Stock Valuation Assignment (Fall 2017 Data)

The purpose of this analysis is to find an intrinsic value for Microsoft (MSFT) using the both the Constant Dividend Discount Model (DDM) and the Non-constant DDM. You will need to (1) estimate Beta in order to calculate the required return for MSFT; (2) estimate dividend growth rate; and (3) estimate future dividends.   

Submit your Excel spreadsheet with all data and formulas so that your answers can be replicated. You may answer the questions on the spreadsheet. HOWEVER, WRAP YOUR TEXT!!! I do NOT want to see text running across 40 columns. Remember, Excel is not a word processor. Do a simple draft print to see if your output is in readable form. Follow instructions as written. NEATNESS AND ORGANIZATION MATTERS!

You are analyzing Microsoft to find an intrinsic value for Microsoft (MSFT) using the both the Constant Dividend Discount Model (DDM) and the Non-constant DDM. I have provided you with an Excel spreadsheet of monthly prices (121 months) from Sept 1, 2007 to Sept 1, 2017). These prices have already been adjusted for dividends. List dates and prices out on your spreadsheet in order to calculate monthly returns.

Using the prices provided, calculate the monthly returns for each of the stocks, where r = (P_t/P_t-1) – 1; which is the same as [(P_t-P_t-1)/ P_t-1] as I covered in the Lecture Video. PLEASE NOTE THAT THE DATA IS LISTED FROM SEPT 2007 TO SEPT 2017! SO BE CAREFUL WITH YOUR RETURN FORMULA! There are 121 months to calculate 120 monthly returns. You may post monthly returns as decimals to 6 places or percentages to 4 places. For example, average return for MSFT can be written as .009999 or .9999%.

(10 points)

At the bottom of the column for each stock calculate the Average Monthly Return (use AVERAGE() function) and the Standard Deviation [use STDEV.P()] population function NOT STDEV() sample function).

As a check, you should find your average returns to be: MSFT = 1.2310% and SPY = .6861%.

(5 points)

Calculate and Interpret the Correlation Coefficient (r_1,2) between Microsoft (MSFT) and S&P 500 Index (SPY). (use CORREL() function). (5 points)

We can estimate the Beta for MSFT over the 120-month period by running a Regression of SPY returns on the x-axis (independent variable) and MSFT returns on the y-axis (dependent variable). The Beta is the SLOPE of the regression. To find Beta use the SLOPE function in Excel. Be careful use RETURNS NOT prices!

How does your estimate compare to the FinanceYahoo.com beta and the Value Line beta? What does Beta represent? (10 points)

Now, let’s check the stability of Beta. You may again use the SLOPE function in Excel, where SPY is independent & MSFT is dependent variable.

Estimate Beta over the first 60 monthly returns (5 years): October 1, 2007 to September 1, 2012.

Estimate Beta over the second 60 monthly returns (5 years):         October 1, 2012 to September 1, 2017.

What is the beta for each period? Is there a substantial difference between the two Betas?

(5 points)

Given the information below, use the CAPM to estimate the required rate of return for MSFT. Round to 2 decimals, e.g., x.xx%, 1.23%

Return on the market portfolio (SPY) R_SPY = 9.25% (based on 25 years of historical data); the risk free rate is R_f = 3.0% (based on L-T inflation rate of 2.0% & real return of 1.0%); USE MSFT beta estimate: b = 0.97

(10 points)

Based on past trends and ValueLine estimate, let’s assume MSFT will pay a dividend of $1.64 in 2018. Therefore, let’s assume that D₁ = $1.64, because it will not be fully paid until the end of Year 2018. Let’s also assume that MSFT will grow its future dividends at a L-T constant rate of g = 6%. Assuming a required rate of return found in (7) above, estimate the current value of MSFT using the Constant Growth DDM.   Assume that D₁ = $1.64

(10 points)

Now, using the Value Line sheet, estimate the average growth rate of dividends for MSFT over the last 10 years, from 2007-2017? Round your growth estimate to 4 decimal places. [Hint: The Growth rate (g) can be calculated as CPT i on your calculator or in Excel as a TVM problem.

(5 points)

Two-stage Non-constant DDM: Now let’s assume that for the next four years MSFT will grow its dividends at the growth rate you estimated in (9) above. Assuming D₁ = $1.64, what are the dividends for: D₂ ; D₃ ; D₄; and D₅ if they grow at the rate estimated in (9)? You may round each dividend estimate to the nearest penny.

(10 points)

Now, let’s assume that the dividend growth reverts back to a L-T sustainable growth rate = 6% after Year 5 to infinity. Estimate is D₆ and P₅.

(5 points)

Use the Non-constant growth DDM from the Stock Video Lecture (at 17:20) to estimate the current value of MSFT using the dividend information you found in (10) & (11) above; assume a L-T sustainable growth rate of g = 6% after Year 5; and the required rate of return found in (7). [HINT: You already have all the data, not much work left here….find the sum of the PV of the cash flows.]

(10 points)

Which of the two models do you think is more reasonable (Constant DDM or Non-constant DDM)? WHY?

(5 points)

What is the current market price of MSFT? Based on your analysis, would you recommend buying this stock at the current market price? Explain why or why not?

(10 points)

What incentives do local and national governments have to attract manufacturers? What incentives can a government provide?

In the beginning, at least, “I think we were all definitely rooting for the U.S.,” said Rich Juchniewicz, a product developer at Thorley, which markets its baby line under the 4moms brand.For years, the U.S. has ceded more and more of its manufacturing to lower-cost corners of the global economy. No one expects the U.S. to again make most of the electronic gadgets, tools, toys, furniture, lighting and other household products that tally more than $500 billion a year in imports.But some companies contend the U.S. has renewed its attraction. Wages are stable, for example, while China’s have soared. The U.S. energy boom has reduced natural gas prices and kept a lid on electricity costs. Plus, more companies want to protect designs from overseas copycats, keep closer tabs on quality control and avoid potential disruption in supply chains that span oceans.AdvertisementAs China’s cost advantages shrink, the U.S. has the potential, with investments in automation, to retrieve a share of such imported household products as TVs, vacuum cleaners and toasters, said Hal Sirkin, a Chicago-based senior partner at Boston Consulting Group. U.S. firms will do it “not to be patriotic,” he said, “but because they can make money.”Any shift, no matter how small, may well depend on the experience of such companies as Thorley, which plans to begin selling its new infant car seat later this year.A dozen Thorley managers began their quest with a tour of prospective U.S. factories in four states to find a manufacturer—a mission undertaken by other pioneering companies. K’Nex Brands LP, a family owned toy maker in Hatfield, Pa., several years ago returnedmost production of its plastic building toys to the U.S. from China, for example. Unlike Thorley, K’Nex already had a U.S. manufacturing plant, making it easier to bring work home.But K’Nex struggled to find a U.S. maker for Lincoln Logs, the toy it produces in China under license from Hasbro Inc. Michael Araten, chief executive of K’Nex, found that some U.S. wood factories were geared only for furniture and other large products; others couldn’t shape the small wooden toy at high volumes.

PrideSports LLC, a maker of golf tees, contacted K’Nex in 2013 after seeing an article in The Wall Street Journal mentioning the search. PrideSports said its factory in Burnham, Maine, had equipment for golf tees that could also make toy logs. The made-in-U.S. Lincoln Logs will hit the market this year.Capital Brands LLC of Los Angeles, maker of the Nutribullet and Magic Bullet blenders, is considering moving production to the U.S. from China. But Colin Sapire, chief executive, said his Chinese partners have engineering skills and a work ethic that could be hard to match in the U.S. He said the company has sold more than 20 million of the Chinese-made blenders in the past two years.Even so, Mr. Sapire said, his company would continue to search for opportunities to make products in the U.S.More U.S. companies would shift production from abroad if they analyzed the costs of overseas production to include such things as the shuttling of executives abroad and holding large inventories as a hedge against supply disruptions, said Harry Moser, founder of the Reshoring Initiative, an industry-funded nonprofit that promotes U.S. manufacturing.Willy Shih, a professor at Harvard Business School, is less optimistic. “China has really captured the whole electronic supply chain,” he said, and that is unlikely to return to the U.S.Instead of trying to make established products in the U.S., Mr. Shih said, “we’re going to have to focus on next-generation technologies” in, for example, advanced pharmaceuticals.Some of the hurdles are practical. The U.S. needs to rebuild its supplier base, as well as invest in more efficient manufacturing equipment. The average age of industrial equipment in the U.S. has passed 10 years old, the highest since 1938, according to estimates by Morgan Stanley & Co. economists.Wal-Mart Stores Inc. has beefed up efforts to buy more U.S.-made goods but finding U.S.-made electrical devices is difficult. The retailer sells electric fans produced by Lasko Products Inc., a family-owned company based in West Chester, Pa. But Lasko, like other U.S.-based manufacturers, can no longer find domestic suppliers of small electric motors.Billions of these motors are made abroad every year, said Alex Chausovsky of IHS Technology, a research firm. They require manual labor, one reason the industry shifted to Asia decades ago. Even if wages in Asia climb, he said, production isn’t likely to move back to the U.S.

“It’s not the labor-cost advantage. It’s the economies of scale,” said Mr. Chausovsky. “We’re talking about absolutely enormous quantities.”A few big companies have returned some production to the U.S., including Whirlpool Corp. , hand mixers; Caterpillar Inc., excavators; and Ford Motor Co. , medium-duty commercial trucks.But many U.S.-based designers of consumer products over the past two decades have grown comfortable contracting with overseas manufacturers. Some doubt they can get the same expertise, efficiency and flexibility in the U.S.The 10-year-old Thorley company, which has annual sales of about $50 million, had little experience with U.S. manufacturing, except for its infant bathtub, which is molded in Erie, Pa. Its automatically folding stroller, motorized baby swing and playpen are made in China.

In its early days, Thorley relied partly on Chinese partners to figure out how to make the gadgets it designed. The company has about 165 U.S. employees in such areas as engineering, design and marketing.One of Thorley’s main manufacturers in China is Jetta Co., which makes more than 100 products for foreign firms, including robotic toys, vacuum cleaners and American Girl dolls. At Jetta’s factory complex in Guangzhou’s Nansha district, halls are piled high with parts-filled plastic boxes headed for dozens of production lines. On a recent day, a train of carts loaded with 4moms boxes rumbled toward a warehouse. Women on a production line assembled the 250 or so parts making up the 4moms mamaRoo infant seat.“You come up with a good idea, we can make it happen,” said C.S. Wong, Jetta’s director of engineering.But labor costs are rising as much as 20% a year. Jetta workers in Nansha typically earn around 3,300 yuan, about $537, a month. Those with more specialized skills earn more. The median wage of assembly workers in the U.S. is about $2,600 a month, according to government data.Jetta and Kin Yat Industrial Ltd., which also makes Thorley’s 4moms products, are adding automation to cut labor costs. At Kin Yat’s plant in Shenzhen, near Hong Kong, a woman in a green cap and a green-and-orange blouse drops bolts into a housing, then holds it up to a round machine that tightens seven at once. “This used to take five people by hand,” said Vincent W.C. Fung, executive director of Kin Yat. “Now it’s taking just one.”

ENLARGERob Daley, chief executive of Thorley Industries, a Pittsburgh-based company that designs and makes the 4moms baby line, plans to launch a new baby car seat with electronic controls this year. China, where most of the company's products are manufactured, has ‘this unbelievable ecosystem that supports manufacturing that's hard to duplicate,’ he said. JEFF SWENSEN FOR THE WALL STREET JOURNALThough Chinese factories are known for flexibility, Jetta and Kin Yat officials said it was getting harder to ramp up production to meet spikes in demand. Workers are harder to find. “Years ago, we could hire 5,000 to 6,000 workers within a month, just put out the word,” said Jetta CEO Kenneth Wong. “But that’s all changed.”Jetta still varies its workforce considerably. The Nansha factory swings from around 4,500 workers to 8,500 at peak times.Most of Jetta and Kin Yat’s suppliers are within an hour’s drive. In China, “there’s just this unbelievable ecosystem that supports manufacturing that’s really hard to replicate,” said Thorley’s chief executive, Rob Daley.Mr. Daley assigned David Yanov, his chief operating officer, to scout potential U.S. manufacturers for the new baby seat. Mr. Yanov, who joined Thorley in 2012, had spent two

decades at a company that made medical devices, a job that involved overseeing factories in China and the Philippines.Unlike China, the U.S. doesn’t have large numbers of so-called contract manufacturers that specialize in producing finished consumer goods. Mr. Yanov and his colleagues set up visits to potential partners in Pennsylvania, Ohio, Illinois and Kentucky. Three companies bid on the project. Thorley also got bids from manufacturers in China.Once shipping and other expenses were calculated, Thorley discovered it would cost about the same to make the baby seats in the U.S. as in China. The decision became, Mr. Juchniewicz, the product developer, said: “Who do we want to work with?”Mr. Daley, the CEO, thought it would be easier to monitor production and maintain quality control with a local factory. “You burn a lot of time,” he said, in trips to China.ENLARGEThe front desk of Thorley Industries in Pittsburgh displays some of the high-tech infant seats sold under the company's 4moms brand. JEFF SWENSEN FOR THE WALL STREET JOURNALOn the other hand, Mr. Yanov said, his company knew what to expect from Thorley’s Chinese partners, who expertly managed frequent changes in design and specifications for new products. “Our model is, ‘Oops, we just thought of something else we’d like to add,’ ” he said. Thorley executives worried that a U.S. firm might take weeks to respond to such changes. “The clock speed is faster in China,” Mr. Yanov said. Because of the 13-hour time difference, he said, he can email a Chinese factory at the end of his workday and get an answer overnight. “It’s a quasi-24-hour day,” he said.The new car seat requires electronics parts from Asia, as well as imported fabric. Mr. Yanov knew his Chinese partners were good at integrating the electronics with other parts, but, he said, he wasn’t sure what to expect from a U.S. factory.“Who points the finger at whom if the electronics don’t work?” Mr. Yanov said. Mr. Daley, the CEO, said U.S. assembly of electronic parts from overseas “was just going to be that much more complicated to manage.”After reviewing the Chinese and U.S. bids, Thorley decision makers began debate in the afternoon and finished around 8 p.m. They would make the car seats in China.“I think the Chinese were trying a little harder” to get the business, Mr. Juchniewicz said

(MSRP) Model: 2016 Ferrari 488 Spider

Price :$276,450

Part III: $$ Your Financing Options $$

In this section, you will have to go online to determine the interest rate incurred when you finance a car.

Let’s say you are unable to put a down payment on a car and you had to finance the full amount. Take the MSRP of your car from part 1).

Go to https://calculator.me/vehicle/

Type the Vehicle price (which total the loan amount), the interest rate and the loan terms (number of years). Set other values to zero.

(12 points) Use the Calculator to determine your monthly payment if you were to get 10% interest by filling the table below. the loan was 60 months (5years), 48 months (4 years), 36 months (3 years), 24 months (2 years) and 12 months ( 1 year).

(3 points) How does the monthly payment change as a function of the loan term?

(3 points) How does the total interest paid change as a function of the loan term?

(3 points) Does it pay off to have a lower interest rate? Why, Give an example using numbers from the table and calculate the actual savings in interest for a loan term of your choice.

Part IV: Modeling Using Excel

Suppose you decide to buy a new car for $ 30000. Suppose that you have no money for a down payment and that you decide to finance the whole amount. The dealer offers several financing option through a local bank. He offers you the option of financing the car over 12 months, 24 month, 36 months, 48 months and 60 months.

Unfortunately, the interest rate was pretty high and equal to 10%. The table below shows the total interest paid after the term of loan if you were to finance it.

(a) (3 points) Graph the total interest paid as a function of the term of the loan in Excel.

(b) (3 points) Find the linear function that best fits the total interest paid as a function of the term of the loan.

(c) (3 points)FROM THIS FUNCTION, calculate how much you have paid in interest 30 month after you had purchased the car assuming you financed it?

Part V: Reflection

(10 points) Your friend John is planning to finance a car. He is unsure about his budget, but thinks he can afford a $15, 000 car. He has only $2,000 to put down and he earns about $1500 a month after taxes. John contacts you for advice. What advice would you give him? (Please write a 200 to 300-word letter to John, advising him on how much he should spend on a car, what interest rate he should try to get and how much he can afford in monthly payments). REFER TO THE TABLE AND CLASS DISCUSSIONS and to the rubric below.

Make sure you answer the following in your paragraph:

Make sure you write a coherent paragraph.

Mention the amount John needs to finance.

Decide how much John can afford a month to pay towards his car monthly payment.

Give John several examples: choose two different interest rates and for each interest rate you choose give the monthly payment for two different loan terms ( 3 years versus 5 years etc..). Don’t forget to use the calculator we used in class.

Bare in mind what you learned from the tables in your conclusion, for e.g. the longer the loan term the more interest you’ll end up paying the bank.

More importantly consider John to be your real friend and do not hesitate in elaborating your response and express your opinion!

Reading: How to Finance a Car and Get a Car Loan

http://usnews.rankingsandreviews.com/cars-trucks/How-to-Finance-a-Car/(accessed March 18 2012) By Jamie Page Deaton

Let's be honest: most people aren't thinking about buying a new car now. The Great Recession has put new cars out of most people's minds. But, if you really need a new car, you can get some great discounts and incentives. With the credit market still tight, the problem most people have is getting the financing to take advantage of the deals available.

Car financing is tricky even when the credit market is good. Now that the credit market is tight, it's back to basics for buyers and lenders. Check out the car financing basics covered below to make sure you get the best car loan for your next vehicle.

The Basics of Car Loans

Getting a car loan simply means borrowing money to pay for it. Borrowing money probably isn't new to you -- everyone's bummed $10 from friends. When you borrow from a lender, the amount you borrow is called the loan principle. Though the basic idea behind borrowing money for a car is the same, when it comes time to pay the loan back, things get a little complicated.

Unless your friends don't like you much, they're not going to charge you interest on money you borrow. But professional lenders will. A bank isn't your friend and doesn't lend money out of the goodness of its heart. It needs a financial incentive. That's what interest provides for the lender: a financial incentive to lend money.

When you take out a loan for a car, it'll come with an interest rate -- a certain percentage of a loan that you must pay back in addition to the original loan amount. So, if you borrow $20,000 for a car at a 5 percent interest rate, you're going to end up paying the bank $21,000 over the life of the loan -- that's the principle, plus the interest.

The Car Loan Term

The life of the loan, or loan term, simply refers to the amount of time you have to pay the lender back. If you sign up for a five-year term, in five years you'll pay the money back and will own the car free and clear. What the loan term doesn't mean is that five years from now you'll have to come up with all of the money. The vast majority of auto loans are repaid in monthly installments. You send the lender a set amount each month and slowly pay off the loan.

Most people think that when you finance a car, the finance company lends you the money and the car is yours. That's a simple way of looking at it. In reality, however, the lender is buying the car and letting you use it. The lender technically owns the car, though you agree to be responsible for it. In fact, you won't have the title to the car until you make your last loan payment. Miss loan payments and the lender repossess the car. Each payment you make buys you a little more of the car, but you don't fully own it until the loan is paid off.

Now that you know the basics, you're probably wondering how people can screw up financing a car. Believe it or not, there are plenty of ways.

Your Credit Score

All interest rates are not created equal. Some people get charged more interest, and some get charged less. Obviously, you want to get charged less. The interest rate lenders charge is based largely on your credit score -- a number that's assigned to you based on how much other debt you have and how good you've been about paying bills on time. Lenders use the score to assess how likely you are to pay them back. If your score is low, they'll think you're not likely to repay the auto loan and charge you more money to cover that risk.

Young people often have lower credit scores than older people, even if they've been good about staying out of debt and paying their bills. That's because young people don't have long credit histories, which makes it difficult for lenders to tell how much of a risk they are. As a result, people without long credit histories can be charged higher interest rates too.

You should know what your credit score is and do your best to make sure it's high. For a small fee, you can get it through Equifax, Experian or TransUnion. If your score is not as high as you'd like, paying off old bills (like credit card debt) and paying all bills on time (the full balance, not just the minimum due) for six to nine months should bring your score up and interest rate down.

Apply, Apply, Apply

You wouldn't just apply to one job or one college, so you shouldn't apply to just one lender for a car loan. Contact your bank, local credit unions and other lenders to find out what they're offering. You'll have to fill out loan applications, which will ask for your employment history, income, expenses and debts. Do not be tempted to exaggerate your income or misstate your expenses. Everything you fill out on a loan application will be verified and lying will get you into serious trouble. The lender will pull your credit history and credit score and make you a loan offer based on that information.

Take some time to go over all the offers. Don't just look at the interest rates -- avoid offers that charge you a lot of fees. Also, watch out for loans that have a prepayment penalty; that's a charge that you'll owe if you pay the loan off early. Paying the loan off early may not be something you'll be able to do, but if your long-lost Aunt Maybel dies and leaves you a fortune, paying it off could save you a lot of money -- and you don't want to pay extra to do it.

Read the following marketing case on GM: Downsizing the Hummer and answer the questions given at the end of the case.

MARKETING CASE

GM: Downsizing the Hummer

A Little Military History

Quickly. What is a "High Mobility Multi-Purpose Wheeled Vehicle"? Well, if you've kept up with Arnold Schwarzenegger films or studied the 1991 Gulf War, you may have recognized the formal military description of what soldiers describe using the acronym "Humvee." If you don't really know what a Humvee is, just stand by—General Motors is going to tell you.

This story starts in 1979, when AM General, a specialty vehicle manufacturer, earned a contract from the U.S. Army to design the Humvee. The Army wanted a new vehicle to replace the Jeep, the ever-present multipurpose vehicle that had transported generations of soldiers. The Army believed it needed a more modern, up-to-date vehicle to meet the needs of the modern soldier. AM General produced the big, boxy Humvee, which labored in relative obscurity until the Gulf War in 1991. In that war, the United States and its allies mounted a military operation against Iraq, which had just invaded Kuwait. Television coverage of the military buildup in advance of the short war and live broadcasts of the war itself introduced the public to the workhorse Humvee.

In 1992, AM General, responding to the Humvee's notoriety, decided to introduce the first civilian version of the Humvee—the Hummer. Weighing in at 7,100 pounds, the Hummer featured a huge, 6.5-liter V-8, turbo-diesel engine that produced 195 horsepower and propelled the Hummer from 0 to 60 miles per hour in a snail-like 18 seconds. But the Hummer's purpose was not speed. AM General designed it, like its military parent, to take people off the beaten path—way off. The Hummer could plow through water to a depth of 30 inches and climb almost vertical, rocky surfaces. It even had a central tire inflation system that allowed the driver to inflate or deflate the vehicle's tires while on the move.

The advertising tag line dubbed the Hummer "The world's most serious 4 × 4," and ad copy played up the vehicle's off-road capabilities and its military heritage. AM General targeted serious, elite road warriors who were willing to pay more than $100,000 to have the toughest vehicle in the car pool. These were people who also wanted to tell the world that they had been successful. To help buyers learn how to handle the Hummer in extreme off-road situations, AM General even offered a Hummer Driving Academy, where drivers learned to handle 22-inch vertical walls, high water, 40 percent side slopes, and 60 percent inclines.

GM's Market Research

In 1998, GM was conducting market research using a concept vehicle that it described as rugged and militaristic. When the vehicle bore the GMC brand name (GM's truck division), the company found that consumers had a lukewarm reaction. However, when GM put the Hummer name on the vehicle, researchers found that it had the highest and most widespread appeal of any vehicle GM had ever tested. Armed with this insight, GM turned to AM General, which had just abandoned acquisition discussions with Ford Motor Company. In December 1999, GM signed an agreement with AM General giving GM rights to the Hummer brand. AM General also signed a seven-year contract to produce the Hummer H2 sport utility vehicle for GM.

Based on its research, GM believed that the Hummer H2, a smaller version of the Hummer, would appeal to rugged individualists and wealthy baby-boomers who wanted the ability to go off-road and to "successful achievers," thirty- and forty-something wealthy consumers who had jobs in investment banking and the like. GM believed that it could introduce the H2 in the luxury SUV market and compete successfully with brands such as the Lincoln Navigator or GM's own Cadillac Escalade. The company charted production plans that called for AM General to build a new $200 million manufacturing facility in Indiana and for GM to launch the H2 in July 2002 at a base sticker price of about $49,000. It predicted that it could sell 19,000 H2s in 2002 (the 2003 model year) and then ramp up production to sell 40,000 units per year thereafter—a number that would make the H2 the largest seller in the luxury SUV market. Further, GM planned to introduce the H3, a still smaller and more affordable version of the Hummer in 2005. It believed it could sell 80,000 units of the H3 per year. These numbers compared with annual sales of only about 800 Hummers.

Softening Up the Market

During 2000, GM and AM General did not advertise the Hummer, but they mapped out a campaign for the year leading up to the H2's 2002 introduction that would raise awareness of the Hummer brand and serve as a bridge to the introduction. GM hired a marketing firm, Modernista, to develop the estimated $3 million campaign. Modernista found that the Hummer had about a 50 percent awareness level among buyers of full-size SUVs, mainly due to its appearance in movies. AM General had been spending less than $1 million a year on advertising and promotion. Further, 13 to 20 percent of these buyers had considered the Hummer.

In mid-2001, GM launched the Modernista campaign using the tag line "Hummer. Like nothing else." Placements in The Wall Street Journal, Barron's, Spin, Business Week, Cigar Aficionado, and Esquire used four different headlines:

"How did my soul get way out here?"

"What good is the world at your fingertips if you never actually touch it?"

"You can get fresh air lots of places, but this is the really good stuff."

"Out here you're nobody. Perfect."

Following each headline was the same copy: "Sometimes you find yourself in the middle of nowhere. And sometimes in the middle of nowhere you find yourself. The legendary H1." One agency official said the ads used journalistic-type photography to make them more believable and to play down the he-man imagery. "Authenticity is probably the most important word when it comes to branding," the official argued. Whereas previous Hummer ads had featured the tough SUV plowing through snow and streams, the new ads featured the Hummer with gorgeous Chilean vistas. The new ads, the agency suggested, were as much about the people who buy Hummers as they were about the vehicle. Hummer owners often believed they got a bum rap as show-offs, the representative suggested, but he argued that the new ads would show the buyer's other side.

The Launch

Right on schedule in July 2002, GM introduced the 2003 Hummer 2 SUT (Sport Utility Truck). GM and AM General designed and built the H2 in just 16 months, much more quickly than the three-to-four-year time normally required. GM built the H2 on GM's GMT 800 truck platform, and it shared a number of parts with other GM models. The H2 was about the same size as the Chevy Tahoe, five inches narrower than the Hummer and about 700 pounds lighter. However, it was about 1,400 pounds heavier than other SUVs. It had a 316-horsepower engine that slurped a gallon of gasoline every 12 miles. It also featured a nine-speaker Bose stereo system. Buyers could upgrade the base model with a $2,575 luxury package that added heated leather front seats and a six-disc CD changer or with a $2,215 Adventure package that added sir suspension, brush guards, and crossbars for the roof rack.

GM had about 150 dealers who would initially offer the H2. The dealers had to agree to build a special showroom and a test track.

For promotion, GM stayed with the Modernista firm. Late in the summer of 2002, TV ads broke on shows such as CSI: Miami and featured a well-dressed woman behind the H2's steering wheel. The Modernista representative indicated that the message was that the H2 is not about blowing things up. Twenty-four print ads showed the H2 not in action but sitting still. Modernista believed that people knew the H2 would be tough—it wanted people to see that the H2 looked good.

The On-Road Test

GM targeted buyers with an average age of 42 and annual household incomes above $125,000 versus H1 owners' averages of about 50 years old and household incomes above $200,000. The questions were, could GM position the H2 to appeal to its target market, and was that market large enough to ensure that GM could reach its sales and profitability targets?

One writer who had driven the H2 found it to be comfortable and surprisingly smooth on the highway. However, he criticized the interior and the lack of storage space. He noted that the H2 seated just six people versus eight or nine for other large SUVs.

Analysts argued that GM was pursuing a risky strategy. Would its having borrowed parts from other GM models to keep costs down and speed the time to market damage the H2's image? Would GM be able to justify the H2's high price when it had so much in common with other SUVs that cost thousands less? Would consumers really spend so much for an off-the-road vehicle that, studies showed, only 10 percent of image-conscious buyers would actually take off road? Finally, could GM make the Hummer 2 stand out in an increasingly crowded market? (See Exhibit 1.)

Arnold Schwarzenegger appeared in an H2 promotional video suggesting, "Don't call it the baby Hummer, you'll make it angry." Will the Hummer H2 be a hum-dinger and make GM happy, or will it get stuck in the rocky luxury SUV market?

Answer All Questions. Each Question carries 10 marks.

1. How are the segmentation decisions of GM for Hummer H2 different from AM General's target for the original Hummer? How has GM attempted to position the H2? ( 10 )
2. Why do you think some consumers will pay $40,000 or more for an off-road vehicle that 90 percent of them will never take off road? (10)
3. What segmentation, targeting, and positioning recommendations would you make to GM for the H2? (10)

Read the following marketing case on GM: Downsizing the Hummer and answer the questions given at the end of the case.

MARKETING CASE

GM: Downsizing the Hummer

A Little Military History

Quickly. What is a "High Mobility Multi-Purpose Wheeled Vehicle"? Well, if you've kept up with Arnold Schwarzenegger films or studied the 1991 Gulf War, you may have recognized the formal military description of what soldiers describe using the acronym "Humvee." If you don't really know what a Humvee is, just stand by—General Motors is going to tell you.

This story starts in 1979, when AM General, a specialty vehicle manufacturer, earned a contract from the U.S. Army to design the Humvee. The Army wanted a new vehicle to replace the Jeep, the ever-present multipurpose vehicle that had transported generations of soldiers. The Army believed it needed a more modern, up-to-date vehicle to meet the needs of the modern soldier. AM General produced the big, boxy Humvee, which labored in relative obscurity until the Gulf War in 1991. In that war, the United States and its allies mounted a military operation against Iraq, which had just invaded Kuwait. Television coverage of the military buildup in advance of the short war and live broadcasts of the war itself introduced the public to the workhorse Humvee.

In 1992, AM General, responding to the Humvee's notoriety, decided to introduce the first civilian version of the Humvee—the Hummer. Weighing in at 7,100 pounds, the Hummer featured a huge, 6.5-liter V-8, turbo-diesel engine that produced 195 horsepower and propelled the Hummer from 0 to 60 miles per hour in a snail-like 18 seconds. But the Hummer's purpose was not speed. AM General designed it, like its military parent, to take people off the beaten path—way off. The Hummer could plow through water to a depth of 30 inches and climb almost vertical, rocky surfaces. It even had a central tire inflation system that allowed the driver to inflate or deflate the vehicle's tires while on the move.

The advertising tag line dubbed the Hummer "The world's most serious 4 × 4," and ad copy played up the vehicle's off-road capabilities and its military heritage. AM General targeted serious, elite road warriors who were willing to pay more than $100,000 to have the toughest vehicle in the car pool. These were people who also wanted to tell the world that they had been successful. To help buyers learn how to handle the Hummer in extreme off-road situations, AM General even offered a Hummer Driving Academy, where drivers learned to handle 22-inch vertical walls, high water, 40 percent side slopes, and 60 percent inclines.

GM's Market Research

In 1998, GM was conducting market research using a concept vehicle that it described as rugged and militaristic. When the vehicle bore the GMC brand name (GM's truck division), the company found that consumers had a lukewarm reaction. However, when GM put the Hummer name on the vehicle, researchers found that it had the highest and most widespread appeal of any vehicle GM had ever tested. Armed with this insight, GM turned to AM General, which had just abandoned acquisition discussions with Ford Motor Company. In December 1999, GM signed an agreement with AM General giving GM rights to the Hummer brand. AM General also signed a seven-year contract to produce the Hummer H2 sport utility vehicle for GM.

Based on its research, GM believed that the Hummer H2, a smaller version of the Hummer, would appeal to rugged individualists and wealthy baby-boomers who wanted the ability to go off-road and to "successful achievers," thirty- and forty-something wealthy consumers who had jobs in investment banking and the like. GM believed that it could introduce the H2 in the luxury SUV market and compete successfully with brands such as the Lincoln Navigator or GM's own Cadillac Escalade. The company charted production plans that called for AM General to build a new $200 million manufacturing facility in Indiana and for GM to launch the H2 in July 2002 at a base sticker price of about $49,000. It predicted that it could sell 19,000 H2s in 2002 (the 2003 model year) and then ramp up production to sell 40,000 units per year thereafter—a number that would make the H2 the largest seller in the luxury SUV market. Further, GM planned to introduce the H3, a still smaller and more affordable version of the Hummer in 2005. It believed it could sell 80,000 units of the H3 per year. These numbers compared with annual sales of only about 800 Hummers.

Softening Up the Market

During 2000, GM and AM General did not advertise the Hummer, but they mapped out a campaign for the year leading up to the H2's 2002 introduction that would raise awareness of the Hummer brand and serve as a bridge to the introduction. GM hired a marketing firm, Modernista, to develop the estimated $3 million campaign. Modernista found that the Hummer had about a 50 percent awareness level among buyers of full-size SUVs, mainly due to its appearance in movies. AM General had been spending less than $1 million a year on advertising and promotion. Further, 13 to 20 percent of these buyers had considered the Hummer.

In mid-2001, GM launched the Modernista campaign using the tag line "Hummer. Like nothing else." Placements in The Wall Street Journal, Barron's, Spin, Business Week, Cigar Aficionado, and Esquire used four different headlines:

"How did my soul get way out here?"

"What good is the world at your fingertips if you never actually touch it?"

"You can get fresh air lots of places, but this is the really good stuff."

"Out here you're nobody. Perfect."

Following each headline was the same copy: "Sometimes you find yourself in the middle of nowhere. And sometimes in the middle of nowhere you find yourself. The legendary H1." One agency official said the ads used journalistic-type photography to make them more believable and to play down the he-man imagery. "Authenticity is probably the most important word when it comes to branding," the official argued. Whereas previous Hummer ads had featured the tough SUV plowing through snow and streams, the new ads featured the Hummer with gorgeous Chilean vistas. The new ads, the agency suggested, were as much about the people who buy Hummers as they were about the vehicle. Hummer owners often believed they got a bum rap as show-offs, the representative suggested, but he argued that the new ads would show the buyer's other side.

The Launch

Right on schedule in July 2002, GM introduced the 2003 Hummer 2 SUT (Sport Utility Truck). GM and AM General designed and built the H2 in just 16 months, much more quickly than the three-to-four-year time normally required. GM built the H2 on GM's GMT 800 truck platform, and it shared a number of parts with other GM models. The H2 was about the same size as the Chevy Tahoe, five inches narrower than the Hummer and about 700 pounds lighter. However, it was about 1,400 pounds heavier than other SUVs. It had a 316-horsepower engine that slurped a gallon of gasoline every 12 miles. It also featured a nine-speaker Bose stereo system. Buyers could upgrade the base model with a $2,575 luxury package that added heated leather front seats and a six-disc CD changer or with a $2,215 Adventure package that added sir suspension, brush guards, and crossbars for the roof rack.

GM had about 150 dealers who would initially offer the H2. The dealers had to agree to build a special showroom and a test track.

For promotion, GM stayed with the Modernista firm. Late in the summer of 2002, TV ads broke on shows such as CSI: Miami and featured a well-dressed woman behind the H2's steering wheel. The Modernista representative indicated that the message was that the H2 is not about blowing things up. Twenty-four print ads showed the H2 not in action but sitting still. Modernista believed that people knew the H2 would be tough—it wanted people to see that the H2 looked good.

The On-Road Test

GM targeted buyers with an average age of 42 and annual household incomes above $125,000 versus H1 owners' averages of about 50 years old and household incomes above $200,000. The questions were, could GM position the H2 to appeal to its target market, and was that market large enough to ensure that GM could reach its sales and profitability targets?

One writer who had driven the H2 found it to be comfortable and surprisingly smooth on the highway. However, he criticized the interior and the lack of storage space. He noted that the H2 seated just six people versus eight or nine for other large SUVs.

Analysts argued that GM was pursuing a risky strategy. Would its having borrowed parts from other GM models to keep costs down and speed the time to market damage the H2's image? Would GM be able to justify the H2's high price when it had so much in common with other SUVs that cost thousands less? Would consumers really spend so much for an off-the-road vehicle that, studies showed, only 10 percent of image-conscious buyers would actually take off road? Finally, could GM make the Hummer 2 stand out in an increasingly crowded market? (See Exhibit 1.)

Arnold Schwarzenegger appeared in an H2 promotional video suggesting, "Don't call it the baby Hummer, you'll make it angry." Will the Hummer H2 be a hum-dinger and make GM happy, or will it get stuck in the rocky luxury SUV market?

Required Question:

Question 01: Why do you think some consumers will pay $40,000 or more for an off-road vehicle that 90 percent of them will never take off road? (10)

Read the following marketing case on GM: Downsizing the Hummer and answer the questions given at the end of the case.

MARKETING CASE

GM: Downsizing the Hummer

A Little Military History

Quickly. What is a "High Mobility Multi-Purpose Wheeled Vehicle"? Well, if you've kept up with Arnold Schwarzenegger films or studied the 1991 Gulf War, you may have recognized the formal military description of what soldiers describe using the acronym "Humvee." If you don't really know what a Humvee is, just stand by—General Motors is going to tell you.

This story starts in 1979, when AM General, a specialty vehicle manufacturer, earned a contract from the U.S. Army to design the Humvee. The Army wanted a new vehicle to replace the Jeep, the ever-present multipurpose vehicle that had transported generations of soldiers. The Army believed it needed a more modern, up-to-date vehicle to meet the needs of the modern soldier. AM General produced the big, boxy Humvee, which labored in relative obscurity until the Gulf War in 1991. In that war, the United States and its allies mounted a military operation against Iraq, which had just invaded Kuwait. Television coverage of the military buildup in advance of the short war and live broadcasts of the war itself introduced the public to the workhorse Humvee.

In 1992, AM General, responding to the Humvee's notoriety, decided to introduce the first civilian version of the Humvee—the Hummer. Weighing in at 7,100 pounds, the Hummer featured a huge, 6.5-liter V-8, turbo-diesel engine that produced 195 horsepower and propelled the Hummer from 0 to 60 miles per hour in a snail-like 18 seconds. But the Hummer's purpose was not speed. AM General designed it, like its military parent, to take people off the beaten path—way off. The Hummer could plow through water to a depth of 30 inches and climb almost vertical, rocky surfaces. It even had a central tire inflation system that allowed the driver to inflate or deflate the vehicle's tires while on the move.

The advertising tag line dubbed the Hummer "The world's most serious 4 × 4," and ad copy played up the vehicle's off-road capabilities and its military heritage. AM General targeted serious, elite road warriors who were willing to pay more than $100,000 to have the toughest vehicle in the car pool. These were people who also wanted to tell the world that they had been successful. To help buyers learn how to handle the Hummer in extreme off-road situations, AM General even offered a Hummer Driving Academy, where drivers learned to handle 22-inch vertical walls, high water, 40 percent side slopes, and 60 percent inclines.

GM's Market Research

In 1998, GM was conducting market research using a concept vehicle that it described as rugged and militaristic. When the vehicle bore the GMC brand name (GM's truck division), the company found that consumers had a lukewarm reaction. However, when GM put the Hummer name on the vehicle, researchers found that it had the highest and most widespread appeal of any vehicle GM had ever tested. Armed with this insight, GM turned to AM General, which had just abandoned acquisition discussions with Ford Motor Company. In December 1999, GM signed an agreement with AM General giving GM rights to the Hummer brand. AM General also signed a seven-year contract to produce the Hummer H2 sport utility vehicle for GM.

Based on its research, GM believed that the Hummer H2, a smaller version of the Hummer, would appeal to rugged individualists and wealthy baby-boomers who wanted the ability to go off-road and to "successful achievers," thirty- and forty-something wealthy consumers who had jobs in investment banking and the like. GM believed that it could introduce the H2 in the luxury SUV market and compete successfully with brands such as the Lincoln Navigator or GM's own Cadillac Escalade. The company charted production plans that called for AM General to build a new $200 million manufacturing facility in Indiana and for GM to launch the H2 in July 2002 at a base sticker price of about $49,000. It predicted that it could sell 19,000 H2s in 2002 (the 2003 model year) and then ramp up production to sell 40,000 units per year thereafter—a number that would make the H2 the largest seller in the luxury SUV market. Further, GM planned to introduce the H3, a still smaller and more affordable version of the Hummer in 2005. It believed it could sell 80,000 units of the H3 per year. These numbers compared with annual sales of only about 800 Hummers.

Softening Up the Market

During 2000, GM and AM General did not advertise the Hummer, but they mapped out a campaign for the year leading up to the H2's 2002 introduction that would raise awareness of the Hummer brand and serve as a bridge to the introduction. GM hired a marketing firm, Modernista, to develop the estimated $3 million campaign. Modernista found that the Hummer had about a 50 percent awareness level among buyers of full-size SUVs, mainly due to its appearance in movies. AM General had been spending less than $1 million a year on advertising and promotion. Further, 13 to 20 percent of these buyers had considered the Hummer.

In mid-2001, GM launched the Modernista campaign using the tag line "Hummer. Like nothing else." Placements in The Wall Street Journal, Barron's, Spin, Business Week, Cigar Aficionado, and Esquire used four different headlines:

"How did my soul get way out here?"

"What good is the world at your fingertips if you never actually touch it?"

"You can get fresh air lots of places, but this is the really good stuff."

"Out here you're nobody. Perfect."

Following each headline was the same copy: "Sometimes you find yourself in the middle of nowhere. And sometimes in the middle of nowhere you find yourself. The legendary H1." One agency official said the ads used journalistic-type photography to make them more believable and to play down the he-man imagery. "Authenticity is probably the most important word when it comes to branding," the official argued. Whereas previous Hummer ads had featured the tough SUV plowing through snow and streams, the new ads featured the Hummer with gorgeous Chilean vistas. The new ads, the agency suggested, were as much about the people who buy Hummers as they were about the vehicle. Hummer owners often believed they got a bum rap as show-offs, the representative suggested, but he argued that the new ads would show the buyer's other side.

The Launch

Right on schedule in July 2002, GM introduced the 2003 Hummer 2 SUT (Sport Utility Truck). GM and AM General designed and built the H2 in just 16 months, much more quickly than the three-to-four-year time normally required. GM built the H2 on GM's GMT 800 truck platform, and it shared a number of parts with other GM models. The H2 was about the same size as the Chevy Tahoe, five inches narrower than the Hummer and about 700 pounds lighter. However, it was about 1,400 pounds heavier than other SUVs. It had a 316-horsepower engine that slurped a gallon of gasoline every 12 miles. It also featured a nine-speaker Bose stereo system. Buyers could upgrade the base model with a $2,575 luxury package that added heated leather front seats and a six-disc CD changer or with a $2,215 Adventure package that added sir suspension, brush guards, and crossbars for the roof rack.

GM had about 150 dealers who would initially offer the H2. The dealers had to agree to build a special showroom and a test track.

For promotion, GM stayed with the Modernista firm. Late in the summer of 2002, TV ads broke on shows such as CSI: Miami and featured a well-dressed woman behind the H2's steering wheel. The Modernista representative indicated that the message was that the H2 is not about blowing things up. Twenty-four print ads showed the H2 not in action but sitting still. Modernista believed that people knew the H2 would be tough—it wanted people to see that the H2 looked good.

The On-Road Test

GM targeted buyers with an average age of 42 and annual household incomes above $125,000 versus H1 owners' averages of about 50 years old and household incomes above $200,000. The questions were, could GM position the H2 to appeal to its target market, and was that market large enough to ensure that GM could reach its sales and profitability targets?

One writer who had driven the H2 found it to be comfortable and surprisingly smooth on the highway. However, he criticized the interior and the lack of storage space. He noted that the H2 seated just six people versus eight or nine for other large SUVs.

Analysts argued that GM was pursuing a risky strategy. Would its having borrowed parts from other GM models to keep costs down and speed the time to market damage the H2's image? Would GM be able to justify the H2's high price when it had so much in common with other SUVs that cost thousands less? Would consumers really spend so much for an off-the-road vehicle that, studies showed, only 10 percent of image-conscious buyers would actually take off road? Finally, could GM make the Hummer 2 stand out in an increasingly crowded market? (See Exhibit 1.)

Arnold Schwarzenegger appeared in an H2 promotional video suggesting, "Don't call it the baby Hummer, you'll make it angry." Will the Hummer H2 be a hum-dinger and make GM happy, or will it get stuck in the rocky luxury SUV market?

Required Question:

Question 01: What segmentation, targeting, and positioning recommendations would you make to GM for the H2? (10)

Read the following marketing case on GM: Downsizing the Hummer and answer the questions given at the end of the case.

MARKETING CASE

GM: Downsizing the Hummer

A Little Military History

Quickly. What is a "High Mobility Multi-Purpose Wheeled Vehicle"? Well, if you've kept up with Arnold Schwarzenegger films or studied the 1991 Gulf War, you may have recognized the formal military description of what soldiers describe using the acronym "Humvee." If you don't really know what a Humvee is, just stand by—General Motors is going to tell you.

This story starts in 1979, when AM General, a specialty vehicle manufacturer, earned a contract from the U.S. Army to design the Humvee. The Army wanted a new vehicle to replace the Jeep, the ever-present multipurpose vehicle that had transported generations of soldiers. The Army believed it needed a more modern, up-to-date vehicle to meet the needs of the modern soldier. AM General produced the big, boxy Humvee, which labored in relative obscurity until the Gulf War in 1991. In that war, the United States and its allies mounted a military operation against Iraq, which had just invaded Kuwait. Television coverage of the military buildup in advance of the short war and live broadcasts of the war itself introduced the public to the workhorse Humvee.

In 1992, AM General, responding to the Humvee's notoriety, decided to introduce the first civilian version of the Humvee—the Hummer. Weighing in at 7,100 pounds, the Hummer featured a huge, 6.5-liter V-8, turbo-diesel engine that produced 195 horsepower and propelled the Hummer from 0 to 60 miles per hour in a snail-like 18 seconds. But the Hummer's purpose was not speed. AM General designed it, like its military parent, to take people off the beaten path—way off. The Hummer could plow through water to a depth of 30 inches and climb almost vertical, rocky surfaces. It even had a central tire inflation system that allowed the driver to inflate or deflate the vehicle's tires while on the move.

The advertising tag line dubbed the Hummer "The world's most serious 4 × 4," and ad copy played up the vehicle's off-road capabilities and its military heritage. AM General targeted serious, elite road warriors who were willing to pay more than $100,000 to have the toughest vehicle in the car pool. These were people who also wanted to tell the world that they had been successful. To help buyers learn how to handle the Hummer in extreme off-road situations, AM General even offered a Hummer Driving Academy, where drivers learned to handle 22-inch vertical walls, high water, 40 percent side slopes, and 60 percent inclines.

GM's Market Research

In 1998, GM was conducting market research using a concept vehicle that it described as rugged and militaristic. When the vehicle bore the GMC brand name (GM's truck division), the company found that consumers had a lukewarm reaction. However, when GM put the Hummer name on the vehicle, researchers found that it had the highest and most widespread appeal of any vehicle GM had ever tested. Armed with this insight, GM turned to AM General, which had just abandoned acquisition discussions with Ford Motor Company. In December 1999, GM signed an agreement with AM General giving GM rights to the Hummer brand. AM General also signed a seven-year contract to produce the Hummer H2 sport utility vehicle for GM.

Based on its research, GM believed that the Hummer H2, a smaller version of the Hummer, would appeal to rugged individualists and wealthy baby-boomers who wanted the ability to go off-road and to "successful achievers," thirty- and forty-something wealthy consumers who had jobs in investment banking and the like. GM believed that it could introduce the H2 in the luxury SUV market and compete successfully with brands such as the Lincoln Navigator or GM's own Cadillac Escalade. The company charted production plans that called for AM General to build a new $200 million manufacturing facility in Indiana and for GM to launch the H2 in July 2002 at a base sticker price of about $49,000. It predicted that it could sell 19,000 H2s in 2002 (the 2003 model year) and then ramp up production to sell 40,000 units per year thereafter—a number that would make the H2 the largest seller in the luxury SUV market. Further, GM planned to introduce the H3, a still smaller and more affordable version of the Hummer in 2005. It believed it could sell 80,000 units of the H3 per year. These numbers compared with annual sales of only about 800 Hummers.

Softening Up the Market

During 2000, GM and AM General did not advertise the Hummer, but they mapped out a campaign for the year leading up to the H2's 2002 introduction that would raise awareness of the Hummer brand and serve as a bridge to the introduction. GM hired a marketing firm, Modernista, to develop the estimated $3 million campaign. Modernista found that the Hummer had about a 50 percent awareness level among buyers of full-size SUVs, mainly due to its appearance in movies. AM General had been spending less than $1 million a year on advertising and promotion. Further, 13 to 20 percent of these buyers had considered the Hummer.

In mid-2001, GM launched the Modernista campaign using the tag line "Hummer. Like nothing else." Placements in The Wall Street Journal, Barron's, Spin, Business Week, Cigar Aficionado, and Esquire used four different headlines:

"How did my soul get way out here?"

"What good is the world at your fingertips if you never actually touch it?"

"You can get fresh air lots of places, but this is the really good stuff."

"Out here you're nobody. Perfect."

Following each headline was the same copy: "Sometimes you find yourself in the middle of nowhere. And sometimes in the middle of nowhere you find yourself. The legendary H1." One agency official said the ads used journalistic-type photography to make them more believable and to play down the he-man imagery. "Authenticity is probably the most important word when it comes to branding," the official argued. Whereas previous Hummer ads had featured the tough SUV plowing through snow and streams, the new ads featured the Hummer with gorgeous Chilean vistas. The new ads, the agency suggested, were as much about the people who buy Hummers as they were about the vehicle. Hummer owners often believed they got a bum rap as show-offs, the representative suggested, but he argued that the new ads would show the buyer's other side.

The Launch

Right on schedule in July 2002, GM introduced the 2003 Hummer 2 SUT (Sport Utility Truck). GM and AM General designed and built the H2 in just 16 months, much more quickly than the three-to-four-year time normally required. GM built the H2 on GM's GMT 800 truck platform, and it shared a number of parts with other GM models. The H2 was about the same size as the Chevy Tahoe, five inches narrower than the Hummer and about 700 pounds lighter. However, it was about 1,400 pounds heavier than other SUVs. It had a 316-horsepower engine that slurped a gallon of gasoline every 12 miles. It also featured a nine-speaker Bose stereo system. Buyers could upgrade the base model with a $2,575 luxury package that added heated leather front seats and a six-disc CD changer or with a $2,215 Adventure package that added sir suspension, brush guards, and crossbars for the roof rack.

GM had about 150 dealers who would initially offer the H2. The dealers had to agree to build a special showroom and a test track.

For promotion, GM stayed with the Modernista firm. Late in the summer of 2002, TV ads broke on shows such as CSI: Miami and featured a well-dressed woman behind the H2's steering wheel. The Modernista representative indicated that the message was that the H2 is not about blowing things up. Twenty-four print ads showed the H2 not in action but sitting still. Modernista believed that people knew the H2 would be tough—it wanted people to see that the H2 looked good.

The On-Road Test

GM targeted buyers with an average age of 42 and annual household incomes above $125,000 versus H1 owners' averages of about 50 years old and household incomes above $200,000. The questions were, could GM position the H2 to appeal to its target market, and was that market large enough to ensure that GM could reach its sales and profitability targets?

One writer who had driven the H2 found it to be comfortable and surprisingly smooth on the highway. However, he criticized the interior and the lack of storage space. He noted that the H2 seated just six people versus eight or nine for other large SUVs.

Analysts argued that GM was pursuing a risky strategy. Would its having borrowed parts from other GM models to keep costs down and speed the time to market damage the H2's image? Would GM be able to justify the H2's high price when it had so much in common with other SUVs that cost thousands less? Would consumers really spend so much for an off-the-road vehicle that, studies showed, only 10 percent of image-conscious buyers would actually take off road? Finally, could GM make the Hummer 2 stand out in an increasingly crowded market? (See Exhibit 1.)

Arnold Schwarzenegger appeared in an H2 promotional video suggesting, "Don't call it the baby Hummer, you'll make it angry." Will the Hummer H2 be a hum-dinger and make GM happy, or will it get stuck in the rocky luxury SUV market?

Required Question:

Question 01:How are the segmentation decisions of GM for Hummer H2 different from AM General's target for the original Hummer? How has GM attempted to position the H2? ( 10 )

There are two reflective essays from MED students during their third year internal medicine clerkship. One student sees each connection to a patient as like the individual brush strokes of an artist and the other sees gratitude in a patient with an incurable illness and is moved to gratitude in her own life. (WORD COUNT 500)

1. Reflect on both essays and then choose one and describe how the student grew from the experience.

2. Then explain what you learned as a result of your reflection and how the lesson(s) will influence your future patient physician relationships.

Reflection #1

Georges Seurat’s A Sunday on La Grande Jatte is one of the most iconic paintings of the nineteenth century. His chromoluminarism and pointillist technique is lost from the distance; only when you look closely can the details of each brush stroke be admired. I caught myself admiring this work when visiting The Art Institute of Chicago just prior to the start of our clinical years. The excitement, perspective, and chaos of the various exhibits foreshadowed what the upcoming year would bring. Early into my medicine clerkship, I was assigned to follow Miss Jones, the patient in room 601. While she had a history of leaving against medical advice (AMA) on prior admissions, these three letters were not limited to her discharge summary. She was found to have a positive antimitochondrial antibody in the workup of her abdominal pain and pruritus. On my first day of meeting Miss Jones, her room was as chaotic as the art exhibit. The interview seemed never-ending--filled with interruptions from consults to vital checks to breakfast orders. While both our general appearances would be deemed as “mild distress” for various reasons, we each took a sigh of relief as we made it to the conclusion of the interview. I was disappointed in myself, having felt like I did not truly connect with this patient. When she mentioned her dog in passing, I got excited and asked his name. “Let’s just get on with it,” she replied. Certainly not the patient-physician relationship I was hoping to foster. Day-by-day, her labs started to come back, providing us with more pieces of the puzzle to solve her case. Cholestatic liver patterns, elevated cholesterol, and a +AMA found in a fortysomething year old female? This classic test question was now being played out in real life. UWorld prepared me for recognizing patterns in labs; but it does not tell you how it will change the world of the patient with the diagnosis. Each new result or team update was a chance to solve the puzzle of getting to know Miss Jones. No longer was she “the patient with suspected PBC,” she was the tea-drinking, yoga-loving bookworm who happened to have been diagnosed with primary biliary cholangitis. When our team officially told the news, she nodded her head and we parted ways to finish rounds. When I went back to see her, she was scared, tearful, and frustrated. I re-explained our findings and plan. We tried the teach-back method but she remained overwhelmed and confused. One could argue that a 50,000 foot view of medicine is pattern recognition of illness scripts; but I believe it's the details that keep people’s passion sustained despite years of practicing. It is understanding your patient in the context of their disease. Just as Seurat thoughtfully juxtaposed dabs of color to create his optical masterpiece, we as physicians must learn to carefully juxtapose the art and science--the patient and the disease--to truly appreciate the wonders of our craft. Seraut believed in dividing colors into its components-- a concept called chromoluminarism. The thought being you can never perfectly recreate the same shade of purple by mixing red and blue. In medicine, the same principle holds true- despite the same disease process, no two hospital stays are alike. The explanation given to Miss Jones about her diagnosis might have been acceptable to the next patient but it did not accommodate her learning style. That night I pondered about how to convey what was going on. No longer did I feel like a student- I was the teacher. The next day I went to 601 with markers and paper in hand. I started drawing pictures of the anatomy of the biliary system. Her face lit up as she conveyed to me that she was a visual learner. Miss Jones and I spent the afternoon going over everything from the different measurements in a liver function panel to the metabolism of bilirubin. Finally, the day came when my progress note read “disposition: home.” As I entered room 601 for the final time, I saw my friend Miss Jones. She took my hand-- thanking me for everything I had done, which pales in comparison to how much she did for me. We discussed her relief after months of pain and uncertainty of not having a diagnosis. Instinctively I said, “You’re a trooper.” “Trooper,” she paused and smiled. With a glisten in her eyes, looked up, and said, “Trooper--that’s my dog’s name.”

Reflection #2

Gratitude is an interesting thing – just as lighting a candle from another previously lit one gives rise to a second bright flame without diminishing the original one, gratitude is an emotion – no an attitude towards life – that seems to give a person the capacity to continually pour from their cup while also simultaneously filling it. This is quite paradoxical. And yet, as future doctors, it is the quintessential question for us – how can we give and give to others while continuing to draw meaning and becoming recharged through our interactions without burning out? Just this last week, I had a patient, let’s call her Mrs. Smith. She is an 82 year old female, very thin and frail in appearance who was diagnosed with acute myeloid leukemia. This was a lifechanging diagnosis our team presented all treatment option. She listened intently, asking all the pertinent questions about prognosis, treatment, and recovery. Finally after explaining that she and her husband had talked about these kinds of issues she said, “I’m 82 years old and I just want to enjoy what time has been given to me with my family… “If I make it through the holidays, then great. If my time is up sooner, then I will still be grateful for all that I’ve been blessed with in this life – my husband, my beautiful children, and a lifetime of teaching little kids not only math but that they have the potential to do whatever they set their mind to.” The team wrapped up the conversation appropriately and left, but I lingered to talk more with her. I was astounded by the grace with which this woman just accepted a terminal diagnosis and the fact that she only had weeks to live. The longer I spoke with her, the more I realized that her acceptance came not from denial or shock but from the knowledge that she had lived life to the fullest, loved and been loved deeply, and made a positive impact in the world around her. As her husband crumpled with the weight of this news and I listened to her bolster his spirits, I realized that she poured from a very full cup of gratitude. It wasn’t that she had an easy life by any means; it’s just that she chose to be grateful for the positive people, events, and opportunities that she had along the way. As I walked home after that conversation, deliberately taking a roundabout route to process what had just happened, I realized a few things: What a sacred privilege we have been afforded to glimpse into the most intimate corners of our patient’s lives. How fortunate are we that through our chosen profession, we have the opportunity to help when we can medically, comfort them when we reach the end of our rope, and through it all be humbled by the strength and wisdom that many show in the face of something insurmountable. And finally, that while grades and test scores matter to some extent, ultimately, we are all on a path to be healers and caretakers in our society with all the position and ability to be the positive change we want to see in this world. I think Mrs. Smith answers that quintessential question for us. We give and give to others without burning out by first filling our own cup, to the brim with gratitude for all the opportunities, support, friendship, and love we have been fortunate to receive. It is this mindset that then allows us to pour freely – pour time, attention, and kindness into patient care and our community, simply because we have already acknowledged what a rich store we have in our personal vault. The beautiful thing about such an attitude is that this personal store is eternally refilled by family and friends who love us, at times by strangers who are kind to us, and by the knowledge that “yes, we are doing something meaningful.” So, I just want to end by expressing gratitude. Gratitude to Mrs. Smith and all the patients like her who imparted such wisdom in our interactions. Gratitude to family that loves unconditionally even when we are not the best versions of ourselves; to mentors who believe in us and help us find our way, even when we stumble and don’t believe in ourselves. Gratitude to the classmates who share the super-efficient pre-rounding data sheet they spent hours creating and friends who bring you a home-cooked meal when coming up to Jacksonville because they know you’ve been there for three weeks and there is only so much dining hall food anyone can handle. And finally, gratitude to this crazy, challenging, rewarding, hilarious, and unique journey that is medical school, for equipping us to be people who can spend our lives serving others. As one of my other patients remarked to me this week: “There are a lot of smart doctors out there who just treat the disease in the body, and then there are those who treat not just our disease but are also are like ministers who heal our soul. It’s these ones who truly care and have compassion for us that end up meaning the most.” Here is to always striving to be the latter.

Do not offer solutions! Write about how you might approach the intervention.

1. Research and identify appropriate interventions, strategies for implementation, and methods for evaluation to resolve organizational problems and take advantage of opportunities.

2. Apply management principles to support organizational transformation and change.

Pigs R Us is a second generation, family-owned Richmond-based company with about 400 employees. It slaughters, manufactures, and sells pork food products. Pigs R Us (PRU) is a low-tech, hands-on, “bricks and mortar” type of company with solid brand recognition, an impeccable reputation for high quality and ethical standards. The processes used in manufacturing are with the highest ISO20002 standards, and the plant is maintained immaculately. The personnel are comprised of an older work force (average employee age is late 40s). There is little staff turnover, though lately there have been a diverse group of younger workers joining the company. There has been an impressive record of speedy state and federal new-product approvals, and solid working relationships with their large and small customers.

The company prides itself on the close "southern family," culture of the business. The company logo features a pig with a smile on its face surrounded by small pictures of some of its oldest serving employees. The organization's structure is “old-fashioned”. It is hierarchical with rigid management divisions and reporting policies. Research, manufacturing, and sales and marketing operate in traditional fashion, with employees reporting to supervisors or mid-level managers. By the 1990s, sales and distribution grew from Richmond into a regional market, establishing a competitive advantage throughout the US South. Despite downward economic times in the US and the South, the pork business does well. This is due largely to the fact that Pork is one of the cheaper meat products and there is a variety of ways it can be prepared.

Owned by the Morris family for the last 60 years, Pigs R Us is a key player in the Richmond based food industry. Various Morris family members sit on the board of charities throughout the city and it is not unusual to see the name at society events. Further, the Company sponsors its own Little League Team and has built a recreation center and assisted living facility for the elderly, guaranteeing space for all former 20+ year veteran workers of the company for free. So, it was no surprise, that the whole community was devastated when it was announced by the Morris family that Vance Morris the CEO of Pigs R Us was killed while driving back from a Pigs R US board meeting. The plant closed for a week to show respect and to determine how it would function until the family could make its succession decisions.

Vance Morris was the only son of James and Kathleen Morris. Vance took over the business 10 years before when his father had a heart attack and died. Fresh out of graduate school when his father died. He took over the business that he had known well much to the pleasure and keen eye of the workers. Vance made some marketing changes that allowed for the growth of the company and with the help of the employees brought the plant into its current state. Vance had just gotten married the year before to a young Richmond artist he had met at one of his charity benefits. He had no heirs and no plans for succession as he was in his mid-thirties and had just gotten married. While Vance had cousins in the area they were all professional people who knew nothing about business or pork. The workers could only surmise that the company would be sold, but speculation as to whom it might be did not include someone from out of the city.

Before the deal was announced publicly, John’s widow, Arleen, reported to the workers that a Chinese company, Shanghou (SHU), would be buying Pigs R US. Mrs. Morris assured the workers that the SHU promised not to cut workers' wages and benefits, and to keep the current management team in place. She said that SHU also promised to keep Pork R US headquarters in Richmond. Arleen assured the workers that SHU promised that there would be no changes for the first year and that almost everything would remain the same. From her talks with SHU, Arleen is a bit worried about future changes that SHU may implement.

SHU is a large manufacturer and distributor of food and beverages with, headquarters in Hong Kong. Manufacturing plants operate in mainland China, and the company has additional offices in Europe and Australia. By acquiring the smaller, well-respected Pork R US, SHU aims to diversify and expand its consumer base by including tailor-made pork products globally to meet market projections of a customer upsurge in sustainable, non-beef meats in the next decade. Given SHU’s current availability of telecommunications software and hardware, the deployment of the Pigs R US refrigeration trucks should not be an insurmountable issue.

Many PRU employees, especially the older workers and some of the older managers, are dispirited about the acquisition, and anxious about working for foreigners, downsizing, less face-to-face interaction, language differences, and more electronic systems that are to be put in place. Some of the of the more experienced workers are considering to move or consider an early retirement due to the ongoing rumors about the acquisition. To make matters worse, recent news media have printed stories about tainted food made by other companies in China. Employees fear loss of product quality and damage to PRU’s reputation as well as the loss of the family southern culture that was their pride and joy.

SHU has told PRU workers that for now, most employees will be retained. However, all employees will be evaluated, and reassigned to teams as the new flat structure is put in place. The new CEO is Harvard-educated Daniel Chinn. He supports increasing the company's competitive edge by discovering and developing existing individual potential through group collaboration and team synergy. Ever since his days as a brilliant, hard-driving MBA student; he has been known to be an enthusiastic supporter of job training and career growth. Like many of SHU’s employees, David is in his early thirties. He speaks four languages and is ambitious, self-directed, tech-savvy, accustomed to working remotely, and experienced with a culturally diverse staff. David is eager to make his newest acquisition a success. He wants to move forward on the integration of "Pork R US’ workers into SHU because Chinn believes they are the “greatest asset have a rich knowledge base and experience can be tapped into to bring the company success." Chinn is concerned about the mix of culture and how his ideas of incorporating artificial intelligence and more robotics into the manufacturing processes will be received by management and the workers at the newly acquired plant.

Scenario

The student will use the following situation that has evolved because of the buy out to complete each section of the project. Additional facts will be added to phase two and three of the project to allow students to complete a typical OD process analysis.

Daniel Chinn is anxious to keep the “southern family” culture of Pigs R Us but at the same time wants to use the most modern of manufacturing techniques. He decided that the best way to do this was to start a pilot change operation in the packaging area to demonstrate to the workers the effectiveness of technology. He bought and set up for use 3D printers in the packaging room. The printers were able to create reusable shipping materials and operate in conjunction with the product conveyor for fast and easy. packaging. He brought in two trained 3D printer operators from China to handle the work along with two robots that would move the package material and create shrink-wrapped pallets for loading on to the trucks.

The current packaging department employs 5 workers on day shift and 3 newer workers on the night shift. All day shift workers are in their early fifties and have been working for Pigs R Us all their lives. John Mellon, the lead line man, exemplifies the group. He is 53 years old. He has a family of three children most all are grown. One works in the business with him as the manager of accounting department having gotten a college degree unlike his father. John rarely travels out of state and has never been abroad. He is not terribly familiar with technology. He has a Smart TV but his children have set it up for him to use Netflix.

When the new employees arrived, the packaging staff tried to get to know them but had little in common and found it hard to communicate with them. The new workers ate together at lunch and always with food they brought with them despite offers of food brought in by the older employees to show their “southern roots”. Things are strained between the groups because the older employees thought they were being snubbed and many are uncertain as to the customs and language unable to communicate their real feelings. This all operated to create a schism among the workers which escalated into job performance and employment commitment issues when the six-month results from the 3D/Robot pilot showed the following success in favor of new technology.

The results showed such a marked process improvement with the added benefit of creating materials that were sustainable. The immediate reaction among the older workers was fear for their jobs. The new workers suddenly were the enemy. Chinn was pleased with the new process and indicated that the 3D printing approach would be continued. The word of the decision spread among the families in the company and the “southern family” culture was now closing ranks on the newcomers both in the packaging room and in the other departments thus confirming their fears when news of the buyout surfaced.