Case Analysis: When new products and Customer Loyalty Collide

Situation Analysis :
Pacer did not make a mistake trying to match some of its larger competitors' moves. It just didn't play the game very well. The company should have done more consumer research before making such major changes in its offerings. Going to its most important customers, serious runners, for input on the existing product line and suggestions for improvement might have prevented what looks like a premature change of strategy. That said, there are several things Pacer can do to halt its downward spiral. Henry Carson should have Sarah, or someone, conduct market research to give him a clear picture of how customers are reacting to the changes in Pacer's running-shoe offerings and the introduction of walking shoes. This research should target both dealers and consumers, and it needn't be complex. The dealer survey, for example, could be as simple as sending out a brief letter and questionnaire and following up with personal phone calls to some respondents. The customer survey could start with focus groups and then expand to other, more quantitative types of research. When the information is gathered, Henry will be in a much better position to decide on a future direction for the company. In the interim, Pacer should reintroduce the original Pacesetter model to gain sales from runners who still remember it and to remind consumers of Pacer's performance-oriented running-shoe heritage.

Problem Defintion :
The walking-shoe program should stay on course until the research results come back; there's no sense in making another impulsive decision without solid reasons. When the results are in, then Henry and Pacer's other executives can either junk the program or continue with it. If the research shows that customers like the walking shoes, Pacer should proceed slowly, in a limited number of retail outlets. In today's athletic-shoe market, companies must offer colorful styling and technical innovations to keep up with the competition. Pacer wasn't wrong to take on this challenge. Having too many styles, however, can hurt a small company by bloating inventories and confusing shoppers. Pacer should cut down on the number of new styles it is offering and also try to get better advance retailer and consumer input on potential new styles. In that spirit, how about contacting Cal Linden? Pacer might be able to turn his complaints to the company's advantage. Why not ask him to participate in a panel of experts who advise the company on its shoes? And why not try to sign on other national or regional runners as well to endorse the product? Paid endorsements can be a good investment, and Pacer needs to examine whether or not it is directing its resources to best advantage. For example, what is a company like this doing with a test track? There must be an ego at play here overruling financial common sense. Henry may have wanted the track to boost the company's image, but most companies Pacer's size use facilities at a local high school or college. Pacer is too small to afford such a luxury

Alternatives to be considered :
What are Pacer's distinctive capabilities? What gives the company some kind of competitive edge? Pacer is not the lowest cost producer, nor does it have an established or unassailable distribution system. There's no evidence it currently provides special services (although that might be a possibility for the future). On what basis, then, can Pacer compete? It needs a distinctive niche that it can serve better than any other company. Henry says that Pacer stands for technical excellence, but it is difficult to see where in the company that excellence resides. Certainly not in manufacturing, where Pacer is outsourcing some of its operations and has quality problems even in assembly. In product design, then? Is either of the two Pacer designers producing patentable designs that constitute a defensible advantage in the market, for instance, based on studies showing that Pacer shoes reduce stress on the legs? Unlikely. What Henry seems to mean by technical excellence is that his shoes are better than tennis shoes or inexpensive running shoes. However, the sophistication of other shoe manufacturers has advanced significantly since Pacer's early days. The market definition of technical excellence has probably changed, and there is no evidence that Pacer has responded accordingly. Henry may be able to define a niche for both serious runners and serious walkers by producing a truly superior shoe, but he will need not only a clearer focus but also resources beyond those he has. He should consider hiring a top design-engineering consultant to help, as Reebok did in developing The Pump, a shoe with an inflatable air chamber. Another change since the early days is that Henry no longer represents Pacer's customer: the serious runner. This is a familiar dilemma for many growing companies. Engineers at Hewlett-Packard, for example, started out making measurements and calculators that they themselves were interested in using. Market research, then, meant presenting new product ideas and designs to engineers at the next bench for an immediate reaction. But when the company branched into personal computers and medical equipment, it suddenly had to

find out about the needs of a market that people in the company did not understand initially, let alone represent. Like Hewlett-Packard engineers, Henry must turn to market research rather than relying on his own two feet to guide Pacer's product design and marketing.

Identification of best alternative :

Examining over 50 different flavor types, we discovered that cream soda was uniquely appropriate to A&W. Not only did it fit our core values, but it was a segment with no national competitors, small enough that it wouldn't attract the giants but large enough to generate a significant incremental product stream without major investment. A&W Cream Soda was launched and, as a result, we were able to increase our business by 40% without cannibalizing root beer volume. Pacer should be seeking similar niches that can play off its core values and not put it in the large players' gun sights. Further, Pacer must come to grips with the reality of production. A small company typically doesn't have the staffing to absorb the leap into the mass market. Rolling out 11 new designs in one year is obviously putting an enormous amount of stress on Pacer's production staff. For a company that has prided itself on technical excellence, it is flirting with a major disaster. Its experience with substandard shoes for the Westford High cross-country team should be a wake-up call. Pacer must slow down its line expansion and only introduce new shoes when it is absolutely certain that they can be produced with few (if any) defects. It's time that Henry abandoned the company's "new standards" and returned to the old standards that created Pacer's success. He needs to refocus his advertising on the technical superiority of his shoe and communicate clearly core values to Pacer's target customers. He should study the shoe performance needs of his existing consumer market so that Pacer can do a better job of developing the kind of shoe that serious runners want. Pursuing this strategy certainly won't make him the largest shoe manufacturer in the world. But it will let him strengthen the hold he has on his niche and make it very difficult for competitors to gain share. As all marathoners know, winning the race is achieved by moving quickly and staying focused.

Implementation Plan:
In a dynamic and highly segmented market such as athletic footwear, it's smarter to let your customers drive your strategy. By focusing on customers rather than competitors, a company can uncover differences among market segments and design products and marketing programs that create value for buyers in specific segments. Because customer-oriented companies have a clear understanding of customer needs, they may compete based on meaningful differentiation, not bells and whistles. For example, Pacer could meet the needs of many runners by offering models that help correct pronation or that protect tender knees or backs, as well as models for the competitive runner who needs a basic, well-made shoe. This sort of differentiation would help Pacer avoid head-to-head competition and price competition. Anchor Steam and Samuel Adams have achieved success in the intensely competitive brewing industry by focusing on the tastes of a very selective market segment, not by attacking Anheuser-Busch or Miller Brewing. Henry's first step toward a competitor-centered market orientation has led Pacer into head-to-head competition with the industry giants for customers that the company does not understand. He must bring Pacer's focus back to its core customers. The company's next piece of market research should reveal the needs and desires of serious runners in the 1990s, which are surely different from their needs in the 1970s or even the 1980s. This understanding of serious runners of the 1990s should then drive Pacer's strategy. To position Pacer for long-term success as a niche player in the athletic-footwear industry, Henry must also restore the company's focus on the technical excellence of its products. Pacer should continue producing the original Pacesetter; this shoe is a cash cow, and the company should exploit its substantial equity in the Pacesetter brand name. Beyond that, Pacer's product development should focus on attracting customers that either value similar characteristics in their running shoes or identify with serious runners. For example, the number of offroad runners is growing, and these runners need high-quality shoes with unique traction characteristics. They are also probably aware of Pacer's reputation and would be willing to try a Pacer shoe. Extending into unrelated markets, such as walking shoes, is risky for a company like Pacer, since the company would have to devote considerable resources to reach this group of consumers. An important element in being market oriented is understanding your market well enough to prioritize opportunities and to pursue those opportunities where, with a little stretch, your capabilities create value for customers.