Answer question # 2 for Intel, question # 7 for Samsung, and question # 5 for the last one Xerox: The Early Days.
Strategic Market Management 9th edition
David Aaker Author
Xerox: The Early Years
During the 1990s, Intel achieved remarkable success in terms of increased sales, stock return, and market capitalization. Sales of its microprocessors went from $1.2 billion in 1989 to over $33 billion in 2000. The firm’s market capitalization grew to over $400 billion in just over three decades. Intel’s ability and willingness to reinvent its product line again and again, making obsolete business areas in which it had big investments, certainly played a key role in its success. Its operational excellence in creating complex new products with breathtaking speed and operating microprocessor fabrication plants efficiently and effectively was also critical.
Intel’s sustained rise would not have happened without the firm’s ability to create and manage a brand portfolio that included a complex set of endorser brands and subbrands. The brand story really starts in 1978 when Intel created the microprocessor chip, the 8086, which won IBM’s approval to power its first PC. The Intel chip and its subsequent generations—the 286 in 1982, the 386 in 1985, and the 486 in 1989—defined the industry standard and made Intel the dominant brand.
In early 1991, though, Intel was facing competitive pressures from competitors who were making clones of the 386 and exploiting the fact that Intel failed to obtain trademark protection on the X86 series. calling their products names like the AMD386, these firms created confusion by implying that an AMD386 was as effective as any other 386.
To respond to this business challenge, in the spring of 1991 Intel began a remarkable ingredient branding program, establishing the “Intel Inside” brand with an initial budget of around $100 million. (The logo—which has a light, personal touch, as if it was written on an informal note—was a sharp departure from Intel’s corporate “dropped-e” logo.) Under the branding program, computer manufacturers who properly displayed the Intel Inside logo received a 6% allowance on their purchases of Intel microprocessors, which could be used to pay for up to 50% of the partner’s advertising . partners also were required to create subbrands for products using a competing microprocessor, so that buyers would realize that they were buying a computer without Intel Inside.
This decision was very controversial within Intel. many people argued that brand building was irrelevant for a firm that only sold to a handful of computer manufacturers; the money could be used for R&D instead. within a relatively short time, however, the Intel Inside logo became ubiquitous, and the program was an incredible success. Even as the budget grew to well over $1 billion per year, the brand-building effort was perceived to generate such loyalty that it more than paid for itself.
For many years, a computer with an Intel Inside logo could be sold at around a 10% premium (for the whole computer, not just the Intel microprocessor). Because of the logo’s wide exposure, Intel was given credit for creating reliable and innovative products and for being an organization of substance and leadership—even though most computer buyers had no idea what a microprocessor was, or why Intel’s were better.
In the fall of 1992, though, when Intel was ready to announce the successor to the 486 chip, it faced increasing competitor confusion despite the Intel Inside campaign. A huge decision loomed. calling the successor the Intel 586 would leverage the Intel Inside brand and provide familiarity to customers who had become accustomed to the X86 progression. Even so, Intel elected to give the chip a new name: Pentium.
Four key issues guided the decision to adapt the Pentium brand. First, it would avoid confusion with competitors who might also use the 586 name. Second, the cost of creating a new brand and transitioning customers to it, although huge, was within the capacity and will of Intel. Third, the Intel Inside equity and program could be leveraged by adding “Intel Inside” on the new Pentium logo, in essence making the former brand an endorser for the latter. Finally, a new name would signal that the product was a significant enough advance to support demand at a premium price, which was necessary to pay for a costly new fabrication plant.
A few years later, Intel developed an improved Pentium with superior graphic capability. Rather than change the brand name itself, the firm added a branded technology, MMX, to the Pentium. This decision gave the Pentium brand more time to repay its investment, and it reserved the impact of announcing a new-generation chip for a more substantial technological leap. Subsequent generations did emerge and leveraged the Pentium name and equity with names like Pentium Pro (1995), Pentium II (1997), Pentium III (1999), and Pentium 4 (2000).
In 1998 Intel decided to extend its reach to mid-range and higher-end servers and workstations. To address this market, it developed features that allowed four or eight processors to be linked to supply the necessary computing power. This progress, however, raised a branding issue. On one hand, because the Pentium brand was associated with the lower-end personal computer market, it would not be regarded as suitable for servers and workstations. On the other hand, the market would not support developing yet another stand-alone brand alongside Intel Inside and Pentium. The solution was to introduce a subbrand, the Pentium II Xeon, in 1998. The subbrand distanced the new microprocessor enough from Pentium to make it palatable for the higher-end users. It also had the secondary advantage of enhancing the Pentium brand because it associated Pentium with a more advanced product.
In 2001, the Xeon subbrand stepped out from behind the Pentium name. Technological advances (in particular, the branded NetBurst architecture) had dramatically improved the chip’s processing power. The Xeon brand had also become established, making it easier to support as a stand-alone brand, and initial trademark issues over the Xeon name had been resolved. Finally, because the target market had become even more important to Intel, having a brand devoted to it was now a strategic imperative.
In 1999 another problem or opportunity emerged. As the PC market matured, a value segment emerged, led by some competitors eager to find a niche and willing to undercut the Intel price points. Intel needed to compete in this market, if only defensively, but using the Pentium brand (even with a subbrand) would have been extremely risky. The solution was a stand-alone brand, Celeron. The brand-building budget, like that for many value brands, was minimal—the target market found the brand, rather than the other way around.
The decision was made to link the Celeron to Intel Inside, so there was an indirect link to Pentium. The trade-off was the credibility that the Intel endorsement would provide to Celeron versus the need to protect the Pentium brand from cannibalization and a tarnished image through association with a lower-end entry.
In 2001, Intel introduced the Itanium processor as a new-generation successor to the Pentium series. Why not call it the Pentium 5? The processor was built from the ground up with an entirely new architecture, based on a branded design termed Explicitly Parallel Instruction Computing (EPIC), and it had 64-bit computing power as opposed to the 32-bit Pentiums. Capable of delivering a new level of performance for high-end enterprise-class servers, the processor needed a new name to signal that it was qualitatively different than the Pentium.
In 2003, Intel introduced its Centrino mobile technology. The new processor provided laptop computers with enhanced performance, extended battery life, integrated wireless connectivity, and thinner, lighter designs. These groundbreaking advances promised to fundamentally affect personal lifestyles and business productivity by enabling people to “unconnect” (the Centrino advertising tag line is “Unwire Your Life”). The new Centrino logo reflects the Intel vision of the convergence of communication and computing, as well as a new approach to product development. Rather than simply pushing the performance envelope, this product responded to real customer needs as determined by market research.
The most dramatic element of the Centrino logo is its shape, a sharp departure from the rectangular design family that preceded it. The two wings suggest a merger of technology and lifestyle, a forward-looking perspective, and the freedom to go where you will. The magenta color used for the Centrino wing balances the Intel blue and visually connotes youth and excitement while suggesting a connection between technology and passion, logic and emotions. The Intel Inside logo has also evolved. More precise, sophisticated, and confident, it now provides a link to the classic dropped-e Intel corporate logo and reflects a world in which the positives of the corporate connection and the loyalty program can be linked.
- The Intel Inside campaign started in the spring of 1991 and $100 million was budgeted for it in 1992. Was that worthwhile? Why would Compaq participate in the program? What about Dell? How would you evaluate the program? What alternatives does a competitor such as AMD have to combat the Intel Inside branding strategy?
- In the fall of 1992, when the “586” chip was ready, would you have called it Intel 586 or i586, or would you have started over with a new name? What are the pros and cons of each alternative?
- What effects did changing the brand name from X86 to Pentium and others have on Intel’s ability to manage the product life cycle of the newly branded products?
- When would a new product require a new name (such as Pentium) versus a new subbrand (such as Xeon)?
- Evaluate the Centrino brand strategy. Will it help Intel be relevant to the mobile computing world?
Strategic Market Management 9th edition
David Aaker Author
Samsung Electronics, which begin in 1972 as a manufacturer of cheap B&W TV sets, in 2002 had sales of over $34 billion and net profit of 5.9 billion dollars which was less than Microsoft’s profits but more than IBM and Nokia earned who were number three and four in industry profitability. In part due to product leadership Samsung achieved third place in world wide mobile handset sales closing on second (after Nokia), became the second place seller of semiconductors (after Intel) and was the largest manufacturer of television sets and computer monitors in the world.
The products delivered function and more. Their products from plasma TV screens to robotic vacuum cleaners to fridge-freezers that tell you when you are low on milk to bracelet cell phones were cool and had a buzz. Business Week recognized Samsung as the number one Information Technology company in the work and its brand was valued by Interbrand at 8.3 million dollars, the 34th most valuable brand in the world. This performance was astounding given the fact that only five years earlier Samsung was financially crippled in the face of a Korean economic crisis and some bad strategic decisions.
In some respects it was the worst of times in late 1996 when Yun Jong Yong became CEO. He addressed the financial crises in part by cutting some 24,000 people, shutting factories, and selling business units. But in the face of this adversity, he set the stage for gaining global leadership by enunciating a bold strategy.
The strategy had several components. First, Samsung would change its market position in the US and Europe from a price-oriented copy-cat manufacturer to a premium priced product leaders sold in the most upscale retail outlets. Essentially no part of his management team agreed with this direction as it meant walking away from much of their business and would be risky to implement. Second, Samsung would continue its policy to be vertically integrated and turn its memory and component design and manufacturing into an asset by providing direct access to the latest technology. Nearly all other firms felt that strategic flexibility required moving away from vertical integration. Third, Samsung would be a leader in creating new products that would be designed to be distinctive and cool. Further, the organization would become much faster to market with its new products. Fourth, it would build the brand especially outside Korea as brand would be crucial in becoming the leader in the coming years.
The new course was somewhat aided by the New Management initiative launched in 1993 by Lee Kun-Hee, the CEO of The Samsung Group of which Samsung Electronics is a part. No less than a total change in the way that the group thinks, works and serves the customer, the initiative included a focus on quality, listening to the world’s markets, creating distinctive advantage, being the world’s best, anticipating the future, creating organizational environment to foster innovation and growth, and contribute to a better global society. The initiative was re-launched in 1996 as it had received little traction. As part of the re-launch, Lee set up in 1996 a training center for information related infrastructure topics.
There were several key aspects to the implementation of the strategy. One was the hiring of Eric Kim to be global marketing head in 1999. Kim, who left Korea at the age of 13, had an engineering and marketing background. He was determined to get the global silos to be on the same page. Toward that end he consolidated the disparate business operations and drove toward a single vision around the new cool, upscale brands with leadership technology around digital convergence. He replaced the 55 advertising agencies with one global agency. In part to emphasize the global future of Samsung, Kim made his first big presentation to 400 managers in English.
Another initiative was sponsorship and advertising. Yun believed that the new Samsung could best be communicated by sports sponsorship. The logic was that sports competition, which involved hard work by athletes striving to achieve ones highest potential, suited the industry and the associations that Samsung wanted to nurture. Sports also provided a stage to demonstrate technology. Samsung sponsored several events include the 1998 Bangkok Asian Games but the crown jewel was the sponsorship of the Olympics starting with the 1998 Winter games in Nagano Japan. In 1999 Samsung embarked in a $400 million advertising effort around the tagline DIGITall which signaled that Samsung was a leader in the digital convergence world and it would apply to all people and all products.
Among the misadventures of Samsung that contributed to the financial crises of 1997 was the AST adventure. AST in the early 90s was among the top four PC manufacturers in the US. However, they struggled to keep up and began losing money at an alarming rate in part because their acquisition of the Tandy PC business in 1993 was not managed well and because their product development tended to be late (they missed a Christmas selling season one year). Meanwhile Samsung which had 30% of the computer market in Korea tried and failed in its effort to crack the critical US market, a failure attributed to a lack of marketing savvy and distribution clout. Their solution was to invest in AST in 1995 and buy the balance in 1997. Inserting a Korean CEO in 1996 who instituted needed manufacturing efficiencies and some co-marketing efforts with Disney. When that did not stem the tide at effort to focus on the business market failed, Samsung bailed out in December of 1998 after having lost well over $1 billion dollars.
- Yun lacked support for his new strategy. Is it important that the strategy be accepted? That it be enthusiastically be embraced? How could the CEO make that happen?
- What are the organizational implications of vertical integration and the new product program? With respect to vertical integration, how would you make sure that the component suppliers are incented to become efficient even though their customer is captive?
- How would you change the reward system to reflect the new strategy? In the past all units have been largely measured on sales and market share.
- Why didn’t Lee’s initiative gain traction in 1993? What is needed to make it happen?
- How should Kim gain acceptance for himself and his ideas? Was it risky to speak in English? In creating a global strategy would you use a top down or bottom up approach?
- Do you agree with the logic of the Olympic sponsorship? How would you get organizational support for it? How would you decide what sports events to sponsor?
- What was the objective of the AST acquisition? Why did it fail?
Source: Samsung Electronics Annual Reports—1997 to 2002. Cliff Edwards, Moon Ihlwan, & Pete Engardio, The Samsung Way, Business Week, June 16, 2003, pp. 56-61.
Strategic Market Management 9th edition
David Aaker Author
Xerox: The Early Days
When Chester Carlson invented xerography in the 1930s, he attempted to market his idea to a host of firms, including Kodak and General Electric. all viewed the rather crude invention as unnecessary in the face of carbon paper and the coated-paper copiers of the day. Finally, in the 1950s, a small firm took the gamble. The result was the Xerox 914, introduced in 1959, which truly revolutionized the copying industry. The first plain-paper copier, it was easy to use and operated at seven copies per minute. The 914 was responsible for the number of copies made in the United States increasing from 20 million to 9.5 billion in only ten years.
The Xerox business strategy through the 1970s involved several pillars. First, the machines were leased at $95 per month, including 2,000 free copies per month to firms who mistakenly felt that their use would never exceed that level. Second, an extensive direct sales and service operation was developed to market the 914 and more expensive models, all of which were relatively complex and needed informed salespeople and responsive service. Third, the R&D focused on the high end of the market, where the best margins were. The low end was virtually ceded to the Japanese, first with coated-paper machines and later with inexpensive plain-paper products. Fourth, international growth was based on a joint venture with Fuji.
The fifth pillar, a major strategic thrust for Xerox in the 1970s, was the “Office of the Future.” This concept recognized that the copier was only one instrument of office productivity and business communication, and Xerox wanted to be a leader in the broader playing field. Clearly, the key to the strategy was a computer capability. To fill that gaping hole, Xerox in 1969 purchased Scientific Data Systems, a firm that targeted the scientific community, and changed its name to Xerox Data Systems (XDS). Despite pouring investment into XDS, the firm’s products for the business data-processing market never had any success in the office, Xerox’s territory. Further, the Xerox organization had too many layers of bureaucracy in too many locations to encourage the integration of computer and copier products. In 1975, after six years of losses, Xerox closed XDS, judging that the computer mainframe market was not part of its core business after all.
Competitors: Savin, Canon, IBM, and Kodak
Savin was a small company obsessed with participating in the copier market and frustrated by the patent chokehold of Xerox. Finally, with the help of an Australian inventor and a consortium of firms from the United States, Germany, and Japan, Savin developed a liquid-toner approach that avoided Xerox patents. Its breakthrough became the Savin 750, manufactured by Ricoh in Japan and introduced in 1975 at $4,999, less than the annual lease price of a Xerox machine. Instead of a direct sales force, Savin sold through dealers who would contact Xerox customers with an attractive alternative when their contracts expired. Dealer service was feasible because the machine was relatively small and reliable; the Savin 750 averaged 17,000 copies between failures. It made twenty copies per minute, the first in less than five seconds, a pace far superior to Xerox efforts at the low end. By 1977, Savin placed more copiers in the United States than Xerox. Meanwhile, Ricoh captured the top market share in Japan, as measured in units.
Canon also avoided the Xerox patents by developing an alternative technology that was licensed to other Japanese firms. Rather than using joint ventures, Canon deliberately decided to market its copiers throughout the world under its own name, even though that would mean relatively slow market penetration in a fast-moving industry. In the long run, keeping control of the brand and operations became a strength. Canon struggled in the United States until 1978, when its NP-80 combined with an aggressive advertising campaign to succeed in the mid-volume market. By 1979, Canon became a leader among the Japanese copier firms. In 1982, it introduced its Personal Copier, which sold for under $1,000 and had a $65 disposable cartridge. The slower copying speed was unimportant to the target customers, who wanted a small, inexpensive, worry‑free machine for the home or office. In 1985, with Savin fading, Canon became the world leader in low‑end machines and the second overall company behind Xerox.
IBM attempted through the 1970s to participate in the copier market with as series of products. It was generally unsuccessful, despite its famous name and a large sales force, in part because it was technologically behind and its products were unreliable.
Kodak entered the market in 1975 with its Ektaprint 100, a plain-paper copier that soon became the industry standard for reliability in the mid‑volume market. The firm then developed a series of high-end machines that were by many measures the best in the industry. Kodak moved slowly, however, making sure the products were reliable, carefully building a strong service and marketing organization, and avoiding building capacity too quickly. Kodak was still able to move into fourth place in copier sales by 1985 because of its technology, reputation, and resources—and because Xerox was not successful in developing comparable products. A Xerox executive opined that if IBM, with its size and superior marketing skills, had the Kodak machine it would have aggressively captured market share at the middle and high ends, and Xerox would have been severely damaged.
Problems at Xerox
After many years of dramatic success, Xerox faced significant threats in 1980. The firm managed to hold onto its dominance in medium‑ and high‑speed machines, still controlling 60% of the market for machines over $40,000 in 1981. performance at the lower end was much worse, however, and as a result Xerox’s share of U.S. copier revenues declined dramatically, from 96% in 1970 to 46% in 1980. between 1976 and 1982, Xerox’s share of worldwide copier revenues dropped from 82% to 41%. Why? How did this happen?
One problem was the development of an unwieldy bureaucracy. In 1966, an executive from Ford was brought in to control an undisciplined organization that was expanding at an unmanageable rate. The result was a divisional structure that looked too much like an auto firm, with a painfully complex and slow process of getting a product from design to manufacturing to marketing. Throughout this marathon, the product would be subjected to a system (adopted from NASA) of staged program management, which entailed constant review and criticism.
In part because of this organizational paralysis, Xerox was not able to respond to the Kodak threat at the high end of the market. Xerox had long prided itself on its superior technology, but it actually lagged behind in product development. In the 1970s, it only introduced three completely new machines, only one of which was a success—and that one cost more that $300 million to develop. For Xerox to have grown as it did during this decade was more a tribute to its sales force than to the quality of its products.
One of Xerox’s major problems in the 1970s was its focus on making the largest, fastest, and fanciest machines. It paid far less attention to reliability, and therefore it was not prepared to compete with machines made by Kodak. Rather than being lean and trim, it became bloated and failed to locate low-cost outsourcing opportunities. When machines like the Savin 750 were introduced, Xerox could not compete in either price or quality.
Despite its large staff, Xerox was weak in customer and market research, even as it transitioned from being a virtual monopoly to a participant in a competitive market. In particular, Xerox gave no thought to the fact that its customers might be willing to trade speed for price and reliability, or that they might prefer to have smaller, slower machines rather than a few large, faster ones.
Xerox ignored the Japanese threat, allowing those firms to get a foothold at the low end of the market that they exploited by moving up. One rationale was that the early Japanese machines were of low quality and priced too high; the Savin 750 was a shock. A second rationale was that the margins at the higher end were much more attractive than those at the low end. Xerox, however, failed to recognize that the Japanese firms would use their advantage further down to climb the market ladder. There was also a strong “not invented here” syndrome. After introducing its 2200 model in Japan in 1973, Fuji Xerox offered to export it to the United States, but Xerox refused, unable to believe that a Japanese product would be up to Xerox standards. It was not until 1979 that Xerox finally accepted a Fuji machine for the American market.
- Identify and evaluate Xerox’s strategy in the 1960s. What entry barriers did Xerox create in that decade?
- Identify and evaluate the strategies of Savin, Canon, IBM, and Kodak. How did each overcome Xerox’s entry barriers? Kodak did not aggressively invest behind its equipment at a time when it held a significant technological edge. Why?
- Why did Xerox lose position in the 1970s? How could that happen? How could a large successful, admired company be so clueless?
- What were the strengths and weaknesses of Xerox in the 1980s? What were its strategic imperatives?
- Xerox had a research think tank in Palo Alto that essentially developed what became the Apple computer. When the Xerox organization was not interested, Steve Jobs and others accessed the concept and started Apple. Why do you think such a blunder happened?
Source: Drawn in part from John Hillkirk and Gary Jacobson, Xerox: American Samurai, New York: Macmillan, 1986, pp. 55‑57.