Potential Internal Strengths of Red Bull - Case Study Example

Potential Internal Strengths of Red Bull To enable us critically evaluate the strategic development of Red Bulls product and marketing strategy we shall use a combination of SWOT, PESTLE analysis and Porter’s five competitive forces that shape strategy. SWOT helps us conduct internal analysis, while PESTLE and Porter’s five forces help us understand how Red Bull should react to its external environment. In fact Porter (2008) states that it is from understanding how the five competitive forces influence profitability in a given industry that a given player can then be able to develop strategies to enhance long-term profits. Potential internal strengths The most prominent internal strength for Red Bull is its number one ranking in the energy drinks industry. We are informed that in 2005 it commanded almost 70 percent of the worldwide market for energy drinks. This market leadership status provides Red Bull an opportunity to sustain its premium pricing, greater publicity, more customer loyalty and a longer product life cycle. From its number one status it is expected that Red Bull be a well-known brand name. Prior to Red Bull, the energy drink market was non-existent and even the marketing research firm that was hired by Mateschitz to test the market for energy drinks in Europe found out as much. Thus the sudden emergence of a market after Red Bull could signify the brands strength and company’s ability to create a market. Contrary to the expectation that this is a brand simply for the youth, Anderson and Sharp (2010) argue that it is almost impossible for a brand to grow to be a big brand without selling to consumers from all age groups. We cannot discuss Red Bull’s strong brand without crediting its superior marketing skills as strength. The development of the Mobile Energy Team (MET) program, use of students to perform its buzz marketing and sponsoring of extreme, alternative sports that involved elements of adventure, risk, and that required stamina and energy are all evidence of a superior marketing approach. Even though there was the threat of companies, such as Monster, gaining market share using Red Bull’s marketing approach we believe that Red Bull is favored by causal ambiguities. Causal ambiguity here refers to the complexity and specificity that Red Bulls has been able to develop within its internal resources and skills to increase the barriers to imitation. However, Red Bull must not be deceived that its approach is fully inimitable because the continued competitive action that it faces could cause this barrier to decay unless the firm reinvests in its causally ambiguous competencies to protect its competitive edge. Without reinvestment, attritional effects of competition will cause decay in the barriers to imitation (Reed & Defillippi, 1990). This means that the firm must remain vigilant by investing appropriately. The abundant financial resources of Red Bull in comparison to its younger competitors are also a source of internal strength. This financial muscle is especially useful for sustaining its large marketing budget that involves grassroots marketing. We are informed that when Red Bull first entered a market it paid for the distributors' promotional and advertising costs and also bore the cost of the samples distributed, for a period of around three months. To replicate such as strategy the firm’s competitors would be need similar deep pockets. Another organizational strength is the good distribution system. From the case we are informed that visibility and availability were the central themes in all of Red Bull's promotions. Ataman, Van Heerde, and Mela (2010) posit that such broad distribution manifests to consumers the manufacturer’s commitment to the brand and, potentially, its success in the marketplace. This strengthens Red Bull’s image to its customers. Note however that Fox and Hoch (2005) state that broader distribution may have a converse effect. A broad distribution system may increase the chance of within brand price comparison across stores, a behavior referred commonly to as ‘cherry picking’ whose effect may be negative on the Red Bull’s price elasticity. Finally, superior management strategy could also be added to the strengths that Red Bull possesses. The decision to retain Red Bull GmbH as a private company offers the firm room for spending a huge portion of its budget on marketing, to utilise unconventional marketing strategies such as 'rumour by omission' where it consciously and carefully cultivated the mystery around its product and to court controversy. In a public company it would have been difficult to convince shareholders of the potential benefits of such marketing strategies. Additionally, Mateschitz’s ability to steer an obscure product to global success against an unfavourable pre-launch market research report, demonstrates visionary leadership. Potential internal weaknesses The biggest weakness for Red Bull is that it is a non-unique product whose formula for the drink is no secret with all the major ingredients listed on the can. This fact coupled with the firm’s weak spending on research and development (R & D) made a lot of competitors in the market to develop similar energy drinks with more flavors and better taste. In the United States alone there emerged 125 energy drink competitors. This weakness has been further aggravated by Red Bull’s lack of success in trying to extend its product line. The company’s profitability is therefore left to be heavily reliant on its one branded product, Red Bull Energy Drink (along with its sugar free variety). Potential external opportunities Not much can be obtained in so far as external opportunities are concerned. One that Red Bull could quickly capitalize on is the discovery of a new use for its major product as a mixer. Red Bull could consider repackaging its main brand to suit this purpose because bar owners require different quantities for mixing. Nevertheless, the raging health implications of mixing caffeine and alcohol could probably justify the firm’s reluctance with openly embracing the Red-Bull-as-a-mixer product. Potential external threats The biggest worry for Red Bull should be the sheer number of threats that it faces now and in the future. To begin with the ease of entry of competitors could rapidly saturate the market. Red Bull's success had spawned a spate of imitators, all wanting to cash in on the booming energy drinks market and as of 2005; there were 125 players in the energy drinks market in the US alone. However, the greater threat is the entry of major beverage companies like Coke, Pepsi and beer brewer Anheuser-Busch into the energy drinks market. These companies have greater spending power and can leverage their experience, distribution and value-chains to potentially match the Red Bull brand in with similar aggressive marketing campaigns. Another threat that Red Bull faces is the introduction of new substitute products in the form of multiple flavoured energy drinks. These substitutes directly attack one of Red Bull’s key flaws; it’s not so very good taste. Consumers who had to be content with Red Bull’s unpleasant taste would now have a variety of familiar tastes to choose from. This threat though may not be that big considering that it was not clear whether taste was an important consideration for consumers in this particular market. Red Bull will also have to be wary of the changing consumer tastes and needs. It is a fact that consumers have increasingly become conscious of their well-being and keener about their health. This implies that drinks such as water, orange juice and so on, could easily become non-obvious substitute products. As of 2006, the effects of taurine and glucuronolactone on the human body were still not well researched and there is possibility that with more research into these key ingredients, the mystery that surrounds Red Bull will be uncovered and the brand could lose one of its greatest selling points. Furthermore, the increasing health concerns of the population have meant that governments come in with possible tougher rules on consumption of certain products such as those with high caffeine content. Increased government regulation, could easily alter the dynamics an industry (Porter, 2008). Another major threat to Red Bull is the decline in its product life cycle. Red Bull’s phenomenal brand growth was mainly pegged on entering new geographic markets and causing a buzz. However, considering that Red Bull had become as ubiquitous as Coke and Pepsi it faces the danger of diluting its 'coolness' factor. Red Bull could lose its identification within its target market as an exclusive product. Another limiting factor in Red Bull's long term success, as picked from the case, was the nature of the company's target market. Red Bull majorly targeted the youth, represented as college-students and young urban professionals. Retaining these customers as they grow older would be a challenge especially considering that older people avoid products with high sugar and/or high caffeine content. The demographic shift of Red Bulls core customers implies that the company would have to keep finding new customer groups regularly. Finally, Red Bull’s rival firms are adopting new strategies that threaten its market dominance. Rockstar’s value chain partnership with Coca-Cola Consolidated (CCBCC), Coca-Cola's second-largest distributor in 2005 is a strategy that Red Bull cannot shun. According to Kotler & Armstrong (2004) in today’s marketplace, competition no longer takes place between individual competitors but between the entire value-delivery networks created by these competitors. Red Bull should use its market leadership to also put in place an efficient and effective value-chain. PESTLE analysis PESTLE stands for political, economic, sociological, technological, legal and environmental factors. Of the six factors looked at under PESTLE analysis, Red Bull’s marketing strategy would be affected mainly by the economic, sociological and legal factors. Political, technological and environmental factors would have an impact on the entire energy drinks industry with no particular greater effect on Red Bull in comparison with its competitors. With regards to economic environment three attributes of Red Bull make it especially vulnerable: its premium pricing, its huge marketing expenditure and its subsistence as a private company which limits its financing options. The fact that Red Bull is a premium priced product implies that it would be susceptible to any changes in consumer spending power. This means that any economic event that impacts on consumer purchasing power would most probably affect Red Bull’s sales especially with the entry of several competitors who are offering substitute products. This situation is aggravated further by Red Bull’s unsuccessful attempt to expand its product line. Secondly, with the entry of major players such as Coke, Pepsi and Anheuser-Busch, and a 70 percent market share of the current market, the energy drinks market is rapidly approaching maturity and saturation. This would mean that Red Bull has to increase its already huge marketing expenditure to retain its market leadership. The greatest sociological factor that Red Bull would need to strategize on is the nature of its target market. According to ICMR Centre for Management Research (2006) Red Bull's main market consisted of college-students and young urban professionals and it was not clear how the company would be able to retain these customers as they grew older. Red Bull would be faced with the huge challenge of retaining its image as a youthful and hip brand against its already grown market share. Red Bull will have to devise a different marketing strategy than the buzz marketing approach it had used at its inception because it is no longer a new product in the market. Another major external environment factor that Red Bull would have to be prepared for is the increasing regulatory controls with regards to health, safety and environmental issues in the world. The company’s erstwhile strategy of consciously and carefully cultivating the mystery around its product and allowing the public to speculate on its nature and effects could easily backfire especially if more research on the effects of taurine and glucuronolactone emerge. Porter’s five forces perspective Porter (2008) states that it is the strategists job to understand and to cope with competition. This is exactly what Red Bull’s management needs to do if its brand is to retain its market leadership in the increasingly competitive energy drinks market. He further adds that it is from an understanding of the causes of these competitive forces that an organisation can develop a framework for anticipating and influencing its profitability over time. The threat of entry is high in the energy drinks market and this essentially reduces the future profit potential for all industry players. This is more so because customers have low switching costs and easy access to distribution channels through value-chain partnerships such as that formed by Rockstar and Coca-Cola Consolidated (CCBCC). This entry of the Coke, Pepsi and beer major Anheuser-Busch aggravates the situation because they can leverage their existing capabilities and cash flows to shake up the market. This implies that Red Bull must continue to invest aggressively in its marketing. However, Red Bull’s has incumbency advantages such as in the causal ambiguities within its marketing approach that it can utilize to retain its competitive edge. Another key force in Red Bull’s case is the power of buyers. The trend today is towards living healthy lifestyles, something that makes buyers in the energy drinks industry very powerful because they can easily switch to consume healthier drinks. This pro-healthier living movement therefore makes the threat of substitutes to also be high. All players in the energy drink industry need to be wary of how healthier drinks are affecting the growth potential of their market. Being a single brand product, Red Bull is particularly too exposed to this competitive force. Red Bull’s industry is also characterized by intense rivalry. The reasons for the intense rivalry are: the slow industry growth that precipitates fights for market share and rivals being highly committed to the business with aspirations for leadership (Porter, 2008). The fact that most of the energy drinks produced are similar could eventually lead to price wars which would be detrimental to all market players. Elements of the marketing mix With our focus being on the longer-term effect of marketing strategy on Red Bull’s brand performance this discussion also seeks to evaluate which elements of the marketing mix will be most critical in making the brand successful. The following conclusions have been adopted from the research done by Ataman, Van Heerde and Mela (2010). Price promotion through discounting policies focuses buyers’ attention on price-oriented cues and therefore on the long run has negative effects on brand sales. There are two schools of thought on the effect of advertising. First, advertising may increase competition by providing information to consumers about the available alternatives or advertising may increase product differentiation. These two affect price elasticity of the brand in opposite ways. Brand-oriented advertising increases price elasticity while price-oriented advertising decreases it. About product, Ataman, Van Heerde and Mela (2010) state that product activity, such as innovations and changes in form, enhance a brand’s perceived quality, increases purchase likelihood, and builds equity. Also, the more differentiated or customized alternatives present in a product line the greater the increase in price elasticity (making it less negative) because strongly differentiated items can serve loyal niches. Conclusion For Red Bull to retain its market leadership in an industry that is characterized by intense rivalry, it needs to leverage its incumbency advantages to build up barriers to entry into the energy drinks market. Red Bull could commence by increasing product activity which as Ataman, Van Heerde and Mela (2010) found out enhances a brand’s perceived quality, increases purchase likelihood, and builds equity. The more daunting challenge will be tackling the big corporations that are moving into the energy drinks market. One approach of tackling the big players is to establish alliances and value-chains with complementary strong brands. Alternatively, Red Bull could seek alliances or make acquisitions so as to broaden its product line. The more differentiated or customized alternatives present in a product line the greater the ability of the firm to serve loyal niches or cause customer lock-ins. However, research still provides mixed findings on the effect of having brand portfolios. The size of a brand portfolio that an organization should have depends on the desired strategic end. To obtain customer loyalty or a greater number of brands marketed across a smaller number of segments, a low level of intra-portfolio competition, and strong consumer perceptions of the quality of the firm’s brands appear to be the strongest brand portfolio strategy drivers. Conversely, for the strategic end of a increasing market share, smaller brand portfolios, marketed across a greater number of segments, with greater intra-portfolio competition and lower perceived quality, are better (Morgan & Rego, p. 70, 2009). To retain its cool status in spite of its ubiquity, Red Bull management should employ the following tactics from Olson, Czaplewski & Slater (2005): product exclusivity, peripheral persuasion, buzz, and connectivity. To maintain product exclusivity Red Bull must consistently develop improvements, enhancements, and variations to meet the needs of innovators and early adopters. Secondly, Red Bull should ensure that its adverting remains subtle for peripheral persuasion. Thirdly, to create buzz all its marketing efforts need to be out of the ordinary, highly creative, and unexpected. Finally, the Red Bull should connect the brand to environmental elements already perceived as cool or co-brand with other cool products. 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