Category Archives: Management Research Study

Fitbit, IPO Superstar Struggling for Survival

Todd Benschneider, Qingqi Meng, Jesse Rubin, Lisa Velesko, Xueying Zou

University of South Florida
February 3, 2018

 Company Overview

Fitbit was founded in 2007 in San Francisco, California by James Park and Eric Friedman with a vision to help people lead healthier, more active lives by empowering them with data to reach their fitness goals. Since its founding, Fitbit has become the leading global wearables brand and its products have helped users track and get motivated for everyday health and fitness. Fitbit offers an innovative lineup of popular activity trackers including the Fitbit Surge, Fitbit Blaze, Fitbit Charge 2, Alta HR, Alta, Fitbit Flex 2, Fitbit One and Fitbit Zip, as well as an accessory line featuring the Fitbit Ionic smartwatch, Fitbit Flyer wireless headphones and Fitbit Aria and Fitbit Aria 2 Wi-Fi Smart Scales. Fitbit products are carried in 46,000 retail stores across 78 countries around the globe. Fitbit’s platform delivers personalized experiences, insights, and guidance through leading software and interactive tools. The success of these functionalities has grown the Fitbit social community to over 25 million active users in 2017. The International Data Corporation (IDC) forecasts that the wearables market will nearly double by 2021, leaving the door open for Fitbit to grow and continue its market leading footprint in this category.


James Park, who serves as the CEO and President of Fitbit, was a Harvard dropout with a computer science background. He was also co-founder of two tech startups, Windup Labs and Epesi Technologies, prior to founding Fitbit. His second startup, Windup Labs, an online photo-sharing company, was acquired by CNET Networks in 2005. James then went on to serve as the director of product development at CNET. James’s diverse background in tech startups also included a stint at Morgan Stanley where he built trading software and developed trading strategies for the bank.

Eric Friedman serves at the CTO of Fitbit. He was a co-founder of both Epesi Technologies and Windup Labs with James Park, and served as an engineer manager at CNET following Windup’s acquisition. Eric earned both his undergraduate and masters degrees in computer science from Yale University.

Neither Park nor Friedman had any manufacturing experience when they came up with the idea to create a wearable product that would change the way people move. They had attended and spoke at the TechCrunch50 conference in 2008, hoping to get 50 preorders. Instead, in one day they received 2,000 pre-orders for the product launching their idea into a true product that had real demand. They had spent several months in Asia looking at suppliers and, according to the founders, nearly crashed and burned seven times (Marshall, 2016). They were already serial entrepreneurs at this point, which gave them an advantage as they traversed the struggles of launching and perfecting a new product.

Financing History

After its founding in 2007, Fitbit went through several rounds of successful seed funding. Funding came primarily from venture capital firms to fund its high growth as an early stage fitness technology company.  The founders were able to raise an initial four hundred- thousand dollars from friends and family to get their idea up and running, but the cash ran out quickly (“Fireside Chat with Fitbit”, 2017). In October 2008, Fitbit closed on its first round of Series A funding, raising $2 million in venture capital from True Ventures, SoftTech VC and several angel investors. This was the company’s first round of institutional funding and the company reportedly met with 40 VCs only to be rejected by all of them (“Fireside Chat with Fitbit”, 2017). Two years later, in September 2010, Fitbit closed a Series B funding round of approximately $9 million. As the company continued to innovate and introduce new products to the market, its need for additional capital also continued. In January 2012, Fitbit raised an additional $12 million in a Series C funding round from its existing investors Foundry Group, True Ventures, SoftTech VC and Felicis Ventures.

A little more than a year later, in September 2013, Fitbit was looking to raise additional capital at a $300 million valuation and secured $43 million in Series D funding from Qualcomm Ventures, Sapphire Ventures and SoftBank Capital, along with its existing shareholders Foundry Group and True Ventures. Only six years after its founding, the company had grown exponentially and raised nearly $66 million in seed capital to fund its operations, innovation and growth and was on its way to going public. Finally, in June 2015, Fitbit completed its Initial Public Offering (IPO) on the New York Stock Exchange at $20 per share, raising $731.5 million in capital. The IPO was comprised of 22,387,500 million new shares offered by Fitbit for a total of $447.75 million in fresh capital for the company and 14,187,500 million shares offered by the selling shareholders. This was the largest ever IPO at the time for a company dedicated to wearable technology. On its first day of trading, the shares of the company popped by 54% and again by 20% on the second day of trading on high demand and trading volume on the NYSE. It is important to note that Fitbit took advantage of the Jumpstart Our Business Startups Act (JOBS Act) of 2012 and registered as an “emerging growth company” (revenues less than $1 billion). This action eased the financial disclosure requirements, thus lowering the cost of going public. Just five months after the IPO closed, Fitbit and its shareholders once again went back to the capital markets and registered a follow-on offering in November 2015.

Unfortunately, market demand for the company’s shares had declined when the follow-on was initiated, which led to the offering being downsized from 7 million to 3 million new shares plus 14 million shares being sold down by current holders. Fitbit was still able to raise $87 million in fresh capital at a $29.00 per share offer price to use for potential acquisitions, working capital and other general corporate purposes, including research and development, sales and marketing activities, general and administrative matters and capital expenditures. Fitbit has not raised any additional equity capital since 2015, but instead has seen its stock price slide to under $6 per share as of January 2018 and its market cap drop from over $6 billion at IPO to under $1.5 billion.

Board of Directors 

Fitbit’s board of directors is comprised of two insider executives and five outside directors. According to Investopedia, the average corporate board size is 9.2 members, so Fitbit may have fewer advisors on its board than its competition. It is important that the founders and company executives surround themselves by intelligent individuals who can help guide the company through its growth and a period of increased competition. Moreover, as the competition in the wearables space increased significantly since the company went public with the introduction of the Apple Watch and other comparable devices, the company will need sound advice for staying competitive. The following table shows the individuals that make up Fitbit’s current board of directors and the important reasoning behind some of their selections as a board member:

Board Member Joined Board Background Reason for Board Selection
James Park Day 1 CEO and President of Fitbit Chairman of the board
Eric Friedman Day 1 CTO of Fitbit Executive Officer of the board
Christopher Paisley January 2015 Executive Professor of Accounting at Santa Clara University. Christopher also sits on the board of 4 corporations in addition to Fitbit Extensive board and operational experience
Laura Alber June 2016 Current President and CEO of Williams-Sonoma Extensive retail industry, merchandising, and operational experience
Jonathan Callaghan September 2008 Founder and Managing Partner of True Ventures Extensive experience with technology companies
Glenda Flanagan June 2016 CFO Whole Foods Market Extensive experience with leading consumer and health-related brands and expertise and background regarding accounting and financial matters
Steven Murray June 2013 Partner at SoftBank Capital Extensive experience with technology companies




Fitbit’s formation in 2007 was inspired by the fitness potential of the 2006 release of the Nintendo Wii. Park theorized that exercise data could be harvested from the Wii game sessions and the resulting feedback metrics would create friendly competition among friends on metrics for health and fitness accomplishments, capitalizing on the social appeal of video game scoring. At eighteen months, the company had released its first fully functional prototype: the Fitbit tracker, which took second place at the 2008 TechCrunch50 conference. Because of the publicity of Fitbit’s second place finish among a field of respectable competition, the young company received a surprising 2,000 preorders for the $99 clip-on device. With those pre-orders, a successful track record from previous ventures and that technology award, Fitbit had gained enough credibility to attract a variety of venture capitalists (Marshall, 2016). 

The first $2 million in venture capital came within two months of the TechCrunch50 publicity allowing the founders to quickly select a production location in Singapore and contract a manufacturer to build the devices. Their initial prototype, a simple pen sized pod which collected motion activity through a gyroscopic sensor like the one found in a Nintendo Wii controller, contained an integrated Bluetooth transmitter and onboard memory. Park was confident this simple design would prove easy enough to mass produce. However, the design and arrangement of the components did not translate well into mass production, causing several complete redesigns before Fitbit had a product that was compatible with an assembly line manufacturer.

Despite promises that the 2,000 preorders would be filled by December 2008, the deadline proved impossible to meet and the first Fitbit’s did not ship until September 2009, nearly two and a half years after the company’s formation and nine months behind schedule. In the remaining months of 2009, 5,000 additional units were sold. In the first year of distribution, reports of software accuracy problems surfaced, several exercise researchers found that Fitbits activity algorithms greatly overestimated the calorie burn rates, resulting in low levels of weight loss success among Fitbits earliest customers. (Koch, 2016).

Core Vertical Operations 

Fitbit’s original business model disrupted a market of more sophisticated fitness devices, such as heart rate monitors from Polar, Garmin and Magellan. The fitness market of 2007 was served by complex sports watch and chest strap combinations, together they measured exercise intensity and estimated the calories burned by monitoring the electronic signals of heart rate and broadcasting the readings to a sport watch for data storage, then were uploaded by a micro USB cord to a PC for processing and storage. The technology in those heart rate monitors was evolving in 2009 as the Fitbit finally arrived on store shelves, with competing fitness trackers offering more precise GPS features to record distances traveled during exercise. Those emerging sports watches combined the distance data along with a user’s height and weight data and the resulting heart rate to provide workout intensity information and more precise calorie burn estimates (Koch, 2016).

The disadvantages of the heart rate monitor technology of Fitbit’s competitors was that the device sensors required a wide elastic belt to be worn around the chest, which many users found awkward and uncomfortable and regardless of how well these transmitters fit, they often lost signal during exercises involving twisting motions (Kerner, 2017).  Fitbit’s one-piece solution simplified calorie burn estimates by utilizing pre-calculated burn rates based on physical motion, factoring in the wearer’s weight and age, which was surprisingly accurate at estimating calorie burn rates almost as precisely as the more sophisticated heart rate system. It is through this minimalistic hardware and multi-day battery life combined with sophisticated software that Fitbit chose to build their first vertical.

A third area of Fitbits design advantage was its freedom from GPS and cellular connections, the competitors in the heart rate and GPS systems were only marginally accurate at measuring distances, and in doing so they consumed considerable battery power; in addition, most the competing GPS watches required an overnight recharge for every three hours of activity monitoring. The amount of hardware and sophisticated technology in Fitbits competitors also added to the costs with a 2008 price range of between $300 and $800 per device. The combination of awkward chest straps, inconvenient recharging times and high price limited the market appeal of those original GPS fitness trackers to serious athletes and extremely health conscious consumers (Seitz, 2016).

Fitbit’s superior solution simplified fitness trackers, because the designers realized that heart rate and distance were not an absolute requirement to estimate calorie burn for casual exercises. Fitbit’s proprietary technology used a more energy efficient pedometer that detected motions generated by walking and combined that multi-sport motion sensing technology. The Fitbit software could decode the detected movements and estimate what type of exercise was being performed, and estimate the number of calories being used, the wristbands were capable of storing days’ worth of data to later be uploaded to their website for analysis and initial studies found that Fitbit’s projected calorie burn was nearly as accurate at calculating the calorie conversions made by more sophisticated hardware used by Garmin and Polar (Huang, 2016).

In comparison, Fitbit’s simplified wristband motion trackers could also easily be worn around the clock to provide a more comprehensive overview of total activity, including sleep data. The system’s energy efficiency allowed the wristbands to last up to five days between charges and the accompanying fast-chargers could recharge the Fitbit in less than an hour. The comfort and convenience of this revolutionary design combined with the simple technology allowed the devices to sell for a fraction of the price of existing fitness monitors. Fitbit’s original business model also planned for an additional revenue stream created by premium website services such as long-term data storage, charts and analysis for an annual subscription cost of $50, this plan would allow sustainable income after market saturation was eventually reached. All of these competitive advantages created a new vertical product in the health and fitness technology market and Fitbit was the first name that any consumer thought of if considering an inexpensive and simple calorie and exercise tracker (Koch, 2016).

Building substantial height to its core vertical, Fitbit pioneered a corporate wellness sales division, a move that has kept the company ahead of its competitors in the workplace wellness marketplace. These partnership’s competitive advantages have been sustained by Fitbit’s unique customization of user data to comply with the recently passed Health Insurance Patient Privacy Act-HIPPA (Seitz, 2015).

Unmet Market Need Aim & Missed Opportunities

Today, Fitbit continues to face tough competition from the Apple Watch and new fitness technology that offers precision level EKG quality heart rate hardware. Apple was quick to acquire the company who created this technology, with hopes of integrating it into a new market of heart conscious consumers. The future possibilities for the Apple Watch include sending 911 notifications if the user’s heartbeat stops or sending an alert to a user when one’s pulse indicates a warning of an oncoming heart attack. The technology could also prove valuable in solving crimes by alerting authorities the precise time and location of a murder or fatal accident. If Apple pioneers such lifesaving technology in an affordable package with a multitude of companion features, it would be safe to assume a dimmer forecast for Fitbit’s market niche (Feel the Beat of Heart Rate Training, 2017).

Competitive Advantage 

Fitbit’s key early advantage was being the first wearable fitness tracker to market. James Park seized the opportunity to address the unmet market need, developing the first few models that set the bar across the market and Fitbit soon became a household name. The simplicity of the initial out of the box setup and continuous wear and convenience made Fitbit the device of choice with consumers looking for daily encouragement to reach personal health and fitness goals.

With over 25 million current Fitbit active users, Fitbit’s community has become the largest activity tracking population. New consumers are also attracted to join the Fitbit community to chat and challenge brand-loyal friends. Maintaining an active online community has been essential for Fitbit’s most recent technical developments. The more people who track their fitness, find opportunities for improvement and provide feedback, the better the next generation product can be. However, it didn’t take long for tech industry giants to catch up and surpass a device, which was once only a pedometer, with their own patented technology (Entis, 2017).

Today, Fitbit’s greatest advantage is its affordable price. Consumers can purchase a new Fitbit for only $100 compared to the lowest grade of the Garmin watch, the Forerunner, which costs $105 and the original Apple Watch priced at $179. This advantage will continue to attract people interested in tracking their health who don’t want to break the bank on GPS satellite accuracy and smartphone compatibility. As Fitbit adds new features to its product set, as done with its newest model, the Ionic, the price gap is slowly closing and the entrance of $25 rivals from several Chinese manufacturers is squeezing the profits in the market (Lashinsky, 2016).

An additional threat to Fitbit’s future growth is the entry of conventional watch companies such as Timex and Casio offering less expensive $30 competitors in addition to luxury brands such as Tag Heuer, Seiko and Ferragamo that offer integrated activity tracking sensors into conventional jewelry timepieces. The entry of the conventional watchmakers eliminated one common complaint of prospective Fitbit buyers, since many users do not choose to wear a simple rubber wristband in place of or in addition to a conventional watch (Seitz, 2016).

Unique Products and Services that Create Barriers to Entry from Competitors 

Fitbit has been able to defend its position as a market leader through its design simplicity. No competitor has managed to offer novice fitness consumers a smoother transition to integrate a tracking device into their daily routines. The loyalty of Fitbit’s existing customers is reinforced by the storage of historical weight and fitness history through the supporting website and phone applications. If a current user switched brands, they would lose the integration of historical charts and graphs comparing current fitness progress to their own previous levels. Additionally, Fitbit has captured the first mover advantage in corporate wellness programs and has maintained that position through a well-developed Health Information Privacy Law department that protects its corporate clients from employee lawsuits. The base model Fitbit’s simplicity also provides competitive advantages in the corporate wellness market, since its lacks GPS and heart-rate capabilities which eases employee fears of health condition discrimination or inappropriate employee location tracking (Farr, 2016).

Home Office and Distribution

Headquartered in San Francisco, California, the company has expanded its distribution around the world after nearly a decade of development. In addition to North America, Fitbit has a presence in Latin America, Europe, the Middle East, Africa and Asia Pacific with offices in large cities including Boston, Dublin, Hong Kong, Shanghai, Seoul, Tokyo, New Delhi and Singapore.

But how does Fitbit expand markets and sell their products in other regions? Take China as an example. Fitbit formally entered the Chinese market in June 2014, following its sales footprint in 42 countries around the world. But why did Fitbit choose to enter the Chinese market in 2014? Fitbit studied the research reports on the health status of Chinese consumers.

In fact, the future health of the Chinese people deserved attention. China’s overweight population has risen from 25% in 2002 to 38% in 2012 and this number reached 50% by 2015. In terms of body fat index, on average, Chinese are not as overweight as Westerners, but the incidence of diabetes in Chinese people is as high as 11%, similar to that of the United States. Furthermore, people categorized as obese now accounts for 11% of the total population. Fitbit can help Chinese consumers become healthier, because it has a lot of measurement functions, such as the number of steps walked, steps climbed, heart rate, quality of sleep, and other personal needs involved in fitness. Fitbit’s products function for sports, diet, sleep and weight management and include peripheral systems to help people build healthier lives (Koch, 2016).

In terms of sales channels, Fitbit understands that online sales in China are very important. Following Best Buy, which uses Jing Dong is its online distributor, Fitbit products have started distribution with Jing Dong.

In addition, Fitbit’s products are now manufactured in Shenzhen, China, an area that is quickly becoming the technology manufacturing region of the 21st century (Entis, 2017). Fitbit also opened a flagship store in Tian Mall. Additionally, conventional distribution channels such as Amazon, sporting goods stores and most large department store chains all carry Fitbit products. The primary mission of the Chinese team is to broaden Fitbit’s brand awareness so that everyone knows what Fitbit is, how it helps people live a healthier and happier life.


Unlike the wide array of applications, functionality and color provided by their wearable trackers, Fitbit is guilty of lacking diversity in the workplace. Like many tech software companies, Fitbit perpetuated a serious gender imbalance in favor of men. The firm took memorable heat from the press in 2015, as their all male Board of Directors generated attention. Even though women dominate the wearable activity tracker consumer base, Fitbit didn’t see it necessary to include females on their board or in leadership positions. The media isn’t the only source reporting misrepresentation. There is a clear consensus among employee reviews on job sites like Glassdoor and Indeed that expose the company as “extremely white-washed” with very little opportunity for growth for minorities that manage to make it in the door. Unfortunately, lack of gender and cultural representation is an all too popular trend in STEM industries and tech software companies in particular.

Recently, Fitbit has made notable strides to diversify its workforce. Two women have succeeded retired board members, while two more have moved up into Vice President roles. As for the inclusion of minorities, Fitbit has yet to demonstrate progress toward their promise to attain an ethnically proportionate workforce. We are hopeful that the firm’s welcome to fair hiring is genuine and Fitbit can create a more inclusive company and culture.


Today’s most successful new companies clearly published policies and strategies to achieve the Triple Bottom Line results. Like their stances on diversity and global responsibility, Fitbit’s formal policies on sustainable business practices are also non-existent. We can conceive the attention extended to healthcare and fitness, but what about the well-being of the environment? From what we can gather on Fitbit’s consumer output, their products are relatively easy to recycle. Once users decide to give up a wearable tracker or upgrade to the newest version, they can either sell or donate the device. But soon, these old technologies will become obsolete. Their capabilities will prove to be outdated and inaccurate, rendering the whole device useless. In the case that the bracelets are not in reusable condition, there is no solution to keep them from piling up in landfills.

This is where a true opportunity lies for Fitbit. Like the Apple take back system, Fitbit can receive old devices at their end of their life to disassemble into separate, reusable parts. Though this prove an initial cost for Fitbit, they can deliver a new sustainability platform to their consumers and save on usable electronic parts in the long-term. 


  • Apple Watch

Fitbit Ionic vs Apple Watch Series 3: Design

There’s no doubt that the Fitbit Ionic lacks a conventional aesthetic appeal; however, it won’t burn your eyes off. Recently Fitbit has been focusing on integrating style into their designs. The Ionic contrastes the Blaze’s angular look, and while we found it grew on us during testing, it’s sure to put a lot of people off.

On the other hand, the Ionic is impressive in how it crams a whole bunch of technology into a slim, lightweight case. You’ve got GPS, NFC, enough battery for four days of life and multiple sensors in a 50m waterproof square. Like the Blaze, there are three buttons on display here. You can use the display to touch your way around Fitbit OS, but if your hands are wet or if you’re in the water you may have an easier way around with some tactility.

With excellent clarity in both low light and glaring sunshine. You’ll get the Ionic in three flavors: a silver watch case with a blue/grey band, a graphite grey case with a charcoal band and a “blue orange” case with a slate blue band. But in case you’re not down with stock bands, you’ll also be able to purchase some nice accessories. There are two-toned breathable sport bands for purchase in three colorways as well as handcrafted Horween leather bands in midnight blue and cognac.

However, Apple watch keeps a design that’s nearly three years old, but the watch is easier on the eyes. Take apple watch series 3 as an example, it stills provide several models to users to choose. There are two different case sizes (38mm and 42mm), three different materials (aluminum, stainless steel and ceramic) and a whole lot of different colors. With the Series 3, you can get the LTE in the whole range, but non-LTE only comes in aluminum. There are also endless band options, from the low-end nylon and sport bands to high-end Milanese Loops and leather bands.

The major differentiator between these two is in the build. If you’re looking for something to complement every outfit in your wardrobe, and you have no problem with collecting an army of bands, the Apple Watch wins. Apple watch offers very limited styles for users to select, if people who want to have different styles smartwatch, Fitbit absolutely a better choice.

Fitbit Ionic vs Apple Watch Series 2: Battery

For as long as the Apple Watch has been around, it’s gotten about a day of battery life. Sometimes it’ll do less, but most of the time you get about a day – a day and a half to two days if you make deliberate efforts to avoid high consumption apps. With a mixture of both LTE and non-LTE features in the Series 3, you should still get around that, but using the call feature will cut it dramatically. In fact, Apple quotes only an hour of continuous talk time on the Watch.

The Ionic, Fitbit, will net people up to five days of battery life, or up to 10 hours when using GPS or playing music. That’s decent from such a slim device with as much power and many features as it has. If you have to make your decision based on battery life, the Fitbit is the clear winner here. Those extra days mean it’s much more viable as a sleep tracker too.

Fitbit Ionic vs Apple Watch Series 3: Price

The Apple Watch Series 3 has a wide range of prices, starting as low as $329 without LTE, $399 with the cellular connection, and then climbing up further depending on your choice of materials. It really depends on what you’re looking for, and how chic you’re willing to go. Bands will cost you at least $50, but again climb up into the hundreds. The Ionic, on the other hand, goes on sale for $299.99 on 1 October. You’ll also be able to purchase some bands for $29.99 to $59.99. Thus, Fitbit could easier to get access into market.

Fitbit Ionic vs Apple Watch Series 3: Fitness

There is usual standard of Fitbit fitness features, like Smart Track, VO2 Max and Sleep Stages. The Apple Watch, on the other hand, doesn’t officially recognize as many workout modes as the Ionic. For instance, it doesn’t have a mode for weights or interval training. The Apple Watch also doesn’t automatically track your workouts like the Fitbit does for running, heart beat tracking.

The Ionic is only the second Fitbit to utilize GPS, after the Surge, allowing it to match the Apple Watch in this regard. In our test we found the data of GPS to be pretty on the money, and it didn’t take too long to actually lock on either.

Finally, Fitbit is debuting Fitbit Coach on the Ionic. It’s basically a new version of Fit star, giving users a curriculum of workouts, the company says will tailor to your personal needs the more you use it. With watch IOS 4, the Apple Watch does some light personalized coaching, but it’s mostly on how to close your rings, giving Fitbit the nod here.

Fitbit Ionic vs Apple Watch Series 3: Smart features

Speaking of ecosystems, the Ionic is Fitbit’s best go yet at creating one. There’s an app store here, which Fitbit refers to as a ‘Gallery’. It debuted with just apps from Pandora, Starbucks, Strava and Accu Weather, but that has grown, adding apps from the likes of The New York Times, Nest and more. Apple has had a head start in getting developers in tow, and it’ll take a bit for Fitbit to catch up.

There’s 2.5GB of space for you to either store offline music from Pandora or from your own library. However, since the Ionic doesn’t have cellular capabilities, people can hardly stream music without your phone around.

Fitbit Pay is that company’s foray into payments, thanks to its purchase of Coin. You can take your American Express, Visa or MasterCard and link it up to Fitbit Pay, as well as debit cards from “top issuing banks”. You can link up to six payment cards to Fitbit Pay, while you have a limit of eight on Apple Pay.

While the Ionic plays some good catch up in the realm of music and NFC payments, the maturation of Apple’s ecosystem gives it a bit of a nudge here. However, as Fitbit gets more time to get major apps up and running, Apple may have a serious competitor to worry about, LTE or not, especially as more Pebble developers join Fitbit’s budding platform.

Fitbit vs Garmin

Both have their obvious strengths, but how do their wearable platforms match up? We’ve broken it down to hardware, features, apps, fitness and sports tracking to see whether it’s Garmin or Fitbit that comes out on top.


Garmin vs Fitbit The Hardware

Fitbit has actually been creeping into the world of smartwatches for a while now, with its Fitbit Blaze and Fitbit Surge acting as introductory “fitness watches”, but that doesn’t change that Fitbit got where it is today because of its fitness trackers like the Charge, Alta and Flex.

While the fitness trackers are the spine of Fitbit, its flagship is the Ionic. It’s a big riposte to the Apple Watch, with an app store that’s still growing, contactless payments and more. It’s the most fully featured Fitbit yet, as it pools together smartwatch-like features with both 5ATM water resistance and built-in GPS – features that previously were limited to select Fitbit lines. It’s also built for the future, intended to eventually have features like sleep apnea and atrial fibrillation detection.

As for Garmin, well, things are a little more complicated, such is the depth on offer. In terms of fitness trackers, the headliner is currently the Garmin Vivosport – its latest attempt to compete with Fitbit. While it’s got GPS, heart rate monitoring and VO2 Max, it’s also got a bit of a small and overly sensitive display. It also offers more basic options like the Vivofit 4 that focuses solely on those standard fitness tracking features. So steps, calories, distance and standing hours.

It’s the little things that separate these two. For example, Fitbit will generally provide users with more stylish wearables and much more customization, while Garmin’s devices tends to lean towards a masculine look. To offset this, of course, you’re given a host of physical options to choose from.

Garmin vs Fitbit: Sports Tracking

Not only can you track the likes of running, trail running, hiking, cycling, swimming, skiing, rowing, triathlon training and more, but you can also do this with the in-built GPS or Garmin’s UltraTrac, which conserves battery to keep tabs on your activity over longer distances. Heart rate is also a mainstay within the higher end of Garmin’s range, giving you ample insights into heart rate zones and heart rate variance.

Garmin vs Fitbit: Price

As always, price is something you have to consider, too. While the notable members of Fitbit’s range begin at $99.95 and max out at the $299.95 mark, that barely makes a dent in Garmin’s family. While there’s the $299.99 Vivoactive 3, if you want the latest from the Fenix or Forerunner series, your wallet will be roughly $500 lighter, and that’s a big financial commitment to consider alongside the ecosystem and general features on offer.

Garmin vs Fitbit: The Apps

Take Fitbit, which, while maybe not providing the most detailed after workout metrics in the business, still manages to offer one of the more rounded fitness platforms. This is particularly the case for beginners, who are able to dive into trends, dedicated workouts, sleep tracking and social aspects, such as linking with friends and challenges.

With the Ionic, Fitbit has also launched an app store. It was rough going at first, with only a couple of apps, but the store has gradually grown over the past couple of months, with the likes of The New York Times, Philips Hue, Yelp and more joining the fray.

As for Garmin, you’ll be dealing with Connect, the home of your activity, and ConnectIQ, the store for you to pick up apps and new watch faces. As with Fitbit, we have a comprehensive look on how to run better with Garmin Connect and a Garmin Connect IQ app store guide, but we’ll skim through the highlights here.

The companion app, which is compatible with all Garmin devices and available on desktop, offers you a place to plan, track and review your workouts. So, whether you’re preparing for a marathon and setting monthly goals or simply looking to beat other runners’ best times in local areas, the platform has you covered.

When compared to its Fitbit counterpart, more serious exercisers will find little comparison – Garmin gives you an incredibly detailed look at your activity once you dive past its handy Snapshots, while also allowing you to upload data to the likes of Strava and understand elements like heart rate zones. Even better, Garmin has recently updated ConnectIQ to be more convenient to use for beginners, with an easy-to-digest home screen filled with your stats and metrics.


Geographic area

Headquartered in San Francisco, California, the company has expanded its distribution around the world after nearly a decade of development. In addition to North America, Fitbit has a presence in Latin America, Europe, the Middle East, Africa and Asia Pacific with offices in large cities including Boston, Dublin, Hong Kong, Shanghai, Seoul, Tokyo, New Delhi and Singapore.

But how does Fitbit expand markets and sell their products in other regions? Take China as an example. Fitbit formally entered the Chinese market in June 2014, following its sales footprint in 42 countries around the world. But why did Fitbit choose to enter the Chinese market in 2014? Fitbit studied the research reports on the health status of Chinese consumers. In fact, the future health of the Chinese people deserved attention.


China’s overweight population has risen from 25% in 2002 to 38% in 2012 and this number reached 50% by 2015. In terms of body fat index, on average, Chinese are not as overweight as Westerners, but the incidence of diabetes in Chinese people is as high as 11%, similar to that of the United States. Furthermore, people categorized as obese now accounts for 11% of the total population. Fitbit can help Chinese consumers become healthier, because it has a lot of measurement functions, such as the number of steps walked, steps climbed, heart rate, quality of sleep, and other personal needs involved in fitness. Fitbit’s products function for sports, diet, sleep and weight management and include peripheral systems to help people build healthier lives (Koch, 2016).

In terms of sales channels, Fitbit understands that online sales in China are very important. Following Best Buy, which uses Jing Dong is its online distributor, Fitbit products have started distribution with Jing Dong. In addition, Fitbit’s products are now manufactured in Shenzhen, China, an area that is quickly becoming the technology manufacturing region of the 21st century (Entis, 2017). Fitbit also opened a flagship store in Tian Mall. Additionally, conventional distribution channels such as Amazon, sporting goods stores and most large department store chains all carry Fitbit products. The primary mission of the Chinese team is to broaden Fitbit’s brand awareness so that everyone knows what Fitbit is, how it helps people live a healthier and happier life.

Factors that Contribute to Innovation 

Fitbit’s products pioneered cross-brand compatibility with devices that seamlessly interface with nearly all brands of smartphones and tablets on the market, a key advantage which contributed to their early revenue growth. Today, many smart wristbands and watch products remain limited to either the Android or Apple systems, an obstacle which alienates those consumers who have both types of devices in their household, and while there are also many products that are compatible with both  the iOS  and Android operating systems, most fitness systems continue to ignore the Windows system users. Fitbit in comparison, has managed to build long-term loyalty by creating products that  can be simultaneously operated on IOS, Android and Windows systems, so that their consumers can be assured that the Fitbit app will always be compatible with their future choices in smartphones. The founders philosophy can is evident by their open source access to fitbit servers to allow third party developers to create unique interfaces to the users data files because as founder James Park stated “In an open market, we can better cooperate with local partners. After all, they know more about the local market than we do.” (McNew, 2015).

In addition to their hardware interface versatility, Fitbit’s strategy is aimed at encouraging an open software platform, because Fitbit believes that more innovative ideas can be better exploited through openness and absorption. According to a developer, Fitbits platform has a port opening of the application works in both directions, Fitbit users cannot only send their data through Fitbit to a third-party application. If a user thinks a third-party app is great, they can also send data from a third-party app to Fitbit. For example, a male consumer is very concerned about his diet. He found a great application for eating and drinking, and he was able to import third-party applications into Fitbit via its interface. He can see and record calories on the Fitbit and so on (Schwahn, 2017).

In addition, Technology is a key factor of Fitbit innovation. Since 2009, it has released 15 different products, each of which is an update to the previous one. For example, Fitbit One, released on September 17, 2012, is an updated version of Fitbit Ultra with a more vivid digital display. It has independent clips and separate charging lines and wireless synchronization. Fitbit One is the first wireless activity tracker to synchronize with Bluetooth 4.0 or Bluetooth smart. Wireless synchronization is currently available on iOS and Android devices. Fitbit One can record several daily activities, including but not limited to the number of steps, distance, floors climbed, calories burned, active minutes and sleep efficiency (Jary, 2018).

Competitors in the same field are also important aspect of Fitbit’s innovation processes. Apple, for example, released the Apple watch series 2 in September 2016. The Apple Watch series 2 has better waterproof features, can be worn when swimming or surfing, and can support up to 50 meters of water pressure. Fitbit also took immediate steps. Fitbit Flex 2 was released on 2017, replacing the original Flex, the lowest end of the Fitbit wristband line. This is the first model that was waterproof with swimming tracking. The tracker can be worn on the wrist, pendant or carried in a pocket. When receiving a phone call or text message it provides alerts movement alarm and vibration functions (Jary, 2018).

Entrepreneurial Improvements 

To stay competitive in the wearable tracker market, Fitbit needs to aggressively invest in hardware research in addition to integrating additional richness to their software platform in order to maintain consumer loyalty. Low price is no longer a guaranteed winning strategy in the fitness market, with the differences between style and performance rapidly shrinking, Fitbit needs to enter another business vertical that sets its products apart. We recommend a steady progression into a closely neighboring market of medical devices. We propose Fitbit aim to align with various medical associations to discover best healthcare practices and create apps for physical treatments fighting illness and disease. If the highly accurate heart rate monitor can identify specific exercises performed by the readings of active heart rates, why can’t it detect palpitations and arrhythmias?

Along with alerts to potential health irregularities, Fitbit should develop software to allow consumers to easily share their tracked data with their healthcare professional. Organizing this data to be analyzed by physicians can open a dialogue with patients to work toward their goals in a safe, customizable fashion. Breaking into healthcare software opens the door to high potential revenue growth, if Fitbit is the first to curb this market.

 Unmet Markets and Missed Opportunities 

In 2014, just four years after Fitbit’s initial distribution, advancements were made in optical heart rate monitoring technology, now Garmin and Polar are producing similar activity trackers at a similar price points. While emerging technology would soon drive additional demand for wristband fitness trackers that increases the size of the pie, it will also breed new competitors who were better positioned to capitalize on consumers with special concerns for heart health along with athletes desiring deeper training feedback metrics.

These advancements in heart rate monitoring technology allowed those serious athletes and health-conscious consumers to abandon their chest strap transmitters for a single unit, rechargeable wrist monitor that integrated real-time pulse-rates along with 24-hour wear ability (Cook, 2017). As a result, Fitbit’s previous competitive advantage of one-piece simplicity was disrupted. To compound Fitbit’s new competing technology, they failed to license the technology in time to be the first to market with the new optical heart rate and activity wearables. Instead, a new competitor, Epson, led the optical heart rate integrated monitors a full year prior.

Fitbit’s first entry in the new market, the Charge HR, missed its planned holiday 2014 release date, instead arriving late to market with an underwhelming level of fanfare in January 2015 (Seitz, 2016). The Charge HR was quickly overshadowed by an improved Apple Watch only three months later. As with many Apple products, the features of their new watch were widely publicized through a big budget marketing campaign, which was the first to educate mainstream consumers on the benefits of wrist worn heart rate monitors. However, Fitbit did outmaneuver one of its main competitors, Polar, which lagged a year behind Fitbit in its release of a pulse monitoring wristband (Lashinsky, 2016).

Today, Fitbit continues to face tough competition from the Apple Watch and new fitness technology that offers precision level EKG quality heart rate hardware. Apple was quick to acquire the company who created this technology, with hopes of integrating it into a new market of heart conscious consumers. The future possibilities for the Apple Watch include sending 911 notifications if the user’s heartbeat stops or sending an alert to a user when one’s pulse indicates a warning of an oncoming heart attack. The technology could also prove valuable in solving crimes by alerting authorities the precise time and location of a murder or fatal accident. If Apple pioneers such lifesaving technology in an affordable package with a multitude of companion features, it would be safe to assume a dimmer forecast for Fitbit’s market niche (Feel the Beat of Heart Rate Training, 2017).

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Data Analytics: Influences of Gross Film Revenue Across Three Decades


Data Analytics: Influences of Gross Film Revenue & Opportunity Analysis

December 6, 2017

Todd Benschneider, Austin Deno, Leigh Harris, Sarah Lassiter, Lisa Velesko
Table of Contents

Problem Significance:                                                                                                         3-4

Data Source & Preparation:                                                                                               4-5

Variable Selection:                                                                                                              5

Preliminary Analysis:                                                                                                          6-8

Models:                                                                                                                                  8-12

Insights:                                                                                                                                 12-13

Problem Significance:

Several societal trends can be mined from the data captured in consumer spending patterns of the film industry, especially a comparison of different genres of films which indicate rising and falling patterns of popular fiction. Films, more so than television, literature, or music, closely correlate with upcoming trends by using a responsive pull towards consumer tastes in fiction-fantasy and most accurately reflects the psyche of a generation and its ever shifting emotional underpinnings. The nimble demand responsiveness of filmmakers has become astoundingly proficient at catering to the emotional voids that drive the fiction market and are reflected with clarity in the ever changing mix of successful films. Through the unspoken demand for clearly defined types of storylines, these quickly produced films reveal a meaningful cross-section of a society’s unfulfilled drives and highlights which particular aspects that a society’s members yearn for in their own life situations.

In addition to trending popularity of varying scripts, other valuable economic indicators can be harvested through reverse engineering techniques to capture the downward trending genres that clarify the contextual changes that indicate which previous underlying drives have since been fulfilled through sociological evolution. Marketing professionals are wise to take note of the peaking decline of each passing trend, as those peaks and valleys encapsulate at a macro level of measure, the unspoken barometers reflected in the overall mood of a culture.

In the industries of entertainment and media, consumer spending directed towards different types of fiction produces great insight into the long-term patterns of emotional and economic wants, that are as useful to producers of consumer goods, as they are to providers of entertainment. It is imperative for businesses to be on the forefront of any trend.

Our data set summarizes three decades of consumer spending trends on tales that potentially reveals early predictors of future spending behaviors. It is through the trend forecasting of these patterns of film revenue data, that a business can be on the forefront of meeting changing consumer tastes, whether that firm creates new movie plots, automobiles, or widgets. With insight into the deepest desires of the society around it, a business can tailor its marketing message to align its product with a representative cross-section of every consumers vision, of not who they are, but instead, what they want to be. Few other data sources can provide the insights into the self-identity of fantasy characters as well as film plots and with this three decade dataset, we expect to gauge the tipping points of long term trends and witness the rebounds that those tipping points predicted.

Our team viewed the movie revenue data from the perspective of a movie merchandiser, evaluating which unreleased movies in production would provide our firm with its highest return on investment for movie-themed posters, toys, clothing and related merchandise. The highest budget films command the highest royalty percentages and also require the greatest undiversified commitment of our manufacturing lines to individual movie projects. Because of the risk and profitability factors affiliated with marketing the high budget prospects, our team instead drilled down into the data looking for the more cost effective prospects. Films that maximize the return on investment allow our firm to utilize a more diversified portfolio of projects with more promising cash flows.

With this goal in mind, we chose instead, to use regression models to dig deeper into other categorical data from the set, hoping to find other actionable predictors that could be valuable on a shorter time-line. With that goal, we evaluated the given variables in search of the most significant predictors to cinematic success to determine the confidence of future investments.

Data Source & Preparation:

The data set was originally gathered from IMDb and then sourced directly from Kaggle using 6,820 movies from 1986 to 2016 and includes details such as budget, gross revenue, the production company, country of origin, director, primary genre, movie name, motion picture rating, date released, runtime, IMBd user score, lead star, IMBd user votes, writer, and year released.

Not all movies contained information regarding the budget of the movie.  Those were removed as it was critical in our analysis to be able to collate the relationships for complete data points, especially in regards to budget.  We also investigated the relationship between profit and return on investment between gross and budget independently.

Tableau and Excel were first used to identify the greatest amounts in each respective variable.  This allowed us to postulate our first level of filtering.  R was then used to plot data using histograms, box plots, and scatter plots to consider outliers, run regression models, multicollinearity and direct correlations, identify R-squared and adjusted R-squared, along with Aikaike Information Criterion (AIC) and Bayesian Information Criterion (BIC), to determine goodness of fit, utilized numeric and qualitative predictors, and with interaction.  Charts in Tableau were generated to visually verify the interaction effects.  Tableau, Excel, and R were all used collectively to ultimately determine the strongest correlation, interaction, numeric, and qualitative predictors in using the variables.

Variable Selection:

Response Variable: In our effort to uncover the driving forces behind blockbuster films, we questioned what causes box office achievement. There are far too many flops in show-business; artistic potential is drowned out, consumer trends are completely misinterpreted, and lucrative investments are wasted. We must review success in cinema and provide a supportive study to investors in major motion pictures to appease the masses and create a stable platform for performers, thereby providing a concrete analysis of how gross revenue is determined. We therefore selected “Gross”, defined by our IMDb source as “gross revenue at the box office” as our response variable for all data modeling in this study.

Predictor Variables:
In order to evaluate the best variables to test against our response variable, we created a correlation table (below) to test the relationship amongst the quantitative variables. We focused on which variables could have a strong effect in deciding gross. The motive in tracking down the most determinant variables is so the investor can later account these factors into their decision to support a film.

Correlation Chart Budget Gross Runtime Score Votes
Budget 1 0.680033 0.313064 0.073579 0.451467
Gross 0.680033 1 0.253273 0.229552 0.642904
Runtime 0.313064 0.253273 1 0.417031 0.359817
Score 0.073579 0.229552 0.417031 1 0.470648
Votes 0.451467 0.642904 0.359817 0.470648 1

To no surprise, the correlation that stood out the most was between gross revenue and budget with .68003256. This correlation suggests that a higher budget movie will most likely fund a movie that generates more revenue. As we believe budget is the heaviest deciding factor in funding the crucial elements for a financially successful film, we regard it as our primary predictor variable which our other qualitative and quantitative variables will be matched against.


The second highest correlation was found between “gross” revenue and “votes” (that is IMBd viewer reviews on a scale from 1 to 10) at .642904. We can justify this correlation two-fold. First, more “votes” logically means more tickets were purchased to watch the movie in theaters. Second, a high number of votes can drive consumer demand, influencing movie-goers who have not yet viewed the film to either watch or avoid depending on how positive the review was. While our first conclusion is provided after the fact of viewership, the second has the potential to boost viewership, making this variable causal. However, since we cannot account for whether “votes” were causal or coincidental, and since the standard error in a simple regression with gross is very large, we decided not to make it a popular predictor variable in our study. Derived from the votes, we deemed “scores” as unacceptable variables in our models because we cannot control the scores that are given by the reviewers.


As “runtime”, the final quantitative variable which refers to the length of the film expressed in minutes, has a relatively moderate correlation with “gross” at positive .2532733, we must take into consideration what this logically means. The correlation expressed as runtime increases, gross revenue also increases. We know that this statement has a limit because if movies were formatted into countless of hours, we cannot logically expect the popularity to rise accordingly. In support we also can see from a simple regression that, like the “votes” variable, “runtime” standard error at 52262 is unacceptably high.


As far as qualitative data, we opted to use both primary “genre” and motion picture “rating” as major predictors of gross, as supported by their high multiple r-squared values. We determined these were likely predictors of movie success based on consumer taste.


Finally, we decided not to use the production company, country of origin, director, movie name, date released, and year released as these factors would be completely out of control of the film investors. This is due to the variables being too widely diverse to classify accurately since they are spread so thinly across the data.

Preliminary Analysis:

Following our variable selection, we began looking at patterns surrounding the relationships between revenue and movie genre and motion picture rating. It’s important for investors to stay current on consumer trends in order to predict where the big money will be made in the film industry.
Hypothesis Testing:


Hypothesis 1:

  1. Since the Action genre and PG-13 rating have the highest gross revenue out of all movies, it is logical to assume that these types will also generate the highest return on an investor’s funding once the production hits the theaters. We have solid evidence that this is true because budget accounts for over 47% of the prediction of a high grossing movie.

H0: Action genre and PG-13 rating have the highest return on investment and an Action PG-13 rated movie will generate the most dollars per dollars invested.
Ha: Action genre and PG-13 rating do not have the highest return on investment.


After realizing high correlations between gross and motion picture genre, we dove into separating genres to see which classifications raked in the most at the box office. We found that the movies with the highest gross revenue were Action with
a combined total of over $708 million. By seemingly no coincidence we also noticed that Action movies
had a higher total budget than all other genres. Since budget has a strong linear correlation with gross, we can assume that Action will produce the highest return on investment than any other genre.

We similarly compared motion picture ratings to gross revenue to identify that PG-13, R, and PG, respectively, generated the most revenue over the course of the 30 year history and looked at the gross revenue and budget within each sector.

Hypothesis 2: Since popular actors have a strong influence over consumer taste, we can assume that starpower has a significant effect on gross revenue. Since high budget is needed we can also assume that as budget increases, more coveted actors can be casted, resulting in a very popular, high grossing film.


H0: Movies with budgets in the upper 3rd quartile will have a significant relationship between star and gross.
H1: Movies with budgets in the upper 3rd quartile will have no relationship between star and gross.


Star: We attempted to identify the correlation of stars to gross revenue by exploring the total number of movies that they been the lead in and the sum of the gross revenue for those movies using Tableau.  We believed that particular stars would impact the budget and also impact the gross revenue.  Frequency of a star being in movies could also lead to their popularity and consequently generate more box office revenue as consumer-demand increased to see that star.  In running a regression model, there were specific stars, such as Chris Pratt(1), Daisy Ridley(1), Ellen DeGeneres(1), Felicity Jones(2), Heather Donahue(1), Jennifer Lawrence(8), Louis C.K(1), Neel Sethi(1), Paige O-Hara(1), Quinton Aaron(1), Sam Neill(3), Sam Worthington(4), Scott Weinger(1), and Taylor Kitsch(1) that had significant influence as interacted with budget to predict gross revenue.  With all but Jennifer Lawrence being listed as the star in less than five films and most less than two, as indicated by the number next to each star, we determined that there were additional factors driving this further, such as co-star, if the movie already had a cult following, was a book first, etc.  We did run a sample test using Jennifer Lawrence and Will Smith to note that, at least for these two stars, there was a positive correlation between gross revenue and budget as depicted in the scatterplot below.



Model 1<-lm(d$gross ~ d$budget)

The correlation chart was a basic look at the significance between gross revenue at the box office and film budget. We soon affirmed our prediction that the correlation between budget and gross was causal by running a simple regression. With a multiple r-squared value of .4624, this model shows that 46.24% of gross revenue can be explained by the budget. Budget also has a very low p-value (2e-16), proving to be a significant factor in predicting a high gross. A higher budget movie has greater potential to purchase the necessary artists, talent, and advertising to create a higher grossing product.
Model 2<-lm(d$gross~d$budget+as.factor(genre), data=d)

Using the as.factor for genre we are able to build a second model that explains how a movie budget and genre affects the revenue of a movie. This model had a slightly higher adjusted R-square with .4691. This model also shows that out of all the genres, the most significant ones were Action, Adventure, Animation, Comedy, and Horror. This indicates that these five genres will be more impactful on the revenue of a film with knowledge of the budget of the film. However, without knowing the budget, Comedy, Drama, and Horror have the most significant impact on gross revenue.
However, we know that correlation does not translate to causation. We carefully curbed our analysis with a linear regression model, placing “Gross” as the response variable and “Budget” as a factor of “Genre”. We used budget as a control because we want to know how the effect of dollars invested in a movie, and more specifically movie genre, would be returned. To our surprise, Action was not the most significant factor, Animation was, as confirmed by a lower p-value and a higher coefficient. In fact, the regression explained that with a hypothetical budget of $0, an Animation movie would produce $22.2M more in revenue than an Action movie. This was an astonishing and valuable discovery.  We noted that Action, Adventure, Animation, Comedy, and Horror all had significant influences.
Model 3<-lm(d$gross~d$budget+as.factor(genre)+d$budget*as.factor(genre), data=d)

For our third model we adjusted it to show a model that explains gross revenue with the budget and genre of the film and the interaction effect between budget and genre. This model was slightly better with an adjusted R-Square of .4696. The model showed that a specific genre budget has a slight effect on gross revenue. Budget is more significant for the Action, Comedy, Drama, and Horror genres.

Model 4<-lm(d$gross~d$budget+as.factor(rating)+d$budget*as.factor(rating), data=d)

For our fourth model, we looked at gross revenue with the interaction between budget and rating. This helped us narrow our data to find the most significant rating for gross revenue as budget increases. This model had an adjusted r-square of .4736. Out of all the different ratings, rated R and G movies were the most statistically significant.


Looking at just the adjusted r-squared and the AIC/BIC; the fourth model was the best predictor of increasing gross revenue. However, the rating to budget interaction was only slightly better than the genre to budget interaction. Both our third and fourth model narrowed down our data because they took into consideration the genre and rating with respect to budget of the film. These two qualitative variables were the most significant in predicting the gross revenue outside of just the movie budget.  In joining the interaction together, PG-13 and Horror had the highest and only interaction, with a slightly higher R-squared but higher AIC and BIC, therefore prompting us to return to the previous model and generating the below chart to illustrate our findings.


Confidence Interval Testing:


With the information we gathered from the regression models, we now have an in-depth look at the effect of budget on genre and rating as they relate to gross revenue. However, these findings contradict our earlier hypotheses. To examine our original assumptions, we performed confidence interval testing.


First, we subsetted the data by creating a new dataframe with only Action genre movies rated PG-13. Then we created another variable, ROI, by implementing the ROI formula using budget and gross data sets. We took a summary of the data discovering the mean ROI for PG-13 Action movies was .1666255 or 16.67%, which seems reasonable. If an investor was to invest $100,000, they could expect an average gross return of $116,000 after the movie hits theaters. With a sample size of 468, we used the normal distribution and with 97.5% confidence to determine that the range for ROI on this type of movie would fall between .0899811 and .4232491. This is a fairly large range. But we can say confidently that the largest return on investment should be 42.32%.


Using the assurance of strong significance, and high coefficient strength of our regression models, we will use the same confidence interval testing on an R rated Horror film to test the strength of our first null hypothesis. We performed the same subsetting technique to attain a dataframe of only R rated Horror movies to gather a set of 173 movies. After removing two extreme outliers, the mean ROI was pinpointed at 2.6610 or 266.1%. The testing gave us 97.5% confidence that the range of expected ROI should fall between 113.89% and 646.1%.


Concluding, R rated Horror movies have a 97.5% confidence in producing a high of 646.1% ROI compared to the maximum potential of 42.32% of a PG-13 Action movie.
We can view this practically and justify the logic in Horror movies having the highest total ROI. When looking at the data it seems that horror movies can be made with relatively low budgets and yield much higher profit. Movies like Paranormal Activity and The Blair Witch Project (the two outliers we removed before confidence interval testing) are prime examples of this phenomenon. The Blair Witch Project cost only around $15,000 to make, but made $107,918,810 in box office revenue, a 7,193% ROI. This data will allow us to make the most informed decision in consideration for investing or merchandising.



In analyzing the data, we uncovered that budget had the strongest significance and correlation to gross revenue.  Genre as a factor of budget, nor rating, influenced the gross revenue more than the budget itself but were highly significant subfactors.  Ratings of “R” and “G” along with genres of Action, Comedy, Drama, and Horror, had the highest significance when factored with budget to gross revenue, as depicted in the charts above.

As score and and votes would come after the fact, an investor or merchandising company looking to predict which movies would gross the highest revenue and consequently have the potential to yield the highest returns on product related to that movie, we would look to an “R” or “G” rated movie that is an Action, Comedy,Drama, or Horror genre specifically. This can be demonstrated by the movie “The Hangover,” which led to a major economic impact in Las Vegas.

In conclusion, while we have familiarized ourselves with the tools and theories of data mining for business applications, the most important lesson we have learned, has been to view data insights with cautious skepticism. We are confident that our regression analysis was accurate and that our data source appeared reliable; however, few of us are prepared to wager our professional reputations by advising a CEO to allocate millions of dollars of investor capital into the actionable insights that we are recommending. In the actual practice, we would be recommending finding alternate sources of similar data sets to verify these conclusions. In addition to our newfound perspective on the practical values of data mining, we are now prepared to temper future data sourced predictions with a managerial “P-Value”, named the “Group 6 N-Value” to represent common sense and intuition. We therefore recommend, that when proposed data sets lead us down a path of  assumptions based on high P and Adj R sq values, but contradict our own personal “N-Values”, we should first pursue additional data sets and alternate models to demonstrate, without doubt, that those high statistical probabilities are indeed replicable and justifiable in the abstract science of strategic management and consumer behavior.

StratSim Marketing Simulation

StratSim Automobile Industry Marketing Simulation Case Study

Todd Benschneider, Nadia Kaminskaya, Sam Mohammad

University of South Florida –  Dr. James Stock

July 8, 2017



Current Marketing Situation:

As the Stratsim Automobile Industry simulation began, the market was split equally into four firms A,B,D and our own firm C. Each company produced three products, an economy car, a family sedan and a pickup truck. All three market offerings were priced identically for each competing firm and each product began with identical features and marketing budgets.

At the close of the game, team D was spending $610 million to generate a 13.2% brand preference. In comparison, our team C led the game with a 43% consumer brand preference a similar with marketing expenditures of $690 million. These final round numbers tripled the opening round’s baseline marketing costs of $215 million for all teams.
Market Environment:

The auto industry is one of the three largest industries in the U.S., which dictates the need for a well engineered marketing strategy and long term brand development consistency. The auto industry operates with little pressure of government regulations and relatively low expectations of social responsibility. Despite the lack of formal regulation, the industry operates in a conservative, understated communication of brand trumpeting.




Target Audience:

Our team targets the upper end of the mid-level market, middle class and high income families who prefer the most value for the dollar. Our customers compare product quality, performance and safety prior to comparing pricing. We aim for a broad spectrum of ages, from young singles and stylish economy cars, middle age families who desire larger, high performance cars  to those retirees who prefer a premium quality touring sedan. Our trucks, with their large size and powerful engines, are directed at small business owners and skilled tradesmen who view their truck as a symbol of their quality work and professionalism.


Distribution Channel Review:

The vehicles are sold through independently owned franchised dealers that share the advertising costs in their local market through advertising fees built into their franchise agreements. The dealers are rewarded through discounts and bonuses for achieving sales volume and customer satisfaction targets. Since the dealerships compete against each other over pricing and inventory levels, the dealer performance ratings diminish as overall dealer coverage increases. Profitable and stable dealerships attract the highest quality employees and provide customers with a better experience in both sales and service after the purchase. No vehicles are sold exclusively online or direct to consumers from the manufacturers. The barriers to entry and exit are great due to the capital requirements of billion dollar manufacturing facilities.


Marketing Goals and Strategy:

Team C creates a consistent and profitable demand by producing technologically advanced cars with above average performance and carefully tailored product features. Our brand identity is communicated with campaigns featuring quality, safety and performance. Through advanced feature and quality products, our vehicles are considered an investment that savvy buyers choose to protect their families from accidents and their pocketbooks from unexpected maintenance costs.


Action Plans:

Team C prioritizes the use of model specific advertising, with a heavy allocation toward direct marketing of vehicles to specific demographics. Brand value is enhanced by using dealer cash rebates, large negotiable dealer profit margins and supported consumer financing to allow greater affordability than the vehicle MSRP would suggest. The premium price point of the MSRP is the backbone of developing our premium brand image.

Team C allocates triple the amount of budgeting expenditures per vehicle sold at nearly $300 per car in comparison to the budget brand marketing strategies. The large marketing budget is of little concern to a brand which averages a contribution margin of nearly $5000 per vehicle sold in comparison to $2000 margins of the low cost leaders in the market


Mission Statement:

Through manufacturing technology, we strive to produce vehicles on the leading edge of safety, quality, and reliability with our cars and trucks.




The Marketing Simulation Game Progression Timeline:


The StratSim marketing exercise simulated the competitive environment of four auto-manufacturing firms across a five-year span of customer and environmental variables, including interest rates, fuel prices, raw material costs and personal income levels. As each round progressed, the competing firms chose brand identity strategies, marketing budgets, product development, consumer research and financing strategies. The base round referred to as “the -1 round” set some standard industry average values to build an initial strategy from. The simulation was detailed and intricate with hundreds of options for cross industry analysis research studies of consumer preferences.  In the early rounds, the complex depth of the game took dozens of hours to comprehend and decisions from the early rounds revealed costly mistakes from poor consideration of the interactions the design costs, pricing and market targeting.



Our team felt that we had an experience advantage in the game, with Todd’s experience in automobile sales and service, Sam’s six sigma and supply chain experience, and Nadia’s marketing talents. The experience of the team, however, did not automatically find quick success in competing against the other firms. In the early rounds we confidently rushed to decisions without fully testing the weight of each decision in the simulation’s “pro forma” estimated results. In fact, we did not fully understand how to use the pro-forma decision simulator until the 3rd round. In addition, during round zero we had miscalculated the due date of the upload and had only a partial collection of decisions uploaded. Fortunately the game automatically reloaded the values of the baseline round into any variable that we had not changed.

Our overall strategy was influenced by the game’s 5 year limit. Only 3 additional models of car could be introduced during the game and those would not go on sale until the 4th round. With the limitations of being unable to pursue a wide range of alternative models such as SUVs, vans, hybrids and sports car we chose to adopt a Honda style model mix, specializing in high quality, moderately equipped, safe vehicles at the upper end of the mid-level price point, all sold at a generous profit to both the dealer and manufacturer. We aggressively marketed our pickup truck, adding size and power to our model from the baseline. We noticed that the baseline contribution margins to the pickup were $5197 as opposed to the $1495 margin of the economy car, while the sales volumes between them were similar at 392,000 and 323,000 respectively. With a lack of other alternatives to cars, we expected to be able to double the sales volume of the pickup by carefully adapting our truck to the buying preferences uncovered in the consumer trend studies. Our intuition was correct and by the fourth round, we had nearly double truck volume and secured a number two ranking in truck sales at 749,000 units, despite being priced at $25,750, which was $2750 higher than the market leader that sold 859,000 with a large surplus remaining. The market leader had a slight advantage because we had run short of inventory in that 4th round; the game estimated that demand for our truck was 30% greater than we had produced.

In the zero round we decided our initial strategy was to begin major technology upgrades to our pickup, applying customer preferences gathered from focus groups, we increased the horsepower from 190 to 210, the size from 70 to 80 and increased interior, style, safety and quality all by two points. Fortunately, we did not notice that all those dramatic improvements had also increased the costs of building that now premium truck by 10%. Had we noticed the $2477 per truck increase in manufacturing costs we probably would have reduced the number of those improvements. Luckily, the results later revealed that truck buyers were willing to pay even 30% higher prices to get the features they wanted and subsequent studies later showed that customers wanted even more horsepower and size than our market leader. In later rounds, our truck was selling out of available inventory while trucks priced $4250 lower had surplus inventory even at half the manufacturing volume. The result managed to create the market position we had in mind to be a premium mid-level brand while the other three firms battled over positioning to be the low cost leader.

We also began a major upgrade to the cash cow of our models, increasing the size of the family sedan from 28 to 38 and horsepower from 145 to 165, we also increased the interior and quality by two points and the safety by one point. These changes increased the future cost of each sedan by $1702, which also was unnoticed by our team and would later haunt us in round two when the upgrades launched at the higher cost after we had lowered our selling prices to better compete with the battle among low-cost leaders. Later our larger sedan size added power commanded a large premium over the cost leader firms.

Planning to capitalize on the untapped market for larger vehicles in later rounds, we hoped to launch both a large family van and an SUV, so we began construction on another development center needed for the assembly plant. We later botched this idea because we did not notice that once the construction was complete on that center that we had to place the concept model into it to begin the 3-year production development. We did not notice what had gone wrong until the 4th round when it was too late to launch. This may have ultimately worked in our favor because the product would have been a poor fit for the 5th round’s consumer demand and complicated our predictions for an appropriate marketing mix.

For the zero round, we increased our price on the family sedan from $20,350 to $23,000, while increasing its marketing budget by 10%. We also increased the price on the truck from $20,498 to $22,500, nearly doubled its marketing budget and increased the dealer profit margin from 12% to 14% to encourage dealers to push the model. We maintained the price of the economy car and slightly increased its marketing budget. We chose to lower production levels by about 10% on all models to burn up round -1’s carry over inventory and test the waters of the higher price’s effect on sales volume.

An error that we made that probably cost us the first place ranking in net income was our choice to buy 500,000 in additional plant capacity to prepare for the later rounds when our new products went into production. That plant capacity cost us $3.57 billion, which we never fully utilized because of our lower volume higher profit strategy. Had the other two new models gone into production as planned, the investment would have allowed us to produce the adequate volume for the higher market share. However, because the added plant volume was never utilized, the investment cost us nearly two rounds of profit and reduced the performance of our otherwise superior round zero income statement to a paltry $1.2 billion despite our average contribution margin of $3830 per vehicle sold.

To finance the round zero investments we sold the maximum allowed stock issue of $3.5 billion and sold $6.6 billion in bonds at 5.5%, we used portion of those proceeds to pay off the $6.6 billion short-term loan that was accumulating 7.5% interest.

A mistake we also later regretted was paying $900 million in dividends back to stockholders rather than holding them as retained earnings. We rationalized that the standard 6% return to investors was needed to pump up our stock prices. Later we realized that holding that $900 million would have nearly doubled our annual earnings for the year. The contextual relationships among the costs and profits between 10 of millions and hundreds of millions and billions was difficult to grasp in the reporting format of thousands of dollars on some columns and millions on other columns rather than simple exact value.. Had it not been for the added plant capacity purchase and the poor choice to issue dividends we would have dominated round zero income statements among the competition through the strengths of our hefty contribution margins.

In round zero we also began our strategy to increase the number of dealerships. We maxed out the allowable by adding 48 dealerships and increasing dealer training to 14 million which equated to $29,167 per dealership compared to the $20,978 average default from round -1. Adequate dealership coverage was imperative to our strategy. Another mistake we had made here was our not understanding that adding all of these dealerships would be reducing the profitability of our existing dealerships if we continued to sell the same annual volume, this was later found in our low dealer ratings among the competition. Fortunately, we had increased the dealer profit margin as part of our marketing strategy, which offset a portion of the damage done by the oversaturation of dealerships. Had our original plan to launch two new models and grab a large share of the existing markets actually worked as designed the increased sales volume would have given those new dealers profits and allowed us the distribution network to outmaneuver competitors through community presence.



Our initial strategy was to focus on the value seeker and family segments. After running some marketing research tests, those segments seemed to most profitable with our vehicle models at the time. We wanted to see what was important to those segments in terms of vehicle attributes. After running some focus groups and other market research, it was clear that there was an overwhelming demand for quality and safety with all the vehicles we made. Therefore, we invested heavily in technology. Investing in technology would allow us to have a competitive advantage over the competitors that stayed stagnant. In addition to revealing important ISSQ attributes, the focus groups also showed us consumer demands for vehicle size and engine power. We adjusted accordingly because we wanted to be proactive to market conditions – not reactive.

Another important part of our initial strategy was to begin developing new vehicle products to satisfy market demand for families. After conducting some market research like concept tests and perceptual mapping, it was clear that two new vehicle lines would mesh well with our brand image of serving families. We began development of a minivan and a utility vehicle, with the idea in mind that as families grew, more seating would be needed.

In round one, we paid the price for an overly optimistic production volume as we increased production of the family sedan to 603,000 and only sold 399,000. Our contribution margins dropped to an average of $2342 from round zero’s $3830 per car. Our marketing expense had attached a $400 burden to the cost to every family sedan sold and in addition, we lowered the price by $2000. Both changes failed to gain additional market share because teams B and D chose minor upgrades to their family sedan. Those minor upgraded sedans hit the market before our major upgrade at a $2000 lower price and captured the bulk of the family sedan market for round 1, even A team’s sedan was at the same specs as ours at a $2000 lower price. This left us with 250,000 unsold units that cost us 4.71 billion to build but not sell in that round, this would be compounded in the next round when our major upgrade launched, causing those 250,000 unsold units to be dumped at a large loss.

Another mistake along the way was that we had unwittingly put our economy car into the 3rd development center for a major upgrade that would add $500 to its cost, and in doing so prevented us from being able to add our van concept to the manufacturing plant. In hindsight, the minor feature changes that we made to the model could have been accomplished using the minor upgrade option and released from the development center a round earlier and given us another year of sales for the more competitive product. Another hindsight error we found, was choosing to reduce the size of our economy car from 12 to 8, while the 2E focus group in that round rated 8 as good for size, the same group later rated even 10 as too small for an economy car. The small size alienated the 2nd largest demographic for economy cars, the 4E customer, as well as overflow 2F buyers. We should have spent some more research money comparing the 10 or 11 size concepts in addition to comparing the needs of the 4E consumer focus group. In the following rounds, we should have retested customer preferences and adapted to the trend direction of larger economy cars.

Round one also saw damage done to the truck market, while holding our price to $22,500, team D’s truck was launched using a minor upgrade to the quality rating, gaining one point edge over ours and pricing at $20,499. While it was assumed that the D team would capture the market, they only produced about 1/3 of the demand volume, which allowed us to capture 400,000 in sales at a $2,000 per vehicle premium and finish above team D in profits.

Due to inadequate cash flow from round zero to round one, we generated a short-term loan of $1.688 billion, which we paid off by another $1.5 billion stock issue and an issue of $3 billion in bonds at 6.5%. Again, we made the poor choice in round one to issue $900 million in dividends as opposed to holding them as retained earnings, which lowered our real income from $1.13 billion to $203 million, pushing us down from 1st place to 3rd place in annual income. In nearly every measure of performance, our group C fell to near last place rankings.



Here is a textbook example of how things can go wrong if the team is slow to learn the pro forma simulated round results. A multitude of mistakes combined with some rushed last minute decisions to set the semester record for most money lost in a single round at $3.4 billion. The largest mistake was not realizing that our major upgrades to the truck and family car went into effect that round, adding about $2000 per car to their manufacturing costs. In the same round, last minute reservations about our price point in the market prompted a revision to cust price increases by $1000 and to further drop production levels. The lower prices caused a sellout shortage exceeding 30% on trucks and sedans at minimal contribution margins as the market responding positively to the added features of the upgraded cars.  Adding to the poor performance was our overproduced stale economy car, causing a carryover production of 54,000 units that cost the round two bottom line $540 million.

Another misunderstanding was that the round one, carryover inventory of 25,000 family sedans would add to the income of round two. Somehow, in a manner that we still cannot comprehend, those units were sold at a loss and their income placed into round one profits. We expected those units to fulfill some of the round two demand and instead found ourselves underproduced by nearly 500,000 units in the family sedan that at a $3000 contribution margin would have generated another 1.5 billion in profits.

In round two financing, there was not a cash shortage, instead $500 million in stock was repurchased to take advantage of low stock prices caused by several rounds of mediocre income performance. Additionally a $2.5 billion CD was purchased at 3% interest because neither of the bonds were callable for an amount less than $6 billion.

Altogether, our heads are still spinning on how we could have made so many consecutive errors in cost to pricing and manufacturing volumes. We can only hope that the other teams makes similar mistakes before the game ends. However, we did learn from these mistakes.



Round three is when we started to figure out where to go in the game to test pricing and predict sales volume. We read in the market news that car sales were expected to rise by 30% and therefore adapted our manufacturing volume, assuming that demand for our superior cars would lead us to victory. Fortunately, the demand for our large, high performance truck allowed for spectacular contribution margins of $6200 per truck and created an average contribution margin of $5176 per car sold of all our models. With confidence that several focus groups indicated that customers were willing to pay much higher prices than the recent market had expected, as two of the four automakers battled for low cost leadership, and the third wanted the middle ground in price point. In round three we lead the round with a profit of $1.131 billion and a second place market value of $15 billion, much of which could be attributed to a complete sellout of inventory which eliminates the cost of cars which get manufactured but not sold in the same round. All of our models had 30% higher demand at their pricing than we produced which meant that, had we been more confident in the appeal of our products we could have increased our income by over $2 billion with an adequate inventory despite being priced thousands above most of our competitors.

In round three, we repurchased $1.5 billion in stock with excess cash and bought a $3 billion CD. We cut the advertising back to try to maintain a marketing budget under $200 per car for each model as the focus groups showed little effect on expected market share for advertising above $100 per vehicle. We focused on controlling expenses and optimizing selling price to bring the contribution margins of the economy car back to $1500 per car sold, up from the low of $762 in the previous rounds.  In round, three we also did not invest in production or technology but stepped up on direct and social media marketing adding 20 million to each.

We also could not figure out why our dealer satisfaction ratings were lower than most of our competitors, we thought perhaps that we had failed to factor in enough dealer support. Our reaction to ramp up dealer ratings we increased dealer training and support from $20,000 per dealer to $210,000 per dealer. We were disappointed to find in round four that the additional spending had little benefit to our dealer ratings. We still failed to uncover all of the reasons for our low dealer ratings, but suspect that our lower sales volume was spread across a greater number of dealers, causing them to be less profitable than our competitors that had fewer dealer locations.

We also started to suspect that the competing firms have not realized that the cost to build the cars has gone up 8% in materials and labor; in addition, inflation has caused a 7% devaluation of the dollar since round zero. The steady price level on the economy car was becoming a costly liability of several hundred dollars for each car sold. We also noticed that our competitors have not reflected that market share does not equal total profit and suspect that they also had not been checking their pricing decisions against the pro forma estimator. In addition, the competition seemed oblivious to how much more the buyers were actually willing to pay, their strategy to hold prices near the -1 round was probably due to a lack of concept studies that showed that consumers were not as price sensitive as the competition believed. The competitors pricing also worked against us because we were competing against an unprofitable market. The odd thing to us was that only one of the other three competitors raised their prices when they saw us outsell them at 10-20% higher prices. The A team even dropped prices further than the beginning round started at.



Round four’s decisions were based on news forecasts that gas prices would rise from $3.50 to $4.90 and real GDP growth will drop 1.5%. In a gas-crisis recession, trucks and larger sedans sales diminish considerably. In the real market, truck sales dropped around 30% in both 2008 and 2009 when fuel prices went from $2.90 to $3.57 with the least fuel-efficient like ours dropping 50%. Since the market news forecast predicted fuel prices to rise $1.40 we anticipated a 45% drop in demand for trucks and struggled to decide whether to eliminate all unneeded spending on product development and marketing to allow for the lower expected sales volume. In the real market history of vehicle sales there has never been an increase of even $1 average fuel price, so there was no historical precedence to predict the impact on the market mix.

Despite the predicted recession, the industry report expected sales to increase by another 20%; however, in round three we learned that historically these industry sales projections had been delusional optimistic. However, it seemed logical that sagging demand for economy cars would rebound, as consumers with long commutes would be forced into more fuel-efficient replacements. We expected our historical demand for economy cars to grow by 25% from 300,000 to 400,000 units and theorized that if the other teams did not increase production of the unprofitable economy car segment that we could capture half of the expected 1,300,000 new car market demand. If our competitors failed to recognize the changing marketplace, we could make a run at capturing a 700,000 unit share.

We pulled the sales trends of 2008 and 2009 to compare market direction and reasonable sales expectations. The wildcard in this round was the unknown, of new model market entrants, if any of the other teams would be launching new products that might take market share from the current players in each demographic. This observation greatly influences our pricing strategy. We could see that two of the other three teams had built the development centers to launch new products, but since they had not arrived by round four, we had assumed that teams A and B had made the same mistakes that we made by not transferring the concept prototype into the development center for production in round one. In hindsight, we should have begun our new concepts in one of the two existing development centers rather the new center because they would have launched in round three rather than round four since they would not have to wait for the center’s construction to be completed. In addition, we decided not to release our minivan and SUV in this round because of the forecasted gas prices.

In planning for round five, we assumed that total car sales would decline 20% or 13000 units. We decided that we were at a disadvantage on the family sedan market because our sedan had the largest size and highest horsepower, which reduces its appeal in years of skyrocketing fuel prices. In an attempt to compete in the new marketplace, we chose a minor upgrade and reduced engine size by five horsepower, but in a contradictory move increased size from 38 to 40 and added one point to every other metric for more of a long-term plan than an actual recession strategy. We initially expected the arrival of large SUVs and vans by this round to fill the customer demands for larger models, it appeared that those demands remained and probably would offset fractional disadvantages in fuel economy. We were surprised to see that these sweeping changes only increased the cost of each sedan by $550; those changes aligned us with customer preferences from the focus groups, which indicated that customers would consider the specifications of the product to be a good value even at $27,000. However, we were nervous about how accurate those value expectations would be in an uncharted recession marketplace.

The other three teams were competing at $20-$22,000 pricing and we had been outselling them priced at $24,000 going into round four. Team B priced theirs at $21,700 and even had a better-rated sedan than ours, but failed to produce enough to satisfy the market which gave us their spill-off, allowing us to sell out with a shortage of more than 30% less than demanded. Team A sold only 642,000 sedans with a surplus remaining; in comparison, our teams sedan was a 957,000 unit sellout despite being priced at $4000 higher than the similarly rated A team product. The sales volume cannot be explained entirely by model features because the A team had already upgraded theirs to be within one point of our sedan on nearly every measure. We believe that the premiums that our sedan sold at were a result of its larger size and increased horsepower, in addition to a larger dealer network and higher profit margins allowed to those dealers.

At the beginning of round four, our team no longer held the same great advantages in quality, safety, style and interior ratings and we expected that the two of the other three teams would launch additional minor upgrades to mimic our products and market those models at much lower prices. In fact, the B team had substantially surpassed our ratings for safety in every model and surpassed us in quality in the sedan market and two of the three other competitors outscored our sedan in style. Only our truck held great advantages over competitors in the market and team B had even surpassed its safety ratings. All of these observations support the conclusion that model size and performance had dramatic influences on customer demand that were beyond the measures of quality, safety and style rankings.

The main priority of round five was to end the game with sellout inventory to maximize the income statement and prevent disastrous consequences of over-producing vehicles in a recession gas-crisis. Overproduction could erase the profits from all five rounds while underproduction could still generate a modest $1.2 billion profit and retain our $11 billion gains in accumulated market value. The question we wrestled with was how far to decrease production? It made sense to cut truck production in half even at the cost of half our annual profits, the truck carried a round three, contribution margin of $6100 and still sold out. However, our truck was the largest and least fuel-efficient vehicle on the market so it made sense that our truck sales would take a disproportionate brunt of the decline. We could not afford to have 400,000 units carry over past the final graded round, those 400,000 would equate to an annual loss of $8.6 billion in net income

Our team then had to estimate how many sedans to produce; while we had taken a 29% share of the sedan market in the 4th round, at 957,000 units sold. We were at high risk for the market trend to turn against our high-priced gas guzzler and leave us with a 4th place finish at around a 19% market share of a 30% smaller pie, which would equate to around 441,000 units. Our sedan had a $6100 contribution margin, so we could even lower our prices beneath the competition to hold a greater piece of our market share or we could retain our contribution margins and lower production to one-half the previous round’s sales. Either strategy netted similar results on the pro forma. However, total sales could surprise us and remain near constant with the migration trends away from trucks to carry into sedans, which may hold total sales steady in sedans, which could justify producing as many as 5 million units. The night before the final round, we were still planning on the conservative play of cutting total production in half. Another change in strategy was to change our advertising direction from “safety” to “quality”, since all three competitors chose safety and two of the three matched or exceeded our safety rating on the sedan. Only one competitor exceeded our quality rating and with the minor upgrades we should take a solid first place ranking in the customer hotspot of quality.

On the surface it seemed like a natural plan to nearly double production of the economy car, which historically gains sales in a gas crisis; however, we had previously only allocated 300,000 in production facilities to the economy line. The low manufacturing capability greatly increased our retooling costs to ramp up production, what we found was that due to the economy car’s low $1600 contribution margin, the added retooling costs ate up the additional profits that 300,000 in additional unit sales would generate. To add to the overproduction risk, our economy car was priced $2000 higher than any of our competitors economy products were priced at and the features we had built into the car prevented us from competing at their pricing. In order to generate the $1500 contribution margin, we needed the higher price but our features did not provide high enough ratings to justify the premium price. In addition, our small size showed that we had fallen out of touch with demand for larger economy cars. This smaller size 8 mini would reduce our ability to cross sell to the family demographic that was seeking economical alternatives to the sedan market in the recession economy. As with the sedan we were at risk to have our sales volume to drop in half which and stick us with $49 billion in unsold inventory.

We realized looking at the round four results that the competitors we beginning to surpass our ratings and we could no longer justify premium prices in a recession market, faced with two choices to lower our prices or perform minor upgrades to align with our premium brand image. We launched two minor upgrades that were cost effective due to our zero unit carryover inventory, the sedan changes cost about $500 of our $6100 contribution margins. In addition, we planned to lower prices somewhere between $1000 and $2000 per unit, with the lower price and the premium features it seemed unlikely that we could end up with a carryover of round five inventory.

Feature upgrades to the economy car increased the cost by about $250 but allowed us to justify our premium prices. The economy car we increased the price enough to offset the added production costs because we believed that our competitors would fail to produce enough economy cars to meet gas crisis demand and we would sell out from the spill off effects. Both upgrades also supported our overall brand image for producing premium quality cars and the changes would be a symbolic gesture of our long-term planning past the end of the game.

If we could only predict what our competitors had planned for round five we could adapt our decisions to offset theirs. If any of them launched upgrades, we would surely lose market share even if they increased their prices, we doubted that any of the three competitors would increase their prices by more than 10% as evidenced by their past aversion to price increases. We suspected that at least one of the competitors would fail to read the market outlook and see the impending recession and gas crisis, if so the truck market would be saturated with less expensive and more fuel efficient trucks. In addition, if two of the three competitors failed to see the switch to economy cars, the market would run short of demand, which could allow us to sell out of the economy model. However, the recession in the auto industry of 2008 and 2009 demonstrated that all product sectors dropped in sales, the economy sector only dropped by a lower percentage than the gas-guzzlers. If all teams maintained economy production, we would probably end up with carryover of our own economy car. This observation prompted us to hold our economy production steady and consider scaling back rather than ramp up production, it was lower risk and more profitable per unit since we did not have the added costs of retooling for increased production volumes. In the gas crisis of 2008 truck sales dropped; but, there remained at least some market demand for consumers who used trucks for work or did not commute far. With that in mind, we assumed that we could hold our market share and assume a 50% drop in the market demand; to reinforce our market placement we lowered the pricing on our trucks to become more competitive in case the recession market placed a heavy penalty on price points. As mentioned before, the $1.40 per gallon increase in gas would create market disruption at levels beyond prediction; it seemed possible though that the forecasts would prove to be far inflated from the reality of round five results. We could assume that sedan sales would drop 30% and that our share would drop further than the market. However, the results of round four indicated that we had missed the market demand by more than 30%, which meant that our true market share would have been 1.3 million units instead of 957,000. With that in mind a drop to 600,000 units of production seemed appropriate.


In the final hours before the 11pm deadline for round four decisions needed to upload we realized that overproduction would not actually hurt our net income line, they only cost us on the cash flow report. Most importantly we had discovered that we were able to simulate more income using inflated pricing to make large profits on what we did sell and let what did not sell roll into the round six liabilities. With this discovery we readjusted our economy car production from 299 to 450 units adding $1000 for a price of $13,650. We increased trucks from the half volume that we expected at 250 up to a more optimistic but still greatly reduced 450, but increased the price from the initial plan to discount the trucks and instead added another $500 to price it at a lofty $27,000, nearly $2000 more than prior round. We kept the sedan production at 770 which would represent a 20% decline in volume from the previous round; however, increased the price by almost $2900. The strategy had expectations of 50% carryover inventory but a higher income that would be reported on the round five results. Regardless, our downside  income exposure seemed capped at a $2 billion loss even if we sold nothing or a $3.5 billion gain if we sold out according to the pro forma estimates. The potential upside to get us beyond our $1.2 billion profit prediction that we were able to generate by playing it safe with lower volumes at lower prices, motivated us to take the risk and overproduce at the higher prices.



Tuesday Morning results surprised us with only a 17% decline in vehicle demand overall, the worst drop of 25% in was in sedans instead of trucks which shocked us by posting a mere 17% drop in reaction to the $1.40/gallon increase in gas prices. Economy car sales only climbed 12% and we were amazed to see that our competitors had all scaled production back on their economy cars, possibly they assumed every other team would pursue the economy market and underproduce for the sedan market.

Our strategy worked and despite being priced $5000 higher than historical market price maximum, we managed to sell out of every model and even at that. But we still missed meeting the demand by another 30%. We once again gained the largest share of the market on every model except the sedan only to be nudged out by D teams version which sold 787,000 at a $5000 lower price and they were plagued by leftover inventory even at that price. In the end, our team was in first place in terms of

  • Stock price ($70.65)
  • Total shareholder return (15.8%)
  • Firm preference (43.3%)



The results of the game reinforced the the philosophy, that price alone rarely wins the market share in major purchases. In fact, features and performance at a premium price do not automatically correct the shortcomings of bare bones pricing either. Automobiles are unique products in their ability to generate sales through each customer’s self-identity. Similar to how many customers would not buy a Wal-Mart branded sneaker or jeans, few customers want their self-identity  to be represented by an unstylish entry level vehicle. The slightest perception of substandard quality becomes a product liability to marketers and pricing the product at the bottom of a market nearly ensures that consumer will perceive the product to be a poorly-made substitute to the average quality market offerings. Competitive advantage is imperative.

Customers at times will even pay a premium for the same product for simply being marketed as a more prestigious product. One example is a $4 Starbucks coffee compared to $1 gas station house brand. Or Bud Light compared to the nearly identically flavored recipe of Busch Light which sells at a 20% discount and only captures a mere ⅕th the volume of the Anheuser Busch’s flagship product. Perception is reality in marketing.

Our results proved that the two teams that battled for the lowest price were outperformed by the other two firms who marketed premium priced vehicles at higher MSRP. At times, especially in the 4th round, product ratings of B and D firms ranked higher than C team’s vehicles selling at a 15% premium. If buyers were strictly logical beings, C team should not have been able to sell a single car in the sedan and economy sectors, but we even outsold the superior lower priced competitors.



We believe that C team should advance its premium place in the market moving slightly further into luxury brand identity from premium product placement. The margins allow high revenues at a lower market share which reduces our risk of overproduction losses and need for expensive capital production facilities. Premium retail prices can weather market downturns when parlayed into affordability through manufacturer subsidized financing and lease programs. Large rebates can also be added to the marketing mix to tempt the bargain hunters and those products can still be sold at respectable profit margins.

Once gas prices decline to average prices, the C team should release the premium featured large van into the marketplace to corner niche markets that are not met with competitors products. Two rounds after the van introduction, if positive results are generated by the product, we would release a mid-grade SUV to cater to family’s whose tastes run the middle ground between the  family and the truck market.

Our fundamental brand placement would be based on the a mid-level marketing, this would prevent alienating the more modest and proudly “sensible” consumers who would avoid products that are seen as pretentious and extravagant. Just as some consumers will avoid entry level products, a portion of customers will avoid products that seem excessive, regardless of the quality the product offers.

With this strategy of a balanced brand placement that can appeal to both the middle ground and the luxury markets, we plan to avoid the pitfalls of luxury market position while also providing the profits that provide the greatest return on investment. With these profits, we can continue to fund the product development to lead the industry into the fastest technology evolutions. With our superior products, we can better withstand market volatility in the future.

Pharmaceutical Price Points – Pricing the EpiPen


Marketing Case Study: Pharmaceutical Price Points – Pricing the EpiPen

Todd Benschneider – University of South Florida – Dr. James Stock

June 29, 2017



Mylan Pharmaceuticals gained front page notoriety in 2016 for its part in sweeping allegations of price gouging and Medicaid abuses among large pharmaceutical companies. Consumer backlash to the rising costs of healthcare fueled a hailstorm of media attention, spotlighting Mylan’s unprecedented price inflation of several older generic drugs. The Mylan product at the forefront of the debate was the EpiPen; an emergency treatment device that assists patients in self-administering adrenaline (epinephrine) during severe allergic reactions. The device had grown into a household brand over the 30 years since its introduction and EpiPen’s brand loyalty provided the foundations for one of the industry’s most successful, and now most questionable, brand revitalization campaigns ever launched.  The marketing vision began in 2007 when Mylan Pharmaceuticals purchased the rights to the EpiPen brand inside a $6.6 billion packaged deal of 434 generic drugs from Merck Pharmaceuticals. Shortly after the acquisition, Mylan began increasing prices by increments of 10% per quarter until the EpiPen’s price had grown by over 600% in ten years that followed (Darden).


Mylan management defends the increases, claiming to have invested over $20 million in product and distribution chain improvements since acquiring the product (Koons). The firm’s executives cite that former owner Merck’s initial price of $94 per package generated a comparatively low 8.9% net profit in 2007. Defendants of the price increases also argue that price adjustments were necessary to create a sustainable supply chain of the lifesaving medicine (Lee).


The combined sum of those arguments were unable to pacify the critics after an investigative report by Ben Popkin of NBC news revealed that “from 2007 to 2015, Mylan CEO Heather Bresch’s total compensation went from $2,453,456 to $18,931,068, a 671 percent increase. During the same period, the company raised EpiPen prices, with the average wholesale price going from $56.64 to $317.82 per pen, a 461 percent increase, according to data provided by Connecture.” In a historical pricing perspective of the brand, Bresch’s salary increases alone increased the cost of manufacturing the EpiPen by nearly $5 per package; which, when contrasted to Merck’s original pricing, would have cost the product nearly its entire profit margin. The attention garnered by the compensation of CEO Bresch, along with the observation that over 40% of Mylan’s annual profits were now being generated by the EpiPen price increases, compounded Mylan’s public relations woes as a symbol of management’s greed, drawing nationwide criticism on executive pay excess and pharmaceutical anti-trust laws (Bastick).


Today Mylan has arrived at a strategic crossroads in its marketing vision. The firm’s 90% market share of epinephrine injectors will certainly be jeopardized if revised pricing fails to satisfy expectations of corporate responsibility, and the potential loss of the EpiPen market could cost stakeholders $847 million in annual earnings (Ubel). In addition, the brand collapse would generate a multi-billion dollar capital value loss of resale value of the brand. Since EpiPen’s patents will soon expire, Mylan’s original plan to sell off the division for a fast profit would be hampered by the devaluation of the EpiPen brand name, rendering the manufacturing facilities, goodwill and marketing capital worthless to prospective buyers.



Unlike other pharmaceutical structure pricing bands, the EpiPen injector pricing was relative to the mechanical engineering patents contained within its dosing syringe system, rather than the chemistry of its medicine. The generic hormone solution inside the applicator has been widely available for years at prices less than $2 per dose; however, the precision, spring-loaded application syringes cost approximately $35 to manufacture. Critics claim that excessive marketing spending under Mylan’s management inflated the total cost to manufacture, market and distribute the device, from $80 to as much as $450 per package (Popkin). EpiPen had enjoyed a unique advantage in the drug market, because its mechanical design the EpiPen had been protected through engineering patents which were outside the pharmaceutical anti-trust regulations of the FDA (Darden). In addition, the arrival of new entrants to the market had been limited by the historically low profits earned by these injection devices (Lee).



The patents alone however, did not allow for a market domination, Pfizer had patented a rival product, the Adrenaclick, which was released for exclusive distribution through Wal-Mart in 2010. The new entrant, however, faltered due to limited brand awareness and its restrictive distribution exclusivity to Wal-Mart stores. In two years following its introduction, Adrenaclick failed to capture more than a 7% market share, despite selling at a price point of 1/3rd that of the EpiPens. In 2012 the maker of Adrenaclick sold off its manufacturing equipment and the product temporarily left the market, under the assumption that the timing was not right to continue challenging the EpiPen for market share (Bastick). Internationally EpiPen competed against a French rival the “Auvi-Q” which was sold in Europe at around $100 per package; however, Auvi-Q initially chose not to apply for U.S. distribution due to possible U.S. patent overlaps with some of EpiPen’s design. The continued existence of this international competition in the injector market remains the driving force behind why EpiPen prices in Europe have remained near their original 2007 prices, at around 1/5th the price of EpiPens sold in the U.S.


Much of Merck’s pre-2007 decisions for U.S. price points near the $100 mark were justified by the international price competition of the French Auvi-Q. Merck management believed that if U.S. market profits grew too lucrative, that Auvi-Q would challenge its U.S. patent rights, generating a legal battle that would cost years of EpiPen’s profits along the way. In addition to Auvi-Q, a new rival was introduced to the U.S. market in 2005 named Twinject which was marketed at a lower price point, at the time, than the $90 EpiPen. With pricing influenced by anticipated market competition of 2007,  the 25 year old EpiPen line had been generating less than $17 million in profits from about $200 million in sales. Even Mylan executives had initially planned to spin off the EpiPen line from its new portfolio purchased in the Merck deal (Koons). However, CEO Heather Bresch saw a golden opportunity for the product and persuaded the board of directors to use EpiPen as a sample case for the future marketing of its generic brands. Mylan took on a revitalization marketing campaign and set its sights on capitalizing on the remaining untapped profits from its captive mechanical syringe market (Koons).


Pricing the EpiPen was a great challenge, since strategies in drug pricing are deeply complex; pharmaceutical makers are faced with a more complicated marketing landscape than manufacturers of retail goods. Prices for the same drug can vary widely from one country to the next, for example an EpiPen is priced in Great Britain at $69, in Germany at $190 and in the U.S. at $600. This variation among pricing processes reflects the complexities of distributing a product to meet a variety of competitors and price-influencing criteria in each market. For example in the U.S. the FDA along with private insurers utilize a market driven price allowance, in the spirit of capitalism, a drug maker can charge nearly any price for its products, a policy that is intended to draw new entrants into the market and drive prices down and quality up. In comparison, many European countries require an approved “reference pricing model”, which dictates the fair insurance reimbursement value of a drug is based on the costs of its alternatives. Some countries such as France include negotiable “price band” restrictions that cap the maximum price the drug can be sold at as an allowable percentage over the lowest price which the company sells the drug in other nations. Because of these price regulations some pharmaceutical firms choose not to distribute their products in highly regulated markets such as France and Switzerland (Rankin).

In 2009, the anticipated arrival of new entrants to the market became a reality when French rival Auvi-Q applied for North American distribution. Auvi-Q was expected to challenge EpiPens U.S. patent rights; however, Auvi-Q withdrew from the U.S. market entry after a series of safety recalls crippled their brand’s market value, they too believed the timing was not optimal to challenge the EpiPen for market share. Bresch’s strategy flourished by the subsequent delay of new competitors to the market and EpiPen found a growing market, even at much higher prices. The CEO’s belief was, that through an increased profitability of the mature market, Mylan had created an incentive for competitors to join with their own rival products in the final years remaining, until 2025, when the EpiPen patents would expire. The resulting lucrative margins created by the new higher prices would provide an improved resale market for the EpiPen division or the future licensing of its technology (Koons).


Mylan expected that the new players in the market would quickly drive EpiPen prices back to near its original $90 per package through price wars. During the eight year period of price increases, EpiPens previously stalled sales volume, even grew by 67%.  Mylan had successfully expanded the existing market by lobbying for revisions to school medical restrictions which had prevented school staff from administering the shots to students in emergencies. With the restrictions lifted, Mylan further lobbied for tax subsidies to donate free EpiPens to schools, increasing goodwill and lowering corporate tax burden by $600 per package rather than the $100 per package deduction which would have been captured in the previous price formula. The theoretically deductible donations allowed Mylan to pay an effective 20% U.S. corporate income tax rate in 2015, saving it nearly $100 million in tax liabilities (Lee).


Bresch’s short-term strategy was directed at harvesting larger profits in the U.S. market through price increases, brand recognition and distribution expansion for several years until competitors could mobilize new products. From Bresch’s long term perspective, once that competition arrived to the market, Mylan could sell off the EpiPen brand and its soon expiring patent protection to the new competitors. However, in the eight years that followed the campaign launch, the anticipated competitive price pressure never materialized, as both Auvi-Q and Twinject suffered public relations problems and financial difficulties during the recession which caused both competitors to withdraw from the U.S. market by 2014. Capitalizing on the limited competition, Mylan increased prices by about 10% per quarter per year, gradually bringing the price from $90 per pair of EpiPens to over $600 per pair.



Mylan executives forecasted the introduction of EpiPen rivals by 2010, however the recession and other unforeseen regulatory factors delayed the arrival of that competition by nearly a decade. Bresch defends Mylan’s aggressive pricing strategy, justifying the tactics by capitalizing on the opportunity to harvest an additional $600 million per year in profits for every year that competition failed to materialize. Executives such as Bresch could claim a fiduciary obligation to the investors to exploit market gaps for shareholder gain and to pad the company cash reserves to fund new drug products (Koons).


In addition, Mylan leadership claims that they did not believe that they were creating a public safety crisis of affordability, because the allergic reactions could be just as effectively treated with an economical alternative which utilizes a $2 syringe and $5 vial of epinephrine. They pointed to the low switching costs of those alternatives and pointed to the examples of emergency responders that had converted back to dosing patients from syringes in addition to the arrival of free clinics which guided the uninsured on the creation of their own emergency kits for a fraction of the cost of a preloaded EpiPen (Rankin).


Mylan’s leadership could not have reasonably anticipated the market’s reluctance to self-dose from conventional syringes. Bresch initially believed that the primary competitive advantages envisioned for the EpiPen were limited to small children who could not administer epinephrine through syringes and to schools which were only protected from legal liability by using the EpiPen or an approved similar device (Koons). Regardless of price, consumer’s fear of incorrect dosing or injecting air into their bloodstream stalled the advancement of self-administered syringes (Bastick). The media scrutiny chose not to address that the EpiPen price should have little effect on affordable healthcare since it is viewed by medical practitioners as a simple convenience, rather than a medical necessity (Lee).


The lack of mounting competition for the past decade could not have been foreseen by management either, as three attempts at injector market entry by other firms failed due to poor timing or marketing. The introduction of a generic EpiPen competitor by Israeli firm Teva Pharmaceuticals was also denied by the FDA in 2016 further diffusing competitive influences. However, in late June of 2017, the FDA approved the next major player in the epinephrine injection market, Adamis Pharmaceuticals introduced their own injector under the brand name “Symjepi” a cheaper alternative to Mylan’s EpiPen, but expected to price higher the Adrenaclick (Bastick). Auvi-Q has also been approved to market their rival injector beginning in 2017 and Adrenaclick and Twinject have announced their returns to the market.

In response to consumer backlash and the coming arrival of generic substitutes, Mylan has announced that it will release a generic version of the EpiPen priced at around $300 per package of two. Analysts suspect that Mylan will continue to donate the EpiPen brand version to schools for a write off of $600 per package to maintain their tax savings and continue to promote the EpiPen brand to those whose insurance allows for brand name premiums. Despite the announcement, Mylan has not been quick to launch the distribution of its half priced generic alternative (Bastick).


Proposed Solution

The arrival of the new competitors, the aging patents, along with the media scrutiny makes a clear case for drastically reducing the EpiPen price. It stands to reason that competition among new firms will drive prices back down to the mid-$100’s per package or possibly even lower by 2025. The inevitable loss of EpiPen’s mechanical patent protection will soon render the brand’s competitive advantages obsolete. The EpiPen brand appears to have run its lifecycle and while the marketing tactics of Bresch succeeded at capturing an astounding quantity of remaining value from the brand; a change of course is needed to salvage the remains of Mylan’s public image and diffuse additional conflicts with lawmakers. The negative publicity around the EpiPen pricing is a driving force that pressured lawmakers to fine Mylan $465 million in 2016 for exploiting a regulatory misclassification to increase Medicaid reimbursement rates. It is likely that regulatory backlash will begin impacting the future FDA cooperation of Mylan’s other products. Continued friction between government regulators and Mylan could delay the FDA approval of more profitable new products and increase scrutiny into other areas of taxation and accounting regulations.

According to Porter’s five forces, over the next 10 years, EpiPen will suffer the fate of many other mature, low technology products which survived by the slight advantages of their distribution chain efficiency and became unable to grow and generate premium profits through technology advantages. For a firm such as Mylan, their interests would be best served by directing their focus toward the development of new products rather than expending administrative resources on the low-margin, maintenance of a supply chain distribution in a mature market.



Selling off the EpiPen brand and facilities to rival Teva Pharmaceuticals seems to be the most logical course of action. Teva’s acquisition of a widely recognized brand such as EpiPen would gain them access to the U.S. market which had recently been denied to them by the FDA’s rejection of their competitive product. The brand development value to Teva appears to exceed the future earnings potential of the EpiPen division to Mylan and could allow the firm to negotiate a premium sale price. However, there is some friction remaining between the leadership of both companies after Teva’s 2015 failed takeover attempt of Mylan.

The logical course of action, would be to advise Mylan’s CEO, Bresch, to contact leaders at Adrenaclick, Teva and Adamis to locate the highest bidder for the sale of the EpiPen brand prior to Mylan’s own launch of the generic version. By leveraging Teva’s offer, Mylan may be able to tempt either Adrenaclick or Adamis to pay a similar premium price for the brand. In addition, by delaying the generic marketing launch, a new competitor could capture the generic market by utilizing their own marketing campaign budget already allocated toward their entrance to the market. By allowing the new entrants to control the price band, the strategy could allow the entrants to more efficiently gain control over the adrenaline injector market, allowing the fewer remaining players to enjoy greater profit margins. It should be expected that EpiPen’s $800 million in annual profits will soon diminish back near the $18 million level of 2007 in the face of international competition and public scrutiny.



Mylan’s success at capturing untapped profit potential from a low-profit, mature market provided a valuable case study in both brand management strategies and an application of SWOT metrics. While the long-term brand potential remained limited, CEO Heather Bresch demonstrated great insight by capitalizing on EpiPen’s remaining market strengths and leveraged those strengths through marketing to exceed all foreseeable expectations of profit potential for the lackluster brand. Some analysts calculate that Bresch harvested more than three times the profits from EpiPen in the 10 years at the end of its patent protected lifecycle than the profits from all of the other companies combined, that owned the product along the 35 years that EpiPen was on the market (Koons).

The negative press would likely have been unforeseen by anyone, since the catalyst for the media scrutiny was originally aimed at Turing Pharmaceuticals and its outspoken CEO Martin Shkreli for their price hikes on lifesaving AIDS treatments. Mylan’s own negative press exposure was viewed by many as unjustified collateral damage, which brought an unfavorable spotlight on Bresch’s strategy and may have accelerated the entrance of new competitors which had been waiting patiently to exploit the optimum timing to reduce switching costs for consumers (Lee).

The public relations opportunity that Mylan probably missed was to demonstrate an empathy toward the uninsured by launching a parallel campaign to provide a package of free EpiPens a year to the uninsured or low-income underinsured customers, rather than their chosen direction of providing “$100 off” coupons that were limited only to those with commercial health insurance. Mylan’s disregard for the underinsured struck a nerve with the low-income masses and fueled the media frenzy that surrounded the executive pay scandals. The public relations damage to Mylan’s brand value and the resulting lack of political cooperation that will follow could be estimated to cost several billion dollars in the coming years as lawmakers begin to apply their own pressure by withholding cooperation and avoiding any compromises that appear to benefit Mylan.



Exhibit 4. Expert Financial Analysis

Martin Zweig Analyst Commentary on Recent Financial Performance of Mylan: Guru Score 62%

P/E RATIO: [PASS] The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. MYL’s P/E is 38.62, , while the current market PE is 19.00. Therefore, it passes the first test.

TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. If a company does have a high level, an investor may want to avoid this stock altogether. MYL’s Debt/Equity (128.91%) is not considered high relative to its industry (152.29%) and passes this test.




“10 New Years Resolutions for the Pharmacy Industry”. 2017.


Bastick, Erin. 2017. “EPA Approves EpiPen Rival”. Formulary Journal.

Lee, Jaime. 2016. “Mylan CEO defends EpiPen strategy, questions pricing model in the U.S.” MMM   



Koons, Cynthia. (2015). “How Marketing Turned EpiPen into a Billion Dollar Business”. Bloomberg

          Business Week.


Mattingly, Joseph. 2017. “Drug Price Wars, Episode VII: The General Assembly Awakens”. Mattingly  


Popkin, Ben. (2016). “Mylan’s CEO Pay Rose over 600% as EpiPen Prices over 400%”. NBC News.

“Pricing the EpiPen: This is Going to Sting”. (2016). Darden Business Publishing University of Virginia.

Rankin, Peter. 2014. “Global Pricing Strategies for Pharmaceutical Product Launches”. Sourced:


Ubel, Peter. 2017. “What is Maddening About Pharmaceutical Prices”. Forbes. 


Zweig, Martin. 2017. “Mylan Guru Performance Assessment”. NASADQ.


Marketing: AccorHotels – Leveraging Online Content

content strategy  

AccorHotels Case

Todd Benschneider, Nadia Kaminskaya, Sam Mohammad

 University of South Florida

26 June 2017

Dr. James Stock


AccorHotels Case

       Over the past decade, technologies like smartphones and the internet have evolved rapidly. These advancements have ushered in new ways for consumers to buy from and communicate with businesses. AccorHotels, one of the most renowned hotel corporations in the world, is trying to find ways to keep up with the new demand for online presence and e-reputation. Olivier Arnoux, SVP Customer Experience and Satisfaction, has two weeks to present a plan for integrating a digital platform strategy into Accor’s brand image.


50 years ago, owning and running a hotel consisted of a completely different dynamic which relied on travel agents, connections, and customer feedback cards. Today, the hotel industry has evolved into its very own beast. Consumers are informed, you can book a hotel with a click of a button, and you can customize your experience as you like. Today AccorHotels has over 4,000 hotels, 570,000 rooms, and is located in 95 countries.

As the dynamics of the hotel world changed, so did the leadership. In 2013 AccorHotels appointed Sebastien Bazin as its fifth CEO in 8 years. With Bazin AccorHotels embarked on a new strategy that was asset-light in certain markets but at the same time actively buying new properties in emerging markets. The new strategy separated AccorHotels into two business units with separate balance sheets: HotelInvest and HotelServices.  Accor’s hotels spanned all the major market segments – economy, midscale, and luxury/upscale. The major focus was on midscale which had a combined portfolio focus of 45%, economy was second with 39% , and luxury/upscale was 16% (Dubois).  With all of the changes AccorHotels has tried its best to keep up, the analysis of their 50 years to today shows the extensive changes in the lodging industry.

AccorHotel’s 50 Year Perspective of the Lodging Industry

     Imagine the business landscape of the lodging industry during Accor’s entry to the market in 1967,  in contrast to the data rich industry of today. Across that 50 year divide, Accor has successfully adapted to countless changes in the ways that customers interacted with hotels and how those hotels generated profits. Nearly every aspect of the host to guest exchange has changed since 1967, customer preferences have evolved through many changes in value perception as well as the emotional processes which influence prospects to choose one hotel over another.

    Convenience was a driving factor in the late 1960’s, but a convenient payment infrastructure remained absent for another 20 years. The lack of a remote payment system limited a hotel’s ability to collect reservation deposits. While credit cards were in use by 40% of U.S. households in 1967, their utilization for telephone reservations was restricted by the banking regulations of the day. Credit Card Companies required card imprints and physical signatures on those imprints, a process that limited a hotel’s ability to enforce cancellation fees (Durkin). The lack of a practical remote payment method created a “first-come, first-serve” market where fewer than 20% of hotel rooms were, on average, booked by reservation in years prior to 1970 . Since the internet would not arrive until three decades later, guest communications were handled by mail or a phone call from the customer’s home to the exact hotel branch. Centralized nationwide 1-800 reservations centers would not become widely used until the late 1980s (Bearne).

    Mobile phones remained an additional two decades away from improving communication convenience for travelers, so hotel customers stopped along the travel route to make calls to the hotel from a payphone to cancel reservations if there was a change in their travel plans. Because of these logistical obstacles many hotels routinely rented rooms out from under those who held  reservations once the recommended 6:30pm check-in had passed. The limited communication and payment options contributed to a hotel market that was driven by its location, billboards and highway visibility. In comparison, 45 years later the mobile phone tapped into the internet and instant access to price and vacancy were found with just a few finger swipes, no matter where the customer was located. In fact today many travelers double check advertised room rates and make modifications to their reservation “online” while they are waiting “in-line” to pick up their keys from the desk clerk  (Benschneider).

1970’s: Sales Pressure Success and the Leverage of the Escalation of Commitment

    From the 1960’s through the 1980’s, the typical traveler would choose a hotel after arrival to their destination, often stopping for pricing and room availability at several hotels prior to making a decision amongst those local competitors. In that period of the industry, location, brand reputation, lobby appeal and desk clerk’s salesmanship were the influential factors that differentiated local competitors. Interpersonal sales skills were greatly valued traits in desk clerks throughout the 70’s. In those years, desk-clerk sales practices for mid-level to luxury brands included a tour of the hotel and a visit to the room prior to the presentation of  the exact rate quote for that room.. Sales bonuses were a standard employee incentive practice, paid in proportion to the desk clerk’s prospect to guest conversion ratios in addition to their average “room-price” booked. Consumer criticism about wide deviations paid between guests reflected the low bargaining power of hotel guests and prompted regulations requiring maximum rate cards to be posted on the inside of each room door (Bearne).

    The sunken time investment required to get a precise rate quote and hotel tour deterred those tired travelers from comparing more than two or three hotels. Much like the car buying process today, deliberate sales tactics stalled the customer at the front desk for as long as possible before quoting the nightly rate, if the customer balked at the rate, savvy desk clerks were trained to ask the prospect for memberships and organizations they might belong to, that might “entitle” them a “preferred rate”. If the customer interview revealed them to have “no qualifying memberships”, the clerk would further detain the guest by “paging a manager” to request an “unprecedented one-time rate discount”. Research of the period studied the buying behaviors and documented, that through the psychological “escalation of commitment principle”, that each minute a guest remained in the hotel past the 10 minute mark, the odds exponentially climbed that the guest would agree to the rate, succumbing to the inertia of the stop, rather than continuing down the road to compare rates at the next hotel. Oftentimes, the guest would relent to the convenience of location, renting from the third hotel even when they preferred the first. The stresses of driving back to find the first hotel again in an unfamiliar city without navigational guidance outweighed the benefit of renting a better room. The convenience appeal of renting from the current hotel rather than the next stop hotel on the guest’s comparison list allowed larger margins as the bargaining power of consumers was very limited in comparison to modern online price comparisons (Harrington).

Late 1970’s – Advances in Telecommunications Improve Bargaining Power of Consumers

     Simple long distance telecommunications technology similar to fax transmission networks provided the infrastructure for the growth of travel agencies in the late 1970s. These agencies enabled reservation cancellation penalties by accepting the cash or check payment locally, while guaranteeing payment to the destination hotel through a commercial line of credit. The technology spawned the arrival of discount programs for travelers who prepaid. Travel agencies popularity also grew in popularity through the arrival of more affordable airline travel. A travel agency’s main products featured intricately designed “travel packages” which bundled specific hotel and airline combinations. Travel agency services dominated the long-distance travel and tended to direct the guests to those hotels which offered the largest agent commissions, regardless of brand recognition, location or lobby appeal (Bearne).

    Airline travel was considered a luxury product at the time, a service with enough margin to provide handsome commissions back to the travel agents, allowing those successful travel agents to enjoy respectable earnings potential until the mid-1980s. The bundling of hotel reservations into airfare packages allowed airlines to circumvent the FAA regulated minimum airline rates which contained large profit margins to prevent price wars between airlines. Until airline deregulation in 1978, airlines routinely offered kickbacks to hotel chains in exchange for discounts on bundled room rates to package into their travel services, these discounts allowed airlines to circumvent the regulated minimum seat prices and undercut competitors to gain market share. In addition, the customer’s inexperience with air travel,  reduced the percentage of customers willing to purchase their tickets in person through the airline kiosks at airports (Highly).

     The expensive risks of booking incompatible connecting flights among competing airlines deterred even the most experienced travelers from self-booking air-inclusive travel plans. Most travelers chose to employ a professional travel agent, their expert guidance also provided a guaranteed delivery of the travel contract, as the agency, hotels and the airlines cooperated to insure the fulfillment of the itinerary. Those guarantees were influential at a time when a round trip cross country airline ticket cost nearly a month’s wages. In inflation adjusted dollars, the lowest possible price for a round trip, red-eye connecting flight from New York to Los Angeles was $1444 in 1974, where today that same ticket can be found as a direct, round trip flight for under $400. The bargaining power of the airline industry supplier’s in that period justified large travel agent commissions and airline subsidized hotel rates. With the guaranteed income from airlines and travel agencies, hotels were less dependent on the street level consumer that arrived seeking lower room rates and competitive hotel amenities. The efficiencies of a demand influenced hotel industry were diffused by the travel agents influence on demand (Thompson).

1980’s: Credit Card and Airline Deregulations Increase Customer Bargaining Power

     A loosening of credit card regulations arrived in the 1980’s that allowed hotels to take payment in full or charge enforceable cancellation fees over the telephone. Those remote electronic payments in combination with the prior airline deregulations of 1978 enabled customers to book their own airfares by phone, bypassing the travel agents who previously held a captive market in airline ticket sales. These changes allowed travelers to cherry pick their precise wants on each day of their trip rather than accepting a plain vanilla bowl of prepackaged hotel offerings, the changes in payment infrastructure resulted in the improved bargaining power of hotel customers (Durkin).

    Hotels began to produce color catalogs listing their locations in a state by state directory with actual photos, contact information, local maps and advertised nightly rates. This fresh recipe provided a consistent and convenient platform for travelers to prepay their reservations for added discounts. The publication of room rates in directories allowed consumers additional bargaining power through the quick comparisons of dozens of hotels near their destination, a factor that allowed hotels with less desirable locations to compete with those flagship hotels in downtown areas. Travelers began to frequent hotels that were located between their destinations rather than at their eventual location to lower the overall expense of their trips. Subsequent hotels were built on the inexpensive real estate along rural stretches of interstate highways. These rural hotels were not only less expensive, but also offered ample parking and relief from the stresses of comparison shopping hotels on the busy downtown streets of unfamiliar cities (Benschneider).

1990’s: Mobile Phones and the Popularity of the Travel Clubs

   The early 1990’s brought the arrival of the mobile phone in addition to an increased consumer confidence in paying by credit card over the phone. These market changes fueled the introductions of travel clubs which provided catalogs that featured detailed state maps which soon replaced conventional travel atlas’ maps. These travel club catalogs highlighted their participating hotel partners and those hotel locations within both state and local maps.  The catalogs contained new driving-directional details which lent themselves well to attracting mobile travelers looking for the least-expensive hotel nearest a particular exit of a highway. Travel club popularity grew quickly, pioneered by Citi-group subsidiary, Citi-Travel, which was the 1990’s incarnation of, the club functioned like a wholesale club, leveraging the bargaining power of millions of members to pressure hotel’s into deeper discounts. Travel clubs featured the participating hotel’s names and addresses as well as their discounted member rates, amenities and distances to major attractions. The 1990’s catalog approach to hotel marketing brought changes to hotel construction and location in order to create offerings that most importantly “looked good on paper”(Bearne).

    In order to utilize the travel club system, members normally paid fees from $100-$250 per year in 2017 dollar equivalent. In order to buy at the “member rate”, customers were required to call a central 800 phone number to request reservations, even if they were already standing in the hotel lobby. This captive reservation system ensured that the travel clubs would be paid their commission on the booking. The club’s hotel catalog was arranged by city and sorted by rates from low-high, a factor that strongly incentivized hotels to shave their margins thinner to capture a larger percentage of the members passing through their city. Travel clubs pre-negotiated rates resolved the variable hotel rate shell game that travelers found distasteful. To combat the leverage of travel clubs, hotels introduced rewards clubs and credit cards that required customers to book their trip direct to the hotel rather than through a travel club. Room rates for “rewards club members” and were similar to the discounts of the travel clubs but pressured the customer to use their company rooms throughout a trip. The publication of those discounted rates laid the foundation for ever increasing bargaining power of customers, in a formula that would later evolve into the travel booking websites of today (Bearne).

Today’s Lodging Market

     In the current U.S. lodging market, hotels are enjoying the highest occupancy rates since 1984, with an average occupancy rate of 66% for 2016 (Edelson). Accor and most other chains have reduced on their reliance on Online Travel Agents (OTA) such as Expedia or Travelocity which still provide about a third of their bookings while currently a quarter of the average hotel industry bookings come through the corporate hotel websites, roughly 10% of bookings are made by inbound phone calls and the balance are a variable and wide mix of rewards clubs, organization referrals and repeat customer walk ins (Edelson). Accorhotels will need to plot their course into the 2020’s, allocating resources to hold or grow their market share utilizing search engine optimization and organic social media brand recognition  We will answer the questions on how Accorhotels can enhance their “Online Travel Agent” relationships, harvest brand value through social media and integrate loyalty rewards clubs. In addition, we can demonstrate how the supplementation of conventional strategies such as charitable contributions and alternating waves of well-designed television, billboard and print advertising can increase in effectiveness when leveraged across online platforms.

       Today, brand recognition for a company is heavily dependent on search engine rankings with those most searched brands returning the highest in search engine results. Search engine optimization, the ability for a company to climb higher in the search engine results, for as an example “Best hotel in Tampa?” is dependent on web traffic that refers to “Hilton, Tampa” or “Accor Tampa”. If web mentions of “Best Hotel” are most often correlated with AccorHotels Tampa than “Hilton Tampa” than the Accor results will show up nearer the top of the page in a search. For a company to fully optimize its search engine rankings, it must depend on consumer posted references of its brand name which have greater influence on rankings than those from corporate public relations websites (Perrin).

    In the internet marketing world, a company that utilized its name brand in most of its products such as “Disney” will have a search engine advantage over an equal sized company that has diversified its brands into independently named products; for example Coca-Cola=Coke, Sprite, Mello-Yello, Barq’s,Seagrams, Nestea, Dasani ect… In an internet optimized world, a hypothetical soft-drink company would be best served to use the word “Coke” in all its offerings and advertising such as Coke-Lemon, Coke-Root Beer, Coke Tea ect to leverage its brand strength in web searches. Today, cost-effective marketing campaigns include the parent brand along with the subsidiary brand name mention in the post titles to pull in larger share of search results. Search engine keyword selections dictate how search engine steer web traffic down the path to the desired content and repeated use of those keywords train search engines to direct similar searches to the intended online content (Campbell).



AccorHotel is one of the largest international hotel chains in the world. The company’s biggest competitors include Starwood, Marriott, Hilton, InterCon, and Wyndham (Exhibit 2). The hotel industry is highly concentrated worldwide. Almost every hotel offers the fulfilling of the same need – a temporary room in which to stay. Because hotels corporations offer near-identical services at similar prices, differentiation in features and minor details is vital. There are two ways to differentiate and obtain a competitive advantage: either vertically or horizontally (Becerra, Santalo, & Silva, 2013).


Vertical differentiation occurs when a company’s product or service is objectively better than the competition’s.  For example, Ferrari makes cars of much higher quality than Toyota, so they can charge significantly more. Since hotel rooms are so similar, vertical differentiation is likely not an attainable strategy for AccorHotel to differentiate from its biggest competitors.

Horizontal differentiation is valuable for gaining market share in industries like that of the hotels. This is attained through offering minor features or distinctions not offered by the majority of competitors (Piana, 2003). Using cars as an example again, Ferrari and Lamborghini offer similar products: high quality sports cars. However, Ferrari generally has always been deeply involved in Formula One racing – a detail that potentially captures more market share.

In the hotel industry, customers are influenced by location, room price, service, quality, reputation, security, and cleanliness (Becerra, Santalo, & Silva, 2013). It would make sense for AccorHotel to differentiate more horizontally because the possibilities are virtually endless as to the features and distinctions of a hotel room that can be offered, both physically and digitally.

Prior to the evolution of digital technologies, hotels found success differentiating horizontally by including pools, gym rooms, and breakfast. Eventually, demand for these extras became mainstream, so other methods of differentiation ensued. Major hotel chains began strategically forming collaborations with airlines, cruises, restaurants, and travel agencies for deals that were mutually beneficial for both the customers and partnering businesses.


No other hotel chain in the world operated more hotels than Wyndham, with over 7,800 facilities around the world (Exhibit 3). They dominated the economy/budget segment of the hotel industry, making them direct competition to Accor in that sector. Both Wyndham and Accor were the biggest players in the low-cost hotel room sector, where the number of rooms offered targeting economy class were 64% and 47%  respectively of their portfolios. Wyndham and Accor were the only two major hotel chains to successfully operate in all three segments – economy, midscale, and luxury.

Wyndham found differentiation by entering the resort and timeshare field. They launched Wyndham Vacation Ownership in 2004, attracting independent timeshare and hotel developers to participate in franchise and affiliation opportunities (“History of Wyndham Resorts”, 2017). Wyndham would later rebrand into Club Wyndham, the umbrella brand from three primary groups: Wyndham Vacation Resorts, WorldMark by Wyndham, and Wyndham Resorts Asia Pacific).


Although one of the biggest hotel chains in the world, Starwood operated fewer hotels and rooms than other major competitors. They were the only major international hotel chain in which 100% of their rooms were of the luxury/upscale segment, where AccorHotel was only 16% (Exhibit 4).

Starwood was the first hotel chain to differentiate themselves through collaboration with the airline industry. In 2013, they teamed up with Delta Airlines to offer a unique reward point system called Crossover Rewards. The new point system would allow customers to use accumulated points interchangeably to redeem rewards with either Delta Airlines or Starwood. The new reward system was a major success, winning the Industry Impact award and changing the way the industry rewarded customers. Five months after Starwood was awarded for success with their Crossover Rewards system, some competitors followed suit.


Similar to Starwood, Marriott hotels mainly centered on luxury/upscale class. Only 15% of their hotels were not luxury. The three biggest players controlling the upscale hotel segment were Marriott, Starwood, and Hilton – Hilton being the largest. Marriott bought Starwood in 2015 for $12.2 billion, surpassing Hilton in the number of luxury hotel facilities and rooms worldwide.

Marriott discovered a successful differentiation strategy through founding a travel agent training program called Hotel Excellence! (HE!) in 1999. HE! would educate travel agents on the general hotel industry and Marriott’s portfolio, offering special certification and discounts through using Marriott hotels. This strategy aimed at influencing customer decisions at an important point of their inquiry process, knowing that customers relied heavily on travel agents for availability information, price listings, deals and discounts (Dubois, 2016).


Hilton hotels mainly target the upscale hotel segment, where 99% of their rooms were of the luxury/upscale type. Hilton, Doubletree, Embassy Suites, Hampton Inn, Hampton Inn & Suites, and several other subsidiaries. They were the first major hotel chain to incorporate the use of balanced scorecards, a concept developed in the early 1990’s that helped Hilton manage its performance of value to customers and stakeholders (Huckstein & Duboff, 1999). The scorecards pointed out a gap between franchised and company-owned properties in meeting basic customer needs of a clean, quiet, comfortable room. A new customer-focused strategy was formed, helping the company continuously evaluate their commitment to customer demands, priorities, and expectations. This approach led to a clear vision for Hilton employees to follow, empowering team members with a sense of pride in creating value for customers.


Intercon owned hotel brands like Holiday Inn, Candlewood Suites, and Crowne Plaza. They are the only major hotel company to focus most of their targeting on the midscale segment was InterCon. Over 2/3 of their 744,364 rooms were midscale-focused, more than any other competitor. They wanted to serve the ‘everyday heroes’ of society, like firemen, sports coaches, and teachers. The InterCon strategy was directed at making guests stay comfortable, starting at the entrance. They decluttered lobbies and implemented peaceful sounds and scents for guests upon arrival (Rooney, 2009). Inside guest rooms, bedding and bathroom amenities were of the highest quality for the average mid-scale hotel room.


One of the biggest disruptions to the hotel industry was the launch of Airbnb in 2008. Its founders, Brian Chesky and Joe Gebbia, were roommates that rented out an air mattress of their San Francisco apartment during a local conference in which all nearby hotels were sold out. After recognizing its potential, they create an online platform that allowed travelers to link up with locals. They expanded the idea and have exploded in growth ever since (Exhibit 5). In 2015, the company received a total of $25.5 billion in funding, surpassing the market cap of hotel chains like Marriot, Starwood, and Wyndham (Dubois, 2016).

Airbnb offers a completely different experience for travels than a traditional hotel. Customers are accommodated with choices from a plethora of residential location to stay for the night. Not only are many offerings cheaper than hotels, but the experience is inherently different. Unlike hotels, travelers establish a one-on-one relationship with their host to feel more like a local than a tourist. Not only is the experience a major differentiator for Airbnb, but the listings are much more unique, where customers a can stay in RVs, Boats, and even castles (Exhibit 6)



Technology Disruption #1: Internet Pricing Search Engines

    The internet arrived in the late 1990’s to spawn a disruptive revolution in customer bargaining power with the arrival of, which unlike a Citi-Travel club, was a free service paid for by its hotel partners rather than club members and its live streamed pricing and room availability information allowed online shoppers to even pick specific rooms from a hotel chart for a better view or preferred location near the pool (Bearnes). However until early 2000’s most customers remained cautious about typing their credit card and personal information into the unfamiliar digital void and instead typically called operators at Priceline to pay for their reservations. Priceline and its imitators were able to publish live discounted pricing and real-time availability from custom built itineraries of airfare, hotel and rental cars rather than prepackaged bundles of the travel agencies of the 70’s and rolled those a-la-carte selections into those familiar guaranteed terms that made the travel agencies of the 70’s popular (Highly).       

      Today, internet shopping is the go-to for Millennials, Generation Z, and even Generation X and Baby Boomers. The advancement of sites such as,, Agoda, KAYAK, TripAdvisor, and Google Bookings has completely changed the way consumers plan trips and book hotels. 148.3 million consumer make travel bookings online, ⅔ of these consumers booked their stay online. The reason for this shift is not only convenience, but also reduced costs. For example, you can book a hotel on that can be almost half the price of booking from an agent.

Technology Disruption #2 – Social Media

As the 21st century progressed, social media and customer ratings began to steer customers away from hotels that featured misleading pictures, an area of customer dissatisfaction that emerged with advancements in online marketing. Customer ratings and reviews revolutionized the customer service factor of the travel industry, not only was the shell game of front desk pricing removed; but, overly flattering hotel pictures and descriptions were exposed to those who were considering a booking. Since customers continued to gain confidence in the online security of their banking information, online purchases exploded and luxuries such as the travel industry grew into the most searched categories of search engine activity (Teicher).

    Today potential customers put greater trust in the feedback from strangers than they afford the public relations campaigns of business owners. Online review sites have magnified the bargaining power of customers and held entire brand names accountable for the wrongs weakest personnel links.  In the social media age, hotel manager’s performance bonuses are directly tied to the metrics of their online customer ratings. Modern desk clerks are no longer recruited for their sales closing ratios and average booking price, instead they are measured by a newly discovered tangible: “customer enthusiasm” which generates high ratings on customer review sites through the gratuitous use of smiles, welcoming body language and energetic verbal skills. Studies revealed that the first ten minutes of a guest’s arrival had become the most critical in generating positive guest ratings throughout the rest of their stay. Every step of the arrival process was refined, from the street signage that guided the guest to the unloading zone through the design of the doorknob that opened the door to their room every detail of the arrival experience was reevaluated (Hognas).

     Social media review scores provided a previously unmeasurable insight into every detail of the customer’s experience, which typically features positive feedback from the guests. IN the past previous attempts to solicit feedback through email and guest card surveys had typically gathered only negative experiences, which only increased the management’s awareness of what customers did not like, where social media was able to articulate and advertise what each hotel’s strengths were in customer appeal. The barriers to entry of new hotel chains and single location boutique hotels were dramatically lowered through social media and brand reputation became less important as customers spent less time browsing the online catalog of hotels from a single brand and instead turned to a google search of hotels near a certain address. Existing hotel chains that had large sunken costs in marketing departments, brand research and advertising contracts found themselves burdened by the high carrying costs of their own operational infrastructure (

    By 2006 family owned bed and breakfasts were able to surpass nearby chain hotels in web traffic and search engine rankings by utilizing a few thousand dollars in servers and then staffing the hotel with pioneers of grassroots social media optimization which was enabled by the arrival of millennial born employees. This new generation of employee was able to reach the digitally influential millennial customers that were coming into their own period of buying power. The social media conscious young employees were often able to push their employer’s search engine rankings ahead of the established hotel chain competition through the simple amplification of their own personal Klout scores which was attached through affiliation to the hotel’s own social media efforts (Teicher).

    The technological disruption of social media is a positive aspect for lodging businesses. Through social media, AccorHotels can connect with the consumers on a day to day basis, instantly. One of the most important technologies that should be utilized is Social Media Listening (SML) which allows for hotels to acquire information easily, brands can also reply to criticism or negative reviews quickly and efficiently to make sure that they do not become a problem and ruin the brands image. For example the Swiss-based Nestle brand developed an internal task force to monitor and respond to potential attacks, criticisms, and negative reviews. Another famous example is Wendy’s, who utilize social media as a brand building mechanism, they use Twitter, Facebook, and Instagram to reply to consumers directly, making them feel special and engaged.    

2009 – Technology Disruption #3 – Airbnb

      EBay introduced a pioneering business model in 1998 that reduced the risks of buying items from unfamiliar sellers in the mysterious, digital void of internet commerce. EBay’s unique escrow partner PayPal guaranteed refunds if seller failed to deliver on the transaction. User ratings allowed both buyers and sellers to rate each other on each transaction and attach those scores to the buyers own public reputation. 11 years later Uber launched a ride sharing system on top of eBay’s escrow payment and peer rating model. Uber’s success is forecasted to become the revolutionary disruption that will reshape the foundations of the 21st century auto industry.  However Uber would have not been able to gain the needed foothold in transportation-for-hire sector, if it had not been for the deregulation of the taxi industry. Today the hotel industry is waging a regulatory battle against the likes of the Uber-esque lodging start-up, Airbnb, to protect their industry from following in the footsteps of the declining taxi industry. The popularity of Uber with millennials has led its customers and investors to expect great success from the business model of Airbnb, a lodging broker that enables hosts to rent rooms in their homes, guesthouses or offer their entire dwelling for short term vacation rentals (Yu, 2017).

Hotel Industry analysts are struggling to determine if AirBnB has added 3% to the total lodging market or taken a 3% share away from existing hotel operators. Regardless of the impact on the distribution of market shares, AirBnB has surprised analysts by increasing in value despite generating operating losses over its nine years in business. In fact today the total market value for AirBnB is 30% greater than that of Accorhotels, despite the 40 year age difference. However, the valuation of Airbnb may be misleading since the startup’s capital value is based mostly on speculative stock value, where over 40% of Accor’s  market value is based on its ownership of sellable capital infrastructure such as hotels, office buildings and furnishings (Stone). The most unique aspect of Airbnb’s  market appeal was the discovery that customer demand for alternative lodging options was not being driven by a demand for lower rates, in fact AirBnB hosts charge average nightly rates 25% higher than those charged by hotels. However, that figure also may prove to be misleading because much of the price premium reflected in the Airbnb rates could be attributed to the higher percentage of “whole-house” vacation rentals that drive up Airbnb’s average nightly rates, these house rentals are difficult to compare since they would equate to three or four hotel rooms.  The arrival of peer to peer lodging sales and the infrastructure that overcame the safety risks that had previously deterred the rental practice may become the biggest disruption that the hotel industry has encountered. Since May of 2016 over 20% of U.S. travelers have used Airbnb at least once for their lodging needs (McDermott).

      In the first quarter of 2017 Airbnb generated an operating profit for the first time since its launch in 2008. Despite the inadequacies of its revenue generation, Airbnb surpassed the then 47 year old Accor’s market value only six years after it opened and today Airbnb is valued at nearly three times the market capitalization of Accorhotels. While Airbnb may only hold 3% of the market share, the capital efficiency of its infrastructure could soon harvest the lion’s share of lodging industry’s profits. The true measure of success remains to be seen as the privately held Airbnb’s true market value will remain unknown until it goes public, but its potential influence to reshape both the housing and lodging markets will have  the potential to make history as one of the greatest digital disruptions in history (Ting).

    Airbnb is one of the greatest threats to the lodging industry, and it has become the go to for young HENRYs (High Earners, Not Rich Yet) , entrepreneurs, college students, and young couples. The CEO Bazin was quoted as saying “I would have loved to participate in Airbnb.” Airbnb provides any experience you desire that can be authentic, welcoming, and engaging. The hardest aspect for hotels is to keep up with the trend. For example AccorHotels has a luxury hotel in China, that is in a garden and was part of the Emperor’s castle. Authenticity and uniqueness is what draws consumers in today.



  • Content and the customer journey.


    1. Steps of the customer journey.
      1. The customer experience begins with educational content, a prospect realizes that they have a problem to solve and have turned to the internet to search for solutions. “How To Videos” are a great tool in creating brand and product awareness. For example Accor could create a youtube series of short videos that highlight how to have unique travel experiences in each of the cities that it services. Content should genuine and avoid excessive brand trumpeting. Additional video series could feature travel tips such as how to fold clothes in a suitcase to avoid wrinkling or life hacks on best ways to  how to hail a cab or save time utilizing street vendor dining during your vacation. The second step in the customer journey is the customer’s readiness for the explanation pitch. These are storytelling examples utilizing a case of a customer and how your hotel overcomes their specific travel inconveniences. Here is where customers want to hear how your service works and defines what you can do for them. This is where you would post blog or video on the range of travel services that are included with a nights stay at an Accor hotel. An example would be how the free morning breakfast is made from superior all fresh ingredients or how the fleet of hotel shuttles at each property are happy to drive you to dinner or pick you up at a bar as a free alternative to Uber. Each video should wrap up with a call to action and clear brand trumpeting. An example of this would be: “You will never need to call a cab if you stay at an Accor hotel, because Accor cares about customer convenience!”. The third step in the customer experience requires added confidence to choose your solution over alternatives. Here is the opportunity for endorsements and testimonials. Highlighting positive reviews and awards in the corners of the rate and room content pages is a good example of this strategy’s application. The fourth step of the customer experience is to be sure to express your gratitude for their patronage. In addition to the standard emailed “thank you for your stay”and survey, by utilizing SML’s you can locate the customer’s posts and add an enthusiastic reply to a positive tweet, rating or geo-check in the guest  made on social media. Supporting posts of others demonstrates that the organization is genuinely happy for the customer and proud to have been a participant in creating the best experience for that guest. The fifth step is continued engagement with customers after their stay is completed. This can be accomplished by emailing the customer links about new features or locations for them to try.
  1. Which types of content efficiently improve each of the different stages of customer experience such as triggering brand awareness or changing customer perceptions?
    1. Short sharable how-to videos are an effective device to introduce the company for brand awareness without the hard sale approach of an advertisement.
    2. Once a customer is aware of the brand, descriptive videos or meme style posts on company facebook page are another type of content exposure to trumpet the competitive advantages of the Accor hotel chains over its competitors. Many companies post action pictures of happy guests and smiling employees with their day to day messages.
    3. Ratings and endorsements further guide the customer along the path to the confidence they need to choose Accor over the competition. A system to encourage satisfied and influential customers to post positive reviews will advance Accor’s own marketing efforts with little to no cost to the bottom line.
    4. Follow up emails that feature upcoming events, discounts or informative links to lifehack videos can maintain the relationship after the stay is over.



  • How to leverage content?
  • For Accorhotels to become “customer-centric” across digital platforms it must first quantify a real-time, single-view of each customer as an individual entity. This can be achieved by isolating the user’s email, phone number, social media profile. By identifying and cataloging an individual user, that person’s online presence and posted feedback can allow Accor insight to how that user and corresponding demographic interacts with, not only Accor, but other people and businesses. Web content posted by that individual can provide insight on how that person might be expected to interact with Accor’s business offerings and allow the firm to adapt its offerings to best serve the largest majority of like-minded consumers. Big Data analyst Vamsi Chemitiganti captured the customer-centric vision of today when he said “The only way to attain Digital success is to understand your customers at a micro level while making strategic decisions on your offerings to the market. Big Data has become the catalyst in this massive disruption as it can help business in any vertical solve their need to understand their customers better. It aids this by providing foundational platform for amazing products.” To launch the data collection process we  recommend that Accor hire the experienced big data software firm Eleks to design a database to harvest customer data and provide guidance on how to interpret and integrate the data into the Accor business model.
  • The online content should first be intuitively responsive to customer posted content gathered by “Social Media Listening Software” that will be designed into Elek’s data analytics product. We recommend that Accor reduce its conventional advertising department by three people to be reallocated to the communication of the Accor corporate vision with the recommended social media marketing firm “Friendemic”. We propose that Friendemic in conjunction with your existing brand managers handle the launch of the multi-platform social media campaign, where the Accor brand can be molded into a carefully groomed online presence by a social media firm with seven years of experience managing campaigns for companies such as Fiat and the Habberstat Group.
  • Social media is a major influencer of customer decision making. According Andrew Perrin of the to the Pew Research Center (2015), most adults use at least one form of social media – and the trend is growing (Exhibit 7); usage grew from only 7% in 2005, to 65% in 2015. Advertising on social media can be an effective way of reaching customers, even before they begin their own independent research. Because Accor does not specialize in creating digital content, it is recommended that they hire in-house employees that are expert in creating social media content that can capture interest. Centralizing the flow of online traffic can be helpful in uniformity, as well as evaluating which personnel and techniques work best. Hiring employees to manage this component can ensure that a consistent image is projected, as opposed to leaving all decisions to a 3rd party social media company to do so. In addition to existing conventional media efforts, we are recommending a strong investment in social media content generation such as youtube, Facebook, Twitter, instagram and WordPress. The content should include travel blogs, destination photos, employee photos, stories and fun, informative one minute videos. The staff should also closely monitor yelp, tripadvisor, google reviews and other ratings sites to gather feedback on areas for improvement.


      1. Youtube is the primary platform to post videos longer than 15 seconds, while Facebook would be the platform to post a mix of links, company news, photos of Accor’s hotels, destinations and happy guests. Twitter is the channel to post very brief news updates and funny stories of less than 140 characters while on the other end of the spectrum WordPress would be the ideal platform to post commentary on the industry or the company history. Review websites like TripAdvisor influence customer decision-making early, so getting guests to leave reviews during or after their stay is critical. According to Dubois’ article (2016), “95% of customers check reviews and research about destinations and rooms”. One way Accor can get more guests to leave reviews is by incentivizing them with discounts on their next visit. For example, upon completion of an online review, customers can receive a promo code to receive 15% off their next visit when booked directly from the company website. In addition, each Accor employee should be encouraged to create LinkedIn profiles that are linked to the main Accor profile, Friendemic consultants should assist and train employees on ideal LinkedIn career content. The more employees who list Accor as their employer, the higher the social media ranking that Accor will reach, especially true for employees who themselves have high Klout scores.


  • How to become a content-driven organization?
  • In addition to creating digital content, monitoring what guests are talking about can be pivotal to Accor’s brand. Technology companies like HootSuite and Social Sprout provide software that allows the monitoring of a company’s entire social media presence.  The software can immediately alert the hired campaign managers of customer posts, allowing for timely responses to any complaints that arise. Accor managers can regularly check the aggregate data to better understand what they are doing right, and to fix what customers say they are doing wrong. This is a fast, reliable way for Accor to become customer-centric.
          Through a combinations of the analytics software designed by Eleks to monitor Accor’s online traffic and the outbound social media pictures and stories from the Friendemic we plan to quantify gains in online presence through  a dashboard of standardized social media metrics. One primary measure of online influence is taken from an organization’s Klout score, a metric which measures web traffic interactions with Accor’s corporate home page and select social media sites: Facebook, LinkedIn,Twitter, Instagram, WordPress, youtube and google+ platforms. In addition we recommend the use of social media tools “Wildfire Monitor”, “Mention” and “Trackur” to compare the trends and performance of competitors Marriott, Hilton and Wyndham in “Wildlife Monitor” and Klout scoring metrics against the social media performance of Accor’s campaign content.
  • The most important guiding principles of a corporate online presence is above all else, do no harm to the anyones perception of the organization, avoid controversial topics and when confronted by a hostile critic, to immediately respond by posting the customer satisfaction help number encouraging that critic to call with the promise that a manager will be happy to help resolve the issue for them. To build brand value it is important that the company post positive and supportive messages of affirmation to others in the online community even congratulating its competitors for acts of  altruism. To be effective it is critical that posts are interesting, entertaining and image rich original content rather than simply sharing or retweeting the posts of others, pictures and videos are especially effective at generating content. Most importantly create a posting protocol that requires a marketing manager with social media training approve all content prior to posting.
  • Marketing or Public Relations employees can post company news and should quickly respond to customer comments on the corporate pages. However, we recommend leaving the foundation content to the professionals and suggest hiring Cox Media to film short and fun informational videos featuring real employees from Accor to demonstrate travel tips, lifehacks and offer local recommendations for fun tourism experiences in the areas around Accor’s various locations. We also recommend leaving the timing and mix of postings to the professionals at Friendemic until the Accor marketing professionals master the concepts through feedback metrics.We recommend bringing in both Cox Media and Friendemic on annual vendor agreements while also seeking out a third Social Media Management firm at the  six month mark to audit the work of all three online content partners: Cox, Friendemic and Eleks.


    1. We recommend that no hard and fast rules be applied to differentiation between each level until the social media partners have initially rolled out a universal marketing campaign.  One year from now Accor will be able to compare the responses to the social media campaign and tweak the content mix for each of the brands. However we do recommend that the Accor parent brand name be included in all content in addition to the subsidiary brand names to leverage the web traffic from all the brands into a single larger and more influential entity.
    2. The success of the social media campaign will be partly dependent on the “buy-in” depth and organizational changes of the Accor staff. Incentive bonus’ for each property’s online ratings and Klout scores should be added to employee’s current compensation plan. Since effective social media marketing can reduce Accor’s dependence on the more expensive advertising in conventional media platforms such as television, print and radio could social media performance bonuses would be a justified through the added payroll expense. There are several recommendations that could help with Olivier’s task. The customer journey taken to reserving hotel rooms typically begin with some research. To get Accor employees on-board with the new digital transformation, an online review system can be sent to guest with a section to rate customer service by employees. This was previously accomplished through client feedback cards which grew into a computerized platform consistent with the digital movement and simplifies tracking. In addition to identifying low customer service score locations, employees of high customer services rating can be rewarded with praises or raises.
    3.      We strongly recommend that employee’s current pay level not be docked for poor social media performance, as negative backlash from the perceived punishment will hinder the enthusiasm needed to drive cultural changes. We recommend that Accor fully integrate social media feedback metrics into their ROA calculations and post each property’s social media influence and customer ratings in common employee areas. Additional bonuses should be awarded properties with the highest scores as compared to other Accor locations to create teamwork and peer pressure within each property to adapt the new directive. We believe that no reasonable business argument could made in favor of remaining absent from social media marketing investments and that Accor should plan to reduce its conventional marketing budget to reallocate it in small incremental fractions into social media development and analysis.













Exhibit 1

New Player Example
Online Travel Agents (OTA), Agoda,  Expedia
Aggregators-Metasearch sites Trivago, Tripadvisor, KAYAK
Review Sites Tripadvisor, Dianping
Travel Blogs and Forums Lonely Planet
Social Media Sites Facebook, Twitter, Instagram
Alternative Lodging Platforms Airbnb, Homestay

Latest Search Engine Highways Driving Traffic to Hotel Brand Content: Dubois, D. (2016)

Exhibit 2

Dubois, D. (2016)


Exhibit 3

Dubois, D. (2016)

Exhibit 4

Dubois, D. (2016)

Exhibit 5

Exhibit 6

Exhibit 7





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A Comparative 360 Degree Performance Assessment of 4 of the World’s Largest Tire Manufacturing Companies: Triple Bottom Line Case Studies

Todd Benschneider, Marie Larose, Kyria Perez-Serrano, Hailey Smith, Daniel Villa

University of South Florida, 10 November 2016


Table of Contents


Industry Overview………….…. 2

Economic Assessments.……… 4

Social and Environmental Assessment………………..……21

Concluding Remarks..…..…… 36

Works Cited…………………….. 37


Industry Overview

For our assessment, we chose to take an in-depth look into the tire industry. Drawn to the topic because of the industry’s large carbon footprint per unit sold and its historic reputation as an environmental polluter of PVC manufacturing byproducts, which have been linked to liver cancer in tire plant workers. 

The impact of worker PVC exposure has been well studied and in response to that research, the EPA has regulated the manufacturing process and the industry has taken subsequent action to reduce PVC vapor exposure (Criswell 3). 

Tire consumption is not considered to be an optional luxury good in industrialized countries; therefore, eliminating tire use is not currently a realistic goal; therefore, creating a long term sustainable plan for the industry is imperative. 

Since rubber product manufacturing is a mature industry dominated by a handful of large multinational companies, it therefore represents an ideal topic to study as an application of well-developed pollution control policies.

The biggest obstacle that we encountered in our U.S. industry choice was the fact that two of the largest companies in the industry were not U.S. based firms. 

Michelin, a French based firm, and Bridgestone, a Japan based firm, are both companies that have bought nearly all the major American brands (i.e. Firestone, Uniroyal, and BF Goodrich) in order to gain North American facilities in their pursuit of global expansion (Goodyear Tire…SWOT Analysis 3). 

We did, however, secure permission to include these companies into our research due to the fact that they are traded on either the NASDAQ or NYSE, and both have published detailed reports for their American shareholders.



We chose to narrow our research focus to the Goodyear Tire Company because it is the largest U.S. based tire manufacturer. 

Based on conclusions drawn from older news stories about the company and previous MSCI ratings, it appears that Goodyear had been a laggard in social and sustainability issues over the previous 30 years; however, more recently the company has sought to reinvent its public image in 2010 with the launch of a strategic initiative on environmental and safety concerns (“Goodyear Tire…SWOT Analysis” 17).

While Goodyear has advanced upward in the MSCI ratings, it still falls behind its two major foreign competitors, Bridgestone and Michelin, in most environmental categories. Goodyear also scores a very distant last place ranking in financial performance among the top five tire companies in their 2015 financial reports. 

Despite the poor financials, most stock analysts still recommend Goodyear stock as “undervalued” or as a “long-term buy,” which indicates that analysts believe the current financial condition is temporary and improving (“Goodyear Pumped with Tire Profits” 1).


Economic Assessment

In the most recent 2015 annual reports, Goodyear was the poorest performer in its industry, and appeared to have fallen dramatically in comparison to its previous four years.

However, most of the 2015 change in financials is attributed to Goodyear’s decision to write off one of its largest tire manufacturing plants located in Venezuela where operations have been disrupted by currency and political instability. The company will retain ownership of the facility, but political instability will prevent the liquidation of the assets which will be written off in their entirety for the 2015 reporting year. Future sale of assets will be applied as capital gains to the year of sale.

Financial Times writer Pan Kwan Yuk summarized the Venezuelan liability in an article titled “Goodyear takes $646m hit on Venezuela” in the February 9th, 2016 edition of The Financial Times in his description of the events:

“The economic meltdown in Venezuela continues to blow holes across the balance sheets of corporate America, with Goodyear, the US tire maker, the latest to announce a substantial write-down to its business there.

The company said it took a $646m hit during the fourth quarter after it moved to deconsolidate its Venezuelan business from its financial statements. The write down pushed Goodyear into a loss of $373m for the December quarter, compared to a profit of more than $2.1bn a year earlier.

Excluding the Venezuelan write-off, net income came in at $257m.

Major US companies with exposure to Venezuela – including Procter & Gamble, Colgate-Palmolive, American Airlines, PepsiCo, AT&T and Ford Motor – have been collectively forced to take billions of dollars of write downs in recent years as Venezuela’s currency problems accelerate.

Unlike bleach maker Clorox, which exited Venezuela altogether 16 months ago, Goodyear said it continues to maintain manufacturing and sales operations in the country.

But like its peers, it has decided deconsolidate and write off nearly all of its cash and investment there amid little sign that it would be able to take the cash out of the country. The move comes as soaring inflation and the fast depreciating bolivar render the value of its bolivars lower by the day. Foreign currency exchange losses related to the Venezuelan bolivar fuerte came in at $34m for the 2015 year, Goodyear said.

Goodyear generates nearly half of its revenues from outside North America and the collapse of a number of major developed and emerging market currencies against the dollar has sharply eroded the value of its sales in those countries. Sales for the fourth quarter were $4.1bn, compared to $4.4bn a year ago. “Sales were impacted by $339 million in unfavorable foreign currency translation,” the company said in a statement. Shares in Goodyear, up 4 per cent over the past 12 months, were largely unchanged in pre-market trading.”

Despite its most recent financial results, many stock analysts see retained value that was built over the most recent five year performance and strongly recommend purchasing the undervalued Goodyear stock throughout most of 2016. In fact, over the past eight years Goodyear stock price has increased by over 500%. However, much of those gains were actually recovering stock price that was lost in the financial crisis of 2008, and has only recently returned to its 2007 price peak after the stock split of 1999. Despite the excellent 12 month performance of both Bridgestone and Michelin, both Goodyear and its U.S. peer Cooper tire have superior 5-year stock price increases.

For Example, on September 28, 2016 included Goodyear Tire in their article titled “These are the Nine Most Beloved Stocks on Wall Street Today” by describing Goodyear’s future potential:

“You might not always trust Wall Street analysts, but their views on stocks can be useful. For one, you can see which companies they favor. And, second, which shares might still be undervalued, given the seven-year-plus bull market in U.S. stocks.

The games that companies and sell-side analysts play with quarterly earnings — lowering expectations to set up “earnings beats” — hurt the credibility of analysts. Their reputations also are hurt by their tendency to avoid putting “sell” recommendations on stocks. In fact, as of the close of trading Sept. 20, not a single S&P 500 SPX, +0.08%  stock had majority “sell” ratings, according to FactSet.

But if you speak to a Wall Street analyst about an industry or a company, he or she will show impressive expertise and be able to justify his 12-month “buy,” “sell” or “hold” ratings pretty easily. Over the long term, analysts are also influential over stock prices as their consensus earnings estimates rise or fall.

Analysts often recommend buying shares of a company because the current stock price is considerably lower than where they think it should be, based on earnings and sales growth, cash-flow generation or other metrics. So there can be a great deal of logic behind a “buy” recommendation.

So we are listing, below, the stocks that are getting the most love from analysts. It might surprise you that there’s not a single stock among the S&P 500 with 100% “buy” or equivalent ratings. But here are nine with at least 90% positive ratings among analysts:

Figure 1- FactSet Stock Analysis


Figure 2- Consensus Recommendations

All the stock analysts’ recommendations on Goodyear we found in November indicated that around $30 per share of the stock is undervalued and on average support the data posted by Marketwatch. posted this summary graph from November 24, 2016 supporting Marketwatch’s claim that nearly all analysts expect Goodyear stock to out-perform the market in coming years.

Some analysts also explain that since tire manufacturers stock prices are volatile by comparison to the S&P 500 due to their reliance on rubber plantation yields, which are often impacted by weather, currency fluctuations and political news. With that level of volatility, tire companies stock prices typically trade at a discount to their earning potential when compared with other less volatile industries (“Sweet Spot” 1). However, while automotive component manufacturer stocks are performing well, the surprising discovery was that Michelin and Cooper, who posted superior returns on their 2015 earnings statements, both have lower stock purchase recommendation than do the frontrunner Goodyear and close second place Bridgestone.

2015 Annual Tire Revenue in Billions USD
Goodyear Bridgestone Michelin Cooper
16 27.1 22 2.9


Of large rubber companies, there are inconsistent rankings among the largest companies. Some rank by corporate revenue, including non-tire, and some even have substantial revenue generated by non-rubber products. For example, in overall revenue, including all subsidiaries, Goodyear is the world’s largest. However, by tire revenue, Goodyear ranks a distant third in revenue from tire sales and Bridgestone leads world tire revenue.

2015 Global Tire Industry Market Share
Goodyear Bridgestone Michelin Cooper
13.8% 23.4% 19% 2.5%


The global tire market demand creates a $116 billion per year industry, of which Japanese Bridgestone captures nearly a quarter of with Goodyear distantly trailing at about 14% global market share.

Current Ratio
Goodyear Bridgestone Michelin Cooper
1.24 2.17 1.91 3.08


Goodyear’s current ratio at 1.24 is the lowest of the Big 4 Tire Companies, but still within a healthy range for auto component firms. Cooper Tire is the leader in the above financial performance metric.

Quick Ratio
Goodyear Bridgestone Michelin Cooper
.74 1.5 1.06 2.13


Goodyear’s liquidity, a metric that serves as a precursor to a firm’s potential, inability to pay its current liabilities, as evidenced by the quick ratio, shows that Goodyear is the least liquid of the Big 4 Tire Companies at a .74, which is considered to be financially unsound at levels under 1.0. However, analysts must view this as a temporary result of the Venezuelan deconsolidation and, in spite of the liquidity report, recommend investing in Goodyear (Kwan Yuk 1).

Cash Ratio
Goodyear Bridgestone Michelin Cooper
.3 .72 .36 1.17


Goodyear’s 2015 cash ratio is the lowest of the Big 4 Tire Companies at .3, with a near tie to Michelin at .36. What seems surprising is that Cooper indicates excellent cash availability, possibly due to the lack of an aggressive growth strategy.


Debt to Equity Ratio
Goodyear Bridgestone Michelin Cooper
1.46 .1963 .2881 .316


Again, Goodyear ranks last in the financial performance metric of debt to equity ratio coming in at 1.46 in comparison with its three industry peers, which all have ratios under .32. However, mention is made by analysts that Goodyear’s accounting system regarding their underfunded pension is the factor that skews this metric. Financial analysts suggest that the average U.S. firm has a debt to equity ratio around 1.5, so Goodyear’s performance is not necessarily out of align with other industries, but their debt level is mentioned in the SWOT portion of their annual report as their greatest weakness.

Long Term Debt to Capital Structure
Goodyear Bridgestone Michelin Cooper
52.91 16.64 18.91 23.0


With regards to long term debt to capital structure, once again, Goodyear distantly trails its top industry peers with a ratio of 52.91:1, in comparison to the other end of the spectrum where its rival, Bridgestone, is much less risky in its structure at 16.64:1.

Debt to Assets Ratio
Goodyear Bridgestone Michelin Cooper
35.01% 11.63% 18.91% 12.7%


Goodyear again trails its industry peers with its debt to assets ratio, with 35.01% of its assets financed by debt, where its top industry peers have healthier ratios from 11.63% to 18.91%, another indicator that suggests that Goodyear does not have the financial health and stability of its peers.

Return on Assets
Goodyear Bridgestone Michelin Cooper
1.78% 7.33% 5.01% 8.64%


With regard to return on assets, Goodyear continues to lag behind its peers. However, analysts explain that if the Venezuelan deconsolidation had not been charged to 2015, the return on assets would have been around 6% (Kwan Yuk 1). One notable observation here is that American rival Cooper, who will later be discounted for poor corporate citizenship scores, shines on this primary measure for generating profits, which suggests the possibility that critics of environmental policies and reporting of the top three who score high on corporate citizenship measures may be at a cost of several percent of return on assets over the short term, and might influence executives to discount the priority of environmental issues.


Return on Equity
Goodyear Bridgestone Michelin Cooper
8.15% 13.26% 12.21% 23.34%


Goodyear’s 2015 return on equity performance also lags behind its industry peers at 8.15% in contrast to its U.S. rival and citizenship laggard Cooper Tire with a return nearly twice as much as the Big Three Tire Companies at 23.34%, which again might reinforce some skeptics’ views on the profitability of corporate sustainability objectives.

Return on Sales
Goodyear Bridgestone Michelin Cooper
10.04% 13.6% 5.47% 14.19%


Goodyear ranks third place out of four in return on sales at 10.04%, with corporate citizenship laggard Cooper leading this profitability factor at 14.19%.

Earnings Per Share
Goodyear Bridgestone Michelin Cooper
1.14 1.64 1.39 3.73


Goodyear ranked last out of four in earnings per share, with once again environmental laggard Cooper at more than double the second place Bridgestone.


Earnings Per Share Growth
Goodyear Bridgestone Michelin Cooper
-87.51% (5.43%) 13.77% .718%


In the easily skewed benchmark of earnings per share growth, Goodyear plummets from the other top three tire companies by reporting earnings 87.51% lower than the 2014 annual report. This is also highly influenced by the write off of its investments in Venezuela. Michelin posted improved earnings per share and Cooper stayed nearly on pace with 2014 earnings.

Price to Earnings Ratio
Goodyear Bridgestone Michelin Cooper
25.56 12.1 15.9 9.3


In terms of stock price value, Goodyear’s 2015 report shows a distant 4th place out of the four largest tire companies with a stock price of 25.26 times of every dollar earned, where Cooper stock represents the opposite spectrum where stock is valued at only $9.30 for every dollar of reported annual earnings. This ratio on the surface would not seem to support analysts’ purchase recommendation for Goodyear, however the record low earnings of 2015 as Goodyear wrote off $646 million dollars of Venezuelan assets skewed the single year earnings (Kwan Yuk 1).

Growth in Share Price
Goodyear Bridgestone Michelin Cooper
(11.8%) 9.68% 6.84%



Figure 3- Goodyear 5 yr Stock Price Chart – 11/24/2016

Along with the previous influence of the Venezuelan write off, the 2014-2015 share price growth for Goodyear ranks it a distant last place among the Big 4 tire companies at -11.8%, where on the other end of the scale Bridgestone’s stock prices climbed 9.68% in the same year.

5 Year Average Growth in Share Price per year
Goodyear Bridgestone Michelin Cooper
51.8% 32.2% 43% 59.3%


However, as evidenced by the above 5-year graph of Goodyear stock, it becomes more apparent why analysts are recommending clients to buy Goodyear stock. It can be seen that over the previous five years Goodyear stock values have increased by an average of 51.8% per year, and recent negative financial data is quite likely limited to a single non-recurring economic anomaly of the Venezuelan deconsolidation, which should have a beneficial effect on 2016 and future financials that will no longer be reduced by continued losses from the sinking Venezuelan location (Kwan Yuk 1). While both Michelin and Bridgestone post more stable financial condition than Goodyear, those competitors are inferior in shareholder value enhancement over the past 5 years. However, it once again needs to be noted that Corporate Citizenship laggard Cooper leads the Top 4 by a sizable margin in this measure of profitability.

Asset Turnover
Goodyear Bridgestone Michelin Cooper
.95 .98 .92 1.2


In the asset turnover benchmark, Goodyear ranks third of four among closely scored competitors at .95. This area most likely was improved by the write off of Venezuelan assets. Once again, it must be noted that the leader of this metric is the laggard Cooper as its efficiency generating sales from its assets is 1.2.

Equity Turnover
Goodyear Bridgestone Michelin Cooper
3.96 1.753 2.07 3.38

Goodyear did show top industry performance in equity turnover as they generated $16.40 of revenue in 2015 from only $4.142 billion in shareholder equity for an equity turnover ratio of 3.96, in comparison to Bridgestone which only managed to double its assets worth in annual sales. This benchmark provides some insight to the majority of financial analysts who are bullish on Goodyear’s future stock value.

Revenue Growth
Goodyear Bridgestone Michelin Cooper
(2.02%) 3.17% 8.42% (13.2%)


In the 2015 year-over-year revenue growth, Goodyear ranked third of the Big 4 at 2.02% loss in revenue from the 2014 annual report. This could be partially attributed to when the income from Venezuela was no longer being measured. This is the first major financial benchmark where Cooper had fallen to a distant fourth place. As little as year-over-year performance might actually mean, Cooper’s loss of market share may be attributed to the launch of high tech fuel efficiency and electricity generating tires being patented by its three rivals, where Cooper has not yet become a player in this tire technology design.

Five Year Average Revenue Growth
Goodyear Bridgestone Michelin Cooper
(2.68%) 5.78% 3.45% (2.42%)


Figure 4- Goodyear Growth Chart from 11/24/2016

Five year average revenue growth is a more reliable indicator of management and industry performance. Here, Goodyear scores at an average annual loss of 2.68%, roughly a 15% decline over half the decade. However, Goodyear had been purposely exiting some tire markets and selling off lower profit lines to concentrate on high value tires and focus on its electricity generating electric car tires, which is later evidenced by its five year increase in profit margins. Here again, Cooper’s lack of investment in high value technology tires is most evident as they may maintain on units sold, but lose out on premium priced tires to inherit the low price leftovers of the Big 3. Bridgestone, which has expanded more deeply into heavy equipment and agriculture lines, taking up some of Goodyear’s void left after their exit from some of those lines, increased in sales revenue by nearly 30% over the past three years from its product line expansion (Pierce 1). Michelin gained about 15% in sales from its expansion into low rolling resistant tires for the hybrid and electric car markets.

Stock analyst buy recommendations may also be influenced by patents that Goodyear has applied for in a tire design that harnesses the heat generated from hot roads and friction, and converts it into electricity for hybrid and electric vehicles (“Tech News: Goodyear Unveils Electric Car Tires” 1). The technology is performing well in testing, and if manufacturing costs can become competitive on the designs, then the value of licensing the technology will become even more valuable than producing the actual tires, and would have a very positive effect on Goodyear stock prices. Alan Pierce wrote an industry reaction to the release of the prototype in the 75th issue of Tech Directions (2015) in an article titled “The Goodyear BHO3–A Car Tire That Generates Electricity.” The following summary:

“The Achilles heel of all electric vehicles is how far they can travel before their batteries need recharging. At the 85th Geneva International Motor Show, The Goodyear Tire and Rubber Company unveiled their BHO3 prototype tire. This tire has a built-in electricity-generating system that can partially recharge the batteries on an electric vehicle without breaking any of the laws of thermodynamics. To avoid breaking the laws of thermodynamics, their tire breakthrough has to generate electricity without changing the amount of energy used by the electric motor during the normal operation of the vehicle. Without changing how much energy it takes to roll the tire, the BHO3 prototype turns tire heat and tire deformation—which are caused by the normal rolling of the tire—into electricity. Tires are usually designed to run as cool as possible. Goodyear has intentionally designed this tire to run as hot as possible to maximize the amount of heat available for conversion into electricity. This tire is designed to absorb heat even when the car is parked. So even if the car isn’t running, its hot tires will be generating electricity to charge the car’s batteries. All ambient heat is converted into electricity by a thermo-piezoelectric layer that covers the full internal surface of the tire. Getting the tires hot is a priority, so the outer shell of the tire has a special black texture specifically designed to absorb sunlight and convert it into heat. The tread is also designed to absorb and transmit heat, created by the friction of the road surface, to further raise the tires’ temperature. Goodyear system that keeps the outer temperature of the tire reasonable while it is extremely hot inside. The goal here is to not melt the blacktop on the road’s surface or burn a person’s hand if they touch a tire. Goodyear’s goal is to get every bit of otherwise wasted energy converted into electricity. To convert the physical deformation of the tires where they touch the road, Goodyear built a separate piezoelectric layer that converts into electricity the physical flexing of the tire as it rolls. These tires are extremely rugged and they can run safely at 50 miles per hour for up to 50 miles even after suffering a puncture. Photo 2 shows what the Goodyear BHO3 prototype tire display looked like at the Geneva Switzerland International Motor show. You can view a video introducing the BHO3 at watch?v=ViMqrtq4aYg. The Goodyear press release that I received did not indicate how the electricity will be transferred from the tires to the batteries, how much electricity the system can generate, or how soon this prototype tire will find its way into commercial use. However, down the road, when it is introduced it might increase the range of the all-electric vehicle enough to make the all-electric vehicle practical.”

The growth potential for electric automobiles could disrupt the 100 year old auto industry once consumer demand for electric models snowballs or once legislators increase tax penalties on combustion powered vehicles. Either way, non-combustion powered vehicles appear to be drawing near on the horizon, and companies that continue to invest in development of gas powered models may find themselves left behind when the change takes place. Goodyear had already lost first mover advantage in 2006 for low rolling resistance passenger car designs to Michelin, but came back in 2010 to patent unique technology to become the low rolling resistance pioneer in heavy truck tires in their recently released “Fuel Max” line that has analysts bullish on Goodyear’s stock performance.

To help detail Goodyear’s logic behind the contradictory financials, Dow Theory Forecasts published this article in on September 12, 2015 titled “Goodyear Pumped with Tire Profits” with the following explanation:

“Formed in 1898, Goodyear Tire & Rubber ($30; GT) initially sold bicycle and carriage tires, horseshoe pads, and poker chips. By the 1980s, Goodyear had grown into a bloated conglomerate that built wheels, aircraft canopies, and even dabbled in gas pipelines. Today those businesses not related to rubber are long gone, as Goodyear has refocused on its core operations. New tires accounted for 87% of Goodyear’s revenue last year, the remainder coming from rubber-related chemicals and about 1,200 tire and auto-service shops. Goodyear tends to be a jittery stock, with exposure to the highly volatile market for synthetic and natural rubber. For now, commodity-price trends tilt in Goodyear’s favor. The company’s raw-material costs fell 9% last year and are projected to decrease 12% in 2015. The stock’s volatility seems well discounted in its price. In Quadrix®, Goodyear scores in the cheapest quintile for price/sales, price/cash flow, and price/earnings ratios using both trailing and estimated current-year profits. At 11 times trailing earnings, the stock trades in line with its 10-year average. Goodyear, earning a Value rank of 95 and Overall rank of 98, was initiated in the June 29 issue as a Long-Term Buy.

Prizing profits over sales have declined 7% to 8% in each of the past three years, hurt by foreign-currency headwinds, weaker pricing, and soft volumes. But Goodyear has a knack for wringing more profits out of less revenue. Net income has surged in recent years on lower raw-material costs and the divestment of high-cost plants. In 2014, Goodyear posted its highest operating profit margins since 1996. Encouragingly, tire volumes are starting to improve. Goodyear’s volumes rose 2% in the March quarter, and the company projects a gain of 1% to 2% for the year. Moreover, Goodyear announced in June plans to dissolve a venture that involved joint ownership of Dunlop branded tires in the U.S., Europe, and Asia. Goodyear will pay a net price of $271 million to take full control of the venture in Europe, divest the North American venture while still retaining the right to sell Dunlop tires in most markets there, and gain full ownership of the Goodyear brand in Asia. As a result, Goodyear expects annual revenue to decline by $100 million, though per-share profits should rise $0.15 to $0.18 due to the reduction in non-controlling interest expense. Operating cash flow totaled $1.62 billion for the 12 months ended March, nearly five times higher than the prior 12-month period. Goodyear has also generated $651 million in free cash flow over the past year.

Investors may have to wait until 2016 for sales to begin growing again. But Goodyear continues to improve efficiency, last month announcing plans to shutter a plant in England and move operations to lower-cost regions. The consensus calls for 5% higher per-share profits in 2015, despite 9% lower revenue.”

The article encapsulates the perspective of stock traders who see great future value in the Goodyear Company based on past ability to overcome adversity and adapt to economic change. Many stock traders see Goodyear’s recent setbacks as an opportunity to obtain the stock for a discount.


Social and Environmental Assessment

Goodyear has a global stake in community engagement, and their personal social assessment of the company is broken down amongst four different categories: Safe, Smart, Associate Volunteerism and Sustainable (“Community Support”). The grant programs that Goodyear has set in place are meant to better the community as it applies to each of the four categories. These grants are part of the Goodyear Better Future platform.

Safe: This category encompasses finding support for safe travel and mobility within communities. Along those lines, Goodyear has four programs in place worldwide. The Safe Mobility Program (which is detailed further in the sustainability report below), the Safe Way to School project in Poland that helps teach first graders safety while walking to school, the Rainy Season Awareness campaign in Guatemala that helps prep drivers for travel in the rainy season, and Race Collaboration in Spain that teaches road risk prevention and responsible road behavior (“Safe”).

Smart: This area includes supportive programs for adults and children in the hopes of educating and inspiring creativity and innovation. Along with the STEM programs detailed later in the report through the sustainability report section, Goodyear has two other programs including the Student Environmental Program in Turkey that gives university students field-based training on environmental support for the future, and the Hope School Project in China that gives students a positive educational environment (“Smart).

Associate Volunteerism: Goodyear encourages its associates worldwide to get out into the community and get involved. They have established programs such as the Hand in Hand program in Slovenia that connects schools through social media, and the safe driving Road and Tire Safety Campaign in Indonesia (“Associate Volunteerism”).

Sustainable: Goodyear has many programs set in place to assure that environmental protection is a key driver for the company. The “Pay Attention! To The Environment” Campaign, which they started in 2010, involves a waste-management collaboration between 60 institutions to reduce high school carbon footprints in Slovenia. Brazil recently received the Goodyear company sustainability award for conservation, in Thailand received the country’s Environmental Good Governance award, and two plants in Turkey held a drawing contest to fill their yearly calendars with images drawn by children highlighting environmental safety and protection. These are all instances of good environmental sustainability efforts that Goodyear is proud to highlight (“Sustainable”)

The Goodyear Foundation is another program designed to fit alongside Goodyear’s social responsibility strategies, but this program focuses on individual funding efforts whereas the others are more community support focused.


Despite Goodyear’s below industry average current “BB” MSCI ratings, the company appears to be growing into a good corporate citizen based on the five year score improvements against higher scoring industry peers. Due to stricter regulations in their home countries, both Bridgestone and Michelin have a longer history of environmental stewardship policies. Goodyear and it U.S. rival Cooper are the only companies from the top five world tire manufacturers that are not members of the United Nations Global Compact. Instead, Goodyear has adopted the lightly regarded WBCSD (World Business Council for Sustainable Development), as well as the WRI (World Resource Institute) environmental impact reporting standards, and Cooper refuses to disclose sustainability reports (“Goodyear 2015 Annual Report” 42-44).

In addition to lack of GRI reporting, Goodyear also could be considered to be greenwashing its efforts since does not use an outside environmental audit firm to verify its impact reports. Among its industry peers, Michelin enjoys a recently upgraded “A rating” on its proprietary impact reporting system, and only “BBB” rated Bridgestone, BB rated Continental and B rated Pirelli utilize independent auditors to verify their environmental impact claims.

Despite Goodyear’s 2015 third place ranking in the big three tire companies, a look at the past three year’s ratings show that, in recent years, Goodyear had been close to the first place with its B and BB rankings in three of the past five years. It should be noted that in the most recent two years, all three tire companies upgraded by one or two grades in MSCI ratings.

The Goodyear website and annual reports have large sections dedicated to publicizing their corporate citizenship goals. Many of these goals seem to be conservative when compared to environmental activist firms like Patagonia or Interface. However, Goodyear received worldwide accolades for its seven consecutive years of zero Landfill success. As taken from Goodyear’s own website, here is the abbreviated front page summary of their 23 pages of corporate citizenship goals and policies.



Sharing the planet responsibly with customers, employees, shareholders, communities and suppliers is the impetus behind key sustainability objectives at Goodyear. Our sustainable activities mirror this commitment.

21 Species of plants and animals protected on site of new Goodyear plant in Mexico.

While a site survey for Goodyear’s new plant in San Luis Potosi identified only a single cactus as a protected species in Mexico, 20 other plants and animals were recognized as protected by the Convention on International Trade in Endangered Species of Wild Flora and Fauna (CITES). These species are not endangered or facing extinction, but their survival requires special consideration. As a company committed to caring for our environment and communities, Goodyear relocated all to safe and compatible habitats.

510,731 GHG emissions reduction in metric tons compared to 2010, our baseline year. In 2015, Goodyear exceeded a five-year goal of reducing greenhouse gas (GHG) emissions by 19%. Part of our strategy to reduce GHG emissions is to address the entire lifecycle of our products, including reducing emissions from supplied materials through manufacturing, during use and final end of product life.

23% water use reduction since 2010, our baseline year. While the majority of Goodyear’s manufacturing facilities are in areas unaffected by water scarcity concerns, it is still important to us that we continuously reduce our impact on local water resources. We have reduced our water use by implementing leak detection programs and water conservation strategies, and investing capital into water reuse and treatment systems at select facilities.

15% reduction in energy consumption since 2010, our baseline year. In 2015, Goodyear achieved its five-year goal of reducing energy consumption by 15%. Each of our regions has a full-time energy manager engaged in implementing steps to reduce the use of energy in our facilities around the world.

38% solvent reduction in the last five years. Goodyear continues to be an industry leader in efforts to reduce solvents in our manufacturing facilities. Our use rate in 2015 was 0.69, a further reduction from 2014. Our focus remains on the global application of best practices to further reduce this rate.

0% amount of waste any Goodyear manufacturing facility is permitted to send to a landfill. For the past seven years, Goodyear has maintained Zero Waste to Landfill, a program that applies to all manufacturing facilities. This corporate initiative reduces our environmental impact by requiring all manufacturing plants to reduce, reuse and recycle waste.


At Goodyear, we are one team working together to drive performance on the road, in the marketplace and throughout the company. To reach our full potential as associates and deliver on business goals, we strive for five interdependent behaviors: Act with Integrity, Promote Collaboration, Be Agile, Energize the Team, and Deliver Results.

65,000 + employees Completed compliance and ethics training events. Associates around the globe completed online and in-person training events on topics such as the Business Conduct Manual, anti-bribery, competition laws, financial integrity, conflicts of interest, privacy, and protecting company information.

4= Current number of Employee Resource Groups.

Employee Resource Groups (ERGs) benefit Goodyear associates by providing access to invaluable coaching, mentoring, professional development, training and seminars, as well as opportunities to expand their professional network within the organization. In 2015, Goodyear had four ERGs —Goodyear Veterans Association, Goodyear Women’s Network, Goodyear Black Network, and Next Generation Leaders. Goodyear has plans to add another ERG in 2016 to promote diversity and inclusion.

66,000 Associates around the world.

We encourage a culture where associates own their own development and managers provide opportunities, coach and support their people throughout the development journey. Our leaders are held accountable for inspiring their teams, growing the business and acting with integrity, and their own talent management by honoring their commitments to associates.


At Goodyear, we continue to build a culture where safety and wellness are values to each and every associate. By doing so, we will continue our drive toward zero incidents.

36% Injury reduction in the past five years. At Goodyear, our goal for safety performance is for every Goodyear associate around the world to go home injury-free every day. Our ultimate goal is for zero incidents. Examples of this focus include programs such as Target Zero, which focuses on near-miss reporting, and our global audit program that helps us strive for full compliance and continuous improvement in our environmental, health, safety and sustainability systems.

18 Health and wellness program and communications channels in place. Goodyear’s wellness initiative for associates, GoodLife, provides the information, tools and programs that foster an atmosphere of wellness and promote a culture of health at Goodyear. A new channel, the GoodLife app, is scheduled to launch in 2016.


Innovation excellence drives our technological advances and enables us to create products and services that are valued and sought out by consumers and customers. Our solutions respond to the needs of an increasingly complex market and help to set us apart from the competition. Innovations our customers want and need.

Innovative Tires: Among other important attributes, Goodyear conducts research to make tires environmentally friendly and fuel efficient in a variety of ways, such as by reducing tire weight. For example, Goodyear is the first manufacturer to incorporate silica derived from rice husk ash into its tires. Aside from making tires more fuel efficient, this innovation has the potential to eliminate millions of tons of rice husk from the waste stream. Visit our Corporate Responsibility website for more information about our award-winning innovations.

SmartWay®-verified products on the roads.

A total of 21 Goodyear truck tire products that increase fuel efficiency and provide low rolling resistance have received SmartWay verification from the U.S. Environmental Protection Agency (EPA). The EPA established low rolling resistance requirements for retreaded truck tires in 2012, and verified tires must help reduce truck fuel consumption by at least 3%.

669 New worldwide patents received.

In 1900, when automotive tires were little more than oversized bicycle tires, Goodyear designed a better tire, thus creating the enduring Goodyear legacy of continuous improvement and innovation. Today, our success continues to be driven by innovation, and our associates around the world create innovative products, including those with low rolling resistance and other sustainable considerations.


Goodyear has a long history of supporting its communities around the world. We strive to build and support collaborative programs that create positive outcomes for people, communities and the world around us. This mindset is reinforced through the company’s ongoing commitment to care for our communities.

2100 Students, parents and teachers in attendance at Goodyear’s 16th annual STEM Career Day.

In Akron, Ohio, Goodyear’s annual STEM Career Day engages local middle- and high-school students in challenging, hands-on STEM instruction and activities. More than 300 Goodyear associates volunteer their time to plan and supervise the event, which includes $40,000 in scholarships to deserving students.

Over $1 Million in funds raised for local charities by Goodyear Blimps since 2012.

Among other corporate responsibility programs, Goodyear supports the fundraising efforts of local charities by providing once-in-a-lifetime opportunities to ride the Goodyear Blimp at our Blimp locations in California, Florida and Ohio.

In 2015, for a fifth year, Goodyear hosted events for the general public at its three blimp bases to benefit the U.S. Marine Corps Reserve Toys for Tots Program. Attendees were invited to see the blimps up close while donating toys and cash to a worthy cause. More than 58,000 toys and $141 thousand have been donated since inception of the program in 2010. This includes a special donation in the form of a check for $10,000 from Goodyear made directly to the Marine Toys for Tots Foundation in 2015. Goodyear is recognized as a national sponsor and is a recipient of the Foundation’s Commander Award.”

With the above declarations of corporate responsibility, it should be noted that Goodyear has not always embodied the corporate values they’ve claimed in the annual report. Over the past 40 years, Goodyear has been associated with multiple hazardous waste lawsuits including the famous Love Canal site, which may explain why management’s most successful stretch goal was to eliminate waste disposal (“Company Spotlight: The Goodyear Tire & Rubber Company” 3). Goodyear also had been sued for worker safety concerns and consumer safety issues that have been blamed for thousands of automobile deaths. In 2003, Goodyear was forced to restate five years of its previous earnings that reduced declared earnings by over $100 million due to earnings management practices engaged in by management of European subsidiaries.

In addition, Goodyear was a party in three now famous precedent setting Supreme Court cases: one for equal pay, one for international judicial jurisdiction and another for improper evidence disclosure in a product liability suit. Dozens of other product liability and worker safety suits have been filed against the Goodyear Corporation over the past 10 years. However, for a company that employs 67,000 workers across the globe, the percentage of alleged wrongdoing appears to be minimal.

The most famous Goodyear lawsuit, which ruled in favor of the company, now has a law named after it as the legal structure was changed to protect workers in the future. The history of that law can be summed up in this summary of the original case ruling written by Linda Barkacs in the 2009 volume 12 of the Journal of Legal, Ethical and Regulatory issues titled “THE TIME IS RIGHT – OR IS IT? THE SUPREME COURT SPEAKS IN LEDBETTER V. GOODYEAR TIRE & RUBBER CO.”

“The plaintiff, Lilly Ledbetter (“Ledbetter”), began her career at Goodyear Tire and Rubber (“Goodyear”) in 1979. For most of her twenty year career at Goodyear, Ledbetter was the only female manager. Initially, Ledbetter’s salary was the same as that of the male managers. However, over time, Ledbetter’s salary slipped relative to that of the male managers. By 1997, Ledbetter was not only the sole woman manager, she was also the lowest paid manager. Ledbetter’s monthly salary at the time of her departure was approximately $3,700 per month. Similarly situated male managers at Goodyear made between $4,200 and $5,200 per month. In 1998, Ledbetter filed an administrative claim of discrimination with the Equal Employment Opportunity Commission (“EEOC”). She alleged that Goodyear violated Title VII of the Civil Rights Act of 1964 by paying her a lower salary because of her sex. Ledbetter’s claim eventually went to a jury who found in her favor. The District Court (in Alabama) entered judgment for Ledbetter for back pay, damages, attorney fees, and costs.”

Goodyear appealed the ruling based on the fact that the plaintiff had waited nearly 20 years to file a complaint for back pay, and the Supreme Court overturned the verdict in Goodyear’s favor. Legislation that prevents the recurrence of similar cases is now called the “Lilly Ledbetter Act.”

A second precedent setting Supreme Court case was Goodyear vs Brown, a case in which the tire company’s European subsidiaries won against the families of two boys from North Carolina who were killed in a tire blowout accident while in France on vacation. The Supreme Court ruled that the state of North Carolina could not bring suit against the French subsidiary of Goodyear due to lack of personal jurisdiction over a foreign company in a foreign country.


It would appear that Michelin and Bridgestone and Germany’s Continental have attained the innovative stage of corporate citizenship, with Goodyear, Sumito and Pirelli two stages behind at the Engaged level, followed by both Korean tire makers, Hankook and Kumho, and by the only other U.S. tire manufacturer Cooper, which lags far behind in the elementary stages of citizenship. However, despite comparatively low citizenship ratings, Goodyear is a world leader in waste management, having attained 100% landfill free sustainability, in which all of its waste products are recycled or consumed internally. Goodyear also ranks above its peers in water conservation and overall carbon emissions. Those waste management claims appear to be substantiated by credible news stories citing Goodyear’s zero landfill success (Criswell 1). With wide support of environmental critics on its landfill policy, it appears that greenwashing of environmental reporting is limited. In addition, the fact that the firm does not claim ties to the UN Global Compact and limits environmental credibility claims, it does not appear that Goodyear relies on bluewashing as a marketing tool.


Bridgestone -BBB Rated – BRDCY

Starting with the world’s largest tire manufacturer, the Japanese owned Bridgestone Tire Company recently nudged its rival Michelin out of first place in global market share. However, in dollars of sales, Bridgestone has long dominated the world tire market in sales revenue and is considered by analysts to be environmentally focused in its policies (Bridgestone Corporate Website).

  • Utilizes Japanese reporting guidelines & Global Reporting Initiative (GRI Standards)
  • Environmental reports are verified for accuracy by the “Bureau Veritas”
  • Japanese company that bought up American tire maker Firestone
  • Auto industry leader in carbon reduction strategy and improvements
  • BB Rating from recent consumer safety recalls
  • Goal 35% carbon emissions reduction from 2005-2020
  • First to adopt non-petroleum based rubber ingredients


Michelin- MSCI A-rated

Reports Environmental Data in UNGC standards and GRI

  • 2nd largest tire mfg. French bought US tire makers – Uniroyal-Goodrich-Riken
  • Proprietary reporting program: MEF– Michelin Environmental footprint
  • Set target to reduce their “MEF” by 40% from 2010-2020
  • Environmental data required by regulators of industry
  • Sustainability is high corporate priority
  • EPA national performance track program participants (Michelin Corporate Website)


  • American company – World’s 3rd largest tire maker
  • Global EHS reporting standards (environmental-health-safety)
  • Focused on landfill and toxic waste reduction
  • Less focused on greenhouse gases
  • Slow to respond to initial green tech markets such as energy efficient tires
  • Carbon emissions per tire have dropped 21% in past 6 years (Goodyear Corporate Website).

Cooper Tire-BB-Rated

Cooper is second largest American tire company and the 10th largest in the world. Among the top 10, only Cooper and the two Korean tire companies Hankook and Komho refuse to publish environmental impact statements or discuss corporate citizenship goals in their annual reports. Because tire manufacturing is regulated by the EPA, Cooper does have some environmental data harvested from those compliance reports. There is no mention of carbon emissions on the Cooper investor website, however, Cooper is listed as very strong in energy efficiency policies on the MSCI data (Cooper Corporate Website).

As the metrics of corporate citizenship are compared, Cooper’s lack of investment in environmental technology becomes apparent as it trails the Big 3 by more than 10%, and Japanese Bridgestone leads the closest competitor by about 15%.


MSCI Carbon Footprint Ratings
Goodyear Bridgestone Michelin Cooper
5.1 6.9 5.6 4.6


MSCI Total Carbon Emissions
Goodyear Bridgestone Michelin Cooper
9 9.1 8.9 6.1


2015 MSCI ratings for total carbon emissions are very close among the Big 3, and the less environmentally concerned Cooper trails by nearly 30%.

MSCI Toxic Waste Ratings
Goodyear Bridgestone Michelin Cooper
5.6 5.7 7.8 4.4


In a surprising outcome for toxic waste ratings, despite Goodyear’s Zero Landfill Waste Campaign, Goodyear trails Michelin by a large margin, and Bridgestone by a smaller one. This may be attributed to PVC vapor escape rather than physical toxic waste dumping. As would be expected, Cooper tire trails the BIG 3 by about 20%.


MSCI Clean Technology Development Ratings
Goodyear Bridgestone Michelin Cooper
4.3 5.7 6.1 4.0


When it comes to a company’s investment in environmentally beneficial products, Michelin leads from its early introduction a decade ago in low rolling resistant tires, a market that Goodyear has recently began to dominate with a fuel saving heavy truck tire line-up. This does not, however, seem to be reflected in these ratings, as well as the potential upcoming release of Goodyear’s patented electricity generating tires, which could move them much higher in the clean technology ratings (“Goodyear Launches New Fuel Max LHS Tire” 1). Again, Cooper lags behind the Big 3 on this research and development category.


MSCI Water Stress Ratings
Goodyear Bridgestone Michelin Cooper
7.3 6.3 3.4 Unrated


In this metric, Goodyear leads with its water stress ratings. Goodyear plants are designed to capture rainwater for use, and also filter and reclaim used water for steam needs. To reduce potential environmental pollution, no Goodyear plant is supposed to have wastewater drains that lead off their self-contained property (2015 Goodyear Annual Report). Bridgestone joins Goodyear in high marks where normally high ranking Michelin lags, and Cooper refuses to report its water handling and usage policies.



MSCI Product Safety and Quality Ratings
Goodyear Bridgestone Michelin Cooper
3.3 3.3 1.2 3.6


With product safety to consumers, all of the Tire Industry falls below industry norms due to the competitive balance between product price competitiveness and the high level of liability that accompanies a tire failure. It seems that, historically, the ranking among the tire manufacturers varies with Michelin currently the target of dangerous tire failures to consumers.


MSCI Labor Management Ratings
Goodyear Bridgestone Michelin Cooper
3.9 2.2 5.0 4.6


Goodyear ranks third of the four companies in labor relation policies, with Japanese owned Bridgestone a distant last place. Several labor relations issues followed when they acquired U.S. based Firestone in 1988 as Japanese management policies have been at odds with U.S. union labor culture for decades. Many analysts believe that either poorly trained strike breaking workers or intentional poor workmanship by disgruntled workers was the root cause of one of the product liability’s largest recalls in history: the 2000-2002 Ford Explorer Firestone tire blowout crashes that resulted in costs of $3 billion dollars (“Strikes, Scabs and Tread Separations: Labor Strife and the Production of Defective Bridgestone/Firestone Tires” 255-258).



                                                          MSCI Health and Safety Ratings
Goodyear Bridgestone Michelin Cooper
8.7 7.6 5.3 Not Rated


In employee health and safety ratings, Goodyear leads its peers by a large margin. The costs of settling several large lawsuits over the past 20 years has motivated management to create strict workplace safety regulations. French owned Michelin came in a third place and American rival Cooper was unrated for health and safety.


MSCI Corporate Governance Ratings
Goodyear Bridgestone Michelin Cooper
5.1 6.3 7.9 6.8


Goodyear held a last place ranking on corporate governance rankings. Analysts’ commentary on the matter suggest that until recently Goodyear’s board of directors was comprised of an excess number of current and former insiders (“Consider Goodyear for the New Year” 1).


Anticompetitive Practices
Goodyear Bridgestone Michelin Cooper
4.2 4.2 5.0 Not Rated


Goodyear tied Bridgestone for second place in ratings for anticompetitive practices. In 1995, all four companies were investigated for alleged violations of U.S. antitrust laws. The 1995 justice department probe was the fourth for Goodyear, each investigation yielding insufficient evidence to bring charges. However, Cooper’s European subsidiary was convicted of violation of trust regulations in England, which was later reversed on appeal. The capital intensive barriers to entry of the tire industry for new competitors leaves the industry ripe for price cooperation among existing companies.


Business Ethics and Fraud
Goodyear Bridgestone Michelin Cooper
4.2 5.0 5.0 Not Rated


The MSCI ratings for management ethics and fraud are relatively consistent among the Big 3 with Cooper tire again unrated on this metric. However, Goodyear does rank last of the Big 3, with some of its score discounted, possibly due to the four antitrust investigations and  large civil settlement and precedent setting court case “Bahena vs. Goodyear,” where evidence showed that Goodyear managers deliberately withheld evidence in a product liability suit  (www/ 201007 p235).


Concluding Remarks

Based strictly on MSCI corporate responsibility ratings, Goodyear would rank third of the four companies studied with its American rival Cooper in a distant 4th place, despite the fact that the overall MSCI score for both was a “BB”. A-rated Michelin leads “BBB” rated Bridgestone by a small and historically temporary margin. Over the past five years ratings, Michelin had averaged a single “B” rating behind Bridgestone’s average double “B”MSCI Rating. In financial performance, Goodyear appeared to rank last place of the four firms studied, with Cooper tire posting financials considerably higher than the Big 3, however Cooper’s short term profitability seems to be relative to their lack of leveraged growth and sustainability investments.

Despite Goodyear’s position in the rankings, analysts’ stock predictions for Goodyear’s future potential financials are more optimistic than any of the other companies. The support of stock analysts suggests that Goodyear is, at the core, a sound and responsible firm going through a temporary set of setbacks that began with the 2008 recession, and has been slower to recover than its foreign based peers. Overall, based on the unique industry hazards and Goodyear’s history of making corrections to its corporate direction following lapses of ethical behavior as can be evidenced by their superior handling of worker safety and waste dumping, we believe that Goodyear is an above average corporate citizen that recently has underperformed when compared to its peers in financial measures.


Works Cited

“Associate Volunteerism.” Goodyear Corporate. The Goodyear Tire and Rubber Company, 2016. Accessed 27 November 2016.

“Community Support.” Goodyear Corporate. The Goodyear Tire and Rubber Company, 2016. Accessed 27 November 2016.

“Company Spotlight: The Goodyear Tire & Rubber Company.” Marketwatch: Automotive 7.3 (2008): 15-22. Business Source Alumni Edition. Web. 23 Nov. 2016

“Consider Goodyear For The New Year.” Dow Theory Forecasts 72.1 (2016): 8. Business Source Alumni Edition. Web. 23 Nov. 2016.

Criswell, Kristen. “Breaking through: Goodyear Tire & Rubber Co.” Tire Review 2016: 16. Business Insights: Essentials. Web. 23 Nov. 2016.

“Goodyear in Global Shake-Up In Pursuit Of ‘Added-Value’.” European Rubber Journal (2016): 0009. Business Source Premier. Web. 23 Nov. 2016.

“Goodyear Launches New Fuel Max LHS Tire.” Bulk Transporter 77.11 (2015): 47. Business Source Alumni Edition. Web. 23 Nov. 2016.

“Goodyear Pumped With Tire Profits.” Dow Theory Forecasts 71.27 (2015): 8. Business Source Alumni Edition. Web. 23 Nov. 2016.

“Goodyear Fined For Conveyor Death.” Industrial Distribution 88.5 (1999): M4. Supplemental Index. Web. 23 Nov. 2016.

“Goodyear picks PPG silica for SUV tire.” European Rubber Journal 2015: General OneFile. Web. 23 Nov. 2016

McNulty, Mike. “Goodyear Fined $1M+ For Danville Deaths.” Tire Business 34.15 (2016): 0003. Business Source Premier. Web. 23 Nov. 2016.

“Natural rubber demand risks Asia’s ‘biodiversity’.” Tire Business 2015: Business Insights: Essentials. Web. 23 Nov. 2016

Pan Kwan Yuk “Goodyear takes $646m hit on Venezuela” Financial Times. Feb 9. 2016.

Pierce, Alan. “The Goodyear BHO3–A Car Tire That Generates Electricity.” Tech Directions 75.4 (2015): 8. Business Source Alumni Edition. Web. 23 Nov. 2016.

“Safe.” Goodyear Corporate. The Goodyear Tire and Rubber Company, 2016. Accessed 27 November 2016.

“Smart.” Goodyear Corporate. The Goodyear Tire and Rubber Company, 2016. Accessed 27 November 2016.

“Sustainable.” Goodyear Corporate. The Goodyear Tire and Rubber Company, 2016. Accessed 27 November 2016.

“Sweet Spot.” Tire Business 34.5 (2016): 0013. Business Source Premier. Web. 23 Nov. 2016.

“Tech News: Goodyear unveils electric car tires.” Electronics For You 2015: General OneFile. Web. 23 Nov. 2016.

“The Goodyear Tire & Rubber Company SWOT Analysis.” Goodyear Tire & Rubber Company SWOT Analysis (2015): 1-9. Business Source Alumni Edition. Web. 23 Nov.

General Motors: Social Stigmas Faced By Industrial Workers

General Motors Recovery and the Influence of Social Stigmas Faced By Industrial Workers

           The 2008 bailout of General Motors remains a focal point of economics analysts and political journalists. Today, nearly four years after its corporate collapse, reporters alternate between glowing praise and sharp criticism. However, regardless of journalistic viewpoint, one fact cannot be ignored: General Motors has clawed its way back up Fortune Magazine 2012 rankings into 5th place of America’s largest revenue corporations (Morgenson 1).

The second observation that can not be ignored is that the press and public opinion during the recovery period have focused heavily on corporate leadership and the politicians who engineered the bailout.  A crucial factor missing from the news articles: The devotion shown by designers and assemblers at General Motors who have banded together to prove that they can produce a world class product at a competitive price. The thousands of headlines during the period the followed the auto industry meltdown reflect the values with which modern Americans view industrial workers, providing recognition to white collar workers and leaving unmentioned of the achievements from the engineering and the industrial trades, this shift in values may be contributing to declines in domestic production.

Much of this anti-union and industry sentiment results from taxpayer resentment of the government rescue of the world’s largest automaker General Motors, that left the American taxpayers owning 31.9% of the common stock. Today GM rightfully wages a daily war on two fronts: normal industry competition and now the new front of public relations, under a microscope of press scrutiny and public opinion. While this scrutiny seems to have generated results with increased accountability,  as units sales climb, product ratings improve and as profitability reaches new levels. This can be seen in the 2012 employee profit sharing plans, which will provide dividends to compensate for a large portion of the pay cuts hourly employees had accepted as part of the restructuring plan. According to an article in the New York Times that for 2012 it is projected that “45,000 union workers would receive profit-sharing checks averaging $4,300, the most in the company’s history” (Morgenson 4).

However, many industry critics present pessimistic statistics possibly influenced by political agendas and an ingrained anti-industrial sentiment. In an example, an article that opens with anti-Obama critique, industry writer Louis Woodhill wrote a scathing review of GM products in the August edition of Forbes under the shocking title “General Motors is Headed for Bankruptcy—Again”. In the article Woodhill interprets a scoring aspect of recent “Car and Driver” review with:

“Not only was the 2013 Malibu (183 points) crushed by the winning 2012 Volkswagen Passat (211 points), it was soundly beaten by the 2012 Honda Accord (198 points), a 5-model-year-old design due for replacement this fall. Worst of all, the 2013 Malibu scored (and placed) lower than the 2008 Malibu would have in the same test.”

Despite a moderate share of negative press many Americans, influenced by recession and unemployment are reconsidering purchasing American industrial products in hopes that their support will result in a mutually beneficial environment for the American economy. This attitude is shared in the New York Times news article titled “General Motors 2012 Earnings: Second Quarter”, which while presenting a negative spin on GM’s European subsidiary, the article does present a positive spin on GM’s domestic operations with the paragraph:

“In its new carnation, the automaker is proving that it can be profitable at a lower sales volume. The company announced in February 2011 that it earned 4.7 billion in 2012, the most in more than a decade. It was the first profitable year since 2004 for G.M. which became publicly traded in November 2012, ending a streak of losses totaling about $90 billion” (Morgenson 1).

However recently an equal number of industry writers have taken a middle of the road stance on the American auto industry such as the CNN Money article entitled “A Recovering GM is Losing Ground at Home” which despite opening with the statistic that GM lost nearly 2% of the domestic market share in 2012, the article goes on to cite the influence of external factors by quoting auto industry economist Sean McAlinden with “Its very complex, the latest downturn isn’t from lack of sales, it is the result of GM closing down 3 million units of production facilities to improve profitability.” The article also offers hope in the second paragraph with “The Cadillac division in coming months will benefit from two key new model introductions” (Levin 1).

Economists and political journalists write about GM leadership strategies and shareholder returns but ignores those autoworkers putting in the effort day after day to prove that they can once again dominate the global automobile market.  This critical public opinion of American manufacturers and the negative stigma of industrial trades is withoutquestion the greatest obstacle of corporate moral. The resulting negative self-image among industrial workers slows the progress of American industry and that anti-industrial sentiment begins with the attitudes that modern Americans view those industrial jobs.

Over the past 150 years careers in manufacturing goods that were once viewed as hi-tech careers are perceived by many with a negative stigma. This negative connotation is fostered through the American educational system, especially seen in views of the parents of school children in manufacturing communities. The attitudes being imbedded in schoolchildren are that by studying hard and earning professional credentials that they could escape a dirty and dangerous, low paying life of industrial work. Those children later grow into consumers that believe that through hard work and achievement that they “escaped industrial servitude” with careers in medicine, science and especially education and who grow  up to resent industrial workers earning similar wages who in their eyes have not earned the right to those wages through scholastic self-improvement. What many educated professionals do not realize is that those high paying industrial jobs need to offer compensation levels that can attract reliable workers to fill jobs with much less desirable working conditions.

These anti-industrial trade values are crippling todays American manufacturing companies, especially in the automobile industry. A slow drive throught the parking lot of any white collar company such as JP Morgan here in Tampa and you can count that nearly 85% of white collar workers in non-industrial cities buy foreign produced automobiles and the  15% of the exceptions to that rule are almost exculsively those few who desired the largest of SUV’s that do not have foreign counterparts. Polling these owners for an explanation, uncovers the nearly universal response offered by import owners, is their belief that the American manufacturers produce an inferior, unreliable product. Many that offer this assumption often admit that they had never owned a new American car for comparison, and deveolped these opinions from information from the press.

The declines in American manufacturing will likely continue until society offers industrial achievement similar recognition to those contributing to the advancements in computer technology and finance professions. You can not build a championship team without being able to recruit the best engineering talents entering the workforce and you can not obtain those cream of the crop graduates to accept a job in an industry with a sinking prestige factor.

Work Cited

Levin, Doron. “A Recovering GM is Losing Ground at Home”. CNN Money. May 11, 2012

Ed. Morgenson, Gretchen. “General Motors 2012 Earnings: Second Quarter”. The New York  

Times. August 2, 2012

Woodhill, Louis. “General Motors is Headed for Bankruptcy –Again” . Forbes. August 15, 2012

Board Independence is Less Effective at Deterring Accounting Fraud in Family Controlled than in Publicly Held Corporations

An Annotated Bibliography by Todd Benschneider

Prencipe, Annalisa. Bar-Yosef, Sasson. “Corporate Governance and Earnings Management in

Family-Controlled Companies.” Journal of Accounting, Auditing and Finance. April 2011,

Vol. 26 Issue 2, p199-227. 29p. Database: Business Source Alumni Edition.

Annalisa Prencipe, PhD. and senior lecturer at SDA Bocconi School of Management with her team of researchers conducted a study of 249 firms to compare the quality (long-term sustainability) of profits in family controlled firms to earnings of publicly held companies. The study investigated the impact of “earnings management strategies” a term that The Journal of Accountancy defines as “the discretionary distortion of revenue, expense and depreciation schedules to optimize short term goals such as executive bonuses, budget targets or manipulation of stock prices.”  The results of the study were intended to provide accounting firms with new tools for identifying ratios and patterns that detect shareholder fraud in family controlled firms.

In publicly held firms strong incentives such as performance bonuses, performance reviews and salary bonuses lure executives to portray company financials in the most positive light, while concealing negative information from financial reports. However, over reporting earnings provides inaccurate feedback to the product development, finance and marketing departments who rely on accurate reporting to steer future products and operations strategy. Extended periods of inaccurate market feedback can undermine the long term economic health of the company. Stockholders can reduce mismanagement by electing an independent board of directors who hire, evaluate, supervise and fire top level executives to ensure that strategic decisions represent the shareholders’ best interest.

Prencipe explains that “A typical board structure is composed of outside directors and top company officers. Outside directors are appointed by the company’s shareholders and are assumed to be acting in the shareholders’ interests. However, the inclusion of top management among board members may give rise to a conflict of interest as management may attempt to transfer wealth from stockholders by taking advantage of information asymmetry. The results show that the increase in shareholder wealth is significantly higher when the board is dominated by independent directors.”

Recent trends in corporate governance now encourage firms’ directors to enforce accurate financial reporting. Board oversight can identify executives who exploit short range strategies that inflate profits to capitalize on performance bonuses. By the time the earnings management schemes unravel, the executives involved have often retired or moved on to other companies, which limits the legal recourse available to the stakeholders. Public demand in response to recently publicized investor fraud cases have prompted legislators to issue regulations that hold board members accountable to shareholders for fraudulent reporting of the executives they oversee. Regulatory changes in corporate governance have been eliminating the participation of company executives from the board of directors to reduce their influence over the boards’ objectivity, especially by eliminating CEO’s from also serving as the Chairman of the Board.

However, family controlled companies face different incentives to publish inaccurate financials, and further compounding the distribution of power, the CEO is often times also the largest stockholder of the company, entitling them to serve as the Chairman of the Board.  Prencipe wrote “Current literature suggests that, although founding family ownership seems to be associated, on average, with higher earnings quality, the extent of earnings management remains an open issue for family controlled firms. Since most families with controlling interest in their company possess a long term vision for growth and therefore make decisions that favor long range goals rather than boosting quarterly profits.”

Prencipe believes that while experts agree that there is less incentive for family controlled firms to over report earnings, that instead those companies manage earnings to secure the family’s controlling interests, minimizing the distribution of wealth to minority shareholders. She hypothesized that recent corporate governance restructuring would be less effective in family controlled companies whose self-interest lies in underreporting earnings, especially present in where the family also served in salaried executive positions by increasing family members bonuses or siphoning private benefits at the expense of other shareholders such as supplier kickbacks, travel expenses and other concealable business write offs.

The study was expected to validate previous research that had shown a lower incidence of earnings management under a board of directors with independent decision making authority, especially those boards lacking a CEO chair holder.  A board possessing low levels of independence has many of the company executives voting on board decisions, with the CEO also serving as the chairman of the board. In cases of a highly independent board the CEO does not hold a seat and possesses only subordinate levels of authority in regulating corporate accounting. However this study would specifically compare results from widely held public corporations against those from private firms and measure the estimated earnings management strategies present in the financial reports. Levels of earnings management in the companies would be calculated from a fraudulent accounting indicator: abnormal working capital accruals (AWCA).

Prencipe and Bar-Yosef conducted a study of Italian corporations by applying AWAC audit calculations to a sample of 249 Italian corporations consisting of four publicly traded corporate governance structures:

1-      Family Controlled with CEO on the Board of Directors

2-      Family Controlled with no executives on the Board of Directors

3-      Publicly Held with CEO on the Board of Directors

4-      Publicly Held with no executives on the Board of Directors

The intent of their study was to see if a correlation could be found that suggested that any of these four governance structures yielded a higher quality long range financial growth. The results validated several previous studies that found higher quality earnings generated by publicly held corporations with a highly independent board of directors. The results also supported Prencipe’s hypothesis that family controlled firms outperformed publicly held firms in earnings quality; however there was a less pronounced advantage to private firms with a highly independent board when compared to public firms with an identical governance structure.

Prencipe’s closed her article with:

“Our conclusions may lead regulators and academics to reevaluate the effectiveness of some corporate governance models when applied to family controlled companies. In particular, our results suggest that regulators should pay special attention to the selection of board members. For the benefit of all shareholders, it is important to guarantee substantial independence of the board. Our results are also useful to users of financial statements, suggesting that a company’s ownership structure and its corporate governance characteristics should be taken into account when accounting numbers are used.”

Managers Rationalize Ethical Dilemmas in Accounting Fraud

An Annotated Bibliography by Todd Benschneider

Johnson, Eric. Fleischman, Gary et al. Managers’ Ethical Evaluation of Earnings Management                         

              And Its Consequences. Contemporary Accounting Research. Fall 2012, Vol. 29 Issue 3,                                         p 910-927. 18p. Database: Business Source Premier.

A 2012 study performed by the Universities of Wyoming and North Dakota questioned 264 experienced managers with a hypothetical ethics scenario. The researchers wanted to discover whether “The ends of positive consequences justify the means of earnings management?” in current managers. To test the idea, managers were given a hypothetical scenario of measuring the scale of severity that upper managers would reprimand lower level managers who were found to be managing earnings reports to increase  salary bonuses. Fleischman wrote “Our findings suggest that the current generation of managers have a tendency to behave as if the end justifies the means, which raises the issue of rationalization of unethical conduct.”

Earnings management is defined by the Journal of Accountancy as “the discretionary distortion of revenue, expense and depreciation schedules to optimize short term goals such as executive performance bonuses, budget objectives or the manipulation of stock prices.”   Earnings management typically involves optimizing of income and expense schedules to achieve short term benefits resulting in salary bonuses and positive evaluations, often resulting in negative consequences for the firm. Biasing earnings reports to achieve short range goals can disrupt market feedback, product development, production, and customer relations in the supply chain.

The study was broken into four separate hypothetical scenarios which found that the managers surveyed agreed that the practice was unethical; however, the positive or negative impact on the firm’s profits was factored into how severely they would reprimand the subordinate manager. The study found that managers overall viewed unethical management practices less negatively if the behavior resulted in a positive short term benefit to the firm. The study suggests that the foundation is detected for the ethical dilemma of “incrementalism” where an acceptance of minor unethical practices gradually lead to large scale corruption and loss of investor confidence.

The researchers surveyed 264 participants who were currently employed in business management positions while enrolled in working adult MBA programs at a variety of universities. The hypothetical situation each manager assessed involved one of the four following basic situations which resulted in either positive or negative repercussions for the firm.

The initial hypothetical situation below presents the subordinate as the originator of the unethical behavior:

“Terry Patton, an automobile dealer manager that you supervise, is anxious to maximize his incentive compensation that is based on budgeted net income for the dealership. Terry receives a higher bonus if he achieves 120 percent of this target, and a lower bonus if he achieves only 80 percent of this target. The sliding scale between these two performance extremes is not linear and encourages achievement of net income in excess of the budget (100 percent). Terry calculates that if he accelerates or delays revenues and expenses to increase the variability of his dealership’s net income over time he will, on average, receive higher bonus income than if he does not manage revenues and expenses.”

The study then presents one of the following two consequences to Terry’s strategy:

  1. Positive Outcome – “Terry tells his friends at dealerships for another company about his compensation strategy and is able to convince these very able managers to join Terry’s company because the compensation is so much more attractive. This causes Terry’s company as a whole to become better managed and 18% more profitable this year.”
  2. Negative Outcome – “Terry tells his friends at other dealerships within the same company of his plan and they also engage in the managing of revenues and expenses, which cause the company as a whole to experience an 18 percent decline in profitability for the year, which is discovered could be solely attributed to Terry’s strategy.”

The alternated basic scenario involves the subordinate Terry being the whistleblower of the bonus manipulation plan described above of other dealer managers: “Terry Patton, an automobile dealer manager that you supervise, has overheard other dealer managers at other locations within Terry’s company discuss their incentive compensation maximizing strategy.” Following this basic story line the participant is presented then offers one of the two following outcomes:

  1. Terry brought up the practice at a dealer managers meeting and discouraged this manipulation. He obtained support from some managers but criticism from others. Over the next twelve months the company as a whole was 18 percent more profitable because those managers that stopped manipulating their dealer net income based on Terry’s recommendation.
  2. Terry brought up this practice at a dealer managers’ meeting and discouraged this manipulation. He obtained support from some managers but criticism from others. Some talented managers were so upset by Terry’s comments that they left the company, which suppressed overall company profitability by 18 percent this year.

The study found that either case, being the supervisor of the conspirator or of the whistleblower that the managers surveyed would have reprimanded the hypothetical subordinate “Terry” more harshly in situations which resulted in losses to the annual profits than in identical dilemmas resulting in improved annual profits. These findings support their hypothesis that in terms of ethics, the management participants surveyed would lean toward “the end justifies the means” attitude to management in ethical dilemmas.

Researcher Eric Johnson concluded: “Our findings suggested that, overall, the ethical nature of an act had the greatest influence on manager judgment of the act and the intention to intervene, however positive organizational consequences significantly reduced the reprimand. This finding answers the question: the end did justify the means. In addition to advancing literature on the ethics of earnings management, these results also provides empirical support for understanding how managers actually respond to such ethical dilemmas, rather than stating what they should do.”

Continued Consumer Resistance to Fuel Efficency Technologies

12/09/2012 EPA policies that affect the economy become front page news in an election year and the hot topic for 2012 is the Corporate Average Fuel Economy (CAFE) revisions, which automakers to improve average automobile fuel economy from 29 mpg to 54.5 mpg over the next 13 years. Agreements to these revised fuel efficiency standards were concessions made by automakers during the industry bailouts of 2009. In the backlash of that federal bailout, critics have been quick to fault American manufacturers for their lack of long term planning. However, in defense of management strategy, the automakers have for decades, simply been doing what profitable businesses do best, responding to consumer demand (Vlasic).

The press often suggests that domestic auto sales recovery will depend on the fuel economy of the products that manufacturers can provide. These critics assume that consumers make purchase decisions using primarily math and logic, those of us in the auto industry experience first hand purchase motives that are much more closely akin to the process of purchasing fashions or artwork. To most Americans, their car is a part of their self-image, not just a tool that converts dollars into miles traveled. Journalists such as News-Herald’s John Lasko write articles that with opening lines such as, “With gas prices hovering near $4 a gallon, many are opting to trade in their gas-guzzlers for more fuel-efficient vehicles.” With news headlines like those, it is easy for the public to conclude that the US automakers lack of sales was due to its heavy reliance on gas guzzling models. However, those assumptions are based on popular ideas that the domestic manufacturers previously lacked the capability to produce fuel efficient vehicles. In their defense, the simple reality remains, the automakers must make their first priority to produce those vehicles that sell well in the domestic market.

The critics overlook the 3 million Chevrolet Chevettes that were produced between 1976 and 1987 or its domestic counterparts, the Plymouth Horizon and the Ford Fiesta that provided fuel efficiency equal to most economy cars on the market today. For example, the Chevrolet Chevette was for nearly a decade, the American flagship economy car, selling millions by providing a real world fuel economy of 25 city/ 30 hwy, or with a popular diesel engine option reaching 33 city/41 hwy. The Chevette was sold with a base price, that inflation adjusts to about $11,000 in today’s dollars and consistently surpassed the fuel economy ratings of it’s main Japanese competitor, the Toyota Corolla by nearly 2 mpg for nearly a decade.

Compare those cost and fuel efficiency ratings to today’s most economical products available in the US, the Korean made 2013 Hyundai Accent with an MSRP of $10,665 that is rated at 29 city/39 hwy. The comparison of these cars in the context of the 25 years of technology that evolved between them should dispel assumptions that Asian economy cars have enjoyed decades of superiority in fuel economy ( However, in the American car market, every one of those fuel sipping economy cars was discontinued in the late 1980’s when sales dried up as the pendulum of automobile fashion swung toward a return of larger and more powerful transportation, with the introduction Sport Utility vehicles and the return of V8 powered high performance sedans.

By 1990, it became increasingly uncool to be seen in fuel efficient cars, American auto fashion began to enter the age of the 1993 Jeep Grand Cherokee, offering a taller ride height for a better visibility in traffic and providing the owner with a sense of safety and rugged capability. The Grand Cherokee became the benchmark to measure style popularity, marketed with an image of recreational outdoor travel and adventure rather than previous trend for  economical commuter transport. These mid-sized all terrain Sport Utilities grew especially popular with female buyers in northern states, at the same time four door 4×4 pickups became increasingly popular with young male buyers seeking that “Eddie Bauer” outdoorsy image.

Critics often ignore the strategic decisions that allocated research and development funding away from fuel economy and directed budgets to safety, performance and durability to meet the consumer demand curves. Over the past 15 years the average vehicle age alone has grown by a third to 10.8 years old with advancements in vehicle durability (USA Today).  Additional progress that was made during that period to improve braking distances and implement crash avoidance technology reduced accident frequency and cut the percentage of crash fatalities in half.  In an effort to appeal to consumer demands for more powerful accelerator pedals, 0-60 acceleration times have improved by over 40%. And to counter the reliability critics of the domestic cars from the 1980’s, the inflation adjusted annual maintenance costs have dropped by more than 80% (NADA.COM).

Today even after the industry collapse, American manufacturers once again dominate automobile industry technology development, General Motors again was ranked the 2011 No. 1 innovator in automotive patents by US patent board (Tuttle). However, consumer demand trends in automobiles are similar to those in fashion, with opposing trends recurring in 10 year cycles, such as style trends toward skinny jeans from bell bottoms and short carefully styled hair to today’s bushy headed natural hairstyles. Sociologists attribute 10 year style cycles to be dependent on the needs for generational self-image, as each generation makes fashion and identity statements to differentiate them from the previous generation.

Business Times writer Brad Tuttle suggests that the fuel economy trend that began in 08 will continue to gain momentum:

“A new True Car post traces the average miles-per-gallon rise among new cars sold

in the US… all of the top seven automakers posted dramatic year over year

increases in average miles per gallon. In 2011 the average new Ford got just 17.3

mpg compared with 22 mpg in February of 2012 … the rise comes primarily as a

result of Ford doubling sales of small cars such as the Fusion and Focus”

However, despite increases in economy cars sales, auto sales as a whole have risen, the demand is also increasing on 5 year old full size SUV’s. According to industry writer Nick Bunkley,

“Retail prices for five-year-old full size S.U.V.’s are 23 percent higher than a year ago

according to, an automotive information Web Site. That is more than

double the average price increase of 11 percent for all five-year-old vehicles.”

One thing is constant in the automobile industry, vehicle selection is an emotional decision more than it is an economic one. Customer buying motives first and foremost are influenced by how the vehicle makes them feel, a vehicle becomes one with the driver, it can allow them to feel bigger, more secure or more powerful.  I recently encountered a perfect case that really defined the influence of self-identity on vehicle selection.

Carolyn, a 60 year old widow and retired guidance counselor arrived at our Buick-GMC showroom in a well maintained, three year-old, luxury four wheel drive truck. Carolyn had gotten a letter from our used car department that high demand for trade-ins like her truck had currently driven trade-in values up thousands over the previous year. The letter encouraged her to consider upgrading soon, to take advantage of current trade in values for used 4×4’s.

The timing of the letter was perfect for Carolyn, since she had recently moved to Florida from the Midwest and no longer had the need for wintertime four wheel drive; to further complicate matter the garage of her new condo also couldn’t accommodate the truck. She explained when she arrived, that she really wanted to reduce her fuel budget and downsize into one the new hybrid Buick Regal sedans she had been reading about in the newspapers, rated for twice the fuel economy of her truck.

Over the following week Carolyn test drove over a dozen of fuel efficient sedans from ours and different dealerships including the Hybrid Regal that she initially planned to purchase. Despite our best efforts to persuade her to choose our last remaining hybrid, she instead opted to buy the high performance Regal T Type, performance sedan, that ironically provides a only a slight fuel economy advantage of 15% over the truck she was trading in and was priced thousands higher than the $28,000 hybrid version.

Carol admitted that when driving the cars rated highly for fuel efficiency she felt as if she had sacrificed the power that she was accustomed to and those low powered cars made her feel old and slow behind the wheel, she insisted that she “wasn’t ready to feel like an old lady toodling down the right lane, holding up traffic”. Carol’s time behind the wheel of the Regal Turbo made her feel young and put a smile on her face every time she pushed down on the accelerator pedal. For the sake of “feeling young” she was perfectly content to pay an extra $90 in monthly car payment for the high performance engine and luxury options and also disregard the $65 month in fuel savings that the hybrid version offered.

Think of the vehicle choices by comparing it to an airplane selection; imagine choosing between airplanes, where you could select a 2 seat Cessna that might make you feel like buzzing mosquito, or for another $150 a month you could pilot the F-16 fighter jet or a Boeing 747 to work, ….to you which of those options excites you?. The difference it capability seems huge and the difference in increased fuel costs may only be an additional $100 a month. The thrill of becoming something larger and more powerful and the status that comes with that ownership has an attraction beyond what can be measured in simple terms of transportation costs per mile. American buyers have consistently demonstrated that they are willing to sacrifice a larger part of their income to enjoy vehicles that provide them with excitement.

Current sedan trends are being influenced by the fuel efficient designs from Asian manufacturers that were designed to handle the high taxes on Japanese gas and the shortage of open roads on the islands of Japan. Understanding the American tastes requires us to understand the differences in our driving habits, many countries do not have the smooth open roads that American can enjoy, foreign drivers are often limted in their ability to appreciate American tastes for size and horsepower. However in Australia, which has road systems similar to the US, they have a huge market for large SUV’s, trucks and big engined cars. During the 1990’s many Japanese automakers began to design vehicles to cater to the American market, large gas guzzlers like the Nissan Armada, Toyota Sequoia and Honda Ridgeline ensured import survival during the SUV years, and most notably those Japanese trucks and SUV’s suffer from slightly lower fuel economy ratings than the American SUV competitors.

It has been easy for the press to fault American automakers for their lack of vision in developing economy vehicles, and to blame management for not remaining competitive in fuel efficiency technology. However, despite almost a total lack of advertising dollars for large engine SUV’s, compounded by the handicaps of stale aged out designs and a decrease of discounts offered on the large SUVs, the demand for large SUV’s is climbing back to nearly 2008 levels despite continued fuel cost nearing $4.

Over the past 30 years, American consumers have voted with their wallets, which indicated that fuel economy has been considerably less important than size, safety, reliability and performance. The challenges that lie ahead are not building smaller, less powerful cars as much as directing energy saving technology development at the powerful SUV’s, light trucks and spirited sedans that American consumers demand.

Because for many Americans the automobile is more than simple transportation, it is as much an entertainment and fashion decision as a financial decision, and many of those Americans have proven for decades that they are perfectly willing to pay a premium to enjoy a few more smiles-per-gallon.

Work Cited

Bunkley, Nick. “As Car Owners Downsize, the Market Is Strong for Their Used S.U.V.’s.” New

                        York Times. 07 2012: n. page. Web. 7 Nov. 2012.

“Side By Side Economy Comparison.” US Environmental Protection Agency,

07 2012. Web. 7 Nov 2012.

Lasko, John. “Gas Prices Have Car Makers, Sellers, Buyers Looking at Fuel Efficiency.” The News

                       Herald. 30 2012: n. page. Web. 7 Nov. 2012.

. “Guidelines.” National Automobile Dealers Association, 07 2012. Web. 7 Nov 2012.

Tuttle, Brad. “Even with $4 Gas, Few Drivers Choose Electric Cars – Or Even Hybrids.” Business

                          Time. 12 2012: n. page. Web. 7 Nov. 2012.

Vlasic, Bill. “U.S. Sets Higher Fuel Efficiency Standards.” New York Times. 28 2012: n. page. Web.

7 Nov. 2012.

“Our Cars are Getting Older, too: Average Age now 10.8 years.” USA Today. 01 2012: n. page.

Web. 7 Nov. 2012..