CHAPTER 12
Services and Nonprofit Organization Marketing
This chapter begins with the learning outcome summaries, followed by a set of lesson plans for you to use to deliver the content in Chapter 12.
• Lecture (for large sections) on page 3
• Company Clips (video) on page 4
• Group Work (for smaller sections) on page 5
Review and Assignments begin on page 6
• Review questions
• Application questions
• Application exercise
• Ethics exercise
• Video Assignment
• Case assignment
Great Ideas for Teaching Marketing from faculty around the country begin on page 15
LEARNING OUTCOMES
12-1 Discuss the importance of services to the economy
The service sector plays a crucial role in the U.S. economy. In 2014, service industries accounted for 68 percent of U.S. GDP and four out of five U.S. jobs. Services have unique characteristics that distinguish them from goods, and marketing strategies need to be adjusted for these characteristics.
12-2 Discuss the differences between services and goods
Services are distinguished by four characteristics. Services are intangible performances in that they lack clearly identifiable physical characteristics, making it difficult for marketers to communicate their specific benefits to potential customers. The production and consumption of services occurs simultaneously. Services are heterogeneous because their quality depends on such elements as the service provider, individual consumer, location, and the like. Finally, services are perishable in the sense that they cannot be stored or saved. As a result, synchronizing supply with demand is particularly challenging in the service industry.
12-3 Describe the components of service quality and the gap model of service quality
Service quality has five components: reliability (ability to perform the service dependably, accurately, and consistently), responsiveness (providing prompt service), assurance (knowledge and courtesy of employees and their ability to convey trust), empathy (caring, individualized attention), and tangibles (physical evidence of the service).
The gap model identifies five key discrepancies that can influence customer evaluations of service quality. When the gaps are large, service quality is low. As the gaps shrink, service quality improves. Gap 1 is found between customers’ expectations and management’s perceptions of those expectations. Gap 2 is found between management’s perception of what the customer wants and specifications for service quality. Gap 3 is found between service quality specifications and delivery of the service. Gap 4 is found between service delivery and what the company promises to the customer through external communication. Gap 5 is found between customers’ service expectations and their perceptions of service performance.
12-4 Develop marketing mixes for services
“Product” (service) strategy issues include what is being processed (people, possessions, mental stimulus, information), core and supplementary services, customization versus standardization, and the service mix. Distribution (place) decisions involve convenience, number of outlets, direct versus indirect distribution, and scheduling. Stressing tangible cues, using personal sources of information, creating strong organizational images, and engaging in post purchase communication are effective promotion strategies. Pricing objectives for services can be revenue oriented, operations oriented, patronage oriented, or any combination of the three.
12-5 Discuss relationship marketing in services
Relationship marketing in services involves attracting, developing, and retaining customer relationships. There are four levels of relationship marketing: level 1 focuses on pricing incentives; level 2 uses pricing incentives and social bonds with customers; level 3 focuses on customization; and level 4 uses pricing, social bonds, and structural bonds to build long-term relationships.
12-6 Explain internal marketing in services
Internal marketing means treating employees as customers and developing systems and benefits that satisfy their needs. Employees who like their jobs and are happy with the firm they work for are more likely to deliver good service.
12-7 Describe nonprofit organization marketing
Nonprofit organizations pursue goals other than profit, market share, and return on investment. Nonprofit organization marketing facilitates mutually satisfying exchanges between nonprofit organizations and their target markets. Several unique characteristics distinguish nonbusiness marketing strategy, including a concern with services and social behaviors rather than manufactured goods and profit; a difficult, undifferentiated, and in some ways marginal target market; a complex product that may have only indirect benefits and elicit very low involvement; distribution that may or may not require special facilities depending on the service provided; a relative lack of resources for promotion; and prices only indirectly related to the exchange between the producer and the consumer of services.
12-8 Discuss global issues in services marketing
The United States has become the world’s largest exporter of services. Although competition is keen, the United States has a competitive advantage because of its vast experience in many service industries. To be successful globally, service firms must adjust their marketing mix for the environment of each target country. Terms
LEARNING OUTCOMES
assurance inseparability public service advertisement (PSA)
core service intangibility reliability
credence quality internal marketing responsiveness
empathy mass customization search quality
experience quality nonprofit organization service
gap model nonprofit organization marketing supplementary services
heterogeneity perishability tangibles
LESSON PLAN FOR LECTURE
Brief Outline and Suggested PowerPoint Slides:
Learning Outcomes and Topics PowerPoint Slides
LO1 Discuss the importance of services to the economy
12-1 The Importance of Services
1: Services and Nonprofit Organization Marketing
2: Learning Outcomes
3: Learning Outcomes
4: The Importance of Services
5: The Importance of Services
LO2 Discuss the differences between services and goods
12-2 How Services Differ from Goods
6: How Services Differ from Goods
7: How Services Differ from Goods
8: When Services Are Assessed
LO3 Describe the components of service quality and the gap model of service quality
12-3 Service Quality
9: Service Quality
10: Components of Service Quality
11: Exhibit 12.1: Gap Model of Service Quality
LO4 Develop marketing mixes for services
12-4 Marketing Mixes for Services
12: Marketing Mixes for Services
13: Product Strategies for Services
14: Service as a Process
15: The Service Offering
16: Customization/Standardization
17: The Service Mix
18: Place (Distribution) Strategy
19: Promotion Strategy
20: Price Strategy
21: Pricing Objectives
LO5 Discuss relationship marketing in services
12-5 Relationship Marketing in Services 22: Relationship Marketing in Services
23: Relationship Marketing in Services
LO6 Explain internal marketing in services
12-6 Internal Marketing in Service Firms 24: Internal Marketing in Service Firms
25: Internal Marketing
LO7 Describe nonprofit organization marketing
12-7 Nonprofit Organization Marketing 26: Nonprofit Organization Marketing
27: Nonprofit Organization
28: Nonprofit Organization Marketing Activities
29: Unique Aspects of Nonprofit Organization Marketing Strategies
30: Objectives
31: Target Markets
32: Product Decisions
33: Product Decisions
34: Promotion Decisions
35: Pricing Decisions
LO8 Discuss global issues in services marketing
12-8 Global Issues in Services Marketing 36: Global Issues in Service Marketing
37: Global Issues in Service Marketing
38: Chapter 12 Video
39: Part 3 Video
Suggested Homework:
• The end of this chapter contains an assignment on the Pepe’s Pizzeria video and the Livestrong case.
• This chapter’s online study tools include flashcards, visual summaries, practice quizzes, and other resources that can be assigned or used as the basis for longer investigations into marketing.
LESSON PLAN FOR VIDEO
Company Clips
Segment Summary: Pepe’s Pizzeria
Pepe’s is a family owned and operated pizzeria in Connecticut. The original Pepe earned the nickname “Old Reliable” for his customer service, and his grandchildren carry out that value today. This video discusses the various ways that Pepe’s Pizzeria works to provide great, consistent service and why it is important.
These teaching notes combine activities that you can assign students to prepare before class, that you can do in class before watching the video, that you can do in class while watching the video, and that you can assign students to complete as assignments after watching the video in class.
During the viewing portion of the teaching notes, stop the video periodically where appropriate to ask students the questions or perform the activities listed on the grid. You may even want to give the students the questions before starting the video and have them think about the answer while viewing the segment. That way, students will be engaged in active viewing rather than passive viewing.
PRE-CLASS PREP FOR YOU: PRE-CLASS PREP FOR YOUR STUDENTS:
• Preview the Company Clips video segment for Chapter 12. This exercise reviews concepts for LO1, LO2, LO5, and LO6
• Review your lesson plan.
• Make sure you have all of the equipment needed to show the video to the class, including the DVD and a way to project the video.
• You can also stream the video HERE
• Have students review and familiarize themselves with the following terms and concepts: the importance of services; how services differ from goods; service quality; marketing mixes for services; and relationship marketing in service firms.
VIDEO REVIEW EXERCISE
ACTIVITY
Warm Up • Begin by asking students to make a list of the top ten companies or institutions with which they engage in exchanges (or buy from).
• Discuss what percentage of the companies on students’ lists is service-oriented. What are the implications for the economy?
In-class Preview • Review Exhibit 12.2, Core and Supplementary Services for a Luxury Hotel. Ask students, “What other firms’ services would fit such a graph?”
• Discuss the components of service quality.
• Review Exhibit 12.1, Gap Model of Service Quality. Ask, “How can marketers work to reduce those gaps?”
• Review the Company Clips questions. Remind students to keep the questions in mind while viewing the video.
Viewing
(Solutions below) 1. Would you classify Pepe’s (and other restaurants) as a service? Explain.
2. Outline Pepe’s pricing strategy for its service.
Follow-up • Have students revisit the Web site for Kodak’s graphic division (see Pre-Class Prep). Ask them to write a half-page report summarizing Kodak’s core and supplementary services.
• Divide the class into groups of three to five students and have each group brainstorm relationship-marketing initiatives for Kodak. When finished, have each group present its ideas.
Solutions for Viewing Activities:
1. Would you classify Pepe’s (and other restaurants) as a service? Explain.
Answer: Students can choose either position, but should support their position with terms and concepts from the chapter, with a particular focus on intangibility, inseparability, and heterogeneity.
Yes, Pepe’s and other restaurants can be classified as a service. While they provide food (a tangible product), the overall dining experience—including customer service, ambiance, and food preparation—is primarily a service. The interaction between staff and customers, along with the atmosphere created, plays a crucial role in the value offered, making it a service-oriented business.
2. Outline Pepe’s pricing strategy for its services.
Answer: Students’ answers may vary. Pepe’s pricing strategy seems to be a mix of revenue- and patronage-oriented pricing, although—like most businesses—some operations-oriented pricing is involved. Pepe’s must compete in the marketplace by matching its supply and demand by keeping prices low.
Pepe's pricing strategy for its services could include the following key components:
1. Value-Based Pricing: Set prices based on the perceived value of services to customers, ensuring they align with customer needs and willingness to pay.
2. Tiered Pricing: Offer different service packages (e.g., basic, premium, and enterprise) to cater to various customer segments and budgets.
3. Competitive Analysis: Regularly evaluate competitor pricing to stay competitive while emphasizing unique value propositions.
4. Freemium Model: Provide basic services for free with the option to upgrade to premium features, encouraging user adoption.
5. Dynamic Pricing: Adjust prices based on demand, seasonality, or special promotions to maximize revenue.
6. Loyalty Discounts: Implement discounts for long-term customers or bulk purchases to encourage repeat business.
7. Bundling Services: Combine related services at a discounted rate to increase overall sales and enhance perceived value.
By employing these strategies, Pepe can effectively attract and retain customers while maximizing profitability.
LESSON PLAN FOR GROUP WORK
In most cases, group activities should be completed after some chapter content has been covered, probably in the second or third session of the chapter coverage. (See “Lesson Plan for Lecture” above.)
• For “Class Activity – Nonprofit Organizations and Their Many Publics,” provide the information and the questions asked by the class activity.
• Application questions 3, 4, 7, and 8 lend themselves well to group work. For those activities, divide the class into small groups of four or five people. Each group should read the question and then use their textbooks, or any work that was completed previously, to perform the exercise. Then each group should discuss or present their work to the class.
Class Activity – Nonprofit Organizations and Their Many Publics
Nonprofit organizations serve several publics. Have students name five nonprofit organizations. They should then determine the respective publics of those organizations. After that has been done, break the class into groups. Have each group select one of the nonprofit organizations and determine the benefits that each of the identified publics desires from the nonprofit organization. They should then design a strategy to appeal to each of the concerned publics. After they have had time to do this, have them present their ideas and explain why they believe their approach will achieve their objectives.
REVIEW AND ASSIGNMENTS FOR CHAPTER 12
REVIEW QUESTIONS
1. Assume you are a manager of a bank branch. Write a list of implications of intangibility for your firm.
Answer: Although students’ answers will vary, they should address some of these points: Service intangibility creates a unique problem for marketers trying to convey the benefits of service products. Marketers of services should attempt to associate their products with tangible qualities or symbols that consumers can recognize.
As a bank branch manager, the implications of intangibility include:
1. Trust Building: Essential for customer confidence.
2. Quality Perception: Subjective assessments require staff training.
3. Marketing Challenges: Need for creative strategies to convey value.
4. Experience Focus: Enhancing customer experience is critical.
5. Employee Training: Continuous development for effective service.
6. Feedback Mechanisms: Important for assessing satisfaction.
7. Differentiation: Unique offerings needed to stand out.
8. Retention Strategies: Focus on personalized services to keep customers.
These factors shape how the bank delivers and improves its services.
2. Analyze a recent experience that you have had with a service business (for example, a hairdresser, movie theater, car repair, or restaurant) in terms of your expectations and perceptions about each of the five components of service quality.
Answer: Students’ answers will vary. However, they should address the following five components of service quality: reliability, responsiveness, assurance, empathy, and tangibles.
I recently visited a restaurant, and here’s how my experience aligned with the five components of service quality:
1. Tangibles: The restaurant was clean and well-decorated, with a pleasant ambiance. The presentation of food was appealing, meeting my expectations.
2. Reliability: My order was delivered accurately and on time, reflecting a strong commitment to consistency and dependability.
3. Responsiveness: The staff was attentive and quick to address my questions and needs, enhancing my overall experience.
4. Assurance: The servers were knowledgeable about the menu and confident in their recommendations, which instilled trust in their service.
5. Empathy: The staff made an effort to personalize the experience, asking about dietary preferences and checking in during the meal.
Overall, my perceptions matched or exceeded my expectations across these components, leading to a satisfying dining experience.
APPLICATION QUESTIONS
1. To keep track of how service employment is affecting the U.S. economy, go to http://www.bls.gov/bdm/. Look at the right sidebar, which gives the latest numbers for Business Employment Dynamics. What trends to you see? Do the numbers support the information from the chapter?
Answer: 1. Job Creation: Look for increases in service sector jobs, indicating growth in employment.
2. Quits and Layoffs: Analyze turnover rates; higher quits may suggest employee confidence and demand for service jobs.
3. Industry Growth: Identify which service industries (like healthcare, hospitality, etc.) are expanding.
4. Seasonal Trends: Note any seasonal fluctuations, particularly in industries like retail and tourism.
These trends should align with information on the increasing importance of service employment in the U.S. economy, reflecting its role in overall job growth and economic health.
2. Over 25 years ago, Tim and Nina Zagat began publishing leisure guides containing reviews of restaurants. Today, the renowned Zagat guides still contain reviews of restaurants, but they also rate hotels, entertainment, nightlife, movies, shopping, and even music. Go to http://www.zagat.com. In your opinion, are Zagat survey guides goods or services? Explain your reasoning.
Answer: Reasons for service: Zagat guides provide information that consumers use to make decisions, and therefore the guides represent a form of mental stimulus processing.
Reasons for good: Zagat guides are a tangible product—books. The guide books cannot be described as intangible, inseparable, or heterogeneous. To some extent they are perishable, meaning that the information in them becomes obsolete as different organizations go out of business, new venues enter the market, and quality at the rated services changes over time.
3. Form a team with at least two other classmates, and come up with an idea for a new service. Develop a marketing mix strategy for your new service.
Answer: Here is an example:
The marketing mix for an auto-leasing company that specializes in inexpensive leases for college students:
• Product: two-to-three-year-old compact cars with low mileage, maintenance included
• Price: $99 to $129 per month on a two-year lease
• Place: franchises in college towns
• Promotion: college newspapers, radio stations, direct mail
4. For the new service developed in question 3, have the members of the team discuss how they would implement a relationship marketing strategy.
Answer: Internal marketing means treating employees as customers and developing systems and benefits that satisfy their needs. Happy employees are more likely to deliver high-quality service. Internal marketing activities include competing for talent, offering a vision, training, stressing teamwork, giving employees freedom to make decisions, measuring and rewarding quality, and learning about employee needs.
5. Choose a service with which you do a lot of business. Write a memo to the manager explaining the importance of internal marketing and outlining what factors internal marketing includes.
Answer: The memo should include the following: definition of internal marketing (treating employees as customers and developing systems and benefits that satisfy their needs) and factors that should be included in internal marketing (competing for talent, offering a vision, training employees, stressing teamwork, giving freedom to make decisions, measuring and rewarding good service performance, and knowing employees’ needs).
6. Return to http://www.zagat.com and investigate what the site offers. How does Zagat propose to help companies do internal services marketing?
Answer: Zagat has a corporate sales division that publishes special editions of its products for business clients to give to their customer and employees. They also sell bulk-rate subscriptions to companies to pass along, as well as handheld devices preloaded with Zagat reviews of attractions, restaurants, and lodgings around the world.
7. What issues would you have to think about in going global with the new service that you developed in the questions above? How would you change your marketing mix to address those issues?
Answer: Answers will vary depending on what kind of service was developed previously. However, some issues that students should consider are: 1) the political, legal, and regulatory issues in global business (differences in regulations, the type of political system in place, etc.); 2) economic issues (type of economic system in the foreign country, the current economic cycle, inflation rates, currency exchange, etc.); 3) cultural issues (what does customer service mean to the residents of the foreign country?); and 4) competitive issues (who are the competitors—both foreign and domestic—in those countries?) Then students should apply those environmental factors to change their marketing mix, if necessary.
When going global with the new service, consider the following issues:
1. Cultural Differences: Understand local customs, preferences, and consumer behavior to tailor the service accordingly.
2. Regulatory Compliance: Familiarize yourself with local laws and regulations affecting service delivery and business operations.
3. Market Entry Strategies: Decide between direct investment, partnerships, or franchising based on market conditions.
4. Language Barriers: Ensure communication materials are translated and culturally relevant.
5. Competition Analysis: Research local competitors to identify gaps and differentiate your service.
To address these issues in your marketing mix:
1. Product: Adapt the service features to meet local needs and preferences.
2. Price: Adjust pricing strategies to reflect local purchasing power and competition.
3. Promotion: Utilize culturally relevant advertising and choose appropriate channels for outreach.
4. Place: Consider distribution methods that suit the local market, whether online, physical locations, or partnerships.
By customizing the marketing mix, you can better align the service with the global market's demands and preferences.
8. Form a team with two or three classmates. Using the promotion strategies discussed in the nonprofit section of this chapter, develop a promotion strategy for your college or university.
Answer: Four promotional strategies for dealing with the unique features of services are:
• stressing tangible cues
• using personal information sources
• creating a strong organizational image
• using post purchase communication
APPLICATION EXERCISE
All people know quality when they see it—or do they? Let’s take a look at some goods and services and then think about assessing their quality. For this exercise, work in teams of two to three and discuss each item before determining its final placement.
Activities
1. Using the abbreviations in parentheses, place each of the following products and services along the continuum below: a new car (C), designer jeans (J), car oil change (O), dress dry cleaning (D), haircut (H), tax preparation software (T), college education (E).
100% physical good 100% service
2. Once you have placed the items along the continuum, consider how easy it is to assess the quality of each item.
Easy to assess quality Difficult to assess quality
3. What assumptions can you make about the ability to assess the quality of goods compared to services? Is it easier to assess the quality of some goods than others? What about for services?
Purpose: The purpose of this exercise is for students to think experientially about how difficult or easy it is to rate products and services according to their quality.
Setting It Up: The activity above provides three questions, two of which are each supported by a continuum. Students place a given set of products or services on each continuum, according to the ease with which their quality can be assessed. This activity will work well in pairs or small groups to allow students to discuss their reasoning.
This exercise was inspired by the following Great Idea in Teaching Marketing:
Stacia Wert-Gray, University of Central Oklahoma
Gordon T. Gray, Oklahoma City University
ASSESSING SERVICE QUALITY
Students sometimes do not understand why service quality is difficult for consumers to assess. This exercise illustrates that physical goods are generally easier to evaluate (for quality) than services.
Recognizing that most product offerings are a blend of physical goods and services, each student is asked to position seven products on a scale ranging from “100% physical good” to “100% services.”
Break students into two- or three-person groups. Provide them with the following worksheet and instruct them to place the letter for each of the products listed in the appropriate position on the scale.
All people know quality when they see it—or do they? Let’s take a look at goods and services and then at assessing their quality. For this exercise, work in teams of two or three and discuss each item before determining final placement.
Activities
Using the following abbreviations, place these products and services along the continuum: a new car (C), designer jeans (J), car oil change (O), dress dry cleaning (D), haircut (H), tax preparation software (T), college education (E).
When groups are finished, the instructor should fill in the class worksheet with input from the groups. The class worksheet often looks something like the following:
100% physical good 100% service
C J O D H E T
Each group is then asked to position the same product offerings on the following scale, which addresses how easy it is to assess the quality of each product.
Easy to assess quality Difficult to assess quality
When the groups are finished the instructor should fill in a class worksheet with input from the groups. The class worksheet often looks something like the following:
Easy to assess quality Difficult to assess quality
C J H D O E T
During the class discussion after completion of the two exercises, the instructor may emphasize at least two important aspects of service quality and consider the implications for marketing practitioners.
1. Assessing the quality of physical goods is usually easier than assessing the quality of products consumers consider services.
2. The quality of some services (e.g., a haircut) can be relatively easy to assess when compared to other services (e.g., tax preparation).
3. Many physical goods have a “service” component, and many services have a “physical goods” component.
ETHICS EXERCISE
Web sites such as cancerpage.com and CancerSource.com offer cancer patients sophisticated medical data and advice in exchange for personal information that is then sold to advertisers and business partners and used by the Web sites to create products to sell back to patients. Some argue that cancer patients visiting these sites are willingly exchanging their personal information for the sites’ medical information. Others contend that this kind of exchange is unethical.
1. Is this practice ethical?
Answer: One point that affects this issue is who actually owns the information once it is given out. Some say that an individual owns his or her data no matter where it is disseminated and has a right to privacy in areas that stretch beyond the original reason for the giving of the data. Others claim that once the data is imparted, the company or organization receiving the information is the owner of the data and can therefore use the data for whatever purposes it deems desirable. Clearly, the view you hold on the ownership of information will influence your assessment of this ethical dilemma.
One way out of the dilemma is through consent. The practice of selling personal data collected on the Web is only ethical insofar as the person whose data is being sold agrees. Selling an individual’s personal data without his or her approval violates the person’s privacy. In this situation, the patients are willingly exchanging their personal data for medical information, not for medical marketing. The companies involved should expressly indicate that they are collecting information for product development purposes, and/or ask the patients if they would like to receive information regarding new products and services that they may find helpful.
2. Does the AMA Statement of Ethics have anything to say about this issue? Go to http://www.marketingpower.com and review the statement. Then write a brief paragraph on what the AMA Statement of Ethics contains that relates to this scenario.
Answer: Although the AMA Statement of Ethics does not specifically mention selling of information, it does state that, “Information collected from customers should be confidential and used only for expressed purposes. All data, especially confidential customer data, should be safeguarded against unauthorized access.” That language puts the marketer in the position of trustee of the data—someone who has access and control over the data, but who also is responsible and accountable for it and its use as well. The obligation of the marketer in this role is not negligible.
VIDEO ASSIGNMENT: Pepe’s Pizzeria
1. In what category of processing does Pepe’s Pizzeria best fit?
A. People processing
B. Possession processing
C. Mental stimulus processing
D. Information processing
Answer: A
Pepe’s service (feeding people) is directed at the customer. Possession processing is directed at things owned by people. Mental stimulus processing is directed at people’s minds. Information processing is using technology directed at people’s assets.
2. What is the unit of service consumption that Pepe’s charges for?
A. Server’s attentive service
B. Waiting in line (the longer you wait, the less you pay)
C. Food and drink
D. Length of time sitting in a booth
Answer: C
The unit of consumption is how customers are charged for services. At Pepe’s (and all restaurants), you are charged based on the food and drink you order.
3. Based on what you heard in the video, what level of relationship marketing does Pepe’s Practice?
A. Level 1
B. Level 2
C. Level 3
Answer: A
While you could argue that Pepe’s offers excellent service as a value-add to their pizza, the main driver is the great pizza at the low price.
4. Jennifer Kelly discusses how she understands that grumpy customers are hungry—just like she gets grumpy when she is hungry. What component of service quality is she embodying?
A. Assurance
B. Tangibles
C. Responsiveness
D. Empathy
Answer: D
She is an empathetic server, providing excellent service and meeting customers’ requirements through empathy. Assurance is the ability of employees to convey trust. Tangibles would be the quality of the pizza she serves.
Jennifer does provide prompt service (responsiveness), but this question refers to her Empathy.
5. If a server is hired and does not provide customers drinks right away and serves the salad with the pizza, rather than with the drinks, which gap in service quality would this represent?
A. Gap 1
B. Gap 2
C. Gap 3
D. Gap 4
Answer: C
This scenario represents gap 3—the gap between service quality expectations (drinks right away, salad with the drinks, pizza when its ready) and service actually provided. Gap 1 is the gap between what customers want and what managers think they want. Gap 2 is the gap between what managers think customers want and the specifications they develop to provide the service. Gap 4 is the gap between what the company provides and what the customer is told they provide.
6. Of the promotion strategies listed, which best fits the strategy used by Pepe’s Pizzeria?
A. Engaging in post purchase communication.
B. Creating a strong organizational image.
C. Using Personal Information Sources.
D. Stressing tangible cues.
Answer: B
Pepe’s is known for its made-to-order family recipe pizza, made in the coal oven in an open kitchen. Their pizza box has an image of their founder. This is all part of creating a strong organizational image.
CASE ASSIGNMENT: Livestrong
Livestrong is currently one of the most visible and active charities in the world. It is consistently praised as resoundingly efficient and accountable; Charity Navigator recently gave Livestrong a rating of four stars (its highest) and a score of 64 out of 70 for its financial responsibility and its transparency. However, all is not well at Livestrong. For years, cyclist and cancer survivor Lance Armstrong has been the face of Livestrong—a living symbol of the organization’s commitment to empowering cancer patients to live to the fullest. Hundreds and thousands of individuals have given to Livestrong or bought a yellow wristband because they were inspired by Armstrong’s bravery in overcoming cancer and reaching the pinnacle of sporting success.
However, Armstrong is now a tainted symbol. After a thorough investigation, the United States Anti-Doping Agency presented a mountain of evidence showing that Armstrong not only used performance-enhancing drugs during his career, but that he was in charge of a systematic doping program that pressured teammates to use drugs as well. Based on this evidence (and later confirmed by Armstrong’s own admission), the USADA banned Armstrong from competing in any of its events, and the International Cycling Union stripped him of all seven of his Tour de France titles. Lance Armstrong was now no longer a symbol of triumph or perseverance; in most eyes, he was simply a cheater who got caught.
In the midst of this professional disgrace, Armstrong decided that he would step down as chairman of Livestrong. Though he would continue to be a member of Livestrong’s board, he would no longer have a role as its public face as he did for the past 15 years. This is, of course, was a huge blow to the organization, which lost its founder—and its best fundraiser.
Brent Schrotenboer, “USADA Release Massive Evidence Vs. Lance Armstrong,” USA Today, October 11, 2012, www.usatoday.com/story/sports/cycling/2012/10/10/lance-armstrong-usada-reasoned-decision-teammates-doping/1624551/ (Accessed March 26, 2013); David Wharton and Lance Pugmire, “USADA Report Details Case Against Lance Armstrong,” Los Angeles Times, October 11, 2012, http://articles.latimes.com/2012/oct/11/sports/la-sp-armstrong-doping-20121011 (Accessed March 26, 2013); “Fact box: State of the Lance Armstrong Foundations’ Finances,” Chicago Tribune, October 17, 2012, http://articles.chicagotribune.com/2012-10-17/business/sns-rt-us-cycling-armstrong-financesbre89g21g-20121017_1_testicular-cancer-lance-armstrong-foundation-austin (Accessed March 26, 2013); Krishnadev Calamur, “Lance Armstrong Admits to Using Performance-enhancing Drugs,” NPR, January 17, 2013, www.npr.org/blogs/thetwo-way/2013/01/17/169650077/lance-armstrong-to-admit-to-using-performance-enhancing-drugs (Accessed March 26, 2013); “Lance Armstrong Foundation,” Charity Navigator, www.charitynavigator.org/index.cfm?bay=search.summary&orgid=6570 (Accessed March 26, 2013); Lance Pugmire, “Lance Armstrong Quits Livestrong Post, Loses Endorsement Deals,” Los Angeles Times, October 18, 2012, http://articles.latimes.com/2012/oct/18/sports/la-sp-lance-armstrong-20121018 (Accessed March 26, 2013); “Where The Money Goes,” Livestrong, October 31, 2012, www.livestrong.org/What-We-Do/Our-Approach/Where-the-Money-Goes (Accessed March 26, 2013).
TRUE/FALSE
1. Disney’s decision to implement new rules banning junk food advertisements suggests a societal marketing orientation.
Answer: True
2. The junk food companies that want to advertise on Disney’s television channels likely have a sales orientation.
Answer: True
3. The type of advertisements a company chooses to broadcast on its television stations is inconsequential because marketing does not play a very large role in society.
Answer: False
Disney’s decision is consequential because marketing plays a large role in society.
4. The goal of junk food advertisers to encourage marketing, whereby people giving up something (money) in order to receive something they would rather have (junk food).
Answer: False
This defines an exchange.
5. Because it is sold at a low price, junk food provides high customer value.
Answer: False
Customer value is not simply a matter of low cost. A low-quality good selling for a low price does not necessarily provide value.
MULTIPLE CHOICE
1. Which of the following was likely not one of Disney’s considerations when determining its marketing concept?
A. Do our customers want to see junk food advertisements on our channels and Web sites?
B. How do junk food advertisements affect our long-term goals?
C. Will new stricter advertising rules distinguish us from our customers?
D. How do our television shows and Web sites affect our bottom line?
E. What do customers picture when they think about our television channels?
Answer: D
What a business thinks it produces is not of primary importance to its success. Instead, what customers think they are buying—the perceived value—defines a business.
2. If Disney allowed customers to choose which types of advertising they saw on its Web sites, it would be engaging in:
A. realistic pricing.
B. co-creation.
C. offering products that perform.
D. giving the buyers facts.
E. providing after-sales support.
Answer: B
Co-creation allows customers to help create their own experiences.
3. Disney customers’ evaluations of the company’s Web sites and television channels in terms of whether those products meet their needs and expectations is called:
A. customer gratification.
B. customer fulfillment.
C. customer approval.
D. customer agreement.
E. customer satisfaction.
Answer: E
The customers’ evaluation of a good or service in terms of whether that good or service has met their needs and expectations is called customer satisfaction.
4. Which of the following describes a Disney customer service representative who has been given the authority to respond to a complaint about junk food advertisement by pulling the advertisement in question and flagging it for review by Disney’s marketing team?
A. The employee is empowered.
B. The employee is improving Disney’s customer relationship management.
C. The employee is working in a teamwork-oriented environment.
D. The employee is operating under a sales orientation.
E. The employee is opposed to junk food advertisements.
Answer: A
Empowerment is delegation of authority to solve customers’ problems quickly—usually by the first person the customer notifies regarding a problem.
5. Who at Disney needs to both be aware of and understand the company’s decision to impose strict junk food advertising rules?
A. The CEO.
B. The CEO and his chief advisors.
C. The CEO, his chief advisors, and the marketing team.
D. The CEO, his chief advisors, the marketing team, and the financial team.
E. Every businessperson at the company.
Answer: E
All businesspeople, regardless of specialization or area of responsibility, need to be familiar with the terminology and fundamentals of accounting, finance, management, and marketing.
GREAT IDEAS FOR TEACHING CHAPTER 12
Kay Blythe Tracy, Gettysburg College
SERVICE LEARNING AS A MARKETING PROJECT
Service learning benefits both the community and the students. This service learning project allows marketing students to put what they are learning in class into practice, and to see some of their ideas actually implemented, while providing much needed assistance in marketing to local not-for-profit agencies. Previous and current clients include the SPCA, Family Planning Center, WeeCare Day Care Center, YWCA, a rape crisis center, a shelter for battered women, Rural Opportunities (which helps migrant workers), and the Office of Aging.
Course Outcomes
Each student consulting group completes a written marketing research report for which they collect primary data on a research question important to their client. Findings are utilized in developing a marketing plan, which is provided to the service agency. An additional project requirement is production of at least one promotional item for the client, and providing specific information as to sourcing and costs for this item. A formal business presentation is made by each group to their client organization.
Client Responsibilities
For this project, potential clients (local not-for-profit agencies) are contacted and asked to participate. The client provides a one-page write-up with information about what the agency does, for use for preliminary assessment by the students. A representative of the agency comes to class and does a brief presentation (limited to five minutes), covering what the agency would want a marketing group to do for them. After selection by a student group, arrangements are made to have the students visit on-site with the client for eight hours, to allow the students to gather firsthand information about the agency. It is important that the client agencies be made aware that the service being provided is not “go-fer” or secretarial help, but a marketing plan that will include marketing research and one or more promotional items, and that this plan will be developed over the semester. At the end of the semester, the agency representative is asked to return to class for a formal presentation of marketing research results, the marketing plan, and the promotional item(s). Agency representatives have a folder of information, including a description of the program, what they can and cannot expect from the student consulting groups, who to contact in case of problems, and the semester schedule. Representatives are asked to keep a contact log, documenting the students’ initial time on-site and other visits or telephone calls.
Student Responsibilities
Before enrolling in the course, students are advised that it is a service learning experience, which will require a higher commitment of time and effort on their part than the standard marketing course. The syllabus indicates that course assignments will be tied to client service organizations’ needs, and that the project requires a tolerance for ambiguity, adjustment, change, and group work.
Students in the marketing class are divided into groups of three or four. They are given written client information prior to the clients’ visits to class, and the group makes a preliminary choice of their preferred clients. Actual client choice is done following the clients’ presentations in class, by a lottery system. Groups have previously drawn a number, and number one gets first choice as to the client they want to work with. At this first meeting with the client representative, contact information is exchanged, and a schedule to allow each student to be on-site at the client’s place of business for eight hours is established. The hours do not need to be consecutive, and the students can go individually at different times to accommodate their schedules. I build two free class periods into the syllabus as “compensation time” to allow the groups to go together for their first visit.
Student groups choose one of their members as the contact person. Groups are urged to have all communications with the client go through this contact person, who maintains a contact log.
Record Keeping
On their initial visit, clients are given a folder with project information. Clients and the student consulting groups keep logs (blank forms are provided), to ensure that a reasonable level of interaction is maintained. Clients are contacted by mail about mid-semester with a “just keeping in touch” letter. Clients are reminded about the presentation date and time by letter about three weeks prior to the presentation. After the presentation, both clients and students are asked to complete a service learning assessment form.
Time Line
Week 1: explanation of project (expect a few students to drop when they hear the details)
Week 2: selection of student consulting groups; handouts of client information; clients’ presentations in class
Week 3: two free class periods for group on-site visits
Week 4: determine client’s marketing research question
Week 5: develop questionnaire; obtain client approval
Week 6: collect data (50 completed questionnaires)
Week 7: code and enter data into statistical program
Week 8: analyze data; prepare marketing research report
Week 9: marking research report due
Week 10: begin work on marketing plan based on marketing research; discuss promotional item(s) with client
Weeks 11–13: develop marketing plan and promotional items
Week 14: prepare presentation
Week 15: present marketing plan and promotional item(s) to client
Summary
We are fortunate in having a service learning center on campus, which helps with setting up the clients initially. We also have college transportation available if needed, but it has not been necessary to use it. The emphasis on practical application of some marketing topics does mean that some areas/chapters you would normally cover during a semester are slighted. I would be happy to discuss this project’s positive and negative aspects with anyone who would like to call me. I can also provide a sample syllabus, handouts, and forms so you don’t have to reinvent the wheel.
Overall, my experiences with service learning projects have been positive. Service learning projects do require more work on the professor’s part, but have resulted in very positive experiences and teaching evaluations. The students have almost uniformly felt that the extra work is well worth it. Client agencies have been pleased with the results of the projects, and 99 percent have indicated that they would like to have another group work with them. If you have small classes and some support, I recommend this project highly.
Allan C. Reddy, Valdosta State University
A LIVE PROJECT FOR SERVICES MARKETING COURSE
Teaching the Services Marketing course can be an interesting and rewarding experience with a live class project included along with the typical lecture, test, and term paper format. A project that involves student participation invariably creates more enthusiasm about the course among the students. Also, it cultivates a group spirit or camaraderie in them.
As part of the learning process, students in my Services Marketing course evaluate two similar service establishments in the area. For convenience, we choose any two identical restaurants in the area—for example, Red Lobster and Ruby Tuesday or Applebee’s. The students will first establish the goals for the project and then choose variables they wish to measure and the measuring instrument they want to use. Once this is done, each student is equipped with two copies of the measuring instrument—one for each restaurant.
Typically, the project goals center on measuring service quality, price, speed of service, and so forth. Often, the measurement instrument is the Semantic Differential method with ten bipolar adjectives reflecting potency (ambience), competency (service quality), and evaluative (food quality) dimensions. The students visit these restaurants in two- or three-member groups and eat there to evaluate the restaurants on ten determined semantic differential scales. They will include items such as food quality, variety, price, service quality, atmosphere, furniture, location, layout, speed of service, and cleanliness, to be ranked on a seven-point scale (1 being good and 7 being bad).
These values are totaled in class followed by a good class discussion on what is wrong with each of the restaurants and how they can possibly improve the quality of their service mix while recognizing the fact that giving a perfect service is not practical and is expensive to do so.
As stated earlier, this mini-project is both entertaining and educative, and it helps to cultivate a group spirit in the class (of 20 or more students). The students eat out together (the student pays for his or her food) to evaluate two identical restaurants (preferably chains). Also, it helps students to have a hands-on experience in setting objectives for the measurement, developing scales of measurement, applying a method of measurement, and analyzing and interpreting the data generated by this method. Thus, the major aim of the project is to educate students on setting up measurement objectives and using a measurement instrument to compare two identical service establishments. This measurement procedure is transferable to other applications, such as evaluating any two similar types of businesses (dry cleaning, auto service, hospitals, and so on).
Jacqueline K. Eastman, Valdosta State University
NONPROFIT MARKETING PLAN PROJECT
Marketing professors like to give their students the opportunity to do “real world” projects, especially in a capstone undergraduate marketing course or an MBA marketing strategy course. Working with for-profit businesses, however, can be problematic for a variety of reasons: 1) students are not given enough information by the firm to address issues thoroughly; 2) students are not taken seriously by the firm or not given enough of the manager’s time; 3) competitors, who may even donate to the university, may get upset with other businesses getting free advice; and 4) students may feel they are doing the grunt work for a potential paid consulting project for their professor.
One way to give the students the needed experience in creating a marketing plan while avoiding the above problems is to work with nonprofit organizations. One’s local United Way Director may be an excellent resource for steering Marketing professors to those nonprofit organizations who are willing to work with students and have more of a marketing orientation. The purpose of this marketing plan project is to allow the students the opportunity to apply what they have learned regarding marketing strategy, management, and planning. This project allows students the chance to provide a real service to the community while practicing their marketing skills.
If possible, one should find a couple of organizations to give students a choice of who they would like to work with and through the presentations made at the end of the quarter, to expose the entire class to different marketing issues. I have used a local domestic violence shelter and a local chapter of Second Harvest Food Bank for this project. I had their directors come make a short presentation to my class about their organizations early in the quarter. At the end of the quarter, the directors return for the students’ oral presentations of the marketing plan and they receive a copy of the final plan, as do I.
Finally, the Marketing Plan the students create needs to address the following areas:
I. Executive Summary (synopsis and major aspects of the marketing plan)
II. Situation Analysis (examine the environment)
SWOT Analysis
A. Internal strengths and weaknesses (recognized by customers—both those who use the service and donors and critical internal concerns)
B. External opportunities and threats (external threats to marketing activities and opportunity analysis)
III. Desired Outcomes/Marketing Objectives (Goals and Objectives)
IV. Marketing Strategies
A. Target market selection (either a specific target market of donors or users of the nonprofit’s services)
B. Marketing mix (product, price, promotion, place)
V. Action Plans (Tactics)
VI. Implementation, Controls, and Evaluation
A. Measures of performance
B. Monitoring and evaluating performance
VII. Financial Projections and Budget
A. Delineation of costs
B. Estimates of sales (donations) and revenues
Part 3 – Integrated Case Assignments
MARKETING MISCUES
McAfee Virus Protection Update Crashes Computers Worldwide
Headquartered in Santa Clara, California, McAfee was founded in the late 1980s and is now one of the world’s largest dedicated security providers. McAfee’s customers range from individual home users to large corporations to governments around the world. The company segments its markets into home, small business, mid-sized business, and enterprise. Annual revenue has grown to around $2 billion. The business market is about 60 percent of the company’s revenue, with the remainder from the consumer marketplace. Geographically, approximately 60 percent of revenue is derived from the North American marketplace. McAfee’s online subscription site, http://home.mcafee.com, provides online software delivery to over two million paid subscribers, making the site one of the largest paid subscription sites on the Internet.
The Botched Update
While the online software delivery has been a hallmark of McAfee’s product design and delivery, it was almost the downfall of the company in early 2010. At that time, a faulty anti-virus update file caused havoc for McAfee customers as computers worldwide were shut down by the update file. Essentially, the anti-virus update misclassified a fundamental Windows XP system file as a malicious program. As such, McAfee’s anti-virus program was instructed to detect and delete the threat. Unfortunately, since this was an essential Windows XP program, computers were rendered useless as many experienced the dreaded “blue screen of death.”
The extent of the impact upon McAfee’s customer base was never clearly disclosed. Media reports and Twitter postings suggested that the affected users numbered in the thousands, while the company suggested that the affected group was less than half of a percent of the company’s customers. While the actual number of affected home and business customers might never be known, there were notable shutdowns that were brought to the public’s attention. For example, it was reported that a third of the hospitals in Rhode Island had to suspend treatment to non-trauma emergency room patients and state police patrol car computers in Kentucky were shut down. One large U.S. multinational company reported that 50,000 personal computers could only be repaired manually by a technician sitting at each computer.
The Aftermath
Although the faulty update product was removed from all McAfee download servers within hours after it was discovered, it took almost 36 hours for McAfee to render an apology to its customers. McAfee’s executive vice president of technical support posted an apology on McAfee’s blog site. McAfee customers were not necessarily appeased by the apology, as they felt that it took too long for the company to render its apology and that it downplayed the number of affected customers. Importantly, however, the aftermath of the faulty product focused on the poor levels of quality assurance at McAfee.
According to some reports, McAfee followed shoddy quality assurance procedures that enabled the release of the faulty product. Critically, the faulty product had not been tested on the version of Windows XP for which the product ultimately crashed. With Windows XP in use by a large number of computer users, many questioned why this configuration was left out of the testing processing. Apparently McAfee had recently changed its quality assurance process. In doing so, it allowed the faulty file to get past the test environment and onto the computers of its customers.
While the company did offer to reimburse home and home office customers for expenses incurred to fix the computer problem and/or to extend antivirus subscriptions for two years free of charge, customers were not easily appeased. The reputation of software security providers such as McAfee hinge on their ability to prevent problems, not cause them. Thus, the lack of confidence in McAfee was exemplified by home customers who disparaged the company’s quality control with blog comments such as, “If this release of McAfee’s passed their quality control, it seems to me they have no quality control” and “What a spectacular failure of QC.” One software consultant noted that 75 percent of the company’s clients had been switched away from McAfee prior to the disaster. The company was thankful it had done that since their technicians were in a chaotic frenzy running all over town, billing their clients for a software glitch in a product that the consulting company had recommended to the client to start with. To sum up the concerns, one customer noted that as a security protection product offering, McAfee should not be on the list of risky software downloads!
Sources: McAffee Web site, www.mcafee.com; Barry McPherson, “McAfee Response to Current False Positive Issue,” April 21, 2010, http://blogs.mcafee .com/enterprise/support/mcafee-response-on-current-false-positive-issue; Larry Barrett, “McAfee Moves on Following Massive Miscue,” eSecurity Planet, April 27, 2010, www.esecurityplanet.com/news/article.php/3878861 /McAfee-Moves-On-Following-Massive-Miscue.htm; Antone Gonsalves, “McAfee Bug Forces Massive PC Cleanup,” InformationWeek, April 22, 2010, www.informationweek.com/news/software/app_optimization/showArticle .jhtml?articleID=224600157; “McAfee to Compensate Home User for Bad Update,” Technology News, April 26, 2010, www.the-technology-news.com /2010/04/mcafee-to-compensate-home-users-for-bad-update; Larry Seltzer, “Lessons of the McAfee False Positive Fiasco,” PCMag, April 23, 2010, www .pcmag.com/article2/0,2817,2363018,00.asp; Lance Whitney, “McAfee Apologizes for Antivirus Update Disaster,” CNet, April 23, 2010, http://news.cnet .com/8301-1009_3-20003247-83.html.
Open-ended questions
1. What is the role of quality assurance in McAfee’s product development process?
Answer: Quality assurance should be an integral component of McAfee’s product development process since a faulty product release can virtually shut down someone’s computer. It is probably doubly important with an online provider in which updates are not necessarily controlled by the customer—that is, an update can be installed without the customer’s knowledge since the customer has essentially pre-purchased the updates as part of the online service.
For a company such as McAfee, quality assurance is particularly critical since the role of the company and its products is to prevent computers from crashing due to external forces. Thus, for a McAfee product to be the cause of overall product failure is almost unforgiveable in the marketplace. Essentially, the McAfee product, due to poor quality control, did exactly what it is to prevent products from doing!
2. Describe McAfee’s customer service recovery process.
Answer:
• Faulty product removed from McAfee’s download servers within hours of its discovery
• 36 hours after the faulty product release, McAfee VP posted an apology
• Company offered to reimburse home and home office customers for expenses incurred to fix the computer problem and/or to extend antivirus subscriptions for two years free of charge
Actually, the customer service recovery process probably received about as much negative press as did the faulty product itself. Customers were not appeased by the way McAfee handled the recovery process and felt as though the company downplayed the impact.
Close-ended questions
TRUE/FALSE
1. For home users, McAfee’s antivirus program would be called a specialty product.
Answer: True
2. McAfee’s problem was exacerbated because it was a global brand.
Answer: True
3. Antivirus software is a membership service.
Answer: True
4. Although relatively few customers experienced the blue screen of death that afflicts a stricken Windows computer, the real harm done was to McAfee’s brand equity.
Answer: True
MULTIPLE CHOICE
1. Perhaps more than any other product or service, antivirus software is subject to the following—almost on a daily basis.
A. quality assurance
B. planned obsolescence
C. product modification
D. functional modification
E. perishability
Answer: C
Quality modification is necessary to ensure and change a product’s dependability and durability.
2. McAfee has antivirus products designed for its consumer and enterprise segments. However, the corrupted data and quality assurance problem affected all market segments. Which of the following seems a likely reason?
A. standardized components
B. research & development
C. Windows XP
D. package uniformity
E. mass customization
Answer: A
In this case, the standardized components would be lines of code and the problem McAfee caused its customers is due to how product lines allow a firm to use standardized components to reduce costs.
3. The McAfee antivirus program illustrates what aspect of the classic definition of a product?
A. A product need not be delivered in a package.
B. A product includes both its favorable and unfavorable characteristics.
C. A product is an item in a product line.
D. A product consists of the equity it produces.
E. A product is anything that satisfies an individual’s personal wants.
Answer: B
A product may be defined as everything, both favorable and unfavorable, that a person receives in an exchange.
4. The remedies that McAfee took to placate subscribers impacted by its failure in quality control were intended to __________.
A. reposition its virus program as reliable
B. improve an existing product
C. investing in brand loyalty
D. ultimately protect its brand equity
E. address each gap in the gap model
Answer: E
The gap model provides a number of scenarios that can be problematic when management underestimates the expectations of its customers.
5. The 36-hour delay in responding to the defective security upload on the part of McAfee’s executive vice president is __________.
A. the gap between the service that customers receive and the service they want
B. doing “whatever it takes” to stay in business
C. an external communication gap
D. the inability of management and employees to do what needs to be done
E. all of the above
Answer: C
Even if the McAfee VP needed time to assess what had caused the botched upload, the clients clearly perceived that a more immediate response was needed.
6. What kind of protection best describes McAfee’s response to those customers inconvenienced by its software update?
A. express warranty
B. implied warranty
C. free repairs of computers
D. subscription extensions
E. limited warranty
Answer: B
Given the way McAfee addressed problems on a case-by-case and did not challenge computer users, the company abided by an implied guarantee and did what was necessary to make its customers whole.
CRITICAL THINKING CASE
Prestige Brands, Inc.: Transforming the Business
Prestige Brands markets, sells, and distributes over-the-counter healthcare and household cleaning products to retail outlets in the United States, Canada, and certain international markets. In September of 2010, the company’s over-the-counter (OTC) healthcare products included:
• Chloraseptic® Sore Throat Relief
• Clear Eyes®
• Cloverine®
• Compound W®
• Compoz®
• Dermoplast®
• Ezo®
• Freezone®
• Kerodex®
• Little Remedies®
• Momentum®
• Mosco®
• Murine® Earigate®
• Murine® Ears
• Murine® Homeopathic
• Murine® Tears
• New-Skin® Liquid Bandage
• New-Skin® Scar Fade
• Outgro®
• Oxipor®
• Percogesic®
• The Doctor’s® Brush Picks®
• The Doctor’s® Night Guard™
• Wartner®
Household brands included:
• Chore Boy®
• Cinch®
• Comet®
• Comet® Spray Gel Mildew Stain Remover
• Spic and Span®
Shareholder Value Creation Strategy
Shareholder value creation at Prestige Brands follows a three-pronged strategic approach: driving core organic growth, a merger-and-acquisition effort focusing exclusively on OTC, and strategic portfolio management. To drive organic growth, the company focuses on five key areas: brand positioning, compelling creative concepts, increasing advertising and marketing support, listening to and responding to retail customers, and connecting with consumers as they are end users of the brands. The second prong of the strategy to create shareholder value involves an exclusive OTC merger-and-acquisition focus. The company has three major acquisition criteria. One, the focus is exclusively on the OTC healthcare market. The OTC healthcare market is a growth market with favorable demographic trends and attractive margins. Two, the company seeks to acquire brands that are broadly recognized by consumers, possess scale strength to make them particularly relevant to retailers, and are additive to the core categories within the company. Three, the company looks closely at the financial characteristics of all potential acquisitions: accretive to growth and earnings, a prudent capital structure, and economics driven by the brand’s ability to enhance potential shareholder value. The third prong of the corporate strategy is to effectively manage the portfolio of products and brands over time. Specifically, this prong involves periodically reassessing which brands are the best long term from a portfolio standpoint and then adjusting the portfolio accordingly.
A Transformational Acquisition: Blacksmith Brands
With core organic growth and strategic portfolio management in mind, Prestige Brands acquired Blacksmith Brands in the fall of 2010. Blacksmith Brands owned five leading consumer OTC brands:
• Efferdent® Denture Cleanser
• Effergrip® Denture Adhesive
• Luden’s® Throat Drops
• NasalCrom® Nasal Allergy Spray
• PediaCare® Children’s OTC Medicines
This was considered a transformational acquisition for the company, as it was a meaningful step in its long-term strategy of an increasing presence in the OTC healthcare arena and in building a brand portfolio that would enable organic growth. The addition of the well-known Blacksmith brands would strengthen Prestige’s platform in its core cough/cold and oral care categories. In particular, Prestige was strengthening its position in key categories with the additions of Efferdent®, PediaCare®, and Luden’s®. These three scale brands competed in attractive categories that Prestige Brands knew well, and they offered a clear path for shareholder value creation through increased brand support and line extensions. The acquired brands were well aligned across Prestige’s key OTC categories:
OTC Category Brands
Cough/Cold Chloraseptic®, Luden’s®, Pediacare®, Little Remedies®, Nasalcrom®
Oral Care Efferdent®, Effergrip®, The Doctor’s® Night Guard™, Ezo®
Eye & Ear Care Clear Eyes®, Murine®
Skin & Foot Care Compound W®, Wartner®, New-Skin®, Dermoplast®
Other Percogesic®, Compoz®
Increased support of the core OTC healthcare franchise after the acquisition of Blacksmith Brands focused on innovative advertising and promotional campaigns and new product launches. The commitment to equity-building brand support of the acquired brands was reflected in a national television campaign and digital marketing for PediaCare®; a radio campaign, digital marketing, sampling, and free-standing inserts (FSIs) for Luden’s®; and bonus packs and FSIs for Efferdent® and Effergrip®.
A Major Milestone
Prestige Brands’ net revenue for the first nine months of fiscal 2011 grew 8 percent to $240.1 million. As a result of the increased advertising and support behind the core OTC healthcare franchise, the core OTC portfolio significantly outperformed their respective categories for the period. Overall, during the latest quarter, Prestige Brands (with the Blacksmith acquisition) experienced a 26.5 percent gain in consumption of its core OTC sales versus flat category consumption of these categories in aggregate. According to Matthew Mannelly, CEO, “The acquisition of Blacksmith Brands represents a transformative and exciting opportunity for us. Our strategy seems to be working, as evidenced by our growth in revenues and data demonstrating our brands’ growth at a rate significantly faster than the overall category growth. And, the Company is strengthened by having a stronger brand portfolio to offer our retail customers.”
Source: “About us,” Prestige Brands Web site, www.PrestigeBrands.com (Accessed April 20, 2011).
Open-ended questions
1. What role can acquisitions play in building a product portfolio?
Answer: At Prestige Brands, acquisitions played a critical role in the development of the company’s product portfolio. For example, the acquisition of Blacksmith Brands was considered a transformational acquisition for the company as it was a meaningful step in its long-term strategy of an increasing presence in the OTC healthcare arena and in building a brand portfolio that would enable organic growth. The addition of the well-known Blacksmith brands strengthened Prestige’s platform in its core cough/cold and oral care categories.
Acquiring strong brands made it easier for Prestige to build its product offerings. Developing new products in an already saturated marketplace would probably not result in the positive outcomes, due to both time and competitive space, experienced through acquisitions. Thus, acquisition can allow a company to build a strong portfolio and then focus on organic growth for continual business success.
2. Outline the product line depth, product mix width, and individual product items at Prestige Brands.
Answer: Students should be directed to go to www .prestigebrands.com to learn more about each of the company’s product offerings. The product mix is comprised of five major product categories: oral care, eye & ear care, skin care, cough/cold/allergy/ sinus, and house & home.
Oral Care is five deep:
• The Doctor’s® Brush Picks®
• The Doctor’s® Night Guard™
• Efferdent® Denture Cleanser
• Effergrip® Denture Adhesive
• Ezo®
Eye & Ear Care is five deep:
• Clear Eyes®
• Murine® Earigate®
• Murine® Ears
• Murine® Homeopathic
• Murine® Tears
Skin Care is ten deep:
• Cloverine®
• Compound W®
• Dermoplast®
• Freezone®
• Kerodex®
• Mosco®
• New-Skin® Liquid Bandage
• Outgro®
• Oxipor®
• Wartner®
Cough/Cold/Allergy/Sinus is five deep:
• Chloraseptic® Sore Throat Relief
• Little Remedies®
• Luden’s® Throat Drops
• PediaCare®
• NasalCrom® Nasal Spray
House & Home is five deep:
• Chore Boy®
• Cinch®
• Comet®
• Comet® Spray Gel Mildew Stain Remover
• Spic and Span®
The company also has two brands that do not fit easily into any of the major product categories:
• Compoz®
• Momentum®
Naturally, the pace at which company management is acquiring brands means that this categorization is changing quickly. For example, soon after this case was written, Prestige Brands acquired Dramamine®, which fits nicely with the Compoz® product offering—suggesting that the company has plans for that product category.
Close-ended questions
TRUE/FALSE
1. Looking at its list of OTC healthcare products, Prestige Brands, did not improve its positioning in eye care products.
Answer: True
2. The acquisition of Blacksmith left Prestige’s depth in household brands unchanged.
Answer: True
3. Given some redundancy in its product mix, Prestige is not immune from cannibalization.
Answer: True
4. One benefit that Prestige probably does not enjoy is an extreme economy of scale in its advertising.
Answer: True
MULTIPLE CHOICE
1. Efferdent, PediaCare, and the other products Prestige picked up from its Blacksmith acquisition should be more correctly seen as __________ rather than __________.
A. product mixes/brands
B. product lines/product items
C. product item/product lines
D. product items/brands
E. product mixes/product lines
Answer: B
Each of these brands will include the various product items that are categorized under a product line.
2. One aspect of expanding a portfolio through acquisition is a new product mix. Compoz and Momentum brands have a product depth of 1. What term best describes them?
A. unsought products
B. noncore brands
C. convenience products
D. product lines
E. all of the above
Answer: D
Each item is a product line. Since both are HTC brands, they are considered core brands unless Prestige decides to sell these brands in the future.
3. The acquisition of Blacksmith is called a “transformational acquisition” for what reason?
A. It made Prestige an even larger niche marketer of minor brands.
B. It addressed stockholder concerns about a lack of focus.
C. It eliminated a competitor.
D. It provided more product line depth to a core business.
E. It evened out a sales pattern that had been dependent on the cough, cold, and flu season.
Answer: D
For the company, it was a meaningful step in its long-term strategy of an increasing presence in the OTC healthcare arena.
4. The third prong of Prestige’s corporate strategy involves periodically reassessing which brands are the best for the company in the long term from a portfolio standpoint and then adjusting the portfolio accordingly. Peter Drucker gave this a name. What is it?
A. product demixing
B. product line attrition
C. organized abandonment
D. periodic audit
E. organized delisting
Answer: C
Prestige practices what management sage Peter Drucker calls “organized abandonment,” which is based upon a periodic audit of all goods and services that a firm markets and eliminating the poorer performers from the product mix.
5. Which of the following expenses does Prestige most likely not eliminate by its reliance on acquisition over new product development?
A. R&D
B. test marketing
C. commercialization
D. business analysis
E. none of the above
Answer: D
Given that Prestige calculates what brands it buys before and after acquisition, it would engage in a process analogous to a business analysis, that is, an assessment of the demand, cost, sales, and profitability of an acquired product.
6. Venerable brands such as Luden’s (cough drops originally formulated over a century ago) and Efferdent (virtually synonymous with denture adhesive since the days of early television) give Prestige what important attribute?
A. brand equity
B. a major position in both segments
C. two brand marks
D. household words
E. manufacturing brands to go with its private brands
Answer: A
These brand names are familiar to consumers and indicate quality, hence brand equity, which refers to the value of a brand name.
Solution Manual for MKTG: Principles of Marketing
Charles W. Lamb, Joe F. Hair, Carl McDaniel
9781305631823, 9781285860145, 9781337116800
