Higher Paying Customer Base Article Discussion

Question Description

3. According to the author, what should managers take away from this article? Make sure the fighter brand will help the business, not go at the expense of the higher paying customer base.

 Should You Launch a Fighter Brand? 1524 Oct09 Ritson.indd 86 9/4/09 12:36:36 PM Customers are suddenly hyperconscious of value, and new low-price competitors are nipping at your heels. Should You Launch a Fighter Brand? ★ BY MA RK RIT SO N ★ Jack Black M ANAGERS contemplating a new product launch during the prosperous early years of the twenty-first century typically looked only in one direction: up. Thanks to consumers’ rising incomes and apparently insatiable desire for superior quality, the era began with a focus on “premiumization,” “trading up,” and “luxury for the masses.” But times change. Economic strains are now causing consumers to trade down, and many midtier and premium brands are losing share to low-price rivals. Their managers face a classic strategic conundrum: Should they tackle the threat head-on by reducing prices, knowing that will destroy profits in the short term and brand equity in the long term?

Or should they hold the line, hope for better times to return, and in the hbr.org 1524 Oct09 Ritson.indd 87 | October 2009 | Harvard Business Review 87 9/4/09 12:36:47 PM Should You Launch a Fighter Brand? meantime lose customers who might never come back? Given how unpalatable both those alternatives can be, many companies are now considering a third option: launching a fighter brand. A fighter brand is designed to combat, and ideally eliminate, low-price competitors while protecting an organization’s premium-price offerings. Philip Morris used the strategy in 1998, when a sudden devaluation of the ruble quadrupled the price of its internationally produced Marlboro cigarettes in Russia, rendering them unaffordable to many smokers there. Rather than lose share to local competitors, the company concentrated its efforts on its locally made fighter brand Bond Street.

When the ruble’s value returned to normal, consumers came back to Marlboro, which had retained its premium pricing and brand equity. In its best applications, a fighter brand strategy can have even more impressive results. In such cases – like that of Busch beer (see the sidebar “The One to Beat”) – the fighter brand not only eliminates competitors but also opens up a new, lowerend market for the organization to pursue. Such triumphs, however, usually turn out to be the exception. For the most part, the history of fighter brands IN BRIEF is a discouraging roll call of campaigns that inflicted very little dam» In eras of belt tightening, marage on the targeted competitors keters are often tempted to launch and resulted instead in significant fighter brands. Properly executed, collateral losses for the companies a fighter brand fends off low-cost that initiated them. What tripped rivals while allowing a company’s them up?

Five major strategic hazpremium brand to stay above ards that a manager must negotiate the fray. Busch beer, for example, carefully in order to enjoy fighter helped Anheuser-Busch hold on to brand success. value-conscious customers that IDEA would otherwise have defected to Budweiser’s cheaper competitors. But the long list of failed fighter brands shows how hard they are to pull off. To be sure launching a fighter brand makes sense, ask five tough questions: ■ Will it cannibalize our premium offering? ■ Will it fail to bury the competition? ■ Will it lose money? ■ Will it miss the mark with customers? ■ Will it consume too much management attention? 88 Harvard Business Review 1524 Oct09 Ritson.indd 88 | HAZARD 1 Cannibalization Most fighter brands are created explicitly to win back customers that have switched to a low-price rival. Unfortunately, once deployed, many have an annoying tendency to also acquire customers from a company’s own premium offering

. This was Kodak’s experience when it attempted to beat back its Japanese rival, Fuji, in 1994. Over the previous decade, Kodak’s market share had dropped as many of its customers switched to Fujicolor Super G film, which was priced 20% October 2009 | lower than Kodak’s best-selling Gold Plus film. Faced with continuing losses in share, Kodak launched a fighter brand called Funtime, which sold at the same price as Fuji’s offering. In an attempt to avoid cannibalization, Kodak manufactured Funtime using an older, less effective formula emulsion that made it significantly inferior to Gold Plus. But what appeared, from a corporate standpoint, to represent a genuine product distinction was lost in the subjective world of consumer interpretation. Already a low-involvement purchase, film had increasingly become a commodity, and most consumers were unaware of the differences in product quality. They simply saw Funtime as Kodak film at a lower price, and the fighter brand ate into Gold Plus sales more than it damaged Fuji’s. Kodak withdrew Funtime from the market after only two years and began to experiment with other alternatives. Positioning a fighter brand presents a manager with a dual challenge: You must ensure that it appeals to the price-conscious segment you want to attract while guaranteeing that it falls short for current consumers of your premium brand.

That means you must match your fighter brand’s low price with equally low perceived quality. Kodak got it right in theory but in practice failed to see to it that consumers considered Funtime inferior to the premium brand it was meant to protect. As with the launch of any new brand, it’s crucial to have a keen grasp of consumers’ coordinates of value, but with a fighter brand, you must use those coordinates to deliberately miss one target segment while hitting the other. Contrast Kodak’s story with that of Procter & Gamble, which used a fighter brand to fend off private-label competitors. In the 1980s, P&G, which sold the leading diaper brand, Pampers, and the number three brand, Luvs, was responsible for half of all diaper sales in the United States. But as the market share of private labels in the category grew to 20% and the profit pool available to marketers like P&G shrank, the idea of operating two premium diaper brands made less and less sense.

In 1993 P&G responded by adjusting its brand portfolio: It repositioned Luvs as a fighter brand and slashed its price by 16%. To avoid cannibalizing Pampers’ sales, P&G also ensured that Luvs offered considerably less relative value. R&D and product innovation on Luvs were cut back, as were TV advertising and promotional support. Existing features, like handles on Luvs’ packaging, were even removed to emphasize that the brand offered consumers less than Pampers. hbr.org 9/4/09 12:36:53 PM The One to Beat Busch Bavarian Anheuser-Busch, luvs.com COMPANY ANHEUSER-BUSCH WHEN COMPANY president August “Gussie” Busch, Jr., addressed the board of Anheuser-Busch in 1954, he admitted he’d made “the biggest mistake in the company’s history.” A year earlier, Anheuser-Busch had followed other national brewers in raising wholesale prices. That move proved disastrous: Regional brewers had recently gained a stronger foothold in the market, thanks to labor strikes that cut into the supplies from national breweries, and they Call it “un–brand management.” To prevent cannibalization, a company must deliberately lessen the value, appeal, and accessibility of its fighter brand to its premium brand’s target segments

. It may even need to actively disable existing product features and withhold standard marketing support from the fighter brand. The good news, for those managers who find value destruction a difficult concept to contemplate, is that the other way to ensure that a fighter brand offers a sufficiently differentiated proposition is to innovate around the premium brand and strengthen its brand equity. Indeed, this proved central to P&G’s strategy when, despite all the company’s efforts, the repositioned Luvs still initially stole its sister brand’s sales. It was only when P&G focused greater managerial and financial resources on marketing and improving the features of Pampers that the two brands began to enjoy separate but equally successful roles within the portfolio. Managers need to weigh the effects of cannibalization before rolling out fighter brands. Because these brands are explicitly oriented toward the rivals that have stolen share from a company, the initial break-even calculations used to justify their launch often are oversimplistically derived from an estimate of the lost sales that can be recouped.

An accurate break-even analysis must account for cannibalization as well. How can you predict whether excessive cannibalization will occur? Test-marketing now used their lower operating costs and cheaper prices to expand their share at Anheuser-Busch’s expense. With his reputation on the line, Busch went on to propose a solution: Busch Bavarian – the company’s first new brand since Prohibition. Promoted as being “yours at popular prices,” the beer was priced at the same level as regional competitors and almost half the wholesale price of its sister brands, Budweiser and Michelob. As well as advertising support, is the best way to ensure that a fighter brand can compete with low-price offerings without robbing significant sales from its higher-price, more profitable sister brand. HAZARD 2 Failure to Bury the Competition Cannibalization might be the most obvious hazard, but it’s certainly not the only one you need to navigate. Indeed, in many cases organizations actually overprotect their premium brands from cannibalization at the expense of the combative potential of their fighter brand.

Merck made exactly this mistake in 2003 when it tried to prepare for the loss of patent protection on its blockbuster drug Zocor in Germany. Zocor – a statin used to treat high cholesterol – had been a major cash cow, but once the patent expired, generic drugs offering identical efficacy would enter the market for as little as 30% of its price. The obvious strategic response was a price reduction, but for Merck that was not an option, because it would have encouraged parallel exports of Zocor from Germany to EU markets where patent protection still existed. Instead, Merck decided to launch a fighter brand called Zocor MSD. It rolled out the fighter brand four months before the patent expiration to give it some time to cannibalize Zocor’s customers, who would then, Merck hoped, remain loyal when generics invaded the market. Because hbr.org 1524 Oct09 Ritson.indd 89 the fighter brand was given a separate sales force and distinct distribution trucks to distance it from the other two brands and reduce potential cannibalization. The rest is business school legend. Busch successfully won back millions in sales, opened up the lower end of the market, and helped force many regional breweries to close.

To this day, it’s still priced at the same discount from its premium sister brands, Budweiser and Michelob. | October 2009 | Luvs COMPANY PROCTER & GAMBLE P&G slashed prices on Luvs by 16% to fend off private-label diapers – and managed to keep Pampers, its premium brand, above the fray. Harvard Business Review 89 9/4/09 12:37:01 PM Should You Launch a Fighter Brand? COMPANY INTEL After being derided as a “decapitated” Pentium, Celeron came back for round two with a better product and thwarted AMD’s encroachment. 90 Harvard Business Review 1524 Oct09 Ritson.indd 90 | October 2009 | In contrast with Zocor MSD, however, Celeron was able to go back for a round two. Chastened by the negative reaction, Intel rushed out a new version called Celeron A only a few months later. The new chip retained its low price but now offered much of the memory cache and processing performance of the more expensive, but soon to be replaced, Pentium II chip.

It proved a success in the lower-end PC market, and Intel has continued to augment and improve Celeron’s offer, just behind its premium brand, ever since. Why such different outcomes? Intel, with its history of frequent product launches, upgrades, and deletions, was better equipped than Merck to learn from its first foray into the good-enough segment. For companies that don’t enjoy such rapid turnover of products, the lessons should be underscored: Market-test your fighter brand, and be prepared to recalibrate its price and performance to ensure it finds the sweet spot between cannibalizing overperformance and uncompetitive underperformance. Intel’s 80% share of the processor market is testament to both the power of fighter brands to open up lower-tier market opportunities and their unequaled ability to keep competitors at bay. Intel also achieved something with Celeron that even the Man of Steel has never managed – it found a cure for kryptonite.

HAZARD 3 Financial Losses In the pantheon of fighter brands, none offer more salutary lessons than Saturn from General Motors. Its 25-year history provides unparalleled insights into, first, the strategic attractions of a fighter brand and, then, the eviscerating damage that such a brand can inflict on its organization if it fails. Saturn was conceived by GM in 1982 as a direct response to the growing threat from the fuel-efficient and affordable cars being launched into America from Japan. Concerned that its reputation for making midprice and midsize cars might damage Saturn’s effectiveness against Honda and Toyota, GM went to great lengths to distinguish Saturn from its existing stable of brands and position it as “a different kind of car company.” The new brand was given its own dedicated plant in Tennessee, and its cars were built very differently from those in Detroit. When the first Saturns hit the market in 1990, they proved an immediate success and quickly achieved the highest repurchase rates and customer satisfaction scores in the industry.

Saturn’s unique dealership network with its transparent, no-haggling ap- Intel Celeron Merck was competing with only itself during this initial stage of Zocor MSD’s launch, the fighter brand was priced just slightly less than the original premium brand. Once generics entered the market, the new brand’s price dropped to 90% of Zocor’s. Within three months of its launch, Zocor MSD had missed its modest sales goals by 50%. More than 30 generics would divide the lion’s share of the category among themselves. Merck’s desire to protect its profits for as long as possible had prevented it from launching a brand priced low enough to seriously compete with the generics. Even when Merck realized it had set the wrong initial price, it was incapable of quick course correction. As a blue-chip multinational, it lacked the competencies to win the kind of price war it was entering. Merck was used to maintaining prices for long periods of time and altering them only after much consultation and reflection. Its generic competitors, accustomed to competing on price, could turn on a dime.

With losses mounting fast, Merck withdrew all marketing support from Zocor MSD and admitted defeat. Intel offers another instructive example of the perils of overprotecting a premium brand. In the late 1990s, personal computers had matured to the point that much of the market growth was in “good enough” home PCs that were priced under $1,000. Intel’s chips had been designed for much more expensive machines; a Pentium processor alone could cost as much as $800. Archrival AMD recognized that Intel was not well positioned to serve this growing segment of the market and launched a fighter brand of its own. Priced at around $260, AMD’s new processor chip was dubbed the K6 in honor of kryptonite, the only substance that could defeat Superman – a cryptic reference to its antiIntel mission. Not surprisingly, Intel was keen to stop AMD before it got a foothold in the low-end market. At the same time, it hated the thought of eroding Pentium’s profits and brand equity by dropping its price. So Intel decided to create a brand called Celeron and price it under $200 a chip. The news that Intel was offering a new chip that significantly undercut AMD generated tremendous buzz in the market when Celeron was launched, in April 1998. But while Celeron’s price was aggressive, the same could not be said for the product itself.

The first Celerons were little more than early series Pentium chips with features disabled and a lower cache memory. Initial customer excitement soon turned to disgust as chip buyers took to referring to Celeron as a “decapitated” Pentium. hbr.org 9/4/09 12:37:08 PM Saturn proach to pricing further emphasized the products’ differentiation. By 1996 orders actually exceeded Saturn’s production capacity, and the brand’s fighting prowess was resoundingly confirmed when dealer research revealed that 50% of these orders were from individuals who would otherwise have bought a Japanese import. When Professor David Aaker of the Haas Business School concluded in 1994 that “Saturn has built from scratch one of the strongest brands in the U.S.,” he was correct in every aspect except one. For all its brand success, Saturn was proving to be a financial disaster. It made an annual operating profit just once, and that’s before even considering GM’s initial setup costs of $5 billion. By 1997 the brand was looking for a major new investment of funds to develop new models, but GM was now balking at Saturn’s huge operating costs. Saturn’s plant had been five times more expensive to build than the usual GM production line and had double the employees of a typical plant.

Saturn cars also cost more to produce because they used virtually no shared GM parts. The brand had a separate marketing and branding budget and its own dedicated dealership network as well. Overhead, in short, was huge and had to be covered by a brand exclusively focused on the low-price, low-margin small-car business. In creating a very different kind of car company and a super effective fighter brand, GM had also burdened Saturn with an overwhelmingly unprofitable business model. By 2000, despite continuing sales success, Saturn was losing $3,000 for every car it sold. GM began to rethink things. It delayed or canceled expensive new features like passenger air bags and plastic body panels and dissolved the unique operating systems and labor agreements at Saturn’s plant. Saturn’s “new” generation of cars did eventually arrive, but they consisted of rebadged versions of other GM models. Saturn’s original small cars evolved into the midsize cars, SUVs, and minivans more traditional of GM. Saturn’s dealers were also reined in and, despite an initial pledge to avoid all price promotions, were now included in GMwide dealership offers like 0% financing.

If the first chapter of Saturn’s existence was characterized by fighter brand success hampered by unprofitability, its second chapter centered on lowering costs at the expense of Saturn’s brand equity and ultimately its fighter brand effectiveness. Shared platforms, rebadged models, and GM promotions spelled the end of Saturn’s differentiation and led to increasing cannibalization of sister brands like Pontiac and Chevy. Meanwhile, the Asian competitors Saturn had been designed to fight steadily gained market share in the United States. GM vice chairman Bob Lutz summarized the Saturn story in 2009, telling Automotive News: “We spent a huge bundle of money in giving Saturn an absolutely no-excuses product lineup, top to bottom. They had a better hbr.org 1524 Oct09 Ritson.indd 91 | October 2009 | Saturn COMPANY GENERAL MOTORS Launched by GM in 1990, Saturn was everything a fighter brand should be – except a money maker. It made an annual operating profit just once. Harvard Business Review 91 9/4/09 12:37:17 PM Ted COMPANY UNITED Ted wasn’t much of a match for rivals Fron…

Do you have a similar assignment and would want someone to complete it for you? Click on the ORDER NOW option to get instant services at EssayBell.com