1. Introduction to Marketing
What’s Marketing?
Three C’s
Customer
Company
Competition
Four P’s
Product
Promotion
Price
Placement
Summary
Professor Andrés Musalem
Marketing Management
Fuqua School of Business

2. MARKETING In-class exercise:
Let’s start with a simple word association task…
MARKETING
Word Association: a tool used often by psychologists…
Please take a piece of paper. I’ll say one word and you are supposed to write down the first word that comes to your mind.
The word is “Marketing”.
Pass this piece of paper to your classmate on your left and start. Ask each student to say their names and to read the word that they received from his/her classmate.
Write on the board each word and count frequency. Summarize results.
Why does marketing has that narrow association (and bad reputation)?
During the course I will try to change those beliefs, we’ll see that mktg is much more than sales and advertising, it also includes
product design, promotions, communications, pricing decision, company strategy, etc.
Write down the first WORD that comes to mind

3. Does Marketing Matter?
Ebit: earnings before interest and taxes= operating revenue –operating expenses + Non-operating income.
Show market shares.
Who do you think is a better marketer?
3% market share > making about 2/3 more in profits than all other competitors combined.
Gavan:
Is this a business to be in? Very competitive.
Profits: 97% of all handsets sold make about 2/3 of what apple makes with 3%.
Why? They do a great job figuring out what customers want, translating that into a product and communicating it to consumers.
These data are really crazy!

4. Does Marketing Matter?
Ebit: earnings before interest and taxes= operating revenue –operating expenses + Non-operating income.
Show market shares.
Who do you think is a better marketer?
3% market share > making about 2/3 more in profits than all other competitors combined.
Gavan:
Is this a business to be in? Very competitive.
Profits: 97% of all handsets sold make about 2/3 of what apple makes with 3%.
Why? They do a great job figuring out what customers want, translating that into a product and communicating it to consumers.
These data are really crazy!
**************
Source: Goldman Sachs “The Rise of the iPad”, page 8, July 2010.
The example of the iPhone highlights the kind of impact the iPad could potentially have on the PC market. Although the iPad
is still in the very early days and we believe incremental to the total computing addressable market, the impact that the iPhone has
already had on the handset market underscores the potential impact of the iPad over the next two to three years. Specifically,
handset EBIT dollars from 2007 to 2010E at Nokia, RIM, Motorola, HTC and Sony Ericsson combined are down more than 40%, and
in total trail our estimate for Apple’s handset EBIT dollars in each of 2009, 2010E, and 2011E (Exhibit 4). Similarly, we estimate that
the median handset EBIT margin at these vendors has collapsed from 20% in 2007 to just 10% in 2010E, well below the roughly 50%
of EBIT margin dollars we believe Apple commands for the iPhone today.
Apple has been able to take the majority of industry profits despite having only 2%-3% of the unit market share, which we think
shows how a relatively small number of units in the overall market can drive significant shifts in profitability (Exhibit 5).

5. Background: How long? Santiago, Chile Ind. Engineering
Find x:
How long?
Santiago, Chile
MBA, U. of Chile
Ph.D., Wharton

6. Research: Quantitative Marketing
Interested in building mathematical models to represent how consumers make decisions and also how firms make decisions.
Why? Can be used to make recommendations: Example: promotions.
Can be used to understand how consumers react to marketing variables. Product availability.
Can be used to understand how competitors might react. 6

7. Teaching Interests: Market Research Pricing Marketing Management
GATE (global academic travel experience):
South America
Marketing Practicum:
Hobbies:

8. Agenda Teaching Philosophy Course overview Ford Ka
Marketing management
Analysis (The 3 C’s)
Planning (The 4 P’s)

9. Teaching Philosophy Lesson first, Problem second versus
Problem first, Lesson second
“Experience is a hard teacher because she gives the test first, the lesson afterward.”
We think it’s better to give the problem first and then the lesson. Different from most courses, where you’ll get the tool and an exercise to apply it (e.g., engineering). How long will you remember that? In my case, until the next exercise or until the final exam. Goal: not for you to memorize a bunch of stuff, what we care about is that 5 years from now if you haven’t worked in mktg but have to make marketing decisions, you’ll remember the framework.
Problem first, lesson next: replicates real life.

10. Course Overview Goals: Have fun & get you to learn. Frameworks: Tools:
Marketing Situation Analysis:
Company, Customer, and Competition
Marketing Planning and Implementation:
Price, Promotion, Place, Product
Tools:
Perceptions, Preferences, Customer Lifetime Value, Economic Value, Brand Associations, Diffusion of new products.
Skills:
Case analysis
Group effectiveness
Idea Communication

11. Course Overview Syllabus Class format Grading Course Materials:
Lectures and cases.
Grading
Cases, participation, final exam
Graded assignments: weekend following discussion.
Course Materials:
Required: Cases and some articles (see syllabus)
Optional: Textbook, press articles in course pack.
Learning partnership:
In the same way that I am responsible for selecting and delivering the content of each lecture and case,
you also have some responsibilities, which include coming prepared to every class, completing the assignments and reading the assigned articles.

12. Study Teams
Action:
Name a representative who will be responsible for submitting assignments.
This doesn’t happen always, but there are times when the members of a team are contributing sufficient time and energy to each of the assignments, but may be there is one member that is not committed enough. If that happens, you should start by trying to tackle that problem talking among yourselves. You can also talk to me. At the end of the term I’ll have a chance to learn about the interactions within your team.

13. Peer Evaluation Your Name: ___________________________________________
Team number : ______________________________________________
In the chart below, write in the name of each team member, including yourself. Estimate the relative effort level and the amount that each team member contributed to the effectiveness. The first column should indicate relative effort and work level while the second column indicates the degree to which each individual contributed to the success of your team.
Your estimates can range from 0% to 100% but should sum to 100%.
Team Member Name
Effort level
Effectiveness
Total
100%

14. Honor Code We take it very seriously It benefits students
Best cases, problems
Equal playing field
Coordination with other classes
We select best, and there are not that many cases that are good.

15. Honor Code You may not get information on cases from
Fuqua students in other classes or study groups
Students or resources at other schools
Electronic means
You may not give the information to others at Duke or elsewhere
Your support is critical for this policy
I do not need to tell you the cost of an honor violation…don’t even think about it.
It is my job to be vigilant. I will use Google search’s on your papers. I also feel free to ask you without warning about how you derived certain information. I also ask you to support the code. Ask me or the T/A’s if you have questions.

16. Administrative Issues:
Platform:
Announcements
Assignment submission
Handouts and other materials
Seating Chart

17. Roadmap for the rest of course

18. Frameworks: Marketing Situation Analysis Marketing Planning
Company, Customer, and Competition (3C’s)
Marketing Planning
Price, Promotion, Place, Product (4P’s)

19. Frameworks: 3 C’s - Customers
Who are the customers?
Why do they buy (Value Proposition)?
Economic value to the customer: Cost-Benefit
Understanding customer psychology: Intangibles
What are they sensitive to (e.g., price, features, etc.)
How many?
Lifetime value, loyalty, customer satisfaction.
Use Ford Ka: Who buys?
How do they buy?
Where do they get information?
What matters to them?

20. Customer Analysis: RFID
How could you use RFID technology to better understand consumers?
RFID: place tags on objects, then using Radio Frequency technology you can identify these objects.

21. Customer Analysis: RFID
Sorensen Associates:
RFID technology to track shoppers path inside grocery stores. (PathTracker®)
How could you use RFID technology to understand consumers.
Source:
Insight: Consumers do not cover each aisle completely, they just approach the first part of the aisle,
Get what they need and then go to the next aisle. Implications? If you are a manufacturer you would
Not like your product to be placed in the middle of the aisle.

22. Frameworks: 3C’s - Company
Strategy: Mission, Objectives
Portfolio Analysis:
Identify SBU’s
Evaluate SBU’s: for example, BCG, GE matrices.
Portfolio Design:
Build a pipeline of SBU’s at different stages
Portfolio growth: expand new/existing products/markets. ?
Market Growth Rate
Relative Market Share
Ford Ka:
Why did Ford decide to introduce Ford Ka?
Hoping to get back to profitable growth!

23. Frameworks: 3C’s - Competition
Identify Competitors
Industry Analysis (5 Forces)
Strengths Weaknesses - Opportunities Threats:
SW: Company versus Competitors
OT: Industry
Competitive reactions
Competition: Who are Ford Ka’s main competitors?

24. Southwest Effect: Competitive Reactions
Increase in passengers per day each way (PDEW )
Drop in average fare
Effects on surrounding airports (lower demand)
A critical aspect in the design of a marketing strategy is to understand how competitors and the industry will react to our plans.
For example, after SW enters a market the typical reaction of other players generates:
1. Increase in PDEW (passengers per day each way)
2. Drop in average fare
3. Effects on surrounding airports (lower demand)
PDEW(Passengers per Day Each Way)
BWI: Baltimore Washington Airport
SDF: Louisville International Airport - Standiford Field
Source:
The “Southwest Effect” is a term that was coined by the Department of Transportation(DOT) in 1993.  It was in 1993 that the DOT’s Office of Aviation Analysis presented information that showed the characteristics of a low-cost carrier’s market entry and the side-effects that come with it.(DOT,1993)  Southwest Airlines(Southwest) was a rapidly expanding airline in the early 90’s.  Its success was well documented, but the carriers effect on the legacy carriers had yet to be completely analyzed.  It would soon be discovered that Southwest didn’t just have an effect on those around it, but it would completely change the environment of a market in which it entered.
There are three distinct features of the “Southwest Effect”: passenger counts in a particular market, the fares in a particular market, and the effects that Southwest has on surrounding airports when it enters a market.  The first two of these affects will be easily analyzed with O&D(Origin &Destination) data.  It is believed that when Southwest enters into a market that the PDEW(Passengers per Day Each Way) rises significantly.  Likewise, it is thought that Southwest’s entry causes the average fare for a particular route to drop significantly.   The third, Southwest’s effects on surrounding airports, is a little tougher as it is hard to prove where a passenger comes from unless access is granted into a Computer Reservation System and the zip codes of passengers are found.  However, there have been articles published that show some evidence that supports this theory.  In one industry magazine, it is stated that Harrisburg International in Pennsylvania, is an airport feeling the effects of Southwest’s entry into Baltimore-Washington International(BWI).  Being only 90 miles apart, Harrisburg’s airport director claims that they were losing 60 percent of their traffic to BWI at that time.  Another example of Southwest’s influence on surrounding airports is up in Buffalo(BUF) where in early 2002 the airport claims that 6 percent to 10 percent of its passenger traffic comes from Canada. (“Harrisburg, PA, Airport Battles ‘Southwest Effect’”,2001, Pg. 1; Pigg,2002, Pg. 1)
The “Southwest Effect” has been well chronicled and looked at by many journals, newspapers, and industry magazines alike.  The articles outline the effects on air fares, passenger counts, and even the economy of the surrounding communities.  As one article mentioned in 1999 on the arrival of Southwest to the city of Hartford, Connecticut, “The biggest economic boom you can bring to an area is to improve your transportation, and a cheaper price is one aspect of that”(Hopgood, 1999, Pg. 2)
Beyond what has previously been written, this paper will attempt to present the facts and answer many questions about the “Southwest Effect”.  Chief among these questions, is whether or not the effect is a real phenomenon.  Yes, it is well known that Southwest enters a market and things change, but how significant is that change and does that hold true across Southwest’s entire network?  What about Southwest’s competitors?  Do they react boldly, or do they go about there business and hope to maintain a market stronghold based on loyalty?  After Southwest’s initial splash into the market, what is the trend in their PDEW and fares in succeeding years?  The intent of this paper is to not only define the “Southwest Effect”, but to present the data that may either prove or disprove the phrase’s worthiness.
TO TOP
2.0 Methodology
Data was collected using the O&D database, with data from the mid-1990’s.  This data was compiled and simplified in order to provide a five year time series for a particular market.  It was then segregated to provide information on Southwest over that five year time series and information on competing carriers within that market over the same period.  The five year time series consisted of the year before Southwest entered the market, the year of their entry, and the three succeeding years beyond their entry.During the research phase,  50 random markets were analyzed in the early to mid-90’s with no discrimination as far as east or west coast routes.  Business and leisure routes, along with short and long-haul(over 1250 miles) routes were all analyzed.
3.0 Results
Across Southwest’s network the PDEW on a particular route did rise upon their entry.  However, on some routes, the PDEW rose more significantly than on other routes.  Taking a look at a route added by Southwest airlines in 1994 the effects can be seen on PDEW over a five year time series.  For example, Baltimore-Washington(BWI) and Louisville(SDF) was added by Southwest.  Graph “BWI-SDF Fares and PDEW” shows the change in PDEW, overall in that market.  Beginning with the year before Southwest’s entry, the route was averaging 34.2 PDEW in 1993.   However, the year Southwest entered the market the overall PDEW grew to   In the year succeeding Southwest’s entry, their first full year of service along that route, the overall PDEW grew to an average of   This is a large jump from an average of 34.2.
The PDEW of Southwest alone grew rapidly along the route.  During the first four years of Southwest’s entry into the market they grew from an average PDEW of 75.9 between BWI and SDF in 1994 to and average PDEW of in 1997 giving them 75 percent of the passengers along that route.
Also in 1994 Southwest entered the market between Seattle(SEA) and Sacramento(SMF).  Seemingly a major business route, the entry of Southwest had the same effects.  The year before Southwest’s entry the average PDEW was 183.2, but graph “SEA-SMF Fares and PDEW” illustrates, the year Southwest began flying between those two cities, the overall average grew to 355.  In the succeeding years average PDEW ballooned to and in 1995 and 1996, respectively.  After 1996 the numbers seem to level off.  The difference along this route is that, even though Southwest’s own average PDEW grew from 68.8 in their first year in the market to by 1997, the overall market share by their fourth year of flying this route was far less than that of the BWI-SDF route, a much lower 32 percent. 
Southwest continued to seemingly create a market out of nothing in 1995 when it began flying between Boise, Idaho(BOI) and Reno, Nevada(RNO).  This was the result of the acquisition of another airline, yet the market was fairly stale before Southwest began to operate between the two cities.  An average PDEW of 16 was being grabbed before Southwest’s entry and upon its entry, the overall average grew to 47.4, followed by continued growth to an average of 77.3 in 1998.  In this case however Southwest had virtually 100% of the passenger by their fourth year in the market.
However, the effect is not the same across the board.  An example is the Houston, Texas (HOU) and Chicago-Midway(MDW) route added in 1995.  The PDEW actually shrank from an overall average of the year before Southwest added the route to an average of by its 4th year of operating between the two airports.  Southwest’s own average PDEW never did experience a giant leap, as graph “HOU-MDW Southwest Fares and PDEW”  illustrates.
3.1 Market Fare Results
As was discussed earlier, the significant change in air fares is also a major factor of the “Southwest Effect”.  The same city pairs were compiled and analyzed in order to see if Southwest has a profound effect on fares on a particular route.  Many airlines use the tactic of decreasing fares when entering into a new city, or add a new route, however, Southwest’s fares seem to stay low and do not increase significantly throughout the years used in this study. Taking a look at the same routes that were analyzed for PDEW effects, the consequences of Southwest entering a market can be seen.
Graph “BWI-SDF Fares and PDEW”, shows the steep decline of fares between BWI and SDF.  The initial average overall fare of $ the year before Southwest’s entry(1993) is significantly altered with the arrival of Southwest, and in 1994 the average overall fare dropped to $49.13.  This could simply be seen as a tactic to gain overall market share, but if you take a look at only Southwest’s fares over the next four years, as illustrated in graph “BWI-SDF Southwest Fares and PDEW”, Southwest’s initial average fare of $43.05 for that year only climbs $10.00 over the following three years.  It is important to note that it seems that Southwest does not have any major competitors at BWI, where the carrier is actually competing with the surrounding airports, for example, Washington-Dulles International and Reagan National airports.
Furthermore on the BOI-RNO route, where it was mentioned earlier that Southwest seemingly created a market, the same effect can be observed.  The year before Southwest began service along this route the average fare for a passenger was $   During Southwest’s first year of serving this route the overall average fare dropped to $59.42.  Over the following three years Southwest did not raise their average fare over $54.00 even though the carrier’s market share was near 100 percent. 
Between the cities of Seattle and Sacramento the fares definitely show a significant drop over pre-Southwest numbers even though as was mentioned earlier, Southwest never really gained as large of a market share in the years analyzed.  An average fare of $ was being asked in 1993, but the year Southwest entered the market, the overall average fare dropped to $71.06 followed by an overall average fare of $56.43 in the year following Southwest’s entry(1995).  In the three years following their entrance into the market, Southwest raised their average fare to a high of $62.99 in 1998. 
Southwest did not seem to have a profound effect on the PDEW between HOU and MDW.  The fares between the two destinations were never really affected either.  In 1994, the year before Southwest began flying this route the overall average fare was $ for the year.  Compare that to one year later when Southwest opened service along the route and you will see a rise in overall average fare to $   In succeeding years there is a drop in the overall average to $ followed by an increase in the overall average to $ and $ in 1997 and 1998, respectively.  Southwest’s average fare never dropped below $100 in the four years after its entry.
4.0 Conclusion
Mentioned earlier was a small look into what effect Southwest can have on an airport.  The fact that the airline itself can attract passengers across the borders into New York State just to take advantage of their service is somewhat compelling.  Whether passengers are taking advantage of Southwest’s fares, schedule, or route structure is unclear and not important.  The fact that the brand name attracts individuals from hours away is.  One article brings this into perspective as it states that, “Up to 40 per cent of the seats on Southwest’s popular Las Vegas run are filled by Canadians.”(Pigg,2002, Pg. 1)  Speculation of course, but airports north of the border would seem to be paying some sort of price for this.  Not just one airport either, the article goes on to mention some individuals from Montreal drive up to 4-hours to Albany, NY to take advantage of the Southwest service.
The idea of Southwest taking passengers from other airports is a trend that would seemingly die down as Southwest adds those other airports to its schedule.  One problem with that is that it cannot add every airport.  Take the case of Harrisburg, Pennsylvania as mentioned earlier in this paper.  While they are losing traffic to BWI, ninety miles away, they are also unfortunately only ninety miles away from Philadelphia.  Why is this important?  Well, this year Southwest announced it was beginning service in and out of Philadelphia.  Unfortunately there are more hard times ahead for Harrisburg, Pennsylvania. (“Harrisburg, PA, Airport Battles ‘Southwest Effect’”,2001, Pg. 1) 
It is tough to measure the impact Southwest has on other airports as many other factors come in to play.  Some airports still claim that there is no impact and that September 11, 2001 is still affecting them, while others openly admit that Southwest and other low-cost carriers do have an affect.
4.1 Load Factors
In 2003 Southwest reported a load factor of 65.9 percent in their operations.  The DOT reports an overall load factor for the past year at 70.2percent.  As averages, the Southwest is somewhat lower than the nationwide domestic average in the past year.( 2003; )  Why would an airline that boasts such success be filling its planes with fewer passengers?  The common argument is that Southwest looks to discourage other airlines from entering their markets by showing that there are no passengers to be had along this route.    Another possible theory why is that with a lower load factor across your network, you theoretically will always have room for walk-up passengers.  What comes with walk-up passengers?  Walk-up prices, meaning the airline can charge a full fare for the room that they have and another airline doesn’t.  If a displaced passenger can come to an airline’s counter and be guaranteed a seat on an aircraft without having to sit stand-by for hours with another carrier, an airline can charge full price.  If it were possible to prove that Southwest has more walk-up passengers on board than any other airline, then this theory may be true.
4.2 Questions Left Open
This paper attempts to answer many of the questions surrounding the “Southwest Effect”.  The analysis still leaves open many questions. 
It must be asked whether or not the “Southwest Effect” will continue throughout the expansion of the airline’s network.  Southwest from here on out can reasonably hide behind the title of low-cost carrier and offer low airfares to many destinations, all the while taking that title into new cities and grabbing up passengers based on its history, not on beating a competitor’s offer.  In Hollywood they call it type-casting when an actor/actress can only play one particular role.  Weird as it may seem, has Southwest been type-casted and no matter if they offer a lower fare they will always gain a substantial market share?
If the “Southwest Effect” does continue throughout its future expansion, is it worth while for airports to spend loads of marketing resources and attract Southwest to their airport?  On one side if the passenger flow through an airport always increases with the arrival of Southwest then of course it would be worth it in the long run.  On the other hand, if Southwest arrives on the seen and drives its competitors out, is that necessarily a good thing for an airport?
4.3 Fares and PDEW
The effect that Southwest has on a market upon entry can be seen by the analysis of fares and PDEW.  On the other hand, there are many factors that remain uncovered when simply pulling data from a database. Southwest has many times been credited with increasing the PDEW on many routes.  This could be for several different reasons.  First, there may have simply not been any service on a particular route before their entry.  Second, smaller aircraft may have been utilized on a route with very low frequency before Southwest began flying the route.  Finally, with the entry of Southwest, lower fares and increased frequency may attract more passengers to a particular route. This could possibly be because Southwest was the first to offer non-stop service along these routes or possibly the airline strategically attracted these passengers knowing their was a niche within a market that had yet to be discovered.  Are there other reasons why passenger traffic increased during Southwest’s entry?
The HOU-MDW route seemed to be one of few anomalies in this study.  The environmental factors surrounding the HOU-MDW route may be such that Southwest never did enter this market and seemingly create a market out of nothing, but they did gain a majority of the passengers along the route yielding a 92 percent share of the passengers between the two airports.  Whether this is significant or not, given that both cities have multiple airports that may be used by airlines, Southwest doesn’t seem to have the same effect on every one of their routes. Why is the HOU-MDW market so different than many others in Southwest’s system?  There may have been a different strategy as far as entering the market for Southwest.  The carrier may have simply noticed a lack of capacity among the other carriers between the two cities, no matter which airport it served, and decided to capitalize and gain passengers by simply offering capacity to the market.
An analysis of the SEA-SMF route showed that Southwest was unable to grab a significant market share by its 4th year of operations along the route.  This could possibly be explained by far more competition along that route than for example, BWI-SDF, given that airlines have only on airport to operate out of Seattle compared to the multiple choices of large airports in the Washington, D.C. area.
This paper simply set out to answer the question on whether or not the “Southwest Effect” exists.  A look at the data shows a definite trend throughout Southwest’s network that seems to show evidence of some sort of effect.  However, it must be stated that with the growing popularity of low-cost carriers this effect will be less and less about just Southwest in the future and more and more about low-cost carriers as a whole.  The effect may always be known as the “Southwest Effect”, but the term will slowly grow to encompass the effects of the entry of all low-cost carriers.
References
Alexander, K. (2001).  Can Southwest Keep Flying High?  The Washington Post.
Air Traffic Statistics and Airline Financial Statistics,2004, from the World Wide Web,
Harrisburg, PA, Airport Battles ‘Southwest Effect’ (June,12,2001). Airport, paragraph 2
Hopgood, M. H. (1999).  Southwest Has The Ticket For Business. The Hartford Courant. Paragraph e 10
Lakamp, P. (2000). Southwest Taking Skies By Storm. Buffalo News
Maurer, M. (1993). Southwest Beating Major Airlines in Many Markets. Tulsa World
Pigg, S. (2002)  Bargain’s in Buffalo; Toronto fliers are Finding the Drive Across The Line Worthwhile In The Search For Low-Cost Air Travel. Toronto Star.
Reeves, F.  (2003).  Analysts Say Southwest’s Move to Philadelphia Puts US Airways in Peril.  Knight Ridder Tribune Business News
Southwest Airlines Flourishes in Era of Deregulation. (Apr. 18, 2001), PR Newswire.
Southwest Airlines-Press Release,2004, from the World Wide Web,
Spagat, E.  (2002).  Southwest Begins Nonstop Transcontinental Flights.  The Wall Street Journal.
U.S. Department of Transportation (1993).  The Airline Deregulation Evolution Continues, The Southwest Effect.  Office of Aviation Analysis, Washington D.C.
Source: Southwest Airlines: An In-Depth Review

25. How might the 3 C’s vary by country?
Mary Kay in China versus US
Walmart in Germany versus US
Also what works in one country, doesn’t necessarily work in another.
3C’s analysis is also useful to understand the rationale for a strategic action: Why Wal-Mart quitted Germany?
Customers: very price-focused and would rather drive to a different store if they know they can buy something cheaper.
Competition: National discounters (Aldi, for example carries private labels of very high quality, limited assortment but high quality; very good relationship with suppliers (doesn’t change terms, trusted by suppliers), financially strong, shops are very small, people in registers are amazingly fast (used to memorize prices, faster than scanning), very crowded marketplace) offering the same products at competitive prices. Many, many grocery stores, operating at low margins.
Company: stores outside of town centers, employees required to smile and heartily greet customers.
An example getting the 3C’s wrong:
Die preise bleiben unten. Immer!
The prices remain down. Always!
Press/
By MARCUS KABEL AP Business Writer
Wal-Mart quits Germany, focuses on China
JUL. 28, :49 P.M. ET Wal-Mart Stores Inc. is ending its loss-generating business in Germany just two months after leaving South Korea in what analysts welcomed as a move to focus resources on expanding in more profitable international markets like China and Latin America.
Wal-Mart said Friday it plans to sell its 85 stores in Germany to rival Metro AG, ending a nearly decade-long effort by the world's largest retailer to crack the market in Europe's biggest economy.
Terms were not disclosed, but the Bentonville, Ark.-based retailer said it expects to incur a loss before taxes of about $1 billion related to the deal in its second quarter. The total cost of the German experiment is not known because Wal-Mart does not report individual financial results for each of its international markets. Wal-Mart has said over the years that its German operations were not profitable.
"They've been losing money there for years," said Robert Buchanan, head of retail analysis at A.G. Edwards & Sons.
Wal-Mart entered the German market in 1997 with the acquisition of the Wertkauf and Interspar hypermarket chains. But Wal-Mart's German stores, which employ 11,000 people, have struggled to break into the local market.
Sy Schlueter, chief executive of investment house Copernicus in Hamburg, said Wal-Mart had trouble winning over German consumers, who tend to be very price-focused and would rather drive to a different store if they know they can buy something cheaper. National discounters such as Lidl GmbH and Aldi Einkauf GmbH put the heat on Wal-Mart's sales, he said, by offering the same products at competitive prices.
Further, Schlueter said consumers rejected some of Wal-Mart's signature features, like stores outside of town centers, employees required to smile and heartily greet customers, or baggers at checkouts.
Patricia Edwards, a portfolio manager and retail analyst at Wentworth, Hauser & Violich in Seattle, which manages $8.2 billion in assets and holds 51,000 Wal-Mart shares, said Wal-Mart can use the money it was spending in Germany to fund expansion elsewhere.
"At some point it feels really good to stop beating your head against the concrete. That's a good thing, because it means that they're being much more logical about their growth and taking into consideration shareholder returns," Edwards said.
Buchanan said another candidate for withdrawal is Argentina, where Wal-Mart has 11 stores. It either needs to make an acquisition to gain scale and market share or pull out, he said.
In May, Wal-Mart left the highly competitive South Korean market.
Wal-Mart's international division accounted for about 20 percent of last year's overall net sales of $312.4 billion.
"As we focus our efforts on where we can have the greatest impact on our growth and return on investment strategies, it has become increasingly clear that in Germany's business environment, it would be difficult for us to obtain the scale and results we desire," Michael Duke, Wal-Mart's vice chairman in charge of international operations, said in a statement.
Deutsche Bank analyst William Dreher Jr. said the German exit was consistent with Wal-Mart's renewed focus on improving returns.
"We see today's announcement as a net positive for the company, as it should free up time and capital for better growth opportunities, particularly in Asia and Latin America," Dreher said in a research note.
Wal-Mart has set its eyes on expanding its existing presence in Asia and Latin America. Besides Germany, its only European presence is subsidiary Asda in Britain.
In China, which has long been a major supplier of its products, it has 56 stores and plans to open 20 more stores this year.
Wal-Mart has not said how many stores it wants there in the long term but did say in March it could hire up to 150,000 employees in China over five years, five times its current work force of about 30,000.
Late last year Wal-Mart bought 140 Sonae stores in Brazil and increased its stake to a majority in Japan's Seiyu Ltd., which has 405 stores.
This year it took a majority stake in Central American Retail Holding Co, which it first bought into last September. CARHCO is Central America's leading retailer with 375 supermarkets and other stores in Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica.
It is also eyeing India if that country drops legal barriers to large foreign retailers.
Under the proposed German deal, Metro will take over 19 pieces of Wal-Mart real estate and lease the rest of the locations. The deal is subject to approval by authorities.
The stores, which had sales near 2 billion euros ($2.55 billion) in 2005, will be incorporated into Metro's Real Hypermarket brand.
While financial terms of the deal were not disclosed, Duesseldorf-based Metro said it would book a one-time gain from the acquisition as the assets are worth more than the purchase price
APRIL 11, EUROPEAN BUSINESS Wal-Mart: Struggling In Germany With discounters already dominating the market, the American giant is in the unaccustomed role of pipsqueak To American eyes, the new ethics manual is standard stuff. But when Wal-Mart Stores Inc. (WMT ) distributed the newly translated code to German employees a few weeks ago, it caused a furor. They read a caution against supervisor-employee relationships as a puritanical ban on interoffice romance, while a call to report improper behavior was taken as an invitation to rat on co-workers. "They have to communicate better," says Ulrich Dalibor, an official at the ver.di service-workers union, which represents German employees of the Bentonville (Arkansas)-based retailer. No kidding. Seemingly surprised Wal-Mart officials said they have nothing against romance -- plenty of Wal-Mart co-workers have married, the company notes. And reporting lawbreaking is just good citizenship, it said. But to no avail. The ethics-code flap, which has prompted a flurry of negative headlines in the local press, is another sign that Wal-Mart doesn't quite get the $370 billion German retail market. Since entering the country in late 1997, Wal-Mart has captured just 2% of German food sales, or $3.2 billion annually, estimates Columbus (Ohio)-based market watcher Retail Forward Inc. "They are really just a secondary player here," says Sirko Siemssen, a retail specialist at Mercer Management Consulting (MMC ) in Munich. Wal-Mart a secondary player? To Americans accustomed to the chain's relentlessly successful expansion, that's hard to believe. But in Germany the store count has slipped from 95 Supercenters in 2002 to 91, a fifth the number of rival Kaufland. Wal-Mart has recently made headway in upgrading store interiors and paring losses once estimated in the hundreds of millions of dollars. The German operations are closer to being profitable after achieving positive cash flow in 2004, according to Wal-Mart. "We are pushing ahead in a turmoil-shaken market where overall consumer spending is on the decline," Kay Hafner, president and managing director of Wal-Mart Germany, says in an . But the company is still a long way from reaching the critical mass it needs to be significantly profitable in Germany, analysts say. (Wal-Mart does not break out financial performance by country). CHASING ALDI  The chain to beat is Aldi, which features a limited selection of high-quality but very inexpensive products. It boasts a 19% share of the market through its network of some 4,000 stores, which are much smaller than Wal-Mart's. Even when Wal-Mart can undercut Aldi on price, the differences are often too slight to motivate consumers to travel the extra distance to a Supercenter, analysts say. Both Wal-Mart and Aldi recently ran specials on kids' inline skates, for example, but Aldi's were more than $6 cheaper. "In the U.S., Wal-Mart has the image of being the price leader, but Aldi owns that territory in Germany," says Wolfgang Twardawa, director of consumer research at Nuremberg-based market researcher GfK. No doubt, Wal-Mart's mind-boggling annual turnover of $285 billion gives it a scale advantage on globally sourced products such as Chinese-made toys and clothing. But that purchasing clout does not extend to regional brands of bratwurst and beer. "Food is primarily local, and even in nonfood the assortment is different," says Andreas W. Bauer, a partner at Roland Berger Strategy Consultants in Munich. Wal-Mart's German selection is dominated by European brands, from Fischer bicycles to Vernel fabric softener. The American company has been showing more savvy about the local market since installing a German chief. Under Hafner, it caters to local tastes better -- for example, recently offering a special on fresh carp, an Easter specialty, for $7.54 per kilo. It's also introducing private labels such as Cosies baby products and Equate cosmetics. Company officials say the plan is to concentrate on improving distribution efficiency and building relationships with local suppliers, then to consider expanding. But the ethics-code fiasco shows that Wal-Mart is still prone to do things the Wal-Mart way without enough consideration to local customs. Rivals continue to chuckle about the customer reaction when, initially, Wal-Mart offered services such as grocery bagging. It turned out that Germans didn't want strangers handling their groceries. And when clerks followed orders to smile at shoppers, male customers took it as a come-on. Also, German companies are used to dealing with workers' councils, which are easy to organize under German law. Some even say the co-determination system improves communication with employees. That's likely to be a tough sell in Bentonville, though. Indeed, Wal-Mart clashes regularly with the ver.di union, which says it has organized every Supercenter in Germany. According to the union, Wal-Mart repeatedly ignores German co-determination rules, which give employees a say in corporate decisions that affect working conditions. The union also complains that Wal-Mart has not kept it adequately informed about store closings. Company officials say they comply with labor laws. What Wal-Mart really needs is more stores so that it can advertise more efficiently and exert more purchasing power. Yet building new Supercenters, which in Germany average 12,960 square meters, is a laborious process because of restrictive building codes and a dearth of locations. Buying a competitor would build critical mass fast, but there's no sign of that yet. Wal-Mart watchers don't expect the company to leave the country, but unless it can figure out the Germans, it won't be a local success story, either. By Jack Ewing in Frankfurt

26. Combining the 3 C’s
Wal*Mart quits Germany (85 stores, $2.55 billion, 2006):
Customers?
Competition?
Company?
3C’s analysis is also useful to understand the rationale for a strategic action:
Walmart is very successful in the US, but why Wal-Mart quitted Germany?
Customers: very price-focused and would rather drive to a different store if they know they can buy something cheaper.
Competition: National discounters (Aldi, for example carries private labels of very high quality, limited assortment but high quality; very good relationship with suppliers (doesn’t change terms, trusted by suppliers), financially strong, shops are very small, people in registers are amazingly fast (used to memorize prices, faster than scanning), very crowded marketplace) offering the same products at competitive prices. Many, many grocery stores, operating at low margins.
Company: stores outside of town centers, employees required to smile and heartily greet customers.
Even worse, the results of several independent
surveys, commissioned by newspapers or conducted by Stiftung Warentest,
a highly influential government-sponsored consumer protection agency, and
the Gesellschaft für Konsumforschung (GfK), Germany’s biggest market-research
institute, demystified Wal-Mart’s fundamental value proposition “everyday
low prices” as a (largely) empty promise: They showed that Wal-Mart had
not been able to systematically undercut Aldi and the other hard discounters, and
that, by contrast, its assortment was not even substantially cheaper then the traditional
retailers’ (Rewe, Edeka etc.) offerings.
An example getting the 3C’s wrong:
Die preise bleiben unten. Immer!
The prices remain down. Always!
Press/
By MARCUS KABEL AP Business Writer
Wal-Mart quits Germany, focuses on China
JUL. 28, :49 P.M. ET Wal-Mart Stores Inc. is ending its loss-generating business in Germany just two months after leaving South Korea in what analysts welcomed as a move to focus resources on expanding in more profitable international markets like China and Latin America.
Wal-Mart said Friday it plans to sell its 85 stores in Germany to rival Metro AG, ending a nearly decade-long effort by the world's largest retailer to crack the market in Europe's biggest economy.
Terms were not disclosed, but the Bentonville, Ark.-based retailer said it expects to incur a loss before taxes of about $1 billion related to the deal in its second quarter. The total cost of the German experiment is not known because Wal-Mart does not report individual financial results for each of its international markets. Wal-Mart has said over the years that its German operations were not profitable.
"They've been losing money there for years," said Robert Buchanan, head of retail analysis at A.G. Edwards & Sons.
Wal-Mart entered the German market in 1997 with the acquisition of the Wertkauf and Interspar hypermarket chains. But Wal-Mart's German stores, which employ 11,000 people, have struggled to break into the local market.
Sy Schlueter, chief executive of investment house Copernicus in Hamburg, said Wal-Mart had trouble winning over German consumers, who tend to be very price-focused and would rather drive to a different store if they know they can buy something cheaper. National discounters such as Lidl GmbH and Aldi Einkauf GmbH put the heat on Wal-Mart's sales, he said, by offering the same products at competitive prices.
Further, Schlueter said consumers rejected some of Wal-Mart's signature features, like stores outside of town centers, employees required to smile and heartily greet customers, or baggers at checkouts.
Patricia Edwards, a portfolio manager and retail analyst at Wentworth, Hauser & Violich in Seattle, which manages $8.2 billion in assets and holds 51,000 Wal-Mart shares, said Wal-Mart can use the money it was spending in Germany to fund expansion elsewhere.
"At some point it feels really good to stop beating your head against the concrete. That's a good thing, because it means that they're being much more logical about their growth and taking into consideration shareholder returns," Edwards said.
Buchanan said another candidate for withdrawal is Argentina, where Wal-Mart has 11 stores. It either needs to make an acquisition to gain scale and market share or pull out, he said.
In May, Wal-Mart left the highly competitive South Korean market.
Wal-Mart's international division accounted for about 20 percent of last year's overall net sales of $312.4 billion.
"As we focus our efforts on where we can have the greatest impact on our growth and return on investment strategies, it has become increasingly clear that in Germany's business environment, it would be difficult for us to obtain the scale and results we desire," Michael Duke, Wal-Mart's vice chairman in charge of international operations, said in a statement.
Deutsche Bank analyst William Dreher Jr. said the German exit was consistent with Wal-Mart's renewed focus on improving returns.
"We see today's announcement as a net positive for the company, as it should free up time and capital for better growth opportunities, particularly in Asia and Latin America," Dreher said in a research note.
Wal-Mart has set its eyes on expanding its existing presence in Asia and Latin America. Besides Germany, its only European presence is subsidiary Asda in Britain.
In China, which has long been a major supplier of its products, it has 56 stores and plans to open 20 more stores this year.
Wal-Mart has not said how many stores it wants there in the long term but did say in March it could hire up to 150,000 employees in China over five years, five times its current work force of about 30,000.
Late last year Wal-Mart bought 140 Sonae stores in Brazil and increased its stake to a majority in Japan's Seiyu Ltd., which has 405 stores.
This year it took a majority stake in Central American Retail Holding Co, which it first bought into last September. CARHCO is Central America's leading retailer with 375 supermarkets and other stores in Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica.
It is also eyeing India if that country drops legal barriers to large foreign retailers.
Under the proposed German deal, Metro will take over 19 pieces of Wal-Mart real estate and lease the rest of the locations. The deal is subject to approval by authorities.
The stores, which had sales near 2 billion euros ($2.55 billion) in 2005, will be incorporated into Metro's Real Hypermarket brand.
While financial terms of the deal were not disclosed, Duesseldorf-based Metro said it would book a one-time gain from the acquisition as the assets are worth more than the purchase price
APRIL 11, EUROPEAN BUSINESS Wal-Mart: Struggling In Germany With discounters already dominating the market, the American giant is in the unaccustomed role of pipsqueak To American eyes, the new ethics manual is standard stuff. But when Wal-Mart Stores Inc. (WMT ) distributed the newly translated code to German employees a few weeks ago, it caused a furor. They read a caution against supervisor-employee relationships as a puritanical ban on interoffice romance, while a call to report improper behavior was taken as an invitation to rat on co-workers. "They have to communicate better," says Ulrich Dalibor, an official at the ver.di service-workers union, which represents German employees of the Bentonville (Arkansas)-based retailer. No kidding. Seemingly surprised Wal-Mart officials said they have nothing against romance -- plenty of Wal-Mart co-workers have married, the company notes. And reporting lawbreaking is just good citizenship, it said. But to no avail. The ethics-code flap, which has prompted a flurry of negative headlines in the local press, is another sign that Wal-Mart doesn't quite get the $370 billion German retail market. Since entering the country in late 1997, Wal-Mart has captured just 2% of German food sales, or $3.2 billion annually, estimates Columbus (Ohio)-based market watcher Retail Forward Inc. "They are really just a secondary player here," says Sirko Siemssen, a retail specialist at Mercer Management Consulting (MMC ) in Munich. Wal-Mart a secondary player? To Americans accustomed to the chain's relentlessly successful expansion, that's hard to believe. But in Germany the store count has slipped from 95 Supercenters in 2002 to 91, a fifth the number of rival Kaufland. Wal-Mart has recently made headway in upgrading store interiors and paring losses once estimated in the hundreds of millions of dollars. The German operations are closer to being profitable after achieving positive cash flow in 2004, according to Wal-Mart. "We are pushing ahead in a turmoil-shaken market where overall consumer spending is on the decline," Kay Hafner, president and managing director of Wal-Mart Germany, says in an . But the company is still a long way from reaching the critical mass it needs to be significantly profitable in Germany, analysts say. (Wal-Mart does not break out financial performance by country). CHASING ALDI  The chain to beat is Aldi, which features a limited selection of high-quality but very inexpensive products. It boasts a 19% share of the market through its network of some 4,000 stores, which are much smaller than Wal-Mart's. Even when Wal-Mart can undercut Aldi on price, the differences are often too slight to motivate consumers to travel the extra distance to a Supercenter, analysts say. Both Wal-Mart and Aldi recently ran specials on kids' inline skates, for example, but Aldi's were more than $6 cheaper. "In the U.S., Wal-Mart has the image of being the price leader, but Aldi owns that territory in Germany," says Wolfgang Twardawa, director of consumer research at Nuremberg-based market researcher GfK. No doubt, Wal-Mart's mind-boggling annual turnover of $285 billion gives it a scale advantage on globally sourced products such as Chinese-made toys and clothing. But that purchasing clout does not extend to regional brands of bratwurst and beer. "Food is primarily local, and even in nonfood the assortment is different," says Andreas W. Bauer, a partner at Roland Berger Strategy Consultants in Munich. Wal-Mart's German selection is dominated by European brands, from Fischer bicycles to Vernel fabric softener. The American company has been showing more savvy about the local market since installing a German chief. Under Hafner, it caters to local tastes better -- for example, recently offering a special on fresh carp, an Easter specialty, for $7.54 per kilo. It's also introducing private labels such as Cosies baby products and Equate cosmetics. Company officials say the plan is to concentrate on improving distribution efficiency and building relationships with local suppliers, then to consider expanding. But the ethics-code fiasco shows that Wal-Mart is still prone to do things the Wal-Mart way without enough consideration to local customs. Rivals continue to chuckle about the customer reaction when, initially, Wal-Mart offered services such as grocery bagging. It turned out that Germans didn't want strangers handling their groceries. And when clerks followed orders to smile at shoppers, male customers took it as a come-on. Also, German companies are used to dealing with workers' councils, which are easy to organize under German law. Some even say the co-determination system improves communication with employees. That's likely to be a tough sell in Bentonville, though. Indeed, Wal-Mart clashes regularly with the ver.di union, which says it has organized every Supercenter in Germany. According to the union, Wal-Mart repeatedly ignores German co-determination rules, which give employees a say in corporate decisions that affect working conditions. The union also complains that Wal-Mart has not kept it adequately informed about store closings. Company officials say they comply with labor laws. What Wal-Mart really needs is more stores so that it can advertise more efficiently and exert more purchasing power. Yet building new Supercenters, which in Germany average 12,960 square meters, is a laborious process because of restrictive building codes and a dearth of locations. Buying a competitor would build critical mass fast, but there's no sign of that yet. Wal-Mart watchers don't expect the company to leave the country, but unless it can figure out the Germans, it won't be a local success story, either. By Jack Ewing in Frankfurt

27. Integration 4P’s  3C’s
With an understanding of the company situation, the next step is to think how to use each of the elements of the Marketing mix to address the company’s problems / opportunities.

28. 3C’s  4P’s Integration: What’s the right price for Angiomax?
Should Team Sameer use a traditional promotional approach?
Should XM air ads?
Should Starbucks invest in improving its customer service?
How should Ford promote the adoption of the Ford Ka?
Should Unilever launch a new product for the low income segment in Brazil?
All these questions have to do with 4P’s: Product, Price, Channel, Promotion (e.g., APP)?
All the answers should be derived from 3C’s analysis.
In some courses, you can learn about different topics separately or sequentially.
In marketing, any lever can affect all else.

29. 4P’s: Marketing Planning - Price, Promotion, Place, Product
4P’s: Marketing Planning - Product, Price, Place, Promotion
4P’s: Marketing Planning - Price, Promotion, Place, Product
I am briefly going to give you an overview of the type of questions we’ll cover. So that you see how all the pieces fit together.

30. Frameworks: 4P’s - Product
Define the product
Core benefit—essence
Basic, Expected, Augmented and Potential Product
First Mover Advantage
How might the Medicines case differ if the product was not a new product?
Which stage? Intro.
Goals: Awareness and trial.
Introduction: Awareness and trial (promote adoption)
Growth: Share maximization (build customer base)
Maturity: Profit maximization (defend market share, improve product)
Decline: Harvest (do not invest, milk or divest)

31. Frameworks: 4P’s – Pricing
Price is the only P that captures value
Small changes in price lead to major profit impact
The issues
What is the value to customers of the benefits the product provides?
How much does it cost to deliver these benefits?
How much do or will customers have to pay to get these same or substitute benefits elsewhere (i.e., from competitors)?
How could you define the minimum price that the Medicines Company should charge?
How could you define the maximum price that the Medicines Company should charge?

32. Importance of Pricing (Price leverage for selected firms)*
1% improvement in price at
Creates operating profit improvement of:
Philips
28.7%
26%
17.5%
Why?
More generally when would you expect to see prices to be more important?
Then show the math:
Profit Improvement percentage after changing price by dP: dP q / (p-c)q –FC
= dP / (p – c – FC/q)
I f (p- c) is small or FC/q are big => big impact (Phillips).
Coke has very high margins and it’s fixed costs must be reasonably small.
What are implications for figuring out what competition might do?
Also note that it is really more complex since Q and C are often a function of price.
16.7%
6.4%
*From Dolan and Simon (1996)

33. Frameworks: 4P’s – Place
Channels exist when they are more efficient than direct distribution:
Channel decisions/issues:
Channel depth
Channel breadth
Channel conflict/coordination M C D
When is it a good idea to sell directly to consumers?
Channels add value:
More efficient way to reach consumers
Brand associations, selling support
Information
Manufacturer
Consumers
Manufacturer Store
Retailer

34. Frameworks: 4P’s - Promotion
The promotional plan:
Target market
Objectives
Message
Media Mix
Budget
Measure the results
Coordinate the process
Key: have a good understanding of what are the objectives for a promotion.
What was the goal in the case of Ford Ka?
Suppose you would like to run an promotion plan for Angiomax. What should be the goal? Back to the goal of awareness mentioned when discussing product lifecycle.
Be specific:
Indicate quantitative targets, how they will be measured.
Awareness
Interest
Desire
Action

35. Promotion and Brand Associations
Non-conscious elements of the logo can be used to promote a brand’s image: speed, reliability.
Notice the white arrow formed between the letters “E” and “x”.

36. Profitability (A Reality Check)
Are assumptions realistic?
Breakeven analysis
Can we sell breakeven volume at given price?
How are other company businesses affected (cannibalization)?
Now you have product, price, promotion and distribution, does it all make sense?
A good marketing plan is a profitable plan => we need to do the calculations, when doing a case we’ll need to consider some numbers.
“The pro forma accounting is a statement of the company's financial activities while excluding "unusual and nonrecurring transactions" (unusual and nonrecurring expenses) when stating how much money the company actually made. Expenses often excluded from pro forma results include company restructuring costs, a decline in the value of the company's investments, or other accounting charges, such as adjusting the current balance sheet to fix faulty accounting practices in previous years.”