MKTG.6650X: Strategic Market Planning Winter 2005 Semester

1. MKTG.6650X: Strategic Market Planning Winter 2005 Semester 13. Market Planning & Implementation Bob Angel, MBA, FCA, CA 416-736-2100 x77935 www.gilfordgrp.com

2. Strategic Market Planning Agenda • Discussion • Robert Mondavi • Meeting the Challenge of Disruptive Change • Driving Market Innovation • Implementing the Marketing Strategy/Plan

3. Article Reading Meeting the Challenge of Disruptive change Christiansen and Overdorf, Harvard Business School Publishing, March-April 2000

4. Case: Mondavi in 1995 • Mondavi is a “shaper” • Vision: leading the wine industry • Positioned in premium high cost/high value quadrant • Mondavi has only 3% of fragmented US market and 9% of premium market • Over 90% of sales in US, but competes in 65 countries • Woodbridge cash cow funds innovation • Record sales and profits…….. but differentiation getting harder

5. The Changing Industry • Excess of demand over supply today, but growing international competition, grow or die – • Demand – only 24% of available market drink wine • Distribution model is consolidating • “Ease” of entry – new wineries proliferating

6. Robert Mondavi – What are the Case Questions? • Must Mondavi “grow or die”? • Where should Mondavi position its brand to compete worldwide? • Should Mondavi consolidate the US industry? • How should Mondavi’s marketing model change?

7. Mondavi’s Strategic Orientation Mode Follow Interact High Customer Orientation Low Isolate Shape Low High SCAs: winemaking knowledge, good growing conditions, reputation Innovation Orientation

8. Towards a Mondavi Marketing Strategy • Stay with shaping strategy – innovate • Continue premium/US market focus – differentiate • Promote Woodbridge brand to mass market – dominate • Raise consumer awareness – communicate • Develop interactive mass marketing style – relate • Extend thru purchases and global alliances – consolidate

9. Robert Mondavi Why Buy MOND? (2004) Growing industry, growing companyU.S. wine sales over $8 per bottle have grown 10% per year since 1991 as consumers have traded up from less expensive wines, baby boomers have enjoyed more wine-friendly foods at home and in restaurants, and the health benefits of moderate wine consumption have become more widely known. Since the time of the June 1993 IPO through June 2002, Robert Mondavi's net revenues have grown an average of 13% per year and profits 25%.Plentiful grape supplyDuring much of the 1990's, the supply of grapes from California lagged growing demand. Today there is an ample supply of high quality grapes, not only from California, but from around the world that offer wine producers opportunities to tap into new sources of demand and new channels of distribution. In addition, Robert Mondavi's grape supply is rapidly shifting toward more internally-grown fruit as newly planted vineyards in Monterey and San Luis Obispo counties reach maturity and provide lower cost, higher quality fruit.Market-leading brandsThe company owns some of the world's leading wine brands in Robert Mondavi and Opus One (a 50/50 joint venture with Chateau Mouton Rothschild). Woodbridge is the most popular brand in scanning stores in America, and several other brands are well positioned to become leaders in various categories.Strong management teamRobert Mondavi's management team has strengthened significantly in the last few years. With the Mondavi family occupying key board positions and setting the strategy and standards for excellence, strong outside directors and an experienced management team are charged with executing the strategy. Recent appointments to both the board and management have been made with an eye towards adding consumer packaged goods marketing and financial experience. The board and management have adopted Economic Profit (EP) as a key metric in measuring the financial performance of the company's brands. EP is the incremental financial return generated over the company's cost of capital.Global diversificationThe company sources premium wine grapes from the cool, coastal regions of California, Italy, Chile and Australia. The wines made from these grapes are sold in over 80 countries around the world and in all forms of retail outlets, from the finest restaurant to the local supermarket or wine shop.

10. Robert Mondavi Environmentally innovativeThe company pursues the highest quality with a commitment to the environment that ensures the health and vitality of its vineyards for generations to come. The Robert Mondavi Winery was among the first in Napa Valley to adopt a natural farming and conservation program two decades ago. Robert Mondavi has been the leader in creating sustainable winegrowing programs on the Central Coast and in the Lodi-Woodbridge area and was the first wine company to receive an "Innovator" award in 1998 from California's Environmental Protection Agency. Robert Mondavi was the first wine producer to sign a Safe Harbor agreement, which allows a landowner to create or improve habitat for endangered species without fear of new restrictions on land use.Shareholder benefitsAll shareholders who own a minimum of 100 shares are enrolled in our Ensemble wine club, where they have access to limited release wines, special discounts and wine and food related events. Purchasing shares is inexpensive, and easy through our online share purchase program. Staying informed of the company's performance and prospects is as easy as signing up to receive email alerts when new information is posted to this website.Demand riskAmong other things, reduced consumer spending, a change in consumer preferences or the length and severity of the current economic downturn in some of the company's key markets could reduce demand for the company's wines. Similarly, competition from numerous domestic and foreign vintners, coupled with changes in foreign currency valuations, could affect the company's volume and revenue growth outlook. Cost and supply riskThe price of grapes, the company's single largest product cost, is beyond the company's control. A shortage of high quality grapes might drive up grape costs and put pressure on the company's gross profit margin. An oversupply of high quality grapes might drive down grape costs, helping to reduce production costs, but leading to lower selling prices or higher marketing spending. In addition, interest rates and other business and economic conditions could change significantly the cost and risks of projected capital spending. Production and quality riskWinemaking and grape growing are subject to a variety of agricultural risks. Various diseases, pests and certain weather conditions can materially and adversely affect the quality and quantity of grapes available to the company, thereby materially and adversely affecting the supply of the company's products and its profitability. For example, the company has had limited experience with Pierce's Disease, a disease that destroys individual vines and for which there is no known cure. Recently, a new carrier of Pierce's Disease, the Glassy Winged Sharpshooter, has infected vineyards in Southern California. If this pest migrates north to the company's vineyards, it could greatly increase the incidence of Pierce's Disease and materially and adversely affect the company's future grape supply.

11. Robert Mondavi ….premium wine market characterized by an oversupply of wine, a weak US economy, growing competition from new and established brands, aggressive pricing in key segments, and an intense battle for shelf space and promotional support…. Annual Report 2003

12. Robert Mondavi Revenues Sales, fiscal 2004 (ended June 30): $468 million Net income: $25.6 million Brands owned or co-owned (partial list): Robert Mondavi Winery, Robert Mondavi Private Selection, Woodbridge by Robert Mondavi, Opus One, Ornellaia, Luce della Vite, Lucente, Arrowood, La Famiglia di Robert Mondavi, Hang Time, Byron, Caliterra Constellation Brands, Fairport, N.Y. Sales, fiscal 2004 (ended Feb. 29): $4.5 billion Net income: $220.4 million Brands owned or distributed (partial list): Almaden, Canandaigua, BRL Hardy, Nobilo, Ravenswood, St. Pauli Girl, Pacifico, Black Velvet, Paul Masson, Manischewitz, Inglenook, Blackstone, Banrock Station, Black Box, Simi, Mount Veeder, Franciscan Oakville Estate, Turner Road Net revenues $200 million in 1995

13. Postscript 2004 Outsider to lead Mondavi - Board names Ted Hall as chairman For the first time since the founding of Robert Mondavi Corp. in 1966, there are no Mondavis running the company as either chief executive officer or chairman. Mondavi Corp.'s board of directors has chosen Ted Hall, 55, a Napa Valley businessman and former McKinsey & Co. director, to replace Michael Mondavi as chairman. Mondavi had been chair less than a month. His father, company founder Robert Mondavi, 90, left that position in December. Still, "the family owns a controlling interest in the company, and there's no question that they're still in control," said consultant Jon Fredrikson of Gomberg, Fredrikson Associates, an industry research firm based in Woodside. "Obviously, the company is trying to deal with some extraordinary competitive developments in the market" and is bringing in extra firepower, he said. Michael Mondavi said Hall was recruited to oversee the company's corporate governance and strategic direction. "This frees me up to spend the time where I really excel and have the most enjoyment, which is in the market with the trade and the media, building the excitement and energy around our brands," said Michael Mondavi, who cited the same reason when leaving the chief executive position in 2001. "This also frees me up to spend much more time ensuring that the family values are being upheld in every aspect of the company," he said. Regarding his short tenure, Mondavi said he realized the situation had to change after calling several key distributors in December. "A number of them that I had known for years said, 'Where in the hell have you been? We'd like to see you more often.' I realized that by not spending time with our customers, we were losing share of mind in this very competitive industry." As it happens, Hall had joined the board in December, replacing Bartlett Rhoades, and was excited at the prospect of chairing the board. …………..Mondavi Corp. has more than a dozen brands in the United States and overseas, ranging from the supermarket staple Woodbridge to the upscale Opus One. Its financial performance has lagged during the recent wine glut, resulting in layoffs and a restructuring. Mondavi suffered one quarterly loss in each of the past two fiscal years. Its net income in fiscal 2003, which ended June 30, fell to $17.3 million from $25.5 million in fiscal 2002, while revenue rose 2.6 percent to $452.7 million. Net income in the most recently reported quarter, which ended Sept. 30, rose to $5.7 million from $4.7 million a year ago, while sales also improved. The firm's stock, which has more than doubled since March, closed Thursday at $38.21, down 42 cents on the Nasdaq Stock Market. …….."Having a Mondavi more present in the marketplace is crucial to maintaining the family personality of the brand, which is one thing that distinguishes them from some other brands," said Vic Motto of the consulting firm MKF in St. Helena. "Michael Mondavi is a master at relationships in the marketplace, and there's no industry I know of where those relationships are as important as in the wine industry." ……In 2001, Michael Mondavi ceded the chief executive's office to veteran Mondavi employee Greg Evans to devote more time to sales and marketing. San Francisco Chronicle, Friday, January 16, 2004

14. Mondavi bought by wine giant Constellation$1 billion deal keeps brands under one roof -- family to no longer own any of business The world's biggest wine conglomerate, Constellation Brands, has snapped up the iconic but struggling Robert Mondavi Corp. of Oakville for more than a billion dollars, saving Napa Valley's best-known winery from its own draconian plan to split in two and sell off its luxury brands piecemeal. The deal will keep all Robert Mondavi brands -- from the $5 Woodbridge by Robert Mondavi to the $125 Robert Mondavi Cabernet Sauvignon Reserve -- under the same roof instead of splitting them among multiple owners. Mondavi Corp.'s board of directors, including two Mondavi family members, voted unanimously Wednesday to accept Constellation's offer for $1.03 billion in cash and $325 million in assumed debt, a 3 percent increase from the $970 million offer the Fairport, N.Y., giant made on Oct. 19. Constellation "has enormous clout globally, and I think will do a lot to build the Mondavi business," said consultant Jon Fredrickson of Gomberg, Fredrickson & Assoc. of Woodside. The billion-dollar offer also significantly exceeded the $749 million to $939 million in equity value Mondavi Corp. executives had said they could achieve with their restructuring plan, which was announced in September. The acquisition further consolidates Constellation's position as the largest global wine company, boosting its annual production to 80 million cases from 70 million. The next largest producer, E&J Gallo Winery of Modesto, sells about 70 million cases. It also hands Constellation Napa's plum property -- "the most respected international brand of any size," in Fredrickson's words. Mondavi Corp. has been hurt by mismanagement and family squabbles for years, but Fredrickson said he believes "Constellation will do wonders for the Mondavi business," with its savvy management and international distribution network. Robert Mondavi, 91, whose evangelistic fervor and focus on quality put California -- especially Napa Valley -- on the world wine map, has agreed to remain an ambassador for the brand and to vote his shares in favor of the deal. He will keep his office at the company's popular tasting room and headquarters on Highway 29 in Oakville. Two of his three children, Marcia Mondavi Borger and Timothy Mondavi, are company directors and voted to approve Constellation's bid. Mondavi Corp. was founded by Robert Mondavi and his eldest son Michael in 1966, a time when Napa was best known as the home of what was then the Napa County Sanitarium. The Mondavis no longer will own any of the company by the end of this year or early in the next.

15. Mondavi (cont.) "I am sad," said Timothy Mondavi, his voice unsteady in a telephone interview Wednesday. "Wearing my shareholder hat, this is a good day. Wearing my family hat, it's a sad day," he said. "We are a public company, and my family has always committed to honor all of our shareholders, and we are doing that." As for his father, he said, "I think he's very saddened that the legacy is in an unclear situation. But I will say that it is my commitment, and the commitment of my father and sister and brother, that the Robert Mondavi Winery legacy will continue" in the form of one or more new family-owned wineries. Timothy Mondavi is consulting winemaker to Mondavi Corp., but he said no decision has been made as to whether he will continue in that role. Until just a few years ago, Constellation was known as Canandaigua and peddled mostly low-end wines such as Inglenook and Almaden. But under Constellation chairman Richard Sands, who inherited the company from his father, it has become known as a respectful steward of other premium acquisitions such as Franciscan Oakville Estates, Mount Veeder, Simi and Ravenswood in California and Australia's BRL Hardy and Blackstone. Constellation is part of a three-way joint venture that is trying to buy Napa-based Chalone Wine Group, owner of Acacia and other brands. Sands said upon announcing his bid last month that he might reverse the layoffs of more than 300 people announced by Mondavi. But in a telephone interview Wednesday he said it was too early to discuss staffing plans. Mondavi chairman Ted Hall and chief executive Greg Evans seemed to give little heed to Constellation's advances last month, saying they would consider the New York company's bid along with other opportunities. But they met with Sands last week and put together a deal in unusually short order. Sands had urged Mondavi Corp. executives to halt the restructuring, especially a downsizing of the luxury Robert Mondavi Winery, until his bid was fully considered. "They have not done anything to date that we feel in anyway impairs the value," Sands said Wednesday. "From this point forward, we'll work together to enhance the prestige of the flagship brand." Constellation shares ended up 30 cents Wednesday at $41.55, and Mondavi Corp. rose 50 cents to $54.75. San Francisco Chronicle, Thursday, November 4, 2004

16. Case: Robert Mondavi ….premium wine market characterized by an oversupply of wine, a weak US economy, growing competition from new and established brands, aggressive pricing in key segments, and an intense battle for shelf space and promotional support…. Annual Report 2003

17. Organizational Drivers of Market Driving Innovation Presentation By: Ashwin W. Joshi, Ph.D. Associate Professor of Marketing Schulich School of Business ajoshi@schulich.yorku.ca At: Connect2004 Reunion Schulich School of Business

18. Market Driving Innovation: Definition and Examples • Examples • Electrical Industry: Light bulb • Office Equipment Industry: typewriter, computer • Consumer Good: zipper • Transportation Industry: bicycle, car, plane • Electronics: Radio, T.V., Video Recorder, gramaphone, • Appliances: Washing machines, Refrigerators, Air Conditioning • Communication: Telephone, Cell-Phones • Market Driven Innovations • Innovations that are SHAPED BY customer preferences Vs. • Market Driving Innovations • Innovations that SHAPE customer preferences

19. Characteristics of Market Driving Innovations • To be successful in shaping customer preferences, innovations have to (i) motivate customers to break out of their “preference” inertia, (ii) engage customers in new preference formation, and (iii) restrict distractions. • Thus, the core characteristics of market driving innovations are that they are: • IMMENSE: they create new benefits or provide significantly greater benefits than does existing technology (e.g., telephone that translates conversations). • INCOMPLETE: they evolve through probing and learning from customer feedback (e.g., version 1, 1.1, 1.2, and so on) • INIMITABLE: they are complex bundles of technology and systems that cannot be easily replicated by competitors

20. Organizational Drivers of Market Driving Innovations Watch out for the Status Quo police! • IMMENSE • Organizational Characteristic: Requires top management to have risk propensity • Organizational Capability: Requires market sensing capability • INCOMPLETE • Organizational Characteristic: Cross-functional new product development teams • Organizational Capability: Learning Orientation • INIMITABLE • Organizational Characteristic: Organized History • Organizational Capability: Creativity

21. Outcomes of Market Driving Innovations “Time will come” – beware escalating commitment to losing course of action • Reputation: Innovative, cutting-edge • Ability to Attract New Resources: Bright new employees • Profitability: because of ability to secure high margins • Market Share: first to market, so high mind share

22. Summary

23. Successful Innovation – Event Triggers Bob Angel on Market Driven Innovation: • Current: Internally focused one way communication fails to understand customers as individuals • Innovation: Detect customer behaviors selectively for clues to changes in circumstances • Inductive, not deductive – used by banks • Key ingredients to make it go right: • Management understanding/sponsorship • Buy in from staff that have to implement it • Culture change to execute and sustain it • Technology to enable it • Business case that makes sense

24. Marketing Innovation • Clayton Christiansen ROB article - Disruptive Innovation • The Innovator’s Solution • Traditional approach: structure the market by product, segment by customer characteristics, and then explore with them the ways in which the product might be made better, cheaper etc. • Alternative approach: circumstance-based segmentation, rather than an attribute-based - investigate the “job that people were trying to get done” when they “hired” a product • Options approach to marketing and strategy

25. A Customer View – Creating Value for the Individual Customer Relationship Optimization is shifting the whole organization from: • Marketing communiques customer dialog • Internally focused product push customer-centricculture • Customer value  value for the customer • Data silos enterprise-wide customer knowledge • Integration management performance management • Aggregated view granular view

26. STAGE 1 REPORTING WHAT happened? STAGE 5 ACTIVE WAREHOUSING MAKING it happen! STAGE 2 ANALYZING WHY did it happen? STAGE 3 PREDICTING WHAT will happen? STAGE 4 OPERATIONALIZING MIXED Workloads Pre-defined Queries Ad Hoc Queries Analytical Modeling Continuous Update Response Sensitive Query Event Based Triggering The Role of Customer KM Technology Generally, KM tools fall into one or more of the following categories: knowledge repositories, expertise access tools, e-learning applications, discussion and chat technologies, synchronous interaction tools, and search and data mining tools. BusinessWeek, March 2003 Source: Teradata

27. A Recap of Strategic Market Management • Customer Analysis • What are the major segments? • What are their motivations and unmet needs? • Competitor Analysis • Who are the existing and potential competitors? What strategic groups can be identified? • What are their sales, share, and profits? What are the growth trends? • What are their strengths, weaknesses, and strategies? • Market Analysis • How attractive is the market or industry and its submarkets? What are the forces reducing profitability in the market, entry and exist barriers, growth projections, cost structures, and profitability prospects? • What are the alternative distribution channels and their relative strengths? • What industry trends are significant to strategy? • What are the current and future key success factors? • Environmental Analysis • What environmental threats, opportunities, and trends exist? • What are the major strategic uncertainties and information need areas? • What scenarios can be conceived? • Internal Analysis • What are our costs, strategy, performance, points of differentiation, strengths, weaknesses, strategy problems and culture? • What is our existing business portfolio? What has been our level of investment in our various product markets?

28. Course Learnings • Frameworks – tactical • Customer segments • Analytical approaches – and using them • Relationship marketing • Marketing in change environment • Competitive Advantages • Sustainable Competitive Advantages • Implementation importance

29. A Recap of Strategic Market Management • Strategy Development • How can our offering be differentiated? How can we add customer value by doing something better than or different from our competitors? How can perceived quality be enhanced? • Can a cost advantage be gained by offering a no frills product, or by reducing product costs? • Can synergy, focus, or a preemptive move be employed to gain advantage? • What is the strategic vision? What are the key assets or competencies to be maintained or developed? • What alternative growth directions should be considered? How should they be pursued? • What investment level is most appropriate for each market‑withdrawal, milking, maintaining, or growing? • What are the alternative functional strategies? • What strategies best fit our strengths, our objectives and our organizations?

30. Thank You……and Good Luck! Bob.angel@gilfordgrp.com