Day 3 mini-case study: general motors and ford motor co

Class 4: Mini-Case New Coke versus Coca-Cola 1. Why did new Coke fail so miserably in 1985? 2. Why do you think Coke's rivals (like Pepsi) capitalise upon the mistake? "God, What a Blunder: The New Coke Story By Michael Bastedo Angela Davis True Cokeaholics know the mystic ritual well. Only one source of the murky brown elixir is acceptable: the traditional, 6 1/2-ounce bottle. No cans, please, and certainly none of those plastic jugs. The bottle is refrigerated for at least two hours and a wide-mouthed glass is filled with ice--preferably five full-sized cubes. The bottle is uncapped slowly, reverently, its contents allowed to trickle gently over the ice until the glass is filled: too much foam squanders carbonation. The glass is lifted and--eureka!--the tongue rejoices at the familiar, hearty, tingly, raspy, 99-year-old taste--neither sweet nor tart, a taste that is both complex and unique. And all too soon, as the last desperately hoarded supplies of Old Coke disappear, it is a taste that will tickle American palates no more. (1) In what Pepsi Cola-USA president Roger Enrico called, "the Edsel of the 80's," (2) the introduction of New Coke represents one of the greatest marketing debacles of the 1980's. How did this happen, and why? Coke began with Dr. John Pemberton and his three-legged brass pot all the way back in 1886; by 1985, Coke was closing in fast on its centennial anniversary. Coke (and Coke chairman Roberto Goizueta) had witnessed a remarkable set of accomplishments during the 1980's: the acquisition of Columbia Pictures in January 1982 and the introduction of diet Coke later that August were foremost among them. There were some creeping problems, however. Most distressing of these was the fact that Coke was losing market share to its biggest competitor, Pepsi. Coke's lead had dropped from a better than two to one margin to a mere 4.9 percent lead by 1984. In supermarkets, Coke was now trailing by 1.7 percent. (3) Coke was clearly in danger of becoming the Number-Two soft drink. This was despite the fact that Coke was far outspending Pepsi on advertising, by upwards of $100 million per year. One major problem was that Pepsi's advertising was simply more effective. The Pepsi Challenge had been fabulously successful: Pepsi's share jumped 8 points almost immediately. (4) Even worse, the tests were true: in blind taste-tests, Coke drinkers preferred Pepsi. At first Coke ads tried to laugh off the Challenge: "They called our product 'Q' and their product 'M' and you know people like the letter 'M' better." When that didn't work, the philosophy changed to, "One sip is not enough." Apparently, Coke tasted better only when you drank a full glassful. (The whole is greater than the sum of its parts in Cokeland.) Finally, Coke was forced to conduct taste tests of its own, but here they clearly identified the two colas. Coke won. (5) Coke's lead in the cola market was tenuous at best. As we said before, Coke was trailing in supermarkets by 1.7 percent, which represented a third of Coke's total sales. Coke's domination was largely continued by its greater availability. The difference in share, according to Coke's own market research department, was that if someone wanted Pepsi, she might only find Coke. Essentially, Coke's market share was being saved by McDonald's and Hardee's. "Everyone at Coca-Cola knew that in the coming years that situation would change, and the result was too shocking to imagine." (6) There was a turning tide in the upper echelons of Coca-Cola management. Roy Stout, head of market research for Coca-Cola USA, put it this way:"If we have twice as many vending machines, dominate fountain, have more shelf space, spend more on advertising, and are competitively priced, why are we losing share? You look at the Pepsi Challenge, and you have to begin asking about taste." (7) rian Dyson, president of Coca-Cola USA, was swayed. "Maybe the principal characteristics that made Coke distinctive, like its bite, consumers now describe as harsh.[m]aybe the way we assuage our thirst has changed." (8) By the fall of 1983, the top brass allowed Dyson and Stout "to explore the possibility of a reformulation." (9) Dyson chose Sergio Zyman, senior vice-president of marketing of Coca-Cola USA, to head the project. Much of the market research conducted between 1983 and 1985 on a the possibility of a new Coke was discouraging. One set of focus groups said that Pepsi could improve its formula, but the answer to a Coke reformulation was a resounding NO. "It was like saying you were going to make the flag prettier," said Zyman. (10) In other focus groups, there was another problem. When asked, "What is your favorite drink?" most people said, "Coke!" When asked, "What do you drink?" the response was shocking: sometimes Coke, sometimes Pepsi, sometimes even a generic if it was on sale. As Thomas Oliver puts it, "There appeared to be a disturbing gap between what people said and what they did." (11) But in September 1984, they thought they had found the answer. The technical division had brewed a formula of Coke that beat Pepsi in blind taste- tests, by as much as 6 to 8 points. Before, Pepsi had beaten Coke by anywhere from 10 to 15 points. This was an 18-point swing. "The minute we had the product, Coca-Cola USA said let's set it in motion," said Dyson. (12) All discouraging market research was tossed into the rectangular file. On April 23, 1985, New Coke was released to a great deal of fanfare. By the middle of June, people were "Saying 'No' to New Coke." (13) Reaction to New Coke was swift and humiliating. The taste of New Coke was likened to "sewer water," "furniture polish," "Coke for wimps," and, most disheartening to Coca-Cola management, "two-day-old Pepsi." (14) "I miss the battery acid tang," said one. Cokeaholics began stockpiling Old Coke in their homes. Black marketeers sold Old Coke for upwards of $30 a case and were looking for ways to import it from abroad. Some desperate addicts had the drink shipped to them from Montreal by FedEx. One Hollywood producer rented a $1,200 wine cellar to hold his 100 cases of Old Coke. The Old Coke Drinkers of America logged 60,000 calls to their national headquarters. (15) The mere idea of changing Coke provoked some of the more virulent responses. Here's a sample: • "like spitting on the flag" (16) • "At first I was numb. Then I was shocked. Then I started to yell and • "I couldn't have been more surprised if someone had told me that I was gay," said one husband and father of two. (18) • "Changing Coke is like God making the grass purple or putting toes on our • "When they took Old Coke off the market, they violated my freedom of choice. It's as basic as the Magna Charta, the Declaration of Independence. We went to was in Japan over that freedom." (20) • "There are only two things in my life: God and Coca-Cola. Now you have taken one of those things away from me." (21) • "Next week, they'll be chiseling Teddy Roosevelt off the side of Mount The Mistakes: If it ain't broken, don't fix it! In a country dedicated to consumption, Coca-Cola has been the most successful product in history, the undisputed leader of the $25 billion soft-drink industry. (23) A number of adjustments have been made in Coke's proportions of sugar and caffeine since 1886. But its secret flavoring formula never before had been changed. Unlike almost every other product ever built or brought, the one thing it never was was new. Overhauling the ingredients of a popular product "happens all the time, whenever you see 'New and Improved' on a label," noted Montgomery Security analyst Emanuel Goldman. "The difference with Coke is that this is one of the most successful products in the history of the world." (24) The company took the gamble because Coke's market share fell from 24.3 in 1980 to 21.8 in 1984. The drop stemmed from the popularity of low-calorie drinks, including Diet Coke, and the "Pepsi Generation" campaigns made to America's youth. "With aging baby boomers increasingly concerned about their weight and turning to nonsugar drinkers, most growth in the sugar segment was expected to come from the teen drinkers. Coke needed to increase its appeal to the young." (25) Coke decided to court teen-agers by sweetening the recipe and calling it "new" Coke. Essentially, Coke got boxed in. Pepsi had positioned itself as the "leading edge" soft drink and called its consumers the "Pepsi Generation." As Pepsi USA President Roger Enrico explains, "For twenty years, we've used this Pepsi Generation campaign to reach out not just to the young but to all people who look forward, who are curious about the next think, who want more out of life." (26) Coke represented the past, nostalgia, small towns, parades, picnics, American values. "There are still a lot of people in Coke's America. But their numbers aren't growing." (27) The problem was that this image would not necessarily appeal to the younger constituency of soft drinkers who would dominate the market. Were there less drastic alternatives? It could have simply changed its campaigns to give Coke a younger image. Image is probably more important than taste in selling soda pop. If Coke was determined to change the recipe, it could have done it without letting anyone know. Alternatively, a New Coke could have been introduced without knocking out Old Coke off the shelves. But the company considered, and rejected, plans to keep the old-formula drink in circulation under the name Coke 100 or "original" Coke. Why did they make the most drastic move? The one central mistake in Coca-Cola's decision to change the formula was maximization. When Goizueta became chairman in 1981, he was determined to be the chairman of change. He promised there would be "no sacred cow in the way we manage our business, including the formulation of any or all of our products." (28) His aggressive attitude helped reinvigorate what had become a sluggish company. Goizueta started shattering tradition early in his tenure. Putting the sacred Coke name on a new product for the first time, he introduced diet Coke in 1982. In early 1985 he put the Coke name on another new product, Cherry Coke. Goizueta had moved the company aggressively and successfully into new fields, buying Columbia Pictures in 1982. "He has breathed new life into the company," says William Meyers. "They needed that, but now.they are tinkering too much." (29) Goizueta and the other executives were getting caught up in the success of their previous changes and decided to make one grand decisive move to recapture the soft-drink market they were losing to Pepsi. The taste question was crucial to Coke. But what Coca-Cola executives fail to realize is that "there's more to marketing soft drinks than winning taste tests. More than any other product.consumers have an emotional attachment to their soft drink brand." (30) Even Gay Mullins, the Seattle man who formed Old Coke Drinkers of America, failed repeatedly to identify or prefer Old Coke in taste tastes. For most people, Coca-Cola was the quintessential representation of Americana. "Baseball, hamburgers, Coke --they're all the fabric of America." (31) When Coca-Cola announced that it would bring back Old Coke, Democratic Senator David Pryor of Arkansas, called Coke's capitulation "a very meaningful moment in the history of America. It shows that some national institutions cannot be changed." (32) As Coke discovered fiddling with the formula of the 99-year-old beverage was an assault to patriotic pride; something akin to burning the flag. "We did not understand the deep emotions of so many of our customers for Coca-Cola," said President Donald R. Keough. "It is not only a function of culture or upbringing or inherited brand loyalty. It is a wonderful American mystery. A lovely American enigma. And you cannot measure it any more than you can measure love, pride or patriotism." (33) Coca-Cola executives should have known that they were playing a very tricky game in changing Coke. When the firm first came out with 10-oz, king size bottles in the mid-1950s, many drinkers were beside themselves. "People raised hell with me and said it didn't taste the same," said Crawford Johnson, president of Birmingham's Coca-Cola Bottling Co. United. 'I told them, 'We put the same ingredients in it that we put in the little bottle.'" (34). One Rotten Apple Spoils The Whole Bunch! Coke's market research on the reformulation was one of the most exhaustive market research projects in the history; it cost $4 million and included interviews with almost 200,000 consumers. Coke's management made sure that the taste test results were checked and corroborated in every major market in the country. What went wrong? The particular question which most frequently has arisen is why Coke's extensive market research was unable to provide management with better guidance in the reformulation decision. When announcing the reintroduction of old Coke in July 1985, Coca-Cola executives suggested that research is not capable of measuring the types of consumer feelings that resulted from the attempted reformulation. However, most observers did not attribute the failure of Coke's research in this instance to an intrinsic limitation of the capabilities of marketing research. Rather, they judged that the research was conducted or interpreted incorrectly. Although some have argued that Coke's research error was to overgeneralize from inexact taste results, the vast majority of people believe Coke's research efforts went wrong with what has been called the "wrong question explanation." (35) This explanation argues that the reason that Coke's marketing research did not detect the consumer outcry which resulted from the reformulation was that they did not make it clear to the taste-test respondents that if most people chose the new Coke flavor, then the traditional Coke flavor would no longer be available. Since the intense publicity has died down, some further details of the research behind the new Coke decision have come to light. Specifically, it is now known that Coca-Cola's market research department did indeed ask the right question. In fact, considerable attention was devoted to testing consumer reactions to the idea of changing Coke's flavor. Coca-Cola consumers were asked a long series of questions about what their reactions to such a change would be. Would you be upset? Would you try the new drink? Would you switch brands immediately? "We estimated from the response that 10%-12% of exclusive Coke drinkers would be upset, and that half of those would get over it, but half wouldn't." (36) To center in on the debate, Coca-Cola's research department used focused groups, a favorite marketing tool. "While the interviews pointed to people's willingness to try a new Coke many people just didn't believe anyone could or should tamper with the king of colas." (37) For the most part, Coca-Cola followed standard market research procedure for the development of a new product or the modification of an existing one. Begin with focus group testing of the product concept, and then a survey would be conducted, using individual interviews with a large representative sample of consumers, to verify and quantify the results of the focus groups. Coke's only deviation from this standard sequence is that the quantitative survey of individuals appears to have been done before rather than after the focus groups. But this is a minor point. The problem was that the focus group phase and the survey conflicted. "Although both the focus group and the survey provided indications that there would be consumer dissatisfaction, the survey results indicated that this dissatisfaction would be limited to a small segment of the market; the focus groups suggested the dissatisfaction would be widespread." (38) However, it is standard market research practice to trust survey research over focus groups. Moreover, Coke's research did a pretty good of predicting consumer response, at least initially. When the reformulation was first introduced, the consumer response was favorable. But by the end of May 1985, it had begun to change. It was this that Coca-Cola had not anticipated. They were well aware that they might alienate some faithful Coke drinkers as mentioned earlier, but the company expected that alienation to fade. It was completely unprepared for how it would spread and deepen in the two months following the debut of the new Coke. "It is this change in consumer opinion, and only this change, that Coke's market research had failed to predict." (39) The conflict between the focus group and the survey of individuals is crucial. As it turned out, one can see that both procedures had provided important information. "When New Coke was first introduced, people made individual decisions on it, and most at least acquiesced to the change. But over time, as the majority of the population had the opportunity to be stimulated by the media reports and other social interactions with angry Coke loyalists, most changed their minds." (40) This is what was predicted by the focus groups. Given the 10%-12% figure from the quantitative survey, a typical eight-to twelve focus group is likely to have at least one angry loyalist as a member. The focus group results showed that, in this situation, exposure to the views of angry Coke loyalists is likely to sway the others in the group to their position. "By July 1985, Coke executives had sensed that this social interaction was a major factor in causing their problems; it was reported in Advertising Age that Coke officials were blaming the press for " fanning public discontent." Of course, by then it was too late. Coke had already ignored the research that told them how the market would respond to a flavor change carried out in a public context." (41) There were a number of reasons for this. First of all, the bottlers let it be known that they were not interested in adding another product to an already bloated line. Coke had just added Diet Coke, Caffeine-Free Diet Coke, Caffeine-Free Coke and Cherry Coke. The top brass was also pushing for the addition of Diet Cherry Coke and Minute Maid Orange Soda. These new products increased bottler costs tremendously. Coca-Cola management was also worried about the interplay between two flagship brands. They were worried that a new Coke would simply cannibalize the sales of old Coke, which would in turn allow Pepsi to become America's Number-One Cola. A new Coke would invite "invidious comparison" between the two Cokes in the media and the public that would ultimately hurt the sales of both brands. And which brand would McDonald's choose? What problems could this cause? Ultimately, Goizueta decided that the costs of two Cokes far outweighed the benefits and steeled himself to the fact that old Coke was going to have to go. This is a very intriguing question. Even after the consequences and repercussions of this blunder were analyzed, no one at Coke was reprimanded, much less fired. The same top management team of Goizueta, Keough, and Dyson continued for a number of years until Dyson moved on to head Coca-Cola's company-owned bottling operations. Why was no one held accountable? There are a number of reasons. First of all, the fact is that Coke did not lose money as a result of this fiasco. In fact, the stock price jumped from 61.875 to 84.500, a 35.5% increase. By early 1986, the stock had reached an all-time high of $110 million. Goizueta was rewarded with $1.7 million for 1985 in salary and bonuses, and was additionally awarded with almost $5 million in bonus for the increase in stock price. President Keough's wage was potentially more than $3 million. (42) According to Coca-Cola's 1986 proxy statement, these awards were given for: "singular courage, wisdom and commitment in making certain decisions in 1985 which entailed considerable business risks, the net result of which has been, and will continue to be, extremely beneficial to the shareholders of the company." Herbert A. Allen, president of Allen & Co. and chairman of Coke's compensation committee said that, "They had the courage to put their jobs on the line, and that's rarely done today at major American companies." (43) (Apparently the quality of their decisions is irrelevant.) Roger Enrico argues that a mass firing would essentially put everyone at Coca-Cola on notice that risk-taking is punished; worse performance would certainly result. The top brass were also helped by a system of diffuse responsibility. While Zyman and Dyson were set up to head "Project Kansas," as the New Coke fiasco was called, everyone, including Goizueta and Keough, was involved in the decision-making. By no means did Dyson or Zyman go off on their own without the express consent and encouragement of the CEO. Even Robert Woodruff, the patriarch of Coke and its president for over two decades agreed to the reformulation. Essentially, Coca-Cola management had no one to blame but themselves. Coca-Cola's marketing disaster of attempting to change the formula of its flagship brand has some important lessons for the making of public policy. First, constituency analysis is extremely important because you never want to alienate or abandon your base. When Coca-Cola did its market research it knew that it would alienate 10%-12% of its faithful drinkers. But they figured that the alienation would fade away. What they did not count on was that this alienated core would stir discontent that would lead them to have to reintroduce Old Coke. So when making public policies you never want to alienate your base, lest they bite off your toes. Second, some things cannot be measured by taste tests, opinion polls, or market research. Whether its Coca-Cola or some cherished public policy, if it becomes ingrained as an American institution it will be very difficult to almost impossible to try to change it. For example, back in 1987, President Reagan offered a new insurance program to help the eldery pay for the devasting costs of acute illness. Congress quickly embraced Reagan's proposal. Lawmakers tacked on even more benefits which were to be paid for with a surtax on all senior citizens and passed what became known as the 1988 Medicare Castastrophic Coverage Act. The law seemed to please everyone, Democrats and Republicans took pride in improving health care coverage for an important constituency. Everyone was happy. Everyone, that is, except the seniors. Many didn't want the new benefits and few wanted to pay for them. And so after so quickly enacting the law in 1988, Congress spent 1989 in retreat, trying to manage an avalanche of protest from wealthier retirees who resented the surtax. Congress finally voted to repeal the law on November 22, 1989, only sixteen months after Reagan had signed it into law. Coca-Cola had an essential and demanding problem as it entered the 1980's: declining market share. What should Coke have done to fix its problem? Luckily, Coke had the data it needed. They knew that their product was competitively priced, universally distributed and well-advertised. The intuitive response would be that Coke did not have an image problem, it had a substance problem (read: taste). However, the research was also telling them that they absolutely could not change the taste of Coke and live to see the light of the following day. What was the solution? Coke had image AND substance problems. First of all, they knew that people were saying they loved Coke, and yet they didn't always buy it. America's Favorite Drink was being taken for granted. Yet it was still true that people, in blind taste-tests, simply liked Pepsi better. Which was the easier problem to solve? Image. How did Coke solve it? By working on substance. It would be nice to think that Coca-Cola management had been smart enough to realize that a blunder of massive proportions was in order. Alas, it was just a happy accident. For one summer, Coke made headlines all across the country. People organized to save their "favorite" drink. They even tried to file a class-action suit. Best of all, people were reminded what they favorite drink was and that it could go away. Ultimately, Coke won the Cola Wars with a megabrand strategy that Pepsi couldn't beat. Pepsi's flagship brand might be Number-One, but Coke was still rolling in more dough. Coke still has more shelf space, more fountain outlets and more advertising. Coke's stock price shot through the roof in a big payoff for shareholders and executives. Thank God for happy accidents.

Source: http://bulatov.org.ua/teaching_courses/marketing_files/Lecture%2003%20ItM%20NewCoke%20vs%20Coca-Cola%20case%20%20MN302_307_classe_4.pdf