Marketing Mistakes and Successes 12th Edition
Marketing Mistakes and Successes 12th Edition
Marketing Mistakes and Successes 12th Edition
12th Edition
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ROBERT F. HARTLEY • Cindy Claycomb
12th Edition
C O NT E N T S
Preface iii
About the Authors vi
Chapter 1 Introduction 1
PART II COMEBACKS 73
Chapter 5 McDonald’s: Rebirth Through a Low Growth Strategy 75
Chapter 6 Harley-Davidson: Building An Enduring Mystique 94
Chapter 7 Chrysler: Merger Problems and Recovery 109
vii
viii • Contents
Index 400
C HA PT E R ON E
Introduction
A t this writing, Marketing Mistakes & Successes has passed its thirty-fifth anni-
versary. Who would have thought? The first edition, back in 1976, was 147 pages
and included such long-forgotten cases as Korvette, W. T. Grant, Edsel, Corfam,
Gilbert, and the Midi.
In this twelfth edition, two new cases are added with extensive modification to
earlier cases. Other cases have been updated and in some instances reclassified.
Some of the cases are as recent as today’s headlines; several still have not come to
complete resolution. A few older cases have been continued because of their relevant
and enduring learning insights, even in today’s changing environment.
The entire book is reorganized. We moved Marketing Wars to Part I and newly
updated these cases with the latest competitive information. The Comebacks section
is now Part II and the case of Chrysler’s recovery after their disastrous merger with
(turned acquisition of) Daimler has been moved to this section, joining the cases
of McDonald’s rebirth and Harley Davidson’s enduring mystique. The Borders
Bookstores case has been added to Part III, Marketing Mistakes. We think students
will find this case particularly interesting and insightful. The Entrepreneurial Adven-
tures, Part IV, are updated with particular attention to Google’s competition for
consumers’ digital time and Starbucks’s setback and recovery. The exciting case of
Toyota’s accelerator problems is added to Part V, Ethical Mistakes. The cases close
with updates to three cases of Marketing Successes in Part VI.
We continue to seek what can be learned—insights that are transferable to
other firms, other times, other situations. What key factors brought monumental
mistakes to some firms and resounding successes for others? Through such evalu-
ations and studies of contrasts, we may learn to improve batting averages in the
intriguing, ever-challenging art of decision-making.
We will encounter organizational life cycles, with an organization growing and
prospering, then failing (just as humans do), but occasionally resurging. Success rarely
lasts forever, but even the most serious mistakes can be (but are not always) overcome.
As in previous editions, a variety of firms, industries, mistakes, and successes are
presented. You will be familiar with most of the organizations, although probably
not with the details of their situations.
1
2 • Chapter 1: Introduction
We are always on the lookout for cases that can bring out certain points or
caveats in the art of marketing decision-making, and that give a balanced view of
the spectrum of marketing problems. The goal is to present examples that provide
somewhat different learning experiences, where at least some aspect of the mistake
or success is unique. Still, we see similar mistakes occurring time and again. From
the prevalence of such mistakes, we have to wonder how much decision-making has
really progressed over the decades. The challenge to improve it is still there, and
with it marketing efficiency and career advancement.
Let us then consider what learning insights we can gain, with the benefit of hind-
sight, from examining these examples of successful and unsuccessful marketing practices.
LEARNING INSIGHTS
Analyzing Mistakes
In looking at sick companies, or even healthy ones that have experienced difficulties
with certain parts of their operations, it is tempting to be overly critical. It is easy
to criticize with the benefit of hindsight. Mistakes are inevitable, given the present
state of decision-making and the dynamic environment facing organizations.
Mistakes can be categorized as errors of omission and of commission. Mistakes
of omission are those in which no action was taken and the status quo was contentedly
embraced amid a changing environment. Such errors, often characteristic of conser-
vative or stodgy management, are not as obvious as the other category of mistakes.
They seldom involve tumultuous upheaval; rather, the company’s competitive position
slowly erodes, until management finally realizes that mistakes having monumental
impact have been allowed to happen. The firm’s fortunes often never regain their
former luster.
Mistakes of commission are more spectacular. They involve hasty decisions
often based on faulty research, poor planning, misdirected execution, and the
like. Although the costs of eroding competitive position attributable to errors
of omission are difficult to calculate precisely, the costs of errors of commission
are often fully evident. For example, in 1993 alone Euro Disney’s loss was $960
million from a poorly planned venture; it improved in 1994 with only a $366
million loss. With Maytag’s overseas Hoover Division, the costs of an incredibly
bungled sales promotion were more than $300 million, and still counting. Then
there was the monumental acquisition of Chrysler by Germany’s Daimler,
proud maker of Mercedes, for $36 billion in 1998. After nine tumultuous years,
Daimler gave up and sold Chrysler to a private equity firm in 2007 for only
$7.4 billion.
Although they may make mistakes, organizations with sharp management follow
certain patterns when confronting difficult situations:
1. Looming problems or present mistakes are quickly recognized.
2. The causes of the problem(s) are carefully determined.
3. Alternative corrective actions are evaluated in view of the company’s
resources and constraints.
Learning Insights • 3
Analyzing Successes
Successes deserve as much analysis as mistakes, although admittedly there is less
urgency than with an emerging problem that requires quick remedial action. Any
analysis of success should seek answers to at least the following questions:
Marketing Wars
Pepsi and Coca-Cola for decades competed worldwide. Usually Coca-Cola won out,
but it could never let its guard down; however, it did so in Europe. Then a trend
toward noncarbonated beverages along with Pepsi’s non-drink diversifications swung
the momentum to Pepsi. Recently, Coca-Cola recovered and the war between the
companies continues.
Dell long dominated the PC market with lowest-prices, direct-to-consumer
marketing. Hewlett-Packard, the world’s second biggest computer maker, experi-
enced a series of four CEOs in twelve years that took H-P through a seesaw battle
with Dell. Today, both H-P and Dell are fighting for dominance in the tech indus-
try against each other and Far East competitors.
Boeing long dominated the worldwide commercial aircraft market, with the
European Airbus only a minor player. A series of Boeing blunders, however, coupled
with an aggressive Airbus, brought market shares close to parity. Both firms intro-
duced strikingly new planes but ran into problems that delayed their first commer-
cial flights. The fight continues for market share dominance.
Comebacks
McDonald’s had long dominated the fast-food restaurant market. Then it began to
falter, and hungry competitors made inroads into its competitive position. As it
Organization of this Book • 5
fought to regain its momentum, it explored diversifications and ever more store
openings, while profitability plummeted. With a new CEO, it found a formula for
profitable growth.
In the early 1960s, Harley-Davidson dominated a static motorcycle industry.
Suddenly, Honda burst on the scene and Harley’s market share dropped from
70 percent to 5 percent in only a few years. It took Harley nearly three decades
to revive, but now it has created a mystique for its heavy motorcycles and gained
new customers.
The merger of Chrysler with Daimler, the huge German firm that makes Mer-
cedes, was supposed to be a merger of equals. But Chrysler’s management quickly
found otherwise, and executives from Germany soon replaced the top Chrysler
executives. Assimilation and coordination problems plagued the merger for years.
Nine years later, Daimler sold Chrysler to a private equity firm for tens of billions
of dollars less than it paid. The situation did not immediately improve for Chrysler,
as it filed for bankruptcy protection in 2009, but emerged from bankruptcy with
newfound momentum.
to foot the bill while trying to appease irate customers. What can we learn from
Maytag’s travails?
Borden, with its enduring symbol of Elsie the Cow, was the country’s largest
producer of dairy products. On an acquisitions binge in the 1980s, it became a
diversified food processor and marketer—and a $7 billion company. But Borden
allowed consumer acceptance of its many brands to wither through unrealistic
pricing, ineffective advertising, and an unwieldy organization.
United Way of America is a nonprofit organization. The man who led it to become
the nation’s largest charity perceived himself as virtually beyond authority. Exorbitant
spending, favoritism, and conflicts of interest—these went without criticism until
investigative reporters from the Washington Post publicized the scandalous conduct.
With its public image plummeting, contributions nationwide drastically declined.
The real concern was whether United Way could ever regain its former luster.
Entrepreneurial Adventures
Google is arguably the most outstanding successful new enterprise ever. It was founded
by Sergey Brin and Larry Page, who dropped out of Stanford’s Ph.D. program to do
so. With its search engine, it raised advertising to a new level: targeted advertising. In
so doing, it spawned a host of millionaires from its rising stock prices and stock options
and made its two founders some of the richest Americans, just below Bill Gates and
Warren Buffett. How did they do it? And can they continue their dominance?
Starbucks rapidly grew as a new firm, a credit to founder Howard Schultz’s
vision of transforming a prosaic product, coffee, into a gourmet coffee house experi-
ence at luxury prices. Starbucks’s successful growth, however, covered up tremendous
waste within the company, and consequently, it suffered a setback. Schultz was
coaxed back to the CEO position to turn things around. What were his plans?
Boston Beer burst on the microbrewery scene with Samuel Adams beers,
higher priced even than most imports. Notwithstanding this—or maybe because of
it—Boston Beer became the largest microbrewer. It proved that a small entrepre-
neur can compete successfully against the giants in the industry, and do this on a
national scale.
Ethical Mistakes
Merck, the pharmaceutical giant, learned that its blockbuster arthritis drug, Vioxx,
doubled the risk of a heart attack or stroke. Over five years and $500 million in
advertising, it had 20 million users in the United States at the time it recalled the
drug on September 30, 2004. Critics and tort lawyers assailed the company for
waiting so long to recall this drug, as some research studies as early as five years
before had raised questions about the safety of Vioxx. What can we learn from
Merck’s handling of its great profit-making drug, now discredited?
The huge insurance firm MetLife, whether through loose controls or tacit
approval, permitted an agent to use deceptive selling tactics on a grand scale, in
the process enriching himself and the company. Investigations by several state attor-
neys general brought a crisis situation to the firm to which it was slow to react.
Eventually, fines and lawsuits totaled almost $2 billion.
General Wrap-Up • 7
Product safety lapses that result in injuries and even loss of life are among
the worst abuses any company can confront. These lapses are difficult for a
company to acknowledge when it has a solid reputation built on reliability and
safety. Toyota was slow to recall nine million vehicles and blamed drivers and
suppliers for accidents in Toyota vehicles. The US media fanned the flames. In
hindsight, it is easy to see that Toyota’s rapid expansion led to quality problems.
Inept crisis management brought a massive fine from the US government and a
host of lawsuits.
GENERAL WRAP-UP
Where possible, the text depicts major personalities involved in these cases. Imagine
yourself in their positions, confronting the problems and facing choices at their points
of crisis or just-recognized opportunities. What would you have done differently, and
why? We invite you to participate in the discussion questions, the hands-on exercises,
the debates appearing at the ends of chapters, and the occasional devil’s advocate
invitation (a devil’s advocate is one who argues an opposing viewpoint for the sake
of testing the decision). There are also discussion questions for the various boxes
within chapters.
While doing these activities, you may feel the excitement and challenge of
decision-making under conditions of uncertainty. Perhaps you may even become a
fast-track executive and make better decisions.
QUESTIONS
3. Large firms tend to err on the side of conservatism and are slower to take
corrective action than smaller ones. Why do you suppose this is?
4. Which is likely to be more costly to a firm, errors of omission or errors of
commission? Why?
5. So often we see the successful firm eventually losing its pattern of success.
Why is success not more enduring?
PA RT
O N E
M A RK ET I NG WA R S
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CC
HHAA
PPTT
EERR S T
EWV E
ON
I ntense competition between Pepsi and Coca-Cola has characterized the soft-drink
industry for decades. In this chess game of giant firms, Coca-Cola ruled the soft-
drink market throughout the 1950s, 1960s, and early 1970s. It outsold Pepsi two to
one. But this was to change. The “war” switched to the international arena, and it
became a “world war.”
11
12 • Chapter 2: Cola Wars: Coke vs. Pepsi
Source: Thomas Oliver. The Real Coke. The Real Story (New York: Random House, 1986), pp. 21, 50;
“Two Cokes Really Are Better Than One—For Now,” Business Week, September 9, 1985, p. 38.
What made the deteriorating comparative performance of Coke all the more
worrisome and frustrating to Coca-Cola was that it was outspending Pepsi in adver-
tising by $100 million. It had twice as many vending machines, dominated fountains,
had more shelf space, and was competitively priced. Why was it losing market
share? The advertising undoubtedly was not as effective as that of Pepsi, despite
vastly more money spent. And this raises the question: How can we measure the
effectiveness of advertising? See the Information Box for a discussion.
INFORMATION BOX
HOW DO WE MEASURE THE EFFECTIVENESS
OF ADVERTISING?
A firm can spend millions of dollars on advertising, and it is only natural to want some
feedback on the results of such an expenditure: To what extent did the advertising
really pay off? Yet many problems confront the firm trying to measure this.
Most methods for measuring effectiveness focus not on sales changes but on how
well the communication is remembered, recognized, or recalled. Most evaluative
methods simply tell which ad is the best among those being appraised. But even
though one ad may be found to be more memorable or to create more attention than
another, that fact alone gives no assurance of relationship to sales success. A classic
example of the dire consequences that can befall advertisers as a result of the inability
to directly measure the impact of ads on sales occurred in December 1970.
In 1970, the Doyle Dane Bernbach advertising agency created memorable TV com-
mercials for Alka-Seltzer, such as the “spicy meatball man” and the “poached oyster
bride.” These won professional awards as the best commercials of the year and received
high marks for humor and audience recall. But in December, the $22 million account
was abruptly switched to another agency. The reason? Alka-Seltzer’s sales had dropped
somewhat. Of course, no one will ever know whether the drop might have been much
worse without these notable commercials.
So, how do we measure the value of millions of dollars spent for advertising? Not well.
Nor can we determine what is the right amount to spend, what is too much or too little.
Can a business succeed without advertising? Why or why not?
Early Battles, Leading to New Coke Fiasco • 13
1
John Greenwald, “Coca-Cola’s Big Fizzle,” Time, July 22, 1985, pp. 48–49.
14 • Chapter 2: Cola Wars: Coke vs. Pepsi
2
“Some Things Don’t Go Better with Coke,” Forbes, March 21, 1988, pp. 34–35.
3
Robert Frank and Jonathan Friedland, “How Pepsi’s Charge into Brazil Fell Short of Its Ambitious
Goals,” Wall Street Journal, August 30, 1996, p. A1.
Battle Shifts to International Arena • 15
and launching new products and packages, he caught Coke by surprise. In only
three years he had increased Pepsi’s market share in the Buenos Aires metro area
from almost zero to 34 percent.4
With Pepsi’s blessing, Beach expanded vigorously, borrowing heavily to do so.
He bought major Pepsi franchises in Chile, Uruguay, and most importantly, Brazil,
where he built four giant bottling plants. Pepsi worked closely with Baesa’s expan-
sion, providing funds to facilitate it.
However, they underestimated the aggressiveness of Coca-Cola. Their rival
spent heavily on marketing and cold-drink equipment for its choice customers. As
a result Baesa was shut out of small retail outlets, those most profitable for bottlers.
Goizueta, CEO of Coca-Cola, used his Latin American background to influence the
Argentine president to reduce an onerous 24 percent tax on cola to 4 percent. This
move strengthened Coke’s position against Baesa, which in contrast to Coca-Cola
was earning most of its profits from non-cola drinks.
By early 1996, Baesa’s expansion plans—and Pepsi’s dream—were floundering.
The new Brazilian plants were running at only a third of capacity. Baesa lost
$300 million for the first half of 1996, and PepsiCo injected another $40 million
into Baesa. On May 9, Beach was relieved of his position. Allegations now surfaced
that Beach might have tampered with Baesa’s books.5
Brazil was only symptomatic of other overseas problems for Pepsi. Roger
Enrico, now CEO, had been on Coke’s black list since he had gloated a decade
before about the New Coke debacle in his memoir, The Other Guy Blinked: How
Pepsi Won the Cola Wars. Goizueta was soon to gloat, “It appears that the company
that claimed to have won the cola wars is now raising the white flag.”6
The person Enrico thought was his close friend, Oswaldo Cisneros, head of one
of Pepsi’s oldest and largest foreign bottling franchises, suddenly abandoned Pepsi
for Coca-Cola. Essentially, this took Pepsi out of the Venezuelan market. Coca-Cola
wooed the Cisneroses with red carpet treatment and frequent meetings with its
highest executives. Eventually, Coca-Cola agreed to pay an estimated $500 million
to buy 50 percent of the Venezuelan business.
4
Patricia Sellers, “How Coke Is Kicking Pepsi’s Can,” Fortune, October 28, 1996, p. 78.
5
Sellers, p. 79.
6
Sellers, p. 72.
7
Frank and Friedland, p. A1.
16 • Chapter 2: Cola Wars: Coke vs. Pepsi
Market Shares
Markets Coke Pepsi
United States 42% 31%
Mexico 61 21
Japan 34 5
Brazil 51 10
East-Central Europe 40 21
Germany 56 5
Canada 37 34
Middle East 23 38
China 20 10
Britain 32 12
Source: Company annual reports and Patricia Sellers, “How
Coke Is Kicking Pepsi’s Can,” Fortune, October 28, 1996, p. 82.
Commentary: These market share comparisons show the extent
of Pepsi’s ineptitude in its international markets. In only one
of these top ten overseas markets is it ahead of Coke, and in
some—such as Japan, Germany, and Brazil—it is practically a
nonplayer.
Table 2.2 shows the top ten markets for Coke and Pepsi in 1996 in the
total world market. Coke had a 49 percent world market share while Pepsi
had only 17 percent, despite its investment of more than $2 billion since 1990
to straighten out its overseas bottling operations and improve its image. 8 With
its careful investment in bottlers and increased financial resources to plow
into marketing, Coke continued to gain greater control of the global soft-
drink industry.
If there was any consolation for PepsiCo, it was that its overseas business
had always been far less important to it than to Coca-Cola, but this was slim
comfort in view of the huge potential this market represented. Most of Pepsi’s
revenues were in the US beverage, snack food, and restaurant businesses, with
such well-known brands as Frito-Lay chips and Taco Bell, Pizza Hut, and KFC
(Kentucky Fried Chicken) restaurants. But as a former Pepsi CEO was fond
of stating, “We’re proud of the US business. But 95 percent of the world
doesn’t live here.”9 And Pepsi seemed unable to hold its own against Coke in
this world market.
8
Robert Frank, “Pepsi Losing Overseas Fizz to Coca-Cola,” Wall Street Journal, August 22, 1996,
p. C2.
9
Frank, p. C2.
Coke Travails in Europe, 1999 • 17
Contamination Scares
On June 8th, a few dozen Belgian schoolchildren began throwing up after drink-
ing Cokes. This was to result in one of the most serious crises in Coca-Cola’s
113-year history. An early warning had seemingly been ignored when in mid-May
the owner of a pub near Antwerp complained of four people becoming sick from
drinking bad-smelling Coke. The company claimed to have investigated but found
no problems.
The problems worsened. Coca-Cola officials were meeting with Belgium’s
health minister, seeking to placate him, telling him that their analyses “show that it
is about a deviation in taste and color” that might cause headaches and other symp-
toms, but “does not threaten the health of your child.” In the middle of this meet-
ing, news came that another fifteen students at another school had gotten sick.11
It was thought that the contamination came from bottling plants in Antwerp,
Ghent, and from the Dunkirk plant that produced cans for the Belgian market.
European newspapers were speculating that Coke cans were contaminated with
rat poison.
Soon hundreds of sick people in France were blaming their illnesses on Coke,
and France banned products from the Dunkirk plant. The setback left Coke out of
the market in parts of Europe because the company had badly underestimated how
much explanation governments would demand before letting it back in business.
Not until June 17 did Belgium and France lift restrictions, and then only on
some products; the bans continued on Coca-Cola’s Coke, Sprite, and Fanta. Then
the Netherlands, Luxembourg, and Switzerland also imposed selective bans until
10
Nikhil Deogun, “Coke’s Slower Sales Are Blamed on Price Increases,” Wall Street Journal, March
31, 1999, pp. A3, A4.
11
“Anatomy of a Recall: How Coke’s Controls Fizzled Out in Europe,” Wall Street Journal, June 29,
1999, p. A6.
18 • Chapter 2: Cola Wars: Coke vs. Pepsi
health risks could be evaluated. Some 14 million cases of Coke products eventually
were recalled in the five countries, and estimates were that Coke was losing $3.4
million per day in revenues. Case volume for the European division was expected
to fall 6 to 7 percent from the year earlier.12 The peak soft drink summer season
had arrived, and the timing of the scare could not have been worse. Coca-Cola and
its local distributors launched an advertising campaign defending the quality of
their products.
Problems continued to spread. The European Union requested further study
as the health scare spread. The Ivory Coast seized 50,000 cans of Coke imported
from Europe as a precautionary measure, though there was no evidence that
anyone in the Ivory Coast had become ill by drinking imported Coke. All glass
bottles of Bonaqua, a bottled water brand of Coca-Cola, were recalled in Poland
because about 1,500 bottles were found to contain mold. This recall in Poland
soon spread to glass bottles of Coke. Barely a week later, the company recalled
180,000 plastic bottles of Bonaqua after discovering nonhazardous bacteria.
Coca-Cola also had to recall some soft drinks in Portugal after small bits of char-
coal from a filtration system were found in some cans. It seems quality control
was a problem.
12
Will Edwards, “Coke Chairman Tries to Assure Europeans,” Cleveland Plain Dealer, June 19, 1999,
pp. 1-C and 3-C; Nikhil Deogun, “Coke Estimates European Volume Plunged 6% to 7% in 2nd
Quarter,” Wall Street Journal, July 1, 1999, p. A4.
Coke Travails in Europe, 1999 • 19
13
Nikhil Deogun and James R. Hagerty, “Coke Scandal Could Boost Rivals, but Also Could Hurt Soft
Drinks,” Wall Street Journal, June 23, 1999, p. A4.
20 • Chapter 2: Cola Wars: Coke vs. Pepsi
Pepsi also filed a complaint with Italian regulators, and they were quicker
to act. A preliminary report found that Coca-Cola and its bottlers violated anti-
trust laws by abusing a dominant market position through practices such as dis-
counts, bonuses, and exclusive deals with wholesalers and retailers. The Italian
regulators also said there was evidence that Coke had a “strategic plan” to remove
Pepsi from the Italian market, one of the biggest in Europe, by paying wholesal-
ers to remove Pepsi fountain equipment and replace it with Coke. At about this
time, Australian and Chilean officials also began conducting informal inquiries
in their markets.
Coca-Cola officials responded to the Italian report as follows: “We believe this
is a baseless allegation by Pepsi and we believe that Pepsi’s poor performance in
Italy is due to their lack of commitment and investment there. As a result, they are
attempting to compete with us in the courtroom instead of the marketplace.”14
Coke Pepsi
1998 2004 % change 1998 2004 % change
Revenues ($ in billions) $16.3 $22.0 35.0% $22.3 $29.3 31.4%
Income ($ in billions) $3.5 $4.8 37.1% $2.0 $4.0 100%
Stock price (ending 12/31) $67.00 $41.64 –37.9% $40.88 $52.20 27.7%
Sources: Company and public reports.
Part of the problem facing Coke was an industry problem, but with its heavy
emphasis on carbonated soft drinks it became worse for Coke than for Pepsi. Con-
sumers, more concerned with health and obesity, were seeking new kinds of beverages
14
Betsy McKay, “Coke, Bottlers Violated Antitrust Laws in Italy, a Preliminary Report States,”
Wall Street Journal, August 13, 1999, p. A4.
Coke Finds Tough Going in New Century While Pepsi Surges • 21
such as gourmet coffees, New Age teas, sports drinks, and waters. Carbonated
beverages were no longer a growth sector of the market. One consultant said, “The
carbonated soft-drink model is 30 years old and out of date.”15 Pepsi had pushed into
the noncarb market with Tropicana juice, Gatorade sports drink, and Aquafina water,
and these were billion-dollar beverage brands. Coca-Cola remained fixated on its
flagship Coke brand, with sodas accounting for 82 percent of its worldwide beverage
sales, far more than Pepsi. On the other hand, Pepsi not only had more strongly
diversified into other noncarb beverages, but also had its Frito-Lay Division with
snack foods such as Lays, Doritos, and Baked Crunchy Cheetos; and then there was
Quaker Oats that it acquired August 2001. (In 1997, PepsiCo had spun off its restau-
rant operations.) The following shows the breakdown of sales and profits for Pepsi’s
four major businesses as of 2004:
Other Problems
Ivester, successor to Goizueta in the late ‘90s, in a desperate effort to try to sustain
the profitability of the Goizueta era, had imposed a 7.6 percent price hike on the
concentrate it sold its bottlers. For decades Coke had sold its beverage concentrate
to US bottlers at a constant price, no matter what price the soft drinks would later
command at retail. Not surprisingly, these bottlers became incensed and complained
bitterly to the board and succeeded in pushing the already embattled Ivester to
resign in late 1999. His successor, Douglas Daft, tried to work with them, but rela-
tions steadily deteriorated. Bottlers began fighting back with sharp increases in their
retail prices of Coke. These hikes dampened sales of Coke but increased bottlers’
profits. Some also refused to carry the company’s new noncarbonated niche offer-
ings, Mad River teas and Planet Java coffee; these flopped and the company phased
them out in 2003. Going into 2005, Isdell faced contentious bottler relations that
needed to be addressed.
The C2 Disappointment
In the summer of 2003, Coca-Cola launched C2, a reduced-calorie, reduced-carb
cola, with a $50 million promotional campaign. This was Coke’s biggest product
introduction since Diet Coke more than twenty years before. The company had
expected this new beverage would help win back a critical consumer group—20- to
40-year-olds who were concerned about weight—and priced it at a 15 percent pre-
mium in the quest to achieve higher profits on its drinks. But sales of C2 fell nearly
60 percent a few weeks after the product introduction.
Isdell halted the premium pricing strategy to try to salvage the product, but
still sales languished. The pricing strategy had been botched, as C2 at times retailed
for 50 percent or more than regular Coke, especially on weekends when sodas were
often discounted. Adding to the dissatisfaction with the higher prices, many con-
sumers were critical of the taste, either too flat or with an aftertaste. Coca-Cola
took C2 off the market in 2006.
Advertising Miscues
Spending for advertising had become conservative during the reign of Ivester. He
believed that the Coke brand could largely sell itself without a major commitment
to advertising. The result of a reduced ad budget was lackluster ads that failed to
attract the important youth market. Instead, Ivester shifted resources into more
vending machines, refrigerated coolers, and delivery trucks, “growth through distri-
bution.” But some of these expanded distribution sites, such as auto parts stores,
did not pay off.
Global Problems
Even Coke’s global strength was becoming tarnished. Ivester’s slowness in respond-
ing to the contamination scare in Belgium and France in 1999 was but the first
misstep. Coke’s plans to make Dasani bottled water into a global brand were slowed
by an aborted launch in Europe after elevated levels of bromate, a cancer-causing
Analysis • 23
ANALYSIS
Coke’s Outlook at the New Millennium
The situation by 2005 did not come about suddenly. It gradually crept up until a
deteriorating stock price confronted investors, managers, and analysts. Though the
company was still healthy and profitable, somehow the Coke name had lost its
cachet and critics abounded. Then there was PepsiCo becoming more formidable
all the time.
Proposals for dealing with the situation went to two extremes: (1) stick with the
basics, and simply do things better, or (2) vigorously diversify, even to nondrink
areas as Pepsi had seemingly done successfully. The two approaches could be cat-
egorized as a mission of being a soda company versus an expanded mission of being
a beverage-and-snack company. Coke’s board, harking back to the glory days of
Goizueta, was negative toward mergers and strongly favored doing a better job with
17
Chang, Terhune and McKay, “Coke’s Big Gamble in Asia,” p. A6.
18
For example, see Dean Foust, p. 76ff; and “Behind Coke’s CEO Travails,” pp. A1, A6.
24 • Chapter 2: Cola Wars: Coke vs. Pepsi
the basic core, such as with distribution and tapping international markets more
aggressively. Critics, however, saw Coke as too wedded to the status quo and miss-
ing growth opportunities. Of course, there was a third option between the two
extremes. This would look for suitable diversifications within the non-cola drink
market, and even fortuitous and compatible nondrink additions, but without any
mandate to go on a merger binge.
Several factors should affect these decisions. One was the recent trend toward
healthy lifestyles, and the foods and drinks that influence this either negatively or
positively. Worrisome omens were appearing. Some schools were removing colas
from their vending machines and school lunches. Advertisements and other public-
ity were trumpeting the health risks of fast foods and soft drinks. Was this the wave
of the future, or merely a short-term phenomenon?
Then Coke needed to confront whether its days as a growth firm were over
and if it was in the mature stage of its life cycle. The long-term consequences of
this decision would hardly be inconsequential. Disavowing aggressive growth—
recognizing a mature life cycle—can benefit investors, at least in the short run, since
more profits would be available for dividends. But the search for breakthrough
diversifications should not be abandoned. The right one(s) might put a mature firm
on the growth path again.
very group drinking more Pepsi in recent years. Interestingly, preference for
sweeter-tasting products tends to diminish with use.19
Consumers were asked whether they favored change as a concept, and whether
they would likely drink more, less, or the same amount of Coke if there were a change.
But such questions could hardly prove the depth of feelings and emotional ties to the
product. The symbolic value of Coke was the sleeper. Perhaps this should have been
foreseen. Admittedly, when we get into symbolic value and emotional involvement,
any researcher is dealing with vague attitudes. But various attitudinal measures have
been developed that can measure the strength or degree of emotional involvement.
Herd Instinct
Here we see a natural human phenomenon, the herd instinct, the tendency of
people to follow an idea, a slogan, a concept, to “jump on the bandwagon.” At first,
acceptance of New Coke appeared to be reasonably satisfactory. But as more and
more outcries were raised—fanned by the media—about the betrayal of the old
tradition (somehow this became identified with motherhood, apple pie, and the
flag), public attitudes shifted strongly against the perceived unworthy substitute.
The bandwagon syndrome was fully activated. It is doubtful that by July 1985 Coca-
Cola could have done anything to reverse the unfavorable tide. To wait for it to die
down was fraught with danger—for who would be brave enough to predict the
durability and possible heights of such a protest movement?
Could, or should, such a tide have been predicted? Perhaps not, at least regard-
ing the full strength of the movement. Coca-Cola expected some protests. But
perhaps it should have been more cautious, by considering a worst-case scenario in
addition to what seemed the more probable, and by being better prepared to react
to such a contingency.
19
“New Cola Wins Round 1, but Can It Go the Distance?” Business Week, June 24, 1985, p. 48.
26 • Chapter 2: Cola Wars: Coke vs. Pepsi
INFORMATION BOX
THE DYADIC RELATIONSHIP
Sellers are now recognizing the importance of the buyer-seller interaction, a dyadic
relationship. A transaction, negotiation, or relationship can often be helped by certain
characteristics of the buyer and seller in the particular encounter. Research suggests
that salespeople tend to be more successful if they have characteristics similar to their
customers in age, size, and other demographic, social, and ethnic variables.
Of course, in the selling situation this suggests that selecting and hiring sales appli-
cants most likely to be successful might require careful study of the characteristics of
the firm’s customers. Turning to the Pepsi/Coke confrontation in Brazil and Venezuela,
the same concepts should apply and give a decided advantage to Coca-Cola and
Roberto Goizueta in influencing government officials and local distributors. After all,
in interacting with customers and affiliates, even a CEO needs to be persuasive in
presenting ideas as well as handling problems and objections.
Can you think of any situations where the dyadic theory may not work?
a CEO who was also a Latino, who could speak Spanish and share the concerns and
build on the egos of the company’s local bottlers. In selling, this is known as a dyadic
relationship, and it is discussed further in the Information Box. After all, why can’t
a CEO do a selling job on a distributor and capitalize on a dyadic relationship?
I see increasing reason to believe that the view formed some time
back as to the origin of the Makonde bush is the correct one. I have
no doubt that it is not a natural product, but the result of human
occupation. Those parts of the high country where man—as a very
slight amount of practice enables the eye to perceive at once—has not
yet penetrated with axe and hoe, are still occupied by a splendid
timber forest quite able to sustain a comparison with our mixed
forests in Germany. But wherever man has once built his hut or tilled
his field, this horrible bush springs up. Every phase of this process
may be seen in the course of a couple of hours’ walk along the main
road. From the bush to right or left, one hears the sound of the axe—
not from one spot only, but from several directions at once. A few
steps further on, we can see what is taking place. The brush has been
cut down and piled up in heaps to the height of a yard or more,
between which the trunks of the large trees stand up like the last
pillars of a magnificent ruined building. These, too, present a
melancholy spectacle: the destructive Makonde have ringed them—
cut a broad strip of bark all round to ensure their dying off—and also
piled up pyramids of brush round them. Father and son, mother and
son-in-law, are chopping away perseveringly in the background—too
busy, almost, to look round at the white stranger, who usually excites
so much interest. If you pass by the same place a week later, the piles
of brushwood have disappeared and a thick layer of ashes has taken
the place of the green forest. The large trees stretch their
smouldering trunks and branches in dumb accusation to heaven—if
they have not already fallen and been more or less reduced to ashes,
perhaps only showing as a white stripe on the dark ground.
This work of destruction is carried out by the Makonde alike on the
virgin forest and on the bush which has sprung up on sites already
cultivated and deserted. In the second case they are saved the trouble
of burning the large trees, these being entirely absent in the
secondary bush.
After burning this piece of forest ground and loosening it with the
hoe, the native sows his corn and plants his vegetables. All over the
country, he goes in for bed-culture, which requires, and, in fact,
receives, the most careful attention. Weeds are nowhere tolerated in
the south of German East Africa. The crops may fail on the plains,
where droughts are frequent, but never on the plateau with its
abundant rains and heavy dews. Its fortunate inhabitants even have
the satisfaction of seeing the proud Wayao and Wamakua working
for them as labourers, driven by hunger to serve where they were
accustomed to rule.
But the light, sandy soil is soon exhausted, and would yield no
harvest the second year if cultivated twice running. This fact has
been familiar to the native for ages; consequently he provides in
time, and, while his crop is growing, prepares the next plot with axe
and firebrand. Next year he plants this with his various crops and
lets the first piece lie fallow. For a short time it remains waste and
desolate; then nature steps in to repair the destruction wrought by
man; a thousand new growths spring out of the exhausted soil, and
even the old stumps put forth fresh shoots. Next year the new growth
is up to one’s knees, and in a few years more it is that terrible,
impenetrable bush, which maintains its position till the black
occupier of the land has made the round of all the available sites and
come back to his starting point.
The Makonde are, body and soul, so to speak, one with this bush.
According to my Yao informants, indeed, their name means nothing
else but “bush people.” Their own tradition says that they have been
settled up here for a very long time, but to my surprise they laid great
stress on an original immigration. Their old homes were in the
south-east, near Mikindani and the mouth of the Rovuma, whence
their peaceful forefathers were driven by the continual raids of the
Sakalavas from Madagascar and the warlike Shirazis[47] of the coast,
to take refuge on the almost inaccessible plateau. I have studied
African ethnology for twenty years, but the fact that changes of
population in this apparently quiet and peaceable corner of the earth
could have been occasioned by outside enterprises taking place on
the high seas, was completely new to me. It is, no doubt, however,
correct.
The charming tribal legend of the Makonde—besides informing us
of other interesting matters—explains why they have to live in the
thickest of the bush and a long way from the edge of the plateau,
instead of making their permanent homes beside the purling brooks
and springs of the low country.
“The place where the tribe originated is Mahuta, on the southern
side of the plateau towards the Rovuma, where of old time there was
nothing but thick bush. Out of this bush came a man who never
washed himself or shaved his head, and who ate and drank but little.
He went out and made a human figure from the wood of a tree
growing in the open country, which he took home to his abode in the
bush and there set it upright. In the night this image came to life and
was a woman. The man and woman went down together to the
Rovuma to wash themselves. Here the woman gave birth to a still-
born child. They left that place and passed over the high land into the
valley of the Mbemkuru, where the woman had another child, which
was also born dead. Then they returned to the high bush country of
Mahuta, where the third child was born, which lived and grew up. In
course of time, the couple had many more children, and called
themselves Wamatanda. These were the ancestral stock of the
Makonde, also called Wamakonde,[48] i.e., aborigines. Their
forefather, the man from the bush, gave his children the command to
bury their dead upright, in memory of the mother of their race who
was cut out of wood and awoke to life when standing upright. He also
warned them against settling in the valleys and near large streams,
for sickness and death dwelt there. They were to make it a rule to
have their huts at least an hour’s walk from the nearest watering-
place; then their children would thrive and escape illness.”
The explanation of the name Makonde given by my informants is
somewhat different from that contained in the above legend, which I
extract from a little book (small, but packed with information), by
Pater Adams, entitled Lindi und sein Hinterland. Otherwise, my
results agree exactly with the statements of the legend. Washing?
Hapana—there is no such thing. Why should they do so? As it is, the
supply of water scarcely suffices for cooking and drinking; other
people do not wash, so why should the Makonde distinguish himself
by such needless eccentricity? As for shaving the head, the short,
woolly crop scarcely needs it,[49] so the second ancestral precept is
likewise easy enough to follow. Beyond this, however, there is
nothing ridiculous in the ancestor’s advice. I have obtained from
various local artists a fairly large number of figures carved in wood,
ranging from fifteen to twenty-three inches in height, and
representing women belonging to the great group of the Mavia,
Makonde, and Matambwe tribes. The carving is remarkably well
done and renders the female type with great accuracy, especially the
keloid ornamentation, to be described later on. As to the object and
meaning of their works the sculptors either could or (more probably)
would tell me nothing, and I was forced to content myself with the
scanty information vouchsafed by one man, who said that the figures
were merely intended to represent the nembo—the artificial
deformations of pelele, ear-discs, and keloids. The legend recorded
by Pater Adams places these figures in a new light. They must surely
be more than mere dolls; and we may even venture to assume that
they are—though the majority of present-day Makonde are probably
unaware of the fact—representations of the tribal ancestress.
The references in the legend to the descent from Mahuta to the
Rovuma, and to a journey across the highlands into the Mbekuru
valley, undoubtedly indicate the previous history of the tribe, the
travels of the ancestral pair typifying the migrations of their
descendants. The descent to the neighbouring Rovuma valley, with
its extraordinary fertility and great abundance of game, is intelligible
at a glance—but the crossing of the Lukuledi depression, the ascent
to the Rondo Plateau and the descent to the Mbemkuru, also lie
within the bounds of probability, for all these districts have exactly
the same character as the extreme south. Now, however, comes a
point of especial interest for our bacteriological age. The primitive
Makonde did not enjoy their lives in the marshy river-valleys.
Disease raged among them, and many died. It was only after they
had returned to their original home near Mahuta, that the health
conditions of these people improved. We are very apt to think of the
African as a stupid person whose ignorance of nature is only equalled
by his fear of it, and who looks on all mishaps as caused by evil
spirits and malignant natural powers. It is much more correct to
assume in this case that the people very early learnt to distinguish
districts infested with malaria from those where it is absent.
This knowledge is crystallized in the
ancestral warning against settling in the
valleys and near the great waters, the
dwelling-places of disease and death. At the
same time, for security against the hostile
Mavia south of the Rovuma, it was enacted
that every settlement must be not less than a
certain distance from the southern edge of the
plateau. Such in fact is their mode of life at the
present day. It is not such a bad one, and
certainly they are both safer and more
comfortable than the Makua, the recent
intruders from the south, who have made USUAL METHOD OF
good their footing on the western edge of the CLOSING HUT-DOOR
plateau, extending over a fairly wide belt of
country. Neither Makua nor Makonde show in their dwellings
anything of the size and comeliness of the Yao houses in the plain,
especially at Masasi, Chingulungulu and Zuza’s. Jumbe Chauro, a
Makonde hamlet not far from Newala, on the road to Mahuta, is the
most important settlement of the tribe I have yet seen, and has fairly
spacious huts. But how slovenly is their construction compared with
the palatial residences of the elephant-hunters living in the plain.
The roofs are still more untidy than in the general run of huts during
the dry season, the walls show here and there the scanty beginnings
or the lamentable remains of the mud plastering, and the interior is a
veritable dog-kennel; dirt, dust and disorder everywhere. A few huts
only show any attempt at division into rooms, and this consists
merely of very roughly-made bamboo partitions. In one point alone
have I noticed any indication of progress—in the method of fastening
the door. Houses all over the south are secured in a simple but
ingenious manner. The door consists of a set of stout pieces of wood
or bamboo, tied with bark-string to two cross-pieces, and moving in
two grooves round one of the door-posts, so as to open inwards. If
the owner wishes to leave home, he takes two logs as thick as a man’s
upper arm and about a yard long. One of these is placed obliquely
against the middle of the door from the inside, so as to form an angle
of from 60° to 75° with the ground. He then places the second piece
horizontally across the first, pressing it downward with all his might.
It is kept in place by two strong posts planted in the ground a few
inches inside the door. This fastening is absolutely safe, but of course
cannot be applied to both doors at once, otherwise how could the
owner leave or enter his house? I have not yet succeeded in finding
out how the back door is fastened.