Archive for August, 2011

By Jared Baan, David Mack, Tim Murphy, Stephanie Sharma and Laura Watson

After raising more than $174 million in its initial public offering on April 14, 2011, and nearly $50 million from private investors pre-IPO, the question now is whether Zipcar has enough gas in the tank to turn a profit.  Zipcar is the undisputed leader in car sharing, with an established presence in more than 200 markets.  However, formidable competitors such as Connect by Hertz and City CarShare (a non-profit based in San Francisco) have entered the race to challenge Zipcar in at least 9 markets. Unfazed, CEO Scott Griffin eyes open roads ahead, “We have 570,000 Zipsters out there and they believe in what we see. The world in cities of transportation is changing.”

The current car sharing market for the US and Europe is an estimated $400 million. By 2020, the company estimates that the car sharing market will grow to $9.1 billion based on a study by Frost & Sullivan [1]. Although the future of the car sharing industry has yet to be written, membership and participation continues to rise and the potential for profit is significant. Zipcar is betting that one of its key pillars for success will be the “young urbanite.”

Blue Waters Run Deep

Founded in 2000, as bloody waters formed in the overcrowded and highly competitive car rental industry, Zipcar established the car sharing business as a socially responsible and sustainable alternative to vehicle ownership.  First-mover advantage enabled Zipcar to implement a blue ocean strategy whereby it determined the rules of the game and developed proprietary technologies and operations unique to servicing this niche market.  Zipcar has relied on word-of-mouth and a network-driven strategy to promote the brand, but is now focusing its efforts on a lifecycle migration strategy targeting the young urbanites in cities across the United States and Europe.

This strategy is designed to create a following of young professionals by creating trendy marketing ploys and programs which present Zipcar as a solution to the many problems associated with vehicle ownership in urban settings such as: insurance coverage, parking, maintenance, fuel costs, inconvenience, and car-theft prevention.  Zipcar will seek to position its services as an attractive, viable, safe and cost-effective option for the young urbanite in hopes that a positive customer experience and value proposition affects lifestyle changes and encourages user adoption among what is expected to be a sticky client segment.

The Winner’s Circle

An “urbanite” is a city dweller, environmentally aware, and comfortable with innovative new ways to view, interact with and contribute to the world.  They live, work, play and relax in the city frequenting coffee shops, corner markets, shopping malls, parks and bars.  Getting around the city efficiently and in a timely manner is a primary concern for the urbanite. Tapping into this market segment, Zipcar promotes car sharing as an eco-friendly alternative and includes in its fleet a mix of hybrid and bio-fuel powered cars.  Proponents of social responsibility will uphold Zipcar as the model of sustainability, reputation and moral appeal.

Zipcar’s demographic beyond the somewhat obscure “urbanite” is laser focused on the younger generations [2].   This younger audience has habits that are still developing as many are living away from home for the first time, whether attending college or working a first job.  By reaching these customers early in the lifestyle cycle, Zipcar can development a lifelong partnership which will generate reoccurring revenue for the company.  This a key advantage to a younger target audience and one that may help to shift automobile utilization. The service model to this audience also creates high switching costs, as dedicated consumers would be making more of a lifestyle change in moving towards substitute products such as buying their own car.

 Beyond the labels branding the Zipcar-car, is the viral marketing that happens on Facebook or Twitter when customers share their experiences “in a Zip.”  Through social networking, customers linked to Zipcar expose the concept and rewards of car sharing to their friends and followers.  This form of personalized and grass-roots marketing has proven very effective in helping Zipcar tap into the young urbanite market segment.  And by focusing on urbanites, Zipcar is able to address the key needs of a large and growing population: access to a car when needed and at a nominal cost.

 Driving to Greener Pastures

 The young urban market that Zipcar is targeting has many attributes that align very well with the company’s socially conscious goals.  Zipcar’s service model has always been socially responsible in looking to change consumers’ driving habits.  Similarly, the younger market segment has grown-up with a greater awareness and appreciation for the environment, and sustainability has been of great concern. The young urbanite tends to be more passionate and educated about the effects of pollution and oil consumption on the environment, certainly more than past generations.  They immediately recognize benefit of car sharing in reducing the carbon footprint and impact on the environment.

 The Zipcar business model centers on car sharing and capitalizes on the ideology that as a convenience product, Zipcar and its members are contributing to a better and  more socially responsible environment.  To support this claim, Zipcar conducted a survey among members and determined that on average Zipsters drove 5,500 miles or less per year than they had as non-members.  This effectively reduced the consumption of oil by an estimated 32 million barrels [3].  Furthermore, independent studies suggest that introducing even one vehicle into a car-sharing program reduces the number of privately owned vehicles on the road by a 7 to 1 ratio [4].  Simply put, members of car sharing programs are more likely to reduce the number of cars they own.

 Priming the Pump

 The company notes that revenue has grown from $30.7 million in 2006 to $186.1 million in 2010. However, this growth includes a merger with Flexcar, Inc. in 2007, as well as the acquisition of Streetcar Limited in 2010.  Isolating for Zipcar revenue as a standalone business, the growth rate for 2010 was still a healthy 24.3%. Year ending 2010, Zipcar owned a 45% market share with revenues totaling $186.1 million [5].  While it is only a matter of time before Hertz Connect and other new entrants seriously compete in this market, Zipcar is committed to developing deep and lasting relationship with the young urbanites.

 The potential volume of the young urbanite segment offers the greatest potential to positively impact the company’s financials.  A Zipcar customer and young urbanite living in Manhattan was recently asked why he became a Zipster. “I was paying $400 a month for parking and another $1,200 for my lease and insurance. Before putting the key into the ignition, I had already paid $1,600 a month. When my lease expired, the decision was easy. I now pay Zip about $500 a month driving as many miles in a month as I had in the leased car,” said Matt Johnson.  Zipcar is betting others like Matt will give car sharing a try. The trend setter potential for Zipcar, where social media and word of mouth are critical, gives Zipcar an advantage over its competitors and the growth in this segment will be a critical source of revenue in the years ahead.

 Zipcar will continue adding smaller compact cars, such as the MINI or Golf, to its fleet of 8,000 vehicles.  These smaller and more fuel efficient cars have certainly been a trend in the United States over the past few years and will reduce the capital outlay needed to expand operations. Lower fuel charges, which is included the cost to rent a Zipcar, increases the profit potential and minimizes the threat of new entrants.  

 Now in its first year of trading following its April 2011 IPO, Zipcar financial results are being closely followed by analysts and the investing public.  As a smaller business, the growth in revenues and number of customers is the largest focus.  The IPO saw shares jump 67% on its first day public, but since then the stock has traded lower, closing in on the stock’s 52-week low of 18.92 [6].  The downtrend in the stock price is also a reflection of the economic environment, which bodes well for Zipcar as young urbanites throttle back on purchases and look to live within their means.  As Zipcar shifts its strategy towards more profitable segments with increased volume potential, any subsequent increase in “Zipsters” member count and revenues will certainly please analysts and the stock price will be rewarded with a higher valuation.

 Speed Bumps and Potholes

Zipcar faces a few challenges in targeting the urban population.  The first major challenge is the availability of parking in densely populated areas. As the company expands, it faces scarce and expensive parking options in prime locations.  Zipcar is competing with developers that are trying to buy up empty lots or paying a contracted price through an existing vendor.  Zipcar has had to think “outside the box” for their parking woes and have had to look at cutting deals with places like schools and churches to help fill these voids [7].  Getting these prime areas also comes at a cost for Zipcar.  “Urbanites” are all about convenience, so Zipcar is also looking at renting “exclusive spots” on popular streets at a high cost from the various city municipal transportation agencies.  Each space would cost roughly $150 to rent per month [8].  However, doing so will pay dividends as a service unique to Zipcar and further differentiate it from its competitors.

 Another challenge for Zipcar is developing a strategy for engaging the lower-income areas within city centers.  There is definitely a demand in these areas, but Zipcar does not extend service to these locations.  Targeting the city areas where universities, shopping centers, and trendy cafes exist does exclude those lower-income areas that are also interested in taking advantage of the car sharing services as well.  The exclusion of the lower-income areas creates conflict with customers living in these neighborhoods [9].

 Finally, insurance costs continue to rise and Zipcar faces an uphill battle with their target audience being young, inexperienced drivers.  According to a report published by Auto.com, people between the ages of 15 and 24 and over 75 are the groups most likely affected by car accidents.  And people under the age of 24 account for 30% or $26 billion per year in accident costs [10].  These statistics suggest that Zipcar will need to carefully consider its target market and in defining what is a “young urbanite”.

 The Race Has Only Just Begun

 For the past decade, Zipcar had the advantage of the Blue Ocean Strategy by offering customers a leap in value at an affordable cost.  As more “young urbanites” turn to Zipcar as a viable option for their transportation needs, the company will remain in the pole position. It is clear that Zipsters are eager to benefit from the convenience and “hassle free” lifestyle that the service provides. And if Zipcar successfully engages the younger generations in promoting and advancing the car sharing lifestyle, rather than owning and operating a car, Zipcar will have made a positive impact on environment and provided a sustainable and cost-efficient alternative to vehicle ownership.

 References:

 1) Zipcar. SEC Filing: Form S-1/A Registration Statement. 06 October 2010.

<http://www.faqs.org/sec-filings/101006/ZIPCAR-INC_S-1.A/>

 2) Keegan, Paul. “Zipcar- The best new idea in business”. CNN Money. 27 August 2009. Web. 18 July 2011.

3) http://www.zipcar.com/is-it/greenbenefits

4) “The Impact of Carsharing on Household Vehicle Ownership,” April 2011.                                                 < http://www.uctc.net/access/38/access38_carsharing_ownership.pdf>

 5) Zipcar. SEC Filing: Form S-1/A Registration Statement. 30 March 2011.

<http://www.faqs.org/sec-filings/110330/ZIPCAR-INC_S-1.A/>

 6) “Zipcar IPO Soars 66% Out of the Gate,” 11 April 2011. <http://blogs.wsj.com/deals/2011/04/14/zipcar-ipo-soars-66-out-of-the-gate/>

 7) “Zipcar, Zapped by Parking,” <http://www.nytimes.com/2008/04/27/nyregion/thecity/27zipc.html?ref=thecity>

 8) “Car Share Companies Eye a Piece of the Curb,”

<http://www.sfexaminer.com/local/2011/06/car-share-companies-eye-piece-curb>

 9) “Car sharing rare in San Francisco’s lower-income areas,”

<http://www.sfexaminer.com/local/2011/07/san-francisco-car-sharing-rare-low-income-areas>

 10)  “Car Crash Statistics Based on Age and Location,”

<http://www.autos.com/driving-and-safety/car-crash-statistics-based-on-age-and-location>

By Ana Best, Tim Clarke, Mandukhai Hansen, Matt Richards, Aleksey Vlasov 

 The Procter & Gamble Company (P&G) embarked on an ambitious growth strategy in recent years to reach “More Consumers in More Parts of the World, More Completely.”¹ The goal is to reach and acquire a billion more consumers by penetrating the emerging markets with the most populous and developing countries of India and China. This “purpose-inspired growth” strategy that would be key to its profitable future, growth and sustainable development seems to be working well so far. In the most recent quarterly earnings statement published August 5^th, P&G’s net sales grew 10 percent to $20.9 billion for the fourth quarter and five percent to $82.6 billion for fiscal 2011.² Organic sales, which exclude the impact of acquisitions, divestitures and foreign exchange, grew five percent for the quarter and four percent for the fiscal year².

As one of the world’s largest consumer products company with the largest lineup of leading brands, P&G has been experiencing stagnant growth in most of its leading markets in developed countries. Rising commodity prices, low single digit growth due to market contractions and market saturation have challenged  P&G’s long term growth strategy. Investments in emerging markets present P&G with unparalleled opportunities for acquiring new market share, expanding its existing operations in more places with more growth and revenues. However, the challenges of emerging markets in most of the developing nations, also present significant issues P&G must identify and solve, sometimes even at the expense of margins.

 Procter & Gamble- for Everyone

Combination of challenges present in emerging developing markets requires P&G to modify its long established strategy of providing top brand, multiple selection,  and superior quality products in developing markets  to shifting towards providing affordable, quality products for everyday use to more consumers in more markets. The essence strategy of companies is usually based on the choices the company selects to pursue to maximize the company’s profits and market share, while selectively identifying paths they choose not to pursue. After careful analysis of market studies of consumer preferences, P&G has made some of the select choices that would fit and would not fit within its course of new strategy.

During 2008, while many of the consumer goods companies were in a craze over ecologically friendly “Green” product offerings, P&G chose not to compete in the same path its competitors such as Clorox, SC Johnson were rushing in.⁶ The ingredients and solutions used in such “green” products usually produced sub-par quality household items with lower results. Higher costs of production often demanded higher costs for the consumers. In a recent article in NY Times, Len Sauers, vice president for global sustainability of P&G, said “the company considered such a move five or six years ago. But in conducting market research about green products, what the company found was that “not many people bought them.”⁶

 Instead, the company focused on its core new strategy, of reaching more consumers, more completely, by offering alternative consumer wallet friendly products, such as Tide Coldwater detergents for consumer who utilize washing machines and Tide Naturals[1] for consumers that utilize hand washing for their fabric laundry care. P&G also chose to offer only essential categories of brand products in developing markets in limited offerings, such as 16 product categories in China compared to 36 categories in the United States.¹²

 Proving Grounds in Emerging Markets- Above and Beyond

Over the past several years P&G has worked to rapidly expand its market share in emerging markets such as Russia, China, and India, driven significantly by three basic demographic factors: population growth, household formation, and household income growth.⁴ These developing markets present large expansion opportunities and strong growth potential. A recent quote by P&G CEO Robert McDonald, who had an exceptional career as a US Army Paratrooper, states that P&G is focusing on these developing nations to create a profitable future, and reach its goal of servicing 1 billion new customers by 2014.¹⁴In order to reach such ambitious goal, he’s been steering P&G through the turbulent waters of worldwide economic downturns and increased competition.

In order to reach these low income, large volume consumers, P&G needed to significantly alter some of its leading name brand products. However, the purchasing power of consumers, and their demand and preference for certain categories of products have proved challenging to embark on such an ambitious strategy. Economies of scale largely enjoyed in developed markets, such as in the US that demand convenient, bigger size packaging are simply not going to work in these markets. Although demand for name brand consumer goods are there, purchasing power of most consumers in the emerging markets is low. P&G research studies showed consumers in China currently spend average of $3 per year for P&G Products and India at $1 per year, compared to a whopping $93 a year spending by US consumers.¹⁴ Even at such low margins, the expected growth in these emerging markets estimated to be much higher at 12% in China, 22% in India compared to stagnant 0.5% in US.⁵

By differentiating itself from many  sub-par quality competitor products and curtailing their products for the local consumer preferences and needs, P&G made significant inroads in developing markets, such as by reducing packaging sizes to affordable smaller sizes with various dimensions and eliminated expensive non essential ingredients.¹⁴ In order to keep its superior quality, P&Gs fabric care detergents such as Tide and Ariel were modified to include easy soluble ingredients for lesser temperature water that are also much more gentler for hand washing¹.  As a result, P&G now enjoys large market share in consumer household and personal care lines in Russia, and it has been hitting double digit growth in sales in China reaching 60% of Chinese consumers. This month’s company announcement notes that quarterly profits rose by 15% as sales grew in emerging markets. ¹¹

 Social Networking for Social Responsibility = Social Gain

After the deadly tsunami hit south-east Asia in early 2000, P&G donated 13million packets of PUR water purifiers to Sri Lanka, Indonesia and Maldives.9 In order to get approval for company to support such effort, Senior P&G Executive Greg Allgood, took the matter to social network. After the PUR brand gained 50,000 Facebook fans in one day and was the ’second-most popular trending topic on Twitter’⁹, the company achieved internal buy in. Similar techniques now used by P&G as part of their corporate social responsibility duty, and even resulted in launch of several programs such as “Tide Loads of Hope” and “Duracell Power Relief” that aid communities affected by natural disasters.  Repurposing a brand and building value through non-financial metrics gained strong internal support from within P&G and also helped them leverage the brand through a non-profit model to increase company value in emerging markets and create opportunities.

 Overcoming Roadblocks – Literally!

Similar to many multinational companies operating in emerging markets, P&G faces logistics nightmares in transportation, storage and distribution of its products. Some markets are improving significantly to aid in such problems, such as China’s state mandated massive infrastructure campaign recently finished building over 25,000 miles of expressway roads. In comparison, India was only able to improve little over 3,700 miles of roadways during the same time period.¹⁵ Overcrowded ports, poor transportation and storage systems at docks and airports, and highly congested roadways can significantly affect company’s operations.

To alleviate some part of the issue, P&G plans to establish strategically positioned 20 manufacturing centers within these developing countries, improving its access to wider distribution areas and keep some control over its product distribution channel activities.³ Being locally present in these locations hopefully will help P&G also combat another issue of roadblock in such emerging markets, fighting and limiting the spread of the counterfeit consumer household brand products.  

Affordable Products- At More Costs?

It’s no secret that P&G is the world’s biggest spender. In a recent Forbes article, it was quoted to have spent $9.3 billion on marketing last year, the second straight year it has set a company record, while also investing $2 billion in Research and Development (R&D). ¹¹ WikiInvest.com also notes that in 2009, R&D expenditure of P&G was $1 billion more than its closest competitor, Unilever.¹³

R&D and technology is certainly are very important aspects of P&G operational strategy. Data gathered on customers’ preferences and buying habits serves as one of the main competitive advantages of P&G, allowing the company to provide the markets with the specialized and customized products. As the leader in innovative supply chain inventory optimization use, in 2009, utilization of combined multi-echelon inventory optimization tools¹⁰ software to minimize inventory costs across the end-to-end supply chain in its more complex supply chain systems, added $1.5 billion in cash savings.⁸ P&G is additionally saving over $770 million by outsourcing its IT infrastructure to HP and IBM.¹⁶

Although efforts in cost savings is significant, with increasing prices in main commodities, such as oils, risen and other raw materials of P&G products¹¹ , require more disciplined spending in order to sell more cheaper, affordable products to these emerging market consumers. As it stands, P&G needs to sell more diapers and detergents to reach McDonald’s ambitious goal.

References

¹Procter & Gamble. “Corporate Profile” PG.com. Web. Accessed 20 July, 2011.

 ²Procter and Gamble. “P&G Announces Results for the Fourth Quarter and 2011 Fiscal Year” PG.com Web. Accessed 5 August, 2011.

 ³Birchall, Jonathan, “P&G to shift ‘centre of gravity’ with growth in emerging markets.” Financial Times. Web 12 December, 2008. Accessed 15 August, 2011.  http://www.ft.com.ezproxy.t-bird.edu/cms/s/0/3fcb6e30-c7eb-11dd-b611-000077b07658.html#ixzz1VdSP3SJL .

 ⁴DATAMONITOR: Procter & Gamble Company, The.” Procter & Gamble SWOT Analysis” (2009): 1-9. Business Source Complete. EBSCO. Web. Accessed 24 July 2011.

 ⁵Gibbs, Lisa. “X-RAY: Procter & Gamble.” Money 40.2 (2011): 60. Business Source Complete. EBSCO. Web. Accessed 23 July 2011.

 ⁶Kapur, Divya. “Corporate Image, Reputation and Identity (Case Study P&G)”. 15 March, 2010. EBSCO Web. 21 July, 2011. 

 ⁷Martin, Andrew and Clifford, Stephanie. “For a Few, Focus on Green Products Pays Off.” NY Times, Web. Accessed 21 April, 2011

 ⁸Masahudu Gunu, Osman. How Procter and Gamble Survived Through Innovation – A Case Study:Innovation at Procter and Gamble – A Case Study. Version 4. Knol. 17 January 2010. EBSCO Web.

 ⁹ Seagle, Carol and Christensen, Lisa. Case study:” Procter & Gamble’s Pur.”Financial Times. 2 March 2011. http://www.ft.com/cms/s/0/1415f250-44fe-11e0-80e7-00144feab49a.html#ixzz1VbKhec00. Accessed 18 Aug., 2011.

 ¹⁰Sean P. Willems, et al. “Inventory Optimization at Procter & Gamble: Achieving Real Benefits Through User Adoption of Inventory Tools.” Interfaces 41.1 (2011): 66-78. Business Source Complete. EBSCO. Web. 23 July 2011.

 ¹¹Sewell, Dan. “Procter and Gamble’s 4th quarter net income jumps 15%” USA Today. Web. 5 August, 2011. http://www.usatoday.com/money/industries/retail/2011-08-05-procter-amp-gamble-earnings_n.htm

 ¹²Team, Trefis. “P&Gs Market Share Play a Winning Strategy.” Forbes.Web.14 January, 2011 http://www.forbes.com/sites/greatspeculations/2011/01/14/pgs-market-share-play-a-winning-strategy/

 ¹³Wikinvest. “Procter and Gamble Company.” Wikinvest.com Web. 20 July, 2011.

 ¹⁴Wayne, Leslie. “P.& G. Sees the World as Its Client.” NY Times. Web. 11 December, 2009. http://www.nytimes.com/2009/12/12/business/global/12procter.html

 ¹⁵“The Trouble with India” BusinessWeek. March 19, 2007. Accessed 5, August 2011 www.businessweek.com/magazine/content/07_12/b4026001.htm

 ¹⁶ Sarah, Cliff. “Procter & Gamble adds to HP outsourcing deal.” Computer Weekly (2004):10. Business  Source Complete. EBSCO. Web. 15 Aug 2011.

[1] http://www.pg.com/en_US/downloads/innovation/factsheet_Tide_Naturals.pdf

Written on August 21, 2011

By: Anwar Alvi, Brian Kocisky, Jacquelyn Henderson, Ilaha Eli Omar and Scott Yuska

After one of mobile industries most significant mergers between Google and Motorola, Research in Motion (RIM) is more vulnerable than even their shrinking customer base and profits indicated. Industry investors and consumers alike are speculating on the fate of RIM’s future. It seems clear that if RIM is to weather this latest industry shift they must seek a strategic partner who can provide software experience, extensive resources and a solid reputation. Microsoft stands out as a potent choice if RIM wants to regain a presence as a mobile device leader.

RIM has gone from smart phone market leader to trailing in both prestige and market share behind both Apple iOS and Android based phones. RIM and their smart phone Blackberry has predominately focused on business users, security, and email/messaging services. Although this created an initial competitive advantage, RIM’s inability to understand drivers to future consumer needs has seen them lag behind the competition in both overall demand and market share. This almost tide wave of new slick operating systems, touch screen phones with the same perceived email and messaging capabilities has only left RIM and the Blackberry clinging to the IT community and the security features that lead to their initial meteoric rise. The term “crackberry” was synonymous with the addictive nature and the popularity that RIMM held. This term seems to be somewhat out of style as the Blackberry is no longer a preferred phone choice. What are the causes that have led to RIM’s current down fall. The days where IT departments wielded the decision making power and corporate email functionality was a difficult code to crack are now over. The shift in power is now with the device users, like you and me. We carry the enough power and there are enough of us to force IT departments to adapt us. This newly acquired power is one of the biggest problems that face RIM today. Their competitive advantage has vanished because it is no longer as important as it once was. They lack the ability to appeal to the users of the phones, but rather to the IT departments that service them. In the world of app stores and multifunctioning devices that easily enable a phone to be the center of one’s multimedia interconnected world, RIM and the Blackberry seem to fall both a bit short and late. There couldn’t be a more glaring example than RIM’s “QNX” operating system. Comparatively to Apples iOS and Google’s Android operating systems the first device with QNX isn’t set to be released in Q1 of 2012, where both Apple and Google will have both released their 5th and 3rd versions, respectively. So where does RIM go from here? And how can they use their business and security based IP to offer devices that people can get excited about?

While it may seem obvious that RIM needs considerable help from a seasoned software company to keep it afloat in the smartphone industry, it may not be as apparent why a partnership with RIM is advantageous. However, there are many factors that helped RIM become a leader in smart phone sales, factors which still keep RIM with healthy, though shrinking profits.

IT departments notoriously favor RIM’s secure server and email application offerings to that of competitor’s. Many companies have already invested in RIM’s BlackBerry and are hesitant to move to a competitor with less robust security at additional cost. Though there is a push from employees to move to more away from BlackBerry’s to Apple or Android devices, a software partner could capitalize on RIM’s existing relationships while providing consumers a better smartphone experience. Additionally, the next frontier in mobile communications seems to be Near-Field Communications (NFC). Integration of NFC into smart phones would allow a mobile device to act as a credit card or a transit pass . A software partner could make these applications a home-run utilizing RIM’s high-security server – a huge advantage when transferring sensitive data.

BlackBerry messaging is extremely popular overseas, with 39 million users . This is an instant customer base for any new potential partner. The overseas markets are increasingly attractive for expanding smart phone companies and existing BlackBerry hardware is priced well for these markets. Utilizing these existing phone offerings is advantageous for a software partner looking to make their mark in emerging markets.

RIM has a huge portfolio of patents that are a definite advantage to a strategic partner. There have been several instances in the industry of lawsuits evolving from patent infringement: smart phone displays, touch screen responses and data processing to name a few. RIM’s bevy of patents will help protect a potential partner from future litigations while allowing them to capitalize on the use of RIM’s existing intellectual property to provide smartphone users with the best possible experience.

Why Microsoft?
RIM is already taking advantage of Microsoft’s strengths by partnering with them on cloud offerings. According to Alec Taylor, Vice President for Software, Services and Enterprise Market, “Cloud has always been core to their business ”. The specific deal between the two companies centers around the implementation of Microsoft’s Office 365, a subscription based model that will keep BlackBerry users current on the latest versions of Office, SharePoint and Exchange. RIM themselves are using this new technology with new apps like BlackBerry Protect and BlackBerry Management Center, both cloud based systems for security and administration.
Another prominent deal between the two companies involves Microsoft’s search engine Bing. Microsoft’s CEO, Steve Ballmer, recently announced that Bing will become the default option for search and maps on all Blackberries . Also, it wouldn’t be an option for users; it would actually be integrated within the BlackBerry OS. This will help Microsoft capture a more lucrative group of enterprise and executive users because business users phones are typically locked down by their organizations and default settings like search providers are not modifiable. They will have no choice but to use Bing. For RIM, this will provide an easy way for them to compete with Android handsets using Google’s search engine. Partnerships like this could possibly lead to RIM utilizing Windows Phone as their operating system in the future. This would be a big plus for business users because they would have Office embedded within their phones with full support offered by Microsoft.

As computing world has evolved from the desktop to the laptop, it is now evolving from the laptop to the smartphone and tablet. Microsoft has no real market share with those emerging technologies. Acquiring RIM would give them immediate access to those markets and establish a strategic foothold within the industry . The advantages of having an integrated hardware-software platform are also evident with Google’s recent acquisition of Motorola Mobility and its valuable patents. With this purchase, some industry insiders have pushed up the value of RIM’s patent portfolio from $2-3 billion to $4-$6 billion, making it more valuable strategically for a company like Microsoft .

As the smartphone industry progresses quickly towards a mature stage and margins begin to shrink, RIM must find new ways to branch into new hardware platforms in order to sustain profitability. The growing tablet business is an excellent option. However, RIM needs to be faster to market and produce both hardware and software that either meet or exceed industry standards. A cooperation between RIM and Microsoft would help RIM do both. Microsoft would help finance new investments and provide flexibility and opportunity to pursue these strategies. Being the trusted name in corporate software, Microsoft would bring to the table decades of experience and brand loyalty in the development of a Windows operating system to run on BlackBerry devices. Delegating software to Microsoft would allow RIM to specialize in hardware. Pooling resources would free up RIM to leverage BlackBerry brand equity and grow their hardware to the level of Apple and other leading devices in both the Smartphone and tablet categories. The synergies will allow Microsoft and RIM to jointly launch devices in the marketplace faster due to increased specialization amongst the respective business units. Similar business cultures make it all the more fitting that a merger of Microsoft and RIM would produce ideal compliments.RIM stands to gain considerably from a partnership with Microsoft. Currently, both RIM’s hardware and software are lagging behind industry standards. Companies have approached the software-hardware choice differently. Apple leveraged its size for synergies to be able to compete in both under the same brand, while Google – despite its large size – has opted to participate in software alone, forming partnerships with firms like HTC for hardware instead. While RIM does have considerable leads in its proprietary BlackBerry Enterprise Servers and its software patents, a majority of its revenue is still in its handset business and that is where is should look to focus.

While the potential synergies between Microsoft and RIM are substantial, there are several impeding drawbacks. Recently Nokia and Microsoft announcement plans to form a strategic partnership enabling them to create market-leading mobile products and services to consumers and operators. The synergy between Microsoft and Nokia could create direct competition with iPhone and Android and put pressure on RIM to “plug in” to the existing Android apps library . A move like this can increase the number of third-party applications available on the BlackBerry and position a more level playing field. “Android-device users can access about 130,000 third-party apps, including games, while iPhone users can access about 300,000 — the BlackBerry supports about 10,000 apps . This makes RIM a straggler in an area of which determines which smartphone consumers will buy.

Furthermore, the Microsoft-Nokia partnership can take away from the potential synergies of Microsoft-RIM. Nokia is not only a smartphone competitor to RIM; ironically, both companies are in need of the next big product refresh. This being said, RIM has time on its side for creating its blue ocean opportunity before Microsoft and Nokia launch any new products. Despite these issues, RIM should still make a pass at Microsoft, perhaps striking a deal that precludes future contracts with RIM competitor’s.
A RIM-Microsoft deal offers much to both companies, but consumers will be the big winners.

[i] http://mashable.com/2010/05/06/near-field-communication/

[ii] http://seekingalpha.com/article/275851-why-research-in-motion-is-an-attractive-takeover-target-for-apple

[iii]  http://www.cioinsight.com/c/a/Latest-News/RIM-Microsoft-Partner-on-Cloud-Solutions-for-PlayBook-BlackBerry-674918/

[iv] http://thisismynext.com/2011/05/03/bing-meets-blackberry-default-search-engine-rim-devices/

[v] http://www.theglobeandmail.com/globe-investor/rim-like-motorola-needs-a-giant-partner/article2131662/

[vi] http://www.ibtimes.com/articles/199326/20110817/google-inc-motorola-mobility-implications-apple-inc-rim-microsoft-android-patents-smartphone-tablet.htm

[vii] http://www.microsoft.com/presspass/press/2011/feb11/02-11partnership.mspx

[vii] http://www.totaltele.com/view.aspx?ID=462423

Whole Foods Swims in Blue Ocean
Summer 2011 GM4468 Group 9: Chris Goossen, Karthik Govinahalli, Brittany Hill, Ajay Mungara, and Sarah Waller 
A customer steps foot into the Whole Foods Market (WFM), her heels hitting the sustainable floors and her eyes pleasantly adjusting to the ambient lighting.  The smell of freshly baked goods fills the air, and bright, fresh produce stacked in elegant arrangements draws her in further, back toward the sustainable seafood section.  She walks through the aisles, filling her carts with organic vegetables, free trade fruit, gluten free quinoa, grass fed beef, and a few bottles of kombucha, a fermented pro-biotic beverage.  Before checking out, she fills a “to-go” container with lunch, considering non-farmed salmon sashimi or homemade pizza, and eventually deciding upon a delectable chicken curry she selected from an abundance of choices at a fresh food bar.  This is not her mom’s grocery store; this is something new.

It is easy to see that Whole Foods is something new for what their shelves contain and maybe more importantly what their shelves don’t contain. No other company has embraced the organic craze with the same commitment as Whole Foods and Whole Foods is reaping the rewards in the process. It is just as important to see that Whole Foods is something new when it comes to their commitment to corporate social responsibility. Whole Foods has strategically improved the communities around them. One main idea that drives all their initiatives is “Shared value in success and sustainability.”  Whole Foods has created and implemented a strategy that transcends just groceries.  

Whole Foods has created a blue ocean of uncontested market spaces where competition is irrelevant. But competition won’t stay irrelevant forever. So while customers flock to sustainable, natural, hormone-free, and non-genetically altered foods, competitors are concocting strategies to steal a share of Whole Foods’ over $9 Billion in sales during 2010. Inevitably competitors will embrace what current co-CEO John Mackey calls “the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholder.”  This course will lead them astray until they learn what Whole Foods learned. That part of their success is their dedication to being a member of the communities where they operate.  As competitors make modest efforts to imitate Whole Foods passion for accountability in their communities, the challenge for Whole Foods will be to continue to exceed global expectations for corporate social responsibility.

Introduction and History of Whole Foods Market:

In 1978, John Mackey, a college dropout and entrepreneur, and his partner Rene Lawson Hardy started a small natural foods store by borrowing money from family and friends. After two years of operating alone, they partnered with Craig Weller and Mark Skiles forming the original Whole Foods Market. One year after merging, they experienced a devastating flood which led to a $400,000 inventory and equipment loss.[1] This was a terrible experience, especially for a company without insurance. Fortunately, customers, neighbors, staff, creditors, vendors and investors alike assisted with the clean up and as a result the store reopened 28 days later. Witnessing the collective action taken by the community around them could have been the point of realization that Whole Foods was an integral part of the community and all parties shared their fate. Whole Foods became more than just a grocery store that happened to have wholesome fresh foods. They became a building block to the communities around them. They have accepted the responsibility to community and integrated this into their core values they follow even today.  The idea of providing exceptional quality of food along with exceptional quality of life for its customers, staff and surrounding communities has allowed Whole Foods to build 300 locations throughout the US, Canada and UK. As of Jan. 2011, 52 leases have been signed for new stores. Whole Foods is currently Number 284 on the FORTUNE 500 list.

A Corporate Strategy to Exceed Expectations

WFM’s mission[2], expressed in terms of “Whole Foods – Whole People – Whole Planet,” elegantly connects their strategy, business, and social responsibility. WFM is telling the world that Corporate Social Responsibility (CSR) is already a core company value and is central to all aspects of their business, essentially connecting their business performance, community health, employee welfare and commitment to the environment. WFM only sells the best-quality, organic, healthy food products from sustainable and humane sources. Adding a social dimension to its value proposition makes social impact integral to their overall strategy. WFM has consistently ranked among the top 25 best companies to work for ten years in a row, an amazing accomplishment for a retail company[3]. WFM consistently shows up in the top 10 socially responsible companies in the world and also has shown that it is a profitable company with recent announcement that their 2001, third quarter earnings rose 35%[4], and they continue to gain market share. The market has successfully demonstrated that its core values of sustainable business can also be a profitable business: they identified social issues of shared value that is of mutual interest, integrates strategy and society and focuses on strategic impact. They are the first major retailer to offset 100% of their energy use with wind energy credits[5], stop using plastic bags, join the Marine Stewardship Council (MSC) , help promote sustainable fisheries, create the Animal Compassion Foundation, and stop selling baby bottles made with BPA.  These practices have led to plenty of sustainability and environmental awards.

The Whole Planet Foundation’s self proclaimed mission is to “create economic partnerships with the poor in those developing world communities that supply our stores with products.” (9) [6]The mission statement is highly indicative of the strategic CSR nature of the Foundation. Rather than giving charitable donations, Whole Foods backs micro-loans of $200 or less that require no collateral or contract. The money is focused in villages and rural tribes that supply Whole Food stores with tropical fruit, vegetables, tea, and coffee. With the loans WFM ensures future availability of their suppliers and simultaneously helps farmers become self employed. According to the Whole Plant Foundation website there is a repayment rate of 97.43% on these loans. They have used a strategic approach and focused on a social dimension of competitive context.

WFM follows an integrated approach that tells a single compelling story that cuts across their entire value chain, and in the process gaining an ethical advantage, appealing to their loyal customer base, and building a strong brand. WFM targets customers who are passionate about food and the environment, with strategic CSR efforts WFM is able to command premium prices. WFM adopts social practices in every part of their business from sourcing, screens out any of the nearly 100 ingredients the company considers unhealthy, spoiled produce are sent for composting, vehicles run on bio-fuels, even the cleaning products used in the store are environmentally friendly and John Mackey, CEO of WFM, runs a Blog on CSR[7]. In summary, WFM distinguishes from its competitors and gains a strategic advantage by reinforcing the CSR dimension in nearly every aspect of the company’s value chain.

Global Expansion Increases Global Responsibility:

Can WFM repeat their success globally?
WFM started its operations in Austin, TX area and now has stores spread all over the United States.  Its rapid initial growth was fuelled by acquiring other natural food chain throughout the 90s.  There were additional acquisitions starting with “Food for Thought” in Northern California in the year 2000. By 2002, in the midst of some more acquisitions, the company opened its first international store in Toronto, Canada. (Whole Foods Market Company Timeline) WFM has done exceedingly well in Canada boasting of 4 new locations in Vancouver and 3 additional locations planned in suburbs of Toronto along with the 20% additional increase in space in its first location. [8]While Canada is far from Texas, the cultural similarities between Canada and the northern United States are similar: the market dynamics, logistics network, availability of local produce, consumer interest in natural foods, and environment,  WFM did not have to work too hard to evolve a market entry strategy.  

WFM has become a household name in the US for the organic food market segment, but there are several challenges it faces when it comes to global expansion. In 2004, WFM entered the United Kingdom with the acquisition of seven Fresh & Wild stores. In 2007; it opened its first full-size store, in Kensington High Street, West London. Company executives were also optimistic about WFM’s UK business model. However, during 2008 global financial crisis WFM landed in a lot of financial trouble. Research has revealed that people opted out of organic food since regular food was much cheaper and some of the grocery chains began to hold organic food and sell them at a cheaper price. In addition, groceries are already far more expensive in the UK compared to the US so customers felt their pockets pinching. The economic climate was and still not good enough for a company like WFM to be around.[9]

UK market may just be a sober example for WFM. Entering highly cost conscious emerging market like China or India may be even more challenging. Organic food stores have a touch of exclusivity and WFM has done an excellent job in communicating that positioning to US customers. WFM would have to enter more affluent markets like the US where customers will not mind paying a higher price for organic food.  To such places, WFM should also think of ways it can market rare and healthy food items from around the world and to encourage local suppliers to partner with them to bring about the product differentiation. And it would always be hard to sustain the business model since cheap imitators will quickly grab a share of the market.

Conclusion:
In a world where corporate social responsibility has a tendency to be viewed by corporate strategist as a necessary burden, Whole Foods is different. They are a company that contends that corporate philanthropy is good business. “Whole Foods gives money to our communities because we care about them and feel a responsibility to help them flourish as well as possible. The business model that Whole Foods has embraced could represent a new form of capitalism, one that more consciously works for the common good instead of depending solely on the “invisible hand” to generate positive results for society,” said Mackey. To realize this goal, Whole Foods will have remained dedicated to their mission as they take on global expansion.

[2] About Whole Foods Market. 21 August 2011 <http://www.wholefoodsmarket.com/company/>.

[3] Berger, Louis. The 10 Most Socially Responsible Companies in the World? 7 March 2011.

[4] About Whole Foods Market. 21 August 2011 <http://www.wholefoodsmarket.com/company/>.

[5] Whole Foods makes largest US purchase or renewable energy credits. 10 January 2006. 2011 August 2011 <http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=115×38197>.

[6] Whole Planet Foundation. 21 August 2011 <http://www.wholeplanetfoundation.org/about/>.

[7] Mackey, John. John Mackey’s Blog. 26 July 2010. 21 August 2011 <http://www2.wholefoodsmarket.com/blogs/jmackey/category/social-responsibility/>.

[8] Weisblott, Marc. Yahoo News. May 2011. 19 August 2011 <http://ca.news.yahoo.com/blogs/dailybrew/whole-foods-market-rebound-reflected-aspiration-expand-across-163022505.html>.

[9]Simpson, Aislinn. Fresh and Wild closes store as consumers reject organic for cheaper deals. September 2008. 19 August 2011 <http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/2795774/Fresh-and-Wild-closes-store-as-consumers-reject-organic-for-cheaper-deals.html>

 Pfizer: Up to the Challenge?

by Reid Bronson, Lavanya Bhenderu, Brian Gatti, Jyoti Srivastava

Today’s pharmaceutical market is inundated with competitors. It is what strategists call a Red Ocean – a market place saturated with competition, with each competing for market share and where few innovations are made. Pfizer Inc. is one such company facing uncertain times. It has an immediate threat looming over its head, with highly profitable patents expiring in 2011. In order to prevent what comes next: competitive erosion of it’s market share with generic brands, Pfizer is making key strategic changes. Pfizer also faces stiff competition from companies like Merck, Procter & Gamble, and Eli Lily. In a market saturated with entrenched competitors, high development costs, and valuable patent protection time consumed by FDA approval testing, drug makers are under considerable pressure to produce more blockbuster drugs.

Pfizer has come up with a multi pronged approach by identifying key focus areas such as diversifying it’s pharma products portfolio, increasing marketing, expanding its late-stage product pipeline,  and developing a lean but effective Research and Development (R&D) program. 

History

Pfizer is a global healthcare company, with a history of success, dating back to as far as 1849, when it was initially founded as a fine-chemicals business. With the discovery of medicinal properties of penicillin in 1929, Pfizer entered the pharmaceutical business manufacturing penicillin and vitamins.  It sold the first FDA approved Pfizer brand drug in 1950.

The Challenge

One of the main strategic issues Pfizer currently faces is patent protection expiration on it’s main revenue generating drugs. Pfizer has enjoyed the revenue and competitive advantage from being the sole manufacturer of drugs like Aricept, Lipitor, BeneFix, and Xalatan. Patents protecting these drugs are set to expire in 2011, threatening the company’s revenue stream. With the expiration of patent protected drugs come generic branded drugs. Generic brands offer consumers a large price differential due to generic brand’s lack of development and research costs. Pfizer’s blockbuster cholesterol lowering drug Lipitor is coming off-patent in November 2011, it alone brought in $10.7 billion of the company’s $67.8 billion world-wide sales in 2010. 

In 2009, Pfizer made the difficult decision to end their late-stage development program for Torcetrapib (a potential new treatment for cardiovascular disease) due to safety concerns. This was followed by a decision to withdraw Exubera (the world’s first inhalable insulin) from the market. These decisions, after having invested billions of dollars, brought renewed focus to two facts: Drug discovery is enormously expensive and inherently risky, and it is unwise to rely on two blockbuster drugs (whether on the market or in the pipeline) for a disproportionate amount of future revenue and profit. Pfizer has revisited the drawing board and came up with what they call “Our Path Forward”, constituting five strategies:

●     Refocus and optimize the patent-protected portfolio;

●     Find and capitalize on new opportunities for established products;

●     Grow in emerging markets;

●     Grow diversified businesses; and

●     Instill a culture of innovation and continuous improvement.

Diversifying the product portfolio

Pfizer is currently structured against competition with nine diverse healthcare businesses: Primary Care, Specialty Care, Oncology, Emerging Markets, Established Products, Consumer Healthcare, Nutrition, Animal Health and Capsugel.  This is important for two reasons. First, diversification hedges against the leverage of consumers by distributing its revenue generation over multiple businesses. It reduces the potential impact of any one specific customer segment. Consumers are very price conscious and may choose to purchase cheap generic brand alternative to name brand drugs. Consumers also have a large selection of substitutes to choose from herbal supplements, lifestyle changes, a competitor’s drugs, generics, or choose no treatment at all. Consumers may receive heavy discounts due to government regulations. In the U.S. and Europe the consumer has incredible leverage due to generic price competition. Also, due to government healthcare subsidization programs, such as Medicare Part D, consumers are eligible for discount up to 50% on name brand drugs.

Secondly, diversification provides a hedge against leverage of suppliers. With multiple businesses multiple different suppliers can be used. This prevents all of Pfizer from being negatively effected by only one supplier.  A recent example is the Animal Health division.  Agricultural costs have risen due to high demand and low supply. This has put considerable margin pressure on the Animal Health division, which brought in sales of $3.6 billion; however, for its biopharmaceuticals such as Viagra and Lipitor, Pfizer has multiple sources to provide raw material.

Emerging markets

While large drug companies tend to let their products wither after their patents expire, Pfizer stands behind these drugs, believing that it can capture more potential, especially in emerging markets. In the coming years, it will be relying heavily on emerging markets to supplement the revenue lost in the U.S. due to patent expiration. Emerging markets are the fastest growing market within pharmaceuticals and off-patent medicines and their generic equivalents are the fastest-growing segment. Growth in emerging markets serves two purposes: expanding the customer base, and enabling Pfizer to be competitive by increased revenues.

In a recent interview with the Wall Street Journal Pfizer CEO Ian Read stated “We’re not going to lose $11 billion. Not all of that’s going away. The U.S. will be more affected. Part of Europe will be more affected. The franchises in the emerging markets will be more resistant.” China, one such emerging market target for Pfizer, will add $125 billion in healthcare spending alone. Even if China were to institute mandatory price cuts, “those price decreases are compensated by volume increases. To the extent that there’s offset in volume”, said Mr. Read.  

Marketing

Pfizer also needs to increase its marketing to retain customers from moving to generic brands. Launching a strong branding campaign to increase consumer awareness about Pfizer’s research capabilities can increase customer loyalty. Pfizer has been marketing its core products like Lipitor and Viagra without mentioning Pfizer itself. Moving forward Pfizer will include its company name to promote company recognition.

Pfizer is bypassing the wholesaler, distributing directly to pharmacies, doctors, and other direct retailers. It is continuing to promote biopharmaceutical products directly to healthcare providers, nurses, doctors and pharmacists. Pfizer is leading the market in this respect. Pfizer’s competitors currently still deal largely with wholesalers. Using direct to consumer marketing encourages patients to talk to doctors by explaining to consumers the approved uses, benefits, and risks of the products. Informing and educating the consumer helps reduce complicated and confusing conversations patients usually are faced with. This helps the company be more receptive to their customer needs and increases Pfizer’s leverage. This is valuable in the company’s strategy and should be continued to use to uphold its brands. It has been noted by wholesalers that this may force other large drug manufactures to follow suit to remain competitive.

With its patents ending, competition will try to gain market share by offering generics at lower cost.  Consumers switch to these generic brands since there is no major switching cost. In order to prevent this, Pfizer will offer huge discounts and promotion coupons through its existing network of doctors and nurses. The doctor-patient interaction is very important with consumers. There is a lot of trust involved. When a patent go off patent the doctor most of the time will recommend or proscribe the generic low cost option. Again the doctor is looking out for the patients health and pocket book. So, its important Pfizer competes in price. Engaging all physicians with the no-cost optional discounts and coupons to lower the cost of a name brand to a price comparable with Medicare will help drive value for both doctors and patients.  These discounts would be up to both the doctors and patients. No strings attached. Value is built for the doctor by giving them another option to build trust with patients, and offering multiple low cost options for the patient.  Value is also built for the patient by getting brand name proven drugs for prices comparable to generic brands.  

Research and Development

In order to maintain revenues by introducing additional blockbuster drugs and to compete against established rivals new drugs, Pfizer needs to make a key strategic change in its R&D program. Pfizer believes it has found the solution. Pfizer’s plan is to reduce its internal R&D by cutting $2 billion in costs by the end of 2012, and will begin to focus on outsourcing more of it’s R&D to hospitals and to specialized contract research organization (CROs) such as Covance Inc, Charles River Laboratories, and Parexel International Corp. Morningstar analyst Damien Conover said, “CROs can do research and development more effectively than Pfizer, which has had a low rate of drug productivity.”

With a renewed understanding of the risk involved in only a few blockbuster drugs, Pfizer has expanded its late-stage Phase III product pipeline for biologics from 16 and one vaccine to 27 drugs and six vaccines, to reduce risk of product failures.The US government passed the Patient Protection and Affordable which allows for competing companies to produce Biosimilars: compounds that can be approved by the FDA if they show interchangeability with the original, but may not be identically the same compound. As a result, the Biosimilar market is expected to grow from $300 million in 2010 to $2 – 2.5 billion in 2015. Pfizer has two important collaborations, one with Israel based Protalix for the debelopment of taligucerase alfa, an enzyme for the treatment of Gaucher’s disease, and a partnership with the Indian company, Biocon, to commercialize biosimilar insulin and insulin analogues. Development and manufacture of more complex products, such as antibodies or drug-antibody conjugates, will take place in the former Wyeth facilities.

Pfizer is also streamlining its Research and Development focus on a core set of sciences: neuroscience, cardiovascular medicine, oncology, inflammation, immunology, and vaccines; and, three specialized units for pain, sensory disorders, and biosimilars – all of Pfizer’s most efficient divisions. Mr. Read’s strategy is to set company focus “to ensure that the core is productive, the core is working.”

Pfizer is moving into a new phase of it’s storied history. More than ever Pfizer needs to be weary of both competition and itself.  Competition threatens to take away its livelihood and internal failures threaten to make Pfizer irrelevant.  It’s time to change. But the question is “is Pfizer up to the challenge?”

References:

1.  Pfizer’s Annual Review 2009, Chairman’s report

2.  www.pfizer.com

3.  Bloomberg Businessweek, February 03, 2011, “Merck, Pfizer Research Strategies Diverge on Spending”, Tom Randall

4.  CNN Money, December 5, 2006, “Investing after Pfizer’s flop – 3 strategies”, Michael Sivy

5.  Fox News, Dow Jones Newswires, February 01, 2011, “Pfizer Realigns Strategy As Generic Rivals Loom”, Peter Loftus

6.  CBO, October 2006, “R&D in the Pharmaceutical Industry”, http://www.cbo.gov/ftpdocs/76xx/doc7615/10-02-DrugR-D.pdf

7.  Pfizer Inc. 10-k Annual report pursuant to section 13 and 15(d), File Period 12/31/2010

8.  The Day, New London, Conn., Factiva, 15 March 2011, “Pfizer may be turning its attention to new drugs”, Lee Howard

9.  The Wall Street Journal: Europe, Factiva, 2 May 2011, “For Pfizer’s chief, there is life after patent expires for Lipitor”, Jonathan D. Rockoff

10. Dow Jones Newswires, Factiva, 8 June 2011, “Pfizer To Work With Boston Hospitals To Speed Research Efforts”, Jon Kamp

11. Pharmaceutical Technology: 11 July 2011, “Pfizer’s Biosimilar strategy”

Corporate social responsibility (CSR) initiatives have become a hot button issue in boardrooms.  Companies such as Walmart, Nike and Whole Foods are continuously finding ways to improve market share, increase revenues and build a believable marketing story on the back of a strategic corporate social responsibility program. Consumer goods giant, Unilever, is no different as its Chairman Niall Fitzgerald points out, “CSR is inherent in everything we do.”

On November 15, 2010, consumer goods global giant Unilever, which owns brands such as Lipton, Ben & Jerry’s and Dove, announced a new sustainability plan with very ambitious goals.  The firm is seeking to reduce the environmental impact caused by the manufacturing and usage of its products by 50% over the next 10 years.  In addition, they will be seeking to improve the health and wellbeing of more than a billion people world-wide.  Although the company has several other goals as part of its overall corporate social responsibility plan, four specific key initiatives including nutrition, waste, sustainable sourcing as well as health and hygiene center on these two goals.¹

Nutrition

The first social issue that Unilever is addressing is the growing obesity rates seen throughout countries worldwide.  Unilever is tightly aligning this social concern with its corporate strategy.  The company is focusing on improving the nutritional value of its food and drink products to help curb growing obesity rates, comply with government relations and enjoy first mover advantages.  Developing products that address obesity concerns common in both developing and developed nations Unilever is displaying product leadership as well as concern for society and the consumer. To achieve this goal Unilever is focusing on reducing four key ingredients in its packaged food lines. These ingredients include salt, sugar, saturated fat, and trans fat.  By focusing on making products more nutritious Unilever is hoping to provide healthier food to its consumers.

As governments worldwide have become increasingly concerned about the health effects of obesity various laws have been enacted and enforced to make processed foods more nutritious.  By positioning Unilever’s products to be compliant even before laws go into effect the company is capitalizing on first mover advantages in being able to comply earlier than the competition.

By reducing salt levels eliminating trans fat, reducing sugar and saturated fat along with increasing essential fat levels Unilever is heeding the guidance of nutritionists and doctors when shaping product contents.  This is in effort to reach acceptable government target levels. Unilever is investing in R&D, product sampling activities, marketing activities, and educational events to hit nutritional targets easily, making healthier products a reality as well as commercially viable.  The investment to reduce salt and sugar for instance is large because these two ingredients alter the flavor profile tremendously.  Investing in finding alternatives or recipes that reduce these will take years to accomplish and cost millions of dollars.

If the goal was simply to improve nutrition it would be unlikely that Unilever would invest in this initiative, but by integrating this CSR goal into its strategy the company can focus on improving its products along with reducing obesity rates.  By implementing this initiative the company is strategically advancing its products for the enjoyment and wellbeing of future consumers.

Waste

In seeking to reduce its environmental footprint, Unilever does not need to look very far because on any given day, two billion people around the world use a Unilever product.² Plus, every year, Unilever purchases two million tons of packaging.³ This makes for an exorbitant amount of waste produced by a single company.

As part of Unilever’s Sustainable Living Plan, the company set an ambitious goal of cutting the waste associated with the disposal of its products in half by 2020. To achieve this target, Unilever will implement the trusty three R’s plus an E – reduce, reuse, recycle and eliminate.

Consumers can already experience some of this waste cutting through the newly designed Dove, Rexona and Sure deodorant packs. This new pack is said to use 18% less plastic in each pack³. However, with over 400 products in its portfolio, Unilever has a long way to go to make its product more sustainable.

On its path to less waste, Unilever will face other challenges as well. Unilever needs outside help to cut in half product waste by 2020, either through NGOs, governments or new technologies.³ These outside relationships will not always come easy as Unilever products are sold in 180 countries, with a significant portion of these countries being emerging and developing markets that do not have the most favorable DEEPLIST (demographics, economics, environment, political, legal, informational, social, technological).

Furthermore, through this waste cutting process Unilever needs to remain ethical and not cut corners elsewhere to ensure higher profits. Back in April, Unilever, along with its main rival P.&G., were fined €104 million and $306 million respectively for price fixing laundry detergents in which their packages had recently been ‘greenified.’ The European competition commissioner, Joaquin Almunia, stated “They [Unilever and P&G] agreed to protect their respective market shares, they agreed also not to decrease price when decreasing the size of the packages, and afterwards they even agreed on a price increase.”⁴

For a company that boasts responsible and sustainable practices, this type of behavior could be severely damaging to its reputation.  For this reason Unilever needs to recognize the need to play fair in the waste conservation arena.

Sustainable Sourcing

As Unilever continues its social responsibility efforts to protect the environment, another area of focus has been sustainable sourcing of raw agricultural materials.  With its diverse product line, Unilever is one of the largest purchasers of specific raw materials worldwide, purchasing 12% of the world’s black tea in 2010.  Unilever has set a corporate goal of 100% sustainable sourcing by 2020, and has set benchmarks along the way, to make sure the initiatives are headed on the right track. Among these products and goals are:100% sustainable palm oil by 2015, 75% sustainable paper by 2015, 100% by 2020, 100% bagged tea sourced from “Rainforest Alliance Estates” by 2015, 50% of top 13 vegetables and herbs from sustainable sources by 2012 and move towards 100% cage free eggs for all products.

For a company of Unilever’s size there are some significant challenges in moving to sustainable sourcing.  Approximately 20% or the resources the company uses will be difficult to source sustainably, due to low volumes and unique growing environments.  Additionally, this plan does not include the company’s non-agricultural raw materials.  While Unilever has made a point to publish this information in its annual reports, consumers will have to wait and see what happens over the next few years.  This new direction may give the multinational corporation the support it needs to grow and succeed in the current market.

Health & Hygiene

Unilever is understands the power of clean.  Every year 3.5 million children die from diarrhea or acute respiratory problems often caused by poor hygiene.  A way to decrease these numbers is to stop the spread of infectious diseases.  The easiest way is to simply wash your hands.  Unfortunately, in developing countries throughout the world soap and clean water is not prevalent.  Basic sanitation and hygiene standards are low.

With strong global brands such as Dove, Pepsodent, Cif and Lever 2000 Unilever continuously strives to aid in personal hygiene on a global scale.  The company is working everyday to improve health and wellbeing throughout the globe by increasing awareness of its health and beauty products.  To aid in this initiative Unilever has created worldwide hygiene awareness programs.  By 2020 Unilever hopes to help more than a billion people to improve their hygiene habits.

From the beginning founder William Lever understood the market demand for good hygiene products.  In 1980 the brand Lifebuoy soap was launched in Victoria England.  This brand is now a market leader in developing nations like India where Unilever has instituted the hygiene education programs to teach the importance of good hygiene and hand washing.

Unilever is accomplishing this challenge through a three-pronged CSR initiative.  The organization is focused on reducing diarrheal and respiratory diseases, improving oral health and building the self-esteem of young people.  In order to meet these goals Unilever is using a combination of education classes and products to spread the knowledge of personal hygiene initiatives.  These initiatives not only promote healthy habits but also build an affinity in developing markets.  This ensures Unilever emerges as brand leader as countries develop.  Generating new revenue streams and changing the world for the better is no small feat.

Conclusion

Unilever has set the bar high for the implementation of its corporate social responsibility initiatives.  The plan has helped the company to clearly define its goals, which in turn support its business strategy of doubling sales in this same time period. Though many companies still struggle to see the link between society and business, Unilever approaches this idea of shared value with open arms. CEO, Paul Polman touts that, “We do not believe there is a conflict between sustainability and profitable growth.”

It will be critical for Unilever to develop partnerships with governments, NGOs and suppliers to achieve these goals because the company alone does not possess all the resources to accomplish such large feats.  Most importantly, Unilever will need help of its consumers. “Ultimately we will only succeed if we inspire billions of people around the world to take the small, everyday actions that add up to big differences – actions that will enable us to all life more sustainably..”

If Unilever is successful in engaging its stakeholders over the next 10 years, the company will be able to not just make a large and significant global impact, but also drive customer preference for its brands.  Through these initiatives, Unilever is developing new and innovative ways to solve both societal concerns as well as corporate business concerns.  These initiatives will help Unilever regain a competitive advantage in an intensely contested consumer goods industry in both the developed and developing countries.

References

(1)<http://www.unileverusa.com/mediacenter/pressreleases/2010/Unilever_Unveils_Plan_to_Decouple_Business_Growth_from_Environmental_Impact.aspx>. 2011. Web. 8/18/2011.

(2)<http://www.unilever.com/sustainability/?WT.GNAV=Sustainability>. 2011. Web. 8/18/2011.

(3)<http://www.uslp.unilever.com/wp-content/uploads/2010/10/UnileverSustainabilityPlan2.pdf>. 2011. Web. 8/18/2011.

(4)<http://www.nytimes.com/2011/04/14/business/global/14cartel.html?_r=1&ref=unilevernv>. 2011. Web. 8/18/2011.

By Kedar Chakradeo, Virginia Roberts, Robert Thompson, Aaron Wood, Steven Young

Background
Behind every great company lies the human creativity, skill set and innovation that brings its products and services to life.  These intangible assets have never been more critical than they are today for large technology companies like Google.  With the pace of technology growing at an ever-increasing rate, investors are left wondering which company will be able to attract and retain top talent in the field to give an edge over competitors.  Compounding the issue is the mismatch of talent needs compared to a limited pool of new graduates in the industry.  While the number of computer science degrees awarded in the US has been trending downward since 2004, the demand for a strong IT workforce is now greater than ever.  In Silicon Valley alone, tech job listings have increased 40% year over year.[1]  Consumer and investor expectations for accelerated growth in new web-based ventures are turning up the pressure for companies to acquire new talent fast.  Additionally, employee retention is becoming increasingly important as a protective measure against poaching from competitors or losing staff to their own entrepreneurial start-up ventures.  If Google doesn’t take a new strategic approach to its talent acquisition and retention efforts soon, it could lose even more ground on this front. 

New Talent: A Powerful Investment

One of the key components in sustaining Google’s profitability has been investing in its staff.  Growing from 40 employees in 1999 to over 20,000 employees today, Google has always considered the talent of the organization its most critical asset and a competitive advantage.  Its initial public offering in 2004 for $1.67 billion made Google a corporate giant and a haven for talent.[2] In 2007 and 2008, the company was ranked #1 by Fortune magazine as the best company to work for.[3]  

In order to maintain this important focus on talent, Google centers on its recruiting process by investing significant funds to attract and retain the best talent.  The company has created its own centralized operation for recruiting with 11 distinct roles that perform specific actions. For example, Google utilizes college campus recruiters to target university students, as well as candidate screeners who narrow down selected candidates before coming onsite for an interview.[4] 

Once a candidate becomes a “Googler” (Google employee), the focus on talent does not end.  Google’s management philosophy highlights talent development.  From new hires to veterans, all employees are put into challenging situations, many times beyond what they think they can achieve.[5]  By continuing to challenge their employees while supporting them along the way, Google continues the development of a talented workforce that is constantly improving their abilities and their performance.  Google understands the needs of its employees and presents them with the opportunities and environment to do the work they enjoy most.  The company focuses on creating an environment where the employees are  “working on interesting projects, learning continuously, constantly challenged to do more and feeling that they are adding value”.[6]                                  

Google’s work environment is intentionally structured to mirror a college atmosphere where work tasks are blended with social aspects to create an informal, unstructured community of colleagues with high energy and vibrant personalities.   This environment is especially present at its “Googleplex” headquarters in Mountain View, CA, although these same aspects of Google’s culture are present at its offices throughout the world.   Google realizes the importance of this to its employees, potential employees, and the company’s success and has even created a position called the Chief Culture Officer whose job is to maintain the culture and work environment in alignment with the core values established when the company was founded.[7]  Google’s culture and focus on attracting and maintaining the best talent is present within Google’s top 10 reasons to work at Google which include “Appreciation is the best motivation”, “Work and play are not mutually exclusive”, and “We love our employees, and we want them to know it.”[8] 

Additionally, Google offers employees an extraordinary set of benefits and perks including an excellent salary.   Google software engineers make an average $107,740 including salary, bonuses, and other related pay which is very competitive.[9] Many of its benefits go above and beyond standard industry practices.  For example Google allows employees to bring dogs to work; they have an on-site doctor, free massage and yoga, free snacks and drinks, free gourmet meals, on-site gym, on-site car washing, on-site laundry, extended maternity and paternity leaves, and valet parking for employees.  The company is also famous for offering employees  ITO (Innovation Time Out) which allows staff to dedicate 20% of their working hours to whatever project interests them.  Gmail, AdSense and Orkut are just some of the innovations created because of this time. [10] Word of mouth about Google’s perks has helped to attract new graduates that view the company as a mecca for techies.  However, Google’s successful practices have not gone unnoticed by its competitors. 

The Competition Heats Up

In 2009 Google gave a 10% across-the-board raise that was worth about $850 million. This offering topped industry salary raises, which went up 5% – 10% that year.  However by 2010, Erik Tseng, a protégé of Google’s CEO Erik Schmidt and the head of Android development, left Google to join Facebook.[11]  That same year Google was faced with another harsh reality as Fast Company declared Facebook the most innovative company in the world, ahead of Google, Apple, and Microsoft.[12] These actions showcased that Google’s halo effect was starting to dim with the advancement of its rivals, especially Facebook which offers employees an exciting new product with which to develop a social networking platform.  

Another challenge that Google faces is competing with startup ventures from former employees.  Over the last five years, former Google employees have launched at least 13 new social sites.  These sites combined have already generated over $300 million in investment funding.[13] For example, Paul Bucheit—the creator and lead developer of Gmail; Bret Taylor— leader of 25 product launches at Google including Google maps; Kevin Fox—user experience designer for Gmail, Google Calendar, and Google Reader all have joined a small 8 employee team for FriendFeed—a small tech startup where they set their own hours and their own culture.[14] Growing startup companies like these also have the advantage to lure current and future Google employees away by offering pre-IPO stocks, something Google cannot compete with anymore as it is now a public company.

With the shortage of qualified engineers, the hiring wars between high tech companies have intensified. Employees hold the power to determine which company will best meet their needs.  Loyalty to one company is low, and the attraction to new challenging projects and more lucrative offers from rival companies are often times enough motivation for employees to find work elsewhere.

Google, which has typically been a hot destination for techies over the years, has now found itself in a situation where it has to defend itself against this type of poaching from competitors.  The company that used to be new and exciting now faces the risk of turning into a safe company.  Google needs to desperately reinvent itself if it wants to survive in this ever-evolving industry.[15]  Investing in new initiatives such as Google+ and the impending purchase of Motorola Mobility are two ways that Google is combating this problem. Google+ is opening the door to allow employee innovation in the world of social media, and acquiring rivals like Motorola Mobility will decrease competition while gaining new talent in the mobile field.

Ways to Win the Talent War
In order to continue to build market share and protect its reputation of employing innovative technology leaders, Google needs to enact changes quickly. The following three tactics can help ensure a successful future for a strong workforce of future Googlers: 

1) Add a more structured mechanism for individuals and teams to further develop ideas through coordinated decentralization.  Google was built by the freedom to develop new ideas; but, Google’s company growth has made maintaining an innovative work environment with individual autonomy a significant challenge.  Many employees are leaving Google to commercialize their ideas by creating new startup companies or joining existing competitors.  Many employee ideas are not being heard or are getting left out of the current Google innovation machine.  Google needs to implement a new system that will better manage its innovation engine by implementing a mechanism that will allow employee creations to be fairly and consistently evaluated.   Google is made up of a variety of business areas so it would make good sense to allow for decentralization of this structure so that the different business segments could better evaluate the new ideas and determine the appropriate development track.  Google should also implement an evaluation segment for new research and development areas that do not align with the existing businesses.  This would allow new idea creators to take their ideas to the next level while also be evaluated in a consistent fashion for continued development and commercialization.  The creators would have to perform a similar function as a standalone company in acquiring investments and financial backing so this should not detract from individuals keeping the ideas within the confines of Google.  Also, Google should allow for the involved individuals and/or teams to gain additional special financial benefits for creating, developing, and commercializing the ideas.

2) Enter the social network space full force. Google + and tying employee bonuses to social media success[16] are a start which should disrupt Facebook’s lead in this area and will limit the associated draw of talent by Facebook.  The social network space is growing rapidly from a consumer uptake standpoint and the associated potential for new software applications stands to be very lucrative.  This potential has attracted the attention of many software developers and engineers; and, as a result, has pulled existing employees and potential talent away from existing companies such as Google to companies more focused on social network applications such as Facebook and LinkedIn.[17]  Social networking and media software development is also attracting the attention of college graduates across the globe who want to immediately work on the “hot” software application areas and further expand the reach of these technologies.  Google needs to continue to remain on the cutting edge and embrace the social network space to attract the best and the brightest talent as well as grow the business.

3) Expand benefit and perk package to attract and retain experienced middle to older generational talent. Incorporate associated facets to the work environment and culture to include these age groups in the company’s inner workings.  The existing package is significantly geared toward the younger generation and may miss on experienced talent available from academia and other companies.  Google can not only rely primarily on college hires and then develop them in-house.  Google must branch out to capture experienced talent that is already involved in developing state-of-the-art software applications.  Google should also consider strategic acquisitions to obtain experienced specialized talent from startup companies.    Many startup companies are not only developing unique applications with commercial promise; but, they also contain internal research and development expertise that could benefit Google with related application development.

[2] “Google History”. 2011. http://www.google.com/about/corporate/company/history.html

[3] CNNMoney; “100 Best Companies To Work For”.  2008; http://money.cnn.com/magazines/fortune/bestcompanies/2008/snapshots/1.html

[4] “Hiring Process”. 2011. http://www.google.com/intl/en/jobs/joininggoogle/hiringprocess/index.html

[5] “Our Philosophy”. 2011. http://www.google.com/about/corporate/company/tenthings.html

6 “A look inside the Google talent machine”. HC Online. July 25, 2006.  http://www.hcamag.com/resources/hr-strategy/a-look-inside-the-google-talent-machine/112999/

[7] Kuntze, Ronald and Matulich, Erika.  “Google:  Searching for Value”, Journal of Case Research in Business and Economics, 2010.  www.aabri.com/manuscripts/09429.pdf

[8] “Top 10 Reasons to Work at Google”.  2011.  www.google.com/intl/en/jobs/lifeatgoogle/toptenreasons/index.html

[9] O’Dell, Jolie.  “Who is Winning & Losing in the Tech Talent Wars?”.  Mashable, June 17, 2011.  http://mashable.com/2011/06/17/tech-talent-wars/

[10] Sawers, Paul. “What it’s like to work at Facebook”. TNW, May 15, 2011. http://thenextweb.com/facebook/2011/05/15/what-its-like-to-work-at-facebook/.

[11] Kennedy, John. “Facebook and Google’s real battle will be talent. Silicon Republic, April 1, 2011.  http://www.siliconrepublic.com/careers-centre/item/19780-facebook-and-googles-real.

[12] Sawers, Paul. “What it’s like to work at Facebook”. TNW, May 15, 2011. http://thenextweb.com/facebook/2011/05/15/what-its-like-to-work-at-facebook/.

[13] Van Grove, Jennifer. “Which Tech Giants Birth the Most Successful Startup Founders?” Mashable, July 27, 2011. http://mashable.com/2011/07/27/startup-founders/

[14] “Google Talent Gone to Startups”. Netpaths. http://www.netpaths.net/blog/google-talent-gone-to-startups/

[15] Manuel-Logan, Ruth. “Facebook Poaches Yet Another Googler, Tom Stocky”. July 12, 2011. http://www.allfacebook.com/facebook-poaches-yet-another-googler-2011-07

[16] Parr, Ben.  “Google’s Earnings: 4 Takeaways”.  Mashable, April 15, 2011.  http://mashable.com/2011/04/15/google-earnings-takeaways/

[17] “The Biggest Talent Losers (and Winners)”.  Topprospect blog, June 2011.  http://blog.topprospect.com/2011/06/the-biggest-talent-losers-and-winners/

Walking down Lexington Avenue in Midtown New York, the strand of high-end clothing brand name stores is seemingly endless. But there is one store that sticks-out somewhat amongst the fashion icons. The Zara store welcomes visitors with inviting windows and an open store layout that is only trumped by the fresh fashions and affordable price tags occupying the shelves. Zara Inc. is the flagship brand of Inditex, a European conglomerate of name clothing brands. Zara stores have become commonplace in fashion centers outside of the company’s home country of Spain. Known for their youthful styles and bright, inviting stores, Zara has taken the fashion and financial world, by storm.

Zara operates a vertically integrated business model in an industry known for outsourcing, controlling both their production and distribution in-house. The result is that Zara has control over its entire supply chain, resulting in a rapid offering of new styles while retaining affordable pricing for consumers. Zara’s business model encourages store managers, employees, and fashion-conscious staffers to identify fresh styles first and quickly push them into evaluation. If a style fits with the company’s target consumer markets, Zara can almost immediately begin to manufacture new clothing because of their vertical integration. The result is that Zara is always on the cutting edge of style. Financially the results have supported the company’s strategy, as sales have boomed to 8 billion Euros in 2010, up from 7 billion in 2009, and the company has even loftier goals in the coming years.

New Challenges

While Zara has excelled in Europe and the Western Hemisphere the world is calling for Zara to spread its wings outside of its traditional markets. Seeing this opportunity, Zara has established some lofty goals for growth. Even during the global recession, Zara grew its business by opening up 95 new stores worldwide.1  Zara recently opened up a store in India and Australia, and will soon enter South Africa, Taiwan and Peru. While there is ample opportunity in rapid growth there are also opportunities for serious blunders. Zara now has a set of new strategic challenges.

Zara has performed well in its current markets, which make-up 66% of the EBIT returns for Inditex. This is a substantial portion of the parent company’s earnings however future opportunities for the company are clearly in the developing markets of Asia and the eastern hemisphere. Zara’s footprint places 72% of their stores in Europe and the Americas, and yet the growing consumer base is in Asia where only 13% of their stores are currently located.
In order to penetrate these new markets, Zara must be strategic in executing their current business model abroad. While vertical integration worked extremely well for Zara in Europe, their existing distribution system will not extend efficiently into new markets. The sheer distance between their operations in Europe and the markets of the eastern hemisphere add real logistical complications, but more importantly, different cultures and trends will pose dramatic challenges. Zara will need specialized teams to study local markets so they can better pinpoint local trends and demand. In order to be successful in these newer markets, Zara will need to invest heavily to duplicate its vertical integration system in these regions. Otherwise, it will be difficult for Zara to maintain its fast fashion mantra.

Duplicating their business model however creates a new set of problems; (1) difficulty communicating cohesive messages and strategies, (2) difficulty finding inexpensive labor (3) investment requirements will drain cash reserves. Resourcing inexpensive labor is a prominent issue. Zara manufactures 50% of its apparel in Portugal, and the rest in Asian, African, and South American countries. 2 Zara’s reliance on outside labor resources will increase if their vertical business model is duplicated in other regions. China has been a solution for many companies over the years, but as China moves up the value chain, it is no longer a viable solution. Countries like Vietnam and Cambodia are still cheaper solutions, but they don’t have comparable infrastructure to easily support large scale operations like Zara. 3 Zara will ultimately have to pay higher wages and heavily rely on their vertically integrated business model to minimize cost.

The competitive landscape is shifting for the retail industry as the price of cotton has risen steadily throughout 2011. Though the price of cotton has fallen in recent months from the 140 year high of $2.30 USD/pound in March of this year, it is still almost double last year’s price at this time (July 2011 reported $1.50 USD/pound). 4 The reason for the rising costs have been attributed to a drought in China, the number one world cotton producer, at the end of 2010 which delayed planting of the new cotton crop as well as unseasonal rains in India, the second largest world cotton producer. 5 With a global shortage of cotton, suppliers have been able to demand a premium.

Companies like Zara, who offer high fashion clothing at a low cost, are unable to pass on rising cotton costs to customers. A critical ingredient without substitute, the label on one pair of Zara trousers shows a 75% cotton composition. 6 Though Zara has not publically announced the impact of increased commodity costs on their profits, it is safe to assume that, all things being equal that Zara will have a difficult time maintaining their outstanding year-on-year profit growth in 2011. From 2009 to 2010 Zara experienced a 39% increase in earnings while sales increased only 14%. 7 Continued retail store expansion alone will likely be unable to maintain Zara’s profitability growth as the world sees more and more volatility in commodity prices like cotton. The challenge to Zara is to determine how much they can influence and stabilize their cotton supply limiting price volatility and potential shortages. Zara is also challenged to maintain their market position as a low cost, high fashion retailer while their variable costs, like cotton, increase.

The Path Forward
Economies everywhere are struggling through a slow recovery. As this struggle unfolds, it’s painfully obvious that no one country will recover without the recovery of neighboring economies. This common struggle illustrates like never before how interdependent many nations are to each other. Companies are waking up to the fact that the game has changed, making the current environment both a scary and exciting time to be at the helm of a company. Zara is not exempt from this worry. As a fashion leader in the western world, they must develop strategic tactics to maintain their Blue Ocean position.

The question is not whether Zara should expand into the rest of the world, but how Zara expands while maintaining their core strengths. This means that Zara should progress into new markets quickly, orderly, and with discipline, while concentrating on key regions first. The progression of fashion retailers into the developing world will require a strong understanding of the culture and heritage of the region they are entering. Zara needs to not only send teams of seasoned western designers but they need to cultivate fashion professionals in any country they plan to enter. Zara needs to find people with the same “passion for fashion” in the new regions they wish to enter; people with a strong sense of fashion but that are a product of the country they are entering. These people need to be folded into teams with Zara’s current designers to form regional cells that will allow Zara to produce new products that are cutting edge but are more in-line with local tastes. This will allow the stores they open in new markets to provide both the western fashion that they are famous for as well as more locally oriented fashions side by side in the same store. This could also have a reverse effect where some of the “local” fashions flow back into western markets.

Rising material and labor prices are a challenge that all manufactures are facing. Zara’s vertical strategy is well placed to take advantage of these inevitable price hikes. Everyday companies are waking up to the fact that consumers expect them to be socially responsible in ways that management never even could have envisioned. Society expects big business to contribute to its well being as much big business needs a healthy society to prosper. Zara should keep this in mind as it enters these new markets. Their success comes from being a fashion leader with an eye on low prices. They are not by any means driven by low prices and low prices alone. They have an opportunity to position themselves as a member of the community in whichever region of the world they plan to enter; pay workers a wage based on living standards of that particular country; attempt to buy cotton locally even if it’s a bit more expensive; provide local citizens with fashion and design education programs to develop talent and provide locals an opportunity for a career with Zara. This may slow profit growth initially but will pay dividends in the long run. Middle classes are springing up all across the developing world and a fashion company that sells to them and is also a socially responsible will be well placed in the future.

Amancio Ortega, Zara’s founder, views advertising as a distraction and that belief has added prestige to the Zara brand. But in this day and age, with Twitter, Facebook, Google+, and whatever social network they will invent tomorrow, a good social relationship with the global community can be more valuable than any amount of money spent on advertising. That is how Zara should present itself – a forward leaning fashion retailer that works in and with the local community in ways that are beneficial to society as well as to the company’s bottom line. Zara can do that while sticking to their small-batch, cutting edge fashion and the advertising will take care of itself.

The progression into these new markets will have to happen in an orderly manner. Parts of the developing world have the customer base in place and are ready while others still have a ways to go. Zara needs to be careful in its selection process and make sure they focus on areas of the world that have a customer base to support their stores. Zara must remember also that for true integration into a new society you cannot cookie cutter your current model into a new location. Instead Zara will need to take the time to learn about the places they are entering and form a strong plan for how to make a profit from being a good neighbor.

Sources
1 http://www.businessweek.com/globalbiz/content/aug2009/gb20090826_715608.htm
2 http://www.forbes.com/sites/andersonantunes/2011/08/17/zara-accused-of-alleged-slave-labor-in-brazil/
3 The Sunday Telegraph (United Kingdom): Cheap fashion is over, China warns West
4 http://www.wikinvest.com/stock/Gap_(GPS)
5 http://seekingalpha.com/article/278381-easing-cotton-prices-could-give-aeropostale-s-stock-a-big-bounce
6 http://en.cbf.net.au/Item/3668.aspx
7 Inditex 2010 Annual Report

Tesla’s Present and Future Challenges

Zero to sixty in 3.7 seconds. 245 miles on a single charge. Smooth, luxurious, and unique – a new zero emission car company that may change how we think about driving. Tesla – the ride of the future.

esla Motors was founded in 2003 by a team of engineers whose overarching goal was to “expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy,” according to Tesla’s CEO, Elon Musk. Tired of electric vehicles (EV) built for retribution, Tesla developed the beautifully crafted EV called the Tesla Roadster, combining both luxury and speed along with nearly twice the efficiency of the Toyota Prius. As Musk describes, “Tesla is breaking misconceptions about electric vehicles.”

The attention grabbing Roadster has changed the image of EVs and at the same time, increased the interests and demands of the affluent – such as George Clooney and Larry Page who are both owners of the Roadster. Tesla has been produced 2,000 plus Roadsters up until now and will stop its production in late 2011 to transition to the lower priced Model S, which is planned for production and release in mid-2012. The Model S is set to be priced at the $50,000 to $70,000 range. The Model S is an innovative five passenger, longer range sedan that is both powerful and stylish. The strong market potential of this vehicle could be a great building block to launch into the Model X series SUV. A variety of vehicles will widen Tesla’s market appeal and further perpetuate their need to penetrate the market. Tesla plans to release the Model X within 3 years and a $30,000 EV by 2015.

Although 2,000 cars and a $100,000 price tag is a small indent in the automobile industry, it is paving the future for what the EV could evolve into. This is all part of Tesla’s master plan to change the industry using revenues received from sales of its premium EV models to fund R&D to drive down costs, increase demand and production to make EV more affordable for everyone and eventually wean the economy off oil and gas.

Current Progressions

Tesla’s immediate challenge towards achieving its goal, and of which its success hinges on, is overcoming production mishaps. Tesla’s best record to date is producing 80 cars within a week. For Tesla to meet the Model S production challenge of 20,000 per year, they will need to increase weekly yield to 384 units per week. For a relatively young automotive company, this would be a significant increase given the available resources and experience, posing as a challenge for Tesla to overcome.

Recently, Tesla Motors purchased the former Toyota-GM auto manufacturing plant, New United Manufacturing Inc. (NUMMI) in Fremont California to house its production. NUMMI and its unionized auto workers, in its prime, were best known for efficiency and quality. Tesla aspires to overcome its Model S production challenges by replicating NUMMI’s success. Owning the plant is one thing, running it as efficiently as Toyota-GM was capable of, is another.

Will Tesla’s future include union labors and/or automation to house its production? With limited capital, union labor could offer the path of least resistance and allow Tesla to get its Model S production running quickly. It may also allow them to gain significant goodwill within the community, extending their brand image. EV production is completely different than its gas guzzling brethren. Significant training will be required to reduce human error to ensure consistency and quality of the Model S. The old NUMMI plant had union workers who were trained by Toyota’s manufacturing practices; Tesla has to start from scratch. In addition, union labor may eventually tie up significant revenue from its sales and potentially hamper its R&D and overall goal of producing a low cost EV.

Automation, on the other hand, will fit into Tesla’s overall strategy. It may require initial capital and set-up time, but it fits better with Tesla’s long term strategy. Manual labor within the production line is limited to the maintenance and programming of the production facilities. With automation, Tesla will gain significant flexibility with its production yield, efficiency, and quality, and can be easily modified and controlled. In addition to lower labor costs, there is also the added benefit of lower labor related issues allowing Tesla to focus its resources on achieving its goals.

If we are to assume that Tesla is able to overcome its production challenges through the utilization of automation in its production plan, then what other actions can Tesla apply to its strategy to further pursue its overall goal of producing more affordable EVs for the larger masses?

Potential Future Progressions

With Tesla’s current production of the Roadster, Tesla has established itself as the premier EV innovator in the sustainable automotive industry. By evolving the EV into a more luxurious, sporty vehicle, Tesla has wedged itself in line with BMW, Audi and Mercedes. Tesla has positioned itself as a brand that compromises nothing to advance technology or style.

However, the rub in Tesla’s blue ocean strategy comes in its plot to head down-market. A $30,000 price target exposes Tesla to an enormous market opportunity, but positions Tesla against a totally different set of competitors who already hold the economies-of-scale advantage (selling on volume) and have extensive, established dealer/service networks. The average new vehicle price-tag in the US market for 2010 was slightly over $29,000. Take Chevrolet and Nissan’s EV offerings: the Volt ($33,500) and Leaf ($25,000), respectively after Federal tax credit. These household brands have tremendous brand equity, very deep pockets and a much wider selection of vehicles to retain existing brand loyalty. Tesla’s strategy would imply that they have chosen to battle the dominant players in their home turf. What they might be overlooking is the fact that the rules of the game at this level can be very different. Many consumers purchase on familiarity, proximity and reliability. These consumers may not be core trendsetters nor highly fashion conscious and are used to making compromises on features for price.

By heading down-market, Tesla could confuse its budding core basis by alienating its brand image through the transition from a luxurious, exclusive brand to a more affordable and accessible brand. This move could create strains on high-level innovation which is required to keep premium brands at status quo, as Telsa’s resources could get tied up in shaving cost to squeeze into the “average budget” for a new car. Nissan already has first-mover advantage in the entry-level EV category with over 56,000 pre-orders of its “Leaf” EV model. In doing so, they will leap from a perfectly good arena with little-to-no direct competitors into a red ocean which will be teaming with fierce competition and tarnishing the brand that it has crafted.

Another issue with this strategy is the lack of involvement in industry relevant regulatory boards. So far, they have been piggy-backing on bigger players, such as Toyota, Nissan and European automobile companies to define and drive the standards for EVs. It was claimed that Tesla has been involved, but they do not have sufficient resources to fully contribute as dedicated members to the boards. Such work resulting in the collaboration of regulatory board members include the designing of a universal electrical plug to be used to charge all EVs, as well as the design of electrical smart grids that will handle the power consumption of mass charging on EVs.

Therefore, Tesla should consider reconstructing value added tactics to incorporate into their overall strategy to remain the industry leader of premier EV’s. To do so, Tesla should apply the Four Actions Framework.

• Raise: Tesla needs to continue to raise its level of innovation and the development of their proprietary technologies. Tesla also needs to increase their level of component supplies to the industry players that strategically align with Tesla’s brand. One such move was to source Toyota’s Rav-4 EV drive components, and another is the supply of their hi-tech batteries to Freightliner for the EV delivery vans. Although Tesla’s product line will include an SUV type of vehicle, the Model X, they have not shared plans in the horizon to make a compact SUV, like the Rav-4. By increasing their component sourcing line, they can expand their business, not only as an automobile producer, but as a key component innovator as well. This will allow them to pick their customers based on their threat to Tesla and continue to focus on advancing the core components that truly make EVs viable in the US market.
• Reduce: Many automakers must decide whether or not to focus on their premium brand or expand their lines into new avenues. For some automakers, such as Toyota, they chose to diversify and created a luxury brand under the parent’s infrastructure, such as Lexus. In this strategy, Toyota was looking to segregate its brand, so that it could cater to the price points and luxury of a larger group of affluent consumers. This strategy worked for Toyota because it was already operationally efficient in the automotive industry and had the means to diversify and attack its core competitors. On the other hand, Tesla is a start up company that employs a blue ocean strategy of technology and industry-firsts in EV designs.  Tesla has determined that instead of utilizing the concepts of Porters 5 Forces by entering a saturated market, it would do better to attempt its blue ocean strategy and make its competition irrelevant. Tesla must continue to focus on its technological capabilities to remain as a premium brand. As a result, Tesla will be able to continue targeting the affluent that look for innovation, but not necessarily price point. In this positive sum game, Tesla will be able to see the benefits of its blue ocean strategy for 10-15 more years, and its customers will benefit from the innovations in electric technology which sets their vehicles apart from any mainstream hybrids.
• Create: Tesla should continue to create and evolve other types of high-quality, feature-rich EVs targeted at the middle to upper class of consumers. They should also maintain a competitive price-point in-class, but build an unbeatable value proposition in their segment because keeping vehicles stylish, feature rich and performance-based allows Tesla to continue to compete with high-end brands such as BMW, Audi, and Mercedes. In doing so, they will be able to maintain their reputation and desirability while touting zero emissions, making the core of their business both beneficial and sustainable to the environment. As a strategic CSR initiative, Tesla should build strong partnerships with energy providers to solidify Tesla as the major player in the EV market. Through the use of cross-promotion and synergized public relations, Tesla will be able to continue to build their brand in the marketplace.
• Eliminate: It is important to remember that many successful blue ocean strategists find ways to make existing technologies more efficient, thus creating a niche market which can strive on innovation. In the EV industry, in which the practicality and simplicity of the charging process consumers face is often overlooked, charging EVs can pose to be a challenge because there are so many different charging modes that need to be designed into the process. While Tesla prides itself in EV technology, it should eliminate the need for cars to be charged in different electric modes. Tesla could diversify its product offering and perfect EV technology so that it is more efficient and practical for the consumers. In this sense, Tesla would be finding efficient ways to charge vehicles for its consumer, all the while maintaining its core blue ocean strategy of EV innovation and unique product offering. Since EV is still a fresh concept, industry standards will be constantly changing. For Tesla to better adapt to these changes and eliminate uncertainty as to the future of the EV, Tesla should dedicate resources and knowledge to help guide the EV industry to where they want it. In doing so, Tesla is better able to control the future of EV technology by taking the proactive approach rather than the reactive stance.

Tesla has many advantages as the innovator and dominant market player in the high-end EV industry. With a market packed with alternatives and a growing number of EV market players in the down-market segment; Tesla needs to focus its efforts on bringing excellent value to its customers. With its limited resources, network, and brand recognition, Tesla needs to cater to one segment, better than any other competitor is capable of, through performance and style. To protect their segment in the market and deepen their sales, Tesla needs additional models that meet the requirements of their current target segments.

Strategically, Tesla has the innovative advantage at present and can deepen and defend its edge by selling components to other cross-segment manufacturers to create consistent streams of revenue that will help fund future innovation. In a way, Tesla will be able to transcend segments without having to force their brand into another. This also creates a strong point of diversification in the Tesla brand as they evolve into a profitable, well-known US brand.  Only time will tell if Tesla’s current strategy will build or erode their market potential. While Tesla is still a small company relative to other EV providers, Tesla holds many “cards in the EV game.” How they play the hand they are dealt will determine how hard they have to fight to succeed in the mass automobile market. With well-placed resources and a properly crafted strategy Tesla has the potential to become a strong player in not only the ever-growing EV market, but in the overall automotive industry.

Tesla Roadster

Sources:

Dignan, Larry. “Tesla: Will it be America’s fourth automaker?” Smart Planet. 31 Mar 2011. Web. 19 Aug 2011.

Ingram, Anthony. “RAV4 EV not the only Tesla-powered SUV: Tesla’s ‘Model X’ due in 2014.” Venture Beat. 10 Feb 2011. Web. 19 Aug 2011.

Kim, Chan W. and Renee Mauborgne. “Blue Ocean Strategy.” Harvard Business Review.

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Musk, Elon. “The Secret Tesla Motors Master Plan (just between you and me).” TeslaMotors.com. 2 Aug 2006. Web. 14 Aug 2011.

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Schwartz, Ariel. “Watch Out, Tesla: Nissan has 56,000 Pre-orders for the Leaf EV.” Fast Company. 15 Mar 2010. Web. 19 Aug 2011.

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BOEING’S BEGINNING
Boeing began its journey in 1916 with three main business units and six subsidiaries: commercial airplanes, four integrated defense systems subsidiaries, and the Boeing Capital Corporation. With the rise of jetliner industry in 1950’s, Boeing has remained the industry leader up until recently. During the years after the 1950’s Boeing faced competition from McDonnell Douglas, a large US competitor, and in 1997 merged with them. Presently Boeing faces steep competition from Airbus, a European company, which is now considered its largest competitor in the commercial airline industry and in 2003 it outsold Boeing jetliners. Airbus is giving Boeing challenges in the market with its A350, a similarly advanced aircraft that boasts similar engine technology to the 787. Up-and-coming aircraft manufacturers such as Embraer and COMAC pose a threat on the horizon as their quality and technology gap continues to close.

Future Product Development
Although Boeing is involved in many different aspects of the aerospace industry, its main concentration throughout the years has been in the commercial jetliner industry. There are two main categories in the industry, short/medium range and long-range each with different seating and distance capabilities. Never before has a midsize aircraft had the distance capabilities for long-range use until the new Boeing 787. The 787 aircraft has two versions, the base 787-8 holds 200-250 passengers with the ability to fly 8,200 nautical miles and the 787-9 which holds 250-290 passengers and can go as far as 8,500 nautical miles. The long range of the new plane will allow the airlines to offer non-stop service for smaller planes where a larger plane could not be justified.

One of Boeing’s core competences is to understand what their customers want as well as understand what their customers’ customers want. The 787 aircraft allows airlines to fly further without stops, reduce fuel consumption by up to twenty percent, and carry more cargo. Airline operating costs are further reduced because smaller seating structure allows for more effective use of space. Environmental performance is improved while passengers will enjoy larger seats, bigger luggage bins, and more features such as Internet access and on-demand in-flight entertainment options. The fuselage of the new plane is made out of composite fibers that are significantly lighter than the traditional aluminum fuselages. This lighter weight fuselage enables Boeing to design larger windows that would be too heavy for traditional planes. Another benefit of the new plane is that the cabin can be humidified providing a more comfortable environment for the passengers. Humidification is not possible in aluminum planes due to corrosion.
The new plane is a radical shift from the traditional design that Boeing developed over almost one hundred years of airplane design and manufacturing. Company executives believed that the new plane was so different that they completely changed their business strategy based on the design of the new plane. The new strategy was called Vision 2016.

Vision 2016
Vision 2016 is a radical new strategy for Boeing where they decided to transition from an airline manufacturer to a “master planner, marketer, and snap-together assembler of high-tech airplanes” Boeing made the decision to sell many of its manufacturing plants and outsource a majority of the manufacturing of the plane. Their master plan was for Boeing to provide 35% of the structure and partner companies around the world would provide the remaining structure. Boeing would receive all the components and snap together the plane in three days to produce the finished product.

The plan is very revolutionary because one of Boeing’s core capabilities that they have developed over the years is the design and manufacturing of airplanes. They were now planning on outsourcing one of their core competencies to many companies throughout the world. Boeing wanted to use the experts in the business for advanced technologies, no matter where in the world they were located, to increase their competitive advantage.

Boeing outlined three main core competences in 2016 Vision it aspires to build on as a global aerospace company: detailed customer knowledge and focus, large-scale systems integration, and lean enterprise. The 787 will be the first aircraft in Boeing’s history produced under Vision 2016 will be 70% outsourced for manufacturing, which allows for other companies to take on financial risk along with Boeing. It is the first project to show its commitment to its more integrated and lean operating 2016 Vision.

Unanticipated Complications
Despite the good intentions and planning of Boeing, several issues have risen that have inhibited the success of their 2016 Vision and Dreamliner production.

Language barriers have come into play now more than ever. Each production facility uses its native language for planning and engineering. To be reviewed by Boeing engineers, everything has to be translated. Any work not completed at the designated production facility may travel to the next; therefore, a new set of installation plans need to be created for the different language. While English has been designated as the common language for the project, that is kept to the high level documents, as there is less of an interpretation error if the mechanic is using instructions in their first language.

Many of the partners that Boeing joined forces with had not been in airplane production before and some had never done such large scale productions. Boeing and its partners did not have a unified vision in terms of requirements, scope of work, or funding required to sustain the operation. Boeing went so far as to acquire or fund several of the partners or suppliers in order to keep production moving. Still many production delays have delivery dates years behind schedule and many airlines have switched part of their demand to Airbus or other manufacturers. Even American Airlines, an all Boeing airliner since 2009, switched some of its demand due in part to unreliable deliveries.

The most significant challenge is the learning curve that accompanies airplane manufacturing. Knowledge on manufacturing techniques and workarounds have been gathered over many years and must be passed down to each new technician to join the team. Since this tribal knowledge was not adequately documented, the necessary steps, requirements, and guidelines passed on to the partners and suppliers were often found to be insufficient or incorrect. Boeing mechanics, engineers and managers had no choice but to travel around the world to help partners with their production.

Competition on the Horizon
With the development of the new 787 aircraft and the implementation of the outsource directive, many executives believe Boeing has dug its own grave through the loss of intellectual property. In the past, Boeing held its “How to Build a Commercial Airplane” plans in secret, but now this information is given freely to companies working on the 787. Opponents believe that Boeing is essentially training future competition. Many of these companies reside in China, and openly voice desires to launch independent ventures into the aerospace industry.

Solution to Boeing’s Vision 2016 Woes
As we saw with the first application of Boeing’s Vision 2016 project on the 787, the plan did not go smoothly. It should have reduced development costs and time, but it increased them through delays and shortages. Vision 2016 is certainly a grand and admirable one, but the problems it has been experiencing seem to outweigh the benefits . We suggest vertical reintegration of key design and manufacturing competencies to give Boeing a tighter control over its intellectual property and production.

Reabsorb some manufacturing
Boeing only outsourced 35-50% of the 737 in production, yet outsources up to 70% of the 787. If its core competencies were manufactured by Boeing itself, this would reduce to around 50% outsourced. Since Boeings Tier 1 strategic partners outsource some parts to Tier 2 suppliers, the quality and capacity can suffer if they are not properly qualified. By reabsorbing the manufacture of key components, in-house quality systems can quickly approve part quality or assess issues and troubleshoot root cause sooner.

Vertical reintegration would also reduce supply chain risks. Japan manufactures roughly 35% of the 787 including the wings and part of the fuselage. While there were no major delays to the 787 directly caused by from the Fukushima reactor crisis in Japan, Boeing had to step in and carefully manage the situation so that smaller components that make up the modules could be sourced to prevent delays. Maersk, the world’s largest container shipping company reported delays in getting containers in and out of Japan when radioactive contamination was a concern and Hapag-Lloyd another large container shipping company pulled out of two ports over suspicions of contamination to crews, freight and equipment. While this disaster is certainly an isolated occurrence, as supply chain complexity increases, the possibility of disruption from disaster (natural or otherwise) increases as well.

Reabsorb key design points and retain trade secrets
Boeing’s wing design had long been considered one of its key advantages and highly guarded trade secrets. However, if Boeing gives too much proprietary information to its key partners in Japan that are manufacturing the wing module for them, they could turn into eventual competitors with the knowledge. As we saw above, outsourced design encountered a multitude of language and inconsistency problems. These key airplane features that are critical to top function of the aircraft should be managed closely. Therefore, Boeing should reabsorb the design and manufacturing functions over its key core competencies.

The Future of Being and Vision 2016
There is little doubt that Boeing will remain a key player in the world aircraft industry, but the Vision 2016 policy stretches the company out too far. The losses and delays caused by outsourced manufacture and design is still Boeing’s responsibility and can best be managed by reintegration. Boeing cannot simply be a company that “snaps-together” its airplanes if it does not have complete control over their design to start with. Eventually, Boeing can gradually relax its grip and allow more outside manufacturing, but it should still carefully manage its design and intellectual property trade secrets in order to stay at the top of the commercial aircraft industry.

References:
Richard Nolan and Suresh Kotha “Boeing 787: The Dreamliner,” HBS No. 9-305-101, (Boston: Harvard Business School Publishing, 2005), p. 11
Supply Chain Forum: International Journal, 2009, Vol. 10 Issue 2, p74-86, 13p, 4 Diagrams, 6 Charts, 1 Graph
Chart; found on p77
http://www.bloomberg.com/news/2011-03-18/boeing-works-with-japan-suppliers-to-prevent-delays-after-quake.html
http://www.google.com/hostednews/afp/article/ALeqM5h_kQK0WOnoOgrGvTZO7dJmiHj-Rw?docId=CNG.6426e8daf15657f3f0c24ada6c927552.531

The 787 Dreamliner