other deCouple sirable products, there were just too many gift options and the gift appeal of watches was beginning to wane. Titan realized it have to use other ways to motivate people to buy watches. Consequently, a new advertising campaign was launched highlighting the Source: www.youtube.com range. A montage of watches was shown with no particular story accompanying them. This campaign also used Mozarts music as the background. It was a classic example of the brochure as a TV commercial (TVC). In the early 2000s, the high levels of penetration of watches in the middle and upper income segment resulted in a shrinking of the market for first time watch buyers. Also, with the shift to quartz technology, most watches were so durable that they hardly needed to be replaced or even repaired. This led TIL to change the communication strategy for Titan in 2004. TIL realized that it would have to be proactive to persuade people to buy more watches. It became clear that the communication for Titan should involve the message of multiple ownership. Kapil Arora, Head (Titan Business), O&M, said, Titan changed its strategy and decided to move on from being a gifting brand to a style statement. Just like one has different clothes and jewelry for different occasions, the same way Titan decided to position its watches where people would match their outfit with a different watch.5 Another factor was that people were getting more style403

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Video: A Titan Ad about Mens Watches for Different Occasions

conscious and experimental. TIL looked to use these traits as planks by which it could persuade people to go in for multiple user-ship

In July 2004, when it became clear that its future communication messages would have to feature multiple ownership, TIL was faced with two issues: should a celebrity be used to Source: www.youtube.com convey the message or not? If it chose to use a celebrity, could it find someone who could personify the Titan brand? After a lot of deliberations, the company was convinced that it would be to its advantage to use the services of a celebrity. Kurien said, We examined whether it made sense for us to use a celebrity to do it or to use any other model to do it. Ultimately we felt that in terms of being able to create Video: A Titan Ad about Womens Watches for Differan impact, in terms of credibilent Occasions ity, and to cut through all the clutter, it will be more beneficial if we used a celebrity.6 Having decidedto use the services of a celebrity, the next issue was to choose the right celebrity someone who would match the image of Titan. TIL felt that since Titan was a Source: www.youtube.com mainstream watch brand that

spanned several customer segments, to get someone who embodied the typical Titan personality would be a bit difficult. The requirement was that the celebrity had to be iconic, styleconscious, moldable, somebody who could cut across both sex and age groups, and between urban and rural India. Another important factor was that the celebrity should not be over-exposed. In October 2004, after considerable consultations with their ad agency, Aamir was chosen from a list of probables to spearhead TILs new communication effort. The company felt that the actor fitted the bill on most parameters. THE AAMIR EFFECT Though the decision had been made to use Aamir, the company was apprehensive that the actor might dominate the brand (Titan) or the message (multiple ownership). The marketing team at Titan wanted to keep the focus on the brand and the message. A TVC created by O&M was launched in October 2004. The commercial showed Aamir packing to leave for a tour and his assistant bringing him his collection of watches to ask which ones Video: The Advertisement he should take out for the trip. Featuring Aamir Khan The advertisement continued with Aamir matching the watches he liked with each of his suits and adding more suits to his baggage to accommodate more watches. The advertisement ended with Aamir selecting all his suits and all his Source: www.youtube.com watches to go with him on the trip.
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When the Titan Gold & Steel collection was launched in 2005, its communication continued with the theme of multiple ownership. F IGURE 12.3 Aamir Khan in Titan The Gold & Steel ad- Gold & Steel Ads vertisement showed Aamir and his assistant preparing to leave for a wedding and Aamir noticing his assistant wearing a gold watch. The advertise- Source: www.indiantelevision.com ment continued with Aamir suggesting that his assistant try a Gold & Steel watch and the camera panning onto Aamirs collection of watches. The advertisement ended with the assistant putting on one of the watches and asking Aamir if things were okay and Aamir pausing for a moF IGURE 12.2 A Titan-Aamir Dis- ment, and then pasting his handlebar moustache play Ad above the assistants lip. Both the advertisements carried a vein of subtle humor in them. Titan also used Aamir in the print and display media. The print ads showed Aamir as a model with the caption What is your

style? - a reminder of the multiple-ownership message. When Aamir shaved off his handlebar moustache, a clean shaven Aamir was used in another campaign with the tagline -- Have you seen the new look? According to analysts, one of the advantages of using a celebrity was that opportunities could be created for advertising promotions and events. In August 2005, when Aamirs much-awaited film Mangal Pandey was released, Titan came up with a F IGURE 12.4 A Titans Mangal Pandey Theme Ad range of watches on the Mangal Pandey theme in a bid to capitalize on the buzz that the film had created. The range comprised four specially designed watches priced between Rs.500 and Rs.3295. Titan also came up with a contest wherein the winner got to dine with Aamir. Many analysts were of the view that Titan used the services of a celebrity because most of the international watch brands retailing in India were already using film and sports personalities to communicate to their target audience. Some of the major brands that were using famous personalities were Movado (Twinkle Khanna), Tag Heuer (Shah Rukh Khan), Longines (Aishwarya Rai), Omega (Sonali Bendre), Rado (Lisa Ray), Christian Dior (Yana Gupta) and Timex (Brett Lee). Except for Timex (Brett Lee campaign), almost all these brands used the print media to convey their message. Some analysts were of the view that Titan was taking forward the strategy of the other companies in the
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Source: www.thehindubusinessline.in

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TATA group which had used celebrities as part of their communication effort. For example, group telecom company Tata Teleservices roped in cricketers Sourav Ganguly and Irfan Pathan to endorse its Tata Indicomm prepaid card, cricketer Yuvraj Singh endorsed Trents Westside brand, southern actor Mohanlal endorsed Kannan Devan tea, and actress Sridevi was the mascot for Agni tea. These endorsements had marked a shift in the groups marketing strategy, which earlier focused more on the strength of the Tata name. Though in the 2000s, marketers used celebrities extensively, there were many branding experts who did not appreciate this trend for various reasons. One of the critics said, Many stars have dual polarity. One half of the population adores them; the other half dislikes or is unmoved by them. In that case, companies could turn off half the target audience right from the start.7 Video: A Coke Ad Featuring Another critic was of the view Aamir Khan that Aamir did not match Titans image. She said The fit between Titan and Aamir just didnt seem right, especially after Aamir has been used so extensively in Cokes Indian man commercials.8 The critical views notwithstand- Source: www.youtube.com ing, celebrity advertising has received a considesrable amount of currency on one aspect the ability to de-clutter (Refer to Exhibit II for a list and a critique on celebrity endorsements). On that count, Titan claimed that it was successful in conveying its message to the intended audience.

Kurien was of the view that celebrity endorsement worked well in the Indian market place. It (celebrity endorsement) has helped us promote the concept of multiple watches for multiple occasions. Our advertising campaign featuring Aamir has created an impact on consumers for sure. During this campaign period (October to December 2004) we grew by 20 to 25% compared to last year,9 he added. Enthused by the response to Aamirs endorsement for Titan watches, the company planned to continue with the celebrity endorsement strategy to popularize its brands in 2005 and beyond. TITANS COLLECTIONS Over the years, TIL launched several collections/ranges under the mother brand Titan (Refer to Exhibit III for a list of the collections). Even though the major contributor to sales was Titans gold plated watches (typically with dark dials), the collections of Titan added to the image of the mother brand. DASH! In July 1999, TIL launched Dash!, an exclusive children's watch targeting those in the age group 6-14. The watch was priced in the range of Rs.250-Rs.395 and came in plastic straps and colorful dials. With this launch, TIL made a serious attempt to change its elegant and old image. TIL tried to tap the childrens watch market, which was an unpenetrated segment, and believed to be as large as 35 million units. The company initially aimed to achieve sales of around one million units from Dash! within a period of 2-3 years of the launch. This was not the first time a watch maker was launching childrens watches in India. Earlier,

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HMT and Timex came up with Zap and Gimmix respectively. However, these attempts failed and the failure was attributed mainly to the absence of mega advertising promotions. TIL was careful not to repeat the mistakes of its competitors. Therefore, an advertising campaign by ad agency AP Lintas was launched in August 1999. It also made adequate marketing investments to establish the brand. The company expected to achieve sales by tapping a childs desire for direct ownership. Initially, the sales were satisfactory, but by 2004, Dash! had lost momentum. Kurien said, we must keep in mind that watches are not a priority for kids, they dont look at it as a fashion statement, and if we look at the Rs.300-500 price brand at which they sell, the kind of money you make does not justify the investment that you put in the brand and distribution.10 By 2005, the company had discontinued the brand. STEEL In September 2001, TIL launched Titan Steel watches in Kolkata. As the name suggested, the watches were created out of steel. The Titan Steel collection had a range of bracelets and leather strap watches for both men and women and were priced between Rs.1,250 and Rs.6,000. Geometric forms and straight lines characterized the collection and gave the watches a bold and fresh look. The collection was positioned as ideal for formal evenings with their blue, black, and white dials with prominent markings. While the watches were positioned to suit all tastes and budgets, the collection was targeted at urban men and women in the age group 25 to 35, who were not just conscious of style and fashion, but who took great interest in coordinating and accessorizing their clothes. The collection was cre

ated by TILs in-house design Video: The Nightlife Camteam. A multimedia campaign, paign inspired by nightlife and urban lifestyle, accompanied the launch of the product. The campaign included TVC, print ads, billboards, in-store display material and web-based promotions.

EDGE

Source: www.youtube.com

In May 2002, TIL launched the Titan Edge, the slimmest commercially available watch in the universe. Produced indigenously after four years of intensive research and development, the Titan Edge had a thickness of just 3.5 mm and a wafer thin movement of 1.15 mm. Considering that most watches average between 6 mm and 10 mm in thickness, TILs achievement made an immediate impression. The watch was a result of the close collaboration between TILs Design StuVideo: A Titan Edge TV Ad dio, the Production Department, and the R&D team. Kurien said, The Titan Edge is a significant achievement and matter of pride not just for TIL but for every Indian as it reiterates our technological strengths and expertise as a nation.11
Source: www.youtube.com

The Titan Edge was a fully jew407

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Video: A Titan Edge TV Ad

eled quartz watch with analog movement and water resistance of up to 30 meters - a feature unheard of in slim watches. Some of the unique features of the watch included a state-of-the-art silicon chip that conserved power and doubled the life of the battery, a

visual merchandise, which were displayed at select stores. The watches were well received in India and also sold well in European countries. FLIP TIL launched Titan Flip in July 2004 at Mumbais Taj F IGURE 12.5 Akshaye Khanna Mahal Hotel. And a celeb- at the Titan Flips Launch rity -- film star Akshaye Khanna -- was invited for the launch. The watch was unique in the sense that it was Indias first dual face watch with dual functionality and styling and had two movements. One could use two watches with the mere flip of the dial. The dual- Source: www.thehindubusinessline.in faced watch allowed customers to switch between international time zones and alternative lifestyles formal/casual, minimal/sporty, etc. The watches were also available with the Automatic Generating System (AGS) feature which enabled the customers to use the watch without having to be concerned about depletion of the power source. The collection also featured a watch in the ultra-light material Titanium. The watches were priced between Rs.5,495 and Rs.6,500 (in July 2004), and those with the AGS feature were priced between Rs.7,995 and Rs.8,500. The Flip collection was supported by a multi-media ad campaign across niche electronic media and select print publications.
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specially designed step motor. Video: A Titan Edge TV Ad The watch received a national award for excellence in the area of R&D in electronics by the Department of Scientific and Industrial Research, Government of India. The Titan Edge was launched in 13 variants eight in stainless Video: A Titan Edge TV Ad
Source: www.youtube.com

Source: www.youtube.com

steel and five in the plated version, priced between Rs.4,495 and Rs.4,995 and came with a two-year comprehensive guarantee. It was promoted by a television campaign which emphasized that the watch was the slimmest watch in the universe. The campaign was supported by striking red and black

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Exhibit I Financial Results of TIL Quarter Year Year Quarter Ended Ended Ended ended 30-06-05 31-03-04 31-03-05 30-06-04 Unaudited Unaudited Audited Audited (in (in million (in (in million Rs.) million million Rs.) Rs.) Rs.) Net Sales Other Income Total Income Expenditure Increase/ (decrease) in Stock-in-Trade Consumption of raw materials Excise Staff Cost VRS Cost Advertising Other expenditure (177.7) (507.5) 346.7 (879.1) 2091.6 5.3 2096.9 3001.6 4.9 3006.5 9585 20.9 9606 11346.6 27.3 11373.9 Contd... Total Expenditure Interest Depreciation Amortization Provision for dimunition in value of investments Provision for doubtful loans Profit/(Loss) before taxes Income tax Current Deferred Profit after taxes Less: Income Tax of previous years Net Profit (21.6) -57.8 -57.8 2018.9 77.2 48.0 7.2 2848.6 58.0 48.5 8585.3 376.2 214.7 39.6 10166.1 309.2 196.1 28.9

100.0

24.4

25.0 (79.4)

25.0 26.4 6.0 (36.3) 50.2 50.2

150.0 140.3 89.6 (64.4) 115.1 3.3 111.8

325.6 323.6 108.3 (58.2) 273.5 24.0 249.5

1388.4 88.5 243.6 37.2 166.5 272.4

2329.5 139.5 282.3 25.3 259.1 320.4

5934.7 636.4 849.8 96.0 598.2 816.9

7503.0 547.1 957.3 112.9 768.9 1156.0 Contd...

Source: www.titanworld.com.

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Exhibit II List of Celebrity Endorsements*

Celebrity Amitabh Bachchan Hrithik Roshan Sachin Tendulkar Aamir Khan Shah Rukh Khan Madhuri Dixit Juhi Chawla Hema Malini John Abraham Kareena Kapoor Preity Zinta Saurav Ganguly Saif Ali Khan Shilpa Shetty Akshay Kumar Salman Khan Sunny Deol Company/Brand(s) Rin, Cadburys, Sahara , Nerolac, ICICI, Dabur, Maruti Versa, Parker, Fast Relief, Reid & Taylor, BPL Hero Honda Karizma, Coca-Cola, Tamarind, John Players Boost, Fiat Palio, Visa, Pepsi, TVS Victor Titan, Pepsi, Coca-Cola, Toyota Innova Hyundai Santro, Videocon, Tag Heur, Pepsi, Lux, Airtel Lux, Emami Lux, Kurkure Lux, Bank of Rajasthan, Casper Yamaha, Fastrack, Wrangler Lux, Citizen, Pepsi, Garnier, Airtel Pepsi, Cadburys Perk, TVS-Scooty Sona Chandi, Pepsi, Tata Indicomm Cream Bell, Lays, Royal Stag, Newport Nirma, P.P.Jewellers Ruf n Tuf, Thumps Up Dollar Innerwear, Thumps Up Lux Innerwear, Sona Chandi

*The list is not exhaustive and includes endorsements done at different periods.

Celebrity Advertisements: Pros and Cons

There has been a growing trend in Indian advertising to use celebrities for communication and promotion. The use of celebrity advertising by companies has become a perceived winning formula of corporate image-building and product marketing. According to research conducted in the early 2000s, associating a brand with a top celebrity could increase brand recall. In that research finding, it was found that 8 out of 10 TV commercials scoring the highest recall were those with celebrity appearances. With time, any media would get cluttered and the need to stand out would become paramount. Celebrities, it was argued, could be a way to ensure brand prominence, enhance consumers awareness of the advertisement, capture their attention, make advertisements more memorable, and strengthen a long running campaign. A leading marketer said, Celebrity endorsement is a serious business, and if used effectively, could have a lasting impression on the brand, its activities, and its image. People begin to notice, opportunities come about. People want to be a part of the brand. Touch It. Feel it. Experience it. On the other hand, a study conducted by Cyber Media Research in 2004 to measure the effectiveness of using celebrities in advertising, found that celebrities, contrary to popular notion, did not have a have a strong mass appeal as their impact varied between regions, age groups, and genders. Also, the intended message by advertisers was seldom received by the consumers Contd...

Compiled from various sources.

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Contd... as there was a huge mismatch in the perceived value of a celebrity between advertisers and consumers. The study also found that 40% of the top five and top 10 advertisements did not use a celebrity at all. Over 55% of the 3,372 respondents interviewed had top-of-mind recall of those advertisements that did not use any celebrity. Another finding was that the top-of-mind recall of brands using celebrities might have been partly due to heavy media-spend rather than the use of a celebrity. Among the top 10 most-recalled advertisements, all four of those which did not make use of a celebrity were found to be effective among the intended target group whereas of the six that used celebrities, only four were found to be effective among the intended target group. According to some other critics, celebrity advertising was the last resort of someone who was void of ideas. A client hits upon a celebrity as a solution when his agency is unable to present to him a viable, exciting solution for his communication/marketing problem. He then feels that the presence of a well-known face is an easy way out, said Madhukar Sabnavis, Country Manager (Discovery), O&M (India). Some branding experts suggested a systematic approach. The marketer has to be completely clear about why a brand should use a celebrity. If the objective was to increase the sales, the celebrity should be used for short-term promotions and brand activities. In the event of an image-building exercise, the celebrity could be used for a longer period of time, so that the brand could derive the benefit of the celebritys image. The use of a celebrity must be proportionate to the objective. Others believed that celebrity advertising was a trap. Celebrities (sometimes dubbed sellebrities) are indeed a potent tool in the hands of the marketer, but they should not be the only tool; they can never substitute for the script, message, or the brand. A noted film maker said, The bottom line is, risk notwithstanding, the business of celebrity endorsement will probably never fade. The one thing that manufacturers need to remember is that celebrities may give them enough notice but the name of the game is building a brand and not just about making noise. This is mostly what all celebrity commercials are doing these days.

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SONATA In 1998, to exploit the huge potential in the budget segment, TIL F IGURE 12.6 A Sonata Watch launched Titan Sonata. Priced between Rs.300 and Rs.1,050, Sonata watches were available in plastic, leather, stainless steel and gold plated-straps.The brand Sonata did remarkable business, (it sold around three million watches during 1998-2001) but the company had to contend with two issues. A sizable proportion Source: www.daisyegifts.com of prospective customers were apprehensive about the prices of Sonata (since they perceived the Titan brand to be elitist). On the other hand, by associating a mass brand with Titan, the company was in danger of causing harm to the brand equity of the mother brand. In order to resolve the two issues, the company came up with a three-pronged strategy in April 2001, aimed at making Sonata an independent brand without Titans brand identity. The strategy included selling Sonata through exclusive Sonata outlets; pushing Sonata deeper into the rural market a virgin territory for branded watches; and restructuring the watch division of the company to facilitate the separation of Sonata from Titan. Since TILs stakes were high at the lowest end of the watch market which was pegged at around 15 million watches, this strategy was seen as an important effort to improve TILs performance.

From 2001, the Sonata brand F IGURE 12.7 Sonata being was communicated as A Tata Product. This move allowed SoCommunicated as a Tata Product nata to share the trust and legacy associated with the Tata brand. While Titan focused on the mid-segment (Rs.1000 and above), Sonata was to wage TILs battle in the mass and upcountry market (below Rs.1000). Sonata was to chalSource: www.ppeople.in lenge Timex, HMT, the unorganized and the grey market that catered to the price-conscious consumer. In 2001, as part of the strategy, the company set up about 10 Sonata showrooms in an endeavor to increase the brands presence, with the first one in Bhopal. The idea was to open Sonata showrooms in watch localities rather than hot and happening places. It was hoped that the showrooms would help establish a strong identity for the brand and thereby drive sales. The second part of the strategy, which was primarily to tackle the unorganized sector, was to push Sonata into the rural market. In 2001, Sonata was available only in around 1,400 towns and had no presence in smaller villages. With this strategy, Sonata was to drive first time ownership in watches in the rural areas. In April 2001, TIL undertook an internal restructuring whereby it split the Sonata and Titan brands into two sub-divisions with separate marketing and sales heads. It was argued that since the strategies and objectives of the two brands differed, the creation of separate business units dedicated to each of the brands would enable better focus. While the restructuring resulted in additional overheads
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of nearly Rs.10 million, the company believed that in the long run the strategy would deliver results. The communication strategy for the Sonata brand was very different from that of Titan. Since the brand primarily catered to the below Rs.1000 category, the communication had a mass appeal. The brand was positioned on the value-for-money plank. It was advertised as a no-compromise watch. The commercial paanch ghadi ke barabar or equivalent to 5 watches hinted that Sonata lasted as long as 5 unbranded watches would. Hindi and the vernacular languages were the preferred medium for the advertisements. By 2004, Sonata had emerged as India's largest selling watch brand. The brand had a network of close to 10,000 dealers. TIL planned to further increase the reach of the brand in rural markets with several initiatives like mobile vans, E-Choupal, and other non-traditional distribution channels. FASTRACK FROM COOL TO BOLD Fastrack was launched in the late 1990s as a product range within the Titan umbrella. These watches were positioned as cool watches from Titan and as the youth face of the Titan brand. The communication of the brand also reflected the heavy fashion quotient of the watches. In the early 2000s, the company started developing Fastrack as a distinct sub-brand. A commercial featuring Formula-1 driver Narain Karthikeyan with the tagline - Are you on it? was launched in 2002. In 2003, the company extended Fastrack into the eye gear segment, with Fastrack sunglasses under its accessories business unit. In September 2004, Fastrack introduced Interchangeables; 3-in-1 watches for girls. The collection offered

a choice of 4 combinaF IGURE 12.8 Some of the Fastrack tions of 3 different colored straps. The Watches in the Early 2000s range was sporty in style and design. The c o l l e c t i o n w a s d esigned to cater to the trendy young generation and was targeted at girls in the 15 to 21Source: www.thehindubusinessline.in year-old age bracket, with the tagline -What mood will you wear today! again projecting an image of multiplicity. The collection was priced at Rs.1,495/- and upward. Manoj Tadepalli, Head Marketing, TIL, said, Todays youth loves to exF IGURE 12.9 Fastrack Interperiment and re-invent changeables their look and find it imperative to present themselves differently at all occasions. Keeping this need in mind, we have introduced this vibrant collection of Fastrack Interchangeables -- a great mix n match option tailormade for this generation.12 In 2004, the company be- Source: www.thehindubusinessline.in
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came aware of the contribution of the youth to watch-buying, when it conducted a study of the market. It interviewed 150,000 urban and rural customers. The research showed that youth aged between 11 and 20 years accounted for 42 per cent of the overall watch buying. TIL had under-estimated the contribution of youth. The company realized that Fastrack was limited by price points (Rs.1,100 and above) usually associated with the mother brand and that operating at those price levels would certainly put the brand beyond the capabilities of several youth looking at buying watches. In hindsight we realize that the biggest problem was the price point, having defined Rs.1,100 as the entry price when the significant youth buying was in the range of Rs.250-1,000. It was also obvious to us that Fastrack cannot remain as part of Titan, and that we have to establish it as an independent brand,13 Kurien said. By 2005, Fastrack was doing a business of Rs.1 billion and made up 12% of the watch sales of TIL. In 2005, TIL decided to merge the two divisions (the watch and eye gear) and make Fastrack a stand-alone brand. This let it have price points as determined by the dynamics of the youth segment rather than be constrained by the Titan brand structure. The merger brought Fastrack watches and the eye gear business under a joint marketing team. It was hoped that this move would give a youth focus to the brand, which formed the main target group. TIL was also of the opinion that a unified Fastrack brand stood to benefit from the synergies between marketing watches and sunglasses to youth. The company searched for a balance between fashion, style, and use of popular icons. In May 2005, John Abraham was appointed as the brand ambassador for the Fastrack eye gear for the 2005 summer season. The idea of associating John Abraham with Fastrack was because of the fashionable, stylish, and youthful appeal that both

enjoy in the country. Both are highly rated, and style icons amongst today's youth, who are constantly looking to express their attitude and highlight their personality, said Ajoy Chawla, Business Head, Accessories and Licensed Brands, TIL. The actor played a key role in the brand and product communication on television, in print, outdoor media, and various promotions and merchandise. In 2005, soon after the merger, the Fastrack watches were relaunched. The brand was repositioned to capture the essence and philosophy of the fun loving, free-spirited youth. Kurien said, Todays youth lives in an instant gratification era. They are ambitious, demanding more out of life constantly seeking excitement in everything. This generation refuses to be bogged down by one thing for too long. Fastrack lends itself to this varietyseeking attitude of todays youth through a new product range that is innovatively styled, boldly designed, and distinctly provocative.14

F IGURE 12.10 Fastrack Watches

Relaunched

Source: www.thehindubusinessline.in

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Industry information suggested that in 2004, about 10 per cent of the watch buying universe owned multiple watches compared to only three per cent in 2000. This prompted TIL to extend Titans communication message of multiple-ownership to Fastrack as well. The communication campaign that was launched in 2005 had multiple-ownership as its theme, though the manner in which it was conveyed was very different from that of the mother brand. A Rs.25 million advertising campaign was planned in 2005. But the launching of the watches was not just a communication activity. It included a design overhaul and new logo (Refer to Exhibit IV for the logo). Though Fastrack watches were available for as high as Rs.2,800, several new designs were launched in the Rs.500-1,000 Exhibit IV:The Logo of Fastrack price range. The company expected that the new launches in the Rs.500-Rs.1,000 price range would facilitate higher growth. Fastrack, which had targeted the 20- to Source: www.titanworld.com 25-year-olds as its core customers, changed its target group to the 15- to 20-year-olds. Since Titan, as a brand, largely did not play in the below Rs.1,000 market, the mother brand Titan was not included in the Fastrack communication (though the words A Titan Product was seen in small fonts in most hoardings and print ads).

A new TVC for the brand was also a part of the communica- F IGURE 12.11 John Abraham Endorsing Fastrack Eye Gear tion effort. The TVC, launched in 2005, was bold, controversial, and was designed to appeal to the target segment. The new positioning was summarized in a colloquial phrase -- How many you have? With this advertisement, TIL tried to encourage the customers to buy more. The outdoor communication efforts included hoardings which displayed the Source: www.indiantelevision.com funky-looking watches with the new logo and the tagline. According to the company, the advertisement was successful in creating a buzz among the youth. The demand for Fastrack watches in July-August 2005 (the period when the TVC was on air) was so huge that they even ran out of stock. Fastrack with this communication effort hoped to be perceived as the ultimate fashion accessory for the youth with variety, multiplicity, and constant excitement being part of the brand image. In 2005, Fastrack also entered into a co-branding exercise with the youth brand MTV and launched a Fastrack-MTV product range of 10 designs that were inspired by Indian life. They were called as The Masala Collection and were priced at Rs.500. Besides creating co-branded products, the company planned to leverage on the association with MTV at many levels. Fastrack wanted to use the opportunity to understand how MTV approached its target audience (youth). With
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this association, TIL hoped that the Fastrack brand would benefit significantly in terms of below-the-line promotions which were primarily targeted at youth. It marked the brand's move to reach out to the youth in pricing and appeal. RAGA Raga was introduced as a range for women, with a distinct ethnic character. Though popular among women, the range was not considered up-to-date. Moreover, TIL wanted to broaden the customer base for the brand. Till 2004, many efforts, short of a full-fledged campaign, were made to revive the brand and infuse new energy into it. In July 2004, TIL announced the launch of the Raga 9 to 5 collection of watches for women. Former Miss India and actress Gul Panag (Panag) was appointed as the brand ambassador. As the name of the collection suggested, the watches were targeted at the working woman. TIL adopted a below-the-line marketing strategy for the launch of this collection. It felicitated 20 working women who were winners of a contest (selected on the basis of a

questionnaire that examined their ability to effectively function as professionals). The contest was held in companies in the Delhi region. The 20 winners along with the brand ambassador Panag, unveiled the collection in New Delhi. TIL also conducted a series of workshops titled Raga 9 to 5 Work Wise. The workshops, conducted at several offices across Delhi, attempted to understand the needs of the professional woman and to give her an insight into the importance of balancing work and life. Panag said, Being fashionable and stylish are integral to a woman's personality and this collection (9 to 5) lends itself perfectly to that.15 Panag was also used in a TVC as F IGURE 12.13 Fastrack-MTV part of the commuWatches nication effort. The advertisement, which was telecast in the second half of 2004, showed Panag as a businesswoman headed to work Source: http://t0.gstatic.com through a plush business district. She glances at the time on her watch -- a Raga 9 to 5. The advertisement continued with Panags imagination seeing an apparition-like image of herself trying to sew a button on her sleeve as she rushes to work. Shrugging this aside, she walks on, only to be confronted with another apparition of herself trying to make her drink milk.
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F IGURE 12.12 Gul Panag Endorsing Raga 9 to 5 Watches

Source: www.thehindubusinessline.in

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The advertisement ended with her hurrying past these images of herself through glass doors that shut behind her, keeping out these two images of herself -- a home-maker and a mother. The commercial tried to emphasize that a working woman effectively shuts out the other facets of her life when she enters her workplace. Manoj Tadepalli, Head - Marketing, Titan Watches, said, Nowhere in life is the complexity greater than F IGURE 12.14 Raga 9 to 5 Collecin that of a working tion at a Store woman. She dons several hats through her daily life, and yet manages to stay careerfocused. They are a segment that is growing in numbers, with specific needs, which are very distinct from women at Source: www.thehindubusinessline.com large. We hope to make a significant difference to the life of a corporate woman with our collection.16 The Raga 9 to 5 collection comprised over 40 designs, with details such as all-twelve marked indices, dual time watches, slanting dials, formal and sleek looks in metal, leather, synthetics, gold and steel. With the Raga 9 to 5 campaign, TIL wanted to highlight the graduation of Raga from a range to a brand for women. Though the 9 to 5 collection was targeted at the working women, TIL had plans to launch exclusive collections for other segments like the non-working women, for after-work, and also for special occasions.

In July 2005, TIL launched an exclusive womens watch store the Raga Store -- with the intention of building equity for the Raga brand. The Raga Store was conceptualized by an allwomen team belonging to the fields of marketing, product, and store design. TIL invited a celebrity -- former Mrs.World Aditi Govitrikar, to inaugurate the store. TIL continued with its below-theline promotion by asking Ananth a noted artist -- to create personalized sketches in a Raga frame for all women who visited the store. In October 2005, TIL introduced a new range of wrist watches under the Raga sub-brand. They were called the Raga Coordinates. The range was designed keeping in mind the growing demand for fashion and lifestyle products. The new range was priced between Rs.1,800 and Rs.4,000. It was a unique innovation to create a multiple look, in the sense that the same watch could be either worn on the wrist or the neck. It was positioned as a many looks one watch series. The uniqueF IGURE 12.15 Raga Coordiness was not limited to the nates product; it was extended to the communication as well. For the first time, Aamir Khan was used to promote a collection under Raga. It was all the more interesting because the male actor was promoting a brand that was essentially for women. Brand analysts were of the view that TIL was using the
Source: www.thehindubusinessline.in
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celebrity because it knew that he was equally popular with both the sexes. The advertisement for Raga Coordinates was an extension of the Titan ads, in the sense that they used humor to sell the message and even the side actor (assistant) was retained. TIL had decided to spend Rs.70 million on advertisements during the festive season (October-November, 2005) alone. NEBULA

F IGURE 12.17 Aditi

Govitrikar at the Inauguration

F IGURE 12.16 Nebula

Nebula launched in 2000, was a premium range of light-weight gold watches, costing anywhere between Rs.8000 and Rs.70,000 (2005 prices). Most watches in the Nebula collection came with an 18 carat gold dial and a leather strap. The range Source: www.exchange4media.com was targeted at the top end of the market and was intended to persuade people to wear gold watches instead of plated metal. These watches were positioned as classics in solid gold. In August 2004, TIL launched four new bridal collections of Nebula designer jewellery watches. The watches in the collection were embellished with precious stones and crowned with sapphire crystal glass and priced between Rs.35,000 and Rs.40,000. The collection targeted the luxury segment. Nebula is an asset, which has lifetime warranty and can be passed on from generation to generation. That is how we have placed the brand, said Simeran Bhasin (Bhasin), Assistant Brand Manager, Nebula. TIL used TV actress Gauri Pradhan to launch the high-end collection. Referring to the celebrity endorse-

ment for the product, Bhasin said, We wanted to use a celebrity who would transfer the values to the brand. Gauri is a person who embodies a blend of sophistication and traditionalism. These are the values that represent our brand. So, she is a complete fit.17 In 2005, TIL launched yet another collection of watches under the Nebula range. The collection was unveiled at the World of Titan showroom in Colaba, Mumbai, by celebrated starlet, Soha Ali Khan. The four new designs

Source: www.hindu.com

F IGURE 12.18 Soha Ali Khan

that at the Titan Watch Event comprised the new selection were inspired by traditional Indian latticework and were priced between Rs.35,000 and Rs.41,000. The commercials for Nebula usually appeared in the print and display media. TIL preferred using below-theline marketing campaigns for this brand and made it a practice to invite celebrities for launching new collec- Source: http://datastore03.rediff.com tions. As part of TILs strat418

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egy of building the sub-brands into full-fledged brands, Nebula, which catered to the premium segment, was being seen as Titans answer to the designer brands that were making rapid strides into the premium segment. CHALLENGES To a large extent, TIL was successful in enhancing the presence and acceptance of most of its sub-brands. As an Indian Institute of Management-Bangalore professor said, The varied offerings to diverse segments with a clear cut positioning strategy have been instrumental in sustaining the market share of the (Titan) brand. (TIL) has to a great extent attempted to balance the positive aspects/associations of the mother brand with the option of using sub-brands to appeal to several segments.18 Titans strategy to project watches as part of ones personality, and not just as a functional product, had also gone down well. But TIL was also facing several challenges. And industry experts warned that the future would bring with it greater challenges, both in number and severity. TIL had always followed a strategy of serving the entire watch market by offering different variants/sub-brands to each market segment. Over the years, it had gathered several sub-brands and collections. With a crowded portfolio, giving focus and attention to each and every brand would become a challenge. The problem of giving due attention to each brand, sub-brand, or collection had surfaced even in the past. The management was also confused regarding the positioning and pricing of some its collections. According to analysts, TIL was taking the help of celebrities to realize its growth targets, which could be a shortterm strategy, but certainly not a long-term one. According to a

leading marketer, Once into a celebrity, it is hard to get out of it. If the brand has done even moderately well after the break of a celebrity campaign, it becomes difficult to separate the role of message and the role of the celebrity in selling the brand. And hence, the celebrity becomes an addiction for the marketing team.19 In 2005, TIL was under pressure in the premium segment, where a surfeit of designer and MNC brands were ruling the roost. The Chinese and the grey marketers were holding sway in the mass market. Even in the mid-segment, which was considered as the bread and butter of Titan, several brands like Esprit were trying to grab space. In an effort to counter the competition from foreign brands, TIL entered into an exclusive fiveyear sub-licensing arrangement with GVM International Ltd, a member of the New York-based Murjani group, to market and distribute the Tommy Hilfiger watches in India. The designer watches, comprising over 50 styles for men and women, were priced at Rs.3,395-8,995. The launch of Tommy Hilfiger watches in India will take Titan ahead of the need-based to a fashion-driven brand. A step further to maintain our position with the fashion-conscious, self-indulgent, young urban Indian men and women,20 Kurien said. It was decided that TIL and Tommy Hilfiger would follow integrated marketing activities. But skeptics argued that by giving space to a foreign brand, TIL ran the risk of harming the aspirational quotient of the Titan brand. Industry analysts were of the view that TIL had the habit of biting off more than it could chew. They referred to the large number of collections/ranges and the companys forays into eye gear and described them as unnecessary deviations. They felt
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that these random and uncoordinated strategies might prove fatal in the long-term. In 2005, TIL embarked on a multi-pronged approach to sustain its growth levels by entering several new product areas while also increasing its focus on global operations. The company extended its product portfolio from watches and jewelry to other lifestyle products such as leather accessories, and perfumery as well. Footnotes: 1. 2. 3. 4. 5. 6. 7. 8. www.watchworldreview.com, February 2005. Ti t a n f i n d s o u t w i t h i t s l a t e s t a d - s e x s e l l s ! www.moneycontrol.com, August 22, 2005. Aamir Khan is Titan Brand Ambassador, www.tata.com, October 15, 2004. Aamir Khan is Titan Brand Ambassador, www.tata.com, October 15, 2004. Marianne De Nazareth, If its Jeans, I want Johns, Deccan Herald, August 26, 2005. Boby Kurien, We did not want the celebrity to overpower the message, Business Line, November 18, 2004. Mahesh Bhatt, Twinkle, twinkle Bollywood star, www.fecolumnists.expressindia.com, August 11, 2005. G e e t a R a o , A v e r y q u i e t a d v e r t i s i n g y e a r, www.fecolumnists.expressindia.com, December 30, 2004.

Lalitha Srinivasan, Split vote on celebrity endorsements, www.financialexpress.com, February 22, 2005.

Collections* Brand/SubBrand Range/Collection Classique Bandhan TITAN Edge Flip (Technology) Gold & Steel Regalia RAGA FASTRACK Steel Miniatures, 9 to 5, Coordinates Interchangeables, MTV Masala NEBULA SONATA Rohit Bal Grand Rs.8000-Rs.70000 Rs.395-Rs.1050 Price Range (As of 2005) Rs.1550-Rs.2495 Rs.3100-Rs.7500 Rs.4400-Rs.5595 Rs.4995-Rs.8500 Rs.1625-Rs.4625 Rs.1900-Rs.5395 Rs.1350-Rs.4795 Rs.1900-Rs.4995 Rs.500-Rs.2850

Source: www.titanworld.com * The list is not exhaustive.

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10. Boby Kurien, We did not want the celebrity to overpower the message, www.hinduonnet.com, November 18, 2004. 11. Titan launches Edge, the slimmest watch in the universe, www.tata.com, May 21, 2002. 12. Fastrack watches introduces Interchangeables, www.titanworld.com, September 30, 2004. 13. B o b y K u r i a n , T i t a n g e t s o n t h e F a s t r a c k , www.thehindubusinessline.com, July 28, 2005. 14. F a s t r a c k w a t c h e s s p o r t a n e w f u n k y l o o k , www.prdomain.com, June 21, 2005. 15. R a g a r e a c h e s o u t t o t h e w o r k i n g w o m a n , www.titanworld.com, July 7, 2004. 16. R a g a r e a c h e s o u t t o t h e w o r k i n g w o m a n , www.titanworld.com, July 7, 2004. 17. Titan launches new range of designer jewellery watches, www.exchange4media.com, August 07, 2004. 18. D r . S . R a m e s h K u m a r , K a l , A a j A u r K a l , www.estrategicmarketing.com 19. Madhukar Sabnavis, Is celebrity advertising effective? www.rediff.com, December 05, 2003. 20. F a s t m o v e s b y Ti t a n o n e y e g e a r, w r i s t w e a r, www.imagefashion.com, July 2004.

Additional Reading & References: 1. 2. 3. 4. 5. 6. 7. 8. 9. Marianne De Nazareth, If its Jeans, I want Johns, Deccan Herald, August 26, 2005. Mahesh Bhatt, Twinkle, twinkle Bollywood star, www.fecolumnists.expressindia.com, August 11, 2005. Boby Kurien, Titan gets on the Fastrack, www.thehindubusinessline.com, July 28, 2005. Fastrack watches sport a new funky look, www.prdomain.com, June 21, 2005. Lalitha Srinivasan, Split vote on celebrity endorsements, www.financialexpress.com, February 22, 2005. Geeta Rao, A very quiet advertising year, www.fecolumnists.expressindia.com, December 30, 2004. Boby Kurien, We did not want the celebrity to overpower the message, Business Line, November 18, 2004. Aamir Khan is Titan Brand Ambassador, www.tata.com, October 15, 2004. Fastrack watches introduces Interchangeables, www.titanworld.com, September 30, 2004.

10. Titan launches new range of designer jewellery watches, www.exchange4media.com, August 07, 2004. 11. Raga reaches out to the working woman, www.titanworld.com, July 7, 2004.

Exhibit III
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12. Fast moves by Titan on eye gear, wrist wear, www.imagefashion.com, July 2004. 13. Madhukar Sabnavis, Is celebrity advertising effective, www.rediff.com, December 05, 2003. 14. Titan launches Edge, the slimmest watch in the universe, www.tata.com, May 21, 2002. 15. Dr.S.Ramesh Kumar, Kal, Aaj Aur Kal, www.estrategicmarketing.com. 16. www.titanworld.com 17. www.tata.com 18. www.domain-b.com 19. www.watchworldreview.com 20. www.expressindia.com

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C HAPTER 13

Advertising and Public Relations

from identifying the target audience and defining the objectives of an advertising campaign to evaluating the effectiveness of an advertising program. Advertising campaigns can be directly handled by a firm or delegated to an advertising agency. An advertising agency is a firm whose job is to develop and run advertisement campaigns on behalf of other organizations. Public relations refer to the efforts made by the firm to build a positive image for itself in the eye of the public.
Source:www.green-groups.com

Advertising is a paid form of non-personal promotional channels. Advertisements are used by individuals or businesses to promote goods, services, ideas, issues, etc. There are several benefits of advertising like creation of awareness and interest, adding value to a product, boosting the sales of a product, changing the perception of the product, etc. The development of an advertising program involves different steps starting

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Section1

Advertising
Benefits of Advertising
The significant benefits of advertising can be listed as follows: Creation of awareness and interest among customers about the products or services. Advertising helps reach a vast number of audiences cost effectively. For example, an advertisement given in a newspaper is targeted at the readers of that newspaper and cost effectiveness increases with the readership rate of the paper. Repeated message through advertisement influences the mind of the customer. Advertising helps in value addition for a product. Advertising can boost the sales of a company. Advertising also helps in reducing post purchase dissonance by reassuring the customer about purchase decision made. Advertising helps change the perception of a product by the customer. Advertising helps in building up the image of a brand or company along with an increase in sales.
Examples of Ads which Helped in Establishing Brands Rasna advertisement featuring a kid saying I love you Rasna was a huge success and boosted the brand remembrance among customers. The advertisement of Alpenliebe candy featuring members of a family eating the chocolate one after another while performing pooja conveys the message that Alpenliebe is tempting to all ages. The different Titan ads using the signature tune of Titan added to the familiarity of the product among the public. The advertisements of Raymonds suiting depicting a complete man helped immensely in reviving the brand.
Compiled from various sources.

Developing an Advertising Program

An advertising program is developed through a series of advertisements in different media, targeted at potential
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customers. Developing an advertising program involves different steps as discussed below:

Identify the Target Audience

Target audience is a segment of the market to which a product or brand image is communicated by the marketer. Identification of target audience is the first step in developing an advertising campaign. Advertising can target mass market or a niche market. Advertising programs are developed according to the specific needs of target audience. Before developing an advertising program, marketers should collect information related to geographic location, demographic variables such as age, gender, www.google.com education, etc., and consumer attitude towards the products of the company and that of the competitors.

An advertising campaign can have varied objectives such as to inform, persuade, or remind the customers about the products of the company. Inform: An advertising campaign of a company can be used to inform the existing and potential customers about the www.google.com launch of a new product, about services provided by the company, about any change in price, or to build the companys image by correcting false impressions about its product. Persuade: Advertising can also have an objective to persuade customers to purchase products by offering discounts or special offers, to convince customers to switch from other brands. Remind: Advertising objectives can also include reminding customers about the benefits yielded by products in the future. For instance, advertisements related to insurance policies. Advertisements can even be used to reinforce the products name in the minds of customers.

Define the Objectives of an Advertising Campaign

The objectives of an advertising campaign should be defined clearly in order to serve as guidelines and help the marketers in evaluation at the end of the campaign.

Set the Advertising Budget

Advertising budget is the amount of money, which a firm allots for an advertising campaign during a specific period. The factors that influence the allocation of an
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advertising budget include the type of products advertised, size of market, sales volume in comparison with competitors sales volume, geographic distribution of customers in market, etc. Advertising budget varies depending on the product lifecycle stage. For instance, new products require a high advertising budget to establish the product in the market by creating awareness in customers. Allocating an appropriate advertising budget is difficult, as the benefits from an advertisement cannot be quantified. Common methods used by firms for setting advertising budgets are: Objective and task method Percentage of sales method Affordability method Competitive parity method

Believable: The ad message should be able to convince the customers about the features of the product.

Approaches to creating advertising messages

Different approaches in developing an advertising message are: Comparative advertising: In this, two or more brands of same product category are compared based on their attributes. Example: comparison of Maruti Swift with Hyundai Getz Inoculative advertising aims at retaining customers by convincing them that the products offered by the company are superior to the competitors products. Example: Head & Shoulders shampoo ads. Refutation advertising contains information supporting the companys product while refuting competitors claims. Reid & Taylor Ad Creating an emotional bond with the brand using the moods and feelings of the customers. Example: Fevicol ads . Using endorsers to create a positive impact about products. Example: Amitabh Bachchan for Reid & Taylor.

Developing the Advertising Message

The advertising message should be developed considering the characteristics of target audience such as their age, gender, habits, education, income, occupation, etc. The advertising message should be: Meaningful: Customers should find the message of an advertisement relevant and meaningful. Distinctive: The ad message should be distinct enough to catch the attention of the audiences.

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Message Structure
Ad messages can be one-sided, where marketers communicate their part of the story, or two-sided, where the marketers product is compared with that of the competitor. Some other forms of messages such as conclusion drawing messages raise issues or questions during the beginning of the ad and then attempt to answer them towards the end of the ad.

before they take a

Selecting the Right Media

Selection of the right media is crucial for the success of an advertising campaign. An advertising program should be developed by the company keeping in view issues like: Who are the target audience? Where are they located? Which medium is appropriate? When should the advertising campaign run?

decision about purchase. Researchers probe the respondents about the receptiveness of the message in the ad, comprehension level of the audience and the response of audiences to the message in the advertisement. Other intermediate methods include recognition and recall tests in which audience are tested on recognition and recall of a particular ad. Example: Changing the Matlab of Thanda Aamir Khan and McCann Erickson When Prasoon Joshi, National Creative Director of the advertising agency McCann Erickson, visited North Indian households he observed that it is very prevalent in North Indian households to ask a guest to make a choice between thanda or a garam beverage to be served. This gave him an idea to develop the advertisement for Coke with a tagline thanda matlab CocaCola. These advertisements, which featured Aamir Khan, a famous film actor, in various get-ups like a shop-keeper, a farmer, a tourist guide, etc., were very well received by the target audience of India.
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Evaluation of Advertising Effectiveness

Evaluation of advertising effectiveness is done by marketers to measure the resultant effects of expenditure on advertising. Several intermediate measures are used by marketers to evaluate the effectiveness of advertising. They are called intermediate measures because the target audiences are tested after they are exposed to the ad and

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Advertising Agencies An advertising agency is a firm, which specializes in developing and running advertising campaigns through various media. Advertising campaigns can be handled by a company on its own or an advertising agency can be given an assignment for handling the advertising campaign for the company. Advertising agencies usually charge a percentage of the total cost for running the campaign as a commission for service. Advertising campaigns can also be developed jointly by the advertising agency and its client (company). Ad Agencies in India In India, each day, around 10,000 brands are advertised through different media. More and more companies are taking the help of advertising agencies in running campaigns. Ad agencies in India charge ten to fifteen percent of the total costs as their commission. Ad agencies play a role in media planning of company, execution of the advertising campaign and evaluation of the campaign through consumer research. The ad agencies in India have acquired greater skills in terms of production and research and are providing quality service to advertisers. Indian ad agencies have tie-ups with international ad agencies, which allow them access to Indian markets.

Example: Ogilvy & Mather An advertising agencys creative work in making advertisements for its clients can help in establishing the brands of the client companies while winning accolades for the creativity of the agency. For example, Ogilvy & Mather (O&M) India is an ad agency which helped some top brands in India stay in peoples mind through creative advertisements. Advertisement for Fevicol, an adhesive offered by Pidilite Industries Ltd., showing a large number of people clinging on to a bus, which has the caption fevicol ka jodh hai tutega, nahi scolled on its back, passes on the message aptly without even using any dialogues. O&M has even won the Lion for this ad at the Cannes advertising awards in 2004. The Hutch advertisement developed by the team of O&M, which shows a kid being followed by a dog everywhere, helped a lot in telling the people that Hutch (Orange) Telecom Service has a network that reaches everywhere. Another advertisement by the O&M agency, which won wide accolades for simple creativity to pass on the significance of a product is the advertisement for Asian Paints. The ad featured a man being appreciated by another person (WahSunil Babu) for having a new house, a new wife and a new car; after some years the house still looks new (while other things in life change) as it is painted by Asian Paints.
Adapted from What about 360 degrees? http://www.businessworldindia.com, August 23, 2004.

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Review 1.1

Question 1 of 10
Henkel India plans to launch a new detergent soap in the Indian market. The company launches an advertising campaign for the new soap brand. What would be the primary benefit for Henkel from the ad campaign?

A. To create awareness about the product B. To increase sales of the company C. To change the perception of customers about the product D. To make the job of the sales force easier

Check Answer

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Section 2

Public Relations (PR)

Institute of Public Relations (UK) defines public relations as the planned and sustained effort to establish and maintain goodwill and mutual understanding between an organization and its public. Public of a firm are its employees, trade unions, stakeholders, customers (past, present, and), general public, media, government, etc. Public relations of a firm play an important role in influencing opinions of the public by reinforcing the favorable opinions, transforming neutral opinions of the public into positive opinions, changing or neutralizing negative opinions. Marketing and PR Marketing managers in small firms handle the responsibilities of advertising, sales promotion, sales, and public relations. But in larger firms the roles of marketing manager and PR manager are distinct. Video on PR and Marketing

Source:www.dpkpr.com

Functions of a marketing manager usually include developing a marketing strategy for the firm, demand for products offered by the firm, monitoring the trends and predicting the demand for products, new product development,

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identifying potential markets and promoting the products by working with the advertising and promotion managers. Functions handled by a PR manager are a part of marketing activities. The PR manager is focused on maintaining relations of the firm with the public. The PR managers are involved in driving publicity programs to the target audience. A PR manager works in cooperation with the managers of other departments in the organization to prepare internal communications like newsletters, financial reports, companys annual reports, etc. Major decisions in PR include setting objectives of the company to build awareness of its products while maintaining minimal promotion cost, selecting the message and media vehicle to advertise the product and other information about the company, implementing the PR plan while maintaining a healthy relationship with the media. Major Tools of PR PR managers can use a variety of tools to communicate with the public. Some of the tools are newsletters, in-house magazines, annual reports, news releases, press conferences, sponsoring events for publicity, etc. Various techniques are available to influence public opinion. The consumer communication tools used in PR are promotional videos, celebrity endorsements, product launch events, consumer exhibitions, web sites, etc. To communicate with business associates, PR managers use tools such as trade exhibitions, direct mailings, company and product

videos, etc. PR managers communicate with t h e i r e m p l o yees through inhouse newslett e r s , m a g azines, notice boards, intranet and eSource:www.mahoganie.les.wordpress.com m a i l s , e mployee conferences, company get-togethers and picnics, etc. PR managers also focus on monitoring the amount of media coverage obtained, measuring the response received in the form of orders or enquiries in response to specific public relations efforts, measuring the attendance at meetings, conferences, etc. Dealing with Unfavorable PR The favorable public relations maintained by the company may get affected adversely in the events of the following: accidents like the Bhopal gas tragedy happen, controversial activities by employees of the company take place, when products or activities of a company are not environmentally friendly and when other negative events or situations happen. PR of a company should be maintained favorably to sustain the goodwill of the public. Effects of unfavorable PR can be reduced if organizations take safety measures, effective quality control measures, conduct inspections at plant level
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to avoid accidents, etc. PR managers can also seek the help of media to reduce the impact of negative publicity to a firm.

Review 1.2 There are several techniques available for public relations managers to influence public opinion. Some are more suitable in certain situations than others. Which of the following target-technique combinations is incorrect?

References: 1. Differences between PR and Advertisinghttp://www.youtube.com/watch?v=ow7jbR_sXKI 2. Explorations in PRhttp://www.youtube.com/watch?v=xhV1KIZPygE

A. Consumers - Product launch events, customer press releases, celebrity endorsements, etc. B. Businesses - Trade press releases, Shareholder meetings, Annual reports, etc. C. Employees - Direct mailings, meetings with stock market analysts, fund managers etc D. All the above

Check Answer

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Section 3

Case Study: Public Relations at Microsoft

This case was written by Sachin Govind and Barnali Chakraborty, under the direction of S.S.George, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

! 2008, IBS Center for Management Research. All rights reserved. To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: [email protected] www.icmrindia.org

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One cannot choose whether or not to have public relations; one can only choose the degree to which those relations will be managed.1 - Paul Holmes, Editor of the Holmes Report. If I was down to my last dollar, Id spend it on public relations.2 - Bill Gates, founder of Microsoft Corp. Microsoft has been the overall strongest index [Cision Corporate Media Reputation Index] company since 2001 and in its worst showing it only dropped to the second position.3 - Joe Barnerdo, President and CEO of Cision North America in January, 2008

INTRODUCTION In 2007, Microsoft Corporation (Microsoft) maintained its top ranking on the Cision Corporate Media Reputation Index that listed the top 100 companies in the US on the basis of positive reputation in the media (Refer Exhibit I for the top ten companies on the Cision Index in 2007), for the fourth consecutive year. In 2007, critical acclaim and strong sales of the Halo 3 game for Microsoft X-box console got the company high marks from the media as Microsoft looked to replicate its desktop and enterprise software successes in its entertainment businesses, said Wayne Bullock, Senior Vice President, Analysis Services, Cision.4

Microsoft had occuF IGURE 13.1 Halo 3 Images pied the first position in the Cision index rankings since 2004. A c c o r d i n g t o a n alysts, the company had successfully used its positive financial results of the last few years, and its Source: http://xbox360media.ign.com new product launches, new business partnerships, and acquisitions to attract media attention. They viewed Microsofts top ranking on the index as an indication of its prowess F IGURE 13.2 The X-Box in harnessing the power of Console Public Relations (PR) to its advantage (Refer Exhibit II for a note on public relations). However, not all of Microsofts PR campaigns were success- Source: www.file-extensions.org ful. For example, even though the PR efforts for the launch of Vista, Microsofts new operating system software, were appreciated, the sales of the product failed to live up to expectations. Explaining this, some analysts said that although PR efforts contribute to the success of a product, they could not be expected to make up for flaws in the product. They said that a PR campaign could only provide the plat-

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form for a product launch; eventually, it would be the quality and features of the product that would decide its fate. MICROSOFT - THE COMPANY Microsoft was founded by Bill Gates (Gates) and his friend Paul Allen in April 1975 at Albuquerque, New Mexico, USA. Microsoft was founded to develop a programming language, Altair BASIC, an improved version of BASIC, for the Altair 8800, the first commercial microcomputer or personal computer (PC) from Micro Instrumentation a n d Te l e m e t r y S y s t e m s Video: Microsofts History (MITS). The company gave MITS distribution rights for the language, but retained the ownership rights. In 1977, Microsoft started selling its version of FORTRAN for CP/ M based computers. The next year, the company introduced its version of COBOL for Source: www.youtube.com PCs. By the end of the 1970s, the company had emerged as the leader in microcomputer programming languages. In 1980, IBM awarded a contract to Microsoft for providing an operating system for the PC that IBM planned to launch. The operating system introduced by Microsoft was called Microsoft Disk Operating System (MS-DOS), and was sold along with IBMs first PC, IBM 5150, which was launched in August 1981. It was with the launch of MS-DOS that the company started attracting attention in the computer operating system market.

In November 1985, Microsoft introduced Windows, an extension of the MS-DOS that provided a graphical operating environment for PC users.5 The company went public in 1986. In 1989, Microsoft introduced Microsoft Office, a collection of desktop application software referred to as the Office Suite. In May 1990, Microsoft launched Windows 3.0 -- an improved version of the Windows operating system. In 1993, to compete with UNIX, it introduced Windows NT. Subsequently, the company released newer versions of Windows. In the meantime, Microsoft Office became the dominant Office suite in the market. In the mid-1990s, Microsoft started expanding its product line into computer networking. In August 1995, it launched the Internet Explorer, a web browser, and MSN, a suite of Internet services. In 1998, Gates appointed Steve Ballmer (Ballmer) as president of Microsoft and continued to hold the position of Chairman and CEO. In early 2000, he stepped down from the post of CEO, and Ballmer was made the CEO. Gates continued to be the Chairman and took on the newly created position of Chief Software Architect. In October 2001, Microsoft launched Windows XP, an improved line of operating systems for use in PCs, including business and home desktops and notebooks. In 2001, the company entered the game console market with the release of the Xbox (Refer Exhibit III for a timeline of important events in Microsofts history). In June 2006, Bill Gates announced a two year transition period from his role as Chief Software Architect, to spend more
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time on the Bill & Melinda Gates Foundation. After July 2008, Chief Technical Officer Ray Ozzie was to assume the title of Chief Software Architect. Gates would, however, continue to be Exhibit I Top Ten Companies on the Cision Index in 2007 Rank 1 2 3 4 5 6 7 8 9 10 Company Microsoft Corporation General Motors Corporation AT&T Inc. Intel Corporation Verizon Communication, Inc. The Walt Disney Company Wal-Mart Stores, Inc. The Boeing Company Cisco Systems, Inc. News Corporation

the chairman and advisor on key development projects. In 2007, Microsoft launched Windows Vista and Microsoft Office 2007. Microsofts annual revenues for the financial year ended June 30, 2007, were US$ 51.12 billion with a net income of US$ 14.06 billion6 (Refer Exhibit IV for some key financial results of Microsoft). As of 2008, the company had a presence in enterprise software, computer peripherals, software development tools, and Internet access services.

Exhibit IV Some Key Financial Results of Microsoft (In US $ Millions) Particulars Revenue Operating income 2007 51,122 18,524 2006 44,282 16,472 12,599 2005 39,788 14,561 12,254 2004 36,835 9,034 8,168 2003 32,187 9,545 7,531

Net income 14,065

*Fiscal Year Ended June 30. Source: www.microsoft.com/msft/reports/ar07/staticversion/ 10k_fh_fin.html.

Source: Microsoft Media Reputation Leads Among 100 Largest U.S. Companies for Fourth Straight Year, http://us.cision.com, January 28, 2008.

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Exhibit II A Brief Note on Public Relations Public relations (PR) is a communication tool for a company where the mass media is used as a vehicle for reaching large potential customers. PR has the advantage of third party endorsement. Consumers generally rely more on an independent press report about a company or about its products, than on paid advertising. PR does not involve any direct cost. However, there are costs associated with the PR department of a company and the PR agency that the company hires. PR agencies help a company to get the necessary exposure so that awareness about the company and its products increase. This helps the company to increase the sales of its product and therefore, its revenues. Through PR campaigns, a company tries to get free media exposure for itself and its products/services. The media decides whether to report anything about the company or not, and even if something is reported, it decides how it will be reported and how much attention it will be given. While a company may offer information to the media expecting wide coverage, the media might not use the information or it may use the information to criticize the company. The company has no direct control over the content, timing, or the amount of coverage. While an advertisement can be run several times depending on the companys budget, how many times a company gets PR exposure for specific news depends on the media. In the case of PR, specific news is not published over and again in one newspaper or magazine.
Compiled from various sources.

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MANAGING PUBLIC RELATIONS AT MICROSOFT A significant factor in Microsofts success was its public image. Right from the beginning, Microsoft laid a lot of emphasis on PR. In 1981, when MS-DOS was launched, the company first felt the need to build the Microsoft brand. In September 1982, for the first time, Microsoft hired a PR professional - Pam Edstrom (Edstrom) from Tektronix. To oversee PR, the company also hired C. Rowland Hanson (Hanson), a marketing executive from Neutrogena Corporation, as its first Vice-President of corporate communications in 1983. From 1983 onward, Edstrom and Hanson worked to build the Microsoft brand. In 1984, when Edstrom left Microsoft, and formed Waggener Edstrom Worldwide (Waggener), with PR consultant Melissa Waggener, Microsoft hired the firm as its first PR agency. Waggener started using Gates as the spokesperson to build the Microsoft brand and Gates began attracting attention in the media. According to Hanson, What we created was a credible authority figure. He [Gates] was very good at communicating, consistently, the message he wanted delivered. Therefore, [the press] started to look to him as a source for information.7 In the 1980s, Microsoft used the print media effectively to build the Microsoft brand. The major early successes of Microsofts PR machinery included People magazine naming Gates one of the 25 most intriguing people of the year in 1983, and Gates

appearing on NBCs Today show in March 1984. In April 1984, Time put Gates on its cover (Refer Exhibit V for the cover page Exhibit V: Cover Page of the Time Magazine in April 1984 o f Ti m e i n A p r i l 1984). The Time article, titled The Wizard inside the Machine, described Microsoft as the largest software company in the US and said that Source: www.time.com Gates himself had a personal wealth of US$ 100 million.8 Click here for the online version of the People magazines article regarding Gates. By 1984, Gates was being recognized in the media as the founder of a leading software company, and someone who had become a multi-millionaire at a very young age, and within a very short span of time. People started associating the Microsoft brand with Gates and the company was successful in popularizing the brand. According to Hanson, We started to see people going into stores and asking for Microsoft products by brand. We saw a clear shift in preference toward Microsoft in all categories. That was a direct result of all the positive editorial we were getting. It was a huge advantage.9

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Subsequently, Microsoft employed a number of other PR firms such as Edelman Public Relations Worldwide (Edelman), Webber Shandwick (Shandwick), etc. Apart from creating a positive image for the company, Microsoft effectively used PR to create a buzz in the market prior to the launch of its new products. In 1994, Microsoft launched its website, which went on to become one of the worlds most visited websites. The company regularly updated the website so that people came to know about the developments in the company and about new products. From the early 2000s, reputed journalists and media personalities began quoting blog articles in their stories. This new trend opened up a new PR channel for Microsoft. The company started using bloggers in its PR campaigns to have some control on the information outside the traditional media. In 2004, Microsoft launched the Channel 9 video blog. Channel 9 had access to product managers and major executives at Microsoft, including Gates. Microsoft employees interviewed each other and circulated the videos on the Microsoft blog site. In the meantime, more and more Microsoft employees started blogging about the company and its different products. The large number of employee bloggers over whom the company had some control helped it to flood the Internet with favorable information. The company also gave product announcements via blogs. The Internet became an important medium for Microsofts PR efforts. According to sources critical of the company, Microsoft employees also sometimes participated in on-line dis-

cussion groups without revealing their affiliation with the company.10 THE HITS Microsofts PR initiatives proved to be an important factor in the success of many of its product launches. In 1995, Microsoft launched Windows 95. Although there were no advertisements to promote the operating system till August 24, 1995, according to the Wall Street Journal, 3,000 headlines, 6,852 stories, and more than three million words were devoted to Windows 95 from July 1, 2005, to August 24, 1995. More than one million copies of Windows 95 were sold even before advertising for the product started.11 Analysts attributed some of the success of the product to the companys PR efforts. In October 2001, Microsoft Video: The Windows XP launched the Windows XP op- Launch Advertisement erating system. Well before the launch, the companys PR campaign had created a buzz about the product. The campaign contributed to sales of more than 17 million copies of Windows XP within two months of the product Source: www.youtube.com launch.12 In May 2006, Microsoft started a PR campaign for the launch of Halo 3, a video game for the Xbox 360. The campaign started with a trailer of the game being shown at the Electronic Entertainment Expo. In this campaign, Microsofts lead PR agency
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was Edelman, which worked on the area of press coverage. Microsoft also engaged the services of Taylor Public Relations Video: The Halo 3 Launch (Taylor), for sports and enterTrailer tainment coverage. For the launch of Halo 3, Microsoft focused on traditional media including Time, Newsweek, Entertainment Weekly, USA Today, etc. David Hufford (Hufford), Director of Xbox product management, said, The Source: www.youtube.com social-media space understands Halo 3 really well, and its very strong virally online. The challenge [was] to grow Halo beyond the converted. Thats why we spent the majority of our time on the broader press. It was more about getting back to our roots of traditional media relations.13 The PR campaign worked well; Wired called the launch a cultural touchstone, and USA Today called it a national holiday for fans. According to Hufford, Those were the kinds of things we wanted to exude through our PR efforts, and we spent well over a year trying to seed these kinds of beliefs with the media.14 The company was able to achieve $170 million in Halo 3 sales on the opening-day. Some of the credit for this was attributed to the PR campaign. Click here for an article on Halo 3 in the online version of Time prior to the video games release. On October 29, 2006, Microsoft announced the launch of Microsoft Office Accounting Express 2007 (OAE 2007) and Microsoft

Office Accounting Professional 2007 (OAP 2007). This launch was supported by a PR campaign called IdeaWins: As part of the campaign, small business customers were invited to submit innovative business ideas at www.ideawins.com Video: An IdeaWins Ad

F IGURE 13.3 Microsoft Office Accounting Professional 2007

Source: http://blogs.msdn.com

(IdeaWins.com). They could also download the OAE 2007 software for free from this website. The winner would receive US$100,000 as startup money, a rent-free retail store space in Manhattan, New York, USA, as Video: Media Coverage of the IdeaWins Campaign

Source: www.youtube.com

well as software and service support from Microsoft and its partners, to put his/her idea to work. According to Microsoft, the objective of this contest was to spur the imagination and spirit of entrepreneurism

Source: www.youtube.com
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that drives small businesses.15 This contest was extensively covered in the media. In November 2007, Microsoft launched the Heroes Happen Here website, to support an innovative PR campaign called the HHH Comic Series. The PR campaign was started by Big Mouth Communications (Big Mouth) and Waggener for launch of the Windows Server 2008, the SQL Server 2008, Source: www.youtube.com and Visual Studio 2008 on February 27, 2008. As part of the campaign, Microsoft and its co-sponsor digital-storage company Seagate together with former DC Comics edi- F IGURE 13.4 Some of the Webtor Jordan Gorfinkel Based HHH Comics created a daily Web comic based on stories from real-life IT pros. The comic strip was featured on the Heroes Happen Here website. The Comic Source: http://blogs.technet.com Series received considerable media attention. Video: The Heroes Happen Here Promotional Video The Bill and Melinda Gates Foundation was itself seen by some as part of Microsofts PR strategy. Although from the beginning,

the company had been projecting Gates as the spokesperson of the company, during the antitrust case with the US Government, there was too much negative publicity about Gates and his journey to becoming a millionaire. As Gates was an icon of the company, this publicity affected the companys image. Some people were of the opinion that the Foundation was actually used to help Microsoft restore its image in the eyes of the public after the antitrust case. AND THE MISSES Although Microsoft used PR very effectively to create a buzz about the company and its products, some of its PR campaigns were not successful. On May 06, 1998, Microsoft organized a rally in New York City as part of its PR campaign to prevent the Department of Justice and several state Attorney Generals from filing suits to restrict the release of Windows 98. Gates said, In America, innovation is progress and progress means economic growth for the PC industry, for consumers, and for the nation. Windows 98 is important not only to Microsoft, but to the PC industry as a whole. PC manufacturers, hardware vendors, software developers, resellers, and retailers are incredibly excited about the market opportunities driven by Windows 98 innovation and how this new product will benefit millions of consumers.16 However, the PR campaign did not stop the Department of Justice from taking legal action against Microsoft. In 2001, the Los Angeles Times alleged that in 1998, when Microsoft had been accused by the US government of monopoly abuse, the companys PR firm Edelman had initiated a program
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to fake spontaneous grass roots support for Microsoft. According to the newspaper report, the campaign, dubbed the astroturf campaign, involved Microsoft making large payments to well-known members of the IT industry and of the press to publish open letters and columns in major newspapers and magazines, expressing support for Microsoft. It was alleged in the report that these letters were in fact written by people from Microsoft. In 2001, Waggener b e g a n a P R c a mF IGURE 13.5 Some of the MSN Dipaign to generate a rect Smart Watches buzz about Smart Watches for MSN Direct. The Smart Watches, manufactured by Fossil Inc. and Suunto, were expected to enable people to receive informa- Source: www.microsoft.com tion including news, w e a t h e r, p e r s o n a l messages, calendar appointment reminders, and stock quotes. The watches were also expected to have multiple watch faces and automatic time-zone adjustment based on location. People could personalize their watches through the website www.msndirect.com, where they could choose the specific information and services they wanted to receive. Waggener organized an essay contest to make sports fans aware of the Smart Watches. The judges for the contest were Tom Arnold (the host

of the talk show, Best Damn Sports Show Period) and Michael Strahan (of the NFLs New York Giants). The campaign reached over 92.5 million sports fans through media coverage in the New York Post, Chicago Tribune, Boston Globe, and Fox News Channel national show. In 2004, Microsoft launched the Smart Watches for MSN Direct at the International Consumer Electronics Show (CES). However, the PR campaign was unable to generate significant interest for the product among the consumers. In late 2006, prior to the launch of Windows Vista, Microsoft, together with AMD, gave Acer Ferrari laptops preloaded with the new operating system, to some bloggers. According to a spokeswoman for Edelman, which handled the Vista launch, by sending these laptops the company was primarily interested in receiving feedback from the bloggers. She also said that Should the [blogger] write about it, we would ask that they disclose that the laptop came from Microsoft. Microsoft is trying to be very transparent and open about this.17 However, some people accused Microsoft and Edelman of trying to bribe bloggers. According to one blogger, Sending them a 30-day trial of Vista to evaluate is one thing. Sending them a very expensive laptop preloaded with Vista is quite another. It would be like record labels sending journalists a free 80GB iPod and stereo speakers with every new song theyre promoting.18 Some industry experts said that this was a PR disaster for Microsoft. In January 2007, Microsoft launched Windows Vista and Microsoft Office 2007. Ballmer, the CEO of Microsoft, said this was the biggest product launch in Microsofts history.19 He predicted that the sales of Windows Vista in the first three months would be five times the early sales of Windows 95, and twice
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that of Windows XP. However, in April 2008, Microsoft said that during the first three months of 2008, revenues from Windows had dropped by 24 percent compared to the corresponding period in 2007.Analysts attributed this revenue drop to poor sales of Vista. OUTLOOK In May 2008, Microsoft came up with an innovative PR campaign to salvage the reputation of Windows Vista, especially the highend version, Vista Ultimate. The company launched an online movie making contest, called Ultimate Video Relay on ultimatevideorelay.com. Participants were required to complete a story that began with a six-minute clip (provided online) called The Cube, seemingly a cross between The Matrix and The Video: The Cube Video Office. The clip was directed by Kyle Newman. The online clip (Act I) ended abruptly and contestants were required to finish the story by creating a middle (Act II) and an end (Act III) using Vista Ultimate. Microsoft and TriggerStreet.com teamed Source: www.youtube.com up to carry out the campaign. Some analysts opined that there were risks associated with such a PR effort, as there was the possibility of the company getting negative publicity if some consumers sent video clips that criticized Vista. Barry Goffe, Director for Windows Client Product Management at Microsoft, said, I think its the best way to engage with our customers and achieve the long-term goals of the business. Id probably end up with a

little bit of a red face. But in the end Id be happy, if it generated that much noise and traffic.20 Even though some of Microsofts PR strategies failed, the fact that the company maintained its number one position in the Cision Corporate Media Reputation Index and was placed first on the index rankings for four consecutive years since 2004, seemed to indicate that, all things considered, it had been successful in using its PR machinery to its advantage. Also, according to analysts, Microsofts effective usage of PR strategies served to re-emphasize the importance of PR in marketing.

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Exhibit III
Contd...

Microsoft A Timeline Date Event 1975 Microsoft founded. January 1, Microsoft moves from Albuquerque, New Mexico, 1979 to Bellevue, Washington. June 25, 1981 August 12, 1981 February 26, 1986 Microsoft is incorporated. IBM introduces its personal computer with Microsofts 16- bit operating system MS DOS 1.0. Microsoft moves to corporate campus in Redmond, Washington.

October 25, 2001 January 15, 2002 November 7, 2002 January 16, 2003 April 24, 2003 October 21, 2003 July 20, 2004

Microsoft launches Windows XP. Bill Gates outlines Microsofts commitment to Trustworthy Computing. Microsoft and partners launch Tablet PC. Microsoft declares annual dividend. Microsoft launches Windows Server 2003. Microsoft launches Microsoft Office System. Microsoft announces plan to return $ 75 billion to the shareholders in dividends and stock buybacks.

March 13, Microsoft stock goes public. 1986 August 1, Microsoft introduces earliest version of Office 1989 Suite of productivity application. May 22, 1990 August 24, 1995 December 7, 1995 June 25, 1998 February 17, 2000 June 22, 2000 May 31, 2001
Contd...

Microsoft launches Windows 3.0. Microsoft launches Windows 95. Bill Gates outlines Microsofts commitment to supporting and enhancing the Internet. Microsoft launches Windows 98. Microsoft launches Windows 2000. Bill Gates and Steve Ballmer outline Microsofts .Net strategy for web services. Microsoft launches Office XP.

Microsoft announces that Bill Gates will June 15, 2006 transition out of a day to day role in the company in July 2008; Ray Ozzie is named Chief Technology Officer and Craig Mandie Chief Research and Strategy Officer. July 20, 2006 Microsoft announces a new $20 billion tender offer and authorizes an additional share repurchase program of up to $ 20 billion over 5 years. Microsoft launches Windows Vista and 2007 Microsoft Office System to consumers worldwide.

Jan 30, 2007

Source: www.microsoft.com.
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Footnotes: 1. 2. 3. Michael Turney, Online Readings in Public Relations, http://www.nku.edu. www.quay-west.co.uk. Microsoft Media Reputation Leads Among 100 Largest U.S. Companies for Fourth Straight Year, http://us.cision.com, January 28, 2008. Microsoft Media Reputation Leads Among 100 Largest U.S. Companies for Fourth Straight Year, http://us.cision.com, January 28, 2008. www.microsoft.com/windows www.microsoft.com Bill is the Brand, http://www.crh-associates.com/founder/mbg.html. Alexander L.Taylor III, The Wizard inside the Machine, www.time.com, April 16, 1984. Bill is the Brand, http://www.crh-associates.com/founder/mbg.html.

12. Microsoft Windows XP Sales Exceed 17 Million Copies Just O v e r Tw o M o n t h s A f t e r Wo r l d w i d e D e b u t , www.microsoft.com, January 7, 2002. 13. Michael Bush, Halo 3 Push Focuses on Traditional Media Outlets, http://www.prweekus.com, September 28, 2007. 14. Michael Bush, Halo 3 Push Focuses on Traditional Media Outlets, http://www.prweekus.com, September 28, 2007. 15. Microsoft Launches Nationwide Contest for Most Innovative Small-Business Idea, www.microsoft.com, November 16, 2006. 16. PR Campaigning over Windows 98 Suit Heats Up, http://www.techlawjournal.com, May 6, 1998. 17. Tom Sanders, Microsoft Vista Laptop Giveaway Sparks Blogger Debate, http://www.vnunet.com, January 3, 2007. 18. Tom Sanders, Microsoft Vista Laptop Giveaway Sparks Blogger Debate, http://www.vnunet.com, January 3, 2007. 19. Steve Lohr, First the Wait for Microsoft Vista; Now the Marketing Barrage, http://www.nytimes.com, January 30, 2007. 20. Stuart Elliott, Your Chance to Finish a Movie Microsoft started, http://www.nytimes.com, May 8, 2008.

5. 6. 7. 8. 9.

10. Microsoft the Company, www.aaxnet.com. 11. Anthony Rose, Leveraging Marketing PR to Build Business and Brands, http://www.thehindubusinessline.com, April 12, 2001.

References and Suggested Readings: 1. Stuart Elliott, Your Chance to Finish a Movie Microsoft started, http://www.nytimes.com, May 8, 2008.
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Gregg Keizer, Is Vista to Blame for Windows Revenue Drop? www.pcworld.com, April 25, 2008. Microsoft Reports Record Third Quarter Revenue, www.microsoft.com, April 24, 2008. Microsoft Media Reputation Leads Among 100 Largest U.S. Companies for Fourth Straight Year, http://us.cision.com, January 28, 2008. Michael Bush, Halo 3 Push Focuses on Traditional Media Outlets, http://www.prweekus.com, September 28, 2007. Joe Willcox, How Microsoft Blogging PR Works, http://www.microsoft-watch.com, September 14, 2007. Colin Barker, Microsoft Sued over Vista Branding, http://www.news.com, April 4, 2007. Steve Lohr, First the Wait for Microsoft Vista; Now the Marketing Barrage, http://www.nytimes.com, January 30, 2007. Microsoft Reports Record Revenues, www.microsoft.com, January 25, 2007.

13. Microsoft Windows XP Sales Exceed 17 Million Copies Just Over Two Months After Worldwide Debut, www.microsoft.com, January 7, 2002. 14. Anthony Rose, Leveraging Marketing PR to Build Business and Brands, http://www.thehindubusinessline.com, April 12, 2001. 15. PR Campaigning over Windows 98 Suit Heats Up, http://www.techlawjournal.com, May 6, 1998. 16. Alexander L.Taylor III, The Wizard inside the Machine, www.time.com, April 16, 1984. 17. Michael Turney, On Line Readings in Public Relations, http://www.nku.edu. 18. Microsoft the Company, www.aaxnet.com. 19. B i l l I s t h e B r a n d , http://www.crh-associates.com/founder/mbg.html. 20. www.microsoft.com/msft/reports/ar07/staticversion/10k_gh_f in_html. 21. http://us.cision.com. 22. http://www.gatesfoundation.org. 23. www.edelman.com.

3. 4.

5. 6. 7. 8. 9.

10. Tom Sanders, Microsoft Vista Laptop Giveaway Sparks Blogger Debate, http://www.vnunet.com, January 3, 2007. 11. Long Zheng, Microsoft Hands out Ferrari to Bloggers, http://www.istartedsomething.com, December 27, 2006. 12. Microsoft Launches Nationwide Contest for Most Innovative Small-Business Idea, www.microsoft.com, November 16, 2006.

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C HAPTER 14

Personal Selling, Sales Force Management and Sales Promotion

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Cautious close: The salesperson carefully inquires about the close. The potential customer can be urged to ask any questions before closing the deal. Follow-Up: Follow up after closing a sale helps in enhancing customer satisfaction. Since the purpose of every organization is to increase repeat sales, follow up can be appropriately used by the salesperson to achieve this objective. Satisfied customers would turn toward the same company for their future purchases. Therefore, follow up is a critical aspect of the selling process. The salesperson may follow up by inquiring about the promptness of delivery, any problems faced after installation, customers satisfaction with the product, etc.

Sales Force Management

The steps involved in sales force management are explained in the following keynote:

Keynote 14.2.2: Types of Sales Persons

Keynote 14.2.1: Sales Force Management

Types of Salespersons On the basis of the nature of functions they perform, sales personnel can be classified as various types as explained in the following keynote:

Improving Personal Selling Efforts

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Gallery 14.2.1: Improving Personal Selling Efforts

Objectives of personal selling http://www.knowthis.com/principles-of-marketing-tutorials /personal-selling/objectives-of-personal-selling/

Professional Training: Providing training to salespersons enables an organization in improving the performance of poor performers and also in enhancing the performance of good performers. The main objective of a training program is to equip the sales personnel with skills that are required to convert prospective customers into buyers. Companies may adopt any of the following two approaches to train their sales personnel:

Sales people can enhance their personal selling efforts by undergoing professional training, improving negotiation skills and through relationship marketing. References: Differences between personal selling & Sales promotion - http://www.youtube.com/watch?v=eHW_4aGznuM

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R EVIEW 14.2
Question 1 of 4
In which sales closing technique, does the salesperson ask the potential customer if he/she would like to ask anything before closing the deal?

A. Assumptive close B. Cautious close C. Direct close D. Concession close

Check Answer

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Section 3

Sales Promotion

Sales Promotion
According to the American Marketing Association (AMA), in a specific sense, sales promotion includes those sales activities that supplement both personal selling and advertising and coordinate them and make them effective, such displays, shows, demonstrations, and other nonrecurrent selling efforts not in the ordinary routine. Sales promotion is a combination of activities like running advertising campaigns, offering free gifts, distributing free samples, conducting trade fairs and exhibitions, offering temporary price discounts, door-to-door campaigning, telemarketing, etc., all aimed at increasing the sales of a product. Sales promotional activities help in encouraging and attracting the customers buy a product as the customers are more responsive to promotional offers and/ or discount coupons.

Source:www.juicecreative.eu.com

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Purpose of Sales Promotion The primary purpose of sales promotion is to increase sales of a product by creating demand (both consumer demand and trade demand). It also helps in achieving the following objectives: Encourage the customers to try a new product. Attract new customers. Encourage customers to use the product or service and ensure brand loyalty. Counter competitors promotional activities. Importance of Sales Promotion Sales promotion plays a crucial role when new products or new brands are introduced into the market. When the economy is in a recession phase, marketers can sustain sales levels using sales promotional activities like offering gift or discount coupons, organizing contests, etc. Sales Video on Sales Promotion promotional activities also help in triggering the impulse buying behavior of customers. Companies also try to gain greater cooperation from retailers through sales promotion. Decisions in Sales Promotion A sales promotion strategy should be developed keeping in view the characteristics of the product and those of target audience. Factors such as size of market, distribution network of the firm, political and legal environment in which the firm operates, etc., can also influence the decision in sales promotion. Decision in sales promotion involves the issue of directing sales promotion towards consumer sales or distribution channels (i.e., trade sales). Consumer sales promotion is a pull strategy, which tries to attract customers to make purchase. The methods followed here are price discounting, free gifts or samples, money refunds and rebates, point-of-purchase displays, installment offers, consumer contests, trade shows, etc. Trade sales promotion is targeted at the distribution channel using the push strategy to encourage channel members to stock the product. The methods of trade sales promotion are buying allowance (temporary price reduction offered to the retailer for purchasing a specific quantity of the product), buyback allowance (the channel members are offered a monetary incentive for each additional unit purchased after the initial deal), merchandise allowance in which resellers are paid a certain amount by the manufacturer for promoting the product, free merchandise in which addition of the
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product is offered without additional cost, dealer loader or a gift to a retailer given as a part of the display kit, dealer listing by the company to encourage customers to buy products from certain dealers/ retailers, etc.

Review 1.3

Question 1 of 6
In a trade sales promotion method, the advertisement of a company identifies and acknowledges its retailers. Identify the method.

Example: Big Bazaar Renewing the Promotional Campaigns Big Bazaar, a division of Pantaloon Retail (India) Ltd., develops innovative sales promotional campaigns to boost sales. Big Bazaar claims to offer best products at reasonable prices and carries out a sales promotional campaign advertising extensively with the tagline Is se achha aur sasta kahin nahi (which means no where else goods with good quality are available at cheaper rates than at Big Bazaar). It offers special discounts to customers on weekends to encourage them to shop. Another promotional campaign designed to boost sales is a discount scheme on purchase of a second product after the purchase of a product in the same category. Big Bazaar tries to renew sales promotional campaigns regularly to keep up the interest of customers.
Source: www.pantaloon.com
Check Answer

A. Dealer listing B. Free merchandise C. Merchandise allowance D. Dealer loader

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Section 4

Case Study: Aventis - Successful Sales Promotion Campaign using Connection Cards

This caselet was written by Satya Srinivas Srikanti, under the direction of Jitesh Nair, ICFAI Center for Management Research. Caselets are intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

! 2005, ICFAI Center for Management Research. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic or mechanical, without permission. To o r d e r c o p i e s , c a l l + 9 1 - 4 0 - 2 3 4 3 - 0 4 6 2 / 6 3 o r w r i t e t o I C FA I C e n t e r f o r M a n a g e m e n t R e s e a r c h , Plot #49, Nagarjuna Hills, Hyderabad 500 082, India or email [email protected]. Website: www.icmrindia.org
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Aventis Pharmaceuticals, Inc. (Aventis Inc.) is the wholly-owned US subsidiary of Aventis AG, the pharma division of Francebased Aventis S.A, a leading global player in pharmaceutical and agriculture products. Aventis Inc. has a presence in major Taxotere therapeutic segments like cardiology, oncology, anti-infectives, arthritis, allergy, and respiratory illnesses. The oncology division of Aventis Inc. markets Taxotere, a drug that is used in the treatment of metastatic breast canSource: www.epocrates.com cer. Taxotere was launched in 1997 and due to the drugs complexity and the sensitivity associated with the disease, sales representatives of the oncology division needed to give a detailed description about the drug to the oncologists and nurses. This became difficult for them, because the oncologists and nurses had lit- Taxotere tle time to spare, and because of FDAs new regulations, which stated that sales representatives of pharmaceutical companies had to meet the doctors only in office. The sales representatives also had to face tough competition from Bristol Myers Squibbs Paclitaxel brand, which was launched before Tax- Source: www.mims.com otere.

In order to overcome the new FDA regulations and gain Bristol Myers Squibbs Paclitaxel Drug higher recall among oncologists and breast cancer patients, Aventis Inc, decided to develop a promotional campaign. The objective of the campaign was to help sales representatives spend more time with oncologists and nurses to discuss ways in Source: www4.carleton.ca which the drug and the company could help them serve their patients better. Besides, the campaign intended to establish long-term relationships with them. Aventis hired the services of an agency to conduct a research study to identify the primary concerns of oncologists and the breast cancer patients undergoing treatment under their supervision. According to the study, the main concern of the oncologists was that they could not spend enough time with their patients. To compensate for this time constraint, the doctors were on the lookout for non-medical options to assist their patients. Patients, on the other hand, wanted to stay in touch with their family members and friends during the course of treatment. In addition, they wanted to know more about the disease and interact with other breast cancer survivors, who had been treated successfully. The insights from the study revealed that patients felt an innate need to stay connected through various means. This prompted the company to launch a unique sales promotion campaign Connection Cards. The Connection Cards were a set of gift pack461

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ages that were offered to breast cancer patients to assist them during the course of their treatment. Each gift pack consisted of ten custom designed alloccasion note cards and envelopes. It also contained a 30Source: www.trademarkia.com minute prepaid long-distance calling card to help patients interact with their loved ones. Besides, a credit card sized reference card was provided that contained information and addresses of some of the nationally recognized breast cancer organizations like the American Cancer Society. The card also contained a toll free number and the web address of the companys breast cancer support program -- Living with It. Apart from these, the Aventiss Taxotere Living gift pack also contained a bro- with It Gift Pack chure giving detailed information about Aventis Taxotere drug. Aventiss Connection Cards Trademark Aventis Inc. started the Connection Cards promotion campaign in 2000. The campaign is usually conducted annually during the month of October, the national breast cancer awareness month in the US. Speaking about the Connec- Source: http://files.coloribus.com tion Cards program, Amy S. Langer, Executive Director of the National Alliance of Breast Can-

cer Organizations (NABCO), said, After a breast cancer diagnosis, every woman needs state-of-the-art care, information to help her make the best decisions, connection to practical and expert resources, and the support and comfort of family and friends. This program will offer patients a welcome and meaningful gift.1 To gauge the success of the promotion campaign, the company decided to conduct an e-mail survey among its sales representatives every year. The objective of this survey was to ascertain the positive impacts of this program for the sales representatives and the company. The Connection Cards campaign helped Aventis Inc. improve relationships with oncologists and nurses. Sales representatives felt that the campaign was well received by oncologists. The survey involved posing open-ended questions regarding the campaign to the representatives. In 2002, nearly 60,000 Connection Cards packs were made available to the patients through 150 representatives of the company. To maintain the effectiveness of the promotional campaign, Aventis Inc. provided taxi coupons at a discount rate to facilitate the patients transportation to chemotherapy centers. Coupons for medical wigs were also given to help them manage some of the side effects of chemotherapy. The success of the promotion campaign led Aventis to make the Connection Cards program a regular feature of its communication mix.

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Questions for Discussion: 1. In order to make a sales promotion campaign effective, a company has to identify and set the right sales promotion objectives to effectively guide the design and implementation of the campaign. Discuss the objectives behind the Connection Cards campaign of Aventis Inc. As part of the post-sales promotion research, Aventis took the help of an e-mail survey among its sales representatives. How far is this approach justified when a post-sales promotion research targeted at oncologists and nurses would help effectively measure the performance of the sales promotion campaign?

4. Connection Cards. www.theproawards.com. October, 2002. 5. www.aventispharma-us.com.

Footnotes: 1. www.biospace.com

Additional Readings and References: 1. Frederick, James. Aventis launches Outreach Program for women with breast cancer. Drug Store News. 30, October, 2000. To repeat successful breast cancer Patient Outreach Program. www.biospace.com. 11, October, 2001. Dialog Awards: Can We Talk? www.promomagazine.com. 01, December, 2001.
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C HAPTER 15

Direct and Online Marketing: Building Direct Customer Relationships

Introduction: Direct marketing is a channel of marketing in which goods are made available directly to customers. Marketers use different kinds of media like internet and telephone to reach customers directly to minimize the role of intermediaries. They use different forms of direct marketing like catalog marketing, telemarketing, kiosk marketing, etc. Online marketing is one form of direct marketing. Online marketing refers to the use of internet for marketing the products. Companies use different forms of online marketing like forums, newsgroups, web communities, etc.

Source: www.referenceforbusiness.com

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Section1

Direct Marketing
Nature and Scope of Direct Marketing In direct marketing, marketers use media such as the Internet, the telephone, mail, etc., to reach the customers directly, thus minimizing the role of intermediaries. Customers can make a telephone call and get the products delivered to their doorsteps. The various forms of direct marketing that companies adopt include catalog marketing, tele-marketing, kiosk marketing and home shopping. Apart from having the features of conventional marketing activities, direct marketing has some additional features: Customers are invited by marketers to respond to marketing efforts on the telephone, by e-mail, etc. The availability of direct feedback helps in easy measurement of the effectiveness of direct marketing. Maintaining a customer database helps direct marketers to understand the customers and to gain a competitive advantage. Direct marketing enables companies to contact customers directly and to build customer loyalty. The Growth and Benefits of Direct Marketing The growth of direct marketing has been exceptional with the adoption of the latest technologies. Companies operating across the globe are utilizing web technologies to make their marketing programs more effective. Direct selling has come a long way from the conventional telephone marketing and e-mail marketing and other online marketing activities are important elements of contemporary marketing. The growth of direct marketing has also been helped by market research studies. Marketers are using these studies to measure the effectiveness of direct marketing efforts. Direct marketing is helping companies to reduce the time taken to reach customers and thus to recover their investments faster. From the customers point of view, direct marketing is enabling them to interact directly with manufacturers and to get the products designed according to their requirements. However, marketers have to handle the issues of information

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privacy and physical privacy efficiently to ensure the further growth of direct marketing. Database Marketing Database marketing (DBM) helps to effectively utilize customer information in formulating cost-effective strategies to serve customers better. DBM includes understanding customers tastes and preferences, and their perceptions. The customer information available with companies helps their salespeople to approach potential customers and improve the sales. Database marketing helps marketers to analyze whether the company is deriving the maximum business from each customer. It enables marketers to make improvisations to their customer service and thus enhance the profits of the company. Database marketing uses different software tools to collect customer information and thereby develop efficient strategies. However, some people consider the use of customer information by marketers as an invasion of privacy. Forms of Direct Marketing Marketers use various forms of direct marketing to reach out to customers. Some of these forms are catalog marketing, telemarketing, kiosk marketing, home shopping and marketing using other media (Refer keynote diagram for detailed explanation). Direct Marketing in India Direct marketing is gaining prominence in India though its full potential is yet to be tapped. Factors such as diversity among the people of India and the increasing number of middle class customers are helping direct marketing companies in the country. In India, more than 70 percent of the people involved in direct marketing are women. The main products in direct marketing are cosmetics, personal

Keynote 15.1.1: Forms of Direct Marketing

products, cookware and household products. International players like Amway, Oriflame, etc., have made remarkable progress in direct marketing in India.

Direct selling companies focus on establishing long-term relationships with customers and the major areas of growth for direct marketing in the country include financial services, credit cards, insurance services, telecom services, automobiles, home appliances and food products. In India, urban customers are open to new ideas and are willing to try out different promotional schemes offered by companies. In rural India, television can be used efficiently for direct marketing. To be successful in direct marketing in India, companies should customize their products according to Indian conditions and customers. In India,
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mail-order shopping has limitations. For, Indian consumers, as a whole, do not feel the pressure of time as much as the people in the West, and they feel that they have enough time for shopping. Also, products received by mail are sometimes damaged, leaving the customers dissatisfied with it. Further, the delay in the delivery of products adds to the anxiety of the customers and makes them averse to mail-order shopping. References: 1. Direct Marketing in the agriculture sector of India

Review 1.2

Question 1 of 7
______ helps in effectively utilizing customer information in formulating cost-effective strategies to serve customers better.

A. Home shopping B. Direct marketing C. Database marketing D. Catalog marketing

Check Answer

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Section 2

Online Marketing

The Growth of Online Marketing The growth of online marketing has been largely facilitated by the advances in technology. IT has enabled companies to set new standards in business. The Internet has revolutionized the world of business and e-commerce has changed the business processes. Dotcom companies are doing business based on the web; other companies also have a presence on the Net. Business is being carried out at all times spanning the different time zones. Powerful technologies such as satellite communication, interactive voice recognition, mobile telecommunications, data mining, portable computing, digital signatures, etc., have assisted the growth of online marketing. These technologies help the companies to operate in a cost-effective way to provide value -added services to customers. In India, e-marketing has tremendous growth potential. With the increasing Internet user base in the country,

due to decrease in hardware and software costs, online marketing has a good chance to develop. Factors like breakthrough technologies, mobile computing, improved standards of encryption for secure transfer of information, etc., have paved the way for growth of ebusiness in the country. Advantages and Disadvantages of Online Marketing The increasing popularity of e-commerce applications is due to certain advantages attached to online marketing. They are: Marketers can reach out to potential customers located anywhere in the world through the Internet. Customers can shop at their convenience from any place.

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Customers can easily compare the products and services of a company with those of its competitors using video clips and statistics. The marketer and the customer can have a closer relationship due to the chance for direct interaction. An online store does not have to incur costs on maintaining a store like the real estate costs, shelf space, interiors, etc. Promotional strategies can be customized based on the requirements of customers. Although online marketing has many advantages for marketers as well as customers, there are some disadvantages such as: 1. Customers cannot get the touch and feel of products before making the purchase. 2. It is difficult to sell products like apparels, flowers, carpets, food-items, etc., online. 3. Customers are reluctant to give credit card details for online purchases. These factors are restricting the growth of online marketing. Developing Online Marketing Strategies

The lack of strategic planning on the part of online marketers can lead to failure in e-business. If the ebusiness is to be successful, business processes should be appropriately designed. Banner ads, which first appeared in 1994, have contributed a lot to the growth of online marketing. Combining online marketing strategies with conventional marketing strategies can ensure success in e-business. Utilizing the evolving technology to develop innovative marketing strategies can help online marketers to stay ahead of the competition. Online advertisements designed in such a way that they are easily understood by the target customers can help in the development of e-business. Apart from promoting the companys products on its own website, they can also be promoted through collaborations with other websites, which can help to enhance visibility and, thereby, the companys profitability. Online Advertising The increasing usage of the Internet is encouraging the marketers to advertise online. Different methods of online advertising are used by various companies. Some of them are forums, newsgroups, bulletin boards, web communities, e-mails and web-casting. Opportunities and Challenges in Online Marketing Online marketing provides plenty of opportunities to marketers. It enables even small companies to compete with multinationals in providing services to customers. It
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Gallery 15.2.1-Online Advertising

Along with availing of opportunities, an online marketer also has to face certain challenges. With an increasing number of marketers going online, the competition to attract customers is increasing tremendously. The marketing costs to acquire a new online customer are increasing as the life time value of customers is low. This is due to low switching costs on the web. Online marketers should utilize banner ads appropriately for promoting their products and/or services. Innovative ways of marketing can help the online marketers. Affiliate marketing is another option which can be beneficial to online marketers. In affiliate marketing, the companys products are sold to customers through a third party site and a commission is paid to that site when customers log on to the companys site through it.

Different methods of online advertising are forums, newsgroups, bulletin boards, web communities, e-mails, and web-casting.

helps them approach customers located in any part of the world and enables marketers to reach the maximum number of customers at the minimum cost.
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Review 1.2

Question 1 of 4
Which of the following is/are the major benefit(s) of on-line marketing for buyers? i. Convenience ii. Information iii. Fewer hassles iv. Common language

A. i, ii, iii B. ii, iii, iv C. i & iii D. ii & iv

Check Answer

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Section 3

Case Study: Unilevers Digital Media Strategy

This case study was written by Abdul Samad Syed under the direction of R Muthukumar, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources.

2008, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.

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In 2002, Unilever introduced the AXE line of deodorant body sprays, primarily with an Internet-based promotional campaign. Within 2 years, it became the No.1 male deodorant. Kevin George (Kevin), Unilevers US vice president and general manager of its deodorants division, credited this quick success to the changed corporate culture that actively encouraged taking risks. He tells his teams to take some chances. Its very rare that we would put you in a position where your decisions could bring down the company.1 Since then, the company had been into digital strategy to launch its products using a variety of new media channels. Again with the relaunch of Dove, its soap brand, in 2006, the company scaled new heights in innovative marketing and advertising, and the efficient use of digital media. Trends of Advertising Media and Changing Consumer Preferences Advertising aims to pass on information about products and services, their use and place of availability through channels like television, radio, movies, magazines, newspapers, telephone, games, the Internet and billboards. This media is even used by political parties, social groups, religious organisations, military and other non-profit organisations, which do not strictly sell a product or service. Advertising is generally considered to have begun with newspapers in the 17th century. But it is even more ancient. Commercial and political displays have been found in the ruins of ancient Arabia. Sales messages, lost-and-found posters were displayed using papyrus in Egypt, ancient Greece and Rome. Wall or rock painting is another form of ancient advertising

found in parts of Asia, Africa and South America even to this day. Such Indian rock-art paintings date back to 4000 BC. Handbills came during 15th and 16th century, with the development of printing. Advertisements to promote books and medicines appeared in weekly newspapers in England in the 17th century, with simple description and price of products, till late 19th century. Illustrations and colours were added later with technological advances. Newspaper advertising grew alongside the expanding economies and businesses during the 18th and 19th centuries. The first advertising agency came up in 1841. Since women were responsible for most of household purchasing, advertisers and agencies recognised their role in advertising at the turn of the century. Radio broadcasts began in early 1920s, with ads in between the programmes. Each programme started and ended with the mention of the business that sponsored it; later there were multiple sponsors. In the late 1940s, advertising was massively disrupted by television that offered viewable programmes with advertising slots. Television soon became a mass-market ad-format. Its position is being displaced by the growing reach of Internet and mobile phones from past 2 decades. Apart from these, major commercial advertising media also includes: Yellow pages, local newsletters and circulars, discount coupons, CD-ROM business cards, trade shows, direct mail, promotional items with logo printed on them Sponsorship (such as buying uniforms for little league teams with company logo), sports ads (in the court or field), telephone kiosks, in-store displays, religious organisations (church, synagogues, mosques)
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School or company yearbooks, outdoor aerial advertising (hot air balloons, blimps, and skywriting airplanes, and airplane billboards), billboards (mobile or stationary), street furniture components, printed flyers and rack cards Cinema and movie screen ads, shopping carts, bus stop benches, human directional, town criers, interior and exterior of buses, trains or airplanes, taxicab doors Roof mounts and passenger screens, musical stage shows, subway platforms and trains Elastic bands on disposable diapers, stickers on apples in supermarkets The opening section of streaming audio and video, posters, and the backs of event tickets and supermarket receipts and word-of-mouth. The selection of advertising media has a major influence on peoples preference of media and entertainment. In 1925, for example, the main advertising media in the US were newspapers, magazines, signs on streetcars and outdoor posters. But by 1998, television and radio became major ad-media. The peoples choice depends on how attractive the media is. Guerrilla promotions is a new innovation and involves unusual approaches such as staged encounters in public places, product giveaways and interactive advertising where the viewer can respond to become part of the advertising message. A trend of interactive and embedded ads such as product placement

(Omega watches, Ford, Vaio, BMW and Aston-Martin cars are featured in recent James Bond films), consumers voting through text messages, social networking sites has begun. Other media such as the World Wide Web are overtaking television because of more consumers using the Internet. Studies show that the biggest growth for the next 10 years will come from the digital media. Advertising expenditures of companies are increasingly shifting from traditional media like TV, radio and newspaper to the new emerging digital signage. Lowered capital expenditure on signage software and, advancement in content and delivery methods are the major factors driving this shift. According to a research report, digital signage market is expected to reach $13.6 billion and alternative advertisings market share will rise to 27.7% by 2011.2 The cultural shift in the use of media for entertainment, news and information also is a major cause. The Internet and other applications tied to it have propelled this change, drawing attention of young consumers. Targeted advertising models like that of Google Inc., Yahoo Inc. and Microsoft Corp.s MSN are readily embraced by consumers and has curbed growth of old media. Outsell Inc., an information industry research firm in Burlingame, California conducted a survey about ad-spending and found that online advertising has surged 19%, search engine ads by 26% in 2006; whereas growth of print ads is estimated at 2% and that of radio and TV, a mere 2.4%. It estimated that Internet is used by 80% of advertisers, with a 90% adoption rate by 2008.3 Along with the convenience of reaching consumers directly, the Internet offers various options of online advertising like banner ads, banner exchanges, ad-networks and interstitial (pop up)
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advertising. The results of a survey in 2007 by ADZ Media reveal that online advertising is up to four times4 more effective than traditional media advertising. In a poll conducted by IBM, advertising professionals expect that by 2012 online advertising would take 30%5 of revenues from traditional broadcasters and media. Along with the global companies, the local companies are also catching up. The Wall Street Journal notes that web companies have highest share (43.7%) of the $8.5 billion local online-ad market in 2007; while newspaper companies had a 33.4%. A report titled 2008 Outlook: Local Online Advertising by Borrell Associates expects a 48% increase in local online ad-spending in 2008, making it a $12.6 billion market.6 Local search and online video advertising will be driven by their popularity and will more than double by 2009, to $5 billion, while locally placed online video will triple, to $1.3 billion.7 The ever-increasing popularity of online advertisements serves as a warning bell for traditional media companies such as yellow pages publishers, cable companies, newspapers, radio stations, TV stations, etc. Unilever Going Digital Unilever is one of the worlds first and largest packaged consumer goods makers. It operates through two main businesses: Unilever Home & Personal Care and Unilever Foods. It is the worlds top manufacturer in segments like personal wash, prestige fragrances and deodorants; while it ranks third in food business after Nestl and Kraft. Unilever Home & Personal Care division includes brands like Dove, Surf, Snuggle, Sunlight, Lever 2000, Caress, Degree, Ponds, Vaseline, Qtips, Mentadent, Finesse, Salon Selectives, ThermaSilk and

Calvin Klein, Nautica and Lagerfeld cosmetic and fragrance products. It is also a global leader in culinary foods, ice cream, margarine and tea-based beverages with brands like Knorr, Lipton and Magnum. The company has its presence in over 150 countries around the globe, evident from its motto: Meeting the everyday needs of people everywhere.8 With revenues of $52 billion for the year ending December 2006, it had a growth of 11.4% over the previous year. 9 Unilever was formed in 1930 with the merger of a Dutch margarine company, Margarine Unie and a British soap company, Lever brothers. Individually both firms had their presence across the world even before the merger. Put together they had operations in over 40 countries. From 1930s till 1980s, the company prospered with many acquisitions and diversifications. It had an extensive range of product categories in each business segment foods, personal care, home care and specialty chemicals. As a result, due to its cumbersome operations, the company became inflexible to change and was referred to as a sleeping giant. This led to its restructuring in early 1990s. As part of it, product categories were reduced from 50 to 13 to focus only on core categories; it made around 100 acquisitions and targeted emerging economies like Eastern Europe, South-East Asia, Latin America, China and India. This yielded good results with increased sales in late 1990s. The company also focused on different product segments in different countries based on their sales potential. Unilever exited from businesses like chemicals, plant breeding and agricultural products. The company had improved its operating margins from 6% in 1985 to 11% by 1999, and had a port475

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folio of 1,600 global, regional and local brands in foods and home & personal care. But in September 1999, the company announced its plans to cut its unwieldy portfolio to 400 of its top power brands. The market took this move as an indication that the company was unable to manage its brands, but the companys plans were something else. Unilever was not actually discontinuing these products, but was trying to sell them to companies in whose portfolios they fit more easily, or be integrated into similar products that already exist in the Unilever range. By doing so, the company intended to downsize the Video on The Ad marketing resources for the other 1,200 products and shift them to power brands. This radical decision came after its Brazilian subsidiary Elida Gibbs set an example by cutting the number of its adverSource: www.youtube.com tised brands from 20 to 7 in 1995 that raised its sales by 10 Hence, Unilever began to prune its 50% and margins by 1%. vast portfolio by disposing regional products and re-branding others, to concentrate on a smaller roster of global power brands. The company was considered the worlds No.1 advertiser, spending about 2.5 billion a year. 11 Most of Unilevers product promotions were done through the traditional media of television, billboards, radio, cinema, magazines, newspaper, etc. But the company had its unique style of promotion. It promotes individual brands Dove, Lifebuoy, Lipton, Close up, Lux, Ponds, etc. instead of its own name. The consumer ac-

tually thinks that these products are made by different companies. The strategy behind such promotion was that, even if a brand does not click, it does not affect the image of the company and other brands belonging to it. Though Unilever was more used to traditional marketing and advertising media, by the turn of the century, it started increasing the use of Internet and other innovative ideas for its marketing campaigns. As the company wanted to increase its online sales as more customers were having computers at home in 2000, it committed 130 million 12 towards e-business initiatives. It termed its ebusiness initiative as a shopping mall that never closes. In August 2002, Unilever launched AXE, a deodorant body spray for men, in US market at the time when its position in the US deodorant market had dropped to No.6 Figure1.1: Unilevers Traditional Mewith only 5.4% of mar- dia Advertising ket share. 13 By 2004, it grabbed a market share of 13% 14 in US and became the fastest growing deodorant brand. The success of AXE was attributed to its aggressive and un- Source: http://les.coloribus.com! conventional ad campaign. Using AXE made men irresistible to women was the ad-pitch. These ads, provocatively made to
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grab the attention of young males, showed beautiful women ravishing male mannequins wearing AXE deodorant. In the initial stages of the launch, the brand was advertised through TV. But it was observed that the conventional TV advertising was not making enough impact on the target group, which spent more time online. The company launched its web-based initiatives with its AXE website in 2002, banner ads on websites of mens magazines like Maxim that in turn directed them to AXE website and spreading word through online peer groups. Not much information was dissipated readily about the brands; instead the target group was left to discover the brands for themselves through the site. The website also displayed commercials that were considered too spicy for television. Within 4 months, the website had 1.7 million visits. It also created an online game for men, aged between 1124, to participate and win invitations to an extravagant house party featuring music, TV and fashion celebrities. Various TV channels covered the event. The company, in 2005, released an online game Mojo Master for young men that could be played free on MojoMastergame.com. A special feature of the site was a blog that detailed the real-life experiences of two young men Evan and Gareth through video clips. The clips contained encounters with women during their trek across US. The clips were downloaded and e-mailed by the visitors to their friends creating a viral marketing effect for Unilever. It spiced up the brand awareness through the unconventional use of the traditional media like giving innovative sales kit to 300 Unilever sales persons (containing skateboard, backpack and other appealing items), recruiting brand ambassadors (young male students); and interactive print-ads like the cover girl on a Colombian mens magazine, with a removable top, to demonstrate the AXE effect.

With the tremendous success of the AXEdigital campaign, the company went onto experiment the same with other brands. Dove, originally a non-irritant skin cleaner for burns and wounds, was re-branded as beauty soap in 1957 and was known for its mildness. But by 2003, its sales were in decline and market share was lost to competitors. With some research, the company found that though the users recognised Doves quality, its image did not resonate with their thoughts and, had become outdated and old-fashioned. In September 2004, the company re-launched it using the slogan the campaign for real beauty along with a website, campaignforrealbeauty.com, Doves campaign integrated digital and traditional channels, and made optimum use of the same. Though the campaign ran in four different formats TV, print, banner and website the online campaign played a main role in engaging women with beauty debate in chat rooms and casting their votes, confessions, philosophical questions, rants and sharing their views about the concept of beauty. This improved the self-esteem of young girls who felt less beautiful than models in various beauty ads. In June 2005, the ads for Doves products were launched featuring regular women, instead of models, to challenge the stereotypes set by the beauty industry. The campaign acted as a catalyst to broaden the definition of beauty and, was identified and associated with regular women. Through this campaign, Unilever successfully applied integrated marketing principles and an interwoven promotion, using traditional and digital channels, which helped it click. Success of these products proved that online advertising has a positive effect on brand awareness and purchase intent; and can create perfect synergy with the traditional media, by reach477

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ing more target audience than a single Backpack etc. channel. The company now plans to significantly increase its budget for online promotion. According to Advertising Age estimates, Unilever Source: www.asicentral.com ranks second in global advertising expenditure with $4.5 billion in 2006. Marketing at Unilever has two disciplines: in the field and in innovation centre. The former develops expert knowledge of local markets, consumers and uses it to create marketing campaigns that maximise brand impact; while the latter combines research with local Figure 1.3: Interactive Print Ad market insights and works closely with dep a r t m e n t s o f r esearch, advertising, design and public relations. The companys new portfolio has become much leaner Source: http://3.bp.blogspot.com making it clear for its brand managers and advertising agencies, to streamline and rationalise its resources. Unilevers chief Figure1.2: Sales Kit -Skateboard,

marketing officer, Simon Clift, opines that it is really important that brands need to stand for something in consumers lives like the role of AXE and Dove in the present-day consumer lives that has made a much deeper impact than 50 years ago, due to the shift from TV to digital media. He explains, The many opportunities available to Unilever in new media and the rapidly changing media habits of our consumers demand a strategic approach to digital media and content. We believe a close, collaborative relationship between our categories and aligned digital agencies will result in more world-class campaigns for our brands in new media. 15 Unilever reduced its global digital agencies list to four Tribal DDB, OgilvyOne, Momentum/MRM and dare to carry out its advertising tasks. It is also taking steps to make sure that its brand managers are on top of the digital media trends. The company changed its corporate culture to encourage the use of new media channels to launch products. Unilever then focused on how to adapt and use digital media in marketing its products, without letting technology drive its strategy. Instead, it uses technology by defining the type of brand experience it wants its consumers to have. It tries to stay as close to its consumers as possible, by embracing ethnography (observing their actual behaviour) to generate insights. The advertising agencies, the company works with, are now becoming more of partners in content creation, thereby restricting any one agency doing it all. Kevin, supporting the shift of companys marketing resources to the more ambiguous digital media in terms of effectiveness and recognising a combination of the effective media, says, Its more of a migration of dollars to digital rather than a large shift away from traditional. Overall
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we need to do a better job of understanding the funnel through which people consume media. They use a portfolio of media to experience our brands, so a dramatic shift from one medium to another would be a mistake. 16 Footnotes: 1. Rasmussen Andrea and Ude Carolyn, Kevin George: Unilevers digital Media Strategy, Strategy+Business, Booz Allen Hamilton, October 16th 2007. Narrowcasting: Outperforming Traditional Advertising, http://www.belwo.com/Narrowcasting.pdf. Weisman Robert, Virtual ads pose real threat to traditional media, http://www.boston.com/business/articles/2006/02/12/virtual _ads_pose_real_threat_to_traditional_media/?page=1, February 12th 2006 Webster Mark, Online Advertising Up To 4 Times More Effective Than Traditional Media, http://virginia-press-release.com/41/Online%20Advertising % 2 0 U p % 20To%204%20Times%20More%20Effective%20Than%20T raditional%20Media.php, September 20th 2007. Digital disruption to traditional advertising, http://www.ibm.com/news/uk/en/2007/11/uk_en_news_200 71108.html.

Local Advertising And Traditional Media, http://www.wildblueskies.com/2008/01/02/local-advertisingand-traditional-media/. Ibid. Unilever (UK/Netherlands): Profile, http://www.mind-advertising.com/nl/unilever_nl.htm U n i l e v e r N . V. C o m p a n y P r o f i l e , http://biz.yahoo.com/ic/93/93845.html, January 31st 2008.

7. 8. 9.

2. 3.

10. Unilever slashes its brand portfolio from 1,600 to 400 Brief Article Statistical Data Included, http://findarticles.com/p/articles/mi_m0DQA/is_1999_Oct_7 /ai_56904871, October 7th 1999 11. Carysforth Carol and Neild Mike, Chapter 5: Functional areas within business, GCSE Applied Business (ISBN 0435446908), Harcourt Heinemann, 2002, page 87. 12. Ibid. 13. Vasudha Aich and Venkatesh T.R., Axe Effect in the US: Success through Viral Marketing?, IRC, 2005. 14. Ibid. 15. U n i l e v e r R e t h i n k s i t s D i g i t a l V i e w , http://www.brandrepublic.com/News/596048/Unilever-rethin ks-its-digital-view/, September 29th 2006. 16. Kevin George: Unilevers digital Media Strategy, op.cit.
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Advertising
Paid non-personal communication with a target market; advertising media include television, radio, newspapers, magazines, billboards, and direct mail.

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Advertising agencies
Companies that specialize in providing various levels of advertising services; some agencies focus on specific services or market segments, and others offer a complete range of services covering a wide range of market.

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Allure
Allure is a womens magazine that is fully devoted to beauty.

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Buying power
The consumers ability to purchase products.

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Chapter 1 - Marketing Evolution and Marketing Process

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Competitive advantage
In the context of international business, the ability of a nations industries to innovate and upgrade to the next level of technology and productivity.

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Chapter 1 - Marketing Evolution and Marketing Process

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Concept testing
A type of marketing research in which marketers describe a new product and ask consumers to react to the concept.

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Demand curve
A graph that plots the relationship between demand and price; it indicates the sensitivity of buyers to various selling prices.

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Demographics
The characteristics of populations.

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Discretionary income
The portion of disposable income the consumer retains after paying for food, shelter, and other necessities.

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Chapter 2 - Understanding External and Internal Environment

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Discrimination
The ability to distinguish between similar stimuli.

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Disposable incomes
Income the consumer retains after paying taxes.

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Chapter 2 - Understanding External and Internal Environment

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Distribution
The process of moving products from the producer to the consumer, which may involve several steps and the participation of multiple companies.

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Chapter 3 - The Marketing Reseach Process

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Garnier
Garnier is a company producing hair care products. It is a brand of LOral SA.

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Information
Data that are useful in a specific marketing situation to help marketers to make decisions.

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Infrastructure
A nations energy (gas and electric utilities), transportation, and communication systems.

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Marketing decision support system

A computerized system of accessing and handling MIS data and other data so that marketer can apply analysis and modeling methods and immediately see the results.

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Merchandising
The process of planning the merchandise assortment for a retail store, making sure the right products are available for target customers; also refers to the presentation of products in retail environment.

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Merchant wholesales
Independent businesses that buy products from producers and then resell them to retailers and organizational customers.

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Needs
A felt discrepancy between your actual state and your desired state.

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Chapter 1 - Defining Marketing and Marketing Process

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Noise
Anything that detracts from the effectiveness of communication, ranging from actual audio noise to competing advertisement.

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Point-of-purchase
Advertising, displays, and other materials that are placed in stores to catch shoppers attention as they are selecting products.

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Political behavior
A capacity that A has to influence the behavior of B so that B does things he or she would not do otherwise.

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Power
A capacity that A has to influence the behavior of B so that B does things he or she would not do otherwise.

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Price
The value, usually in monetary terms, that sellers ask for in exchange for the products they are offering.

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Price elasticity of demand

The measure of price sensitivity, expressed as the ratio of percentage change in demand to percentage change in price.

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Utility
The ability of a product to satisfy the customers wants or needs.

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Value delivery sequence

Value delivery sequence consists of a chain that identifies four support and five primary activities that aims to add value and cost in any business. It basically includes the activities like inbound logistics and adding materials to the business and converting them into final products. It also facilitates marketing process including sales and their service.

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Value pricing
Traditionally, a method for selecting a price based on the value that customers place on a product relative to its competitors; the terms is increasingly used to describe the practice of adopting a lower price while maintaining the products basic value.

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Warranty
A statement specifying what the producer of a product will do to compensate the buyer if the product does not live up to its promised level of performance.

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