What are the advertising objectives of Benetton?

Benetton Case Sample Case Study

Discussion Questions

1. What are the basic objectives of advertising? What are the advertising objectives of Benetton?

Advertising may be used to achieve a variety of objectives including building awareness of the brand and/or company, informing customers about the product/service or company, providing information and developing an image Additional objectives include creating favorable attitudes and preferences for a brand, persuading the target audience to switch brands, and encouraging them to try new products. Advertising may also used to maintain top-of-mind awareness of a brand and/or company.

The objectives of Benetton’s advertising appear to differ from those discussed above. Benetton’s shock advertising did not focus on the company or its products, choosing instead to address socially relevant issues that might concern the global audience such as war, poverty, AIDS, discrimination and the death penalty. Benetton believed that its advertisements could project the company as a supporter of social causes and that its customers would highly value that stance. Of course many would argue that while Benetton’s goal was to use the ads to position itself as a socially conscious company, the ultimate objective was to use this image to help generate sales of its products.

2. Discuss the pros and cons of the shock advertising campaign that Benetton used for many years.

There are few companies in the world that enjoy the global brand recognition of Benetton. The unconventional shock advertisements used in this campaign evoked strong feelings among consumers and helped the company attract attention and generate publicity. One of Toscani’s quotes is appropriate here: Most good ads are forgotten after six months, but who still remembers the Benetton ad with the priest kissing the nun? Ten years later and people remember! That’s immortality!” Benetton has always had an image as somewhat of a renegade in the advertising community because of the avant-garde approaches the company has used. However, the company is also known for being very socially concerned and trying to make consumers realize the realities of the world in which they live. Benetton’s goal with the shock advertising campaign was to raise public awareness of social issues and position the company as a cutting-edge, socially conscious marketer. However, one might argue that the ultimate goal of the campaign was to help the company sell more of its products. The controversy surrounding the various shock ads that Benetton used over the past two decades generated a tremendous amount of publicity and made many consumers aware of the company. Also, it is important to note that Benetton’s primary target market is teens and young adults who are likely to be more tolerant of the shock ads as they may identify with the issues and causes the company is raising in these ads. Thus, the campaign might have actually helped Benetton’s image and sales.

There are also a number of negative aspects to the Benetton shock ads. Many critics argued that Benetton was exploiting human suffering to sell its products and felt that the company used the ads to create controversy and generate publicity rather than to address social issues. One might question whether the type of publicity Benetton was getting from its shock ads was really beneficial to the company. The Benetton ads were controversial even in more liberal European countries, and advertising self-regulatory bodies in Britain, France, and Spain condemned some of the ads and urged magazines to reject them. As long as the advertisements were just unconventional in nature, Benetton’s image was enhanced and sales grew. However, when Toscani resorted to using “shock techniques” from 1991 onwards with the pictures of a priest and nun kissing, a baby with uncut umbilical cord, etc., it generated huge furor among religious and social groups, not to mention the advertising regulatory bodies in various countries. Toscani argued that the company’s intentions were misunderstood by the public. While many thought the kiss to be inappropriate and the uncut umbilical cord to be disgusting, the position of the company was that all that was meant was to demonstrate love and motherhood. Unfortunately for Benetton, many countries banned the two ads. Another ad which created problems due to its intensity was the scene of a dying AIDS victim. The ad angered many viewers because they thought Benetton exploited the man’s suffering and intentionally made him look like Jesus Christ.

3. Oliviero Toscani has defended Benetton’s use of shock advertising by noting that it constitutes nothing less than a debate between advertising and art. He argues that potentially offensive images are acceptable in the world of art and journalism while in other realms such as advertising they are not. Do you agree with Toscani’s position?

The position taken by Oliver Toscani, Benetton’s former creative director, is that advertising should be free from any type of censorship or scrutiny since it is often a form of art. When viewing advertising as art it becomes difficult to say where one ends and the other begins. If one views the Benetton ads as a form of art, this suggests that there should be a wide tolerance for the types of images used. The statement by Toscani which is shown at the beginning of the case summarizes his position very well:

When Life magazine makes a cover about war, it makes the cover to inform, but also to sell the magazine and to sell the advertising pages inside the magazine — Chivas Regal and all the others. So Time magazine and all the others make a cover to inform and to sell. To do what I do, I do that to sell but also to inform. And as soon as you inform, people point a finger at you and say, “You are exploiting!” No. It’s the people who don’t even inform [who are exploiting]. I don’t care about the rejection; I’m not afraid to be rejected. Actually, it’s a big honor in this world.

There are other examples which support Toscani’s argument. For example, the December 22, 2003 issue of Time Magazine featured the Year in Pictures 2003 and showed disturbing images of the Iraq and Afghan war injured and dead — not very different from Toscani’s image of the bloodied uniform of the Bosnian soldier shown in one of the Benetton ads. Ethical or moral standards are very subjective and relative as evident from reactions to the Benetton ads showing an image of a priest and nun kissing. While this ad was banned in Italy, it won the Eurobest Award in Britain.

Some people question Toscani’s position, however, and argue that advertising is intrusive in nature and the public cannot decide what ads they will be exposed to in a medium. Advertising must often respond to a different set of standards since consumers often have no way of controlling their exposure to the images used in advertising and these images are often offensive to many people. Benetton has taken a novel approach and people are likely to disagree as to whether the ads are unethical. However, as noted discussed in question five, Benetton may have gone too far with the “We, on Death Row” campaign. The surviving family members of those killed by the inmates shown in the death row campaign were very offended by the ads and opposed to the idea of having the killers lionized in the national media. However, there were also those who feel that capital punishment is inhumane and praised Toscani’s effort to increase awareness of the issue.

4. Can you think of any other companies that use shock advertising? For what type of companies might this type of advertising be effective?

Calvin Klein and Benetton are the two companies that are probably best known for using shock ads although there are a number of other companies that have used the technique (see Abercrombie). Calvin Klein has been using shock ads for nearly two decades and built the company and brand by tapping into both the charge and the cultural unease surrounding youthful sexuality. The company’s controversial ads have explored the taboo of youthful sexuality and appeal to the independent spirit of young people. Calvin Klein was willing to accept the controversy that accompanies its ads because the scandal and sex appeal surrounding them help differentiate CK products. It also helped generated hundreds of millions of dollars worth of free publicity. Like Benetton, CK handles its advertising in-house which means that an agency does not have to become involved with the negative publicity and controversy surrounding their shock ads. However, Calvin Klein also found that there is a limit to how far they could push could push the envelope with their advertising. Many retailers rebelled against the Calvin Klein ads featuring childlike models in provocative poses which was referred to as “kiddie porn” by many critics. Irate consumer groups also called for boycotts and threatened to picket stores carrying the brand.

Another company that has used shock ads is FCUK (French Connection UK) who has been criticized for what many perceive as pornographic images in its campaigns. As discussed in Chapter 21 of the text, clothing retailer Abercrombie & Fitch has also been criticized for using shock techniques its ads as well as in other promotional materials such as its quarterly catalog. It should be noted that all of these companies are involved in the fashion industry and their primary target market consists of young people. Younger consumers are less likely to perceive shock ads as offensive or in bad taste and may even help create favorable attitudes toward these companies because of their edgy, rebellious tone.

While other companies have used shock ads, Benetton’s use of the advertising genre is unique. While the ads of Calvin Klein and FCUK are meant to differentiate these brands and increase sales, Benetton’s goal (at least according to Toscanni) was to raise the public’s awareness and make them more conscience of important social issues. Few companies are brave enough to experiment to such a degree with their advertising. One exception is Egg Banking, a United Kingdom based online financial services group that has used campaigns based on stereotyping of men, women and certain ethnic groups. One advertisement shows a dark-skinned man in an orange string bikini that revealed the outlines of his small sex organ. The caption reads, ‘Black men are well endowed.’ Another ad shows a blonde woman studying a modern painting as the brunette next to her studies an exit sign. The caption reads, “Blondes have nothing in their heads.” However, while some consumers in the UK have viewed the ads as humorous, other have been offended by them and have protested.

5. Do you agree with Benetton’s decision to drop the use of shock ads and return to the use of more conventional ads?

Benetton appears to have pushed the envelope too far with the “We, On Death Row” campaign as the ads generated very negative reactions and there were strong repercussions as a result. Families of the victims objected strongly to the campaign and accused Benetton of glamorizing murderers while ignoring the crimes they had committed. The state of Missouri filed a lawsuit arguing that it had been misled regarding the use of the photos. The lawsuit was settled in June 2001 when Benetton agreed to write letters of apology and to donate $50,000 to the Missouri Crime Victims Compensation Fund. In the US, retailer Sears canceled an exclusive $100 million contract to sell a line of Benetton clothes, calling the death row images “terribly insensitive.” Sears ended its contract even after Benetton agreed to allow the retailer to preview future ads. Toscani believed that the sharp criticism in the US was not justified as many countries in Europe had more already banned the death penalty. However, as a result of the increasing furor, Toscani resigned in May 2000. He was replaced by James Mollison, a graduate of Fabrica, Benetton’s cultural research and development center that backs young artists from all over the world.

In 2001 Benetton began running a new campaign featuring product-focused ads that ran in print and on TV and billboards. The ads showed exuberant teen models clad in Benetton sweaters and jackets against a crisp white background and were designed to convey a sense of freedom and a positive, dynamic expression of the Benetton style. The impact of Benetton reverting back to more conventional advertising is yet to be determined, although given the way Benetton had built its brand image under Toscani, this approach does appear rather conservative. As noted in the case, Toscani dismissed the more conventional ads as a “waste of money.” In some countries such as Britain they were panned as “so innocuous as to be invisible.” Benetton may be able to capture the customer’s attention and interest with more conventional ads focusing on young people wearing its colorful clothing and emphasizing product qualities and perceived value. While these types of ads may not generate as much attention and interest as the shock ads, they may be effective in shifting attention to Benetton’s products and image as a retailer rather than as a social crusader.

Benetton Case Sample Case Study

Discussion Questions

1. What are the basic objectives of advertising? What are the advertising objectives of Benetton?

Advertising may be used to achieve a variety of objectives including building awareness of the brand and/or company, informing customers about the product/service or company, providing information and developing an image Additional objectives include creating favorable attitudes and preferences for a brand, persuading the target audience to switch brands, and encouraging them to try new products. Advertising may also used to maintain top-of-mind awareness of a brand and/or company.

The objectives of Benetton’s advertising appear to differ from those discussed above. Benetton’s shock advertising did not focus on the company or its products, choosing instead to address socially relevant issues that might concern the global audience such as war, poverty, AIDS, discrimination and the death penalty. Benetton believed that its advertisements could project the company as a supporter of social causes and that its customers would highly value that stance. Of course many would argue that while Benetton’s goal was to use the ads to position itself as a socially conscious company, the ultimate objective was to use this image to help generate sales of its products.

2. Discuss the pros and cons of the shock advertising campaign that Benetton used for many years.

There are few companies in the world that enjoy the global brand recognition of Benetton. The unconventional shock advertisements used in this campaign evoked strong feelings among consumers and helped the company attract attention and generate publicity. One of Toscani’s quotes is appropriate here: Most good ads are forgotten after six months, but who still remembers the Benetton ad with the priest kissing the nun? Ten years later and people remember! That’s immortality!” Benetton has always had an image as somewhat of a renegade in the advertising community because of the avant-garde approaches the company has used. However, the company is also known for being very socially concerned and trying to make consumers realize the realities of the world in which they live. Benetton’s goal with the shock advertising campaign was to raise public awareness of social issues and position the company as a cutting-edge, socially conscious marketer. However, one might argue that the ultimate goal of the campaign was to help the company sell more of its products. The controversy surrounding the various shock ads that Benetton used over the past two decades generated a tremendous amount of publicity and made many consumers aware of the company. Also, it is important to note that Benetton’s primary target market is teens and young adults who are likely to be more tolerant of the shock ads as they may identify with the issues and causes the company is raising in these ads. Thus, the campaign might have actually helped Benetton’s image and sales.

There are also a number of negative aspects to the Benetton shock ads. Many critics argued that Benetton was exploiting human suffering to sell its products and felt that the company used the ads to create controversy and generate publicity rather than to address social issues. One might question whether the type of publicity Benetton was getting from its shock ads was really beneficial to the company. The Benetton ads were controversial even in more liberal European countries, and advertising self-regulatory bodies in Britain, France, and Spain condemned some of the ads and urged magazines to reject them. As long as the advertisements were just unconventional in nature, Benetton’s image was enhanced and sales grew. However, when Toscani resorted to using “shock techniques” from 1991 onwards with the pictures of a priest and nun kissing, a baby with uncut umbilical cord, etc., it generated huge furor among religious and social groups, not to mention the advertising regulatory bodies in various countries. Toscani argued that the company’s intentions were misunderstood by the public. While many thought the kiss to be inappropriate and the uncut umbilical cord to be disgusting, the position of the company was that all that was meant was to demonstrate love and motherhood. Unfortunately for Benetton, many countries banned the two ads. Another ad which created problems due to its intensity was the scene of a dying AIDS victim. The ad angered many viewers because they thought Benetton exploited the man’s suffering and intentionally made him look like Jesus Christ.

3. Oliviero Toscani has defended Benetton’s use of shock advertising by noting that it constitutes nothing less than a debate between advertising and art. He argues that potentially offensive images are acceptable in the world of art and journalism while in other realms such as advertising they are not. Do you agree with Toscani’s position?

The position taken by Oliver Toscani, Benetton’s former creative director, is that advertising should be free from any type of censorship or scrutiny since it is often a form of art. When viewing advertising as art it becomes difficult to say where one ends and the other begins. If one views the Benetton ads as a form of art, this suggests that there should be a wide tolerance for the types of images used. The statement by Toscani which is shown at the beginning of the case summarizes his position very well:

When Life magazine makes a cover about war, it makes the cover to inform, but also to sell the magazine and to sell the advertising pages inside the magazine — Chivas Regal and all the others. So Time magazine and all the others make a cover to inform and to sell. To do what I do, I do that to sell but also to inform. And as soon as you inform, people point a finger at you and say, “You are exploiting!” No. It’s the people who don’t even inform [who are exploiting]. I don’t care about the rejection; I’m not afraid to be rejected. Actually, it’s a big honor in this world.

There are other examples which support Toscani’s argument. For example, the December 22, 2003 issue of Time Magazine featured the Year in Pictures 2003 and showed disturbing images of the Iraq and Afghan war injured and dead — not very different from Toscani’s image of the bloodied uniform of the Bosnian soldier shown in one of the Benetton ads. Ethical or moral standards are very subjective and relative as evident from reactions to the Benetton ads showing an image of a priest and nun kissing. While this ad was banned in Italy, it won the Eurobest Award in Britain.

Some people question Toscani’s position, however, and argue that advertising is intrusive in nature and the public cannot decide what ads they will be exposed to in a medium. Advertising must often respond to a different set of standards since consumers often have no way of controlling their exposure to the images used in advertising and these images are often offensive to many people. Benetton has taken a novel approach and people are likely to disagree as to whether the ads are unethical. However, as noted discussed in question five, Benetton may have gone too far with the “We, on Death Row” campaign. The surviving family members of those killed by the inmates shown in the death row campaign were very offended by the ads and opposed to the idea of having the killers lionized in the national media. However, there were also those who feel that capital punishment is inhumane and praised Toscani’s effort to increase awareness of the issue.

4. Can you think of any other companies that use shock advertising? For what type of companies might this type of advertising be effective?

Calvin Klein and Benetton are the two companies that are probably best known for using shock ads although there are a number of other companies that have used the technique (see Abercrombie). Calvin Klein has been using shock ads for nearly two decades and built the company and brand by tapping into both the charge and the cultural unease surrounding youthful sexuality. The company’s controversial ads have explored the taboo of youthful sexuality and appeal to the independent spirit of young people. Calvin Klein was willing to accept the controversy that accompanies its ads because the scandal and sex appeal surrounding them help differentiate CK products. It also helped generated hundreds of millions of dollars worth of free publicity. Like Benetton, CK handles its advertising in-house which means that an agency does not have to become involved with the negative publicity and controversy surrounding their shock ads. However, Calvin Klein also found that there is a limit to how far they could push could push the envelope with their advertising. Many retailers rebelled against the Calvin Klein ads featuring childlike models in provocative poses which was referred to as “kiddie porn” by many critics. Irate consumer groups also called for boycotts and threatened to picket stores carrying the brand.

Another company that has used shock ads is FCUK (French Connection UK) who has been criticized for what many perceive as pornographic images in its campaigns. As discussed in Chapter 21 of the text, clothing retailer Abercrombie & Fitch has also been criticized for using shock techniques its ads as well as in other promotional materials such as its quarterly catalog. It should be noted that all of these companies are involved in the fashion industry and their primary target market consists of young people. Younger consumers are less likely to perceive shock ads as offensive or in bad taste and may even help create favorable attitudes toward these companies because of their edgy, rebellious tone.

While other companies have used shock ads, Benetton’s use of the advertising genre is unique. While the ads of Calvin Klein and FCUK are meant to differentiate these brands and increase sales, Benetton’s goal (at least according to Toscanni) was to raise the public’s awareness and make them more conscience of important social issues. Few companies are brave enough to experiment to such a degree with their advertising. One exception is Egg Banking, a United Kingdom based online financial services group that has used campaigns based on stereotyping of men, women and certain ethnic groups. One advertisement shows a dark-skinned man in an orange string bikini that revealed the outlines of his small sex organ. The caption reads, ‘Black men are well endowed.’ Another ad shows a blonde woman studying a modern painting as the brunette next to her studies an exit sign. The caption reads, “Blondes have nothing in their heads.” However, while some consumers in the UK have viewed the ads as humorous, other have been offended by them and have protested.

5. Do you agree with Benetton’s decision to drop the use of shock ads and return to the use of more conventional ads?

Benetton appears to have pushed the envelope too far with the “We, On Death Row” campaign as the ads generated very negative reactions and there were strong repercussions as a result. Families of the victims objected strongly to the campaign and accused Benetton of glamorizing murderers while ignoring the crimes they had committed. The state of Missouri filed a lawsuit arguing that it had been misled regarding the use of the photos. The lawsuit was settled in June 2001 when Benetton agreed to write letters of apology and to donate $50,000 to the Missouri Crime Victims Compensation Fund. In the US, retailer Sears canceled an exclusive $100 million contract to sell a line of Benetton clothes, calling the death row images “terribly insensitive.” Sears ended its contract even after Benetton agreed to allow the retailer to preview future ads. Toscani believed that the sharp criticism in the US was not justified as many countries in Europe had more already banned the death penalty. However, as a result of the increasing furor, Toscani resigned in May 2000. He was replaced by James Mollison, a graduate of Fabrica, Benetton’s cultural research and development center that backs young artists from all over the world.

In 2001 Benetton began running a new campaign featuring product-focused ads that ran in print and on TV and billboards. The ads showed exuberant teen models clad in Benetton sweaters and jackets against a crisp white background and were designed to convey a sense of freedom and a positive, dynamic expression of the Benetton style. The impact of Benetton reverting back to more conventional advertising is yet to be determined, although given the way Benetton had built its brand image under Toscani, this approach does appear rather conservative. As noted in the case, Toscani dismissed the more conventional ads as a “waste of money.” In some countries such as Britain they were panned as “so innocuous as to be invisible.” Benetton may be able to capture the customer’s attention and interest with more conventional ads focusing on young people wearing its colorful clothing and emphasizing product qualities and perceived value. While these types of ads may not generate as much attention and interest as the shock ads, they may be effective in shifting attention to Benetton’s products and image as a retailer rather than as a social crusader.

Rather than moving solely into product based advertising after Toscani’s exit, the company could still continue to address social issues like war, poverty, education, child labor and exploitation and the like but with less controversial ads. In fact, Benetton indicated that it would not be completely abandoning its social issues messages and planned to run ads speaking to the refugee issue. The subject is very important to James Mollison who wrote a book on Kosovan refugees in conjunction with the United Nation’s High Commission for Refugees as well as an earlier book on foreign workers in the factories of northeast Italy. In 2003 Benetton began a social issues campaign dealing with the problem of hunger that exists in many countries and promoting its work with the World Food Program. The “Food for…” campaign consists of ads promoting the important role the availability of food plays in relations to issues such as education, work, peace, and life. Examples of messages from this campaign, as well as other Benetton ads, can be found on the company’s web site at www.benetton.com.

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Integrated Marketing Communication Plan Assignment

Assessment task title: An Integrated Marketing Communication Plan for (insert brand name)

 

Due Date: Friday, October 12 2018 by 5pm (Week 11).

 

Weighting/Value: 25%

 

Details of Task: Assume the role of either a marketing communications manager within an

organisation or a marketing communication consultant hired by an organisation to devise an

integrated marketing communication (IMC) campaign for a new brand. You are required to

develop an IMC plan for this new product in the market.

 

The IMC plan:

(i) Pertains to a new product for a new company. You cannot use an existing product or company.

(ii) Be based on one of the three (3) product offerings outlined below. There will be no exceptions!

(iii) Pertain to a B2C (business-to-consumer) environment.

(iii) Cover a single 12 month period of time.

(iv) Have a budget equivalent to a maximum of RM 1 million

(v) Be confined to one geographic location i.e. Malaysia.

 

The THREE (3) product offerings you can select from are:

(i) A themed cafe (ii) baby food (III) Energy drinks

 

 

The IMC plan will comprise of the following sections:

 

Executive summary

Provide an overview of the plan so the readers can quickly grasp what the objectives, main

findings, and recommendations are.

 

1.0. Introduction

Include purpose of your assignment, briefly introduce your product concept, outline of your

assignment and select a geographic location. Note: for this assessment task you are not required

to provide the following typical business report subsections: methodology / scope/ assumptions /

limitations.

 

2.0 An abbreviated IMC situation analysis

● 2.1. Internal analysis: In this section of your IMC campaign plan you will discuss the

strengths and weaknesses of your brand.

● 2.2. External analysis: In this section of your IMC campaign plan, you will briefly discuss

industry trends resulting in the identification of opportunities and threats for your selected

product. Identification of consumer trends to be included.

 

3.0 Segmentation, targeting and positioning (markets)

Identification of a minimum of 3 potential segments. Briefly describe each segment (market) and select a Target Market. Justify your selection. Recommend a positioning strategy for your brand.

4.0 IMC objectives

Develop a minimum of 5 communication objectives, complying with the SMARTT guidelines.

5.0 Creative strategy statement

● Tagline/ brand associations/ packaging design/ choice of colours (if significant)

● Recommended message strategy, the corresponding appeals and executional techniques

with justification.

6.0 Selection and discussion of IMC tools

● Describe how you would like to use each of your selected MC tools over the course of your

12-month IMC campaign.

● Clearly outline the costs associated with using each of your selected MC tools. You are

required to provide a detailed budget table for each selected MC tool. The costs

associated with using each MC tool will come out of your RM1 million.

● A written explanation and graphical presentation of media schedule.

● A timetable of activities (to include all MC tools/functions).

The following are specific instructions regarding your use of various media vehicles (i.e., your

media mix):

 

Think carefully about which media vehicles you select, as these will be used to deliver your brand

messages/sales promotions etc. As such, you need to explain the link between each media vehicle and your selected primary target audience. Again, it is critical that you explain how this media mix will facilitate the attainment of your communication objectives.

You are required to:

● include at least two mass media vehicles and at least one type of social media in your

IMC plan.

● Describe how these media vehicles will help you to achieve your communication objectives.

● Discuss when you want to use each media vehicle over the course of your 12-month IMC

campaign. For example, do you want to use one particular media channel before the product

launch and other types after the launch? If so, why?

● Outline the (i) frequency and (ii) cost of each media vehicle selected.

7.0. Campaign evaluation & conclusion

In this section, you will discuss how you intend to evaluate your IMC campaign. In other words,

you will:

● Discuss the specific evaluation methods/techniques you would recommend be used to

evaluate your IMC program.

● Discuss what is to be tested and when the testing will occur.

● Provide a final summary budget table outlining the top line costing for each of your IMC tools.

It should also include the costs associated with the evaluation phase of your IMC campaign.

Note: Collateral material

This refers to your promotional material. This can include advertisements, brochures, point-ofpurchase

(POP) material, packaging if you are using creative packaging, sales promotion material,

and trade promotion material. This must be original work and must reflect your communication

objectives, target audience and positioning of the product.

10% of the overall assignment marks are allocated for creativity and collateral material.

 

 

Referencing

You are required to use the APA referencing format for this assignment. Failure to use this

reference format will result in a loss of marks. The Unit Moodle site has links to information on this referencing format. Please also refer to the Q manual. It is expected that you will provide at least 10 references that are a combination of journals, textbooks, trade-press articles, newspaper articles, and relevant industry sources. Ensure that all references cited in text are listed in your references and vice versa. Check that you have appropriately acknowledged the sources that you used to formulate your statements.

Saving of Assignment/ Unit Work You are required to keep a copy of each assignment that you submit in case you are asked to resubmit your work. This copy must be retained until the results of this unit are finalised. Each semester considerable distress results from students losing work because of computer/disk/USB/iPod failures. Such failures ARE NOT a reason for seeking within semester extensions of time. It is the responsibility of all students to adequately back-up their work in multiple ways. Do not rely

 

Word limit: 3000 words, excluding executive summary, table of contents, reference list,

appendices and collateral material.

Presentation requirements: The ability to present a well formatted and edited piece of work is an

essential graduate attribute for business students. As such, you are expected to prepare and

present your work in a professional manner. Attention to basic elements of expression – spelling,

punctuation, and grammar is essential.

● Bind your assignments.

● All pages of your assignments should be numbered appropriately.

● You must use numbered descriptive subheadings throughout your IMC campaign plan.

● Fully justify your text.

● Use 12 (font size) Times New Roman, 2.5cm margins all sides and 1.5 spacing. Tables and

diagrams need to be single spaced, 10 fonts.

● Tables and figures need to be labelled appropriately and referred to in the body of the plan.

● If colour features in your collateral material, you should print this material in colour.

● You must report the word count at the end of the document.

Estimated return date: 2 weeks from submission date

Criteria for marking: The following is a general guide to the breakdown of marks between different

elements of the task,

 

Task Components ( % of Available Mark)

· Executive Summary 5%

· Introduction 5%

· SWOT Analysis 10%

· Segmentation, Targeting and Positioning 10%

· Communication Objectives 10%

· Creative Strategy Statement 5%

· IMC Program Mix 30%

· Campaign Evaluation & Conclusion 10%

· Presentation and References 5%

· Collateral Material 10%

· Total 100%

 

Learning objectives assessed: Objectives 1, 3 & 5.

 

1. Demonstrate a detailed understanding of the marketing communication strategies used to build

brands.

3. Analyse and apply the marketing communication processes as they apply to specific targets.

5. Determine and apply the processes associated with evaluating the effectiveness of marketing

communication across a range of media vehicles.

You should also bear in mind Unit Objective 4 when developing your IMC campaign. That is, you

should think about any social, legal, and ethical issues that could impact on the way in which you

 
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Case Study: Chase Sapphire- Creating A Millennial Cult Brand

9 – 5 1 8 – 0 2 4

R E V : N O V E M B E R 2 6 , 2 0 1 8

 

Professor Shelle Santana, Senior Lecturer Jill Avery, and Case Researcher Christine Snively (Case Research & Writing Group) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. Shelle Santana is a former employee of American Express. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2017, 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

S H E L L E S A N T A N A

J I L L A V E R Y

C H R I S T I N E S N I V E L Y

Chase Sapphire: Creating a Millennial Cult Brand One morning in July 2017, Pam Codispoti (HBS MBA ‘93), President of Chase Branded Cards, and

Eileen Serra, Senior Advisor and former CEO of Chase Card Services for JPMorgan Chase, shook their heads in astonishment. They had launched the Chase Sapphire Reserve Card in August 2016, and the card exceeded its 12-month sales target in two weeks. Half of the new customers were under 35 years old, building on the strong millennial cohort that was initially attracted to the Sapphire brand. These millennial consumers were proudly posting photos of their new Chase Sapphire Reserve cards on social media. Some were uploading “unboxing” videos on YouTube when they received their Reserve card. #SapphireReserve was trending on Twitter. One customer, initially denied the card because she had opened too many new credit card accounts, wore a handmade Chase Sapphire Reserve costume for Halloween in a social media-fueled attempt to persuade the company to approve her application.

The product’s pièce de résistance that drove social media and word of mouth surrounding the launch was its 100,000-point sign-on bonus. The size of the bonus was unprecedented for Chase, and had garnered the attention of prominent bloggers and affiliates such as Brian Kelly, aka The Points Guy, who declared the Chase Sapphire Reserve “the must-have card of 2016, if not the most appealing card ever.”1 It also captured the attention of competitors, who saw it as a shot across the bow in the arms race of reward programs.

While Codispoti and Serra were pleased with the progress to date, they knew that their hard work had just begun. As planned, the company had reduced the introductory 100,000-point bonus to 50,000 points in January 2017. Now they had to ensure that the flood of new customers became profitable to the firm.

As the company approached the one-year anniversary of the Reserve launch, Codispoti and Serra wondered how many of their enthusiastic consumers would remain with the brand, renew their cards for another year, and pay the $450 annual fee now that their promotional inducement was gone. They had to assess how the drop to 50,000 bonus points would impact the rate of new customer acquisition— particularly given the enhanced richness of American Express’s and Citi’s rewards programs—and to design new features and benefits for the Chase Sapphire Reserve card to maintain its competitive differentiation. They also wanted to return their attention to the broader Sapphire portfolio, which included two other products—Sapphire and Sapphire Preferred. How should the products be differentiated to ensure they did not cannibalize each other? Were there other new products that could address the needs of new customer segments to capitalize on the momentum of the Reserve launch?

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JPMorgan Chase: Consumer and Community Banking JPMorgan Chase operated four lines of business: Commercial Banking, Corporate & Investment

Bank, Asset & Wealth Management, and Consumer & Community Banking (CCB). Under the leadership of CEO Gordon Smith, the CCB division served as the face of the company to the general public. In addition to credit cards, CCB also included merchant acquiring, payment processing, small business and consumer banking services (including Chase’s 5,200 retail bank branches), mortgages, and auto financing.

In 2016, CCB counted nearly half of all U.S. households as customers and generated $44.9 billion in revenue, with net income of $9.7 billion. Chase was ranked #1 or #2 in credit card issuance, credit and debit payments volume, and merchant acquisitions. It boasted the highest-rated mobile banking app and the largest ATM network (with 18,000 locations), and was the most visited banking portal. Over 50% of affluent U.S. households lived within two miles of a Chase branch or ATM.

The U.S. Consumer Credit Card Market There were five primary players in the credit card industry. Issuers were banks that issued credit

cards to consumers and businesses, extended loans in the form of credit lines, and absorbed the resulting credit risk. Cardholders repaid charges made on their cards, often in monthly installments, paying interest on the unpaid portion. Merchant Acquirers signed up and managed relationships with Merchants so that merchants could accept credit cards as a form of payment. Network Providers (e.g., MasterCard and Visa) processed payments between consumers and merchants. Under the “open-loop” system operated by MasterCard and Visa, an issuer, such as JPMorgan Chase, marketed and issued cards to consumers and businesses, MasterCard or Visa processed the transactions, and a merchant acquirer enrolled merchants to accept issuers’ cards running on the network provider’s system. 2 In contrast, American Express (Amex) and Discover served as their own network providers and merchant acquirers in a “closed-loop” system. Each of the partners received a small percentage of the value of each customer’s purchase (i.e., “transaction”). (See Exhibit 1 for a summary.)

In 2016, the U.S. general purpose credit card industry sales totaled ~$3 trillion. 3 In Q4 2016, the market was dominated by six issuers that accounted for 78% of industry sales. JPMorgan Chase led in market share (21.7%), followed by Amex (19.9%), Citigroup (11.5%), Capital One (11.0%), Bank of America (8.9%), and Discover (4.7%).4 The industry experienced 1.1% annual revenue growth between 2011 and 2016, and was expected to grow 4.5% annually between 2016 and 2021.5 Industry profit margins had dropped from 31% in 2011 to 25% in 2016 due to lower interest rates, increased competition, greater regulation, and security/technology costs. 6 Customer acquisition in the industry was competitive and expensive. Costs to acquire a new cardholder ranged from $250 to $500.7

American consumers held 636 million credit cards8 and 38% of households carried credit card revolving debt, which averaged roughly $11,000.9 On average, people carried 2.35 credit cards in their wallets (14% held seven or more cards)10 but generally only used one on a regular basis. Thus, issuers strove to make their cards the preferred choice, or “top of wallet.” Generally speaking, Amex network cardholders charged $1,687 per month on their cards, while Visa cardholders charged $843.11

Issuers had three main sources of revenue: cardholder fees, interest paid by consumers on unpaid card balances, and interchange fees, which were paid by merchants as a percentage of each transaction amount. The contribution of each revenue source varied greatly from one issuer to another. For example, Amex, which required its charge card customers to pay all purchases in full each month, earned 21% of its revenue from interest payments and 79% from cardholder and interchange fees,12

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while JPMorgan Chase earned an estimated 70% of its revenue from interest payments and 30% from cardholder and interchange fees.13 Across the industry, about 30% of all customers were transactors (those who paid their balances off in full each month to avoid paying interest fees), 43% were revolvers (those who did not pay off their balances in full each month), and 28% were dormant (those who carried, but did not use their cards frequently).14

Market Segmentation

Issuers segmented the market in different ways in order to identify different types of consumers. Common segmentation strategies included demographic, behavioral, and psychographic methods.

Demographic segmentation separated consumers based on their life stage, assets, or credit score.

• Life Stage: Young adults (ages 18–26) accounted for 15% of industry revenue. 15 The 26–60 age group accounted for 59% and tended to be more loyal.16 Senior citizens accounted for 15%, and the remainder (11%) was derived from business accounts.17

• Assets/Credit: The wealthy segment consisted of households with $500,000 to $1 million in assets, the affluent segment $100,000 to $500,000, and the emerging affluent segment consisted of those not yet affluent, but likely to be so within five to ten years.18 Affluent and wealthy consumers preferred to put most of their spending on credit cards and were a little less likely to carry revolving debt than the average consumer.

Behavioral/attitudinal segmentation provided insight into how consumers used their cards and how much they valued rewards and/or what types of rewards they preferred (cash back, miles, points), as well as their channel preferences. For example:

• Annual Fee: While most consumers did not pay an annual fee for credit cards, some issuers offered cards with annual fees of $25–$550 to attract consumers that valued rich rewards and benefits.

• Rewards: Rewards were one of the key features consumers considered when selecting and using a credit card. There were currently three types of rewards cards in the market:

– Cash Back on Purchases: Cards that offered cash back attracted consumers who didn’t want to spend time planning for and redeeming reward points. Some products offered higher percentages of cash back on spending in particular categories.

– Proprietary Rewards on Purchases: Issuers offered rewards in the form of points accumulated based on spending; point multiples varied for different categories of purchases. Points could be redeemed for travel benefits, merchandise, or other perks.

– Cobranded Rewards on Purchases: Issuers partnered with particular hotels, airlines, retailers, and other merchants to offer cobranded cards that offered rewards affiliated with that partner. Points earned would typically be transferred to the cobrand partner’s loyalty program. These cards carried both the partner and the issuer brands.

Recently, some issuers had increased their level of rewards and cobrand partner remuneration to a point where the costs of the rewards were approaching the interchange fee the issuer earned on the purchase.

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518-024 Chase Sapphire: Creating a Millennial Cult Brand

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• Interest Rates or APR: Low interest rates appealed to consumers who wanted the option to extend payment on card purchases over time. Average interest rates varied by card type and could range from 12.88% to over 20%.19

• Credit Lines: Some heavy spenders were drawn to cards with high credit lines that allowed them to access credit for big-ticket purchases in categories such as travel and home improvement.

• Creditworthiness: Consumers with low credit scores were attracted to cards that offered a high likelihood of approval. These cards often carried higher interest rates and/or annual fees to compensate for the higher level of risk the issuer incurred.

A segmentation approach based on consumer psychographics offered yet another way to group consumers. McKinsey & Company identified five prominent segments based on consumers’ beliefs about and attitudes toward credit (see Exhibit 2 for segment descriptions and Exhibit 3 for how consumer behavior differed by card type).20

A New Strategy for Chase Consumer Credit Cards In 2006, despite the size and profitability of Chase Card Services, JPMorgan Chase CEO James

“Jamie” Dimon (HBS MBA ’82) believed that more should be done to strengthen Chase’s proprietary products and to build a stronger presence for the company in the affluent market. In 2007, he hired Gordon Smith from Amex to become the CEO of Chase Card Services. Smith and Serra, who had also recently joined Chase, created a new strategy that rationalized the company’s product portfolio and identified the need to create new Chase proprietary products to compete in the affluent market.

Serra launched a substantial market research project. “It was clear we needed to deeply understand the various segments in the market, what features were attractive to those segments, and what kinds of products we wanted to build for those segments,” she explained. The research confirmed the attractiveness of the affluent/high net worth (AFF/HNW) customer segment. According to company research, this group represented ~15% of the ~200 million U.S. cardholders, generating ~50% of total spending on credit cards, of which Chase was capturing ~15% market share. Sixty percent of AFF/HNW individuals lived in the top 15 markets in the U.S. that were well-served by Chase branches.

Competition in the affluent space was formidable. Travel cobranded credit card products, such as those for United and Delta Air Lines, had always been strong in the affluent market, but competition for proprietary issuer cards had been dominated by Amex. In 1984, Amex had introduced its Platinum Card, initially available by invitation only, with a $250 annual fee. It offered 24-hour customer service, access to exclusive clubs, and special amenities at high-end hotels, resorts, and restaurants around the world. 21 In 2007, Amex increased the annual fee to $450, but its extensive slate of rewards and perks allowed savvy users to recoup most of this cost. 22 The Platinum Card’s value proposition included exclusivity, rewards, and access. Amex referred to its customers as “card members,” and all cards were embossed with a “member since” date, which for many served as a badge of honor that marked the arrival of financial success and stability. “For more than 30 years American Express has reaped enormous profits by telling its customers that they are successful, elite, the cream of the moneyed crop and . . . that there’s no better way to make certain everyone knows just how special you are than by pulling an Amex out of your wallet,” explained the New York Times. 23 However, after reviewing consumer insights from her research, Serra questioned just how relevant the Amex brand was to the younger, emerging affluent consumer. She felt confident that Chase could compete for these affluent consumers with the right product and positioning.

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Chase Sapphire: A New Sub-Brand Is Born In 2009, JPMorgan Chase consolidated its Chase proprietary card portfolio into five primary sub-

brands to address distinct market segments: JPMorgan (for private banking customers), Chase Sapphire (for affluent consumers interested in travel and dining), Chase Ink (for small business owners), Chase Freedom (for those consumers interested in cash back), and Chase Slate (for consumers interested in building financial responsibility). The Chase brand was used on all products as an endorser brand, which gave consumers a sense of trust, credibility, and security, according to Chief Brand Officer Susan Canavari, while each of the sub-brands carried its own unique meaning. Serra recounted the discussion: “There were people who felt that all of our products should just be called ‘Chase.’ That just didn’t make sense to me. The market is highly segmented. Sub-branding allows you to speak directly to each target segment. I think it strengthens the Chase brand, broadening it and making it more relevant to more segments of consumers.”

In August 2009, Chase launched Chase Sapphire, its first Chase proprietary card marketed to the affluent consumer. A company statement articulated the value proposition of this new offering: For today’s savvy affluent consumer, Chase Sapphire is the new, next generation rewards card that combines the premium service and travel benefits high-end consumers expect with practical features, so that they can always get more of what matters most. To enter the market, the team decided to offer a card with no annual fee. Consumers earned 1 point per dollar on general spend and 2 points per dollar on airline travel booked through Chase. Customers also received 10,000 bonus reward points after they spent $500 on the card during the first three months.

Note:

  • Do not use any outside research whatsoever. 
  • All research is contained within the case PDF. Please provide your own, original analysis. 

Read the case study PDF: Chase Sapphire- Creating a Millennial Cult Brand in order to complete this assignment.

Please answer the following (in a Case Study / written paper format using full sentences and prose (NOT bullet points)):

In completing the case please make sure to answer the following in your paper. 

  • Note: Remember to reference the case’s attached exhibits and financials were relevant.
  • Do NOT use first person (“I” or “me” forms of speech) in writing a case document
    1. Perform a brand analysis of Chase using the case documents and the brand pyramid. Your analysis should mirror your work from the discussion board assignment as follows:
    • SALIENCE (Category)
      • Needs this category fulfills for target segments
      • Recognition – how is Chase recognized and regarded within its category by target segments?
    • PERFORMANCE & JUDGEMENTS
      • Features & Functional – what features do target segments like about Chase and its product(s)?
      • Design (elements that we know matter)
        • Describe Chase’s design and how your brand’s design differentiates and what it communicates
        • Fighting brand confusion: What we need them to know/believe (incl. brand “truths”) that they aren’t aware of or are confused regarding and describe how the brand can help communicate that fact better.
          • (From video: Think Keurig where some customers believe Keurig has instant coffee in their k-cups instead of high quality grounds. The company needs to change this perception. This can also be something the company does well but not enough customers are aware)
    • FEELINGS & IMAGERY
      • Emotional Connection – describe the emotional fulfillment target segments receive from Chase
      • Social Connections – what social value does Chase deliver to target segments? (Think Prius and how it allows customers to communicate they are “green” just by driving such a unique looking vehicle)
        • Remember social media matters here
        • Image – How would you describe Chase’s image?
    • 2. Based on your brand pyramid analysis what are your recommendations for Chase?
      • Are there gaps?
      • Should they be doing anything differently?
  • Overview
    • What was the general market for credit card offerings and where was Chase looking to compete?
    • How did the Sapphire concept sit with Chase’s existing product offerings and why was Sapphire an offering the market needed?
  • Customers
    • Describe the landscape of segments for credit card customers and based on your answers where is Chase’s best opportunity for the Sapphire?
    • Who are the most ideal customers for the Chase Sapphire card and what are their expectations of a credit card offering?
    • Please pay special attention to Dormants (people who use and shelve the card) and churners (people who rack up points and leave the service). If there are other segments please find them.
  • Challenges
    • What defines success for Chase in launching Sapphire (besides getting as many subscribers/cardholders as possible which is a given)?
    • What are churners and why do they present a challenge?
    • What challenges to dormants pose?
    • If you have uncovered other segments, what challenges do they pose to the success of this card?
    • What were the challenges in designing Sapphire to appeal to key segments?
    • How did Chase answer these challenges and fulfill customer expectations at the same time? (pay special attention to the Millennial and millennial-minded base)
    • Remember to refer back to your brand pyramid too
  • GTM (go-to-market) strategy
    • How did Chase market the Sapphire and why (or why not) do you believe it maximized effectiveness? Could they have done something better?
    • Remember to leverage learnings from your brand pyramid
    • Why or why not do you consider Chase Sapphire to be a success? Back your answers with information from the case.
  • Recommendations
    • Given competitor responses and the possible opportunities for Chase after successfully being in the market a while, make at least three strategic recommendations to senior management on what you think is the best path forward and back your answer with case information.
 
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Tata Case Study

Answers the three questions. Need citation and try to use simple words

1. Identify and explain what the four pillars of Blue Ocean (value innovation) strategy are (your textbook will be helpful for this one… this is also known as the Four Actions Framework).

2. Apply the Blue Ocean strategy pillars to the Tata Nano case, be specific and include case citations (refer to the textbook, if you need help).

3. Provide your assessment of the Tata execution and diagnose both what was done well and what was done poorly.  If something was done poorly, then also provide justification that explains WHY it was not done well (e.g. Tata was not successful at A, as evidenced by B (pg. 3)).

N1314

 

Tata Nano’s Execution Failure: How the People’s Car Failed to Reshape the Auto Industry and Create New Growth

01/2017-6275

This case was written by Dr Robert Bong and Dr Mi Ji, under the supervision of W. Chan Kim and Renée Mauborgne, Professors of Strategy at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Special thanks go to Oh Young Koo for her research on this topic.

Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu.

Copyright © 2017 INSEAD

COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.

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On January 13, 2008, Ratan Tata, Chairman of the Tata Group, unveiled the Tata Nano: “the People’s Car”, at the Auto Expo in New Delhi. According to Mr Tata, the Nano was built to meet all safety standards, designed to meet and exceed emissions norms, be low in pollution and high in fuel efficiency. Moreover, the car was within everyone’s reach, the price of its base model being only 1 lakh1 (US$1,984).2

The Nano and its creators received rock-star greetings at the event. The cheers and whistles from the crowd drowned the polite applause from the front row VIP guests. Ratan Tata had to pause several times for the crowd to calm down. In the next ten days of the Expo, hundreds of thousands of people visited the Tata Motors pavilion to catch a glimpse of the Nano.

On March 23, 2009, the Tata Nano was officially and commercially launched at the Taj Mahal Palace in Mumbai. As there were only 1,000 cars on display across India, most people had to place an order without having seen, let alone test drive, the Nano. Within two weeks, the Tata Nano official website received 20,000,000 hits. Order applications reached 200,000 – the biggest sales uptake in the history of global automobile industry.

Tata Nano: The People’s Car that Promised to Reshape the Auto Industry

The Tata Nano changed the dynamics of the Indian automobile industry. Socioeconomic development in recent years led to fast growth of the automobile industry in India. As people in the emerging middle-income class aspired to greater mobility, the small and compact car segment had grown phenomenally. Of a total of 1,551,880 passenger cars sold in India in 2009, about half were small and compact cars. The growth of the segment attracted competition from local as well as foreign players. Renowned makes such as Suzuki, Ford, Hyundai, Toyota, Renault-Nissan, Chery (Dodge) and Mercedes all jumped into the competition with their respective economy models. The average price was at first in the Rs 200,000 ($3,968) range. As the market got crowded, automakers tried to differentiate themselves by offering new models with more advanced technology, design and styling, features and functions. With each new model, prices moved up into the Rs 450,000 ($8,928) range.

While engaged in fierce competition, auto manufacturers had actually missed the low-end mass market that small and compact cars normally targeted in more developed economies. India’s GDP per capita remained low – nominal GDP per capita was only US$1,127 in 2009.3 Middle-income consumers who could afford to buy passenger cars represented only a very small percentage of the total population. Even in urban areas, the majority of people either used public transport or two-wheeled vehicles for their daily transportation needs. In 2009, of total motor vehicle sales in India, only about 7% were small and compact passenger cars, and 76% were two-wheeled vehicles. In fact, only 10% of Indian households owned a motorcycle. As economic development boosted demand for personal mobility, for the majority of Indian families two-wheelers were the entry-level choice to the world of motor vehicles.

1 A lakh is a numbering system in India equal to 100,000. Rs 1 lakh=Rs 100,000. 2 To provide readers with a consistent reference, the currency conversions here and below all use the

historical exchange rate at the commercial launch of the Tata Nano (March 23, 2009). At the time of the Tata Nano unveil in 2008, Rs 1 lakh was equal to US$ 2,556.

3 World Bank, http://data.worldbank.org/indicator/NY.GDP.PCAP.CD . Accessed November 24, 2012.

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The Tata Nano was conceived to appeal to this vast population of people neglected by the automobile industry. Tata Motors, a subsidiary of the Tata Group, one of the largest conglomerates in India, is the country’s largest automobile company by sales, with consolidated revenues of US$14 billion in 2009. Tata Motors was the leading manufacturer in commercial vehicles and among the top three in passenger vehicles, with products in the compact, midsize and utility vehicle segments.

In 2002, travelling in his car on a rainy afternoon in Bangalore, Ratan Tata had spotted a family of four on a scooter at an intersection: “The father was riding on the scooter, his young kid standing in front of him between his legs, and his wife seated behind him holding on a little baby.” This was a typical scene on Indian roads. Due to the lack of decent means of transportation, people across the country were risking their lives every day to get to work or to send their children to school.

This encounter prompted Ratan Tata to think about conceiving “a safe, affordable all-weather form of transport for such a family”. The idea of building a four-wheel vehicle from scooter parts came to his mind. At the Geneva Motor Show in March 2003, Ratan Tata revealed the idea to a reporter from the Financial Times: it would look like a real car and have proper seating, not stretch canvas as in the case of an auto rickshaw. The car might be a little noisier than an ordinary car but it would have to be both simple and safe. When asked about the cost, Tata said it would ideally be around one lakh ($1,984)4, which was the price of the most expensive two-wheelers at the time. The next day, March 10, 2003, the Financial Times ran the headline “Tatas plan Rs 1 lakh car.”

Creating the Nano: Achieving Distinctive Value at Low Cost

Ratan Tata’s ambitious plan was greeted with disbelief by the auto industry, as the cheapest existing car was priced at Rs 2.5 lakh ($ 4,960) in India. Even in 2006, two years before the unveiling of the Tata Nano, Osamu Suzuki, founder of Suzuki, made a public statement that it was impossible to make a reliable car for Rs 1 lakh.

Yet from day one, Tata Motors was committed to turning the dream of a people’s car into reality. In 2003, a dedicated team was set up to undertake this ‘mission impossible’. It was mainly composed of young engineers under 35, who were highly motivated and ready to take on new challenges. The initial two years of explorations followed a trial-and-error process. The team tried using different platforms, chassis, engines, transmission, power trains and materials to build a rock-bottom low-cost car to meet the 1-lakh price point. After various experiments, they concluded that all those technological innovations, albeit great, could not be applied to building a Rs 1 lakh car on an scalable basis.

Technology was not the only challenge confronting the team in the beginning. The imperative of creating a “real car” for a family of five on a scooter posed an even greater challenge. A plastic car that met all the performance and safety standards, for example, would still be perceived as a “toy car” within the socio-cultural context in India despite all good intentions.

After many design proposals had been turned down by Ratan Tata, the team realized that simply cutting costs across the board would not put them on a path to creating a low-cost car

4 Rs 1 Lakh equalled US$2,110 at the exchange rate on March 10, 2003.

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that Indian families would embrace. The car also needed to carry the promise of upward social mobility. This would require a completely new paradigm and a revolutionary way of designing and building a car.

In July 2005, the team was assigned a new leader, Girish Wagh, from another division of Tata Motors. His past experience of bringing a low-cost pickup truck to market and eventually capturing the market for three-wheelers prompted him to see the Tata Nano project in a different light. To him the low-cost challenge was not only about cost, but also about customer needs and regulatory requirements. In other words, cost reductions needed to be premised upon delivering the core buyer value that mattered to both customers and potential customers.

From the inception of the idea on that rainy afternoon in Bangalore, the Tata Nano was never about what was good for existing passenger car owners per se. Instead, it was about what was good for the millions of Indian families crowding onto scooters or other two-wheelers and how to provide them with a safe, comfortable, reliable mobility that was economical and decent. The team realized that this value proposition to buyers should not be compromised while they endeavoured to achieve target costing for the 1-lakh price point. It would be a journey to build a proper car that delivered critical buyer value while dramatically reducing costs to make it accessible to the masses.

They came to realize that some factors could not be reduced or eliminated even though doing so would reduce costs. For example, making the Nano a two-door car could achieve substantial cost savings, but omitting easy access to the rear seats would greatly inconvenience the typical multi-generational Indian families, and therefore could not be adopted.

Likewise, a typical small car has a turning circle of more than 8.6m (28ft) corresponding to a steering angle of 38mm to 40mm (1.5in to 1.57in). The team designed a steering angle of 43mm (1.69in) so as to achieve a very small turning circle of 8.0m (26ft 3in). It had never been done before – and not doing so would have saved costs – but they knew it was critical to the end user on Indian roads, and to the Nano’s practicality and character. In fact, all cost innovations were premised upon and conducive to the goal of transforming the life of Indian families by getting them off a two-wheeler and into a safe, comfortable, fuel-efficient passenger car.

In seeking to provide a comfortable, relatively spacious, reliable and low-cost car, Tata Motors collaborated with Bosch to design a two-cylinder aluminium rear engine in place of the conventional four-cylinder steel front engine. While 98% of passenger cars had a front engine with either front-wheel drive or rear-wheel drive, a rear engine with rear-wheel drive would create a lot more space without having to increase the size of the car. Moreover, a smaller footprint would offer buyers tax savings over bigger passenger cars and the car would weigh less, and therefore require a less powerful engine to achieve the same performance, as well as saving on the transmission system, rolling parts and the suspension system. With the engine in the rear, combined with innovative body design and styling by the project team, the Nano was 4% wider, 14% taller and had 21% more interior space than the Maruti 800, the then market leader of the small and compact car segment. It had a curb weight of 600 kilograms (1,322lb).

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The innovative engine of the Nano not only cost less to build but also provided better fuel efficiency, emission control and cost of maintenance. The car had a 4-speed manual transmission system capable of a maximum speed of 105 kilometres (65 miles). It also had fuel economy of around 21 kilometres per litre (49 miles per gallon) under city driving conditions. With a carbon dioxide value of 101 grams per kilometre (5.7oz per mile), it had the lowest emissions of all cars in India and set a new standard for other car manufacturers.

Another example was the system control of the engine. A typical electronic control unit (ECU) for a mid-sized passenger car in Europe had an average of 5,500 parameter groups. Yet the more complex the system control and software design, the more processors and system control sub modules were required, and the higher the power consumption and heat generation, besides the added cost. The Nano reduced the parameter groups to only 1,700. An idle speed control unit, for example, was typically made up of more than 100 parameters, yet most drivers would hardly notice the difference in revolutions per minute (RPM) in their cars, even up to a difference of 20 RPM. The Nano was designed with only 7 parameters.

Among other examples of cost innovations, the front seats of the Nano had no seat frame and were adjustable to only three fixed reclining positions, which resulted in 10% fewer components than the Maruti and a 60% reduction in cost. The door handles were designed with 70% fewer parts than the cheapest European cars. The dashboard was centrally placed with a bare-bones instrumentation panel, speedometer, odometer and digital fuel gauge. The fuel inlet and cap were placed under the nose of car inside the front boot, which eliminated the need to cut a hole on the side of the car body. The wheels were made of low-cost alloy with only three lugs (instead of four on most conventional wheels). The tires were tubeless 12-inch tires, with the front ones smaller (narrower to be exact) than the rear tires, with a 7.1- inch ground clearance which provided better road balance and lighter steering control without the need for power steering. The body was made of lightweight sheet metal, which delivered critical cost savings. But it was stronger than a conventional car body as it had ample crumple zones and borrowed from the design concept of a motorcycle to use both the body skin and internal triangular space frames to support the structural load.

The team’s cost-reduction efforts were not limited to product innovations. To lower the cost to users, they endeavoured to lower the total cost of ownership of the Nano, not only in terms of the upfront purchase price, but also monthly fixed expenses and operating expenses such as after-sales services and maintenance, as well as interest repayments on loans. The team created a suppliers outreach programme that included more than 800 different suppliers. In addition to targeting the manufacturing costs, operating costs and replacement parts were worked out starting from the prototype.

To reduce the monetary burden on customers migrating from a two-wheeler to a car, the team arranged cheaper financing services for borrowers through partnerships with major Indian banks. People could purchase a Nano by paying as little as Rs 2,999 ($59) and financing the rest at a lower rate of interest than that of other four-wheelers. For example, the official interest rate on the Nano’s closest rival the Maruti 800 at ICIC Bank was 14.5-16%, whereas that on the Nano was 13%. Tata Motors itself offered financing at 12-13%, which in turn brought the company extra income through customer loans.

The Tata Nano research team conducted an operating economics study and calculated the total cost of ownership based on the total investment and monthly repayments over 36 months,

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usage of 1,250 kilometres (777 miles) per month, and all monthly fixed expenses and operating expenses. When compared with a range of alternatives, the Tata Nano was among the most affordable options not only against other small and compact passenger cars, but also three-wheelers and motorcycles in India.

An innovative distribution plan was designed to reach the great mass of Indian families. Tata Motors intended to distribute the Nano through Tata Group’s non-traditional channels, like electronics retailer Croma and the fashion retailer Westside. In addition, the Tata Nano team seriously explored the possibility of extending such non-traditional channels to include distributed manufacturing, whereby semi knocked down kits (SKD Kits) could be sent to strategically positioned satellite mini-factories where the Tata Nano could be assembled like Ikea furniture and distributed directly to buyers. In so doing, Tata Motors expected to make massive cost savings on operating assembly lines, running local dealerships, and paying for labour. Furthermore, it could also save on high insurance fees for the delivery of cars requiring a long, dangerous trip across India.

Challenges and Surprises: A Bumpy Road for the Nano

The Tata Nano team was well on its way to achieving its cost target when Ratan Tata announced to the world that the launch price of the base model would be Rs 1 lakh on January 13, 2008. Yet a huge challenge loomed ahead. In the spring of 2008, the prices of oil, metal and other commodities sharply and unexpectedly increased. 5 The manufacturing and processing of raw materials were heavily dependent on petroleum, as was transportation. When the price of oil soared to USD $200 per barrel, it drove up the prices of derivatives like plastic, and other raw materials like copper, anywhere from 40% to 200% in some cases.

With only six months to go until the scheduled start of production, and less than a year to go before the Tata Nano was to be launched commercially, the project team went back to the drawing board and reassessed every single item, looking for further opportunities for cutting costs. At the same time they brought back key suppliers in the outreach programme to renegotiate the pricing of every single item. After a series of deliberations, all key suppliers agreed to cooperate with Tata Motors to reach the cost target by keeping the original prices and engaging in further cost reduction efforts.

The challenge that almost derailed the project, however, came from a completely different source. As a corporation with a strong reputation for social responsibility, Tata Motors intended to locate the manufacturing facilities for the Nano in one of the poorest areas in India. The management believed that by doing so, Tata Motors could create jobs for the local community, thereby helping regenerate a part of the country that was socially and economically lagging. Singur in West Bengal was such an area. The state government of West Bengal offered Tata Motors attractive incentives for setting up the manufacturing plant in Singur in anticipation of the employment opportunities and economic prosperity it would bring to the local community.

5 The causes of the price spikes are subject to debate. Some analysts believe that the global commodity price

rises in early 2008 were caused by a combination of factors, particularly, the strong demand of the developing economies on the one hand, and the attractiveness of commodities as alternative financial assets against the backdrop of intensifying credit market problems and slowing growth in advanced economies on the other.

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The initiative, however, met strong local resistance. Between 2006 and 2008, Ms Mamata Banerjee, then head of the Trinamool Congress Party, repeatedly voiced strong protests in the media against the conversion of arable land for industrial use and the way the West Bengal government had acquired the land. Firmly believing that it was pursuing a lofty cause, Tata Motors went ahead and built the facilities despite the disgruntlement and accusations.

In June 2008, the political agitation turned directly against Tata Motors. Protesters included former landowners who were dissatisfied with the compensation they had received and hired goons reportedly brought in by Mamata Banerjee’s organizers. The swelling crowd of protesters stormed the wall of the new Tata Nano plant in Singur, coming into conflict with the policemen guarding the compound. The protest became increasingly violent, threatening the safety and wellbeing of the company’s 400 white-collar workers and more than 800 apprentices located at the Singur plant.

On the fateful evening of August 28, 2008, Girish Wagh took the extremely difficult and painful decision to stop the work at the new plant. At this point the plant was 95% complete. In fact, five Nanos had already been manufactured in Singur during the test phase and Rs 15,000,000,000 ($297,589,462) had been spent on the site. On October 3, 2008, Ratan Tata announced that Tata Motors would pull out of Singur. Within the next month, Tata Motors managed to strike an agreement with the Gujarat state government for a parcel of land in Sanand, which became the new home for the Nano, 2,100 kilometres (1,305 miles) away.

The move from Singur to Sanand was no ordinary move. The plant had been designed to last for decades, not to be dismantled right after installation. It involved detailed planning down to accounting for literally every single nut and bolt. This forced the team to come up with new ideas and techniques for dismantling the equipment and executing anti-rust protection procedures for transit. Every single part was meticulously tagged, photographed, packed and loaded onto the trucks, so that anyone could track and retrieve any part during the transit. The entire process took 3,200 trailer trucks hauling a distance of 2,100 kilometres (1,305 miles) over a period of four months to complete.

To compound the situation, 46 of the tier-1 ancillary manufacturers who had already made substantial investments in setting up their respective facilities in Singur had to relocate immediately to the new site in Sanand, and in the middle of the global financial crisis. In a true spirit of partnership, Tata Motors agreed to bear 75% of the relocation costs for all 46 of them.

As the commercial launch of the Tata Nano approached, an interim manufacturing site was needed while the Sanand plant was being built. The Tata Motors Ace truck plant located in Pantnagar, 1,300 kilometres (808 miles) to the Northwest of Singur, shouldered the responsibility. In less than four months, the Tata Nano team managed to roll out five cars in Pantnagar, with a maximum capacity of producing 50,000 Tata Nanos per year.

Meanwhile, Tata Motors, working in collaboration with the construction companies, suppliers and the state government of Gujarat, completed the new plant in Sanand in 14 months (for a project that would normally have taken 24 months). On June 2, 2010, the new plant was officially inaugurated in Sanand, with a capacity of producing 250,000 Tata Nano a year to meet peak demand, and a reserve capacity of up to 350,000 a year.

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A People’s Car or a Poor Man’s Car?

Heroic though the relocation effort was, it unavoidably incurred substantial additional costs for Tata Motors. And, more critically, it distracted the management from its original strategic plan and the distribution plan for Tata Nano in particular. Instead of using non-traditional channels and adopting the SKD models to allow the Tata Nano to reach Indian families throughout the country, Tata Motors resorted to traditional dealerships for the display and sale of the car, as these were already in place. Moreover, due to the limited production capacity of the interim facilities, only 1,000 cars were available for display across India when the Nano was launched commercially, and they went on display in larger showrooms in big cities.

As typical two-wheeler buyers were reluctant to walk into a large car showroom, the “people’s car” mostly reached existing car owners who were looking to buy Tata Nano as a second car for its cheap price. As the reputation of the Tata Nano went from being perceived as the “people’s car” to the “cheapest car” by existing owners, two-wheeler owners were turned off. After all, what they wanted was not only better mobility but also to upgrade their socioeconomic status.

By the end of March 2012, exactly three years after its commercial launch, monthly sales crossed the 10,000 mark for the first time. To be exact, 10,475 units had been delivered by Tata Motors’ dealers to buyers that month, nowhere near the original projection of 20,000 to 25,000 units per month.

In April 2011, Tata Motors put together a 10-member crack team to monitor the progress of Tata Nano sales. One of its actions was to set up 210 “First-class Showrooms” in small cities and towns across India, manned by 1,200 personnel. Each showroom displayed one Tata Nano in a floor area of only 50m²(538ft²). To increase the distribution reach, Tata Motors tied up with the hypermarket chain Big Bazaar to display the Tata Nano at the latter’s 70 outlets in smaller cities and towns, making it more accessible and real to potential buyers.

While the crack team was still working hard to get the sales and marketing campaign back on track, Ratan Tata announced at the Geneva Auto Show 2012 that the humble Tata Nano was about to get a major upgrade from its “people’s car” roots to a must-have fashion item. The headline read: “Tata Reboots Nano, World’s Cheapest Car, as Coolest Small Car.”

Despite this effort, Nano sales dropped from 74,521 cars in 2011-12 to 53,847 cars in 2012- 13, followed by 21,130 cars sold in 2013-14 and 16,903 cars in 2014-15. In 2015 Tata Motors launched Tata Nano GenX in an attempt to revive the Nano brand by repositioning it as a more upmarket product. Yet sales of the Nano continued to dwindle. In 2016, barely over 10,000 GenX cars were shipped. Apparently the “people’s car” has missed its people.

 

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This document is authorized for use only by Huiru Li in Summer 2020 Strategic Management-1 taught by Matt Fisher, San Francisco State University from Jun 2020 to Nov 2020.

 

 

 

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Questions to think about before the class and while watching the three videos:

1. If screened against the Blue Ocean Idea Index (BOI Index), did the Tata Nano, as originally conceived, create exceptional utility? Was it strategically priced to capture the target mass of four-wheeler noncustomers? Did it exercise target costing and hit its cost target? Did it effectively overcome possible adoption hurdles for employees, partners and the general public?

2. When the prices of oil, metal and other commodities rose sharply and unexpectedly in 2008, how did Tata Motors respond? What allowed it to overcome the seemingly insurmountable obstacles posed by the crisis?

3. Despite huge initial orders for the Nano, by the time the car was commercially available, sales fell short of performance expectations. What went wrong here? In particular, what did Tata Motors mishandle when it tried to build its facilities in Singur with the intention to promote local growth and prosperity? In your opinion, what was the key problem in the execution of the Tata Nano strategy? Could you explain this using the blue ocean strategy framework?

4. What would be a step in the right direction for the Tata Nano if it ever wants to get back on track and head towards the blue ocean?

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