Marketing Management and Organization XMBA 206.1

Marketing Management and OrganizationXMBA 206.1 Summer 2008 Professor Ganesh Iyer Edgar F. Kaiser Professor of Business Administration

Agenda • Introductions • What is Marketing? • Marketing Concept • A Framework for Marketing Analysis and Planning • Caselets. • Bombardier • Preview of the Course • Syllabus (What to expect?...And what is expected?)

Some Perspective • What does Marketing mean in your company? • When you think of industries traditionally associated with marketing which industries come to mind? • 8 Ads on CNN, Sunday morning… • Geico … lizard • Country-wide • Head-on • Cialis • Lunesta • Boeing • Avodart • Pillsbury

Some Perspective A Historical Perspective “In well-ordered states, storekeepers and salesmen are commonly those who are weakest in bodily strength and, therefore, of little use for any other purpose.” - Plato “Advertising ... is a meretricious endeavor in which psychological appeals to ‘fear’ and ‘shame’ are developed to bamboozle the public into purchasing essentially worthless packaged goods at bloated prices.” - Thorstein Veblen

Some Perspective (cont…)A modern view Marketing Philosophy: “Customer Orientation” “I came here with a view that you start the day with customers, that you start thinking about a company around its customers” - Lou Gerstner, Chairman IBM. “Why does the customer want to buy from me?” - Charles Schwab. “Stop being a company with its face towards the CEO and ass towards the customer” - Jack Welch, ex-CEO, G.E. Reaction to TQM--Reengineering--Competing for Future.

The Marketing ConceptTwo Components C: Customer Orientation • The Marketing concept is to make profits through creating and keeping customers. • “Connection (Emotional Identification)” C: Competitive Advantage • The marketing concept is about satisfying the needs and wants of consumers more effectively than competitors.

Caselet: New Coke Cola Category Share of Soft Drinks From 57% to 67%

Cola Category (Sales Volume) Almost tripling

Coke’s Declining Performance From a 12% lead to a 3% lead

Competitive Comparisons • Advertising • Coke: $34.4 million (1975) to $211.5 million (1993) • Pepsi: $25.3 million (1975) to $147.3 million (1993) • Distribution • Coke stronger in fountain. But Pepsi growing in supermarkets. • Pricing • no differences • Why the decline??

Market Facts • Baby Boomers respond to the “Pepsi Generation” and boost Pepsi sales. • Pepsi sales surpass Coke in supermarkets by 1975.

Market Facts • Pepsi had Diet Pepsi and Mountain Dew since the 60’s. Coke had Sprite and Tab. • In 1982 made a departure in extending the “Coke” brand name for the first time - Diet Coke. • Runaway success and becomes 3rd largest soft drink and had 5.2% m.s by 1984 (versus 22.5% for Coke and 19.1% for Pepsi).

US Soft Drink Industry • Pepsi Cola • 1960s “Pepsi Generation” • 1974 “Pepsi Challenge”(based on taste test) • Coca Cola • Coke had nostalgic home town image in early 60’s. • “Real Thing” response to Pepsi Generation

The Pepsi Challenge • Integrated Advertising/Promotion Campaign (1975 to 1984) • a majority of consumers prefer Pepsi in blind taste tests • Advertising hammered away on this • promotion had booths in malls across U.S. • by 79, Pepsi share in overall grocery was bigger than Coke • In supermarkets and convenience store where the two brands were available side-by-side.

Testimonials • The company is obsessed about Coke losing the No.1 slot. • Concern: “Over the last ten years we moved by barely 3 tenths of a percent, the competition gained 4 points on us.” Brian Dyson, Coca-Cola 1979 • Confusion: “If we have twice as many vending machines, dominate fountain, have more shelf space, spend more on advertising, and are competitively priced, why are we losing share?” Roy Stout, Coca-Cola 1980 • “I am not going to sit on my ass and watch that. To do nothing means I am forever condemned to not touching my product even though I know I can make a better product and move with consumer tastes.” Brian Dyson, Coca-Cola 1981

Change to New Coke • 1983 go-ahead to explore possibilities of reformulation. • September 1984 found a formula that beat Pepsi in nationwide blind tests by 8 points. • Even Pepsi exclusive drinkers preferred it. • Decision to not introduce the new formula as a line extension. • January 1985: Secret mission to introduce New Coke (after 200,000 taste tests).

Change to New Coke • Taste Tests • blind taste tests • “what if this were a new Coke taste?” test • Direct test against branded and unbranded Pepsi • But did not disclose that the product that they were testing would replace Old Coke. • Once again overwhelming preference for new formulation over Pepsi in blind taste tests. • A small minority (about 6%) will not get over the change. This loss will be more than compensated by Pepsi consumers switching to New Coke. • In focus groups when participants knew that it was new coke about one in ten participants get upset.

Change to New Coke • April 23, 1985: Launch Press Conference in New York City. • Coke PR line: Product improvement, necessary change to follow trends in consumer preferences. • “the best just got better.” • Absolutely no mention that New Coke beat Pepsi in taste tests.

Pepsi’s Response • Responded aggressively to Coke through advertising, public media • Re-framed the change as a product withdrawal. • Gave reporters list of questions to ask

Pepsi’s Message • ... After 87 years of going at it eyeball to eyeball, the other guy just blinked. Coca-Cola is withdrawing their product from the marketplace, and is reformulating brand Coke to be more like Pepsi. ... • There is no question the long-term market success of Pepsi has forced this move. ... Maybe they finally realized what most of us have known for years. Pepsi tastes better than Coke.” Letter by Roger Enrico, CEO Pepsi-Cola USA, to employees and published as full page ad on the morning of the New Coke introduction.

Consumer ReactionsA Surprise • Many consumers did not perceive the introduction of New Coke as a “product improvement,” but as a loss of Coca Cola, a sentiment that was reinforced by the media coverage. • Coca Cola’s toll-free number was flooded with calls from angry and deeply saddened consumers. • “Dear Chief Dodo: What ignoramus decided to change the formula of Coke?” • It was nice knowing you. You were my friend for most of 35 years. Yesterday I had my first taste of the new Coke and to tell the truth, if I had wanted a Pepsi, I would have ordered a Pepsi. • Some hard-core drinkers stocked up Coke worth hundreds or even thousands of dollars.

Consumer Reactions • Organized groups of consumers that resisted the change received extensive news coverage. • “Old Coke Drinkers of America” laid plans to file a class action lawsuit. • Many bottlers also resisted the change. • What was the problem? Why was this happening?

Coke’s Retraction • July 1985: Comeback of original formula as “Coke Classic” announced. • Hype actually did the overall Coke brand good • “love you more if harder to get” syndrome. • Emphasis from brands to category (megabrand strategy). • January 1986: Coke Classic becomes flagship brand.

What can we learn from this? • Even a marketer as experienced as Coke can misread its customers. Two Questions • When people consume Coke what do they really consume? • Did Coke really have a problem?

Corporate Shares A constant 8 point lead

Total Cola Shares Goes up from a 5 point to a 6 point lead

How was Coke actually doing? • Diet Coke was the main reason for the decline in regular Coke • Coke is lighter than Pepsi • Pepsi is sweeter than Coke • Should we be surprised that Coke drinkers converted more enthusiastically to the diet version? • Obsession on the Coke vs. Pepsi rivalry blinded management on the real reason for Coke’s decline. • It wasn’t taste----it was Diet Coke.

The Pepsi Challenge • Despite the Pepsi taste tests...did Coke really have a taste problem? • consumers in mall prefer the taste of Pepsi (58%). • only 67% of ALL consumers are cola drinkers • Pepsi was stronger than Coke but with non-cola drinkers. • depending on who you sample you can get very different results. • There is a market research lesson here. • Form of Marketing Myopia: Obsession about competition leading to a misreading of consumer behavior

Homework • What if Coca-Cola made the product change gradually and did not announce the change? • The Canadian new coke experience

Connection…1984 • "There is a twist to this story which will probably keep professors puzzled for years…” • “The simple fact is that all the time and money and skill poured into consumer research on the new Coca-Cola could not measure or reveal the deep and abiding emotional attachment (connection) to original Coca-Cola felt by so many people." …Don Keough, President Coca-Cola.

Connection…2004Neuromarketing evidence(Neural Correlates of Behavioral Preference for Culturally Familiar Drinks, Neuron 2004, v.44, October)Effect of Brand Knowledge on Brain Activation

Connection • More than four million of children under five die in sub-Saharan Africa every year. • In sub-Saharan Africa, child mortality rates are running at an average rate of 172 deaths per 1000 babies born, compared with 9 per 1000 in developed regions. • Please donate to the red cross.

ConnectionEmotional Identification Help the children of Africa

Caselet: Apple ComputersIdentifying the competitor • Apple 1980s - a tremendous success story: • Introduced computers that anybody could learn to use • had a stranglehold on the US educational market, so kids got exposed to Apple much earlier than competitive products • Better products and better advertising • price premium reflecting the product advantage and the stronger loyalty of its customers • Where did they go wrong?

What can we learn from this? • Apple didn’t understand who their competition was • Who did Apple think was their competition? • In fact, competition changed over time • Apple’s perceived vs. actual competition • Apple’s strengths • good at designing customer interfaces • Apple was superior because of its operating system and software. • What was the best way to leverage Apple’s strength?

Key Takeaways • What do these two caselets tell us? • Coke misread their customers “emotional” value for the product. • Mis-read the emotional connection that customers had with Coke. • Coke executives did not make the Coke brand versus Coke corporate distinction. • Marketing Myopia: Obsession about competition leading to a misreading of consumer behavior.

Key Takeaways • Understanding the market and customer needs is a firm’s most difficult task. • Using relevant quantitative and qualititative customer analysis tools is a critical skill. • Consumers often consume more than the physical product.

Key TakeawaysApple • Weren’t really sure who the competition was. • licensed their system for the first time very late. • the horse already bolted • Technically superior • operating system • the hardware/software interface • Microsoft which was technically behind • understood the market and the need for an open Windows platform. • network effects • icon-based

Summary Successful marketing strategy entails two principles. Designing products, services, and programs that emphasize attributes which: • which customers value and connect to. • provide a sustainable differential advantage over competitors.

Customer Analysis Analysis Framework Company Analysis Competitor Analysis Marketing Strategy Product Price Promotion Place Market

Course Summary • Use a consistent analysis framework so you see the link between different sessions. • Cases which involve integrating more than one of the four elements of the Marketing Strategy Mix • Expose you to through cases to decision situations which involve the application of the specific marketing strategies. • Analytical decision tools (MDS, conjoint analysis, product line design etc.)

Course Summary • Each session = case + lecture / in class activity • Go through case prep notes in syllabus or given to you prior to class. Performance Evaluation • Class participation • Please display name cards.

Course Summary Written Case Report (Individual Assignment) • Session 5, Optical Distortion. Written Case Report (Group Assignment) • Session 7, Calyx and Corolla. Group assignment • Groups by the end of Block 1. Final Exam

Administrative Details • Course Information • Course pack available at: https://www.study.net/default.asp • Course website: • http://groups.haas.berkeley.edu/marketing/COURSES/xmba206.html • Contact Details • Office Room F699, 510-643-4328 • email= giyer@haas.berkeley.edu • Cell 925-788-1769

Expectations • “Please” prepare the case and readings. • Please stick to a constant seat in the class as far as feasible.

Marketing Management and Organization XMBA 206.1