The Al Ries Column


The Boardroom Ignored Market Reality

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Volkswagen just announced that it was withdrawing its luxury Phaeton model from the U.S. market. No surprise there. In the two years since its introduction in November 2003, VW has sold just 3,715 Phaetons.

The Phaeton was Volkswagen's attempt to make a name for itself as a builder of top-end luxury cars.
Why would Volkswagen, a company known for small, relatively inexpensive cars, introduce the Phaeton, a sedan that starts at $68,655 for the V-8 model and goes up to $100,255 for the 12-cylinder version?

Common sense.

Upmarket effort
With the low end of the market being taken over by brands from Japan and Korea (Toyota, Honda, Nissan, Mazda, Hyundai, Kia and others) the folks at Volkswagen figured they would have to move upmarket.

Furthermore, low-cost Chinese brands are poised to enter the American market. With all this competition at the low end, it made sense for Volkswagen to get into bigger, more expensive and presumably more profitable cars.

Hence the Phaeton, a model that would not only stake out a claim at the high end, but whose success would also add luster to the rest of the Volkswagen line.

Actually, the reviews were quite good. Forbes called the Phaeton a "great car." USA Today gave it a glowing review. “Styling is nice. The interior decor sets a standard for class and taste. Comfort is exceptional. Driving personality is ever-so-lovely. Power’s right.”

'Magnificent vehicle'
Business 2.0 was even more laudatory. “It might be the most compelling luxury vehicle currently sold. It is overwhelmingly the best value among high-end luxury cars. Without question it is a magnificent vehicle.

“And yet the company can’t give them away,” reports the magazine. “Blame two minor faults: a VW badge on the front grille, and another on the trunk.”

I can visualize what happened in the boardroom. Grown men, with decades of experience in the automobile field, sit around a conference table and decide to launch a Volkswagen vehicle with a price tag approaching six digits.

(I don’t know of anyone with as little as three weeks of marketing experience who would think that was a good idea.)

Similar situation at Wal-Mart
What happened at Volkswagen is also happening at Wal-Mart. Management thinks, We’re getting a reputation for selling nothing but cheap merchandise. So what is Wal-Mart doing? Advertising in Vogue magazine and selling diamond rings, some costing as much as $9,988. (Phaeton owners now have a reason to shop at Wal-Mart.)

There is a gulf as wide as the Seine between management and marketing. What divides the two is common sense. On the right bank are the management people who approach every situation in a sane, sensible way. Their emphasis is always on the product. “If we can produce a better product at a better price, we can win the marketing battle.”

On the left bank are the marketing people who approach every situation from the prospect’s point of view. Their emphasis is on perception. “How do we improve sales by enhancing the perception of the brand.”

Guess who’s winning? It’s not the marketing bank. Look at the struggles at General Motors. I have read dozens of stories about the problems at GM and the solutions suggested are always the same. Improve the products. Cut the costs. Reduce the prices.

These are not solutions suggested by “marketing-type” people. These are solutions suggested by “management-type” people.

Ruling the boardrooms of the world
Common sense rules the boardrooms of the world. Whenever a company has an important decision to make, they invariably make the “right” decision. That is, the decision that would be applauded on the right, or logical bank.

What chief executive said, “This is our surest move ever” regarding the launch of a new product that would make or break his company?

It was Roberto C. Goizueta, a former chairman of Coca-Cola who confidently predicted the success of New Coke. How could it miss? The company conducted almost 200,000 consumer taste tests that proved conclusively that New Coke tastes better than the original formula.

And doesn’t the better product win in the marketplace? Common sense says it does. And common sense is the driving force in business today.

Take brand line extensions, which have become an article of faith in the management community. I have fought repeatedly with many management people on this issue.

Guess what name Western Union decided to use when the company went into the telephone business? It was a common-sense decision. Western Union was a well-known company with more than a hundred years of history. Why couldn’t they use their famous, old Western Union name on their new phone business?

It was the “right” decision, of course, but one that eventually caused the company a $600 million write-off.

Guess what name Xerox decided to use when the company went into the mainframe computer business to compete with IBM?

Dell computers
Guess what name IBM decided to use when the company went into the personal computer business? And guess who won the PC battle? A battle that took place between the world’s most powerful company at the time (IBM) and a sophomore at the University of Texas (Michael Dell). Common sense would have told you that Dell didn’t have a chance.

Guess what name Barnes & Noble decided to use when the company launched an Internet book site to compete with

Names don’t matter. It’s the product that counts. That’s common sense. I’ve heard that sentiment expressed many times and in many different ways by many different management people in many different boardrooms.

When Eastern Airlines got into trouble, I suggested to the president at the time, former astronaut Frank Borman, that perhaps the problem was the name itself. What you overlook, Mr. Borman replied, is the fact that “the name now has some 47 years behind it.” Common sense would have told you that you don’t change a name that is 47 years old.

(Eastern managed to live only until the age of 60 before filing for bankruptcy protection.)

Also living with the management people on the right bank are the lawyers and the accountants. They get along quite well.

Ignoring the marketing department
When management has a legal problem, it turns to its lawyers and invariably takes their advice.

When management has an accounting problem, it turns to its CPAs and invariably takes their advice.

When management has a marketing problem, it turns to its marketing department and says, "We’ll do it my way because marketing is just common sense." And no one has more common sense than the CEO, right?

What should Eastern Airlines have done?

Change the name? No, people would have thought that it’s the old Eastern Airlines with a new name.

Change the planes? Perhaps by adding leather seats and audio consoles? No, you can’t win that way.

If the improvements are any good, competition will quickly catch up. If they’re not, all you’ve done is add to your costs.

My recommendation? Merge with Western Airlines to create a legitimate reason for changing the airline’s name. Furthermore, the combination of the two would be perceived as a “national” airline, erasing the airline’s old “up-and-down the East Coast” reputation.

(Western Airlines at the time was a viable merger candidate. It was eventually bought by Delta, an airline that didn’t need a new name.)

And what should Volkswagen do?

From a marketing point of view: Go back to what made the brand famous. Small, ugly, reliable cars.

From a management point of view: Build ‘em in China.

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Al Ries is the author or co-author of 11 books on marketing, including his latest, The Origin of Brands. He and his daughter Laura run the Atlanta-based marketing strategy firm Ries & Ries. Their website:

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