The directors of Early Bird, Inc., were considering whether to begin a sales pro
ID: 354340 • Letter: T
Question
The directors of Early Bird, Inc., were considering whether to begin a sales promotion for their line of specialty coffees earlier than originally planned. Over the last two quarters, they had worked out an extensive deal with the Fair-Trade Coffee Association for shade grown, hand-picked beans. To promote this high-quality coffee, they planned to discount their regular coffee beans as a loss leader, that is, as a way to bring more customers into their stores. The fair-trade label would show that they care about the coffee growers by paying a fair price, and care about the environment by supporting sustainable growing practices. “I think we should go ahead with an early promotion and price cuts,” Tracy Brandon said. “After all, it couldn’t hurt! At the very worst, we’ll sell some coffee cheap for a little longer than we had planned, and on the other side we could beat New Morning to the punch.”
“That’s really the question, isn’t it?” replied Jack Santorini. “If New Morning really is planning their own promotion, and we start our promotion now, we would beat them to the punch. On the other hand, we might provoke a price war. And you know what a price war with that company means. We spend a lot of money fighting with each other. There’s no real winner. We both just end up with less profit.”
Janice Wheeler, the finance VP for Early Bird, piped up, “The consumer wins in a price war. They get to buy things cheaper for a while. We ought to be able to make something out of that.”
Ira Press, CEO for Early Bird, looked at the VP thoughtfully. “You’ve shown good common sense in situations like these, Janice. How do you see it?”
Janice hesitated. She didn’t like being put on the spot like this. “You all know what the projections are for the 6-week promotion as planned. The marketing group tells us to expect sales of 10 million dollars. Our objective is to gain first-mover advantage with this premium high-margin coffee. The fair-trade label will continue our strategy of differentiating ourselves from New Morning as the
coffee shop for connoisseurs. If all goes well, we expect to gain at least two percentage points of market share, but our actual gain could be anywhere from nothing to 3, 4, maybe even 5 points. Profits during the promotion are expected to be down by 10%, but after the promotion ends, our increased market share and differentiation strategy should result in more sales, higher margins, and more profits.”
Tracy broke in. “That’s assuming New Morning doesn’t come back with their own promotion in reaction to ours. And you know what our report is from Pete. He says that he figures New Morning is up to something.”
“Yes, Pete did say that. But you have to remember that Pete works for our advertising agent. His incentive is to sell advertising. And if he thinks he can talk us into spending more money, he will. Furthermore, you know, he isn’t always right. Last time he told us that New Morning was going to start a major campaign, he had the dates right, but it was for a different product line altogether.” Ira wouldn’t let Janice off the hook. “But Janice, if New Morning does react to our promotion, would we be better off starting it early?”
Janice thought for a bit. Her immediate concern was the extra pressure that an earlier-than- expected promotion would put on their supply chain. If sales of their fair-trade coffees took off, then they might not have a sufficient supply to meet demand. The last thing she wanted was to disappoint consumers. Add to this the downward pressure on profits from a promotion by New Morning, and Janice was starting to realize the complexities of their situation. If she were working at New Morning and saw an unexpected promotion begin, how would she react? Would she want to cut prices to match the competition? Would she try to stick with the original plans? Finally she said, “Look, we have to believe that New Morning also has some common sense. They would not want to get involved in a price war if they could avoid it. At the same time, they aren’t going to let us walk
away with the market. I think that if we move early, there’s about a 30% chance that they will react immediately, and we’ll be in a price war before we know it.”
“We don’t have to react to their reaction, you know,” replied Ira. “You mean,” asked Jack, “we have another meeting like this to decide what to do if they do react?”
“Right.”
“So,” Janice said, “I guess our immediate options are to start our promotion early or to start it later as planned. If we start it now, we risk the possibility of not meeting consumer demand and a strong reaction from New Morning. There is only a small chance, say 10%, of demand outpacing supply. If
New Morning does react, then we can decide at that point whether we want to cut our prices further.”
Jack spoke up, “But if New Morning reacts strongly and we don’t, we would probably end up just spending our money for little financial gain. While we would further differentiate ourselves, we would gain no market share at all. We might even lose some market share. If we were to cut prices further, it would hurt profits, but at least we would be able to preserve what market share gains we had made before New Morning’s initial reaction.”
At this point, several people began to argue among themselves. Sensing that no resolution was immediately forthcoming, Ira adjourned the meeting, asking everyone to sleep on the problem and to call him with any suggestions or insights they had.
a. Based on the information in the case, what are Early Bird’s objectives in this situation? Are there any other objectives that you think they should consider?
b. Given your answer to the previous question, what do you think Early Bird’s planning horizon should be?
c. Identify the four basic elements (values, decisions, uncertain events, consequences) of Early Bird’s decision problem.
“That’s really the question, isn’t it?” replied Jack Santorini. “If New Morning really is planning their own promotion, and we start our promotion now, we would beat them to the punch. On the other hand, we might provoke a price war. And you know what a price war with that company means. We spend a lot of money fighting with each other. There’s no real winner. We both just end up with less profit.”
Janice Wheeler, the finance VP for Early Bird, piped up, “The consumer wins in a price war. They get to buy things cheaper for a while. We ought to be able to make something out of that.”
Ira Press, CEO for Early Bird, looked at the VP thoughtfully. “You’ve shown good common sense in situations like these, Janice. How do you see it?”
Janice hesitated. She didn’t like being put on the spot like this. “You all know what the projections are for the 6-week promotion as planned. The marketing group tells us to expect sales of 10 million dollars. Our objective is to gain first-mover advantage with this premium high-margin coffee. The fair-trade label will continue our strategy of differentiating ourselves from New Morning as the
coffee shop for connoisseurs. If all goes well, we expect to gain at least two percentage points of market share, but our actual gain could be anywhere from nothing to 3, 4, maybe even 5 points. Profits during the promotion are expected to be down by 10%, but after the promotion ends, our increased market share and differentiation strategy should result in more sales, higher margins, and more profits.”
Tracy broke in. “That’s assuming New Morning doesn’t come back with their own promotion in reaction to ours. And you know what our report is from Pete. He says that he figures New Morning is up to something.”
“Yes, Pete did say that. But you have to remember that Pete works for our advertising agent. His incentive is to sell advertising. And if he thinks he can talk us into spending more money, he will. Furthermore, you know, he isn’t always right. Last time he told us that New Morning was going to start a major campaign, he had the dates right, but it was for a different product line altogether.” Ira wouldn’t let Janice off the hook. “But Janice, if New Morning does react to our promotion, would we be better off starting it early?”
Janice thought for a bit. Her immediate concern was the extra pressure that an earlier-than- expected promotion would put on their supply chain. If sales of their fair-trade coffees took off, then they might not have a sufficient supply to meet demand. The last thing she wanted was to disappoint consumers. Add to this the downward pressure on profits from a promotion by New Morning, and Janice was starting to realize the complexities of their situation. If she were working at New Morning and saw an unexpected promotion begin, how would she react? Would she want to cut prices to match the competition? Would she try to stick with the original plans? Finally she said, “Look, we have to believe that New Morning also has some common sense. They would not want to get involved in a price war if they could avoid it. At the same time, they aren’t going to let us walk
away with the market. I think that if we move early, there’s about a 30% chance that they will react immediately, and we’ll be in a price war before we know it.”
“We don’t have to react to their reaction, you know,” replied Ira. “You mean,” asked Jack, “we have another meeting like this to decide what to do if they do react?”
“Right.”
“So,” Janice said, “I guess our immediate options are to start our promotion early or to start it later as planned. If we start it now, we risk the possibility of not meeting consumer demand and a strong reaction from New Morning. There is only a small chance, say 10%, of demand outpacing supply. If
Explanation / Answer
A) Given the focus that is being put on market share and beating New Morning, two basic objectives of Early Bird can be deduced. They are:
1) Gain at least 2% market share.
As can be seen from Janice Wheeler said, even if they compromise a little on profit margins, their improved market share would help them counter it. This suggests that 'improving market share' is of utmost importance to Early Bird inc. They also wanted to gain a first mover advantage in premium high margin coffee segment.
2) Differentiation and Enhancement of public image.
Early Bird wanted to differentiate themselves from coffees sold by New Morning and others and mke sure that they create an ever lasting space in the minds of the customers.
One more objective that they should probably consider is 'maintaining a certain degree of profit margin'. As can be seen from te case it is an important thing for Early Bird and hence it should act as a direct objective instead of acting as a constraint under which the decision is to be taken.
B) The planning horizon should be at least two promotion cycles, or one promotion cycle + 3/4 months. This is because Early Bird, after promotional time, would need to analyse the results of promotions with regards to sales, market share etc. and then take corrective measures. For this one cycle is too small a time period. Also, changing promotional strategy in the midst of the promotional time can confuse the customers and make them feel alienated about what's happening in the company.
C) Four Basic Elements are:
1) Values - Early Bird wanted to differentiate themselves from the competitors and carve a name for its coffee. They wanted to show that the fair-trade label of coffee cares about the coffee growers by paying a fair price, and care about the environment by supporting sustainable growing practices. Early Bird believed that this value based positioning would help them create a niche in the minds of the customers
2) Decisions - The decision that they needed to take was 'whether to go for early sales promotion launch or hold it back till the earlier decided time'.
3) Uncertain Events - Uncertain Events in this case are 'How New Morning would react to Early Bird's decision of launching sales promotion earlier than expected' and 'would they be drawn into a price war by New Morning'.
4) Consequences - Positive consequences can be 'shocking New Morning and creating a niche in customers minds along with increase in market share'. Negative consequences can be 'Decrease in profit margins due to price war and spending too much without any results'.