Category Archives: Marketing Strategy

Fitbit, IPO Superstar Struggling for Survival

February 19, 2018Applied Management, Business Management, Business Model, Consumer Behavioral Research, corporate citizenship, Economics, Fitness Technology, IPO, Management Research Study, Marketing Strategy, Muma College of Business, Start-Up Ventures, Technology, Triple Bottom Line, University of South Florida, Venture CapitalTodd Benschneider

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.

Founders

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 GROWTH CURVE

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 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.

Diversity

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.

Sustainability

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.

Competitor

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

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).

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Data Analytics: Influences of Gross Film Revenue Across Three Decades

December 9, 2017Applied Management, Automobile Industry, Business Management, Business Model, Consumer Behavioral Research, Data Analytics for Business, Earnings Management, Economics, Executive Leadership, Management Research Study, Marketing Strategy, Muma College of Business, Technology, University of South FloridaTodd Benschneider

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:

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.

Genre:

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.
Rating:

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.

Models:

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.

Insights:

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

July 19, 2017Automobile Industry, Management Research Study, Marketing Strategy, University of South FloridaTodd Benschneider

StratSim Automobile Industry Marketing Simulation Case Study

Todd Benschneider, Nadia Kaminskaya, Sam Mohammad

University of South Florida – Dr. James Stock

July 8, 2017

EXECUTIVE SUMMARY

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.
Budget:

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.

ROUND 0

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 3^rd 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 4^th 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 4^th 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 4^thround 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 5^th 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.

ROUND 1

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 3^rd 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 2^nd 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 1^st place to 3^rd place in annual income. In nearly every measure of performance, our group C fell to near last place rankings.

ROUND 2

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 3

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 4

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 4^th 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 4^th 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.

ROUND 5

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%)

CONCLUSION

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.

FUTURE RECOMMENDATIONS

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

July 4, 2017Applied Management, Business Management, Business Model, Consumer Behavioral Research, corporate citizenship, Economics, EpiPen, Executive Leadership, Industry Regulation, Management Research Study, Marketing Strategy, Muma College of Business, Mylan, Pharmaceuticals, Triple Bottom Line, University of South FloridaTodd Benschneider

Marketing Case Study: Pharmaceutical Price Points – Pricing the EpiPen

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

June 29, 2017

Introduction

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.

Background

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 1/3^rd 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 1/5^th 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.

Alternatives

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.

Recommendations

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.

Conclusions

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.

SOURCES

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https://www.medreps.com/medical-sales-careers/10-new-years-resolutions-for-the-pharma-

industry/

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

http://formularyjournal.modernmedicine.com/formulary-journal/news/fda-approves-epipen-rival

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

Online. http://www.mmm-online.com/commercial/mylan-ceo-defends-epipen-strategy-questions-

pricing-model-in-the-us/article/576448/

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

Business Week. https://www.bloomberg.com/news/articles/2015-09-23/how-marketing-turned-

the-epipen-into-a-billion-dollar-business

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

Report. https://www.mattinglymanagement.com/2017/02/generalassemblyawakens/

Popkin, Ben. (2016). “Mylan’s CEO Pay Rose over 600% as EpiPen Prices over 400%”. NBC News. http://www.nbcnews.com/business/consumer/mylan-execs-gave-themselves-raises-they-hiked-epipen-prices-n636591

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

https://cb.hbsp.harvard.edu/cbmp/product/UV7186-PDF-ENG

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Consumer Resistance to Superior Technology: General Motors Hybrids, Siri and Video Messaging, Why are We So Slow to Adopt?

October 28, 2013Applied Management, Automobile Industry, Business Management, Business Model, Consumer Behavioral Research, corporate citizenship, Domestic Policy, Economics, environmental sustainability, EPA, Executive Leadership, Foreign Policy, General Motors, Human Resources, Industry Regulation, Management Research Study, Marketing Strategy, Muma College of Business, Pollution, Start-Up Ventures, Technology, Triple Bottom Line, University of South FloridaBob Lutz, Business Canvas, China Auto Industry, electric vehicles, Elon Musk, Entrepreneurship, Eric Ries, general motors, Hybrid technology, Innovation, Innovation Education, Jack Welch, Lean Startup Methodology, Lithium Batteries, MBA Programs, Solar Power, STEM, Technology Adoption, Tesla, University of South FloridaTodd Benschneider

Todd Benschneider

University of South Florida
Revised 4/23/2018

When I first wrote the foundation for this article on “Consumer Resistance to General Motors Hybrid Vehicles” nearly six years ago, I was hoping to make sense of the unexpected marketing challenges that we uncovered when Americans proved surprisingly reluctant to purchase the General Motors electric and hybrid option vehicles in 2012.

The market timing of 2009-2012 seemed ideal for electric automobile technology, with record high fuel prices, deeper understandings of global warming and the inevitable decline of petroleum production in the coming century.

On the surface, it seemed to be a reasonable assumption in 2012, that industry projections for alternate fuel vehicles would become a reality and “most cars of the future” (by 2020 was the expectation) would employ some form of electric or hybrid powertrain.

It is ironic how eight years into the future seemed limitless in its potential; but, eight years ago, feels like it was just yesterday.

How could anyone not want inexpensive clean energy cars; especially, ones that cost less than a dinosaur powered vehicle?

Few people would even argue that oil reserves could possibly sustain our current demand for gasoline for future generations.

The proposed electric car technology was reliable, those powertrains had proven their reliability for a decade of testing.

The price was certainly right, General Motors hybrid options for Buick Lacrosse and Chevrolet Malibu were priced the same as the gas versions and, as bonus, the hybrids were even more powerful and provided income tax credits.

How could that not sell like a syrup covered hot cake????

I still shake my head in amazement at how difficult it was to get rid of the hybrids we ordered in 2011 at our Buick-GMC store. Several sales managers would have probably been fired if our veteran inventory manager Sandy had not pushed back and insisted that we limit our initial order to six units rather than the twenty that I thought was a very modest forecast …. this was not her first rodeo.

Sandy probably saved my job and managed to dealer trade most of those six aged units from our inventory and I for one, learned a valuable lesson in product development: think twice before building a superior solution for customers who do not see a problem worth solving.

Since that realization I, like many in the industry, have concluded that unless government intervention mandates the phase out of petroleum powertrains, the adoption rate of electric-powered vehicles could take another two decades. Looking ahead now from 2018, I have adjusted my expectations down a few notches from back in 2012; now, I suspect that relying on the market demand alone to bring electric powertrains to full-scale adoption would be overly optimistic.

I find myself taunting the overzealous Tesla enthusiasts with history trivia that the automaker Detroit Electric nearly overtook gas automobiles in the early 1900s, selling over 13,000 electric cars that had top speed of 20 mph and a recharge range of 80 miles. A current Tesla 3 base model is rated for 220 miles of recharge range and with modern production capability has only recently surpassed 200,000 units sold. That seems like a miniscule amount of progress made across the 100 years of technology that evolved between the two.

It also seems unlikely that government intervention will mandate the phase-out of the internal combustion engine. Some assumptions could be made regarding the far-reaching economic disruptions to foreign trade markets, devastation to the economies of export countries, displaced petroleum workers, and the reallocation of every dollar generated throughout the gasoline supply chain, not to mention the economic impact to the plastics and chemical industries which rely on the waste byproducts of oil for cheap fundamental ingredients.

So, despite being a GM guy whose career was built on gas engine emissions and combustion technology, I must admit that I had been rooting for Elon Musk’s solar-powered auto revolution. Mostly because, I hoped to avoid becoming one of those cynical old guys who fights progress, for no reason other than, maintaining a comfortable status-quo.

I am still optimistic that electric powertrains will become mainstream and that automobiles will convert to solar charged electricity before the rest of the power grid. However, I am imagining that the solar revolution will plod forward slowly for decades in a long-drawn-out guerilla war due to the lack of strong market pull for those alternative fuel vehicles while the petroleum industry survives long enough to support the codependent plastics industry until renewable sourced manufacturing ingredients are developed.

Hopefully Tesla investors are long-range thinkers and have prepared for the long road ahead when consumer demand someday aligns with electric automobile technology. Recently Tesla’s investors had their confidence shaken when company stock prices dropped over 60% during the first week of April over a combination of news that was only slightly negative. If that bearish responsiveness is any indicator of the market, we could expect that a prolonged loss of investor confidence could snuff out the young company before they make it to the finish line.

Few people in the auto industry expect the Tesla plants to disappear or its existing cars to become obsolete. However, a sharp drop in Tesla market value will most likely lure General Motors or Toyota in to absorb the brand at a bargain price in the coming years. Unfortunately, if that happens, a Tesla surviving without Musk at the helm will probably see electric car technology being pushed to the back burner, adding several additional decades to reach full market potential.

It is times such as this that it becomes apparent that consumers (and voters) stated principals fail to correlate with their actions. This anomaly of consumer behavior manages to slow the adoption of superior technology for reasons that will remain a mystery.

My personal experience from being on the front lines, trying to persuade General Motors customers to buy the hybrid powertrain has burned this demand paradox into my view of most technological advances.

For now, we can appreciate how one man, Elon Musk, passionate about his vision for solar power has managed to get far enough to pose a serious market threat to all three economic super powers: auto manufacturing, petroleum and the global power grid. I tip my GM hat to the relentless visionary and hope he makes it to the finish line to prove the naysayers wrong.

As a matter of fact, back in 2012, I used to tell a similar story to this one about rates of technology adoption, it was my own story about the technology predictions of a decade earlier. In 2002, a full two years before Elon Musk joined Tesla, while he was busy building PayPal, I enrolled in an Automotive Technology program and was introduced to Professors suggesting that our class focus on the General Motors hybrid trucks and Chevrolet EV1 electric prototypes from the parking lot, since they would be the products in the market when we finished the program in 2005.

Not taking any credit away from the Tesla contributions, but electric and hybrid gas/electric models were well-developed by several large automakers and proven in field testing long prior to 2002. General Motors introduced the GM Impact electric car prototype in 1990 and revised it several times into the EV1 in 1996, adding the S10 EV truck in 1997, the duo sold around 1600 units from 1996 through 2002 when they were discontinued due to high replacement battery costs.

GM prepared the next generation of alternative fuel powertrains, this time using smaller batteries in combination with the standard gas engine, allowing drivers to select between gas and electric modes. The added value proposition to hybrid technology being that the hybrid optioned car could still be driven in standard gasoline mode if the customer chose not to spend the $10,000 plus to replace the batteries required for the electric mode.

In 2002, most of us in the GM world thought this hybrid technology would provide the company with the competitive edge needed to fend off the Japanese competitors in the global market. Inside GM, everyone seemed fully committed to the project and the service press even printed the repair manuals and training materials for an expected hybrid truck product release.

We were told that the first hybrids would release no later than 2005. Surprisingly though, with the exception of the quiet release of a small batch of hybrid tucks in 2005, General Motors delayed the marketing air campaign for hybrid offerings until 2009. The marketing launch failed to build the required buzz among consumers and even with $4 gas, the hybrids were seen by most as a dismal market flop. Some environmental critics claim that the marketing campaign was designed to flop with a hope of preserving GM’s previous investments in gas engine technology while also winning support of environmentally focused politicians.

Regardless of the motives of the ineffective marketing campaign, I was there when new customers came to our showrooms to test drive hybrid models, then agreed with the proposition of the revolutionary technology; but, when it came time to sign the finance contracts, the agreement fizzled out. Many of these deals fell apart in the finance office, when the customers began contemplating uncertain future repair costs, trade in values, warranty extensions and differences in insurance rates. It seemed like many feared that hybrids would be a passing fad and they could be stuck investing in a car that would have limited resale or trade in value.

In fact, from 2008 to 2018 the General Motors dealership I worked at sold around 8000 new vehicles and despite the huge bonus offered to sales staff and managers to improve sales of hybrids, the store sold a whopping total of sixteen hybrid cars in those nine years and nearly all of those were leases.

These thoughts came to mind earlier this week when having a conversation with friends about another ambitious prediction in tech news that, by 2020, over 90% of web traffic will be video rather than the text and image data of today.

Being jaded now by these types of predictions, I shared with them another related story, that just a couple of years earlier I had read a similarly optimistic prediction, that by 2020, few people would be texting and reading from their phones; instead, we would all be using Siri-like voice translators and listening to the replies of others through our cordless ear buds.

With the 2020 model year now only fifteen short months away, I realize that most of the auto manufacturing line equipment is currently tooling for that year’s production and my friends in engineering tell me that they are working from forecasts that fewer than 7% of GM vehicles sold in 2020 will be ordered with the hybrid powertrains.

With that fresh on my mind, I am sitting in the atrium lounge of the University of South Florida, surrounded by nearly a hundred of the youngest millennials and realized that they were all still texting from their phones and reading the responses. I will curb my enthusiasm for consumer technology adoption projections in the future….. I am starting to see how old guys become so cynical

The foundation article from back in 2012, here is the research on the state of fuel economy technology and the obstacles to adoption:

Continued Consumer Resistance to General Motors Hybrid Vehicle Technology – November 7, 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, requiring 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 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; but, those of us in the auto industry experience firsthand that purchase motives are more akin to 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 (fueleconomy.gov).

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 (fueleconomy.gov). 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 unfashionable to be seen in fuel-efficient cars, American auto style entered 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 Edmunds.com, an automotive information Website. That is more than
double the average price increase of 11 percent for all five-year-old vehicles.”
One 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 an 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 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 imagine if the difference in increased fuel costs was only 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 influenced by the fuel-efficient designs from Asian manufacturers, designed to handle the high taxes on Japanese gas and the shortage of open roads and parking space on the islands of Japan. Understanding the American tastes requires us to understand the differences in our driving habits and the luxuries of smooth, open roads that Americans can enjoy, foreign drivers are often limited in their ability to appreciate American tastes for size and horsepower.

However, in Australia, with road systems similar to the US, a huge market still exists for large SUV’s, trucks and big engine cars. A market that was penetrated in the 1990’s when many Japanese automakers began to design vehicles to cater to the American influenced market, with large gas guzzlers like the Nissan Armada, Toyota Sequoia and Honda Ridgeline ensured import survival during the SUV years, and most notably even 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 sales incentives offered, 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, fuel economy was considerably less important to them than size, safety, reliability and performance. The challenge that lies ahead is not to build smaller, less powerful cars as much as the need to direct energy-saving technology development at the powerful SUV’s and spirited sedans that consumers demand (nada.org).

Because for many Americans the automobile is more than transportation, it is a fashion decision as much as a financial decision, and many Americans have proven for decades that 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.” fueleconomy.gov. 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.” nada.com. 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.

Todd Benschneider

Research Projects and Case Studies in Economics & Management

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