When New Products

and Customer Loyalty

Collide
by Regina Fazio Maruca and Amy L. Halliday

Harvard Business Review

Reprint 93608

C A S E

S T U D Y

Pacer Shoes expanded its line

and entered a new market.
Now the returns are coming in,
and theyre not good.

When New Products

and Customer Loyalty
Collide
by Regina Fazio Maruca and Amy L. Halliday

Henry Carson, president and CEO

of Baltimore-based Pacer Athletic
Shoes, stood at the edge of the track
behind company headquarters and
watched as the fourth group of runners completed their final lap. They
were testing a new line of running shoes, now in the final design
stages, which Pacer planned to introduce in 1995. Henry examined
the cracks on the surface of the
track. He had hoped to put in a new
one next spring, but right now he
wasnt so sure that the company
would have the resources.
As the runners began a cool-down
walk, vice president Sarah Levine
joined Henry, looking perturbed.
Did you read that letter I left on
your desk this morning? she asked.
I did, Henry squinted at her in
the afternoon sun. I guess we cant
approach Cal Linden for an endorsement now, can we. And I was really
looking forward to wooing Michael
Jordan too.
Sarah didnt laugh at his gallows
humor. Given Pacers tight budget,
the company had never paid athletes
for endorsements.

Thats a joke, Sarah. He tapped

her arm.
I know, she said. I just wish we
would get some good reviews for
a change.
Henry nodded. The letter, waiting
on top of his In pile, was the first
thing hed read that
morning, and it had
started his day on a
sour note. Henry took
pride in the number of
serious runners who
praised the technical
excellence of his shoes
and who had formed the core of Pacers customer base from the companys early years. Criticism from Cal
Linden really stung. Cal was a former Boston Marathon winner and
a longtime fan of Pacers flagship
shoe, the Pacesetter. His support for
the companys new models, intro-

duced in June to upgrade the Pacesetter line, would have been a real
boon. More important, it might have
boosted sluggish sales, which for the
past couple of months had worried
Henry more than he wanted to admit to any of his staff.
If Sarah had been mean-spirited,
she might have said, I told you so.
Two years ago, when Henry had
broached the idea of upgrading the
companys offerings each season and
introducing a line of walking shoes,
she had opposed the plan. Indeed,
Henry had had inner reservations
about making such a move.
In the 1970s, when he had been
a mid-pack marathoner, Henry had
started the company to serve runners like himself. Back then, he had
viewed himself as an entrepreneur
with a mission, not as a corporate
empire-builder. He had never imagined that his tiny operation, making
80 pairs of shoes a day, would become a $10 million company. But almost without his realizing it, the
company had done just that. By
1990, Pacer was producing 1,000
pairs a day and employing 46 people,
with 35 production workers, two designers, and two pattern engineers.
And, like many other athletic shoemakers, the company had long since
stopped making all its own components two plants in South Korea
produced most of its uppers.

Henry viewed himself as

an entrepreneur, not a
corporate empire-builder.

Regina Fazio Maruca is an associate

editor and Amy L. Halliday is a
manuscript editor at HBR. Michael
Featherston, managing partner of
Lotto Sport, U.S.A., based in Dallas,
Texas, helped develop this case.

At the beginning of 1991, Henry

thought that Pacer was solid, stable,
and as big as it was going to get. But
then the 1990 industry statistics
were published, and he decided he
had been wrong. The athletic-shoe
market was booming, and the industrys largest players were going after
all the share they could get. Henry
began to fear that it was only a matter of time before they targeted his
small following. If they did, with
their vast resources and marketing
abilities, they could easily blow Pacer out of the water.

Copyright 1993 by the President and Fellows of Harvard College. All rights reserved. HARVARD BUSINESS REVIEW

November-December 1993

C A S E

And when Henry commissioned

a customer profile from the leading
industry research firm, the results
seemed to confirm his fears. Pacer
was holding onto many of its longtime customers and even gaining
some younger runners. But the studies also showed that as many as 10%
of former Pacer wearers were being
lured by the flashier shoes of the industry giants.
As far as Henry could determine,
the company had been left with no
choice. It had to fight to hang onto
the serious runners who had always
bought Pacer shoes and win consumers who might be attracted by
competitors high-performance models. But in order to survive, it also had to build a following in the
broader market of casual runners
and walkers. So despite reservations
voiced by Sarah and a few other colleagues, he had gone ahead.
By now, the test runners had
changed into their own sneakers and
were standing on the side of the
track, filling out questionnaires.
Henry mustered a smile for Sarah. I
dont know what Cals problem is.
The Pacesetter Plus is the best shoe
Ive ever run in. It feels great. And
the designers think its a better shoe.
But lets remember, we would have
been naive to think that our new
plan was going to please everyone.
Sarah frowned. This isnt the first
letter like this weve received, she
reminded him. Im afraid those extra magazine ads we ran are confusing old customers, not attracting
new ones you know the reps say
that the first quarter reports are way
off our projections. And we seem to

n:
may concer
To whom it
you first
omer since
st
cu
r
. In
ce
ck in 1975
a loyal Pa
er model ba
tt
Ive been
d me
se
le
ce
el
Pa
er prop
th your
e Pacesett
th
came out wi
at
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y
ed to sa
fact, I us
.
ass status
cl
de?
to worl
shoe anymor
find this
e
I
th
t
t
n
ou
ca
ab
g on
ed? Why
ne ads goin
dWhat happen
zi
en
ga
an
ma
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l thes
Old Favori
old
You have al
s from Your
just want my
rd
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da
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bu
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ls
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de
New
nn
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nifty ne
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so
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less list of
a
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s
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d
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tles, an
ba
is
wh
te
d
ri
an
vo
s
fa
ll
s.
t all the be
nning year
shoe withou
st of my ru
re
e
th
r
it fo
ub,
have worn
Running Cl
the Dallas
ing
th
er
wi
nd
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rl
regula
so been
al
ve
ha
s
I work out
mber
been able
an a few me
thing Ive
ly
on
e
and more th
Th
.
tter Plus,
Pacesetter
the Pacese
ed
ll
about the
ca
ride,
g
somethin
s a cushy
midsole. It
to find is
ning
io
er
sh
ft
cu
so
a much
ow that
which has
d. I
ke it. I kn
ar
li
bo
t
er
n
ov
do
y, I
ys went
gu
u
ole
yo
but frankl
wh
t
d my
ght now, bu
pillows, an
o
tw
all
is in ri
on
me
g
ve
tter ga
Im runnin
The Pacese
feel like
.
st
ju
ad
d to re
body has ha
ed.
I ever need
n
io
sh
gh
the cu
e are enou
thing? Ther
t
od
gh
go
ou
a
th
th
never
u mess wi
ready. We
al
Why did yo
et
rk
ma
on the
fad shoes
ll out.
se
d
ul
you wo
Cal Linden

els, the RaceOne, but less than a

week into practice, the toe stitching
on half the pairs started to fray. Pacer
immediately sent her a new shipment, free of charge, and
dispatched a sales rep to
make sure that the relationship didnt disintegrate, but the incident
touched a nerve.
I really dont think its
time to panic, Henry
said. Weve known all
along that there would be some
rough spots. And when I talked to
Sam at the factory, he said that they
just needed some more time to get
up to speed. This is a big project for
them, rolling out 11 new designs
when for the past 15 years theyve

Our regional share is

eroding, and we havent
increased our presence at
all in the broader market.
be getting hit from all sides. What
about that fiasco with the crosscountry team at Westford High?
For the past four seasons, the local
high schools coach had ordered the
teams shoes from Pacer. This year,
she went with one of the new modHARVARD BUSINESS REVIEW

S T U D Y

November-December 1993

been producing only 5. But its not

a long-term problem. Theyre as excited about this as we are.
I know, I know, Sarah snapped.
But just because the industry is expanding doesnt mean that we had
to. Weve got some fierce competition, but we were holding our own.
I mean, we spent 12% of last years
sales on marketing to try to swim in
the same pond as the big fish, but
what are we getting from all this effort? Our regional share is eroding,
and we havent increased our presence at all in the broader market.
HBRs cases are derived from the
experiences of real companies and
real people. As written, they are
hypothetical, and the names used
are fictitious.
3

C A S E

Our walking shoes arent even making a dent. I just dont know what
this company stands for anymore.
Were still going to stand for
technical excellence. Henry started
walking toward the office and motioned Sarah to follow. Thats not
going to change. You werent here
when we used to go door to door to
the local sports stores to sell our
shoes. We had our share of troubles
then too.
And you persevered through all
that and built a strong customer
base, Sarah said. What are those
people thinking about us now? You

S T U D Y

remember when you were a serious

runner, how attached you could get
to one particular shoe. Maybe we
misfired with the Pacesetter Plus.
You thought it was time to upgrade,
and the track tests were positive, but
its clear that at least some of our
customers dont like it. And even if
the consultants said that the climate
was right for expansion, maybe it
wasnt right for us.
You know as well as I do that
were committed to this plan, Henry said. Manufacturing purchase
orders for next season are right
around the corner.

They had entered Pacers modest

lobby. Maybe we should consider
this for next years lineup, Sarah
said. She was pointing at a picture of
the original Pacesetter hanging over
the reception desk. Henry looked
where she was pointing, his lips set
in a tight line. What if the company
did reintroduce the original Pacesetter, he wondered. Was demand for
that shoe so strong that it could
make up for the marketing investment hed made to tout the companys new standards? And what
about company morale? Was it too
late to change course?

Is It Too Late for Pacer to Change Course?

Five experts give their views on the companys options.

Pacer wasnt wrong in trying to

match larger competitors
moves. It just didnt play the
game very well.

THOMAS D. GLEASON, vice chair-

man of Wolverine World Wide, was

CEO of that company for 21 years.
4

Pacer did not make a mistake trying to match some of its larger competitors moves. It just didnt 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 Pacers running-shoe offerings and the introduction of walking shoes. This research should target both dealers and consumers, and
it neednt be complex. The dealer
DRAWING BY NARDA LEBO