Marketing turnarounds

( ~ ) Pergamon 0263-2373(95)00013-5

European Management Journal Vol. 13, No. 3, pp. 239-244, 1995 Copyright © 1995 Elsevier Science Ltd

Printed in Great Britain. All rights reserved 0263-2373/95 $9.50 + 0.00

Marketing Turnarounds ROBERT DOLAN, Edward W. Carter Professor of Business Administration, Harvard Business School

Focusing on the successful experience of BMW (Germany) and Northern Telecom (Canada) in turning around their previously dispiriting market positions worldwide, Robert Dolan first of all describes the traditional good marketing practices which these two companies utilized to help achieve their goal. Secondly, he details seven further factors which were critical in achieving the dramatic turnarounds. These factors amount to general principles which have been observed in other corporate turnaround situations, like the recent Black and Decker strategy, and can apply to smaller companies as well.

Introduction Marketing competi t ion is very intense in most industries. Everyday, the popular press reports another story of price cuts devastating suppliers in an industry or firms becoming leaner in response to pressure from more 'value-oriented' consumers. For most marketers, the 1990s have been and will continue to be a challeng- ing decade. For some the challenge is greater than for others. What about those firms whose:

brand equity has been eroded? relationships with the trade have soured? product quality has come into question? unit sales have fallen creating financial strains? employees have become dispirited in light of previous success being swept away?

Sometimes starting a new game is more appealing than playing the hand that history has dealt, but such is not an option, given customers', intermediaries', and employees ' memories. History does matter. Actions must be taken to turnaround the situation, to get back into the game and be competitive. The marketing skills and programs necessary to effect such a change have a special character. The marketing analysis, insight and skill needed to maintain a long-held market leadership position, while appreciable, are not those which will support a turnaround. In this article, we elucidate the marketing disposition and analysis needed to turnaround operations in trouble. Our approach to this is to examine closely two recent striking success stories, viz the turnarounds of (i) BMW in a key strategic foreign market and (ii) Northern Telecom's key systems business on a worldwide basis. We first describe these two situations and then draw general principles from the two cases. 1

BMW Turnaround in the United States In 1991, BMW produced 553,000 cars -- 1.7 per cent of the world's output. About 40 per cent of these cars were sold in Germany, BMW's home market. In the 20 years preceding, BMW had posted 17 per cent compound annual sales growth. An examination of worldwide unit sale figures would yield no concerns because growth in other markets covered up the sales problem in BMW's largest market outside Germany -- the United States. In 1986, BMW unit sales in the US market reached a record 96,800 cars. The sales followed the path set out in Exhibit I -- falling by 45 per cent over 5 years to 53,000 in 1991. The significance of this 43,000 car drop in volume was far reaching as it was BMW's view that due to the global nature of the automobile market 'you must have a market position in Japan, the United States, and Europe. If you lose one of these markets, you will eventually lose all three. '

Analysis of the three key pieces of any marketing situation -- consumers, competitors, and the company -- yields a good diagnosis of the cause of the sales plunge.

Consumers The crash of the US stock market in October 1987 had a dual impact on the luxury car market and BMW. While this crash took money out of the pockets of potential BMW buyers, the emotional impact may have been more significant than the economic one. With the crash, the high-flying 1980s with its 'conspicuous consump- tion' and the idea of even greater prosperity always in store were over. The ultimate status symbol of the yuppie generation -- a BMW -- became, to some, outmoded. Even the buyer in the high-end of the market became 'value-oriented' and BMW's image was at odds with this new buying criterion.

Competitors In 1986, Honda introduced the Acura in the US; followed in 1989 by Nissan's Infiniti and Toyota's Lexus. These competitors brought a new conception of what an automobile was to be. They widened their concern from the car to the total customer experience of procur- ing, operating, and maintaining one. Dealers were seen as a source of value-added well beyond negotiating pricing and delivering the car. Lexus and Infiniti quickly topped customer satisfaction surveys and in 1990; its second year on the market, Lexus' unit sales topped BMW's.

EUROPEAN MANAGEMENT JOURNAL Vol 13 No 3 September 1995 239

MARKETING TURNAROUNDS

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1990 1991

Exhibit 1 BMW Unit Sales In the United States 1986-1991

Company BMW's position in the market had been fostered by its advertising program. But as Karl Gerlinger, BMW's President of North America explained: 'the prestige we sought with our ads with polo ponies and elegant parties helped put us in disfavor and tagged us as having outrageous prices.' BMW's pricing policy of changing US prices in response to exchange rate fluctuations between DMs and dollars had resulted in price increases at the time the onslaught of the high- end Japanese competitors with their low market entry prices.

With sales down to near 50,000 cars in 1991 it was obvious that a quite profitable niche still existed for BMW operating at about 40,000 cars per year in the US market. However, the global significance of the US market made this an unacceptable strategy and Karl Gerlinger described the mission this way:

. . . what does it take to do it right, to be a major player in the US market? It takes 100,000 cars per year to develop the economies of scale . . . given the importance of the United States to our worldwide strategy . . . the real question is simply: How are we going to get ourselves and our dealers to 100,000 cars in this new competitive environment?

The Turnaround Strategy The critical philosophy underlying the strategy was stated in the first line of a chart developed to capture BMW's challenges and goals for the 1990s, viz 'The success of the past cannot be repeated with traditional means and methods.' Karl Gerlinger recognized that the challenge required a fundamentally new paradigm. One BMW employee reported an initial headquarter reaction to the US plans: 'Lots of people thought we were crazy. ,2

The new paradigm was built from a redefinition of the

brand and product. 'Performance' was defined to encompass three aspects: quality, safety, and social responsibility. The marketing program was to address total cost of ownership. The fun and excitement of driving a BMW, for 15 years touted as 'The Ultimate Driving Machine' in BMW advertising, was to remain, but be augmented by a pleasant buying experience and efficient maintenance program.

All elements of the marketing mix were marshalled to support this new product positioning.

Price While the conventional wisdom is not to cut price on a durable with a resale market because it impacts resale values so negatively, BMW addressed its out-of-line pricing at the top end via price cuts and innovative programs to compensate those who had recently bought at higher prices,

Product Lower priced models available in Germany, but previously not exported to the US were brought to the US market to put a BMW entry vehicle at the $20,000 price point. The incremental sales impact of this move went well beyond the sales of these vehicles. It also helped develop the BMW image in the direction of better value. New models, the 325 and 740, were both introduced to the market at aggressive prices and to rave reviews.

Advertising The shift in consumer values necessitated a change from the lifestyles advertising featuring the aforementioned 'polo ponies.' After a short transition to focus on car features, the program shifted to a key benefit sought by today's driver -- safety. In short, the positioning was 'An expensive car is worth the money only if it makes you a better driver.'

Dealer Network The new focus on the consumer's experience in not just driving the car, but also buying and maintaining it created the need for a revitalized participation of the dealer in providing customer benefits. BMW's sales declines of the past five years had created great dealer frustration. Only 28 per cent of BMW dealerships in the US sold only BMWs, the vast majority being 'dual dealership.' These dual dealers responded to the downturn in BMW by focusing on their other lines. BMW had finished near the bottom in dealer satisfaction studies. Based on extensive dealer input, BMW defined new roles for dealers and enacted bonus payment systems based on customer satisfaction, rather than sales volume.

Rather than a series of incremental changes or tactical moves within the existing paradigm, these changes represented a wholesale change in the way the product was positioned and customers managed. The new con- cept was carefully communicated through the 350 member dealer network. In 1992, BMW eliminated any

240 EUROPEAN MANAGEMENT JOURNAL Vol 13 No 3 September 1995


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Exhibit 2 BMW Unit Sales In the United States 1986-1994

concern about their commitment to the US market by beginning development of a large scale manufacturing operation in South Carolina.

Exhibit 2 shows unit sales results for 1992-94, in addition to the years induded in Exhibit 1. Fifty-eight percent growth from 1991 to 1994 put unit sales at 84,500, well on track to the 100,000 by 1997 goal established in 1992.

Northern Telecom's Norstar The business products division of Northern Telecom sold telephone systems for small businesses from its operation in Calgary, Canada. Called Key Systems, these systems were sold to firms needing from 2 to 100 telephone lines. Northern's product -- the Vantage system generated negative cash flow of $61 million over the years 1982-1984. Vantage did hold the leading share in the relatively small Canadian market; but, it was eroding and Vantage's position in the US was minimal: less than I per cent of share. Development expenditure and capacity decisions had been predicated upon a significant position in the US market.

The North American market was intensely competitive. AT&T sold its Merlin line through its own salesforce, while a collection of about 40 Pacific Rim manufacturers and Northern sold through distributors such as the Regional Telephone Operating Companies. AT&T held a differentiated position and a 42 per cent share of the US market despite a 30 per cent price premium over the rest who priced near parity with one another. As the newly installed division general manager, Mike Ennis, assessing the operation in 1985 observed -- a not very heartening situation.

A very price sensitive end user group. ReseUers who were not making money selling Key Systems and consequently were not investing in any demand generation.

Competitors from the Pacific Rim with much lower cost than Northern. A strong branded competitor in AT&T dominating the US market. No unit growth in the market and a downward per unit price trend. Vantage having cost and quality problems. Northern's relationship with dealers deteriorating because of Vantage's quality problems com- pounded by attitude toward them, viz Northern actively disavowed any responsibility for non- technical issues.

Turn the clock ahead to 1993. The Key Systems picture at Northern could not be more different from 1985. Business was quite profitable for Northern Bell; Canada had designated Northern as its Supplier of the Year and GTE had presented it the 'Quality Award of Excellence.' Northern's Key System product, known as Norstar, held dominant share positions in the UK and Canada, a strong second place to AT&T in the US, and a strong global presence. The approximately $50 million devoted to developing the Norstar product line and fixing Vantage problems had paid off handsomely.

T h e Strategy The key insight to the development of Norstar was recognition that the total system, i.e., vendor management, manufacturer, logistics, and marketing of Key Systems was not working. Excepting AT&T, suppliers were having a hard time making any money because of the lack of product differentiation and resulting price competition. Resellers, such as the telephone companies, were not making any money either because of their difficulty in predicting end user demand, long resupply times from the Pacific Rim, and excessive repair costs as units did not operate well. Resellers and users were both unhappy. The technological revolution which worked so well in television sets, VCRs and other advanced consumer electronics items seemed to have failed in small business telephones. Northern's strategy was simple: let's make a product that's reliable, that's easy-to-use, and resellers can make money selling.

Northern's insight that it was a total system that needed fixing rather than just a physical product led to two important definitions. First, the 'customer' was defined as both an end user and a reseller. In particular, added attention was to be devoted to the resellers' problem of making money. To this end, extensive studies of the resellers' cost structure were conducted to help identify the key leverage points. This led to the 'value model' shown in Exhibit 3 as a representation of how to make the reseller more profitable.

In the short term, the model held the price paid by end users fixed at the market determined level. The model showed the reseller's cost/profit structure having seven elements. In addition to the cost of the phones and profit, from its revenue the reseller had to fund:



PROFIT

INSTALL AND REPAIR

MATERIALS MANAGEMENT

SALE COSTS

TRAINING

OVERHEAD

PRODUCT COST

MARKET SET PRICE

Exhibit 3 The Norstar 'Value Model' of Resellers' Cost

Its installation at the end user site and repair costs for installed systems. Materials management -- reseUers' inventory costs had historically been high due to long lead times in order fulfilment and demand uncertainty. The true cost of the resulting high unit inventory levels was driven up by product obsolescence and the pattern of regularly declining prices. Sales costs to generate demand. Training of end users in proper use of the system. Overhead costs.

Northern realized that the key to a strategy based on reseller profitability was not to charge them less -- any price cuts would be matched by competitors -- nor to attempt to enable them to get a price premium from end users. Rather, the key was to decrease the elements of their cost structure.

This led to the second, appropriately broad definition of Northern's 'product, ' i.e., as 'anything we can do to improve our resellers' cost position'. The development job then was not to design a telephone but rather to design a total business system for providing resellers with a profitable business opportunity. Specifically, Norstar would represent a new set of telephones, but also a new system of manufacturing, delivery, and vendor management.

As shown in Exhibit 4, Norstar 'product ' elements impacted each element of cost.

A product design effort focused on manufacture with few components and provision of 24 hour telephone support to installers drove down installation and repair costs. Design of the product and production process to provide high product reliability drove down repair. Materials' management costs were impacted by limiting the product line to two items; each build- ing in lots of items previously considered 'options', e.g., a long cord. The key here was in

PROFIT

INSTALL AND REPAIR

MATERIALS MANAGEMENT

SALE COSTS

TRAINING

OVERHEAO

PRODUCT COST

MARKET SET PRICE

• HIGH RELIABILrt'Y 24 HOUR TELEPHONE SUPPORT

• FEW ITEMS IN P ~ T LINE • SHORT LEAO TIME • DELIVERY TO END USER

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Exhibit 4 The Norstar Product Definition

design of the production logistics systems enabling Northern to offer 48 hour delivery to the end user. Thus, the reseller need not maintain any inventory at all. Resellers' sales costs were driven down by the fact that Northern assumed some of the demand generation responsibility. Resellers' cost of training end users were decreased due to a principle of 'self-evident' feature use in product design and preparation of demonstration videos. Northern understood end users well enough to know that provision of a standard, printed extensive user guide would be ignored and training demands placed back on resellers. The product was extensively tested with end users to ensure ease-of-use and product videos provided as support. The principle throughout design was 'absolute simplicity'.

Internal process changes enabled this dramatic decrease in resellers' costs. A cross-functional team made up of product design, manufacturing, and marketing stayed with the entire project. In a break with Northern tradition, designers were taken from labs and colocated with the manufacturing team. They also worked only on the Norstar product. Exhibit 5 shows the operation of the entirely new business system. Northern's offering of 48 hour delivery to end users obviated the need for resellers to hold inventory. Northern could accomplish this by maintaining huge finished goods inventory itself - - a not very appealing prospect -- or by developing its own Just-In-Time vendor relations -- which it did by offering 'single-source' contracts -- and by a very fast manufacturing cycle time.

Northern developed its product and approach through 100 work years of development and 20 work years on verification. The new product, manufacturing process, and vendor relationships were set in place in about three years. Sales throughout the world have grown steadily as the Northern promise of reduced costs and a chance to make money have been validated in the field by


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Exhibit 5 New Systems for Key Systems Flows

r e s e l l e r s all over the world. The fundamental change in product definition from a telephone to an easy-to-install, reliable telephone delivered to your end users site within 48 hours has precluded effective competitive reaction and imitation.

Managerial Implications The BMW and Northern Telecom situations share and exemplify characteristics of many turnaround situations. Some of these characteristics are simply good marketing practices, e.g.

use of appropriate market research techniques to understand consumer behavior analysis of competition as input to a product differentiation strategy focus on developing an integrated marketing mix of product, pricing, communication, and channel management.

However, to turnaround a situation from one in which brand equity had declined, resellers have turned from the product, and where employee morale is at issue, it requires some factors which go beyond these. BMW and Northern Telecom were both dramatic turnarounds and in each case:

1 .

2.

There was a turnaround champion who garnered necessary corporate support. The p roduc t champion 'broke the rules ' . Traditional approaches w e r e n o t able to solve these problems. Mike Ennis could not have managed Norstar by keeping the division's current manufacturing operation and allowing the design team to function as in the past, designing a product and ' throwing it over the wall' to manufacturing. He forged a new relationship between design and manufacturing with everyone working off a common understanding of the business plan. The investment in current production facilities was ignored and design of product and product ion process joined. At BMW,

.

.

G e r l i n g e r b r o k e n e w ground with price cuts on the high end of the BMW line and programs to motivate dealers properly. The 'vision' or 'how' of the turnaround was clearly and consistently communicated to employees. This included specification of short-term programs, interim goals, and regular progress reports against those goals as well as setting out the long- term direction and ultimate objectives. In each case, the turnaround champion was personally involved in communicating the strategy to employees and key partners. History was not ignored. Advice often given to golfers about hitting a terrible shot is to ignore it, forget it ever happened, and just concentrate on hitting t h e b e s t shot you can on the next one. This is good advice for golf, but terrible advice for business. Yet some managers seem to take this lesson from the golf course to the business arena. Damaged customer or reseller relationships are

just assumed to return to a neutral state. In contrast, Ennis assigned two of his best people not to look forward with Norstar, but to look back with Vantage. What went wrong, who has been hurt, how can we remedy it so we have the foundation we need to be successful with Norstar? Northern even published a small book entitled 'Learning from Vantage' including such candid observations on itself as:

Vantage took a glacial seven years to cover the small-business market. Its technological superiority vanished. Vantage was expensive across all the size range . . .

5. Shor t - te rm actions with some immediate , measurable payoffs were implemented helping to instil a 'can-do' attitude in the employees. For Ennis, a first step was to achieve significant cost reductions on the Vantage system as it was to be sold while the product development on Norstar progressed. These achievements boosted both corpora te su p p o r t and employee morale . Similarly, the elements of the marketing mix which can be quickly changed, e.g., price and advertising theme, produced good initial results for BMW.

6. The 'product ' was redefined to include a much broader set of end user and reseller benefits than p r i o r definitions.

7. Ultimately what changed was not a product, a price, or an advertising theme -- the change was much more fundamental. What was implemented was a new business model -- a changed overall marketing system. For BMW, dealers were now part of the customer value creation process and a customer relationship was key. For Northern, the whole system moved to Just-In-Time and short cycle times.

These seven characteristics of BMW and Northern are found as well in other turnarounds -- Black and



Decker's recent comeback against Makita in the trade segment of the power tools market to cite another large company situation. The principles apply in smaller company situations as well and can be summarized concisely as"

Appreciate the path by which you got to where you are. Don't be confined by traditional ways of thinking or standard operating procedures. Set out the vision but also the concrete, interim steps.

Think system and business models change, not just product change.

Notes 1. The situations are described in greater detail in three case

studies written by the author. Bayerische Moteren Werke AG (BMW) (case #593-082), Northern Telecom (A): Greenwich Investment Proposal (case #594-051), and Northern Telecom (B): The Norstar Launch (case #593-104). All are available from the publishing division of Harvard Business School.

2. J. Templeman and J.R. Trece, BMW's Comeback, Business Week, February 14, 1994, pp. 42-44.

ROBERT J. DOLAN, Graduate School of Business Administration, Harvard University, Soldiers Field, Boston, Massachusetts 02163, USA.

Robert J. Dolan is the Edward W. Carter Professor of Business Administration at the Graduate School of Business Administration, Harvard University. His major research interests are product policy and pricing. He has published widely on these topics in such journals as the Bell Journal of Economics, Industrial Marketing Management, Journal of Business, Journal of Marketing, Marketing Science and Sales and Marketing Management. He is also author or co-author of six books, the most recent of which is Managing the New Product Development Process (Addison-Wesley, 1993). He is presently researching and writing a book on pricing policy as a joint project with Hermann Simon from Germany. This book will be published in 1996. He currently teaches in

Harvard's Advanced Management Program for senior executives, and Harvard's Summer Programs, Strategic Marketing Management and Leading Product Development.


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Marketing turnarounds