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CASE 1–1 Starbucks – Going Global Fast 1–2 Nestlé – The Infant Formula Incident 1–3 Coke and Pepsi Learn to Compete in India 1-4 Marketing Microwave Ovens to a New Market Segment 2–1 The Not-So-Wonderful World of EuroDisney 2-2 Cultural Norms, Fair and Lovely, and Advertising 2–3 Starnes-Brenner Machine Tool Company – To Bribe or Not to Bribe 2-4 Ethics and Airbus* 2–5 Coping with Corruption in Trading with China 2–6 When International Buyers and Sellers Disagree 2-7 McDonald’s and Obesity 3-1 International Marketing Research at Mayo Clinic 3–2 Swifter, Higher, Stronger, Dearer 3-3 easyCar.com 3-4 4–1 4-2 4–3 4–4 4–5 4–6 4–7
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Marketing to the Bottom of the X Pyramid McDonald’s Great Britain – The Turn Around Tambrands – Overcoming Cultural Resistance Iberia Airlines Builds a BATNA Sales Negotiations Abroad for MRIs National Office Machines – Motivating Japanese Salespeople: Straight Salary or Commission? AIDS and Condoms X Making Social Responsibility and Ethical making Decisions: Selling Tobacco to Third-World*
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*There are three suggestions on using cases 2-4 and 4-7. (1) Have the students prepare the case in conjunction with the discussion of ethics and social responsibility in Chapter 5; (2) In a two stage approach, have the students prepare the case early in the semester after or during discussion of culture (Chapter 4) and business customs (Chapter 5) and then toward the end of the course after Chapter 17. Have them compare early recommendations with later recommendations. Discuss how attitudes have changed; (3) Have the students prepare the cases at the end of the semester after all text chapters have been read and discussed.
Case 1 – An Overview
1-1 Starbucks – Going Global Fast 1-2 Nestlé – The Infant Formula Incident 1-3 Coke and Pepsi Learn to Compete in India 1.4 Marketing Microwave Ovens to a New Market Segment
Case 2 – The Cultural Environment of Global Marketing
2-1 The Not-So-Wonderful World of EuroDisney 2-2 Cultural Norms, Fair and Lovely, and Advertising 2-3 Starnes-Brenner Machine Tool Company – To Bribe or Not to Bribe 2-4 Ethics and Airbus 2-5 Coping with Corruption in Trading with China 2-6 When International Buyers and Sellers Disagree 2-7 Mc Donald’s and Obesity
Case 3 – Assessing Global Market Opportunities
3-1 International Marketing Research at Mayo Clinic 3-2 Swifter, Higher, Stronger, Dearer 3-3 easyCar.com 3-4 Marketing to the Bottom of the Pyramid
Case 4 – Developing global Marketing Strategies
4-1 McDonald’s Great Britain-The Turn Around
4-2 Tambrands – Overcoming Cultural Resistance 4-3 Iberia Airlines Builds a BATNA 4-4 Sales Negotiations Abroad for MRIs 4-5 National Office Machines – Motivating Japanese Salespeople: Straight Salary or Commission? 4-6 AIDS and Condoms 4-7 Making Social Responsibility and Ethical making Decisions: Selling Tobacco to Third-World
CASE 1 AN OVERVIEW
Case 1 – An Overview
1-1 Starbucks – Going Global Fast 1-2 Nestlé – The Infant Formula Incident 1-3 Coke and Pepsi Learn to Compete in India 1-4 Marketing Microwave Ovens to a New Market Segment Case 1-1, Starbucks The Starbucks case is excellent examples of how Wall Street pushes retailers to over- extend by demanding fast growth. Maintaining historical 20% growth rates will be impossible in the future for the firm. During the last 10 years it has been riding a wave of changes in consumer behavior and a booming economy that has allowed for such fast growth. Both “uncontrollables” always change over time. Going international will help the company, but rushing into international markets will hurt the company. Signs of problems are already manifesting themselves in declining sales and profits in Japan and the U.K. As the company has rushed into new markets it has seen initial interest and sales even in the traditional tea drinking countries (Japan, the U.K., and China), but because of differences in consumer tastes and behaviors same store sales have slowed. 1. Controllables – the pace of entry (and growth), research, pricing, product line, places and methods of distribution, and promotion (advertising and personal selling). Indeed, most recently Starbucks is expanding both its product line and distribution channels in the tough Japanese market. Uncontrollabes – anti-Americanism, anti-globalism, terrorism, pirating and copying, competition generally (new competition in Japan from other “chill cup” producers), market saturation, consumer behavior differences and changes, health issues related to coffee consumption, economic cycles in demand and coffee supplies (prices), the attractiveness of it’s U.S. compensation plan depends on the direction of the stock market 2. Risks – all of the above. Particularly trying to meet Wall Street’s expectations for 20% annual growth. Lower profits overseas – must work with local partners. Difficulty of maintaining quality of customer service in most international markets. Decline in the economy – in U.S. or globally. Burning out the brand as did Izod in the 1980s – with ubiquity comes a loss of attractiveness. 3. Overall Strategy – the hyper-growth rates the company is trying to maintain will result in huge blunders in new markets. While we laud growth through international expansion, it must be careful growth based on research and experimentation (that is, a program of test marketing) in products and operations. Most recently, in a continuation of risky growth Starbucks is planning on entering the economically volatile Mexican market. 4. Japan – sales lagged until most recently. The firm seems to have solved its profitability problems with the stores. The company has been experimenting with a variety of ways to broaden the product line to include alcoholic beverages (perhaps coffee based) and hot food. Indeed, the firm test marketed alcoholic beverages at three stores in Seattle previously, but decided to close them.
But, the test marketing will be the key to finding the right product/service mix for Japan. Also, distribution channels may be experimented with as well. The company has recently put an operation in a car dealership. And, the Japanese love vending machines. Indeed, exploiting the brand in Japan may require a completely different operating philosophy given the substantial differences in consumer culture there. As outlined in the most recent press the firm now will test the strength of its brand in a new way, vending machine sales. We’re sure they’ve done extensive marketing research to back up this new strategy. However, we like the idea of expansion via more stores and improved operations. We will enjoy watching how things go for Starbucks in Japan. See articles by Geoffrey Fowler and Jason Singer and Martin Fackler in the July 14, 2003 issue of the Wall Street Journal, page B1.
Case 1-2 Nestlé – The Infant Formula Incident Summary of Case and Results In response to a pamphlet entitled “Nestlé Kills Babies,” published in 1974 by the Swiss consumer/activist group, Arbeitsgruppe Dritte Welt, Nestlé Alimentana filed a four-count libel suit against members of the organization. The pamphlet was a reprint of an earlier one entitled “Bottled Babies,” published by a similar British group. Both alleged that false advertising had prompted mothers in LDCs to use infant formula instead of breast feeding, and consequently caused the deaths of thousands of children. However, the original pamphlet had not mentioned Nestlé or any of the other companies by name, and thus did not raise the issue of libel. Three of the charges, which Nestlé subsequently withdrew, related to allegations made in the pamphlet about Nestlé’s promotional methods in LDCs. The fourth charge, which led to a judgment against thirteen members of the group in June 1976, focused on the defamatory title “Nestlé Kills Babies.” In his decision, the judge stated that the cause behind the injuries and deaths was not Nestlé’s products; rather, it was the unhygienic way they were prepared by end-users. Although Nestlé won its case, the firm’s victory was diluted by (1) having to pay one third of the court costs and (2) being told by the judge to change its marketing methods to prevent further misuse of its products. The defendants were ordered to pay $120 each in damages to Nestlé and two thirds of court costs. Suggestions Companies selling consumable products (foods, beverages, pharmaceuticals) to LDCs have long recognized the need to adapt their promotional techniques to their consumers who are, by and large, poor and illiterate. In recent years, one particular group of food producers—those firms making infant formula and other milk products—has come under severe attack by various religious, consumer and governmental organizations. Criticism focuses on two issues: (1) that companies allegedly use false advertising to induce mothers to substitute formula for their own milk, and (2) that firms are directly responsible when misuse of their products results in illness or death. The assault was dramatized in the recent Swiss case involving Nestlé Alimentana. The responses of milk product manufacturers have ranged from writing corporate policies on LDC marketing to organizing industry councils and holding meetings with pressure groups. But most significantly, companies have altered marketing practices in ways that other firms making consumable items should find instructive. These changes include
Tightening up direct selling methods. A common practice is to have “mother-craft nurses,”—local women who may be nurses, dietitians or midwives—visit clinics and homes to encourage doctors and consumers to use infant formula. Critics charge that these women are often unqualified to speak on nutrition and that they distort facts to make formula feeding more attractive than breast feeding. As a result, many firms now forbid representatives from discouraging breast feeding and demand that they go to clinics and homes only if invited or sent by a family doctor. Stressing nutritional training. Firms are improving the nutritional instruction given to representatives. In addition, promoters are providing consumers with educational presentations, including seminars, films and brochures. Such training not only combats misuse of products, but also benefits the manufacturer. For example, one corporation whose sales representatives in Indonesia conducted local demonstration on uses of a condensed-milk product found that the presentations accomplished several aims: (1) alerted the representative to problems people had in preparing and using the product, (2) served as a rough test market for the product and (3) helped to bolster the firm’s image. Controlling distributors’ promotional activities. Manufacturers selling milk products through distributors have often given them free rein over local advertising. Some corporate executives worry about becoming too closely associated with distributors’ advertising, fearing possible liability for erroneous claims made by distributors. However, such liability would be difficult to avoid in any situation involving a company’s trademarks and products. A few firms, recognizing this, are currently monitoring all new promotional campaigns of distributors. Curtailing mass media advertising. Several corporations that formerly advertised infant formula on TV, radio, billboards and newspapers are now relying solely on sales representatives. Improving labeling and directions for use. Some firms have revised package instructions to ensure safety. For example, Wyeth Laboratories’ X S-26 formula labels include the following: (1) comprehensive, easy-to-follow directions on preparing and storing the product (vital in areas lacking refrigeration and/or clean water), (2) a “suggested feeding table” giving the amount of formula and frequency of feedings according to an infant’s weight and age, (3) a statement in bold type stressing the importance of following directions carefully and (4) a statement on the preferability of breast feeding newborn babies and the proper role for prepared formula in an infant’s feeding. Developing promotional/instructional materials to help low-literacy users. The International Council of Infant Food Industries, formed in 1975, is studying ways to improve communication methods for use in areas of high illiteracy. Possibilities include cartoons, pictures, radio programs and even sound trucks. (Use of new informational materials would be subject to approval of local authorities.) Price of Social Responsibility For some firms, the cost of maintaining ethical standards is high. One large food company actually closed down its milk-processing plant in Pakistan because pasteurization laws were not being enforced, and local firms selling unpasteurized milk were gaining a competitive edge. Additionally, the quality of the firm’s product was tarnished by local consumers who frequently diluted the milk with polluted stream water to “stretch” it for their own use or for resale. In light of these problems, and others—such as the high cost of marketing and training, and the relatively low sales volume—some companies have contemplated withdrawing these products from LDC markets. However, the market potential for milk products in these countries is strong because of increasing populations and rising standards of living. In addition, the growing role of women in the labor force is creating a greater need for infant formulas. Thus, it appears that firms will remain in these markets.
Notes to Instructors The following considerations should be examined by the case discussants 1. The infant formula food was successful in certain countries and very detrimental in others. (Basically, the answer is in the controlled use by educated missionaries.) This may also indicate that reasonable use of the formula food and full use by medical and religious groups might be an answer, with monitored introduction to other areas. Education is a must. The boycott groups are well organized and use modern political pressure. In addition, they are getting strong media coverage. Nestlé is being isolated as the major contributor to this problem. Nestlé is considered a non-American company, and therefore, U.S. government loyalty may begin to wane. The longer the controversy carries on, the more costly the settlement will be. The cross-cultural aspects of product introduction and communication activities must be better planned and monitored. Corporate responsibility is not only what is defined by industry, but what is perceived by consumers. Strong external affair (outside public relations activities) programs must be closely coordinated and monitored by the Nestlé headquarters.
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The Nestlé infant formula controversy continues after more than twenty years. In a 1984 agreement with the International Nestlé Boycott Committee, Nestlé agreed to cease distribution of free and low-cost formula in developing countries, except in need. However, one Nestlé Infant Formula Audit Commission (NIFAC) alleges that a study conducted in 1989 in Mexico revealed that Institutions can have as much formula as they want and in many cases it [formula] is given to 100 percent of the children in developing countries. Nestlé claims it provides only small amounts of free and low-cost formula. Further, their sales of infant formula in developing countries is less than 1% of $46.3 billion 1990 sales. The problem according to Nestlé, is that when Nestlé stopped giving out free formula rival infant-formula makers increased their free distribution. For example, when Nestlé stopped free formula in Thailand in 1988, rival companies filled the void. In 1991, Nestlé announced it would stop all free and low-cost giveaways in developing countries except for the limited number of infants who need it.1 Just after Nestlé’s commitment to stop formula giveaways in developing countries, American Home Products, the second largest infant formula marketer, unveiled a plan to stop providing free and low-cost infant formula to developing countries as well. Nestlé and American Home have been under mounting pressure for defying the World Health Organization (WHO) guidelines by dumping large quantities of free and low-cost formula. In 1988, a Minneapolis-based adversary group launched a worldwide boycott against both companies. The companies say they have been in full compliance with the WHO code but that hospital administrators
Alix M. Freedman, to Curtail Infant Formula In Third World, The Wall Street Journal, January 30, 1991, A1.
interpret in need broadly and provide free and low-cost formula on request. The boycott has now spread to 16 countries. This step by the two companies is seen by some as an industry trend while others are more skeptical. In December 1991, Advertising Age reported that Nestlé began a series of advertisements advising women to breast-feed. Targeted at poor women who get free formula from the government, Nestlé has nothing to lose since they have no government contracts. The director of public affairs for Nestlé, said the new campaign is meant to promote breast-feeding to an undereducated audience.2 In the long run, they may gain if this advertising campaign helps polish their tarnished image. However, in another controversy, Nestlé has been accused of raising the specter of AIDS as a justification for bottle-feeding when the head of public relations at Nestlé UK told schoolchildren that the spread of AIDS in many African countries meant that mothers who are HIV positive “can’t then breast-feed because the baby will then run the risk of getting AIDS.” A few days later, the media reports were described as misleading and, further, Nestlé was not seeking to give the impression that HIV-infected mothers should not breast-feed. In response to an editorial critical of Nestlé’s alleged position on HIV and breast-feeding that appeared in an issue of a newsletter produced by a Nestlé shareholders’ association, a Nestlé vice president said that the association represented only about 100 out of the 100,000 shareholders and has no claim whatever to speak for Nestlé. He said the company is in full agreement with the official WHO recommendations which note that the large majority of babies breast-fed by HIV-infected mothers do not become infected through breast milk and which emphasizes that where the primary causes of infant deaths are infectious diseases and malnutrition, breast-feeding should remain standard advice. Regarding question 5 in the text, it will be quite important for Nestlé to cooperate with the local health and government officials IN EACH COUNTRY SEPARATELY in order to determine the best approach to handling the AIDS/infant formula problem. Each country has its own set of problems and circumstances and any promotional/advertising programs should be developed with much care. LOCALIZATION will be key. Films Available 1. The most complete discussion of the Nestlé infant formula controversy is now available in a CDROM format from the Council for Ethics in Economics, 125 E. Broad Street, Columbus, OH 43215–3605, (614) 221-8661, FAX (614) 221-8707, http://www.businessethics.org. Into the Mouths of Babes (CBS News, color, 35mm) is available through the National Council of Churches, Room 860, 475 Riverside Drive, New York, New York 10015. It is likely that a local chapter of INFACT, or a local third World Resources Center, will have a copy. Bottle Babies (Dir. Peter King, Teldok Films, 1975 color, 26 min.) is the film mentioned in the case, which heightened awareness of the issue. It is obviously oriented “against” the companies. Some current articles on this controversial subject that the Professor may want to have students read in preparation for this case discussion are: 1. “Tailors Marketing of Infant Formula to Meet WHO Code Demands,” Business International, April 30, 1982.
Bradley Johnson, Ads Pitch Breast-Feeding, Advertising Age, December 2, 1991, p. 40 and Vital Signs: A Medical Renegade Stands the System on Its Head; The Boycott Is Back, Health/Pac Bulletin, Fall 1990, V.20, No. 3 p. 42.
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James C. Baker, “The International Infant Formula Controversy: A Dilemma in Corporate Social Responsibility,” Journal of Business Ethics, #4, 1985, pp. 181–190. Thomas V. Greer, “The Future of the International Code of Marketing of Breast-milk Substitutes: The Socio-Legal Context,” International Marketing Review, Spring/Summer 1984, pp. 33–41. Two publications available from the company are excellent. They are: “The Dilemma of Third World Nutrition,” updated, 1985 and “The Role of Infant Formula in Developing Countries: The Resolution of a Conflict,” 1985. Both of these are available from: Coordination Center for Nutrition, Inc. 1025 Connecticut Avenue NW, Suite 707, Washington, DC 20036–(212) 7750180. Alix M. Freedman, To Curtail Infant Formula In Third World, The Wall Street Journal, January 30, 1991, A1. Alex M. Freedman, American Home Infant-Formula Giveaway to End, The Wall Street Journal, February 4, 1991, p. B4.g Bradley Johnson, Ads Pitch Breast-Feeding, Advertising Age, December 2, 1991, p. 40 and Vital Signs: A Medical Renegade Stands the System on Its Head; The Boycott is Back, Health/Pac Bulletin, Fall 1990, V. 20, No. 3, p 42. Prakash Sethi, Multinational Corporations and the Impact of Public Advocacy on Corporate Strategy; Nestlé and the Infant Formula Controversy (Norwell, MA: Kluwer Academic Publications, 1994) If you are able to show one of the videos above an excellent contemporary article arguing in favor of Nestlé and the other infant formula makers is “The Corporation Haters,” by Herman Nickel, Fortune, April 17, 1980. The combination of reading this article then viewing the video makes for the liveliest class discussions. We also recommend a series of articles on the topic in the Journal of Macromarketing, Spring and Fall 1988 and Spring 1988. The academic arguments in the Fall 1988 are perhaps the most interesting: Mary C. Gilly and John L. Graham, “A Macroeconomic Study of the Effects of Promotion on the Consumption of Infant Formula in Developing Countries” (Spring 1988); Jean J. Boddewyn, “Comments on Gilly and Graham’s Study” (Fall 1988); Bill Meade, “Comments on Gilly and Graham’s Study,” (Fall 1988); and Graham and Gilly’s “Rejoinder” (Spring 1989). These articles are also part of Meloan and Graham’s International & Global Marketing Concepts and Cases, Irwin-McGraw-Hill (1998 and 1995). Barry Meier, “Anglicans Mull New Step on Baby Formula,” New York Times, 3/3/97, page 8, column 4. “Mother’s Dilemma: A Special Report,” New York Times, 6/8/97, business/financial desk. This article provides more information on the HIV aspect of the infant formula problem. Finally, see. http://www.nestle.com/html
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Back to the bottle? NAIROBI MULTINATIONAL food companies have long been under attack for pushing milk powder at mothers who do not need it and cannot afford it. But the anti-bottle-feeding lobby is now in a quandary. Evidence is growing that around half the 3.8 million children infected with HIV contracted the infection at their mothers’ breast. In rich countries, HIV-infected women can be told to bottle-feed their babies. But the problem is more complicated in the developing world, where over 90% of child infections occur. The risks of bottlefeeding remain—breast-milk protects infants from all manner of other infections—and so does the cost. Moreover, in even the most heavily infected areas, 70% of mothers do not carry the virus and, for them, breast-feeding is still by far the best option. The difficulty is that the vast majority of pregnant women in the developing world have no idea whether or not they are infected. Promoters of breastfeeding worry that large numbers of healthy women will switch to bottle-feeding just in case. Others fear that if bottlefeeding becomes a badge of infection, even women who know they are infected will continue to breastfeed to avoid being stigmatized. Many of them have no alternative. Even where mothers have access to clean water to prepare artificial milk, a year’s supply of powdered milk can cost over $700, more than the GNP per head in some heavily infected countries. Ironically, the cost is pushed up by high taxes, imposed to discourage bottle-feeding. A few countries, such as Thailand, offer testing to all pregnant women, and give those who are HIVinfected free milk powder. But in Africa, where a woman is likely to be pregnant three times as often as in Thailand and where HIV infection ranges up to 25% of the population against Thailand’s 2%, that solution is an expensive and distant dream.
Case 1-3 Coke and Pepsi Learn to Compete in India INTENDED USER: This case is intended for use in an international marketing class, international business, cross-cultural analysis, or international advertising or international marketing research class at either the undergraduate (BBA) or graduate (MBA) level. BRIEF SUMMARY OF CASE CONTENT: This is a detailed and comprehensive case describing the market entry of two global consumer product companies, PepsiCo and Coca-Cola Corporation into a Big Emerging Market (BEM), India. It traces the history of the challenges encountered by these two companies in the developing country environment of India from the late 1980s to the present time. Emphasis is placed on lessons learned by the two companies as they adjust to competing in an unfamiliar and rapidly-changing environment. Key themes include: - the effects of the changing political scene resulting in the imposition of a non-standard domestication policy on foreign direct investors; - the need for foreign companies to adapt their marketing and competitive strategies to suit conditions in the Indian marketplace; - and the role of ‘glocalization’ policies across the marketing mix variables, but particularly in the case of promotional strategies.
PEDAGOGICAL OBJECTIVES: Students are often told that Coca-Cola and Pepsi are leading exponents of globalized marketing. This case invites students to reflect on changes that the two companies have had to make to their global marketing policies as a necessary response to specific environmental factors in the Indian market, resulting in use of glocalized marketing strategies. This case reflects Cateora and Graham’s focus on the need for detailed environmental analysis and appropriate marketing response. The title of the case – “Coke and Pepsi Learn to Compete in India,” indicates that both companies encountered difficult and unexpected situations in India that rendered competition difficult and challenging, despite the global marketing expertise that both companies brought to this market. VALUE OF THE CASE: Students are presented with an objective account, told in retrospect, of market entry into India by two giant marketing companies. Details of the local market environment are presented, focusing on large cities throughout India. Aspects of life in India are portrayed in detail, with examples of national sporting heroes and movie and music stars. The importance of cricket is illustrated through the two companies’ use of celebrity endorsers for seasonal campaigns. Photographs of leading celebrities are also presented in the case. A key feature of the case is the information provided about the local Indian producers of soft beverages and the tough fight that they put up against Coke and Pepsi, before entering into strategic alliances with the two companies. TEACHING THE CASE: It is strongly recommended that students be instructed to equip themselves with a map of India. This will help in understanding the location of key cities which were chosen as regional production and distribution centers by companies in the Indian soft drinks market. In addition, students should be referred to a general information website such as: http://www.cia/gov for additional background information on India. It is suggested that students read the case and prepare answers to the seven case questions. These address a range of issues arising from the case. Some questions require students to review the case for factual information presented in the case. Other questions require students to draw inferences about actions taken by various companies and people in the Indian marketplace. Answers to Questions. Q1. The political environment in India has proven to be critical to company performance for both PepsiCo and Coca-Cola India. What specific aspects of the political environment have played key roles? Could these effects have been anticipated prior to market entry? If not, could developments in the political arena have been handled better by each company? A1. The political environment of India has had a very significant impact in the way foreign businesses operate in the country. Both companies benefited from the opening up of the market in the early 1990’s and the relaxation of prior restrictive trade policies and rules foreign direct investment. The cap on the equity stake has been gradually lowered over the years, giving greater flexibility to foreign companies in terms of operation and profitability. The ouster of Coca-Cola in 1977 was probably the most damaging effect of traditionally restrictive rules governing foreign investment that the Indian government had. Until recently, the Indian government had a policy whereby no foreign company could own a majority equity stake (greater
than 50%) in a venture/project in the country. Coca-Cola’s withdrawal from India was partly due to this reason, and partly due to the demand by the government to share its secret formula for the concentrate. Leaving the country on a non-cordial note with the government in 1977 had negative repercussions when Coca-Cola tried to re-enter. After being turned down on initial proposed joint venture with Godrej it finally reentered the Indian market in the early 90’s via a joint venture with Britannia Industries. This market entry was forced on Coca-Cola because its major competitor PepsiCo had already entered the Indian market in 1986. Entering later in the market had costs associated with it – (1) spending greater time, energy and money in building relationships with key government officials because PepsiCo had a headstart of about four years in the game; (2) spending maximum money on advertising to woo customers away from Pepsi’s substantial base in the cola market. PepsiCo had its own share of problems dealing with the Indian government in the initial years of its entry. Stringent conditions were imposed on foreign beverage manufacturers. Sales of soft drink concentrate to local bottlers could not exceed 25% of total sales for any new venture. This limit also included processing of fruits and vegetables by Pepsi Foods Ltd. (a joint venture launched by PepsiCo in India). At that time the government prohibited use of foreign brand names on products sold in India. As a result PepsiCo had to market its brands under the name of “Lehar Pepsi” (‘lehar’ meaning ‘wave’). Despite these strict regulations, PepsiCo was able to work with the government in order to establish an early presence in the country. When government opens up its market to foreign investors, it is always hard to know who will set the rules. It was the Congress party under the leadership of P.V. Narasimha Rao that allowed foreign investors into India. Given the instability at that time it was almost impossible to anticipate, for how long this government would be in power, which party would follow, or what policies or measures they might impose on foreign investment (FDI). Building a relationship with the major political parties was crucial for any foreign company trying to make its way in India. In this regard, both PepsiCo and Coca-Cola both did a tremendous job in keeping up with the numerous changes in the government (6 or 7 times) during the mid-1990’s. Now that the government is much more stable than 8-10 years ago, PepsiCo and Coca-Cola have less worries about lobbying in New Delhi, the capital city, and can concentrate more on running their business. Q2. Timing of entry into the Indian market brought different results for PepsiCo and Coca-Cola India. What benefits or disadvantages accrued as a result of earlier or later market entry? A2. Timing of entry is a crucial element in the future growth and prosperity of a global company. In the case of India, Coca-Cola had had a presence since 1958 though in a very small way. PepsiCo did not enter India until 1986. The advantage of earlier entry was lost when Coca-Cola had to exit the Indian market in 1977. Coca-Cola re-entered in the early 1990’s, about 4-5 years after PepsiCo. By that time PepsiCo had accumulated knowledge about local market conditions, understood the sentiments of the local people, was creating a solid distribution network, and had established a strong lobby with the government in New Delhi. With its early entry PepsiCo had more time and greater opportunity to promote its main brands, like Pepsi Cola and 7UP and to capture substantial market share. In the case of Coca-Cola, they quickly realized that competing with Pepsi in terms of market size would not be possible if they relied solely on their main brands. As a result, Coca-Cola felt obliged to buy an already established brand “Thums Up” from Parle Industries at a hefty price, and aggressively market this brand in order to keep up with Pepsi in terms of market share. On the advertising front, PepsiCo learned to adapt its advertising campaign to the hearts and minds of the Indian people well in advance of Coca-Cola. PepsiCo successfully used celebrity endorsements to reach out to the Indian youth, the main market segment for carbonated drinks.
Soon after entry, PepsiCo realized that cricket, movies and music were the very passions of the Indian masses. They recruited major cricket, movie and music stars to endorse their brands. On the other hand, Coca-Cola for a long period of time after its second entry into India tried to work with a standardized global advertising approach. This was a major mistake for the company because sales did not reach levels expected for the huge advertising expenditures. Later on they completely revamped their advertising campaigns to reflect strategic approaches used by PepsiCo. Overall the cost of later entry into the Indian market for Coca-Cola proved to be very expensive. In 2001 the company had to write off a loss of $400 million accumulated since its return in 1993. India is one of the few markets in the world where Coca-Cola lags behind PepsiCo in terms of market size and total sales. Q3. The Indian market is enormous in terms of population and geography. How have the two companies responded to the sheer scale of operations in India in terms of product policies, promotional activities, pricing policies, and distribution arrangements? A3. To capture the huge market that India has to offer, both Coca-Cola and PepsiCo have consistently tailoring their strategies to meet local needs and tastes. Both companies market a range of brands, in a range of bottle sizes. This is critical given the low purchasing power of most of the people in India (more so in the rural areas). In fact the 200ml bottle is very popular in rural areas owing to its low price. Bottle sizes range from 200ml, 250ml, 300ml, 500ml, 1 liter, to 2 liters. Both Coca-Cola and PepsiCo have marginally increased the sweetness level in their products for the Indian market. In order to serve the Indian consumers’ taste both companies have now extended their brand lines into the bottled water market as well. The range of bottle sizes in the bottled water market is even greater than for carbonated drinks. This market has also seen fierce competition in terms of advertising, sales, promotions and pricing. Both companies actively associate with cricket, movies and music, three of the main drivers of the Indian sports/entertainment industries. Celebrity endorsements are a common means for both companies if relating to ordinary people. Both also sponsor regional/local festivals. Sponsorship of college festivals and rock shows in major metropolitan cities has also worked well for both companies. Since a major target market in India is the young college crowd, promoting their brands in colleges fits in very well with their overall strategy. The tough competition between Coca-Cola and PepsiCo shows up in the lower pricing planks used by both companies, along with promotion of smaller bottles at very affordable prices. Price competition is not only restricted to the carbonated drinks sector but also affects the bottled water market. With the low purchasing power of people in the rural sector of India, pricing becomes a crucial part of the overall strategy for both these companies. Due to its early entry into the country PepsiCo has developed a much broader distribution network than Coca-cola. PepsiCo was able to reach deep into the villages of India much before Coca-Cola started to seriously think about it. Coca-Cola has followed suit and has considerable presence in the rural sector as well. Vital to this strategy was the already established network for “Thums Up” which Coca-Cola took over in the late 1990’s. On the whole, both companies have had to make serious adaptations in their distribution strategy from what they used in the developed markets of US and Europe. Reaching out to the rural sector has been a great challenge given the poor infrastructure throughout rural India.
Q4. “Global localization” (glocalization) is a policy that both companies have implemented successfully. Give examples for each company from the case. A4. The concept of glocalization plays a very important role in making or breaking of the brand in India. It is very clearly shown in the promotional campaigns of both PepsiCo and Coca-cola in India. PepsiCo’s strategy to promote their main brand under the name “Lehar Pepsi” (“Lehar” meaning ‘wave’ in Hindi) worked very well in connecting with the Hindi speaking people in India. Although the new brand name was required by the Indian government, PepsiCo continued with it even after such requirements were removed. The effect of glocalization can be seen in all promotions. Apart from summer sales the second highest sales period is during the festival of Navratri (‘nav’ means nine and ‘ratri’ means nights), which is mainly in the west part of India. This is a traditional Gujarati festival that goes on for nine nights while people dance and have fun. PepsiCo also came up with several offers during the “Garba” (‘dance’) festival. For example a refill of 300ml fetches one kilo (close to 2.2 pounds) of premium quality rice. PepsiCo also tied up with other companies for various promotional offers. For example free Kit-Kats were given away with every 1.5 liter bottle or a pack of Polo (hard mint candies) with each 500ml bottle of Pepsi and Mirinda. Pepsi is one of the biggest sponsors of cricket tournaments around the world in order to build awareness and preference among target consumers. Coca-Cola’s strategy of “think local – act local’ is prominently seen in its campaigns for the Navratri festival. The “Thums Up Toofani Ramjhat” message is synonymous with having fun while dancing. A lot of on-site promotional activities take place simultaneously, like offering exotic trips with the purchase of a bottle of Coke. The soft drinks slugfest has taken another interesting turn, with both Coca-Cola India and PepsiCo claiming better recall and higher ratings for their respective `ads of the season'. While PepsiCo's biggest ad in 2003 featured Amitabh Bachchan (a very powerful celebrity) and Sachin Tendulkar's (a popular cricket star) flying kites. Coca-Cola's most popular commercial for Summer 2002 was Aamir Khan's (a film star) `thanda matlab Coca-Cola' act in a pedestrian Mumbai restaurant. The first ad execution, called “Bombay Dreams” with A.R. Rahman (a famous music director), was so successful among the young target audience that it increased the sales by 50% for Coca Cola. Q5. Some analysts consider that Coca-Cola India made mistakes in planning and managing its return to India. Do you agree? What or who do you think was responsible for any mistakes? A5. Re-entry for Coca-Cola in India was not easy. It had to face a tough time when its application of an initial proposed joint venture with a local bottling company was turned down by the government headed by Rajiv Ghandhi. In contrast, PepsiCo’s application for entry through a joint venture was approved easily. Later Coca-Cola made its entry by joining forces with Britannia Industries (a local snack producer). In 1993 Coca-Cola filed an application to create a 100% owned soft drinks company. In July 93 it bought bottling plants from Parle in the key cities of Delhi, Mumbai, Ahmedabad and Surat and bought Parle’s leading brands, Thums Up, Limca, Citra, Gold Spot and Maza. Parle held 49% of marketing venture but took an equal 50% stake in the bottling venture. The later entry by Coca-Cola in the Indian market had its own costs in terms of requiring greater advertising expenditures. To make matters worse Coca-Cola was forced to disinvest under the new government policy passed in 1996, regulating all new soft drink investments. Coca-Cola agreed to sell 49% of its equity to Indian partners within two years. The company requested an extension to sell its equity by 2007 with the hope that it would be in a much stronger financial position to seek a higher amount for its disinvestments. The request was turned down by the government of India on Oct, 2001.
These problems were not predictable and were a function of the changing policies of the government at that time. But, analysts believe that Coca-Cola could have done better. First, in entering India the second time it was considerably behind PepsiCo’s entry. PepsiCo’s head start allowed it to create obstacles for Coca-Cola’s smooth entry and growth in India. One can also argue that Coca-Cola did a relatively poor job in managing relationships with key people in government. It had its initial joint venture project application turned down. A better focus on lobbying with the government was needed by Coca-Cola executives, given the well known bureaucratic nature of the Indian business world. Also, Coca-Cola took more time to adapt to the local market in terms of their advertising strategy. This was surprising given that the company had previously operated in India. The blame can only be put on the Coca-Cola executives responsible for marketing the product in India. The huge loss that the company had to write off suggests poor financial management by the Indian division of the company. On the whole, critical environmental factors plus some marketing and financial blunders committed by the Coca-Cola executives can be said to be the leading causes of dismal performance of the company in its initial few years in India. Q6. Which of the two companies do you think has better long-term prospects for success in India? A6. A definite answer to this question is difficult and calls into question the assumptions and anticipations about strategy, structure and performance of both companies. Based on the past experience of over 10 years for Coca-Cola and over 15 years for Pepsi, PepsiCo appears slightly ahead in the race. PepsiCo saw an opportunity in entering the Indian market after Coca-Cola had to withdraw in 1977. It quickly worked on the opportunity and utilized the advantages that it got from being first to enter the Indian market. In the 90’s PepsiCo was also more proactive vis-à-vis CocaCola in terms of learning about the local preferences, adjusting to the local needs, targeting the right segment with the right marketing and promotional weapons. Till now Coca-Cola can be said to have taken a more reactive or “follow the leader” strategy for the Indian market. After a huge investment in advertising it had to copy Pepsi’s strategy of endorsing big celebrities in order to reach the common people. Entering later than Pepsi had costs, causing Coca-Cola to write off a huge loss for the Indian office. Although PepsiCo seems to have an edge as far as the Indian beverage market is concerned, it is difficult to predict which one of these two companies will stand to do better in the long run. CocaCola is back on track according to analysts and should be able to recover its losses in the next 10 years of operations in India. In terms of market share Pepsi and Coca-Cola are almost equal with slight fluctuations from year to year. Long-run sustainability will depend on how these two companies manage their Indian operations in terms of the broader global operations that they have. How PepsiCo and Coca-Cola can use their Indian operations to compete in the global marketplace is probably what will decide which one outshines the other. Q7. What lessons can each company draw from its Indian experience as it contemplates entry into other Big Emerging Markets? A7. An important element for the long-term success of Coca-Cola and PepsiCo depends on how they can transfer learning from one market to another, particularly Big Emerging Markets (BEMs). This is where both companies can utilize their Indian experience, as for example in Pakistan or China. Adaptation to local culture, tastes, and preferences is a critical requirement. This necessitates changes to product, packaging, promotions (advertising/marketing), and distribution in order to meet local demands. Relationship building at all levels is another key lesson that both Pepsi and Coca-Cola can learn from India. For whatever reason Coca-Cola failed in building a strong relationships with the government of India in the 1970’s. Some of Coca-Cola’s present worries can be traced back to this failure which gave an opportunity to its arch-rival.
Of all the elements of the marketing mix, pricing seems to be most critical in BEMs where the greater part of the population suffer from low purchasing power. The future for global companies worldwide may not lie in targeting high earning people rather the billions of the people at the bottom-of-the pyramid (BOP). How to devise strategies to target this huge sector should be an opportunity and an important lesson for both PepsiCo and Coca-Cola from their Indian experience. Finally, having a good exit strategy is a lesson that both these companies should keep in mind while working in politically unstable countries. Coca-Cola’s exit in 1977 from India is the perfect example where having such an exit strategy could have worked well for the company. UPDATE: Since the conclusion of the case, there has been a major controversy caused by findings of a research study in India. Some harmful pesticides were found in samples of Coke and Pepsi. The thought of consuming pesticides under the brand name of Coke or Pepsi has made consumers become hostile. More than 8,000 people voted in an online poll on www.Indiatimes.com within a span of 24 hours - 80 per cent vowed not to drink Coke or Pepsi products ever again. Moreover, a recent readers' debate (2003) launched on www.timesofindia.com evoked an overwhelming response - 1,200 letters in less than 24 hours expressed disbelief, disgust and cynicism. Of note are the 1,000 letters to the Times of India Group demanding a complete ban on the two multinational soft drink brands. "What Union Carbide did in one night, Coke or Pepsi shouldn't be allowed to do over the years," writes are reader. While the horrific thought of consuming pesticides with one's soft drinks created bad press for both mega brands, hundreds of readers also questioned the quality of municipal ground water supplied as raw materials to these manufacturing plants. The truth of this event is yet to found, but this controversy shows the strong sentiments of consumers in India. India remains a delicate market for both Pepsi and Coca-Cola and there are more lessons to be learned in this country. On a more general level, both Coca-Cola and PepsiCo have ambitious plans to invest further in the country, and both see great potential in the Indian market. The latest ORG-MARG and IMRB polls shows that the relative market shares of these giant companies were subject to controversy. This gives an idea of the intense level of competition between these two cola giants plus local producers who are fighting neckand-neck for every single percent point in this huge market.
Case 1-4 Marketing Microwave Ovens to a New Market Segment In addition to the suggestions at the end of the case, two other ways you may want to approach this case are: 1. In-class analysis and discussion using as a basis all or any one of the following. Use “The International Marketing Task” from the text as a basis; “Product. Component Model” from the text; and/or “The Message: Creative Challenge” section of Chapter 16. 2. The case also lends itself to developing a full market plan using the Country Notebook: A Guide for Developing a Marketing Plan as a term project. Here are some materials in chronological order gleaned from the sources listed below. This information has been included here for you to decide whether or not you want to share it with your students before they complete the assignment or in-class discussion after the assignment is complete.
(1999) Whirlpool says it will be possible to make dosas and paranthas in its oven. Indian food involves bottom heat cooking. Whirlpool claims that their oven has bottom heating. Indians, with their preference for brown color in their dishes, are not likely to accept an appliance that will not be bottom heated to brown their food. Students should do some extra research and find out how dosas and paranthas are cooked. One of the problems with conventional microwave ovens is adapting it to traditional Indian cooking. (2001) LG Electronics, Ltd (LG) expects to end this calendar year (2001) with a 34 percent share. Samsung, at #2 slot with a current 22 percent share is aiming for a 25 percent share in the current year. Samsung’s new campaign will be centered around everyday cooking opposed to reheating. Film actress Tabu will be featured in TV ads and she will be used for ground-level promotions and calling centers are being set up across nine cities. The strategy is working as well for microwaves as it is for its refrigerators and washing machines. (2001) The current penetration level is low, the product category is still at a very nascent stage. LG Electronics India is holding customized cooking classes catering to each part of Indian cooking. (2001) LG has call-centers where a prospective customer can get information on microwave ovens, how to use them, ask questions about cooking in microwave ovens, get recipes, find out about scheduled instore demonstration and other information about LGs microwaves. “Our focus is to ensure that the consumer gets a hands-on experience of our products through extensive live demonstration and cooking classes.” The LG call centers are not restricted to LG consumers but open to all callers. (2002) LG Electronics India wants to break the myth that a microwave oven is a premium product. To cater to the mass market, LG has changed the communication strategy for its microwave ovens to focus on the benefit of ‘hot foods’. LG hopes to sell one million microwave ovens in five years. (2002) Samsung India Electronics Ltd (SIEL) which is targeting 25 percent market share in 2002, plans to launch a print campaign. The campaign will project the product as a full-fledged cooking medium in contrast to a heating device. SEIL will also focus on strengthening in-store microwave oven demonstrations at dealers outlets. (2003)There is a need to reach out to the consumer, and companies are taking several direct marketing initiatives as most consumers want to experience the product before buying it. We are sending small mobile vans to residential colonies in several cities through which we are able to give a demo of the product. LG dealers also conduct cooking classes so that the consumer knows that a microwave is not merely a re-heating device and can also be used to make small things such as curd, jams, etc. (2003) Experiential marketing is the route many companies, including LG, are taking to sell microwave ovens. (2003) Several consumer durables companies are taking a door-to-door approach for the product; similar to the approach Eureka-Forbes takes to sell its vacuum cleaners. (2003) Microwave oven manufacturers are readying new marketing initiatives to push sales to 240,000 units in 2002. Samsung has launched a Spot the Van Cookie Fiesta campaign in Delhi and in North India in which a mobile van carrying the entire range of Samsung microwave ovens tours residential colonies and dealer outlets, giving demonstrations of the product as well as making special offers available to customers. “We are trying to educate the consumer on the Samsung range of microwave ovens as well as the benefits of the product related with everyday cooking.”
(2003) According to Whirlpool, prices of microwave ovens have registered a downward trend in the last couple of years. Depending on the segment, the shift has been between 10-20 percent of the industry (2003) Although the sale of microwave ovens is by and large confined to the metros and the larger towns, it is gradually spreading to mini metros and larger towns. (2003) According to industry analysts, the microwave ovens category is expected to grow by about 20-25 percent this year to 2.5 lakh units. Note: A lakh is a unit in a traditional number system, still widely used in India. One lakh is equal to 100 thousand. A Crore is also a traditional number system unit and one crore is equal to 10 million. (2003) This category (microwave ovens) has been showing a consistent growth. From the sale of 85,000 units in 1998-1999 to 1.5 lakh units in 2000-2001, the industry is estimating to close 2001-2002 with the sale of 1.6 lakh units. (2003) LG is extending its cookery classes to retail outlets and have even tied up with celebrity chefs for demonstration shows. The companies are introducing new features and models to boost sales. The new features include drop down door, stoppable turntable, crisp function and job dial apart from the tawa feature, which enables bottom heating to help the consumer cook dishes like paranthas. There are also models with built-in toasters. (2003) Samsung says that our consistent efforts at educating the customer on cooking benefits of microwave ovens through cooking classes, the microwave cookbook and product demonstrations, have helped us register 100 percent growth I n October 2002-March 2003 over the same period the previous year. (2003) Samsung India has emerged the clear leader in 240,000 unit microwave oven market with a 33.5 percent share over October/March 2003, with LG trailing at 31.3 percent market share, according to the latest data made available by a market research agency. Videocon International’s brand Kenstar is at number 3 position with 10.6 per cent share of the market while Panasonic’s brand is placed next with 6.1 share. (2003) Though the product base is quite small, there has been a general decline in prices of microwave ovens in order to make the product affordable to a larger segment of the market. (2005) With falling price points and changing lifestyles driving growth , the microwave oven category grew by a sizeable 84.7 percent during the first eleven months of the last fiscal year. According to the data, LG Electronics and Samsung India dominated the segment with a collective market share of about 61 percent. (2005) Prices for the smallest units have dropped from Rs7000 to about Rs5000. Sales over the past two years have increased while total revenues from microwaves have no grown as rapidly due to price reductions. (2005) According to industry data, while the solo microwave oven models sold some 70,838 units the first eleven months of 2004, the combination models grew 73.1 percent with sales of 104,545 units. Sources for this case are listed here in the Instructor’s Manual since they have information about what occurred in the market that you may not want the students to have before your class room discussion. .
Sources: Alpana Varma, “Oven-makers In a Chicken-and-Egg Dilemma,” The Times of India, August 2, 1999; Patricia Tennison, “Thoroughly Modern Moghul Cooking Makes Use of the Microwave Oven,” Chicago Tribune, September 27, 1990, p. 13; “India: Microwave Ovens – Race Is Hotting Up,” Business Line (The Hindu), October 27, 2001; Ratna Bhushan, “India: What’s Cooking?” Business Line (The Hindu) October 4, 2001; LG To Tap Mass Market for Microwave Ovens,” Indian Business Insight, November 20, 2002; “Samsung To Roll Out New Print Advertisements,” Indian Business Insight, February 19, 2002, p. 9; “Cooking A New Strategy to Induce Customer Pull,” Indian Business Insight, February 14, 2003; “Samsung Emerges As Leader In Indian Microwave Oven Market.,” Asia Pulse, May 29,2003; and, Neha Kaushik, “Cos to Take Microwave-Ovens to Door-Steps,” Business Line (The Hindu) May 28, 2003; Neha Kaushik, “Lower Prices Heat up Microwave Oven Sales” Business Line (The Hindu), April 19, 2005; and, BG Shirsat and Prabodh Chandrasekhar, “Consumer Durables Fetch Less,” rediff.com, August 9, 2005.
CASE 2 THE CULTURAL ENVIRONMENT OF GLOBAL MARKETING 2.1 2.2 2.3 2.4 2.5 2.6 2.7 The Not-So-Wonderful World of EuroDisney Cultural Norms, Fair and Lovely, and Advertising Starnes-Brenner Machine Tool Company – To Bribe or Not to Bribe Ethics and Airbus Coping with Corruption in Trading with China When International Buyers and Sellers Disagree McDonald’s and Obesity
Case 2-1 The Not-So-Wonderful World of EuroDisney Summary This case tells the story of the planning, construction and early days of management of a new Disney theme park in France, Euro Disneyland (“EuroDisney”). Details are given on the background to the project and the expectations of success. Real-life results did not meet expectations. Problems were encountered requiring extensive adaptation of both strategy and tactics by EuroDisney’s management. Eventually the parent company, The Walt Disney Company (“Disney”) had to step in to organize a financial bail-out. Reasons for the poor performance of EuroDisney are suggested in the case, along with some implications for the future of the ambitious new theme park. Use of the Case and Teaching Objectives The case is appropriate for use in both undergraduate and graduate international marketing classes. Endof-case questions are provided as a focus for class discussions. The case allows the instructor to explore in considerable depth aspects such as: • • • • • • the role of environmental factors in shaping international marketing strategies; the impact of ethnocentric thinking on overseas investments; the need for adaptation (versus the desire for standardization) of company marketing policies abroad; market forecasting and assumptions about consumer response to foreign products and services; cultural conflicts between buyers and sellers; and issues involved in developing international marketing strategies, tactics and policies.
Answers To Questions Q1. What factors contributed to EuroDisney’s poor performance during its first year of operation? Three types of factors can be identified from the case: (i) managerial errors of judgment; (ii) elements of consumer response; and (iii) environmental factors. A1 (i) Students will easily be able to identify from the case a list of managerial errors relating to over-ambitious forecasts and real-estate investments, expensive or inappropriate park design and construction, flawed initial marketing, pricing, staffing, and park management policies. Disney management expected some 50% of park attendance to include French visitors. The French people in general proved to be reluctant in their response to this example of “Americana” in Europe. EuroDisney’s management seriously underestimated negative attitudes among the French. Visitors of other nationalities were also unwilling to pay the high prices of EuroDisney or to stay more than one or two days (instead of the expected three days). Clearly, perceptions of the park’s benefits among tourists differed from those of the American managers. In summer 1992, transatlantic airfare wars and currency swings made it cheaper to go to DisneyWorld in Florida than to EuroDisney in France, for many European tourists. Perhaps EuroDisney’s management could not be expected to foresee such eventualities, but they should have planned for seasonal variations in attendance related to the poor winter weather of northern Europe. Also, better environmental monitoring would have alerted management to the approaching recession, which hit the whole of Europe in the late 1980s and persisted into the early 1990s.
Q2. To what degree do you consider that these factors were (i) foreseeable and (ii) controllable by either EuroDisney or the parent company, Disney? A2. The narrative in the case makes it clear that managers and planners involved in the EuroDisney project were infected with over-confidence, led by Disney’s “dynamic duo,” chairman Eisner and president Wells. Both of these two had achieved significant successes for the company in previous years, and seemed to believe that their judgment was infallible: hence the grandiose real estate development plans, the ambitious financing, and rigid imposition of the “Disney way” of doing things in Europe. Students can debate how far Disney’s management should be held responsible for being blind-sided to environmental events and being insensitive to cultural differences. Probably a lot of the early missteps can be attributed to poor judgment, particularly as corrections in strategy and tactics were made after the first year of operation. More marketing research in France and better environmental scanning would have helped make some of the unfortunate events at least foreseeable, if not entirely controllable. Q3. What role does ethnocentrism play in the story of EuroDisney’s launch? A3. This question is a little more subtle than it might appear at first glance. For example, students may rush to judgment and say that “EuroDisney’s managers should have known. . . but it would be prudent to discuss separately the quality of management’s decisions versus the nature of the product and the need for standardization across world markets.
Disney’s “product” is grounded in American life, culture, and entertainment traditions. Thus the question of how far to standardize or adapt the product offering overseas must be set in the context of its country-of-origin effect. In other words, to make EuroDisney completely “French” (by adapting to the local market) would have undermined the whole selling proposition. However, ethnocentrism does appear to have clouded management’s judgment. It certainly played a role in the unwillingness of Disney’s managers to even consider the need for some adaptation in Europe when marketing such an all-American product. Q4. How do you assess the cross-cultural marketing skills of Disney? A4. Based on a SWOT analysis (Strengths and Weaknesses, Opportunities and Threats) of the new theme park, one would probably conclude that the EuroDisney experience was an initial cross-cultural marketing failure, due primarily to rigid imposition of Disney rules and unwillingness to consider adaptations. After the first year of operations, greater sensitivity was shown and numerous small but important changes were made in marketing, operating and staffing policies. Q5a. Do you think success in Tokyo predisposed Disney management to be too optimistic in their expectations of success in France? A5a. Yes. The outstanding success of Tokyo Disneyland must certainly have given Disney’s management the impression that managing theme parks overseas did not present any major problems. However, the false assumption was made that all foreigners would respond favorably to “Americana.” The Japanese people visit America in great numbers and spend extravagantly, once here. They share a common fascination with the American way of life, fashions, and style of entertainment (such as MTV and movies). In contrast, Europeans are much more independent and value deeply their own cultural habits and traditions. There are pockets of active dislike of America among Europeans, left over from the 1960s when American firms were investing heavily in Europe. Greater research of the French market might have revealed some of these differences to Disney’s management. Certainly when Eisner was pelted with eggs in Paris, he should have suspected that market entry might not be that easy. Q5b. Do you think the new theme park would have encountered the same problems if a location in Spain had been selected? A5b. The answer to this question depends on answers to earlier questions insofar as one is willing to sympathize with EuroDisney managers’ mistakes or one is led to censor their lack of insight, sensitivity, and basic information about the French market. If one believes that uncontrollable variables affecting the economy (e.g., recession, currency swings) were largely responsible for EuroDisney’s troubles, then these problems would also have been encountered in the Spanish market at that time. However, if one believes that many of EuroDisney’s problems were the result of poor marketing practice, then it is possible that the same mistakes would have been made, regardless of the location. Alternatively, Disney’s managers may have done better research in Spain and achieved a deeper understanding of this less familiar market. If one argues that EuroDisney’s problems were primarily due to environmental factors such as poor weather in the off-season, then clearly Spain, with its Mediterranean climate, would have been a better choice of location. Nevertheless, Disney’s management decision to pursue a market skimming policy to earn a fast return, might have led to poor attendance levels in Spain too.
Q6. Disney’s entry strategy for Japan minimized risk and control? A6. Their strategy for Europe was the opposite. The firm has been satisfied with neither. Having most recently been burned in Europe, the company’s approach in China is much more like the Japanese model, letting the Chinese take the greater part of the risk (investment in hotels, etc.) and control. The company should recognize that each major expansion into country X will demand a unique approach and a new assessment of the potential risks and returns. Indeed, one would predict that ultimately Disney will be dissatisfied with the structure of the Hong Kong deal feeling perhaps that their return might have been greater had their commitment been less conservative in reaction to the bad experiences in France. Q7. This question should lead to a lively discussion. Key factors of course will be population, per capita income, climate, and familiarity with Disney. Thinking out to the year 2010, potential sites might include: A7. a. San Antonio, Texas b.Rio de Janeiro, Brazil or Buenos Aries, Argentina (Michael Eisner mentioned Latin America in his 1998 letter to investors) and President Bush is now promoting an American Free Trade Area to include both North and South America. c. Singapore/Malaysia area d.Bombay, India e. Southern Spain – likely to cannibalize from Paris Disneyland f. The Black Sea area, Sevastapol in the Ukraine The experiences of American, Tokyo, and now Paris will help of course. But no matter what the new location, new and unforeseen financial and operational problems should be expected. Class members who are from or who have visited potential new locations might provide interesting insights regarding the feasibility of Disney expanding. References Further reading on subsequent events at Disneyland Paris and other actions taken by The Walt Disney Company is suggested below: DeGeorge, Gail and Ronald Grover (1994), “Reanimating DisneyWorld,” BusinessWeek, (December 5), 41. Dwyer, Paula (1994), “Is Disney Headed for the Euro-Trash Heap?” BusinessWeek, (January 24), 52. Grover, Ronald and Gail DeGeorge, “Theme-Park Shootout, A Host of New Competitors Has Disney Building Like Crazy,” BusinessWeek, 4/6/98, pages 66–67. Longman, Phillip J. “No Sex S’il Vous Plait. We’re Club Med, Can Disneyfication Save the French Resort?” U.S. News & World Report, 9/8/97, pages 46–47 Marcial, Gene G. (1994), “Could These Cats Pounce on Mickey?” BusinessWeek, (December 5), 92. Solomon, Jolie, Andrew Murr and Daniel McGinn (1994), “Disney: A Sudden Surrender in Virginia” Newsweek, (October 10), 46. Toy, Stewart (1995), “Mickey Goes To Charm School, BusinessWeek, (February 13), 8.
Case 2-2 Cultural Norms, Fair and Lovely, and Advertising In addition to the questions at the end of the case, some other ways to approach this case: 1. In-class analysis and discussion using as a basis all or any one of the following. “The International Marketing Task” Exhibit 1-3 page 10 “Product. Component Model” Exhibit 12-1 p. 354, and/or “The Message: Creative Challenge” section of Chapter 16 2. Have one group of students representing Fair & Lovely debate another representing CavinKare. 3. Discuss other ways to counter activist groups like AIDWA besides the approach taken by Fair & Lovely, i.e., creating the Fair and Lovely Foundation. Questions: In our experience the dominant issue discussed by students was the ethics of selling a product that had little if any merit. We found the discussion effective but, in order to get the other issues addressed, we asked the students to put aside the ethics issue and discuss the marketing issues in the case. 1. Is it ethical to sell a product that is, at best, only mildly effective? Discuss. 2. Is it ethical to exploit cultural norms and values to promote a product? Discuss 3. It the advertising of Fair & Lovely demeaning to women or is it portraying a product not too dissimilar to how most cosmetics are promoted? 4. Will HLL’s Fair & Lovely Foundation counter charges made by AIDAW? Discuss 5. In light of how AIDWA’s charges, how would you suggest Fair & Lovely promote their product? Discuss, Would your response be different if Fairever continues to use “fairness” as a theme of their promotion? Discuss. 6. Propose a promotion/marketing program that will counter all the arguments and charges against Fair & Lovely and be an effective program. Here are excerpts from reports on Fair and Lovely taken from material on the WWW. There are a multitude of reports on products sold to lighten one’s complexion – search “fair and lovely” and “fairness creams”. Fairness creams lead in skin care market’
THE country’s obsession with fair skin continues unabated. According to the latest AC Nielsen India Retail audit, fairness creams and lotions put together continue to be the largest segment in the skin creams category, accounting for 48 per cent of the total skin creams volume market, in the 12-month period ended July 2003. This is much higher than the total of the next three segments. The volume contribution of moisturizing lotions and creams was 17 per cent, antiseptic creams accounted for 14 per cent of the total skin creams market, and cold creams accounted for 13 per cent during the same period. Vanishing creams, calamines and foundations, snows and astringents remain marginal categories within the skin-care market. In terms of value, the contribution of fairness creams and lotions has been recorded at 53 per cent in the same time period. In the last 12 months ended July 2003, a total of 30 new brands were added in the skin creams category, out of which four brands were added in the fairness creams/lotions segment. During the same period, 30 per cent of new stock keeping units (SKUs) out of the total 984 SKUs was added in the fairness creams/lotions segment. Fairness creams and lotions achieved double-digit volume growth of 10.7 per cent in July 2003 over the corresponding period last year, according to the AC Nielsen India retail audit. Value growth of fairness creams and lotions was 5.1 per cent in July 2003 over the corresponding period last year. The uproar over ‘demeaning’ fairness creams advertisements which had erupted earlier this year does not seem to have blemished brand sales in any way. Hindustan Lever’s Fair & Lovely brand continued its stranglehold in the category, with a volume share of 82 per cent of the fairness creams and lotions category in July 2003 against 75 per cent the previous year, as per the AC Nielsen retail audit. By value also, Fair & Lovely’s share was 82 per cent. In terms of growth, Fair & Lovely recorded a volume growth of 16.7 per cent in July 2003 over July 2002. Value growth for the brand was 10.4 per cent during the same period.
In July 2003, within skin creams, the total number of companies was 172, the total number of brands was 345, and the total stock keeping units (SKUs) were 1,454. Within the fairness creams and lotions category, the total number of companies was 33, the total number of brands was 58, and the total SKUs were 338 in the same month, as per AC Nielsen India retail audit.
Nothing fair about the beauty business Teresa Barat “Mirror, mirror on the wall, who is the fairest of us all?” ISN’T it ironic that for a long time India took the high moral ground and refused to play any sport with apartheid-ridden South Africa? Isn’t it ironic that a reputed company rejected Lara Dutta for its advertisements because she was too dark? This was before her Miss Universe win, of course. Isn’t it ironic that in a country where skin tones span the spectrum from ebony to ivory, almost every matrimonial advertisement seeks ‘homely, fair brides’? What happens to the homely, dark maidens trembling on the shelf of the marriage mart? Kalee kalooti is an oft-heard comment about women who happen to have dark skin. They get humiliated and mortified over the colour of their skin, a fact over which they have no control. There are attractive people who go through life feeling inferior to their fairer sisters. And all because of charming grandmothers and aunts who do not hesitate to make unflattering comparisons. For too many people in India prettiness lies in the colour of the skin. And the perpetrators are everywhere and, surprisingly, of every hue. Those with dark skin are vulnerable to verbal attacks from anyone - even family members. The fair-dark divide is as arbitrary and unfair as the rich-poor or the homely-beautiful. And as hopeless. It is painful when a little child comes home crying because somebody has called her kalee (dark). It is distressing when a friend’s domestic help from a poor tribal area in Bastar (Madhya Pradesh) spends the bulk of her money on fairness creams. It is a scam that is being ruthlessly facilitated by manufacturers of fairness creams and their partners in crime — advertising agencies. The current crop of advertisements for fairness creams is highly objectionable. The campaign strategy is simple: One dark skinned aspirant for a beauty contest. Have a bratty child taunt, “No chance. They’ll take one look at your face and throw you out.” Miraculous application of said fairness cream and proud, now fair contestant comes back dangling a medal. One wishes one could laugh it off. But these advertisements are no laughing matter. They service an industry worth about Rs 140 crore and the bulk of those sales are in the South, a region where people are generally darker, and no amount of fairness cream will change their complexions. Who is responsible for this state of affairs? Societal values? Or advertising campaigns? It is a chicken and egg phenomenon, with advertising moguls disowning their part in the game, claiming that they only reflect prevailing attitudes in India. This is possibly true, but what about ethics in advertising? Is it acceptable to make advertisements that openly denigrate a majority of Indian people — the dark skinned populace? The advertisements are blatant in their strategy. Mock any one who is not the ‘right’ colour and shoot down their self-image.
The manufacturers push their product in India, a country that is riddled with colour prejudice. And even the new international entrants in India - all big names in the cosmetic industry - are entering the fairness cream market with great gusto. Ethics apart, peddling dreams makes good business sense, it appears. And who cares if little children and tribal lasses end up with wounded psyches in the process? The fairness cream industry reflects not merely a harmless preference for fair skin, but a deeper, more internalised racism. It is a biased attitude against dark skin that manifests in many ways. Black students studying in our universities talk of people sniggering at them and calling them names. This is in stark contrast to the obsequious handling of white travellers to our land. When will this country awaken to some self-pride and come up with a slogan half as punchy and sassy as ‘Black is Beautiful’? Unfortunately, that day seems distant — we are too busy aspiring for Fair and Lovely and Snow White. (WFS) http://www.tribuneindia.com/2001/20010606/" \l "top It’s no major revelation that the skin-lightening obsession in Indian society is more prevalent among women than men. If a woman is fair-skinned, she is automatically beautiful, no matter how many coats you could hang from her nose. If a woman is dark-skinned, she’d have almost no chance of winning the Miss. India contest, even if her personality were as top-notch as her plastic surgeon. Men, on the other hand, have never had to obsess over their complexion, largely because they’re judged more by their earning power than their looks. A single doctor who advertises himself as “tall, dark and handsome” would get far more attention from women than a single writer who’s “tall, fair and unemployed.” The situation may be changing though - and not necessarily for the better. A recent survey commissioned by the Media Researchers Users Council (MRUC) found that 32% of fairness cream users in India are men! Yes, men are using products such as Fair Glow, Fairever, and Fair & Lovely, trying hard to prove that women are no longer the fairer sex. Instead of getting women less obsessed with complexion, our society has managed to get men more obsessed. If this continues, you’ll soon see new beauty products such as Fair Guy, Fairmale, and Fair & Hairy. Most users of fairness creams probably consider themselves dark-skinned. But “dark” and “fair” are relative terms. The woman calling herself “very fair” in a matrimonial ad may be darker than the woman calling herself “medium-complexioned,” but fairer than the woman calling herself “as fair as Snow White.” New Delhi, March 11, 2003 Hindustan Lever Limited today announced the launch of the Fair & Lovely Foundation, an initiative whose mission is to encourage economic empowerment of women across India through information and resources in the areas of education, career and enterprise. The series of projects that have been drawn up to achieve the vision include the following: Careers: Project Disha aims at providing career guidance by organizing career fairs in over 20 cities across the country, offering counseling in as many as 110 careers. So far, over 45,000 students have benefited from these career fairs.
Project Jagruti aims at providing guidance to women in Gujarat through innovative live television broadcast and interactive learning sessions. Education: Project Saraswati aims to provide women with scholarships for education such that it opens career avenues for them. There will be 100 rural scholarships for women students passing their 10th grade, given across 5 districts with the lowest HDI (Human Development Index) in select States. In the urban phase of this project, the Foundation will give 20 scholarships for postgraduate studies offers scholarships to deserving women in rural & urban India. Enterprise: Project Sanjeevani is a three month Home Healthcare Nursing Assistant’s Course in partnership with Dr. Reddy’s Foundation. It will cater to young women between the ages 18 and 30 who have formal educational backgrounds ranging from the 8th grade to intermediate levels. The programme will run under the aegis of The Fair and Lovely Academy for Home Care Nursing Assistants and will provide a unique training opportunity for young women who possess no entry level skills and, therefore, are not employable in the new economy job market. Project Kaladarshan is a pioneering effort towards skill development in the areas of embroidery and garment designing for the DWCRA Self Help Groups of Andhra Pradesh. This is being done in collaboration with the Commissionerate of Women Empowerment & Self Employment and Employment Generation Mission, Government of Andhra Pradesh. Project Sneha is a unique initiative that attempts to provide young women, who have been unable to complete formal education, with the opportunity to obtain training in various aspects of home care. This training will equip them with the requisite skills to gain employment in households and thus provide them with economic independence. Project Saundarya in association with CSI (Cosmetology Society of India), is a first of its kind professional course for aspiring beauticians. Speaking at the launch, Sangeeta Pendurkar, Marketing Manager, Skincare - Hindustan Lever Limited, said, “Fair & Lovely Foundation will serve as a catalyst for the economic empowerment for women across India. We believe that there are lakhs and lakhs of women, who though immensely talented and capable, need a guiding hand to help them take the leap forward. At the same time, achievers need to be acknowledged, to further boost their confidence and help serve as role models for countless others. Through the Fair & Lovely Foundation we want to make a difference to the lives of women by providing guidance and recognition; thereby helping them achieve their potential.” Pendurkar further added, “Our association with leading women and organizations who have done credible work in the area of economic empowerment of women will help us achieve this objective. We will continue to identify and work on several such initiatives that will help us ignite this spark in other women and make a difference to their lives.” Said Dr Malika Sarabhai, “Speaking on behalf of all members on this foundation, we are very happy and proud to join hands with the Fair &Lovely Foundation. The projects this foundation has already committed itself to are definitely steps in the right direction and we look forward to identifying and working on many more such initiatives. In the long run we are confident that the Fair and Lovely Foundation will make a difference to the lives of many women.” About the Fair & Lovely Foundation The Fair and Lovely Foundation is a non-profit foundation set up under the aegis of the Hindustan Lever Educational and Welfare Trust. This foundation seeks to encourage economic empowerment of Indian women through information and resources in the areas of education, career and enterprise. Comprising an advisory body of leading individuals, this foundation will undertake various projects and initiatives in keeping with its vision of taking women to a brighter future. Consumer goods giant Hindustan Lever (HLL), which has embarked upon its power brands strategy two years ago, sees each of its mega brands achieving a potential turnover of Rs 1,000 crore in the foreseeable
future, chairman M S Banga told shareholders at the company’s annual general meeting today. The company has identified over 30 brands in its FMCG business depending upon their size, strength and growth potential. The brands account for over 93 per cent of HLL’s domestic consumer business. In fact, the top five HLL brands together account for sales of over Rs 3,000 crore and last year it grew by over 10 per cent. Even though HLL has not made public its list of over 30 brands, Surf, Fair & Lovely , Lifebuoy, Taj Mahal, Wheel, Rin, Lux, Max, Annapurna, Knorr, Kissan are some of its mega brands. Banga noted that leveraging brand scale was crucial. “Brand scale enables us to get a larger share of the consumer’s mind as well as larger share of the retail shelf. For instance five of our power brands are among the top ten most heavily advertised brands in India, Banga said. The strategy of the company is to stretch the brand into other product formats or categories. The launch of Fair & Lovely soap, Lifebuoy talc, extending the Max ice cream brand to confectionery are few examples. The company’s new opportunities for growth, which arose out of Project Millennium, increase the size of HLL’s market opportunity by about 40 per cent, Banga added. According to Banga, “There is a misconception that our categories are mature with little scope for growth. In fact, several of our categories still have low usership levels.” The actual amount used per capita is far lower in India compared with other countries. For example, the per capita consumption in India for fabric wash stands at 2.63 kgs, while UK stands at 13.90. However, HLL has challenged that FMCG markets after growing in strong double-digits throughout the nineties are now declining in value for the last couple of years. This is because urban consumers are spending high on mobile phones, leisure, durables etc and therefore downtrading their FMCG purchases. Also, rural demand has been dampened by three unusually poor monsoons in the last four years, Banga added. What’s the truth? Can fairness creams, soaps and talc turn Black Beauties into Snowhites? Expert verdict is a clear no. Dr R.K. Pandhi, who heads the department of dermatology at AIIMS in Delhi, declares, “I have never come across a medical study that substantiated such claims. No externally applied cream can change your skin colour.” Indeed, the amount of melanin in an individual’s skin cannot be reduced by applying fairness creams, bathing with sun-blocking soaps or using fairness talc. Dr Pandhi explains that the upper layer of the skin-or the stratum corneum-is dead tissue. Below it is a barrier zone that prevents foreign particles from entering the body. Only if a substance crosses this barrier zone can it reach the melanin. Medicated ointments contain chemicals that help them get absorbed beyond the barrier zone. “I don’t know if any fairness cream does that. As for something like soap, which is on the skin for barely a few minutes, it’s a nonsensical proposition,” says Dr Pandhi. The reality is not so cut and dry. Even though there is no scientific backing of the claims made by manufacturers, sales of fairness products continue to gallop. The organized market of branded goods alone is worth Rs 558 crore. The unbranded and fakes market is estimated to be another Rs 150 crore. That’s a big market already but the potential is even bigger. Going by the matrimonial ads in the classified columns of newspapers, it seems fairness is the most important definer of beauty in this wondrous land. With such an attitude firmly entrenched in the minds of millions of people, the fairness products industry will never see dark days. GLOWING FACTS The fairness product market grew from Rs 384 crore in 1997-98 to Rs 558 crore in 1999-2000. At least 12 new brands have been launched since 1998. Popular brands have 4-6 fake copies, implying that the market is bigger than figures suggest. It’s no more just creams. Soaps and talcs are also in the market.
THE latest slugfest on the television-advertising front has unfolded, and it is to do with the Rs 700-crore fairness cream market. The Chennai-based CavinKare Ltd has yet again drawn the battlelines with longtime rival Hindustan Lever on the advertising front for its fairness cream brand. The latest television commercial for Fairever, CavinKare’s fairness cream brand, takes a dig at HLL’s Fair & Lovely ad. Fairever’s current ad has a father-daughter duo as the protagonists, with the father shown encouraging the daughter to be an achiever irrespective of her complexion. Fair & Lovely has been airing an ad film where the father is shown resenting his daughter because of her inability to acquire a job owing to her dark complexion. While the attempt to take on Fair & Lovely’s communication plank is obvious, CavinKare maintains that the objective of its new commercial is not to take a dig at Fair & Lovely but to “reinforce Fairever’s positioning”. “We have noticed attempts by Fair & Lovely to blur our positioning by changing its communication platform from ‘wanting to get married’ to ‘achievement’ and supporting this with high media spends. Since we don’t have the spend capacity to match HLL, a tactical way for us to respond is to reinforce our brand positioning,” a CavinKare official said. According to CavinKare, it is Fairever’s ‘challenger’ positioning that helped the brand make a dent in Fair & Lovely’s market share. Interestingly, this is not the first time HLL and CavinKare have warred over fairness creams. While Fair & Lovely is the market leader among fairness creams, Fairever’s current market share is 12.7 per cent. According to the CavinKare official, this commercial is expected to be aired till the time the company’s ‘objective’ is achieved. Business Line’s attempts to get a reaction from HLL on the issue, meanwhile, did not yield any response. According to industry estimates, growth rate in the fairness cream market slowed down to three per cent last year, against 8-10 per cent earlier. This probably explains why players are turning aggressive in pushing their respective brands. Apart from HLL and CavinKare, other significant players in the fairness cream market include Godrej Consumer Products and Emami. NOTE: It is interesting to note that despite the adverse news that Fair and Lovely, and fairness creams in general, received in 2002 and 2003, the fairness cream market was still growing at 10 percent annually as reported by CavinKare products. See: “Fairness Cream Mkt Growing at 10 pc Annually,” Business Line, December 15, 2004 www.blonnet.com . Also a study by AdEx India reported that fairness creams advertising on television rose nearly 56 percent in the first half of 2004 as compare to the same period in 2003. This study by AdEx India can be seen at www.indiantelevision.com --search for fairness creams.
Case 2-3 Starnes-Brenner Machine Tool Company–To Bribe or Not to Bribe Several questions should be emphasized in the case; the question of ethics, the question of self-reference criterion and a more important question of what role should the marketer play; how much should they try to change the system and how much should they try to become a part of the system. A strong point should be made that in a country where bribery is part of the way of doing business, there is an identifiable system of how much bribes are made, how much for different activities, when paid and to whom paid. One retired British executive once graded bribes as: 5% of $200,000 will be interesting to a senior official below the top rank, while 5% of $200 million justifies the serious attention of the head of state.3 Anyone being sent to a country where bribery is an important aspect of doing business should be well versed on the system of bribery in the country and be prepared to deal with it effectively.
Robert Keatley, “U. S. Campaign Against Bribery Faces Resistance from Foreign Governments,” The Wall Street Journal, February 4, 1994, p. A-10.
Pertinent Facts The Latin American sales effort of Starnes-Brenner Machine Tool Company of Iowa City, Iowa centers around a one-man operation in Latino. The company is changing its international marketing emphasis and is going to act more aggressively as an international firm. A new salesman is going to replace the Latino representative who is retiring. During the training period the new man who is a company man from the U.S., is introduced to the role bribery plays in doing business in Latin America. He questions the ethics of the practice and the rationality of it as a means of doing business profitably. The retiring representative points out that the firm in Latino, in addition to making a profit, is stimulating the economy of the country and that since bribery is a recognized means of doing business it is stimulating to the economy of Latino. He proposes that ethics will rise with an increase in the standard of living. Bribery persists as a problem the world over. In China, many of the Republics of the former USSR, and elsewhere, the business person is confronted with the decision to bribe or not to bribe. The instructor may want to have the students review the section on Business Ethics in Chapter 5 before attempting this case. It may be useful to have them examine the case without using the decision tree for ethical and socially responsible decisions (Exhibit 5-4) and then to review the case using the decision tree. The advantage of using the decision tree is to help them focus their thinking on the consequences of their decisions. One of the purposes of this case is to explore all the ramifications of bribery. A point raised in the case concerned bribery in the U.S. The attitude presented is that all others engage in wholesale bribery but that Americans are somehow above it all, except for isolated cases. Two articles that address issues of bribery both in the United States and elsewhere are recommended before discussion of this case. See “The Destructive Costs of Greasing Palms,” BusinessWeek, December 6, 1993, p.133–138 and Daniel B. Moskowitz, “Taking Aim at Bribes Overseas,” International Business, February 1994, p. 110. An excellent review of the present state of bribery around the world and international attempts to curtail the activities can be found in “Bye-bye To Bribes: The Industrial World Takes Aim at Official Corruption,” U.S. News & World Report, December 22, 1997. Discussion Topic An interesting comment from a retired agent in the U.S. Foreign Service raises questions about how strictly the Foreign Corrupt Practices Act is enforced. Although the U.S. Foreign Service agent was referring to his experience in China, it might be interesting to discuss his comments with the Latino case. An economics officer of the U.S. Foreign Service said he intentionally subverted the intent of the Foreign Corrupt Practices Act so U.S. investors and exporters would not lose out unfairly to companies and agencies from other foreign countries. “I figured out how business was actually done in corrupt countries who was on the take, whether the going rate for host country cooperation in particular types of transactions was 10 percent or 25 percent and who was good or bad as a go between.” I would tell Americans trying to do business in the host country: “Don’t tell me about any corrupt practices you are engaged in, because I am obliged to write that up and report you to Washington but do tell me in detail about corrupt activities by competing foreign companies. In return, if your information is interesting, I’ll give you my best guess on how corruption works here,” By doing this I hope that I have helped level the playing field.--(Walter H. Drew, “Corrupt Thinking,” Foreign Policy May/June 2005.)
Case 2-4 Ethics and Airbus
The case provides wonderful detail about how bribery works (including Swiss bank account numbers), how difficult are convictions, how different countries pursue cases (India vs. Canada), and the importance of personal connections even in billion-dollar deals. The Foreign Corrupt Practices Act (1977) and its OECD incarnation (2000) have been shown to affect corporate behavior in the US – this is so even though convictions are unusual. Hopefully, the OECD statutes will have a similar effect on other countries’ behavior. 1. Who benefits? The involved executives (if they don’t get caught), the firms making the bribes (that includes employees, shareholders, and home governments – the last in the form of tax payments made on income). Who is hurt? The customer firms pay more for the aircraft (shareholders, employees, local governments); and often is the case that airlines are government owned – so taxpayers in those countries lose as well. Also, many would argue that the employees and shareholders of the bribe paying companies suffer long term consequences with regard to a corporate culture that allows/promotes corrupt practices. 2. Airbus’ PR response? It is hard to guess what the best public relations response might be appropriate in different countries around the world. Our recommendation would be to tout the firm’s extensive training program regarding prevention of bribery in accordance with the new OECD rules (2000); and blame previous executive for previous transgressions that were allowed by law before 2000. Regarding the most recent revelation in The Guardian about Airbus’ lobbying to keep its “middleman list” confidential – the best response is to promise to follow the new regulations of disclosure demanded by the Export Credits Guarantee Department (ECGD) in the future, while reviewing the firm’s past behavior and the associated implications and consequences regarding middleman arrangements. Policies and executive training should be put in place to maximize the transparency of the firm’s international transactions in compliance with all pertinent laws. 3. Boeing defense against such behaviors by Airbus should be three-fold: (1) go directly to the customer and complain, (2) complain to the governments concerned (French and local), and (3) complain to the local press. Boeing should also point out that it has been obeying the FCPA for more than 25 years! 4. One might expect that a French company would be more savvy about interpersonal relations in global business given their higher values for Power Distance and lower Individualism score in Hofstede’s data (France = 68 and 71, respectively and the USA at 40 and 91). Also, since trade shows are more important in Europe than in the US you might expect the French to be better at using that promotional tool as well. An “objective” look at Transparency International’s indices suggests the French to be about the same as Americans when it comes to bribery (on bribe payers index France is ranked just above the US at #12 vs. #13; on the corruption perception index France is ranked #23 and the US #18). Of course, the Economist, a British magazine would rate Airbus as much more corrupt as implied in their article. However, given the recent transgressions of Boeing with regard to its US practices and the general lack of ethical and legal behaviors on the part of several US CEOs, one has to wonder if the Transparency International numbers are not about right.
Yes, we believe that the OECD conventions will affect the behavior of French companies in ways similar to the effects of the FCPA on US companies.
Case 2-5 Coping With Corruption in Trading With China This is a good case to explore the broad issues of ethical, legal, and unethical decisions. While some of these examples are blatant misuses of power (the extortion cases) some are minor but nevertheless unethical. Reality may dictate the necessity of paying but students should realize that some moral codes would dictate that they not pay. Others may just wink at the issues. Each student must decide his or her own moral standards. On a strictly legal basis, most of the activities would be considered illegal. 1. All the bribes, payments or favors mentioned in the case would be illegal under the FCPA. The one exception may be a trip or payment that simply ensures that the official does what he or she is supposed to do. The case of the PRC bank official that refused to issue a letter of credit until he was invited on a trip is obviously a case of extortion on the part of the official but whether or not it would be considered as illegal under the FCPA is questionable. Would a trip be considered a small payment? That may be an issue that cannot be answered outside of a court. All requests for payments by an official who has the authority to deny a sale is considered as extortion. Some examples in the case are: Trips built into cost of machines – extortion. Trip in exchange for a letter of credit – extortion Overseas education for children – extortion Cash payments for sales – extortion Dismantle the products for inspection if trips are not offered – extortion All offers to an official to have the official break his/her country’s laws are considered subornation. Some examples of subornation in the case are: Purchase black market import and export licenses – subornation Paying customs officials in a southern province to reduce the dutiable value of imports – subornation 3. 4. All are illegal under the FCPA with the possible exception of the one lubrication payment that was paid to ensure that the official carried out his/her official responsibility. Even if the FCPA did not exist, such behavior outlined in the case would be unethical. It hurts the country in the long run, adds to illegal behavior, increases prices for the benefit of officials only, and, in general, is corrupt. Yes, there is reason to hope that the large MNCs will change their behavior. At this writing already bills to comply with the OECD treaty have been submitted to legislators in Germany, the Czech Republic, Belgium, and Japan. Also, in China it will be particularly interesting to see who influences whom – that is, will more direct contact with the relatively “clean” Hong Kong system (Transparency International rated #18) help “clean up” the larger China system (TI rated #41), or vice-versa? A variety of actions are possible. Some of those are: a. Pay the bribe – illegal and unethical with all the associated ramifications
b. Report the requested bribe to person’s superior c. Report the requested bribe to a local enforcement agency d. Report the requested bribe to a local news agency e. Negotiate legal alternatives such as paying for community improvements f.Check with local expert or partner g. Usually students can come up with a list of more than a dozen alternatives, some of them humorous A study on the effects of corruption on administration performance by the World Bank and others made the following estimates on what corruption costs. What Corruption Costs Around the World4 Corrupt Activity government bureaucrat accepts “speed” money to issue licenses Organized crime, with sanction of local officials, controls and sets prices in markets Tax collectors permit underreporting of income in exchange for a bribe Government officials order expensive capital goods, or overpay or over-invoice for public works, in exchange for kickbacks Economic Cost 3% to 10% premium above licensing fee Goods sell at 15% to 20% premium Income tax revenues reduced by up to 50% Goods and services priced 20% to 100% higher than necessary
The professor may have the students read the following in preparation for the case discussion. Certainly have the students visit the Transparency International Web site referenced in the book. Shengliang Deng, A New Look At Ethics in International Business, The International Executive, Vol. 34, No. 2, March/April 1992, pp. 151–162. PRC Trade – “Where for Some Payoffs Are a Way of Life,” Business Asia, June 24, 1991, pp. 216– 217. “The Destructive Costs of Greasing Palms,” BusinessWeek, December 6, 1993, p. 136. Daniel B. Moskowitz, “Taking Aim At Bribes Overseas,” International Business, February 1994, p. 110 – 13i “The Gloves are Coming Off In China,” BusinessWeek, May 15, 1995, pp.60–61. Case 2-6 When International Buyers and Sellers Disagree Pertinent Facts The disagreement is that a West German importer bought pork livers from a U.S. supplier. The buyer was expecting 100 percent male pig livers, but got 45 percent sow livers which the Germans consider inferior to the male pig liver. The German firm had to dispose of the sow livers at a reduced price and wants the U.S. supplier to reduce his price accordingly on the sow livers.
Sources: Robert Klitgaard, Controlling Corruption (University of California Press, 1991); World Bank, The Effects of Corruption on Administrative Performance, and “The Destructive Costs of Greasing Palms, “BusinessWeek, December 6, 1993, p. 136.
The U.S. supplier refused to pay the $1,000 requested. Comments Insofar as contract law is concerned, the crux of the problem seemed to be whether the phrases “customary merchantable quality” referred to standards in the United States, where the meat originated, or in the country to which it was exported. Many other firms in the industry awaited the arbitrator’s decision because, while arbitral awards do not constitute binding precedents as such, they do provide some guidelines for the future. The American Arbitration Association upheld the American exporter. The arbitrator found that, although there was some tendency in the U.S. for packers to distinguish between male pork livers and pork livers from sows, the practice was not so widespread as to constitute an implied term of the contract. If the German buyer wanted no sow livers included in the shipment, he should have stated so when the contract was made. Case 2-7 McDonald’s and Obesity QUESTIONS: 1. How should McDonald’s respond when ads promoting healthy life styles featuring Ronald McDonald are equated with Joe Camel and cigarette ads? Should McDonald’s eliminate Ronald McDonald in its ads? 2. Discuss the merits of the law, proposed by France that would allow fast food companies either to add a health message to commercials or to pay a 1.5 percent tax on their ad budgets. Propose a strategy for McDonald’s to pay the tax or add health messages and defend your recommendation. 3. If there is no evidence that obesity rates fall in those countries that ban food advertising to children, why bother? 4. The broad issue facing McDonald’s U.K. is the current attitude toward rising obesity. The company seems to have tried many different approaches to deal with the problem but the problem persists. List all the problems facing McDonald’s and critique their various approaches to solve the problems. 5. Based on your response to question # 4 above, recommend both a short range and long range plan for McDonald’s to implement. Case Comments: There are no correct responses to the questions for this case. Who is to blame for the global trend in population obesity- parents, fast food, lack of exercise, etc.—can be debated forever but from a company’s view, the issue is not who is to blame but what needs to be done to overcome the public perceptions real or imagined that fast food is the sole culprit. Debate on this issue can rapidly morph into a debate of “its public’s responsibility to control their eating habits,” “advertising causes people to overeat,” and so on. Regardless of who is to blame, a company has to operate in the environment that exists. So, what can a company do to be able to continue to prosper? An old adage goes something like this,” It isn’t what’s true that is important; it’s what the market believes to be true that is important.” Following are excerpts from several articles that discuss McDonald’s efforts to deal with the problems it faces in Europe and the rest of the world. • McDonald's is heavily promoting a fruit-and-walnut salad, as well as a
new line of so-called premium chicken sandwiches. It also has refashioned Ronald McDonald into a fitness "ambassador" who in some cases visits schools. • The chain announced it would remove the "super size" option from its menus -- just weeks before a controversial documentary, titled "Super Size Me," was set to make its U.S. premiere. McDonald's said the decision wasn't related to the film.
"If we're concerned about the obesity epidemic, having nutritional data on the menu is a way to deal with it," says Michael F. Jacobson, executive director of the Center for Science in the Public Interest, a Washington advocacy group. Diners need the information before they order, not when they settle in to eat and, in some cases, throw away their wrappers, he said. One customer commented that she comes to McDonald's for the convenience and the price of the food. "Most people don't think it's good for you," she added. "So if that were your main concern, you probably wouldn't be eating here anyway." Starting in February 2006 in Turin, Italy, McDonald’s will print the calories, protein, fat, carbohydrates and sodium contained in some of its most popular menu items on wrappers and boxes. The data will be posted on package at al of the roughly 13,600 McDonald’s restaurants in the U.S and at about 20,000 restaurants world-wide. McDonald's said it has tested the nutrition packages in Colombia, Hong Kong, the United Kingdom and four local U.S. markets, among other places. McDonald's executives say they chose calories and the four other nutritional points based on what customers in test markets, as well as public-health experts, said are most relevant. In the U.S., the data will be available in English and Spanish, and in Canada, in English and French. Calories, protein, fat, carbohydrates and salt will be listed, with a graphic device in a bar chart format illustrating how the food compares with the recommended daily intake of nutrients. It currently lists details on the back of tray liners and online, but has come under pressure to give the information greater visibility in light of public concerns about increasing levels of obesity. McDonald’s has revealed the redesign of its packaging that takes in nutritional information. Five graphic icons representing the key nutritional elements of each product will appear on all packaging. McDonald’s has been testing the new-look packaging in several hundred restaurants around the world, including in Columbia and Spain. The finalized packaging will go into McDonald’s restaurants during the Winter Olympic Games in Turing, Italy in Feb 2006. It will then be rolled out to restaurants in North America, the remainder of Europe, Asia and Lain America. McDonald’s is the first fast food chain to put nutritional information such as fat and sodium contend on most of it s packaging. Big Macs, premium chicken sandwiches, french fries and salads are among the first products that will be served up with nutritional details. One executive commented, “It isn’t clear whether the data will boost sales of the chain’s healthier fare or hurt sales of its less-healthy items.. One customer’s response was that she might switch her Cobb salad order to a regular salad, one without the bacon, eggs and blue cheese, if she learned the Cobb and a lot of sodium or fat. One executive commented that the nutritional facts won’t hurt profit margins, as customers navigate the menu particularly toward higher –priced premium products. If it does push customers to the new chicken sandwich or salads both with very high price points that would e good for profit. But at the same time they don’t want to scare people away from their core menu items like the Big Mac.
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In its first corporate responsibility report aimed at the European market, Mcdonald’s will say it has learned from its customers that “we could do better in our understanding of wider social trends and expectations.” The 70 page report, aimed at EU policy makers, pressure groups, shareholders, suppliers and employees, gives details about he content and quality of meals and employment conditions. • McDonald’s strongly reject claims that restaurant workers are poorly paid and skilled, as epitomized by the American Merriam-Webster dictionary expression “McJob.” • Initiatives taken in Europe to boost its image with consumers include an invitation of customers in 30 European countries to look round its kitchens under its Open Doors program. In the U.K., where it has lost a quarter of its sales in five years, it has launched a direct mailing campaign to educate consumers about the sources of its organic milk and vegetables. • Sales in Europe have recovered in the past two quarters of 2005 but the recovery has yet to gain momentum in the U.K. • McDonald’s is aiming to boost its popularity among women with the launch of an 8 million pound, multiple-country drive featuring Destiny’s Child, to promote its expanded salads offering. • McDonald’s is bolstering its Salads Plus menu with the addition of Chicken Salad and Pasta, which includes roast peppers, basil and cherry tomatoes. • McDonald’s UK replaced the dressing on its Salad Plus range, which had been criticized for its fat content, with a lower-calorie, lower fat versions. These excerpts were taken from the following sources: Mark Sweney, “McDonald’s Unveils 8million pound Ads to Win over Women,” Marketing UK, April 6, 2005, Samuel Solley, McDonald’s Unveils Nutrition-Level Packs,” Marketing UK, Amy Garber, “Plan to Revitalize McD’s European market Now in Hennequjin’s Hands,” Nation’s Restaurant News, June 20, 2005 and, Steven Gray and Ilan Brat. “Read It and Weep? Big Mac Wrapper to Show Fat, Calories,” Wall Street Journal, October 26, 2005, p. B1.
CASE 3 ASSESSING GLOBAL MARKET OPPORTUNITIES Case 3-1 International Marketing Research at Mayo Clinic Case 3-2 Swifter, Higher, Stronger, Dearer Case 3-3 EasyCar.com Case 3-4 Marketing to the Bottom of the Pyramid Case 3-1 International Marketing Research at Mayo Clinic This case offers an in-depth description of the kinds of research (and some of the results) that one of the most international health care providers routinely does; and it is a worthwhile read just for that reason. 1. The first step in deciding how to double the clinic’s international business is to forecast growth of demand and revenues based on the current business model. As can be seen in the case the firm already collects a great deal of information regarding its international customers/patients already. 2. We would expect that most of their international patients are not covered by insurance and represent the highest levels of income in their respective countries. This can be verified by a survey of present clients. Potential markets then might be projected based on demographic kinds of analyses and those sales compared to the clinic’s actual penetration of those markets. 3. A key problem identified in the current marketing research is the low awareness levels of the Mayo brand and services. The firms should experiment with a variety of media and messages to increase awareness. 4. Another direction for the clinic’s marketing research would be to follow the lead of the American insurers as they expand overseas. Case 3-2 Swifter, Higher, Stronger, Dearer There are several juicy topics addressed in this case—three are perhaps most useful. One is the growing importance of services and entertainment in international trade. Another is the fascinating interaction of professional athletics institutions and global communications companies. The case is also useful as a context for setting up international negotiations simulations for classroom play. 1. The pricing approach Peter Ueberroth used for pricing the 1984 Los Angeles Olympic broadcast rights makes sense here. He set up a bidding scheme in the U.S. pitting ABC, NBC, and CBS against one another. ABC bid highest and agreed to pay $250 million to broadcast the 1984 Olympics to Americans. Ueberroth then turned his attention to Japan. He reasoned that Japan population was about half that of the United States and Japan at the time had a per capita income about equal to the U.S. He also knew that Japanese consumers had more color televisions per capita that Americans. Finally, the value of the Games varies according to the relative time zone and the associated convenience for TV viewers. Based on all these factors his first offer to the Japanese was $90 million. A similar calculus might be used for each of the five markets listed in question #1.
The key factor in these kinds of negotiations is what Fisher and Ury 5 call the BATNA, that is, the Best Alternative to a Negotiated Agreement. That is, in 1984 Ueberroth had three alternatives in the U.S.—ABC, NBC, and CBS. Because of that market structure, one seller and three buyers, he was able to extract the maximum “rents” for the 1984 games. However, in Japan he negotiated with only one customer, a consortium of Japanese network lead by NHK. Thus, he was only able to extract about $20 million from the Japanese because he had no other good alternative except not selling the broadcast rights at all. So the class might be broken up into several groups for simulated negotiations. Having read the case they should be prepared. You might allow one class session (say 60–90 minutes) for the teams to prepare for the negotiations, another class session for the actual negotiations, and a third for comparisons of outcomes and feedback. You might break up a class of 36 students into the following teams: A team of 3 IOC representatives negotiating with a team of 3 NHK (Japanese) reps A team of 3 IOC with a team of 3 Chinese A team of 3 IOC reps with three teams (of two each) of Australian reps, each representing a different TV network A team of 3 IOC reps with a team of 3 EU reps (they also formed a consortium in past negotiations) A team of 3 IOC reps with three teams (of two each) of Brazilian reps, each representing a different TV network These are of course just guidelines, but this set up does work quite well. The teams selling to the Australians and Brazilians need not be given specific instructions to or how to set up a bidding process. It’s actually more interesting to let them think it through and organize it themselves.
The Scottish Claymores make a nice hypothetical pricing problem including other investment criteria. Currently all the WFL teams are jointly owned by the NFL and Fox, and there are now no current plans to sell the teams to individual owners as in the States. However, such a sale is certainly within the realm of possibility given the dynamic nature of the global entertainment and communications industries. Pertinent information includes population, income, TV viewing habits, and interest in American football in the European countries. The attached article from the Washington Post provides crucial recent information that you may or may not wish to provide for your students. The prices of recent sales of NFL teams have run between $500 – $800 million. All things considered perhaps, $50 million makes sense for the Claymores as a long-term investment.
Useful References Echikson, William “Making the Games Run on Time,” BusinessWeek, 2/9/98, pages 66–68. Hamilton, David P. “Winter Olympics 1998: Made in Japan? Not for Home Team,” Wall Street Journal, 2/18/98, page A6. Hyman, Mark “Putting the Squeeze on the Media,” BusinessWeek, December 11, 2000, page 75. Peers, Alexandra “Winter Olympics 1998: Salt Lake’s Mission: Go One Better, and Do It Cheaper, Than Nagano,” Wall Street Journal, February 20, 1998. Case 3-3 easyCar.com
Roger Fisher and William Ury, Getting to Yes, New York: Penguin, 1980.
INSTRUCTOR’S NOTE FOR CASE DESCRIPTION The primary subject matter of this case concerns concepts relating to operations strategy and service system design. Secondary issues examined include the application of production line approaches to service, service quality concepts, and the value of demand management systems to the firm. The case has a difficulty level of four/five. The case was written for an MBA level introductory operations management class. It is also suitable for use in operations strategy, service operations managemen, and/or strategic management courses, at either the MBA or senior undergraduate level. The case has been designed to be taught in 75 minutes and is expected to require about two hours of outside preparation. CASE SYNOPSIS This case describes the situation faced by easyCar.com at the start of 2003. EasyCar is the low priced European car rental business founded by easyJet pioneer Stelios Haji-Ioannou. EasyCar had just reached breakeven in 2002 on sales of ₤27 million, and had as its goals to reach sales of ₤100 million and profits of ₤10 million by the end of fiscal year 2004 in order to position itself for an initial public offering. To do this would require opening new locations at a rate of two per week and expanding its fleet of rental cars from 7000 to 24,000. The case describes the company’s processes and facilities as well as its pricing and promotional strategies. It also describes a number of significant changes that the company has made in the last year, including a move to allow rentals for as little as an hour that was designed to position easyCar as a competitor to local taxis, buses, trains and even car ownership. The case also explores several legal challenges the firm faced, including a ruling that threatened one of the core elements of its business model. Students are asked to evaluate easyCar’s operations strategy and assess the likelihood that easyCar will be able to achieve its ambitious goals. RECOMMENDATIONS FOR TEACHING APPROACHES DETAILED LEARNING OBJECTIVES The case has been written primarily to illustrate concepts relating to operations strategy and service process design. Specific concepts that the case can be used to illustrate include: 1. How to align a company’s operations strategy with its business strategy (i.e., low price market strategy supported by processes, procedures and systems totally focused on achieving low cost), and how to use the concept of order winning criteria to facilitate linking process design decisions to the firm’s operations strategy (Hill, 1999). 2. How to apply production line approaches to a service through standardization, the use of technology, and the reduction of the discretionary actions of employees (Levitt, 1972). 3. Why a low cost service does not necessarily imply a low quality service to the consumer. The case provides a good illustration of Parasuraman, Zeithaml and Berry’s (1985) service quality model and the notion of service quality relating to customer perceptions compared to customer expectations. 4. How services differ from manufactured products (i.e., intangibility, perishability, heterogeneity and simultaneity), how services differ from each other, and how the characteristics of a given service
influence the design of the service delivery process (i.e., relative focus given to physical facilities and policies, employee behaviors and employee judgment). 5. How the customer can be designed into the service delivery process (i.e., so that they are performing a portion of the service delivery). 6. How valuable sophisticated forecasting and demand management systems can be to a firm and how process details can be designed to aid forecasting and capacity planning efforts (e.g., early bookings, no cancellations). CASE DISCUSSION QUESTIONS WITH ANSWERS & TEACHING SUGGESTIONS
The discussion questions that follow were written so that the instructor can simply walk the class through the questions in sequence. This takes the class basically through a discussion of different order winning criteria that a rental car company might choose to compete on (cost, quality, flexibility) and looks at easyCar’s processes, policies and procedures with respect to these possible order winning criteria. Questions 5 and 6 are designed to either further reinforce the lessons of questions 1-4 or to test students understanding of the ideas discussed in these earlier questions. Some instructors may wish to assign only questions 1-4 and 7 and integrate the important discussion points from questions 5 and 6 into questions 2 and 3. Question 7 is designed to help bring closure to the discussion and emphasize to students that the success of easyCar’s operations strategy will depend in part on how well it can implement the strategy during a period of rapid growth. 1. What are the characteristics of the car rental industry? How do these characteristics influence the design of service delivery processes in this industry in general? This first question is intended to have students think about the nature of the industry that easyCar competes in and the nature of car rental services in general. This will help students better understand and distinguish between actions taken by easyCar’s that are related to the nature of the industry and service and those related to easyCar’s strategy. Perhaps the best way to start the discussion is by looking at the general characteristics of services and which of these characteristics are most significant in the case of car rentals. In general, services are characterized by their intangibility, perishability, heterogeneity and simultaneity. But different services vary significantly in the extent to which these characteristics hold. Intangibility – While strictly speaking, the “service” of car rental is intangible, given the physical nature of the rented vehicle, it really is not as intangible as many other services in the sense that the consumer can see and touch the rented vehicle. For the vast majority of the period during which the customer uses the service of car rental, the physical car is the service provided. For many services, intangibility makes it very difficult for the consumer to judge quality and for the producer to control quality. This is not nearly as difficult a proposition in the case of car rental. The “convenience” factor (e.g., location, speed of pickup and drop-off, etc.) associated with rental is the most significant intangible associated with rental cars. Perishability – Car rental is clearly a very perishable service. If a day goes by and a car is not rented, the opportunity to generate revenues from that unrented time is lost forever. Perishability is a critical factor in the rental industry given the generally high fixed cost associated with the service (i.e., a fleet of vehicles). All industry players must cope with this perishability and different companies will have somewhat different strategies for dealing with it.
Heterogeneity – Car rental is not a particularly heterogeneous service, as compared, for example, to the services provided by a doctor, an architect, a lawyer or a hairdresser. While customers may request different vehicles or different extras (e.g., child seat, ski rack) or different rental terms (return with empty or full tank, unlimited miles, etc.), the majority of customers will receive exactly the same service – the use of a vehicle for some specified period of time. Further, the basic interaction or contact that employees of the rental car company have with customers is going to be very similar. Simultaneity – The issue of simultaneity is not a major issue for the car rental industry. The service being provided by the car rental industry is the use of a vehicle in a location where the customer both needs one and does not have one (i.e., typically when the customer is travelling). While there is simultaneity in the sense that the customer and the vehicle are together during the time that the service is consumed, most of the process of creating the service (e.g., creating the facilities, arranging for the right car to be in the right place) is done without the customer in the process. The customer only interacts with the service organization when booking the vehicle and when picking up and returning a vehicle. While these interactions are important, they do not limit the ability to achieve economies of scale in the industry the way simultaneity does in some other industries. Service design has been characterized as having three basic components – (i) physical facilities, processes & procedures, (ii) employee’s behaviors, and (iii) employee’s professional judgement. Given that car rental service is a relatively tangible, homogenous service with fairly low levels of customer contact (i.e., simultaneity), rental companies tend to focus their service design on the physical facilities, processes and procedures. While employees’ behaviors are not unimportant, they are of secondary importance to facilities, processes and procedures in service design in the car rental industry. This can be seen industry wide. 2. EasyCar obviously competes on the basis of low price. What does it do in operations to support this strategy? Once the student understands the characteristics of the car rental industry from a service design perspective, the discussion can move to how easyCar’s operational design allows it to compete on the basis of price. Given the extent to which easyCar has designed its process to reduce cost, students should not have a difficult time identifying the features of its process design that allow it to offer a lower price. The key point to drive home is the extent that easyCar has gone to align its operations strategy and process design with its business strategy. Clearly the order winning criteria in this case is low price. (see Terry Hill’s Manufacturing Strategy textbook for more on the concept of the order winning criteria in operations strategy). Perhaps the best way to make this point is to explicitly compare easyCar’s operations with the operations of a traditional car rental company. Exhibit TN-1 shows this comparison. After having gone through this comparison, the instructor can ask students why all rental car companies don’t follow easyCar’s lead and reduce their costs in this manner. Doing this drives home the link between the operations design and the business strategy – that is, the traditional car rental companies have strategies focused more on flexibility and service, and as such have different order winning criteria and different operational designs to support these criteria. (An alternate way to ask this is to ask what easyCar gives up to achieve this low cost, although discussion questions 3 & 4 are really designed in part to get at this issue). Finally, once the components of the easyCar operations systems have been brought out, they can be used to make the point that many of the methods that easyCar uses can be thought about as applications of production line approaches applied to a service context. This point is particularly worth making if students have been assigned to read Levitt’s (1972) “Production-line approach to service”. The
easyCar situation clearly illustrates the ideas of service standardization, reducing the discretionary action of employees and using technology to support or substitute for people in the process. 3. How would you characterize the level of quality that easyCar provides? Asking students about quality is a logical follow-up to the previous question focused on cost. Discussing quality is important so students see that low cost does not necessarily imply low quality in the minds of the customer. The discussion can also be used to illustrate several important service quality concepts. One way to begin this discussion is to ask what is quality in this case in the mind of the consumer. Clearly easyCar is targeting a particular segment of the market that is very price conscious, but the students should recognize that “quality” in the consumers’ minds is more than simply a low price (or alternatively, the needs of this segment are more than simply low price). The idea of value as a concept relating both quality and price can also be introduced here, with value equating to the benefit of the service provided relative to the price paid. After students begin to offer ideas about what quality means in this situation, the instructor can use this input to introduce the ideas that (i) consumers judge the quality of service based on both the outcomes achieved as well as the process used to achieve them; and (ii) consumers perceive quality in a multi-dimensional way. This discussion can then be used to introduce Parasuraman, Zeithaml and Berry’s five dimensions of service quality that have been found to apply across a wide variety of service contexts. These dimensions, and how they relate to the easyCar situation, are as follows: Reliability – the ability to perform the promised service dependable and accurately, or in a broad sense, whether the company delivers on its promises. Of the five dimensions, this is the one that is the most important in this case. Chances are that when students were asked about quality to start this discussion, someone said that customers wanted a reliable vehicle – one that didn’t break down, started every time, and never caused any problems. What such students were describing was the reliability of the outcome. Students should be pressed to think about reliability in the context of the process and the interaction between the easyCar and the customer. Customers expect not only the outcome of the service (i.e., the use of the car) to be reliable, but also expect the process of booking, collecting and returning the vehicle to be reliable. That is, they don’t want any surprises during these critical service encounters. They want their paperwork processed predictably and accurately, for example, each time a vehicle is rented, and they don’t want to be surprised by additional fees or unexpected requirements. They expect the processes to conform to the process descriptions provided on the easyCar website. Tangibles – the appearance of physical facilities, equipment, personnel and written materials – Tangibles other than the car and the website were not emphasized. easyCar strived to have clean, simple facilities that conveyed an image of efficient, practical, no frills service. If it didn’t come up in the context of discussing reliability, students should be asked why easyCar started with a fleet of Mercedes A-class vehicles. This choice seems inconsistent with easyCar’s positioning as a low cost provider. The key to understanding the launch of easyCar with the more expensive Mercedes is that easyCar did not want to be perceived as a low quality service provider (this comes through in the quote in the case from Stelios about not compromising on the hardware). The importance of the Mercedes A-class is not just for the current customer. Since a major advertising strategy of easyCar is to put its name in bold orange lettering on all its cars, the Mercedes A-class vehicles are likely to be more positively perceived by those who see the vehicle and the easyCar advertising. EasyCar wants to create an image of reliability that a fleet of new Mercedes might imply (as opposed to being associated with other very low-price rental car companies that often rent older vehicles).
Assurance – employee’s knowledge and courtesy and their ability to inspire trust – this dimension is particularly important for services that the customer perceives to be high risk and/or about which they have a hard time evaluating outcomes. Neither of these situations exist in the case of rental cars, so this dimension was also not emphasized. While employees were trained and were expected to be knowledgeable and courtesy, they were not expected to build relationships with customers. Trust and confidence was embodied here more in the organization itself than its individual employees – easyCar has tried to position itself as a trustworthy, reliable, large company alternative to customers seeking a low priced car rental who are nervous about going to the smaller, unknown companies operating out of only one or a few locations. Responsiveness – willingness to help customer and provide prompt service – easyCar does not emphasize responsiveness – it’s strategy is based on charging extra to those customers who need extra help (beyond answering simple questions on pickup or return) thereby encouraging customers who require a lot of customized service to go elsewhere. It’s approach to staffing also means customers sometimes have to wait 15 minutes or more to pick up their vehicles. Empathy – caring, individualized attention given to customers – easyCar does not emphasize empathy – it does not try to treat customers as unique – its goal is to treat all customers the same and pass on as much of the processing work to the customers as possible in order to drive costs out of the process. It is worth pointing out to students that while reliability is the service quality dimension that easyCar focuses most of its attention on, this is the dimensions upon which it is the most difficult to exceed customer expectation. This is not a significant concern for easyCar, because it competes based on a price leadership strategy – it’s goal is to exceed customer’s expectations on price (which so far it has done) while meeting their needs with respect to particular service quality dimensions. Building on this, instructors also may want to emphasize to students that while customers sometimes use all of the dimensions to determine service quality perceptions, other times they do not. Because car rental is not as intangible or heterogeneous as many services, and the simultaneity of the service is associated primarily with the facilitating good, many customers may evaluate service quality upon a subset of the above dimensions. This is particularly true in the case of easyCar because of how easyCar uses its website to manage its customers’ expectations about the service process. At this point, instructor’s can wrap up the discussion of service quality by discussing the research indicating that consumers evaluate the quality of a service largely by comparing the perception they have after receiving the service with the expectations they had in advance for the service. Parasuraman, Zeithaml, and Berry’s (1985) service quality model can be introduced at this point to drive home this idea. EasyCar is good example of an application of this model. EasyCar now goes to great lengths on their website to communicate exactly what customers will receive and what they will not receive. The reason that easyCar does this is to manage its customers’ expectations regarding the service (gaps 4 & 5 in the Parasuraman, Zeithaml and Berry model). When easyCar was launched, it experienced some bad press as a result of customers who did not fully understand the easyCar approach. EasyCar does not want customers to be surprised by any of the features of its service that are different than traditional car rental companies, as such surprises would have a negative impact on the customer’s perceptions of service quality (primarily along the very important reliability dimension. 4. Is easyCar a viable competitor to taxis, buses and trains as Stelios claims? How does the design of its operations currently support this form of competition? How not? EasyCar sees itself as a potential competitor to taxis and buses because it allows customers to rent a vehicle for as little as one hour. From easyCar’s position, this makes sense as part of their effort to
achieve maximum utilization of their fleet. If they can rent out a car for even an extra one or two hours when the vehicle would otherwise sit in a garage unused, then it adds to their bottom line. Further, it is possible that such very short term rentals seem most likely to come during the work week, a traditionally slower period for easyCar given its primary appeal is to leisure travelers who demand vehicles more on weekends than on weekdays. In this way, the very short-term rentals may help balance out demand on a weekly basis. EasyCar’s change to allow rentals for as little as one hour provides a good opportunity to discuss the issue of the flexibility of EasyCar’s processes. The easyCar process is flexible in that it allows customers to choose exact pick-up and drop-off times and pay for only that time. Traditional rental car companies charge by 24-hour periods and for a minimum of one day. Further, easyCar charges customers for each individual service that they use (e.g., cleaning the car, extra kilometers), allowing customers to pay only for the services that they require. This flexibility really revolves around prices. In two cities, easyCar also offers flexibility in terms of location. Fully half of easyCar’s rental sites are in either London or Paris. The question is whether these forms of flexibility are sufficient to make rentals of a couple of hours appealing to customers. There are several significant limitations from the customer’s perspective that will likely limit easyCar’s ability to attract these customers. First are the preparation fees or activities that the customer will have to pay and/or engage in to rent the car. There is a €4 standard preparation charge and a €5 charge if the customer uses a standard credit card to pay for the rental. Then the customer may have to wait once arriving at the easyCar location to collect their car if there is a queue of other customers, which as the case indicates can occur, particularly during peak times, because of the minimum staffing levels maintained at each location. Once the customer picks up the car, he or she will then have to put gas in the car before it is ready to go. When the customer returns the car, he or she needs to wash the car or pay the €16 cleaning fee, and must again potentially wait to return the car. This all amounts to a significant investment in time or money to rent for a couple of hours. The second limitation is that easyCar’s prices typically increase as the time of the rental period draws near, particularly during peak periods. While a few customers may know well in advance that they need a vehicle for only a couple of hours on a given day, it would seem that this market segment is likely to buy more at the last minute. This makes the price somewhat less competitive. Obviously easyCar can factor this into their pricing model, so that if a customer does want a car for a short term period on short notice and the vehicle is available and would likely go unrented, then the system can quote the customer a reasonable price. However, this raises a third limitation, which is that frequently easyCar will not have a vehicle on such short notice, as they currently achieve 90% utilization of their fleet. If a customer frequently finds no vehicles available, at some point he or she will stop bothering to check and simply use the alternatives. The point to make is that most of easyCar’s processes are tailored much more to the customer who knows his or her travel plans well in advance and has the extra time to go to a secondary location and perform some of the traditional service themselves. This does not seem compatible with the renter who might want to use the easyCar for an hour or two on short notice instead of taking one or a couple of taxi rides. For easyCar to successfully compete for such customers may require changes to its service process. Such changes might include, for example, a relaxation of cleaning policies (e.g., the exterior is free from mud, grime, etc. rather than evidence that the car has been washed) and some type of automated drop off system to reduce the time factor for customers. Having many locations in the same city also clearly makes easyCar a more viable competitor to taxis, buses and car ownership. This has significant implications to easyCar’s expansion strategy. If it truly wants to compete against taxis, buses and car ownership, it will focus its expansion on opening multiple locations in the major European cities. If it sees itself more as competing for tourist customer, it will open more locations in tourist destination locations, either near airports or train and bus stations. 5. What are the operational implications of the changes made by EasyCar.com in the last year?
A total of five recent changes are identified in the text that easyCar has made in the last year. Discussing some or all of these is designed to reinforce some of the proceeding lessons as well as further highlight some of the trade-offs that the company must deal with in its efforts to compete based on cost. The discussion can also be used to emphasize that all companies, regardless of what their competitive priorities are, must still seek continuous improvement in their methods. (i) Rental by the Hour: This would have been discussed in detail in the preceding question. (ii) Introduction of vehicles other than the Mercedes A-Class: Perhaps the most interesting change that easyCar made, other than allowing rentals of only an hour, was to move away from its one car model and offer a number of different, although generally similar, vehicles at its different locations. The case indicates that the change was made to keep pressure on suppliers (i.e., the automobile manufacturers) to keep costs down and to in turn be able to lower the price of a rental to customers. What is perhaps surprising in the change is that easyCar went from having one vehicle type to having five vehicle types. Part of the operational benefits of a single fleet is site specific. Any car can go to any customer and significant economies of scale would exist in the maintenance of the fleet. However, having different vehicles at different locations reduces easyCar’s flexibility to shift vehicles between locations easily if demand is greater at one location than at another. This is particularly an issue in shifting vehicles between Mercedes and non-Mercedes locations. Customers who have paid a few euros extra a day to rent from a location that offered the Mercedes vehicles would likely be disappointed if they showed up to pick up there vehicle and were given a Renualt Clio or Ford Focus. So operationally, what easyCar has done with this change is to lower its cost some, but at the expense of some operational flexibility. The long term question related to this is whether customers will develop preferences for specific vehicles and how easyCar will deal with this on the market side of things. This situation can also be used to introduce extending operations strategy issues to the supply function. Clearly the move by easyCar pushes their vehicle suppliers to offer competitive prices, although it moves easyCar away from a supplier partnership models intended particularly to improve quality and flexibility along the supply chain. (iii) Clean Car Policy: This changes is clearly very consistent with easyCar’s low cost strategy. Basically it represents a transfer of a task traditionally done by the company to the customer. Operationally, it has several implications. It reduces the need for staff at the rental site, helping easyCar reduce one of its costs. More significantly, perhaps, it also speeds the turnaround of a vehicle. That is, this policy, combined the empty fuel policy, means that most vehicles are returned in a condition that allows them to be immediately rented to the next customer. This helps easyCar maintain a very high fleet utilization. But what is also interesting operationally is that it makes the employees’ task somewhat less predictable. Whereas with the old policy employees knew they would have to clean each vehicle, and they knew how many vehicles were coming back each hour, with the new policy there is an additional element of uncertainty in the process because an occasional car will need to be cleaned. This may mean that one or more customers may have to wait at the easyCar site while the employee cleans such a vehicle. This is particularly an issue at sites which are staffed by a single employee. It is worth mentioning that the change in policy on the operational side has a real impact on the market side as well. The policy lowers the price to customers willing to take the time to wash the car by €7 (i.e., through reduction of the vehicle preparation charge from €11 to €4) while increasing the price of the vehicle to customers not willing to wash the vehicle by €9 (i.e., such customers now pay a €4 preparation fee + a €16 cleaning fee instead of the previous €11 preparation fee). EasyCar is likely to pick up some new, price sensitive customers by the €7 reduction in price. However, for customers who don’t want the inconvenience of cleaning the vehicle, the €9 price increase may push some of them toward traditional rental car companies.
(iv) Empty to Empty Policy: This change, like the previous one, is clearly consistent with easyCar’s low cost strategy. Operationally, the empty to empty policy would seem to significantly reduce the chance that an easyCar employee would have to deal with the gas level. Previously, customers had to worry about taking the time to fill the tank. Customers running late might skip this step to save time, leaving the task for an easyCar employee. With the new policy, the gas can be at any level as long as the low fuel indicator light is not on. Since most drivers are unlikely to allow the gas level in their vehicles to drop this low anyway, the chance that an easyCar employee would have to deal with putting gas in the car is small. Combined with the previous change, this policy basically means the vast majority of customers bring their car back in a condition that allows it to be immediately re-rented.
(v) Requiring Customers to Purchase Insurance: This policy change probably has greater implications on the marketing side than on the operations side. Operationally, however, it greatly reduces the likelihood of conflict between customer and easyCar employee when a customer returns a damaged car. Previously customers who did not purchase the optional insurance had some liability, and the employee on duty would have to sort this out with the customer. This can be a timely process, and present difficulties particularly for a location staffed by only one person. Such incidents would likely cause delays for other customers attempting to pick up or return cars at the same time. 6. How significant are the legal challenges that easyCar is facing? Clearly the OFT ruling against easyCar is much more significant than is the posting of the pictures of renters with overdue vehicles. Discussing the OFT ruling against easyCar is designed primarily to reinforce the cost benefits gained from easyCar’s demand management system and its high utilization rates it achieves. According to the quote by Stelios, allowing customers 7 days to change or cancel reservations without penalty would cause utilization to fall from 90% to 65% and prices to triple. While these estimates are in all likelihood an overly pessimistic assessment of the impact, the impact none the less would be significant given the central role yield management plays in easyCar’s approach. Further, it is worth using Stelios’ estimates to give students a better feel for the significance of the high utilization rate that easyCar achieves. At a 90% utilization rate, easyCar would have (0.9)(24,000) = 21,600 vehicles rented out at any given time by the end of 2004 if its growth goals are realized. To have the same number of vehicles on rent at the end of 2004 with a 65% utilization rate would require a total fleet of 33,200 (21,600/0.65) or a 38% larger fleet than currently planned. Further, current easyCar facilities rent as few as 15-20 spaces in a parking garage to operate a fleet of 150 cars. To service the same number of customers out of a location at a 65% utilization rate would require a fleet of 208 (0.9*150/0.65) vehicles and an absolute minimum of 72 (208*(1-0.65)) spaces to park un-rented vehicles. Students could be asked what would happen to easyCar’s hoped for ₤10 million profit if it had to purchase an additional 9,000 vehicles and quadruple the size of all of its facilities. Going through this analysis and asking students to think about and calculate the impact on profits should drive home the cost savings achieved from the high utilization rate. The other legal challenge easyCar faces deals with its posting of the pictures of customers with overdue vehicles. This is not as significant, both because its impact is not as great and because no legal action has yet been taken. The value of including this in the case, and possibly in the discussion, is twofold. First, it indicates to students the significant cost of this problem to the rental car industry. Second, it illustrates that basically a “zero mistakes” process must exist for implementation of this policy to minimize the chance of any legal claim against the firm. 7. What is your assessment of the likelihood that easyCar will be able to realize its goals for 2004?
This question is really intended to bring closure to the discussions. The established goals, a quadrupling of sales from ₤27 million to ₤100 million via the opening of 130 new locations in the next two years while realizing a ₤10 million profit are certainly ambitious. It is worth noting that easyCar’s operational model certainly makes opening new locations easier than for traditional rental car companies, given the minimum facilities required and the creation on the part of easyCar of vans with all the equipment needed to run a location. The bottlenecks for expansion more likely rest with hiring and training all of the employees to staff these locations, as well as providing sufficient marketing support to launch 130 new locations on a minimum marketing budget. The greater challenge operationally will be to continue to find ways to drive costs down while maintaining customer satisfaction so that it can realize profits at the same time. USE IN A STRATEGIC MANAGEMENT CLASS The case, as written, could also be used in a strategic management class to discuss or illustrate how functional strategies need to be aligned with corporate strategies, how a low cost strategy is implemented, and what constitutes a durable competitive advantage. The following questions are suggested as possible discussion questions for using the case in a strategic management class. Questions 1-4 and 7 are very similar to those described above, only broadened somewhat to better fit a strategic management (as opposed to an operations management) course. Questions 5 and 6 are unique and are intended to point students toward important strategic management concepts. In relation to a strategic management class, the idea of strategic groups could be included in the discussion of question #1 (with a strategic group map being built along dimensions of price and service/quality). Discussion of question #2 can be broadened to include issues relating to finance (e.g., customers paying in advance has a big impact on cash management) and marketing (e.g., advertising on the side of the car, posters in subway, bus & train stations). Question 5 is intended to highlight that process innovation can be as or more important than product innovation in creating competitive advantage. Question 6 allows for a discussion of how a company goes about achieving a durable competitive advantage and whether or not easyCar.com’s strategy and actions are consistent with creating a durable advantage. The strategy easyCar.com is pursuing is likely to be at least somewhat durable because the rental car industry is not terribly dynamic, the major competitors are unlikely to try to imitate its strategy because of prior strategic commitments, and easyCar.com’s advantage is built around process innovation is not always easy for a competitor to copy. 1. What were the characteristics of the car rental industry that made it attractive to Stelios? 2. EasyCar obviously competes on the basis of low price. What does it do across the business to support this strategy? 3. How would you characterize the level of quality that easyCar provides? How would you characterize the level of customer responsiveness that easyCar provides? 4. Is easyCar a viable competitor to taxis, buses and trains as Stelios claims? How does the design of its operations currently support this form of competition? How not? 5. It has been argued that innovation is the single most important building block of competitive advantage. Does that appear to be the case for easyCar? Why or why not? 6. Your textbook authors discuss the durability of competitive advantage. Based on your textbook authors’ perspectives, is easyCar’s competitive advantage durable?
7. What is your assessment of the likelihood that easyCar will be able to realize its goals for 2004? EPILOGUE
In March of 2003, easyCar had announced that it was going to make as many as 12,000 vehicles available from unmanned pick up points by the end of 2004 through the use of car clubs. EasyCar had started testing the technology at one of its locations in London in the spring of 2003. Customers would still reserve a car via the internet, then call on their mobile phone when they arrived at the vehicle. EasyCar operators would then unlock the car remotely using mobile technology connected to the vehicles locking system. Customers would then get the keys from the glove box and be on their way. EasyCar was going to allow only customers who proved trustworthy through the hire of cars from ordinary locations to use the club vehicles, and there would be no preparation fee associated with the club vehicles. (Mackintosh, J. “EasyCar plans unmanned rental pick-up,” Financial Times, 03 March 2003, pg 4). By June of 2003 easyCar had 53 locations open (up from 46 in January, 2003) and had reached a fleet size of 8000 vehicles. This was well off its desired pace of opening two new locations a week. In July of 2003, easyCar admitted that its expansion and profitability goals were not being achieved. It cut its workforce from 150 to 60 and reduced its operating hours to save costs. It also began closing some unprofitable locations. It had closed its operations in the Netherlands and was looking for franchisees to take over operations of facilities in France, Spain and Switzerland. Plans for an IPO were put off until 2005 or later. (“EasyCar put brakes on stock listing,” 21 July 2003, BBC News). Several of the other easyGroup businesses (easyInternetcafe in particular) were also still struggling, and Stelios had to sell ₤17 million of his stock in easyJet.com to keep the various easyGroup businesses going (Rogers, D. “Not so easy after all” Marketing (UK) 10 July 2003). During the fall of 2003, easyCar received bad press because of complaints from customers about cars not being available as promised and not being able to find easyCar staff at certain locations (“How easyCar gives angry clients the runaround” The Guardian, 01 November 2003). By February, 2004, easyCar had operations in only 39 locations, 30 of which were in the UK. In June, 2004, easyCar undertook a major shift in strategy and signed a brokerage account with Alamo Renta-car that added 740 rental locations in 21 European countries to its website (“Digests” Marketing Week (UK), 17 June 2004, p. 9). easyCar still operated its own UK based rental operations with the same policies that it had been using, but everywhere else in the world it served as only a broker. Certain policies were extended to these brokerage rentals (e.g., no refunds for cancellations, a preparation cost in addition to the daily rental charge), while others (e.g., clean car policy, fuel policy) were not. Essentially easyCar provided the marketing strength of its brand and its website and managed the pricing/yield management process, while Alamo managed the actual fleet and facilities. By October, 2004, this brokerage arrangement had been extended to 300 locations in the U.S. (“easyCar hits the states” The Guardian (London), 2 October, 2004), and easyCar planned to continue this rapid expansion through brokerage agreements. INSTRUCTOR’S MANUAL REFERENCES Garvin, D.A. (1984) “What does Product Quality Really Mean?” Sloan Management Review, 26(1), pp. 25-43. Hill, T. (1999) Manufacturing Strategy: Text & Cases, 3rd Ed. McGraw-Hill/Irwin, New York.
Levitt, T. (1972) “Production Line Approach to Service.” Harvard Business Review, September/October, pp. 41-52. Parasuraman, A., Zeithaml, V.A. & Berry, L. (1985) “A Conceptual Model of Service Quality and its Implications for Future Research.” Journal of Marketing, 49(3), pp. 41-50.
Teaching Note Exhibit 1 easyCar.com Secondary locations and nearby prime locations in some cases. Frequently near train and bus stations, where budget travelers are often found and where rents are typically lower. Even when near an airport, rarely at the airport complex given the high cost of these locations. Small, simple facilities to help keep costs down. Often a simple structure inside a parking garage. Fleet consists of one type of vehicle per site. This simplifies the tasks for the maintenance and customer service staff and makes it much easier to achieve a high utilization rate as all vehicles are substitutable for each other. Customers limited to 100 km per day free to limit depreciation of fleet value. Customer designed into the process and required to do certain tasks traditionally done by the company (or charged a higher fee for the services). Customer expected to print out the service contract and bring it with them, fill the car with fuel, and, most significantly, clean the car prior to returning it so that it is in ready-to-rent condition when they return it. All of these reduce easyCar’s costs. Technology used extensively in the booking process to replace people, again reducing labor costs. Process very standardized, with few extras. Very tightly scheduled (to the hour for pick-up & drop-off), and customer expected to adhere to the schedule or incur significant penalties. Once service is scheduled, only limited changes are permitted. Inflexible schedules make planning easier and helps easyCar achieve high utilization and operate at minimal staffing levels. Aggressive use of pricing to insure high capacity utilization. Expectation that capacity utilization will approach 100%, and on average exceeds 90%. Capacity added only when its clear it will be utilized most of the time. Traditional car rental Prime locations. At most or all major airports, within the airport complex.
Facilities & Equipment
Generally larger, more nicely decorated, stand alone facilities to promote image. Fleet features a wide range of vehicles. Customer frequently allowed to drive unlimited miles.
Customer has little involvement in the process except to re-fill the gas tank before returning the vehicle. Customer has numerous options to book the vehicle, include company toll free numbers, company websites, and traditional travel agents. Frequently customer has options, like one-way rentals and pick-up or delivery, although usually for an added fee. Flexible. Customers often charged normal rates for keeping vehicle beyond originally scheduled return time. Customers permitted to change or cancel reservations without penalty. Use price to increase capacity utilization, but only to a certain extent (e.g., industry leader Avis Europe utilization at 68%). Expect to have excess capacity at many off-peak times. Capacity added to satisfy peak demand periods.
Case 3-4 Marketing to the Bottom of the Pyramid Questions 1. As a junior member of your company’s committee to explore new markets you have received a memo from the chairman stating that at the next meeting be prepared to discuss key questions that need to be addressed if the company decides to look further into the possibility of marketing to the BOP segment. The ultimate goal of this meeting will be a set of general guidelines to use in developing a market strategy for any one of the company’s products to be marketed to the “aspirational poor”. These guidelines need not be company or product specific at this time. In fact, think of the final guideline as a check list—a series of questions that a company could use as a start in evaluating the potential of a specific BOP market segment for one of its products. Some of the basic issues in marketing to the BOP to be addressed in the checklists should include. Providing infrastructure for products to function properly, Design products to function in local areas with inadequate product support. Package products in salable sizes. Examine manufacturing costs to be able to lower prices. Provide credit in a market where credit purchases are not traditional. Devise distribution strategies to gain market penetration to small and geographically scattered villages. Work with local self-help groups to bring products to the BOP 2. Marketing to the BOP raises a number of issues revolving around the social responsibility of marketing efforts. Write a position paper either pro or con on one of the following: a. Is it exploitation for a company to profit from selling soaps, shampoo, personal computers, and ice cream, etc. to people with little disposable income? b. Can making loans to customers whose income is less than $100 monthly at interest rates of 20 percent to purchase TVs, cell phones and other consumer durables be justified? c. One authority argues that squeezing profits from people with little disposable income—and often not enough to eat—isn’t capitalist exploitation but rather that it stimulates economic growth. A starting point for the discussion of question 2 might begin with a criticism of the basic ideas of C.K. Prahalad and C.K. Prahalad’s response to the criticism which follows: Anuradha Mittal and Lori Wallach, “Selling Out the Poor,” Foreign Policy, September/October 2004, p. 6. Allen L. Hammond and C.K. Prahalad's notion that "Selling to the Poor" (May/June 2004) to turn them into consumers is an "effective way of reducing poverty" is a shameless, far-fetched example of corporate "poor washing," through which an agenda for boosting profits is packaged as a poverty antidote. The authors celebrate how the efforts of Hindustan Lever and Procter & Gamble have resulted in "nearly all Indians now enjoy[ing] access to shampoo." Yet they fail to recognize that India is home to the largest number of hungry people in the world. Shampoo is progress? They also ignore India's grinding poverty and loss of food sovereignty and security--caused by agricultural liberalization and seed patenting--that have led to thousands of farmers committing suicide. The insults to the poor do not end there. Hammond and Prahalad's example of how globalization empowers the poor--by giving a poor young worker the "choice" to use a skin-lightener that will somehow make her hard toil more tolerable than when her parents did the same work--reads like a horrific parody. When discussing choice in India, let's start with the absence of choice for the nearly 80 million children there who will never have the chance to attend school.
Hammond and Prahalad claim that bad marketing has left the poor "unable to interact with the global economy," yet the poor have been acutely vulnerable to forced interaction with the global economy. This vulnerability has resulted in slowing per capita income growth rates, privatization of essential services, depressed commodity prices, and increased hunger. A 2002 study of the world's 49 least developed countries by the United Nations Conference on Trade and Development rejected the claim that more globalization is good for the poor. Arguing that the international economic system is part of the problem, it warns that "the current form of globalization is tightening rather than loosening this international poverty trap." It is estimated that more than 307 million people live below the basic subsistence level of a dollar per day, a number set to rise to 420 million by 2015. Hammond and Prahalad somehow conclude that the poor are looking for happiness in single-serve fashion products. But, around the world, social movements representing the poorest and most marginalized people demand recognition and implementation of their basic human rights, including their rights to food, water, land, seeds, a living wage, and a dignified life. Response by Allen L. Hammond and C,K. Prahalad. We agree with Anuradha Mittal and Lori Wallach that poverty and a lack of basic rights are abhorrent and that globalization has not yet brought many benefits to the poor. We disagree, however, with their assumption that private sector approaches are "shameless" and implicitly evil. As they themselves point out, corporate neglect of low-income markets and dependency on state and civil society aid has not done away with poverty; hence our modest proposal to remedy the situation by finding win-win private sector approaches. It is precisely the scale of the problem that begs for solutions from the private sector. Very few developing-country governments, and even fewer civil society organizations, can provide services in millions of locations every day; large corporations do so routinely. Indeed, the ITC e-Choupal example of Internet connectivity that we cite is now helping to raise incomes and alleviate poverty for more than 2.5 million farmers in rural India. And the only effective way to hire the private sector to provide basic goods and services is through sustainable--profitable--approaches. We also disagree with Mittal and Wallach's underlying premise that they or other critics of globalization know what is best for low-income communities. If a street sweeper chooses to spend part of her meager earnings on a product that she believes improves her quality of life, then surely that choice is a basic right, one of those that Mittal and Wallach so passionately defend. The real debate should be over the best means to provide real choices and improvements in people's lives. We welcome this debate and know that we don't have all the answers. We seek only to suggest a potentially important alternative approach--one that now has the endorsement of the United Nations, in the recent report of the Commission on the Private Sector and Development--and to report some preliminary evidence that it is working. You may also want to read an interview with C.K. Prahalad in: A.J. Vogl, “The Invisible Market,” Across the Board” September/October 2004, p. 23. Some pertinent excerpts from this article follow: The Invisible Market Why settle for single-digit margins, asks C.K. Prahalad, when there’s greater game afoot? Your book's subtitle reads "eradicating poverty through profits." A rather sweeping promise, isn't it? Not at all. My book is about a new world economic order in which there is an invisible market constituency of 5 billion people. It is invisible to us because of the way we've been socialized to think. If you take the top developing countries-China, India, Brazil, Mexico, Indonesia, Turkey, Russia, South Africa, Thailand, the usual suspects-they represent 70 to 75 percent of the world's poor population and
about 90 percent of the GDP of developing countries. We tend to look at the GDP in U.S. dollar terms, which don't give you any idea of the nature and intensity of commerce in those countries. You have to look at purchasing-for-parity dollars. If you look at those dollars, it's about $14 trillion-and that sum is larger than that of Germany, France, Italy, Japan, and the United Kingdom put together. How can they afford to buy companies' goods and services? We always assume: If you have money, I can sell it to you. The more interesting question deals with creating the capacity to consume: How do I sell something to you-commercially, profitably-if you don't have the money? A very American example of how to do it is the Singer sewing-machine company 150 years ago. Poor people who needed the machines didn't have the $100 to pay for them, so Singer said, Why don't you pay in installments of $5 a month? They sold a lot of sewing machines using that scheme. It seems to me that the market you're talking about is not invisible as much as ignored, that marketers not only think it not worth their while but also assume that it would disrupt their existing operation. That's an interesting perspective, but think about what is happening now in this country. We are trying so hard to eke out 2 to 3 percent organic growth, and most companies have tried to do acquisitions and mergers with competitors in order to get some growth. But that ends up being just a cost-cutting strategywhen you merge two operations, you can eliminate redundancies. But where is the next round of growth? You can't eke out more and more growth in traditional markets using traditional methods. Look at which industries are growing rapidly. Take cell phones. There are 300 million cell phones in China, and not all are in the hands of rich people. There are 40 million cell phones in India, and they're adding 1.5 million new subscribers per month. Again, not all rich people. It is poor people, ordinary people, on whose backs these businesses are being built. If you take three countries-China, India, and Brazil-you have 500 million cell phones, compared to 170 million in the United States. Now, if you're Nokia or Motorola, where do you want to be? That's not to say, Don't be in the United States. But if you're not in China or India, you're going to miss out on the biggest growth opportunities. The most disturbing aspect of the bottom-of-the-pyramid market is that both the problems and the solutions are known. What's often missing is the fundamental innovation to develop the solution into an affordable product and a distribution system to make it widely available. But there are some Western multinationals that are doing interesting work-Hindustan Lever Ltd., for instance, the Unilever subsidiary that has been in India seemingly forever. Iodine deficiency disorder affects over 200 million children in developing countries, more than 100 million of them in India. Now, the easiest way to prevent mental retardation and other disabilities that IDD is responsible for is to have children get an adequate amount of iodized salt in their diet. But only 20 percent of the salt in India is iodized, and even iodized salt loses its potency through storage, cooking, and other means. Using an advanced technology developed by India's atomic-energy agency, Hindustan Lever found a way to microencapsulate the salt, to make sure the iodine would be retained. Then the company had to convince consumers that its iodized salt was better than noniodized salt and iodized salt that had not been encapsulated. To educate the bottom-of-the-pyramid customers, they took out television ads but in the villages employed direct education, using empowered local village women. Whatever the price-5 rupees or 10 rupees-I can imagine people in civil-society organizations seeing it as another instance of Western exploitation: "Here comes Coke again to dominate us." We continuously make choices for others, and it's a very elitist attitude. Who are we to say that a kid shouldn't have an ice cream or a Coke? Then there's the other assumption: Poor people make dumb choices. Well, rich people make dumb choices, too. How many times do people buy PDAs that don't work for them?
An example: For years, bottom-of-the-pyramid customers in India had to depend on local moneylenders for credit, at interest rates up to 500 percent a year. ICICI Bank, the second-largest banking institution in India, saw these people as critical to its future. But how to convert them into customers in a cost-effective way? ICICI turned to village self-help groups, which it helped organize. These groups, each composed of twenty women, are taught about savings, borrowing, investing, and so on, and each woman contributes to a joint savings account with the other members. Based on the self-help group's track record of saving, the bank then lends money to the group, which in turn lends money to its individual members. The group, in effect, becomes an extension of the bank. So far, ICICI has developed ten thousand of these groups, reaching 200,000 women. And ICICI is working with local communities and NGOs to enlarge its reach. Costco or Sam's Club being other prime examples. That's right, and smaller and smaller packages are 180 degrees opposite to that. Single-serve has some very interesting implications. If I as a consumer buy, say, five pounds of detergent, I'm stuck with it. If I'm rich enough or don't like it, I can throw it away. Poor people can't afford to do that. Instead, they go to the village store and buy a small amount when they need it and when they can afford it. It's equally economically rational. However, if I buy a single-serve and don't like it, I can switch to another brand tomorrow morning. Which leads to a critical question: How do you retain customers? Brands have to continually prove superior value to customers, and to continuously innovate. That's what it takes. In my previous book, I said that top management and employees are disconnected. That is still true-in fact, if you look at all the scandals, it's because the disconnect became even larger in the last ten years. This book says that there's a huge disconnect between all managers in multinational companies-not just senior managers-and 5 billion potential consumers. Because we don't see poor people, we don't know how they live. When I'm asked whether poor people have money, I ask, Do you know what interest rates they pay when they borrow from moneylenders? They say they don't know. Suppose I told you it's 300 percent. Say you offer 25 percent. They'll think you're a savior. Twenty-five percent may be more than 10 percent, which you give to your best customers, but it beats 300 percent anytime. Sounds good, they say. Then I ask, Why do you want to charge 25 percent to these people when you charge 10 percent to rich people? They say it's higher-risk-poor people default. I say, That's an assumption; the fact is exactly the opposite. If you look at Grameen Bank and its experience in microfinancing-and this has been extremely well documented-the default rate is less than 1 percent. What's the default rate for a car business in this country? It's 5 or 6 percent. So who should be the higher-risk customer? Poor people should get a triple-A rating. If you're lending money to me at 10 percent, you should give it to them at 5 percent. There's an old Indian saying that you have to have a piece of dirt to create a pearl. In other words, if you don't have the irritant, there's no pearl to be made. And you're the irritant? I'm the irritant. What I want comes down to simple things, like seeing the smile of a young child eating an ice cream on a hot day. It looks like a very simple, even dumb, test. But it's not if you think deeply about how to do it-especially how to do it in a country where there are frequent blackouts and brownouts. How do you keep ice cream soft and at the right temperature, which is minus 18 degrees centigrade? You have to fundamentally rethink refrigeration. And this is not a speculative thing: There are now ice-cream vending machines that don't have to be charged for two days. So if there's a blackout or brownout the ice cream won't melt. Yes, and this method of refrigeration reduces the amount of electricity supplied, because in a country like India, 40 percent of the cost of ice cream is electricity in a vending machine. This looks like a simple
problem, but when you break it down in detail, you have to change things quite dramatically. Think of what it means for every Indian kid to afford to buy an ice cream. You must have had to create wealth in the country as well as affordable prices and distribution and quality levels. If you can pull it off, that means a very vibrant economy. So that's the Prahalad yardstick of democracy-an ice cream on a hot day? To me, democracy and freedom mean nothing if people cannot have an ice cream when they want it.
Recent examples of companies adjusting their marketing strategies to reflect marketing to the BOP include Hindustan Lever and Motorola. S Dinakar, “A Penny a Packet” Forbes, November 28, 2005. This article discusses how Hindustan Lever (HLL) formerly focused only on better-off households but now HLL jostles for display on bargain counter with smaller companies such as CavinKare which focuses on lower income market segments. Such companies threaten HLL’s position in the middle class, where HLL does $2.4 billion in annual revenues, 70 percent from personal and home care items. The threat comes on two fronts. One is that low-income buyers may develop brand preferences that will stick with them as they migrate up the income scale and second, competitive attacks on big, established companies often come from underneath. Traditionally HLL controlled consumer marketing in India but more recently it has faced competition from such companies as CavinKare and Procter and Gamble which have gained a foothold in the consumer market with packaging and pricing for the lower income groups. HLL had been reluctant to sacrifice margins, and take risks isolated an emerging class of consumers which regional companies pursued.. India’s poor may have gotten no richer, but several regional upstarts built businesses hawking products such as shampoos--- used earlier only by the better-off--- to the underprivileged at low prices for single-use packets. Andy Reinhardt, “Cell Phones for the People,” Business Week, November 14, 2005. This article discusses the moves by Motorola and Nokia to develop and market to the BOP cell phones that sell for $60 and under. Motorola has won bids to deliver up to 12 million handsets to Bangladesh. The model handles voice and text and will cost just $40 wholesale. It includes a ringtone composer, games, currency converter and calcualtor. And Nokia has sold 15 million of this 100 series phones in on quarter alone. The handsets retail for about $60 and has games, ringtones and, for illiterate users, a speaking alarm clock and iconic address book. Both companies are making models fro a little as $25 allowing gross margins of 15% to 30% at current prices. Recent examples of companies adjusting their marketing strategies to reflect marketing to the BOP include Hindustan Lever and Motorola. S Dinakar, “A Penny a Packet” Forbes, November 28, 2005. This article discusses how Hindustan Lever (HLL) formerly focused only on better-off households but now HLL jostles for display on bargain counter with smaller companies such as CavinKare which focuses on lower income market segments. Such companies threaten HLL’s position in the middle class, where HLL does $2.4 billion in annual revenues, 70 percent from personal and home care items. The threat comes on two fronts. One is that low-income buyers may develop brand preferences that will stick with them as they migrate up the income scale and second, competitive attacks on big, established companies often come from underneath. Traditionally HLL controlled consumer marketing in India but more recently it has faced competition from such companies as CavinKare and Procter and Gamble which have gained a foothold in the consumer market with packaging and pricing for the lower income groups. HLL had been reluctant to sacrifice margins, and take risks isolated an emerging class of consumers which regional companies pursued.. India’s poor may have gotten no richer, but several regional upstarts built businesses hawking
products such as shampoos--- used earlier only by the better-off--- to the underprivileged at low prices for single-use packets. Andy Reinhardt, “Cell Phones for the People,” Business Week, November 14, 2005. This article discusses the moves by Motorola and Nokia to develop and market to the BOP cell phones that sell for $60 and under. Motorola has won bids to deliver up to 12 million handsets to Bangladesh. The model handles voice and text and will cost just $40 wholesale. It includes a ringtone composer, games, currency converter and calcualtor. And Nokia has sold 15 million of this 100 series phones in on quarter alone. The handsets retail for about $60 and has games, ringtones and, for illiterate users, a speaking alarm clock and iconic address book. Both companies are making models fro a little as $25 allowing gross margins of 15% to 30% at current prices.
CASE 4 DEVELOPING GLOBAL MARKETING STRATEGIES Case 4 – Developing global Marketing Strategies 4-1 McDonald’s Great Britain-The Turn Around 4-2 Tambrands – Overcoming Cultural Resistance 4-3 Iberia Airlines Builds a BATNA 4-4 Sales Negotiations Abroad for MRIs 4-5 National Office Machines – Motivating Japanese Salespeople: Straight Salary or Commission? 4-6 AIDS and Condoms 4-7 Making Social Responsibility and Ethical making Decisions: Selling Tobacco to Third-World
Case 4-1 McDonald’s Great Britain- The Turn Around
Questions: 1. Identify the problems confronting McDonald’s U.K. and order them from the most critical to the least critical. For each problem identified, explain your reasoning. Some of the questions students may address are: a.. How can McDonald compete with smaller rivals who often adapt to trends more quickly? b. How can a brand tainted by criticism from food critics and film makers be turned around? c. How does a restaurant chain develop a more up-market appeal? d.. How can programs successful in other markets be applied to the U.K. market. 2. Some problems you identified in question #1 may require a “quick fix” in the short run while others may require a major shift in company strategy. Assuming that you can not focus on all the problems at once, suggest the order in which the issues should be addressed and suggest an approach to solving each problem. Below are excerpts from news articles that indicate how McDonald’s is addressing the problems in Europe and the U.K. • • In its first corporate responsibility report aimed at the European market, McDonald’s will say it has learned from its customers that “we could do better in our understanding of wider social trends and expectation.” The 70-page report, aimed at EU policy makers, pressure groups, shareholders, suppliers and employees, gives details about the contend and quality of meals and employment conditions.
McDonald’s strongly reject claims that restaurant workers are poorly paid and skilled, as epitomized by the American Merriam-Webster dictionary expression “McJob” McDonald's will admit next week that it has not done enough to allay European concerns about the nutritional value of meals and the quality of jobs at the world's largest fast food chain. The 70-page report, aimed at EU policy makers, pressure groups, shareholders, suppliers and employees, gives details about the content and quality of meals and employment conditions. It draws on the views of a wide range of stakeholders from government officials to health and consumer groups, financial analysts and employees. McDonald’s would become the first fast food chain to put nutritional information such as fat and sodium content on most on its packaging. It has also taken initiatives to boost its image with consumers in Europe, where it has 6,200 restaurants.. It invited customers in 30 European countries to look round its kitchens under its Open Doors programme. Thousands of McDonald's restaurants will allow customers into their kitchens for a behind-the-scenes look at what goes into the fast-food chain's burgers, fries and Egg McMuffins. Staff will give customers a tour of the kitchen, explaining where the beef that goes into the burgers is sourced from and showing how each menu item is made. While McDonald's has allowed customers into its kitchens in some European and South American countries before, the so-called "Open Doors" campaign is being rolled out across 30 European countries simultaneously for the first time. In the U.K., where it has lost a quarter of its sales in five years, it has launched a direct mailing campaign to educate consumers about the sources of its organic milk and vegetables. Peter Beresford, Europe northern division president at McDonald's, says the company is now in the midst of a "a massive campaign" of "trust-building activities" with consumers. For months, the company has been mailing millions of nutritional leaflets to households, some showing pictures of beef cattle grazing in a field, others featuring pictures of organic milk used in its restaurants. For a company that frequently has found itself defensive on nutrition issues, it is a chance to educate current and - more importantly - potential customers. McDonald's has suffered most in the UK, where attacks from politicians and health lobbyists have led to consumers deserting its fast-food outlets. McDonald’s is aiming to boost its popularity among women with the launch of an 8 million pound, multiple-country drive featuring Destiny’s child, to promote its expanded salads offering. McDonald’s is bolstering its Salads Plus menu with the addition of chicken Salad with pasta, which includes roast peppers, basil and cherry tomatoes. McDonald’s UK replaced the dressing on its Salad Plus range, which had been criticized for its fat content, with lower-calorie, lower-fat versions.
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Two years ago (2004), McDonald's introduced its "Plan to Win" - a brand revitalization program built around five drivers of exceptional customer experiences: people, products, price, place and promotion. For instance, regarding the "Price - P" in the Plan to Win, McDonald's operators around the world have added value in many different ways: the United States features a "Dollar Menu;" Europe offers "Eurosaver" programs; China has the RMB 5 Program; and Latin America features McMenu and McAhorro programs. McMenu offers "everyday value," while McAhorro is a program of special pricing for certain products during certain times of day or on various days of the week. All those initiatives aim to move the brand away from promotions and toward everyday affordability, with the intent of making McDonald's affordable to the broadest number of customers possible, according to the company. At McDonald's, a good idea knows no borders, and the result is a variety of regional menu and design innovations coming from all corners of the world. Among recent innovations from McDonald's international offices are: the McCafe coffee and dessert concept, developed in Australia and popularized in Latin America; a new line of toasted deli sandwiches, recently rolled out in Canada; home delivery in Egypt, Turkey, Hong Kong, and throughout Southeast Asia; and new unit designs from the chain's European Design Studio. While items from the core menu comprise the largest proportion of sales, McDonald's restaurants in Latin America also offer such regional specialties as fried yucca sticks in Venezuela and an egg, rice, beans and chorizo platter for breakfast in Mexico. Soft-serve ice cream cones are a popular product in the region, accounting for as much as 10 percent of restaurant sales in some areas. In addition to its branded restaurants, the company also operates 100 McCafe units in Latin America. The coffee and dessert café concept originated in Australia and has become popular throughout Latin America, Trask says, noting that the McCafes are particularly popular with mothers and young adults. There are also new playland concepts. McDonaldlandia in Mexico features an area for physical play as well as Nintendo video game stations. In France, the Ronald Gym Club offers a variety of physical activity areas for kids, including basketball, dance and judo stations. "For the past 24 months we've been working a lot on a panEurope strategy," he says. The company created the European Food Studio, located in Paris, and appointed French chef Olivier Pichot to supervise food development. Recent developments coming from the Food Studio include the Mediterranean-inspired Pitamac, a square pita bread sandwich that is open at top and filled with spiced beef, grilled vegetables or chicken. "We're developing the next generation of food ideas for McDonald's." Several products are in the works, including sandwiches, desserts and coffee drinks. Each year about 50 to 100 ideas are developed, but only as few as five of those ideas make it past feasibility and consumer testing and end up being rolled out.
Another benchmark of McDonald's regional European strategy is its design studio, which has created models for new restaurants and for extensive makeovers of existing stores. The design studio is described as a collaboration of well known architects and interior designers who are developing the brand's stores of the future. "We hope their designs will be a source of inspiration for McDonald's around the world," he says. In March, McDonald's UK published a report outlining a 7.4 million euro investment in a package of initiatives for 2005 focused on helping parents make informed choices for their children. The report, "Taking Steps Empowering Parents in 2005," was submitted to key stakeholders and details a combination of activities, including new Happy Meal menu options, a focus on practical, easy-to-use nutrition information and a program of activity promoting balanced lifestyles. Peter Beresford, chairman and chief executive of McDonald's Restaurants Limited, commented: "Families are very important to us. Their needs change over time and we need to change with them. That's why we have been out listening to mums and dads, hearing what they want for their children, so we can respond directly. They want more variety on our menu, they want to know more about our food, and they want us to make all of this as easy and convenient for them as possible." The complexity is in managing all of the moving parts," Whaley says. "You're dealing with an incredible diversity of culture, religion, economics, and governments." There are 7,567 McDonald's restaurants in the ASIAN region, with the most units - 3,774 restaurants - located in Japan. Revenues for the region totaled $2.72 billion in 2004, and operating income totaled $200 million. Items from the core menu make up the largest proportion of sales. McDonald's global "i'm lovin' it" marketing campaign has energized the chain's Latin America division. "Whether 'me encanta' in Spanish-speaking Latin America or 'amo muito tudo isso' in Brazil, the [marketing campaign] creative has ignited new energy behind our brand," Armario says. In December 2004, McDonald's Canada rolled out its newest menu innovation, a line of six Toasted Deli Sandwiches, including a Turkey BLT, Crispy Buffalo Chicken, Beef 'N Provolone, New York Reuben, Leaning Tower Italian and Grilled Veggie Melt. The sandwiches are made with quality deli meats, vegetables, cheeses and toasted white or whole wheat breads, and the lineup is being tested in select U.S. markets as well. Specialty items in Canada include the McLobster, a lobster salad sandwich offered in summer months on the east coast of the country, and Poutine, which features french fries topped with gravy and cheese curds and is offered only in the province of Quebec. For a score of reasons, Denis Henneqin seems to be the one to fix McDonald's problems in Europe. The Frenchman, newly minted as European president of the American-born burger icon, has mastered the game of playing to both sides of proand anti-American sentiments in the effort to expand the Golden Arches. Observers credit Mr. Hennequin, with a series of moves that contributed to his French success, including setting a consistent team, emphasizing design and food
innovation and skillfully handling difficult political and societal issues, including globalization protestors, food critics and the mad-cow outbreak in Europe. • Mr. Hennequin revamped the restaurants to look like ski chalets, music lounges and citified lofts rather than adopting the mass-produced interiors and menus seen in America. Of the more than 1,200 stores in France, half have already been remodeled to fit their locale, and the restaurants often use downsized versions of the famous arch logo. France is not exactly a quick-serve-restaurant market," he admitted. In fact, McDonald's in France uses more in-store displays touting its salads, yogurts, water and version of the French ham-and-cheese sandwich called the Croque McDo than its Big Mac and Fries. Still, the topselling item is the Big Mac, so it appears that the French may be closet eaters of the American fare. He relies on a monthly consumer panel of about 150 people to help shape product and promotional ideas. Mr. Hennequin artfully diffused the sting of activist farmer Jose Bove, who in 1999 drove his tractor into a Provencal Mickey D's to protest globalization. Under Mr. Hennequin, marketing positioned the brand as "born in the U.S.A. but made in France" and emphasized the use of locally grown food. The strife forced the chain to "tell the story of the Arches," Mr. Hennequin said. "We should never forget that. We're quite the opposite of globalization." He's been credited with doubling the restaurants and driving some of the best samestore sales gains in Europe on his strategy to refashion restaurants as a destination. With the help of McDonald's European Food Studio and Design and Arches Studio, he did so by providing a menu and dining ambiance more akin to that of fast casual chains to make McDo-as it's called by the French-more than just a convenient place to get fast fuel. "The French are more sensitive to that," he said.
Sources: Alison Maitland and Jeremy Grant, “”McDonald’s Tries to Calm European Worries,” Financial Times, London, November 24, 2005; Mark Sweney, “McDonald’s Unveils 8 million Pound Ads to Win Over Women,” Marketing UK, April 6, 2005; “Studying McDonald’s Abroad: Overseas Branches Merge Regional Preferences, Corporate Directives,” Nation’s Restaurant News, October 2005; Kate MacArthur, “Would-be Rocker Takes on Arches’ ‘Common’ Challenges in Europe,” Advertising Age, July 25, 2005; Jeremy Grant, “McDonald's Responds to Customers' Beefs Stung by Criticism of the Quality of its Food”, Financial Times,London, November 25, 2005; and, Jeremy Grant and Alison Maitland,, “McDonald's Tackles European Concerns-Corporate Responsibility,” Financial Times London, September 24, 2005. Case 4–2 Tambrands – Overcoming Cultural Resistance This case may be too DELICATE for some students. The Instructor is advised to take this into consideration before assigning this case. However, it is a real live case and P&G is having success with promotions and it is gaining market share. The company said unit-volume growth rose 8%, adding that
acquisitions—especially the $1.85 billion purchase of the Tambrands Inc., the maker of Tampax tampons —contributed 2% to P&G’s unit volume growth in the quarter. In Asia, unit volume was flat, which the company blamed on the region’s economic crises. Asian sales fell 5%, while net earnings slid. Among the problems P&G face with increasing its share of market globally are the cultural issues. Perspective can be gained by reviewing the cultural issues that still exist in the United States. Here are some examples: So here it is. Again. That time of the month. If you’re like the majority of American women, your most pressing concern is keeping your menstrual period hush-hush. You’re not about to grab a tampon out of your purse and walk to the bathroom twirling it nonchalantly between your fingers. In fact, you probably schlep your whole briefcase to the restroom just to be discreet about it. And if you’re like my mom, you have hidden that tampon in a pretty little plastic container inside your handbag, just in case anyone happens to peek. But wait a minute. It’s 1998. We hear almost as much about condoms as we do about cappuccino. “Safe sex” is a buzz phrase. So why don’t we talk openly about menstruation? As the century draws to a close, societal attitudes toward menses seem to be changing. Whether that’s good news or bad depends upon whom you ask. “I truly think we’re in a new era of openness about it, just based on the advertising alone,” says Barbara Czerwinski, an associate professor of nursing at the University of Texas-Houston Health Science Center. Czerwinski studies women’s health-care practices and serves on the board of the Museum of Menstruation. The what? Yes, Virginia, there really is a Museum of Menstruation. Harry Finley, 55, a graphic designer, opened the archive in July 1994. And though MUM, as it’s called, fits neatly in the paneled basement of Finley’s Maryland home, it has received a great deal of attention from major media outlets and academics. Skip to March 1997 and the Canadian release of the documentary “Under Wraps: A Film About Going With the Flow.” It took four years before Vancouver-based Penny Wheelwright and Teresa MacInnes amassed the cash to make the slick 56-minute film. There’s more literature, more grass-roots activism and more advertising surrounding menstruation than ever before, but a cloak of secrecy, shame and squeamishness continues to keep it out of public dialogue. The stigma attached to menstruation dates back to humankind’s earliest days. In the Bible, the Old Testament book of Leviticus warns against contact with a menstruating woman: “. . . and whoever toucheth her shall be unclean until the even.” Religious Jewish women still immerse themselves in a ritual bath following their periods each month. Many ancient cultures, and some modern ones, forbid a menstruating woman to touch food, plants, men and even herself, lest the powerful and strange forces causing the woman to bleed harm those things around her. Other societies beat, isolate or perform female circumcision on a girl upon her first period, called menarche. It’s no wonder women take pains to hide their bleeding. “. . . he grew up in an Irish Catholic home with six sisters. “I never knew that anyone was menstruating in my house,” he says. “It was totally secretive. It was dirty. It was not proper to show or talk about or admit to. “In my mother’s generation it was looked upon as ‘the curse,’ he adds. “That’s a pretty negative concept. To turn something so beautiful and powerful into something so evil is pretty devastating.” Kotex marketed the first successful disposable pad in 1921; it was 22 inches long. Before that, women devised their own protection from cloths and wore rubber aprons underneath their skirts. Tampax introduced the tampon in 1936, touting it as “a comfort never known before.” The inventor
of Tampax, Dr Earle Haas, received no monetary rewards for his efforts, although the London Sunday Times named him one of the “1000 Most Important People of the 20th Century”. (In fact, women have used a variation of tampon since ancient times. Egyptians used softened papyrus and Romans used wool.) Dr Haas sold the patent to businesswoman and physician Gertrude Tenderich. She had a few problems with American religious groups who feared that Tampax would encourage young women to masturbate. Undeterred, Gertrude hired registered nurses to give lectures, sent women door-knocking and took on a smart partner. A full-page, four-color ad in the American Weekly depicted young women dancing, playing tennis etc. and demonstrated that with internal protection a modern menstruating woman could be active. Next is an article that discusses the issues P&G faces and additional examples of how they are facing the issues. Consumer products giant Procter & Gamble launched a Web site for teenage girls with information on puberty and relationships and little dancing tampons at the bottom of the main page. The Web site, www.beinggirl.com, was designed with the help of an advisory board of teenage girls, P&G said. Sara Nathan, Levi’s to Launch “Cool” Ad Campaign,” USA Today, July 27, 2000, pp. 01B. Near the beginning of this century the Johnson and Johnson company produced the first commercial disposable pad. It was made of cotton covered with gauze, but the retail industry shunned the product. According to the book, The Curse: A Cultural History of Menstruation, this happened because “turn-of-the-century morality prevented advertising these ‘unmentionables.’” The pads did not reach many women and were eventually withdrawn from the market. It was only after the First World War had ended that another company, Kimberly Clark, was prepared to once again try to market a feminine napkin. They decided to do this after it was learned that some resourceful Red Cross nurses had replaced obnoxious menstrual rags with Cellucotton, the surgical material the company had supplied to dress war wounds. In 1920, after intensive research and market testing, the company succeeded in producing a viable consumer product for women. The first napkins, bulky by today’s standards, sold for 60 cents for 12 pads packaged in a “hospital blue” box. A customer didn’t even have to request the product by name; all she had to do was put her money in a box near a pile of the unmarked packages and walk out of the store. Almost immediately the product was the center of controversy. Many drug and department stores refused to stock the Kotex pads. One Woolworth store in San Francisco was forced by a men’s organization to take down a window display of the sanitary pads. Media outlets were aghast at the idea of advertising a product associated with something that was regarded as a “hush-hush” subject. Ladies Home Journal was the first magazine willing to accept an ad for sanitary pads, but this was done with the understanding euphemisms and great discretion would be paramount. Later, magazine publishers felt somewhat reassured when some ads stressed that women doctors had played a role in design improvements. About the same time Kimberly Clark was pioneering its first sanitary pad, a young man on its staff was experimenting with a bizarre-looking device—a condom in which he had punctured holes and filled with the same material used in the pads.
He was thrilled with his innovative achievement, which he contended could be used by menstruating women. His father, Dr. George H. Williamson, who was Kimberly Clark’s first medical consultant during the development of the sanitary pad, was shocked by his son’s creation. He said, “Never would I put such a strange article inside a woman.” He also warned that marketing such a product would be a legal nightmare. “Don’t discuss this with anyone because some damn fool will want to put it on the market and you’ll be in trouble!” But clever ideas seldom disappear and, 10 years later, another company bought the patent for a tampon prototype from a woman who claimed her device would be “a different method of taking care of menstruation.” Given the name Tampax, the new feminine product was also destined to generate widespread outrage. Any woman contemplating using the new product was warned that tampons could rupture a virgin’s hymen. From church pulpits, clerics denounced tampons as an evil invention associated with abortion, masturbation and defloration. But most women ignored this propaganda. They quickly educated themselves about the medical implications of using tampons and efforts to convince them to shun the product were doomed. Today, many products designed for “women only” are available. Tampons, of course, experienced terrible press in the 1980s after a number of cases of toxic shock syndrome were traced to improper use of a particular type made of a super-absorbent material. These days, tampons are considered safe as long as users follow the manufacturers’ instructions. In recent years, a “menstrual cup” product has also found favor with many women. This device, which fits low in the vagina where it collects the menstrual flow, is now available in both single use and reusable versions. The reusable type, which requires only a thorough washing after each use, is promoted as being “environmentally friendly.” One brand, called The Keeper, which is priced under $60, can be reused for as long as 10 years. But menstruation and its impact on women still continues to present medical challenges. In the 1970s, a feminist group in Los Angeles concluded it was time to find a way to eliminate menstruation, and several members of the organization developed a technique called menstrual extraction. Those who had supported the initiative were ecstatic about the significance of the procedure. They claimed the simple extraction method done by the woman herself or a friend could reduce the duration of menstruation from a few days to a matter of minutes. In spite of feminists’ insistence that menstrual extraction was safe and liberating, the procedure soon created a great deal of controversy. Many American doctors raised serious medical concerns about a woman or other lay person using a primitive suction method to remove the entire menstrual flow from a uterus (the procedure was also suspected as being a means of performing a very early abortion).
Those who have endorsed menstrual extraction contend it is no more traumatic than having an IUD inserted. What they fail to acknowledge is, given the choice, most women would probably prefer to experience their monthly menstrual period rather than face the risk of
infection and tissue damage that many physicians insist could result from menstrual extraction. Dorothy Grant is a freelance writer in Halifax. Dorothy Grant, From fig leaf to the ‘sanitary napkin.’ Vol. 3 5, Medical Post, 04/06/1999 The first site is to be aimed at European teenagers, promoting products such as Clearasil, Sunny Delight and Tampax. Another example, Escobar says, is a site for young parents based around a trusted baby product brand, involving parenting advice, the opportunity to e-mail a pediatrician and a chat room for young mothers. Procter & Gamble, to step up its Internet activity will give the World Wide Web a boost as a marketing medium. P&G has always been an early and aggressive adopter of new media, dating back to radio and television. According to Kim Escobar, director of Euro RSCG Interactive, the agency that has been asked to develop the first European site for P&G, the opportunity presented by the Internet is twofold: to develop an interactive marketing device that allows for communication with customers; and to generate direct sales from the Web and make savings on promotional literature. “High-tech companies have done a lot of work in this area but have a much easier model to work from because high-tech products are much more of a considered purchase,” she says. “For a general fast-moving consumer-goods client you are seeking to build a branding relationship. There is not a clean-cut model for how you do that, so we are seeing a lot of experimentation. No one has the answer; it is just the same as when people started to use television to advertise products.” P&G’s idea is to attract consumers to interactive sites that will be of interest to particular target groups, with the hope of developing deeper relationships with consumers. An interesting sidebar to this case is that Johnson and Johnson and Tambrands launched their brands of tampons in the Hong Kong market in 1946 and the market did not peak at 3.2 percent and then dropped to 2.0 percent in 1996. An analysis indicated that neither company considered the cultural the cultural differences between napkin and tampon usage. In Hong Kong Chinese culture, respect for family and for education has been found to be a strong influence on consumer behavior, which suggests that a woman is likely to seek the advice of a family member, particularly a mother, about products. Since older Chinese women had no experience with tampons, they could not be expected to recommend them to their daughters. Also, several studies available at the time would have told marketing researchers at both companies that sex and feminine hygiene, in particular, are topics that elicit a strict and austere response in a Chinese family setting. This would have led researchers to conclude that the implications of the penetrative attributes of tampons lauded by both companies would be, reality, and a powerful disincentive for young Chinese women. A suggestion is to pose this situation to the students and ask if the “new approach” by P&G would have worked in Hong Kong. Source: Michael D. White, International Marketing Blunders (Novato, CA.: World Trade Press, 2002) p.158.
Ed Shelton, “P&G to Seek Web Friends, The European, November 16, 1998, p. 18.
Case 4-3 Iberia Airlines Builds a BATNA This is by far the best description of a high-level international business negotiation ever published in the popular press. The insights and lessons are most useful. 1. Iberia’s Dupuy played the game to perfection. His critical task was to strengthen his BATNAs (best alternative to a negotiated agreement). It had been a long time since Iberia had bought Boeing. He went to great lengths to bring the Boeing folks into the bidding contest including offering to fly the 14 hours to Seattle. Another stroke of genius was to bring the used Singapore Airlines 747s into consideration. He also had done a good job during the 1995 (another bad market year for the aircraft makers) negotiations with Airbus by including the resale price guarantees. Bright (Boeing) was in trouble from the start. But, in a down market he could hardly ignore a big order even from a European airline with cozy connections to Airbus. He did do well on the creativity dimension by guaranteeing GE concessions on engine maintenance. Leahy (Airbus) probably gave away too much in price and had not bothered to include a confidentiality agreement about the final price. 2. Airbus and Boeing are competing for market share through price cuts. In a volatile industrial market this guarantees major advantages in the bidding process. We, of course, cannot and would not counsel collusion between the aircraft makers. But, both firms would be better off with less aggressive price discounting. One of Boeing’s failings is to not have a European working on business in that part of the world. Notice how Airbus has hired an American (Leahy) to sell planes in that market. It appears from the case that the strong personal and political relationships between the top executives at the European firms clinched the deal. In future negotiations with Iberia real consideration has to given to bidding list price and leaving at that. Of course, remind the Iberia folks about how this last transaction went. But, let them pay list price to Airbus just once and perhaps in the next round Boeing will get the order finally.
Case 4-4 Sales Negotiations Abroad for MRIs* Negotiation is the most frequently used means of resolving conflicts between organizations. Particularly in international industrial marketing, when “big-ticket” and/or high technology products are involved, sales are most often negotiated. Yet principles of effective negotiation and negotiation skills are seldom part of the curriculum in business schools. The General Medical MRI Negotiation Simulation (GM/MRI) has been developed specifically to provide a context for experiential learning and practical discussion of international business negotiations. Through the simulation and associated debriefing, participants are familiarized with the complex bargaining issues, strategies, and pressures typical of relationships between industrial firms in the global market place. The presentation of the (GM/MRI) Negotiation Simulation to follow is divided into five parts. First, the simulation is briefly described. Next, instructions for participation and administration are detailed. Third, instructions for debriefing are outlined. Fourth, variations in the use of the game are suggested. The last section, the Appendix, consists of the student materials for both the Japanese and Brazilian versions.
A Brief Description of The Simulation The simulation and debriefing can be accomplished during a four-hour period. Two two-hour sessions are ideal. The GM/MRI Negotiation Simulation involves a final sales negotiation between two industrial concerns, one U.S. and the other a Japanese hospital group. The product is a $1.5 million Magnetic Resonance Imaging (MRI) System for installation in a Tokyo hospital. A second version of the simulation regards a similar Brazilian client – details are provided in the Appendix. Six representatives of three firms are participating in the discussions: (1) a Sales Representative, a Regional Sales Manager, and a Product Sales Specialist from General Medical, Inc.; (2) the Radiology Department Manager, Chief Radiologist, and CFO of Ichikawa Hospitals. Each participant has somewhat different (and in some cases conflicting) personal and professional motives regarding the deal. Previous to the negotiation, General Medical has submitted a price quotation for the MRI System, including several product options and General Medical standard terms and conditions. The Ichikawa Hospitals CFO has established certain purchasing objectives that would require substantial concessions from General Medical. Both sides are supplied with similar amounts of information about various environmental constraints (e.g., time schedules, market conditions, etc.). Additionally, each side has been instructed to come to an agreement during this meeting. The final agreement will consist of a completed purchase agreement, signed by representatives of both companies. Instructions for Participants There are six roles to be played in the simulation (see the Appendix): three for the General Medical sales team and three for the Ichikawa Hospitals purchasing team. Groups of six students (smaller groups also work) are given the appropriate materials, and the three General Medical representatives are sent to a different location to plan bargaining strategies. The role-playing instructions are self-explanatory; however, a few questions of clarification should be anticipated. The Ichikawa Hospitals roles include a set of special cultural/behavioral instructions. The General Medical team is instructed to return at the end of 30 minutes (30 minute time limit for negotiation preparations) and begin the sales discussions. The bargaining session is limited to one hour. If facilities allow, private intra-team conferences are permitted. In any case, the 60-minute time limit for bargaining is strictly adhered to. The simulation is complete when the final contract terms are specified and approved by the appropriate representatives of both firms (the form is included in the General Medical sales representative’s materials). Usually bargaining is concluded very near the end of the time limit, and very often no agreement is reached. The simulation is designed to be a difficult negotiation. The purpose is not so much to compare outcomes, but instead the focus of classroom discussions should be negotiation PROCESSES. The simulation has been designed to provide an hour or so of negotiation interaction. Often students will ask for just “10 more minutes.” However, that “10 more minutes” almost always turns into another 30, 40, or 50. Debriefing Instructions The simulation debriefing can be accomplished in approximately two hours and consists of three parts: (1) written student evaluation of the negotiations; (2) instructor-led class discussion; and (3) student discussion of the negotiation within the six-person groups. Two forms should be prepared for evaluation of the negotiation by students. One is a negotiator evaluation form. Each participant is instructed to evaluate the performance of one member of the opposing team. The form consists of twelve dimensions of negotiator skills to be rated and includes room for brief comments. The twelve five-point items are: (1) well prepared/unprepared; (2) high aspirations/ low aspirations; (3) good listener/poor listener; (4) asks good questions/doesn’t ask good questions; (5)
makes powerful arguments/makes weak arguments; (6) quick to respond/slow to respond; (7) honest/deceptive; (8) exploitative/accommodating; (9) patient/impatient; (10) avoids concessions/readily makes concessions; (11) creative/not creative; and (12) would be interested in working with person again/would not. On the second form the students are asked to comment on both negotiation teams’ performance. The group evaluation form is much less structured and asks for general comments about “strong points” and “weak points.” The forms require about 10 to 15 minutes to complete and should be filled out immediately after completion of the negotiation. The instructor-led discussion includes four topics: (1) a comparison of the various groups’ results, including disclosure of the purchasing objectives and a discussion about the reasons if no agreement is reached; (2) a description of the different and conflicting motives for each of the six roles; (3) possible effective bargaining strategies for each side; and (4) the special cultural nuances of the Japanese negotiation style. The Ichikawa Hospitals purchasing objectives should be disclosed first, followed by comparison of bargaining outcomes among student groups. However, it is important to point out during the discussion that any evaluation of negotiation outcomes is in itself a difficult task and very much dependent on one’s point of view. Any deviations from standard terms and conditions or price or purchasing objectives almost always requires explanation once representatives return to their respective headquarters. Following the comparison of results, the individual motives of each role should be shared with the group. For example, the Ichikawa Hospitals Radiology Department Manager wants the X2001 Software Package options, while the Chief Radiologist thinks that the X2001 is an unnecessary frill. All such individual motives should be revealed to the group. It should be pointed out to the students that such contrary personal and professional goals are typical of industrial sales negotiations. The next topic to be discussed during the instructor debriefing is possible bargaining tactics. The list below is not intended to be exhaustive, but exemplary only. The last topic of discussion is cultural influences on bargaining styles. The General Medical side should be asked if they noticed anything different or unusual about the Ichikawa Hospitals team’s negotiation style. Their feelings and responses can be reported. Then the Japanese or Brazilian cultural instructions can be revealed. General Medical Tactics The following are a few of the more important bargaining tactics which the General Medical team might have employed during the simulation. 1. 2. 3. Market research at the negotiation table. Initially maximize questions and carefully sound out the buyer’s position. Get them to make a counter offer. Break and reconsider your strategy. Once you are certain of the buyer’s position and priorities, break for a private “strategy adjustment,” given the new information. Raise your price. “Things have changed since we prepared the quote.” “If this seems too risky you may want to add, “...but we’ll leave the price as it is.” The ethics of such a tactic should be discussed. This is not a recommended strategy, but students should be aware of its use by others. Avoid concessions. Avoid making any further commitments or concessions until you understand the full picture. “I can’t say for certain until we’ve discussed the other issues.”
5. 6. 7.
The mouthpiece routine. Let the sales representative do the talking. This gives the sales manager the opportunity to change things and correct mistakes if necessary. Creativity. Suggest concessions on issues not listed – future purchases, for example. Use all the time. Make no concessions until near the end of the bargaining session.
Purchasing Team Tactics The following bargaining tactics might have been used by the purchasing team. 1. 2. 3. 4. Why so high? Have the General Medial side explain “why” on every item in the quotation. Explore for weak points. Break, then reconsider your strategy. No counter-offer. Avoid making a counter-offer if possible. Your first offer is your first concession and it set limits on your profits from the deal. Start low. If the other side forces a counter-offer, then start lower than your purchasing objectives. If you start with your listed price there is no room for the necessary compromise and no way to achieve your goals. Use all the time. Good guy/bad guy routine. Don’t settle the X2001 software package issue ahead of time. Let the Chief Radiologist weaken General Medical’s position. Creativity.
5. 6. 7.
Usually 45 minutes is adequate to accomplish this second part of the debriefing. The final step in the debriefing includes discussion of the various students’ evaluation forms within the groups of six. Each student reads his/her comments about the group and then the six amplify, clarify, or disagree. Sharing the information from the group evaluation forms serves as an excellent discussion stimulus. Following this group discussion, each person is given his/her individual evaluation form to review. Here again, the students usually ask questions and clarify the other’s ratings of their own negotiation performance. Ordinarily this second step in the debriefing can be accomplished in about 30 minutes. Variations in Usage and Structure of the Simulation There are a number of ways in which the GM/MRI Negotiation Simulation might be changed. Below are listed just a few of the possibilities. Smaller groups. The simulation is ideally conducted with groups of six students. However, groups of five (the Radiology Department Manger’s information is given to the Ichikawa Hospitals CFO) or four (and the General Medical Product Sales Specialist’s information is given to the General Medical sales manger) also work well. Use of videotaping facilities. The availability of videotaping facilities dramatically enriches the GM/MRI Negotiation Simulation experience. Each bargaining session would be videotaped. Following completion of the evaluation forms, each student would be required to review the taped negotiation and “correct” his or her evaluations. Such an exercise allows the students to view themselves as others do. Moreover, our limited capabilities of perception and memory are demonstrated by contrasting the recollections of events to the “reality” of the videotape. Videotaping also allows the instructor the opportunity to view and evaluate the performance of each team, even when several simulations are conducted simultaneously. The videotapes might be used during the debriefing to demonstrate successful or unsuccessful tactics. Finally, students absent from class on the day of the simulation might be required to view one of the tapes and fill out the evaluation forms. Such an assignment would enrich their participation in the instructor’s debriefing.
APPENDIX STUDENT MATERIALS Each of the six role descriptions requires a different set of support documents. See the bottom of each for a list.
1. Materials for the Japanese (client is Ichikawa Hospitals) version of the simulation.
GENERAL MEDICAL PRODUCT SALES SPECIALIST (J) You will be playing the role of a Product Sales Specialist working for General Medical, Inc. (GMI), a manufacturer of a broad line of medical instruments and equipment. You have been selected by your firm to participate in negotiations with representatives of Ichikawa Hospitals, a chain of nine hospitals headquartered in Tokyo, Japan regarding their purchase of a model 2000 MRI. A price quotation for the basic system and associated product options is attached. As a member of the Technical Sales Support Department of your firm, you are very interested in communicating to the client personnel the advantages of the options listed. It has been the experience of those in your department that when GMI supplies such options, fewer operational difficulties are encountered during installation and use of the system. Service contracts have proven advantageous in avoiding warranty work possibly caused by improper servicing by client personnel. GMI is recognized in the industry as the leader in providing cutting-edge technology and user-friendly MRI systems. Both the TOF Angiography and the Flow Analysis options will be appropriate for cardiovascular work done at Ichikawa Hospitals. The X2001 Software Package you are particularly proud of since you advised GMI engineering staff on its development. It provides much faster and more flexible manipulation of the images and has wonderful ease of use qualities. However, since the package is new there may still be bugs to worked out. Ichikawa Hospitals is also the first foreign client to which it has been offered, so the price quoted for this option is relatively low. You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of Ichikawa Hospitals. You may make notes on these forms and ask questions if clarification of the instructions is needed. (attach price quotation)
GENERAL MEDICAL REGIONAL SALES MANAGER (J) You will be playing the role of a regional sales manager for General Medical, Inc. (GMI), a manufacturer of a broad product line of medical instruments and equipment. You will be heading up a team of GMI representatives in the final sales negotiations for a $1.5 million magnetic resonance imaging system (MRI) for Ichikawa Hospitals, a chain of nine hospitals headquartered in Tokyo, Japan. Your salesperson has been conducting preliminary sales and technical discussions. During this final session with the client personnel you will be expected to make the necessary decisions to conclude the agreement with Ichikawa. This contract is particularly important for your firm because so far, sales of MRIs in the Japanese market have been dominated by Japanese competitors. The sale to Ichikawa Hospitals, a well-respected general hospital chain will be a crucial “foot in the door” in this increasingly important market. The opportunity to sell the X2001 Software Package, a brand new one for General Medical, is also important because the firm has had little experience with Japanese medical personnel using its advanced operating systems in English. Your sales person has already submitted a price quotation to Ichikawa (see the attached copy). Company policy allows up to a 10 percent price reduction at your discretion. Any further reduction in price will require substantial justification on your return to headquarters. Additionally, a large part of your annual compensation depends on achieving profit objectives established at headquarters. Finally, according to market research, GMI’s competitors have recently raised prices on comparable products, thus making your bid very attractive. Recently, several customers have requested an arbitration clause as part of the terms and conditions. Your legal department feels that such clauses are not necessary. Indeed, in the past when GMI and client disagreements have gone to arbitration by a third party, GMI has consistently lost out. Thus, the legal department has asked you to actively avoid arbitration clauses of any sort. Finally, the Japanese are likely to request to pay in yen. Your financial people have a strong bias against customers forcing currency risks on GMI and have asked you to ensure the contract be written in American dollars. You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of Ichikawa Hospitals. You may make notes on these forms and ask questions if clarification of the instructions is needed. (attach price quotation)
GENERAL MEDICAL SALES REPRESENTATIVE (J) You will be playing the role of a sales representative of General Medical, Inc. (GMI), a manufacturer of a broad product line of medical instruments and equipment. You have arranged a meeting between representatives of your company (your sales manager, a product sales specialist, and you) and the representatives of your client firm, Ichikawa Hospitals, a chain of nine hospitals headquartered in Tokyo, Japan. There will be three Ichikawa Hospitals personnel attending the meeting—the Radiology Department Manager, the Chief Radiologist, and the CFO. The purpose of this meeting is to negotiate the final details of a contract you have been working on during the last six months. This particularly contract is personally important to you because it will push your sales performance for the year into the bonus area. You have submitted, with headquarters’ approval, a price quotation to the client (a copy is attached). Most of your clients, particularly those in foreign countries, ask for substantial price reductions below original quotes. You have the opportunity to “trade off” hardware price for other favorable terms and conditions which are part of the standard agreement. GMI’s standard terms and conditions are listed as part of the attached price quotation. In the past you have found that sticking to the standard warranty is considered most important by your headquarters. Particularly when installations are located in new markets, costs of labor and warranty work can be extremely unpredictable. The product options specified by the client are not particularly important to you. You are very concerned that an agreement be reached for the basic system, as it dramatically affects your annual bonus. However, the product extras have no effect on your performance evaluation or compensation. Your Ichikawa Hospitals counterparts have been hinting that an agreement written in yen is preferable. The yen has been depreciating recently, so this may be a problem in the discussions. You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of Ichikawa Hospitals. You may make notes on these forms and ask questions if clarification of the instructions is needed. The terms of the final contract will be recorded on the attached contract and signed by representatives of both companies. (attach price quotation, blank contract)
ICHIKAWA HOSPTIALS CHIEF FINANCIAL OFFICER (J) You will be playing the role of the Chief Financial Officer for Ichikawa Hospitals, a chain of nine general hospitals headquartered in Tokyo, Japan. You are working with your medical staff in the final negotiations for a Magnetic Resonance Imaging (MRI) system for installation in your central Tokyo hospital being offered by an American company, General Medical, Inc. (GMI). A sales representative at GMI has submitted a bid ($1.5 million) for the system that may or may not be the best solution to your purchasing problem. You consider the price quoted by GMI to be out of line with local Japanese manufacturers. Indeed, one of your college classmates working for Onzo Electric says his company will beat any price GMI offers. You recognize that GMI’s products are superior, but you also know that GMI is trying to break into the Japanese market and should be willing to make substantial price concessions. Of the terms and conditions included in the initial bid, you feel that three are critical. First, in recent months GMI has had difficulty meeting delivery dates. Therefore, the late delivery penalty will be an important issue during the discussions. Second, you believe that it is imperative that your vendors bear the risk of currency fluctuations, and therefore the agreement should be written in yen, not dollars. Indeed, latest forecasts are for the yen to decline during the upcoming year. Your firm wishes to stay as far away as possible from American-style legal disputes, so you see a third party arbitration clause as an essential part of the contract. Another issue of concern is an internal lack of harmony between your Radiology Department Manager and the Chief Radiologist. The latter has little interest in the X2001 Software Package—he sees it as an unnecessary and potentially unreliable frill. The Department Manager sees its purchase as an opportunity to aid in the development of similar products which might be sold throughout Japan. Finally, the Chief Radiologist has asked you to consider buying two systems, the second to be installed in your central Yokohama hospital. Even though you are not sure about even one GMI system, you have included a second one in the Purchasing Objectives you’ve supplied the others on your negotiation team. You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Included in your materials will be some special instructions about “acting” Japanese. Have fun with these—try to make your portrayal as realistic as possible. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of General Medical, Inc. You may make notes on these forms and ask questions if clarification of the instructions is needed. (attach price quotation, purchasing objectives, negotiation style instructions)
ICHIKAWA HOSPITALS CHIEF RADIOLOGIST (J) You will be playing the role of the Chief Radiologist at the central Tokyo location of Ichikawa Hospitals, a chain of nine general hospitals headquartered in your building. You are representing your fellow physicians and working with your administrative counterparts in the final negotiations for a Magnetic Resonance Imaging (MRI) system being offered by an American company, General Medical, Inc. (GMI). A sales representative at GMI has submitted a bid ($1.5 million) for the system and you are quite interested in getting this advanced equipment as soon as possible. You consider the General Medical MRI to be a far superior product to any currently available from Japanese suppliers. Its speed and ease of use characteristics will not only result in increased operational efficiency at your hospital, but some of the newer cardiovascular imaging product options will help you provide a new, higher level of care to your older patients. You are, however, quite skeptical about the value of the “experimental” X2001 Software Package option. You know from discussions with your colleagues at international medical conventions who are most familiar with GMI’s products that new software packages always have bugs. Indeed, such bugs have “brought down” the whole system previously. You would prefer to use the standard software, and not take a chance with the X2001. Elatedly, you prefer that GMI train your own people to service the system. That would make the service contract unnecessary and you don’t trust GMI to provide timely service in Japan anyway. Finally, your fellow radiologists in Yokohama are also urging you to order a second MRI for their central hospital. You mentioned it to your CFO previously, but s/he seemed quite distracted at the time. However, a second system is included in the Purchasing Objectives the CFO has given you (see attached). You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Included in your materials will be some special instructions about “acting” Japanese. Have fun with these—try to make your portrayal as realistic as possible. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of General Medical, Inc. You may make notes on these forms and ask questions if clarification of the instructions is needed. (attach price quotation, purchasing objectives, negotiation style instructions)
ICHIKAWA HOSPITALS RADIOLOGY DEPARTMENT MANAGER (J) You will be playing the role of the Radiology Department Manager for Ichikawa Hospitals, a chain of nine general hospitals headquartered in Tokyo, Japan. You are working with your CFO and the senior Radiologist on your medical staff in the final negotiations for a Magnetic Resonance Imaging (MRI) system for installation in your central Tokyo hospital. A sales representative of the American Company, General Medical, Inc. (GMI) has submitted a bid for the system preferred by your medical staff. Surprisingly, the CFO has also listed a second MRI for installation at your central Yokohama hospital in her/his Purchasing Objectives (see attached). You know your CFO is primarily interested in saving money. From your talks with the senior Radiologist you know there is a strong bias against including the X2001 Software Package option. Its reliability is the main objection. However, you see obtaining this state-of-the-art software as the key to an important business opportunity for Ichikawa Hospitals. You and your staff hope to work with the Ichikawa Hospitals radiologists (particularly the younger ones) and GMI in developing Japanese language software for MRIs and a variety of other medical imaging instruments. Japanese manufacturers have been generally lagging behind the Americans in software development, and you see this as a big future opportunity for developing products for the entire Japanese health care market. You are quite concerned that the X2001 was not included on the Purchasing Objectives distributed by the CFO. Finally, you would prefer to have GMI provide service for the systems. You feel the more contact with the GMI technical personnel the better, given your long-term objectives. You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Included in your materials will be some special instructions about “acting” Japanese. Have fun with these—try to make your portrayal as realistic as possible. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of General Medical, Inc. You may make notes on these forms and ask questions if clarification of the instructions is needed. (attach price quotation, purchasing objectives, negotiation style instructions)
Deep Vision 2000 MRI (basic unit) Product options: • • • 2D and 3D Time-of-flight (TOF) angiography for capturing fast flow Flow analysis for quantification of cardiovascular studies X2001 Software Package
150,000 70,000 20,000 60,000 $1,500,000
Service contract (2 years normal maintenance, parts, and labor) Total price
Standard Terms and Conditions
Delivery Penalty for late delivery Cancellation charges Warranty (for defective machinery) Terms of payment
6 months $10,000/month 10% of contract price parts, one year COD
Ichikawa Hospitals Purchasing Objectives (J) Two (2) Deep Vision 2000 MRIs 2D and 3D TOF Angiography (2) Flow Analysis (2) Service Contract (3 years) 226 million yen 28 million yen 13 million yen 11 million yen
TOTAL PRICE 278 million yen _____________________________________________________________________ Delivery Penalty for late delivery Cancellation charges Warranty Terms of payment 3 months $12,000/month 2% of contract parts and labor, 2 years 4 equal payments: 1st at delivery, 2nd at start-up, rd th 3 and 4 at 90-day intervals included
Third Party Arbitration Clause
Final Contract (J) Deep Vision 2000 MRI Product Options (circle those selected) Angiography Flow analysis X2001 Software TOTAL Price $ ______________ Service Contact (list conditions) _________________________________ _________________________________ Price $ ______________ _____________________________________________________________________ Terms and conditions Delivery Penalty Cancellation Charges Terms of Payment ________________ ________________ Warranty Arbitration clause _____________________________________________________________________ Signatures _________________________________________ Ichikawa Hospitals Representative _________________________________________ General Medical, Inc. Representative Parts _____ Labor _____ Years _____ Yes _____ No ____ ________________ ________________ ________________ ________________
JAPANESE NEGOTIATION STYLE INSTRUCTIONS The simulation becomes much more interesting for everyone if a little culture is brought into the game. Please try to incorporate the following three aspects of Japanese negotiation style into your behavior at the negotiation table. 1. 2. 3. Emphasize asking QUESTIONS. Even when they answer, ask the same question in another way. Deliberately allow SILENT PERIODS. Don’t settle any issues until the end. It is OK for you to bring up issues again later in the negotiation, even if the other side thinks they were settled.
APPENDIX STUDENT MATERIALS
2. Materials for the Brazilian (client is Corcovado Hospital) version of the simulation.
GENERAL MEDICAL PRODUCT SALES SPECIALIST (B) You will be playing the role of a Product Sales Specialist working for General Medical, Inc. (GMI), a manufacturer of a broad line of medical instruments and equipment. You have been selected by your firm to participate in negotiations with representatives of Corcovado Hospital, a large private hospital located in Rio de Janeiro, Brazil regarding their purchase of a model 2000 MRI. A price quotation for the basic system and associated product options is attached. As a member of the Technical Sales Support Department of your firm you are very interested in communicating to the client personnel the advantages of the options listed. It has been the experience of those in your department that when GMI supplies such options, fewer operational difficulties are encountered during installation and use of the system. Service contracts have proven advantageous in avoiding warranty work possibly caused by improper servicing by client personnel, and they are quite profitable as well. GMI is recognized in the industry as the leader in providing cutting-edge technology and user-friendly MRI systems. Both the TOF Angiography and the Flow Analysis options will be appropriate for cardiovascular work done at Corcovado Hospital. The X2001 Software Package you are particularly proud of since you advised GMI engineering staff on its development. It provides much faster and more flexible manipulation of the images and has wonderful ease of use qualities. However, since the package is new there may still be bugs to be worked out. Corcovado Hospital is also the first foreign client to which it has been offered, so the price quoted for this option is relatively low. There have been some questions asked about the very new (not yet approved by the FDA in the U.S.) Probe Spectroscopy option for head studies. You are personally reluctant to push this product in foreign countries ahead of its U.S. approval. However, others in the company don’t feel that way. You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of Corcovado Hospital. You may make notes on these forms and ask questions if clarification of the instructions is needed. (attach price quotation)
GENERAL MEDICAL REGIONAL SALES MANAGER (B) You will be playing the role of a regional sales manager for General Medical, Inc. (GMI), a manufacturer of a broad product line of medical instruments and equipment. You will be heading up a team of GMI representatives in the final sales negotiations for a $1.5 million magnetic resonance imaging system (MRI) for Corcovado Hospital, a large private hospital located in Rio de Janeiro, Brazil. Your salesperson has been conducting preliminary sales and technical discussions. During this final session with the client personnel you will be expected to make the necessary decisions to conclude the agreement. This contract is particularly important for your firm because so far, sales of MRIs in Latin America have faced tough competition from Japanese firms. The sale to Corcovado Hospital, one of the most respected private hospitals in the country, would be a crucial competitive coup in this increasingly important market. The opportunity to sell the X2001 Software Package, a brand new one for General Medical, is also important because the firm has had little experience with foreign medical personnel using its advanced operating systems in English. Your sales person has already submitted a price quotation to Corcovado (see the attached copy). Company policy allows up to a 10 percent price reduction at your discretion. Any further reduction in price will require substantial justification upon your return to headquarters. Additionally, a large part of your annual compensation depends on achieving profit objectives established at headquarters. Finally, according to market research, GMI’s competitors have recently raised prices on comparable products, thus making your bid very attractive. Recently, several customers have requested an arbitration clause as part of the terms and conditions. Your legal department feels that such clauses are not necessary. Indeed, in the past when GMI and client disagreements have gone to arbitration by a third party, GMI has consistently lost out. Thus, the legal department has asked you to actively avoid arbitration clauses of any sort. Finally, the Brazilians are likely to request to pay in reals. Your financial people have a strong bias against customers forcing currency risks on GMI and have asked you to ensure the contract be written in American dollars. You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of Corcovado Hospital. You may make notes on these forms and ask questions if clarification of the instructions is needed. (attach price quotation)
GENERAL MEDICAL SALES REPRESENTATIVE (B) You will be playing the role of a sales representative of General Medical, Inc. (GMI), a manufacturer of a broad product line of medical instruments and equipment. You have arranged a meeting between representatives of your company (your sales manager, a product sales specialist, and you) and the representatives of your client firm, Corcovado Hospital, a large private hospital in Rio de Janeiro, Brazil. There will be three Corcovado Hospital personnel attending the meeting—the Radiology Department Manager, the Chief Radiologist, and the CFO. The purpose of this meeting is to negotiate the final details of a contract you have been working on during the last six months. This particularly contract is personally important to you because it will push your sales performance for the year into the bonus area. You have submitted, with headquarters’ approval, a price quotation to the client (a copy is attached). Most of your clients, particularly those in foreign countries, ask for substantial price reductions below original quotes. You have the opportunity to “trade off” hardware price for other favorable terms and conditions which are part of the standard agreement. GMI’s standard terms and conditions are listed as part of the attached price quotation. In the past you have found that sticking to the standard warranty is considered most important by your headquarters. Particularly when installations are located in new markets, costs of labor in warranty work can be extremely unpredictable. In your last conversation with the Chief Radiologist at Corcovado he mentioned an interest in GMI’s new Probe Spectroscopy option (list price = $50,000) for head studies, which hasn’t yet received FDA approval. However, the product options specified by the client are not particularly important to you. You are very concerned that an agreement be reached for the basic system, as it dramatically affects your annual bonus. However, the product extras have no effect on your performance evaluation or compensation. Your Corcovado Hospital counterparts have been hinting that an agreement written in reals is preferable. The real has been depreciating recently, so this may be a problem in the discussions. You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of Corcovado Hospital. You may make notes on these forms and ask questions if clarification of the instructions is needed. The terms of the final contract will be recorded on the attached contract and signed by representatives of both companies. (attach price quotation, blank contract)
CORCOVADO HOSPTIAL CHIEF FINANCIAL OFFICER (B) You will be playing the role of the Chief Financial Officer for Corcovado Hospital, a large private hospital located in Rio de Janeiro, Brazil. You are working with your medical staff in the final negotiations for a Magnetic Resonance Imaging (MRI) system for installation in your hospital being offered by an American company, General Medical, Inc. (GMI). A sales representative at GMI has submitted a bid ($1.5 million) for the system that may or may not be the best solution to your purchasing problem. You consider the price quoted by GMI to be out of line with their Japanese competitors. Indeed, a good friend working for Hokkaido Electric says his company will beat any price GMI offers. You recognize that GMI’s products are superior, but you also know that GMI is trying to beat the Japanese and should be willing to make substantial price concessions. Of the terms and conditions included in the initial bid, you feel that three are critical. First, in recent months GMI has had difficulty meeting delivery dates. Therefore, the late delivery penalty will be an important issue during the discussions. Second, you believe that it is imperative that your vendors bear the risk of currency fluctuations, and therefore the agreement should be written in reals, not dollars. Indeed, latest forecasts are for the real to decline during the upcoming year. Your firm wishes to stay as far away as possible from American-style legal disputes, so you see a third party arbitration clause as an essential part of the contract. Another issue of concern is an internal dispute between your Radiology Department Manager and the Chief Radiologist. The latter wishes to order two MRI systems right away, and argues that the current patient load justifies the aggressive purchasing. The Department Manager prefers to see how this first GMI purchase works out before committing to a second system. You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Included in your materials will be some special instructions about “acting” Brazilian. Have fun with these—try to make your portrayal as realistic as possible. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of General Medical, Inc. You may make notes on these forms and ask questions if clarification of the instructions is needed. (attach price quotation, purchasing objectives, negotiation style instructions)
CORCOVADO HOSPITAL CHIEF RADIOLOGIST (B) You will be playing the role of the Chief Radiologist at Corcovado Hospital, a large private hospital in Rio de Janeiro. You are representing your fellow physicians and working with your administrative counterparts in the final negotiations for a Magnetic Resonance Imaging (MRI) system being offered by an American company, General Medical, Inc. (GMI). A sales representative at GMI has submitted a bid ($1.5 million) for the system and you are quite interested in getting this advanced equipment as soon as possible. You consider the General Medical MRI to be a far superior product to any currently available from other suppliers including the Japanese. Its speed and ease of use characteristics will not only result in increased operational efficiency at your hospital, but some of the newer cardiovascular imaging product options will help you provide a new, higher level of care to your older patients. You also are quite keen on adding GMI’s new Probe Spectroscopy option for head studies (list price = $50,000). It may not yet be approved by the FDA in the U.S., but this is not an obstacle in Brazil. Finally, your fellow radiologists are also urging you to order a second MRI. Patient load and quality of care more than justify the extra expense. You mentioned it to your CFO previously, but s/he seemed quite distracted at the time. However, a second system is included in the Purchasing Objectives the CFO has given you (see attached). You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Included in your materials will be some special instructions about “acting” Brazilian. Have fun with these—try to make your portrayal as realistic as possible. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of General Medical, Inc. You may make notes on these forms and ask questions if clarification of the instructions is needed. (attach price quotation, purchasing objectives, negotiation style instructions)
CORCOVADO HOSPITAL RADIOLOGY DEPARTMENT MANAGER (B) You will be playing the role of the Radiology Department Manager for Corcovado Hospital, a large private hospital in Rio de Janeiro, Brazil. You are working with your CFO and the senior Radiologist on your medical staff in the final negotiations for a Magnetic Resonance Imaging (MRI) system for installation in your hospital. A sales representative of the American company, General Medical, Inc. (GMI) has submitted a bid for the system preferred by your medical staff. Surprisingly, the CFO has also listed a second MRI in her/his Purchasing Objectives (see attached). You see buying two MRIs now as a big potential problem. Although GMI has a wonderful reputation, you do not know any of their personnel well. A new GMI sales representative seems to call on you every six months. Your preference is to perhaps buy one system and use it for at least six months before buying another. That would give your financial and technical staff some time to get to know the GMI people. You will be the person responsible for coordinating servicing and repair of the system, and if things don’t work efficiently with GMI, you are the one that gets blamed. Finally, you’re very much against any risky new product features like the X2001 Software Package. New systems are notorious for bugs that can cause major system failures, and you don’t trust GMI to repair/service the product in a timely manner. Indeed, great service has been the best part of the long relationship Corcovado Hospitals has enjoyed with Hokkaido Electric, a Japanese maker of a variety of medical instruments and systems. Clearly GMI now produces the best product, but their reputation for after-sales services is spotty. You have thirty minutes to plan bargaining strategies with other members of your negotiation team. Feel free to use part or all of the information provided above in shaping your strategies. Create additional arguments to bolster your position if you so desire. It is important that you play the assigned role to the best of your abilities in order to maximize the learning of all participants. Included in your materials will be some special instructions about “acting” Brazilian. Have fun with these—try to make your portrayal as realistic as possible. Although you can exchange information from these forms, please do not exchange forms with the other members of your negotiation team. You will have one hour to reach an agreement with the representatives of General Medical, Inc. You may make notes on these forms and ask questions if clarification of the instructions is needed. (attach price quotation, purchasing objectives, negotiation style instructions)
Deep Vision 2000 MRI (basic unit) Product options: 2D and 3D Time-of-flight (TOF) angiography for capturing fast flow Flow analysis for quantification of cardiovascular studies X2001 Software Package Service contract (2 years normal maintenance, parts, and labor) Total price
150,000 70,000 20,000 60,000 $1,500,000
Standard Terms and Conditions
Delivery Penalty for late delivery Cancellation charges Warranty (for defective machinery) Terms of payment
6 months $10,000/month 10% of contract price parts, one year COD
Corcovado Hospitals Purchasing Objectives (B) Two (2) Deep Vision 2000 MRIs 2D and 3D TOF Angiography (2) Flow Analysis (2) Service Contract (3 years) 2,000,000 reals 240,000 reals 110,000 reals 97,000 reals
TOTAL PRICE 2,477,000 reals _____________________________________________________________________ Delivery Penalty for late delivery Cancellation charges Warranty Terms of payment 3 months $12,000/month 2% of contract parts and labor, 2 years 4 equal payments: 1st at delivery, 2nd at start-up, rd th 3 and 4 at 90-day intervals included
Third Party Arbitration Clause
Final Contract (B) Deep Vision 2000 MRI Product Options (circle those selected) Angiography Flow analysis X2001 Software TOTAL Price $ ______________ Service Contact (list conditions) _________________________________ _________________________________ Price $ ______________ _____________________________________________________________________ Terms and conditions Delivery Penalty Cancellation Charges Terms of Payment ________________ ________________ Warranty Arbitration clause _____________________________________________________________________ Signatures _________________________________________ Corcovado Representative _________________________________________ General Medical, Inc. Representative Parts _____ Labor _____ Years _____ Yes _____ No ____ ________________ ________________ ________________ ________________
BRAZILIAN NEGOTIATION STYLE INSTRUCTIONS The simulation becomes much more interesting for everyone if a little culture is brought into the game. Please try to incorporate the following three aspects of Brazilian negotiation style into your behavior at the negotiation table. 1. Do not talk about business directly during the first 10 minutes of the game. Sports, the weather, the world economy are all OK. But, during the first 10 minutes if the other side brings up business, you change the subject. Try to INTERRUPT your counterparts frequently. Periodically reach across the table and pat your counterpart’s arm when you say something friendly.
Case 4-5 National Office Machines – Motivating Japanese Salespeople: Straight Salary or Commission? The problem of changing management methods and also motivating salesmen in another culture is highlighted in this particular case. The entire Japanese system, their basis for motivation, is so different from the U.S. method and system that major problems can arise in changing the basis for compensation. Several questions should be emphasized. Should a firm change its method of operation to blend more closely with the Japanese, since to change the Japanese culture is such a difficult problem? Or should the U.S. firm force a change in motivation methods because it realizes that Japanese culture is already changing? Problems associated with running a dual system between the old and the new should be highlighted and the very serious question of whether or not the Japanese will ever change their system should be pinpointed. There has been much written on the subject. The following piece may provide interesting background. I don’t think Japan is as westernized as is widely thought. Those who believe this are looking only at the surface of life, not at the essence of Japanese culture. To be sure, many international conference halls and hotels of Japan seem totally westernized, as do the meetings that go inside them. But if there were an x-ray machine with which we cold look into people’s minds, I believe many Japanese thoughts and feelings would seem “odd” and “fantastic” from a western point of view. For example, we’d find the Japanese quite at home with various gods and several religions. He thinks nothing of being married in a Christian church, praying at a Shinto shrine on New Year’s Day, and holding funerals and memorials for ancestors according to Buddhist rites. This multi-layered, pluralistic thinking and living is basic to Japanese culture. Consider also the daily life of the Japanese. It looks very westernized, but is a surface phenomenon. I, for instance, look very westernized in my suit and tie, but once I go home I take them off end get back into the traditional kimono. The same is true of food. Although I eat western food quite often, I haven’t given up Japanese food. In effect, a layer of westernization has been added to the existing layers in the Japanese mind. In trying to make Japanese culture comprehensible to international society, Japanese scholars and intellectuals tend to emphasize Japan’s homogeneity with western cultures—just as the Rolumeikan party-goers did. But it is misleading to extend western terms to the underlying principles that unify, organize, and actually operate science, technology, industry and the economy. Japan’s culture may be in many of its forms similar to Europe’s and America’s, but in nature and spirit it is very different. The cultural legacy of the samurai and the han system lives in many areas of Japan’s economy. In the large industries of modern Japan, for example, the executives are the lords or samurai of modem hans. In fact, some of the titles for officials such as juyaku and torishimariyaku from the days of the han system are still in use in today’s companies. The relationship between the samurai and his han was one of hereditary employment, as a general rule. Employment in modern Japanese companies is no longer hereditary but it is in general lifetime. Just as the relationship between the samurai and his han was marked by a deep loyalty, the same spirit continues today in Japanese enterprises, and the ethics and esthetics of the old order remain. Nor did the influx of western people and ideas after World War II change Japan. For example, many people at one point thought the lifetime employment and seniority systems in Japan would be abolished as old-fashioned left-overs of feudalism. Not only did they continue, but in a sense they became even
more developed. The lifetime employment system doesn’t exist in a vacuum. It exists in a society which has a long history. When Westerners study Japanese culture they sometimes think of it as mystical, beyond the intellect. There is, however, nothing particularly mystical about Japanese culture. It can be explained logically. But the premises are different than those of western logic. The first premise in the Japanese esthetics of behavior is concealing the self. From a Japanese viewpoint, western culture appears to be developed on the principle of being conspicuous. As in other East Asian countries self-assertion is not a virtue in Japan. In general, human economic activities are based on the desire for wealth. While the Japanese have nothing against making money, it is rather the fascination or absorption in the activity itself that drives the Japanese. They like the planning, the running around, the whole process, the flurry and excitement of it all. Being immersed in and “drinking up” the various activities of business, produces in them a kind of aesthetic intoxication in which they revel. This, I believe, is the motivating power behind the spirited economic activities of the Japanese.** The excerpt represented above reflects what many see as the traditional Japan of the past. Japan is changing, albeit not overnight, but nevertheless changing. Contrast the piece above with the Japan of the future as revealed by excepts from several current articles. In a country famous for corporate loyalty, “lifetime” employees suddenly are harkening to the headhunter’s call. Many are beginning to change jobs in return for better pay, greater opportunity and a chance to participate in a different management style. Some Japanese companies reduce jobs and tighten their belts—Japanese workers are thinking about their careers differently. People are beginning to sense the bottleneck in the promotional system much earlier than before. In Tokyo, many Japanese are sensing that their future course as a corporate employee won’t be like the ones they have seen with their fathers. Indeed, more than 30% of businessmen in the Tokyo metropolitan area said they were inclined to change jobs in 1992, up from 25.4% in 1991. In the future, analysts say, the headhunting trend may even extend to huge Japanese companies which will eventually switch to traditional, seniority-based promotion system to one based more on ability and performance. Even so, job-hopping is still not easy. Breaking the news to his wife and family was tough, said one executive. Most Japanese wives are still used to the idea that the job lasts through life. My wife had to speak to her parents. And my sister screamed at me and called me names, like when we were children. (Jenify Coddy, “Headhunting in Japan Gains Respectability,” The Wall Street Journal, July 6, 1994, p. B-1.) Lifetime employment, promotion through seniority and single-minded company unions—are the foundations of Japanese management crumbling? Evidence seems to point toward significant trends in that direction. Younger employees want to be promoted on merit not on age or seniority, and they are less likely to see themselves staying at the same company for life. Under these growing pressures, trade unions may have to re-invent their role. (Robert Heller, David Kilburn, Peggy Salz-Trautman, and John Thachray, “The Manager’s Dilemma—What’s In Store For Management,” Management Today, January 1994, pp. 4248.) The Japanese worked an average of 1,904 hours in 1994, down from 2,111 hours in 1988 and way down from a peak of 2,432 in 1960, according to the Ministry of Labor. Comparable American figures (blue collar manufacturing workers only), the Japanese Labor Ministry estimated that Japanese employees put in 2,017 hours in 1992, compared with 1,957 for American
Tadeo Umesao, “What Makes Japan Run,” Atlas World Press Review, May 1977, pp. 27-30
workers. But by 1994, the Japanese figure had dropped to about 1,960 while American work hours had risen by about 2.4 percent. The company and their private lives are two separate things. They look for employers who will make full use of their abilities and provide opportunities. They are less inclined to be pegged into whatever slot pleases the personnel department and more inclined to change jobs if they sense more opportunity. (David Kilburn, “The Sun Sets on Japan’s Lifers,” Management Today, September 1993, pp. 4447.) Pertinent Facts National Office Machines of Dayton, Ohio entered into a joint venture with Nippon Cash Machines in Tokyo, Japan (N.A.B.M.C.). NCM is the oldest cash register manufacturer in Japan. But they have been steadily losing their market share. There are 14 other manufacturers of Office/EDP equipment in Japan, including other American and foreign firms. The venture calls for doubling the sales force to 42 salesmen. U.S. personnel will man the supervisory positions for an indeterminate time. One of the major problems facing the firm is the compensation and motivation of the expanded sales force. The traditional Japanese program is presently in use. Under this plan a man is hired until death on a straight salary, no bonus or incentive plan; at retirement he is given either a pension or a retirement sum, which is sufficient to retire on. Use of an American plan centered around bonuses and incentives, while on the surface it appears good, runs into the serious problem of acceptance in the very tradition-oriented Japanese work force. In addition to the job for life concept the labor force also receives many benefits similar to an enlisted man in the U.S. Army (housing, PX, medical). If the more American plan could be sold to the labor force, the problem of implementing it would still be considerable due to the nature of the market system in Japan. Essentially, retailers do business with those wholesalers or manufacturers whom they perceive themselves as owing favors to. Competition means very little to them. Therefore, it is questionable whether salesmen could break down the ties necessary to secure new sales if the compensation plan was instituted. Comments on NCR in Japan A pioneer in the development of commission selling in Japan, NCR has some 600 salesmen “on quota”— with most of them in the running for top salesmen honors. “The Commission system is considered as important an incentive there as in the United States and elsewhere,” a company spokesman said. “Japanese NCR personnel currently in Dayton for sales seminars are of the opinion that the commission approach is becoming more and more popular in their country.” The NCR commission system has been widely studied in Japan. A number of Japanese firms have modeled plans directly on NCR’s. In the past 10 years, NCR sales of EDP equipment, cash registers, accounting machines, and other office machines has quadrupled. Xerox has approached the same problem in Japan (i.e., the custom of providing personal monetary incentives to salesmen); they created group norms and sales goals as team objectives. Salesmen collected regular salaries and benefits but teams that exceeded targets received extra payments and bonuses given all personnel twice annually. This system works very effectively for Fuji Xerox.
Other Sources The professor may want to have students review the following articles for a discussion of changing trends in employment and human resource management in Japan: “Japan’s New ‘Gamblers,’” World Press Review, November l99l, p. 46. This article addresses changes in employment, recruiting, risk taking and the demise of the ringi system in Japanese firms. Another report on changes in employment traditions is found in Jenny C. McCune, “Japan Says Sayonara to Womb-to-Womb Management,” Management Review, November 1990, pp. 12–16. Stress in employment is chronic in Japan. Many believe it leads to Karoishi—sudden death by a heart attack or stroke by overwork—which kills an estimated 10,000 Japanese each year. More on this can be found in Karen L. Miller, “Now, Japan is Admitting It: Work Kills Executives,” BusinessWeek, August 2, 1992, p. 35. Ken Goldstein, “Japan in Ferment,” Across the Board, April 1994, pp. 51–52. F.J. Logan, “Executive Recruitment, Japanese Style,” Across the Board, September 1990, pp. 24 28. Although some things in human resource management are changing as indicated in the earlier articles, other processes remain the same. Such is the case of the elaborate system some companies employ in recruiting discussed in this article. Lea Nattalia, “The Life of A Salaryman,” Manitoba Business, July–August 1994, p. 46. John L. Graham, Shigeru Ichikawa, and Yao Apasu, “Managing Your Sales Force in Japan and the United States,” Euro-Asian Business Review, January 1987 and reprinted in Taylor Meloan and John L. Graham, International & Global Marketing, Concepts and Cases, Irwin/McGraw-Hill, 1998. R. Bruce Money and John L. Graham, “Salesperson Performance, Pay, and Job Satisfaction: Test of a Model Using Data Collected in the U. S. and Japan,” Journal of International Business Studies, 1998. Summarized in Harvard Business Review, Editor’s Briefing Section, September-October 1997, pp. 9–10.
Case 4-6 AIDS and Condoms
This may be a difficult topic for some in class discussions. However, we feel that we should not let a disease “hide” behind cultural norms about appropriate topics for class. Indeed, assuming you have foreign students in your class, an interesting associated topic is how sex/health education is handled in schools in foreign countries. Where do people in foreign countries first hear about AIDS? When it comes to the global AIDS problem we really don’t have very good answers. Perhaps your students can suggest some. The key points to be made through this case are two-fold: First, any actions to market condoms and associated changes in social behavior will require the most careful research in each country and in each market segment within the countries. Second, cooperative efforts between governments, health institutions, and for-profit companies like LIG/Durex will achieve the best results. Answers to questions: 1. Here’s what we wrote in the last (12th) edition of the Instructors Manual: “The Brazilian approach of distributing 10 million condoms during Carnival in Rio de Janeiro seems quite simple-minded. Trying
to get “euphoric drunks” to behave rationally and responsibly seems like a major waste of precious Health Ministry resources. The attitudes and behaviors related to safe sex are quite complex and the marketing/social change problem for health officials is akin to other difficult public health issues like birth control, smoking (see Case 4-7), alcoholism, and the HIV/infant formula conundrum (discussed in Case 1-2). Alternatively, the Indian approach of using barbers to dispense condoms and health advice seems quite well considered. One wonders if such an approach might be worth trying in Brazil?” Despite our best analyses then, it appears (albeit from the popular press) that the “try everything” approach seems to be working in Brazil. Given the gravity of the problem, perhaps such an inefficient approach may be justified. And, of course, it is hard to measure the promotional value of the “Mardi Gras” distribution. Also, certainly we laud the gumption of Coke and Pepsi to publicly consider promoting condoms in India. Indeed, we wonder what other innovative marketing strategies might be experimented with around the world? 2. The AIDS problem in the United States is relatively more under control. Education levels and growing success with medical treatment has slowed its advance here. However, prevention in the United States can certainly be improved through creative thinking and research regarding the encouragement of safe sex, particularly among young people. 3. It’s hard to imagine distributing condoms during Mardi Gras in New Orleans or at the latest rock concert. It’s also hard to imagine a barber engaging a customer in a conversation about safe sex here in America. But the key with this question is to promote a creative discussion among your students on these issues. During class you might ask, “If these approaches won’t work in the U.S., what might work?” You might also ask how research should be conducted on these issues. Certainly the methods most appropriate will be in-depth interviews and other qualitative approaches. Evaluation of pilot programs/test marketing will also be important. 4. The key is for LIG/Durex to work with local health officials in developing education and condom distribution programs. The key will be work at the local level to modify successful approaches used elsewhere and to develop new approaches to marketing the condoms and the associated social change. This kind of work will be the best example of marketers as cultural change agents. Useful associated articles: David Lamb, “Vietnam Seeks to Modernize Its Methods of Birth Control,” Los Angeles Times, April 11, 1998, page A2. Condoms are being smuggled in from China. Marilyn K. Nations and Maria Auxiliadora de Souza, “Umbanda Healers as Effective AIDS Educators: Case-control Study in Brazilian Urban Slums (Favelas),” Tropical Doctor, Supplement 1, 1997, pp. 60–66. This article provides an in-depth discussion of the problem of AIDS in Brazil and the successful testing of research-based, locally produced education programs. Teresa Poole, “China Starts Chain of Condom Shops,” San Francisco Examiner, March 29, 1998, page E7. LIG/Durex is investing $3 million to build a plant in China. Gary A. Richwald and Jane Baeumler, “Condoms Can Dramatically Reduce the Risk of Infection,” Los Angeles Times, April 6, 1998, pp. S1 and S10. Provides latest information about problem in U.S.
Case 4-7 Making Social Responsibly and Ethical Marketing Decisions: Selling Tobacco to ThirdWorld Countries This case is designed to provide the student with real world situations that require corporate strategic solutions. The case is presented in an international context so students can experience the complexity and importance of ethical decision-making in a global environment. Initially, the instructor may sense some discomfort with the level of uncertainty that is inherent in such analyses, but the instructor is advised to let the case speak for itself in analysis. Business decisions and strategies are always made into the future, into uncertainty. Business decisions rarely have the precision of a Balance Sheet or a P/L statement; they reflect decisions about what is strategically appropriate for the firm as it currently assesses its options. Strategic decisions have AN ETHICS COMPONENT because they reflect the basic assumptions and ground rules the firm holds to be important. The options the firm sees in any given situation reflect its assumptions about its mission and what is an appropriate course of action for the present, or for the future. The common component of both strategic and ethical decisions is that they both constitute judgments about what ‘should’ be done next. Questions may come up about the differences in ethical beliefs between differing cultures or differences between countries approaches to doing business. There is a trap here that leads to the logical extension of cultural RELATIVISM—“When in Rome, do as the Romans do.” This argument is circular and feeds on itself. Clearly, throughout history, peoples of differing cultures have honored and given credence to fundamentally human and rational characteristics—such as the value of honesty or trustworthiness, the basic need to be believable and not be deceitful—basically to be authentic, not to lie, to do what one says or promises. Even cultures that authorize bribery or coercion lay down ground rules or parameters within which these actions are to take place. To maintain integrity, remain “legal,” cultures set ground rules by which business is to be conducted—if such rules are known by the players, then the issues of ethics become a matter of knowing how the game is to be played. For the United States, the ground rules by which business is to be conducted are set by the institutions this society has developed and which are currently emerging. In the USA, governmental entities as a representation of society set these rules—legislative statutes, agency regulations, and court rulings. These constitute the corpus of what this society requires of its citizens and its business activities. One may point to the Foreign Corrupt Practices Act as a case in point: this society has asked its business leaders not to succumb to the seduction of bribery or kickbacks that may go on in international competition, but to conduct business without resorting to payoffs. There is a price to be paid for this societal mandate, whether in losses of business opportunities, in allegations of naiveté, or losses to competitors. But this is the standard set and required of American business standard of honesty (with a known price to be paid for integrity) that is known to the entire world. The USA has mandated that businesses will engage in free market competition freely and honestly—and not by the exigencies of expediency. U.S. society has mandated business not to “...do as the Romans do.” What about international companies that transact business with firms in the USA? This issue is more complex. Essentially, these firms are asked to respect and abide by the rules. In similar fashion, U.S. firms should be sensitive to and respect foreign customs, traditions and legal actions—without compromise of U.S. principles and precedents. This is not an easy world. The situation reflects this complexity.
The case involves the exportation of cigarettes to Third World countries or LDCs. This is an ethical as well as economic issue. The case depicts how the more developed and enlightened countries are CUTTING BACK on cigarette consumption—and finding that there are CLEARLY DOCUMENTED HEALTH RISKS associated with this consumption. However, manufacturers are beginning to feel these cutbacks in demand as losses in revenue and profitability. This is causing these manufacturers to expand their search for new markets anywhere they can find them in the world. LDCs provide an excellent new growth market for these manufacturers. The tradeoff is economics vs. ethics. Is it morally permissible to take competitive advantage of an LDC who lacks the sophistication and understanding of the hazards of smoking to be able to make an informed choice as to risks? Is it morally acceptable to generate demand in LDCs by heavy and sophisticated advertising that has already been banned in this country by societal mandate? Market trends and conflicting objectives of governments and multinational companies make this one of the most complex situations confronting those involved. Tobacco consumption in major markets of the Western developed world has been declining in the last decade. Negative public opinion about smoking coupled with aggressive anti-smoking campaigns have finally stemmed the rate of growth. At the same time, Eastern Europe, Russia, China, India, and Latin America are huge markets with less strict regulations against smoking and advertising that offer new opportunities for tobacco companies. For example, Poland has an annual cigarette market of almost 100 billion cigarettes; Ukraine, 81 billion; 32 billion; the Commonwealth of Independent States as a whole, about 456 billion. World sales of cigarettes are currently estimated to be $225 billion a year and rising. Brazil exported $1 billion worth of tobacco in 1994, double the level of five years earlier. To capitalize on the opening of markets in Eastern Europe, China, and the potential growth elsewhere, multinational tobacco companies are investing heavily in the developing world. For example, Philip Morris has signed an agreement with Russia to help modernize its cigarette industry—$100 million in a new factory near St. Petersburg with an annual output of 10 billion cigarettes. The company has bought a factory in Hungary and has licensing deals with state producers in Poland and Bulgaria. In the Czech Republic, the company has acquired the entire state industry—five factories, 56% of the market and valued at $400 million. RJ. Reynolds is building a $33 million plant in Warsaw. Similar investments are being made in China and elsewhere by the major tobacco companies. To fully capitalize on the potential and to establish major market share in these markets, heavy investments in promotions, sampling, and advertising are being made. In China, for example, commercials by Philip Morris and British American Tobacco alone account for about 25% of television advertising. The government’s role in many countries seems to be in conflict in one hand, governments enter agreements with tobacco companies to build manufacturing plants and collect taxes on cigarette sales. At the same time, laws limiting cigarette advertising are being passed. In Brazil, a ban on advertising cigarettes from sporting and cultural events and on television have been passed. In addition, prime-time shows and television news programs will also be forbidden from showing people smoking and advertisements will not be able to suggest that smokers are socially, professionally or sexually successful. China has also passed a ban on tobacco advertising. Its Law of Advertisement bans advertising in the media and public places, such as theaters and at sporting events. So, if you are a tobacco company, how do you react to declining sales in the major markets, growth in demand and opportunity for investment in the developing world, and restrictions on advertising in the Western developed world and in many countries in the developing world? Is it ethical and socially responsible for tobacco companies to expand their reach throughout the world? There is no simple answer.
The situation presents the students with opportunities to exercise moral judgment—in the same way they will have to in business, to identify and understand the ethical components of business decisions, to familiarize them with the experience of “thinking through” complex strategic choices, and finally to come to conclusions with an understanding of the moral implications or consequences of their decisions. The purpose of the exercise is to ASK STUDENTS TO ARTICULATE WHY THEY HAVE DECIDED AS THEY HAVE—TO ARTICULATE THE ASSUMPTIONS AND GROUND RULES BEHIND THEIR STRATEGIC CHOICES. To assist both instructor and students, the authors have devised a DECISION TREE approach to identifying the ethical components of the decision. By overlaying the three key questions in the tree on any strategic decision being contemplated, the ethical dimensions of the choice options will become apparent. The Decision Tree allows the student to work his/her way through the case situations highlighting and identifying ethical considerations. What remains is the need for the student to COME TO SOME CONCLUSIONS ABOUT THE SITUATION AND ARTICULATE THE WHY (GROUND RULES) BY WHICH THEY HAVE ARRIVED AT THEIR DECISIONS. These can then be discussed in class, or handled on an individual basis (e.g. have student take a position on the situation and advise the instructor by memorandum of this conclusion and give recommendations for alleviating the situation). The key to making this a successful learning experience for the students is for the instructor to forego a modicum of control for a simplistic or single answer, and to allow some freedom to assert differences of opinion within the class. At the same time, the instructor must not condone sloppy thinking or levity and be rigorous in the requirement that the student ARTICULATE RATIONALES FOR HIS/HER CHOICES. POSTSCRIPT The Instructor may want to have the students read: --Bert van de Ven and Ronald Jeurissen, “Competing Responsibly,” Business Ethics Quarterly, Volume 15, Issue 2, 2005—in preparation for the case discussion. An excerpt from this article may be interesting to use as a basis for discussion of the case. “Other ethicists, writing on corporate social responsibility, suggest that intensity of competition, risks to reputation, and the regulatory environment determine the competitive conditions of a firm. They state that ‘differential strength of competition produces differential moral legitimacy of firm behavior.’ When competition is fierce or weak, different acts or strategies become morally acceptable”. Below are excerpts from recent (1998) articles that will provide some background in Europe. You may want students to read these articles before preparing the case.
The Wall Street Journal Europe: Europe is saying au revoir to Joe Camel and adios to the Marlboro Man. In another major setback for the beleaguered tobacco industry, the European Parliament approved a virtually total ban on tobacco advertising despite frenzied last-minute lobbying by cigarette companies, the advertising industry and media interests. Although the restrictions will be imposed gradually over an eight-year period, they will be all-encompassing—prohibiting tobacco ads on billboards, in newspapers and magazines, and even preventing tobacco companies from using direct-mail marketing and putting logos on nontobacco products, such as clothing. Sponsorship of sporting and cultural events also is outlawed. The new law, adopted after a recommendation by European health ministers in December, affects tobacco advertising in 15 countries in Western Europe, where tobacco companies now spend an estimated $1 billion a year on marketing. And anti- tobacco groups expressed hope that the legislation
will have a ripple effect, leading to similar curbs elsewhere. “This sends a strong signal that Europe is united against the tobacco industry, and that other countries can also stand up to them,” said Amanda Sandford, spokeswoman for a British antismoking group, Action on Smoking and Health, in London. Under European Union rules, the legislation must be formally adopted by EU ministers and will take effect three years from its publication in the EU’s Official Journal, which is expected in the next few months. But the law allows further delays of one year for the ban on ads in the press—or until about 2001 or 2002 – and two years for the prohibition of tobacco sponsorship. Moreover, international events, such as Formula One racing, won’t be affected until October 2006. Critics of the ban—led by tobacco companies, but including advertising-industry associations and publishing companies— contend that the ban raises serious issues about the right to advertise, press freedom and alleged EU interference in national affairs of member countries. What is more, some say the restrictions might drive tobacco companies to market their products in new, unregulated areas, such as the Internet, which is a gray area for trans-national legislation. “There’s no magic way to get out of this difficult bind, but we won’t give up,” said Michael Prideaux, spokesman for B.A.T Industries PLC, the world’s second-largest tobacco company, which owns Brown & Williamson Co., in the U.S. “The battle goes on.” He added that the industry will appeal the decision to the European Court of Justice, and possibly in the courts of member states. The ban is indeed severe, compared to current voluntary agreements in many European countries to restrict tobacco advertising. (Complete bans in EU countries are already in place in France, Italy, Sweden, Finland and Portugal.) The EU ban broadly matches one proposed in the U.S., as part of the $368.5 million tobacco-liability settlement. This would prohibit sports promotions and billboard ads, as well as the appearance of people or cartoon characters in advertising. Under the EU directive, any “commercial communication,” direct or indirect, that promotes tobacco would be illegal. The only exceptions would be so-called point-of-sale displays in places where tobacco products are sold; publications brought into the EU; and tobacco-trade publications. Publishing companies are likely to feel the pinch first, as print ads are in the first phase of implementation within four years. Almost half of all tobacco-advertising revenue goes to newspapers, magazines and outdoor billboards. Magazines—especially national weeklies aimed at an adult audience—could suffer. “This will hurt, and hurt very badly for some titles,” said Julius Waller, director of the European Magazine Publishers Federation in Brussels. Further, publishers say the ban is chipping away at press freedom, because reduced ad revenue could lead many publications to fold. Ad agencies, some of which already refuse to handle tobacco accounts, also will lose out. However, what the industry fears most is that the ban might spread to other products deemed “unhealthy” by different interest groups. “It’s scary to think that constitutional means can be used to ban” the advertising for certain products, said Stig Carlson, director of the European Association of Advertising Agencies. Instead, the association says voluntary agreements and self-regulation are the best way to reach the EU’s health objectives of reducing tobacco consumption. In the U.K., for example, ads aren’t allowed to feature attractive models, be humorous or show cheerful scenes or landscapes that imply fresh air. A spokeswoman for the EU’s social-affairs commissioner, Padraig Flynn, rejected suggestions that the measure would have a domino effect and lead to advertising curbs on other products. “Mr. Flynn certainly doesn’t believe that alcohol is in the same category as tobacco. Indeed, there’s evidence that moderate consumption of alcohol can be beneficial to health,” said the spokeswoman, Barbara Nolan. “That is a scare tactic by the tobacco industry.” The commission said Mr. Flynn would now press countries applying to join the EU—including those in Eastern Europe, where cigarette consumption levels are among the world’s highest—to control tobacco advertising and sponsorship.
The EU also defended the legislation, saying it is necessary to prevent varying national rules that are springing up and disrupting efforts to establish Europe’s unified market. On Wednesday, Mr. Flynn said, “the way is now clear for a better-functioning internal market in the area of tobacco advertising and sponsorship.” But the use of internal-market laws, which aren’t subject to unanimity by EU ministers, has always been controversial. For its part, the tobacco industry contends that advertising is used to maintain or increase brand market share—not to lure new smokers—and that ads are aimed at adult smokers only. There is evidence to support the claim that advertising’s impact is mixed. In Britain, smoking levels have fallen continuously over the past 20 years, although advertising has been restricted, not banned. In Norway, though, a total ban has been in effect for 25 years, and consumption among certain population groups has increased. Tobacco-industry insiders say that snuffing out public advertising could lead to a price war as a mechanism to stimulate market demand, and prompt tobacco companies to look for ways around the law to peddle their products. “By banning, you lose control,” explained Mr. Waller, of the publishers federation. “Cigarette companies are flush with cash, and they will find a way to spend their money.”
Abstracted from Expansion in Spanish, Source: World Reporter Tabacalera, the Spanish tobacco group, and its main competitors (Philip Morris, Reynolds and BAT) have their sights set on Asia. According to Cesar Alierta, the chairman of Tabacalera, Asia is a market with great potential and represents unfinished business for the sector. However, in the short and medium term Tabacalera will concentrate its efforts on Russia, Eastern Europe and North Africa with its brands Fortuna and Ducados through its strategic alliance with the French company Seita. Alierta added that one objective for the company is to bid for the privatisation of the Moroccan state tobacco company. Regarding the EC rule which will ban all tobacco advertising and which come into force in Spain within five years, Alierta has said that the company thus has five years to consolidate its position. Tabacalera has an ample capacity for borrowing, with a ratio of thirty per cent for debts over equity. This will allow the company to spend Pta 100 billion on financial investments. According to Alierta this will be spent on developing its distribution network, adding that the company does not intend to increase its stakes in Aldeasa, Midesa and Inmobiliaria Zabalburu. He also ruled out a future takeover bid for Zabalburu. Facts About the Global Tobacco Business SMOKING IN AMERICA Percentage of American adults who smoke: 25.5% Men: 28.2% Women: 23.1% 1996 consumer spending on tobacco products: $46.6 billion Federal, state and local excise taxes collected from cigarettes in 1996: $13.1 billion Average number of Americans who die each day from smoking-related illnesses: 1,145 Health-care costs of smoking-related illnesses: $50 billion Largest tobacco-producing state: North Carolina: $943 million Average price per pack nationwide: $1.91 THE GLOBAL MARKET World-wide sales of cigarettes in 1996: $295.8 billion Total number of cigarettes sold last year: 5,505 billion Average number of cigarettes sold per second: 174,562 Top five cigarette markets in 1996, in billions of cigarettes: China: 1,791 U.S.: 488 Japan: 335 Russia: 180 Indonesia: 173
World market share of five largest tobacco companies: Philip Morris: 16.2% B.A.T: 12.8% R.J. Reynolds: 5.9% Japan Tobacco: 5.1% Rothmans: 4.2% Biggest cigarette brands and world market share: Marlboro (Philip Morris): 8.4% Mild Seven (Japan Tobacco): 2.3% L&M (Philip Morris/Liggett): 1.8% Winston (R.J. Reynolds): 1.6% Camel (R.J. Reynolds): 1.2% Highest annual per capita spending on tobacco: Denmark: $407.80 U.S. annual per capita spending on tobacco products: $185.30 Countries with the heaviest smokers (annual per capita smoking rate): 1. Greece: 2,774 cigarettes, 139 packs 2. Japan: 2,669 cigarettes, 133 packs 3. Poland: 2,365 cigarettes, 118 packs 11. U.S.: 1,831 cigarettes, 92 packs ADVERTISING AND HOLLYWOOD Spending on advertising and promotion in the U.S. by cigarette companies in 1994: $4.83 billion Number of Marlboro men who have died from smoking-related illnesses in the past five years: Three Percentage of 133 top-grossing movies in 1994 and 1995 showing tobacco use: 77% Smokiest U.S. television network: Fox: with 2.67 smoking scenes an hour SMOKING AND KIDS Percentage of U.S. high school kids in 1995 who said they had smoked in the past month: 34.8% (27.5% in 1991) Number of kids who become “regular” smokers each day: 3,000 Average age kids start smoking: 13 Number of U.S. children under age 18 today who are expected to die from smokingrelated illnesses: 5 million TRYING TO QUIT Percentage of smokers who say they want to quit: 70% Annual U.S. spending on products to help people quit smoking: $417.7 million Average weight gained when a smoker quits: Three to five pounds
OTHER TOBACCO PRODUCTS Fastest-growing tobacco product in the U.S. in 1996: Cigars (+18%) Value of Cuban cigars seized by U.S. customs in 1996: $1 million ($140,000 in 1994) Sources: World Tobacco Market report from Chicago-based Euromonitor; Centers for Disease Control; U.S. government data (Department of Agriculture, Commerce Department, Federal Trade Commission, Food and Drug Administration); American Lung Association; Center for Tobacco Free Kids; Tobacco Institute; Information Resources Inc. The Wall Street Journal SANTA CRUZ DO SUL, Brazil—The tobacco industry may be reeling from an antismoking backlash in the U.S., but you wouldn’t know it here. This quaint Germanic city on the rolling southern frontier of Brazil has become one of the key staging areas for Big Tobacco’s push into the developing world. Only a few blocks from the leafy beer gardens and cobbled walkways favored by tourists, multinational tobacco companies are investing hundreds of millions of dollars to expand what is already the continent’s largest tobacco-leaf export center. In January, B.A.T Industries PLC’s Souza Cruz unit opened an $80 million processing plant with an annual capacity of 120,000 tons, greater than that of any other facility in the world, the company says. Just down the road, Philip Morris Cos. is working on its own $220 million expansion. And Universal Leaf Tobacco Co. is gearing up a $30 million investment program. Big increases in per-capita tobacco consumption – up more than 20% in the developing world over the past decade—and enthusiastic political support have made nonindustrial countries a key element in the tobacco industry’s growth strategy. “When the antitobacco movement attacks in an exaggerated way in one area, the industry naturally tends to expand someplace else,” says Helio Fensterseifer, president of the local tobacco industry association. “Certain mutations are created.” If Santa Cruz’s tobacco industry is growing disproportionately because of the U.S. public health wars, no one here is complaining. Thanks to tobacco, the city’s 100,000 people boast per-capita income that’s three times the national average. City fathers had few problems collecting funds for the restoration of the town’s Gothic-style cathedral. And there’s enough disposable income left over in Santa Cruz to support a professional basketball team that draws 7,000 fans a game. “Seventy percent of the economy is tobacco, and there is tremendous loyalty to the industry for having elevated us, in a sense, out of the developing world,” says Fernando Kothe, the city’s industrial-development director. Santa Cruz is the hub of a thriving three-state tobacco belt, and throughout the area, quality-of-life indicators are superior to national norms in virtually every category but one: Lung cancer rates among men are extraordinarily high, says Mara Brognoli, a public health official in the neighboring state of Santa Catarina. And there’s the rub. “It is very hard for people in a poor country to refuse a bargain like that offered by rich tobacco companies, even though it is a bargain that might kill them,” says Vera Luisa Costa e Silva, the coordinator of primary cancer prevention for Brazil’s National Cancer Institute. Brazil desperately needs the tax revenue, export income and jobs provided by the tobacco companies. Kathryn Mulvey, executive director of Infact, a Boston-based activist group, adds that “there is a clear challenge to put in place strong public-health regulations in countries like Brazil” where the industry has a big economic impact. Santa Cruz reveals in microcosm how far tobacco’s reach extends. The industry serves as banker and agrarian extension agent for 160,000 small farmers in the southern region, providing them with seed, fertilizer and technical assistance on credit. But tobacco’s role only begins on the farm. When local government was working on the cleanup of a polluted river, the industry was tapped
for its technical expertise. When the local university library needed to buy some new bibliographical files, the industry picked up the tab. Most significantly, B.A.T’s Souza Cruz, which controls 83% of Brazil’s cigarette market, has teamed up with state education authorities and a local newspaper to operate ambitious programs promoting gardening and reforestation in grade schools. By providing teaching materials and vegetable and tree seeds to schools, the company is practicing good corporate citizenship and doing its part to replace the large amounts of wood consumed in tobacco curing ovens, says Souza Cruz executive Roberto Eisenberger. Company officials don’t deal directly with students, and tobacco isn’t mentioned in the curriculum, he adds. “To kids, Souza Cruz means the ‘Arbor Club,’ not tobacco,” agrees Jane Ellvvanger, the assistant principal of a local elementary school. Critics say the distinctions aren’t so neat. “The company talks about reforestation and healthy living, but the educational literature includes the Souza Cruz symbol: a tobacco leaf,” says Ms. Brognoli, the health official. People here have been living side by side with tobacco ever since a wave of small farmers from Northern Europe started emigrating here back in the 1850s. Unlike the vast tobacco farms of the Carolinas, Brazilian tobacco plots tend to average only four or five acres. At the office of the local growers association, pride in ethnicity and in tobacco are evident in a placard featuring a smoldering cigarette and the German legend: “Mein Vergnugen, Meine Wahl.” (“My Pleasure, My Choice.”) “Thanks to the immigrant culture, you see agriculture conducted on an almost artisanal level,” says Guido Knies, export operations manager for Souza Cruz. But with plenty of help from the companies, small planters like Selvino Mueller have become cogs in the global export economy. The income that Mr. Mueller and his six children earn farming about 15 acres of tobacco has provided him with the start-up capital to develop a sideline trucking business. “In other parts of Brazil, you see people being forced to abandon the land for the city,” says Mr. Mueller, inspecting a row of tobacco seedlings covered with plastic to protect them from the cold. “Never in Santa Cruz.”
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