Final Exam Questions
Course 62.601 (Customers and Markets)
Fall 2014 / Professor Tao (Tony) Gao
Question 1:
I recommend CDT to introduce accessories for music, movies and video game fans as a new category of products. These accessories include posters, clothes, cups, and so on. These accessories related to a specific movie or famous star, for instance, a T-shirt with a theme of Star Wars.

As CDT is a store for music lover and movie lover, this new category can attract these customers’ attention when they looking for their entertainment products. Based on the customer survey, 56% of customers are between 18 and 36 years old, these young customers more like to purchase the accessories for collecting. The accessories for music and video are a new trend that more and more famous singers and movie companies like to release some accessories about their music and movies to earn more money. It provides a new way for CDT to compete with these mass merchandise stores. These merchandise stores are only sell CDs and movies, they do not sell these accessories. In addition, these accessories are high profit products. If CDT introduces this new category, it will bring high profits to CDT. It is a good category for CDT’s long-term business. The digital downloading and piracy significantly affect the sales for CDT’s traditional business. However, the new category will not affected by digital downloading and piracy, so it may be a good way for CDT to focus on it.

Question 2:
1. Introducing accessories as a new category of products for CDT. This strategy is a SO strategy. In this strategy, the Strengths are CDT has many satisfied and loyal customers, and its knowledgeable staff has many existing experience selling music and movie products. The Opportunity is customers continue to have entertainment needs and demand more value in entertainment purchases. These accessories can meet customers’ needs, and expand its merchandise scope. It is also a good strategy to compete with large retailers.

2. Online purchase. It is a SOT strategy. There are two Strengths in this strategy. The first is good brand recognition among customers. The second is there are many existing inventory of music, movies, and video games. The Opportunity is more and more people want to purchase online. Moreover, the Threat is CDT needs to compete with many large online retailers, like Amazon. In this strategy, CDT can use its strength to provide abundant music, movies, and video games online, and customer like to purchase on CDT’s website due to the brand recognition.

3. Providing rent service for movies and video games. This is a SO strategy. The strength is there are many existing inventory of movies and video games. The Opportunity is it can meet customers demand in entertainment needs. It is a good way to compete with piracy and digital downloading, because customers only need a little of money to meet their entertainment needs. Also, based on customer survey, 51% of customers did buying and selling in CDT, it means 51% of customers like to trade-in their used products and buy other products again and again, it look like rent. Therefore, it is reasonable for CDT to provide rent service.

4. Using social media to promote. This is a SO strategy. The Strength is CDT has a high brand recognition among its customers. Moreover, the Opportunity is customers continue to have entertainment needs. CDT can use the social media to promote some new products, and these customers would like to pay attention to CDT’s social media to get news about CDT from it. In addition, CDT can communicate with customers using social media.

5. Following the trend of entertainment products. This is a SOT strategy. The Strengths are CDT has 27 stores and many inventory of music, movies, and video games. The Opportunity is consumers continue to have entertainment needs. The Threat is that technological advancements in entertainment. Blu-ray is a new trend for movie, and PS4 and Xbox One games are trends for video games. CDT should allow customers to trade-in Blu-ray and these new consoles video games, then resell them. CDT also need to sell VHS movies and other old products with discount to decrease its inventory cost. Question 3:
In my opinion, all five strategies above are bold strategy decisions. They will increase CDT’s sales by 50% in different aspects, and increase its relevant to customers finally. All of these strategies based on CDT’s current situation and industry trends.
For the first strategy, it can expand CDT’s merchandise scope and attract more customers to visit CDT’s stores. It is also a new way to compete with large merchandise retailers, like Wal-Mart and BestBuy. In this way, the sales for CDT would increased by 50%.
Consistency: These accessories products related to music, movie and video games, so it is an expansion of CDT’s business scope. These accessories can sell at a relative high price, because its target customers are fans for different music, movies, and video games, they seldom to care about the prices of these products. It can bring a high gross margin for CDT.
Consonance: Now, more and more music albums, movies, and video games like to release collection edition and many other accessories for fans to purchase, it is a new trend for entertainment products. The sales for these accessories will increased year by year.
Advantage: By adding this new category to CDT, it can raise CDT’s competitiveness, because customers cannot purchase these accessories from Wal-Mart, and BestBuy.
Feasibility: As CDT’s staff is knowledgeable staff, so they can promote these accessories as well as CDs and DVDs. Moreover, these accessories are only needs little spaces to display. They can display these accessories on the related goods shelf.

For the second strategy, it is can expand CDT’s business scale, and it can be a national retailer for used entertainment products. Customers can purchase the used CDs and DVDs online, and find the products list online easily. It is a convenience way for shopping.
Consistency: CDT already had an online presence, but it is not a perfect online shopping service. CDT should upgrade its online shopping service, and provide All Access Pass program with online shopping. In this way, customers can shopping online without going to the store and finding their CDs and DVDs. Customer who live far away from CDT can purchase the products from CDT. It is an effective way to increase sales.
Consonance: Online shopping is a trend, there are many retailers provide online shopping service. However, only few of retailers, like eBay and Amazon third party seller, provide used product online. These sellers are personal, so it is so hard to make sure the quality of products. It is an opportunity for CDT to provide online shopping service, and it may be a successful platform for selling used entertainment products.
Advantage: Online shopping provides a new way for CDT to compete with some large retailers. It also can expand CDT’s business scale, and provide a convenience way for customers to find their products online.
Feasibility: As CDT already had a basic online presence, it only need little budget to upgrade its online shopping service. In addition, CDT needs to hire some technical employees to maintain the website.

For the third strategy, it is providing rent service for movies and video games to customers. It provides a cheaper way for customers to meet their entertainment needs. As many movies and video games are only need to play once, so it is not necessary to purchase it. Many customers like to trade-in used movies and video games and purchase another one after playing them. It just likes a rental. Therefore, it is a popular service for movie fans and video game fans.
Consistency: Rent service can bring more sales for CDT. For instance, if the price for a Blu-ray movie is $40, and trade-in by $20, the rent fee is $10, it only need to rent twice to cover the cost, and it also can be bought by customer with the price higher than $20. Therefore, it is a profitable service for CDT.
Consonance: Rent service is also a new trend for entertainment products. Even for digital downloading products, people also can rent digital copy on iTunes and other online providers. However, rent DVDs and Blu-rays are a convenience way, as customers do not need to download it before playing it.
Advantage: It can raise CDT’s competitiveness among its competitors, because both of Wal-Mart and BestBuy do not provide rent service. It also can use low rent strategy to compete with other rent providers.
Feasibility: It is an easiest strategy for CDT to implement. It has many inventories of movies and video games to support this service.

For the fourth strategy, it is using the social media, like Facebook and Twitter, to promote their products and announce some events. It provides a platform for customers to communicate with CDT. In addition, it can help CDT to know what product customer really need.
Consistency: This strategy cannot increase sales directly, but can increase the relevance to customers. It is a platform for CDT to communicate with its customers, and increase its brand recognition.
Consonance: Due to more and more companies like to use Facebook and Twitter to communicate with their customers, and the effect is very good, CDT can use the social media to promote its products and announce some events. It is a low cost advertisement.
Advantage: It is a low cost way to promote, and helps CDT to understand what products customers need. It can mitigate the weakness of limited merchandise scope.
Feasibility: The social media account needs employees to manage it. The managers for each store may be a good choice, because they understand their customers so that they can communicate with them better.

The last strategy is following the trend of entertainment products. In this strategy, CDT recommends customers to trade-in Blu-Ray movies and PS4 and Xbox One games in relative high prices, and sells the VHS movies and old games in a discounted price.
Consistency: This strategy aim to update CDT’s products, even with a high trade-in price. However, it still can increase sales while Blu-Ray and new games for new console will be popular in the future, and CDT can resell them with a higher price.
Consonance: As VHS movies and games for old console, like Super Nintendo, are not popular now, and customers more like to purchase Blu-Ray movies and games for new consoles. For a long-term business, it is necessary for CDT to update its products to new generation as quickly as possible.
Advantage: It can expand CDT’s merchandise scope and raise its competitiveness. Customers prefer to buy a used Blu-Ray or new generation game with a low price, rather than a new one with a high price.
Feasibility: Trade-in these new movies and new games with a high price can encourage customers to these products. CDT also can provide other rewards to encourage customers to do this.

Question 4.1:
In my opinion, the key decision issue Citibank faced belongs to product expansion. According to the Citibank case, Citibank wants to make a decision whether to launch its credit card in Asia Pacific market. However, Citibank have entered the Asia Pacific market for 11 years, so Asia Pacific market is a present market for Citibank. Citibank have already had its consumer business in Asia Pacific, however, its credit card is a new product to this market. So, it is a decision that bringing a new product to the current market. Based on the Product-Market Growth Directions, it is a decision for product expansion. Citibank wants to launch its credit card to expand its customer base, so that Citibank can cross-sell its other products and services to these customers. It aims to increase its market share in Asia Pacific.

Question 4.2:
Based on the content from the textbook, there are four significant conditions for triumph in global expansion. The first condition is a strong core. For Citibank, it was the largest banking company in the United States and ranked eleventh in the world. Therefore, it has a strong home market, and Citibank can use its resources and experience to support its global expansion. For the second condition, which is a repeatable formula for expansion. Citibank has expanded its services into 9 million households in 15 countries outside the United States, and based on the Exhibit 2, it has 2,180 offices and branches overseas, its global expansion is successful, so it has a repeatable formula for expansion. Customer differentiation that travels is the third condition. In Asia Pacific market, there are many developing countries and consumers’ attitudes and credit card usage patterns differed country by country. In these developing countries, there are little high-income population, and a high level of fraud. It would be a potential risk for Citibank to launch its credit card in this market. The last condition is industry economics. As many developing countries in this market, the economic scale in Asia Pacific may be limited. However, the economic growth rates in these countries are higher than developed countries. According to Exhibit 4, six out of eleven countries have a growth rate higher than 7%. This market has great potential for Citibank to launch its credit card.

There are several basic dimensions to determine whether to enter market. Asia Pacific market is a high growth rate market, and the market size is large. However, the quality consumers for Citibank is very small, because there is few of high-income population in some countries, like Thailand and Philippines, based on Exhibit 8. Citibank can launch its credit card in some relative developed countries, like Hong Kong and Singapore. The competitors in this market are mainly local banks and American Express. These local banks provide local-currency credit cards, and American Express provides U.S.-dollar credit cards. Therefore, it is hard for Citibank to determine which type of credit card to issue. Citibank cannot implement its business model in some countries, because some countries have some regulations to foreign banks. The barriers are so hard for Citibank to overcome. However, Citibank can use telephone service to serve its customers. Based on Exhibit 4, India, Indonesia, and Philippines have some political or economic risks. It would increase the potential risk to enter these countries, so it is better to avoid enter these countries.

In conclusion, Citibank can launch its credit card in Hong Kong, Australia, Singapore, and Taiwan, because these countries have a high business scale and a high economic growth rate. The percentage of urban population and percentage of high-income population are also very high among these countries in Asia Pacific. Other countries lack of infrastructural support, and have a relative high risk to enter, such as high barriers and a high level of fraud.

Question 4.3:
According to the case, the Qualification Rate for direct mail and direct sales are two-thirds, and the Qualification Rate for take-ones and bind-ins are one-third. The Conversion Rate, based on the case, is over 80% of qualified prospects. In the calculation, I use 80% as the Conversion Rate. For direct sales force, we need to calculate the number of sales person. As they make 10 calls in one day, and there are 365 days in one year, one sales person can reach 365 × 10 = 3650 prospects. Moreover, the total prospect reached is 30,000, so there are 30,000 / 3650 ≈ 8.22 sales person, and I use nine sales person in this calculation. The formulas shown below:
The Number of Qualified Prospects = Prospects Reached × Response Rate × Qualification Rate
The Number of Final Customers = the Number of Qualified Prospects × Conversion Rate
Total Acquisition Costs = Prospects Reached × Unit Cost (or = the number of sales person × Unit Cost)
Average Acquisition Cost = Total Acquisition Costs / the Number of Final Customers The Excel sheet attached in the end of this paper.

Question 5:
Table 1: Aldi | * Superior customer experiences (1) * Value (2) * Quality (3) * Appealing design (4) * Brand familiarity (5) * Being global * Niche specialist | Aqualisa Quartz | * Attribute or benefit (1) * Quality (2) * Value (3) * Appealing design (4) * Niche specialist (5) * Superior customer experiences * Brand familiarity * System solutions * Being global | Progressive Insurance | * Value (1) * Quality (2) * Superior customer experiences (3) * Attribute or benefit (4) * Niche specialist * Brand familiarity | Citibank | * Superior customer experiences (1) * Quality (2) * Being global (3) * Niche specialist (4) * Value (5) * Self-expressive benefit |

In Table 1, I have identified some key value propositions for Aldi, Aqualisa, Progressive Insurance, and Citibank. I also listed some key applicable value propositions in bold, and ranked them. For Aldi, as a grocery store chain, customer experience is very important, an excellent customer experience will increase customer’s satisfaction. Value is also important, because a low cost strategy will bring Aldi a high profit and a low price to customers. Customers want to spend little money on high quality goods, so quality is also very important. The appealing design is important to every brand. A credible and visible appealing design can attract customers’ attention, and customers would be very happy to visit. Aldi also need to focus on its brand familiarity, because customers always like to purchase all goods they need in one grocery store. A good brand familiarity will make customers more willing to Aldi.

For Aqualisa Quartz, it is a shower manufacture, so the products attributes and quality is significant to Aqualisa. Different products with different attributes can target different customer segment, and the quality is always the most important factor for customer to choose. A low strategy can help Aqualisa to earn more profit on its products. A good appealing design will attract customers to purchase its product. For some customers, the design is more important than product’s function. Becoming a niche specialist can help Aqualisa to be a lead in this industry, and it will give Aqualisa many advantages to compete with other competitors.

For Progressive Insurance, it is an insurance company. Insurance industry is a mature industry. There are many competitors in this industry. As many competitors in this industry are facing loss in their insurance products, it is important to Progressive to implement a low cost strategy. In addition, the insurance products are not differentiated goods. Therefore, the best way to compete with other companies is to improve its service quality and enhance customer experiences. Progressive also can use product innovation to create more benefits to its insurance.

For Citibank, it is a financial institution, and providing financial services to customers. Therefore, the superior customer experiences and excellent service quality are important to Citibank. Being global can help Citibank to do its business global, and provide its services to global customers. It is another way to improve its service quality. To be a niche specialist can help Citibank to manage its customers’ asset better, and become more reliable to its customers. The lower cost will bring more profit to Citibank, and it will give Citibank a cost advantage to compete with local banks while global expansion.

Question 6:
“The Value Option” has three parts, which are low-cost culture, cost advantage, and value perceptions. For low-cost culture, Aldi is a grocery store chain providing high quality goods in low prices. Its low-cost culture focused on cost reduction, and the brothers made a conscious decision to add the principle of low prices to Aldi’s concept.
Aldi has many cost advantages to support its low prices strategy. First, its private label products have high qualities and low prices, this made Aldi hard discounter. Aldi produced these products and sold by themselves, it is a best way to reduce costs. Not like the branded products, Aldi does not need to pay distribution cost and other costs to the manufactures or distributors. In addition, its private label products can be no-frill products. It is a direct approach to lower its costs. Aldi’s private label products held a 16.7% market share of total food retail sales and approximately half of all private label sales in Germany. Its private label products have large-scale economies. The scale effect reflects the efficiencies associated with size. Aldi’s fixed costs, such as advertising, sales force, can be spread over more units. In this way, Aldi would have a higher cost advantage with larger scale economies. For Aldi’s operations, its operations are organized in cells, and one cell consisted of 50 to 80 stores in a specific region and have one distribution center. The distribution centers can reduce its distribution costs directly, and Aldi’s suppliers pay for the shipping to its distribution centers. To keep the quality of goods, they never keep their stock more than 24 hours. The experience curve effects will affect Aldi’s low cost strategy in many aspects. For its private label products, the cost of these products will decline at a predictable rate, because the accumulated experience in manufacturing these products. The costs of distribution center will also decline with the accumulated experience in managing it.

For value perceptions, as price is often a quality cue, low prices always mean poor qualities. However, Aldi is stringent with quality. All products are tested carefully. To achieve high market share, the products’ prices are often 20 to 30 per cent below those in regular supermarkets. Aldi also employed an everyday low price strategy to promote some goods. These goods are stocking with limited quantities to attract its customers to purchase. Overall, Aldi does very well in its low price strategy. “The Value Option” can explain it very well.
Exhibit for Question 4.3: Channel | Unit Cost ($) | Prospects Reached | Response Rate | # of Responded | Qualification Rate | Direct Mail | 1.5 | 300,000 | 2% | 6,000 | 2/3 | Take-Ones | 0.25 | 2,000,000 | 1.50% | 30,000 | 1/3 | Direct Sales | 18,000 / sales person | 30,000 | 50% | 15,000 | 2/3 | Bind-Ins | 0.15 | 3,000,000 | 1% | 30,000 | 1/3 | # of Qualified Prospects | Conversion Rate | # of Final Customers | Total Acquisition Costs ($) | Average Acquisition Cost ($) | 4,000 | 80% | 3,200 | 450,000 | 140.625 | 10,000 | 80% | 8,000 | 500,000 | 62.5 | 10,000 | 80% | 8,000 | 162,000 | 20.25 | 10,000 | 80% | 8,000 | 450,000 | 56.25 |